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[REGISTERED LOGO]
BARON
CAPITAL
FUNDS
INVESTMENT STRATEGY.................................................2
PORTFOLIO HOLDINGS..................................................3
TABLES
FINANCIAL STATEMENTS................................................6
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
BARON CAPITAL ASSET FUND
ANNUAL REPORT DECEMBER 31, 1998
Dear Baron Capital
Asset Fund
Shareholder:
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The December 31, 1998 quarter represented the Fund's first quarter of
operation. The Fund began operations with the Insurance Shares on October 1,
1998.
The performance of the Insurance Shares for the quarter was exceptionally
strong, reflecting the strong performance of US equity markets as they
rebounded from the third quarter declines. Baron Capital Asset Fund gained
32.5% during the quarter and significantly outperformed the strong performance
of the S&P500, +21.3%, and the Russell 2000, +16.1%. The inception date of the
Retirement Shares was November 25, 1998 and the performance of that share class
was +10.0% for the slightly longer than one month period.
Small and Medium Sized Companies
Although the Fund has only a limited history, its investment objective and
philosophy is similar to Baron Asset Fund's, a publicly offered "retail " fund
that has been managed by the same adviser since its inception in June of 1987.
Baron Capital Asset Fund invests in small and medium sized companies. The
investment performance of smaller companies as compared to larger more
established and better-recognized companies has been dismal. The Russell 2000
underperformed the S&P 500 by over 30 percentage points in calendar 1998, an
unprecedented performance gap for a single year. In fact, small cap stocks have
underperformed larger companies for most of the last 15 years. This relative
underperformance of smaller companies has resulted in relative valuations of
smaller companies that are compelling. Even more importantly, bottom up, we are
identifying many investment opportunities in what we believe are great
businesses that are selling at very attractive prices on an absolute basis as
well as on a relative basis to larger cap stocks.
[GRAPH]
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PERFORMANCE
FOR THE PERIOD 10/1/98-12/31/98
BARON CAPITAL ASSET FUND 32.5%
S&P 500* 21.3%
RUSSELL 2000* 16.1%
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* THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P 500 MEASURES THE
PERFORMANCE OF THE STOCK MARKET IN GENERAL; THE RUSSELL 2000 OF SMALL SIZED
COMPANIES.
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B A R O N C A P I T A L A S S E T F U N D
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INVESTMENT STRATEGY
Invest in great businesses...for the long term.
Our philosophy? . . . . how do we manage your and our money? We don't think
it's just about numbers, about more stocks . . . or fewer stocks . . . it's not
just about growth, momentum, or value . . . it's not just about small cap, big
cap, or all cap . . . . and, it's not just about asset allocation, about
continually rebalancing our investment portfolio, although we do have opinions
about all these choices. We focus our investments in a relatively few,
entrepeneurially managed, small and medium sized, very profitable, fast growing
businesses, with strong barriers to competitors . . . businesses that have an
opportunity to get BIGGER. And, we expect that when these companies do get
bigger, we'll still be shareholders. That's how we think we'll achieve the best
returns for our fellow shareholders with what we regard as acceptable risk.
Start to invest when businesses are small. Learn as much as you can about that
business, its prospects and its management over time through our own research.
Then, take advantage of market volatility, inefficiencies, to purchase more
stock in successful businesses at opportune times when share prices don't
reflect current business values and growth prospects. And, finally, invest for
the long term in businesses. Don't just trade stocks.
A business must pass the test of time. It must be a survivor.
Will a business pass the test of time? Can we visualize this business as a
successful enterprise, a much larger, successful enterprise in five years? Ten
years? That's the test. We don't want to invest in a business that manufactures
textiles in high cost New England, textiles that could be produced for a lot
less elsewhere. Business is hard enough. We don't want to invest in one that's
competitively disadvantaged from the start. But, we also don't want to invest
in a business that exists only because it sells goods or services at a cheaper
price...we think that's also a losing strategy. Just think about all the
discount retailers that have failed during the past couple of decades. It's
about a lot more than just price. Someone can always offer products at a
cheaper price. You don't want a business that to prosper must always sell at
the lowest price. Individuals are willing to pay a fair price for a quality
service.
We don't want our businesses to be disadvantaged by change.
We want to invest in businesses that will not be disadvantaged by change and
whose business can benefit from long lasting mega-trends created by change,
such as the internet. The internet will allow many businesses to reduce costs
and improve results achieved through direct marketing of merchandise. The trick
here will be to identify businesses that can use technology to create
sustainable competitive advantage. We have always preferred to invest in
businesses that use technology, not create it. But, you might reasonably ask,
as futurists, why don't we invest directly in
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technology? Because, we believe, even if you have the best software, computer
chip, super-fast modem or portal to the internet today, your product or service
will not necessarily be the best in five or ten years.
Not too much debt is key.
We invest principally in businesses that are well financed . . . but we also
invest a smaller portion of our assets in businesses that, we believe, soon
will be. We want time to be on our side, not ticking against us, as it often is
when you invest in highly leveraged businesses.
We're looking for "sunrise" industries.
Baron Funds invests in "sunrise" industries. That's what we're looking for. Job
creating, sunrise industries. Communications. Healthcare. Financial services.
Media and entertainment. Leisure. Education and training. Marketing. Industries
in which your children and grandchildren will find their careers. Growth
businesses offer opportunities to employees, communities and shareholders. We
are not interested in the "sunset" industries in which your parents and
grandparents worked. Not steel. Not automobiles. Not railroads. Not utilities.
Not industries that must fire workers and consolidate to improve or maintain
profitability.
Our executive friends help us a lot.
Another benefit of long term investing? In addition to how profitable it can
be? If you seek their help, executives usually try hard to help you better
understand their businesses so you can be a better informed shareholder. They
try to help you understand the intricacies and subtleties of other businesses
and their strategies and prospects and people, as well. It sure makes it
easier. This benefit I don't think you can underestimate. After I met Jay
Pritzker more than twenty years ago, and helped him purchase the Hyatt Hotel
company, he continued to give me advice on other investments, about doing the
"right thing" and about investing with strong and ethical individuals. ("What
goes around, comes around.") Jay recently passed away and we will surely miss
one of the great investors of our time. It was Jay I turned to for a
recommendation on Adam Aron . . . Adam had worked for Jay . . . before we
invested in Vail. Jay couldn't have spoken more highly about Vail's chairman.
And, he was right. By the way, Jay always relied upon the assessments of his
friends, fellow executives, before he considered an investment...and achieved
enviable and outstanding results during his career.
2
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B A R O N C A P I T A L A S S E T F U N D
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PORTFOLIO HOLDINGS
We own businesses with significant and sustainable competitive advantages,
important barriers to competition.
So, what's so special about the companies in which we are shareholders, in
which we are part owners? Competitive barriers to competition, sustainable
competitive advantage, that's a big part of it. Of course, like most successful
investments, ours are well managed, highly profitable businesses with favorable
and strong, open-ended, long term growth prospects. Our growth businesses also
have important barriers to competition . . . we think this focus on sustainable
competitive advantage distinguishes our portfolio companies from those of most
other funds. Brand names, government licenses, patents, trademarks, reputation,
unique competitive positions . . . as long term investors, not short term
traders, we want to be sure the businesses in which we invest will continue to
prosper over the several year time horizon in which we intend to be
shareholders. Barriers to competitors will help them do so.
Polo Ralph Lauren will receive this year about $210 million in license fees, a
revenue source growing 15-20% per year, for granting others rights to
manufacture and market home furnishings, women's wear, accessories, sneakers
and jeans using the Polo trade dress and marks. For the right to use the Polo
name! Polo provides design and marketing assistance and concept development to
its licensees. But, it doesn't own the factories and inventories and assume the
capital risk necessary for these businesses to grow. Thirty years, hundreds of
millions spent for promotion and painstaking attention to detail have
established the Polo brand. Due to consumer perception of quality and style for
Polo's branded products, and resultant strong demand for those products,
licensees pay Polo...a lot...to use its name. With significant Polo oversight,
of course (4.5% position in Baron Capital Asset Fund).
Sotheby's is really a retailer of fine arts and antiques, jewelry and other
collectibles...but, unlike other retailers, it doesn't own the items it sells.
Items sold by Sotheby's are consigned to it for sale. Sotheby's bears the
expense of marketing items to be sold through its auctions, but if those items
are unsold, the works are returned to their owners, not marked down and placed
on sale by Sotheby's. Why do the owners of expensive art and antiques around
the world trust Sotheby's with their property? Because Sotheby's over the past
254 years has established a reputation for probity and expertise, for
integrity, and, of course, for the ability to sell these items. When Sotheby's
says an armoire is worth $10,000 or a picture $10 million, its
customers . . . consignors and purchasers alike . . . believe (4.6% position in
Baron Capital Asset Fund).
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Charles Schwab will spend nearly $375 million next year on technology to make
its internet based investment services easier to use and services provided its
customers more robust. Schwab will also spend $200 million next year marketing
its services and enhancing its brand. The huge scale of these expenditures is
unmatched by other "competitive" financial services businesses. It is a
continuation of the trend of substantial capital expenditures begun by Charles
Schwab twenty years ago when his then young company, with only $2 million in
the bank, bought $2 million computers (6.1% position in Baron Capital Asset
Fund).
Vail Resorts . . . it should be obvious that they're not building any more
resort mountain communities with thirty six year reputations and cache and
infrastructure . . . and they're not building any more mountains. Choice Hotels
has a brand so well established that owners of independent hotels pay 5% of
their revenues for the right to use the Choice brand and the Choice
reservations system . . . which fills about 30% of their beds with heads every
night. Of course, Choice is not required to make any capital investment in its
licensees to receive this revenue stream. I just love licensing
businesses . . . if there are good controls on the quality of customer service
provided by your franchisees and if you are confident you're not being short
changed. NTL has a license granted by the British government to encourage that
company to compete with British Telephone, a notoriously poor, and expensive,
service provider. NTL's license prevents others, except BT, from offering a
competitive service in its markets. Demand for NTL's local telephone, long
distance, cable television and internet services has been exceptional. Robert
Half operates the biggest permanent placement business for accounting
professionals. This service provides it with candidates for its rapidly growing
temporary accountants business. Robert Half's customers, small and medium sized
businesses, not Fortune 1000 companies, are more difficult to service than
larger businesses and therefore provide additional barriers to competition. It
is difficult to compete with Robert Half's reputation, its brand, which has
established Robert Half for over fifty years as a quality provider of specialty
professional workers.
Our diversified portfolio of great businesses with strong barriers to prevent
competition also have business opportunities that are unusually large . . . in
some instances, positively vast . . .
. . . with $500 billion customer assets growing 35-40% per year, Charles
Schwab can poach the $4 trillion customer assets in banks, the $5 trillion
invested in U.S. mutual funds; the $4 trillion invested in full service
brokerage firms...and offer internet bank services to its customers to increase
the return to Schwab of these assets...the internet permits clients to bring
assets to Schwab easily and provides Schwab means to provide its customers
increasingly robust services . . .
3
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B A R O N C A P I T A L A S S E T F U N D
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. . . $2 billion annual auction revenues Sotheby's, an 11-12% annual revenues
growth business for thirty years, has the opportunity to address a vast, tens
of billions of annual estate sales opportunity using the internet . . . estate
sales currently take place through private dealers, classified ads, in small
retail stores and in farmers markets . . .
. . . a recent article in the Wall Street Journal poignantly outlined huge
demand in the United States for long term care and assisted living facilities
capable of caring for Alzheimer's patients. There are currently 4 million
Americans with Alzheimer's disease. The incurable disease results in
progressive deterioration of the patient's mental facilities, and families are
usually soon unable to care for their loved one. A dramatic increase in
Alzheimer's in our country is expected. About 50% of our population over age 85
have the disease. The number of people who are over age 85 is growing three
times as rapidly as those under age 85. But, there are just 1.7 million nursing
home beds, 100,000 fewer than were available ten years ago. And, nursing homes
are increasingly being used to provide care for sicker patients, not older,
enfeebled, long term care, Alzheimer's patients. Managed care, rather than
extending hospital stays for its patients, encourages nursing homes to be used
instead. This is because nursing homes are a lot cheaper and the care provided
is hospital equivalent. HCR Manor Care is the leading, and most profitable,
nursing home chain; the first nursing chain to offer dedicated Alzheimer's
wings; and the leading provider of assisted living Alzheimer's care.
. . . Vail Resorts could boost its annual resort cash flow from $106 million
last year and an estimated $126 million this fiscal year to $200 million in
2002. This principally by increasing revenue per daily ski pass only $10. By
that time, Vail also expects to attract more guests, especially in off-peak
"shoulder" periods. Category III, a 19% Vail terrain expansion in 2000, will
help. Vail also will continue to own and operate more lodging, restaurants and
retail facilities. Summer activities will become more important to this unique
resort. Spectacular golf courses and other amenities are now on the drawing
board. In fact, my friends who live in Colorado already tell me they live there
for the summers, not the winters! With continued investment in its four
mountain resort towns and the 65% increase in prime baby boomer vacation
candidates expected in the next ten years, not to mention the big increases
anticipated in echo-boomers, Vail should be able to double its resort cash flow
again by 2007 or 2008. If it is able to purchase another important mountain
resort or accelerate its investments, our second doubling target date could be
a little conservative.
. . . women's apparel sales in the United States are about twice men's. Polo
Ralph Lauren's sales are the opposite. Polo's recent efforts with women's
licensing agreements could double the size of its entire business.
International markets, where we believe Polo is synonymous with Americana,
could double the size of the company again. The niche $350 million Polo Jeans
business, just
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two years old, offers the $1.5 billion company huge opportunity, especially when
measured against $7 billion annual sales jeans business. And, the Polo brand is
extendable. It's already worked on home furnishings, another huge opportunity,
and even housepaints. It can go further. And, finally, profits. Polo's pre tax
profits currently only approximate its license income as it has spent heavily
over the past thirty years to establish its brand. Polo has a huge opportunity
to increase the profitability of all its other businesses.
. . . the United States will probably need more than 100,000 communications
towers within a few years. There are now about 60,000. Increasing wireless
phone usage due to sharply declining monthly charges for cellular and pcs
phones are an important factor. Also driving increased demand for towers is the
apparently insatiable potential demand for wireless data applications,
including pagers and the internet. High definition television broadcasters will
also require more towers. And, the two licensed satellite radio broadcasters
will require lots of repeaters on towers to enable their signals to be received
in urban areas. American Tower is the largest independent communications tower
owner. It owns just 3000 towers and intends to build 1500 to 2000 towers per
year as well as acquire a lot more. Existing telecommunications company towers
often have just one tenant, themselves, on towers that could accommodate
several. Towers that represent cost centers to them are revenue opportunities
to an independent owner. American Tower's chairman, Steve Dodge, formerly the
chairman of American Radio, apparently wants to own them all. Starting from a
small base should offer this well financed business very strong growth
opportunities.
Sotheby's auction revenues in 1998 will approximate the $2 billion sales
achieved in 1989, yet its stock price is only about 65% the level it reached
then, its second year as a public company. Although Sotheby's is now battling
its only real competitor, Christie's, for dominant auction market share,
Sotheby's balance sheet is significantly stronger than it was nine years ago.
Sotheby's now has a large real estate brokerage business that was then small;
it has a substantial art financing business that was then small; it has a
retail jewelry sales business offering great potential that was then nearly
non-existent; it will soon open an auction business in Paris, France, a market
closed to outsiders for 480 years; and Sotheby's "arcade" business, lower
priced jewelry, art and antiquity sales, is growing nicely and also did not
then exist. The company's greatly expanded facility in New York City will open
in 2000 and should both significantly increase sales and materially reduce
handling costs.
What's really exciting is the prospect for Sotheby's both to auction lower
priced goods on the internet and to allow individuals unable to physically
attend an auction to be "present" in the auction room during a sale, also
through the internet. Estate sales of lower priced goods each year approximate
tens of billions, sales that neither Sotheby's nor its $2 billion annual
auction sales revenue, fierce competitor Christie's now share. Of course,
Sotheby's
4
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B A R O N C A P I T A L A S S E T F U N D
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reputation for expertise and integrity established over 254 years should give
it competitive advantage over all but Christie's in sourcing and having the
credibility to authenticate and value goods to be auctioned on the internet.
Although we have followed Sotheby's since its initial public offering in 1988,
we have been purchasing its shares only for the past year.
An investment advantage through original research
Baron Capital Asset Fund invests in a relatively small number of securities. As
of December 31, the Fund owned 34 companies. We believe that we can gain the
greatest investment advantage by concentrating our investments in the
businesses in which our original, independent research has identified the
greatest opportunities for long term capital appreciation. The Fund has
invested 37% of its portfolio in its largest ten positions.
Largest 10 security positions at December 31, 1998:
Charles Schwab Corp. ............................ 6.12%
Robert Half International ....................... 5.17
HCR Manor Care, Inc. ............................ 5.12
Sotheby's Holdings, Inc. ........................ 4.65
Polo Ralph Lauren ............................... 4.46
Sun International ............................... 2.64
Choice Hotels ................................... 2.39
Learning Tree ................................... 2.11
Century Communications .......................... 1.84
Industrie Natuzzi SPA ........................... 1.81
Subtotal ........................................ 36.31
24 other positions and cash ..................... 63.69
Total assets .................................... 100.00%
Thank you for investing in Baron Capital Asset Fund.
Baron Capital Asset Fund has performed well from its inception just three
months ago, but our extraordinary performance during that period follows a
period when stock prices in general were very low and began a sharp rebound. As
a result, you should not expect that performance to be often repeated. Our goal
is to earn 15-20% per year in the long term, to double your money every four to
ten years and then double it again. Of course, we cannot guarantee we will
achieve our goal. We will continue to work hard to invest your savings with our
philosophy and approach to investing that has served us well over the last 29
years. Thank you for the confidence you have placed in us by being shareholders
of the Fund.
Sincerely,
/s/ Ronald Baron
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Ronald Baron
President
February 8, 1999
5
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B A R O N C A P I T A L A S S E T F U N D
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Table I
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Portfolio Market Capitalization
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The Fund invests primarily in small and medium sized companies. Table I ranks
the Fund's investments by market capitalization and displays the percentage of
the Fund's portfolios invested in each market capitalization category. At times
the Fund will invest in companies with market capitalizations greater than $3.5
billion.
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Baron Capital Asset Fund
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Equity
Market Cap % of
Company (in millions) Net Assets
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Large Capitalization
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Charles Schwab Corp. ...................... $15,018 6.1%
Outdoor Systems, Inc. ..................... 5,529 0.1
Robert Half Intl., Inc. ................... 4,071 5.2
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11.4%
Medium Capitalization
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HCR Manor Care, Inc. ...................... $ 3,256 5.1%
American Tower Corp. Class A .............. 3,165 0.6
Univision Communications, Inc. Class A 3,108 0.1
Mirage Resorts, Inc. ...................... 2,689 1.7
Dollar Tree Stores, Inc. .................. 2,584 0.1
Century Communications Corp. .............. 2,384 1.8
NTL, Inc. ................................. 2,336 1.0
Williams-Sonoma, Inc. ..................... 2,242 0.1
Spieker Properties, Inc. .................. 2,178 1.5
DeVry, Inc. ............................... 2,123 0.1
Polo Ralph Lauren Corp. Class A ........... 1,912 4.5
Sotheby's Holdings, Inc. Class A .......... 1,821 4.6
Flextronics Intl. Ltd. .................... 1,771 0.3
Federated Investors, Inc. ................. 1,565 0.2
Sun Intl. Hotels, Ltd. .................... 1,518 2.6
Industrie Natuzzi SPA ADR ................. 1,415 1.8
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26.1%
Small Capitalization
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Quorum Health Group, Inc. ................. $ 975 0.7%
ChoicePoint, Inc. ......................... 945 1.5
OM Group, Inc. ............................ 865 1.3
Choice Hotels Intl., Inc. ................. 792 2.4
Vail Resorts, Inc. Class A ................ 755 0.3
Seacor Smit, Inc. ......................... 627 0.1
Budget Group, Inc. Class A ................ 571 1.1
CCA Prison Realty Trust ................... 519 0.1
Libbey, Inc. .............................. 500 1.0
Cross Timbers Oil Co. ..................... 343 0.4
Saga Communications, Inc. Class A ......... 261 1.2
DVI, Inc. ................................. 255 0.2
Counsel Corp. ............................. 220 0.9
CoreComm, Ltd. ............................ 208 0.3
Learning Tree Intl., Inc. ................. 199 2.1
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13.6%
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Table II
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Historical Information
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Table II displays on a quarterly basis each class' closing net assets and net
asset value per share, dividend distributions and the value of $10,000 invested
in each class at the time of its inception.
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Baron Capital Asset Fund
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Insurance Class
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Net Asset Value of Shares
Value Owned, if Initial
Date Class Net Assets per Share Dividends Investment was $10,000*
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10/01/98 $100,000 $ 10.00 $10,000
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12/31/98 806,286 13.25 0.000 13,250
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* Assumes all dividends were reinvested and no shares were redeemed.
Retirement Class
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Net Asset Value of Shares
Value Owned, if Initial
Date Class Net Assets per Share Dividends Investment was $10,000*
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11/25/98 $2,400,000 $ 12.06 $10,000
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12/31/98 2,638,488 13.26 0.000 10,995
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* Assumes all dividends were reinvested and no shares were redeemed.
BARON CAPITAL ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended December 31, 1998
Insurance Class
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Since inception October 1, 1998 32.5%
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Retirement Class
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Since inception November 25, 1998 10.0%
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The performance data represents past performance. Investment returns and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their cost. For more complete information about
Baron Capital Asset Fund including charges and expenses, contact your plan
administrator or participating insurance company for a copy of the Fund's
prospectus. Read it carefully before you invest or send money. This report is
not authorized for use as an offer of sale or a solicitation of an offer to buy
shares of Baron Capital Asset Fund unless accompanied or preceded by the Fund's
current prospectus.
6
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B A R O N C A P I T A L A S S E T F U N D
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STATEMENT OF NET ASSETS
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December 31, 1998
Shares Value
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Common Stocks (51.12%)
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Amusement and Recreation Services (4.69%)
4,000 Mirage Resorts, Inc.* ....................... $ 59,750
2,000 Sun Intl. Hotels, Ltd.* ..................... 90,875
500 Vail Resorts, Inc. Class A* ................. 11,000
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161,625
Business Services (6.67%)
800 ChoicePoint, Inc.* .......................... 51,600
4,000 Robert Half Intl., Inc.* .................... 178,000
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229,600
Chemical (1.27%)
1,200 OM Group, Inc. .............................. 43,800
Communications (1.86%)
700 American Tower Corp. Class A* ............... 20,694
600 CoreComm, Ltd.* ............................. 9,450
600 NTL, Inc.* .................................. 33,863
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64,007
Education (2.19%)
100 DeVry, Inc.* ................................ 3,062
8,000 Learning Tree Intl., Inc.* .................. 72,500
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75,562
Energy (0.51%)
2,000 Cross Timbers Oil Co. ....................... 15,000
50 Seacor Smit, Inc.* .......................... 2,472
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17,472
Financial (6.43%)
3,750 Charles Schwab Corp. ........................ 210,703
300 DVI, Inc.* .................................. 5,438
300 Federated Investors, Inc. ................... 5,437
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221,578
Health Services (6.78%)
4,000 Counsel Corp.* .............................. 31,500
6,000 HCR Manor Care, Inc.* ....................... 176,250
2,000 Quorum Health Group, Inc.* .................. 25,875
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233,625
Hotels and Lodging (2.38%)
6,000 Choice Hotels Intl., Inc.* .................. 82,125
Manufacturing (0.25%)
100 Flextronics Intl. Ltd.* ..................... 8,562
Media and Entertainment (3.25%)
2,000 Century Communications Corp.* ............... 63,437
100 Outdoor Systems, Inc.* ...................... 3,000
2,050 Saga Communications, Inc. Class A* .......... 42,025
100 Univision Communications, Inc. Class A*. 3,600
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112,062
Real Estate and REITs (1.57%)
100 CCA Prison Realty Trust ..................... 2,050
1,500 Spieker Properties, Inc. .................... 51,937
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53,987
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Shares Value
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Retail Trade and Restaurants (9.35%)
100 Dollar Tree Stores, Inc.* ............ $ 4,369
8,000 Polo Ralph Lauren Corp. Class A* ..... 153,500
5,000 Sotheby's Holdings, Inc. Class A ..... 160,000
100 Williams-Sonoma, Inc.* ............... 4,031
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321,900
Transportation (1.11%)
2,400 Budget Group, Inc. Class A* .......... 38,100
Wholesale Trade (2.81%)
2,500 Industrie Natuzzi SPA ADR ............ 62,188
1,200 Libbey, Inc. ......................... 34,725
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96,913
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Total Common Stocks and Investments (51.12%)
(Cost $1,580,457)............................... 1,760,918
Cash and Other Assets
Less Liabilities (48.88%) ...................... 1,683,856
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Net Assets (100.00%) ............................ $ 3,444,774
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Net Asset Value per Share
Insurance Class:
Net asset value, offering and redemption price per
share (based on net assets of $806,286 and 60,840
shares of beneficial interest outstanding) ..... $ 13.25
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Retirement Class:
Net asset value, offering and redemption price per
share (based on net assets of $2,638,488 and
199,005 shares of beneficial interest outstanding) $ 13.26
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% Represents percentage of net assets
* Non-income producing securities
** For Federal income tax purposes the cost basis is identical. Aggregate
unrealized appreciation and depreciation of investments are $229,351 and
$48,890, respectively.
See Notes to Financial Statements.
7
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B A R O N C A P I T A L A S S E T F U N D
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STATEMENT OF ASSETS AND LIABILITIES
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December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments in securities, at value (cost $1,580,457) .............................. $ 1,760,918
Cash ............................................................................... 1,681,624
Dividends and interest receivable .................................................. 6,550
-----------
3,449,092
-----------
Liabilities:
Payable for shares redeemed ........................................................ 29
Accrued expenses and other payables (Note 3) ....................................... 4,289
-----------
4,318
-----------
Net Assets .......................................................................... $ 3,444,774
===========
Net Assets consist of:
Par value .......................................................................... $ 2,598
Paid-in capital .................................................................... 3,109,001
Accumulated net investment income .................................................. 4,187
Accumulated net realized gain ...................................................... 148,527
Net unrealized appreciation on investments ......................................... 180,461
-----------
Net Assets .......................................................................... $ 3,444,774
===========
Net Asset Value per Share
Insurance Class
Net asset value, offering and redemption price per share (based on net assets of
$806,286 and 60,840 shares outstanding) .......................................... $ 13.25
===========
Retirement Class
Net asset value, offering and redemption price per share (based on net assets of
$2,638,488 and 199,005 shares outstanding) ....................................... $ 13.26
===========
</TABLE>
STATEMENT OF OPERATIONS
-----------------------------------------------------------------------------
For the Period October 1, 1998 (Commencement of Operations) to December
31, 1998
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Income:
Interest ........................................................................ $ 7,444
Dividends ....................................................................... 1,032
---------
Total income .................................................................... 8,476
---------
Expenses:
Investment advisory fees (Note 3) ............................................... 3,244
Distribution fees -- Insurance Class (Note 3) ................................... 234
Shareholder servicing agent fees ................................................ 2,698
Custodian fees .................................................................. 1,115
Registration and filing fees .................................................... 9,573
Trustee fees .................................................................... 175
Professional fees ............................................................... 8,000
---------
Total expenses .................................................................. 25,039
Less: Expense reimbursement by investment adviser ............................... (20,750)
---------
Net expenses .................................................................... 4,289
---------
Net investment income ........................................................... 4,187
---------
Realized and unrealized gain on investments:
Net realized gain on investments sold ............................................ 148,527
Change in net unrealized appreciation of investments ............................. 180,461
---------
Net gain on investments ......................................................... 328,988
---------
Net increase in net assets resulting from operations ............................ $ 333,175
=========
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
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B A R O N C A P I T A L A S S E T F U N D
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For The Period
October 1, 1998
(Commencement
Of Operations) To
December 31, 1998
------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income .............................................................. $ 4,187
Net realized gain on investments sold .............................................. 148,527
Net change in unrealized appreciation on investments ............................... 180,461
----------
Increase in net assets resulting from operations ................................. 333,175
----------
Capital share transactions:
Insurance Class:
Proceeds from the sale of shares ................................................. 793,298
Cost of shares redeemed .......................................................... (81,699)
Retirement Class:
Proceeds from the sale of shares ................................................. 2,400,000
Cost of shares redeemed .......................................................... 0
----------
Increase in net assets derived from capital share transactions ................... 3,111,599
----------
Net increase in net assets ....................................................... 3,444,774
Net assets:
Beginning of period .............................................................. 0
----------
End of period .................................................................... $3,444,774
==========
Undistributed net investment income at end of period ................................ $ 4,187
==========
Shares of beneficial interest:
Insurance Class:
Shares sold ...................................................................... 67,411
Shares redeemed .................................................................. (6,571)
----------
Net increase in Insurance Class shares outstanding ............................... 60,840
==========
Retirement Class:
Shares sold ...................................................................... 199,005
Shares redeemed .................................................................. 0
----------
Net increase in Retirement Class shares outstanding .............................. 199,005
==========
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
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B A R O N C A P I T A L A S S E T F U N D
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
Baron Capital Funds Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the"1940 Act"), as a diversified, open-end
management investment company. The Trust currently consists of one series,
Baron Capital Asset Fund (the "Fund"). There are currently two classes of
shares: the Insurance Shares and the Retirement Shares. The Insurance Shares
are offered in connection with variable annuity contracts and variable life
insurance contracts offered by life insurance companies. The Retirement Shares
are offered to certain qualified retirement plans. The two classes of shares
differ in their respective shareholder servicing and distribution expenses. The
two classes have identical rights to earnings, assets and voting privileges,
except for class specific-expenses and exclusive voting rights with respect to
matters affecting that individual class. The following is a summary of
significant accounting policies followed by the Fund. The policies are in
conformity with generally accepted accounting principles.
(a) Security Valuation. Portfolio securities traded on any national stock
exchange or quoted on the NASDAQ National Market System are valued on the basis
of the last sale price on the date of valuation or, in the absence of any sale
on that date, the last sale price on the date the security last traded. Other
securities are valued at the mean of the most recent bid and asked prices if
market quotations are readily available. Where market quotations are not
readily available the securities are valued at their fair value as determined
in good faith by the Board of Trustees, or by the Adviser pursuant to
procedures established by the Trustees. Money market instruments held by the
Fund with a remaining maturity of sixty days or less are valued at amortized
cost, which approximates value.
(b) Securities Transactions, Investment Income and Expense Allocation.
Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are recorded on an identified cost basis for
financial reporting and federal income tax purposes. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis. Income, expenses (other than those attributable to a specific
class) and gains and losses are allocated daily to each class of shares based
upon the relative proportion of net assets represented by such class. Operating
expenses directly attributable to a specific class are charged against the
operations of that class.
(c) Federal Income Taxes. It is the policy of the Fund to continue to qualify
as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income, including net realized capital gains, if
any, to its shareholders. No federal income tax provision is therefore
required.
(d) Distributions. Income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
(e) Use of Estimates. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of financial statements, and the amounts of income and
expenses during the period. Actual results could differ from those estimates.
(2) Purchases and Sales of Securities.
For the period October 1, 1998 to December 31, 1998, purchases and sales of
securities, other than short term securities, aggregated $1,757,452 and
$325,522, respectively.
<PAGE>
(3) Investment Advisory Fees and Other Transactions with Affiliates
(a) Investment Advisory Fees. BAMCO, Inc. (the "Adviser"), a wholly owned
subsidiary of Baron Capital Group, Inc. ("BCG") serves as investment adviser to
the Fund. As compensation for services rendered, the Adviser receives a fee
payable monthly from the assets of the Fund equal to 1% per annum of the Fund's
average daily net asset value. The Adviser has contractually agreed to reduce
its fee to the extent required to limit the operating expense to 1.25% for the
Retirement Shares, and for the Insurance Shares, 1.5% for the first $250
million of net assets; 1.35% for the next $250 million of net assets and 1.25%
for net assets over $500 million.
(b) Distribution Fees. Baron Capital, Inc. ("BCI"), a wholly owned subsidiary
of BCG is a registered broker dealer and the distributor of the Insurance
Shares pursuant to a distribution plan under Rule 12b-1 of the 1940 Act. The
distribution plan authorizes the Fund to pay BCI a distribution fee equal on an
annual basis to 0.25% of average daily net assets of the Insurance Shares.
Brokerage transactions for the Fund may be effected by or through BCI. During
the period October 1, 1998 to December 31, 1998, BCI earned brokerage
commissions of $3,417.
(c) Organization Costs. Costs incurred in connection with the organization and
initial registration of the Fund have been paid by BAMCO, Inc.
(d) Trustee Fees. Certain Trustees of the Trust may be deemed to be affiliated
with or interested persons (as defined by the 1940 Act) of the Fund's Adviser
or of BCI. None of the Trustees so affiliated received compensation for his/her
services as a Trustee of the Trust. None of the Fund's officers received
compensation from the Fund.
10
<PAGE>
- --------------------------------------------------------------------------------
B A R O N C A P I T A L A S S E T F U N D
- --------------------------------------------------------------------------------
(4) Financial Highlights
BARON CAPITAL ASSET FUND
Selected data for a share of beneficial interest outstanding throughout the
period:
- --------------------------------------------------------------------------------
Insurance Class:
1998*
----
Net asset value, beginning of period .............. $ 10.00
----------
Income from investment operations .................
Net investment income ............................. 0.02
Net realized and unrealized gains
on investments ................................. 3.23
----------
Total from investment operations ............. 3.25
----------
Net asset value, end of period .................... $ 13.25
==========
Total Return ................................. 32.5%
----------
Ratios/Supplemental Data ..........................
Net assets (in thousands), end of year ............ $ 806.3
Ratio of total expenses to average net assets...... 7.62%**
Less: expense reimbursement by
investment adviser ............................. (6.17%)**
-----------
Ratio of net expenses to average net assets ....... 1.45%**
===========
Ratio of net investment income to average
net assets ..................................... 0.99%**
Portfolio turnover rate ........................... 37.11%
- --------------------------------------------------------------------------------
* For the period October 1, 1998 (commencement of operations) to December 31,
1998.
** Annualized.
Retirement Class:
1998*
----
Net asset value, beginning of period ............. $ 12.06
------------
Income from investment operations ................
Net investment income ............................ 0.02
Net realized and unrealized gains
on investments ................................ 1.18
------------
Total from investment operations ............ 1.20
------------
Net asset value, end of period ................... $ 13.26
============
Total Return ................................ 10.0%
------------
Ratios/Supplemental Data .........................
Net assets (in thousands), end of year ........... $ 2,638.5
Ratio of total expenses to average net assets..... 7.38%**
Less: expense reimbursement by
investment adviser ............................ (6.17%)**
-------------
Ratio of net expenses to average net assets ...... 1.21%**
=============
Ratio of net investment income to average
net assets .................................... 1.34%**
Portfolio turnover rate .......................... 37.11%
- --------------------------------------------------------------------------------
* For the period November 25, 1998 (commencement of operations) to December
31, 1998.
** Annualized.
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
- -------------------------
TO THE SHAREHOLDERS
AND BOARD OF TRUSTEES OF
BARON CAPITAL ASSET FUND:
- -------------------------
In our opinion, the accompanying statements of net assets and of assets and
liabilities, and the related statements of operations and of changes in net
assets and the financial highlights present fairly, in all material respects,
the financial position of Baron Capital Asset Fund (the "Fund") at December 31,
1998, the results of its operations, the changes in its net assets and the
financial highlights for the period October 1, 1998 (commencement of
operations) to December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit, which included confirmation of
securities at December 31, 1998 by correspondence with the custodian, provides
a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 10, 1998
11
<PAGE>
[REGISTERED LOGO]
BARON
CAPITAL
FUNDS
767 Fifth Avenue
NY, NY 10153
