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THE BARON FUNDS
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BARON ASSET FUND page 1
(LOGO) -----------------------------------
BARON GROWTH &
INCOME FUND page 10
450 Park Avenue, New York, New York 10022, 1-800-99-BARON, 212-759-7700
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SECOND QUARTER REPORT MARCH 31, 1996
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BARON ASSET FUND PERFORMANCE UPDATE
[CHART APPEARS HERE]
1996 First Quarter Latest Year Since Inception
1/1/96 - 3/31/96 4/1/95 - 3/31/96 6/12/87 - 3/31/96
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Baron Asset Fund 14.8% 40.7% 343%
S&P 500* 5.4% 32.1% 176%
Russell 2000* 5.1% 28.8% 137%
*The S&P 500 and Russell 2000 are unmanaged indexes. The S&P measures the
performance of the stock market in general; the Russell 2000 of small and
mid-sized companies.
Dear Baron Asset Fund
Shareholder:
The Baron Funds have recently grown rapidly in assets under management. Since
we have many new shareholders, we thought it would be useful in this letter
to talk a little more extensively than we normally do about our investment
practices, principles and goals. We want to welcome our new fellow
shareholders and thank our existing shareholders for their continued support.
If either our new shareholders or our existing shareholders have any
suggestions or questions, please feel free to either write or call.
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PERFORMANCE REVIEW
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Small-Cap Stocks Begin to Outperform
Stocks of larger U.S. companies had outperformed stocks of smaller companies
from September 1993 through March 1996. From March through late May,
small-cap stocks once again have, by far, been the better performers. In our
December 1995 shareholder report, we noted that the extended period of below
average performance by stocks of smaller U.S. companies had created unusually
attractive investment opportunities in smaller, publicly owned businesses.
For more than fifty years, according to Ibbottson data, smaller companies
have significantly outperformed larger companies. This is despite the fact
that larger companies have outperformed within this time frame for periods
often measured in years.
Smaller companies are generally considered riskier investments than larger,
more established companies. This is due to smaller companies' greater
reliance upon entrepeneurial management talent, less robust balance sheets
and less established businesses. Nevertheless, the superior growth prospects
of smaller companies have provided investors the better returns over the long
term.
Management Critical to Success in Small-Cap Stocks; Our Experience and
Research: The Baron Funds' Competitive Investment Advantage
We have often remarked that we invest in people, not buildings. We believe
management is especially critical to success in small and medium sized
businesses. A very important element in our attempt to identify and invest in
fast growing, very profitable, well managed
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BARON ASSET FUND
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businesses is our effort to visit personally and become well acquainted with
the managements of companies in which we invest. We believe my twenty seven
years experience as a securities analyst and twenty two years as a portfolio
manager, when coupled with the judgments of our talented analysts, two of
whom, Susan Robbins and Morty Schaja, I have worked with closely for years,
enables us to accurately assess and evaluate management talent, honesty and
business strategies. Our collective experience and independent research
efforts should provide us with competitive advantage over the many fund
managers who rely only upon brokerage research, information gathered at
widely attended conferences and publicly available financial information.
Baron Asset Fund Performs Well in 1996's First Quarter; Fund's Longer Term
Results Strong, Consistent, Rank Highly
U.S. stocks and mutual funds investing in U.S. companies performed very well
in the three months ended March 31, 1996. The S & P 500, an index measuring
the performance of large U.S. companies' stocks, gained 5.4%; the Russell
2000, an index measuring the performance of smaller U.S. companies, gained
4.7%. According to Lipper Analytical Services, the average diversified mutual
fund investing in U.S. stocks increased in value 5.7% in the first quarter;
the average small cap mutual fund, 6.4%. Baron Asset Fund, which invests
principally in smaller and mid-sized U.S. companies, increased in value
14.8%.
For the three months ended March, Lipper ranked Baron Asset Fund number 8 of
373 small cap mutual funds which had assets greater than $1 million. For the
twelve months ended March, Baron Asset Fund's 40.7% gain was ranked by Lipper
number 55 of 321 small cap mutual funds. The fact that Baron Asset Fund's
very strong performance ranks only in the top 17% of its category is ample
testimony to the unusually strong performance achieved by most investors
during the past year.
Short term performance gauges can be misleading. Baron Asset Fund's strong
and consistent, long term performance ranks highly, both on a relative and an
absolute basis. The Fund's compound annual rate of return for the five years
ended March 31, 1996 is 21.6%; for three years, 24.7%; and, for the nearly
nine years from its inception on June 12, 1987, 18.4%. Based upon information
provided to us by Lipper Analytical, Baron Asset Fund ranks among the top 2%
of equity mutual funds from its inception.
Baron Asset Fund is rated five stars by Morningstar, that company's highest
performance ranking. Morningstar's rankings are based upon risk adjusted
three- and five-year returns. Fewer than 10% of equity mutual funds are
accorded five star ratings. These are funds which have achieved historically
high returns with the lowest risk. Baron Asset Fund is also ranked among top
performing mutual funds by Fortune for the after tax returns we have provided
to our shareholders.
Baron Asset Fund is included in Schwab's Mutual Fund Select List. This list
consists of only fifteen, top-performing, domestic, OneSource, equity mutual
funds. Schwab's Select List funds have achieved historically high returns
with low measured risk. There are more than 500 funds available through
Schwab's OneSource program.
Baron Asset Fund is ranked highly by Investor's Business Daily. IBD has
accorded the Fund an A+ ranking for the second consecutive year. This ranking
places Baron Asset Fund among the top 5% of IBD's mutual fund universe for
three year performance. IBD's universe encompasses about 2500 diversified,
equity growth mutual funds.
Portfolio Performance: Baron Asset Fund's Core, Long Term Investments Produce
Strong Gains in First Quarter; Several "Farm Team" Stocks Achieve Spectacular
Gains
During the first quarter of 1996, most of our larger investments increased
significantly in price. Shareholdings in eleven companies which comprise 42%
of our assets recorded gains for the three months ended March ranging from
12.1% to 30.8%. This group of core holdings includes many companies in which
we have been shareowners for several years. Baron Asset Fund has been a
shareholder of nursing home operator Manor Care since 1989; discount
broker/no-load mutual fund distributor Charles Schwab since 1992; private
college operator DeVry since 1991; specialty temporary help provider Robert
Half since 1991; food and restaurant supplies wholesaler Smart & Final since
1991; radio station operator Saga Communications since 1992; U.K cable
television/telephony provider International CableTel since 1993; and casino
hotel developer/owner Mirage Resorts since 1989. Investments of more recent
vintage which have become core holdings in the past two years are funeral
home/cemetary operator Stewart Enterprises; temporary home care and office
help provider Olsten; and our second casino hotel developer/owner Circus
Circus. We had been shareholders of Circus Circus to our great benefit for
several years ending in 1992 when we sold our shares after its successful
management was forced to resign. We repurchased our shares at much lower
prices last year when its prior management was rehired.
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Performance of our 50 "farm team" investments was also strong across the
board during the first quarter. The stock performance of eight of these
companies, representing 13.3% of our assets at the end of the quarter, can
only be characterized as spectacular. Gains among these stocks for the three
months ranged from 40.4% to 77.8%. Included in this group are the leading
supplier of genetically altered cotton seed Delta & Pine Land; specialty pet
store retailer Petco; operators of privatized prisons Corrections
Corporation, Wackenhut Corrections and Youth Services; provider of infant
homecare Pediatric Services; specialty retailer of low priced necessities
Dollar Tree; and communications satellite company Globalstar.
It is our hope and expectation that many farm team investments will be
successful and, in the long term, will mature into core Baron Asset Fund
portfolio holdings.
Not All of Our Investments Performed Well; We Believe Two That Fell in Price
Now Offer Very Attractive Investment Opportunity
Among our larger investments, only medical equipment financing company DVI
and advanced communications satellite owner/operator American Mobile
Satellite (AMSC) fell sharply in price during the first quarter.
AMSC is controlled by Hughes Electronics, AT & T and Singapore Telephone.
Following the successful launch in April 1995 of the first AMSC
communications satellite, operating problems were encountered. Contracted
equipment and software deliveries were delayed; phone dealer distribution was
inadequate; technical transmission problems were experienced; and marketing
and sales management had to be changed. With strong financial and management
support from Hughes, the company's management team has been significantly
improved, its technical problems nearly resolved, its dealer network
strengthened, and its financing secured.
AMSC will soon have the unique ability to offer fixed interconnections
between mobile units both onshore and offshore North America. We expect its
private networks to experience very strong demand. AMSC's services should be
of great value to large fleets requiring nationwide dispatch communications
like AT & T , MCI and Beacons Moving; government agencies like the FBI and
FEMA; public service organizations like the American Red Cross; utilities
like Florida Light & Power and oil and gas pipeline companies; broadcasters
like CNN, ABC and CBS; as well as numerous maritime and aeronautical users.
DVI experienced delays arranging receivables financing for its clients, a
large opportunity. This has since been resolved. Baron Asset Fund has taken
advantage of stock price weakness at both companies and added significantly
to our holdings of AMSC and DVI.
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INVESTMENT PRINCIPLES, STRATEGY AND OUTLOOK
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Baron Asset Fund invests principally in securities issued by well managed,
publicly owned, fast growing, small- and mid-sized businesses. We invest only
in securities we believe can increase in value at least 50% within two years.
We hope to hold our investments much longer than that to minimize both taxes
and transaction costs.
We believe stock prices over the long term reflect the value and growth of
underlying businesses. In the short term, businesses change very little.
Stock prices, however, change a lot every day. After identifying businesses
in which we would like to be shareholders, we estimate the value of these
businesses and target at what prices they are likely to sell in a few years.
We believe it is more important to invest in a great business than to
purchase shares at a great price, although we attempt to do both. When share
prices of businesses in which we would like to be shareholders are available
at prices that offer us the prospect of a satisfactory return, i.e., at least
50% over two years, we purchase stock.
We Attempt to be Long Term Investors in Great Businesses
Stock prices of companies in which we invest may become temporarily
overpriced relative to their near term prospects but still offer satisfactory
long term returns. We will not necessarily sell these shares. This may
penalize our short term performance but, if we are correct in our judgments,
should not negatively impact our long term results. We always sell shares of
companies when we conclude that we have been mistaken in our assessments of
business fundamental prospects.
We will try not to make the mistakes we have in the past when we sold shares
of fast growing, great businesses run by exceptionally talented executives
whom we liked and respected and in which we had been early investors.
Included in this group are Columbia Hospital, Office Depot and Mirage
Resorts. Shares of all three were sold years ago when they temporarily became
"overpriced" or were no longer "small cap" stocks due to their great
successes. Although these businesses and their stocks performed very well
while we were shareholders, their stocks more than doubled and tripled after
we sold. And, years later, all three still remain attractive investments.
Investment Outlook: Tempered Optimism
We have consistently reported to our fellow shareholders that our goal is to
double Baron Asset Fund's per
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share value (with dividends reinvested) every three to five years. Of course,
we can offer no assurance that we will be able to achieve our objective. In
the nearly nine years since Baron Asset Fund's inception, we have managed to
achieve performance in line with our objective. During the past three years,
we have about doubled the per share value of Baron Asset Fund. This is at the
high end of our expectations. We believe it is more realistic to expect our
per share value to double again over the next four to five years, e.g., by
the year 2000. We again must emphasize that there can be no assurance that we
can achieve this goal.
Stock prices of many businesses in which we are shareholders have
outperformed their underlying businesses during the past several months. When
this occurs, stock prices of the affected companies often change little in
subsequent months until business fundamentals catch up with investor
expectations. A good example would be Charles Schwab. During the first six
months of 1995, Schwab's share price more than doubled. Its business, as
measured by customer assets, increased more than 42% last year and is on
track to increase by about the same percentage again this year. Schwab's
stock price is now at about the same level as a year ago, and once more we
regard it as very attractively priced.
Since the performance of our investment portfolio has not been monolithic, we
currently own shares in many companies whose stock prices, like Schwab's, do
not, in our opinion, reflect accurately their favorable current prospects.
These stocks offer us significant opportunity for capital appreciation. This
lends rise to our optimism despite the recent outperformance by a number of
our investments.
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PORTFOLIO STRUCTURE
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The Baron Funds are long term investors in publicly owned businesses. We are
not stock traders. Unlike so called "momentum" investors, our annual stock
turnover is very low. We do not attempt to "market time," a feat we believe
is not possible, nor do we seek to generate short term gains through active
trading. The Funds use a thematic investment approach and choose stocks in
which to invest based upon our independent fundamental research, careful
financial analyses of businesses, common sense and our judgment of
managements' abilities and integrity.
The Baron Funds Invest in Relatively Few Businesses
The Baron Funds have concentrated their investments in a relatively small
number of businesses. As of the date of this letter, Baron Asset Fund's four
largest portfolio holdings, Manor Care, Charles Schwab, Smart & Final and
Robert Half, represent 22.8% of the Fund's assets. All have the potential, in
our opinion, to at least double in price by the year 2000.
The Baron Funds also own meaningful percentages of a number of other well
managed, publicly owned businesses. In addition to the four companies listed
above, our investment group has acquired and holds for investment purposes
more than 5% of the shares of the following companies: DeVry; real estate
investment trust Alexander's; International CableTel; Saga Communications;
Pediatric Services; nursing home operator Summit Care; wireless telephone
company Cellular Communications of Puerto Rico; independent oil and gas
company Cross Timbers Oil; Youth Services; communications and medical
equipment manufacturer Flextronics; car rental and used car sales company
Team Rental; specialty chemical company O M Group; and, Petco. We have
invested in these businesses for the long term and "do not seek to influence
management or change control of these businesses." We have invested in these
businesses because we have confidence in their managers. Unlike many other
"value" investors, we will not invest in a business that is not growing, that
is not well managed or that is not attractively positioned just because its
shares are "cheap."
The Baron Funds Have Not Invested in Volatile Tech Stocks
The Baron Funds believe that technology will continue to represent a growing
share of domestic GDP as companies seek to become more efficient and
competitive. The Baron Funds do not invest in volatile technology stocks such
as computer manufacturers, software developers, internet access providers and
chip producers although all seem to have exciting and profitable growth
prospects. We believe it is very difficult, if not impossible, to predict
whether today's leading technologies will remain so or will be obsoleted in a
few years. It's like basketball. Just because the Chicago Bulls have the best
basketball player in the world today doesn't mean they will have a
championship team in five years (?) once Michael Jordan retires.
We have chosen to invest, instead, in companies like Charles Schwab that
invest heavily in computer and software technology to improve their services
and gain competitive advantage; like Robert Half that supply temporary
computer programmers and systems analysts; like Learning Tree that for twenty
five years has provided classroom training to computer professionals for new
systems and software; and, like DeVry that provide a college degree,
technical education and a job to high school graduates.
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INVESTMENT THEMES
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The Baron Funds focus their investments in fast growing, job-creating
"sunrise" industries. These industries are likely to benefit from current
demographic trends as well as changing government policies, programs and
priorities. We find of great interest industries in which our children are
likely to find opportunities and employment. Industries of current interest
include health care due to both an aging population and the need to provide
high quality, affordable health care; education because the government says
that 80% of the available jobs by the year 2000 will require education beyond
high school and graduating high school seniors will increase 25% in the next
five years; media and entertainment and gaming because that's what people
like to do, and as we become a more prosperous nation we will have more time
and money available to do what we want; communications and space because huge
investments are now being made in infrastructure, businesses need advanced
communications services to be efficient and competitive and presently unseen
opportunities will evolve in space; privatization of government services due
to the general proposition that private industry can provide services nearly
always better and for lower cost than the government; and financial services,
which should experience increasing secular demand for the next fifteen years
from the huge "baby boomer" population of which I am a member.
We do not invest in "sunset" industries, industries in which our parents and
grandparents made their livelihoods and which must now fire employees and
reduce costs in order to maintain profitability or achieve growth. Employee
firings, of course, are not an attractive proposition politically. Among the
industries in which we have no investment interest regardless of how
"cheaply" their businesses are valued are automobiles, steel, railroads and
tobacco.
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PORTFOLIO ADDITIONS
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During the March Quarter, Baron Asset Fund Opportunistically Increased Its
Investments in Several Businesses
Energy
We had only once before invested in an oil and gas business, and that was at
least fifteen years ago. But even I had read about Jon Brumley, the Chairman
of Cross Timbers Oil Company. In 1967, as a 28 year old analyst, Jon became
assistant to the President of Southland Oil, then a small, independent oil
and gas company. In 1972, Jon became the President of that publicly owned
company. Jon had theorized that it would be cheaper to acquire than explore
for oil and gas reserves and was given the opportunity to implement his
strategies. Using Southland's petroleum reservoir engineers' expertise, Jon
purchased properties that had been either ignored or overlooked by other oil
and gas companies. Oil fields were purchased in regions with which Southland
had become familiar; the fields were then reworked and reengineered.
Southland's asset value was significantly enhanced. In 1980, Jon and Bob
Simpson, Southland's CFO, created two royalty trusts, the Permian Basin
Royalty Trust and the San Juan Basin Royalty Trust, innovative and
financially attractive corporate structures that boosted Southland's value to
its shareholders.
From the time Jon and his team assumed control of Southland in 1972 until it
was acquired in 1985 by Burlington Northern in an unfriendly tender offer,
Southland was one of the fastest growing stocks on the New York Stock
Exchange. Its market value during this period increased from $150 million to
more than $4 billion.
Cross Timbers' chief financial officer called me one afternoon in October
1995 to tell me that Jon Brumley and he would be in New York later that
month. I was told that Jon was the Chairman of Cross Timbers Oil, a company I
had never heard of. Would I care for him to visit and tell me about his
business? I asked whether this Jon Brumley was the same Jon Brumley who had
been President of Southland Oil. When I learned that he was, I requested that
Cross Timbers' financial information be fedexed to me and jumped at the
chance to meet him.
Following Southland's aquisiton by Burlington Northern, Jon, along with Bob
Simpson, Southland's CFO and Cross Timbers' new CEO, and Steve Palko,
Southland's chief reservoir engineer and Cross Timbers' new president,
founded Cross Timbers Oil in 1986. Financing was provided by partners of
Goldman Sachs. Jon, Bob and Steve were able to attract to Cross Timbers
perhaps 35-40 key Southland employees including reservoir engineers and
financial executives who had helped the three of them build Southland.
Cross Timbers made its initial public offering in May 1993 at $13 per share
and, in the fall of 1995 on the date of their visit to New York, its shares
were selling for about 10% more than that. During the nearly two and a half
years that it had been a public company, Cross Timbers' annual production had
increased 38.8%; its proved developed reserves jumped 69%; and the discounted
future value of its proved reserves had increased 93.4%.
Not surprisingly, Cross Timbers' business strategy was similar to that
employed by Southland. Cross Timbers is engineering, not exploration,
oriented. Properties have
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often been acquired from "majors" who had dated field geology and had not
looked at the fields Cross Timbers acquired for years. Long- lived properties
have been acquired by Cross Timbers for 5.5X first year cash flow; costs were
lowered using fewer people and more appropriate, less expensive equipment;
and in-fill drilling or waterflooding were frequently employed to boost
production. Nearby gathering systems were acquired when the company's
reserves in a region became significant. Cross Timbers' business objective is
to replace its reserves using less than 50% of its cash flow from production.
Due to its unusually low energy finding costs, Cross Timbers has been able to
replace its produced reserves using just 43% of its cash flow. Of course,
Cross Timbers has not only replaced its reserves, but, as noted above,
expanded them substantially. Cross Timbers could increase its annual cash
flow an additional nearly 50% to $5.50 per share by the end of 1997 while
maintaining debt constant at about $2.00 per barrel.
Brumley announced his retirement last week, and will remain a large
shareholder as well as a consultant to Simpson, the new Chairman, and Palko,
Cross Timbers' President. Both remaining executives are well regarded at
their company and in their industry. Cross Timbers also announced an
important acquisition and that it would repurchase two million of its 18.3
million outstanding shares. Baron Asset Fund purchased 973,000 shares of
Cross Timbers from November 1995 through May 1996 for an average cost of
$17.63 per share.
Healthcare
During March, Manor Care announced it would split apart into two publicly
owned businesses, a healthcare company owning more than 26,000 nursing home
beds and a hotel franchising company that currently receives royalties from
more than 250,000 hotel rooms and, in addition, owns more than 10,800 hotel
rooms. This is a change we have been looking forward to for several years.
Immediately following this announcement, Manor Care's stock price jumped
11.5% to $43.50 per share. Over the following six weeks, its shares fell 16%
to $36.50 per share. Why the decline? As the financier J.P. Morgan once
noted, "Stocks fluctuate." Baron Asset Fund added significantly to its Manor
Care holdings during this decline.
I had briefly invested in Manor Care while I was in law school in Washington,
D.C. in the late 1960's. I invested using money I had borrowed from the
Patent Office credit union. (I was then a Patent Examiner by day, a law
student on scholarship by night.) I invested in Quality Inns International,
then an independent company and the predecessor to Choice Hotels, soon
afterwards. I began to follow Manor Care casually as a young securities
analyst in 1970; we became shareholders in 1978 and remained so through 1983
when I thought a nursing shortage could imperil profits growth. It had little
impact. Finally, we again began to purchase Manor Care stock in 1989 and have
been shareholders continuously since then.
I first began to visit Manor Care in Silver Springs, Maryland in 1978. Our
files remain filled with conversations dating to this period. Last month, we
spent a half day in Silver Springs with Manor Care's senior operating
management to discuss business changes likely to occur following its
announced breakup. The evening before our visit, I reviewed my old notes to
prepare for the interview. In 1978, Manor Care owned 3344 nursing homes worth
$15-20,000 apiece. They now have 26,000 beds worth $60-70,000 apiece. Also
interesting, in 1979 they had built a hospital in Texas for $6 million. It
took two years to complete and I was critical of this investment as
indicative of loss of management focus. They tried to assure me that this
hospital could then be sold for $9 million but would, more importantly, be a
way they could learn about the hospital business. I remained skeptical. Manor
Care still owns this property although few are aware they do. It is their
only hospital. When I asked about the hospital during our visit, we learned
it had earned $7 million last year and they had just been offered and had
rejected $42 million for the property. Although this is only a small part of
Manor Care's value, we bring it up to show that prosperous companies (Manor
Care's free cash flow now approximates $20 million per month) usually own
assets few know about and are thus probably even richer than you think.
Few analysts follow Manor Care. Hotel analysts don't like nursing homes. And,
nursing home analysts don't like hotels. The hotel business has invested $250
million during the past few years in distressed hotel properties that have
since been repaired, are producing annual cash flow of about $40-45 million,
but are not contributing earnings per share. The healthcare business has
bloated selling, general and administration expenses. This is due to the
requirement for administrative expense prior to the impending introduction of
new healthcare services, e.g., assisted living, home care, disease management
protocols. It has also invested about $180 million in newly opened properties
that are not only not yet contributing earnings, but are still probably
losing money.
We believe the 10,800 hotel rooms owned by Choice could be mortgaged for
perhaps $275 million and then disposed of. The mortgage proceeds could be
used to retire all outstanding Choice debt and retire
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nearly half of Manor Healthcare's debt, as well. Choice would then have
annual franchise revenue from more than 250,000 hotel rooms of $220 million,
$80 million annual operating income and growth of about 15% per year. Growth
could accelerate with aggressive franchising of Sleep Inns, a budget hotel
operation, and Main Stay, an extended stay concept that has only recently
opened its first unit. Management contracts also offer exciting potential as
does a new concept for franchised hotel dining courts. We expect Choice to
record annual earnings growth of at least 20-25% per year for the next
several years.
Although Manor Healthcare's operating margins are likely to remain 300 basis
points below their potential for the next three years due to startup expense
from planned 15% annual unit expansion, introduction of new healthcare
services, a growing percentage of lower margined, managed care business and
potential negative reimbursement changes, aftertax earnings should still
increase 15-17% per year. Income growth should then accelerate as margins
begin to improve.
Since we believe the parts of Manor Care could be valued at double the
current price of the whole enterprise within three years, we have recently
significantly increased our Manor Care holdings. Baron Asset Fund now owns
2.55 million shares of Manor Care, about 9.6% of our Fund's assets, acquired
for $35.58 per share. We had acquired shares in 1989 for less than $9 per
share. Our investment in Manor Care is nearly twice the size of our next
largest investment, Charles Schwab.
Manufacturing
About the closest we've come to an investment in high tech is Flextronics.
Flextronics contract manufactures for others home medical equipment like
thermometers, communications equipment such as modems and speaker phones, and
computer peripheral equipment such as the computer mouse. Among its largest
customers are Johnson & Johnson and Hewlett Packard. Recent important
customer additions have been Microsoft, U.S. Robotics and Cisco Systems.
Flextronics' manufacturing skills allow its customers to concentrate on their
core competancies, i.e., developing and marketing new products. Flextronics'
modern, Far East manufacturing facilities staffed by skilled and low cost
labor enable it to manufacture products for its customers cheaper and faster
than they could themselves. Flextronics' packaging skills using
miniaturization have allowed its customers to design increased functionality
into their products, an important advantage. Flextronics' electronic data
interchange with its customers allows work performed in Flextronics' Far East
plants to appear as if it is being done on the domestic production floors of
its customers. Flextronics has been able to continuously lower production
costs, producing items in minutes that used to take days, and pass on these
savings to its customers.
Flextronics' business economics are very attractive. Revenues approach ten
times investment; operating margins average 7-8%. Flextronics' shares now
sell for about 15 times our estimated next twelve months' earnings. Earnings
are growing about 50% per year. We purchased additional shares of Flextronics
when its shares fell about 23% after it reported that March quarter income
was flat with the December 1995 period; income for the period was about 64%
ahead of year ago results. Customer additions and already contracted business
will sharply boost earnings results later this year. Baron Asset Fund owns
674,500 shares of Flextronics purchased for an average $29.82 per share.
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CORPORATE NEWS DEVELOPMENTS
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Education
Westcott Communications creates and produces training and educational
programming for government, healthcare and industrial clients. Among its
clients are fire and police departments, nursing homes and hospitals, and
large industrial companies introducing new products to geographically
dispersed sales forces. Westcott delivers its programming to its customers by
both satellite and CD ROM. In April, K III Communications reached a
definitive agreement to acquire Westcott for $21.50 per share. Although we
sold about a third of our shares at about $19 per share after Westcott
announced it was for sale, Baron Asset Fund continues to hold 135,000 shares
of Westcott which cost us about $14.95 per share last year.
Media and Entertainment
While other radio companies continue to make acquisitions for 12-15 times
broadcast cash flow in top markets, Saga Communications continues to buy
stations in smaller markets with less competition for little more than half
this price. In February, Saga acquired the farm belt's premier agricultural
station, WANX, Yankton, S.D., for $7 million. This equates to about 7.5 times
the station's trailing $930,000 annual cash flow. Cash flow is growing 6-7%
per year. WANX is the most powerful radio station in the country reaching 225
counties in five states with its weather reports, fertilizer and seed ads and
hog futures reports. Also thrown into this deal is a Sioux City, Iowa FM
oldies station that, although it has no current cash flow, has the potential
to generate $400,000 cash flow per year. In March, Saga announced the
acquisition of its competitor in Portland, Maine, the leading AM/FM
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country station in that market, for $10 million. The acquisition price was
about 8.3 times cash flow of $1.2 million. In addition to a reasonable
valuation for this acquisition, Saga should be able to boost the results at
its existing station by instituting a higher ad rate structure. Baron Asset
Fund owns 1.1 million shares of Saga acquired for an average of $12.83 per
share. Saga is the least expensive publicly owned radio company based upon
last twelve month's cash flow multiples.
- -------------------------------------------------------------------------------
OTHER DEVELOPMENTS
- -------------------------------------------------------------------------------
The Baron Funds Receive Favorable Media Coverage
Baron Asset Fund's performance has been strong and consistent since its
inception nearly nine years ago in June 1987; Baron Growth & Income Fund's
performance was category leading in 1995, its first year of operation, and
continues to be highly ranked in the current year. Our investment approach is
based upon common sense, our independent investment research and rigorous
financial analysis. When coupled with our Funds' favorable long term
performance and our historic avoidance of volatile, high technology
investments, the Baron Funds continue to attract favorable media coverage.
Since our last quarterly letter, Baron Asset Fund was either featured or
mentioned in a number of financial magazines and newsletters. We were
featured in the March 1996 issue of Louis Rukeyser's Mutual Funds in an
interview titled "In Tune With Tomorrow." In Rukeyser's inimitable style, he
called me "a sure-footed hunter in the often tricky jungle of small-company
stocks." The March Kiplinger's Personal Finance Magazine included Baron Asset
Fund in a story titled "Best Funds for Your Goals." We were mentioned in an
April 7, 1996 New York Times article titled "Nothing Seems to Stop the Flow
at Stock Funds." We were one of six mutual funds recommended in the May 1996
Money Magazine article "How to Make Money Even if the Market Falls." We agree
with an important premise of this article that equity mutual funds are an
attractive investment over the long term as an inflation hedge. In an
Associated Press Newswire feature story dated May 7, 1996, both Baron Asset
Fund and Baron Growth & Income Fund were featured in a story carried by
hundreds of newspapers nationwide. The purpose of this article was to
describe how to decide between investing in two funds managed by the same
portfolio manager. "Ron Baron, a mutual fund manager who has been a big
winner in the recent fund performance race, faces a stiff new challenge right
now from a rival fund managed by ... Ron Baron!" We are appreciative of these
stories but it certainly isn't going to be easy to live up to their
flattering reviews.
If you would like to receive copies of any of these articles, please let us
know. Articles will be furnished without charge, of course.
Baron Asset Fund's Net Assets Reach One Billion Dollars. Can We Continue to
Manage Assets Entrusted to Us Well? We Think So. Will We Close the Fund? Not
as Long as We Can Manage Assets Productively. See Below.
Late during the month of May, Baron Asset Fund's net assets reached one
billion dollars. Can we continue to manage the Fund as well with its
substantially increased asset base? We think so. We are continuing to find
securities in which to invest that are attractively priced relative to our
absolute return requirements. We are continuing to invest a significant
portion of our daily cash flows in stocks. In late May, however, following
the very strong performance of small cap stocks this spring, we have become
even more opportunistic with our stock purchases, and have allowed cash and
short term investments to increase as a percentage of our assets.
We have continued to maintain our market capitalization mix between our
definition of small-cap, mid-cap and large-cap stocks. In fact, a significant
portion of our very large Manor Care shareholdings, the Choice Hotel portion,
should be reclassified as mid-cap this fall after shares of the hotel company
are given as a dividend to Manor Care's shareholders. Manor Care now
represents about 9.6% of Baron Asset Fund's net assets and, with a $2.5
billion market cap, is now classified by us as a large cap holding.
Our analytical team is strong. Susan Robbins has worked with me for nearly
twenty years and helps me with our investments in healthcare, business
services and privatization of government services, about 25-30% of our
portfolio. Morty Schaja, my close associate for nearly six years, in addition
to shouldering a great deal of our business operating responsibilities,
performs special situation project research for me and acts as supervisor and
mentor to our three young analysts. I would also be remiss if I did not
mention the terrific job our senior trader, David Schneider, and his
assistant have done purchasing and, on occasion, selling stocks at attractive
prices. Our strong office support team allows me to spend more time than ever
on research and portfolio management, tasks I enjoy the most and am probably
better at than administration and trading.
Finally, as long as we are able to continue to manage assets entrusted to us
productively and achieve our objective rates of return, we are unlikely to
close our Funds to new investors.
- -------------------------------------------------------------------------------
8
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Personal Trading by Portfolio Managers
The Chairman of the Securities and Exchange Commission believes that personal
securities trading by portfolio managers of mutual funds presents
irreconcilable, inherent conflicts of interest. Although our investment
management company already had one of the most stringent codes of ethics and
compliance for our industry, I have decided to forgo any additional direct
personal securities investments. Since the beginning of 1995, I have made
only one new direct investment: I have added to my shareholdings in Robert
Half, an existing personal investment, during May 1995. I have since added to
my significant personal investments in our two mutual funds and in our two
private partnerships and intend to continue to do so. I have also made it
exceedingly difficult and onerous for employees of Baron Capital, Inc., an
affiliate of the Baron Funds' adviser, to make direct personal securities
investments.
Fifth Annual Baron Investment Conference Scheduled for October 18, 1996: New
York City
The Fifth Annual Baron Investment Conference is scheduled for Friday morning,
breakfast through lunch, October 18, 1996, in New York City. Please save the
date. Our Conference speakers, chief executives of businesses in which we are
shareholders, will be announced over the summer. I will be the final speaker.
Following my presentation, I will try to answer any questions posed by our
guests. We hope you will be able to attend. There will be no charge, of
course.
Thank You for Investing in Baron Asset Fund
Individuals and their financial advisers have literally thousands of choices
if 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
support.
Sincerely,
/s/ Ronald Baron
-------------------------------
Ronald Baron
President
May 29, 1996
- -------------------------------------------------------------------------------
9
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND PERFORMANCE UPDATE
[CHART APPEARS HERE]
1996 First Quarter Latest Year Since Inception
1/1/96 - 3/31/96 4/1/95 - 3/31/96 1/3/95 - 3/31/96
------------------ ---------------- ----------------
Baron G & I Fund 11.9% 44.8% 70.6%
S&P 500* 5.4% 32.1% 44.9%
Russell 2000* 5.1% 28.8% 34.7%
*The S&P 500 and Russell 2000 are unmanaged indexes. The S&P measures the
performance of the stock market in general; Russell 2000 of small and
mid-sized companies.
Dear Baron Growth & Income Shareholder:
- -------------------------------------------------------------------------------
PERFORMANCE REVIEW
- -------------------------------------------------------------------------------
Baron Growth & Income Ranks Highly; But, It is Still Only a Little More Than
a Year Old
Baron Growth & Income Fund continues to perform well, both on an absolute and
relative basis. Baron Growth & Income Fund increased in value 11.9% during
the three months ended March 31, 1996. The S & P 500 increased 5.4%; the
Russell 2000, 4.7%. According to Lipper Analytical Services, the average U.S.
diversified growth stock fund gained 5.7% in the quarter; the average U.S.
growth and income fund also gained 5.7%. Based upon information furnished to
us by Lipper, for the three months ending March, 31, 1996, Baron Growth &
Income was the number one fund among 520 growth and income funds with assets
greater than $1 million. Also according to Lipper, Baron Growth & Income
Fund's 52.5% gain last year, its first year of operations, ranked number one
of 426 growth and income funds. The New York Times on May 29, 1996 ranked
Baron Growth & Income as the number one performing growth and income fund for
the twelve months ending May 1996. The Fund's performance ranks highly not
only among both growth and income funds but also among diversified U.S. stock
funds.
Most of Our Stocks Performed Well During the Quarter; Several Were
Outstanding
Most of our portfolio holdings performed well during the quarter. Solid stock
performance that during nearly any other time period would have to be
considered "outstanding" was achieved by private college operator DeVry; cash
and carry, wholesale food and restaurant supplies store Smart & Final; radio
stations American Radio and Saga Communications; nursing home operator/hotel
franchisor Manor Care; casino hotel developer/owner Circus Circus; discount
broker/no-load mutual fund distributor Charles Schwab; U.K. cable
t.v./telephony operator International CableTel; and funeral home/cemetery
owner Stewart Enterprises. Performance that can only be considered
"outstanding," either now or at any other time, was achieved by pet supplies
retailer Petco; low priced necessities retailer Dollar Tree; privatized
prisons operators Wackenhut Corrections and Youth Services; classroom
instructor to information technology professionals Learning Tree; and,
communications satellite company Globalstar.
Even Our REITs Did Well
We are especially pleased by the performance of the real estate investment
trusts (REITs) in which we have invested. REITs normally represent about
20-25% of Baron Growth & Income Fund's assets, about half the "income"
component of our "growth" and "income" fund. It has been especially difficult
to make money in real estate stocks for the past fifteen months. Rising
interest rates, the possibility of increased real estate development
pressuring rents, and more attractive investment alternatives in a rapidly
rising stock market have all caused REIT prices to lag. Baron Growth & Income
Fund hopes to obtain attractive income yields and moderate capital
appreciation, about 12-15% annual total returns from this segment of our
portfolio. The stability of this portfolio sector and that devoted to
non-rated, high yielding and convertible debt permits us to invest nearly 60%
of the Fund's assets in riskier, small- and medium-sized businesses having
much greater capital growth potential.
During 1995, our REIT investments achieved total returns in excess of 20%,
category leading performance for this conservative sector. During the first
quarter of 1996, our REIT investments achieved aggregate total return of
about 6.5%. This performance is again significantly in excess of the NAREIT
index gain in the first quarter of 2.3%.
There Was a Lot of Merger and Acquisition Activity in Our Portfolio in the
March Quarter
- -------------------------------------------------------------------------------
10
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
The March quarter also evidenced unusual merger and acquisition activity in
Baron Growth & Income Fund's investment portfolio. Westcott Communications
was acquired by K III; Waterhouse Securities by Toronto Dominion; and
DeBartolo by Simon. Baron Growth & Income Fund achieved significant capital
appreciation in all of the above listed securities. Immediately before the
Waterhouse acquisition was announced, its convertible debt represented nearly
3% of our Fund's investment portfolio. Our Waterhouse investment increased in
value more than 40% this year. Cellular Communications of Puerto Rico
recently announced that it, too, had hired an investment bank to explore a
possible strategic combination or the sale of its business. We expect this
company to make a further announcement regarding its decision within the next
few months.
There is an Important Difference Between Baron Growth & Income Fund and Baron
Asset Fund
Over the long term, our performance objectives for Baron Growth & Income Fund
are similar to those for Baron Asset Fund, i.e., 15-20% annual returns. The
difference? Growth & Income will normally invest about 35-40% of its assets
in income producing securities, e.g., REITs and convertible and
non-investment grade debt principally issued by fast growing, small and
medium-sized businesses. This compares to an allocation to these securities
of somewhat less than 10% by Baron Asset Fund. This income producing
portfolio segment, while growing less rapidly than the balance of Growth &
Income's portfolio, offers the portfolio ballast, stability. It should
normally be expected that in a very strong market, Baron Growth & Income Fund
will not perform quite as well as Baron Asset Fund and, in a falling market,
it should do a little better. We consider the spectacular performance of
Baron Growth & Income last year an anomaly. We plan for the Fund to do well.
Just not that well.
- -------------------------------------------------------------------------------
CORPORATE DEVELOPMENTS
- -------------------------------------------------------------------------------
Real Estate Investment Trusts
Our real estate investment trust shareholdings are focused in well managed,
niche businesses where we believe barriers to competition for a reasonable
time period exist. These barriers are the result of inherent competitive
advantage held by the businesses in which we are shareholders. REIT
competitive advantage can be derived from zoning barriers, below market
rents, site redevelopment and tenant marketing expertise, non-reproducible
properties, etc.
DeBartolo Realty Acquired by Simon Property
During March, the two largest mall and shopping center owners in the country,
DeBartolo Realty and Simon Property, announced their intention to merge.
DeBartolo shareholders will receive 0.68 shares of Simon for each share owned
in DeBartolo. This combination will result in North America's largest real
estate company. Simon's less leveraged balance sheet and resultant lower cost
of capital can be used to upgrade and expand DeBartolo's malls. The
combination will provide the new entity increased bargaining power with
national retailers and reduce portfolio risk since no single tenant will
represent more than 2% of annual rents. Yields on shopping center investments
are now very attractive; there is little new construction to depress returns;
and below market rents offer upside on lease expirations.
Security Capital USA Realty Invests $220 million in Storage USA
On March 1, Security Capital USA Realty agreed to invest $220 million in new
Storage USA shares at $31.30 per share. This will represent 28.6% of the then
outstanding shares of Storage USA. Security Capital is also seeking
permission from Storage USA's shareholders to purchase sufficient additional
shares of Storage USA in open market transactions or otherwise to boost its
ownership percentage to 37.5% of Storage USA's outstanding shares. This
transaction is subject to approval by Storage USA's shareholders. Security
Capital USA Realty is a Luxembourg based fund advised by respected U.S. real
estate investor Bill Sanders. It had been formed to allow non-U.S. citizens
and tax exempt U.S. institutions to invest in U.S. real estate investment
trusts which offer strategic potential for other ventures. This transaction
will provide Storage USA with adequate capital resources to complete its
aggressive current building and acquisition program. We believe this
transaction will be additive to business value and offer Storage USA overseas
management expansion potential.
We have addressed in a previous letter the very favorable economics of
storage REITS when compared to other real estate ventures, e.g., more revenue
per foot with lower construction costs and less expensive maintenance than
apartments, much higher return on capital than offices and retail. The
economics are becoming even more favorable. Commercial tenants, now about 36%
of Storage USA's customers, could reach 50% in a few years. Commercial
tenants have average length of stay of two years compared to 7 months for
individuals. This will reduce marketing expense to fill units. Rents are
easily raised 5 - 6% per year since average monthly charges for a 100
square foot space are less than $100. There are also significant
acquisition opportunities and lots of new build expansion potential.
In large cities like New York, Boston,
- -------------------------------------------------------------------------------
11
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
Washington, D.C. and San Francisco, there are significant barriers to opening
properties. Square feet per person, as a result, ranges from just 1 sq. ft.
to 5 sq. ft. compared to 10 sq. ft. per person in Phoenix. This signals unmet
demand that Storage will begin to try to satisfy.
Sun Communities Largest Manufactured Home Community Owner Following
Acquisition
During March, Sun Communities, a large owner of manufactured home
communities, announced the acquisition of Aspen Communities, a privately held
owner of twenty five similar communities. Aspen's communities are
concentrated in Michigan and Florida, key Sun markets. The acquisition
increases the size of Sun by nearly 50% making it the largest, publicly held
owner of manufactured home communities. There is opportunity for Sun to
improve the returns from this acquisition through corporate administration
expense reductions, by separately metering water for tenants and by
converting some Aspen seasonal sites to permanent sites. Sun has 2500
potentially high return expansion sites in its portfolio, the lowest
operating costs in its industry, the ability to raise its inexpensive land
rents to tenants by more than inflation annually, and is well protected from
competition due to zoning barriers.
- -------------------------------------------------------------------------------
OTHER DEVELOPMENTS
- -------------------------------------------------------------------------------
The Fifth Annual Baron Investment Conference: Friday, October 18, New York City
The Fifth Annual Baron Investment Conference will be held in New York City on
Friday, October 18, 1996. It will extend from breakfast through lunch. Please
save the date. Our five conference speakers, chief executives of companies in
which The Baron Funds are shareholders, will be announced over the summer.
Their presentations will each consist of a half hour slide show followed by
about fifteen minutes of questions and answers. I will be the final speaker
immediately after lunch. Following my presentation I will also attempt to
answer any questions from our guests. I have found it useful to allow our
shareholders to meet each year and question both the executives of the
companies in which their money is invested and the portfolio manager, me, who
has selected these investments. We hope you will be able to attend. There
will be no charge, of course.
Sections of the Baron Asset Fund Quarterly Report are Relevant to Your
Investment in Baron Growth & Income Fund
There are a number of 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 especially relevant our discussions
regarding Investment Principles, Strategy and Outlook as well as our brief
note regarding the Investment Themes we now find attractive. The Baron Asset
Fund segment Other Developments lists a number of articles that have recently
appeared in the media about the two Baron Funds. If you would like to receive
a copy of any of these articles, please either call or write.
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 advisors would probably characterize our Fund as
among the more aggressive in this category due to its focus on small- and
mid-sized businesses as well as our investments in non-rated debt. We agree.
However, we regard Baron Growth & Income Fund as a significantly more
conservative mutual fund than most others which focus on small- and mid-sized
companies. We will attempt to achieve annual returns superior to most growth
and income funds and at least comparable to mutual funds which focus on
small- and mid-sized companies. Of course, there can obviously be no
guarantee that we can achieve our objective 15 - 20% compound annual returns.
While our Fund's initial results have been very strong, it must be remembered
that Baron Growth & Income Fund is now only seventeen months old. We believe
it is probably still too early for most investors and their advisors to fully
assess the unconventional growth and income investment strategy we have
mapped for our Fund. As a result of this strategy and the young life of the
Fund, we are especially grateful for the strong initial support provided by
our early fellow shareholders. We are especially thankful as well for the
strong early support given our venture by Sheldon Jacob's No Load Fund
Investor and Ken Gregory's No Load Fund Analyst. Both have not only
recommended our Fund in their letters, but have become substantial Baron
Growth & Income shareholders.
We are also appreciative of the strong interest shown 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
May 29, 1996
- -------------------------------------------------------------------------------
12
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
TABLE I
- -------------------------------------------------------------------------------
PORTFOLIO MARKET CAPITALIZATION
- -------------------------------------------------------------------------------
The Funds invest primarily in small and medium sized 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
- -------------------------------------------------------------------------------
Charles Schwab Corp. ........... $4,629,037 6.0%
Mirage Resorts, Inc.* .......... 4,022,021 0.6
Circus Circus Enterprises, Inc.* . 3,792,732 1.8
Globalstar Telecomm., Ltd* ..... 2,968,000 1.0
United States Cellular Corp.* .. 2,959,755 0.2
Manor Care, Inc. ............... 2,457,883 6.3
Olsten Corp. ................... 2,296,200 2.5
Corrections Corp. of America* .. 2,280,000 1.2
----
19.6%
Medium Capitalization
- -------------------------------------------------------------------------------
La Quinta Inns, Inc. ........... $1,579,582 0.8%
Nine West Group, Inc.* ......... 1,538,369 1.5
Robert Half Intl., Inc.* ....... 1,390,189 4.3
Promus Hotel Corp.* ............ 1,336,006 0.2
Stewart Enterprises, Inc. CL A . 1,180,730 3.2
Dollar Tree Stores, Inc.* ...... 1,101,793 2.0
Delta and Pine Land Co. ........ 1,079,125 2.3
Heilig Meyers, Co. ............. 1,002,217 1.6
Genesis Health Ventures, Inc.* . 983,131 2.2
Kimco Realty Corp. ............. 973,668 0.5
Vornado Realty Trust ........... 922,831 0.6
Intl. CableTel, Inc.* .......... 909,806 5.6
----
24.8%
Small Capitalization
- -------------------------------------------------------------------------------
Petco Animal Supplies, Inc. .... $ 686,196 1.9%
American Radio Systems Corp.* .. 634,500 1.5
Proffitt's Inc.* ............... 605,116 0.5
DeVry, Inc.* ................... 565,136 2.0
Smart and Final, Inc. .......... 521,441 6.4
OM Group, Inc. ................. 461,464 2.1
Bristol Hotel Co.* ............. 451,419 0.4
Palmer Wireless, Inc.* ......... 447,449 0.5
- -----------------------------------------------------------------------------
13/1
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
Small Capitalization (continued)
- -------------------------------------------------------------------------------
Occusystems, Inc.* ................. $447,230 0.1%
American Mobile Satellite Corp.* ... 424,668 1.5
Wackenhut Corrections Corp.* ....... 424,526 1.1
American Freightways Corp.* ........ 398,858 0.3
Flextronics Intl. Ltd.* ............ 392,659 2.3
Equity Corp. Intl.* ................ 377,290 0.5
Avatar Holdings, Inc.* ............. 363,804 1.0
Westcott Communications, Inc.* ..... 350,744 0.4
Cellular Comm. of P.R., Inc .* ..... 345,670 2.3
Scotts Co.* ........................ 336,905 0.8
Alexander's, Inc.* ................. 330,056 1.2
Vitalink Pharmacy Svcs, Inc.* ...... 314,437 0.7
Cross Timbers Oil Co. .............. 314,122 1.7
Seacor Holdings, Inc.* ............. 313,947 0.2
American Homepatient, Inc.* ........ 313,804 0.8
Scandinavian Broadcasting Systems .. 303,255 1.0
Cheesecake Factory, Inc.* .......... 293,112 0.1
Marcus Corp. ....................... 284,586 1.0
Learning Tree Intl., Inc.* ......... 281,832 1.1
Spacehab, Inc.* .................... 157,737 0.7
Youth Services Intl., Inc.* ........ 155,550 2.3
Pediatric Services of America, Inc.* . 154,834 1.4
Saga Communications, Inc.* ......... 150,577 2.4
Chancellor Broadcasting Co.* ....... 147,400 0.8
Summit Care Corp.* ................. 143,741 1.6
Echostar Communications Corp.* ..... 135,000 0.2
American Superconductor Corp.* ..... 132,818 0.1
DVI, Inc.* ......................... 128,227 1.7
USA Trucks, Inc.* .................. 128,020 0.4
American Classic Voyages Co. ....... 113,602 0.3
Team Rental Group, Inc.* ........... 61,100 0.4
Big Entertainment, Inc.* ........... 37,893 0.1
----
45.8%
- -------------------------------------------------------------------------------
13/2
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
TABLE I
- -------------------------------------------------------------------------------
PORTFOLIO MARKET CAPITALIZATION (continued)
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
Large Capitalization
- -------------------------------------------------------------------------------
Charles Schwab Corp. ............. $4,629,037 5.8%
Circus Circus Enterprises, Inc.* . 3,792,732 1.4
Harrah's Entertainment, Inc.* .... 3,020,429 0.4
U.S. Satellite Broadcasting, Inc.* . 2,941,303 2.1
Manor Care, Inc. ................. 2,457,883 4.3
Olsten Corp. ..................... 2,296,200 1.3
Corrections Corp. of America* .... 2,280,000 0.7
----
16.0
Medium Capitalization
- -------------------------------------------------------------------------------
Leucadia National Corp. .......... $1,564,264 2.6%
Nine West Group, Inc.* ........... 1,538,369 0.8
T. Rowe Price Assoc., Inc. ....... 1,513,851 0.8
Public Storage, Inc. ............. 1,467,000 0.9
Robert Half Intl., Inc.* ......... 1,390,189 2.5
DeBartolo Realty Corp. ........... 1,366,629 1.1
Stewart Enterprises, Inc. ........ 1,180,730 1.9
Dollar Tree Stores, Inc.* ........ 1,101,793 1.5
Sun Intl. Hotels Ltd.* ........... 1,044,000 1.2
Heilig Meyers, Co. ............... 1,002,217 0.7
Genesis Health Ventures, Inc.* ... 983,131 1.6
Kimco Realty Corp. ............... 973,668 2.1
Vornado Realty Trust ............. 922,831 1.8
Intl. CableTel, Inc.* ............ 909,806 4.0
----
23.5
Small Capitalization
- -------------------------------------------------------------------------------
Starwood Lodging Trust ........... $ 733,800 2.0%
Beacon Properties Corp. .......... 719,318 1.4
Petco Animal Supplies, Inc.* ..... 686,196 1.4
Highwoods Properties, Inc. ....... 673,644 1.1
Storage USA, Inc. ................ 672,124 2.1
American Radio Systems Corp.* .... 634,500 1.8
Omnipoint Corp.* ................. 625,540 0.3
DeVry, Inc.* ..................... 565,136 1.1
Smart and Final, Inc. ............ 521,441 2.6
Extended Stay of America, Inc.* .. 491,525 0.3
OM Group, Inc. ................... 461,464 1.6
Sun Communities, Inc. ............ 460,007 2.8
Waterhouse Inv. Svcs, Inc. ....... 415,135 4.6
Stratosphere Corp. ............... 437,563 1.7
American Mobile Satellite Corp.* . 424,668 1.0
Cali Realty Corp. ................ 400,546 1.5
Flextronics Intl. Ltd.* .......... 392,659 2.0
Westcott Communications, Inc.* ... 350,744 0.4
Cellular Comm. of P.R., Inc.* .... 345,670 1.2
- -------------------------------------------------------------------------------
14/1
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -------------------------------------------------------------------------------
('000s)
Small Capitalization (continued)
- -------------------------------------------------------------------------------
Cellular Comm. Intl., Inc.* ........ $342,841 1.8%
Scotts Co.* ........................ 336,905 0.4
Southern Union Co. New* ............ 332,472 2.3
Alexander's, Inc.* ................. 330,056 0.9
Scandinavian Broadcasting .......... 303,255 2.7
Rainforest Cafe, Inc.* ............. 287,120 0.6
Marcus Corp. ....................... 284,586 1.0
Learning Tree Intl., Inc.* ......... 281,832 0.9
Studio Plus Hotel, Inc.* ........... 233,100 0.5
Columbus Realty Trust .............. 227,398 2.4
Sirrom Capital Corp. ............... 222,642 0.6
Spacehab, Inc.* .................... 157,737 1.0
Youth Services Intl., Inc.* ........ 155,550 3.4
Pediatric Services of America, Inc.* . 154,834 1.1
Saga Communications, Inc.* ......... 150,577 2.7
Chancellor Broadcasting Co.* ....... 147,400 1.5
Summit Care Corp.* ................. 143,741 1.2
Counsel Corp.* ..................... 132,300 0.6
DVI, Inc.* ......................... 128,227 1.3
Alcide Corp.* ...................... 59,286 0.3
----
58.1
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 ........ 23.1% 25.1%
Leverage (Debt |- 40% of
Market Cap) ................. 12.2 16.5
Foreign Sales Dependent
(Sales |- 10%) .............. 10.0 7.4
Volatility (Beta |- 1.2) ...... 7.3 11.2
Over-the-Counter Securities .. 38.9 38.2
Unseasoned Securities
(Publicly owned for -| 3 years) 32.6 42.7
(Publicly owned for |- 1 year). 3.3 4.5
Turnarounds .................. 3.4 1.1
Development Companies ........ 10.7 10.9
- -------------------------------------------------------------------------------
14/2
<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
- -------------------------------------------------------------------------------
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment 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 16.72 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
- -------------------------------------------------------------------------------
* Assumes all dividends were reinvested and no shares were redeemed.
- -------------------------------------------------------------------------------
15/1
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Baron Growth & Income Fund
- -------------------------------------------------------------------------------
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment 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
- -------------------------------------------------------------------------------
* Assumes all dividends were reinvested and no shares were redeemed.
- -------------------------------------------------------------------------------
Performance Information
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Baron Asset Fund's Average Annual Return
- -------------------------------------------------------------------------------
Period ended March 31, 1996
- -------------------------------------------------------------------------------
One year 40.7%
- -------------------------------------------------------------------------------
Two years 30.5%
- -------------------------------------------------------------------------------
Three years 24.7%
- -------------------------------------------------------------------------------
Four years 21.9%
- -------------------------------------------------------------------------------
Five years 21.6%
- -------------------------------------------------------------------------------
Since inception June 12, 1987 18.4%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND'S AVERAGE ANNUAL RETURN
- -------------------------------------------------------------------------------
Period ended March 31, 1996
- -------------------------------------------------------------------------------
One year 44.8%
- -------------------------------------------------------------------------------
Since inception January 3, 1995 53.3%
- -------------------------------------------------------------------------------
The performance data represents past performance. Investment returns and
principle value will fluctuate so that an investor's share 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.
- -------------------------------------------------------------------------------
15/2
<PAGE>
- -------------------------------------------------------------------------------
BARON ASSET FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- -----------------------------------------------------------------------------
March 31, 1996 (Unaudited)
Shares or Market
Principal Amount Value(1) %(2)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Common Stocks
- -------------------------------------------------------------------------------
Amusement and Recreation Services
200,000 American Classic Voyages Co. .... $ 1,650,000 0.3 %
100,000 Bristol Hotel Co.* .............. 2,725,000 0.4
350,000 Circus Circus Enterprises, Inc.* . 11,768,750 1.8
180,000 La Quinta Inns, Inc. ............ 5,287,500 0.8
250,000 Marcus Corp. .................... 6,593,750 1.0
80,000 Mirage Resorts, Inc.* ........... 3,510,000 0.6
50,000 Promus Hotel Corp.* ............. 1,300,000 0.2
------------ -------
32,835,000 5.1
Business Services
109,500 Equity Corp. Intl.* ............. 3,230,250 0.5
501,000 Olsten Corp. .................... 16,157,250 2.5
560,000 Robert Half Intl., Inc.* ........ 27,230,000 4.3
474,500 Stewart Enterprises, Inc. CL A .. 20,284,875 3.2
240,000 Team Rental Group, Inc.* ........ 2,400,000 0.4
------------ -------
69,302,375 10.9
Chemical
365,000 OM Group, Inc. .................. 13,550,625 2.1
Communications
580,000 American Mobile Satellite Corp.* . 9,860,000 1.5
545,000 Cellular Comm. of P.R., Inc.* ... 14,715,000 2.3
125,000 Globalstar Telecomm., Ltd* ...... 6,625,000 1.0
350,000 Intl. CableTel, Inc.* ........... 10,543,750 1.7
155,000 Palmer Wireless, Inc.* .......... 2,964,375 0.5
30,000 United States Cellular Corp.* ... 1,035,000 0.2
------------ -------
45,743,125 7.2
Education
379,000 DeVry, Inc.* .................... 12,886,000 2.0
345,000 Learning Tree Intl., Inc.* ...... 6,813,750 1.1
145,500 Westcott Communications, Inc.* .. 2,582,625 0.4
------------ -------
22,282,375 3.5
Energy
635,000 Cross Timbers Oil Co. ........... 10,953,750 1.7
30,000 Seacor Holdings, Inc.* .......... 1,106,250 0.2
------------ -------
12,060,000 1.9
Financial
1,471,000 Charles Schwab Corp. ............ 38,062,125 6.0
870,000 DVI, Inc.* ...................... 10,766,250 1.7
------------ -------
48,828,375 7.7
Food and Agriculture
266,666 Delta and Pine Land Co. ......... 14,833,296 2.3
305,000 Scotts Co.* ..................... 5,413,750 0.8
------------ -------
20,247,046 3.1
Government Services
138,500 Corrections Corp. of America* ... 7,894,500 1.2
302,500 Spacehab, Inc.* ................. 4,310,625 0.7
188,000 Wackenhut Corrections Corp.* .... 7,332,000 1.1
292,500 Youth Services Intl., Inc.* ..... 7,458,750 1.2
------------ -------
26,995,875 4.2
Health Services
125,000 American Homepatient, Inc.* ..... 4,906,250 0.8
343,300 Genesis Health Ventures, Inc.* .. 13,860,738 2.2
1,025,000 Manor Care, Inc. ................ 40,231,250 6.3
34,000 Occusystems, Inc.* .............. 773,500 0.1
352,000 Pediatric Services of America, Inc. 8,932,000 1.4
479,000 Summit Care Corp.* .............. 10,178,750 1.6
196,500 Vitalink Pharmacy Svcs, Inc.* ... 4,421,250 0.7
------------ -------
83,303,738 13.1
Machinery and Electronics
30,000 American Superconductor Corp.* .. 420,000 0.1
Manufacturing
475,000 Flextronics Intl. Ltd.* ......... 14,487,500 2.3
Media and Entertainment
280,000 American Radio Systems Corp.* ... 9,450,000 1.5
125,000 Big Entertainment, Inc.* ........ 789,062 0.1
240,000 Chancellor Broadcasting Co.* .... 5,280,000 0.8
30,000 Echostar Communications Corp.* .. 1,012,500 0.2
735,000 Saga Communications, Inc.* ...... 15,618,750 2.4
------------ -------
32,150,312 5.0
- -------------------------------------------------------------------------------
16/1
<PAGE>
- -------------------------------------------------------------------------------
BARON ASSET FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (Continued)
- -------------------------------------------------------------------------------
March 31, 1996 (Unaudited)
Shares or Market
Principal Amount Value(1) %(2)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Common Stocks (Continued)
- -------------------------------------------------------------------------------
Real Estate & REIT's
112,000 Alexander's, Inc.* ..................... $ 7,392,000 1.2%
164,500 Avatar Holdings, Inc.* ................. 6,580,000 1.0
120,000 Kimco Realty Corp. ..................... 3,240,000 0.5
100,000 Vornado Realty Trust ................... 3,800,000 0.6
------------- ------
21,012,000 3.3
Retail Trade & Restaurants
30,000 Cheesecake Factory, Inc.* ............... 810,000 0.1
290,000 Dollar Tree Stores, Inc.* .............. 12,760,000 2.0
500,000 Heilig Meyers, Co. ..................... 10,312,500 1.6
215,000 Nine West Group, Inc.* ................. 9,298,750 1.5
275,000 Petco Animal Supplies, Inc.* ........... 12,306,250 1.9
110,000 Proffitt's Inc.* ....................... 3,465,000 0.5
1,641,000 Smart and Final, Inc. .................. 40,614,750 6.4
------------- ------
89,567,250 14.0
Transportation
165,000 American Freightways Corp.* ............ 2,124,375 0.3
177,500 USA Trucks, Inc.* ...................... 2,396,250 0.4
------------- ------
4,520,625 0.7
Miscellaneous ................................... 6,423,751 1.0
------------- ------
Total Common Stocks
(Cost $399,110,838) ........................... 543,729,972 85.2
------------- ------
- -------------------------------------------------------------------------------
Corporate Bonds
- -------------------------------------------------------------------------------
Communications
$20,500,000 Intl. CableTel, Inc. 7.25% Conv. Sub. Notes
04/15/2005 ........................... 25,010,000 3.9
6,000,000 Scandinavian Broadcasting Systems 7.25%
Sub. Deb. Conv. 8/01/2005 ............ 6,195,000 1.0
------------- ------
31,205,000 4.9
Government Services
5,000,000.00 Youth Services Intl. Inc. 7.00% Conv.
Sub. Deb. 02/01/2006 .............. 6,750,000 1.1
------------- ------
Total Corporate Bonds
(Cost $33,260,898) ............................ 37,955,000 6.0
------------- ------
Short Term Money Market
Instrument
62,759,000 Associates Corp. of N.A., 5.4% Due 01/02/96 62,759,000 9.8
------------- ------
Total Short Term Money Market
Instrument (Cost $62,759,000) .................. 62,759,000 9.8
------------- ------
Total Investments
(Cost $495,130,736**) .......................... 644,443,972 101.0
------------- ------
Liabilities Less
Cash and Other Assets .......................... (6,146,068) (1.0)
------------- ------
Net Assets (Equivalent to $34.14 per share based on
18,698,344 shares of beneficial interest
outstanding) .................................... $638,297,904 100.0%
============= ======
- ------
(1) See Note 1 to Financial Statements
(2) Percentage of Net Assets
* Non-income producing securities
** For Federal income tax purposes the cost basis is $495,313,219. Aggregate
unrealized appreciation and depreciation of investments are $157,003,654
and $7,872,901, respectively.
See Notes to Financial Statements.
- -------------------------------------------------------------------------------
16/2
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------------------
March 31, 1996 (Unaudited)
Shares or Market
Principal Amount Value(1) %(2)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Common Stocks
- -------------------------------------------------------------------------------
Amusement and Recreation Services
34,000 Circus Circus Enterprises, Inc.* . $1,076,000 1.4%
10,000 Extended Stay of America, Inc.* . 222,500 0.3
10,000 Harrah's Entertainment, Inc.* .. 293,750 0.4
30,000 Marcus Corp. ................... 791,250 1.0
15,000 Studio Plus Hotel, Inc.* ....... 416,250 0.5
25,000 Sun Intl. Hotels Ltd.* ......... 900,000 1.2
------------ ------
3,699,750 4.8
Business Services
30,000 Olsten Corp. ................... 967,500 1.3
40,000 Robert Half Intl., Inc.* ....... 1,945,000 2.5
34,000 Stewart Enterprises, Inc. CL A . 1,453,500 1.9
------------ ------
4,366,000 5.7
Chemical
10,000 Alcide Corp.* .................. 212,500 0.3
34,000 OM Group, Inc. ................. 1,262,250 1.6
------------ ------
1,474,750 1.9
Communications
46,000 American Mobile Satellite Corp.* . 782,000 1.0
10,000 Cellular Comm. Intl., Inc.* .... 332,500 0.4
34,000 Cellular Comm. of P.R., Inc.* .. 918,000 1.2
20,000 Intl. CableTel, Inc.* .......... 602,500 0.8
10,000 Omnipoint Corp.* ............... 255,000 0.3
------------ ------
2,890,000 3.7
Education
24,000 DeVry, Inc.* ................... 816,000 1.1
34,000 Learning Tree Intl., Inc.* ..... 671,500 0.9
20,000 Westcott Communications, Inc.* . 355,000 0.4
------------ ------
1,842,500 2.4
Financial
174,000 Charles Schwab Corp. ........... 4,502,250 5.8
80,000 DVI, Inc.* ..................... 990,000 1.3
20,000 Sirrom Capital Corp. ........... 457,500 0.6
12,000 T. Rowe Price Assoc., Inc. ..... 636,000 0.8
------------ ------
6,585,750 8.5
Food and Agriculture
19,800 Scotts Co.* .................... 351,450 0.4
Government Services
10,000 Corrections Corp. of America* .. 570,000 0.7
54,000 Spacehab, Inc.* ................ 769,500 1.0
40,000 Youth Services Intl., Inc.* .... 1,020,000 1.3
------------ ------
2,359,500 3.0
Health Services
70,000 Counsel Corp.* ................. 428,750 0.6
30,000 Genesis Health Ventures, Inc.* . 1,211,250 1.6
85,000 Manor Care, Inc. ............... 3,336,250 4.3
34,000 Pediatric Services of America, Inc. 862,750 1.1
45,000 Summit Care Corp.* ............. 956,250 1.2
------------ ------
6,795,250 8.8
Manufacturing
50,000 Flextronics Intl. Ltd.* ........ 1,525,000 2.0
Media & Entertainment
42,000 American Radio Systems Corp.* .. 1,417,500 1.8
51,000 Chancellor Broadcasting Co.* ... 1,122,000 1.5
100,000 Saga Communications, Inc.* ..... 2,125,000 2.7
50,000 U.S. Satellite Broadcasting, Inc.* 1,637,500 2.1
------------ ------
6,302,000 8.1
Real Estate & REIT's
10,000 Alexander's, Inc.* ............. 660,000 0.9
40,000 Beacon Properties Corp. ........ 1,055,000 1.4
52,000 Cali Realty Corp. .............. 1,163,500 1.5
96,000 Columbus Realty Trust .......... 1,872,000 2.4
56,000 DeBartolo Realty Corp. ......... 854,000 1.1
30,000 Highwoods Properties, Inc. ..... 836,250 1.1
60,000 Kimco Realty Corp. ............. 1,620,000 2.1
36,000 Public Storage, Inc. ........... 733,500 0.9
- -------------------------------------------------------------------------------
17/1
<PAGE>
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
STATEMENT OF NET ASSETS (Continued)
- -----------------------------------------------------------------------------
March 31, 1996 (Unaudited)
Shares or Market
Principal Amount Value(1) %(2)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Common Stocks (Continued)
- -------------------------------------------------------------------------------
45,000 Starwood Lodging Trust ......... $ 1,518,750 2.0%
48,000 Storage USA, Inc. .............. 1,650,000 2.1
80,000 Sun Communities, Inc. .......... 2,180,000 2.8
36,000 Vornado Realty Trust ........... 1,368,000 1.8
------------- -------
15,511,000 20.1
Retail Trade & Restaurants
26,000 Dollar Tree Stores, Inc.* ...... 1,144,000 1.5
25,000 Heilig Meyers, Co. ............. 515,625 0.7
15,000 Nine West Group, Inc.* ......... 648,750 0.8
24,000 Petco Animal Supplies, Inc.* ... 1,074,000 1.4
16,000 Rainforest Cafe, Inc.* ......... 504,000 0.6
80,000 Smart and Final, Inc. .......... 1,980,000 2.6
------------- -------
5,866,375 7.6
Utility Services
86,000 Southern Union Co. New* ........ 1,763,000 2.3
------------- -------
Total Common Stocks
(Cost $52,473,082) ....................... 61,332,325 79.3
------------- -------
- -------------------------------------------------------------------------------
Corporate Bonds
- -------------------------------------------------------------------------------
Amusement & Recreation
$1,100,000 Stratosphere Corp. Gtd 1st Mtge
Note 14.25% 05/15/2002 ...... 1,336,500 1.7
Communications
1,800,000 Cellular Comm. Intl. Units
1 Unit = $1000 0% Sr. Disc. Notes
8/15/2000 and 1 Warrant ..... 1,116,000 1.4
2,000,000 Intl. CableTel, Inc. 7.25% Conv.
Sub. Notes 4/15/2005 ........ 2,440,000 3.2
2,000,000 Scandinavian Broadcasting
Systems 7.25% Sub. Deb. Conv.
8/01/2005 ................... 2,065,000 2.7
------------- -------
5,621,000 7.3
Financial
2,000,000 Leucadia National Corp. 5.25% Sub
Deb. Conv. Due 02/01/2003 ... 2,050,000 2.6
2,496,000 Waterhouse Inv. Svcs, Inc., 6.0%
Sub Note Conv. 12/15/2003 ... 3,544,320 4.6
------------- -------
5,594,320 7.2
Government Services
1,200,000 Youth Services Intl. Inc. 7.00%
Conv. Sub. Deb. 02/01/2006 .. 1,620,000 2.1
------------- -------
Total Corporate Bonds
(Cost $12,519,466) ....................... 14,171,820 18.3
------------- -------
Short Term Money Market Instrument
2,520,000 Associates Corp. of N.A., 5.4%
Due 01/02/96 ................ $ 2,520,000 3.3
------------- -------
Total Short Term Money Market
Instrument (Cost $2,520,000) ............. 2,520,000 3.3
------------- -------
Total Investments
(Cost $67,512,548**) ..................... 78,024,145 100.9
------------- -------
Liabilities Less Cash and Other Assets ... (686,314) -0.9
------------- -------
Net Assets (Equivalent to $16.90 per share
based on 4,575,672 shares of beneficial 100.0
interest outstanding) .................. $77,337,831 %
============= =======
- ------
(1) See Note 1 to Financial Statements
(2) 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 $11,300,563
and $788,966, respectively.
See Notes to Financial Statements.
- -------------------------------------------------------------------------------
17/2
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------
March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH
FUND & INCOME FUND
-------------- ---------------
<S> <C> <C>
Assets:
Investments in securities, at value (Cost $495,130,736
and $67,512,548, respectively) ..................... $644,443,972 $78,024,145
Cash .................................................. 353 777
Dividends and interest receivable ..................... 939,433 369,030
Receivable for securities sold ........................ 1,546,213 597,338
Receivable for shares sold ............................ 4,141,195 339,412
Unamortized organization costs (Note 1) ............... 0 24,655
Prepaid expenses ...................................... 10,188 0
-------------- ---------------
651,081,354 79,355,357
-------------- ---------------
Liabilities:
Payable for securities purchased ...................... 12,575,152 1,935,751
Accrued organization costs (Note 1) ................... 0 24,655
Accrued expenses and other payables (Note 3) .......... 208,298 57,120
-------------- ---------------
12,783,450 2,017,526
-------------- ---------------
Net Assets .............................................. $638,297,904 $77,337,831
============== ===============
Net Assets consist of:
Par value ............................................. $ 186,983 $ 45,757
Paid-in capital in excess of par value ................ 486,415,515 66,396,123
Undistributed net investment income (loss) ............ (1,271,843) 281,210
Undistributed net realized gains ...................... 3,654,013 103,144
Net unrealized appreciation on investment ............. 149,313,236 10,511,597
-------------- ---------------
Net Assets ............................................ $638,297,904 $77,337,831
============== ===============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) ........ 18,698,344 4,575,672
============== ===============
Net Asset Value Per Share ............................... $ 34.14 $ 16.90
============== ===============
</TABLE>
See Notes to Financial Statements.
- -------------------------------------------------------------------------------
18
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
For the six months ended March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH
FUND & INCOME FUND
------------- ---------------
<S> <C> <C>
Investment income:
Income:
Interest ....................................... $ 900,979 $ 306,737
Dividends ...................................... 600,533 382,768
------------- ---------------
Total income ................................... 1,501,512 689,505
Expenses:
Investment advisory fees (Note 3) .............. 1,922,684 229,233
Distribution fees (Note 3) ..................... 480,671 57,308
Custodian fees ................................. 49,224 20,549
Shareholder servicing agent fees ............... 63,884 12,421
Amortization of organization costs (Note 1) .... 0 3,287
Registration and filing fees ................... 124,706 43,699
Trustee fees ................................... 21,909 2,591
Professional fees .............................. 14,000 6,500
Reports to shareholders ........................ 62,787 7,108
Insurance ...................................... 5,751 680
Miscellaneous .................................. 27,739 966
------------- ---------------
Total expenses ................................. 2,773,355 384,342
------------- ---------------
Custodian fees paid indirectly ................. 0 (5,252)
------------- ---------------
Net expenses ................................... 2,773,355 379,090
------------- ---------------
Net investment income (loss) ................... (1,271,843) 310,415
------------- ---------------
Realized and unrealized gain on investments:
Net realized gain on investments sold ............. 3,904,641 111,372
Change in net unrealized appreciation of investments 73,588,282 8,093,473
------------- ---------------
Net gain on investments ........................ 77,492,923 8,204,845
------------- ---------------
Net increase in net assets resulting from operations $76,221,080 $8,515,260
============= ===============
</TABLE>
See Notes to Financial Statements.
- -------------------------------------------------------------------------------
19
<PAGE>
- -------------------------------------------------------------------------------
THE BARON FUNDS
- -------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BARON ASSET FUND BARON GROWTH & INCOME FUND
--------------------------------- ------------------------------------
For the For the For the Period
Six Months For the Six Months January 3, 1995
Ended Year Ended Ended (Commencement of
March 31, 1996 September 30, March 31, 1996 Operations) to
(Unaudited) 1996 (Unaudited) September 30, 1995
-------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) ...................... ($ 1,271,843) ($ 851,738) $ 310,415 $ 69,347
Net realized gain on investments sold ............. 3,904,641 149,491 111,372 271,446
Net change in unrealized appreciation on investments 73,588,282 54,335,827 8,093,473 2,418,124
-------------- --------------- -------------- ---------------
Increase in net assets resulting from operations 76,221,080 53,633,580 8,515,260 2,758,917
-------------- --------------- -------------- ----------------
Dividends to shareholders from:
Net investment income ............................. 0 0 (98,552) 0
Net realized gain on investments .................. (399,312) (2,514,282) (279,674) 0
-------------- --------------- -------------- ----------------
(399,312) (2,514,282) (378,226) 0
-------------- --------------- -------------- ----------------
Capital share transactions:
Proceeds from the sale of shares .................. 318,932,115 219,118,186 46,665,394 27,921,323
Net asset value of shares issued in reinvestment of
dividends ....................................... 386,670 2,410,279 368,158
Cost of shares redeemed ........................... (46,815,980) (62,932,974) (6,465,222) (2,047,773)
-------------- --------------- -------------- ----------------
Increase in net assets derived from capital share
transactions ............................... 272,502,805 158,595,491 40,568,330 25,873,550
-------------- --------------- -------------- ----------------
Net increase in net assets ........................ 348,324,573 209,714,789 48,705,364 28,632,467
Net assets:
Beginning of period ............................... 289,973,331 80,258,542 28,632,467 0
-------------- --------------- -------------- ----------------
End of period ..................................... $638,297,904 $289,973,331 $77,337,831 $28,632,467
============== =============== ============== ================
Undistributed net investment income(loss) at end of year . ($ 1,271,844) $ 0 $ 281,209 $ 69,347
============== =============== ============== ================
Shares of Beneficial Interest:
Shares sold ....................................... 10,362,323 8,798,265 3,040,289 2,094,005
Shares issued in reinvestment dividends ........... 13,224 111,227 24,692 0
Shares redeemed ................................... (1,572,800) (2,531,541) (427,910) (155,404)
-------------- --------------- -------------- ----------------
Net increase ...................................... 8,802,747 6,377,951 2,637,071 1,938,601
============== =============== ============== ================
</TABLE>
See Notes to Financial Statements.
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20
<PAGE>
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THE BARON FUNDS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES
Baron Asset Fund (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as a diversified, open-end management
investment company established as a Massachusetts business trust on February
19, 1987. The Trust currently offers two series (individually a "Fund" and
collectively the "Funds"): Baron Asset Fund, started in June of 1987, and
Baron Growth & Income Fund, started in January of 1995. The following is a
summary of significant accounting policies followed by the Funds. The
policies are in conformity with generally accepted accounting principles.
(a) Security Valuation. Portfolio securities traded on any national stock
exchange or quoted on the NASDAQ National Market System are valued on the
basis of the last sale price on the date of valuation or, in the absence of
any sale on that date, the last sale price on the date the security last
traded. Other securities are valued at the mean of the most recent bid and
asked prices if market quotations are readily available. Where market
quotations are not readily available the securities are valued at their fair
value as determined in good faith by the Board of Trustees, although the
actual calculations may be done by others. Money market instruments held by
the Funds with a remaining maturity of sixty days or less are valued at
amortized cost, which approximates value.
(b) Securities Transactions and Investment Income. Securities transactions
are recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on an identified cost basis for financial reporting
and Federal income tax purposes. Dividend income is recognized on the
ex-dividend date and interest income is recognized on an accrual basis.
(c) Federal Income Taxes. Each Fund of the Trust is treated as a separate
entity for Federal income tax purposes. It is the policy of each Fund to
continue to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended, and to distribute all of its taxable
income, including net realized capital gains, if any, to its shareholders. No
federal income tax provision is therefore required.
(d) Expense Allocation. Expenses directly attributed to a Fund are charged to
that Fund's operations; expenses which are applicable to both Funds are
allocated on a basis deemed fair and equitable by the Trustees, usually on
the basis of average net assets.
(e) Organization Costs. Costs incurred in connection with the organization
and initial registration of Baron Growth & Income Fund have been deferred and
are being amortized on a straight-line basis over a five-year period. Baron
Capital, Inc. ("BCI"), a wholly-owned subsidiary of Baron Capital Group, Inc.
("BCG"), agreed to make advances for organization expenses incurred and will
be reimbursed as the costs are amortized.
(f) Distributions. Income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses.
(g) Other. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(2) PURCHASES AND SALES OF SECURITIES.
During the six months ended March 31, 1996, purchases and sales of
securities, other than short term securities, aggregated $261,856,762 and
$40,670,101, respectively for Baron Asset Fund, and $51,344,530 and
$12,607,814, respectively for Baron Growth & Income Fund.
(3) Investment Advisory Fees and Other Transactions with Affiliates
(a) Investment Advisory Fees. BAMCO, Inc. (the "Adviser"), a wholly-owned
subsidiary of BCG serves as investment adviser to the Funds. As compensation
for services rendered, the Adviser receives a fee payable monthly from the
assets of the Funds equal to 1% per annum of each Fund's average daily net
asset value. The Adviser has agreed that if the expenses (exclusive of
interest, taxes, brokerage, extraordinary expenses and amounts paid by the
Funds under the plan of distribution) of either Fund in any fiscal year
exceed the limits prescribed by any state in
- -------------------------------------------------------------------------------
21
<PAGE>
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THE BARON FUNDS
- -------------------------------------------------------------------------------
which that Fund's shares are qualified for sale, the Adviser will reduce its
fee by the amount of any such excess, up to the amount of the Adviser's fee.
The Trustees do not anticipate that the expenses will exceed 2.0% of the
first $100 million and 1.5% of the remainder in excess of $100 million of
each Fund.
(b) Distribution Fees. BCI is a registered broker dealer and the distributor
of the shares of the Funds pursuant to a distribution plan under Rule 12b-1
of the 1940 Act. The distribution plan authorizes the Funds to pay BCI a
distribution fee equal on an annual basis to 0.25% of the Funds' average
daily net assets.
Brokerage transactions for the Funds may be effected by or through BCI.
During the six months ended March 31, 1996, BCI earned $326,009 in brokerage
commissions from Baron Asset Fund, and $62,335 from Baron Growth & Income
Fund.
(c) Trustee Fees. Certain Trustees of the Trust may be deemed to be
affiliated with or interested persons (as defined by the 1940 Act) of the
Funds' Adviser or of BCI. None of the Trustees so affiliated received
compensation for his services as a Trustee of the Trust. None of the Funds'
officers received compensation from the Funds.
(4) Financial Highlights
BARON ASSET FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Year Ended September 30,
Six Months
ended
March, 31, 1996
(Unaudited) 1995 1994 1993 1992
--------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $ 29.30 $ 22.82 $21.91 $ 16.20 $14.80
--------------- -------- -------- -------- --------
Income from investment operations
Net investment income (loss) ............. (0.07) (0.09) (0.14) (0.13) (0.08)
Net realized and unrealized gains (losses)
on investments .......................... 4.94 7.23 1.82 6.00 1.52
--------------- -------- -------- -------- --------
Total from investment operations ....... 4.87 7.14 1.68 5.87 1.44
Less distributions
Dividends from net investment income ..... (0.04)
Distributions from net realized gains .... (0.03) (0.66) (0.77) (0.16)
--------------- -------- -------- -------- --------
Total Distributions .................... (0.03) (0.66) (0.77) (0.16) (0.04)
--------------- -------- -------- -------- --------
Net asset value, end of year ............. $ 34.14 $ 29.30 $22.82 $ 21.91 $16.20
=============== ======== ======== ======== ========
Total Return ........................... 16.7% 32.3% 8.0% 36.5% 9.7%
--------------- -------- -------- -------- --------
Ratios/Supplemental Data
Net assets ( in millions), end of year ... $638.3 $290.0 $80.3 $ 59.9 $43.8
Ratio of expenses to average net assets .. 1.4%** 1.4% 1.6% 1.8% 1.7%
Ratio of net investment income (loss) to
average net assets ...................... (0.7%)** (0.5%) (0.7%) (0.7%) (0.5%)
Portfolio turnover rate .................. 21.0%** 35.2% 55.9% 107.9% 95.5%
</TABLE>
- -------------------------------------------------------------------------------
22/1
<PAGE>
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THE BARON FUNDS
- -------------------------------------------------------------------------------
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987*
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....... $10.88 $ 17.22 $12.98 $11.95 $10.00
-------- --------- -------- -------- --------
Income from investment operations
Net investment income (loss) ............. 0.07 0.21 0.13 0.05 0.07
Net realized and unrealized gains (losses)
on investments .......................... 4.05 (5.14) 4.81 1.18 1.88
-------- --------- -------- -------- --------
Total from investment operations ....... 4.12 (4.93) 4.94 1.23 1.95
Less distributions
Dividends from net investment income ..... (0.20) (0.16) (0.05) (0.03)
Distributions from net realized gains .... (1.25) (0.65) (0.17)
-------- --------- -------- -------- --------
Total Distributions .................... (0.20) (1.41) (0.70) (0.20)
-------- --------- -------- -------- --------
Net asset value, end of year ............. $14.80 $ 10.88 $17.22 $12.98 $11.95
======== ========= ======== ======== ========
Total Return ........................... 38.3% (30.7%) 39.9% 10.7% 19.5%
-------- --------- -------- -------- --------
Ratios/Supplemental Data
Net assets ( in millions), end of year ... $ 47.4 $40.0 $ 47.7 $ 11.7 $ 3.9
Ratio of expenses to average net assets .. 1.7% 1.8% 2.1% 2.5% 2.8%**
Ratio of net investment income (loss) to
average net assets ...................... 0.5% 1.5% 1.3% 0.5% 1.9%**
Portfolio turnover rate .................. 142.7% 97.8% 148.9% 242.4% 84.7%
- ------
* For the period June 12, 1987 (commencement of operations) to September 30, 1987.
** Annualized.
</TABLE>
The Fund's adviser and/or Baron Capital reimbursed the Fund for expenses
aggregating $8,561 (less than $0.01 per share) in 1990, $27,315 ($0.01 per
share) in 1989, $83,219 ($0.11 per share) in 1988, and $36,330 ($0.20 per
share) in 1987. The reimbursement amounts are excluded from the expense data
above.
- -------------------------------------------------------------------------------
22/2
<PAGE>
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THE BARON FUNDS
- -------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH
PERIOD:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
ended
March, 31, 1996
(Unaudited) 1995*
--------------- --------
<S> <C> <C>
Net asset value, beginning of period ................ $14.77 $10.00
------ ------
Income from investment operations
Net investment income ............................... 0.06 0.04
Net realized and unrealized gains on investments .... 2.21 4.73
------ ------
Total from investment operations ............... 2.27 4.77
Less distributions
Dividends from net investment income ................ (0.04)
Distributions from net realized gains ............... (0.10)
------
Total Distributions ............................ (0.14)
------
Net asset value, end of period ...................... $16.90 $14.77
====== ======
Total Return ................................... 15.5% 47.7%
------ ------
Ratios/Supplemental Data
Net assets ( in millions), end of period ............ $77.3 $28.6
Ratio of expenses to average net assets ............. 1.7%** 2.0%**
Ratio of net investment income to average net assets . 1.3%** 1.1%**
Portfolio turnover rate ............................. 54.2%** 40.6%
</TABLE>
- ------
* For the period January 3, 1995 (commencement of operations) to September
30, 1995.
** Annualized
- -------------------------------------------------------------------------------
23
