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[REGISTERED LOGO]
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BARON ASSET
1 FUND
PERFORMANCE.......................................................1
INVESTMENT STRATEGY...............................................3
INVESTMENT THEMES.................................................4
NEWS..............................................................5
OTHER DEVELOPMENTS................................................6
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BARON GROWTH
2 FUND
PERFORMANCE.......................................................8
PORTFOLIO HOLDINGS................................................9
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BARON SMALL
3 CAP FUND
PERFORMANCE &
PHILOSOPHY.......................................................14
PORTFOLIO
COMPOSITION AND
HOLDINGS.........................................................15
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BARON
4 iOPPORTUNITY
FUND
IN REGISTRATION
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
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THIS ANNUAL REPORT CONTAINS
INFORMATION FOR THREE FUNDS
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BARON ASSET FUND
ANNUAL REPORT SEPTEMBER 30, 1999
Dear Baron Asset
Fund Shareholder:
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PERFORMANCE
Baron Asset Fund has performed well from its inception more than 12 years ago.
. .
Baron Asset Fund's performance for more than 12 years from its inception on
June 12, 1987 through fiscal year end September 30, 1999 has been good. The
Fund increased in value on average 16.7% per year during the period. Its per
share value gained 570.9%, nearly seven fold. Baron Asset Fund's performance
was better than that of both the large cap S & P 500 index and the small cap
Russell 2000. Baron Asset Fund was ranked by Lipper Analytical the number 2 of
55 small cap growth funds
from the Fund's inception through December 31, 1998 when, due to the
appreciation of several of its long term holdings, Baron Asset Fund began to be
classified as a mid-cap growth fund.
. . . but, Baron Asset Fund's performance during the past year has been
disappointing.
Although Baron Asset Fund's performance for the one year ended September 30,
1999 was strong, it was deceptively so. It is measured from the very depressed
level that the Fund reached last fall. The Fund began to rebound strongly on
October 9, 1998, about a week after fiscal 1998 year end, and on the day of
last year's Baron Investment Conference. As a result of sharp price declines
both last summer and this summer, from April 1998 through
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PERFORMANCE PERFORMANCE PERFORMANCE
ONE YEAR ENDED SINCE INCEPTION SINCE INCEPTION
SEPTEMBER 30, 1999 JUNE 12, 1987 THROUGH JUNE 12, 1987 THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
CUMULATIVE ANNUALIZED
BARON ASSET FUND 29.2% BARON ASSET FUND 570.9% BARON ASSET FUND 16.7%
S&P 500* 27.8% S&P 500* 492.1% S&P 500* 15.6%
RUSSELL 2000* 19.1% RUSSELL 2000* 221.1% RUSSELL 2000* 9.9%
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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
early October 1999 Baron Asset Fund has made little progress. Please see chart
below.
Q4 98 Sept 30, 1998 (23.3%)
Fiscal Year 1999
Q1 99 Dec 31, 1998 26.7%
Q2 99 Mar 31, 1999 7.7%
Q3 99 June 30, 1999 12.2%
Q4 99 Sept 30, 1999 (14.6%)
So, what's going on?
Our media, entertainment and communications investments and several of our
other businesses have grown significantly . . . and so have their stocks . . .
Stock prices of several businesses in which we are shareholders have
appreciated significantly during the past fifteen months. Media, entertainment
and communications businesses, Charles Schwab and Flextronics have all
performed very well. Radio businesses benefited this year from strong .com
business demand for advertising and should benefit next year from .com ads as
well as political and Olympic ads. The wave of radio mergers and consolidations
has helped lower station operating costs and increase revenues. Communications
enterprises have benefited from the explosive demand growth for bandwidth, both
from consumers and businesses seeking faster and more robust Internet
connections. Charles Schwab is the beneficiary of a tidal wave of customer
assets leaving banks and full service brokers and pouring into that firm.
Flextronics is the beneficiary of the increasingly strong trend to outsource
electronics manufacturing.
But, many of our other businesses have also become a lot bigger . . . while
their stock prices have not . . . offering us opportunity . . . we believe. . .
Although our education businesses have grown substantially since the start of
this year, their stock prices have fallen sharply. DeVry, Apollo and Education
Management all have more students, more campuses, charge higher tuition and
fees . . . and are significantly more profitable than they were a year ago.
But, their stock prices are lower. Investors have chosen to focus on negatives.
Why do you need education beyond high school in a full employment economy? Why
do you need physical campuses in a virtual world?
Although retailers Polo Ralph Lauren's and Sotheby's businesses are prospering,
their share prices have also fallen sharply. Investors are concerned, we
suppose, about heavy spending on brand building and no visible Internet
strategy in the case of Polo, uncertainty about the startup and prospects for
its virtual business in the case of Sotheby's. Polo has indicated it will soon
disclose its Internet strategy. Sotheby's on-line auctions that have just begun
have the potential to sharply increase that company's core growth rate during
the next several years and could eventually become even larger than Sotheby's
live auction business.
Specialty temporary help provider Robert Half's growth slowed when it couldn't
find enough people to fill all its jobs. Its share
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price fell sharply, although the company's growth, due to several new
initiatives, has recently begun to accelerate again. The company has begun only
recently to discuss new Internet business initiatives which should both reduce
costs and enhance growth. Nursing home operator Manor Care's share price fell
sharply when it reported that it will earn about 15% less than it did last year
after the government reduced healthcare reimbursements. Most of its competitors
have since gone bankrupt, the government has recently increased its
reimbursement rates, and Manor Care's business is now getting better.
Apparently due to freakish El Ninio Pacific Ocean currents, it snowed less in
Vail, Colorado, last year than at any time in the past twenty years. Of course,
less snow at Vail would be considered blizzard conditions in most places.
Annual average snowfall at Vail has averaged more than 300 inches! Although
Vail's chairman Adam Aron points out in this year's Vail Resorts' annual report
that, "It's been snowing in the Rockies for millions of years and it will
likely snow again . . .," Vail's share price plummeted anyway. (Ed. Note. On
November 22, 1999, the date of this letter, it snowed 13 inches in Vail.)
Hurricane Floyd impacted Sun International's Christmas bookings this year and
its share price also fell sharply. The resort is in good shape and ready for
visitors this Christmas. And bookings are getting better. Mirage Resorts opened
the magnificent Bellagio resort hotel in Las Vegas. In a very competitive
environment, Mirage heavily staffed the property to assure its guests memorable
visits. In response, investors marked down Mirage's share price sharply.
Bellagio has since reduced staff as they have become more efficient . . . and
significantly reduced costs and boosted profits in the process.
Our stocks are cheap.
You don't have to take our word for it. Our businesses and their managements
are buying back millions of their shares . . . aggressively. Ten businesses
representing about 17.9% of our assets have outstanding repurchase
authorizations for millions of shares and have already repurchased and retired
millions of shares. Included in these companies are Apollo, Education
Management, Choice Hotels, Manor Care, Mirage Resorts, Sun International,
Robert Half, Seacor Smit, Southern Union and Sunburst. And in several
instances, with their stock prices low, businesses in which we are part owners
have been approached by strategic investors interested in acquiring their
entire companies. Nine companies representing 17.5% of our portfolio
investments fit this category . . . and only one overlaps with the prior group
that is repurchasing its shares. And . . . in the midst of this frenzied
financial activity, our businesses are all busy "webifying" to improve their
growth prospects.
Baron Asset Fund has underperformed before. Our long term performance
objectives remain unchanged.
While Baron Asset Fund's long term performance has been good . . . and during
the month and a half since September 30, 1999 it has again begun to perform
well . . . there have been a few
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B A R O N A S S E T F U N D
other periods during the past twelve years when our Fund underperformed for
several quarters. In the past, we have sharply recovered as share prices of
businesses in which we are part owners rebounded to more accurately reflect
their business' values and earnings prospects. We remain committed to our long
term goal of trying to double our shareholders' investments per share every
four or five years by investing in businesses that double in size every four or
five years. Of course, there can obviously be no guarantee that we will
continue to be successful. We've been able to accomplish our goals in the past
by purchasing shares in fast growing, well managed, small and mid-sized
businesses at attractive prices. Many of these companies have since grown to
become much larger businesses and their stock prices have reflected their
performance. It has certainly not proved difficult for us to buy shares at
attractive prices in businesses we believe have exciting long term prospects
this year! We are hopeful the Fund's nascent strong performance will continue
and allow us to reach our long stated objective of $100 per share before the
end of 2002 . . . and allow us to begin to focus on our goal for 2006!
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INVESTMENT STRATEGY
"This time it's different."
At a recent charity event we attended, Morgan Stanley's investment strategist
Byron Wein described his first years on Wall Street. In 1958, after graduating
from business school, Byron got a job as an investment analyst. In business
school, Byron was taught the then conventional wisdom that stocks were riskier
than bonds and, therefore, should offer higher yields than bonds. Higher yield
was the "risk premium" required of a riskier investment. In 1958 . . . for the
first time in nearly thirty years . . . stocks began to yield less than bonds.
Investment strategists, the "guys in the paneled corner offices," of course,
became bearish when investment valuation parameters changed in 1958. And, those
analysts never altered their opinions. Ten years later, when Byron was well
along his climb to success, those once highly respected analysts had been moved
from their glorious corner offices to center room cubbys. And then spent all
their time making lunch plans and golf dates with their friends . . . who also
had been bearish for ten years. Byron and his associate Barton Biggs have been
either neutral or negative for some time since stock prices have once again
moved beyond the framework of historic valuations. Byron relayed his concern to
the audience that evening about how he was constantly looking for the "moving
men."
"Show me the money!"
But, it's not different this time. Nor has it ever been different, we think.
It's really all about valuation. And always has been. It's about return on
investment . . . how much does it cost an investor to purchase a share in a
business? . . . and how much can that business earn on capital it invests? It's
not about how much a business is earning today. It's about how much that
business can earn over time. It's about the present value of those earnings.
What is the business opportunity? How much does it cost to obtain customers?
How much revenue will those customers produce each year? How long will a
customer remain a customer? What's going to prevent competition from stealing
that customer?
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We're growth investors. We invest in entrepreneurs' dreams . . . and always
have. When we invested in cellular telephone businesses more than ten years ago
and cable television businesses fifteen years ago before they had any customers
and any cash flow, these were the same questions we asked then. They were the
same questions we asked when we invested in media, radio, communications and
finance businesses during the past ten years. And, they're the same questions
we're asking now as we consider web opportunities for bricks and mortar
businesses and the ability of "new media" business to business and business to
consumer enterprises. And, they're the same questions we ask of bricks and
mortar resorts and schools and health care facilities. How much can these
businesses earn? How long will it take them to accomplish their dreams? And,
what will forestall competition from stealing their opportunities? What will it
cost us to invest in these businesses and, if they can achieve their
objectives, what will the business then be worth? . . . and, can we at least
double our money in four or five years? Show me the money! All businesses
aspire to achieve what Microsoft has accomplished: high levels of
profitability, important barriers to competition and huge growth opportunities.
Entrepreneurially managed businesses with definable prospects. Purchased at a
reasonable price. As long term investors, that's what we're looking for.
Where is the value?
Where is the value? The value at Vail Resorts is not in the reservation system.
It's in the place. But if Vail's management is not diligent, if Mirage Resorts'
and Four Seasons' managements are not diligent, Internet travel portals will
aggregate customer demand and take away value from the place by negotiating
preferred provider discounted rates. Don't let it happen to you. You've got to
look around corners. The head of an Internet venture capital firm recently
visited us seeking to determine whether many of our portfolio businesses had
web opportunities. "What do you look for in your businesses?" I wanted to know.
"Of course, you're always looking for unique opportunities that are large
relative to a business' capitalization. But most importantly, you're looking
for successful people, individuals who have been successful before and who have
thought about what to do when their plan doesn't work . . . which, of course,
it rarely does." Entrepreneurs. That's what we've got to have in the fast
growing, small and mid-sized businesses in which we invest.
We're research focused . . . and, we don't depend on brokerage firm
research . . . we do it ourselves.
Mirage Resorts' chairman Steve Wynn recently spent a few hours with Morty
Schaja and me in our office in New York City. I nor
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B A R O N A S S E T F U N D
mally visit Steve in Las Vegas and he hadn't been to see me since we had moved
to our new space a few years ago. Steve first complimented us on our office
design and views. He then began, "I know you since 1987. You were managing less
than $100 million when we were introduced. But, I must tell you, of all the
analysts and portfolio managers I met then, I would have bet you would be the
least likely to still be a Mirage shareholder. The intense questions you
asked . . . the information you sought . . . no one had ever asked me those
sort of questions before. I thought you were trying to gain some sort of short
term trading advantage. Boy, was I wrong. I apologize. You were just trying to
learn as much as you could about our business . . . to understand our
business . . . so that you could be comfortable as a long term investor." That,
of course, is our goal . . . to understand a business' prospects, it's
strengths and weaknesses, through rigorous due diligence.
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INVESTMENT THEMES
1. "In five years all businesses will be Internet businesses or they won't have
a business." Andy Grove, Chairman, Intel.
The web changes everything. Opportunities abound for "bricks and mortar"
businesses to become what Charles Schwab calls "clicks and mortar" businesses.
Charles Schwab is building a competitive full service brokerage firm on an
Internet platform and is spending hundreds of millions every year to integrate
its physical and virtual businesses . . . and every year distance itself further
from its competitors. Robert Half is using web "bots" and "spiders" to lower its
recruiting costs. The web will also allow it to provide its customers with
enhanced services, e.g., reference checking, video clip resumes, skills testing
and training, e-mail notification of preferred jobs and just in time employees.
Robert Half is spending tens of millions each year to achieve this functionality
. . . while at the same time increasing its staff productivity . . . and
continuing to grow its profits! Sotheby's customers worldwide can now purchase
art, antiques and collectibles from the company and its worldwide network of
4600 dealers on the web. Sotheby's is spending tens of millions to develop this
capability for sothebys.com (coming soon) and sothebys.amazon.com . . . and to
make sure consumers, dealers and resources know this service is available.
Choice Hotels' franchisees are able to purchase $1.5 billion of annual supplies
through Choice Buys on the web and receive favorable preferred provider
discounts while Choice will make a little on each transaction. Choice's hotel
guests are being offered web access in their rooms and producing incremental fee
income to the chain. Ethan Allen because of its uniform pricing and proprietary
distribution is uniquely able to offer its furniture to consumers through the
web and pay its local dealers commissions for delivery and service. Westwood
One's Metro One traffic and weather reports lend themselves to both wired and
wireless web service offerings. Won't it be great to have in-car trip routing
depend on local traffic conditions? Univision. The potential for web based
enhanced sports and news services for this Hispanic broadcaster is exciting.
Saga Communications has great web based potential for its farm and regional
information networks. Southern Union is beginning to use the web to more
efficiently schedule its service calls and will likely produce cost savings that
could approximate many millions each year. Polo Ralph Lauren has not yet
publicly described its on line business strategies. We believe, however, that
Polo On-Line will offer that business significant cost and revenue
opportunities.
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2. "Let the young people guide your business of the future, or you may not have
one." Alan Boehme, ebusiness leader, GE Power Systems.
We believe that and try to be sure that we're not investing in a 1950's
Cadillac car company that allows its products to age with its customers until
what the business sells is no longer relevant to a current generation of
consumers.
This is more important today than ever. Echo Boomers, also known as "Gen Y,"
are the children of our Baby Boomers. Gen Y now numbers more than 70 million
individuals, an even larger population segment than the Baby Boomers. Of
course, the Baby Boomers have got the money, but the Echo Boomers will shape
demand for products and services for as long as we care to look ahead. Polo
Ralph Lauren with Polo Jeans shops, Vail Resorts with its snowboarding hills
and Adventure Ridge on-mountain amusement park and the highly themed lost
continent Atlantis resort are all obviously trying to appeal to Gen Yers. Our
music and communications businesses, obviously are doing so as well. As a 56
year old investor, I believe I've been relatively successful during my nearly
30 year career largely because I've always invested in what I
liked . . . Disney and McDonald's in the early 1970's, Fed Ex, cellular phones
and cable television in the 1980's and Charles Schwab, communications, media
and entertainment, especially music, in the 1990's. Of course, with 70 million
Baby Boomers following close behind me, liking what I liked and buying what I
bought, this was and remains a successful formula. Our "youthification" efforts
center on trying to make sure that just because we like a product or service,
it's still relevant to Gen Y, our children. And making sure we have enough
young people influencing our investment process to avoid investing in a 1950's
Cadillac car business.
3. Bandwidth Famine. Demand for more bandwidth by both consumers and businesses
is soaring. Whenever more bandwidth becomes available, businesses figure out
new services to cram into those communications pipelines . . . and is met with
even greater demand for even more services! NTL has provided its customers in
the U.K. high bandwidth facilities and demand for its services is growing
rapidly. Citizens Utilities is purchasing non-urban telephone businesses and
enhancing the services and bandwidth those companies provide their customers.
Southern Union is getting ready to offer its gas utility customers 10X the
bandwidth now available to them using Southern Union's right of ways and
customer care services. CoreComm is creating a virtual telephone business
reselling local services and offering high profit switched services . . . until
it is assured of a customer base for high bandwidth facilities.
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B A R O N A S S E T F U N D
4. Education. We can't emphasize it enough or believe in it more strongly. In
an information based, knowledge and technology-oriented economy and society,
education wins! Apollo, DeVry, Education Management and ITT Education provide
their graduates the skills necessary to be competitive, and, probably even, to
be employable. Certainly, to be employable at good salaries with strong
advancement opportunities.
5. Leisure. We think our affluent Baby Boomer dominated society will prize
unique, high quality vacation experiences. And, pay a premium for their
accommodations . . . if the accommodations are spectacular and the service
impeccable. Four Seasons. The most luxurious hotels in the world with the best
services. Vail Resorts. The best ski mountain in North America. Mirage Resorts'
Bellagio in Las Vegas. A wonderful European oasis in the Las Vegas desert. Sun
International's Atlantis in Nassau, Bahamas. They don't take their motto "Blow
away the customer . . ." lightly at this spectacular water oriented Caribbean
resort. Those are the places we like. We hope you'll try to vacation there as
well. You are an owner, too, through your holdings in Baron Funds, so don't
forget to tell your friends. We're certain you'll enjoy your experience as much
as we've enjoyed the research (it certainly beats visits to Libbey's Toledo
glass furnace in the summer or CrossTimbers' Oklahoma gas field in the dead of
winter). And, don't forget to take your children and grandchildren to Premier
Parks' regional Six Flags amusement parks this summer. They're gonna' love the
rides. Just don't watch them when they're doing the loop de loops on the roller
coasters!
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NEWS
On January 6, 2000, Vail Resorts will open for skiing the 885 acre Blue Sky
Basin. The aptly named Blue Sky Basin represents an 18% increase in Vail's
already vast skiable terrain. In the past, ski terrain expansion has led to
increased skier days at Vail. Blue Sky Basin will open a year ahead of
schedule. Vail also acquired the Grand Teton Lodge in Yellowstone National Park
in Jackson Hole, Wyoming this year. This very special summer resort, built by
John D. Rockefeller, Jr., is our first important effort to offset Vail's
seasonality.
Sotheby's launched its sothebys.amazon.com collectibles site November 19 in
partnership with Amazon.com. Its higher end art and antiques oriented
sothebys.com site will launch before year end 1999 . . . supported by a
remarkable 4600 independent dealers worldwide. Collectibles and art purchased
on either site are guaranteed by Sotheby's and Amazon for authenticity.
Smaller regional gas utilities continue to sell their businesses to Southern
Union at reasonable multiples of trailing gas cash flows. Southern Union
continues to buy gas businesses that it believes are more attractive in
aggregate than individually and that can serve as a platform to offer advanced
communications services, e.g. internet connections, telephony and, perhaps,
video, to its customers.
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American Tower continues to make large, strategic communications tower
acquisitions. ATT and Vodaphone Airtouch were the most important of these
transactions. American Tower expects to add significantly to its wireless voice
customers as well funded personal communications services businesses continue
to build their networks. Data customers should prove important as demand to
access the Internet anytime, anywhere, begins to increase dramatically.
Broadcast represents an important strategic initiative as well. As do Teleport
satellite farms for the international distribution of data.
NTL merged this year with Cable and Wireless to become the largest and dominant
cable television/telephony provider in the U.K. France Telecom purchased about
20% of NTL for $5.5 billion to finance this transaction. Microsoft had shortly
before invested $500 million in NTL at a somewhat lower valuation. Microsoft's
purchase was at about ten times our cost five years ago. NTL is achieving
terrific telephony results in the U.K. and is about to introduce high speed
Internet access and digital television services about which we are very
optimistic. In addition, NTL is beginning to expand its footprint beyond
England and this year purchased the cable television business in Ireland.
Charles Schwab enhanced its customer services with a joint venture ECN for
after hours trading, Velocity service for active traders, and joint venture
iBank with leading on line brokers and venture capital firms to provide its
customers with greater access to investment research and initial public stock
offerings. There's more to come with trust and bank services. Schwab will
likely add more than $100 billion in net new customer assets in 1999, a huge
number. Schwab's earnings ultimately depend upon customer assets held at that
firm.
Following its acquisition for $75 million of a "stick" radio station in Los
Angeles, number one ranked Hispanic radio business Hispanic Broadcasting has
invested $440 million in stations that are not yet producing cash flow. Within
four or five years, these stations should produce $50-60 million annual
broadcast cash flow. In addition, although Hispanic is the number one rated
station group in Los Angeles, its annual advertising revenues are $30 million
less than they should be with a one power ratio. New management at those
properties offers strong potential. The company recently sold $285 million new
shares to equity investors to fund possible acquisitions from Clear Channel as
that business is forced to divest properties prior to its merger with AMFM.
Hispanic could acquire several Anglo stations with weak audience share but good
technical facilities that, after conversion to Spanish formats, should be very
profitable.
Polo Ralph Lauren acquired its Polo Europe licensee for $230 million in a
transaction that will close in January 2000. Polo products at retail generate
$4.3 billion annual revenues in the United States but less than $500 million in
Europe. Since both regions have about the same populations, there should be a
very large opportunity for this business.
Citizens Utilities sold its water utilities for nearly $1 billion and should
get at least another $1 billion for the sale of its electric and gas utilities.
Citizens will use the proceeds from these sales
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B A R O N A S S E T F U N D
to purchase telephone companies in smaller, rural and suburban communities.
Citizens will not purchase telephone companies in highly competitive large
metropolitan areas. Citizens has already grown its telephone access lines from
one million to 1.85 million and expects to reach 2.0 million lines before the
end of 2000. Citizens hopes to reach 5 million lines within five years.
XM Satellite obtained $250 million direct private equity investments by
DirecTV, Clear Channel Communications, General Motors and two venture capital
firms. On October 4, XM Satellite then sold 10 million shares through an
initial public offering at $12 per share.
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OTHER DEVELOPMENTS
October 15, 1999: 2000 shareholders attend 8th annual Baron Investment
Conference, New York City; The Piano Man, Billy Joel, surprises cheering Baron
Funds' shareholders with midday concert performance!
After I described how I discovered the spectacular Paradise Island beaches in
1964 as a college junior on spring break, Sol Kerzner, Sun International's
chairman, the company that now owns the island, said he arrived at about the
same time I did and had about the same reaction. Sol is widely regarded as a
visionary resort developer. He first spoke to our shareholders about how he
built the Atlantis and Mohegan Sun and then began to outline his company's
planned projects in Atlantic City and Nevada. Derek Smith, ChoicePoint's
chairman and a die hard Atlanta Braves fan, after giving his New York audience a
few obligatory Braves' chops, donned a Mets' hat we gave him as a gift. Baron
Funds has been ChoicePoint's largest shareholder for the past two years and
Derek described the great opportunities that lay before the online distributor
of credentialing information to businesses, individuals and institutions with
appropriate needs. When he finished, I believe our investors were comfortable
that privacy issues would be carefully considered by this owner of sensitive
personal information. Michael Marks, the dynamic and youthful chairman of
Flextronics, described how he convinced me nearly five years ago that strong
demand for Flextronics' outsourced technology manufacturing services did not
depend upon the success of any specific technology. Flextronics has since become
a much larger business. With 400-500 process engineers providing manufacturing
and design services to widely diversified client businesses in widely
diversified geographic regions, it is even less risky, and its growth prospects
have not diminished. Flextronics' sales jumped from $500 million to $3.5 billion
during the past five years; its stock price increased nearly ten times. In 2000,
Flextronics could nearly double its sales again . . . and then increase many
fold during the following several years. As Flextronics' largest shareholder for
the past several years, Baron Funds is grateful that Michael remains in what
seems to us perpetual motion. Four Season's Chairman and Founder Issy Sharp
spoke about how he equates luxury to high level concierge services. Getting
people to sign on to a vision is the key to his business' success, he thought.
That, and his wife. Issy's wife sealed the most important deal of his life when
she accepted a cigar and pretended she was about to smoke it. Doing so she
charmed the seller of a property to close a deal with her husband. Issy by
himself could not convince the businessman to consummate this deal . . . and he
had been trying for more than a year. Issy often asked himself, "Why was someone
willing to do business with me when it was clear that if I failed I could not
live up to my obligations?" It was because of values, he concluded. We couldn't
agree more. When you meet someone with character like Issy, it's difficult to
miss. Just like when you meet a man like Charles Schwab's President and Co-CEO
David Pottruck, it's not easy to miss that you're with a FORCE, someone who's
special . . . really special! There are few individuals I would ask to speak
after Billy Joel performed. And, when I was able to see David through the crowd
during Billy's performance, he seemed deep in thought amidst The Entertainer's
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cheering fans. But, David is an extraordinarily good sport and was more than up
to the occasion. Donning Bruce Springsteen motorcycle sunglasses, he first joked
with me and then with the crowd. Like Issy, David also spoke about getting
people to sign on to a vision. David also spoke about one of the most important
challenges his fast growing business faces . . . how do you keep his now wealthy
employees working their tails off? "I used to say, 'Snooze and you lose," David
reported to the crowded room. "It's now, 'Blink and you lose,' " David remarked,
alluding to fast paced Internet time. Several of our shareholders have either
mentioned to me in casual conversation or written that they purchased shares in
Charles Schwab immediately after hearing David speak. They have been well
rewarded. In the month since our conference, Schwab's share price has increased
about 50%! Following presentations by these executives, I spoke about "value
investing in a virtual world," about the changes being wrought in conventional
businesses by the web and its impact on business values. Morty and my three
fellow Baron Funds portfolio managers then helped me answer questions from our
guests for the next hour.
And, the message from these conferences is getting through.
One of my best friends from high school and his wife, shareholders since Baron
Asset Fund's inception, have traveled from Florida each year for the past
several years to attend our annual conferences. Sheila takes notes during
speaker presentations. "Where else can you hear the best businessmen in America
talk about how they've become successful and answer questions about why they
think their success should continue? How can that not be helpful to my
organization?"
Pelly, another of my high school friends and another long time shareholder and
annual conference guest, first thanked us for Billy Joel who was "better than
ever," and also went on to note that she and her husband "find the conference
valuable and take away from it principles which we try to incorporate into our
own businesses. Thanks for making this available to us."
6
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Billy Joel was spectacular!
We tried to keep the identity of our "surprise guest rock 'n roll performer"
secret for obvious reasons. We were successful . . . with a few exceptions. The
salesman from whom I purchase my suits has owned Baron Asset Fund for his young
daughter for years. "Louis, you've never been to one of our annual meetings.
Your daughter's education depends on our results. You ought to learn more about
what we do. Now is a great time to start. We're going to do something special
at our meeting this year to thank our shareholders. We're having a surprise
rock 'n roll concert performance at lunch," I told him. "Mr. Baron. I know who
your performer is. It's obvious. You're from Asbury Park. It must be The Boss.
It must be Springsteen." "Not a bad guess. But, you'll just have to show up to
see for yourself." A few days before the conference, I returned to pick up a
suit. "I know who your performer is," Louis reported grinning. "It's the Piano
Man. It's Billy Joel!" "And, just why do you think it's Billy Joel?" "Because
the Piano Man is also my client and he just came in for a suit he's going to
wear at a performance on Friday, the same date as your conference."
Billy Joel quickly showed why he is Long Island's favorite performer. Billy
established an immediate rapport with our surprised, applauding and yelling
shareholders when he started his performance with, "New York State of Mind,"
and then explained that "I don't do daytime gigs anymore . . . at least not in
a long time . . . but this is fun!" "Only the Good Die Young" became a hit only
after the Archdiocese of St. Louis prohibited its young parishioners from
listening to it, he explained, and a couple of 1970's hits were written for his
first ex-wife whom drummer Liberty explained "got the house, got the car and
got just about everything else." "The Piano Man" was written after Billy
watched Bob Dylan in the Bitter End in Greenwich Village playing the piano with
a harmonica attached to a contraption that hung around his neck. "What's wrong
with his teeth?" wondered the young Billy. "I Don't Care What You Say, This is
My Life," was written when Billy was young and is now coming back to haunt him
as his 13 year old daughter Alexis begins to understand the meaning of the
lyrics. Anyway, song after hit song was met with cheering and clapping and
hollering from our shareholders of all ages. Which was met with easy reparte
from The Entertainer and his drummer. I think it was even more fun for our
shareholders when it was so apparent that Billy was also having a good time.
And, it made it even more enjoyable for our shareholders, I'm sure, when I
explained, before the concert began, that this was not an expense of Baron
Funds, but rather of our's, of Baron Capital's. Thank you for your support.
<PAGE>
Many of our guests traveled quite far to attend our conference this year. We
are appreciative of your interest, for taking the time to be with us that
morning, whether you traveled a long distance or came from nearby. We gave our
guests conference t-shirts emblazoned with one of artist Red Grooms New York
City street scenes and a Billy Joel autograph. The shirts were definitely our
coolest yet. Shareholders who were unable to attend, but who would like a
complimentary t-shirt, should e-mail us your name, address and Baron Funds
account number attention [email protected] or call us with that information
at 1-800-99-BARON. If you'd like a copy of my formal remarks and slides, we'd
be happy to send it. Just let us know. The speech will soon be available on our
web site as well. The date for Baron Funds' Ninth Annual Investment Conference
will be October 20, 2000. We hope we'll see you there. Look for our online
registration form coming soon at www.baronfunds.com. Only shareholders will be
admitted.
Cool deals.
They're coming soon to BaronFunds.com, our web site. Watch for special Baron
Funds' shareholder deals on commissions at sothebys.com or lift tickets at Vail
Resorts or hotel rooms at Sun International's Atlantis or . . . well, you get
the idea. Please either e-mail or phone us of your interest and we'll be
certain to notify you when our shareholder cool deals are available. Neither
Baron Funds nor its advisor BAMCO nor any other Baron Capital affiliate will
receive any compensation for this service.
Thank you for investing in Baron Funds.
We recognize it cannot be an easy decision for most individuals and their
families when choosing a mutual fund in which to invest. Especially since you
must consider how to invest your hard earned savings to fund your children's
education, a new home or your retirement. The task is even more daunting since
there are now more mutual funds than stocks and trusted advisors offer well
considered advice . . . that is often conflicting. We hope our shareholder
letters, interviews in the press and annual investment conferences have made it
easier for you to determine if Baron Funds represents an appropriate investment
for you and your family.
We want to thank you for choosing to join us as fellow shareholders in Baron
Funds. We will continue to work hard to justify your confidence.
Sincerely,
/s/ Ronald Baron
- ---------------------------------------
Ronald Baron
Chairman
November 22, 1999
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[REGISTERED LOGO]
---------------------------------------------------
BARON GROWTH
2 FUND
PERFORMANCE.......................................................8
PORTFOLIO HOLDINGS................................................9
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
<PAGE>
- --------------------------------------------------------------------------------
BARON GROWTH FUND
ANNUAL REPORT SEPTEMBER 30, 1999
Dear Baron Growth
Fund Shareholder:
- --------------------------------------------------------------------------------
PERFORMANCE
Baron Growth Fund has performed well from the beginning of this year (16.9%
return v. 2.4% for the Russell and 5.4% for the S&P) and in the last 12 months
(43.2% v. 19.1% for the Russell and 27.8% for the S&P). However, the Fund's
performance in the third quarter, like that of the broader market, was
disappointing. The Fund was down 7.5% in the period as compared with a negative
6.3% return for the Russell 2000 and a negative 6.2% return for the S&P 500.
Since the Fund's inception in the beginning of
1995 through September 30, 1999, Baron Growth Fund has produced a 198.7%
return, significantly greater than the Russell 2000 (82.7%) and about in line
with the S&P 500 (205.4%) despite that index's dramatically higher technology
weighting.
During 1999, we have, with your approval, refocused the Fund on small growth
companies and have reduced the influence of both income-oriented investments
and larger companies' shareholdings on the Fund. While a significant change, we
believe this transformation has been a positive one for the Fund and hope that
it has given you, its shareholders, a more clearly defined small cap investment
fund. Several of our more recent additions to the Fund are reviewed below.
<PAGE>
- ---------------------- ---------------------- ---------------------
PERFORMANCE PERFORMANCE PERFORMANCE
ONE YEAR ENDED SINCE INCEPTION SINCE INCEPTION
SEPTEMBER 30, 1999 MARCH 3, 1995 THROUGH MARCH 3, 1995 THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
CUMULATIVE ANNUALIZED
BARON GROWTH FUND 43.2% BARON GROWTH FUND 198.7% BARON GROWTH FUND 25.9%
S&P 500* 27.8% S&P 500* 205.4% S&P 500* 26.5%
RUSSELL 2000* 19.1% RUSSELL 2000* 82.7% RUSSELL 2000* 13.5%
- ----------------------- ------------------------ -----------------------
* 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>
B A R O N G R O W T H F U N D
- --------------------------------------------------------------------------------
Portfolio Holdings
Media and Entertainment
CD Radio and XM Satellite
Note written by Matt Ervin, Vice President and Co-Portfolio Manager, Baron
Growth Fund
Over the past quarter, the Fund has made significant new investments in both CD
Radio and XM Satellite Radio. We now own 200,000 shares of CD Radio at an
average cost of $25, and one million shares of XM Satellite at an average cost
of $12. The radio industry has seen very few technological changes over the
years, but there is one coming. In April of 1997 the Federal Government sold
licenses giving these companies the co-exclusive opportunity to create a third
band of radio, complementing the AM and FM bands that listeners already know
and love. This third radio band will offer 200 radio channels, each with
national coverage and a clear digital signal. To achieve national coverage
economically, the operators will deploy satellites and terrestrial repeater
stations. To generate revenue, each operator will charge a subscription fee
amounting to roughly $10 per month. How many consumers will find this an
attractive offering? That is the question.
Radio industry consolidation has been a boon to those of us who invested in
this industry. But the audience has not necessarily benefited. Commercials now
account for more minutes during an hour of programming than ever. Marginally
profitable formats such as classical or blues have been replaced by solid
winners such as rock or easy listening. Yet commute times continue to lengthen
and the average American still listens to two hours of radio programs each day.
CD Radio and XM Satellite offer these commuters more choice and better quality.
Each satellite station will have DJs and a cutting edge personality, with
limited or no commercials. David Margolese, CEO of CD Radio, tells me that his
vision is to be more interesting than traditional radio broadcasters, "just
like the cable industry provided something better than over-the air
television." Among the programming partners for these companies are the best
programmers of business news, classical music, jazz, country, Hispanic radio
formats, etc. In smaller cities throughout America, over-the-air radio offers
less than 15 viable radio signals. In these cities, formats such as jazz,
classical, or business oriented talk radio usually do not exist despite a
significant minority audience that is often strongly interested in these
formats. Even in larger cities, such as Atlanta, my younger sister finds
herself flipping impatiently from station to station, trying to find the right
mix of music during the hour and a half that she spends in her car each day.
Like many 28-year olds in this country, she has eclectic musical tastes and a
strong desire to hear new, alternative music. Should CD Radio and XM
successfully tap into this demand, the upside for shareholders will be
dramatic. About one third of Americans indicate strong interest in this
service, and if just 10% of American cars are eventually equipped with this
service then profitability per share could be over $10 for each company.
Margins should be very high and stable because, unlike television programming,
radio programming is very inexpensive to produce. To seed demand, CD Radio has
aligned with Ford and XM has aligned with GM. Each of these car companies has
plans to sell over one million cars with the satellite radio service, starting
in year 2002. During 2001, after-market radios will go on sale through retail
channels. DirectTV is an investor in XM Satellite and a powerful partner for
helping to master the challenges of retail distribution.
<PAGE>
These companies, though public, are really venture capital investments. There
is considerable uncertainty in the outcomes of their business plans, and we
must watch carefully over time to see how the market develops. We think each
company is well positioned to succeed, so we have invested in both. Both have
management teams which have successfully developed enabling technologies,
funded their business plans, and laid the groundwork for exciting marketing
campaigns. As with all investments, there are risks, and these fledgling
businesses carry more than most. But the upside potential far outweighs the
risks. If CD Radio and XM succeed, we will see a many-fold increase in the
value of our investments. We will benefit whether the overall stock market does
well or poorly. Moreover, as we get closer to the launch of commercial service,
our investment should appreciate in value as investors with a shorter timer
horizon pay more attention to the potential for these companies.
The last major technological innovation in radio was the introduction of the FM
radio band. After many years, FM has overtaken the AM band and now dominates
the radio industry. Some investors have asked, if you believe in satellite
radio, can you still believe in AM and FM radio. The answer is yes. Satellite
radio would be a tremendous success at 10% penetration. Among those
subscribers, many would continue to listen to AM and FM stations alongside
their satellite bands. So even when CD Radio and XM Satellite are successful,
AM and FM stations might collectively lose modest audience share. AM and FM
stations draw their revenue mainly from local advertising, and a modest loss of
audience would not necessarily have an impact on the demand for local radio
ads.
Communications
Rural Cellular
Note written by Matt Ervin.
Rural Cellular, led by Rick Ekstrand, operates rural cell phone properties in
Minnesota and New England. Baron Capital first began investing in small-market
cellular properties in 1997, through companies such as Centenniel Cellular,
CommNet Cellular, and eventually Rural Cellular. At the time, investors were
growing enamored with large, highly liquid stocks instead of small cap
businesses. One industry expert told me "the problem with investing in these
little companies is that no one cares about them." Moreover, there was reason
to be cautious about the
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entire wireless arena. New spectrum, known as PCS spectrum, was issued by the
government in 1996 and competition was on the horizon. We nonetheless chose to
care about companies such as Rural Cellular, because the laws of physics were
on their side.
The potential new competitors were licensed to operate at radio spectrum around
1.9Ghz. But not all spectrum is created equal; interference from trees,
buildings, and even the atmosphere itself causes radio signals to decay, and
the 1.9 GHz frequencies showed much more vulnerability to these issues than did
the spectrum in use by Rural Cellular and other legacy operators. New operators
needed to build at least 4 cell sites for every 1 that Rural Cellular had
already constructed. Technical disadvantages in urban markets were less
extreme. The business case made sense in urban areas where the capacity of the
existing networks was failing to keep pace with demand. But in rural areas,
operators such as Rural Cellular were having no problem keeping up with demand.
Not to say that demand isn't growing. As competition drives down cell phone
rates in the urban areas, Rural Cellular reports more roaming traffic. City
dwellers don't leave their phones behind when they roam into Rural Cellular
territories during summer vacations or winter ski trips. This becomes even more
important as flat-rate plans from ATT and other operators grow in popularity
and make it economically painless for city dwellers to use their phones as they
roam. Moreover, the core customer base at Rural Cellular grows 20% or so a
year, thanks to well-managed local marketing efforts. Rick argues that "rural
markets do tend to be several years behind the cities, but growth in
penetration follows the same curve, so we have a lot of upside." In the
meantime, he says, lagging the urban operators "allows us to get good economics
on technology upgrades because we can wait until after the new technology has
been produced in mass volumes" for the urban wireless carriers. Rick and his
team do not wait too long to deploy new technology, and the company has already
upgraded to digital. The higher level of capacity improves service quality and
leads to customer satisfaction, a further barrier to entry for upstart PCS
operators.
Rural Cellular's defensible foothold is finally getting some attention in the
wireless industry. As the large players such as ATT and Bell Atlantic reduced
prices to rates as low as 10 cents per minute, the investment community wrongly
concluded that Rural Cellular's high-priced roaming revenues would collapse.
Instead, the fact that Rural Cellular is one of only two possible partners
within their territories has allowed that company to renegotiate strong deals
with the industry leaders. Annual increases of 20% or more to roaming revenues
appear sustainable. With a new digital network that is largely built out, a
high percentage of those incremental revenues reach the bottom line. The
company's cash flow streams are stable and growing rapidly, justifiably
supporting considerable financial leverage, which in turn serves to boost
equity returns tremendously. This last quarter investors began to realize the
big pay-off that will eventually result. During the September quarter, Rural
Cellular shares increased in price from $20 to $45 and have risen further
since. Baron Growth Fund owns 250,000 shares at an average cost of $17. We wish
Rick and his team luck as they continue to create shareholder value.
<PAGE>
Hotels and Lodging
Four Seasons
Note written by Mitch Rubin, Vice President and Co-Portfolio Manager, Baron
Growth Fund
There are several reasons why we have focused our hotel and lodging investments
on franchise and management companies over the past several years. Our goal is
to take advantage of the strength of their brands and the power of the free
cash flow generated through their franchise and management fees without the
capital obligations or cyclicality of real estate ownership. Four Seasons, with
its high royalty and management fees, 80 year non-cancellable contracts and
powerful balance sheet epitomizes this strategy.
Most companies in the hotel sector have had a difficult year during 1999 as
overbuilding in many sectors has led to softening rates. However, because of
its luxury focus and strong brand name, Four Seasons has continued to post
exceptional results. Four Seasons' core hotel group has posted 6% RevPar
(revenue per available room) increases during most of the year with
acceleration to nearly 10% during the third quarter. This compares to a
relatively flat hotel rate market. Moreover, gross operating profits at the
hotels managed by the Four Seasons have increased nearly 15% during 1999 on top
of record performances during 1998. These are the profits that flow to the
company's real estate owner/partners and helps solidify Four Seasons'
reputation as the manager of choice in the luxury hotel industry. In
particular, Four Seasons' Asian hotels have experienced a dramatic rebound
during 1999. Following negative RevPar trends throughout 1998, the region's
hotels turned positive in the first half of 1999 and then jumped nearly 16% in
RevPar and nearly 74% in gross operating profit during the third quarter.
Unit growth also continues for the company with two new properties having
opened during 1999, the Four Seasons Las Vegas, which has posted the highest
room rates in the Las Vegas market in this its first year, and the Four Seasons
Resort in Punta Mita, Mexico. In addition, the company's flagship European
hotel, the dramatic George V in Paris, is set to open in December of this year.
This will truly be one of the most spectacular hotels in the world and will
open the door to substantial European expansion over the next several years. In
fact, the next 18 months will mark the most dramatic growth in new units in
Four Seasons history as 17 properties are currently in construction and
development including properties in nine countries where Four Seasons does not
now have a presence.
Four Seasons has also made substantial enhancements to its balance sheet during
1999. In addition to the strong cash flow from
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operations, Four Seasons recently sold nearly $175 million in convertible
notes. These notes bear a non-cash interest rate of only 4.5% per year and do
not mature until 2029 (they are redeemable or convertible earlier). As a result
of this offering, as well as its strong operations, Four Seasons' shareholder's
equity has increased over 60% to over $530 million during 1999 and the company
currently has nearly $150 million of cash on the balance sheet for investments
or acquisitions to continue to fuel its growth.
Financial
Medallion Financial
Note written by Mitch Rubin.
We have owned Medallion Financial (TAXI) since its IPO in mid-1996 when we were
intrigued by both the company's core lending operations as well as its nascent
taxi top advertising subsidiary. Both businesses have exceeded our expectations
over the past several years and have accelerated during 1999.
TAXI remains the undisputed leader in taxicab medallion lending with a $286
million portfolio of loans outstanding at the end of the third quarter. This
portfolio has grown over 130% in size since the company's IPO in 1996 and TAXI
has still not written off a single loan in this portfolio. The commercial
lending business has also performed extremely well. The portfolio stood at
nearly $152 million at the end of the third quarter, a nearly 5 fold increase
in size over the past 2 1/2 years. Moreover, TAXI has begun to move its
commercial lending business to the Internet with the recent launch of
www.BusinessLenders.com. Business Lenders is the company's Small Business
Association (SBA) lending subsidiary in which up to 80% of the loans are
guaranteed by the US Government. While the Business Lenders portfolio has more
than doubled during 1999 alone, TAXI believes the introduction of a web site
could dramatically increase this subsidiary's growth potential. During the
third quarter alone, the Business Lenders web site received 862 loan
applications.
Medallion has also dramatically decreased its cost of capital during 1999.
Using a sophisticated commercial paper program, Medallion has decreased the
average interest rate paid on its borrowings by nearly 60 basis points during
the year from approximately 6.9% at the end of 1998 to just under 6.3% during
the third quarter.
Although not well publicized, TAXI's advertising division has also had an
outstanding year. The company has grown its installed base of available taxi
tops by 33% during the year to more than 9,000 cabs as of the end of the third
quarter. This is up 4.5 times since the beginning of 1997. In addition, the
division has successfully replaced most of its tobacco advertisers (who made up
the majority of the ad space over the past several years), in many instances
with Internet related advertising. This year alone, TAXI has signed advertising
contracts with over 14 Internet companies including FTD.com, Forbes.com,
ComputerJobs.com and Alta Vista. As a result, the occupancy rate for the
company's taxi tops has risen from 70% to 84% by the end of the third quarter
and should approach nearly 100% by the end of the year.
<PAGE>
In our opinion, the market does not appreciate the stability and growth in the
company's core lending business and has placed almost no value on the
advertising subsidiary. TAXI's share price is currently around $19, up over 70%
since its IPO. However, the company is currently trading at only approximately
1.7x book value. We believe that the core lending business alone is worth at
least 2.5x book value given TAXI's proprietary pipeline of loans and wide
spread between interest earned (over 10%) on its portfolio and its cost of
capital (6.3%). This would place a $28 value on the lending business by itself.
Moreover, we believe that the taxi top advertising business, which should
generate $6 million in EBITDA in 1999 growing to over $10 million in 2000, is
worth, at a minimum, 15x EBITDA given the recent prices paid for other outdoor
advertising firms in acquisitions and the growth rate in both tops and ad rates
at the company. This equates to an additional $10 per share. We believe TAXI's
share price is 50% undervalued today, and the firm continues to have
outstanding growth opportunities ahead.
Manufacturing
Flextronics
Note written by Matt Ervin.
Flextronics, an electronics manufacturing service (EMS) company which you have
seen discussed in our past reports, continues to knock the cover off the ball,
posting a 45% EPS growth rate in the September quarter. The company continues
to win new business from marquee customers such as Compaq, Motorola, Ericsson
and Phillips. As Ron mentioned in his Baron Asset Fund report, we asked Michael
Marks, CEO of Flextronics, to speak at our conference last month. Michael
walked the audience through a description of the company, and chronicled the
spectacular success achieved by the company under his leadership. During the
last 5 years, sales have grown from $237 million to a current rate of $3.5
billion. Some of that growth has come from acquisitions, but internal growth
has been a not-so-paltry 40%, fueling 36% compounded growth in both earnings
and cash flow. These strong fundamentals have resulted in a 10-fold increase in
the value of the stock since we began accumulating shares in 1995. Michael also
pointed out that these strong fundamentals have lifted Flextronics from the
rank of 20th largest electronics manufacturing company to a current rank of
fourth, based on both revenues and profits. One member of the audience,
apparently not impressed, listened to Michael's presentation and asked: "How
are you going to be really successful and reach the rank of number one in your
industry?"
Fortunately, we do not need Flextronics to become the largest player in the EMS
industry to enjoy excellent investment returns. At this point, the electronics
manufacturing industry is whittling
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down to a handful of giant global players. It will be difficult for any one
player to gain control of the industry, because large electronics companies
like Ericsson or Lucent want to have more than one manufacturing partner.
Effectively, the industry is becoming a club, like the Big 6 Accounting firms
or the bulge bracket investment banks. There are probably 5 to 7 global EMS
companies, Flextronics among them, who will eventually share the majority of
the $200 billion market for electronics manufacturing.
The key for investors is that this industry grows rationally, with healthy
compounded returns on capital to drive the value of our shares higher. The
value of our shares is being pulled upward by a Flextronics financial engine
that generates 25% after-tax returns on invested capital and plows those
returns back into the company for similar rates of return. In addition, the
company has raised outside capital at attractive prices. Instead of diluting
existing shareholders, this increased investment further boosts EPS growth. The
hard part, usually, is consistently generating high returns on the incremental
capital deployed. But the bulge bracket EMS companies have the resources to
build deep relationships with their clients, increasing dependency and
de-emphasizing the importance of price. While price pressures still exist, the
Flextronics financial engine remains tuned-up and looks capable of powering 30%
EPS growth over a considerable period of time. Even if the stock's PE multiple
gradually contracts over time, we as shareholders will be very satisfied with
the resulting appreciation of our investment. That being said, it is probably
important that an executive as talented as Michael Marks should be continually
challenged. So Michael, when is Flextronics going to be the largest
manufacturer of electronics in the world?
Retail
Ethan Allen
Note written by research analyst Andrew Peck.
Founded in 1932, Ethan Allen is the only fully integrated player in the $60
billion home furnishings industry. Led by Farooq Kathwari, an industry
visionary, Ethan Allen manufactures furniture in its own production plants and
sells its products exclusively through its 309 retail stores. None of the other
large furniture makers controls its distribution channel, and none of the other
retailers manufacture their own furniture. As a result, Ethan Allen has an
unmatched ability to control all aspects of its customers' buying experience -
from the design of its merchandise, to the tone of its marketing campaign, to
the customer service at its stores.
During the past seven years, Ethan Allen has been in the midst of 'Phase I' of
its long-term growth strategy. This has entailed a series of steps to
reinvigorate its brand and to improve the quality of its customers' shopping
experience. The Ethan Allen product line has been completely revamped, with 95%
of its current models introduced during the past seven years. Nearly all of its
stores have undergone extensive interior and exterior renovations, and over
half have also been relocated to higher-traffic areas. The company's
manufacturing facilities and its distribution network have been made
significantly more efficient. And, the company has reinforced its "new look and
feel" through a $60+ million annual marketing campaign - by far the largest in
the industry. The program has already generated substantial returns for the
company - its 18% operating margins are among the best in the industry, and its
same store sales have consistently grown at double-digit rates.
<PAGE>
Phase II of the plan is now underway, and Farooq's long-term goal is to double
sales through the existing stores. In addition, management believes it can grow
the store base by nearly one-third, to 400 stores, within the next five years.
The important keys to achieving these goals include hiring at least 1,000 more
in-store 'design specialists,' each of whom could eventually generate about
$300,000-400,000 in annual sales. In addition, the company is introducing an
installment financing plan that's similar to an installment loan for a new
automobile. Loans would be around 5 years, non-recourse to the Company, and
carry sub- 10% rates. No other major furniture retailer offers this type of
plan. Lastly, the Company is introducing several exciting new product lines,
including EA Kids, and the contemporary-styled Avenue collection.
Ethan Allen also has a meaningful e-commerce opportunity. Although furniture
shopping may never fully gravitate to the Internet, Ethan Allen is the
manufacturer best-positioned to incorporate this new sales and marketing
channel into its current business. The Ethan Allen brand already has 95%
recognition in the off- line world. In addition, all of its products are sold
at the same price at every store nationwide. And, the Company controls its own
store base, allowing it to avoid the channel conflicts that all other
manufacturers face in selling via the Internet. Finally, the Company already
has an extensive distribution and customer service network in place to deliver
to and service potential on line customers. Management has spent the past year
gearing up for its e-commerce initiative, which should launch during the last
quarter of 1999.
As these various initiatives take shape, we think Ethan Allen has the potential
to double its sales, which are currently about $750mm, during the next five
years. Even then, the company would command only about a 2% market share within
the highly fragmented furniture industry. Operating margins, which have
increased nearly 700 basis points during the past four years, should also
improve, albeit at a more modest pace. In addition, the company's balance sheet
is now nearly debt-free, and it should generate at least $50 million in annual
free cash flow, a portion of which should be applied to its share repurchase
program.
Business Services
Kronos
Note written by research analyst Andrew Peck.
Kronos produces software, along with complementary hardware, that, basically,
automates a company's time clock. Instead of
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using a paper timecard to punch in each morning, workers using the Kronos
products can swipe special badges through a smart terminal, designed to
efficiently capture attendance data. The Kronos software then uses that data to
determine each worker's paycheck, vacation and benefit schedule.
Although this sounds simple, the 'rules engine' underlying the Kronos system is
actually incredibly complex - the result of thousands of hours spent detailing
the arcane rules governing pay and benefit schedules for different hourly
workers. The Company's products have many additional applications: they can
create schedules to maximize the productivity of multiple employees (i.e. the
staffing plan for a nursing home), and they can also track all operations
across a plant floor.
Kronos's annual revenues are about $250 million, giving it a dominant 65% share
in a market that's currently estimated at about $400 million. However, by some
accounts the market size could grow as high as $6 billion, if all targeted
businesses replaced their time clocks with this software. The Company also
expects to benefit as many of its 30,000 existing customers upgrade from their
existing DOS-based software to a new Windows/ NT version. Kronos is also
introducing several new Internet-enabled products that will be targeted at the
untapped white collar market. In addition, only 7% of the Company's revenues
currently come from overseas, amounting to a significant growth opportunity.
Kronos is focused on a very attractive niche market that its products have only
begun to penetrate. As all types of businesses continue to implement
efficiency-enhancing technologies, the demand for Kronos solutions should grow
substantially. Sales of its core product should continue their 20% growth, and
additional new products promise to tap related markets. Given the scalability
of the company's core financial model, and its significant free cash flow,
Kronos should be able to drive 25% growth in earnings per share during the next
several years.
Amusement and Recreation
American Classic Voyages
Note written by Mitch Rubin.
We introduced you to American Classic in our last quarterly note. As you may
recall, American Classic is the largest operator of United States flagged
cruise ships. The company operates the Delta Queen cruise line, which operates
overnight excursions on in-land US rivers, and the Independence, the only
sizable overnight cruising vessel in Hawaii, a destination where American
Classic has been granted legislative exclusivity to operate cruises and expand
its business.
At a travel industry press conference in New York recently, American Classic
unveiled the branding for its future Hawaii cruising fleet - the "United States
Lines." The United States Lines was one of the most recognized names in
passenger shipping early in the 20th Century but was withdrawn from service
with its last ship in 1969. The old/new US Lines fleet will be formally
introduced to the Hawaiian market in December of 2000 when the New Amsterdam, a
1,200 berth ship under contract to be purchased from Holland America, is put
into service as the "Patriot." The Patriot will be followed into service by two
newly built, 1,900 berth vessels currently under construction at Ingalls
Shipyard. These $500 million plus ships are scheduled for delivery beginning in
2003.
<PAGE>
At the same time, the company's core cruise business has exceeded expectations
during 1999 with solid revenue increases on all ships and strong bookings in
hand for next year. The Independence is currently 88% booked for the first half
of 2000 at a $224 per night rate as compared to 64% booking and a $213 rate at
this time last year. Similarly, the Delta Queen is 54% booked at a $289 rate as
compared with 41% and $264 at this time last year.
With the strength in its core business, the new ship line introductions in
Hawaii and the pending expansion of the company's Delta Queen franchise, we
continue to be extremely excited about American Classic's prospects. We believe
that the company's operating cash flow can conceivably grow approximately 10
fold over the next 7 years as it solidifies its position as the dominant
provider of US cruise vacations.
Other
Please see the preceding Baron Asset Fund letter for more details on several
Baron Growth Fund holdings, broader comments about our investing strategies and
a review of the 8th Annual Baron Investment Conference.
Once again, we thank you for investing in Baron Growth Fund. Many of you have
been investors with us for several years and have supported the transformation
of the Fund during 1999 to focus on small cap growth stocks and remove income
as a secondary objective. We believe this transformation has been extremely
positive for our Fund and thank you for your continued support. Many of you are
new investors that are reading our shareholder letters for the first time. We
welcome you and hope you find these letters both entertaining and informative.
Thank you for investing in Baron Funds.
We appreciate your decision to entrust us with a portion of your assets as
fellow shareholders in Baron Growth Fund. We have invested a significant
portion of our own assets along side you in the Fund and will continue to work
hard to maximize the Fund's performance and justify your confidence.
Sincerely,
/s/ Ronald Baron /s/ Mitch Rubin /s/ Matt Ervin
- ------------------------- -------------------- ----------------------
Ronald Baron Mitch Rubin Matt Ervin
Chairman Vice President Vice President
November 22, 1999
13
<PAGE>
[REGISTERED LOGO]
---------------------------------------------------
BARON SMALL
3 CAP FUND
PERFORMANCE AND
PHILOSOPHY........................................................14
PORTFOLIO
COMPOSITION AND
HOLDINGS..........................................................15
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
<PAGE>
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
ANNUAL REPORT SEPTEMBER 30, 1999
Dear Baron Small Cap
Fund Shareholder:
- --------------------------------------------------------------------------------
PERFORMANCE AND
PHILOSOPHY
Baron Small Cap Fund just finished its second year and I would like to take
this opportunity to review this year's performance and our investment
philosophy, then describe our portfolio and highlight some important
investments.
Baron Small Cap Fund's performance in the fiscal year ended September 1999 was
strong as markets recovered from depressed levels last fall. The Fund gained
55.3% during the year and significantly outperformed the Russell 2000 index,
which gained 19.1% and the S&P
500, which gained 27.8%. In its first two years of operation, the Fund was up
33.7% and has significantly outperformed the Russell 2000, which lost 3.6% in
the two years ended September 30, 1999.
The Fund's performance was strong both on an absolute basis, and relative to
its small cap peers throughout the fiscal year. The Fund performed exceedingly
well in the first three quarters of the fiscal year and managed a small gain in
the September quarter in which both the Russell 2000 and S&P 500 fell 6.3%. The
Fund realized its greatest gains in the first fiscal quarter, +22.4%, a strong
quarter for U.S. stocks in general. The Fund realized its greatest relative
gains in the March quarter, up 12.8%, while the Russell 2000 fell 5.4%.
- ---------------------- ---------------------- ---------------------
PERFORMANCE PERFORMANCE PERFORMANCE
ONE YEAR ENDED SINCE INCEPTION SINCE INCEPTION
SEPTEMBER 30, 1999 OCTOBER 1, 1997 THROUGH OCTOBER 1, 1997 THROUGH
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
CUMULATIVE ANNUALIZED
BARON SC FUND 55.3% BARON SC FUND 33.7% BARON SC FUND 15.6%
S&P 500* 27.8% S&P 500* 39.3% S&P 500* 18.0%
RUSSELL 2000* 19.1% RUSSELL 2000* -3.6% RUSSELL 2000* -1.8%
- ----------------------- ----------------------- -----------------------
* 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>
B A R O N S M A L L C A P F U N D
Quarterly Table
Fiscal Year 1998 Baron Small Cap Fund Russell 2000
Qtr 4 1998 ........... +22.4% +16.3%
Qtr 1 1999 ........... +12.8% -5.4%
Qtr 2 1999 ........... +12.4% +15.6%
Qtr 3 1999 ........... +0.1% -6.3%
Fiscal Year .......... +55.3% +19.1%
The Fund is heavily weighted in certain industry groups and in its top
holdings, although it maintains a diversified portfolio. This helped our
performance in 1999 as our biggest investments and areas of strongest
concentration performed the best.
Our Communications and Media holdings were very strong in 1999. These are
dynamic, changing industries and we have invested in some of the emerging
leaders. Our most successful investments have been UnitedGlobalcom, Rural
Cellular, Century Communications and CoreComm. The Fund also performed well in
its investments in Business Services, Retail and Leisure, the other areas of
concentration. These groups performed less well than the overall market, but
our stock picking proved to be successful. Our best performing investments in
these sectors were Kenneth Cole Productions, Four Seasons Hotels and William
Sonoma. In this past year where the wind was at our back, we had few losers,
the worst being United Rentals and Province Healthcare.
The investment philosophy is the same as we laid out in last year's annual
report and mirrors the foundations of the other Baron Funds. We invest in small
companies that we think have big opportunities. We invest only in businesses
with strong executives who have proved themselves and whom we trust and
respect. We only invest when we believe we can make significant returns, at
least a double in the next three years. Returns are viewed in absolute, not
relative terms, and we assume a flat market outlook when we invest. We expect
to hold sizeable investments for long periods of time, so we need to thoroughly
understand the company, the people, the industry and the opportunity we are
investing in. To accomplish this we spend a lot of time with our investments,
both initiating new positions and monitoring existing ones.
We invest primarily in "growth stocks", unique companies with significant
competitive advantages which can grow for many years. Competitive advantage
comes in many forms. Sometimes it's a long-established brand name that is now
being further developed (Four Seasons, Williams Sonoma, Kenneth Cole).
Sometimes it's an asset base being leveraged (UnitedGlobalcom, Premier Parks.)
Sometimes it's the skill set of the management of the company being applied to
new opportunities (CoreComm, Heidrick & Struggles). Sometimes it's an evolving
industry, at the right place and at the right moment in time (radio/outdoor,
cable television).
What we have found is that the company's management is an exceedingly important
factor in the equation. The best executives have not just created the present
opportunities but also can take advantage of them for the benefit of the
shareholders. They also are working on tomorrow's opportunity before the market
or their competitors perceive it.
<PAGE>
To complement our growth stock investing, we also invest in "special
situations" and "fallen angels". Special situations are spin-offs,
re-structurings, split-ups or merger securities - new securities which are
formed from other companies that are often overlooked or misunderstood. These
new companies and executives often flourish outside the umbrella of their
former parent, yet initially they trade at depressed levels because they are
unknown. "Fallen angels" are former Wall Street darlings who fall out of favor
either because they disappoint on near-term expectations or because a
competitor or related company falls on hard times. This is another area to find
cheap stocks, although the key is to research the situation well to make sure
the current shortfalls are not endemic of larger problems. Also, we are most
interested in uncovering good investments, stocks we can own for awhile, not
just trading opportunities, so we must be thorough in this effort.
- --------------------------------------------------------------------------------
Portfolio Composition and Holdings
As of the end of September, we have about $800 million under management. The
portfolio has 46 investments. The top ten positions make up 41% of the
portfolio, the top 15 equal 53%. As we have stated before, we strongly believe
that the portfolio should be relatively concentrated to best benefit from our
best ideas. Five industry groups: communications, media, business services,
leisure and retail, make up over 75% of our investments. These are dynamic
industries and those in which we have our most expertise.
Media and Entertainment
We have two very important themes in the media and communications sector.
First, we own cable stocks both in the U.S. and abroad, as these companies are
evolving from distributors of a limited menu of programming to the "triple
play" of delivering hundreds of channels of digitally encrypted entertainment
programs, high speed Internet connection, and competitive local telephony. The
Fund's largest position is UnitedGlobalcom, whose primary assets are cable
systems in Europe. In the last year, UnitedGlobalcom has greatly expanded its
program offerings and successfully introduced Internet and telephony services
over its existing systems. The company has doubled its footprint in Europe
through a series of eight acquisitions, launched an Internet portal called
Chello (which they also offer to non-affiliated cable systems), started a wire
line and wireless competitive telephone division and continued to build its
content development effort.
The parent company had major achievements also, in floating its Australian
operation, adding systems in Latin America as a
15
<PAGE>
B A R O N S M A L L C A P F U N D
potential prelude to creating a third major leg to its stool, and forming a
joint venture with Liberty and Microsoft to pool interests in present assets
and jointly seek programming-oriented investments. We also own Adelphia
Communications, the fourth largest domestic cable company, which we became
shareholders of when they acquired Century Communications for stock earlier in
the year.
The second area of interest is out-of-home media, which includes two niche
radio stocks, a programming supplier to the radio industry and a billboard
company. As we detailed in our June quarterly, radio and outdoor are terrific
businesses. We are in the growth phase of the industry's consolidation, and
radio and outdoor are big beneficiaries of the advertising spending of new
Internet firms and existing brick and mortar companies trying to establish
brand awareness. Our holdings are Radio One (urban radio station operator),
Entercom (a company that specializes in improving under-performing radio
stations), Westwood One (which acquired our Metro Networks, a provider of
traffic, news and long-form programs to the radio industry generally), and
Lamar Advertising (the lone publicly traded billboard company). Two of our
prior billboard holdings, Outdoor Systems and Universal Outdoor, were acquired
by larger media concerns.
Communications
The Fund is involved in many of the exciting sub-sectors in the communications
industry, the two biggest being cellular telephony and competitive telecoms.
When we started the Fund two years ago, we purchased stock in three rural
cellular operators on the thesis that cell phone penetrations would be strong
even in secondary markets, that the competitive environment would be more
limited because less licenses were built out and that the stocks were
inexpensive, trading at well below 10x cash flow with 25% internal growth
rates. These stocks, Rural Cellular, Centennial Cellular and Comnet Cellular,
have been big winners because the cash flow growth rates have proven to be even
stronger than we expected, primarily because roaming revenue has been way above
expectations due to the introduction of one rate plans by the larger operators.
Also, there has been substantial consolidation in the industry at 12-15x cash
flow, validating our valuation thesis. In the case of Rural Cellular, the
company has, twice in the last year, doubled its footprint in leveraged
transactions which has enhanced our return.
In competitive telephone, we have multiple ideas: the two most significant are
Commonwealth Telephone and CoreComm. We bought Commonwealth as the company was
being split off from a communications conglomerate controlled by Level 3
Communications. The company had very attractive monopoly phone operations, and
had started to invest its cash flow to build a competitive telephone company in
neighboring territories. The initial returns in this investment have been very
strong, therefore more capital is being deployed to build this valuable
enterprise.
<PAGE>
In 2000, the company will look to exploit a new opportunity, offering DSL
Internet service in both their monopoly and competitive territories, an effort
with great promise.
Interestingly, we bought into CoreComm also as it was being spun out from
another company because of our prior success investing with the company's
management team of George Blumenthal and Barclay Knapp. CoreComm has set itself
up as a competitive residential telco company, with the goal of offering
Internet and dial tone service in the top forty telecom markets in the States.
If successful in getting a 5% share of the applicable telco revenues, CoreComm
could generate $1billion of cash flow in time, on an aggregate investment of
about $1billion, which would be an incredible return and lead to sensational
equity returns for the shareholders. The key to success will be the timely and
effective execution of the business plan which we are encouraged about because
of the track record of these managers.
Business Services
Our biggest investments in the business service sector are Iron Mountain,
Heidrick and Struggles, and Penton Media. Iron Mountain is the leading company
in document storage and records management. The company is benefiting from the
general trend of business to outsource ancillary functions. The company's
present business is very stable and grows internally about 15% in revenues and
cash flow from existing accounts and new customers. The company has enhanced
its internal growth through acquisitions of small competitors, entering into
the new business lines of medical records management and data tape storage, and
its nascent effort to replicate its platform in Europe. Recently, Iron Mountain
announced it would acquire its leading competitor, Pierce Leahy (which was a
holding of ours in 1997), which secures the company's domination in this space,
should make future acquisitions less costly and should create additional
pricing power and incremental profitability for the new enterprise.
Heidrick and Struggles is the largest executive search firm in the world,
specializing in retained searches for the highest level of executives (CEO,
CFO, CIO, Director). This industry has demonstrated strong, non-cyclical growth
for the last four decades and Heidrick has compounded revenue growth of over
25% the last five years. Because of Heidrick's leadership in technology
executive searches, its business is accelerating as many new technology firms
are formed, and as traditional companies look to add managers to launch
e-commerce efforts. We feel the stock is inexpensive at 15x 2000 EPS, given the
pace and quality of its present earnings growth. Heidrick has also formed a
subsidiary, Leaders On Line, to do mid-level searches facilitated by the
Internet. Due to their dominant position in technology and Internet searches,
Heidrick is getting warrants as part of its fees to do placements into private
technology firms. This warrant portfolio is another source of potential
significant value to its shareholders.
16
<PAGE>
B A R O N S M A L L C A P F U N D
Penton Media is a leading business-to-business media firm, meaning they publish
trade journals and produce trade shows for certain industry verticals. Penton's
publications division was soft earlier this year which enabled us to acquire a
significant position at a favorable price (at less than 8x projected cash
flow). Its trade show division is growing rapidly, especially the shows that
focus on the Internet and the health food businesses, and the publications
business has stabilized. We are excited about the company's efforts to create
vertical Internet portals in sectors where they already have proven mind share
and feel that this is a valuable, unrecognized opportunity.
Leisure
Our two big positions in this group are Premier Parks and SFX Entertainment
which, as we have detailed in previous quarterlies, are operators of regional
amusement parks and music amphitheaters, respectively. Both companies turned in
tremendous operating performances in their now completed seasons, both with
internal cash flow growth approaching 40%. Neither were particularly strong
stocks this year, as the market has valued the increased cash flow generated at
lower multiples either because interest rates have ticked up or because of some
skepticism of future growth rates. We are highly confident both companies can
maintain rapid internal growth and therefore feel that the present trading
multiples are too low. We also are excited about significant business ventures
in front of each, specifically, consolidation and growth opportunities for
Premier Parks in Europe and Latin America, and Internet ticketing and
sponsorship opportunities for SFX.
Retail
Our biggest ideas in this sector are Kenneth Cole Productions and Williams
Sonoma. Kenneth Cole was once an aspiring avante garde men's shoe company which
has evolved into a super life-style brand with retail and licensing businesses
that are now more important than their wholesale roots. With several major
category expansions still to come, especially women's apparel, and bigger
stores in the offing, we feel growth will accelerate and the stock will
continue to appreciate. Williams Sonoma is the highly successful retailer and
catalog company, operating primarily under the brands Pottery Barn and Williams
Sonoma. When a key executive left the firm earlier this year for personal
reasons and the stock sank, we increased our position believing strongly that
the successful rollout of the brands would continue. We have been rewarded
handsomely as the stock has more than doubled. In addition to the present
course, the company has recently introduced two new growth initiatives which
have us very excited. A Pottery Barn Kids catalog has been very well received,
so a retail effort will be started in 2000 to complement it. And a lower market
furniture and accessory retail concept called Elm Street will be rolled out
starting in 2001, modeled after the Gap's successful Old Navy chain.
Thank you for investing in Baron Funds.
We would like to thank you, our fellow shareholders in Baron Small Cap Fund. It
was a more gratifying year than last year and we appreciate your support. In
addition to strong results, we are proud that we were able to make money in a
tax efficient manner, which is an important goal. We are dedicated to
continuing to stay close to our present investments to appreciate their
business opportunities and our rewards as shareholders, and to work diligently
to uncover additional winners. It's fun.
I'd personally also like to thank Stefan Mykytiuk and the other Baron analysts
for helping in the management of the Fund.
Sincerely,
/s/ Cliff Greenberg
- -----------------------------
Cliff Greenberg
Vice President
November 22, 1999
17
<PAGE>
B A R O N F U N D S
Table I
- --------------------------------------------------------------------------------
Portfolio Market Capitalization
- --------------------------------------------------------------------------------
The Funds invest primarily in small and medium sized companies. Table I ranks
the Funds' investments by market capitalization and displays the percentage of
the Funds' portfolios invested in each market capitalization category. At times
the Funds 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.
Baron Asset Fund
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- --------------------------------------------- --------------- ----------
Large Capitalization
- -------------------------------------------------------------------------------
Charles Schwab Corp. ........................ $27,550 13.9%
Univision Communications, Inc. Class A 8,258 1.4
NTL, Inc. ................................... 7,044 5.6
Outdoor Systems, Inc. ....................... 6,608 0.2
----
21.1%
Medium Capitalization
- -------------------------------------------------------------------------------
Hispanic Broadcasting Corp. ................. $ 3,756 3.6%
Century Communications Corp. ................ 3,459 1.0
RCN Corp. ................................... 3,110 0.4
American Tower Corp. Class A ................ 3,044 1.7
UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.) ..... 2,959 1.1
Citizens Utilities Co. ...................... 2,940 1.6
Flextronics Intl., Ltd. ..................... 2,897 2.8
Mirage Resorts, Inc. ........................ 2,798 2.1
Williams-Sonoma, Inc. ....................... 2,711 0.5
Westwood One, Inc. (Formerly Metro
Networks, Inc.) .......................... 2,537 1.3
Dollar Tree Stores, Inc. .................... 2,474 2.6
Premier Parks, Inc. ......................... 2,266 1.7
Spieker Properties, Inc. .................... 2,203 1.4
Robert Half Intl., Inc. ..................... 2,194 2.9
Kimco Realty Corp. .......................... 2,171 0.5
Azurix Corp ................................. 2,013 0.5
Manor Care, Inc. (Formerly HCR Manor
Care, Inc.) .............................. 1,841 3.0
Polo Ralph Lauren Corp. Class A ............. 1,787 3.2
Cox Radio, Inc. Class A ..................... 1,704 0.8
Apollo Group, Inc. .......................... 1,632 2.0
Post Properties, Inc. ....................... 1,517 0.1
Sotheby's Holdings, Inc. Class A ............ 1,517 9.1
----
43.9%
Small Capitalization
- -------------------------------------------------------------------------------
DeVry, Inc. ................................. $ 1,388 1.8%
Ethan Allen Interiors, Inc. ................. 1,297 0.9
Prison Realty Trust, Inc. ................... 1,259 0.1
Four Seasons Hotels, Inc. ................... 1,253 0.5
FelCor Lodging Trust, Inc. .................. 1,191 0.1
Industrie Natuzzi SPA ADR ................... 1,128 1.9
Aurora Foods, Inc. .......................... 1,072 0.4
<PAGE>
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- ------------------------------------------- --------------- ---------
Small Capitalization (Continued)
- ----------------------------------------------------------------------------
Citadel Communications Corp. .............. $1,068 0.4%
Iron Mountain, Inc. ....................... 1,050 0.4
ChoicePoint, Inc. ......................... 993 1.9
Commonwealth Telephone Ent., Inc. ......... 972 0.2
Choice Hotels Intl., Inc. ................. 940 3.9
OM Group, Inc. ............................ 913 1.5
Sun Intl. Hotels, Ltd. .................... 802 1.3
Vail Resorts, Inc. Class A ................ 801 3.9
CoreComm, Ltd. ............................ 798 1.2
Young Broadcasting, Inc. Class A .......... 706 0.8
American Mobile Satellite Corp. ........... 688 1.0
Cross Timbers Oil Co. ..................... 658 1.0
Seacor Smit, Inc. ......................... 618 1.1
Taubman Centers, Inc. ..................... 613 0.1
CD Radio, Inc. ............................ 595 0.4
Sun Communities, Inc. ..................... 573 0.2
Southern Union Co. ........................ 564 0.7
Kenneth Cole Productions, Inc. Class A . 490 0.1
ITT Educational Services, Inc. ............ 486 0.7
Libbey, Inc. .............................. 481 1.5
Education Management Corp. ................ 365 0.6
Alexander's, Inc. ......................... 362 0.4
Learning Tree Intl., Inc. ................. 359 0.6
AMF Bowling, Inc. ......................... 345 0.7
Stein Mart, Inc. .......................... 319 0.2
Saga Communications, Inc. Class A ......... 302 1.2
Smart and Final, Inc. ..................... 291 0.6
Budget Group, Inc. Class A ................ 261 0.3
DVI, Inc. ................................. 231 0.5
Avatar Holdings, Inc. ..................... 174 0.2
Bristol Hotels & Resorts, Inc. ............ 123 0.2
Sunburst Hospitality Corp. ................ 118 0.4
Counsel Corp. ............................. 90 0.1
----
34.0%
18
<PAGE>
B A R O N F U N D S
Baron Growth Fund
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- --------------------------------------------- --------------- ---------
Large Capitalization
- ------------------------------------------------------------------------------
Charles Schwab Corp. ........................ $27,550 6.1%
NTL, Inc. ................................... 7,044 6.4
----
12.5%
Medium Capitalization
- ------------------------------------------------------------------------------
Hispanic Broadcasting Corp. ................. $ 3,756 1.7%
UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.) ..... 2,959 0.3
Flextronics Intl., Ltd. ..................... 2,897 2.7
Westwood One, Inc. (Formerly Metro
Networks, Inc.) .......................... 2,537 1.5
Dollar Tree Stores, Inc. .................... 2,474 2.2
Robert Half Intl., Inc. ..................... 2,194 1.2
Time Warner Telecom, Inc. Class A ........... 2,180 0.1
Kimco Realty Corp. .......................... 2,171 1.2
Manor Care, Inc. (Formerly HCR Manor
Care, Inc.) .............................. 1,841 0.6
Post Properties, Inc. ....................... 1,517 1.0
Sotheby's Holdings, Inc. Class A ............ 1,517 2.1
----
14.6%
Small Capitalization
- ------------------------------------------------------------------------------
DeVry, Inc. ................................. $ 1,388 1.2%
Entercom Communications Corp. ............... 1,338 0.4
Insight Communications Co., Inc.
Class A .................................. 1,308 0.3
Ethan Allen Interiors, Inc. ................. 1,297 2.9
Wink Communications, Inc. ................... 1,267 0.6
Prison Realty Trust, Inc. ................... 1,259 0.3
Four Seasons Hotels, Inc. ................... 1,253 0.3
Industrie Natuzzi SPA ADR ................... 1,128 2.7
Aurora Foods, Inc. .......................... 1,072 2.1
Citadel Communications Corp. ................ 1,068 1.3
The Yankee Candle Co., Inc. ................. 1,053 1.2
Intrawest Corp. ............................. 997 0.2
ChoicePoint, Inc. ........................... 993 2.7
Choice Hotels Intl., Inc. ................... 940 8.2
OM Group, Inc. .............................. 913 2.0
Extended Stay America, Inc. ................. 858 1.1
Sun Intl. Hotels, Ltd. ...................... 802 3.9
Vail Resorts, Inc. Class A .................. 801 1.2
CoreComm, Ltd. .............................. 798 2.6
Storage USA, Inc. ........................... 770 0.9
Radio One, Inc. Class A ..................... 751 1.9
American Classic Voyages Co. ................ 688 0.6
Electric Lightwave, Inc. Class A ............ 661 1.3
Cross Timbers Oil Co. ....................... 658 0.6
Seacor Smit, Inc. ........................... 618 0.9
Taubman Centers, Inc. ....................... 613 0.2
CD Radio, Inc. .............................. 595 1.2
Sun Communities, Inc. ....................... 573 1.4
<PAGE>
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- ------------------------------------------- --------------- ---------
Small Capitalization (Continued)
- ----------------------------------------------------------------------------
Southern Union Co. ........................ $564 2.3%
Corporate Executive Board Co. ............. 537 0.2
ITT Educational Services, Inc. ............ 486 0.9
Libbey, Inc. .............................. 481 0.8
Kronos, Inc. .............................. 463 0.5
Gabelli Asset Management, Inc. Class A . 461 1.1
American Mobile Satellite Corp. ........... 423 1.6
Rural Cellular Corp. Class A .............. 415 2.6
Steiner Leisure, Ltd. ..................... 415 0.9
Education Management Corp. ................ 365 2.3
Alexander's, Inc. ......................... 362 0.8
Saga Communications, Inc. Class A ......... 302 1.8
Smart and Final, Inc. ..................... 291 1.6
Medallion Financial Corp. ................. 284 1.8
DVI, Inc. ................................. 231 0.9
ResortQuest Intl., Inc. ................... 169 0.3
Bristol Hotels & Resorts, Inc. ............ 123 0.3
The Sports Club Co. ....................... 89 0.5
----
65.4%
Baron Small Cap Fund
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- --------------------------------------------- --------------- ---------
Medium Capitalization
- ---------------------------------------------------------------------------
Century Communications Corp. ................ $3,459 2.3%
Lamar Advertising Co. Class A ............... 3,030 2.1
UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.) ..... 2,959 10.0
Williams-Sonoma, Inc. ....................... 2,711 2.2
Westwood One, Inc. (Formerly Metro
Networks, Inc.) .......................... 2,537 3.1
Premier Parks, Inc. ......................... 2,266 4.0
SFX Entertainment, Inc. Class A ............. 1,716 3.1
United Rentals, Inc. ........................ 1,567 1.7
----
28.5%
Small Capitalization
- ------------------------------------------------------------------------------
Centennial Cellular Corp. ................... $1,418 0.5%
Hyperion Telecommunications, Inc.
Class A .................................. 1,357 0.5
Entercom Communications Corp. ............... 1,338 0.7
Insight Communications Co., Inc.
Class A .................................. 1,308 0.2
Four Seasons Hotels, Inc. ................... 1,253 2.7
High Speed Access Corp. ..................... 1,242 0.6
Central Parking Corp. ....................... 1,074 3.0
Pinnacle Holdings, Inc. ..................... 1,063 0.4
The Yankee Candle Co., Inc. ................. 1,053 1.6
19
<PAGE>
B A R O N F U N D S
Baron Small Cap Fund
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- --------------------------------------------- --------------- ---------
Small Capitalization (Continued)
- ---------------------------------------------------------------------------
Iron Mountain, Inc. ......................... $1,050 4.0%
Intrawest Corp. ............................. 997 0.6
ChoicePoint, Inc. ........................... 993 2.2
Commonwealth Telephone Ent., Inc. ........... 972 2.8
Sun Intl. Hotels, Ltd. ...................... 802 1.3
CoreComm, Ltd. .............................. 798 2.4
Radio One, Inc. Class A ..................... 751 3.0
Investment Technology Group, Inc. ........... 735 0.6
Commnet Cellular, Inc. ...................... 716 1.5
Electric Lightwave, Inc. Class A ............ 661 0.9
Corporate Executive Board Co. ............... 537 2.3
El Paso Electric Co. ........................ 535 1.3
Penton Media, Inc. .......................... 509 0.9
Kenneth Cole Productions, Inc. Class A . 490 3.4
Loews Cineplex Entertainment Corp. .......... 462 1.1
Gabelli Asset Management, Inc. Class A . 461 0.7
Rural Cellular Corp. Class A ................ 415 3.5
SBA Communications Corp. .................... 312 0.6
Loislaw.Com, Inc. ........................... 304 0.2
Heidrick & Struggles Int'l., Inc. ........... 299 1.9
Casella Waste Systems, Inc. Class A ......... 267 0.9
Career Education Corp. ...................... 227 3.6
IT Group, Inc. .............................. 218 1.8
Caribiner Intl., Inc. ....................... 206 1.2
Province Healthcare Co. ..................... 181 1.2
ResortQuest Intl., Inc. ..................... 169 1.0
Todd-AO Corp. Class A ....................... 145 1.3
KTI, Inc. ................................... 109 0.3
Morton's Restaurant Group, Inc. ............. 101 0.9
Strategic Distribution, Inc. ................ 97 0.2
Equity Marketing, Inc. ...................... 92 0.6
The Sports Club Co. ......................... 89 0.5
AVTEAM, Inc. Class A ........................ 79 0.7
----
59.6%
Table II
- --------------------------------------------------------------------------------
Portfolio Risk Characteristics
- --------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external risk
factors that might impact the companies in which the Funds invest. Table II
displays some of the risk factors that are currently monitored and the
percentage of each portfolio considered exposed to these factors. The Funds use
this tool to avoid concentration of risk within the portfolios.
Baron Baron
Baron Growth Small
Asset & Income Cap
Fund Fund Fund
----------- ----------- ----------
% of % of % of
Portfolio Portfolio Portfolio
----------- ----------- ----------
Leverage (Debt > 40% of
Market Cap) .................. 23.6% 32.7% 45.0%
Foreign Sales Dependent
(Sales > 15%) ................ 26.4 18.5 17.7
Oil Price Sensitivity ........... 18.1 22.4 5.0
Volatility (Beta > 1.2) ......... 35.0 19.1 14.6
Over-the-Counter Securities 24.8 33.0 44.5
Unseasoned Securities
(Publicly owned
for <3 years) .............. 19.1 29.2 40.5
(Publicly owned
for <1 year) ............... 0.5 6.2 13.6
Turnarounds ..................... 1.4 1.6 4.1
Development Companies ........... 4.5 3.6 6.2
20
<PAGE>
B A R O N F U N D S
Table III
- --------------------------------------------------------------------------------
Historical Information (Unaudited)
- --------------------------------------------------------------------------------
Table III displays on a quarterly basis the Funds' closing net assets and net
asset value per share, dividend distributions and the value of $10,000 invested
in a Fund at the time of its inception.
- --------------------------------------------------------------------------------
Baron Asset Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- ---------- ----------------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C>
06/12/87 $ 108,728 $ 10.00 $10,000
- -------------------------------------------------------------------------------------
06/30/87 1,437,521 10.71 10,710
- -------------------------------------------------------------------------------------
09/30/87 3,905,221 11.95 11,950
- -------------------------------------------------------------------------------------
12/31/87 4,406,972 10.10 $ 0.197 10,298
- -------------------------------------------------------------------------------------
03/31/88 6,939,435 11.56 11,786
- -------------------------------------------------------------------------------------
06/30/88 9,801,677 12.68 12,928
- -------------------------------------------------------------------------------------
09/30/88 11,734,509 12.98 13,234
- -------------------------------------------------------------------------------------
12/31/88 15,112,031 12.87 0.701 13,843
- -------------------------------------------------------------------------------------
03/31/89 22,269,578 14.75 15,864
- -------------------------------------------------------------------------------------
06/30/89 31,397,929 16.06 17,273
- -------------------------------------------------------------------------------------
09/30/89 47,658,616 17.22 18,521
- -------------------------------------------------------------------------------------
12/31/89 49,007,084 14.66 1.409 17,299
- -------------------------------------------------------------------------------------
03/31/90 50,837,946 13.87 16,367
- -------------------------------------------------------------------------------------
06/30/90 54,413,786 14.32 16,898
- -------------------------------------------------------------------------------------
09/30/90 40,002,612 10.88 12,838
- -------------------------------------------------------------------------------------
12/31/90 42,376,625 11.75 0.198 14,100
- -------------------------------------------------------------------------------------
03/31/91 47,104,889 13.88 16,656
- -------------------------------------------------------------------------------------
06/30/91 45,600,730 13.81 16,572
- -------------------------------------------------------------------------------------
09/30/91 47,409,180 14.80 17,760
- -------------------------------------------------------------------------------------
12/31/91 46,305,042 15.71 0.035 18,895
- -------------------------------------------------------------------------------------
03/31/92 48,011,634 16.72 20,109
- -------------------------------------------------------------------------------------
06/30/92 42,289,409 15.28 18,377
- -------------------------------------------------------------------------------------
09/30/92 43,816,305 16.20 19,484
- -------------------------------------------------------------------------------------
12/31/92 47,955,530 17.73 0.162 21,522
- -------------------------------------------------------------------------------------
03/31/93 50,015,244 18.82 22,845
- -------------------------------------------------------------------------------------
06/30/93 52,432,090 19.70 23,912
- -------------------------------------------------------------------------------------
09/30/93 59,916,570 21.91 26,595
- -------------------------------------------------------------------------------------
12/31/93 64,069,114 21.11 0.774 26,576
- -------------------------------------------------------------------------------------
03/31/94 63,099,109 20.69 26,047
- -------------------------------------------------------------------------------------
06/30/94 68,880,300 20.40 25,682
- -------------------------------------------------------------------------------------
09/30/94 80,258,542 22.82 28,728
- -------------------------------------------------------------------------------------
12/31/94 87,058,228 22.01 0.656 28,547
- -------------------------------------------------------------------------------------
03/31/95 160,603,528 24.29 31,505
- -------------------------------------------------------------------------------------
06/30/95 202,259,502 25.79 33,450
- -------------------------------------------------------------------------------------
09/30/95 289,973,331 29.30 38,003
- -------------------------------------------------------------------------------------
12/31/95 353,095,409 29.74 0.034 38,618
- -------------------------------------------------------------------------------------
03/31/96 638,297,904 34.14 44,332
- -------------------------------------------------------------------------------------
06/30/96 1,124,647,802 36.65 47,591
- -------------------------------------------------------------------------------------
09/30/96 1,166,057,654 35.50 46,098
- -------------------------------------------------------------------------------------
12/31/96 1,326,321,785 36.23 0.039 47,097
- -------------------------------------------------------------------------------------
03/31/97 1,663,347,667 34.98 45,472
- -------------------------------------------------------------------------------------
06/30/97 2,306,228,855 41.74 54,260
- -------------------------------------------------------------------------------------
09/30/97 3,224,498,394 47.43 61,656
- -------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------
</TABLE>
<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>
- -------------------------------------------------------------------------------------
12/31/98 $5,672,309,694 $50.54 $0.041 $65,752
- -------------------------------------------------------------------------------------
03/31/99 6,087,986,855 54.17 70,474
- -------------------------------------------------------------------------------------
06/30/99 6,991,160,511 60.63 78,879
- -------------------------------------------------------------------------------------
09/30/99 5,863,125,015 51.57 67,092
- -------------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended September 30, 1999
One year 29.2%
- ---------------------------------------
Two years 4.3%
- ---------------------------------------
Three years 13.3%
- ---------------------------------------
Four years 15.3%
- ---------------------------------------
Five years 18.5%
- ---------------------------------------
Ten years 13.7%
- ---------------------------------------
Since inception June 12, 1987 16.7%
- ---------------------------------------
21
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------
06/30/99 396,879,495 31.42 32,293
- ----------------------------------------------------------------------------------------
09/30/99 439,424,784 29.06 29,868
- ----------------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON GROWTH FUND'S
AVERAGE ANNUAL RETURN
Period ended September 30, 1999
One year 43.2%
- -----------------------------------------
Two years 8.3%
- -----------------------------------------
Three years 17.2%
- -----------------------------------------
Four years 19.2%
- -----------------------------------------
Since inception January 3, 1995 25.9%
- -----------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------
06/30/99 644,583,528 13.36 13,360
- ----------------------------------------------------------------------------------------
09/30/99 715,683,132 13.37 13,370
- ----------------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON SMALL CAP FUND'S
AVERAGE ANNUAL RETURN
Period ended September 30, 1999
One year 55.3%
- ----------------------------------------
Since inception October 1, 1997 15.6%
- ----------------------------------------
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.
22
<PAGE>
B A R O N A S S E T F U N D
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1999
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks (99.36%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (9.73%)
10,210,000 AMF Bowling, Inc.*# $ 42,116,250
8,550,000 Mirage Resorts, Inc.* 120,234,375
3,450,000 Premier Parks, Inc.* 100,050,000
3,315,000 Sun Intl. Hotels, Ltd.*# 79,145,625
6,066,000 Vail Resorts, Inc. Class A*# 140,655,375
4,000,000 Vail Resorts, Inc. Class A*# @ 88,112,400
-------------
570,314,025
Business Services (5.30%)
1,640,000 ChoicePoint, Inc.*# 110,495,000
1,749,532 Correctional Management Services
Corp.*@ 8,000,085
650,000 Iron Mountain, Inc.* 22,018,750
7,100,000 Robert Half Intl., Inc.*# 170,400,000
-------------
310,913,835
Chemical (1.55%)
2,367,500 OM Group, Inc. # 90,852,813
Communications (11.04%)
3,500,000 American Mobile Satellite Corp.*# 61,250,000
5,000,000 American Tower Corp. Class A* 97,812,500
1,230,000 Century Communications Corp.* 56,118,750
254,200 Commonwealth Telephone Ent., Inc.* 11,184,800
2,205,000 CoreComm, Ltd.*# 72,627,155
3,391,636 NTL, Inc.* 325,914,852
549,000 RCN Corp.* 22,509,000
-------------
647,417,057
Education (5.66%)
5,605,000 Apollo Group, Inc.* 118,405,625
52,632 Apollo International, Inc. S-A CV
Pfd.*@ 1,000,008
804,600 Caliber Learning Network, Inc.*# 1,659,488
5,150,000 DeVry, Inc.*# 103,000,000
2,900,000 Education Management Corp.*# 35,887,500
2,000,000 ITT Educational Services, Inc.*# 39,000,000
2,000,000 Learning Tree Intl., Inc.*# 33,125,000
-------------
332,077,621
Energy (2.14%)
4,375,000 Cross Timbers Oil Co.# 59,062,500
1,300,000 Seacor Smit, Inc.*# 66,625,000
-------------
125,687,500
Financial (14.39%)
24,225,000 Charles Schwab Corp. 816,079,687
1,680,000 DVI, Inc.*# 27,510,000
-------------
843,589,687
Food & Agriculture (0.40%)
1,446,700 Aurora Foods, Inc.* 23,147,200
Health Services (3.24%)
2,557 Chesapeake Healthcare Corp.* @ 4,000,196
2,170,000 Counsel Corp.*# 7,323,750
10,400,000 Manor Care, Inc. (Formerly HCR
Manor Care, Inc.)*# 178,750,000
-------------
190,073,946
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Hotels and Lodging (5.03%)
2,100,750 Bristol Hotels & Resorts, Inc.*# $ 14,442,656
13,225,300 Choice Hotels Intl., Inc.*# 226,483,263
800,000 Four Seasons Hotels, Inc. 29,250,000
3,975,036 Sunburst Hospitality Corp.*# 24,595,536
-------------
294,771,455
Manufacturing (2.78%)
2,800,000 Flextronics Intl., Ltd.*# 162,925,000
Media and Entertainment (11.05%)
825,000 CD Radio, Inc.* 21,037,500
650,000 Citadel Communications Corp.* 22,181,250
830,000 Cox Radio, Inc. Class A* 49,385,000
2,800,000 Hispanic Broadcasting Corp.*# 213,150,000
250,000 Outdoor Systems, Inc.* 8,937,500
2,937,002 Saga Communications, Inc. Class A*# 67,551,046
875,000 UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.)* 62,671,875
975,000 Univision Communications, Inc.
Class A* 79,340,625
1,700,000 Westwood One, Inc. (Formerly Metro
Networks, Inc.)* 76,712,500
900,000 Young Broadcasting, Inc. Class A* 47,137,500
-------------
648,104,796
Real Estate and REITs (3.24%)
350,900 Alexander's, Inc.*# 25,374,456
750,000 Avatar Holdings, Inc.*# 14,250,000
375,000 FelCor Lodging Trust, Inc. 6,562,500
800,000 Kimco Realty Corp. 28,600,000
179,999 Post Properties, Inc. 7,076,211
600,000 Prison Realty Trust, Inc. 6,450,000
2,400,000 Spieker Properties, Inc. 83,250,000
335,000 Sun Communities, Inc. 11,075,938
640,000 Taubman Centers, Inc. 7,360,000
-------------
189,999,105
Retail Trade and Restaurants (17.14%)
3,750,000 Dollar Tree Stores, Inc.*# 149,765,625
1,639,500 Ethan Allen Interiors, Inc. 52,156,594
88,500 Kenneth Cole Productions, Inc.
Class A* 3,307,687
129,900 Morton's Restaurant Group, Inc.* 2,281,369
10,360,000 Polo Ralph Lauren Corp. Class A* 185,832,500
3,393,500 Smart and Final, Inc.# 33,935,000
20,775,000 Sotheby's Holdings, Inc. Class A# 536,254,687
1,750,000 Stein Mart, Inc.* 12,468,750
600,000 Williams-Sonoma, Inc.* 29,137,500
-------------
1,005,139,712
Transportation (0.28%)
2,300,000 Budget Group, Inc. Class A* 16,243,750
Utility Services (2.90%)
1,825,000 Azurix Corp.* 31,367,187
8,500,000 Citizens Utilities Co.* 96,156,250
2,230,000 Southern Union Co.*# 42,370,000
-------------
169,893,437
Wholesale Trade (3.38%)
5,687,000 Industrie Natuzzi SPA ADR# 111,607,375
2,920,000 Libbey, Inc.# 86,322,500
-------------
197,929,875
See Notes to Financial Statements.
</TABLE>
23
<PAGE>
B A R O N A S S E T F U N D
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1999
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------
Miscellaneous (0.11%) $ 6,475,000
--------------
Total Common Stocks
(Cost $4,546,218,747) 5,825,555,814
--------------
- --------------------------------------------------------------------------------------------------
Convertible Preferred Stock (0.18%)
- --------------------------------------------------------------------------------------------------
Transportation
350,000 Budget Group Capital Trust Conv. Pref.+
(Cost $17,500,000) 10,850,000
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Bonds (0.37%)
- ----------------------------------------------------------------------------------------------------
Communications
$ 21,500,000 American Mobile Satellite Corp. 6.0%
Jr. Sub. Secured Exch. Note due
09/30/2006 (Cost $21,500,000) @ $ 21,500,000
--------------
Total Investments (99.91%)
(Cost $4,585,218,747**) 5,857,905,814
Cash and Other Assets
Less Liabilities (0.09%) 5,219,201
--------------
Net Assets (Equivalent to $51.57 per share
based on 113,687,936 shares of beneficial
interest outstanding) $5,863,125,015
==============
</TABLE>
- ----------
% 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 $4,585,118,355. Aggregate
unrealized appreciation and depreciation of investments are $2,040,141,991
and $767,354,532, respectively.
See Notes to Financial Statements.
24
<PAGE>
B A R O N G R O W T H F U N D
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1999
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (92.72%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (7.37%)
120,000 American Classic Voyages Co.* $ 2,752,500
50,000 Intrawest Corp. 828,125
165,000 Steiner Leisure, Ltd.* 4,125,000
720,000 Sun Intl. Hotels, Ltd.* 17,190,000
410,000 The Sports Club Co.* 2,050,000
235,000 Vail Resorts, Inc. Class A* 5,449,063
------------
32,394,688
Business Services (4.64%)
175,000 ChoicePoint, Inc.* 11,790,625
25,000 Corporate Executive Board Co.* 1,018,750
4,000 DBT Online, Inc.* 99,750
60,000 Kronos, Inc.* 2,201,250
220,000 Robert Half Intl., Inc.* 5,280,000
------------
20,390,375
Chemical (2.00%)
228,700 OM Group, Inc. 8,776,362
Communications (15.04%)
390,000 American Mobile Satellite Corp.* 6,825,000
340,000 CoreComm, Ltd.* 11,198,750
412,600 Electric Lightwave, Inc. Class A* 5,466,950
292,804 NTL, Inc.* 28,136,620
250,000 Rural Cellular Corp. Class A* 11,468,750
20,000 Time Warner Telecom, Inc. Class A* 417,500
59,500 Wink Communications, Inc.* 2,599,406
------------
66,112,976
Education (4.43%)
270,000 DeVry, Inc.* 5,400,000
820,000 Education Management Corp.* 10,147,500
200,000 ITT Educational Services, Inc.* 3,900,000
------------
19,447,500
Energy (1.49%)
180,000 Cross Timbers Oil Co. 2,430,000
80,000 Seacor Smit, Inc.* 4,100,000
------------
6,530,000
Financial (10.14%)
93,333 Bingham Financial Services Corp.*@ 864,497
800,000 Charles Schwab Corp. 26,950,000
250,000 DVI, Inc.* 4,093,750
299,000 Gabelli Asset Management, Inc. Class A* 4,615,813
396,200 Medallion Financial Corp. 8,023,050
------------
44,547,110
Food & Agriculture (2.14%)
587,600 Aurora Foods, Inc.* 9,401,600
Health Services (0.59%)
150,000 Manor Care, Inc. (Formerly
HCR Manor Care, Inc.)* 2,578,125
Hotels and Lodging (10.24%)
218,800 Bristol Hotels & Resorts, Inc.* 1,504,250
2,100,000 Choice Hotels Intl., Inc.* 35,962,500
550,000 Extended Stay America, Inc.* 4,950,000
35,000 Four Seasons Hotels, Inc. 1,279,687
140,000 ResortQuest Intl., Inc.* 1,303,750
------------
45,000,187
Manufacturing (2.65%)
200,000 Flextronics Intl., Ltd.* 11,637,500
<PAGE>
Shares Value
- ------------ ------------
Media and Entertainment (10.43%)
200,000 CD Radio, Inc.* $ 5,100,000
160,000 Citadel Communications Corp.* 5,460,000
50,000 Entercom Communications Corp.* 1,800,000
100,000 Hispanic Broadcasting Corp.* 7,612,500
50,000 Insight Communications Co., Inc.
Class A* 1,431,250
200,000 Radio One, Inc. Class A* 8,300,000
343,750 Saga Communications, Inc. Class A* 7,906,250
20,000 UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.)* 1,432,500
150,000 Westwood One, Inc. (Formerly Metro
Networks, Inc.)* 6,768,750
------------
45,811,250
Real Estate and REITs (5.83%)
48,600 Alexander's, Inc.* 3,514,388
150,000 Kimco Realty Corp. 5,362,500
109,999 Post Properties, Inc. 4,324,336
100,000 Prison Realty Trust, Inc. 1,075,000
150,000 Storage USA, Inc. 4,125,000
190,000 Sun Communities, Inc. 6,281,875
80,000 Taubman Centers, Inc. 920,000
------------
25,603,099
Retail Trade and Restaurants (9.90%)
240,000 Dollar Tree Stores, Inc.* 9,585,000
394,500 Ethan Allen Interiors, Inc. 12,550,031
707,781 Smart and Final, Inc. 7,077,810
360,000 Sotheby's Holdings, Inc. Class A 9,292,500
260,000 The Yankee Candle Co., Inc.* 5,021,250
------------
43,526,591
Utility Services (2.27%)
526,050 Southern Union Co.* 9,994,950
Wholesale Trade (3.56%)
610,000 Industrie Natuzzi SPA ADR 11,971,250
125,000 Libbey, Inc. 3,695,312
------------
15,666,562
------------
Total Common Stocks
(Cost $289,530,356) 407,418,875
------------
Principal Amount
- ------------------------------------------------------------------------------
Short Term Money Market Instruments (7.96%)
- ------------------------------------------------------------------------------
$ 34,999,999 Associates Corp. of N. A. 4.25%
due 10/01/1999 (Cost $34,999,999) 34,999,999
------------
Total Investments (100.68%)
(Cost $324,530,355**) 442,418,874
Liabilities Less
Cash and Other Assets (-0.68%) (2,994,090)
------------
Net Assets (Equivalent to $29.06 per
share based on 15,121,926 shares of
beneficial interest outstanding) $439,424,784
============
- ----------
% Represents percentage of net assets
* Non-income producing securities
@ Restricted securities
** For Federal income tax purposes the cost basis is $324,651,615. Aggregate
unrealized appreciation and depreciation of investments are $132,346,358
and $14,579,099, respectively.
See Notes to Financial Statements.
25
<PAGE>
B A R O N S M A L L C A P F U N D
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1999
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (88.07%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (10.62%)
250,000 Intrawest Corp. $ 4,140,625
1,000,000 Loews Cineplex Entertainment Corp.* 7,875,000
1,000,000 Premier Parks, Inc.* 29,000,000
725,000 SFX Entertainment, Inc. Class A* 22,112,500
375,000 Sun Intl. Hotels, Ltd.* 8,953,125
790,300 The Sports Club Co.* 3,951,500
------------
76,032,750
Business Services (16.37%)
1,000,000 Caribiner Intl., Inc.* 8,687,500
235,000 ChoicePoint, Inc.* 15,833,125
400,000 Corporate Executive Board Co.* 16,300,000
725,000 Heidrick & Struggles Int'l., Inc.* 13,820,313
850,000 Iron Mountain, Inc.* 28,793,750
307,500 Lamar Advertising Co. Class A* 15,221,250
100,000 Loislaw.Com, Inc.* 1,450,000
400,000 Penton Media, Inc. 6,500,000
500,000 Strategic Distribution, Inc.* 1,562,500
600,000 Todd-AO Corp. Class A 9,000,000
------------
117,168,438
Communications (15.97%)
75,000 Centennial Cellular Corp.* 3,407,812
350,000 Century Communications Corp.* 15,968,750
450,000 Commonwealth Telephone Ent., Inc.* 19,800,000
350,000 Commnet Cellular, Inc.* 10,959,375
525,000 CoreComm, Ltd.* 17,292,188
500,000 Electric Lightwave, Inc. Class A* 6,625,000
200,000 High Speed Access Corp.* 4,587,500
150,000 Hyperion Telecommunications, Inc.
Class A* 3,721,875
100,000 Pinnacle Holdings, Inc.* 2,612,500
550,000 Rural Cellular Corp. Class A* 25,231,250
375,000 SBA Communications Corp.* 4,078,125
------------
114,284,375
Consumer Products (0.62%)
300,000 Equity Marketing, Inc.* 4,425,000
Consumer Services (2.96%)
725,000 Central Parking Corp. 21,206,250
Education (3.62%)
893,900 Career Education Corp.*# 25,923,100
Environmental (2.92%)
370,000 Casella Waste Systems, Inc. Class A* 6,174,375
1,350,000 IT Group, Inc.*# 12,909,375
235,800 KTI, Inc.* 1,842,187
------------
20,925,937
Financial (1.29%)
299,000 Gabelli Asset Management, Inc. Class A* 4,615,813
200,000 Investment Technology Group, Inc. 4,600,000
------------
9,215,813
Health Services (1.17%)
725,000 Province Healthcare Co.* 8,337,500
<PAGE>
Shares Value
- --------------------------------------------------------------------------------
Hotels and Lodging (3.66%)
525,000 Four Seasons Hotels, Inc. $ 19,195,312
750,000 ResortQuest Intl., Inc.* 6,984,375
------------
26,179,687
Industrial Services (1.67%)
550,000 United Rentals, Inc.* 11,962,500
Manufacturing (0.72%)
750,000 AVTEAM, Inc. Class A* # 5,156,250
Media and Entertainment (17.16%)
150,000 Entercom Communications Corp.* 5,400,000
50,000 Insight Communications Co., Inc.
Class A* 1,431,250
525,000 Radio One, Inc. Class A* 21,787,500
1,000,000 UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.)* 71,625,000
500,000 Westwood One, Inc. (Formerly Metro
Networks, Inc.)* 22,562,500
------------
122,806,250
Retail Trade and Restaurants (8.06%)
660,000 Kenneth Cole Productions, Inc. Class A* 24,667,500
350,000 Morton's Restaurant Group, Inc.*# 6,146,875
325,000 Williams-Sonoma, Inc.* 15,782,813
575,000 The Yankee Candle Co., Inc.* 11,104,687
------------
57,701,875
Utility Services (1.26%)
1,000,000 El Paso Electric Co.* 9,000,000
------------
Total Common Stocks
(Cost $463,200,683)
630,325,725
------------
Principal Amount
- ------------------------------------------------------------------------------
Corporate Bonds (0.29%)
- ------------------------------------------------------------------------------
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 (9.64%)
- ------------------------------------------------------------------------------
68,999,999 Associates Corp. of N.A. 4.25% due
10/01/99 (Cost $68,999,999) 68,999,999
------------
Total Investments (98.00%)
(Cost $534,720,682**)
701,405,724
Cash and Other Assets
Less Liabilities (2.00%)
14,277,408
------------
Net Assets (Equivalent to $13.37 per
share based on 53,530,434 shares of
beneficial interest outstanding)
$715,683,132
============
% 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 $538,413,749. Aggregate
unrealized appreciation and depreciation of investments are $206,249,353
and $43,257,378, respectively.
See Notes to Financial Statements.
26
<PAGE>
B A R O N F U N D S
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1999
<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 $1,759,192,259, $324,530,355, and $485,567,198,
respectively) $2,741,280,814 $ 442,418,874 $ 651,270,124
"Affiliated" issuers (Cost $2,826,026,488, $0, and
$49,153,484, respectively) 3,116,625,000 0 50,135,600
Dividends and interest receivable 2,481,449 234,548 19,446
Receivable for securities sold 23,297,183 0 18,124,837
Receivable for shares sold 10,028,797 2,134,667 3,193,942
Unamortized organization costs 0 1,644 17,085
Prepaid expenses 24,212 0 0
-------------- ------------- -------------
5,893,737,455 444,789,733 722,761,034
-------------- ------------- -------------
Liabilities:
Payable for securities purchased 3,442,398 4,668,075 5,596,130
Payable for shares redeemed 16,086,549 337,290 655,283
Due to custodian bank 10,673,957 253,156 673,658
Accrued organization costs 0 1,644 17,085
Accrued expenses and other payables 409,536 104,784 135,746
-------------- ------------- -------------
30,612,440 5,364,949 7,077,902
-------------- ------------- -------------
Net Assets $5,863,125,015 $ 439,424,784 $ 715,683,132
============== ============= =============
Net Assets consist of:
Capital paid-in $4,640,572,993 $ 292,811,668 $ 604,942,511
Accumulated net realized gain(loss) (50,135,045) 28,724,597 (55,944,421)
Net unrealized appreciation on investments 1,272,687,067 117,888,519 166,685,042
-------------- ------------- -------------
Net Assets $5,863,125,015 $ 439,424,784 $ 715,683,132
============== ============= =============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) 113,687,936 15,121,926 53,530,434
============== ============= =============
Net Asset Value Per Share $ 51.57 $ 29.06 $ 13.37
============== ============= =============
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
B A R O N F U N D S
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Baron Asset Baron Growth Baron Small Cap
Fund Fund Fund
------------------ ---------------- ----------------
<S> <C> <C> <C>
Investment income:
Income:
Interest $ 6,929,491 $ 884,393 $ 1,824,376
Dividends -- unaffiliated issuers (net of foreign tax
withholding of $0, $56,736, and $0, respectively) 18,039,687 3,361,851 122,393
Dividends -- "affiliated" issuers (net of foreign tax
withholding of $1,284,973, $0, and $0, respectively) 19,051,856 0 0
-------------- ------------ -------------
Total income 44,021,034 4,246,244 1,946,769
-------------- ------------ -------------
Expenses:
Investment advisory fees 59,460,701 3,534,481 5,457,810
Distribution fees 14,865,186 883,621 1,364,454
Shareholder servicing agent fees 1,496,000 219,820 216,820
Reports to shareholders 1,376,600 103,500 151,000
Registration and filing fees 261,030 39,830 49,570
Custodian fees 185,090 21,530 31,470
Trustee fees 82,480 4,960 7,490
Professional fees 103,421 47,570 47,710
Amortization of organization costs 0 6,570 5,700
Miscellaneous 64,610 4,737 10,990
-------------- ------------ -------------
Total operating expenses 77,895,118 4,866,619 7,343,014
Interest expense 0 103,943 0
-------------- ------------ -------------
Total expenses 77,895,118 4,970,562 7,343,014
-------------- ------------ -------------
Net investment loss (33,874,084) (724,318) (5,396,245)
-------------- ------------ -------------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments sold in unaffiliated
issuers 66,923,461 34,354,265 (27,309,728)
Net realized loss on investments sold in "affiliated" issuers (20,123,170) 0 (1,725,521)
Change in net unrealized appreciation of investments 1,250,313,281 78,932,635 242,203,032
-------------- ------------ -------------
Net gain on investments 1,297,113,572 113,286,900 213,167,783
-------------- ------------ -------------
Net increase in net assets resulting from operations $1,263,239,488 $112,562,582 $ 207,771,538
============== ============ =============
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
B A R O N F U N D S
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Baron Asset Fund
----------------------------------------
For the For the
Year Ended Year Ended
September 30, September 30,
1999 1998
------------------- -------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income (loss) ($ 33,874,084) $ 5,182,423
Net realized gain (loss) on
investments sold 46,800,291 (76,452,243)
Net change in unrealized
appreciation (depreciation)
on investments 1,250,313,281 (848,684,103)
---------------- -----------------
Increase (decrease) in net
assets resulting from
operations 1,263,239,488 (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 2,326,280,913 3,405,277,873
Net asset value of shares issued
in reinvestment of dividends 4,175,765 0
Cost of shares redeemed (2,138,067,002) (1,299,315,896)
---------------- -----------------
Increase in net assets derived
from capital share transactions 192,389,676 2,105,961,977
Capital contribution 1,584,375 0
---------------- -----------------
Net increase (decrease) in net
assets 1,452,618,567 1,186,008,054
Net assets:
Beginning of year 4,410,506,448 3,224,498,394
---------------- -----------------
End of year $ 5,863,125,015 $ 4,410,506,448
================ =================
Undistributed net investment
income at end of year $ 0 $ 4,637,960
================ =================
Shares of beneficial interest:
Shares sold 45,041,285 69,710,623
Shares issued in reinvestment
dividends 82,185 0
Shares redeemed (41,802,254) (27,334,849)
---------------- -----------------
Net increase (decrease) 3,321,216 42,375,774
================ =================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Baron Growth Fund Baron Small Cap Fund
------------------------------------ ------------------------------------
For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998*
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income (loss) ($ 724,318) $ 899,890 ($ 5,396,245) ($ 826,516)
Net realized gain (loss) on
investments sold 34,354,265 (6,952,711) (29,035,249) (26,895,646)
Net change in unrealized
appreciation (depreciation)
on investments 78,932,635 (73,445,498) 242,203,032 (75,517,990)
-------------- --------------- -------------- --------------
Increase (decrease) in net
assets resulting from
operations 112,562,582 (79,498,319) 207,771,538 (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 193,413,986 236,230,743 403,817,666 692,941,797
Net asset value of shares issued
in reinvestment of dividends 461,215 1,161,950 0 0
Cost of shares redeemed (182,084,702) (231,956,848) (299,634,070) (185,973,647)
-------------- --------------- -------------- --------------
Increase in net assets derived
from capital share transactions 11,790,499 5,435,845 104,183,596 506,968,150
Capital contribution 0 0 0 0
-------------- --------------- -------------- --------------
Net increase (decrease) in net
assets 123,866,934 (75,274,011) 311,955,134 403,727,998
Net assets:
Beginning of year 315,557,850 390,831,861 403,727,998 0
-------------- --------------- -------------- --------------
End of year $ 439,424,784 $ 315,557,850 $ 715,683,132 $ 403,727,998
============== =============== ============== ==============
Undistributed net investment
income at end of year $ 0 $ 472,714 $ 0 $ 0
============== =============== ============== ==============
Shares of beneficial interest:
Shares sold 6,776,893 9,436,383 34,490,488 65,055,206
Shares issued in reinvestment
dividends 18,636 47,958 0 0
Shares redeemed (7,201,050) (9,658,984) (27,846,667) (18,168,593)
-------------- --------------- -------------- --------------
Net increase (decrease) (405,521) (174,643) 6,643,821 46,886,613
============== =============== ============== ==============
</TABLE>
- ----------
* For the period October 1, 1997(commencement of operations) to September 30,
1998.
See Notes to Financial Statements.
29
<PAGE>
B A R O N F U N D S
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies.
Baron Asset Fund (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the"1940 Act"), as a diversified, open-end management
investment company established as a Massachusetts business trust on February
19, 1987. The Trust currently offers 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. On May 19, 1999, Baron Growth & Income Fund changed its name
to Baron Growth Fund. The following is a summary of significant accounting
policies followed by the Funds. The policies are in conformity with generally
accepted accounting principles.
(a) Security Valuation. Portfolio securities traded on any national stock
exchange or quoted on the NASDAQ National Market System are valued on the basis
of the last sale price on the date of valuation or, in the absence of any sale
on that date, the last sale price on the date the security last traded. Other
securities are valued at the mean of the most recent bid and asked prices if
market quotations are readily available. Where market quotations are not
readily available the securities are valued at their fair value as determined
in good faith by the Board of Trustees, or by the Adviser, pursuant to
procedures established by the Trustees. Money market instruments held by the
Funds with a remaining maturity of sixty days or less are valued at amortized
cost, which approximates value.
(b) Securities Transactions, Investment Income and Expense Allocation.
Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are recorded on an identified cost basis for
financial reporting and federal income tax purposes. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis. Common expenses of the Funds are allocated on a basis deemed
fair and equitable by the Trustees, usually on the basis of average net assets.
Direct expenses are charged to each Fund on a specific identification basis.
(c) Federal Income Taxes. Each Fund of the Trust is treated as a separate
entity for federal income tax purposes. It is the policy of each Fund to
continue to qualify as a regulated investment company under 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.
(e) Organization Costs. Costs incurred in connection with the organization and
initial registration of Baron Growth 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.
<PAGE>
(f) Distributions. Income distributions and capital gain 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.
For the year ended September 30, 1999, the following amounts were reclassified
for federal income tax purposes:
<TABLE>
<CAPTION>
Undistributed Undistributed
Fund Net Investment Income Realized Gain/Loss Capital-Paid-In
- ---------------------- ----------------------- -------------------- -----------------
<S> <C> <C> <C>
Baron Asset Fund $33,831,096 $3,974,320 $ (37,805,416)
Baron Growth Fund $ 737,751 $ 260,969 $ (998,720)
Baron Small Cap Fund $ 5,396,245 $ (16,695) $ (5,379,550)
</TABLE>
(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
year ended September 30, 1999 were as follows:
Fund Purchases Sales
- ---------------------- ----------------- ---------------
Baron Asset Fund $1,154,642,273 $908,031,849
Baron Growth Fund $ 182,744,649 $203,437,226
Baron Small Cap Fund $ 244,885,840 $221,936,174
30
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
(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.
(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 year ended September 30, 1999, BCI earned brokerage commissions as follows:
Fund Commissions
- ---------------------- -------------
Baron Asset Fund $2,525,589
Baron Growth Fund $ 351,548
Baron Small Cap Fund $ 409,592
(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) Capital Loss Carryforward.
Baron Asset Fund and Baron Small Cap Fund had capital loss carryforwards at
September 30, 1999, which can be used to offset future capital gains.
Capital Loss Capital Loss
Carryovers Carryovers
Fund Expiring 2006 Expiring 2007
- ---------------------- --------------- --------------
Baron Asset Fund $22,037,516 $28,197,921
Baron Small Cap Fund -- $52,251,354
- --------------------------------------------------------------------------------
(5) Borrowings. During the year ended September 30, 1999, Baron Growth Fund
borrowed from its custodian bank. The average daily balance of loans
outstanding was $1,726,439 at a weighted average interest rate of 6.021%.
<PAGE>
- --------------------------------------------------------------------------------
(6) Restricted Securities.
A summary of the restricted securities held at September 30, 1999 follows:
<TABLE>
<CAPTION>
BARON ASSET FUND
Acquisition
Name of Issuer Date Value
- -------------- ------------ --------------
<S> <C> <C>
Common Stock
Apollo International, Inc. S-A CV Pfd. 07/21/99 $ 1,000,008
Chesapeake Healthcare Corp. 12/03/98 4,000,196
Correctional Management Services Corp. 12/30/98 8,000,085
Vail Resorts, Inc. Class A 05/14/98 88,112,400
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 $146,500,008) (2.09% of Net Assets) $122,612,689
============
</TABLE>
<TABLE>
<CAPTION>
BARON GROWTH FUND
Acquisition
Name of Issuer Date Value
- -------------- ------------ -------------
<S> <C> <C>
Common Stock
Bingham Financial Services Corp. (Cost $1,399,995) (0.20% of Net Assets) 04/27/99 $ 864,497
==========
</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.
31
<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
Shares Held on Purchases and
Name of Issuer Sep. 30, 1998 and Additions Reductions
- ----------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
Alexander's, Inc. 252,000 98,900
AMF Bowling, Inc. 9,895,000 650,000 335,000
American Mobile Satellite Corp. 3,500,000
Avatar Holdings, Inc. 774,000 24,000
Bristol Hotels & Resorts, Inc. 2,191,150 90,400
Caliber Learning Network, Inc. 1,840,000 1,035,400
Cellular Communications of P.R., 1,272,500 1,272,500
Inc.
Choice Hotels Intl., Inc. 13,021,300 204,000
ChoicePoint, Inc. 1,015,300 624,700
CoreComm, Ltd.+ 1,272,500 932,500
Counsel Corp. 2,408,200 80,300 318,500
Cross Timbers Oil Co. 4,747,500 372,500
DeVry, Inc. 4,635,200 514,800
Dollar Tree Stores, Inc. 3,690,000 60,000
DVI, Inc. 1,605,000 75,000
Education Management Corp. # 880,000 2,020,000
Flextronics Intl., Ltd. $ 1,393,000 1,420,000 13,000
Hispanic Broadcasting Corp. 3,270,000 470,000
(Formerly Heftel Broadcasting
Corp. Class A)
Industrie Natuzzi SPA ADR 1,565,500 4,121,500
ITT Educational Services, Inc. 1,562,500 600,000 162,500
Learning Tree Intl., Inc. 3,145,000 1,145,000
Libbey, Inc. 2,650,000 270,000
Manor Care, Inc. (Formerly HCR 10,350,700 649,300 600,000
Manor Care, Inc.)
NTL, Inc.@ 2,724,500 667,136
OM Group, Inc. 1,557,500 810,000
Prison Realty Trust (Formerly CCA 1,990,000 89,800 1,479,800
Prison Realty Corp.)
Robert Half Intl., Inc. 2,335,000 4,815,000 50,000
Saga Communications, Inc. Class A 2,932,002 5,000
Seacor Smit, Inc. 990,000 352,300 42,300
Smart and Final, Inc. 2,237,900 1,155,600
Sotheby's Holdings, Inc. Class A 18,030,000 2,745,000
Southern Union Co. % 832,500 1,397,500
Stein Mart, Inc. 2,825,000 1,075,000
Sun Intl. Hotels, Ltd. 2,875,000 440,000
Sunburst Hospitality Corp. 3,650,036 606,666 281,666
The Sports Club Co. 1,955,000 1,955,000
Vail Resorts, Inc. Class A 9,678,900 387,100
Westwood One, Inc (Formerly 1,250,000 635,000 185,000
Metro Networks, Inc.)&
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Sep. 30, 1999 Sep. 30, 1999 Oct. 1-Sep. 30, 1999
- ----------------------------------- ---------------- ----------------- ---------------------
<S> <C> <C> <C>
Alexander's, Inc. 350,900 $25,374,456
AMF Bowling, Inc. 10,210,000 42,116,250
American Mobile Satellite Corp. 3,500,000 61,250,000
Avatar Holdings, Inc. 750,000 14,250,000
Bristol Hotels & Resorts, Inc. 2,100,750 14,442,656
Caliber Learning Network, Inc. 804,600 1,659,488
Cellular Communications of P.R., 0 0**
Inc.
Choice Hotels Intl., Inc. 13,225,300 226,483,263
ChoicePoint, Inc. 1,640,000 110,495,000
CoreComm, Ltd.+ 2,205,000 72,627,155
Counsel Corp. 2,170,000 7,323,750 $ 2,119,364
Cross Timbers Oil Co. 4,375,000 59,062,500 318,661
DeVry, Inc. 5,150,000 103,000,000
Dollar Tree Stores, Inc. 3,750,000 149,765,625
DVI, Inc. 1,680,000 27,510,000
Education Management Corp. # 2,900,000 35,887,500
Flextronics Intl., Ltd. $ 2,800,000 162,925,000
Hispanic Broadcasting Corp. 2,800,000 213,150,000
(Formerly Heftel Broadcasting
Corp. Class A)
Industrie Natuzzi SPA ADR 5,687,000 111,607,375 4,102,391
ITT Educational Services, Inc. 2,000,000 39,000,000
Learning Tree Intl., Inc. 2,000,000 33,125,000
Libbey, Inc. 2,920,000 86,322,500 855,750
Manor Care, Inc. (Formerly HCR 10,400,000 178,750,000
Manor Care, Inc.)
NTL, Inc.@ 3,391,636 0**
OM Group, Inc. 2,367,500 90,852,813 845,675
Prison Realty Trust (Formerly CCA 600,000 0** 2,598,120
Prison Realty Corp.)
Robert Half Intl., Inc. 7,100,000 170,400,000
Saga Communications, Inc. Class A 2,937,002 67,551,046
Seacor Smit, Inc. 1,300,000 66,625,000
Smart and Final, Inc. 3,393,500 33,935,000 111,895
Sotheby's Holdings, Inc. Class A 20,775,000 536,254,687 8,100,000
Southern Union Co. % 2,230,000 42,370,000
Stein Mart, Inc. 1,750,000 0**
Sun Intl. Hotels, Ltd. 3,315,000 79,145,625
Sunburst Hospitality Corp. 3,975,036 24,595,536
The Sports Club Co. 0 0**
Vail Resorts, Inc. Class A 10,066,000 228,767,775
Westwood One, Inc (Formerly 1,700,000 0**
----------------
Metro Networks, Inc.)&
$3,116,625,000 $19,051,856
================ ===========
</TABLE>
* "Affiliated" issuers, as defined in the Investment Company Act of 1940, are
issuers in which Baron Asset Fund held 5% or more of the outstanding voting
securities as of September 30, 1999.
** As of September 30, 1999, no longer an affiliate.
+ Received 735,000 shares from 3:2 stock split.
# Received 880,000 shares from 2:1 stock split .
$ Received 1,390,000 shares from 2:1 stock split.
@ Received 369,636 shares from bond conversion.
% Received 144,125 shares from 5% stock dividend.
& Received 625,000 shares from merger
32
<PAGE>
B A R O N F U N D S
(8) Investment in "Affiliates"* (continued)
BARON SMALL CAP FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales
Shares Held on Purchases and
Name of Issuer Sep. 30, 1998 and Additions Reductions
- -------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
AVTEAM, Inc. 750,000
Career Education Corp. 520,000 386,700 12,800
Equity Marketing, Inc. 400,000 25,250 125,250
IT Group, Inc. 1,750,000 50,000 450,000
Mortons Restaurant Group, Inc. 350,000 25,000 25,000
ResortQuest Intl., Inc. 825,000 25,000 100,000
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Sep. 30, 1999 Sep. 30, 1999 Oct. 1-Sep. 30, 1999
- -------------------------------- ---------------- --------------- ---------------------
<S> <C> <C> <C>
AVTEAM, Inc. 750,000 $ 5,156,250
Career Education Corp. 893,900 25,923,100
Equity Marketing, Inc. 300,000 0**
IT Group, Inc. 1,350,000 12,909,375
Mortons Restaurant Group, Inc. 350,000 6,146,875
ResortQuest Intl., Inc. 750,000 0**
------------
$50,135,600 $ 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 September 30, 1999.
** As of September 30, 1999, no longer an affiliate.
33
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
(9) Financial Highlights
BARON ASSET FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997 1996
--------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 39.96 $ 47.43 $ 35.50 $ 29.30
----------- ---------- ----------- -----------
Income from investment
operations
Net investment income (loss) (0.30) 0.05 (0.14) (0.06)
Net realized and unrealized gains
(losses) on investments 11.95 (7.52) 12.11 6.29
----------- ---------- ----------- -----------
Total from investment
operations 11.65 (7.47) 11.97 6.23
----------- ---------- ----------- -----------
Less distributions
Dividends from net investment
income (0.04) 0.00 0.00 0.00
Distributions from net realized gains 0.00 0.00 (0.04) (0.03)
----------- ---------- ----------- -----------
Total distributions (0.04) 0.00 (0.04) (0.03)
----------- ---------- ----------- -----------
Net asset value, end of year $ 51.57 $ 39.96 $ 47.43 $ 35.50
=========== ========== =========== ===========
Total return 29.2%* (15.7%) 33.8% 21.3%
----------- ---------- ----------- -----------
Ratios/Supplemental data
Net assets (in millions), end of year $ 5,863.1 $ 4,410.5 $ 3,224.5 $ 1,166.1
Ratio of expenses to average net
assets 1.31% 1.32% 1.35% 1.40%
Ratio of net investment income
(loss) to average net assets (0.57%) 0.11% (0.52%) (0.29%)
Portfolio turnover rate 15.64% 23.43% 13.23% 19.34%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993 1992 1991 1990
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 22.82 $ 21.91 $ 16.20 $ 14.80 $ 10.88 $ 17.22
--------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income (loss) (0.09) (0.14) (0.13) (0.08) 0.07 0.21
Net realized and unrealized gains
(losses) on investments 7.23 1.82 6.00 1.52 4.05 (5.14)
--------- -------- -------- -------- -------- --------
Total from investment
operations 7.14 1.68 5.87 1.44 4.12 (4.93)
--------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income 0.00 0.00 0.00 (0.04) (0.20) ( 0.16)
Distributions from net realized gains (0.66) (0.77) (0.16) 0.00 0.00 ( 1.25)
--------- -------- -------- -------- -------- --------
Total distributions (0.66) (0.77) (0.16) (0.04) (0.20) ( 1.41)
--------- -------- -------- -------- -------- --------
Net asset value, end of year $ 29.30 $ 22.82 $ 21.91 $ 16.20 $ 14.80 $ 10.88
========= ======== ======== ======== ======== ========
Total return 32.3% 8.0% 36.5% 9.7% 38.3% (30.7%)
--------- -------- -------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of year $ 290.0 $ 80.3 $ 59.9 $ 43.8 $ 47.4 $ 40.0
Ratio of expenses to average net
assets 1.44% 1.59% 1.85% 1.68% 1.70% 1.78%
Ratio of net investment income
(loss) to average net assets (0.55%) (0.71%) (0.69%) (0.53%) 0.49% 1.53%
Portfolio turnover rate 35.15% 55.87% 107.94% 95.45% 142.73% 97.81%
</TABLE>
*Had the adviser not made the capital contribution, the adjusted total return
would have been 29.1% for the year ended September 30, 1999.
The Fund's adviser and/or Baron Capital reimbursed the Fund for expenses
aggregating $8,561 (less than $0.01 per share) in 1990. The reimbursement
amounts are excluded from the expense data above.
34
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
(9) Financial Highlights (CONTINUED)
BARON GROWTH FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997 1996 1995*
------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 20.32 $ 24.89 $ 18.40 $ 14.77 $ 10.00
-------- -------- -------- -------- -------
Income from investment operations
Net investment income (loss) (0.04) 0.06 0.06 0.11 0.04
Net realized and unrealized gains (losses)
on investments 8.82 (4.56) 6.68 3.66 4.73
-------- -------- -------- -------- -------
Total from investment operations 8.78 (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 year $ 29.06 $ 20.32 $ 24.89 $ 18.40 $ 14.77
======== ======== ======== ======== =======
Total return 43.2 % (18.1%) 37.1% 25.8% 47.7%
-------- -------- -------- -------- -------
Ratios/Supplemental data
Net assets (in millions), end of year $ 439.4 $ 315.6 $ 390.8 $ 207.2 $ 28.6
Ratio of total expenses to average net assets 1.40% 1.43% 1.40% 1.54% 1.99%**
Less: Ratio of interest expense to average net assets (0.03%) (0.06%) 0.00% 0.00% 0.00%
-------- --------- --------- --------- --------
Ratio of operating expenses to average net assets 1.37% 1.37% 1.40% 1.54% 1.99%**
======== ========= ========= ========= ========
Ratio of net investment income (loss) to average
net assets (0.20%) 0.21% 0.37% 1.20% 1.13%**
Portfolio turnover rate 53.36% 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 offset amounts are included in expense data above.
<PAGE>
BARON SMALL CAP FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998*
------------ -------------
<S> <C> <C>
Net asset value, beginning of year $ 8.61 $ 10.00
-------- --------
Income from investment operations
Net investment loss (0.10) (0.02)
Net realized and unrealized gains (losses)
on investments 4.86 (1.37)
-------- --------
Total from investment operations 4.76 (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 year $ 13.37 $ 8.61
======== ========
Total return 55.3 % (13.9%)
-------- --------
Ratios/Supplemental data
Net assets (in millions), end of year $ 715.7 $ 403.7
Ratio of expenses to average net assets 1.34% 1.39%
Ratio of net investment loss to average net assets (0.99%) (0.20%)
Portfolio turnover rate 42.69% 59.68%
</TABLE>
* For the period October 1, 1997 (commencement of operations) to
September 30, 1998.
35
<PAGE>
B A R O N F U N D S
Report of Independent Accountants
- --------------------------------------------------------------------------------
- -----------------------
TO THE SHAREHOLDERS
AND BOARD OF TRUSTEES OF
BARON ASSET FUND:
- -----------------------
In our opinion, the accompanying statements of assets and liabilities and
statements of net assets, and the related statements of operations and of
changes in net assets and financial highlights present fairly, in all material
respects, the financial position of Baron Asset Fund (comprising, respectively,
Baron Asset Fund, Baron Growth Fund (formerly Baron Growth & Income Fund) and
Baron Small Cap Fund) (collectively the "Funds") at September 30, 1999, the
results of their operations for the year then ended, the changes in their net
assets for each of the two years in the period then ended and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
November 17, 1999
- --------------------------------------------------------------------------------
Any statements contained in this annual report which are not historical facts
are forward-looking statements; and, therefore, many important factors could
cause actual results to differ materially from those in the forward-looking
statements. Such factors include, but are not limited to, changes (legislative
or otherwise) in the industries in which the Funds invest, as well as changes
relating to taxes and mutual funds. The "Investment Policies and Risks" section
of the Prospectus discusses certain factors that could cause actual results to
differ materially from those in such forward-looking statements.
36
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON ASSET FUND IN RELATION TO THE RUSSELL 2000*
Baron Asset Fund Russell 2000
---------------- ------------
10000 10000
1987 11950 10479
1988 13234 9353
1989 18521 11366
1990 12838 8282
1991 17760 12018
1992 19484 13091
1993 26595 17436
1994 28728 17892
1995 38003 22079
1996 46098 24979
1997 61656 33269
1998 51946 26943
1999 67090 32080
* The Russell 200 is an unmanaged index of small and mid-sized companies
- --------------------------------------------------------------------------------
Baron Asset Fund
Baron Asset Fund's performance in the fiscal year ended September 1999 was
strong as markets recovered from depressed levels last fall. The Fund gained
29.2% during the year and significantly outperformed the Russell 2000 index
which gained 19.1%. The Fund kept pace with the S&P 500 which gained 27.8%.
Baron Asset Fund invests in small and medium sized companies. The relative bear
market in small cap stocks continued in the first half of fiscal year 1999. In
the sixteen-year period since 1983 the performance of market averages that
represent small companies has significantly under-performed market averages
that represent more established, large companies. The resulting valuations of
small cap stocks in general are compelling. Small cap stocks normally trade at
valuations relative to their earnings substantially above those of large cap
stocks, reflecting superior growth expectations. Only twice before have small
cap stocks traded at valuations relative to their earnings equal to large cap
companies. In both instances the attractive valuations led to multi-year small
cap rallies. Today, valuations remain at those extremely attractive levels.
Baron Asset Fund's investment style is best categorized as a value orientation
towards growth. Purchase great businesses with exciting growth opportunities at
value-based attractive prices. The Fund has characteristics of both value and
growth. Value stocks dramatically under-performed growth stocks in Fiscal Year
1999. The Russell 2000 growth index gained 32.6% while the Russell 2000 value
index gained only 5.8% in the year ended September 30. Baron Asset Fund with
its under-weighting in the technology sector should benefit when value comes
back in favor.
The Fund's performance was not uniform across the year. Baron Asset Fund
performed extremely well in the first half of the fiscal year. The Fund gained
35.7% and significantly outperformed the performance of the Russell 2000,
+10.0%, and the performance of the S&P 500, +27.2%. The Fund performed poorly
in the second half of the year, losing 4.9% as compared to a gain for the
Russell 2000 of 8.3% and 0.3% for the S&P 500.
The performance of Baron Asset Fund was not uniform across sectors. The Fund
realized large gains in Financial Services, Media & Entertainment and
Communications. The Fund also performed well in its investments in Retail,
Manufacturing and Hotels and Lodging. The Fund realized losses in Health Care,
Business Services, Education and Leisure.
In fiscal year 2000, the Fund will continue to invest in companies that, in our
opinion, are undervalued relative to their long-term growth prospects and have
the ability to sustain superior levels of profitability. The companies will
continue to be identified through our independent research efforts. Companies
in which we invest will have the potential to increase in price at least 50%
over the next two years. The Fund will remain diversified not only by industry
and investment theme, but also by external factors we have identified that
could affect company performance. This approach to investing in companies, not
trading of stocks, could allow the Fund to continue to produce above average
rates of return while keeping an attractive risk profile. The extremely
attractive valuation levels of companies within the small cap universe and the
current prices of some of our longer term core positions leave us looking
forward to a successful 2000.
37
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON GROWTH FUND IN RELATION TO THE RUSSELL 2000*
Baron Growth & Income Russell 2000
--------------------- ------------
10000 10000
1995 14770 12730
1996 18575 14408
1997 25469 19181
1998 20855 15534
1999 29868 18496
Information Presented by Fiscal Year as of September 30
Past performance is not predictive of future performance
* The Russell 200 is an unmanaged index of small and mid-sized companies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Baron Growth Fund
Baron Growth Fund's performance in the fiscal year ended September 1999 was
strong as markets recovered from depressed levels last fall. The Fund gained
43.2% during the year and significantly outperformed the Russell 2000 index
which gained 19.1% and the S&P 500, which gained 27.8%.
Baron Growth Fund invests in small sized companies. While the investment
performance of smaller companies in fiscal 1999 was acceptable, rebounding from
a poor fiscal 1998, the performance of smaller companies continues to lag that
of larger more established companies. This trend has continued for most of the
last sixteen years. The resulting valuations of smaller companies remain
compelling. While Baron Growth Fund has been able to keep pace with the S&P 500
in the nearly five years since its inception, +25.9% per year, it is well
positioned to take advantage of a better small cap environment when it
materializes.
The Fund's performance was not uniform across the year. Baron Growth Fund
performed exceedingly well in the first half of the fiscal year gaining 31.9%,
and out-performed the performance of the Russell 2000 which gained 10.0% and
the S&P 500 which gained 27.2%. The Fund continued to do well in the June
quarter, +17.5%, but lost 7.5% in the September quarter. For the second half of
the fiscal year the Fund gained 8.7% as compared to +0.3% and +8.3% for the S&P
500 and Russell 2000 respectively.
The performance of Baron Growth Fund was not uniform across sectors. The Fund
realized large gains in Financial Services and Communications. The Fund also
performed well in its investments in Media and Entertainment, Manufacturing and
Hotels and Lodging. The Fund realized losses in Health Care, Business Services,
Education and Leisure.
In fiscal year 2000 the Fund will continue to be invested in small companies
that have the potential to appreciate in value at least 50% during the next two
years. The Fund's portfolio is well positioned to take advantage of the
attractive valuations that now exist within the small cap universe.
38
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON SMALL CAP FUND IN RELATION TO THE RUSSELL 2000*
Baron Small Cap Fund Russell 2000
-------------------- ------------
10000 10000
1998 8610 8085
1999 13370 9626
Information Presented by Fiscal Year as of September 30
Past performance is not predictive of future performance
* The Russell 200 is an unmanaged index of small and mid-sized companies
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
Baron Small Cap Fund's performance in the fiscal year ended September 1999 was
strong as markets recovered from depressed levels last fall. The Fund gained
55.3% during the year and significantly outperformed the Russell 2000 index
which gained 19.1% and the S&P 500 which gained 27.8%. In its first two years
of operation the Fund, was up 33.7%, and has significantly outperformed the
Russell 2000 which lost 3.6% in the two years ended September 30.
The Fund's performance was strong both on an absolute basis, and relative to
its small cap peers throughout the Fiscal year. The Fund performed exceedingly
well in the first three quarters of the fiscal year and managed a small gain in
the September quarter in which both the Russell 2000 and S&P 500 fell 6.3%. The
Fund realized its greatest gains in the first fiscal quarter, +22.4%, a strong
quarter for U.S. stocks in general. The Fund realized its greatest relative
gains in the March quarter, up 12.8%, while the Russell 2000 fell 5.4%.
Quarterly Table
Fiscal Year 1998 Baron Small Cap Fund Russell 2000
- ------------------ ---------------------- -------------
4th Qtr 1998 +22.4% +16.3%
1st Qtr 1999 +12.8% -5.4%
2nd Qtr 1999 +12.4% +15.6%
3rd Qtr 1999 + 0.1% -6.3%
Fiscal Year +55.3% +19.1%
The performance of Baron Small Cap Fund was not uniform across sectors. The
Fund realized large gains in Communications and Media and Entertainment. The
Fund also performed well in its investments in Retail, Business Services,
Hotels and Lodging and Leisure. The Fund realized losses in Health Care and
Manufacturing.
In fiscal year 2000, the Fund will continue to invest in companies that, in our
opinion, are undervalued relative to their long-term growth prospects and
ability to sustain superior levels of profitability. The companies will
continue to be identified through our independent research efforts. Companies
in which we invest have the potential to increase in price at least 50% over
the next two years. The Fund will continue to invest in smaller "Growth
Companies", "Fallen Angels" and "Special Situations". The industries that
continue to be of special interest are in Communications, Media and
Entertainment and specialized service companies that provide services to these
industries. The attractive valuation levels of companies within the small cap
universe leave us looking forward to a successful 2000.
39
<PAGE>
-----------------
[REGISTERED LOGO] | PRFSORTED |
767 Fifth Avenue | FIRST CLAS MAIL |
NY, NY 10153 | U.S. POSTAGE |
| PAID |
| PERMIT NO 8084 |
| NEW YORK, N.Y. |
-----------------
4QR99
