<PAGE>
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BARON ASSET
1 FUND
PERFORMANCE.................................................1
INVESTMENT STRATEGY AND
PORTFOLIO STRUCTURE.........................................2
BUSINESS PERFORMANCE........................................4
BUSINESS NEWS...............................................5
OTHER DEVELOPMENTS..........................................6
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BARON GROWTH
2
FUND
PERFORMANCE.................................................8
INVESTMENT STRATEGY.........................................9
CONCLUSION.................................................11
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BARON SMALL
3 CAP FUND
PERFORMANCE................................................12
PORTFOLIO
COMPOSITION................................................13
NEW IDEAS..................................................13
RECENT RESULTS.............................................14
CONCLUSION.................................................14
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BARON
4 iOPPORTUNITY
FUND
PERFORMANCE OVERVIEW.......................................15
iOPPORTUNITY STRATEGIC
OVERVIEW...................................................16
CONCLUSION.................................................21
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
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THIS QUARTERLY REPORT CONTAINS
INFORMATION FOR FOUR FUNDS
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BARON ASSET FUND
QUARTERLY REPORT JUNE 30, 2000
[GRAPHIC OMITTED]
Dear Fellow
Shareholder:
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PERFORMANCE
For the eleven and a half years from Baron Asset Fund's inception on June 12,
1987 through December 31, 1998, Baron Asset was ranked by Lipper Analytical the
number two performing small cap mutual fund. Lipper ranked Baron Asset Fund as
the 219th best performing mid-cap mutual fund in 1999's technology and Internet
driven stock market! Baron Asset ranks in about the middle of the pack for
mid-cap growth funds' year 2000 performance to date, and near the top quartile
for all domestic equity funds.*
Baron Asset Fund's per share value has now increased about eight times from its
inception thirteen years ago. This is the result of investing for the long term
in fast growing, well managed, forward looking, smaller businesses with
substantial barriers to competitors . . . whose shares Baron Asset purchased at
attractive prices before those businesses became bigger . . . much bigger.
Table I. Performance . . . Year 2000 and Since Inception.
12/31/99-8/4/00 6/12/87-8/4/00
----------------- ---------------
Baron Asset Fund .......... 6.2% 711.8%
S & P 500 ................. ( .2%) 581.9%
Russell 2000 .............. ( .4%) 281.3%
NASDAQ .................... (6.9%) 790.3%
Lipper reclassified Baron Asset as a mid-cap growth fund last year since a
number of our investments that had been purchased when they were smaller
companies have become successful and have increased in value and size
significantly during the past several years. Baron Asset has not sold these
investments since we believe their business' prospects remain promising and
their
------------------------------
*(See Disclosure on page 22)
<TABLE>
<CAPTION>
<S> <C> <C>
PERFORMANCE PERFORMANCE PERFORMANCE
FOR THE 3 MONTHS ENDED FOR THE 6 MONTHS ENDED SINCE INCEPTION
JUNE 30, 2000 JUNE 30, 2000 JUNE 12, 1987 THROUGH
JUNE 30, 2000
5 5 700
3.0% 654.7%
600
577.3%
0 0 -0.5% 500
-2.7% -1.3%
400
-3.8% 291.5%
-5 -5 300
200
-10 -10 100
-10.5%
0
-15 -15
BARON S&P RUSSELL BARON S&P RUSSELL BARON S&P RUSSELL
ASSET 500* 2000* ASSET 500* 2000* ASSET 500* 2000*
FUND FUND FUND
-------------------------------------- ---------------------------------------- --------------------------------------
*THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P MEASURES THE PERFORMANCE OF THE STOCK MARKET IN GENERAL;
THE RUSSELL 2000 OF SMALL AND MID-SIZED COMPANIES.
</TABLE>
<PAGE>
B A R O N A S S E T F U N D
stocks continue to offer the Fund the opportunity to at least double our money
still again within the next four years. Baron Asset has about half its current
investments in smaller companies. The Fund continues to make the vast majority
of its new investments in such businesses.
Baron Asset's businesses have Internet opportunities not yet recognized by
investors . . .
Most mutual funds performed well during the past two and half years principally
due to their holdings of technology, Internet, communications and media stocks.
Although Baron Asset Fund has significant communications and media investments,
it has not invested directly in Internet and technology stocks. However, about
80% of our businesses have opportunities to grow significantly faster, reduce
costs and create competitive advantage using technology and the Internet. This
is in accord with our belief that the most obvious beneficiaries of the
Internet are businesses whose executives can use the web to manage more
efficiently. The Internet will clearly continue to make us all more efficient
as it makes information widely available at low cost and eliminates the need
for human intervention in routine tasks . . . and the cost to perform those
tasks falls from dollars to pennies. For example, we think businesses with
Internet-enabled ideas to reduce operations costs, like phone centers,
procurement, making travel reservations, stock trade confirms, service
provisioning, even checking ski lift tickets, will certainly be among the
principal beneficiaries of the Internet. Dot coms with enabling technologies
that may be obsoleted by the next "new new thing" have less clear
opportunities.
Our stocks are cheap . . . and there have been lots of
takeover attempts to prove it . . .
Share prices of many technology businesses anticipate continued very strong
growth. Our non-tech businesses with technology and Internet growth
opportunities typically sell at discounts to their present business values.
This can be easily confirmed by the sharply increased takeover activity of our
businesses at substantial premiums to their recent stock trading prices. This
year, five companies we owned whose stocks performed poorly last year have
already received takeover offers at substantial premiums. Three, Mirage
Resorts, Bristol Hotels and SFX Entertainment, have been acquired. Management
buyout proposals to acquire Manor Care and Sun International were deemed
inadequate by those companies' independent boards of directors.
<PAGE>
Our stocks that performed poorly last year are doing well this year . . . their
businesses grew strongly both years . . .
The stock prices of Robert Half, the temp agency for highly-skilled financial
executives and assistants, and our education businesses, Apollo, DeVry and
Education Management, have performed especially well year 2000 to the date of
this letter. This is in sharp contrast to their disappointing stock price
performance last year. All these businesses have grown strongly both years.
Also performing well this year are two of our favorite small cap growth stocks,
ChoicePoint and OM Group. Charles Schwab and Flextronics share prices have
performed well both last year and during year 2000 to date. Both businesses
have grown strongly in 1999 and 2000.
Several of our small cap value stocks that performed poorly last year are also
doing better of late. Our "value" stocks are "growth" businesses; value to us
just means we think they're cheap, compellingly cheap. They're cheap based on
low p/e's, e.g., Ethan Allen with its scorching 17% comparable store sales
gains selling at just 12X earnings, or Polo Ralph Lauren with 15-18% annual
earnings growth and a huge international opportunity at 6X franchise fees and
11X earnings. They're cheap based on asset values, e.g., Southern Union, at
about a third the per share price its gas utility would be worth to an acquirer
(financial leverage magnifies per share value), while it is continuing to grow
its business both organically and through acquisitions. And Alexander's, with
its prime New York real estate worth at least twice its current share price,
while developing its prime, Upper East Side, 59th and Third Avenue property to
make its business even more valuable. Or, they're cheap based on cash flow,
e.g. Saga Communications' smaller market radio stations, which, despite their
market dominance and continued strong same station revenue gains, are accorded
a large discount both to urban stations and to the company's growth rates.
Our stocks that did well last year are doing poorly this year . . . but, their
businesses also continue to grow strongly . . .
Communications and media stocks have performed poorly this year in contrast to
their very strong performance last year. These businesses have grown strongly
both years. Sotheby's also penalized our performance this year as uncertainty
about the Department of Justice's price fixing investigation continues to
engage the company's executives and restrain the company's stock price. Its
business, though, is doing quite well. The company's experts and staff continue
to assemble exceptional collections for its auctions and to achieve very strong
sales results.
Baron Asset Fund's goal remains to reach $100 per share before the end of 2002.
Of course, there can obviously be no assurance we will achieve our performance
objectives. Baron Asset Fund's performance during the next five years will be
driven by the expected earnings and cash flow growth of our businesses. The
Internet and technology will, in most cases, significantly augment this
earnings growth.
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INVESTMENT STRATEGY AND PORTFOLIO STRUCTURE
Baron Asset Fund: a long term investor in growth businesses purchased at
attractive prices. 53.1% of our investments already successful . . . with strong
prospects for further gains . . .
The most successful mutual fund manager so far, Fidelity's vice-chairman and
former Magellan portfolio manager Peter Lynch, observed that he usually didn't
make much money until after he had
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B A R O N A S S E T F U N D
owned shares for two or three years. We concur. And just why is that the case?
Because the most successful investments are often those businesses whose
prospects are not yet obvious or evident to most. They are businesses run by
entrepreneurs whose dreams are clear to them but have not yet been realized.
Invest in a business for what it can become, not necessarily just what it is
today! Senator Robert Kennedy often remarked, "Some men see things as they are
and ask 'why?' I dream things that never were and ask, 'Why not?' " Invest in
dreams that you think can become realities . . . before you read about them on
the front pages of business magazines or in Internet chat rooms. That's how we
try to invest.
About 53.1% of Baron Asset's portfolio is invested in businesses that were
quite small when we first invested . . . but had very large growth
opportunities with substantial barriers to competitors . . . were run by
visionary entrepreneurs . . . and have been extraordinarily successful
investments. These businesses have since become larger . . . in many instances
a lot larger and a lot more profitable.
Baron Asset "invests in people, not just buildings . . ."
In 1991, although 80% of businesses had employed temporary employees with light
skills, fewer than 20% had used temporary accountants or other highly skilled
and highly paid executives or assistants that were Max Messmer's temporary
employment agency Robert Half's bread and butter. And probably no one was then
thinking about Internet-sourced job candidates. But, based in Silicon Valley,
how could Max have missed it? He didn't. Robert Half's earnings had grown
30-40% annually for years, and after slowing in the middle of last year due to
candidate shortages, have reaccelerated in recent quarters as Internet
candidate sourcing initiatives have favorably impacted results.
Also in 1991, Ron Taylor's and Dennis Keller's DeVry's for-profit, accredited
schools offered students, many of whom were minorities, a technical education,
a college degree for a lot lower cost than private colleges and a virtually
assured job upon graduation. The Department of Education then forecast that 80%
of jobs in ten years would require post secondary education, while only 25% of
our population was so educated. Ivy educated investors and analysts then looked
askance at DeVry's privately owned, for-profit colleges. No longer. It's
difficult to remember a period when DeVry's quarterly earnings have not
increased 20-25% from the prior year during the nearly ten years in which we
have been shareholders.
In 1992, few thought Chuck Schwab's and David Pottruck's Charles Schwab's
Mutual Fund Marketplace was about to revolutionize mutual funds distribution.
Schwab, the very same technology-oriented discount broker that had led the way
on May Day in 1975 when stock brokerage commissions became negotiable! Who
would have thought this Silicon Valley-based technology business disguised as a
discount stock broker would then be the leader in reinventing full service
brokerage with an Internet backbone in 2000? Chuck and Dave. That's who.
Schwab's customer assets have grown 40% annually since we first invested in
1992 while that company's earnings have grown at about the same pace.
In 1993, George Blumenthal and Barclay Knapp somehow raised the financing
necessary to acquire a U.K. cable television franchise that could also offer
residential and business telephony services to compete against the notoriously
poor service provider British Telecom. NTL has since acquired a communications
tower business and most of its cable competitors. It has successfully obtained
both telephony and cable customers, begun to offer Internet access and digital
television, raised billions in capital, most recently from Microsoft and France
Telecom, and has recently begun to expand its services to Continental Europe.
Whew! NTL's most recently acquired cable franchises in the U.K. offer great
opportunity since their results are much less favorable than the existing NTL
businesses.
<PAGE>
In 1995, few recognized that hardcharging Michael Mark's Flextronics would have
the opportunity to provide outsourced manufacturing services to the likes of
Motorola, Ericsson, Microsoft, Hewlett Packard et. al. by manufacturing for
them in low cost jurisdictions such as China, Mexico and Eastern Europe and, at
the same time, grow his business twenty fold in five years with the potential
to quadruple it again in the next five!
In 1996, investors had not yet recognized that Mac Tichenor's Hispanic
Broadcasting would be able to dominate Spanish radio with its carefully
researched programming that catered to a rapidly growing Hispanic population.
With great programming driving ratings ever higher, its aggressive sales force
would sell its leading market shares for rapidly increasing "power ratios."
Ditto in 1997 for Jerry Perenchio's even more dominant Spanish television
station business, Univision, with its unique programming that was almost
impossible to duplicate. In 1998, Steve Dodge recognized before others the
explosive incipient demand for wireless communications towers. Steve raised the
capital, and acquired and built American Tower into the largest U.S.
communications tower business. American Tower will continue to grow rapidly due
to strong demand for wireless voice and broadcast services. Utilization of its
towers could soar with demand from wireless data services, e.g. "the Internet
everywhere and anywhere all the time."
The potential benefits of long term investing?...huge untaxed appreciation for
individuals . . . compounded returns in businesses where portfolio managers and
analysts develop business expertise . . .
The table below lists Baron Asset Fund's small cap investments that have
already been so successful they are no longer small cap investments. We think
all continue to offer our fellow shareholders the opportunity to at least
double their money again within the next four years. The power of growth. And,
the power of the visionary, hardworking, ethical, smart executives who make it
happen. When investors question our admiration and respect for and
relationships with the executives who run the companies in which we invest, we
direct their attention to the table below. It's too bad, of course, that we, on
occasion, misjudge people. But, overall, as you can see, the results of our
program to "invest in people, not just buildings" have been positive.
3
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B A R O N A S S E T F U N D
Table II. Successful small-cap investments (no longer small caps, but still
offer significant opportunity).
Date 8/4/00
Initial Purchase Appreciation Portfolio %
----------------- ------------ ------------
Robert Half .............. 1991 75X 8.1%
DeVry .................... 1991 19X 3.5%
Charles Schwab ........... 1992 60X 18.4%
NTL ...................... 1993 7X 4.1%
Flextronics .............. 1995 19X 6.6%
Dollar Tree .............. 1995 8X 3.1%
Hispanic Broadcasting .... 1996 8X 1.4%
Cox Radio ................ 1996 5X 0.6%
Westwood One ............. 1996 10X 0.7%
Univision ................ 1997 7X 0.8%
American Tower ........... 1998 3X 4.2%
United Globalcom ......... 1998 6X 0.4%
Four Seasons ............. 1998 3X 1.2%
----
53.1%
After studying the table above, you shouldn't be under the illusion it's been
easy to continue to hold our most successful investments after they have
achieved substantial price appreciation and increased sharply as a percentage
of our portfolio. While our focus is on "business risk," not "stock market
risk," many investors worry about greater fund share price variability that may
result from large portfolio holdings. For example, due to Charles Schwab's
great business successes and resultant tremendous stock price appreciation
during the past eight years, its stock has become a large portion of our
investment portfolio. Schwab's business prospects remain very favorable. But,
we have listened to the concerns expressed by our financial planner
shareholders regarding sizable holdings. As a result, we have opportunistically
reduced our investment in Charles Schwab by more than a third during the past
two years. This is the first time we have sold shares in Schwab since we began
to invest in that business in 1992. Schwab's shares have, nevertheless,
continued to increase in value faster than the rest of our Fund. And, during
the past two years, despite these sales, Schwab has actually increased as a
percent of the Fund. It reminds me of an interview I had read years ago with
the late T. Rowe Price, the fund manager. Mr. Price was lamenting that if he
hadn't continued to sell his fund's shareholdings of IBM to provide his
shareholders with a more diversified portfolio his investors would find more
palatable, his fund would have performed a lot better. As the portfolio
manager, as well as the largest individual shareholder of Baron Asset Fund, I
will continue to manage Baron Asset to achieve strong results over the long
term while mitigating portfolio business risk. At the same time, we will remain
sensitive to the wishes of our fellow shareholders.
. . . the 28 smaller companies that represent 46.9% of our assets and were
purchased principally in recent years also provide Baron Asset potential to
grow our per share value significantly . . .
Six businesses, about 7.0% of our investments, were purchased before 1996 and
are still classified as small cap companies. We believe these companies, as
well as our other small cap investments that were purchased from 1996 through
the present, are fast growing and well managed and have ample opportunities to
become a lot larger. All have low price earnings ratios, cash flow multiples
modest relative to their growth rates or asset values significantly in excess
of current stock market prices. Therefore, we believe, all offer potential to
achieve much higher stock valuations relative to their business' earnings, cash
flows or asset values. So far, we have earned about 1.5X our initial investment
in specialty finance business DVI since 1991. We've earned 4X our initial
investment in Ed Christian's small market radio and television business Saga
Communications since 1992; 1.7X our initial cost in Steve Roth's New York real
estate owner/developer Alexander's, also since 1992; 2.5X our initial cost in
Jim Mooney's specialty chemical company OM Group, (Mitch Rubin's first research
project at Baron Capital in 1995); and about double our money since 1995 in
Chuck Fabricant's oil service boats company, Seacor. We're not making money yet
in Gary Parson's wireless communications network and XM Satellite Radio's
controlling shareholder, Motient, that we purchased first in 1993. At various
times since our initial investment in Motient we have actually had large, but
ephemeral, "paper" profits. We regard the Motient investment as sort of public
venture capital, but it does offer potential ten times plus returns in the next
several years.
<PAGE>
Of the 22 investments made since 1996 that are still smaller companies, ten
have increased significantly from our initial cost. This includes private
college Education Management, 3X; insurance and business data base provider
ChoicePoint, 2.3X; rapidly consolidating gas utility Southern Union, 1.5X;
Commonwealth Telephone, 2.5X; satellite radio company Sirius, 2.5X; private
college operator Apollo, 1.5X; phone company, Internet service provider
CoreComm, 2.0X; trade publisher Primedia, 1.5X; satellite radio XM Satellite,
3X and rural phone company Citizens Communications, 1.5X. Twelve are so far not
profitable or only marginally profitable, including hotel franchisor Choice
Hotels; resort owner Sun International; furniture manufacturer Natuzzi; the
venerable auction house Sotheby's; Polo Ralph Lauren; drinking glass
manufacturer Libbey; cash and carry food wholesaler Smart & Final; furniture
manufacturer and retailer Ethan Allen; nursing home operator Manor Care; radio
broadcaster Citadel; ski resort Vail Resorts; and amusement park operator Six
Flags.
The above 28 investments, which we regard as "immature" and offering great
potential, sort of the way my wife regards me, I suppose, continue to offer
strong growth prospects for our Fund. In fact, we think perhaps nine offer
"ten-bagger" potential or more during the next several years. We'll see. But,
at least the open-ended business development potential is there.
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BUSINESS PERFORMANCE
. . . most of our businesses increased earnings significantly in the June
quarter . . . although their stock prices did not consistently reflect this
progress.
Earnings and cash flow for most businesses in which we are shareholders grew
strongly in the June quarter. This was a continuation
4
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B A R O N A S S E T F U N D
of first period results. But, unlike the first period, the performance of their
stocks in the second quarter would have been difficult to predict based upon
earnings, cash flow or any other metric you might choose to measure growth.
Over a time period longer than three months, we expect stock price performance
to be closely correlated to business growth, offering Baron Asset current
opportunity, we believe.
Dollar Tree reported its second quarter sales gained 33.5% and net income grew
47.9%. If comparable store sales for retailers increase more than low single
digits, that is considered favorable. Dollar Tree's comparable store sales
increased 14.3%! Not unexpectedly, its stock price gained.
Hispanic Broadcasting's second period revenues increased 25% and broadcast cash
flow increased 17.8%. The company used its strong sales gains to invest in
sales, programming and Internet initiatives penalizing short term margins. Same
station radio revenue growth greater than single digits is considered
favorable. Hispanic's same station revenues increased 18.6% and third quarter
"pacings," indications of future same radio station revenue, increased 17%.
Hispanic's shares fell in the quarter.
Robert Half's June quarter revenue increased 35% and its net income increased
38%. Following years and years of very strong comparable office revenue
increases, its largest division, Accountemps, specialists in temporary
accounting and finance executives, grew "same store" Accountemps revenues
nearly 24%. Half's heavy investments in both web and physical candidate
sourcing efforts during the past two years, while penalizing margins about 200
bp, are favorably impacting results. Robert Half's stock price increased.
Apollo International reported May period degree enrollments increased 19.2%,
revenues increased 21.3% and earnings per share increased 34.8%. Apollo's more
mature campuses, i.e., those open before 1995, increased their enrollments a
very strong 15.9%. Apollo's newer campuses, growing from much lower bases,
increased enrollments even more dramatically. Online enrollments increased 44%.
University of Phoenix Online tracking stock is in registration with the SEC.
Apollo's shares declined in the quarter.
Flextronics' June quarter earnings per share increased 95%, its revenues jumped
139%. The $10 billion annual revenues business announced an agreement to
outsource certain manufacturing for Motorola that could exceed $30 billion in
five years. When we invested in Flextronics in 1995, annual revenues
approximated $500 million and I think we didn't make money on the investment
for more than a year! Flextronics continued to expand its worldwide geographic
manufacturing capacity as well as its production capabilities in the quarter.
Flextronic's shares fell about 2% in the quarter.
High value added, metals-based, specialty chemicals producer OM Group reported
June quarter earnings increased 30.5% while revenues, boosted by a highly
accretive acquisition, increased 122.1%. Its share price fell.
Over the long term, we believe that if a business doubles in size, normally so
does its share price. During the past nearly two years, not just in the current
quarter, this has not been the case for many smaller and mid-sized
non-technology businesses in which we are shareholders. In instance after
instance, these stocks have underperformed their businesses. This performance
disparity is starting to be corrected. But, there is a still a lot of catchup
that must occur before our stocks reach parity and share prices again grow at
the same rate as their businesses. In addition, our communications and media
stocks have fallen sharply this year while their businesses have continued
unabated strong growth offering further excess performance opportunity.
<PAGE>
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BUSINESS NEWS
XM Satellite Radio . . . closes $235 million convertible preferred private
placement. The preferred shares are convertible into XM common shares at $26
per share. Honda invested $50 million as the lead strategic investor in this
financing. Honda joins DIRECTTV, Clear Channel, General Motors and Motient as
shareholders. Baron Asset Fund invested $31 million in this round, adding to
its prior investments, made during the last year, which have since increased
sharply in value. The new capital will fund XM's business through commercial
launch of its nationwide satellite radio service. Digital satellite radio is
the first significant technological advance in radio services since FM radio
was introduced nearly 50 years ago. XM Radio and Sirius Radio, in which we are
also shareholders, will each offer subscribers 100 narrowly targeted digital
radio stations. Listeners not well served by current radio shows that are
necessarily targeted to achieve mass audience appeal will find attractive
programming, e.g., live concerts, news-talk, show tunes, Hispanic, innovative
'60's and '70's rock stations with djs and sound clips from those eras. Other
digital programming designed by and for individual listeners, e.g., mass
customization of news, sports, weather, is also possible. While most channels
will have no advertising, there will be some advertiser sponsored shows. The
dream? If as successful as surveys indicate possible, by 2007 XM could have 18
million subscribers (as could Sirius) paying $9.95 per month subscription fees.
An additional $8 per subscriber per month could be obtained from limited
advertising. XM's potential $4 billion annual revenues and $2 billion annual
cash flow could then be valued for 10-15 times XM's current share price, well
worth the speculation, we think.
Sotheby's . . . elects four new independent directors including Steve Dodge,
Chairman, American Tower, the leading U.S. communications tower business;
George Blumenthal, Chairman, NTL, a leading U.K. cable television,
communications tower, telephony and Internet service provider; Dr. Henry
Jarecki, founder, Moviephone, as well as of several other communications and
trading businesses, and a psychiatrist, to boot, which I guess could be as
useful as any of his other qualifications; and Brian Posner, a well respected,
former Fidelity fund manager and analyst. Sotheby's now has highly regarded
media, communications, wireless and Internet experienced Board members to
advise and oversee its Internet initiatives. In addition, a
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B A R O N A S S E T F U N D
committee of independent directors has been formed to oversee the DOJ
investigation. With the obvious exception of a few interested parties who will
be required to recuse themselves when many issues are even discussed, we are
confident members of the new Board will act decisively and in the best
interests of not just all Sotheby's shareholders, but also its employees,
customers and community.
It was also announced that company outside legal counsel will investigate a
purported offer made last year by Bernard Arnault, LVMH's chairman, through the
head of Lazard Freres, to ex-Chairman Alfred Taubman to purchase Sotheby's for
more than $45 per share. The alleged proposal had not been reported to
Sotheby's Board. The investigation will try to determine the facts of this
incident and if Sotheby's former chairman acted in accord with his fiduciary
obligations.
As noted previously, Sotheby's physical auction business continues to perform
very well and its managers, experts and other employees must be given great
credit for these results. In addition, Sotheby's efforts to provide greater
focus by allocating resources more effectively to obtain and market property
that offers the greatest potential should boost future profits. For example,
about 70% of the items Sotheby's sells at its physical auctions have values of
less than $5000 and have similar costs allocated to them as are attributed to
items that sell for many hundreds of thousands or even millions of dollars.
Sotheby's has an opportunity with its Internet auctions to not just increase
its reach and sales many fold over current location constrained physical
auctions, but to reduce costs and achieve greater price realizations as well.
Of note, sothebys.com this summer auctioned one of six original copies of the
U.S. Declaration of Independence on its web site and achieved a remarkable $8
million selling price (vs. $4-6 million pre sale estimate).
Southern Union . . . cheap valuation; favorable prospects to reduce customer
care costs with Internet provisioning; IPO of strategic Capstone Turbine
investment successful. In an age of electricity deregulation, electric power
businesses are acquiring gas distribution companies for both offensive and
defensive purposes. Last year, the average gas utility acquisition, not
including those made by Southern Union, was made for about $3300 per gas
customer. Southern Union acquired gas utilities last year for about $2200 per
customer. Southern Union's shares have a current stock market value of about
$1400 per customer. Due to financial leverage, $3000 per customer would
translate into a share price in excess of $50 per share. Natural growth in
existing markets occurs for about $1000 per new customer, providing additional
value creation. Further, Southern Union's general and administrative costs
represent a significantly lower percentage of its revenues than the companies
it has acquired, also offering opportunity. Of course, in the virtual world in
which we live, it should certainly cost a lot less to bill and provision
electronically through the Internet, than physically, also offering significant
potential opportunity. During the past few years, Southern Union has made
several relatively small strategic investments in four privately owned
businesses. All can enhance the services provided by Southern Union to its
customers . . . and help it get more customers. Advent provides high speed
communications connectivity using a hybrid coax and fibre system that is about
50X faster than existing DSL and cable modem technology. Pointserve offers
dynamic interactive scheduling for service calls applicable not just to gas
service (where costs have been reduced significantly), but for plumbers,
gardeners, cable tv repairmen, etc. Servana provides consumers with an
interface for the new services being offered by Southern Union's affiliated
businesses. Capstone Turbine's MicroTurbines provide low cost, efficient and
low maintenance, commercial electric power generation that can be effective for
load management. At the end of June, Goldman Sachs led an IPO for Capstone
Turbine Corporation. Southern Union's $10.6 million private investment has a
current stock market value of more than $200 million! And, there could be three
more where this one came from.
<PAGE>
Manor Care . . . government reimbursement for Medicare becomes more favorable.
Last year, Federal government Medicare payments for services to long term care
facilities, i.e., nursing homes, fell from $16.7 billion to $11 billion, well
below HCFA's targeted reimbursement of $14.5 billion. The shortfall was caused
by the implementation of HCFA's "prospective pay" methodology. While the
government cut service provider rates, facilities' profits were also hurt by
rising costs, most importantly rising labor expense. The not-surprising result?
Most nursing home businesses are now bankrupt. Manor Care, however, with its
reliance upon private pay patients and its strategy to care for patients with
greater "acuity" (sicker patients), has not just survived but, is beginning to
grow again. HCFA recently announced it will delay indefinitely the
implementation of further adverse reimbursement rules and, in fact, may
actually increase payments to homes. Too late for most. But this should help
Manor Care boost its cash flow from a little more than $300 million in 2000 to
nearly $350 million next year. While that's a nice improvement, it will still
leave the company more than $50 million below peak earnings. But, in the land
of the walking wounded and the fallen, the guy still standing is the king!
Manor Care's share price has declined more than 75% from its peak two years
ago, a $3.5 billion hit to shareholder value. We think this is pretty severe
relative to the company's cash flow impairment that may even prove to be
temporary. Manor Care's share price has only recently begun to recover.
--------------------------------------------------------------------------------
OTHER DEVELOPMENTS
Ninth Annual Baron Investment Conference: October 20, 2000. 8:00 AM through
4:00 PM. Grand Hyatt, New York City. Great speakers. Surprise entertainment.
Don't miss it!
For more than thirteen and a half years since Baron Asset Fund's inception on
June 12, 1987, we have tried to provide our shareholders with enough
information to allow you to make an informed decision about whether Baron Funds
is a suitable investment for you and your family. Baron Funds' quarterly
reports describing our investments and strategies is the information I would
like to have if our roles were reversed. We regard our annual shareholder
investment conferences as another opportunity for you, our shareholders, to
become more knowledgeable about your investments in Baron Funds.
6
<PAGE>
B A R O N A S S E T F U N D
Each October since 1992, we have invited the chief executives of five
businesses in which we have significant investments to speak with our
shareholders at our annual conferences. The executives first describe in
30-minute presentations the businesses they lead and the prospects for those
businesses. The presentations are similar to Wall Street "dog and pony" shows
analysts and portfolio managers attend to initially become familiar with a
company and its management. The talks are often, but not always, accompanied,
and often enlivened, by film clips and slides. Charles Schwab's David Pottruck
and Four Season's Issy Sharp spoke informally last year and completely "off the
cuff" as did Polo Ralph Lauren's Ralph Lauren the year before . . . and
received unusually warm receptions from our conference attendees. In fact,
virtually all executives who have spoken over the years have been very well
received and been quite successful "connecting" with our shareholders. Each
talk is followed by a 15 minute question and answer session with our
shareholders.
Following lunch, I will address our shareholders. My talks in the past have
focused on our investment strategies and philosophy. Last year I spoke about
"Value Investing in a Virtual World." A copy of that presentation, including
slides, is available by request at our web site www.baronfunds.com or by phone
at 1-800-99-BARON. After my talk, unlike our other speakers who answer audience
questions for a limited time, I have always answered questions until you tire
of asking them. You may also ask our other portfolio managers and analysts any
questions you'd like. No holds barred. Last year our shareholders questioned us
for nearly two hours before filing out to our surprise lunchtime performer
Billy Joel's "New York State of Mind."
We would not think of investing in a business on behalf of our Funds'
shareholders before visiting and interviewing a business' management, speaking
to their competitors and carefully studying available financial information. We
call this our "kick the tires" research approach . . . and, after we kick the
tires once, we keep kicking them regularly to make sure they're still o.k. We
offer our shareholders each year that same opportunity, the chance to kick the
tires of your investment in Baron Funds, to judge for yourselves whether the
businesses in which we've invested on your behalf are appealing, have
significant growth prospects and are attractively valued. You also have the
opportunity to judge for yourselves whether the executives leading these
businesses are forthright, capable and trustworthy. And, you get to judge the
competency of your funds' portfolio managers, analysts and executives. Just ask
us questions. We'll try to answer them.
Our conference begins at 8:00 AM for breakfast goes through lunch and will end
this year in mid-afternoon with desert, music and an informal question and
answer period with executives of several companies in which we are also
shareholders, but who did not speak in the morning. Baron Funds' portfolio
managers, analysts and executives, including me, will also be available at this
time to answer any other questions you may have. Our speakers for this year's
conference will be announced when our shareholder invitations are mailed later
this month.
Please RSVP at 1-800-99-BARON or 212-583-2100 or e-mail us at
[email protected] to reserve a place so that we can be certain we will be
able to accommodate you. Space is limited. Only shareholders with tickets will
be admitted. Last year almost 2000 guests attended and we expect similar
attendance this year. Of course, as always, there will be no charge to attend
our conference. We have set aside rooms in four hotels to accommodate our
guests at "special rates." Unfortunately, as we noted last year, this is New
York City and "special rates" here would not be so regarded in the rest of our
country. We hope you'll be able to attend.
<PAGE>
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 technology and Internet stocks, has not been inclusive of many
other businesses. In fact, most non-technology and Internet companies, despite
their strong business growth, have achieved only modest share price
appreciation during the past two years. According to a recent interview with
Neuberger Berman's Marvin Schwartz in Barron's, seven leading technology
companies accounted for 4.5% of the S&P 500 in 1996 and were selling for 14-15
times earnings. By December 1999, the same seven companies represented 19% of
the S&P 500 and were selling for about 55 times earnings. During 1998, the
median performance for S&P 500 stocks was positive 3.9%. In 1999, it was minus
1.9%!
Baron Asset Fund's investment thesis is relatively uncomplicated. Baron Asset
Fund invests for the long term in growth businesses purchased at what we
believe are attractive prices. Purchasing stocks at good prices limits risk, we
believe. We try to invest in businesses that will double in size and profits or
cash flow in three to five years. We assume that if a business doubles in size,
so will its stock price. But we cannot be certain we will achieve those
objectives. As we have outlined in this report, business growth and share price
performance have often been disconnected during the past two years. We will
continue to invest in fast growing, inexpensive businesses whose valuations
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 attractive and
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.
See you in October.
Sincerely,
/s/ Ronald Baron
-------------------
Ronald Baron
Chairman
August 4, 2000
7
<PAGE>
[GRAPHIC OMITTED]
---------------------------------------------------
BARON GROWTH
2
FUND
PERFORMANCE.................................................8
INVESTMENT STRATEGY.........................................9
CONCLUSION.................................................11
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
<PAGE>
--------------------------------------------------------------------------------
BARON GROWTH FUND
QUARTERLY REPORT JUNE 30, 2000
Dear Baron Growth
Fund Shareholder:
--------------------------------------------------------------------------------
PERFORMANCE
Baron Growth Fund fell 6.8% during the quarter, underperforming both the
Russell 2000 and the S&P 500, which fell 3.8% and 2.7%, respectively, during
the period. Since the Fund's inception over five years ago, the Fund has
generated a cumulative return of 249% (25.6% per year) which is identical to
the S&P 500, and more than double the performance of the Russell 2000, +123%
(15.7% per year).
These are Bizarre Times!
Small Cap Companies are Cheap
Baron Growth Fund invests in small cap companies. The investment performance of
smaller companies in 1999, as measured by the Russell 2000, +21.3%, after
under-performing by a record 30 percentage points in 1998 and after years of
under-performance, was only slightly better than the performance of larger
companies as measured by the S&P 500, +21.0%. In 2000, stocks of smaller cap
companies are marginally outperforming stocks of larger companies. Over the last
five years the performance of the Russell 2000, +95%, was cumulatively half the
performance of the S&P 500, +191%. This relative under-performance of smaller
companies has resulted in relative valuations of smaller companies that are
compelling. Historically, small company stock prices have usually been able to
sustain periods of strong outperformance relative to larger companies that last
for years at a time from these price levels. More importantly, bottom up, we are
identifying many investment opportunities in
<TABLE>
<CAPTION>
<S> <C> <C>
PERFORMANCE PERFORMANCE PERFORMANCE
FOR THE 3 MONTHS ENDED FOR THE 6 MONTHS ENDED SINCE INCEPTION
JUNE 30, 2000 JUNE 30, 2000 JANUARY 3, 1995 THROUGH
JUNE 30, 2000
5 5 250 249.5%
3.0% 249.3%
200
0 0 -0.5% 150
-2.7% 122.9%
100
-5 -3.8% -5
-6.8% -5.5% 50
-10 -10 0
BARON S&P RUSSELL BARON S&P RUSSELL BARON S&P RUSSELL
GROWTH 500* 2000* GROWTH 500* 2000* GROWTH 500* 2000*
FUND FUND FUND
-------------------------------------- ---------------------------------------- --------------------------------------
*THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P MEASURES THE PERFORMANCE OF THE STOCK MARKET IN GENERAL;
THE RUSSELL 2000 OF SMALL AND MID-SIZED COMPANIES.
</TABLE>
<PAGE>
B A R O N G R O W T H F U N D
what we believe are great businesses that are selling at very attractive prices
on an absolute basis as well as on a relative basis to larger cap stocks.
Value vs. Growth -- The Gap Narrows
The gap between the performance of growth and value stocks in 1999 was record
setting. While the Russell 2000 growth index gained 43.1% for the year the
Russell 2000 value index lost 1.5%! This gap has now begun to narrow. In 2000
year-to-date, the Russell 2000 value index is ahead of the growth index by 16
percentage points. Our focus is on buying what we believe are great businesses
with significant growth prospects at reasonable prices. We believe these
companies will double in size within four years. We call our style a value
orientation toward growth. As value returns to favor, we believe we will
benefit.
It's Been a Trading World
Traders have been big winners during the last year; not investors. The
combination of unusual stock price volatility and retail momentum investors in
mostly technology oriented, limited float stocks has been nirvana for day
traders. Even larger, more established, institutional investors or mutual funds
that have a momentum style and high turnover have benefited from this trading
oriented environment. It is our belief that this, too, will end. We believe
that when, not if, normalcy returns to the stock market, investing, investing
for the long-term, which is what we do, will once again generate superior
long-term investment results.
--------------------------------------------------------------------------------
INVESTMENT STRATEGY
Baron Growth Fund is a long-term investor in growth businesses purchased at
what we believe are attractive prices. While we are disappointed by our most
recent results, we believe the current market environment is advantageous to
our research driven, fundamental investment approach as it allows us to deploy
our capital into great companies with terrific prospects at, what we believe to
be, fire-sale prices.
Over the past year, we have reshaped Baron Growth Fund away from larger
capitalization and income oriented investments and focused on finding exciting,
new businesses with great management teams and expansive long term
opportunities. This evolution is nearly complete and we are encouraged by the
terrific business results that many of our investments are enjoying. While we
are disappointed in the market's seemingly lack of interest in fundamentals, we
continue to expect stock price performance to mirror business fundamental
performance over the long term. As such, we are as excited as ever about the
prospects for the Fund. We outline below some of the recent developments at
some of our portfolio companies, which, we believe, highlight these prospects.
<PAGE>
Flextronics
During this last quarter, Flextronics announced a pact with Motorola which,
according to estimates from the two companies, could result in $30 billion of
revenue for Flextronics over the next 5 years. We believe that this pact is an
important milestone for both Flextronics, and the electronics manufacturing
services (EMS) industry as a whole.
Motorola is already a large and satisfied customer of Flextronics. This
agreement promises to turbocharge that relationship, mainly by integrating the
information technology (IT) systems of the two companies. Once these systems
can talk to each other, Motorola will be able to monitor and direct production
at Flextronics' facilities almost as easily as they handle their own plants.
Although Flextronics will still bid competitively for contracts on specific
product lines, and the company will not be the sole manufacturing partner of
Motorola, we believe that this pact is a significant endorsement of
Flextronics' importance to Motorola's production. Motorola outsources
manufacturing to 25 companies right now, and intends to whittle that number
down to a few EMS partners that can work closely and seamlessly with Motorola
over time. As this consolidation takes place, we believe that Flextronics will
enjoy a real competitive advantage thanks to this IT integration.
The Motorola-Flextronics announcement also further highlights the growing
momentum in the EMS industry as a whole. It indicates that the role of EMS
partners is becoming more central to the strategy of almost every electronics
company. In polls of large electronics OEMs, 50% say they plan to outsource
substantially more of their manufacturing needs in the near future and up to
60-90% of their manufacturing, eventually. Including Flextronics, the EMS
industry handles only 15% of electronics manufacturing in the world today.
Currently the most eager to outsource are US-based manufacturers, but European
companies have been equally eager, as they've jumped on the bandwagon in the
last several years. Only the Japanese, renowned for their prowess at
electronics manufacturing, have been resistant to the notion of relying on
external manufacturers.
Consider cell phone manufacturing, dominated by companies such as Ericsson,
Nokia, Motorola, etc. Cell phone manufacturers spend $55 billion per annum
manufacturing phones. This sum is growing as an ever-wider swath of the world's
landmass becomes populated by the cell phone culture. Mobile phone
manufacturers only recently opened the gates to outsource products, and only 7%
of total cell manufacturing is managed by EMS companies. But the trickle of
initial contracts is rapidly turning into a flood, and contracts worth billions
of dollars are now being proposed.
One of the key enablers of large-scale outsourcing is improved IT systems.
Thanks to revolutionary advances in computing and networking, even large
companies can react quickly to changes in demand and design specifications, and
these changes can be communicated instantaneously to manufacturing partners if
9
<PAGE>
B A R O N G R O W T H F U N D
their IT systems have been upgraded and integrated, saving both time and money
in the process. As OEMs continue to look for outsourcing partners, we believe
that they will concentrate their relationships on those few partners that prove
reliable in providing the systems that can maximize the benefits of these
improvements. We believe that this evolution will drive further expansion of
Flextronics' operations.
Four Seasons
There had been a lot of internal ridicule when we first invested in Four
Seasons Hotels and Resorts about two years ago. The obvious critique was that
the due diligence trips to visit their properties were the underlying goal.
While their hotels truly are extraordinary, the real draw was the company's
hugely profitable business and extraordinary growth prospects. In fact, we
still haven't made it to Nevis for due diligence.
As many of you know, Four Seasons, headquartered in Toronto, Ontario, is the
world's premier luxury hotel operator. The Company currently manages 48 hotels
and resorts in 20 countries with more than 14 thousand rooms. These hotels are
managed under long-term management contracts that extend for up to 80 years,
and are virtually non-cancelable. Moreover, Four Seasons is paid both a
percentage of revenue and a percentage of profits, without having to own the
property. This presents a highly stable and extremely profitable business with
high profit margins (approximately 70%) and extraordinary free cash flow.
As we've noted in previous letters, Four Seasons is enjoying one of its
strongest growth periods in its history, with five hotels opening in the last
12 months and an additional 19 properties in 12 countries under construction or
in advanced stages of development that will open over the next several years.
This development pipeline, as well as a robust worldwide economy, is driving
terrific financial results for the company. Four Seasons recently announced
over 30% revenue growth and almost 60% EBITDA growth in the most recent
quarter, soundly beating even the rosiest of analysts' estimates. Moreover, the
portfolio's revpar (revenue per available room) growth remains at a substantial
premium to the average deluxe lodging chain, confirming Four Seasons' strong
brand loyalty and dominance in the luxury space.
Four Season's stock has appreciated almost 4 fold since our initial investment
in the fall of 1998 and the stock has advanced roughly 55% over last 12 months
compared to an 8% increase in the S&P. Nevertheless, with operating profits
still expected to double over the next several years, we continue to believe
that Four Seasons has great return prospects from here.
<PAGE>
Sirius Satellite launches satellite....XM announces further funding
Our Satellite radio companies, XM Satellite and Sirius, continue to hit
important milestones. Sirius launched the first of its three satellites on June
30th, and XM is on track to launch its first satellite in November of this
year. As you may recall from our prior letters, XM and Sirius are the two
companies which won licenses from the FCC to offer 100 channels of digital,
nationwide radio services via satellite. Their business plans are built on
marketing $10/month subscriptions via partnerships with auto manufacturers and
electronics retailers.
We believe that satellite radio will offer the best content and the best DJs in
radio. The promise is to provide a much better media experience than
traditional AM or FM radio, which is laden with commercials and concentrated on
a few popular formats. We believe that better content and nationwide coverage
will drive high levels of consumer adoption which could translate into
substantial financial returns for both companies.
XM has lagged behind Sirius in financing its business plan, but on July 10th
the company announced an agreement for a $235 million round of funding. This is
a significant milestone and should carry the company through launch of service.
We at Baron Funds contributed $35 million in this round, and other investors
included American Honda, Madison Dearborn, DirectTV and Columbia Capital.
We continue to believe that both XM and Sirius are well positioned for success.
The radio services will be available for consumers in 2001, and we believe that
the stock prices of each company will appreciate many-fold if their internal
plans are accomplished.
Dollar Tree
Dollar Tree has been one of the most successful retailing investments at Baron
Funds over the past several years and the company continues to hit on all
cylinders. It's hard to believe, but Dollar Tree currently has over 1,600
stores open today in 35 states, up from 350 stores only 7 years ago. Almost
harder to believe is the fact that the chain could generate almost $2 billion
in sales this year. That number seems unfathomable given that every piece of
merchandise in the store is sold at the fixed price of $1.00. (Yes that means 2
billion items sold).
The company continues to post stellar financial results with same store sales
up over 14% and operating earnings up over 45% in the recently released second
quarter. In addition, Dollar Tree recently announced an exciting acquisition
that increases the company's footprint in the important mid-Atlantic region. In
May, Dollar Tree acquired Dollar Express in exchange for approximately 9
million shares (roughly $340 million) and the assumption of $30 million in
debt. Dollar Express operates 132 stores in Pennsylvania and New Jersey, all in
the $1 format. While slightly larger than the average Dollar Tree store, the
Dollar Express stores had good sales productivity ($1.2 million per unit) and a
strong operating team.
Although we have based our investment thought process principally on Dollar
Tree's organic growth prospects and flawless execution, it is notable that this
is the fourth sizable acquisition that the company has made in the last 4
years. In addition to Dollar Express this year, in 1996, Dollar Tree bought
Dollar Bills,
10
<PAGE>
B A R O N G R O W T H F U N D
a 136 store chain based in the mid-west for approximately $55 million, in 1998,
98 Cents Clearance Centers with 66 stores in California for approximately $90
million, and in 1999 Only $One in New York with 24 stores for a little over $20
million. In total, these acquisitions have contributed nearly 360 stores to the
chain as well as critical footholds and distribution capacity in new markets.
While many companies have had difficulty assimilating acquisitions into their
core business and culture, Dollar Tree's acquisition record has been terrific
with substantial same store sales gains at each of the acquired chains' stores
as well as expanded operating margins in the twelve months following the
acquisitions.
This acquisition success notwithstanding, we continue to focus principally on
the company's organic growth prospects, which remain exciting. The company's
1,600 store base could easily expand to 5,000 or more without beginning to
worry about saturation, leaving room for years of continued store base growth.
The company has prudently managed to a 20% annual store base growth target
(slightly higher in square footage) rather than push its expansion much faster
(as many retailers have done in the past). When combined with steady same store
sales gains, this could continue to fuel 25% revenue growth for the company for
the foreseeable future. With the operating leverage that Dollar Tree has
historically exhibited, we believe that this revenue growth could translate
into +30% annual earnings growth for at least the next several years.
Importantly, this growth should continue to be accomplished while also
generating (rather than consuming) free cash flow. Dollar Tree currently has
over $55 million in cash on the balance sheet which could grow to well over
$200 million by year end as fourth quarter sales come in. The company continues
to generate extraordinary 100% unit level returns on capital (meaning new
stores generate enough operating profit to return all invested capital within
the first year). Under our projections, over the next several years, we expect
Dollar Tree to grow its store base to in excess of 3,000, its revenue to more
than $4 billion while at the same time generating over $1 billion in excess
cash. Pretty good numbers when you never raise prices.
Saga Communications
Saga is an investment that the Baron Growth Fund has held since the Fund's
inception. The company is a very conservatively managed radio group with 54
stations in 14 markets. While other radio companies have consolidated their
stations in major cities, often at extremely high prices, Saga has always
maintained a focus as a small market operator. As such, as an investment, Saga
has, in our opinion, always presented a much different risk/reward ratio from
our other radio investments. Saga's smaller markets were never as fragmented as
large market radio, so Saga could not benefit as much from deregulation and
consolidation. Nonetheless, the bottom line has grown steadily in this strong
advertising market, and, in our opinion, we bore far fewer risks from
competition or financial leverage.
This year's free cash flow at Saga is likely to post a roughly 20% growth rate
despite little Internet advertising in Saga's small markets. And, the stock
trades at approximately 20x free cash flow, a multiple that is, in our opinion,
reasonable and sustainable into the future. If underlying free cash flow
continues to grow at approximately 20% per annum, as we think it will, then we
as shareholders can expect to see similar rates of growth in the value of our
shares over time. Meanwhile, the company has a very light debt load and thus
carries little financial risk. Moreover, if the private market prices of radio
stations soften, dry powder is available to take advantage of opportunities.
Saga is seeing a few opportunities for acquisitions of late, and has recently
bought stations in Ithaca, NY, Springfield, MA and Champaign, IL. So far in
2000, the company has announced $40 million of acquisitions, compared to $36
million in 1998 and 1999 combined. The acquisition strategy is disciplined,
with ROI justifications built on reasonable multiples of future cash flows. For
the current crop of acquisitions, the company is paying roughly 12x next year's
cash flow. In addition, Saga continues to focus on stations with local market
dominance. In Ithaca, for example, Saga purchased four stations which in
aggregate garner 40% of the town's radio listenership and 40% of the market's
ad dollars. This sort of market dominance, which Saga has repeated in other
small markets, is one of our key investment theses that we believe will drive
substantial future value as the industry continues to consolidate.
<PAGE>
--------------------------------------------------------------------------------
CONCLUSION
We hope that these few summaries help highlight the investment thought process
we are employing for Baron Growth Fund. While this most recent quarter has been
a difficult one, we remain focused on the fundamental growth of the businesses
in which we are invested. We are confident that by adhering to our research
disciplines and focusing on long-term opportunities the Fund will once again
generate strong investment returns, both absolutely, and relative to the small
cap indices. Of course there can be no assurance that we can achieve this goal.
We continue to appreciate your support as fellow shareholders in Baron Growth
Fund and we look forward to reviewing additional holdings with you in our
future letters and at the shareholder conference in New York this October.
Sincerely,
/s/ Ronald Baron /s/ Matt Ervin /s/ Mitch Rubin
------------------ ------------------- ---------------------
Ronald Baron Matt Ervin Mitch Rubin
Chairman & CEO Vice President Vice President
August 4, 2000 & Co-Portfolio & Co-Portfolio
Manager Manager
11
<PAGE>
[GRAPHIC OMITTED]
---------------------------------------------------
BARON SMALL
3 CAP FUND
PERFORMANCE................................................12
PORTFOLIO
COMPOSITION................................................13
NEW IDEAS..................................................13
RECENT RESULTS.............................................14
CONCLUSION.................................................14
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
<PAGE>
--------------------------------------------------------------------------------
BARON SMALL CAP FUND
QUARTERLY REPORT JUNE 30, 2000
Dear Baron Small Cap
Fund Shareholder:
--------------------------------------------------------------------------------
Performance
Baron Small Cap Fund was flat in the June quarter. During the June quarter, the
S&P 500 was down about 3% and the Russell 2000 was down about 4%, so our
performance was above these barometers. Though the market has been more
difficult this year, we are not too excited about being even for the quarter or
year-to-date.
The Fund's best performers were Heidrick & Struggles, Career Education, Penton
Media, Four Seasons Hotels, and SBA Communications. The stocks with the
greatest negative impact on our performance were UnitedGlobalCom, CoreComm,
Allied Riser and Frontline Capital.
As mentioned in the March 2000 quarterly report, the second quarter continued
the market's trend of favoring well-performing companies in traditional
industries over the burgeoning Internet, telecommunications or technology
upstarts that were such great stocks in 1999. We continue to see opportunities
in the "old economy" as well as the "new economy" so we have investments in
both. However, Baron Small Cap Fund has consciously been focusing on finding
new investments with more established companies and take some risk out of the
portfolio. Because of this prediliction, and because of the volatility in the
market which presents us good buying opportunities, we have been more active in
and establishing new positions this quarter in paring back the portfolio to
fund the purchases. We will discuss some new ideas later in this report.
<TABLE>
<CAPTION>
<S> <C> <C>
PERFORMANCE PERFORMANCE PERFORMANCE
FOR THE 3 MONTHS ENDED FOR THE 6 MONTHS ENDED SINCE INCEPTION
JUNE 30, 2000 JUNE 30, 2000 OCTOBER 1, 1997 THROUGH
JUNE 30, 2000
1.0 3.0 3.0% 80
78.9%
70
0.3% 59.3%
0.0 2.0 60
50
-1.0 1.0
40
-2.0 30
0.0
-2.7% -0.5% 20
-3.0 -0.6% 17.7%
10
-3.8%
-4.0 -1.0 0
BARON S&P RUSSELL BARON S&P RUSSELL BARON S&P RUSSELL
SMALL CAP 500* 2000* SMALL CAP 500* 2000* SMALL CAP 500* 2000*
FUND FUND FUND
-------------------------------------- ---------------------------------------- --------------------------------------
*THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P MEASURES THE PERFORMANCE OF THE STOCK MARKET IN GENERAL;
THE RUSSELL 2000 OF SMALL AND MID-SIZED COMPANIES.
</TABLE>
<PAGE>
B A R O N S M A L L C A P F U N D
--------------------------------------------------------------------------------
Portfolio Composition
At the end of June, we had assets of a little more than $1billion in the Fund.
The Fund has about 50 positions, and remains relatively concentrated in
industry focus and particular names. The top 10 holdings account for 41% of
assets. The industry groups which make up the largest percentage holdings were
Communications 21%, Media and Entertainment 18%, Business Services 13%,
Retail/Restaurants 8%, Education 8% and Publishing 7%. The average median
market capitalization of the portfolio was $1.2 billion. Turnover was under
50%. We ended the quarter with a cash position of about 5% of assets.
In the quarter, we added six new positions; Hain Celestial Group, Community
Health Systems, Korn Ferry, Championship Auto Racing, Choice One, and Krispy
Kreme Doughnuts. As we have stated before, we like to buy well performing, fast
growing companies which we believe are unique and have superior managements
with whom we can be long-term investors. It is critical for us to establish our
positions at favorable prices so there is the potential for significant
returns. We carefully follow many situations to pick our entry points. We also
meet with a lot of companies during the IPO process, hopefully to establish our
opinion before others. Secondly, we invest in "Fallen Angels", which we define
as seasoned growth companies whose stock has suffered because of near-term
issues which we feel will lift shortly and we can make good money as the
equities become more rationally valued in the market. Our third broad category
of investment is "Special Situations" -- spinouts, mergers, management changes
-- where understanding events or complications enable us to find what we
believe are long-term winners that are not yet obvious because of the
circumstances.
Though our investments often straddle those three types, I would characterize
three of the new investments as opportunistic purchases of unblemished growth
companies, (one which dipped because of merger arbitrage, and two IPOs), two
Fallen Angels (one because of operational and funding issues at comparables,
and one because of losses incurred by an internally funded internet subsidiary)
and one "Special Situation" (new management).
--------------------------------------------------------------------------------
New Ideas
Hain Celestial Group is America's leading natural/organic and specialty food
company. Eating healthy and watching our diet have become a major focus of
people's lives. The natural and organic products business has exploded, and
presently is a $19 billion market, up from just $5 billion in 1992 and now
growing well in excess of 20% a year. The majority of sales are still driven
through natural food stores. However, more mainstream supermarkets, drug stores
and mass merchants are devoting space to these products because of consumer
demand and the higher margins they offer.
Hain was founded in 1993 to capitalize on these trends. The company has
acquired or developed some of the most powerful brands in the industry
including Westsoy Soy beverages, Celestial Seasonings teas, Health Valley
cereals, Terra chips and Earth's Best baby foods, and as a company dominates 11
of the top 15 natural food categories as measured by syndicated data. Hain is
renowned for product innovation and quality. Because of the equity it has
developed in its brands, Hain has tremendous potential to develop product line
extensions, cross sell its brands, and lead the charge with distributors and
retailers to more ubiquitously distribute its products in the states and enter
international markets.
<PAGE>
The most important growth opportunities are in soy milk, where Westsoy is the
nation's leading product. The soy milk category is about $300 million in
revenues and Westsoy has a one third share. As the FDA continues to certify the
health benefits of soy products and these attributes become more widely known,
it is anticipated that soy milk could grow to be a $2-3 billion category and
Westsoy could compound its growth at over 30% a year for the foreseeable
future. Celestial Seasonings is a well-known, mostly grocery, brand and Hain
plans to greatly expand its penetration into natural channels and expand
distribution to food service and club accounts. A new iced tea product will be
developed. Terra chips is a $50 million business that has outrun its
manufacturing capacity. As multiple new plants are brought onstream, Terra
could grow very rapidly towards $200 million in sales. These are astounding
growth rates for the mundane food industry.
Hain's historical financial results are similarly impressive. Revenues have
compounded at over 50% because of the acquisition program and strong internal
growth rates. The portfolio of brands has been established at a relatively
modest price, by acquiring well known brands which were underachieving with
previous management. EBITDA margins have more than doubled through cost savings
and leverage from the expanded top line growth.
We started to purchase Hain stock during the pre-closing period of the
Celestial Seasonings acquisition, when it was disclosed that Celestial's
near-term growth rates would be slowed by Hain's decision to clean out the
inventory loaded in the distribution channel by previous management. This
decision, which was obviously appropriate when explained by senior management,
unnerved the market and caused the stock to decline from $38 to $22, which was
the break we were looking for. By spending considerable time with top
management, we decided that as opposed to being nervous about the near-term,
the strength of some of Hain's other "power brands" was sufficient to maintain
the company's 30% plus growth rate and the stock was cheap. We expect Hain to
earn $ .85 in the June 2000 year, $1.40 in June 2001 and a $1.80 in June 2002.
These reported numbers include $.20 of goodwill amortization, so cash earnings
are closer to $2.00 in June 2001. We think the stock should trade at its growth
rate, or 30x or so, and therefore feel the stock will more than double over the
next year and triple off the bottom. Additionally, there has been much
consolidation in the food industry (Nabisco, Best Foods) and we feel Hain is a
very attractive acquisition candidate. Heinz owned 20% of the company,
purchased in September 1999 at $29 per share when it sold Hain its Earth's Best
brand. Heinz recently exercised its right to maintain its 20% holding in Hain
by purchasing additional shares when the Celestial Seasonings deal closed, and
has expanded its strategic alliance with Hain to develop the natural foods
business internationally as well as distribute Hain products to new markets
domestically. At 15 times fiscal year 2002 cash flow, the approximate multiple
at which other, less attractive food assets have been trading, the stock would
be worth $60.
13
<PAGE>
B A R O N S M A L L C A P F U N D
The Fund purchased stock in Community Health Systems (CHS) in its initial
public offering this May. CHS is the largest non-urban provider of general
hospital healthcare services in the United States. This will be the fourth
significant investment in "rural" businesses by the Fund, on top of our
holdings in rural telco Commonwealth Telephone (a local exchange company),
Rural Cellular (a small market cellular telephone service provider) and
Province Healthcare (a rural hospital operator, much like CHS). Generally,
these companies have superior managements, operating unique assets in less
competitive environments, which results in terrific profit growth and good
shareholder returns.
CHS, formed in 1985, was a successful public company until it was purchased in
an LBO by Forstmann Little in July 1996. CHS just came public again to access
capital to continue its growth. CHS now operates 51 rural hospitals, over 80%
of the facilities are the sole providers in their respective markets. CHS's
strategy is simple, to purchase underdeveloped hospitals where residents are
leaving the community to receive medical care and attempt to recapture the
medical spending with the goal of rebuilding share from 25% to 50%. CHS
provides capital to facilities that was not available under prior
not-for-profit ownership. The new funds are used to purchase equipment that
enables the offering of new services (orthopedics, obstetrics, cardiology) or
to build entirely new facilities. CHS has been particularly successful adding
or enhancing the Emergency Room programs at most of its hospitals, which is an
important generator of admissions in addition to being a profitable service.
New physicians are recruited to the community to provide the new hospital
services and feed the hospital with additional volume. CHS's experienced
management team has also been successful in enhancing the financial performance
of the hospitals by sharing operating successes across its portfolio and
through corporate savings.
The financial model is very attractive. CHS typically purchases non-profit
hospitals at 4-6x run rate cash flow, assuming some immediate cost savings to
CHS. They expect to grow facility revenues at 8% per year and cash flow 12-15%
as the facility enhancement program results in recapture of market share. Since
the LBO in 1997, CHS has acquired 21 hospitals for $470 million and achieved
results that exceed these guidelines. There are 2,200 rural hospitals in the
country, so we think it will be easy for CHS to acquire 3-5 new facilities a
year into the foreseeable future and greatly expand its holdings overtime. The
combination of strong internal growth with the addition of new facilities each
year should result in rapidly growing cash flow and earnings streams. We
purchased our position at less than 8 times our estimate for year 2001 cash
flow and feel the company should be valued between 12-15 times, which creates
our price target of between $32-$43 versus our $14 cost.
--------------------------------------------------------------------------------
Recent Results
Across our portfolio, our companies have generally reported stellar results
year-to-date. For instance, Heidrick and Struggles reported revenues growth of
44% and earnings growth of 66% through June and substantial progress developing
its Internet recruitment subsidiary and with its investment portfolio. Career
Education reported a 53% increase in revenues through June and an 85% rise in
profits. They also announced new curricula at the schools and additional
distance learning programs. SBA Communications reported 35% same tower revenue
growth and an expanded new tower build and acquisition plan. Penton Media
announced results well above expectations, and on a pro forma basis, is pacing
to grow its cash flow at 30% in 2000 and almost that strong in 2001, based on
the strength of multiple new trade show launches in the states and
internationally. We are also enthused with the progress of the company's first
Internet channel offering, the B2B Showplace, an online trade show which is
getting great traction.
<PAGE>
We had some poor performers, but not many. ITX missed its projections because
of higher interest expense and delays in government funding of certain
programs. We have since sold our shares. Six Flags suffered through terrible
weather in many of its important markets and attendance was below expectations.
However, the real hits to our performance in the June quarter and into the
summer were in our telecommunications holdings, which have fallen out of favor
in the market. We remain very excited about development at UnitedGlobalCom
(UGC), CoreComm and Mpower. UGC announced two significant transactions
recently: that Liberty Media was increasing its position in UGC from 10% to 45%
by contributing its portfolio of international cable and programming assets to
UGC in exchange for additional equity. Also, United-Pan European, the European
subsidiary of UGC, announced that it was combining its Internet portal Chello
with At Home Excite's international business to create a more dominant company.
Both of these developments we feel are extremely positive to UGC's goal to
create scale and finance its ambitious growth plans. Though the stocks of our
competitive local telecommunications companies (CLECs) have suffered, we
maintain our conviction that these new entrants can garner significant market
share from incumbent providers and earn very high equity returns in doing so.
We are excited about the managements and operating results of our holdings and
have added a new position, Choice One, to our portfolio, as the stocks have
been under pressure.
--------------------------------------------------------------------------------
Conclusion
Thank you for investing in the Fund. Though this year has not been as lucrative
as last year, we very much like our portfolio and look for good returns as the
market recovers.
I look forward to seeing many of you at our Fall Investment Conference. Please
also seek out Stefan Myktiuk who is instrumental in the mangement of the Fund.
Best regards,
/s/ Cliff Greenberg
-----------------------
Cliff Greenberg
Vice President
August 4, 2000
14
<PAGE>
[GRAPHIC OMITTED]
---------------------------------------------------
BARON
4 iOPPORTUNITY
FUND
PERFORMANCE OVERVIEW............................ 15
iOPPORTUNITY STRATEGIC
OVERVIEW........................................ 16
CONCLUSION...................................... 21
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
<PAGE>
--------------------------------------------------------------------------------
BARON iOPPORTUNITY FUND
QUARTERLY REPORT JUNE 30, 2000
Dear Baron iOpportunity
Fund Shareholder:
--------------------------------------------------------------------------------
PERFORMANCE OVERVIEW
The second quarter of 2000 was a difficult one for investors focused on
Internet and information technology companies as a combination of rising
interest rates and stratospheric valuations finally caught up with many of
these stocks. The technology heavy NASDAQ Composite index fell 13.3% during the
quarter while the Morgan Stanley internet index fell an even deeper 29.9%. Many
of the stocks within these indexes contracted by over 80% during the quarter.
Although we were able to take advantage of these volatile markets to invest a
large portion of our capital at what we believe are attractive prices, the Baron
iOpportunity Fund also fell during the quarter, losing 9.7%. As of the beginning
of August, the Fund was over 85% invested.
Market Volatility; Building Conviction and Adhering to Disciplines
There has certainly been a sense of incredulity amongst professionals in the
market this year as the volatility of stock price movements has accelerated. In
the early part of the year, the stratospheric advance of certain stocks beyond
any semblance of reasonable value claimed many "old world" investors as
"victims" whose retirements or retrenchments were blamed on a disbelief in the
insanity of the market's valuations (witness George Soros and Julian
Robertson).
<TABLE>
<CAPTION>
<S> <C>
PERFORMANCE PERFORMANCE SINCE INCEPTION
FOR THE 3 MONTHS ENDED JUNE 30, 2000 MARCH 1, 2000 THROUGH JUNE 30, 2000
0 0
-5 -5
-10 -10
-9.7% -11.0%
-13.3%
-15 -15
-15.6%
-20 -20
-25 -25
-29.9%
-30 -30
-34.3%
-35
BARON NASDAQ MORGAN BARON NASDAQ MORGAN
iOPPORTUNITY COMPOSITE STANLEY iOPPORTUNITY COMPOSITE STANLEY
FUND INTERNET FUND INTERNET
INDEX INDEX
--------------------------------------------- ------------------------------------------------------
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.
</TABLE>
<PAGE>
B A R O N iO P P O R T U N I T Y F U N D
Not surprisingly, if you believe in Murphy's Law, the public demises of these
storied investors occurred just before being proved correct in their distrust
of recent valuations as technology oriented stocks came tumbling back to earth.
Many market pundits cheered the bursting of the "bubble of speculative excess"
in the technology and Internet sectors and many predicted the completion of the
collapse of stock prices in the coming months as "rationality" was sure to
return to the markets.
The freefall was halted somewhat by some initial earnings reports in early July
(most notably Yahoo) which drove a powerful move upwards in many information
technology stocks for several days, only to sell off again in mid July as other
earnings reports and analyst downgrades captured investors attention.
The volatility in these stocks can be truly mindnumbing. It seems that, almost
daily, the market is rapidly switching its seemingly singular focus from risk
(fear) to reward (greed) and back again with little pause to digest long term
fundamentals.
While humbled by the market's potential to vastly overshoot rationality in
either direction in the short term, we maintain our sanity by focusing on a
long term horizon and a research driven investment approach. At Baron Capital,
we have never attempted to predict what the market will do tomorrow or in the
coming weeks (an endeavor, in our opinion, akin to flipping a coin). Our goal,
on all of our funds, is to estimate what a given company will earn over the
next several years by focusing on their business and industry. In our opinion,
building conviction and adhering to a valuation discipline is critical to
long-term investing success, especially in times of volatility. This, and a
healthy dose of intellectual honesty and patience.
Conviction can be built only through exhaustive fundamental research focused on
the long-term financial potential of companies and industries with an emphasis
on management expertise, competitive advantage and barriers to entry. Valuation
discipline can be constructed only through in-depth financial analysis and a
realistic approach to potential future valuation parameters. Intellectual
honesty and patience is required to sell and/or avoid buying stocks whose
valuation does not afford the potential for great long-term returns despite
seemingly robust current prospects.
--------------------------------------------------------------------------------
iOPPORTUNITY STRATEGIC OVERVIEW
In our first quarterly letter, we outlined our approach to investing for the
Baron iOpportunity Fund. We will briefly review our approach here, then turn
our focus to a more in-depth description of some of our initial investments and
themes.
As we have often noted, the "i" in iOpportunity does not stand only for
Internet. It also includes information technology, interactive communication
and information systems' infrastructure (as well as many non-"i"-beginning
businesses, such as telecommunications, media and entertainment, and business
and consumer services). As such, ours is a diversified (rather than a sector)
fund with the common thread being businesses that are utilizing the advantages
of the Internet and the changing communication and information technology
environment to create the potential for substantial future profits and,
thereby, good stock performance. The fund embraces both newly created
companies, as well as "bricks and mortar" companies transforming themselves for
the new economy.
<PAGE>
In order to balance our approach and segment our holdings, we have divided the
Fund into five baskets that best describe the different types of businesses we
are seeking. These baskets are:
1. Proven Leaders with Unbounded Future Opportunity -- companies that have
ascended to recognized leadership positions with scaleable, profitable and
sustainable business models.
2. Bricks and Mortar Converting to Clicks and Mortar -- existing businesses
with substantially enhanced prospects for growth and profitability from
embracing the Internet.
3. Leaders in Sunrise Industries Benefiting from Powerful Trends -- there are
several "fundamental truths" that exist by virtue of the growth of the
Internet which produce powerful business trends and sunrise industries.
These include the increased use and dependence on the Internet for daily
information and communication, as well as the derivative trends thereof,
such as the increased demand for high speed bandwidth. By focusing on
these themes, we hope to "swim with the current" of economic evolution
rather than against it. We are looking for the leading companies
benefiting from these macro trends.
4. Venture Capital Investments. Risky, yet potentially very rewarding young
companies with new and superior technologies and practices at the vanguard
of the information technology revolution.
5. Special Situations. Stocks where, although we may not yet have the required
conviction to warrant a more substantial investment, the price of the
stock is compelling related to both the current business prospects and a
potential near term catalyst.
Over time, we expect companies within the portfolio to overlap baskets and
evolve from one basket to another as their businesses mature.
Below we outline a few of the initial themes we have focused on in greater
detail and describe some of our initial holdings. We hope this gives you some
greater insight into our investment thought process.
Human Capital Management in the Electronic Economy
Throughout our economy, a "War for Talent" is raging as the demand for quality
employees accelerates against a demographic trend that indicates a declining
supply of people. Several studies indicate that people costs now make up over
60% of corporate spending and most executives will tell you that finding and
retaining top quality employees is one of their top priorities for
16
<PAGE>
B A R O N iO P P O R T U N I T Y F U N D
improving their businesses. Yet, unemployment among "knowledge workers" is
estimated at less than 1% in a robust economy whose overall unemployment rate
is a paltry 4%. For high-tech and Internet firms, human capital needs are
paramount as the growth in their businesses mandates a nearly insatiable
appetite for quality employees. In these firms in particular, business success
and failure often hinges not on their bricks and mortar but on the
decision-making ability of their managerial staff.
The Internet is having several different and dramatic impacts on the human
capital management process. First, until recently, the flood of new capital
into, and the skyrocketing stock performance of, high-tech and Internet firms
created a talent drain out of old economy businesses, as high and mid-level
executives were wooed to new challenges at younger companies. This occurred at
precisely the moment in time when those old economy businesses most needed
their young executives to lead them in their own new economy evolution. In
addition, the Internet provides a powerful information tool for employees to
use in planning their careers, comparing their compensations and seeking more
rewarding opportunities. This has led to a shortening of the average tenure of
employees and an increase in their willingness to change jobs. Further, for
those firms that embrace the Internet within their own HR departments, job
boards and Internet tools can help dramatically decrease their cost of employee
acquisition while also shortening the recruitment timetable.
It is against this backdrop that both the high-end executive recruitment firms
and the more mid-level focused electronic recruiting companies are experiencing
substantial growth. For Baron iOpportunity, we have invested in what we
believe to be the two dominant firms in the human capital management space
--TMP Worldwide and Heidrick & Struggles. The Internet and information
technology are having substantial impacts in driving their top-line revenues.
Notably, both also have substantial cash holdings on their balance sheets and
have been, and should continue to be, extremely profitable businesses. As a
result, both companies fit within both the "bricks and mortar" and "powerful
trend" baskets described above.
TMP is the parent of Monster.com, the leading, global on-line employment site
on the web. TMP is executing a strategy dubbed "Interns to CEOs" whereby the
company aims to help candidates navigate their careers over time (from
internships to CEO positions), while also profiting from providing value-added
services to companies in their on-going recruitment efforts.
Although TMP, which has been in existence since 1967, remains the world's
leading off-line recruitment advertising agency (dominating the yellow pages
and classified advertising business segments), the most dramatic growth
potential for the company is from its Monster.com subsidiary. Monster was
founded in 1994 by CEO Jeff Taylor as one of the first Internet sites on the
web (site number 454 out of all web sites to be exact). Today, with nearly
400,000 paid job listings and 4.5 million resumes, Monster dominates the
on-line recruiting industry and is over twice the size and scale of its nearest
competitors. In fact, approximately 50% of all "eyeball" time on employment
sites on the web is spent on Monster.
<PAGE>
As a result, Monster continues to be one of the prime beneficiaries of the
substantial growth of recruitment time and expenditures on the web. The
Internet is one of the first new recruiting tools to come along in the last 50
years, and it has been proven to save substantial time and money in the hiring
process for most corporations. While the average fee to a headhunter for a mid-
level manager generally exceeds $10,000, the average cost per hire on the Net
averages about $1,000. In addition, the average time to hire in the off line
world is approximately 90 days, while the average Internet hire can be sourced,
interviewed and hired in approximately 30 days. These are the advantages
driving the substantial increase in on-line recruitment spending over the last
several years-from nothing several years ago to over $400 million in 1999, and
a projected $750 million in the year 2000.
The Monster jobs database can be freely accessed by job candidates. The Company
makes money by charging companies job listing and database search fees (as well
as deriving some advertising revenue). For the last ten quarters, Monster and
TMP's other internet business have posted sequential revenue growth in excess
of 20% while also expanding operating profit margins towards 20%. We expect
both usage and revenue growth to continue robustly for the foreseeable future
as various initiatives (international expansion, AOL alliance, desktop tools
for recruiters, among others) begin to contribute. In addition, operating
margins should continue to expand as the company leverages its core technology
infrastructure and sizable advertising budget over a larger revenue base. We
project that Monster alone will generate over $500 million in annual revenue
and a 25% operating margin within 2-3 years, and over $1 billion in revenue
with a 38% profit margin over the next 5 years. This compares with a base of
$370 million in annualized revenue at the end of the second quarter of 2000.
Oh, and by the way, TMP's non-Internet businesses last year generated over $1.7
billion in gross billings which led to over $630 million in commissions and
fees to the company. Also, did we mention the over $500 million in cash on the
balance sheet to fund future growth?
Heidrick & Struggles (which Cliff Greenberg has done the principal research on
and owned for some time in Baron Small Cap) has been a leader in executive
search for nearly 50 years and is currently the top executive recruitment firm
in the US. The company has evolved over the years to its current emphasis on
top level executive searches with a focus on high-tech companies. In fact,
technology industry searches at Heidrick have grown by over 40% in each of the
last two years and now represent over 30% of the company's revenue. Heidrick is
currently enjoying one of the strongest growth periods of its history with
revenue in the most recently reported quarter increasing 47% to $166 million
and net income increasing over 100% to $10 million.
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B A R O N iO P P O R T U N I T Y F U N D
In addition to the powerful growth trends in its core executive search
business, Heidrick recently founded a subsidiary company, LeadersOnline, to
focus on Internet-based recruiting solutions for mid-level executives.
LeadersOnline candidates who register on the site, free of charge, are matched
with appropriate career opportunities and notified by e-mail of job openings
posted by leading employers. The site offers a series of integrated tools as
well as community resources and deep editorial content to prospective
candidates to help draw them to the site on a regular basis. For example, in
April of this year, Leaders entered into a strategic five-year alliance with
Business Week, under which the Business Week Online Careers Channel and the
LeadersOnline site will be linked. In addition, Business Week Online will
supply editorial content for weekly newsletters to Leaders candidates as well
as custom-publish a "LeadersOnline" magazine for registered members.
Leaders generates revenue by fulfilling placements for employers, similar to
the core Heidrick search business -- a revenue stream that is growing faster
than original expectations. From a standing start a little over a year ago,
Leaders reported over $6 million of revenue in the second quarter of this year
as compared to $150,000 in last year's second quarter and a little over $2
million for all of last year. An IPO of Leaders is planned for the second half
of this year. Heidrick has been one of the top performing stocks in the Fund
since inception and we look for continued strong core business growth and a
successful Leaders IPO to propel still further returns.
Bandwidth and Broadband -- Focusing on the Last Mile and on Wireless
Transmission
Bandwidth is the oil of the Internet economy -- the basic commodity critical to
fueling new generations of information technology-based businesses and
applications. Demand for bandwidth has increased geometrically over the last
decade as corporate networks (local and wide area), as well as corporate and
consumer internet usage, have exploded. We believe that these trends are
destined to continue for many decades into the future, creating a myriad of
exciting investment opportunities.
However, before we talk about our bandwidth investment strategy, we should
answer a simple question: What is bandwidth?
<PAGE>
Bandwidth is the capacity of a communications link, such as the link between
your home phone and a telephone company's central office. Signals sent down
copper wires and through electrical boosting stations can be muddled by
electrical interference of various sorts. This interference reduces the
accuracy of the signal, which means that the reproduction at the end of the
link doesn't necessarily accurately represent the original input. Certain
frequencies are too high for effective transmission (your dog won't hear the
dog whistle if you transmit that sound over the phone system), and some
frequencies are actually too low for transmission. The difference between the
highest and lowest frequencies that can be transmitted is the "available
bandwidth" of the communications link. This definition holds whether we are
talking about electrical signals sent down a copper wire or broadcast into the
air; it holds even if we are talking about photons traveling down a fiber optic
cable. This available bandwidth directly limits the amount of information which
can be transmitted over a communications link (For those of you with technical
interests, this limit is specified by Nyquist's Theorem). Hence, bandwidth is
referred to as the capacity of a communications link.
The information technology world revolves around digital technologies, and the
components of digital information are bits - the 1s and 0s of digital
conversations. The amount of bandwidth available in a communications link is
proportional to the number of bits that the link can transmit. When we talk
about broadband, we're referring to a communications link that has enough
bandwidth to transmit the many 1s and 0s that make up a large file, such as a
video, without adversely affecting the consumer experience. Obviously, a large
video file, such as a full length motion picture, has a lot more 1s and 0s than
an e-mail or fax and therefore demands a robust broadband connection to be
effective. Thus, with the daily increase in demand for all sorts of broadband
applications (such as videos, music files, full color magazines) comes the
daily increasing demand for broadband connectivity.
This brings us to the business models of the many companies attempting to
profit from the explosive demand for broadband connectivity. As we noted above,
we view bandwidth like oil, the fuel of the information economy -- however,
like oil, it becomes subject to commodity pricing. It is difficult to
differentiate one barrel of oil from another if they are of the same grade.
Similarly, a broadband connection from one provider with the same bandwidth as
another's can become indistinguishable. As portions of bandwidth provisioning
become more commodity-like, returns on capital for the vendors of bandwidth
will deteriorate as the only mechanism for competition becomes price. We
believe that this trend can already be seen in certain long haul fiber carriers
and the embedded long distance voice providers.
Our goal in Baron iOpportunity, like the other Baron Funds, is to strive to
achieve great investment returns by investing in non-commodity businesses which
can erect barriers to entry, compete on corporate advantages other than price
and generate superior returns on their capital. Thus, our bandwidth and
broadband investment strategy rests on dissecting the connectivity value chain
to find those players which we believe can benefit from the explosive demand
for bandwidth while avoiding commoditization.
The Last Mile Challenge and Comcast Corporation
The telecommunications infrastructure of America has been greatly bolstered by
the invention of fiber optic cable. All major telecom companies (the AT&Ts and
Verizons of the world) have employed this fiber in their backbone networks,
which has enabled exponential increases in capacity. Dozens of telecom
18
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B A R O N iO P P O R T U N I T Y F U N D
players now boast of high-speed nationwide backbone networks. However, while
the communications links between these telecom backbones and their customers'
premises -- the last mile -- have been largely upgraded for large business
customers, most small business and residential connections have not been
rebuilt. Thus, the last mile, for many, remains decidedly narrow.
Nevertheless, most residences do have a broadband connection fully wired in
their home -- that is the coaxial cable that supplies cable television.
Although historically a one-way pipe for the distribution of video programming,
with the proper technology upgrade, the cable can become a two-way highway for
broadband connectivity. Because the cable has already been deployed, and the
cable company already has a consumer service infrastructure supported by a
current, profitable business, the owner of the cable has a distinct competitive
advantage in upselling the cable customer a variety of broadband applications.
Comcast is the third largest cable operator in the US passing 11.5 million
homes and providing services to over 8 million subscribers. The company boasts
an impressive mix of businesses in cable, commerce and content that includes
the company's jointly owned and hugely successful QVC Shopping Network (it's
hard to believe they sell over $3.3 billion of that stuff) as well as the
popular cable networks, E! Entertainment and The Golf Channel. Comcast also
owns two professional sports franchises, the NHL's Philadelphia Flyers and the
NBA's Philadelphia 76ers, as well as sports and entertainment arenas.
Comcast is at the forefront of the cable world in exploiting its embedded
assets to generate new revenue streams through digital and broadband enabled
interactivity. The company has upgraded over 90% of its subscriber base to
digital cable capabilities and currently provides digital cable to close to one
million customers, one of the largest digital footprints in the country. The
company added more than thirteen thousand digital cable customers per week
during the second quarter of 2000 and saw this pace accelerate as the quarter
ended. This robust demand for higher margin digital cable (with its newly
introduced premium digital channel packages) should increase Comcast's revenue
and cash flow per subscriber substantially over the next several years.
Notably, not only has this digital upgrade provided accelerated revenue growth
at attractive margins for the company, it has also effectively slowed the
encroachment of DBS satellite systems operators in Comcast's markets. In areas
where Comcast subscribers do not yet have the option to receive digital cable,
DBS penetration has risen as high as 12%. However, in digital cable-enabled
areas, DBS's penetration is closer to 7%. We believe Comcast will be virtually
immune to threats from DBS satellite systems with the introduction of broadband
capacity-dependent Video on Demand (on demand, first run movies with VCR-like
capabilities) in the beginning of 2001.
The interactivity inherent in digital cable opens the door for various other
new business as well, such as Internet connectivity. Comcast's internet access
product, Comcast@Home, has enjoyed robust growth and customer acceptance and
now passes 4.4 million homes providing broadband access to about a quarter of a
million customers. Comcast is currently adding over three thousand new Internet
subscribers per week, an adoption rate that is also accelerating. Future
additional opportunities include e-commerce and targeted promotion
opportunities as well as cable telephony which is expected to be available in
late 2001.
<PAGE>
We project that Comcast's budding new services will drive double-digit cash
flow growth for the company for many years to come. This comes on top of a
business that has already produced over 20 consecutive quarters of cash flow
growth. Moreover, with 90% of its digital upgrade now behind it and new
subscribers accelerating, Comcast's capital expenditure budget is expected to
rapidly decline while free cash flow increases dramatically from $250 million
this year to $750 million to $1 billion in 2001. Investors seemed to give
Comcast credit for its business momentum during 1999, when its stock increased
from $30 to $50. However, the stock has drifted back down to the low $30s this
year, giving us the opportunity to begin to build a position at a relatively
inexpensive 12-14x forward cash flow.
In addition to Comcast, we have comparable last mile cable/broadband
investments in the Fund, including NTL and UnitedGlobalCom, which Cliff and Ron
have written about extensively in previous reports. Both are European operators
of cable/telecom systems that are market leaders in creating broadband
residential platforms in Europe.
Wireless Bandwidth and Why We Own the Towers
The wireless revolution was launched by basic voice services, which led to deep
penetration of cell phones throughout society. That penetration continues to
increase, while at the same time, one-rate plans are driving substantial
increases in usage and mobile Internet access and data transmission is
accelerating the already brisk pace of demand for wireless bandwidth. In
addition, technological improvements are spawning wireless personal digital
assistants that extend the PC's capabilities into portable devices using
wireless networks for connectivity. As new generations of bandwidth consuming
devices come to market, new wireless networks are being built while old
networks continue to be used to carry current generation traffic.
Despite this robust growth in wireless traffic, there remains much debate about
the potential business winners in the wireless arena as competition amongst
carriers intensifies in both the acquisition of customers and the bidding for
newly auctioned spectrum. Moreover, with many different protocols available, it
remains unclear which platform and technology will become the standard in the
industry. However, we believe that one of the clear beneficiaries of the
certain increase in wireless traffic will be the owners of wireless towers, who
face limited risk of head to head competition within their markets.
19
<PAGE>
B A R O N iO P P O R T U N I T Y F U N D
The communications tower companies in our portfolio, American Tower, SBA, and
Pinnacle, have built defensible positions as arms merchants to the wireless
bandwidth providers. Towers are scarce vertical real estate that serve as a
roost for an ever growing array of wireless transmitters and receivers. The
revenue from these towers grows inexorably as the underlying technologies
change and improve. The US government has been, and will continue to be
auctioning off new spectrum periodically, and each auction produces another
layer of demand for tower space. The demand for tower space far outstrips the
available supply and leasing rates are steadily rising. Moreover, individual
towers often hold a nearly monopoly-like position on the vertical real estate
in a market. Local zoning boards make building a tower difficult; then, once a
tower has been constructed, local boards usually refuse to permit a new tower
to be built in a similar locale. Thus, most tower operators are finding a
considerable degree of pricing power on leases, as well as the ability to
cluster antennae from competing providers together on a single structure. We
believe that through both rising rates and incremental tenants, towers which
today produce $35,000 of revenue will more than double their revenue over the
next five years. In addition, because the cost of maintaining a tower remains
relatively fixed, incremental revenues drop almost 100% to the bottom line. We
expect tower cash flows, which are today approximately $20,000 per tower, to
grow even faster and thus roughly triple over the same period.
Importantly, we believe that tower cash flow is of extremely high quality
because leases of tower space are long-term and carry regular escalator
clauses. Not only do we believe that the tower companies will continue to enjoy
premium valuation multiples, we also believe that the tower companies will be
able to employ a high degree of leverage to increase equity returns in the
future. There is no doubt that the market has rewarded the tower companies with
lofty valuations (30-40x current year cash flow) and that the stocks have
enjoyed strong performance over the past several years. Nevertheless, we
believe that substantial future returns are still likely from these levels. In
the aggregate, our tower stock investments represent approximately 5% of the
Fund.
The Internet and Travel Services
Many are surprised to learn that, notwithstanding the substantial press devoted
to many of today's leading e-commerce companies such as Amazon.com and WebVan,
the single largest category of e-commerce purchases on the web last year was
travel at over $7 billion.
There are, we believe, several key reasons that travel has become the largest
on-line commerce category. First, the purchaser requires uniquely
individualized information, and a lot of it, before making a decision (flights,
hotel rooms, rental cars, attractions, times, days, prices, etc). The Internet
provides a forum for rich content and programmable searches to present all
possible alternatives to a traveler based on his or her preferences. Second,
the actual purchase does not require the expensive physical delivery of any
goods or services, and sometimes, no delivery at all. This is because the
"product" is a ticket or reservation, which requires no inventory and rarely
requires physical delivery beyond a simple mailing of a ticket or confirmation.
Third, purchasers want to peruse the information and alternatives on their own
terms and at times convenient for them (not just when a travel agency is open).
With the Internet, the "agency" is always open for business. In addition, the
Internet provides a powerful and cost-effective distribution channel for travel
providers. Commissions are generally cheaper, more information can be learned
about purchasers and their buying preferences, time sensitive inventory can be
efficiently marketed and a younger, more technology-savvy audience can be
marketed to directly. Because of these, and other issues, Internet travel,
which represents less than 5% of total US travel purchases, is projected to hit
12% of all travel purchases by 2003, a level that, we believe, could be very
conservative.
<PAGE>
Baron iOpportunity Fund has made several investments to take advantage of the
expected explosion in Internet travel demand. The first, Hotel Reservations
Network, is one of the Fund's largest holdings and has been one of our top
performers. It is also the only instance in the Fund where we bought a company
on its IPO and have made it a top holding. This is the result of a confluence
of several compelling issues: a great, proven management team, impressive,
Internet-driven revenue growth, high and sustainable profit margins,
substantial free cash flow, broad market opportunity and, following a
successful offering, an inexplicably weak stock price.
HRN was founded in 1991 by Dave Litman and Rob Diener after selling their first
business, an airline ticket wholesaler, for a substantial profit. They
perceived the wholesaling opportunity in hotel rooms to be as good if not
better than they had found in the airline industry. The fact is that the hotel
industry, even in the best of times, runs at only a 60-70% annual occupancy
rate, leaving a significant amount of unsold inventory wasted every night (once
the day passes, the empty room's revenue potential is lost forever). In
addition, despite the consolidation in the hotel industry, consumers have no
centralized access to hotel availability and pricing data across brands. Rob
and Dave correctly surmised that they could provide a valuable service to both
the hotel owners in selling unsold inventory and to consumers in providing a
centralized reservation and booking engine across brands.
While the business began as a call center (1-800) system, the partners quickly
recognized the power of the Internet as a distribution channel and converted
the business to an internet-based platform. However, they did so, not by trying
to build their own brand as a travel agent on the Internet, a very expensive
proposition; rather, they created an unduplicable affiliate network of local
and national sites on the net (which currently numbers in excess of 3,000) for
which HRN provides a hotel booking engine.
20
<PAGE>
B A R O N iO P P O R T U N I T Y F U N D
The type of affiliates range from national travel sites like Travelocity, to
portals and search engines like Yahoo, to local information sites like
Orlando.com. The rest, as they say, is history. Since 1995, the company's
revenues have grown from $17 million to a projected $300 million for this year
(a 78% compound annual growth rate) while operating cash flow (that's right,
real cash flow for an Internet company) has expanded from about $2 million in
1995 to in excess of $40 million projected for this year. During this year, we
believe that HRN could sell over 2 million room nights over the Internet as
compared to 170,000 room nights a mere 5 years ago.
However, not only are HRN's growth characteristics impressive, but its business
model also has several incredibly advantageous features. First, the company has
almost no inventory risk. Rooms are contracted on a forward basis from the
hotel owners. However, HRN has the option of putting the vast majority of any
unsold rooms back to the hotel owner several days before the occupancy date.
Thus, HRN faces almost no risk of paying for rooms that it hasn't sold to a
consumer. Second, because it provides a valuable service in helping the hotel
owner yield manage its forward inventory and bringing demand to the hotel
during soft periods, HRN is able to "buy" its inventory from the hotel owners
at substantial discounts to public rates. As a result, HRN is able to earn
attractive gross margins on its rooms' sales (25-30%) while still offering
consumers rates that are at substantial discounts to the published rates they
could get from a travel agent or from calling the hotel directly. Finally,
while HRN bills the consumer's credit card for the room when the consumer stays
at the property, the hotel owners do not bill HRN for the rooms until 30 days
after the consumer has checked out, and HRN pays them thirty days after that --
providing a nearly 2 month cash flow float on the money.
Although the company's growth to date has been spectacular, we believe that the
future could be just as bright. At its current rate of nearly 2 million room
nights per year, HRN accounts for less than .2% of the industry's room nights,
leaving substantial room for significant future growth. Moreover, the company
is building a large cash position on its balance sheet (currently $150 million)
to take advantage of future opportunities to expand its business further
through internal initiatives or acquisition.
HRN came public in February of this year, approximately 1 year after the
founders had sold a majority of the company to Barry Diller's USA Networks
(while retaining control over the business' strategic direction). Despite the
attractive business model, strong balance sheet and expanding profits, the
stock traded below it IPO price within a month and continued weak during the
March/April sell off in the market. We took advantage of this dip to make HRN
one of the Fund's largest positions.
Baron iOpportunity also owns a significant stake in Expedia Inc. which has a
bolder and thus riskier, but potentially more rewarding, business plan than
HRN. Expedia's goal, simply put, is to become the dominant travel agent and
travel destination spot on the web by building a global travel marketplace for
consumers that gives them access to a much more robust shopping and booking
experience.
The Expedia management team, led by CEO Rich Barton, was formed within
Microsoft in the mid-1990's to create a next generation software solution for
the travel industry (which is dominated by inflexible, mainframe-based booking
engines). As the business took shape within Microsoft, it became apparent to
Rich and his boss (Bill Gates), that the Expedia business potential was far
beyond software and that the business group should be formed into a separate
company to pursue the opportunity. Expedia was spun out of Microsoft, which
continues to own a majority stake in the company, in the fourth quarter of
1999.
<PAGE>
Expedia is built, as one might expect, off a great technology base of
scaleable, self-written code, on a modern, Windows NT platform, that can
manipulate huge databases of travel itineraries and options and present them in
a flexible, consumer-oriented interface. This technology (which has taken four
years and over $70 million of research and development investment) is a key
competitive advantage for Expedia. The technology is leveraged into the two
sides of Expedia's business model -- the wholesaling or merchant business (a
business similar to HRN) that sells contracted inventory at a mark up, and a
commission-driven, agency arm (which encompasses the lion's share of the
airline tickets) that sells other people's inventory on an as-available basis
for a fee.
Expedia is currently one of the most trafficked travel sites on the web with
8.1 million unique monthly visitors and nearly $2 billion of run rate annual
gross travel bookings (making Expedia the 10th largest travel agent in the US).
Although not currently profitable, the company will have over $120 million in
cash on its balance sheet following a recently announced financing which is
expected to help fund the company's aggressive growth initiatives through
profitability, which is projected by June of 2002.
While we are generally skeptical of businesses that will take that long to turn
profitable, we believe that the business opportunity here is substantial enough
(the total travel industry is estimated at over $3.7 trillion annually), and
Expedia's technology creates enough of a competitive advantage, to warrant our
patience. Moreover, the stock, after debuting above $50 following its IPO (a
nearly $3 billion market value), has since fallen to the high teens (a less
than $1 billion market value), an entry price that, we believe, presents an
attractive risk/reward given the size of the future opportunity.
--------------------------------------------------------------------------------
CONCLUSION
During 1998 and 1999 the public markets displayed unbridled enthusiasm for
Internet companies, so much so that countless IPOs of fledgling enterprises
soared despite little research on the
21
<PAGE>
B A R O N iO P P O R T U N I T Y F U N D
part of investors. This spring's downdraft of stock prices doused that
speculative enthusiasm and has lead to a perception that the party is winding
down and that the businesses have become mature. We think this is far from the
case.
Rather, for long-term investors who focus on business fundamentals, we believe
that now is a time to lay the groundwork for future potential investment
successes. There is little doubt that there will continue to be a sometimes
painful shakeout of businesses whose valuations and prospects have little in
common. The good news is that, in this dislocation, we are finding businesses
with what we believe are terrific prospects and strong management teams, that
are erecting sustainable barriers to entry and developing highly profitable
financial models. We have outlined some of those businesses above. As we hope
you can see, we are applying our "old economy," Baron investment discipline to
finding and assessing these "new economy" opportunities to invest your and our
capital. Of course we may not achieve our investment goals, but it won't be for
lack of effort.
As we do this, stock price volatility serves as our ally, providing us with
points of entry into exciting businesses at substantially more reasonable
valuations. Since the inception of the Fund, we have invested capital with a
cautionary eye on valuations, with the result that over the last five months
our investments have held up better than the averages for Internet and
information technology-oriented funds. Our goal remains finding what we believe
are terrific businesses led by extraordinary management teams that are building
solid, sustainable businesses with tremendous long-term prospects. With this
strategy, we hope to generate great long-term investment returns for our
shareholders.
As always, we thank you for your support.
Sincerely,
/s/ Matt Ervin /s/ Mitch Rubin
-------------------- --------------------------------
Matt Ervin Mitch Rubin
Vice President Vice President
& Co-Portfolio & Co-Portfolio
Manager Manager
August 4, 2000
--------------------------------------------------------------------------------
*Baron Asset Fund's rankings are according to Lipper Analytical Services' "Fund
Classification" system. As of September 16, 1999 Lipper changed its primary
ranking and fund classification system from the "Investment Objective" system
which, based on prospectus, categorized Baron Asset Fund as a small-cap growth
fund. The new "Fund Classification" system, based on portfolio practice,
categorizes the Baron Asset Fund as a mid-cap growth fund. The "Investment
Objective" system will remain active for the next three years.
According to the "Investment objective" system Baron Asset Fund's ranking from
+inception June 12, 1987 through December 31, 1998 ranked 2 out of 55 small-cap
equity funds. The comparative universe consisted of 732 small-cap growth,
domestic equity funds from which the Baron Asset Funds rankings were derived.
<PAGE>
According to the "Fund Classification" system Baron Asset Fund's ranking from
December 31, 1998 through December 31, 1999 ranked 219 out of 232 mid-cap
equity funds. The comparative universe consisted of 252 mid-cap growth,
domestic equity funds from which the Baron Asset Funds rankings were derived.
According to the "Fund Classification" system Baron Asset Fund's ranking
against the entire domestic equity universe year to date December 31, 1999
through July 31, 2000 ranked 1631 out of 4555 equity funds. The comparative
universe consisted of 4805 domestic equity funds from which the Baron Asset
Funds rankings were derived.
According to the "Fund Classification" system Baron Asset Fund's ranking from
inception June 12, 1987 through July 31, 2000 ranks number 12 out of 50 mid-cap
growth funds. For the ten-year period (July 31, 1990 through July 31, 2000) its
rank is number 24 out of 32 mid-cap growth funds. For the five-year period
(July 31, 1995 through July 31, 2000) its rank is number 67 out of 89 mid-cap
growth funds. Baron Asset Fund's ranking for one year (July 31, 1999 through
July 31, 2000) is number 233 out of 234 mid-cap growth funds. Year-to-Date
(December 31, 1999 through July 31, 2000) its rank is number 117 our of 256
mid-cap growth funds. The comparative universe consisted of 263 mid-cap growth,
domestic equity funds from which the Baron Asset Funds rankings were derived.
Baron Asset Fund has been managed by Ron Baron since its inception.
----------
+Lipper does not rank Baron Asset Fund using its inception date of June 12,
1987. Lipper ranks the Fund as of June 30, 1987.
22
<PAGE>
B A R O N F U N D S
Table I
--------------------------------------------------------------------------------
Portfolio Market Capitalization (Unaudited)
--------------------------------------------------------------------------------
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. ......................... $42,453 18.2%
Univision Comm., Inc. Cl A ................... 10,633 0.8
NTL, Inc. .................................... 8,509 5.8
Flextronics Intl., Ltd. ...................... 7,931 6.9
American Tower Corp. Cl A .................... 6,599 4.1
Robert Half Intl., Inc. ...................... 5,061 7.2
----
43.0%
Medium Capitalization
--------------------------------------------------------------------------------
Citizens Comm. Co. (formerly Citizens
Utilities Co.) ............................. $ 4,548 3.4%
UnitedGlobalCom, Inc. Cl A ................... 4,470 0.4
Dollar Tree Stores, Inc. ..................... 4,064 3.3
Westwood One, Inc. ........................... 3,833 1.0
Hispanic Broadcasting Corp. .................. 3,605 1.7
Primedia, Inc. ............................... 3,304 0.2
Cox Radio, Inc. Cl A ......................... 2,432 0.8
Four Seasons Hotels, Inc. .................... 2,131 1.1
Apollo Group, Inc. ........................... 2,123 3.2
RCN Corp. .................................... 1,982 0.1
ChoicePoint, Inc. ............................ 1,847 3.0
DeVry, Inc. .................................. 1,841 2.9
XM Satellite Radio Hldgs, Inc., Cl A ......... 1,825 1.1
Premier Parks, Inc. .......................... 1,788 0.7
Sirius Satellite Radio, Inc. ................. 1,721 0.4
----
23.3%
Small Capitalization
--------------------------------------------------------------------------------
Polo Ralph Lauren Corp. Cl A ................. $ 1,406 2.4%
Citadel Comm. Corp. .......................... 1,286 0.4
Commonwealth Telephone Ent., Inc. ............ 1,051 0.2
OM Group, Inc. ............................... 1,051 2.2
Sotheby's Hldgs., Inc. Cl A .................. 1,030 7.3
Ethan Allen Interiors, Inc. .................. 949 1.1
CoreComm, Ltd. ............................... 783 1.4
Southern Union Co. ........................... 783 0.9
Motient Corp. (formerly American Mobile
Satellite Corp.) ........................... 777 1.1
Manor Care, Inc. ............................. 716 1.1
Industrie Natuzzi SPA ADR .................... 682 0.8
Sun Intl. Hotels, Ltd. ....................... 674 1.4
Seacor Smit, Inc. ............................ 653 1.3
Vail Resorts, Inc. ........................... 581 3.4
Choice Hotels Intl., Inc. .................... 530 2.7
Education Mgmt. Corp. ........................ 521 1.1
<PAGE>
Equity % of
Market Cap Net
Company (in millions) Assets
--------------------------------------------------------------------------------
Small Capitalization (Continued)
--------------------------------------------------------------------------------
Libbey, Inc. ................................. $ 489 1.8%
Alexander's, Inc. ............................ 366 0.5
Saga Comm., Inc. Cl A ........................ 363 1.7
DVI, Inc. .................................... 228 0.5
Smart and Final, Inc. ........................ 224 0.4
----
33.7%
--------------------------------------------------------------------------------
Baron Growth Fund
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
--------------------------------------------------------------------------------
Large Capitalization
--------------------------------------------------------------------------------
Charles Schwab Corp. .......................... $42,453 4.6%
NTL, Inc. ..................................... 8,509 3.4
Flextronics Intl., Ltd. ....................... 7,931 3.7
Robert Half Intl., Inc. ....................... 5,061 2.2
----
13.9%
Medium Capitalization
--------------------------------------------------------------------------------
Dollar Tree Stores, Inc. ...................... $ 4,064 2.7%
Westwood One, Inc. ............................ 3,833 1.2
Capstone Turbine Corp. ........................ 3,304 0.0
Pinnacle Hldgs., Inc. ......................... 2,608 0.4
Entercom Comm. Corp. .......................... 2,202 1.1
Four Seasons Hotels, Inc. ..................... 2,131 1.1
Apollo Group, Inc. ............................ 2,123 4.6
SBA Comm. Corp. ............................... 2,024 0.9
BlackRock, Inc., Cl A ......................... 1,852 2.6
ChoicePoint, Inc. ............................. 1,847 4.0
DeVry, Inc. ................................... 1,841 1.3
XM Satellite Radio Hldgs., Inc., Cl A ......... 1,825 5.1
Sirius Satellite Radio, Inc. .................. 1,721 1.6
Getty Images, Inc. ............................ 1,715 1.4
Hotel Reservations Network, Inc. .............. 1,642 0.1
----
28.1%
Small Capitalization
--------------------------------------------------------------------------------
World Wrestling Federation Entertainment,
Inc., Cl A .................................. $ 1,419 0.2%
Polo Ralph Lauren Corp., Cl A ................. 1,406 0.3
Citadel Comm. Corp. ........................... 1,286 1.1
Heidrick & Struggles Int'l., Inc. ............. 1,214 1.0
The Yankee Candle Co., Inc. ................... 1,179 0.5
Intrawest Corp. ............................... 1,143 0.5
OM Group, Inc. ................................ 1,051 2.5
23
<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 (Continued)
--------------------------------------------------------------------------
Sotheby's Hldgs., Inc., Cl A ............ $1,030 1.1%
Ethan Allen Interiors, Inc. ............. 949 3.0
Electric Lightwave, Inc., Cl A .......... 942 1.9
Wink Comm., Inc. ........................ 932 0.6
Rural Cellular Corp., Cl A .............. 901 4.9
Extended Stay America, Inc. ............. 883 1.1
Radio One, Inc. ......................... 836 3.0
Azurix Corp. ............................ 821 1.0
Allied Riser Comm. Corp. ................ 803 0.6
CoreComm, Ltd. .......................... 783 2.8
Southern Union Co. ...................... 783 3.7
Motient Corp. (formerly American Mobile
Satellite Corp.) ...................... 777 1.2
HomeGrocer.com, Inc. .................... 753 0.3
Gabelli Asset Mgmt., Inc., Cl A ......... 740 1.4
Manor Care, Inc. ........................ 716 0.3
Industrie Natuzzi SPA ADR ............... 682 1.0
Sun Intl. Hotels, Ltd. .................. 674 2.9
Expedia, Inc., Cl A ..................... 657 0.1
Seacor Smit, Inc. ....................... 653 1.2
Vail Resorts, Inc., Cl A ................ 581 0.7
Choice Hotels Intl., Inc. ............... 530 3.6
Education Mgmt. Corp. ................... 521 3.3
Libbey, Inc. ............................ 489 0.9
American Classic Voyages Co. ............ 428 0.8
drugstore.com, Inc. ..................... 393 0.3
Steiner Leisure, Ltd. ................... 376 0.9
Alexander's, Inc. ....................... 366 0.8
Saga Comm., Inc., Cl A .................. 363 1.8
Kronos, Inc. ............................ 326 1.2
DVI, Inc. ............................... 228 0.8
Smart and Final, Inc. ................... 224 1.0
Medallion Financial Corp. ............... 217 1.4
Collectors Universe, Inc. ............... 72 0.2
----
55.9%
<PAGE>
--------------------------------------------------------------------------------
Baron Small Cap Fund
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
------------------------------------------------------------------------------
Large Capitalization
------------------------------------------------------------------------------
AT&T Liberty Media Group Cl A ............... $62,621 0.9%
Medium Capitalization
------------------------------------------------------------------------------
UnitedGlobalCom, Inc. Cl A .................. $ 4,470 6.5%
Lamar Advertising Co. Cl A .................. 3,836 0.3
Westwood One, Inc. .......................... 3,833 3.3
Capstone Turbine Corp. ...................... 3,304 0.0
SFX Entertainment, Inc. Cl A ................ 3,027 1.8
Pinnacle Hldgs., Inc. ....................... 2,608 0.6
Entercom Comm. Corp. ........................ 2,202 2.9
Four Seasons Hotels, Inc. ................... 2,131 3.0
Medium Capitalization (Continued)
------------------------------------------------------------------------------
Apollo Group, Inc. .......................... $ 2,123 2.8%
SBA Comm. Corp. ............................. 2,024 4.2
Iron Mountain, Inc. ......................... 1,907 2.6
ChoicePoint, Inc. ........................... 1,847 3.3
Williams-Sonoma, Inc. ....................... 1,830 2.5
MGC Comm., Inc. ............................. 1,788 1.9
Premier Parks, Inc. ......................... 1,788 2.2
Getty Images, Inc. .......................... 1,715 2.9
----
40.8%
Small Capitalization
------------------------------------------------------------------------------
Centennial Comm. Corp. ...................... $ 1,291 0.1%
Choice One Comm., Inc. ...................... 1,266 1.0
United Rentals, Inc. ........................ 1,234 1.3
Heidrick & Struggles Int'l., Inc. ........... 1,214 3.4
Korn/Ferry Intl. ............................ 1,190 0.8
The Yankee Candle Co., Inc. ................. 1,179 0.9
Intrawest Corp. ............................. 1,143 0.5
Penton Media, Inc. .......................... 1,113 4.0
ICG Comm., Inc. ............................. 1,072 0.3
Hain Celestial Group, Inc. .................. 1,067 2.1
Commonwealth Telephone Ent., Inc. ........... 1,051 3.4
Krispy Kreme Doughnuts, Inc. ................ 951 0.4
Corporate Executive Board Co. ............... 922 1.6
Rural Cellular Corp. Cl A ................... 901 3.9
Liberty Livewire Corp. ...................... 889 2.7
Central Parking Corp. ....................... 873 0.9
Radio One, Inc. ............................. 836 4.2
CoreComm, Ltd. .............................. 783 2.4
PrimaCom AG ................................. 750 0.6
Gabelli Asset Mgmt., Inc. Cl A .............. 740 0.7
Frontline Capital Group ..................... 738 0.8
Kenneth Cole Productions, Inc. Cl A ......... 713 3.8
ACTV, Inc. .................................. 704 0.2
Sun Intl. Hotels, Ltd. ...................... 674 0.9
El Paso Electric Co. ........................ 613 1.0
Province Healthcare Co. ..................... 569 1.3
Championship Auto Racing Team, Inc. ......... 397 1.0
Career Education Corp. ...................... 386 4.7
Community Health Systems, Inc. .............. 325 0.6
Casella Waste Systems, Inc. Cl A ............ 253 1.4
Loislaw.com, Inc. ........................... 180 0.3
IT Group, Inc. .............................. 112 0.4
Morton's Restaurant Group, Inc. ............. 103 0.8
Equity Marketing, Inc. ...................... 67 0.4
The Sports Club Co. ......................... 62 0.2
----
53.0%
<PAGE>
--------------------------------------------------------------------------------
Baron iOpportunity Fund
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
------------------------------------------------------------------------
Large Capitalization
------------------------------------------------------------------------
America Online, Inc. .................. $120,363 1.3%
Time Warner, Inc. ..................... 99,424 1.5
Yahoo! Inc. ........................... 67,297 1.8
AT&T Liberty Media Group Cl A ......... 62,621 3.6
Charles Schwab Corp. .................. 42,453 2.5
Comcast Corp. Cl A .................... 36,707 2.0
eBay, Inc. ............................ 14,255 2.7
Amazon.com, Inc. ...................... 12,692 1.5
24
<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 (Continued)
----------------------------------------------------------------------------
Gemstar International Group Ltd. .......... $12,368 1.7%
United Pan-Europe Comm. N.V. .............. 11,778 1.3
TV Guide, Inc., Cl A ...................... 10,436 0.8
NTL, Inc. ................................. 8,509 1.8
StorageNetworks, Inc. ..................... 8,432 0.1
At Home Corp. ............................. 7,984 1.8
Flextronics Intl., Ltd. ................... 7,931 2.2
TMP Worldwide, Inc. ....................... 6,800 4.2
American Tower Corp. Cl A ................. 6,599 2.0
Lycos, Inc. ............................... 5,935 1.7
----
34.5%
Medium Capitalization
----------------------------------------------------------------------------
UnitedGlobalCom, Inc. Cl A ................ $ 4,470 1.6%
DoubleClick, Inc. ......................... 4,287 2.7
Primedia, Inc. ............................ 3,304 2.5
Research In Motion Ltd. ................... 3,227 1.1
Pinnacle Hldgs., Inc. ..................... 2,608 0.5
homestore.com, Inc. ....................... 2,189 2.7
Tumbleweed Comm. Corp. .................... 2,050 0.9
SBA Comm. Corp. ........................... 2,024 2.6
ChoicePoint, Inc. ......................... 1,847 2.6
MGC Comm., Inc. ........................... 1,788 1.5
FreeMarkets, Inc. ......................... 1,783 1.2
Getty Images, Inc. ........................ 1,715 3.1
Hotel Reservations Network, Inc. .......... 1,642 4.0
----
27.0%
Small Capitalization
----------------------------------------------------------------------------
Teligent, Inc. ............................ $ 1,300 0.9%
Heidrick & Struggles Int'l., Inc. ......... 1,214 3.7
ICG Comm., Inc. ........................... 1,072 1.1
Sotheby's Hldgs., Inc. Cl A ............... 1,030 1.2
Wink Comm., Inc. .......................... 932 1.5
Liberty Livewire Corp. .................... 889 0.9
Allied Riser Comm. Corp. .................. 803 1.8
Travelocity.com, Inc. ..................... 798 0.5
HomeGrocer.com, Inc. ...................... 753 0.2
GoTo.Com, Inc. ............................ 750 0.8
Front Line Capital Group .................. 738 1.9
Expedia, Inc. ............................. 657 1.8
Futurelink Corp. .......................... 601 0.4
About.com, Inc. ........................... 522 1.3
Advanced Radio Telecom Corp. .............. 422 0.1
drugstore.com, Inc. ....................... 393 0.2
----
18.3%
<PAGE>
Table II
--------------------------------------------------------------------------------
Portfolio Risk Characteristics
--------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external risk
factors that might impact the companies in which the Funds invest. Table II
displays some of the risk factors that are currently monitored and the
percentage of each portfolio considered exposed to these factors. The Funds use
this tool to avoid concentration of risk within the portfolios.
<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) ................. 21.5% 23.6% 20.9% 9.9
Foreign Sales Dependent
(Sales > 15%) ............... 27.0 19.8 19.9 33.4
Oil Price Sensitivity .......... 11.7 19.2 0.9 1.8
Volatility (Beta > 1.2) ........ 53.5 33.4 40.9 44.7
NASDAQ Securities .............. 25.3 48.6 54.1 66.0
Unseasoned Securities
(Publicly owned
for < 3 years) ............. 12.9 34.2 49.1 51.7
(Publicly owned
for < 1 year) .............. 1.1 11.0 3.4 20.3
Turnarounds .................... 0.0 0.0 1.1 0.0
Development Companies .......... 2.4 13.9 3.3 32.1
</TABLE>
25
<PAGE>
B A R O N F U N D S
Table III
--------------------------------------------------------------------------------
Historical Information (Unaudited)
--------------------------------------------------------------------------------
Table III displays on a quarterly basis the Funds' closing net assets and net
asset value per share, dividend distributions and the value of $10,000 invested
in a Fund at the time of its inception.
--------------------------------------------------------------------------------
Baron Asset Fund
--------------------------------------------------------------------------------
BARON ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended June 30, 2000
One year (4.3%)
-----------------------------------------
Three years 11.6%
-----------------------------------------
Five years 17.7%
-----------------------------------------
Ten years 16.1%
-----------------------------------------
Since inception June 12, 1987 16.7%
-----------------------------------------
--------------------------------------------------------------------------------
Baron Growth Fund
--------------------------------------------------------------------------------
BARON GROWTH FUND'S
AVERAGE ANNUAL RETURN
Period ended June 30, 2000
One year 8.2%
-----------------------------------------
Three years 16.1%
-----------------------------------------
Five years 21.5%
-----------------------------------------
Since inception January 3, 1995 25.5%
-----------------------------------------
--------------------------------------------------------------------------------
Baron Small Cap Fund
--------------------------------------------------------------------------------
BARON SMALL CAP FUND'S
AVERAGE ANNUAL RETURN
Period ended June 30, 2000
One year 33.9%
-----------------------------------------
Two years 22.3%
-----------------------------------------
Since inception October 1, 1997 23.6%
-----------------------------------------
--------------------------------------------------------------------------------
Baron iOpportunity Fund
--------------------------------------------------------------------------------
BARON iOPPORTUNITY FUND'S
AVERAGE ANNUAL RETURN
Period ended June 30, 2000
Since inception February 29, 2000 (11.0%)
---------------------------------------------
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.
26
<PAGE>
B A R O N A S S E T F U N D
STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
June 30, 2000 (Unaudited)
Shares Value
--------------------------------------------------------------------------------
Common Stocks (99.97%)
--------------------------------------------------------------------------------
Business Services (10.38%)
3,280,000 ChoicePoint, Inc.*# $ 145,960,000
1,749,532 Correctional Mgmt. Services Corp.*@ 8,000,085
12,110,000 Robert Half Intl., Inc.*# 345,135,000
-------------
499,095,085
Chemical (2.17%)
2,367,500 OM Group, Inc.# 104,170,000
Communications (16.13%)
4,725,000 American Tower Corp. Cl A* 196,973,437
9,350,000 Citizens Comm. Co. (formerly Citizens
Utilities Co.)* 161,287,500
250,000 Commonwealth Telephone Ent., Inc.* 11,765,625
3,322,500 CoreComm, Ltd.*# 64,788,750
3,500,000 Motient Corp. (formerly American
Mobile Satellite Corp.)*# 54,906,250
4,660,000 NTL, Inc.* 279,017,501
270,000 RCN Corp.* 6,851,250
-------------
775,590,313
Education (7.16%)
5,500,000 Apollo Group, Inc.* 154,000,000
5,215,000 DeVry, Inc.*# 137,871,563
2,900,000 Education Mgmt. Corp.*# 52,381,250
-------------
344,252,813
Energy (1.27%)
1,580,000 Seacor Smit, Inc.*# 61,126,250
Financial (18.64%)
26,000,000 Charles Schwab Corp. 874,250,000
1,390,000 DVI, Inc.*# 22,240,000
-------------
896,490,000
Health Services (1.09%)
7,475,000 Manor Care, Inc.*# 52,325,000
Hotels and Lodging (3.86%)
13,225,300 Choice Hotels Intl., Inc.*# 131,426,419
870,000 Four Seasons Hotels, Inc. 54,103,125
-------------
185,529,544
Manufacturing (6.92%)
4,843,400 Flextronics Intl., Ltd.* 332,681,038
Media and Entertainment (8.07%)
590,000 Citadel Comm. Corp.* 20,613,125
1,280,000 Cox Radio, Inc. Cl A* 35,840,000
2,390,000 Hispanic Broadcasting Corp.* 79,168,750
3,671,252 Saga Comm., Inc. Cl A*# 80,767,544
400,000 Sirius Satellite Radio, Inc.* 17,725,000
400,000 UnitedGlobalCom, Inc. Cl A* 18,700,000
370,000 Univision Comm., Inc. Cl A* 38,295,000
1,350,000 Westwood One, Inc.* 46,068,750
40,000 XM Satellite Radio Hldgs, Inc., Cl A* 1,497,500
1,314,914 XM Satellite Radio Hldgs, Inc., Cl A*@ 49,227,093
-------------
387,902,762
Printing and Publishing (0.19%)
401,000 Primedia, Inc.* 9,122,750
Real Estate and REITs (0.53%)
350,900 Alexander's, Inc.*# 25,703,425
Recreation and Resorts (5.43%)
8,672,600 AMF Bowling, Inc.*# 1,626,113
1,440,000 Premier Parks, Inc.* 32,760,000
3,300,000 Sun Intl. Hotels, Ltd.*# 66,000,000
6,066,000 Vail Resorts, Inc.*# 98,951,625
4,000,000 Vail Resorts, Inc.*# @ 61,987,600
-------------
261,325,338
<PAGE>
Shares Value
--------------------------------------------------------------------------------
Retail Trade and Restaurants (14.56%)
4,000,000 Dollar Tree Stores, Inc.* $ 158,250,000
2,250,000 Ethan Allen Interiors, Inc.# 54,000,000
8,125,000 Polo Ralph Lauren Corp. Cl A* 115,781,250
2,666,300 Smart and Final, Inc.*# 20,497,181
20,100,000 Sotheby's Hldgs., Inc. Cl A# 351,750,000
-------------
700,278,431
Utility Services (0.94%)
2,870,000 Southern Union Co.*# 45,381,875
Wholesale Trade (2.63%)
3,212,800 Industrie Natuzzi SPA ADR# 38,152,000
2,750,000 Libbey, Inc.# 88,343,750
-------------
126,495,750
-------------
Total Common Stocks
(Cost $3,196,992,755) 4,807,470,374
-------------
--------------------------------------------------------------------------------
Convertible Preferred Stocks (0.10%)
--------------------------------------------------------------------------------
Education (0.02%)
52,632 Apollo International, Inc. S-A CV
Pfd.*@ 1,000,008
Health Services(0.08%)
2,557 Chesapeake Healthcare Corp.* @ 4,000,196
---------
Total Convertible Preferred Stocks
(Cost $5,000,008) 5,000,204
-----------
<TABLE>
<CAPTION>
<S> <C> <C>
Warrants (0.01%)
----------------------------------------------------------------------------------------------
Communications
75,000 CoreComm, Ltd. Warrants Exp
05/26/2002*@# (Cost $1,473,750) 462,500
-------
Total Investments (100.08%)
(Cost $3,203,466,513**) 4,812,933,078
Liabilities Less
Cash and Other Assets (-0.08%) (3,744,592)
-------------
Net Assets (Equivalent to $58.01 per
share based on 82,899,191 shares of
beneficial interest outstanding) $4,809,188,486
==============
</TABLE>
----------------------
% 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 $3,201,371,507. Aggregate
unrealized appreciation and depreciation of investments are $2,357,447,193
and $745,885,622, respectively.
27
<PAGE>
B A R O N G R O W T H F U N D
STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
June 30, 2000 (Unaudited)
Shares Value
---------------------------------------------------------------------------
Common Stocks (96.86%)
---------------------------------------------------------------------------
Business Services (8.40%)
498,995 ChoicePoint, Inc.* $ 22,205,278
90,000 Heidrick & Struggles Int'l., Inc.* 5,681,250
245,000 Kronos, Inc.* 6,370,000
426,000 Robert Half Intl., Inc.* 12,141,000
------------
46,397,528
Chemical (2.47%)
310,000 OM Group, Inc. 13,640,000
Communications (15.11%)
250,000 Allied Riser Comm. Corp.* 3,531,250
510,000 CoreComm, Ltd.* 9,945,000
560,000 Electric Lightwave, Inc., Cl A* 10,465,000
410,000 Motient Corp. (formerly American
Mobile Satellite Corp.)* 6,431,875
315,000 NTL, Inc.* 18,860,625
40,000 Pinnacle Hldgs., Inc.* 2,160,000
351,200 Rural Cellular Corp., Cl A* 26,888,750
100,000 SBA Comm. Corp.* 5,193,750
------------
83,476,250
Consumer Services (0.11%)
40,000 Expedia, Inc., Cl A* 592,500
Education (9.12%)
900,000 Apollo Group, Inc.* 25,200,000
270,000 DeVry, Inc.* 7,138,125
1,000,000 Education Mgmt. Corp.* 18,062,500
------------
50,400,625
Energy (1.19%)
170,000 Seacor Smit, Inc.* 6,576,875
Financial (10.84%)
93,333 Bingham Financial Services Corp.*@ 459,954
500,000 BlackRock, Inc., Cl A* 14,500,000
750,000 Charles Schwab Corp. 25,218,750
283,200 DVI, Inc.* 4,531,200
299,000 Gabelli Asset Mgmt., Inc., Cl A* 7,475,000
500,000 Medallion Financial Corp. 7,718,750
------------
59,903,654
Health Services (0.29%)
225,000 Manor Care, Inc.* 1,575,000
Hotels and Lodging (5.95%)
2,020,000 Choice Hotels Intl., Inc.* 20,073,750
650,000 Extended Stay America, Inc.* 6,012,500
100,000 Four Seasons Hotels, Inc. 6,218,750
20,000 Hotel Reservations Network, Inc.* 595,000
------------
32,900,000
Manufacturing (3.73%)
300,000 Flextronics Intl., Ltd.* 20,606,250
Media and Entertainment (15.49%)
180,000 Citadel Comm. Corp.* 6,288,750
120,000 Entercom Comm. Corp.* 5,850,000
220,000 Radio One, Inc., Cl A* 6,503,750
440,000 Radio One, Inc., Cl D* 9,707,500
460,000 Saga Comm., Inc., Cl A* 10,120,000
200,000 Sirius Satellite Radio, Inc.* 8,862,500
200,000 Westwood One, Inc.* 6,825,000
110,000 Wink Comm., Inc.* 3,355,000
750,000 XM Satellite Radio Hldgs., Inc., Cl A* 28,078,125
------------
85,590,625
Printing and Publishing (1.41%)
210,000 Getty Images, Inc.* 7,783,125
Real Estate and REITs (0.78%)
58,600 Alexander's, Inc.* 4,292,450
<PAGE>
Shares Value
----------------------------------------------------------------------------
Recreation and Resorts (5.94%)
210,000 American Classic Voyages Co.* $ 4,331,250
140,000 Intrawest Corp. 2,660,000
220,000 Steiner Leisure, Ltd.* 4,977,500
800,000 Sun Intl. Hotels, Ltd.* 16,000,000
235,000 Vail Resorts, Inc., Cl A* 3,833,438
50,000 World Wrestling Federation
Entertainment, Inc., Cl A* 1,040,625
-------------
32,842,813
Retail Trade and Restaurants (9.41%)
350,000 Collectors Universe, Inc.* 1,028,125
370,000 Dollar Tree Stores, Inc.* 14,638,125
200,000 drugstore.com, Inc.* 1,506,260
700,000 Ethan Allen Interiors, Inc. 16,800,000
250,000 HomeGrocer.com, Inc.* 1,507,825
125,000 Polo Ralph Lauren Corp., Cl A* 1,781,250
700,881 Smart and Final, Inc.* 5,388,023
360,000 Sotheby's Hldgs., Inc., Cl A 6,300,000
140,000 The Yankee Candle Co., Inc.* 3,027,500
-------------
51,977,108
Utility Services (4.71%)
775,000 Azurix Corp.* 5,425,000
5,300 Capstone Turbine Corp.* 238,831
1,286,250 Southern Union Co.* 20,338,828
-------------
26,002,659
Wholesale Trade (1.91%)
484,600 Industrie Natuzzi SPA ADR 5,754,625
150,000 Libbey, Inc. 4,818,750
-------------
10,573,375
-------------
Total Common Stocks
(Cost $369,992,205) 535,130,837
-------------
--------------------------------------------------------------------------------
Warrants (0.21%)
--------------------------------------------------------------------------------
Communications
187,500 CoreComm, Ltd. Warrants Exp
05/26/2002*@ (Cost $3,684,375) 1,156,250
-------------
Principal Amount
---------------------------------------------------------------------------
Corporate Bonds (0.83%)
---------------------------------------------------------------------------
Communications
$ 5,000,000 CoreComm, Ltd. 6.00%
Conv. Sub. Deb. due
10/01/2006+ (Cost $5,000,000) 4,587,500
-------------
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------------------------------------------------------------------------------
Short Term Money Market Instruments (0.92%)
--------------------------------------------------------------------------------------------------
5,069,000 Associates Corp. of N.A. 6.58%
due 07/03/2000 (Cost $5,069,000) 5,069,000
---------
Total Investments (98.82%)
(Cost $383,745,580**) 545,943,587
Cash and Other Assets
Less Liabilities (1.18%) 6,542,717
-----------
Net Assets (Equivalent to $31.82 per
share based on 17,365,158 shares of
beneficial interest outstanding) $552,486,304
============
</TABLE>
----------
% Represents percentage of net assets
+ Rule 144A securities
@ Restricted securities
* Non-income producing securities
** For Federal income tax purposes the cost basis is $383,272,190. Aggregate
unrealized appreciation and depreciation of investments are $203,278,749
and $40,607,352, respectively.
28
<PAGE>
B A R O N S M A L L C A P F U N D
STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
June 30, 2000 (Unaudited)
Shares Value
------------------------------------------------------------------------
Common Stocks (94.31%)
------------------------------------------------------------------------
Business Services (12.82%)
778,750 ChoicePoint, Inc.* $ 34,654,375
280,000 Corporate Executive Board Co.* 16,765,000
375,000 Frontline Capital Group* 7,992,188
562,500 Heidrick & Struggles Int'l., Inc.* 35,507,812
800,000 Iron Mountain, Inc.* 27,200,000
264,000 Korn/Ferry Int'l.* 8,365,500
76,000 Lamar Advertising Co. Cl A* 3,291,750
------------
133,776,625
Communications (20.29%)
150,000 ACTV, Inc.* 2,240,625
100,000 Centennial Comm. Corp.* 1,375,000
248,700 Choice One Comm., Inc.* 10,150,069
760,000 Commonwealth Telephone Ent., Inc.* 35,767,500
1,050,000 CoreComm, Ltd.* 20,475,000
125,000 ICG Comm., Inc.* 2,757,812
400,000 Liberty Livewire Corp.* 28,100,000
325,000 MGC Comm., Inc.* 19,479,688
125,000 Pinnacle Hldgs., Inc.* 6,750,000
528,800 Rural Cellular Corp. Cl A* 40,486,250
850,000 SBA Comm. Corp.* 44,146,875
------------
211,728,819
Consumer Products (0.38%)
375,000 Equity Marketing, Inc.*# 3,984,375
Consumer Services (0.91%)
400,000 Central Parking Corp. 9,475,000
Education (7.45%)
1,045,000 Apollo Group, Inc.* 29,260,000
1,000,000 Career Education Corp.*# 48,500,000
------------
77,760,000
Environmental (1.82%)
1,400,000 Casella Waste Systems, Inc. Cl A* 15,050,000
800,000 IT Group, Inc.* 3,900,000
------------
18,950,000
Financial (0.72%)
299,000 Gabelli Asset Mgmt., Inc. Cl A* 7,475,000
Food and Agriculture(2.11%)
600,000 Hain Celestial Group, Inc.* 22,012,500
Health Services (1.92%)
400,000 Community Health Systems, Inc.* 6,475,000
375,000 Province Healthcare Co.* 13,546,875
------------
20,021,875
Hotels and Lodging (2.98%)
500,000 Four Seasons Hotels, Inc. 31,093,750
Industrial Services (1.27%)
775,000 United Rentals, Inc.* 13,271,875
Media and Entertainment (18.45%)
400,000 AT&T Liberty Media Group Cl A* 9,750,000
625,000 Entercom Comm. Corp.* 30,468,750
250,000 PrimaCom AG* 5,937,500
570,000 Radio One, Inc. Cl A* 16,850,625
1,249,400 Radio One, Inc. Cl D* 27,564,888
1,450,000 UnitedGlobalCom, Inc. Cl A* 67,787,500
1,000,000 Westwood One, Inc.* 34,125,000
------------
192,484,263
Printing and Publishing (7.28%)
825,000 Getty Images, Inc.* 30,576,562
400,000 Loislaw.com, Inc.* 3,425,000
1,200,000 Penton Media, Inc. 42,000,000
------------
76,001,562
<PAGE>
Shares Value
------------------------------------------------------------------------
Real Estate and REITs (0.04%)
37,500 Insignia Financial Group, Inc.* $ 375,000
Recreation and Resorts (6.49%)
399,700 Championship Auto Racing Team, Inc.* 10,192,350
250,000 Intrawest Corp. 4,750,000
1,000,000 Premier Parks, Inc.* 22,750,000
425,000 SFX Entertainment, Inc. Cl A* 19,257,813
450,000 Sun Intl. Hotels, Ltd.* 9,000,000
500,000 The Sports Club Co.* 1,750,000
------------
67,700,163
Retail Trade and Restaurants (8.32%)
985,700 Kenneth Cole Productions, Inc. Cl A* 39,428,000
50,000 Krispy Kreme Doughnuts, Inc.* 3,675,000
375,000 Morton's Restaurant Group, Inc.*# 8,062,500
800,000 Williams-Sonoma, Inc.* 25,950,000
450,000 The Yankee Candle Co., Inc.* 9,731,250
------------
86,846,750
Utility Services (1.06%)
8,900 Capstone Turbine Corp.* 401,056
950,000 El Paso Electric Co.* 10,628,125
------------
11,029,181
------------
Total Common Stocks
(Cost $613,238,751) 983,986,738
------------
--------------------------------------------------------------------------------
Warrants (0.04%)
--------------------------------------------------------------------------------
Communications
75,000 CoreComm, Ltd. Warrants Exp
05/26/2002*@ (Cost $1,473,750) 462,500
------------
Principal Amount
-------------------------------------------------------------------
Corporate Bonds (0.64%)
-------------------------------------------------------------------
Communications (0.44%)
$ 5,000,000 CoreComm Ltd. 6.00%
Conv. Sub. Deb. due 10/01/2006+ 4,587,500
Health Services (0.20%)
3,250,000 U.S. Diagnostic, Inc. 9.00%
Conv. Sub. Deb. due 03/31/2003 2,112,500
----------
Total Corporate Bonds
(Cost $7,520,000) 6,700,000
----------
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------------------------------------------------------------------
Short Term Money Market Instruments (3.62%)
------------------------------------------------------------------------------------------------------
37,730,999 Associates Corp. of N.A. 6.58%
due 07/03/2000 (Cost $37,730,999) 37,730,999
----------
Total Investments (98.61%)
(Cost $659,963,500**) 1,028,880,237
Cash and Other Assets
Less Liabilities (1.39%) 14,471,709
-------------
Net Assets (Equivalent to $17.89 per
share based on 58,331,329 shares of
beneficial interest outstanding) $1,043,351,946
==============
</TABLE>
----------
% 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 $663,450,042.
Aggregate unrealized appreciation and depreciation of investments
are $419,820,388 and $54,390,193, respectively.
29
<PAGE>
B A R O N iO P P O R T U N I T Y F U N D
STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
June 30, 2000 (Unaudited)
Shares Value
----------------------------------------------------------------------------
Common Stocks (79.78%)
----------------------------------------------------------------------------
Business Services (16.40%)
120,000 ChoicePoint, Inc.* $ 5,340,000
145,000 DoubleClick, Inc.* 5,528,125
50,000 FreeMarkets, Inc.* 2,371,875
175,000 Front Line Capital Group* 3,729,688
120,000 Heidrick & Struggles Int'l., Inc.* 7,575,000
1,000 StorageNetworks, Inc.* 90,250
115,000 TMP Worldwide, Inc.* 8,488,437
------------
33,123,375
Communications (16.15%)
10,000 Advanced Radio Telecom Corp.* 146,250
250,000 Allied Riser Comm. Corp.* 3,531,250
95,000 American Tower Corp. Cl A* 3,960,313
100,000 Comcast Corp. Cl A* 4,050,000
100,000 ICG Comm., Inc.* 2,206,250
26,000 Liberty Livewire Corp.* 1,826,500
50,000 MGC Comm., Inc.* 2,996,875
60,000 NTL, Inc.* 3,592,500
20,000 Pinnacle Hldgs., Inc.* 1,080,000
50,000 Research In Motion Ltd.* 2,262,500
100,000 SBA Comm. Corp.* 5,193,750
75,000 Teligent, Inc.* 1,771,875
------------
32,618,063
Consumer Services (12.55%)
80,000 About.com, Inc. 2,520,000
50,000 America Online, Inc.* 2,637,500
175,000 At Home Corp.* 3,631,250
250,000 Expedia, Inc.* 3,703,125
105,000 GoTo.Com, Inc.* 1,607,812
65,000 Lycos, Inc.* 3,510,000
40,000 Time Warner, Inc. 3,040,000
60,000 Travelocity.com, Inc.* 982,500
30,000 Yahoo! Inc.* 3,716,250
------------
25,348,437
Financial (2.50%)
150,000 Charles Schwab Corp. 5,043,750
Hotels and Lodging (4.02%)
272,500 Hotel Reservations Network, Inc.* 8,106,875
Manufacturing (2.21%)
65,000 Flextronics Intl., Ltd.* 4,464,688
Media and Entertainment (10.47%)
295,000 AT&T Liberty Media Group Cl A* 7,190,625
55,000 Gemstar International Group Ltd.* 3,379,921
45,000 TV Guide, Inc., Cl A* 1,541,250
100,000 United Pan-Europe Comm. N.V.* 2,700,000
70,000 UnitedGlobalCom, Inc. Cl A* 3,272,500
100,000 Wink Comm., Inc.* 3,050,000
------------
21,134,296
<PAGE>
Shares Value
-------------------------------------------------------------------------
Printing and Publishing (5.66%)
170,000 Getty Images, Inc.* $ 6,300,625
225,000 Primedia, Inc.* 5,118,750
------------
11,419,375
Real Estate and REITs (2.67%)
185,000 homestore.com, Inc.* 5,399,688
Retail Trade and Restaurants (5.85%)
85,000 Amazon.com, Inc.* 3,086,562
60,000 drugstore.com, Inc.* 451,878
100,000 eBay, Inc.* 5,431,250
80,000 HomeGrocer.com, Inc.* 482,504
135,000 Sotheby's Hldgs., Inc. Cl A 2,362,500
------------
11,814,694
Software(1.30%)
100,000 Futurelink Corp.* 718,750
37,500 Tumbleweed Comm. Corp.* 1,907,812
------------
2,626,562
------------
Total Common Stocks
(Cost $185,345,525) 161,099,803
------------
Principal Amount
----------------------------------------------------------------------------
U.S. Treasury Bills (14.41%)
----------------------------------------------------------------------------
$29,104,804 U.S. Treasury Bills 5.03%
due 07/05/2000 (Cost $29,104,804) 29,104,804
------------
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Short Term Money Market Instruments (5.76%)
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11,628,999 Associates Corp. of N.A. 6.58%
due 07/03/2000 (Cost $11,628,999) 11,628,999
------------
Total Investments (99.95%)
(Cost $226,079,328) 201,833,606
Cash and Other Assets
Less Liabilities (0.05%) 97,952
------------
Net Assets (Equivalent to $8.90 per
share based on 22,684,129 shares of
beneficial interest outstanding) $201,931,558
============
----------------------
% Represents percentage of net assets
* Non-income producing securities
** For Federal income tax purposes the cost basis is identical. Aggregate
unrealized appreciation and depreciation of investments are $12,505,774
and $36,751,496, respectively.
30
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[Graphic Omitted]
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