-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F1ArnGLMNxtoOFtgMnEpeTFr6INaB9YEUMtEtz3xxd30GPl/xJql90ii+yncl680 1X3YG/tcgar2tWtagTH49w== 0000810902-98-000002.txt : 19980130 0000810902-98-000002.hdr.sgml : 19980130 ACCESSION NUMBER: 0000810902-98-000002 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19980128 EFFECTIVENESS DATE: 19980128 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARON ASSET FUND CENTRAL INDEX KEY: 0000810902 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 136891420 STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-12112 FILM NUMBER: 98515737 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-05032 FILM NUMBER: 98515738 BUSINESS ADDRESS: STREET 1: 767 FIFTH AVENUE STREET 2: 24TH FL CITY: NEW YORK STATE: NY ZIP: 10153 BUSINESS PHONE: 2125832000 MAIL ADDRESS: STREET 1: 767 FIFTH AVE STREET 2: 24TH FL CITY: NEW YORK STATE: NY ZIP: 10153 485BPOS 1 BARON ASSET FUND 485BPOS File No. 33-12112 File No. 811-5032 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933[ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 14 [X] and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ] Amendment No. 15 [X] Baron Asset Fund - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) 767 Fifth Avenue, 24th Floor New York, New York 10153 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (zip code) Registrant's Telephone Number, including Area Code: (212) 583-2000 Linda S. Martinson BARON ASSET FUND 767 Fifth Avenue 24th Floor New York, New York 10153 - -------------------------------------------------------------------------------- (Name and Address of Agent for Service) Approximate Date of Proposed Public Offering: Immediately It is proposed that this filing will become effective (check appropriate box) X immediately upon filing pursuant to paragraph (b) - --- on (date) pursuant to paragraph (b) - --- 60 days after filing pursuant to paragraph (a)(1) - --- on (date) pursuant to paragraph (a)(1) - --- 75 days after filing pursuant to paragraph (a)(2) - --- on (date) pursuant to paragraph (a)(2) of rule 485 - --- Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended, Registrant has registered an indefinite number of shares of beneficial interest, $0.01 par value, of securities of the Fund, now existing or hereafter established, under the Securities Act of 1933. The Rule 24f-2 Notice for Registrant's most recent fiscal year was filed on November 28, 1997. The Registrant proposes that this amendment will become effective pursuant to Rule 485(a)(2) under the Securities Act of 1933. BARON ASSET FUND CROSS-REFERENCE SHEET Items Required by Form N-1A --------------------------- PART A - ------
Caption in Item No. Item Caption Prospectus - -------- ------------ ---------- 1. Cover Page COVER PAGE 2. Synopsis FUND EXPENSES 3. Condensed Financial FINANCIAL HIGHLIGHTS Information 4. General Description of INVESTMENT OBJECTIVE AND Registrant PHILOSOPHY; INVESTMENT POLICIES AND RISKS; GENERAL POLICIES; DISTRIBUTION PLAN; INVESTMENT PERFORMANCE; GENERAL INFORMATION 5. Management of the Fund MANAGEMENT OF THE FUNDS; INVESTMENT OBJECTIVES AND PHILOSOPHY; INVESTMENT POLICIES AND RISKS; GENERAL POLICIES; FUND EXPENSES 6. Capital Stock and Other DIVIDENDS AND DISTRIBUTIONS; Securities TAXES; GENERAL INFORMATION 7. Purchase of Securities HOW TO PURCHASE SHARES; Being Offered DETERMINING YOUR SHARE PRICE; DISTRIBUTION PLAN; GENERAL INFORMATION 8. Redemption or Repurchase HOW TO REDEEM SHARES; DETERMINING YOUR SHARE PRICE; GENERAL INFORMATION 9. Pending Legal Proceedings NOT APPLICABLE
PART B - ------
Caption in Statement of Item No. Item Caption Additional Information - -------- ------------ ----------------------- 10. Cover Page COVER PAGE 11. Table of Contents TABLE OF CONTENTS 12. General Information and NOT APPLICABLE History 13. Investment Objectives and INVESTMENT OBJECTIVES AND Policies POLICIES 14. Management of the MANAGEMENT OF THE FUNDS Registrant 15. Control Persons and MANAGEMENT OF THE FUNDS Prinicipal Holders of Securities 16. Investment Advisory and MANAGEMENT OF THE FUNDS Other Services 17. Brokerage Allocation and MANAGEMENT OF THE FUNDS Other Practices 18. Capital Stock and Other ORGANIZATION AND Securities CAPITALIZATION 19. Purchase, Redemption and MANAGEMENT OF THE FUNDS; REDEMPTION OF SHARES; NET ASSET VALUE 20. Tax Status NOT APPLICABLE 21. Underwriters MANAGEMENT OF THE FUNDS 22. Calculation of Performance CALCULATION OF PERFORMANCE Data DATA 23. Financial Statements FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
PROSPECTUS [BARON FUNDS LOGO] JANUARY 1998 BARON ASSET FUND BARON GROWTH & INCOME FUND BARON SMALL CAP FUND [GRAPHIC] [PHOTO OF RONALD BARON] WELCOME TO BARON FUNDS: Many investment strategies can be successful. Twenty-eight years experience as a securities analyst and twenty-three years as a portfolio manager have taught me there are many ways to be a successful investor. Baron Funds has chosen to be a long term investor in publicly owned businesses. Baron Funds is not a short term trader of common stocks. Baron Funds focuses on the long term fundamental prospects for the businesses in which we are investors. The Funds have often remained shareholders of companies, part owners of their businesses, for years. Regardless of stock market fluctuations. We don't even try to predict what the market will do. This because since I became interested in investing while I was still in school, I have never known or observed anyone who has been able to forecast broad market trends accurately. Baron Asset Fund, our first mutual fund, was founded in June 1987. It has been a shareholder in discount broker, mutual fund distributor Charles Schwab since 1992, in nursing homeowner/operator Manor Care since 1989, in casino hotel owner/operator Mirage Resorts since 1987, in specialized temporary help provider Robert Half since 1991 and in private college DeVry, also since 1991. Baron Asset Fund's long term performance, more than six fold appreciation since its inception, has benefited from the very strong growth experienced by these businesses during the past several years. The stock prices of all these companies have appreciated several fold since our initial purchases. We believe the prospects for these businesses, and therefore for their stocks, continue to be favorable. Past performance is no guarantee of future results. Baron Funds does not rely upon brokerage firm research, computer-based stock selections or so-called momentum investing. Baron Funds does not seek to emulate popular market indexes. The Funds' investment decisions are based upon our independent, fundamental analyses of businesses. Basics. Company visits; management, employee, customer and competitor interviews; our opinions of management talent, integrity, honesty and business strategies; and our assessments of industry prospects. Baron Funds believes management is a most critical element in determining the success of a business. We choose to invest in people, not just in buildings. We believe my long experience as a securities analyst, as well as the exten- NOT PART OF THE PROSPECTUS sive experience of our five senior analysts, Cliff Greenberg, Susan Robbins, Mitch Rubin, Matt Ervin and Morty Schaja, offer our Funds significant competitive advantage in studying, understanding and analyzing businesses and their managements. [GROUP PHOTO] Once we qualitatively identify great businesses and managements in which we would like to invest, we value those businesses quantitatively. Baron Funds seeks to purchase either debt or equity issued by companies with compelling investment characteristics before their business prospects are widely recognized. Baron Funds seeks to purchase securities at prices which offer our shareholders the potential to earn a return of at least 50% over a two-year period. We are willing to invest in income producing securities such as real estate investment trusts or convertible bonds which offer us the potential to earn at least 30% over a two-year period. We will accept a lower potential return on income generating securities because we regard these securities as less risky. Baron Asset Fund's long term performance has so far met our stated objective of doubling our shareholders money every three to five years. Of course, we cannot guarantee that we will continue to be able to achieve these results. Baron Funds invests in growing, well managed, very profitable businesses. Baron Funds focuses its investments in businesses managed by hardworking, ethical, entrepreneurial executives. These companies are usually small and mid-sized. They are nearly always growing their businesses' intrinsic values, e.g. earnings, cash flow or asset value, at least 15-20% per year. These companies are in emerging, job creating sunrise industries, industries in which our children are likely to work, not industries in which our parents and grandparents were employed. Baron Funds currently has significant investments in health care, education, financial services, government privatization services, communications, media and entertainment, casino gaming, temporary help and other outsourced business services. These industries are favorably impacted by strong ""megatrends," long lasting economic trends often caused by demographics, societal changes and legislative initiatives and programs. These areas of investment focus represent several of our investment themes. Because investors have differing investment needs and risk tolerances, we currently offer three Funds to help you achieve your long term financial goals. NOT PART OF THE PROSPECTUS BARON ASSET FUND, A NO-LOAD, SMALL CAP FUND Baron Asset Fund, founded June 12, 1987, invests primarily in small and mid-sized companies. We believe the market is least efficient when valuing assets and growth prospects of these companies. This is because most investors and securities analysts are most interested in larger companies. They also seem to be most interested in current events and company earnings results for the next three months, information they believe will influence stock prices in the near term. This provides our Fund with investment opportunity since we focus, instead, on the prospects for businesses over the long term, e.g. at least three to five years. Baron Asset Fund is suitable for investors seeking long term capital appreciation. BARON GROWTH & INCOME FUND, A NO-LOAD, GROWTH AND INCOME FUND Baron Growth & Income Fund, founded January 3, 1995, also invests primarily in common stocks of well managed, fast growing, small and mid-sized companies. In addition, it currently invests 25-30% of its assets in convertible debt securities and dividend paying common stocks which offer both attractive yields and growth. A large portion of these income producing securities are currently real estate investment trusts. Baron Growth & Income Fund could achieve higher returns than most growth and income funds due to its investments in fast growing smaller companies; it should be less volatile than most small cap growth funds due to its significant investments in income producing securities. This Fund is suitable for investors seeking capital appreciation but who desire less risk than is usually associated with investing in small cap funds. BARON SMALL CAP FUND, A NO-LOAD, SMALL CAP FUND Baron Small Cap Fund, founded October 1, 1997, invests primarily in small companies. The Fund's investments fall into three categories: small cap stocks that have significant long-term growth prospects that can be purchased at attractive prices because their prospects have not yet been appreciated by investors; smaller companies that have strong long-term franchises but have disappointed investors with short-term results and can be currently purchased at value prices; and special situations, including spin-offs and recapitalizations, where significant shareholder displacement and a lack of investor awareness create opportunities to purchase great businesses at discount prices. Baron Small Cap Fund is suitable for investors seeking long term capital appreciation who understand the risks associated with investing in smaller companies. NOT PART OF THE PROSPECTUS 1997 WAS AN EVENTFUL YEAR FOR BARON FUNDS Baron Funds performed well in 1997. Assets under management in the Funds increased substantially during the year. We attribute increased in shareholder interest in our Funds to the strong long term performance of our Funds; significant favorable media attention to our Funds; increased interest by financial planners in our Funds; and, the ability of investors to conveniently purchase our Funds without any fees through mutual fund marketplaces, most importantly Charles Schwab's Mutual Fund OneSource and Fidelity's FundsNetwork. In October, Baron Funds successfully introduced Baron Small Cap Fund, the firm's third, no-load, mutual fund. The new fund was sold by subscription during September to customers of Charles Schwab's OneSource. It has since been made available broadly to all investors. 401(k) plans increase investments in Baron Asset Fund. During the past two years, a number of large companies have begun to offer their employees the option to invest their 401(k) plan retirement assets in Baron Asset Fund. Employees of Northern Telecom have invested more than $120 million in Baron Asset Fund and are now the Fund's largest shareholder. In September, Bechtel Corporation became the second large corporation to make a significant investment in Baron Asset Fund on behalf of its employees' 401(k) retirement plan. Cincinnati Bell, Nokia, Hershey Foods, VF Corporation, Scotts, Allegience, Jostens, Apria and Spear, Leeds & Kellogg, have also recently added Baron Asset Fund as an investment option for their employees' 401(k) plans. The Fund is now also available to plan sponsors through programs at Charles Schwab, Fidelity, Vanguard, American Express, Scudder Stevens & Clark, Sunguard and New York Life. On September 30, 1997, about 11% of Baron Asset Fund's shares were owned by employee retirement plans. BARON FUNDS RECEIVES VERY FAVORABLE MEDIA COVERAGE During the past year, we have been mentioned in more articles than at any time I can remember. Most coverage has been quite favorable. We believe heightened press interest has been helpful by allowing our shareholders to learn more about Baron Funds, to assist them, as do, we hope, our shareholder letters, quarterly conference calls with financial advisors and annual investment conferences, ""kick the tires" of their investments in Baron Funds. Recent articles' coverage can be broadly classified into four topics: mutual fund supermarkets; Baron Funds' investment process; the introduction of the new Baron Small Cap Fund; and top performing mutual funds. Crain's New York; USA Today; Smart Money; The New York Times; and Fund Marketing Alert described mutual fund ""supermarkets" and the rapid growth of this dis- NOT PART OF THE PROSPECTUS tribution channel. Baron Funds was featured prominently since it was frequently described as a prime beneficiary of Schwab's OneSource and Fidelity's FundsNetwork. Baron Asset Fund has been included on Schwab's Select List virtually since that list's inception. Investor's Business Daily, Forbes, and Smart Money wrote about our investment process, how we choose businesses in which to invest. Both described our reliance upon long lived ""megatrends" and investment themes. The introduction of Baron Small Cap Fund on September 30, 1997 received amazingly broad coverage. The Street.com; Dow Jones Newswire; The Wall Street Journal; Barron's; Money; Reuters; Sage.AOL; Fundsnet; Bloomberg News and Smart Money Interactive all wrote about our new fund and its portfolio manager, Cliff Greenberg. Baron Asset Fund was also mentioned in recent articles in Consumers Digest; Funds Net Digest; Entrepreneur; Your Money; Fortune; Forbes; USA Today; and Money. Finally, Smart Money Interactive on October 31, in an outlying article, wrote about Baron Funds' annual investment conference in an article modestly titled, ""Mr. Popularity." NEARLY 700 SHAREHOLDERS ATTEND SIXTH ANNUAL BARON INVESTMENT CONFERENCE, NEW YORK CITY, OCTOBER 24 [PHOTO OF BAND] [GROUP PHOTO] The First Annual Baron Investment Conference in 1992 had about 80 guests...65 of whom were family and friends I had to nearly beg to attend. Attendance at the Sixth Annual Baron Investment Conference on October 24th in New York City by shareholders and financial planners exceeded 700 persons, a significant increase from last year. Again, shareholders came from both near and far, this year from as far away as Hawaii and Europe. We greatly appreciate your interest. NOT PART OF THE PROSPECTUS OUTLOOK FOR 1998 Although we do not believe it is possible to predict how the stock market will perform either next year or any other year, we believe Baron Funds' 1998 investment performance could approximate the profits growth of the businesses in which we are shareholders. In the long term, we believe that prices of securities mirror the value of their underlying businesses. While the U.S. economy is currently growing moderately, we expect most companies in which we are shareholders to achieve strong profits growth in 1998. We are therefore optimistic that 1998 could be another favorable year for Baron Funds. Of course, investing in small cap stocks is inherently risky. Please see pages 9-17 of the prospectus for a discussion of the investment risks. Our past performance should not be considered a predictor of future results. [PHOTO OF RONALD BARON] THANK YOU FOR INVESTING IN BARON FUNDS We recognize it cannot be an easy decision for most individuals and their families when choosing mutual funds in which to invest. It must be especially difficult when you must consider how to invest your hard earned savings to fund your retirement, your children's education or a new home. We understand the task must be even more daunting since there are now more mutual funds than there are stocks. We hope our shareholder letters, interviews in the press and annual investment conferences have made it easier for you to determine if Baron Funds represents an appropriate investment for you and your family. We want to thank you for choosing to join us as fellow shareholders in Baron Funds. We will continue to work hard to justify your confidence. Please feel free to write of call if you have any questions or comments. We are looking forward to a successful 1998. Sincerely, Ronald Baron President January 16, 1998 Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. Please see the prospectus regarding special risks associated with investing in small companies. NOT PART OF THE PROSPECTUS BARON ASSET FUND BARON GROWTH & INCOME FUND BARON SMALL CAP FUND 767 Fifth Avenue, New York, New York 10153 1-800-99-BARON 212-583-2100 BARON ASSET FUND, started in June of 1987, BARON GROWTH & INCOME FUND, started in January of 1995, and BARON SMALL CAP FUND, started in September of 1997, are no-load, open-end, diversified management investment companies, commonly referred to as mutual funds. BARON ASSET FUND'S investment objective is to seek capital appreciation through investments in securities of small and medium sized companies, with undervalued assets or favorable growth prospects. BARON GROWTH & INCOME FUND'S investment objective is to seek capital appreciation with income as a secondary objective. BARON SMALL CAP FUND'S investment objective is to seek capital appreciation through investments primarily in securities of small companies. These Funds are described in this Prospectus and are referred to individually as a 'Fund' and collectively as the 'Funds' or 'Baron Funds.' The Funds are no-load funds. They sell and redeem their shares at net asset value without any sales charges or redemption fees. The minimum initial investment is $2,000. There is no minimum for subsequent purchases. The minimum for purchases made pursuant to the Funds' Automatic Investment Plan is $500 with a $50 monthly minimum for subsequent purchases. This Prospectus sets forth concisely the essential information a prospective investor should know before investing. Investors are advised to read this Prospectus and retain it for future reference. A Statement of Additional Information, dated January 28, 1998, containing additional and more detailed information about the Funds, has been filed with the Securities and Exchange Commission and is hereby incorporated by (continued on next page) THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. January 28, 1998 1 PROSPECTUS (continued from previous page) reference into this Prospectus. A copy of the Statement of Additional Information may be obtained without charge by writing or calling the Funds at the address and telephone number set forth above. A copy of this Prospectus and the Statement of Additional Information is also available through the Funds' website at http://www.baronfunds.com. The Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains the Prospectus, the Statement of Additional Information, material incorporated by reference, and other information regarding the Funds. 2 PROSPECTUS [FN] Baron Asset Fund is a Massachusetts business trust. All persons dealing with the trust must look solely to the property of this trust for the enforcement of any claims against this trust. Neither the trustees, officers, agents nor shareholders of the trust assume any personal liability in connection with its business or assume any personal liability for obligations entered into on its behalf. TABLE OF CONTENTS Fund Expenses............................................................ 4 Financial Highlights..................................................... 6 Investment Objective and Philosophy...................................... 8 Investment Policies and Risks............................................ 9 Investment Performance................................................... 18 Management of the Fund................................................... 19 Distribution Plan........................................................ 23 How to Purchase Shares................................................... 23 How to Redeem Shares..................................................... 25 Determining Your Share Price............................................. 28 Dividends and Distributions.............................................. 29 Taxes.................................................................... 29 General Information...................................................... 30 Management Discussion and Analysis....................................... 32 The net asset value per share and the value of a shareholder's holding in the Funds will vary with economic and market conditions. The dividends paid by each Fund will increase or decrease in relation to the income received by that Fund from its investments and the expenses incurred by that Fund. There is no assurance that the Funds will achieve their respective objectives. The Funds do not purport to offer a complete investment program to which investors should commit all of their investment capital. Please see the section entitled 'Investment Policies and Risks' starting on page 8 for a discussion of the risks associated with the Funds. No person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer contained in the Prospectus and, if given or made, such information or representations may not be relied upon as authorized by the Funds, their Investment Adviser or any affiliate thereof. This Prospectus does not constitute an offer to sell or a solicitation of any offer to buy securities in any state to any person to whom it is unlawful to make such offer in such state. The Funds have registered some or all of the shares intended to be sold pursuant to this Prospectus under state securities laws. 3 PROSPECTUS FUND EXPENSES SHAREHOLDER TRANSACTION EXPENSES: Sales Load Imposed on Purchases..................................... NONE Redemption Fee...................................................... NONE Deferred Sales Load................................................. NONE Exchange Fees....................................................... NONE There are additional charges associated with retirement accounts and wire transfers. Purchases and redemptions may also be made through broker-dealers or others who may charge a commission or other transaction fee for their services. (See 'How to Purchase Shares' and 'How to Redeem Shares') ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets):
TOTAL MANAGEMENT OTHER OPERATING FEES 12B-1 FEES EXPENSES EXPENSES BARON ASSET FUND 1.00% 0.25% 0.10% 1.35% BARON GROWTH & INCOME FUND 1.00% 0.25% 0.15% 1.40%* BARON SMALL CAP FUND 1.00% 0.25% 0.25% 1.50%*
The expenses set forth in the table above for Baron Asset Fund and Baron Growth & Income Fund are based on actual expenses incurred for the fiscal year ended September 30, 1997. Because Baron Small Cap Fund is a new fund, 'other expenses' is based on estimated amounts for the current fiscal year. *The Adviser will reduce its fee to the extent required to limit Baron Growth & Income Fund's and Baron Small Cap Fund's operating expenses to 1.5%. 4 PROSPECTUS EXAMPLE A Shareholder would pay the following expenses on a $1,000 investment, assuming (1) a 5% annual return, and (2) redemption at the end of each time period: YEAR 1 3 5 10 BARON ASSET FUND $14 $43 $74 $162 BARON GROWTH & INCOME FUND $14 $44 $77 $168 BARON SMALL CAP FUND $15 $47 $82 $179 This information is provided to assist an investor in understanding the various costs and expenses that an investor will bear, directly or indirectly, as a shareholder of each of the Funds. This information should not be considered a representation of past or future expenses, as actual expenses fluctuate and may be greater or less than those shown. The example assumes a 5% annual return as required by SEC regulations applicable to all mutual funds. The actual performance of the Funds will vary and may result in an actual return greater or less than 5%. The Funds have a plan of distribution pursuant to Rule 12b-1 pursuant to which the Funds pay the Distributor a fee for distribution-related services at the annual rate of .25% of the respective Fund's average daily net assets. As a result, long-term shareholders of the Funds may pay more than the economic equivalent of the maximum front-end sales load permitted by the rules of the National Association of Securities Dealers, Inc. ('NASD'). For a description of the various costs and expenses incurred in the operation of the Funds, as well as any expense reimbursement or reduction arrangements, see 'Management of the Funds' and 'Distribution Plan.' 5 PROSPECTUS FINANCIAL HIGHLIGHTS The following tables show, on a per share basis, the changes in net asset value, total return and ratios/supplemental data for a share of beneficial interest of Baron Asset Fund and Baron Growth & Income Fund for each period. The information was audited by Coopers & Lybrand L.L.P., the Funds' independent accountants. Their report and the Financial Statements for the Funds are included in the Funds' Annual Report and the Statement of Additional Information, which are available from the Distributor. The following information should be read in conjunction with the Financial Statements and related notes. BARON ASSET FUND
- ------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED SEPTEMBER 30, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987* - ------------------------------------------------------------------------------------------------------------------------------ Net Asset Value Beginning of Year...... $ 35.50 $ 29.30 $22.82 $21.91 $16.20 $14.80 $10.88 $17.22 $12.98 $11.95 $10.00 ------ -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income (Loss)................. (0.14) (0.06) (0.09) (0.14) (0.13) (0.08) 0.07 0.21 0.13 0.05 0.07 Net Realized and Unrealized Gains (Losses) on Investments............ 12.11 6.29 7.23 1.82 6.00 1.52 4.05 (5.14) 4.81 1.18 1.88 ------ -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Total from Investment Operations............. 11.97 6.23 7.14 1.68 5.87 1.44 4.12 (4.93) 4.94 1.23 1.95 ------ -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ LESS DISTRIBUTIONS Dividends from Net Investment Income...... 0.00 0.00 0.00 0.00 0.00 (0.04) (0.20) (0.16) (0.05) (0.03) 0.00 Distributions from Net Realized Gains......... (0.04) (0.03) (0.66) (0.77) (0.16) 0.00 0.00 (1.25) (0.65) (0.17) 0.00 ------ -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Total Distributions..... (0.04) (0.03) (0.66) (0.77) (0.16) (0.04) (0.20) (1.41) (0.70) (0.20) 0.00 ------ -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Net Asset Value, End of Year................... $ 47.43 $ 35.50 $29.30 $22.82 $21.91 $16.20 $14.80 $10.88 $17.22 $12.98 $11.95 ------ -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL RETURN............ 33.8% 21.3% 32.3% 8.0% 36.5% 9.7% 38.3% (30.7%) 39.9% 10.7% 19.5% ------ -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Year................... $ 3,224.5 $1,166.1 $290.0 $ 80.3 $ 59.9 $ 43.8 $ 47.4 $ 40.0 $ 47.7 $ 11.7 $ 3.9 Ratio of Expenses to Average Net Assets..... 1.3% 1.4% 1.4% 1.6% 1.8% 1.7% 1.7% 1.8% 2.1% 2.5% 2.8%** Ratio of Net Investment Income (Loss) to Average Net Assets..... (0.5%) (0.3%) (0.5%) (0.7%) (0.7%) (0.5%) 0.5% 1.5% 1.3% 0.5% 1.9%** Portfolio Turnover Rate................... 13.2% 19.3% 35.2% 55.9% 107.9% 95.5% 142.7% 97.8% 148.9% 242.4% 84.7% Average per share commission rate paid***................ $ 0.0600 $ 0.0600 - ---------------------------------------------------------------------------------------- * For the period June 12, 1987 (commencement of operations) to September 30, 1987. ** Annualized. *** Disclosure required for fiscal years beginning after September 1, 1995. BARON ASSET FUND'S Adviser and/or Baron Capital reimbursed Baron Asset Fund for expenses aggregating $8,561 (less than $.01 per share) in 1990, $27,315 ($.01 per share) in 1989, $83,219 ($.11 per share) in 1988, and $36,330 ($.20 per share) in 1987. The reimbursement amounts are excluded from the expense data above.
6 PROSPECTUS BARON GROWTH & INCOME FUND
- ---------------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, 1997 1996 1995* - ---------------------------------------------------------------------------------------- Net Asset Value Beginning of Year $ 18.40 $ 14.77 $10.00 ---------- ---------- ------ INCOME FROM INVESTMENT OPERATIONS Net Investment Income.................................... 0.06 0.11 0.04 Net Realized and Unrealized Gains on Investments......................................... 6.68 3.66 4.73 ---------- ---------- ------ Total from Investment Operations......................... 6.74 3.77 4.77 ---------- ---------- ------ LESS DISTRIBUTIONS Dividends from Net Investment Income..................... (0.09) (0.04) 0.00 Distributions from Net Realized Gains.................... (0.16) (0.10) 0.00 ---------- ---------- ------ Total Distributions...................................... (0.25) (0.14) 0.00 ---------- ---------- ------ Net Asset Value, End of Year............................. $ 24.89 $ 18.40 $14.77 ---------- ---------- ------ TOTAL RETURN............................................. 37.1% 25.8% 47.7% ---------- ---------- ------ RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Year.................... $390.8 $207.2 $28.6 Ratio of Expenses to Average Net Assets.................. 1.4% 1.5% 2.0%** Ratio of Net Investment Income to Average Net Assets..... 0.4% 1.2% 1.1%** Portfolio Turnover Rate.................................. 25.2% 40.3% 40.6% Average per share commission rate paid***................ $ 0.0600 $ 0.0600 - ---------------------------------------------------------------------------------------- * For the period January 3, 1995 (commencement of operations) to September 30, 1995. ** Annualized. *** Disclosure required for fiscal years beginning after September 1, 1995. Baron Growth & Income Fund's Custodian offset custody fees of $5,252 (less than $0.01 per share) in 1996 and $12,003 (less than $0.01 per share) in 1995. The expense offset amount is included in the expense data above.
BARON SMALL CAP FUND (UNAUDITED)
- ---------------------------------------------------------------------------------------- 1997* - ---------------------------------------------------------------------------------------- Net Asset Value Beginning of Period........................................... $ 10.00 --------- INCOME FROM INVESTMENT OPERATIONS Net Investment Loss........................................................... (0.01) Net Realized and Unrealized Gains on Investments.............................. 0.32 --------- Total from Investment Operations.............................................. 0.31 --------- 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................................................ $ 10.31 --------- TOTAL RETURN.................................................................. 3.1% --------- RATIOS/SUPPLEMENTAL DATA Net Assets (in millions), End of Period....................................... $285.3 Ratio of Expenses to Average Net Assets....................................... 1.5% Ratio of Net Investment Income to Average Net Assets.......................... (0.4%) Portfolio Turnover Rate....................................................... 13.0% Average per share commission rate paid........................................ $ 0.0600 - ---------------------------------------------------------------------------------------- * For the period October 1, 1997 (commencement of operations) to December 31, 1997.
7 PROSPECTUS INVESTMENT OBJECTIVES AND PHILOSOPHY The investment objective of BARON ASSET FUND is to seek capital appreciation through investments in securities of small and medium sized companies with undervalued assets or favorable growth prospects. Production of income, if any, is incidental to this objective. The investment objective of BARON GROWTH & INCOME FUND is to seek capital appreciation with income as a secondary objective. The investment objective of BARON SMALL CAP FUND is to seek capital appreciation through investments primarily in securities of small companies. These investment objectives are fundamental and, as such, may not be changed without the approval of a majority of the respective Fund's outstanding shares. There is no assurance that the Funds will achieve their investment objectives. Investment decisions are made by the Funds' investment adviser, BAMCO, Inc. (the 'Adviser'). BARON ASSET FUND and BARON SMALL CAP FUND seek to achieve their investment objectives by investing their assets in diversified portfolios of primarily common stocks. BARON GROWTH & INCOME FUND seeks to achieve its investment objective by investing in equity and debt securities. BARON ASSET FUND and BARON GROWTH & INCOME FUND invest primarily in the securities of small sized companies with market capitalizations of approximately $100 million to $1 billion and medium sized companies with market values of $1 billion to $2 billion. BARON SMALL CAP FUND will invest at least 65% of its total assets, measured at cost, in the securities of smaller companies with market values of up to $1 billion. Although Baron Funds invest primarily in small and medium sized companies, the Funds will not sell positions just because their market values have increased. The other kinds of investments each Fund makes and the risks associated therewith are discussed starting on page 9 in connection with the Funds' investment policies. The Funds seek to purchase securities judged by their Adviser to have favorable price to value characteristics based on the Adviser's assessment of their prospects for future growth and profitability. The Adviser seeks securities that the Adviser believes have the potential to increase in value at least 50% over two subsequent years, although that goal may not be achieved. As a guide in selecting such investments, the Adviser studies and considers such fundamentals as business profitability, balance sheet strength, undervalued and unrecognized assets, price multiples of free cash flow and income, perceived management skills, unit growth, and the potential to capitalize upon anticipated economic trends. Securities are selected for investment after thorough research of the issuers, the 8 PROSPECTUS industries in which they operate, and their managements. The Funds invest principally in businesses for the long term; they are not short-term traders of securities. When the Adviser determines that opportunities for profitable investments are limited or that adverse market conditions exist and believes that investing for temporary defensive purposes is appropriate, all or a portion of the Funds' assets may be invested in money market instruments, which include U.S. Government securities, certificates of deposit, time deposits, bankers' acceptances, short-term investment grade corporate bonds and other short-term debt instruments, and repurchase agreements. Investment grade obligations would be classified at the time of the investment within the four highest ratings of Standard & Poor's Corporation ('S&P') or Moody's Investor's Service, Inc. ('Moody's'), or, if unrated, would be determined by the Adviser to be of comparable high quality and liquidity. The Funds may also invest in money market instruments in anticipation of investing cash positions or of meeting redemptions. To the extent the Funds are so invested their investment objectives may not be achieved. INVESTMENT POLICIES AND RISKS BARON ASSET FUND AND BARON SMALL CAP FUND In seeking to achieve their investment objective of capital appreciation, BARON ASSET FUND and BARON SMALL CAP FUND invest primarily in common stocks but may also invest in other equity-like securities such as convertible bonds and debentures, preferred stocks, warrants and convertible preferred stocks. Securities are selected solely for their capital appreciation potential, and investment income is not a consideration. BARON GROWTH & INCOME FUND BARON GROWTH & INCOME FUND seeks capital appreciation and income by investing in equity and debt securities. The proportion of BARON GROWTH & INCOME FUND'S assets invested in each type of security will vary depending entirely on the Adviser's view of then-existing investment opportunities and economic conditions. The Fund will usually be more heavily invested in equity securities than debt securities, but at other times may have a large portion of its assets invested in debt securities, often with equity characteristics. The portion of the portfolio invested in equity securities is comprised of common stocks and other equity-like securities such as convertible bonds and debentures, preferred stocks, warrants and convertible preferred stocks. The debt security portion of 9 PROSPECTUS the portfolio may include notes, bonds, and money market instruments. The debt securities generally will have equity-like characteristics but may consist of all varieties of corporate debt, including the debt of financially distressed companies, debt convertible into equity, and debt issued or guaranteed by the U.S. government or its agencies or instrumentalities, without restriction as to duration. There is no minimum rating for debt securities. Equity securities are purchased for their capital appreciation potential, but may also be purchased for income purposes because of their dividends. Debt securities are purchased for both their income potential and their capital appreciation opportunities. GENERAL POLICIES SMALL AND MEDIUM SIZED COMPANIES BARON ASSET FUND and BARON GROWTH & INCOME FUND invest primarily in small to medium sized companies with market values between $100 million and $2 billion. BARON SMALL CAP FUND invests in primarily smaller sized companies with market values up to $1 billion, although the Fund may increase the market capitalization in the future. The Adviser believes there is more potential for capital appreciation in smaller companies, but there also may be more risk. Securities of smaller companies may not be well known to most investors and may be thinly traded. There is more reliance on the skills of a company's management and on their continued tenure. Investments may be attractively priced relative to the Adviser's assessment of a company's growth prospects, management expertise, and business niche, yet have modest or no current cash flows or earnings. Although the Adviser concentrates on a company's growth prospects, it also focuses on cash flow, asset value and reported earnings. This investment approach requires a long-term outlook and may require shareholders to assume more risk and to have more patience than investing in the securities of larger, more established companies. From time to time the Adviser may purchase securities of larger, more widely followed companies for any of the Funds if it believes such investments meet the Adviser's investment criteria and the Funds' investment objectives. The Funds may invest up to 35% of their respective total assets in larger companies if the Adviser perceives an attractive opportunity in a larger company. The Funds may continue to make investments in a company even though its market capitalization has increased beyond the limits stated, if, in the Adviser's judgment, the company is still an attractive investment. Equity securities may fluctuate in value, often based on factors unrelated to the value of the issuer or its securities. Since convertible securities 10 PROSPECTUS combine the investment characteristics of both bonds and common stocks, the Funds absorb the market risks of both stocks and bonds. The combination does, however, make the investment less sensitive to interest rate changes than straight bonds of comparable maturity and quality. Because of these factors, convertible securities are likely to perform differently than broadly-based measures of the stock and bond markets. DEBT SECURITIES The debt securities in which the Funds may invest include rated and unrated securities and convertible instruments. In making investment selections, the Adviser, in addition to using nationally recognized statistical rating organizations ('NRSROs'), also makes its own independent judgments about a security and its issuer. Securities which are not rated by an NRSRO are purchased based solely on the Adviser's assessment of the security and its issuer. BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may invest up to 35% of their respective total assets in non-investment grade debt securities, commonly referred to as 'junk bonds.' There is no minimum rating for the debt securities that may be purchased for those Funds. Lower rated securities may have a higher yield and the potential for a greater return than investment grade securities but may also have more risk. Lower rated securities are generally meant for longer-term investing and may be subject to certain risks with respect to the issuing entity and to market fluctuations. The NRSROs may characterize these securities as speculative, with moderate or little protection as to the payment of interest and principal. See the Statement of Additional Information for a general description of NRSRO ratings of debt obligations. The ratings by these NRSROs represent their opinions as to the quality of the debt obligations which they undertake to rate. It should be emphasized that ratings are relative and subjective, and although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market value risks of these securities. The Adviser will also evaluate the securities and the ability of the issuers to pay interest and principal. The Fund's ability to achieve its investment objective may be more dependent on the Adviser's credit analysis than might be the case with higher rated securities. The market price and yield of lower rated securities are generally more volatile than those of higher rated securities. Factors adversely affecting the market price and yield of these securities will adversely affect the Fund's net asset value. The trading market for these securities may be less liquid than that of higher rated securities. Companies that issue lower rated securities may be highly leveraged or may have unstable earnings, and consequently the 11 PROSPECTUS risk of the investment in the securities of such issuers may be greater than with higher rated securities. With respect to debt securities generally, the interest bearing features of such securities carry a promise of income flow, but the price of the securities are inversely affected by changes in interest rates and are therefore subject to the risk of market price fluctuations. The market values of debt securities may also be affected by changes in the credit ratings or financial condition of the issuers. BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND from time to time may also purchase indebtedness and participations therein, both secured and unsecured, of debtor companies in reorganization or financial restructuring. Such indebtedness may be in the form of loans, notes, bonds or debentures. Participations normally are made available only on a nonrecourse basis by financial institutions, such as banks or insurance companies, or by governmental institutions, such as the Resolution Trust Corporation or the Federal Deposit Insurance Corporation or the Pension Benefit Guaranty Corporation. When the Funds purchase a participation interest they assume the credit risk associated with the bank or other financial intermediary as well as the credit risk associated with the issuer of any underlying debt instrument. The Funds may also purchase trade and other claims against, and other unsecured obligations of, such debtor companies, which generally represent money due a supplier of goods or services to such company. Some debt securities purchased by the Funds may have very long maturities. The length of time remaining until maturity is one factor the Adviser considers in purchasing a particular indebtedness. The purchase of indebtedness of a troubled company always involves a risk as to the creditworthiness of the issuer and the possibility that the investment may be lost. The Adviser believes that the difference between perceived risk and actual risk creates the opportunity for profit which can be realized through thorough analysis. There are no established markets for some of this indebtedness and it is less liquid than more heavily traded securities. Indebtedness of the debtor company to a bank are not securities of the banks issuing or selling them. The Funds may purchase loans from national and state chartered banks as well as foreign ones. The Funds may invest in senior indebtedness of the debtor companies, although on occasion subordinated indebtedness may also be acquired. The Funds may also invest in distressed first mortgage obligations and other debt secured by real property. The Funds do not currently anticipate investing more than 5% of their respective assets in trade and other claims. 12 PROSPECTUS BARON GROWTH & INCOME FUND may invest in zero-coupon, step-coupon, and pay-in-kind securities. These securities are debt securities that do not make regular interest payments. Zero-coupon and step-coupon securities are sold at a deep discount to their face value; pay-in-kind securities pay interest through the issuance of additional securities. The market value of these debt securities generally fluctuates in response to changes in interest rates to a greater degree than interest-paying securities of comparable term and quality. OPTIONS BARON ASSET FUND may, in certain market conditions, use options to defer recognition of unrealized gains in the portfolio and to take advantage of perceived investment opportunities. BARON ASSET FUND may write (sell) call options or buy put options on specific securities BARON ASSET FUND owns or may be deemed covered where, in the Adviser's judgment, there may be temporary downward pressure on the security. The Adviser does not expect options transactions to be a significant part of BARON ASSET FUND'S investment program. BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may purchase put and call options and write (sell) covered put and call options on equity and/or debt securities. A call option gives the purchaser of the option the right to buy, and when exercised obligates the writer to sell, the underlying security at the exercise price. A put option gives the purchaser of the option the right to sell, and when exercised obligates the writer to buy, the underlying security at the exercise price. The writing of put options will be limited to situations where the Adviser believes that the exercise price is an attractive price at which to purchase the underlying security. A put option sold by a Fund would be considered covered by the Fund's placing cash or liquid securities in a segregated account with the custodian in an amount necessary to fulfill the obligation undertaken. Options may fail as hedging techniques in cases where the price movements of the securities underlying the options do not follow the price movements of the portfolio securities subject to the hedge. Gains on investments in options depend on the Adviser's ability to predict correctly the direction of stock prices, interest rates, and other economic factors. The Adviser could be wrong in its predictions. Where a liquid secondary market does not exist, the Fund would likely be unable to control losses by closing its position. The Funds may engage in options transactions on specific securities that may be listed on national securities exchanges or traded in the over-the-counter market. Options not traded on a national securities exchange are treated as illiquid securities and may be considered to be 'derivative securities.' Options transactions will not exceed 25% of BARON GROWTH & 13 PROSPECTUS INCOME FUND'S or BARON SMALL CAP FUND'S net assets, as measured by the securities covering the options, or 5% of net assets, as measured by the premiums paid for the options, at the time the transactions are entered into. BORROWINGS The Funds may borrow up to 5% of their respective net assets for extraordinary or emergency temporary investment purposes or to meet redemption requests which might otherwise require an untimely sale of portfolio securities. In addition, BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may borrow for other short-term purposes. To the extent a Fund borrows, it must maintain continuous asset coverage of 300% of the amount borrowed. BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND will not borrow in an amount exceeding 25% of the value of their respective total assets, including the amount borrowed, as of the time the borrowing is made. Such borrowing has special risks. Any amount borrowed will be subject to interest costs that may or may not exceed the appreciation of the securities purchased. As a form of borrowing, BARON GROWTH & INCOME FUND may engage in reverse repurchase agreements with certain banks or non-bank dealers, where it sells a security and simultaneously agrees to buy it back later at a mutually agreed upon price. If it engages in reverse repurchase agreements BARON GROWTH & INCOME FUND will maintain a segregated account consisting of liquid assets or highly marketable securities to cover its obligations. Reverse repurchase agreements may expose the Fund to greater fluctuations in the value of its assets. SHORT SALES AGAINST THE BOX For the purpose of either protecting or deferring unrealized gains on portfolio securities, BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may make short sales 'against the box' where the Fund sells short a security it already owns or has the right to obtain without payment of additional consideration an equal amount of the same type of securities sold. The proceeds of the short sale will be held by the broker until the settlement date, at which time the Fund delivers the security to close the short position. If the Fund sells securities short against the box, it may protect unrealized gains, but will lose the opportunity to profit on such securities if the price rises. BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND will not sell short against the box in excess of 25% of their respective net assets. 14 PROSPECTUS LENDING The Funds may lend their portfolio securities to broker-dealers and other institutions as a means of earning additional income. In lending their portfolio securities, the Funds may incur delays in recovery of loaned securities or a loss of rights in the collateral. To minimize such risks, such loans will only be made if the Funds deem the other party to be of good standing and determines that the income justifies the risk. BARON ASSET FUND will not lend more than 10% of its total assets and BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND will not lend more than 25% of their respective total assets. ILLIQUID SECURITIES BARON ASSET FUND may invest up to 10%, and BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND may invest up to 15%, of their respective net assets in securities that are not readily marketable or are otherwise restricted. The absence of a trading market could make it difficult to ascertain a market value for illiquid positions. A Fund's net asset value could be adversely affected if there were no ready buyer at an acceptable price at the time the Fund decided to sell. Time-consuming negotiations and expenses could occur in disposing of the shares. FOREIGN SECURITIES The Funds may invest up to 10% of their respective total assets directly in the securities of foreign issuers which are not publicly traded in the U.S. and may also invest in foreign securities in domestic markets through depositary receipts without regard to this limitation. The Adviser currently intends to invest not more than 10% of the Funds' assets in foreign securities, including both direct investments and investments made through depositary receipts. These securities may involve additional risks not associated with securities of domestic companies, including exchange rate fluctuations, political or economic instability, the imposition of exchange controls, or expropriation or confiscatory taxation. Issuers of foreign securities are subject to different, often less detailed, accounting, reporting and disclosure requirements than are domestic issuers. SHORT-TERM TRADING AND TURNOVER The Funds may engage in short-term trading where the Adviser believes that the anticipated gains outweigh the costs of short-term trading. The Adviser expects that the average turnover rate of the Funds' portfolios should not exceed 100%. The turnover rate may vary from year to year depending on how the Adviser anticipates portfolio securities will 15 PROSPECTUS perform. Short-term trading will increase the amount of brokerage commissions paid by each Fund and the amount of possible short-term capital gains. The amount of portfolio activity will not be a limiting factor in making portfolio decisions. REAL ESTATE INVESTMENT TRUSTS The Funds may invest in the equity securities of real estate investment trusts ('REITs'). A REIT is a corporation or business trust that invests substantially all of its assets in real estate and derives most of its income from rents from real property or interest on loans secured by mortgages on real property. REITs which meet certain specific requirements of the Internal Revenue Code effectively do not pay corporate level federal income tax. REITs may be affected adversely by changes in the value of their underlying properties and by defaults by borrowers or tenants. REITs are dependent on the skills of their management and have limited diversification. REITs also rely on their ability to generate cash flow to make distributions to shareholders and some REITs may have self-liquidation provisions allowing mortgages to be paid in full. The market value of REITs may also be affected by changes in the tax laws or by their inability to qualify for the tax-free pass-through of their income. The REIT portion of the portfolio may also be affected by general fluctuations in real estate values. REPURCHASE AGREEMENTS The Funds may enter into repurchase agreements with certain banks or non-bank dealers. In a repurchase agreement the Fund buys a security at one price, and at the time of sale, the seller agrees to repurchase that security at a mutually agreed upon time and price. Repurchase agreements could involve certain risks in the event of the failure of the seller to repurchase the securities as agreed, which may cause a fund to suffer a loss, including loss of interest on or principal of the security, and costs associated with delay and enforcement of the repurchase agreement. Repurchase agreements with a duration of more than seven days are considered illiquid securities and are subject to the restrictions stated above. MORTGAGE-BACKED SECURITIES BARON GROWTH & INCOME FUND may invest up to 5% of its assets in mortgage-backed securities that are issued or guaranteed by U.S. government agencies or instrumentalities, such as the Government National Mortgage Association and the Federal National Mortgage Association. Mortgage-backed securities represent direct or indirect participation in, or are secured by and payable from, mortgage loans 16 PROSPECTUS secured by real property. These securities are subject to the risk that prepayments on the underlying mortgages will cause the principal and interest on the mortgage-backed securities to be paid prior to their stated maturities. Mortgage prepayments are more likely to accelerate during periods of declining long-term interest rates. If a prepayment occurs, BARON GROWTH & INCOME FUND may have unanticipated proceeds which it may then have to invest at a lower interest rate, and may be penalized by not having participated in a comparable security not subject to prepayment. WHEN-ISSUED SECURITIES The Funds may invest up to 5% of their respective assets in debt and equity securities purchased on a when-issued basis. Although the payment and interest terms of when-issued securities are established at the time the purchaser enters into the commitment, the actual payment for and delivery of when-issued securities generally takes place within 45 days. The Fund bears the risk that interest rates on debt securities at the time of delivery may be higher or lower than those contracted for on the when-issued security. Failure of the issuer to deliver the security purchased on a when-issued basis may result in a loss or missed opportunity to make an alternative investment. SPECIAL SITUATIONS The Funds may invest in 'special situations.' A special situation arises when, in the opinion of the Adviser, the securities of a company will be recognized and appreciate in value due to a specific anticipated development at that company. Such developments might include a new product, a management change, an acquisition or a technological advancement. Investments in special situations may carry an additional risk of loss in the event that the anticipated development does not occur or does not attract the expected attention. The special situation may involve securities of companies with higher market capitalizations. 17 PROSPECTUS INVESTMENT PERFORMANCE The investment results of each Fund quoted in advertisements and other sales literature may refer to average annual total return and actual return. Average annual total return assumes that an investment in the Fund was purchased with an initial payment of $1,000 and that the investment was redeemed at the end of a stated period of time, after giving effect to the reinvestment of all dividends and distributions during the period at the net asset value on the reinvestment date. The return is expressed as a percentage rate which, if applied on a compounded annual basis, would result in the redeemable value of the investment at the end of the period. Because average annual returns are annualized they tend to even out variations in the returns, and are not the same as actual year-by-year results. The actual return performance calculations, which also may be quoted in advertising, reflect the results of a continuous shareholder who does not redeem. It measures the percentage change between the net asset value of a hypothetical $1,000 investment in each Fund at the beginning of a period and the net asset value of that investment at the end of a period, assuming reinvestment of all dividend and capital gain distributions at the net asset value on the reinvestment date. The performance of major market indices such as the Dow Jones Industrial Average, Russell 2000, and Standard & Poor's 500 may also be included in advertising so that each Fund's results may be compared with those of groups of unmanaged securities widely regarded by investors as measures of market performance. Brokerage fees are not factored into the performance of the indices. The performance data of the Funds include all recurring fees such as brokerage and investment advisory fees. Data and rankings from Lipper Analytical Services, Inc., CDA Investment Technologies, Morningstar or other industry publications may also be used in advertising. See the Statement of Additional Information. Performance results represent past performance and are not necessarily representative of future results. Investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed. The annual report contains additional performance information which is available upon request without charge by writing or calling the Funds at the address and telephone number set forth on the back of this Prospectus. 18 PROSPECTUS MANAGEMENT OF THE FUND INVESTMENT ADVISER BAMCO, Inc., the Adviser, is located at 767 Fifth Avenue, New York, New York 10153, and is responsible for portfolio management. It is a wholly owned subsidiary of Baron Capital Group, Inc. ('BCG'). Baron Capital, Inc. ('Baron Capital'), a registered broker-dealer and the distributor of the shares of the Funds, is also a wholly owned subsidiary of BCG. Under separate Advisory Agreements with each Fund (the 'Advisory Agreements'), the Adviser furnishes continuous investment advisory services and management to each Fund. Mr. Ronald Baron is the chief investment officer of the Adviser and is primarily responsible for the day-to-day management of the portfolios of BARON ASSET FUND and BARON GROWTH & INCOME FUND. He has managed the portfolios of these Funds since their inception. Mr. Clifford Greenberg is primarily responsible for the day-to-day management of BARON SMALL CAP FUND. Mr. Greenberg joined Baron Funds in January of 1997. Prior to that he was a general partner and portfolio manager at HPB Associates, L.P., an investment partnership. The Adviser also keeps the books of account of each series, and calculates daily the income and net asset value per share of each Fund. As compensation for the services rendered under each Advisory Agreement, the Adviser receives a fee payable monthly from the assets of each Fund equal to 1% per annum of each Fund's respective average daily net asset value. BROKERAGE Brokerage transactions for the Funds are effected chiefly by or through its Adviser's affiliate, Baron Capital, when consistent with the policy of obtaining the best net results for the Funds and subject to the conditions and limitations of the 1940 Act. Baron Capital is a registered broker-dealer and a member of the NASD. In determining the best net results for the Fund, the Adviser will examine factors such as price (including the applicable brokerage commission or dealer spread), size of order, efficiency and reliability of execution. The Funds' Board of Trustees has adopted procedures in conformity with Rule 17e-1 under the 1940 Act to ensure that all brokerage commissions paid to Baron Capital are reasonable and fair compared to the commission, fee or other remuneration received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. The Funds will also consider sales of their shares as a factor in the selection of broker-dealers to execute portfolio transactions. See Statement of Additional Information for a description of the commissions paid to Baron Capital. 19 PROSPECTUS TRUSTEES AND EXECUTIVE OFFICERS The Funds' Board of Trustees has overall responsibility for the management of the Funds. The Trustees and executive officers of the Funds and their principal occupations during the last five years are set forth below.
- ------------------------------------------------------------------------------------------- POSITION HELD PRINCIPAL OCCUPATION(S) NAME AND ADDRESS WITH BARON FUNDS DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------- Ronald Baron*'D' President, Chief President and Director of: Baron 767 Fifth Avenue Investment Officer Capital, Inc. (1982-Present), Baron New York, NY 10153 & Trustee Capital Management, Inc. (1983-Present), Baron Capital Group, Inc. (1984-Present), BAMCO, Inc. (1987-Present). - ------------------------------------------------------------------------------------------- Norman S. Edelcup Trustee Chairman, Item Processing of America 244 Atlantic Isle (1989-Present), (financial institution N. Miami Beach, FL 33160 service bureau); Director, Valhi, Inc. (1975-Present) (diversified company); Director, Artistic Greetings, Inc.(1985- Present). - ------------------------------------------------------------------------------------------- Neal M. Elliott Trustee President, Chief Executive Officer and 6001 Indian School Rd., NE Chairman, Horizon/CMS Healthcare Corp. Albuquerque, NM 87110 (1986-Present) (long-term health care); Director, LTC Properties, Inc. (1992-Present) (real estate investment trust); Director, Frontier Natural Gas Corp. (1991-Present) (oil and gas exploration). - ------------------------------------------------------------------------------------------- Mark M. Feldman Trustee President and Chief Executive Officer, 444 Madison Ave, Ste 703 Cold Spring Group, Inc.(1993-Present) New York, N.Y. 10022 (reorganization and restructuring consulting); Chief Restructuring Officer, various companies (1995-Present) (case and litigation management); Director, SNL Securities, Inc. (1997-Present) (publisher of data bases and manager of a bank and thrift stock portfolio); Trustee, Aerospace Creditors Liquidating Trust (1993-1997) (administered and liquidated assets).
20 PROSPECTUS
- ------------------------------------------------------------------------------------------- POSITION HELD PRINCIPAL OCCUPATION(S) NAME AND ADDRESS WITH BARON FUNDS DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------- Irwin Greenberg Trustee Chairman (1994-1997) and Director 4303 W. Wyndemere Circle (1991-Present), Lehigh Valley Hospital Schnecksville, PA 18078 Board, Retail Consultant, (1990-Present); Director, Cedar Crest College (1990-Present); Director, Henry Lehr & Co. Inc. (1996-Present) (insurance); President and Chief Executive Officer, Hess's Department Stores (1976-1990). - ------------------------------------------------------------------------------------------- Clifford Greenberg Vice President Vice President, Baron Capital, Inc., 767 Fifth Avenue Baron Capital Group, Inc., BAMCO, Inc. New York, NY 10153 (1997-Present); General Partner, HPB Associates, L.P. (1984-1996) (investment partnership). - ------------------------------------------------------------------------------------------- Linda S. Martinson*'D' Secretary, General Counsel and Secretary of: Baron 767 Fifth Avenue Vice President Capital, Inc. (1983-Present), BAMCO, New York, NY 10153 and Trustee Inc. (1987-Present), Baron Capital Group, Inc. (1984-Present), Baron Capital Management, Inc. (1983-Present). - ------------------------------------------------------------------------------------------- Charles N. Mathewson Trustee Chairman of the Board, International 9295 Prototype Road Game Technology (1986-Present) Reno, NV 89511 (manufacturer of microprocessor- controlled gaming machines and monitoring systems). - ------------------------------------------------------------------------------------------- Harold W. Milner Trustee Retired; President and Chief Executive 2293 Morningstar Drive Officer, Kahler Realty Corporation Park City, UT 84060 (1985-1997) (hotel ownership and management). - ------------------------------------------------------------------------------------------- Raymond Noveck'D' Trustee President, The Medical Information 31 Karen Road Line, Inc. (1997-Present) (health care Waban, MA 02168 information); President, Strategic Systems, Inc. (1990-1997) (health care information); Director, Horizon/CMS Healthcare Corporation (1987-1997). - -------------------------------------------------------------------------------------------
21 PROSPECTUS
- ------------------------------------------------------------------------------------------- POSITION HELD PRINCIPAL OCCUPATION(S) NAME AND ADDRESS WITH BARON FUNDS DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------- Susan Robbins Vice President Senior Analyst, Vice President and 767 Fifth Avenue Director of: Baron Capital, Inc. (1982- New York, NY 10153 Present), Baron Capital Management, Inc. (1983-Present), Baron Capital Group, Inc. (1984-Present). - ------------------------------------------------------------------------------------------- Morty Schaja* Senior Vice Senior Vice President and Chief 767 Fifth Avenue President, Chief Operating Officer of Baron Capital, Inc. New York, NY 10153 Operating Officer (1997-Present), Managing Director, Vice and Trustee President, Baron Capital, Inc. (1991- Present) and Director, Baron Capital Group, Inc., Baron Capital Management, Inc., and BAMCO, Inc. (1997-Present). - ------------------------------------------------------------------------------------------- Daniel Tisch Trustee Partner, Mentor Partners, L.P. (1987- 500 Park Avenue Present) (investment partnership). New York, NY 10022 - ------------------------------------------------------------------------------------------- David A. Silverman, M.D. Trustee Physician and Faculty, New York Univ. 239 Central Park West School of Medicine (1976-Present). New York, NY 10024 - ------------------------------------------------------------------------------------------- Peggy Wong Treasurer and Treasurer and Chief Financial Officer 767 Fifth Avenue Chief Financial of: Baron Capital, Inc., Baron Capital New York, NY 10153 Officer Group, Inc., BAMCO, Inc., Baron Capital Management, Inc. (1987-Present). - ------------------------------------------------------------------------------------------- * Trustees deemed to be 'interested persons' of the Fund as that term is defined in the Investment Company Act of 1940. 'D' Members of the Executive Committee, which is empowered to exercise all of the powers, including the power to declare dividends, of the full Board of Trustees when the full Board of Trustees is not in session.
22 PROSPECTUS DISTRIBUTION PLAN The Funds' shares are distributed by Baron Capital, which is the principal underwriter of the shares of each Fund, pursuant to a distribution plan under Rule 12b-1 of the 1940 Act ('Distribution Plan'). The Distribution Plan authorizes the Fund to pay the Principal Underwriter a distribution fee equal on an annual basis to 0.25% of each Fund's average daily net assets. The distribution fee is paid to the Principal Underwriter in connection with its activities or expenses primarily intended to result in the sale of shares, including, but not limited to, compensation to registered representatives or other employees of the Principal Underwriter who engage in or support the distribution of shares or who service shareholder accounts; telephone expenses; interest expenses; preparing, printing and distributing promotional and advertising material; preparing, printing and distributing the Prospectus and reports to other than current shareholders; and commissions and other fees to broker-dealers or other persons (excluding banks) who have introduced investors to the Funds. See the Statement of Additional Information for a more detailed listing of the expenses covered by the Distribution Plan. HOW TO PURCHASE SHARES Shares of BARON ASSET FUND, BARON GROWTH & INCOME FUND and BARON SMALL CAP FUND are offered without any sales load. This means you may purchase, redeem, or exchange shares directly without paying a sales charge. An application is included with this prospectus. A separate application is required to open a regular or Roth individual retirement account ('IRA') and is available by calling 1-800-99-BARON. Purchase applications are subject to acceptance by the Funds and the Funds reserve the right to reject any purchase application in whole or part. All purchase payments will be invested in full and fractional shares at a price based on the next calculation of net asset value after the order is received by the transfer agent. See 'Net Asset Value.' The minimum initial investment is $2,000 unless you choose to invest through the Baron InvestPlan (see page 25). There is no minimum for subsequent purchases. The Adviser may, in its discretion, waive the minimum investment requirements. The Fund may redeem the shares of any shareholder who has an account balance of less than $2,000. See 'How to Redeem Shares.' At present, only U.S. citizens and non-U.S. citizens with a tax identification number who reside in the U.S., may purchase shares of the 23 PROSPECTUS Funds. Please call the Funds' transfer agent at 1-800-442-3814, if you have any questions. No certificates will be issued except upon written request, and no certificates are issued for fractional shares. The Funds' transfer agent establishes an account for each shareholder to which all shares purchased are credited, together with any dividends and capital gain distributions which may be paid in additional shares. Whenever a transaction occurs in a shareholder's account, the transfer agent will mail a statement showing the transaction and the status of the account. You may invest the following ways: BY MAIL To open a new account send your signed application form with your check payable to Baron Funds to: Baron Funds P.O. Box 419946 Kansas City, MO 64141-6946 Please make sure you indicate how much money you want invested in which Fund. CHECKS MUST BE PAYABLE IN U.S. DOLLARS AND MUST BE DRAWN ON A U.S. BANK. THIRD PARTY CHECKS, CREDIT CARDS AND CASH WILL NOT BE ACCEPTED. If your order to purchase shares of a Fund is canceled because your check does not clear, you will be responsible for any resulting loss incurred by the Fund. When making subsequent investments, complete the additional investment form provided at the bottom of your account statement or purchase confirmation. If you do not have that form, write a note indicating in which Baron Fund the investment should go and the account number. Send it to the address above. BY WIRE You can make your initial or subsequent investments in the Funds by wire. To do so: (1) contact the Funds' transfer agent, DST Systems, Inc., at 1-800-442-3814 to obtain an account number. (2) Complete and sign the application form and mail it to Baron Funds, P.O. Box 419946, Kansas City, MO 64141-6946. (3) Instruct your bank to wire funds to the United Missouri Bank of Kansas City, N.A., ABA No. 1010-0069-5, Account No. 98-7037-101-4. Your bank may charge you a fee for sending the wire transfer. (4) Be sure to specify the following information in the wire: (a) Fund you are buying, (b) your account number, (c) your name, and (d) your wire number. 24 PROSPECTUS Please be sure to include your name and account number. The Fund will not be responsible for the consequences of delays in the wiring process. BY TELEPHONE Once your account is open you may make subsequent investments by telephone and exchange between the Funds if you have elected that option on the application. By choosing this option you authorize Baron Funds to draw on your bank account. Please note that your accounts must be identically registered. To add this option to your account, call 1-800-99-BARON for the forms. BARON INVESTPLAN Baron InvestPlan is an automatic investment plan offered by the Funds. The minimum initial investment is $500 with monthly investments of as little as $50 automatically invested from your checking account. To enroll in the Baron InvestPlan, complete the Enrollment Form (available by calling 1-800-99-BARON), attach a voided check and mail them to Baron Funds, P.O. Box 419946, Kansas City, MO 64141-6946. THROUGH INTERMEDIARIES You may purchase shares of the Funds through a broker-dealer, bank or other financial institution that may charge a transaction fee. If you purchase the shares directly from the Funds, no transaction fee is charged. The Funds will generally effect orders received from these intermediaries at the net asset value next determined after the Fund's transfer agent has received the order. HOW TO REDEEM SHARES Shares of the Funds may be redeemed by any of the methods described below. If you are selling shares in an IRA account please read the information in the IRA kit. BY MAIL Shares may be sold by executing a written request for redemption, as described below, and mailing the request to Baron Funds, P.O. Box 419946, Kansas City, MO 64141-6946. The redemption request must specify the name of the Fund, the number of shares, or dollar amount, to be redeemed and the account number. The request must be signed in exactly the same way the account is registered, including the signature of each joint owner, if applicable. A 25 PROSPECTUS signature guarantee is required for redemptions greater than $25,000. See the 'Special Information About Redemptions' section on page 26. If any certificates have been issued for shares that are included in the redemption request, the certificates must be presented in properly endorsed form. Within three days after receipt of a redemption request by the transfer agent in proper form, the Fund will normally mail you the proceeds. BY TELEPHONE If you have selected the telephone redemption option when you opened your account, you may redeem your shares by telephone. To add this option to your account call 1-800-442-3814 for a telephone redemption form. Once made, your telephone request cannot be modified or canceled. The minimum amount that you may redeem by telephone is $1,000. The maximum amount that you may redeem by telephone in any quarter is $25,000, although exceptions may be made for institutions. You may receive the proceeds by any one of the following methods: (a) we will mail a check to the address to which your account is registered, (b) we will transmit the proceeds by Electronic Funds Transfer to a pre-authorized bank account (usually a two banking day process), or (c) we will wire the proceeds to a pre-authorized bank account for a $10.00 fee (usually a next banking day process). If you have a stock certificate, you must redeem by mail. The Funds reserve the right to refuse a telephone redemption if they believe it advisable to do so. Neither the Funds, its officers, employees and trustees, nor its agents will be responsible for the authenticity of telephone instructions or for any losses caused by fraudulent or unauthorized instructions received over the telephone provided that the Fund reasonably believes that such instructions are genuine. The Funds and their transfer agent employ reasonable procedures to confirm that instructions communicated by telephone are genuine, including recording telephonic instructions and sending written confirmations. The Funds may incur liability if they do not follow these procedures. BY BROKER-DEALER You may redeem shares through broker-dealers or other institutions who may charge you a fee. The Funds may have special redemption procedures with certain broker-dealers. SPECIAL INFORMATION ABOUT REDEMPTIONS To protect you and the Funds from fraud, all of the signatures on a redemption request and/or certificate must be guaranteed by an 'eligible' 26 PROSPECTUS guarantor if (1) you want to redeem more than $25,000 in a quarter, (2) you want the redemption check made out to someone other than the record owner, (3) you want the redemption check to be mailed to somewhere other than the record address, or (4) you want the proceeds to be wired or transferred electronically to a bank account not previously indicated. A signature guarantee is a widely accepted way to protect you and the Funds by verifying the signature on your request. The Funds will honor a signature guarantee from acceptable financial institutions such as banks, trust companies, savings and loan associations, credit unions and broker-dealers. A notary public is not an acceptable guarantor. A redemption request that requires a signature guarantee should be sent by mail. No signature guarantee is required for redemptions of $25,000 or less, per quarter, if proceeds are sent to the address of record. The Funds may exempt certain institutions from the signature guarantee requirements. A corporate resolution, specifying the authorized signatory and containing the corporate seal, is required for corporations that are redeeming. Further documentation may be requested from corporations, administrators, executors, trustees, custodians, or others who hold shares in a fiduciary or representative capacity to evidence the authority of the person or entity making the request. If there are any questions concerning the required documentation, the transfer agent should be contacted in advance at 1-800-442-3814. Redemptions will not be effective or complete until all of the foregoing conditions, including receipt of all required documentation by the transfer agent, have been satisfied. If you have recently purchased shares please be aware that your redemption request may not be honored until the purchase check has cleared your bank, which generally occurs within fifteen calendar days. Upon receipt of a redemption request in proper form, the shares will be redeemed at their next computed net asset value following receipt of redemption requests by the transfer agent. The net asset value of shares on redemption may be more or less than the investor's cost depending on the market value of the Fund's portfolio securities at the time of redemption. A redemption of shares is a taxable event that may result in recognition of a gain or loss for tax purposes. The Funds may suspend the right of redemption or postpone the date of payment beyond three days during any period when (a) the New York Stock Exchange is closed other than customary weekend and holiday closings; (b) trading on the New York Stock Exchange is restricted; (c) the Securities and Exchange Commission has by order permitted such suspension; or (d) an emergency, as defined by rules and regulations of 27 PROSPECTUS the Securities and Exchange Commission, exists as a result of which disposal of portfolio securities or determination of the value of the Funds' net assets is not reasonably practicable. If you redeem more than $250,000 or 1% of the net asset value of a Fund during any 90-day period, the Fund has the right to pay the redemption price, either totally or partially, by a distribution of portfolio securities instead of cash. The securities distributed in such a distribution would be valued at the same amount as that assigned to them in calculating the net asset value for the shares being redeemed or repurchased. If shares are redeemed in kind, the redeeming investor may incur brokerage costs in converting such securities to cash. The Trustees may, in order to reduce the expenses of the Funds, redeem all of the shares of any shareholder whose account, due to the redemption of shares, has a net asset value of less than $2,000. The Funds will give 60 days' prior written notice to shareholders whose shares are being redeemed to allow them to purchase sufficient additional shares of the Funds to avoid such redemption. DETERMINING YOUR SHARE PRICE Your purchases, sales or exchanges will be processed at the net asset value per share of the Fund as of the close of the New York Stock Exchange (the 'Exchange') (currently 4:00 p.m., New York City time) on each day that the Exchange is open for trading by dividing the current market value of the Fund's total assets less all of its liabilities by the total number of shares outstanding at the time the determination is made. Valid purchase and redemption orders placed prior to the close of the Exchange on a day the Exchange is open for trading are executed at the net asset value determined as of the close that day, and orders placed after that time are valued as of the close of the next trading day. The Funds may have arrangements with certain institutional entities with respect to the actual receipt of orders. The Funds reserve the right to change the time at which orders are priced if the Exchange closes at a different time or an emergency exists. The Funds' portfolio securities traded on any national stock exchange or quoted on the NASDAQ National Market System are valued on the basis of the last sale price on the date of valuation or, in the absence of any sale on that date, the last sale price on the date the security last traded. Other securities are valued at the mean of the most recent bid and asked prices if market quotations are readily available. Where market quotations are not readily available the securities are valued at their fair value as determined in good faith by the Board of Trustees, or by the Adviser, 28 PROSPECTUS pursuant to procedures established by the Board. Money market instruments and debt securities with a remaining maturity of sixty days or less are valued by the amortized cost method unless such method does not represent fair value. Odd lot differentials and brokerage commissions are excluded in calculating net asset value. Securities quoted in a foreign currency are valued daily in U.S. dollars at the foreign currency exchange rates that are prevailing at the time the daily net asset value per share is determined. If events that materially affect the value of a Fund's foreign investments occur, the investments will be valued at their fair value as determined in good faith by the Board of Trustees. DIVIDENDS AND DISTRIBUTIONS Each Fund intends to distribute all of its net investment income and realized capital gains, if any, to its shareholders in a single, combined distribution by December 31 of each year. After every distribution, the value of a share is automatically reduced by the amount of the distribution. You may elect to have all your dividends and capital gains distributions from the Funds automatically reinvested in additional shares of that Fund at the next computed net asset value at the close of business on the payment date. You may, instead, elect to receive your distributions in cash, which the Fund will pay by either crediting your bank account by Electronic Funds Transfer or issuing a check to you within five business days of the reinvestment date. If no election is made, all distributions will automatically be reinvested in shares of the Fund. You may change your election by notifying the Fund in writing prior to the record date for a particular distribution. There are no charges in connection with the reinvestment of distributions. If a shareholder has elected to receive dividends and/or distributions in cash and the postal or other delivery service is unable to deliver checks to the shareholder's address of record, such shareholder's distribution option will automatically be converted to having all dividend and other distributions reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution or redemption checks. TAXES Each Fund intends to qualify each year as a regulated investment company under the Internal Revenue Code of 1986 (the 'Code'). Qualification as a regulated investment company relieves the Fund of federal income and excise taxes on the portion of its net ordinary income and net realized capital gain distributed to shareholders. You are subject to federal income tax at ordinary income tax rates on any dividends derived from net investment income and distributions of net 29 PROSPECTUS short-term capital gains, whether received in cash or in additional shares. A portion of such dividends received by corporate shareholders may qualify for the dividends-received deduction. Distributions of net capital gain (the excess of net long-term capital gains over net short-term capital losses) are taxable to you as long-term gains regardless of how long you have held your Fund shares. Dividends and distributions declared by the Fund may also be subject to state and local taxes. If you purchase shares shortly before a distribution, you must pay income taxes on the distribution, even though the value of your investment (plus cash received, if any) remains the same. The share price at the time of your purchase may include unrealized gains in the securities held in the investment portfolio of that Fund. If these portfolio securities are subsequently sold and the gains are realized, they will (to the extent not offset by capital losses) be paid to you as a distribution of capital gains and be taxable to you. The Fund will be required to withhold 31% of all dividends, distributions and redemption proceeds if you do not provide the Fund with your valid social security or taxpayer identification number or are otherwise subject to backup withholding. In addition to the 31% backup withholding, your account will be charged $50 to reimburse the Fund for any penalty that the IRS imposes on the Fund for your failure to provide the required information. Each shareholder will receive information annually on Form 1099 as to the federal income tax status of all dividends and other distributions paid or deemed paid to them for the year. The foregoing is only a summary of some important tax considerations generally affecting the Funds and their shareholders. Prospective shareholders are urged to consult their tax advisers concerning the tax consequences of this investment. GENERAL INFORMATION The Funds are organized as diversified open-end management investment companies registered under the Investment Company Act of 1940 ('1940 Act') as three series of Baron Asset Fund, a Massachusetts business trust organized under the laws of The Commonwealth of Massachusetts on February 19, 1987. The Funds are each authorized to issue an indefinite number of shares of beneficial interest. The Declaration of Trust permits the Trustees to establish additional series. Each share of a Fund has one vote on all matters for which a shareholder vote is required, and participates equally in dividend and capital gain distributions when and if declared by the Fund and in the Fund's net assets upon liquidation. 30 PROSPECTUS Shares are fully paid and non-assessable and there are no preemptive, conversion or exchange rights. Shares do not have cumulative voting rights and, as a result, holders of at least 50% of the shares voting for Trustees can elect all Trustees and the remaining shareholders would not be able to elect any Trustees. As a Massachusetts business trust, annual shareholder meetings are not required. Shareholders have certain rights, as set forth in the Declaration of Trust, including the right to call a meeting of shareholders for the purpose of voting on the removal of one or more Trustees on the written request of not less than 10% of the outstanding shares. Such removal can be effected upon the action of two-thirds of the outstanding shares. CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT The Bank of New York, 48 Wall Street, New York, New York 10015 is the custodian for the Funds' cash and securities. DST Systems, Inc. serves as transfer agent and dividend disbursing agent for the shares. In their respective capacities both institutions maintain certain financial and accounting records pursuant to agreements with the Funds. They do not assist in and are not responsible for investment decisions involving assets of the Funds. SHAREHOLDER INFORMATION All shareholder inquiries regarding account information or transactions should be directed to DST Systems, Inc., P.O. Box 419946, Kansas City, MO 64141-6946, or by telephone to 1-800-442-3814. Shareholder inquiries about general Fund information and requests for forms should be directed to the Funds' office at 1-800-99-BARON or 212-583-2100. Shareholders will be provided semi-annual unaudited and annual audited reports, including a listing of portfolio securities held. A single copy of each report will be mailed to an address at which more than one registered shareholder with the same last name (except nominees) has indicated mail is to be delivered, unless a shareholder requests otherwise. INTERNET ACCESS The Funds have an internet site on the World Wide Web at http://www.baronfunds.com. STOCK SYMBOLS BARAX Baron Asset Fund BGINX Baron Growth & Income Fund BSCFX Baron Small Cap Fund 31 PROSPECTUS MANAGEMENT DISCUSSION AND ANALYSIS BARON ASSET FUND Baron Asset Fund performed well in the fiscal year ended September 30, 1997. The Fund's 33.8% gain last year improved upon the Fund's 19.3% average annual performance since its inception a little more than ten years ago. ------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN BARON ASSET FUND & THE RUSSELL 2000 ------------------------------------------------------------------- [CHART] RUSSELL BARON 2000* ASSET FUND ------- ---------- 10,000 10,000 1987 10,471 11,950 1988 9,339 13,234 1989 11,346 18,521 1990 8,226 12,838 1991 11,993 17,760 1992 13,066 19,484 1993 17,397 26,595 1994 17,892 28,728 1995 22,072 38,002 1996 24,971 46,097 1997 33,259 61,655 INFORMATION PRESENTED BY FISCAL YEAR AS OF SEPTEMBER 30 ------------------------------------------------------------------- Past performance is not predictive of future performance * The Russell 2000 is an unmanaged index of small and mid sized companies The Fund's performance was not uniform throughout the year. Baron Asset Fund under-performed the large cap S&P 500 index in the six months ended March 1997 while outperforming the small cap Russell 2000 index. During the six months ended September 1997, Baron Asset gained 35.6% and outperformed both the S&P 500 and the Russell 2000. The Russell 2000 also posted very strong gains. Although the businesses in which the Fund invested grew strongly during the first half of the fiscal year, the stock prices of these companies did not reflect the growth of their underlying businesses. The second half of the year represented a catch-up period for the stock prices of our investments. 32 PROSPECTUS Baron Asset Fund concentrates its investments in small and mid sized companies. During this year, and since late 1993, the performance of market averages that represent small companies significantly under-performed market averages that represent more established, large companies. This trend reversed in the second half of fiscal year 1997 when the Russell 2000 dramatically outperformed the S&P 500. We believe that small and mid sized companies currently offer better values than larger companies. Baron Asset Fund is well positioned if small cap stocks continue to outperform.
BARON ASSET RUSSELL FUND S&P 500 2000 ----------- ------- ------- 12/31/92 - 9/30/97...................... +186.5% +144.3 % +120.9% 9/30/96 - 4/30/97....................... -0.7% +17.9 % +0.1% 4/30/97 - 9/30/97....................... +34.7% +19.1 % +33.1%
The performance of Baron Asset Fund was consistent across sectors. Most of our investments performed well. Performance was strongest in Education, Financial Services, Media and Entertainment and Real Estate. Performance lagged in Communications. In fiscal year 1998, the Fund will continue to invest in companies that, in our opinion, are undervalued relative to their long term growth prospects and profitability. The Fund will continue to invest in businesses with significant growth prospects and increasing profitability. The companies will continue to be identified through our independent research efforts. Companies in which we invest will have the potential to increase in price at least 50% over the next two years. The Fund will remain diversified not only by industry and investment theme, but also by external factors we have identified that could affect company performance. This approach to investing in companies, not trading in stocks, could allow the Fund to continue to produce above average rates of return while keeping an attractive risk profile. We look forward to a successful 1998. 33 PROSPECTUS BARON GROWTH AND INCOME FUND Baron Growth & Income Fund performed well in the fiscal year ended September 30, 1997. According to Lipper analytical, the Fund is the number one ranked growth and income fund since its inception on January 3, 1995. ------------------------------------------------------------------- COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN BARON GROWTH & INCOME FUND & THE RUSSELL 2000 ------------------------------------------------------------------- [CHART] BARON GROWTH RUSSELL AND 2000* INCOME FUND ------- ---------- 1995 10,000 10,000 1996 14,223 18,575 1997 18,943 25,468 INFORMATION PRESENTED BY FISCAL YEAR AS OF SEPTEMBER 30 ------------------------------------------------------------------- Past performance is not predictive of future performance * The Russell 2000 is an unmanaged index of small and mid sized companies The Fund's strong performance can be attributed to its investment strategy of allocating approximately 70% of its portfolio to rapidly growing, well managed, very profitable small cap companies that are attractively priced, and the remaining 30% to value oriented, income producing securities, also principally of smaller companies. The growth component of the Fund experienced below average performance during the first half of the fiscal year even though the businesses in which the Fund is a shareholder grew steadily. The strong relative performance of the Fund in the second half of the fiscal year, a gain of 34.1%, is to a great extent due to the Fund's investments in rapidly growing businesses and the strong relative performance of small cap stocks. The Fund performed well with its investments in Education, Financial Services and Media and Entertainment. The Fund's investments in Communications under-performed in 1997 and provide significant opportunities in fiscal 1998. The income component of the Fund performed well with its significant REIT investments. The REIT portion of the Fund gained a very strong 34 PROSPECTUS 49.4% for the year. This performance compared extremely well with other real estate oriented mutual funds. Strong appreciation from the Fund's income component and substantial current income, provided the Fund with very attractive relative risk characteristics for a mutual fund invested primarily in small cap companies. In fiscal year 1998, we currently expect the majority of the Fund's income producing securities to continue to be REITs. The growth component of the Fund will continue to be invested in stocks that have the potential to appreciate in value at least 50% during the next two years. The Fund's portfolio is well positioned to offer attractive returns with its fast growing small cap companies. Its investments in income-producing securities should provide the portfolio with more stable, although somewhat lesser, returns. We look forward to a successful 1998. 35 PROSPECTUS HOW TO PURCHASE SHARES (Please consult the Prospectus for more detailed information) BY MAIL To open a new account send your application form with your check payable to: Baron Funds P.O. Box 419946 Kansas City, MO 64141-6946 When making subsequent investments, complete the additional investment form provided at the bottom of your account statement or purchase confirmation, or write a note indicating in which Baron Fund the investment should go and the account number. BY TELEPHONE Once your account is open you may make subsequent investments by telephone and exchange among the Funds if you have elected that option on the application. By choosing this option you authorize Baron Funds to draw on your bank account. Please note that your accounts must be identically registered. To add this option to your account, call 1-800-442-3814 for the forms. BY WIRE You can make your initial or subsequent investments in the Funds by wire. To do so: (1) contact the Funds' transfer agent, DST Systems, Inc., at 1-800-442-3814 to obtain an account number. (2) Complete the application form and mail it to: Baron Funds P.O. Box 419946 Kansas City, MO 64141-6946 (3) Instruct your bank to wire funds to the United Missouri Bank of Kansas City, N.A., ABA No. 1010-0069-5, Account No. 98-7037-101-4. (4) Be sure to specify the following information in the wire: (a) the Fund you are buying, (b) your account number, (c) your name, and (d) your wire number. BY BROKER-DEALERS You may purchase shares of the Funds through a broker-dealer or other financial institution that may charge a transaction fee. Investors should be aware that if you purchase the shares directly from the Funds, no transaction fee is charged. NOT PART OF THE PROSPECTUS HOW TO REDEEM SHARES (Please consult the Prospectus for more detailed information) BY MAIL Shares may be sold by executing a written request for redemption, as described below, and mailing the request to: Baron Funds P.O. Box 419946 Kansas City, MO 64141-6946 The redemption request must specify the name of the Fund, the number of shares, or dollar amount, to be redeemed and the account number. BY TELEPHONE If you have selected the telephone redemption option when you opened your account, you may redeem up to $25,000 per quarter by telephone. To add this option to your account call 1-800-442-3814 for a telephone redemption form. Once made, your telephone request cannot be modified or canceled. The minimum amount that you may redeem by telephone is $1,000. BY WIRE To have redeemed shares wired to you please call 1-800-442-3814 for instructions. BY BROKER-DEALERS You may redeem shares through broker-dealers or other institutions who may charge you a fee. SPECIAL INFORMATION ABOUT REDEMPTIONS If the amount to be redeemed is greater than $25,000, all of the signatures on a redemption request and/or certificate must be guaranteed by an 'eligible' guarantor. Corporations and other entities may have additional requirements. NOT PART OF THE PROSPECTUS [LOGO] 767 Fifth Avenue NY, NY 10153 212-583-2100 1-800-99-BARON STATEMENT OF DIFFERENCES ------------------------ The dagger symbol shall be expressed as............................... 'D' BARON ASSET FUND BARON GROWTH & INCOME FUND BARON SMALL CAP FUND 767 Fifth Avenue New York, New York 10153 (800) 99-BARON 212-583-2100 ________________________ STATEMENT OF ADDITIONAL INFORMATION January 28, 1998 ________________________ Baron Asset Fund is a no-load, open-end, diversified management investment company organized as a series fund with three series currently available (individually a "Fund" and collectively the "Funds"): Baron Asset Fund, started in June of 1987, Baron Growth & Income Fund, started in January of 1995, and Baron Small Cap Fund, started October 1, 1997. Baron Asset Fund's investment objective is to seek capital appreciation through investments in securities of small and medium sized companies with under valued assets or favorable growth prospects. Baron Growth & Income Fund's investment objective is to seek capital appreciation with income as a secondary objective. Baron Small Cap Fund's investment objective is to seek capital appreciation through investments primarily in securities of small companies. ________________________ This Statement of Additional Information is not a prospectus and is only authorized for distribution when preceded or accompanied by the Funds' prospectus dated January 28, 1998 as amended or supplemented from time to time (the "Prospectus"). This Statement of Additional Information contains additional and more detailed information than that set forth in the Prospectus and should be read in conjunction with the Prospectus. Additional copies of the Prospectus may be obtained without charge by writing or calling the Funds at the address and telephone number set forth above. No dealer, salesman or any other person has been authorized to give any information or to make any representations, other than those contained in this Statement of Additional Information or in the related Prospectus, in connection with the offer contained herein, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Funds or the Distributor. This Statement of Additional Information and the related Prospectus do not constitute an offer by the Funds or by the Distributor to sell or a solicitation of any offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. TABLE OF CONTENTS -----------------
Page in Statement of Additional Page in Information Prospectus ----------- ---------- Investment Objectives and Policies . . . . . . . 3 8 Investment Restrictions . . . . . . . . . . 3 Short Sales Against the Box . . . . . . . . 7 14 Option Transactions . . . . . . . . . . . . 8 13 Use of Segregated and Other Special Accounts 10 Depository Receipts . . . . . . . . . . . . 11 Medium and Lower Rated Corporate Debt Securities 12 11 Turnover Rate . . . . . . . . . . . . . . . 14 15 Management of the Funds Board of Trustees and Officers. . . . . . . 15 20 Principal Holders of Shares . . . . . . . . 17 Investment Adviser. . . . . . . . . . . . . 17 19 Distributor . . . . . . . . . . . . . . . . 19 23 Distribution Plan . . . . . . . . . . . . . 20 23 Brokerage . . . . . . . . . . . . . . . . . 23 19 Custodian, Transfer Agent and Dividend Agent. . . . . . . . . . . . . . . 26 31 Redemption of Shares . . . . . . . . . . . . . . 26 25 Net Asset Value. . . . . . . . . . . . . . . . . 26 28 Taxes. . . . . . . . . . . . . . . . . . . . . . 27 29 Organization and Capitalization. . . . . . . . . 28 30 General . . . . . . . . . . . . . . . . . . 28 Shareholder and Trustee Liability . . . . . 28 Other Information. . . . . . . . . . . . . . . . 27 30 Independent Accountants . . . . . . . . . . 27 6 Calculation of Performance Data . . . . . . 27 18
INVESTMENT OBJECTIVES AND POLICIES The following information supplements the discussion of the Funds' investment objectives and policies set forth on page 8 of the Prospectus. Unless otherwise specified, the investment programs and restrictions are not fundamental policies. Such operating policies are subject to change by the Fund's Board of Trustees without the approval by the shareholders. Shareholders will, however, be notified prior to any material changes. Fundamental policies may be changed only with the approval of a majority of the Funds' outstanding voting securities. Investment Restrictions Baron Asset Fund, Baron Growth & Income Fund, and Baron Small Cap Fund have adopted the following investment restrictions, which include those described in the Prospectus. These restrictions represent fundamental policies of the Funds and may not be changed without the approval of the Funds' shareholders. Unless otherwise noted, all percentage restrictions are as of the time of the investment after giving effect to the transaction. BARON ASSET FUND MAY NOT: 1. Issue senior securities except in connection with any permitted borrowing where the Fund is deemed to have issued a senior security; 2. Borrow money except from banks for temporary purposes in an amount not exceeding 5% of the Fund's total assets less liabilities at the time the borrowing is made; 3. Purchase securities on margin except for short-term credit necessary for the clearance of portfolio transactions; 4. Make short sales of securities, maintain a short position, write put options or buy futures contracts; 5. Purchase or sell commodities or commodity contracts; 6. Purchase or sell real estate or real estate mortgage loans or invest in the securities of real estate companies unless such securities are publicly traded; 7. Invest in oil, gas or mineral-related programs or leases; 8. Invest more than 25% of the value of its total assets in any one industry, except investments in U.S. government securities; 9. Purchase the securities of any one issuer other than the U.S. government or any of its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of the Fund's total assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to the 5% and 10% limitations; 10. Invest more than 10% of the value of the Fund's total assets in securities which are restricted or not readily marketable or in repurchase agreements maturing or terminable in more than seven days; 11. Invest in securities of other open end investment companies (except in connection with a merger, consolidation or other reorganization and except for the purchase of shares of registered open-end money market mutual funds if double advisory fees are not assessed), invest more than 5% of the value of the Fund's total assets in more than 3% of the total outstanding voting securities of another investment company or more than 10% of the value of the Fund's total assets in securities issued by other investment companies; 12. Participate on a joint, or a joint and several, basis in any securities trading account; 13. Underwrite securities of other issuers; 14. Make loans to other persons, except up to 10% of the value of the Fund's total assets in loans of portfolio securities and except to the extent that the purchase of publicly traded debt securities and the entry into repurchase agreements in accordance with the Fund's investment objective and policies may be deemed to be loans; 15. Mortgage, pledge or hypothecate any portfolio securities owned or held by the Fund, except as may be necessary in connection with permitted borrowing; 16. Invest more than 5% of its total assets in warrants to purchase common stock; 17. Purchase securities of any issuer with a record of less than three years' continuous operation, including predecessors, except obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if such purchase would cause the investments of the Fund in all such issuers to exceed 5% of the value of the total assets of the Fund; or 18. Purchase or retain any securities of an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Fund, or is a member, officer or Director of the Adviser, if after the purchase of the securities of such issuer by the Fund one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at market value. BARON GROWTH & INCOME FUND AND BARON SMALL CAP FUND MAY NOT: 1. Issue senior securities or borrow money or utilize leverage in excess of 25% of its net assets (plus 5% for emergency or other short-term purposes) from banks from time to time. 2. Except as described in the prospectus, engage in short-sales, purchase securities on margin or maintain a net short position. 3. Purchase or sell commodities or commodity contracts except for hedging purposes and in conformity with regulations of the Commodities Futures Trading Commission such that the Fund would not be considered a commodity pool. 4. Purchase or sell oil and gas interests or real estate. Debt or equity securities issued by companies engaged in the oil, gas or real estate business are not considered oil or gas interests or real estate for purposes of this restriction. First mortgage loans and other direct obligations secured by real estate are not considered real estate for purposes of this restriction. 5. Invest more than 25% of the value of its total assets in any one industry, except investments in U.S. government securities. 6. Purchase the securities of any one issuer other than the U.S. government or any of its agencies or instrumentalities, if immediately after such purchase more than 5% of the value of the Fund's total assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to the 5% and 10% limitations. 7. Underwrite securities of other issuers. 8. Make loans, except to the extent the purchase of debt obligations of any type (including repurchase agreements and corporate commercial paper) are considered loans and except that the Fund may lend portfolio securities to qualified institutional investors in compliance with requirements established from time to time by the Securities and Exchange Commission and the securities exchanges where such securities are traded. 9. Participate on a joint, or a joint and several, basis in any securities trading account. 10. Mortgage, pledge or hypothecate any of its assets, except as may be necessary in connection with options, loans of portfolio securities, or other permitted borrowings. 11. Purchase securities of any issuer with a record of less than three years' continuous operations, including predecessors, except obligations issued or guaranteed by the U.S. government or its agencies or instrumentalities, if such purchase would cause the investments of the Fund in all such issuers to exceed 5% of the value of the total assets of the Fund. 12. Invest more than 15% of its assets in restricted or illiquid securities, including repurchase agreements maturing in more than seven days. AS A NON-FUNDAMENTAL POLICY, BARON GROWTH & INCOME FUND AND BARON SMALL CAP FUND WILL NOT: 1. Invest in securities of other registered investment companies (except in connection with a merger, consolidation or other reorganization and except for the purchase of shares of registered open-end money market funds if double advisory fees are not assessed), invest more than 5% of the value of the Fund's total assets in more than 3% of the total outstanding voting securities of another investment company or more than 10% of the value of the Fund's total assets in securities issued by other investment companies. 2. Invest more than 5% of its total assets in warrants to purchase common stock. 3. Purchase the securities of any issuer of which any officer or director of the Fund owns 1/2 of 1% of the outstanding securities or in which the officers and directors in the aggregate own more than 5%. The Securities and Exchange Commission currently requires that the following conditions be met whenever portfolio securities are loaned: (1) the Fund must receive at least 100% cash collateral from the borrower; (2) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (3) the Fund must be able to terminate the loan at any time; (4) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned securities, and any increase in market value; (5) the Fund may pay only reasonable custodian fees in connection with the loan; and (6) while voting rights on the loaned securities may pass to the borrower, the Fund's trustees must terminate the loan and regain the right to vote the securities if a material event adversely affecting the investment occurs. These conditions may be subject to future modifications. The portfolios of the Funds are valued every day the New York Stock Exchange is open for trading. With respect to investments in warrants, the Funds will not invest in excess of 2% of the value of the particular Fund's net assets in warrants that are not listed on the New York or American Stock Exchanges. Warrants are essentially options to purchase equity securities at a specified price valid for a specific period of time. Their prices do not necessarily move parallel to the prices of the underlying securities. Warrants have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer. SHORT SALES AGAINST THE BOX Baron Growth & Income Fund and Baron Small Cap Fund may sell short "against the box" to protect or defer an unrealized gain in a security. At the time of the short sale, the Funds will either own or have the unconditional right to acquire at no additional cost the identical security sold short. The Funds may use this technique in connection with convertible securities as well as common stock. The Funds may have to pay a fee to borrow securities, which would partially offset any gain thereon. OPTIONS TRANSACTIONS AND SWAPS Baron Asset Fund may write (sell) call options and purchase put options, and Baron Growth & Income Fund and Baron Small Cap Fund may purchase or write put or call options. The purpose of writing covered call options is to reduce the effect of price fluctuations of the securities owned by the Fund (and involved in the options) on the Fund's net asset value per share. The Funds may also enter into equity swap transactions. A put option gives the purchaser of the option, upon payment of a premium, the right to sell, and the writer the obligation, when exercised, to buy, the underlying security, at the exercise price. For instance, the Fund's purchase of a put option on a security might be designed to protect its holdings in the underlying security against a substantial decline in the market value by giving the Fund the right to sell such security at the exercise price. A call option, upon payment of a premium, gives the purchaser of the option the right to buy, and the seller if exercised, the obligation to sell, the underlying security at the exercise price. The Fund's purchase of a call option on a security might be intended to protect the Fund against an increase in the price of the underlying security that it intends to purchase in the future by fixing the price at which it may purchase such security or to limit the loss to the extent of the premium for a security it might otherwise purchase. An American style put or call option may be exercised at any time during a fixed period while a European style put or call option may be exercised only upon expiration or during a fixed period prior thereto, and the Funds may engage in either style option. The Funds are authorized to engage in transactions with respect to exchange-listed options and over-the-counter options ("OTC options") and equity swap transactions. Exchange-listed options are issued by a regulated intermediary such as the Options Clearing Corporation ("OCC"), which guarantees the performance of the obligations of the parties to such options. The discussion below uses the OCC as an example, but is also applicable to other financial intermediaries. With certain exceptions, OCC-issued and exchange-listed options generally settle by physical delivery of the underlying security, although in the future cash settlement may become available. Rather than taking or making delivery of the underlying security through the process of exercising the option, listed options are usually closed by entering into offsetting purchase or sale transactions that do not result in ownership of the new option. The Fund's ability to close out its position as a purchaser or seller of an OCC or exchange- listed put or call option is dependent, in part, upon the liquidity of the option market. Among the possible reasons for the absence of a liquid option market on an exchange are: (i) insufficient trading interest in certain options; (ii) restrictions on transactions imposed by an exchange; (iii) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities including reaching daily price limits; (iv) interruption of the normal operations of the OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to handle current trading volume; or (vi) a decision by one or more exchanges to discontinue the trading of options (or a particular class or series of options), in which event the relevant market for that option on that exchange would cease to exist, although outstanding options on that exchange would generally continue to be exercisable in accordance with their terms. The hours of trading for listed options may not coincide with the hours during which the underlying instruments are traded. To the extent that the option markets close before the markets for the underlying instruments, significant price and rate movements can take place in the underlying markets that cannot be reflected in the option markets. Equity swap transactions are entered into with financial institutions through a direct agreement with the Counterparty, generally pursuant to an ISDA Master Agreement. The Funds may use equity swaps, or other derivative instruments, for hedging purposes against potential adverse movements in security prices or for non-hedging purposes such as seeking to enhance return. The Funds may be required to post collateral for such transactions. The risks involved are similar to the risks for OTC options. Please see the discussion of risks below. OTC options are purchased from or sold to securities dealers, financial institutions or other parties ("Counterparties") through direct bilateral agreement with the Counterparty. In contrast to exchange-listed options, which generally have standardized terms and performance mechanics, all the terms of an OTC option and an equity swap, including terms such as method of settlement, term, exercise price, premium, guarantees and security, are negotiated by the parties. The Funds expect generally to enter into OTC options that have cash settlement provisions, although they are not required to do so. Unless the parties provide for it, there is no central clearing or guaranty function in an OTC option. As a result, if the Counterparty fails to make or take delivery of the security, or other instrument underlying an OTC option it has entered into with a Fund or fails to make a cash settlement payment due in according with the option, the Fund will lose any premium it paid for the option as well as any anticipated benefit of the transaction. The Adviser must assess the creditworthiness of each such Counterparty or any guarantor or credit enhancement of the Counterparty's credit to determine the likelihood that the terms of the OTC option will be satisfied. The Funds will engage in OTC option transactions only with United States securities dealers recognized by the Federal Reserve Bank of New York as "primary dealers" or broker dealers, domestic or foreign banks or other financial institutions which have received (or the guarantors of the obligations of which have received) a short-term credit rating of "A-1" from Standard & Poor's Corporation ("S&P") or "P-1" from Moody's Investor Services ("Moody's") or an equivalent rating from any nationally recognized statistical rating organization ("NRSRO"). The staff of the SEC currently takes the position that OTC options purchased by a fund, and portfolio securities "covering" the amount of the fund's obligation pursuant to an OTC option sold by it (the cost of the sell-back plus the in-the-money amount, if any,) are illiquid, and are subject to a fund's limitations on investments in illiquid securities. If a Fund sells a call option, the premium that it receives may serve as a partial hedge, to the extent of the option premium, against a decrease in the value of the underlying securities in its portfolio or will increase the Fund's income. The sale of put options can also provide income. Baron Growth & Income Fund and Baron Small Cap Fund may purchase and sell call options, and Baron Asset Fund may sell options, on corporate debt securities and equity securities (including convertible securities). All calls sold by the Funds must be "covered" (i.e., a Fund must own the underlying securities) or must meet the asset segregation requirements described below as long as the call is outstanding. Even though a Fund will receive the option premium to help protect it against loss, a call sold by a Fund exposes that Fund during the term of the option to possible loss of opportunity to realize appreciation in the market price of the underlying security or instrument and may require the Fund to hold a security or instrument which it might otherwise have sold. Baron Growth & Income Fund and Baron Small Cap Fund may purchase and sell put options, and Baron Asset Fund may buy put options, on corporate debt securities and equity securities (including convertible securities). All put options must be covered. In selling put options, there is a risk that the Fund may be required to buy the underlying security at a disadvantageous price above the market price. USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS Many hedging transactions, in addition to other requirements, require that a Fund segregate liquid high grade assets with its custodian to the extent Fund obligations are not otherwise "covered" through ownership of the underlying security or instrument. In general, either the full amount of any obligation by the Fund to pay or deliver securities or assets must be covered at all times by the securities or instruments required to be delivered, or, subject to any regulatory restrictions, an amount of cash or liquid high grade securities at least equal to the current amount of the obligation must be segregated with the custodian. The segregated assets cannot be sold or transferred unless equivalent assets are substituted in their place or it is no longer necessary to segregate them. For example, a call option written by the Fund will require that Fund to hold the securities subject to the call (or securities convertible into the needed securities without additional consideration) or to segregate liquid high grade securities sufficient to purchase and deliver the securities if the call is exercised. A put option written requires that the Fund segregate liquid, high grade assets equal to the exercise price. Hedging transactions may be covered by other means when consistent with applicable regulatory policies. OTC options entered into by a Fund will generally provide for cash settlement. As a result, when the Fund sells these instruments it will only segregate an amount of assets equal to its accrued net obligations, as there is no requirement for payment or delivery of amounts in excess of the net amount. These amounts will equal 100% of the exercise price in the case of a noncash settled put, the same as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount plus any sell-back formula amount in the case of a cash-settled put or call. OCC-issued and exchange-listed options sold by a Fund other than those above generally settle with physical delivery, or with an election of either physical delivery, or cash settlement and the Fund will segregate an amount of assets equal to the full value of the option. OTC options settling with physical delivery, or with an election of either physical delivery or cash settlement, will be treated the same as other options settling with physical delivery. DEPOSITORY RECEIPTS The Funds may invest in securities commonly known as American Depository Receipts ("ADRs"), and in European Depository Receipts ("EDRs") or other securities convertible into securities of foreign issuers. ADRs are certificates issued by a United States bank or trust company and represent the right to receive securities of a foreign issuer deposited in a domestic bank or foreign branch of a United States bank and traded on a United States exchange or in an over-the- counter market. EDRs are receipts issued in Europe generally by a non-U.S. bank or trust company that evidence ownership of non-U.S. or domestic securities. Generally, ADRs are in registered form and EDRs are in bearer form. There are no fees imposed on the purchase or sale of ADR's or EDRs although the issuing bank or trust company may impose on the purchase of dividends and the conversion of ADRs and EDRs into the underlying securities. Investment in ADRs has certain advantages over direct investment in the underlying non-U.S. securities, since (i) ADRs are U.S. dollar denominated investments which are easily transferable and for which market quotations are readily available and (ii) issuers whose securities are represented by ADRs are subject to the same auditing, accounting and financial reporting standards as domestic issuers. EDRs are not necessarily denominated in the currency of the underlying security. MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES Baron Growth & Income Fund and Baron Small Cap Fund may invest in securities that are rated in the medium to lowest rating categories by S&P and Moody's, some of which may be known as "junk bonds." The Funds may invest in securities of distressed issuers when the intrinsic values of such securities have, in the opinion of the Adviser, warranted such investment. Corporate debt securities rated Baa are regarded by Moody's as being neither highly protected nor poorly secured. Interest payments and principal security appears adequate to Moody's for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such securities are regarded by Moody's as lacking outstanding investment characteristics and having speculative characteristics. Corporate debt securities rated BBB are regarded by S&P as having adequate capacity to pay interest and repay principal. Such securities are regarded by S&P as normally exhibiting adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for securities in this rating category than in higher rated categories. Corporate debt securities which are rated B are regarded by Moody's as generally lacking characteristics of the desirable investment. In Moody's view, assurance of interest and principal payments or of maintenance of other terms of the security over any long period of time may be small. Corporate debt securities rated BB, B, CCC, CC and C are regarded by S&P on balance as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. In S&P's view, although such securities likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. BB and B are regarded by S&P as indicating the two lowest degrees of speculation in this group of ratings. Securities rated D by S&P or C by Moody's are in default and are not currently performing. The Funds will rely on the Adviser's judgment, analysis and experience in evaluating debt securities. Ratings by S&P and Moody's evaluate only the safety of principal and interest payments, not market value risk. Because the creditworthiness of an issuer may change more rapidly than is able to be timely reflected in changes in credit ratings, the Adviser monitors the issuers of corporate debt securities held in the Funds' portfolio. The credit ratings assigned by a rating agency to a security is a factor considered by the Adviser in selecting a security, but the intrinsic value in light of market conditions and the Adviser's analysis of the fundamental values underlying the issuer are of more significance. Because of the nature of medium and lower rated corporate debt securities, achievement by the Funds of their respective investment objectives when investing in such securities is dependent on the credit analysis of the Adviser. If the Funds purchased primarily higher rated debt securities, risks would be substantially reduced. A general economic downturn or a significant increase in interest rates could severely disrupt the market for medium and lower grade corporate debt securities and adversely affect the market value of such securities. Securities in default are relatively unaffected by such events or by changes in prevailing interest rates. In addition, in such circumstances, the ability of issuers of medium and lower grade corporate debt securities to repay principal and to pay interest, to meet projected business goals and to obtain additional financing may be adversely affected. Such consequences could lead to an increased incidence of default for such securities and adversely affect the value of the corporate debt securities in a Fund's portfolio. The secondary market prices of medium and lower grade corporate debt securities are less sensitive to changes in interest rates than are higher rated debt securities, but are more sensitive to adverse economic changes or individual corporate developments. Adverse publicity and investor perceptions, whether or not based on rational analysis, may also affect the value and liquidity of medium and lower grade corporate debt securities, although such factors also present investment opportunities when prices fall below intrinsic values. Yields on debt securities in the portfolio that are interest rate sensitive can be expected to fluctuate over time. In addition, periods of economic uncertainty and changes in interest rates can be expected to have an impact on the market price of any medium to lower grade corporate debt securities in the portfolio and thus could have an effect on the net asset value of a Fund if other types of securities did not show offsetting changes in values. The secondary market value of corporate debt securities structured as zero coupon securities or payment-in-kind securities may be more volatile in response to changes in interest rates than debt securities which pay interest periodically in cash. Because such securities do not pay current interest, but rather, income is accrued, to the extent that a Fund does not have available cash to meet distribution requirements with respect to such income, it could be required to dispose of portfolio securities that it otherwise would not. Such disposition could be at a disadvantageous price. Investment in such securities also involves certain tax considerations. To the extent that there is no established market for some of the medium or low grade corporate debt securities in which the Funds may invest, there may be thin or no trading in such securities and the ability of the Adviser to value accurately such securities may be adversely affected. Further, it may be more difficult for a Fund to sell securities for which no established retail market exists as compared with securities for which such a market does exist. During periods of reduced market liquidity and in the absence of readily available market quotations for medium and lower grade corporate debt securities held in a Fund's portfolio, the responsibility of the Adviser to value that Fund's securities becomes more difficult and the Adviser's judgment may play a greater role in the valuation of the Fund's securities due to a reduced availability of reliable objective data. To the extent that a Fund purchases illiquid corporate debt securities or securities which are restricted as to resale, that Fund may incur additional risks and costs. Illiquid and restricted securities may be particularly difficult to value and their disposition may require greater effort and expense than more liquid securities. A Fund may be required to incur costs in connection with the registration of restricted securities in order to dispose of such securities, although under Rule 144A under the Securities Act of 1933 certain securities may be determined to be liquid pursuant to procedures adopted by the Board of Trustees under applicable guidelines. TURNOVER RATE The adviser expects that the average annual turnover rate of the portfolios of Baron Asset Fund and Baron Growth & Income Fund should not exceed 50% and of Baron Small Cap Fund should not exceed 100%. A portfolio turnover rate of 100% would occur if all the securities in the portfolio were replaced in a one year period. The portfolio turnover rate is calculated by dividing the lesser of portfolio purchases or sales by the average monthly value of portfolio securities, excluding short term securities. For the year ended September 30, 1997, Baron Asset Fund's portfolio turnover was 13% and Baron Growth & Income Fund's was 25%. For the year ended September 30, 1996, Baron Asset Fund's portfolio turnover was 19% and Baron Growth & Income Fund's portfolio turnover was 40%. Baron Small Cap Fund has no historical rates to report at this time. The turnover rate fluctuates depending on market conditions. MANAGEMENT OF THE FUNDS ----------------------- BOARD OF TRUSTEES AND OFFICERS The Trustees and executive officers of the Funds and their principal occupations during the last five years are set forth below.
Position Held Principal Occupation(s) Name and Address With the Fund During Past Five Years - ---------------- --------------------------- ------------------------------------------------------- Ronald Baron *+ President, Chief Investment President and Director of: 767 Fifth Avenue Officer and Trustee Baron Capital, Inc. (1982- Present), Baron Capital New York, NY 10153 Management, Inc. (1983-Present), Baron Capital Group, Inc. (1984-Present), BAMCO, Inc. (1987- Present). Norman S. Edelcup Trustee Chairman, Item Processing of America (1989-Present), 244 Atlantic Isle (financial institution service bureau); Director, Valhi Inc. N. Miami Beach, FL 33160 (1975-Present) (diversified company); Director, Artistic Greetings, Inc. (1985-Present). Neal M. Elliott Trustee President, Chief Executive Officer and Chairman, 6001 Indian School Road, NE Horizon/CMS Healthcare Corp.(1986-Present) (long term Albuquerque, NM 87110 health care); Director, LTC Properties, Inc.(1992-Present) (real estate investment trust); Director, Frontier Natural Gas Corp. (1991-Present) (oil and gas exploration). Mark M. Feldman Trustee President and Chief Executive Officer, Cold Spring Group, 444 Madison Avenue, Ste 703 Inc. (1993-Present)(reorganization and restructuring consulting); New York, NY 10020 Chief Restructuring Officer, various companies (1995-Present) (case and litigation management); Director, SNL Securities, Inc. (1997-Present) (publisher of data bases and manager of a bank and thrift stock portfolio); Trustee, Aerospace Creditors Liquidating Trust (1993-1997)(administered and liquidated assets). Irwin Greenberg Trustee Chairman (1994-1997) and Director (1991-Present), Lehigh Valley 4303 W. Wyndemere Circle Hospital Board; Retail Consultant, (1990-Present); Director, Cedar Schnecksville, PA 18078 Crest College (1990-Present); Director, Henry Lehr & Co., Inc. (1996-Present) (insurance); President and Chief Executive Officer, Hess's Department Stores (1976-1990).
Position Held Principal Occupation(s) Name and Address With the Fund During Past Five Years - ---------------- --------------------------- ------------------------------------------------------- Clifford Greenberg Vice President Vice President, Baron Capital, Inc., 767 Fifth Avenue Baron Capital Group, Inc., BAMCO, Inc. New York, NY 10153 (1997-Present); General Partner, HPB Associates, L.P. (1984-1996) (investment partnership). Linda S. Martinson*+ Secretary, General Counsel and Secretary of: Baron 767 Fifth Avenue Vice President Capital, Inc. (1983-Present), BAMCO, New York, NY 10153 and Trustee Inc. (1987-Present), Baron Capital Group, Inc. (1984-Present), Baron Capital Management, Inc. (1983-Present). Charles N. Mathewson Trustee Chairman of the Board, International 9295 Prototype Road Game Technology (1986-Present) Reno, NV 89511 (manufacturer of microprocessor- controlled gaming machines and monitoring systems). Harold W. Milner Trustee Retired; President and Chief Executive 2293 Morningstar Drive Officer, Kahler Realty Corporation Park City, UT 84060 (1985-1997) (hotel ownership and management). Raymond Noveck+ Trustee President, The Medical Information 31 Karen Road Line, Inc. (1997-Present) (health care Waban, MA 02168 information); President, Strategic information); Director, Horizon/CMS Healthcare Corporation (1987-1997). Susan Robbins Vice President Senior Analyst, Vice President and 767 Fifth Avenue Director of: Baron Capital, Inc. (1982- New York, NY 10153 Present), Baron Capital Management, Inc.(1984-Present). Morty Schaja* Senior Vice Senior Vice President and Chief 767 Fifth Avenue President, Chief Operating Officer of Baron Capital, Inc. New York, NY 10153 Operating Officer and Trustee (1997-Present), Managing Director, Vice President, Baron Capital, Inc. (1991-Present) and Director, Baron Capital Group, Inc., Baron Capital Management, Inc., and BAMCO, Inc. (1997-Present). Daniel Tisch Trustee Partner, Mentor Partners, L.P. (1987- 500 Park Avenue Present) (investment partnership). New York, NY 10022
Position Held Principal Occupation(s) Name and Address With the Fund During Past Five Years - ---------------- --------------------------- ------------------------------------------------------- David A. Silverman, M.D. Trustee Physician and Faculty, New York Univ. 239 Central Park West School of Medicine (1976-Present). New York, NY 10024 Peggy Wong Treasurer and Treasurer and Chief Financial Officer 767 Fifth Avenue Chief Financial Officer of: Baron Capital, Inc., Baron Capital New York, NY 10153 Group, Inc., BAMCO,Inc., Baron Capital Management, Inc.(1987-Present). - --------------------------------- * Trustees deemed to be "interested persons" of the Fund as that term is defined in the Investment Company Act of 1940. + Members of the Executive Committee, which is empowered to exercise all of the powers, including the power to declare dividends, of the full Board of Trustees when the full Board of Trustees is not in session.
The Trustees who are not affiliated with or interested persons of the Funds' investment adviser receive fees of $5,000 annually plus an attendance fee of $500 for each meeting attended in person ($250 for telephone participation). The Trustees who are interested persons of the Funds' investment adviser receive no compensation from the Funds. As indicated in the above table, certain Trustees and officers also hold positions with the Funds' adviser and distributor. PRINCIPAL HOLDERS OF SHARES As of December 31, 1997, the following persons were known to the Funds to be the record or beneficial owners of more than 5% of the outstanding securities of the Funds:
Baron Asset Baron Growth Baron Small Fund & Income Fund Cap Fund ----------- ------------- ----------- Charles Schwab & Co., Inc. 49.8% 45.8% 45.2% National Financial Services Corp. 11.8% 15.6% 28.4%
All of the above record owners are brokerage firms or other Financial Institutions that hold stock for the benefit of their respective customers. As of December 31, 1997, all of the officers and Trustees of Baron Asset Fund as a group beneficially owned directly or indirectly 0.41% of Baron Asset Fund's outstanding shares 1.30% of Baron Growth & Income Fund's outstanding shares and 1.22% of Baron Small Cap Fund's outstanding shares. INVESTMENT ADVISER The investment adviser to the Funds is BAMCO, Inc. (the "Adviser"), a New York corporation with its principal offices at 767 Fifth Avenue, New York, N.Y. 10153 and a subsidiary of Baron Capital Group, Inc. ("BCG"). Mr. Ronald Baron is the controlling stockholder of BCG and is BAMCO's chief investment officer. Mr. Baro-n has over 25 years of experience as a Wall Street analyst and has managed money for others for over 20 years. He has been a participant in Barron's Roundtable and has been a featured guest on Wall Street Week, CNN and CNBC/FNN. Pursuant to separate Advisory Agreements with each Fund (the "Advisory Agreement"), the Adviser furnishes continuous investment advisory services and management to each Fund, including making the day-to-day investment decisions and arranging portfolio transactions for the Funds subject to such policies as the Trustees may determine. Baron Asset Fund incurred advisory expenses of $18,573,064 for the year ended September 30, 1997; $6,923,899 for the year ended September 30, 1996; and $1,549,306 for the year ended September 30, 1995. Baron Growth & Income Fund incurred advisory expenses of $2,828,391 for the year ended September 30, 1997; $994,621 for the year ended September 30, 1996; and $60,398 for the period January 3, 1995 (commencement of operations) to September 30, 1995. Baron Small Cap Fund had no operating history as of September 30, 1997. Under the Advisory Agreement, the Adviser, at its own expense and without reimbursement from the Funds, furnishes office space and all necessary office facilities, equipment and executive personnel for managing the Funds, and pays the salaries and fees of all officers and Trustees who are interested persons of the Adviser. The Funds pay all operating and other expenses not borne by the Adviser such as audit, accounting and legal fees; custodian fees; expenses of registering and qualifying its shares with federal and state securities commissions; expenses in preparing shareholder reports and proxy solicitation materials; expenses associated with each Fund's shares such as dividend disbursing, transfer agent and registrar fees; certain insurance expenses; compensation of Trustees who are not interested persons of the Adviser; and other miscellaneous business expenses. The Funds also pay the expenses of offering the shares of each respective Fund, including the registration and filing fees, legal and accounting fees and costs of printing the prospectus and related documents. Each Fund also pays all taxes imposed on it and all brokerage commissions and expenses incurred in connection with its portfolio transactions. Ronald Baron is the controlling stockholder, President and a Director of BCG. The Adviser utilizes the staffs of Baron Capital and Baron Capital's subsidiary Baron Capital Management, Inc. ("BCM") to provide research. Directors, officers or employees of the Adviser and/or its affiliates may also serve as officers or Trustees of the Fund. BCM is an investment adviser to institutional and individual accounts. Clients of BCM and Baron Capital have investment objectives which may vary only slightly from those of each other and of the Fund. BCM and Baron Capital invest assets in such clients' accounts and in the accounts of principals and employees of BCM and Baron Capital in investments substantially similar to, or the same as, those which constitute the principal investments of the Fund. When the same securities are purchased for or sold by the Fund and any of such other accounts, it is the policy of the Adviser, BCM and Baron Capital to allocate such transactions in a manner deemed equitable by the Adviser, and for the Adviser's, BCM's and Baron Capital's principals and employees to take either the same or least favorable price of the day. Each Advisory Agreement provides that the Fund may use "Baron" as part of its name for so long as the Adviser serves as investment adviser to that Fund. Each Fund acknowledges that the word "Baron" in its name is derived from the name of the entities controlling, directly and indirectly, the Adviser, which derive their name from Ronald Baron; that such name is the property of the Adviser and its affiliated companies for copyright and/or other purposes; and that if for any reason the Adviser ceases to be that Fund's investment adviser, that Fund will promptly take all steps necessary to change its name to one that does not include "Baron," absent the Adviser's written consent. Each Advisory Agreement provides that the Adviser shall have no liability to that Fund or its shareholders for any error of judgment or mistake of law or for any loss suffered by that Fund; provided, that the Adviser shall not be protected against liabilities arising by virtue of willful misfeasance, bad faith or gross negligence, or reckless disregard of the Adviser's obligations under the Advisory Agreement. The Advisory Agreement with respect to Baron Asset Fund and Baron Growth & Income Fund were approved by a majority of the Trustees, including a majority of the Trustees who are not "interested persons" ( as defined by the Investment Company Act of 1940 ( "1940 Act" ) ) on May 11, 1987, and October 21, 1994, respectively. The Advisory Agreement with respect to Baron Small Cap Fund was approved by a majority of the Trustees, including a majority of the non- interested Trustees, on July 29, 1997. Baron Small Cap Fund's Advisory Agreement is for an initial two year period but the Advisory Agreements must normally be approved annually by the Trustees or a majority of the particular Fund's shares and by a majority of the Trustees who are not parties to the Advisory Agreement or interested persons of any such party. With respect to Baron Asset Fund and Baron Growth & Income Fund, such approval for 1997 was approved at a Board of Trustees meeting held on April 28, 1997. Each Advisory Agreement is terminable without penalty by either the Fund (when authorized by majority vote of either its outstanding shares or the Trustees) or the Adviser on 60 days' written notice. Each Advisory Agreement shall automatically terminate in the event of its "assignment" (as defined by 1940 Act). Distributor The Funds have a distribution agreement with Baron Capital, Inc., ("Baron Capital" or the "Distributor") a New York corporation and a subsidiary of BCG (controlled by Ronald Baron), located at 767 Fifth Avenue, New York, N.Y. 10153. Baron Capital is affiliated with the Adviser. The Distributor acts as the agent for the Funds for the continuous public offering of their shares on a best efforts basis pursuant to a distribution plan adopted under Rule 12b-1 under the 1940 Act ("Distribution Plan"). Distribution Plan The Distribution Plan authorizes the Funds to pay the Distributor a distribution fee equal on an annual basis to 0.25% of the Funds' average daily net assets. The fee was reduced to 0.25% from 0.50% on July 12, 1993. The distribution fee is paid to the Distributor in connection with its activities or expenses primarily intended to result in the sale of shares, including, but not limited to, compensation to registered representatives or other employees of the Distributor; compensation to and expenses of employees of the Distributor who engage in or support the distribution of shares or who service shareholder accounts; telephone expenses; interest expenses; preparing, printing and distributing promotional and advertising material; preparing, printing and distributing the Prospectus and reports to other than current shareholders; and commissions and other fees to broker-dealers or other persons (excluding banks) who have introduced investors to the Fund. If and to the extent the expenses listed below are considered to be primarily intended to result in the sale of shares within the meaning of Rule 12b-1, they are exempted from the limits set forth above: (a) the costs of preparing, printing or reproducing and mailing all required reports and notices to shareholders; (b) the costs of preparing, printing or reproducing and mailing all proxy statements and proxies (whether or not such proxy materials include any item relating to or directed toward the sale of shares); (c) the costs of preparing, printing or reproducing and mailing all prospectuses and statements of additional information; (d) all legal and accounting fees relating to the preparation of any such report, prospectus, and proxy materials; (e) all fees and expenses relating to the qualification of the Funds and/or their shares under the securities or "Blue Sky" laws of any jurisdiction; (f) all fees under the 1940 Act and the Securities Act of 1933, including fees in connection with any application for exemption relating to or directed toward the sale of Shares; (g) all fees and assessments, if any, of the Investment Company Institute or any successor organization, whether or not its activities are designed to provide sales assistance; (h) all costs of preparing and mailing confirmations of shares sold or redeemed and reports of share balances; (i) all costs of responding to telephone or mail inquiries of shareholders or prospective shareholders. The Distribution Plan requires that while it is in effect the Distributor report in writing, at least quarterly, the amounts of all expenditures, the identity of the payees and the purposes for which such expenditures were made for the preceding fiscal quarter. For the fiscal year ended September 30, 1997, Baron Asset Fund paid distribution fees to the Distributor of $4,643,269 (an additional $577,723 was incurred but not paid pursuant to the 0.25% limitation), and Baron Growth & Income Fund paid distribution fees to the Distributor of $707,098 (an additional $85,998 was incurred but not paid pursuant to the 0.25% limitation). The distribution expenses incurred by the Distributor for the fiscal year ended September 30, 1997with respect to these two Funds were as follows:
(a) Advertising $ 4,315 (b) printing and mailing of prospectuses 941,633 to other than current shareholders (c) Compensation paid or to be paid to 4,022,417 sales personnel (d) Other 1,055,723
Trustees of the Funds who were not interested persons of the Funds had no direct or indirect financial interest in the operation of the Distribution Plan or the Distribution Agreement. Ronald Baron, an interested person of the Funds, the Adviser and the Distributor, had such an interest. Baron Asset Fund received net proceeds of approximately $1,902,643,771 from sales of its shares during the fiscal year ended September 30, 1997. The cost of shares redeemed by the Fund during such year was approximately $507,202,614. Baron Growth & Income Fund received net proceeds of approximately $203,535,325 from sales of1its shares for the fiscal year ended September 30,1997. The cost of shares redeemed by the Fund during such period was approximately $112,424,286 Baron Small Cap Fund had no operating history as of September 30, 1997. The Distribution Plan has been approved by the Funds' Board of Trustees, including a majority of the Trustees who are not interested persons of the Funds and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related thereto. In approving the Distribution Plan, the Trustees considered various factors and determined that there is a reasonable likelihood that the Plan will benefit the Funds and their shareholders. Baron Capital is authorized to make payments to authorized dealers, banks and other financial institutions who have rendered distribution assistance and ongoing shareholder support services, shareholder servicing assistance or record keeping. Certain states may require that any such person be registered as a dealer with such state. The Funds may execute portfolio transactions with and purchase securities issued by depository institutions that receive payments under the Distribution Plan. No preference will be shown in the selection of investments for the instruments of such depository institutions. Baron Capital may also retain part of the distribution fee as compensation for its services and expenses in connection with the distribution of shares. Baron Capital anticipates that its actual expenditures will substantially exceed the distribution fee received by its during the early years of the Funds, and that in later years its expenditures may be less than the distribution fee, thus enabling Baron Capital to realize a profit in those years. For example, if a Fund's average daily net asset value were $2 million, even if Baron Capital incurred $50,000 of distribution expenses, it would receive only $10,000 as its fee. Alternatively, if, the Fund's daily average net assets were $25 million, and Baron Capital incurred $60,000 of distribution expenses, it would receive $125,000 as its fee giving Baron Capital a $65,000 profit. If the Distribution Plan is terminated, the Funds will owe no payments to Baron Capital other than any portion of the distribution fee accrued through the effective date of termination but then unpaid. Unless terminated in accordance with its terms, the Distribution Plan shall continue in effect until, and from year to year thereafter if, such continuance is specifically approved at least annually by its Trustees and by a majority of the Trustees who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related thereto, such votes cast in person at a meeting called for the purpose of such vote. The Distribution Plan may be terminated at any time by the vote of a majority of the members of the Funds' Board of Trustees who are not interested persons of the Funds and have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related thereto or by the vote of a majority of the outstanding shares. The Distribution Plan may not be amended to increase materially the amount of payments to be made without the approval of a majority of the shareholders. All material amendments must be approved by a vote of the Trustees and of the Trustees who are not interested persons of the Funds and have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related thereto, such votes cast in person at a meeting called for the purpose of such vote. The Glass-Steagall Act and other applicable laws, among other things, prohibit banks from engaging in business of underwriting, selling or distributing securities. Accordingly, the Distributor will enter into agreements with banks only to provide administrative assistance. However, changes in federal or state statues and regulations pertaining to the permissible activities of banks and their affiliates, as well as judicial or administrative decisions or interpretations could prevent a bank from continuing to perform all or a part of the contemplated services. If a bank were prohibited from so acting, the Trustees would consider what actions, if any, would be necessary to continue to provide efficient and effective shareholder services. It is not expected that shareholders would suffer any adverse financial consequences as a result of these occurrences. BROKERAGE The Adviser is responsible for placing the portfolio brokerage business of the Funds with the objective of obtaining the best net results for the Funds, taking into account prompt, efficient and reliable executions at a favorable price. Brokerage transactions for the Funds are effected chiefly by or through the Adviser's affiliate, Baron Capital, when consistent with this objective and subject to the conditions and limitations of the 1940 Act. Baron Capital is a member of the National Association of Securities Dealers, Inc., but is not a member of any securities exchange. The Funds' Board of Trustees has adopted procedures pursuant to Rule 17e-1 of the 1940 Act which are reasonably designed to provide that the commissions paid to Baron Capital are reasonable and fair compared to the commission, fee or other enumeration received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. The Board reviews no less frequently than quarterly that all transactions effected pursuant to Rule 17e-1 during the preceding quarter were effected in compliance with such procedures. The Funds and the Adviser furnish such reports and maintain such records as required by Rule 17e-1. The Funds do not deal with Baron Capital in any portfolio transaction in which Baron Capital acts as principal. For the fiscal year ended September 30, 1997, of the total $3,307,779 brokerage commissions paid by Baron Asset Fund and Baron Growth & Income Fund, $2,575,700 brokerage commissions were paid to Baron Capital. For the fiscal year ended September 30, 1996, of the total $1,576,882 brokerage commissions paid by Baron Asset Fund and Baron Growth & Income Fund, $1,383,564 brokerage commissions were paid to Baron Capital. The brokerage commissions paid to Baron Capital represent 77.9% of the aggregate dollar amount of brokerage commissions paid and 76.4% of the aggregate dollar amount of transactions involving the payment of commissions for the 1997 fiscal year. The brokerage commissions paid to Baron Capital represent 87.7% of the aggregate dollar amount of brokerage commissions paid and 58.4% of the aggregate dollar amount of transactions involving the payment of commissions for the 1996 fiscal year. For the fiscal year ended September 30, 1995, of the total $369,753 brokerage commissions paid by the Funds, $341,336 in brokerage commissions were paid to Baron Capital. The brokerage commissions paid to Baron Capital represent 92.3% of the aggregate dollar amount of brokerage commissions paid and 89.0% of the aggregate dollar amount of transactions involving the payment of commissions for the 1995 fiscal year. Baron Small Cap Fund had no operating history as of September 30, 1997. Under the Investment Advisory Agreements and as permitted by Section 28(e) of the Securities and Exchange Act of 1934, the Adviser may cause the Funds to pay a broker-dealer (except Baron Capital) which provides brokerage and research services to the Adviser an amount of commission for effecting a securities transaction for the Funds in excess of the amount other broker-dealers would have charged for the transaction if the Adviser determines in good faith that the greater commission is consistent with the Funds' policies and is reasonable in relation to the value of the brokerage and research services provided by the executing broker-dealer viewed in terms of either a particular transaction or the Adviser's overall responsibilities to the Funds or to its other clients. The term "brokerage and research services" includes advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or of purchasers or sellers of securities; furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; and effecting securities transactions and performing functions incidental thereto such as clearance and settlement. Such research and information may be used by the Adviser or its affiliates to supplement the services it is required to perform pursuant to the Advisory Agreement in serving the Funds and/or other advisory clients of affiliates. Broker-dealers may be willing to furnish statistical research and other factual information or services to the Adviser for no consideration other than brokerage or underwriting commissions. Securities may be bought or sold through such broker-dealers, but at present, unless otherwise directed by the Funds, a commission higher than one charged elsewhere will not be paid to such a firm solely because it provided research to the Adviser. Research provided by brokers is used for the benefit of all of the Adviser's or its affiliates' clients and not solely or necessarily for the benefit of the Funds. The Adviser's investment management personnel attempt to evaluate the quality of research provided by brokers. Results of this effort are sometimes used by the Adviser as a consideration the in the selection of brokers to execute portfolio transactions. Baron Capital acts as broker for, in addition to the Funds, accounts of BCM and Baron Capital, including accounts of principals and employees of Baron Capital, BCM and the Adviser. Investment decisions for the Funds for investment accounts managed by BCM and for accounts of Baron Capital are made independent of each other in light of differing considerations for the various accounts. The same investment decision may, however, be made for two or more of the Adviser's, BCM's and/or Baron Capital's accounts. In such event, simultaneous transactions are inevitable. Purchases and sales are averaged as to price where possible and allocated to account in a manner deemed equitable by the Adviser in conjunction with BCM and Baron Capital. This procedure could have a detrimental effect upon the price or value of the security for the Funds, but may have a beneficial effect. The investment advisory fee that the Funds pay to the Adviser is not reduced as a consequence of the Adviser's receipt of brokerage and research services. To the extent the Funds' portfolio transactions are used to obtain such services, the brokerage commissions paid by the Funds will exceed those that might otherwise be paid by an amount that cannot be presently determined. Such services would by useful and of value to the Adviser in serving both the Funds and other clients and, conversely, such services obtained by the placement of brokerage business of other clients would by useful to the Adviser in carrying out its obligations to the Funds. CUSTODIAN, TRANSFER AGENT AND DIVIDEND AGENT The Bank of New York, 48 Wall Street, New York, NY, is the custodian for the Funds' cash and securities. DST Systems, Inc., CT-7 Tower, 1004 Baltimore, Kansas City, MO 64105, is the transfer agent and dividend agent for the Funds' shares. Neither institution assists in or is responsible for investment decisions involving assets of the Funds. REDEMPTION OF SHARES The Funds expect to make all redemptions in cash, but have reserved the right to make payment, in whole or in part, in portfolio securities. Payment will be made other than all in cash if the Funds' Board of Trustees determines that economic conditions exist which would make payment wholly in cash detrimental to a particular fund's best interests. Portfolio securities to be so distributed, if any, would be selected in the discretion of the Funds' Board of Trustees and priced as described under "Determining Your Share Price" herein and in the Prospectus. NET ASSET VALUE As more fully set forth in the Prospectus under "Determining Your Share Price," the net asset value per share of each Fund is determined as of the close of the New York Stock Exchange on each day that the Exchange is open. The Exchange is open all week days that are not holidays, which it announces annually. The most recent announcement states it will not be open on New Year's Day, Martin Luther King, Jr.'s Day, Washington's Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Securities traded on more than one national securities exchange are valued at the last sale price of the day as of which such value is being determined as reflected at the close of the exchange which is the principal market for such securities. U.S. Government obligations and other debt instruments having sixty days or less remaining until maturity are stated at amortized cost. Debt instruments having a greater remaining maturity will be valued at the highest bid price from the dealer maintaining an active market in that security or on the basis of prices obtained from a pricing service approved by the Board of Trustees. TAXES Each Fund intends to qualify every year as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). Qualification as a regulated investment company relieves the Funds of Federal income taxes on the portion of their net investment income and net realized capital gains distributed to shareholders. The Funds intend to distribute virtually all of their net investment income and net realized capital gains at least annually to their respective shareholders. A non-deductible 4% excise tax will be imposed on a Fund to the extent that it does not distribute (including declaration of certain dividends), during each calendar year, (i) 98% of its ordinary income for such calendar year, (ii) 98% of its capital gain net income (the excess of short and long term capital gain over short and long term capital loss) for each one-year period ending October 31 and (iii) certain other amounts not distributed in previous years. Shareholders will be taxed during each calendar year on the full amount of such dividends distributed (including certain declared dividends not actually paid until the next calendar year). For Federal income tax purposes, distributions paid from net investment income and from any net realized short-term capital gains are taxable to shareholders as ordinary income, whether received in cash or in additional shares. Distributions paid from net capital gains are taxable as long-term capital gains, whether received in cash or shares and regardless of how long a shareholder has held the shares, and are not eligible for the dividends received deduction. Distributions of investment income (but not distributions of short-term or long-term capital gains) received by shareholders will qualify for the 70% dividends received deduction available to corporations to the extent designated by the Fund in a notice to each shareholder. Unless all of a Fund's gross income constitutes dividends from domestic corporations qualifying for the dividends received deduction, a portion of the distributions of investment income to those holders of that Fund which are corporations will not qualify for the 70% dividends received deduction. The dividends received deduction for corporate holders maybe further reduced if the shares with respect to which dividends are received are treated as debt-financed or deemed to have been held for less than forty-six (46) days. The Funds will send written notices to shareholders regarding the Federal income tax status of all distributions made during each calendar year as ordinary income or capital gain and the amount qualifying for the 70% dividends received deduction. The foregoing relates to Federal income taxation. Distributions may also be subject to state and local taxes. The Funds are organized as a Massachusetts business trust. Under current law, so long as the Funds qualify for the Federal income tax treatment described above, it is believed that they will not be liable for any income or franchise tax imposed by Massachusetts. Investors are urged to consult their own tax advisers regarding the application of Federal, state and local tax laws. ORGANIZATION AND CAPITALIZATION GENERAL Baron Asset Fund is an open-end investment company organized as a series fund and established under the laws of The Commonwealth of Massachusetts by a Declaration of Trust dated February 19, 1987, as amended. The three series currently available are Baron Asset Fund, Baron Growth & Income Fund, and Baron Small Cap Fund. Shares entitle their holders to one vote per share. Shares have noncumulative voting rights, which means that holders of more than 50% of the shares voting for the election of Trustees can elect all Trustees and, in such event, the holders of the remaining shares voting for the election of Trustees will not be able to elect any person or persons as Trustees. Shares have no preemptive or subscription rights, and are transferable. Shareholder and Trustee Liability Under Massachusetts law, shareholders of a Massachusetts business trust may, under certain circumstances, be held personally liable as partners for the obligations of the trust. The Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Fund or any series thereof. Notice of such disclaimer will normally be given in each agreement, obligation or instrument entered into or executed by the Funds or Trustees. The Declaration of Trust provides for indemnification by a Fund for any loss suffered by a shareholder as a result of an obligation of that Fund. The Declaration of Trust also provides that a Fund shall, upon request, assume the defense of any claim made against any shareholder for an act or obligation of that Fund and satisfy any judgement thereon. Thus, the risk of a shareholder incurring financial loss on account or shareholder liability is limited to circumstances in which the Fund itself would be unable to meets its obligations. The Trustees believe that, in view of the above, the risk of personal liability of shareholders is remote. The Declaration of Trust further provides that the Trustees will not be liable for errors of judgement or mistakes of fact or law, but nothing in the Declaration of trust protects a trustee against liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. OTHER INFORMATION INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P., 1301 Avenue of the Americas, New York, New York 10019, has been selected as independent accountants of the Funds. Calculations of Performance Data Advertisements and other sales literature for the Funds may refer to average annual total return and actual return. Average annual total return is computed by finding the average annual compounded rates of return over a given period that would equate a hypothetical initial investment to the ending redeemable value thereof, as follows: P(1+T)^ = ERV Where: P = a hypothetical initial payment of $1,000 T = average annual total return ^ = number of years ERV = ending redeemable value at the end of the period of a hypothetical $1,000 investment made at the beginning of the period Actual return is computed by measuring the percentage change between the net asset value of a hypothetical $1,000 investment in the Fund at the beginning of a period and the net asset value of that investment at the end of a period. The performance data used in advertisements does not give effect to a 2% contingent deferred sales charge that is no longer applicable. All performance calculations assume that dividends and distributions are reinvested at the net asset value on the appropriate reinvestment dates and include all recurring fees. Computed in the manner described above, the performance of Baron Asset Fund has been:
Average Annual Total Actual Return (does not Return (prior to January include the 2% 1, 1992 includes the 2% contingent deferred contingent deferred sales load) sales load where investment is less than 3 years) Year ended 12/31/97 +33.9% +33.9% Year ended 12/31/96 +22.0% +22.0% Year ended 12/31/95 +35.3% +35.3% Year ended 12/31/94 +7.4% +7.4% Year ended 12/31/93 +23.5% +23.5% Year ended 12/31/92 +13.9% +13.9% Year ended 12/31/91 +32.0% +34.0% Year ended 12/31/90 -20.5% -18.5% Year ended 12/31/89 +23.0% +25.0% Year Ended 12/31/88 +32.4% +34.4% Inception (06/12/87) to 12/31/97 +19.1% +530.6% Inception (06/12/87) to 12/31/96 +17.6% +371.0% Inception (06/12/87) to 12/31/95 +17.1% +286.2% Inception (06/12/87) to 12/31/94 +14.9% +185.5% Inception (06/12/87) to 12/31/93 +16.1% +165.8%
Average Annual Total Actual Return (does not Return (prior to January include the 2% 1, 1992 includes the 2% contingent deferred contingent deferred sales load) sales load where investment is less than 3 years) Inception (06/12/87) to 12/31/92 +14.8% +115.2% Inception (06/12/87) to 12/31/91 +15.0% +89.0% Inception (06/12/87) to 12/31/90 +10.1% +41.0% Inception (06/12/87) to 12/31/89 +23.4% +73.0% Inception (06/12/87) to 12/31/88 +22.1% +38.4% Five Years Ended 12/31/97 +24.0% +193.0% FOR BARON GROWTH & INCOME FUND THE PERFORMANCE HAS BEEN: Year Ended 12/31/97 +31.1% +31.1% Year Ended 12/31/96 +27.7% +27.7% Year Ended 12/31/95 +52.5% +52.5% Three Years Ended 12/31/97 +36.7% +155.4% (From Inception 01/03/95) FOR BARON SMALL CAP FUND THE PERFORMANCE HAS BEEN: Quarter ended 12/31/97 +3.1% +3.1%
Performance results represent past performance and are not necessarily representative of future results. Investment return and principal value will fluctuate so that shares may be worth more or less than their original cost when redeemed. In addition to advertising average annual and actual return data, comparative performance information may be used in advertising materials about the Funds, including data and other information from Lipper Analytical Services, Inc., CDA Investment Technologies, Morningstar Inc., Money, Forbes, SEI, Ibbotson, No Load Investor, Growth Fund Guide, Fortune, Barron's, The New York Times, The Wall Street Journal, Changing Times, Medical Economics, Business Week, Consumer Digest, Dick Davis Digest, Dickenson's Retirement Letter, Equity Fund Outlook, Executive Wealth Advisor, Financial World, Investor's Daily, Time, Personal Finance, Investment Advisor, Smartmoney, Rukeyser, Kiplinger's, NAPFA News, US News, Bottomline, Investors Business Daily, Bloomberg Radio, CNBC, and/or USA Today. The Fund may also use comparative performance data from indexes such as the Dow Jones Industrial Average, Standard & Poor's 400, 500, Small Cap 600, 1,500, or Midcap 400, Value Line Index, Wilshire 4,500, 5000, or Small Cap; NASDAQ/OTC Composite, New York Stock Exchange; and the Russell 1000, 2000, 2500, 3000, 2000 Growth, 2000 Value, or Midcap. With respect to the rating services, the Fund may use performance information that ranks the Fund in any of the following categories: all funds, aggressive growth funds, value funds, mid-cap funds, small-cap funds, growth and income funds, equity income funds, and any combination of the above listed categories. BARON ASSET FUND PART C.OTHER INFORMATION ------------------------ ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS --------------------------------- A. Financial Statements: Included in Part B of this Registration Statement: Report of Independent Accountants Statement of Net Assets at September 30, 1997 Statement of Assets and Liabilities at September 30, 1997 Statement of Operations for the Year Ended to September 30, 1997 Statement of Changes in Net Assets for the Years Ended September 30, 1997 and 1996 Notes to the Financial Statements Supplementary Information (condensed financial information) (also included in Part A of this Registration Statement) B. Exhibits: 1. Declaration of Trust dated February 19, 1987. 2. By-laws dated February 19, 1987. 3. Inapplicable. 4. Specimen Share Certificates representing shares of beneficial interest of $.01 par value. 5. (a) Investment Advisory Agreement between Baron Asset Fund and BAMCO, Inc. (b) Investment Advisory Agreement between Baron Growth & Income Fund and BAMCO, Inc. (c) Investment Advisory Agreement between Baron Small Cap Fund and BAMCO, Inc. 6. Distribution Agreement with Baron Capital, Inc. 7. Inapplicable. 8. (a) Custodian Agreement with The Bank of New York. (b) Fee Schedule for Exhibit 8(a). 9. (a) Transfer Agency Agreement with Supervised Services Company, Inc. (b) Fee Schedule for Exhibit 9(a). 10. Opinion and consent of counsel as to legality of shares being registered (filed with Rule 24f-2 Notice). 11. Consent of Independent Certified Public Accountants. 12. Inapplicable. 13. Letter agreement between the Registrant and the Purchaser of the Initial Shares. 14. (a) IRA Disclosure Statement. (b) IRA Account Application. (c) 5305-A Agreement. 15. Distribution Plan pursuant to Rule 12b-1. 16. Schedule for computation of performance quotations. 17. Power of Attorney. ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT The following diagram indicates the persons under common control with Registrant, all of which are incorporated in New York. Ronald Baron | | 90% | | Baron Capital Group, Inc. | | 100% 100% | | Baron Capital, Inc. BAMCO, Inc. | 100% | | Baron Capital Management, Inc. Baron Capital, Inc. serves as distributor of Registrant's shares and performs brokerage services for Registrant. BAMCO, Inc. serves as investment adviser to Registrant. Ronald Baron, President of Registrant, is the controlling shareholder of Baron Capital Group, Inc. and serves as President of all the above entities. ITEM 26. NUMBER OF HOLDERS OF SECURITIES (AS OF DECEMBER 31, 1997) (1) (2) TITLE OF CLASS OF SERIES NUMBER OF SHAREHOLDERS (APPROX) - -------------------------------- --------------------------------- Shares of beneficial interest ($.01 par value), Baron Asset Fund 185,000 Baron Growth & Income Fund 35,000 Baron Small Cap Fund 25,000 ITEM 27. INDEMNIFICATION Article IV of Registrant's Declaration of Trust states as follows: SECTION 4.1. NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC. No shareholder shall be subject to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall be subject to any personal liability whatsoever to any Person, other than to the Trust of its shareholders, in connection with Trust Property of the affairs of the Trust, save only that arising from bad faith, willful misfeasance, gross negligence or reckless disregard of his duties with respect to such Person; and all such Persons shall look solely to the Trust Property, or to the Property of one or more specific series of the Trust if the claim arises from the conduct of such Trustee, officer, employee or agent with respect to only such Series, for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability of the Trust, he shall not, on account thereof, be held to any personal liability. The Trust shall indemnify and hold each shareholder harmless from and against all claims and liabilities, to which such shareholder may become subject by reason of his being or having been a shareholder, and shall reimburse such shareholder out of the Trust Property for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. Indemnification and reimbursement required by the preceding sentence shall be made only out of assets of the one of more Series whose shares were held by said shareholder at the time the act or event occurred which gave rise to the claim against or liability of said shareholder. The rights accruing to a shareholder under this Section 4.1 be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a shareholder in any appropriate situation even though not specifically provided herein. SECTION 4.2. NON-LIABILITY OF TRUSTEES, ETC. No Trustee, officer, employee or agent of the Trust shall be liable to the Trust, its shareholders, or to any shareholder, Trustee, officer, employee, or agent thereof for any action or failure to act (including without limitation the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of the duties involved in the conduct of his office. SECTION 4.3. MANDATORY INDEMNIFICATION. (a) Subject to the exceptions and limitations contained in paragraph (b) below: (i) every person who is, or has been, a Trustee or officer of the Trust shall be indemnified by the Trust, or by one or more Series thereof if the claim arises from his or her conduct with respect to only such Series to the fullest extent permitted by law against all liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement thereof; (ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal, or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Trustee or an officer: (i) against any liability to the Trust or a Series thereof or the shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; (ii) with respect to any matter as to which he shall have been finally adjudicated not the have acted in good faith in the reasonable belief that his action was in the best interest of the Trust or a Series thereof; (iii)in the event of a settlement or other disposition not involving a final adjudication as provided in paragraph (b)(ii) resulting in a payment by a Trustee or officer, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office: (A) by the court or other body approving the settlement or other disposition; or (B) based upon a review of readily available facts (as opposed to a full trial-type inquiry) by (x) vote of a majority of the Non-interested Trustees acting on the matter (provided that a majority of the Non-interested Trustees then in office act on the matter) or (y) written opinion of independent legal counsel. (c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Trustee or officer may now or hereafter be entitled, shall continue as to a person who has ceased to be such Trustee or officer and shall inure to the benefit of the heirs, executors, administrators and assigns of such a person. Nothing contained herein shall affect any rights to indemnification to which personnel of the Trust other than Trustees and officers may be entitled by contract or otherwise under law. (d) Expenses of preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in paragraph (a) of this Section 4.3 may be advanced by the Trust or a Series thereof prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he is not entitled to indemnification under this Section 4.3, provided that either: (i) such undertaking is secured by a surety bond or some other appropriate security provided by the recipient, or the Trust or Series thereof shall be insured against losses arising out of any such advances; or (ii) a majority of the Non-interested Trustees acting on the matter (provided that a majority of the Non-interested Trustees act on the matter) or an independent legal counsel in a written opinion shall determine, based upon a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the recipient ultimately will be found entitled to indemnification. As used in this Section 4.3, a "Non-interested Trustee" is one who is not (i) an "Interested Person" of the Trust (including anyone who has been exempted from being an "Interested Person" by any rule, regulation or order of the Commission), or (ii) involved in the claim, action, suit or proceeding. ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER The business and other connections of BAMCO, Inc. is summarized under "The Adviser" in the Prospectus constituting Part A of the Registration Statement, which summary is incorporated herein by reference. The business and other connections of the officers and directors of BAMCO, Inc. is currently listed in the investment adviser registration on Form ADV for BAMCO, Inc. (File No. 801-29080) and is incorporated herein by reference. ITEM 29. PRINCIPAL UNDERWRITERS (a) Inapplicable. (b)
(1) (2) (3) Positions and Positions and Name and Principal Offices with Offices with Business Address Underwriter Registrant - ------------------ ---------------- --------------- Ronald Baron Director and Trustee and 767 Fifth Avenue President President New York, N.Y. 10153 Collin Baron Director None 855 Main Street Bridgeport, CT 06604 Susan Robbins Director Vice President 767 Fifth Avenue and Vice President New York, N.Y. 10153 Peggy Wong Treasurer Treasurer 767 Fifth Avenue New York, N.Y. 10153 Morty Schaja Vice President Trustee and 767 Fifth Avenue Vice President New York, N.Y. 10153 Clifford Greenberg Vice President Vice President 767 Fifth Avenue New York, N.Y. 10153 Linda S. Martinson Secretary Trustee, Vice 767 Fifth Avenue President and New York, N.Y. 10153 Secretary
(c) Inapplicable. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS Certain accounts, books and other documents required to be maintained by Section 31 (a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are maintained at the offices of the Registrant, BAMCO, Inc. and Baron Capital, Inc., 767 Fifth Avenue, New York, NY 10153. Records relating to the duties of the Registrant's transfer agent are maintained by DST Systems, Inc. 1004 Baltimore Avenue, Kansas City, MO 64105 and of the Registrant's custodian are maintained by The Bank of New York, 48 Wall Street, New York, N.Y. 10015. ITEM 31. MANAGEMENT SERVICES Inapplicable. ITEM 32. UNDERTAKINGS Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to Trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Registrant undertakes to file an amendment to the Registration Statement which includes financial statements (which need not be certified) within four to six months from the effective date of Registrant's 1933 Act Registration Statement. SIGNATURES ---------- Pursuant to the requirement of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this post-effective amendment No. 13 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City and State of New York, on the day of January 28, 1998. BARON ASSET FUND By: s/ Ronald Baron -------------------------- Ronald Baron, President Pursuant to the requirements of the Securities Act of 1933, this post-effective amendment No. 14 to the registration statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- s/ Ronald Baron President (Principal January 28, 1998 - --------------------- Executive Officer) & Ronald Baron Trustee *s/ Raymond Noveck Trustee January 28, 1998 - --------------------- Raymond Noveck s/ Linda S. Martinson Secretary, January 28, 1998 - --------------------- Vice President & Trustee Linda S. Martinson
SIGNATURES TITLE DATE ---------- ----- ---- s/ Peggy Wong Treasurer (Principal January 28, 1998 - ------------------------ Financial & Accounting Peggy Wong Officer) *s/ Mark M. Feldman Trustee January 28, 1998 - ------------------------ Mark M. Feldman *s/ Norman S. Edelcup Trustee January 28, 1998 - ------------------------ Norman S. Edelcup *s/ Charles N. Mathewson Trustee January 28, 1998 - ------------------------ Charles N. Mathewson *s/ Irwin Greenberg Trustee January 28, 1998 - ------------------------ Irwin Greenberg *s/ Daniel Tisch Trustee January 28, 1998 - ------------------------ Daniel Tisch *s/ David A. Silverman Trustee January 28, 1998 - ------------------------ David A. Silverman *s/ N. Elliott Trustee January 28, 1998 - ------------------------ N. Elliott s/ M. Schaja Vice President & January 28, 1998 - ------------------------ Trustee M. Schaja s/ C. Greenberg Vice President January 28, 1998 - ------------------------ C. Greenberg
*By: s/ Linda S. Martinson --------------------- Linda S. Martinson Attorney-in-fact pursuant to a power of attorney previously filed. BARON ASSET FUND Index to Exhibits
EXHIBIT NO. TITLE OF EXHIBIT PAGE - ----------- ---------------- ---- 1 Declaration of Trust 2 By-laws * 4 Specimen Certificates *** Baron Asset Fund Baron Growth & Income Fund 5(a) Investment Advisory Agreement for ** Baron Asset Fund 5(b) Investment Advisory Agreement for ** Baron Growth & Income Fund 5(c) Investment Advisory Agreement for Baron Small Cap Fund 6 Distribution Agreement ** 8(a) Custodian Contract * 8(b) Fee Schedule for Exhibit 8(a) * 9(a) Transfer Agency Agreement *** 9(b) Fee Schedule for Exhibit 9(a) *** 10 Opinion and consent of counsel as ^ to legality of shares being registered (filed with Rule 24f-2 Notice) 11 Consent of Independent Accountants 12 Unaudited Financial Statement for Baron Small Cap Fund 13 Letter agreement relating to * inital capital 14(a) IRA Disclosure Statement 14(b) IRA Application 15 Distribution Plan pursuant to ** Rule 12b-1 16(a,b,c) Calculation of performance 24 Power of Attorney 27(a) Financial Data Schedule for @ Baron Asset Fund 27(b) Financial Data Schedule for @ Baron Growth & Income Fund 27(c) Financial Data Schedule Baron Small Cap Fund * Previously filed with Pre-Effective Amendment No. 1 ** Previously filed with Post-Effective Amendment No. 3 *** Previously filed with Post-Effective Amendment No. 5 **** Previously filed with Post-Effective Amendment No. 7 ^ Previously filed with Rule 24f-2 Notice 11/97 @ Previously filed with Form NSAR for the period ended 09/30/97
EX-99.B1 2 AMENDMENT TO DECLARATION OF TRUST-BARON SMALL CAP BARON ASSET FUND Certificate of Designation Establishing A Third Series of Baron Asset Fund, BARON SMALL CAP FUND The undersigned, being not less than a majority of the Trustees now in office of Baron Asset Fund (hereinafter referred to as the "Trust"), a trust with transferable shares of the type commonly called a Massachusetts business trust, do hereby certify that, pursuant to the authority conferred upon the Trustees of the Trust by Section 5.11 of the Declaration of Trust, dated February 19, 1987 (hereinafter referred to as the "Declaration of Trust"), and by the affirmative vote of not less than a majority of the Trustees, a third series of shares of beneficial interest of the Trust is hereby established. 1. Without limiting the authority of the Trustees to establish and designate hereafter other Series of the Trust, the shares of beneficial interest (each a "Share" and collectively "Shares") of the Trust are hereby divided into three separate series, designated the "Baron Asset Fund", the "Baron Growth & Income Fund" and the "Baron Small Cap Fund." All shares of beneficial interest of the Trust outstanding on the date on which this Certificate of Designation becomes effective shall be and shall continue to be shares of the Baron Asset Fund and Baron Growth & Income Fund, respective series of the Trust. 2. Each Series established and designated hereby shall have the rights and preferences provided for such Series herein and in the Declaration of Trust, including without limitation the rights and preferences set forth in Section 5.11 of the Declaration of Trust. Shareholders of any Series shall also be considered Shareholders of the Trust, without distinction by Series, for purposes of receiving reports and notices. 3. Each Series shall be authorized to invest in cash, securities, instruments and other property as from time to time described in the Trust's then-effective registration statement under the Securities Act of 1933. Each Share of each Series shall be redeemable, shall be entitled to one vote or fraction thereof in respect of a fractional share on matters on which Shares of that series shall be entitled to vote and shall represent a pro rata beneficial interest in the assets allocated to that Series and shall be entitled to receive its pro rata share of net assets of that Series upon liquidation of that Series, all as provided in the Declaration of Trust. 4. Shareholders of each Series shall vote separately as a class on any matter to the extent required by, and any matter shall be deemed to have been duly acted upon with respect to any Series as provided in Rule 18f-2 (or any successor rule) as from time to time in effect under the Investment Company Act of 1940, as amended, and the Declaration of Trust. 5. The assets and liabilities of the Trust shall be allocated among the Series of the Trust as provided in Section 5.11(c) of the Declaration of Trust. 6. Subject to compliance with requirements of the 1940 Act, the Trustees shall have the authority to provide that holders of Shares of any Series shall have the right to convert said Shares into Shares of one or more other Series of the Trust specified for the purpose in the Trust's Prospectus for the Series accorded such right, in accordance with such requirements and procedures as the Trustees may from time to time establish. The requirements and procedures applicable to such conversion of Shares of any Series shall be set forth in the Prospectus in effect with respect to such Shares. 7. Subject to the provisions and limitations of Section 5.9 and Section 8.3 of the Declaration of Trust and applicable law, this Certificate of Designation may be amended by an instrument signed in writing by a majority of the Trustees (or by any officer of the Trust pursuant to the vote of a majority of the Trustees), subject to authorization by the vote of the holders of Shares of any Series to the extent required by and in the manner provided in Section 8.3 of the Declaration of Trust. 8. All capitalized terms which are not defined herein shall have the same meanings as are assigned to those terms in the Declaration of Trust filed with the Secretary of State of the Commonwealth of Massachusetts. The Trustees further direct that, upon the execution of this Certificate of Designation, the Trust take all necessary action to file a copy of this Certificate of Designation with the Secretary of State of The Commonwealth of Massachusetts and at any other place required by law or by the Declaration of Trust. In Witness Whereof, the undersigned have set their hands this 5th day of September, 1997. /s/ Ronald Baron /s/ Norman S. Edelcup - ------------------------------------- ---------------------------------- Ronald Baron Norman S. Edelcup /s/ Neal M. Elliott /s/ Mark M. Feldman - ------------------------------------- ---------------------------------- Neal M. Elliott Mark M. Feldman /s/ Irwin Greenberg /s/ Linda S. Martinson - ------------------------------------- ---------------------------------- Irwin Greenberg Linda S. Martinson /s/ Charles N. Mathewson /s/ Harold W. Milner - ------------------------------------- ---------------------------------- Charles N. Mathewson Harold W. Milner /s/ Raymond Noveck /s/ Morty Schaja - ------------------------------------- ---------------------------------- Raymond Noveck Morty Schaja /s/ David A. Silverman /s/ Daniel Tisch - ------------------------------------- ---------------------------------- David A. Silverman Daniel Tisch ACKNOWLEDGMENT State of New York ) ) ss. County of New York ) July 29, 1997 Then personally appeared the above named Ronald Baron and acknowledged the foregoing instrument to be his free act and deed. Before me, /s/ Linda S. Martinson -------------------------- Linda S. Martinson Notary Public EX-99.B5 3 ADVISORY AGREEMENT - BARON SMALL CAP FUND ADVISORY AGREEMENT ------------------ THIS ADVISORY AGREEMENT, made this 30th day of September, 1997, by and between BAMCO, Inc., a New York corporation ("BAMCO") and Baron Small Cap Fund ("Client") a series of Baron Asset Fund, WHEREAS Client is an open-end, diversified management investment company and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), that wishes to employ BAMCO to manage Client's portfolio (the "Account"), upon the terms and subject to the conditions hereinafter set forth; and WHEREAS BAMCO is an investment adviser registered under the Investment Advisers Act of 1940, as amended, that is willing to manage the Account in the manner, upon the terms and subject to the conditions hereinafter set forth; NOW THEREFORE in consideration of the promises and mutual agreements hereinafter set forth, the parties hereby agree as follows: 1. The Account shall consist of such cash, stocks, bonds and other securities which, from time to time, Client places under the supervision of BAMCO and/or which shall become part of the Account as a result of transactions therein, deposits of cash proceeds from the sale of Client's shares or otherwise. 2. Subject to the supervision of the Trustees of the Client, BAMCO shall have full discretion and authority to manage the Account, subject to such policies as set forth in Client's prospectus. Client shall provide the Adviser with copies of its current prospectus and statement of additional information which set forth the investment objectives, policies and investment restrictions of the Account, Declaration of Trust and By-laws. BAMCO, as Client's agent and attorney in fact and at Client's expense, is duly authorized without further approval with respect to the Account, except as otherwise required by law, (a) to make all investment decisions; (b) to vote all proxies with respect to portfolio securities in the Account; (c) to buy, sell and otherwise trade in securities; and (d) in furtherance of the foregoing, to do anything which BAMCO shall deem requisite, appropriate or advisable, including, without limitation, the submission of instructions to the custodian of the Account, and the selection of such brokers or dealers as BAMCO shall determine. 3.(a)For BAMCO's services as investment adviser to Client, Client shall pay BAMCO an advisory fee computed daily and payable monthly from Client's assets equal to 1% per annum of the Client's average daily net asset value. The fee shall be paid in arrears, within thirty (30) days after the end of each month. The net asset value is determined as of the close of the New York Stock Exchange on each day the Exchange is open. Securities traded on any national stock exchange or quoted on the NASDAQ National Market System are valued on the basis of the last sale price, or in the absence of any sale on the date of valuation, the last sale price on the date the security last traded. Other securities will be valued at the mean of the most recent bid and asked prices if market quotations are not readily available. Where market quotations are not readily available the securities will be valued at their fair value as determined in good faith by Client's Trustees or their delegate. Odd lot differentials and brokerage commissions will be excluded in calculating net asset value. (b)If BAMCO should serve for less than the whole of any month,its compensation shall be determined on the basis of the average daily net asset value of the Account for the month up to and including the date of termination. (c)If Client's expenses (exclusive of interest, taxes, brokerage, extraordinary expenses and amounts paid by Client pursuant to its distribution plan) in any fiscal year exceed the limits prescribed by any state in which Client's shares of common stock ("Shares") are qualified for sale, BAMCO shall, at each contract payment date, reduce its fee by the amount of any excess up to the amount of BAMCO's advisory fee as determined hereunder. Client undertakes to notify BAMCO of each state in which Client's Shares are qualified for sale. 4.(a)BAMCO shall furnish office space and all necessary office facilities, equipment and executive personnel for managing the Account without reimbursement from Client. (b)BAMCO shall pay the salaries and fees of all officers and trustees of Client who are "interested persons" (as defined in the 1940 Act) of BAMCO. (c)BAMCO shall not be obligated to pay the following expenses: (a) audit, accounting and legal fees; (b) custodian fees; (c) fees for registering and qualifying Client's Shares with federal and state securities commissions; (d) fees for preparing shareholder reports and proxy solicitation materials; (e) fees associated with Client's Shares such as dividend disbursing, transfer agent and registrar fees; (f) insurance for [blank]; (g) compensation of Trustees of Client who are not "interested persons" of BAMCO; (h) miscellaneous business expenses that are not within paragraph 4(a) above; (i) costs associated with the public offering of Client's Shares, including registration, filing, legal and accounting fees and costs of printing Client's prospectus and other offering documents; (j) taxes; and (k) brokerage commissions and fees incurred in connection with portfolio transactions. (d)BAMCO shall maintain all books and records with respect to Client's securities transactions required by subparagraphs (b)(5), (6), (9) and (10) and paragraph (f) of Rule 31a-1 under the 1940 Act and shall render to Client's Trustees such periodic and special reports as the Trustees may reasonably request. (e)BAMCO shall provide Client's Custodian on each business day with information relating to the execution of all portfolio transactions pursuant to standing instructions. (f)The investment management services provided by the Adviser hereunder are not to be deemed exclusive, and BAMCO shall be free to render similar services to others. 5. Client has delivered to BAMCO copies of each of the following documents and will deliver to it all future amendments and supplements, if any: (a)Declaration of Trust of the Trust, filed with the Secretary of The Commonwealth of Massachusetts (such Declaration of Trust, as in effect on the date hereof and as amended from time to time, is herein called the "Declaration of Trust"); (b)By-laws of the Trust (such By-laws, as in effect on the date hereof and as amended from time to time, are herein called the "By-laws"); (c)Certified resolutions of the Trustees of Client authorizing the appointment of BAMCO and approving the form of this Agreement; (d)Registration Statement under the 1940 Act and the Securities Act of 1933, as amended, on Form N-1A (the "Registration Statement"), as filed with the Securities and Exchange Commission (the "Commission") relating to Client and Client's Shares and all amendments thereto; (e)Notification of Registration of the Client under the 1940 Act on Form N-8A as filed with the Commission and all amendments thereto; and (f)Prospectus and Statement of Additional Information of the Trust (such Prospectus and Statement of Additional Information, as currently in effect and as amended or supplemented from time to time, being herein called the "Prospectus"). 6. BAMCO shall keep Client's books and records required to be maintained by it pursuant to paragraph 9 hereof. BAMCO agrees that all records which it maintains for Client are the property of the Client, and it will surrender promptly to the Client any of such records upon Client's request. BAMCO further agrees to preserve for the periods prescribed by Rule 31a-2 as promulgated by the Commission under the 1940 Act any such records as are required to be maintained by BAMCO pursuant to paragraph 9 hereof. 7.(a)BAMCO understands that it is the policy of Client to obtain the best net results for Client's shareholders in the execution of brokerage transactions for the Account. BAMCO shall select all brokers in accordance with such policy and as set forth below. (b)BAMCO may use Baron Capital, Inc. ("BCI"), a broker-dealer affiliated with BAMCO, as broker as long as BCI's execution of transactions is consistent with Client's policy referred to above. (c)Client represents and warrants that it has adopted procedures in conformity with Rule 17e-1 ("Procedures") of the 1940 Act to ensure that all brokerage commissions paid to BCI are reasonable and fair. Client shall inform BAMCO of such Procedures and any amendments thereto. BAMCO shall provide Client with such information as is required by the Procedures, including, among other things, a written record of each portfolio transaction effected pursuant to Rule 17e-1, setting forth the amount and source of the commission, fee or other remuneration received or to be received; the identity of the person acting as broker; the terms of the transaction; and, each quarter, such information as is necessary to enable Client to determine whether its procedures have been followed. (d)For BCI's services as broker to Client, Client shall pay to BCI brokerage commissions consistent with Rule 17e-1 that are fair and reasonable compared to the commission, fee or other remuneration received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. (e)Where brokers and dealers other than BCI are used to effect portfolio transactions, BAMCO may pay to those brokers and dealers, in return for research analysis, advice and similar services and/or promotion of the Client's Shares, a higher commission or spread than may be charged by BCI or other brokers or dealers, if BAMCO determines that such commission or spread is reasonable and consistent with the Client's policies. Client agrees that such research and information may be used by BAMCO to supplement the services it is required to perform hereunder. Whether using BCI or others, BAMCO shall have no obligation to seek the lowest commission cost to Client. BAMCO's selection of a broker other than BCI will take into account factors such as: price, reliability, financial responsibility, commission rates, the ability of the broker to effect particular securities transactions, and research and similar services, all of which may enhance general portfolio management capabilities for BAMCO and/or its affiliates, notwithstanding that Client may not be the direct or exclusive beneficiary of such services. 8. BAMCO and/or BCI shall direct the clearing broker to send promptly to Client confirmations of purchases and sales and monthly statements prepared by the clearing broker. BAMCO shall provide Client with monthly and quarterly statements. On the written request of Client, BAMCO and/or BCI will send or direct the sending of any copies of the foregoing to any other person. 9. BAMCO shall keep the books of account of the Fund and compute the net asset value per share of the outstanding Shares. BAMCO shall also calculate daily the net investment income of the Fund as described in the Fund's currently effect Prospectus and shall advise the Fund and the transfer agent daily of the total amounts of such investment income and, if instructed in writing by an officer of the Fund to do so, shall advise the transfer agent periodically of the division of such net investment income among its various components. The calculations of the net asset value per share and the daily income of the Fund shall be made at the time or times described from time to time in the Fund's currently effective Prospectus. BAMCO shall submit to all regulatory and administrative bodies having jurisdiction over the services provide pursuant to this Agreement, present or future, any information, reports, or other material which any such body by reason of this Agreement may request or require pursuant to applicable laws and regulations. BAMCO shall not disclose or use any records it has prepared by reason of this Agreement in any manner except as expressly authorized herein or directed by the Fund and shall keep confidential any information obtained by reason of this Agreement. 10. Client understands and agrees that: (a) BAMCO is a wholly owned subsidiary of Baron Capital Management, Inc. a registered investment adviser; (b) BAMCO and/or its affiliates will manage accounts and perform advisory services for others; (c) depending upon investment objectives and cash availability and requirements, BAMCO and/or its affiliates may direct the sale of a particular security for certain accounts and direct the purchase of such security for other accounts, and, accordingly, transactions in particular accounts may not be consistent with transactions in other accounts; (d) where there is a limited supply of a security, BAMCO in conjunction with its affiliates will allocate investment opportunities in a matter deemed equitable by BAMCO; (e) BAMCO and/or its affiliates, principals and employees may from time to time have an interest, direct or indirect, in a security which is purchased, sold or otherwise traded for the Account, and BAMCO and/or its affiliates may effect transactions in said security for the Account which may be the same as or different from the action which BAMCO, its affiliates or such other persons may take with respect thereto for its or their accounts. 11. Client and BAMCO represent and warrant that each (i) has adopted and supplied to one another a copy of a written code of ethics complying with Rule 17j-1 of the Investment Company Act of 1940, and (ii) will obtain such reports and maintain such records as are specified in Rule 17j-1. 12. Client acknowledges that the word "Baron" in Client's name is derived from the name of the entities controlling, directly and indirectly, BAMCO, which derive their names from Mr. Ronald Baron; and that such name is the property of BAMCO, its affiliated companies and Ronald Baron for copyright and/or other similar purposes. Client understands and agrees that Client may use "Baron" as part of its name for so long as BAMCO serves as investment adviser to Client, and if BAMCO ceases to be Client's investment adviser, Client will promptly take all steps necessary to change its name (to the extent it lawfully can) to one that does not include "Baron," absent BAMCO's written consent. 13. BAMCO shall have no liability to Client or its shareholders for any error of judgment or mistake of law or for any loss suffered by Client, provided that BAMCO shall not be protected against liabilities arising by virtue of willful misfeasance, bad faith or gross negligence, or reckless disregard of BAMCO's obligations hereunder. 14. Nothing in this Agreement shall limit or restrict the right of any of BAMCO's directors, officers, or employees who may also be a Trustee, officer or employee of Client to engage in any other business or to devote his time and attention in part to the management or other aspects of any business, whether of a similar or a dissimilar nature, nor limit or restrict BAMCO's right to engage in any other business or to render services of any kind to any other corporation, trust, firm, individual or association. 15. Except as otherwise provided herein or authorized by the Trustees of Client from time to time, BAMCO shall for all purposes herein be deemed to be an independent contractor and shall have no authority to act for or represent Client in any way or otherwise be deemed an agent of Client. 16. During the term of this Agreement, Client agrees to furnish BAMCO at its principal office all prospectuses, proxy statements, reports to shareholders, sales literature or other material prepared for distribution to shareholders of Client or to the public, which refer to BAMCO in any way, prior to use thereof and not to use such material if BAMCO reasonably objects in writing within five business days (or such other time as may be mutually agreed) after receipt thereof. In the event of termination of this Agreement, Client will continue to furnish to BAMCO copies of any of the above-mentioned materials which refer in any way to BAMCO. Client shall furnish or otherwise make available to BAMCO such other information relating to the business affairs of Client as BAMCO at any time, or from time to time, reasonably requests in order to discharge its obligations hereunder. 17. This Agreement shall continue in effect for a period of two years from the date of its execution, and thereafter only so long as such continuance is specifically approved at least annually by Client's Trustees or by a vote of a majority of the Trustees who are not parties to this Agreement or interested persons of any such party. 18. This Agreement may be terminated at any time, without the payment of any penalty, by the Trustees of Client or by vote of a majority of the outstanding voting Shares of Client (as defined in the 1940 Act) on not more than sixty days' written notice to BAMCO or by BAMCO on not more than sixty days' written notice to Client. 19. This Agreement shall terminate automatically in the event of its assignment (as defined in the 1940 Act) by either party. 20. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, to the extent federal law does not apply. 21. BAMCO shall have no responsibility of liability with respect to custody arrangements or the acts, omissions or other conduct of the custodian. 22. It is understood and expressly stipulated that none of the Trustees, officers, agents or shareholders of the Fund shall be personally liable hereunder. The name "Baron Asset Fund" is the designation of the Trustees for the time being under a Declaration of Trust dated February 19, 1987, and all persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the Trustees, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 23. Any notice or other communication required to be given pursuant to this Agreement shall be deemed duly given if delivered or mailed by registered mail, postage prepaid, (1) to BAMCO at 767 Fifth Avenue, New York, New York 10153; or (2) to the Client at 767 Fifth Avenue, New York, New York 10153. 24. This Agreement contains the entire agreement and may not be amended or modified in any respect unless in a writing signed by both parties obtained in conformity with the requirements of the 1940 Act and the Rules thereunder. In the event that any provision of this Agreement is declared to be invalid such declaration shall not be deemed to affect the validity of any of the provisions. 25. Client acknowledges receipt of Part II of BAMCO's Form ADV which is filed with the Securities and Exchange Commission, and which contains information concerning BAMCO's services and fees. Agreed to as of September 30, 1997 New York, New York BAMCO, INC. By: /s/ Peggy C. Wong ----------------------------------- Peggy C. Wong Baron Small Cap Fund By: /s/ Ronald Baron ----------------------------------- Ronald Baron EX-99.B11 4 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the inclusion in this Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A (File Nos. 33-12112 and 811-5032) of our report dated Novemeber 24, 1997, on our audits of the financial statements and financial highlights of Baron Asset Fund. We also consent to the reference to our Firm in the Prospectus under the caption "Financial Highlights" and in the Statement of Additional Information under the caption "Other Information-Independent Accountants." /s/ Coopers & Lybrand, L.L.P. ----------------------------- Coopers & Lybrand, L.L.P. New York, New York January 23, 1998 EX-99.B12 5 UNAUDITED FINANCIAL STATEMENTS-BARON SMALL CAP BARON SMALL CAP FUND STATEMENT OF NET ASSETS DECEMBER 31, 1997 (UNAUDITED)
MARKET SHARES VALUE - ------------ -------------- COMMON STOCKS (96.12%) AMUSEMENT AND RECREATION SERVICES (15.93%) 522,500 AMF Bowling, Inc.* 13,062,500 1,250,000 Cineplex Odeon Corp.* 1,562,500 250,000 Intrawest Corp. 4,343,750 232,000 Premier Parks, Inc.* 9,396,000 325,000 Regal Cinemas, Inc.* 9,059,375 250,000 Suburban Lodges of America, Inc.* 3,328,125 125,000 Sun Intl. Hotels, Ltd.* 4,703,125 ----------- 45,455,375 BUSINESS SERVICES (11.78%) 230,000 Choicepoint, Inc.* 10,982,500 200,000 Culligan Water Tech., Inc.* 10,050,000 760,000 Strategic Distribution, Inc.* 3,420,000 190,000 United Stationers, Inc.* 9,143,750 ----------- 33,596,250 COMMUNICATIONS (11.92%) 275,000 Centennial Cellular Corp.* 5,637,500 75,000 Commnet Cellular, Inc.* 2,667,187 335,000 Commonwealth Telephone Enterprises* 8,668,125 400,000 Mobile Telecommunication Technologies Corp* 8,800,000 400,000 Paging Network, Inc.* 4,300,000 300,000 Rural Cellular Corp.* 3,918,750 ----------- 33,991,562 CONSUMER PRODUCTS (6.82%) 125,000 Equity Marketing, Inc.* 3,125,000 165,000 Harman International Industries, Inc. 7,053,750 325,000 Unova, Inc.* 5,342,188 250,000 U.S.A. Floral Product, Inc.* 3,937,500 ----------- 19,458,438 EDUCATION (0.16%) 25,000 Bright Horizons, Inc.* 468,750 HEALTH SERVICES (11.08%) 275,000 Apple Orthodontix, Inc.* 3,265,625 350,000 Assisted Living Concepts, Inc.* 6,912,500 811,500 Counsel Corp.* 10,549,500 100,000 Emeritus Corp.* 1,275,000 400,000 Medical Resources, Inc.* 3,750,000 300,000 Paragon Health Network, Inc.* 5,868,750 ----------- 31,621,375 HOTELS AND LODGING (2.06%) 175,000 Bristol Hotel Co.* 5,085,937 50,000 Choice Hotels Intl. Inc.* 800,000 ----------- 5,885,937
MARKET SHARES VALUE - ------------ -------------- MACHINERY AND ELECTRONICS (1.29%) 150,000 Coinmach Laundry Corp.* 3,675,000 MANUFACTURING (0.98%) 50,000 Amphenol Corp.* 2,784,375 MEDIA AND ENTERTAINMENT (11.30%) 250,000 Metro Networks, Inc.* 8,187,500 75,000 SFX Broadcasting, Inc.* 6,018,750 235,000 Universal Outdoor Hldgs, Inc.* 12,220,000 150,000 Young Broadcasting, Inc.* 5,812,500 ----------- 32,238,750 REAL ESTATE AND REITS (10.72%) 210,000 CCA Prison Realty Trust 9,371,250 155,500 Crescent Operating, Inc.* 3,809,750 300,000 Iron Mountain, Inc.* 10,800,000 100,000 Kimco Realty Corp. 3,525,000 150,000 Pierce Leahy Corp.* 3,075,000 ----------- 30,581,000 RETAIL TRADE AND RESTAURANTS (9.96%) 200,000 Kenneth Cole Productions, Inc. * 3,212,500 350,000 Mortons Restaurant Group, Inc.* 7,087,500 170,700 RDO Equipment Co.* 3,125,944 275,000 Sotheby Holdings, Inc. 5,087,500 142,500 West Marine, Inc.* 3,188,437 160,000 Williams-Sonoma, Inc.* 6,700,000 ----------- 28,401,881 TRANSPORTATION (2.12%) 175,000 Budget Group, Inc.* 6,048,438 ----------- TOTAL COMMON STOCKS (Cost $264,085,905) 274,207,131 CONTRACTS - --------- OPTIONS PURCHASED (0.48%) MEDIA AND ENTERTAINMENT (0.48%) 450 American Radio Systems Corp. Call $45.00 4/18/1998 466,875 1,000 American Radio Systems Corp. Call $50.00 4/18/1998 562,500 1,650 American Radio Systems Corp. Call $53.41 3/31/1998 334,950 ----------- TOTAL OPTIONS PURCHASED (Cost $1,180,362) 1,364,325
PRINCIPAL AMOUNT - ------------ ------------- SHORT TERM MONEY MARKET INSTRUMENTS (3.60%) 10,265,000 American Express Credit Corp. 6.6% Due 01/02/98 10,265,000 ------------- TOTAL SHORT TERM MONEY MARKET INSTRUMENTS (Cost $10,265,000) 10,265,000 TOTAL INVESTMENTS (100.20%) (Cost $275,531,267) 285,836,456 ------------ OPTIONS WRITTEN (-0.12%) (1,650) American Radio Systems Corp. Put $53.41 3/31/1998 (351,037) ------------ TOTAL OPTIONS WRITTEN (Proceeds $343,200) (351,037) ------------ LIABILITIES LESS CASH AND OTHER ASSETS (214,495) ------------ NET ASSETS (EQUIVALENT TO $10.31 PER SHARE BASED ON 27,664,373 SHARES OF BENEFICIAL INTEREST OUTSTANDING) $285,270,924 ============ % 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 $23,379,900 and $13,074,711, respectively.
BARON SMALL CAP FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1997(UNAUDITED)
ASSETS: Investments in securities, at value (Cost $275,531,267) $285,836,456 Cash 584 Dividends and interest receivable 132,398 Receivable for securities sold 5,659,607 Receivable for shares sold 832,634 Unamortized organization costs (Note 1) 28,951 ------------ 292,490,630 ------------ LIABILITIES: Options written (Proceeds $ 343,200) 351,037 Payable for securities purchased 6,718,245 Accrued organization costs (Note 1) 28,951 Accrued expenses and other payables (Note 3) 121,473 ------------ 7,219,706 ------------ NET ASSETS $285,270,924 ============ NET ASSETS CONSIST OF: Par value $276,644 Paid-in capital in excess of par value 277,344,815 Accumulated net investment loss (178,240) Accumulated net realized loss (2,469,647) Net unrealized appreciation on investments 10,297,352 ------------ NET ASSETS $285,270,924 ============ SHARES OF BENEFICIAL INTEREST OUTSTANDING ($.01 par value; indefinite shares authorized) 27,664,373 ============ NET ASSET VALUE PER SHARE $10.31 ============
See Notes to Financial Statements. BARON SMALL CAP FUND STATEMENT OF OPERATIONS FOR THE PERIOD OCTOBER 1, 1997(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997(UNAUDITED)
INVESTMENT INCOME: INCOME: Interest $528,012 Dividends 221,624 -------- TOTAL INCOME 749,636 -------- EXPENSES: Investment advisory fees (Note 3) 626,406 Distribution fees (Note 3) 156,602 Shareholder servicing agent fees 41,860 Custodian fees 18,875 Amortization of organization costs (Note 1) 1,524 Registration and filing fees 63,578 Trustee fees 2,126 Professional fees 7,500 Reports to shareholders 8,250 Insurance 324 Miscellaneous 831 -------- TOTAL EXPENSES 927,876 -------- NET INVESTMENT LOSS (178,240) -------- REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS: Net realized loss on investments sold (2,469,647) Change in net unrealized appreciation of investments 10,297,352 ---------- Net gain on investments 7,827,705 ---------- Net increase in net assets resulting from operations $7,649,465 ==========
See Notes to Financial Statements. BARON SMALL CAP FUND STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE PERIOD OCTOBER 1, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997 --------------------- INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment loss ($178,240) Net realized loss on investments sold (2,469,647) Net change in unrealized appreciation on investments 10,297,352 ---------- Increase in net assets resulting from operations 7,649,465 ---------- DIVIDENDS TO SHAREHOLDERS FROM: Net investment income 0 Net realized gain on investments 0 ---------- 0 ---------- CAPITAL SHARE TRANSACTIONS: Proceeds from the sale of shares 299,538,551 Net asset value of shares issued in reinvestment of dividends 0 Cost of shares redeemed (21,917,092) ----------- Increase in net assets derived from capital share transactions 277,621,459 ----------- Net increase in net assets 285,270,924 NET ASSETS: Beginning of period 0 ----------- End of period $285,270,924 =========== UNDISTRIBUTED NET INVESTMENT LOSS AT END OF PERIOD ($178,240) =========== SHARES OF BENEFICIAL INTEREST: Shares sold 29,870,458 Shares redeemed (2,206,085) ----------- Net increase 27,664,373 ===========
See Notes to Financial Statements. BARON SMALL CAP FUND Notes to Financial Statements (1) SIGNIFICANT ACCOUNTING POLICIES Baron Small Cap Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the"1940 Act"), as a diversified, open-end management investment company. The Fund is one of three series offered through Baron Asset Fund (the Trust). The Trust was established on February 19,1987 as a Massachusetts business trust. The following is a summary of significant accounting policies followed by the Fund. The policies are in conformity with generally accepted accounting principles. (a) SECURITY VALUATION Portfolio securities traded on any national stock exchange or quoted on the NASDAQ National Market System are valued on the basis of the last sale price on the date of valuation or, in the absence of any sale on that date, the last sale price on the date the security last traded. Other securities are valued at the mean of the most recent bid and asked prices if market quotations are readily available. Where market quotations are not readily available the securities are valued at their fair value as determined in good faith by the Board of Trustees, although the actual calculations may be done by others. Money market instruments held by the Fund with a remaining maturity of sixty days or less are valued at amortized cost, which approximates value. (b) OPTION ACCOUNTING PRINCIPLES When the Fund writes an option, an amount equal to the premium received by the Fund is included in the Statement of Assets and Liabilities as an asset and a corresponding liability. The amount of the liability is subsequently mark-to-market to reflect the current value of the option written. The current value of a traded option is the last offering price, or in the absence of such price, fair value as determined in good faith by the Board. When an option expires, or the Fund enters into a closing purchase transaction, the Fund realizes a gain or loss and the liability related to such option will be extinguished. When an option is exercised, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds of sale are increased by the premium originally received. (c) RESTRICTED SECURITIES The Fund invests 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. (d) SECURITIES TRANSACTIONS AND INVESTMENT INCOME 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. (e) FEDERAL INCOME TAXES It is the Funds policy to continue to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended, 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. (f) EXPENSE ALLOCATION Expenses directly attributed to a Fund are charged to that Fund's operations; expenses which are applicable to all Funds are allocated on a basis deemed fair and equitable by the Trustees, usually on the basis of average net assets. (g) ORGANIZATION COSTS Costs incurred in connection with the organization and initial registration of 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. (h) DISTRIBUTIONS Income distributions and capital gains 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. 2) PURCHASES AND SALES OF SECURITIES During the the period October 1,1997(Commencement of Operations) to December 31, 1997, purchases and sales of securities, other than short term securities, aggregated $299,563,967 and $33,008,447, respectively. Transactions in written options during the period October 1, 1997(Commencement of Operations) to December 31, 1997 were as follows: NUMBER OF CONTRACTS PREMIUMS ------------------- --------- Options outstanding at October 1, 1997 0 0 Options written 1,650 $343,200 Options outstanding at December 31, 1997 1,650 $343,200 (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 Fund. As compensation for services rendered, the Adviser receives a fee payable monthly from the assets of the Fund equal to 1% per annum of each Fund's average daily net asset value. The Adviser has agreed that if the expenses (exclusive of interest, taxes, brokerage, extraordinary expenses and amounts paid by the Fund under the plan of distribution) of the Fund in any fiscal year exceed the limits prescribed by any state in which the Fund's shares are qualified for sale, the Adviser will reduce its fee by the amount of any such excess, up to the amount of the Adviser's fee. (b) DISTRIBUTION FEES BCI is a registered broker dealer and the distributor of the shares of the Fund pursuant to a distribution plan under Rule 12b-1 of the 1940 Act. The distribution plan authorizes the Fund to pay BCI a distribution fee equal on an annual basis to 0.25% of the Funds' average daily net assets. Brokerage transactions for the Fund may be effected by or through BCI. During the period October 1, 1997(Commencement of Operations) to December 31, 1997, BCI earned $334,200 in brokerage commissions from Fund transactions. (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 Fund's Adviser or of BCI. None of the Trustees so affiliated received compensation for his services as a Trustee of the Trust. None of the Fund's officers received compensation from the Fund. (4) FINANCIAL HIGHLIGHTS BARON SMALL CAP FUND Selected data for a share of beneficial interest outstanding: 1997* -------- NET ASSET VALUE, BEGINNING OF PERIOD $10.00 -------- INCOME FROM INVESTMENT OPERATIONS Net investment loss (0.01) Net realized and unrealized gains on investments 0.32 -------- TOTAL FROM INVESTMENT OPERATIONS 0.31 -------- 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 $10.31 ======== TOTAL RETURN 3.1% -------- RATIOS/SUPPLEMENTAL DATA Net assets ( in millions), end of period $285.3 Ratio of expenses to average net assets 1.5% Ratio of net investment income to average net assets (.4%) Portfolio turnover rate 13.0% Average per share commission rate paid $0.0600 - ---------------------------------- * For the period October 1, 1997 (commencement of operations) to December 31, 1997. EX-99.B14 6 IRA DISCLOSURE BOOKLET BARON FUNDS INDIVIDUAL RETIREMENT ACCOUNT BARON ASSET FUND BARON GROWTH & INCOME FUND BARON SMALL CAP FUND ENCLOSED ARE THE FOLLOWING DOCUMENTS NEEDED TO ESTABLISH YOUR BARON FUNDS IRA AS A REGULAR IRA OR A ROTH IRA: o Introduction o Individual Retirement Account Adoption Agreement (Application) o Authorization to Add an IRA o Transfer/Rollover/Conversion Authorization o Disclosure Statement o Custodial Agreement HOW TO OPEN A BARON FUNDS INDIVIDUAL RETIREMENT ACCOUNT (1) Review carefully the enclosed material, including the Baron Funds prospectus and the description of the custodian's fees. (2) Complete, sign and date the Individual Retirement Account Application. (3) To transfer an existing IRA to Baron Funds, complete, sign and date the Transfer/Rollover/Conversion Authorization Form in addition to the IRA Application. (4) Except for transfers, make your investment check payable to Baron Funds. The minimum initial contribution is $2,000. (5) Please note that the Custodian charges annual maintenance fees of $12.00 per IRA Plan. If you have a Roth IRA and a Regular IRA, you would pay two annual fees. The per account maintenance fee is waived if the assets in the IRA are over $10,000. There is no fee to establish your IRA. (6) Send the IRA Application and checks or Transfer/Rollover Authorization (as applicable) to: BARON FUNDS P.O. BOX 419946 KANSAS CITY, MO 64141-6946 (7) If you have any questions, please call the Transfer Agent at 1-800-442-3814. BARON FUNDS IRA Information Kit INTRODUCTION - ------------------------------------ WHAT'S NEW IN THE WORLD OF IRAS? An Individual Retirement Account ("IRA") has always provided an attractive means to save money for the future on a tax-advantaged basis. Recent changes to Federal tax law have now made the IRA an even more flexible investment and savings vehicle. Among the new changes is the creation of the Roth Individual Retirement Account ("Roth IRA"), which will be available for use after January 1, 1998. Under a Roth IRA, the earnings and interest on an individual's nondeductible contributions grow without being taxed, and distributions may be tax-free under certain circumstances. Most taxpayers (except for those with very high income levels) will be eligible to contribute to a Roth IRA. A Roth IRA can be used instead of a Regular IRA, to replace an existing Regular IRA, or complement a Regular IRA you wish to continue maintaining. Taxpayers with adjusted gross income of up to $100,000 are eligible to convert existing IRAs into Roth IRAs. The details on conversion are found in the description of Roth IRAs in this booklet. Congress has also made significant changes to Regular IRAs. First, Congress increased the income levels at which IRA holders who participate in employer-sponsored retirement plans can make deductible Regular IRA contributions. Also the rules for deductible contributions by an IRA holder whose spouse is a participant in an employer-sponsored retirement plan have been liberalized. Second, the 10% penalty tax for premature withdrawals (before age 59 1/2) will no longer apply in the case of withdrawals to pay certain higher education expenses or certain first-time homebuyer expenses. WHAT'S IN THIS KIT? In this Kit you will find detailed information about Roth IRAs and about the changes that have been made to Regular IRAs. You will also find everything you need to establish and maintain either a Regular or Roth IRA, or to convert all or part of an existing Regular IRA to a Roth IRA. The first section of this Kit contains the instructions and forms you will need to open a new Regular or Roth IRA, to transfer from another IRA to a Baron Funds IRA, or to convert a Regular IRA to a Roth IRA. The second section of this Kit contains our Universal IRA Disclosure Statement. The Disclosure Statement is divided into three parts: Part One describes the basic rules and benefits which are specifically applicable to your Regular IRA. Part Two describes the basic rules and benefits which are specifically applicable to your Roth IRA. Part Three describes important rules and information applicable to all IRAs. The third section of this Kit contains the Universal IRA Custodial Agreement. The Custodial Agreement is also divided into three parts: Part One contains provisions specifically applicable to Regular IRAs. Part Two contains provisions specifically applicable to Roth IRAs. Part Three contains provisions applicable to all IRAs (Regular and Roth). The Universal Individual Retirement Custodial Account Kit contains information and forms for both Regular IRAs and Roth IRAs. However, you may use the Adoption Agreement in this Kit to establish only one Regular IRA or one Roth IRA; separate Adoption Agreements must be completed if you want to establish multiple (Roth or Regular) IRA accounts. WHAT'S THE DIFFERENCE BETWEEN A REGULAR IRA AND A ROTH IRA? With a Regular IRA, an individual can contribute up to $2,000 per year and may be able to deduct the contribution from taxable income, reducing income taxes. Taxes on investment growth and dividends are deferred until the money is withdrawn. Withdrawals are taxed as additional ordinary income when received. Nondeductible contributions, if any, are withdrawn tax-free. Withdrawals before age 59 1/2 are assessed a 10% penalty in addition to income tax, unless an exception applies. With a Roth IRA, the contribution limits are essentially the same as Regular IRAs, 2 but there is no tax deduction for contributions. All dividends and investment growth in the account are tax-free. Most important with a Roth IRA: there is no income tax on qualified withdrawals from your Roth IRA. Additionally, unlike a Regular IRA, there is no prohibition on making contributions to Roth IRAs after turning age 70 1/2, and there's no requirement that you begin making minimum withdrawals at that age. The following chart highlights some of the major differences between a Regular IRA and a Roth IRA:
- ------------------------------------------------------------------------------------------------------------------- CHARACTERISTICS REGULAR IRA ROTH IRA ELIGIBILITY o Individuals (and their spouses) who o Individuals (and their spouses) receive compensation who receive compensation o Individuals age 70 1/2 and over may Individuals age 70 1/2 and over not contribute may contribute - ------------------------------------------------------------------------------------------------------------------ TAX TREATMENT OF CONTRIBUTIONS o Subject to limitations, contributions o No deduction permitted for are deductible amounts contributed - ------------------------------------------------------------------------------------------------------------------ CONTRIBUTION LIMITS o Individuals may contribute up to o Individuals may generally con- $2,000 annually (or 100% of com- tribute up to $2,000 (or 100% pensation, if less) of compensation, if less) o Deductibility depends on income o Ability to contribute phases out level for individuals who are active at income levels of $95,000 to participants in an employer- $110,000 (individual taxpayer) sponsored retirement plan and $150,000 to $160,000 (mar- ried taxpayers). Overall limit for contributions to all IRAs (Regu- lar and Roth combined) is $2,000 annually (or 100% of compensation, if less) - ------------------------------------------------------------------------------------------------------------------ EARNINGS o Earnings and interest are not taxed o Earnings and interest are not when received by your IRA taxed when received by your IRA - ------------------------------------------------------------------------------------------------------------------ ROLLOVER/CONVERSIONS o Individual may rollover amounts o Rollovers from other Roth IRAs held in employer-sponsored retire- or Regular IRAs only ment arrangements (401(k), SEP o Amounts rolled over (or con- IRA, etc.) tax free to Regular IRA verted) from another Regular IRA are subject to income tax in the year rolled over or con- verted o Tax on amounts rolled over or converted in 1998 is spread over four year period (1998-2001) - ------------------------------------------------------------------------------------------------------------------ WITHDRAWALS o Total (principal + earnings) taxable o Not taxable as long as a quali- as income in year withdrawn (except fied distribution--generally, for any prior non-deductible contri- account open non-deductible butions) contribu tions) for 5 years, and o Minimum withdrawals must begin age 59 1/2 after age 70 1/2 o Minimum withdrawals not required after age 70 1/2 - ------------------------------------------------------------------------------------------------------------------
3 IS A ROTH OR A REGULAR IRA RIGHT FOR ME? We cannot act as your legal or tax advisor and so we cannot tell you which kind of IRA is right for you. The information contained in this Kit is intended to provide you with the basic information and material you will need if you decide whether a Regular or Roth IRA is better for you, or if you want to convert an existing Regular IRA to a Roth IRA. We suggest that you consult with your accountant, lawyer or other tax advisor, or with a qualified financial planner, to determine whether you should open a Regular or Roth IRA or convert any or all of an existing Regular IRA to a Roth IRA. Your tax advisor can also advise you as to the state tax consequences that may affect whether a Regular or Roth IRA is right for you. SEPS AND SIMPLES The Baron Funds Regular IRA may be used in connection with a simplified employee pension (SEP) plan maintained by your employer. To establish a Regular IRA as part of your Employer's SEP plan, complete the Adoption Agreement for a Regular IRA, indicating in the proper box that the IRA is part of a SEP plan. A Roth IRA should not be used in connection with a SEP plan. A Roth IRA may not be used as part of an employer SIMPLE IRA plan. A Regular IRA may be used, but only after an individual has been participating for two or more years (for the first two years, only a special SIMPLE IRA may be used). SIMPLE IRA plans were added by the 1996 tax law to provide an easy and inexpensive way for small employers to provide retirement benefits for their employees. If you are interested in a SIMPLE IRA plan at your place of employment, call or write to the number or address given at the end of the Disclosure Statement portion of this Kit. OTHER POINTS TO NOTE The Disclosure Statement in this Kit provides you with the basic information that you should know about Baron Funds Regular IRAs and Roth IRAs with Investors Fiduciary Trust Company. The Disclosure Statement provides general information about the governing rules for these IRAs and the benefits and features offered through each type of IRA. However, the Adoption Agreement and the Custodial Agreement are the primary documents controlling the terms and conditions of your personal Baron Funds Regular or Roth IRA, and these shall govern in the case of any difference with the Disclosure Statement. You or your when used throughout this Kit refer to the person for whom the Baron Funds Regular or Roth IRA is established. A Roth IRA is either a Baron Funds Roth IRA or any Roth IRA established by any other financial institution. A Regular IRA is any non-Roth IRA offered by Baron Funds or any other financial institution. FEES The annual fee for maintaining each IRA is $12.00. The annual fee is applied to each plan type. For example, if you have a Roth IRA and a Regular IRA you would pay two $12.00 fees. The annual maintenance fee is waived for an IRA plan if the assets in that plan exceed $10,000. There are no fees to establish an IRA or to terminate one. 4 (APPLICATIONS) BARON FUNDS UNIVERSAL INDIVIDUAL RETIREMENT ACCOUNT DISCLOSURE STATEMENT PART ONE: DESCRIPTION OF REGULAR IRAS SPECIAL NOTE Part One of the Disclosure Statement describes the rules applicable to Regular IRAs beginning January 1, 1998. IRAs described in these pages are called "Regular IRAs" to distinguish them from the new "Roth IRAs" first available starting in 1998. Roth IRAs are described in Part Two of this Disclosure Statement. For Regular IRA contributions for 1997 (including contributions made up to April 15, 1998 but designated as contributions for 1997), there are different rules for determining the deductibility of your contribution on your federal tax return. For contributions for 1997, the "active participant" limits on deductibility (described below) apply if either spouse is an active participant in an employer-sponsored plan. Also, the adjusted gross income ("AGI") levels for partially deductible or nondeductible Regular IRA contributions (described below) are lower for 1997 ($25,000 for single taxpayers, with no deduction if your AGI is above $35,000; and $40,000 for married taxpayers filing jointly, with no deduction if your AGI is above $50,000). Also, the exceptions to the 10% early withdrawal penalty for withdrawals to pay certain higher education or first-time homebuyer expenses do not apply to withdrawals in 1997. This Part One of the Disclosure Statement describes Regular IRAs. It does not describe Roth IRAs, a new type of IRA available starting in 1998. Contributions to a Roth IRA are not deductible (regardless of your AGI), but withdrawals that meet certain requirements are not subject to federal income tax, so that dividends and investment growth on amounts held in the Roth IRA can escape federal income tax. Please see Part Two of this Disclosure Statement if you are interested in learning more about Roth IRAs. Regular IRAs described in this Disclosure Statement may be used as part of a simplified employee pension (SEP) plan maintained by your employer. Under a SEP your employer may make contributions to your Regular IRA, and these contributions may exceed the normal limits on Regular IRA contributions. This Disclosure Statement does not describe IRAs established in connection with a SIMPLE IRA program maintained by your employer. Employers provide special explanatory materials for accounts established as part of a SIMPLE IRA program. Regular IRAs may be used in connection with a SIMPLE IRA program, but for the first two years of participation a special SIMPLE IRA (not a Regular IRA) is required. YOUR REGULAR IRA This Part One contains information about your Regular Individual Retirement Custodial Account with Investors Fiduciary Trust Company as Custodian. A Regular IRA gives you several tax benefits. Earnings on the assets held in your Regular IRA are not subject to federal income tax until withdrawn by you. You may be able to deduct all or part of your Regular IRA contribution on your federal income tax return. State income tax treatment of your Regular IRA may differ from federal treatment; ask your state tax department or your personal tax advisor for details. Be sure to read Part Three of this Disclosure Statement for important additional information, including information on how to revoke your Regular IRA, investments and prohibited transactions, fees and expenses, and certain tax requirements. ELIGIBILITY WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR A REGULAR IRA? You are eligible to establish and contribute to a Regular IRA for a year if: o You received compensation (or earned income if you are self employed) during the year for personal services you rendered. If you received taxable alimony, this is treated like compensation for IRA purposes. o You did not reach age 70 1/2 during the year. 5 CAN I CONTRIBUTE TO A REGULAR IRA FOR MY SPOUSE? For each year before the year when your spouse attains age 70 1/2, you can contribute to a separate Regular IRA for your spouse, regardless of whether your spouse had any compensation or earned income in that year. This is called a "spousal IRA." To make a contribution to a Regular IRA for your spouse, you must file a joint tax return for the year with your spouse. For a spousal IRA, your spouse must set up a different Regular IRA, separate from yours, to which you contribute. CONTRIBUTIONS WHEN CAN I MAKE CONTRIBUTIONS TO A REGULAR IRA? You may make a contribution to your existing Regular IRA or establish a new Regular IRA for a taxable year by the due date (not including any extensions) for your federal income tax return for the year. Usually this is April 15 of the following year. HOW MUCH CAN I CONTRIBUTE TO MY REGULAR IRA? For each year when you are eligible (see above), you can contribute up to the lesser of $2,000 or 100% of your compensation (or earned income, if you are self-employed). However, under the tax laws, all or a portion of your contribution may not be deductible. If you and your spouse have spousal Regular IRAs, each spouse may contribute up to $2,000 to his or her IRA for a year as long as the combined compensation of both spouses for the year (as shown on your joint income tax return) is at least $4,000. If the combined compensation of both spouses is less than $4,000, the spouse with the higher amount of compensation may contribute up to that spouse's compensation amount, or $2,000 if less. The spouse with the lower compensation amount may contribute any amount up to that spouse's compensation plus any excess of the other spouse's compensation over the other spouse's IRA contribution. However, the maximum contribution to either spouse's Regular IRA is $2,000 for the year. If you (or your spouse) establish a new Roth IRA and make contributions to both your Regular IRA and a Roth IRA, the combined limit on contributions to both your (or your spouse's) Regular IRA and Roth IRA for a single calendar year is $2,000. HOW DO I KNOW IF MY CONTRIBUTION IS TAX DEDUCTIBLE? The deductibility of your contribution depends upon whether you are an active participant in any employer-sponsored retirement plan. If you are not an active participant, the entire contribution to your Regular IRA is deductible. If you are an active participant in an employer-sponsored plan, your Regular IRA contribution may still be completely or partly deductible on your tax return. This depends on the amount of your income (see below). Similarly, the deductibility of a contribution to a Regular IRA for your spouse depends upon whether your spouse is an active participant in any employer-sponsored retirement plan. If your spouse is not an active participant, the contribution to your spouse's Regular IRA will be deductible. If your spouse is an active participant, the Regular IRA contribution will be completely, partly or not deductible depending upon your combined income. An exception to the preceding rules applies to high-income married taxpayers, where one spouse is an active participant in an employer-sponsored retirement plan and the other spouse is not. A contribution to the non-active participant spouse's Regular IRA will be only partly deductible at an adjusted gross income level on the joint tax return of $150,000, and the deductibility will be phased out as described below over the next $10,000 so that there will be no deduction at all with an adjusted gross income level of $160,000 or higher. HOW DO I DETERMINE MY OR MY SPOUSE'S "ACTIVE PARTICIPANT" STATUS? Your (or your spouse's) Form W-2 should indicate if you (or your spouse) were an active participant in an employer-sponsored retirement plan for a year. If you have a question, you should ask your employer or the plan administrator. In addition, regardless of income level, your spouse's "active participant" status will not affect the deductibility of your contributions to your Regular IRA if you and your spouse file separate tax returns for the taxable year and you lived apart at all times during the taxable year. WHAT ARE THE DEDUCTION RESTRICTIONS FOR ACTIVE PARTICIPANTS? If you (or your spouse) are an active participant in an employer plan during a year, the contribution to your Regular IRA (or your spouse's Regular IRA) may be completely, partly or not deductible depending upon your filing status and your amount of adjusted gross income ("AGI"). If AGI is any amount up to the lower limit, the contribution is deductible. If your AGI falls between the lower limit and the upper limit, the contribution is partly deductible. If your AGI falls above the upper limit, the contribution is not deductible. 6
FOR ACTIVE PARTICIPANTS - 1998 IF YOU ARE IF YOU ARE THEN YOUR REGULAR SINGLE MARRIED FILING JOINTLY IRA CONTRIBUTION IS - --------------------------------------------------------------------------------------------------------------------- Up to Lower Limit Up to Lower Limit Fully ($30,000 for 1998) ($50,000 for 1998) Deductible ----------------------------------------------------------------------------------------------------------- ADJUSTED More than Lower Limit More than Lower Limit Partly GROSS but less than but less than Deductible INCOME Upper Limit Upper Limit (AGI) ($40,000 for 1998) ($60,000 for 1998) LEVEL ----------------------------------------------------------------------------------------------------------- Upper Limit or more Upper Limit or more Not Deductible - ---------------------------------------------------------------------------------------------------------------------
The Lower Limit and the Upper Limit will change for 1999 and later years. The Lower Limit and Upper Limit for these years are shown in the following table. Substitute the correct Lower Limit and Upper Limit in the table above to determine deductibility in any particular year. (Note: if you are married but filing separate returns, your Lower Limit is always zero and your Upper Limit is always $10,000).
TABLE OF LOWER AND UPPER LIMITS - --------------------------------------------------------------------------------------------------------------------- YEAR SINGLE MARRIED FILING JOINTLY - --------------------------------------------------------------------------------------------------------------------- Lower Limit Upper Limit Lower Limit Upper Limit - --------------------------------------------------------------------------------------------------------------------- 1999 $31,000 $41,000 $51,000 $ 61,000 2000 $32,000 $42,000 $52,000 $ 62,000 2001 $33,000 $43,000 $53,000 $ 63,000 2002 $34,000 $44,000 $54,000 $ 64,000 2003 $40,000 $50,000 $60,000 $ 70,000 2004 $45,000 $55,000 $65,000 $ 75,000 2005 $50,000 $60,000 $70,000 $ 80,000 2006 $50,000 $60,000 $75,000 $ 85,000 2007 and Later $50,000 $60,000 $80,000 $100,000 - ---------------------------------------------------------------------------------------------------------------------
HOW DO I CALCULATE MY DEDUCTION IF I FALL IN THE "PARTLY DEDUCTIBLE" RANGE? If your AGI falls in the partly deductible range, you must calculate the portion of your contribution that is deductible. To do this, multiply your contribution by a fraction. The numerator is the amount by which your AGI exceeds the lower limit (for 1998: $30,000 if single, or $50,000 if married filing jointly). The denominator is $10,000 (note that the denominator for married joint filers is $20,000 starting in 2007). Subtract this from your contribution and then round down to the nearest $10. The deductible amount is the greater of the amount calculated or $200 (provided you contributed at least $200). If your contribution was less than $200, then the entire contribution is deductible. For example, assume that you make a $2,000 contribution to your Regular IRA in 1998, a year in which you are an active participant in your employer's retirement plan. Also assume that your AGI is $57,555 and you are married, filing jointly. You would calculate the deductible portion of your contribution this way: 7 1. The amount by which your AGI exceeds the lower limit of the partly - deductible range: ($57,555-$50,000) = $7,555 2. Divide this by $10,000: $ 7,555 = 0.7555 $10,000 3. Multiply this by your contribution limit: 0.7555 x $2,000 = $1,511 4. Subtract this from your contribution: ($2,000 - $1,551) = $489 5. Round this down to the nearest $10: = $480 6. Your deductible contribution is the greater of this amount or $200. Even though part or all of your contribution is not deductible, you may still contribute to your Regular IRA (and your spouse may contribute to your spouse's Regular IRA) up to the limit on contributions. When you file your tax return for the year, you must designate the amount of non-deductible contributions to your Regular IRA for the year. See IRS Form 8606. HOW DO I DETERMINE MY AGI? AGI is your gross income minus those deductions which are available to all taxpayers even if they don't itemize. Instructions to calculate your AGI are provided with your income tax Form 1040 or 1040A. WHAT HAPPENS IF I CONTRIBUTE MORE THAN ALLOWED TO MY REGULAR IRA? The maximum contribution you can make to a Regular IRA generally is $2,000 or 100% of compensation or earned income, whichever is less. Any amount contributed to the IRA above the maximum is considered an |P`excess contribution.|P' The excess is calculated using your contribution limit, not the deductible limit. An excess contribution is subject to excise tax of 6% for each year it remains in the IRA. HOW CAN I CORRECT AN EXCESS CONTRIBUTION? Excess contributions may be corrected without paying a 6% penalty. To do so, you must withdraw the excess and any earnings on the excess before the due date (including extensions) for filing your federal income tax return for the year for which you made the excess contribution. A deduction should not be taken for any excess contribution. The earnings must be included in your income for the tax year for which the contribution was made and may be subject to a 10% premature withdrawal tax if you have not reached age 59 1/2. WHAT HAPPENS IF I DON'T CORRECT THE EXCESS CONTRIBUTION BY THE TAX RETURN DUE DATE? Any excess contribution not withdrawn by the tax return due date (including any extensions) for the year for which the contribution was made will be subject to the 6% excise tax. There will be an additional 6% excise tax for each subsequent year the excess remains in your account. Under limited circumstances, you may correct an excess contribution after tax filing time by withdrawing the excess contribution (leaving the earnings in the account). This withdrawal will not be includable in income nor will it be subject to any premature withdrawal penalty if (1) your contributions to all Regular IRAs do not exceed $2,000 and (2) you did not take a deduction for the excess amount (or you file an amended return (Form 1040X) which removes the excess deduction). HOW ARE EXCESS CONTRIBUTIONS TREATED IF NONE OF THE PRECEDING RULES APPLY? Unless an excess contribution qualifies for the special treatment outlined above, the excess contribution and any earnings on it withdrawn after tax filing time will be includable in taxable income and may be subject to a 10% premature withdrawal penalty. No deduction will be allowed for the excess contribution for the year in which it is made. Excess contributions may be corrected in a subsequent year to the extent that you contribute less than your maximum amount. As the prior excess contribution is reduced or eliminated, the 6% excise tax will become correspondingly reduced or eliminated for subsequent tax years. Also, you may be able to take an income tax deduction for the amount of excess that was reduced or eliminated, depending on whether you would be able to take a deduction if you had instead contributed the same amount. ARE THE EARNINGS ON MY REGULAR IRA FUNDS TAXED? Any dividends on or growth of the investments held in your Regular IRA are generally exempt from federal income taxes and will not be taxed until withdrawn by you, unless the tax exempt status of your Regular IRA is revoked (this is described in Part Three of this Disclosure Statement). TRANSFERS/ROLLOVERS CAN I TRANSFER OR ROLL OVER A DISTRIBUTION I RECEIVE FROM MY EMPLOYER'S RETIREMENT PLAN INTO A REGULAR IRA? Almost all distributions from employer plans or 403(b)arrangements (for employees of tax-exempt employers) are eligible for rollover to a Regular IRA. The main exceptions are: 8 o payments over the lifetime or life expectancy of the participant (or participant and a designated beneficiary), o installment payments for a period of 10 years or more, o required distributions (generally the rules require distributions starting at age 70 1/2 or for certain employees starting at retirement, if later), and o payments of employee after-tax contributions. If you are eligible to receive a distribution from a tax qualified retirement plan as a result of, for example, termination of employment, plan discontinuance, or retirement, all or part of the distribution may be transferred directly into your Regular IRA. This is a called a "direct rollover." Or, you may receive the distribution and make a regular rollover to your Regular IRA within 60 days. By making a direct rollover or a regular rollover, you can defer income taxes on the amount rolled over until you subsequently make withdrawals from your IRA. The maximum amount you may roll over is the amount of employer contributions and earnings distributed. You may not roll over any after-tax employee contributions you made to the employer retirement plan. If you are over age 70 1/2 and are required to take minimum distributions under the tax laws, you may not roll over any amount required to be distributed to you under the minimum distribution rules. Also, if you are receiving periodic payments over your or your and your designated beneficiary's life expectancy or for a period of at least 10 years, you may not roll over these payments. A rollover to a regular IRA must be completed within 60 days after the distribution from the employer retirement plan to be valid. NOTE: A qualified plan administrator or 403(b) sponsor MUST WITHHOLD 20% OF YOUR DISTRIBUTION for federal income taxes UNLESS you elect a direct rollover. Your plan or 403(b) sponsor is required to provide you with information about direct and traditional rollovers and withholding taxes before you receive your distribution and must comply with your directions to make a direct rollover. The rules governing rollovers are complicated. Be sure to consult your tax advisor or the IRS if you have a question about rollovers. ONCE I HAVE ROLLED OVER A PLAN DISTRIBUTION INTO A REGULAR IRA, CAN I SUBSEQUENTLY ROLL OVER INTO ANOTHER EMPLOYER'S QUALIFIED RETIREMENT PLAN? Yes. Part or all of an eligible distribution received from a qualified plan may be transferred from the Regular IRA holding it to another qualified plan. However, the IRA must have no assets other than those which were previously distributed to you from the qualified plan. Specifically, the IRA cannot contain any contributions by you (or your spouse). Also, the new qualified plan must accept rollovers. Similar rules apply to Regular IRAs established with rollovers from 403(b) arrangements. CAN I MAKE A TRADITIONAL ROLLOVER FROM MY REGULAR IRA TO ANOTHER REGULAR IRA? You may make a rollover from one Regular IRA to another Regular IRA you have or you establish to receive the rollover. Such a rollover must be completed within 60 days after the withdrawal from your first Regular IRA. After making a traditional rollover from one Regular IRA to another, you must wait a full year (365 days) before you can make another such rollover. (However, you can instruct a Regular IRA custodian to transfer amounts directly to another Regular IRA custodian; such a direct transfer does not count as a rollover.) WHAT HAPPENS IF I COMBINE ROLLOVER CONTRIBUTIONS WITH MY NORMAL CONTRIBUTIONS IN ONE IRA? If you wish to make both a normal annual contribution and a rollover contribution, you may wish to open two separate Regular IRAs by completing two Adoption Agreements and two sets of forms. You should consult a tax advisor before making your annual contribution to the IRA you established with rollover contributions (or make a rollover contribution to the IRA to which you make your annual contributions). This is because combining your annual contributions and rollover contributions originating from an employer plan distribution would prohibit the future rollover out of the IRA into another qualified plan. If despite this, you still wish to combine a rollover contribution and the IRA holding your annual contributions, you should establish the account as a Regular IRA on the Adoption Agreement (not a Rollover IRA or Direct Rollover IRA) and make the contributions to that account. HOW DO ROLLOVERS AFFECT MY CONTRIBUTION OR DEDUCTION LIMITS? Rollover contributions, if properly made, do not count toward the maximum contribution. Also, rollovers are not deductible and they do not affect your deduction limits as described above. WHAT ABOUT CONVERTING MY REGULAR IRA TO A ROTH IRA? The rules for converting a Regular IRA to a new Roth IRA, or making a rollover from a Regular IRA to a new Roth IRA, are described in Part Two below. 9 WITHDRAWALS WHEN CAN I MAKE WITHDRAWALS FROM MY REGULAR IRA? You may withdraw from your Regular IRA at any time. However, withdrawals before age 59 1/2 may be subject to a 10% penalty tax in addition to regular income taxes (see below). WHEN MUST I START MAKING WITHDRAWALS? If you have not withdrawn your entire IRA by the April 1 following the year in which you reach 70 1/2, you must make minimum withdrawals in order to avoid penalty taxes. The rule allowing certain employees to postpone distributions from an employer qualified plan until actual retirement (even if this is after age 70 1/2) does not apply to Regular IRAs. The minimum withdrawal amount is determined by dividing the balance in your Regular IRA (or IRAs) by your life expectancy or the combined life expectancy of you and your designated beneficiary. The minimum withdrawal rules are complex. Consult your tax advisor for assistance. The penalty tax is 50% of the difference between the minimum withdrawal amount and your actual withdrawals during a year. The IRS may waive or reduce the penalty tax if you can show that your failure to make the required minimum withdrawals was due to reasonable cause and you are taking reasonable steps to remedy the problem. HOW ARE WITHDRAWALS FROM MY REGULAR IRA TAXED? Amounts withdrawn by you are includable in your gross income in the taxable year that you receive them, and are taxable as ordinary income. Lump sum withdrawals from a Regular IRA are not eligible for averaging treatment currently available to certain lump sum distributions from qualified employer retirement plans. Since the purpose of a Regular IRA is to accumulate funds for retirement, your receipt or use of any portion of your Regular IRA before you attain age 59 1/2 generally will be considered as an early withdrawal and subject to a 10% penalty tax. The 10% penalty tax for early withdrawal will not apply if: o The distribution was a result of your death or disability. o The purpose of the withdrawal is to pay certain higher education expenses for yourself or your spouse, child, or grandchild. Qualifying expenses include tuition, fees, books, supplies and equipment required for attendance at a post-secondary educational institution. Room and board expenses may qualify if the student is attending at least half-time. o The withdrawal is used to pay eligible first-time homebuyer expenses. These are the costs of purchasing, building or rebuilding a principal residence (including customary settlement, financing or closing costs). The purchaser may be you, your spouse, or a child, grandchild, parent or grandparent of you or your spouse. An individual is considered a |P`first-time homebuyer|P' if the individual (or the individual's spouse, if married) did not have an ownership interest in a principal residence during the two-year period immediately preceding the acquisition in question. The withdrawal must be used for eligible expenses within 120 days after the withdrawal. (If there is an unexpected delay, or cancellation of the home acquisition, a withdrawal may be redeposited as a rollover). o There is a lifetime limit on eligible first-time homebuyer expenses of $10,000 per individual. o The distribution is one of a scheduled series of substantially equal periodic payments for your life or life expectancy (or the joint lives or life expectancies of you and your beneficiary). o If there is an adjustment to the scheduled series of payments, the 10% penalty tax may apply. The 10% penalty will not apply if you make no change in the series of payments until the end of five years or until you reach age 59 1/2, whichever is later. If you make a change before then, the penalty will apply. For example, if you begin receiving payments at age 50 under a withdrawal program providing for substantially equal payments over your life expectancy, and at age 58 you elect to receive the remain ing amount in your Regular IRA in a lump-sum, the 10% penalty tax will apply to the lump sum and to the amounts previously paid to you before age 59 1/2. o The distribution does not exceed the amount of your deductible medical expenses for the year (generally speaking, medical expenses paid during a year are deductible if they are greater than 7 1/2% of your adjusted gross income for that year). o The distribution does not exceed the amount you paid for health insurance coverage for yourself, your spouse and dependents. This exception applies only if you have been unemployed and received federal or state unemployment compensation payments for at least 12 weeks; this exception applies to distributions during the year in which you received the unemployment compensation and during the following year, but not to any distributions received after you have been reemployed for at least 60 days. 10 HOW ARE NONDEDUCTIBLE CONTRIBUTIONS TAXED WHEN THEY ARE WITHDRAWN? A withdrawal of nondeductible contributions (not including earnings) will be tax-free. However, if you made both deductible and nondeductible contributions to your Regular IRA, then each distribution will be treated as partly a return of your nondeductible contributions (not taxable) and partly a distribution of deductible contributions and earnings (taxable). The nontaxable amount is the portion of the amount withdrawn which bears the same ratio as your total nondeductible Regular IRA contributions bear t o the total balance of all your Regular IRAs (including rollover IRAs and SEPs, but not including Roth IRAs). For example, assume that you made the following Regular IRA contributions:
Year Deductible Nondeductible - -------------------------------------------------------------------------------- 1995 $2,000 1996 $2,000 1997 $1,000 $1,000 1998 $1,000 ______ ______ $5,000 $2,000
In addition assume that your Regular IRA has total investment earnings through 1998 of $1,000. During 1998 you withdraw $500. Your total account balance as of 12-31-98 is $7,500 as shown below. Deductible Contributions $ 5,000 Nondeductible Contributions $ 2,000 Earnings On IRA $ 1,000 Less 1998 Withdrawal $ 500 Total Account Balance as of 12/31/98 $ 7,500 To determine the nontaxable portion of your 1998 withdrawal, the total 1998 withdrawal ($500) must be multi-plied by a fraction. The numerator of the fraction is the total of all nondeductible contributions remaining in the account before the 1998 withdrawal ($2,000). The denominator is the total account balance as of 12-31-98 ($7,500) plus the 1998 withdrawal ($500) or $8,000. The calculation is: Total Remaining Nondeductible Contributions $2,000 x $500 = $ 125 __________________________________ Total Account Balance$8,000 Thus, $125 of the $500 withdrawal in 1998 will not be included in your taxable income. The remaining $375 will be taxable for 1998. In addition, for future calculations the remaining nondeductible contribution total will be $2,000 minus $125, or $1,875. A loss in your Regular IRA investment may be deductible. You should consult your tax advisor for further details on the appropriate calculation for this deduction if applicable. IS THERE A PENALTY TAX ON CERTAIN LARGE WITHDRAWALS OR ACCUMULATIONS IN MY IRA? Earlier tax laws imposed a "success" penalty equal to 15% of withdrawals from all retirement accounts (including IRAs, 401(k) or other employer retirement plans, 403(b) arrangements and others) in a year exceeding a specified amount (initially $150,000 per year). Also, there was a 15% estate tax penalty on excess accumulations remaining in IRAs and other tax-favored arrangements upon your death. These 15% penalty taxes have been repealed. IMPORTANT: Please see Part Three below which contains important information applicable to ALL Baron Funds IRAs with Investors Fiduciary Trust Company. 11 PART TWO: DESCRIPTION OF ROTH IRAS SPECIAL NOTE Part Two of the Disclosure Statement describes the rules generally applicable to Roth IRAs beginning January 1, 1998. Roth IRAs are a new kind of IRA available for the first time in 1998. Contributions to a Roth IRA for 1997 are not permitted. Contributions to a Roth IRA are not tax-deductible, but withdrawals that meet certain requirements are NOT subject to federal income taxes. This makes the dividends on and growth of the investments held in your Roth IRA tax-free for federal income tax purposes if the requirements are met. Regular IRAs, which have existed since 1975, are still available. Contributions to a Regular IRA may be tax-deductible. Earnings and gains on amounts while held in a Regular IRA are tax-deferred. Withdrawals are subject to federal income tax (except for prior after-tax contributions which may be recovered without additional federal income tax). This Part Two does not describe Regular IRAs. If you wish to review information about Regular IRAs, please see Part One of this Disclosure Statement. This Disclosure Statement also does not describe IRAs established in connection with a SIMPLE IRA program or a Simplified Employee Pension (SEP) plan maintained by your employer. Roth IRAs may not be used in connection with a SIMPLE IRA program or a SEP plan. YOUR ROTH IRA Your Roth IRA gives you several tax benefits. While contributions to a Roth IRA are not deductible, dividends on and growth of the assets held in your Roth IRA are not subject to federal income tax. Withdrawals by you from your Roth IRA are excluded from your income for federal income tax purposes if certain requirements (described below) are met. State income tax treatment of your Roth IRA may differ from federal treatment; ask your state tax department or your personal tax advisor for details. Be sure to read Part Three of this Disclosure Statement for important additional information, including information on how to revoke your Roth IRA, investments and pro-hibited transactions, fees and expenses and certain tax requirements. ELIGIBILITY WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR A ROTH IRA? Starting with 1998, you are eligible to establish and contribute to a Roth IRA for a year if you received compensation (or earned income if you are self employed) during the year for personal services you rendered. If you received taxable alimony, this is treated like compensation for IRA purposes. In contrast to a Regular IRA, with a Roth IRA you may continue making contributions after you reach age 70 1/2. CAN I CONTRIBUTE TO A ROTH IRA FOR MY SPOUSE? Starting with 1998, if you meet the eligibility requirements you can not only contribute to your own Roth IRA, but also to a separate Roth IRA for your spouse out of your compensation or earned income, regardless of whether your spouse had any compensation or earned income in that year. This is called a |P`spousal Roth IRA.|P' To make a contribution to a Roth IRA for your spouse, you must file a joint tax return for the year with your spouse. For a spousal Roth IRA, your spouse must set up a different Roth IRA, separate from yours, to which you contribute. Of course, if your spouse has compensation or earned income, your spouse can establish his or her own Roth IRA and make contributions to it in accordance with the rules and limits described in this Part Two of the Disclosure Statement. CONTRIBUTIONS WHEN CAN I MAKE CONTRIBUTIONS TO A ROTH IRA? You may make a contribution to your Roth IRA or establish a new Roth IRA for a taxable year by the due date (not including any extensions) for your federal income tax return for the year. Usually this is April 15 of the following year. For example, you will have until April 15, 1999 to establish and make a contribution to a Roth IRA for 1998. CAUTION: Since Roth IRAs are available starting January 1, 1998, you may not make a contribution by April 15, 1998 to a Roth IRA for 1997. HOW MUCH CAN I CONTRIBUTE TO MY ROTH IRA? For each year when you are eligible (see above), you can contribute up to the lesser of $2,000 or 100% of your compensation (or earned income, if you are self-employed). Annual contributions may be made only to a Roth IRA annual contribution account which does not contain converted or transferred funds from a Regular IRA. 12 Your Roth IRA limit is reduced by any contributions for the same year to a Regular IRA. For example, assuming you have at least $2,000 in compensation or earned income, if you contribute $500 to your Regular IRA for 1998, your maximum Roth IRA contribution for 1998 will be $1,500. If you and your spouse have spousal Roth IRAs, each spouse may contribute up to $2,000 to his or her Roth IRA for a year as long as the combined compensation of both spouses for the year (as shown on your joint income tax return) is at least $4,000. If the combined compensation of both spouses is less than $4,000, the spouse with the higher amount of compensation may contribute up to that spouse's compensation amount, or $2,000 if less. The spouse with the lower compensation amount may contribute any amount up to that spouse's compensation plus any excess of the other spouse's compensation over the other spouse's Roth IRA contribution. However, the maximum contribution to either spouse's Roth IRA is $2,000 for the year. As noted above, the spousal Roth IRA limits are reduced by any contributions for the same calendar year to a Regular IRA maintained by you or your spouse. For taxpayers with high income levels, the contribution limits may be reduced (see below). ARE CONTRIBUTIONS TO A ROTH IRA TAX DEDUCTIBLE? Contributions to a Roth IRA are not deductible. This is a major difference between Roth IRAs and Regular IRAs. Contributions to a Regular IRA may be deductible on your federal income tax return depending on whether or not you are an active participant in an employer-sponsored plan and on your income level. ARE THE EARNINGS ON MY ROTH IRA FUNDS TAXED? Any dividends on or growth of investments held in your Roth IRA are generally exempt from federal income taxes and will not be taxed until withdrawn by you, unless the tax exempt status of your Roth IRA is revoked. If the withdrawal qualifies as a tax-free withdrawal (see below), amounts reflecting earnings or growth of assets in your Roth IRA will not be subject to federal income tax. WHICH IS BETTER, A ROTH IRA OR A REGULAR IRA? This will depend upon your individual situation. A Roth IRA may be better if you are an active participant in an employer-sponsored plan and your adjusted gross income is too high to make a deductible IRA contribution (but not too high to make a Roth IRA contribution). Also, the benefits of a Roth IRA vs. a Regular IRA may depend upon a number of other factors including: your current income tax bracket vs. your expected income tax bracket when you make withdrawals from your IRA, whether you expect to be ab le to make nontaxable withdrawals from your Roth IRA (see below), how long you expect to leave your contributions in the IRA, how much you expect the IRA to earn in the meantime, and possible future tax law changes. Consult a qualified tax or financial advisor for assistance on this question. ARE THERE ANY RESTRICTIONS ON CONTRIBUTIONS TO MY ROTH IRA? Taxpayers with very high income levels may not be able to contribute to a Roth IRA at all, or their contribution may be limited to an amount less than $2,000. This depends upon your filing status and the amount of your adjusted gross income (AGI). The following table shows how the contribution limits are restricted: 13 ROTH IRA CONTRIBUTION LIMITS
IF YOU ARE IF YOU ARE THEN YOU MAY MAKE SINGLE TAXPAYER MARRIED FILING JOINTLY - --------------------------------------------------------------------------------------------------------- Up to Up to $95,000 $150,000 Full Contribution Adjusted --------------------------------------------------------------------------------------------- Gross More than $95,000 More than $150,000 Reduced Contribution Income but less than but less than (see explanantion (AGI) $110,000 $160,000 below) LEVEL --------------------------------------------------------------------------------------------- $110,000 $160,000 Zero (No Contribution) and up and up - ---------------------------------------------------------------------------------------------------------
Note: If you are a married taxpayer filing separately, your maximum Roth IRA contribution limit phases out over the first $15,000 of adjusted gross income. If your AGI is $15,000 or more not contribute to a Roth IRA for the year. (Note: Pending legislation in Congress may reduce this number from $15,000 to $10,000. Consult your tax adviser or te IRS for the latest developments.) HOW DO I CALCULATE MY LIMIT IF I FALL IN THE "REDUCED CONTRIBUTION" RANGE? If your AGI falls in the reduced contribution range, you must calculate your contribution limit. To do this, multiply your normal contribution limit ($2,000 or your compensation if less) by a fraction. The numerator is the amount by which your AGI exceeds the lower limit of the reduced contribution range ($95,000 if single, or $150,000 if married filing jointly). The denominator is $15,000 (single taxpayers) or $10,000 (married filing jointly). Subtract this from your normal limit and then round down to th e nearest $10. The contribution limit is the greater of the amount calculated or $200. For example, assume that your AGI for the year is $157,555 and you are married, filing jointly. You would calculate your Roth IRA contribution limit this way: 1. The amount by which your AGI exceeds the lower limit of the reduced contribution deductible range: ($157,555-$150,000) = $7,555 2. Divide this by $10,000: $7,555 $10,000 = 0.7555 3. Multiply this by $2,000 (or your compensation for the year, if less): 0.7555 x $2,000 = $1,511 4. Subtract this from your $2,000 limit: ($2,000 - $1,551) = $489 5. Round this down to the nearest $10 = $480 6. Your contribution limit is the greater of this amount or $200. Remember, your Roth IRA contribution limit of $2,000 is reduced by any contributions for the same year to a Regular IRA. If you fall in the reduced contribution range, the reduction formula applies to the Roth IRA contribution limit left after subtracting your contribution for the year to a Regular IRA. HOW DO I DETERMINE MY AGI? AGI is your gross income minus those deductions which are available to all taxpayers even if they don't itemize. Instructions to calculate your AGI are provided with your income tax Form 1040 or 1040A. There are two additional rules when calculating AGI for purposes of Roth IRA contribution limits. First, if you are making a deductible contribution for the year to a Regular IRA, your AGI is reduced by the amount of the deduction. Second, if you are converting a Regular IRA to a Roth IRA in a year (see below), the amount includable in your income as a result of the conversion is not considered AGI when computing your Roth IRA contribution limit for the year. (Note: a bill pending in Congress might affect the first rule -- consult your tax advisor or the IRS for the latest developments.) WHAT HAPPENS IF I CONTRIBUTE MORE THAN ALLOWED TO MY ROTH IRA? The maximum contribution you can make to a Roth IRA generally is $2,000 or 100% of compensation or earned income, whichever is less. As noted above, your maximum 14 is reduced by the amount of any contribution to a Regular IRA for the same year and may be further reduced if you have high AGI. Any amount contributed to the Roth IRA above the maximum is considered an "excess contribution." An excess contribution is subject to excise tax of 6% for each year it remains in the Roth IRA. HOW CAN I CORRECT AN EXCESS CONTRIBUTION? Excess contributions may be corrected without paying a 6% penalty. To do so, you must withdraw the excess and any earnings on the excess before the due date (including extensions) for filing your federal income tax return for the year for which you made the excess contribution. The earnings must be included in your income for the tax year for which the contribution was made and may be subject to a 10% premature withdrawal tax if you have not reached age 59 1/2 (unless an exception to the 10% penalty tax ap plies). WHAT HAPPENS IF I DON'T CORRECT THE EXCESS CONTRIBUTION BY THE TAX RETURN DUE DATE? Any excess contribution not withdrawn by the tax return due date (including any extensions) for the year for which the contribution was made will be subject to the 6% excise tax. There will be an additional 6% excise tax for each subsequent year the excess remains in your account. Unless an excess contribution qualifies for the special treatment outlined above, the excess contribution and any earnings on it withdrawn after tax filing time will be includable in taxable income and may be subject to a 10% premature withdrawal penalty. For subsequent years you may reduce the excess contributions in your account by making a withdrawal equal to the excess. Earnings need not be withdrawn. To the extent that no earnings are withdrawn, the withdrawal will not be subject to income taxes or possible penalties for premature withdrawals before age 59 1/2. Excess contributions may also be corrected in a subsequent year to the extent that you contribute less than your Roth IRA contribution limit for the subsequent year. As the prior excess contribu tion is reduced or eliminated, the 6% excise tax will become correspondingly reduced or eliminated for subsequent tax years. CONVERSION OF EXISTING REGULAR IRA CAN I CONVERT AN EXISTING REGULAR IRA INTO A ROTH IRA? Yes, starting in 1998 you can convert an existing Regular IRA into a Roth IRA if you meet the adjusted gross income (AGI) limits described below. Conversion may be accomplished either by establishing a Roth IRA and then transferring the amount in your Regular IRA you wish to convert to the new Roth IRA. Or, if you want to convert an existing Regular IRA with Investors Fiduciary Trust as custodian to a Roth IRA, you may give us directions to convert. You are eligible to convert a Regular IRA to a Roth IRA if, for the year of the conversion, your AGI is $100,000 or less. The same limit applies to married and single taxpayers, and the limit is not indexed to cost-of-living increases. Married taxpayers are eligible to convert a Regular IRA to a Roth IRA only if they file a joint income tax return; married taxpayers filing separately are not eligible to convert. Note: No contributions other than Roth IRA conversion contributions made during the same tax year may be deposited in a single Roth IRA conversion account. CAUTION: You should be extremely cautious in converting an existing IRA into a Roth IRA early in a year if there is any possibility that your AGI for the year will exceed $100,000. Although a bill pending in Congress would permit you to transfer amounts back to your Regular IRA if your AGI exceeds $100,000, under the current rules, if you have already converted during a year and you turn out to have more than $100,000 of AGI, there may be adverse tax results for you. Consult your tax advisor or the IRS for the latest developments. WHAT ARE THE TAX RESULTS FROM CONVERTING? The taxable amount in your Regular IRA you convert to a Roth IRA will be considered taxable income on your federal income tax return for the year of the conversion. All amounts in a Regular IRA are taxable except for your prior non-deductible contributions to the Regular IRA. If you make the conversion during 1998, the taxable income is spread over four years. In other words, you would include one quarter of the taxable amount on your federal income tax return for 1998, 1999, 2000 and 2001. SHOULD I CONVERT MY REGULAR IRA TO A ROTH IRA? Only you can answer this question, in consultation with your tax or financial advisors. A number of factors, including the following, may be relevant. Conversion may be advantageous if you expect to leave the converted funds on deposit in your Roth IRA for at least five years and to be able to withdraw the funds under circumstances that will not be taxable (see below). The benefits of converting will also depend on whether you expect to be in the same tax bracket when you withdraw from your Roth IRA as you 15 are now. Also, conversion is based upon an assumption that Congress will not change the tax rules for withdrawals from Roth IRAs in the future, but this cannot be guaranteed. TRANSFERS/ROLLOVERS CAN I TRANSFER OR ROLL OVER A DISTRIBUTION I RECEIVE FROM MY EMPLOYER'S RETIREMENT PLAN INTO A ROTH IRA? Distributions from qualified employer-sponsored retirement plans or 403(b) arrangements (for employees of tax-exempt employers) are not eligible for rollover or direct transfer to a Roth IRA. However, in certain circumstances it may be possible to make a direct rollover of an eligible distribution to a Regular IRA and then to convert the Regular IRA to a Roth IRA (see above). Consult your tax or financial advisor for further information on this possibility. CAN I MAKE A ROLLOVER FROM MY ROTH IRA TO ANOTHER ROTH IRA? You may make a rollover from one Roth IRA to another Roth IRA you have or you establish to receive the rollover. Such a rollover must be completed within 60 days after the withdrawal from your first Roth IRA. After making a rollover from one Roth IRA to another, you must wait a full year (365 days) before you can make another such rollover. (However, you can instruct a Roth IRA custodian to transfer amounts directly to another Roth IRA custodian; such a direct transfer does not count as a rollover.) HOW DO ROLLOVERS AFFECT MY ROTH IRA CONTRIBUTION LIMITS? Rollover contributions, if properly made, do not count toward the maximum contribution. Also, you may make a rollover from one Roth IRA to another even during a year when you are not eligible to contribute to a Roth IRA (for example, because your AGI for that year is too high). WITHDRAWALS WHEN CAN I MAKE WITHDRAWALS FROM MY ROTH IRA? You may withdraw from your Roth IRA at any time. If the withdrawal meets the requirements discussed below, it is tax-free. This means that you pay no federal income tax even though the withdrawal includes earnings or gains on your contributions while they were held in your Roth IRA. WHEN MUST I START MAKING WITHDRAWALS? There are no rules on when you must start making withdrawals from your Roth IRA or on minimum required withdrawal amounts for any particular year during your lifetime. Unlike Regular IRAs, you are not required to start making withdrawals from a Roth IRA by the April 1 following the year in which you reach age 70 1/2. After your death, there are IRS rules on the timing and amount of distributions. In general, the amount in your Roth IRA must be distributed by the end of the fifth year after your death. However, distributions to a designated beneficiary that begin by the end of the year following the year of your death and that are paid over the life expectancy of the beneficiary satisfy the rules. Also, if your surviving spouse is your designated beneficiary, the spouse may defer the start of distributions until you wou ld have reached age 70 1/2 had you lived. WHAT ARE THE REQUIREMENTS FOR A TAX-FREE WITHDRAWAL? To be tax-free, a withdrawal from your Roth IRA must meet two requirements. First, the Roth IRA must have been open for 5 or more years before the withdrawal. Second, at least one of the following conditions must be satisfied: o You are age 59 1/2 or older when you make the withdrawal. o The withdrawal is made by your beneficiary after you die. o You are disabled (as defined in IRS rules) when you make the withdrawal. o You are using the withdrawal to cover eligible first time homebuyer expenses. These are the costs of purchasing, building or rebuilding a principal residence (including customary settlement, financing or closing costs). The purchaser may be you, your spouse or a child, grandchild, parent or grandparent of you or your spouse. An individual is considered a |P`first-time homebuyer|P' if the individual (or the individual's spouse, if married) did not have an ownership interest in a principal residence duri ng the two-year period immediately preceding the acquisition in question. The withdrawal must be used for eligible expenses within 120 days after the withdrawal (if there is an unexpected delay, or cancellation of the home acquisition, a withdrawal may be redeposited as a rollover). There is a lifetime limit on eligible first-time homebuyer expenses of $10,000 per individual. For a Roth IRA that you set up with amounts rolled over or converted from a Regular IRA, the 5 year period begins with the year in which the conversion or rollover was made. (Note: a bill pending in Congress might affect this rule -- consult your tax advisor or the IRS for the latest developments.) 16 For a Roth IRA that you started with a normal contribution, the 5 year period starts with the year for which you make the initial normal contribution. HOW ARE WITHDRAWALS FROM MY ROTH IRA TAXED IF THE TAX-FREE REQUIREMENTS ARE NOT MET? If the qualified withdrawal requirements are not met, a withdrawal consisting of your own prior contribution amounts to your Roth IRA will not be considered taxable income in the year you receive it, nor will the 10% penalty apply. To the extent that the nonqualified withdrawal consists of dividends or gains while your contributions were held in your Roth IRA, the withdrawal is includable in your gross income in the taxable year you receive it, and may be subject to the 10% withdrawal penalty. All amounts withdrawn from your Roth IRA are considered withdrawals of your contributions until you have withdrawn the entire amount you have contributed. After that, all amounts withdrawn are considered taxable withdrawals of dividends and gains. Note that, for purposes of determining what portion of any distribution is includable in income, all of your Roth IRA accounts are considered as one single account. Amounts withdrawn from any one Roth IRA account are deemed to be withdrawn from contributions first. Since all your Roth IRAs are considered to be one account for this purpose, withdrawals from Roth IRA accounts are not considered to be from earnings or interest until an amount equal to ALL contributions made to ALL of an individual's Roth IRA accounts is withdrawn. The following example illustrates this: A single individual contributes $1,000 a year to his Baron Funds Roth IRA account and $1,000 a year to the Brand X Roth IRA account over a period of ten years. At the end of 10 years his account balances are as follows: Principal Contributions Earnings - -------------------------------------------------------------------------------- Baron Funds Roth IRA $10,000 $10,000 Brand X Roth IRA $10,000 $10,000 _______ _______ Total $20,000 $20,000 At the end of 10 years, this person has $40,000 in both Roth IRA accounts, of which $20,000 represents his contributions (aggregated) and $20,000 represents his earnings (aggregated). This individual, who is 40, withdraws $15,000 from his Brand X Roth IRA (not a qualified withdrawal). We look to the aggregate amount of all principal contributions - in this case $20,000 - to determine if the withdrawal is from contributions, and thus non-taxable. In this example, there is no ($0) taxable income as a result of this withdrawal because the $15,000 withdrawal is less than the total amount of aggregated contributions ($20,000). If this individual then withdrew $15,000 from his Baron Funds Roth IRA, $5,000 would not be taxable (the remaining aggregate contributions) and $10,000 would be treated as taxable income for the year of the withdrawal, subject to regular income taxes and the 10% premature withdrawal penalty (unless an exception applies). Note: If passed, a bill currently pending in Congress will change the rules and the results discussed above. Under the proposed legislation, in general, separate Roth IRAs established for annual contributions and conversions for separate years are not aggregated as explained above to determine the tax on withdrawals. See your tax adviser for more information and the latest developments. Taxable withdrawals of dividends and gains from a Roth IRA are treated as ordinary income. Withdrawals of taxable amounts from a Roth IRA are not eligible for averaging treatment currently available to certain lump sum distributions from qualified employer-sponsored retirement plans, nor are such withdrawals eligible for taxable gains tax treatment. Your receipt of any taxable withdrawal from your Roth IRA before you attain age 59 1/2 generally will be considered as an early withdrawal and subject to a 10% penalty tax. The 10% penalty tax for early withdrawal will not apply if any of the following exceptions applies: o The withdrawal was a result of your death or disability. o The withdrawal is one of a scheduled series of substantially equal periodic payments for your life or life expectancy (or the joint lives or life expectancies of you and your beneficiary). If there is an adjustment to the scheduled series of payments, the 10% penalty tax will apply. For example, if you begin receiving payments at age 50 under a withdrawal program providing for substantially equal payments over your life expectancy, and at age 58 you elect to withdraw the remaining amount in your Roth I RA in a lump-sum, the 10% penalty tax will apply to the lump sum and to the amounts previously paid to you before age 59 1/2 to the extent they were includable in your taxable income. o The withdrawal is used to pay eligible higher education expenses. These are expenses for tuition, fees, books, and supplies required to attend an institution for post-secondary education. Room and board expenses are also eligible for a student attending at least half-time. The student may be you, your spouse, or your child or grandchild. However, expenses that are paid for with a scholarship or other educational assistance payment are not eligible expenses. 17 o The withdrawal is used to cover eligible first time homebuyer expenses (as described above in the discussion of tax-free withdrawals). o The withdrawal does not exceed the amount of your deductible medical expenses for the year (generally speaking, medical expenses paid during a year are deductible if they are greater than 7 1/2% of your adjusted gross income for that year). o The withdrawal does not exceed the amount you paid for health insurance coverage for yourself, your spouse and dependents. This exception applies only if you have been unemployed and received federal or state unemployment compensation payments for at least 12 weeks; this exception applies to distributions during the year in which you received the unemployment compensation and during the following year, but not to any distributions received after you have been reemployed for at least 60 days. WHAT ABOUT THE 15 PERCENT PENALTY TAX? The rule imposing a 15% penalty tax on very large withdrawals from tax-favored arrangements (including IRAs, 403(b) arrangements and qualified employer-sponsored plans), or on excess amounts remaining in such tax-favored arrangements at your death, has been REPEALED. This 15% tax no longer applies. IMPORTANT: The discussion of the tax rules for Roth IRAs in this Disclosure Statement is based upon the best available information. However, Roth IRAs are new under the tax laws, and the IRS has not issued regulations or rulings on the operation and tax treatment of Roth IRA accounts. Also, if enacted, legislation now pending in Congress will change some of the rules. Therefore, you should consult your tax advisor for the latest developments or for advice about how maintaining a Roth IRA will affect your p ersonal tax or financial situation. Also, please see Part Three below which contains important information applicable to ALL Baron Funds IRAs with Investors Fiduciary Trust Company. 18 PART THREE: RULES FOR ALL IRAS (REGULAR AND ROTH) GENERAL INFORMATION IRA REQUIREMENTS All IRAs must meet certain requirements. Contributions generally must be made in cash. The IRA trustee or custodian must be a bank or other person who has been approved by the Secretary of the Treasury. Your contributions may not be invested in life insurance or collectibles or be commingled with other property except in a common trust or investment fund. Your interest in the account must be nonforfeitable at all times. You may obtain further information on IRAs from any district office of the Internal Revenue Service. MAY I REVOKE MY IRA? You may revoke a newly established Regular or Roth IRA at any time within seven days after the date on which you receive this Disclosure Statement. A Regular or Roth IRA established more than seven days after the date of your receipt of this Disclosure Statement may not be revoked. To revoke your Regular or Roth IRA, mail or deliver a written notice of revocation to the Custodian at the address which appears at the end of this Disclosure Statement. Mailed notice will be deemed given on the date that it is postmarked (or, if sent by certified or registered mail, on the date of certification or registration). If you revoke your Regular or Roth IRA within the seven-day period, you are entitled to a return of the entire amount you originally contributed into your Regular or Roth IRA, without adjustment for such items as sales charges, administrative expenses or fluctuations in market value. INVESTMENTS HOW ARE MY IRA CONTRIBUTIONS INVESTED? You control the investment and reinvestment of contributions to your Regular or Roth IRA. Investments must be in one or more of the Baron Funds available from time to time as listed in the Adoption Agreement for your Regular or Roth IRA or in an investment selection form provided with your Adoption Agreement. You direct the investment of your IRA by giving your investment instructions to the Distributor or Service Company for the Fund(s). Since you control the investment of your Regular or Roth IRA, you are responsible for any losses; neither the Custodian, the Distributor nor the Service Company has any responsibility for any loss or diminution in value occasioned by your exercise of investment control. Transactions for your Regular or Roth IRA will generally be at the applicable public offering price or net asset value for shares of the Fund(s) involved next established after the Distributor or the Service Company (whichever may apply) receives proper investment instructions from you; consult the current prospectus for the Fund(s) involved for additional information. Before making any investment, read carefully the current prospectus for any Fund you are considering as an investment for your Regular IRA or Roth IRA. The prospectus will contain information about the Fund's investment objectives and policies, as well as any minimum initial investment or minimum balance requirements and any sales, redemption or other charges. Because you control the selection of investments for your Regular or Roth IRA and because mutual fund shares fluctuate in value, the growth in value of your Regular or Roth IRA cannot be guaranteed or projected. ARE THERE ANY RESTRICTIONS ON THE USE OF MY IRA ASSETS? The tax-exempt status of your Regular or Roth IRA will be revoked if you engage in any of the prohibited transactions listed in Section 4975 of the tax code. Upon such revocation, your Regular or Roth IRA is treated as distributing its assets to you. The taxable portion of the amount in your IRA will be subject to income tax (unless, in the case of a Roth IRA, the requirements for a tax-free withdrawal are satisfied). Also, you may be subject to a 10% penalty tax on the taxable amount as a premature withdrawal if you have not yet reached the age of 59 1/2. Any investment in a collectible (for example, rare stamps) by your Regular or Roth IRA is treated as a withdrawal; the only exception involves certain types of government-sponsored coins or certain types of precious metal bullion. WHAT IS A PROHIBITED TRANSACTION? Generally, a prohibited transaction is any improper use of the assets in your Regular or Roth IRA. Some examples of prohibited transactions are: o Direct or indirect sale or exchange of property between you and your Regular or Roth IRA. 19 o Transfer of any property from your Regular or Roth IRA to yourself or from yourself to your Regular or Roth IRA. Your Regular or Roth IRA could lose its tax exempt status if you use all or part of your interest in your Regular or Roth IRA as security for a loan or borrow any money from your Regular or Roth IRA. Any portion of your Regular or Roth IRA used as security for a loan will be treated as a distribution in the year in which the money is borrowed. This amount may be taxable and you may also be subject to the 10% premature withdrawal penalty on the taxable amount. FEES AND EXPENSES CUSTODIAN'S FEES The fees charged by the Custodian for maintaining either a Regular IRA or a Roth IRA are listed in the Adoption Agreement. General Fee Policies Fees may be paid by you directly, or the Custodian may deduct them from your Regular or Roth IRA. Fees may be changed upon 30 days written notice to you. The full annual maintenance fee will be charged for any calendar year during which you have a Regular or Roth IRA with us. This fee is not prorated for periods of less than one full year. If provided for in this Disclosure Statement or the Adoption Agreement, termination fees are charged when your account is closed whether the funds are distributed to you or transferred to a successor custodian or trustee. The Custodian may charge you for its reasonable expenses for services not covered by its fee schedule. OTHER CHARGES There may be sales or other charges associated with the purchase or redemption of shares of a Fund in which your Regular IRA or Roth IRA is invested. Before investing, be sure to read carefully the current prospectus of any Fund you are considering as an investment for your Regular IRA or Roth IRA for a description of applicable charges. TAX MATTERS WHAT IRA REPORTS DOES THE CUSTODIAN ISSUE? The Custodian will report all withdrawals to the IRS and the recipient on the appropriate form. For reporting purposes, a direct transfer of assets to a successor custodian or trustee is not considered a withdrawal. The Custodian will report to the IRS the year-end value of your account and the amount of any rollover (including conversions of a Regular IRA to a Roth IRA) or regular contribution made during a calendar year, as well as the tax year for which a contribution is made. Unless the Custodian receives an indication from you to the contrary, it will treat any amount as a contribution for the tax year in which it is received. It is most important that a contribution between January and April 15th for the prior year be clearly designated as such. WHAT TAX INFORMATION MUST I REPORT TO THE IRS? You must file Form 5329 with the IRS for each taxable year for which you made an excess contribution or you take a premature withdrawal that is subject to the 10% penalty tax, or you withdraw less than the minimum amount required from your Regular IRA. If your beneficiary fails to make required minimum withdrawals from your Regular or Roth IRA after your death, your beneficiary may be subject to an excise tax and be required to file Form 5329. For Regular IRAs, you must also report each nondeductible contribution to the IRS by designating it a nondeductible contribution on your tax return. Use Form 8606. In addition, for any year in which you make a nondeductible contribution or take a withdrawal, you must include additional information on your tax return. The information required includes: (1) the amount of your nondeductible contributions for that year; (2) the amount of withdrawals from Regular IRAs in that year; (3) the amount by which your total nondeductible contributions for all the years exceed the total amount of your distributions previously excluded from gross income; and (4) the total value of all your Regular IRAs as of the end of the year. If you fail to report any of this information, the IRS will assume that all your contributions were deductible. This will result in the taxation of the portion of your withdrawals that should be treated as a nontaxable return of your nondeductible contributions. WHICH WITHDRAWALS ARE SUBJECT TO WITHHOLDING? ROTH IRA Federal income tax will be withheld at a flat rate of 10% of any taxable withdrawal from your Roth IRA, unless you elect not to have tax withheld. Withdrawals from a Roth IRA are not subject to the mandatory 20% income tax withholding that applies to most distributions from qualified plans or 403(b) accounts that are not directly rolled over to another plan or IRA. REGULAR IRA Federal income tax will be withheld at a flat rate of 10% from any withdrawal from your Regular IRA, unless you 20 elect not to have tax withheld. Withdrawals from a Regular IRA are not subject to the mandatory 20% income tax withholding that applies to most distributions from qualified plans or 403(b) accounts that are not directly rolled over to another plan or IRA. ACCOUNT TERMINATION You may terminate your Regular IRA or Roth IRA at any time after its establishment by sending a completed withdrawal form (or other withdrawal instructions in a form acceptable to the Custodian), or a transfer authorization form, to: BARON FUNDS P.O. BOX 419946 KANSAS CITY, MO 64141-6946 Your Regular IRA or Roth IRA with Investors Fiduciary Trust will terminate upon the first to occur of the following: o The date your properly executed withdrawal form or instructions (as described above) withdrawing your total Regular IRA or Roth IRA balance is received and accepted by the Custodian or, if later, the termination date specified in the withdrawal form. o The date the Regular IRA or Roth IRA ceases to qualify under the tax code. This will be deemed a termination. o The transfer of the Regular IRA or Roth IRA to another custodian/trustee. o The rollover of the amounts in the Regular IRA or Roth IRA to another custodian/trustee. Any outstanding fees must be received prior to such a termination of your account. The amount you receive from your IRA upon termination of the account will be treated as a withdrawal, and thus the rules relating to Regular IRA or Roth IRA withdrawals will apply. For example, if the IRA is terminated before you reach age 59 1/2, the 10% early withdrawal penalty may apply to the taxable amount you receive. IRA DOCUMENTS REGULAR IRA The terms contained in Articles I to VII of Part One of the Investors Fiduciary Trust Company Universal Individual Retirement Custodial Account document have been promulgated by the IRS in Form 5305-A for use in establishing a Regular IRA Custodial Account that meets the requirements of Code Section 408(a) for a valid Regular IRA. This IRS approval relates only to the form of Articles I to VII and is not an approval of the merits of the Regular IRA or of any investment permitted by the Regular IRA. ROTH IRA The terms contained in Articles I through VII of Part Two of the Universal Individual Retirement Account Custodial Agreement have been promulgated by the IRS in Form 5305-RA for use in establishing a Roth IRA Custodial Account that meets the requirements of Code Section 408A for a valid Roth IRA. This IRS approval relates only to the form of Articles I to VII and is not an approval of the merits of the Roth IRA or of any investment permitted by the Roth IRA. Based on our legal advice relating to current tax laws and IRS meetings, the Custodian believes that the use of a Universal Individual Retirement Account Information Kit such as this, containing information and documents for both a Regular IRA or a Roth IRA, will be acceptable to the IRS. However, if the IRS makes a ruling, or if Congress enacts legislation, regarding the use of different documentation, the Custodian will forward to you a Regular IRA or a Roth IRA Kit (as appropriate) for you to read and, if necessary, an appropriate new Adoption Agreement to sign. By adopting a Regular IRA or a Roth IRA using these materials, you acknowledge this possibility and agree to this procedure if necessary. In all cases, to the extent permitted, Investors Fiduciary Trust will treat your IRA as being opened on the date your account was opened using the Adoption Agreement in this Kit. ADDITIONAL INFORMATION For additional information you may write to the following address or call the following telephone number. BARON FUNDS P.O. BOX 419946 KANSAS CITY, MO 64141-6946 1-800-442-3814 21 BARON FUNDS UNIVERSAL INDIVIDUAL RETIREMENT ACCOUNT CUSTODIAL AGREEMENT PART ONE: PROVISIONS APPLICABLE TO REGULAR IRAS The following provisions of Articles I to VII are in the form promulgated by the Internal Revenue Service in Form 5305-A for use in establishing an individual retirement custodial account. ARTICLE I. The Custodian may accept additional cash contributions on behalf of the Depositor for a tax year of the Depositor. The total cash contributions are limited to $2,000 for the tax year unless the contribution is a rollover contribution described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or an employer contribution to a simplified employee pension plan as described in section 408(k). ARTICLE II. The Depositor's interest in the balance in the custodial account is nonforfeitable. ARTICLE III. 1. No part of the custodial funds may be invested in life insurance contracts, nor may the assets of the custodial account be commingled with other property except in a common trust fund or common investment fund (within the meaning of section 408(a)(5)). 2. No part of the custodial funds may be invested in collectibles (within the meaning of section 408(m) except as otherwise permitted by section 408(m)(3) which provides an exception for certain gold, silver and platinum coins, coins issued under the laws of any state, and certain bullion. ARTICLE IV. 1. Notwithstanding any provisions of this agreement to the contrary, the distribution of the Depositor's interest in the custodial account shall be made in accordance with the following requirements and shall otherwise comply with section 408(a)(6) and Proposed Regulations section 1.408-8, including the incidental death benefit provisions of Proposed Regulations section 1.401(a)(9)-2, the provisions of which are incorporated by reference. 2. Unless otherwise elected by the time distributions are required to begin to the Depositor under paragraph 3, or to the surviving spouse under paragraph 4, other than in the case of a life annuity, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Depositor and the surviving spouse and shall apply to all subsequent years. The life expectancy of a nonspouse beneficiary may not be recalculated. 3. The Depositor's entire interest in the custodial account must be, or begin to be, distributed by the Depositor's required beginning date, the April 1 following the calendar year end in which the Depositor reaches age 70 1/2. By that date, the Depositor may elect, in a manner acceptable to the Custodian, to have the balance in the custodial account distributed in: (a) A single-sum payment. (b) An annuity contract that provides equal or substantially equal monthly, quarterly, or annual payments over the life of the Depositor. (c) An annuity contract that provides equal or substantially equal monthly, quarterly, or annual payments over the joint and last survivor lives of the Depositor and his or her designated beneficiary. 22 (d) Equal or substantially equal annual payments over a specified period that may not be longer than the Depositor's life expectancy. (e) Equal or substantially equal annual payments over a specified period that may not be longer than the joint life and last survivor expectancy of the Depositor and his or her designated beneficiary. 4. If the Depositor dies before his or her entire interest is distributed to him or her, the entire remaining interest will be distributed as follows: (a) If the Depositor dies on or after distribution of his or her interest has begun, distribution must continue to be made in accordance with paragraph 3. (b) If the Depositor dies before distribution of his or her interest has begun, the entire remaining interest will, at the election of the Depositor or, if the Depositor has not so elected, at the election of the beneficiary or beneficiaries, either (i) Be distributed by the December 31 of the year containing the fifth anniversary of the Depositor's death, or (ii) Be distributed in equal or substantially equal payments over the life or life expectancy of the designated beneficiary or beneficiaries starting by December 31 of the year following the year of the Depositor's death. If, however, the beneficiary is the Depositor's surviving spouse, then this distribution is not required to begin before December 31 of the year in which the Depositor would have turned age 70 1/2. (c) Except where distribution in the form of an annuity meeting the requirements of section 408(b)(3) and its related regulations has irrevocably commenced, distributions are treated as having begun on the Depositor's required beginning date, even though payments may actually have been made before that date. (d) If the Depositor dies before his or her entire interest has been distributed and if the beneficiary is other than the surviving spouse, no additional cash contributions or rollover contributions may be accepted in the account. 5. In the case of distribution over life expectancy in equal or substantially equal annual payments, to determine the minimum annual payment for each year, divide the Depositor's entire interest in the custodial account as of the close of business on December 31 of the preceding year by the life expectancy of the Depositor (or the joint life and last survivor expectancy of the Depositor and the Depositor's designated beneficiary, or the life expectancy of the designated beneficiary, whichever applies.) In the case of distributions under paragraph 3, determine the initial life expectancy (or joint life and last survivor expectancy) using the attained ages of the Depositor and designated beneficiary as of their birthdays in the year the Depositor reaches age 70 1/2. In the case of a distribution in accordance with paragraph 4(b)(ii), determine life expectancy using the attained age of the designated beneficiary as of the beneficiary's birthday in the year distributions are required to commence. 6. The owner of two or more individual retirement accounts may use the "alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the minimum distribution requirements described above. This method permits an individual to satisfy these requirements by taking from one individual retirement account the amount required to satisfy the requirement for another. ARTICLE V. 1. The Depositor agrees to provide the Custodian with information necessary for the Custodian to prepare any reports required under section 408(i) and Regulations sections 1.408-5 and 1.408-6. 2. The Custodian agrees to submit reports to the Internal Revenue Service and the Depositor as prescribed by the Internal Revenue Service. ARTICLE VI. Notwithstanding any other articles which may be added or incorporated, the provisions of Articles I through III and this sentence will be controlling. Any additional articles that are not consistent with section 408(a) and the related regulations will be invalid. ARTICLE VII. This agreement will be amended from time to time to comply with the provisions of the Code and related regulations. Other amendments may be made with the consent of the persons whose signatures appear on the Adoption Agreement. 23 PART TWO: PROVISIONS APPLICABLE TO ROTH IRAS See Section 25 of Part Three for information about the following provisions of Articles I to VII. ARTICLE I. 1. If this Roth IRA is not designated as a Roth Conversion IRA, then, except in the case of a rollover contribution described in section 408A(e), the Custodian will accept only cash contributions and only up to a maximum amount of $2,000 for any tax year of the Depositor. 2. If this Roth IRA is designated as a Roth Conversion IRA, no contributions other than IRA Conversion Contributions made during the same tax year will be accepted. ARTICLE IA. The $2,000 limit described in Article I is gradually reduced to $0 between certain levels of adjusted gross income (AGI). For a single Depositor, the $2,000 annual contribution is phased out between AGI of $95,000 and $110,000; for a married Depositor who files jointly, between AGI of $150,000 and $160,000; and for a married Depositor who files separately, between $0 and $10,000. In case of a conversion, the Custodian will not accept IRA Conversion Contributions in a tax year if the Depositor's AGI for that tax year exceeds $100,000 or if the Depositor is married and files a separate return. Adjusted gross income is defined in section 408A(c)(3) and does not include IRA Conversion Contributions. ARTICLE II. The Depositor's interest in the balance in the custodial account is nonforfeitable. ARTICLE III. 1. No part of the custodial funds may be invested in life insurance contracts, nor may the assets of the custodial account be commingled with other property except in a common trust fund or common investment fund (within the meaning of section 408(a)(5)). 2. No part of the custodial funds may be invested in collectibles (within the meaning of section 408(m)) except as otherwise permitted by section 408(m)(3) which provides an exception for certain gold, silver, and platinum coins, coins issued under the laws of any state, and certain bullion. ARTICLE IV. 1. If the Depositor dies before his or her entire interest is distributed to him or her and the Depositor's surviving spouse is not the sole beneficiary, the entire remaining interest will, at the election of the Depositor or, if the Depositor has not so elected, at the election of the beneficiary or beneficiaries, either: (a) Be distributed by December 31 of the year containing the fifth anniversary of the Depositor's death, or (b) Be distributed over the life expectancy of the designated beneficiary starting no later than December 31 of the year following the year of the Depositor's death. If distributions do not begin by the date described in (b), distribution method (a) will apply. 2. In the case of distribution method 1(b) above, to determine the minimum annual payment for each year, divide the Depositor's entire interest in the custodial account as of the close of business on December 31 of the preceding year by the life expectancy of the designated beneficiary using the attained age of the designated beneficiary as of the beneficiary's birthday in the year distributions are required to commence and subtract 1 for each subsequent year. 3. If the Depositor's spouse is the sole beneficiary on the Depositor's date of death, such spouse will then be treated as the Depositor. ARTICLE V. 1. The Depositor agrees to provide the Custodian with information necessary for the Custodian to prepare any reports required under Sections 408(i) and 408A(d)(3)(E), and Regulations Section 1.408-5 and 1.408-6, and under guidance published by the Internal Revenue Service. 2. The Custodian agrees to submit reports to the Internal Revenue Service and the Depositor as prescribed by the Internal Revenue Service. ARTICLE VI. Notwithstanding any other articles which may be added or incorporated, the provisions of Articles I through IV and this sentence will be controlling. Any additional articles that are not consistent with section 408A, the related regulations, and other published guidance will be invalid. ARTICLE VII. This agreement will be amended from time to time to comply with the provisions of the Code, related regulations, and other published guidance. Other amendments may be made with the consent of the persons whose signatures appear below. 24 PART THREE: PROVISIONS APPLICABLE TO BOTH REGULAR IRAS AND ROTH IRAS ARTICLE VIII. 1. As used in this Article VIII the following terms have the following meanings: "Account" or "Custodial Account" means the individual retirement account established using the terms of either Part One or Part Two and, in either event, Part Three of this Investors Fiduciary Trust Company Universal Individual Retirement Account Custodial Agreement and the Adoption Agreement signed by the Depositor. The Account may be a Regular Individual Retirement Account or a Roth Individual Retirement Account, as specified by the Depositor. See Section 24 below. "Custodian" means Investors Fiduciary Trust Company. "Fund" means any registered investment company which is advised, sponsored or distributed by Sponsor; provided, however, that such a mutual fund or registered investment company must be legally offered for sale in the state of the Depositor's residence. "Distributor" means the entity which has a contract with the Fund(s) to serve as distributor of the shares of such Fund(s). In any case where there is no Distributor, the duties assigned hereunder to the Distributor may be performed by the Fund(s) or by an entity that has a contract to perform management or investment advisory services for the Fund(s). "Service Company" means any entity employed by the Custodian or the Distributor, including the transfer agent for the Fund(s), to perform various administrative duties of either the Custodian or the Distributor. In any case where there is no Service Company, the duties assigned hereunder to the Service Company will be performed by the Distributor (if any) or by an entity specified in the second preceding paragraph. "Sponsor" means Baron Funds and/or Baron Asset Fund, a Massachussets business trust. 2. The Depositor may revoke the Custodial Account established hereunder by mailing or delivering a written notice of revocation to the Custodian within seven days after the Depositor receives the Disclosure Statement related to the Custodial Account. Mailed notice is treated as given to the Custodian on date of the postmark (or on the date of Post Office certification or registration in the case of notice sent by certified or registered mail). Upon timely revocation, the Depositor's initial contribution will be returned, without adjustment for administrative expenses, commissions or sales charges, fluctuations in market value or other changes. The Depositor may certify in the Adoption Agreement that the Depositor received the Disclosure Statement related to the Custodial Account at least seven days before the Depositor signed the Adoption Agreement to establish the Custodial Account, and the Custodian may rely upon such certification. 3. All contributions to the Custodial Account shall be invested and reinvested in full and fractional shares of one or more Funds. Such investments shall be made in such proportions and/or in such amounts as Depositor from time to time in the Adoption Agreement or by other written notice to the Service Company (in such form as may be acceptable to the Service Company) may direct. The Service Company shall be responsible for promptly transmitting all investment directions by the Depositor for the purchase or sale of shares of one or more Funds hereunder to the Funds' transfer agent for execution. However, if investment directions with respect to the investment of any contribution hereunder are not received from the Depositor as required or, if received, are unclear or incomplete in the opinion of the Service Company, the contribution will be returned to the Depositor, or will be held uninvested (or invested in a money market fund if available) pending clarification or completion by the Depositor, in either case without liability for interest or for loss of income or appreciation. If any other directions or other orders by the Depositor with respect to the sale or purchase of shares of one or more Funds for the Custodial Account are unclear or incomplete in the opinion of the Service Company, the Service Company will refrain from carrying out such investment directions or from executing any such sale or purchase, without liability for loss of income or for appreciation or depreciation of any asset, pending receipt of clarification or completion from the Depositor. All investment directions by Depositor will be subject to any minimum initial or additional investment or minimum balance rules applicable to a Fund as described in its prospectus. All dividends and capital gains or other distributions received on the shares of any Fund held in the Depositor's 25 Account shall be (unless received in additional shares) reinvested in full and fractional shares of such Fund (or of any other Fund offered by the Sponsor, if so directed). 4. Subject to the minimum initial or additional investment, minimum balance and other exchange rules applicable to a Fund, the Depositor may at any time direct the Service Company to exchange all or a specified portion of the shares of a Fund in the Depositor's Account for shares and fractional shares of one or more other Funds. The Depositor shall give such directions by written notice acceptable to the Service Company, and the Service Company will process such directions as soon as practicable after receipt thereof (subject to the second paragraph of Section 3 of this Article VIII). 5. Any purchase or redemption of shares of a Fund for or from the Depositor's Account will be effected at the public offering price or net asset value of such Fund (as described in the then effective prospectus for such Fund) next established after the Service Company has transmitted the Depositor's investment directions to the transfer agent for the Fund(s). Any purchase, exchange, transfer or redemption of shares of a Fund for or from the Depositor's Account will be subject to any applicable sales, redemption or other charge as described in the then effective prospectus for such Fund. 6. The Service Company shall maintain adequate records of all purchases or sales of shares of one or more Funds for the Depositor's Custodial Account. Any account maintained in connection herewith shall be in the name of the Custodian for the benefit of the Depositor. All assets of the Custodial Account shall be registered in the name of the Custodian or of a suitable nominee. The books and records of the Custodian shall show that all such investments are part of the Custodial Account. The Custodian shall maintain or cause to be maintained adequate records reflecting transactions of the Custodial Account. In the discretion of the Custodian, records maintained by the Service Company with respect to the Account hereunder will be deemed to satisfy the Custodian's recordkeeping responsibilities therefor. The Service Company agrees to furnish the Custodian with any information the Custodian requires to carry out the Custodian's recordkeeping responsibilities. 7. Neither the Custodian nor any other party providing services to the Custodial Account will have any responsibility for rendering advice with respect to the investment and reinvestment of Depositor's Custodial Account, nor shall such parties be liable for any loss or diminution in value which results from Depositor's exercise of investment control over his Custodial Account. Depositor shall have and exercise exclusive responsibility for and control over the investment of the assets of his Custodial Account, and neither Custodian nor any other such party shall have any duty to question his directions in that regard or to advise him regarding the purchase, retention or sale of shares of one or more Funds for the Custodial Account. 8. The Depositor may in writing appoint an investment advisor with respect to the Custodial Account on a form acceptable to the Custodian and the Service Company. The investment advisor's appointment will be in effect until written notice to the contrary is received by the Custodian and the Service Company. While an investment advisor's appointment is in effect, the investment advisor may issue investment directions or may issue orders for the sale or purchase of shares of one or more Funds to the Service Company, and the Service Company will be fully protected in carrying out such investment directions or orders to the same extent as if they had been given by the Depositor. The Depositor's appointment of any investment advisor will also be deemed to be instructions to the Custodian and the Service Company to pay such investment advisor's fees to the investment advisor from the Custodial Account hereunder without additional authorization by the Depositor or the Custodian. 9. Distribution of the assets of the Custodial Account shall be made at such time and in such form as Depositor (or the Beneficiary if Depositor is deceased) shall elect by written order to the Custodian. Depositor acknowledges that any distribution of a taxable amount from the Custodial Account (except for distribution on account of Depositor's disability or death, return of an "excess contribution" referred to in Code Section 4973, or a "rollover" from this Custodial Account) made earlier than age 59 1/2 may subject Depositor to an "additional tax on early distributions" under Code Section 72(t) unless an exception to such additional tax is applicable. For that purpose, Depositor will be considered disabled if Depositor can prove, as provided in Code Section 72(m)(7), that Depositor is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or be of long-continued and indefinite duration. It is the responsibility of the Depositor (or the Beneficiary) by appropriate distribution instructions to the Custodian to insure that any applicable distribution requirements of Code Section 401(a)(9) and Article IV above are met. If the Depositor (or Beneficiary) does not direct the Custodian to make distributions from the Custodial Account by the time that such distributions are required to commence in accordance with such distribution requirements, the Custodian (and Service Company) shall assume that the Depositor (or Beneficiary) is meeting the minimum distribution requirements from 26 another individual retirement arrangement maintained by the Depositor (or Beneficiary) and the Custodian and Service Company shall be fully protected in so doing. The Depositor (or the Depositor's surviving spouse) may elect to comply with the distribution requirements in Article IV using the recalculation of life expectancy method, or may elect that the life expectancy of the Depositor and/or the Depositor's surviving spouse, as applicable, will not be recalculated; any such election may be in such form as the Depositor (or surviving spouse) provides (including the calculation of minimum distribution amounts in accordance with a method that does not provide for recalculation of the life expectancy of one or both of the Depositor and surviving spouse and instructions for withdrawals to the Custodian in accordance with such method). Notwithstanding paragraph 2 of Article IV, unless an election to have life expectancies recalculated annually is made by the time distributions are required to begin, life expectancies shall not be recalculated. Neither the Custodian nor any other party providing services to the Custodial Account assumes any responsibility for the tax treatment of any distribution from the Custodial Account; such responsibility rests solely with the person ordering the distribution. 10. The Custodian assumes (and shall have) no responsibility to make any distribution except upon the written order of Depositor (or Beneficiary if Depositor is deceased) containing such information as the Custodian may reasonably request. Also, before making any distribution or honoring any assignment of the Custodial Account, Custodian shall be furnished with any and all applications, certificates, tax waivers, signature guarantees and other documents (including proof of any legal representative's authority) deemed necessary or advisable by Custodian, but Custodian shall not be responsible for complying with any order or instruction which appears on its face to be genuine, or for refusing to comply if not satisfied it is genuine, and Custodian has no duty of further inquiry. Any distributions from the Account may be mailed, first-class postage prepaid, to the last known address of the person who is to receive such distribution, as shown on the Custodian's records, and such distribution shall to the extent thereof completely discharge the Custodian's liability for such payment. 11. (a) The term "Beneficiary" means the person or persons designated as such by the "designating person" (as defined below) on a form acceptable to the Custodian for use in connection with the Custodial Account, signed by the designating person, and filed with the Custodian. The form may name individuals, trusts, estates, or other entities as either primary or contingent beneficiaries. However, if the designation does not effectively dispose of the entire Custodial Account as of the time distribution is to commence, the term "Beneficiary" shall then mean the designating person's estate with respect to the assets of the Custodial Account not disposed of by the designation form. The form last accepted by the Custodian before such distribution is to commence, provided it was received by the Custodian (or deposited in the U.S. Mail or with a reputable delivery service) during the designating person's lifetime, shall be controlling and, whether or not fully dispositive of the Custodial Account, thereupon shall revoke all such forms previously filed by that person. The term "designating person" means Depositor during his/her lifetime; after Depositor's death, it also means Depositor's spouse, but only if the spouse elects to treat the Custodial Account as the spouse's own Custodial Account in accordance with applicable provisions of the Code. (b) When and after distributions from the Custodial Account to Depositor's Beneficiary commence, all rights and obligations assigned to Depositor hereunder shall inure to, and be enjoyed and exercised by, Beneficiary instead of Depositor. 12. (a) The Depositor agrees to provide information to the Custodian at such time and in such manner as may be necessary for the Custodian to prepare any reports required under Section 408(i) or Section 408A(d)(3)(E) of the Code and the regulations thereunder or otherwise. (b) The Custodian or the Service Company will submit reports to the Internal Revenue Service and the Depositor at such time and manner and containing such information as is prescribed by the Internal Revenue Service. (c) The Depositor, Custodian and Service Company shall furnish to each other such information relevant to the Custodial Account as may be required under the Code and any regulations issued or forms adopted by the Treasury Department thereunder or as may otherwise be necessary for the administration of the Custodial Account. (d) The Depositor shall file any reports to the Internal Revenue Service which are required of him by law (including Form 5329), and neither the Custodian nor Service Company shall have any duty to advise Depositor concerning or monitor Depositor's compliance with such requirement. 13. (a) Depositor retains the right to amend this Custodial Account document in any respect at any time, effective on a stated date which shall be at least 60 27 days after giving written notice of the amendment (including its exact terms) to Custodian by registered or certified mail, unless Custodian waives notice as to such amendment. If the Custodian does not wish to continue serving as such under this Custodial Account document as so amended, it may resign in accordance with Section 17 below. (b) Depositor delegates to the Custodian the Depositor's right so to amend, provided (i) the Custodian does not change the investments available under this Custodial Agreement and (ii) the Custodian amends in the same manner all agreements comparable to this one, having the same Custodian, permitting comparable investments, and under which such power has been delegated to it; this includes the power to amend retroactively if necessary or appropriate in the opinion of the Custodian in order to conform this Custodial Account to pertinent provisions of the Code and other laws or successor provisions of law, or to obtain a governmental ruling that such requirements are met, to adopt a prototype or master form of agreement in substitution for this Agreement, or as otherwise may be advisable in the opinion of the Custodian. Such an amendment by the Custodian shall be communicated in writing to Depositor, and Depositor shall be deemed to have consented thereto unless, within 30 days after such communication to Depositor is mailed, Depositor either (i) gives Custodian a written order for a complete distribution or transfer of the Custodial Account, or (ii) removes the Custodian and appoints a successor under Section 17 below. Pending the adoption of any amendment necessary or desirable to conform this Custodial Account document to the requirements of any amendment to any applicable provision of the Internal Revenue Code or regulations or rulings thereunder, the Custodian and the Service Company may operate the Depositor's Custodial Account in accordance with such requirements to the extent that the Custodian and/or the Service Company deem necessary to preserve the tax benefits of the Account. (c) Notwithstanding the provisions of subsections (a) and (b) above, no amendment shall increase the responsibilities or duties of Custodian without its prior written consent. (d) This Section 13 shall not be construed to restrict the Custodian's right to substitute fee schedules in the manner provided by Section 16 below, and no such substitution shall be deemed to be an amendment of this Agreement. 14. (a) Custodian shall terminate the Custodial Account if this Agreement is terminated or if, within 30 days (or such longer time as Custodian may agree) after resignation or removal of Custodian under Section 17, Depositor or Sponsor, as the case may be, has not appointed a successor which has accepted such appointment. Termination of the Custodial Account shall be effected by distributing all assets thereof in a single payment in cash or in kind to Depositor, subject to Custodian's right to reserve funds as provided in Section 17. (b) Upon termination of the Custodial Account, this custodial account document shall have no further force and effect (except for Sections 15(f), 17(b) and (c) hereof which shall survive the termination of the Custodial Account and this document), and Custodian shall be relieved from all further liability hereunder or with respect to the Custodial Account and all assets thereof so distributed. 15. (a) In its discretion, the Custodian may appoint one or more contractors or service providers to carry out any of its functions and may compensate them from the Custodial Account for expenses attendant to those functions. In the event of such appointment, all rights and privileges of the Custodian under this Agreement shall pass through to such contractors or service providers who shall be entitled to enforce them as if a named party. (b) The Service Company shall be responsible for receiving all instructions, notices, forms and remittances from Depositor and for dealing with or forwarding the same to the transfer agent for the Fund(s). (c) The parties do not intend to confer any fiduciary duties on Custodian or Service Company (or any other party providing services to the Custodial Account), and none shall be implied. Neither shall be liable (or assumes any responsibility) for the collection of contributions, the proper amount, time or tax treatment of any contribution to the Custodial Account or the propriety of any contributions under this Agreement, or the purpose, time, amount (including any minimum distribution amounts), tax treatment or propriety of any distribution hereunder, which matters are the sole responsibility of Depositor and Depositor's Beneficiary. (d) Not later than 60 days after the close of each calendar year (or after the Custodian's resignation or removal), the Custodian or Service Company shall file with Depositor a written report or reports 28 reflecting the transactions effected by it during such period and the assets of the Custodial Account at its close. Upon the expiration of 60 days after such a report is sent to Depositor (or Beneficiary), the Custodian or Service Company shall be forever released and discharged from all liability and accountability to anyone with respect to transactions shown in or reflected by such report except with respect to any such acts or transactions as to which Depositor shall have filed written objections with the Custodian or Service Company within such 60 day period. (e) The Service Company shall deliver, or cause to be delivered, to Depositor all notices, prospectuses, financial statements and other reports to shareholders, proxies and proxy soliciting materials relating to the shares of the Funds(s) credited to the Custodial Account. No shares shall be voted, and no other action shall be taken pursuant to such documents, except upon receipt of adequate written instructions from Depositor. (f) Depositor shall always fully indemnify Service Company, Distributor, the Fund(s), Sponsor and Custodian and save them harmless from any and all liability whatsoever which may arise either (i) in connection with this Agreement and the matters which it contemplates, except that which arises directly out of the Service Company's, Distributor's, Fund's, Sponsor's or Custodian's bad faith, gross negligence or willful misconduct, (ii) with respect to making or failing to make any distribution, other than for failure to make distribution in accordance with an order therefor which is in full compliance with Section 10, or (iii) actions taken or omitted in good faith by such parties. Neither Service Company nor Custodian shall be obligated or expected to commence or defend any legal action or proceeding in connection with this Agreement or such matters unless agreed upon by that party and Depositor, and unless fully indemnified for so doing to that party's satisfaction. (g) The Custodian and Service Company shall each be responsible solely for performance of those duties expressly assigned to it in this Agreement, and neither assumes any responsibility as to duties assigned to anyone else hereunder or by operation of law. (h) The Custodian and Service Company may each conclusively rely upon and shall be protected in acting upon any written order from Depositor or Beneficiary, or any investment advisor appointed under Section 8, or any other notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed, and so long as it acts in good faith, in taking or omitting to take any other action in reliance thereon. In addition, Custodian will carry out the requirements of any apparently valid court order relating to the Custodial Account and will incur no liability or responsibility for so doing. 16. (a) The Custodian, in consideration of its services under this Agreement, shall receive the fees specified on the applicable fee schedule. The fee schedule originally applicable shall be the one specified in the Adoption Agreement or Disclosure Statement, as applicable. The Custodian may substitute a different fee schedule at any time upon 30 days' written notice to Depositor. The Custodian shall also receive reasonable fees for any services not contemplated by any applicable fee schedule and either deemed by it to be necessary or desirable or requested by Depositor. (b) Any income, gift, estate and inheritance taxes and other taxes of any kind whatsoever, including transfer taxes incurred in connection with the investment or reinvestment of the assets of the Custodial Account, that may be levied or assessed in respect to such assets, and all other administrative expenses incurred by the Custodian in the performance of its duties (including fees for legal services rendered to it in connection with the Custodial Account) shall be charged to the Custodial Account. If the Custodian is required to pay any such amount, the Depositor (or Beneficiary) shall promptly upon notice thereof reimburse the Custodian. (c) All such fees and taxes and other administrative expenses charged to the Custodial Account shall be collected either from the amount of any contribution or distribution to or from the Account, or (at the option of the person entitled to collect such amounts) to the extent possible under the circumstances by the conversion into cash of sufficient shares of one or more Funds held in the Custodial Account (without liability for any loss incurred thereby). Notwithstanding the foregoing, the Custodian or Service Company may make demand upon the Depositor for payment of the amount of such fees, taxes and other administrative expenses. Fees which remain outstanding after 60 days may be subject to a collection charge. 17. (a) Upon 30 days' prior written notice to the Custodian, Depositor or Sponsor, as the case may be, 29 may remove it from its office hereunder. Such notice, to be effective, shall designate a successor custodian and shall be accompanied by the successor's written acceptance. The Custodian also may at any time resign upon 30 days' prior written notice to Sponsor, whereupon the Sponsor shall notify the Depositor (or Beneficiary) and shall appoint a successor to the Custodian. In connection with its resignation hereunder, the Custodian may, but is not required to, designate a successor custodian by written notice to the Sponsor or Depositor (or Beneficiary), and the Sponsor or Depositor (or Beneficiary) will be deemed to have consented to such successor unless the Sponsor or Depositor (or Beneficiary) designates a different successor custodian and provides written notice thereof together with such a different successor's written acceptance by such date as the Custodian specifies in its original notice to the Sponsor or Depositor (or Beneficiary) (provided that the Sponsor or Depositor (or Beneficiary) will have a minimum of 30 days to designate a different successor). (b) The successor custodian shall be a bank, insured credit union, or other person satisfactory to the Secretary of the Treasury under Code Section 408(a)(2). Upon receipt by Custodian of written acceptance by its successor of such successor's appointment, Custodian shall transfer and pay over to such successor the assets of the Custodial Account and all records (or copies thereof) of Custodian pertaining thereto, provided that the successor custodian agrees not to dispose of any such records without the Custodian's consent. Custodian is authorized, however, to reserve such sum of money or property as it may deem advisable for payment of all its fees, compensation, costs, and expenses, or for payment of any other liabilities constituting a charge on or against the assets of the Custodial Account or on or against the Custodian, with any balance of such reserve remaining after the payment of all such items to be paid over to the successor custodian. (c) Any Custodian shall not be liable for the acts or omissions of its predecessor or its successor. 18. References herein to the "Internal Revenue Code" or "Code" and sections thereof shall mean the same as amended from time to time, including successors to such sections. 19. Except where otherwise specifically required in this Agreement, any notice from Custodian to any person provided for in this Agreement shall be effective if sent by first-class mail to such person at that person's last address on the Custodian's records. 20. Depositor or Depositor's Beneficiary shall not have the right or power to anticipate any part of the Custodial Account or to sell, assign, transfer, pledge or hypothecate any part thereof. The Custodial Account shall not be liable for the debts of Depositor or Depositor's Beneficiary or subject to any seizure, attachment, execution or other legal process in respect thereof except to the extent required by law. At no time shall it be possible for any part of the assets of the Custodial Account to be used for or diverted to purposes other than for the exclusive benefit of the Depositor or his/her Beneficiary except to the extent required by law. 21. When accepted by the Custodian, this Agreement is accepted in and shall be construed and administered in accordance with the laws of the state where the principal offices of the Custodian are located. Any action involving the Custodian brought by any other party must be brought in a state or federal court in such state. If in the Adoption Agreement, Depositor designates that the Custodial Account is a Regular IRA, this Agreement is intended to qualify under Code Section 408(a) as an individual retirement Custodial Account and to entitle Depositor to the retirement savings deduction under Code Section 219 if available. If in the Adoption Agreement Depositor designates that the Custodial Account is a Roth IRA, this Agreement is intended to qualify under Code Section 408A as a Roth individual retirement Custodial Account and to entitle Depositor to the tax-free withdrawal of amounts from the Custodial Account to the extent permitted in such Code section. If any provision hereof is subject to more than one interpretation or any term used herein is subject to more than one construction, such ambiguity shall be resolved in favor of that interpretation or construction which is consistent with the intent expressed in whichever of the two preceding sentences is applicable. However, the Custodian shall not be responsible for whether or not such intentions are achieved through use of this Agreement, and Depositor is referred to Depositor's attorney for any such assurances. 22. Depositor should seek advice from Depositor's attorney regarding the legal consequences (including but not limited to federal and state tax matters) of entering into this Agreement, contributing to the Custodial Account, and ordering Custodian to make distributions from the Account. Depositor acknowledges that Custodian and Service Company (and any company associated therewith) are prohibited by law from rendering such advice. 30 23. If any provision of any document governing the Custodial Account provides for notice, instructions or other communications from one party to another in writing, to the extent provided for in the procedures of the Custodian, Service Company or another party, any such notice, instructions or other communications may be given by telephonic, computer, other electronic or other means, and the requirement for written notice will be deemed satisfied. 24. The legal documents governing the Custodial Account are as follows: (a) If in the Adoption Agreement the Depositor designated the Custodial Account as a Regular IRA under Code Section 408(a), the provisions of Part One and Part Three of this Agreement and the provisions of the Adoption Agreement are the legal documents governing the Depositor's Custodial Account. (b) If in the Adoption Agreement the Depositor designated the Custodial Account as a Roth IRA under Code Section 408A, the provisions of Part Two and Part Three of this Agreement and the provisions of the Adoption Agreement are the legal documents governing the Depositor's Custodial Account. (c) In the Adoption Agreement the Depositor must designate the Custodian Account as either a Roth IRA or a Regular IRA, and a separate account will be established for such IRA. One Custodial Account may not serve as a Roth IRA and a Regular IRA (through the use of subaccounts or otherwise). 25. Articles I through VII of Part One of this Agreement are in the form promulgated by the Internal Revenue Service as Form 5305-A. It is anticipated that, if and when the Internal Revenue Service promulgates changes to Form 5305-A, the Custodian will amend this Agreement correspondingly. Articles I through VII of Part Two of this Agreement are in the form promulgated by the Internal Revenue Service as Form 5305-RA. It is anticipated that, if and when the Internal Revenue Service promulgates changes to Form 5305-RA, the Custodian will amend this Agreement correspondingly. The Internal Revenue Service has endorsed the use of documentation permitting a Depositor to establish either a Regular IRA or Roth IRA (but not both using a single Adoption Agreement), and this Kit complies with the requirements of the IRS guidance for such use. If the Internal Revenue Service subsequently determines that such an approach is not permissible, or that the use of a "combined" Adoption Agreement does not establish a valid Regular IRA or a Roth IRA (as the case may be), the Custodian will furnish the Depositor with replacement documents and the Depositor will if necessary sign such replacement documents. Depositor acknowledges and agrees to such procedures and to cooperate with Custodian to preserve the intended tax treatment of the Account. 26. If the Depositor maintains an Individual Retirement Account under Code section 408(a), Depositor may convert or transfer such other IRA to a Roth IRA under Code section 408A using the terms of this Agreement and the Adoption Agreement by completing and executing the Adoption Agreement and giving suitable directions to the Custodian and the custodian or trustee of such other IRA. Alternatively, the Depositor may convert or transfer such other IRA to a Roth IRA by use of a reply card or by telephonic, computer or electronic means in accordance with procedures adopted by the Custodian or Service Company intended to meet the requirements of Code section 408A, and the Depositor will be deemed to have executed the Adoption Agreement and adopted the provisions of this Agreement and the Adoption Agreement in accordance with such procedures. 27. The Depositor acknowledges that he or she has received and read the current prospectus for each Fund in which his or her Account is invested and the Individual Retirement Account Disclosure Statement related to the Account. The Depositor represents under penalties of perjury that his or her Social Security number (or other Taxpayer Identification Number) as stated in the Adoption Agreement is correct. 31 EX-99.B14 7 IRA APPLICATIONS INDIVIDUAL RETIREMENT ACCOUNT ADOPTION AGREEMENT FOR NEW IRAS Use this form to open a new IRA, IRA R/O (Conduit), Roth IRA, Roth Conversion IRA, SEP IRA, and/or SAR SEP. If you have an existing IRA of one of the types listed above invested in the BARON FUNDS group of funds, you may open an additional IRA of a different type by completion of a shorter form, "AUTHORIZATION TO ADD AN IRA".(Do not use this application to open a SIMPLE IRA or Education IRA.)Please use one application form for each IRA type. For information or to request forms call 1-800-442-3814. SEND ALL COMPLETED DOCUMENTATION TO: BARON FUNDS, P.O. BOX 419946, KANSAS CITY, MO 64141-6946 ANNUAL MAINTENANCE FEE FOR ACCOUNTS LESS THAN $10,000 IS $12. PARTICIPANT INFORMATION - -------------------------------------------------------------------------------- First Name Initial Last Name - --------------------------------- ----------------------- Social Security # Date of Birth - ----------------------------------------------------------------------------- Address - ----------------------------------------------------------------------------- City State Zip Code - ----------------------------------------------------------------------------- Daytime Phone Number Home Phone Number - ------------------------------------------------------------------------------ Name and Firm of Representative Representative's Phone Number NEW ACCOUNT INFORMATION Please select one IRA type, mark investment type, and complete requested investment information.
DOLLARS CONTRIBUTION SPECIAL IRA TYPE INVESTMENT TYPE INVESTED TAX YEAR FORM - --------------------------------------------------------------------------------------------------------------- o Regular IRA o IRA deductible or nondeductible Contribution $------ ------- o Direct Transfer from existing IRA $------ [ ] o Rollover within 60 days of receipt from a regular IRA $------ - --------------------------------------------------------------------------------------------------------------- o Rollover IRA (Conduit) o Direct Rollover payable to IFTC from 403(b) or employer qualified plan $------ o Direct Transfer from existing Conduit IRA $------ [ ] o Rollover within 60 days of receipt from 403(b) or employer qualified plan $------ - --------------------------------------------------------------------------------------------------------------- o Roth IRA o Roth IRA nondeductible Contribution $------ ------- o Direct Transfer from existing Roth IRA with original start date --/--/-- $------ [ ] o Rollover within 60 days from Roth IRA with original start date --/--/-- $------
DOLLARS CONTRIBUTION SPECIAL IRA TYPE INVESTMENT TYPE INVESTED TAX YEAR FORM - ---------------------------------------------------------------------------------------------------------------- o Roth Converted IRA o Convert my existing NonBaron Funds to a regular IRA to a Roth Converted IRA $------- [ ] o Convert my existing Baron Funds IRA to a Roth Converted IRA o Direct Transfer from existing Roth Converted IRA with original start date --/--/-- $------- [ ] o Rollover within 60 days from Roth Converted IRA with original start date --/--/-- $------- - ---------------------------------------------------------------------------------------------------------------- o SEP IRA o SEP Employer (or self employed) Contribution $------- ------- o Direct Transfer from existing SEP IRA $------- [ ] o Rollover within 60 days of receipt from a SEP IRA $------- - ---------------------------------------------------------------------------------------------------------------- o SAR SEP IRA plan established before 1997 o SEP Employee Salary Reduction $------- ------- o Direct Transfer from existing SAR SEP IRA $------- [ ] o Rollover within 60 days of receipt from a SAR SEP IRA $-------
[ ] COMPLETE AND ENCLOSE "AUTHORIZATION FOR IRA TRANSFER, DIRECT ROLLOVER & CONVERSION". Please call 1-800-442-3814 to request Authorization forms. INVESTMENT INSTRUCTIONS PLEASE ALLOCATE MY PURCHASE AS FOLLOWS: If opening more than one type of IRA with this form, please give the reference number of the account beside the investment instruction. NAME OF FUND AMOUNT BARON ASSET FUND ------------------------------------------------ BARON GROWTH & INCOME FUND ------------------------------------------------ BARON SMALL CAP FUND ------------------------------------------------ DESIGNATION OF BENEFICIARIES I designate the individual(s) named below the Beneficiary(ies) of this IRA. I revoke all prior IRA Beneficiary designations, if any, made by me for these assets. I understand that I may change or add Beneficiaries at any time by written notice to the Custodian. If I am not survived by any Beneficiary, my Beneficiary shall be my estate. (If no percentage is specified, primary beneficiaries will share the account balance equally.) PRIMARY BENIFICIARY(IES) - --------------------------------------------------- ------------------------ First Name Initial Last Name Relationship - ----------------------------- --------------- -------------------- Social Security Number Date of Birth % of Account - -------------------------------------------------------------------------------- Address - --------------------------------------------------- ------------------------ First Name Initial Last Name Relationship - ----------------------------- --------------- -------------------- Social Security Number Date of Birth % of Account - -------------------------------------------------------------------------------- Address CONTINGENT BENIFICIARY(IES) - --------------------------------------------------- ------------------------ First Name Initial Last Name Relationship - ----------------------------- --------------- -------------------- Social Security Number Date of Birth % of Account - -------------------------------------------------------------------------------- Address - --------------------------------------------------- ------------------------ First Name Initial Last Name Relationship - ----------------------------- --------------- -------------------- Social Security Number Date of Birth % of Account - -------------------------------------------------------------------------------- Address SPOUSAL CONSENT (This section should be reviewed if the accountholder is married, is a resident of a community property or marital property state, and designates a beneficiary other than the spouse. It is the accountholder's responsibility to determine if this section applies. The accountholder may need to consult with legal counsel. Neither the Custodian nor the Sponsor are liable for any consequences resulting from a failure of the accountholder to provide proper spousal consent.) I am the spouse of the above named accountholder. I acknowledge that I have received full and reasonable disclosure of my spouse's property and financial obligations. Due to any possible consequences of giving up my community property interest in this IRA, I have been advised to see a tax professional or legal advisor. I hereby consent to the beneficiary designation(s) indicated above. I assume full responsibility for any adverse consequence that may result. No tax or legal advice was given to me by the Custodian or Sponsor. - -------------------------------------------------------------------------------- Signature of Spouse Date - -------------------------------------------------------------------------------- Signature of Witness for Spouse Date CERTIFICATION AND SIGNATURES If the Depositor has indicated a Regular IRA Rollover or Direct Rollover above, Depositor certifies that the contribution does not include any employee contributions to any qualified plan (other than accumulated deductible employee contributions) or 403(b) arrangement; if the distribution is from another Regular IRA, that Depositor has not made another rollover within the oneyear period immediately preceding this rollover; that such distribution was received within 60 days of making the rollover to this Account; and that no portion of the amount rolled over is a required minimum distribution under the required distribution rules. If Depositor has indicated a Conversion or a Rollover of an existing Regular IRA to a Roth IRA, Depositor acknowledges that the amount converted will be treated as taxable income (except for prior nondeductible contributions) for federal income tax purposes. If Depositor has indicated a Rollover from another Roth IRA, Depositor certifies that the information given above is correct and acknowledges that adverse tax consequences or penalties could result from giving incorrect information. Depositor has received and read the applicable sections of the "Universal Individual Retirement Account Disclosure Statement" relating to this Account. The Custodial Account document, and the "Instructions" pertaining to this Adoption Agreement. Depositor acknowledges and understands that the beneficiaries named herein may be changed or revoked at any time by filing a new designation in writing with the Custodian. All forms must be acceptable to the Custodian and dated and signed by the Depositor. If the Depositor is a minor under the laws of the Depositor's state of residence, a parent or guardian must sign the Adoption Agreement. Until the Depositor reaches the age of majority, the parent or guardian will exercise the powers and duties of the Depositor. - -------------------------------------------------------------------------------- Signature of Depositor Date CUSTODIAN ACCEPTANCE: Investors Fiduciary Trust Company will accept appointment as Custodian of the Depositor's Account. However, this Agreement is not binding upon the Custodian until the Depositor has received a statement of the transaction. Receipt by the Depositor of a confirmation of the purchase of the Fund shares indicated above will serve as notification of Investors Fiduciary Trust Company's acceptance of appointment as Custodian of the Depositor's Account. INVESTORS FIDUCIARY TRUST COMPANY, CUSTODIAN - -------------------------------------------------------------------------------- Signature of Custodian RETAIN A PHOTOCOPY OF THIS FORM FOR YOUR RECORDS AUTHORIZATION TO ADD AN IRA USE THIS FORM TO OPEN AN ADDITIONAL IRA IF YOU HAVE AN EXISTING IFTC IRA INVESTED IN THE BARON FUNDS.(THIS FORM IS NOT REQUIRED TO OPEN AN INVESTMENT ACCOUNT IN AN ADDITIONAL FUND OF THE SAME FUND GROUP IN THE SAME TYPE IRA.) DO NOT USE FORM TO OPEN A SIMPLE IRA. FOR SIMPLE IRA INFORMATION CALL 18004423814.SEND ALL COMPLETED DOCUMENTATION TO: BARON FUNDS, P.O. BOX 419946, KANSAS CITY, MO 641416946 REQUEST FOR ADDITIONAL IRA Please open an additional Individual Retirement Account (IRA) for which I authorize the identical mutual fund for investment, address, accountholder birthdate, social security number, and beneficiary information as that shown on the existing account referenced below. For information on how to make future changes to your IRA, call 18004423814. Annual Maintenance Fee for accounts less than $10,000 is $12. EXISTING ACCOUNT INFORMATION - ------------------------------------------------------------------------------- Existing IRA account number Fund - ------------------------------------------------------------------------------- Social Security # - ------------------------------------------------------------------------------- First Name Initial Last Name (on existing IRA) - ------------------------------------------------------------------------------- Daytime Phone Number Home Phone Number NEW ACCOUNT INVESTMENT INFORMATION Please select one IRA type, mark investment type, and complete requested investment information.
DOLLARS CONTRIBUTION SPECIAL IRA TYPE INVESTMENT TYPE INVESTED TAX YEAR FORM - -------------------------------------------------------------------------------------------------------------- o Regular IRA o IRA deductible or nondeductible Contribution $------ ------ o Direct Transfer from existing IRA $------ [ ] o Rollover within 60 days of receipt from a regular IRA $------ - --------------------------------------------------------------------------------------------------------------- o Rollover IRA (Conduit) o Direct Rollover payable to IFTC from 403(b) or employer qualified plan $------ o Direct Transfer from existing Conduit IRA $------ [ ] o Rollover within 60 days of receipt from 403(b) or employer qualified plan $------ - ---------------------------------------------------------------------------------------------------------------- o Roth IRA o Roth IRA nondeductible Contribution $------ ------- o Direct Transfer from existing Roth IRA with original start date --/--/-- $------ [ ] o Rollover within 60 days from Roth IRA with original start date --/--/-- $------ - ----------------------------------------------------------------------------------------------------------------- o Roth Converted IRA o Convert my existing regular IRA to Roth Converted IRA $------ [ ] o Direct Transfer from existing Roth Converted IRA with original start date --/--/-- $------ [ ] o Rollover within 60 days from Roth Converted IRA with original start date --/--/-- $------
DOLLARS CONTRIBUTION SPECIAL IRA TYPE INVESTMENT TYPE INVESTED TAX YEAR FORM - ------------------------------------------------------------------------------------------------------------------ o SEP IRA o SEP Employer (or self employed) Contribution $------ --------- o Direct Transfer from existing SEP IRA $------ [ ] o Rollover within 60 days of receipt from a SEP IRA $------ - ------------------------------------------------------------------------------------------------------------------ o SAR SEP IRA plan established before 1997 o SEP Employee Salary Reduction $------ --------- o Direct Transfer from existing SAR SEP IRA $------ [ ] o Rollover within 60 days of receipt from a SAR SEP IRA $------
[ ]Complete and enclose "Authorization to Transfer/Direct Rollover/Convert IRA to Roth IRA". Please call 18004423814 to request Authorization forms. CERTIFICATION AND SIGNATURES If the Depositor has indicated a Regular IRA Rollover or Direct Rollover above, Depositor certifies that the contribution does not include any employee contributions to any qualified plan (other than accumulated deductible employee contributions) or 403(b)arrangement; if the distribution is from another Regular IRA, that Depositor has not made another rollover within the oneyear period immediately preceding this rollover; that such distribution was received within 60 days of making the rollover to this Account; and that no portion of the amount rolled over is a required minimum distribution under the required distribution rules. If Depositor has indicated a Conversion or a Rollover of an existing Regular IRA to a RothIRA, Depositor acknowledges that the amount converted will be treated as taxable income(except for prior nondeductible contributions) for federal income tax purposes. If Depositor has indicated a Rollover from another Roth IRA, Depositor certifies that the information given above is correct and acknowledges that adverse tax consequences or penalties could result from giving incorrect information. Depositor has received and read the applicable sections of the "Universal Individual Retirement Account Disclosure Statement" relating to this Account. The Custodial Account document, and the "Instructions" pertaining to this Adoption Agreement. Depositor acknowledges and understands that the beneficiaries named herein may be changed or revoked at any time by filing a new designation in writing with the Custodian. All forms must be acceptable to the Custodian and dated and signed by the Depositor. If the Depositor is a minor under the laws of the Depositor's state of residence, a parent or guardian must sign the Adoption Agreement. Until the Depositor reaches the age of majority, the parent or guardian will exercise the powers and duties of the Depositor. - -------------------------------------------------------------------------------- SIGNATURE (AND TITLE IF APPLICABLE) DATE CUSTODIAN ACCEPTANCE: Investors Fiduciary Trust Company will accept appointment as Custodian of the Depositor's Account. However, this Agreement is not binding upon the Custodian until the Depositor has received a statement of the transaction. Receipt by the Depositor of a confirmation of the purchase of the Fund shares indicated above will serve as notification of Investors Fiduciary Trust Company's acceptance of appointment as Custodian of the Depositor's Account. INVESTORS FIDUCIARY TRUST COMPANY, CUSTODIAN - -------------------------------------------------------------------------------- SIGNATURE OF CUSTODIAN RETAIN A PHOTOCOPY OF THIS FORM FOR YOUR RECORDS ACCOUNT APPLICATION AUTHORIZATION FOR IRA TRANSFER, DIRECT ROLLOVER & CONVERSION You may use this form to effect a direct transfer from an IRA to an IRA with another Custodian; a direct rollover from a Qualified Plan or 403(b) to an IRA; or a conversion from a regular IRA to a Roth IRA. The assets may be from another fund family or within the BARON Funds. Make sure you attach a copy of your existing account statement, any other forms required by your current custodian/trustee, and an IRA Application or "Authorization to Add an IRA" form if you do not have an existing IRA of the type necessary to receive the assets. Send all completed documentation to: BARON FUNDS,P.O. Box 419946, Kansas City, MO 64141-6946 ANNUAL MAINTENANCE FEE IS $12. PARTICIPANT INFORMATION - -------------------------------------------------------------------------------- First Name Initial Last Name - --------------------------------- ----------------------- Social Security # Date of Birth - ----------------------------------------------------------------------------- Address - ----------------------------------------------------------------------------- City State Zip Code - ----------------------------------------------------------------------------- Daytime Phone Number Home Phone Number - ------------------------------------------------------------------------------ Name and Firm of Representative Representative's Phone Number CURRENT CUSTODIAN ACCOUNT INFORMATION - ----------------------------------------- ------------------------------------ Custodian Name Current Fund Name/Class - ----------------------------------------- ------------------------------------ Custodian Address Current Account Number - ----------------------------------------- ------------------------------------ Additional Fund Name/Class - ----------------------------------------- ------------------------------------ Custodian Telephone Number Additional Account Number INSTRUCTIONS TO MY CURRENT CUSTODIAN I have established a Baron Funds Individual Retirement Account with Investors Fiduciary Trust Company as Custodian. Please transferinkind or withdraw assets from my account in your custody in the following manner and send a check payable to Investors Fiduciary Trust Company (IFTC) Individual Retirement Account FBO my name and social security number. Mail to Baron Funds, P.O. Box 419946, Kansas City, MO 64141-6946 TYPE OF ACCOUNT TO BE TRANSFERRED (CHECK ONE)* o IRA o Conduit IRA (direct rollover from my current qualified plan or 403(b)) o Roth Contributory Account (Account start date --/--/--) o Roth Conversion Account (Account start date --/--/--) o SEP IRA o SARSEP IRA (For plans established prior to 1/1/97) o SIMPLE IRA transfer to a SIMPLE IRA o Employers Qualified Plan, 403(b), 401(k), etc.. * Note: You may not transfer from a Roth IRA or a simplified employee pension (SEP)IRA. Transfers to a Regular IRA or SEP IRA may be made from another Regular IRA or SEP IRA, qualified employer plan, 403(b) arrangement, or a SIMPLE IRA account (but not until at least 2 years after the first contribution to your SIMPLE IRA account). Transfers to a Roth IRA are possible only from another Roth IRA or from a Regular IRA, not from other types of taxdeferred accounts. A transfer from a Regular IRA will trigger federal income tax on the taxable amount transferred from the Regular IRA. Transfers to a SIMPLE IRA may be made only from another SIMPLE IRA. During the first two years after a SIMPLE IRA may be made only from another SIMPLE IRA; after two years, transfers may be made from a SIMPLE IRA to a Regular IRA.. PORTION OF ACCOUNT TO BE TRANSFERRED (CHECK ONE): o All of the assets in my account OR $--- or --- % of my account. o Transfer of Baron Fund shares in kind. Check here to authorize a transferinkind of Baron Fund shares only from your existing trustee/custodian to Investors Fiduciary Trust Company. IF YOU ARE TRANSFERRING A CERTIFICATE OF DEPOSIT IRA CHOOSE ONE OPTION: o Liquidate prior to maturity date. I am aware that I may incur a penalty for early withdrawal. o Liquidate at maturity. (Maturity date must be within 60 days. If the maturity date is less than 15 days from the date of this request, you may want to contact your custodian bank to prevent automatic reinvestment of the account.) INSTRUCTIONS TO INVESTORS FIDUCIARY TRUST COMPANY Invest my assets into the IRA and investment type indicated below.
IRA TYPES: (CHOOSE ONE) INVESTMENT TYPES: (CHOOSE ONE) o Regular IRA o Direct Transfer from existing IRA o Rollover IRA (Conduit) o Direct Rollover payable to IFTC from 403(b) or employer qualified plan o Direct Transfer from existing Conduit IRA o Roth IRA o Direct Transfer from existing Roth IRA-original start date --/--/-- o Roth Conversion IRA o Convert my existing regular IRA to a Roth Conversion IRA o Direct Transfer from existing Roth Conversion IRA- original start date of --/--/-- o SEP IRA o Direct Transfer from existing SEP IRA o SAR SEP IRA plan o Direct Transfer from existing SAR SEP IRA established before 1997 ------ o SIMPLE IRA o Direct Transfer from existing SIMPLE IRA
PLEASE ALLOCATE MY PURCHASE AS FOLLOWS: NAME OF FUND ACCOUNT NUMBER AMOUNT BARON ASSET FUND ------------------- ------------------------ BARON GROWTH & INCOME FUND ------------------- ------------------------ BARON SMALL CAP FUND ------------------- ------------------------ SIGNATURE OF DEPOSITOR The undersigned certifies to the present IRA custodian or trustee that the undersigned has established a successor Individual Retirement Custodial Account meeting the requirements of Internal Revenue Code Section 408(a), 408(p) or 408A (as the case may be) to which assets will be transferred, and certifies to Investors Fiduciary Trust Company that the IRA from which assets are being transferred meets the requirements of Internal Revenue Code Section 408(a), 408(p) or 408A (as the case may be). - -------------------------------------------------------------------------------- Signature Date SIGNATURE GUARANTEE (only if required by current Custodian or Trustee). Signature guaranteed by: - -------------------------------------------------------------------------------- Name of Bank or Dealer Firm - -------------------------------------------------------------------------------- Signature of Officer and Title ACCEPTANCE BY NEW CUSTODIAN Investors Fiduciary Trust Company agrees to accept transfer of the above amount for deposit to the Depositor's Investors Fiduciary Trust Company Individual Retirement Custodial Account, and requests the liquidation and transfer of assets as indicated above. INVESTORS FIDUCIARY TRUST COMPANY - -------------------------------------------------------------------------------- Signature of Custodian Date EX-99.B16 8 COMPUTATION OF PERFORMANCE DATA EXHIBIT 16.a COMPUTATION OF PERFORMANCE DATA ------------------------------- Performance data, as described in the Prospectus and the Statement of Additional Information, is calculated on an average annual total return and an actual return basis. For the period ended December 31, 1997, the Baron Asset Fund's performance was calculated based on the following:
(1) DIVIDEND INFORMATION -------------------- DIVIDEND PER SHARE PER SHARE NO. OF EX DIVIDEND REINVESTMENT REINVESTED DATE AMOUNT PRICE SHARES -------- --------- ------------ ---------- 12/23/87 $0.197 $10.06 1.96 12/28/88 0.701 12.77 5.60 12/28/89 1.409 14.51 10.44 12/27/90 0.198 11.67 2.00 12/27/91 0.035 15.60 0.27 12/29/92 0.162 17.49 1.11 12/28/93 0.774 20.85 4.51 12/28/94 0.656 21.67 3.81 12/27/95 0.034 29.24 0.15 12/27/96 0.039 36.66 0.14 12/29/97 None
(2) VALUATION INFORMATION: ---------------------- Assuming $1,000 initial investment at inception at $10 per share (100 shares):
TOTAL SHARES NAV TOTAL DATE OWNED PER SHARE VALUE -------- ------------ --------- --------- 12/31/87 101.96 $10.10 $1,029.80 12/31/88 107.56 12.87 1,384.23 12/31/89 118.00 14.66 1,729.87 12/31/90 120.00 11.75 1,410.01 12/31/91 120.27 15.71 1,889.45 12/31/92 121.38 17.73 2,152.14 12/31/93 125.89 21.11 2,657.54 12/31/94 129.70 22.01 2,854.72 12/31/95 129.85 29.74 3,861.80 12/31/96 129.99 36.23 4,709.68 12/31/97 129.99 48.51 6,306.01
CALCULATION OF AVERAGE ANNUAL TOTAL RETURN: - ------------------------------------------- ERV n --- Using the formula: T = [root] /P - 1 assuming P = $1.000 (A) For the one year ended 12/31/97 n = 1.00000 ERV = 1.33892 T = +33.9% (B) For the five year period 12/31/91 - 12/31/97 n = 5.00000 ERV = 2.93015 T = 24.0% (C) For the period 6/12/87 (inception) - 12/31/97 n = 10.55616 ERV = 6.30601 T = 19.1% (4) Calculation of Actual Return Assuming a $1,000 investment, NAV per share at 6/12/87 = $10.00 at 100 shares. Value =$1,000. NAV per share at 12/31/87 = $10.10 at 101.96 shares (includes 1.96 reinvested shares). Value =$1,029.80. NAV per share at 12/31/88 = $12.87 at 107.56 shares (includes 1.96 + 5.60 reinvested shares). Value =$1,384.23. NAV per share at 12/31/89 = $14.66 at 118.00 shares (includes 1.96 + 5.60 + 10.44 reinvested shares). Value = $1,729.87. NAV per share at 12/31/90 =$11.75 at 120.00 shares (includes 1.96 + 5.60 + 10.44 + 2.00 reinvested shares). Value = $1,410.01. NAV per share at 12/31/91 = $15.71 at 120.27 shares (includes 1.96 + 5.60 + 10.44 + 2.00 + 0.27 reinvested shares). Value = $1,889.45. NAV per share at 12/31/92 = $17.73 at 121.38 shares (includes 1.96 + 5.60 + 10.44 + 2.00 + 0.27 + 1.11 reinvested shares). Value = $2,152.14. NAV per share at 12/31/93 = $21.11 at 125.89 shares (includes 1.96 + 5.60 + 10.44 + 2.00 + 0.27 + 1.11 + 4.51 reinvested shares). Value = $2,657.54. NAV per share at 12/31/94 = $22.01 at 129.70 shares (includes 1.96 + 5.60 + 10.44 + 2.00 + 0.27 + 1.11 + 4.51 + 3.81 reinvested shares). Value = $2,854.72. NAV per share at 12/31/95 = $29.74 at 129.85 shares (includes 1.96 + 5.60 + 10.44 + 2.00 + 0.27 + 1.11 + 4.51 + 3.81 + 0.15 reinvested shares). Value = $3,861.80. NAV per share at 12/31/96 = $36.23 at 129.99 shares (includes 1.96 + 5.60 + 10.44 + 2.00 + 0.27 + 1.11 + 4.51 + 3.81 + 0.15 + 0.14 reinvested shares). Value = $4,709.68. NAV per share at 12/31/97 = $48.51 at 129.99 shares (includes 1.96 + 5.60 + 10.44 + 2.00 + 0.27 + 1.11 + 4.51 + 3.81 + 0.15 + 0.14 reinvested shares). Value = $6,306.01. ONE YEAR - -------- Performance for the year ended 12/31/97 is 6306.01/4709.68 = +33.89% FIVE YEARS - ---------- Performance for the period 12/31/92 - 12/31/97 is 6306.01/2152.14 = +193.01% SINCE INCEPTION - --------------- Performance for the period 06/12/87 - 12/31/97 is 6306.01/1000 = +530.60% EXHIBIT 16.b For the period ended December 31, 1997, Baron Growth & Income Fund's performance was calculated based on the following: (1) DIVIDEND INFORMATION --------------------
DIVIDEND PER SHARE PER SHARE NO. OF EX DIVIDEND REINVESTMENT REINVESTED DATE AMOUNT PRICE SHARES -------- --------- ------------ ---------- 12/27/95 $ 0.142 $ 14.91 0.952 12/27/96 $ 0.255 $ 18.73 1.374 12/29/97 $ 0.073 $ 24.23 0.308
(2) VALUATION INFORMATION --------------------- Assuming $1,000 initial investment at inception at $10 per share (100 shares):
TOTAL SHARES NAV TOTAL DATE OWNED PER SHARE VALUE ------- ------------ --------- ------- 12/31/95 100.952 15.11 1525.38 12/31/96 102.326 19.04 1948.29 12/31/97 102.634 24.88 2553.53
(3) CALCULATION OF AVERAGE ANNUAL TOTAL RETURN ------------------------------------------ ERV n ---- Using the formula: T = [root] P - 1 assuming P = $1.000 For the one year ended 12/31/97 n = 1.00000 ERV = 1.31065 T = 31.1% For the period 1/3/95 (commencement of operations) - 12/31/97 n = 2.0000 ERV = 2.55353 T = 36.7% (4) CALCULATION OF ACTUAL RETURN ---------------------------- Assuming a $1,000 investment, NAV per share at 01/03/95 = $10.00 at 100 shares Value = $1,000. NAV per share at 12/31/95 = $15.11 at 100.952 shares (includes 0.952 reinvested shares) Value = $1525.38. NAV per share at 12/31/96 = $19.04 at 102.326 shares (includes 0.952 + 1.374 reinvested shares) Value = $1948.29. NAV per share at 12/31/97 = $24.88 at 102.634 shares (includes 0.952 + 1.374 + 0.308 reinvested shares) Value = $2553.53. ONE YEAR - -------- Performance for the year ended 12/31/97 is 2553.53/1948.29 = +31.1% SINCE INCEPTION - --------------- Performance for the period 01/03/95 - 12/31/97 is 2553.53/1000 = +155.35%. EXHIBIT 16.c For the period ended December 31, 1997, Baron Small Cap Fund's performance was calculated based on the following: (1) DIVIDEND INFORMATION --------------------
DIVIDEND PER SHARE PER SHARE NO. OF EX DIVIDEND REINVESTMENT REINVESTED DATE AMOUNT PRICE SHARES -------- --------- ------------ ---------- 12/29/97 None
(2) VALUATION INFORMATION --------------------- Assuming $1,000 initial investment at inception at $10 per share (100 shares):
TOTAL SHARES NAV TOTAL DATE OWNED PER SHARE VALUE ------- ------------ --------- ------- 12/31/97 100 $10.31 $1031.00
(3) CALCULATION OF ACTUAL RETURN ---------------------------- Assuming a $1,000 investment, NAV per share at 10/01/97 = $10.00 at 100 shares Value = $1,000. NAV per share at 12/31/97 = $10.31 at 100 shares Value = $1031.00. SINCE INCEPTION - --------------- Performance for the period 10/01/97 - 12/31/97 is 1031/1000 = +3.1%. EX-24 9 POWER OF ATTORNEY BARON ASSET FUND POWER OF ATTORNEY ----------------- The undersigned in his or her capacity as a Trustee or officer, or both, as the case may be, of the Baron Asset Fund (the "Trust") does hereby appoint Linda S. Martinson and Ronald Baron, and each of them, severally, his or her true and lawful attorney and agent to execute in his or her name, place and stead (in such capacity) any and all amendments to the Registration Statement of the Trust and any post-effective amendments thereto and all instruments necessary or desirable in connection therewith, to attest the seal of the Trust thereon and to file the same with the Securities and Exchange Commission; and any and all other instruments or documents necessary or desirable in connection with the establishment of a new series of the Trust or any other corporate action authorized by the Board of Trustees. Each of said attorneys and agents have power and authority of do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as each of the undersigned might or could do in person, hereby ratifying and approving the act of said attorneys and agents and each of them. Signature Title Date - --------- ----- ---- /s/ Ronald Baron President and Trustee November 4, 1997 - ------------------------- Ronald Baron /s/ Norman S. Edelcup Trustee November 4, 1997 - ------------------------- Norman S. Edelcup /s/ Neal M. Elliott Trustee November 4, 1997 - ------------------------- Neal M. Elliott /s/ Mark M. Feldman Trustee November 4, 1997 - ------------------------- Mark M. Feldman /s/ Irwin Greenberg Trustee November 4, 1997 - ------------------------- Irwin Greenberg /s/ Linda S. Martinson Secretary, Trustee November 4, 1997 - ------------------------- Linda S. Martinson /s/ Charles N. Mathewson Trustee November 4, 1997 - ------------------------- Charles N. Mathewson /s/ Harold W. Milner Trustee November 4, 1997 - ------------------------- Harold W. Milner Signature Title Date - --------- ----- ----- /s/ Raymond Noveck Trustee November 4, 1997 - ----------------------- Raymond Noveck /s/ Morty Schaja Senior Vice President November 4, 1997 - ----------------------- and Trustee Morty Schaja /s/ David A. Silverman Trustee November 4, 1997 - ----------------------- David A. Silverman /s/ Daniel Tisch Trustee November 4, 1997 - ----------------------- Daniel Tisch EX-27 10 ARTICLE 6 - BARON SMALL CAP
6 0000810902 BARON ASSET FUND 3 BARON SMALL CAP FUND 3-MOS SEP-30-1998 OCT-01-1997 DEC-31-1997 275,531,267 285,836,456 6,624,639 29,535 0 292,490,630 6,718,245 0 501,461 7,219,706 0 277,621,459 27,664,373 0 (178,240) 0 (2,469,647) 0 10,297,352 285,270,924 221,624 528,012 0 927,876 (178,240) (2,469,647) 10,297,352 7,649,465 0 0 0 0 29,870,458 (2,206,085) 0 285,270,924 0 0 0 0 626,406 0 927,876 251,103,935 10.00 (.01) .32 0 0 0 10.31 1.5 0 0 -----END PRIVACY-ENHANCED MESSAGE-----