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[GRAPHIC OMITTED]
1 BARON ASSET
FUND HIGHLIGHTS
PERFORMANCE ..........................................1
INVESTMENT THEMES ....................................2
NEWS BRIEFS ..........................................3
PORTFOLIO HOLDINGS.....................................4
OTHER BARON FUNDS
DEVELOPMENTS...........................................5
BARON GROWTH
2 & INCOME FUND
HIGHLIGHTS
PERFORMANCE ..........................................7
REAL ESTATE INVESTMENT
TRUSTS.................................................8
OTHER DEVELOPMENTS.....................................9
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
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QUARTERLY REPORT
JUNE 30, 1997
THIS QUARTERLY REPORT CONTAINS
INFORMATION FOR TWO FUNDS
BARON ASSET FUND
BARON GROWTH & INCOME FUND
Dear Baron Asset &
Fund Shareholder:
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PERFORMANCE
Baron Asset Fund was founded June 12, 1987, a little more than ten years ago.
Since that date the Fund's performance has been satisfactory. Baron Asset
Fund's long term performance, more than five fold appreciation since its
inception, has met our stated objective of doubling our shareholders' money
every three to five years. That we have achieved this goal can be seen easily
from the long-term performance chart at the bottom of this page. Table III,
"Historical Information" on page 14 also shows these results.
Baron Asset Fund's share price appreciation reflects the revenue and income
growth of the businesses in which the Fund has been a long term investor, e.g.,
Charles Schwab, Robert Half, Mirage Resorts, DeVry and Manor Care. These "core"
business investments have increased in value so far several fold since our
initial share purchases five to ten years ago.
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The performance of these stocks is in accord with our belief that, although in
the short term stock prices may fluctuate greatly, over the long term, stock
prices closely mirror the value and growth of underlying businesses.
We remain committed to our investment objectives and performance goals. We will
continue to make new investments in fast growing, well managed, small and
mid-sized businesses that, in our opinion, offer our shareholders, over the
long term, the potential to double the value of their investment in Baron Asset
Fund every three to five years. Of course, there can be no assurance that the
businesses in which we have long held significant investments, our "core"
portfolio holdings, will continue to grow rapidly. There is no guarantee that
our newer "farm team" investments, which include businesses like Choice Hotels,
Vail Resorts, CCA Prison REIT, Heftel Broadcasting, Sylvan Learning, Dollar
Tree and Stein Mart, will develop into "core" investment holdings. As a result,
there can be no guarantee that our Fund's past performance will be duplicated.
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BAF:
BAF S&P 500 Russell 2000
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1 Year 14.0% 34.7% 16.3%
Cumulative 443% 288% 189%
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B A R O N A S S E T F U N D
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The businesses in which Baron Asset Fund has invested are continuing to grow
both steadily and strongly. In most cases, the businesses in which we are
partial owners are at least 20% larger at present than they were twelve months
ago. Despite this, the performance of Baron Asset Fund for the sixteen months
ended April 1997 did not consistently reflect the growth of the businesses in
which we are shareholders. The performance of Baron Asset Fund has been more
consistent and has improved significantly since spring.
Table I.
Four months Four months
ended April 1997 ended August 1997
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BAF (2.8%) 24.4%
S&P500 8.8% 12.9%
R2000 (5.4%) 23.5%
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Small cap stocks begin to outperform large cap stocks.
Large cap stocks outperformed small cap stocks from early 1994 until very
recently. In August the Bank Credit Analyst attributed this to disparate
profitability growth of small and large businesses. The Bank Credit Analyst
found that profit margins of the largest publicly owned businesses ranked by
market cap more than doubled from 7% in 1993 to 15% in the first quarter of
1997. Larger businesses have recently benefitted from improved worker
productivity due to both very significant technology investments and corporate
restructurings, e.g., layoffs and downsizing. These restructurings and massive
technology investments have occurred within the framework of an improving
economy. Smaller businesses, which according to the Census Bureau generated
virtually all net new jobs in our economy in recent years, saw their profit
margins expand only about 30%. Smaller companies were able to keep up with
larger companies' profits gains, since sales growth of smaller companies was
significantly faster than that of larger companies.
Investors, led by index funds, during the past three years, have accorded
increased p/e multiples to the currently high profit margined earnings of
larger businesses. Unlike smaller companies, many of these businesses have
relied upon international sales for a significant portion of their growth. Weak
foreign economies, currency turmoil in Asia and the very strong dollar argue
against further near term significant sales and earning gains for many larger,
internationally focused businesses. Small cap stocks, with favorable domestic
sales and profits outlooks and favorable valuations compared to larger
businesses, since spring have outperformed larger companies' stocks.
Although Baron Asset Fund has the vast majority of its capital invested in
small and mid sized businesses, our Fund's share price performance has
nevertheless modestly exceeded that of the large cap S&P 500 index from the
beginning of 1994 through the
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present. This is despite the fact that the small cap Russell 2000 index lagged
the S & P 500 significantly during that period. Baron Asset Fund is well
positioned if small cap stocks continue to outperform.
Table II. Relative performance of small caps improves.
S&P 500 R2000
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Forty months through April 1997 +80.2% +28.7%
Four months through August 1997 +12.9% +23.5%
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Baron Asset Fund's long term performance ranks highly.
In June, Baron Asset Fund was one of only three small cap funds to receive
Morningstar's coveted top five star rating. Baron Asset Fund was then ranked by
Morningstar number one of the 69 small cap funds at ten years old. Baron Asset
Fund is currently the top performing mutual fund on Charles Schwab's Select
List based upon our Fund's ten-year performance. The Fund is ranked the number
one small company fund by Fortune magazine based on our performance, net of
fees, over the five years ended June. Fortune includes in its comparison only
those funds that had the same portfolio manager for the entire five years.
Baron Asset Fund is accorded an A+ rating by Investors Business Daily for its
performance over the past three years.
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INVESTMENT THEMES
We learned about investment themes from George Soros.
For nearly seven years during the 1980s I managed money for the now well known,
but then not so famous, investor George Soros. George is one of the most
brilliant men I have ever known, but was only average as a stockpicker of
individual companies. His success as an investor in stocks, I am convinced,
came not from his analysis of individual businesses, but rather from his
ability to decide whether a macro theme supporting an investment was long lived
and offered significant opportunity. From George I learned about investment
themes.
Baron Funds focuses its investments in well managed, fast growing, very
profitable businesses that we believe will benefit from "mega-trends."
Mega-trends are long lasting economic trends resulting from societal,
demographic or political changes. Mega-trends create extended period demand for
products and services and offer businesses opportunities over the long term to
produce products and provide services profitably. Baron Funds' "investment
themes" focus upon job creating industries that are beneficiaries of
mega-trends. We label these job-creating industries "sunrise" industries,
industries such as healthcare, education, communications, media and
entertainment, government privatizations, financial services and outsourcing.
Sunrise industries are those in which your children will be employed, not those
in which your parents and grandparents worked.
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B A R O N A S S E T F U N D
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Query: "But, why do you think it's important to invest in "sunrise," job
creating businesses?"
We want to invest in job-creating industries for two principal reasons: it's
good business, and we find it more interesting and more satisfying. We believe
it's more enjoyable for employees to work in an environment where existing
workers are receiving raises and new employees are being hired, not fired.
These are the businesses likely to attract the best, most ambitious, motivated,
savvy, intelligent, entrepreneurial employees, creating, in the process, what
Max Messmer, Robert Half's chairman, labels a positive "spiral effect." Great
employees likely will attract other great employees, helping a business grow
stronger and stronger. Since we believe investing in people is integral to
investment success, these are the businesses we're looking for and in which we
want to invest.
Our "mega-trends" and resultant investment themes keep us focused on the long
term.
Most investors focus on their favorite analysts' next quarter's sales and
earnings forecasts; whether the government's next employment report will show
that "too many" jobs have been created; whether the Federal Reserve will next
lower or raise short term interest rates; whether the prices of oil and gold
are rising or falling; and, finally, how "the market" will react to all this
news. They focus on unpredictable short term events. Former Magellan portfolio
manager Peter Lynch, the best mutual fund portfolio manager of his time, and
perhaps of all time, in his quest for "ten-baggers," stocks that increased in
price ten times after he had purchased them, had a longer term perspective.
Peter said that he often didn't make a lot of money in his investments until he
owned them three or four years.
Baron Funds' focus on mega-trends that affect long term business profitability
allows us to identify businesses and, as importantly, executives in which we
would like to invest; carefully value those businesses; take advantage of stock
market volatility to purchase shares in those businesses at attractive prices;
and then, hold on for the long term. To us, long term means years. Baron Asset
Fund's turnover rate is currently in the mid-teens. That means we currently
hold stocks for an average of six to seven years.
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NEWS BRIEFS
Education
Learning Tree's Power Seminars development expense impacts current earnings.
Company's revenue growth remains strong.
Learning Tree is the leading provider of instructor-led information technology
courses. Despite a record 58% increase in quarterly revenues, Learning Tree's
stock price fell 40% in August after the company announced that one of its two
recently launched
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divisions, Power Seminars, failed to generate expected revenues in the most
recent quarter. Power Seminars offers to seasoned information technology
professionals short, focused seminars on various "hot" topics. Power Seminars
could prove a valuable addition to Learning Tree's comprehensive,
instructor-led, multi-day, computer based courses. When Power Seminars'
anticipated attendance disappointed, the company was already committed to
increased marketing and administration expense. We believe that Learning Tree
will soon be able to adjust its marketing efforts and program offerings or
better match expenses to slower program revenue increases.
Learning Tree's other new division, Learning Solutions, provides custom,
enterprise-wide training for large corporate clients. Learning Solutions is
meeting revenue expectations. Enrollment should exceed the initial 20,000
General Motors' employees Learning Tree was contracted to train in a six-month
period. An extension of the contract, which should generate $5 million revenues
in the next quarter, is likely. Customer satisfaction is high.
Expansion of Learning Tree's computer based training (CBT) library will enable
the company to pursue significant multi-year contracts with larger
corporations. CBT could be 10% of sales in fiscal 1998. Learning Tree's
significant classroom expansion will help next year's results. Baron Asset Fund
currently owns 1,140,000 shares of Learning Tree purchased for about $18.95 per
share. Included in this total are 693,500 shares purchased during August for
about $26.40 per share.
Media and Entertainment
American Radio to "maximize shareholder value."
On August 20, American Radio Systems announced it was considering steps "to
maximize shareholder value" which may include the possible sale of the company.
Following this announcement, the price of American Radio's shares jumped $6.50
to $45.625. American Radio's share price has since advanced to about $50. Baron
Funds has made significant and very profitable investments in several radio
stocks during the past three years. Baron Funds is the largest institutional
shareholder of several radio businesses, including American Radio. Steve Dodge,
American Radio's chairman, was a guest speaker at our annual investment
conference last year.
We have written frequently about our radio investments, especially with regard
to the consistent, long term growth of radio ad revenues and the opportunities
presented by passage of the Telecommunications Act of 1996. That landmark act,
essentially government deregulation of the radio industry, has allowed radio
stations to consolidate and realize significant economic advantages. The
announcement of American Radio's impending sale at this time is somewhat
surprising since the company has a very rapidly growing and still immature
communications towers business; a significant amount of assets invested in
underdeveloped "stick" radio stations; and its "same store" station ad revenues
3
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B A R O N A S S E T F U N D
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continue to grow at double-digit rates. Speculation abounds that interested
purchasers include Westinghouse-CBS, Clear Channel, Jacor and Chancellor. It is
unlikely that a transaction resulting in the sale of American Radio could be
consummated before spring 1998. Baron Asset Fund owns 1,355,000 shares of
American Radio common stock purchased for an average cost of $29.21 per share
and 200,000 shares of its 7% convertible preferred purchased for $50 per share.
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PORTFOLIO HOLDINGS: "FARM TEAM"
Query: "So just where do you get all these ideas?"
Answer: "We get lots of help."
While it is very flattering as Baron Asset Fund's portfolio manager and chief
investment officer to be singled out for accolades due to our Fund's long term
success, I do not work alone. The contributions from others' investment ideas
are significant. Our sources of investment ideas are wide-ranging. Executives
of companies in which we are shareholders are but one example (see page 9,
Baron Growth & Income Fund report, "Real Estate Investment Trusts," Spieker
Properties). Our firm's research analysts and my long time investment friends
provide important help to me as well.
During 1997, Susan Robbins, our firm's longest tenured research analyst who has
worked with me for more than twenty years, so long I'm sure she can scarcely
remember life before me, boosted our performance significantly through her
expertise in education, business services, health care and government
privatization services. Susan's expertise and experience have become
increasingly valuable as businesses she follows, especially healthcare, have
become ever more complex.
Mitch Rubin, a Harvard trained lawyer and the point guard and captain of our
firm's remarkable championship basketball team this past summer, also
contributed importantly to our results through his research. Mitch follows
REITs, leisure and gaming, retail and hotels. Although Mitch has only been an
analyst for four years, we believe he has the same star potential in business
that he has already demonstrated on basketball courts and ball fields.
The cerebral, Harvard educated Matt Ervin, like Morty Schaja a physicist by
training, contributed to our performance this year with his work on radio
businesses. Matt, in addition to studying financial reports, prepares for
meetings with communications executives by reading treatises about how
satellites work. His research on satellites and other communications businesses
is beginning to pay off. Although Matt has also been an analyst for only about
four years, he has already demonstrated strong potential.
Cliff Greenberg has been my friend for almost fourteen years, a period that
encompasses nearly his entire professional career as an analyst and portfolio
manager. Cliff, like Mitch, is a lawyer by
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training. I obviously believe legal training is a good background for securities
analysis. Business executives rarely describe the prospects for their companies
in anything but a very favorable light. Legal education teaches you to listen
closely for what is not said as well as to pay attention to what is. After
Cliff's graduation from Columbia Law School, he worked as an analyst, portfolio
manager and general partner for almost fourteen years for a private investment
partnership. Cliff joined us in January, will manage the new Baron Small Cap
Fund and has already made an important contribution to Baron Asset Fund's
results this year with his work across a broad spectrum of companies operating
within the investment themes in which we are interested.
Finally, last but not least, Morty Schaja. Morty is our firm's chief operating
officer but still manages to spend almost a quarter of his time on special
project investment research. Morty has worked with me for almost seven years
and continues to make an important contribution to our research effort, despite
the seemingly overwhelming requirements of our business operations.
The impetus for us to research three of our current "farm team" investments
came, however, not from a corporate executive, one of our own analysts or
myself. It was provided instead by a business friend of at least fifteen years,
one of the best and most successful investors I know, Bob Jaffee. Bob is one of
two general partners of Charter Oak Partners, L.P., an investment partnership
based in Westport, Connecticut. Bob convinced Susan and me to study Delta &
Pine Land Company, the leading producer of genetically engineered cotton seed,
about three years ago. We have about quadrupled our money over the past three
years by investing in Delta & Pine Land. I have written on more than one
occasion about this investment. Roger Malkin, Delta & Pine's chairman and ceo,
born and bred above a candy store in Brooklyn and now residing in the
Mississippi delta cotton country, was a guest speaker at the Fourth Annual
Baron Investment Conference in October 1995.
During the past year, Bob provided us with the impetus to study and
subsequently invest in two businesses, Libbey and OM Group. Libbey and OM Group
both are unusually well managed, very profitable, steadily growing, niche
businesses. Libbey I researched by myself, OM Group with Mitch.
Our "farm team" investments overall are performing well. We invest in smaller
companies not because they are small, but rather because they have the
opportunity to become BIG! Our small company investments are fast growing, well
managed businesses that we believe have sustainable, competitive advantages
over the long term.
Chemical
As an undergraduate, I studied chemistry. I was good enough at predicting the
color of reaction solutions and whether or not they would explode to receive a
one year biochemistry teaching fellowship at Georgetown University in 1965 upon
graduating
4
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B A R O N A S S E T F U N D
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college. The next year I obtained a "critical skills" job in the U.S. Patent
Office as a chemical coatings patent examiner...and a scholarship to attend law
school in the evenings. I left Washington, D.C. in 1970 for New York City to
seek my fortune as a securities analyst. But, invest in the chemical industry?
Before Bob suggested that we meet the management of OM Group, I had never
considered it. But, OM Group certainly was growing. And, the company certainly
had created new jobs.
OM Group is a leading, vertically integrated producer of value added,
metal-based specialty chemicals and concentrates. The company is the world's
leading producer of cobalt and nickel based products. The engineered solutions
OM Group sells to its industrial customers are incorporated in their toys,
rechargeable batteries, catalytic converters, tires, etc.
The cost for OM Group's specialty chemicals represent a very small portion of
its customers' manufactured goods' costs, usually significantly less than 1% of
costs of goods sold. Despite their low cost, OM Group's products are very
important to the performance of its customers' end products. Firestone several
years ago chose to replace OM Group's cobalt stabilizers in its tires.
Firestone's profits had recently fallen and it ordered its managers to accept
"no supplier price increases." When OM Group's costs increased, Firestone
refused to allow OM Group to pass through these increased costs. OM Group, as a
result, stopped supplying cobalt to the tire company. OM Group's proposed price
increase represented fractions of pennies for each dollar of Firestone's sales.
When Firestone's reformulated tires began to pop when used on racing cars and
airplanes, liability suits resulted. Firestone and other tire companies now use
cobalt in their tire formulations.
OM Group is the low cost producer of cobalt. This is partly the result of its
long term, and unusual, raw material supply contract with Zaire. This agreement
allows the company to earn a consistent spread per pound and insulates it from
raw material price fluctuations. Probably as important is OM Group's ability to
process slag mined in Zaire at OM's very expensive and difficult to replace
processing plant in Finland. Due to its low cost feed material and efficient
manufacturing capability, OM Group is a supplier of cobalt to virtually all its
competitors.
OM Group has significant growth opportunities. Secular demand for OM Group's
products has been increasing about 10-11% per year in units. Upgrading OM
Group's product sales from lower valued, commodity salts to higher priced,
higher margined, engineered powders and salts offers opportunity. Also offering
potential are the company's increasing international sales. Niche acquisitions
able to utilize OM Group's manufacturing technology, low raw material costs and
distribution advantages provide opportunities as well. About 10% of OM Group's
revenues each year come from new products. 15-25 people have an impact on new
product introductions. Last year, projects that could have added $350 million
in annual sales, nearly equal to current annual revenues, were considered.
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Two recently introduced OM Group products should encounter significant demand.
Engineered powders for rechargeable batteries have increased from $2 million
annual revenues two years ago to $35 million in 1997. Potential is for $100
million annual sales in three years to five years. Recently acquired SCM has
the opportunity to increase sales of engineered stainless steel powders used to
prevent corrosion of catalytic converters. Revenues from stainless steel
powders could jump from $9 million to $90 million within three to four years.
There are significant barriers to prevent others from encroaching on OM Group's
very profitable, 15-20% annual growth business. OM Group's raw material cost
advantages, strong customer relations, engineering support for its customers
and reputation for low cost, quality products are important. Also a significant
barrier is the long lead time, usually three to five years, to receive
approvals for inclusion of OM Group's materials in others' manufactured
products.
OM Group is well managed. The company's management is entrepreneurial, its
labor force largely non-union. Annual sales per employee approximate $850,000
compared to a $286,000 average for other niche specialty chemical businesses.
OM Group's employees' benefits are attractive and annual employee turnover is
only 2%, a shockingly low and favorable figure. OM Group has been the recipient
of many quality supplier awards. Baron Asset Fund owns 1,090,000 shares of OM
Group purchased for about $24.38 per share.
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OTHER BARON FUNDS DEVELOPMENTS
401(k) plans increase investments in Baron Asset Fund.
Nearly two years ago, Northern Telecom became the first large corporation to
offer its employees the opportunity to invest a portion of their 401(k)
retirement assets in Baron Asset Fund. Northern Telecom's employees have since
invested more than $100 million in Baron Asset Fund. Northern Telecom's 401(k)
plan is now Baron Asset Fund's single largest individual shareholder. In
September 1997, Bechtel Corporation will become the second large corporation to
make a significant investment in Baron Asset Fund on behalf of its employees'
401(k) retirement plan. The Bechtel investment will be made through a company
fund of funds. During the next six months four other large corporations will
offer Baron Asset Fund as an option for their employees' 401(k) plans.
Baron Asset Fund is now also an available small cap option to 401(k) plan
sponsors through programs at Charles Schwab & Company, Fidelity Investments,
T.Rowe Price, Vanguard, American Express, Scudder Stevens & Clark and SunGard.
By September 30, we expect about 11% of Baron Asset Fund's shares to be owned
by employee retirement plans, including 401(k)s.
Sixth Annual Baron Investment Conference: October 24,1997, Essex House, New
York City
The Sixth Annual Baron Investment Conference will take place on Friday,
breakfast through lunch, October 24, 1997, at the
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B A R O N A S S E T F U N D
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Essex House, 160 Central Park South, New York City. Our meeting will begin
promptly at 8:00 AM for breakfast and end following my speech after lunch.
Shareholders of Baron Funds are invited to attend, as are financial advisors,
plan sponsors, pension consultants and clients of our affiliate, Baron Capital
Management, Inc.
Chief executives of five businesses in which Baron Funds is a shareholder will
each make formal 30 minute presentations, usually with slide shows, regarding
their businesses' prospects and strategies. Each will then take 15 minutes to
answer questions from our shareholders. I will be the final speaker. Following
my presentation, I will also try to answer shareholders' questions, with no
time constraints, until you tire of asking them.
Before we invest in a business on behalf of our shareholders, in addition to
studying publicly available financial information, we visit company facilities
and interview its management, employees, competitors, customers and suppliers.
Our shareholders are usually unable to do this. In addition to providing you
access to meet and question managements of companies in which you are
indirectly a shareholder, we believe it is helpful that annually you are able
to ask the portfolio manager who has chosen to invest in these businesses, me,
why. Or any other questions about our mutual funds, their prospects and our
investment strategy you would care to know about. Our annual conferences are
intended to allow you to do due diligence to better understand and judge the
prospects for your investments in Baron Funds, to "kick the tires" of your
investment. We hope you will be able to attend. There will be no charge, of
course.
Please RSVP at 1-800-99-BARON or 212-583-2100 if you plan to attend. Please
call if you have any further questions or if you need help with hotel
reservations.
The following executives are scheduled speakers in the order listed.
Adam Aaron, Chairman and CEO, Vail Resorts, Inc., Avon, Colorado. Vail Resorts
is the largest and most profitable publicly owned American ski resort. Vail has
significant opportunities to increase the number of annual destination ski
visits to its mountains, increase the amount of money received by Vail Resorts
per skier, further develop its properties, and acquire other currently
privately owned ski resorts.
Jay Stein, Chairman and CEO, Stein Mart, Jacksonville, Florida. Stein Mart is a
rapidly growing, 130 store, chain retailer of upscale, current season
merchandise. Retail prices charged by this department store-type business are
25-60% below prices typically found in competitive department stores. Stein
Mart could more than double its stores within the next five years.
McHenry Tichenor, Jr., Chairman, President and CEO, Heftel Broadcasting,
Dallas, Texas. Heftel is the country's largest, Spanish language, radio
broadcasting business. Heftel's listener ratings
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should benefit from the very rapid growth of the U.S. Hispanic populace. Its
advertising rates per listener are currently far below levels justified by its
existing audience, offering further opportunity. Finally, Heftel could make
additional Hispanic media acquisitions.
Douglas Becker, President and Co-CEO, Sylvan Learning Systems, Baltimore,
Maryland. Sylvan Learning is an important provider of educational services in
the United States. The company is the leading provider of computerized testing
services, instruction and tutoring for K through 12th grade students and
contract educational services in public and parochial schools. In addition to
important growth opportunities in its core businesses, Sylvan's new joint
venture with MCI offers significant growth potential in distance learning.
Stewart Bainum, Jr., Chairman, President and CEO, Manor Care, Gaithersburg,
Maryland. Manor Care is America's leading and most profitable, private pay,
skilled nursing home business. The company has significant expansion
opportunities in lower acuity, assisted living facilities. Manor Care has been
reorganized during the past year by giving its shareholders a dividend of the
now publicly traded Choice Hotels.
Thank you for investing in Baron Asset Fund
We recognize it cannot be an easy decision for most individuals and their
families when choosing mutual funds in which to invest. Especially since there
are now even more mutual funds than there are stocks. Investing to save for
your children's education, for a new home or for your retirement certainly
makes this task even more daunting. We hope Baron Funds' quarterly reports,
annual investment conferences, published interviews and articles written about
our Funds have made it easier for you to decide whether Baron Funds is an
appropriate investment for you and your family.
Thank you for the confidence you have shown in us by joining us as fellow
shareholders in Baron Funds. We will continue to work hard to justify your
confidence.
Sincerely,
/s/ Ronald Baron
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Ronald Baron
President
September 12, 1997
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BARON GROWTH
2 & INCOME FUND
HIGHLIGHTS
PERFORMANCE .........................................7
REAL ESTATE INVESTMENT
TRUSTS................................................8
OTHER DEVELOPMENTS....................................9
QUARTERLY REPORT
JUNE 30, 1997
BARON GROWTH & INCOME FUND
Dear Baron Growth
Income Shareholder:
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PERFORMANCE
Baron Growth & Income Fund was founded on January 3, 1995, a little less than
three years ago. Baron Growth & Income Fund's performance, from inception, an
approximate 140% gain, has met our stated objection of doubling our
shareholders' money every three to five years.
The performance of Baron Growth & Income Fund for the June 1997 quarter as well
as for the summer months has been strong. These results can be seen in Table I.
The Fund's volatility earlier this year mirrored the performance of the small
cap stock index, the Russell
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2000. Unlike most growth and income funds that invest in high yielding large
cap stocks, Baron Growth & Income Fund invests in small and mid-sized
companies.
In recent months smaller companies have out-performed larger cap companies.
(Please see discussion of small cap companies in Baron Asset Fund's performance
section.) Baron Growth & Income Fund is well positioned if small cap companies
continue to out-perform large caps.
Table I.
Four months Four months
ended April 1997 ended August 1997
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BGI (1.9%) 22.7%
S&P500 8.8% 12.9%
R2000 (5.4%) 23.5%
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BGI:
BGI S&P 500 Russell 2000
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1 Year 21.5% 34.7% 16.3%
Cumulative 123% 104% 64%
7
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B A R O N G R O W T H & I N C O M E F U N D
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Lipper Analytical ranks Baron Growth & Income Fund as the number one performing
growth & income fund for the 32 months from the Fund's inception through August
31, 1997. Lipper includes 404 funds in this ranking. In the quarter ending June
30, 1997 Lipper ranked the Fund in the top ten percent of the 655 growth &
income funds that it monitors.
As we have already noted, most growth and income funds, unlike Baron Growth &
Income Fund, concentrate their investments in S&P 500 stocks, large, mature,
slower growing, economically sensitive companies with substantial dividends.
S&P 500 companies usually have less attractive opportunities to invest capital
in their own businesses to earn high rates of return and choose, instead, to
return a significant portion of their profits to their shareholders as
dividends. We expect that, over the long term, Baron Growth & Income Fund's
investments in fast growing, very profitable, small and mid-sized businesses,
well managed by entrepreneurs, will outperform the larger, slower growing,
ponderous, less profitable S&P 500 businesses.
Morningstar classifies Baron Growth & Income Fund as a small cap growth fund.
That firm eliminated its growth and income category last year. In Morningstar's
small cap growth category, Baron Growth & Income is top-ranked from its
inception. Morningstar does not give star rankings to mutual funds less than
three years old. Baron Growth & Income will be star ranked by Morningstar in
four months.
Baron Growth & Income Fund is more conservatively managed than most small cap
funds. This is readily apparant since nearly 30% of our Fund's assets are
invested in income producing securities. Regardless, Baron Growth & Income Fund
would be ranked in the top one percent of small cap funds by Lipper Analytical
since its inception were it considered by Lipper a small cap growth fund. Of
course, the Fund's past performance is no guarantee of future results.
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS
News Brief
Starwood Lodging announced on September 8, 1997 that it would acquire a leading
upscale hotel chain, Westin Hotels & Resorts. This announcement followed months
of speculation that Starwood would do exactly that. Westin has dramatically
improved its profitability during the past two years. This follows its
approximate $500 million cost renovation program. Also helping to boost
Westin's profits were its revamped marketing and quality assurance programs.
Westin's domestic and international physical expansion opportunities are
strong. Westin is currently adding about two to three new hotels a month to its
108 unit chain. These additions, worldwide, are primarily through management
contracts. About twenty of Starwood's well located, domestic, urban properties
could also soon be reflagged as Westin Hotels. Reflagging will result in annual
savings of about $10 million franchise fees Starwood currently pays to others.
<PAGE>
Westin could acquire many of its existing franchisees and managed hotels at
attractive prices. Starwood's management has been terrific at acquiring hotel
properties at very favorable prices; this expertise should help the combined
company. Westin's management is well regarded for its operations expertise;
they should help improve Starwood's operations. Westin could also add
international acquisition opportunities to Starwood. Starwood will be renamed
Westin Hotels & Resorts. The combined company could double its 1998 estimated
$4.00 per share operations cash flow within the next four years. Baron Growth &
Income Fund owns 165,000 shares of Starwood purchased for about $22.11 per
share.
Portfolio Addition
Pierce Leahy is the United States' largest archives records management company.
Pierce Leahy outsources businesses' file rooms. Nearly all businesses must
maintain records and files for long periods due to business, fiduciary or legal
regulations. Financial, accounting, legal and healthcare companies have
especially stringent requirements. Records management is a core competency for
few businesses. Most companies have poor document retention systems, they store
records in expensive real estate, and they employ non-expert employees to
manage file rooms. By outsourcing records management to third parties such as
Pierce Leahy, companies can generally reduce their records management costs
30-50% per year.
Over the past 40 years, Pierce Leahy has grown from a small, family business to
become the preeminent provider of records management and retrieval services in
the country. Peter Pierce, the current ceo, is the third generation of his
family to run the business. Pierce Leahy operates 160 facilities throughout the
United States. The most important negative? Won't the proliferation of
computers cause the storage of paper records to diminish? So far, apparently
not. The company stores all forms of records including paper, computer tapes
and microfilm. Comparable customers' record storage demands have continued to
increase 6-7% per year. The company has also developed an on-line proprietary
data retrieval system, PLUS, that provides customers direct access to their
records. Because of PLUS, Pierce's customers can keep nearly all their
documents off site and retrieve them within hours.
Pierce Leahy receives annual records storage rent of about $2.17 per cu. foot
per year. Pierce Leahy's capital costs, including shelving, sales and move in
expense to obtain this business approximate $4.00 per cu. foot. Annual
warehouse rent approximates $.35 per cu. ft. Documents often remain in Pierce's
storage 10 to 15 years or more. Pierce also charges customers to retrieve or
remove records. Pierce Leahy's first customer in 1957 remains a customer. Baron
Capital has been a Pierce customer for nearly ten years. Pierce expects its
business to grow at least 25% per year for the next several years by adding new
accounts and by acquiring smaller, local records management businesses. An
estimated
8
<PAGE>
- --------------------------------------------------------------------------------
B A R O N G R O W T H & I N C O M E F U N D
- --------------------------------------------------------------------------------
75% of all U.S. businesses still manage their records in house. Baron Growth &
Income Fund purchased 200,000 shares of Pierce Leahy for about $20.73 per
share.
Portfolio Holding
When I was reviewing my Robert Half International conversation notes before a
recent visit to its Menlo Park, CA. offices, I noticed that during a July 23,
1996 meeting in San Francisco with Max Messmer, Half's Chairman, and Keith
Waddell, Half's Chief Financial Officer, Max suggested I consider investing in
Spieker Properties. "It could be a good investment for the real estate
portfolio of your Baron Growth & Income Fund," Max said. "Ned Spieker is your
kind of guy. He runs a really neat business. He doesn't just own a portfolio of
buildings. And, with Spieker Properties' concentration in and domination of
several California markets, it should soon do a lot better." Max concluded,
"Ned's been my friend a long time and I'm on his board."
That should have been enough to either make me extend my stay in California or
to come back as quickly as I could. Max is one of my heroes. I have known him
since 1985. Our Funds and partnerships have been among Robert Half's largest
shareholders since 1991. In addition to being a really neat guy himself, Max is
one of the greatest executives I have known. Robert Half's stock has increased
in price about thirty times since our original investment in 1991! It's been
the most successful investment we've ever made. Half's growth prospects remain
favorable and very strong. Finally, Max is also a shareholder of Baron Asset
Fund, an investment, although modest by his standards, which gives him a vested
interest in our continuing to do well. Last year we had research priorities I
deemed of more immediate interest than another real estate trust. Mitch Rubin,
our real estate analyst, and I finally got around to meeting Ned Spieker in
February of this year. We began to invest in Spieker Properties almost
immediately thereafter. This seven month delay made Spieker about 25% more
expensive to purchase. I'm certain there's a lesson to be learned here.
Unlike many real estate investment trusts, Spieker Properties is not just a
portfolio of undervalued, well located, office and industrial buildings
positioned for significant rent growth. To be fair, Spieker does have these
qualities. But, Spieker is more. Spieker is a fast growing, well managed,
operating business with well considered, carefully crafted strategic goals and
initiatives. Many of Spieker's highly regarded managers have worked together
for nearly 25 years, initially as the west coast office for Trammel Crow. There
has been virtually no turnover among its top managers. Spieker's managers work
together with their assistants in egalitarian office space without walls. This
to facilitate open communication and make any potential opportunities or
operating problems immediately visible. The experienced Spieker team,
entrepreneurial owner-operators of their business, has an unusual regional real
estate operating structure. Property management, leasing and development are
provided by each region,
<PAGE>
not centrally. This localized operating structure provides better tenant
services and generally results in improved tenant retention. This structure also
offers Spieker operating leverage in individual markets and market intelligence
not available to others. Among Spieker Properties' strategic goals are dominance
of attractive individual markets to better control rental rates. Spieker is
focused on small tenants, average 5000 square foot space users. Spieker's
attractive, high quality buildings provide highly flexible space with lots of
windows relative to their building footprints to make them attractive to small
space users.
Spieker Properties concentrates its investments in West Coast markets,
principally in northern and southern California, Seattle and Portland. The
company is expanding rapidly. In the current year, it has already acquired
about $600 million office and industrial buildings and begun to build about
$200 million additional projects. Most Spieker acquisitions have been through
negotiated transactions, not auctions. Spieker has a current market
capitalization, including debt, of about $3 billion, moderately below the
company's replacement cost. Recent space acquisitions have been below
replacement cost with rents in place about 25% below current market rents.
During the three previous years, Spieker acquired $385.6 million, $196.6
million and $149.7 million buildings respectively. There seem to be further
significant acquisition opportunities, as well. There is little new office
construction in Spieker's markets.
All newly acquired Spieker properties offer significant embedded opportunities
for rent growth. This is especially so in southern California where vacancy
rates should soon fall to single digits, indicating significant landlord rent
increase opportunities. About 20% of Spieker's rented space reprices annually.
Spieker's rents are beginning to escalate sharply. In the second quarter of
1997, new leases signed on expiring Spieker space rose a staggering 33.8% over
previous rents. Two years ago, Ned Spieker helped Max Messmer negotiate a lease
for 60,000 square feet office space for Robert Half in northern California from
another owner. The lease rate was $.90 per foot per month. Comparable space now
rents for $2.00 per foot per month. Baron Growth & Income Fund owns 120,000
shares of Spieker purchased for about $35.88 per share.
- --------------------------------------------------------------------------------
OTHER DEVELOPMENTS
Sections of the preceding Baron Asset Fund quarterly report are relevant to
your investment in Baron Growth & Income Fund.
Please see the discussion titled "Investment Themes", which is applicable to
both mutual funds.
Sixth Annual Baron Investment Conference: October 24, 1997 Essex House, New
York City
The Sixth Annual Baron Investment Conference will take place Friday, breakfast
through lunch, October 24, 1997, at the Essex
9
<PAGE>
- --------------------------------------------------------------------------------
B A R O N G R O W T H & I N C O M E F U N D
- --------------------------------------------------------------------------------
House in New York City. Please save the date. Please see the discussion in the
Baron Asset Fund letter for all of the conference details. We strongly believe
in "kicking the tires" of our investments. Our annual conferences provide our
shareholders with the opportunity to "kick the tires" of their investment in
Baron Funds. We hope you will be able to attend. There will be no charge, of
course.
Thank you for investing in Baron Growth & Income Fund
We recognize it cannot be an easy decision for most individuals and their
families when choosing mutual funds in which to invest. Especially since there
are now even more mutual funds than there are stocks. Investing to save for
your children's education, for a new home or for your retirement certainly
makes this task even more daunting. We hope Baron Funds' quarterly reports,
annual investment conferences, published interviews and articles written about
our Funds have made it easier for you to decide whether Baron Funds is an
appropriate investment for you and your family.
Thank you for the confidence you have shown in us by joining us as fellow
shareholders in Baron Funds. We will continue to work hard to justify your
confidence.
Sincerely,
/s/ Ronald Baron
- -------------------------------
Ronald Baron
President
September 12, 1997
[GRAPHIC OMITTED]
10
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Table I
- --------------------------------------------------------------------------------
Portfolio Market Capitalization
- --------------------------------------------------------------------------------
The Funds invest primarily in small and medium size companies. Table I ranks
the Funds' investments by market capitalization and displays the percentage of
the Funds' portfolios invested in each market capitalization category. At times
the Funds will invest in companies with market capitalizations greater than $2
billion. These larger cap companies 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. ............................. 7,147,295 6.1%
Mirage Resorts, Inc. ............................. 4,510,584 1.8
Corrections Corp. of America ..................... 3,053,970 2.2
Public Storage, Inc. ............................. 3,011,639 0.3
Robert Half Intl., Inc. .......................... 2,833,470 3.0
Starwood Lodging Trust ........................... 2,492,793 0.7
Circus Circus Enterprises, Inc. .................. 2,335,978 1.7
Ucar International, Inc. ......................... 2,095,487 0.1
Manor Care, Inc. ................................. 2,068,730 7.4
Outdoor Systems, Inc. ............................ 2,057,850 0.4
------
23.7%
Medium Capitalization
- --------------------------------------------------------------------------------
Promus Hotel Corp. ............................... 1,993,035 0.7%
Vornado Realty Trust ............................. 1,914,751 0.3
Stewart Enterprises, Inc. CL A ................... 1,779,611 2.3
Quorom Health Group, Inc. ........................ 1,763,721 1.9
La Quinta Inns, Inc. ............................. 1,697,850 0.2
Univision Communications, Inc. ................... 1,667,202 0.3
Industrie Natuzzi SPA ............................ 1,457,499 0.1
Nine West Group, Inc. ............................ 1,368,078 0.4
Dollar Tree Stores, Inc .......................... 1,310,313 2.8
Proffitt's Inc. .................................. 1,237,348 0.3
Heftel Broadcasting Corp. ........................ 1,219,235 3.9
Sun Intl. Hotels, Inc. ........................... 1,208,132 1.5
Genesis Health Ventures, Inc ..................... 1,188,493 1.5
American Radio Systems Corp. CL A ................ 1,172,122 2.8
Kimco Realty Corp. ............................... 1,150,718 0.4
Williams-Sonoma, Inc. ............................ 1,093,051 0.2
Choice Hotels Intl. Inc. ......................... 1,063,675 5.3
Storage USA, Inc. ................................ 1,041,032 0.2
Budget Group, Inc. (Formerly Team
Rental Group, Inc.) .............................. 1,035,921 0.7
Delta and Pine Land Co. .......................... 1,004,102 1.2
------
27.0%
Small Capitalization
- -------------------------------------------------------------------------------
Learning Tree Intl., Inc. ........................ 976,028 1.0%
DeVry, Inc. ...................................... 948,041 1.4
Sylvan Learning Systems, Inc. .................... 880,430 0.5
Vail Resorts, Inc. ............................... 843,493 4.1
<PAGE>
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
('000s)
Small Capitalization (Continued)
- --------------------------------------------------------------------------------
NTL, Inc. ........................................ 798,405 2.7%
Redwood Trust, Inc. .............................. 734,817 0.5
Seacor Smit, Inc. ................................ 728,548 1.0
Cox Radio, Inc. .................................. 725,563 0.8
OM Group, Inc. ................................... 724,927 1.6
Stein Mart, Inc. ................................. 692,102 1.0
Premier Parks, Inc. .............................. 674,837 1.0
The Registry, Inc. ............................... 649,520 1.0
Bristol Hotel Co. ................................ 637,791 3.0
Central European Media ........................... 620,923 0.2
Sun Communities, Inc. ............................ 610,838 0.5
PMT Services, Inc. ............................... 581,025 0.2
PETCO Animal Supplies ............................ 558,570 0.2
Smart and Final, Inc. ............................ 543,524 2.3
Libbey, Inc. ..................................... 528,953 0.8
Cross Timbers Oil Co. ............................ 516,283 2.2
Marcus Corp. ..................................... 504,231 0.5
Equity Corp. Intl ................................ 500,632 0.3
American Freightways Corp. ....................... 488,541 0.1
Vitalink Pharmacy Svcs., Inc. .................... 485,113 0.6
Young Broadcasting, Inc. ......................... 449,280 1.2
Metro Networks, Inc. ............................. 401,346 1.3
Education Management Corp. ....................... 373,932 0.7
Flextronics Intl. Ltd. ........................... 371,312 1.7
American Homepatient, Inc. ....................... 369,527 0.3
Alexander's, Inc. ................................ 351,935 0.4
Avatar Holding, Inc. ............................. 304,686 1.1
Columbus Realty Trust ............................ 301,320 0.3
American Mobile Satellite Corp. .................. 257,480 1.6
Profit Recovery Group Intl ....................... 251,897 0.1
Telemundo Group, Inc. ............................ 243,976 0.4
Corecomm, Inc. ................................... 225,527 1.0
Kenneth Cole Productions, Inc. ................... 214,499 0.4
Shaw Group, Inc. ................................. 201,322 0.4
Saga Communications, Inc. ........................ 186,850 1.7
Chartwell Leisure, Inc. .......................... 179,088 0.5
DVI, Inc. ........................................ 170,449 0.9
Pediatric Services of America, Inc. .............. 126,148 0.8
Youth Services Intl., Inc. ....................... 120,917 0.6
USA Truck, Inc. .................................. 105,287 0.2
Summit Care Corp. ................................ 91,433 0.3
------
43.4%
11
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
('000s)
Baron Growth & Income Fund
- --------------------------------------------------------------------------------
Large Capitalization
- --------------------------------------------------------------------------------
Franklin Resources, Inc. ......................... 9,148,607 1.2%
Charles Schwab Corp. ............................. 7,147,295 6.6
Mirage Resorts, Inc. ............................. 4,510,584 1.3
Crescent Real Estate Equities, Co. ............... 3,241,421 0.4
Corrections Corp. of America ..................... 3,053,970 2.9
Public Storage, Inc. ............................. 3,011,639 1.6
Robert Half Intl., Inc. .......................... 2,833,470 2.6
Starwood Lodging Trust ........................... 2,492,793 2.2
Circus Circus Enterprises, Inc. .................. 2,335,978 1.1
Manor Care, Inc. ................................. 2,068,730 7.4
-------
27.3%
Medium Capitalization
- --------------------------------------------------------------------------------
Vornado Realty Trust ............................. 1,914,751 1.3%
Beacon Propeties Corp. ........................... 1,840,449 0.4
Stewart Enterprises, Inc. CL A ................... 1,779,611 1.5
Quorom Health Group, Inc. ........................ 1,763,721 1.4
Spieker Properties, Inc. ......................... 1,602,157 1.0
Highwoods Properties, Inc. ....................... 1,386,798 0.6
Dollar Tree Stores, Inc .......................... 1,310,313 2.2
Heftel Broadcasting Corp. ........................ 1,219,235 3.5
Sun Intl. Hotels, Inc. ........................... 1,208,132 2.1
American Radio Systems Corp. CL A ................ 1,172,122 4.3
Kimco Realty Corp. ............................... 1,150,718 1.2
Choice Hotels Intl. Inc. ......................... 1,063,675 12.5
Storage USA, Inc. ................................ 1,041,032 1.8
Delta and Pine Land Co. .......................... 1,004,102 1.5
------
35.2%
Small Capitalization
- ------------------------------------------------------------------------------
Learning Tree Intl., Inc. ........................ 976,028 0.7%
DeVry, Inc. ...................................... 948,041 1.5
Boston Properties, Inc. .......................... 926,064 1.0
Vail Resorts, Inc. ............................... 843,493 1.4
NTL, Inc. ........................................ 798,413 2.6
Reckson Realty Associates Corp. .................. 788,624 0.4
Redwood Trust, Inc. .............................. 734,817 2.1
Seacor Smit, Inc. ................................ 728,548 0.6
OM Group, Inc. ................................... 724,927 1.5
Stein Mart, Inc. ................................. 692,102 0.9
Sun Communities, Inc. ............................ 610,838 2.0
CBL & Associates, Inc. ........................... 575,520 0.7
Smart and Final, Inc. ............................ 543,524 2.6
Healthcare Realty ................................ 535,981 1.0
Cross Timbers Oil Co. ............................ 516,283 0.3
Marcus Corp. ..................................... 504,231 0.6
Metro Networks, Inc. ............................. 401,346 0.8
Southern Union Co. ............................... 391,597 1.9
<PAGE>
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
('000s)
Small Capitalization (Continued)
- ------------------------------------------------------------------------------
Counsel Corp. .................................... 380,800 1.8%
Education Management Corp. ....................... 373,932 0.5
Flextronics Intl. Ltd. ........................... 371,312 1.6
Alexander's, Inc. ................................ 351,935 0.4
Pierce Leahy Corp. ............................... 327,285 0.6
Avatar Holding, Inc. ............................. 304,686 0.4
Columbus Realty Trust ............................ 301,320 1.7
American Mobile Satellite Corp. .................. 257,480 2.1
Medallion Financial Corp. ........................ 246,254 1.5
Corecomm, Inc. ................................... 225,527 0.1
Saga Communications, Inc. ........................ 186,850 1.6
DVI, Inc. ........................................ 170,449 1.0
Pediatric Services of America, Inc. .............. 126,148 1.1
Youth Services Intl., Inc. ....................... 120,917 0.2
Childrens Comprehensive Services, Inc. ........... 100,655 0.6
------
37.4%
12
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Table II
- --------------------------------------------------------------------------------
Portfolio Risk Characteristics
- --------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external risk
factors that might impact the companies in which the Funds invest. Table II
displays some of the risk factors that are currently monitored and the
percentage of each portfolio considered exposed to these factors. The Funds use
this tool to avoid concentration of risk within the portfolios.
Baron Asset Baron Growth
Fund & Income Fund
------------- --------------
% of % of
Portfolio Portfolio
------------- --------------
Oil Price Sensitivity ............................ 24.4 25.3%
Leverage (Debt greater than 40% of
Market Cap) ...................................... 19.0 21.1
Foreign Sales Dependent
(Sales greater than 10%) ......................... 11.7 12.8
Volatility (Beta greater than 1.2) ............... 15.6 18.6
Over-the-Counter Securities ...................... 31.4 25.5
Unseasoned Securities
(Publicly owned for less than 3 years) ........... 32.1 33.3
(Publicly owned for less than 1 year) ............ 12.5 16.8
Turnarounds ...................................... 0.5 0.0
Development Companies ............................ 5.2 4.6
13
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
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 13.88 16,656
- --------------------------------------------------------------------------------
06/30/91 45,600,730 13.81 16,572
- --------------------------------------------------------------------------------
09/30/91 47,409,180 14.80 17,760
- --------------------------------------------------------------------------------
12/31/91 46,305,042 15.71 0.035 18,895
- --------------------------------------------------------------------------------
03/31/92 48,011,634 16.72 20,109
- --------------------------------------------------------------------------------
06/30/92 42,289,409 15.28 18,377
- --------------------------------------------------------------------------------
09/30/92 43,816,305 16.20 19,484
- --------------------------------------------------------------------------------
12/31/92 47,955,530 17.73 0.162 21,522
- --------------------------------------------------------------------------------
03/31/93 50,015,244 18.82 22,845
- --------------------------------------------------------------------------------
06/30/93 52,432,090 19.70 23,912
- --------------------------------------------------------------------------------
09/30/93 59,916,570 21.91 26,595
- --------------------------------------------------------------------------------
12/31/93 64,069,114 21.11 0.774 26,576
- --------------------------------------------------------------------------------
03/31/94 63,099,109 20.69 26,047
- --------------------------------------------------------------------------------
06/30/94 68,880,300 20.40 25,682
- --------------------------------------------------------------------------------
09/30/94 80,258,542 22.82 28,728
- --------------------------------------------------------------------------------
12/31/94 87,058,228 22.01 0.656 28,547
- --------------------------------------------------------------------------------
03/31/95 160,603,528 24.29 31,505
- --------------------------------------------------------------------------------
06/30/95 202,259,502 25.79 33,450
- --------------------------------------------------------------------------------
09/30/95 289,973,331 29.30 38,003
- --------------------------------------------------------------------------------
12/31/95 353,095,409 29.74 0.034 38,618
- --------------------------------------------------------------------------------
03/31/96 638,297,904 34.14 44,332
- --------------------------------------------------------------------------------
06/30/96 1,124,647,802 36.65 47,591
- --------------------------------------------------------------------------------
09/30/96 1,166,057,654 35.50 46,098
- --------------------------------------------------------------------------------
12/31/96 1,326,321,785 36.23 0.039 47,097
- --------------------------------------------------------------------------------
03/31/97 1,663,347,667 34.98 45,472
- --------------------------------------------------------------------------------
06/30/97 2,306,228,855 41.74 54,260
- --------------------------------------------------------------------------------
* Assumes all dividends were reinvested and no shares were
redeemed.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
06/30/96 172,070,435 18.20 18,373
- --------------------------------------------------------------------------------
09/30/96 207,234,494 18.40 18,575
- --------------------------------------------------------------------------------
12/31/96 243,983,507 19.04 0.255 19,483
- --------------------------------------------------------------------------------
03/31/97 273,907,177 18.57 19,002
- --------------------------------------------------------------------------------
06/30/97 316,981,759 21.82 22,328
- --------------------------------------------------------------------------------
* Assumes all dividends were reinvested and no shares were redeemed.
- --------------------------------------------------------------------------------
Performance Information
- --------------------------------------------------------------------------------
BARON ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended June 30, 1997
One year 14.0%
- --------------------------------------------------------------------------------
Two years 27.4%
- --------------------------------------------------------------------------------
Three years 28.3%
- --------------------------------------------------------------------------------
Four years 22.7%
- --------------------------------------------------------------------------------
Five years 24.2%
- --------------------------------------------------------------------------------
Ten years 17.6%
- --------------------------------------------------------------------------------
Since inception June 12, 1987 18.3%
- --------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND'S
AVERAGE ANNUAL RETURN
Period ended June 30, 1997
One year 21.5%
- --------------------------------------------------------------------------------
Two years 30.2%
- --------------------------------------------------------------------------------
Since inception January 3, 1995 37.9%
- -------------------------------- -----
The performance data represents past performance. Investment returns and
principle value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their cost. For more complete information about
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 Baron Funds unless accompanied or preceded by the Funds' current
prospectus.
14
<PAGE>
- --------------------------------------------------------------------------------
B A R O N A S S E T F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (94.72%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (20.22%)
1,780,000 Bristol Hotel Co.*# $ 68,530,000
783,000 Chartwell Leisure, Inc.* 10,472,625
7,220,000 Choice Hotels Intl. Inc.*# 122,288,750
1,580,000 Circus Circus Enterprises, Inc.* 38,907,500
250,000 La Quinta Inns, Inc. 5,468,750
445,000 Marcus Corp. 10,958,125
1,655,000 Mirage Resorts, Inc.* 41,788,750
625,000 Premier Parks, Inc.* 23,046,875
405,000 Promus Hotel Corp.* 15,693,750
937,900 Sun Intl. Hotels, Ltd* 34,643,681
3,745,000 Vail Resorts, Inc.*# 94,561,250
---------------
466,360,056
Business Services (7.63%)
450,000 Budget Group, Inc. (Formerly Team 15,525,000
Rental Group, Inc.)*
240,000 Equity Corp. Intl.* 5,805,000
360,000 PMT Services, Inc.* 5,490,000
180,000 Profit Recovery Group Intl. * 2,497,500
517,500 The Registry, Inc.* 23,805,000
1,465,000 Robert Half Intl., Inc.* 68,946,563
1,281,000 Stewart Enterprises, Inc. CL A 53,802,000
---------------
175,871,063
Chemical (1.58%)
1,100,000 OM Group, Inc. # 36,437,500
Communications (3.71%)
3,500,000 American Mobile Satellite Corp.*# 35,875,000
1,270,500 CoreComm, Inc.*# 21,916,125
1,115,000 NTL, Inc.* 27,735,625
---------------
85,526,750
Education (3.70%)
1,225,000 DeVry, Inc.* 33,075,000
635,000 Education Management Corp.* 16,510,000
526,500 Learning Tree Intl., Inc.* 23,363,437
366,000 Sylvan Learning Systems, Inc.* 12,444,000
---------------
85,392,437
Energy (3.15%)
2,620,000 Cross Timbers Oil Co.# 50,435,000
423,000 Seacor Smit, Inc.* 22,128,188
---------------
72,563,188
Financial (6.97%)
3,455,000 Charles Schwab Corp. 140,575,313
1,393,200 DVI, Inc.*# 20,201,400
---------------
160,776,713
Food and Agriculture (1.19%)
770,000 Delta and Pine Land Co. 27,431,286
Government Services (2.53%)
1,250,000 Corrections Corp. of America* 49,687,500
710,000 Youth Services Intl., Inc.*# 8,608,750
---------------
58,296,250
Health Services (12.86%)
294,000 American HomePatient, Inc.* 7,350,000
1,031,000 Genesis Health Ventures, Inc.* 34,796,250
5,250,000 Manor Care, Inc.# 171,281,250
935,000 Pediatric Services of America, Inc.*# 18,816,875
<PAGE>
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (94.72%)
- --------------------------------------------------------------------------------
1,230,000 Quorum Health Group, Inc.* $ 43,972,500
446,500 Summit Care Corp.*# 6,027,750
754,300 Vitalink Pharmacy Svcs., Inc.* 14,425,987
---------------
296,670,612
Machinery & Electronics (.10%)
50,000 Ucar International, Inc.* 2,287,500
1,485,000 Flextronics Intl. Ltd.*# 40,095,000
Manufacturing (2.10%)
515,000 Shaw Group, Inc.* 8,368,750
---------------
48,463,750
Media and Entertainment (12.35%)
1,325,000 American Radio Systems Corp. CL A*# 52,834,375
159,000 Central European Media* 4,134,000
675,000 Cox Radio, Inc.*# 17,296,875
1,635,000 Heftel Broadcasting Corp.*# 90,333,750
1,230,000 Metro Networks, Inc.*# 29,827,500
220,000 Outdoor Systems, Inc.* 8,415,000
2,100,000 Saga Communications, Inc.*# 38,850,000
335,000 Telemundo Group, Inc.* 8,040,000
180,000 Univision Communication, Inc.* 7,042,500
860,000 Young Broadcasting, Inc.*# 27,950,000
---------------
284,724,000
Real Estate & REIT's (4.57%)
145,000 Alexander's, Inc.* 10,204,375
732,800 Avatar Holdings, Inc.*# 24,548,800
280,000 Columbus Realty Trust 6,370,000
270,000 Kimco Realty Corp. 8,572,500
212,000 Public Storage, Inc. 6,201,000
265,000 Redwood Trust, Inc. 12,388,750
360,000 Starwood Lodging Trust 15,367,500
140,000 Storage USA, Inc. 5,355,000
315,000 Sun Communities, Inc. 10,572,188
80,000 Vornado Realty Trust 5,770,000
---------------
105,350,113
Retail Trade & Restaurants (7.56%)
1,260,000 Dollar Tree Stores, Inc.* 63,472,500
496,000 Kenneth Cole Productions, Inc. *# 8,091,000
260,000 Nine West Group, Inc.* 9,928,750
170,000 Petco Animal Supplies, Inc.* 5,100,000
140,000 Proffitt's Inc.* 6,142,500
2,185,000 Smart and Final, Inc.# 53,532,500
760,000 Stein Mart, Inc.* 22,800,000
125,000 Williams-Sonoma, Inc.* 5,343,750
---------------
174,411,000
Transportation (0.34%)
200,000 American Freightways Corp.* 3,125,000
420,000 USA Truck, Inc.* 4,725,000
---------------
7,850,000
Wholesale Trade (0.90%)
70,000 Industrie Natuzzi SPA 1,793,750
540,000 Libbey, Inc. 18,900,000
---------------
20,693,750
15
<PAGE>
- --------------------------------------------------------------------------------
B A R O N A S S E T F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
Shares or Market
Principal Amount Value
- --------------------------------------------------------------------------------
Miscellaneous (3.26%) $ 75,261,147
---------------
Total Common Stocks
(Cost $1,670,787,541) 2,184,367,115
---------------
- --------------------------------------------------------------------------------
Convertible Preferred (0.48%)
- --------------------------------------------------------------------------------
Media and Entertainment (0.49%)
200,000 American Radio Systems
Corp. 7% Conv. +
(Cost $10,000,000) 11,200,000
- --------------------------------------------------------------------------------
Corporate Bonds (1.81%)
- --------------------------------------------------------------------------------
Communications (1.54%)
$20,500,000 Intl. CableTel, Inc. 7.25%
Conv. Sub. Notes 04/15/2005+ 22,345,000
14,000,000 Intl. CableTel, Inc. 7.0%
Conv. Sub. Notes 06/15/2008 13,230,000
---------------
35,575,000
Government Services (0.27%)
5,450,000 Youth Services Intl. Inc. 7.00%
Conv. Sub. Deb. 02/01/2006 6,104,000
---------------
Total Corporate Bonds
(Cost $41,352,215) 41,679,000
---------------
<PAGE>
June 30, 1997 (Unaudited)
Market
Principal Amount Value
- --------------------------------------------------------------------------------
Short Term Money Market Instruments (4.07%)
- --------------------------------------------------------------------------------
$93,786,000 Associates Corp. 6.16%
Due 07/01/97 $ 93,786,000
--------------
Total Short Term Money Market
Instruments (Cost $93,786,000) 93,786,000
--------------
Total Investments
(Cost $1,815,925,756**) 2,331,032,115
--------------
Liabilities Less
Cash and Other Assets (24,803,260)
--------------
Net Assets (Equivalent to $41.74 per
share based on 55,248,765 shares of
beneficial interest outstanding) $2,306,228,855
==============
- ----------
% Represents percentage of Net Assets
+ Restricted Securities
# Affiliated Issuers
* Non-income producing securities
** For Federal income tax purposes the cost basis is $1,815,802,780.
Aggregate unrealized appreciation and depreciation of investments are
$561,447,008 and $46,217,673, respectively.
16
<PAGE>
- --------------------------------------------------------------------------------
B A R O N G R O W T H & I N C O M E F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (96.51%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (18.91%)
2,335,000 Choice Hotels Intl., Inc.* $ 39,549,063
140,000 Circus Circus Enterprises, Inc.* 3,447,500
80,000 Marcus Corp. 1,970,000
160,000 Mirage Resorts, Inc.* 4,040,000
180,000 Sun Intl. Hotels, Ltd.* 6,648,750
170,000 Vail Resorts, Inc.* 4,292,500
---------------
59,947,813
Business Services (4.09%)
175,000 Robert Half Intl., Inc.* 8,235,938
112,500 Stewart Enterprises, Inc. CL A 4,725,000
---------------
12,960,938
Chemical (1.46%)
140,000 OM Group, Inc. 4,637,500
Communications (3.44%)
640,000 American Mobile Satellite Corp.* 6,560,000
20,000 CoreComm, Inc.* 345,000
160,000 NTL, Inc.* 3,980,000
---------------
10,885,000
Education (3.30%)
140,000 Children's Comprehensive Services,
Inc.* 1,977,500
175,000 DeVry, Inc.* 4,725,000
58,000 Education Management Corp.* 1,508,000
51,000 Learning Tree Intl., Inc.* 2,263,125
---------------
10,473,625
Energy (0.30%)
50,000 Cross Timbers Oil Co. 962,500
Financial (10.18%)
513,000 Charles Schwab Corp. 20,872,687
220,000 DVI, Inc.* 3,190,000
50,000 Franklin Resources, Inc. 3,628,125
240,000 Medallion Financial Corp. 4,590,000
---------------
32,280,812
Food and Agriculture (1.46%)
130,000 Delta and Pine Land Co. 4,631,250
Government Services (3.08%)
230,000 Corrections Corp. of America* 9,142,500
50,000 Youth Services Intl., Inc.* 606,250
---------------
9,748,750
Health Services (11.64%)
375,000 Counsel Corp.* 5,578,125
720,000 Manor Care, Inc. 23,490,000
167,500 Pediatric Services of America, Inc.* 3,370,938
125,000 Quorum Health Group, Inc.* 4,468,750
---------------
36,907,813
Manufacturing (1.62%)
190,000 Flextronics Intl. Ltd.* 5,130,000
<PAGE>
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Media & Entertainment (8.79%)
230,000 American Radio Systems Corp. CL A* $ 9,171,250
200,000 Heftel Broadcasting Corp.* 11,050,000
110,000 Metro Networks, Inc.* 2,667,500
268,750 Saga Communications, Inc.* 4,971,875
---------------
27,860,625
Real Estate & REIT's (20.65%)
16,000 Alexander's, Inc.* 1,126,000
35,000 Avatar Holdings, Inc.* 1,172,,500
40,000 Beacon Properties Corp. 1,332,500
120,000 Boston Properties, Inc.* 3,300,000
90,000 CBL & Associates, Inc. 2,160,000
230,000 Columbus Realty Trust 5,232,500
35,000 Crescent Real Estate Equities, Co. 1,111,250
110,000 Healthcare Realty Trust, Inc. 3,066,250
60,000 Highwoods Properties, Inc. 1,931,250
120,000 Kimco Realty Corp. 3,810,000
100,000 Pierce Leahy Corp.* 1,800,000
170,000 Public Storage, Inc. 4,972,500
60,000 Reckson Associates Realty Corp. 1,380,000
145,000 Redwood Trust, Inc. 6,778,750
90,000 Spieker Properties, Inc. 3,166,875
165,000 Starwood Lodging Trust 7,043,437
150,000 Storage USA, Inc. 5,737,500
190,000 Sun Communities, Inc. 6,376,875
55,000 Vornado Realty Trust 3,966,875
---------------
65,465,062
Retail Trade & Restaurants (5.71%)
140,000 Dollar Tree Stores, Inc.* 7,052,500
340,000 Smart and Final, Inc. 8,330,000
90,000 Stein Mart, Inc.* 2,700,000
---------------
18,082,500
Utility Services (1.88%)
260,000 Southern Union Co.* 5,947,500
---------------
Total Common Stocks
(Cost $238,883,807) 305,921,688
-------------
- --------------------------------------------------------------------------------
Convertible Preferred (1.41%)
- --------------------------------------------------------------------------------
Media and Entertainment
80,000 American Radio Systems 7% Conv.
Corp.+
(Cost $3,890,000) 4,480,000
17
<PAGE>
- --------------------------------------------------------------------------------
B A R O N G R O W T H & I N C O M E F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
Market
Principal Amount Value
- --------------------------------------------------------------------------------
Corporate Bonds (1.86%)
- --------------------------------------------------------------------------------
Communications (1.28%)
$2,000,000 Intl. CableTel. Inc. 7.25% Conv. Sub.
Notes 4/15/2005+ $2,180,000
2,000,000 Intl. CableTel, Inc. 7.00% Conv. Sub.
Notes 6/15/2008 1,890,000
-----------
4,070,000
Energy (0.57%)
1,700,000 Seacor Holdings 5.375% Conv. Due
11/15/2006+ 1,793,500
Real Estate & REITs (0.01%)
36,800 Avatar Holdings, Inc. 8.0% Sr Deb
10/01/2000 33,212
-----------
Total Corporate Bonds
(Cost $5,829,938) $5,896,712
-----------
<PAGE>
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
Market
Value
- --------------------------------------------------------------------------------
Total Investments
(Cost $248,603,745**) 316,298,400
-------------
Cash and Other Assets
Less Liabilities 683,359
-------------
Net Assets (Equivalent to $21.82
per share based on 14,525,575
shares of beneficial interest
outstanding) $316,981,759
=============
- ----------
% Represents percentage of Net Assets
* Non-Income producing securities
+ Restricted Securities
** For Federal income tax purposes the cost basis is $248,329,944. Aggregate
unrealized appreciation and depreciation of investments are $74,206,935 and
$6,238,479, respectively.
- --------------------------------------------------------------------------------
NOTE
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of June 30, 1996 and are subject to change every month. Past performance is not
guarantee of future results. The Morningstar 5 star rating is for the overall
three-, five, and ten-year period ended June 30, 1997. Baron Asset Fund is
ranked in the small-growth category. Morningstar ratings are calculated from
the Fund s three-, five- and ten-year average annual returns in excess of
90-day Treasury bill returns with appropriate fee adjustments, and a risk
factor that reflects fund performance below 90-day T-bill returns. Ten percent
of the funds in an investment category receive five stars, 22.5% receive four
stars, 35% receive three stars, 22.5% receive two stars, and 10% receive one
star. Baron Asset Fund received 4 stars for a 3-year period, 5 stars for a
5-year period and 5 stars for a 10-year period.
Baron Growth & Income Fund's ranking is according to Lipper Analytical
Services. Lipper ranks funds on net total return. Ranking from inception on
January 3, 1995 through June 30, 1997 Baron Growth & Income Fund is number 1
out of 408 growth & income funds.
Investors Business Daily' s rankings are based on 36 month performance versus
all other mutual funds and recalculates each month on a total return basis,
including dividends and capital gains. The top 5% of funds are rated A+, the
top 10% are A, the top 15% are A-, the top 20% are B+, the top 25% are B, the
top 30% are B-, the top 35% are C+, the top 40% are C, the top 45% are C-, the
top 50% are D+, the top 60% are D, the top 70% are D-, and below 70% are E.
Fortune ranked Baron Asset Fund number 1 of small cap funds for a five years
period ending June 30, 1997, net of annual expenses, brokerage costs and sales
loads. The returns were provided by Morningstar (see above). Fortune used only
diversified funds in existence for at least five years with the same manager
for the full five year period. The funds had to be open to new investors, be
available in at least 25 states, have a minimum investment of less than
$25,000, and hold at least $25 million in net assets. The total number of funds
used in all the categories was 225.
18
<PAGE>
3QR97
