P R O S P E C T U S
BARON FUNDS
J A N U A R Y 1 7, 2 0 0 0
BARON ASSET FUND
BARON GROWTH FUND
BARON SMALL CAP FUND
BARON iOPPORTUNITY FUND
[REGISTERED CASTLE LOGO]
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[PHOTOS]
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WELCOME TO
BARON FUNDS:
BARON: A LONG-TERM INVESTOR IN SMALL AND MID-SIZED, GROWTH BUSINESSES
...BUSINESSES OPERATED BY TALENTED, HARDWORKING AND ETHICAL ENTREPRENEURS WITH
BIG DREAMS...
When I founded Baron Capital nearly eighteen years ago in June 1982, I did so
based upon a few relatively simple and straightforward ideas.
I had been a securities analyst since 1970 and managed money for others since
1975. I achieved early investment success by purchasing McDonalds, Disney, Hyatt
Hotels, Federal Express and Mattel...when they were all a lot smaller than
today. These successes reinforced my belief that small and mid sized businesses
offer greater opportunities for growth than larger companies. Small and medium
sized businesses that can become BIG...businesses that have the opportunity to
double in size in three to five years...and then double again in the next three
to five years. That's what we're looking for...doubles, doubles again and
doubles then again...if we can purchase and continue to own shares that are
attractively priced, of course.
I also believed talented, hardworking and honest business managers were
absolutely essential for a business to be successful. In certain instances, we
have placed even more reliance on management than on the business itself. George
Blumenthal and his partner Barclay Knapp with their NTL, Corecomm, Cellular
Communications of Puerto Rico, Cellular Communications International and
Cellular Communications of Ohio businesses are prime examples. These investments
all have been home runs for us and there was little to commend them when we
initially invested except George and Barclay and their dreams.
Finally, Baron determined to be a LONG TERM INVESTOR in businesses...not a short
term trader of stocks. We think of ourselves as part owners of publicly held
businesses...very profitable businesses with important barriers to prevent
others from usurping our corporate opportunities. As long term investors, when
our small and mid sized businesses are successful, when they do become BIG, and
they're still attractively priced, we'll still own them and participate in their
success. Companies like Charles Schwab, Robert Half, NTL, Hispanic Broadcasting,
DeVry, Flextronics, American Tower and others have increased in value many fold
since our initial purchases several years ago. All our investments, including
those just mentioned, have the potential to at least double during the next
three or four years.
Baron Asset Fund, our largest fund, has low portfolio turnover...on average 16%
per year over the last four years...meaning we hold investments on average more
than six years. This allows us to learn a lot more than others about the
businesses and their prospects in which we are PART OWNERS. Baron Funds should
be advantaged by the special insights its analysts glean over the years about
these businesses. The average small cap mutual fund turned over its portfolio
100% last year, i.e., by the end of the year it didn't own any shares of
business that it owned at start of year.
NOT A PART OF THE PROSPECTUS
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In fact, a few trading oriented, very strong performing mutual funds last year
turned over their portfolios as much as 600%! This means they held an average
stock less than two months...a good strategy in last year's IPO and momentum
driven stock market...but, not always a successful strategy during the past
thirty years.
BARON: RESEARCH. RESEARCH. RESEARCH.
Baron relies upon our own "kick the tires" investment research. We are not
dependent upon investment banking supported, brokerage firm research
recommending stocks of their fee paying banking clients. We are certainly not
reliant upon "hot tips," reports on Internet message boards and chat rooms and
broadcast and news media recommendations or reports of businesses exceeding or
"missing" earnings estimates. Our analysts visit the companies in which we
invest regularly (and, their competitors as well, of course), develop our own
opinions on businesses' executives abilities and strategies, and not just model
the financial prospects of businesses, but, peer review our opinions and
research with our fellow Baron analysts and portfolio managers (not an easy
group to convince). "Investigate before you invest" was the well advertised
slogan of the New York Stock Exchange in the 1950s when I became interested in
the stock market in high school. This remains our credo. And in this Internet
democratized world of vast information networks, we believe that INFORMATION IS
NOT KNOWLEDGE and our research and business analysis are more important...and
relevant...than ever.
Our intense research efforts have provided us with enough knowledge and
information to allow us to purchase significant interests in a number of
publicly traded businesses...at attractive prices. Vail Resorts, Sotheby's,
Charles Schwab, Flextronics, Hispanic Broadcasting, Mirage Resorts, Saga
Communications, NTL, American Tower, Corecomm, Polo Ralph Lauren, Dollar Tree,
Choice Hotels, DeVry, Apollo, Robert Half and Sun International Hotels are among
these investments. We are likely to remain investors in these businesses and
several others, as well, for years to come. The common element in these
investments? All these businesses are likely to be a lot larger and a lot more
profitable in a few years than they are today...and a lot larger and a lot more
profitable in a few more years after that. This is in contrast to many
businesses today whose stocks are currently doing well but, that are not yet
profitable and must rely upon capital markets financing, not retained earnings,
to permit them not just to grow but, to remain viable.
BARON: NO DIRECT TECHNOLOGY INVESTMENTS. SO...WHY BARON I OPPORTUNITY FUND?
AND, WHY NOW?
Baron has not previously invested in software, computer hardware and chip
businesses. This is because, due to rapid advances in technology, success with
current technology is generally not a good predictor of future success.
Regardless, BARON EMBRACES CHANGE and believes that technology will continue to
become increasingly more important in our economy and lives. Baron has
substantial investments in businesses that use technology to achieve long term
competitive advantages...i.e. Charles Schwab; businesses that provide technology
training and education...i.e.
NOT A PART OF THE PROSPECTUS
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DeVry and Apollo; and a business that manufactures for others advanced
technology products but is indifferent to the success or failure of specific
products...i.e. Flextronics. Baron also has substantial investments in
communications businesses, i.e. cable television, cellular telephone, satellite
communications and telephone. We believe that strong demand by both businesses
and consumers for wired and wireless data services (Internet) and significant
barriers to competition, i.e. exclusive government licenses and huge capital
requirements, make these successful businesses less vulnerable to competition.
Our significant media investments are benefiting from very strong advertising
markets driven by Internet business demand.
WE THINK THERE ARE VERY PROFITABLE INTERNET BUSINESS OPPORTUNITIES WITH
SUSTAINABLE COMPETITIVE ADVANTAGES THAT OFFER GOOD LONG TERM INVESTMENT
OPPORTUNITY...AND THAT CAN BE PURCHASED AT ATTRACTIVE PRICES RELATIVE TO THESE
OPPORTUNITIES.
During the last two years we have studied numerous Internet businesses. Many
Internet stock market valuations are not easily justified. But, there are
attractive, well priced Internet opportunities, both subtle and readily
apparent, that may be discovered by "kick the tires" research. And, researching
Internet businesses isn't a lot different from the due diligence we perform on
"bricks and mortar" businesses to find the few businesses that meet our
investment criteria. The potential rewards for a successful Internet investment
are, of course, present.
OUR RESEARCH EFFORTS FOR BARON I OPPORTUNITY FUND ARE EXPECTED TO ENHANCE OUR
KNOWLEDGE BASE AND BENEFIT OUR OTHER FUNDS.
We have to be convinced that the "bricks and mortar" businesses in which Baron
Funds already has large investments will not become the functional equivalents
of early 1900's horse and carriage buggywhip companies. We want to be certain we
don't invest in a chain of video stores and later discover that films can be
delivered to your home by satellite, cable or the Internet; or in a newspaper
reliant upon classified and help wanted advertising revenues and later discover
that online auctions and job boards are challenging those revenue streams; or in
a "bricks and mortar" stock brokerage firm staffed with thousands of brokers and
later discover that business challenged by Charles Schwab using the web as a
backbone to provide full service brokerage to its baby boomer customers.
Retailers, distribution businesses, regional banks, mailing services and
suppliers to manufacturing companies are just some of the businesses threatened
by the web. The web is changing everything.
OUR RESEARCH ON INTERNET AND COMMUNICATIONS BUSINESSES SHOULD ALLOW BARON FUNDS
TO OFFER OUR YOUNG ANALYSTS MORE EXCITING AND CHALLENGING CAREER OPPORTUNITIES.
It is challenging for us (and, so far, it's been one of our great successes) to
identify, attract, train and retain bright, young, hardworking analysts and
portfolio managers. This is especially true when we're competing for talent not
just with other investment firms, but also with rapidly growing Internet
companies. Recent conversations and visits in the course of our investment
research with recruiters Monster.com, Robert Half, Heidrick and Struggles and
others, only serve to reinforce this point.
NOT A PART OF THE PROSPECTUS
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"What top college student wants to interview at Proctor and Gamble for a role in
their marketing department, when he or she could try to obtain a position and
seek their fortune with a dot.com business?" we were often told. Young people,
the future of all businesses, want to be involved in forward looking,
interesting, and potentially lucrative businesses. Our Internet work will
continue to make Baron a most desirable and preferred place of employment for
young analysts.
I am grateful for the strong contributions my fellow Baron Capital employees
have made to our firm's investment successes. I am confident that the coming
years offer even greater promise and potential than the recent past.
THANK YOU FOR INVESTING IN BARON FUNDS.
Thank you for joining us as fellow shareholders in Baron Funds. As mutual funds
have proliferated in recent years, i.e. there are now more funds than there are
stocks, the decisions you must make on behalf of yourself and your family, we
are certain, has become ever more difficult. This is especially the case since
the very strong market advance during the past two years has been so
concentrated in technology and Internet stocks, and highly regarded financial
advisers and newsletters often give you conflicting advice.
We hope our detailed quarterly shareholder letters, annual investment
conferences, interviews with the press and quarterly financial adviser
conference calls have allowed you to determine if Baron Funds remains a suitable
investment for you and your family. If you have any further questions, please
feel free to call or email us at [email protected].
Again, we want to thank you, our fellow shareholders, for your continued strong
support.
Sincerely,
/s/Ronald Baron
- ---------------
Ronald Baron
Chairman and Chief Executive Officer
Baron Capital, Inc.
January 17, 2000
NOT A PART OF THE PROSPECTUS
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Percentage of each stock owned by the Funds combined (Baron Asset Fund, Baron
Growth Fund and Baron Small Cap Fund) as of 12/31/99
American Tower Corp. 3.2% Heidrick and Struggles 4.8%
Apollo Group, Inc. 7.4% Hispanic Broadcasting Corp. 4.0%
Budget Group 6.6% Mirage Resorts 4.4%
Charles Schwab Corp. 3.0% NTL, Inc. 3.5%
Choice Hotels Intl., Inc. 28.3% Polo Ralph Lauren 10.3%
Corecomm 12.8% Robert Half Intl. 8.1%
DeVry, Inc. 7.9% Saga Communications 24.9%
Dollar Tree 5.8% Sotheby's Holdings, Inc. 36.0%
Education Management 13.4% Sun International Hotels 13.5%
Flextronics International, Vail Resorts 29.1%
Inc. 6.0% XM Satellite 2.5%
Four Seasons Hotel, Inc. 4.4%
Percentage of Total Assets for the Top Ten Industries of the Funds combined
(Baron Asset Fund, Baron Growth Fund and Baron Small Cap Fund) as of 12/31/99
Communications 16.6% Hotels & Lodging 4.5%
Retail Stores & Restaurants 15.0% Business Services 6.7%
Media & Entertainment 13.5% Education 4.4%
Financial Services 12.7% Manufacturing 3.5%
Amusement & Recreation Utility Services 2.7%
Services 7.7%
Annual Portfolio Turnover Rate as of 12/31/99
Baron Asset Fund 13%
Baron Growth Fund 42%
Baron Small Cap Fund 38%
According to Morningstar, as of November 30, 1999 the average turnover rate of
the 1,775 small and mid cap mutual funds tracked is 103%. Of the 1,775 small and
mid cap mutual funds, 8 have a portfolio turnover rate of 600% or greater.
NOT A PART OF THE PROSPECTUS
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[PAGE INTENTIONALLY LEFT BLANK]
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BARON FUNDS
BARON iOPPORTUNITY FUND
SUPPLEMENT TO JANUARY 17, 2000 PROSPECTUS
The distributor of BARON iOPPORTUNITY FUND (the "Fund"), Baron Capital, Inc.
("Baron Capital"), is soliciting subscriptions for Fund shares during an initial
offering period currently scheduled from January 18, 2000 to February 29, 2000
(the "Subscription Period"). Orders received during the Subscription Period will
be accepted by the Fund at the Fund's initial offering price of $10.00 per share
on February 29, 2000. Payments accompanying orders received during the
Subscription Period will be held by the Fund's transfer agent uncashed and
uninvested until that time.
Charles Schwab & Co., Inc. ("Schwab") is also soliciting subscriptions of Fund
shares during the Subscription Period, pursuant to a Selected Dealer Agreement
with Baron Capital. The $10.00 per share purchase price for Fund shares ordered
through Schwab will be paid from a Schwab customer's brokerage account on
February 29, 2000. For services rendered by Schwab during the Subscription
Period, Baron Capital will pay compensation to Schwab that is in addition to the
normal fees received by Schwab regarding Fund shares that are sold through
Schwab upon the conclusion of and after the Subscription Period. All fees paid
to Schwab for subscription services will be paid by Baron Capital out of its own
resources or those of its affiliates and will have no effect on the Fund's fees
or expenses. After the Subscription Period, Schwab will receive remuneration for
recordkeeping and shareholder servicing of Fund shares purchased through Schwab.
Shares of the Fund will not be available to the public prior to the Fund's
commencement of operations except through these subscription offers.
This Supplement is Dated January 17, 2000
---------------------
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BARON ASSET FUND
BARON GROWTH FUND
BARON SMALL CAP FUND
BARON iOPPORTUNITY FUND
767 Fifth Avenue
New York, New York 10153
1-800-99-BARON
212-583-2100
This prospectus contains essential information for anyone investing in these
funds. Please read it carefully and keep it for reference.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the Commission has
approved or disapproved them or determined whether this prospectus is accurate
or complete. Anyone who tells you otherwise is committing a crime.
January 17, 2000
PROSPECTUS o 1
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TABLE OF CONTENTS
______________________________________________________________________________
INFORMATION Investment Goals, Strategies and Risks 3
ABOUT THE
FUNDS Past Performance 6
Fund Expenses 8
Financial Highlights 10
Other Investment Strategies 13
Management 15
______________________________________________________________________________
INFORMATION How Your Shares are Priced 17
ABOUT YOUR
INVESTMENT How to Purchase Shares 17
How to Redeem Shares 19
Distributions and Taxes 21
General Information 22
______________________________________________________________________________
MORE
INFORMATION Back Cover
2 o POSPECTUS
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INFORMATION ABOUT THE FUNDS
INVESTMENT GOALS AND STRATEGIES
WHAT ARE THE INVESTMENT GOALS OF THE FUNDS?
BARON ASSET FUND capital appreciation through investments in securities
of small and medium sized companies with undervalued
assets or favorable growth prospects
BARON GROWTH FUND capital appreciation
BARON SMALL CAP FUND capital appreciation through investments primarily in
securities of small companies
BARON iOPPORTUNITY FUND capital appreciation
WHAT ARE THE MAIN INVESTMENT STRATEGIES OF THE FUNDS?
In making investment decisions for the Funds the Adviser seeks securities that
the Adviser believes have:
1. favorable price to VALUE characteristics based on the Adviser's assessment
of their prospects for future GROWTH and profitability.
2. the potential to increase in value at least 50% over two subsequent years.
Investment decisions are made by the Funds' investment adviser, BAMCO, Inc. (the
"Adviser"). The Adviser seeks investments that are supported by long term
demographic, economic and societal "mega-trends." Among the industries that will
benefit from long lasting "mega-trends" are education, due to increased
knowledge requirements in an information based-economy; healthcare, due to the
aging of America; products and services for the large baby-boomer and
echo-boomer (their children) segments of our population; media and services for
the rapidly growing U.S. Hispanic population; communication businesses, due to
rapidly increasing demand for bandwidth; and businesses able to establish long
term competitive advantage through the use of the Internet. The Adviser
thoroughly researches the companies in which the Funds invest. The Adviser's
research process includes visits and interviews by the Adviser with company
managements and their major competitors. The Adviser looks for the ability of a
company to grow its business substantially within a four to five year period;
special business niches that create unusually favorable business opportunities;
sustainable barriers to competition; and strong management capabilities. The
Adviser seeks to purchase these companies at what it perceives are attractive
prices relative to projected future cash flows and
PROSPECTUS o 3
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asset values, before the companies' long-term business prospects are appreciated
by other investors. There is no assurance that the Funds will meet their
investment goals. The Funds may take large positions in the companies in which
the Adviser has the greatest conviction. The Funds have a long term outlook. The
Funds are designed for long-term investors, not for investors who intend to sell
after a short period of time.
BARON ASSET FUND invests primarily in common stocks of small and medium sized
companies selected for their capital appreciation potential.
BARON GROWTH FUND invests primarily in common stocks of smaller companies
selected for their capital appreciation potential.
BARON SMALL CAP FUND invests primarily in common stocks selected for their
capital appreciation potential. At least 65% of the Fund's total assets are
invested in the securities of smaller companies based on the market size of the
investment at the time of purchase.
BARON iOPPORTUNITY FUND invests primarily in common stocks selected for their
capital appreciation potential. The Fund seeks investments in companies that the
Adviser believes have Internet-related growth opportunities. "Internet-related"
will include opportunities directly related to the web as well as opportunities
that result from the rapidly changing information technology environment. The
Fund will focus on new media, interactive communication, electronic content
delivery, networking and e-commerce. Investments will also include access,
infrastructure, products and services for all of the above. The Adviser seeks to
invest in both new emerging companies and more mature "bricks and mortar"
businesses which the Adviser believes have significant, sustainable,
Internet-related growth opportunities. Internet-related investments, as with
investments for the other Baron Funds, will be purchased at prices the Adviser
deems attractive based on the Adviser's projected cash flows and/or customer and
asset valuations within a reasonable time period. At least 65% of the Fund's
total assets are invested in securities of companies that are Internet-related.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
The Funds invest primarily in common stocks but may also invest in other
equity-type securities such as convertible bonds and debentures, preferred
stocks, warrants and convertible preferred stocks. Securities are selected for
their capital appreciation potential, and investment income is not a
consideration.
BARON ASSET FUND invests primarily in small and medium sized companies with
market capitalizations of approximately $500 million to $5 billion. BARON GROWTH
FUND and BARON SMALL CAP FUND invest primarily in small sized companies with
market values under $1.5 billion. These Funds will not sell positions just
because their market values have increased. The Funds will add to
4 o PROSPECTUS
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positions in a company even though its market capitalization has increased
through appreciation beyond the limits stated, if, in the Adviser's judgment,
the company is still an attractive investment. BARON iOPPORTUNITY FUND invests
in companies of all sizes.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS?
GENERAL STOCK MARKET RISK The Funds' principal risks are those of investing in
the stock market. The value of your investment in a Fund will increase as the
stock market prices of the securities owned by the Fund increase and will
decrease as the Fund's investments decrease in market value. Equity securities
fluctuate in value, often based on factors unrelated to the value of the issuer,
such as political, economic or general market conditions. Because the stock
values fluctuate, when you sell your investment you may receive more or less
money than you originally invested.
SMALL AND MEDIUM SIZED COMPANIES The Adviser believes there is more potential
for capital appreciation in smaller companies but there also may be more risk.
Securities of smaller companies may not be well known to most investors and the
securities may be thinly traded. Smaller company securities may fluctuate in
price more widely than the stock market generally and they may be more difficult
to sell during market downturns. There is more reliance on the skills of a
company's management and on their continued tenure. This investment approach
requires a long-term outlook and may require shareholders to assume more risk
and to have more patience than investing in the securities of larger, more
established companies.
LARGE POSITIONS Even though the Funds are diversified, the Funds may establish
significant positions in companies in which the Adviser has the greatest
conviction. If the stock price of one or more of those companies should
decrease, it would have a big impact on the Fund's net asset value. The Fund's
returns may be more volatile than those of a less concentrated portfolio.
LONG TERM OUTLOOK AND PROJECTIONS The Funds are designed for long-term investors
who are willing to hold investments for a substantial period of time. The cash
flows and valuations that the Adviser projects for a company may not be
achieved, which would negatively impact the stock market price of that company.
INTERNET Internet-related companies and companies propelled by new technologies
may present the risk of rapid change and product obsolescence and their
successes may be difficult to predict for the long term. Some Internet-related
companies may be newly formed and have limited operating history and experience.
Internet-related companies may also be adversely affected by changes in
governmental policies, competitive pressures, and changing demand. The
securities of these companies may also experience significant price movements
caused by disproportionate investor optimism or pessimism with little or no
basis in the company's fundamentals or economic conditions.
PROSPECTUS o 5
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PAST PERFORMANCE
The information below shows the Funds' annual returns and their long term
performance. The information provides some indications of the risks of investing
in the Funds. The bar charts show you how the performance for each Fund has
varied from year to year. The tables compare each Fund's performance over time
to that of the Russell 2000, a widely recognized unmanaged index of smaller
companies. How the Funds have performed in the past is not necessarily an
indication of how they will perform in the future. The annual report contains
additional performance information which is available upon request without
charge by writing or calling the Funds at the address and telephone number set
forth on the back of this Prospectus.
BARON ASSET FUND
Annual returns for periods ended 12/31 of each year [bar chart]
- ---------------------------------------------------
25.0% -18.5% 34.0% 13.9% 23.5% 7.4% 35.3% 22.0% 33.9% 4.3% 16.3%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Best Quarter: 4thQ 1999: 26.6%
Worst Quarter: 3rdQ 1990: -24.0%
Average annual total return for periods ended 12/31/99
- -------------------------------------------------------
1 year 5 years 10years since inception (6.12.87)
BARON ASSET FUND 16.3% 21.8% 16.0% 17.6%
Russell 2000 21.3% 16.7% 13.4% 11.2%
6 o PROSPECTUS
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BARON GROWTH FUND
Annual returns for periods ended 12/31 of each year [bar chart]
- ---------------------------------------------------
52.5% 27.7% 31.1% 0.1% 44.7%
1995 1996 1997 1998 1999
Best Quarter: 4thQ 1999: 23.9%
Worst Quarter: 3rdQ 1998: -22.1%
Average annual total returns for periods ended 12/31/99
- -------------------------------------------------------
1 year 5 years since inception (1.3.95)
BARON GROWTH FUND 44.7% 29.9% 29.9%
Russell 2000 21.3% 17.0% 17.0%
BARON SMALL CAP FUND
Annual returns for periods ended 12/31 of each year [bar chart]
- ---------------------------------------------------
2.2% 70.8%
1998 1999
Best Quarter: 4thQ 1999: 34.6%
Worst Quarter: 3rdQ 1998: -28.1%
Average annual total returns for periods ended 12/31/99
- -------------------------------------------------------
1 year since inception (10/1/97)
Baron Small Cap Fund 70.8% 29.9%
Russell 2000 21.3% 6.0%
There is no performance information for Baron iOpportunity Fund which is
scheduled to begin operations on February 29, 2000.
PROSPECTUS o 7
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FUND EXPENSES
The table below describes the fees and expenses that you would pay if you buy
and hold shares of the Funds.
Annual Fund Operating Expenses (Expenses that are deducted from a Fund's assets)
Management Distribution Other Expenses Total Annual
Fee (12b-1) Fee Fund Operating
Expenses
BARON ASSET FUND 1.0% 0.25% 0.06% 1.31%
Baron Growth 1.0% 0.25% 0.15% 1.40%
Fund
Baron Small Cap 1.0% 0.25% 0.09% 1.34%
Fund
Baron iOpportunity 1.0% 0.25% 0.25%** 1.50%**
Fund
** "Other Expenses" are based on the estimated expenses that the Fund expects to
incur in its initial fiscal year. The Adviser has contractually agreed to
reimburse certain expenses of the Fund so that its total operating expenses are
limited to 1.5% of average net assets. The advisory contract is for an initial
period of two years.
Baron iOpportunity Fund imposes a short-term trading fee of 1% on redemptions of
shares held for less than 180 days.
8 o PROSPECTUS
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EXAMPLE
This example is intended to help you compare the cost of investing in the Funds
with the cost of investing in other mutual funds. The example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Funds' operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
================================================================================
YEAR 1 3 5 10
================================================================================
BARON ASSET FUND $133 $415 $718 $1,579
- --------------------------------------------------------------------------------
BARON GROWTH FUND $143 $443 $766 $1,680
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND $136 $425 $734 $1,613
- --------------------------------------------------------------------------------
BARON iOPPORTUNITY FUND* $153 $474 N/A N/A
================================================================================
* Your estimated costs for Baron iOpportunity Fund for the one year period would
be $153 under the reimbursement arrangement described in the footnote above and
for the three year period would be $474.
There are additional charges if you have retirement accounts and wire transfers.
You also may purchase and redeem your shares through broker-dealers or others
who may charge a commission or other transaction fee for their services. (See
"How to Purchase Shares" and "How to Redeem Shares")
The 12b-1 fee is paid to Baron Capital, Inc. for shareholder and distribution
services. Because the fees are paid out of the Funds' assets on an ongoing
basis, over time it will increase the cost of your investment and may cost you
more than paying other types of sales charges.
PROSPECTUS o 9
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Funds'
financial performance for the fiscal years indicated. Certain information
reflects financial results for a single fund share. The "total return" shows how
much your investment in the Fund would have increased (or decreased) during each
period, assuming you had reinvested all dividends and distributions. These
financial highlights have been audited by PricewaterhouseCoopers LLP, the Funds'
independent accountants, whose report, along with the Funds' financial
statements, is included in the annual report. There are no financial highlights
for Baron iOpportunity Fund.
BARON ASSET FUND
Year Ended September 30
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $39.96 $47.43 $35.50 $29.30 $22.82
- -----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.30) 0.05 (0.14) (0.06) (0.09)
Net Realized and Unrealized Gains
(Losses) on Investments 11.95 (7.52) 12.11 6.29 7.23
- ------------------------------------------------------------------------------------
Total from Investment Operations 11.65 (7.47) 11.97 6.23 7.14
- ------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.04) 0.00 0.00 0.00 0.00
Distributions from Net Realized
Gains 0.00 0.00 (0.04) (0.03) (0.66)
- ------------------------------------------------------------------------------------
Total Distributions (0.04) 0.00 (0.04) (0.03) (0.66)
- ------------------------------------------------------------------------------------
Net Asset Value, End of Year $51.57 $39.96 $47.43 $35.50 $29.30
====================================================================================
TOTAL RETURN 29.2%* (15.7%) 33.8% 21.3% 32.3%
- ------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets (in millions), End of
Year $5,863.1 $4,410.5 $3,224.5 $1,166.1 $290.0
Ratio of Expenses to Average Net
Assets 1.31% 1.32% 1.35% 1.40% 1.44%
Ratio of Net Investment Income
(Loss) to Average Net Assets (0.57%) 0.11% (0.52%) (0.29%) (0.55%)
Portfolio Turnover Rate 15.64% 23.43% 13.23% 19.34% 35.15%
- -------------------------------------------------------------------------------------------------
</TABLE>
* Had the adviser not made the capital contribution, the Fund's performance
would have been reduced by 0.003%.
10 o PROSPECTUS
<PAGE>
BARON GROWTH FUND
Year Ended September 30
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995*
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $20.32 $24.89 $18.40 $14.77 $10.00
- ---------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) (0.04) 0.06 0.06 0.11 0.04
Net Realized and Unrealized Gains
(Losses) on Investments 8.82 (4.56) 6.68 3.66 4.73
- ---------------------------------------------------------------------------------
Total from Investment Operations 8.78 (4.50) 6.74 3.77 4.77
- ---------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income (0.04) (0.02) (0.09) (0.04) 0.00
Distributions from Net Realized
Gains 0.00 (0.05) (0.16) (0.10) 0.00
- ---------------------------------------------------------------------------------
Total Distributions (0.04) (0.07) (0.25) (0.14) 0.00
- ---------------------------------------------------------------------------------
Net Asset Value, End of Year $29.06 $20.32 $24.89 $18.40 $14.77
=================================================================================
TOTAL RETURN 43.2% (18.1%) 37.1% 25.8% 47.7%
- ---------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets (in millions), End of
Year $439.4 $315.6 $390.8 $207.2 $28.6
Ratio of Total Expense to Average Net
Assets 1.40% 1.43% 1.40% 1.54% 1.99%**
Less: Ratio of Interest Expenses to
Average Net Assets (0.03%) (0.06%) 0.00% 0.00% 0.00%
- -----------------------------------------------------------------------------------
Ratio of expenses to Average Net
Assets exclusive of Interest Expense 1.37% 1.37% 1.40% 1.54% 1.99%**
===================================================================================
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.20%) 0.21% 0.37% 1.20% 1.130**
Portfolio Turnover Rate 53.36% 40.38% 25.17% 40.27% 40.56%
- --------------------------------------------------------------------------------------
</TABLE>
* For the period January 3, 1995 (commencement of operations) to September
30, 1995.
** Annualized.
The Fund's custodian offset custody fees amounted to less than $0.01 per share
in 1996 and 1995. The expense offset amounts are included in expense data above.
PROSPECTUS o 11
<PAGE>
BARON SMALL CAP FUND
Year Ended September 30
1999 1998
Net Asset Value, Beginning of Year $ 8.61 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss (0.10) (0.02)
Net Realized and Unrealized Gains
(Losses) on Investments 4.86 (1.37)
- ------------------------------------------------------------------------
Total from Investment Operations 4.76 (1.39)
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends Net Investment Income 0.00 0.00
Distributions from Net Realized Gains 0.00 0.00
- ------------------------------------------------------------------------
Total Distributions 0.00 0.00
- ------------------------------------------------------------------------
Net Asset Value, End of Year $13.37 $ 8.61
========================================================================
TOTAL RETURN 55.3% (13.9%)
- ------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets(in millions), End of Year $715.7 $403.7
Ratio of Expenses to Average Net Assets 1.34% 1.39%
Ratio of Net Investment Loss
to Average Net Assets (0.99%) (0.20%)
Portfolio Turnover Rate 42.69% 59.68%
- ------------------------------------------------------------------------
12 o PROSPECTUS
<PAGE>
OTHER INVESTMENT STRATEGIES
WHAT ARE SOME OF THE OTHER INVESTMENTS THE FUNDS MAKE?
CASH POSITION When the Adviser determines that opportunities for profitable
investments are limited or that adverse market conditions exist, all or a
portion of the Funds' assets may be invested in cash or cash equivalents such as
money market instruments, which include U.S. Government securities, certificates
of deposit, short-term investment grade corporate bonds and other short-term
debt instruments, and repurchase agreements. When a Fund's investments in cash
or similar investments increase, its investment objectives may not be achieved.
BARON ASSET FUND may borrow up to 5% of its net assets for extraordinary or
emergency temporary investment purposes or to meet redemption requests which
might otherwise require an untimely sale of portfolio securities. BARON GROWTH
FUND, BARON SMALL CAP FUND and BARON iOPPORTUNITY FUND may borrow up to 30% of
the value of their respective total assets, including the amount borrowed, as of
the time the borrowing is made for temporary, emergency or other purposes.
DEBT SECURITIES The Funds may invest in debt securities which may include notes,
bonds, debentures and money market instruments. Debt securities represent an
obligation of the issuer to repay a loan of money to it, often with interest.
The debt securities in which the Funds may invest include rated and unrated
securities and convertible instruments. There is no minimum rating for the debt
securities that may be purchased for those Funds. The Funds rely on the
Adviser's assessment of the issuer's securities and do not use independent
ratings organizations.
ILLIQUID SECURITIES BARON ASSET FUND may invest up to 10%, and BARON GROWTH
FUND, BARON SMALL CAP FUND and BARON iOPPORTUNITY FUND may invest up to 15%, of
their respective net assets in securities that are illiquid. An illiquid
security is one that cannot be disposed of in the ordinary course of business
within seven days.
SPECIAL SITUATIONS The Funds may invest in "special situations." A special
situation arises when, in the opinion of the Adviser, the securities of a
company will be recognized and appreciate in value due to a specific anticipated
development at that company. Such developments might include a new product, a
management change, an acquisition or a technological advancement.
FOREIGN SECURITIES The Funds may invest without limitation in the securities of
foreign issuers in U.S. denominated form known as American Depository Receipts.
They may also invest in foreign denominated form (Global Depository Receipts or
European Depository Receipts), up to 10% of the respective total assets of BAF,
BGF and BSCF and up to 25% of the total assets of BiOPPF.
OPTIONS AND DERIVATIVES BARON ASSET FUND may write (sell) covered call options
or purchase put options on equity and/or debt securities. BARON
PROSPECTUS o 13
<PAGE>
GROWTH FUND, BARON SMALL CAP FUND and BARON iOPPORTUNITY FUND may write (sell)
put options and covered call options and purchase put and call options on equity
and/or debt securities. A call option gives the purchaser of the options the
right to buy, and when exercised obligates the writer to sell, the underlying
security at the exercise price. A put option gives the purchaser of the option
the right to sell, and when exercised obligates the writer to buy, the
underlying security at the exercise price. The options may be listed or
over-the-counter. The Funds may also enter into equity swap agreements and other
derivative investments.
OTHER STRATEGIES The Funds have additional investment strategies and
restrictions that govern their activities. For a list of these restrictions and
more information about the investment strategies, please see the section
"Investment Goals, Strategies and Risks" in the Statement of Additional
Information. Those that are identified as "fundamental"may only be changed with
shareholder approval, while the others may be changed by the Board of Trustees.
WHAT ARE SOME ADDITIONAL RISK FACTORS?
OPTIONS AND DERIVATIVES Options may fail as hedging techniques in cases where
the price movements of the securities underlying the options do not follow the
price movements of the portfolio securities subject to the hedge. Gains on
investments in options and derivatives depend on the Adviser's ability to
anticipate correctly the direction of stock prices, interest rates, and other
economic factors. The dealer who takes the other side of a derivative
transaction could fail. Where a liquid secondary market does not exist, the Fund
would likely be unable to control losses by closing its position.
DEBT SECURITIES Lower rated securities may have a higher yield and the potential
for a greater return than investment grade securities but may also have more
risk. Lower rated securities are generally meant for longer-term investing and
may be subject to certain risks with respect to the issuing entity and to market
fluctuations. See the SAI for more information. The Adviser will also evaluate
the securities and the ability of the issuers to pay interest and principal.
With lower rated debt securities, a Fund's ability to achieve its investment
objective may be more dependent on the Adviser's credit analysis than might be
the case with higher rated securities. The market price and yield of lower rated
securities are generally more volatile than those of higher rated securities.
Factors adversely affecting the market price and yield of these securities will
adversely affect the Fund's net asset value. The trading market for these
securities may be less liquid than that of higher rated securities. Companies
that issue lower rated securities may be highly leveraged or may have unstable
earnings, and consequently the risk of the investment in the securities of such
issuers may be greater than with higher rated securities.
The interest bearing features of debt securities carry a promise of income flow,
but the price of the securities are inversely affected by changes in interest
rates and are therefore subject to the risk of market price fluctuations. The
market values of debt
14 o PROSPECTUS
<PAGE>
securities may also be affected by changes in the credit ratings or financial
condition of the issuers.
FOREIGN SECURITIES Investments in foreign securities may have greater risks than
investments in domestic securities and such risks may be unrelated to the price
of the security. Such risks include currency exchange risks, as the value of
local currency relates to the U.S. dollar. The value of a foreign security may
be worth less in U.S. Dollars even if the security increases in value in its own
country due to declines in exchange rates or changes in U.S. or foreign laws.
Foreign investments are also subject to political and economic risks,
particularly in countries with unstable governments, different legal systems,
and limited industries. In some countries there may be the risk of governments
seizing the assets or operations of a company. Further, there may be less
governmental supervision of foreign markets, including non-standardize financial
reporting and less publicly available information. There is also the risk that
the foreign securities may be less liquid, there may be delays in settlement of
purchase and sale transactions, and there may not be adequate protection to
ensure the other side will complete a transaction.
CONVERTIBLE SECURITIES Since convertible securities combine the investment
characteristics of both bonds and common stocks, the Funds' convertible
securities investments absorb the market risks of both stocks and bonds. The
combination does, however, make the investment less sensitive to interest rate
changes than straight bonds of comparable maturity and quality and usually less
volatile than common stocks. Because of these factors, convertible securities
are likely to perform differently than broadly-based measures of the stock and
bond markets.
BORROWINGS To the extent a Fund borrows, it must maintain continuous asset
coverage of 300% of the amount borrowed. Such borrowing has special risks. Any
amount borrowed will be subject to interest costs that may or may not exceed the
appreciation of the securities purchased.
ILLIQUID SECURITIES The absence of a trading market could make it difficult to
ascertain a market value for illiquid positions. A Fund's net asset value could
be adversely affected if there were no ready buyer at an acceptable price at the
time the Fund decided to sell. Time-consuming negotiations and expenses could
occur in disposing of the shares.
SPECIAL SITUATIONS Investments in special situations have the risk that the
anticipated development does not occur or does not attract the expected
attention.
MANAGEMENT OF THE FUND
The Board of Trustees oversees the management of the Funds. A list of the Board
members and the Funds' officers may be found in the Statement of Additional
Information. BAMCO, Inc., the Adviser, is located at 767 Fifth Avenue, New York,
New York 10153, and is responsible for portfolio management. It is a subsidiary
of Baron Capital Group, Inc. ("BCG"). Baron Capital, Inc. ("Baron Capital"), a
registered
PROSPECTUS o 15
<PAGE>
broker-dealer and the distributor of the shares of the Funds, is also a
subsidiary of BCG.
Ronald Baron is the founder, chief executive officer and chairman of the Adviser
and BCG and is the principal owner of BCG. Morty Schaja is the president and
chief operating officer of the Adviser and BCG and has been with the Adviser and
BCG since 1991.
Mr. Baron has been the portfolio manager of BARON ASSET FUND and BARON GROWTH
FUND since their inception. He has managed money for others since 1975. Since
January 1999, BARON GROWTH FUND has been managed by a team that is headed by Ron
Baron and that includes Matt Ervin and Mitch Rubin. Matt Ervin has been an
analyst with Baron Funds for 5 years and before that was an analyst at another
large money management firm. Mitch Rubin has worked at Baron Funds as an analyst
for 4 years and before that was an analyst at a large brokerage firm. Cliff
Greenberg has been the portfolio manager of BARON SMALL CAP FUND since its
inception. Mr. Greenberg joined Baron Funds in January of 1997. He was a general
partner and portfolio manager at HPB Associates, L.P., an investment partnership
from January 1990 until he joined Baron Funds. BARON iOPPORTUNITY FUND is
managed by co-portfolio managers Mitch Rubin and Matt Ervin. All of BARON
iOPPORTUNITY FUND's holdings will be pre-approved by Morty Schaja and Ron Baron.
Each of the portfolio managers named above may serve as portfolio managers or
analysts for other products offered by affiliates that could conflict with their
responsibilities to the Funds for which they are portfolio mangers. The Adviser
also keeps the books of account of each Fund, and calculates daily the income
and net asset value per share of each Fund. For its services, the Adviser
receives a fee payable monthly from the assets of each Fund equal to 1% per
annum of each Fund's respective average daily net asset value.
Brokerage transactions for the Funds in exchange-listed securities are executed
primarily by or through the Adviser's affiliate, Baron Capital, when consistent
with trying to obtain the best net results for the Funds. Baron Capital is a
registered broker-dealer and a member of the NASD. Please see the Statement of
Additional Information for more information about trade executions.
12b-1 PLAN
The Funds have adopted a plan under rule 12b-1 that allows the Fund to pay
distribution fees for the sale and distribution of their shares and for services
provided to shareholders. Because the fees are paid out of the Funds' assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges. The
12b-1 plan authorizes the Fund to pay Baron Capital a distribution fee equal on
an annual basis to 0.25% of each Fund's average daily net assets. See the
Statement of Additional Information for a more detailed listing of the expenses
covered by the Distribution Plan.
16 o PROSPECTUS
<PAGE>
INFORMATION ABOUT YOUR INVESTMENT
HOW YOUR SHARES ARE PRICED
The purchase or sale price for your shares is the particular Fund's net asset
value per share ("NAV"), which is generally calculated as of the close of
trading of the New York Stock Exchange (usually 4:00 p.m. Eastern time) on each
day the Exchange is open. Your purchase or sale will be priced at the next NAV
calculated after your order is accepted by the Baron Funds' transfer agent. If
you purchase or sell shares through a brokerage firm, bank or other financial
institution, your transaction will receive the NAV next calculated after the
financial institution receives your order. The Funds have agreements with
certain financial institutions which authorize the financial institutions to
accept orders or designate third parties to accept orders on behalf of the
Funds. If you place your order through these authorized financial institutions,
the order will be considered received when the authorized party accepts the
order. Those orders will receive the NAV next computed after acceptance of the
order by the authorized institution or its agent. The Funds' investments are
valued based on the last sale price or where market quotations are not readily
available, based on fair value as determined by the Adviser, using procedures
established by the Board of Trustees. The Funds may change the time at which
orders are priced if the Exchange closes at a different time or an emergency
exists.
HOW TO PURCHASE SHARES
You may purchase shares of the Funds directly without paying a sales charge. An
application is included with this prospectus. Special applications are available
to open individual retirement accounts ("IRAs"). The minimum initial investment
is $2,000 unless you choose to invest through the Baron InvestPlan (see page
18). There is no minimum for subsequent purchases. The Funds may reject any
proposed purchase. If the Funds identify short term traders, the Funds will
reject their proposed purchases.
At present, only U.S. citizens and non-U.S. citizens with a tax identification
number who reside in the U.S. may purchase shares of the Funds. Please call the
Funds' transfer agent at 1-800-442-3814, if you have any questions.
You may invest or add to your account using any of the following methods:
PROSPECTUS o 17
<PAGE>
BY MAIL
TO OPEN A NEW ACCOUNT send your signed application form with your check payable
to BARON FUNDS to:
Baron Funds
P.O. Box 219946
Kansas City, MO 64121-9946
PLEASE MAKE SURE YOU INDICATE HOW MUCH MONEY YOU WANT INVESTED IN EACH FUND.
Checks must be payable in U.S. dollars and must be drawn on a U.S. bank. Third
party checks, credit cards and cash will not be accepted.
WHEN ADDING TO YOUR ACCOUNT complete the additional investment form provided at
the bottom of your account statement or purchase confirmation. If you do not
have that form, write a note indicating in which Baron Fund the investment
should go and the account number. Send it to the address above.
BY WIRE
You can make your initial or additional investments in the Funds by wire. To do
so: (1) contact the Funds' transfer agent, DST Systems, Inc., at 1-800-442-3814
to obtain an account number. (2) Complete and sign the application form and mail
it to Baron Funds, P.O. Box 219946, Kansas City, MO 64121-9946. (3) Instruct
your bank to wire funds to the United Missouri Bank of Kansas City, N.A., ABA
No. 1010-0069-5, Account No. 98-7037-101-4. (4) Be sure to specify the following
information in the wire: (a) Fund you are buying, (b) your account number, (c)
your name, and (d) your wire number.
Please be sure to include your name and account number. The Fund is not
responsible for delays in the wiring process.
BY TELEPHONE
Once your account is open you may add to your investment by telephone and
exchange among the Baron Funds if you have elected that option on the
application. By choosing this option you authorize Baron Funds to draw on your
bank account. Please note that your accounts must be identically registered. To
add this option to your account, call 1-800-442-3814 for the forms.
BARON INVESTPLAN
Baron InvestPlan is an automatic investment plan offered by the Funds. The
minimum initial investment is $500 with monthly investments of as little as $50
automatically invested from your checking account. To enroll in the Baron
InvestPlan, complete the Enrollment Form (available by calling 1-800-99-BARON),
attach a voided check and mail them to Baron Funds, P.O. Box 219946, Kansas
City, MO 64121-9946.
18 o PROSPECTUS
<PAGE>
THROUGH BROKER-DEALERS
You may purchase shares of the Funds through a broker-dealer or other financial
institution that may charge a transaction fee. If you purchase the shares
directly from the Funds, no transaction fee is charged. The Funds also
participate in no transaction fee programs with many national brokerage firms.
HOW TO REDEEM SHARES
You may redeem your shares of the Funds by any of the methods described below.
There are no redemption charges. If you are selling shares in an IRA account
please read the information in the IRA kit. Redemptions will not be made until
all of the requirements for redemption are met. Redemptions are priced at the
next NAV calculated after your redemption request is received in proper form. If
you have recently purchased shares your redemption request may not be honored
until the purchase check has cleared your bank, which generally occurs within
fifteen calendar days.
BY MAIL
Write a letter that includes the following information: the name of the
registered owner(s) of the account, the name of the Fund, the number of shares
or dollar amount to be redeemed, and the account number. The letter must be
signed in exactly the same way the account is registered, including the
signature of each joint owner, if applicable. Mail the request to the transfer
agent at Baron Funds, P.O. Box 219946, Kansas City, MO 64121-9946.
A signature guarantee is required for redemptions of more than $50,000 in any
quarter. See the "Special Information About Redemptions" section on page XX.
Within three days after receipt of a redemption request by the transfer agent in
proper form, the Fund will normally mail you the proceeds.
BY TELEPHONE
If you have selected the telephone redemption option when you opened your
account, you may redeem your shares by telephone. To add this option to your
account call 1-800-442-3814 for a telephone redemption form. Once made, your
telephone request cannot be changed. The minimum amount that you may redeem by
telephone is $1,000. The maximum amount that you may redeem by telephone in any
quarter is $50,000. You may receive the proceeds by any one of the following
methods: (a) we will mail a check to the address to which your account is
registered, (b) we will transmit the proceeds by electronic funds transfer to a
pre-authorized bank account (usually a two banking day process), or (c) we will
wire the proceeds to a pre-authorized bank account for a $10.00 fee (usually a
next banking day process).
PROSPECTUS o 19
<PAGE>
The Funds have the right to refuse a telephone redemption if they believe it
advisable to do so. If you have selected the telephone option you may be
responsible for any fraudulent telephone order as long as the Funds and their
transfer agent use reasonable procedures to confirm that telephone instructions
are genuine.
BY BROKER-DEALER
You may redeem shares through broker-dealers or other institutions who may
charge you a fee. The Funds may have special redemption procedures with certain
broker-dealers.
SHORT-TERM TRADING FEE
BARON iOPPORTUNITY FUND imposes a short-term trading fee on redemptions and
exchanges of shares held for less than 180 days. The fee is 1% of the redemption
value and is deducted from the redemption proceeds. The Fund uses the "first-in,
first-out" method to determine the holding period, so if you bought shares on
different days, the shares purchased first will be redeemed first for
determining whether the fee applies. The fee is retained by the Fund for the
benefit of the remaining shareholders to offset the administrative costs
associated with processing redemptions and exchanges and to offset the portfolio
transaction costs and facilitate portfolio management.
The Fund will waive the fee for defined contribution plans. The Fund may waive
the fee on redemptions if the Fund believes it is in the best interest of the
Fund. Please check with your account representative before you purchase your
shares to determine whether the fee waiver is applicable.
SPECIAL INFORMATION ABOUT REDEMPTIONS
If the amount to be redeemed in any quarter is greater than $50,000, all of the
signatures on a redemption request and/or certificate must be guaranteed. If you
have changed your address within 30 days of a redemption request, a signature
guarantee is required. A signature guarantee helps protect you and the Funds
from fraud. You can obtain a signature guarantee from most securities firms or
banks, but not from a notary public. If you are redeeming $50,000 or less per
quarter, and if proceeds are sent to the address of record, no signature
guarantee is required. For joint accounts, each signature must be guaranteed.
Please call the transfer agent at 1-800-442-3814 if you are unsure of any of the
requirements. Please remember that the Funds will not redeem your shares until
the original letter of instruction with the signature guarantee in proper form
has been received by the transfer agent.
Any Fund share certificates that have been issued must be returned with your
redemption request. The transfer agent may require other documentation from
corporations, trustees, executors, and others who hold shares on behalf of
someone
20 o PROSPECTUS
<PAGE>
else. If you have any questions concerning the requirements, please call the
transfer agent at 1-800-442-3814. Redemptions will not be made until all of the
conditions, including receipt of all required documentation by the transfer
agent, have been satisfied.
A redemption or exchange of Fund shares may generate a tax liability.
If you redeem more than $250,000 or 1% of the net asset value of a Fund during
any 90-day period, the Fund has the right to pay the redemption price, either
totally or partially, by a distribution of portfolio securities instead of cash.
If your account falls below $2,000 because of withdrawals, the Fund may ask you
to increase your balance. If it is still below $2,000 after 60 days, the Fund
may close your account and send you the proceeds.
The Funds may suspend the normal redemption process if trading on the New York
Stock Exchange is suspended or if an emergency exists that reasonably precludes
the valuation of the Funds' net assets.
DISTRIBUTIONS AND TAXES
Each Fund pays its shareholders dividends from its net investment income and
distributes any net realized capital gains once each year. Your distributions
will be reinvested in the Fund unless you instruct the Fund otherwise. There are
no charges on reinvestments. After every distribution, the value of a share is
automatically reduced by the amount of the distribution. If you elect not to
reinvest and the postal or other delivery service is unable to deliver checks to
your address of record, your distribution will be reinvested in additional
shares. No interest will accrue on amounts represented by uncashed distribution
or redemption checks.
You are subject to federal income tax on Fund distributions, unless your
investment is in an IRA or other tax-advantaged account. The tax status of any
distribution is the same regardless of how long you have invested in the Fund
and whether you reinvest your distributions or take them in cash. Income and
short-term capital gain distributions are taxed at the ordinary income rate.
Long-term capital gains distributions are taxed at either 10% or 20%, depending
on your tax bracket. The tax status of the annual distribution will be detailed
in an annual tax statement from the Fund. Distributions declared by the Fund may
also be subject to state and local taxes. You should consult with your own tax
adviser regarding your personal tax situation.
If you do not provide the Fund with your valid social security or taxpayer
identification number, you will be subject to backup withholding for taxes.
PROSPECTUS o 21
<PAGE>
GENERAL INFORMATION
CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
The Bank of New York, 100 Church Street, New York, New York 10286 is the
custodian for the Baron Funds' cash and securities. DST Systems, Inc. serves as
transfer agent and dividend disbursing agent for the shares. They are not
responsible for investment decisions for the Baron Funds.
SHAREHOLDER INFORMATION
If you have questions about your account or transactions please contact the
transfer agent, DST Systems, Inc., P.O. Box 219946, Kansas City, MO 64121-9946,
or by telephone to 1-800-442-3814.
If you have questions about general Fund information please call the Baron
Funds' office at 1-800-99-BARON or 212-583-2100.
As a Massachusetts business trust, annual shareholder meetings are not required.
The Funds send quarterly reports to shareholders.
22 o PROSPECTUS
<PAGE>
[PHOTOS]
<PAGE>
[REGISTERED LOGO]
BARON
FUNDS
FOR MORE INFORMATION
Investors who want more information about the Baron Funds may obtain the
following documents free upon request at the numbers or address below.
SHAREHOLDER REPORTS
Additional information about the Funds' investments is available in the Fund's
quarterly reports to Shareholders. In the Funds' annual report you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION
Additional information is also contained in the Statement of Additional
Information dated January 17, 2000. A current Statement of Additional
Information is on file with the Securities and Exchange Commission ("SEC") and
is incorporated by reference. You may obtain the Statement of Additional
Information and the shareholder reports without charge by writing or calling the
Funds.
TO OBTAIN INFORMATION
By telephone: Call 1-800-99-BARON (1-800-992-2766)
By mail write to: BARON FUNDS
767 Fifth Avenue
New York, NY 10153
By e-mail: Send your request to:
[email protected]
On the Internet: Text-only versions of Baron Funds documents
can be viewed on-line or downloaded from:
http://www.baronfunds.com
or from: http://www.sec.gov
OTHER
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, D.C. (phone 1-800-SEC-0330). Copies of this information may be
obtained, upon payment of a duplicating fee, by writing the Public Reference
Section of the SEC, Washington, D.C. 20549- 6009.
Ticker Symbols: BARON ASSET FUND BARAX
BARON GROWTH FUND BGRFX
Baron Small Cap Fund BSCFX
Baron iOpportunity Fund BIOPX
SEC file number: 811-5032
2000PROSP
<PAGE>
BARON ASSET FUND
BARON GROWTH FUND
BARON SMALL CAP FUND
BARON iOPPORTUNITY FUND
767 Fifth Avenue
New York, New York 10153
(800) 99-BARON
212-583-2100
________________________
STATEMENT OF ADDITIONAL INFORMATION
January 17, 2000
________________________
This Statement of Additional Information ("SAI"
is not a prospectus. The Fund's Prospectus, dated
January 17, 2000, may be obtained without charge
by writing or calling the Funds at the address and
telephone number above.
________________________
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS SAI OR IN THE RELATED
PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE IN
STATEMENT
OF
ADDITIONAL PAGE IN
INFORMATION PROSPECTUS
FUND HISTORY AND CLASSIFICATION................ 3
Baron iOpportunity Fund Questions & Answers... 3
Investment Goals, Strategies and Risks........ 4 3,5,13,14
Options Transactions and Swaps................ 8 13
Use of Segregated and Other Special Accounts.. 9
Investment Restrictions....................... 9
Turnover Rate................................. 11
MANAGEMENT OF THE FUNDS........................ 12 15
Board of Trustees and Officers................ 12
Principal Holders of Shares................... 14
Investment Adviser............................ 15
Service Agreements............................ 16
Distributor................................... 16
Distribution Plan............................. 16 16
Brokerage..................................... 18
Custodian, Transfer Agent and Dividend Agent.. 20 22
REDEMPTION OF SHARES........................... 20 19
NET ASSET VALUE................................ 20 17
TAXES.......................................... 20 21
ORGANIZATION AND CAPITALIZATION................ 21
General....................................... 21 22
Shareholder and Trustee Liability............. 21
OTHER INFORMATION.............................. 22 Back Cover
Independent Accountants....................... 22
Calculations of Performance Data.............. 22
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FUND HISTORY AND CLASSIFICATION
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BARON ASSET FUND is a no-load, open-end, diversified management investment
company organized as a series fund and established under the laws of the
Commonwealth of Massachusetts on February 19, 1987. There are four series
currently available (individually a "Fund" and collectively the "Funds"): BARON
ASSET FUND, started in June of 1987, BARON GROWTH FUND (formerly named Baron
Growth & Income Fund), started in January of 1995, BARON SMALL CAP FUND, started
in October 1997, and BARON iOPPORTUNITY FUND, which starts operations in March
2000.
BARON iOPPORTUNITY FUND QUESTIONS & ANSWERS
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1. HOW WILL BARON iOPPORTUNITY FUND DIFFER FROM OTHER INTERNET FUNDS?
Baron iOpportunity Fund defines Internet broadly to encompass a diversified
group of industries and companies with opportunities directly related to
the web, as well as opportunities stemming from the rapidly changing
information technology environment. The Fund will focus on new media,
interactive communication, electronic content delivery, networking and
e-commerce businesses. The Fund will seek investments in both new,
emerging, Internet-related businesses, as well as established companies
that have significant and scalable Internet-related growth opportunities.
Baron believes the Fund is a potentially more conservative and diversified
approach to Internet investing than other Internet Funds. In addition,
Baron iOpportunity Fund will bring Baron Funds' value orientation to
investing in the Internet.
2. HOW DOES THE BARON iOPPORTUNITY FUND DEFINE "OPPORTUNITY"?
Baron believes that value is created by investing in businesses with
sustainable, competitive advantage and strong barriers to entry that will
allow those businesses to realize high rates of return over long periods of
time. The Fund's goal is to purchase existing and new companies at
valuations that it believes are attractive relative to the Advisor's
projection of future cash flows and earnings power. The Adviser believes
that the rapidly changing information technology environment will allow
Baron's independent research to identify investment opportunities that are
attractively priced relative to their future prospects. Although the
valuations of many Internet-related companies have risen substantially
during recent years, Baron believes that the long-term opportunities of
many Internet businesses are at a very early stage of development ... and
that most Internet opportunities have yet to be discerned.
3. WILL THE BARON iOPPORTUNITY FUND SHARE THE SAME LONG-TERM INVESTMENT
OBJECTIVE OF THE OTHER BARON FUNDS?
Yes. The Baron iOpportunity Fund intends to analyze businesses with a time
horizon measured in years - not months, weeks or days. The Fund will invest
in companies which it believes have open-ended, scalable opportunities -
businesses that it expects to be substantially larger and more profitable
in the future than they are today. The Adviser will seek to find those
companies that have the potential for sustainable competitive advantage and
may benefit most from those opportunities over time. The Adviser intends to
hold those investments for the long term to realize the substantial gains
that it believes can be realized in this environment. Accordingly, the
Adviser believes the Fund will have low turnover and will hopefully
minimize current taxes and maximize long-term capital gains. Of course, the
Fund intends to continue to hold only those investments whose valuations
continue to afford the potential for substantial appreciation from the
then-current levels.
4. WILL THE BARON iOPPORTUNITY FUND FOCUS PREDOMINANTLY ON SMALL AND MEDIUM
SIZED COMPANIES AS DO THE OTHER BARON FUNDS?
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No. The Baron iOpportunity Fund will not be limited solely to companies
with a specific market capitalization. The Fund will invest in those
companies that the Adviser believes have the greatest growth prospects and
appreciation potential in the new information technology environment
regardless of their current size.
5. BARON FUNDS HAS HISTORICALLY LIMITED ITS DIRECT EXPOSURE TO TECHNOLOGY, HOW
WILL BARON iOPPORTUNITY FUND APPROACH TECHNOLOGY INVESTMENTS?
While direct technology investments may play a modest role in Baron
iOpportunity Fund it will approach these investments in a similar fashion
to the other Baron Funds. The Funds have not historically made direct
investments in hardware or software companies, but many of Baron Funds'
investment successes in recent years have been indirectly related to
technology. While Baron Funds has not directly invested in "dot-com"
companies, the Funds' media, communication and financial service
investments have benefited from the explosive growth in Internet usage.
Further, many of the Funds' traditional bricks and mortar, branded consumer
investments are currently implementing Internet strategies that the Adviser
believes will accelerate their growth. By indirectly investing in
technology, Baron Funds has historically benefited from the technology
explosion without the higher risks and volatility associated with direct
technology investments. The Adviser believes that Baron iOpportunity Fund
will be able to invest successfully in the Internet without significant
exposure to specific products that may be prone to technological
obsolescence. Baron's research of the Internet and its likely affect on
practically every company in the Baron Funds' portfolios has been, and will
continue to be, intense.
6. WHO WILL BE MANAGING BARON iOPPORTUNITY FUND?
Baron iOpportunity Fund will be managed by co-portfolio managers Mitch
Rubin and Matt Ervin. Mitch is a graduate of the University of Michigan and
Harvard Law School and has been with Baron since 1995. Prior to joining
Baron, Mitch was an emerging growth stock research analyst at Solomon Smith
Barney and an associate at Latham & Watkins. Matt is a graduate of Harvard
(bachelors and masters degrees) and has been with Baron since 1995. Prior
to joining Baron, Matt was a research analyst with Sanford C. Bernstein &
Co. Both Mitch and Matt have also been co-portfolio managers of Baron
Growth Fund with Ron Baron since January 1999. Andrew Peck will be a senior
analyst of the Fund. Andrew is a graduate of Yale and has a JD/MBA from
Stanford. Since joining Baron in 1998, Andrew has focused his research
analysis on Internet-related opportunities in the other Baron Funds. All
investments will be approved for purchase in advance by Ron Baron, Chairman
and Chief Executive Officer and Morty Schaja, President and Chief Operating
Officer. Baron believes Baron iOpportunity Fund will derive significant
benefit from the combination of a youthful management team with the
experience and wisdom of the Fund's senior executives.
7. HOW CAN I PURCHASE THE BARON iOPPORTUNITY FUND AND WHAT IS THE MINIMUM
INITIAL INVESTMENT?
The Fund will be in subscription beginning January 18, 2000 through 4:00
p.m. Eastern Time on February 29, 2000. During the subscription period, the
Fund will be available at the initial offering price of $10 per share.
After that time, the share price will fluctuate and may be more or less
than $10 per share. There is a $2,500 initial minimum brokerage investment
for the Fund ($2,000 for IRA and custodial accounts).
INVESTMENT GOALS, STRATEGIES AND RISKS
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BARON ASSET FUND's investment objective is to seek capital appreciation through
investments in securities of small and medium sized companies with undervalued
assets or favorable growth prospects. BARON GROWTH FUND's investment objective
is to seek
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capital appreciation. BARON SMALL CAP FUND's investment objective is to seek
capital appreciation through investments primarily in securities of small
companies. The investment objective of BARON iOPPORTUNITY FUND is capital
appreciation. BARON ASSET FUND invests primarily in small and medium sized
companies with market capitalizations of approximately $500 million to $5
billion. BARON GROWTH FUND and BARON SMALL CAP FUND invest primarily in the
securities of smaller companies with market capitalizations of up to $1.5
billion. At least 65% of BARON SMALL CAP FUND's total assets, measured at the
time of purchase, are invested in smaller companies. BARON iOPPORTUNITY FUND
invests in companies of all sizes.
In addition to the principal investment strategies of the Funds described in the
Prospectus on pages 3 and 13, the Funds may use the additional strategies
described below. These investment strategies are not fundamental policies and
may be changed by the Fund's Board of Trustees. Shareholders would be notified
of any material changes. Some of the strategies discussed below are mentioned in
the Prospectus, but are explained in more detail here.
FOREIGN SECURITIES BARON ASSET FUND, BARON GROWTH FUND and BARON SMALL CAP FUND
may invest up to 10% and BARON iOPPORTUNITY FUND may invest up to 25%of their
respective total assets directly in the securities of foreign issuers which are
not publicly traded in the U.S. and may also invest in foreign securities in
domestic markets through depositary receipts without regard to this limitation.
These securities may involve additional risks not associated with securities of
domestic companies, including exchange rate fluctuations, political or economic
instability, the imposition of exchange controls, or expropriation or
confiscatory taxation. Issuers of foreign securities are subject to different,
often less detailed, accounting, reporting and disclosure requirements than are
domestic issuers. The Funds may invest in securities commonly known as American
Depository Receipts ("ADRs"), and in European Depository Receipts ("EDRs") and
Global Depository Receipts ("GDRs") or other securities convertible into
securities of foreign issuers. ADRs are certificates issued by a U.S. bank or
trust company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a United States bank and
traded on a U.S. exchange or in an over-the-counter market. EDRs and GDRs are
receipts issued in Europe generally by a non-U.S bank or trust company that
evidence ownership of non-U.S. or domestic securities. There are no fees imposed
on the purchase or sale of ADRs, EDRs or GDRs although the issuing bank or trust
company may impose fees on the purchase of dividends and the conversion of ADRs,
EDRs and GDRs into the underlying securities. Investment in ADRs has certain
advantages over direct investment in the underlying non-U.S. securities, since
(i) ADRs are U.S. dollar denominated investments which are easily transferable
and for which market quotations are readily available and (ii) issuers whose
securities are represented by ADRs are subject to the same auditing, accounting
and financial reporting standards as domestic issuers. EDRs and GDRs are not
necessarily denominated in the currency of the underlying security.
REITs The Funds may invest in the equity securities of real estate investment
trusts ("REITs"). A REIT is a corporation of business trust that invests in real
estate and derives its income from rents from real property or interest on loans
secured by mortgages on real property. The market value of REITs may be affected
by changes in the tax laws or by their inability to qualify for the tax-free
pass-through of their income. The REIT portion of the portfolio may also be
affected by general fluctuations in real estate values and by defaults by
borrowers or tenants.
LENDING The Funds may lend their portfolio securities to institutions as a means
of earning additional income. In lending their portfolio securities, the Funds
may incur delays in recovery of loaned securities or a loss of rights in the
collateral. To minimize such risks, such loans will only be made if the Funds
deem the other party to be of good standing and determines that the income
justifies the risk. BARON ASSET FUND will not lend more than 10% of its total
assets and BARON GROWTH FUND, BARON SMALL CAP FUND and BARON iOPPORTUNITY FUND
will not lend more than 25% of their respective total assets.
MORTGAGE-BACKED SECURITIES The Funds may invest up to 5% of their respective
assets in mortgage-backed securities that are issued or guaranteed by U.S.
government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association.
Mortgage-backed securities represent direct or indirect participation in, or are
secured by and payable from, mortgage loans secured by real property. These
securities are subject to the risk that prepayments on the underlying mortgages
will cause the principal and interest on the mortgage-backed securities to be
paid prior to their stated maturities. Mortgage
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prepayments are more likely to accelerate during periods of declining long-term
interest rates. If a prepayment occurs, the Funds may have unanticipated
proceeds which it may then have to invest at a lower interest rate, and may be
penalized by not having participated in a comparable security not subject to
prepayment.
WHEN-ISSUED SECURITIES The Funds may invest up to 5% of their respective assets
in debt and equity securities purchased on a when-issued basis. Although the
payment and interest terms of when-issued securities are established at the time
the purchaser enters into the commitment, the actual payment for and delivery of
when-issued securities generally takes place within 45 days. The Fund bears the
risk that interest rates on debt securities at the time of delivery may be
higher or lower than those contracted for on the when-issued security. Failure
of the issuer to deliver the security purchased on a when-issued basis may
result in a loss or missed opportunity to make an alternative investment.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES All of the Funds may invest up
to 35% of their respective total assets in debt securities that are rated in the
medium to lowest rating categories by S&P and Moody's, some of which may be
known as "junk bonds."
The Funds will rely on the Adviser's judgment, analysis and experience in
evaluating debt securities. The Adviser believes that the difference between
perceived risk and actual risk creates the opportunity for profit which can be
realized through thorough analysis. Ratings by S&P and Moody's evaluate only the
safety of principal and interest payments, not market value risk. Because the
creditworthiness of an issuer may change more rapidly than is able to be timely
reflected in changes in credit ratings, the Adviser monitors the issuers of
corporate debt securities held in the Funds' portfolio. The credit ratings
assigned by a rating agency to a security are not considered by the Adviser in
selecting a security. The Adviser examines the intrinsic value of a security in
light of market conditions and the underlying fundamental values. Because of the
nature of medium and lower rated corporate debt securities, achievement by the
Funds of their respective investment objectives when investing in such
securities is dependent on the credit analysis of the Adviser. The Adviser could
be wrong in its analysis. If the Funds purchased primarily higher rated debt
securities, risks would be substantially reduced.
A general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt securities
and adversely affect the market value of such securities. The ability of issuers
of medium and lower grade corporate debt securities to repay principal and to
pay interest, to meet projected business goals and to obtain additional
financing may be adversely affected by economic conditions. Such consequences
could lead to an increased incidence of default for such securities and
adversely affect the value of the corporate debt securities in a Fund's
portfolio. The secondary market prices of medium and lower grade corporate debt
securities are more sensitive to adverse economic changes or individual
corporate developments than are higher rated debt securities. Adverse publicity
and investor perceptions, whether or not based on rational analysis, and periods
of economic uncertainty may also affect the value and liquidity of medium and
lower grade corporate debt securities, although such factors also present
investment opportunities when prices fall below intrinsic values. Yields on debt
securities in the portfolio that are interest rate sensitive can be expected to
fluctuate over time.
To the extent that there is no established market for some of the medium or low
grade corporate debt securities in which the Funds may invest, there may be thin
or no trading in such securities and the ability of the Adviser to value
accurately such securities may be adversely affected. Further, it may be more
difficult for a Fund to sell securities for which no established retail market
exists as compared with securities for which such a market does exist. During
periods of reduced market liquidity and in the absence of readily available
market quotations for medium and lower grade corporate debt securities held in a
Fund's portfolio, the responsibility of the Adviser to value that Fund's
securities becomes more difficult and the Adviser's judgment may play a greater
role in the valuation of the Fund's securities due to a reduced availability of
reliable objective data.
To the extent that a Fund purchases illiquid securities or securities which are
restricted as to resale, that Fund may
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incur additional risks and costs. Illiquid and restricted securities may be
particularly difficult to value and their disposition may require greater effort
and expense than more liquid securities. A Fund may be required to incur costs
in connection with the registration of restricted securities in order to dispose
of such securities, although pursuant to Rule 144A under the Securities Act of
1933 certain securities may be determined to be liquid pursuant to procedures
adopted by the Board of Trustees under applicable guidelines. The Funds may
invest in securities of distressed issuers when the intrinsic values of such
securities, in the opinion of the Adviser, warrant such investment.
OTHER DEBT SECURITIES The Funds may invest in zero-coupon, step-coupon, and
pay-in-kind securities. These securities are debt securities that do not make
regular interest payments. Zero-coupon and step-coupon securities are sold at a
deep discount to their face value; pay-in-kind securities pay interest through
the issuance of additional securities. The market value of these debt securities
generally fluctuates in response to changes in interest rates to a greater
degree than interest-paying securities of comparable term and quality. The
secondary market value of corporate debt securities structured as zero coupon
securities or payment-in-kind securities may be more volatile in response to
changes in interest rates than debt securities which pay interest periodically
in cash. Because such securities do not pay current interest, but rather, income
is accrued, to the extent that a Fund does not have available cash to meet
distribution requirements with respect to such income, it could be required to
dispose of portfolio securities that it otherwise would not. Such disposition
could be at a disadvantageous price. Investment in such securities also involves
certain tax considerations.
BARON GROWTH FUND, BARON SMALL CAP FUND and BARON iOPPORTUNITY FUND from time to
time may also purchase indebtedness and participations therein, both secured and
unsecured, of debtor companies in reorganization or financial restructuring.
Such indebtedness may be in the form of loans, notes, bonds or debentures. When
the Funds purchase a participation interest they assume the credit risk
associated with the bank or other financial intermediary as well as the credit
risk associated with the issuer of any underlying debt instrument. The Funds may
also purchase trade and other claims against, and other unsecured obligations
of, such debtor companies, which generally represent money due a supplier of
goods or services to such company. Some debt securities purchased by the Funds
may have very long maturities. The length of time remaining until maturity is
one factor the Adviser considers in purchasing a particular indebtedness. The
purchase of indebtedness of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost. The Adviser believes that the difference between perceived risk and actual
risk creates the opportunity for profit which can be realized through thorough
analysis. There are no established markets for some of this indebtedness and it
is less liquid than more heavily traded securities. Indebtedness of the debtor
company to a bank are not securities of the banks issuing or selling them. The
Funds may purchase loans from national and state chartered banks as well as
foreign ones. The Funds may invest in senior indebtedness of the debtor
companies, although on occasion subordinated indebtedness may also be acquired.
The Funds may also invest in distressed first mortgage obligations and other
debt secured by real property. The Funds do not currently anticipate investing
more than 5% of their respective assets in trade and other claims.
The Funds may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement the Fund buys a security at one price, and at
the time of sale, the seller agrees to repurchase that security at a mutually
agreed upon time and price. Repurchase agreements could involve certain risks in
the event of the failure of the seller to repurchase the securities as agreed,
which may cause a fund to suffer a loss, including loss of interest on or
principal of the security, and costs associated with delay and enforcement of
the repurchase agreement. Repurchase agreements with a duration of more than
seven days are considered illiquid securities.
As a form of borrowing, the Funds may engage in reverse repurchase agreements
with certain banks or non-bank dealers, where the Fund sells a security and
simultaneously agrees to buy it back later at a mutually agreed upon price. To
the extent a Fund engages in reverse repurchase agreements it will maintain a
segregated account consisting of liquid assets or highly marketable securities
to cover its obligations. Reverse repurchase agreements may expose the Fund to
greater fluctuations in the value of its assets.
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OPTIONS TRANSACTIONS AND SWAPS
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BARON ASSET FUND may write (sell) covered call options or purchase put options
on equity and/or debt securities. BARON GROWTH FUND, BARON SMALL CAP FUND and
BARON iOPPORTUNITY FUND and may write (sell) put and covered call options and
purchase put and call options on equity and/or debt securities. The Funds may
also enter into equity swap transactions. All calls sold by the Funds must be
"covered" (i.e., a Fund must own the underlying securities) or must meet the
asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by a Fund exposes that Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the Fund to hold
a security or instrument which it might otherwise have sold.
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation, when exercised, to buy, the
underlying security, at the exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller if
exercised, the obligation to sell, the underlying security at the exercise
price. An American style put or call option may be exercised at any time during
a fixed period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto, and the Funds may engage
in either style option. The Funds are authorized to engage in transactions with
respect to exchange-listed options, over-the-counter options ("OTC options") and
other derivative investments. Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
Rather than taking or making delivery of the underlying security through the
process of exercising the option, listed options are usually closed by entering
into offsetting purchase or sale transactions that do not result in ownership of
the new option. The Fund's ability to close out its position as a purchaser or
seller of an OCC or exchange-listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms. The
hours of trading for listed options may not coincide with the hours during which
the underlying instruments are traded. To the extent that the option markets
close before the markets for the underlying instruments, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option are negotiated by the parties. The Funds expect generally to enter
into OTC options that have cash settlement provisions, although they are not
required to do so.
Equity swap transactions are entered into with financial institutions through a
direct agreement with the Counterparty, generally an ISDA Master Agreement, the
specific terms of which are negotiated by the parties. The Funds may use equity
swaps, or other derivative instruments, for hedging purposes against potential
adverse movements in security prices or for non-hedging purposes such as seeking
to enhance return. The Funds may be
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required to post collateral for such transactions.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option or derivatives, including swaps. As a result, if the
Counterparty fails to make or take delivery of the security, or other instrument
or fails to make a cash settlement payment due in according with the option, the
Fund will lose any premium it paid for the option as well as any anticipated
benefit of the transaction. The Adviser must assess the creditworthiness of each
Counterparty to determine the likelihood that the terms of the OTC option or the
derivative will be satisfied. The Funds will engage in OTC option transactions
and derivatives only with previously approved Counterparties. The staff of the
SEC currently takes the position that OTC options purchased by a fund, and
portfolio securities "covering" the amount of the fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any,) are illiquid, and are subject to a fund's limitations on
investments in illiquid securities.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
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Many hedging transactions, in addition to other requirements, require that a
Fund segregate liquid high grade assets with its custodian to the extent Fund
obligations are not otherwise "covered" through ownership of the underlying
security or instrument. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities or instruments required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid high grade securities at
least equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by a Fund will require that Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid high
grade securities sufficient to purchase and deliver the securities if the call
is exercised. A put option written requires that the Fund segregate liquid, high
grade assets equal to the exercise price. Hedging transactions may be covered by
other means when consistent with applicable regulatory policies. The Funds have
adopted investment restrictions, described below, which are fundamental policies
of the Funds and may not be changed without the approval of the Funds'
shareholders. Unless otherwise noted, all percentage restrictions are measured
as of the time of the investment after giving effect to the transaction.
INVESTMENT RESTRICTIONS
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BARON ASSET FUND may not:
1. Issue senior securities except in connection with any permitted borrowing
where the Fund is deemed to have issued a senior security;
2. Borrow money except from banks for temporary purposes in an amount not
exceeding 5% of the Fund's net assets at the time the borrowing is made;
3. Purchase securities on margin except for short-term credit necessary for
the clearance of portfolio transactions;
4. Make short sales of securities, maintain a short position, or write put
options;
5. Purchase or sell commodities or commodity contracts;
6. Purchase or sell real estate or real estate mortgage loans or invest in the
securities of real estate companies unless such securities are publicly
traded;
7. Invest in oil, gas or mineral-related programs or leases;
8. Invest more than 25% of the value of its total assets in any one industry,
except investments in U.S. government securities;
9. Purchase the securities of any one issuer other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of the Fund's total assets would be
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invested in such issuer or the Fund would own more than 10% of the
outstanding voting securities of such issuer, except that up to 25% of the
value of the Fund's total assets may be invested without regard to the 5%
and 10% limitations;
10. Invest more than 10% of the value of the Fund's total assets in securities
which are restricted or illiquid or in repurchase agreements maturing or
terminable in more than seven days;
11. Invest in securities of other open end investment companies (except in
connection with a merger, consolidation or other reorganization and except
for the purchase of shares of registered open-end money market mutual funds
if double advisory fees are not assessed), invest more than 5% of the value
of the Fund's total assets in more than 3% of the total outstanding voting
securities of another investment company or more than 10% of the value of
the Fund's total assets in securities issued by other investment companies;
12. Participate on a joint, or a joint and several, basis in any securities
trading account;
13. Underwrite securities of other issuers;
14. Make loans to other persons, except up to 10% of the value of the Fund's
total assets in loans of portfolio securities and except to the extent that
the purchase of publicly traded debt securities and the entry into
repurchase agreements in accordance with the Fund's investment objective
and policies may be deemed to be loans;
15. Mortgage, pledge or hypothecate any portfolio securities owned or held by
the Fund, except as may be necessary in connection with permitted
borrowing;
16. Invest more than 5% of its total assets in warrants to purchase common
stock;
17. Purchase securities of any issuer with a record of less than three years'
continuous operation, including predecessors, except obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, if
such purchase would cause the investments of the Fund in all such issuers
to exceed 5% of the value of the total assets of the Fund; or
18. Purchase or retain any securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the
Fund, or is a member, officer or Director of the Adviser, if after the
purchase of the securities of such issuer by the Fund one or more of such
persons owns beneficially more than of 1% of the shares or securities, or
both, all taken at market value, of such issuer, and such persons owning
more than of 1% of such shares or securities together own beneficially more
than 5% of such shares or securities, or both, all taken at market value.
BARON GROWTH FUND, BARON SMALL CAP FUND and BARON iOPPORTUNITY FUND may not:
1. Issue senior securities or borrow money or utilize leverage in excess of
25% of its net assets (plus 5% for emergency or other short-term purposes)
from banks from time to time.
2. Except as described in the prospectus or SAI, engage in short-sales,
purchase securities on margin or maintain a net short position.
3. Purchase or sell commodities or commodity contracts except for hedging
purposes and in conformity with regulations of the Commodities Futures
Trading Commission such that the Fund would not be considered a commodity
pool.
4. Purchase or sell oil and gas interests or real estate. Debt or equity
securities issued by companies engaged in the oil, gas or real estate
business are not considered oil or gas interests or real estate for
purposes of this restriction. First mortgage loans and other direct
obligations secured by real estate are not considered real estate for
purposes of this restriction.
5. Invest more than 25% of the value of its total assets in any one industry,
except investments in U.S. government securities.
6. Purchase the securities of any one issuer other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of the Fund's total assets would be
invested in such issuer or the Fund would own more than 10% of the
outstanding voting securities of such issuer, except that up to 25% of the
value of the Fund's total assets may be invested without regard to the 5%
and 10% limitations.
-10-
<PAGE>
7. Underwrite securities of other issuers.
8. Make loans, except to the extent the purchase of debt obligations of any
type (including repurchase agreements and corporate commercial paper) are
considered loans and except that the Fund may lend portfolio securities to
qualified institutional investors in compliance with requirements
established from time to time by the Securities and Exchange Commission and
the securities exchanges where such securities are traded.
9. Participate on a joint, or a joint and several, basis in any securities
trading account.
10. Mortgage, pledge or hypothecate any of its assets, except as may be
necessary in connection with options, loans of portfolio securities, or
other permitted borrowings.
11. Purchase securities of any issuer with a record of less than three years'
continuous operations, including predecessors, except obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities, if
such purchase would cause the investments of the Fund in all such issuers
to exceed 5% of the value of the total assets of the Fund.
12. Invest more than 15% of its assets in restricted or illiquid securities,
including repurchase agreements maturing in more than seven days.
As a non-fundamental policy, BARON GROWTH FUND, BARON SMALL CAP FUND and BARON
iOPPORTUNITY FUND will not:
1. Invest in securities of other registered investment companies (except in
connection with a merger, consolidation or other reorganization and except
for the purchase of shares of registered open-end money market funds if
double advisory fees are not assessed), invest more than 5% of the value of
the Fund's total assets in more than 3% of the total outstanding voting
securities of another investment company or more than 10% of the value of
the Fund's total assets in securities issued by other investment companies.
2. Invest more than 5% of its total assets in warrants to purchase common
stock.
3. Purchase the securities of any issuer of which any officer or director of
the Fund owns 1/2 of 1% of the outstanding securities or in which the
officers and directors in the aggregate own more than 5%.
The Securities and Exchange Commission currently requires that the following
conditions be met whenever portfolio securities are loaned: (1) the Fund must
receive at least 100% cash collateral from the borrower; (2) the borrower must
increase such collateral whenever the market value of the securities rises above
the level of such collateral; (3) the Fund must be able to terminate the loan at
any time; (4) the Fund must receive reasonable interest on the loan, as well as
any dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Fund may pay only reasonable custodian fees in
connection with the loan; and (6) while voting rights on the loaned securities
may pass to the borrower, the Fund's trustees must terminate the loan and regain
the right to vote the securities if a material event adversely affecting the
investment occurs. These conditions may be subject to future modifications. The
portfolios of the Funds are valued every day the New York Stock Exchange is open
for trading.
With respect to investments in warrants, the Funds will not invest in excess of
2% of the value of the particular Fund's net assets in warrants that are not
listed on the New York or American Stock Exchanges. Warrants are essentially
options to purchase equity securities at a specified price valid for a specific
period of time. Their prices do not necessarily move parallel to the prices of
the underlying securities. Warrants have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
TURNOVER RATE
- -------------
The adviser expects that the average annual turnover rate of the portfolios of
BARON ASSET FUND and BARON GROWTH FUNd should not exceed 50% and of BARON SMALL
CAP FUND and BARON iOPPORTUNITY FUND should not exceed 100%. The turnover rate
fluctuates depending on market conditions. The turnover rates for the Funds for
the past two years are:
-11-
<PAGE>
FUND 1999 1998
---- ---- ----
BARON ASSET FUND 16% 23%
BARON GROWTH FUND 53% 40%
BARON SMALL CAP FUND 43% 60%
MANAGEMENT OF THE FUNDS
- -----------------------
BOARD OF TRUSTEES AND OFFICERS
- ------------------------------
The Board of Trustees oversees the management of the Funds. The Trustees and
executive officers of the Funds and their principal occupations during the last
five years are set forth below.
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -------------------- --- ------------- ---------------------------------------------
Ronald Baron *+ 56 Chairman, CEO, Chief Chairman, CEO, and Director of: Baron
767 Fifth Avenue Investment Officer and Trustee Capital, Inc. (1982-Present), Baron Capital
New York, NY 10153 Management, Inc. (1983-Present), Baron
Capital Group, Inc. (1984-Present),
BAMCO, Inc. (1987-Present).
Norman S. Edelcup^ 64 Trustee Senior Vice President, Item Processing of
244 Atlantic Isle America (1999-Present) (a subsidiary of The
North Miami, FL 33160 Intercept Group); Chairman, Item
Processing of America (1989-1999) (a
financial institution service bureau);
Director, Valhi, Inc. (1975-Present)
(diversified company); Director, Artistic
Greetings, Inc. (1985-1998).
Mark M. Feldman 48 Trustee President and CEO, Cold Spring Group, Inc.
444 Madison Ave., Ste 703 (1993-Present) (reorganization and
New York, NY 10020 restructuring consulting); Chief
Restructuring Officer, various companies
(1995-Present) (case and litigation
management); Director, SNL Securities, Inc.
(1997-Present) (publisher of data bases and
manager of a bank and thrift portfolio);
Trustee, Aerospace Creditors Liquidating
Trust (1993-1997) (administered and liquidated assets).
Irwin Greenberg^ 68 Trustee Chairman (1994-1997) and Director (1991-
4303 W. Wyndemere Circle Present), Lehigh Valley Hospital Board;
Schnecksville, PA 18078 Retail Consultant, (1990-Present); Director,
Cedar Crest College (1990-1999); Director,
Henry Lehr & Co., Inc. (1996-Present)
(insurance); President and CEO, Hess's
Department Stores (1976-1990).
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -------------------- --- ------------- ---------------------------------------------
Clifford Greenberg 40 Vice President Vice President of: Baron Capital, Inc.,
767 Fifth Avenue Baron Capital Group, Inc., BAMCO, Inc.,
New York, NY 10153 (1997-Present); Genera Partner, HPB
Associates, LP (1984-1996) (investment partnership).
Linda S. Martinson*+ 45 Vice President, Secretary and General Counsel and Secretary of: Baron
767 Fifth Avenue Trustee Capital, Inc. (1983-Present), BAMCO, Inc.
New York, NY 10153 (1987-Present), Baron Capital Group, Inc.
(1984-Present), Baron Capital Management,
Inc. (1983-Present).
Charles N. Mathewson 71 Trustee Chairman, International Game Technology
9295 Prototype Road (1986-Present) (manufacturer of
Reno, NV 89511 microprocessor-controlled gaming machines
and monitoring systems).
Harold W. Milner 65 Trustee Retired; President and CEO, Kahler Realty
2293 Morningstar Drive Corporation (1985-1997) (hotel ownership
Park City, UT 84060 and management).
Raymond Noveck+ 55 Trustee Private Investor (1999-Present); President,
31 Karen Road The Medical Information Line, Inc. (1997-
Waban, MA 02168 1998) (health care information); President,
Strategic Systems, Inc. (1990-1997) (health
care information); Director, Horizon/CMS
Healthcare Corporation (1987-1997).
Susan Robbins 45 Vice President Senior Analyst, Vice President and Director
767 Fifth Avenue of: Baron Capital, Inc. (1982-Present),
New York, NY 10153 Baron Capital Management, Inc. (1984-
Present).
Morty Schaja* 45 President, Chief President and Chief Operating Officer of Baron
767 Fifth Avenue Operating Officer and Trustee Capital Inc. (1999-Present),Senior Vice President
New York, NY 10153 and Chief Operating Officer of Baron Capital, Inc.
(1997-1999), Managing Director, Vice
President, Baron Capital, Inc. (1991-
Present), and Director, Baron Capital Group,
Inc., Baron Capital Management, Inc., and
BAMCO, Inc. (1997-Present).
David A. Silverman, MD 49 Trustee Physician and Faculty, New York
239 Central Park West University School of Medicine (1976-
New York, NY 10024 Present).
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
POSITION HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS AGE WITH THE FUND DURING PAST FIVE YEARS
<S> <C> <C> <C>
- -------------------- --- ------------- ---------------------------------------------
Peggy C. Wong 39 Treasurer and Chief Financial Treasurer and Chief Financial Officer of:
767 Fifth Avenue Officer Baron Capital, Inc., Baron Capital Group,
New York, NY 10153 Inc., BAMCO, Inc. and Baron Capital
Management, Inc. (1987-Present).
</TABLE>
________________________________________________________________________________
* Trustees deemed to be "interested persons" of the Fund as that term is
defined in the Investment Company Act of 1940.
+ Members of the Executive Committee, which is empowered to exercise all of
the powers, including the power to declare dividends, of the full Board of
Trustees when the full Board of Trustees is not in session.
^ Members of the Audit Committee.
The Trustees of the Funds' received the following compensation from the Funds
for the fiscal year ended September 30, 1999:
AGGREGATE COMPENSATION TOTAL COMPENSATION
NAME FROM THE FUNDS FROM THE FUNDS PAID TO TRUSTEES
- ---- ---------------------- -------------------------------
Ronald Baron $0 $0
Norman Edelcup $15,000 $15,000
Linda S. Martinson $0 $0
Charles Mathewson $ 2,500 $ 2,500
Mark Feldman $12,500 $12,500
Irwin Greenberg $15,000 $15,000
Harold Milner $12,500 $12,500
Raymond Noveck $12,500 $12,500
Morty Schaja $0 $0
David Silverman $12,500 $12,500
Daniel Tisch $143 $143
TOTALS $82,643 $82,643
PRINCIPAL HOLDERS OF SHARES
- ---------------------------
As of December 31, 1999, the following persons were known to the Funds to be the
record or beneficial owners of more than 5% of the outstanding securities of the
Funds:
BARON ASSET BARON GROWTH BARON SMALL
FUND FUND CAP FUND
----------- ------------ -----------
Charles Schwab & Co., Inc. 36.7% 35.0% 44.9%
National Financial Services Corp. 13.1% 25.8% 24.0%
All of the above record owners are brokerage firms or other Financial
Institutions that hold stock for the benefit of their respective customers. As
of December 31, 1999, all of the officers and Trustees of BARON ASSET FUND as a
group beneficially owned directly or indirectly 0.12% of BARON ASSET FUND's
outstanding shares 0.43% of BARON GROWTH FUND's outstanding shares and 0.38% of
BARON SMALL CAP FUND's outstanding shares.
-14-
<PAGE>
INVESTMENT ADVISER
- ------------------
The investment adviser to the Funds is BAMCO, Inc. (the "Adviser"), a New York
corporation with its principal offices at 767 Fifth Avenue, New York, N.Y. 10153
and a subsidiary of Baron Capital Group, Inc. ("BCG"). Mr. Ronald Baron is the
controlling stockholder of BCG and is BAMCO's chief investment officer. Mr.
Baron has over 30 years of experience as a Wall Street analyst and has managed
money for others for over 25 years. He has been a participant in Barron's
Roundtable and has been a featured guest on Wall Street Week, CNN and CNBC/FNN.
Pursuant to separate Advisory Agreements with each Fund (the "Advisory
Agreement"), the Adviser furnishes continuous investment advisory services and
management to each Fund, including making the day-to-day investment decisions
and arranging portfolio transactions for the Funds subject to such policies as
the Trustees may determine. BARON ASSET FUND incurred advisory expenses of
$59,460,701 for the year ended September 30, 1999; $45,074,474 for the year
ended September 30, 1998; and $18,573,064 for the year ended September 30, 1997.
BARON GROWTH FUND incurred advisory expenses of $3,534,481 for the year ended
September 30, 1999; $4,310,057 for the year ended September 30, 1998; and
$2,828,391 for the year ended September 30, 1997. BARON SMALL CAP FUND incurred
advisory expenses of $5,457,810 for the year ended September 30, 1999; and
$4,041,420 for the year ended September 30, 1998, its first year of operation.
BARON iOPPORTUNITY FUND did not incur any advisory fees in 1999.
Under the Advisory Agreements, the Adviser, at its own expense and without
reimbursement from the Funds, furnishes office space and all necessary office
facilities, equipment and executive personnel for managing the Funds, and pays
the salaries and fees of all officers and Trustees who are interested persons of
the Adviser.
The Funds pay all operating and other expenses not borne by the Adviser such as
audit, accounting and legal fees; custodian fees; expenses of registering and
qualifying its shares with federal and state securities commissions; expenses in
preparing shareholder reports and proxy solicitation materials; expenses
associated with each Fund's shares such as dividend disbursing, transfer agent
and registrar fees; certain insurance expenses; compensation of Trustees who are
not interested persons of the Adviser; and other miscellaneous business
expenses. The Funds also pay the expenses of offering the shares of each
respective Fund, including the registration and filing fees, legal and
accounting fees and costs of printing the prospectus and related documents. Each
Fund also pays all taxes imposed on it and all brokerage commissions and
expenses incurred in connection with its portfolio transactions.
The Adviser utilizes the staffs of BCG and its subsidiary Baron Capital
Management, Inc. ("BCM") to provide research. Directors, officers or employees
of the Adviser and/or its affiliates may also serve as officers or Trustees of
the Funds. BCM is an investment adviser to institutional and individual
accounts. Clients of BCM have investment objectives which may vary only slightly
from those of each other and of the Funds. BCM invests assets in such clients'
accounts and in the accounts of principals and employees of BCM and its
affiliates in investments substantially similar to, or the same as, those which
constitute the principal investments of the Funds. When the same securities are
purchased for or sold by a Fund and any of such other accounts, it is the policy
of the Adviser and BCM to allocate such transactions in a manner deemed
equitable by the Adviser, and for the principals and employees of the Adviser,
BCM, and affiliates to take either the same or least favorable price of the day.
All trading by employees is subject to the Code of Ethics of the Funds and the
Adviser. In certain circumstances the Adviser may make investments for the Funds
that conflict with investments being made by BCM. The Adviser may also make
investment decisions for a Fund that are inconsistent with the investment
decisions for another Fund.
Each Advisory Agreement provides that the Fund may use "Baron" as part of its
name for so long as the Adviser serves as investment adviser to that Fund. Each
Fund acknowledges that the word "Baron" in its name is derived from the name of
the entities controlling, directly and indirectly, the Adviser, which derive
their name from Ronald Baron; that such name is the property of the Adviser and
its affiliated companies for copyright and/or other purposes; and that if for
any reason the Adviser ceases to be that Fund's investment adviser, that Fund
will promptly take all steps necessary to change its name to one that does not
include "Baron," absent the Adviser's written consent.
Each Advisory Agreement provides that the Adviser shall have no liability to
that Fund or its shareholders for any
-15-
<PAGE>
error of judgment or mistake of law or for any loss suffered by that Fund;
provided, that the Adviser shall not be protected against liabilities arising by
virtue of willful misfeasance, bad faith or gross negligence, or reckless
disregard of the Adviser's obligations under the Advisory Agreement.
The Advisory Agreements were approved by a majority of the Trustees, including a
majority of the Trustees who are not "interested persons" ( as defined by the
Investment Company Act of 1940 ("1940 Act" )) for BARON ASSET FUND on May 11,
1987, for BARON GROWTH FUND on October 21, 1994, and for BARON SMALL CAP FUND on
July 29, The Advisory Agreements must normally be approved annually by the
Trustees or a majority of the particular Fund's shares and by a majority of the
Trustees who are not parties to the Advisory Agreement or interested persons of
any such party. With respect to BARON ASSET FUND, BARON GROWTH FUND and BARON
SMALL CAP FUND, such approval for 1999 was given at a Board of Trustees meeting
held on April 26, 1999. The Advisory Agreement for BARON iOPPORTUNITY FUND was
approved by the Board of Trustees on January 18, 1999 for an initial term of two
years.
Each Advisory Agreement is terminable without penalty by either the Fund (when
authorized by majority vote of either its outstanding shares or the Trustees) or
the Adviser on 60 days' written notice. Each Advisory Agreement shall
automatically terminate in the event of its "assignment" (as defined by the 1940
Act).
SERVICE AGREEMENTS
- ------------------
The Funds have agreements with various service providers pursuant to which
administrative services such as record keeping, reporting and processing
services are provided to the Funds.
DISTRIBUTOR
- -----------
The Funds have a distribution agreement with Baron Capital, Inc., ("Baron
Capital" or the "Distributor") a New York corporation and a subsidiary of BCG,
located at 767 Fifth Avenue, New York, N.Y. 10153. Baron Capital is affiliated
with the Adviser. The Distributor acts as the agent for the Funds for the
continuous public offering of their shares on a best efforts basis pursuant to a
distribution plan adopted under Rule 12b-1 under the 1940 Act ("Distribution
Plan").
DISTRIBUTION PLAN
- -----------------
The Distribution Plan authorizes the Funds to pay the Distributor a distribution
fee equal on an annual basis to 0.25% of the Funds' average daily net assets.
The fee was reduced to 0.25% from 0.50% on July 12, 1993. The distribution fee
is paid to the Distributor in connection with its activities or expenses
primarily intended to result in the sale of shares, including, but not limited
to, compensation to registered representatives or other employees of the
Distributor; compensation to and expenses of employees of the Distributor who
engage in or support the distribution of shares or who service shareholder
accounts; telephone expenses; preparing, printing and distributing promotional
and advertising material; preparing, printing and distributing the Prospectus
and reports to other than current shareholders; compensation for certain
shareholder services; and commissions and other fees to broker-dealers or other
persons (excluding banks) who have introduced investors to the Fund. The
distribution fee is payable to the Distributor regardless of the actual expenses
incurred, although the actual expenses incurred by the Distributor have
historically exceeded the distribution fees received by the Distributor.
If and to the extent the expenses listed below are considered to be primarily
intended to result in the sale of shares within the meaning of Rule 12b-1, they
are not included in the limits above: (a) the costs of preparing, printing or
reproducing and mailing all required reports and notices to shareholders; (b)
the costs of preparing, printing or reproducing and mailing all proxy statements
and proxies (whether or not such proxy materials include any item relating to or
directed toward the sale of shares); (c) the costs of preparing, printing or
reproducing and mailing all prospectuses and statements of additional
information; (d) all legal and accounting fees relating to the preparation of
any such report, prospectus, and proxy materials; (e) all fees and expenses
relating to the qualification of the Funds and/or their shares under the
securities or "Blue Sky" laws of any jurisdiction; (f) all fees under the 1940
Act
-16-
<PAGE>
and the Securities Act of 1933, including fees in connection with any
application for exemption relating to or directed toward the sale of Shares; (g)
all fees and assessments, if any, of the Investment Company Institute or any
successor organization, whether or not its activities are designed to provide
sales assistance; (h) all costs of preparing and mailing confirmations of shares
sold or redeemed and reports of share balances; (i) all costs of responding to
telephone or mail inquiries of shareholders or prospective shareholders.
The Distribution Plan requires that while it is in effect the Distributor report
in writing, at least quarterly, the amounts of all expenditures, the identity of
the payees and the purposes for which such expenditures were made for the
preceding fiscal quarter.
For the fiscal year ended September 30, 1999, BARON ASSET FUND paid distribution
fees to the Distributor of $14,865,186 (an additional $231,170 was absorbed by
the Distributor and/or its affiliates and not paid by the Fund pursuant to the
0.25% limitation); BARON GROWTH FUND paid distribution fees to the Distributor
of $883,621 (an additional $1,308 was absorbed by the Distributor and/or its
affiliates and not paid by the Fund pursuant to the 0.25% limitation); and BARON
SMALL CAP FUND paid distribution fees to the Distributor of $1,364,454 (an
additional $49,300 was absorbed by the Distributor and/or its affiliates and not
paid by the Fund pursuant to the 0.25% limitation). The distribution expenses
incurred by the Distributor for the fiscal year ended September 30, 1999 with
respect to the three Funds in the aggregate were as follows:
(a) Advertising $ 14,200
(b) printing and mailing of prospectuses 1,213,971
to other than current shareholders
(c) Compensation paid or to be paid to 13,451,843
broker/dealers
(d) Compensation paid to sales and clerical personnel 2,395,459
(e) Other 684,218
Trustees of the Funds who were not interested persons of the Funds had no direct
or indirect financial interest in the operation of the Distribution Plan or the
Distribution Agreement. All the interested Trustees had such an interest.
The Distribution Plan has been approved by the Funds' Board of Trustees,
including a majority of the Trustees who are not interested persons of the Funds
and who have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreements related thereto. In approving the
Distribution Plan, the Trustees considered various factors and determined that
there is a reasonable likelihood that the Plan will benefit the Funds and their
shareholders. The anticipated benefits include the following: (i) reduced
expense ratios due to economies of scale, (ii) the ability to purchase larger
blocks of securities, resulting in decreased expenses, and (iii) the
minimization of adverse effects from forced sales of portfolio securities to
meet redemptions.
Baron Capital is authorized to make payments to authorized dealers, banks and
other financial institutions who have rendered distribution assistance and
ongoing shareholder support services, shareholder servicing assistance or record
keeping. Certain states may require that any such person be registered as a
dealer with such state. The Funds may execute portfolio transactions with and
purchase securities issued by depository institutions that receive payments
under the Distribution Plan. No preference will be shown in the selection of
investments for the instruments of such depository institutions. Baron Capital
may also retain part of the distribution fee as compensation for its services
and expenses in connection with the distribution of shares. Baron Capital's
actual expenditures have and will continue to substantially exceed the
distribution fee received by it. If the Distribution Plan is terminated, the
Funds will owe no payments to Baron Capital other than any portion of the
distribution fee accrued through the effective date of termination but then
unpaid.
-17-
<PAGE>
Unless terminated in accordance with its terms, the Distribution Plan shall
continue in effect until, and from year to year thereafter if, such continuance
is specifically approved at least annually by its Trustees and by a majority of
the Trustees who are not interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Distribution Plan or in
any agreements related thereto, such votes cast in person at a meeting called
for the purpose of such vote.
The Distribution Plan may be terminated at any time by the vote of a majority of
the members of the Funds' Board of Trustees who are not interested persons of
the Funds and have no direct or indirect financial interest in the operation of
the Distribution Plan or in any agreements related thereto or by the vote of a
majority of the outstanding shares. The Distribution Plan may not be amended to
increase materially the amount of payments to be made without the approval of a
majority of the shareholders. All material amendments must be approved by a vote
of the Trustees and of the Trustees who are not interested persons of the Funds
and have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreements related thereto, such votes cast in
person at a meeting called for the purpose of such vote.
The Glass-Steagall Act and other applicable laws, among other things, prohibit
banks from engaging in underwriting, selling or distributing securities.
Accordingly, the Distributor will enter into agreements with banks only to
provide administrative assistance. However, changes in federal or state statues
and regulations as well as judicial or administrative decisions or
interpretations could prevent a bank from continuing to perform all or a part of
the contemplated services. If a bank were prohibited from so acting, the
Trustees would consider what actions, if any, would be necessary to continue to
provide efficient and effective shareholder services. It is not expected that
shareholders would suffer any adverse financial consequences as a result of
these occurrences.
BROKERAGE
- ---------
The Adviser is responsible for placing the portfolio brokerage business of the
Funds with the objective of obtaining the best net results for the Funds, taking
into account prompt, efficient and reliable executions at a favorable price.
Brokerage transactions for the Funds in exchange-listed securities are effected
chiefly by or through the Adviser's affiliate, Baron Capital, when consistent
with this objective and subject to the conditions and limitations of the 1940
Act. Baron Capital is a member of the National Association of Securities
Dealers, Inc., but is not a member of any securities exchange. Transactions in
securities that trade on NASDAQ or are otherwise not listed are effected by
broker/dealers other than Baron Capital. The Funds do not deal with Baron
Capital in any portfolio transaction in which Baron Capital acts as principal.
The Funds' Board of Trustees has adopted procedures pursuant to Rule 17e-1 of
the 1940 Act which are reasonably designed to provide that the commissions paid
to Baron Capital are reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. The Board reviews no
less frequently than quarterly that all transactions effected pursuant to Rule
17e-1 during the preceding quarter were effected in compliance with such
procedures. The Funds and the Adviser furnish such reports and maintain such
records as required by Rule 17e-1.
For the fiscal year ended September 30, 1999, of the total $4,038,205 brokerage
commissions paid by BARON ASSET FUND, $2,525,589 brokerage commissions were paid
to Baron Capital. Of the total $642,337 brokerage commissions paid by BARON
GROWTH FUND, $351,548 brokerage commissions were paid to Baron Capital. Of the
total $697,825 brokerage commissions paid by BARON SMALL CAP FUND, $409,592
brokerage commissions were paid to Baron Capital. For the fiscal year ended
September 30, 1998, of the total $8,178,614 brokerage commissions paid by the
Funds, $5,435,764 were paid to Baron Capital. For the fiscal year ended
September 30, 1997, of the total $3,307,779 brokerage commissions paid by BARON
ASSET FUND and BARON GROWTH FUND, $2,575,700 brokerage commissions were paid to
Baron Capital. The brokerage commissions paid to Baron Capital by BARON ASSET
FUND represent 62.5% of the aggregate dollar amount of brokerage commissions
paid and 62.6% of the aggregate dollar amount of transactions involving the
payment of commissions for the 1999 fiscal year. The brokerage commissions paid
to Baron Capital by BARON GROWTH FUND represent 54.7% of the aggregate dollar
-18-
<PAGE>
amount of brokerage commissions paid and 62.0% of the aggregate dollar amount of
transactions involving the payment of commissions for the 1999 fiscal year. The
brokerage commissions paid to Baron Capital by BARON SMALL CAP FUND represent
58.7% of the aggregate dollar amount of brokerage commissions paid and 55.9% of
the aggregate dollar amount of transactions involving the payment of commissions
for the 1999 fiscal year. The brokerage commissions paid to Baron Capital
represent 66.5% of the aggregate dollar amount of brokerage commissions paid and
59.1% of the aggregate dollar amount of transactions involving the payment of
commissions for the 1998 fiscal year. The brokerage commissions paid to Baron
Capital represent 77.9% of the aggregate dollar amount of brokerage commissions
paid and 76.4% of the aggregate dollar amount of transactions involving the
payment of commissions for the 1997 fiscal year. Transactions in which Baron
Capital acted as broker represents 36.0% of the aggregate dollar amount of all
principal and agency transactions for BARON ASSET FUND for the 1999 fiscal year.
Transactions in which Baron Capital acted as broker represents 44.4% of the
aggregate dollar amount of all principal and agency transactions for BARON
GROWTH FUND for the 1999 fiscal year. Transactions in which Baron Capital acted
as broker represents 32.5% of the aggregate dollar amount of all principal and
agency transactions for BARON SMALL CAP FUND for the 1999 fiscal year.
Under the Investment Advisory Agreements and as permitted by Section 28(e) of
the Securities and Exchange Act of 1934, the Adviser may cause the Funds to pay
a broker-dealer (except Baron Capital) which provides brokerage and research
services to the Adviser an amount of commission for effecting a securities
transaction for the Funds in excess of the amount other broker-dealers would
have charged for the transaction if the Adviser determines in good faith that
the greater commission is consistent with the Funds' policies and is reasonable
in relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of either a particular transaction or
the Adviser's overall responsibilities to the Funds or to its other clients. The
term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto such as clearance and settlement. Such research and information may be
used by the Adviser or its affiliates to supplement the services it is required
to perform pursuant to the Advisory Agreement in serving the Funds and/or other
advisory clients of affiliates.
Broker-dealers may be willing to furnish statistical research and other factual
information or services to the Adviser for no consideration other than brokerage
or underwriting commissions. Securities may be bought or sold through such
broker-dealers, but at present, unless otherwise directed by the Funds, a
commission higher than one charged elsewhere will not be paid to such a firm
solely because it provided research to the Adviser. Research provided by brokers
is used for the benefit of all of the Adviser's or its affiliates' clients and
not solely or necessarily for the benefit of the Funds. The Adviser's investment
management personnel attempt to evaluate the quality of research provided by
brokers. Results of this effort are sometimes used by the Adviser as a
consideration the in the selection of brokers to execute portfolio transactions.
Baron Capital acts as broker for, in addition to the Funds, accounts of BCM and
Baron Capital, including accounts of principals and employees of Baron Capital,
BCM and the Adviser. Investment decisions for the Funds for investment accounts
managed by BCM and for accounts of Baron Capital are made independent of each
other in light of differing considerations for the various accounts. The same
investment decision may, however, be made for two or more of the Adviser's,
BCM's and/or Baron Capital's accounts. In such event, simultaneous transactions
are inevitable. Purchases and sales are averaged as to price where possible and
allocated to account in a manner deemed equitable by the Adviser in conjunction
with BCM and Baron Capital. This procedure could have a detrimental effect upon
the price or value of the security for the Funds, but may have a beneficial
effect.
The investment advisory fee that the Funds pay to the Adviser is not reduced as
a consequence of the Adviser's receipt of brokerage and research services. To
the extent the Funds' portfolio transactions are used to obtain such services,
the brokerage commissions paid by the Funds will exceed those that might
otherwise be paid by an amount that cannot be presently determined. Such
services would by useful and of value to the Adviser in serving both the Funds
and other clients and, conversely, such services obtained by the placement of
brokerage business of other clients would by useful to the Adviser in carrying
out its obligations to the Funds.
-19-
<PAGE>
CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT
- ------------------------------------------------
The Bank of New York, 100 Church Street, New York, NY, is the custodian for the
Funds' cash and securities. DST Systems, Inc., CT-7 Tower, 1004 Baltimore,
Kansas City, MO 64105, is the transfer agent and dividend agent for the Funds'
shares. Neither institution assists in or is responsible for investment
decisions involving assets of the Funds.
REDEMPTION OF SHARES
- --------------------
The Funds expect to make all redemptions in cash, but have reserved the right to
make payment, in whole or in part, in portfolio securities. Payment will be made
other than all in cash if the Funds' Board of Trustees determines that economic
conditions exist which would make payment wholly in cash detrimental to a
particular fund's best interests. Portfolio securities to be so distributed, if
any, would be selected in the discretion of the Funds' Board of Trustees and
priced as described under "Determining Your Share Price" herein and in the
Prospectus.
BARON iOPPORTUNITY FUND imposes a short-term trading fee on redemptions and
exchanges of its shares held for less than 180 days. The fee is 1% of the
redemption value and is deducted from the redemption proceeds. The Fund uses the
"first-in, first-out" method to determine the holding period, so if you bought
shares on different days, the shares purchased first will be redeemed first for
determining whether the fee applies. The fee is retained by the Fund for the
benefit of the remaining shareholders to offset the administrative costs
associated with processing redemptions and to offset the portfolio transaction
and facilitate portfolio management.
The Fund waives the fee for defined contribution plans and may waive the fee for
other redemptions if it is in the best interest of the Fund
NET ASSET VALUE
- ----------------
As more fully set forth in the Prospectus under "Determining Your Share Price,"
the net asset value per share of each Fund is determined as of the close of the
New York Stock Exchange on each day that the Exchange is open. he Exchange is
open all week days that are not holidays, which it announces annually. The most
recent announcement states it will not be open on New Year's Day, Martin Luther
King, Jr.'s Day, Washington's Birthday, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Securities traded on more than one national securities exchange are valued at
the last sale price of the day as of which such value is being determined as
reflected at the close of the exchange which is the principal market for such
securities.
U.S. Government obligations and other debt instruments having sixty days or less
remaining until maturity are stated at amortized cost. Debt instruments having a
greater remaining maturity will be valued at the highest bid price from the
dealer maintaining an active market in that security or on the basis of prices
obtained from a pricing service approved by the Board of Trustees.
TAXES
- -----
Each Fund intends to qualify every year as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 (the "Code").
Qualification as a regulated investment company relieves the Funds of Federal
income taxes on the portion of their net investment income and net realized
capita gains distributed to shareholders. The Funds intend to distribute
virtually all of their net investment income and net realized capital gains at
least annually to their respective shareholders.
-20-
<PAGE>
A non-deductible 4% excise tax will be imposed on a Fund to the extent that it
does not distribute (including declaration of certain dividends), during each
calendar year, (i) 98% of its ordinary income for such calendar year, (ii) 98%
of its capital gain net income (the excess of short and long term capital gain
over short and long term capital loss) for each one-year period ending October
31 and (iii) certain other amounts not distributed in previous years.
Shareholders will be taxed during each calendar year on the full amount of such
dividends distributed (including certain declared dividends not actually paid
until the next calendar year).
For Federal income tax purposes, distributions paid from net investment income
and from any net realized short-term capital gains are taxable to shareholders
as ordinary income, whether received in cash or in additional shares.
Distributions paid from net capital gains are taxable as long-term capital
gains, whether received in cash or shares and regardless of how long a
shareholder has held the shares, and are not eligible for the dividends received
deduction. Distributions of investment income (but not distributions of
short-term or long-term capital gains) received by shareholders will qualify for
the 70% dividends received deduction available to corporations to the extent
designated by the Fund in a notice to each shareholder. Unless all of a Fund's
gross income constitutes dividends from domestic corporations qualifying for the
dividends received deduction, a portion of the distributions of investment
income to those holders of that Fund which are corporations will not qualify for
the 70% dividends received deduction. The dividends received deduction for
corporate holders may be further reduced if the shares with respect to which
dividends are received are treated as debt-financed or deemed to have been held
for less than forty-six (46) days.
The Funds will send written notices to shareholders regarding the Federal income
tax status of all distributions made during each calendar year as ordinary
income or capital gain and the amount qualifying for the 70% dividends received
deduction.
The foregoing relates to Federal income taxation. Distributions may also be
subject to state and local taxes. The Funds are organized as a Massachusetts
business trust. Under current law, so long as the Funds qualify for the Federal
income tax treatment described above, it is believed that they will not be
liable for any income or franchise tax imposed by Massachusetts.
Investors are urged to consult their own tax advisers regarding the application
of Federal, state and local tax laws.
ORGANIZATION AND CAPITALIZATION
- -------------------------------
GENERAL
- -------
Baron Asset Fund is an open-end investment company organized as a series fund
and established under the laws of The Commonwealth of Massachusetts by a
Declaration of Trust dated February 19,1987, as amended. The four series
currently available are Baron Asset Fund, Baron Growth Fund, Baron Small Cap
Fund and Baron iOpportunity Fund. Shares entitle their holders to one vote per
share. Shares have non-cumulative voting rights, which means that holders of
more than 50% of the shares voting for the election of Trustees can elect all
Trustees and, in such event, the holders of the remaining shares voting for the
election of Trustees will not be able to elect any person or persons as
Trustees. Shares have no preemptive or subscription rights, and are
transferable.
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Massachusetts law, shareholders of a Massachusetts business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Fund or any
series thereof. Notice of such disclaimer will normally be given in each
agreement, obligation or instrument entered into or executed by the Funds or
Trustees. The Declaration of Trust provides for indemnification by a Fund for
any loss suffered by a shareholder as a result of an obligation of that Fund.
The Declaration of Trust also provides that a Fund shall, upon request, assume
the
-21-
<PAGE>
defense of any claim made against any shareholder for an act or obligation of
that Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account or shareholder liability is limited to
circumstances in which the Fund itself would be unable to meets its obligations.
The Trustees believe that, in view of the above, the risk of personal liability
of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of trust protects a trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
OTHER INFORMATION
- -----------------
INDEPENDENT ACCOUNTANTS
- -----------------------
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, has been selected as independent accountants of the Funds.
CALCULATIONS OF PERFORMANCE DATA
- --------------------------------
Advertisements and other sales literature for the Funds may refer to average
annual total return and actual return. Average annual total return is computed
by finding the average annual compounded rates of return over a given period
that would equate a hypothetical initial investment to the ending redeemable
value thereof, as follows:
P(1+T)^ = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
^ = number of years
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 investment made at the beginning
of the period
Actual return is computed by measuring the percentage change between the net
asset value of a hypothetical $1,000 investment in the Fund at the beginning of
a period and the net asset value of that investment at the end of a period. The
performance data used in advertisements does not give effect to a 2% contingent
deferred sales charge that is no longer applicable.
All performance calculations assume that dividends and distributions are
reinvested at the net asset value on the appropriate reinvestment dates and
include all recurring fees.
Computed in the manner described above, the performance of BARON ASSET FUND has
been:
AVERAGE ANNUAL TOTAL RETURN ACTUAL RETURN*
(PRIOR TO JANUARY 1, 1992
INCLUDES THE 2% CONTINGENT
DEFERRED SALES LOAD WHERE
INVESTMENT IS LESS THAN 3 YEARS)
Year ended 12/31/99 16.28% 16.28%
Inception(06/12/87) to 12/31/99 17.59% 664.57%
-22-
<PAGE>
Five Years Ended 12/31/99 21.78% 167.84%
Ten Years Ended 12/31/99 16.02% 341.99%
* Does not include the 2%contingent deferred sales load which applied only prior
to 1/1/92.
For BARON GROWTH FUND the performance has been:
AVERAGE ANNUAL TOTAL RETURN ACTUAL RETURN
Year Ended 12/31/99 44.71% 44.71%
Inception (01/03/95) to
Year Ended 12/31/99 29.90% 269.90%
For BARON SMALL CAP FUND the performance has been:
AVERAGE ANNUAL TOTAL RETURN ACTUAL RETURN
Year Ended 12/31/99 70.78% 70.78%
Inception (10/01/97) to
Year Ended 12/31/99 29.85% 80.00%
Performance results represent past performance and are not necessarily
representative of future results. Investment return and principal value will
fluctuate so that shares may be worth more or less than their original cost when
redeemed.
In addition to advertising average annual and actual return data, comparative
performance information may be used in advertising materials about the Funds,
including data and other information from Lipper Analytical Services, Inc., DA
Investment Technologies, Morningstar Inc., Money, Forbes, SEI, Ibbotson, No Load
Investor, Growth Fund Guide, Fortune, Barron's, The New York Times, The Wall
Street Journal, Changing Times, Medical Economics, Business Week, Consumer
Digest, Dick Davis Digest, Dickenson's Retirement Letter, Equity Fund Outlook,
Executive Wealth Advisor, Financial World, Investor's Daily, Time, Personal
Finance, Investment Advisor, SmartMoney, Rukeyser, Kiplinger's, NAPFA News, US
News, Bottomline, Investors Business Daily, Bloomberg Radio, CNBC, USA Today,
1998 Mutual Fund Report, Mutual Fund Magazine, The Street.com, Bloomberg
Personal, Worth, Washington Business Journal, Investment News, Hispanic
Magazine, Institutional Investor, Rolling Stone Magazine, Microsoft Investor,
Individual Investor, SmartMoney Interactive, Art & Auction, Dow Jones Newswire,
Dow Jones News, The Boston Globe, Standard & Poor's Advisor Insight, CBS Market
Watch, Morningstar.Net, On Wall Street, Los Angeles Times, Standard & Poor's
Outlook, Bloomberg Online, Fund Action, Funds Net Insight, Boston Herald, Dow
Jones Investment Advisor, Annuity.Net.com, Morningstar Fund Investor, Associated
Press, Bloomberg Business News, Standard & Poor's Personal Wealth, The
Washington Post, and Crain's NY Business. The Fund may also use comparative
performance data from indexes such as the Dow Jones Industrial Average, Standard
& Poor's 400, 500, Small Cap 600, 1,500, or Midcap 400, Value Line Index,
Wilshire 4,500, 5000, or Small Cap; NASDAQ/OTC Composite, New York Stock
Exchange; and the Russell 1000, 2000, 2500, 3000, 2000 Growth, 2000 Value, or
Midcap. With respect to the rating services, the Fund may use performance
information that ranks the Fund in any of the following categories: all funds,
aggressive growth funds, value funds, mid-cap funds, small-cap funds, growth
funds, equity income funds, and any combination of the above listed categories.
-23-
<PAGE>
B A R O N F U N D S
Table I
- --------------------------------------------------------------------------------
Portfolio Market Capitalization
- --------------------------------------------------------------------------------
The Funds invest primarily in small and medium sized companies. Table I ranks
the Funds' investments by market capitalization and displays the percentage of
the Funds' portfolios invested in each market capitalization category. At times
the Funds invest in companies with market capitalizations greater than $5
billion. These larger cap companies have increased in value since the Funds
first invested in them and still offer attractive opportunities for further
appreciation.
Baron Asset Fund
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- --------------------------------------------- --------------- ----------
Large Capitalization
- -------------------------------------------------------------------------------
Charles Schwab Corp. ........................ $27,550 13.9%
Univision Communications, Inc. Class A 8,258 1.4
NTL, Inc. ................................... 7,044 5.6
Outdoor Systems, Inc. ....................... 6,608 0.2
----
21.1%
Medium Capitalization
- -------------------------------------------------------------------------------
Hispanic Broadcasting Corp. ................. $ 3,756 3.6%
Century Communications Corp. ................ 3,459 1.0
RCN Corp. ................................... 3,110 0.4
American Tower Corp. Class A ................ 3,044 1.7
UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.) ..... 2,959 1.1
Citizens Utilities Co. ...................... 2,940 1.6
Flextronics Intl., Ltd. ..................... 2,897 2.8
Mirage Resorts, Inc. ........................ 2,798 2.1
Williams-Sonoma, Inc. ....................... 2,711 0.5
Westwood One, Inc. (Formerly Metro
Networks, Inc.) .......................... 2,537 1.3
Dollar Tree Stores, Inc. .................... 2,474 2.6
Premier Parks, Inc. ......................... 2,266 1.7
Spieker Properties, Inc. .................... 2,203 1.4
Robert Half Intl., Inc. ..................... 2,194 2.9
Kimco Realty Corp. .......................... 2,171 0.5
Azurix Corp ................................. 2,013 0.5
Manor Care, Inc. (Formerly HCR Manor
Care, Inc.) .............................. 1,841 3.0
Polo Ralph Lauren Corp. Class A ............. 1,787 3.2
Cox Radio, Inc. Class A ..................... 1,704 0.8
Apollo Group, Inc. .......................... 1,632 2.0
Post Properties, Inc. ....................... 1,517 0.1
Sotheby's Holdings, Inc. Class A ............ 1,517 9.1
----
43.9%
<PAGE>
Small Capitalization
- -------------------------------------------------------------------------------
DeVry, Inc. ................................. $ 1,388 1.8%
Ethan Allen Interiors, Inc. ................. 1,297 0.9
Prison Realty Trust, Inc. ................... 1,259 0.1
Four Seasons Hotels, Inc. ................... 1,253 0.5
FelCor Lodging Trust, Inc. .................. 1,191 0.1
Industrie Natuzzi SPA ADR ................... 1,128 1.9
Aurora Foods, Inc. .......................... 1,072 0.4
- -------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- ------------------------------------------- --------------- ---------
Small Capitalization (Continued)
- ----------------------------------------------------------------------------
Citadel Communications Corp. .............. $1,068 0.4%
Iron Mountain, Inc. ....................... 1,050 0.4
ChoicePoint, Inc. ......................... 993 1.9
Commonwealth Telephone Ent., Inc. ......... 972 0.2
Choice Hotels Intl., Inc. ................. 940 3.9
OM Group, Inc. ............................ 913 1.5
Sun Intl. Hotels, Ltd. .................... 802 1.3
Vail Resorts, Inc. Class A ................ 801 3.9
CoreComm, Ltd. ............................ 798 1.2
Young Broadcasting, Inc. Class A .......... 706 0.8
American Mobile Satellite Corp. ........... 688 1.0
Cross Timbers Oil Co. ..................... 658 1.0
Seacor Smit, Inc. ......................... 618 1.1
Taubman Centers, Inc. ..................... 613 0.1
CD Radio, Inc. ............................ 595 0.4
Sun Communities, Inc. ..................... 573 0.2
Southern Union Co. ........................ 564 0.7
Kenneth Cole Productions, Inc. Class A . 490 0.1
ITT Educational Services, Inc. ............ 486 0.7
Libbey, Inc. .............................. 481 1.5
Education Management Corp. ................ 365 0.6
Alexander's, Inc. ......................... 362 0.4
Learning Tree Intl., Inc. ................. 359 0.6
AMF Bowling, Inc. ......................... 345 0.7
Stein Mart, Inc. .......................... 319 0.2
Saga Communications, Inc. Class A ......... 302 1.2
Smart and Final, Inc. ..................... 291 0.6
Budget Group, Inc. Class A ................ 261 0.3
DVI, Inc. ................................. 231 0.5
Avatar Holdings, Inc. ..................... 174 0.2
Bristol Hotels & Resorts, Inc. ............ 123 0.2
Sunburst Hospitality Corp. ................ 118 0.4
Counsel Corp. ............................. 90 0.1
----
34.0%
-24-
<PAGE>
B A R O N F U N D S
Baron Growth Fund
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- --------------------------------------------- --------------- ---------
Large Capitalization
- ------------------------------------------------------------------------------
Charles Schwab Corp. ........................ $27,550 6.1%
NTL, Inc. ................................... 7,044 6.4
----
12.5%
Medium Capitalization
- ------------------------------------------------------------------------------
Hispanic Broadcasting Corp. ................. $ 3,756 1.7%
UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.) ..... 2,959 0.3
Flextronics Intl., Ltd. ..................... 2,897 2.7
Westwood One, Inc. (Formerly Metro
Networks, Inc.) .......................... 2,537 1.5
Dollar Tree Stores, Inc. .................... 2,474 2.2
Robert Half Intl., Inc. ..................... 2,194 1.2
Time Warner Telecom, Inc. Class A ........... 2,180 0.1
Kimco Realty Corp. .......................... 2,171 1.2
Manor Care, Inc. (Formerly HCR Manor
Care, Inc.) .............................. 1,841 0.6
Post Properties, Inc. ....................... 1,517 1.0
Sotheby's Holdings, Inc. Class A ............ 1,517 2.1
----
14.6%
Small Capitalization
- ------------------------------------------------------------------------------
DeVry, Inc. ................................. $ 1,388 1.2%
Entercom Communications Corp. ............... 1,338 0.4
Insight Communications Co., Inc.
Class A .................................. 1,308 0.3
Ethan Allen Interiors, Inc. ................. 1,297 2.9
Wink Communications, Inc. ................... 1,267 0.6
Prison Realty Trust, Inc. ................... 1,259 0.3
Four Seasons Hotels, Inc. ................... 1,253 0.3
Industrie Natuzzi SPA ADR ................... 1,128 2.7
Aurora Foods, Inc. .......................... 1,072 2.1
Citadel Communications Corp. ................ 1,068 1.3
The Yankee Candle Co., Inc. ................. 1,053 1.2
Intrawest Corp. ............................. 997 0.2
ChoicePoint, Inc. ........................... 993 2.7
Choice Hotels Intl., Inc. ................... 940 8.2
OM Group, Inc. .............................. 913 2.0
Extended Stay America, Inc. ................. 858 1.1
Sun Intl. Hotels, Ltd. ...................... 802 3.9
Vail Resorts, Inc. Class A .................. 801 1.2
CoreComm, Ltd. .............................. 798 2.6
Storage USA, Inc. ........................... 770 0.9
Radio One, Inc. Class A ..................... 751 1.9
American Classic Voyages Co. ................ 688 0.6
Electric Lightwave, Inc. Class A ............ 661 1.3
Cross Timbers Oil Co. ....................... 658 0.6
Seacor Smit, Inc. ........................... 618 0.9
Taubman Centers, Inc. ....................... 613 0.2
CD Radio, Inc. .............................. 595 1.2
Sun Communities, Inc. ....................... 573 1.4
<PAGE>
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- ------------------------------------------- --------------- ---------
Small Capitalization (Continued)
- ----------------------------------------------------------------------------
Southern Union Co. ........................ $564 2.3%
Corporate Executive Board Co. ............. 537 0.2
ITT Educational Services, Inc. ............ 486 0.9
Libbey, Inc. .............................. 481 0.8
Kronos, Inc. .............................. 463 0.5
Gabelli Asset Management, Inc. Class A . 461 1.1
American Mobile Satellite Corp. ........... 423 1.6
Rural Cellular Corp. Class A .............. 415 2.6
Steiner Leisure, Ltd. ..................... 415 0.9
Education Management Corp. ................ 365 2.3
Alexander's, Inc. ......................... 362 0.8
Saga Communications, Inc. Class A ......... 302 1.8
Smart and Final, Inc. ..................... 291 1.6
Medallion Financial Corp. ................. 284 1.8
DVI, Inc. ................................. 231 0.9
ResortQuest Intl., Inc. ................... 169 0.3
Bristol Hotels & Resorts, Inc. ............ 123 0.3
The Sports Club Co. ....................... 89 0.5
----
65.4%
Baron Small Cap Fund
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- --------------------------------------------- --------------- ---------
Medium Capitalization
- ---------------------------------------------------------------------------
Century Communications Corp. ................ $3,459 2.3%
Lamar Advertising Co. Class A ............... 3,030 2.1
UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.) ..... 2,959 10.0
Williams-Sonoma, Inc. ....................... 2,711 2.2
Westwood One, Inc. (Formerly Metro
Networks, Inc.) .......................... 2,537 3.1
Premier Parks, Inc. ......................... 2,266 4.0
SFX Entertainment, Inc. Class A ............. 1,716 3.1
United Rentals, Inc. ........................ 1,567 1.7
----
28.5%
Small Capitalization
- ------------------------------------------------------------------------------
Centennial Cellular Corp. ................... $1,418 0.5%
Hyperion Telecommunications, Inc.
Class A .................................. 1,357 0.5
Entercom Communications Corp. ............... 1,338 0.7
Insight Communications Co., Inc.
Class A .................................. 1,308 0.2
Four Seasons Hotels, Inc. ................... 1,253 2.7
High Speed Access Corp. ..................... 1,242 0.6
Central Parking Corp. ....................... 1,074 3.0
Pinnacle Holdings, Inc. ..................... 1,063 0.4
The Yankee Candle Co., Inc. ................. 1,053 1.6
-25-
<PAGE>
B A R O N F U N D S
Baron Small Cap Fund
- --------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
- --------------------------------------------- --------------- ---------
Small Capitalization (Continued)
- ---------------------------------------------------------------------------
Iron Mountain, Inc. ......................... $1,050 4.0%
Intrawest Corp. ............................. 997 0.6
ChoicePoint, Inc. ........................... 993 2.2
Commonwealth Telephone Ent., Inc. ........... 972 2.8
Sun Intl. Hotels, Ltd. ...................... 802 1.3
CoreComm, Ltd. .............................. 798 2.4
Radio One, Inc. Class A ..................... 751 3.0
Investment Technology Group, Inc. ........... 735 0.6
Commnet Cellular, Inc. ...................... 716 1.5
Electric Lightwave, Inc. Class A ............ 661 0.9
Corporate Executive Board Co. ............... 537 2.3
El Paso Electric Co. ........................ 535 1.3
Penton Media, Inc. .......................... 509 0.9
Kenneth Cole Productions, Inc. Class A . 490 3.4
Loews Cineplex Entertainment Corp. .......... 462 1.1
Gabelli Asset Management, Inc. Class A . 461 0.7
Rural Cellular Corp. Class A ................ 415 3.5
SBA Communications Corp. .................... 312 0.6
Loislaw.Com, Inc. ........................... 304 0.2
Heidrick & Struggles Int'l., Inc. ........... 299 1.9
Casella Waste Systems, Inc. Class A ......... 267 0.9
Career Education Corp. ...................... 227 3.6
IT Group, Inc. .............................. 218 1.8
Caribiner Intl., Inc. ....................... 206 1.2
Province Healthcare Co. ..................... 181 1.2
ResortQuest Intl., Inc. ..................... 169 1.0
Todd-AO Corp. Class A ....................... 145 1.3
KTI, Inc. ................................... 109 0.3
Morton's Restaurant Group, Inc. ............. 101 0.9
Strategic Distribution, Inc. ................ 97 0.2
Equity Marketing, Inc. ...................... 92 0.6
The Sports Club Co. ......................... 89 0.5
AVTEAM, Inc. Class A ........................ 79 0.7
----
59.6%
Table II
- --------------------------------------------------------------------------------
Portfolio Risk Characteristics
- --------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external risk
factors that might impact the companies in which the Funds invest. Table II
displays some of the risk factors that are currently monitored and the
percentage of each portfolio considered exposed to these factors. The Funds use
this tool to avoid concentration of risk within the portfolios.
Baron Baron
Baron Growth Small
Asset & Income Cap
Fund Fund Fund
----------- ----------- ----------
% of % of % of
Portfolio Portfolio Portfolio
----------- ----------- ----------
Leverage (Debt > 40% of
Market Cap) .................. 23.6% 32.7% 45.0%
Foreign Sales Dependent
(Sales > 15%) ................ 26.4 18.5 17.7
Oil Price Sensitivity ........... 18.1 22.4 5.0
Volatility (Beta > 1.2) ......... 35.0 19.1 14.6
Over-the-Counter Securities 24.8 33.0 44.5
Unseasoned Securities
(Publicly owned
for <3 years) .............. 19.1 29.2 40.5
(Publicly owned
for <1 year) ............... 0.5 6.2 13.6
Turnarounds ..................... 1.4 1.6 4.1
Development Companies ........... 4.5 3.6 6.2
-26-
<PAGE>
B A R O N F U N D S
Table III
- --------------------------------------------------------------------------------
Historical Information (Unaudited)
- --------------------------------------------------------------------------------
Table III displays on a quarterly basis the Funds' closing net assets and net
asset value per share, dividend distributions and the value of $10,000 invested
in a Fund at the time of its inception.
- --------------------------------------------------------------------------------
Baron Asset Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- ---------- ----------------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C>
06/12/87 $ 108,728 $ 10.00 $10,000
- -------------------------------------------------------------------------------------
06/30/87 1,437,521 10.71 10,710
- -------------------------------------------------------------------------------------
09/30/87 3,905,221 11.95 11,950
- -------------------------------------------------------------------------------------
12/31/87 4,406,972 10.10 $ 0.197 10,298
- -------------------------------------------------------------------------------------
03/31/88 6,939,435 11.56 11,786
- -------------------------------------------------------------------------------------
06/30/88 9,801,677 12.68 12,928
- -------------------------------------------------------------------------------------
09/30/88 11,734,509 12.98 13,234
- -------------------------------------------------------------------------------------
12/31/88 15,112,031 12.87 0.701 13,843
- -------------------------------------------------------------------------------------
03/31/89 22,269,578 14.75 15,864
- -------------------------------------------------------------------------------------
06/30/89 31,397,929 16.06 17,273
- -------------------------------------------------------------------------------------
09/30/89 47,658,616 17.22 18,521
- -------------------------------------------------------------------------------------
12/31/89 49,007,084 14.66 1.409 17,299
- -------------------------------------------------------------------------------------
03/31/90 50,837,946 13.87 16,367
- -------------------------------------------------------------------------------------
06/30/90 54,413,786 14.32 16,898
- -------------------------------------------------------------------------------------
09/30/90 40,002,612 10.88 12,838
- -------------------------------------------------------------------------------------
12/31/90 42,376,625 11.75 0.198 14,100
- -------------------------------------------------------------------------------------
03/31/91 47,104,889 13.88 16,656
- -------------------------------------------------------------------------------------
06/30/91 45,600,730 13.81 16,572
- -------------------------------------------------------------------------------------
09/30/91 47,409,180 14.80 17,760
- -------------------------------------------------------------------------------------
12/31/91 46,305,042 15.71 0.035 18,895
- -------------------------------------------------------------------------------------
03/31/92 48,011,634 16.72 20,109
- -------------------------------------------------------------------------------------
06/30/92 42,289,409 15.28 18,377
- -------------------------------------------------------------------------------------
09/30/92 43,816,305 16.20 19,484
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
12/31/92 47,955,530 17.73 0.162 21,522
- -------------------------------------------------------------------------------------
03/31/93 50,015,244 18.82 22,845
- -------------------------------------------------------------------------------------
06/30/93 52,432,090 19.70 23,912
- -------------------------------------------------------------------------------------
09/30/93 59,916,570 21.91 26,595
- -------------------------------------------------------------------------------------
12/31/93 64,069,114 21.11 0.774 26,576
- -------------------------------------------------------------------------------------
03/31/94 63,099,109 20.69 26,047
- -------------------------------------------------------------------------------------
06/30/94 68,880,300 20.40 25,682
- -------------------------------------------------------------------------------------
09/30/94 80,258,542 22.82 28,728
- -------------------------------------------------------------------------------------
12/31/94 87,058,228 22.01 0.656 28,547
- -------------------------------------------------------------------------------------
03/31/95 160,603,528 24.29 31,505
- -------------------------------------------------------------------------------------
06/30/95 202,259,502 25.79 33,450
- -------------------------------------------------------------------------------------
09/30/95 289,973,331 29.30 38,003
- -------------------------------------------------------------------------------------
12/31/95 353,095,409 29.74 0.034 38,618
- -------------------------------------------------------------------------------------
03/31/96 638,297,904 34.14 44,332
- -------------------------------------------------------------------------------------
06/30/96 1,124,647,802 36.65 47,591
- -------------------------------------------------------------------------------------
09/30/96 1,166,057,654 35.50 46,098
- -------------------------------------------------------------------------------------
12/31/96 1,326,321,785 36.23 0.039 47,097
- -------------------------------------------------------------------------------------
03/31/97 1,663,347,667 34.98 45,472
- -------------------------------------------------------------------------------------
06/30/97 2,306,228,855 41.74 54,260
- -------------------------------------------------------------------------------------
09/30/97 3,224,498,394 47.43 61,656
- -------------------------------------------------------------------------------------
12/31/97 3,793,013,753 48.51 0.000 63,060
- -------------------------------------------------------------------------------------
03/31/98 5,187,450,337 53.68 69,781
- -------------------------------------------------------------------------------------
06/30/98 5,545,334,568 52.20 67,857
- -------------------------------------------------------------------------------------
09/30/98 4,410,506,448 39.96 51,946
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
12/31/98 $5,672,309,694 $50.54 $0.041 $65,752
- -------------------------------------------------------------------------------------
03/31/99 6,087,986,855 54.17 70,474
- -------------------------------------------------------------------------------------
06/30/99 6,991,160,511 60.63 78,879
- -------------------------------------------------------------------------------------
09/30/99 5,863,125,015 51.57 67,092
- -------------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended September 30, 1999
One year 29.2%
- ---------------------------------------
Two years 4.3%
- ---------------------------------------
Three years 13.3%
- ---------------------------------------
Four years 15.3%
- ---------------------------------------
Five years 18.5%
- ---------------------------------------
Ten years 13.7%
- ---------------------------------------
Since inception June 12, 1987 16.7%
- ---------------------------------------
-27-
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
Baron Growth Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
- ------------- ----------------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C>
01/03/95 $ 741,000 $ 10.00 $10,000
- ----------------------------------------------------------------------------------------
03/31/95 3,425,507 11.78 11,780
- ----------------------------------------------------------------------------------------
06/30/95 7,231,619 13.18 13,180
- ----------------------------------------------------------------------------------------
09/30/95 28,632,467 14.77 14,770
- ----------------------------------------------------------------------------------------
12/31/95 41,043,705 15.11 $ 0.142 15,254
- ----------------------------------------------------------------------------------------
03/31/96 77,337,831 16.90 17,061
- ----------------------------------------------------------------------------------------
06/30/96 172,070,435 18.20 18,373
- ----------------------------------------------------------------------------------------
09/30/96 207,234,494 18.40 18,575
- ----------------------------------------------------------------------------------------
12/31/96 243,983,507 19.04 0.255 19,483
- ----------------------------------------------------------------------------------------
03/31/97 273,907,177 18.57 19,002
- ----------------------------------------------------------------------------------------
06/30/97 316,981,759 21.82 22,328
- ----------------------------------------------------------------------------------------
09/30/97 390,831,861 24.89 25,469
- ----------------------------------------------------------------------------------------
12/31/97 415,134,319 24.88 0.073 25,535
- ----------------------------------------------------------------------------------------
03/31/98 511,405,730 27.28 27,998
- ----------------------------------------------------------------------------------------
06/30/98 478,748,484 26.07 26,757
- ----------------------------------------------------------------------------------------
09/30/98 315,557,850 20.32 20,855
- ----------------------------------------------------------------------------------------
12/31/98 343,695,555 24.87 0.035 25,561
- ----------------------------------------------------------------------------------------
03/31/99 313,002,293 26.75 27,493
- ----------------------------------------------------------------------------------------
06/30/99 396,879,495 31.42 32,293
- ----------------------------------------------------------------------------------------
09/30/99 439,424,784 29.06 29,868
- ----------------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON GROWTH FUND'S
AVERAGE ANNUAL RETURN
Period ended September 30, 1999
One year 43.2%
- -----------------------------------------
Two years 8.3%
- -----------------------------------------
Three years 17.2%
- -----------------------------------------
Four years 19.2%
- -----------------------------------------
Since inception January 3, 1995 25.9%
- -----------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Baron Small Cap Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
10/01/97 $112,604,624 $ 10.00 $10,000
- ----------------------------------------------------------------------------------------
12/31/97 285,270,924 10.31 0.000 10,310
- ----------------------------------------------------------------------------------------
03/31/98 449,240,304 11.84 11,840
- ----------------------------------------------------------------------------------------
06/30/98 571,568,792 11.97 11,970
- ----------------------------------------------------------------------------------------
09/30/98 403,727,998 8.61 8,610
- ----------------------------------------------------------------------------------------
12/31/98 470,029,904 10.54 0.000 10,540
- ----------------------------------------------------------------------------------------
03/31/99 521,729,028 11.89 11,890
- ----------------------------------------------------------------------------------------
06/30/99 644,583,528 13.36 13,360
- ----------------------------------------------------------------------------------------
09/30/99 715,683,132 13.37 13,370
- ----------------------------------------------------------------------------------------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON SMALL CAP FUND'S
AVERAGE ANNUAL RETURN
Period ended September 30, 1999
One year 55.3%
- -----------------------------------------
Since inception October 1, 1997 15.6%
- -----------------------------------------
The performance data represents past performance. Investment returns and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their cost. For more complete information about Baron
Funds, including charges and expenses, call or write for a prospectus. Read it
carefully before you invest or send money. This report is not authorized for use
as an offer of sale or a solicitation of an offer to buy shares of Baron Funds
unless accompanied or preceded by the Funds' current prospectus.
-28-
<PAGE>
B A R O N A S S E T F U N D
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1999
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (99.36%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (9.73%)
10,210,000 AMF Bowling, Inc.*# $ 42,116,250
8,550,000 Mirage Resorts, Inc.* 120,234,375
3,450,000 Premier Parks, Inc.* 100,050,000
3,315,000 Sun Intl. Hotels, Ltd.*# 79,145,625
6,066,000 Vail Resorts, Inc. Class A*# 140,655,375
4,000,000 Vail Resorts, Inc. Class A*# @ 88,112,400
-------------
570,314,025
Business Services (5.30%)
1,640,000 ChoicePoint, Inc.*# 110,495,000
1,749,532 Correctional Management Services
Corp.*@ 8,000,085
650,000 Iron Mountain, Inc.* 22,018,750
7,100,000 Robert Half Intl., Inc.*# 170,400,000
-------------
310,913,835
Chemical (1.55%)
2,367,500 OM Group, Inc. # 90,852,813
Communications (11.04%)
3,500,000 American Mobile Satellite Corp.*# 61,250,000
5,000,000 American Tower Corp. Class A* 97,812,500
1,230,000 Century Communications Corp.* 56,118,750
254,200 Commonwealth Telephone Ent., Inc.* 11,184,800
2,205,000 CoreComm, Ltd.*# 72,627,155
3,391,636 NTL, Inc.* 325,914,852
549,000 RCN Corp.* 22,509,000
-------------
647,417,057
Education (5.66%)
5,605,000 Apollo Group, Inc.* 118,405,625
52,632 Apollo International, Inc. S-A CV
Pfd.*@ 1,000,008
804,600 Caliber Learning Network, Inc.*# 1,659,488
5,150,000 DeVry, Inc.*# 103,000,000
2,900,000 Education Management Corp.*# 35,887,500
2,000,000 ITT Educational Services, Inc.*# 39,000,000
2,000,000 Learning Tree Intl., Inc.*# 33,125,000
-------------
332,077,621
Energy (2.14%)
4,375,000 Cross Timbers Oil Co.# 59,062,500
1,300,000 Seacor Smit, Inc.*# 66,625,000
-------------
125,687,500
Financial (14.39%)
24,225,000 Charles Schwab Corp. 816,079,687
1,680,000 DVI, Inc.*# 27,510,000
-------------
843,589,687
Food & Agriculture (0.40%)
1,446,700 Aurora Foods, Inc.* 23,147,200
Health Services (3.24%)
2,557 Chesapeake Healthcare Corp.* @ 4,000,196
2,170,000 Counsel Corp.*# 7,323,750
10,400,000 Manor Care, Inc. (Formerly HCR
Manor Care, Inc.)*# 178,750,000
-------------
190,073,946
<PAGE>
Shares Value
- --------------------------------------------------------------------------------
Hotels and Lodging (5.03%)
2,100,750 Bristol Hotels & Resorts, Inc.*# $ 14,442,656
13,225,300 Choice Hotels Intl., Inc.*# 226,483,263
800,000 Four Seasons Hotels, Inc. 29,250,000
3,975,036 Sunburst Hospitality Corp.*# 24,595,536
-------------
294,771,455
Manufacturing (2.78%)
2,800,000 Flextronics Intl., Ltd.*# 162,925,000
Media and Entertainment (11.05%)
825,000 CD Radio, Inc.* 21,037,500
650,000 Citadel Communications Corp.* 22,181,250
830,000 Cox Radio, Inc. Class A* 49,385,000
2,800,000 Hispanic Broadcasting Corp.*# 213,150,000
250,000 Outdoor Systems, Inc.* 8,937,500
2,937,002 Saga Communications, Inc. Class A*# 67,551,046
875,000 UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.)* 62,671,875
975,000 Univision Communications, Inc.
Class A* 79,340,625
1,700,000 Westwood One, Inc. (Formerly Metro
Networks, Inc.)* 76,712,500
900,000 Young Broadcasting, Inc. Class A* 47,137,500
-------------
648,104,796
Real Estate and REITs (3.24%)
350,900 Alexander's, Inc.*# 25,374,456
750,000 Avatar Holdings, Inc.*# 14,250,000
375,000 FelCor Lodging Trust, Inc. 6,562,500
800,000 Kimco Realty Corp. 28,600,000
179,999 Post Properties, Inc. 7,076,211
600,000 Prison Realty Trust, Inc. 6,450,000
2,400,000 Spieker Properties, Inc. 83,250,000
335,000 Sun Communities, Inc. 11,075,938
640,000 Taubman Centers, Inc. 7,360,000
-------------
189,999,105
Retail Trade and Restaurants (17.14%)
3,750,000 Dollar Tree Stores, Inc.*# 149,765,625
1,639,500 Ethan Allen Interiors, Inc. 52,156,594
88,500 Kenneth Cole Productions, Inc.
Class A* 3,307,687
129,900 Morton's Restaurant Group, Inc.* 2,281,369
10,360,000 Polo Ralph Lauren Corp. Class A* 185,832,500
3,393,500 Smart and Final, Inc.# 33,935,000
20,775,000 Sotheby's Holdings, Inc. Class A# 536,254,687
1,750,000 Stein Mart, Inc.* 12,468,750
600,000 Williams-Sonoma, Inc.* 29,137,500
-------------
1,005,139,712
Transportation (0.28%)
2,300,000 Budget Group, Inc. Class A* 16,243,750
Utility Services (2.90%)
1,825,000 Azurix Corp.* 31,367,187
8,500,000 Citizens Utilities Co.* 96,156,250
2,230,000 Southern Union Co.*# 42,370,000
-------------
169,893,437
Wholesale Trade (3.38%)
5,687,000 Industrie Natuzzi SPA ADR# 111,607,375
2,920,000 Libbey, Inc.# 86,322,500
-------------
197,929,875
See Notes to Financial Statements.
-29-
<PAGE>
B A R O N A S S E T F U N D
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1999
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks (continued)
- --------------------------------------------------------------------------------------------------
Miscellaneous (0.11%) $ 6,475,000
--------------
Total Common Stocks
(Cost $4,546,218,747) 5,825,555,814
--------------
- --------------------------------------------------------------------------------------------------
Convertible Preferred Stock (0.18%)
- --------------------------------------------------------------------------------------------------
Transportation
350,000 Budget Group Capital Trust Conv. Pref.+
(Cost $17,500,000) 10,850,000
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount Value
- ----------------------------------------------------------------------------------------------------
<S> <C>
Corporate Bonds (0.37%)
- ----------------------------------------------------------------------------------------------------
Communications
$ 21,500,000 American Mobile Satellite Corp. 6.0%
Jr. Sub. Secured Exch. Note due
09/30/2006 (Cost $21,500,000) @ $ 21,500,000
--------------
Total Investments (99.91%)
(Cost $4,585,218,747**) 5,857,905,814
Cash and Other Assets
Less Liabilities (0.09%) 5,219,201
--------------
Net Assets (Equivalent to $51.57 per share
based on 113,687,936 shares of beneficial
interest outstanding) $5,863,125,015
==============
</TABLE>
- ----------
% Represents percentage of net assets
+ Rule 144A securities
@ Restricted securities
# Issuers deemed to be "affiliated"
* Non-income producing securities
** For Federal income tax purposes the cost basis is $4,585,118,355. Aggregate
unrealized appreciation and depreciation of investments are $2,040,141,991
and $767,354,532, respectively.
See Notes to Financial Statements.
-30-
<PAGE>
B A R O N G R O W T H F U N D
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1999
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (92.72%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (7.37%)
120,000 American Classic Voyages Co.* $ 2,752,500
50,000 Intrawest Corp. 828,125
165,000 Steiner Leisure, Ltd.* 4,125,000
720,000 Sun Intl. Hotels, Ltd.* 17,190,000
410,000 The Sports Club Co.* 2,050,000
235,000 Vail Resorts, Inc. Class A* 5,449,063
------------
32,394,688
Business Services (4.64%)
175,000 ChoicePoint, Inc.* 11,790,625
25,000 Corporate Executive Board Co.* 1,018,750
4,000 DBT Online, Inc.* 99,750
60,000 Kronos, Inc.* 2,201,250
220,000 Robert Half Intl., Inc.* 5,280,000
------------
20,390,375
Chemical (2.00%)
228,700 OM Group, Inc. 8,776,362
Communications (15.04%)
390,000 American Mobile Satellite Corp.* 6,825,000
340,000 CoreComm, Ltd.* 11,198,750
412,600 Electric Lightwave, Inc. Class A* 5,466,950
292,804 NTL, Inc.* 28,136,620
250,000 Rural Cellular Corp. Class A* 11,468,750
20,000 Time Warner Telecom, Inc. Class A* 417,500
59,500 Wink Communications, Inc.* 2,599,406
------------
66,112,976
Education (4.43%)
270,000 DeVry, Inc.* 5,400,000
820,000 Education Management Corp.* 10,147,500
200,000 ITT Educational Services, Inc.* 3,900,000
------------
19,447,500
Energy (1.49%)
180,000 Cross Timbers Oil Co. 2,430,000
80,000 Seacor Smit, Inc.* 4,100,000
------------
6,530,000
Financial (10.14%)
93,333 Bingham Financial Services Corp.*@ 864,497
800,000 Charles Schwab Corp. 26,950,000
250,000 DVI, Inc.* 4,093,750
299,000 Gabelli Asset Management, Inc. Class A* 4,615,813
396,200 Medallion Financial Corp. 8,023,050
------------
44,547,110
Food & Agriculture (2.14%)
587,600 Aurora Foods, Inc.* 9,401,600
Health Services (0.59%)
150,000 Manor Care, Inc. (Formerly
HCR Manor Care, Inc.)* 2,578,125
Hotels and Lodging (10.24%)
218,800 Bristol Hotels & Resorts, Inc.* 1,504,250
2,100,000 Choice Hotels Intl., Inc.* 35,962,500
550,000 Extended Stay America, Inc.* 4,950,000
35,000 Four Seasons Hotels, Inc. 1,279,687
140,000 ResortQuest Intl., Inc.* 1,303,750
------------
45,000,187
Manufacturing (2.65%)
200,000 Flextronics Intl., Ltd.* 11,637,500
<PAGE>
Shares Value
- ------------ ------------
Media and Entertainment (10.43%)
200,000 CD Radio, Inc.* $ 5,100,000
160,000 Citadel Communications Corp.* 5,460,000
50,000 Entercom Communications Corp.* 1,800,000
100,000 Hispanic Broadcasting Corp.* 7,612,500
50,000 Insight Communications Co., Inc.
Class A* 1,431,250
200,000 Radio One, Inc. Class A* 8,300,000
343,750 Saga Communications, Inc. Class A* 7,906,250
20,000 UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.)* 1,432,500
150,000 Westwood One, Inc. (Formerly Metro
Networks, Inc.)* 6,768,750
------------
45,811,250
Real Estate and REITs (5.83%)
48,600 Alexander's, Inc.* 3,514,388
150,000 Kimco Realty Corp. 5,362,500
109,999 Post Properties, Inc. 4,324,336
100,000 Prison Realty Trust, Inc. 1,075,000
150,000 Storage USA, Inc. 4,125,000
190,000 Sun Communities, Inc. 6,281,875
80,000 Taubman Centers, Inc. 920,000
------------
25,603,099
Retail Trade and Restaurants (9.90%)
240,000 Dollar Tree Stores, Inc.* 9,585,000
394,500 Ethan Allen Interiors, Inc. 12,550,031
707,781 Smart and Final, Inc. 7,077,810
360,000 Sotheby's Holdings, Inc. Class A 9,292,500
260,000 The Yankee Candle Co., Inc.* 5,021,250
------------
43,526,591
Utility Services (2.27%)
526,050 Southern Union Co.* 9,994,950
Wholesale Trade (3.56%)
610,000 Industrie Natuzzi SPA ADR 11,971,250
125,000 Libbey, Inc. 3,695,312
------------
15,666,562
------------
Total Common Stocks
(Cost $289,530,356) 407,418,875
------------
Principal Amount
- ------------------------------------------------------------------------------
Short Term Money Market Instruments (7.96%)
- ------------------------------------------------------------------------------
$ 34,999,999 Associates Corp. of N. A. 4.25%
due 10/01/1999 (Cost $34,999,999) 34,999,999
------------
Total Investments (100.68%)
(Cost $324,530,355**) 442,418,874
Liabilities Less
Cash and Other Assets (-0.68%) (2,994,090)
------------
Net Assets (Equivalent to $29.06 per
share based on 15,121,926 shares of
beneficial interest outstanding) $439,424,784
============
- ----------
% Represents percentage of net assets
* Non-income producing securities
@ Restricted securities
** For Federal income tax purposes the cost basis is $324,651,615. Aggregate
unrealized appreciation and depreciation of investments are $132,346,358
and $14,579,099, respectively.
See Notes to Financial Statements.
-31-
<PAGE>
B A R O N S M A L L C A P F U N D
STATEMENT OF NET ASSETS
- --------------------------------------------------------------------------------
September 30, 1999
Shares Value
- --------------------------------------------------------------------------------
Common Stocks (88.07%)
- --------------------------------------------------------------------------------
Amusement and Recreation Services (10.62%)
250,000 Intrawest Corp. $ 4,140,625
1,000,000 Loews Cineplex Entertainment Corp.* 7,875,000
1,000,000 Premier Parks, Inc.* 29,000,000
725,000 SFX Entertainment, Inc. Class A* 22,112,500
375,000 Sun Intl. Hotels, Ltd.* 8,953,125
790,300 The Sports Club Co.* 3,951,500
------------
76,032,750
Business Services (16.37%)
1,000,000 Caribiner Intl., Inc.* 8,687,500
235,000 ChoicePoint, Inc.* 15,833,125
400,000 Corporate Executive Board Co.* 16,300,000
725,000 Heidrick & Struggles Int'l., Inc.* 13,820,313
850,000 Iron Mountain, Inc.* 28,793,750
307,500 Lamar Advertising Co. Class A* 15,221,250
100,000 Loislaw.Com, Inc.* 1,450,000
400,000 Penton Media, Inc. 6,500,000
500,000 Strategic Distribution, Inc.* 1,562,500
600,000 Todd-AO Corp. Class A 9,000,000
------------
117,168,438
Communications (15.97%)
75,000 Centennial Cellular Corp.* 3,407,812
350,000 Century Communications Corp.* 15,968,750
450,000 Commonwealth Telephone Ent., Inc.* 19,800,000
350,000 Commnet Cellular, Inc.* 10,959,375
525,000 CoreComm, Ltd.* 17,292,188
500,000 Electric Lightwave, Inc. Class A* 6,625,000
200,000 High Speed Access Corp.* 4,587,500
150,000 Hyperion Telecommunications, Inc.
Class A* 3,721,875
100,000 Pinnacle Holdings, Inc.* 2,612,500
550,000 Rural Cellular Corp. Class A* 25,231,250
375,000 SBA Communications Corp.* 4,078,125
------------
114,284,375
Consumer Products (0.62%)
300,000 Equity Marketing, Inc.* 4,425,000
Consumer Services (2.96%)
725,000 Central Parking Corp. 21,206,250
Education (3.62%)
893,900 Career Education Corp.*# 25,923,100
Environmental (2.92%)
370,000 Casella Waste Systems, Inc. Class A* 6,174,375
1,350,000 IT Group, Inc.*# 12,909,375
235,800 KTI, Inc.* 1,842,187
------------
20,925,937
Financial (1.29%)
299,000 Gabelli Asset Management, Inc. Class A* 4,615,813
200,000 Investment Technology Group, Inc. 4,600,000
------------
9,215,813
Health Services (1.17%)
725,000 Province Healthcare Co.* 8,337,500
<PAGE>
Shares Value
- --------------------------------------------------------------------------------
Hotels and Lodging (3.66%)
525,000 Four Seasons Hotels, Inc. $ 19,195,312
750,000 ResortQuest Intl., Inc.* 6,984,375
------------
26,179,687
Industrial Services (1.67%)
550,000 United Rentals, Inc.* 11,962,500
Manufacturing (0.72%)
750,000 AVTEAM, Inc. Class A* # 5,156,250
Media and Entertainment (17.16%)
150,000 Entercom Communications Corp.* 5,400,000
50,000 Insight Communications Co., Inc.
Class A* 1,431,250
525,000 Radio One, Inc. Class A* 21,787,500
1,000,000 UnitedGlobalCom, Inc. Class A
(Formerly United Intl. Hldgs., Inc.)* 71,625,000
500,000 Westwood One, Inc. (Formerly Metro
Networks, Inc.)* 22,562,500
------------
122,806,250
Retail Trade and Restaurants (8.06%)
660,000 Kenneth Cole Productions, Inc. Class A* 24,667,500
350,000 Morton's Restaurant Group, Inc.*# 6,146,875
325,000 Williams-Sonoma, Inc.* 15,782,813
575,000 The Yankee Candle Co., Inc.* 11,104,687
------------
57,701,875
Utility Services (1.26%)
1,000,000 El Paso Electric Co.* 9,000,000
------------
Total Common Stocks
(Cost $463,200,683)
630,325,725
------------
Principal Amount
- ------------------------------------------------------------------------------
Corporate Bonds (0.29%)
- ------------------------------------------------------------------------------
Health Services
$ 3,250,000 U.S. Diagnostic, Inc. 9.00% Conv. Sub.
Deb. due 03/31/2003 (Cost $2,520,000) 2,080,000
------------
- --------------------------------------------------------------------------------
Short Term Money Market Instruments (9.64%)
- ------------------------------------------------------------------------------
68,999,999 Associates Corp. of N.A. 4.25% due
10/01/99 (Cost $68,999,999) 68,999,999
------------
Total Investments (98.00%)
(Cost $534,720,682**)
701,405,724
Cash and Other Assets
Less Liabilities (2.00%)
14,277,408
------------
Net Assets (Equivalent to $13.37 per
share based on 53,530,434 shares of
beneficial interest outstanding)
$715,683,132
============
% Represents percentage of net assets
# Issuers that may be deemed to be "affiliated"
* Non-income producing securities
** For Federal income tax purposes the cost basis is $538,413,749. Aggregate
unrealized appreciation and depreciation of investments are $206,249,353
and $43,257,378, respectively.
See Notes to Financial Statements.
-32-
<PAGE>
B A R O N F U N D S
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Baron Asset Baron Growth Baron Small Cap
Fund Fund Fund
----------------- --------------- ----------------
<S> <C> <C> <C>
Assets:
Investments in securities, at value
Unaffiliated issuers
(Cost $1,759,192,259, $324,530,355, and $485,567,198,
respectively) $2,741,280,814 $ 442,418,874 $ 651,270,124
"Affiliated" issuers (Cost $2,826,026,488, $0, and
$49,153,484, respectively) 3,116,625,000 0 50,135,600
Dividends and interest receivable 2,481,449 234,548 19,446
Receivable for securities sold 23,297,183 0 18,124,837
Receivable for shares sold 10,028,797 2,134,667 3,193,942
Unamortized organization costs 0 1,644 17,085
Prepaid expenses 24,212 0 0
-------------- ------------- -------------
5,893,737,455 444,789,733 722,761,034
-------------- ------------- -------------
Liabilities:
Payable for securities purchased 3,442,398 4,668,075 5,596,130
Payable for shares redeemed 16,086,549 337,290 655,283
Due to custodian bank 10,673,957 253,156 673,658
Accrued organization costs 0 1,644 17,085
Accrued expenses and other payables 409,536 104,784 135,746
-------------- ------------- -------------
30,612,440 5,364,949 7,077,902
-------------- ------------- -------------
Net Assets $5,863,125,015 $ 439,424,784 $ 715,683,132
============== ============= =============
Net Assets consist of:
Capital paid-in $4,640,572,993 $ 292,811,668 $ 604,942,511
Accumulated net realized gain(loss) (50,135,045) 28,724,597 (55,944,421)
Net unrealized appreciation on investments 1,272,687,067 117,888,519 166,685,042
-------------- ------------- -------------
Net Assets $5,863,125,015 $ 439,424,784 $ 715,683,132
============== ============= =============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) 113,687,936 15,121,926 53,530,434
============== ============= =============
Net Asset Value Per Share $ 51.57 $ 29.06 $ 13.37
============== ============= =============
</TABLE>
See Notes to Financial Statements.
-33-
<PAGE>
B A R O N F U N D S
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Baron Asset Baron Growth Baron Small Cap
Fund Fund Fund
------------------ ---------------- ----------------
<S> <C> <C> <C>
Investment income:
Income:
Interest $ 6,929,491 $ 884,393 $ 1,824,376
Dividends -- unaffiliated issuers (net of foreign tax
withholding of $0, $56,736, and $0, respectively) 18,039,687 3,361,851 122,393
Dividends -- "affiliated" issuers (net of foreign tax
withholding of $1,284,973, $0, and $0, respectively) 19,051,856 0 0
-------------- ------------ -------------
Total income 44,021,034 4,246,244 1,946,769
-------------- ------------ -------------
Expenses:
Investment advisory fees 59,460,701 3,534,481 5,457,810
Distribution fees 14,865,186 883,621 1,364,454
Shareholder servicing agent fees 1,496,000 219,820 216,820
Reports to shareholders 1,376,600 103,500 151,000
Registration and filing fees 261,030 39,830 49,570
Custodian fees 185,090 21,530 31,470
Trustee fees 82,480 4,960 7,490
Professional fees 103,421 47,570 47,710
Amortization of organization costs 0 6,570 5,700
Miscellaneous 64,610 4,737 10,990
-------------- ------------ -------------
Total operating expenses 77,895,118 4,866,619 7,343,014
Interest expense 0 103,943 0
-------------- ------------ -------------
Total expenses 77,895,118 4,970,562 7,343,014
-------------- ------------ -------------
Net investment loss (33,874,084) (724,318) (5,396,245)
-------------- ------------ -------------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments sold in unaffiliated
issuers 66,923,461 34,354,265 (27,309,728)
Net realized loss on investments sold in "affiliated" issuers (20,123,170) 0 (1,725,521)
Change in net unrealized appreciation of investments 1,250,313,281 78,932,635 242,203,032
-------------- ------------ -------------
Net gain on investments 1,297,113,572 113,286,900 213,167,783
-------------- ------------ -------------
Net increase in net assets resulting from operations $1,263,239,488 $112,562,582 $ 207,771,538
============== ============ =============
</TABLE>
See Notes to Financial Statements.
-34-
<PAGE>
B A R O N F U N D S
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Baron Asset Fund
----------------------------------------
For the For the
Year Ended Year Ended
September 30, September 30,
1999 1998
------------------- -------------------
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income (loss) ($ 33,874,084) $ 5,182,423
Net realized gain (loss) on
investments sold 46,800,291 (76,452,243)
Net change in unrealized
appreciation (depreciation)
on investments 1,250,313,281 (848,684,103)
---------------- -----------------
Increase (decrease) in net
assets resulting from
operations 1,263,239,488 (919,953,923)
---------------- -----------------
Dividends to shareholders from:
Net investment income (4,594,972) 0
Net realized gain on investments 0 0
---------------- -----------------
(4,594,972) 0
---------------- -----------------
Capital share transactions:
Proceeds from the sale of shares 2,326,280,913 3,405,277,873
Net asset value of shares issued
in reinvestment of dividends 4,175,765 0
Cost of shares redeemed (2,138,067,002) (1,299,315,896)
---------------- -----------------
Increase in net assets derived
from capital share transactions 192,389,676 2,105,961,977
Capital contribution 1,584,375 0
---------------- -----------------
Net increase (decrease) in net
assets 1,452,618,567 1,186,008,054
Net assets:
Beginning of year 4,410,506,448 3,224,498,394
---------------- -----------------
End of year $ 5,863,125,015 $ 4,410,506,448
================ =================
Undistributed net investment
income at end of year $ 0 $ 4,637,960
================ =================
Shares of beneficial interest:
Shares sold 45,041,285 69,710,623
Shares issued in reinvestment
dividends 82,185 0
Shares redeemed (41,802,254) (27,334,849)
---------------- -----------------
Net increase (decrease) 3,321,216 42,375,774
================ =================
<PAGE>
<TABLE>
<CAPTION>
Baron Growth Fund Baron Small Cap Fund
------------------------------------ ------------------------------------
For the For the For the For the
Year Ended Year Ended Year Ended Year Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998*
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations:
Net investment income (loss) ($ 724,318) $ 899,890 ($ 5,396,245) ($ 826,516)
Net realized gain (loss) on
investments sold 34,354,265 (6,952,711) (29,035,249) (26,895,646)
Net change in unrealized
appreciation (depreciation)
on investments 78,932,635 (73,445,498) 242,203,032 (75,517,990)
-------------- --------------- -------------- --------------
Increase (decrease) in net
assets resulting from
operations 112,562,582 (79,498,319) 207,771,538 (103,240,152)
-------------- --------------- -------------- --------------
Dividends to shareholders from:
Net investment income (486,147) (282,139) 0 0
Net realized gain on investments 0 (929,398) 0 0
-------------- --------------- -------------- --------------
(486,147) (1,211,537) 0 0
-------------- --------------- -------------- --------------
Capital share transactions:
Proceeds from the sale of shares 193,413,986 236,230,743 403,817,666 692,941,797
Net asset value of shares issued
in reinvestment of dividends 461,215 1,161,950 0 0
Cost of shares redeemed (182,084,702) (231,956,848) (299,634,070) (185,973,647)
-------------- --------------- -------------- --------------
Increase in net assets derived
from capital share transactions 11,790,499 5,435,845 104,183,596 506,968,150
Capital contribution 0 0 0 0
-------------- --------------- -------------- --------------
Net increase (decrease) in net
assets 123,866,934 (75,274,011) 311,955,134 403,727,998
Net assets:
Beginning of year 315,557,850 390,831,861 403,727,998 0
-------------- --------------- -------------- --------------
End of year $ 439,424,784 $ 315,557,850 $ 715,683,132 $ 403,727,998
============== =============== ============== ==============
Undistributed net investment
income at end of year $ 0 $ 472,714 $ 0 $ 0
============== =============== ============== ==============
Shares of beneficial interest:
Shares sold 6,776,893 9,436,383 34,490,488 65,055,206
Shares issued in reinvestment
dividends 18,636 47,958 0 0
Shares redeemed (7,201,050) (9,658,984) (27,846,667) (18,168,593)
-------------- --------------- -------------- --------------
Net increase (decrease) (405,521) (174,643) 6,643,821 46,886,613
============== =============== ============== ==============
</TABLE>
- ----------
* For the period October 1, 1997(commencement of operations) to September 30,
1998.
See Notes to Financial Statements.
-35-
<PAGE>
B A R O N F U N D S
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies.
Baron Asset Fund (the "Trust") is registered under the Investment Company Act of
1940, as amended (the"1940 Act"), as a diversified, open-end management
investment company established as a Massachusetts business trust on February 19,
1987. The Trust currently offers three series (individually a "Fund" and
collectively the "Funds"): Baron Asset Fund, started in June of 1987, Baron
Growth Fund, started in January 1995, and Baron Small Cap Fund, started in
October of 1997. On May 19, 1999, Baron Growth & Income Fund changed its name to
Baron Growth Fund. The following is a summary of significant accounting policies
followed by the Funds. The policies are in conformity with generally accepted
accounting principles.
(a) Security Valuation. Portfolio securities traded on any national stock
exchange or quoted on the NASDAQ National Market System are valued on the basis
of the last sale price on the date of valuation or, in the absence of any sale
on that date, the last sale price on the date the security last traded. Other
securities are valued at the mean of the most recent bid and asked prices if
market quotations are readily available. Where market quotations are not readily
available the securities are valued at their fair value as determined in good
faith by the Board of Trustees, or by the Adviser, pursuant to procedures
established by the Trustees. Money market instruments held by the Funds with a
remaining maturity of sixty days or less are valued at amortized cost, which
approximates value.
(b) Securities Transactions, Investment Income and Expense Allocation.
Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are recorded on an identified cost basis for
financial reporting and federal income tax purposes. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis. Common expenses of the Funds are allocated on a basis deemed fair
and equitable by the Trustees, usually on the basis of average net assets.
Direct expenses are charged to each Fund on a specific identification basis.
(c) Federal Income Taxes. Each Fund of the Trust is treated as a separate entity
for federal income tax purposes. It is the policy of each Fund to continue to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code and to distribute all of its taxable income, including net realized
capital gains, if any, to its shareholders. No federal income tax provision is
therefore required.
<PAGE>
(d) Restricted Securities. The Funds invest in securities which are restricted
as to public sale in accordance with the Securities Act of 1933. Such assets are
valued at fair value as determined in good faith by the Board of Trustees.
(e) Organization Costs. Costs incurred in connection with the organization and
initial registration of Baron Growth Fund and Baron Small Cap Fund have been
deferred and are being amortized on a straight-line basis over a five-year
period. Baron Capital, Inc. ("BCI"), a wholly owned subsidiary of Baron Capital
Group, Inc. ("BCG"), agreed to make advances for organization expenses incurred
and will be reimbursed as the costs are amortized.
(f) Distributions. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses and distributions from REIT's. For
the year ended September 30, 1999, the following amounts were reclassified for
federal income tax purposes:
<TABLE>
<CAPTION>
Undistributed Undistributed
Fund Net Investment Income Realized Gain/Loss Capital-Paid-In
- ---------------------- ----------------------- -------------------- -----------------
<S> <C> <C> <C>
Baron Asset Fund $33,831,096 $3,974,320 $ (37,805,416)
Baron Growth Fund $ 737,751 $ 260,969 $ (998,720)
Baron Small Cap Fund $ 5,396,245 $ (16,695) $ (5,379,550)
</TABLE>
(g) Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of financial statements, and the amounts of income and expenses during
the period. Actual results could differ from those estimates.
- --------------------------------------------------------------------------------
(2) Purchases and Sales of Securities.
Purchases and sales of securities, other than short term securities, for the
year ended September 30, 1999 were as follows:
Fund Purchases Sales
- ---------------------- ----------------- ---------------
Baron Asset Fund $1,154,642,273 $908,031,849
Baron Growth Fund $ 182,744,649 $203,437,226
Baron Small Cap Fund $ 244,885,840 $221,936,174
-36-
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
(3) Investment Advisory Fees and Other Transactions with Affiliates.
(a) Investment Advisory Fees. BAMCO, Inc. (the "Adviser"), a wholly owned
subsidiary of BCG, serves as investment adviser to the Funds. As compensation
for services rendered, the Adviser receives a fee payable monthly from the
assets of the Funds equal to 1% per annum of each Fund's average daily net asset
value.
(b) Distribution Fees. BCI is a registered broker dealer and the distributor of
the shares of the Funds pursuant to a distribution plan under Rule 12b-1 of the
1940 Act. The distribution plan authorizes the Funds to pay BCI a distribution
fee equal on an annual basis to 0.25% of the Funds' average daily net assets.
Brokerage transactions for the Funds may be effected by or through BCI. During
the year ended September 30, 1999, BCI earned brokerage commissions as follows:
Fund Commissions
- ---------------------- -------------
Baron Asset Fund $2,525,589
Baron Growth Fund $ 351,548
Baron Small Cap Fund $ 409,592
(c) Trustee Fees. Certain Trustees of the Trust may be deemed to be affiliated
with or interested persons (as defined by the 1940 Act) of the Funds' Adviser or
of BCI. None of the Trustees so affiliated received compensation for his or her
services as a Trustee of the Trust. None of the Funds' officers received
compensation from the Funds.
- --------------------------------------------------------------------------------
(4) Capital Loss Carryforward.
Baron Asset Fund and Baron Small Cap Fund had capital loss carryforwards at
September 30, 1999, which can be used to offset future capital gains.
Capital Loss Capital Loss
Carryovers Carryovers
Fund Expiring 2006 Expiring 2007
- ---------------------- --------------- --------------
Baron Asset Fund $22,037,516 $28,197,921
Baron Small Cap Fund -- $52,251,354
- --------------------------------------------------------------------------------
<PAGE>
(5) Borrowings. During the year ended September 30, 1999, Baron Growth Fund
borrowed from its custodian bank. The average daily balance of loans outstanding
was $1,726,439 at a weighted average interest rate of 6.021%.
- --------------------------------------------------------------------------------
(6) Restricted Securities.
A summary of the restricted securities held at September 30, 1999 follows:
BARON ASSET FUND
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
- -------------- ------------ --------------
<S> <C> <C>
Common Stock
Apollo International, Inc. S-A CV Pfd. 07/21/99 $ 1,000,008
Chesapeake Healthcare Corp. 12/03/98 4,000,196
Correctional Management Services Corp. 12/30/98 8,000,085
Vail Resorts, Inc. Class A 05/14/98 88,112,400
Corporate Bonds
American Mobile Satellite Corp. 6.0% Jr. Sub. Secured Exch. Note due 09/30/2006 01/15/99 21,500,000
------------
Total Restricted Securities: (Cost $146,500,008) (2.09% of Net Assets) $122,612,689
============
</TABLE>
BARON GROWTH FUND
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
- -------------- ------------ -------------
<S> <C> <C>
Common Stock
Bingham Financial Services Corp. (Cost $1,399,995) (0.20% of Net Assets) 04/27/99 $ 864,497
==========
</TABLE>
- --------------------------------------------------------------------------------
(7) Capital Contribution. On March 19, 1999, the Adviser reimbursed Baron Asset
Fund $1,584,375 for the unrealized loss relating to the 10/07/98 purchase of
650,000 AMF Bowling, Inc. Baron Asset Fund recorded a capital contribution of
$1,584,375. The Adviser did not receive any shares of Baron Asset Fund in
exchange for this contribution. For tax purposes, this capital contribution
reduced the realized gains (losses) for the fiscal year ended September 30,
1999.
-37-
<PAGE>
B A R O N F U N D S
(8) Investment in "Affiliates"*
BARON ASSET FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales
Shares Held on Purchases and
Name of Issuer Sep. 30, 1998 and Additions Reductions
- ----------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
Alexander's, Inc. 252,000 98,900
AMF Bowling, Inc. 9,895,000 650,000 335,000
American Mobile Satellite Corp. 3,500,000
Avatar Holdings, Inc. 774,000 24,000
Bristol Hotels & Resorts, Inc. 2,191,150 90,400
Caliber Learning Network, Inc. 1,840,000 1,035,400
Cellular Communications of P.R., 1,272,500 1,272,500
Inc.
Choice Hotels Intl., Inc. 13,021,300 204,000
ChoicePoint, Inc. 1,015,300 624,700
CoreComm, Ltd.+ 1,272,500 932,500
Counsel Corp. 2,408,200 80,300 318,500
Cross Timbers Oil Co. 4,747,500 372,500
DeVry, Inc. 4,635,200 514,800
Dollar Tree Stores, Inc. 3,690,000 60,000
DVI, Inc. 1,605,000 75,000
Education Management Corp. # 880,000 2,020,000
Flextronics Intl., Ltd. $ 1,393,000 1,420,000 13,000
Hispanic Broadcasting Corp. 3,270,000 470,000
(Formerly Heftel Broadcasting
Corp. Class A)
Industrie Natuzzi SPA ADR 1,565,500 4,121,500
ITT Educational Services, Inc. 1,562,500 600,000 162,500
Learning Tree Intl., Inc. 3,145,000 1,145,000
Libbey, Inc. 2,650,000 270,000
Manor Care, Inc. (Formerly HCR 10,350,700 649,300 600,000
Manor Care, Inc.)
NTL, Inc.@ 2,724,500 667,136
OM Group, Inc. 1,557,500 810,000
Prison Realty Trust (Formerly CCA 1,990,000 89,800 1,479,800
Prison Realty Corp.)
Robert Half Intl., Inc. 2,335,000 4,815,000 50,000
Saga Communications, Inc. Class A 2,932,002 5,000
Seacor Smit, Inc. 990,000 352,300 42,300
Smart and Final, Inc. 2,237,900 1,155,600
Sotheby's Holdings, Inc. Class A 18,030,000 2,745,000
Southern Union Co. % 832,500 1,397,500
Stein Mart, Inc. 2,825,000 1,075,000
Sun Intl. Hotels, Ltd. 2,875,000 440,000
Sunburst Hospitality Corp. 3,650,036 606,666 281,666
The Sports Club Co. 1,955,000 1,955,000
Vail Resorts, Inc. Class A 9,678,900 387,100
Westwood One, Inc (Formerly 1,250,000 635,000 185,000
Metro Networks, Inc.)&
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Sep. 30, 1999 Sep. 30, 1999 Oct. 1-Sep. 30, 1999
- ----------------------------------- ---------------- ----------------- ---------------------
<S> <C> <C> <C>
Alexander's, Inc. 350,900 $25,374,456
AMF Bowling, Inc. 10,210,000 42,116,250
American Mobile Satellite Corp. 3,500,000 61,250,000
Avatar Holdings, Inc. 750,000 14,250,000
Bristol Hotels & Resorts, Inc. 2,100,750 14,442,656
Caliber Learning Network, Inc. 804,600 1,659,488
Cellular Communications of P.R., 0 0**
Inc.
Choice Hotels Intl., Inc. 13,225,300 226,483,263
ChoicePoint, Inc. 1,640,000 110,495,000
CoreComm, Ltd.+ 2,205,000 72,627,155
Counsel Corp. 2,170,000 7,323,750 $ 2,119,364
Cross Timbers Oil Co. 4,375,000 59,062,500 318,661
DeVry, Inc. 5,150,000 103,000,000
Dollar Tree Stores, Inc. 3,750,000 149,765,625
DVI, Inc. 1,680,000 27,510,000
Education Management Corp. # 2,900,000 35,887,500
Flextronics Intl., Ltd. $ 2,800,000 162,925,000
Hispanic Broadcasting Corp. 2,800,000 213,150,000
(Formerly Heftel Broadcasting
Corp. Class A)
Industrie Natuzzi SPA ADR 5,687,000 111,607,375 4,102,391
ITT Educational Services, Inc. 2,000,000 39,000,000
Learning Tree Intl., Inc. 2,000,000 33,125,000
Libbey, Inc. 2,920,000 86,322,500 855,750
Manor Care, Inc. (Formerly HCR 10,400,000 178,750,000
Manor Care, Inc.)
NTL, Inc.@ 3,391,636 0**
OM Group, Inc. 2,367,500 90,852,813 845,675
Prison Realty Trust (Formerly CCA 600,000 0** 2,598,120
Prison Realty Corp.)
Robert Half Intl., Inc. 7,100,000 170,400,000
Saga Communications, Inc. Class A 2,937,002 67,551,046
Seacor Smit, Inc. 1,300,000 66,625,000
Smart and Final, Inc. 3,393,500 33,935,000 111,895
Sotheby's Holdings, Inc. Class A 20,775,000 536,254,687 8,100,000
Southern Union Co. % 2,230,000 42,370,000
Stein Mart, Inc. 1,750,000 0**
Sun Intl. Hotels, Ltd. 3,315,000 79,145,625
Sunburst Hospitality Corp. 3,975,036 24,595,536
The Sports Club Co. 0 0**
Vail Resorts, Inc. Class A 10,066,000 228,767,775
Westwood One, Inc (Formerly 1,700,000 0**
----------------
Metro Networks, Inc.)&
$3,116,625,000 $19,051,856
================ ===========
</TABLE>
* "Affiliated" issuers, as defined in the Investment Company Act of 1940, are
issuers in which Baron Asset Fund held 5% or more of the outstanding voting
securities as of September 30, 1999.
** As of September 30, 1999, no longer an affiliate.
+ Received 735,000 shares from 3:2 stock split.
# Received 880,000 shares from 2:1 stock split .
$ Received 1,390,000 shares from 2:1 stock split.
@ Received 369,636 shares from bond conversion.
% Received 144,125 shares from 5% stock dividend.
& Received 625,000 shares from merger
-38-
<PAGE>
B A R O N F U N D S
(8) Investment in "Affiliates"* (continued)
BARON SMALL CAP FUND
Balance of Gross Gross Sales
Shares Held on Purchases and
Name of Issuer Sep. 30, 1998 and Additions Reductions
- ------------------------------ ---------------- --------------- -------------
AVTEAM, Inc. 750,000
Career Education Corp. 520,000 386,700 12,800
Equity Marketing, Inc. 400,000 25,250 125,250
IT Group, Inc. 1,750,000 50,000 450,000
Mortons Restaurant Group, Inc. 350,000 25,000 25,000
ResortQuest Intl., Inc. 825,000 25,000 100,000
<TABLE>
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Sep. 30, 1999 Sep. 30, 1999 Oct. 1-Sep. 30, 1999
- -------------------------------- ---------------- --------------- ---------------------
<S> <C> <C> <C>
AVTEAM, Inc. 750,000 $ 5,156,250
Career Education Corp. 893,900 25,923,100
Equity Marketing, Inc. 300,000 0**
IT Group, Inc. 1,350,000 12,909,375
Mortons Restaurant Group, Inc. 350,000 6,146,875
ResortQuest Intl., Inc. 750,000 0**
------------
$50,135,600 $ 0
============ ===
</TABLE>
* "Affiliated" issuers, as defined in the Investment Company Act of 1940, are
issuers in which Baron Small Cap Fund held 5% or more of the outstanding
voting securities as of September 30, 1999.
** As of September 30, 1999, no longer an affiliate.
-39-
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
(9) Financial Highlights
BARON ASSET FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997 1996
--------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 39.96 $ 47.43 $ 35.50 $ 29.30
----------- ---------- ----------- -----------
Income from investment
operations
Net investment income (loss) (0.30) 0.05 (0.14) (0.06)
Net realized and unrealized gains
(losses) on investments 11.95 (7.52) 12.11 6.29
----------- ---------- ----------- -----------
Total from investment
operations 11.65 (7.47) 11.97 6.23
----------- ---------- ----------- -----------
Less distributions
Dividends from net investment
income (0.04) 0.00 0.00 0.00
Distributions from net realized gains 0.00 0.00 (0.04) (0.03)
----------- ---------- ----------- -----------
Total distributions (0.04) 0.00 (0.04) (0.03)
----------- ---------- ----------- -----------
Net asset value, end of year $ 51.57 $ 39.96 $ 47.43 $ 35.50
=========== ========== =========== ===========
Total return 29.2%* (15.7%) 33.8% 21.3%
----------- ---------- ----------- -----------
Ratios/Supplemental data
Net assets (in millions), end of year $ 5,863.1 $ 4,410.5 $ 3,224.5 $ 1,166.1
Ratio of expenses to average net
assets 1.31% 1.32% 1.35% 1.40%
Ratio of net investment income
(loss) to average net assets (0.57%) 0.11% (0.52%) (0.29%)
Portfolio turnover rate 15.64% 23.43% 13.23% 19.34%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994 1993 1992 1991 1990
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 22.82 $ 21.91 $ 16.20 $ 14.80 $ 10.88 $ 17.22
--------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income (loss) (0.09) (0.14) (0.13) (0.08) 0.07 0.21
Net realized and unrealized gains
(losses) on investments 7.23 1.82 6.00 1.52 4.05 (5.14)
--------- -------- -------- -------- -------- --------
Total from investment
operations 7.14 1.68 5.87 1.44 4.12 (4.93)
--------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income 0.00 0.00 0.00 (0.04) (0.20) ( 0.16)
Distributions from net realized gains (0.66) (0.77) (0.16) 0.00 0.00 ( 1.25)
--------- -------- -------- -------- -------- --------
Total distributions (0.66) (0.77) (0.16) (0.04) (0.20) ( 1.41)
--------- -------- -------- -------- -------- --------
Net asset value, end of year $ 29.30 $ 22.82 $ 21.91 $ 16.20 $ 14.80 $ 10.88
========= ======== ======== ======== ======== ========
Total return 32.3% 8.0% 36.5% 9.7% 38.3% (30.7%)
--------- -------- -------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of year $ 290.0 $ 80.3 $ 59.9 $ 43.8 $ 47.4 $ 40.0
Ratio of expenses to average net
assets 1.44% 1.59% 1.85% 1.68% 1.70% 1.78%
Ratio of net investment income
(loss) to average net assets (0.55%) (0.71%) (0.69%) (0.53%) 0.49% 1.53%
Portfolio turnover rate 35.15% 55.87% 107.94% 95.45% 142.73% 97.81%
</TABLE>
*Had the adviser not made the capital contribution, the adjusted total return
would have been 29.1% for the year ended September 30, 1999.
The Fund's adviser and/or Baron Capital reimbursed the Fund for expenses
aggregating $8,561 (less than $0.01 per share) in 1990. The reimbursement
amounts are excluded from the expense data above.
-40-
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
(9) Financial Highlights (CONTINUED)
BARON GROWTH FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997 1996 1995*
------------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 20.32 $ 24.89 $ 18.40 $ 14.77 $ 10.00
-------- -------- -------- -------- -------
Income from investment operations
Net investment income (loss) (0.04) 0.06 0.06 0.11 0.04
Net realized and unrealized gains (losses)
on investments 8.82 (4.56) 6.68 3.66 4.73
-------- -------- -------- -------- -------
Total from investment operations 8.78 (4.50) 6.74 3.77 4.77
-------- -------- -------- -------- -------
Less distributions
Dividends from net investment income (0.04) (0.02) (0.09) (0.04) 0.00
Distributions from net realized gains 0.00 (0.05) (0.16) (0.10) 0.00
-------- -------- -------- -------- -------
Total distributions (0.04) (0.07) (0.25) (0.14) 0.00
-------- -------- -------- -------- -------
Net asset value, end of year $ 29.06 $ 20.32 $ 24.89 $ 18.40 $ 14.77
======== ======== ======== ======== =======
Total return 43.2 % (18.1%) 37.1% 25.8% 47.7%
-------- -------- -------- -------- -------
Ratios/Supplemental data
Net assets (in millions), end of year $ 439.4 $ 315.6 $ 390.8 $ 207.2 $ 28.6
Ratio of total expenses to average net assets 1.40% 1.43% 1.40% 1.54% 1.99%**
Less: Ratio of interest expense to average net assets (0.03%) (0.06%) 0.00% 0.00% 0.00%
-------- --------- --------- --------- --------
Ratio of operating expenses to average net assets 1.37% 1.37% 1.40% 1.54% 1.99%**
======== ========= ========= ========= ========
Ratio of net investment income (loss) to average
net assets (0.20%) 0.21% 0.37% 1.20% 1.13%**
Portfolio turnover rate 53.36% 40.38% 25.17% 40.27% 40.56%
</TABLE>
* For the period January 3, 1995 (commencement of operations) to September
30, 1995.
** Annualized.
The Fund's custodian offset custody fees of $5,252 (less than $.01 per share)
in 1996 and $12,003 (less than $0.01 per share) in 1995.
The expense offset amounts are included in expense data above.
<PAGE>
BARON SMALL CAP FUND
Selected data for a share of beneficial interest outstanding throughout each
year:
Year ended September 30,
1999 1998*
------------ -------------
Net asset value, beginning of year $ 8.61 $ 10.00
-------- --------
Income from investment operations
Net investment loss (0.10) (0.02)
Net realized and unrealized gains (losses)
on investments 4.86 (1.37)
-------- --------
Total from investment operations 4.76 (1.39)
-------- --------
Less distributions
Dividends from net investment income 0.00 0.00
Distributions from net realized gains 0.00 0.00
-------- --------
Total distributions 0.00 0.00
-------- --------
Net asset value, end of year $ 13.37 $ 8.61
======== ========
Total return 55.3 % (13.9%)
-------- --------
Ratios/Supplemental data
Net assets (in millions), end of year $ 715.7 $ 403.7
Ratio of expenses to average net assets 1.34% 1.39%
Ratio of net investment loss to average net assets (0.99%) (0.20%)
Portfolio turnover rate 42.69% 59.68%
* For the period October 1, 1997 (commencement of operations) to
September 30, 1998.
-41-
<PAGE>
B A R O N F U N D S
Report of Independent Accountants
- --------------------------------------------------------------------------------
- -----------------------
TO THE SHAREHOLDERS
AND BOARD OF TRUSTEES OF
BARON ASSET FUND:
- -----------------------
In our opinion, the accompanying statements of assets and liabilities and
statements of net assets, and the related statements of operations and of
changes in net assets and financial highlights present fairly, in all material
respects, the financial position of Baron Asset Fund (comprising, respectively,
Baron Asset Fund, Baron Growth Fund (formerly Baron Growth & Income Fund) and
Baron Small Cap Fund) (collectively the "Funds") at September 30, 1999, the
results of their operations for the year then ended, the changes in their net
assets for each of the two years in the period then ended and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
November 17, 1999
- --------------------------------------------------------------------------------
Any statements contained in this annual report which are not historical
facts are forward-looking statements; and, therefore, many important factors
could cause actual results to differ materially from those in the
forward-looking statements. Such factors include, but are not limited to,
changes (legislative or otherwise) in the industries in which the Funds invest,
as well as changes relating to taxes and mutual funds. The "Investment Policies
and Risks" section of the Prospectus discusses certain factors that could cause
actual results to differ materially from those in such forward-looking
statements.
-42-
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON ASSET FUND IN RELATION TO THE RUSSELL 2000*
Baron Asset Fund Russell 2000
---------------- ------------
10000 10000
1987 11950 10479
1988 13234 9353
1989 18521 11366
1990 12838 8282
1991 17760 12018
1992 19484 13091
1993 26595 17436
1994 28728 17892
1995 38003 22079
1996 46098 24979
1997 61656 33269
1998 51946 26943
1999 67090 32080
* The Russell 200 is an unmanaged index of small and mid-sized companies
- --------------------------------------------------------------------------------
BARON ASSET FUND
Baron Asset Fund's performance in the fiscal year ended September 1999 was
strong as markets recovered from depressed levels last fall. The Fund gained
29.2% during the year and significantly outperformed the Russell 2000 index
which gained 19.1%. The Fund kept pace with the S&P 500 which gained 27.8%.
Baron Asset Fund invests in small and medium sized companies. The relative bear
market in small cap stocks continued in the first half of fiscal year 1999. In
the sixteen-year period since 1983 the performance of market averages that
represent small companies has significantly under-performed market averages that
represent more established, large companies. The resulting valuations of small
cap stocks in general are compelling. Small cap stocks normally trade at
valuations relative to their earnings substantially above those of large cap
stocks, reflecting superior growth expectations. Only twice before have small
cap stocks traded at valuations relative to their earnings equal to large cap
companies. In both instances the attractive valuations led to multi-year small
cap rallies. Today, valuations remain at those extremely attractive levels.
<PAGE>
Baron Asset Fund's investment style is best categorized as a value orientation
towards growth. Purchase great businesses with exciting growth opportunities at
value-based attractive prices. The Fund has characteristics of both value and
growth. Value stocks dramatically under-performed growth stocks in Fiscal Year
1999. The Russell 2000 growth index gained 32.6% while the Russell 2000 value
index gained only 5.8% in the year ended September 30. Baron Asset Fund with its
under-weighting in the technology sector should benefit when value comes back in
favor.
The Fund's performance was not uniform across the year. Baron Asset Fund
performed extremely well in the first half of the fiscal year. The Fund gained
35.7% and significantly outperformed the performance of the Russell 2000,
+10.0%, and the performance of the S&P 500, +27.2%. The Fund performed poorly in
the second half of the year, losing 4.9% as compared to a gain for the Russell
2000 of 8.3% and 0.3% for the S&P 500.
The performance of Baron Asset Fund was not uniform across sectors. The Fund
realized large gains in Financial Services, Media & Entertainment and
Communications. The Fund also performed well in its investments in Retail,
Manufacturing and Hotels and Lodging. The Fund realized losses in Health Care,
Business Services, Education and Leisure.
In fiscal year 2000, the Fund will continue to invest in companies that, in our
opinion, are undervalued relative to their long-term growth prospects and have
the ability to sustain superior levels of profitability. The companies will
continue to be identified through our independent research efforts. Companies in
which we invest will have the potential to increase in price at least 50% over
the next two years. The Fund will remain diversified not only by industry and
investment theme, but also by external factors we have identified that could
affect company performance. This approach to investing in companies, not trading
of stocks, could allow the Fund to continue to produce above average rates of
return while keeping an attractive risk profile. The extremely attractive
valuation levels of companies within the small cap universe and the current
prices of some of our longer term core positions leave us looking forward to a
successful 2000.
-43-
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON GROWTH FUND IN RELATION TO THE RUSSELL 2000*
Baron Growth & Income Russell 2000
--------------------- ------------
10000 10000
1995 14770 12730
1996 18575 14408
1997 25469 19181
1998 20855 15534
1999 29868 18496
Information Presented by Fiscal Year as of September 30
Past performance is not predictive of future performance
* The Russell 200 is an unmanaged index of small and mid-sized companies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BARON GROWTH FUND
Baron Growth Fund's performance in the fiscal year ended September 1999 was
strong as markets recovered from depressed levels last fall. The Fund gained
43.2% during the year and significantly outperformed the Russell 2000 index
which gained 19.1% and the S&P 500, which gained 27.8%.
Baron Growth Fund invests in small sized companies. While the investment
performance of smaller companies in fiscal 1999 was acceptable, rebounding from
a poor fiscal 1998, the performance of smaller companies continues to lag that
of larger more established companies. This trend has continued for most of the
last sixteen years. The resulting valuations of smaller companies remain
compelling. While Baron Growth Fund has been able to keep pace with the S&P 500
in the nearly five years since its inception, +25.9% per year, it is well
positioned to take advantage of a better small cap environment when it
materializes.
The Fund's performance was not uniform across the year. Baron Growth Fund
performed exceedingly well in the first half of the fiscal year gaining 31.9%,
and out-performed the performance of the Russell 2000 which gained 10.0% and the
S&P 500 which gained 27.2%. The Fund continued to do well in the June quarter,
+17.5%, but lost 7.5% in the September quarter. For the second half of the
fiscal year the Fund gained 8.7% as compared to +0.3% and +8.3% for the S&P 500
and Russell 2000 respectively.
The performance of Baron Growth Fund was not uniform across sectors. The Fund
realized large gains in Financial Services and Communications. The Fund also
performed well in its investments in Media and Entertainment, Manufacturing and
Hotels and Lodging. The Fund realized losses in Health Care, Business Services,
Education and Leisure.
In fiscal year 2000 the Fund will continue to be invested in small companies
that have the potential to appreciate in value at least 50% during the next two
years. The Fund's portfolio is well positioned to take advantage of the
attractive valuations that now exist within the small cap universe.
-44-
<PAGE>
B A R O N F U N D S
- --------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF $10,000 INVESTMENT
IN BARON SMALL CAP FUND IN RELATION TO THE RUSSELL 2000*
Baron Small Cap Fund Russell 2000
-------------------- ------------
10000 10000
1998 8610 8085
1999 13370 9626
Information Presented by Fiscal Year as of September 30
Past performance is not predictive of future performance
* The Russell 200 is an unmanaged index of small and mid-sized companies
- --------------------------------------------------------------------------------
BARON SMALL CAP FUND
Baron Small Cap Fund's performance in the fiscal year ended September 1999 was
strong as markets recovered from depressed levels last fall. The Fund gained
55.3% during the year and significantly outperformed the Russell 2000 index
which gained 19.1% and the S&P 500 which gained 27.8%. In its first two years of
operation the Fund, was up 33.7%, and has significantly outperformed the Russell
2000 which lost 3.6% in the two years ended September 30.
The Fund's performance was strong both on an absolute basis, and relative to its
small cap peers throughout the Fiscal year. The Fund performed exceedingly well
in the first three quarters of the fiscal year and managed a small gain in the
September quarter in which both the Russell 2000 and S&P 500 fell 6.3%. The Fund
realized its greatest gains in the first fiscal quarter, +22.4%, a strong
quarter for U.S. stocks in general. The Fund realized its greatest relative
gains in the March quarter, up 12.8%, while the Russell 2000 fell 5.4%.
Quarterly Table
Fiscal Year 1998 Baron Small Cap Fund Russell 2000
- ------------------ ---------------------- -------------
4th Qtr 1998 +22.4% +16.3%
1st Qtr 1999 +12.8% -5.4%
2nd Qtr 1999 +12.4% +15.6%
3rd Qtr 1999 + 0.1% -6.3%
Fiscal Year +55.3% +19.1%
The performance of Baron Small Cap Fund was not uniform across sectors. The Fund
realized large gains in Communications and Media and Entertainment. The Fund
also performed well in its investments in Retail, Business Services, Hotels and
Lodging and Leisure. The Fund realized losses in Health Care and Manufacturing.
In fiscal year 2000, the Fund will continue to invest in companies that, in our
opinion, are undervalued relative to their long-term growth prospects and
ability to sustain superior levels of profitability. The companies will continue
to be identified through our independent research efforts. Companies in which we
invest have the potential to increase in price at least 50% over the next two
years. The Fund will continue to invest in smaller "Growth Companies", "Fallen
Angels" and "Special Situations". The industries that continue to be of special
interest are in Communications, Media and Entertainment and specialized service
companies that provide services to these industries. The attractive valuation
levels of companies within the small cap universe leave us looking forward to a
successful 2000.
-45-
