P R O S P E C T U S
BARON CAPITAL FUNDS TRUST
INSURANCE SHARES
BARON CAPITAL ASSET FUND
767 Fifth Avenue, New York, New York 10153
1-800-99-BARON 212-583-2100
BARON CAPITAL FUNDS TRUST (the "Trust") is an open-end, diversified
management investment company, commonly referred to as a mutual fund.
The Trust currently consists of one series, BARON CAPITAL ASSET FUND
(the "Fund"). There are currently two classes of shares. The Fund's
investment objective is to seek capital appreciation through
investments in securities of small and medium sized companies, with
undervalued assets or favorable growth prospects. The Fund has
recently been organized and has no operating history, but the Fund's
investment adviser, BAMCO, Inc., has been an investment advisor to
registered mutual funds for over ten years.
The shares of the Fund offered by this prospectus ("Insurance Shares")
are not offered directly to the public; they are sold only in
connection with investments in and payments under variable annuity
contracts and variable life insurance contracts (collectively
"variable insurance contracts") issued by life insurance companies
("Participating Insurance Companies"). Shares of the Fund are also
offered under a separate prospectus in connection with certain
qualified retirement plans ("Retirement Shares"). The Trust sells and
redeems its shares at net asset value without any sales charges or
redemption fees. The minimum initial investment is $2,000 for each
contract owner allocating money to the Fund. There is no minimum for
subsequent purchases.
This Prospectus sets forth concisely the essential information a
prospective purchaser of a variable insurance contract should consider
before allocating premiums to the Fund. Investors are advised to read
this Prospectus and retain it for future reference and to read the
separate account prospectus of the specific insurance product. A
Statement of Additional Information, dated August 3, 1998, containing
additional and more detailed information about the Fund, has been
filed with the Securities and Exchange Commission and is hereby
incorporated by reference into this Prospectus. A copy of the
Statement of Additional Information may be obtained without charge by
writing or calling the insurance company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
August 3, 1998
TABLE OF CONTENTS
FUND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT OBJECTIVES AND PHILOSOPHY . . . . . . . . . . . . . . . . . 4
INVESTMENT POLICIES AND RISKS . . . . . . . . . . . . . . . . . . . . . 5
INVESTMENT PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . 9
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . 9
DISTRIBUTION PLAN AND OTHER EXPENSES . . . . . . . . . . . . . . . . . 12
PURCHASES AND REDEMPTIONS . . . . . . . . . . . . . . . . . . . . . . . 12
DETERMINING YOUR SHARE PRICE . . . . . . . . . . . . . . . . . . . . . 13
DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . 13
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The net asset value per share and the value of a shareholder's holding in
the Fund will vary with economic and market conditions. The dividends paid
by the Fund will increase or decrease in relation to the income received by
the Fund from its investments and the expenses incurred by the Fund.
Investment in the Fund involves risk, including the possible loss of
principal.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, nor are they federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other
agency.
There is no assurance that the Fund will achieve its respective objective.
The Fund does not purport to offer a complete investment program to which
investors should commit all of their investment capital. Please see the
section entitled "Investment Policies and Risks" starting on page 5 for a
discussion of the risks associated with the Fund.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection
with the offer contained in the Prospectus and, if given or made, such
information or representations may not be relied upon as authorized by the
Fund, its Investment Adviser or any affiliate thereof. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy
securities in any state to any person to whom it is unlawful to make such
offer in such state.
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases........................ NONE
Redemption Fee......................................... NONE
Deferred Sales Load.................................... NONE
Exchange Fees.......................................... NONE
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OPERATING
FEES EXPENSES
(AFTER EXPENSE OTHER (AFTER EXPENSE
REIMBURSEMENT) 12B-1 FEES EXPENSES REIMBURSEMENT)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BARON CAPITAL
ASSET FUND 1.00%* 0.25% 0.25% 1.50%*
--------------------------------------------------------------------------------
</TABLE>
Because Baron Capital Asset Fund is a new fund, "other expenses" and
"total operating expenses" are based on estimated amounts for the
current fiscal year.
*The Adviser will reduce its fee to the extent required to limit Baron
Capital Asset Fund's total operating expenses to 1.5% for the first
$250 million of assets in the Fund, 1.35% for the Fund assets over
$250 million and up to $500 million, and 1.25% for Fund assets over
$500 million. Without the expense limitations, the Fund estimates that
actual expenses would be 1.6%.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return, (2) the 1.5% expense ratio, and (3) redemption
at the end of each time period:
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------------------
Baron Capital Asset Fund $ 15 $ 47 $ 82 $ 179
Owners of variable insurance contracts that invest in the Fund should
refer to the variable insurance contract prospectus for a description
of costs and expenses, as the tables and example do not reflect
deductions at the separate account level or contract level for any
charges that may be incurred under a contract. This information should
not be considered a representation of past or future expenses, as
actual expenses fluctuate and may be greater or less than those shown.
The example assumes a 5% annual return as required by SEC regulations
applicable to all mutual funds. The actual performance of the Fund
will vary and may result in an actual return greater or less than 5%.
The Fund has a plan of distribution pursuant to Rule 12b-1 pursuant to
which the Fund pays the Distributor a fee for distribution-related
services at the annual rate of .25% of the Fund's average daily net
assets. The Distributor may use any part or all of the distribution
fee to pay other parties for administrative services relating to the
shareholder accounts. Because of the distribution fee, long-term
shareholders of the Fund may pay more than the economic equivalent of
the maximum front-end sales load permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). For a
description of the various costs and expenses incurred in the
operation of the Fund, as well as any expense reimbursement or
reduction arrangements, see "Management of the Fund" and "Distribution
Plan."
INVESTMENT OBJECTIVES AND PHILOSOPHY
The investment objective of BARON CAPITAL ASSET FUND is to seek
capital appreciation through investments in securities of small and
medium sized companies with undervalued assets or favorable growth
prospects. Production of income, if any, is incidental to this
objective. The investment objective and philosophy of the Fund is
similar to those of Baron Asset Fund, a publicly offered "retail" fund
managed by the Fund's adviser. Although it is anticipated that the
Fund and the corresponding retail fund will hold similar securities,
differences in asset size and cash flow needs resulting from purchases
and redemptions of Fund shares may result in different security
selections, differences in the relative weightings of securities or
differences in the prices paid for particular portfolio securities.
The Fund's stated fundamental policies and other non-fundamental
policies may differ from Baron Asset Fund's, but it presently
anticipates that the investment selections made for the Fund will be
similar to those made by Baron Asset Fund. Expenses of the Fund and
its corresponding retail fund are also expected to differ. The
performance results are also expected to differ. The variable
insurance contract owner will also bear various insurance-related
costs at the insurance company level and should refer to the
accompanying separate account prospectus for a summary of contract
fees and expenses. The investment objective is fundamental and, as
such, may not be changed without the approval of a majority of the
Fund's outstanding shares. There is no assurance that the Fund will
achieve its investment objective. Investment decisions are made by the
Fund's investment adviser, BAMCO, Inc. (the "Adviser").
The Fund seeks to achieve its investment objective by investing its
assets in a diversified portfolio of primarily common stocks. The Fund
invests primarily in the securities of small sized companies with
market capitalizations of approximately $100 million to $1 billion and
medium sized companies with market values of $1 billion to $2 billion.
Although the Fund invests primarily in small and medium sized
companies, it will not sell positions just because their market values
have increased. The other kinds of investments the Fund makes and the
risks associated therewith are discussed starting on page 5 in
connection with the Fund's investment policies.
The Fund seeks to purchase securities judged by their Adviser to have
favorable price to value characteristics based on the Adviser's
assessment of their prospects for future growth and profitability. The
Adviser seeks securities that the Adviser believes have the potential
to increase in value at least 50% over two subsequent years, although
that goal may not be achieved. As a guide in selecting such
investments, the Adviser studies and considers such fundamentals as
business profitability, balance sheet strength, undervalued and
unrecognized assets, price multiples of free cash flow and income,
perceived management skills, unit growth, and the potential to
capitalize upon anticipated economic trends. Securities are selected
for investment after thorough research of the issuers, the industries
in which they operate, and their managements. The Fund invests
principally in businesses for the long term; it is not a short-term
trader of securities.
When the Adviser determines that opportunities for profitable
investments are limited or that adverse market conditions exist and
believes that investing for temporary defensive purposes is
appropriate, all or a portion of the Fund's assets may be invested in
money market instruments, which include U.S. Government securities,
certificates of deposit, time deposits, bankers' acceptances,
short-term investment grade corporate bonds and other short-term debt
instruments, and repurchase agreements. Investment grade obligations
would be classified at the time of the investment within the four
highest ratings of Standard & Poor's Corporation ("S&P") or Moody's
Investor's Service, Inc. ("Moody's"), or, if unrated, would be
determined by the Adviser to be of comparable high quality and
liquidity. The Fund may also invest in money market instruments in
anticipation of investing cash positions or of meeting redemptions. To
the extent the Fund is so invested its investment objectives may not
be achieved.
INVESTMENT POLICIES AND RISKS
In seeking to achieve its investment objective of capital
appreciation, the Fund invests primarily in common stocks but may also
invest in other equity-like securities such as convertible bonds and
debentures, preferred stocks, warrants and convertible preferred
stocks. Securities are selected solely for their capital appreciation
potential, and investment income is not a consideration.
GENERAL POLICIES SMALL AND MEDIUM SIZED COMPANIES
The Fund invests primarily in small to medium sized companies with
market values between $100 million and $2 billion. The Adviser
believes there is more potential for capital appreciation in smaller
companies, but there also may be more risk. Securities of smaller
companies may not be well known to most investors and may be thinly
traded. There is more reliance on the skills of a company's management
and on their continued tenure. Investments may be attractively priced
relative to the Adviser's assessment of a company's growth prospects,
management expertise, and business niche, yet have modest or no
current cash flows or earnings. Although the Adviser concentrates on a
company's growth prospects, it also focuses on cash flow, asset value
and reported earnings. This investment approach requires a long-term
outlook and may require shareholders to assume more risk and to have
more patience than investing in the securities of larger, more
established companies. From time to time the Adviser may purchase
securities of larger, more widely followed companies for the Fund if
it believes such investments meet the Adviser's investment criteria
and the Fund's investment objective. The Fund may invest up to 35% of
its total assets in larger companies if the Adviser perceives an
attractive opportunity in a larger company. The Fund may continue to
make investments in a company even though its market capitalization
has increased beyond the limits stated, if, in the Adviser's judgment,
the company is still an attractive investment.
Equity securities may fluctuate in value, often based on factors
unrelated to the value of the issuer or its securities. Since
convertible securities combine the investment characteristics of both
bonds and common stocks, the Fund absorbs the market risks of both
stocks and bonds. The combination does, however, make the investment
less sensitive to interest rate changes than straight bonds of
comparable maturity and quality. Because of these factors, convertible
securities are likely to perform differently than broadly-based
measures of the stock and bond markets.
DEBT SECURITIES
The debt securities in which the Fund may invest include rated and
unrated securities and convertible instruments. In making investment
selections, the Adviser, in addition to using nationally recognized
statistical rating organizations ("NRSROs"), also makes its own
independent judgments about a security and its issuer. Securities
which are not rated by an NRSRO are purchased based solely on the
Adviser's assessment of the security and its issuer. The Fund may
invest up to 35% of its total assets in non-investment grade debt
securities, commonly referred to as "junk bonds." There is no minimum
rating for the debt securities that may be purchased. Lower rated
securities may have a higher yield and the potential for a greater
return than investment grade securities but may also have more risk.
Lower rated securities are generally meant for longer-term investing
and may be subject to certain risks with respect to the issuing entity
and to market fluctuations. The NRSROs may characterize these
securities as speculative, with moderate or little protection as to
the payment of interest and principal. See the Statement of Additional
Information for a general description of NRSRO ratings of debt
obligations. The ratings by these NRSROs represent their opinions as
to the quality of the debt obligations which they undertake to rate.
It should be emphasized that ratings are relative and subjective, and
although ratings may be useful in evaluating the safety of interest
and principal payments, they do not evaluate the market value risks of
these securities. The Adviser will also evaluate the securities and
the ability of the issuers to pay interest and principal. The Fund's
ability to achieve its investment objective may be more dependent on
the Adviser's credit analysis than might be the case with higher rated
securities. The market price and yield of lower rated securities are
generally more volatile than those of higher rated securities. Factors
adversely affecting the market price and yield of these securities
will adversely affect the Fund's net asset value. The trading market
for these securities may be less liquid than that of higher rated
securities. Companies that issue lower rated securities may be highly
leveraged or may have unstable earnings, and consequently the risk of
the investment in the securities of such issuers may be greater than
with higher rated securities. With respect to debt securities
generally, the interest bearing features of such securities carry a
promise of income flow, but the price of the securities are inversely
affected by changes in interest rates and are therefore subject to the
risk of market price fluctuations. The market values of debt
securities may also be affected by changes in the credit ratings or
financial condition of the issuers.
The Fund from time to time may also purchase indebtedness and
participations therein, both secured and unsecured, of debtor
companies in reorganization or financial restructuring. Such
indebtedness may be in the form of loans, notes, bonds or debentures.
Participations normally are made available only on a nonrecourse basis
by financial institutions, such as banks or insurance companies, or by
governmental institutions, such as the Resolution Trust Corporation or
the Federal Deposit Insurance Corporation or the Pension Benefit
Guaranty Corporation. When the Fund purchases a participation interest
it assumes the credit risk associated with the bank or other financial
intermediary as well as the credit risk associated with the issuer of
any underlying debt instrument. The Fund may also purchase trade and
other claims against, and other unsecured obligations of, such debtor
companies, which generally represent money due a supplier of goods or
services to such company. Some debt securities purchased by the Fund
may have very long maturities. The length of time remaining until
maturity is one factor the Adviser considers in purchasing a
particular indebtedness. The purchase of indebtedness of a troubled
company always involves a risk as to the creditworthiness of the
issuer and the possibility that the investment may be lost. The
Adviser believes that the difference between perceived risk and actual
risk creates the opportunity for profit which can be realized through
thorough analysis. There are no established markets for some of this
indebtedness and it is less liquid than more heavily traded
securities. Indebtedness of the debtor company to a bank are not
securities of the banks issuing or selling them. The Fund may purchase
loans from national and state chartered banks as well as foreign ones.
The Fund may invest in senior indebtedness of the debtor companies,
although on occasion subordinated indebtedness may also be acquired.
The Fund may also invest in distressed first mortgage obligations and
other debt secured by real property. The Fund does not currently
anticipate investing more than 5% of its assets in trade and other
claims.
OPTIONS
The Fund may purchase put and call options and write (sell) covered
put and call options on equity and/or debt securities. A call option
gives the purchaser of the options the right to buy, and when
exercised obligates the writer to sell, the underlying security at the
exercise price. A put option gives the purchaser of the option the
right to sell, and when exercised obligates the writer to buy, the
underlying security at the exercise price. The writing of put options
will be limited to situations where the Adviser believes that the
exercise price is an attractive price at which to purchase the
underlying security. A put option sold by the Fund would be considered
covered by the Fund's placing cash or liquid securities in a
segregated account with the custodian in an amount necessary to
fulfill the obligation undertaken. Options may fail as hedging
techniques in cases where the price movements of the securities
underlying the options do not follow the price movements of the
portfolio securities subject to the hedge. Gains on investments in
options depend on the Adviser's ability to predict correctly the
direction of stock prices, interest rates, and other economic factors.
The Adviser could be wrong in its predictions. Where a liquid
secondary market does not exist, the Fund would likely be unable to
control losses by closing its position.
The Fund may engage in options transactions on specific securities
that may be listed on national securities exchanges or traded in the
over-the-counter market. Options not traded on a national securities
exchange are treated as illiquid securities and may be considered to
be "derivative securities." Options transactions will not exceed 25%
of the Fund's net assets, as measured by the securities covering the
options, or 5% of net assets, as measured by the premiums paid for the
options, at the time the transactions are entered into.
BORROWINGS
The Fund may borrow up to 5% of its net assets for extraordinary or
emergency temporary investment purposes or to meet redemption requests
which might otherwise require an untimely sale of portfolio
securities. The Fund may also borrow for other short-term purposes. To
the extent the Fund borrows, it must maintain continuous asset
coverage of 300% of the amount borrowed. The Fund will not borrow in
an amount exceeding 25% of the value of its net assets, including the
amount borrowed, as of the time the borrowing is made. Such borrowing
has special risks. Any amount borrowed will be subject to interest
costs that may or may not exceed the appreciation of the securities
purchased.
SHORT SALES AGAINST THE BOX
For the purpose of either protecting or deferring unrealized gains on
portfolio securities, the Fund may make short sales "against the box"
where the Fund sells short a security it already owns or has the right
to obtain without payment of additional consideration an equal amount
of the same type of securities sold. The proceeds of the short sale
will be held by the broker until the settlement date, at which time
the Fund delivers the security to close the short position. If the
Fund sells securities short against the box, it may protect unrealized
gains, but will lose the opportunity to profit on such securities if
the price rises. The Fund will not sell short against the box in
excess of 25% of its net assets.
LENDING
The Fund may lend its portfolio securities to broker-dealers and other
institutions as a means of earning additional income. In lending its
portfolio securities, the Fund may incur delays in recovery of loaned
securities or a loss of rights in the collateral. To minimize such
risks, such loans will only be made if the Fund deems the other party
to be of good standing and determines that the income justifies the
risk. The Fund will not lend more than 25% of its total assets.
ILLIQUID SECURITIES
The Fund may invest up to 15%, of its net assets in securities that
are not readily marketable or are otherwise restricted. The absence of
a trading market could make it difficult to ascertain a market value
for illiquid positions. The Fund's net asset value could be adversely
affected if there were no ready buyer at an acceptable price at the
time the Fund decided to sell. Time-consuming negotiations and
expenses could occur in disposing of the shares.
FOREIGN SECURITIES
The Fund may invest up to 10% of its total assets directly in the
securities of foreign issuers which are not publicly traded in the
U.S. and may also invest in foreign securities in domestic markets
through depositary receipts without regard to this limitation. The
Adviser currently intends to invest not more than 10% of the Fund's
assets in foreign securities, including both direct investments and
investments made through depositary receipts. These securities may
involve additional risks not associated with securities of domestic
companies, including exchange rate fluctuations, political or economic
instability, the imposition of exchange controls, or expropriation or
confiscatory taxation. Issuers of foreign securities are subject to
different, often less detailed, accounting, reporting and disclosure
requirements than are domestic issuers.
SHORT-TERM TRADING AND TURNOVER
The Fund may engage in short-term trading where the Adviser believes
that the anticipated gains outweigh the costs of short-term trading.
The Adviser expects that the average turnover rate of the Fund's
portfolio should not exceed 100%. The turnover rate may vary from year
to year depending on how the Adviser anticipates portfolio securities
will perform. Short-term trading will increase the amount of brokerage
commissions paid by the Fund and the amount of possible short-term
capital gains. The amount of portfolio activity will not be a limiting
factor in making portfolio decisions.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in the equity securities of real estate investment
trusts ("REITs"). A REIT is a corporation or business trust that
invests substantially all of its assets in real estate and derives
most of its income from rents from real property or interest on loans
secured by mortgages on real property. REITs which meet certain
specific requirements of the Internal Revenue Code effectively do not
pay corporate level federal income tax. REITs may be affected
adversely by changes in the value of their underlying properties and
by defaults by borrowers or tenants. REITs are dependent on the skills
of their management and have limited diversification. REITs also rely
on their ability to generate cash flow to make distributions to
shareholders and some REITs may have self-liquidation provisions
allowing mortgages to be paid in full. The market value of REITs may
also be affected by changes in the tax laws or by their inability to
qualify for the tax-free pass-through of their income. The REIT
portion of the portfolio may also be affected by general fluctuations
in real estate values.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement the Fund buys a security
at one price, and at the time of sale, the seller agrees to repurchase
that security at a mutually agreed upon time and price. Repurchase
agreements could involve certain risks in the event of the failure of
the seller to repurchase the securities as agreed, which may cause a
fund to suffer a loss, including loss of interest on or principal of
the security, and costs associated with delay and enforcement of the
repurchase agreement. Repurchase agreements with a duration of more
than seven days are considered illiquid securities and are subject to
the restrictions stated above.
WHEN-ISSUED SECURITIES
The Fund may invest up to 5% of its assets in debt and equity
securities purchased on a when-issued basis. Although the payment and
interest terms of when-issued securities are established at the time
the purchaser enters into the commitment, the actual payment for and
delivery of when-issued securities generally takes place within 45
days. The Fund bears the risk that interest rates on debt securities
at the time of delivery may be higher or lower than those contracted
for on the when-issued security. Failure of the issuer to deliver the
security purchased on a when-issued basis may result in a loss or
missed opportunity to make an alternative investment.
SPECIAL SITUATIONS
The Fund may invest in "special situations." A special situation
arises when, in the opinion of the Adviser, the securities of a
company will be recognized and appreciate in value due to a specific
anticipated development at that company. Such developments might
include a new product, a management change, an acquisition or a
technological advancement. Investments in special situations may carry
an additional risk of loss in the event that the anticipated
development does not occur or does not attract the expected attention.
The special situation may involve securities of companies with higher
market capitalizations.
INVESTMENT PERFORMANCE
The investment results of the Fund quoted in advertisements and other
sales literature may refer to average annual total return and actual
return. Average annual total return assumes that an investment in the
Fund was purchased with an initial payment of $1,000 and that the
investment was redeemed at the end of a stated period of time, after
giving effect to the reinvestment of all dividends and distributions
during the period at the net asset value on the reinvestment date. The
return is expressed as a percentage rate which, if applied on a
compounded annual basis, would result in the redeemable value of the
investment at the end of the period. Because average annual returns
are annualized they tend to even out variations in the returns, and
are not the same as actual year-by-year results. The actual return
performance calculations, which also may be quoted in advertising,
reflect the results of a continuous shareholder who does not redeem.
It measures the percentage change between the net asset value of a
hypothetical $1,000 investment in the Fund at the beginning of a
period and the net asset value of that investment at the end of a
period, assuming reinvestment of all dividend and capital gain
distributions at the net asset value on the reinvestment date. The
performance of major market indices such as the Dow Jones Industrial
Average, Russell 2000, and Standard & Poor's 500 may also be included
in advertising so that the Fund's results may be compared with those
of groups of unmanaged securities widely regarded by investors as
measures of market performance. Brokerage fees are not factored into
the performance of the indices. The performance data of the Fund
include all recurring fees such as brokerage and investment advisory
fees. Data and rankings from Lipper Analytical Services, Inc., CDA
Investment Technologies, Morningstar or other industry publications
may also be used in advertising. See the Statement of Additional
Information.
Performance results represent past performance and are not necessarily
representative of future results. Investment return and principal
value will fluctuate so that shares may be worth more or less than
their original cost when redeemed.
The annual report contains additional performance information which is
available upon request without charge by writing or calling the Fund
at the address and telephone number set forth on the back of this
Prospectus.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
BAMCO, Inc., the Adviser, is located at 767 Fifth Avenue, New York,
New York 10153, and is responsible for portfolio management. It is a
wholly owned subsidiary of Baron Capital Group, Inc. ("BCG"). Baron
Capital, Inc. ("Baron Capital"), a registered broker-dealer and the
distributor of the shares of the Fund, is also a wholly owned
subsidiary of BCG.
Under an advisory agreement with the Fund (the "Advisory Agreement"),
the Adviser furnishes continuous investment advisory services and
management to the Fund. Mr. Ronald Baron is the chief investment
officer of the Adviser and is primarily responsible for the day-to-day
management of the portfolio of the Fund. Mr. Baron also has primary
responsibility for the investments of two of the retail funds, Baron
Asset Fund and Baron Growth & Income Fund. He has managed the
portfolios of those Funds since their inception. The Adviser also
keeps the books of account of each series, and calculates daily the
income and net asset value per share of each Fund.
As compensation for the services rendered under each Advisory
Agreement, the Adviser receives a fee payable monthly from the assets
of each Fund equal to 1% per annum of each Fund's respective average
daily net asset value. The Adviser has agreed to waive its advisory
fee to the extent necessary so that total operating expenses of the
Fund do not exceed 1.50% for the first $250 million of assets in the
Fund, 1.35% for Fund assets over $250 million and up to $500 million,
and 1.25% for Fund assets over $500 million.
BROKERAGE
Brokerage transactions for the Fund are effected chiefly by or through
its Adviser's affiliate, Baron Capital, when consistent with the
policy of obtaining the best net results for the Fund and subject to
the conditions and limitations of the 1940 Act. Baron Capital is a
registered broker-dealer and a member of the NASD. In determining the
best net results for the Fund, the Adviser will examine factors such
as price (including the applicable brokerage commission or dealer
spread), size of order, efficiency and reliability of execution. The
Fund's Board of Trustees has adopted procedures in conformity with
Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions
paid to Baron Capital are reasonable and fair compared to the
commission, fee or other remuneration received by other brokers in
connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable
period of time. The Fund will also consider sales of its shares as a
factor in the selection of broker-dealers to execute portfolio
transactions. See Statement of Additional Information for a
description of the commissions paid to Baron Capital.
TRUSTEES AND EXECUTIVE OFFICERS
The Trust's Board of Trustees has overall responsibility for the
management of the Fund. The Trustees and executive officers of the
Fund and their principal occupations during the last five years are
set forth below.
<TABLE>
<CAPTION>
POSITION HELD WITH PRINCIPAL OCCUPATION(S) DURING
NAME AND ADDRESS BARON FUNDS PAST FIVE YEARS
--------------------------------------------------------------------------------------
<S> <C> <C>
Ronald Baron*+ President, Chief President and Director of: Baron
767 Fifth Avenue Investment Officer Capital, Inc. (1982-Present),
New York, NY 10153 and Trustee Baron Capital Management, Inc.
(1983-Present), Baron Capital
Group, Inc. (1984-Present), BAMCO,
Inc. (1987-Present).
Norman S. Edelcup Trustee Chairman, Item Processing of
244 Atlantic Isle America (1989-Present), (financial
N. Miami Beach, FL 33160 institution service bureau);
Director, Valhi, Inc. (1975-Present)
(diversified company); Director,
Artistic Greetings, Inc.
(1985-Present).
Mark M. Feldman Trustee President and Chief Executive
444 Madison Ave, Ste 703 Officer, Cold Spring Group, Inc.
New York, N.Y. 10020 (1993-Present) (reorganization and
restructuring consulting);
Executive Vice President and Chief
Restructuring Officer, Lomas
Financial Corp. and subsidiaries
(1995-1996) (reorganizing
debtors-in-possession); Trustee,
Aerospace Creditors Liquidating
Trust (1993-Present) (administers
and liquidates assets).
Irwin Greenberg Trustee Chairman, Lehigh Valley Hospital
3048 Congress Street Board (1991-Present); Retail
Allentown, PA 18101 Consultant, (1990-Present);
Director, Cedar Crest College
(1990-Present); President and Chief
Executive Officer, Hess's Department
Stores (1976-1990).
Clifford Greenberg Vice President Vice President, Baron Capital,
767 Fifth Avenue Inc., Baron Capital Group, Inc.,
New York, NY 10153 BAMCO, Inc. (1997-Present);
General Partner, HPB Associates,
L.P. (1984-1996) (investment
partnership).
Linda S. Martinson*+ Secretary, Vice General Counsel and Secretary of:
767 Fifth Avenue President and Baron Capital, Inc. (1983-Present),
New York, NY 10153 Trustee BAMCO, Inc. (1987-Present), Baron
Capital Group, Inc. (1984-Present),
Baron Capital Management, Inc.
(1983-Present).
Charles N. Mathewson Trustee Chairman of the Board, International
5270 Neil Road Game Technology (1986-Present)
Reno, NV 89502-4169 (manufacturer of microprocessor-
controlled gaming machines and
monitoring systems).
Harold W. Milner Trustee Retired; President and Chief
2293 Morningstar Drive Executive Officer, Kahler Realty
Park City, UT 84060 Corporation (1985-1997) (hotel
ownership and management).
Raymond Noveck+ Trustee President, Strategic Systems, Inc.
31 Karen Road (1990-Present) (health care
Waban, MA 02168 information); Director, Horizon/CMS
Healthcare Corporation
(1987-Present).
Susan Robbins Vice President Senior Analyst, Vice President and
767 Fifth Avenue Director of: Baron Capital, Inc.
New York, NY 10153 (1982-Present), Baron Capital
Management, Inc. (1983-Present),
Baron Capital Group, Inc.
(1984-Present).
Morty Schaja* Senior Vice Senior Vice President and Chief
767 Fifth Avenue President, Chief Operating Officer of Baron Capital,
New York, NY 10153 Operating Officer Inc. (1997-Present), Managing
and Trustee Director, Vice President, Baron
Capital, Inc. (1991-Present) and
Director, Baron Capital Group, Inc.,
Baron Capital Management, Inc., and
BAMCO, Inc. (1997-Present).
David A. Silverman, M.D. Trustee Physician (1976-Present).
239 Central Park West
New York, NY 10024
Peggy Wong Treasurer and Chief Treasurer and Chief Financial
767 Fifth Avenue Financial Officer Officer of: Baron Capital, Inc.,
New York, NY 10153 Baron Capital Group, Inc., BAMCO,
Inc., Baron Capital Management,
Inc. (1987-Present).
</TABLE>
----------------------
* Trustees deemed to be "interested persons" of the Fund as that
term is defined in the Investment Company Act of 1940.
+ Members of the Executive Committee, which is empowered to
exercise all of the powers, including the power to declare
dividends, of the full Board of Trustees when the full Board of
Trustees is not in session.
DISTRIBUTION PLAN AND OTHER EXPENSES
The Fund's Insurance Shares are distributed by Baron Capital, which is
the principal underwriter of the shares of the Baron retail funds,
pursuant to a distribution plan under Rule 12b-1 of the 1940 Act
("Distribution Plan"). The Distribution Plan authorizes the Fund to
pay the Principal Underwriter a distribution fee equal on an annual
basis to 0.25% of each Fund's average daily net assets. The
distribution fee is paid to the Principal Underwriter in connection
with its activities or expenses primarily intended to result in the
sale of shares, including, but not limited to, compensation to
registered representatives or other employees of the Principal
Underwriter who engage in or support the distribution of shares or who
service shareholder accounts; telephone expenses; interest expenses;
preparing, printing and distributing promotional and advertising
material; preparing, printing and distributing the Prospectus and
reports to other than current shareholders; and commissions and other
fees to broker-dealers or other persons (excluding banks) who have
introduced investors to the Funds. See the Statement of Additional
Information for a more detailed listing of the expenses covered by the
Distribution Plan.
From time to time the Distributor may compensate Participating
Insurance Companies or their affiliates whose customers hold the
Insurance Shares for providing a variety of administrative services,
such as record-keeping and accounting, and investor support services,
such as responding to inquiries and preparing mailings to
shareholders. The compensation may be paid as either a per account fee
or a percentage of the average daily assets invested by the
participating Insurance Company. The compensation will be paid out of
the assets of the Fund. Such compensation would be paid out of the
12b-1 fee paid to the Distributor.
The Fund pays a fee to its custodian, the Bank of New York, 48 Wall
Street, New York, NY 10015. The Fund also pays a fee to its transfer
and dividend distributing agent, DST Systems, Inc. P.O. Box 419946,
Kansas City, MO 64141. In their respective capacities both
institutions maintain certain financial and accounting records
pursuant to agreements with the Trust. They do not assist in and are
not responsible for investment decisions involving assets of the Fund.
PURCHASES AND REDEMPTIONS
The Insurance Shares of the Fund are offered on a continuous basis to
separate accounts of Participating Insurance Companies and the
Retirement Shares are offered on a continuous basis through qualified
plans. Investors may not purchase or redeem shares of the Fund
directly, but only through variable insurance contracts offered
through the separate accounts of Participating Insurance Companies or
through qualified retirement plans. You should refer to the applicable
Separate Account Prospectus or your plan documents for information on
how to purchase or surrender a contract, make partial withdrawals of
contract values, or change existing allocations.
All investments in the Fund are credited to a Participating Insurance
Company's separate account or a qualified plan immediately upon
acceptance of the investment by the Transfer Agent. Investments will
be processed at the net asset value next determined after an order is
received and accepted by the Transfer Agent. The Fund reserves the
right to reject any purchase order.
Redemptions are processed at the net asset value next calculated after
receipt and acceptance of the redemption order by the Transfer Agent.
Redemption proceeds will normally be wired to the qualified plan the
business day following receipt of the redemption order, but in no
event later than seven days after receipt of such order.
DETERMINING YOUR SHARE PRICE
Your purchases, sales or exchanges will be processed at the net asset
value per share of the Fund as of the close of the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m., New York City time) on
each day that the Exchange is open for trading by dividing the current
market value of the Fund's total assets less all of its liabilities by
the total number of shares outstanding at the time the determination
is made. Valid purchase and redemption orders placed prior to the
close of the Exchange on a day the Exchange is open for trading are
executed at the net asset value determined as of the close that day,
and orders placed after that time are valued as of the close of the
next trading day. The Fund may have arrangements with certain
institutional entities with respect to the actual receipt of orders.
The Fund reserves the right to change the time at which orders are
priced if the Exchange closes at a different time or an emergency
exists.
The Fund's 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, or by the Adviser, pursuant to procedures
established by the Board. Money market instruments and debt securities
with a remaining maturity of sixty days or less are valued by the
amortized cost method unless such method does not represent fair
value. Odd lot differentials and brokerage commissions are excluded in
calculating net asset value. Securities quoted in a foreign currency
are valued daily in U.S. dollars at the foreign currency exchange
rates that are prevailing at the time the daily net asset value per
share is determined. If events that materially affect the value of the
Fund's foreign investments occur, the investments will be valued at
their fair value as determined in good faith by the Board of Trustees.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income and
realized capital gains, if any, to its shareholders in a single,
combined distribution by December 31 of each year. After every
distribution, the value of a share is automatically reduced by the
amount of the distribution. All your dividends and capital gains
distributions from the Fund are automatically reinvested in additional
shares of the Fund at the next computed net asset value at the close
of business on the payment date.
TAXES
The Fund intends to qualify each year as a regulated investment
company under the Internal Revenue Code of 1986 (the "Code").
Qualification as a regulated investment company relieves the Fund of
federal income and excise taxes on the portion of its net ordinary
income and net realized capital gain distributed to shareholders. The
Fund also intends to qualify under the Code with respect to the
diversification requirements for tax deferral with respect to
insurance company separate accounts.
Because the Insurance Shares may be purchased only through variable
insurance contacts and the Retirement Shares may be purchased only
through qualified plans, it is anticipated that any dividends derived
from net investment income and distributions of capital gains will be
exempt from current taxation if left to accumulate within the variable
insurance contract or qualified plan. Generally, withdrawals from such
contracts may be subject to ordinary income tax and, if made before
age 591/2, a 10% penalty tax. The tax status of your investment in the
Insurance Shares depends on the features of the variable insurance
contracts purchased from a Participating Insurance Company. Please see
the separate account prospectus for additional information.
The foregoing is only a summary of some important tax considerations
generally affecting the Fund and its shareholders. Prospective
shareholders are urged to consult their tax advisers concerning the
tax consequences of this investment.
GENERAL INFORMATION
The Trust is a diversified open-end management investment company
registered under the Investment Company Act of 1940 ("1940 Act"), it
was organized as a Delaware business trust on November 20, 1997. The
Trust is authorized to have separate series, but currently has only
the Fund. It is authorized to issue an indefinite number of shares of
beneficial interest. The Declaration of Trust permits the Trustees to
establish additional series. The Fund currently offers two classes of
shares, one of which, the Insurance Shares offered through
Participating Insurance Companies, are offered pursuant to this
Prospectus. The shares offered hereby are available only in connection
with investments in and payments under variable contracts and life
insurance contracts. Retirement Shares of the Fund are also available
to participant directed plans through a separate prospectus. Because
the expenses of each class may differ, the performance of each class
is expected to differ. Each share of the Fund has one vote on all
matters for which a shareholder vote is required, and participates
equally in dividend and capital gain distributions when and if
declared by the Fund and in the Fund's net assets upon liquidation.
Shares are fully paid and non-assessable and there are no preemptive,
conversion or exchange rights. Shares do not have cumulative voting
rights and, as a result, holders of at least 50% of the shares voting
for Trustees can elect all Trustees and the remaining shareholders
would not be able to elect any Trustees.
As a Delaware business trust, annual shareholder meetings are not
required. Shareholders have certain rights, as set forth in the
Declaration of Trust, including the right to call a meeting of
shareholders for the purpose of voting on the removal of one or more
Trustees on the written request of not less than 10% of the
outstanding shares. Such removal can be effected upon the action of
two-thirds of the outstanding shares. An insurance company issuing a
variable contract invested in the Fund requests voting instructions
from the variable contract holders. Under current law, the insurance
company must vote all shares of the Fund held by the Separate Accounts
in proportion to the voting instructions received.
CONFLICTS OF INTEREST
Each Portfolio's Shares are available only to variable annuity and
variable life separate accounts of insurance companies that are
unaffiliated with the Adviser and to certain qualified retirement
plans. The Retirement Shares, offered through a separate prospectus,
are available to certain participant directed qualified plans.
Although the Fund currently does not anticipate any disadvantages to
policy owners or plan participants arising out of the fact that the
Fund offers its shares to such entities, there is a possibility that a
material conflict may arise. The Trustees monitor events in order to
identify any anticipated disadvantages or material irreconcilable
conflicts to determine what action, if any, should be taken in
response. If a material disadvantage or conflict occurs, the Trustees
may require one or more insurance company separate accounts or plans
to withdraw its investments in the Fund. If this occurs, the Fund may
be forced to sell securities at disadvantageous prices. The Trustees
may refuse to sell shares of the Fund to any separate account or
qualified plan or may suspend or terminate the offering of a Fund's
shares if such action is required by law or regulatory authority or is
in the best interests of the Fund's shareholders. It is possible that
a qualified plan investing in the Retirement Shares of the Fund could
lose its qualified plan status under the Internal Revenue Code, which
could have adverse tax consequences on insurance company separate
accounts investing in the Fund. The Adviser intends to monitor such
qualified plans and the Fund may discontinue sales to a qualified plan
and require plan participants with existing investments in the
retirement shares to redeem those investments if a plan loses (or in
the opinion of the Adviser is at risk losing) its qualified plan
status.
MASTER/FEEDER OPTION
The Trust may in the future seek to achieve the Fund's or any future
series' investment objective by investing all of that series' assets
in another investment company having the same investment objective and
substantially the same investment policies and restrictions as those
applicable to that series. It is expected that any such investment
company would be managed by the Adviser in substantially the same
manner as the existing series. The initial shareholder(s) of each
series voted to vest the authority to convert to a master/feeder
structure in the sole discretion of the Trustees. No further approval
of the shareholders of the series of the Trust is required. You will
receive at least 30 days' prior notice of any such investment. Such
investment would be made only if the Trustees determine it to be in
the best interests of a series and its shareholders. In making that
determination, the Trustees will consider, among other things, the
benefits to shareholders and/or the opportunity to reduce costs and
achieve operational efficiencies. Although the Adviser believes the
Trustees will not approve an arrangement that is likely to result in
higher costs, no assurance is given that costs will be materially
reduced if this option is implemented.
SHAREHOLDER INFORMATION
Shareholder inquiries about general Fund information should be
directed to the Funds' office at 1-800-99-BARON or 212-583-2100.
Owners of variable insurance contracts and plan participants will be
provided semi-annual unaudited and annual audited reports, including
the financial statements of the Fund. Each report will include a
listing of portfolio securities held. The Trust's fiscal year ends
September 30.
P R O S P E C T U S
BARON CAPITAL FUNDS TRUST
RETIREMENT SHARES
BARON CAPITAL ASSET FUND
767 Fifth Avenue, New York, New York 10153
1-800-99-BARON 212-583-2100
BARON CAPITAL FUNDS TRUST (the "Trust") is an open-end, diversified
management investment company, commonly referred to as a mutual
fund. The Trust currently consists of one series, BARON CAPITAL
ASSET FUND (the "Fund"). There are currently two classes of shares.
The Fund's investment objective is to seek capital appreciation
through investments in securities of small and medium sized
companies, with undervalued assets or favorable growth prospects.
The Fund has recently been organized and has no operating history,
but the Fund's investment adviser, BAMCO, Inc., has been an
investment adviser to registered mutual funds for over ten years.
The shares of the Fund offered by this prospectus ("Retirement
Shares") are not offered directly to the public; they are sold only
in connection with certain participant directed qualified
retirement plans and, under a separate prospectus, investments in
and payments under variable annuity contracts and variable life
insurance contracts (collectively "variable insurance contracts")
issued by life insurance companies ("Institutional Shares"). The
Trust sells and redeems its shares at net asset value without any
sales charges or redemption fees. The minimum initial investment is
$2,000. There is no minimum for subsequent purchases.
This Prospectus sets forth concisely the essential information a
plan participant should consider before allocating purchase
payments to the Fund. Investors are advised to read this Prospectus
and retain it for future reference and to read the plan documents.
A Statement of Additional Information, dated August 3, 1998,
containing additional and more detailed information about the Fund,
has been filed with the Securities and Exchange Commission and is
hereby incorporated by reference into this Prospectus. A copy of
the Statement of Additional Information may be obtained without
charge by writing or calling the plan sponsor.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
August 3, 1998
TABLE OF CONTENTS
FUND EXPENSES....................................................3
INVESTMENT OBJECTIVES AND PHILOSOPHY.............................4
INVESTMENT POLICIES AND RISKS....................................5
INVESTMENT PERFORMANCE...........................................9
MANAGEMENT OF THE FUND...........................................9
DISTRIBUTION PLAN AND OTHER EXPENSES............................12
PURCHASES AND REDEMPTIONS.......................................12
DETERMINING YOUR SHARE PRICE....................................12
DIVIDENDS AND DISTRIBUTIONS.....................................13
TAXES...........................................................13
GENERAL INFORMATION.............................................13
The net asset value per share and the value of a shareholder's holding in
the Fund will vary with economic and market conditions. The dividends paid
by the Fund will increase or decrease in relation to the income received by
the Fund from its investments and the expenses incurred by the Fund.
Investment in the Fund involves risk, including the possible loss of
principal.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank, nor are they federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other
agency.
There is no assurance that the Fund will achieve its respective objective.
The Fund does not purport to offer a complete investment program to which
investors should commit all of their investment capital. Please see the
section entitled "Investment Policies and Risks" starting on page 5 for a
discussion of the risks associated with the Fund.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection
with the offer contained in the Prospectus and, if given or made, such
information or representations may not be relied upon as authorized by the
Fund, its Investment Adviser or any affiliate thereof. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy
securities in any state to any person to whom it is unlawful to make such
offer in such state.
FUND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases.............NONE
Redemption Fee..............................NONE
Deferred Sales Load.........................NONE
Exchange Fees...............................NONE
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):
MANAGEMENT FEES OTHER TOTAL
(AFTER EXPENSE EXPENSES OPERATING
REIMBURSEMENT) EXPENSES
(AFTER EXPENSE
REIMBURSEMENT)
BARON CAPITAL
ASSET FUND 1.00% 2.5% 1.25%
Because Baron Capital Asset Fund is a new fund, "other expenses" and "total
operating expenses" are based on estimated amounts for the current fiscal
year.
*The Adviser will reduce its fee to the extent required to limit Baron
Capital Asset Fund's total operating expenses to 1.25%. The Adviser may use
a portion of its fee to pay other parties for certain administrative
services provided to fund shareholders. Without the expense limitation, the
Fund estimates that actual expenses would be 1.35%.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1) a
5% annual return, and (2) redemption at the end of each time period:
1 Year 3 Years 5 Years 10 Years
Baron Capital Asset Fund $13 $40 $69 $151
This information should not be considered a representation of past or
future expenses, as actual expenses fluctuate and may be greater or less
than those shown. The example assumes a 5% annual return as required by SEC
regulations applicable to all mutual funds. The actual performance of the
Fund will vary and may result in an actual return greater or less than 5%.
For a description of the various costs and expenses incurred in the
operation of the Fund, as well as any expense reimbursement or reduction
arrangements, see "Management of the Fund" and "Distribution Plan."
INVESTMENT OBJECTIVES AND PHILOSOPHY
The investment objective of BARON CAPITAL ASSET FUND is to seek capital
appreciation through investments in securities of small and medium sized
companies with undervalued assets or favorable growth prospects. Production
of income, if any, is incidental to this objective. The investment
objective and philosophy of the Fund is similar to those of Baron Asset
Fund, a publicly offered "retail" fund managed by the Fund's adviser.
Although it is anticipated that the Fund and the corresponding retail fund
will hold similar securities, differences in asset size and cash flow needs
resulting from purchases and redemptions of Fund shares may result in
different security selections, differences in the relative weightings of
securities or differences in the prices paid for particular portfolio
securities. The Fund's stated fundamental policies and other
non-fundamental policies may differ from Baron Asset Fund's, but it
presently anticipates that the investment selections made for the Fund will
be similar to those made by Baron Asset Fund. Expenses of the Fund and its
corresponding retail fund are also expected to differ. The performance
results are also expected to differ. The variable insurance contract owner
will also bear various insurance-related costs at the insurance company
level and should refer to the accompanying separate account prospectus for
a summary of contract fees and expenses. The investment objective is
fundamental and, as such, may not be changed without the approval of a
majority of the Fund's outstanding shares. There is no assurance that the
Fund will achieve its investment objective. Investment decisions are made
by the Fund's investment adviser, BAMCO, Inc. (the "Adviser").
The Fund seeks to achieve its investment objective by investing its assets
in a diversified portfolio of primarily common stocks. The Fund invests
primarily in the securities of small sized companies with market
capitalizations of approximately $100 million to $1 billion and medium
sized companies with market values of $1 billion to $2 billion. Although
the Fund invests primarily in small and medium sized companies, it will not
sell positions just because their market values have increased. The other
kinds of investments the Fund makes and the risks associated therewith are
discussed starting on page 5 in connection with the Fund's investment
policies.
The Fund seeks to purchase securities judged by their Adviser to have
favorable price to value characteristics based on the Adviser's assessment
of their prospects for future growth and profitability. The Adviser seeks
securities that the Adviser believes have the potential to increase in
value at least 50% over two subsequent years, although that goal may not be
achieved. As a guide in selecting such investments, the Adviser studies and
considers such fundamentals as business profitability, balance sheet
strength, undervalued and unrecognized assets, price multiples of free cash
flow and income, perceived management skills, unit growth, and the
potential to capitalize upon anticipated economic trends. Securities are
selected for investment after thorough research of the issuers, the
industries in which they operate, and their managements. The Fund invests
principally in businesses for the long term; it is not a short-term trader
of securities.
When the Adviser determines that opportunities for profitable investments
are limited or that adverse market conditions exist and believes that
investing for temporary defensive purposes is appropriate, all or a portion
of the Fund's assets may be invested in money market instruments, which
include U.S. Government securities, certificates of deposit, time deposits,
bankers' acceptances, short-term investment grade corporate bonds and other
short-term debt instruments, and repurchase agreements. Investment grade
obligations would be classified at the time of the investment within the
four highest ratings of Standard & Poor's Corporation ("S&P") or Moody's
Investor's Service, Inc. ("Moody's"), or, if unrated, would be determined
by the Adviser to be of comparable high quality and liquidity. The Fund may
also invest in money market instruments in anticipation of investing cash
positions or of meeting redemptions. To the extent the Fund is so invested
its investment objectives may not be achieved.
INVESTMENT POLICIES AND RISKS
In seeking to achieve its investment objective of capital appreciation, the
Fund invests primarily in common stocks but may also invest in other
equity-like securities such as convertible bonds and debentures, preferred
stocks, warrants and convertible preferred stocks. Securities are selected
solely for their capital appreciation potential, and investment income is
not a consideration.
GENERAL POLICIES SMALL AND MEDIUM SIZED COMPANIES
The Fund invests primarily in small to medium sized companies with market
values between $100 million and $2 billion. The Adviser believes there is
more potential for capital appreciation in smaller companies, but there
also may be more risk. Securities of smaller companies may not be well
known to most investors and may be thinly traded. There is more reliance on
the skills of a company's management and on their continued tenure.
Investments may be attractively priced relative to the Adviser's assessment
of a company's growth prospects, management expertise, and business niche,
yet have modest or no current cash flows or earnings. Although the Adviser
concentrates on a company's growth prospects, it also focuses on cash flow,
asset value and reported earnings. This investment approach requires a
long-term outlook and may require shareholders to assume more risk and to
have more patience than investing in the securities of larger, more
established companies. From time to time the Adviser may purchase
securities of larger, more widely followed companies for the Fund if it
believes such investments meet the Adviser's investment criteria and the
Fund's investment objective. The Fund may invest up to 35% of its total
assets in larger companies if the Adviser perceives an attractive
opportunity in a larger company. The Fund may continue to make investments
in a company even though its market capitalization has increased beyond the
limits stated, if, in the Adviser's judgment, the company is still an
attractive investment.
Equity securities may fluctuate in value, often based on factors unrelated
to the value of the issuer or its securities. Since convertible securities
combine the investment characteristics of both bonds and common stocks, the
Fund absorbs the market risks of both stocks and bonds. The combination
does, however, make the investment less sensitive to interest rate changes
than straight bonds of comparable maturity and quality. Because of these
factors, convertible securities are likely to perform differently than
broadly-based measures of the stock and bond markets.
DEBT SECURITIES
The debt securities in which the Fund may invest include rated and unrated
securities and convertible instruments. In making investment selections,
the Adviser, in addition to using nationally recognized statistical rating
organizations ("NRSROs"), also makes its own independent judgments about a
security and its issuer. Securities which are not rated by an NRSRO are
purchased based solely on the Adviser's assessment of the security and its
issuer. The Fund may invest up to 35% of its total assets in non-investment
grade debt securities, commonly referred to as "junk bonds." There is no
minimum rating for the debt securities that may be purchased. Lower rated
securities may have a higher yield and the potential for a greater return
than investment grade securities but may also have more risk. Lower rated
securities are generally meant for longer-term investing and may be subject
to certain risks with respect to the issuing entity and to market
fluctuations. The NRSROs may characterize these securities as speculative,
with moderate or little protection as to the payment of interest and
principal. See the Statement of Additional Information for a general
description of NRSRO ratings of debt obligations. The ratings by these
NRSROs represent their opinions as to the quality of the debt obligations
which they undertake to rate. It should be emphasized that ratings are
relative and subjective, and although ratings may be useful in evaluating
the safety of interest and principal payments, they do not evaluate the
market value risks of these securities. The Adviser will also evaluate the
securities and the ability of the issuers to pay interest and principal.
The Fund's ability to achieve its investment objective may be more
dependent on the Adviser's credit analysis than might be the case with
higher rated securities. The market price and yield of lower rated
securities are generally more volatile than those of higher rated
securities. Factors adversely affecting the market price and yield of these
securities will adversely affect the Fund's net asset value. The trading
market for these securities may be less liquid than that of higher rated
securities. Companies that issue lower rated securities may be highly
leveraged or may have unstable earnings, and consequently the risk of the
investment in the securities of such issuers may be greater than with
higher rated securities. With respect to debt securities generally, the
interest bearing features of such securities carry a promise of income
flow, but the price of the securities are inversely affected by changes in
interest rates and are therefore subject to the risk of market price
fluctuations. The market values of debt securities may also be affected by
changes in the credit ratings or financial condition of the issuers.
The Fund from time to time may also purchase indebtedness and
participations therein, both secured and unsecured, of debtor companies in
reorganization or financial restructuring. Such indebtedness may be in the
form of loans, notes, bonds or debentures. Participations normally are made
available only on a nonrecourse basis by financial institutions, such as
banks or insurance companies, or by governmental institutions, such as the
Resolution Trust Corporation or the Federal Deposit Insurance Corporation
or the Pension Benefit Guaranty Corporation. When the Fund purchases a
participation interest it assumes the credit risk associated with the bank
or other financial intermediary as well as the credit risk associated with
the issuer of any underlying debt instrument. The Fund may also purchase
trade and other claims against, and other unsecured obligations of, such
debtor companies, which generally represent money due a supplier of goods
or services to such company. Some debt securities purchased by the Fund may
have very long maturities. The length of time remaining until maturity is
one factor the Adviser considers in purchasing a particular indebtedness.
The purchase of indebtedness of a troubled company always involves a risk
as to the creditworthiness of the issuer and the possibility that the
investment may be lost. The Adviser believes that the difference between
perceived risk and actual risk creates the opportunity for profit which can
be realized through thorough analysis. There are no established markets for
some of this indebtedness and it is less liquid than more heavily traded
securities. Indebtedness of the debtor company to a bank are not securities
of the banks issuing or selling them. The Fund may purchase loans from
national and state chartered banks as well as foreign ones. The Fund may
invest in senior indebtedness of the debtor companies, although on occasion
subordinated indebtedness may also be acquired. The Fund may also invest in
distressed first mortgage obligations and other debt secured by real
property. The Fund does not currently anticipate investing more than 5% of
its assets in trade and other claims.
OPTIONS
The Fund may purchase put and call options and write (sell) covered put and
call options on equity and/or debt securities. A call option gives the
purchaser of the options the right to buy, and when exercised obligates the
writer to sell, the underlying security at the exercise price. A put option
gives the purchaser of the option the right to sell, and when exercised
obligates the writer to buy, the underlying security at the exercise price.
The writing of put options will be limited to situations where the Adviser
believes that the exercise price is an attractive price at which to
purchase the underlying security. A put option sold by the Fund would be
considered covered by the Fund's placing cash or liquid securities in a
segregated account with the custodian in an amount necessary to fulfill the
obligation undertaken. Options may fail as hedging techniques in cases
where the price movements of the securities underlying the options do not
follow the price movements of the portfolio securities subject to the
hedge. Gains on investments in options depend on the Adviser's ability to
predict correctly the direction of stock prices, interest rates, and other
economic factors. The Adviser could be wrong in its predictions. Where a
liquid secondary market does not exist, the Fund would likely be unable to
control losses by closing its position.
The Fund may engage in options transactions on specific securities that may
be listed on national securities exchanges or traded in the
over-the-counter market. Options not traded on a national securities
exchange are treated as illiquid securities and may be considered to be
"derivative securities." Options transactions will not exceed 25% of the
Fund's net assets, as measured by the securities covering the options, or
5% of net assets, as measured by the premiums paid for the options, at the
time the transactions are entered into.
BORROWINGS
The Fund may borrow up to 5% of its net assets for extraordinary or
emergency temporary investment purposes or to meet redemption requests
which might otherwise require an untimely sale of portfolio securities. The
Fund may also borrow for other short-term purposes. To the extent the Fund
borrows, it must maintain continuous asset coverage of 300% of the amount
borrowed. The Fund will not borrow in an amount exceeding 25% of the value
of its net assets, including the amount borrowed, as of the time the
borrowing is made. Such borrowing has special risks. Any amount borrowed
will be subject to interest costs that may or may not exceed the
appreciation of the securities purchased.
SHORT SALES AGAINST THE BOX
For the purpose of either protecting or deferring unrealized gains on
portfolio securities, the Fund may make short sales "against the box" where
the Fund sells short a security it already owns or has the right to obtain
without payment of additional consideration an equal amount of the same
type of securities sold. The proceeds of the short sale will be held by the
broker until the settlement date, at which time the Fund delivers the
security to close the short position. If the Fund sells securities short
against the box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price rises. The Fund will
not sell short against the box in excess of 25% of its net assets.
LENDING
The Fund may lend its portfolio securities to broker-dealers and other
institutions as a means of earning additional income. In lending its
portfolio securities, the Fund may incur delays in recovery of loaned
securities or a loss of rights in the collateral. To minimize such risks,
such loans will only be made if the Fund deems the other party to be of
good standing and determines that the income justifies the risk. The Fund
will not lend more than 25% of its total assets.
ILLIQUID SECURITIES
The Fund may invest up to 15%, of its net assets in securities that are not
readily marketable or are otherwise restricted. The absence of a trading
market could make it difficult to ascertain a market value for illiquid
positions. The Fund's net asset value could be adversely affected if there
were no ready buyer at an acceptable price at the time the Fund decided to
sell. Time-consuming negotiations and expenses could occur in disposing of
the shares.
FOREIGN SECURITIES
The Fund may invest up to 10% of its total assets directly in the
securities of foreign issuers which are not publicly traded in the U.S. and
may also invest in foreign securities in domestic markets through
depositary receipts without regard to this limitation. The Adviser
currently intends to invest not more than 10% of the Fund's assets in
foreign securities, including both direct investments and investments made
through depositary receipts. These securities may involve additional risks
not associated with securities of domestic companies, including exchange
rate fluctuations, political or economic instability, the imposition of
exchange controls, or expropriation or confiscatory taxation. Issuers of
foreign securities are subject to different, often less detailed,
accounting, reporting and disclosure requirements than are domestic
issuers.
SHORT-TERM TRADING AND TURNOVER
The Fund may engage in short-term trading where the Adviser believes that
the anticipated gains outweigh the costs of short-term trading. The Adviser
expects that the average turnover rate of the Fund's portfolio should not
exceed 100%. The turnover rate may vary from year to year depending on how
the Adviser anticipates portfolio securities will perform. Short-term
trading will increase the amount of brokerage commissions paid by the Fund
and the amount of possible short-term capital gains. The amount of
portfolio activity will not be a limiting factor in making portfolio
decisions.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in the equity securities of real estate investment
trusts ("REITs"). A REIT is a corporation or business trust that invests
substantially all of its assets in real estate and derives most of its
income from rents from real property or interest on loans secured by
mortgages on real property. REITs which meet certain specific requirements
of the Internal Revenue Code effectively do not pay corporate level federal
income tax. REITs may be affected adversely by changes in the value of
their underlying properties and by defaults by borrowers or tenants. REITs
are dependent on the skills of their management and have limited
diversification. REITs also rely on their ability to generate cash flow to
make distributions to shareholders and some REITs may have self-liquidation
provisions allowing mortgages to be paid in full. The market value of REITs
may also be affected by changes in the tax laws or by their inability to
qualify for the tax-free pass-through of their income. The REIT portion of
the portfolio may also be affected by general fluctuations in real estate
values.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement the Fund buys a security at one
price, and at the time of sale, the seller agrees to repurchase that
security at a mutually agreed upon time and price. Repurchase agreements
could involve certain risks in the event of the failure of the seller to
repurchase the securities as agreed, which may cause a fund to suffer a
loss, including loss of interest on or principal of the security, and costs
associated with delay and enforcement of the repurchase agreement.
Repurchase agreements with a duration of more than seven days are
considered illiquid securities and are subject to the restrictions stated
above.
WHEN-ISSUED SECURITIES
The Fund may invest up to 5% of its assets in debt and equity securities
purchased on a when-issued basis. Although the payment and interest terms
of when-issued securities are established at the time the purchaser enters
into the commitment, the actual payment for and delivery of when-issued
securities generally takes place within 45 days. The Fund bears the risk
that interest rates on debt securities at the time of delivery may be
higher or lower than those contracted for on the when-issued security.
Failure of the issuer to deliver the security purchased on a when-issued
basis may result in a loss or missed opportunity to make an alternative
investment.
SPECIAL SITUATIONS
The Fund may invest in "special situations." A special situation arises
when, in the opinion of the Adviser, the securities of a company will be
recognized and appreciate in value due to a specific anticipated
development at that company. Such developments might include a new product,
a management change, an acquisition or a technological advancement.
Investments in special situations may carry an additional risk of loss in
the event that the anticipated development does not occur or does not
attract the expected attention. The special situation may involve
securities of companies with higher market capitalizations.
INVESTMENT PERFORMANCE
The investment results of the Fund quoted in advertisements and other sales
literature may refer to average annual total return and actual return.
Average annual total return assumes that an investment in the Fund was
purchased with an initial payment of $1,000 and that the investment was
redeemed at the end of a stated period of time, after giving effect to the
reinvestment of all dividends and distributions during the period at the
net asset value on the reinvestment date. The return is expressed as a
percentage rate which, if applied on a compounded annual basis, would
result in the redeemable value of the investment at the end of the period.
Because average annual returns are annualized they tend to even out
variations in the returns, and are not the same as actual year-by-year
results. The actual return performance calculations, which also may be
quoted in advertising, reflect the results of a continuous shareholder who
does not redeem. It measures the percentage change between the net asset
value of a hypothetical $1,000 investment in the Fund at the beginning of a
period and the net asset value of that investment at the end of a period,
assuming reinvestment of all dividend and capital gain distributions at the
net asset value on the reinvestment date. The performance of major market
indices such as the Dow Jones Industrial Average, Russell 2000, and
Standard & Poor's 500 may also be included in advertising so that the
Fund's results may be compared with those of groups of unmanaged securities
widely regarded by investors as measures of market performance. Brokerage
fees are not factored into the performance of the indices. The performance
data of the Fund include all recurring fees such as brokerage and
investment advisory fees. Data and rankings from Lipper Analytical
Services, Inc., CDA Investment Technologies, Morningstar or other industry
publications may also be used in advertising. See the Statement of
Additional Information.
Performance results represent past performance and are not necessarily
representative of future results. Investment return and principal value
will fluctuate so that shares may be worth more or less than their original
cost when redeemed.
The annual report contains additional performance information which is
available upon request without charge by writing or calling the Fund at the
address and telephone number set forth on the back of this Prospectus.
MANAGEMENT OF THE FUND
INVESTMENT ADVISER
BAMCO, Inc., the Adviser, is located at 767 Fifth Avenue, New York, New
York 10153, and is responsible for portfolio management. It is a wholly
owned subsidiary of Baron Capital Group, Inc. ("BCG"). Baron Capital, Inc.
("Baron Capital"), a registered broker-dealer and the distributor of the
shares of the Fund, is also a wholly owned subsidiary of BCG.
Under an advisory agreement with the Fund (the "Advisory Agreement"), the
Adviser furnishes continuous investment advisory services and management to
the Fund. Mr. Ronald Baron is the chief investment officer of the Adviser
and is primarily responsible for the day-to-day management of the portfolio
of the Fund. Mr. Baron also has primary responsibility for the investments
of two of the retail funds, Baron Asset Fund and Baron Growth & Income
Fund. He has managed the portfolios of those Funds since their inception.
The Adviser also keeps the books of account of each series, and calculates
daily the income and net asset value per share of each Fund.
As compensation for the services rendered under each Advisory Agreement,
the Adviser receives a fee payable monthly from the assets of each Fund
equal to 1% per annum of each Fund's respective average daily net asset
value. The Adviser has agreed to waive its advisory fee to the extent
necessary so that total operating expenses of the Fund do not exceed 1.25%
of the Fund's average net assets.
BROKERAGE
Brokerage transactions for the Fund are effected chiefly by or through its
Adviser's affiliate, Baron Capital, when consistent with the policy of
obtaining the best net results for the Fund and subject to the conditions
and limitations of the 1940 Act. Baron Capital is a registered
broker-dealer and a member of the NASD. In determining the best net results
for the Fund, the Adviser will examine factors such as price (including the
applicable brokerage commission or dealer spread), size of order,
efficiency and reliability of execution. The Fund's Board of Trustees has
adopted procedures in conformity with Rule 17e-1 under the 1940 Act to
ensure that all brokerage commissions paid to Baron Capital are reasonable
and fair compared to the commission, fee or other remuneration received by
other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a
comparable period of time. The Fund will also consider sales of its shares
as a factor in the selection of broker-dealers to execute portfolio
transactions. See Statement of Additional Information for a description of
the commissions paid to Baron Capital.
TRUSTEES AND EXECUTIVE OFFICERS
The Trust's Board of Trustees has overall responsibility for the management
of the Fund. The Trustees and executive officers of the Fund and their
principal occupations during the last five years are set forth
below.
<TABLE>
<CAPTION>
Name and Address Position Held With Principal Occupation(s) During
Baron Funds Past Five Years
<S> <C> <C>
Ronald Baron*+ President, Chief President and Director of: Baron Capital, Inc.
767 Fifth Avenue Investment Officer (1982-Present), Baron Capital Management, Inc.
New York, NY 10153 and Trustee (1983-Present), Baron Capital Group, Inc.
(1984-Present), BAMCO, Inc. (1987-Present).
Norman S. Edelcup Trustee Chairman, Item Processing of America (1989-Present),
244 Atlantic Isle (financial institution service bureau); Director, Valhi, Inc.
N. Miami Beach, FL (1975-Present) (diversified company); Director, Artistic Greetings,
33160 Inc. (1985-Present).
Mark M. Feldman Trustee President and Chief Executive Officer, Cold Spring Group,
444 Madison Ave, Inc.(1993-Present) (reorganization and restructuring consulting); Executive
Ste 703 Vice President and Chief Restructuring Officer, Lomas Financial Corp. and
New York, N.Y. 10020 subsidiaries (1995-1996) (reorganizing debtors-in-possession); Trustee,
Aerospace Creditors Liquidating Trust (1993-Present) (administers and
liquidates assets).
Irwin Greenberg Trustee Chairman, Lehigh Valley Hospital Board (1991-Present); Retail
3048 Congress Street Consultant, (1990- Present); Director, Cedar Crest College(1990-Present);
Allentown, PA 18101 President and Chief Executive Officer, Hess's Department Stores
(1976-1990).
Clifford Greenberg Vice President Vice President, Baron Capital, Inc., Baron Capital Group, Inc., BAMCO,
767 Fifth Avenue Inc. (1997-Present); General Partner, HPB Associates, L.P. (1984-1996)
New York, NY 10153 (investment partnership).
Linda S. Martinson*+ Secretary, Vice General Counsel and Secretary of: Baron Capital, Inc. (1983-Present),
767 Fifth Avenue President and Trustee BAMCO, Inc. (1987-Present), Baron Capital Group, Inc. (1984-Present),
New York, NY 10153 Baron Capital Management, Inc. (1983-Present).
Charles N. Mathewson Trustee Chairman of the Board, International Game Technology (1986-
5270 Neil Road Present) (manufacturer of microprocessor-controlled gaming
Reno, NV 89502-4169 machines and monitoring systems).
Harold W. Milner Trustee Retired; President and Chief Executive Officer, Kahler Realty
2293 Morningstar Drive Corporation (1985-1997) (hotel ownership and management).
Park City, UT 84060
Raymond Noveck+ Trustee President, Strategic Systems, Inc. (1990-Present) (health
31 Karen Road care information); director, Horizon/CMS Healthcare
Waban, MA 02168 Corporation (1987-Present).
Susan Robbins Vice President Senior Analyst, Vice President and Director of: Baron Capital, Inc.
767 Fifth Avenue (1982- Present), Baron Capital Management, Inc. (1983-Present), Baron
New York, NY 10153 Capital Group, Inc. (1984-Present).
Morty Schaja* Senior Vice Senior Vice President and Chief Operating Officer of Baron
767 Fifth Avenue President, Chief Capital, Inc. (1997-Present), Managing Director, Vice President, Baron
New York, NY 10153 Operating Officer Capital, Inc. (1991-Present) and Director, Baron Capital Group, Inc., Baron
and Trustee Capital Management, Inc., and BAMCO, Inc. (1997-Present).
David A. Silverman, M.D. Trustee Physician (1976-Present).
239 Central Park West
New York, NY 10024
Peggy Wong Treasurer and Chief Treasurer and Chief Financial Officer of: Baron Capital, Inc., Baron
767 Fifth Avenue Financial Officer Capital Group, Inc., BAMCO, Inc., Baron Capital Management, Inc.
New York, NY 10153 (1987-Present).
</TABLE>
* Trustees deemed to be "interested persons" of the Fund as that
term is defined in the Investment Company Act of 1940.
+ Members of the Executive Committee, which is empowered to
exercise all of the powers, including the power to declare
dividends, of the full Board of Trustees when the full Board of
Trustees is not in session.
DISTRIBUTION PLAN AND OTHER EXPENSES
The Fund's Retirement Shares are distributed by Baron Capital, which is the
principal underwriter of the shares of the Baron retail funds. From time to
time the Adviser may compensate plan administrators or their affiliates
whose participants hold the Retirement Shares for providing a variety of
administrative services, such as record-keeping and accounting, and
investor support services, such as responding to inquiries and preparing
mailings to shareholders. The compensation paid to the other parties would
be for administrative services to existing accounts only, the Adviser will
not pay other parties for selling-related activities. The compensation may
be paid as either a per account fee or a percentage of the average daily
assets invested by the retirement plan. The compensation would be paid by
the Adviser.
The Fund pays a fee to its custodian, the Bank of New York, 48 Wall Street,
New York, NY 10015. The Fund also pays a fee to its transfer and dividend
distributing agent, DST Systems, Inc. P.O. Box 419946, Kansas City, MO
64141. In their respective capacities both institutions maintain certain
financial and accounting records pursuant to agreements with the Trust.
They do not assist in and are not responsible for investment decisions
involving assets of the Fund.
PURCHASES AND REDEMPTIONS
The Retirement Shares of the Fund are offered on a continuous basis through
qualified plans. Investors may not purchase or redeem shares of the Fund
directly, but only through qualified retirement plans. You should refer to
your plan documents for information on how to invest in or redeem the
Retirement Shares of the Fund.
All investments in the Fund are credited to a qualified plan immediately
upon acceptance of the investment by the Transfer Agent. Investments will
be processed at the net asset value next determined after an order is
received and accepted by the Transfer Agent. The Fund reserves the right to
reject any purchase order.
Redemptions are processed at the net asset value next calculated after
receipt and acceptance of the redemption order by the Transfer Agent.
Redemption proceeds will normally be wired to the qualified plan the
business day following receipt of the redemption order, but in no event
later than seven days after receipt of such order.
DETERMINING YOUR SHARE PRICE
Your purchases, sales or exchanges will be processed at the net asset value
per share of the Fund as of the close of the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York City time) on each day that the
Exchange is open for trading by dividing the current market value of the
Fund's total assets less all of its liabilities by the total number of
shares outstanding at the time the determination is made. Valid purchase
and redemption orders placed prior to the close of the Exchange on a day
the Exchange is open for trading are executed at the net asset value
determined as of the close that day, and orders placed after that time are
valued as of the close of the next trading day. The Fund may have
arrangements with certain institutional entities with respect to the actual
receipt of orders. The Fund reserves the right to change the time at which
orders are priced if the Exchange closes at a different time or an
emergency exists.
The Fund's 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, or by the Adviser,
pursuant to procedures established by the Board. Money market instruments
and debt securities with a remaining maturity of sixty days or less are
valued by the amortized cost method unless such method does not represent
fair value. Odd lot differentials and brokerage commissions are excluded in
calculating net asset value. Securities quoted in a foreign currency are
valued daily in U.S. dollars at the foreign currency exchange rates that
are prevailing at the time the daily net asset value per share is
determined. If events that materially affect the value of a Fund's foreign
investments occur, the investments will be valued at their fair value as
determined in good faith by the Board of Trustees.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute all of its net investment income and
realized capital gains, if any, to its shareholders in a single, combined
distribution by December 31 of each year. After every distribution, the
value of a share is automatically reduced by the amount of the
distribution. All your dividends and capital gains distributions from the
Fund are automatically reinvested in additional shares of the Fund at the
next computed net asset value at the close of business on the payment date.
TAXES
The Fund intends to qualify each year as a regulated investment company
under the Internal Revenue Code of 1986 (the "Code"). Qualification as a
regulated investment company relieves the Fund of federal income and excise
taxes on the portion of its net ordinary income and net realized capital
gain distributed to shareholders. Because of the Institutional Shares, the
Fund also intends to qualify under the Code with respect to the
diversification requirements for tax deferral with respect to insurance
company separate accounts.
Because the Retirement Shares may be purchased only through qualified
plans, it is anticipated that any dividends derived from net investment
income and distributions of capital gains will be exempt from current
taxation if left to accumulate within the qualified plan. Generally,
withdrawals from such contracts may be subject to ordinary income tax and,
if made before age 59 1/2, a 10% penalty tax. The tax status of your
investment in the Retirement Shares depends on the features of the
qualified plan. Please see your plan sponsor for additional information.
The foregoing is only a summary of some important tax considerations
generally affecting the Fund and its shareholders. Prospective shareholders
are urged to consult their tax advisers concerning the tax consequences of
this investment.
GENERAL INFORMATION
The Trust is a diversified open-end management investment company
registered under the Investment Company Act of 1940 ("1940 Act"), it was
organized as a Delaware business trust on November 20, 1997. The Trust is
authorized to have separate series, but currently has only the Fund. It is
authorized to issue an indefinite number of shares of beneficial interest.
The Declaration of Trust permits the Trustees to establish additional
series. The Fund currently offers two classes of shares, one of which, the
Institutional Shares offered through Participating Insurance Companies, are
offered pursuant to this Prospectus. The shares offered hereby are
available only in connection with investments in and payments under
variable contracts and life insurance contracts. Retirement Shares of the
Fund are also available to participant directed plans through a separate
prospectus. Because the expenses of each class may differ, the performance
of each class is expected to differ. Each share of the Fund has one vote on
all matters for which a shareholder vote is required, and participates
equally in dividend and capital gain distributions when and if declared by
the Fund and in the Fund's net assets upon liquidation. Shares are fully
paid and non-assessable and there are no preemptive, conversion or exchange
rights. Shares do not have cumulative voting rights and, as a result,
holders of at least 50% of the shares voting for Trustees can elect all
Trustees and the remaining shareholders would not be able to elect any
Trustees.
As a Delaware business trust, annual shareholder meetings are not required.
Shareholders have certain rights, as set forth in the Declaration of Trust,
including the right to call a meeting of shareholders for the purpose of
voting on the removal of one or more Trustees on the written request of not
less than 10% of the outstanding shares. Such removal can be effected upon
the action of two-thirds of the outstanding shares. An insurance company
issuing a variable contract invested in the Fund requests voting
instructions from the variable contract holders. Under current law, the
insurance company must vote all shares of the Fund held by the Separate
Accounts in proportion to the voting instructions received.
CONFLICTS OF INTEREST
Each Portfolio's Shares are available only to certain qualified retirement
plans. Institutional Shares of the Fund are available to variable annuity
and variable life separate accounts of insurance companies through a
separate prospectus. Although the Fund currently does not anticipate any
disadvantages to plan participants or policy owners arising out of the fact
that the Fund offers its shares to such entities, there is a possibility
that a material conflict may arise. The Trustees monitor events in order to
identify any anticipated disadvantages or material irreconcilable conflicts
to determine what action, if any, should be taken in response. If a
material disadvantage or conflict occurs, the Trustees may require one or
more insurance company separate accounts or plans to withdraw its
investments in the Fund. If this occurs, the Fund may be forced to sell
securities at disadvantageous prices. The Trustees may refuse to sell
shares of the Fund to any separate account or qualified plan or may suspend
or terminate the offering of a Fund's shares if such action is required by
law or regulatory authority or is in the best interests of the Fund's
shareholders.
MASTER/FEEDER OPTION
The Trust may in the future seek to achieve the Fund's or any future
series' investment objective by investing all of that series' assets in
another investment company having the same investment objective and
substantially the same investment policies and restrictions as those
applicable to that series. It is expected that any such investment company
would be managed by the Adviser in substantially the same manner as the
existing series. The initial shareholder(s) of each series voted to vest
the authority to convert to a master/feeder structure in the sole
discretion of the Trustees. No further approval of the shareholders of the
series of the Trust is required. You will receive at least 30 days' prior
notice of any such investment. Such investment would be made only if the
Trustees determine it to be in the best interests of a series and its
shareholders. In making that determination, the Trustees will consider,
among other things, the benefits to shareholders and/or the opportunity to
reduce costs and achieve operational efficiencies. Although the Adviser
believes the Trustees will not approve an arrangement that is likely to
result in higher costs, no assurance is given that costs will be materially
reduced if this option is implemented.
SHAREHOLDER INFORMATION
Shareholder inquiries about general Fund information should be directed to
the Funds' office at 1-800-99-BARON or 212-583-2100.
Owners of variable insurance contracts and plan participants will be
provided semi-annual unaudited and annual audited reports, including the
financial statements of the Fund. Each report will include a listing of
portfolio securities held. The Trust's fiscal year ends September 30.
BARON CAPITAL FUNDS TRUST
BARON CAPITAL ASSET FUND
INSURANCE SHARES
767 Fifth Avenue
New York, New York 10153
(800) 99-BARON
212-583-2100
STATEMENT OF ADDITIONAL INFORMATION
August 3, 1998
BARON CAPITAL FUNDS TRUST is an open-end, diversified management
investment company organized as a series fund with one series currently
available, BARON CAPITAL ASSET FUND (the "Fund"). There are currently two
classes of shares. BARON CAPITAL ASSET FUND'S investment objective is to
seek capital appreciation through investments in securities of small and
medium sized companies with undervalued assets or favorable growth
prospects. The Fund has recently been organized and has no operating
history.
The shares of the Fund may be purchased only by the separate accounts
of insurance companies for the purpose of funding variable life insurance
policies and variable annuity contracts (collectively, "variable insurance
contracts") and by certain other qualified retirement plans ("Insurance
shares"). The Fund also offers a second class of shares to certain other
participant directed qualified plans.
This Statement of Additional Information is not a prospectus and is
only authorized for distribution when preceded or accompanied by the Fund's
prospectus dated August 3, 1998 as amended or supplemented from time to
time with respect to the Insurance Shares of the Fund. (the "Prospectus").
This Statement of Additional Information contains additional and more
detailed information than that set forth in the Prospectus and should be
read in conjunction with the Prospectus. Additional copies of the
Prospectus may be obtained without charge from the insurance company.
No dealer, salesman or any other person has been authorized to give
any information or to make any representations, other than those contained
in this Statement of Additional Information or in the related Prospectus,
in connection with the offer contained herein, and, if given or made, such
other information or representations must not be relied upon as having been
authorized by the Funds or the Distributor. This Statement of Additional
Information and the related Prospectus do not constitute an offer by the
Funds or by the Distributor to sell or a solicitation of any offer to buy
any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer in such jurisdiction.
TABLE OF CONTENTS
Page in
Statement of
Additional Page in
Information Prospectus
Investment Objectives and Policies. . . . 3 4
Investment Restrictions . . . . . . 3 --
Short Sales Against the Box . . . . . 4 7
Option Transactions . . . . . . . . . 4 6
Use of Segregated and Other Special
Accounts . . . . . . . . . . . . . . 6 --
Depository Receipts . . . . . . . . . 6 --
Medium and Lower Rated Corporate Debt
Securities . . . . . . . . . . . . . . . 7 5
Turnover Rate . . . . . . . . . . . 8 8
Management of the Funds
Board of Trustees and Officers . . . 9 10
Principal Holders of Shares . . . . . 11 --
Investment Adviser . . . . . . . . . 11 9
Distributor . . . . . . . . . . . . 12 12
Distribution Plan . . . . . . . . . 12 12
Brokerage . . . . . . . . . . . . . 14 10
Custodian, Transfer Agent and
Dividend Agent . . . . . . . . . . . 15 12
Redemption of Shares . . . . . . . . . . 15 12
Net Asset Value . . . . . . . . . . . . . 15 --
Taxes . . . . . . . . . . . . . . . . . . 16 13
Organization and Capitalization . . . . . 16 14
General . . . . . . . . . . . . . . 16 14
Shareholder and Trustee Liability . . 16 --
Other Information . . . . . . . . . . . . 16 --
Independent Accountants . . . . . . 16 --
Calculation of Performance Data . . . 17 --
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Fund's
investment objectives and policies set forth on pages of the Prospectus.
Unless otherwise specified, the investment programs and restrictions are
not fundamental policies. Such operating policies are subject to change by
the Fund's Board of Trustees without the approval by the shareholders.
Shareholders will, however, be notified prior to any material changes.
Fundamental policies may be changed only with the approval of a majority of
the Fund's outstanding voting securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions, which
include those described in the Prospectus. These restrictions represent
fundamental policies of the Fund and may not be changed without the
approval of the Fund's shareholders. Unless otherwise noted, all
percentage restrictions are as of the time of the investment after giving
effect to the transaction.
The Fund may not:
1. Issue senior securities or borrow money or utilize leverage in
excess of 25% of its net assets (plus 5% for emergency or other
short-term purposes) from banks from time to time.
2. Except as described in the prospectus, engage in short-sales,
purchase securities on margin or maintain a net short position.
3. Purchase or sell commodities or commodity contracts except for
hedging purposes and in conformity with regulations of the
Commodities Futures Trading Commission such that the Fund would
not be considered a commodity pool.
4. Purchase or sell oil and gas interests or real estate. Debt or
equity securities issued by companies engaged in the oil, gas or
real estate business are not considered oil or gas interests or
real estate for purposes of this restriction. First mortgage
loans and other direct obligations secured by real estate are not
considered real estate for purposes of this restriction.
5. Invest more than 25% of the value of its total assets in any one
industry, except investments in U.S. government securities.
6. Purchase the securities of any one issuer other than the U.S.
government or any of its agencies or instrumentalities, if
immediately after such purchase more than 5% of the value of the
Fund's total assets would be invested in such issuer or the Fund
would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of the value of the Fund's
total assets may be invested without regard to the 5% and 10%
limitations.
7. Underwrite securities of other issuers.
8. Make loans, except to the extent the purchase of debt obligations
of any type (including repurchase agreements and corporate
commercial paper) are considered loans and except that the Fund
may lend portfolio securities to qualified institutional
investors in compliance with requirements established from time
to time by the Securities and Exchange Commission and the
securities exchanges where such securities are traded.
9. Participate on a joint, or a joint and several, basis in any
securities trading account.
10. Mortgage, pledge or hypothecate any of its assets, except as may
be necessary in connection with options, loans of portfolio
securities, or other permitted borrowings.
11. Purchase securities of any issuer with a record of less than
three years' continuous operations, including predecessors,
except obligations issued or guaranteed by the U.S. government or
its agencies or instrumentalities, if such purchase would cause
the investments of the Fund in all such issuers to exceed 5% of
the value of the total assets of the Fund.
12. Invest more than 15% of its net assets in restricted or illiquid
securities, including repurchase agreements maturing in more than
seven days.
As a non-fundamental policy, The Fund will not:
1. Invest in securities of other registered investment companies
(except in connection with a merger, consolidation or other
reorganization and except for the purchase of shares of
registered open-end money market funds if double advisory fees
are not assessed), invest more than 5% of the value of the Fund's
total assets in more than 3% of the total outstanding voting
securities of another investment company or more than 10% of the
value of the Fund's total assets in securities issued by other
investment companies.
2. Invest more than 5% of its total assets in warrants to purchase
common stock.
3. Purchase the securities of any issuer of which any officer or
director of the Fund owns 2 of 1% of the outstanding securities
or in which the officers and directors in the aggregate own more
than 5%.
The Securities and Exchange Commission currently requires that the
following conditions be met whenever portfolio securities are loaned: (1)
the Fund must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Fund must be
able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities, and any increase in market
value; (5) the Fund may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may
pass to the borrower, the Fund's trustees must terminate the loan and
regain the right to vote the securities if a material event adversely
affecting the investment occurs. These conditions may be subject to future
modifications. The portfolio of the Fund is valued every day the New York
Stock Exchange is open for trading.
With respect to investments in warrants, the Fund will not invest in
excess of 2% of the value of its net assets in warrants that are not
listed on the New York or American Stock Exchanges. Warrants are
essentially options to purchase equity securities at a specified price
valid for a specific period of time. Their prices do not necessarily move
parallel to the prices of the underlying securities. Warrants have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer.
SHORT SALES AGAINST THE BOX
The Fund may sell short "against the box" to protect or defer an
unrealized gain in a security. At the time of the short sale, the Fund
will either own or have the unconditional right to acquire at no additional
cost the identical security sold short. The Fund may use this technique in
connection with convertible securities as well as common stock. The Fund
may have to pay a fee to borrow securities, which would partially offset
any gain thereon.
OPTIONS TRANSACTIONS
The Fund may purchase or write put or call options. The purpose of
writing covered call options is to reduce the effect of price fluctuations
of the securities owned by the Fund (and involved in the options) on the
Fund's net asset value per share. A put option gives the purchaser of the
option, upon payment of a premium, the right to sell, and the writer the
obligation, when exercised, to buy, the underlying security, at the
exercise price. For instance, the Fund's purchase of a put option on a
security might be designed to protect its holdings in the underlying
security against a substantial decline in the market value by giving the
Fund the right to sell such security at the exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to
buy, and the seller if exercised, the obligation to sell, the underlying
security at the exercise price. The Fund's purchase of a call option on a
security might be intended to protect the Fund against an increase in the
price of the underlying security that it intends to purchase in the future
by fixing the price at which it may purchase such security or to limit the
loss to the extent of the premium for a security it might otherwise
purchase. An American style put or call option may be exercised at any
time during a fixed period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto, and
the Fund may engage in either style option. The Fund is authorized to
engage in transactions with respect to exchange-listed options and over-
the-counter options ("OTC options"). Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"),
which guarantees the performance of the obligations of the parties to such
options. The discussion below uses the OCC as an example, but is also
applicable to other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options
generally settle by physical delivery of the underlying security, although
in the future cash settlement may become available. Rather than taking or
making delivery of the underlying security through the process of
exercising the option, listed options are usually closed by entering into
offsetting purchase or sale transactions that do not result in ownership of
the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange-listed put or call option is dependent, in part, upon
the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of
options or underlying securities including reaching daily price limits;
(iv) interruption of the normal operations of the OCC or an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current
trading volume; or (vi) a decision by one or more exchanges to discontinue
the trading of options (or a particular class or series of options), in
which event the relevant market for that option on that exchange would
cease to exist, although outstanding options on that exchange would
generally continue to be exercisable in accordance with their terms. The
hours of trading for listed options may not coincide with the hours during
which the underlying instruments are traded. To the extent that the option
markets close before the markets for the underlying instruments,
significant price and rate movements can take place in the underlying
markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers,
financial institutions or other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics,
all the terms of an OTC option, including terms such as method of
settlement, term, exercise price, premium, guarantees and security, are
negotiated by the parties. The Funds expect generally to enter into OTC
options that have cash settlement provisions, although they are not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails
to make or take delivery of the security, or other instrument underlying an
OTC option it has entered into with a Fund or fails to make a cash
settlement payment due in according with the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Funds will engage in OTC option transactions
only with United States securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers" or broker dealers, domestic
or foreign banks or other financial institutions which have received (or
the guarantors of the obligations of which have received) a short-term
credit rating of "A-1" from Standard & Poor's Corporation ("S&P") or "P-1"
from Moody's Investor Services ("Moody's") or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO"). The staff
of the SEC currently takes the position that OTC options purchased by a
fund, and portfolio securities "covering" the amount of the fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back
plus the in-the-money amount, if any,) are illiquid, and are subject to a
fund's limitations on investments in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease
in the value of the underlying securities in its portfolio or will increase
the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on corporate debt
securities and equity securities (including convertible securities). All
calls sold by the Fund must be "covered" (i.e., the Fund must own the
underlying securities) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible
loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a
security or instrument which it might otherwise have sold.
The Fund may purchase and sell put options on corporate debt
securities and equity securities (including convertible securities). All
put options must be covered. In selling put options, there is a risk that
the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many hedging transactions, in addition to other requirements, require
that the Fund segregate liquid high grade assets with its custodian to the
extent Fund obligations are not otherwise "covered" through ownership of
the underlying security or instrument. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must
be covered at all times by the securities or instruments required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a
call option written by the Fund will require that Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high
grade securities sufficient to purchase and deliver the securities if the
call is exercised. A put option written requires that the Fund segregate
liquid, high grade assets equal to the exercise price. Hedging
transactions may be covered by other means when consistent with applicable
regulatory policies.
OTC options entered into by the Fund will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will
only segregate an amount of assets equal to its accrued net obligations, as
there is no requirement for payment or delivery of amounts in excess of the
net amount. These amounts will equal 100% of the exercise price in the
case of a noncash settled put, the same as an OCC guaranteed listed option
sold by the Fund, or the in-the-money amount plus any sell-back formula
amount in the case of a cash-settled put or call. OCC-issued and exchange-
listed options sold by a Fund other than those above generally settle with
physical delivery, or with an election of either physical delivery, or cash
settlement and the Fund will segregate an amount of assets equal to the
full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement, will be
treated the same as other options settling with physical delivery.
DEPOSITORY RECEIPTS
The Fund may invest in securities commonly known as American
Depository Receipts ("ADRs"), and in European Depository Receipts ("EDRs")
or other securities convertible into securities of foreign issuers. ADRs
are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in
a domestic bank or foreign branch of a United States bank and traded on a
United States exchange or in an over-the-counter market. EDRs are receipts
issued in Europe generally by a non-U.S. bank or trust company that
evidence ownership of non-U.S. or domestic securities. Generally, ADRs are
in registered form and EDRs are in bearer form. There are no fees imposed
on the purchase or sale of ADR's or EDRs although the issuing bank or trust
company may impose on the purchase of dividends and the conversion of ADRs
and EDRs into the underlying securities. Investment in ADRs has certain
advantages over direct investment in the underlying non-U.S. securities,
since (i) ADRs are U.S. dollar denominated investments which are easily
transferable and for which market quotations are readily available and (ii)
issuers whose securities are represented by ADRs are subject to the same
auditing, accounting and financial reporting standards as domestic issuers.
EDRs are not necessarily denominated in the currency of the underlying
security.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES
The Fund may invest in securities that are rated in the medium to
lowest rating categories by S&P and Moody's, some of which may be known as
"junk bonds." The Fund may invest in securities of distressed issuers when
the intrinsic values of such securities have, in the opinion of the
Adviser, warranted such investment. Corporate debt securities rated Baa
are regarded by Moody's as being neither highly protected nor poorly
secured. Interest payments and principal security appears adequate to
Moody's for the present, but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time. Such
securities are regarded by Moody's as lacking outstanding investment
characteristics and having speculative characteristics. Corporate debt
securities rated BBB are regarded by S&P as having adequate capacity to pay
interest and repay principal. Such securities are regarded by S&P as
normally exhibiting adequate protection parameters, although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for securities in
this rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's
view, assurance of interest and principal payments or of maintenance of
other terms of the security over any long period of time may be small.
Corporate debt securities rated BB, B, CCC, CC and C are regarded by S&P on
balance as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. In S&P's view, although such securities likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. BB and B are
regarded by S&P as indicating the two lowest degrees of speculation in this
group of ratings. Securities rated D by S&P or C by Moody's are in default
and are not currently performing.
The Fund will rely on the Adviser's judgment, analysis and experience
in evaluating debt securities. Ratings by S&P and Moody's evaluate only
the safety of principal and interest payments, not market value risk.
Because the creditworthiness of an issuer may change more rapidly than is
able to be timely reflected in changes in credit ratings, the Adviser
monitors the issuers of corporate debt securities held in the Funds'
portfolio. The credit ratings assigned by a rating agency to a security is
a factor considered by the Adviser in selecting a security, but the
intrinsic value in light of market conditions and the Adviser's analysis of
the fundamental values underlying the issuer are of more significance.
Because of the nature of medium and lower rated corporate debt securities,
achievement by the Fund of its investment objectives when investing in such
securities is dependent on the credit analysis of the Adviser. If the Fund
purchased primarily higher rated debt securities, risks would be
substantially reduced.
A general economic downturn or a significant increase in interest
rates could severely disrupt the market for medium and lower grade
corporate debt securities and adversely affect the market value of such
securities. Securities in default are relatively unaffected by such events
or by changes in prevailing interest rates. In addition, in such
circumstances, the ability of issuers of medium and lower grade corporate
debt securities to repay principal and to pay interest, to meet projected
business goals and to obtain additional financing may be adversely
affected. Such consequences could lead to an increased incidence of
default for such securities and adversely affect the value of the corporate
debt securities in the Fund's portfolio. The secondary market prices of
medium and lower grade corporate debt securities are less sensitive to
changes in interest rates than are higher rated debt securities, but are
more sensitive to adverse economic changes or individual corporate
developments. Adverse publicity and investor perceptions, whether or not
based on rational analysis, may also affect the value and liquidity of
medium and lower grade corporate debt securities, although such factors
also present investment opportunities when prices fall below intrinsic
values. Yields on debt securities in the portfolio that are interest rate
sensitive can be expected to fluctuate over time. In addition, periods of
economic uncertainty and changes in interest rates can be expected to have
an impact on the market price of any medium to lower grade corporate debt
securities in the portfolio and thus could have an effect on the net asset
value of the Fund if other types of securities did not show offsetting
changes in values. The secondary market value of corporate debt securities
structured as zero coupon securities or payment-in-kind securities may be
more volatile in response to changes in interest rates than debt securities
which pay interest periodically in cash. Because such securities do not
pay current interest, but rather, income is accrued, to the extent that the
Fund does not have available cash to meet distribution requirements with
respect to such income, it could be required to dispose of portfolio
securities that it otherwise would not. Such disposition could be at a
disadvantageous price. Investment in such securities also involves certain
tax considerations.
To the extent that there is no established market for some of the
medium or low grade corporate debt securities in which the Fund may invest,
there may be thin or no trading in such securities and the ability of the
Adviser to value accurately such securities may be adversely affected.
Further, it may be more difficult for the Fund to sell securities for which
no established retail market exists as compared with securities for which
such a market does exist. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower
grade corporate debt securities held in the Fund's portfolio, the
responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the
valuation of the Fund's securities due to a reduced availability of
reliable objective data. To the extent that the Fund purchases illiquid
corporate debt securities or securities which are restricted as to resale,
the Fund may incur additional risks and costs. Illiquid and restricted
securities may be particularly difficult to value and their disposition may
require greater effort and expense than more liquid securities. The Fund
may be required to incur costs in connection with the registration of
restricted securities in order to dispose of such securities, although
under Rule 144A under the Securities Act of 1933 certain securities may be
determined to be liquid pursuant to procedures adopted by the Board of
Trustees under applicable guidelines.
TURNOVER RATE
The adviser expects that the average annual turnover rate of the
portfolio of the Fund should not exceed 100%. A portfolio turnover rate of
100% would occur if all the securities in the portfolio were replaced in a
one year period. The portfolio turnover rate is calculated by dividing the
lesser of portfolio purchases or sales by the average monthly value of
portfolio securities, excluding short term securities. The Fund has no
historical rates to report at this time. The turnover rate will fluctuate
depending on market conditions.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund and their principal
occupations during the last five years are set forth below.
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING PAST FIVE YEARS
Ronald Baron *+ President and Trustee President and
767 Fifth Avenue Director of: Baron
New York, NY 10153 Capital, Inc. (1982-
Present), Baron Capital
Management, Inc. (1983-
Present), Baron Capital
Group, Inc. (1984-
Present), BAMCO, Inc.
(1987- Present).
Norman S. Edelcup Trustee Chairman, Item Processing
244 Atlantic Isle of America (1989-Present),
N. Miami Beach, FL 33160 (financial institution
service bureau); Director,
Valhi Inc. (1975-Present)
(diversified company);
Director, Artistic
Greetings, Inc.
(1985-Present).
Mark M. Feldman Trustee President and Chief
444 Madison Avenue, Ste 703 Executive
New York, NY 10020 Officer, Cold Spring
Group, Inc.
(1993-Present)
(reorganization and
restructuring
consulting); Executive
Vice President and
Chief Restructuring
Officer, Lomas
Financial Corp. and
subsidiaries
(1995-1996)
(reorganizing
debtors-in-possession);
Trustee, Aerospace
Creditors Liquidating
Trust (1993-Present)
(administers and
liquidates assets).
Irwin Greenberg Trustee Chairman, Lehigh Valley
3048 Congress Street Hospital Board (1991-
Allentown, PA 18101 Present); Retail
Consultant,
(1990-Present);
Director, Cedar Crest
College
(1990-Present);
President and Chief
Executive Officer,
Hess's Department
Stores (1976-1990).
Clifford Greenberg Vice President Vice President, Baron
767 Fifth Avenue Capital, Inc., BAMCO,
New York, NY 1015311 Inc. (1997-Present);
General Partner, HPB
Associates, L.P.
(1984-1996)
(investment
partnership).
Linda S. Martinson *+ Secretary, General Counsel and
767 Fifth Avenue Secretary of: Baron
New York, NY 10153 Vice President, and
Trustee Capital, Inc.
(1983-Present), BAMCO,
Inc. (1987-Present),
Baron Capital Group, Inc.
(1984-Present),Baron
Capital Management,
Inc. (1983-Present).
Charles N. Mathewson Trustee Chairman of the Board,
5270 Neil Road International Game
Reno, NV 89502-416 Technology (1986-
Present) (manufacturer of
microprocessor-controlled
gaming machines and
monitoring systems).
Harold W. Milner Trustee Retired; President
2293 Morningstar Drive and Chief Executive
Park City, UT 84060 Officer, Kahler Realty
Corporation (1985-1997)
(hotel ownership and
management).
Raymond Noveck + Trustee President, Strategic
31 Karen Road Systems, Inc. (1990-
Waban, MA 02168 Present) (health care
information); Director,
Horizon/CMS Healthcare
Corporation
(1987-Present).
Susan Robbins Vice President Senior Analyst, Vice
767 Fifth Avenue President, Secretary
New York, NY 10153 and Director of:
Baron Capital, Inc.
(1982-Present), Baron
Capital Management,
Inc. (1983-Present),
Baron Capital Group,
Inc. (1984-Present).
Morty Schaja * Vice President Managing Director,
767 Fifth Avenue and Trustee Vice President,
New York, NY 10153 Baron Capital, Inc.
(1991-Present), and
Director, Baron
Capital Group, Inc.,
Baron Capital
Management, Inc., and
BAMCO, Inc.
(1997-Present).
David A. Silverman, M.D. Trustee Physician (1976-Present).
239 Central Park West
New York, NY 10024
Peggy Wong Treasurer and Treasurer and Chief
767 Fifth Avenue Chief Financial Financial Officer of:
New York, NY 10153 Officer Baron Capital, Inc.,
Baron Capital Group,
Inc., BAMCO, Inc.,
Baron Capital
Management, Inc.,
(1987- Present).
- -----------------------
* Trustees deemed to be "interested persons" of the Fund as that term is
defined in the Investment Company Act of 1940.
+ Members of the Executive Committee, which is empowered to exercise all
of the powers, including the power to declare dividends, of the full
Board of Trustees when the full Board of Trustees is not in session.
The Trustees who are not affiliated with or interested persons of the
Fund's investment adviser receive fees of $5,000 annually plus an
attendance fee of $500 for each meeting attended in person ($250 for
telephone participation). The Trustees who are interested persons of the
Funds' investment adviser receive no compensation from the Fund. As
indicated in the above table, certain Trustees and officers also hold
positions with the Fund's adviser and distributor.
PRINCIPAL HOLDERS OF SHARES
As of July 5, 1998, the Fund had no shareholders.
INVESTMENT ADVISER
The investment adviser to the Fund is BAMCO, Inc. (the "Adviser"), a
New York corporation with its principal offices at 767 Fifth Avenue, New
York, N.Y. 10153 and a subsidiary of Baron Capital Group, Inc. ("BCG").
Mr. Ronald Baron is the controlling stockholder of BCG and is BAMCO's chief
investment officer. Mr. Baron has over 25 years of experience as a Wall
Street analyst and has managed money for others for over 20 years. He has
been a participant in Barron's Roundtable and has been a featured guest on
Wall Street Week, CNN and CNBC/FNN. Pursuant to an Advisory Agreement with
the Fund (the "Advisory Agreement"), the Adviser furnishes continuous
investment advisory services and management to the Fund, including making
the day-to-day investment decisions and arranging portfolio transactions
for the Fund subject to such policies as the Trustees may determine. The
Fund has no operating history at this time.
Under the Advisory Agreement, the Adviser, at its own expense and
without reimbursement from the Fund furnishes office space and all
necessary office facilities, equipment and executive personnel for managing
the Fund, and pays the salaries and fees of all officers and Trustees who
are interested persons of the Adviser. The Adviser presently anticipates
that "Year 2000" issues will have no material effect on the ability of the
Adviser to provide services to the Fund.
The Fund pays all operating and other expenses not borne by the
Adviser such as audit, accounting and legal fees; custodian fees; expenses
of registering and qualifying its shares with federal and state securities
commissions; expenses in preparing shareholder reports and proxy
solicitation materials; expenses associated with the Fund's shares such as
dividend disbursing, transfer agent and registrar fees; certain insurance
expenses; compensation of Trustees who are not interested persons of the
Adviser; and other miscellaneous business expenses. The Fund also pays the
expenses of offering the shares of the Fund, including the registration and
filing fees, legal and accounting fees and costs of printing the prospectus
and related documents. The Fund also pays all taxes imposed on it and all
brokerage commissions and expenses incurred in connection with its
portfolio transactions.
Ronald Baron is the controlling stockholder, President and a Director
of BCG. The Adviser utilizes the staffs of Baron Capital and Baron
Capital's subsidiary Baron Capital Management, Inc. ("BCM") to provide
research. Directors, officers or employees of the Adviser and/or its
affiliates may also serve as officers or Trustees of the Fund. BCM is an
investment adviser to institutional and individual accounts. Clients of
BCM and Baron Capital have investment objectives which may vary only
slightly from those of each other and of the Fund. BCM and Baron Capital
invest assets in such clients' accounts and in the accounts of principals
and employees of BCM and Baron Capital in investments substantially similar
to, or the same as, those which constitute the principal investments of the
Fund. When the same securities are purchased for or sold by the Fund and
any of such other accounts, it is the policy of the Adviser, BCM and Baron
Capital to allocate such transactions in a manner deemed equitable by the
Adviser, and for the Adviser's, BCM's and Baron Capital's principals and
employees to take either the same or least favorable price of the day.
The Advisory Agreement provides that the Fund may use "Baron" as part
of its name for so long as the Adviser serves as investment adviser to the
Fund. The Fund acknowledges that the word "Baron" in its name is derived
from the name of the entities controlling, directly and indirectly, the
Adviser, which derive their name from Ronald Baron; that such name is the
property of the Adviser and its affiliated companies for copyright and/or
other purposes; and that if for any reason the Adviser ceases to be the
Fund's investment adviser, the Fund will promptly take all steps necessary
to change its name to one that does not include "Baron," absent the
Adviser's written consent.
The Advisory Agreement provides that the Adviser shall have no
liability to the Fund or its shareholders for any error of judgment or
mistake of law or for any loss suffered by the Fund; provided, that the
Adviser shall not be protected against liabilities arising by virtue of
willful misfeasance, bad faith or gross negligence, or reckless disregard
of the Adviser's obligations under the Advisory Agreement.
The Advisory Agreement with respect to the Fund was approved by a
majority of the Trustees, including a majority of the non-interested
Trustees, on April 28, 1998. The Fund's Advisory Agreement is for an
initial two year period but the Advisory Agreements must normally be
approved annually by the Trustees or a majority of the Fund's shares and by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party.
The Advisory Agreement is terminable without penalty by either the
Fund (when authorized by majority vote of either its outstanding shares or
the Trustees) or the Adviser on 60 days' written notice. The Advisory
Agreement shall automatically terminate in the event of its "assignment"
(as defined by 1940 Act).
Distributor
The Fund has a distribution agreement with Baron Capital, Inc.,
("Baron Capital" or the "Distributor") a New York corporation and a
subsidiary of BCG (controlled by Ronald Baron), located at 767 Fifth
Avenue, New York, N.Y. 10153. Baron Capital is affiliated with the
Adviser. The Distributor acts as the agent for the Fund for the continuous
public offering of its shares on a best efforts basis pursuant to a
distribution plan adopted under Rule 12b-1 under the 1940 Act
("Distribution Plan").
Distribution Plan
The Distribution Plan authorizes the Fund to pay the Distributor a
distribution fee equal on an annual basis to 0.25% of the Fund's average
daily net assets. The distribution fee is paid to the Distributor in
connection with its activities or expenses primarily intended to result in
the sale of Institutional Shares, including, but not limited to,
compensation to registered representatives or other employees of the
Distributor; compensation to and expenses of employees of the Distributor
who engage in or support the distribution of shares or who service
shareholder accounts; telephone expenses; interest expenses; preparing,
printing and distributing promotional and advertising material; preparing,
printing and distributing the Prospectus and reports to other than current
shareholders; and commissions and other fees to broker-dealers or other
persons (excluding banks) who have introduced investors to the Fund.
If and to the extent the expenses listed below are considered to be
primarily intended to result in the sale of shares within the meaning of
Rule 12b-1, they are exempted from the limits set forth above: (a) the
costs of preparing, printing or reproducing and mailing all required
reports and notices to shareholders; (b) the costs of preparing, printing
or reproducing and mailing all proxy statements and proxies (whether or not
such proxy materials include any item relating to or directed toward the
sale of shares); (c) the costs of preparing, printing or reproducing and
mailing all prospectuses and statements of additional information; (d) all
legal and accounting fees relating to the preparation of any such report,
prospectus, and proxy materials; (e) all fees and expenses relating to the
qualification of the Funds and/or their shares under the securities or
"Blue Sky" laws of any jurisdiction; (f) all fees under the 1940 Act and
the Securities Act of 1933, including fees in connection with any
application for exemption relating to or directed toward the sale of
Shares; (g) all fees and assessments, if any, of the Investment Company
Institute or any successor organization, whether or not its activities are
designed to provide sales assistance; (h) all costs of preparing and
mailing confirmations of shares sold or redeemed and reports of share
balances; (i) all costs of responding to telephone or mail inquiries of
shareholders or prospective shareholders.
The Distribution Plan requires that while it is in effect the
Distributor report in writing, at least quarterly, the amounts of all
expenditures, the identity of the payees and the purposes for which such
expenditures were made for the preceding fiscal quarter.
The Distribution Plan has been approved by the Fund's Board of
Trustees, including a majority of the Trustees who are not interested
persons of the Funds and who have no direct or indirect financial interest
in the operation of the Distribution Plan or in any agreements related
thereto. In approving the Distribution Plan, the Trustees considered
various factors and determined that there is a reasonable likelihood that
the Plan will benefit the Funds and their shareholders.
Baron Capital is authorized to make payments to authorized dealers,
banks and other financial institutions who have rendered distribution
assistance and ongoing shareholder support services, shareholder servicing
assistance or record keeping. Certain states may require that any such
person be registered as a dealer with such state. The Fund may execute
portfolio transactions with and purchase securities issued by depository
institutions that receive payments under the Distribution Plan. No
preference will be shown in the selection of investments for the
instruments of such depository institutions. Baron Capital may also retain
part of the distribution fee as compensation for its services and expenses
in connection with the distribution of shares.
Baron Capital anticipates that its actual expenditures will
substantially exceed the distribution fee received by it. If the Fund's
average daily net asset value were $2 million, even if Baron Capital
incurred $50,000 of distribution expenses, it would receive only $10,000 as
its fee. Alternatively, if, the Fund's daily average net assets were $25
million, and Baron Capital incurred $60,000 of distribution expenses, it
would receive $125,000 as its fee giving Baron Capital a $65,000 profit.
If the Distribution Plan is terminated, the Fund will owe no payments to
Baron Capital other than any portion of the distribution fee accrued
through the effective date of termination but then unpaid.
Unless terminated in accordance with its terms, the Distribution Plan
shall continue in effect until, and from year to year thereafter if, such
continuance is specifically approved at least annually by its Trustees and
by a majority of the Trustees who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of
the Distribution Plan or in any agreements related thereto, such votes cast
in person at a meeting called for the purpose of such vote.
The Distribution Plan may be terminated at any time by the vote of a
majority of the members of the Fund's Board of Trustees who are not
interested persons of the Fund and have no direct or indirect financial
interest in the operation of the Distribution Plan or in any agreements
related thereto or by the vote of a majority of the outstanding shares.
The Distribution Plan may not be amended to increase materially the amount
of payments to be made without the approval of a majority of the
shareholders. All material amendments must be approved by a vote of the
Trustees and of the Trustees who are not interested persons of the Fund and
have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreements related thereto, such votes cast in
person at a meeting called for the purpose of such vote.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in business of underwriting, selling or
distributing securities. Accordingly, the Distributor will enter into
agreements with banks only to provide administrative assistance. However,
changes in federal or state statues and regulations pertaining to the
permissible activities of banks and their affiliates, as well as judicial
or administrative decisions or interpretations could prevent a bank from
continuing to perform all or a part of the contemplated services. If a
bank were prohibited from so acting, the Trustees would consider what
actions, if any, would be necessary to continue to provide efficient and
effective shareholder services. It is not expected that shareholders would
suffer any adverse financial consequences as a result of these occurrences.
BROKERAGE
The Adviser is responsible for placing the portfolio brokerage
business of the Fund with the objective of obtaining the best net results
for the Fund, taking into account prompt, efficient and reliable executions
at a favorable price. Brokerage transactions for the Fund are effected
chiefly by or through the Adviser's affiliate, Baron Capital, when
consistent with this objective and subject to the conditions and
limitations of the 1940 Act. Baron Capital is a member of the National
Association of Securities Dealers, Inc., but is not a member of any
securities exchange.
The Fund's Board of Trustees has adopted procedures pursuant to Rule
17e-1 of the 1940 Act which are reasonably designed to provide that the
commissions paid to Baron Capital are reasonable and fair compared to the
commission, fee or other enumeration received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of
time. The Board reviews no less frequently than quarterly that all
transactions effected pursuant to Rule 17e-1 during the preceding quarter
were effected in compliance with such procedures. The Fund and the Adviser
furnish such reports and maintain such records as required by Rule 17e-1.
The Fund does not deal with Baron Capital in any portfolio transaction in
which Baron Capital acts as principal. The Fund has no operating history.
Under the Investment Advisory Agreement and as permitted by Section
28(e) of the Securities and Exchange Act of 1934, the Adviser may cause
the Fund to pay a broker-dealer (except Baron Capital) which
provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of
the amount other broker-dealers would have charged for the transaction if
the Adviser determines in good faith that the greater commission is
consistent with the Fund's policies and is reasonable in relation to the
value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or the
Adviser's overall responsibilities to the Fund or to its other clients.
The term "brokerage and research services" includes advice as to the value
of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers
of securities; furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and
the performance of accounts; and effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
Such research and information may be used by the Adviser or its affiliates
to supplement the services it is required to perform pursuant to the
Advisory Agreement in serving the Fund and/or other advisory clients of
affiliates.
Broker-dealers may be willing to furnish statistical research and
other factual information or services to the Adviser for no consideration
other than brokerage or underwriting commissions. Securities may be bought
or sold through such broker-dealers, but at present, unless otherwise
directed by the Fund, a commission higher than one charged elsewhere will
not be paid to such a firm solely because it provided research to the
Adviser. Research provided by brokers is used for the benefit of all of
the Adviser's or its affiliates' clients and not solely or necessarily for
the benefit of the Fund. The Adviser's investment management personnel
attempt to evaluate the quality of research provided by brokers. Results
of this effort are sometimes used by the Adviser as a consideration the in
the selection of brokers to execute portfolio transactions.
Baron Capital acts as broker for, in addition to the Fund, accounts of
BCM and Baron Capital, including accounts of principals and employees of
Baron Capital, BCM and the Adviser. Investment decisions for the Fund and
for investment accounts managed by BCM, are made independent of each other
in light of differing considerations for the various accounts. The same
investment decision may, however, be made for two or more of the Adviser's
and or BCM's accounts. In such event, simultaneous transactions are
inevitable. Purchases and sales are averaged as to price where possible
and allocated to account in a manner deemed equitable by the Adviser in
conjunction with BCM and Baron Capital. This procedure could have a
detrimental effect upon the price or value of the security for the Fund,
but may have a beneficial effect.
The investment advisory fee that the Fund pays to the Adviser is not
reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Fund's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Fund will
exceed those that might otherwise be paid by an amount that cannot be
presently determined. Such services would by useful and of value to the
Adviser in serving both the Fund and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients
would by useful to the Adviser in carrying out its obligations to the Fund.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
The Bank of New York, 48 Wall Street, New York, NY, is the custodian
for the Fund's cash and securities. DST Systems, Inc., CT-7 Tower, 1004
Baltimore, Kansas City, MO 64105, is the transfer agent and dividend agent
for the Fund's shares. Neither institution assists in or is responsible
for investment decisions involving assets of the Fund. Both institutions
are responsible for the maintenance of the Fund's portfolios and general
accounting records, and provide certain shareholder services.
REDEMPTION OF SHARES
The Fund expects to make all redemptions in cash, but have reserved
the right to make payment, in whole or in part, in portfolio securities.
Payment will be made other than all in cash if the Fund's Board of Trustees
determines that economic conditions exist which would make payment wholly
in cash detrimental to a particular fund's best interests. Portfolio
securities to be so distributed, if any, would be selected in the
discretion of the Fund's Board of Trustees and priced as described under
"Determining Your Share Price" herein and in the Prospectus.
NET ASSET VALUE
As more fully set forth in the Prospectus under "Determining Your
Share Price," the net asset value per share of the Fund is determined as of
the close of the New York Stock Exchange on each day that the Exchange is
open. The Exchange is open all week days that are not holidays, which it
announces annually. The most recent announcement states it will not be
open on New Year's Day, Martin Luther King, Jr.'s Day, Washington's
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
Securities traded on more than one national securities exchange are
valued at the last sale price of the day as of which such value is being
determined as reflected at the close of the exchange which is the principal
market for such securities.
U.S. Government obligations and other debt instruments having sixty
days or less remaining until maturity are stated at amortized cost. Debt
instruments having a greater remaining maturity will be valued at the
highest bid price from the dealer maintaining an active market in that
security or on the basis of prices obtained from a pricing service approved
by the Board of Trustees.
TAXES
The Fund intends to qualify each year as a regulated investment
company under the Internal Revenue Code of 1986 (the "Code").
Qualification as a regulated investment company relieves the Funds of
federal income and excise taxes on the portion of its net ordinary income
and net realized capital gain distributed to shareholders. The Fund also
intends to qualify under the Code with respect to the diversification
requirements for tax deferral regarding insurance company separate
accounts.
Because the Insurance Shares may be purchased only through variable
insurance contacts and the Retirement Shares may be purchased only through
qualified plans, it is anticipated that any dividends derived from net
investment income and distributions of capital gains will be exempt from
current taxation if left to accumulate within the variable insurance
contract or qualified plan. Generally, withdrawals from such contracts may
be subject to ordinary income tax and, if made before age 591/2, a 10%
penalty tax. The tax status of an investment in the Insurance Shares
depends on the features of the variable insurance contracts purchased from
a Participating Insurance Company. Please see the separate account
prospectus for additional information.
The foregoing is only a summary of some important tax considerations
generally affecting the Fund and its shareholders. Prospective
shareholders are urged to consult their tax advisers concerning the tax
consequences of this investment.
ORGANIZATION AND CAPITALIZATION
GENERAL
The Trust is an open-end diversified investment company organized as a
series fund and established under the laws of The state of Delaware by a
Declaration of Trust dated November 20, 1997. The one series currently
available is Baron Capital Asset Fund. Shares entitle their holders to one
vote per share. Shares have noncumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees and, in such event, the holders of the remaining
shares voting for the election of Trustees will not be able to elect any
person or persons as Trustees. Shares have no preemptive or subscription
rights, and are transferable.
TRUSTEE LIABILITY
The Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in
the Declaration of trust protects a trustee against liability to which he
or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers L.L.P., 1301 Avenue of the Americas, New York,
New York 10019, has been selected as independent accountants of the Fund.
Calculations of Performance Data
Advertisements and other sales literature for the Fund may refer to
average annual total return and actual return. Average annual total return
is computed by finding the average annual compounded rates of return over a
given period that would equate a hypothetical initial investment to the
ending redeemable value thereof, as follows:
P (1+T)N =ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = Number of years
ERV = ending redeemable value at the end of the
period of a Hypothetical $1,000 investment
made at the beginning of the period
Actual return is computed by measuring the percentage change between
the net asset value of a hypothetical $1,000 investment in the Fund at the
beginning of a period and the net asset value of that investment at the end
of a period. All performance calculations assume that dividends and
distributions are reinvested at the net asset value on the appropriate
reinvestment dates and include all recurring fees. The Fund has no
operating history.
Performance results represent past performance and are not necessarily
representative of future results. Investment return and principal value
will fluctuate so that shares may be worth more or less than their original
cost when redeemed.
In addition to advertising average annual and actual return data,
comparative performance information may be used in advertising materials
about the Funds, including data and other information from Lipper
Analytical Services, Inc., CDA Investment Technologies, Morningstar Inc.,
Money, Forbes, SEI, Ibbotson, No Load Investor, Growth Fund Guide, Fortune,
Barron's, The New York Times, The Wall Street Journal, Changing Times,
Medical Economics, Business Week, Consumer Digest, Dick Davis Digest,
Dickenson's Retirement Letter, Equity Fund Outlook, Executive Wealth
Advisor, Financial World, Investor's Daily, Time, Personal Finance,
Investment Advisor, Smartmoney, Rukeyser, Kiplinger's, NAPFA News, US News,
Bottomline, Investors Business Daily, Bloomberg Radio, CNBC, and/or USA
Today. The Fund may also use comparative performance data from indexes such
as the Dow Jones Industrial Average, Standard & Poor's 400, 500, Small Cap
600, 1,500, or Midcap 400, Value Line Index, Wilshire 4,500, 5000, or Small
Cap; NASDAQ/OTC Composite, New York Stock Exchange; and the Russell 1000,
2000, 2500, 3000, 2000 Growth, 2000 Value, or Midcap. With respect to the
rating services, the Fund may use performance information that ranks the
Fund in any of the following categories: all funds, aggressive growth
funds, value funds, mid-cap funds, small-cap funds, growth and income
funds, equity income funds, and any combination of the above listed
categories.
BARON CAPITAL FUNDS TRUST
BARON CAPITAL ASSET FUND
RETIREMENT SHARES
767 Fifth Avenue
New York, New York 10153
(800) 99-BARON
212-583-2100
STATEMENT OF ADDITIONAL INFORMATION
August 3, 1998
BARON CAPITAL FUNDS TRUST is an open-end, diversified management
investment company organized as a series fund with one series currently
available, BARON CAPITAL ASSET FUND (the "Fund"). There are currently two
classes of shares. BARON CAPITAL ASSET FUND'S investment objective is to
seek capital appreciation through investments in securities of small and
medium sized companies with undervalued assets or favorable growth
prospects. The Fund has recently been organized and has no operating
history.
The shares of the Fund may be purchased only in connection with
certain participant directed qualified retirement plans ("Retirement
Shares"). The Fund also offers a second class of shares in connection with
investments in and payments under variable annuity contracts and variable
life insurance contracts (collectively "variable insurance contracts")
issued by life insurance companies ("Institutional Shares"). The Trust
sells and redeems its shares at net asset value without any sales charges
or redemption fees. The minimum initial investment is $2,000. There is no
minimum for subsequent purchases.
This Statement of Additional Information is not a prospectus and is
only authorized for distribution when preceded or accompanied by the Fund's
prospectus dated August 3, 1998 as amended or supplemented from time to
time with respect to the Retirement Shares of the Fund. (the "Prospectus").
This Statement of Additional Information contains additional and more
detailed information than that set forth in the Prospectus and should be
read in conjunction with the Prospectus. Additional copies of the
Prospectus may be obtained without charge from the retirement plan sponsor.
No dealer, salesman or any other person has been authorized to give
any information or to make any representations, other than those contained
in this Statement of Additional Information or in the related Prospectus,
in connection with the offer contained herein, and, if given or made, such
other information or representations must not be relied upon as having been
authorized by the Funds or the Distributor. This Statement of Additional
Information and the related Prospectus do not constitute an offer by the
Funds or by the Distributor to sell or a solicitation of any offer to buy
any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer in such jurisdiction.
TABLE OF CONTENTS
Page in
Statement
of
Additional Page in
Information Prospectus
Investment Objectives and Policies........ 3 4
Investment Restrictions............. 3 --
Short Sales Against the Box......... 4 7
Option Transactions................. 4 6
Use of Segregated and Other Special Accounts 6 --
Depository Receipts................. 6 --
Medium and Lower Rated Corporate Debt Securities 7 5
Turnover Rate....................... 8 8
Management of the Funds
Board of Trustees and Officers...... 9 10
Principal Holders of Shares......... 11 --
Investment Adviser.................. 11 9
Distributor......................... 12 12
Distribution Plan................... 13 12
Brokerage........................... 13 9
Custodian, Transfer Agent and
Dividend Agent...................... 14 12
Redemption of Shares...................... 14 12
Net Asset Value........................... 14 --
Taxes .................................... 15 13
Organization and Capitalization........... 15 13
General............................. 15 13
Shareholder and Trustee Liability... 15 --
Other Information......................... 16 --
Independent Accountants............. 16 --
Calculation of Performance Data..... 17 --
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion of the Fund's
investment objectives and policies set forth on pages of the Prospectus.
Unless otherwise specified, the investment programs and restrictions are
not fundamental policies. Such operating policies are subject to change by
the Fund's Board of Trustees without the approval by the shareholders.
Shareholders will, however, be notified prior to any material changes.
Fundamental policies may be changed only with the approval of a majority of
the Fund's outstanding voting securities.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions, which
include those described in the Prospectus. These restrictions represent
fundamental policies of the Fund and may not be changed without the
approval of the Fund's shareholders. Unless otherwise noted, all percentage
restrictions are as of the time of the investment after giving effect to
the transaction.
The Fund may not:
1. Issue senior securities or borrow money or utilize leverage in
excess of 25% of its net assets (plus 5% for emergency or other
short-term purposes) from banks from time to time.
2. Except as described in the prospectus, engage in short-sales,
purchase securities on margin or maintain a net short position.
3. Purchase or sell commodities or commodity contracts except for
hedging purposes and in conformity with regulations of the
Commodities Futures Trading Commission such that the Fund would
not be considered a commodity pool.
4. Purchase or sell oil and gas interests or real estate. Debt or
equity securities issued by companies engaged in the oil, gas
or real estate business are not considered oil or gas interests
or real estate for purposes of this restriction. First mortgage
loans and other direct obligations secured by real estate are
not considered real estate for purposes of this restriction.
5. Invest more than 25% of the value of its total assets in any
one industry, except investments in U.S. government securities.
6. Purchase the securities of any one issuer other than the U.S.
government or any of its agencies or instrumentalities, if
immediately after such purchase more than 5% of the value of
the Fund's total assets would be invested in such issuer or the
Fund would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value
of the Fund's total assets may be invested without regard to
the 5% and 10% limitations.
7. Underwrite securities of other issuers.
8. Make loans, except to the extent the purchase of debt
obligations of any type (including repurchase agreements and
corporate commercial paper) are considered loans and except
that the Fund may lend portfolio securities to qualified
institutional investors in compliance with requirements
established from time to time by the Securities and Exchange
Commission and the securities exchanges where such securities
are traded.
9. Participate on a joint, or a joint and several, basis in any
securities trading account.
10. Mortgage, pledge or hypothecate any of its assets, except as
may be necessary in connection with options, loans of portfolio
securities, or other permitted borrowings.
11. Purchase securities of any issuer with a record of less than
three years' continuous operations, including predecessors,
except obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities, if such purchase would
cause the investments of the Fund in all such issuers to exceed
5% of the value of the total assets of the Fund.
12. Invest more than 15% of its net assets in restricted or
illiquid securities, including repurchase agreements maturing
in more than seven days.
As a non-fundamental policy, The Fund will not:
1. Invest in securities of other registered investment companies
(except in connection with a merger, consolidation or other
reorganization and except for the purchase of shares of
registered open-end money market funds if double advisory fees
are not assessed), invest more than 5% of the value of the
Fund's total assets in more than 3% of the total outstanding
voting securities of another investment company or more than
10% of the value of the Fund's total assets in securities
issued by other investment companies.
2. Invest more than 5% of its total assets in warrants to purchase
common stock.
3. Purchase the securities of any issuer of which any officer or
director of the Fund owns 2 of 1% of the outstanding securities
or in which the officers and directors in the aggregate own
more than 5%.
The Securities and Exchange Commission currently requires that the
following conditions be met whenever portfolio securities are loaned: (1)
the Fund must receive at least 100% cash collateral from the borrower; (2)
the borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (3) the Fund must be
able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities, and any increase in market
value; (5) the Fund may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned securities may
pass to the borrower, the Fund's trustees must terminate the loan and
regain the right to vote the securities if a material event adversely
affecting the investment occurs. These conditions may be subject to future
modifications. The portfolio of the Fund is valued every day the New York
Stock Exchange is open for trading.
With respect to investments in warrants, the Fund will not invest in
excess of 2% of the value of its net assets in warrants that are not listed
on the New York or American Stock Exchanges. Warrants are essentially
options to purchase equity securities at a specified price valid for a
specific period of time. Their prices do not necessarily move parallel to
the prices of the underlying securities. Warrants have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer.
SHORT SALES AGAINST THE BOX
The Fund may sell short "against the box" to protect or defer an
unrealized gain in a security. At the time of the short sale, the Fund will
either own or have the unconditional right to acquire at no additional cost
the identical security sold short. The Fund may use this technique in
connection with convertible securities as well as common stock. The Fund
may have to pay a fee to borrow securities, which would partially offset
any gain thereon.
OPTIONS TRANSACTIONS
The Fund may purchase or write put or call options. The purpose of
writing covered call options is to reduce the effect of price fluctuations
of the securities owned by the Fund (and involved in the options) on the
Fund's net asset value per share. A put option gives the purchaser of the
option, upon payment of a premium, the right to sell, and the writer the
obligation, when exercised, to buy, the underlying security, at the
exercise price. For instance, the Fund's purchase of a put option on a
security might be designed to protect its holdings in the underlying
security against a substantial decline in the market value by giving the
Fund the right to sell such security at the exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to
buy, and the seller if exercised, the obligation to sell, the underlying
security at the exercise price. The Fund's purchase of a call option on a
security might be intended to protect the Fund against an increase in the
price of the underlying security that it intends to purchase in the future
by fixing the price at which it may purchase such security or to limit the
loss to the extent of the premium for a security it might otherwise
purchase. An American style put or call option may be exercised at any time
during a fixed period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto, and
the Fund may engage in either style option. The Fund is authorized to
engage in transactions with respect to exchange-listed options and
over-the-counter options ("OTC options"). Exchange-listed options are
issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties
to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options
generally settle by physical delivery of the underlying security, although
in the future cash settlement may become available. Rather than taking or
making delivery of the underlying security through the process of
exercising the option, listed options are usually closed by entering into
offsetting purchase or sale transactions that do not result in ownership of
the new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange-listed put or call option is dependent, in part, upon
the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of
options or underlying securities including reaching daily price limits;
(iv) interruption of the normal operations of the OCC or an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current
trading volume; or (vi) a decision by one or more exchanges to discontinue
the trading of options (or a particular class or series of options), in
which event the relevant market for that option on that exchange would
cease to exist, although outstanding options on that exchange would
generally continue to be exercisable in accordance with their terms. The
hours of trading for listed options may not coincide with the hours during
which the underlying instruments are traded. To the extent that the option
markets close before the markets for the underlying instruments,
significant price and rate movements can take place in the underlying
markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers,
financial institutions or other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics,
all the terms of an OTC option, including terms such as method of
settlement, term, exercise price, premium, guarantees and security, are
negotiated by the parties. The Funds expect generally to enter into OTC
options that have cash settlement provisions, although they are not
required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails
to make or take delivery of the security, or other instrument underlying an
OTC option it has entered into with a Fund or fails to make a cash
settlement payment due in according with the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be satisfied. The Funds will engage in OTC option transactions
only with United States securities dealers recognized by the Federal
Reserve Bank of New York as "primary dealers" or broker dealers, domestic
or foreign banks or other financial institutions which have received (or
the guarantors of the obligations of which have received) a short-term
credit rating of "A-1" from Standard & Poor's Corporation ("S&P") or "P-1"
from Moody's Investor Services ("Moody's") or an equivalent rating from any
nationally recognized statistical rating organization ("NRSRO"). The staff
of the SEC currently takes the position that OTC options purchased by a
fund, and portfolio securities "covering" the amount of the fund's
obligation pursuant to an OTC option sold by it (the cost of the sell-back
plus the in-the-money amount, if any,) are illiquid, and are subject to a
fund's limitations on investments in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease
in the value of the underlying securities in its portfolio or will increase
the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on corporate debt
securities and equity securities (including convertible securities). All
calls sold by the Fund must be "covered" (i.e., the Fund must own the
underlying securities) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible
loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a
security or instrument which it might otherwise have sold.
The Fund may purchase and sell put options on corporate debt
securities and equity securities (including convertible securities). All
put options must be covered. In selling put options, there is a risk that
the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many hedging transactions, in addition to other requirements, require
that the Fund segregate liquid high grade assets with its custodian to the
extent Fund obligations are not otherwise "covered" through ownership of
the underlying security or instrument. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must
be covered at all times by the securities or instruments required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a
call option written by the Fund will require that Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high
grade securities sufficient to purchase and deliver the securities if the
call is exercised. A put option written requires that the Fund segregate
liquid, high grade assets equal to the exercise price. Hedging transactions
may be covered by other means when consistent with applicable regulatory
policies.
OTC options entered into by the Fund will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as
there is no requirement for payment or delivery of amounts in excess of the
net amount. These amounts will equal 100% of the exercise price in the case
of a noncash settled put, the same as an OCC guaranteed listed option sold
by the Fund, or the in-the-money amount plus any sell-back formula amount
in the case of a cash-settled put or call. OCC-issued and exchange-listed
options sold by a Fund other than those above generally settle with
physical delivery, or with an election of either physical delivery, or cash
settlement and the Fund will segregate an amount of assets equal to the
full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement, will be
treated the same as other options settling with physical delivery.
DEPOSITORY RECEIPTS
The Fund may invest in securities commonly known as American
Depository Receipts ("ADRs"), and in European Depository Receipts ("EDRs")
or other securities convertible into securities of foreign issuers.
ADRs are certificates issued by a United States bank or trust company and
represent the right to receive securities of a foreign issuer deposited in
a domestic bank or foreign branch of a United States bank and traded on a
United States exchange or in an over-the-counter market. EDRs are receipts
issued in Europe generally by a non-U.S. bank or trust company that
evidence ownership of non-U.S. or domestic securities. Generally, ADRs are
in registered form and EDRs are in bearer form. There are no fees imposed
on the purchase or sale of ADR's or EDRs although the issuing bank or trust
company may impose on the purchase of dividends and the conversion of ADRs
and EDRs into the underlying securities. Investment in ADRs has certain
advantages over direct investment in the underlying non-U.S. securities,
since (i) ADRs are U.S. dollar denominated investments which are easily
transferable and for which market quotations are readily available and (ii)
issuers whose securities are represented by ADRs are subject to the same
auditing, accounting and financial reporting standards as domestic issuers.
EDRs are not necessarily denominated in the currency of the underlying
security.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES
The Fund may invest in securities that are rated in the medium to
lowest rating categories by S&P and Moody's, some of which may be known as
"junk bonds." The Fund may invest in securities of distressed issuers when
the intrinsic values of such securities have, in the opinion of the
Adviser, warranted such investment. Corporate debt securities rated Baa are
regarded by Moody's as being neither highly protected nor poorly secured.
Interest payments and principal security appears adequate to Moody's for
the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
securities are regarded by Moody's as lacking outstanding investment
characteristics and having speculative characteristics. Corporate debt
securities rated BBB are regarded by S&P as having adequate capacity to pay
interest and repay principal. Such securities are regarded by S&P as
normally exhibiting adequate protection parameters, although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for securities in
this rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's
as generally lacking characteristics of the desirable investment. In
Moody's view, assurance of interest and principal payments or of
maintenance of other terms of the security over any long period of time may
be small. Corporate debt securities rated BB, B, CCC, CC and C are regarded
by S&P on balance as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the
obligation. In S&P's view, although such securities likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. BB and B are
regarded by S&P as indicating the two lowest degrees of speculation in this
group of ratings. Securities rated D by S&P or C by Moody's are in default
and are not currently performing.
The Fund will rely on the Adviser's judgment, analysis and experience
in evaluating debt securities. Ratings by S&P and Moody's evaluate only the
safety of principal and interest payments, not market value risk. Because
the creditworthiness of an issuer may change more rapidly than is able to
be timely reflected in changes in credit ratings, the Adviser monitors the
issuers of corporate debt securities held in the Funds' portfolio. The
credit ratings assigned by a rating agency to a security is a factor
considered by the Adviser in selecting a security, but the intrinsic value
in light of market conditions and the Adviser's analysis of the fundamental
values underlying the issuer are of more significance. Because of the
nature of medium and lower rated corporate debt securities, achievement by
the Fund of its investment objectives when investing in such securities is
dependent on the credit analysis of the Adviser. If the Fund purchased
primarily higher rated debt securities, risks would be substantially
reduced.
A general economic downturn or a significant increase in interest
rates could severely disrupt the market for medium and lower grade
corporate debt securities and adversely affect the market value of such
securities. Securities in default are relatively unaffected by such events
or by changes in prevailing interest rates. In addition, in such
circumstances, the ability of issuers of medium and lower grade corporate
debt securities to repay principal and to pay interest, to meet projected
business goals and to obtain additional financing may be adversely
affected. Such consequences could lead to an increased incidence of default
for such securities and adversely affect the value of the corporate debt
securities in the Fund's portfolio. The secondary market prices of medium
and lower grade corporate debt securities are less sensitive to changes in
interest rates than are higher rated debt securities, but are more
sensitive to adverse economic changes or individual corporate developments.
Adverse publicity and investor perceptions, whether or not based on
rational analysis, may also affect the value and liquidity of medium and
lower grade corporate debt securities, although such factors also present
investment opportunities when prices fall below intrinsic values. Yields on
debt securities in the portfolio that are interest rate sensitive can be
expected to fluctuate over time. In addition, periods of economic
uncertainty and changes in interest rates can be expected to have an impact
on the market price of any medium to lower grade corporate debt securities
in the portfolio and thus could have an effect on the net asset value of
the Fund if other types of securities did not show offsetting changes in
values. The secondary market value of corporate debt securities structured
as zero coupon securities or payment-in-kind securities may be more
volatile in response to changes in interest rates than debt securities
which pay interest periodically in cash. Because such securities do not pay
current interest, but rather, income is accrued, to the extent that the
Fund does not have available cash to meet distribution requirements with
respect to such income, it could be required to dispose of portfolio
securities that it otherwise would not. Such disposition could be at a
disadvantageous price. Investment in such securities also involves certain
tax considerations.
To the extent that there is no established market for some of the
medium or low grade corporate debt securities in which the Fund may invest,
there may be thin or no trading in such securities and the ability of the
Adviser to value accurately such securities may be adversely affected.
Further, it may be more difficult for the Fund to sell securities for which
no established retail market exists as compared with securities for which
such a market does exist. During periods of reduced market liquidity and in
the absence of readily available market quotations for medium and lower
grade corporate debt securities held in the Fund's portfolio, the
responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the
valuation of the Fund's securities due to a reduced availability of
reliable objective data. To the extent that the Fund purchases illiquid
corporate debt securities or securities which are restricted as to resale,
the Fund may incur additional risks and costs. Illiquid and restricted
securities may be particularly difficult to value and their disposition may
require greater effort and expense than more liquid securities. The Fund
may be required to incur costs in connection with the registration of
restricted securities in order to dispose of such securities, although
under Rule 144A under the Securities Act of 1933 certain securities may be
determined to be liquid pursuant to procedures adopted by the Board of
Trustees under applicable guidelines.
TURNOVER RATE
The adviser expects that the average annual turnover rate of the
portfolio of the Fund should not exceed 100%. A portfolio turnover rate of
100% would occur if all the securities in the portfolio were replaced in a
one year period. The portfolio turnover rate is calculated by dividing the
lesser of portfolio purchases or sales by the average monthly value of
portfolio securities, excluding short term securities. The Fund has no
historical rates to report at this time. The turnover rate will fluctuate
depending on market conditions.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES AND OFFICERS
The Trustees and executive officers of the Fund and their principal
occupations during the last five years are set forth below.
Position Held Principal Occupation(s)
NAME AND ADDRESS With the Fund During Past Five Years
Ronald Baron *+ President and President and Director of:
767 Fifth Avenue Trustee Baron Capital, Inc.
New York, NY 10153 (1982-Present), Baron
Capital Management, Inc.
(1983-Present), Baron
Capital Group, Inc.
(1984-Present), BAMCO,
Inc. (1987-Present).
Norman S. Edelcup Trustee Chairman, Item Processing
244 Atlantic Isle of America (1989-Present),
N. Miami Beach, FL 33160 (financial institution
service bureau);
Director, Valhi Inc.
(1975-Present)
(diversified company);
Director, Artistic
Greetings, Inc.
(1985-Present).
Mark M. Feldman Trustee President and Chief
444 Madison Avenue, Ste 703 Executive Officer,
New York, NY 10020 Cold Spring Group, Inc.
(1993-Present)
(reorganization and
restructuring
consulting); Executive
Vice President and Chief
Restructuring Officer,
Lomas Financial Corp.
and subsidiaries
(1995-1996)
(reorganizing debtors-
in-possession); Trustee,
Aerospace Creditors
Liquidating Trust (1993-
Present) (administers
and liquidates assets).
Irwin Greenberg Trustee Chairman, Lehigh Valley
3048 Congress Street Hospital Board
Allentown, PA 18101 (1991-Present);
Retail Consultant,
(1990-Present);
Director, Cedar Crest
College (1990-Present);
President and Chief
Executive Officer,
Hess's Department Stores
(1976-1990).
Clifford Greenberg Vice President Vice President, Baron
767 Fifth Avenue Capital, Inc.,
New York, NY 10153 BAMCO, Inc. (1997-Present);
General Partner, HPB
Associates,
L.P. (1984-1996)
(investment
partnership).
Linda S. Martinson *+ Secretary, General Counsel and
767 Fifth Avenue Vice Secretary of:
New York, NY 10153 President, Baron Capital, Inc.
and Trustee (1983-Present),
BAMCO, Inc.
(1987-Present), Baron
Capital Group, Inc. (1984-
Present),Baron Capital
Management, Inc.
(1983-Present).
Charles N. Mathewson Trustee Chairman of the Board,
5270 Neil Road International
Reno, NV 89502-4169 Game Technology
(1986-Present)
(manufacturer of
microprocessor-
controlled gaming machines
and monitoring systems).
Harold W. Milner Trustee Retired; President and
2293 Morningstar Drive Chief Executive Officer,
Park City, UT 84060 Kahler Realty
Corporation (1985-1997)
(hotel ownership and
management).
Raymond Noveck + Trustee President, Strategic
31 Karen Road Systems, Inc.
Waban, MA 02168 (1990-Present) (health
care information);
Director, Horizon/CMS
Healthcare Corporation
(1987- Present).
Susan Robbins Vice President Senior Analyst, Vice
767 Fifth Avenue President, Secretary and
New York, NY 10153 Director of: Baron
Capital, Inc.
(1982-Present), Baron
Capital Management, Inc.
(1983- Present), Baron
Capital Group, Inc.
(1984-Present).
Morty Schaja * Vice President Managing Director, Vice
767 Fifth Avenue and Trustee President,
New York, NY 10153 Baron Capital, Inc.
(1991-Present),
and Director, Baron
Capital Group,
Inc., Baron Capital
Management,
Inc., and BAMCO, Inc.
(1997-
Present).
David A. Silverman, M.D. Trustee Physician (1976-Present).
239 Central Park West
New York, NY 10024
Peggy Wong Treasurer and Treasurer and Chief
767 Fifth Avenue Chief Financial
New York, NY 10153 Financial Officer of: Baron Capital,
Officer Inc., Baron
Capital Group, Inc.,
BAMCO, Inc.,
Baron Capital Management,
Inc.,
(1987-Present).
- ------------------------------------------------------------------------------
* Trustees deemed to be "interested persons" of the Fund as that term
is defined in the Investment Company Act of 1940.
+ Members of the Executive Committee, which is empowered to exercise
all of the powers, including the power to declare dividends, of the
full Board of Trustees when the full Board of Trustees is not in
session.
The Trustees who are not affiliated with or interested persons of the
Fund's investment adviser receive fees of $5,000 annually plus an
attendance fee of $500 for each meeting attended in person ($250 for
telephone participation). The Trustees who are interested persons of the
Funds' investment adviser receive no compensation from the Fund. As
indicated in the above table, certain Trustees and officers also hold
positions with the Fund's adviser and distributor.
PRINCIPAL HOLDERS OF SHARES
As of July 5, 1998, the Fund had no shareholders.
INVESTMENT ADVISER
The investment adviser to the Fund is BAMCO, Inc. (the "Adviser"), a
New York corporation with its principal offices at 767 Fifth Avenue, New
York, N.Y. 10153 and a subsidiary of Baron Capital Group, Inc. ("BCG"). Mr.
Ronald Baron is the controlling stockholder of BCG and is BAMCO's chief
investment officer. Mr. Baron has over 25 years of experience as a Wall
Street analyst and has managed money for others for over 20 years. He has
been a participant in Barron's Roundtable and has been a featured guest on
Wall Street Week, CNN and CNBC/FNN. Pursuant to an Advisory Agreement with
the Fund (the "Advisory Agreement"), the Adviser furnishes continuous
investment advisory services and management to the Fund, including making
the day-to-day investment decisions and arranging portfolio transactions
for the Fund subject to such policies as the Trustees may determine. The
Fund has no operating history at this time.
Under the Advisory Agreement, the Adviser, at its own expense and
without reimbursement from the Fund furnishes office space and all
necessary office facilities, equipment and executive personnel for managing
the Fund, and pays the salaries and fees of all officers and Trustees who
are interested persons of the Adviser. The Adviser presently anticipates
that "Year 2000" issues will have no material effect on the ability of the
Adviser to provide services to the Fund.
The Fund pays all operating and other expenses not borne by the
Adviser such as audit, accounting and legal fees; custodian fees; expenses
of registering and qualifying its shares with federal and state securities
commissions; expenses in preparing shareholder reports and proxy
solicitation materials; expenses associated with the Fund's shares such as
dividend disbursing, transfer agent and registrar fees; certain insurance
expenses; compensation of Trustees who are not interested persons of the
Adviser; and other miscellaneous business expenses. The Fund also pays the
expenses of offering the shares of the Fund, including the registration and
filing fees, legal and accounting fees and costs of printing the prospectus
and related documents. The Fund also pays all taxes imposed on it and all
brokerage commissions and expenses incurred in connection with its
portfolio transactions.
Ronald Baron is the controlling stockholder, President and a Director
of BCG. The Adviser utilizes the staffs of Baron Capital and Baron
Capital's subsidiary Baron Capital Management, Inc. ("BCM") to provide
research. Directors, officers or employees of the Adviser and/or its
affiliates may also serve as officers or Trustees of the Fund. BCM is an
investment adviser to institutional and individual accounts. Clients of BCM
and Baron Capital have investment objectives which may vary only slightly
from those of each other and of the Fund. BCM and Baron Capital invest
assets in such clients' accounts and in the accounts of principals and
employees of BCM and Baron Capital in investments substantially similar to,
or the same as, those which constitute the principal investments of the
Fund. When the same securities are purchased for or sold by the Fund and
any of such other accounts, it is the policy of the Adviser, BCM and Baron
Capital to allocate such transactions in a manner deemed equitable by the
Adviser, and for the Adviser's, BCM's and Baron Capital's principals and
employees to take either the same or least favorable price of the day.
The Advisory Agreement provides that the Fund may use "Baron" as part
of its name for so long as the Adviser serves as investment adviser to the
Fund. The Fund acknowledges that the word "Baron" in its name is derived
from the name of the entities controlling, directly and indirectly, the
Adviser, which derive their name from Ronald Baron; that such name is the
property of the Adviser and its affiliated companies for copyright and/or
other purposes; and that if for any reason the Adviser ceases to be the
Fund's investment adviser, the Fund will promptly take all steps necessary
to change its name to one that does not include "Baron," absent the
Adviser's written consent.
The Advisory Agreement provides that the Adviser shall have no
liability to the Fund or its shareholders for any error of judgment or
mistake of law or for any loss suffered by the Fund; provided, that the
Adviser shall not be protected against liabilities arising by virtue of
willful misfeasance, bad faith or gross negligence, or reckless disregard
of the Adviser's obligations under the Advisory Agreement.
The Advisory Agreement with respect to the Fund was approved by a
majority of the Trustees, including a majority of the non-interested
Trustees, on April 28, 1998. The Fund's Advisory Agreement is for an
initial two year period but the Advisory Agreements must normally be
approved annually by the Trustees or a majority of the Fund's shares and by
a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party.
The Advisory Agreement is terminable without penalty by either the
Fund (when authorized by majority vote of either its outstanding shares or
the Trustees) or the Adviser on 60 days' written notice. The Advisory
Agreement shall automatically terminate in the event of its "assignment"
(as defined by 1940 Act).
DISTRIBUTOR
The Fund has a distribution agreement with Baron Capital, Inc.,
("Baron Capital" or the "Distributor") a New York corporation and a
subsidiary of BCG (controlled by Ronald Baron), located at 767 Fifth
Avenue, New York, N.Y. 10153. Baron Capital is affiliated with the Adviser.
The Distributor acts as the agent for the Fund for the continuous public
offering of its shares on a best efforts basis.
The Glass-Steagall Act and other applicable laws, among other things,
prohibit banks from engaging in business of underwriting, selling or
distributing securities. Accordingly, the Distributor will enter into
agreements with banks only to provide administrative assistance. However,
changes in federal or state statues and regulations pertaining to the
permissible activities of banks and their affiliates, as well as judicial
or administrative decisions or interpretations could prevent a bank from
continuing to perform all or a part of the contemplated services. If a bank
were prohibited from so acting, the Trustees would consider what actions,
if any, would be necessary to continue to provide efficient and effective
shareholder services. It is not expected that shareholders would suffer any
adverse financial consequences as a result of these occurrences.
BROKERAGE
The Adviser is responsible for placing the portfolio brokerage
business of the Fund with the objective of obtaining the best net results
for the Fund, taking into account prompt, efficient and reliable executions
at a favorable price. Brokerage transactions for the Fund are effected
chiefly by or through the Adviser's affiliate, Baron Capital, when
consistent with this objective and subject to the conditions and
limitations of the 1940 Act. Baron Capital is a member of the National
Association of Securities Dealers, Inc., but is not a member of any
securities exchange.
The Fund's Board of Trustees has adopted procedures pursuant to Rule
17e-1 of the 1940 Act which are reasonably designed to provide that the
commissions paid to Baron Capital are reasonable and fair compared to the
commission, fee or other enumeration received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of
time. The Board reviews no less frequently than quarterly that all
transactions effected pursuant to Rule 17e-1 during the preceding quarter
were effected in compliance with such procedures. The Fund and the Adviser
furnish such reports and maintain such records as required by Rule 17e-1.
The Fund does not deal with Baron Capital in any portfolio transaction in
which Baron Capital acts as principal. The Fund has no operating history.
Under the Investment Advisory Agreement and as permitted by Section
28(e) of the Securities and Exchange Act of 1934, the Adviser may cause the
Fund to pay a broker-dealer (except Baron Capital) which provides brokerage
and research services to the Adviser an amount of commission for effecting
a securities transaction for the Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Adviser
determines in good faith that the greater commission is consistent with the
Fund's policies and is reasonable in relation to the value of the brokerage
and research services provided by the executing broker-dealer viewed in
terms of either a particular transaction or the Adviser's overall
responsibilities to the Fund or to its other clients. The term "brokerage
and research services" includes advice as to the value of securities, the
advisability of investing in, purchasing, or selling securities, and the
availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of
accounts; and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement. Such research and
information may be used by the Adviser or its affiliates to supplement the
services it is required to perform pursuant to the Advisory Agreement in
serving the Fund and/or other advisory clients of affiliates.
Broker-dealers may be willing to furnish statistical research and
other factual information or services to the Adviser for no consideration
other than brokerage or underwriting commissions. Securities may be bought
or sold through such broker-dealers, but at present, unless otherwise
directed by the Fund, a commission higher than one charged elsewhere will
not be paid to such a firm solely because it provided research to the
Adviser. Research provided by brokers is used for the benefit of all of the
Adviser's or its affiliates' clients and not solely or necessarily for the
benefit of the Fund. The Adviser's investment management personnel attempt
to evaluate the quality of research provided by brokers. Results of this
effort are sometimes used by the Adviser as a consideration the in the
selection of brokers to execute portfolio transactions.
Baron Capital acts as broker for, in addition to the Fund, accounts
of BCM and Baron Capital, including accounts of principals and employees of
Baron Capital, BCM and the Adviser. Investment decisions for the Fund and
for investment accounts managed by BCM, are made independent of each other
in light of differing considerations for the various accounts. The same
investment decision may, however, be made for two or more of the Adviser's
and or BCM's accounts. In such event, simultaneous transactions are
inevitable. Purchases and sales are averaged as to price where possible and
allocated to account in a manner deemed equitable by the Adviser in
conjunction with BCM and Baron Capital. This procedure could have a
detrimental effect upon the price or value of the security for the Fund,
but may have a beneficial effect.
The investment advisory fee that the Fund pays to the Adviser is not
reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Fund's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Fund will
exceed those that might otherwise be paid by an amount that cannot be
presently determined. Such services would by useful and of value to the
Adviser in serving both the Fund and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients
would by useful to the Adviser in carrying out its obligations to the Fund.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
The Bank of New York, 48 Wall Street, New York, NY, is the custodian
for the Fund's cash and securities. DST Systems, Inc., CT-7 Tower, 1004
Baltimore, Kansas City, MO 64105, is the transfer agent and dividend agent
for the Fund's shares. Neither institution assists in or is responsible for
investment decisions involving assets of the Fund. Both institutions are
responsible for the maintenance of the Fund's portfolios and general
accounting records, and provide certain shareholder services.
REDEMPTION OF SHARES
The Fund expects to make all redemptions in cash, but have reserved
the right to make payment, in whole or in part, in portfolio securities.
Payment will be made other than all in cash if the Fund's Board of Trustees
determines that economic conditions exist which would make payment wholly
in cash detrimental to a particular fund's best interests. Portfolio
securities to be so distributed, if any, would be selected in the
discretion of the Fund's Board of Trustees and priced as described under
"Determining Your Share Price" herein and in the Prospectus.
NET ASSET VALUE
As more fully set forth in the Prospectus under "Determining Your
Share Price," the net asset value per share of the Fund is determined as of
the close of the New York Stock Exchange on each day that the Exchange is
open. The Exchange is open all week days that are not holidays, which it
announces annually. The most recent announcement states it will not be open
on New Year's Day, Martin Luther King, Jr.'s Day, Washington's Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.
Securities traded on more than one national securities exchange are
valued at the last sale price of the day as of which such value is being
determined as reflected at the close of the exchange which is the principal
market for such securities.
U.S. Government obligations and other debt instruments having sixty
days or less remaining until maturity are stated at amortized cost. Debt
instruments having a greater remaining maturity will be valued at the
highest bid price from the dealer maintaining an active market in that
security or on the basis of prices obtained from a pricing service approved
by the Board of Trustees.
TAXES
The Fund intends to qualify each year as a regulated investment
company under the Internal Revenue Code of 1986 (the "Code"). Qualification
as a regulated investment company relieves the Funds of federal income and
excise taxes on the portion of its net ordinary income and net realized
capital gain distributed to shareholders. The Fund also intends to qualify
under the Code with respect to the diversification requirements for tax
deferral regarding insurance company separate accounts.
Because the Retirement Shares may be purchased only through qualified
plans and the Insurance Shares may be purchased only through variable
insurance contacts, it is anticipated that any dividends derived from net
investment income and distributions of capital gains will be exempt from
current taxation if left to accumulate within the qualified plan or
variable insurance contract. Generally, withdrawals from such contracts may
be subject to ordinary income tax and, if made before age 591/2, a 10%
penalty tax. The tax status of an investment in the Retirement Shares
depends on the features of the qualified plan. Please see the plan sponsor
for additional information.
The foregoing is only a summary of some important tax considerations
generally affecting the Fund and its shareholders. Prospective shareholders
are urged to consult their tax advisers concerning the tax consequences of
this investment.
ORGANIZATION AND CAPITALIZATION
GENERAL
THE TRUST is an open-end diversified investment company organized as
a series fund and established under the laws of The state of Delaware by a
Declaration of Trust dated November 20, 1997. The one series currently
available is BARON CAPITAL ASSET FUND. Shares entitle their holders to one
vote per share. Shares have noncumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees and, in such event, the holders of the remaining
shares voting for the election of Trustees will not be able to elect any
person or persons as Trustees. Shares have no preemptive or subscription
rights, and are transferable.
TRUSTEE LIABILITY
The Declaration of Trust provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in
the Declaration of trust protects a trustee against liability to which he
or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers L.L.P., 1301 Avenue of the Americas, New York,
New York 10019, has been selected as independent accountants of the Fund.
Calculations of Performance Data
Advertisements and other sales literature for the Fund may refer to
average annual total return and actual return. Average annual total return
is computed by finding the average annual compounded rates of return over a
given period that would equate a hypothetical initial investment to the
ending redeemable value thereof, as follows:
P (1+T)N =ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = Number of years
ERV = ending redeemable value at the end of the
period of a Hypothetical $1,000 investment made
at the beginning of the period
Actual return is computed by measuring the percentage change between
the net asset value of a hypothetical $1,000 investment in the Fund at the
beginning of a period and the net asset value of that investment at the end
of a period. All performance calculations assume that dividends and
distributions are reinvested at the net asset value on the appropriate
reinvestment dates and include all recurring fees. The Fund has no
operating history.
Performance results represent past performance and are not
necessarily representative of future results. Investment return and
principal value will fluctuate so that shares may be worth more or less
than their original cost when redeemed.
In addition to advertising average annual and actual return data,
comparative performance information may be used in advertising materials
about the Funds, including data and other information from Lipper
Analytical Services, Inc., CDA Investment Technologies, Morningstar Inc.,
Money, Forbes, SEI, Ibbotson, No Load Investor, Growth Fund Guide, Fortune,
Barron's, The New York Times, The Wall Street Journal, Changing Times,
Medical Economics, Business Week, Consumer Digest, Dick Davis Digest,
Dickenson's Retirement Letter, Equity Fund Outlook, Executive Wealth
Advisor, Financial World, Investor's Daily, Time, Personal Finance,
Investment Advisor, Smartmoney, Rukeyser, Kiplinger's, NAPFA News, US News,
Bottomline, Investors Business Daily, Bloomberg Radio, CNBC, and/or USA
Today. The Fund may also use comparative performance data from indexes such
as the Dow Jones Industrial Average, Standard & Poor's 400, 500, Small Cap
600, 1,500, or Midcap 400, Value Line Index, Wilshire 4,500, 5000, or Small
Cap; NASDAQ/OTC Composite, New York Stock Exchange; and the Russell 1000,
2000, 2500, 3000, 2000 Growth, 2000 Value, or Midcap. With respect to the
rating services, the Fund may use performance information that ranks the
Fund in any of the following categories: all funds, aggressive growth
funds, value funds, mid-cap funds, small-cap funds, growth and income
funds, equity income funds, and any combination of the above listed
categories.
