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[LOGO]
BARON ASSET
1 FUND HIGHLIGHTS
PERFORMANCE.........................................................1
INVESTMENT STRATEGY.................................................4
RECENT NEWS
DEVELOPMENTS........................................................5
PORTFOLIO HOLDINGS..................................................6
OTHER DEVELOPMENTS..................................................7
BARON GROWTH
& INCOME FUND
2 HIGHLIGHTS
PERFORMANCE.........................................................9
REAL ESTATE
INVESTMENT TRUSTS..................................................10
PORTFOLIO HOLDINGS.................................................11
OTHER DEVELOPMENTS.................................................12
BARON SMALL
3 CAP FUND
PERFORMANCE........................................................13
NEW SHAREHOLDERS...................................................13
LONG TERM POSITIONS................................................14
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
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THIS SEMI-ANNUAL REPORT CONTAINS
INFORMATION FOR THREE FUNDS
BARON ASSET FUND
QUARTERLY REPORT o MARCH 31, 1998
Dear Baron Asset
Fund Shareholder:
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PERFORMANCE
Baron Asset Fund's long term performance has been strong.
Baron Asset Fund has performed well since its inception on June 12, 1987. Baron
Asset Fund has increased 19.7% per year from its inception through March 31,
1998. The S & P 500 increased 15.8% per year during the same period. The
Russell 2000, an index measuring the performance of smaller companies,
companies more similar to those in which Baron Asset Fund invests, gained 12.4%
per year. Baron Asset Fund has also performed well, both relatively and
absolutely, during the past one year, three year, five year and ten year time
periods. Baron Asset Fund's nearly sevenfold appreciation during the past
eleven years has met our goal of doubling the value of our shareholders'
investment every three to five years.
Baron Asset Fund's performance during past five months has been disappointing.
Baron Asset Fund's performance during the nearly five months from December 31,
1997 through May 26, 1998, the date of this letter, however, must be considered
disappointing. Baron Asset Fund gained just 4.0% during the period,
significantly less than the 13.5% gain recorded by the S&P 500 and moderately
below the 4.1% gain achieved by the Russell 2000. The Fund's performance was
significantly penalized when share prices of our two largest "core investment
holdings," discount broker, mutual fund distributor Charles Schwab and private
pay nursing home and assisted living operator Manor Care, each fell 20-25%
within the past few months. This is the fourth time since we purchased Schwab's
stock in 1992 and the fourth time since we bought Manor Care's stock in 1989
that both stocks have fallen sharply. Prior share price declines have been
short lived. Schwab's stock has now appreciated about nine times since our
initial purchases six years ago, Manor Care's nearly seven times since our
initial purchases nine years ago.
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Baron Asset Fund:
BAF S&P Russell
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Qtr 1998 10.7% 13.9% 10.1%
BAF S&P Russell
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1 year 53.50% 48.00% 42.00%
BAF S&P Russell
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Cumulative 598% 389% 253%
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During 1998's first quarter, Charles Schwab offered its full service customers
the ability to trade with that firm electronically rather than by telephone.
Commisions per trade and direct costs of electronic trades are lower than those
for trades made by telephone. However, the decline in average revenue per trade
has so far offset greater trading volumes and lower costs per trade. Schwab's
over the counter market making business was also penalized in the quarter by
changed regulations. OTC trading spreads were cut about in half. Although
Schwab continues to add customer assets at a pace that can only be considered
phenominal, about $6 billion per month, its earnings in the first quarter were
flat with year ago results. Schwab has recently raised prices for its mutual
fund OneSource distribution and over the counter correspondent trading. This
should help earnings increase over the near term. Over the long term, we
believe Schwab will soon be considered a "virtual national bank" as it offers
additional services to its customers and achieves greater revenues and
earnings, per dollar, of customer assets. Schwab is currently valued by
investors for about 2.2% of its $414 billion customer assets ($62 billion when
we began to invest in Schwab in 1992). This represents a significant discount
to values accorded banks based upon their customer deposits. Since we think
Schwab's customer assets could increase two and a half times in the next three
to four years and its earnings on customer assets may improve dramatically, as
well, we purchased more stock.
Manor Care will soon reorganize into two businesses. The company's private pay
nursing home real estate business will be separated from both its nursing home
management and very rapidly growing assisted living management and ownership
businesses. Investors have apparently been disappointed that this restructuring
has taken so long to complete (it should finally be completed in July). Manor
Care's financial statements have been complicated by the proposed
reorganization and, during an SEC mandated "quiet period," management has not
been readily available to explain these statements. Further uncertainty was
created when the proposed ceo for Manor Healthcare Services unexpectedly
resigned last week. Stewart Bainum, the company's chairman and driving force,
has stated the company will be unaffected and Stewart will be interim ceo.
Trends in Manor Care's business are favorable and significant overhead cost
reductions have recently been implemented. We believe Manor Care's c corp
healthcare real estate business could trade for perhaps $10-12 per share, while
its health services business could initially be worth $30-32 per share. The
value of the health services business could double in three years, the real
estate business in five years. We bought more stock.
We had been too optimistic about the prospects for Learning Tree's
instructor-taught information technology training courses. When the company
reported its backorders for courses had increased "only" 18% from last year,
its share price plummeted.
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We believe Learning Tree's revenues from instructor-led training courses will
accelerate to more than 25% annually next year and that its CBT course
introductions offer great opportunity and will be successful. Learning Tree's
shares offer the potential to nearly triple during the next four years.
Corrections Corporation of America and CCA Prison REIT's proposed merger was
not well received by investors. The share prices of both businesses fell
sharply. The most objectionable aspect of this proposed merger is the
acquisition, for no consideration to CCA's shareholders, of CCA's prison
management company by CCA's executives. To date, inadequate information is
available regarding this proposed transaction. Fundamental prospects for prison
privatization remain very strong and CCA should have the potential to nearly
triple in size during the next four years.
Leading Hispanic radio broadcaster Heftel acquired stations in New York City
and Houston in very favorable transactions. Its share price fell anyway. This
is probably only a reaction to the very rapid price increase experienced by
Heftel's shares during the past two years (they have quadrupled). Heftel's
business offers significant promise during the next several years since we
expect its existing stations to substantially increase their revenues. This due
to Heftel's target market's rapid population growth and advertisers'
willingness to pay more per listener to reach this audience. Heftel's share
price could about double in the next four to five years with no further
acquisitions.
Concerns regarding real estate overbuilding, in general, and hotel
overbuilding, specifically, especially with respect to limited service hotels
and high end Las Vegas' casino resort hotels, negatively impacted our
performance. Although we believe Mirage Resorts' operating earnings could about
double within months of opening its spectacular new Bellagio resort this Fall,
Mirage's stock price continues to languish about 20-25% below levels reached in
Spring 1996 and again in Fall 1997. We bought more stock. Spieker Properties is
achieving very large rent increases when its suburban California office
property leases are renewed. In addition, high return on investment development
opportunities are becoming increasingly available in markets Spieker dominates.
When its shares fell to less than we estimate it would cost to replace its
buildings, we bought more stock. Kimco Realty's restructuring into high
yielding, mature and lower yield, but faster growing, real estate businesses
caught our fancy. Although Kimco's shares had not declined, they hadn't
appreciated either, and we also bought more shares. Choice Hotels is a
beneficiary of increased hotel construction as a franchisor of these
properties. Choice's business is growing rapidly; it is repurchasing its
shares; and, if we had not agreed to limit our purchases of its shares, we
would have bought more Choice stock as well.
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Table I Largest Losses December 31, 1997 through May 26, 1998
Business Loss
Charles Schwab $46.9 million
Manor Care 46.3
Learning Tree 39.8
Heftel Broadcasting 25.3
CCA Prison REIT 25.2
Corrections Corp of America 18.2
Partly offsetting the above losses were very strong gains achieved by several
long term investments. As investors became aware of the very strong growth
prospects for American Radio's American Tower Systems subsidiary, the parent's
share price advanced strongly. Baron Asset Fund was already American Radio's
largest shareholder and increased its holdings significantly. Specialty
temporary professional help provider Robert Half International, private college
operator DeVry, dollar discount store operator Dollar Tree, telecommunications
provider NTL, auctioneer Sotheby's and casino resort Sun International all
reported very strong results from operations. Their share prices reflected
these results. Polo Ralph Lauren also reported very good results from
operations, and signed a new, and very significant, women's apparel licensing
agreement with Jones New York. Its share price also reflected its strong
business and favorable prospects. American Mobile Satellite acquired a
telecommunications business from Motorola and completed a $335 million debt
financing. Its share price increased sharply. And, CD Radio made good progress
instituting its new satellite radio service. Its share price more than doubled
since we invested in the business about six months ago. Our young
telecommunications and media analyst, Matt Ervin, a Harvard educated physicist
now in his fourth year at Baron Capital and his sixth as an investment analyst,
has contributed importantly to our performance this year. Matt identified CD
Radio as an investment opportunity, dragged me to several meetings with its
management and finally convinced me to invest, to our good fortune. Matt has
also made significant research contributions this year with his work on NTL,
Corecomm and several radio, cable and communication tower businesses.
Table II Largest Gains December 31, 1997 through May 26, 1998
Business Gain
American Radio $40.2 million
Polo Ralph Lauren 31.2
Robert Half 30.5
NTL 30.3
Dollar Tree 30.2
DeVry 21.7
CD Radio 21.5
American Mobile Satellite 19.5
Sun International 19.1
Sotheby's 18.7
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Our goal is to double our money every three to five years.
We remain committed to our long term performance objective of doubling our
shareholders' money every three to five years. This has been my objective since
I first began to manage money for others in 1975. (Of course, there can be no
guarantee that we will continue to achieve our goal.) We have so far been able
to do so by identifying, through our independent research, well managed, very
profitable, unique and defensible businesses which have the potential to double
their earnings, and their intrinsic value, in three to five years ... and which
have prospects for doubling earnings and value again during the following three
to five years. Finally, we have invested in these businesses at attractive
prices, at prices which did not yet reflect their strong growth potential and
franchise values. Purchasing shares of businesses, part ownership, at
attractive prices offers our shareholders the opportunity to increase the value
of their investment in Baron Asset Fund as rapidly as the businesses we own are
growing.
Since market valuations of publicly owned businesses have increased more
rapidly than most business' earnings during the past five years, we believe it
is more realistic for our fellow shareholders to expect to double the value of
their investment in Baron Asset Fund in four or five years, rather than three.
Our next goal? That Baron Asset Fund will reach $100 per share net asset value
before the end of 2002. We expect virtually all businesses in which we are
shareholders to at least double in size by that time. We also believe that
these businesses have significant growth prospects well beyond the next four
years ...which, of course, augers well for the longer term prospects for our
Fund. As should be apparent, we are unable to assure you that we will be able
to achieve our objectives. But, if we don't, it won't be for lack of trying.
Stocks of smaller companies are cheap.
Stocks representing ownership of larger businesses have appreciated more
rapidly than those representing ownership of smaller companies during the
eleven years since Baron Asset Fund's inception. This despite the fact that
smaller companies, in general, have grown faster than larger ones both
historically and during this period. Smaller companies' stocks have
outperformed larger companies' stocks during the past fifty years by, on
average, more than 200 basis points per year. (Ibbotson, University of Chicago)
According to today's issue of Barron's, " ... small stocks now look more
attractive relative to large stocks than at any time in the past 15 years,
based on trailing and projected profits. The Russell 2000 and S&P 500 have
identical P/Es based upon trailing 12-month earnings. ...the Russell's P/E
historically has been 24% higher than that of the S&P 500 because of the higher
profit growth expected of smaller companies. The current reading of one is even
lower than the ratio at the trough of the market in 1990, when small stocks got
mauled."
We always expect Baron Asset Fund to perform well, whether small or large
company stocks are in vogue. This due to our
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investments in well managed, fast growing, very profitable businesses purchased
at attractive prices. Baron Asset Fund should be very well positioned, however,
if smaller and mid-sized companies begin to outperform shares of larger
businesses.
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INVESTMENT STRATEGY
Baron Asset Fund's net assets under management have increased significantly
during the past year and we have added many new shareholders. As a result, I
felt it would be helpful to many of our new shareholders if we reviewed briefly
our investment strategy and philosophy.
Investment Criteria:
1. To be an attractive investment for Baron Asset Fund, a business must have a
huge and long lasting opportunity for sustainable, profitable growth relative
to the current size of its business. The basis for this opportunity is usually
an investment theme that benefits from one of our "megatrends," i.e., long
lasting economic trends created by societal, demographic or political changes.
Job creating, "sunrise" industries, industries in which our children will find
jobs, industries like education, media and entertainment, healthcare, financial
services, communications, travel and leisure, outsourced business services and
government privatization services are our focus. The Fund avoids "sunset"
industries, industries in which our parents and grandparents were employed and,
which must now cut costs and fire employees to maintain profits or grow, e.g.,
autos, railroads, utilities, tobacco, steel.
2. We want to invest with entrepeneurial, hardworking, smart, motivated
managers. These executives must operate their businesses with utmost integrity.
Managers must recognize that businesses have four important constituencies:
community, employees, customers and, of course, shareholders ....and try to
serve them all. It's a virtuous circle. Unless a business attempts to attract,
train well and retain exceptional and talented employees, it will soon become a
run of the mill business, a business we deem unattractive as an owner. If a
firm's employees are not treated well, with respect, and offered favorable
career opportunities, turnover will be high, which is costly, and service to
its customers will suffer. Poor customer service, of course, will make a
business unlikely to grow and remain profitable. That business will not be a
good investment for its shareholders. Businesses experiencing declining
profitability are not likely to be good corporate citizens. They cannot afford
to be. A business with a poor reputation in its community, of course, will have
difficulty recruiting and retaining exceptional and talented employees.
3. To be an attractive investment for us, businesses must either be very
profitable or have the potential to be very profitable. And, at least as
importantly, an attractive business must have long lasting and strong barriers
to competition. Long lasting barriers to competitors and long lasting
profitable opportunities create the potential for sustainable profits growth.
Barriers to competitive entry are especially important to an investor who
thinks in terms of years, not days or months. If a business has exciting, very
profitable, long term opportunities for growth, e.g., an ability to invest
capital in its business and earn exceptional returns, there must be barriers to
prevent others, larger, better capitalized, predatory businesses, from usurping
these opportunities ... or, very quickly, opportunities that seemed large,
won't be.
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How do we do it? Baron Asset Fund is a "long term" investor in publicly held
businesses...an investor in businesses..... not a trader of stocks.
Baron Asset Fund's annual portfolio turnover is less than 12%! This means that
we hold an average investment eight years. Most "growth" mutual funds average
portfolio turnover of more than 100% per year, so the length of time for their
typical "investment" is less than one year. Morningstar says that the average
small cap growth mutual fund had 134% portfolio turnover last year. This means
that the average portfolio investment for most small cap growth funds was held
for less than nine months. Baron Asset Fund's lengthy investment holding period
allows us to become more knowledgeable about the businesses in which we invest.
We regard our in depth knowledge of businesses as our competitive advantage
when we are compared to other "investors." This knowledge allows us to buy
shares when others are disadvantaged and compelled to sell due to short term
developments that are unlikely to impact a business' long term prospects.
By-products of our buy and hold investment strategy are lower transaction costs
and greater tax efficiency for our shareholders. Another by-product? Our long
term orientation keeps us from selling investments too soon, before a business
opportunity is realized. We often don't make a lot of money in an investment
until we've owned it for several years. The examples are too numerous to list.
A few of the more prominent? We've earned more than nine times our money in
discount broker, mutual fund distributor Charles Schwab since 1992; nearly 50
times our money since 1991 in Robert Half, a provider of temporary accountants
and IT professionals; more than seven times our money since 1989 in private pay
nursing home owner Manor Care; more than twelve times our money since 1990 in
private college operator DeVry; and about ten times our money since 1987 in
upscale casino hotel operator Mirage Resorts. These investments all experienced
their most significant appreciation after we had been shareholders for at least
two years. And, they all continue to offer the opportunity to at least double
in value during the next four years. Four of our top eleven investments,
representing 16.6% of our net assets, were initiated in 1997, also offering our
portfolio, we believe, significant embedded appreciation opportunity.
Baron Asset Fund's investment portfolio is unusually concentrated when compared
to most other mutual funds. 40.9% of our
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assets are invested in just eleven businesses, 53.4% of our assets in eighteen.
We believe this strategy enables us to take advantage of the expertise we have
developed about these individual businesses, yet remain a diversified fund.
Table III Top Holdings May 26, 1998
Business Pctg Net Assets Initial Purchase
Manor Care 5.7% 1989
Vail Resorts 4.9% 1997
Charles Schwab 4.7% 1992
Sotheby's 4.1% 1997
AMF Bowling 4.0% 1997
Choice Hotels 4.0% 1996
Polo Ralph Lauren 3.6% 1997
NTL 2.6% 1994
Dollar Tree 2.5% 1995
Heftel Broadcasting 2.4% 1996
Robert Half 2.4% 1991
We are very careful, disciplined, about the price we pay for an investment.
Once we identify businesses we would like to own, we estimate what that
business is worth. We will not make an investment unless we are able to
purchase shares at a price that offers us an opportunity to earn at least 50%
during the two years after our initial investment. We will not remain an
investor in a business unless we have the opportunity to earn at least 100%
over the next five (hopefully four) years. Short term stock price movements are
often random and may bear little relation to a business' long term fundamental
prospects. When stock prices of attractive businesses fall 20-30% for little
reason, we try to take advantage of the opportunity. This happens all the time.
Major purchases during the period from December 31, 1997 through May 26, 1998
are listed below. Vail Resorts had declined in price due to below average
snowfall during Christmas; Polo Ralph Lauren for indeterminate reasons; Charles
Schwab when its customers were offered lower commissions and its correspondents
lower fees; Manor Care when a reorganization was delayed a few months; and AMF
when its bowling equipment sales in Asia were impacted by turmoil in those
markets. We regarded all these developments as short term in nature and added
to our holdings. Holdings in Sotheby's were in the process of being
established.
Table IV Top Purchases Dec 31, 1997 to May 26, 1998
Business Amount Purchased Initial Purchase
Sotheby's $154.2 million 1997
Vail Resorts 144.0 1997
Polo Ralph Lauren 80.2 1997
Charles Schwab 73.4 1992
Manor Care 72.3 1989
AMF Bowling 68.8 1997
American Radio 55.1 1998
Research. Research. Research. When we began Baron Asset Fund in June 1987, I
decided to advertise our new Fund under the
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heading, "Research. Research. Research." Sort of my interpretation of the real
estate maxim that only three things are important when considering a real
estate investment: location, location and location. Although our research ad
was not very successful letting investors know that Baron Asset Fund existed,
it was, and remains, descriptive of our investment process. The lasting
benefit of the ad? Whenever our Fund's performance lags for a time, my wife is
quick to remind me that "research, research, research" is the basis for our
success. "Don't let it (success) go to your head. Just go do it! (research)."
It helps.
Is Baron Asset Fund an "active" investor that purchases shares of
underperforming, valuable businesses and lobbies for change, e. g., business
restructuring, management change, employee layoffs, asset sales, or, even, the
sale of an entire company?
"Emphatically, no!" As a long term investor in businesses, we regard management
as our partner, not our adversary. When, as a large shareholder, we are asked
for advice, we are careful to phrase our suggestions as just that. We rely upon
managements' expertise, not our own, to operate the businesses in which we are
part owners. One proposal we nearly always favor, and encourage when asked,
however, is strategic capital investment, a lesson we learned long ago from
Mirage Resorts' Steve Wynn with his exploding volcanos, pirate battles, dolphin
pools and soon-to-be operational theatrical fountains in a huge, man-made,
Nevada desert lake. Whether it's old masters' paintings on the walls of Mirage
Resorts' Bellagio, or glass walled, theatrical warehouse space at Sotheby's, or
center of town ice skating rinks, open outdoor escalators and extra trail
grooming at Vail Resorts' Beaver Creek or remedial instruction at DeVry's
private colleges, we're for it!
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RECENT NEWS DEVELOPMENTS
Acquisitions: they've been plentiful! And, accomodative investors, both debt
and equity, have been more than willing to provide the financing for high
return on investment asset deals. A few examples follow.
Amusement and Recreation
During late March, Premier Parks, a well managed, regional amusement park,
acquired the larger Six Flags' park business from Time Warner for $1.9 billion,
9.5 times that company's last twelve months' cash flow. Six Flags had been an
underperforming unit of the entertainment/media conglomerate, was undermanaged
and capital starved. Assuming only modest revenue growth for Six Flags' parks
under its new management, Six Flags' operating profits, due to cost
efficiencies, could double in four or five years. Significant revenue
enhancement opportunities do exist, however, by simply adding water parks and
rides and
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through improved marketing. In addition, Premier Parks' owned parks could boost
revenue and cash flow significantly by rebranding and remarketing those
facilities as the better known Six Flags. Since the newly configured Premier
Parks' cash flow could more than double in four or five years and debt can be
reduced while this occurs, Premier Parks' share price has the potential to
nearly triple during that period. As investors learned about the improvements
possible at Six Flags, the acquisition was readily financed by investors, half
with equity, half with debt. (See Cliff's Baron Small Cap shareholder letter
for a more complete discussion of this business.)
Communications
Also in late March, American Mobile Satellite acquired Motorola's Ardis
terrestrial telecommunications business for $100 million consideration, half
cash, half stock. The Ardis terrestrial data communications system with its
1700 tower sites compliments American Mobile's satellite voice and data
communications system. American Mobile is now uniquely positioned with the
broadest nationwide service coverage for voice and data mobile communications.
Large new Ardis customers, UPS and Enron, offer a glimpse of potential.
American Mobile had initially sought to issue $250 million unrated medium term
debt to repay existing debt, fund the $50 million cash purchase price of this
acquisition and fund the new AMSC satellite radio service. Investors quickly
understood the very high returns possible from the combination AMSC/Ardis
service, as well as the potential for its satellite radio business, and allowed
AMSC to increase the size of its debt offering to $335 million.
Energy
Management at utility EEX changed in 1997, and in late January 1998 the newly
installed executives decided to monetize that company's non-strategic, 270 bcf
East Texas gas properties. EEX had initially estimated this field's gas
reserves at 890 bcf. A new estimate was commissioned by an outside engineering
firm known for its inherently conservative appraisals. The result? The reserves
were now estimated to be 243 bcf. EEX management's goal was to realize a bid
for these properties in two weeks! The time was too short to allow the two most
logical purchasers, Union Pacific Resources and Sonat, to study the
transaction. Cross Timbers' entrepeneurial management learned about this
transaction, was immediately interested, and quickly determined to perform the
necessary due diligence. After a week of nearly sleepless nights spent in data
rooms and in conversations with field managers and appraisers, Cross Timbers
determined the property to be attractively priced and its prospects
underappreciated. EEX had not worked on the field in years, was a notoriously
poor operator and, in fact, two years ago had lost 12 of their 14 person
engineering staff. Cross Timbers soon determined the field's reserves could
easily reach 500-600 bcf, and
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agreed to purchase the property for $265 million, at least $250 million less
than the field could be worth after a year's work proving the complexity of
the property's reserves. Investors quickly grasped the significance of this
transaction and purchased 7.5 million new shares of Cross Timbers for $146
million to help finance this transaction. Investors were able to feel
comfortable with Cross Timbers' management assessment since their executives
have historically purchased long lived, neglected gas reserves from major oil
companies and increased estimated field reserves at least 50% after purchase.
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PORTFOLIO HOLDINGS
"farm team"...small cap ...up
and coming ...
Steady growth of foodservice glassware sales and tabletop vendor acquisitions
boost Libbey's earnings.
With my background as a Jersey Shore waiter and busboy (among my many college
summer jobs), I felt I understood intuitively and well the market demand for
restaurant replacement glassware and china. In my youth, to my employers' great
chagrin, I had created part of this demand! Libbey is the leading U.S. supplier
of tabletop glassware to the foodservice industry, e.g., restaurants, schools,
hotels and bars. The company has become a leading supplier, as well, of other
tabletop products such as china and flatware, by acquiring other vendors and
selling their products through Libbey's proprietary foodservice distribution.
Libbey has about a 65% share in foodservice glassware sales, a business where
90-95% of user demand is derived from replacement glasses. Foodservice glasses
last more than 100 servings, on average, before they are broken or stolen. The
cost per serving to an operator is about 0.8 cents, offering Libbey, it would
appear, good pricing flexibility.
Libbey's high 17% operating margins attest to significant barriers to
competition. Libbey offers its customers more than 1000 glassware shapes. Molds
to make each shape cost $30,000 to $100,000, enough to make someone think twice
before trying to compete. A joint venture finalized last summer with
Vitrocrisa, the largest glass tableware manufacturer in Mexico, offers Libbey
distribution in Mexico and lower end product for sale in the United States.
This venture has the potential to significantly boost the company's
profitability. When sales to K Mart last Christmas were below expectations (K
Mart and Wal Mart together represent about $20 million of Libbey's estimated
$500 million 1998 sales), Libbey's shares fell and we significantly added to
our investment. Libbey's current annual earnings potential could already exceed
$2.80 per share. We estimate Libbey's earnings could increase at least 12%, and
more likely, at least 15%, per year for the next several years. Baron Asset
Fund owns 1,435,000 Libbey shares purchased for about $34.20 per share.
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OTHER DEVELOPMENTS
Seventh Annual Baron Investment Conference: October 9th, New York City. Don't
miss it.
The Seventh Annual Baron Investment Conference will take place Friday morning,
October 9th, breakfast through lunch, at the Ballroom of The Grand Hyatt New
York Hotel in New York City. Please save the date. Our conference speakers,
five chief executives of businesses in which Baron Funds is a shareholder, will
be announced over the summer. Each executive will make a formal 30-minute
presentation, usually with slides, and then answer questions from our guests
for 15 minutes. I will, as always, be the final speaker following lunch. I will
then try, with the help of our analysts if needed, to answer any questions
asked by you, our shareholder guests, until you tire of asking them.
Before we invest in a business on behalf of our shareholders, we attempt to
become as knowledgeable as possible about that business. Our due diligence, our
"kick the tires" research, includes not just studying public financial
information, but also meeting with company managements, both in our office and
theirs. This, so we can judge for ourselves their ability and competency,
honesty, integrity and business strategies. Our annual investment conferences
give our shareholders the opportunity to "kick the tires" of your investment in
Baron Funds.
The First Annual Baron Investment Conference in 1992 had 80 guests... most of
whom I had to personally ask to attend. Last year more than 700 persons
attended our meeting. Please RSVP at 1-800-99-BARON or 212-583-2100 as soon as
possible if you plan to be here so that we can be certain you will be
accommodated. If you have any further questions or if you'd like any help or
suggestions regarding hotel reservations, please call or write us. We hope
we'll see you this Fall. There will be no charge to take part, of course.
Lots of mutual fund investment management companies are for sale. We're not.
We are frequently asked by institutions for whom we manage money, as well as by
many of our friends, when do I plan to retire and sell our mutual fund
management company? This question has apparently become of greater interest, of
late, as one after another fund management company, including those owned by
long time friends, either prepares to "go public" or sell. Forbes magazine
devoted a cover story to this phenomenon last month. Baron Capital has been
approached several times during the past few months by large institutions
regarding our interest in selling the firm. I have responded unequivocally that
our business is not for sale. Baron Capital is well capitalized and very
profitable. With 100% ownership by my family and the firm's employees, I
believe Baron Capital, as a privately owned company, has a sig-
<PAGE>
nificant competitive advantage in attracting and retaining youthful, talented,
highly qualified and highly motivated investment professionals. Our investment
professionals now number eight analysts, two portfolio manager/analysts (I'm
one of them, Cliff Greenberg, portfolio manager of Baron Small Cap, is the
other) and two traders, of our total 35 employees. We plan to add three
additional investment professionals during the next twelve months. Our appeal
to these individuals can only widen and broaden as other firms are sold, their
founders retire and their businesses become "institutionalized." Of course,
our ability to attract, train and retain the best investment professionals
will inure to the benefit of Baron Funds' shareholders. Finally, I enjoy my
work and have no plans to retire.
401(k) plans continue to increase their investments in Baron Asset Fund.
Until January 1996, investments by 401(k) retirement plans in Baron Asset Fund
were modest. Northern Telecom then became the first large corporation to offer
its employees the opportunity to invest a portion of their 401(k) retirement
assets in Baron Asset Fund. Baron Asset Fund has since become the most popular
actively managed equity mutual fund investment for Nortel's employees. Their
investment in Baron Asset Fund now approximates $148 million. Nortel's 401(k)
plan is currently Baron Asset Fund's single largest shareholder (not including
Schwab's OneSource and Fidelity's Funds Network supermarkets, of course).
Baron Asset Fund has also recently been chosen in traditional manager searches
to be included as an option for their employees' 401(k) plans at several
additional large corporations. Included are Bechtel, VF Corporation, Cincinatti
Bell, Josten's, Nissan Motor, Hershey Foods, Allegiance Healthcare and,
starting July 1, Avon Products. In addition, our Fund has established strategic
alliances with American Express, Fidelity Investments and Charles Schwab, as
well as with larger mutual fund companies including Scudder Stevens & Clark,
Vanguard and T. Rowe Price, so that Baron Asset Fund may now be offered as a
401(k) small cap option to their clients' employees.
401(k) assets represented about 11% of Baron Asset Fund's net assets at
September 30,1997, the end of our last fiscal year. 401(k) assets could exceed
15% of Baron Asset Fund's net assets at fiscal year end 1998. The benefit to
our shareholders? 401(k) investments, in general, have greater persistency,
they last longer, than most other investment programs. Strong 401(k) asset
flows and their favorable persistency, coupled with large and steady asset
flows from Charles Schwab's OneSource and Fidelity's Funds Network mutual fund
supermarkets, have allowed Baron Asset Fund to make significant strategic
investments at attractive prices in fast growing, well managed, small and
mid-sized businesses. We believe these investments offer great potential for
gain to our fellow Baron Asset Fund shareholders.
7
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BARON ASSET FUND
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Thank you for investing in Baron Asset Fund.
We recognize it cannot be an easy decision for most individuals when you choose
to invest in stocks through mutual funds. Your decision must be especially
difficult when you must consider how to invest hard-earned savings to fund your
retirement, your children's education or a new home. Your task has become even
more daunting in recent years since there are now more mutual funds than there
are stocks...and widely published, and well respected, advice is often
conflicting.
We hope our quarterly shareholder letters, interviews in the press, investment
advisor conference calls and annual investment conferences have made it easier
for you to determine if Baron Funds is an appropriate investment for you and
your family.
We want to thank you for choosing to join us as fellow shareholders of Baron
Funds. We will continue to work hard to justify your confidence. Again, thank
you.
Sincerely,
/s/ Ronald Baron
- --------------------
Ronald Baron
President
May 26, 1998
8
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[LOGO]
BARON GROWTH
& INCOME FUND
2 HIGHLIGHTS
PERFORMANCE.........................................................9
REAL ESTATE
INVESTMENT TRUSTS..................................................10
PORTFOLIO HOLDINGS.................................................11
OTHER DEVELOPMENTS.................................................12
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
<PAGE>
BARON GROWTH & INCOME FUND
QUARTERLY REPORT o MARCH 31, 1998
Dear Shareholder:
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PERFORMANCE
Baron Growth & Income Fund's long term performance has been strong.
Baron Growth & Income Fund's performance from its inception through March 31,
1998 has been strong. The Fund's 37.3% annualized performance compares
favorably to the unusually strong 33.7% annualized performance achieved by the
large cap S&P 500 index. The Russell 2000 index, an index measuring the
performance of smaller companies, companies more similar to those in which
Baron Growth & Income Fund invests, although lagging the S&P's performance,
gained a very strong 24% per year over the same time period. Baron Growth &
Income Fund's performance from its inception a little more than three years ago
through March 31, 1998 is ranked number one among growth and income funds by
Lipper Analytical. There are 395 mutual funds in the Lipper growth and income
category. Baron Growth & Income Fund's performance has been strong, not only
relatively, but absolutely, and has met our oft stated objective of doubling
the value of our fellow shareholders' investment every three to five years. Of
course, as our lawyers never tire of warning us, we cannot guarantee that we
will continue to meet our goals.
Baron Growth & Income Fund's performance has so far been disappointing in 1998.
Baron Growth & Income Fund's performance in 1998 has significantly trailed that
of the S&P 500. In fact, as of May 26, the date of this letter, our Fund's 1998
performance has fallen behind that of even the Russell 2000, itself a
significant laggard. Baron Growth & Income Fund, like Baron Asset Fund, has
been adversely impacted by recent share price declines of two of our largest,
long term, "core holdings." Stock prices of leading discount broker, mutual
fund distributor Charles Schwab and leading private pay nursing home and
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Baron Growth & Income Fund:
BGI S&P Russell
--- --- -------
Qtr 1998 9.7% 13.9% 10.1%
BGI S&P Russell
--- --- -------
1 Year 47.30% 48.00% 42.00%
BGI S&P Russell
--- --- -------
Cumulative 180% 157% 101%
<PAGE>
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BARON GROWTH & INCOME FUND
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assisted living operator Manor Care each fell 20-25% within the past few
months. Both companies' share prices have fallen sharply several times during
the past several years. In retrospect, each decline has been short lived and
has been caused by short term developments that have had no impact on either
business' long term prospects. Baron Funds has been a shareholder of Schwab
since 1992 and has now earned about nine times its original investment. It has
been a shareholder of Manor Care since 1989 and has since earned about seven
times its original investment. We believe the developments that have apparently
caused the most recent share price declines will not adversely impact either
business' very favorable longer term prospects. Please see Baron Asset Fund's
"Performance" segment for a more complete discussion on Manor Care and Schwab
as well as on Learning Tree, CCA Prison REIT, Heftel Broadcasting and
Corrections Corporation, other businesses we own that penalized recent results.
Our Real Estate and Hotel and Lodging investments also penalized our
performance year to date. A discussion of these portfolio segments follows.
Table I Largest Losses December 31, 1997 through May 26, 1998
Business Loss
Charles Schwab $ 5.8 million
Manor Care 3.4
Learning Tree 3.3
Heftel Broadcasting 3.2
CCA Prison REIT 2.9
Corrections Corp of Amer 2.4
Partly offsetting the above losses were large gains achieved by several long
term investments. A discussion of these stocks can also be found in the segment
of Baron Asset Fund's preceding report also titled "Performance."
Table II Largest Gains December 31, 1997 through May 26, 1998
Business Gain
American Radio $ 4.5 million
American Mobile Sat 3.6
Robert Half 3.4
NTL 3.2
Dollar Tree 2.6
Delta & Pine Land 2.2
Sun International 2.0
DeVry 1.8
Baron Growth & Income Fund invests the major portion of its assets in equity
securities of well managed, fast growing, very profitable businesses that the
Fund has been able to acquire at attractive prices. (Our investments offer us
the opportunity to increase in value at least 50% over two years.) In addition,
25-30% of our assets are invested in income producing securities, principally
REITs, that offer us a more stable, 12-15% projected annual rate of return. We
think the returns from this portfolio segment are likely to be more consistent
than our hired expected small cap growth equity returns. This is because a
large part of
<PAGE>
the return is derived from dividends. Dividends, of course, should be more
predictable than capital appreciation.
Mitch Rubin, our young, star REIT, hotel and retail business analyst helped me
write the following "REIT" and "Portfolio Holdings" sections. Mitch, a Harvard
Law School grad, has toiled as an analyst at Baron Capital for a little more
than three years. He's also the point guard and captain of our championship,
intramural basketball team. (Which, of course, says a lot about the league in
which we compete.) I needed Mitch's help to complete this quarterly report
since I had already spent more than 35 hours, including my entire Memorial Day
weekend, writing it and my family was beginning to lose patience with me.
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS
REITS have underperformed.
REITs have significantly underperformed most equity indexes this year. The
NAREIT index has fallen 5% year to date while equities, in general, have
advanced. Our real estate investments have also underperformed. Baron Growth &
Income Fund's REITs have declined in value 4.5% this year.
Lagging REIT performance follows three years of very strong results. Baron
Growth & Income Fund's REITs produced annual returns of 20%, 48% and 26% for
the last three years. Since real estate stocks have substantially
underperformed this year, several well managed real estate businesses with
significant niche growth opportunities are now undervalued, in our opinion.
Kimco separates its growth and mature businesses.
Kimco Realty Corporation was the first publicly-traded modern REIT. For over 30
years, Kimco has acquired and subsequently redeveloped, for very good returns,
neighborhood and community shopping centers. The company currently controls a
broadly diversified portfolio with more than 40 million square feet in nearly
350 neighborhood and community shopping centers. Several recent transactions
highlight the innovation and expertise of Kimco's management led by Milton
Cooper.
Many properties in the core Kimco portfolio are reaching maturity with stable
cash flows, but limited additional growth. Kimco intends to create a new REIT,
Levered Kimco, into which its mature properties will be placed. This new
vehicle would be able to use high leverage to enhance its equity returns and
pay out a high dividend yield to its shareholders. To enhance the properties
available for Levered Kimco and bolster its management team's development
expertise, Kimco will merge with Price REIT. Price REIT is a west-coast based
developer of community shopping centers anchored predominantly by "category
killer" retailers, e.g., Home Depot, Costco, Home Base, and Office Max. Price
10
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BARON GROWTH & INCOME FUND
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currently controls a portfolio of approximately 7.5 million square feet with
long term, triple net leases (the tenant pays for all expenses). These assets
fit perfectly with Kimco's mature properties.
The assets remaining in Kimco following the Levered Kimco spin-out would have a
higher projected growth rate and should command a premium valuation. The Kimco
entrepreneurial growth portfolio can utilize Kimco's expertise in complex
transactions, leasing and systems to create significantly higher returns. These
opportunities may be in new, innovative property types e.g., healthcare, auto
malls, manufactured home communities, as well as traditional underperforming
shopping centers.
The company also recently announced the conclusion of a series of transactions
where Kimco acquired the majority of the real estate assets of Venture Stores,
the recently bankrupt discount retailer. Over a two year period, Kimco gained
control of Venture's entire real estate portfolio of approximately 10 million
square feet for approximately $415 million, a value roughly 50% of estimated
real estate replacement cost. We expect Kimco to earn a return in excess of 15%
on its investment in the Venture real estate. We added to our Kimco holdings.
Taubman's development properties begin to add value
Taubman Centers has been added to our real estate portfolio in the last several
months. The Taubman family is one of the nation's pioneers in regional mall
development. Over the last 50 years the company has amassed a portfolio of 25
of the highest quality, regional and super regional malls in the country.
While there are over a dozen mall REITs that are publicly traded, none can
match the quality of the Taubman portfolio. Taubman's malls are the most
productive in the United States with 1997 average sales per square foot of
$384. Most Taubman malls dominate their regions. Rather than own a broadly
diverse portfolio of malls, Taubman has focused on large centers in affluent,
urban locations. The barriers to entry at these locations are enormous. Cost,
time and regulatory hurdles that a competitor has to overcome to construct a
competing center are generally prohibitive. As important, it would be very
difficult to tenant a competing mall since Taubman already has four of the six
possible anchor tenants in its malls.
Over the last several years, Taubman has had relatively modest funds from
operations growth as the company built a development pipeline. While its
competitors focused on high profile acquisitions at ever declining returns, the
Taubman family determined that it could create substantially higher value
through development. Taubman now has a pipeline of development projects that
should contribute approximately $200 million per year in additional mall real
estate to the Taubman portfolio at initial yields of 12% or greater for at
least the next five years. Taubman's earnings growth rate increased in 1997 to
6.1% and should reach 9% by 1999.
<PAGE>
Spieker renewal rents increasing dramatically, development begins.
We have continued to add to our holdings in Spieker Properties during the first
quarter of 1998. Spieker is a west coast REIT concentrating on office and
industrial properties principally in northern and southern California as well
as Seattle and Portland. Spieker is appealing for the strength of its core
markets, its dominance of these markets and the strength and expertise of its
management. During 1997, and continuing in the first quarter of 1998, rents in
Spieker's core markets continue to rise at strong double digit rates. In fact,
rents on the 2.1 million square feet of space that was renewed or re-leased
during the first quarter were a staggering 21.7% higher than the expiring rents
on the same space. Approximately 42% of Spieker's nearly 40 million square feet
of space will expire before the end of the year 2000. Management estimates that
rents on this space are at least 20% below the current market rents.
Despite the strength of its internal rental growth, Spieker's management
believes property acquisition prices in many of its markets now exceed
replacement costs and offer unattractive returns. Although Embarcadero Center
is the largest trophy asset in the company's San Francisco backyard, Spieker
dropped out of the bidding when the acquisition price escalated beyond $1.2
billion, a price that represented only a 6-7% return without substantial rent
expirations for several years. Ned Spieker has recently shifted his company's
focus from acquisition to development. The company completed approximately $500
million of acquisitions during the first quarter and an additional $200 million
is scheduled to close in the second quarter, but acquisition activity should
soon slow considerably. Recent acquisitions have been completed at cap rates of
approximately 8%. Spieker completed development projects last quarter totaling
approximately $18 million with nearly 11% initial returns. In addition, the
company has over 3.1 million square feet of development projects in progress
aggregating approximately $300 million and expects to begin at least an
additional $300 million of new development projects before the end of the year.
These projects are all expected to yield in excess of 11% returns on cost.
Development opportunities, when coupled with the strength of the company's
internal growth prospects from expiring, below-market leases, should allow
Spieker to continue to deliver strong, double-digit funds from operation growth
for at least the next several years.
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PORTFOLIO HOLDINGS
Hotels and Lodging
Choice Hotels benefits from new hotel construction
Choice Hotels was spun out of Manor Care as a dividend to that company's
shareholders during October 1996. Choice subsequently spun out its owned hotel
real estate properties into a
11
<PAGE>
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BARON GROWTH & INCOME FUND
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separate entity, Sunburst Hospitality, in October of 1997. As a result of these
transactions, Choice is now strictly a hotel franchisor. Choice currently
franchises six hotel brands in three market segments. Its full service brand is
Clarion; its limited service brands, Comfort Inn, Quality Inn, Sleep Inn,
Rodeway Inn and Econo Lodge; and its extended stay brand, MainStay Suites. At
the end of 1997, Choice's worldwide franchise system boasted nearly 3,500
hotels with approximately 300,000 rooms. Choice is one of the top 20 franchise
companies in the United States. Choice is the second largest hotel franchisor
in the world.
The last two years have seen a dramatic increase in new hotel construction. As
a franchisor, Choice is helped, not hurt, by this increase in hotel
construction activity. This construction means substantial growth in the number
of franchised units in the Choice system. During 1997, the company's franchised
hotel rooms grew by approximately 8%. Currently, the Choice system has over 850
hotels under development with approximately 75,000 additional rooms, which will
provide a potential 25% increase in franchised rooms over the next two to three
years.
Most of the costs of maintaining the Choice franchise system are fixed and only
marginal cost increases are required for the growth of the system. As a result,
Choice profit margins should continue to expand. Moreover, without the need for
maintenance capital expenditures for real estate, Choice's franchise system
generates substantial free cash flow.
There are substantial additional embedded revenue opportunities within the
Choice business that could further accelerate the company's growth rate. Choice
has repurchased nearly four million of its outstanding shares since it has been
publicly owned.
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OTHER DEVELOPMENTS
All sections of the preceding Baron Asset Fund report are relevant to your
investment in Baron Growth & Income Fund. Please see sections titled
"Performance," "Investment Strategy," "Recent News Developments," "Portfolio
Holdings" and "Other Developments."
Thank you for investing in Baron Growth & Income Fund.
We understand it cannot be an easy decision for most individuals when deciding
in which mutual funds to invest your hard earned savings. The decision can only
be more difficult when those savings are intended to fund a first home, your
children's education or your retirement. The decision certainly has not been
made any easier since there are now more mutual funds than stocks. And,
voluminous expert advice is readily available ...but it is often conflicting.
We hope that our quarterly reports, annual investment conferences, widely
published interviews with the financial press and quarterly adviser conference
calls have allowed you to determine if Baron Growth & Income Fund is an
appropriate investment for you and your family.
We are clearly disappointed in the performance of our Fund during the past five
months, and are greatly appreciative of the strong support of our fellow
shareholders. We will continue to work hard to justify your confidence. We
remain optimistic that the businesses in which we are part owners have very
strong long term growth prospects and, that we will soon, again, have favorable
performance results to report. If you have any questions or comments, please
feel free to write. Again, thank you for your support.
Sincerely,
/s/ Ronald Baron
- ---------------------
Ronald Baron
President
May 26, 1998
12
<PAGE>
[LOGO]
BARON SMALL
3 CAP FUND
PERFORMANCE........................................................13
NEW SHAREHOLDERS...................................................13
LONG TERM POSITIONS................................................14
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:
- --------------------------------------------------------------------------------
PERFORMANCE
Baron Small Cap performed well in the March Quarter. Baron Small Cap gained
14.8% and since its founding on October 1, 1997, the Fund is up 18.4%. This
compares favorably to the Russell 2000 which was up 10.1% in the quarter and up
6.5% for the past six months. For the quarter, Baron Small Cap ranked number 73
out of the 583 small cap funds that
Lipper Analytical tracks.
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NEW SHAREHOLDERS
Baron Small Cap has just completed its second quarter of operations and
therefore many of you are new shareholders. The Fund has grown to $535 million
as of May 26, 1998 and we appreciate the support and confidence you have placed
in us.
As I discussed in the last quarterly letter, we set out to invest in companies
with superior pros-pects managed by superb executives that we purchase at
attractive prices. We utilize a common investment philosophy with the other
Baron funds with our focus on thorough bottom-up research of companies.
The Fund's investments can be classified as Growth Stocks (45% of portfolio),
Fallen Angels (30% of portfolio) and Special Situations (25% of portfolio). We
expect the portfolio to be comprised of stocks across all three classifications
with no target percentages and often with stocks falling across more than one
classification, as I will cover by example later in this report.
Growth stocks include: Premier Parks (3.8% of portfolio), Iron Mountain (3.8%
of portfolio) and Metro Networks (3.6% of portfolio). Fallen Angels include:
three separate rural cellular positions (7% of portfolio), two paging stocks
(3.7% of portfolio), and two cinema holdings (2% of portfolio). Special
Situations include: spinoffs (ChoicePoint, Unova, Commonwealth Telephone),
recaps and restructurings (US Office Products and El Paso
- --------------------------------------------------------------------------------
Baron Small Cap Fund:
Baron SC Fund
BSC S&P Russell
Qtr 1998 14.8% 13.9% 10.1%
BSC S&P Russell
Since InceptiPN 18.4% 17.2% 6.5%
<PAGE>
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BARON SMALL CAP FUND
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Electric), and new business formations (SFX Entertainment, IT Corporation and
Paragon Health Network).
We are currently most excited about opportunities that we have identified in
communications, media, entertainment, real estate, retail, business and
healthcare services. These industries comprise over 70% of the Fund's assets.
These are industries in which I have developed an expertise and invested in
throughout my career and in which the Baron team has extensive experience.
As of March 31, 1998, the Fund had $449 million in assets invested in 59
securities. The portfolio is relatively concentrated for a diversified fund;
the top ten ideas represent 40% of assets. New positions that have become part
of our top ten holdings this quarter include: Centennial Cellular, Metro
Networks, United Stationers and Unova.
We will sell stocks when the businesses in which we are investing are not
performing to our expectations or when we are concerned that they won't
(Suburban Lodges); when companies are acquired (Regal Cinemas, Culligan); and
when stock prices reach target levels and we find new ideas that are more
compelling (RDO Equipment, Emeritus Corporation). I believe in an old
investment adage -- "cut your weeds and water your flowers". The "pruning" can,
at times, cause higher than normal turnover. For the six months ending March
31, 1998, the Fund's annualized turnover is approximately 46%. For the same six
months, the Fund's tax position is a net loss which bodes well for a small
dividend at year end. As a substantial investor myself in the Fund, I will
always keep an eye on minimizing the tax burden to
shareholders whenever possible.
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LONG TERM POSITIONS
We look forward to finding businesses in which we can invest for a long time;
businesses in which we can make many times our initial investment.
Premier Parks, which I consider a long term growth stock, has a unique history.
It was founded in 1981 as the Tierco Group which from 1981 to 1989 made various
real estate investments and loans. Present management, including CEO Kieran
Burke, got involved in 1989 when the firm was failing. They decided to sell off
all of its real estate holdings and focus the business on its theme park
operations, which at that time consisted of a 50% interest in a small park in
Oklahoma City called Frontier City. Oddly enough, Tierco originally acquired
its interest in the park because they were interested in its land value, not
its operations. The new management became enamored with the park and sensed an
opportunity to build a larger business in the regional amusement park industry.
The thesis was simple and still holds today: First, the assets are regional
monopolies. Usually there is only one park of size in each metropolitan area
and there are significant barriers to entry.
<PAGE>
Second, the experience is fun and affordable. As opposed to taking a family to
a Disney park, a regional park gets $20-$35 per visitor for an entire day of
rides, shows, food and merchandise. And third, most parks are not well
maintained or promoted since they have been owned by families who didn't have
the capital or the expertise to upgrade and market their product. Our team
felt they could do it better and could create a unique company. They attracted
a great theme park operator, Gary Story, and a crack financial man, Jim
Dannheuser, and changed the name of the company to Premier Parks and set out
to expand.
They acquired two small parks in the early '90's and in August 1995, acquired
three parks in the Funtime acquisition. Premier paid $60 million which was 5
times the $12M of trailing cash flow (cash flow is the operative figure with
theme parks because reported depreciation is not a good indicator of capital
expenditures). Over that winter, they invested $22M more into the parks to
renovate the existing facilities and add new rides and attractions. This is the
main strategy of the company -- don't just buy, but buy and improve through
better management and capital investment. The returns have been spectacular.
The three Funtime parks did cash flow of $21M in 1996. So for a total
investment of $82M, they earned over 25% and created an asset worth about three
times their investment (assuming the parks are worth 12 times cash flow).
The company raised public equity in early to mid 1996 at $18/share, which was
the time I first became a shareholder. In the fall of 1996 and early 1997,
Premier acquired six more parks, the most significant being Elitch Gardens in
Denver, Riverside Park in New England and Marine World outside San Francisco.
The returns on these investments including the significant capital invested in
the parks since acquisitions has also been outstanding. Attendance at Riverside
grew from 750K to 1.25M from 1996 to 1997 and cash flow grew from $1.5M to
$8.2M. Elitch's attendance went from 900K to 1.4M and cash flow from
negative $1M to positive $8.6M in its first year under Premier's management.
In late 1997, the company bought Kentucky Kingdom near Louisville and in early
1998, a group of European parks owned by a Dutch company called Walibi, the
first of what could be a big international program. Both of these deals have
the same characteristics of earlier purchases -- modest purchase multiples and
big upside potential in cash flow.
Then lightning struck. Premier acquired the industry leader, which they had
dreamt of owning since the outset. They purchased Six Flags Entertainment from
Time Warner/Boston Ventures for $1.9 billion. Six Flags has twelve parks
throughout the United States and trailing cash flow of about $200M.
Opportunities are great: First, though you wouldn't suspect it, Six Flags was
under-managed and capital starved. Sometimes this happens in LBOs or when a
subsidiary is too small to be significant to its
14
<PAGE>
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BARON SMALL CAP FUND
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larger corporate parent. As a company, Six Flags had EBITDA (cash flow) margins
of 25%, whereas Premier's larger, comparable parks have margins in the high
30s. Margin improvement and modest top line growth along with the expected $25M
of overhead savings could increase Six Flags' cash flow from $200M to over
$400M meaning the purchase price would decline from about 10 times to 5 times
cash flow.
Second, there are numerous revenue opportunities at the Six Flags Parks.
Premier is considering adding water parks, either as part of the existing park
or separate "gates" at four of the parks, plus one of the old Premier Parks. We
expect the aggregate investment to be between $50-60M and the return to be in
excess of 50%. They plan to add rides in some Six Flags parks which, along with
the contemplated water parks, will decrease the waiting time and increase
throughput at the park. They hope to attract real estate developers to build
hotels and camp grounds near the parks which will drive attendance. They plan
to more effectively sell advertising and sponsorship because of the company's
larger footprint. All these revenue opportunities are very exciting because the
incremental margins on additional park revenues is very high.
Third, and most significant, is the corollary benefit of the Six Flags name on
the rest of Premier's portfolio. Premier will re-brand most of its big parks
Six Flags and use this well-known name and the animated characters of Warner
Brothers and DC Comics to better market the parks. Former management of Six
Flags re-flagged a few acquired parks during its tenure and the results were
great. Attendance in Los Angeles went from 1.5M to 3.5M, Chicago from 2.2M to
3.5M and New Jersey from 1.5M to 4.0M. Premier has parks in New England,
Washington/Baltimore, and San Francisco, whose attendance today is about 1M
visitors and, in the future, could be 3M visitors. Also, in-park spending is
expected to rise dramatically as kids lobby their folks to buy Bugs Bunny and
Batman dolls as opposed to nameless kewpie dolls. In-park spending at Six Flags
is $5 more per head than at Premier. The financial impact of this could be
enormous.
For instance, if attendance at Adventure World in Washington D.C. goes from
1.0M to 3.0M and "per-cap" rises from $24 to $35, all reasonable assumptions in
time, cash flow at the park goes from $5M in 1997 to over $35M. And Premier
owns 400 approved underdeveloped acres on the site to build a second gate and
other amenities, both very high return projects.
As you can tell, we are very excited about Premier's prospects. We feel cash
flow could go from about $275M in 1997 to between $550M and $650M over the next
few years from these assets. Though the stock trades at a reasonable price on
the trailing numbers and 1998 estimates, it does not reflect Premier's
potential. Debt will decline from about $1.5B to $1.0B over the time frame so
the cash flow growth will accrete to us, the shareholders. If the stock
maintains its multiples, which we feel it will, the stock could double or
triple.
<PAGE>
As of March 31, 1998, Baron Small Cap had purchased 290,000 shares of Premier
Parks at an average price of $41.23. At the time of our first purchase Premier
had a market cap of $700 million. Premier is the third largest position in the
portfolio.
A second significant investment which I consider both a special situation and a
fallen angel is International Technology Corporation (IT). We are investing in
the new IT, which this June will merge its business with OHM Corporation to
become a very large environmental service company. I go back with both of these
companies a long time, having first invested in IT in 1985 and OHM in 1986 when
they were two leading, fast-growing hazardous waste contractors. In fact, on my
desk at home, safely out of reach of my young kids, is a piece of incinerated
Dioxin-laden stone encased in lucite, that IT gave to me in the mid 80's. (am I
getting old!). Back then, the industry was booming -- the superfund had just
been written and both private and governmental cleanups were starting up and
being pursued in earnest. Both companies had lead technologies and assets in
mobile incineration and wholly owned landfills, which gave them a real
advantage in winning business. Both had aggressive entreprenurial family
managements.
That's where the fun ends. The landfills quickly became liabilities (in fact,
IT is just now finishing the closure of its last waste site), the incinerators
didn't work so well and the NIMBY (Not In My Backyard) syndrome stifled their
deployment. The EPA and other regulatory agencies talked tough, but didn't
enforce the environmental laws strongly enough so cleanups got delayed and
delayed, and the family managements weren't up to the challenges of running
their bigger companies in this difficult environment. The result was disastrous
for the share prices of these stocks. IT traded at over $100/share in late 1986
and fell to the teens in 1989 and today, ten years later, still trades around
$10/share.
The change that has caught our attention and got us back involved is the
following. In November 1996, Carlyle Group, a fine, private merchant banking
firm located in Washington, D.C. made a $45M investment to buy 40% of IT and
effectively took over control of the company. Carlyle has principals who
formerly held high-ranking positions in the federal government and has
successfully invested in businesses related to the government -- most notably
the restructuring of the defense industry. They saw in the environmental
service industry the need for scale, which would increase capabilities and,
most importantly, profitability, as the government and private businesses seek
larger, more comprehensive service providers. They identified IT as a leading
company with a strong reputation, excellent service capabilities and fine
internal systems, which could serve as a platform to build a big company. In
addition, they identified Tony DeLuca, formerly the CFO of IT, as a business
leader who could pull it all together. In other words, IT is transforming
itself from a small, family-run operation into a large, professionally managed,
industry leader.
15
<PAGE>
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
- --------------------------------------------------------------------------------
IT announced the purchase of OHM in late 1997. IT generated about $400M in
revenues in 1997 and OHM did about $600M, so the new IT will be a billion
dollar revenue company. The deal is highly accretive. Management has identified
cost savings of at least $25M which are significant when compared to historical
combined operating profits of less than $50M. The savings are so significant
not only because there are duplicate corporate offices and personnel, but also
because each company spent tens of millions of dollars a year in preparing bids
on new work and now only one bid needs to be prepared.
On a pro-forma basis, the new IT is being valued at about ten times reported
earnings of $.90 per share. This number is being penalized by about $.30 per
share of goodwill amortization which we feel should be added back to earnings,
so the operable earnings number is a $1.20 per share. At about $10 each share,
the stock is cheap. It's even cheaper on free cash flow, which is almost twice
earnings because IT won't pay taxes near term and has capital requirements
which are less than reported depreciation.
Not only is IT a cheap stock, but we are excited about the growth prospects for
the new company. The new entity is already jointly bidding work and has been
highly successful and its clients seem excited about the new company's size and
joint capabilities. Margins are still depressed and we are encouraged that
industry consolidation will lead to better profitability. And importantly, IT
plans to continue to be a consolidator and is pursuing domestic and
international acquisitions of significance.
As opposed to Premier Parks, which is known to Wall Street, but whose prospects
are not well enough appreciated, IT is unknown. Since the industry has been in
the doldrums and the new company is just now being formed, IT is not covered by
Wall Street analysts and has a low profile with investors. As Wall Street
becomes better educated about the new IT, we expect its stock price to rise.
The company's growth and execution of the new business plan should take us
beyond.
As of March 31st, Baron Small Cap had purchased 600,000 shares of IT
Corporation at an average price of $9.81.
Thank you
I want to thank my fellow investors for investing with us. We feel good about
our performance in this quarter and are excited about the prospects of our
companies. I hope these letters give you a better sense of what we are
investing in and how we think about it.
Sincerely,
/s/ Cliff Greenberg
- ------------------------
Cliff Greenberg
Vice President,
Portfolio Management
16
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
Table I
- --------------------------------------------------------------------------------
Portfolio Market Capitalization
- --------------------------------------------------------------------------------
The Funds invest primarily in small and medium sized companies. Table I ranks
the Funds' investments by market capitalization and displays the percentage of
the Funds' portfolios invested in each market capitalization category. At times
the Funds will invest in companies with market capitalizations greater than
$2.0 billion. These 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
- --------------------------------------------------------------------------------
(Millions)
Large Capitalization
- --------------------------------------------------------------------------------
Charles Schwab Corp. ...................... 10,143 3.9%
Starwood Hotels & Resorts ................. 10,100 0.3
Robert Half Intl., Inc. ................... 4,415 2.2
Mirage Resorts, Inc. ...................... 4,365 1.1
Outdoor Systems, Inc. ..................... 4,248 0.8
Promus Hotel Corp. ........................ 4,156 0.5
Public Storage, Inc. ...................... 3,748 0.1
Qualcomm, Inc. ............................ 3,703 0.3
Vornado Realty Trust ...................... 3,630 0.4
----
9.7%
Medium Capitalization
- --------------------------------------------------------------------------
Univision Communications, Inc. ............ 3,208 0.3%
Polo Ralph Lauren Corp. ................... 3,014 3.0
Corrections Corp. of America .............. 2,740 1.1
Stewart Enterprises, Inc. CL A ............ 2,711 1.5
Spieker Properties, Inc. .................. 2,555 1.7
Quorum Health Group, Inc. ................. 2,534 1.2
Manor Care, Inc. .......................... 2,356 7.0
Proffitt's, Inc. .......................... 2,226 0.2
Heftel Broadcasting Corp. ................. 2,207 2.8
Dollar Tree Stores, Inc. .................. 2,089 2.5
Circus Circus Enterprises, Inc. ........... 2,010 0.2
MGM Grand, Inc. ........................... 1,987 0.2
Delta and Pine Land Co. ................... 1,978 1.2
American Radio Systems Corp. CL A ......... 1,875 2.0
Universal Outdoor Hldgs, Inc. ............. 1,730 0.5
UICI ...................................... 1,598 0.2
Paging Network, Inc. ...................... 1,589 0.3
Industrie Natuzzi SPA ADR ................. 1,571 0.1
Sun Intl. Hotels, Ltd ..................... 1,562 1.9
Renaissance Worldwide, Inc.
(Formerly The Registry, Inc.) .......... 1,532 0.7
AMF Bowling, Inc. ......................... 1,530 3.0
Williams-Sonoma, Inc. ..................... 1,512 0.3
Kimco Realty Corp. ........................ 1,511 0.5
Phycor, Inc. .............................. 1,509 0.9
----
33.3%
Small Capitalization
- --------------------------------------------------------------------------
Post Properties, Inc. ..................... 1,418 0.1%
Sylvan Learning Systems, Inc. ............. 1,403 0.7
NTL, Inc. ................................. 1,397 2.2
Cox Radio, Inc. ........................... 1,380 0.8
Sotheby Holdings, Inc. .................... 1,319 3.8
Bristol Hotel Co. ......................... 1,205 2.3
<PAGE>
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
(Millions)
Small Capitalization (Continued)
- --------------------------------------------------------------------------------
DeVry, Inc. ............................. 1,185 1.5%
Choice Hotels Intl. Inc. ................ 1,099 4.6
Premier Parks, Inc. ..................... 1,096 1.5
Unova, Inc. ............................. 1,090 0.2
Storage USA, Inc. ....................... 1,062 0.1
Budget Group, Inc. ...................... 1,038 1.1
Vail Resorts, Inc. ...................... 999 3.0
Genesis Health Ventures, Inc. ........... 989 0.5
Cross Timbers Oil Co. ................... 934 1.5
OM Group, Inc. .......................... 929 1.0
CCA Prison Realty Trust ................. 894 2.0
Flextronics Intl. Ltd. .................. 835 1.1
Stein Mart, Inc. ........................ 818 1.0
Choicepoint, Inc. ....................... 797 0.7
Seacor Smit, Inc. ....................... 769 0.8
ITT Educational Services, Inc. .......... 756 0.1
Iron Mountain, Inc. ..................... 729 0.4
Young Broadcasting, Inc. ................ 717 1.1
Metro Networks, Inc. .................... 713 1.0
Signature Resorts, Inc. ................. 709 0.6
Central European Media Enterprises Ltd. 702 0.0
Centennial Cellular Corp. ............... 677 0.3
Libbey, Inc. ............................ 656 1.0
Sun Communities, Inc. ................... 586 0.2
Vitalink Pharmacy Svcs., Inc. ........... 563 0.5
Marcus Corp. ............................ 534 0.2
Equity Corp. Intl. ...................... 512 0.2
Education Management Corp. .............. 492 0.6
Learning Tree Intl., Inc. ............... 487 1.5
Alexander's, Inc. ....................... 469 0.5
Southern Union Co. ...................... 451 0.1
American Mobile Satellite Corp. ......... 436 1.0
Smart and Final, Inc. ................... 435 0.8
Pierce Leahy Corp. ...................... 417 0.1
Counsel Corp. ........................... 412 0.5
Redwood Trust, Inc. ..................... 353 0.2
CD Radio, Inc. .......................... 351 0.4
Assisted Living Concepts, Inc. .......... 335 0.2
Shaw Group, Inc. ........................ 311 0.2
American HomePatient, Inc. .............. 291 0.1
Kenneth Cole Productions, Inc. .......... 268 0.2
DVI, Inc. ............................... 253 0.7
Avatar Holdings, Inc. ................... 252 0.4
American Freightways Corp. .............. 237 0.1
CoreComm, Inc. .......................... 220 0.4
17
<PAGE>
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
(Millions)
Small Capitalization (Continued)
- --------------------------------------------------------------------------------
Saga Communications, Inc. ................... 212 0.9%
Youth Services Intl., Inc. .................. 191 0.4
Strategic Distribution, Inc. ................ 187 0.1
Sunburst Hospitality Corp. .................. 175 0.6
Apple Orthodontix, Inc. ..................... 171 0.2
Pediatric Services of America, Inc. ......... 153 0.4
USA Truck, Inc. ............................. 141 0.1
Simon Transportation Services, Inc. ......... 97 0.1
----
47.1%
Baron Growth & Income Fund
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
(Millions)
Large Capitalization
- --------------------------------------------------------------------------
Charles Schwab Corp. ........................ 10,143 5.7%
Starwood Hotels & Resorts ................... 10,100 0.8
Robert Half Intl., Inc. ..................... 4,415 2.5
Mirage Resorts, Inc. ........................ 4,365 0.8
Public Storage, Inc. ........................ 3,748 1.0
Qualcomm, Inc. .............................. 3,703 1.6
Vornado Realty Trust ........................ 3,630 1.3
----
13.7%
Medium Capitalization
- --------------------------------------------------------------------------
Polo Ralph Lauren Corp. ..................... 3,014 0.9%
Corrections Corp. of America ................ 2,740 1.2
Stewart Enterprises, Inc. CL A .............. 2,711 1.3
Spieker Properties, Inc. .................... 2,555 2.3
Quorum Health Group, Inc. ................... 2,534 1.2
Manor Care, Inc. ............................ 2,356 5.2
Heftel Broadcasting Corp. ................... 2,207 3.5
Boston Properties, Inc. ..................... 2,171 1.1
Dollar Tree Stores, Inc. .................... 2,089 2.3
Delta and Pine Land Co. ..................... 1,978 1.6
American Radio Systems Corp. CL A ........... 1,875 3.4
Sun Intl. Hotels, Ltd. ...................... 1,562 1.9
AMF Bowling, Inc. ........................... 1,530 6.5
Kimco Realty Corp. .......................... 1,511 1.2
----
33.6%
Small Capitalization
- --------------------------------------------------------------------------
Cadillac Fairview Corp. ..................... 1,435 0.8%
Post Properties, Inc. (Formerly
Columbus Realty Trust) ................... 1,418 1.1
Sylvan Learning Systems, Inc. ............... 1,403 0.6
NTL, Inc. ................................... 1,397 2.6
Scandinavian Broadcasting Systems ........... 1,347 0.4
Sotheby Holdings, Inc. ...................... 1,319 0.8
Bristol Hotel Co. ........................... 1,205 2.7
DeVry, Inc. ................................. 1,185 1.3
Choice Hotels Intl., Inc. ................... 1,099 8.6
Storage USA, Inc. ........................... 1,062 1.1
Reckson Associates Realty Corp. ............. 1,054 0.5
Vail Resorts, Inc. .......................... 999 1.1
Cross Timbers Oil Co. ....................... 934 2.0
OM Group, Inc. .............................. 929 1.2
<PAGE>
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
(Millions)
Small Capitalization (Continued)
- --------------------------------------------------------------------------------
CCA Prison Realty Trust ..................... 894 2.1%
Flextronics Intl. Ltd. ...................... 835 1.2
Stein Mart, Inc. ............................ 818 0.8
Choicepoint, Inc. ........................... 797 0.4
Seacor Holdings, Inc. ....................... 769 0.4
Metro Networks, Inc. ........................ 713 0.9
Taubman Centers, Inc. ....................... 691 1.0
CBL & Associates Properties, Inc. ........... 590 0.4
Sun Communities, Inc. ....................... 586 1.3
Healthcare Realty Trust, Inc. ............... 584 0.6
Marcus Corp. ................................ 534 0.4
Education Management Corp. .................. 492 0.4
Learning Tree Intl., Inc. ................... 487 1.2
Alexander's, Inc. ........................... 469 0.4
Southern Union Co. .......................... 451 1.4
American Mobile Satellite Corp. ............. 436 1.8
Smart and Final, Inc. ....................... 435 2.1
Pierce Leahy Corp. .......................... 417 0.9
Counsel Corp. ............................... 412 2.3
ESG Re Ltd. ................................. 362 0.9
Medallion Financial Corp. ................... 349 1.0
Assisted Living Concepts, Inc. .............. 335 0.3
DVI Health Services Corp. ................... 253 1.0
Avatar Holdings, Inc. ....................... 252 0.2
Saga Communications, Inc. ................... 212 1.1
Sunburst Hospitality Corp. .................. 175 1.4
Apple Orthodontix, Inc. ..................... 171 0.2
Children's Comprehensive Services, Inc. 153 0.6
Pediatric Services of America, Inc. ......... 153 0.7
----
52.0%
Baron Small Cap Fund
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
(Millions)
Medium Capitalization
- --------------------------------------------------------------------------------
US Office Products Co ....................... 2,530 1.7%
Universal Outdoor Hldgs, Inc. ............... 1,730 3.4
Paging Network, Inc. ........................ 1,589 1.7
Sun Intl. Hotels, Ltd. ...................... 1,562 1.3
AMF Bowling, Inc. ........................... 1,530 3.4
Williams-Sonoma, Inc. ....................... 1,512 2.1
Kimco Realty Corp. .......................... 1,511 1.5
----
15.0%
Small Capitalization
- --------------------------------------------------------------------------------
Culligan Water Tech., Inc. .................. 1,498 3.6%
Sylvan Learning Systems, Inc. ............... 1,403 0.3
Mobile Telecommunication
Technologies Corp ........................ 1,237 2.0
Bristol Hotel Co. ........................... 1,205 1.5
Premier Parks, Inc. ......................... 1,096 3.7
Unova, Inc. ................................. 1,090 2.9
SFX Broadcasting, Inc. ...................... 1,045 2.4
Budget Group, Inc. .......................... 1,038 1.7
Amphenol Corp. .............................. 1,011 1.0
18
<PAGE>
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Equity % of
Company Market Cap Portfolio
- --------------------------------------------------------------------------------
(Millions)
Small Capitalization (Continued)
- --------------------------------------------------------------------------------
United Stationers, Inc. .................... 999 3.2%
Regal Cinemas, Inc. ........................ 997 0.4
Century Communications Corp. ............... 954 0.5
CCA Prison Realty Trust .................... 894 1.9
United Rentals, Inc. ....................... 874 1.0
Excel Realty Trust, Inc. ................... 835 1.5
Paragon Health Network, Inc. ............... 824 1.3
Harman International Industries, Inc. ...... 820 1.6
Choicepoint, Inc. .......................... 797 3.0
Iron Mountain, Inc. ........................ 729 3.8
Intrawest Corp. ............................ 722 1.2
Young Broadcasting, Inc. ................... 717 1.8
Metro Networks, Inc. ....................... 713 3.6
Centennial Cellular Corp. .................. 677 3.8
Commnet Cellular, Inc. ..................... 628 0.8
Dril-Quip, Inc. ............................ 560 1.5
Commonwealth Telephone
Enterprises, Inc. ....................... 517 1.9
El Paso Electric Co ........................ 501 1.4
----
53.4%
Micro Capitalization
- --------------------------------------------------------------------------------
West Marine, Inc. .......................... 490 1.0%
Pierce Leahy Corp. ......................... 417 0.6
Counsel Corp. .............................. 412 3.4
Province Healthcare Co. .................... 342 0.6
Assisted Living Concepts, Inc. ............. 335 1.7
U.S.A. Floral Products, Inc. ............... 326 1.3
Coinmach Laundry Corp. ..................... 278 1.9
Specialty Teleconstructors, Inc. ........... 270 0.7
Kenneth Cole Productions, Inc. ............. 268 0.9
Crescent Operating, Inc. ................... 240 0.7
Pentacon, Inc. ............................. 217 0.5
Strategic Distribution, Inc. ............... 187 1.1
Dispatch Management Services Corp. ......... 181 0.1
Cineplex Odeon Corp. ....................... 175 1.4
Apple Orthodontix, Inc. .................... 171 0.8
Career Education Corp. ..................... 165 1.8
Mortons Restaurant Group, Inc. ............. 153 1.8
Rural Cellular Corp. ....................... 151 2.1
Bright Horizons Childrens Center, Inc. ..... 139 0.1
Equity Marketing, Inc. ..................... 133 1.5
Medical Resources, Inc. .................... 120 0.9
International Technology Corp .............. 99 1.4
U.S. Diagnostic, Inc. ...................... 99 0.3
Simon Transportation Services, Inc. ........ 97 0.9%
----
27.3
<PAGE>
Table II
- --------------------------------------------------------------------------------
Portfolio Risk Characteristics
- --------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external risk
factors that might impact the companies in which the Funds invest. Table II
displays some of the risk factors that are currently monitored and the
percentage of each portfolio considered exposed to these factors. The Funds use
this tool to avoid concentration of risk within the portfolios.
Baron Baron
Baron Growth Small
Asset & Income Cap
Fund Fund Fund
----------- ----------- ----------
% of % of % of
Portfolio Portfolio Portfolio
----------- ----------- ----------
Oil Price Sensitivity ........... 23.6% 22.0% 14.3%
Leverage (Debt greater than 40%
of Market Cap) ............... 21.8 33.4 37.5
Foreign Sales Dependent
(Sales greater than 10%) ..... 12.4 16.1 13.7
Volatility (Beta greater than
1.2) ......................... 12.9 14.6 14.5
Over-the-Counter
Securities ................... 25.2 24.8 51.5
Unseasoned Securities
(Publicly owned
for less than 3 years) ..... 30.3 37.6 48.5
(Publicly owned
for less than 1 year) ...... 9.2 14.0 21.7
Turnarounds ..................... 0.0 0.0 6.9
Development Companies ........... 3.0 3.7 7.6
19
<PAGE>
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
- --------------------------------------------------------------------------------
Table III
- --------------------------------------------------------------------------------
Historical Information
- --------------------------------------------------------------------------------
Table III displays on a quarterly basis the Funds' closing net assets and net
asset value per share, dividend distributions and the value of $10,000 invested
in a Fund at the time of its inception.
- --------------------------------------------------------------------------------
Baron Asset Fund
- --------------------------------------------------------------------------------
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- --------------------------------------------------------------------------------
06/12/87 $ 108,728 $ 10.00 $10,000
- --------------------------------------------------------------------------------
06/30/87 1,437,521 10.71 10,710
- --------------------------------------------------------------------------------
09/30/87 3,905,221 11.95 11,950
- --------------------------------------------------------------------------------
12/31/87 4,406,972 10.10 $ 0.197 10,298
- --------------------------------------------------------------------------------
03/31/88 6,939,435 11.56 11,786
- --------------------------------------------------------------------------------
06/30/88 9,801,677 12.68 12,928
- --------------------------------------------------------------------------------
09/30/88 11,734,509 12.98 13,234
- --------------------------------------------------------------------------------
12/31/88 15,112,031 12.87 0.701 13,843
- --------------------------------------------------------------------------------
03/31/89 22,269,578 14.75 15,864
- --------------------------------------------------------------------------------
06/30/89 31,397,929 16.06 17,273
- --------------------------------------------------------------------------------
09/30/89 47,658,616 17.22 18,521
- --------------------------------------------------------------------------------
12/31/89 49,007,084 14.66 1.409 17,299
- --------------------------------------------------------------------------------
03/31/90 50,837,946 13.87 16,367
- --------------------------------------------------------------------------------
06/30/90 54,413,786 14.32 16,898
- --------------------------------------------------------------------------------
09/30/90 40,002,612 10.88 12,838
- --------------------------------------------------------------------------------
12/31/90 42,376,625 11.75 0.198 14,100
- --------------------------------------------------------------------------------
03/31/91 47,104,889 13.88 16,656
- --------------------------------------------------------------------------------
06/30/91 45,600,730 13.81 16,572
- --------------------------------------------------------------------------------
09/30/91 47,409,180 14.80 17,760
- --------------------------------------------------------------------------------
12/31/91 46,305,042 15.71 0.035 18,895
- --------------------------------------------------------------------------------
03/31/92 48,011,634 16.72 20,109
- --------------------------------------------------------------------------------
06/30/92 42,289,409 15.28 18,377
- --------------------------------------------------------------------------------
09/30/92 43,816,305 16.20 19,484
- --------------------------------------------------------------------------------
12/31/92 47,955,530 17.73 0.162 21,522
- --------------------------------------------------------------------------------
03/31/93 50,015,244 18.82 22,845
- --------------------------------------------------------------------------------
06/30/93 52,432,090 19.70 23,912
- --------------------------------------------------------------------------------
09/30/93 59,916,570 21.91 26,595
- --------------------------------------------------------------------------------
12/31/93 64,069,114 21.11 0.774 26,576
- --------------------------------------------------------------------------------
03/31/94 63,099,109 20.69 26,047
- --------------------------------------------------------------------------------
06/30/94 68,880,300 20.40 25,682
- --------------------------------------------------------------------------------
09/30/94 80,258,542 22.82 28,728
- --------------------------------------------------------------------------------
12/31/94 87,058,228 22.01 0.656 28,547
- --------------------------------------------------------------------------------
03/31/95 160,603,528 24.29 31,505
- --------------------------------------------------------------------------------
06/30/95 202,259,502 25.79 33,450
- --------------------------------------------------------------------------------
09/30/95 289,973,331 29.30 38,003
- --------------------------------------------------------------------------------
<PAGE>
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
- --------------------------------------------------------------------------------
12/31/97 3,793,013,753 48.51 0.000 63,060
- --------------------------------------------------------------------------------
03/31/98 5,187,450,337 53.68 69,781
- --------------------------------------------------------------------------------
* Assumes all dividends were reinvested and no shares were
redeemed.
BARON ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 1998
One year 53.5%
- --------------------------------------------------------------------------------
Two years 25.5%
- --------------------------------------------------------------------------------
Three years 30.4%
- --------------------------------------------------------------------------------
Four years 27.9%
- --------------------------------------------------------------------------------
Five years 25.0%
- --------------------------------------------------------------------------------
Ten years 19.5%
- --------------------------------------------------------------------------------
Since inception June 12, 1987 19.7%
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Baron Growth & Income Fund
- --------------------------------------------------------------------------------
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- --------------------------------------------------------------------------------
01/03/95 $ 741,000 $ 10.00 $10,000
- --------------------------------------------------------------------------------
03/31/95 3,425,507 11.78 11,780
- --------------------------------------------------------------------------------
06/30/95 7,231,619 13.18 13,180
- --------------------------------------------------------------------------------
09/30/95 28,632,467 14.77 14,770
- --------------------------------------------------------------------------------
12/31/95 41,043,705 15.11 $ 0.142 15,254
- --------------------------------------------------------------------------------
03/31/96 77,337,831 16.90 17,061
- --------------------------------------------------------------------------------
06/30/96 172,070,435 18.20 18,373
- --------------------------------------------------------------------------------
09/30/96 207,234,494 18.40 18,575
- --------------------------------------------------------------------------------
12/31/96 243,983,507 19.04 0.255 19,483
- --------------------------------------------------------------------------------
03/31/97 273,907,177 18.57 19,002
- --------------------------------------------------------------------------------
06/30/97 316,981,759 21.82 22,328
- --------------------------------------------------------------------------------
09/30/97 390,831,861 24.89 25,469
- --------------------------------------------------------------------------------
12/31/97 415,134,319 24.88 0.073 25,535
- --------------------------------------------------------------------------------
03/31/98 511,405,730 27.28 27,998
- --------------------------------------------------------------------------------
* Assumes all dividends were reinvested and no shares were redeemed.
BARON GROWTH & INCOME FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 1998
One year 47.3%
- --------------------------------------------------------------------------------
Two years 28.1%
- --------------------------------------------------------------------------------
Three years 33.5%
- --------------------------------------------------------------------------------
Since inception January 3, 1995 37.3%
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Baron Small Cap Fund
- --------------------------------------------------------------------------------
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- --------------------------------------------------------------------------------
10/01/97 $112,604,624 $ 10.00 $10,000
- --------------------------------------------------------------------------------
12/31/97 285,270,924 10.31 10,310
- --------------------------------------------------------------------------------
03/31/98 449,240,304 11.84 11,840
- --------------------------------------------------------------------------------
*Assumes all dividends were reinvested and no shares were redeemed.
BARON SMALL CAP FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 1998
Since inception October 1, 1997 18.4%
- --------------------------------------------------------------------------------
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.
The companies mentioned in this report are not recommendations by Baron Funds
or the adviser and the securities may be sold by Baron Funds at any time.
21
<PAGE>
- --------------------------------------------------------------------------------
BARON ASSET FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1998 (Unaudited) Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (92.17%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (11.68%)
5,969,000 AMF Bowling, Inc. *# $152,955,625
580,000 Circus Circus Enterprises, Inc.* 12,252,500
667,500 Marcus Corp. 11,764,688
275,000 MGM Grand, Inc.* 9,418,750
2,365,000 Mirage Resorts, Inc.* 57,499,062
1,313,000 Premier Parks, Inc.*# 76,154,000
1,615,000 Signature Resorts, Inc.* 31,896,250
2,025,000 Sun Intl. Hotels, Ltd*# 95,934,375
5,400,000 Vail Resorts, Inc.*# 157,950,000
------------
605,825,250
Business Services (3.65%)
667,000 Choicepoint, Inc.* 36,309,813
1,277,000 Renaissance Worldwide, Inc.*
(Formerly The Registry, Inc.) 35,037,687
2,335,000 Robert Half Intl., Inc.* 112,080,000
965,000 Strategic Distribution, Inc.* 5,790,000
------------
189,217,500
Chemical (0.96%)
1,185,000 OM Group, Inc. # 49,918,125
Communications (3.19%)
3,500,000 American Mobile Satellite Corp.*# 49,875,000
507,000 Centennial Cellular Corp.* 13,324,568
1,272,500 CoreComm, Inc.*# 21,195,015
1,539,501 NTL, Inc.* 66,583,418
940,000 Paging Network, Inc.* 14,452,500
------------
165,430,501
Communications Equipment (0.34%)
335,000 Qualcomm, Inc.* 17,922,500
Consumer Products (1.63%)
338,000 Equity Corp. Intl.* 8,090,875
1,375,000 Stewart Enterprises, Inc. CL A 76,484,375
------------
84,575,250
Education (4.41%)
2,317,600 DeVry, Inc.*# 79,232,950
875,000 Education Management Corp.*# 29,750,000
171,200 ITT Educational Services, Inc.* 4,793,600
3,460,000 Learning Tree Intl., Inc.*# 76,552,500
815,000 Sylvan Learning Systems, Inc.* 38,406,875
------------
228,735,925
Energy (2.37%)
3,952,500 Cross Timbers Oil Co.# 79,544,063
750,000 Seacor Smit, Inc.*# 43,640,625
------------
123,184,688
Financial (4.85%)
5,390,000 Charles Schwab Corp. 204,820,000
1,505,900 DVI, Inc.*# 34,541,581
362,000 UICI* 12,511,625
------------
251,873,206
Food and Agriculture (1.23%)
1,225,004 Delta and Pine Land Co. 63,700,208
Government Services (1.34%)
1,657,500 Corrections Corp. of America* 56,562,187
690,000 Youth Services Intl., Inc.*# 12,765,000
------------
69,327,187
<PAGE>
March 31, 1998 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Health Services (11.53%)
373,000 American HomePatient, Inc.* $ 7,250,188
820,000 Apple Orthodontix, Inc.*# 10,301,250
440,000 Assisted Living Concepts, Inc.* 9,350,000
1,790,000 Counsel Corp.*# 26,402,500
846,000 Genesis Health Ventures, Inc.* 23,793,750
9,786,200 Manor Care, Inc.# 362,089,400
1,080,000 Pediatric Services of America, Inc.*# 23,085,000
2,080,000 Phycor, Inc.* 46,930,000
1,880,000 Quorum Health Group, Inc.* 63,215,000
1,188,300 Vitalink Pharmacy Svcs., Inc.* 25,622,719
------------
598,039,807
Hotels and Lodging (8.03%)
4,362,300 Bristol Hotel Co.*# 119,963,250
13,012,600 Choice Hotels Intl. Inc.*# 239,106,525
535,125 Promus Hotel Corp.* 25,552,219
3,650,036 Sunburst Hospitality Corp.*# 31,937,815
------------
416,559,809
Manufacturing (1.54%)
1,373,000 Flextronics Intl. Ltd.*# 59,296,437
422,100 Shaw Group, Inc.* 10,526,119
500,000 Unova, Inc.* 10,000,000
------------
79,822,556
Media and Entertainment (10.31%)
1,390,800 American Radio Systems Corp. CL A* 88,228,875
851,700 CD Radio, Inc.*# 18,630,938
58,000 Central European Media
Enterprises Ltd.* 1,689,250
830,000 Cox Radio, Inc.* 40,255,000
3,270,000 Heftel Broadcasting Corp.*# 146,332,500
1,245,000 Metro Networks, Inc.*# 53,535,000
1,160,500 Outdoor Systems, Inc.* 40,690,031
2,345,602 Saga Communications, Inc.*# 48,964,442
394,300 Universal Outdoor Hldgs, Inc.* 25,432,350
450,000 Univision Communications, Inc.* 16,762,500
1,092,000 Young Broadcasting, Inc.* 54,600,000
------------
535,120,886
Real Estate and REITs (7.16%)
252,000 Alexander's, Inc.*# 23,609,250
774,000 Avatar Holdings, Inc.*# 21,285,000
2,500,000 CCA Prison Realty Trust # 103,593,750
600,000 Iron Mountain, Inc.* 22,500,000
790,000 Kimco Realty Corp. 27,946,250
286,000 Pierce Leahy Corp.* 7,239,375
179,999 Post Properties, Inc. 7,188,710
230,000 Public Storage, Inc. 7,101,250
500,000 Redwood Trust, Inc. 11,750,000
2,100,000 Spieker Properties, Inc. 86,625,000
320,000 Starwood Hotels & Resorts 17,100,000
140,000 Storage USA, Inc. 5,372,500
315,000 Sun Communities, Inc. 10,946,250
435,000 Vornado Realty Trust 18,949,687
------------
371,207,022
22
<PAGE>
- --------------------------------------------------------------------------------
BARON ASSET FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1998 (Unaudited)
Shares or Market
Principal Amount Value
- --------------------------------------------------------------------------------
Retail Trade and Restaurants (11.80%)
2,460,000 Dollar Tree Stores, Inc.*# $ 130,687,500
509,500 Kenneth Cole Productions, Inc. * 10,253,688
5,230,000 Polo Ralph Lauren Corp.* 157,226,875
310,000 Proffitt's, Inc.* 11,237,500
2,237,900 Smart and Final, Inc.# 43,359,312
8,430,000 Sotheby Holdings, Inc. 195,997,500
1,395,000 Stein Mart, Inc.*# 49,696,875
240,000 Williams-Sonoma, Inc.* 13,890,000
--------------
612,349,250
Transportation (1.41%)
250,000 American Freightways Corp.* 2,750,000
1,560,000 Budget Group, Inc.* 58,500,000
345,000 Simon Transportation Services, Inc.* 5,325,938
430,000 USA Truck, Inc.* 6,450,000
--------------
73,025,938
Utility Services (0.12%)
260,000 Southern Union Co.* 6,240,000
Wholesale Trade (1.07%)
180,000 Industrie Natuzzi SPA ADR 4,972,500
1,350,000 Libbey, Inc.# 50,287,500
--------------
55,260,000
Miscellaneous (3.55%) 184,219,460
--------------
Total Common Stocks
(Cost $3,389,238,374) 4,781,555,068
--------------
- --------------------------------------------------------------------------------
Convertible Preferred (0.29%)
- --------------------------------------------------------------------------------
Media and Entertainment (0.29%)
200,000 American Radio Systems
Corp. 7% Conv. + 14,900,000
--------------
Total Convertible Preferred
(Cost $10,000,000) 14,900,000
--------------
- --------------------------------------------------------------------------------
Corporate Bonds (1.10%)
- --------------------------------------------------------------------------------
Communications (0.94%)
$ 20,500,000 Intl. CableTel, Inc. 7.25%
Conv. Sub. Notes 04/15/2005+ 31,160,000
14,000,000 Intl. CableTel, Inc. 7%
Conv. Sub. Notes 06/15/2008 17,570,000
--------------
48,730,000
Government Services (0.16%)
5,450,000 Youth Services Intl. Inc. 7.00%
Conv. Sub. Deb. 02/01/2006 8,331,688
--------------
Total Corporate Bonds
(Cost $41,352,215) 57,061,688
--------------
<PAGE>
March 31, 1998
Market
Principal Amount Value
- --------------------------------------------------------------------------------
Short Term Money Market Instruments (6.78%)
- --------------------------------------------------------------------------------
$201,688,000 Associates Corporation of N.A. 5.95%
Due 04/01/98 $ 201,688,000
150,000,000 General Electric Capital Corp. 5.57%
Due 04/03/98 150,000,000
--------------
Total Short Term Money Market
Instruments (Cost $351,688,000) 351,688,000
--------------
Total Investments (100.34%)
(Cost $3,792,278,589) 5,205,204,756
--------------
Liabilities Less
Cash and Other Assets (17,754,419)
--------------
Net Assets (Equivalent to $53.68 per
share based on 96,643,077 shares of
beneficial interest outstanding) $5,187,450,337
==============
% Represents percentage of net assets
+ Restricted securities pursuant to Rule 144A
# Issuers that may be deemed to be "affiliated."
* Non-income producing securities
** For Federal income tax purposes the cost basis is $3,793,002,541. Aggregate
unrealized appreciation and depreciation of investments are $1,458,326,035
and $46,123,820, respectively.
See Notes to Financial Statements.
23
<PAGE>
- --------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1998 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (96.13%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (10.74%)
1,292,000 AMF Bowling, Inc.* $33,107,500
120,000 Marcus Corp. 2,115,000
160,000 Mirage Resorts, Inc.* 3,890,000
210,000 Sun Intl. Hotels, Ltd.* 9,948,750
200,000 Vail Resorts, Inc.* 5,850,000
-----------
54,911,250
Business Services (2.86%)
35,000 Choicepoint, Inc. 1,905,313
265,000 Robert Half Intl., Inc.* 12,720,000
-----------
14,625,313
Chemical (1.15%)
140,000 OM Group, Inc. 5,897,500
Communications (3.26%)
640,000 American Mobile Satellite Corp.* 9,120,000
175,000 NTL, Inc.* 7,568,750
-----------
16,688,750
Communications Equipment (1.57%)
150,000 Qualcomm, Inc.* 8,025,000
Consumer Products (1.25%)
115,000 Stewart Enterprises, Inc. CL A 6,396,875
Education (3.92%)
150,000 Children's Comprehensive Services,
Inc.* 2,850,000
190,000 DeVry, Inc.* 6,495,625
58,000 Education Management Corp.* 1,972,000
267,500 Learning Tree Intl., Inc.* 5,918,437
60,000 Sylvan Learning Systems, Inc.* 2,827,500
-----------
20,063,562
Energy (1.97%)
500,000 Cross Timbers Oil Co. 10,062,500
Financial (8.52%)
769,500 Charles Schwab Corp. 29,241,000
220,000 DVI Health Services Corp.* 5,046,250
170,000 ESG Re Ltd.* 4,420,000
180,000 Medallion Financial Corp. 4,882,500
-----------
43,589,750
Food and Agriculture (1.63%)
160,000 Delta and Pine Land Co. 8,319,844
Government Services (1.24%)
185,000 Corrections Corp. of America* 6,313,125
Health Services (9.68%)
100,000 Apple Orthodontix, Inc.* 1,256,250
800,000 Counsel Corp.* 11,800,000
725,000 Manor Care, Inc. 26,825,000
167,500 Pediatric Services of America, Inc.* 3,580,313
180,000 Quorum Health Group, Inc.* 6,052,500
-----------
49,514,063
Hotels and Lodging (12.71%)
505,000 Bristol Hotel Co.* 13,887,500
2,400,000 Choice Hotels Intl., Inc.* 44,100,000
800,000 Sunburst Hospitality Corp.* 7,000,000
-----------
64,987,500
Manufacturing (1.18%)
140,000 Flextronics Intl. Ltd.* 6,046,250
<PAGE>
March 31, 1998 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Media and Entertainment (8.02%)
199,000 American Radio Systems Corp. CL A* $12,624,062
400,000 Heftel Broadcasting Corp.* 17,900,000
110,000 Metro Networks, Inc.* 4,730,000
275,000 Saga Communications, Inc.* 5,740,625
-----------
40,994,687
Real Estate and REITs (18.04%)
20,000 Alexander's, Inc.* 1,873,750
35,000 Avatar Holdings, Inc.* 962,500
160,000 Boston Properties, Inc. 5,630,000
180,000 Cadillac Fairview Corp.* 3,892,500
90,000 CBL & Associates Properties, Inc. 2,205,000
259,000 CCA Prison Realty Trust 10,732,313
110,000 Healthcare Realty Trust, Inc. 3,107,500
170,000 Kimco Realty Corp. 6,013,750
175,000 Pierce Leahy Corp.* 4,429,687
139,999 Post Properties, Inc. (Formerly 5,591,210
Columbus Realty Trust)
170,000 Public Storage, Inc. 5,248,750
100,000 Reckson Associates Realty Corp. 2,637,500
280,000 Spieker Properties, Inc. 11,550,000
80,000 Starwood Hotels & Resorts 4,275,000
150,000 Storage USA, Inc. 5,756,250
190,000 Sun Communities, Inc. 6,602,500
400,000 Taubman Centers, Inc. 5,225,000
150,000 Vornado Realty Trust 6,534,375
-----------
92,267,585
Retail Trade and Restaurants (6.98%)
220,000 Dollar Tree Stores, Inc.* 11,687,500
155,000 Polo Ralph Lauren Corp.* 4,659,688
562,900 Smart and Final, Inc. 10,906,187
180,000 Sotheby Holdings, Inc. 4,185,000
120,000 Stein Mart, Inc.* 4,275,000
-----------
35,713,375
Utility Services (1.41%)
293,997 Southern Union Co.* 7,199,928
-----------
Total Common Stocks
(Cost $344,803,727)
491,616,857
-----------
- --------------------------------------------------------------------------------
Convertible Preferred (1.17%)
- --------------------------------------------------------------------------------
Media and Entertainment (1.17%)
80,000 American Radio Systems Corp. 7%
Conv.+ 5,960,000
-----------
Total Convertible Preferred
(Cost $3,890,000)
5,960,000
-----------
24
<PAGE>
- --------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1998 (Unaudited)
Market
Principal Amount Value
- --------------------------------------------------------------------------------
Corporate Bonds (2.16%)
- --------------------------------------------------------------------------------
Communications (1.45%)
$2,000,000 Intl. CableTel, Inc. 7.25% Conv. Sub.
Notes 4/15/2005+ $3,040,000
2,000,000 Intl. CableTel, Inc. 7.0% Conv. Sub.
Notes 6/15/2008 2,510,000
1,500,000 Scandinavian Broadcasting Systems
7.0% Conv. Sub. Notes 12/01/2004 1,845,000
----------
7,395,000
Health Services (0.34%)
1,500,000 Assisted Living Concepts, Inc. 6.0%
Conv. Sub. Notes 11/01/2002 1,762,000
Energy (0.37%)
1,700,000 Seacor Holdings 5.375% Conv.
11/15/2006+ 1,874,250
----------
Total Corporate Bonds
(Cost $8,796,634) 11,031,750
----------
<PAGE>
March 31, 1998 (unaudited)
Market
Principal Amount Value
- --------------------------------------------------------------------------------
Short Term Money Market Instruments (0.54%)
- --------------------------------------------------------------------------------
$2,790,000 Associates Corp. of N.A. 5.95%
Due 04/01/1998 $ 2,790,000
-------------
Total Short Term Money Market Instruments
(Cost $2,790,000) 2,790,000
-------------
Total Investments (100%)
(Cost $360,280,361**) 511,398,607
-------------
Cash and Other Assets
Less Liabilities 7,123
-------------
Net Assets (Equivalent to $27.28 per
share based on 18,748,801 shares of
beneficial interest outstanding) $ 511,405,730
=============
% Represents percentage of net assets
+ Restricted securities pursuant to Rule 144A
* Non-income producing securities
** For Federal income tax purposes the cost basis is $360,918,148. Aggregate
unrealized appreciation and depreciation of investments are $154,759,810 and
$4,279,351, respectively.
See Notes to Financial Statements.
25
<PAGE>
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1998 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (95.72%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (11.43%)
600,000 AMF Bowling, Inc.* $15,375,000
3,606,900 Cineplex Odeon Corp.* 6,086,644
250,000 Intrawest Corp. 5,296,875
290,000 Premier Parks, Inc.* 16,820,000
61,300 Regal Cinemas, Inc.* 1,839,000
125,000 Sun Intl. Hotels, Ltd.* 5,921,875
-----------
51,339,394
Business Services (9.20%)
250,000 Choicepoint, Inc.* 13,609,375
400,000 Coinmach Laundry Corp.* 8,450,000
15,000 Dispatch Management Services Corp.* 236,250
800,000 Strategic Distribution, Inc.* 4,800,000
230,000 United Stationers, Inc.* 14,216,875
-----------
41,312,500
Communications (12.92%)
650,000 Centennial Cellular Corp.* 17,082,780
75,100 Commnet Cellular, Inc.* 3,426,437
300,000 Commonwealth Telephone
Enterprises, Inc.* 8,437,500
400,000 Mobile Telecommunication
Technologies Corp* 8,950,000
500,000 Paging Network, Inc.* 7,687,500
550,000 Rural Cellular Corp.* 9,350,000
92,000 Specialty Teleconstructors, Inc.* 3,105,000
-----------
58,039,217
Consumer Products (4.35%)
300,000 Equity Marketing, Inc.* 6,590,610
165,000 Harman International Industries, Inc. 7,260,000
250,000 U.S.A. Floral Products, Inc.* 5,671,875
-----------
19,522,485
Consumer Services (3.65%)
275,000 Culligan Water Tech., Inc.* 16,379,688
Education (2.24%)
25,000 Bright Horizons Childrens Center, Inc.* 637,500
375,000 Career Education Corp.* 8,250,000
25,000 Sylvan Learning Systems, Inc.* 1,178,125
-----------
10,065,625
Energy (1.52%)
210,000 Dril-Quip, Inc.* 6,825,000
Environmental (1.36%)
600,000 International Technology Corp.* 6,112,500
Health Services (8.97%)
300,000 Apple Orthodontix, Inc.* 3,768,750
350,000 Assisted Living Concepts, Inc.* 7,437,500
1,025,000 Counsel Corp.* 15,118,750
775,000 Medical Resources, Inc.* 4,092,930
300,000 Paragon Health Network, Inc.* 5,962,500
100,000 Province Healthcare Co.* 2,625,000
300,000 U.S. Diagnostic, Inc.* 1,293,750
-----------
40,299,180
<PAGE>
March 31, 1998 (Unaudited)
Market
Shares Value
- --------------------------------------------------------------------------------
Hotels and Lodging (1.53%)
250,000 Bristol Hotel Co.* $ 6,875,000
Manufacturing (4.40%)
75,000 Amphenol Corp.* 4,326,562
175,000 Pentacon, Inc.* 2,450,000
650,000 Unova, Inc.* 13,000,000
-----------
19,776,562
Media and Entertainment (11.68%)
175,000 Century Communications Corp.* 2,242,188
375,000 Metro Networks, Inc.* 16,125,000
110,000 SFX Broadcasting, Inc.* 10,711,250
235,000 Universal Outdoor Hldgs, Inc.* 15,157,500
165,000 Young Broadcasting, Inc.* 8,250,000
-----------
52,485,938
Real Estate and REITs (10.00%)
210,000 CCA Prison Realty Trust 8,701,875
155,500 Crescent Operating, Inc.* 3,323,812
195,000 Excel Realty Trust, Inc. 6,946,875
450,000 Iron Mountain, Inc.* 16,875,000
185,000 Kimco Realty Corp. 6,544,375
100,000 Pierce Leahy Corp.* 2,531,250
-----------
44,923,187
Retail Trade and Restaurants (8.43%)
200,000 Kenneth Cole Productions, Inc. * 4,025,000
350,000 Mortons Restaurant Group, Inc.*# 8,071,875
175,000 United Rentals, Inc.* 4,550,000
400,000 US Office Products Co* 7,600,000
150,000 West Marine, Inc.* 4,368,750
160,000 Williams-Sonoma, Inc.* 9,260,000
-----------
37,875,625
Transportation (2.61%)
200,000 Budget Group, Inc.* 7,500,000
275,000 Simon Transportation Services, Inc.* 4,245,313
-----------
11,745,313
Utility Services (1.43%)
750,000 El Paso Electric Co* 6,421,875
-----------
Total Common Stocks
(Cost $369,599,947)
429,999,089
-----------
26
<PAGE>
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1998
Market
Contracts Value
- --------------------------------------------------------------------------------
Options Purchased (0.86%)
- --------------------------------------------------------------------------------
Media and Entertainment (0.86%)
450 American Radio Systems Corp.
Call $45.00 4/18/1998 $ 832,500
1,000 American Radio Systems Corp.
Call $50.00 4/18/1998 1,350,000
1,650 American Radio Systems Corp.
Call $53.41 4/30/1998 1,681,721
----------
Total Options Purchased
(Cost $2,456,472) 3,864,221
----------
March 31, 1998
Market
Principal Amount Value
- --------------------------------------------------------------------------------
Short Term Money Market Instruments (5.02%)
- --------------------------------------------------------------------------------
$22,572,000 Associates Corporation of N.A., 5.95%
Due 04/01/1998 $ 22,572,000
------------
Total Short Term Money Market
Instruments (Cost $22,572,000) 22,572,000
------------
Total Investments (101.60%)
(Cost $394,628,419**) 456,435,310
------------
Options Written (-0.01%)
(1,650) American Radio Systems Corp.
Put $53.41 4/30/1998 (27,184)
------------
Total Options Written (27,184)
------------
(Proceeds $89,265)
Liabilities Less
Cash and Other Assets (7,167,822)
------------
Net Assets (Equivalent to $11.84 per
share based on 37,944,889 shares of
beneficial interest outstanding) $449,240,304
============
% Represents percentage of net assets
# Issuers that may be deemed to be "affiliated."
* Non-income producing securities
** For Federal income tax purposes the cost basis is identical. Aggregate
unrealized appreciation and depreciation of investments are $71,193,008 and
$9,386,117, respectively.
27
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
March 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH & BARON SMALL CAP
FUND INCOME FUND FUND
----------------- ---------------- ----------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value
Unaffiliated issuers
(Cost $1,953,114,399, $360,280,361, and
$386,476,382, respectively) ........................ $2,683,031,653 $511,398,607 $448,363,435
"Affiliated" issuers (Cost $1,839,164,190, $0, and
$8,152,037, respectively) .......................... 2,522,173,103 0 8,071,875
Cash .................................................. 859,454 431 6,732
Due from brokers ...................................... 14,733,726 759,198 1,150,357
Dividends and interest receivable ..................... 4,347,916 1,018,419 279,282
Receivable for securities sold ........................ 936,911 0 0
Receivable for shares sold ............................ 5,825,459 394,336 1,009,317
Unamortized organization costs (Note 1) ............... 0 11,505 25,627
Prepaid expenses ...................................... 30,516 0 0
-------------- ------------ ------------
5,231,938,738 513,582,496 458,906,625
-------------- ------------ ------------
Liabilities:
Options written (Proceeds $0, $0 and $89,265,
respectively) ........................................ 0 0 27,184
Payable for securities purchased ...................... 43,733,821 2,025,661 9,409,362
Accrued organization costs (Note 1) ................... 0 11,505 25,627
Accrued expenses and other payables (Note 3) .......... 754,580 139,600 204,148
-------------- ------------ ------------
44,488,401 2,176,766 9,666,321
-------------- ------------ ------------
Net Assets ............................................. $5,187,450,337 $511,405,730 $449,240,304
============== ============ ============
Net Assets consist of:
Par value ............................................. $ 966,431 $ 187,488 $ 379,449
Paid-in capital in excess of par value ................ 3,775,528,930 353,272,308 389,670,810
Undistributed net investment losses ................... (10,763,633) (159,306) (882,855)
Accumulated net realized gain (loss) .................. (5,941,284) 6,227,796 (2,946,429)
Net unrealized appreciation on investments ............ 1,427,659,893 151,877,444 63,019,329
-------------- ------------ ------------
Net Assets ............................................. $5,187,450,337 $511,405,730 $449,240,304
============== ============ ============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized)......... 96,643,077 18,748,801 37,944,889
============== ============ ============
Net Asset Value Per Share .............................. $ 53.68 $ 27.28 $ 11.84
============== ============ ============
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
For the Six Months Ended March 31, 1998 (UNAUDIITED)
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH BARON SMALL CAP
FUND & INCOME FUND FUND*
---------------- --------------- ----------------
<S> <C> <C> <C>
Investment income:
Income:
Interest .............................................................. $ 5,469,884 $ 356,345 $ 737,412
Dividends -- unaffiliated issuers ..................................... 7,379,521 2,417,859 544,713
Dividends -- "affiliated" issuers ..................................... 2,303,544 0 0
Miscellaneous ......................................................... 8,833 0 0
------------- ----------- ------------
Total income .......................................................... 15,161,782 2,774,204 1,282,125
------------- ----------- ------------
Expenses:
Investment advisory fees (Note 3) ..................................... 19,358,410 2,115,615 1,488,550
Distribution fees (Note 3) ............................................ 4,839,606 528,904 372,138
Shareholder servicing agent fees ...................................... 477,450 121,750 79,760
Reports to shareholders ............................................... 535,600 63,225 23,750
Registration and filing fees .......................................... 495,042 41,495 139,158
Custodian fees ........................................................ 116,940 38,905 38,250
Trustee fees .......................................................... 43,610 4,888 3,421
Professional fees ..................................................... 30,040 14,998 15,445
Amortization of organization costs (Note 1) ........................... 0 3,284 2,846
Miscellaneous ......................................................... 28,717 4,128 1,662
------------- ----------- ------------
Total expenses ........................................................ 25,925,415 2,937,192 2,164,980
------------- ----------- ------------
Net investment loss ................................................... (10,763,633) (162,988) (882,855)
------------- ----------- ------------
Realized and unrealized gain(loss) on investments:
Net realized gain (loss) on investments sold in unaffiliated issuers ... 17,483,801 5,596,580 (2,946,429)
Net realized gain on investments sold in "affiliated" issuers .......... 1,473,241 0 0
Change in net unrealized appreciation of investments ................... 556,602,004 39,476,062 63,019,329
------------- ----------- ------------
Net gain on investments ................................................ 575,559,046 45,072,642 60,072,900
------------- ----------- ------------
Net increase in net assets resulting from operations ................... $ 564,795,413 $44,909,654 $ 59,190,045
============= =========== ============
</TABLE>
*For the period October 1, 1997 (Commencement of operations) to March 31, 1998.
See Notes to Financial Statements.
29
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BARON ASSET FUND
----------------------------------------
Six Months
Ended For the
March 31, Year Ended
1998 September 30,
(Unaudited) 1997
-------------------- ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) .................... ($ 10,763,633) ($ 9,740,291)
Net realized gain (loss) on investments sold..... 18,957,042 (25,537,003)
Net change in unrealized appreciation on
investments .................................... 556,602,004 699,696,611
------------- -------------
Increase in net assets resulting from
operations .................................. 564,795,413 664,419,317
------------- -------------
Dividends to shareholders from:
Net investment income ........................... 0 0
Net realized gain on investments ................ 0 (1,419,734)
------------- -------------
0 (1,419,734)
------------- -------------
Capital share transactions:
Proceeds from the sale of shares ................ 1,805,730,962 1,901,291,106
Net asset value of shares issued in
reinvestment of dividends ...................... 0 1,352,665
Cost of shares redeemed ......................... (407,574,432) (507,202,614)
------------- -------------
Increase in net assets derived from
capital share transactions .................. 1,398,156,530 1,395,441,157
------------- -------------
Net increase in net assets ...................... 1,962,951,943 2,058,440,740
Net assets:
Beginning of period ............................. 3,224,498,394 1,166,057,654
------------- -------------
End of year of period ........................... $5,187,450,337 $3,224,498,394
============== ==============
Undistributed net investment
income (loss) at end of period .................. ($ 10,763,633) $ 0
============== ==============
Shares of Beneficial Interest:
Shares sold ..................................... 37,087,254 48,411,239
Shares issued in reinvestment dividends ......... 0 37,932
Shares redeemed ................................. (8,435,123) (13,300,780)
-------------- --------------
Net increase .................................... 28,652,131 35,148,391
============== ==============
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
BARON SMALL
BARON GROWTH & INCOME FUND CAP FUND*
------------------------------------- -----------------
Six Months Six Months
Ended For the Ended
March 31, Year Ended March 31,
1998 September 30, 1998
(Unaudited) 1997 (Unaudited)
------------------ ----------------- -----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) .................... ($ 162,988) $ 1,046,525 ($ 882,855)
Net realized gain (loss) on investments sold..... 5,596,580 790,402 (2,946,429)
Net change in unrealized appreciation on
investments .................................... 39,476,062 93,851,250 63,019,329
------------ --------------- ------------
Increase in net assets resulting from
operations .................................. 44,909,654 95,688,177 59,190,045
------------ --------------- ------------
Dividends to shareholders from:
Net investment income ........................... (282,139) (1,142,621) 0
Net realized gain on investments ................ (929,398) (2,059,229) 0
------------ --------------- ------------
(1,211,537) (3,201,850) 0
------------ --------------- ------------
Capital share transactions:
Proceeds from the sale of shares ................ 148,661,085 200,457,503 436,177,679
Net asset value of shares issued in
reinvestment of dividends ...................... 1,161,950 3,077,823 0
Cost of shares redeemed ......................... (72,947,283) (112,424,286) (46,127,420)
------------ --------------- ------------
Increase in net assets derived from
capital share transactions .................. 76,875,752 91,111,040 390,050,259
------------ --------------- ------------
Net increase in net assets ...................... 120,573,869 183,597,367 449,240,304
Net assets:
Beginning of period ............................. 390,831,861 207,234,494 0
------------ --------------- ------------
End of year of period ........................... $511,405,730 $ 390,831,861 $449,240,304
============ =============== ============
Undistributed net investment
income (loss) at end of period .................. ($ 159,306) $ 285,821 ($ 882,855)
============ =============== ============
Shares of Beneficial Interest:
Shares sold ..................................... 5,921,802 9,989,857 42,421,064
Shares issued in reinvestment dividends ......... 47,958 164,326 0
Shares redeemed ................................. (2,923,049) (5,713,945) (4,476,175)
------------ --------------- ------------
Net increase .................................... 3,046,711 4,440,238 37,944,889
============ =============== ============
</TABLE>
*For the period October 1, 1997 (Commencement of operations) to March 31, 1998.
See Notes to Financial Statements.
30
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
Baron Asset Fund (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the"1940 Act"), as a diversified, open-end management
investment company established as a Massachusetts business trust on February
19, 1987. The Trust currently offers three series (individually a "Fund" and
collectively the "Funds"): Baron Asset Fund, started in June of 1987, Baron
Growth & Income Fund, started in January 1995, and Baron Small Cap Fund,
started October 1, 1997. 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, or by the Adviser, pursuant to
procedures established by the Trustees. Money market instruments held by the
Funds with a remaining maturity of sixty days or less are valued at amortized
cost, which approximates value.
(b) Securities Transactions, Investment Income and Expense Allocation.
Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are recorded on an identified cost basis for
financial reporting and federal income tax purposes. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis. Common expenses of the Funds are allocated on a basis deemed
fair and equitable by the Trustees, usually on the basis of average net assets.
Direct expenses are charged to each Fund on a specific identification basis.
(c) Federal Income Taxes. Each Fund of the Trust is treated as a separate
entity for federal income tax purposes. It is the policy of each Fund to
continue to qualify as a regulated investment company under the Internal
Revenue Code and to distribute all of its taxable income, including net
realized capital gains, if any, to its shareholders. No federal income tax
provision is therefore required.
(d) Options. Options purchased are recorded as investments; options written
(sold) are recorded as liabilities. When an option expires, the premium is
realized as a gain if the option was written or as a loss if the option was
purchased. When the exercise of an option results in a cash settlement, the
difference between the premium and the settlement proceeds is realized as a
gain or loss. When securities are acquired or delivered upon exercise of an
option, the acquisition cost or sale proceeds are adjusted by the amount of the
premium. When an option is closed, the difference between the premium and the
cost to close the position is realized as a gain or loss.
(e) 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.
(f) Organization Costs. Costs incurred in connection with the organization and
initial registration of Baron Growth & Income Fund and Baron Small Cap 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.
(h) Use of Estimates. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of financial statements, and the amounts of income and
expenses during the period. Actual results could differ from those estimates.
<PAGE>
(2) Purchases and Sales of Securities.
Purchases and sales of securities, other than short term securities, for the
six months ended March 31, 1998 were as follows:
Fund Purchases Sales
-------------------------- -------------- ------------
Baron Asset Fund $1,438,922,128 $186,160,687
Baron Growth & Income Fund $ 117,622,418 $ 39,412,403
Baron Small Cap Fund $ 444,019,058 $ 69,355,724
Transactions in written options for Baron Small Cap Fund during the six months
ended March 31, 1998 were as follows:
Number of Contracts Premiums
------------------- --------
Options outstanding at October 1, 1997 0 $ 0
Options written 3,300 $ 432,465
Options expired (1,650) ($ 343,200)
------ ---------
Options outstanding at March 31, 1998 1,650 $ 89,265
====== =========
31
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
(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 each 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.
Brokerage transactions for the Funds may be effected by or through BCI. During
the six months ended March 31, 1998, BCI earned brokerage commissions as
follows:
Fund Commissions
-------------------------- -----------
Baron Asset Fund $1,905,341
Baron Growth & Income Fund $ 168,067
Baron Small Cap Fund $ 578,492
(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) Financial Instruments with Off Balance Sheet Risk. The Funds maintain
positions in derivative financial instruments consisting of equity options and
equity swap contracts. These transactions are subject to credit risks in
addition to the various risks related to the underlying equity security.
The following tables indicate the fair value of derivative financial
instruments held or issued at March 31, 1998, and the average fair value of the
instruments, calculated on a monthly basis, during the six months ended March
31, 1998:
Fair Value at Average
March 31, 1998 Fair Value
-------------- ----------
BARON ASSET FUND
Equity Swap Contracts $14,733,726 $3,842,051
Fair Value at Average
March 31, 1998 Fair Value
-------------- ----------
BARON GROWTH &
INCOME FUND
Equity Swap Contracts $ 759,198 $ 226,281
Fair Value at Average
March 31, 1998 Fair Value
---------------- -------------
BARON SMALL CAP FUND
Purchased Options $3,864,221 $1,785,790
Written Options (27,184) (157,637)
Equity Swap Contracts 1,150,357 284,650
<PAGE>
The following table represents the notional contract amounts with respect to
the Funds' outstanding derivative contracts at March 31, 1998.
BARON BARON
BARON GROWTH SMALL
ASSET INCOME CAP
FUND FUND FUND
--------------- ------------- ----------------
Purchased Options -- -- $15,837,650
Written Options -- -- ($ 8,812,650)
Equity Swap Contracts $177,780,842 $9,673,125 $19,233,231
The notional amount does not necessarily represent the amount potentially
subject to risk. In addition, the measurement of risk is meaningful only when
all related and offsetting transactions are identified.
32
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
(6) Investment in "Affiliates"*
BARON ASSET FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales
Shares Held on Purchases and
Name of Issuer Sep. 30, 1997 and Additions Reductions
-------------- ------------- ------------- ----------
<S> <C> <C> <C>
Alexander's, Inc. ....................... 200,000 52,000
AMF Bowling, Inc. ....................... 5,990,000 21,000
American Mobile Satellite Corp. ......... 3,500,000
Apple Orthodontix, Inc. ................. 20,000 800,000
Avatar Holdings, Inc. ................... 732,800 41,200
Bristol Hotel Co. ....................... 3,395,000 967,300
CCA Prison Realty Trust ................. 2,455,000 45,000
CD Radio, Inc. .......................... 851,700
Chartwell Leisure, Inc. ................. 783,000 783000
Choice Hotels Intl. Inc. ................ 10,421,400 2,591,200
CoreComm, Inc. .......................... 1,275,000 2,500
Counsel Corp. ........................... 140,000 1,650,000
Cross Timbers Oil Co.** ................. 2,630,000 1,322,500
DeVry, Inc. ............................. 1,230,000 1,087,600
Dollar Tree Stores, Inc. ................ 2,060,000 400,000
DVI, Inc. ............................... 1,458,200 47,700
Education Management Corp. .............. 637,500 237,500
Flextronics Intl. Ltd. .................. 1,370,000 13,000 10,000
Heftel Broadcasting Corp.*** ............ 1,635,000 1,635,000
Learning Tree Intl., Inc. ............... 1,641,700 1,818,300
Libbey, Inc. ............................ 780,000 570,000
Manor Care, Inc. ........................ 5,735,000 4,051,200
Metro Networks, Inc. .................... 1,230,000 15,000
OM Group, Inc. .......................... 1,100,000 85,000
Pediatric Services of America, Inc. ..... 942,500 137,500
Premier Parks, Inc. ..................... 767,200 545,800
Saga Communications, Inc. ............... 2,318,650 26,952
Seacor Smit, Inc. ....................... 490,000 260,000
Smart and Final, Inc. ................... 2,185,000 52,900
Stein Mart, Inc. ........................ 875,000 520,000
Summit Care Corp. ....................... 350,600 350,600
Sun Intl. Hotels, Ltd. .................. 1,890,000 135,000
Sunburst Hospitality Corp.**** .......... 3,650,036
Vail Resorts, Inc. ...................... 3,950,000 1,450,000
Youth Services Intl., Inc. .............. 675,000 15,000
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Balance of Dividend Realized
Shares Held on Value Income Capital
Name of Issuer Mar. 31, 1998 Mar. 31, 1998 Oct. 1-Mar. 31, 1998 Gains/(Losses)
-------------- ------------- ------------- -------------------- --------------
<S> <C> <C> <C> <C>
Alexander's, Inc. ....................... 252,000 $ 23,609,250
AMF Bowling, Inc. ....................... 5,969,000 152,955,625 $ (26,378)
American Mobile Satellite Corp. ......... 3,500,000 49,875,000
Apple Orthodontix, Inc. ................. 820,000 10,301,250
Avatar Holdings, Inc. ................... 774,000 21,285,000
Bristol Hotel Co. ....................... 4,362,300 119,963,250
CCA Prison Realty Trust ................. 2,500,000 103,593,750 $1,062,500
CD Radio, Inc. .......................... 851,700 18,630,938
Chartwell Leisure, Inc. ................. 0 0 1,973,563
Choice Hotels Intl. Inc. ................ 13,012,600 239,106,525
CoreComm, Inc. .......................... 1,272,500 21,195,015 (37,813)
Counsel Corp. ........................... 1,790,000 26,402,500
Cross Timbers Oil Co.** ................. 3,952,500 79,544,063 303,025
DeVry, Inc. ............................. 2,317,600 79,232,950
Dollar Tree Stores, Inc. ................ 2,460,000 130,687,500
DVI, Inc. ............................... 1,505,900 34,541,581
Education Management Corp. .............. 875,000 29,750,000
Flextronics Intl. Ltd. .................. 1,373,000 59,296,437 23,522
Heftel Broadcasting Corp.*** ............ 3,270,000 146,332,500
Learning Tree Intl., Inc. ............... 3,460,000 76,552,500
Libbey, Inc. ............................ 1,350,000 50,287,500 155,287
Manor Care, Inc. ........................ 9,786,200 362,089,400 367,387
Metro Networks, Inc. .................... 1,245,000 53,535,000
OM Group, Inc. .......................... 1,185,000 49,918,125 194,200
Pediatric Services of America, Inc. ..... 1,080,000 23,085,000
Premier Parks, Inc. ..................... 1,313,000 76,154,000
Saga Communications, Inc. ............... 2,345,602 48,964,442
Seacor Smit, Inc. ....................... 750,000 43,640,625
Smart and Final, Inc. ................... 2,237,900 43,359,312 221,145
Stein Mart, Inc. ........................ 1,395,000 49,696,875
Summit Care Corp. ....................... 0 0 (459,653)
Sun Intl. Hotels, Ltd. .................. 2,025,000 95,934,375
Sunburst Hospitality Corp.**** .......... 3,650,036 31,937,815
Vail Resorts, Inc. ...................... 5,400,000 157,950,000
Youth Services Intl., Inc. .............. 690,000 12,765,000
--------------
$2,522,173,103 $2,303,544 $1,473,241
============== ========== ==========
</TABLE>
<PAGE>
BARON SMALL CAP FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales
Shares Held on Purchases and
Name of Issuer Sep. 30, 1997 and Additions Reductions
-------------- ------------- ------------- ----------
<S> <C> <C> <C>
Mortons Restaurant Group, Inc. .. 350,000
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Balance of Dividend Realized
Shares Held on Value Income Capital
Name of Issuer Mar. 31, 1998 Mar. 31, 1998 Oct. 1-Mar. 31, 1998 Gains/(Losses)
-------------- ------------- ------------- -------------------- --------------
<S> <C> <C> <C> <C>
Mortons Restaurant Group, Inc. .. 350,000 $8,071,875
----------
$8,071,875
==========
</TABLE>
- ----------
* "Affiliated" issuers, as defined in the Investment Company Act of 1940, are
issuers in which a Fund held 5% or more of the outstanding voting
securities as of March 31, 1998.
** Received 1,317,500 shares from 3:2 Stock Split
*** Received 1,635,000 shares from 2:1 Stock Split
**** Received 3,620,466 shares from Choice Hotels Intl., Inc. Spin-off
33
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
(7) Financial Highlights
BARON ASSET FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
Six Months
ended
March 31, 1998
(Unaudited) 1997 1996 1995 1994
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ................... $ 47.43 $ 35.50 $ 29.30 $ 22.82 $ 21.91
-------- -------- -------- -------- --------
Income from investment
operations
Net investment income
(loss) ...................... (0.11) (0.14) (0.06) (0.09) (0.14)
Net realized and
unrealized gains
(losses) on investments 6.36 12.11 6.29 7.23 1.82
-------- -------- -------- -------- --------
Total from investment
operations ................. 6.25 11.97 6.23 7.14 1.68
-------- -------- -------- -------- --------
Less distributions
Dividends from net
investment income ........... 0.00 0.00 0.00 0.00 0.00
Distributions from net
realized gains .............. 0.00 (0.04) (0.03) (0.66) (0.77)
-------- -------- -------- -------- --------
Total Distributions ......... 0.00 (0.04) (0.03) (0.66) (0.77)
-------- -------- -------- -------- --------
Net asset value, end of
period ...................... $ 53.68 $ 47.43 $ 35.50 $ 29.30 $ 22.82
======== ======== ======== ======= ========
Total Return ................ 13.2% 33.8% 21.3% 32.3% 8.0%
-------- -------- -------- -------- --------
Ratios/Supplemental Data
Net assets (in millions),
end of period ............... $5,187.5 $3,224.5 $1,166.1 $ 290.0 $ 80.3
Ratio of expenses
average net assets .......... 1.3%** 1.3% 1.4% 1.4% 1.6%
Ratio of net investment
income (loss) to
average net assets .......... (0.6%)** (0.5%) (0.3%) (0.5%) (0.7%)
Portfolio turnover rate ...... 4.9% 13.2% 19.3% 35.2% 55.9%
Average per share
commission rate
paid*** ..................... $0.0600 $0.0600 $0.0600
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Year Ended September 30,
1993 1992 1991 1990 1989 1988 1987*
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ................... $ 16.20 $ 14.80 $ 10.88 $ 17.22 $ 12.98 $ 11.95 $ 10.00
--------- --------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income
(loss) ...................... (0.13) (0.08) 0.07 0.21 0.13 0.05 0.07
Net realized and
unrealized gains
(losses) on investments 6.00 1.52 4.05 ( 5.14) 4.81 1.18 1.88
--------- --------- -------- -------- -------- -------- --------
Total from investment
operations ................. 5.87 1.44 4.12 ( 4.93) 4.94 1.23 1.95
--------- --------- -------- -------- -------- -------- --------
Less distributions
Dividends from net
investment income ........... 0.00 (0.04) (0.20) (0.16) (0.05) (0.03) 0.00
Distributions from net
realized gains .............. (0.16) 0.00 0.00 (1.25) (0.65) (0.17) 0.00
--------- --------- -------- -------- -------- -------- --------
Total Distributions ......... (0.16) (0.04) (0.20) (1.41) (0.70) (0.20) 0.00
--------- --------- -------- -------- -------- -------- --------
Net asset value, end of
period ...................... $ 21.91 $ 16.20 $ 14.80 $ 10.88 $ 17.22 $ 12.98 $ 11.95
========= ========= ======== ======== ======== ======== ========
Total Return ................ 36.5% 9.7% 38.3% (30.7%) 39.9% 10.7% 19.5%
--------- --------- -------- -------- -------- -------- --------
Ratios/Supplemental Data
Net assets (in millions),
end of period ............... $ 59.9 $ 43.8 $ 47.4 $ 40.0 $ 47.7 $ 11.7 $ 3.9
Ratio of expenses to
average net assets .......... 1.8% 1.7% 1.7% 1.8% 2.1% 2.5% 2.8%**
Ratio of net investment
income (loss) to
average net assets .......... (0.7%) (0.5%) 0.5% 1.5% 1.3% 0.5% 1.9%**
Portfolio turnover rate ...... 107.9% 95.5% 142.7% 97.8% 148.9% 242.4% 84.7%
Average per share
commission rate
paid*** .....................
</TABLE>
- ----------
* For the period June 12, 1987 (commencement of operations) to September 30,
1987.
** Annualized.
*** 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, $83,219 ($0.11 per share) in 1988, and $36,330 ($0.20 per
share) in 1987. The reimbursement amounts are excluded from the expense data
above.
34
<PAGE>
- --------------------------------------------------------------------------------
BARON FUNDS
- --------------------------------------------------------------------------------
BARON GROWTH & INCOME FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
ended
March 31, 1998 Year Ended September 30,
(Unaudited) 1997 1996 1995*
----------- ---- ---- -----
<S> <C> <C> <C> <C>
Net asset value, beginning of period ......................... $ 24.89 $ 18.40 $ 14.77 $ 10.00
--------- -------- -------- -------
Income from investment operations
Net investment income ........................................ (0.01) 0.06 0.11 0.04
Net realized and unrealized gains on investments ............. 2.47 6.68 3.66 4.73
--------- -------- -------- -------
Total from investment operations ........................... 2.46 6.74 3.77 4.77
--------- -------- -------- -------
Less distributions
Dividends from net investment income ......................... (0.02) (0.09) (0.04) 0.00
Distributions from net realized gains ........................ (0.05) (0.16) (0.10) 0.00
--------- -------- -------- -------
Total Distributions ........................................ (0.07) (0.25) (0.14) 0.00
--------- -------- -------- -------
Net asset value, end of period ............................... $ 27.28 $ 24.89 $ 18.40 $ 14.77
========= ======== ======== =======
Total Return ............................................... 9.9% 37.1% 25.8% 47.7%
--------- --------- --------- -------
Ratios/Supplemental Data
Net assets (in millions), end of period ...................... $ 511.4 $ 390.8 $ 207.2 $ 28.6
Ratio of expenses to average net assets ...................... 1.4%** 1.4% 1.5% 2.0%**
Ratio of net investment income to average net assets ......... (0.1%)** 0.4% 1.2% 1.1%**
Portfolio turnover rate ...................................... 9.2% 25.2% 40.3% 40.6%
Average per share commission rate paid*** .................... $0.0600 $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.
<PAGE>
BARON SMALL CAP FUND
Selected data for a share of beneficial interest outstanding:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
ended
March 31, 1998*
(Unaudited)
-----------
<S> <C>
Net asset value, beginning of period ......................... $ 10.00
--------
Income from investment operations
Net investment loss .......................................... (0.02)
Net realized and unrealized gains on investments ............. 1.86
--------
Total from investment operations ........................... 1.84
--------
Less distributions
Dividends from net investment income ......................... 0.00
Distributions from net realized gains ........................ 0.00
--------
Total Distributions ........................................ 0.00
--------
Net asset value, end of period ............................... $ 11.84
========
Total Return ............................................... 18.4%
--------
Ratios/Supplemental Data
Net assets (in millions), end of period ...................... $ 449.2
Ratio of expenses to average net assets ...................... 1.4%**
Ratio of net investment income to average net assets ......... (0.6%)**
Portfolio turnover rate ...................................... 22.9%
Average per share commission rate paid ....................... $0.0600
</TABLE>
- ----------
* For the period October 1, 1997 (commencement of operations) to March 31,
1998.
** Annualized.
35
