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BARON FUNDS LOGO
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| BARON ASSET
1 |
| FUND HIGHLIGHTS
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PERFORMANCE.................................1
INVESTMENT THEMES...........................2
PORTFOLIO ADDITIONS ........................2
PORTFOLIO SALES ............................7
OTHER DEVELOPMENTS .........................8
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| BARON GROWTH
2 | & INCOME FUND
| HIGHLIGHTS
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PERFORMANCE ................................10
OTHER DEVELOPMENTS .........................11
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| BARON SMALL
3 |
| CAP FUND
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LETTER FROM RON BARON.......................12
INTERVIEW WITH
CLIFF GREENBERG AND
MORTY SCHAJA ...............................12
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
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THIS ANNUAL REPORT CONTAINS
INFORMATION FOR THREE FUNDS
BARON ASSET FUND
ANNUAL REPORT o SEPTEMBER 30, 1997
Dear Baron Asset
Fund Shareholder:
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PERFORMANCE
Baron Asset Fund began operations on June 12, 1987, a little more than ten
years ago. The Fund has since performed well. Baron Asset Fund's long term
performance, more than six fold appreciation since its inception, has met our
stated objective of doubling our shareholders' money every three to five years.
The strong performance of Baron Asset Fund over the long term reflects the
strong revenue and net income gains of the Fund's "core" investment holdings.
Baron Asset Fund has been a long term shareholder in discount broker, mutual
fund distributor Charles Schwab; private college DeVry; nursing home, assisted
living operator Manor Care; specialized temporary help provider Robert Half;
and casino hotel operator Mirage Resorts. Share prices of our "core"
investments have increased, so far, several fold since our initial purchases
five to ten years ago. Our Fund's performance has benefitted from the very
strong growth experienced by these businesses during the past several years.
Our long term "core" investment holdings, our legacy investments, now represent
about 18% of Baron Asset Fund's portfolio.
We expect our "core" business investments to continue to grow rapidly and their
share prices to continue to reflect this growth. During the past year our
legacy investments all performed well and all contributed significantly to our
results. Although we have been a shareholder of Charles Schwab since 1992, and
it had already quintupled during the prior four years, last year it doubled
again. Schwab has become a "ten-bagger." Schwab, currently our third largest
investment, made the largest dollar contribution to Baron Asset's last year's
strong results. Legendary investment manager Peter Lynch often commented, "Most
of the money I make is in the third or fourth year I've owned something . . .
(although sometimes it) takes a little longer." We couldn't agree more.
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PERFORMANCE YEAR PERFORMANCE FOR PERFORMANCE
TO DATE ONE YEAR SINCE INCEPTION
THROUGH SEPTEMBER 30, 1997 THROUGH SEPTEMBER 30, 1997 JUNE 12, 1987 CUMULATIVE
THROUGH SEPTEMBER 30, 1997
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BARON ASSET FUND 30.9% 33.8% 517%
S&P 500* 29.6% 40.4% 317%
RUSSELL 2000* 26.6% 33.2% 232%
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* THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P MEASURES THE
PERFORMANCE OF THE STOCK MARKET IN GENERAL:
THE RUSSELL 2000 OF SMALL AND MID-SIZED COMPANIES.
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B A R O N A S S E T F U N D
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We remain committed to our investment objectives and performance goals. We will
continue to make new investments in well managed, fast growing, small and mid
sized businesses that have, in our opinion, sustainable competitive advantages
. . . and that offer our shareholders the potential to double the value of
their investment in Baron Asset Fund every three to five years. To meet our
goals, our newer "farm team" investments must perform as well in the future as
our legacy investments have during the past. Our "farm team" investments . . .
in various stages of development . . . represent a significantly larger portion
of our investment portfolio than our legacy investments.
During the past fiscal year, Baron Asset Fund has added to our "farm team" with
significant new investments in ski resort Vail Resorts; Hispanic radio
broadcaster Heftel Broadcasting; and upscale, branded consumer goods company
Polo Ralph Lauren. We also added to our investment in hotel franchisor Choice
Hotels after receiving it as a tax free dividend from "core" investment holding
Manor Care. These new investments have all performed well since their
purchases. They join, among the more important members of our future all-stars,
discount merchant Dollar Tree; technology training company Learning Tree;
casino hotel Sun International; oil and gas operator Cross Timbers Oil; Holiday
Inns' operator Bristol Hotels; tutor and testing business Sylvan Learning; and
car rental business Budget. Since the end of our fiscal year we have added
another to our "farm team" cast of future stars, bowling company AMF Bowling.
There can be no guarantee that our newer investments will develop into future
all stars and attain "core" investment status. There can be no guarantee that
our Fund's past performance can be duplicated.
Baron Asset Fund's long term performance ranks highly.
Although Baron Asset Fund has the vast majority of its capital invested in
small and mid sized businesses, our Fund's performance has nevertheless
modestly exceeded that of the large cap S&P 500 index from the beginning of
1994 through the present. This despite the fact that the small cap Russell 2000
index has trailed the S&P significantly during the period. The relative
performance of smaller companies has sharply improved since April. We believe
compelling absolute and relative values are now present in fast growing small
and mid sized companies. Baron Asset Fund is well positioned if small companies
continue their recent outperformance.
Baron Asset Fund is ranked five stars by Morningstar, their highest rating.
"Baron Asset Fund does almost everything right," Morningstar's November 11,
1997 rating proclaims. ". . . (even if) the fund's size has become an obstacle
. . . its uncommon risk/reward profile should keep it on most investors' radar
screens." Baron Asset is one of the top performing mutual funds on Charles
Schwab's Select List. Baron Asset Fund is accorded an A+ rating by Investors
Business Daily for its performance during the past three years. Its performance
is also ranked among the top twenty five growth funds both from the market low
in 1990 and the market peak in 1990 to present. Baron Asset's performance is
also highly ranked by IBD for the past six months. The New York Times ranks
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Baron Asset Fund as the top performing small company mutual fund of the ten
largest such funds both during 1997 and for the past three years. Fortune, in
June, ranked Baron Asset Fund the top performing small company fund for the
past twelve months.
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INVESTMENT THEMES
Baron Funds focuses its investments in well managed, fast growing, very
profitable businesses that we believe will benefit from what we term
"mega-trends." Mega-trends are long lasting economic trends that result from
societal, demographic or political changes. Mega-trends create demand for
products and services over the long term and offer businesses opportunities
over the long term to produce products and provide services profitably.
Baron Funds' "investment themes" focus upon job creating industries that are
beneficiaries of mega-trends. We call these job creating industries "sunrise"
industries, industries such as healthcare, education, communications, media and
entertainment, government privatizations, financial services and outsourcing.
(1) Healthcare, since our elderly citizens are growing three times as fast as
the overall population and will require increased care; (2) education, since
high school graduates will increase 25% in the next five years and most jobs
already require training beyond secondary school; (3) communications, since
huge investments are now being made in infrastructure, businesses require
advanced services to be competitive and students and consumers have grown
dependent upon their convenience as well; (4) media and entertainment, since
they are beneficiaries of government deregulation, globalization and because as
we have become more prosperous as a nation, we have more money to spend and
want to be entertained; (5) government privatizations, due to the general
proposition that private industry can nearly always provide services that are
at least equivalent to those provided by government, but at a lower cost; (6)
financial services, since baby boomers, our largest population segment, are
approaching retirement and have suddenly recognized the need to save and
invest; and, finally, (7) outsourcing, since businesses have recognized that
they can be most profitable if they focus on their core competancies and
outsource to others services that can be better provided with scale and
competance. Our "sunrise" industries are those in which your children will find
employment, not the railroads, steel, automobiles, mining, utilities and
tobacco businesses in which your parents and grandparents worked.
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PORTFOLIO ADDITIONS
Baron Funds takes advantage of stock market volatility to invest at attractive
prices in growth businesses.
Baron Funds remains focused on its objective of purchasing shares of fast
growing, well managed, very profitable businesses at attractive prices . . .
prices which offer our shareholders the opportunity to earn at least 50% in the
two years after Baron Funds invests in a business. We expect the businesses in
which we invest to about double in size, to double their intrinsic value . . .
their sustainable earnings power . . . every three to five years. Baron Funds
believes that, although in the short term share
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prices are likely to be volatile . . . and random, over the long term stock
prices accurately reflect the values of their underlying businesses. For the
stocks we own to grow as rapidly as the income of their underlying businesses,
we must purchase shares at fair prices . . . at prices that reflect the current
value of a business . . . at prices that do not accurately anticipate a
business' long term earnings growth prospects.
We target the businesses . . . and executives . . . in which we would like to
invest and then study these businesses with our "kick the tires" company
visits. We believe that, in most instances, you've just got to visit a
company's executives in their offices to be able to accurately gauge a
business' prospects, to know what's really going on.
Most "investors" and analysts focus upon short term market moving events . . .
Friday's unemployment report, Tuesday's Federal Reserve Chairman's testimony
before Congress, next week's quarterly earnings report, last week's turmoil in
Asian markets. Baron Funds focuses on the long term prospects for a business
. . . its earnings potential in three to five years and its sustainable
competitive advantages, i.e., its ability to prevent others from usurping
profitable investment opportunities.
With a different investment time horizon than most, once we have identified
businesses in which we would like to invest and have determined the prices we
are willing to pay, we are often given several opportunities to do so when
others react to short term market disruptions. In addition to world news
developments, numerous events also cause short term valuation inefficiencies
that offer Baron Funds opportunities: analyst "sell" or "hold" recommendations,
spinoffs, initial and secondary public offerings, and securities that have been
just plain overlooked or not yet discovered by Wall Street analysts.
1. Initial Public Offerings . . .
An analyst or portfolio manager living in New York City could probably spend
every waking hour reading prospectuses, attending "roadshow" lunches and
listening to managements paraded through your office daily describe their
businesses and strategies. This is part of the "going public" process by which
privately owned businesses seek to sell a portion of their businesses to the
public. The reasons for a business to "go public" are many: estate planning,
rewarding loyal employees, seeking capital to accelerate growth. We are most
interested when businesses seek capital likely to earn high returns when
invested.
Our watchword in the process? Selectivity. Like others, we read many
prospectuses and attend many meetings each year. We are interested, however, in
only a few, perhaps a half dozen, "new issues" each year . . . businesses we
think likely to benefit from long lived economic megatrends. We research these
newly public businesses like any other . . . we interview their managements,
visit their premises, study their competitors, talk to their suppliers and
customers and, finally, value their businesses.
We invest in newly public businesses for the long term . . . with the intent to
remain part owners for years. The greatest portion of stock we purchase in
newly public companies is not during initial public offerings, but rather in
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"aftermarket" transactions. This is because demand in most instances exceeds
supply, and initial investment allocations are limited. In many instances we
purchase shares in aftermarket transactions at modest premiums to initial
offering prices. We believe, nevertheless, that our investment returns in the
long term will be quite favorable. We have also purchased shares in newly
public businesses in aftermarket transactions at less than the initial public
offering prices. Most notable historically among this category have been DeVry,
Budget Group and MGM Grand. These businesses have been very profitable
investments for Baron Asset Fund. During the past year, Baron Funds has
purchased Polo Ralph Lauren and Vail Resorts in aftermarket transactions at
prices less than initial offering prices.
Amusement and Recreation
Vail Resorts was a "hot" IPO. Its shares, however, were purchased heavily by
"flippers." When the "flippers" "flipped," i.e., sold, their Vail IPO shares,
Vail's price tumbled from $24 to $17. Vail's initial offering price was $22.
Vail could about double its $100 million annual cash flow within the next five
years and repay a significant portion of its debt. Higher effective lift ticket
prices; a greater share of skier vacation revenue from ancillary services such
as restaurants, equipment rentals and hotel rooms; more effective marketing to
lure skiers; and income from infrastructure investments should all help. During
the past year, Baron Funds has made a significant investment in Vail Resorts.
Our cost is about 8% less than Vail's initial IPO price. If Vail Resorts is
able to further develop its mountains, double its cash flow and reduce its debt
during the next four to five years, its stock price could nearly triple our
cost. We have so far earned about 35%.
Media and Entertainment
Metro Networks. We paid about a 15% premium to the IPO price in aftermarket
transactions to make a significant investment in this outsourced news, traffic
and weather service for radio and television stations. Metro Networks offers
broadcast stations better and less costly services than if the services were
self provided. Expanded services to existing radio stations and new services to
television stations offer promise. Metro Networks' share price so far has
increased about 65% from our purchase price.
Univision. This scorching hot IPO, the leading Hispanic television network,
quickly doubled from its initial offering price. We were given a modest share
allocation on the initial offering. When Univision's stock price then fell
about 25% last summer as the "flippers" flipped, we bought as much as we could.
Univision's share price has since nearly doubled from our purchase price.
Univision is a prime beneficiary, as is Heftel, the leading Hispanic radio
broadcaster, of the rapid growth of the U.S. Hispanic population.
Real Estate
CCA Prison REIT. Another in demand IPO. The founding management for this
specialized REIT is the same as that of another of our profitable investments,
Corrections Corporation of America. CCA Prison REIT offers municipal
governments the
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ability to refinance their owned prisons without seeking voter approvals . . .
a $100 billion refinancing opportunity . . . significant for a business with a
market capitalization of less than $800 million. CCA Prison REIT, using
Corrections Corporation's development capabilities, could also develop and
provide long term financing for new prisons . . . both those managed by
municipalities and those managed by Corrections Corp. Development could offer
CCA Prison REIT enhanced profit potential while providing governments with
significantly lower cost financing for new jails. Baron Funds received a "fair"
initial allocation on this IPO and increased its investment significantly in
aftermarket transactions. Prices in aftermarket trades were about 40% higher
than the shares' initial prices. CCA Prison REIT, to date, has appreciated
about 18-20% from our aftermarket cost. If this business proves successful, and
new prison development proves a significant opportunity, our shares could
appreciate several fold. We are advantaged in studying this business . . .
Susan Robbins has long analyzed businesses that governments privatize and,
Mitch Rubin, our REIT analyst, has added his brand of real estate expertise.
Retailers
Branded and upscale apparel, accessories and home goods supplier Polo Ralph
Lauren was a genuinely "hot" IPO. The self fashioned "lifestyle" brand company
began trading about 25% above its $26 per share initial offering price. Polo's
shares subsequently fell sharply for reasons that were never very clear to us.
Polo's share price finally bottomed more than 10% below its initial offering
price. Baron Funds has purchased more than 2.5 million Polo Ralph Lauren shares
at average prices below the firm's initial public offering price. Although U.S.
women's retail apparel sales are about 50% greater than men's, Polo's men's
sales are about three times women's sales. If Polo's women's clothing and
accessories sales exceed men's, a reasonable target, Polo's sales could about
double. International expansion offers the potential to double Polo's revenues
again. A large part of the company's current profits can be attributed to
license fees revenues. The company is focused on significantly improving
wholesale and retail profitability. Polo has the opportunity to boost profit
margins about 50% over the next several years to the high teens. With potential
profit gains of more than six times during the next eight to ten years, Polo's
stock price could increase 5-6 times over the same period.
2. Secondary Public Offerings . . .
Secondary public offerings, offerings of shares by businesses that are already
publicly owned, usually depress share prices, at least on a temporary basis. We
are most interested in these transactions when a business seeks capital for
investment which we believe can accelerate its growth rate and earn high
returns.
Amusement and Recreation
Premier Parks acquires and improves the operations, attendance, and, of course,
cash flows of regional amusement parks. To take advantage of acquisition and
development opportunities, Premier Parks earlier this year sold new shares in a
secondary offering. Unlike most secondaries, this offering was oversubscribed.
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Premier could increase the cash flows of its owned amusement parks
substantially during the next five years after improving their parks'
infrastructure and marketing. There are also many well located, regional
amusement parks that have been undermanaged and capital starved which provide
consolidation opportunities. Premier's share price has increased about 25% from
our purchase price earlier this year. If Premier's management is successful,
the company could easily double its cash flow, and the value of its business,
within the next four to five years.
Education
We purchased additional shares of DeVry in a secondary offering earlier this
year. DeVry's share price had fallen about 25% after announcing this secondary.
DeVry is a private college that provides its students with technical training
and its graduates with an accredited degree and, most likely, a job offer.
DeVry plans to accelerate the openings of both its private colleges and its
Keller Graduate Schools . . . and boost its growth rate in the process. We have
earned about ten times our investment in DeVry's shares since our initial
investment in 1990. Its share price has rebounded since its most recent
offering.
Media and Entertainment
Leading Hispanic radio broadcaster Heftel's stock price fell about 20% when it
sought financing to merge with Tichenor, a large, well run, Hispanic radio
broadcaster. Tichenor was intended to provide Heftel with exceptional
management; to solidify its dominance as the leading Hispanic radio
broadcaster; and to achieve operating efficiencies. Baron Funds about doubled
its Heftel share ownership at the time of this offering. Heftel's shares have
jumped more than 80% above the cost we incurred this spring to double our
holdings.
Real Estate
Baron Funds recently significantly increased its investment in Spieker
Properties. We invested additional funds in Spieker when that company sold new
shares through a secondary offering. The proceeds of this offering were used to
help pay for its acquisition of Goldman Sachs' California suburban office
properties. Spieker acquired the Goldman properties for less than their
replacement costs. Rents in place are below current market. There is little new
construction in Spieker's markets and rollover rents on expiring tenant leases
have recently increased 30%. The Goldman properties will make Spieker even more
dominant in its markets. The prices Baron Funds paid for additional Spieker
shares were about 10% less than we would have had to pay in open market
transactions a little more than a month ago.
Transportation
We purchased additional shares of Budget Group in a recent secondary offering.
Proceeds from the offering were used to purchase parent Budget Rent-a-Car
franchisor from Ford. Since Budget has been a publicly owned business, Chairman
Sandy Miller and his management team have acquired one after another Budget
franchisee, emphasized truck rentals, opened suburban
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locations to better utilize their fleet, started a used car sales business and,
finally, have acquired parent Budget Rent-a-Car. Whew! We have been
shareholders of Budget since its initial public offering in 1994 (it was then
called Team Rental) and have so far almost quadrupled our money. If Sandy and
his management team are able to improve Budget's profitability, we sure think
they can, we should be able to make a lot more.
3. Spinoffs . . .
Joel Greenblatt is a friend of Baron Small Cap Fund's portfolio manager Cliff
Greenberg. Joel is an extraordinarily successful hedge fund manager and the
author of "You Can be a Stock Market Genius (Even if you're not too smart)."
Joel recommends in his "stock market genius" book that you purchase "spinoffs."
Why? He describes spinoffs as a "fundamentally inefficient method of
distributing stock to the wrong people . . . spinoff stock is given to
shareholders who, for the most part, were investing in the parent company's
business . . . the shares of spinoffs are typically sold immediately by those
shareholders without regard to price or fundamental value." Sellers of stocks
who don't consider price or fundamental value, of course, are sellers likely to
create significant value for the purchasers of those shares. Market
inefficiencies and dislocations. We make a living trying to find and take
advantage of them. Spinoffs, in many instances, provide us with this
opportunity.
Hotels and Lodging
Choice Hotels. When shares of this large hotel franchisor were given as a
dividend to shareholders of nursing home operator Manor Care in October 1996,
an event we had long suggested would be a positive development for both
companies, the shares of Choice immediately fell nearly 30%. Why? Manor Care is
part of the S & P 500, Choice is not. Index funds which owned Manor Care were
thus compelled to sell Choice when they received its shares. This without
regard to whether it is a fundamentally attractive business. Further, most
shareholders of Manor Care owned that stock because it is a healthcare
business. They did not care about, nor were they knowledgeable about, Choice, a
hotel franchisor. They also were natural sellers. Since very few analysts then
followed Choice . . . its shares were unduly depressed. Choice used this
opportunity to repurchase about four million of its shares at depressed prices.
Baron Funds also purchased several million Choice shares at similarly depressed
prices. Choice's share price has since increased in value about 50%.
Healthcare
Manor Care. During September 1997, Manor Care announced it would spin off its
nursing home and assisted living management businesses. The remaining company
will be renamed Manor Care Realty and will own, acquire and develop nursing
home real estate. We believe this is a very positive development. Baron Funds
has since significantly increased its shareholdings of Manor Care. Manor Care
is currently valued by stock market investors based upon its earnings per share
and growth rate. Its owned real estate has been inappropriately valued. Real
estate is commonly valued by investors not on earnings per share, which are
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often nominal due to leverage and depreciation charges, but rather on cash flow
. . . EBITDA, and asset value, i.e., $65,000 per nursing home bed. Based upon
disparate valuation metrics, Manor Care Realty and Manor Care Health Services
should be accorded higher values than when the businesses were combined as
Manor Care.
4. Analyst "Sell" or "Hold" Recommendations . . .
We are often asked, "Just how do you manage to invest all that money in fast
growing, well managed businesses at attractive prices? Aren't all those
billions a terrible handicap?" The answer to the handicap question, so far, is
unequivocally, "No!" Our information about and knowledge of businesses seems to
have improved as significantly as our assets under management have grown. The
help we receive from brokerage investment analysts is often unintended and
inadvertent. Analysts are under pressure to perform in the short term. As a
result, they are frequently compelled to recommend "sale" or "hold" when events
cloud a company's near term earnings prospects. The trick, we think, is to find
businesses where adverse near term events have little or no impact upon a
business' long term outlook. Analyst "sell" recommendations usually cause stock
prices to fall, and allow us to purchase shares in our favorite businesses at
attractive prices. If we are right about our fundamental, long term, business
judgments, we will make unusually high returns over the long term . . . if we
invest in businesses at times when most stock traders are only interested in
selling.
Amusement and Recreation
Sun International's management stated earlier this year that it would redevelop
its newly acquired Atlantic City casino hotel more slowly than analysts had
expected. When the New Jersey resort's business became more competitive and
Sun's redevelopment project was deferred, most analysts recommended that
investors "hold" their Sun shares and wait to make additional purchases. Sun's
investment in Atlantic City is small when compared to that in its Paradise
Island, Bahamas casino-resort hotel, Atlantis. Atlantis is currently doing very
well. When Atlantis' current expansion projects are opened next year, Sun's
earnings potential should quickly about double . . . and significant
development opportunity will remain. Sun's Atlantic City project seemed to us
sensible, with potential for development and substantial earnings in the next
three or four years. When Sun's stock price declined after analysts changed
their recommendations, we added to our holdings. Sun's current earnings could
nearly triple in the next five or six years. Its stock price should reflect
this growth. Sun's share price has recovered from its most recent decline.
Education
When analysts discovered that Learning Tree's newly introduced, short Power
Seminars courses had incurred development expense and operating costs and were
achieving nominal revenues, one after another recommended "sale" or "hold."
. . . and have maintained those recommendations although the
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company's share price tumbled about 50%; its core classroom instructor led
businesses can only be described as booming, i.e. typically advancing 40-50%
from year ago; its Power Seminars courses have been discontinued; and its
library of computer based training (cbt) courses has increased from 12 in
September 1996 to 72 in September 1997 and could reach nearly 200 in September
1998. Learning Tree's costs to develop its cbt courses are expensed as
incurred. Learning Tree has significant opportunity in instructor led technical
training in European markets. Learning Tree's specialized technical training
revenues could increase nearly 75% within the next two years and its profits
could more than double. Baron Funds significantly increased its holdings of
Learning Tree after its shares had fallen.
Hotels and Lodging
During the past few months, Bristol Hotels was planning the strategic
redevelopment of its recently acquired Holiday Inns. Although Bristol's
property revenues during this period were as expected, its costs were not. The
company had two property management systems in operation, not one, and its
costs, primarily labor, had not been controlled as well as had been
anticipated. Bristol's food and beverage and room operating margins were
penalized about 400 basis points in the quarter. Earnings, as a result, fell
below analysts' estimates. Of course, analysts immediately changed their
investment rating on Bristol to "hold," the equivalent in the real world of
"sell."(The word "hold" is used to hopefully allow investment banks avoid
offending potential corporate customers.) Bristol's stock price then declined
about 20%. Baron Funds considered this earnings problem short lived. Since
Bristol's shares were selling for an attractive discount to its properties'
replacement costs; its properties offered attractive redevelopment potential;
and, Bristol was likely to make additional property acquisitions; Baron Funds
substantially increased its Bristol investment.
Media and Entertainment
Young Broadcasting is considered by most a premier television station operator.
However, when Young acquired a leading Los Angeles' television station from
Disney for almost 17 times its $20 million annual trailing broadcast cash flow,
analysts were upset. This despite Young's explanation that it expected to at
least double the new station's cash flow in the short term. When the outside
rep firm the L.A. station had employed was given notice that it would be
terminated, for three months its sales efforts languished and Young experienced
a modest earnings shortfall. Analysts downgraded Young, its stock fell sharply
and we purchased shares. Young also purchased stock which it then retired.
Young replaced its station rep and ad sales have returned to normal. The LA
station's broadcast cash flow this year should approximate $42 million, about
in line with its early estimates. Ratings for Young's ABC station affiliates
are still lagging, but if Disney is ever able to fix the network, we think they
will, Young will be a prime beneficiary. While recent station acquisitions have
been made at 10-13 times broadcast cash flow, Young's growing income stream is
now valued by investors for less than 8 times. Since Young is leveraged, were
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it to sell for 11 times, its share price would increase about 75%. Young's
shares now trade for about 25% more than our cost a few months ago.
Share prices of billboard advertising businesses fell sharply this year when
analysts voiced concerns that tobacco advertising revenues could soon be
eliminated. Tobacco liability settlement discussions included outdoor
advertising prohibitions. Tobacco businesses are large outdoor advertisers;
perhaps 25-30% of billboard space is now rented to cigarette companies.
However, tobacco businesses have rented the best billboard locations under long
term leases at below market rents. Therefore, it should be relatively easy to
replace tobacco, and at higher rates, were billboard companies required to do
so. New categories of advertisers are now considering billboard advertising
. . . increasing demand for boards with little prospects for supply increases.
This is because environmental barriers make it difficult to successfully start
billboard businesses. Other media businesses, especially radio, have recognized
the potential of billboards and, have begun to acquire billboard businesses.
After share prices of billboard businesses had fallen, Baron Funds acquired
shares in Outdoor Advertising and Universal Outdoor. Universal has since
announced its acquisition by radio station operator Clear Channel at an
attractive premium to our cost. Outdoor's share price has also risen
significantly.
Earlier this fiscal year analysts became worried when the Department of Justice
began to scrutinize recently announced radio mergers. Analyst concern was
quickly evident in cautious research commentary. Radio stocks quickly fell
30-40%. Most limitations on mergers and business combinations discussed by
Justice did not seem to us onerous. Since we recognized continued opportunity
for radio businesses in pricing, operating efficiencies and marketing, and
despite short term regulatory uncertainty, we added to our radio holdings at
what have proved to be very attractive prices. Baron Funds bought additional
shares of American Radio, Cox Radio and Saga Communications; all have risen
substantially in price.
5. Overlooked and Undiscovered . . .
Perhaps the two most prominent examples of businesses among our core investment
holdings that were undiscovered and overlooked for years by Wall Street
analysts are Robert Half and Manor Care. We began to visit regularly and study
Robert Half in 1986 when Max Messmer resigned as President of Dole Foods, at
that time our largest investment, and became the new Chairman of Robert Half.
Max explained to us that he had accepted this position since he wanted to slow
down a little, he was already 35 years old, and spend more time with his family
who lived nearby Half's offices. We began to invest in Robert Half in 1991 and,
to date, have made more than 30 times our original investment! Half has been
the most profitable investment we have ever made. Obviously, Max hasn't slowed
down too much. When we began to visit Robert Half on the peninsula south of San
Francisco in 1986, and until only a few years ago, there was virtually no
information about Robert Half available through Wall Street brokerage firms.
Robert Half, a then small provider of highly
6
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B A R O N A S S E T F U N D
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compensated, specialized temporary help, e.g. accountants and information
technology staffers, although offering potential for very rapid and profitable
growth, was simply below most analysts' radar screens.
Manor Care is a slightly different story. The nursing home industry has
promised investors exciting growth since the 1960's. The industry, however, has
been tainted by reimbursement fraud and inadequate quality of care scandals.
Manor Care is conservatively financed, has never been touched by fraud or
scandal and, is among the most profitable publicly owned nursing businesses.
Its high level of profitability is due to its reliance upon residents who pay
premium prices with their own money to reside in Manor Care's upscale
facilities. This, rather than depending upon lower per diem, government funded,
Medicaid residents. Manor Care's earnings have grown consistently 15-20% per
year, seemingly forever, and its stock price has multiplied more than a hundred
fold in the past three decades. Yet, in my entire investment career I have
never seen one, not one, table pounding, "you've got to buy this now," Wall
Street research "buy" recommendation of Manor Care. Most analysts have
consistently ranked it "hold" or "buy on weakness." I first invested in Manor
Care in 1969 shortly after it had become a publicly owned business. I was still
in law school and used borrowed money to invest. Baron Asset Fund began to
invest in Manor Care in 1989 and has so far earned about ten times its original
investment.
Healthcare
Nursing home pharmacy services provider Vitalink has about quintupled in size
since its initial public offering in March 1992 at $17 per share. Its annual
revenues now approximate nearly $500 million. About half this growth can be
attributed to its recent merger with Teamcare. Yet, due to Vitalink's small
share float, the result of a 50% controlling shareholder, Manor Care, Vitalink
had attracted the attention of few analysts. With pharmacy acquisitions
becoming scarce and pricey, Vitalink recently announced it had hired investment
bankers to "consider strategic alternatives," shorthand for saying the company
could soon be sold. Baron Funds has been a small shareholder of Vitalink since
its share price fell sharply following its IPO five years ago. Baron Funds
bought more Vitalink stock during the past year at prices not much changed from
its initial public offering price in 1992. Still few analysts follow the
company.
Media and Entertainment
Although we normally avoid like the plague businesses we perceive to be poorly
managed, Telemundo, the second largest Hispanic television broadcaster was an
exception. When its share price fell after reporting continued disappointing
ratings last summer, we purchased its stock. We believed that either its
management would be changed or that its business would be sold, either as a
second Spanish network or as an assembly of stations that could compliment an
existing conventional network. We have been well rewarded. Telemundo's share
price has jumped nearly 75% above our purchase cost. Last week it was reported
that the company's 40% shareholder has made a proposal to acquire the entire
business. Due to Telemundo's disappointing results, small size and even smaller
<PAGE>
float, few analysts follow the company. We had become knowledgeable about
Telemundo through our research on Univision and Heftel.
- -------------------------------------------------------------------------------
PORTFOLIO SALES
Baron Funds is a long term investor in businesses, not a short term trader of
stocks. The length of time we invest in businesses can usually be measured in
years, not months. This contrasts to many mutual funds which turnover their
portfolios, (replace their investments) annually. Baron Asset Fund's annual
portfolio turnover in fiscal 1997 was 13%, Baron Growth & Income Fund's, 25%.
Baron Asset Fund, on average, invests in businesses for nearly eight years,
Baron Growth & Income Fund for four years. The benefits to Baron Funds'
shareholders? Lower transaction costs for one. Lower income taxes on gains, if
you're a taxable shareholder, for another. And finally, and perhaps most
importantly, as long term investors in businesses we believe we are better able
to understand and anticipate and benefit from the prospects for a business and
its management.
But, our record is not perfect. We, too, make mistakes in our assessments of
businesses and managements. When we recognize we have made an error, we sell,
regardless of whether or not an investment is profitable. Sometimes our
investments are priced to fully anticipate many years of earnings growth with
little or no recognition accorded business risk. In those instances, we may
reduce or eliminate an investment to make room for another we deem more
attractive.
Business Services
Baron Funds sold home healthcare provider Olsten's shares at a loss after we
had become worried about the profitability of newly signed managed care
contacts. The trends to fewer visits per managed care patient and lower fees
per visit had become evident. Hospital referrals to captive homecare agencies
were under investigation for fraud and abuse by the Office of the Inspector
General. This was an important concern since we had expected the company's
relationship with Columbia HCA to boost profits. Finally, the company's
management had repeatedly cancelled and rescheduled our attempted visits to
their offices, not generally a good sign.
Communications
Communications satellite operator Globalstar's shares were sold after we had
about quadrupled our investment in a little more than a year. Although we
continue to believe this project has attractive prospects, its rapid share
price appreciation before its satellites were successfully launched and its new
service instituted increased the investment risk.
We purchased shares of Palmer Wireless through a secondary stock offering. I
had previously met, and immediately liked and admired, that cellular telephone
company's management and business strategy. Proceeds from the Palmer stock
offering were used to repay debt and were intended to allow the company to
pursue acquisitions in fast growing, southeastern U.S.' rural
7
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B A R O N A S S E T F U N D
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markets. Palmer Wireless' share price dropped sharply when competitive pressures
we had not expected for years occurred in months. When Palmer was acquired soon
afterwards, our losses were sharply reduced, but not eliminated.
Government Privatization
Private prison operator Wackenhut Corrections was sold after about threefold
share price appreciation. We elected, instead, to increase our investment in
Corrections Corporation of America (CCA), the largest private prison operator.
CCA earns significantly more per managed prison bed per day than Wackenhut. The
newly public CCA Prison REIT should help CCA accelerate its growth.
Retailers
Pet store operator Petco Animal Supplies was sold, although I just love the
stores, after regional competition with Petsmart accelerated and Petco
continued to issue shares at prices we felt were unjustified to pay for store
acquisitions. We about doubled our money in Petco.
When Heilig Meyers installed new marketing executives following two years of
faltering same store sales, credit losses stubbornly above our expectations and
retail sales stimulated only by zero down payments and low prices, we finally
gave up and sold our stock. Our investment in Heilig Meyers was not profitable.
Finance
We purchased Mercury Finance Company's shares from May 1996 through the end of
September 1996. When I visited the company in late September, my third visit
with its management since May, I decided I had misjudged the company's long
term prospects. The company's embryonic small loans business in Hispanic
communities was growing much less rapidly than I had anticipated, and, the
company's core used car loans business had become much more competitive. Loans
had become more expensive to purchase, and, it was explained to me, defaults to
other dealers were increasing significantly. This information only heightened
my concerns about Mercury. From October through early December we sold our
entire Mercury shareholdings. There were three brokerage firms recommending
purchase of Mercury's shares at the time and the company had announced a share
repurchase. We had a modest loss on this transaction, less than 10%, but it
clearly could have been a lot worse. Fraudulent accounting was disclosed by
Mercury in February 1997. Mercury's shares have since fallen about 90%.
- -------------------------------------------------------------------------------
OTHER DEVELOPMENTS
Nearly 700 shareholders attend Sixth Annual Baron Investment Conference, New
York City, October 24.
The First Annual Baron Investment Conference in 1992 had about 80 guests . . .
65 of whom were family and friends I had to nearly beg to attend. This year, a
week before the conference, we had already received more than 1100 requests to
<PAGE>
attend and were receiving 30 to 40 additional requests daily. We were then
unable to accept additional reservations. We also called back about 100
prospective shareholders and offered them Baron Funds' "party favor" t-shirts
and copies of my speech to forgo attendance.
Chief executives from five companies in which Baron Funds is a shareholder
spoke this year. They each described their businesses, prospects and strategies
and then answered questions from our shareholders. Chairman Adam Aaron
previewed Vail's new media campaign (we don't think you should wait to visit
Vail); President Doug Becker spoke for a half hour without notes and without
hesitation about Sylvan Learning's tutoring, testing, credentialing and
distance learning businesses; Chairman Jay Stein walked us through Stein Mart's
stores . . . using slides, of course; Chairman Mac Tichenor described
opportunities for Heftel Broadcasting's radio business that the rapidly
increasing U.S. Hispanic population presents; and Chairman Stewart Bainum, in
especially good humor, described Manor Care Health Services' significant
opportunity in assisted living unit development (if your parent or loved one
needs to live in one of these places, Manor Care's are the best!).
Following presentations by these executives, I spoke about our "kick the tires"
research, several of my more interesting travel and meetings experiences,
personal values and what we look for as we travel around the country visiting
companies and their executives. Our five senior analysts helped me answer
questions from our guests for the next forty-five minutes.
We believe our annual meetings help Baron Funds' shareholders better understand
the prospects for the businesses in which their savings are invested. We think
it is useful for our shareholders to each year have the opportunity to question
me . . . and our analysts . . . to be able to "kick the tires" of their
investments in Baron Funds.
Many of our guests traveled quite far to attend our conference. We are
appreciative of your interest and the time and effort you spent to be with us
that morning, whether you traveled a long distance or came from nearby. We gave
our guests "party-favor" Baron Funds-NYC 1997 t-shirts. Our t-shirts this year,
definitely our coolest yet, were designed by New York City pop artist Peter
Max. Shareholders who were unable to attend, but who would like a t-shirt,
should call us at 1-800-99-BARON. Of course, there will be no charge. Many of
our conference attendees asked afterwards if my formal remarks and slides could
be made available. We have made copies of my speech. Any shareholder who would
like a copy should call us. We'd be happy to furnish it.
Baron Funds continues to receive very favorable media coverage.
During the past few months, we have been mentioned in more articles than at any
time I can remember. Most coverage has been favorable. We believe press
interest is helpful and allows our shareholders to learn more about Baron
Funds, to assist them, as do, we hope, our shareholder letters, quarterly
conference calls with financial advisors and annual investment conferences,
"kick the tires" of their investments in Baron Funds.
8
<PAGE>
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B A R O N A S S E T F U N D
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Recent articles' coverage can be broadly classified into four topics: mutual
fund supermarkets; Baron Funds' investment process; the introduction of the new
Baron Small Cap Fund; and top performing mutual funds. Crain's New York; USA
Today; Smart Money; The New York Times; and Fund Marketing Alert all described
mutual fund "supermarkets" and the rapid growth of this distribution channel.
Baron Funds was featured prominently since it was frequently described as a
prime beneficiary of Schwab's OneSource and Fidelity's FundsNetwork. The long
term investment performances of Baron Asset Fund and Baron Growth & Income Fund
rank near the top of funds included in the supermarkets. Baron Asset Fund has
been included on Schwab's Select List of top performing funds virtually since
that list's inception.
Recent articles in Investors Business Daily and Forbes wrote about our
investment process, how we choose businesses in which to invest. Both described
our reliance upon long lived "mega-trends" and investment themes.
The introduction of Baron Small Cap Fund on September 30, 1997 received
amazingly broad coverage. The Street.com; Dow Jones Newswire; The Wall Street
Journal; Barron's; Money; Reuters; Sage.AOL; Fundsnet; Bloomberg News and Smart
Money Interactive all wrote about our new fund and its portfolio manager, Cliff
Greenberg.
Baron Asset Fund was ranked as a "top fund" in recent articles in Consumers
Digest; Funds Net Digest; Entrepeneur; Your Money; Fortune; Forbes; USA Today;
and, Money.
Finally, Smart Money Interactive on October 31, in an outlier article, wrote
about Baron Funds' annual investment conference in an article modestly titled,
"Mr. Popularity."
I'm usually critical of pictures of me included in articles because, I suppose,
they clearly show that I'm no longer 27 years old. But, this summer I finally
found a picture of me that I liked. Crain's New York caught me in a flattering
casual pose in a neat summer suit with a t-shirt. I thought I looked great,
sort of a cross between Don Johnson and Bruce Willis. "Ronnie, I just saw your
picture in Crain's," our good friend said as she called to compliment me. "You
looked so handsome. You looked just like Paul Simon," she gushed. Not exactly
what I expected to hear, of course.
Baron Funds performed well in 1997. Tax efficient due to low turnover. Our
taxable dividends to Baron Funds' shareholders will be either nominal or
non-existent.
<PAGE>
As a long term investor in businesses, not a short term trader of stocks, Baron
Funds has been tax efficient. For the fiscal year ended September 30, 1997,
Baron Asset Fund increased in value 33.8% per share. The Fund will not,
however, be required to distribute taxable dividends this year to its
shareholders. Baron Asset Fund had a net realized loss, for tax purposes, in
the year just ended that will be carried forward to fiscal 1998. About $26
million in capital gains will be sheltered from taxes next year by our loss
carryforward. Baron Asset Fund's most successful investments, those responsible
for its largest gains, have been held for several years, and taxable gains, to
date, have been avoided. For example, Baron Asset Fund has been a shareholder
in Robert Half since 1991, Charles Schwab since 1992, Manor Care since 1989,
Mirage Resorts since 1987 and DeVry since 1990. In the above mentioned
instances, our listed investments have appreci-ated several fold since their
initial purchases and continue to offer potential for significant additional
gain.
Thank you for investing in Baron Funds.
We recognize it cannot be an easy decision for most individuals and their
families when choosing mutual funds in which to invest. It must be especially
difficult when you must consider how to invest your hard earned savings to fund
your retirement, your children's education or a new home. We understand the
task must be even more daunting since there are now more mutual funds than
there are stocks. We hope our shareholder letters, interviews in the press and
annual investment conferences have made it easier for you to determine if Baron
Funds represents an appropriate investment for you and your family.
We want to thank you for choosing to join us as fellow shareholders in Baron
Funds. We will continue to work hard to justify your confidence.
Sincerely,
/s/ Ronald Baron
- --------------------
Ronald Baron
President
November 22, 1997
9
<PAGE>
BARON FUNDS LOGO
- ---------------------------------------------------
BARON GROWTH
2 & INCOME FUND
HIGHLIGHTS
- ---------------------------------------------------
PERFORMANCE ................................10
OTHER DEVELOPMENTS .........................11
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
<PAGE>
BARON GROWTH & INCOME FUND
ANNUAL REPORT o SEPTEMBER 30, 1997
Dear Baron Growth & Income
Fund Shareholder:
- --------------------------------------------------------------------------------
PERFORMANCE
Baron Growth & Income Fund was founded on January 3, 1995, a little less than
three years ago. Baron Growth & Income's performance, from its inception an
approximate gain of 155%, 40% per year, has exceeded our stated objectives.
Baron Growth & Income Fund invests in businesses which we expect to double
their intrinsic value, their income producing potential, every three to five
years. We expect our investments in these businesses, our Fund's part ownership
in these businesses, to offer our shareholders similar potential returns over
the long term. Of course, we cannot guarantee that we will be able to achieve
our goal.
The performance of Baron Growth & Income Fund during the past year was
inconsistent. The Fund gained 2.3% in value during the first six months, 34.0%
in the second six months. The Fund's performance was similar to that of the
small cap market indexes, both of which underperformed the S&P 500 in the first
half and outperformed in the second half. The businesses in which the Fund is a
shareholder, however, grew steadily and strongly throughout the entire period.
Strong capital appreciation was recorded this year throughout our investment
portfolio. Discount broker and mutual fund distributor Charles Schwab; hotel
franchisor Choice Hotels; Hispanic radio broadcaster Heftel; nursing home and
assisted living operator Manor Care; hotel REIT Starwood Lodging; provider of
highly specialized temporary professional workers Robert Half; contract
manufacturer Flextronics; and privatized prison manager Corrections Corporation
all contributed importantly to our performance. Our REIT investments once again
achieved what can only be considered spectacular success. This investment
segment of our portfolio produced 49.4% total return for the twelve months.
Over the long term, we continue to expect our REIT portfolio segment to yield
consistant annual total returns that are substantially lower than that realized
to date and that are not correlated to the overall stock market.
<TABLE>
<CAPTION>
--------------------------- ---------------------------- -----------------------------
PERFORMANCE YEAR PERFORMANCE FOR PERFORMANCE
TO DATE ONE YEAR SINCE INCEPTION
THROUGH SEPTEMBER 30, 1997 THROUGH SEPTEMBER 30, 1997 JANUARY 3, 1995 CUMULATIVE
THROUGH SEPTEMBER 30, 1997
<S> <C> <C> <C>
BARON ASSET FUND 30.7% 37.1% 155%
S&P 500* 29.6% 40.4% 119%
RUSSELL 2000* 26.6% 33.2% 89%
--------------------------- ---------------------------- -----------------------------
* THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P MEASURES THE PERFORMANCE OF THE STOCK MARKET IN GENERAL:
THE RUSSELL 2000 OF SMALL AND MID-SIZED COMPANIES.
</TABLE>
<PAGE>
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B A R O N G R O W T H & I N C O M E F U N D
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Unlike most growth and income funds, Baron Growth & Income Fund concentrates
its investments in fast growing, well managed, very profitable small and
mid-sized businesses. It also invests about 30-35% of its assets in income
producing securities, primarily real estate investment trusts and convertible
bonds issued by small cap businesses. Most growth and income funds concentrate
their investments, instead, in S&P 500 stocks, large, mature, slower growing,
economically sensitive companies with substantial dividends. Large mature
companies usually have less attractive opportunities to invest capital in their
businesses and choose, instead, to return capital to their shareholders as
dividends. We expect that Baron Growth & Income Fund's investments in smaller,
growth businesses managed by entrepeneurs will outperform, in the long term,
the slower growing, ponderous, less profitable larger cap businesses.
Baron Growth & Income Fund's long term performance ranks highly.
Baron Growth & Income Fund is ranked by Lipper Analytical as the number one
performing growth and income fund from its inception on January 3, 1995 through
September 30, 1997. Lipper includes 403 growth and income funds in its universe
against which Baron Growth & Income is measured. Baron Growth & Income is more
conservatively managed than most small cap funds. This can be readily seen
since nearly 30% of its assets are invested in income producing securities.
Nevertheless, Baron Growth & Income would be ranked among the top 1% of small
cap funds by Lipper Analytical were it considered by Lipper a small cap fund.
Morningstar classifies Baron Growth & Income as a small cap growth fund. That
firm eliminated its growth and income category last year. Morningstar does not
rank funds for performance that are less than three years old. Morningstar
comments in its November writeup about Baron Growth & Income that . . . "[the
Fund's] income holdings are meant to soften the Fund's volatility relative to
its sibling's [Baron Asset] . . . Its income producing stocks hardly make the
fund a pussycat, though. Most are REITs which have seen some big swings in
recent years . . . Still, Baron Asset's good risk scores suggest that this fund
should at least dish out less downside volatility than most of its small growth
peers. Yet it has been every bit the speed demon its sibling has been . . .
Indeed, this fund's performance so far has shined as brightly as its sibling's.
If it can deliver the same exemplary tax efficiency, it will be an outstanding
growth holding." Morningstar will rank Baron Growth & Income Fund with stars
during 1998.
<PAGE>
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OTHER DEVELOPMENTS
Sections of the preceding Baron Asset Fund annual report are relevant to your
investment in Baron Growth & Income Fund. Please see the discussions titled
"Investment Themes," "Portfolio Additions," "Portfolio Sales," and "Other
Developments" which are applicable to both mutual funds.
Baron Growth & Income Fund performed well in 1997. Tax efficient due to low
turnover. Dividend will be nominal. Baron Funds, it seems we never tire of
saying, is a long term investor in businesses, not a short term trader in
stocks. The benefits? Lower transaction costs, for one. Low realized gains and
a correspondingly low taxable dividend, for another . . . an important benefit
if you're a taxpaying shareholder. Although Baron Growth & Income achieved
strong 37.1% annual performance in the fiscal year ended September 30, we
estimate Baron Growth & Income Fund will distribute to its shareholders a
dividend of about $0.11 in December.
Thank you for investing in Baron Growth & Income Fund.
Thank you for joining us as fellow shareholders in Baron Growth & Income Fund.
We recognize it cannot be an easy choice for most individuals when deciding in
which mutual funds to invest your hard earned savings. This must be an
especially difficult decision when mutual funds are intended to secure your
retirement, your children's education or a new home. We understand the process
must be even more intimidating when it is recognized that there are now even
more mutual funds than there are stocks.
We hope that our quarterly reports, annual investment conferences and published
interviews have helped you determine if Baron Funds are an appropriate
investment for you and your family. We are appreciative of the confidence you
have displayed in us by joining us as fellow shareholders in Baron Growth &
Income Fund. We will continue to work hard to justify your confidence. Again,
thank you.
Sincerely,
/s/ Ronald Baron
- -------------------
Ronald Baron
President
November 22, 1997
11
<PAGE>
BARON FUNDS LOGO
- ---------------------------------------------------
| BARON SMALL
3 |
| CAP FUND
- ---------------------------------------------------
LETTER FROM RON BARON.......................12
INTERVIEW WITH
CLIFF GREENBERG AND
MORTY SCHAJA ...............................12
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
<PAGE>
BARON SMALL CAP FUND
SHAREHOLDER LETTER
Dear Baron Small Cap
Fund Shareholder:
- -------------------------------------------------------------------------------
WELCOME!
I am pleased to welcome you as fellow shareholders of our newest mutual fund,
Baron Small Cap Fund. Baron Small Cap Fund began operations on October 1, 1997.
The Fund was offered in a subscription period during the month of September
through Charles Schwab & Co. and Baron Capital, Inc., the Fund's distributor.
At November 21, 1997 approximately $268 million had been invested in the Fund.
I am delighted with the prospect of working on Baron Small Cap with my friend
Cliff Greenberg, who will serve as portfolio manager of the Fund. I have known
Cliff for fourteen years and am confident that our new Fund's shareholders will
come to appreciate Cliff's skills as an analyst and money manager . . . as I
have.
We believe that Baron Small Cap Fund, along with our two other small cap funds,
will more fully address the investment needs of our shareholders.
Thank you for the confidence you have shown in us by investing in Baron Small
Cap Fund. Cliff, Morty and I, as well as Baron Funds' other investment
professionals, will work hard to justify your confidence. Again, thanks.
Sincerely,
/s/ Ronald Baron
- ---------------------
Ronald Baron
President
November 22, 1997
<PAGE>
An interview with Cliff Greenberg, Portfolio Manager of Baron Small Cap Fund
and Morty Schaja, Chief Operating Officer of Baron Funds.
QUESTION: Will Baron Small Cap Fund be managed in a fashion similar to Baron
Asset Fund and Baron Growth & Income Fund?
MORTY: Yes. Baron Funds believes we can gain an investment advantage through
our independent and exhaustive research of companies. Baron Funds' investment
approach is based upon our belief that we can purchase great companies with
exciting growth prospects at attractive prices. We are long-term investors in
very profitable, fast growing businesses run by great management teams. Cliff
Greenberg will manage Baron Small Cap Fund utilizing our philosophy and
approach to investing.
Q: Why another small cap fund?
MORTY: Baron Small Cap Fund complements our two existing mutual funds. Baron
Asset Fund's objective is to seek capital appreciation through investments in
securities of small and medium-sized companies with undervalued assets or
favorable growth prospects. The vast majority of Baron Asset Fund's investments
continue to be small cap companies when we initially invest. Over time, many of
the businesses in which that Fund has invested have become very successful and
have grown significantly. As a result, although Baron Asset Fund continues to
make most of its new investments in smaller companies, about 20% of our
portfolio is now invested in businesses with market caps that exceed $2
billion. Baron Asset Fund remains a shareholder in these companies since they
continue to offer our shareholders an expected return of at least 50% over two
years.
<PAGE>
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B A R O N S M A L L C A P F U N D
- --------------------------------------------------------------------------------
Since Baron Small Cap Fund will invest nearly all its assets in businesses with
market caps below $1 billion, it will offer investors an investment fund that
will have a lower median market cap than Baron Asset Fund.
Baron Growth & Income Fund will continue to invest on average 30% - 35% of its
portfolio in income producing securities. This approach offers investors a more
conservative investment fund that utilizes our philosophy and approach to
investing within the small cap universe.
We're excited about the prospects for our two established funds, as well as for
the new Baron Small Cap Fund. Investing in smaller companies may entail more
risk. Please read the prospectus regarding special risks associated with
investing in smaller companies.
Q: Cliff, what is your background and experience in investing in small cap
companies?
CLIFF: I've worked as an analyst and portfolio manager for nearly fourteen
years. While attending Columbia University Law School, after I had received an
undergraduate degree from Cornell University, I studied investment analysis at
the business school.
Upon graduation from Columbia Law School, I chose not to practice law, and
instead joined a private investment partnership. That partnership was managed
by one of the three founding partners of one of the first, and most successful,
investment hedge funds started in the 1960s. I worked at this partnership for
the next thirteen years and became a general partner seven years ago. I
concentrated principally on small cap equities for our partnership. So, I have
managed money within the small cap universe since I graduated law school.
Q: What is your approach to investing?
CLIFF: My approach to investing is eclectic, but I try to invest in good
businesses that have exciting long term growth prospects, and are run by great
people. My goal is to find companies in which I can remain a shareholder for a
long time. I invest in growth companies, but don't like to pay high valuations.
I spend my time learning about the companies in which I'm investing by getting
to know the people who are running them, by spending time with their executives
and others in an industry, and by learning about their business' prospects. I
try to develop strong relationships with company managements so that we can
stay abreast of what's happening in their businesses, and make sure that the
companies are progressing as we had hoped. I look for companies where I believe
the prospects are very good and where, from a public equity standpoint, we can
make a lot of money by being shareholders. Of course, we may not achieve our
investment objectives. My investment style, like that of the other Baron Funds,
can be categorized as a value orientation toward growth.
<PAGE>
Q: How will Cliff fit into the overall structure at Baron Funds?
MORTY: Cliff has already proven to be a very valuable asset since he joined the
firm as a senior analyst in January.
Over the years Ron has known many people in the investment community. Cliff was
one of the few money managers who think and invest for the long-term as we do
at Baron Funds. We are excited to have him as part of our team. It is part of
my job at Baron Funds to create an environment in which Cliff will be able to
benefit from our firm's research capabilities, risk management tools and
trading desk operation.
Cliff joins Baron Funds with well-honed skills as a stock picker and money
manager. Ron will work closely with Cliff, providing guidance based on Ron's
extensive portfolio management experience. We also expect Cliff to continue to
provide research support to Ron.
Q: Where are there opportunities in today's market?
CLIFF: There are many fertile areas today. I believe there are always
businesses that have superior long-term prospects and are mispriced. This
allows investors to buy great businesses at attractive prices. Through our
research, we identify companies whose growth prospects have not yet been
appreciated by other investors and are selling at prices where we have the
potential to make at least a 50% return on our investment over two years.
Every day the marketplace creates new value opportunities or special
situations, based upon normal market mechanisms and corporate events. In the
current market environment, there are many such investment opportunities.
13
<PAGE>
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B A R O N F U N D S
- --------------------------------------------------------------------------------
Table I
- --------------------------------------------------------------------------------
Portfolio Market Capitalization
- --------------------------------------------------------------------------------
The Funds invest primarily in small and medium sized companies. Table I ranks
the Funds' investments by market capitalization and displays the percentage of
the Funds' portfolios invested in each market capitalization category. At times
the Funds will invest in companies with market capitalizations greater than
$2.0 billion. These larger cap companies have increased in value since the
Funds first invested in them and still offer attractive opportunities for
further appreciation.
Baron Asset Fund
- -----------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -----------------------------------------------------------------
('000s)
Large Capitalization
- -----------------------------------------------------------------
Charles Schwab Corp. ................. 9,494,700 5.8%
Mirage Resorts, Inc. ................. 5,386,681 1.6
Robert Half Intl., Inc. .............. 3,752,795 2.8
Starwood Lodging Trust .............. 3,632,864 0.8
TV Azteca ............................. 3,519,382 0.2
Corrections Corp. of America ........ 3,310,829 1.7
Public Storage, Inc. ................. 3,050,901 0.2
Circus Circus Enterprises, Inc. ....... 2,394,122 1.1
Promus Hotel Corp. .................... 2,276,654 0.6
Vornado Realty Trust ................. 2,255,685 0.2
Manor Care, Inc. .................... 2,218,108 5.9
Outdoor Systems, Inc. .............. 2,119,635 0.5
Stewart Enterprises, Inc. CL A ........ 2,050,738 1.9
-----
23.2%
Medium Capitalization
- -----------------------------------------------------------------
Quorum Health Group, Inc. ........... 1,814,949 1.4%
Proffitt's Inc. ....................... 1,790,594 0.3
Spieker Properties, Inc. .............. 1,765,807 0.7
Dollar Tree Stores, Inc. .............. 1,643,340 2.7
Nine West Group, Inc. ................. 1,408,488 0.3
Kimco Realty Corp. ................. 1,403,257 0.6
Genesis Health Ventures, Inc. ........ 1,365,616 1.3
Industrie Natuzzi SPA ................. 1,347,321 0.1
UlCl ................................ 1,301,886 0.2
Bristol Hotel Co. .................... 1,219,053 2.9
Sylvan Learning Systems, Inc. ........ 1,215,162 0.7
American Radio Systems Corp. ........ 1,152,287 2.4
Choice Hotels Intl. Inc. ........... 1,148,705 6.2
Heftel Broadcasting Corp. ........... 1,135,417 3.8
Culligan Water Tech., Inc. ........... 1,134,360 0.5
Sun Intl. Hotels, Ltd. .............. 1,128,392 2.0
Storage USA, Inc. .................... 1,110,281 0.2
Williams-Sonoma, Inc. ................. 1,102,651 0.3
DeVry, Inc. .......................... 1,030,897 1.1
The Registry, Inc. .................... 1,008,523 0.8
-----
28.2%
Small Capitalization
- -----------------------------------------------------------------
Universal Outdoor Hldgs, Inc. ........ 987,300 0.5%
Delta and Pine Land Co. .............. 906,690 0.9
Polo Ralph Lauren .................... 897,524 0.9
Vail Resorts, Inc. ................. 893,611 3.3
<PAGE>
- -----------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -----------------------------------------------------------------
('000s)
Small Capitalization (Continued)
- -----------------------------------------------------------------
OM Group, Inc. ...................... 882,100 1.4%
Seacor Smit, Inc. ................... 857,088 0.9
NTL, Inc. ............................ 846,743 2.2
CCA Prison Realty Trust ............. 814,494 2.9
Stein Mart, Inc. ...................... 759,211 0.9
Flextronics Intl. Ltd. ................ 747,332 2.0
Budget Group, Inc. ................... 742,533 0.7
Premier Parks, Inc. ................... 690,863 0.9
Univision Communications, Inc. ....... 651,543 0.3
Cross Timbers Oil Co. ................ 643,159 2.0
Learning Tree Intl., Inc. .......... 629,607 1.5
Libbey, Inc. ......................... 613,004 0.9
American Freightways Corp. .......... 597,854 0.1
Sun Communities, Inc. ................ 584,332 0.4
Vitalink Pharmacy Svcs., Inc. ....... 545,345 0.6
Choicepoint, Inc. ................... 540,779 0.3
Smart and Final, Inc. ................ 529,667 1.6
Metro Networks, Inc. ................ 498,569 1.2
Equity Corp. Intl. ................... 483,804 0.2
Redwood Trust, Inc. ................... 449,823 0.3
Central European Media ................ 447,581 0.2
Alexander's, Inc. ................... 411,332 0.5
Young Broadcasting, Inc. ............. 404,869 1.0
Education Management Corp. .......... 382,528 0.5
American HomePatient, Inc. .......... 341,366 0.2
Profit Recovery Group Intl. .......... 332,698 0.1
Marcus Corp. ......................... 327,540 0.4
Columbus Realty Trust ................ 324,354 0.2
Avatar Holdings, Inc. ................ 304,683 0.8
Shaw Group, Inc. ................... 273,254 0.3
American Mobile Satellite Corp. ....... 257,726 1.1
Cox Radio, Inc. ...................... 247,734 0.7
Telemundo Group, Inc. ................ 243,845 0.4
Chartwell Leisure, Inc. ............. 222,891 0.4
Saga Communications, Inc. ............. 216,965 1.7
CoreComm, Inc. ...................... 215,721 0.7
DVI, Inc. ............................ 176,646 0.8
Youth Services Intl., Inc. .......... 165,674 0.6
Pediatric Services of America, Inc..... 146,889 0.7
Kenneth Cole Productions, Inc. ....... 120,223 0.3
USA Truck, Inc. ...................... 112,308 0.2
Summit Care Corp. ................... 99,946 0.2
-----
38.9%
14
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Baron Growth & Income Fund
- -------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -----------------------------------------------------------------
('000s)
Large Capitalization
- -----------------------------------------------------------------
Franklin Resources, Inc. ............. 11,739,524 1.2%
Charles Schwab Corp. ................ 9,494,700 7.0
Mirage Resorts, Inc. ................ 5,386,681 1.2
Crescent Real Estate Equities, Co. .... 4,497,680 0.4
Robert Half Intl., Inc. ............. 3,752,795 2.8
Starwood Lodging Trust ................ 3,632,864 2.6
Corrections Corp. of America .......... 3,310,829 2.6
Public Storage, Inc. ................ 3,050,901 1.3
Circus Circus Enterprises, Inc. ....... 2,394,122 0.6
Vornado Realty Trust ................ 2,255,685 1.2
Manor Care, Inc. ................... 2,218,108 6.1
Stewart Enterprises, Inc. CL A ....... 2,050,738 1.3
-----
28.3%
Medium Capitalization
- -----------------------------------------------------------------
Quorum Health Group, Inc. ............. 1,814,949 1.2%
Spieker Properties, Inc. ............. 1,765,807 2.4
Dollar Tree Stores, Inc. ............. 1,643,340 2.3
Kimco Realty Corp. ................... 1,403,257 1.3
Boston Properties, Inc. ............. 1,269,647 1.0
Sylvan Learning Systems, Inc. ....... 1,215,162 0.4
American Radio Systems Corp. CL A .... 1,152,287 4.0
Choice Hotels Intl., Inc. ............. 1,148,705 11.5
Heftel Broadcasting Corp. .......... 1,135,417 3.9
Sun Intl. Hotels, Ltd. ............. 1,128,392 1.8
Storage USA, Inc. ................... 1,110,281 1.6
DeVry, Inc. ......................... 1,030,897 1.3
-----
32.6%
Small Capitalization
- -----------------------------------------------------------------
Reckson Associates Realty Corp. .... 918,083 0.7%
Delta and Pine Land Co. ............. 906,690 1.0
Vail Resorts, Inc. ................... 893,611 1.2
OM Group, Inc. ...................... 882,100 1.4
Seacor Smit, Inc. ................... 857,088 0.5
NTL, Inc. ............................ 846,743 2.2
CCA Prison Realty Trust ............. 814,494 2.5
Stein Mart, Inc. ...................... 759,211 1.0
Flextronics Intl. Ltd. ................ 747,332 1.9
Cross Timbers Oil Co. ................ 643,159 1.7
Learning Tree Intl., Inc. ............. 629,607 1.2
CBL & Associates, Inc. ................ 623,174 0.6
Sun Communities, Inc. ................ 584,332 1.7
Healthcare Realty Trust, Inc. ....... 547,536 0.8
Smart and Final, Inc. ................ 529,667 2.3
Metro Networks, Inc. ................ 498,569 0.9
Redwood Trust, Inc. ................... 449,823 1.0
<PAGE>
- -----------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- -----------------------------------------------------------------
('000s)
Small Capitalization (Continued)
- -----------------------------------------------------------------
Pierce Leahy Corp. ................... 438,042 1.4%
Southern Union Co. ................... 417,373 1.7
Alexander's, Inc. ................... 411,332 0.4
Counsel Corp. ......................... 390,334 1.5
Education Management Corp. .......... 382,528 0.4
Marcus Corp. ......................... 327,540 0.6
Columbus Realty Trust ................ 324,354 1.5
Avatar Holdings, Inc. ................ 304,683 0.3
Medallion Financial Corp. ............. 279,488 1.0
SL Green Realty Corp. ................ 278,855 0.3
American Mobile Satellite Corp. .... 257,726 1.7
Saga Communications, Inc. ............. 216,965 1.7
DVI, Inc. ............................ 176,646 0.9
Children's Comprehensive
Services, Inc. ................... 168,023 0.8
Pediatric Services of America, Inc..... 146,889 1.0
-----
37.7%
Table II
- -------------------------------------------------------------------------------
Portfolio Risk Characteristics
- -------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external factors
that might impact the companies in which the Funds invest. Table II displays
some of the risk factors that are currently monitored and the percentage of
each portfolio considered exposed to these factors. The Funds use this tool to
avoid concentration of risk within the portfolios.
Baron Asset Baron Growth
Fund & Income Fund
------------- --------------
% of % of
Portfolio Portfolio
------------- --------------
Oil Price Sensitivity ......... 24.1% 23.4%
Leverage (Debt greater than 40% of
Market Cap) .................. 22.3 21.9
Foreign Sales Dependent
(Sales greater than 10%) .... 10.1 9.9
Volatility (Beta greater than
1.2) .......................... 14.1 17.3
Over-the-Counter Securities ... 28.0 23.8
Unseasoned Securities
(Publicly owned for less than
3 years) ...................... 32.8 30.7
(Publicly owned for less than
1 year) ....................... 15.4 19.2
Turnarounds ..................... 0.3 0.0
Development Companies ......... 4.2 4.3
15
<PAGE>
- -------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Table III
- --------------------------------------------------------------------------------
Historical Information
- --------------------------------------------------------------------------------
Table III displays on a quarterly basis the Funds' closing net assets and net
asset value per share, dividend distributions and the value of $10,000 invested
in a Fund at the time of its inception.
- -------------------------------------------------------------------------------
Baron Asset Fund
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
06/12/87 $ 108,728 $ 10.00 $10,000
- -------------------------------------------------------------------------------------
06/30/87 1,437,521 10.71 10,710
- -------------------------------------------------------------------------------------
09/30/87 3,905,221 11.95 11,950
- -------------------------------------------------------------------------------------
12/31/87 4,406,972 10.10 $ 0.197 10,298
- -------------------------------------------------------------------------------------
03/31/88 6,939,435 11.56 11,786
- -------------------------------------------------------------------------------------
06/30/88 9,801,677 12.68 12,928
- -------------------------------------------------------------------------------------
09/30/88 11,734,509 12.98 13,234
- -------------------------------------------------------------------------------------
12/31/88 15,112,031 12.87 0.701 13,843
- -------------------------------------------------------------------------------------
03/31/89 22,269,578 14.75 15,864
- -------------------------------------------------------------------------------------
06/30/89 31,397,929 16.06 17,273
- -------------------------------------------------------------------------------------
09/30/89 47,658,616 17.22 18,521
- -------------------------------------------------------------------------------------
12/31/89 49,007,084 14.66 1.409 17,299
- -------------------------------------------------------------------------------------
03/31/90 50,837,946 13.87 16,367
- -------------------------------------------------------------------------------------
06/30/90 54,413,786 14.32 16,898
- -------------------------------------------------------------------------------------
09/30/90 40,002,612 10.88 12,838
- -------------------------------------------------------------------------------------
12/31/90 42,376,625 11.75 0.198 14,100
- -------------------------------------------------------------------------------------
03/31/91 47,104,889 13.88 16,656
- -------------------------------------------------------------------------------------
06/30/91 45,600,730 13.81 16,572
- -------------------------------------------------------------------------------------
09/30/91 47,409,180 14.80 17,760
- -------------------------------------------------------------------------------------
12/31/91 46,305,042 15.71 0.035 18,895
- -------------------------------------------------------------------------------------
03/31/92 48,011,634 16.72 20,109
- -------------------------------------------------------------------------------------
06/30/92 42,289,409 15.28 18,377
- -------------------------------------------------------------------------------------
09/30/92 43,816,305 16.20 19,484
- -------------------------------------------------------------------------------------
12/31/92 47,955,530 17.73 0.162 21,522
- -------------------------------------------------------------------------------------
03/31/93 50,015,244 18.82 22,845
- -------------------------------------------------------------------------------------
06/30/93 52,432,090 19.70 23,912
- -------------------------------------------------------------------------------------
09/30/93 59,916,570 21.91 26,595
- -------------------------------------------------------------------------------------
12/31/93 64,069,114 21.11 0.774 26,576
- -------------------------------------------------------------------------------------
03/31/94 63,099,109 20.69 26,047
- -------------------------------------------------------------------------------------
06/30/94 68,880,300 20.40 25,682
- -------------------------------------------------------------------------------------
09/30/94 80,258,542 22.82 28,728
- -------------------------------------------------------------------------------------
12/31/94 87,058,228 22.01 0.656 28,547
- -------------------------------------------------------------------------------------
03/31/95 160,603,528 24.29 31,505
- -------------------------------------------------------------------------------------
06/30/95 202,259,502 25.79 33,450
- -------------------------------------------------------------------------------------
09/30/95 289,973,331 29.30 38,003
- -------------------------------------------------------------------------------------
12/31/95 353,095,409 29.74 0.034 38,618
- -------------------------------------------------------------------------------------
03/31/96 638,297,904 34.14 44,332
- -------------------------------------------------------------------------------------
06/30/96 1,124,647,802 36.65 47,591
- -------------------------------------------------------------------------------------
09/30/96 1,166,057,654 35.50 46,098
- -------------------------------------------------------------------------------------
12/31/96 1,326,321,785 36.23 0.039 47,097
- -------------------------------------------------------------------------------------
03/31/97 1,663,347,667 34.98 45,472
- -------------------------------------------------------------------------------------
06/30/97 2,306,228,855 41.74 54,260
- -------------------------------------------------------------------------------------
09/30/97 3,224,498,394 47.43 61,656
- -------------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
<PAGE>
- -------------------------------------------------------------------------------
Baron Growth & Income Fund
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- ------------- ----------------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C>
01/03/95 $ 741,000 $ 10.00 $10,000
- ------------------------------------------------------------------------------------
03/31/95 3,425,507 11.78 11,780
- ------------------------------------------------------------------------------------
06/30/95 7,231,619 13.18 13,180
- ------------------------------------------------------------------------------------
09/30/95 28,632,467 14.77 14,770
- ------------------------------------------------------------------------------------
12/31/95 41,043,705 15.11 0.142 15,254
- ------------------------------------------------------------------------------------
03/31/96 77,337,831 16.90 17,061
- ------------------------------------------------------------------------------------
06/30/96 172,070,435 18.20 18,373
- ------------------------------------------------------------------------------------
09/30/96 207,234,494 18.40 18,575
- ------------------------------------------------------------------------------------
12/31/96 243,983,507 19.04 0.255 19,483
- ------------------------------------------------------------------------------------
03/31/97 273,907,177 18.57 19,002
- ------------------------------------------------------------------------------------
06/30/97 316,981,759 21.82 22,328
- ------------------------------------------------------------------------------------
09/30/97 390,831,861 24.89 25,469
- ------------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
- -------------------------------------------------------------------------------
Performance Information
- -------------------------------------------------------------------------------
BARON ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended September 30, 1997
One year 33.8%
- -------------------------------------------------------------------------
Two years 27.4%
- -------------------------------------------------------------------------
Three years 29.0%
- -------------------------------------------------------------------------
Four years 23.4%
- -------------------------------------------------------------------------
Five years 25.9%
- -------------------------------------------------------------------------
Ten years 17.8%
- -------------------------------------------------------------------------
Since inception June 12, 1987 19.3%
- -------------------------------------------------------------------------
BARON GROWTH & INCOME FUND'S
AVERAGE ANNUAL RETURN
Period ended September 30, 1997
One year 37.1%
- -------------------------------------------------------------------------
Two years 31.3%
- -------------------------------------------------------------------------
Since inception January 3, 1995 40.5%
- -------------------------------------------------------------------------
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 Funds including charges and expenses, call or write for a prospectus.
Read it carefully before you invest or send money. This report is not
authorized for use as an offer of sale or a solicitation of an offer to buy
shares of Baron Funds unless accompanied or preceded by the Funds' current
prospectus.
16
<PAGE>
- --------------------------------------------------------------------------------
B A R O N A S S E T F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- -------------------------------------------------------------------------
September 30, 1997
Market
Shares Value
- -------------------------------------------------------------------------
Common Stocks (92.76%)
- -------------------------------------------------------------------------
Amusement and Recreation Services (9.24%)
1,400,000 Circus Circus Enterprises, Inc.* $ 35,262,500
445,000 Marcus Corp. 12,960,625
1,655,000 Mirage Resorts, Inc.* 49,856,875
767,200 Premier Parks, Inc.* 28,961,800
1,890,000 Sun Intl. Hotels, Ltd*# 65,205,000
3,950,000 Vail Resorts, Inc.*# 105,662,500
-------------
297,909,300
Business Services (7.04%)
645,000 Budget Group, Inc.* 21,285,000
215,000 Choicepoint, Inc. 8,035,625
320,000 Culligan Water Tech., Inc.* 14,720,000
252,000 Equity Corp. Intl.* 5,874,750
125,000 Profit Recovery Group Intl. * 2,281,250
525,000 The Registry, Inc.* 24,215,625
2,197,500 Robert Half Intl., Inc.* 90,921,562
1,361,000 Stewart Enterprises, Inc. CL A 59,543,750
-------------
226,877,562
Chemical (1.36%)
1,100,000 OM Group, Inc. 43,931,250
Communications (2.86%)
3,500,000 American Mobile Satellite Corp.*# 35,875,000
1,275,000 CoreComm, Inc.*# 21,037,500
1,338,500 NTL, Inc.* 35,302,938
-------------
92,215,438
Education (3.82%)
1,230,000 DeVry, Inc.* 36,746,250
637,500 Education Management Corp.* 16,893,750
1,641,700 Learning Tree Intl., Inc.*# 46,993,662
516,000 Sylvan Learning Systems, Inc.* 22,639,500
-------------
123,273,162
Energy (2.93%)
2,630,000 Cross Timbers Oil Co.# 64,106,250
490,000 Seacor Smit, Inc.* 30,380,000
-------------
94,486,250
Financial (6.67%)
5,182,500 Charles Schwab Corp. 185,274,375
1,458,200 DVI, Inc.*# 24,424,850
182,000 UICI* 5,232,500
-------------
214,931,725
Food and Agriculture (0.90%)
900,000 Delta and Pine Land Co. 28,968,782
Government Services (2.03%)
1,252,500 Corrections Corp. of America* 54,483,750
675,000 Youth Services Intl., Inc.*# 11,095,313
-------------
65,579,063
Health Services (10.27%)
297,000 American HomePatient, Inc.* 6,831,000
1,036,000 Genesis Health Ventures, Inc.* 40,339,250
5,735,000 Manor Care, Inc.# 190,688,750
942,500 Pediatric Services of America, Inc.*# 22,030,938
1,860,000 Quorum Health Group, Inc.* 45,453,750
350,600 Summit Care Corp.*# 5,171,350
974,300 Vitalink Pharmacy Svcs., Inc.* 20,642,981
-------------
331,158,019
<PAGE>
- -------------------------------------------------------------------------
September 30, 1997
Market
Shares Value
- --------------------------------------------------------- -------------
Hotels and Lodging (10.14%)
3,395,000 Bristol Hotel Co.*# $ 94,847,812
783,000 Chartwell Leisure, Inc.*# 13,017,375
10,421,400 Choice Hotels Intl. Inc.*# 200,611,950
415,000 Promus Hotel Corp.* 18,597,188
-------------
327,074,325
Manufacturing (2.31%)
1,370,000 Flextronics Intl. Ltd.*# 65,246,250
424,000 Shaw Group, Inc.* 9,301,500
-------------
74,547,750
1,355,000 American Radio Systems Corp. CL A*# 64,531,875
177,000 Central European Media* 4,734,750
835,000 Cox Radio, Inc.*# 23,640,938
1,635,000 Heftel Broadcasting Corp.*# 123,851,250
1,230,000 Metro Networks, Inc.*# 37,053,750
634,000 Outdoor Systems, Inc.* 16,642,500
2,318,650 Saga Communications, Inc.*# 56,227,262
335,000 Telemundo Group, Inc.* 11,725,000
300,000 TV Azteca* 6,750,000
392,300 Universal Outdoor Hldgs, Inc.* 14,711,250
182,200 Univision Communications, Inc.* 9,884,350
937,500 Young Broadcasting, Inc.*# 32,109,375
-------------
401,862,300
Real Estate and REITs (7.64%)
200,000 Alexander's, Inc.* 16,450,000
732,800 Avatar Holdings, Inc.*# 24,548,800
2,455,000 CCA Prison Realty Trust # 92,676,250
284,703 Columbus Realty Trust 6,886,254
520,000 Kimco Realty Corp. 18,102,500
212,000 Public Storage, Inc. 6,280,500
310,000 Redwood Trust, Inc. 9,416,250
539,000 Spieker Properties, Inc. 21,863,188
460,000 Starwood Lodging Trust 26,421,250
140,000 Storage USA, Inc. 5,687,500
315,000 Sun Communities, Inc. 11,300,625
80,000 Vornado Realty Trust 6,795,000
-------------
246,428,117
2,060,000 Dollar Tree Stores, Inc.*# 86,648,750
524,500 Kenneth Cole Productions, Inc. *# 8,555,906
230,000 Nine West Group, Inc.* 9,041,875
1,095,000 Polo Ralph Lauren* 28,675,313
140,000 Proffitt's Inc.* 8,295,000
2,185,000 Smart and Final, Inc.# 52,166,875
875,000 Stein Mart, Inc.* 28,656,250
200,000 Williams-Sonoma, Inc.* 8,550,000
-------------
230,589,969
Transportation (0.28%)
200,000 American Freightways Corp.* 3,800,000
430,000 USA Truck, Inc.* 5,160,000
-------------
8,960,000
Wholesale Trade (0.94%)
100,000 Industrie Natuzzi SPA 2,368,750
780,000 Libbey, Inc.# 27,836,250
-------------
30,205,000
17
<PAGE>
- --------------------------------------------------------------------------------
B A R O N A S S E T F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1997
Shares or Market
Principal Amount Value
- ------------------------------------------------- ---------------
Miscellaneous (4.72%) $ 152,193,602
---------------
Total Common Stocks
(Cost $2,124,396,697) 2,991,191,614
---------------
- -------------------------------------------------------------------------------
Convertible Preferred (0.36%)
- -------------------------------------------------------------------------------
Media and Entertainment (0.36%)
200,000 American Radio Systems
Corp. 7% Conv. + 11,500,000
---------------
Total Convertible Preferred
(Cost $10,000,000) 11,500,000
---------------
- -------------------------------------------------------------------------------
Corporate Bonds (1.37%)
- -------------------------------------------------------------------------------
Communications (1.13%)
$20,500,000 Intl. CableTel, Inc. 7.25%
Conv. Sub. Notes 04/15/2005+ 22,857,500
14,000,000 Intl. CableTel, Inc. 7%
Conv. Sub. Notes 06/15/2008 13,580,000
---------------
36,437,500
Government Services (0.24%)
5,450,000 Youth Services Intl. Inc. 7.00%
Conv. Sub. Deb. 02/01/2006 7,677,687
---------------
Total Corporate Bonds
(Cost $41,352,215) 44,115,187
---------------
See Notes to Financial Statements.
<PAGE>
- -------------------------------------------------------------------------------
September 30, 1997
Market
Principal Amount Value
- -------------------------------------------------------------------------
Short Term Money Market Instruments (6.32%)
- -------------------------------------------------------------------------
$103,785,000 Associates Corp. of North America 6.2%
10/01/97 $ 103,785,000
100,000,000 American Express Credit Corp. 5.6%
10/01/97 100,000,000
---------------
Total Short Term Money Market
Instruments (Cost $203,785,000) 203,785,000
---------------
Total Investments
(Cost $2,379,533,912) 3,250,591,801
---------------
Liabilities Less
Cash and Other Assets (26,093,407)
---------------
Net Assets (Equivalent to $47.43 per
share based on 67,990,946 shares of
beneficial interest outstanding) $3,224,498,394
===============
% Represents percentage of net assets
+ Restricted securities
# Affiliated issuers
* Non-income producing securities
** For Federal income tax purposes the cost basis is $2,380,754,202. Aggregate
unrealized appreciation and depreciation of investments are $905,893,430
and $36,055,831, respectively.
18
<PAGE>
- --------------------------------------------------------------------------------
B A R O N G R O W T H & I N C O M E F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1997
Market
Shares Value
- -------------------------------------------------------------------------
Common Stocks (95.87%)
- -------------------------------------------------------------------------
Amusement and Recreation Services (5.52%)
100,000 Circus Circus Enterprises, Inc.* $ 2,518,750
80,000 Marcus Corp. 2,330,000
160,000 Mirage Resorts, Inc.* 4,820,000
205,000 Sun Intl. Hotels, Ltd.* 7,072,500
180,000 Vail Resorts, Inc.* 4,815,000
-------------
21,556,250
Business Services (4.07%)
262,500 Robert Half Intl., Inc.* 10,860,938
115,000 Stewart Enterprises, Inc. CL A 5,031,250
-------------
15,892,188
Chemical (1.43%)
140,000 OM Group, Inc. 5,591,250
Communications (2.83%)
640,000 American Mobile Satellite Corp.* 6,560,000
170,000 NTL, Inc.* 4,483,750
-------------
11,043,750
Education (4.12%)
150,000 Children's Comprehensive Services,
Inc.* 3,225,000
175,000 DeVry, Inc.* 5,228,125
58,000 Education Management Corp.* 1,537,000
160,000 Learning Tree Intl., Inc.* 4,580,000
35,000 Sylvan Learning Systems, Inc.* 1,535,625
-------------
16,105,750
Energy (1.68%)
270,000 Cross Timbers Oil Co. 6,581,250
Financial (10.18%)
769,500 Charles Schwab Corp. 27,509,625
220,000 DVI, Inc.* 3,685,000
50,000 Franklin Resources, Inc. 4,656,250
180,000 Medallion Financial Corp. 3,915,000
-------------
39,765,875
Food and Agriculture (1.03%)
125,000 Delta and Pine Land Co. 4,023,438
Government Services (2.56%)
230,000 Corrections Corp. of America* 10,005,000
Health Services (9.82%)
425,000 Counsel Corp.* 5,950,000
720,000 Manor Care, Inc. 23,940,000
167,500 Pediatric Services of America, Inc.* 3,915,312
187,500 Quorum Health Group, Inc.* 4,582,031
-------------
38,387,343
Hotels and Lodging (11.52%)
2,340,000 Choice Hotels Intl., Inc.* 45,045,000
Manufacturing (1.89%)
155,000 Flextronics Intl. Ltd.* 7,381,875
<PAGE>
- -------------------------------------------------------------------------------
September 30, 1997
Market
Shares Value
- -------------------------------------------------------------------------------
Media and Entertainment (9.23%)
230,000 American Radio Systems Corp. CL A * $ 10,953,750
200,000 Heftel Broadcasting Corp.* 15,150,000
110,000 Metro Networks, Inc.* 3,313,750
275,000 Saga Communications, Inc.* 6,668,750
-------------
36,086,250
Real Estate and REITs (22.75%)
20,000 Alexander's, Inc.* 1,645,000
35,000 Avatar Holdings, Inc.* 1,172,500
120,000 Boston Properties, Inc.* 3,937,500
90,000 CBL & Associates, Inc. 2,334,375
259,000 CCA Prison Realty Trust 9,777,250
234,415 Columbus Realty Trust 5,669,913
35,000 Crescent Real Estate Equities, Co. 1,400,000
110,000 Healthcare Realty Trust, Inc. 3,128,125
146,000 Kimco Realty Corp. 5,082,625
200,000 Pierce Leahy Corp.* 5,425,000
170,000 Public Storage, Inc. 5,036,250
95,000 Reckson Associates Realty Corp. 2,529,375
125,000 Redwood Trust, Inc. 3,796,875
40,000 SL Green Realty Corp.* 1,035,000
230,000 Spieker Properties, Inc. 9,329,375
175,000 Starwood Lodging Trust 10,051,562
150,000 Storage USA, Inc. 6,093,750
190,000 Sun Communities, Inc. 6,816,250
55,000 Vornado Realty Trust 4,671,563
-------------
88,932,288
Retail Trade and Restaurants (5.59%)
210,000 Dollar Tree Stores, Inc.* 8,833,125
380,000 Smart and Final, Inc. 9,072,500
120,000 Stein Mart, Inc.* 3,930,000
-------------
21,835,625
Utility Services (1.65%)
265,000 Southern Union Co.* 6,459,375
-------------
Total Common Stocks
(Cost $263,320,900) 374,692,507
-------------
- -------------------------------------------------------------------------------
Convertible Preferred (1.18%)
- -------------------------------------------------------------------------------
Media and Entertainment (1.18%
80,000 American Radio Systems 7% Conv.
Corp.+ 4,600,000
-------------
Total Convertible Preferred
(Cost $3,890,000) 4,600,000
-------------
19
<PAGE>
- --------------------------------------------------------------------------------
B A R O N G R O W T H & I N C O M E F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1997
Market
Principal Amount Value
- ------------------------------------------------------------- -----------
Corporate Bonds (1.58%)
- -------------------------------------------------------------------------
Communications (1.07%)
$2,000,000 Intl. CableTel, Inc. 7.25% Conv. Sub.
Notes 4/15/2005+ $2,230,000
2,000,000 Intl. CableTel, Inc. 7.20% Conv. Sub.
Notes 6/15/2008 1,940,000
-----------
4,170,000
Energy (0.50%)
1,700,000 Seacor Holdings 5.375% Conv.
11/15/2006+ 1,946,500
Real Estate and REITs (0.01%)
36,800 Avatar Holdings, Inc. 8.0% Sr. Deb.
10/01/2000 33,212
-----------
Total Corporate Bonds
(Cost $5,829,937) $6,149,712
-----------
- ----------------------------------------------------------------------------
September 30, 1997
Market
Principal Amount Value
- ----------------------------------------------------------------------------
Short Term Money Market Instruments (1.76%)
- ----------------------------------------------------------------------------
6,886,000 Associates Corp. 6.2% 10/01/9 $ 6,886,000
-------------
Total Short Term Money Market
Instrument (Cost $6,886,000) 6,886,000
-------------
Total Investments
(Cost $279,926,837 392,328,219
-------------
Liabilities Less
Cash and Other Assets (1,496,35
-------------
Net Assets (Equivalent to $24.89 per
share based on 15,702,090 shares of
beneficial interest outstanding) $390,831,861
==============
% Represents percentage of net assets
+ Restricted securities
* Non-income producing securities
** For Federal income tax purposes the cost basis is $279,289,051. Aggregate
unrealized appreciation and depreciation of investments are $118,570,398
and $5,531,230, respectively.
See Notes to Financial Statements.
20
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
September 30, 1997
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH
FUND & INCOME FUND
----------------- --------------
<S> <C> <C>
Assets:
Investments in securities, at value
Unaffiliated issuers
(Cost $1,185,481,712 and $279,926,837, respectively) ...... $1,654,730,020 $392,328,219
Affiliated issuers (Cost $1,194,052,200) ..................... 1,595,861,781 0
Cash ......................................................... 211,114 958
Dividends and interest receivable ........................... 3,099,870 896,445
Receivable for securities sold .............................. 1,802,383 0
Receivable for shares sold ................................. 3,428,820 724,591
Unamortized organization costs (Note 1) ..................... 0 14,793
Prepaid expenses ............................................. 29,504 0
-------------- -------------
3,259,163,492 393,965,006
-------------- -------------
Liabilities:
Payable for securities purchased ........................... 34,024,476 3,013,572
Accrued organization costs (Note 1) ........................ 0 14,793
Accrued expenses and other payables (Note 3) ............... 640,622 104,780
-------------- -------------
34,665,098 3,133,145
-------------- -------------
Net Assets ................................................... $3,224,498,394 $390,831,861
============== =============
Net Assets consist of:
Par value ................................................... $ 679,909 $ 157,021
Paid-in capital in excess of par value ..................... 2,377,658,922 276,427,023
Undistributed net investment income ........................... 0 285,821
Accumulated net gain (loss) ................................. (24,898,326) 1,560,614
Net unrealized appreciation on investments .................. 871,057,889 112,401,382
-------------- -------------
Net Assets ................................................... $3,224,498,394 $390,831,861
============== =============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) ............... 67,990,946 15,702,090
============== =============
Net Asset Value Per Share .................................... $ 47.43 $ 24.89
============== =============
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
For the Year Ended September 30, 1997
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH
FUND & INCOME FUND
---------------- --------------
<S> <C> <C>
Investment income:
Income:
Interest ............................................................ $ 7,294,972 $ 671,458
Dividends -- unaffiliated issuers ................................. 5,844,118 4,334,443
Dividends -- affiliated issuers .................................... 2,256,760 0
Miscellaneous ...................................................... 50 325
------------- ------------
Total income ...................................................... 15,395,900 5,006,226
------------- ------------
Expenses:
Investment advisory fees (Note 3) ................................. 18,573,064 2,828,391
Distribution fees (Note 3) .......................................... 4,643,269 707,098
Shareholder servicing agent fees .................................... 599,500 167,980
Custodian fees ...................................................... 158,875 74,750
Amortization of organization costs (Note 1) ........................ 0 6,590
Registration and filing fees ....................................... 475,848 51,291
Trustee fees ...................................................... 50,570 7,922
Professional fees ................................................... 54,795 29,580
Reports to shareholders ............................................. 542,000 78,705
Insurance ......................................................... 14,680 2,225
Miscellaneous ...................................................... 23,590 5,169
------------- ------------
Total expenses ...................................................... 25,136,191 3,959,701
------------- ------------
Net investment income (loss) ....................................... (9,740,291) 1,046,525
------------- ------------
Realized and unrealized gain(loss) on investments:
Net realized gain (loss) on investments sold in unaffiliated issuers (12,421,059) 790,402
Net realized (loss) on investments sold in affiliated issuers ...... (13,115,944) 0
Change in net unrealized appreciation of investments ............... 699,696,611 93,851,250
------------- ------------
Net gain on investments ............................................. 674,159,608 94,641,652
------------- ------------
Net increase in net assets resulting from operations ............... $ 664,419,317 $95,688,177
============= ============
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BARON ASSET FUND
--------------------------------------
For the For the
Year Ended Year Ended
September 30, September 30,
1997 1996
------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) ..................... ($ 9,740,291) ($ 2,017,953)
Net realized gain(loss) on investments sold ...... (25,537,003) 3,537,309
Net change in unrealized appreciation on
investments .................................... 699,696,611 95,636,324
-------------- --------------
Increase in net assets resulting from operations 664,419,317 97,155,680
-------------- --------------
Dividends to shareholders from:
Net investment income ........................... 0 0
Net realized gain on investments .................. (1,419,734) (399,312)
-------------- --------------
(1,419,734) (399,312)
-------------- --------------
Capital share transactions:
Proceeds from the sale of shares .................. 1,901,291,106 1,084,282,947
Net asset value of shares issued in reinvestment
of dividends .................................... 1,352,665 386,670
Cost of shares redeemed ........................... (507,202,614) (305,341,662)
-------------- --------------
Increase in net assets derived from capital
share transactions ........................... 1,395,441,157 779,327,955
-------------- --------------
Net increase in net assets ........................ 2,058,440,740 876,084,323
Net assets:
Beginning of year ................................. 1,166,057,654 289,973,331
-------------- --------------
End of year ....................................... $3,224,498,394 $1,166,057,654
============== ==============
Undistributed net investment income at end of year . $ 0 $ 0
============== ==============
Shares of Beneficial Interest:
Shares sold ....................................... 48,411,239 32,101,812
Shares issued in reinvestment dividends ......... 37,932 13,224
Shares redeemed ................................. (13,300,780) (9,168,078)
-------------- --------------
Net increase .................................... 35,148,391 22,946,958
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BARON GROWTH & INCOME FUND
-----------------------------------
For the For the
Year Ended Year Ended
September 30, September 30,
1997 1996
----------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) ..................... $ 1,046,525 $ 1,198,083
Net realized gain(loss) on investments sold ...... 790,402 2,050,709
Net change in unrealized appreciation on
investments .................................... 93,851,250 16,132,008
--------------- --------------
Increase in net assets resulting from operations 95,688,177 19,380,800
--------------- --------------
Dividends to shareholders from:
Net investment income ........................... (1,142,621) (98,552)
Net realized gain on investments .................. (2,059,229) (279,674)
--------------- --------------
(3,201,850) (378,226)
--------------- --------------
Capital share transactions:
Proceeds from the sale of shares .................. 200,457,503 203,114,578
Net asset value of shares issued in reinvestment
of dividends .................................... 3,077,823 368,158
Cost of shares redeemed ........................... (112,424,286) (43,883,283)
--------------- --------------
Increase in net assets derived from capital
share transactions ........................... 91,111,040 159,599,453
--------------- --------------
Net increase in net assets ........................ 183,597,367 178,602,027
Net assets:
Beginning of year ................................. 207,234,494 28,632,467
--------------- --------------
End of year ....................................... $ 390,831,861 $ 207,234,494
=============== ==============
Undistributed net investment income at end of year . $ 285,821 $ 1,147,402
=============== ==============
Shares of Beneficial Interest:
Shares sold ....................................... 9,989,857 11,899,055
Shares issued in reinvestment dividends ......... 164,326 24,692
Shares redeemed ................................. (5,713,945) (2,600,496)
--------------- --------------
Net increase .................................... 4,440,238 9,323,251
=============== ==============
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
Baron Asset Fund (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as a diversified, open-end management
investment company established as a Massachusetts business trust on February
19, 1987. The Trust currently offers two series (individually a "Fund" and
collectively the "Funds"): Baron Asset Fund, started in June of 1987, and Baron
Growth & Income Fund, started in January of 1995. The following is a summary of
significant accounting policies followed by the Funds. The policies are in
conformity with generally accepted accounting principles.
(a) Security Valuation. Portfolio securities traded on any national stock
exchange or quoted on the NASDAQ National Market System are valued on the basis
of the last sale price on the date of valuation or, in the absence of any sale
on that date, the last sale price on the date the security last traded. Other
securities are valued at the mean of the most recent bid and asked prices if
market quotations are readily available. Where market quotations are not
readily available the securities are valued at their fair value as determined
in good faith by the Board of Trustees, although the actual calculations may be
done by others. Money market instruments held by the Funds with a remaining
maturity of sixty days or less are valued at amortized cost, which approximates
value.
(b) Restricted Securities. The Funds invest in securities which are restricted
as to public sale in accordance with the Securities Act of 1933. Such assets
are valued at fair value as determined in good faith by the Board of Trustees.
(c) Securities Transactions and Investment Income. Securities transactions are
recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on an identified cost basis for financial reporting
and Federal income tax purposes. Dividend income is recognized on the
ex-dividend date and interest income is recognized on an accrual basis.
(d) Federal Income Taxes. Each Fund of the Trust is treated as a separate
entity for Federal income tax purposes. It is the policy of each Fund to
continue to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended, and to distribute all of its taxable income,
including net realized capital gains, if any, to its shareholders. No Federal
income tax provision is therefore required.
(e) Expense Allocation. Expenses directly attributed to a Fund are charged to
that Fund's operations; expenses which are applicable to both Funds are
allocated on a basis deemed fair and equitable by the Trustees, usually on the
basis of average net assets.
(f) Organization Costs. Costs incurred in connection with the organization and
initial registration of Baron Growth & Income Fund have been deferred and are
being amortized on a straight-line basis over a five-year period. Baron
Capital, Inc. ("BCI"), a wholly owned subsidiary of Baron Capital Group, Inc.
("BCG"), agreed to make advances for organization expenses incurred and will be
reimbursed as the costs are amortized.
(g) Distributions. Income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses and distributions received
from REITs. During the year ended September 30, 1997, Baron Asset Fund
reclassified net operating loss of $9,740,291 and $750,425 of accumulated net
realized loss to paid-in capital. Baron Growth & Income Fund reclassified net
operating income of $765,485 to accumulated net realized gains.
<PAGE>
(2) Purchases and Sales of Securities.
During the year ended September 30, 1997, purchases and sales of securities,
other than short term securities, aggregated $1,477,673,085 and $240,382,513,
respectively for Baron Asset Fund, and $158,680,282 and $71,111,499,
respectively for Baron Growth & Income Fund.
(3) Investment Advisory Fees and Other Transactions with Affiliates
(a) Investment Advisory Fees. BAMCO, Inc. (the "Adviser"), a wholly owned
subsidiary of BCG serves as investment adviser to the Funds. As compensation
for services rendered, the Adviser receives a fee payable monthly from the
assets of the Funds equal to 1% per annum of each Fund's average daily net
asset value. The Adviser has agreed that if the expenses (exclusive of
interest, taxes, brokerage, extraordinary expenses and amounts paid by the
Funds under the plan of distribution) of either Fund in any fiscal year exceed
the limits prescribed by any state in which that Fund's shares are qualified
for sale, the Adviser will reduce its fee by the amount of any such excess, up
to the amount of the Adviser's fee.
(b) Distribution Fees. BCI is a registered broker dealer and the distributor of
the shares of the Funds pursuant to a distribution plan under Rule 12b-1 of the
1940 Act. The distribution plan authorizes the Funds to pay BCI a distribution
fee equal on an annual basis to 0.25% of the Funds' average daily net assets.
24
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Brokerage transactions for the Funds may be effected by or through BCI. During
the year ended September 30, 1997, BCI earned $2,214,558 in brokerage
commissions from Baron Asset Fund, and $361,142 from Baron Growth & Income
Fund.
(c) Trustee Fees. Certain Trustees of the Trust may be deemed to be affiliated
with or interested persons (as defined by the 1940 Act) of the Funds' Adviser
or of BCI. None of the Trustees so affiliated received compensation for his
services as a Trustee of the Trust. None of the Funds' officers received
compensation from the Funds.
(4) Capital Loss Carryforward. At September 30, 1997, Baron Asset Fund had a
capital loss carryforward of $24,898,326 available to offset future capital
gains, comprised of $744,575 which expires on September 30, 2005 and
$24,153,751 which expires on September 30, 2006.
(5) Restricted Securities.
A summary of the restricted securities held at September 30, 1997 follows:
BARON ASSET FUND
<TABLE>
<CAPTION>
Acquisition
Date Value
---------------------- --------------
<S> <C> <C>
Preferred Stock
American Radio Systems Corp. 7% Conv. 06/19/96 $11,500,000
Corporate Bonds
Intl. CableTel, Inc. 7.25%
Conv. Sub. Notes 04/15/2005 04/12/95 22,857,500
------------
Total restricted securities: (Cost $31,784,465)(1.07% of Net Assets) $34,357,500
============
BARON GROWTH & INCOME FUND
Acquisition
Date Value
----------- ------------
Preferred Stock
American Radio Systems 7% Conv. Corp. 06/19/96 $ 4,600,000
Corporate Bonds
Intl. CableTel, Inc. 7.25%
Conv. Sub. Notes 4/15/2005 04/12/95 2,230,000
Seacor Holdings 5.375%
Conv. 11/15/2006 10/30/96 1,946,500
------------
Total restricted securities: (Cost $7,699,133)(2.25% of Net Assets) $ 8,776,500
============
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
(6) Investment in Affiliates*
BARON ASSET FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales
Shares Held on Purchases and
Name of Issuer Sep. 30, 1996 and Additions Reductions
- ------------------------------------------ ---------------- --------------- -------------
<S> <C> <C> <C>
American Mobile Satellite Corp. ......... 1,660,000 1,840,000
American Radio Systems Corp. Class A ... 600,000 770,000 15,000
Avatar Holdings, Inc. .................. 480,000 252,800
Bristol Hotel Co.** ..................... 420,000 2,975,000
CCA Prison Realty Trust .................. 2,455,000
Chartwell Leisure, Inc. .................. 783,000
Choice Hotels Intl. Inc.*** ............ 10,421,400
CoreComm, Inc. ........................ 870,000 1,255,000 850,000
Cox Radio, Inc. ........................ 390,000 445,000
Cross Timbers Oil Co.**** ............... 1,325,000 1,305,000
Dollar Tree Stores, Inc.***** ............ 850,000 1,210,000
DVI, Inc. .............................. 1,305,000 153,200
Flextronics Intl. Ltd. .................. 1,270,000 215,000 115,000
Heftel Broadcasting Corp. ............... 615,000 1,020,000
Kenneth Cole Productions, Inc. ......... 570,500 46,000
Learning Tree Intl., Inc.****** ......... 350,000 1,296,700 5,000
Libbey, Inc. ........................... 780,000
Manor Care, Inc. ........................ 3,400,000 2,335,000
Metro Networks, Inc. .................. 1,230,000
Pediatric Services of America, Inc. ... 634,000 308,500
Saga Communications, Inc.******* ......... 1,560,300 758,350
Smart and Final, Inc. .................. 1,940,000 245,000
Summit Care Corp. ..................... 483,000 65,500 197,900
Sun Intl. Hotels, Ltd. .................. 1,890,000
Vail Resorts, Inc. ..................... 3,950,000
Young Broadcasting, Inc. ............... 937,500
Youth Services Intl., Inc. ............ 588,750 171,250 85,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Sep. 30, 1997 Sep. 30, 1997 Oct. 1-Sep. 30, 1997
- ------------------------------------------ ---------------- ---------------- ---------------------
<S> <C> <C> <C>
American Mobile Satellite Corp. ......... 3,500,000 $ 35,875,000
American Radio Systems Corp. Class A ... 1,355,000 64,531,875
Avatar Holdings, Inc. .................. 732,800 24,548,800
Bristol Hotel Co.** ..................... 3,395,000 94,847,812
CCA Prison Realty Trust .................. 2,455,000 92,676,250 $ 849,430
Chartwell Leisure, Inc. .................. 783,000 13,017,375
Choice Hotels Intl. Inc.*** ............ 10,421,400 200,611,950
CoreComm, Inc. ........................ 1,275,000 21,037,500
Cox Radio, Inc. ........................ 835,000 23,640,938
Cross Timbers Oil Co.**** ............... 2,630,000 64,106,250 524,750
Dollar Tree Stores, Inc.***** ............ 2,060,000 86,648,750
DVI, Inc. .............................. 1,458,200 24,424,850
Flextronics Intl. Ltd. .................. 1,370,000 65,246,250
Heftel Broadcasting Corp. ............... 1,635,000 123,851,250
Kenneth Cole Productions, Inc. ......... 524,500 8,555,906
Learning Tree Intl., Inc.****** ......... 1,641,700 46,993,662
Libbey, Inc. ........................... 780,000 27,836,250 73,500
Manor Care, Inc. ........................ 5,735,000 190,688,750 385,330
Metro Networks, Inc. .................. 1,230,000 37,053,750
Pediatric Services of America, Inc. ... 942,500 22,030,938
Saga Communications, Inc.******* ......... 2,318,650 56,227,262
Smart and Final, Inc. .................. 2,185,000 52,166,875 423,750
Summit Care Corp. ..................... 350,600 5,171,350
Sun Intl. Hotels, Ltd. .................. 1,890,000 65,205,000
Vail Resorts, Inc. ..................... 3,950,000 105,662,500
Young Broadcasting, Inc. ............... 937,500 32,109,375
Youth Services Intl., Inc. ............ 675,000 11,095,313
--------------- -----------
$1,595,861,781 $2,256,760
=============== ===========
</TABLE>
- ----------
* Affiliated issuers, as defined in the Investment Company Act of 1940,
are issuers in which Baron Asset Fund held 5% or more of the outstanding
voting securities as of September 30, 1997.
** Received 894,900 shares of Bristol Hotel, Inc. from 3:2 stock split.
*** 3,400,000 shares received from Manor Care spin-off. 7,021,400 shares
purchased after spin-off.
**** Received 810,000 shares of Cross Timbers Oil, Co. from 3:2 stock split.
***** Received 655,000 shares of Dollar Tree Stores, Inc. from 3:2 stock
split.
****** Received 172,500 shares of Learning Tree Intl., Inc. from 3:2 stock
split.
******* Received 417,375 shares of Saga Communications, Inc. from 5:4 stock
split.
26
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
(7) Financial Highlights
BARON ASSET FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995 1994
--------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ......... $ 35.50 $ 29.30 $ 22.82 $ 21.91
------------- ------------- ------------ ---------
Income from investment operations
Net investment income (loss) ............... (0.14) (0.06) (0.09) (0.14)
Net realized and unrealized gains (losses) on
investments .............................. 12.11 6.29 7.23 1.82
------------- ------------- ------------ ---------
Total from investment operations ......... 11.97 6.23 7.14 1.68
------------- ------------- ------------ ---------
Less distributions
Dividends from net investment income ...... 0.00 0.00 0.00 0.00
Distributions from net realized gains ...... (0.04) (0.03) (0.66) (0.77)
------------- ------------- ------------ ---------
Total distributions ........................ (0.04) (0.03) (0.66) (0.77)
------------- ------------- ------------ ---------
Net asset value, end of year ............... $ 47.43 $ 35.50 $ 29.30 $ 22.82
============= ============= ============ =========
Total Return .............................. 33.8% 21.3% 32.3% 8.0%
-------------- -------------- ------------ ---------
Ratios/Supplemental Data
Net assets (in millions), end of year ...... $ 3,224.5 $ 1,166.1 $ 290.0 $ 80.3
Ratio of expenses to average net assets ... 1.3% 1.4% 1.4% 1.6%
Ratio of net investment income (loss) to
average net assets ........................ (0.5%) (0.3%) (0.5%) (0.7%)
Portfolio turnover rate ..................... 13.2% 19.3% 35.2% 55.9%
Average per share commission rate paid* ... $ 0.0600 $ 0.0600
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1993 1992 1991 1990 1989 1988
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ......... $ 16.20 $ 14.80 $ 10.88 $ 17.22 $ 12.98 $ 11.95
----------- ----------- --------- ------------ --------- ---------
Income from investment operations
Net investment income (loss) ............... (0.13) (0.08) 0.07 0.21 0.13 0.05
Net realized and unrealized gains (losses) on
investments .............................. 6.00 1.52 4.05 (5.14) 4.81 1.18
----------- ----------- --------- ------------ --------- ---------
Total from investment operations ......... 5.87 1.44 4.12 (4.93) 4.94 1.23
----------- ----------- --------- ------------ --------- ---------
Less distributions
Dividends from net investment income ...... 0.00 (0.04) (0.20) (0.16) (0.05) (0.03)
Distributions from net realized gains ...... (0.16) 0.00 0.00 (1.25) (0.65) (0.17)
----------- ----------- --------- ------------ --------- ---------
Total distributions ........................ (0.16) (0.04) (0.20) (1.41) (0.70) (0.20)
----------- ----------- --------- ------------ --------- ---------
Net asset value, end of year ............... $ 21.91 $ 16.20 $ 14.80 $ 10.88 $ 17.22 $ 12.98
=========== =========== ========= ============ ========= =========
Total Return .............................. 36.5% 9.7% 38.3% (30.7%) 39.9% 10.7%
----------- ----------- --------- ------------ --------- ---------
Ratios/Supplemental Data
Net assets (in millions), end of year ...... $ 59.9 $ 43.8 $ 47.4 $ 40.0 $ 47.7 $ 11.7
Ratio of expenses to average net assets ... 1.8% 1.7% 1.7% 1.8% 2.1% 2.5%
Ratio of net investment income (loss) to
average net assets ........................ (0.7%) (0.5%) 0.5% 1.5% 1.3% 0.5%
Portfolio turnover rate ..................... 107.9% 95.5% 142.7% 97.8% 148.9% 242.4%
Average per share commission rate paid* ...
</TABLE>
- ----------
* Disclosure required for fiscal years beginning after September 1, 1995.
The Fund's Adviser and/or Baron Capital reimbursed the Fund for expenses
aggregating $8,561 (less than $0.01 per share) in 1990, $27,315 ($0.01 per
share) in 1989, and $83,219 ($0.11 per share) in 1988. The reimbursement
amounts are excluded from the expense data above.
<PAGE>
BARON GROWTH & INCOME FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995*
----------- ----------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period ..................... $ 18.40 $ 14.77 $ 10.00
--------- --------- ----------
Income from investment operations
Net investment income .................................... 0.06 0.11 0.04
Net realized and unrealized gains on investments ......... 6.68 3.66 4.73
--------- --------- ----------
Total from investment operations ........................ 6.74 3.77 4.77
--------- --------- ----------
Less distributions
Dividends from net investment income ..................... (0.09) (0.04) 0.00
Distributions from net realized gains ..................... (0.16) (0.10) 0.00
--------- --------- ----------
Total Distributions .................................... (0.25) (0.14) 0.00
--------- --------- ----------
Net asset value, end of period ........................... $ 24.89 $ 18.40 $ 14.77
========= ========= ==========
Total Return ............................................. 37.1% 25.8% 47.7%
---------- ---------- ----------
Ratios/Supplemental Data
Net assets (in millions), end of period .................. $390.8 $207.2 $ 28.6
Ratio of expenses to average net assets .................. 1.4% 1.5% 2.0***
Ratio of net investment income to average net assets ...... .4% 1.2% 1.1***
Portfolio turnover rate .................................... 25.2% 40.3% 40.6%
Average per share commission rate paid*** .................. $ 0.0600 $ 0.0600
</TABLE>
- ----------
* For the period January 3, 1995 (commencement of operations) to September 30,
1995.
** Annualized.
*** Disclosure required for fiscal years beginning after September 1, 1995.
The Fund's custodian offset custody fees of $5,252 (less than $.01 per share)
in 1996 and $12,003 (less than $0.01 per share) in 1995. The expense offset
amounts are included in expense data above.
27
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
- --------------------------
TO THE SHAREHOLDERS
AND BOARD OF TRUSTEES OF
BARON ASSET FUND:
- --------------------------
We have audited the accompanying statements of net assets and statements of
assets and liabilities of Baron Asset Fund (comprising, respectively, Baron
Asset Fund and Baron Growth & Income Fund) as of September 30, 1997, the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and
financial highlights for each of the ten years in the period then ended for
Baron Asset Fund and for each of the two years in the period then ended and for
the period January 3, 1995 (commencement of operations) to September 30, 1995
for Baron Growth & Income Fund. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective series constituting Baron Asset Fund as of September 30,
1997, and the results of their operations for the year then ended, the changes
in their net assets for each of the two years in the period then ended and
financial highlights for each of the periods referred to above, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
November 24, 1997
<PAGE>
- --------------------------------------------------------------------------------
NOTE
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of June 30, 1996 and are subject to change every month. Past performance is no
guarantee of future results. The Morningstar 5 star rating is for the overall
three-, five- and ten-year period ended September 30, 1997. Baron Asset Fund is
ranked in the small-growth category. Morningstar ratings are calculated from
the Fund's three-, five- and ten-year average annual returns in excess of
90-day Treasury bill returns with appropriate fee adjustments, and a risk
factor that reflects fund performance below 90-day T-bill returns. Ten percent
of the funds in an investment category receive five stars, 22.5% receive four
stars, 35% receive three stars, 22.5% receive two stars, and 10% receive one
star. Baron Asset Fund received 4 stars for a 3-year period, 5 stars for a
5-year period and 5 stars for a 10-year period.
Baron Growth & Income Fund's ranking is according to Lipper Analytical
Services. Lipper ranks funds on net total return. Ranking from inception on
January 3, 1995 through September 30, 1997 Baron Growth & Income Fund is number
1 out of 408 growth & income funds.
Investors Business Daily's rankings are based on 36 month performance versus
all other mutual funds and recalculates each month on a total return basis,
including dividends and capital gains. The top 5% of funds are rated A+, the
top 10% are A, the top 15% are A-, the top 20% are B+, the top 25% are B, the
top 30% are B-, the top 35% are C+, the top 40% are C, the top 45% are C-, the
top 50% are D+, the top 60% are D, the top 70% are D-, and below 70% are E.
Fortune ranked Baron Asset Fund number 1 of small cap funds for a five years
period ending June 30, 1997, net of annual expenses, brokerage costs and sales
loads. The returns were provided by Morningstar (see above). Fortune used only
diversified funds in existence for at least five years with the same manager
for the full five year period. The funds had to be open to new investors, be
available in at least 25 states, have a minimum investment of less than
$25,000, and hold at least $25 million in net assets. The total number of funds
used in all the categories was 225.
- --------------------------------------------------------------------------------
Any statements contained in this annual report which are not historical facts
are forward-looking statements; and, therefore, many important factors could
cause actual results to differ materially from those in the forward-looking
statements. Such factors include, but are not limited to, changes (legislative
or otherwise) in the industries in which the Funds invest, as well as changes
relating to taxes and mutual funds. The "Investment Policies and Risks" section
of the Prospectus discusses certain factors that could cause actual results to
differ materially from those in such forward-looking statements.
28
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON ASSET FUND AND THE RUSSELL 2000*
$70,000 |---------------------------------------------------------------------|
| |
| # |
$60,000 |---------------------------------------------------------------------|
| |
| |
$50,000 |---------------------------------------------------------------------|
| # |
| |
$40,000 |---------------------------------------------------------------------|
| # |
| * |
$30,000 |---------------------------------------------------------------------|
| # * |
| # * |
$20,000 |---------------------------------------------------------------------|
| # # # # * * |
| *# * # * * |
$10,000 |---------------------------------------------------------------------|
| * * |
| |
0 |---|------|-----|-----|------|------|-----|-----|----|-----|-----|---|
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Information Presented by Fiscal Year
as of September 30 # Baron Asset Fund
* The Russell 2000 is an unmanaged index of
small and mid-sized companies * Russell 2000
<PAGE>
- --------------------------------------
Baron Asset Fund's Management
Discussion and Analysis
Baron Asset Fund performed well in the fiscal year ended September 30, 1997.
The Fund's 33.8% gain last year improved upon the Fund's 19.3% average annual
performance since its inception a little more than ten years ago.
The Fund's performance was not uniform throughout the year. Baron Asset Fund
under-performed the large cap S&P 500 index in the six months ended March 1997
while outperforming the small cap Russell 2000 index. During the six months
ended September 1997, Baron Asset gained 35.6% and outperformed both the S&P
500 and the Russell 2000. The Russell 2000 also posted very strong gains.
Although the businesses in which the Fund invested grew strongly during the
first half of the fiscal year, the stock prices of these companies did not
reflect the growth of their underlying businesses. The second half of the year
represented a catch-up period for the stock prices of our investments.
Baron Asset Fund concentrates its investments in small and mid sized companies.
During this year, and since late 1993, the performance of market averages that
represent small companies significantly under-performed market averages that
represent more established, large companies. This trend reversed in the second
half of fiscal year 1997 when the Russell 2000 dramatically outperformed the
S&P 500. We believe that small and midsized companies currently offer better
values than larger companies. Baron Asset Fund is well positioned if small cap
stocks continue to outperform.
Baron Asset Russell
Fund S&P 500 2000
------------- --------- ------------
12/31/92 - 9/30/97 +186.5% +144.3% +120.9%
9/30/96 - 4/30/97 -0.7% +17.9% +0.1%
4/30/97 - 9/30/97 +34.7% +19.1% +33.1%
The performance of Baron Asset Fund was consistent across sectors. Most of our
investments performed well. Performance was strongest in Education, Financial
Services, Media and Entertainment and Real Estate. Performance lagged in
Communications.
In fiscal year 1998, the Fund will continue to invest in companies that, in our
opinion, are undervalued relative to their long term growth prospects and
profitability. The Fund will continue to invest in businesses with significant
growth prospects and increasing profitability. The companies will continue to
be identified through our independent research efforts. Companies in which we
invest will have the potential to increase in price at least 50% over the next
two years. The Fund will remain diversified not only by industry and investment
theme, but also by external factors we have identified that could affect
company performance. This approach to investing in companies, not trading in
stocks, could allow the Fund to continue to produce above average rates of
return while keeping an attractive risk profile. We look forward to a
successful 1998.
29
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON GROWTH & INCOME FUND AND THE RUSSELL 2000*
$25,000 |---------------------------------------------------------------------|
| |
| |
$20,000 |---------------------------------------------------------------------|
| |
| |
$50,000 |---------------------------------------------------------------------|
| # |
| # * |
$15,000 |---------------------------------------------------------------------|
| # * |
| * |
$10,000 |---------------------------------------------------------------------|
| |
| |
0 |---|------|------|-- |
1995 1996 1997
Information Presented by Fiscal Year Baron Growth &
as of September 30 # Income Fund
* The Russell 2000 is an unmanaged index of
small and mid-sized companies * Russell 2000
- -------------------------------------------------------------------------------
Baron Growth & Income Fund's
Management Discussion and Analysis
Baron Growth & Income Fund performed well in the fiscal year ended September
30, 1997. According to Lipper analytical, the Fund is the number one ranked
growth and income fund since its inception on January 3, 1995.
The Fund's strong performance can be attributed to its investment strategy of
allocating approximately 70% of its portfolio to rapidly growing, well managed,
very profitable small cap companies that are attractively priced, and the
remaining 30% to value oriented, income producing securities, also principally
of smaller companies.
The growth component of the Fund experienced below average performance during
the first half of the fiscal year even though the businesses in which the Fund
is a shareholder grew steadily. The strong relative performance of the Fund in
the second half of the fiscal year, a gain of 34.1%, is to a great extent due
to the Fund's investments in rapidly growing businesses and the strong relative
performance of small cap stocks. The Fund performed well with its investments
in Education, Financial Services and Media and Entertainment. The Fund's
investments in Communications under-performed and provide significant
opportunities in fiscal 1998.
The income component of the Fund performed well with its significant REIT
investments. The REIT portion of the Fund gained a very strong 49.4% for the
year. This performance compared extremely well with other real estate oriented
mutual funds. Strong appreciation from the Fund's income component and
substantial current income, provided the Fund with very attractive relative
risk characteristics for a mutual fund invested primarily in small cap
companies.
In fiscal year 1998, we currently expect the majority of the Fund's income
producing securities to continue to be REITs. The growth component of the Fund
will continue to be invested in stocks that have the potential to appreciate in
value at least 50% during the next two years.
The Fund's portfolio is well positioned to offer attractive returns with its
fast growing small cap companies. Its investments in income-producing
securities should provide the portfolio with more stable, although somewhat
lesser, returns. We look forward to a successful 1998.
30
