<PAGE>
[REGISTERED LOGO]
BARON
FUNDS
--------------------------------------------------------------
BARON ASSET
1 FUND
--------------------------------------------------------------
PERFORMANCE................................................. 1
THE RISE AND FALL OF TECH
AND THE INTERNET............................................ 2
INVESTMENT STRATEGY......................................... 3
COMPANY NEWS................................................ 6
"2300 GUESTS AND THE
SOLITARY MAN"............................................... 8
--------------------------------------------------------------
BARON GROWTH
2 FUND
--------------------------------------------------------------
PERFORMANCE.................................................10
SMALL BUSINESSES . . .
BIG IDEAS...................................................11
PORTFOLIO STRUCTURE.........................................12
---------------------------------------------------
BARON SMALL
3 CAP FUND
--------------------------------------------------------------
PERFORMANCE AND
PHILOSOPHY..................................................14
PORTFOLIO COMPOSITION
AND KEY HOLDINGS............................................15
--------------------------------------------------------------
BARON
4 iOPPORTUNITY
FUND
--------------------------------------------------------------
PERFORMANCE.................................................18
PORTFOLIO CONSTRUCTION
AND STRATEGY................................................20
PORTFOLIO HOLDINGS..........................................21
CONCLUSION..................................................23
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
<PAGE>
THIS ANNUAL REPORT CONTAINS
INFORMATION FOR FOUR FUNDS
--------------------------------------------------------------------------------
BARON ASSET FUND
--------------------------------------------------------------------------------
ANNUAL REPORT SEPTEMBER 30, 2000
Dear Baron Asset
Fund Shareholder:
--------------------------------------------------------------------------------
PERFORMANCE
Results of Baron Asset Fund were satisfactory for the fiscal year ended
September 30. During the fiscal year, Baron Asset Fund's performance was helped
by the very strong performance of our education stocks, DeVry, Apollo and
Education Management. Although these businesses did well last year, their
stocks did not. This year their businesses continued to do well and their
stocks recovered. Ditto for professional, financial executive, temp placement
firm Robert Half. Also boosting Baron Asset's performance this fiscal year has
been the continuing strong stock price performance of specialized data base
business ChoicePoint and specialized chemicals producer OM Group. Stocks of
these mid-sized businesses with small market capitalizations have performed
well both last year and this.
After outstanding stock price performance during the first six months of our
fiscal year, several of our successful, long term investments purchased for
value prices years ago fell sharply in price. These businesses are now well
regarded and more fairly valued. Our communications investments were adversely
affected this year by troubled high-yield debt markets, an important source of
capital for their building programs. Our two principal communications
investments, American Tower and NTL, are well funded for years to come. And
anyone who uses a cellular phone just knows that we need more of American
Tower's communications towers. Increasing data transmissions (the Internet)
will further bolster tower demand. NTL will benefit in coming months
-------------------------------
PERFORMANCE
FOR THE YEAR ENDED
SEPTEMBER 30, 2000
BARON ASSET FUND 22.8%
S&P 500* 13.3%
RUSSELL 2000* 23.4%
-------------------------------
-------------------------------
PERFORMANCE
FOR THE 5 YEARS ENDED
SEPTEMBER 30, 2000
ANNUALIZED
BARON ASSET FUND 16.7%
S&P 500* 21.7%
RUSSELL 2000* 12.4%
-------------------------------
-------------------------------
PERFORMANCE
SINCE INCEPTION
JUNE 12, 1987 THROUGH
SEPTEMBER 30, 2000
CUMULATIVE
BARON ASSET FUND 724.2%
S&P 500* 570.7%
RUSSELL 2000* 295.8%
-------------------------------
* 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 A S S E T F U N D
from its program to bring fibre close to its homes in the U.K. It will soon
offer its customers not high speed Internet access, but exceptional speed
Internet access, and the services that portends, i.e., streaming media and
video on demand.
Slowing advertising revenue growth, partly a function of comparisons to very
strong growth last year, hurt our radio and television stocks this year. We
think this is a short term phenomenon. Charles Schwab's shares first rallied
sharply and then fell nearly as sharply when Internet shares fell. Schwab's
earnings ultimately depend upon the level of customer assets held at that firm,
which have continued to increase. Its shares are now valued for about 3.5% of
its current customers' assets. We expect these assets could triple in the next
five or six years. Based upon expected earnings, we think Schwab should be
valued for 6-7% of customer assets during the good times. Slow growing banks,
with vast fixed overheads, are often valued for almost 10% of deposits since
they offer more services. Schwab's revenues have fallen as a percentage of
customer assets for the past several years, but could soon begin to increase as
the firm offers its customers more services. Schwab's margins should then
increase. . . significantly. Flextronics' shares increased sharply this year
and, despite their recent decline, are still ahead for the year substantially.
During the first calendar quarter, although these businesses remain among our
favorite investments, Baron Asset Fund reduced its communications and media
holdings, including American Tower and NTL, as well as its investments in
Schwab and Flextronics, moderately as a percentage of our assets. This was the
second time we had done so in years. We also reduced our Schwab holdings in the
first quarter of 1999, after Schwab's shares quintupled in price in less than a
year and became a very large part of our Fund.
While prices for our communications and media stocks and several of our other
long term successful investments have declined since April, many of our small
company investments including Vail, Seacor, Manor Care, Polo Ralph Lauren,
Southern Union, Smart & Final and Ethan Allen have been in stealth bull markets
and have rebounded from very depressed levels. Since the results of these
smaller growth businesses, in our opinion, never justified deeply depressed,
"value" prices, we think these gains are likely to continue.
What's next? We think Baron Asset should soon perform very well although we
obviously cannot assure that result. Although most of our businesses are doing
very well, only about 18% of our assets are currently invested in businesses
whose share prices are close to their highs for the year. We expect our stocks
that are now doing well to continue to do so. Our communications and media
businesses that are now at depressed prices could provide excess performance
during the next fiscal year. This will be especially true if NTL's chairman,
George Blumenthal, is correct in his belief that, "Investing in communications
fibre to the home is like investing in cellular in 1982!" This belief was
relayed to my
<PAGE>
associate Andrew Peck and me last week as George led the two of us down alleys
between apartment buildings and across New York City streets to inspect wires
on buildings and manhole covers that hold fibre conduits below.
The rise and fall of tech and the Internet.
Since 1997, tech businesses grew strongly and increased as a percent of our
economy from 9% to 11%! But, during the two and a half years ended March 31,
2000, technology and Internet stocks increased as a percentage of the stock
market from 10% to 40%! The technology laden Nasdaq index jumped 85% in the six
months ended March, and during the prior 30 months about tripled, as did the
price earnings ratios of the businesses underlying that index.
Since March, technology and Internet shares have fallen sharply. The Nasdaq
index has so far declined about 46%. Many Internet stocks lost nearly all their
value this year, falling 90-95% while some of the very best technology
businesses lost at least 50% of their stock market values. Technology and
Internet businesses still represent about 27% of the stock market's value and
their price earning ratios are, on average, still about 2X average non-tech
company multiples. This is despite the fact that these businesses are highly
competitive; their customers are, for the most part, so called "old economy"
businesses; and technology businesses are clearly subject to cyclical demand
for their products and services that relates to "old economy" businesses'
capital spending.
We think, if you want to invest in "sunrise" Internet businesses as well as
businesses with open-ended Internet opportunities and significant competitive
advantages that have been purchased at what we believe are attractive prices,
you should read Mitch Rubin's Baron iOpportunity Fund shareholder letter that
follows. I think you'll agree, after you finish his report, that Baron's
approach to the Internet differs substantially from others' and that Mitch's
hard work, passion and diligent research could pay off for his shareholders
. . . big time.
"Hot" IPOs don't offer guaranteed returns. . . at least not guaranteed positive
returns! The opposite, in the long run, is more likely.
During the past two and a half years, investment bankers convinced professional
managers, as well as individuals including doctors, dentists and nearly
everyone else, that "hot" tech and Internet initial public offerings offered
investors certain riches...with little risk. The spectacular performance during
the past few years of several "post venture capital" mutual funds perpetuated
this belief. . . until their dramatic declines beginning in March, of course.
Those funds' strategies for investing in IPOs and, even worse, private
securities issued by businesses about to go public, have proven anything but a
certain path to riches. The skills of fund managers that are necessary to
receive large allocations of "hot" IPOs or to receive invitations to invest in
private
2
<PAGE>
B A R O N A S S E T F U N D
companies about to go public do not necessarily mean these managers have the
analytical skills and knowledge to determine if they are purchasing good or bad
businesses. It merely shows they are able to funnel enough trading commissions
to underwriters to justify preferred allocations.
Individuals and most professional mutual fund investors usually don't have
either the financial or technical expertise to evaluate risks that venture
capitalists are practiced in determining. They certainly don't get enough
information about these businesses from perusing a prospectus, or by attending
road shows or one hour, "one-on-one," heavily scripted meetings with
managements. It must by now be obvious that because you've invested in a stock
that initially increases in price certainly does not mean you've invested in a
successful business. We think most of the so called "post venture capital"
investors and IPO oriented individual traders who purchased unproven businesses
at extraordinary valuations too high for venture investors have only shifted
the risk of venture capital investing from knowledgeable private to unskilled
public investors. We agree with Warren Buffet's recent comment that the
innumerable recent "hot" tech and Internet IPOs in the past couple of years
have not created wealth but have merely transferred wealth from those who
earned it to the owners of the private businesses going public!
Baron Asset Fund's Investment Strategy: A restatement of principles.
Baron Asset invests in fast-growing, small and mid-sized, non-tech businesses
with sustainable competitive advantages. . . at attractive prices. . . for the
long term. . . that we identify through our own research.
Baron Asset Fund invests in fast growing, non-technology businesses that can
create sustainable competitive advantage, in many instances through their own
significant investments in technology. The Fund has not invested in the
companies that make chips, computers and software because those businesses are
so competitive, and scientific advances that can obsolete current technology
occur so rapidly. We just believe we can earn better and more consistent
returns by investing in businesses that use technology rather than by investing
in businesses that make it. . . while incurring significantly less risk.
Valuation is important. . . and it always has been. I have always tried to
impress upon my sons the notion that investing in stocks is riskier than
leaving your money in the bank or purchasing T-bills. But, if you invest only
in "riskless" interest bearing instruments, due to inflation and taxes, every
year you're going to fall further behind. "So you've got to invest in
businesses by purchasing stocks. When you do, you better be sure that the
expected potential returns you can achieve are a lot better than you can get by
investing in Treasury bills. The price you pay for a stock, just like the price
you pay for a sweater, a computer, a car, your home or anything else, does
matter."
<PAGE>
We invest in growing businesses. We won't invest in a business that isn't
growing just because it's cheap. But we also won't invest in a business with a
tremendous growth opportunity if its valuation, in our opinion, already
discounts great success. That was the problem with so many Internet
investments. Great opportunities. But, the valuations were already huge and
were based upon the assumption that these businesses had already achieved great
success.
So, how do we value businesses? Like a business person would. . . based upon
current cash flows, earnings, asset values, growth rates and long term barriers
to entry. . . with only a little premium for a growth opportunity. We're not
ready to accord a valuation that approaches General Motors' to a start up
business.
We think our research and long term investment horizon provide us with
competitive advantage.
Why do we do our own research? We have never thought it particularly useful to
follow widely publicized recommendations of large brokerage firms that all seem
to arrive at the same conclusion at the same time based upon the same
information. Recommendations based upon earnings for a calendar quarter that's
just ended beating or missing earnings estimates by a penny. . . upon
management presentations at widely attended conferences or conference
calls. . . or upon projected interest rates, the nation's economic growth rate,
unemployment or inflation rates (all basically unknowable). We don't even care
if there's a tie presidential election (we will have a president. . . or, if
you believe Saturday Night Live, we'll have a Jack Lemmon/Walter Matthau "Odd
Couple" presidency with two presidents).
We think it's better to first identify a large business opportunity. . . and
then to identify businesses that could take advantage of the opportunity. We
try to regularly visit these companies, as well as their competitors and
customers, to determine a business' sustainable competitive advantages and the
talent and passion of its executives. What does "the passion of its executives"
mean? It means that these executives don't regard what they do as a job, but
truly enjoy their work and have a sense of urgency to make things happen. Every
day. And, would likely work long hours even if they didn't have to. Like Tina
Turner, they want to be "Simply the Best." We have often written that how
executives treat their customers, their fellow employees, their community and
their fellow investors is an important determinant to the success of a
business. You can only measure attitude by seeing it with your own eyes.
When a big opportunity, great executives and attractive fundamentals, including
valuation, are all present, we invest for the long term. Long term, to us,
means years and years. . . not quarters, months, weeks or days, so that if the
business is successful, our Fund should profit accordingly. Most mutual funds
have annual portfolio turnover of 100%, i.e., they sell their entire portfolio
and replace it every year, leading Jack Bogle, founder of Vanguard, to headline
a recent op-ed article in The Wall St. Journal, that "mutual funds have lost
their way." Baron Asset Fund's
3
<PAGE>
B A R O N A S S E T F U N D
portfolio turnover has averaged 15% for the past five years, which means that,
on average, it holds investments seven years! We believe this allows our Fund
to participate in the long term growth experienced by our successful
investments. . . such as Charles Schwab, Robert Half, Flextronics, DeVry,
Hispanic Broadcasting, American Tower, NTL, Saga Communications and others
where we have multiplied our initial investments many fold.
Do we make mistakes? Absolutely. After all, we're not investing in the large,
well established, best known growth companies in America, companies such as GE,
Home Depot, Merck and Coca Cola. Rather, our favorites are the small and
mid-sized, non-technology businesses which are growing a lot faster and are a
lot cheaper than those blue chips. But, they're also riskier. If a significant
number of our businesses fulfill their promise of long term, sustainable rapid
growth, we expect to earn better returns than a portfolio of today's widely
held, blue chip, growth companies. And, better than a diversified portfolio
with technology business concentration. Of course we can't make any guarantees.
The outlook for our "sunrise" businesses is good.
Following a three-year bear market in non-technology stocks that ended in
March, we are very optimistic about the prospects for our businesses. . . and
their stocks. The reasons begin with the very strong growth prospects for our
"sunrise" business themes that are the result of many long lasting megatrends
we have often written about. Services for a U.S. Hispanic population that is
growing five times as rapidly as non-Hispanics. Education to enable individuals
to achieve a higher standard of living for themselves and their families in an
information economy. Services for the "baby boomer" population segment that is
larger and wealthier than any other. Services for the elderly who are growing
three times as fast as the overall population. Businesses able to create
significant competitive barriers, sustainable competitive advantage, through
significant investments in technology. The return potential for our stocks is
buttressed by cheap valuations. And, by a more slowly growing economy that may
permit Federal Reserve credit easing and, therefore, result in higher stock
valuations for our businesses. For practical purposes, "high yield" debt
issuance as well as new equity issuance for smaller businesses has stopped due
to very stringent credit conditions engineered by the Fed. Small and mid-sized
businesses flourishing in the current environment will do even better when
market conditions become more favorable.
Regulation FD. (Regulation Fair Disclosure)
Recently implemented SEC Regulation FD should advantage long term investors and
negatively impact short-term traders dependent upon advance hints of new
contracts and quarterly earnings "beats" and "misses." And, by the way, we just
love the ten and twenty page quarterly press releases we now regularly receive
with detail never before widely disseminated. They sure shortcut a lot of
discussions and allow us to be more productive. But, most importantly, the new
Regulation FD certainly doesn't seem intended to prevent strategic discussions
between analysts and management regarding the long term prospects for a
business. Trying to understand a business' longer term prospects and how its
management intends to create competitive advantage has always been critical to
investors seeking to make substantial long term investments in businesses. This
information, of course, has never been material to a company's short term share
price valuation.
<PAGE>
For example, other high end art and antiques auctions may provide disclosures
regarding sale guarantees and property ownership that comply with the letter,
if not the spirit, of regulations. Sotheby's has an opportunity to provide
transparency to the auction process not available elsewhere by promulgating
ethical standards and offering price histories even though it is not required
to do so. Analysts are certainly permitted to discuss with its management how
Sotheby's intends to do this. . . how it intends to make its York Avenue
headquarters facility into a widely visited art and antiques department
store. . . and how it intends to focus its physical auctions on higher priced
objects and achieve better price realizations on lower valued goods sold
through its dealer network on sothebys.com. They can discuss with Motient how
its nationwide, data optimized, wireless network can compete against larger
companies' voice and data communications networks. . . and the ultimate value
of Motient's customers, if they are successful, and to whom they will be
valuable. They can discuss with Vail's management the sort of investments
necessary in its town and marketing that will allow it to bring tourists to
that community in "shoulder" periods during the ski season. They can discuss
with Charles Schwab the sorts of services it can provide its clients to "make
them smarter investors" that will allow Schwab to achieve more revenues per
dollar of customer assets with which it is entrusted. In other words, analysts
can interview management and its competitors to become students of a business;
to understand when results are reported, what they mean; and to be able to make
judgments about whether a business is successful. They've got to use these
interviews to create a mosaic to understand a business. Just like they're
trying to understand a topic in a course in college or law school or business
school. They just can't find out from management about market moving earnings
results before they are released. If analysts are doing their job right, they
will already know if a company is doing well or not without even asking.
Peace in our lifetimes?
When the Berlin wall fell in 1989, I was incredibly bullish. . . a year too
early, perhaps, but, looking back on the past decade, it certainly proved not a
bad time to be optimistic. Money and efforts that governments had previously
spent on non-productive defense could now be devoted to spending that could
improve lives and boost economic growth providing many businesses with great
opportunities.
4
<PAGE>
B A R O N A S S E T F U N D
At a recent charity dinner, my wife and I were seated with Avrum Burg, Speaker
of the Israeli Knesset. Speaker Burg, whom everyone just calls "Avrum," may be
one of the more popular politicians in Israel and is a leading proponent for
peace initiatives with the Palestinians. Avrum told the crowded room, "Isn't a
cold war a lot better than a hot war? I want to make peace with the
Palestinians even if now they don't want to make peace with me. We must create
an environment where resentment, jealousy and revenge are minimized so that
true peace may occur in the future." Avrum continued, "I am not going to rely
on only the good will of the Palestinians to achieve a peace accord. But, you
should know that just as Israelis have grievances against Palestinians,
Palestinians living in Israel have grievances against the Jewish people. There
is a great disparity between the incomes of Palestinians and the Israelis.
There will be peace made when the Palestinians believe peace will improve their
lives and economic situations."
Avrum's father was the Deputy Speaker of the Knesset for several years, and a
leading force in Israeli politics for decades. Eight or nine years ago Avrum,
his twelve year old son and his father were stuck in a traffic jam in Jerusalem
that had been caused by a terrorist bomb scare. Avrum's son plaintively asked
him, "How can we ever make peace with these people? It just doesn't seem
possible." Avrum's father answered. "Boychik, I escaped from Germany in 1939,
but the rest of my family did not. When I learned what had happened to my
family, I thought peace between the Germans and Jews would never be possible. I
was wrong. There is now peace between these two nations. The rift between
Germans and Jews was a lot wider than that which separates the Jews and
Palestinians. There will be peace in your lifetime between Arabs and Jews!"
The Israelis during the past several years have given a substantial part of
their land to the Palestinians. They have invested heavily in that land's
infrastructure to improve Palestinian living standards. Which has occurred. All
for the promise of peace. Which has not occurred. Palestinian terrorists still
bomb Israeli school buses and set car bombs killing and injuring innocent
individuals; Palestinian children still stone Israeli troops; and, Palestinian
armaments continue to regularly assault Israeli towns and villages.
We certainly hope Avrum is correct and at least a cessation to the fighting can
be negotiated soon, if not by the Labor party of Barach and Avrum, then by the
harder line Likud party of Netanyahu and Sharon. And, we, too, believe peace
between Arabs and Jews will be made in our lifetimes, if not by current
leaders, then by succeeding leaders not tied to current hostilities. Peace in
the Middle East, or even just a prolonged and healing cease fire, just like the
peace eleven years ago when the Berlin wall fell and democratic societies were
born behind the "Iron Curtain," would be immensely favorable for world
economies and markets. It would also be nice to no longer see those horrible
images daily on television and in the newspapers.
<PAGE>
Baron Funds invests in dreams with strong business fundamentals. . . but, we
pay for the fundamentals, not so much for the dreams. . .
Like Vail Resorts. We believe Vail is not a weather, "Act of God" investment.
Vail is a well capitalized and very profitable business with significant growth
prospects. We think Vail will be a very profitable investment for us during the
next few years. . . not because the snowfall was less than normal during the
past two Christmas seasons and, due to the absence of La Nina and El Nino, has
returned to normal this year. But, it certainly won't hurt this year's results
that, as of November 20, there has already been six feet of snow on Vail's
summit, the most before Thanksgiving in fifteen years.
Although Vail's share price has changed little during the past three years,
Vail's annual cash flow increased from $80 million to an estimated $120 million
this year. Not too bad for a unique business currently valued by investors for
only about $660 million (plus $300 million debt less $150 million owned real
estate. . . that we think is worth a lot more). Vail Resorts is investing
heavily in its communities' "streetscapes," e.g., heated stone streets and
walkways, old fashioned lampposts and fancier storefronts; as well as new and
remodeled hotels, some spectacular, some moderately priced; convention centers;
restaurants; and golf courses for summer visitors.
Vail has invested $230 million in its communities in the last three years on
which it has not yet earned a return due to "once in a hundred years'
weather". . . two years in a row. Billions more will be spent by Vail and
others in its communities during the next ten years. . . to make its resorts
attractive to both winter and summer visitors and residents.
By the way, residents frequently volunteer that they came to Vail for the snow
but decided to stay, to live there, because of the summers. You would certainly
understand if you've ever visited Vail or Beaver Creek in the summertime. And,
I'm sure you'd quickly see the tremendous opportunity, the dream Vail Resorts
has, to become not just a winter resort, but a summer resort as well.
The rest of the dream? Vail is only 65-70% occupied during peak periods that
include Christmas, Presidents' Weekend and Spring Break. It is a little more
than 40% occupied during the entire 150-day ski season. The challenge? There
are plenty of rooms to fill during peak school vacation periods. There's even
more rooms and ski trails to fill during the rest of the 150 day ski season
when the snow is great and the mountain is nearly empty. If Vail can attract
only about 60,000 more families to ski at its resorts each year, about 250,000
to 300,000 families now visit each year, and Vail achieves moderately higher
revenues per
5
<PAGE>
B A R O N A S S E T F U N D
guest, Vail's annual operating profits could more than double to $250-300
million! Vail Resort's investments in business meeting facilities and hotel
rooms and promotions to young marrieds, single "echo boomers" and empty nester
"baby boomers" during "shoulder" periods will intuitively be successful.
Vail was the largest ski resort in the United States before it opened Blue Sky
Basin last year. Blue Sky Basin was a ten year project due to objections by
environmentalists. Now, that's what we consider a significant barrier to entry!
Blue Sky Basin makes Vail seem sparsely occupied even during peak school
vacation times. And, more hotels and time share units, both moderate and luxury
priced, as well as significant upgrades to existing hotels, will soon give Vail
Resorts further opportunity, both during ski season and during the so-far
unsung summer.
iOpportunities. Virtually all the businesses in which we have invested have
significant opportunities to use high speed Internet access and rapidly falling
communications costs to grow their businesses more rapidly. . . and reduce
operating expenses. Among the most obvious beneficiaries are our financial
services firms and our resort businesses. These businesses will use the
Internet more and phone centers less, replace operators with photons, and cut
reservations and information costs from dollars to pennies in the process. In
fact, any business that is communications intensive will benefit from the huge
increases in bandwidth now becoming available at ever lower prices. Businesses
that can offer distance learning. . . recruit more effectively. . . make data
base services more readily available. . . provision utility services. . .
obtain customers for lower cost. . . offer billing and account statements
through the Internet. . . and purchase materials more efficiently. They are the
beneficiaries. We believe the benefits of communications fibre, with its huge
increments to bandwidth, will be apparent in months. . . not years.
Using the Internet, Schwab can already provide its customers with the resources
required to make "smarter" investment decisions. It can also offer more
efficient trading systems, provide access to real time account information, and
bill and collect through the Internet. Robert Half offers its employees up to
the minute information about job openings; wages earned and due; while sharing
candidate resumes among its recruiters, serving its employers, candidates and
recruiters better. Communications businesses can sharply reduce their service
provisioning, marketing and billing costs while offering consumers expanding
services, movies on demand, travel services and information real time.
Utilities can do all that and eliminate meter reading, as well. All the above
services will only improve. We agree with Intel's Andy Grove that, "All
businesses will become Internet businesses or they won't have a business." As
CS First Boston's former Internet analyst Liz Byer notes, "There soon won't
even be any Internet analysts. It'll be like saying you're an electricity
analyst!"
<PAGE>
--------------------------------------------------------------------------------
COMPANY NEWS
Our small cap stocks are cheap!
DVI is the leading, independent, financing company for health care providers.
DVI lends to health services providers including hospitals, doctor practices,
outpatient surgery centers and medical imaging centers. Equipment used by these
enterprises, as well as their medical receivables, are the collateral for DVI's
loans. Nearly two years ago, the Health Care Financing Agency (HCFA) changed
its reimbursement rate for medicaid and medicare health care from "cost
reimbursement," reimbursement for actual costs incurred by the service
provider, to "prospective pay," fixed payments for services provided regardless
of how much it costs to provide the services. It is obviously a lot cheaper to
take care of an individual in his or her home or in a nursing bed than in a
hospital bed. But, HCFA reacted to the above normal growth in home care and
nursing services as providers sought to reduce costs and, rather than trying to
encourage even more use of these services, cut reimbursements! The impact? Many
businesses were bankrupted since their costs could no longer be recovered. Nine
months ago, HCFA was pressured by Congress to change after constituents were
denied access to services because providers were in distress. HCFA then
announced that in October 2000, healthcare provider reimbursements would
increase. Businesses that were then moribund were resuscitated. Since these
changes are good for DVI's customers, they're good also for DVI. DVI has
increased its income 41% per year for the past five years, and its prospects
for the next five are promising. However, investors fear that this relatively
small business with more than $2 billion of financed assets may not have access
to financial markets that will permit it to continue to grow. This is
demonstrably not the case since DVI now has committed financing for the next
two years and its growth is accelerating. DVI's shares now sell for just 9
times current earnings and one times book. DVI's current stock market value is
a lot less than it would be worth to an acquirer although now certainly does
not seem an attractive time to consider selling the business. DVI's two
principal shareholders are Chicago's Pritzker Family and Baron Funds.
Seacor's chairman Chuck Fabricant is one of my favorite entrepreneurs. In
addition to being a personal friend for fifteen years. . . our boys went from
kindergarten through high school together. . . he's a heck of a businessman.
He's smart, honest, hardworking and focused on creating long term value for his
shareholders. He's also in the same boat that we are (that's a pun, Chuck). . .
he's the largest individual shareholder of Seacor. Chuck buys oil and gas
exploration and production assets when they're cheap and sells or leases them
for lengthy terms when they're dear. There are probably not many who know more
about lease terms than this brilliant lawyer who once clerked for a United
States Supreme Court Justice. And, there are probably few executives who better
understand that, regardless of what lease terms dictate, you've always got to
try to help your customers if you expect them to remain good customers. As oil
and gas businesses increase their exploration activities, the drill boats and
rigs
6
<PAGE>
B A R O N A S S E T F U N D
owned by Seacor are becoming more valuable. Spot rates on equipment leased have
increased about 20% since just last summer. Because these rates remain below
what would be required to justify building new boats, they will likely continue
to increase. Spot rates are significantly above Seacor's average contract rate,
offering the company earnings upside as contracts are renewed at current rates.
Also putting upward pressure on rates is increasing fleet utilization. In the
September quarter, Seacor's fleet utilization jumped 7% to 80.3%. With one of
the industry's newest fleets, Seacor's stock market value is less than the
replacement cost for its drill and production boats. Its shares are selling for
less than 12 times estimated 2001 earnings, less than 5X estimated 2001 cash
flow. Baron Funds has more than doubled its money, so far, since it began to
invest in Seacor five years ago. We expect to do it again in the next three to
five years.
Smart & Final achieved very strong 8-9% comparable store sales gains in the
September quarter. These are the best results for this cash and carry,
institutional foodservice business in eight years. Smart & Final is
accelerating its new store openings to 15 this year, 20 next. There are
literally thousands of 20-25,000 square foot closed supermarkets offering
potential expansion sites for this specialized, cash and carry, 220 store
chain. Although the company's operating margin could increase by nearly a
third, its share price commands just 10 times current after tax earnings per
share. Another metric for valuation is as a percent of sales. Here also, we
consider Smart & Final unusually cheap at a little more than 12% of revenues.
Libbey has the potential to acquire other foodservice businesses and add their
products to its institutional foodservice distribution. Libbey also has an
opportunity to significantly reduce its cost of goods sold if it can use its
Mexican affiliates' production capacity. In the meantime, although Libbey is
the dominant foodservice glass supplier, Libbey's shares sell for just 8.5
times earnings.
When others were paying huge multiples of current broadcast cash flow to make
radio acquisitions, Saga Communications' chairman Ed Christian was just biding
his time. Saga is now one of the least leveraged, publicly owned broadcast
businesses. And, this operator of big city style radio stations in small towns
has recently nearly tripled its pace of acquisitions now that others find it
hard to do deals, even at prices that are more than a few multiple points
cheaper than in the very recent past. Using conservative assumptions, Saga has
a current acquisition value nearly 75% higher than its share price. Saga's
acquisition value could be double that within the next five years. In the
meantime, Saga is currently valued for less than 10 times broadcast cash flow,
a steal even in today's depressed markets.
Furniture sales continue very strong, confirmation of our theory that strong
housing markets of the past several years will lead to strong home furnishings
markets for the next several years. Ethan Allen's comparable store sales
increased a remarkable 17% in the last quarter, helped in part, we assume, by
new GE revolving credit terms for its customers. Ethan Allen has also increased
the number of professional designers in its stores 7-8%, favorably impacting
sales. Industrie Natuzzi's United States' "seat" sales were ahead more than 20%
in the most recent period. Natuzzi recently agreed to increase its French
distribution significantly and has begun a plant expansion outside Italy. Ethan
Allen sells for just 11 times next year's earnings, Natuzzi for a little more
than 7 times.
<PAGE>
Sun International announced it intends to sell its casino in Atlantic City for
$140 million with the sale of its assembled acreage to follow for $40 million.
The casino in Atlantic City was producing annual cash flow of about $20
million, the land obviously nothing. This sale will free the company's
management to focus on the Atlantis, its very profitable casino resort on
Paradise Island, the Bahamas, and its managed facility, The Mohegan Sun, in
Connecticut. And, to invest in other potentially profitable gaming ventures.
Sun's shares sell for 9x 2001 after tax earnings.
Sotheby's settled both the U.S. government's anti-trust price fixing complaint
and civil claims arising from the same behavior. The settlements are subject to
court approval. There had been little reported movement toward either civil or
anti-trust legal settlements during the seven months since February when it was
announced that Christie's was cooperating with the government and De De Brooks
and Alfred Taubman were forced to resign as Sotheby's executives. However, in
the eight weeks after new independent directors were elected to Sotheby's board
on August 2, the company was able to settle claims, subject, as noted, to court
approval, by the government and civil litigants including Sotheby's customers
and its shareholders. Alfred Taubman paid the major portion of this settlement
on behalf of Sotheby's. No surprise here. We had suggested in our shareholder
letters that would be the likely result.
Earnings for most of our businesses have been very strong through 2000, the
September quarter especially so. Several among the more notable results follow.
Flextronics' September sales more than doubled last year's while earnings
increased 92%. Its stock price fell since many of its customers reported
slowing growth. Flextronics' sales have grown about 25 times in the five years
we've been shareholders as the trend to outsourced electronics manufacturing,
that's what Flextronics does, has accelerated. Only about 15% of electronics
manufacturing is now outsourced, offering further opportunity. Flextronics has
become the second largest business in this sector and hopes to multiply its
business tenfold again in the next eight to ten years. Robert Half's September
sales increased 30% while its earnings jumped 37%. Robert Half is benefiting
from its substantial investments in the Internet that now permit it to source
candidates more effectively. OM Group's sales increased 77%, the result of a
strategic and accretive acquisition, while earnings gained 31%. Trends in its
core business are favorable and more acquisitions are likely. ChoicePoint's
September quarter revenues
7
<PAGE>
B A R O N A S S E T F U N D
increased 17% while its earnings increased 68%. The company's core insurance
services business continues to experience good growth. Its commercial and
government business is beginning to evidence much stronger margin potential.
Consolidation efficiencies are evident. Dollar Tree's quarter sales gained 25%,
its earnings exploded 73%, the result of a relatively easy comparison a year
ago when consolidation expenses slowed earnings growth. DeVry's revenues
increased 14%, earnings 21%. Looking back over the ten years we have been
shareholders of this business, I can scarcely remember a quarter where income
growth has not exceeded 20%! DeVry also announced on-line education
initiatives. Apollo's revenues increased 22%, while earnings gained 33%. Apollo
completed a successful initial public offering of University of Phoenix
On-Line, a tracking stock. Education Management's sales increased 19%, earnings
jumped 33%. A burdensome regulatory issue was resolved favorably. The last
named three private colleges have been our best performing investments this
year. The reason? Although their businesses performed equally well last year,
investors then were concerned, I guess, that jobs markets were so strong, why
do young people need a higher education? We found that view remarkable in our
information economy. With economic growth slowing this year, investors have
seemingly changed their minds.
"2300 guests and The Solitary Man" is how the New York Times phrased it.
Neil Diamond entertained more than 2000 of our fellow shareholders on October
19 at the Baron 2000 investment conference.
I have long believed that it would be useful for our shareholders to be able to
"kick the tires" of their investments in Baron Funds each year. Our quarterly
shareholder letters are designed to provide you with the information I would
like to have if our positions were reversed and I was trying to determine if
Baron Funds was a suitable investment for my family's savings. Our annual
investment conferences are intended to allow you to hear chief executives of
several businesses in which our funds have invested talk to you about their
businesses and then answer your questions. The conferences are also intended to
permit me to address you each year and then answer any of your questions, no
holds barred, with the help of Morty Schaja, our firm's president and Cliff
Greenberg and Mitch Rubin, our firm's two other portfolio managers when I need
it or when the questions are directed at them.
This year's conference began with Apollo's President Todd Nelson describing the
outlook for his company, this country's largest private university with more
than 100,000 adult, degree-seeking students, adults who need a degree to
provide better for their families and who learn differently than younger
students. Todd also discussed the prospects for the exponential growth of
Apollo's on-line, 90% owned University of Phoenix. About 75% of our citizens do
not have a college degree and, because of this, are often stymied in their
efforts to provide for their families. That is the opportunity for Apollo.
Rapidly growing, specialty chemicals business OM Group's Chairman Jim Mooney
first spoke about how growing up as one of thirteen children he had to learn to
be very competitive, just if he wanted to eat! He then showed how his company
was "changing the way businesses had to compete" against him and made it
abundantly clear they wouldn't have an easy time of it as his company continues
to develop new services and products to benefit its customers. Jim has about
tripled the size of his business to $1 billion annual sales in the past five
years and expects to quintuple it again during the next five.
<PAGE>
Radio One's President, Alfred Liggens, and CFO, Scott Royster, spoke about the
competitive advantages of their radio stations that target Afro-Americans
listeners. Alfred and Scott are both young Afro-American executives. Why does
it matter? Because they are, therefore, more sensitive to their listeners'
issues and tastes. Their community oriented radio stations can, as a result,
more easily address the concerns of their audience. . . by providing health
updates regarding sickle cell anemia; by helping raise funds to rebuild
churches that have been burned by bigots; by offering single mothers
information about how to better educate their children. Since it is a minority
controlled business, Radio One was advantaged in its recent purchase of $1.3
billion radio stations from radio giant Clear Channel Communications. Its
current challenge? Operate the newly acquired stations better in Afro-American
formats than they had been under their prior owners.
Robert Half has been the most profitable investment we have ever made in terms
of percentage gain. We've earned even a little more percentage-wise than our
investment in Charles Schwab. Robert Half's shares have increased more than 60
fold since our initial purchases in 1991. We made this investment after its
chairman, Max Messmer, whom I greatly admired as a member of Castle & Cooke's
office of the chairman, left that company, at the time our largest investment,
in 1986 to become the chairman of Robert Half. "I want to move closer to my
home in the Bay area and take it a little easier. I don't want to miss my kids
growing up." Well, he did move closer to home, but it certainly has never been
evident to me that he's taken it any easier. Max and his "first hire" at Robert
Half, Keith Waddell, the company's vice chairman and chief financial officer,
described the dominant position of Robert Half as the country's largest and
most profitable provider of temporary, highly skilled, financial executives.
They described the company's culture as well as the reasons it is so hard for
others to compete against them. Half's clients are small and mid-sized
businesses, not the Fortune 1000. Its clients and candidates do business with
Robert Half based upon its reputation for great service established over 50
years. Max and Keith also spoke of the company's significant Internet
initiatives that have allowed the company to recruit more effectively and
better serve its candidates and customers. When we first invested in Robert
Half in 1991, its annual sales were about $200 million and it was marginally
profitable. In the most recent quarter, Half's revenues were $687 million and
it earned 12% pre tax! Their dream is to triple the size of their business
again. Thank you Max and Keith!
8
<PAGE>
B A R O N A S S E T F U N D
Morty Schaja, Baron Capital's president and chief operating officer, then spoke
about "trading" as contrasted to "investing." His presentation borrowed
liberally from The Trillionaire Next Door, a recent bestseller that bills
itself as "The Greedy Investor's Guide to Day Trading." Following my keynote
speech, I introduced our surprise entertainer this year, Neil Diamond. My
announcement before the entertainment began that this was my expense, Baron
Capital's expense, not that of our mutual funds, was met by cheers from our
audience. I explained that it was our way of saying thank you to our
shareholders for their strong support for the past thirteen years. We believe
these conferences are an important way for us to communicate with our fellow
shareholders and to let you see how your savings have been invested. The
entertainment following the conference during the last two years has provided
the day with an appropriate end.
I explained when I introduced Neil that both my grandfathers "came to America"
almost 100 years ago from eastern Europe and Russia to settle in Brooklyn. . .
which probably accounts for my love for anything from Brooklyn. . . especially
the Brooklyn Dodgers and The Boys of Summer. Neil Diamond was born in Brooklyn,
and I've been a fan of his and his music since I was in law school. As a child,
Neil also happened to have gone to summer camp at Surprise Lake, a UJA camp at
which my wife later. . . much later. . . served as President for several years.
Anyway, one of Brooklyn's greatest performers ever gave our shareholders one of
the greatest performances ever! Neil performed his hit standards, one crowd
pleaser after another, for more than an hour including "Solitary Man,"of
course, "Forever in Blue Jeans," "September Morn," "You Don't Bring Me Flowers"
and an amazing number of his other hits too numerous to list. When the
entertainer joked with the audience, it certainly appeared that not just the
audience, including our speakers during the morning, was enjoying the
performance. And an entertainer Neil certainly is. When he wandered singing
into the standing, clapping and yes, even dancing, crowd, and "high-fived" me,
the room exploded with cheers. My friend Connie from high school dialed her
cell phone to reach her daughter, Caroline, when Neil sang "Sweet Caroline" and
Caroline played the song through her speakerphone for her office to enjoy! Of
course, the performance ended with probably Neil's greatest hit, "Coming to
America," that I'm certain had special meaning to many. Anyway, Neil's
performance was certainly a suitable encore to last year's surprise performance
by Billy Joel.
As is our custom, we gave our shareholder conference guests complimentary,
Baron 2000 t-shirts, perfect for use on jogging trails, the beach or while
riding your motorcycle. . . which is how OM Group's Chairman Jim Mooney plans
to use his! I think our shirts this year, with a Roy Lichtenstein American flag
rendition on the front, and a Neil Diamond autograph on the sleeve, are our
coolest yet. As I noted in my conference remarks, if I ever tire of my career
as a money manager, a career as a t-shirt designer beckons. If you'd like one,
too, there will be no charge, just call or e-mail us showing that you're a
shareholder. Stories are already filtering in about t-shirt sightings in the
most unlikely places. Copies of my speech, as well as Morty's, including
slides, are available as well.
<PAGE>
The Wall Street Journal noted a few days after our conference in a paragraph
titled "Red Faced Baron" that during my talk, to illustrate a point poking fun
at day trading, we ran a film clip of an on-line trading ad from a Charles
Schwab competitor. The ad obviously promoted Schwab's competitor. David
Pottruck, Charles Schwab's co-CEO, and the speaker at our conference last year
whom I asked to follow Billy Joel's surprise hour long "gig," faxed me the
article. "First you make me follow Billy Joel. . . and now this?" Although I
had tried to explain to David last year that Billy Joel was just intended to
warm up the audience for him, I faxed back, "Can you just imagine whom I'm
going to ask you to follow next year?" "If I agree to speak at your conference
again I'm not going on after the entertainment!" came the reply. In a followup
phone call, David suggested to me that if I want to warm up the crowd for him,
". . . use a magician who just performed at a Saturday night bar mitzvah, not
Billy Joel."
Thank you for investing in Baron Asset Fund.
We recognize that, for most individuals, deciding how to invest your hard
earned savings to pay for your children's education, a new home or your
retirement is one of your most difficult decisions. It must be especially
difficult now since the stock market advance of the past few years, led
principally by Internet and technology stocks, has not been inclusive of many
other businesses. And, technology and Internet stocks have recently fallen
sharply.
Baron Asset Fund's investment thesis is relatively uncomplicated. Baron Asset
Fund invests for the long term in growth businesses we believe have been
purchased at attractive prices. Purchasing stocks at attractive prices reduces
risk, we believe. We try to invest in businesses that will likely double in
size, profits, cash flow or asset value, in three to five years. We assume that
if a business doubles in size, so will its stock price. Of course, we cannot be
certain we will continue to achieve our objectives. In fact, during the past
two years, business growth and stock prices have often been disconnected. We
will continue to invest in fast growing, inexpensive businesses with valuations
that offer both downside protection and potentially significant rewards.
We hope our quarterly shareholder letters and annual investment conferences
have made it easier for you to determine if Baron Funds is an appropriate
investment for you and your family. We want to thank you for choosing to join
us as fellow shareholders. We will continue to work hard to justify your
confidence. Again, thank you for your strong support and interest.
We wish you a Happy New York Holiday Season and Happy New Year's!
Sincerely,
/s/ Ronald Baron
----------------------------
Ronald Baron
Chairman
November 20, 2000
9
<PAGE>
[REGISTERED LOGO]
BARON
FUNDS
--------------------------------------------------------------
BARON GROWTH
2 FUND
--------------------------------------------------------------
PERFORMANCE................................................ 10
SMALL BUSINESSES . . .
BIG IDEAS.................................................. 11
PORTFOLIO STRUCTURE........................................ 12
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
--------------------------------------------------------------------------------
BARON GROWTH FUND
--------------------------------------------------------------------------------
ANNUAL REPORT SEPTEMBER 30, 2000
Dear Baron Growth
Fund Shareholder:
--------------------------------------------------------------------------------
PERFORMANCE
Baron Growth Fund's performance in the year ended September was satisfactory.
Favorably contributing to the Fund's performance were our education businesses,
Apollo, DeVry and Education Management. During the prior year ended September
30, 1999, these businesses had performed well. . .more students attended their
schools, higher tuition revenues were received, more campuses were operated and
they earned more money. However, stock traders opined, surprising as this might
seem in an information economy, that since jobs were plentiful and employees
scarce, why did anyone need a higher education? And, as a result, education
share prices fell sharply. In the fiscal year ended September 2000, these
businesses continued to grow strongly and their share prices rebounded. In
addition, Apollo successfully offered shares of a tracking stock for its
Internet division, University of Phoenix On-Line; DeVry recently received
regulatory approval to begin to offer an under graduate degree on-line; and
Education Management favorably resolved a regulatory issue.
Specialized temporary provider of highly skilled, financial executives, Robert
Half International's growth slowed moderately in mid year fiscal 1999 as it
became increasingly difficult to fill positions in a very strong economy.
Half's share price, as a result, fell sharply. In the fiscal year ended
September 2000, its Internet and other initiatives to more effectively recruit
candidates became increasingly effective, its growth accelerated and its share
price rebounded sharply.
<PAGE>
-------------------------------
PERFORMANCE
FOR THE YEAR ENDED
SEPTEMBER 30, 2000
BARON GROWTH FUND 18.6%
S&P 500* 13.3%
RUSSELL 2000* 23.4%
-------------------------------
-------------------------------
PERFORMANCE
FOR THE 5 YEARS ENDED
SEPTEMBER 30, 2000
ANNUALIZED
BARON GROWTH FUND 19.1%
S&P 500* 21.7%
RUSSELL 2000* 12.4%
-------------------------------
-------------------------------
PERFORMANCE
SINCE INCEPTION
JANUARY 3, 1995 THROUGH
SEPTEMBER 30, 2000
CUMULATIVE
BARON GROWTH FUND 254.3%
S&P 500* 245.9%
RUSSELL 2000* 125.4%
-------------------------------
* 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
Investment managers Blackrock and Gabelli Asset Management performed well as
those firms' assets under management grew strongly. Blackrock is reaping the
benefit of its continuing strong fixed asset performance, Gabelli, its strong
media and communications performance during the prior few years. We had
purchased shares in both businesses during 1999 when few others were
interested, and, as a result, were able to buy shares at attractive prices. We
have more than doubled our money in Gabelli, more than tripled in Blackrock. Of
course, we believe that there are a few businesses about which we are more
knowledgeable than investment management businesses.
Two of our favorite small capitalization stocks with mid-sized businesses,
specialized data base business ChoicePoint and specialized chemical company OM
Group, continued to perform well and also favorably impacted the Fund's
performance. ChoicePoint's margins on its business and government revenues have
begun to increase sharply but are still far below those achieved by its
insurance segment. An OM Group strategic acquisition has bolstered last year's
results; a new trading business should further separate this company from its
competitors as that company continues "to change the rules others must follow
to compete." Jim Mooney, OM's chairman, patiently explains that he expects his
competitors to have an increasingly difficult time keeping up with his business
which is now integrated from mining to processing to materials production to
trading.
XM Satellite Radio contributed strongly to last year's results. It has fallen
sharply since September as traders have focused on the fact that in another
year or so this development-stage business will have to seek additional
financing. Traders then decided to sell first and ask questions later. XM and
its only competitor, Sirius Radio, will begin to offer nationwide satellite
radio next year. Each service will have 100 unique, digitally transmitted
stations. To date, XM has successfully met its milestones. It has received
large strategic investments from Clear Channel, DirecTV, General Motors and
Honda. It has radio manufacturing agreements with SONY and others. It has radio
distribution agreements with auto manufacturers for new cars and for older cars
with Best Buy and Circuit City. And it recently opened its spectacular new
studio in Washington, D.C. Radio stations physically located in big cities are
constrained by the size of their markets and must program to reach a large
fraction of those markets, by necessity, the biggest common denominator. XM and
Sirius broadcast to markets nationwide and small sliver niches in any market
are often as large or larger, in aggregate, than competitive and highly popular
Adult Contemporary, Classic Rock, Oldies, Top 40 and R&B Urban in a single
market. XM and Sirius will offer the most popular station formats as well.
Unlike landed radio stations which could easily cost hundreds of millions of
dollars, XM has a current stock market value of only about $12 million for each
of its 100 channels. Sirius, of which we are also a shareholder, has already
launched two of its three satellites, and has a current stock market value of
about $25 million per station. XM expects to launch the first of its two
satellites in December.
Baron Growth Fund's performance was also helped by its long term investments in
Charles Schwab and Flextronics. Both businesses have grown substantially since
our initial investments to become large cap stocks. Although the prospects for
both businesses continue to be bright, we have reduced our holdings in both as
we focus the Fund's investments in smaller businesses that have, for so long,
been overlooked by investors. We have also reduced our investment in NTL
earlier this year for the same reason. Please see "Portfolio Changes" for
further details.
<PAGE>
The Fund's performance was negatively impacted by our investments in
communications and media businesses, which over the long term have been very
profitable investments for the Fund and which we expect to provide positive
returns in the near term. That will be especially the case if the U.S. Federal
Reserve eases credit conditions to allow these businesses to more easily fund
their aggressive capital investment programs. It will also help a lot if, in
the near term, fibre to the home or near to the home yields expected returns
from great new services that providers are not willing to just give away.
Choice Hotels provided the largest loss to the Fund last year. Choice's
business continued to grow, albeit somewhat more slowly than it had during the
past couple of years. Sales in the year increased 6%, EBITDA 10%. The company
has many opportunities to boost its growth rate by adding more franchised
hotels, providing its existing properties with more services and lowering its
operations costs in order to spend more on advertising. Choice has a current
market capitalization of about 6.6X next year's cash flow, a very conservative
valuation since similar businesses have been valued as acquisitions at 10X
EBITDA!
Baron Growth Fund invests in small businesses with big ideas . . . where we
don't have to pay for the big ideas!
How do we do it? "Hit 'em where they ain't," was the sage advice "Wee Willie"
Keeler gave when the diminutive Hall of Famer with the 12th highest batting
average in major league history, .341, was asked in 1900 by a reporter to
explain his great hitting successes. Does anyone else out there in Baron Funds
land remember that interview? But, it's sort of the same thing with us. "Buy
'em when no one wants 'em". . . if we're buying what we believe are well
managed, growth businesses not easy to attack . . . that have a big dream.
That's our advice. It's been so long since there's been investor interest in
small, non-tech, growth businesses, that even I, at age 57, can scarcely
remember it. So, we just think there have got to be good values, great values
even, among largely ignored-for-years, small cap businesses.
Such as Smart & Final with thousands of 20,000-30,000 square foot old
supermarkets that are possible acquisitions for its 212 store, cash and carry,
foodservice stores. In the meantime, Smart & Final's shares are selling for
just 10X next year's earnings, 12% of its revenues and comparable store sales
gains have lately been a very strong 8-9%. Or, such as Libbey, which has an
opportunity to acquire other institutional foodservice resources at attractive
prices to add to its dominant, drinking glass product line.
11
<PAGE>
B A R O N G R O W T H F U N D
Libbey has already expanded into china and tableware. Most acquisitions could
further leverage its distribution infrastructure. Libbey also has the
opportunity to source more product in low cost labor facilities operated by its
Mexican joint venture partner. In the meantime, this free cash flow generating
business is growing nicely and selling for 9X earnings. Or, such as Sun
International which has the opportunity to develop all of Paradise Island into
a spectacular resort and may be able to develop other very profitable, gaming
businesses, as well. In the meantime shares of this underleveraged business
sell for just 8X 2001 earnings. Or such as Vail Resorts which has the potential
to double its cash flow in a few years by adding guests during "shoulder"
periods and could grow even more if its dream of becoming a summer resort is
fulfilled. The reason most people live at Vail is because of the summer, not
the snow. In the meantime, Vail's shares sell for less than 7X current year
cash flow.
Sotheby's has the opportunity to earn $4-5 per share in eight to ten years from
its core, physical auction business and, if it is successful on-line, it could
earn two or three times that amount. In the meantime, its shares are selling
for just a little more then 3X annual physical auction revenues that should
earn in normal circumstances more than 30% pre tax. OM Group's chairman thinks
he has the opportunity to quintuple the size of his business in the next five
years . . . and, in the process, make his business even less vulnerable to
competitors. He has just tripled its size in the past five years. In the
meantime, this specialized chemical producer which continues to build what
appear to us to be stronger and stronger barriers to competition is selling for
just 13X 2001 earnings. And, if you've ever met Chairman Jim Mooney, I think
you'll agree, I don't think you'd like to be his competitor. Gas distributor
Southern Union doubled its customers to 1.5 million in the past year. It hopes
to be able to double them again. How? The sellers of these businesses are
selling existing gas transmission cash flows; Southern Union is buying a scale
customer base that can be a lot more profitable . . . and that will be worth
substantially more to electric company acquirers seeking competitive advantage
in a deregulated environment. Gas distribution acquisitions by electric power
companies have commonly taken place for $2500-3000 per customer. If Southern
Union is successful with its efforts to get high speed Internet access to its
customers' homes, its customers should be worth a lot more than that. In the
meantime, Southern Union's shares have a current stock market value of about
$1300 per customer. Saga Communications is one of the least leveraged radio
businesses in the least competitive markets. It offers big city radio to
smaller communities. Saga did not take part in the radio stations acquisition
orgy of the past few years that took place at ever higher prices. It is well
positioned to pick up the pieces now that acquisition prices have fallen
sharply. In fact, Saga is now stepping up sharply the pace of its acquisitions.
Saga, nevertheless, is valued for less than 10X cash flow, a level that even in
this depressed market should be regarded as a steal.
Kronos is the leading supplier of time and attendance software, providing
businesses with a fully automated, computer based time clock. It also keeps tab
of vacations, sick days, salary, benefits and other payroll information. Kronos
has a substantial advantage over potential competitors because of the complex
algorithms and exhaustive sets of rules compiled state by state, union by
union, that underlie its software. The Internet makes Kronos' product much more
easily accessible to white collar workers, such as lawyers and consultants, who
will be able to access Kronos' software from their desktops. A recent study by
an independent consulting firm sized Kronos' addressable market opportunity at
$2.5 billion over the next three years. This compares with Kronos' current
annual revenues of about $300 million. Kronos is trading at 1.3X estimated 2001
sales and 24X earnings that have the opportunity to grow significantly as
Kronos obtains operating leverage from its large investment in research needed
to create its software.
<PAGE>
Ethan Allen has the opportunity to double sales in its existing furniture
stores in the next five years and increase profits even more. Better
merchandizing, including more sales specialists, decorators, per store, and
third party, fixed rate, non-recourse, installment credit available for the
first time will help. So will its Internet efforts. Of course, the multi-year
boom in new home sales in the 1990s should lead to a multi-year boom in home
furnishings sales in the 2000s. In the meantime, Ethan Allen's shares are
selling for 11X 2001 earnings that should grow at least 15-20% per year for
years and years to come.
The common element in these investments? The market value of their equity
approximates $1 billion, or even less in many instances. And, it's not just
these ideas that are of interest. In the current market environment, if there's
one thing we don't have a shortage of, it's ideas. Our issue is just having the
time to research them all.
--------------------------------------------------------------------------------
Portfolio structure
Baron Growth Fund's portfolio strategy has been to sell opportunistically
larger capitalized, long term investments and purchase small-cap companies. We
made significant changes during fiscal 2000, especially during the last
quarter. The large cap part of the portfolio (companies with market caps above
$3 billion) currently comprises only 12.9% of the portfolio and includes just
five holdings. None are top ten positions.
We sold 780,000 shares of Charles Schwab representing 65% of our position as of
September 30, 1999 at an average sales price of $36.65 per share. This is about
10 times our average cost basis of $3.15 per share. We continue to believe that
we have an opportunity to make five times more on our remaining Schwab
investment over the next five years.
We sold 270,000 shares of Flextronics representing 67.5% of our holdings from a
year ago at an average price of $76.23 per share. This is about 13 times our
average cost basis of $5.78 per share. Flextronics is well positioned to take
advantage of the tremendous growth in technology products with little
technology risk.
12
<PAGE>
B A R O N G R O W T H F U N D
The trend toward outsourcing manufacturing by technology companies will benefit
Flextronics. We think Flextronics could grow ten fold again in the next decade.
We sold 142,506 shares of NTL, representing 31% of our position of a year ago,
at an average price of $99.89 per share. This is about five times our average
cost basis of $19.29 per share. NTL, the leading cable and independent
telephone company in the UK, is in the process of integrating its Cable &
Wireless acquisition and, once that is completed, is expected to resume growing
its cash flow commensurate with its revenue growth. NTL has fallen
substantially in price from the levels earlier this year and is again
exceptionally attractively priced. If successful, NTL could increase its share
price seven fold in five or six years.
We sold all 200,000 post-split shares of Hispanic Broadcasting that we owned a
year ago at an average price of $47.25 per share. This is about seven times our
average cost basis of $6.50 per share. While the mega-trend remains intact and
the Hispanic population is growing at five times the rate of the non-Hispanics
in the United States, the shares of Hispanic Broadcasting became more fairly
priced and it became a good time to channel these funds into smaller cap
companies.
We added significantly to Ethan Allen, Choicepoint, Kronos, OM Group, Southern
Union. Baron Growth Fund's significant new investments this year include
Apollo, Blackrock, Chiles Offshore, drugstore.com, Getty Images and University
of Phoenix On-Line.
Thank you for investing in Baron Growth Fund.
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. And as my wife is fond of saying, "You
can't spend the same money twice." Your task has become even more daunting since
there are now more mutual funds than stocks; the advice of highly respected
advisors is often conflicting; and the market advance of the past few years,
until March 2000, had been concentrated in tech and Internet stocks leaving
broad market segments behind.
Baron Growth Fund's investment philosophy is straightforward. Invest for the
long term in attractive businesses purchased at attractive prices. Purchasing
good businesses at attractive prices limits risk, we believe. We attempt to
invest in businesses that will double in size, profits, cash flow and asset
value, in three to five years. We assume if a business doubles in size, over
the long term, so will its stock price. Our job has become a little easier
during the recent past since so many smaller companies, as we've tried to
outline above, are now selling at unusually attractive prices.
We want to thank you for choosing to join us as fellow shareholders in Baron
Growth Fund. We will continue to work hard to justify your confidence. Again,
thank you for your strong support and interest.
Sincerely,
/s/ Ronald Baron
-----------------------------
Ronald Baron
Chairman
November 20, 2000
13
<PAGE>
[REGISTERED LOGO]
BARON
FUNDS
--------------------------------------------------------------
BARON SMALL
3 CAP FUND
--------------------------------------------------------------
PERFORMANCE AND
PHILOSOPHY..................................................14
PORTFOLIO
COMPOSITION AND KEY
HOLDINGS....................................................15
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
--------------------------------------------------------------------------------
BARON SMALL CAP FUND
--------------------------------------------------------------------------------
ANNUAL REPORT SEPTEMBER 30, 2000
Dear Baron Small Cap
Fund Shareholder:
--------------------------------------------------------------------------------
PERFORMANCE AND
PHILOSOPHY
Baron Small Cap just finished its third year and I would like to take this
opportunity to review the year's performance, describe our portfolio and
highlight some of our larger investments to best explain where we have been and
how we see the future. We will also dissect our fourth fiscal quarter, the
September period that just ended, since our performance was weak in both
absolute and relative terms.
Baron Small Cap gained 20.0% during the fiscal year ended September 2000. These
results were slightly less than that of the Russell 2000 index, up 23.4%, but
exceeded the S&P 500, which gained 13.3% over the comparable time
frame. For the three years of the Fund's existence, we have generated average
annual returns of 17.1%, or 60.5% over the three year period. These results
greatly exceeded the Russell index, up 6% per year and 19% cumulatively, and
were in line with S&P returns of 16.4% annualized and 57.8% in total.
We are pleased with these returns. We set return goals of 15-20% per year when
we started the Fund and have been able to deliver results in that range through
some very challenging periods. Additionally, our gross returns stated above in
the table very closely mirror our net, or after-tax, returns. We did not pay a
dividend during the first two years of the Fund's life and paid a very modest
long term distribution this fiscal year. We have repeatedly suggested that our
long term investment philosophy would result in tax efficiency and it has.
<PAGE>
-------------------------------
PERFORMANCE
FOR THE YEAR ENDED
SEPTEMBER 30, 2000
BARON SMALL CAP FUND 20.0%
S&P 500* 13.3%
RUSSELL 2000* 23.4%
-------------------------------
-------------------------------
PERFORMANCE
FOR THE 3 YEARS ENDED
SEPTEMBER 30, 2000
ANNUALIZED
BARON SMALL CAP FUND 17.1%
S&P 500* 16.4%
RUSSELL 2000* 6.0%
-------------------------------
-------------------------------
PERFORMANCE
SINCE INCEPTION
OCTOBER 1, 1997 THROUGH
SEPTEMBER 30, 2000
CUMULATIVE
BARON SMALL CAP FUND 60.5%
S&P 500* 57.8%
RUSSELL 2000* 19.0%
-------------------------------
* 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
The Fund's quarterly performance has fluctuated greatly. In the fiscal year
just ended, we had terrific performance in the first quarter (up 34%), were
flat in quarters two and three versus a flat market in general, and were down
(10%) in the quarter just ended while the market itself was flat.
Quarterly Table
Baron Russell
Fiscal Year 2000 Small Cap 2000 S&P 500
---------------- --------- ------- -------
Q4 1999 +34.6% +18.4% +14.9%
Q1 2000 -0.9% +7.0% -2.7%
Q2 2000 +0.3% -3.8% +2.3%
Q3 2000 -10.3% +1.1% -1.0%
The reason for the dramatic quarterly fluctuations is both the frenetic market
and the make-up of our portfolio.
As we have repeatedly noted, the portfolio is concentrated in relatively few
investments and focused on relatively few industry sectors, to take advantage
of what we feel to be the best opportunities in businesses we understand well
and are excited about.
Fiscal 1999 was a period where we were rewarded for our stock selection across
all the industry sectors we invest in with some supercharged returns in our
"new economy" telecommunication plays. Fiscal 2000 has been much different.
Most all of our stocks performed very well through February 2000 and since
there has been a tremendous divergence in our returns based on the industry
sectors we invest in. Our education, business services and healthcare holdings
have soared, while our communications and media stocks have gotten hammered. As
we said in the March 2000 period as this trend started to play, we professed
that though we saw opportunity in both the "old economy" and "new economy", we
would trim back some of our high flying telecoms and media positions and more
aggressively add new traditional positions (be it reasonably priced growth
stocks, special situations or fallen angels). We have done so, but in hindsight
not in sufficient size to protect ourselves from the severe NASDAQ sell off
that has taken no prisoners. We believe those holdings that are down
substantially off their peaks are well oversold and offer tremendous values.
Therefore, we have generally decided to live through this period of
irrationality because we think we will be rewarded to do so. We will come back
to specifics when we discuss our fourth quarter results.
--------------------------------------------------------------------------------
Portfolio Composition and Key Holdings
At the end of September, we had about $900 million under management. The
portfolio is made up of 46 investments. The top ten positions equal 45% of the
portfolio. The industry groups of highest concentration are business services:
14.8%, communications: 14.3%, education: 13.4%, media and entertainment: 12.6%,
retail and restaurants: 9.2%.
<PAGE>
I'd like to highlight a handful of stocks which are important to the portfolio
and which we have owned for some time. They have performed well and we expect
them to continue to make significant returns from here.
Our largest holding at the end of September is Career Education (CECO). We
purchased CECO on its IPO two years ago and have become the company's largest
outside investor. As we detailed in our September 1998 quarterly when we
initiated our position, CECO is a provider of private, post secondary
education, teaching four highly desirable curriculum: business administration,
I.T., visual communications and culinary arts. They have grown dramatically
since going public in early 1998, from $83 million in revenues in 1997 to about
$320 million in 2000 and now have operations at 30 campuses. The growth is
primarily internally generated, from increasing enrollments and revenues at
existing schools through enhanced marketing and the addition of new curricula.
Profit growth greatly exceeds revenue growth due to the leveraging of school
expenses and corporate overhead. Year-to-date in 2000, same facility new
student starts are up 23%, revenues are up 32% and cash flow is up 51%. Net
income per share is expected to increase greater than 50% in 2000, following a
70% increase in EPS in 1999. The company recently announced the acquisition of
Edutrek International, another school group, which we feel is very strategic.
We expect CECO to be able to greatly enhance the operating results of this
school group and the acquisition is important to CECO's launch of its
university division, which offers bachelors and masters degree programs, and
will enhance its online effort. We feel CECO can continue to grow its earnings
in excess of 30% for several more years and with the stock trading slightly
above 20 times our estimate for 2001 earnings per share, we believe the stock
will appreciate as the earnings grow and the multiple expands.
ChoicePoint (CPS) is a leading provider of credential verification and
identification services to business, individuals and government, selling its
proprietary information data bases to the insurance industry and corporations.
We purchased ChoicePoint after its spinout from Equifax in July 1997 and
detailed our investment thesis in our December 1997 quarterly report. Over the
past three years, the company has divested extraneous businesses and acquired
complimentary databases and has transformed itself into a fast growing, unique
and highly profitable cash flow producer, much as they laid out to us when we
first met them on the spinout. In 2000, internal revenue growth has been in the
low teens with cash flow growing twice that and acquisitions are accretive such
that overall earnings per share are expected to grow 35%. We currently expect
greater than 30% growth in the next few years, so with the stock trading at
slightly over 20 times 2001 cash earnings per share, we feel it is still
underappreciated.
We first acquired shares in Penton Media (PME), our 3rd largest holding at
year-end, in the fall of 1999. Penton, you may recall, is a
business-to-business media company which produces
15
<PAGE>
B A R O N S M A L L C A P F U N D
trade shows and publishes trade magazines. Management has transformed Penton
from a company that in 1998 generated 85% of its revenues from magazines, many
of which were targeted at slow growth end markets, to one with 40% of its 2000
revenues and 60% of its cash flow from trade shows. Trade shows are more
profitable than magazines and have tremendous revenue visibility because
typically 60-70% of the exhibitors book one year in advance and pre-pay their
fees. Penton is now addressing much faster growing industry verticals, such as
natural and organic products, internet communications, wireless communications
and broadband media. Most recently, Penton made three complimentary
acquisitions that expand their presence in technology and broadband media
magazines and trade shows (Duke Communications and Streaming Media), and their
shows in machinery/industrial markets (Professional Trade Shows). In addition
to these acquisitions, Penton launched ten to twelve new trade shows in 2000
and will do another ten to twelve in 2001. These successful launches, plus
continued growth of existing offerings, will lead to cash EPS growth of 100% in
2000 and 25-30% per year over the next few years. We believe we can more than
double our money in this company over the next several years.
SBA Communications (SBAC) is a leading independent owner and operator of
wireless communications towers. As we detailed in our March 2000 quarterly, SBA
has grown from its roots as a provider of services to the tower industry to one
of the country's largest tower owners through the acquisition of mom-and-pop-
owned sites and an aggressive new build program. In 2000, SBA will more than
double its tower count and we feel it can maintain this pace of adding over
1,000 towers per year to its portfolio well into the future. More important
than sheer size, though, is the company's tremendous success in adding new
tenants to its existing structures, having grown same tower revenues over 35%
and cash flow 50% year-to-date. We still believe that within three years the
company will amass over 5000 towers, which when mature should do over $350
million in annual cash flow (versus $50 million run rate cash flow today). In
addition it is developing a complimentary business providing services to
tenants on their towers and expanding its presence into other markets outside
the states where the same macros are in place.
Kenneth Cole Productions (KCP), which has been a core holding of the Fund since
its inception, is a rapidly growing designer and marketer of men's and women's
shoes, apparel and accessories. In the June 1999 quarterly, we detailed how KCP
growth would accelerate because of the success of its multiple brand strategy,
its increased retail store development plans and a licensing program that was
in its infancy. In 2000, the business plan has developed even better than we
expected and this may bode well for continued success. Wholesale sales are up
30%. Retail square footage is up 40% (including a magnificent new store on
Fifth Avenue in New York City) and same store sales have increased at double
digit rates. Licensing revenue, which carries over an 80% profit margin, is
growing 50% and the women's apparel licensing agreement with Liz Claiborne is
just now beginning its rollout. Therefore, 2000 could be a year of over 30%
revenue growth and 45% earnings growth. We currently project greater than 25%
plus earnings growth in 2001 and 2002 and continued strong stock performance.
<PAGE>
SEPTEMBER QUARTER REVIEW
Baron Small Cap Fund was down 10% in the September quarter which was
disappointing in both absolute and relative terms. Again the negative
performance was primarily confined to certain sectors in our portfolio: media
and communications. In the September quarter alone, these two sectors cost us
16% of performance, while our education and healthcare positions earned us 7%.
Our media holdings include three radio stocks (Radio One, Entercom and Westwood
One) and Penton Media. We sold our holding in Lamar Advertising and Clear
Channel, which acquired SFX Entertainment, earlier in the year after
significant profits. The radio stocks declined sharply as the fundamentals of
the industry softened. We expected the industry to slow, since the 20% growth
the business showed in the first half of 2000 was twice the historic rate and
was unsustainable. The industry benefited in late 1999 and early 2000 from
dotcom spending, which in its own right was not such a big buyer but pressured
other advertisers to pay up for ad spots. As dotcom marketing budgets were cut
back and as the economy has slowed down, the national portion of radio
advertising went flat for a month or two and the industry grew at 8% in the
third quarter. This scared off most investors. Though we were taken back by the
steepness of the short term decline, we believe the industry will regain its
footing, that the stocks are terribly oversold and that our companies will
continue to outperform industry metrics and be strong investments.
To state our case simply, we feel that total advertising spending will grow
5-8% a year (depending on the strength of the economy) and that radio will grow
faster, 8-12% as it takes share from other mediums. We expect that our
companies will grow same station revenues even faster because they have the
most underdeveloped portfolios and the best rating trends. Operating leverage
enables cash flow to grow 1.5-2x faster than revenues, and financial leverage
adds more growth to after-tax cash flow per share. We steadfastly believe these
equities should trade at 20x cash flow even though they traded down to 10x 2001
estimates. We have increased our positions during this time period, most
notably in Radio One.
Penton Media was soft in the third quarter because it, too, is considered
advertising-dependent and produces several trade shows that are oriented to the
new economy, both out-of-favor sectors in the fall of 2000. However, Penton's
magazines rely on business-to-business spending, not general market
advertising, and therefore are much less cyclical than the traditional media
16
<PAGE>
B A R O N S M A L L C A P F U N D
markets of television, radio and newspaper. Penton's trade shows are booming
irrespective of the fact that internet stocks have declined. The "Fall Internet
World" show in New York City was a blowout success as were all the other events
launched around the world in the second half of 2000. At 9x our 2001 cash flow
estimate, with internal growth of 15-20% and substantial free cash flow, we
believe the stock is just too cheap. Therefore, we increased our position.
Our communications portfolio is more diverse, yet each of the investments were
weak in the quarter. We owned three competitive local exchange carriers (CLEC):
CoreComm, Mpower and Choice One which were very soft as competing CLECs missed
financial projections and the capital markets dried up as the source of future
funding. We sold our Mpower because we were uncomfortable with changes in the
business plan. We purchased more Choice One because of our confidence in their
execution and the stock was oversold. We have held onto our CoreComm, which has
not been wise, yet we remain convinced that the business plan makes sense and
management will persevere even in difficult capital markets.
Stocks of cellular phone companies fell based on competitive pressures in the
big urban markets, which knocked down our SBA, which provides antennae space on
towers to cellular operators and Rural Cellular, which offers services in less
competitive rural markets. Both companies are operating well, yet the stocks
are down. Commonwealth Telephone, a rural incumbent local exchange carrier,
fell in sympathy with other telcos and trades at seven times cash flow from its
growing monopoly markets with modest credit given to its proven competitive
offerings in adjacent areas.
Our international cable companies have been very disappointing. We sold a small
position we had in a German cable operator, Primacom, which though extremely
cheap was less exciting to us. UnitedGlobalCom (UCOMA) is more distressing. The
company's strategic accomplishments in 2000 have been stellar -- additional
acquisitions of properties at reasonable prices, a joint venture to bring scale
to its internet portal and a strategic asset for stock swap with Liberty Media,
which we think adds scope and credibility to the enterprise. They have financed
the business for the next two years and scaled back some less important
endeavors to adjust to the tougher capital markets environment. They have
performed admirably in rolling out new services, beating projections for RGU
(revenue generating unit) growth and posting cash flow losses better than
expectations. Nonetheless, the stock has gotten beaten hard because it is
leveraged, it is at an early stage in its development and it is telecom/internet
related. We sold a quarter of our position at its peak this spring, after
selling some of our holdings on the way up in 1999, but, in hindsight, we were
not cautious enough. We are convinced the values are there. UCOMA's cable subs
trade at under $1000 each, yet we believe they will be worth $5000 or more
assuming reasonable take up of the additional services that are now being
offered. However, we missed the severe reflexive nature of the market that has
turned against companies like this and has made the execution of their business
plan more challenging.
THANK YOU
Thank you, my fellow shareholders for investing in Baron Small Cap. In
aggregate, Fiscal 2000 was a fruitful, though harrowing year. We will continue
to look for well-managed companies whose stocks don't reflect their unique
market position or tremendous growth opportunities, and we will invest when we
see significant upside. We continue to do our best to provide solid long term
returns, hopefully with less volatility.
Sincerely,
/s/ Cliff Greenberg
-----------------------
Cliff Greenberg
Portfolio Manager
November 20, 2000
17
<PAGE>
[REGISTERED LOGO]
BARON
FUNDS
---------------------------------------------------
BARON
4
iOPPORTUNITY
FUND
PERFORMANCE.................................................18
PORTFOLIO CONSTRUCTION
AND STRATEGY................................................20
PORTFOLIO HOLDINGS..........................................21
CONCLUSION..................................................23
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
--------------------------------------------------------------------------------
BARON iOPPORTUNITY FUND
ANNUAL REPORT SEPTEMBER 30, 2000
Dear Baron iOpportunity
Fund Shareholder:
--------------------------------------------------------------------------------
PERFORMANCE
To say the least, since the inception of the iOpportunity Fund on February
29th of this year, it has not been an easy market to invest in internet and
information technology companies. The iOpportunity Fund declined approximately
1.57% during the third quarter and, in the six weeks since the end of the third
quarter, has declined an additional 14.4%.
As you can see from the charts, our performance compares relatively well to the
truly ugly performance of the Morgan Stanley Internet Index (the MOX) and the
NASDAQ Composite (the Comp) over each of the time frames indicated. However,
relative outperformance is weak consolation when you've lost money -- and we are
obviously disappointed by our initial performance. We also appreciate the
comments raised by some of our investors during the recent Baron Funds
investment conference in New York in October -- Why does the Fund go down every
day? When is the Fund going to begin to go up? Do you still believe that the
internet and information technology are interesting and exciting places to
invest?
I wish I had the answer to the first two questions (I have a substantial
portion of my family's net worth invested in the Fund alongside you and I hate
losing money) but market timing has never been our focus (this must be obvious
to many of you since Baron Asset Fund was started in the fall of 1987 ahead of
the October 1987 Crash and iOpportunity launched on February 29th of this
year, a week
<PAGE>
------------------------------------------
PERFORMANCE
FOR THE 3 MONTHS ENDED
SEPTEMBER 30, 2000
BARON iOPPORTUNITY FUND -1.6%
MORGAN STANLEY INTERNET INDEX -11.7%
NASDAQ COMPOSITE -7.4%
------------------------------------------
------------------------------------------
PERFORMANCE
SINCE INCEPTION
FEBRUARY 29, 2000 THROUGH
SEPTEMBER 30, 2000
BARON iOPPORTUNITY FUND -12.4%
MORGAN STANLEY INTERNET INDEX -42.0%
NASDAQ COMPOSITE -21.8%
------------------------------------------
THE NASDAQ COMPOSITE AND THE MORGAN STANLEY INTERNET INDEX ARE UNMANAGED
INDEXES. THE NASDAQ COMPOSITE TRACKS THE PERFORMANCE OF MARKET-VALUE WEIGHTED
COMMON STOCKS LISTED ON NASDAQ; THE MORGAN STANLEY INTERNET INDEX OF ACTIVELY
TRADED, HIGH MARKET CAP INTERNET STOCKS DRAWN FROM NINE INTERNET SUBSECTORS.
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
before the NASDAQ peaked). However, my answer to the third question is a
resounding YES. And that "Yes" is the product of my nearly six years of working
at Baron Capital.
One of the underlying investment themes at Baron over the years is the search
for what Ron has described as "sunrise" industries -- the industries of
tomorrow, the places where our children will work, not those where our parents
and grandparents worked. In addition, we have focused within those industries
of tomorrow on the companies that are changing the rules and challenging the
status quo -- changing the way services are delivered, products are
manufactured and goods are sold. We have always looked for companies that are
redefining the competitive landscape in industries and markets that have
substantial growth opportunities. Moreover, we have always looked for
investment opportunities where we believe we can earn substantial, multi-fold
returns on our money over long periods of time, as opposed to clever trading
with a short-term focus. These return expectations are predicated on our belief
and expectation that the businesses in which we invest here at Baron (in all of
our Funds) have the opportunity, competitive advantage and management
leadership to be substantially larger (2, 5 or 10 times bigger) enterprises in
the future than they are today. And, we try to buy them at great prices -- this
is generally when others are selling and short-term events may be clouding the
long-term picture.
Current market conditions notwithstanding, I believe that there remains no
better place to search for those kinds of investments than in the information
technology market. And, given the volatility in today's market, and the
precipitous drop in so many of the leading companies, I believe that current
prices present a great entry point.
THE INTERNET AND INFORMATION
TECHNOLOGY HAVE EXPERIENCED EXPLOSIVE GROWTH YET REMAIN IN THEIR INFANCY
When we first started the Fund, we observed that the internet changes
everything -- the way people and businesses communicate, transact, become
informed and make decisions. Although the stocks of many of the firms within
this sector have faltered, the pace of change and evolution in information
technology continue to accelerate. With today's volatility in the stock market
and the press' daily obituaries about the death of the dot.com world, it pays
to step back and look at the evolution of some of the trends in the industry
that make us so excited.
On the consumer side, by the end of this year, we estimate there will be over
300 million people online worldwide compared with just 14 million people at the
end of 1995, a compound annual growth rate of over 80%. They spend, on average,
1 hour per day online compared with 10 minutes five years ago and, because of
the increases in transmission speeds, are able to view 10-20x the amount of
content per minute than they could in the past. As a result, page views have
grown at an astonishing 200% annual rate over the past five years and commerce
transactions on the internet have grown 10 fold from $300 million in 1995 to
approximately $300 billion by the end of this year.
<PAGE>
In addition, while the rate of growth in the number of users must slow over the
next several years as we reach nearly ubiquitous penetration, we believe that
the amount of time on line, quantity of information viewed and number of
transactions consummated will almost certainly continue to accelerate as the
number of devices with the ability to connect to the internet proliferates.
Over the past several years, the universal mode of going on line was to dial
into the internet from a desktop or laptop computer. However, with the
acceleration of both broadband and wireless access, we are fast approaching the
time when many of us will be "on line" 100% of the time through our cell
phones, personal organizers, television sets and other internet appliances. The
consumer and lifestyle impacts of this connectivity are substantial -- and
businesses and industries are evolving to take advantage of it in all aspects
of consumer services and retail sales. We have highlighted several of these
businesses in our past two reports and several more are highlighted below.
The evolution and impact of information technology on the business front is no
less extraordinary. The ability to access huge stores of data, communicate with
customers and suppliers and monitor business progress (inventory levels, sales
productivity, workforce learning, market conditions) all on a real time basis
is changing the way businesses compete. The power that this connectivity
brings, and the positive (and negative) potential impacts on businesses that it
creates, is mind boggling. Dell and Cisco, today, transact nearly 90% of their
business on line. Oracle has already saved over $1 billion in operating costs
by embracing the internet for internal business process, and expects to save an
additional $1 billion or more over the next several years. These are not
fleeting changes.
A simple example illustrates these potential savings. Today, it costs most
brokerage firms approximately $1 in postage and administrative costs to send
out a trade confirmation by mail. However, if that confirmation were sent by
e-mail, the cost drops to pennies (no paper, no stamps, no need to stuff
envelopes, no duplicate and triplicate paper copies, etc.). The result is
80-90% savings for the brokerage firm. Moreover, customers then have a much
simpler method for storing and accessing their trading records for future
access (i.e., year end tax planning). It's a win-win situation -- lower cost
with increased customer service. (We have a small investment in a firm called
Tumbleweed Communications that is, among other things, developing secure and
archivable messaging infrastructure to enable these communications).
It is the excitement and potential of these revolutions of business and
consumer interaction that drove such extraordinary price increases in stocks
over the last two years as well as the unprecedented increases in venture
capital funding for new businesses
19
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
and initial public offerings. There is no doubt that a substantial number of
the fledgling businesses attempting to profit from these massive changes will
and have failed. And, there is no question that many stock prices advanced well
ahead of even the rosiest of business prospects last year and earlier this
year. However, to paraphrase Mark Twain, the rumors about the death of the
internet and information technology have been greatly exaggerated. In our
opinion, there has been little change in the underlying dynamics that make the
internet and information technology two of the truly awesome "sunrise"
industries of our time. The question, in this market, is "How to invest in it?"
--------------------------------------------------------------------------------
PORTFOLIO CONSTRUCTION AND
STRATEGY
As we have stated before, the fact that we believe in the potential of the new
economy does not mean that we are using new economics to justify our
investments. Every company in which we invest is researched and modeled to
understand the competitive position, business model, management skill and
credibility, potential size of the market and the potential value of the future
stream of cash flows that the company, if successful, could produce. We do
this, principally, through hands on research -- company visits, channel
contacts, industry trade shows and trade journals, competitor visits and
reviews, financial modeling, etc. Getting on airplanes, not just talking to
Wall Street.
In many ways, the volatility of the markets, and the precipitous decline in
many of the stocks in our universe really works to our benefit as the companies
are hungry for long term investors willing to do their homework. This gives us
great access to management teams to discuss and debate long-term strategic
plans (discussions that are still appropriate under the new SEC disclosure
rules). The market invariably overreacts to any short-term news in an industry,
often throwing the baby out with the bath water when a sector comes under
pressure. In these markets, even companies that are flawlessly executing their
business plans can have their stocks fall 20% or 30% or 50% because the market
is down and valuations, across the board, are being compressed. While not a
great time to generate current returns, this is usually the best time to
invest.
However, such volatility also argues for caution and prudence with respect to
business plans and valuations as opposed to speculation and venture optimism.
As a result, for Baron i Opportunity, we have maintained a higher than normal
cash balance of 10-12% in the Fund, both to give us dry powder to take
advantage of market sell-offs and to be prepared in the event of redemptions
(which, we are encouraged to note, have not accelerated despite our
disappointing performance). In addition, and more importantly, we have focused
almost exclusively on companies that are currently profitable on an economic
basis (that is, are today generating positive income before taxes and before
non-cash charges such as goodwill amortization or stock-based compensation). If
not currently profitable, we next have focused on those companies that have
more than enough cash on their balance sheet and in the bank today to fund the
company to profitability. We have severely limited our holdings of truly
venture oriented investments. To put some facts behind these statements, if you
aggregated all of the Fund's holdings, approximately 80% of our assets are
invested in companies that are profitable today (or in cash) and an additional
10% are in businesses that are fully funded to reach profitability. As a
result, the public discourse you may hear about all of the dot.coms going out
of business because they are running out of cash does not really apply to our
Fund, as less than 10% of the companies in the fund have any financing
exposure. And this 10% includes such incredibly well-capitalized, and highly
financeable (although not yet profitable) companies such as long time Baron
holding NTL, Incorporated.
<PAGE>
In addition to being predominantly invested in currently profitable companies,
the companies in which we have invested are growing at incredibly fast rates
and they are generating very high gross profit margins. In the most recently
reported quarter, our companies grew their revenue sequentially (i.e., from the
June quarter of this year to the September quarter of this year) on average at
an over 35% rate and, on an annual basis, at a rate of well over 130%.
Moreover, on average, the gross margins of the companies in which we've
invested are well over 50% (in many cases 80-90%). This indicates the potential
for highly profitable business models that, if sustainable and with continued
strong revenue growth, should lead to extraordinary profit growth and high
rates of return on invested capital. Therefore, in addition to our confidence
in the continued expansion of the overall industries involved in the internet
and information technology, the companies within the industry in which we are
investing are really beginning to thrive.
So, if all of the above is true (and it is), WHY DOES THE FUND CONTINUE TO GO
DOWN?
Well, we are not market strategists but it's obvious that there is a tremendous
overhang of uncertainty leaning on the broader markets: historically anomolous
presidential elections, questionable direction of interest rates and the
economy, volatile and increasing energy prices, Middle East unrest, etc. The
markets have always hated uncertainty. Moreover, there have been many high
profile earnings disappointments in many of the bellwether technology names --
Nortel, Dell, Apple, AT&T, Lucent, Intel, Hewlett Packard, IBM to name a few.
Political and economic uncertainty -- combined with faltering earnings in many
leadership companies -- after several years of incredibly robust stock
performance -- does not make for a great market backdrop.
And, as we have said many times in the past, we own common stocks. While we
believe that our companies, even in the current environment, have outstanding
long-term prospects, in the short-term, if most stocks and the broader markets
are going down, it is going to be difficult for our stocks to go up.
20
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
Still, we steadfastly believe that as these issues resolve themselves (I do
believe that we will, someday, settle on a President) and the market becomes
more constructive, fundamental company performance will drive long-term stock
performance. And then, you want to be invested in the best stocks in the best
industries with the greatest opportunity for sustainable, long-term growth. I'm
not sure when the investing environment will again turn positive, but, given
the volatility of our sectors, when it does (and it will), I suspect the
ensuing rally could be powerful.
--------------------------------------------------------------------------------
PORTFOLIO HOLDINGS
With all of that being said -- What do we own?
In the previous quarterly (June 30, 2000) we outlined the investment cases for
some of our larger holdings such as the two best recruitment companies (in our
opinion) TMP Worldwide and Heidrick and Struggles; one of the largest cable
multi-system operators with great digital and high speed transmission
prospects, Comcast; two of the best positioned wireless tower operators
American Tower and SBA Communications; and two of our favorite e-travel names
Hotel Reservations Network and Expedia. These stocks all remain important
holdings in the Fund and all had outstanding third quarter earnings reports. If
you did not get a copy of the last quarterly and/or would like to read up on
the investment cases for these names please let us know and we'll send out
another copy.
For this quarterly we will describe some additional holdings.
EBAY
Given Baron Funds' extensive holdings in leading auctioneer Sotheby's, we have
been doing research on Ebay since before its 1998 initial public offering. I
have known of Meg Whitman, Ebay's impressive CEO, for even longer as she was
the boss of a great friend of mine at her previous job at FTD (the florist
association). My friend Scott always spoke highly of Meg's vision and business
acumen. Although most still view Ebay as a quirky seller of kitschy, flea
market fare, it has, under Meg's leadership, become one of the most impressive
and profitable businesses created in the internet revolution and one of the
most recognized brands in the world.
As you may or may not know, Ebay began as founder Pierre Omidyar's brainstorm
to create a forum for his wife to interact with other collectors of Pez
dispensers (she has a 400+ unit collection). Given his background as a software
developer at several technology enterprises (including Apple and General
Magic), Pierre was well versed in the then fledgling internet and launched Ebay
as one of the early web sites on Labor Day 1995. Pierre's vision was to create
a business enterprise based on the unique power that the internet created
amongst disparate people with similar interests -- a cost effective and
real-time forum to interact and transact amongst themselves in almost anything
imaginable. Ebay envisioned its role as the platform that enabled others to
interact and transact. Its revenues would be based on small listing and success
fees, without any inventory, sales force or fulfillment infrastructure -- a
truly virtual business.
<PAGE>
The rest, as they say, is history. With a top flight management team and
incredible press coverage that has created nearly ubiquitous global name
recognition at virtually no cost, Ebay has evolved into one of the leading
commerce generating platforms in the world (not just on the internet). Today,
Ebay generates over $5.4 billion in annualized gross merchandise sales - a
staggering number compared with the under $750 million generated by the company
in 1998. By comparison, two of the most successful and valuable media/commerce
networks of the past decade, QVC and Home Shopping Network, combined, generated
approximately the same amount of merchandise sales last year. And Ebay's sales
are growing at an 80-100% annual rate. Today, nearly 19 million users search
each other's 70+ million listings to find everything from Pez dispensers to
Cadillacs.
Ebay's future growth is expected to be realized through continued execution of
management's vision of becoming a diversified global e-commerce portal. At a
recent analyst meeting, Ebay management identified their targeted global market
as representing nearly $2 trillion of annual purchases. To address this market,
the company plans a multi-faceted growth that includes category expansion
(beyond collectibles to practicals, autos, computers, technology products, real
estate and beyond) as well as geographic expansion (regional and local in the
US as well as new international markets that also have regional and local
extensions). Ebay currently offers items in 5,000 categories in seven countries
(up from 727 categories in mid-1998 when Ebay operated only in the U.S.) and we
expect continued aggressive country and category expansion over the next
several years. In addition, Ebay recently introduced a fixed pricing model for
goods like CD's and books through its recently acquired Half.com subsidiary.
Half's fixed price model complements Ebay's core dynamic pricing business and
extends the user base to consumers who prefer the certainty of fixed retail
prices.
In addition to these core business expansions, Ebay recently entered into
discussions with ABC Television to explore the possibility of a television show
or series using stories from the Ebay commerce network as the topics. While
such media extensions may have seemed far-fetched two years ago, given the deep
appetite viewers have shown for other forms of reality TV, an Ebay show could
have real potential -- and great financial implications for Ebay who would have
no production costs and only profit sharing and licensing upside. While a TV
show may still be years away, more visible near-term enhancements to Ebay's
business model should come from the addition of incremental core services such
as payment processing, escrow, shipping services, digital photo listing
services and others that Ebay can develop to further monetize the economic
activity occurring on its site while, at the same time, enhancing the users'
experiences.
21
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
Ebay's management has publicly stated its goal to grow the company's revenue at
a compound annual rate of 50% while expanding profitability from the low teens
operating margin enjoyed today to 30-35% within 4 years. These projections
contemplate a $3 billion revenue stream with in excess of $1 billion in
operating income by 2005. Curiously, while initially applauded for the candor
of these goals, many internet analysts have since criticized the company for
such aggressive statements and several have since downgraded their ratings on
the company, declaring such goals unachievable. These are the same analysts
that couldn't have been more bullish last year when the stock was three times
higher and the future opportunities less clear. Go figure.
We, on the other hand, believe that the truly difficult job of creating the
brand and opportunities that exist for the company today are now behind them,
and that the goal of expanding and monetizing its opportunities should be
relatively easier for Ebay's management team in the future. As such, we suspect
that management's guidance could prove conservative given the size of the
company's targeted market and the creativity of the management team to find
outlets such as traditional media that they have not yet tapped (not to mention
the nearly $1 billion in cash on the balance sheet). Under management's
guidance, we believe that the company could be worth well over $30 billion in 4
years (3 times the current value and 2 times the value at our initial
purchase). However, we believe that the value creation opportunities could be
substantially higher and have added to our position during the recent sell-off.
HOMESTORE
One of the first stocks we researched for the Fund, and one that has become one
of our larger holdings, is Homestore.com. Stuart Wolff and John Giesecke,
Homestore's CEO and CFO, respectively, have set out a relatively ambitious goal
for Homestore to be the single best site for all consumers and professionals to
go to for all things related to your home on the internet -- searching through
real estate listings, buying and selling or renting a home, executing all of
the related transactions (leases, sale contracts, title, mortgages, etc),
moving, wiring, decorating and everything else. While this may seem like a
nearly impossible goal for most, for executives who trained under John Malone
at TCI (Stuart) and Michael Eisner at Disney (John), the goal seems like a
normal business practice. And, with 95% of all homes available for sale in the
country listed on the Homestore network, all 6 national franchise organizations
represented and, following their recent Move.com acquisition, an 80-85% share
of all of the eyeball minutes on the web looking for a home, they appear to be
on their way to achieving it.
The first point that makes Homestore exciting to us is the size of the market
it is addressing. Real estate is the single largest segment of US GDP at $1.5
trillion in annual expenditures. Of this, over $100 billion is spent each year
on fees (realtors, mortgage brokers, title agents, insurance agents) and over
$10 billion is spent each year on classified, yellow page and other forms of
marketing and advertising for homes and home-related services.
<PAGE>
Moreover, like travel, the internet is one of the best new consumer tools for
getting educated about your options. Despite the fact that the newspaper
classified ad is a terrible medium for researching homes (no pictures, brief
and confusing descriptions, not real time), it remains the dominant source for
most people in their searches. But that is changing rapidly because, in
contrast, the internet is a great resource for such a search -- available 24
hours a day, lengthy descriptions, 360 degree pictures, tons of information
about local community details, unlimited listings, sortable according to your
preferences, etc. Not surprisingly, while in 1995 only 2% of home searchers
used the internet in looking for their home (compared with 51% using the
newspaper), by 1999 nearly 40% used the internet while newspapers had dropped
to 43%. The advantages of the internet can also benefit the real estate
professional. Leads generated by Homestore tend to close twice as fast as those
generated elsewhere (that is, searches that used to take an average of 8 weeks
with 8 homes viewed drops to 4 and 4 with Homestore). This is because the
internet consumer is usually better informed by the time they are ready to
begin viewing.
In addition to a large and growing market opportunity, through the pending
merger with its largest competitor, Move.com, Homestore offers significant
market leadership. Move.com was the #2 real estate portal on the web and was
controlled by Cendant, which also controls 3 of the leading real estate
brokerage franchises (Coldwell Banker, Century 21 and ERA), the largest
corporate relocation business, a dominant mortgage brokerage business and other
real estate-related companies. Together, the combined company offers incredible
reach on both the consumer and professional sides of the business while at the
same time removing the largest competitive threat to Homestore's future.
Homestore also has a terrific business model that recently turned profitable.
The company has both a consumer-oriented advertising revenue line as well as a
business-oriented subscription and professional services model that gives
Homestore great balance (advertising is 47% of revenue, subscriptions are 53%)
in its income statement. Both sides are witnessing extraordinary growth as
Homestore's total revenue has grown from just over $20 million in 1998 to over
$400 million projected for this year. Profit potential is also impressive as
gross margins have expanded from less than 50% in 1998 to nearly 75% currently,
and the company generated its first quarterly profit in the recently released
third quarter showing impressive signs of leverage over its installed
infrastrucutre. The Move.com merger is projected to be accretive to both
revenue and profit for next year (revenue should approach $500 million) and the
combined company will have nearly $400 million in cash to continue to invest in
new opportunities.
22
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
Over time, we expect Homestore's continued dominance of the real estate
consumer portal space to transition to a dominance of the real estate
transaction platform. Through several investments and alliances, Homestore now
controls one of the most powerful transaction platforms for professionals in
the real estate industry including leading products for lead generation
management, electronic real estate forms, customer relationship management, web
design and hosting and relocation and moving services. By combining these and
other capabilities in a single, integrated product suite, Homestore expects to
reduce that thick file of multiple documents from disparate providers to a
single, digital archive. This platform was recently unveiled at a national
realtor's convention in California to rave reviews throughout the industry, and
we expect it to add another leg to Homestore's business model in the future.
We believe that by combining the best consumer portal experience with the
broadest set of business to business tools in one of the largest industry
segments in our economy Homestore's future growth opportunities are incredibly
exciting. We expect the current $400 million in revenue to easily surpass $1
billion within 3-4 years and profits to expand from the $0.01 per share
reported in the third quarter of this year to $3.00-$4.00 per share by 2005.
With the stock currently at approximately $30, we believe that we can make at
least 3-4 times our money over the next several years if Homestore can achieve
these goals.
CNET
Following its recent merger with ZDNet, the combined, new CNET is now the ninth
most popular property on the entire Internet and one of the i Opportunity
Fund's larger holdings. CNET is a collection of web properties that represent
one of the world's best sources for comprehensive information about technology
products and trends. While CNET's sites had focused on the consumer technology
purchaser, ZD's focus had been on the corporate tech buyer providing for a
nearly perfect marriage of complementary audiences. Together, they represent
one of the best media plays on our broader theme about the impact that the
internet and information technology are having throughout the business and
consumer landscape.
Information technology (IT) expenditures represent an enormous market --
approximately $1.4 trillion annually -- and both corporate and consumer buyers
are hungry for the most thorough and trusted data about the
rapidly-proliferating variety of products in this area. Similarly,
manufacturers, distributors, retailers and other advertisers are desperate to
reach these tech-savvy audiences as they are researching future purchases. The
merged CNET is the must-see source for all things new and cool in the world of
tech and includes a collection of sites containing descriptions, commentary and
reviews about thousands of products spanning the entire gamut of the
information technology industry. Before buying a new $100 piece of software or
a $10,000 server, buyers turn to CNET to get the latest data on product
features, alternative products, prices and availability. In addition, CNET is
extending its comprehensive technology market expertise into magazines, radio
and television productions all focused on the changing technology landscape.
All told, the company's content is digested by more than 24 million
tech-oriented customers each month.
<PAGE>
As a result, CNET is in a key position to influence that $1.4 trillion in
annual IT expenditures and thus offers one of the most compelling advertising
opportunities on the web -- the chance to reach a targeted group of buyers as
they are on the verge of making expensive, complex purchase decisions. Not
surprisingly, most of CNET's 1,300 advertisers are large, established
technology companies, like Dell and Hewlett Packard, willing to pay big dollars
to reach these potential customers. These advertisers have fully embraced the
benefits of internet advertising and continue to increase their commitment to
the medium, but only with the top properties. This makes CNET less exposed to
the much publicized downdraft in Internet advertising rates for run-of-the-mill
banner ads from poorly financed dot.coms.
Currently, about three-quarters of CNET's revenues are derived from advertising
and promotions. However, the company believes that its extensive, proprietary
content and enormous user base can be leveraged into several important new
revenue streams. For instance, CNET has begun selling the real-time information
it accumulates on purchasers' behavior to technology manufacturers and
consultants, so that they can better understand their customers and better
manage their supply chain. The company is also working with technology
companies to help them market new products directly to likely buyers. There's
also the opportunity to create web-based exchanges for technology distributors
and resellers to trade their wares.
Another great thing about CNET is that it's not only profitable today, but, as
a stand alone company, was profitable as far back as mid 1998. Operating income
before depreciation and amortization, which is currently about $50 million, is
expected to grow to over $140 million next year and sustain a 40-50% annual
growth rate for the next several years. In addition, the balance sheet includes
nearly $500 million of cash, so the company is less likely to ever need to
return to the volatile public markets to finance its next stages of growth. The
company today trades at a reasonable 18 times next year's operating income
projection given the expected 40-50% annual operating income growth rate
management has endorsed, the size of their market opportunity and their
dominance of the category. If the stock only appreciates in line with its
operating income growth, we should make substantial returns on the stock over
time regardless of the short-term direction in the market.
--------------------------------------------------------------------------------
CONCLUSION
We pride ourselves on focusing on hard and true facts to construct our opinions
-- and we prefer well-funded, currently profitable businesses with
extraordinary growth prospects in
23
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
"sunrise" markets. Certainly, the visibility of future opportunities can
sometimes be clouded by current facts that offer contradictory interpretations.
Some of the questions being raised today include: Is internet advertising alive
or dead? It has risen from almost nothing three years ago to $8-10 billion
annually, but its growth has definitely slowed along with the broader
advertising markets during the latter half of this year. Are all internet
companies going out of business? So far, during the 10 months of this year
according to Barron's, over 130 internet firms have folded laying off thousands
of would be dot.com millionaires who are now going B2C or B2B (back to
consulting or back to banking). Does the internet make businesses more
profitable by saving them money or less profitable by increasing their
competition? Contracting and expanding margins in many industries point both
ways. By focusing intensely on the businesses that we believe have the best
management teams, business models and competitive advantages in the internet
and information technology sectors, and using the difficult market environment
to buy them at attactive prices, we hope to take advantage of these
uncertainties to create an exciting portfolio at great entry prices that we
hope will generate terrific returns over the long term if the businesses mature
and reach their potential. (There can obviously be no assurances of our
success.)
As the broader markets as a whole have become more difficult and uncertain in
recent months, many have turned a pessimistic eye towards the future prospects
for the types of companies that we own. This certainly makes for a difficult
investing environment. We are acutely aware that fellow shareholders who have
invested in iOpportunity have lost a substantial amount of money since our
inception. These losses highlight that there is a level of risk inherent in
equity investing that has not been apparent in recent years. While those risks
can certainly be higher for the kinds of younger, faster growing companies in
new industries that we own, we hope and expect (although we cannot assure) that
the rewards in the future (as the best companies achieve their potential) will
justify and offset these risks. We hope these letters continue to give you a
sense of the basis for our excitement about the opportunities that we see in
these markets as well as our approach for constructing a portfolio to balance
the risks and potential future rewards. We hope to continue to justify your
confidence and support as fellow shareholders.
As always, we thank you for your support.
Sincerely,
/s/ Mitch Rubin
------------------------
Mitch Rubin
Portfolio Manager
November 20, 2000
24
<PAGE>
B A R O N F U N D S
Table I (Unaudited)
--------------------------------------------------------------------------------
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. ...................... $49,012 14.4%
Flextronics Intl., Ltd. ................... 16,436 6.8
NTL, Inc. ................................. 12,540 4.4
Univision Comm., Inc., Cl A ............... 7,715 0.5
American Tower Corp., Cl A ................ 6,740 3.5
Robert Half Intl., Inc. ................... 6,200 8.4
----
38.0%
Medium Capitalization
-----------------------------------------------------------------------------
Dollar Tree Stores, Inc. .................. $ 4,356 3.2%
Citizens Comm. Co. ........................ 3,558 2.6
Hispanic Broadcasting Corp. ............... 3,033 1.2
Apollo Group, Inc., Cl A .................. 2,998 4.3
UnitedGlobalCom, Inc., Cl A ............... 2,890 0.2
DeVry, Inc. ............................... 2,620 3.9
Four Seasons Hotels, Inc. ................. 2,533 1.1
Westwood One, Inc. ........................ 2,400 0.5
Primedia, Inc. ............................ 2,379 0.1
Sirius Satellite Radio, Inc. .............. 2,218 0.4
XM Satellite Radio Hldgs., Inc. ........... 2,102 2.1
ChoicePoint, Inc. ......................... 1,849 3.1
Manor Care, Inc. .......................... 1,604 2.2
Polo Ralph Lauren Corp., Cl A ............. 1,563 2.6
Cox Radio, Inc., Cl A ..................... 1,515 0.5
----
28.0%
Small Capitalization
-----------------------------------------------------------------------------
Sotheby's Hldgs., Inc., Cl A .............. $ 1,465 10.1%
Six Flags, Inc. (formerly Premier Parks,
Inc.) .................................. 1,220 0.3
Ethan Allen Interiors, Inc. ............... 1,120 1.3
OM Group, Inc. ............................ 1,040 2.1
Southern Union Co. ........................ 981 1.2
Commonwealth Telephone Ent., Inc. ......... 831 0.2
Seacor Smit, Inc. ......................... 792 1.5
Education Mgmt. Corp. ..................... 777 1.5
Vail Resorts, Inc. ........................ 721 4.1
Industrie Natuzzi SPA ADR ................. 700 0.8
Motient Corp. ............................. 700 1.0
<PAGE>
-----------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
-----------------------------------------------------------------------------
Small Capitalization (Continued)
-----------------------------------------------------------------------------
Sun Intl. Hotels, Ltd. .................... $ 629 0.8%
Citadel Comm. Corp. ....................... 628 0.2
Choice Hotels Intl., Inc. ................. 581 3.0
Libbey, Inc. .............................. 474 1.7
Alexander's, Inc. ......................... 409 0.6
CoreComm, Ltd. ............................ 319 0.5
DVI, Inc. ................................. 276 0.5
Saga Comm., Inc., Cl A .................... 272 1.2
Smart and Final, Inc. ..................... 206 0.4
Prison Realty Trust, Inc. ................. 141 0.1
----
33.1%
BARON GROWTH FUND
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
-----------------------------------------------------------------------------
Large Capitalization
-----------------------------------------------------------------------------
Charles Schwab Corp. ...................... $49,012 2.8%
Flextronics Intl., Ltd. ................... 16,436 2.0
NTL, Inc. ................................. 12,540 2.7
Robert Half Intl., Inc. ................... 6,200 2.7
----
10.2%
Medium Capitalization
-----------------------------------------------------------------------------
Dollar Tree Stores, Inc. .................. $ 4,356 2.7%
Apollo Group, Inc., Cl A .................. 2,998 6.3
DeVry, Inc. ............................... 2,620 1.9
Four Seasons Hotels, Inc. ................. 2,533 1.4
Westwood One, Inc. ........................ 2,400 0.8
Sirius Satellite Radio, Inc. .............. 2,218 2.0
XM Satellite Radio Hldgs., Inc. ........... 2,102 5.1
BlackRock, Inc., Cl A ..................... 2,044 2.9
Hotel Reservations Network, Inc., Cl A..... 2,022 0.1
ChoicePoint, Inc. ......................... 1,849 4.3
SBA Comm. Corp., Cl A ..................... 1,664 0.8
Manor Care, Inc. .......................... 1,604 0.7
Polo Ralph Lauren Corp., Cl A ............. 1,563 0.4
Getty Images, Inc. ........................ 1,514 1.2
----
30.6%
25
<PAGE>
B A R O N F U N D S
Baron Growth Fund
----------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
----------------------------------------------------------------------------
Small Capitalization
----------------------------------------------------------------------------
Sotheby's Hldgs., Inc., Cl A .............. $1,465 1.7%
Entercom Comm. Corp. ...................... 1,354 0.7
Extended Stay America, Inc. ............... 1,262 1.6
Ethan Allen Interiors, Inc. ............... 1,120 3.7
The Yankee Candle Co., Inc. ............... 1,097 0.5
University of Phoenix Online .............. 1,070 2.0
OM Group, Inc. ............................ 1,040 2.9
World Wrestling Federation
Entertainment, Inc., Cl A .............. 1,035 0.2
Intrawest Corp. ........................... 1,000 0.4
Heidrick & Struggles Int'l., Inc. ......... 990 0.4
Southern Union Co. ........................ 981 4.8
Gabelli Asset Mgmt., Inc., Cl A ........... 888 1.7
Rural Cellular Corp., Cl A ................ 803 3.8
Seacor Smit, Inc. ......................... 792 1.5
Education Mgmt. Corp. ..................... 777 4.9
Webvan Group, Inc. ........................ 770 0.1
Vail Resorts, Inc. ........................ 721 0.9
Radio One, Inc. ........................... 710 1.0
Industrie Natuzzi SPA ADR ................. 700 1.1
Motient Corp. ............................. 700 1.2
Sun Intl. Hotels, Ltd. .................... 629 2.0
Citadel Comm. Corp. ....................... 628 0.6
Choice Hotels Intl., Inc. ................. 581 4.2
Expedia, Inc., Cl A ....................... 576 0.5
California Pizza Kitchen, Inc. ............ 504 0.0
Libbey, Inc. .............................. 474 0.9
Azurix Corp. .............................. 418 0.1
Alexander's, Inc. ......................... 409 0.9
Steiner Leisure, Ltd. ..................... 372 0.9
Kronos, Inc. .............................. 370 1.5
Chiles Offshore, Inc. ..................... 357 1.1
CoreComm, Ltd. ............................ 319 0.8
American Classic Voyages Co. .............. 306 0.6
DVI, Inc. ................................. 276 1.0
Saga Comm., Inc., Cl A .................... 272 1.5
Medallion Financial Corp. ................. 236 1.6
Smart and Final, Inc. ..................... 206 0.9
drugstore.com, Inc. ....................... 176 1.4
Collectors Universe, Inc. ................. 64 0.1
----
55.7%
BARON SMALL CAP FUND
----------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
----------------------------------------------------------------------------
Medium Capitalization
----------------------------------------------------------------------------
Apollo Group, Inc., Cl A .................. $2,998 4.2%
UnitedGlobalCom, Inc., Cl A ............... 2,890 4.9
Four Seasons Hotels, Inc. ................. 2,533 2.7
----------------------------------------------------------------------------
<PAGE>
Equity % of
Market Cap Net
Company (in millions) Assets
----------------------------------------------------------------------------
Medium Capitalization (Continued)
----------------------------------------------------------------------------
Community Health Systems, Inc. ........... $2,443 1.7%
Westwood One, Inc. ....................... 2,400 2.4
Outback Steakhouse, Inc. ................. 2,113 0.9
Iron Mountain, Inc. ...................... 2,025 3.3
Williams-Sonoma, Inc. .................... 1,931 2.6
APW, Ltd. ................................ 1,911 3.1
ChoicePoint, Inc. ........................ 1,849 4.1
United Rentals, Inc. ..................... 1,696 2.1
SBA Comm. Corp., Cl A .................... 1,664 4.1
Getty Images, Inc. ....................... 1,514 2.9
----
39.0%
Small Capitalization
---------------------------------------------------------------------------
Korn Ferry Int'l. ........................ $1,393 2.0%
Entercom Comm. Corp. ..................... 1,354 2.5
Pinnacle Hldgs., Inc. .................... 1,289 0.4
Six Flags, Inc. (formerly Premier Parks,
Inc.) ................................. 1,220 1.8
Lexent, Inc. ............................. 1,215 0.7
The Yankee Candle Co., Inc. .............. 1,097 1.0
Krispy Kreme Doughnuts, Inc. ............. 1,083 0.5
University of Phoenix Online ............. 1,070 0.6
Heidrick & Struggles Int'l., Inc. ........ 990 2.6
Career Education Corp. ................... 901 8.6
Gabelli Asset Mgmt., Inc., Cl A .......... 888 1.0
Penton Media, Inc. ....................... 875 4.4
Liberty Livewire Corp., Cl A ............. 846 1.3
Commonwealth Telephone Ent., Inc. ........ 831 2.9
Province Healthcare Co. .................. 810 1.0
Rural Cellular Corp., Cl A ............... 803 4.0
El Paso Electric Co. ..................... 752 1.0
Kenneth Cole Productions, Inc., Cl A ..... 721 3.4
Radio One, Inc. .......................... 710 2.5
Hain Celestial Group, Inc. ............... 647 4.0
Sun Intl. Hotels, Ltd. ................... 629 0.6
Corporate Executive Board Co. ............ 622 2.3
Frontline Capital Group .................. 594 0.5
Choice One Comm., Inc. ................... 460 0.6
PrimaCom AG .............................. 442 0.2
Championship Auto Racing Team, Inc........ 380 1.2
CoreComm, Ltd. ........................... 319 1.0
Casella Waste Systems, Inc., Cl A ........ 235 1.2
Loislaw.com, Inc. ........................ 101 0.2
Morton's Restaurant Group, Inc. .......... 89 0.7
Equity Marketing, Inc. ................... 86 0.6
The Sports Club, Inc. .................... 71 0.2
----
55.5%
26
<PAGE>
B A R O N F U N D S
BARON iOPPORTUNITY FUND
----------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
----------------------------------------------------------------------------
Large Capitalization
----------------------------------------------------------------------------
EMC Corp. ................................. $216,130 1.1%
America Online, Inc. ...................... 123,485 1.9
Time Warner, Inc. ......................... 103,559 1.7
Charles Schwab Corp. ...................... 49,012 2.8
AT&T Corp. Liberty Media Group, Cl A 46,429 2.9
Comcast Corp., Cl A ....................... 37,038 2.6
Gemstar TV Guide Intl., Inc. .............. 35,676 3.9
Flextronics Intl., Ltd. ................... 16,436 3.2
eBay, Inc. ................................ 18,420 3.7
Amazon.com, Inc. .......................... 13,679 3.3
NTL, Inc. ................................. 12,540 2.2
United Pan-Europe Comm. N.V. ADR
Cl A ................................... 8,498 0.3
TMP Worldwide, Inc. ....................... 7,740 4.9
Lycos, Inc. ............................... 7,592 0.7
Research In Motion Ltd. ................... 7,028 2.6
American Tower Corp., Cl A ................ 6,740 3.0
At Home Corp., Series A ................... 5,682 0.9
----
41.7%
Medium Capitalization
----------------------------------------------------------------------------
DoubleClick, Inc. ......................... $ 3,927 3.0%
homestore.com, Inc. ....................... 3,506 4.7
McData Corp., Cl B ........................ 3,128 0.3
UnitedGlobalCom, Inc., Cl A ............... 2,890 1.1
Primedia, Inc. ............................ 2,379 0.4
FreeMarkets, Inc. ......................... 2,147 0.5
XM Satellite Radio Hldgs. ................. 2,102 1.6
Hotel Reservations Network, Inc., Cl A. . 2,022 4.9
ChoicePoint, Inc. ......................... 1,849 2.9
SBA Comm. Corp., Cl A ..................... 1,664 3.3
Getty Images, Inc. ........................ 1,514 2.9
----
25.6%
Small Capitalization
----------------------------------------------------------------------------
Sotheby's Hldgs., Inc., Cl A .............. $ 1,465 1.8%
Tumbleweed Comm. Corp. .................... 1,346 1.6
University of Phoenix Online .............. 1,070 0.2
Ziff-Davis, Inc. .......................... 1,059 1.9
Heidrick & Struggles Int'l., Inc. ......... 990 2.7
Penton Media, Inc. ........................ 875 1.5
Liberty Livewire Corp., Cl A .............. 846 0.2
GoTo.Com, Inc. ............................ 751 2.5
Motient Corp. ............................. 700 1.1
Avantgo, Inc. ............................. 667 0.4
Front Line Capital Group .................. 594 1.5
Expedia, Inc., Cl A ....................... 576 1.9
Allied Riser Comm. Corp. .................. 380 1.6
Wink Comm., Inc. .......................... 372 0.6
drugstore.com, Inc. ....................... 176 0.8
----
20.3%
<PAGE>
Table II (Unaudited)
--------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Baron
Baron Baron Small Baron
Asset Growth Cap iOpportunity
Fund Fund Fund Fund
----------- ----------- ----------- -------------
% of % of % of % of
Portfolio Portfolio Portfolio Portfolio
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Leverage (Debt > 40% of
Market Cap) ................. 14.7% 26.4% 28.9% 4.5%
Foreign Sales Dependent
(Sales > 15%) ............... 27.2 18.3 15.7 32.1
Oil Price Sensitivity .......... 12.0 22.9 0.6 1.9
Volatility (Beta > 1.2) ........ 34.8 25.5 30.1 50.7
NASDAQ Securities .............. 19.4 41.5 51.6 61.9
Unseasoned Securities
(Publicly owned
for < 3 years) ............. 8.8 25.8 48.8 48.3
(Publicly owned
for < 1 year) .............. 1.2 14.4 7.8 18.1
Turnarounds .................... 0.0 0.0 0.2 0.0
Development Companies .......... 1.5 10.5 2.4 34.2
</TABLE>
27
<PAGE>
B A R O N F U N D S
Table III (Unaudited)
--------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS AS OF SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
BARON ASSET FUND
One year 22.8%
----------------------------------- ----
Two years 26.0%
----------------------------------- ----
Three years 10.2%
----------------------------------- ----
Four years 15.6%
----------------------------------- ----
Five years 16.7%
----------------------------------- ----
Ten years 20.4%
----------------------------------- ----
Since inception June 12, 1987 17.2%
----------------------------------- ----
BARON GROWTH FUND
One year 18.6%
----------------------------------- ----
Two years 30.3%
----------------------------------- ----
Three years 11.6%
----------------------------------- ----
Four years 17.5%
----------------------------------- ----
Five years 19.1%
----------------------------------- ----
Since inception January 3, 1995 24.6%
----------------------------------- ----
BARON SMALL CAP FUND
One year 20.0%
----------------------------------- ----
Two years 36.5%
----------------------------------- ----
Since inception October 1, 1997 17.1%
----------------------------------- ----
BARON iOPPORTUNITY FUND
Since inception February 29, 2000 (12.4%)
----------------------------------- -----
The performance data represents past performance. Investment returns and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their cost. For more complete information about
Baron Funds, including charges and expenses, call or write for a prospectus.
Read it carefully before you invest or send money. This report is not
authorized for use as an offer of sale or a solicitation of an offer to buy
shares of Baron Funds unless accompanied or preceded by the Funds' current
prospectus.
28
<PAGE>
B A R O N A S S E T F U N D
STATEMENT OF NET ASSETS
------------------------------------------------------------------------------
September 30, 2000
Shares Value
------------------------------------------------------------------------------
COMMON STOCKS (98.20%)
------------------------------------------------------------------------------
BUSINESS SERVICES (11.49%)
3,276,400 ChoicePoint, Inc.*# $ 150,304,850
11,955,200 Robert Half Intl., Inc.*# 414,696,000
--------------
565,000,850
CHEMICAL (2.09%)
2,360,300 OM Group, Inc. # 102,968,088
COMMUNICATIONS (12.15%)
4,556,900 American Tower Corp., Cl A* 171,738,169
9,323,300 Citizens Comm. Co.* 125,281,844
213,000 Commonwealth Telephone Ent., Inc.* 7,854,375
3,304,000 CoreComm, Ltd.*# 26,225,500
3,486,100 Motient Corp.*# 49,241,162
4,686,800 NTL, Inc.* 217,057,425
--------------
597,398,475
EDUCATION (9.77%)
5,344,000 Apollo Group, Inc., Cl A* 213,092,000
5,075,600 DeVry, Inc.*# 190,969,450
2,825,000 Education Mgmt. Corp.*# 76,098,438
--------------
480,159,888
ENERGY (1.47%)
1,552,200 Seacor Smit, Inc.*# 72,371,325
Financial (14.98%)
19,989,500 Charles Schwab Corp. 709,627,250
1,378,600 DVI, Inc.*# 26,796,538
--------------
736,423,788
HEALTH SERVICES (2.23%)
6,993,000 Manor Care, Inc. *# 109,702,687
Hotels and Lodging (4.06%)
13,205,300 Choice Hotels Intl., Inc.*# 145,258,300
745,000 Four Seasons Hotels, Inc. 54,524,688
--------------
199,782,988
MANUFACTURING (6.82%)
4,086,000 Flextronics Intl., Ltd.* 335,562,750
MEDIA AND ENTERTAINMENT (5.91%)
560,000 Citadel Comm. Corp.* 9,520,000
1,266,000 Cox Radio, Inc., Cl A* 22,075,875
2,195,000 Hispanic Broadcasting Corp.* 61,185,625
3,664,752 Saga Comm., Inc., Cl A*# 60,468,408
400,000 Sirius Satellite Radio, Inc.* 21,150,000
300,000 UnitedGlobalCom, Inc., Cl A* 9,000,000
635,000 Univision Comm., Inc., Cl A* 23,733,125
1,250,000 Westwood One, Inc.* 26,796,875
1,314,914 XM Satellite Radio Hldgs., Inc.,
Cl A*@ 56,623,656
--------------
290,553,564
PRINTING AND PUBLISHING (0.13%)
391,000 Primedia, Inc.* 6,402,625
REAL ESTATE AND REITS (0.72%)
350,900 Alexander's, Inc.*# 28,686,075
5,673,759 Prison Realty Trust, Inc. 6,737,589
--------------
35,423,664
RECREATION AND RESORTS (5.17%)
965,000 Six Flags, Inc. (formerly Premier Parks,
Inc.)* 14,957,500
2,082,706 Sun Intl. Hotels, Ltd.*# 40,092,090
6,045,600 Vail Resorts, Inc.*# 122,423,400
4,000,000 Vail Resorts, Inc.*# @ 76,950,000
--------------
254,422,990
<PAGE>
Shares Value
---------------------------------------------------------------------------
RETAIL TRADE AND RESTAURANTS (17.55%)
3,839,400 Dollar Tree Stores, Inc.* $ 155,735,663
2,245,000 Ethan Allen Interiors, Inc.# 63,561,562
7,937,200 Polo Ralph Lauren Corp., Cl A* 127,987,350
2,560,000 Smart and Final, Inc.*# 18,080,000
20,003,400 Sotheby's Hldgs., Inc., Cl A# 497,584,575
--------------
862,949,150
UTILITY SERVICES (1.16%)
2,866,900 Southern Union Co.*# 56,800,457
WHOLESALE TRADE (2.50%)
3,075,000 Industrie Natuzzi SPA ADR# 37,476,563
2,745,000 Libbey, Inc.# 85,438,125
--------------
122,914,688
--------------
TOTAL COMMON STOCKS
(Cost $2,843,069,426)
4,828,837,977
--------------
--------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (1.04%)
---------------------------------------------------------------------------
EDUCATION (0.02%)
52,632 Apollo Intl., Inc. S-A CV Pfd.*@ 1,000,008
HEALTH SERVICES (0.08%)
2,557 Chesapeake Healthcare Corp.* @ 4,000,196
MEDIA AND ENTERTAINMENT (0.94%)
31,000 XM Satellite Radio Hldgs., Inc. 8.25%
Series C Conv. Pfd due 2012@ 46,429,080
--------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $36,371,371) 51,429,284
--------------
---------------------------------------------------------------------------
WARRANTS (0.03%)
---------------------------------------------------------------------------
COMMUNICATIONS (0.00%)
75,000 CoreComm, Ltd. Warrants Exp
05/26/2002*@# 0
REAL ESTATE AND REITS (0.03%)
2,127,660 Prison Realty Trust, Inc. Warrants Exp
09/29/2005*@ 1,670,213
--------------
TOTAL WARRANTS
(Cost $1,473,750) 1,670,213
--------------
Principal Amount
---------------------------------------------------------------------------
SHORT TERM MONEY MARKET INSTRUMENTS (1.02%)
---------------------------------------------------------------------------
$ 49,939,999 Associates Corp. of N.A. 6.35%
due 10/02/2000 (Cost $49,939,999) 49,939,999
--------------
TOTAL INVESTMENTS (100.29%)
(COST $2,930,854,546**) 4,931,877,473
LIABILITIES LESS
CASH AND OTHER ASSETS (--0.29%) (14,427,667)
--------------
NET ASSETS (EQUIVALENT TO $63.35 PER
SHARE BASED ON 77,623,484 SHARES OF
BENEFICIAL INTEREST OUTSTANDING) $4,917,449,806
==============
----------
% Represents percentage of net assets
@ Restricted securities
# Issuers that may be deemed to be "affiliated"
* Non-income producing securities
** For Federal income tax purposes the cost basis is
$2,931,054,150. Aggregate unrealized appreciation and depre-
ciation of investments are $2,320,517,615 and $319,694,292,
respectively.
See Notes to Financial Statements.
29
<PAGE>
B A R O N G R O W T H F U N D
STATEMENT OF NET ASSETS
---------------------------------------------------------------------------
September 30, 2000
Shares Value
---------------------------------------------------------------------------
COMMON STOCKS (96.48%)
---------------------------------------------------------------------------
BUSINESS SERVICES (8.87%)
498,995 ChoicePoint, Inc.* $ 22,891,396
40,000 Heidrick & Struggles Int'l., Inc.* 2,055,000
260,000 Kronos, Inc.* 7,800,000
420,000 Robert Half Intl., Inc.* 14,568,750
------------
47,315,146
CHEMICAL (2.86%)
350,000 OM Group, Inc. 15,268,750
COMMUNICATIONS (9.24%)
510,000 CoreComm, Ltd.* 4,048,125
450,000 Motient Corp.* 6,356,250
315,000 NTL, Inc.* 14,588,438
295,000 Rural Cellular Corp., Cl A* 20,096,875
100,000 SBA Comm. Corp., Cl A* 4,193,750
------------
49,283,438
CONSUMER SERVICES (0.49%)
200,000 Expedia, Inc., Cl A* 2,600,000
EDUCATION (15.10%)
845,000 Apollo Group, Inc., Cl A* 33,694,375
270,000 DeVry, Inc.* 10,158,750
970,000 Education Mgmt. Corp.* 26,129,375
517,400 University of Phoenix Online* 10,542,025
------------
80,524,525
ENERGY (1.49%)
170,000 Seacor Smit, Inc.* 7,926,250
FINANCIAL (10.02%)
93,333 Bingham Financial Services Corp.*@ 166,254
485,000 BlackRock, Inc., Cl A* 15,520,000
420,000 Charles Schwab Corp. 14,910,000
283,200 DVI, Inc.* 5,504,700
299,000 Gabelli Asset Mgmt., Inc., Cl A* 8,970,000
500,000 Medallion Financial Corp. 8,406,250
------------
53,477,204
FOOD AND AGRICULTURE (0.04%)
7,500 California Pizza Kitchen, Inc.* 210,000
HEALTH SERVICES (0.66%)
225,000 Manor Care, Inc.* 3,529,687
HOTELS AND LODGING (7.29%)
2,020,000 Choice Hotels Intl., Inc.* 22,220,000
650,000 Extended Stay America, Inc.* 8,612,500
100,000 Four Seasons Hotels, Inc. 7,318,750
20,000 Hotel Reservations Network, Inc., Cl A* 732,500
------------
38,883,750
MANUFACTURING (2.00%)
130,000 Flextronics Intl., Ltd.* 10,676,250
MEDIA AND ENTERTAINMENT (11.74%)
180,000 Citadel Comm. Corp.* 3,060,000
130,000 Entercom Comm. Corp.* 3,891,875
220,000 Radio One, Inc., Cl A* 1,828,750
575,000 Radio One, Inc., Cl D* 4,060,938
472,500 Saga Comm., Inc., Cl A* 7,796,250
200,000 Sirius Satellite Radio, Inc.* 10,575,000
200,000 Westwood One, Inc.* 4,287,500
630,000 XM Satellite Radio Hldgs., Inc., Cl A* 27,129,375
------------
62,629,688
OIL SERVICES (1.13%)
277,800 Chiles Offshore, Inc.* 6,007,425
PRINTING AND PUBLISHING (1.20%)
210,000 Getty Images, Inc.* 6,391,875
REAL ESTATE AND REITS (0.90%)
58,600 Alexander's, Inc.* 4,790,550
<PAGE>
Shares Value
---------------------------------------------------------------------------
RECREATION AND RESORTS (5.02%)
210,000 American Classic Voyages Co.* $ 3,071,250
140,000 Intrawest Corp. 2,327,500
220,000 Steiner Leisure, Ltd.* 4,922,500
550,000 Sun Intl. Hotels, Ltd.* 10,587,500
235,000 Vail Resorts, Inc.* 4,758,750
75,000 World Wrestling Federation
Entertainment, Inc., Cl A* 1,139,062
------------
26,806,562
RETAIL TRADE AND RESTAURANTS (11.59%)
325,000 Collectors Universe, Inc.* 812,500
360,000 Dollar Tree Stores, Inc.* 14,602,500
200,000 drugstore.com, Inc.* 675,000
2,227,848 drugstore.com, Inc.*@ 6,767,088
700,000 Ethan Allen Interiors, Inc. 19,818,750
125,000 Polo Ralph Lauren Corp., Cl A* 2,015,625
700,000 Smart and Final, Inc.* 4,943,750
360,000 Sotheby's Hldgs., Inc., Cl A 8,955,000
269,012 Webvan Group, Inc.* 622,090
130,000 The Yankee Candle Co., Inc.* 2,616,250
------------
61,828,553
UTILITY SERVICES (4.88%)
158,300 Azurix Corp.* 563,944
1,286,250 Southern Union Co.* 25,483,828
------------
26,047,772
WHOLESALE TRADE (1.96%)
475,000 Industrie Natuzzi SPA ADR 5,789,063
150,000 Libbey, Inc. 4,668,750
------------
10,457,813
------------
TOTAL COMMON STOCKS
(Cost $357,500,060)
514,655,238
------------
---------------------------------------------------------------------------
WARRANTS (0.00%)
---------------------------------------------------------------------------
COMMUNICATIONS
187,500 CoreComm, Ltd. Warrants Exp
05/26/2002*@ (Cost $3,684,375) 0
-------------
Principal Amount
---------------------------------------------------------------------------
CORPORATE BONDS (0.44%)
---------------------------------------------------------------------------
COMMUNICATIONS
$5,000,000 CoreComm Ltd. 6.00%
Conv. Sub. NT due 10/01/2006+
(Cost $5,000,000) 2,337,500
-----------
--------------------------------------------------------------------------------
SHORT TERM MONEY MARKET INSTRUMENTS (4.77%)
--------------------------------------------------------------------------------
25,480,000 Associates Corp. of N.A. 6.35%
due 10/02/2000 (Cost $25,480,000) 25,480,000
-----------
TOTAL INVESTMENTS (101.69%)
(COST $391,664,435**) 542,472,738
LIABILITIES LESS
CASH AND OTHER ASSETS (-1.69%) (9,025,592)
-----------
NET ASSETS (EQUIVALENT TO $32.26 PER
SHARE BASED ON 16,534,864 SHARES OF
BENEFICIAL INTEREST OUTSTANDING) $533,447,146
============
-----------------
% Represents percentage of net assets
@ Restricted securities
+ Rule 144A securities
* Non-income producing securities
** For Federal income tax purposes the cost basis is $392,731,206.
Aggregate unrealized appreciation and depreciation of investments are
$192,352,392 and $42,610,860 respectively.
See Notes to Financial Statements.
30
<PAGE>
B A R O N S M A L L C A P F U N D
STATEMENT OF NET ASSETS
---------------------------------------------------------------------------
September 30, 2000
Shares Value
---------------------------------------------------------------------------
COMMON STOCKS (94.55%)
---------------------------------------------------------------------------
BUSINESS SERVICES (14.77%)
778,750 ChoicePoint, Inc.* $ 35,725,156
500,000 Corporate Executive Board Co.* 20,125,000
250,000 Frontline Capital Group* 4,109,375
450,000 Heidrick & Struggles Int'l., Inc.* 23,118,750
780,000 Iron Mountain, Inc.* 28,860,000
475,000 Korn Ferry Int'l.* 17,960,938
------------
129,899,219
COMMUNICATIONS (14.26%)
450,000 Choice One Comm., Inc.* 5,484,375
700,000 Commonwealth Telephone Ent., Inc.* 25,812,500
1,050,000 CoreComm, Ltd.* 8,334,375
381,600 Liberty Livewire Corp., Cl A* 11,734,200
125,000 Pinnacle Hldgs., Inc.* 3,328,125
515,000 Rural Cellular Corp., Cl A* 35,084,375
850,000 SBA Comm. Corp., Cl A* 35,646,875
------------
125,424,825
CONSUMER PRODUCTS (0.58%)
375,000 Equity Marketing, Inc.*# 5,109,375
EDUCATION (13.40%)
925,000 Apollo Group, Inc., Cl A* 36,884,375
1,700,000 Career Education Corp.*# 75,650,000
261,400 University of Phoenix Online* 5,326,025
------------
117,860,400
ENVIRONMENTAL (1.15%)
1,000,000 Casella Waste Systems, Inc., Cl A* 10,125,000
FINANCIAL (1.02%)
299,000 Gabelli Asset Mgmt., Inc., Cl A* 8,970,000
FOOD AND AGRICULTURE (3.95%)
990,000 Hain Celestial Group, Inc.* 34,773,750
HEALTH SERVICES (2.67%)
450,000 Community Health Systems, Inc.* 14,456,250
225,000 Province Healthcare Co.* 8,985,937
------------
23,442,187
HOTELS AND LODGING (2.70%)
325,000 Four Seasons Hotels, Inc. 23,785,938
INDUSTRIAL SERVICES (2.06%)
750,000 United Rentals, Inc.* 18,093,750
MANUFACTURING (3.79%)
567,500 APW, Ltd.* 27,665,625
191,000 Lexent, Inc.* 5,682,250
------------
33,347,875
MEDIA AND ENTERTAINMENT (12.64%)
725,000 Entercom Comm. Corp.* 21,704,687
150,000 PrimaCom AG* 2,100,000
565,000 Radio One, Inc., Cl A* 4,696,563
2,510,000 Radio One, Inc., Cl D* 17,726,875
1,450,000 UnitedGlobalCom, Inc., Cl A* 43,500,000
1,000,000 Westwood One, Inc.* 21,437,500
------------
111,165,625
PRINTING AND PUBLISHING (7.47%)
830,000 Getty Images, Inc.* 25,263,125
400,000 Loislaw.com, Inc.* 1,925,000
1,400,000 Penton Media, Inc. 38,500,000
------------
65,688,125
<PAGE>
Shares Value
---------------------------------------------------------------------------
RECREATION AND RESORTS (3.86%)
450,000 Championship Auto Racing Team, Inc.* $ 10,968,750
1,000,000 Six Flags, Inc. (formerly Premier Parks,
Inc.)* 15,500,000
284,006 Sun Intl. Hotels, Ltd.* 5,467,115
500,000 The Sports Club, Inc.* 2,000,000
------------
33,935,865
RETAIL TRADE AND RESTAURANTS (9.21%)
850,000 Kenneth Cole Productions, Inc., Cl A* 30,015,625
55,000 Krispy Kreme Doughnuts, Inc.* 4,606,250
325,000 Morton's Restaurant Group, Inc.*# 6,581,250
300,000 Outback Steakhouse, Inc.* 8,137,500
650,000 Williams-Sonoma, Inc.* 22,587,500
450,000 The Yankee Candle Co., Inc.* 9,056,250
------------
80,984,375
UTILITY SERVICES (1.02%)
650,000 El Paso Electric Co.* 8,950,500
------------
TOTAL COMMON STOCKS
(Cost $571,650,328)
831,556,809
------------
--------------------------------------------------------------------------------
WARRANTS (0.00%)
---------------------------------------------------------------------------
COMMUNICATIONS
75,000 CoreComm, Ltd. Warrants Exp
05/26/2002*@ (Cost $1,473,750) 0
------------
Principal Amount
---------------------------------------------------------------------------
CORPORATE BONDS (0.53%)
---------------------------------------------------------------------------
COMMUNICATIONS (0.26%)
$ 5,000,000 CoreComm Ltd 6.00%
Conv. Sub. NT due 10/01/2006+ 2,337,500
HEALTH SERVICES (0.27%)
3,250,000 U.S. Diagnostic, Inc. 9.00%
Conv. Sub. Deb. due 03/31/2003 2,340,000
------------
TOTAL CORPORATE BONDS
(Cost $7,520,000)
4,677,500
------------
---------------------------------------------------------------------------
SHORT TERM MONEY MARKET INSTRUMENTS (4.08%)
---------------------------------------------------------------------------
35,910,000 Associates Corp. of N.A. 6.35%
due 10/02/2000 (Cost $35,910,000) 35,910,000
------------
TOTAL INVESTMENTS (99.16%)
(COST $616,554,078**)
872,144,309
CASH AND OTHER ASSETS
LESS LIABILITIES (0.84%)
7,385,570
------------
NET ASSETS (EQUIVALENT TO $16.05 PER
SHARE BASED ON 54,807,115 SHARES OF
BENEFICIAL INTEREST OUTSTANDING)
$879,529,879
============
----------
% Represents percentage of net assets
@ Restricted security
+ Rule 144A securities
# Issuers that may be deemed to be "affiliated"
* Non-income producing securities
** For Federal income tax purposes the cost basis is
$618,816,228. Aggregate unrealized appreciation and
depreciation of investments are $336,528,047 and
$83,199,966, respectively.
See Notes to Financial Statements.
31
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
STATEMENT OF NET ASSETS
---------------------------------------------------------------------------
September 30, 2000
Shares Value
---------------------------------------------------------------------------
COMMON STOCKS (86.02%)
---------------------------------------------------------------------------
BUSINESS SERVICES (16.87%)
120,000 ChoicePoint, Inc.* $ 5,505,000
175,000 DoubleClick, Inc.* 5,600,000
20,000 EMC Corp.* 1,982,500
15,000 FreeMarkets, Inc.* 856,875
175,000 Front Line Capital Group* 2,876,562
100,000 Heidrick & Struggles Int'l., Inc.* 5,137,500
5,000 McData Corp., Cl B* 614,453
114,000 TMP Worldwide, Inc.* 9,177,000
------------
31,749,890
COMMUNICATIONS (17.16%)
450,000 Allied Riser Comm. Corp.* 2,981,250
150,000 American Tower Corp., Cl A* 5,653,125
40,000 Avantgo, Inc.* 800,000
120,000 Comcast Corp., Cl A* 4,912,500
14,200 Liberty Livewire Corp., Cl A* 436,650
150,000 Motient Corp.* 2,118,750
90,000 NTL, Inc.* 4,168,125
50,000 Research In Motion Ltd.* 4,928,125
150,000 SBA Comm. Corp., Cl A* 6,290,625
------------
32,289,150
CONSUMER SERVICES (11.47%)
65,000 America Online, Inc.* 3,493,750
125,000 At Home Corp., Series A* 1,765,625
2,000 CNET Networks, Inc.* 48,719
280,000 Expedia, Inc., Cl A* 3,640,000
280,000 GoTo.Com, Inc.* 4,620,000
20,000 Lycos, Inc.* 1,375,312
40,000 Time Warner, Inc. 3,130,000
250,000 Ziff-Davis, Inc.* 3,515,625
------------
21,589,031
EDUCATION (0.15%)
14,100 University of Phoenix Online* 287,287
FINANCIAL (2.83%)
150,000 Charles Schwab Corp. 5,325,000
HOTELS AND LODGING (4.87%)
250,000 Hotel Reservations Network, Inc., Cl A* 9,156,250
MANUFACTURING (3.23%)
74,000 Flextronics Intl., Ltd.* 6,077,250
MEDIA AND ENTERTAINMENT (8.82%)
300,000 AT&T Corp. Liberty Media Group, Cl A* 5,400,000
85,000 Gemstar TV Guide Int'l., Inc.* 7,410,938
25,000 United Pan-Europe Comm. N.V. ADR, Cl A* 485,937
70,000 UnitedGlobalCom, Inc., Cl A* 2,100,000
100,000 Wink Comm., Inc.* 1,200,000
------------
16,596,875
<PAGE>
Shares Value
---------------------------------------------------------------------------
PRINTING AND PUBLISHING (4.81%)
180,000 Getty Images, Inc.* $ 5,478,750
100,000 Penton Media, Inc. 2,750,000
50,000 Primedia, Inc.* 818,750
------------
9,047,500
REAL ESTATE AND REITS (4.72%)
190,000 homestore.com, Inc.* 8,882,500
RETAIL TRADE AND RESTAURANTS (9.46%)
160,000 Amazon.com, Inc.* 6,150,000
60,000 drugstore.com, Inc.* 202,500
405,063 drugstore.com, Inc.*@ 1,230,379
100,000 eBay, Inc.* 6,862,500
135,000 Sotheby's Hldgs., Inc., Cl A 3,358,125
------------
17,803,504
SOFTWARE(1.63%)
60,000 Tumbleweed Comm. Corp.* 3,060,000
------------
TOTAL COMMON STOCKS
(Cost $181,582,889)
161,864,237
------------
---------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (1.59%)
---------------------------------------------------------------------------
MEDIA AND ENTERTAINMENT
2,000 XM Satellite Radio Hldgs., Inc. 8.25%
Series C Conv. Pfd due 2012 @
(Cost $2,023,959) 2,995,520
------------
Principal Amount
---------------------------------------------------------------------------
SHORT TERM MONEY MARKET INSTRUMENTS (13.04%)
---------------------------------------------------------------------------
$ 24,530,000 Associates Corp. of N.A. 6.35%
due 10/02/2000 (Cost $24,530,000) 24,530,000
------------
TOTAL INVESTMENTS (100.65%)
(COST $208,136,848**)
189,389,757
LIABILITIES LESS
CASH AND OTHER ASSETS (-0.65%)
(1,223,128)
------------
NET ASSETS (EQUIVALENT TO $8.76 PER
SHARE BASED ON 21,474,230 SHARES OF
BENEFICIAL INTEREST OUTSTANDING)
$188,166,629
============
----------
% Represents percentage of net assets
@ Restricted securities
* Non-income producing securities
** For Federal income tax purposes the cost basis is identical.
Aggregate unrealized appreciation and depreciation of
investments are $20,187,768 and $38,934,859, respectively.
See Notes to Financial Statements.
32
<PAGE>
B A R O N F U N D S
STATEMENTS OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
September 30, 2000
<TABLE>
<CAPTION>
Baron Asset
Fund
-------------------
<S> <C>
Assets:
Investments in securities, at value
Unaffiliated issuers
(Cost $961,760,921, $391,664,435, $584,450,800, and
$208,136,848, respectively) $ 2,479,683,880
"Affiliated" issuers (Cost $1,969,093,625, $0, $32,103,278,
and $0, respectively) 2,452,193,593
Cash 0
Dividends and interest receivable 726,107
Receivable for securities sold 5,584,466
Receivable for shares sold 12,303,964
Unamortized organization costs 0
Prepaid expenses 21,992
---------------
4,950,514,002
---------------
Liabilities:
Payable for securities purchased 0
Payable for shares redeemed 32,379,059
Due to custodian bank 11,468
Accrued organization costs 0
Accrued expenses and other payables 673,669
---------------
33,064,196
---------------
Net Assets $ 4,917,449,806
===============
Net Assets consist of:
Capital paid-in $ 2,569,022,984
Undistributed net investment income 0
Accumulated net realized gain (loss) 347,403,895
Net unrealized appreciation (depreciation) on investments 2,001,022,927
---------------
Net Assets $ 4,917,449,806
===============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) 77,623,484
===============
Net Asset Value Per Share $ 63.35
===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Baron Growth Baron Small Cap Baron iOpportunity
Fund Fund Fund
----------------- ----------------- -------------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value
Unaffiliated issuers
(Cost $961,760,921, $391,664,435, $584,450,800, and
$208,136,848, respectively) $ 542,472,738 $ 784,803,684 $ 189,389,757
"Affiliated" issuers (Cost $1,969,093,625, $0, $32,103,278,
and $0, respectively) 0 87,340,625 0
Cash 3,209 582,280 87
Dividends and interest receivable 259,952 347,978 8,658
Receivable for securities sold 2,219,777 12,581,924 5,590,203
Receivable for shares sold 998,742 2,605,153 11,022
Unamortized organization costs 0 11,390 0
Prepaid expenses 0 0 0
------------- ------------- -------------
545,954,418 888,273,034 194,999,727
------------- ------------- -------------
Liabilities:
Payable for securities purchased 11,156,131 5,384,385 6,529,755
Payable for shares redeemed 1,182,808 3,144,493 182,344
Due to custodian bank 0 0 0
Accrued organization costs 0 11,390 0
Accrued expenses and other payables 168,333 202,887 120,999
------------- ------------- -------------
12,507,272 8,743,155 6,833,098
------------- ------------- -------------
Net Assets $ 533,447,146 $ 879,529,879 $ 188,166,629
============= ============= =============
Net Assets consist of:
Capital paid-in $ 333,187,966 $ 607,137,509 $ 217,512,959
Undistributed net investment income 0 0 539,050
Accumulated net realized gain (loss) 49,450,877 16,802,139 (11,138,289)
Net unrealized appreciation (depreciation) on investments 150,808,303 255,590,231 (18,747,091)
------------- ------------- -------------
Net Assets $ 533,447,146 $ 879,529,879 $ 188,166,629
============= ============= =============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) 16,534,864 54,807,115 21,474,230
============= ============= =============
Net Asset Value Per Share $ 32.26 $ 16.05 $ 8.76
============= ============= =============
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
B A R O N F U N D S
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
For the year ended September 30, 2000
<TABLE>
<CAPTION>
Baron Asset Baron Growth
Fund Fund
------------------ --------------
<S> <C> <C>
Investment income:
Income:
Interest $ 1,418,454 $ 1,039,194
Dividends -- unaffiliated issuers (net of foreign tax
withholding of $0, $236,690, $0, and $0, respectively) 3,415,579 2,174,519
Dividends -- "affiliated" issuers (net of foreign tax
withholding of $1,660,981, $0, $0, and $0, respectively) 9,489,825 0
-------------- ------------
Total income 14,323,858 3,213,713
-------------- ------------
Expenses:
Investment advisory fees 54,034,991 5,577,859
Distribution fees 13,508,748 1,394,465
Shareholder servicing agent fees 1,482,900 256,805
Reports to shareholders 1,540,600 181,650
Registration and filing fees 102,272 42,331
Custodian fees 159,855 28,659
Trustee fees 69,491 7,220
Professional fees 992,852 66,700
Amortization of organization costs 0 1,640
Miscellaneous 88,942 10,020
-------------- ------------
Total operating expenses 71,980,651 7,567,349
Interest expense 1,385,356 14,645
-------------- ------------
Total expenses 73,366,007 7,581,994
Less: Expense reimbursement by investment adviser 0 0
-------------- ------------
Net expenses 73,366,007 7,581,994
-------------- ------------
Net investment income (loss) (59,042,149) (4,368,281)
-------------- ------------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments sold in unaffiliated
issuers 629,809,981 62,856,684
Net realized loss on investments sold in "affiliated" issuers (157,336,808) 0
Change in net unrealized appreciation (depreciation) of
investments 728,335,860 32,919,784
-------------- ------------
Net gain (loss) on investments 1,200,809,033 95,776,468
-------------- ------------
Net increase (decrease) in net assets resulting from operations $1,141,766,884 $ 91,408,187
============== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Baron Small Cap Baron iOpportunity
Fund Fund*
----------------- -------------------
<S> <C> <C>
Investment income:
Income:
Interest $ 3,915,730 $ 2,283,177
Dividends -- unaffiliated issuers (net of foreign tax
withholding of $0, $236,690, $0, and $0, respectively) 223,693 32,677
Dividends -- "affiliated" issuers (net of foreign tax
withholding of $1,660,981, $0, $0, and $0, respectively) 0 0
------------ ------------
Total income 4,139,423 2,315,854
------------ ------------
Expenses:
Investment advisory fees 9,766,731 1,184,536
Distribution fees 2,441,683 296,134
Shareholder servicing agent fees 309,406 127,460
Reports to shareholders 280,550 74,092
Registration and filing fees 34,001 71,634
Custodian fees 46,585 14,728
Trustee fees 12,917 1,554
Professional fees 43,455 36,324
Amortization of organization costs 5,695 0
Miscellaneous 17,415 1,461
------------ ------------
Total operating expenses 12,958,438 1,807,923
Interest expense 0 0
------------ ------------
Total expenses 12,958,438 1,807,923
Less: Expense reimbursement by investment adviser 0 (31,119)
------------ ------------
Net expenses 12,958,438 1,776,804
------------ ------------
Net investment income (loss) (8,819,015) 539,050
------------ ------------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments sold in unaffiliated
issuers 75,914,734 (11,138,289)
Net realized loss on investments sold in "affiliated" issuers (2,573,692) 0
Change in net unrealized appreciation (depreciation) of
investments 88,905,189 (18,747,091)
------------ ------------
Net gain (loss) on investments 162,246,231 (29,885,380)
------------ ------------
Net increase (decrease) in net assets resulting from operations $153,427,216 ($ 29,346,330)
============ ============
</TABLE>
----------
* For the period February 29, 2000 (Commencement of Operations) to September
30, 2000.
See Notes to Financial Statements.
34
<PAGE>
B A R O N F U N D S
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Baron Asset Fund Baron Growth 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,
2000 1999 2000 1999
------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
Operations:
Net investment income
(loss) ($ 59,042,149) ($ 33,874,084) ($ 4,368,281) ($ 724,318)
Net realized gain (loss) on
investments sold 472,473,173 46,800,291 62,856,684 34,354,265
Net change in unrealized
appreciation
(depreciation) on
investments 728,335,860 1,250,313,281 32,919,784 78,932,635
---------------- ---------------- -------------- --------------
Increase (decrease) in net
assets resulting from
operations 1,141,766,884 1,263,239,488 91,408,187 112,562,582
---------------- ---------------- -------------- --------------
Dividends to shareholders
from:
Net investment income 0 (4,594,972) 0 (486,147)
Net realized gain on
investments 0 0 (29,536,361) 0
---------------- ---------------- -------------- --------------
0 (4,594,972) (29,536,361) (486,147)
---------------- ---------------- -------------- --------------
Capital share transactions:
Proceeds from the sale of
shares 1,045,621,423 2,326,280,913 291,908,779 193,413,986
Net asset value of shares
issued in reinvestment
of dividends 0 4,175,765 28,265,440 461,215
Cost of shares redeemed (3,133,863,389) (2,138,067,002) (288,023,683) (182,084,702)
---------------- ---------------- -------------- --------------
Increase (decrease) in net
assets derived from
capital share transactions (2,088,241,966) 192,389,676 32,150,536 11,790,499
---------------- ---------------- -------------- --------------
Capital contribution 799,873 1,584,375 0 0
Redemption fees 0 0 0 0
---------------- ---------------- -------------- --------------
Net increase (decrease) in
net assets (945,675,209) 1,452,618,567 94,022,362 123,866,934
Net assets:
Beginning of year 5,863,125,015 4,410,506,448 439,424,784 315,557,850
---------------- ---------------- -------------- --------------
End of year $ 4,917,449,806 $ 5,863,125,015 $ 533,447,146 $ 439,424,784
================ ================ ============== ==============
Undistributed net
investment income at end
of year $ 0 $ 0 $ 0 $ 0
================ ================ ============== ==============
Shares of beneficial interest:
Shares sold 18,148,606 45,041,285 9,330,253 6,776,893
Shares issued in
reinvestment dividends 0 82,185 1,029,706 18,636
Shares redeemed (54,213,058) (41,802,254) (8,947,021) (7,201,050)
---------------- ---------------- -------------- --------------
Net increase (decrease) (36,064,452) 3,321,216 1,412,938 (405,521)
================ ================ ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Baron Small Cap Fund Baron iOpportunity Fund
------------------------------------ ------------------------
For the Period
For the For the February 29, 2000
Year Ended Year Ended (Commencement
September 30, September 30, of Operations)
2000 1999 to September 30, 2000
----------------- ----------------- ------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
Operations:
Net investment income
(loss) ($ 8,819,015) ($ 5,396,245) $ 539,050
Net realized gain (loss) on
investments sold 73,341,042 (29,035,249) (11,138,289)
Net change in unrealized
appreciation
(depreciation) on
investments 88,905,189 242,203,032 (18,747,091)
-------------- -------------- -------------
Increase (decrease) in net
assets resulting from
operations 153,427,216 207,771,538 (29,346,330)
-------------- -------------- -------------
Dividends to shareholders
from:
Net investment income 0 0 0
Net realized gain on
investments 0 0 0
-------------- -------------- -------------
0 0 0
-------------- -------------- -------------
Capital share transactions:
Proceeds from the sale of
shares 474,426,688 403,817,666 255,732,509
Net asset value of shares
issued in reinvestment
of dividends 0 0 0
Cost of shares redeemed (464,007,157) (299,634,070) (38,535,735)
-------------- -------------- -------------
Increase (decrease) in net
assets derived from
capital share transactions 10,419,531 104,183,596 217,196,774
-------------- -------------- -------------
Capital contribution 0 0 0
Redemption fees 0 0 316,185
-------------- -------------- -------------
Net increase (decrease) in
net assets 163,846,747 311,955,134 188,166,629
Net assets:
Beginning of year 715,683,132 403,727,998 0
-------------- -------------- -------------
End of year $ 879,529,879 $ 715,683,132 $ 188,166,629
============== ============== =============
Undistributed net
investment income at end
of year $ 0 $ 0 $ 539,050
============== ============== =============
Shares of beneficial interest:
Shares sold 28,848,269 34,490,488 25,760,021
Shares issued in
reinvestment dividends 0 0 0
Shares redeemed (27,571,588) (27,846,667) (4,285,791)
-------------- -------------- -------------
Net increase (decrease) 1,276,681 6,643,821 21,474,230
============== ============== =============
</TABLE>
See Notes to Financial Statements.
35
<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 four series (individually a "Fund" and
collectively the "Funds"): Baron Asset Fund, started in June of 1987, Baron
Growth Fund, started in January of 1995, Baron Small Cap Fund, started in
October of 1997, and Baron iOpportunity Fund, started in February of 2000. 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 based on the
last sale price or, where market quotations are not readily available, based on
fair value as determined by the Adviser, using procedures established by the
Board of 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.
(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, 2000, 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 $59,042,149 ($ 74,934,233) $ 15,892,084
Baron Growth Fund 4,368,281 (12,594,043) 8,225,762
Baron Small Cap Fund 8,819,015 (594,482) (8,224,533)
</TABLE>
<PAGE>
(g) SHORT-TERM TRADING FEE. Baron iOpportunity Fund imposes a 1% short-term
trading fee on redemptions and exchanges of shares held for less than 180 days.
The fee is retained by Baron iOpportunity for the benefit of the remaining
shareholders to offset the administrative costs associated with processing
redemptions and exchanges, offset the portfolio transaction costs and
facilitate portfolio management. The fee is accounted for as an addition to
paid in capital.
(h) USE OF ESTIMATES. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the 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, 2000 were as follows:
Fund Purchases Sales
---- --------------- -----------------
Baron Asset Fund $134,953,617 $2,311,730,990
Baron Growth Fund $223,104,210 $ 209,306,815
Baron Small Cap Fund $520,266,453 $ 478,684,100
Baron iOpportunity Fund $241,314,985 $ 46,569,848
--------------------------------------------------------------------------------
(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. For Baron iOpportunity Fund, the Adviser has contractually agreed
to reduce its fee to the extent required to limit the operating expense to
1.50% of average net assets.
36
<PAGE>
B A R O N F U N D S
(b) DISTRIBUTION FEES. BCI is a registered broker dealer and the distributor of
the shares of the Funds pursuant to a distribution plan under Rule 12b-1 of the
1940 Act. The distribution plan authorizes the Funds to pay BCI a distribution
fee equal on an annual basis to 0.25% of the Funds' average daily net assets.
Brokerage transactions for the Funds may be effected by or through BCI. During
the year ended September 30, 2000, BCI earned brokerage commissions as follows:
Fund Commissions
------------------------ ------------
Baron Asset Fund $3,184,110
Baron Growth Fund $ 352,202
Baron Small Cap Fund $ 783,107
Baron iOpportunity Fund $ 290,864
(c) TRUSTEE FEES. Certain Trustees of the Trust may be deemed to be affiliated
with or interested persons (as defined by the 1940 Act) of the Funds' Adviser
or of BCI. None of the Trustees so affiliated received compensation for his or
her services as a Trustee of the Trust. None of the Funds' officers received
compensation from the Funds.
--------------------------------------------------------------------------------
(4) POST OCTOBER LOSSES.
Under current tax law, capital losses realized after October 31 may be deferred
and treated as occurring on the first day of the following fiscal year. These
deferrals can be used to offset future capital gains at September 30, 2001.
Baron iOpportunity Fund had post October losses of $11,138,289.
--------------------------------------------------------------------------------
(5) LINE OF CREDIT.
Baron Asset Fund, Baron Growth Fund, and Baron Small Cap Fund have entered into
a line of credit agreement with the custodian bank to be used for temporary
purposes, primarily for financing redemptions. The agreement provides that
Baron Asset Fund may borrow up to 5% of the value of its net assets. Baron
Growth Fund and Baron Small Cap Fund may borrow up to 15% of each Fund's
respective net assets. The aggregate outstanding principal amount of all loans
to any of the Funds may not exceed $50,000,000. Interest is charged to each
Fund, based on its borrowings, at a rate per annum equal to the Federal Funds
Rate plus a margin of 0.875% to 2.00% depending on the duration of the loan. A
commitment fee of 0.125% per annum is incurred on the unused portion of the
line of credit and is allocated to the participating Funds. During the year
ended September 30, 2000, Baron Asset Fund had an average daily balance on the
line of credit of $17,980,556 at a weighted average interest rate of 7.71%, and
Baron Growth Fund had an average daily balance of $187,346 at a weighted
average interest rate of 7.82%. At September 30, 2000, there were no loans
outstanding under the line of credit.
37
<PAGE>
B A R O N F U N D S
--------------------------------------------------------------------------------
(6) RESTRICTED SECURITIES.
A summary of the restricted securities held at September 30, 2000 follows:
BARON ASSET FUND
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
-------------- ------------ --------------
<S> <C> <C>
Common Stock
Vail Resorts, Inc. Class A 05/14/98 $ 76,950,000
XM Satellite Radio Hldgs., Inc., Class A 01/15/99 56,623,656
Convertible Preferred Stock
Apollo International, Inc. 07/21/99 1,000,008
Chesapeake Healthcare Corp. 12/03/98 4,000,196
XM Satellite Radio Hldgs., Inc. 8.25% Series C Conv. Pfd due 2012 07/07/00 46,429,080
Warrants
CoreComm, Ltd. Warrants Exp 05/26/2002 11/17/99 0
Prison Realty Trust, Inc. Warrants Exp 09/2005 09/29/00 1,670,213
------------
Total Restricted Securities: (Cost $171,345,112) (3.80% of Net Assets) $186,673,153
============
</TABLE>
BARON GROWTH FUND
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
------------------------------------------------------------------------ ------------ -------------
<S> <C> <C>
Common Stock
Bingham Financial Services Corp. 04/27/99 $ 166,254
drugstore.com, Inc. 07/31/00 6,767,088
Warrants
CoreComm, Ltd. Warrants Exp 05/26/2002 11/17/99 0
----------
Total Restricted Securities: (Cost $16,084,370) (1.30% of Net Assets) $6,933,342
==========
</TABLE>
BARON SMALL CAP FUND
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
--------------------------------------------------------------------------------- ------------ -------
<S> <C> <C>
Warrants
CoreComm, Ltd. Warrants Exp 05/26/2002 (Cost $1,473,750) (0.00% of Net Assets) 11/17/99 $ 0
====
</TABLE>
<PAGE>
BARON iOPPORTUNITY FUND
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
-------------- ------------ -------------
<S> <C> <C>
Common Stock
drugstore.com, Inc. 07/31/00 $1,230,379
Convertible Preferred Stock
XM Satellite Radio Hldgs., Inc. 8.25% Series C Conv. Pfd due 2012 07/07/00 2,995,520
----------
Total Restricted Securities: (Cost $4,023,957) (2.25% of Net Assets) $4,225,899
==========
</TABLE>
--------------------------------------------------------------------------------
(7) CAPITAL CONTRIBUTION.
On March 19, 1999 and on July 11, 2000, the adviser reimbursed Baron Asset Fund
$1,584,375 and $799,873, respectively, for the realized loss relating to the
10/07/98 purchase of 650,000 shares of AMF Bowling, Inc. Baron Asset Fund
recorded capital contributions for both reimbursements. The Adviser did not
receive any shares of Baron Asset Fund in exchange for these contributions. For
tax purposes, these capital contributions reduced the realized loss on the sale
of the 650,000 shares of AMF Bowling, Inc.
--------------------------------------------------------------------------------
(8) PROFESSIONAL FEES.
Baron Asset Fund, Baron Growth Fund and Baron iOpportunity Fund have entered
into an agreement with an investment banking firm to advise them with respect
to their investments in Sotheby's Holdings, Inc. For the year ended September
30, 2000, professional fees accrued were as follows: Baron Asset Fund,
$848,753; Baron Growth Fund, $15,204; Baron iOpportunity, $6,257.
38
<PAGE>
B A R O N F U N D S
--------------------------------------------------------------------------------
(9) INVESTMENT IN "AFFILIATES"*
BARON ASSET FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales
Shares Held on Purchases and
Name of Issuer Sep. 30, 1999 and Additions Reductions
----------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
Alexander's, Inc. 350,900
AMF Bowling, Inc. 10,210,000 10,210,000
Avatar Holdings, Inc. 750,000 750,000
Bristol Hotels & Resorts Co. 2,100,750 2,100,750
Caliber Learning Network, Inc. 804,600 804,600
Choice Hotels Intl., Inc. 13,225,300 20,000
ChoicePoint, Inc. + 1,640,000 1,640,000 3,600
CoreComm, Ltd. # 2,205,000 1,117,500 18,500
CoreComm, Ltd. Warrants Exp 0 75,000
05/26/2002++
Counsel Corp. 2,170,000 2,170,000
Cross Timbers Oil Co. 4,375,000 4,375,000
DeVry, Inc. 5,150,000 70,000 144,400
Dollar Tree Stores, Inc.% 3,750,000 1,352,000 1,262,600
DVI, Inc. 1,680,000 301,400
Education Management Corp. 2,900,000 75,000
Ethan Allen Interiors, Inc. 1,639,500 610,500 5,000
Flextronics Intl. Ltd. $ 2,800,000 2,800,000 1,514,000
Hispanic Broadcasting Corp.*** 2,800,000 1,245,000 1,850,000
Industrie Natuzzi SPA ADR 5,687,000 2,612,000
ITT Educational Services, Inc. 2,000,000 2,000,000
Learning Tree Intl., Inc. 2,000,000 2,000,000
Libbey, Inc. 2,920,000 175,000
Manor Care, Inc. 10,400,000 3,407,000
Motient Corp. (formerly American 3,500,000 13,900
Mobile Satellite Corp.)
OM Group, Inc. 2,367,500 7,200
Robert Half Intl., Inc. $$ 7,100,000 6,100,000 1,244,800
Saga Communications, Inc., Cl A @ 2,937,002 734,250 6,500
Seacor Smit, Inc. @@ 1,300,000 540,000 287,800
Smart and Final, Inc. 3,393,500 833,500
Sotheby's Holdings, Inc. Class A 20,775,000 771,600
Southern Union Co. ## 2,230,000 640,000 3,100
Sun Intl. Hotels, Ltd. 3,315,000 1,232,294
Sunburst Hospitality Corp. 3,975,036 3,975,036
Vail Resorts, Inc. Class A 10,066,000 20,400
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Sep. 30, 2000 Sep. 30, 2000 Oct. 1-Sep. 30, 2000
----------------------------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C>
Alexander's, Inc. 350,900 $ 28,686,075
AMF Bowling, Inc. 0
Avatar Holdings, Inc. 0
Bristol Hotels & Resorts Co. 0
Caliber Learning Network, Inc. 0
Choice Hotels Intl., Inc. 13,205,300 145,258,300
ChoicePoint, Inc. + 3,276,400 150,304,850
CoreComm, Ltd. # 3,304,000 26,225,500
CoreComm, Ltd. Warrants Exp 75,000 0
05/26/2002++
Counsel Corp. 0
Cross Timbers Oil Co. 0 $ 26,000
DeVry, Inc. 5,075,600 190,969,450
Dollar Tree Stores, Inc.% 3,839,400 **
DVI, Inc. 1,378,600 26,796,538
Education Management Corp. 2,825,000 76,098,438
Ethan Allen Interiors, Inc. 2,245,000 63,561,562 331,720
Flextronics Intl. Ltd. $ 4,086,000 **
Hispanic Broadcasting Corp.*** 2,195,000 **
Industrie Natuzzi SPA ADR 3,075,000 37,476,563 5,199,280
ITT Educational Services, Inc. 0
Learning Tree Intl., Inc. 0
Libbey, Inc. 2,745,000 85,438,125 837,300
Manor Care, Inc. 6,993,000 109,702,687
Motient Corp. (formerly American 3,486,100 49,241,162
Mobile Satellite Corp.)
OM Group, Inc. 2,360,300 102,968,088 1,018,025
Robert Half Intl., Inc. $$ 11,955,200 414,696,000
Saga Communications, Inc., Cl A @ 3,664,752 60,468,408
Seacor Smit, Inc. @@ 1,552,200 72,371,325
Smart and Final, Inc. 2,560,000 18,080,000
Sotheby's Holdings, Inc. Class A 20,003,400 497,584,575 2,077,500
Southern Union Co. ## 2,866,900 56,800,457
Sun Intl. Hotels, Ltd. 2,082,706 40,092,090
Sunburst Hospitality Corp. 0
Vail Resorts, Inc. Class A 10,045,600 199,373,400
--------------
$2,452,193,593 $9,489,825
============== ==========
</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, 2000.
** As of September 30, 2000, no longer an affiliate.
+ Received 1,640,000 shares from 2:1 stock split.
# Received 1,107,500 shares from 3:2 stock split.
++ Received 25,000 warrants from 3:2 split.
% Received 1,350,000 shares from 3:2 stock split.
$ Received 2,800,000 shares from 2:1 stock split.
*** Received 1,245,000 shares from 2:1 stock split.
$$ Received 6,100,000 shares from 2:1 stock split.
@ Received 734,250 shares from 5:4 stock split
@@ Received 540,000 shares from 3:2 stock split.
## Received 136,250 shares from 5% stock dividend.
39
<PAGE>
B A R O N F U N D S
--------------------------------------------------------------------------------
(9) 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, 1999 and Additions Reductions
-------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
AVTEAM, Inc. 750,000 750,000
Career Education Corp.@ 893,900 1,106,100 300,000
Equity Marketing, Inc. 300,000 125,000 50,000
IT Group, Inc. 1,350,000 1,350,000
Mortons Restaurant Group, Inc. 350,000 25,000 50,000
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Sep. 30, 2000 Sep. 30, 2000 Oct. 1-Sep. 30, 2000
-------------------------------- ---------------- --------------- ---------------------
<S> <C> <C> <C>
AVTEAM, Inc. 0
Career Education Corp.@ 1,700,000 $75,650,000
Equity Marketing, Inc. 375,000 5,109,375
IT Group, Inc. 0
Mortons Restaurant Group, Inc. 325,000 6,581,250
----------- ------
$87,340,625 $ 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, 2000.
@ Received 1,000,000 shares from 2:1 stock split.
40
<PAGE>
B A R O N F U N D S
--------------------------------------------------------------------------------
(10) FINANCIAL HIGHLIGHTS
BARON ASSET FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999 1998 1997
---------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 51.57 $ 39.96 $ 47.43 $ 35.50
----------- ----------- ---------- -----------
Income from investment operations
Net investment income (loss) (0.76) (0.30) 0.05 (0.14)
Net realized and unrealized gains
(losses) on investments 12.53 11.94 (7.52) 12.11
----------- ----------- ---------- -----------
Total from investment operations 11.77 11.64 (7.47) 11.97
----------- ----------- ---------- -----------
Less distributions
Dividends from net investment income 0.00 (0.04) 0.00 0.00
Distributions from net realized gains 0.00 0.00 0.00 (0.04)
----------- ----------- ---------- -----------
Total distributions 0.00 (0.04) 0.00 (0.04)
----------- ----------- ---------- -----------
Capital contribution 0.01 0.01 0.00 0.00
----------- ----------- ---------- -----------
Net asset value, end of year $ 63.35 $ 51.57 $ 39.96 $ 47.43
=========== =========== ========== ===========
Total return 22.8%# 29.2%* (15.7%) 33.8%
----------- ----------- ---------- -----------
Ratios/Supplemental data
Net assets (in millions), end of year $ 4,917.4 $ 5,863.1 $ 4,410.5 $ 3,224.5
Ratio of expenses to average net assets 1.36% 1.31% 1.32% 1.35%
Less: Ratio of interest expense to average
net assets (0.03%) 0.00% 0.00% 0.00%
----------- ----------- ----------- -----------
Ratio of operating expenses to average
net assets 1.33% 1.31% 1.32% 1.35%
=========== =========== =========== ===========
Ratio of net investment income (loss) to
average net assets (1.09%) (0.57%) 0.11% (0.52%)
Portfolio turnover rate 2.51% 15.64% 23.43% 13.23%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994 1993 1992 1991
--------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 29.30 $ 22.82 $ 21.91 $ 16.20 $ 14.80 $ 10.88
----------- --------- -------- -------- -------- --------
Income from investment operations
Net investment income (loss) (0.06) (0.09) (0.14) (0.13) (0.08) 0.07
Net realized and unrealized gains
(losses) on investments 6.29 7.23 1.82 6.00 1.52 4.05
----------- --------- -------- -------- -------- --------
Total from investment operations 6.23 7.14 1.68 5.87 1.44 4.12
----------- --------- -------- -------- -------- --------
Less distributions
Dividends from net investment income 0.00 0.00 0.00 0.00 (0.04) (0.20)
Distributions from net realized gains (0.03) (0.66) (0.77) (0.16) 0.00 0.00
----------- --------- -------- -------- -------- --------
Total distributions (0.03) (0.66) (0.77) (0.16) (0.04) (0.20)
----------- --------- -------- -------- -------- --------
Capital contribution 0.00 0.00 0.00 0.00 0.00 0.00
----------- --------- -------- -------- -------- --------
Net asset value, end of year $ 35.50 $ 29.30 $ 22.82 $ 21.91 $ 16.20 $ 14.80
=========== ========= ======== ======== ======== ========
Total return 21.3% 32.3% 8.0% 36.5% 9.7% 38.3%
----------- --------- -------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of year $ 1,166.1 $ 290.0 $ 80.3 $ 59.9 $ 43.8 $ 47.4
Ratio of expenses to average net assets 1.40% 1.44% 1.59% 1.85% 1.68% 1.70%
Less: Ratio of interest expense to average
net assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
----------- --------- -------- -------- -------- --------
Ratio of operating expenses to average
net assets 1.40% 1.44% 1.59% 1.85% 1.68% 1.70%
=========== ========= ======== ======== ======== ========
Ratio of net investment income (loss) to
average net assets (0.29%) ( 0.55%) ( 0.71%) ( 0.69%) ( 0.53%) 0.49%
Portfolio turnover rate 19.34% 35.15% 55.87% 107.94% 95.45% 142.73%
</TABLE>
# Had the adviser not made the capital contribution, the Fund's performance
would have been reduced by 0.02%.
* Had the adviser not made the capital contribution, the Fund's performance
would have been reduced by 0.03%.
<PAGE>
BARON GROWTH FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
2000 1999
------------- -------------
<S> <C> <C>
Net asset value, beginning of year $ 29.06 $ 20.32
--------- ---------
Income from investment operations
Net investment income (loss) (0.26) (0.04)
Net realized and unrealized gains (losses) on
investments 5.34 8.82
--------- ---------
Total from investment operations 5.08 8.78
--------- ---------
Less distributions
Dividends from net investment income 0.00 (0.04)
Distributions from net realized gains (1.88) 0.00
--------- ---------
Total distributions (1.88) (0.04)
--------- ---------
Net asset value, end of year $ 32.26 $ 29.06
========= =========
Total return 18.6% 43.2%
--------- ---------
Ratios/Supplemental data
Net assets (in millions), end of year $ 533.4 $ 439.4
Ratio of total expenses to average net assets 1.36% 1.40%
Less: Ratio of interest expense to average net assets 0.00% (0.03%)
--------- ---------
Ratio of operating expenses to average net assets 1.36% 1.37%
========= =========
Ratio of net investment income (loss) to average net
assets (0.78%) (0.20%)
Portfolio turnover rate 39.00% 53.36%
<CAPTION>
Year Ended September 30,
1998 1997 1996 1995*
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 24.89 $ 18.40 $ 14.77 $ 10.00
--------- -------- -------- --------
Income from investment operations
Net investment income (loss) 0.06 0.06 0.11 0.04
Net realized and unrealized gains (losses) on
investments (4.56) 6.68 3.66 4.73
--------- -------- -------- --------
Total from investment operations (4.50) 6.74 3.77 4.77
--------- -------- -------- --------
Less distributions
Dividends from net investment income (0.02) (0.09) (0.04) 0.00
Distributions from net realized gains (0.05) (0.16) (0.10) 0.00
--------- -------- -------- --------
Total distributions (0.07) (0.25) (0.14) 0.00
--------- -------- -------- --------
Net asset value, end of year $ 20.32 $ 24.89 $ 18.40 $ 14.77
========= ======== ======== ========
Total return (18.1%) 37.1% 25.8% 47.7%
--------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of year $ 315.6 $ 390.8 $ 207.2 $ 28.6
Ratio of total expenses to average net assets 1.43% 1.40% 1.54% 1.99%**
Less: Ratio of interest expense to average net assets (0.06%) 0.00% 0.00% 0.00%
--------- -------- -------- ---------
Ratio of operating expenses to average net assets 1.37% 1.40% 1.54% 1.99%**
========= ======== ======== =========
Ratio of net investment income (loss) to average net
assets 0.21% 0.37% 1.20% 1.13%**
Portfolio turnover rate 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's offset of custody fees amounted to less than $0.01 per
share in 1996 and 1995.
The expense offset amounts are included in expense data above.
41
<PAGE>
B A R O N F U N D S
--------------------------------------------------------------------------------
(10) Financial Highlights (continued)
BARON SMALL CAP FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended September 30,
2000 1999 1998
------------- ------------ -------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 13.37 $ 8.61 $ 10.00
-------- -------- --------
Income from investment operations
Net investment loss (0.16) (0.10) (0.02)
Net realized and unrealized gains (losses) on
investments 2.84 4.86 (1.37)
-------- -------- --------
Total from investment operations 2.68 4.76 (1.39)
-------- -------- --------
Less distributions
Dividends from net investment income 0.00 0.00 0.00
Distributions from net realized gains 0.00 0.00 0.00
-------- -------- --------
Total distributions 0.00 0.00 0.00
-------- -------- --------
Net asset value, end of year $ 16.05 $ 13.37 $ 8.61
======== ======== ========
Total return 20.0% 55.3% (13.9%)
-------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of year $ 879.5 $ 715.7 $ 403.7
Ratio of expenses to average net assets 1.33% 1.34% 1.39%
Ratio of net investment loss to average net assets (0.90%) (0.99%) (0.20%)
Portfolio turnover rate 53.18% 42.69% 59.68%
</TABLE>
BARON i OPPORTUNITY FUND
Selected data for a share of beneficial interest outstanding throughout the
period:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
February 29, 2000
(Commencement of Operations)
September 30, 2000
-----------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
----------
Income from investment operations
Net investment income 0.03
Net realized and unrealized loss on investments (1.28)
----------
Total from investment operations (1.25)
----------
Less distributions
Dividends from net investment income 0.00
Distributions from net realized gains 0.00
----------
Total distributions 0.00
----------
Redemption fees added to paid in capital 0.01
----------
Net asset value, end of period $ 8.76
==========
Total return @ (12.4%)
----------
Ratios/Supplemental data
Net assets (in millions), end of period $ 188.2
Ratio of total expenses to average net assets 1.53%**
Less: Expense reimbursement by investment adviser (0.03%)**
----------
Ratio of net expenses to average net assets 1.50%**
==========
Ratio of net investment income to average net assets 0.46%**
Portfolio turnover rate 31.47%
</TABLE>
** Annualized.
@ The total returns would have been lower had certain expenses not been reduced
during the periods shown.
42
<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 the financial highlights present fairly, in all
material respects, the financial position of Baron Asset Fund (comprising,
respectively, Baron Asset Fund, Baron Growth Fund, Baron Small Cap Fund and
Baron iOpportunity Fund (collectively the "Funds") at September 30, 2000, the
results of each of their operations for the periods then ended, the changes in
each of their net assets for the periods then ended and the financial
highlights for the periods presented, in conformity with accounting principles
generally accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
November 13, 2000
--------------------------------------------------------------------------------
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.
43
<PAGE>
B A R O N F U N D S
[GRAPH]
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
---------------- ------------
6/12/1987 10,000 10,000
1987 11,950 10,479
1988 13,234 9,353
1989 18,521 11,366
1990 12,838 8,282
1991 17,760 12,018
1992 19,484 13,091
1993 26,595 17,436
1994 28,728 17,892
1995 38,003 22,079
1996 46,098 24,979
1997 61,656 33,269
1998 51,946 26,943
1999 67,092 32,080
2000 82,416 39,584
Information Presented by Fiscal Year as of September 30
Past performance is not predictive of future performance
*The Russell 2000 is an unmanaged index of small and mid-size companies
--------------------------------------------------------------------------------
BARON ASSET FUND
Baron Asset Fund's performance in the fiscal year ended September 30, 2000 was
strong. The Fund gained 22.8% during the year, matching the strong performance
of the Russell 2000, +23.4%, and significantly outperformed the S&P 500, which
gained 13.3%.
Baron Asset Fund invests in small and medium sized companies. In the
seventeen-year period since 1983 the performance of market averages that
represent small companies have significantly under-performed market averages
that represent more established, large companies. Small cap stocks normally
trade at valuations relative to their earnings substantially above those of
large cap stocks, reflecting superior growth expectations. As we began fiscal
year 2000 small cap stocks traded at valuations relative to their earnings
about equal to large cap companies, which by historical standards would be
considered very attractive levels. In both prior instances these attractive
valuations led to multi-year small cap rallies. The relative bear market in
small cap stocks showed signs of reversing in the first half of fiscal year
2000 but seemed to fizzle out in the second half of the year. While the Russell
2000, +23.4%, significantly outperformed the S&P 500, +13.3%, we believe small
cap stocks in general remain very attractively priced relative to larger
companies.
Baron Asset Fund invests in businesses for the long term. The average turnover
of the Fund over the last five years was under 15% per year. While historically
active trading by mutual funds has not contributed positively to investment
returns, given the unusually high level of market volatility over the last
year, more active traders have recently performed better than buy-and-hold
long-term investors. Our strategy has not changed. We seek to purchase what we
believe are great businesses with exciting growth opportunities at value based
attractive prices for the long-term. Even though "investing" appears to be out
of favor, if we can purchase businesses that we believe will at least double in
size within four years, and purchase them at reasonable prices, we will, over
time, generate attractive returns for investors. We believe the trading era
long-term will once again lead to superior returns as compared to trading.
The Fund's performance was not uniform across the year. Baron Asset Fund
performed extremely well in the first two quarters of the fiscal year and in
the Fund's fiscal fourth quarter. The Fund gained 37.2% in the three quarters
and outperformed the performance of the Russell 2000, +28.2%. The Fund
performed poorly in the fiscal third quarter losing 10.5% as compared to a much
smaller Russell 2000 loss, -3.8%. While the Fund has, on average, historically
outperformed the Russell 2000 during down quarters, this was not the case in
the spring quarter, and therefore, a cause for significant disappointment.
<PAGE>
The performance of Baron Asset Fund was not uniform across sectors. The Fund
realized large gains in Financial Services, Business Services and Education.
The latter two sectors rebounding from weak performance a year ago. The Fund
realized losses in the Communication and Recreation & Resorts sectors. The
Communication and Media & Entertainment sectors performed especially poorly in
the second half of the fiscal year.
In fiscal year 2001, 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 will have what we believe to be 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
attractive valuation levels that we perceive of companies within the small cap
universe and the current prices of some of our longer term core positions,
especially in the media and communication sectors, leave us looking forward to
a successful 2001.
44
<PAGE>
B A R O N F U N D S
[GRAPH]
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON GROWTH FUND IN RELATION TO THE RUSSELL 2000*
Baron Growth Fund Russell 2000
----------------- ------------
1/1/1995 10,000 10,000
1995 14,770 12,573
1996 18,575 14,224
1997 25,469 18,945
1998 20,855 15,342
1999 29,868 18,268
2000 35,431 22,541
Information Presented by Fiscal Year as of September 30
Past performance is not predictive of future performance
*The Russell 2000 is an unmanaged index of small and mid-size companies
--------------------------------------------------------------------------------
BARON GROWTH FUND
Baron Growth Fund's performance in the fiscal year ended September 30, 2000 was
satisfactory in absolute terms but lagged the Russell 2000, an index of small
cap stocks. The Fund gained 18.6% during the year and under-performed the
Russell 2000 index which gained 23.4% and outperformed the S&P 500 which gained
13.3%.
Baron Growth Fund invests in small sized companies. In the seventeen-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. Small cap stocks normally trade at valuations
relative to their earnings substantially above those of large cap stocks,
reflecting superior growth expectations. As we began fiscal year 2000 small cap
stocks traded at valuations relative to their earnings about equal to large cap
companies, which by historical standards would be considered very attractive
levels. In both prior instances these attractive valuations led to multi-year
small cap rallies. The relative bear market in small cap stocks showed signs of
reversing in the first half of fiscal year 2000 but seemed to fizzle out in the
second half of the year. While the Russell 2000, +23.4%, significantly
outperformed the S&P 500, +13.3%, we believe small cap stocks in general remain
very attractively priced relative to larger companies. Baron Growth Fund has
historically significantly outperformed the small cap averages. Towards the end
of the year the Fund reduced its position in larger companies to better
position the Fund to be able to take advantage of the opportunities that now
exist in the small cap universe.
The Fund's performance was not uniform across the year. Baron Growth Fund
performed exceedingly well in the fiscal first quarter +23.9%, as compared to
the Russell 2000, +18.4%. The Fund lost 4.3% in the remaining three quarters of
the fiscal year as compared to a gain of 4.2% for the Russell 2000.
The performance of Baron Growth Fund was not uniform across sectors. The Fund
performed well with its investments in Financial Services, Business Services,
Education, Manufacturing and Media & Entertainment. There were no sectors in
which the Fund was significantly impacted negatively for the entire fiscal
year. The Fund's strong fiscal first quarter performance was lead by its
investments in Communications and Media & Entertainment. However, its Media &
Entertainment holdings hurt performance in the fiscal second quarter,
Communication positions hurt performance in the fiscal third quarter, and both
sectors performed poorly in the fiscal fourth quarter. Many of these positions
experienced severe price declines from their earlier year highs as the year
progressed.
In fiscal 2001 the Fund will continue to be invested in small companies that we
believe 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 we believe continue to exist within the small cap
universe.
45
<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*
[GRAPH]
Baron Small
Cap Fund Russell 2000
----------- ------------
10/1/1997 10,000 10,000
1998 8,610 8,085
1999 13,370 9,626
2000 16,050 11,878
Information Presented by Fiscal Year as of September 30
Past performance is not predictive of future performance
*The Russell 2000 is an unmanaged index of small and mid-size companies
--------------------------------------------------------------------------------
BARON SMALL CAP FUND
Baron Small Cap Fund's performance in the fiscal year ended September 30, 2000
was satisfactory in absolute terms but lagged the Russell 2000, an index of
small cap stocks. The Fund gained 20.0% during the year and under-performed the
Russell 2000 index which gained 23.4% and outperformed the S&P 500 which gained
13.3%.
Baron Small Cap Fund invests in small sized companies. In the seventeen-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. Small cap stocks normally trade at valuations
relative to their earnings substantially above those of large cap stocks,
reflecting superior growth expectations. As we began fiscal year 2000 small cap
stocks traded at valuations relative to their earnings about equal to large cap
companies, which by historical standards would be considered very attractive
levels. In both prior instances these attractive valuations led to multi-year
small cap rallies. The relative bear market in small cap stocks showed signs of
reversing in the first half of fiscal year 2000 but seemed to fizzle out in the
second half of the year. While the Russell 2000, +23.4%, significantly
outperformed the S&P 500, +13.3%, we believe small cap stocks in general remain
very attractively priced relative to larger companies. In the three years since
the Fund's inception Baron Small Cap Fund has dramatically outperformed the
small cap averages. On a cumulative basis the Fund's return in the three-year
period is +60.5% versus +19.0% for the Russell 2000. The Fund is well
positioned to take advantage of the opportunities that now exist in the small
cap universe.
The Fund's performance was not uniform across the year. Baron Small Cap Fund
performed exceedingly well in the fiscal first quarter, +34.6%, as compared to
Fund performed poorly in the fiscal fourth quarter losing 10.3% as compared to
a 1.1% gain for the Russell 2000. While the Fund experienced significant
volatility in the fiscal year, we believe the Fund's value disciplines will
more than offset the Fund's concentration in generating less volatile
performance in the years ahead as it has historically.
The performance of Baron Small Cap Fund was not uniform across sectors. The
Fund realized large gains in Business Services, Education and Health Care
services. The Communications and Media & Entertainment sectors contributed
negatively to performance after stellar contributions a year ago. These sectors
contributed very positively to the Fund's strong fiscal first quarter
performance, but contributed very negatively to the Fund's performance in the
second half of the fiscal year. The Fund's performance volatility is directly
related to the volatility of these investments that ran up to record highs
earlier in the year only to experience sharp price declines as the year
progressed.
In fiscal year 2001, 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 will 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 Communications and
Media & Entertainment sectors at current prices are very attractively priced
and we believe will contribute to strong performance over the next year. The
attractive valuation levels that we perceive of companies within the small cap
universe leave us looking forward to a successful 2001.
46
<PAGE>
B A R O N F U N D S
[GRAPH]
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON iOPPORTUNITY FUND IN RELATION TO THE
MORGAN STANLEY INTERNET INDEX & NASDAQ COMPOSITE*
Baron
iOpportunity Russell
------------ -------
2/29/2000 10,000 10,000
2000 8,760 9,087
Information Presented by Fiscal Year as of September 30
Past performance is not predictive of future performance
*The Nasdaq Composite and the Morgan Stanley Internet Index are unmanaged
indexes. The Nasdaq Composite tracks the performance of market-value
weighted common stocks listed on Nasdaq: The Morgan Stanley Internet Index
of activity traded, high market cap internet stocks drawn from nine internet
subsectors.
--------------------------------------------------------------------------------
BARON iOPPORTUNITY FUND
Baron iOpportunity Fund performed poorly in the seven months since the Fund's
inception on February 29, 2000 through September 30, 2000. The Fund lost 12.4%,
which compared favorably to the Morgan Stanley Internet Index, -42.0%, and the
Nasdaq Composite, -21.8%, over the same period.
Internet related stocks experienced sharp declines in the period since the
Fund's inception earlier this year. Baron iOpportunity Fund, like the other
Baron Funds, has a value purchase discipline while investing in growth
companies. The Fund seeks to make investments for the long term in companies in
which we as investors believe we can realize substantial returns while assuming
normal valuation parameters by historical standards. The Fund will only invest
in companies in which we believe there are barriers to entry and in which we
believe the growth and profitability is sustainable for years. We believe the
Fund is potentially a more conservative Internet fund because of this
investment approach. While the Fund has lost money since its inception, it has
significantly outperformed the Internet indices and most of its peers. The
sharp decline in prices within this universe of stocks has created unusual
opportunities to purchase great businesses at what we believe are very
attractive valuations.
The Fund invests across industries in companies benefiting from the Internet
and the rapidly changing information technology environment. The Fund
experienced the largest losses in the Communication, Consumer Services and
Media & Entertainment areas. The Fund experienced gains in the Financial
services, Hotels & Lodging, Manufacturing and Real Estate sectors.
In fiscal 2001 the Fund will continue to be invested in Internet-related
businesses with what we believe are significant growth opportunities that have
least 100% during the next two years. The Fund's portfolio is well positioned
to take advantage of the very attractive valuations that we perceive now exist
in this universe.
47
<PAGE>
[REGISTERED LOGO]
BARON FUNDS
767 Fifth Avenue
NY, NY 10153
4QR00
