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[REGISTERED LOGO]
BARON
FUNDS
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BARON ASSET
1
FUND
PERFORMANCE.......................................................1
PORTFOLIO STRATEGY................................................2
RECENT DEVELOPMENTS...............................................5
OTHER DEVELOPMENTS................................................8
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BARON GROWTH
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FUND
PERFORMANCE.......................................................9
CONCLUSION.......................................................13
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BARON SMALL
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CAP FUND
PERFORMANCE......................................................14
PORTFOLIO
COMPOSITION......................................................15
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BARON
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i OPPORTUNITY
FUND
PERFORMANCE AND
PHILOSOPHY.......................................................17
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
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THIS QUARTERLY REPORT CONTAINS
INFORMATION FOR FOUR FUNDS
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BARON ASSET FUND
QUARTERLY REPORT MARCH 31, 2000
Dear Baron Asset
Fund Shareholder:
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PERFORMANCE
Baron Asset Fund performed well in the first quarter (see table below), but has
since fallen with the general market. Our businesses achieved very strong
earnings growth in the quarter. Robert Half's earnings increased 24%, its
revenue increased 30%. Half's Internet recruiting initiatives are having a
favorable impact on the company's ability to source candidates. ChoicePoint's
earnings increased 68%, its revenues 23%. Internal revenue growth for both the
traditional insurance services and newer commercial and government services
businesses achieved record results. ChoicePoint also announced the acquisition
of DBT, its largest competitor. Ethan Allen increased earnings 18%, revenues
12%. Orders increased 19%. Delivery times for wood furniture have been
extended. Normally 85% of orders are delivered in four weeks. That number is
now 60%. OM Group earnings increased 17%, sales 30%. A recent acquisition
should boost results in following quarters. Apollo increased earnings 23%,
revenues 23%. Apollo announced it would issue a tracking stock for University
of Phoenix Online. The proceeds of this offering should enable the company to
boost the growth rate of its on-line business from 40% to 60% for the next
several years. DeVry earnings increased 27%, revenues 18%. Enrollments
continued their steady climb, margins continued to expand. DeVry recently
applied to their accrediting body to offer a bachelors degree program on-line.
Education Management increased earnings 20%, revenues 18%. Enrollment
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PERFORMANCE
FOR THE 3 MONTHS ENDED MARCH 31, 2000
BARON ASSET FUND 10.2%
S&P 500* 2.3%
RUSSELL 2000* 7.0%
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PERFORMANCE
FOR THE 12 MONTHS ENDED MARCH 31, 2000
BARON ASSET FUND 19.6%
S&P 500* 17.9%
RUSSELL 2000* 37.3%
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PERFORMANCE SINCE INCEPTION
JUNE 12, 1987 THROUGH MARCH 31, 2000
BARON ASSET FUND 742.9%
S&P 500* 595.9%
RUSSELL 2000* 306.9%
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*THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P MEASURES THE
PERFORMANCE OF THE STOCK MARKET IN GENERAL; THE RUSSELL 2000 OF SMALL AND
MID-SIZED COMPANIES.
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increased nearly 16%. Charles Schwab's earnings more than doubled while
revenues jumped 65%. These results were achieved because trading levels
increased far beyond budgeted and sustainable levels. Staffing has since
increased, service levels have improved and volumes fallen back to more
normalized levels. We expect Schwab's income to increase 40% per year for the
next several years. Michael Mark's Flextronics continued to achieve outstanding
results. Earnings jumped 50% and sales about doubled. Saga Communications
increased earnings 33%, revenues 21%, as its comparable radio stations continue
to achieve strong growth. Two notable laggards in the quarter were Manor Care
and Sun International. See our discussion below "Costly mistakes." About 69.5%
of Baron Asset's equity portfolio is represented by stocks including those
mentioned that can be valued based upon price earnings ratios and five year
growth rates. This segment has a p/e ratio of 23.1X 2000 earnings that are
expected to increase 27.1% from 1999's level.
About half the remaining equity investments can be valued based upon the
discounted present value of future cash flows. These businesses include
communications companies American Tower, CoreComm, NTL (see discussion
"NTL:. . .the glass is half full. . .the glass is half empty. . .") and
UnitedGlobalCom. These businesses are all growing rapidly, and if they continue
to do so, offer us the potential to earn more than 25% per year. . .maybe a lot
more. Communications businesses Citizens Utilities, soon to be Citizens
Communications, and Commonwealth Telephone, are valued on the basis of cash
flows and growth rates. Both offer prospects for at least a double within three
years. Our radio and television businesses, Cox Radio, Hispanic Broadcasting,
Citadel Broadcasting and Univision continue to report exceptional cash flow
growth and continue to offer the prospects to double our money yet again within
the next four years. Speculative communications and media ventures Motient, XM
Radio and Sirius Satellite offer huge potential . . .and large risk. . .and
represent a very small portion of our assets. Alexanders and Southern Union are
cheap, cheap, cheap based upon asset values that we believe are two to three
times their current stock prices.
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PORTFOLIO STRATEGY
Baron Asset Fund. . .a small cap "out of the box" fund. . .a "long term"
investor
We're true to our principles but, not by a long shot, are we your "average"
small cap mutual fund. In a May 15, 2000 note on Morningstar.com, "Thinking
Outside the Style Box," the author notes that the parameters of market
capitalization and investment style used to construct Morningstar's nine square
style box "can be misused. . .a fund's strategy could be consistent even as its
style box position shifts. That can happen when its managers let its small-or
mid-cap winners run while keeping portfolio turnover low. For example, the
median market cap of Baron Asset crept upward in the late 1990s, because
manager Ron Baron held on to favorites like Charles Schwab."
Baron Asset Fund is an "out of the box" small cap fund that doesn't easily fit
into narrowly defined investing categories. The reason? Baron Asset Fund is a
long term investor in businesses, not a short term stock trader. Although Baron
Asset has purchased principally smaller companies, during the thirteen years
since the Fund's founding in June 1987, many businesses in which the Fund
invested when they were small have become BIG. The Fund continues to hold these
investments since they continue to have the potential to double in size again
within the next four years. The average mutual fund's annual portfolio turnover
is nearly 100%, i.e, it replaces its entire equity portfolio every year! Baron
Asset Fund invests in businesses for years, not months. Its 15% average annual
turnover means that, on average, it holds investments for seven years. It keeps
its winners! Barron's noted in a featured interview with us a few years ago
that "Ron Baron knows when to hold 'em." Too bad I don't always know when to
"fold 'em." Please see "Costly mistakes."
You won't find $32 billion market cap Charles Schwab in most small cap fund
portfolios. . . Baron Asset first invested in that business in 1992 when
Schwab's market cap was just $800 million. You won't find $8 billion market cap
Flextronics in most small cap portfolios. . .Baron Asset invested in this
business five years ago when its market cap was $500 million. You won't find $5
billion market cap Robert Half in small cap portfolios either . . .Baron
initially invested in that business ten years ago when its market cap was less
than $200 million. You won't find $20 billion market value NTL in small cap
portfolios, either. . .Baron invested in that business seven years ago when its
market cap was just $250 million. Baron Asset invested in Mirage Resorts in
1987 when its market cap was just $250 million. Mirage was recently acquired by
MGM Resorts for more than $4 billion. And you won't find mid-sized market cap
businesses like DeVry, Hispanic Broadcasting, Dollar Tree, American Tower,
Univision, Cox Radio and many other companies that have multiplied many fold
since Baron Asset purchased their shares in most small funds either.
Baron Asset Fund's small market cap businesses Saga Communications, Ethan
Allen, CoreComm, Vail Resorts, ChoicePoint, OM Group, Four Seasons, Choice
Hotels, Libbey, XM Radio and Education Management et al do not yet justify mid
cap and large cap valuations. But, we think they will. So, what's our strategy?
Buy well managed, small and mid-sized businesses which have opportunities to
become large. . .and not sell them just because they are successful when they
become mid-sized and larger companies. . .until these companies no longer have
the opportunity to double in size again within the next four years. . .
A recent Wall St Journal story described a meeting between a technology fund
manager and his investors. The manager was
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trying to reassure his shareholders. But, since turnaround is obviously fair
play, he was repeatedly assured instead by his shareholders, "We're long term
investors in technology businesses. We're not concerned." We found this news
account bizarre since the annual portfolio turnover in that tech fund was well
in excess of 100% per year. . .by the end of the year the fund didn't, on
average, own anything it owned at the start of the year.
Baron Asset buys growth at value prices.
Value vs growth. . .you won't find American Tower, NTL, CoreComm, Hispanic
Broadcasting, Univision, Flextronics and Westwood One in most value
portfolios. . .but, we invested at "value" prices before others recognized
these businesses as "growth" businesses and have profited accordingly. You
won't find Citizens Utilities, Southern Union, Seacor Smit, Sotheby's and
Alexanders in most growth funds. . .but we believe we've also invested in these
businesses before others have recognized what we believe are their "hidden
assets" and favorable growth prospects. . .
Technology. Most small cap growth funds have 30-50% or more of their portfolios
invested in technology businesses. Baron Asset Fund has no technology
investments. We've chosen instead to invest in businesses that benefit from the
Internet and have been able to create sustainable competitive advantage from
their own technology investments. . .Charles Schwab, Robert Half, NTL,
ChoicePoint et al, not businesses that make black boxes, software or chips. . .
(although we sure wish we had the returns tech heavy funds achieved during the
past three years as their p/e and price to sales ratios soared, our large
communications and media investments did help offset the sluggish investment
performance of our many, cheap, very profitable, fast growing "old economy"
businesses).
Research. Research. Research. We've said it before. We'll say it again.
And just what is it that we do? What does Baron Funds stand for? Baron Funds
researches and studies businesses. It's our judgment and work that's the basis
for our long term investments. . .it's not brokerage firm, investment banking
funded research recommendations. And, it's not IPO investments and rapid
trading that have produced our favorable long term returns. It's our own
research. . .and we believe we should get the credit. . .and the blame. . .for
our successes and failures. We visit and interview managements and executives
of the companies we own, as well as their competitors and customers to try to
judge talent, honesty and drive. And business' opportunity, of course. We try
to find businesses we believe are well managed and can take advantage of BIG
growth opportunities. Barriers to prevent others from usurping these
opportunities are a must. Short term traders care only about companies
exceeding next quarter's earnings by a penny or two, sales a little better than
expected, an announced contract or joint venture or an announced government
policy initiative. Early one recent morning while working out on my treadmill,
I was listening to a particularly well-spoken CNBC anchor analyst. "We sit here
all day trying to make sense of the markets," he commented with some degree of
frustration. Well, that's exactly what we do not do. Baron Asset Fund is a long
term investor in fast growing, well managed, small and mid-sized businesses.
And to us long term means long term. And, we attempt to purchase these
businesses at attractive prices. . .prices that will allow us as shareholders
to double our money in three to five years. . .if the businesses in which we
are shareholders double in size in three to five years. If the businesses in
which we are shareholders double in size, and then double again, so should the
value of our investment double and then double again. As a long term investor,
we'll still own them. Of course we may not achieve our objectives.
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Internet stocks, value stocks, growth stocks, "momentum investing". . .
The year long laggard performance of Warren Buffett's Berkshire
Hathaway. . .its stock price fell about 16% last year. . .the retirements by
noted, value oriented, "old economy" investors Tiger's Julian Robertson,
Oakmark's Robert Sanborn and Fidelity's George VanDerHeiden who underperformed
after missing the tech and Internet, media and communications stock
booms. . .the retirement of Soros' Stanley Druckenmuller following his
abandonment of "old economy" stocks last year and recent ill-timed, "new
economy" tech investments. . .just like the demise last year of Long Term
Capital Management marked the bottom of the stock market's sharp
decline. . .the retirements of these well established portfolio managers has
probably marked the bottom of the underperformance of "value" stocks. And there
are a lot of cheap, very cheap, non-technology stocks with good prospects.
There need be no further evidence than front page business stories about Carl
Icahn's recent investment exploits.
And, why did Internet and technology IPO's increase in price so much last year?
We think their stock prices were inflated partly because there was so little
float available in these new businesses which offered open-ended growth
prospects. But limited supply of many issues will soon end. The expiration of
many "lockup periods," periods following initial public offerings when insiders
are not allowed to sell their personal shareholdings, is close. Lockup period
lengths are considered important to insiders. In fact, underwritings are
awarded partly based upon investment bank agreements to terminate lockup
periods early.
"Momentum" investing, namely, buying only what's going up, to paraphrase Will
Rogers, the father of momentum investing, "If a stock doesn't increase in
price, don't buy it." Momentum investing has also had an important role in the
huge tech stock advance during the past three years. However, few owners of
these stocks know very much about the underlying businesses. One of my good
friends, we've been friends since college, now heads an investment bank. Last
year his firm was the lead underwriter for one of 1999's "hot" IPOs, actually
one of 1999's hottest IPOs. Before that company's initial public offering, the
company's chief executive and senior management team visited inves-
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tors cross country on a three week "roadshow" set up by my friend. The roadshow
included about 70 meetings with hundreds of portfolio managers and analysts.
"Well, what did you think?" my friend wanted to know when the chief executive
returned exhausted. "Of the hundreds of people at your meetings, maybe five
understood what I do. The rest would have believed me if I explained that I
make a box that you take with you into a phone booth that converts you into
atoms that can be sent through a telephone line and reconstituted as a person
in a phone booth in another city across the country. But, they all wanted to
buy my stock!" So, it really shouldn't be surprising when stocks falling in
price generate selling. The only reason many traders bought these stocks in the
first place was because the shares were likely to increase in price because
there was more demand for shares than there were shares available. Of course,
when share prices began to decline, this was no longer the case. Momentum
investors and traders become forced sellers of shares when stock prices are
falling. That's the flip side of momentum investing.
Huge price increases in tech and Internet stocks really have impacted the U.S.
economy. . .
At Berkshire Hathaway's recent shareholder meeting, Warren Buffett opined that
the high stock prices accorded technology and Internet businesses with little
revenues and no earnings "had not created wealth. They merely transferred
wealth to the founders and early investors of those companies from new public
investors." Public venture capital investing. Except at valuations in the
billions not in single digit millions! Few of these new ventures will likely be
successful if the past is a yardstick. Normally, new ventures are incubated for
years before they are able to have an initial public offering. Due to the
recent technology mania, the public has accepted great risks of which they have
only recently become aware. The financing window for these ventures is now
closed.
And the disruption caused in financial markets where profitable, growing,
non-tech businesses were "crowded out" by fast growing but not yet unprofitable
Internet ventures has ended. Financing really did become a zero sum game when
technology stocks tripled to about 30% of equity share values in three years,
growing much faster than underlying businesses and much faster than the economy
produced savings. The money to produce these gains had to come from somewhere.
It came, we believe, from investor sales of more traditional investments.
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Labor markets squeezed by young graduates seeking .com employment and
individuals leaving full time employment to become "day traders" have ended as
well. getrichquick.com. We were recently visited by two young women with a web
site for safety tips, e.g. shots to take when you travel, what to do if you're
kidnapped in Bolivia, how you should avoid sunburns, what you should do if you
have hot oil spilled on you. Although their "business" was really just an idea,
they thought it was worth $6 million (!!!). Wow. The moral to these stories?
They're just meant to show that when public markets accord businesses
extraordinary valuations, it really does impact the rest of our economy. . .it
impacts capital formation and the quality of our workforce and their
willingness to work long and hard to achieve success, not trying to get rich
quickly overnight. To the extent these excesses are corrected, the recent stock
market correction, although painful to most of us, will be helpful. As of late
May, the date of this letter, Chairman Greenspan certainly seems to have been
successful at reducing the "wealth effect" of high stock prices. If the Federal
Reserve eases credit early enough to prevent a NASDAQ death spiral, and we
believe they will, it will be even more helpful.
. . .but the springtime NASDAQ decline has created significant values. . .
Although we have not escaped the spring NASDAQ tech stock slaughter unscathed
(our communications, media, Charles Schwab and Flextronics investments
participated in the decline just as they had in the three year tech advance) we
welcome more rational stock prices. And, we expect to take advantage of new
opportunities that have been created. All the Baron Funds should be able to
take advantage of more attractive prices for communications and media
businesses. Baron iOpportunity Fund should be especially well positioned to
sift through the wreckage of the Internet sector. . .and Mitch and Matt seem to
be finding lots of attractive values.
Costly mistakes.
We have often stated that, "We invest in people, not just buildings." When we
make a mistake, as often as not it's because we've misjudged management's
capabilities or motivations. Two companies that have lately not done as well as
most businesses in our portfolio are resort operator Sun International and
nursing home operator Manor Care. We don't think it's a coincidence that the
managements of both businesses are members of groups attempting to purchase
those businesses. Such transactions, of course, are rife with structural
conflicts and management distractions. A management team that operates a
business as fiduciaries for the business' shareholders/owners but wants to
purchase that business for themselves at an attractive price. . .how can that
be fair? Management has the ability to influence current reported earnings, and
therefore a business' stock price. Congress recognized that there are inherent
conflicts of interest between lobbyists and those being lobbied. Senators,
Representatives and members of the Executive Branch are not permitted to become
lobbyists immediately after they leave the government. We think there should be
similar ethics rules in business.
Young Broadcasting. We sold our shares after about doubling our money. We had
about tripled our money when the company's executives announced the leveraged
purchase of an extraordinarily expensive San Francisco NBC affiliate before
obtaining NBC's written approval to do so. Although Young was confident
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it would retain the affiliation agreement, we believed this transaction very
risky and sold our shares. The San Francisco station has since lost its
affiliation, and Young's shares fell another 50% after we sold.
We've fortunately been right in our judgments about people a lot more than
we've been wrong. 2000 marks my 30th year as an investment analyst. And, it's
probably more upsetting to me now when I make a mistake than it's ever been.
It's especially disappointing if we seem to have misjudged individuals we
personally like. Although it's obviously unfair and premature to make judgments
before we've seen all the facts, we remain concerned regarding Sotheby's.
Please see our note about the ongoing Sotheby's saga below.
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RECENT DEVELOPMENTS
Sotheby's. No news yet on Department of Justice price fixing probe. Sotheby's
annual shareholder meeting postponed to discuss composition of the board.
We were first intrigued by and began to learn about Sotheby's in 1988 shortly
after that company's initial public offering. We did not purchase any Sotheby's
shares, however, until September 1997. . .and then only at prices that averaged
40% less than those prevailing nearly ten years earlier (. . .a lesson
applicable to last year's frenzied IPO boom?). Sotheby's initial public
offering occurred in the midst of a fine arts boom inspired by the then surging
Japanese stock market. In the early 1990's, the art market predictably suffered
a "hangover" and collectible prices fell sharply. Sotheby's stock price
followed suit. Impressionist and contemporary masterpieces by Picasso, Monet,
Cezanne, van Gogh, Warhol, Johns and Rothko et al have in the past few years
again increased sharply in value. Prices of lesser works have recently begun to
increase as well. This should not have been unexpected. Stock prices are a lot
higher than ten years ago. So are real estate prices. . .restaurant prices, car
prices, school tuitions and, most importantly, discretionary incomes. So, why
should art prices have continued to languish? Price increases of objects
auctioned have increased revenues of the leading fine arts auctioneers.
And what a great business Sotheby's has! A virtual retailer of art that owns
neither stores nor inventory. Fine art that doesn't sell at auction is returned
to the consignor. It is not owned by Sotheby's and does not have to be marked
down and sold by the auctioneer at a loss. Sotheby's, as does its principal
competitor, Christie's, owes its long survival and enduring prosperity to the
enormous competitive advantage provided by its reputation for integrity and
expertise established over the past two and a half centuries. Further, it is
hard to think of a more direct beneficiary of rising worldwide affluence and
prosperity than Sotheby's. What else spurred our interest in Sotheby's 256 year
old business during the past two years. . .other than its 11% annual secular
revenue growth rate for thirty five years and its prospects for rising margins
during the next ten years that could at least quadruple its current operating
earnings? And a stock price that did not mirror these opportunities? The
prospects for Internet auctions that could, if successful, double or triple our
earnings forecasts over the next decade. That's what! Sotheby's stock price had
more than doubled during the past year subsequent to our purchases. However,
its share price is currently depressed by the Department of Justice
investigation into whether Sotheby's and others were involved in criminal price
fixing, and has declined this year to less than half the price it reached a
year ago. This is because if the company were found guilty of price fixing, the
liability attached could be substantial. We believe the value of Sotheby's
franchise is intact. Assuming the government completes its investigation, this
scandal is resolved and the litigation concluded, all on favorable terms, we
believe Sotheby's share price will again reflect the company's outstanding long
term prospects.
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When we began to invest in Sotheby's, we did so in part because we liked and
admired the Sotheby's management team led by its charismatic chief executive
Dee Dee Brooks and closely supervised by Chairman A. Alfred Taubman, one of the
United States' most able, visionary, hands-on retail executives. To say we were
shocked by the reports in January that Christies was cooperating with the
Department of Justice in their investigation of a price fixing conspiracy
between Sotheby's and Christie's executives would be an understatement.
Especially since we questioned Sotheby's management on several occasions about
the 10(k) disclosures regarding this investigation and had been reassured by
their answers. The resignations of Taubman and Brooks following news reports of
Christie's grant of conditional amnesty by the Department of Justice were even
more surprising and unsettling. Especially since we had just been reassured by
a board member that pricing decisions were a board decision and that the
company was completely innocent of any wrongdoing.
We certainly hope that Taubman, Brooks and Sotheby's will be exonerated of any
wrongdoing. However, if what has been reported in the press and civil lawsuits
can be proven in court, Sotheby's and one or more former executives may be
liable for penalties and damages at least to the government and sellers of art
at auctions for the three years from 1996-1998. Fortunately for Sotheby's
shareholders, according to published reports, Alfred Taubman is one of the
wealthiest Americans. If the newspaper reports are accurate, Taubman may be
personally liable to both Sotheby's shareholders and the company for any
resulting damages.
We regard the appointment of Mike Sovern as Sotheby's new board chairman as a
good step. Mike is the former President of Columbia University, currently
teaches law at Columbia Law School and is a member of the boards of Warner
Lambert and AT&T. But, most importantly, Mike is known for his ability to
resolve disputes. For those of you who remember the student unrest at Columbia
University in the 1960s, he's the guy who fixed the problem.
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Baron Funds had expected that an outstanding, independent Sotheby's board would
be assembled to oversee the continuing government investigation. We were
clearly surprised and upset when a proxy was issued naming Robert Taubman,
Alfred Taubman's son, to the board in Alfred's place. If the father resigned to
allow the investigation to proceed without interference from the company's
controlling shareholder, how could it be o.k. for his son to take his place?
Other individuals with exceptionally close ties to Taubman also remain on the
board. I believe Robert Taubman's appointment to be inappropriate at this time.
We believe Robert Taubman will soon recognize the enormous conflicts of
interest he will face. To enable the company's defense to be separated from
that of his father, and minimize potential liabilities for the company, we
remain hopeful Robert will resign his position in favor of another highly
qualified but independent individual.
If the subjects of my discussions with Mike were not often so unpleasant and
serious, our conversations would have been more than enjoyable. "May you be
cursed by being in a lawsuit in which you're right," he told me he admonishes
his law students in a lightly veiled but friendly warning to me. When Mike was
attempting to convince me to compromise on a difficult point he told me a
story. "A matchmaker in England in the 1950's was trying to marry Yosell, a
young Jewish man, to Princess Margaret, the daughter of the Queen. Yosell's
grandmother was distressed that her grandson would consider marrying out of
their religion. After several meetings between the grandmother, Yosell and the
matchmaker, the grandmother relented and blessed the marriage. When the old
matchmaker and Yosell left the grandmother's home, the matchmaker turned to
Yosell. 'Well, that's half the battle.' "
We have previously chosen to support Alfred Taubman's board nominees. But,
circumstances have changed. As a direct result of the DOJ investigation,
Sotheby's share price no longer reflects the very strong value of its
businesses. . .off-line or on-line. The new Sotheby's board will include at
least four independent directors acceptable to Baron Capital. We expect these
individuals to provide business expertise to Sotheby's management and influence
the board to "do the right thing" for all Sotheby's constituencies, e.g. its
employees, customers, community and shareholders in addition to the Taubman
family.
We believe the efforts by the "fresh blood" that will be added to Sotheby's
board will help the business overcome its current legal travails and refocus on
both its "bricks and mortar" auctions and enormous electronic commerce
opportunities. Vanity Fair's June 2000 article titled "Sotheby's Under Siege"
ended with an old art world saying. "When Armageddon is over, Sotheby's and
Christie's will still be around to auction off the ashes." We certainly do not
believe this investigation represents Armageddon for either Sotheby's or
Christie's. And, as noted, assuming the investigation is concluded and
resulting litigation completed on favorable terms, we expect Sotheby's share
price to again reflect its very strong growth opportunities. Sotheby's market
value now approximates just $1 billion. According to press reports, Bernard
Arnoult, Chairman of luxury goods retailer LVMH, offered to purchase Sotheby's
last fall. Sotheby's share price was then almost three times its current level.
Sotheby's chairman reportedly rejected the proposal without presenting it to
Sotheby's board.
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Libbey. The next time you dine out, listen for the sound of breaking
glass. . .that's income for restaurant glassware supplier Libbey!
In early May, Andrew Peck, our young (Andrew doesn't want to be called "young"
anymore. . .he just turned "31"), Yale undergraduate, Stanford Law and MBA
educated, Internet- opportunity focused analyst walked into my office. "Ron,
we've just been invited to spend a day and a half with management at the Libbey
glass plant in the hills of Monterey, Mexico." "Isn't Monterey supposed to be
very pretty?" I asked. "That's Monterey, California. I wouldn't exactly call
Monterey, Mexico a resort. According to the Weather Channel, it's 102 degrees
there today and, of course, you can't drink the water. But, we'll get to see
their low labor cost glass furnaces up close. I don't think the plant is air-
conditioned, though. Their glass furnace we visited in Toledo last summer
wasn't air-conditioned, either. Do you want to go or should I?" Of course,
sensing the opportunity to make sure that Andrew remains focused on what's
ultimately important, investing in businesses that generate more revenues each
year than they spend, that make a good return on invested capital and that have
important barriers to competitors. . .I decided to allow Andrew to make this
trip alone.
Upon his arrival in Monterey late in the afternoon, Andrew checked in with our
office. "I had to get up at 5AM to catch a flight to Dallas where I was
supposed to have a two hour layover. Unfortunately, when my plane taxied onto
the runway in Dallas, its tire blew out and we had to wait another hour to
change it. But, I'm here now and on my way to the plant in a van with heavy
security." "How's the hotel?" "Not exactly a Four Seasons."
Although it took Andrew quite a while to get to Monterey (sounds like a song
title, doesn't it?) and the hotel where he stayed wasn't the greatest, Andrew
was extremely impressed with Libbey's joint venture partner, Vitro, one of
Mexico's largest private enterprises. Andrew was wined, dined and entertained
in a luxurious, magnificent hacienda filled with expensive art, antiques and
luxurious furnishings and carpets. . .that was surrounded by high, seemingly
impenetrable walls and heavily guarded by armed men and dogs. Vitro's highly
efficient, low labor cost glass manufacturing facility was especially
impressive. In fact, Andrew liked it better than Libbey's Toledo plant. The
layout of the Monterey plant seemed more efficient and its direct manufacturing
costs are clearly a lot lower. Andrew was acutely aware that labor in this
plant, representing perhaps half standard manufacturing costs in the United
States, cost only about $2 per hour, about 10% of its cost in Toledo.
6
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B A R O N A S S E T F U N D
Libbey is the United States' dominant manufacturer of glassware for restaurants
and other institutional customers. Its market share probably exceeds 70%. More
than 90% of its sales are highly predictable replacement sales, e.g., glasses
break after limited usage. As a former waiter during my college years, I can
personally verify this to be true. During Andrew's plant tour, Libbey's
management outlined aggressive revenue and earnings growth targets for the next
few years. Libbey expects to grow its core $461 million annual revenues 5% per
year for the next three years while adding perhaps $200 million to annual sales
through acquisitions of complementary products that can be distributed by
Libbey, e.g., dinnerware or flatware or other dining area furnishings. Pre tax
margins should increase 200 basis points over the time period driving earnings
per share from an estimated $3.15 per share this year to about $6 in 2002. The
company also expects to continue to repurchase its shares. Libbey's share price
continues to languish below $30 per share, less than 10X 2000 after tax
earnings.
NTL. The glass is half full. . .the glass is half empty. . .
During 1999, Microsoft purchased a $500 million NTL preferred issue convertible
into common stock at a split adjusted price of about $61 per share, about nine
times Baron Asset Fund's initial cost per share in 1993. In 1993, Baron Funds
was the largest shareholder in NTL's predecessor company. Microsoft's capital
helped NTL continue its aggressive broadband communication capacity build.
France Telecom subsequently invested $5.5 billion for an approximate 25% stake
in NTL. The split adjusted stock purchase price paid by France Telecom was
about $68 per NTL share. France Telecom's most recent investment provided
financing for NTL to nearly double the size of its U.K. cable, telephone and
Internet access businesses by purchasing similar Cable & Wireless businesses.
It also provided NTL the capital necessary to purchase the Switzerland cable
television system, Cablecom.
NTL's and Cable & Wireless' businesses are virtually identical in size. NTL's
franchise encompasses 6,042,000 homes, CWC 5,977,000 homes. Both companies have
invested similar amounts in cable plant and have each "passed" about 71% of the
homes in their respective markets. NTL has, by far, done the better marketing
job. NTL has achieved significantly greater service penetration than CWC, e.g.
53% more telephone customers, 84% more cable television customers and eight
times the Internet access customers. This provides NTL substantial opportunity
to improve the newly acquired CWC systems. Switzerland's Cablecom has passed
90.8% of the homes in its market and has achieved remarkable 96% customer
penetration for cable television service. Cablecom does not offer its customers
telephone services at present. Cablecom was purchased for $3.7 billion, about
$2500 per customer. NTL intends to upgrade Cablecom's network with broadband to
offer telephone and Internet access. If successful with its telephone and
Internet service efforts, NTL could reduce Cablecom's purchase price to five
times cash flow within a few years. Investors applauded the Microsoft and
France Telecom investments and the Cable & Wireless and Cablecom acquisitions.
NTL shares more than doubled in value last year to over $100 per share. Traders
clearly thought the glass half full.
<PAGE>
During May, NTL announced it plans to compete aggressively to purchase and
upgrade cable systems in Europe that are being privatized. Cable television
purchases in Europe could nearly double again the size of NTL. Financing for
these acquisitions was not outlined. NTL also announced modest sequential
revenue and subscriber growth due to currency fluctuations and seasonal factors
as well as a couple of month delay in its introduction of digital television.
This slight delay gave Sky Television a short term competitive advantage when
it introduced its "Open" digital television service that somewhat surprisingly
employs closed system architecture. NTL's share price fell more than 40% to
less than the purchase prices paid by Microsoft and France Telecom. Traders
obviously now feel the glass is half empty.
NTL has built and owns England's state of the art telecommunications system. In
its 1999 annual report NTL notes that "just two of the 48 fibres in one of our
four national network ducts could handle all of today's UK telephony traffic."
The NTL February 2000 proxy statement (issued for shareholders to approve the
investment by France Telecom and NTL's purchase of Cable & Wireless) notes that
NTL's 3500 mile long fibre optic telecommunications network has "sufficient
duct capacity to accommodate over 2,300 fibres." This capacity is obviously far
more than is currently required. Thus, NTL can add huge incremental
telecommunications capacity at relatively low cost (labor is the largest
component of network construction, not fibre) and low incremental operating
cost. This "future proof" communications network should allow NTL to be at the
forefront of data transmission (the Internet), streaming video that requires
10X the capacity of data which requires 10X the capacity of voice and future
applications not yet dreamed about.
NTL will shortly launch its digital television service, ntl:digital plus; a
digital television portal, ntlworld; and a true video-on-demand movie service.
Over the next several years, we think NTL could significantly increase the
number of households in its markets to whom it provides telephone, television
and Internet services as well as boost revenues per customer nearly 50% while
charging less for each service. This could boost the company's cash flow nearly
15 times. . .and this is before it purchases additional European cable
television systems. We think we have the potential to earn several times on our
investment in the next few years, at least a double from the high earlier this
year, at least a quadruple from current levels. If the NTL world portal is
successful, we could easily double our money again in a few more years. If NTL
is able to successfully purchase and rebuild cable television systems on the
continent, we could earn even more.
7
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B A R O N A S S E T F U N D
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OTHER DEVELOPMENTS
Charles Schwab's co-CEO David Pottruck's new book Clicks and Mortar gets great
reviews. You should read it.
Warren Buffett has recently commented that he views his businesses as castles
surrounded by deep moats filled with alligators. Buffet's executives are
charged with continuing to deepen their moats and add more alligators to defend
against competitors. David's mantra, when he senses encroaching competition, is
to "move the castle." We just love the way David thinks.
In David Pottruck's Clicks and Mortar, he and co-author Terry Pearce discuss
the challenges of growing a business and maintaining its edge in our, fast
paced, technology driven world. Throughout the book David uses real life
examples from his experiences at Schwab. Schwab's corporate culture of doing
the "right thing" for customers and creating an environment for employees to
work together toward common goals is underscored throughout the book. David
discusses with great candor the mistakes he has made and the lessons he has
learned as he has developed into, in our opinion, one of the top business
leaders of our time. Over and above the valuable lessons we can all learn from
David and Terry regarding running a business in a virtual world, we, as
shareholders in Schwab, can only have a warm and fuzzy feeling about the
company after reading the book. Please e-mail us with your thoughts after you
have had a chance to read it as well.
Baron Funds Ninth Annual Investment Conference. October 20, 2000. New York
City.
The Ninth Annual Baron Investment conference will take place Friday, October
20, breakfast through lunch, at the Ballroom of the Grand Hyatt New York Hotel
in New York City. Please save the date. Our conference speakers, five chief
executives of businesses in which Baron Funds is a shareholder, will be
announced over the summer.
Before we invest in a business on behalf of our shareholders, we attempt to
become as knowledgeable as possible about that business. Our due diligence, our
"kick the tires" research, includes not just studying public financial
information, but also meeting with company managements, both in our office and
theirs. This is to judge for ourselves their ability, competency, honesty,
integrity and business strategies. Our annual investment conferences give our
shareholders the opportunity to "kick the tires" of your investment in Baron
Funds.
The First Annual Baron Investment Conference in 1992 had 80 guests, most of
whom I had to ask as a personal favor to attend. Last year nearly 2000 persons
attended our meeting. Please RSVP at www.baronfunds.com or at 1-800-99-BARON or
212-583-2100 as soon as possible if you intend to be here so we can be certain
you will be accommodated. If you have any further questions or if you'd like
help or suggestions regarding hotel reservations, please e-mail, call or write
us. We hope we'll see you this fall. There will be no charge to take part, of
course.
<PAGE>
BaronMail: e-mail service from Baron Funds.
Please register your e-mail address with Baron Funds at [email protected] so
we can communicate via e-mail relevant information about your investment. We
welcome your comments about how we may better serve you.
Thank you for investing in Baron Asset Fund.
We recognize that, for most individuals, deciding how to invest your hard
earned savings to pay for your children's education, a new home or your
retirement is a most difficult decision. The huge stock appreciation achieved
in the past few years that has been driven by technology and Internet stocks is
multiples of what has ever been previously achieved. . .leading many to worry
that stocks are overpriced. But, the stock market advance has been relatively
narrow and most companies' share prices have advanced modestly during this
period.
Baron Asset Fund's investment thesis is relatively uncomplicated. Baron Asset
Fund invests for the long term in growth businesses purchased at attractive
prices. Purchasing stocks at good prices limits risk, we believe. As we
outlined in this report, we attempt to invest in businesses that we believe
will double in size and profits or cash flow in three to five years. We assume
that if a business doubles in size, so will its stock price. We hope our
quarterly shareholder letters, interviews in the press and annual investment
conferences have made it easier for you to determine if Baron Asset Fund
represents an appropriate investment for you and your family.
We want to thank you for choosing to join us as fellow shareholders of Baron
Asset Fund. . .especially since rapid trading, tech and Internet focused funds
have so strongly outperformed during the past year and a half. We will continue
to invest in fast growing, inexpensive businesses whose valuations offer both
downside protection and potentially substantial rewards. We will continue to
work hard to justify your confidence. Again, thank you for your strong support
and interest.
Sincerely,
/s/ Ronald Baron
---------------------------------
Ronald Baron
Chairman and CEO
May 23, 2000
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[REGISTERED LOGO]
BARON
FUNDS
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BARON GROWTH
2
FUND
PERFORMANCE.......................................................9
CONCLUSION.......................................................13
767 Fifth Avenue
NY, NY 10153
212-583-2100
1-800-99-BARON
baronfunds.com
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BARON GROWTH FUND
QUARTERLY REPORT MARCH 31, 2000
Dear Baron Growth
Fund Shareholder:
--------------------------------------------------------------------------------
PERFORMANCE
Baron Growth Fund is off to a slow start in 2000, following a solid 1999. For
the first quarter, the Fund gained 1.4%, compared with a gain of 2.3% for the
S&P 500 index and 7.1% for the Russell 2000 index. Since Baron Growth's
inception in January of 1995, the Fund has outperformed the S&P 500 and
significantly outperformed the Russell 2000. The annualized compounded returns
for Baron Growth shareholders is 28.6% over this time period, versus a return
of 27.6% for the S&P 500 and 17.4% for the Russell 2000.
Fund Completes Small Cap
Growth Transition
A year ago, on May 19, 1999, Baron Growth Fund shareholders approved a change
in the Fund's name to Baron Growth Fund and eliminated income as a secondary
objective of the Fund. A year later, we are pleased to report to shareholders
that the transition to growth, and in particular to small cap growth, is now
complete. As of March 31, 1999 the Fund had 41.5% of its holdings in companies
with a market cap of over $2.2 billion, our "larger cap" category. Only 43.7%
of assets were in smaller companies, those with market caps under $1.75
billion. A year later (March 31, 2000) the Fund has only 21.9% of assets in
larger cap companies, those over $2.2 billion of equity value. The focus of the
Fund is now
--------------------------------------------------------------------------------
PERFORMANCE
FOR THE 3 MONTHS ENDED MARCH 31, 2000
BARON GROWTH FUND 1.4%
S&P 500* 2.3%
RUSSELL 2000* 7.1%
--------------------------------------------------------------------------------
PERFORMANCE
FOR THE 12 MONTHS ENDED MARCH 31, 2000
BARON GROWTH FUND 36.4%
S&P 500* 17.9%
RUSSELL 2000* 37.3%
--------------------------------------------------------------------------------
PERFORMANCE SINCE INCEPTION
JUNE 12, 1987 THROUGH MARCH 31, 2000
BARON GROWTH FUND 275.0%
S&P 500* 258.9%
RUSSELL 2000* 131.7%
--------------------------------------------------------------------------------
*THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P MEASURES THE
PERFORMANCE OF THE STOCK MARKET IN GENERAL; THE RUSSELL 2000 OF SMALL AND
MID-SIZED COMPANIES.
<PAGE>
B A R O N G R O W T H F U N D
squarely on smaller cap names under $1.75 billion in value, with 58.9% of our
assets in companies of that category.
Investing in small cap growth companies; Value oriented
purchase discipline
Baron Growth Fund's investment approach is to seek investments in smaller
companies which we believe have superior long term growth prospects and
purchase them at what we believe are attractive prices. We believe smaller
companies provide greater growth opportunities over the long term than larger,
more mature businesses. Because these smaller businesses are less well known,
extensive independent research is required to develop high levels of conviction
prior to investment. Our research focuses on a company's ability to generate
significant profits and cash flows and sustain those cash flows for long
periods of time. These business dynamics lead to superior stock price
performance over the long term. While long term investing may not currently be
in vogue, we believe the current momentum-based trading environment will soon
come to an end.
Baron Growth Fund has avoided, and will continue to avoid, small cap technology
companies where management teams are constantly in a paranoid shadow boxing
contest against new start-ups and unknown technologies. Rather, we are
investing in those businesses which can benefit from advances in technology.
Some of our companies are creating enterprises around new technologies and
constructing other types of barriers to entry to minimize the risk of
technological obsolescence. We've invested in Flextronics as a high
return-on-capital supplier of manufacturing services to large technology
companies. We've invested in telecom companies that are leveraging broadband
technologies to offer new suites of services to businesses and consumers. We've
found attractively priced "clicks and mortar" businesses which have spawned new
opportunities from old-line businesses thanks to the Internet revolution.
We will continue to invest the Fund with an objective to double our money every
three to five years in businesses that are well managed, have exciting growth
opportunities, barriers to entry and are selling at what we believe to be
attractive prices. Of late we have identified many old line businesses
currently being ignored by today's markets which are selling at prices that
will allow us to continue to achieve this objective. We look forward to a more
rational market environment where bottom-up stock research and investing trumps
short-term trading as the mantra of investors. Baron Growth Fund is well
positioned when that day comes. Of course we cannot predict the market or that
we will achieve our objectives.
<PAGE>
RURAL CELLULAR. Note written by Matt Ervin, Vice President and Co-Portfolio
Manager, Baron Growth Fund
Our friends at Rural Cellular reported excellent results in the first quarter
of 2000. The lead story on the earnings report was continued strong growth in
roaming revenue. Roaming revenue is money paid to Rural Cellular by AT&T
Wireless or other cellular companies when one of their subscribers roams into
Rural Cellular territory and makes a phone call. Now that AT&T and others are
offering nationwide one-rate plans, their subscribers are using wireless phones
in places, such as Rural's rural territories, where roaming usage had never
been strong. Rick Ekstrand and Wes Schultz, respectively the CEO and CFO of
Rural Cellular, have put top priority on solidifying relationships with AT&T
and other large carriers so that the company can continue to attract roaming
traffic. The results to date have been spectacular: Rural dropped roaming
prices by 20% versus last year and has been rewarded with 90% more roaming
minutes versus the year prior. The net result is roaming revenue growth of 45%
annually. There is not much in the way of incremental operating cost to handle
a roaming customer, so dramatic increases in roaming revenue pretty much drop
to the bottom line.
While roaming revenue is booming, the subscriber count is also on track with
solid 18% year over year improvement. We consider this a sustainable growth
rate for the future. Revenue per subscriber is holding relatively steady, and
in fact may increase going forward. Historically, the cellular industry
reported declines of 5% or so annually in revenue per subscriber. Primarily
this is because the initial devotees of cellular phones were high usage, price
insensitive business customers, and to increase penetration rates the industry
has found it necessary to drive rates down and offer cheaper entry-level
packages. But with the advent of digital systems, customers have shown a
willingness to buy more expensive packages in return for a dramatic increase in
available minutes of use. To date, Rural Cellular has had little need to change
over to digital systems because capacity on the company's analog systems was
sufficient to carry the traffic. Nonetheless, the company has installed digital
systems in most cells and is beginning to enroll digital subscribers.
Currently, the company yields about $35/month from the average analog
subscriber. It does appear that digital rate plans produce larger commitments
from customers, and could drive revenue growth to higher levels; we'll keep you
informed as this story unfolds.
Overall, the company has posted at least 18% revenue growth and 20% cash flow
growth, and we believe it has strong prospects for lengthening this enviable
track record. The quality and sustainability of these cash flow streams is
extremely high, and as investors have come to this realization the stock has
risen to around $70 in mid-May from $12 when we bought our initial block of
250K shares only 17 months ago. Even at these levels, the stock is trading at
only 12x our estimate for next year's cash flow. That's still a very good deal
for a business that has what we believe are robust and stable prospects for
growth. When the stock pulled back in February and March, we added to our
position. Baron Growth now holds 410,000 shares of Rural Cellular.
OM GROUP, INC. Note written by Mitch Rubin, Vice President and Co-Portfolio
Manager, Baron Growth Fund
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B A R O N G R O W T H F U N D
When I first began working at Baron Capital, Ron gave me an ecclectic list of
diverse companies that he had found interesting but had not yet researched. One
of them, OM Group, seemed especially interesting due to its dominant leadership
in the cobalt market. Not that Ron or I had any idea what cobalt was used for
(it turns out that cobalt has wonderful properties of adhesion, hardening and
drying that are critical in many industries). OM caught our interest because
its products were critical to the production process across a myraid of
industries, its customers designed OM's products directly into their own
products with exacting specification and OM had maintained an impressive record
of revenue and profit growth through various economic cycles.
After several days of research, I told Ron that the company seemed incredibly
interesting but that the Street did not really provide any research coverage
and I was having difficulty learning more about the company. "So," he replied,
"Go to Cleveland." Something few New Yorkers relish hearing in their careers.
Several trips to Cleveland, and countless meetings with company CEO Jim Mooney
and CFO Jim Materna over the next several months gave us a much deeper
understanding of the company.
The company began as Mooney Chemicals (started by James B. Mooney) in Cleveland
in 1945. Mooney Chemicals produced carboxylates manufactured from cobalt and
nickel and marketed its products almost exclusively to paint and lubricant
manufacturers as drying agents. The founding Jim Mooney retired from the
company in 1975 and the seventh of his 14 children James P. Mooney (who had
been working as a sales rep for the company in Texas) took over. At the time
the company's annual sales were approximately $2 million. In the early 1990s,
no other Mooney children were involved in the business and the siblings were
eager to sell the company. However, Jim wanted to continue running the business
and feared that a financial buyer would overlever and/or undercapitalize the
company and destroy his family's legacy. Instead, Mooney entered a combination
with Outukumpu, a mining concern in Helsinki, Finland that was a raw material
supplier to Mooney, and transformed OM into a leading international producer
and marketer of niche, value-added, metal-based specialty chemicals and
concentrates. The prospects for the business quelled his siblings desire to
sell. Lucky for them, as sales over the next ten years grew from that $2
million level to over $500 million by the end of 1999.
<PAGE>
Despite its years of consistent growth, the market often ignores OM's prospects
and management's capability, viewing the company as a cyclical metals play with
unsustainable growth. This has given us several instances to buy OM's stock on
unwarranted price dips. We were recently given another such opportunity.
In February of this year, OM announced a significant acquisition designed to
give it a similar market dominance and raw material pricing advantage in
nickel-based specialty chemicals that it enjoys in cobalt. By acquiring from
Outokumpu (the same partner from years ago) its nickel refinery business, and
then establishing long term nickel feedstock agreements with Weda Bay Minerals
in Indonesia, OM nearly instantly established itself as one of the world's
lowest cost producers of value added nickel products. These products are the
perfect complement to the company's current cobalt and other specialty metal
products and are critical components in the production process for such high
growth products as rechargeable batteries, fuel cells, super alloy, stainless
steel and others. Moreover, the refinery provided the opportunity for
substantial synergy with other OM facilities to enhance production efficiencies
and broaden the company's product offerings.
The acquisition also had compelling financial characteristics. OM paid $185
million for the facility which, in 1999, produced $400 million in sales and $35
million in EBITDA. This equated to a multiple of 50% of sales and approximately
5x operating cash flow. The acquisition was financed fully with bank debt with
no additional need for equity. The acquisition was thus highly accretive to
OM's earnings. So much so, that the incredibly conservative fiscal team at OM
was forced to guide earnings estimates substantially higher ($0.10 per quarter
or a nearly 20% increase in annual earnings).
After such a strategic and financially compelling transaction, what do you
think the market did with OM's stock? Right. Nothing. After a brief increase,
OM's stock price drifted back to the low $30s, the low end of the stock's
trading range for much of the past year. We took advantage of this apathy to
continue to add to our position and Baron Growth now owns 310,000 shares. In
the past several weeks, the market has begun to focus on the company's new
prospects and the shares have risen to nearly $50.
XM SATELLITE and SIRIUS SATELLITE RADIO. Note written by Matt Ervin
Our next-generation radio companies, which we have discussed at some length in
past reports, are each drawing close to the launch of their satellites. Each
company's satellite system will serve up 100 digital radio channels available
ubiquitously across the United States. Sirius is expected to launch its first
satellite this summer and XM is slated to launch its "bird" close to the end of
the year.
While the satellites are nearing completion, the management teams are thinking
about their marketing plans. XM recently inked an interesting deal with Avis
Rent-A-Car to increase exposure of the service. Avis has agreed to allow XM to
install satellite receivers in all Avis rental cars. The rental market
represents a tremendous venue for satellite radio because the companies can
cheaply gain exposure to potential subscribers. There's no better selling tool
than a test drive, and XM points out that the rental car industry could offer
24 million test drives per year for satellite radio. Yes, that's if the entire
rental car industry signs on, not
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B A R O N G R O W T H F U N D
just Avis, but we feel that the Avis deal is the first in a series of deals to
be announced. Hertz is likely to sign an agreement with Sirius, and the other
smaller rental car companies should follow suit.
On other fronts, Sirius is getting serious about making sure that it has enough
radio units available to meet customer demand. Current capacity is roughly
250,000 units per year, but early indications from OEMs such as Ford suggest
that capacity needs to be increased. Panasonic and Sirius have worked out a
deal to devote an entire factory to the production of digital radios should the
demand warrant the production.
On Wall Street the stocks of these two companies have been fairly volatile but
are basically trading in sympathy with the NASDAQ; both of these stocks peaked
in early March and have subsequently declined. We anticipate continued
volatility in these shares given the developmental stage of their businesses.
What captivates our continued interest is the long-term potential for positive
cash flow and earnings. In our view each of these companies appears capable of
producing $10-20 of cash flow per share if subscription digital radio achieves
popular success.
CHOICE HOTELS Note written by Mitch Rubin
Choice's stock has declined sharply of late from $16.50 in early March to a
recent $11 share price in early May. The decline, we believe, relates both to
continued concern in the hotel industry about overbuilding in the limited
service hotel sector as well as a write down that the company recently took
related to its investment in Friendly Hotels, plc overseas.
We believe that both of these concerns are short-term and that Choice's stock
has fallen well past fair value.
Choice remains one of the largest hotel franchising operations in the world
with over 4,200 hotels in 38 countries with over 400,000 rooms. During 2000, we
expect Choice to generate approximately $175 million in revenue and $110
million in EBITDA. Earnings, despite the write down from Friendly as well as
increased investment in its online venture are projected to grow approximately
10% to $1.10 or better. The stock is thus trading at approximately 10x after
tax earnings. We believe this valuation is extremely compelling given the
stability and free cash flow production of Choice's franchising business model.
The company also believes its stock remains undervalued and is continuing to
buy in shares. Through the end of the first quarter, Choice has retired over 7
million shares (over 10% of outstanding stock) in the last year or so at a cost
of slightly over $100 million.
<PAGE>
In addition to ignoring the strength and stability of Choice's core franchising
business, the market is giving the company little credit for its two exciting
Internet initiatives. We introduced these initiatives in the last quarterly and
update the progress here. Last year, Choice introduced ChoiceBuys.com as an
Internet based buying cooperative for its franchisees. Through ChoiceBuys,
Choice franchisees are able to pool their buying power to purchase online the
products and services used in running their hotels at a substantial discount to
the prices they would have paid buying individually. The ChoiceBuys program now
includes over 150 vendors and more than 7,000 products (up from only 3,000
products 6 months ago.) It has also gotten great acceptance in the Choice
system with over 1,200 Choice-affiliated properties now using the service. Last
year, the program registered over $400 million in purchases and generated
approximately $9 million in revenues to Choice. Choice continues to believe
that, in time, the system has the potential to drive annual expenditures of
$1.5 billion in goods and services by Choice franchisees which could contribute
an incremental $30-40 million in high margin revenue to Choice.
Choice has also made substantial strides in pursuing opportunities to provide
in-room Internet services to its guests. High speed in-room connectivity
remains almost non-existent in the hotel industry with less than one percent of
the US's four million hotel rooms equipped for such service. Yet the demand
appears robust. In its initial test of the system in four locations, in-room
computers at Choice properties enjoyed overwhelming consumer acceptance with
average system usage of 52% and with online sessions that averaged 67 minutes
each (both well above initial projections). Choice believes that, with a broad
roll out, this system will help drive a room rate premium of $5 to $10 as well
as offering the opportunity for online advertising and promotion to drive
additional revenue. To pursue this opportunity further, Choice has established
a new subsidiary, Stay Connect, Inc., to offer a turn-key solution throughout
the hotel industry and beyond the Choice franchise system. Stay Connect has
entered partnerships with Darwin Networks, a leading broadband solutions
company, and Compaq Computers, for the purchase of its new iPAQ desktop PCs.
The company remains committed to its goal of turning on 50,000 hotel rooms with
the new service within one year.
APOLLO GROUP, INC. Note written by Susan Robbins, Vice President
A couple of facts continue to support our thesis that the demand for college
education has never been greater, and that Apollo's business prospects,
especially its University of Phoenix (U of P) Online initiatives, remain
robust. Despite all of the funding for secondary and college education, only
21% of the US population over age 25 has earned a bachelor's degree. In
addition, the pay gap between a college and a high school grad has widened
dramatically over the past two decades from a 50% premium in 1980 to over 100%
by the end of the '90s. Further, online education is becoming an increasingly
attractive alternative to the now 50% of college students who are over the age
of 25, often juggling work and family to try to improve their knowledge base
and resumes and thereby their earnings potential.
With 12,000 students and $100M in run-rate revenues, Apollo's U of P Online,
founded in 1980, is the largest degree granting
12
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B A R O N G R O W T H F U N D
online program in the world. Unlike any other e-learning enterprise that we
know of, it is profitable, with stand alone operating margins in excess of 20%.
Although enrollment growth was "only" 38% in the most recent quarter, we think
current lead flow could support growth closer to historical 60% levels for the
next several years if Apollo continues to invest in the expanded marketing and
infrastructure required to support this growth without having to worry about
meeting investors' short term earnings expectations for the parent company.
To this end, Apollo has announced plans to issue a tracking stock for the
University of Phoenix Online in a $75M IPO slated for mid to late June. Apollo
Group intends to sell 10 - 15% of U of P Online to the public with the goal of
exploiting and expanding its market leadership position while, at the same
time, giving investors the opportunity to more fully realize the existing
strength and potential of its core, off line business.
We think U of P Online could have 100,000 students and be a $1 billion business
in five years. Beyond this, Apollo is also developing an online offering
directed at the $62 billion non-degreed corporate education market,
capitalizing on the already strong relationship U of P has with large
corporations who provide employee tuition reimbursement for around 65% of U of
P students. On-going conversations with several large clients represent an
additional several hundred million dollar revenue opportunity in this area.
Apollo will also pursue e-commerce revenues generated from its extensive
database of students and alumni.
Meanwhile, we expect U of P's campus based business, with 87,000 students
today, driven by the same strong secular demand, and possibly benefiting from
the "halo" effect of increased online marketing, could become a $1 billion
business in its own right, by growing enrollments at a 15% year over year pace,
tuition increases of 3 to 4 % a year, and margin expansion as the mix of new
and mature campuses shifts more favorably towards mature campuses.
Opportunities presented by moving U of P's traditionally western focus eastward
seem especially bright. Apollo has recently opened campuses or won approvals in
the highly populated states of Pennsylvania, Maryland, Massachusetts and Texas.
Six to eight states, including Ohio and New York are pending.
<PAGE>
CHOICEPOINT. Note written by Andrew Peck, Senior Analyst
ChoicePoint, a longtime holding of the Fund, recently purchased DBT Online for
approximately $440 million, its largest acquisition to date. We are very
enthusiastic about the opportunities facing the newly merged firm. The addition
of DBT should give ChoicePoint significant scale in its Business & Government
division, which comprises all of its non-insurance businesses and represents
about 40% of its sales. DBT will supplement ChoicePoint's current product set
by expanding the size and scope of its database offerings, while also providing
access to a complementary customer base. The merged entity should also
recognize meaningful cost savings in areas including technology content
management, data purchasing, and new product research. In addition, the
combination unites two firms that had previously been competing vigorously with
each other for market share, which may permit new pricing flexibility.
The result of these various top- and bottom-line synergies should be
significantly expanded profitability. The business & government division
currently has low-teens operating margins, ompared with margins of 40% in
ChoicePoint's larger, more-established Insurance division. Over time, the
additional scale brought by this acquisition, coupled with the low marginal
costs inherent to the database business, should result in significant margin
expansion. We are also excited about the company's expanded Board of Directors,
which will include Ken Langone, one of the country's most successful and
experienced venture capitalists, and Bernard Marcus, the founder of Home Depot.
--------------------------------------------------------------------------------
CONCLUSION
We look forward to continuing to employ our value-oriented discipline to
investing in exciting small cap growth businesses. Thank you for investing with
us.
Sincerely,
/s/ Ronald Baron /s/ Matt Ervin /s/ Mitch Rubin
---------------- --------------- ---------------
Ronald Baron Matt Ervin Mitch Rubin
Chairman & CEO Vice President Vice President
May 24, 1999 & Co-Portfolio & Co-Portfolio
Manager Manager
13
<PAGE>
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BARON SMALL
3
CAP FUND
PERFORMANCE......................................................14
PORTFOLIO
COMPOSITION......................................................15
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<PAGE>
BARON SMALL CAP FUND
QUARTERLY REPORT MARCH 31, 2000
Dear Baron Small Cap
Fund Shareholder:
--------------------------------------------------------------------------------
Performance
Baron Small Cap Fund was flat in the March quarter. This compares to gains of
over 2% in the S&P 500 and 7% in the Russell 2000. The results are satisfactory
coming on the heels of a strong performance in the fourth quarter of last year
and in 1999 as a whole. The quarter was a period of tremendous volatility in
the markets and within the portfolio. Though we profess no true insight into
the market's trading pattern, we will discuss fluctuations in the prices of the
stocks we own, how we have reacted to it and what our outlook is in this
report.
The Fund's best performers in the quarter were SBA Communications,
UnitedGlobalCom, Kenneth Cole Productions, Province Healthcare, and Apollo
Group. The worst performers were Radio One, Casella Waste, Rural Cellular,
Premier Parks, and Getty Images. Generally, our holdings that the market
considered "new economy" stocks started the quarter strong and finished weaker
and down for the period. Our "old economy" holdings did the reverse. We think
this characterization to be foolish; there is only one economy. We see
opportunities in both established enterprises and newer upstarts and will
continue to invest in established, growing, well-managed companies and to dream
with thoughtful, well-financed and proven entrepreneurs.
--------------------------------------------------------------------------------
PERFORMANCE
FOR THE 3 MONTHS ENDED MARCH 31, 2000
BARON SMALL CAP FUND -0.9%
S&P 500* 2.3%
RUSSELL 2000* 7.1%
--------------------------------------------------------------------------------
PERFORMANCE
FOR THE 12 MONTHS ENDED MARCH 31, 2000
BARON SMALL CAP FUND 50.0%
S&P 500* 17.9%
RUSSELL 2000* 37.3%
--------------------------------------------------------------------------------
PERFORMANCE SINCE INCEPTION
OCTOBER 1, 1998 THROUGH MARCH 31, 2000
BARON SMALL CAP FUND 78.4%
S&P 500* 63.7%
RUSSELL 2000* 22.3%
-------------------------------------------------------------------------------
*THE S&P 500 AND RUSSELL 2000 ARE UNMANAGED INDEXES. THE S&P MEASURES THE
PERFORMANCE OF THE STOCK MARKET IN GENERAL; THE RUSSELL 2000 OF SMALL AND
MID-SIZED COMPANIES.
<PAGE>
B A R O N S M A L L C A P F U N D
--------------------------------------------------------------------------------
Portfolio Composition
At the end of March, we had assets of about $1 billion in the Fund. The Fund
had about 50 investments. The top ten positions accounted for 44% of assets.
The portfolio remains concentrated by industry group, with 23% in
Communications, 21% in Media and Entertainment, 14% in Business Services and 8%
in Recreation. The biggest themes within these headings are radio 13%,
competitive local exchange operators 10%, broadband network operators 12%, and
tower service providers, 5%.
During the quarter we took our cash position down from 10% to 5% to add to
certain positions and take advantage of the wide trading ranges of our
holdings. We more than doubled our positions in SBA, Getty, Province, Williams
Sonoma and Entercom and increased our holding by a quarter or more in Rural
Cellular, Radio One and Commonwealth Telephone.
We established new positions in Apollo Group, a post secondary education
company with a strong and fast growing existing business and an exciting
on-line subsidiary (please see write-up in this quarter's Baron Growth Fund
report) and DBT Online, a database operator which our longtime holding
ChoicePoint, announced it would acquire during the quarter. We purchased DBT in
essence to increase our ChoicePoint position, as we examine the exciting
synergies and growth prospects of the new larger company.
In the quarter we sold 25% of our UnitedGlobalCom position as the stock price
spiked during the internet frenzy of February. We also sold smaller positions
in World Wrestling Federation, FatBrain, Loews Cineplex, Caribiner and Spanish
Broadcasting. We were surprised by new business plans at World Wrestling
Federation (a football league) and FatBrain (e-publishing), were disappointed
in execution at Loews and Caribiner, and sold Spanish Broadcasting because we
were more enthused about the opportunities of other radio station groups. Also,
SFX Entertainment, a holding since the Fund's inception, agreed to be acquired
by Clear Channel Communications.
<PAGE>
Market Action
It seemed like the prices of most of our stocks were either up a lot or down a
lot during the quarter, which is rather unusual. I thought I would give you
some perspective on our thoughts, and how we have reacted by reviewing some
specific examples.
A. The radio stocks, including Radio One, Entercom and Westwood One, declined
by around 50% mid-quarter. The reasons for their decline was concern that
radio advertising would be negatively affected if funding for internet
IPOs dried up. This fear was terribly overblown. Internet advertising was
only 2% of ad spending for radio as a whole in 1999, and even less for our
small market operators. The larger Internet companies which are well
financed accounted for most of the 1999 budget, and we expect they will
increase their radio advertising by almost 100% in 2000. Bricks and mortar
competitors, seeking to launch Internet subsidiaries or protect their
existing franchises are responding by advertising more. Radio is the
medium of choice as it offers the best efficacy and continues to grow its
share of total advertising spending. Radio advertising grew 12% as an
industry in 1999 and 15% in the first quarter of 2000. Our holdings did
even better. Radio One grew its same store revenues 29% and its cash flow
56% in the period, Entercom grew 19% in revenues and 47% in cash flow, and
Westwood One grew revenues at 21% and cash flow by 140%. These are
tremendous results.
Also during the quarter, our holdings made substantial progress expanding
their footprint. Radio One announced the purchase of 21 urban stations for
$1.4 billion. We believe that they will continue their proven history of
improving ratings and operations of the acquired stations, thereby greatly
improving cash flow and earning a high return on their investment. The
acquisitions also create a national platform which creates opportunities to
develop an urban internet portal and radio and cable networks. Entercom
closed the acquisition of the Sinclair transaction, which increased its
station group by a third, and they showed immediate progress in improving
results of the acquired stations. The new Westwood One-Metro Networks is
performing sensationally. Westwood's national inventory revenues have
accelerated from less than 10% growth to over 20%, and Metro's traffic
revenues are accelerating as the two sales forces work together.
B. Rural Cellular (RCCC) was a tremendous stock in 1999, appreciating five
fold. As we detailed in our December 1999 report, RCCC's stock performance
was due to the combination of cash flow growth of 55% and multiple
expansion. During the first quarter of 2000, US Cellular, a somewhat
similar cellular operator, revised earnings estimates downward because of
pressure on its roaming rates. This coincided with an equity offering RCCC
was doing to finance its acquisition of Triton Cellular. Because of the
weakness in a comparable stock price and the pressure of an equity
offering, RCCC's stock price fell almost 50%. They affirmed that their
business was strong, and that roaming revenues would continue to grow at
double digit rates as accelerating volume compensated for pricing
declines. The stock retreated to 10x projected cash flow and we increased
our position. Results for the first quarter came in ahead of projections
and the stock has recovered most of the decline. At present levels, it
trades at 12x projected cash flow, with a 20% internal growth versus
industry comparables trading at 15-20x cash flow in the public and private
markets, so we believe there is lots of upside.
C. Getty Images had an outstanding run in 1999 when the investing world became
enamored with "B to B plays" and sought companies with real revenues to put
multiples on. We don't believe that businesses are worth multiples of sales.
They are worth multiples of future earnings, with the multiple dependent on
the growth rates, the quality of earnings and the competitive barriers. We
think Getty is very attractive when its earnings prospects are analyzed.
Getty announced in its first quarter that the revenue for the businesses it
owned for over a year internally grew 35%, accelerating from 26% in the
December quarter and 20% in September. It also closed on the acquisition of
two significant competitors, the Image Bank and VCG Communications, which
further secures its competitive position. We believe Getty's core stock
photography will grow from $500 million in revenues that we project for 2000
to $750 million in 2002. Cash flow margins should expand from 18% to 35%
over the same period so cash flow will grow to around $250 million. That
cash flow stream could be worth a 20 multiple because it will still be
growing over 20% per year, requires very little capital investment to
sustain and Getty will have such a dominant market position. So the business
could be worth $5 billion versus its current market value of $1.5 billion.
Additionally, the company has big opportu-
15
<PAGE>
B A R O N S M A L L C A P F U N D
nities in the stock film business and is developing portals for the
advertising community.
D. Casella Waste fell 75% in the quarter because it missed an earnings
estimate, which is different than the prior examples. Casella acquired KTI
Industries in December primarily to add KTI's in-region waste-to-energy
plants and its contiguous hauling operations to further dominate the New
England solid waste market. KTI also owned some assets, which were non-core
to Casella and were to be disposed of when appropriate. Unfortunately, the
earnings of these non-core assets turned sour subsequent to the acquisition
and caused the total enterprise to miss projections. Since other high
profile waste consolidators had recently stumbled with acquisitons, it was
assumed that Casella's problems were severe and integral to its core
business. The stock traded down to 8x projected 2000 earnings, 5x 2001.
Though the earnings shortfall was real, and our losses severe (but
temporary), we took advantage of the price decline to buy more stock. It has
doubled off the bottom and still trades at 10x projected earnings with over
20% internal earnings growth.
New Ideas
We've been enamored with the communications tower industry since American
Radio, a core holding of Baron Asset Fund, started purchasing towers in 1999
and we were advised of the opportunity. The business's focus is to lease space
on multi-tenant towers to the rapidly growing wireless communications
providers. US cellular telephone penetration is at about 30% at year end 1999.
We expect it to grow to 75%+, and usage per phone is skyrocketing with the
cheaper "one-rate" plans now being offered. Increased penetration has made it
economic for additional frequencies to be built out. Often, 5 PCS licenses are
being constructed per market, as well as one national ESMR network (Nextel).
The original cellular providers are adding cell sites to increase capacity and
keep up with call volume. New licenses will soon be auctioned off (30 MHz and
the Nextwave spectrum) and new technology is being developed (3G) to continue
to enhance service offerings. Fixed wireless telephony for business
applications is growing dramatically, led by companies such as Teligent,
Winstar, and Metricom as they develop LMDS and MMDS spectrum. Wireless data is
in its infancy and when the internet can be delivered seemlessly without a hard
line connection, tremendous additional capacity will be needed.
All these developments bode well for the tower owners whose bottom line can be
expressed very easily:
More cell sites and more tenants = more revenues = more cash flow.
There is the added benefit of strong barriers to entry. Local regulators are
swamped by zoning requests for the additional cell sites needed to support this
growth and have been very reluctant to approve new sites because of the NIMBY
(Not In My Back Yard) syndrome. This has resulted in a mandate to utilize
existing towers more efficiently through co-locating the antennae of multiple
providers on existing towers. The primary owners of these sites, the wireless
carriers themselves, have followed suit by selling their towers to the public
consolidators who were more adept and focused on these leasing activities.
SBA Communications is one of the five public companies taking advantage of
these trends. Started in 1989 by Steve Bernstein, SBA was primarily a service
provider to the original carriers: siting, zoning, constructing and deploying
systems for MCI and McCaw Cellular in the 1980's. In 1997, SBA began an
aggressive expansion into the site leasing business by beginning to build
towers for its own account and buying towers from some of the smaller carriers
and mom-and-pops. The company came public in mid-1999 to raise additional
capital to accelerate these plans. In 1999, SBA built 438 towers for their
ownership and completed $81 million in tower acquisitions. It ended 1999 with
1163 towers, up from 494 at year-end 1998. The game plan going forward is to
build 550 towers and acquire $100 million of mom-and-pop towers (approximately
250 towers) per year, goals we think should be well attainable.
<PAGE>
SBA has shied away from acquisitions of carrier portfolios because the
transactions have been at 30x cash flow and they could find sites with better
growth prospects from mom-and-pops at half the prices. The new builds are
either "build-to-suit", which means done in conjunction with a carrier who
helps pick the location and commits to a long term lease as the initial tenant,
or built "strategically" which capitalizes on SBA's operating history and field
resources to be ahead of the curve on carrier deployment and seek to zone sites
before others. The backlog of new builds is over 1,000 and we are particularly
impressed with the success of the strategies to date.
But what most impressed us is SBA's success in lease up of its owned towers.
Same tower revenue growth was 31% in 1999 and remains strong in 2000. What will
drive our ultimate return over time is the cash flow per tower, the market
multiple of that cash flow and the company's financial structure. When we first
got interested, we figured cash flow per tower would get to $35K per tower. We
now feel it will be closer to $65K, because of all the demand for space that
has become evident over the last two years. We believe that tower cash flow
will trade at a 15-20x multiple because of its continued growth prospects, low
capital re quirements and barriers to entry. We feel SBA will grow its tower
portfolio to 5,000 towers by mid-2003 and that its portfolio will be worth
$5.5B - $7.5B. Assuming some additional equity funding along the way, this
yields a price target of $100-$150 per share. I know it's a wide range, but we
purchased our position when the company had an all in capitalization of
approximately $1B.
Recent Events
Since the end of the March quarter, the market has continued to be volatile,
mostly on the downside. Our portfolio has traded anywhere between flat and down
15%, which has been frustrating but not disastrous. Most of our portfolio
companies produced extraordinary operating results in the quarter and their
outlooks remain strong. We continue with our approach of trying to remain
focused on the business fundamentals, and the long-term investment potential,
while being opportunistic in a turbulent market.
Thanks for your continued support.
Sincerely,
/s/ Cliff Greenberg
--------------------------------------
Cliff Greenberg
Vice President
16
<PAGE>
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BARON
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BARON
4
iOPPORTUNITY
FUND
PERFORMANCE AND
PHILOSOPHY.......................................................17
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1-800-99-BARON
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<PAGE>
BARON iOPPORTUNITY FUND
QUARTERLY REPORT MARCH 31, 2000
Dear Baron iOpportunity
Fund Shareholder:
--------------------------------------------------------------------------------
PERFORMANCE AND
PHILOSOPHY
We welcome all of our new fellow shareholders to the Baron iOpportunity Fund
and to our first quarterly letter. Below we will review the performance of the
Fund in its first several weeks and provide an overview of our investment
strategy.
What a time to launch an Internet and
information technology fund!
The launch of the Baron iOpportunity Fund on March 1 was nearly perfectly
correlated with the most recent peak of the NASDAQ Composite on March 10. Since
that peak, the NASDAQ has fallen 33% through May 19 and the Morgan Stanley
Internet Index has fallen 46%.
--------------------------------------------------------------------------------
PERFORMANCE
FOR THE MONTH ENDED MARCH 31, 2000
BARON iOPPORTUNITY FUND -1.4%
NASDAQ COMPOSITE -2.6%
MORGAN STANLEY
INTERNET INDEX -7.5%
--------------------------------------------------------------------------------
THE NASDAQ COMPOSITE AND THE MORGAN STANLEY INTERNET INDEX ARE UNMANAGED
INDEXES. THE NASDAQ COMPOSITE TRACKS THE PERFORMANCE OF MARKET-VALUE WEIGHTED
COMMON STOCKS LISTED ON NASDAQ; THE MORGAN STANLEY INTERNET INDEX OF ACTIVELY
TRADED, HIGH MARKET CAP INTERNET STOCKS DRAWN FROM NINE INTERNET SUBSECTORS.
<PAGE>
No doubt, a challenging time to launch an iOpportunity Fund.
Despite our caution in putting money to work, we were not able to escape this
downdraft in stock prices unscathed. The technology sell-off of the past
several weeks has been broad based and even our more conservative investments
fell in price with the group. During the month of March, the Fund lost 1.4% and
through May 19, the Fund is down 18.4% since its inception. As the chart below
depicts, this compares favorably with the even steeper drops in the NASDAQ and
the Morgan Stanley Internet Index.
While steeper than most would have predicted, this sell off is not surprising
given the substantial rise in both technology and Internet-related stocks over
the past two years. Few would argue that valuations in this sector had become
extended and that a correction was possible. Not to mention that more and more
companies came public during the frenzy of the past 24 months adding greatly to
the supply of stocks in the market. Moreover, many businesses were taken public
at earlier and earlier stages of development, increasing the risks attendant to
investing in these stocks.
Does this mean that this was a terrible time to have launched the iOpportunity
Fund?
DEFINITELY NOT.
We firmly believe that falling markets and volatile prices are two of the best
friends that long term, research driven investors can have. We are not looking
to day-trade stocks. We are looking to build positions in exciting businesses
that are embracing the information technology revolution to create substantial
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
profits and great long term returns for shareholders. Today's market
environment will help us buy these businesses at significantly more reasonable
prices than they were trading at just two months ago.
We are not momentum investors. Quite the contrary. We like to buy stocks when
they go down. Warren Buffet gave his shareholders a quiz on investment strategy
in his 1997 Report to Shareholders that highlights the benefits of falling
markets to investors.
How We Think About Market Fluctuations
A short quiz: If you plan to eat hamburgers throughout your life and
are not a cattle producer, should you wish for higher or lower prices for
beef? Likewise, if you are going to buy a car from time to time but are
not an auto manufacturer, should you prefer higher or lower car prices?
These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the
next five years, should you hope for a higher or lower stock market
during that period? Many investors get this one wrong. Even though they
are going to be net buyers of stocks for many years to come, they are
elated when stock prices rise and depressed when they fall. In effect,
they rejoice because prices have risen for the "hamburgers" they will
soon be buying. This reaction makes no sense. Only those who will be
sellers of equities in the near future should be happy at seeing stocks
rise. Prospective purchasers should much prefer sinking prices...
They should therefore rejoice when markets decline and allow both us and
our investees to deploy funds more advantageously.
Our strategy during this time of volatility has been to put our cash to work in
a disciplined and judicious manner. We are neither trying to time the market or
call a bottom. We are, however, trying to buy the most exciting businesses
embracing this new technology at attractive prices relative to our view of
their long-term prospects. The current market environment gives us the
opportunity to invest our large cash position and new assets into the Fund in
business we believe, over the long term, will have values substantially higher
than today's prices. Disciplined, research driven investors are rewarded far
more by rational, than irrational markets. We believe those rewards will come,
although of course we may not achieve our objectives.
<PAGE>
The Internet changes everything.
Why are we still so bullish about these companies' prospects?
Simple -- because we believe that the evolution of the Internet empowers
certain business dynamics that will create substantial expansions of future
profits.
We believe that the Internet, and the explosion of information and
communication technology over the past several years, is as revolutionary to
society as was the discovery of electricity, the advent of the telephone and
the proliferation of computers. In fact, the companies on which we are focusing
are the next generation of all three of these revolutions converging.
"iOpportunity" companies are permanently altering the way we live our lives
and transact business.
This is NOT tulipmania. In his legendary book "Extraordinary Popular Delusions
and the Madness of Crowds," Charles Mackay reviews some of the greatest
speculative bubbles of the past. Tulipmania in Holland, the South Sea Bubble in
England, the race for Alchemy. These were fads and delusions that swept through
nations quickly creating, and then destroying, vast amounts of wealth. The
press has quoted from this book extensively of late to compare the risks in
Internet stocks with the risks of past periods of speculative excess. (In fact,
during March, Ron handed copies of this book out at Baron Capital to give us
all some perspective on past periods of "irrational exuberance.") The lessons
from the book are important ones. Periods of rapid change and spikes in values
warrant supreme caution and discipline.
However, the Internet is NOT a flower in fleeting demand due to the whims of
society. It is, we believe, a transforming technology that has only just begun
to have an impact on society. This impact will NOT diminish any time soon. It
will be both a disruptive and constructive force within our society and economy
for years to come. It is a global, borderless phenomenon embodied in E-Mail,
E-commerce, person to person and business to business marketplaces and
auctions, broadband connectivity, wireless communication and the world wide
web. It is the ability to communicate, transact and inform over great distances
at little cost and without borders. It is NOT a fad.
The revolution of the Internet both creates and destroys business models and,
therefore, potential investment returns. Invested capital and installed systems
can quickly go from a competitive advantage and barriers to entry to a handicap
on a company's ability to innovate to meet new challenges and competition.
Pricing becomes transparent and information becomes universally available to
both sides in a transaction. New tools and technologies are needed, and new
business practices are required, to meet these changes. We believe that many of
these new tools, technologies and business practices will come from the
entrepreneurial spirit and innovative genius often found in newer, younger
companies.
The goal of the Fund is to find a diversified group of those businesses of
tomorrow that are embracing these challenges by providing highly valued
products and services and, in doing so, creating the opportunity for
substantial future profits and returns on capital. And, we want to buy them at
attractive prices.
18
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
The Internet changes nothing.
The value of an asset or business is ALWAYS directly related to its potential
to create sustainable streams of future profit and cash flow. Always has been
and always will be.
Nothing about the Internet changes this proposition.
Barriers to entry, sustainable competitive advantage, extraordinary management
teams, scaleable and profitable business models, access to capital and prudent
capital structure. These remain the most critical elements to understand in
trying to predict those future cash flows and profits and trying to determine
potential value.
Moreover, the only way to understand these elements is through exhaustive
research. Studying financial statements, visiting and interviewing management
teams as well as customers and competitors, reading trade journals, attending
trade conferences, etc. Research, research, research.
Wall Street research is nearly always wrong (we know this first hand since
Mitch used to write it for a leading investment bank). That is what makes it
useful. Earnings "surprises" are expected. Research published by brokerage
houses and investment banks is nearly flawless at underpredicting the future
profits of tomorrow's leading businesses and overprojecting the future profits
of tomorrow's failures. To be fair, Wall Street research is focused on the
short term, while we believe that value is created by understanding the long
term. Our goal is to develop conviction in long term business models through
independent research. This is as critical in the Internet world as it has been
in the off line world.
The Internet also does not alter our investment goals (long stated by Ron and
Cliff regarding the other Baron Funds). We seek to make investments today that
have the potential to appreciate multi-fold over several years. We are
investors in businesses, not stock traders. We hope to achieve this goal by
buying businesses with sustainable advantages and terrific business models, and
then holding on to those investments as those advantages are exploited to
maximize our returns (while limiting trading costs and taxes). Of course we may
not achieve our goals.
<PAGE>
The price at which you make an investment is equally as important as your
projection of what you think the company may earn in the future. In addition,
reaction to substantial near term price appreciation, to rebalance our capital
into our best return-potential ideas, is of paramount importance. We will not
be successful fund managers if we get the business right but the stock wrong by
buying in at too high a price. Another investment proposition that is unaltered
by the Internet.
With these thoughts in mind, the following is an overview of our approach to
investing in the iOpportunity Fund.
The i Opportunity Fund is more than just an Internet Fund
The i in iOpportunity does not stand for Internet alone. It also includes
information technology, interactive communication and information systems'
infrastructure (as well as many non-"i "-beginning businesses). We have taken a
broad and diversified approach to finding businesses that are utilizing the
advantages of these phenomena to create substantial future profits.
We also note that the Internet is as powerful a corporate and personal tool as
the telephone or the computer have become. In this way, all forward-thinking
businesses will adopt an Internet strategy in their business. As Andy Grove,
the Chairman of Intel, has been often quoted as saying: "All businesses will be
Internet businesses or they won't survive." However, just as companies that
embraced and utilized the telephone or the desktop computer were not
necessarily telephone or computer companies, companies that embrace the
Internet are not necessarily Internet companies.
The stocks that we will focus on for the iOpportunity Fund will be limited to
those companies where the use and exploitation of the Internet and information
technology is a primary driver of the companies' future profitability and
value. We are not just looking for a company that has a web site. The company
must be embracing the Internet in a way that can dramatically enhance future
profitability and growth to warrant inclusion in the Fund. We expect this list
of companies to be diversified across many industries including direct
Internet/dot com businesses as well as businesses engaged in new media,
interactive communication, electronic content delivery, networking and
information technology and infrastructure. In addition, we are looking for the
"bricks and mortar" businesses of today that can profitably evolve to the
"clicks and mortar" leaders of tomorrow.
We have established five segments, or baskets, as we call them, that best
describe our holdings. These baskets are:
1. Proven Leaders with Unbounded Future Opportunity -- companies that have
ascended to recognized leadership positions with scalable, profitable and
sustainable business models.
2. Bricks and Mortar Converting to Clicks and Mortar -- existing businesses
with substantially enhanced prospects for growth and profitability from
embracing the Internet.
3. Leaders in Sunrise Industries Benefiting from Powerful Trends -- there are
several "fundamental truths" that exist by virtue of the growth of the
Internet which produce powerful business trends and sunrise industries. We
are looking for the leading companies benefiting from these macro trends.
4. Venture Capital Investments. Risky, yet potentially very rewarding young
companies with new and superior technologies and practices at the vanguard
of the information technology revolution.
19
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
5. Special Situations. Stocks where, although we may not yet have the required
conviction to warrant a more substantial investment, the price of the
stock is compelling related to both the current business prospects and a
potential near term catalyst.
These baskets are reviewed in more detail below with brief descriptions of some
of the companies that fit within them.
1. Proven Leaders with Unbounded Future Opportunity
We believe that proven leaders have emerged on the Internet and in the
information technology universe whose business prospects are extremely bright
and relatively more predictable than many others. These are companies with
substantial scale and proven, profitable business models. While many are still
relatively young, these are neither start up nor fledgeling businesses but
businesses that are established leaders generating enormous current profits and
with the opportunity and expectation that they will be significantly larger in
the future than they are today. While many hurdles certainly lie ahead to
maintain this leadership, their scale, competitive advantages and
capitalization create huge barriers to competition. And, by the way, they have
and we believe will generate huge amounts of capital and cash flow to reinvest
in their businesses to solidify their leadership.
Many of these companies are well known and have large market capitalizations.
Our research will be focused on the long term to determine the potential size
of markets and the potential long term profit potential of their business
models. We will then patiently wait for the opportunities to purchase these
companies at attractive prices relative to our view of their future long term
value. Owning these companies at a reasonable cost and then letting the
company's growth take care of the rest is the key to making money in this
segment.
Some companies that we believe fall within this category include:
AOL and Yahoo! -- both have huge market share leads (multi times the size of
their nearest competitors) in most of the important web traffic categories
including registered members, reach, page views and monetization of traffic.
Both are also hugely profitable with substantially underleveraged balance
sheets.
Despite many later entrants, Ebay is by far the global leader in person to
person auctions with a business model that builds no inventory or distribution
infrastructure. Ebay has become such a household name that the amount of free
publicity it receives because of the phenomena it has created dwarfs its own
sales and marketing expenditures and has created a powerful and valuable global
brand.
Liberty Media, has, in our opinion, the broadest portfolio of direct and
indirect investments with the deepest reach in a group of companies focused on
content ownership, media distribution and broadband connectivity.
American Tower has one of the largest and most profitable portfolios of
wireless communication towers in the world. The portfolio continues to grow
dramatically from both new construction and acquisition while the cash flow per
tower is expected to at least triple over the next five years as the demand for
wireless connectivity continues to explode.
There are many other companies that fall within this category of "proven
leaders." This status, however, does not make these companies "must owns." Like
any investment, the price of the stock must also be attractive. To purchase
these companies, we must be able to project substantial stock price
appreciation from current levels without using heroic valuation parameters. We
do not subscribe to the theory of "buy growth at any price."
<PAGE>
The market invariably gives you many opportunities to buy great businesses at
reasonable prices. We hope to take advantage of short-term trading events that
create opportunities to buy these and other leading companies at attractive
prices. The dislocating events can be macro (as exist in today's market where
rising interest rates are causing valuation disruption across many industries
-- especially in media and telecom stocks) or micro (where company-specific
near term events cause momentary disruptions that, in our opinion, do not
impact our long-term investment thesis). Research, discipline and patience will
all be rewarded in this basket. Of course we cannot predict how the stocks will
trade.
2. Bricks and Mortar converting to Clicks and Mortar; We Hope to Get the Clicks
for Free
A second basket includes companies with existing, "bricks and mortar"
businesses that are being transformed by the Internet in a way that should
substantially enhance both growth and profitability. By bricks and mortar, we
mean real businesses that existed before the Internet. These are businesses
that are currently profitable and well run with great management teams in the
off-line world. In addition, rather than being disaggregated by the new
technology, these businesses are embracing the Internet to dramatically enhance
their business and leverage their competitive advantages on the web.
In many cases, these companies have not had the same parabolic advance in their
share values because they are not directly perceived as either Internet or
technology companies. Yet, their future profitability is just as tied to their
ability to execute their business plan on line as any of the dot coms. Our goal
in this basket is to buy these businesses at what we believe are reasonable
prices relative to their current businesses and, hopefully, get the Internet
opportunity for free.
Some examples of investments in this basket include:
Getty Images, the leading archive of high quality imagery for creative
professionals. Through both internal growth and acquisition, Getty has created
substantial market share and high profit margins over the last several years.
This leadership is now
20
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
being enhanced as Getty transitions its business model to the Internet world by
digitizing its library and developing electronic search and distribution
technology.
ChoicePoint, the leading provider of claims-related data to the insurance
industry as well as a key supplier of public records and credentialling data to
several industries including Federal and State governments. ChoicePoint's data
is being transitioned to the Internet so that a wider customer base (both
business and consumer) may access the data, creating, potentially, dramatically
greater revenue at a substantially lower cost.
Hotel Reservations Network, a leading hotel wholesaler that has transitioned
from an off line, telephone based distributor, to the leading booking engine
for discount hotel rooms for a broad portfolio of affiliate companies on the
Internet.
Primedia, a targeted media company with a large portfolio of diversified
businesses and content including magazines, video production and distribution
and live event production. Primedia is leveraging its off line business and
content on the Internet with more than 200 Internet sites and the creation of
multiple e-marketplaces.
Heidrick and Struggles, the leading executive search and recruiting firm with
a focus on top level job openings in the technology world. Heidrick is
utilizing its unique position as a critical adviser to both the venture capital
and new economy sectors to expand its business beyond the CEO's office to
mid-level executives and professionals through its newly created LeadersonLine
subsidiary.
We believe that the combination of our experience researching small and medium
sized growth businesses for the other Baron Funds with our research and
understanding of the challenges and benefits of the Internet will be invaluable
in finding these unique opportunities.
3. Leaders in Sunrise Industries; Beneficiaries of Powerful Trends
Baron Capital has always focused on "sunrise industries," the industries of
your sons and daughters, not your fathers and mothers. We have taken that same
approach to the Internet. There are several "fundamental truths" that exist by
virtue of the growth of the Internet which produce powerful business trends and
sunrise industries. These are broad trends which we believe are indisputable -
such as the powerful growth of Internet usage... there are more people coming
online and staying online longer each day. Almost all Internet-related
companies are beneficiaries of this macro trend. We've identified a number of
other long-term trends, including:
<PAGE>
(1) The geometric growth of dollars spent on advertising and promotion on the
Internet. Advertisement dollars follow eyeballs, and subsequent to March 31st
we have added Doubleclick to our portfolio of investments as a leader in the
race to capitalize in this trend. Advertising over the Internet may appear
crude and clunky today, but the future promises more targeted and more
impactful marketing campaigns. Doubleclick is the dominant provider of ad
serving technology, and is leading the push to match advertisements with a
viewer's interests.
(2) The expansion of wireless connectivity (Internet everywhere). There are
many potential beneficiaries of the increased interest in mobile computing and
communications: device manufacturers, cell phones companies, etc. But one of
the fastest growing beneficiaries of this trend are the tower owners and
operators such as American Tower (noted above as well), Pinnacle Holdings and
SBA Communications. The paging and cell phone networks of today don't have the
capacity to carry the data traffic demands of tomorrow. As network operators
increase capacity, they must lease space on towers owned by our portfolio
companies at rates which are already showing signs of rising.
(3) The nearly insatiable demand for bandwidth. Every year the demand for
bandwidth increases at a tremendous rate, and the constraint on bandwidth has
been most acute in the proverbial last mile of connectivity. The companies
which are expanding this bottleneck, such as NTL and UnitedGlobalCom, enjoy the
opportunity to generate powerful cash flow streams by providing expanded
services to their customers and, moreover, are in a position to catalyze a new
generation of content and software development.
Our investments in sunrise industries are businesses which are well positioned
to capitalize on a growing market. But the rate of growth of the business may
be difficult to quantify, or the ultimate level of profitability may depend on
a host of variables which are impossible to predict. We are trying to identify
businesses with management teams capable of adjusting to changing conditions.
In light of the uncertainties which we as investors must face, our expectation
for return on investment is approximately 50% more than our expectations for
well established growth companies with more predictable prospects.
Venture Capital Investments
The public markets have shown a surprising willingness to finance venture stage
businesses over the last 5 years. In Baron Growth Fund, we have invested in XM
Satellite and Sirius Satellite Radio in hopes that these venture stage
companies can eventually strike it rich.
Many, if not most, of the pure Internet companies which are public today might
be seen as venture investments. One of the missions of the Baron iOpportunity
Fund is to thoroughly explore this investment territory and stake a claim on
the most promising new businesses. This is not an easy task. Often, these are
companies without a proven business model. We spend time with management teams
dissecting their business plans and
21
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
executional capabilities in the same way that a venture capitalist might. When
we find a plan we believe in, we intend to invest only when we have a
reasonable expectation of obtaining venture capital type returns. That means
that we aim for 10-fold increases in value in our venture investments while
recognizing that these companies may not succeed and their share prices could
fall precipitously. We plan to mitigate our risks by building a portfolio of
these investments and limiting our exposure to any one venture.
Some of the names in our Fund which fall into this category include: Wink
Communications, a company on the leading edge of creating interactive
television. Wink is creating software and other technology to lead the TV
revolution. But more important than developing the software, CEO Maggie
Wilderotter has brought programmers, cable companies, and advertisers together
to synchronyze efforts to integrate the technology into people's television
viewing habits. Allied Riser, a telecommunications venture which is rewiring
thousands of buildings to bring the tenants a rich set of broadband services
anchored by a fiber network many times faster than dial up connectivity.
Mpower, a company in the forefront of providing advanced telecommunications
services to small businesses, with plans for offering software services in
addition to traditional telecom services.
The ultimate value of these types of investments is difficult to judge. In the
short-term, we expect there to be tremendous volatility in these stocks as
these businesses are without earnings and often without a shareholder base that
really understands the business. As always, patience, discipline and a
long-term perspective are critical.
Special situations
One hallmark of Baron Capital investing is our willingness, in fact our
eagerness, to engage in intensive research in order to really understand the
fundamentals of industries that interest us. In the Internet-related space,
which to date has been dominated more by momentum investors than fundamental
investors, sometimes we find special situations where stock prices have gotten
out of line with fundamental values. While we may not yet be convinced that
these businesses are appropriate long term holdings, we have a high degree of
conviction that the current stock prices are well below fair value. We plan to
devote a portion of iOpportunity's capital to investing in these special
situations. Our investment time horizon will be shorter, by our standard,
perhaps 1 to 3 years, and we will often look for catalyzing events which will
prompt the market to agree with our assessment of value.
<PAGE>
We invested in Lycos with this mentality. The company is one of the large
portal companies with many web properties, including European operations,
which, according to our sum-of-the-parts valuation was dramatically undervalued
relative to its peers. CEO Bob Davis struck a deal last year to sell the
company to Barry Diller's USA Networks which fell through due to disatisfaction
from CMGI, Lycos' largest shareholder, about the price. Bob remains committed
to transactions that highlight the value of Lycos' assets. In fact, while this
report was being written, Lycos announced that it will be acquired by Terra
Networks in a stock transaction which has a nominal value of $96.50 per share,
roughly 40% higher than our average cost.
Conclusion
The financial pundits and news media have been preaching that the swift
currents of today's equity markets have turned against us, that the investment
climate is now equivalent to treacherous water in which Internet stocks will
inevitably sink. That analysis, we believe, applies appropriately to businesses
which lack strong, sustainable prospects; some of these are businesses that
never should have reached the public markets in the first place, and clearly
not at market caps amounting to billions of dollars.
Our approach to investing your assets is to scan the sea of Internet-related
opportunities in search of companies that we believe are on a course to
creating long-term shareholder value. We will invest in businesses with the
wind at their backs, captained capably by experienced management teams. It is
difficult to ignore the turbulent volatility in today's stock market.
Nonetheless, we are looking beyond the choppy waters and focusing on the
long-term opportunities for the businesses in which we are invested. We believe
we have identified soundly constructed businesses, many of them charting
exciting new waters, and we've purchased stakes in these companies at what we
believe to be fair prices. Ultimately, if we invest wisely in businesses that
will stand the test of time, the dramatic growth of these businesses will drive
substantially higher stock prices.
We will work hard to justify the trust you have placed in us. Thank you for
joining us at the beginning of this fund's journey.
Sincerely,
/s/ Matt Ervin /s/ Mitch Rubin
--------------------- -----------------------
Matt Ervin Mitch Rubin
Vice President Vice President
& Co-Portfolio & Co-Portfolio
Manager Manager
22
<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. ...................... $47,564 17.9%
NTL, Inc. ................................. 13,143 7.6
Univision Comm., Inc. Cl A ................ 11,609 0.8
Flextronics Intl., Ltd. ................... 8,133 6.1
American Tower Corp. Cl A ................. 7,634 4.1
UnitedGlobalCom, Inc. Cl A ................ 7,178 0.9
Hispanic Broadcasting Corp. ............... 6,162 2.7
-----
40.1%
Medium Capitalization
-----------------------------------------------------------------------------
Primedia, Inc. ............................ $ 4,648 0.2%
Citizens Utilities Co. .................... 4,305 2.7
RCN Corp. ................................. 4,208 0.6
Robert Half Intl., Inc. ................... 4,201 5.0
Westwood One, Inc. ........................ 4,072 1.1
Dollar Tree Stores, Inc. .................. 3,245 2.6
Cox Radio, Inc. Cl A ...................... 2,429 0.7
Sirius Satellite Radio, Inc. .............. 2,214 0.4
Apollo Group, Inc. ........................ 2,138 2.7
DeVry, Inc. ............................... 2,122 2.8
Polo Ralph Lauren Corp. Cl A .............. 1,844 2.8
CoreComm, Ltd. ............................ 1,729 2.5
XM Satellite Radio Holdings, Inc.,
Cl A ................................... 1,699 0.9
Premier Parks, Inc. ....................... 1,650 0.6
Citadel Comm. Corp. ....................... 1,553 0.4
Four Seasons Hotels, Inc. ................. 1,544 0.7
-----
26.7%
Small Capitalization
-----------------------------------------------------------------------------
Manor Care, Inc. .......................... $ 1,381 1.9%
American Mobile Satellite Corp. ........... 1,187 1.5
ChoicePoint, Inc. ......................... 1,104 2.1
Sotheby's Holdings, Inc. Cl A ............. 1,085 6.5
OM Group, Inc. ............................ 1,084 1.9
Commonwealth Telephone Ent., Inc. ......... 1,046 0.2
Ethan Allen Interiors, Inc. ............... 1,022 1.0
Azurix Corp. .............................. 879 0.1
Southern Union Co. ........................ 866 0.8
Choice Hotels Intl., Inc. ................. 771 3.3
<PAGE>
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
----------------------------------- --------------- ---------
Small Capitalization (Continued)
--------------------------------------------------------------------
Learning Tree Intl., Inc. ......... $768 0.2%
Seacor Smit, Inc. ................. 677 1.1
Industrie Natuzzi SPA ADR ......... 664 0.8
Sun Intl. Hotels, Ltd. ............ 657 1.1
Vail Resorts, Inc. ................ 574 2.8
Libbey, Inc. ...................... 417 1.3
Education Mgmt. Corp. ............. 415 0.7
Alexander's, Inc. ................. 318 0.4
Saga Comm., Inc. Cl A ............. 315 1.2
Smart and Final, Inc. ............. 217 0.4
DVI, Inc. ......................... 203 0.3
AMF Bowling, Inc. ................. 178 0.4
----
30.0%
Baron Growth Fund
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
-------------------------------------- --------------- ---------
Large Capitalization
-----------------------------------------------------------------------
Charles Schwab Corp. ................. $47,564 5.1%
NTL, Inc. ............................ 13,143 4.7
Flextronics Intl., Ltd. .............. 8,133 3.8
Hispanic Broadcasting Corp. .......... 6,162 0.4
----
14.0%
Medium Capitalization
-----------------------------------------------------------------------
Robert Half Intl., Inc. .............. $ 4,201 1.6%
Westwood One, Inc. ................... 4,072 1.5
Dollar Tree Stores, Inc. ............. 3,245 2.0
Pinnacle Holdings, Inc. .............. 2,668 0.4
Entercom Comm. Corp. ................. 2,304 0.6
Sirius Satellite Radio, Inc. ......... 2,214 1.8
Apollo Group, Inc. ................... 2,138 4.0
MGC Comm., Inc. ...................... 2,133 1.0
DeVry, Inc. .......................... 2,122 1.3
Allied Riser Comm. Corp. ............. 1,976 2.2
Radio One, Inc. Cl A ................. 1,884 2.3
CoreComm Ltd. ........................ 1,729 3.5
SBA Comm. Corp. ...................... 1,715 0.7
23
<PAGE>
B A R O N F U N D S
Baron Growth Fund
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
------------------------------------------- --------------- ---------
Medium Capitalization (Continued)
----------------------------------------------------------------------------
XM Satellite Radio Holdings, Inc.,
Cl A ................................... $1,699 4.8%
Getty Images, Inc. ........................ 1,663 0.8
Citadel Comm. Corp. ....................... 1,553 1.1
Four Seasons Hotels, Inc. ................. 1,544 0.7
----
30.3%
Small Capitalization
----------------------------------------------------------------------------
Manor Care, Inc. .......................... $1,381 0.4%
BlackRock, Inc., Cl A ..................... 1,293 1.6
World Wrestling Federation
Entertainment, Inc. Cl A ............... 1,209 0.1
Electric Lightwave, Inc. Cl A ............. 1,198 2.1
American Mobile Satellite Corp. ........... 1,187 1.5
ChoicePoint, Inc. ......................... 1,104 2.1
Sotheby's Holdings, Inc. Cl A ............. 1,085 1.0
OM Group, Inc. ............................ 1,084 2.1
Ethan Allen Interiors, Inc. ............... 1,022 2.8
Wink Comm., Inc. .......................... 1,020 1.0
Intrawest Corp. ........................... 1,015 0.4
Hotel Reservations Network, Inc. .......... 966 0.1
Azurix Corp. .............................. 879 0.9
Southern Union Co. ........................ 866 3.5
The Yankee Candle Co., Inc. ............... 862 0.3
Expedia, Inc., Cl A ....................... 828 0.1
Rural Cellular Corp. Cl A ................. 805 4.4
Choice Hotels Intl., Inc. ................. 771 4.6
Heidrick & Struggles Int'l., Inc. ......... 768 0.7
Extended Stay America, Inc. ............... 716 0.8
Seacor Smit, Inc. ......................... 677 1.1
Industrie Natuzzi SPA ADR ................. 664 1.0
Sun Intl. Hotels, Ltd. .................... 657 2.5
Vail Resorts, Inc. Cl A ................... 574 0.6
American Classic Voyages Co. .............. 523 0.8
Gabelli Asset Mgmt., Inc. Cl A ............ 507 0.8
Libbey, Inc. .............................. 417 0.5
Education Mgmt. Corp. ..................... 415 2.3
DBT Online, Inc. .......................... 374 0.8
Kronos, Inc. .............................. 371 0.6
Steiner Leisure, Ltd. ..................... 320 0.7
Alexander's, Inc. ......................... 318 0.6
Saga Comm., Inc. Cl A ..................... 315 1.3
Medallion Financial Corp. ................. 236 1.3
Smart and Final, Inc. ..................... 217 0.8
DVI, Inc. ................................. 203 0.6
Collectors Universe, Inc. ................. 159 0.3
The Sports Club Co. ....................... 66 0.2
----
47.3%
<PAGE>
Baron Small Cap Fund
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
------------------------------------------- --------------- ----------
Large Capitalization
--------------------------------------------------------------------------
UnitedGlobalCom, Inc. Cl A ................ $7,178 10.0%
Medium Capitalization
-----------------------------------------------------------------------------
Westwood One, Inc. ........................ $4,072 3.3%
Lamar Advertising Co. Cl A ................ 4,029 1.3
SFX Entertainment, Inc. Cl A .............. 2,726 2.8
Pinnacle Holdings, Inc. ................... 2,668 1.0
Entercom Comm. Corp. ...................... 2,304 2.9
Centennial Comm. Corp.
(formerly Centennial Cellular Corp.) . 2,283 0.3
Apollo Group, Inc. ........................ 2,138 2.7
MGC Comm., Inc. ........................... 2,133 2.1
Allied Riser Comm. Corp. .................. 1,976 1.7
Iron Mountain, Inc. ....................... 1,910 2.5
Radio One, Inc. Cl A ...................... 1,884 3.9
Williams-Sonoma, Inc. ..................... 1,749 2.3
CoreComm, Ltd. ............................ 1,729 4.3
SBA Comm. Corp. ........................... 1,715 3.6
Getty Images, Inc. ........................ 1,663 2.3
ACTV, Inc. ................................ 1,653 0.6
Premier Parks, Inc. ....................... 1,650 1.9
Four Seasons Hotels, Inc. ................. 1,544 2.1
Frontline Capital Group ................... 1,524 1.2
----
42.8%
Small Capitalization
-----------------------------------------------------------------------------
PrimaCom AG ............................... $1,462 1.1%
HomeGrocer.com, Inc. ...................... 1,295 0.2
United Rentals, Inc. ...................... 1,243 1.2
World Wrestling Federation
Entertainment, Inc. Cl A ............... 1,209 0.4
Electric Lightwave, Inc. Cl A ............. 1,198 1.1
ChoicePoint, Inc. ......................... 1,104 1.7
Commonwealth Telephone Ent., Inc. ......... 1,046 3.3
Intrawest Corp. ........................... 1,015 0.4
Hotel Reservations Network, Inc. .......... 966 0.1
Kenneth Cole Prod., Inc. Cl A ............. 953 3.6
The Yankee Candle Co., Inc. ............... 862 0.9
Penton Media, Inc. ........................ 825 3.0
Rural Cellular Corp. Cl A ................. 805 4.4
Corporate Executive Board Co. ............. 781 1.3
Heidrick & Struggles Int'l., Inc. ......... 768 3.3
Central Parking Corp. ..................... 737 0.9
Sun Intl. Hotels, Ltd. .................... 657 0.8
El Paso Electric Co. ...................... 568 1.0
Gabelli Asset Mgmt., Inc. Cl A ............ 507 0.5
Province Healthcare Co. ................... 451 1.1
Insignia Financial Group, Inc. ............ 408 0.1
24
<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)
-----------------------------------------------------------------------------
Loislaw.com, Inc. .......................... $402 0.7%
DBT Online, Inc. ........................... 374 0.9
Todd-AO Corp. Cl A ......................... 369 3.2
Career Education Corp. ..................... 278 3.2
Cryptologic, Inc. .......................... 255 0.6
Loews Cineplex Entertainment Corp. ......... 205 0.1
Marvel Enterprises, Inc. ................... 200 0.1
Casella Waste Systems, Inc. Cl A ........... 177 0.8
IT Group, Inc. ............................. 173 0.7
Morton's Restaurant Group, Inc. ............ 92 0.7
Equity Marketing, Inc. ..................... 67 0.4
The Sports Club Co. ........................ 66 0.3
----
42.1%
Baron iOpportunity Fund
--------------------------------------------------------------------------------
Equity % of
Market Cap Net
Company (in millions) Assets
------------------------------------------- --------------- ---------
Large Capitalization
-------------------------------------------------------------------------
America Online, Inc. ...................... $153,877 0.9%
Time Warner, Inc. ......................... 130,821 0.9
Liberty Media Group ....................... 76,109 1.8
Charles Schwab Corp. ...................... 47,564 0.5
eBay, Inc. ................................ 22,912 1.9
United Pan-Europe Comm. N.V. .............. 21,621 1.0
Gemstar International Group Ltd. .......... 17,309 1.1
TV Guide, Inc. ............................ 14,645 0.6
NTL, Inc. ................................. 13,143 1.6
At Home Corp. ............................. 12,673 2.2
Lycos, Inc. ............................... 7,721 3.1
American Tower Corp. Cl A ................. 7,634 1.6
UnitedGlobalCom, Inc. Cl A ................ 7,178 1.8
TMP Worldwide, Inc. ....................... 7,163 3.9
----
22.9%
Medium Capitalization
----------------------------------------------------------------------------
Primedia, Inc. ............................ $ 4,648 2.1%
homestore.com, Inc. ....................... 3,656 2.2
U.S. Trust Corp. .......................... 3,528 1.2
Pinnacle Holdings, Inc. ................... 2,668 0.6
MGC Comm., Inc. ........................... 2,133 1.4
GoTo.Com, Inc. ............................ 2,012 0.4
Allied Riser Comm. Corp. .................. 1,976 1.5
SBA Comm. Corp. ........................... 1,715 1.4
Getty Images, Inc. ........................ 1,663 2.3
Frontline Capital Group ................... 1,524 2.9
----
16.0%
<PAGE>
SmallCapitalization
----------------------------------------------------------------------------
HomeGrocer.com, Inc. ...................... $ 1,295 0.7%
Sotheby's Holdings, Inc., Cl A ............ 1,085 1.1
Wink Comm., Inc. .......................... 1,020 2.2
Hotel Reservations Network, Inc. .......... 966 1.9
Expedia, Inc., Cl A ....................... 828 1.4
Heidrick & Struggles Int'l., Inc. ......... 768 2.2
DBT Online, Inc. .......................... 374 1.8
Todd-AO Corp. Cl A ........................ 369 0.5
Fatbrain.com, Inc. ........................ 123 0.5
----
12.3%
Table II
--------------------------------------------------------------------------------
Portfolio Risk Characteristics
--------------------------------------------------------------------------------
The Funds are diversified not only by industry, but also by external risk
factors that might impact the companies in which the Funds invest. Table II
displays some of the risk factors that are currently monitored and the
percentage of each portfolio considered exposed to these factors. The Funds use
this tool to avoid concentration of risk within the portfolios.
<TABLE>
<CAPTION>
Baron
Baron Baron Small Baron
Asset Growth Cap iOpportunity
Fund Fund Fund Fund
----------- ----------- ----------- -------------
% of % of % of % of
Portfolio Portfolio Portfolio Portfolio
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Leverage (Debt > 40% of
Market Cap) ................. 20.9% 21.2% 26.6% 6.8
Foreign Sales Dependent
(Sales > 15%) ............... 26.4 16.9 17.0 5.5
Oil Price Sensitivity .......... 12.5 18.0 2.7 1.4
Volatility (Beta > 1.2) ........ 47.9 30.4 46.3 22.5
NASDAQ Securities .............. 29.3 49.5 60.3 39.3
Unseasoned Securities
(Publicly owned
for < 3 years) ............. 17.8 35.0 46.8 60.0
(Publicly owned
for < 1 year) .............. 1.0 15.9 12.1 33.6
Turnarounds .................... 0.3 0.0 1.8 0.0
Development Companies .......... 1.5 18.3 13.4 19.7
</TABLE>
25
<PAGE>
B A R O N F U N D S
Table III
--------------------------------------------------------------------------------
Historical Information (Unaudited)
--------------------------------------------------------------------------------
Table III displays on a quarterly basis the Funds' closing net assets and net
asset value per share, dividend distributions and the value of $10,000 invested
in a Fund at the time of its inception.
--------------------------------------------------------------------------------
Baron Asset Fund
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value of Shares
Value Owned, if Initial
Date Fund Net Assets Per Share Dividends Investment was $10,000*
---------- ----------------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C>
06/12/87 $ 108,728 $ 10.00 $10,000
-------- ------------- -------- -------
06/30/87 1,437,521 10.71 10,710
-------- ------------- -------- -------
09/30/87 3,905,221 11.95 11,950
-------- ------------- -------- -------
12/31/87 4,406,972 10.10 $ 0.197 10,298
-------- ------------- -------- ------- -------
03/31/88 6,939,435 11.56 11,786
-------- ------------- -------- -------
06/30/88 9,801,677 12.68 12,928
-------- ------------- -------- -------
09/30/88 11,734,509 12.98 13,234
-------- ------------- -------- -------
12/31/88 15,112,031 12.87 0.701 13,843
-------- ------------- -------- ------- -------
03/31/89 22,269,578 14.75 15,864
-------- ------------- -------- -------
06/30/89 31,397,929 16.06 17,273
-------- ------------- -------- -------
09/30/89 47,658,616 17.22 18,521
-------- ------------- -------- -------
12/31/89 49,007,084 14.66 1.409 17,299
-------- ------------- -------- ------- -------
03/31/90 50,837,946 13.87 16,367
-------- ------------- -------- -------
06/30/90 54,413,786 14.32 16,898
-------- ------------- -------- -------
09/30/90 40,002,612 10.88 12,838
-------- ------------- -------- -------
12/31/90 42,376,625 11.75 0.198 14,100
-------- ------------- -------- ------- -------
03/31/91 47,104,889 13.88 16,656
-------- ------------- -------- -------
06/30/91 45,600,730 13.81 16,572
-------- ------------- -------- -------
09/30/91 47,409,180 14.80 17,760
-------- ------------- -------- -------
12/31/91 46,305,042 15.71 0.035 18,895
-------- ------------- -------- ------- -------
03/31/92 48,011,634 16.72 20,109
-------- ------------- -------- -------
06/30/92 42,289,409 15.28 18,377
-------- ------------- -------- -------
09/30/92 43,816,305 16.20 19,484
-------- ------------- -------- -------
12/31/92 47,955,530 17.73 0.162 21,522
-------- ------------- -------- ------- -------
03/31/93 50,015,244 18.82 22,845
-------- ------------- -------- -------
06/30/93 52,432,090 19.70 23,912
-------- ------------- -------- -------
09/30/93 59,916,570 21.91 26,595
-------- ------------- -------- -------
12/31/93 64,069,114 21.11 0.774 26,576
-------- ------------- -------- ------- -------
03/31/94 63,099,109 20.69 26,047
-------- ------------- -------- -------
06/30/94 68,880,300 20.40 25,682
-------- ------------- -------- -------
09/30/94 80,258,542 22.82 28,728
-------- ------------- -------- -------
12/31/94 87,058,228 22.01 0.656 28,547
-------- ------------- -------- ------- -------
03/31/95 160,603,528 24.29 31,505
-------- ------------- -------- -------
06/30/95 202,259,502 25.79 33,450
-------- ------------- -------- -------
09/30/95 289,973,331 29.30 38,003
-------- ------------- -------- -------
12/31/95 353,095,409 29.74 0.034 38,618
-------- ------------- -------- ------- -------
03/31/96 638,297,904 34.14 44,332
-------- ------------- -------- -------
06/30/96 1,124,647,802 36.65 47,591
-------- ------------- -------- -------
09/30/96 1,166,057,654 35.50 46,098
-------- ------------- -------- -------
12/31/96 1,326,321,785 36.23 0.039 47,097
-------- ------------- -------- ------- -------
03/31/97 1,663,347,667 34.98 45,472
-------- ------------- -------- -------
06/30/97 2,306,228,855 41.74 54,260
-------- ------------- -------- -------
09/30/97 3,224,498,394 47.43 61,656
-------- ------------- -------- -------
12/31/97 3,793,013,753 48.51 0.000 63,060
-------- ------------- -------- ------- -------
03/31/98 5,187,450,337 53.68 69,781
-------- ------------- -------- -------
06/30/98 5,545,334,568 52.20 67,857
-------- ------------- -------- -------
</TABLE>
<PAGE>
<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>
09/30/98 $4,410,506,448 $ 39.96 $51,946
-------- -------------- ------- -------
12/31/98 5,672,309,694 50.54 $ 0.041 65,752
-------- -------------- ------- ------- -------
03/31/99 6,087,986,855 54.17 70,474
-------- -------------- ------- -------
06/30/99 6,991,160,511 60.63 78,879
-------- -------------- ------- -------
09/30/99 5,863,125,015 51.57 67,092
-------- -------------- ------- -------
12/31/99 6,146,779,390 58.77 0.000 76,459
-------- -------------- ------- ------- -------
03/31/00 5,748,152,015 64.79 84,289
-------- -------------- ------- -------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON ASSET FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 2000
One year 19.6%
-------------------------------- ----
Two years 9.9%
-------------------------------- ----
Three years 22.8%
-------------------------------- ----
Four years 17.4%
-------------------------------- ----
Five years 21.8%
-------------------------------- ----
Ten years 17.8%
-------------------------------- ----
Since inception June 12, 1987 18.1%
-------------------------------- ----
26
<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
-------- ----------- ------- -------
12/31/99 620,388,045 33.68 1.883 36,991
-------- ----------- ------- ------- -------
03/31/00 637,439,612 34.14 37,496
-------- ----------- ------- -------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON GROWTH FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 2000
One year 36.4%
--------------------------------- ----
Two years 15.7%
--------------------------------- ----
Three years 25.4%
--------------------------------- ----
Four years 21.8%
--------------------------------- ----
Five years 26.1%
--------------------------------- ----
Since inception January 3, 1995 28.6%
--------------------------------- ----
<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
-------- ------------- ------- -------
12/31/99 1,088,988,069 18.00 0.000 18,000
-------- ------------- ------- ------- -------
03/31/00 1,085,625,217 17.84 17,840
-------- ------------- ------- -------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
BARON SMALL CAP FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 2000
One year 50.0%
--------------------------------- ----
Two years 22.7%
--------------------------------- ----
Since inception October 1, 1997 26.1%
--------------------------------- ----
--------------------------------------------------------------------------------
Baron iOpportunity 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>
02/29/00 $200,212,220 $ 10.00 $10,000
-------- ------------ ------- -------
03/31/00 229,731,181 9.86 9,860
-------- ------------ ------- -------
</TABLE>
* Assumes all dividends were reinvested and no shares were redeemed.
<PAGE>
BARON iOPPORTUNITY FUND'S
AVERAGE ANNUAL RETURN
Period ended March 31, 2000
Since Inception February 29, 2000 (1.4%)
----------------------------------- ----
The performance data represents past performance. Investment returns and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their cost. For more complete information about
Baron Funds, including charges and expenses, call or write for a prospectus.
Read it carefully before you invest or send money. This report is not
authorized for use as an offer of sale or a solicitation of an offer to buy
shares of Baron Funds unless accompanied or preceded by the Funds' current
prospectus.
27
<PAGE>
B A R O N A S S E T F U N D
STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
March 31, 2000 (Unaudited)
Shares Value
------------------------------------------------------ ----------------
Common Stocks (96.89%)
--------------------------------------------------------------------------
Business Services (7.31%)
3,280,000 ChoicePoint, Inc.*# $ 122,590,000
1,749,532 Correctional Mgmt. Services Corp.*@ 8,000,085
6,100,000 Robert Half Intl., Inc.*# 289,368,750
--------------
419,958,835
Chemical (1.87%)
2,367,500 OM Group, Inc. # 107,721,250
Communications (16.59%)
3,500,000 American Mobile Satellite Corp.*# 84,000,000
4,800,000 American Tower Corp., Cl A* 237,000,000
250,000 Commonwealth Telephone Ent., Inc.* 11,734,375
3,322,500 CoreComm, Ltd.*# 146,189,956
4,720,000 NTL, Inc.* 438,075,000
675,000 RCN Corp.* 36,365,625
--------------
953,364,956
Education (6.45%)
5,575,000 Apollo Group, Inc.* 157,145,313
5,220,000 DeVry, Inc.*# 159,210,000
2,900,000 Education Mgmt. Corp.*# 41,868,750
350,000 Learning Tree Intl., Inc.* 12,425,000
--------------
370,649,063
Energy (1.13%)
1,080,000 Seacor Smit, Inc.*# 65,205,000
Financial (18.26%)
18,125,000 Charles Schwab Corp. 1,029,726,563
1,390,000 DVI, Inc.*# 19,807,500
--------------
1,049,534,063
Health Services (1.89%)
8,050,000 Manor Care, Inc. *# 108,675,000
Hotels and Lodging (4.02%)
13,225,300 Choice Hotels Intl., Inc.*# 190,940,269
890,000 Four Seasons Hotels, Inc. 40,105,625
--------------
231,045,894
Manufacturing (6.13%)
5,000,000 Flextronics Intl., Ltd.* 352,187,500
Media and Entertainment (9.07%)
590,000 Citadel Comm. Corp.* 24,890,625
450,000 Cox Radio, Inc., Cl A* 37,800,000
1,380,000 Hispanic Broadcasting Corp.* 156,285,000
3,671,252 Saga Comm., Inc., Cl A*# 70,212,695
435,000 Sirius Satellite Radio, Inc.* 24,795,000
695,000 UnitedGlobalCom, Inc., Cl A* 52,168,437
400,000 Univision Comm., Inc., Cl A* 45,200,000
1,660,000 Westwood One, Inc.* 60,175,000
111,900 XM Satellite Radio Holdings, Inc.,
Cl A* 3,902,373
1,314,914 XM Satellite Radio Holdings, Inc.,
Cl A*@ 45,857,765
--------------
521,286,895
Printing & Publishing (0.20%)
355,000 Primedia, Inc.* 11,360,000
Real Estate and REITs (0.39%)
350,900 Alexander's, Inc.*# 22,282,150
Recreation and Resorts (4.79%)
9,500,000 AMF Bowling, Inc.*# 20,187,500
1,500,000 Premier Parks, Inc.* 31,500,000
3,300,000 Sun Intl. Hotels, Ltd.*# 64,350,000
6,066,000 Vail Resorts, Inc.*# 97,814,250
4,000,000 Vail Resorts, Inc.*# @ 61,275,200
--------------
275,126,950
<PAGE>
Shares Value
------------ --------------
Retail Trade and Restaurants (13.10%)
2,815,000 Dollar Tree Stores, Inc.* $ 146,731,875
2,250,000 Ethan Allen Interiors, Inc.# 56,250,000
8,500,000 Polo Ralph Lauren Corp., Cl A* 158,843,750
2,800,000 Smart and Final, Inc.*# 20,825,000
20,100,000 Sotheby's Holdings, Inc., Cl A# 370,593,750
--------------
753,244,375
Transportation (0.03%)
400,000 Budget Group, Inc., Cl A* 1,975,000
Utility Services (3.54%)
450,000 Azurix Corp.* 3,375,000
9,300,000 Citizens Utilities Co.* 152,287,500
2,650,000 Southern Union Co.*# 47,865,625
--------------
203,528,125
Wholesale Trade (2.12%)
4,052,900 Industrie Natuzzi SPA ADR# 46,861,656
2,750,000 Libbey, Inc.# 75,281,250
--------------
122,142,906
--------------
Total Common Stocks
(Cost $3,330,388,433)
5,569,287,962
--------------
Preferred Stocks (0.09%)
---------------------------------------------------------
Convertible Preferred Stocks (0.02%)
Education
52,632 Apollo International, Inc. S-A CV
Pfd.*@ 1,000,008
Nonconvertible Preferred (0.07%)
Health Services
2,557 Chesapeake Healthcare Corp.* @ 4,000,196
---------
Total Preferred Stocks
(Cost $5,000,008) 5,000,204
---------
Warrants (0.04%)
---------------------------------------------------------
Communications
75,000 CoreComm, Ltd. Warrants Exp
05/26/2002*@# (Cost $1,473,750) 2,300,000
----------
<TABLE>
<CAPTION>
Principal Amount
------------------------------------------------------------------------------------
<S> <C> <C>
Short Term Money Market Instruments (2.07%)
--------------------------------------------------------------------------------------------------------
$119,000,000 Associates Corp. of N.A. 5.95%
due 04/03/2000 (Cost $119,000,000) 119,000,000
-----------
Total Investments (99.09%)
(Cost $3,455,862,191**) 5,695,588,166
Cash and Other Assets
Less Liabilities (0.91%) 52,563,849
-------------
Net Assets (Equivalent to $64.79 per
share based on 88,721,475 shares of
beneficial interest outstanding) $5,748,152,015
==============
</TABLE>
----------
%
Represents percentage of net assets
@ Restricted securities
# Issuers that may be deemed to be "affiliated"
* Non-income producing securities
** For Federal income tax purposes the cost basis is
$3,453,767,185. Aggregate unrealized appreciation and depre-
ciation of investments are $2,880,958,419 and $639,137,438,
respectively.
See Notes to Financial Statements.
28
<PAGE>
B A R O N G R O W T H F U N D
STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
March 31, 2000 (Unaudited)
Shares Value
--------------- --------------
Common Stocks (91.72%)
------------------------------------------------------------------------------
Business Services (5.78%)
350,000 ChoicePoint, Inc.* $ 13,081,250
275,000 DBT Online, Inc.* 5,104,687
115,000 Heidrick & Struggles Int'l., Inc.* 4,614,375
120,700 Kronos, Inc.* 3,575,737
220,000 Robert Half Intl., Inc.* 10,436,250
------------
36,812,299
Chemical (2.14%)
300,000 OM Group, Inc. 13,650,000
Communications (20.45%)
410,000 Allied Riser Comm. Corp.* 14,247,500
410,000 American Mobile Satellite Corp.* 9,840,000
510,000 CoreComm, Ltd.* 22,440,000
560,000 Electric Lightwave, Inc., Cl A* 13,370,000
90,000 MGC Comm., Inc.* 6,435,000
320,000 NTL, Inc.* 29,700,000
41,700 Pinnacle Holdings, Inc.* 2,303,925
410,000 Rural Cellular Corp., Cl A* 27,700,625
98,100 SBA Comm. Corp.* 4,316,400
------------
130,353,450
Comsumer Services (0.13%)
40,000 Expedia, Inc., Cl A* 850,000
Education (7.54%)
900,000 Apollo Group, Inc.* 25,368,750
270,000 DeVry, Inc.* 8,235,000
1,000,000 Education Mgmt. Corp.* 14,437,500
------------
48,041,250
Energy (1.09%)
115,000 Seacor Smit, Inc.* 6,943,125
Financial (9.52%)
93,333 Bingham Financial Services Corp.*@ 642,831
500,000 BlackRock, Inc., Cl A* 10,125,000
570,000 Charles Schwab Corp. 32,383,125
280,000 DVI, Inc.* 3,990,000
299,000 Gabelli Asset Mgmt., Inc., Cl A* 5,120,375
500,000 Medallion Financial Corp. 8,406,250
------------
60,667,581
Health Services (0.42%)
200,000 Manor Care, Inc.* 2,700,000
Hotels and Lodging (6.10%)
2,020,000 Choice Hotels Intl., Inc.* 29,163,750
650,000 Extended Stay America, Inc.* 4,875,000
100,000 Four Seasons Hotels, Inc. 4,506,250
20,000 Hotel Reservations Network, Inc.* 355,000
------------
38,900,000
Manufacturing (3.76%)
340,000 Flextronics Intl., Ltd.* 23,948,750
Media and Entertainment (14.86%)
160,000 Citadel Comm. Corp.* 6,750,000
80,000 Entercom Comm. Corp.* 4,080,000
22,400 Hispanic Broadcasting Corp.* 2,536,800
220,000 Radio One, Inc., Cl A* 14,657,500
443,900 Saga Comm., Inc., Cl A* 8,489,588
200,000 Sirius Satellite Radio, Inc.* 11,400,000
270,000 Westwood One, Inc.* 9,787,500
200,000 Wink Comm., Inc.* 6,675,000
870,000 XM Satellite Radio Holdings, Inc., Cl A* 30,341,250
------------
94,717,638
Printing & Publishing (0.79%)
140,000 Getty Images, Inc.* 5,031,250
Real Estate and REITs (0.58%)
58,600 Alexander's, Inc.* 3,721,100
<PAGE>
Shares Value
------------ ------------
Recreation and Resorts (5.25%)
200,000 American Classic Voyages Co.* $ 5,037,500
140,000 Intrawest Corp. 2,362,500
220,000 Steiner Leisure, Ltd.* 4,235,000
800,000 Sun Intl. Hotels, Ltd.* 15,600,000
410,000 The Sports Club Co.* 1,537,500
235,000 Vail Resorts, Inc., Cl A* 3,789,375
50,000 World Wrestling Federation
Entertainment, Inc., Cl A* 886,720
-------------
33,448,595
Retail Trade and Restaurants (7.33%)
320,000 Collectors Universe, Inc.* 2,080,000
250,000 Dollar Tree Stores, Inc.* 13,031,250
700,000 Ethan Allen Interiors, Inc. 17,500,000
707,781 Smart and Final, Inc.* 5,264,121
360,000 Sotheby's Holdings, Inc., Cl A 6,637,500
140,000 The Yankee Candle Co., Inc.* 2,213,750
-------------
46,726,621
Utility Services (4.41%)
800,000 Azurix Corp.* 6,000,000
1,225,000 Southern Union Co.* 22,126,563
-------------
28,126,563
Wholesale Trade (1.57%)
570,300 Industrie Natuzzi SPA ADR 6,594,094
125,000 Libbey, Inc. 3,421,875
-------------
10,015,969
-------------
Total Common Stocks
(Cost $381,096,439)
584,654,191
-------------
------------
Warrants (0.90%)
------------------------------------------------------------------------------
Communications
187,500 CoreComm, Ltd. Warrants Exp
05/26/2002*@ (Cost $3,684,375) 5,750,000
-------------
Principal Amount
------------------------------------------------------------------------------
Corporate Bonds (1.35%)
------------------------------------------------------------------------------
Communications
$ 5,000,000 CoreComm Ltd 6.00%
Conv. Sub. Deb. due
10/01/2006+ (Cost $5,000,000) 8,612,500
-------------
<TABLE>
<CAPTION>
<S> <C> <C>
Short Term Money Market Instruments (4.77%)
----------------------------------------------------------------------------------------------------
30,379,999 Associates Corp. of N. A. 5.95%
due 04/03/2000 (Cost $30,379,999) 30,379,999
----------
Total Investments (98.74%)
(Cost $420,160,813**) 629,396,690
Cash and Other Assets
Less Liabilities (1.26%) 8,042,922
-----------
Net Assets (Equivalent to $34.14 per
share based on 18,668,970 shares of
beneficial interest outstanding) $637,439,612
============
</TABLE>
----------
% Represents percentage of net assets
+ Rule 144A securities
@ Restricted securities
* Non-income producing securities
** For Federal income tax purposes the cost basis is $419,687,424. Aggregate
unrealized appreciation and depreciation of investments are $241,590,652
and $31,881,386, respectively.
See Notes to Financial Statements.
29
<PAGE>
B A R O N S M A L L C A P F U N D
STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
March 31, 2000 (Unaudited)
Shares Value
-------------------------------------------------------- ----------------
Common Stocks (94.95%)
----------------------------------------------------------------------------
Business Services (15.28%)
490,000 ChoicePoint, Inc.* $ 18,313,750
280,000 Corporate Executive Board Co.* 14,210,000
500,000 DBT Online, Inc.* 9,281,250
285,000 Frontline Capital Group* 12,540,000
900,000 Heidrick & Struggles Int'l., Inc.* 36,112,500
800,000 Iron Mountain, Inc.* 27,250,000
300,000 Lamar Advertising Co., Cl A* 13,650,000
1,000,000 Todd-AO Corp., Cl A 34,500,000
--------------
165,857,500
Communications (22.39%)
200,000 ACTV, Inc.* 7,012,500
525,000 Allied Riser Comm. Corp.* 18,243,750
117,800 Centennial Comm. Corp.
(formerly Centennial Cellular Corp.)* 2,864,012
760,000 Commonwealth Telephone Ent., Inc.* 35,672,500
1,050,000 CoreComm, Ltd.* 46,200,000
500,000 Electric Lightwave, Inc., Cl A* 11,937,500
324,800 MGC Comm., Inc.* 23,223,200
200,000 Pinnacle Holdings, Inc.* 11,050,000
700,000 Rural Cellular Corp., Cl A* 47,293,750
900,000 SBA Comm. Corp.* 39,600,000
--------------
243,097,212
Consumer Products (0.51%)
375,000 Equity Marketing, Inc.*# 4,007,813
250,000 Marvel Enterprises, Inc.* 1,484,375
--------------
5,492,188
Consumer Services (0.92%)
500,000 Central Parking Corp. 10,000,000
Education (5.94%)
1,045,000 Apollo Group, Inc.* 29,455,937
1,000,000 Career Education Corp.*# 35,000,000
--------------
64,455,937
Environmental (1.47%)
1,125,000 Casella Waste Systems, Inc., Cl A* 8,437,500
1,000,000 IT Group, Inc.* 7,562,500
--------------
16,000,000
Financial (0.47%)
299,000 Gabelli Asset Mgmt., Inc., Cl A* 5,120,375
Health Services (1.11%)
422,500 Province Healthcare Co.* 12,094,063
Hotels and Lodging (2.17%)
500,000 Four Seasons Hotels, Inc. 22,531,250
54,400 Hotel Reservations Network, Inc.* 965,600
--------------
23,496,850
Industrial Services (1.23%)
775,000 United Rentals, Inc.* 13,368,750
Media and Entertainment (21.26%)
625,000 Entercom Comm. Corp.* 31,875,000
250,000 PrimaCom AG* 11,578,125
635,000 Radio One, Inc., Cl A* 42,306,875
1,450,000 UnitedGlobalCom, Inc., Cl A* 108,840,625
1,000,000 Westwood One, Inc.* 36,250,000
--------------
230,850,625
Printing & Publishing (6.02%)
700,000 Getty Images, Inc.* 25,156,250
400,000 Loislaw.com, Inc.* 7,675,000
1,250,000 Penton Media, Inc. 32,500,000
--------------
65,331,250
Real Estate and REITs (0.13%)
100,000 Insignia Financial Group, Inc.* 1,400,000
<PAGE>
Shares Value
----------- --------------
Recreation and Resorts (7.44%)
250,000 Cryptologic, Inc.* $ 6,937,500
250,000 Intrawest Corp. 4,218,750
468,500 Loews Cineplex Entertainment Corp.* 1,639,750
1,000,000 Premier Parks, Inc.* 21,000,000
750,000 SFX Entertainment, Inc., Cl A* 30,609,375
450,000 Sun Intl. Hotels, Ltd.* 8,775,000
850,000 The Sports Club Co.* 3,187,500
250,000 World Wrestling Federation
Entertainment, Inc., Cl A* 4,433,600
--------------
80,801,475
Retail Trade and Restaurants (7.65%)
45,000 Fatbrain.com, Inc.* 486,562
175,000 HomeGrocer.com, Inc.* 1,815,625
1,000,000 Kenneth Cole Prod., Inc., Cl A* 39,250,000
375,000 Morton's Restaurant Group, Inc.*# 7,148,438
800,000 Williams-Sonoma, Inc.* 24,800,000
600,000 The Yankee Candle Co., Inc.* 9,487,500
--------------
82,988,125
Utility Services (0.96%)
1,000,000 El Paso Electric Co.* 10,375,000
--------------
Total Common Stocks
(Cost $650,598,789) 1,030,729,350
--------------
----------------------------------------------------------------------------
Warrants (0.21%)
----------------------------------------------------------------------------
Communications
75,000 CoreComm, Ltd. Warrants Exp
05/26/2002*@ (Cost $1,473,750) 2,300,000
--------------
Principal Amount
-------------------------------------------------------------------
Corporate Bonds (0.98%)
-------------------------------------------------------------------
Communications (0.79%)
$ 5,000,000 CoreComm Ltd. 6.00%
Conv. Sub. Deb. due 10/01/2006+ 8,612,500
Health Services (0.19%)
3,250,000 U.S. Diagnostic, Inc. 9.00%
Conv. Sub. Deb. due 03/31/2003 2,047,500
---------
Total Corporate Bonds
(Cost $7,520,000) 10,660,000
----------
<TABLE>
<CAPTION>
<S> <C> <C>
------------------------------------------------------------------------------------------------------
Short Term Money Market Instruments (3.21%)
------------------------------------------------------------------------------------------------------
34,832,000 Associates Corp. of N.A. 5.95%
due 04/03/2000 (Cost $34,832,000) 34,832,000
----------
Total Investments (99.35%)
(Cost $694,424,539**) 1,078,521,350
Cash and Other Assets
Less Liabilities (0.65%) 7,103,867
-------------
Net Assets (Equivalent to $17.84 per
share based on 60,863,986 shares of
beneficial interest outstanding) $1,085,625,217
==============
</TABLE>
----------
% Represents percentage of net assets
@ Restricted security
+ Rule 144A securities
# Issuers that may be deemed to be "affiliated"
* Non-income producing securities
** For Federal income tax purposes the cost basis is $697,970,129.
Aggregate unrealized appreciation and depreciation of invest-
ments are $429,532,501 and $48,981,280, respectively.
See Notes to Financial Statements.
30
<PAGE>
B A R O N i O P P O R T U N I T Y F U N D
STATEMENT OF NET ASSETS
--------------------------------------------------------------------------------
March 31, 2000 (Unaudited)
Shares Value
------------------------------------------------------ ----------------
Common Stocks (51.21%)
--------------------------------------------------------------------------
Business Services (11.27%)
225,000 DBT Online, Inc.* $ 4,176,563
150,000 Frontline Capital Group* 6,600,000
125,000 Heidrick & Struggles Int'l., Inc.* 5,015,625
115,000 TMP Worldwide, Inc.* 8,941,250
30,900 Todd-AO Corp., Cl A 1,066,050
1,400 Versata, Inc.* 84,262
-------------
25,883,750
Communications (8.18%)
100,000 Allied Riser Comm. Corp.* 3,475,000
75,000 American Tower Corp., Cl A* 3,703,125
45,000 MGC Comm., Inc.* 3,217,500
40,000 NTL, Inc.* 3,712,500
25,000 Pinnacle Holdings, Inc.* 1,381,250
75,000 SBA Comm. Corp.* 3,300,000
-------------
18,789,375
Consumer Services (8.79%)
30,000 America Online, Inc.* 2,017,500
150,000 At Home Corp.* 4,940,625
150,000 Expedia, Inc., Cl A* 3,187,500
25,000 GoTo.Com, Inc.* 1,026,563
100,000 Lycos, Inc.* 7,025,000
20,000 Time Warner, Inc. 2,000,000
-------------
20,197,188
Financial (1.73%)
20,000 Charles Schwab Corp. 1,136,250
15,000 U.S. Trust Corp. 2,835,000
-------------
3,971,250
Hotels and Lodging (1.93%)
250,000 Hotel Reservations Network, Inc.* 4,437,500
Media and Entertainment (8.50%)
30,000 Gemstar International Group Ltd.* 2,580,000
70,000 Liberty Media Group* 4,147,500
30,000 TV Guide, Inc.* 1,441,875
45,000 United Pan-Europe Comm. N.V.* 2,230,312
55,000 UnitedGlobalCom, Inc., Cl A* 4,128,438
150,000 Wink Comm., Inc.* 5,006,250
-------------
19,534,375
<PAGE>
Shares Value
------------ -------------
Printing & Publishing (4.45%)
150,000 Getty Images, Inc.* $ 5,390,625
151,000 Primedia, Inc.* 4,832,000
-------------
10,222,625
Real Estate and REITs (2.21%)
104,000 homestore.com, Inc.* 5,070,000
Retail Trade and Restaurants (4.15%)
25,000 eBay, Inc.* 4,400,000
100,000 Fatbrain.com, Inc.* 1,081,250
150,000 HomeGrocer.com, Inc.* 1,556,250
135,000 Sotheby's Holdings, Inc., Cl A 2,489,062
-------------
9,526,562
Total Common Stocks
(Cost $123,514,563) 117,632,625
-------------
Principal Amount
--------------------------------------------------------------------------
U.S. Treasury Bills (49.91%)
--------------------------------------------------------------------------
$114,660,175 U.S. Treasury Bills 5.73%
due 04/03/2000 (Cost $114,660,175) 114,660,175
--------------------------------------------------------------------------
Short Term Money Market Instruments (5.22%)
--------------------------------------------------------------------------
11,999,999 Associates Corp. of N.A. 5.95%
due 04/03/2000 (Cost $11,999,999) 11,999,999
-------------
Total Investments (106.34%)
(Cost $250,174,737**)
244,292,799
Liabilities Less
Cash and Other Assets (-6.34%)
(14,561,618)
-------------
Net Assets (Equivalent to $9.86 per
share based on 23,297,726 shares of
beneficial interest outstanding)
$ 229,731,181
=============
----------
% Represents percentage of net assets
* Non-income producing securities
** For Federal income tax purposes the cost basis is identical. Aggregate
unrealized appreciation and depreciation of investments are $6,049,745 and
$11,931,683, respectively.
See Notes to Financial Statements.
31
<PAGE>
B A R O N F U N D S
STATEMENTS OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
MARCH 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
Baron Asset Baron Growth
Fund Fund
----------------- ----------------
<S> <C> <C>
Assets:
Investments in securities, at value
Unaffiliated issuers
(Cost $1,157,752,281, $420,160,813, $656,535,712, and
$250,174,737, respectively) $3,406,212,615 $629,396,690
"Affiliated issuers" (Cost $2,298,109,910, $0, $37,888,827,
and $0, respectively) 2,289,375,551 0
Cash 209,457 9,849
Dividends and interest receivable 19,678 155,024
Receivable for securities sold 70,131,328 7,921,184
Receivable for shares sold 7,090,121 3,135,992
Unamortized organization costs 0 0
Prepaid expenses 39,442 0
-------------- ------------
5,773,078,192 640,618,739
-------------- ------------
Liabilities:
Payable for securities purchased 3,283,915 2,645,908
Payable for shares redeemed 21,216,362 415,930
Accrued organization costs 0 0
Accrued expenses and other payables 425,900 117,289
-------------- ------------
24,926,177 3,179,127
-------------- ------------
Net Assets $5,748,152,015 $637,439,612
============== ============
Net Assets consist of:
Capital paid-in $3,217,043,428 $395,252,778
Accumulated net investment income (loss) (33,490,245) (2,288,988)
Accumulated net realized gain (loss) 324,872,857 35,239,945
Net unrealized appreciation (depreciation) on investments 2,239,725,975 209,235,877
-------------- ------------
Net Assets $5,748,152,015 $637,439,612
============== ============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) 88,721,475 18,668,970
============== ============
Net Asset Value Per Share $ 64.79 $ 34.14
============== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Baron Small Cap Baron iOpportunity
Fund Fund
----------------- -------------------
<S> <C> <C>
Assets:
Investments in securities, at value
Unaffiliated issuers
(Cost $1,157,752,281, $420,160,813, $656,535,712, and
$250,174,737, respectively) $1,032,365,099 $244,292,799
"Affiliated issuers" (Cost $2,298,109,910, $0, $37,888,827,
and $0, respectively) 46,156,251 0
Cash 402,541 811,025
Dividends and interest receivable 201,559 20,225
Receivable for securities sold 6,906,960 590,080
Receivable for shares sold 3,936,528 653,009
Unamortized organization costs 14,237 0
Prepaid expenses 0 0
-------------- ------------
1,089,983,175 246,367,138
-------------- ------------
Liabilities:
Payable for securities purchased 3,610,257 16,299,208
Payable for shares redeemed 603,944 315,214
Accrued organization costs 14,237 0
Accrued expenses and other payables 129,520 21,535
-------------- ------------
4,357,958 16,635,957
-------------- ------------
Net Assets $1,085,625,217 $229,731,181
============== ============
Net Assets consist of:
Capital paid-in $ 717,293,300 $233,169,298
Accumulated net investment income (loss) (3,910,668) 476,883
Accumulated net realized gain (loss) (11,854,226) 1,966,938
Net unrealized appreciation (depreciation) on investments 384,096,811 (5,881,938)
-------------- ------------
Net Assets $1,085,625,217 $229,731,181
============== ============
Shares of Beneficial Interest Outstanding
($.01 par value; indefinite shares authorized) 60,863,986 23,297,726
============== ============
Net Asset Value Per Share $ 17.84 $ 9.86
============== ============
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
B A R O N F U N D S
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED MARCH 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
Baron Asset Baron Growth
Fund Fund
------------------ ----------------
<S> <C> <C>
Investment income:
Income:
Interest $ 150,611 $ 653,693
Dividends -- unaffiliated issuers 2,492,668 908,407
Dividends -- "affiliated" issuers 3,177,195 0
-------------- ------------
Total income 5,820,474 1,562,100
-------------- ------------
Expenses:
Investment advisory fees 29,096,788 2,822,947
Distribution fees 7,274,197 705,737
Shareholder servicing agent fees 817,000 128,655
Reports to shareholders 798,600 91,350
Registration and filing fees 47,202 43,565
Custodian fees 87,465 14,925
Trustee fees 36,425 3,566
Professional fees 34,165 24,695
Amortization of organization costs 0 1,644
Miscellaneous 35,032 5,007
-------------- ------------
Total operating expenses 38,226,874 3,842,091
Interest expense 1,083,845 8,997
-------------- ------------
Total expenses 39,310,719 3,851,088
Less: Expense reimbursement by investment adviser 0 0
-------------- ------------
Net expenses 39,310,719 3,851,088
-------------- ------------
Net investment income (loss) (33,490,245) (2,288,988)
-------------- ------------
Realized and unrealized gain (loss) on investments:
Net realized gain on investments sold in unaffiliated issuers 381,891,028 36,051,709
Net realized loss on investments sold in "affiliated" issuers (6,883,126) 0
Change in net unrealized appreciation (depreciation) of
investments 967,038,908 91,347,358
-------------- ------------
Net gain (loss) on investments 1,342,046,810 127,399,067
-------------- ------------
Net increase (decrease) in net assets resulting from operations $1,308,556,565 $125,110,079
============== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Baron Small Cap Baron iOpportunity
Fund Fund*
----------------- -------------------
<S> <C> <C>
Investment income:
Income:
Interest $ 2,433,282 $ 765,232
Dividends -- unaffiliated issuers 114,562 0
Dividends -- "affiliated" issuers 0 0
------------ -----------
Total income 2,547,844 765,232
------------ -----------
Expenses:
Investment advisory fees 4,845,633 192,363
Distribution fees 1,211,408 48,091
Shareholder servicing agent fees 152,406 50,814
Reports to shareholders 135,850 15,000
Registration and filing fees 47,688 52,983
Custodian fees 25,395 3,167
Trustee fees 6,007 252
Professional fees 24,730 4,000
Amortization of organization costs 2,848 0
Miscellaneous 6,547 231
------------ -----------
Total operating expenses 6,458,512 366,901
Interest expense 0 0
------------ -----------
Total expenses 6,458,512 366,901
Less: Expense reimbursement by investment adviser 0 (78,552)
------------ -----------
Net expenses 6,458,512 288,349
------------ -----------
Net investment income (loss) (3,910,668) 476,883
------------ -----------
Realized and unrealized gain (loss) on investments:
Net realized gain on investments sold in unaffiliated issuers 49,008,669 1,966,938
Net realized loss on investments sold in "affiliated" issuers (4,918,474) 0
Change in net unrealized appreciation (depreciation) of
investments 217,411,769 (5,881,938)
------------ -----------
Net gain (loss) on investments 261,501,964 (3,915,000)
------------ -----------
Net increase (decrease) in net assets resulting from operations $257,591,296 ($ 3,438,117)
============ ===========
</TABLE>
----------
* For the period February 29, 2000 (commencement of operations) to March 31,
2000.
See Notes to Financial Statements.
33
<PAGE>
B A R O N F U N D S
STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Baron Asset Fund Baron Growth Fund
---------------------------------------- ------------------------------------
Six Months For the Six Months For the
Ended Year Ended Ended Year Ended
March 31, September 30, March 31, September 30,
2000 1999 2000 1999
------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
Operations:
Net investment income
(loss) ($ 33,490,245) ($ 33,874,084) ($ 2,288,988) ($ 724,318)
Net realized gain (loss) on
investments sold 375,007,902 46,800,291 36,051,709 34,354,265
Net change in unrealized
appreciation
(depreciation) on
investments 967,038,908 1,250,313,281 91,347,358 78,932,635
---------------- ---------------- -------------- --------------
Increase (decrease) in net
assets resulting from
operations 1,308,556,565 1,263,239,488 125,110,079 112,562,582
---------------- ---------------- -------------- --------------
Dividends to shareholders
from:
Net investment income 0 (4,594,972) 0 (486,147)
Net realized gain on
investments 0 0 (29,536,361) 0
---------------- ---------------- -------------- --------------
0 (4,594,972) (29,536,361) (486,147)
---------------- ---------------- -------------- --------------
Capital share transactions:
Proceeds from the sale of
shares 620,421,529 2,326,280,913 216,875,752 193,413,986
Net asset value of shares
issued in reinvestment
of dividends 0 4,175,765 28,265,440 461,215
Cost of shares redeemed (2,043,951,094) (2,138,067,002) (142,700,082) (182,084,702)
---------------- ---------------- -------------- --------------
Increase (decrease) in net
assets derived from
capital share
transactions (1,423,529,565) 192,389,676 102,441,110 11,790,499
Capital Contribution 0 1,584,375 0 0
Redemption fees 0 0 0 0
---------------- ---------------- -------------- --------------
Net increase (decrease) in
net assets (114,973,000) 1,452,618,567 198,014,828 123,866,934
Net assets:
Beginning of period 5,863,125,015 4,410,506,448 439,424,784 315,557,850
---------------- ---------------- -------------- --------------
End of period $ 5,748,152,015 $ 5,863,125,015 $ 637,439,612 $ 439,424,784
================ ================ ============== ==============
Accumulated net
investment income (loss)
at end of period ($ 33,490,245) $ 0 ($ 2,288,988) $ 0
================ ================ ============== ==============
Shares of beneficial interest:
Shares sold 11,016,028 45,041,285 6,964,829 6,776,893
Shares issued in
reinvestment dividends 0 82,185 1,029,706 18,636
Shares redeemed (35,982,489) (41,802,254) (4,447,491) (7,201,050)
---------------- ---------------- -------------- --------------
Net increase (decrease) (24,966,461) 3,321,216 3,547,044 (405,521)
================ ================ ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Baron Small Cap Fund Baron iOpportunity Fund
--------------------------------------- ------------------------
For the period
Six Months For the February 29, 2000
Ended Year Ended (commencement
March 31, September 30, of operations)
2000 1999 to March 31, 2000
-------------------- ----------------- ------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
Operations:
Net investment income
(loss) ($ 3,910,668) ($ 5,396,245) $ 476,883
Net realized gain (loss) on
investments sold 44,090,195 (29,035,249) 1,966,938
Net change in unrealized
appreciation
(depreciation) on
investments 217,411,769 242,203,032 (5,881,938)
------------- -------------- ------------
Increase (decrease) in net
assets resulting from
operations 257,591,296 207,771,538 (3,438,117)
------------- -------------- ------------
Dividends to shareholders
from:
Net investment income 0 0 0
Net realized gain on
investments 0 0 0
------------- -------------- ------------
0 0 0
------------- -------------- ------------
Capital share transactions:
Proceeds from the sale of
shares 341,994,155 403,817,666 241,723,960
Net asset value of shares
issued in reinvestment
of dividends 0 0 0
Cost of shares redeemed (229,643,366) (299,634,070) (8,625,623)
------------- -------------- ------------
Increase (decrease) in net
assets derived from
capital share
transactions 112,350,789 104,183,596 233,098,337
Capital Contribution 0 0 0
Redemption fees 0 0 70,961
------------- -------------- ------------
Net increase (decrease) in
net assets 369,942,085 311,955,134 229,731,181
Net assets:
Beginning of period 715,683,132 403,727,998 0
------------- -------------- ------------
End of period $1,085,625,217 $ 715,683,132 $229,731,181
============== ============== ============
Accumulated net
investment income (loss)
at end of period ($ 3,910,668) $ 0 $ 476,883
============== ============== ============
Shares of beneficial interest:
Shares sold 20,975,818 34,490,488 24,159,302
Shares issued in
reinvestment dividends 0 0 0
Shares redeemed (13,642,266) (27,846,667) (861,576)
-------------- -------------- ------------
Net increase (decrease) 7,333,552 6,643,821 23,297,726
============== ============== ============
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
B A R O N F U N D S
Notes to Financial Statements (Unaudited)
--------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES.
Baron Asset Fund (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the"1940 Act"), as a diversified, open-end management
investment company established as a Massachusetts business trust on February
19, 1987. The Trust currently offers four series (individually a "Fund" and
collectively the "Funds"): Baron Asset Fund, started in June of 1987, Baron
Growth Fund, started in January of 1995, Baron Small Cap Fund, started in
October of 1997, and Baron iOpportunity Fund, started in February of 2000. The
following is a summary of significant accounting policies followed by the
Funds. The policies are in conformity with generally accepted accounting
principles.
(a) SECURITY VALUATION. Portfolio securities traded on any national stock
exchange or quoted on the NASDAQ National Market System are valued based on the
last sale price or where market quotations are not readily available, based on
fair value as determined by the Adviser, using procedures established by the
Board of Trustees. Money market instruments held by the Funds with a remaining
maturity of sixty days or less are valued at amortized cost, which approximates
value.
(b) SECURITIES TRANSACTIONS, INVESTMENT INCOME AND EXPENSE ALLOCATION.
Securities transactions are recorded on a trade date basis. Realized gain and
loss from securities transactions are recorded on an identified cost basis for
financial reporting and federal income tax purposes. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis. Common expenses of the Funds are allocated on a basis deemed
fair and equitable by the Trustees, usually on the basis of average net assets.
Direct expenses are charged to each Fund on a specific identification basis.
(c) FEDERAL INCOME TAXES. Each Fund of the Trust is treated as a separate
entity for federal income tax purposes. It is the policy of each Fund to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and to distribute all of its taxable income, including
net realized capital gains, if any, to its shareholders. No federal income tax
provision is therefore required.
(d) RESTRICTED SECURITIES. The Funds invest in securities which are restricted
as to public sale in accordance with the Securities Act of 1933. Such assets
are valued at fair value as determined in good faith by the Board of Trustees.
(e) ORGANIZATION COSTS. Costs incurred in connection with the organization and
initial registration of Baron Growth Fund and Baron Small Cap Fund have been
deferred and are being amortized on a straight-line basis over a five-year
period. Baron Capital, Inc. ("BCI"), a wholly owned subsidiary of Baron Capital
Group, Inc. ("BCG"), agreed to make advances for organization expenses incurred
and will be reimbursed as the costs are amortized.
(f) DISTRIBUTIONS. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due
to differing treatments for net operating losses and distributions from REIT's.
<PAGE>
(g) SHORT-TERM TRADING FEE. Baron iOpportunity Fund imposes a 1% short-term
trading fee on redemptions and exchanges of shares held for less than 180 days.
The fee is retained by Baron iOpportunity for the benefit of the remaining
shareholders to offset the administrative costs associated with processing
redemptions and exchanges, offset the portfolio transaction costs and
facilitate portfolio management. The fee is accounted for as an addition to
paid in capital.
(h) USE OF ESTIMATES. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of financial statements, and the amounts of income and
expenses during the period. Actual results could differ from those estimates.
--------------------------------------------------------------------------------
(2) PURCHASES AND SALES OF SECURITIES.
Purchases and sales of securities, other than short term securities, for the
six months ended March 31, 2000 were as follows:
Fund Purchases Sales
------------------------- -------------- -----------------
Baron Asset Fund $ 90,811,483 $1,714,175,940
Baron Growth Fund $171,850,715 $ 107,651,965
Baron Small Cap Fund $360,990,257 $ 211,208,596
Baron iOpportunity Fund $125,722,318 $ 4,174,692
--------------------------------------------------------------------------------
(3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
(a) INVESTMENT ADVISORY FEES. BAMCO, Inc. (the "Adviser"), a wholly owned
subsidiary of BCG, serves as investment adviser to the Funds. As compensation
for services rendered, the Adviser receives a fee payable monthly from the
assets of the Funds equal to 1% per annum of each Fund's average daily net
asset value. For Baron iOpportunity Fund, the Adviser has contractually agreed
to reduce its fee to the extent required to limit operating expenses to 1.50%
of average net assets.
(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.
35
<PAGE>
B A R O N F U N D S
Brokerage transactions for the Funds may be effected by or through BCI. During
the six months ended March 31, 2000, BCI earned Brokerage commissions as
follows:
Fund Commissions
------------------------- ------------
Baron Asset Fund $2,365,631
Baron Growth Fund $ 232,246
Baron Small Cap Fund $ 439,115
Baron iOpportunity Fund $ 99,810
(c) TRUSTEE FEES. Certain Trustees of the Trust may be deemed to be affiliated
with or interested persons (as defined by the 1940 Act) of the Funds' Adviser or
of BCI. None of the Trustees so affiliated received compensation for his or her
services as a Trustee of the Trust. None of the Funds' officers received
compensation from the Funds.
--------------------------------------------------------------------------------
(4) CAPITAL LOSS CARRYFORWARD.
Baron Asset Fund and Baron Small Cap Fund had capital loss carryforwards at
September 30, 1999, which can be used to offset future capital gains.
Capital Loss Capital Loss
Carryovers Carryovers
Fund Expiring 2006 Expiring 2007
---------------------- --------------- --------------
Baron Asset Fund $22,037,516 $28,197,921
Baron Small Cap Fund -- 52,251,354
--------------------------------------------------------------------------------
(5) LINE OF CREDIT. Baron Asset Fund, Baron Growth Fund, and Baron Small Cap
Fund have entered into a line of credit agreement with the custodian bank to be
used for temporary purposes, primarily for financing redemptions. The agreement
provides that Baron Asset Fund may borrow up to 5% of the value of its net
assets. Baron Growth Fund and Baron Small Cap Fund may borrow up to 15% of each
Fund's respective net assets. The aggregate outstanding principal amount of all
loans to any of the Funds may not exceed $50,000,000. Interest is charged to
each Fund, based on its borrowings, at a rate per annum equal to the Federal
Funds Rate plus a margin of 0.875% to 2.00% depending on the duration of the
loan. A commitment fee of 0.125% per annum is incurred on the unused portion of
the line of credit and is allocated to the participating Funds.
During the six months ended March 31, 2000, Baron Asset Fund had an average
daily balance on the line of credit of $28,903,967 at a weighted average
interest rate of 7.50%, and Baron Growth Fund had an average daily balance of
$249,183 at a weighted average interest rate of 7.22%. At March 31, 2000, there
were no loans outstanding under the line of credit.
--------------------------------------------------------------------------------
(6) RESTRICTED SECURITIES.
A summary of the restricted securities held at March 31, 2000 follows:
<PAGE>
<TABLE>
<CAPTION>
BARON ASSET FUND
Acquisition
Name of Issuer Date Value
------------------------------------------------------------------------- ------------ ---------------
<S> <C> <C>
Common Stock
Apollo International, Inc. 07/21/99 $ 1,000,008
Chesapeake Healthcare Corp. 12/03/98 4,000,196
Correctional Mgmt. Services Corp. 12/30/98 8,000,085
Vail Resorts, Inc. Cl A 05/14/98 61,275,200
XM Satellite Radio Holdings, Inc., Cl A 01/15/99 45,857,765
Warrants
CoreComm, Ltd. Warrants Exp 05/26/2002 11/17/99 2,300,000
------------
Total Restricted Securities: (Cost $147,973,749) (2.13% of Net Assets) $122,433,254
============
</TABLE>
<TABLE>
<CAPTION>
BARON GROWTH FUND Acquisition
Name of Issuer Date Value
---------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Common Stock
Bingham Financial Services Corp. 04/27/99 $ 642,831
Warrants
CoreComm, Ltd. Warrants Exp 05/26/2002 11/17/99 5,750,000
----------
Total Restricted Securities: (Cost $5,084,370) (1.00% of Net Assets) $6,392,831
==========
</TABLE>
<TABLE>
<CAPTION>
BARON SMALL CAP FUND Acquisition
Name of Issuer Date Value
--------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Warrants
CoreComm, Ltd. Warrants Exp 05/26/2002 (Cost $1,473,750) (0.21% of Net Assets) 11/17/99 $2,300,000
==========
</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.
36
<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, 1999 and Additions Reductions
--------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
Alexander's, Inc. 350,900
AMF Bowling, Inc. 10,210,000 710,000
American Mobile Satellite Corp. 3,500,000
Avatar Holdings, Inc. 750,000 750,000
Bristol Hotels & Resorts Co. 2,100,750 2,100,750
Caliber Learning Network, Inc. 804,600 804,600
Choice Hotels Intl., Inc. 13,225,300
ChoicePoint, Inc. + 1,640,000 1,640,000
CoreComm, Ltd. # 2,205,000 1,117,500
Counsel Corp. 2,170,000 2,170,000
Cross Timbers Oil Co. 4,375,000 4,375,000
DeVry, Inc. 5,150,000 70,000
Dollar Tree Stores, Inc. 3,750,000 935,000
DVI, Inc. 1,680,000 290,000
Education Mgmt. Corp. 2,900,000
Ethan Allen Interiors, Inc. 1,639,500 610,500
Flextronics Intl. Ltd. $ 2,800,000 2,800,000 600,000
Hispanic Broadcasting Corp. 2,800,000 1,420,000
Industrie Natuzzi SPA ADR 5,687,000 1,634,100
ITT Educational Services, Inc. 2,000,000 2,000,000
Learning Tree Intl., Inc. 2,000,000 1,650,000
Libbey, Inc. 2,920,000 170,000
Manor Care, Inc. 10,400,000 2,350,000
OM Group, Inc. 2,367,500
Robert Half Intl., Inc. 7,100,000 1,000,000
Saga Comm., Inc., Cl A@ 2,937,002 734,250
Seacor Smit, Inc. 1,300,000 220,000
Smart and Final, Inc. 3,393,500 593,500
Sotheby's Holdings, Inc., Cl A 20,775,000 675,000
Southern Union Co. 2,230,000 420,000
Sun Intl. Hotels, Ltd. 3,315,000 15,000
Sunburst Hospitality Corp. 3,975,036 3,975,036
Vail Resorts, Inc., Cl A 10,066,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Mar. 31, 2000 Mar. 31, 2000 Oct. 1-Mar. 31, 2000
--------------------------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C>
Alexander's, Inc. 350,900 $ 22,282,150
AMF Bowling, Inc. 9,500,000 20,187,500
American Mobile Satellite Corp. 3,500,000 84,000,000
Avatar Holdings, Inc. 0 **
Bristol Hotels & Resorts Co. 0 **
Caliber Learning Network, Inc. 0 **
Choice Hotels Intl., Inc. 13,225,300 190,940,269
ChoicePoint, Inc. + 3,280,000 122,590,000
CoreComm, Ltd. # 3,322,500 146,189,956
Counsel Corp. 0 **
Cross Timbers Oil Co. 0 ** $ 26,000
DeVry, Inc. 5,220,000 159,210,000
Dollar Tree Stores, Inc. 2,815,000 **
DVI, Inc. 1,390,000 19,807,500
Education Mgmt. Corp. 2,900,000 41,868,750
Ethan Allen Interiors, Inc. 2,250,000 56,250,000 151,720
Flextronics Intl. Ltd. $ 5,000,000 **
Hispanic Broadcasting Corp. 1,380,000 **
Industrie Natuzzi SPA ADR 4,052,900 46,861,656
ITT Educational Services, Inc. 0 **
Learning Tree Intl., Inc. 350,000 **
Libbey, Inc. 2,750,000 75,281,250 424,800
Manor Care, Inc. 8,050,000 108,675,000
OM Group, Inc. 2,367,500 107,721,250 497,175
Robert Half Intl., Inc. 6,100,000 289,368,750
Saga Comm., Inc., Cl A@ 3,671,252 70,212,695
Seacor Smit, Inc. 1,080,000 65,205,000
Smart and Final, Inc. 2,800,000 20,825,000
Sotheby's Holdings, Inc., Cl A 20,100,000 370,593,750 2,077,500
Southern Union Co. 2,650,000 47,865,625
Sun Intl. Hotels, Ltd. 3,300,000 64,350,000
Sunburst Hospitality Corp. 0 **
Vail Resorts, Inc., Cl A 10,066,000 159,089,450
-------------- ----------
$2,289,375,551 $3,177,195
============== ==========
</TABLE>
*" Affiliated" issuers, as defined in the Investment Company Act of 1940, are
issuers in which Baron Asset Fund held 5% or more of the outstanding voting
securities as of March 31, 2000.
** As of March 31, 2000, no longer an affiliate.
+ Received 1,640,000 shares from 2:1 stock split.
# Received 1,107,500 shares from 3:2 stock split.
$ Received 2,800,000 shares from 2:1 stock split.
@ Received 734,250 shares from 5:4 stock split
BARON SMALL CAP FUND
<TABLE>
<CAPTION>
Balance of Gross Gross Sales
Shares Held on Purchases and
Name of Issuer Sep. 30, 1999 and Additions Reductions
-------------------------------- ---------------- --------------- -------------
<S> <C> <C> <C>
AVTEAM, Inc. 750,000 750,000
Career Education Corp. 893,900 106,100
Equity Marketing, Inc. 300,000 125,000 50,000
IT Group, Inc. 1,350,000 350,000
Mortons Restaurant Group, Inc. 350,000 25,000
<CAPTION>
Balance of Dividend
Shares Held on Value Income
Name of Issuer Mar. 31, 2000 Mar. 31, 2000 Oct. 1-Mar. 31, 2000
-------------------------------- ---------------- ---------------- ---------------------
<S> <C> <C> <C>
AVTEAM, Inc. 0 $ 0**
Career Education Corp. 1,000,000 35,000,000
Equity Marketing, Inc. 375,000 4,007,813
IT Group, Inc. 1,000,000 0**
Mortons Restaurant Group, Inc. 375,000 7,148,438
----------- ------
$46,156,251 $ 0
=========== ======
</TABLE>
* Affiliated issuers, as defined in the Investment Company Act of 1940, are
issuers in which Baron Small Cap Fund held 5% or more of the outstanding
voting securities as of March 31, 2000.
** As of March 31, 2000, no longer an affiliate.
37
<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
period:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
Six Months
ended
March 31, 2000 1999 1998 1997
---------------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 51.57 $ 39.96 $ 47.43 $ 35.50
------------- ----------- ---------- -----------
Income from investment operations
Net investment income (loss) (0.38) (0.30) 0.05 (0.14)
Net realized and unrealized gains
(losses) on investments 13.60 11.95 (7.52) 12.11
-------------- ----------- ---------- -----------
Total from investment operations 13.22 11.65 (7.47) 11.97
-------------- ----------- ---------- -----------
Less distributions
Dividends from net investment income 0.00 (0.04) 0.00 0.00
Distributions from net realized gains 0.00 0.00 0.00 ( 0.04)
-------------- ----------- ---------- -----------
Total distributions 0.00 (0.04) 0.00 ( 0.04)
-------------- ----------- ---------- -----------
Net asset value, end of period $ 64.79 $ 51.57 $ 39.96 $ 47.43
============== =========== ========== ===========
Total return 25.6% 29.2%* (15.7%) 33.8%
-------------- ----------- ---------- -----------
Ratios/Supplemental data
Net assets (in millions), end of period $ 5,748.2 $ 5,863.1 $ 4,410.5 $ 3,224.5
Ratio of expenses to average net assets 1.35%** 1.31% 1.32% 1.35%
Less: Ratio of interest expense to average
net assets (0.03%)** 0.00% 0.00% 0.00%
-------------- ----------- ----------- -----------
Ratio of operating expenses to average
net assets 1.32%** 1.31% 1.32% 1.35%
============== =========== =========== ===========
Ratio of net investment income (loss) to
average net assets (1.15%)** (0.57%) 0.11% (0.52%)
Portfolio turnover rate 1.57% 15.64% 23.43% 13.23%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1996 1995 1994 1993 1992 1991
--------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 29.30 $ 22.82 $ 21.91 $ 16.20 $ 14.80 $ 10.88
----------- --------- -------- -------- -------- --------
Income from investment operations
Net investment income (loss) (0.06) (0.09) (0.14) (0.13) (0.08) 0.07
Net realized and unrealized gains
(losses) on investments 6.29 7.23 1.82 6.00 1.52 4.05
----------- --------- -------- -------- -------- --------
Total from investment operations 6.23 7.14 1.68 5.87 1.44 4.12
----------- --------- -------- -------- -------- --------
Less distributions
Dividends from net investment income 0.00 0.00 0.00 0.00 (0.04) (0.20)
Distributions from net realized gains (0.03) (0.66) (0.77) (0.16) 0.00 0.00
----------- --------- -------- -------- -------- --------
Total distributions (0.03) (0.66) (0.77) (0.16) (0.04) (0.20)
----------- --------- -------- -------- -------- --------
Net asset value, end of period $ 35.50 $ 29.30 $ 22.82 $ 21.91 $ 16.20 $ 14.80
=========== ========= ======== ======== ======== ========
Total return 21.3% 32.3% 8.0% 36.5% 9.7% 38.3%
----------- --------- -------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of period $ 1,166.1 $ 290.0 $ 80.3 $ 59.9 $ 43.8 $ 47.4
Ratio of expenses to average net assets 1.40% 1.44% 1.59% 1.85% 1.68% 1.70%
Less: Ratio of interest expense to average
net assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
----------- --------- -------- -------- -------- --------
Ratio of operating expenses to average
net assets 1.40% 1.44% 1.59% 1.85% 1.68% 1.70%
=========== ========= ======== ======== ======== ========
Ratio of net investment income (loss) to
average net assets (0.29%) (0.55%) (0.71%) (0.69%) (0.53%) 0.49%
Portfolio turnover rate 19.34% 35.15% 55.87% 107.94% 95.45% 142.73%
</TABLE>
* Had the advisor not made the capital contribution, the Fund's performance
would have been reduced by 0.003%.
** Annualized.
<PAGE>
BARON GROWTH FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
Six Months
ended
March 31, 2000 1999
-------------------- -------------
<S> <C> <C>
Net asset value, beginning of period $ 29.06 $ 20.32
----------- ---------
Income from investment operations
Net investment income (loss) (0.12) (0.04)
Net realized and unrealized gains (losses) on
investments 7.08 8.82
------------ ---------
Total from investment operations 6.96 8.78
------------ ---------
Less distributions
Dividends from net investment income 0.00 (0.04)
Distributions from net realized gains (1.88) 0.00
------------ ---------
Total distributions (1.88) (0.04)
------------ ---------
Net asset value, end of period $ 34.14 $ 29.06
============ =========
Total return 25.5% 43.2%
------------ ---------
Ratios/Supplemental data
Net assets (in millions), end of period $ 637.4 $ 439.4
Ratio of total expenses to average net assets 1.36%** 1.40%
Less: Ratio of interest expense to average net assets 0.00%** (0.03%)
------------ ---------
Ratio of operating expenses to average net assets 1.36%** 1.37%
============ =========
Ratio of net investment income (loss) to average net
assets (0.81%)** (0.20%)
Portfolio turnover rate 20.03% 53.36%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996 1995*
------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 24.89 $ 18.40 $ 14.77 $ 10.00
--------- -------- -------- --------
Income from investment operations
Net investment income (loss) 0.06 0.06 0.11 0.04
Net realized and unrealized gains (losses) on
investments (4.56) 6.68 3.66 4.73
--------- -------- -------- --------
Total from investment operations (4.50) 6.74 3.77 4.77
--------- -------- -------- --------
Less distributions
Dividends from net investment income (0.02) (0.09) (0.04) 0.00
Distributions from net realized gains (0.05) (0.16) (0.10) 0.00
--------- -------- -------- --------
Total distributions (0.07) (0.25) (0.14) 0.00
--------- -------- -------- --------
Net asset value, end of period $ 20.32 $ 24.89 $ 18.40 $ 14.77
========= ======== ======== ========
Total return (18.1%) 37.1% 25.8% 47.7%
--------- -------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of period $ 315.6 $ 390.8 $ 207.2 $ 28.6
Ratio of total expenses to average net assets 1.43% 1.40% 1.54% 1.99%**
Less: Ratio of interest expense to average net assets (0.06%) 0.00% 0.00% 0.00%
--------- -------- -------- ---------
Ratio of operating expenses to average net assets 1.37% 1.40% 1.54% 1.99%**
========= ======== ======== =========
Ratio of net investment income (loss) to average net
assets 0.21% 0.37% 1.20% 1.13%**
Portfolio turnover rate 40.38% 25.17% 40.27% 40.56 %
</TABLE>
* For the period January 3, 1995 (commencement of operations) to September 30,
1995.
** Annualized.
The Fund's custodian's offset of custody fees amounted to less than $0.01 per
share in 1996 and 1995. The expense offset amounts are included in expense data
above.
38
<PAGE>
B A R O N F U N D S
--------------------------------------------------------------------------------
(9) Financial Highlights (continued)
BARON SMALL CAP FUND
Selected data for a share of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Six Months Year ended September 30,
ended ---------------------------
March 31, 2000 1999 1998
---------------------- ------------ -------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 13.37 $ 8.61 $ 10.00
------------ -------- --------
Income from investment operations
Net investment gain (loss) (0.06) (0.10) (0.02)
Net realized and unrealized loss on
investments 4.53 4.86 (1.37)
------------- -------- --------
Total from investment operations 4.47 4.76 (1.39)
------------- -------- --------
Less distributions
Dividends from net investment income 0.00 0.00 0.00
Distributions from net realized gains 0.00 0.00 0.00
------------- -------- --------
Total distributions 0.00 0.00 0.00
------------- -------- --------
Net asset value, end of period $ 17.84 $ 13.37 $ 8.61
============= ======== ========
Total return 33.4% 55.3% (13.9%)
------------- -------- --------
Ratios/Supplemental data
Net assets (in millions), end of period $ 1,085.6 $ 715.7 $ 403.7
Ratio of expenses to average net assets 1.33%** 1.34% 1.39%
Ratio of net investment loss to average net assets (0.81%)** (0.99%) (0.20%)
Portfolio turnover rate 24.18% 42.69% 59.68%
</TABLE>
** Annualized.
BARON i OPPORTUNITY FUND
Selected data for a share of beneficial interest outstanding throughout the
period:
<PAGE>
<TABLE>
<CAPTION>
For the period
February 29, 2000
(commencement of operations)
to March 31, 2000
-----------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
----------
Income from investment operations
Net investment gain 0.02
Net realized and unrealized loss on investments (0.16)
-----------
Total from investment operations (0.14)
-----------
Less distributions
Dividends from net investment income 0.00
Distributions from net realized gains 0.00
-----------
Total distributions 0.00
-----------
Net asset value, end of period $ 9.86
===========
Total return (1.4%)
-----------
Ratios/Supplemental data
Net assets (in millions), end of period $ 229.7
Ratio of total expenses to average net assets 1.91%**
Less: Expense reimbursement by investment adviser (0.41%)**
-----------
Ratio of net expenses to average net assets 1.50%**
===========
Ratio of net investment income to average net assets 2.48%**
Portfolio turnover rate 3.55%
</TABLE>
** Annualized.
39
<PAGE>
[REGISTERED LOGO]
BARON
FUNDS
767 Fifth Avenue
NY, NY 10153
