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REGISTERED
[LOGO]
BARON
FUNDS
BARON ASSET
1 FUND
PERFORMANCE........................................................1
INVESTMENT STRATEGY................................................2
INVESTMENT THEMES..................................................4
RECENT DEVELOPMENTS................................................6
OTHER RECENT
DEVELOPMENTS.......................................................7
BARON GROWTH
2 FUND
[Formerly Baron
Growth & Income Fund]
PERFORMANCE........................................................8
PORTFOLIO HOLDING..................................................9
OTHER DEVELOPMENTS................................................12
BARON SMALL
3 CAP FUND
PERFORMANCE.......................................................13
PORTFOLIO
COMPOSITION.......................................................13
RECENT EVENTS.....................................................14
NEW POSITIONS.....................................................15
www.baronfunds.com
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
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THIS QUARTERLY REPORT CONTAINS
INFORMATION FOR THREE FUNDS
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BARON ASSET FUND
QUARTERLY REPORT MARCH 31, 1999
Dear Baron Asset
Fund Shareholder:
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PERFORMANCE
Baron Asset Fund performed well in the quarter ended March 31, 1999 and in the
year to date period ended May 24, 1999, the date of this letter. Baron Asset
Fund's performance for the nearly twelve years ended March 31, 1999, about
seven fold appreciation, has been significantly better than both the large cap
S & P 500 and the small cap Russell 2000. This was not the case, however, in
1998 when the small and mid cap oriented Baron Asset underperformed the large
cap, technology driven S & P 500 (although we still managed to beat the Russell
2000 by nearly 700 basis points). Our underperformance ended on October 8,
1998, the day before the Seventh Annual Baron Investment Conference. If I had
known that was going to happen, I'd hold these conferences all year long.
Anyway, the Fund outperformed both the S & P 500 and Russell 2000 indexes
during the fourth quarter of 1998, during the first quarter of 1999 and
continues to outperform through today.
Baron Asset Fund's results in the March quarter were favorably impacted by the
stock price performance of Charles Schwab, the Fund's largest holding. Schwab's
share price gained 71% in the three months ending March, reflecting very strong
customer asset flows and very strong current earnings. Schwab's stock price has
increased about fifty fold since our initial purchases in 1992. During the
first quarter, Baron Asset Fund reduced its Schwab shareholdings about 6.7%,
the first time in more than seven years that we have sold a single share. This
was done to diversify the Fund's holdings somewhat, with the proceeds used to
increase our holdings of undervalued smaller businesses. We remain a large
shareholder in Charles Schwab since we believe Schwab's earnings can increase
several fold in the next five years and several fold again in the following
five years. We expect earnings gains
[GRAPH]
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PERFORMANCE PERFORMANCE PERFORMANCE
FOR THE 3 MONTHS ENDED SINCE INCEPTION FOR THE 12 MONTHS ENDED
MARCH 31, 1999 JUNE 12, 1987 THROUGH MARCH 31, 1999
MARCH 31, 1999
BARON ASSET FUND 7.2% BARON ASSET FUND 605% BARON ASSET FUND 1.0%
S&P 500* 4.9% S&P 500* 490% S&P 500* 18.4%
RUSSELL 2000* -5.4% RUSSELL 2000* 196% RUSSELL 2000* -16.3%
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* THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES, THE S&P MEASURES THE
PERFORMANCE OF THE STOCK MARKET IN GENERAL; THE RUSSELL 2000 OF SMALL AND
MID-SIZED COMPANIES.
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B A R O N A S S E T F U N D
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to be driven by continued strong asset flows to Schwab from banks and full
service brokerage firms; growth of existing customers' accounts; the addition
of very profitable bank-like services for its customers; international
expansion; and operational leverage from its high cost technology, marketing
and personnel infrastructure. Schwab's margins should increase over the years.
Baron Asset Fund's long stated goal is to double its shareholders' per share
value every four or five years and double it again in the next four or five
years. We have achieved our goals during the past twelve years, seven fold
appreciation, by investing in businesses that themselves have doubled in size
and then doubled again. Of course, we might not achieve our goal in the future.
During the next ten years, Schwab's stock price will not perform as well as it
has in the past ten years. The law of big numbers will see to that. However,
Schwab does have an opportunity to become one of the largest and most
profitable companies in America during the next decade. Its share price still
has the potential to increase more than twice as fast as the hurdle rate of
return we require for an attractive investment, i.e., a double in four to five
years, five times appreciation in ten years.
Many of our other long term holdings have also continued to perform well. Our
investments in communications businesses performed exceptionally well as many
investors have come to understand the large potential returns possible from
communications network investments. (See INVESTMENT THEMES, Communications,
page 5.) During the quarter NTL gained 44.2%, CoreComm, 132.0%, United
International Holdings, 117.2%, Century Communications, 46.4%, and Cellular
Communications of Puerto Rico, 45.9%. But, many small and mid-sized businesses
continued to underperform. That's probably where we have the most significant
opportunity in our portfolio...the downtrodden and the weak. HCR Manor Care,
Robert Half International, Dollar Tree, Sun International Hotels, Industrie
Natuzzi and Vail Resorts stock prices all declined in the quarter. All should
increase their earnings in the current year.
"The last shall be first." President Kennedy used this biblical quote to
congratulate his youngest brother, Ted, when he was elected to fill the vacant
Massachusetts' Senate seat after its junior Senator had become President. The
statement is often applicable to stocks. During the past few months, among our
largest percentage gainers have been several of our biggest investment
disappointments during the past several years. AMF Bowling hired a youthful,
aggressive and previously very successful new President and CEO and announced a
recapitalization plan and investors breathed a collective sigh of relief.
American Mobile Satellite announced several high profile communications network
customers and investors focused on the dramatic prospects for its XM satellite
radio service. Avatar sold a water utility and generated more cash per share
from the transaction than its public market share price...and it still owns
hugely valuable tracts of Florida land. Smart & Final announced a new
Chairman/CEO with a prior illustrious career who immediately began to prove at
this company why that had been the case. The company's stores that have
recently been remerchandised have
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recorded very strong gains and a rights offering to its shareholders will
strengthen its balance sheet. Cyclically, sometimes the last shall be first. In
the above cases, we wish we hadn't invested in these businesses at times when
they had already been first and poised for a fall. But, the prospects both for
these businesses and their share prices now appear bright.
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INVESTMENT STRATEGY
So, just what is it we're looking for?
Think strategically. Invest opportunistically.
The internet is the great investment equalizer. It provides information to
everyone...at the same time...at the speed of light. Investors everywhere now
have timely access to SEC regulatory filings, Wall Street analyst commentary
and research, financial oriented web services, news and stock quotes, business
press releases and conferences and, even individual investor and employee
comments on Yahoo! message boards. To distinguish yourself as an investor, we
believe you must think strategically, more so now than ever before. You must be
able to formulate a long term strategic view for a business, be right and act
upon your opinion and analysis before it's obvious to others and already
reflected in a stock's price. Think strategically. Invest opportunistically.
That's our credo in this brave new world.
It's not just about price. Brands win. Guerillas beat armies.
We have always believed that selling items at the "lowest possible price" is
not a good business strategy...someone can always sell for less...and will.
Witness the web. There are now web merchants who sell for cost, or even below
cost, to obtain customer demographics that advertisers may want to reach.
Brands that customers believe connote value and consistent quality will win,
even at higher prices. Witness the great success of Polo Ralph Lauren, Vail,
Sotheby's, Charles Schwab, Four Seasons Hotel.
"Guerillas can beat armies." A highly focused niche business (the guerilla)
with specialized expertise can usually beat a financially much stronger, broad
line business (the army)...in that specialized competency. When the niche
business attempts to fight its larger competitor on the rival's turf, it will
likely lose. Fidelity Management Company's president, Robert Pozen, said in a
recent speech that smaller, focused mutual fund companies, as well as very
large ones, can prosper, and middle sized, diversified management companies are
likely to have difficulties. We agree. We believe Baron Funds can prosper, with
its focused long term, strategic investments in fast growing, well managed,
high return on investment, small and mid-sized businesses...that have the
opportunity to become large...and, when they do, we'll derive the benefits of
that growth because we'll still own them. "Guerillas can beat armies." It's the
corollary to the dictum in our last letter, "Buy the predator, sell short the
prey."
We invest in people...not just buildings.
Growing up at the Jersey Shore (Asbury Park, New Jersey) nearly forty years
ago, I held many summer jobs to help pay for my
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B A R O N A S S E T F U N D
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college. I was able to obtain most jobs with little prior experience...golf
caddy, "Can you carry two heavy golf bags four miles twice a day and pretend
you know what club to use?," umbrella boy, "Can you bury an umbrella deep
enough in the sand so that a slight wind will not cause the umbrella's staff to
torpedo an unsuspecting sunworshiper?," cabana boy, "Do you know how to bring
towels, drinks and sandwiches to gin players?," lifeguard, "Have you passed
your lifesaver's test and do you think you can tell the difference between
someone who's waving 'hello' and someone who's drowning?," ice cream truck
driver, "Are you willing to work six days a week from 10AM to midnight, drive a
top-heavy truck without rolling it over and, if everyone at your planned next
stop is already eating ice cream, do you think it's a good idea to stop
there?," and hospital orderly, "Can you empty a bed pan?" But, the most
difficult job for me to obtain, and keep, was that of a highly tipped waiter.
"Do you have any experience?" I was repeatedly asked. I did not, but each time
I told the truth, I did not get the job. "How do waiters ever get experience if
experience is required for their first job?" I wondered. Finally, I succumbed,
lied about previous jobs in the Catskills and was given a chance. During my
first lunch service, the chef noticed I was having a difficult time assembling
a shrimp cocktail, began to scream at me while waving a knife that looked like
a machete and threatened to kill me if I ever entered his kitchen again. I left
immediately and never looked back.
Summer jobs provided important lessons to me about the value of experience and
success. We don't invest in businesses where the executives are learning to be
successful. We invest in businesses run by executives who are already
successful, proven winners...hardworking, entrepreneurial, smart, honest,
driven executives who want to be even more successful.
In our last quarterly report I mentioned several entrepreneurial executives in
whose businesses we've invested and been inordinately successful. That listing
was not meant to be all inclusive. When Michael Marks, the Chairman and CEO of
Flextronics, recently walked into our office, he exclaimed, "So what do I have
to do to get you to write about me?!!! Since you've invested in Flextronics
four years ago, our sales have quintupled and our stock price has done even
better! I'm a shareholder in Baron Asset Fund. I read all your letters and you
haven't mentioned us in years." Michael's right. This was an oversight and I'll
try to make amends. When Matt Ervin, our telecommunications and media analyst,
introduced me to Michael four years ago, even I, with no technology background,
could understand that Flextronics had operational expertise that would provide
it with significant competitive advantage as an outsourced equipment
manufacturer to large consumer electronics and communications businesses. We
soon became Flextronic's largest shareholder, and despite additional stock
offerings since our initial purchases (the company needed more capital to build
and purchase additional high return on investment assets), we still own 7.6% of
this rapidly growing business. And we've earned more than five times
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our initial investment, so far, and could at least triple our investment again
during the next five years...if Michael and his management continue to achieve
their ambitious goals.
Ed Christian, Chairman, Founder and CEO, Saga Communications, is another
executive I've also neglected to mention for a while. A radio business "lifer,"
Ed has built Saga into a unique and excellent radio business that is
conservatively financed, consistently growing, dominant in its smaller
community media markets ("big city radio in smaller towns"), and undervalued by
the stock market. In fact, Saga seems to be such an attractive business at such
an unusually attractive valuation, e.g. 11X broadcast cash flow, 15% annual
internal growth, that at least three other radio executives have approached us
during the past few years to help convince Ed to sell them Saga. "Call Ed," I
tell them. "Someday he may be interested, but I doubt if it's now. The
company's doing very well and I think he believes it's on the verge of
realizing on significant growth prospects. And he still seems to be having a
lot of fun."
In addition to running Saga, Ed has been a great, and unpaid, research resource
for our fellow Baron Funds' investors. "Make sure you look at Radio One. Great
management. You'll like them. That's a good one." "Did you read the prospectus
on ____? Hundreds of pages to describe their deals. Always a bad sign. Be
careful. Their managers are all unhappy. They're given budgets they can't
possibly meet and they're afraid to discuss it or they could lose their jobs."
"Talk to ___. There's just no way that business can make a good return on that
station. Especially if their expectations are based on reducing station
operating expenses. Everyone in that station has already been fired." With
radio businesses, it seems Ed knows everyone. And, his judgment about people
and their businesses has been unerring.
We don't invest where we're not wanted.
The comedian Groucho Marx used to say that he never wanted to join a club that
would allow him to become a member! For good reason, we suppose. We're
different. Before we make a major investment in a business, we ask the
executives who operate that business if they are comfortable having us as a
large shareholder. Since we consider ourselves to be part owners of businesses,
not short term stock traders, it is important to us that we are viewed by
managements as their "partners." We do not want to be thought of as adversaries
seeking to obtain short term profits at the expense of a business' long term
growth. Of course, we expect dedication, hard work and commitment from the
executives who run the businesses of which we're part owners. The commitment is
not just to us as owners, but also to their employees and communities,
commitments we believe are necessary to operate a successful, fast growing,
profitable business.
Mirage Resorts' stock price had fallen about 50% from the fall of 1997 through
the fall of 1998. This was due to investors' fears of increased competition in
Las Vegas, the impact of weakened far east economies and concerns about whether
that company
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B A R O N A S S E T F U N D
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could achieve a satisfactory return on the huge, new $1.6 billion extravagant
Bellagio casino hotel resort. Mirage, at half its 1997 peak price, was still
about seven times our initial cost in 1987. Convinced that Mirage's cash flow
would increase nearly 75% over the next year and could increase at least an
additional 50% by 2002, we believed its share price could triple over that
time. I visited Mirage and after a day reviewing the company's prospects with
Steve Wynn and his executives, I asked Steve if he would allow us to increase
our holdings to nearly 10% of his company. "Don't you want to wait until
Circus' Mandalay Bay, Sheldon Adelson's Venetian and Bally's Paris open? Don't
you want to wait until you see how successful we'll be in Mississippi? Don't
you want to wait until we're further along in New Jersey?", he wanted to know.
I told him I felt those uncertainties were already reflected in Mirage's share
price and I was already comfortable with Mirage's earnings prospects. Steve
then told me that although we might prevent Mirage's share price from falling
even lower and give him a better opportunity to buy more, we're one of the few
investors he'd like to have as a larger shareholder. Over the next few months,
we bought a little more than half the shares we had hoped to acquire before Las
Vegas' results dramatically improved in early 1999, Mirage's share price
rallied about 65% and our window of opportunity closed.
Sotheby's share price last year was still about 40% below the peak prices it
had reached in 1989. Although we had studied Sotheby's as securities analysts
since the company's initial public offering in 1988, we had never purchased a
single share until fall 1997. We had by then become convinced that art prices
were cyclically low and that Sotheby's unit volumes were likely to continue to
increase at least 10-12% per year (as they had for the past thirty years) and
its profits grow at a somewhat greater rate. We also thought that Sotheby's
real estate brokerage and other ancillary art businesses, e.g., Sotheby's lower
priced arcade, art financing and insurance, offered good growth opportunities.
And, that "web" auctions offered not just a potential threat, but a huge
opportunity, and that while it might not yet be apparent to most, the company's
chief executive officer, Dee Dee Brooks, "got it" and was working hard to
figure out how Sotheby's could participate. When a large Sotheby's shareholder
became disenchanted early last year with the pace of the company's internet and
database marketing activities, we had the opportunity to purchase a four
million share block at what we perceived a very favorable price. We first
called the company's chairman, Alfred Taubman, and Dee Dee, and asked if they
would mind if we bought the shares. Both Alfred and Dee Dee said they would be
delighted to have us as an important shareholder and we did buy the
shares...and a lot more afterwards. Although Alfred is Sotheby's controlling
shareholder, he owns high voting shares, we are now Sotheby's largest
shareholder. It had to be clear to anyone who spent time with Dee Dee and
Alfred during the past several months that Dee Dee had developed an
overwhelming interest in internet commerce, was working tirelessly to implement
sothebys.com auctions this summer...and had Alfred's strong support. In
addition, Sotheby's management is well incented, we think, with
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relatively large management shareholdings, closely aligning their executives'
interests with our own. The market value of our investment in Sotheby's has
about doubled after our purchases during the past year and a half.
Diversification. We believe in it...but we've also learned to hold on to our
winners...for years...and years...and years...
even if they become a very large percentage of our assets...
Charles Schwab. Sotheby's. NTL. DeVry. Heftel. Dollar Tree. Robert Half. "How
many people in the Forbes 400 got there by investing in a diversified portfolio
of common stocks?" I ask my fellow Baron Capital employees when they tell me we
should reduce our holdings, rebalance our portfolio, and sell shares in our
best performing investments when there is no fundamental reason to do so except
that their share prices have performed well.
We try to help the businesses of which we're part owners.
A recent Yahoo! chat room discussion, "The good and bad of Ron Baron," provided
flattering and not so flattering commentary... "a brilliant stockpicker," "a
shameless asset gatherer," etc. One comment, though, with which I could not be
in more complete agreement, "surrounded by brilliant young analysts..." is, in
my opinion, key. I have been a securities analyst since 1970. The nine analysts
who work with me are a lot younger than I, but have, nevertheless, worked with
me from just a few years to more than twenty years. My experience coupled with
their youth, brains and energy, in my opinion, are a great combination. We have
no interest or obvious skill in managing publicly owned businesses or in
participation on their Boards of Directors; we have often been asked to do so,
but have always declined. We are happy to provide analysis, however, or to act
as a sounding board or to provide ideas or intelligence when asked. Sort of
free investment banking/consulting opinions to the businesses of which we are
part owners. We hope it helps them. These conversations certainly help us
better understand the long term prospects for the
businesses in which we have invested.
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INVESTMENT THEMES
(1) Data based marketing. Big brother is watching! When I was growing up in the
1950's and 1960's, science fiction movies often focused on government computers
knowing all about their nation's citizens. The loss of privacy seemed scary.
Well, that's already happened. "Big brother" and forward looking businesses are
no longer just watching us, but think they will soon be able to predict our
behavior through knowledge gleaned from relational databases. This is called
"profiling." I call it "technical analysis of people" to put it in Wall Street
parlance. "Off line" businesses with their millions of customers with credit
and purchasing histories, e.g., department store retailers, car manufacturers,
credit card companies, banks, and brokerage firms all have enormously valuable
"hidden assets," their consumer databases, just waiting to be mined. What are
the income and purchasing and demographic and psychographic characteristics of
skiers at Vail and how can we find more like them who haven't visited
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B A R O N A S S E T F U N D
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yet? Who are the most likely purchasers of $500 to $2500 collectables and art
through sothebys.com auctions and how do we make sure they know about the
service? How can we make sure that all purchasers of new and preexisting homes
know that Natuzzi makes the best value, highest quality, commercially available
leather furniture? How can Charles Schwab determine when one of its $100,000
investment asset customers is likely to want to borrow $200,000 from a bank to
finance a new home?...or buy insurance?...or, apply for a credit card? Schwab's
opportunity?...to receive a bank customer referral fee, pure profit, that could
nearly equal the annual revenues that client now produces for Schwab.
(2) Government healthcare reimbursement is about to increase. Recent
"prospective pay" (PPS) Medicare reimbursement fees have been so sharply
reduced that many providers dependent upon these payments, e.g., nursing homes
and hospitals, have become financially imperiled. Congressional committees have
recently recognized that PPS mandated cost reimbursements may have been reduced
too much and are now considering greater funding for many healthcare services
providers. At the same time, the population over age 85, prime users of many
health services, is increasing three times as fast as younger Americans,
creating some urgency for more generous reimbursement programs.
(3) Baby boomers are the United States' biggest and most prosperous population
segment. As my friend Vail's Chairman Adam Aron never tires of telling me, not
without a little self interest, "You're 55 years old. The number of people in
this country who are 55 years old will increase by two thirds during the next
ten years. Invest in what you enjoy. And, if you don't enjoy it, like golf, but
all your friends do, you should invest in that, too."
(4) Education. It couldn't be more clear. In a knowledge and information based
economy, education wins.
(5) Outsourcing services which aren't business core competency.
(6) Government deregulation.
(7) The Empire Strikes Back. We're interested in "off-line" bricks and mortar
businesses, rich in current revenues, cash flow and assets, not just paper
assets, and which are able to use the internet to operate their businesses more
effectively, more cost efficiently, to create competitive advantage. Business
opportunities ...not stock market opportunities...we're looking for companies
that have the opportunity to use the internet to make a lot more money, not just
opportunities to sell stock at inflated prices to unsuspecting investors.
"Profiling," data based marketing, is only one example. We want the executives
who run the businesses in which we are part owners to view the internet as not
just an opportunity, but as a THREAT to their current businesses. See Intel
Chairman Andy Grove's Only the Paranoid Survive. We want executives to "get it."
See Microsoft Chairman Bill Gates' Business @ the Speed of Thought. Schwab,
Sotheby's, Robert Half, as well as our private schools, healthcare and resorts
businesses, forward thinking bricks and mortar enterprises all, have significant
"web" business opportunities. These businesses are all
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now either developing or have already developed effective "web" business
models...from positions of considerable strength. Schwab, the leading bricks and
mortar discount broker, has led the charge to provide more financial services
using the internet. Schwab conducts more web commerce daily than any other
company, and stands on the brink of successfully challenging full service
brokers, who still hold 75% of individual customer assets in the United States.
Banking services and international opportunities loom for Schwab...with an
internet backbone, of course.
(8) Communications. Driven by consumer and business demand for internet
services, data transmission is doubling every three months! Data transmission,
i.e. the internet, currently represents only about 2% of communications
revenues. Long distance networks are under construction by 60 companies. When
completed, these new, high capacity networks will provide 8000 times the
capacity of the ATT network built during the past 100 years! Lots of bandwidth
and falling long distance charges, we think, will force long distance charges
from 10 cents per minute to 2 or 3 cents per minute in a few years, and make
possible a panoply of new services. "Streaming, full-motion video," home
appliance control, home security, utility metering, movies on demand and
services we can't yet imagine will soon become viable.
When Thomas Edison invented electricity 100 years ago, conventional wisdom
assumed electric home illumination would be accomplished with two light
fixtures per home. The average home now has 25 light fixtures. Yet, lighting
currently represents only about 14% of an average consumer's monthly electric
bill. Refrigerators, televisions, toasters, ovens, microwaves, air
conditioners, etc. comprise the rest.
Baron Funds has chosen to invest in businesses we think will be able to take
advantage of the huge increase in long distance transmission capacity soon to
be available. We have not invested in the long distance, "inter-latta" networks
themselves due to our fear of competitive rate reductions. So far, avoiding
those businesses has not been a good decision. The new communications networks'
stocks have performed well. We have invested with good results, however, in the
most obvious beneficiaries of the increase in intercity communications pipeline
capacity, e.g., communications networks that provide "intra-latta" local,
residential and business telephony, television and high speed internet access
services. In addition to facing less competition, only a small percentage of a
single network's capacity connected to the home, maybe 15%, will be used for
the services described. Thus, just as electricity had significant opportunities
beyond illumination, so will these broadband local communications networks have
great opportunities for future revenue, and profit, growth as additional
services are developed. NTL has an especially promising outlook since its newly
built cable and telephony services are protected from direct competition in
their U.K. licensed regions. Also of interest to us are communications towers,
businesses that will benefit from the huge demand for wireless one rate
services, services that now offer $.10 per minute anytime, anywhere calls, the
prices of which, as we have already suggested, are likely to continue to
dramatically fall.
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RECENT DEVELOPMENTS
Communications
As I noted in my introduction of George Blumenthal, Chairman of NTL, at last
fall's seventh annual Baron Investment Conference, "You should invest in any
business that my friend George operates...even before you research the
business." 1999 has been a very competitive environment for telecom business
acquisitions. Since the start of this year, nevertheless, NTL has acquired (1)
the Australian National Transmission Network, the operator of 560 transmission
towers in that country; (2) Diamond Cable, a competitive U.K. broadband cable
television, telephony, internet service network; (3) Ireland Cablelink, a
360,000 customer cable network; and, (4) a portion of France Telecom's cable
network. NTL was able to acquire these businesses at attractive prices since it
is generally regarded as the preeminent operator of similar systems...and, it
had the money and could act fast. NTL also began its interactive television
service linking television and the internet. In addition, Microsoft invested
$500 million in securities convertible into NTL common shares at $100 per NTL
share. Most importantly, NTL has continued to achieve terrific operating
results, with strong residential telephony, business telecom, cable television
and internet customer additions. Whew! As of the date of this letter, NTL's
shares have appreciated more than 70% this year, and about ten times since our
original purchases seven years ago. Years ago, before we were diluted by
subsequent NTL share offerings and acquisitions, Baron Funds was NTL's largest
shareholder. Baron Funds remains a significant NTL shareholder.
On May 3, Cellular Communications of Puerto Rico, one of three cellular phone
service providers on that island, and another of the businesses started and
headed by George and his partner, Barclay Knapp, announced it would be acquired
by SBC and Telephonos de Mexico at $29.50 per share. Baron Funds, the company's
largest shareholder, has more than tripled its money in this investment during
the past four years.
During February, CoreComm, the most recent George and Barclay startup telecom
business, announced it had acquired USN, a bankrupt reseller of local telecom
services in the midwestern United States. The $27 million cash and 350,000
CoreComm warrants USN purchase price could, if the acquired entity is
successful and incentives are earned, reach $85 million. USN had invested more
than $400 million in its business during the past two years. CoreComm also
announced it would purchase, MegsINet, an internet service provider, for $16.75
million and 1.4 million CoreComm shares. CoreComm, a virtual telecom business,
is taking advantage of recent legislation and court decisions requiring local
phone companies to provide reseller access to homes at sharply lower costs.
With large network capacity increments by others scheduled to soon be
operational, and broadband electronics prices falling, the cost to use networks
will continue to fall. We think CoreComm's opportunity is to build a
significant customer base by reselling value priced local telephone services
and offer additional highly profitable services to
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those customers, e.g. internet access, call forwarding, long distance. If
CoreComm can obtain 5-10% of the residential homes at attractive customer
acquisition costs in 500,000 to 1.5 million population markets, the company
could build its own switches...and, maybe even overlay its residential telephony
service with broadband. Baron Funds, as the largest shareholder in Cellular
Communications of P.R. when that company spun out CoreComm, also became the new
company's largest shareholder. We added significantly to our CoreComm holdings
during the past few months at an average cost of less than $10 per share, less
than the amount of cash held by the business before it began to execute its
business plan. CoreComm's shares have since about quadrupled in price.
Education
Year after year after year since we first invested in DeVry in 1990, the
company has increased its earnings per share 25% per year. During the first few
years, by improving its program each year and adding more students each year to
its existing schools, increasing tuition modestly each year and paying down its
debt using free cash flow. During the past several years, by improving its
program each year and adding more students each year to its existing schools,
increasing tuition modestly each year and opening more schools. Despite the
currently tight labor market after the sustained nine year U.S. economic
advance when, it seems, just about everyone can get a job, DeVry has continued
to attract more students this year than last to its existing schools, and
graduation rates have even slightly improved. And, of course, DeVry's earnings
continue to increase about 25% year over year. We've earned about 15 times our
initial investment since 1990.
Utilities
Southern Union offered to acquire Southwest Gas. Please see discussion on
Gabelli Asset Management in Baron Growth Fund's shareholder letter for my
comments on this offer. Baron Growth Fund is a shareholder of both Southern
Union and Gabelli. Gabelli is Southwest Gas' largest shareholder.
Wholesale Trade
Pasqualle Natuzzi. Our firm's young jack-of-all-trades analyst, Andrew Peck,
and I recently visited Pasqualle Natuzzi at the spring furniture show in High
Point, North Carolina. We wanted to see Industrie Natuzzi's new furniture line
and to try to gauge retailer demand for Natuzzi's leather chairs and sofas. We
were anxious, as well, to see the company's newly introduced slipcover and
fabric upholstered furniture. Natuzzi is the largest and most efficient
manufacturer of leather covered furniture in the world, both under its own
brand and that of leading department and chain stores. It makes about 25% of
all leather couches sold in the United States, 5% of a much larger market in
Europe. But slipcover couches? Natuzzi's $800 slipcover couches with
fashionable and attractive $200 retail selling priced covers that can be easily
changed appear to be upholstered. We couldn't tell the difference. Natuzzi has
also begun to let consumers choose to have their furniture covered in either
leather or design coordinated
6
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B A R O N A S S E T F U N D
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fabric...another good idea. Although leather furniture is a faster growing
market segment, fabric covered chairs and couches are at least three times as
big a business.
A few days later Pasqualle visited our office. "Your leather chairs are lovely,
but you paid too much for them!" he told us. I began to question him about how
he, as an individual growing up poor in southern Italy, could understand what
furniture designs would appeal to consumers in New York, Beverly Hills and
Paris. Pasqualle shrugged and launched into a wide-ranging and impassioned
discussion about his family, his fellow townspeople and his business. He
concluded in somewhat broken English, "You toucha my wife...I be very, very
angry. Very angry. You toucha my company...there's the cemetery!" Now, that's
the sort of CEO interest in a business that catches our attention!
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OTHER RECENT DEVELOPMENTS
www.baronfunds.com
Although we haven't exactly figured out yet how to provide our shareholders
with special services from the businesses in which we're shareholders, please
be patient. We hope it won't be too much longer. Our concept is relatively
simple. If you owned a
candy store, you wouldn't think of buying your candy or grocer-ies at your
competitor's store across the street. In the same way, we hope you'll consider
yourselves part owners of the businesses in which Baron Funds holds shares. The
better the businesses of which we're part owners perform, the richer you'll
become. When Vail and Beaver Creek have fewer skiers, great snow and great
deals in January, you'll hear about it on our web site. When sothebys.com has
acquired a special collection it will auction, you'll hear about it on our
site. When Robert Half needs accountants or systems analysts in Dallas, you'll
hear about it on our site. When Charles Schwab offers new banking or investment
services to its clients, you'll hear about it on our site. When CoreComm offers
new business and consumer communications services, you'll hear about it on our
site. Of course, we will receive no compensation for doing so other than
helping our businesses and you, our shareholders, the true owners of these
businesses through your Baron Funds' shareholdings, prosper.
Baron Funds Eighth Annual Investment Conference. October 15. New York City.
The Eighth Annual Baron Investment Conference will take place Friday Morning,
October 15, 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 30 minute
presentation, often with slides, but on occasion, extemporaneously. Last year
Polo Ralph Lauren's Chairman Ralph Lauren wowed the crowd with his off the cuff
remarks and casual demeanor. The executives will then answer questions from our
guests for 15 minutes. I will, as always, be the final speaker fol-
<PAGE>
lowing 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 is to judge for ourselves their ability, 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 ask as a personal favor to attend. Last year more
than 1300 persons attended our meeting. Please RSVP at www.baronfunds.com or at
1-800-99-Baron or 212-583-2100 as soon as possible if you intend to be here so
we can be certain you will be accommodated. If you have any further questions or
if you'd like help or suggestions regarding hotel reservations, please e-mail,
call or write us. We hope we'll see you this fall. There will be no charge to
take part, of course.
BaronMail; e-mail service from Baron Funds.
Please register your e-mail address with Baron Funds at [email protected] so
we can communicate via e-mail relevant investment information about your
investment. We welcome your comments on how we may better serve you.
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
children's education, a new home or your retirement. 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 decide if Baron Asset Fund is an appropriate investment for you and
your family.
We want to thank you for joining us as fellow shareholders of Baron Asset Fund.
We will continue to work hard to justify your confidence. Again, thank you.
Sincerely,
/s/ Ronald Baron
- -----------------
Ronald Baron
Chairman and CEO
May 24, 1999
7
<PAGE>
REGISTERED
[LOGO]
BARON
FUNDS
BARON GROWTH
FUND
2
[Formerly Baron Growth & Income Fund]
PERFORMANCE.........................................................8
PORTFOLIO HOLDINGS..................................................9
OTHER DEVELOPMENTS.................................................12
www.baronfunds.com
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
<PAGE>
BARON GROWTH FUND
QUARTERLY REPORT MARCH 31, 1999
Dear Baron Growth Fund
Shareholder:
- --------------------------------------------------------------------------------
PERFORMANCE
Baron Growth Fund outperformed the S&P 500 and significantly outperformed the
Russell 2000, an index of small cap companies during the March 31, 1999
quarter. The Fund's strong performance was a continuation of its strong
performance since the October 8th lows of last year. The Fund also outperformed
both indexes in the fourth quarter of 1998 and has continued to outperform
through May 24, the date of this letter.
The stellar performance of large cap stocks relative to small cap stocks
continued during the March quarter. The S&P 500 beat the Russell 2000 by over
ten percentage points. The smaller a company, it seems, the more attractively
it is priced.
Baron Growth Fund has established a strong record in the almost five years
since its inception in January 1995. The Fund has nearly kept pace with the S&P
500 although it invests principally in currently out of favor, smaller
companies. It has beaten the Russell 2000 by more than 2.5 times since its
inception.
Although we believe that small caps are cheap and will likely soon outperform
larger companies, the Fund's performance is not dependent on a change in market
sentiment. As we have since the Fund's inception, we invest in businesses which
we think can double in size over four to five years...and then double again.
With our long term investment horizon and the low turnover of the Fund, we
believe that the growth of the businesses in which we invest will drive our
returns...if we invest at attractive prices.
[GRAPH]
- ----------------------- ----------------------- -----------------------
PERFORMANCE PERFORMANCE PERFORMANCE
FOR THE 3 MONTHS ENDED SINCE INCEPTION FOR THE 12 MONTHS ENDED
MARCH 31, 1999 JANUARY 3, 1995 THROUGH MARCH 31, 1999
MARCH 31, 1999
BARON GROWTH FUND 7.6% BARON GROWTH FUND 175% BARON GROWTH FUND -1.8%
S&P 500* 4.9% S&P 500* 204% S&P 500* 18.4%
RUSSELL 2000* -5.4% RUSSELL 2000* 69% RUSSELL 2000* -16.3%
- ----------------------- ----------------------- -----------------------
* THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES, THE S&P MEASURES THE
PERFORMANCE OF THE STOCK MARKET IN GENERAL; THE RUSSELL 2000 OF SMALL AND
MID-SIZED COMPANIES.
<PAGE>
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B A R O N G R O W T H F U N D
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Our philosophy contrasts sharply with many small cap funds that have high
portfolio turnover. These trading oriented small cap funds expect to sell
stocks for a profit soon after purchasing them, a "greater fool" theory of
investing. The volatility of the small cap market affects their ability to do
so. We believe Baron Growth Fund is well positioned to achieve its financial
objectives, a doubling of the Fund's net asset value every three to five years,
in both good small cap markets and bad ones. Of course, there can be no
guarantee we will be able to achieve our objectives.
We love the phrase "smallification" coined by Acorn Fund's President, Ralph
Wanger. Baron Growth Fund's "smallification" program, similar to Ralph's, is
intended to take our Fund where the values are...even deeper into the vast
small cap stock wasteland. Although Charles Schwab remains the Fund's largest
holding and its strong appreciation has contributed importantly to the Fund's
recent results, we reduced the Fund's Schwab investment by half, despite our
optimism about the company's prospects for the next decade. Please see the
discussion in the Baron Asset Fund letter. The Schwab sales and subsequent
reinvestment of proceeds in smaller companies were part of Baron Growth Fund's
"smallification" program.
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PORTFOLIO HOLDINGS
The difficult market for "small cap" stocks during the past several months has
allowed Baron Growth Fund to make several strategic investments in smaller
businesses at what we believe to be opportunistic prices. Gabelli Asset
Management's shares were purchased for about 15% less than their February 1999
initial public offering price when a complicated capital structure, an
underwriter change, a little negative publicity and lack of institutional
interest allowed its stock price to fall. During the past few months, Baron
Growth Fund bought shares in Aurora Foods more than 20% below its June 1998
initial public offering price. When a few large institutional shareholders
decided to sell the millions of shares they had purchased on the Aurora Food's
initial public offering...in just three days in the midst of last fall's
financial panic...Aurora's share price fell, has still not recovered and
provided us with opportunity. Baron Growth Fund purchased shares in Radio One,
a radio station group targeted at African-Americans, both on its initial public
offering and at higher prices in aftermarket transactions. This investment idea
was brought to our attention by Ed Christian, Chairman of Saga Communications,
a radio business in which Baron Funds is the major shareholder. Radio One
purchases radio stations that are not doing especially well and attempts to
"turn them around" by changing their format to one attractive to Radio One's
African-American listeners. Since a number of acquisitions had not yet closed
and several had not yet been owned long enough for Radio One's management to
impact their results, its shares did not appear "cheap" on current results and
offered us opportunity. Electric Lightwave, a competitive local exchange
carrier (CLEC)
<PAGE>
sells at a substantial discount to similar businesses not as well situated. Matt
Ervin believes this is because it is controlled by Leonard Tow and Citizens
Utilities. Leonard Tow has made us a lot of money, we like and trust him and, in
fact, Baron Asset Fund is a shareholder of Citizens Utilities. Accordingly, we
were undeterred and purchased Electric Lightwave at attractive prices when we
had the opportunity to do so.
Communications
Electric Lightwave. Note written by Matt Ervin, Vice President and Co-Portfolio
Manager of Baron Growth Fund.
In the world of telecommunications, the ability to provide affordable broadband
services all the way to the customer's doorstep is still a rarely accomplished
feat. Electric Lightwave is building a robust and valuable telecom plant to
provide such services to businesses in key Western cities. The Telecom Act of
1996 opened the door for the launch of the CLEC industry, an acronym that
stands for Competitive Local Exchange Carrier. The CLECs have regulatory
approval to target the $100 billion annual revenues controlled by the Bell
companies, BellAtlantic, USWest, et al. Electric Lightwave competes against
legacy provider USWest but Electric Lightwave has the latest fiber technology,
advanced telecommunications switches, and therefore potential broadband
connections to the internet at prices that USWest cannot touch. The company
jumped ahead of other telecom upstarts in cities such as Seattle, Portland,
Salt Lake City, and Phoenix. Thus far, Electric Lightwave has installed almost
$600 million of fiber-based plant and has captured roughly 50% marketshare
among all the CLECs in Seattle and Portland. Building a fiber network may be
harder in the future than it has been in the past. Just as localities are
resisting the construction of more cellular towers, so too are they likely to
resist continual digging up of streets necessary to install new
telecommunication infrastructure. Those with plant in the ground or secure
rights-of-way have an important competitive advantage.
For Electric Lightwave, the future opportunity dwarfs current revenues. CLECs
nationwide have only 6% share of business telecom revenue while old-line
Regional Bell Operating companies (RBOCs) still have 94% share within their
operating territories. In Seattle, for example, Electric Lightwave has
aspirations for 20% marketshare within 5 years, up from about 4% today. And we
believe that at the same time the CLEC industry is likely to consolidate. The
most sought-after companies in the industry should be those with deep local
networks and strong local teams for sales and service. For Electric Lightwave,
with the right assets and building the right team, we foresee two possible
outcomes. (1) The company merges at a premium valuation with the likes of an
AmeriTech, ATT, another CLEC, etc. Any consolidator with nationwide ambitions
must have a network in the cities that Electric Lightwave serves. If the
company continues to be the market-leading CLEC within those cities, its
management has firm negotiating leverage in any merger. (2) The company
9
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B A R O N G R O W T H F U N D
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remains independent and executes on its strategy of gaining roughly 20% share
of the business market in each of its target cities. That would yield a
business generating roughly $1 billion annual revenue and $400M of cash flow,
hopefully in five years. Of course more capital must be employed to achieve
that goal. The company could then have debt of about $1 billion and nearly 60
million shares outstanding. And, Electric Lightwave would still be well
positioned for further growth. The fiber plant being built has such tremendous
capacity that it would still be significantly underutilized. Investors could
value its still-growing cash flow at least 8-10x, providing strong potential
upside. Another valuation metric is the ratio of enterprise value to plant in
the ground. Electric Lightwave sells for roughly 1.5X plant versus an average
for the industry of around 3X plant.
We bought shares at attractive prices as investors worried about several
issues. Revenues have not developed at the pace expected. The company has been
hampered by a lack of cooperation from USWest. CLECs need cooperation from the
incumbent Bell company in order to switch new customers from the Bell network
to the CLEC network. Not surprisingly, the Bell companies have been somewhat
lackadaisical in this process. Electric Lightwave takes business customers
primarily from US West, notorious for its intransigence in letting customers
off of its network. Eventually US West must yield to the pro-competitive stance
of the FCC and Congress. To speed the process, Electric Lightwave has filed an
anti-trust case against USWest. Leonard Tow, chairman of Electric Lightwave,
notes that USWest has one of the most interesting defenses he has ever seen:
"Their defense is that they are incompetent." If that defense holds, perhaps
Electric Lightwave can convince 20% of the marketplace that they are the better
telecom provider.
Another reason for the low prices of this stock may be that the majority of
shares are owned by Citizens Utilities and controlled by its Chairman, Leonard
Tow. Tow has doggedly built several other billion dollar enterprises through
years of patient work. The stocks of fledgling telecom companies often trade
based upon take-out value. Wall Street's perception seems to be that Tow is not
a seller, that he will continue to be a patient builder and not a man to build
quickly and flip the assets to the highest bidder. While Tow is certainly
focused on long-term shareholder value, he also recently sold two companies
under his control: Centennial Cellular was sold to Welsh Carson for cash and
Century Communications to Adelphia for stock. We were large investors in both
of these success stories, and at all times were confident Tow would maximize
shareholder value at the appropriate time. Electric Lightwave, in the meantime,
gets some big benefits from its controlling shareholder; Electric Lightwave
borrows at very attractive rates because Citizens has backstopped a $400
million credit line.
<PAGE>
Finance and Investments
Gabelli Asset Management
Mario Gabelli and I have been good friends since the early 1970's when we were
both young (at least I still look young) and trying to establish ourselves as
securities analysts. In fact, when we started our separate businesses, we
briefly considered joining forces...until, that is, Mario pointed out that the
combination, Baron and Gabelli, shortened to its logical acronym, was "BAG." We
were both certain that acronym would quickly become, in Wall Street parlance,
"Bag 'em." Now, that just wouldn't do.
Anyway, when Mario decided to become a publicly owned business, there could be
few businesses whose prospects, opportunities and risks that I, as the owner of
a similar business, understood better. Mario's management company has several
unique and very valuable "franchise" funds, e.g. Gabelli Growth, Gabelli Value,
Gabelli Asset and Gabelli Equity Trust, sort of the "franchise players" on his
team. His firm's high net worth individual account management business is also
very attractive. Gabelli's "franchise" funds have performed especially well
during the past two years as their long time cable television and media
investments have attracted greater interest. That should give his firm the
opportunity to continue to improve its distribution, attract more assets to
manage and grow earnings at least 15% per year. Selling at 12X estimated 1999
earnings in a 30X market for 7% growth large businesses, Gabelli Asset
Management is attractively valued. In addition, the firm is valued at 3% of
assets under management and 3X revenues, a significant discount to other
publicly held investment managers. Gabelli could earn about $1.30 per share
this year before non-recurring charges. Baron Growth Fund has recently
purchased 299,000 shares of Gabelli Asset Management Company for an average
cost of $14.84 per share.
In re: Gabelli Asset Management Company's role in the "menage atrois" between
Southern Union, Southwest Gas and Oneok.
Mario's principal asset, in our opinion, is his reputation, well deserved, as a
great stockpicker, a money maker, as well as a highly regarded investment
analyst with a keen understanding of business "private market" values,
strategic values, if that business were acquired. Mario has also become a
highly visible and important value investor who speaks out for the rights of
his mutual funds' shareholders. And, who better to do that than an investor who
understands the value of businesses and whether or not they are being well run?
Mario has moved more in that direction with his annual "Hall of Shame" awards
to the most egregiously incompetent, or worse, managers.
10
<PAGE>
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B A R O N G R O W T H F U N D
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Baron Funds attempts to invest only in very attractive, fast growing businesses
operated by executives we like, respect and admire...and in whom we have
confidence will manage these businesses well. Mario, on the other hand, often
invests in valuable businesses which are poorly run with the hope that others
will recognize these gems and try to buy the businesses "lock, stock and
barrel" at his estimate of private market value. His other hope? That
shareholders and directors of these underperforming businesses will awaken and
"kick the bums out" realizing shareholder value.
Baron Funds is one of the largest shareholders in Southern Union, a well
managed, rapidly expanding retail gas utility that has offered to purchase
Southwest Gas for $33.50 per share in cash. Gabelli Funds is the largest
shareholder in Southwest Gas. Oneok has also offered to acquire Southwest Gas
but, for only $30 per share in cash. Southwest Gas' executives are small
shareholders in their business, prefer to be acquired by Oneok and, alas, have
chosen that offer instead of the higher per share cash offer made by Southern
Union. Oneok's chief executive has reportedly bragged to analysts that he
"stole the company (Southwest Gas)."
There are some very interesting questions that must be answered, probably in
court, but hopefully by reasonable explanation before then, prior to the
acquisition of Southwest Gas by Oneok. How can a $30 cash offer to acquire
Southwest Gas proffered by Oneok be superior to the $33.50 per share cash
offered by Southern Union? Why was Merrill Lynch fired as an advisor to
Southwest Gas when they apparently opined that Southern Union's offer was fully
funded? (George Lindemann, Southern Union's chairman and a Forbes Four Hundred
member, has offered to purchase at least half any new Southern Union equity, if
needed. His directors and other large shareholders, including Baron Funds,
would also purchase additional shares. And, Donaldson Lufkin Jenrette stands
ready to lend whatever additional capital may be required.) Did Southwest Gas
bargain in good faith with Southern Union when Southern Union was provided
information in return for a standstill, or did Southwest's management always
intend to sell to Oneok? And, finally, one of the operating questions that has
always puzzled me, why is it nearly twice as expensive to obtain customers and
bury pipe in the Nevada desert as under the streets of Kansas City? The last,
of course, could offer Southwest Gas' new owner good opportunity to lower
customer acquisition costs.
Mario, as a 9.9% shareholder in Southwest Gas, has the power to impede that
company's acquisition by Oneok if it is not, in his opinion, in the best
interests of his funds' shareholders. Stick up for your clients' rights, Mario.
Go for it!
Foods
Aurora Foods is a leading independent producer and marketer of premium branded
grocery products. Included in the company's array of eight branded products are
Duncan Hines cake-
<PAGE>
mixes, Log Cabin and Mrs. Butterworth syrups, Van de Kamp's and Mrs. Paul's
frozen seafood, Aunt Jemima frozen breakfasts, and Celeste frozen pizza. Each
represents annual sales in excess of $100 million. The average age of the seven
listed brands is 70 years. The only exception to Aurora's $100 million annual
revenues per brand rule is the recently acquired skillet meal, home meal
replacement ("HMR") brand, Chef's Choice. Chef's Choice, a mixture of chicken,
meat or shrimp with vegetables and sauce, all packaged separately to be cooked
in a skillet, is only a few years old. It is the only HMR skillet brand sold in
the meat and fish departments of supermarkets. We think this provides an
important advantage over its larger competitor, Birdseye, which is sold as just
another SKU in the frozen food case. Chef's Choice could increase its sales
nearly 40% this year to $80 million; $200 million per year in a few years is not
out of the question. In December, Chef's Choice had only achieved 50% national
distribution; its target this year, 75%. Aurora Foods' 1999 total sales could
approximate $1.05 billion.
Aurora Foods is the creation of Ian Wilson, a former Coca Cola vice chairman,
who for the past fifteen years has earned his living buying, fixing and selling
food businesses. Aurora's focus is to purchase from large food companies
"orphaned" brands, brands considered "mature" by their large consumer products
or food company parents. These brands have, as a result, received little senior
management attention for years. Unlike internet land when it's good to have
inexperienced young tigers running businesses, in food companies that's
demonstrably not the case. Aurora has been able to boost sales of acquired
brands significantly and to lower operating costs at the same time. Marketing
strategies have been revamped, corporate overhead per brand sharply reduced and
manufacturing costs trimmed by better utilizing existing manufacturing
facilities or copacking with another manufacturer. Manufacturing and overhead
cost savings have been reinvested in brand marketing to drive growth. Aurora
budgets 30% of annual revenues as marketing expense for its brands. The food
industry, by comparison, spends 22.5% of sales on marketing, about what had
been spent by Aurora's brands' former parents. Aurora has also been able to
boost annual sales 2-3% per year by increasing lower gross margin, lower ad
supported and equally profitable sales through the club distribution channel,
i.e. Sam's, Costco and B.J.'s. With its strong 18% EBITDA margin, and $37
million per year, tax deductible, non-cash, goodwill charges, Aurora expects to
increase its revenues, before any acquisitions, 8-10% per year for the next few
years. This is lightning fast by the food industry's 3% annual growth standard.
Due to the leverage of interest expense and amortization charges, earnings per
share could grow 30-40% per year. Aurora could earn $.88 per share in 1999,
$1.20 in 2000. Baron Growth Fund purchased 320,000 shares of Aurora Foods for
about $16.35 per share.
11
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B A R O N G R O W T H F U N D
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Media and Communications
RadioOne. Note written by Matt Ervin, Vice President and Co-Portfolio Manager,
Baron Growth Fund.
RadioOne is the leading radio company in the United States that targets
exclusively the African-American population. Led by CEO Alfred Liggins and
chairperson/founder Catherine Hughes, RadioOne has established an enviable
record of operational performance and acquisitions since the company's founding
in 1980. Radio industry consolidation continues to result in benefits for all
broadcasters, and RadioOne has taken noteworthy advantage. In 1998, RadioOne
was able to boost revenue growth an astounding 28%, and cash flow from their
average station 43%. Improved advertising rates and increased advertiser
interest in radio has come in the wake of radio industry consolidation. The
company saw big benefits from several years of work to turnaround stations
which, when acquired, were poorly managed. Although the eye-popping growth
rates of last year should moderate in the short term, the underpinnings for
long-term success are in place. CEO Alfred Liggins notes his advantages versus
other large broadcasters: "We are from the African-American community so we
understand it better," a claim that no other CEO of a public radio company can
make. When creating promotions, RadioOne stations often touch listeners in a
unique way, using approaches that may be less obvious to a general market
broadcaster. For example, sickle cell anemia is much more common in the
African-American community than in the population at large, and the difficulty
of arranging bone-marrow transplants has become a heartfelt issue for many. "We
have geared promotions to raise awareness of this issue, get people registered
as potential donors, and this in turn augments the importance of our station in
the minds of our audience." Alfred has established numerous other services to
his community performed by Radio One stations that must certainly build both
audience and loyalty.
RadioOne's stations now dominate the urban scene in Washington and Baltimore,
and the company has recently expanded into 8 of the top 20 African-American
markets. With the expanded station base, free cash flow from existing stations
could grow from $17 million to $65-$70 million over 5-6 years. Prevailing
demographic trends put the wind at their backs. The African-America population
continues to grow faster than average, with above average per capita economic
growth as the gap in earning power between White America and Black America
slowly closes. Of potential significance, RadioOne is currently the best
financed company focusing on the urban programming niche and so could be in the
driver's seat if there arises a profitable opportunity to further consolidate
this segment of the industry.
<PAGE>
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OTHER DEVELOPMENTS
Shareholders approve change in Fund's investment
objective; name changed to Baron Growth Fund.
On May 19, 1999 shareholders of Baron Growth & Income Fund voted to change the
Fund's investment objective to capital appreciation, eliminating income as a
secondary objective. The Fund's Board immediately thereafter changed the name
of the Fund to Baron Growth Fund.
Baron Growth Fund to focus on smaller companies; median market cap $1billion
and falling.
The Fund has invested all of its net flows this year in smaller businesses. The
Fund's median market cap is now below $1 billion and falling, compared to its
March 31, 1999 median market cap of $1.8 billion. The repositioning of the Fund
includes lowering its concentration and adding new investments.
Thank you for investing in Baron Growth 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
children's education, a new home or your retirement. 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 decide if Baron Asset Fund is an appropriate investment for you and
your family.
We want to thank you for joining us as fellow shareholders of Baron Asset Fund.
We will continue to work hard to justify your confidence. Again, thank you.
Sincerely,
/s/ Ronald Baron /s/ Matt Ervin /s/ Mitch Rubin
- -------------------- -------------------- --------------------
Ronald Baron Matt Ervin Mitch Rubin
Chairman & CEO Vice President Vice President
May 24, 1999 & Co-Portfolio & Co-Portfolio
Manager Manager
12
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REGISTERED
[LOGO]
BARON
FUNDS
3 BARON SMALL
CAP FUND
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PERFORMANCE........................................................13
PORTFOLIO
COMPOSITION........................................................13
RECENT EVENTS......................................................14
NEW POSITIONS......................................................15
www.baronfunds.com
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
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BARON SMALL CAP FUND
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QUARTERLY REPORT MARCH 31, 1999
Dear Baron Small Cap
Fund Shareholder:
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PERFORMANCE
Baron Small Cap Fund performed well in the March quarter. The Fund gained 12.8%
in the March quarter and outperformed the Russell (-5.4%) and the S&P 500
(+4.9%). Our best performing stocks were our communications and media holdings,
especially United International Holdings, Century Communications, and CoreComm.
We also had good gains in Four Seasons, Premier Parks, and Kenneth Cole
Productions. Later, we will discuss more fully the corporate events and
industry changes that affected our performance, along with an in-depth
discussion of a significant position, as is our practice in these letters.
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PORTFOLIO COMPOSITION
At the end of March, Baron Small Cap Fund had net assets of $522M and owned 42
stocks.
The top ten stocks accounted for 51% of assets and the top 15 were 65%.
Investments in the four industry groups: communications, media and
entertainment, amusements and recreations and business services were 48% of
assets. This illustrates our stated practice of running a concentrated
portfolio -- few positions, the best ideas accounting for a large percentage of
the investments, and a focus on dynamic industries where special companies can
excel and we can prosper as investors.
The turnover in the portfolio is modest, since we seek to find companies that
we can invest in for the long term and make strong, compounding and tax-free
returns. But we are constantly tweaking the portfolio, trying to find new ideas
and replace positions which we feel are the weakest and to take advantage of
price declines in our existing investments to increase our positions.
In this quarter, we significantly increased our positions in Jeffries Group (a
broker that is cleaving itself into two entities) during a period when the
market was weak, Province Healthcare (an operator of rural hospitals),
[GRAPH]
- -------------------------- ----------------------- --------------------------
PERFORMANCE PERFORMANCE PERFORMANCE
FOR THE 3 MONTHS ENDED SINCE INCEPTION FOR 12 THE MONTHS ENDED
MARCH 31, 1999 OCTOBER 1, 1998 THROUGH MARCH 31, 1999
MARCH 31, 1999
BARON SC FUND 12.8% BARON SC FUND 18.9% BARON SC FUND 0.4%
S&P 500* 4.9% S&P 500* 38.9% S&P 500* 18.4%
RUSSELL 2000* -5.4% RUSSELL 2000* -10.9% RUSSELL 2000* -16.3%
- -------------------------- ----------------------- --------------------------
* THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES, THE S&P MEASURES THE
PERFORMANCE OF THE STOCK MARKET IN GENERAL; THE RUSSELL 2000 OF SMALL AND
MID-SIZED COMPANIES.
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B A R O N S M A L L C A P F U N D
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when fears of unfavorable changes in government reimbursement overly depressed
the stock and Electric Lightwave (a competitive local telephone operator) when
its strong quarterly results were misinterpreted by the market. We increased
our positions in Career Education and Central Parking as our enthusiasm for
their prospects grew. We started new positions in three new public companies:
Entercom Communications (a radio operator), Gabelli Asset Management (a money
manager), and Corporate Executive Board (a consulting company). We sold out of
four investments: Dispatch Management, US Office Products, Amphenol and Clear
Channel.
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RECENT EVENTS
It was an eventful period for our portfolio companies so I thought we'd discuss
some of the company specific and industry developments that are driving the
stock performance.
As we have mentioned, the cable television industry is undergoing a resurgence
as plant is upgraded to allow three services, entertainment, telephony and
internet, to be offered over a common platform. This calendar 1999 has been a
period where demand for the new services has been confirmed to be beyond
original expectations, and a year of dramatic consolidation in the domestic
market in order to create greater economies of scale. AT&T completed its
purchase of TCI and announced the acquisition of MediaOne. AT&T is paying 25X
1999 cash flow and almost $4000 a subscriber for Media One, yet they still feel
they can earn over a 30% return on the purchase because of the growth in cash
flow to come. We own Century Communications, which traded at less than a 10
multiple of cash flow when we acquired our position. Century put itself up for
sale this spring and announced in March that it will be sold to Adelphia
Communications for 16X cash flow, or about $3600 a subscriber. Over three
quarters of the consideration in the transaction is stock of Adelphia.
Adelphia, with Century and other acquisitions, now has 5M subscribers, a
terrific record as a basic cable operator and much success in its initial
digital rollout. Our Century stock has appreciated 4 times since our purchase
18 months ago. Century's Chairman, Leonard Tow, has indicated that there is
more upside since he orchestrated the deal to be mostly for stock and we have
decided to ride on with him.
United International Holdings (UIH), is our international play in the same
theme. We believe that over time European cable subscribers will prove to be as
valuable as American subscribers, because the opportunities for greater
telephony penetration and cash flow outweigh the lower starting point in analog
cable cash flow. UIH now owns 3M subscribers in Europe, as well as assets in
other parts of the world. In this last period, they raised $1.2B in UPC (the
European subsidiary) to purchase 500T new subscribers, delever, enable the
company to rapidly rollout out new services and buy additional operators. UPC's
offering valued the European company at about $1300 a subscriber. The stock has
<PAGE>
since doubled, but the valuation is still modest compared to U.S. standards.
Management is hard at work attempting to buy additional subscribers with
borrowed money at a fraction of their ultimate value and develop its internet
backbone service "Chello", which could be incredibly valuable in its own right.
CoreComm was created as a spinoff from Cellular Communications of Puerto Rico
last fall. On the spin, the company had $13 per share in assets, mostly cash,
an unstated business plan, but an exceptional management team led by George
Blumenthal and Barclay Knapp. We purchased our position at around $11 per share
when the market was soft, because of our prior success investing with these
managers in Cellular Communications, NTL, and Cellular Communications
International. This quarter, they unveiled their plan for the company, which is
to exploit the convergence of the telecommunications and information services
industries through a "Smart LEC" strategy. CoreComm will offer consumers a
one-stop shopping experience for bundled voice and internet services using its
own facilities and leasing arrangements with other telecom network operators.
The company plans to create a "virtual AT&T" without the expense of owning all
of the network. Management's prior experience in building businesses and their
innovation in marketing telecommunication services has us and the market
excited about the prospects for the venture. The stock is up 3.5x from our
initial purchase.
Last fall, the stocks of lodging companies were under heavy pressure because of
fears that the stock market decline would affect travel. Four Seasons' stock,
one of our large holdings, took an additional hit for its Asian exposure, since
about a quarter of its cash flow is generated from management of hotels in this
region. We increased our position because we found the valuation to be
compelling and we thought that softness in results would be temporary. We were
very excited about the Company's development pipeline and thought the tougher
conditions would help us secure additional management contracts. Four Seasons
reported strong results for the March quarter, earnings are up 30% and a U.S.
and European RevPar gain of 4%. The development pipeline is intact and recently
an important Four Seasons opened up strongly in Las Vegas. The company expects
to add 18 hotels to its base of 41 over the next three years. Four Seasons won
a new contract in London, where it converted an independently flagged hotel to
a Four Seasons.
Premier Parks completed a $250M capital expenditure program during the first
quarter. Four previously owned regional parks were re-branded Six Flags and big
complements of rides and attractions were added to other parks as well. So far
the buzz is terrific. Season pass sales are up considerably and early season
attendance is very strong. The company also announced some significant
acquisitions, which is an important driver of value. Premier acquired free
standing water parks in Atlanta and Houston, and a large park in Mexico City
called Reino Aventura. We are particularly excited about the latter. Not only
is it indicative of the Company's intent to build a global company, but also
the economics of the deal are exciting. Premier is paying $59M to
14
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B A R O N S M A L L C A P F U N D
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acquire Reino Aventura and over the next two years plans to invest an
additional $40M to enhance the park and re-brand it Six Flags. The capital
upgrades will be funded from the park's operations. Premier hopes the park,
which is now doing $7M in cash flow, can do $25M in cash flow in time. We would
value this at $300M, substantially above the purchase price and incremental
investment.
Kenneth Cole Productions did much in this period to fulfill its desire to
become the next fashion mega brand. Its licensed mens sportswear line has been
very well received and a jeanswear line has also been launched. The Company
opened three large retail stores in the Christmas time period; each was five
times the size of previous openings. These stores, in New York City, San
Francisco and Chicago are doing big volumes and the rest of the retail chain is
seeing comparable store gains of over 20% for the last six months as all the
newly licensed merchandise flows through the stores. The present success bodes
well for additional undertakings to come: the continued aggressive rollout of
retail space and new licenses for women's sportswear, fragrance and home.
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NEW POSITIONS
Baron Small Cap Fund has a significant position in Career Education Corportion
(CEC). CEC is a unique company in a great business run by a terrific management
team, that through multiple avenues of growth could be a substantially larger
company than it presently is.
CEC is one of the largest providers of private, for-profit, post secondary
education in North America. The company was founded in 1994 by Jack Larson, who
had over 20 years of experience managing schools and education companies. The
post secondary education business is compelling because, as operated by CEC, it
is a win-win-win scenario. Students pay, on average, $10,000 for a one year
program to earn a degree in one of four highly valuable skills: information
technology, visual communications and design, business studies and culinary
arts. Employers are paying $30,000-$50,000 for CEC's graduates, so the students
are getting a great return on their investment. Placement rates are over 90%,
so there is obvious demand for the students. CEC has a highly profitable
business model, making its shareholders, the third constituent, a winner too.
Since its launch, CEC has acquired 13 schools, with 22 campuses. The schools
are local "schools of excellence", with long operating histories and recognized
educational excellence. But unlike a more traditional rollup, CEC's primary
focus is on internal growth of the acquired schools. First, CEC implements its
systems and procedures and makes substantial investments in people (recruiting,
retention, and placement officers), facilities and classroom technologies to
prepare the school for growth. Internal growth is achieved by tailored
marketing programs to recruit additional students from high schools and from
out of state, by re-pricing existing curricula and, most importantly, by
<PAGE>
adding additional curricula through selectively duplicating programs that have
been successful at other CEC schools. For instance, CEC introduced information
technology programs at its Gibbs Schools in 1998 and started a culinary program
at Brown Institute. The results have been dramatic. In 1998, CEC schools had
same store population growth of 20%, revenue growth of 28% and cash flow growth
of 58%.
CEC acquired the Al Collins Graphic Design School in 1994 for $3M. Since the
acquisition CEC has added two new programs, PC/LAN and animation. Attendance
has grown from 450 to 1100 students, revenue from $4.7M to $12.1M and cash flow
now is over $3M. Brown Institute was acquired in 1995 for $3.5M. Its enrollment
has doubled, its revenues have gone from $8.4M to $15.7M and its cash flow was
$3.5M in 1998. Katherine Gibbs had seven campuses when acquired by CEC in
mid-1997 for $26M, and focused mostly on secretarial programs for women. In the
first 18 months of ownership, they have added new curricula and have marketed
to men, driving attendance growth of 40% and revenues from $31M to $44M. We
anticipate that after three years the Gibbs Schools could be doing between
$15-20M of cash flow, up from the $3M they were doing when acquired. Since
these schools are real franchises with strong growth rates, we feel they are
worth high multiples of earnings (or cash flow), yet because of the internal
growth the cost to CEC's shareholders is only 1 to 3x earnings, three years
out. Pretty outstanding.
CEC plans to do 8-9 curricula cross polinations in 1999 and each year
thereafter, which along with the maturation of the existing startup programs
will fuel strong internal growth. In addition, CEC seeks to make additional
acquisitions, and so far in 1999 has acquired three schools with four campuses.
Also, CEC will be offering its programs over the internet this fall (distance
learning) and will open its first greenfield-developed schools next year.
Wall Street expects CEC to grow its earnings 40% in 1999 and 25% in 2000. We
expect even stronger results and believe that 30%+ growth is sustainable into
the foreseeable future. Reported earnings actually greatly underestimate actual
cash earnings because goodwill amortization from the school acquisitions
penalizes the estimates by $.40 in 1999 and $.30 in 2000. We feel the Company
could earn over $2.00 in cash earnings in 2000 and sell for over $60 per share
with significant upside from there.
Thank You
Thank you, my fellow shareholders in Baron Small Cap Fund. We appreciate your
support and hope these letters give you more insight into how we are thinking
and what's going on with our portfolio companies.
Sincerely,
/s/ Cliff Greenberg
- --------------------
Cliff Greenberg
15
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B A R O N F U N D S
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Table I
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Portfolio Market Capitalization (Unaudited)
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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 invest in companies with market capitalizations greater than $5
billion. These larger cap companies have increased in value since the Funds
first invested in them and still offer attractive opportunities for further
appreciation.
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Baron Asset Fund
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Equity
Market Cap % of
Company (in millions) Net Assets
- ------------------------------------------- ------------- -------------
Large Capitalization
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Charles Schwab Corp. ...................... $39,061 19.6%
NTL, Inc. ................................. 5,965 4.0
Outdoor Systems, Inc. ..................... 5,534 0.6
----
24.2%
Medium Capitalization
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Univision Communications, Inc. Class A $ 4,316 1.1%
Mirage Resorts, Inc. ...................... 3,852 2.7
American Tower Corp. Class A .............. 3,851 2.1
Century Communications Corp. .............. 3,493 1.0
Robert Half Intl., Inc. ................... 2,989 3.4
Premier Parks, Inc. ....................... 2,850 2.1
HCR Manor Care, Inc. ...................... 2,533 3.9
Flextronics Intl., Ltd. ................... 2,414 2.3
Spieker Properties, Inc. .................. 2,230 1.4
Kimco Realty Corp. ........................ 2,219 0.5
Heftel Broadcasting Corp. Class A ......... 2,140 2.3
DeVry, Inc. ............................... 2,012 2.2
Polo Ralph Lauren Corp. ................... 1,981 3.4
Prison Realty Trust ....................... 1,971 0.4
Dollar Tree Stores, Inc. .................. 1,892 1.9
Sotheby's Holdings, Inc. Class A .......... 1,857 11.1
United Intl. Hldgs., Inc. ................. 1,767 0.6
FelCor Lodging Trust, Inc. ................ 1,578 0.7
Williams-Sonoma, Inc. ..................... 1,574 0.3
----
43.4%
Small Capitalization
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Cox Radio, Inc. ........................... $ 1,465 0.7%
Post Properties, Inc. ..................... 1,306 0.1
Four Seasons Hotels, Inc. ................. 1,257 0.5
Sun Intl. Hotels, Ltd. .................... 1,095 1.8
ITT Educational Services, Inc. ............ 1,015 0.9
Industrie Natuzzi SPA ADR ................. 938 1.5
Iron Mountain, Inc. ....................... 922 0.4
Metro Networks, Inc. ...................... 919 1.1
Education Management Corp. ................ 902 0.9
Commonwealth Telephone Ent., Inc. ......... 813 0.2
Storage USA, Inc. ......................... 791 0.1
OM Group, Inc. ............................ 782 1.3
Choice Hotels Intl., Inc. ................. 778 3.0
ChoicePoint, Inc. ......................... 730 1.3
Unova, Inc. ............................... 725 0.2
Quorum Health Group, Inc. ................. 723 0.2
Seacor Smit, Inc. ......................... 652 1.1
Taubman Centers, Inc. ..................... 650 0.1
<PAGE>
Equity
Market Cap % of
Company (in millions) Net Assets
- -------------------------------------------- --------------- -------------
Small Capitalization (continued)
- ------------------------------------------------------------------------------
Young Broadcasting, Inc. Class A .......... $ 630 0.9%
CD Radio, Inc. ............................ 604 0.4
Southern Union Co. ........................ 560 0.5
Vail Resorts, Inc. Class A ................ 548 2.6
Sun Communities, Inc. ..................... 542 0.2
Libbey, Inc. .............................. 504 1.5
CoreComm, Ltd. ............................ 487 0.9
Stein Mart, Inc. .......................... 453 0.4
Budget Group, Inc. Class A ................ 440 0.5
Cellular Communications of P.R., Inc. ..... 373 0.6
Alexander's, Inc. ......................... 339 0.3
Cross Timbers Oil Co. ..................... 316 0.5
American Mobile Satellite Corp. ........... 242 0.4
AMF Bowling, Inc. ......................... 238 0.7
Saga Communications, Inc. Class A ......... 231 0.9
Learning Tree Intl., Inc. ................. 220 0.5
Smart and Final, Inc. ..................... 211 0.5
DVI, Inc. ................................. 210 0.4
Counsel Corp. ............................. 177 0.3
Avatar Holdings, Inc. ..................... 167 0.2
Bristol Hotels & Resorts, Inc. ............ 152 0.3
Sunburst Hospitality Corp. ................ 74 0.3
Caliber Learning Network, Inc. ............ 49 0.1
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29.3%
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Baron Growth Fund
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Equity
Market Cap % of
Company (in millions) Net Assets
- ------------------------------------------- --------------- -----------
Large Capitalization
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Charles Schwab Corp. ...................... $39,061 16.9%
NTL, Inc. ................................. 5,965 6.4
----
23.3%
Medium Capitalization
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Mirage Resorts, Inc. ...................... $ 3,852 1.2%
American Tower Corp. Class A .............. 3,851 1.6
Robert Half Intl., Inc. ................... 2,989 2.8
HCR Manor Care, Inc. ...................... 2,533 5.3
Flextronics Intl., Ltd. ................... 2,414 3.3
Spieker Properties, Inc. .................. 2,230 2.0
Kimco Realty Corp. ........................ 2,219 2.0
Heftel Broadcasting Corp. Class A ......... 2,140 2.4
DeVry, Inc. ............................... 2,012 2.5
Dollar Tree Stores, Inc. .................. 1,892 2.4
Sotheby's Holdings, Inc. Class A .......... 1,857 3.7
United Intl. Hldgs., Inc. ................. 1,767 0.3
----
29.5%
16
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B A R O N F U N D S
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Baron Growth Fund
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Equity
Market Cap % of
Company (in millions) Net Assets
- ------------------------------------------- --------------- -----------
Small Capitalization
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Entercom Communications Corp. ............. $1,314 0.6%
Post Properties, Inc. ..................... 1,306 1.3
Aurora Foods, Inc. ........................ 1,097 0.2
Sun Intl. Hotels, Ltd. .................... 1,095 2.3
Industrie Natuzzi SPA ADR ................. 938 0.8
Metro Networks, Inc. ...................... 919 1.4
Education Management Corp. ................ 902 1.0
Storage USA, Inc. ......................... 791 1.5
OM Group, Inc. ............................ 782 2.2
Choice Hotels Intl., Inc. ................. 778 9.4
ChoicePoint, Inc. ......................... 730 2.1
Seacor Smit, Inc. ......................... 652 1.0
Taubman Centers, Inc. ..................... 650 0.4
Southern Union Co. ........................ 560 3.0
Vail Resorts, Inc. Class A ................ 548 1.2
Sun Communities, Inc. ..................... 542 1.9
Steiner Leisure, Ltd. ..................... 511 0.3
Libbey, Inc. .............................. 504 1.1
CoreComm, Ltd. ............................ 487 2.3
Gabelli Asset Management, Inc. ............ 467 0.6
Cross Timbers Oil Co. ..................... 316 0.5
ResortQuest Intl., Inc. ................... 275 0.8
American Mobile Satellite Corp. ........... 242 1.2
Saga Communications, Inc. Class A ......... 231 2.0
Medallion Financial Corp. ................. 211 1.3
Smart and Final, Inc. ..................... 211 0.9
DVI, Inc. ................................. 210 1.0
Bristol Hotels & Resorts, Inc. ............ 152 0.6
Rural Cellular Corp. Class A .............. 120 0.8
----
43.7%
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Baron Small Cap Fund
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Equity
Market Cap % of
Company (in millions) Net Assets
- -------------------------------------------- ---------------- -------------
Medium Capitalization
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American Tower Corp. Class A ............... $3,851 2.7%
Century Communications Corp. ............... 3,493 6.0
Premier Parks, Inc. ........................ 2,850 6.6
SFX Entertainment, Inc. .................... 1,966 5.1
United Rentals, Inc. ....................... 1,950 2.2
United Intl. Hldgs., Inc. .................. 1,767 8.3
Williams-Sonoma, Inc. ...................... 1,574 1.9
---
32.8%
Small Capitalization
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Entercom Communications Corp. .............. $1,314 0.7%
Four Seasons Hotels, Inc. .................. 1,257 4.4
Centennial Cellular Corp. .................. 1,211 1.0
Sun Intl. Hotels, Ltd. ..................... 1,095 1.0
Central Parking Corp. ...................... 1,020 4.3
Jefferies Group, Inc. ...................... 998 1.9
Iron Mountain, Inc. ........................ 922 5.1
<PAGE>
Equity
Market Cap % of
Company (in millions) Net Assets
- --------------------------------------------- ------------- -------------
Small Capitalization (continued)
- -------------------------------------------------------------------------------
Metro Networks, Inc. ....................... 919 2.9
Commonwealth Telephone Ent., Inc. .......... 813 2.8
ChoicePoint, Inc. .......................... 730 2.2
Unova, Inc. ................................ 725 1.8
Intrawest Corp. ............................ 647 0.8
Young Broadcasting, Inc. Class A ........... 630 1.3
United Stationers, Inc. .................... 563 1.8
CoreComm, Ltd. ............................. 487 2.5
Gabelli Asset Management, Inc. ............. 467 1.0
El Paso Electric Co. ....................... 458 1.2
Electronic Lightwave, Inc. ................. 454 0.6
Loews Cineplex Entertainment Corp. ......... 451 1.9
Commnet Cellular, Inc. ..................... 364 1.1
Corporate Executive Board Co. .............. 348 0.7
Kenneth Cole Productions, Inc. ............. 345 3.2
IT Group, Inc. ............................. 329 3.7
Province Healthcare Co. .................... 290 1.6
ResortQuest Intl., Inc. .................... 275 2.6
Career Education Corp. ..................... 270 4.5
Caribiner Intl., Inc. ...................... 216 1.6
Counsel Corp. .............................. 177 1.0
Rural Cellular Corp. Class A ............... 120 1.1
Morton's Restaurant Group, Inc. ............ 98 1.0
The Sports Club Co. ........................ 95 0.7
Strategic Distribution, Inc. ............... 62 0.2
AVTEAM, Inc. ............................... 56 0.7
Equity Marketing, Inc. ..................... 36 0.4
---
63.3%
Table II
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Portfolio Risk Characteristics
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The Funds are diversified not only by industry, but also by external risk
factors that might impact the companies in which the Funds invest. Table II
displays some of the risk factors that are currently monitored and the
percentage of each portfolio considered exposed to these factors. The Funds use
this tool to avoid concentration of risk within the portfolios.
Baron Asset Baron Growth Baron Small
Fund Fund Cap Fund
------------- -------------- ------------
% of % of % of
Portfolio Portfolio Portfolio
------------- -------------- ------------
Oil Price Sensitivity ....... 17.6% 23.6% 14.7%
Leverage (Debt > 40% of
Market Cap) .............. 22.1 26.4 44.2
Foreign Sales Dependent
(Sales > 15%) ............ 24.4 20.6 19.3
Volatility (Beta > 1.2) ..... 34.8 28.6 30.8
Over-the-Counter
Securities ............... 19.7 24.4 43.5
Unseasoned Securities
(Publicly owned for
(3 years) .............. 19.9 1.8 11.9
(Publicly owned for
(1 year) ............... 0.3 22.8 39.4
Turnarounds ................. 1.5 0.9 7.3
Development Companies........ 3.6 1.2 5.1
17
<PAGE>
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B A R O N F U N D S
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Table III
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Historical Information (Unaudited)
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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.
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Baron Asset Fund
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<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- ---------- ----------------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C>
06/12/87 $ 108,728 $ 10.00 $10,000
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06/30/87 1,437,521 10.71 10,710
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09/30/87 3,905,221 11.95 11,950
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12/31/87 4,406,972 10.10 $ 0.197 10,298
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03/31/88 6,939,435 11.56 11,786
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06/30/88 9,801,677 12.68 12,928
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09/30/88 11,734,509 12.98 13,234
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12/31/88 15,112,031 12.87 0.701 13,843
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03/31/89 22,269,578 14.75 15,864
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06/30/89 31,397,929 16.06 17,273
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09/30/89 47,658,616 17.22 18,521
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12/31/89 49,007,084 14.66 1.409 17,299
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03/31/90 50,837,946 13.87 16,367
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06/30/90 54,413,786 14.32 16,898
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09/30/90 40,002,612 10.88 12,838
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12/31/90 42,376,625 11.75 0.198 14,100
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03/31/91 47,104,889 13.88 16,656
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06/30/91 45,600,730 13.81 16,572
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09/30/91 47,409,180 14.80 17,760
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12/31/91 46,305,042 15.71 0.035 18,895
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03/31/92 48,011,634 16.72 20,109
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06/30/92 42,289,409 15.28 18,377
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09/30/92 43,816,305 16.20 19,484
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12/31/92 47,955,530 17.73 0.162 21,522
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03/31/93 50,015,244 18.82 22,845
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06/30/93 52,432,090 19.70 23,912
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09/30/93 59,916,570 21.91 26,595
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12/31/93 64,069,114 21.11 0.774 26,576
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03/31/94 63,099,109 20.69 26,047
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06/30/94 68,880,300 20.40 25,682
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09/30/94 80,258,542 22.82 28,728
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12/31/94 87,058,228 22.01 0.656 28,547
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03/31/95 160,603,528 24.29 31,505
- --------------------------------------------------------------------------------
06/30/95 202,259,502 25.79 33,450
- --------------------------------------------------------------------------------
09/30/95 289,973,331 29.30 38,003
- --------------------------------------------------------------------------------
12/31/95 353,095,409 29.74 0.034 38,618
- --------------------------------------------------------------------------------
03/31/96 638,297,904 34.14 44,332
- --------------------------------------------------------------------------------
06/30/96 1,124,647,802 36.65 47,591
- --------------------------------------------------------------------------------
09/30/96 1,166,057,654 35.50 46,098
- --------------------------------------------------------------------------------
12/31/96 1,326,321,785 36.23 0.039 47,097
- --------------------------------------------------------------------------------
03/31/97 1,663,347,667 34.98 45,472
- --------------------------------------------------------------------------------
06/30/97 2,306,228,855 41.74 54,260
- --------------------------------------------------------------------------------
09/30/97 3,224,498,394 47.43 61,656
- --------------------------------------------------------------------------------
12/31/97 3,793,013,753 48.51 0.000 63,060
- --------------------------------------------------------------------------------
03/31/98 5,187,450,337 53.68 69,781
- --------------------------------------------------------------------------------
06/30/98 5,545,334,568 52.20 67,857
- --------------------------------------------------------------------------------
09/30/98 4,410,506,448 39.96 51,946
- --------------------------------------------------------------------------------
12/31/98 5,672,309,694 50.54 0.041 65,752
- --------------------------------------------------------------------------------
03/31/99 6,087,986,855 54.17 70,474
- --------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
<PAGE>
BARON ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 1999
One year 1.0%
- --------------------------------------------------------------------------------
Two years 24.5%
- --------------------------------------------------------------------------------
Three years 16.7%
- --------------------------------------------------------------------------------
Four years 22.3%
- --------------------------------------------------------------------------------
Five years 22.0%
- --------------------------------------------------------------------------------
Ten years 16.1%
- --------------------------------------------------------------------------------
Since inception June 12, 1987 18.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Baron Growth Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- ------------- ----------------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C>
01/03/95 $ 741,000 $ 10.00 $10,000
- --------------------------------------------------------------------------------
03/31/95 3,425,507 11.78 11,780
- --------------------------------------------------------------------------------
06/30/95 7,231,619 13.18 13,180
- --------------------------------------------------------------------------------
09/30/95 28,632,467 14.77 14,770
- --------------------------------------------------------------------------------
12/31/95 41,043,705 15.11 $ 0.142 15,254
- --------------------------------------------------------------------------------
03/31/96 77,337,831 16.90 17,061
- --------------------------------------------------------------------------------
06/30/96 172,070,435 18.20 18,373
- --------------------------------------------------------------------------------
09/30/96 207,234,494 18.40 18,575
- --------------------------------------------------------------------------------
12/31/96 243,983,507 19.04 0.255 19,483
- --------------------------------------------------------------------------------
03/31/97 273,907,177 18.57 19,002
- --------------------------------------------------------------------------------
06/30/97 316,981,759 21.82 22,328
- --------------------------------------------------------------------------------
09/30/97 390,831,861 24.89 25,469
- --------------------------------------------------------------------------------
12/31/97 415,134,319 24.88 0.073 25,535
- --------------------------------------------------------------------------------
03/31/98 511,405,730 27.28 27,998
- --------------------------------------------------------------------------------
06/30/98 478,748,484 26.07 26,757
- --------------------------------------------------------------------------------
09/30/98 315,557,850 20.32 20,855
- --------------------------------------------------------------------------------
12/31/98 343,695,555 24.87 0.035 25,561
- --------------------------------------------------------------------------------
03/31/99 313,002,293 26.75 27,493
- --------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON GROWTH FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 1999
One year -1.8%
- --------------------------------------------------------------------------------
Two years 20.3%
- --------------------------------------------------------------------------------
Three years 17.2%
- --------------------------------------------------------------------------------
Four years 23.6%
- --------------------------------------------------------------------------------
Since inception January 3, 1995 26.9%
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Baron Small Cap Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- ------------- ----------------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C>
10/01/97 $112,604,624 $ 10.00 $10,000
- --------------------------------------------------------------------------------
12/31/97 285,270,924 10.31 0.000 10,310
- --------------------------------------------------------------------------------
03/31/98 449,240,304 11.84 11,840
- --------------------------------------------------------------------------------
06/30/98 571,568,792 11.97 11,970
- --------------------------------------------------------------------------------
09/30/98 403,727,998 8.61 8,610
- --------------------------------------------------------------------------------
12/31/98 470,029,904 10.54 0.000 10,540
- --------------------------------------------------------------------------------
03/31/99 521,729,028 11.89 11,890
- --------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON SMALL CAP FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 1999
One year 0.4%
- --------------------------------------------------------------------------------
Since inception October 1, 1997 12.2%
- --------------------------------------------------------------------------------
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.
19
<PAGE>
- --------------------------------------------------------------------------------
B A R O N A S S E T F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1999 (Unaudited)
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (97.61%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (9.85%)
10,210,000 AMF Bowling, Inc.*# $ 40,840,000
7,650,000 Mirage Resorts, Inc.* 162,562,500
3,510,000 Premier Parks, Inc.* 130,747,500
3,315,000 Sun Intl. Hotels, Ltd.*# 108,980,625
6,066,000 Vail Resorts, Inc. Class A*# 96,297,750
4,000,000 Vail Resorts, Inc. Class A*# @ 60,325,200
--------------
599,753,575
Business Services (4.92%)
1,640,000 ChoicePoint, Inc.*# 81,795,000
1,749,532 Correctional Management Services
Corp.*@ 8,000,085
6,400,000 Robert Half Intl., Inc.*# 210,000,000
--------------
299,795,085
Chemical (1.28%)
2,367,500 OM Group, Inc. # 78,127,500
Communications (8.81%)
3,500,000 American Mobile Satellite Corp.*# 26,250,000
5,240,000 American Tower Corp. Class A* 128,380,000
1,272,500 Cellular Communications of P.R., Inc.*# 34,357,500
254,200 Commonwealth Telephone Ent., Inc.* 9,357,738
1,470,000 CoreComm, Ltd.*# 54,022,500
3,022,000 NTL, Inc.* 245,915,250
870,000 United Intl. Hldgs., Inc.* 37,845,000
--------------
536,127,988
Education (4.55%)
1,060,000 Caliber Learning Network, Inc.*# 4,240,000
4,635,200 DeVry, Inc.*# 134,420,800
1,760,000 Education Management Corp.*# 54,120,000
1,400,000 ITT Educational Services, Inc.*# 52,587,500
3,145,000 Learning Tree Intl., Inc.*# 31,450,000
--------------
276,818,300
Energy (1.68%)
4,549,900 Cross Timbers Oil Co.# 32,133,669
1,300,000 Seacor Smit, Inc.*# 69,956,250
--------------
102,089,919
Financial (19.99%)
12,400,000 Charles Schwab Corp. 1,191,950,000
1,680,000 DVI, Inc.*# 24,990,000
--------------
1,216,940,000
Health Services (4.43%)
2,557 Chesapeake Healthcare Corp.* @ 4,000,196
2,488,500 Counsel Corp.*# 16,486,312
10,350,700 HCR Manor Care, Inc.*# 236,125,344
1,300,000 Quorum Health Group, Inc.* 13,000,000
--------------
269,611,852
Hotels and Lodging (4.11%)
2,191,150 Bristol Hotels & Resorts, Inc.*# 18,761,722
13,225,300 Choice Hotels Intl., Inc.*# 185,980,781
715,000 Four Seasons Hotels, Inc. 29,851,250
4,256,702 Sunburst Hospitality Corp.*# 15,962,633
--------------
250,556,386
<PAGE>
Shares Value
- --------------------------------------------------------------------------------
Manufacturing (2.54%)
2,780,000 Flextronics Intl., Ltd.*# $ 141,780,000
1,000,000 Unova, Inc.* 13,187,500
--------------
154,967,500
Media and Entertainment (8.93%)
850,000 CD Radio, Inc.* 22,100,000
1,260,400 Century Communications Corp.* 58,529,825
830,000 Cox Radio, Inc.* 42,537,500
3,267,000 Heftel Broadcasting Corp. Class A*# 141,706,125
1,245,500 Metro Networks, Inc.*# 68,502,500
1,200,000 Outdoor Systems, Inc.* 36,000,000
2,937,002 Saga Communications, Inc. Class A*# 52,498,911
1,400,000 Univision Communications, Inc.
Class A* 70,000,000
1,130,000 Young Broadcasting, Inc. Class A* 51,556,250
--------------
543,431,111
Real Estate and REITs (4.47%)
270,300 Alexander's, Inc.*# 18,312,825
750,000 Avatar Holdings, Inc.*# 13,687,500
1,850,000 FelCor Lodging Trust, Inc. 42,896,875
780,000 Iron Mountain, Inc.* 24,375,000
810,000 Kimco Realty Corp. 29,868,750
179,999 Post Properties, Inc. 6,524,964
1,430,000 Prison Realty Trust (Formerly CCA
Prison Realty Trust) 24,935,625
2,424,500 Spieker Properties, Inc. 85,463,625
240,000 Storage USA, Inc. 6,810,000
335,000 Sun Communities, Inc. 10,636,250
700,000 Taubman Centers, Inc. 8,575,000
--------------
272,086,414
Retail Trade and Restaurants (17.57%)
3,725,000 Dollar Tree Stores, Inc.*# 115,242,188
10,360,000 Polo Ralph Lauren Corp.* 205,905,000
3,350,000 Smart and Final, Inc.# 31,406,250
20,775,000 Sotheby's Holdings, Inc. Class A# 672,590,625
2,500,000 Stein Mart, Inc.*# 25,000,000
700,000 Williams-Sonoma, Inc.* 19,775,000
--------------
1,069,919,063
Transportation (0.46%)
2,300,000 Budget Group, Inc. Class A* 28,175,000
Utility Services (0.53%)
1,700,000 Southern Union Co.*# 32,087,500
Wholesale Trade (3.03%)
5,687,000 Industrie Natuzzi SPA ADR# 93,835,500
2,920,000 Libbey, Inc.# 90,520,000
--------------
184,355,500
Miscellaneous (0.46%) 27,857,407
--------------
Total Common Stocks
(Cost $4,348,814,314) 5,942,700,100
--------------
See Notes to Financial Statements.
20
<PAGE>
- --------------------------------------------------------------------------------
B A R O N A S S E T F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1999 (Unaudited)
Shares Value
- --------------------------------------------------------------------------------
Convertible Preferred (0.24%)
- --------------------------------------------------------------------------------
Transportation
400,000 Budget Group Capital Trust Conv. Pref. +
(Cost $20,000,000) $ 14,500,000
--------------
Principal Amount
- --------------------------------------------------------------------------------
Corporate Bonds (0.84%)
- --------------------------------------------------------------------------------
Communications
$ 14,000,000 Intl. CableTel, Inc. 7.0% Conv. Sub.
Notes due 06/15/2008 30,030,000
21,500,000 American Mobile Satellite Corp. 6.0%
Jr. Sub. Secured Exch. Note due
09/30/2006 @ 21,500,000
--------------
Total Corporate Bonds
(Cost $35,382,500) 51,530,000
--------------
Short Term Money Market Instruments (0.86%)
52,156,000 Associates Corp. of N. A. 5.03% due
04/01/1999 (Cost $52,156,000) 52,156,000
--------------
Total Investments (99.55%)
(Cost $4,456,352,814**) 6,060,886,100
--------------
Cash and Other Assets Less Liabilities (0.45%) 27,100,755
--------------
Net Assets (Equivalent to $54.17 per share
based on 112,376,518 shares of beneficial
interest outstanding) $6,087,986,855
==============
- ----------
% Represents percentage of net assets
+ Rule 144A Securities
@ Restricted securities
# Issuers deemed to be "affiliated"
* Non-income producing securities
** For Federal income tax purposes the cost basis is $4,458,064,509.
Aggregate unrealized appreciation and depreciation of investments are
$2,335,252,568 and $732,430,977 respectively.
See Notes to Financial Statements.
21
<PAGE>
- --------------------------------------------------------------------------------
B A R O N G R O W T H F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1999 (Unaudited)
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (96.45%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (5.02%)
180,000 Mirage Resorts, Inc.* $ 3,825,000
30,000 Steiner Leisure, Ltd.* 922,500
220,000 Sun Intl. Hotels, Ltd.* 7,232,500
235,000 Vail Resorts, Inc. Class A* 3,730,625
------------
15,710,625
Business Services (4.85%)
130,000 ChoicePoint, Inc.* 6,483,750
265,000 Robert Half Intl., Inc.* 8,695,313
------------
15,179,063
Chemical (2.21%)
210,000 OM Group, Inc. 6,930,000
Communications (12.60%)
497,000 American Mobile Satellite Corp.* 3,727,500
200,000 American Tower Corp. Class A* 4,900,000
200,000 CoreComm, Ltd.* 7,350,000
247,568 NTL, Inc.* 20,145,846
185,000 Rural Cellular Corp. Class A* 2,451,250
20,000 United Intl. Hldgs., Inc.* 870,000
------------
39,444,596
Education (3.49%)
270,000 DeVry, Inc.* 7,830,000
100,000 Education Management Corp.* 3,075,000
------------
10,905,000
Energy (1.53%)
220,000 Cross Timbers Oil Co. 1,553,750
60,000 Seacor Smit, Inc.* 3,228,750
------------
4,782,500
Financial (19.86%)
550,000 Charles Schwab Corp. 52,868,750
220,000 DVI, Inc.* 3,272,500
125,000 Gabelli Asset Management, Inc.* 1,945,312
270,000 Medallion Financial Corp. 4,066,875
------------
62,153,437
Food & Agriculture (0.18%)
35,000 Aurora Foods, Inc.* 573,125
Health Services (5.29%)
725,000 HCR Manor Care, Inc.* 16,539,063
Hotels and Lodging (10.80%)
218,800 Bristol Hotels & Resorts, Inc.* 1,873,475
2,100,000 Choice Hotels Intl., Inc.* 29,531,250
150,000 ResortQuest Intl., Inc.* 2,400,000
------------
33,804,725
Manufacturing (3.26%)
200,000 Flextronics Intl., Ltd.* 10,200,000
Media and Entertainment (6.36%)
50,000 Entercom Communications Corp.* 1,768,750
175,000 Heftel Broadcasting Corp. Class A* 7,590,625
80,000 Metro Networks, Inc.* 4,400,000
343,750 Saga Communications, Inc. Class A* 6,144,531
------------
19,903,906
<PAGE>
Shares Value
- --------------------------------------------------------------------------------
Real Estate and REITs (9.07%)
170,000 Kimco Realty Corp. $ 6,268,750
110,000 Post Properties, Inc. 3,987,464
180,000 Spieker Properties, Inc. 6,345,000
160,000 Storage USA, Inc. 4,540,000
190,000 Sun Communities, Inc. 6,032,500
100,000 Taubman Centers, Inc. 1,225,000
-------------
28,398,714
Retail Trade and Restaurants (6.98%)
240,000 Dollar Tree Stores, Inc.* 7,425,000
295,000 Smart and Final, Inc. 2,765,625
360,000 Sotheby's Holdings, Inc. Class A 11,655,000
-------------
21,845,625
Utility Services (3.02%)
501,000 Southern Union Co.* 9,456,375
Wholesale Trade (1.93%)
160,000 Industrie Natuzzi SPA ADR 2,640,000
110,000 Libbey, Inc. 3,410,000
-------------
6,050,000
-------------
Total Common Stocks
(Cost $197,852,771) 301,876,754
-------------
Principal Amount
- --------------------------------------------------------------------------------
Corporate Bonds (1.37%)
- --------------------------------------------------------------------------------
Communications
$ 2,000,000 Intl. CableTel, Inc. 7.00%
Conv. Sub. Notes due 6/15/2008
(Cost $1,987,500) 4,290,000
-------------
- --------------------------------------------------------------------------------
Short Term Money Market Instruments (0.78%)
- --------------------------------------------------------------------------------
2,440,000 Associates Corp. of N. A. 5.03%
due 04/01/1999 (Cost $2,440,000) 2,440,000
-------------
Total Investments (98.60%)
(Cost $202,280,271**) 308,606,754
-------------
Cash and Other Assets
Less Liabilities (1.40%)
4,395,539
-------------
Net Assets (Equivalent to $26.75 per
share based on shares of 11,701,119
beneficial interest outstanding)
$313,002,293
=============
- ----------
% Represents percentage of net assets
* Non-income producing securities
** For Federal income tax purposes the cost basis is $201,617,333. Aggregate
unrealized appreciation and depreciation of investments are $120,857,070
and $13,867,649, respectively.
See Notes to Financial Statements.
22
<PAGE>
- --------------------------------------------------------------------------------
B A R O N S M A L L C A P F U N D
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
March 31, 1999 (Unaudited)
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (96.08%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (11.06%)
250,000 Intrawest Corp. $ 4,218,750
1,000,000 Loews Cineplex Entertainment Corp.* 9,937,500
925,000 Premier Parks, Inc.* 34,456,250
165,000 Sun Intl. Hotels, Ltd.* 5,424,375
722,000 The Sports Club Co.* 3,655,125
------------
57,692,000
Business Services (10.79%)
900,000 Caribiner Intl., Inc.* 8,212,500
650,000 Central Parking Corp. 22,425,000
235,000 ChoicePoint, Inc.* 11,720,625
135,000 Corporate Executive Board Co.* 3,560,625
600,000 Strategic Distribution, Inc.* 1,200,000
600,000 United Stationers, Inc.* 9,150,000
------------
56,268,750
Communications (20.16%)
575,000 American Tower Corp. Class A* 14,087,500
110,000 Centennial Cellular Corp.* 5,197,500
400,000 Commonwealth Telephone Ent., Inc.* 14,725,000
350,000 Commnet Cellular, Inc.* 5,621,875
350,000 CoreComm, Ltd.* 12,862,500
355,000 Electronic Lightwave, Inc.* 3,239,375
450,000 Rural Cellular Corp. Class A* 5,962,500
1,000,000 United Intl. Hldgs., Inc.* 43,500,000
------------
105,196,250
Consumer Products (0.41%)
375,000 Equity Marketing, Inc.*# 2,156,250
Education (4.48%)
675,000 Career Education Corp.*# 23,371,875
Environmental (3.70%)
1,500,000 IT Group, Inc.*#
(Formerly International Technology
Corp.) 19,312,500
Financial (2.86%)
320,000 Gabelli Asset Management, Inc.* 4,980,000
210,000 Jefferies Group, Inc. 9,961,875
------------
14,941,875
Health Services (2.55%)
750,000 Counsel Corp.* 4,968,750
450,000 Province Healthcare Co.* 8,325,000
------------
13,293,750
Hotels and Lodging (7.01%)
550,000 Four Seasons Hotels, Inc. 22,962,500
850,000 ResortQuest Intl., Inc.*# 13,600,000
------------
36,562,500
Manufacturing (2.47%)
750,000 AVTEAM, Inc.* # 3,656,250
700,000 Unova, Inc.* 9,231,250
------------
12,887,500
<PAGE>
Shares Value
- --------------------------------------------------------------------------------
Media and Entertainment (15.97%)
675,000 Century Communications Corp.* $ 31,345,313
100,000 Entercom Communications Corp.* 3,537,500
275,000 Metro Networks, Inc.* 15,125,000
410,000 SFX Entertainment, Inc.* 26,470,625
150,000 Young Broadcasting, Inc. Class A* 6,843,750
------------
83,322,188
Real Estate and REITs (5.09%)
850,000 Iron Mountain, Inc.* 26,562,500
Retail Trade and Restaurants (8.28%)
625,000 Kenneth Cole Productions, Inc.* 16,484,375
350,000 Morton's Restaurant Group, Inc.*# 5,425,000
400,000 United Rentals, Inc.* 11,400,000
350,000 Williams-Sonoma, Inc.* 9,887,500
------------
43,196,875
Utility Services (1.25%)
855,000 El Paso Electric Co.* 6,519,375
------------
Total Common Stocks
(Cost $394,074,956) 501,284,188
------------
Principal Amount
- --------------------------------------------------------------------------------
Corporate Bonds (0.40%)
Health Services
$ 3,250,000 U.S. Diagnostic, Inc. 9.00%
Conv. Sub. Deb. due 03/31/2003
(Cost $2,520,000) 2,080,000
------------
Short Term Money Market Instruments (3.29%)
17,185,000 Associates Corp. of N.A. 5.03%
due 04/01/1999 (Cost $17,185,000) 17,185,000
------------
Total Investments (99.77%)
(Cost $413,779,956**) 520,549,188
------------
Cash and Other Assets
Less Liabilities (0.23%) 1,179,840
------------
Net Assets (Equivalent to $11.89 per
share based on shares of 43,863,260
beneficial interest outstanding) $521,729,028
============
% 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
$414,410,851. Aggregate unrealized appreciation and depre-
ciation of investments are $148,919,941 and $42,781,604,
respectively.
See Notes to Financial Statements.
23
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH BARON SMALL CAP
FUND FUND FUND
----------------- ---------------- ----------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value
Unaffiliated issuers
(Cost $1,588,513,677, $202,280,271, and $347,923,175,
respectively) ...................................... $2,895,505,090 $308,606,754 $ 453,027,313
"Affiliated issuers" (Cost $2,867,839,137, $0,
and $65,856,781, respectively) ...................... 3,165,381,010 0 67,521,875
Cash ................................................... 938 1,906 985
Dividends and interest receivable ...................... 2,776,241 458,595 12,950
Receivable for securities sold ......................... 23,785,192 5,611,907 2,152,091
Receivable for shares sold ............................. 19,597,671 134,329 559,511
Unamortized organization costs ......................... 0 4,931 19,932
Prepaid expenses ....................................... 29,512 0 0
-------------- ------------ -------------
6,107,075,654 314,818,422 523,294,657
-------------- ------------ -------------
Liabilities:
Payable for securities purchased ....................... 4,399,117 649,279 757,413
Payable for shares redeemed ............................ 14,349,909 1,099,299 699,930
Accrued organization costs ............................. 0 4,931 19,932
Accrued expenses and other payables .................... 339,773 62,620 88,354
-------------- ------------ -------------
19,088,799 1,816,129 1,565,629
-------------- ------------ -------------
Net Assets .............................................. $6,087,986,855 $313,002,293 $ 521,729,028
============== ============ =============
Net Assets consist of:
Par value .............................................. $ 1,123,765 $ 117,012 $ 438,633
Paid-in capital in excess of par value ................. 4,580,469,949 191,862,335 480,758,328
Accumulated net investment loss ........................ (14,314,034) (99,441) (2,430,579)
Accumulated net realized gain (loss) ................... (83,826,111) 14,795,904 (63,806,586)
Net unrealized appreciation on investments ............. 1,604,533,286 106,326,483 106,769,232
-------------- ------------ -------------
Net Assets .............................................. $6,087,986,855 $313,002,293 $ 521,729,028
============== ============ =============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) ......... 112,376,518 11,701,119 43,863,260
============== ============ =============
Net Asset Value Per Share ............................... $ 54.17 $ 26.75 $ 11.89
============== ============ =============
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
For the Six Months Ended March 31, 1999 (Unaudited)
<TABLE>
<CAPTION>
BARON ASSET BARON GROWTH BARON SMALL CAP
FUND FUND FUND
------------------ -------------- ----------------
<S> <C> <C> <C>
Investment income:
Income:
Interest .............................................. $ 3,423,619 $ 123,272 $ 565,801
Dividends - unaffiliated issuers ...................... 10,344,119 2,105,946 72,447
Dividends - "affiliated" issuers ...................... 6,859,003 0 0
-------------- ----------- -------------
Total income .......................................... 20,626,741 2,229,218 638,248
-------------- ----------- -------------
Expenses:
Investment advisory fees .............................. 26,515,640 1,590,188 2,255,467
Distribution fees ..................................... 6,628,915 397,547 563,867
Shareholder servicing agent fees ...................... 741,204 112,367 105,113
Reports to shareholders ............................... 752,700 43,239 76,499
Registration and filing fees .......................... 141,160 30,953 12,813
Custodian fees ........................................ 86,594 9,903 15,855
Trustee fees .......................................... 41,355 2,523 3,567
Professional fees ..................................... 47,194 24,024 24,076
Amortization of organization costs .................... 0 3,276 2,854
Miscellaneous ......................................... 29,001 3,078 8,716
-------------- ----------- -------------
Total operating expenses .............................. 34,983,763 2,217,098 3,068,827
Interest expense ...................................... 0 98,128 0
-------------- ----------- -------------
Total expenses ........................................ 34,983,763 2,315,226 3,068,827
-------------- ----------- -------------
Net investment loss ................................... (14,357,022) (86,008) (2,430,579)
-------------- ----------- -------------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments sold in
unaffiliated issuers .................................. 50,060,990 20,686,541 (36,751,402)
Net realized loss on investments sold in "affiliated"
issuers ............................................... (32,977,445) 0 (162,707)
Change in net unrealized appreciation of investments ... 1,582,159,500 67,370,599 182,287,222
-------------- ----------- -------------
Net gain on investments ............................... 1,599,243,045 88,057,140 145,373,113
-------------- ----------- -------------
Net increase in net assets resulting from operations .. $1,584,886,023 $87,971,132 $ 142,942,534
============== =========== =============
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BARON ASSET FUND
----------------------------------------
Six Months For the
Ended Year Ended
March 31, September 30,
1999 1998
------------------- -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) ................. ($ 14,357,022) $ 5,182,423
Net realized gain (loss) on investments
sold ........................................ 17,083,545 (76,452,243)
Net change in unrealized appreciation
(depreciation) on investments ............... 1,582,159,500 (848,684,103)
---------------- -----------------
Increase (decrease) in net assets
resulting from operations .................. 1,584,886,023 (919,953,923)
---------------- -----------------
Dividends to shareholders from:
Net investment income ........................ (4,594,972) 0
Net realized gain on investments ............. 0 0
---------------- -----------------
(4,594,972) 0
---------------- -----------------
Capital share transactions:
Proceeds from the sale of shares ............. 1,238,345,778 3,405,277,873
Net asset value of shares issued in
reinvestment of dividends ................... 4,175,765 0
Cost of shares redeemed ...................... (1,146,916,562) (1,299,315,896)
---------------- -----------------
Increase (decrease) in net assets derived
from capital share transactions ............ 95,604,981 2,105,961,977
Capital contribution .......................... 1,584,375 0
---------------- -----------------
Net increase (decrease) in net assets ........ 1,677,480,407 1,186,008,054
Net assets:
Beginning of period .......................... 4,410,506,448 3,224,498,394
---------------- -----------------
End of period ................................ $ 6,087,986,855 $ 4,410,506,448
================ =================
Accumulated net investment income
(loss) at end of period ...................... ($ 14,314,034) $ 4,637,960
================ =================
Shares of beneficial interest:
Shares sold .................................. 26,210,377 69,710,623
Shares issued in reinvestment dividends ...... 82,185 0
Shares redeemed .............................. (24,282,764) (27,334,849)
---------------- -----------------
Net increase (decrease) ...................... 2,009,798 42,375,774
================ =================
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
BARON GROWTH FUND BARON SMALL CAP FUND
------------------------------------ ------------------------------------
Six Months For the Six Months For the
Ended Year Ended Ended Year Ended
March 31, September 30, March 31, September 30,
1999 1998 1999 1998*
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income (loss) ................. ($ 86,008) $ 899,890 ($ 2,430,579) ($ 826,516)
Net realized gain (loss) on investments
sold ........................................ 20,686,541 (6,952,711) (36,914,109) (26,895,646)
Net change in unrealized appreciation
(depreciation) on investments ............... 67,370,599 (73,445,498) 182,287,222 (75,517,990)
-------------- --------------- -------------- --------------
Increase (decrease) in net assets
resulting from operations .................. 87,971,132 (79,498,319) 142,942,534 (103,240,152)
-------------- --------------- -------------- --------------
Dividends to shareholders from:
Net investment income ........................ (486,147) (282,139) 0 0
Net realized gain on investments ............. 0 (929,398) 0 0
-------------- --------------- -------------- --------------
(486,147) (1,211,537) 0 0
-------------- --------------- -------------- --------------
Capital share transactions:
Proceeds from the sale of shares ............. 26,806,226 236,230,743 163,579,119 692,941,797
Net asset value of shares issued in
reinvestment of dividends ................... 461,215 1,161,950 0 0
Cost of shares redeemed ...................... (117,307,983) (231,956,848) (188,520,623) (185,973,647)
-------------- --------------- -------------- --------------
Increase (decrease) in net assets derived
from capital share transactions ............ (90,040,542) 5,435,845 (24,941,504) 506,968,150
Capital contribution .......................... 0 0 0 0
-------------- --------------- -------------- --------------
Net increase (decrease) in net assets ........ (2,555,557) (75,274,011) 118,001,030 403,727,998
Net assets:
Beginning of period .......................... 315,557,850 390,831,861 403,727,998 0
-------------- --------------- -------------- --------------
End of period ................................ $ 313,002,293 $ 315,557,850 $ 521,729,028 $ 403,727,998
============== =============== ============== ==============
Accumulated net investment income
(loss) at end of period ...................... ($ 99,441) $ 472,714 ($ 2,430,579) $ 0
============== =============== ============== ==============
Shares of beneficial interest:
Shares sold .................................. 1,160,162 9,436,383 16,296,520 65,055,206
Shares issued in reinvestment dividends ...... 18,636 47,958 0 0
Shares redeemed .............................. (5,005,126) (9,658,984) (19,319,873) (18,168,593)
-------------- --------------- -------------- --------------
Net increase (decrease) ...................... (3,826,328) (174,643) (3,023,353) 46,886,613
============== =============== ============== ==============
</TABLE>
* For the period October 1, 1997 (commencement of operations) to September 30,
1998.
See Notes to Financial Statements.
26
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
(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 Fund, started in January 1995, and Baron Small Cap Fund, started in
October of 1997. The following is a summary of significant accounting policies
followed by the Funds. The policies are in conformity with generally accepted
accounting principles. On May 19, 1999 Baron Growth & Income Fund changed its
name to Baron Growth Fund.
(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 Subchapter M of 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) 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.
<PAGE>
(e) 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.
(f) Distributions. Income distributions and capital gains distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses and distributions from REIT's.
(g) Use of Estimates. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of financial statements, and the amounts of income and
expenses during the period. Actual results could differ from those estimates.
(2) Purchases and Sales of Securities.
Purchases and sales of securities, other than short term securities, for the
six months ended March 31, 1999 were as follows:
Fund Purchases Sales
- ---- --------- -----
Baron Asset Fund $662,121,370 $566,816,133
Baron Growth Fund $ 41,544,306 $138,259,244
Baron Small Cap Fund $ 84,882,280 $123,179,481
(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.
27
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
(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, 1999, BCI earned brokerage commissions as
follows:
Fund Commissions
- ---- -----------
Baron Asset Fund $1,445,914
Baron Growth Fund $ 162,582
Baron Small Cap Fund $ 197,837
(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 or
her services as a Trustee of the Trust. None of the Funds' officers received
compensation from the Funds.
(4) Post October Losses and Capital Loss Carryforward. Under current tax law,
capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. These deferrals can be
used to offset future capital gains at September 30, 1999. The Funds also had
capital loss carryforwards at September 30, 1998, which can be used to offset
future capital gains.
Post Capital Loss Capital Loss
10/31/97 Carryovers Carryovers
Fund Loss Deferral Expiring 2005 Expiring 2006
- ---- ------------- ------------- -------------
Baron Asset Fund $74,519,043 $686,772 $22,935,119
Baron Growth Fund 6,286,961 -- 262,931
Baron Small Cap Fund 25,902,801 -- --
(5) Borrowings. During the six months ended March 31, 1999, Baron Growth Fund
borrowed from its custodian bank. The average daily balance of loans
outstanding was $2,919,737 at a weighted average interest rate of 6.025%.
(6) Restricted Securities.
A summary of the restricted securities held at March 31, 1999 follows:
BARON ASSET FUND
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
- -------------- ---- -----
<S> <C> <C>
Common Stock
Vail Resorts, Inc. Class A 05/14/98 $60,325,200
Chesapeake Healthcare Corp. 12/03/98 4,000,196
Correctional Management Services Corp. 12/30/98 8,000,085
Corporate Bonds
American Mobile Satellite Corp. 6.0% Jr. Sub. Secured Exch. Note due
09/30/2006 01/15/99 21,500,000
-----------
Total Restricted Securities: (Cost $145,500,000) (1.54% of Net Assets) $93,825,481
===========
</TABLE>
(7) Capital Contribution. On March 19, 1999, the Adviser reimbursed Baron Asset
Fund $1,584,375 for the unrealized loss relating to the 10/07/98 purchase of
650,000 AMF Bowling, Inc. Baron Asset Fund recorded a capital contribution of
$1,584,375. The Adviser did not receive any shares of Baron Asset Fund in
exchange for this contribution. For tax purposes, this capital contribution
reduced the realized gains (losses) for the fiscal year ended September 30,
1999.
28
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
(8) Investment in "Affiliates"*
BARON ASSET FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales Balance of Dividend
Shares Held on Purchases and Shares Held on Value Income
Name of Issuer Sep. 30, 1998 and Additions Reductions Mar. 31, 1999 Mar. 31, 1999 Oct. 1-Mar. 31, 1999
-------------- ------------- ------------- ---------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Alexander's, Inc. ..................... 252,000 18,300 270,300 $ 18,312,825
AMF Bowling, Inc. ..................... 9,895,000 650,000 335,000 10,210,000 40,840,000
American Mobile Satellite Corp. ....... 3,500,000 3,500,000 26,250,000
Avatar Holdings, Inc. ................. 774,000 24,000 750,000 13,687,500
Bristol Hotels & Resorts Co. .......... 2,191,150 2,191,150 18,761,722
Caliber Learning Network, Inc. ........ 1,840,000 780,000 1,060,000 4,240,000
Cellular Communications of P.R., Inc. . 1,272,500 1,272,500 34,357,500
Choice Hotels Intl., Inc. ............. 13,021,300 204,000 13,225,300 185,980,781
ChoicePoint, Inc. ..................... 1,015,300 624,700 1,640,000 81,795,000
CoreComm, Ltd. ........................ 1,272,500 197,500 1,470,000 54,022,500
Counsel Corp. ......................... 2,408,200 80,300 2,488,500 16,486,312
Cross Timbers Oil Co. ................. 4,747,500 197,600 4,549,900 32,133,669 $ 230,183
DeVry, Inc. ........................... 4,635,200 4,635,200 134,420,800
Dollar Tree Stores, Inc. .............. 3,690,000 35,000 3,725,000 115,242,188
DVI, Inc. ............................. 1,605,000 75,000 1,680,000 24,990,000
Education Management Corp. # .......... 880,000 880,000 1,760,000 54,120,000
Flextronics Intl. Ltd. $ .............. 1,393,000 1,400,000 13,000 2,780,000 141,780,000
HCR Manor Care, Inc. .................. 10,350,700 10,350,700 236,125,344
Heftel Broadcasting Corp. Class A ..... 3,270,000 3,000 3,267,000 141,706,125
ITT Educational Services, Inc. ........ 1,562,500 162,500 1,400,000 52,587,500
Industrie Natuzzi SPA ADR ............. 1,565,500 4,121,500 5,687,000 93,835,500
Learning Tree Intl., Inc. ............. 3,145,000 3,145,000 31,450,000
Libbey, Inc. .......................... 2,650,000 270,000 2,920,000 90,520,000 417,750
Metro Networks, Inc. .................. 1,250,000 4,500 1,245,500 68,502,500
NTL, Inc. ............................. 2,724,500 297,500 3,022,000 0**
OM Group, Inc. ........................ 1,557,500 810,000 2,367,500 78,127,500 372,175
Prison Realty Trust @ ................. 1,990,000 560,000 1,430,000 0** 1,782,000
Robert Half Intl., Inc. ............... 2,335,000 4,065,000 6,400,000 210,000,000
Saga Communications, Inc. Class A ..... 2,932,002 5,000 2,937,002 52,498,911
Seacor Smit, Inc. ..................... 990,000 352,300 42,300 1,300,000 69,956,250
Smart and Final, Inc. ................. 2,237,900 1,112,100 3,350,000 31,406,250 111,895
Sotheby's Holdings, Inc. Class A ...... 18,030,000 2,745,000 20,775,000 672,590,625 3,945,000
Southern Union Co. % .................. 832,500 867,500 1,700,000 32,087,500
Stein Mart, Inc. ...................... 2,825,000 325,000 2,500,000 25,000,000
Sun Intl. Hotels, Ltd. ................ 2,875,000 440,000 3,315,000 108,980,625
Sunburst Hospitality Corp. ............ 3,650,036 606,666 4,256,702 15,962,633
The Sports Club Co. ................... 1,955,000 1,214,300 740,700 0**+
Vail Resorts, Inc. Class A ............ 9,678,900 387,100 10,066,000 156,622,950
------------- ----------
$3,165,381,010 $6,859,003
============== ==========
</TABLE>
- ----------
*" Affiliated" issuers, as defined in the Investment Company Act of 1940, are
issuers in which Baron Asset Fund held 5% or more of the outstanding voting
securities as of March 31, 1999.
** As of March 31, 1999, no longer an affiliate.
+ Included in miscellaneous holdings.
# Received 880,000 shares from 2:1 stock split .
$ Received 1,390,000 shares from 2:1 stock split.
@ Formerly CCA Prison Realty Trust.
% Received 41,625 shares from 5% stock dividend.
29
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales Balance of Dividend
Shares Held on Purchases and Shares Held on Value Income
Name of Issuer Sep. 30, 1998 and Additions Reductions Mar. 31, 1999 Mar. 31, 1999 Oct. 1-Mar. 31, 1999
-------------- ------------- ------------- ---------- ---------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
AVTEAM, Inc. ................... 750,000 750,000 $ 3,656,250
Career Education Corp. ......... 520,000 167,800 12,800 675,000 23,371,875
Equity Marketing, Inc. ......... 400,000 250 25,250 375,000 2,156,250
IT Group, Inc.** ............... 1,750,000 50,000 300,000 1,500,000 19,312,500
Mortons Restaurant Group, Inc. . 350,000 25,000 25,000 350,000 5,425,000
ResortQuest Intl., Inc. ........ 825,000 25,000 850,000 13,600,000
---------- ----
$67,521,875 $ 0
========== ====
</TABLE>
- ----------
* Affiliated issuers, as defined in the Investment Company Act of 1940, are
issuers in which Baron Small Cap Fund held 5% or more of the outstanding
voting securities as of March 31, 1999.
** Formerly International Technology Corp.
(9) Financial Highlights (unaudited)
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, 1999 1998 1997
-------------- ---- ----
<S> <C> <C> <C>
Net asset value, beginning of period ......... $ 39.96 $ 47.43 $ 35.50
------------- ---------- -----------
Income from investment operations
Net investment income (loss) ................. (0.13) 0.05 (0.14)
Net realized and unrealized gains (losses)
on investments .............................. 14.38 (7.52) 12.11
-------------- ---------- -----------
Total from investment operations ............ 14.25 (7.47) 11.97
-------------- ---------- -----------
Less distributions
Dividends from net investment income ......... (0.04) 0.00 0.00
Distributions from net realized gains ........ 0.00 0.00 (0.04)
-------------- ---------- -----------
Total distributions ......................... (0.04) 0.00 (0.04)
-------------- ---------- -----------
Net asset value, end of period ............... $ 54.17 $ 39.96 $ 47.43
============== ========== ===========
Total return ................................ 35.7%* (15.7%) 33.8%
-------------- ---------- -----------
Ratios/Supplemental data
Net assets (in millions), end of period ...... $ 6,088.0 $ 4,410.5 $ 3,224.5
Ratio of expenses to average net assets ...... 1.31%** 1.32% 1.35%
Ratio of net investment income (loss) to
average net assets .......................... (0.54%)** 0.11% (0.52%)
Portfolio turnover rate ...................... 10.68% 23.43% 13.23%
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ......... $ 29.30 $ 22.82 $ 21.91 $ 16.20 $ 14.80
----------- --------- -------- -------- --------
Income from investment operations
Net investment income (loss) ................. (0.06) (0.09) (0.14) (0.13) (0.08)
Net realized and unrealized gains (losses)
on investments .............................. 6.29 7.23 1.82 6.00 1.52
----------- --------- -------- -------- --------
Total from investment operations ............ 6.23 7.14 1.68 5.87 1.44
----------- --------- -------- -------- --------
Less distributions
Dividends from net investment income ......... 0.00 0.00 0.00 0.00 (0.04)
Distributions from net realized gains ........ (0.03) (0.66) (0.77) (0.16) 0.00
----------- --------- -------- -------- --------
Total distributions ......................... (0.03) (0.66) (0.77) (0.16) (0.04)
----------- --------- -------- -------- --------
Net asset value, end of period ............... $ 35.50 $ 29.30 $ 22.82 $ 21.91 $ 16.20
=========== ========= ======== ======== ========
Total return ................................ 21.3% 32.3% 8.0% 36.5% 9.7%
----------- --------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of period ...... $ 1,166.1 $ 290.0 $ 80.3 $ 59.9 $ 43.8
Ratio of expenses to average net assets ...... 1.40% 1.44% 1.59% 1.85% 1.68%
Ratio of net investment income (loss) to
average net assets .......................... (0.29%) (0.55%) (0.71%) (0.69%) (0.53%)
Portfolio turnover rate ...................... 19.34% 35.15% 55.87% 107.94% 95.45%
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Year Ended September 30,
1991 1990 1989 1988
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ......... $ 10.88 $ 17.22 $ 12.98 $ 11.95
-------- -------- -------- --------
Income from investment operations
Net investment income (loss) ................. 0.07 0.21 0.13 0.05
Net realized and unrealized gains (losses)
on investments .............................. 4.05 (5.14) 4.81 1.18
-------- -------- -------- --------
Total from investment operations ............ 4.12 (4.93) 4.94 1.23
-------- -------- -------- --------
Less distributions
Dividends from net investment income ......... (0.20) (0.16) (0.05) (0.03)
Distributions from net realized gains ........ 0.00 (1.25) (0.65) (0.17)
-------- -------- -------- --------
Total distributions ......................... (0.20) (1.41) (0.70) (0.20)
-------- -------- -------- --------
Net asset value, end of period ............... $ 14.80 $ 10.88 $ 17.22 $ 12.98
======== ======== ======== ========
Total return ................................ 38.3% (30.7%) 39.9% 10.7%
-------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of period ...... $ 47.4 $ 40.0 $ 47.7 $ 11.7
Ratio of expenses to average net assets ...... 1.70% 1.78% 2.06% 2.47%
Ratio of net investment income (loss) to
average net assets .......................... 0.49% 1.53% 1.29% 0.53%
Portfolio turnover rate ...................... 142.73% 97.81% 148.88% 242.40%
</TABLE>
- ----------
* Had the Adviser not made the capital contribution, the adjusted total return
would have been 35.6% for the six months ended March 31, 1999.
** Annualized
The Fund's Adviser and/or Baron Capital reimbursed the Fund for expenses
aggregating $8,561 (less than $0.01 per share) in 1990, $27,315 ($0.01 per
share) in 1989, and $83,219 ($0.11 per share) in 1988. The reimbursement
amounts are excluded from the expense data above.
30
<PAGE>
- --------------------------------------------------------------------------------
B A R O N F U N D S
- --------------------------------------------------------------------------------
BARON GROWTH FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
Six Months
ended
March 31, 1999 1998 1997 1996 1995*
----------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ......................... $ 20.32 $ 24.89 $ 18.40 $ 14.77 $ 10.00
----------- --------- -------- -------- --------
Income from investment operations
Net investment income ........................................ 0.00 0.06 0.06 0.11 0.04
Net realized and unrealized gains (losses) on investments .... 6.47 (4.56) 6.68 3.66 4.73
----------- --------- -------- -------- --------
Total from investment operations ........................... 6.47 (4.50) 6.74 3.77 4.77
----------- --------- -------- -------- --------
Less distributions
Dividends from net investment income ......................... (0.04) (0.02) (0.09) (0.04) 0.00
Distributions from net realized gains ........................ 0.00 (0.05) (0.16) (0.10) 0.00
------------ --------- -------- -------- --------
Total distributions ........................................ (0.04) (0.07) (0.25) (0.14) 0.00
----------- --------- -------- -------- --------
Net asset value, end of period ............................... $ 26.75 $ 20.32 $ 24.89 $ 18.40 $ 14.77
=========== ========= ======== ======== ========
Total return ............................................... 31.8% (18.1%) 37.1% 25.8% 47.7%
----------- --------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of period ...................... $ 313.0 $ 315.6 $ 390.8 $ 207.2 $ 28.6
Ratio of total expenses to average net assets ................ 1.45%** 1.43% 1.40% 1.54% 1.99%**
Less: Ratio of interest expense to average net assets ........ (0.06%)** (0.06%) 0.00% 0.00% 0.00%
----------- --------- -------- -------- --------
Ratio of operating expenses to average net assets ............ 1.39%** 1.37% 1.40% 1.54% 1.99%**
=========== ========= ======== ======== ========
Ratio of net investment income (loss) to average net assets .. (0.05%)** 0.21% 0.37% 1.20% 1.13%**
Portfolio turnover rate ...................................... 12.95% 40.38% 25.17% 40.27% 40.56%
</TABLE>
- ----------
* For the period January 3, 1995 (commencement of operations) to September 30,
1995.
** Annualized.
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 ratio is
gross of the custodian offset.
<PAGE>
BARON SMALL CAP FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Six Months ended
ended September 30,
March 31, 1999 1998*
-------------------- --------------
<S> <C> <C>
Net asset value, beginning of period .............................. $ 8.61 $ 10.00
---------- -------
Income from investment operations
Net investment loss ............................................... (0.06) (0.02)
Net realized and unrealized gains (losses) on investments ......... 3.34 (1.37)
---------- --------
Total from investment operations ................................ 3.28 (1.39)
---------- --------
Less distributions
Dividends from net investment income .............................. 0.00 0.00
Distributions from net realized gains ............................. 0.00 0.00
---------- --------
Total distributions ............................................. 0.00 0.00
---------- --------
Net asset value, end of period .................................... $ 11.89 $ 8.61
========== ========
Total return .................................................... 38.1% (13.9%)
---------- --------
Ratios/Supplemental data
Net assets (in millions), end of period ........................... $ 521.7 $ 403.7
Ratio of expenses to average net assets ........................... 1.35%** 1.39%
Ratio of net investment loss to average net assets ................ (1.07%)** (0.20%)
Portfolio turnover rate ........................................... 18.91% 59.68%
</TABLE>
- ----------
* For the period October 1, 1997 (commencement of operations) to September 30,
1998.
** Annualized.
31
