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ACORN INVESTMENT TRUST
STATEMENT OF
ADDITIONAL
INFORMATION
September 3, 1996
supplemented December 9, 1996
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-800-9-ACORN-9
1-800-922-6769
ACORN USA
No-Load Fund
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TABLE OF CONTENTS
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Information About the Fund............................................... 2
Investment Objectives and Policies....................................... 2
Investment Techniques and Risks.......................................... 2
Investment Restrictions.................................................. 15
Performance Information.................................................. 17
Investment Adviser....................................................... 18
Distributor.............................................................. 19
The Trust................................................................ 20
Trustees and Officers.................................................... 21
Purchasing and Redeeming Shares.......................................... 23
Additional Tax Information............................................... 25
Portfolio Transactions................................................... 25
Custodian................................................................ 26
Independent Auditors..................................................... 27
Appendix - Description of Bond Ratings................................... 27
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This Statement of Additional Information ("SAI") is not a prospectus but
provides information that should be read in conjunction with the prospectus of
ACORN USA dated September 3, 1996 and any supplement thereto, which may be
obtained from Acorn at no charge by writing or telephoning Acorn at its address
or telephone number shown above.
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INFORMATION ABOUT THE FUND
ACORN USA is a series of Acorn Investment Trust ("Acorn" or the "Trust").
The discussion below supplements the description in the prospectus of the
Fund's investment objectives, policies, and restrictions.
INVESTMENT OBJECTIVES AND POLICIES
ACORN USA invests with the objective of long-term growth of capital.
Although income is considered by ACORN USA in the selection of securities, the
Fund is not designed for investors seeking primarily income rather than capital
appreciation.
The Fund uses the techniques and invests in the types of securities
described below and in the prospectus.
INVESTMENT TECHNIQUES AND RISKS
DEBT SECURITIES
The Fund may invest in debt securities, including lower-rated securities
(i.e., securities rated BB or lower by Standard & Poor's Corporation ("S&P") or
Ba or lower by Moody's Investor Services, Inc. ("Moody's"), commonly called
"junk bonds"), and securities that are not rated. There are no restrictions as
to the ratings of debt securities acquired by the Fund or the portion of the
Fund's assets that may be invested in debt securities in a particular ratings
category. The Fund does not intend to invest more than 20% of its total assets
in debt securities nor more than 5% of its total assets in securities rated at
or lower than the lowest investment grade.
Securities rated BBB or Baa are considered to be medium grade and to have
speculative characteristics. Lower-rated debt securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer default or
bankruptcy. An economic downturn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition,
lower-quality bonds are less sensitive to interest rate changes than higher-
quality instruments and generally are more sensitive to adverse economic changes
or individual corporate developments. During a period of adverse economic
changes, including a period of rising interest rates, the junk bond market may
be severely disrupted, and issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Medium- and lower-quality debt securities may be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and the Fund may have greater difficulty selling
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its portfolio securities. See "Net Asset Value." The market value of these
securities and their liquidity may be affected by adverse publicity and investor
perceptions.
A more complete description of the characteristics of bonds in each ratings
category is included in the appendix to this SAI.
OPTIONS AND FUTURES
The Fund may purchase and write both call options and put options on
securities and on indexes, and enter into interest rate and index futures
contracts, and may purchase or sell options on such futures contracts ("futures
options") in order to provide additional revenue, or to hedge against changes in
security prices or interest rates. The Fund may also use other types of
options, futures contracts and futures options currently traded or subsequently
developed and traded, provided the board of trustees determines that their use
is consistent with the Fund's investment objective.
OPTIONS. An option on a security (or index) is a contract that gives the
purchaser (holder) of the option, in return for a premium, the right to buy from
(call) or sell to (put) the seller (writer) of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option (normally not exceeding nine
months). The writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver the
underlying security or foreign currency upon payment of the exercise price or
to pay the exercise price upon delivery of the underlying security or foreign
currency. Upon exercise, the writer of an option on an index is obligated to
pay the difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial or securities
market, a specific group of financial instruments or securities, or certain
economic indicators.)
The Fund will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the option
is "covered" if the Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional
consideration (or, if additional consideration is required, assets having a
value at least equal to that amount are segregated on the books of the Fund)
upon conversion or exchange of other securities held in its portfolio.
If an option written by the Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by the Fund expires, the Fund realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.
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The Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
A put or call option purchased by the Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an
option written by the Fund is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid and
asked prices.
OTC DERIVATIVES. The Fund may buy and sell over-the-counter ("OTC")
derivatives. Unlike exchange-traded derivatives, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of OTC derivatives (derivatives not traded on exchanges)
generally are established through negotiation with the other party to the
contract. While this type of arrangement allows the Fund greater flexibility
to tailor an instrument to its needs, OTC derivatives generally involve greater
credit risk than exchange-traded derivatives, which are guaranteed by the
clearing organization of the exchanges where they are traded. The Fund will
limit its investments so that no more than 5% of its total assets will be placed
at risk in the use of OTC derivatives. See "Illiquid Securities" below for more
information on the risks associated with investing in OTC derivatives.
RISKS ASSOCIATED WITH OPTIONS. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities markets, the currency markets, and the options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when, and
how to use options involves the exercise of skill and judgment, and even a well-
conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option would expire and become worthless.
If the Fund were unable to close out a covered call option that it had written
on a security, it would not be able to sell the underlying security until the
option expired. As the writer of a covered call option on a security, the Fund
foregoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call. As the writer of a covered call
option on a foreign currency, the Fund foregoes, during the option's life, the
opportunity to profit from currency appreciation.
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If trading were suspended in an option purchased or written by the Fund,
the Fund would not able to close out the option. If restrictions on exercise
were imposed, the Fund might be unable to exercise an option it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may use
interest rate futures contracts and index futures contracts. An interest rate
or index futures contract provides for the future sale by one party and purchase
by another party of a specified quantity of a financial instrument or the cash
value of an index /1/ at a specified price and time. A public market exists in
futures contracts covering a number of indexes (including, but not limited to:
the Standard & Poor's 500 Index; the Value Line Composite Index; and the New
York Stock Exchange Composite Index) as well as financial instruments
(including, but not limited to: U.S. Treasury bonds; U.S. Treasury notes;
Eurodollar certificates of deposit; and foreign currencies). Other index and
financial instrument futures contracts are available and it is expected that
additional futures contracts will be developed and traded.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true.
To the extent required by regulatory authorities having jurisdiction over
the Fund, the Fund will limit its use of futures contracts and futures options
to hedging transactions. For example, the Fund might use futures contracts to
hedge against fluctuations in the general level of stock prices, anticipated
changes in interest rates, or currency fluctuations that might adversely affect
either the value of the Fund's securities or the price of the securities that
the Fund intends to purchase. The Fund's hedging may include sales of futures
contracts as an offset against the effect of expected declines in stock prices
or currency exchange rates or increases in interest rates and purchases of
futures contracts as an offset against the effect of expected increases in stock
prices or currency exchange rates or declines in interest rates. Although other
techniques could be used to reduce the Fund's exposure to stock price, interest
rate, and currency fluctuations, the Fund may be able to hedge its exposure more
effectively and perhaps at a lower cost by using futures contracts and futures
options.
The success of any hedging technique depends on WAM correctly predicting
changes in the level and direction of stock prices, interest rates, currency
exchange rates, and other factors.
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/1/ A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. Although the value of a securities index is a function of the value of
certain specified securities, no physical delivery of those securities is made.
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Should those predictions be incorrect, the Fund's return might have been better
had hedging not been attempted; however, in the absence of the ability to hedge,
WAM might have taken portfolio actions in anticipation of the same market
movements with similar investment results but, presumably, at greater
transaction costs.
When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. government securities or other securities
acceptable to the broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded and may be
modified during the term of the contract. The initial margin is in the nature of
a performance bond or good faith deposit on the futures contract, which is
returned to the Fund upon termination of the contract, assuming all contractual
obligations have been satisfied. The Fund expects to earn interest income on its
initial margin deposits. A futures contract held by the Fund is valued daily at
the official settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking-to-
market." Variation margin paid or received by the Fund does not represent a
borrowing or loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract had expired
at the close of the previous day. In computing daily net asset value, the Fund
will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts it writes. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
RISKS ASSOCIATED WITH FUTURES. There are several risks associated with the
use of futures contracts and futures options as hedging techniques. A purchase
or sale of a futures contract may result in losses in excess of the amount
invested in the futures contract. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. In addition, there are significant differences between
the securities and futures markets that could result in an imperfect correlation
between the markets, causing a given hedge not to achieve its objectives. The
degree of imperfection of correlation depends on circumstances such as:
variations in speculative market demand for futures, futures options, and the
related securities, including technical influences in futures and futures
options trading and differences between the Fund's investments being hedged and
the securities underlying the standard contracts available for trading. For
example, in the case of
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index futures contracts, the composition of the index, including the issuers and
the weighting of each issue, may differ from the composition of the Fund's
portfolio, and, in the case of interest rate futures contracts, the interest
rate levels, maturities, and creditworthiness of the issues underlying the
futures contract may differ from the financial instruments held in the Fund's
portfolio. A decision as to whether, when, and how to hedge involves the
exercise of skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected stock price
or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Stock index
futures contracts are not normally subject to such daily price change
limitations.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or futures option position. The Fund would
be exposed to possible loss on the position during the interval of inability to
close, and would continue to be required to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES. The Fund will not enter into a futures
contract or purchase an option thereon if, immediately thereafter, the initial
margin deposits for futures contracts held by the Fund plus premiums paid by it
for open futures option positions, less the amount by which any such positions
are "in-the-money," /2/ would exceed 5% of the Fund's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, the Fund must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the market
value of such contract. When writing a call option on a futures contract, the
Fund similarly will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is in-the-money
until the option expires or is closed out by the Fund.
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/2/ A call option is "in-the-money" if the value of the futures contract that
is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
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The Fund may not maintain open short positions in futures contracts, call
options written on futures contracts, or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent the Fund has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," the "underlying
commodity value" of each long position in a commodity contract in which the Fund
invests will not at any time exceed the sum of:
(1) The value of short-term U.S. debt obligations or other U.S.
dollar denominated high-quality short-term money market
instruments and cash set aside in an identifiable manner,
plus any funds deposited as margin on the contract;
(2) Unrealized appreciation on the contract held by the broker;
and
(3) Cash proceeds from existing investments due in not more
than 30 days.
"Underlying commodity value" means the size of the contract multiplied by
the daily settlement price of the contract.
As long as the Fund continues to sell its shares in certain states, the
Fund's options and futures transactions will also be subject to certain non-
fundamental investment restrictions set forth under "Investment Restrictions" in
this SAI. Moreover, the Fund will not purchase puts, calls, straddles, spreads,
or any combination thereof if by reason of such purchase more than 10% of the
Fund's total assets would be invested in such securities./3/
SWAP AGREEMENTS. A swap agreement is generally individually negotiated and
structured to include exposure to a variety of different types of investments or
market factors. Depending on its structure, a swap agreement may increase or
decrease the Fund's exposure to changes in the value of an index of securities
in which the Fund might invest, the value of a particular security or group of
securities, or foreign currency values. Swap agreements can take many different
forms and are known by a variety of names. The Fund may enter into any form of
swap agreement if WAM determines it is consistent with the Fund's investment
objective and policies, but the Fund will limit its use of swap agreements so
that no more than 5% of its total assets will be placed at risk.
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/3/ In addition, the Fund must comply with certain state regulations that may
impose additional restrictions. Arkansas regulations currently prohibit
investment of more than 5% of a fund's assets in such classes of securities.
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A swap agreement tends to shift the Fund's investment exposure from one
type of investment to another. For example, if the Fund agrees to exchange
payments in dollars at a fixed rate for payments in a foreign currency the
amount of which is determined by movements of a foreign securities index, the
swap agreement would tend to increase the Fund's exposure to foreign stock
market movements and foreign currencies. Depending on how it is used, a swap
agreement may increase or decrease the overall volatility of the Fund's
investments and its net asset value.
The performance of a swap agreement is determined by the change in the
specific currency, market index, security, or other factors that determine the
amounts of payments due to and from the Fund. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
If the counterparty's creditworthiness declines, the value of a swap agreement
would be likely to decline, potentially resulting in a loss. The Fund expects to
be able to eliminate its exposure under any swap agreement either by assignment
or by other disposition, or by entering into an offsetting swap agreement with
the same party or a similarly creditworthy party.
The Fund will segregate assets of the Fund to cover its current obligations
under swap agreements. If the Fund enters into a swap agreement on a net basis,
it will segregate assets with a daily value at least equal to the excess, if
any, of the Fund's accumulated obligations under the swap agreement over the
accumulated amount the Fund is entitled to receive under the agreement. If the
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accumulated
obligations under the agreement.
ILLIQUID SECURITIES
The Fund may not invest in illiquid securities, if as a result they would
comprise more than 15% of the value of the net assets of ACORN USA./4/
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Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined in good faith by the board of trustees. If through the
appreciation of illiquid securities or the depreciation of liquid securities,
ACORN USA
/4/ In addition, the Fund must comply with certain state regulations that may
impose additional restrictions. Arkansas regulations currently prohibit
investment of more than 10% of a fund's assets in restricted securities.
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should be in a position where more than 15% of the value of its net
assets are invested in illiquid assets, including restricted securities, the
Fund will take appropriate steps to protect liquidity.
Notwithstanding the above, the Fund may purchase securities that have been
privately placed but that are eligible for purchase and sale under Rule 144A
under the 1933 Act. That rule permits certain qualified institutional buyers,
such as the Fund, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. WAM, under the supervision of the board
of trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Fund's restriction of investing no more than
15% of its assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination WAM will consider the trading markets for the specific security
taking into account the unregistered nature of a Rule 144A security. In
addition, WAM could consider the (1) frequency of trades and quotes, (2) number
of dealers and potential purchasers, (3) dealer undertakings to make a market,
and (4) nature of the security and of market place trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored and if, as
a result of changed conditions, it is determined that a Rule 144A security is no
longer liquid, the Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund does not
invest more than 15% of its assets in illiquid securities. Investing in Rule
144A securities could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (4) under "Investment Restrictions" in this
statement of additional information, the Fund may lend its portfolio securities
to broker-dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by the Fund.
The Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and also would receive an
additional return that may be in the form of a fixed fee or a percentage of the
collateral. The Fund would have the right to call the loan and obtain the
securities loaned at any time on notice of not more than five business days.
The Fund would not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the securities if, in
judgment of Wanger Asset Management, L.P., a material event requiring a
shareholder vote would otherwise occur before the loan was repaid. In the event
of bankruptcy or other default of the borrower, the Fund could experience both
delays in liquidating the loan collateral or recovering the loaned securities
and losses, including (a) possible decline in the value of the collateral or in
the value of the securities loaned during the period while the Fund seeks to
enforce its rights thereto, (b) possible subnormal levels of income and lack of
access to income during this period, and (c) expenses of enforcing its rights.
The Fund does not currently intend to loan more than 5% of its net assets.
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REPURCHASE AGREEMENTS
Repurchase agreements are transactions in which the Fund purchases a
security from a bank or recognized securities dealer and simultaneously commits
to resell that security to the bank or dealer at an agreed-upon price, date, and
market rate of interest unrelated to the coupon rate or maturity of the
purchased security. Although repurchase agreements carry certain risks not
associated with direct investments in securities, the Fund will enter into
repurchase agreements only with banks and dealers believed by WAM to present
minimum credit risks in accordance with guidelines approved by the board of
trustees. WAM will review and monitor the creditworthiness of such
institutions, and will consider the capitalization of the institution, WAM's
prior dealings with the institution, any rating of the institution's senior
long-term debt by independent rating agencies, and other relevant factors.
The Fund will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued interest.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase were less than the repurchase price, the Fund
would suffer a loss. If the financial institution which is party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
bankruptcy or other liquidation proceedings there may be restrictions on the
Fund's ability to sell the collateral and the Fund could suffer a loss.
However, with respect to financial institutions whose bankruptcy or liquidation
proceedings are subject to the U.S. Bankruptcy Code, the Fund intends to comply
with provisions under such Code that would allow it immediately to resell such
collateral.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS
The Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time the Fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed. The Fund makes such commitments only with the intention
of actually acquiring the securities, but may sell the securities before the
settlement date if WAM deems it advisable for investment reasons. The Fund may
utilize spot and forward foreign currency exchange transactions to reduce the
risk inherent in fluctuations in the exchange rate between one currency and
another when securities are purchased or sold on a when-issued or delayed-
delivery basis.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
At the time the Fund enters into a binding obligation to purchase
securities on a when-issued basis or enters into a reverse repurchase agreement,
assets of the Fund having a value at least as great as the purchase price of the
securities to be purchased will be segregated on the
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books of the Fund and held by the custodian throughout the period of the
obligation. The use of these investment strategies, as well as any borrowing by
the Fund, may increase net asset value fluctuation.
The Fund has no present intention of investing in reverse repurchase
agreements.
FOREIGN SECURITIES
The Fund may invest up to 10% of its total assets in foreign securities
(including American Depository Receipts ("ADRs")), which may entail a greater
degree of risk (including risks relating to exchange rate fluctuations, tax
provisions, or expropriation of assets) than does investment in securities of
domestic issuers. ADRs are receipts typically issued by an American bank or
trust company evidencing ownership of the underlying securities. The Fund may
invest in sponsored or unsponsored ADRs. In the case of an unsponsored ADR, the
Fund is likely to bear its proportionate share of the expenses of the depository
and it may have greater difficulty in receiving shareholder communications than
it would have with a sponsored ADR. The Fund does not intend to invest more
than 5% of its net assets in unsponsored ADRs.
With respect to portfolio securities that are issued by foreign issuers or
denominated in foreign currencies, the Fund's investment performance is affected
by the strength or weakness of the U.S. dollar against these currencies. For
example, if the dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in the portfolio will rise even though the
price of the stock remains unchanged. Conversely, if the dollar rises in value
relative to the yen, the dollar value of the yen-denominated stock will fall.
(See discussion of transaction hedging and portfolio hedging under "Currency
Exchange Transactions.")
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve certain considerations comprising both risks
and opportunities not typically associated with investing in U.S. securities.
These considerations include: fluctuations in exchange rates of foreign
currencies; possible imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back to the United
States; less public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers, and issuers of
securities; lack of uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading practices; less
liquidity and frequently greater price volatility in foreign markets than in the
United States; possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed countries; and
sometimes less advantageous legal, operational, and financial protections
applicable to foreign sub-custodial arrangements.
Although the Fund will try to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange
12
<PAGE>
controls, the adoption of foreign government restrictions, or other adverse
political, social or diplomatic developments that could affect investment in
these nations.
CURRENCY EXCHANGE TRANSACTIONS.
The Fund may enter into currency exchange transactions. A currency
exchange transaction may be conducted either on a spot (i.e., cash) basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market or through a forward currency exchange contract ("forward contract"). A
forward contract is an agreement to purchase or sell a specified currency at a
specified future date (or within a specified time period) and price set at the
time of the contract. Forward contracts are usually entered into with banks and
broker-dealers, are not exchange-traded, and are usually for less than one year,
but may be renewed.
Forward currency transactions may involve currencies of the different
countries in which the Fund may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. The Fund's currency
transactions are limited to transaction hedging and portfolio hedging involving
either specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of a forward contract with respect to specific payables or
receivables of the Fund accruing in connection with the purchase or sale of
portfolio securities. Portfolio hedging is the use of a forward contract with
respect to a portfolio security position denominated or quoted in a particular
currency. The Fund may engage in portfolio hedging with respect to the currency
of a particular country in amounts approximating actual or anticipated positions
in securities denominated in that currency. When the Fund owns or anticipates
owning securities in countries whose currencies are linked, WAM may aggregate
such positions as to the currency hedged.
If the Fund enters into a forward contract hedging an anticipated purchase
of portfolio securities, assets of the Fund having a value at least as great as
the Fund's commitment under such forward contract will be segregated on the
books of the Fund and held by the custodian while the contract is outstanding.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
13
<PAGE>
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
TEMPORARY STRATEGIES
The Fund has the flexibility to respond promptly to changes in market and
economic conditions. In the interest of preserving shareholders' capital, WAM
may employ a temporary defensive investment strategy if it determines such a
strategy to be warranted. Pursuant to such a defensive strategy, the Fund
temporarily may hold cash (U.S. dollars, foreign currencies, multinational
currency units) and/or invest up to 100% of its assets in high quality debt
securities or money market instruments of U.S. issuers, and most or all of the
Fund's investments may be made in the United States and denominated in U.S.
dollars. It is impossible to predict whether, when, or for how long the Fund
might employ defensive strategies.
In addition, pending investment of proceeds from new sales of Fund shares
or to meet ordinary daily cash needs, the Fund temporarily may hold cash (U.S.
dollars, foreign currencies, or multinational currency units) and may invest any
portion of its assets in money market instruments.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. Portfolio turnover can occur for a number of reasons
such as general conditions in the securities markets, more favorable investment
opportunities in other securities, or other factors relating to the desirability
of holding or changing a portfolio investment. A high rate of portfolio
turnover, if it should
14
<PAGE>
occur, would result in increased transaction expenses which must be borne by the
Fund. High portfolio turnover may also result in the realization of capital
gains or losses and, to the extent net short-term capital gains are realized,
any distributions resulting from such gains will be considered ordinary income
for federal income tax purposes.
INVESTMENT RESTRICTIONS
In pursuing its investment objective ACORN USA will not:
1. With respect to 75% of the value of the Fund's total assets, invest
more than 5% of its total assets (valued at time of investment) in securities of
a single issuer, except securities issued or guaranteed by the government of the
U.S., or any of its agencies or instrumentalities;
2. Acquire securities of any one issuer which at the time of investment
(a) represent more than 10% of the voting securities of the issuer or (b) have a
value greater than 10% of the value of the outstanding securities of the issuer;
3. Invest more than 25% of its assets (valued at time of investment) in
securities of companies in any one industry, except that this restriction does
not apply to investments in U.S. government securities;
4. Make loans, but this restriction shall not prevent the Fund from (a)
buying a part of an issue of bonds, debentures, or other obligations that are
publicly distributed, or from investing up to an aggregate of 15% of its total
assets (taken at market value at the time of each purchase) in parts of issues
of bonds, debentures or other obligations of a type privately placed with
financial institutions, (b) investing in repurchase agreements, or (c) lending
portfolio securities, provided that it may not lend securities if, as a result,
the aggregate value of all securities loaned would exceed 33% of its total
assets (taken at market value at the time of such loan);
5. Borrow money except (a) from banks for temporary or emergency purposes
in amounts not exceeding 33% of the value of the Fund's total assets at the time
of borrowing, and (b) in connection with transactions in options, futures and
options on futures;
6. Underwrite the distribution of securities of other issuers; however,
the Fund may acquire "restricted" securities which, in the event of a resale,
might be required to be registered under the Securities Act of 1933 on the
ground that the Fund could be regarded as an underwriter as defined by that act
with respect to such resale;
7. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real estate
or interests in real estate;
8. Purchase and sell commodities or commodity contracts, except that it
may enter into (a) futures and options on futures and (b) foreign currency
contracts;
15
<PAGE>
9. Make margin purchases of securities, except for use of such short-term
credits as are needed for clearance of transactions and except in connection
with transactions in options, futures and options on futures;
10. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
Restrictions 1 through 10 above are "fundamental," which means that they
cannot be changed without the approval of the lesser of (i) 67% of ACORN USA'S
shares present at a meeting if more than 50% of the shares outstanding are
present or (ii) more than 50% of ACORN USA'S outstanding shares.
For the Fund has no present intention of investing in repurchase agreements
or lending its portfolio securities.
In addition, ACORN USA is subject to a number of restrictions that may be
changed by the board of trustees without shareholder approval. Under those
nonfundamental restrictions, ACORN USA will not:
(a) Invest in companies for the purpose of management or the exercise of
control;
(b) Invest in oil, gas or other mineral leases or exploration or
development programs, although it may invest in marketable securities
of enterprises engaged in oil, gas or mineral exploration;
(c) Invest more than 2% of its net assets (valued at the time of
investment) in warrants not listed on the New York or American stock
exchanges, nor more than 5% of its net assets (valued at the time of
investment) in all warrants, in each case valued at the lower of cost
or market; provided that warrants acquired in units or attached to
securities shall be deemed to be without value for purposes of this
restriction;
(d) Invest more than 5% of its total assets (valued at time of investment)
in securities of issuers (other than issuers of federal agency
obligations or securities issued or guaranteed by any foreign country
or asset-backed securities) that, together with any predecessors or
unconditional guarantors, have been in continuous operation for less
than three years ("unseasoned issuers") or (b) more than 15% of its
total assets (valued at the time of investment) in restricted
securities and securities of unseasoned issuers;
(e) Acquire securities of other registered investment companies except in
compliance with the Investment Company Act of 1940 and applicable
state law;/5/
- ------------------------
/5/ The Ohio Administrative Code prohibits investment in the securities of
other investment companies, except by purchase in the open market where no
commision or profit to a
16
<PAGE>
(f) Invest more than 15% of its net assets (valued at time of investment)
in illiquid securities, including repurchase agreements maturing in
more than seven days;
(g) Purchase or retain securities of a company if all of the trustees,
directors and officers of the Trust and of its investment adviser who
individually own beneficially more than 1/2% of the securities of the
company collectively own beneficially more than 5% of such securities;
(h) Pledge, mortgage or hypothecate its assets, except as may be necessary
in connection with permitted borrowings or in connection with short
sales, options, futures and options on futures;
(i) Purchase a put or call option if the aggregate premiums paid for all
put and call options exceed 20% of its net assets (less the amount by
which any such positions are in-the-money), excluding put and call
options purchased as closing transactions;
(j) Make short sales of securities unless the Fund owns at least an equal
amount of such securities, or owns securities that are convertible or
exchangeable, without payment of further consideration, into at least
an equal amount of such securities;
(k) Invest more than 10% of its total assets (valued at the time of
investment) in securities of non-U.S. issuers, including securities
represented by American Depository Receipts.
Notwithstanding the foregoing investment restrictions, the Fund may purchase
securities pursuant to the exercise of subscription rights, provided that such
purchase will not result in the Fund's ceasing to be a diversified investment
company.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return"
for a period is the percentage change in value during the period of an
investment in shares of the Fund, including the value of shares acquired through
reinvestment of all dividends and capital gains distributions. "Average Annual
Total Return" is the average annual compounded rate of change in value
represented by the Total Return for the period.
Average Annual Total Return is computed as follows:
ERV = P(1+T)/n/
- --------------------------------------------------------------------------------
sponsor or dealer results from the purchase other than the customary
broker's commission, or except when the purchase is part of a plan of
merger, consolidation, reorganization or acquisition.
17
<PAGE>
Where: P = the amount of an assumed initial investment in shares of the
Fund
T = average annual total return
n = number of years from initial investment to the end of the period
ERV = ending redeemable value of shares held at the end of the
period
The Fund imposes no sales charges and pays no distribution expenses.
Income taxes are not taken into account. Performance figures quoted by the Fund
are not necessarily indicative of future results. The Fund's performance is a
function of conditions in the securities markets, portfolio management, and
operating expenses. Although information about past performance is useful in
reviewing the Fund's performance and in providing some basis for comparison with
other investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
In advertising and sales literature, the Fund's performance may be compared
with those of market indexes and other mutual funds. In addition to the
performance information described above, the Fund might use comparative
performance as computed in a ranking or rating determined by Lipper Analytical
Services, Inc., an independent service that monitors the performance of over
1,000 mutual funds, Morningstar, Inc., or another service.
The Fund may note its mention or recognition in newsletters, newspapers,
magazines, or other media. The Fund may similarly note mention or recognition
of WAM, or appearances of principals of WAM, in the media.
INVESTMENT ADVISER
The Fund's investment adviser, Wanger Asset Management, L.P. ("WAM"),
furnishes continuing investment supervision to the Fund and is responsible for
overall management of the Fund's business affairs. It furnishes office space,
equipment, and personnel to the funds; it assumes substantially all expenses for
bookkeeping, and assumes the expenses of printing and distributing the Fund's
prospectus and reports to prospective investors.
For its services to ACORN USA WAM receives a fee (calculated daily and paid
monthly) at the annual rate of 1.00% of the net asset value of the Fund up to
$200 million and .95% of the net asset value in excess of $200 million.
The staff of the Securities and Exchange Commission has advised Acorn that
the annual advisory fees paid by most mutual funds are less than .75% of average
net assets.
The Fund pays the cost of custodial, stock transfer, dividend disbursing,
audit and legal services and membership in trade organizations. It also pays
other expenses such as the cost of maintaining the registration of its shares
under federal and state securities laws and of proxy solicitations, printing and
distributing notices and copies of the prospectus and shareholder reports
furnished to existing shareholders, taxes, insurance premiums, and the fees of
trustees not affiliated with WAM.
The investment advisory agreement provides that the total annual expenses
of the Fund, exclusive of taxes, interest, and extraordinary litigation
expenses, but including fees paid to
18
<PAGE>
WAM, shall not exceed the limits prescribed by any state in which the Fund's
shares are being offered for sale. Acorn believes that currently the most
restrictive limits are 2.5% of the first $30 million of the average net asset
value, 2% of the next $70 million, and 1.5% of the average net asset value in
excess of $100 million. WAM has voluntarily undertaken to reimburse the Fund for
any ordinary operating expenses, with certain exceptions, in excess of 2.0% of
the Fund's average daily net assets annually. Brokers' commissions and other
charges relating to the purchase and sale of securities are not regarded as
expenses for this purpose. Moreover, for purposes of calculating the expenses
subject to this limitation, the excess custodian costs attributable to
investments in foreign securities compared to the custodian costs which would
have been incurred had the investments been in domestic securities are excluded.
For the purpose of determining whether the Fund is entitled to any reduction in
advisory fee or expense reimbursement, the Fund's expenses are calculated daily
and any reduction in fee or reimbursement is made monthly.
WAM advanced all of ACORN USA'S organizational expenses, which are being
amortized and reimbursed to WAM through September 2001.
WAM employs a team approach to management of the Fund. The management team
is comprised of the lead portfolio manager, other WAM portfolio managers and
research analysts. Team members share responsibility for providing ideas,
information, knowledge and expertise in managing the Fund. Each team member has
one or more areas of expertise that is applied to the management of the Fund.
Daily decisions on portfolio selection rest with the lead portfolio manager who
utilizes the input and advice of the management team in making purchase and sale
determinations.
ROBERT MOHN is the Fund's lead portfolio manager.
Mr. Mohn has been a key member of WAM's domestic analytical team since
August 1992, and a principal of WAM since July 1995. Prior to his position at
WAM, he worked as an analyst for Ariel Capital Management (June to August 1991).
His formal education includes a B.S. from Stanford University (1983) and an
M.B.A. from the University of Chicago (1992).
WAM is a limited partnership managed by its general partner, Wanger Asset
Management, Ltd., which is controlled by Ralph Wanger. WAM commenced operations
in 1992. Ralph Wanger, Charles P. McQuaid, Terence M. Hogan, and Leah J. Zell,
who are officers of the Trust, are limited partners of WAM. WAM has
approximately $4.5 billion under management.
DISTRIBUTOR
Shares of the Fund are distributed by WAM Brokerage Services, L.L.C. ("WAM
BD") under a Distribution Agreement as described in the prospectus dated
September 3, 1996, which is incorporated herein by reference. The Distribution
Agreement continues in effect from year to year, provided such continuance is
approved annually (i) by a majority of the trustees or by a majority of the
outstanding voting securities of the Trust, and (ii) by a majority of the
trustees who are not parties to the Agreement or interested persons of any such
party. The Trust has
19
<PAGE>
agreed to pay all expenses in connection with registration of its shares with
the Securities and Exchange Commission and auditing and filing fees in
connection with registration of its shares under the various state blue sky
laws. WAM bears all sales and promotional expenses, including the cost of
prospectuses and other materials used for sales and promotional purposes by WAM
BD.
As agent, WAM BD offers shares of the Fund to investors in states where the
shares are qualified for sale, at net asset value without sales commissions or
other sales loads to the investor. In addition, no sales commission or "12b-1"
payment is paid by the Fund. WAM BD offers the Fund's shares only on a best
efforts basis.
THE TRUST
The Declaration of Trust may be amended by a vote of either the Trust's
shareholders or its trustees. The Trust may issue an unlimited number of
shares, in one or more series as the board of trustees may authorize. Any such
series of shares may be further divided, without shareholder approval, into two
or more classes of shares having such preferences or special or relative rights
or privileges as the trustees may determine. The shares of the Fund are not
currently divided into classes. Acorn Fund, Acorn International and Acorn USA
are the only series of the Trust currently being offered. The board of trustees
may authorize the issuance of additional series if deemed advisable, each with
its own investment objective, policies, and restrictions. All shares issued
will be fully paid and non-assessable and will have no preemptive or conversion
rights.
The Agreement and Declaration of Trust disclaims liability of the
shareholders, trustees and officers of the Trust for acts or obligations of the
Trust and requires that notice of such disclaimer be given in each agreement,
obligation, or contract entered into or executed by the Trust or the board of
trustees. The Declaration of Trust provides for indemnification out of the
Trust's assets for all losses and expenses of any shareholder held personally
liable for obligations of the Trust. Thus, although shareholders of a business
trust may, under certain circumstances, be held personally liable under
Massachusetts law for the obligations of the Trust, the risk of a shareholder
incurring financial loss on account of shareholder liability is believed to be
remote because it is limited to circumstances in which the disclaimer is
inoperative and the Trust itself is unable to meet its obligations. The risk to
any one series of sustaining a loss on account of liabilities incurred by
another series is also believed to be remote.
On any matter submitted to a vote of shareholders, shares are voted in the
aggregate and not by individual series except that shares are voted by
individual series when required by the Investment Company Act of 1940 or other
applicable law, or when the board of trustees determines that the matter affects
only the interests of one series, in which case shareholders of the unaffected
series are not entitled to vote on such matters. All shares of the Trust are
voted together in the election of trustees.
20
<PAGE>
TRUSTEES AND OFFICERS
The trustees and officers of the Trust and their ages and principal
business activities during the past five years are:
Irving B. Harris, trustee and chairman
Two North LaSalle Street, Chicago, Illinois 60602; age 86; chairman of the
executive committee and director, Pittway Corporation (multi-product
manufacturer and publisher); chairman, William Harris Investors, Inc.
(investment adviser); chairman, The Harris Foundation (charitable
foundation); director, Teva Pharmaceutical Industries, Inc. (pharmaceutical
manufacturer)
Ralph Wanger, trustee and president
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 62;
trustee and president, Wanger Advisors Trust; principal, Wanger Asset
Management, L.P. since July 1992; prior thereto, principal, Harris
Associates L.P.
James H. Lorie, trustee and vice chairman
1101 East 58th Street, Chicago, Illinois 60637; age 74; retired; Eli B. and
Harriet B. Williams Professor of Business Administration Emeritus,
University of Chicago Graduate School of Business; director, Ardco, Inc.
(refrigeration equipment manufacturer); director, Thornburg Mortgage Asset
Corp. (REIT) and Santa Fe Natural Tobacco
Leo A. Guthart, trustee
165 Eileen Way, Syosset, New York 11791; age 58; vice chairman, Pittway
Corporation (multi-product manufacturer and publisher); chief executive
officer, Pittway Corporation's Security Group of Companies which include
ADEMCO (manufacturer of alarm equipment), ADI (distributor of security
equipment), Fire Burglary Instruments (supplier of security control
panels), First Alert Professional (alarm dealers), Cylink Corporation
(supplier of encryption equipment), and Alarm Net (cellular radio service);
director, AptarGroup, Inc. (producer of dispensing valves, pumps and
closures); director, Cylink Corporation; chairman of the board of trustees,
Hofstra University; chairman, Tech Transfer Island Corp. (private
investment partnership); director, Long Island Research Institute
Jerome Kahn, Jr., trustee
Two North LaSalle Street, Suite 505, Chicago, Illinois 60602; age 62; vice
president, William Harris Investors, Inc. (investment adviser); director,
Pittway Corporation (multi-product manufacturer and publisher)
David C. Kleinman, trustee
1101 East 58th Street, Chicago, Illinois 60637; age 60; senior lecturer in
business administration, University of Chicago Graduate School of Business;
business consultant; director, Irex Corporation (insulation contractor)
Charles P. McQuaid, trustee and senior vice president
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 43;
trustee and senior vice president, Wanger Advisors Trust; principal, Wanger
Asset Management, L.P. since July 1992; prior thereto, principal, Harris
Associates L.P.
21
<PAGE>
Roger S. Meier, trustee
1211 S. W. Fifth Avenue, Portland, Oregon 97204; age 70; president, AMCO,
Inc. (investment and real estate management); director, Fred Meyer, Inc.
(retail chain); director, Red Lion Inns Limited Partnership (hotel chain);
director, Key Bank of Oregon (banking)
Adolph Meyer, Jr., trustee
1511 West Webster Avenue, Chicago, Illinois 60614; age 72; president, Gulco
Corp. (leather manufacturer)
Malcolm N. Smith, trustee
309 Maple Avenue, Highland Park, Illinois 60035; age 75; president, Newmac,
Inc. (importers of Sheffield cutlery); prior thereto, president, Macromatic
Division, Milwaukee Electronics Corporation (electronic timing devices
manufacturer)
Terence M. Hogan, vice president
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 34; vice
president, Wanger Advisors Trust; principal, analyst, and portfolio
manager, Wanger Asset Management, L.P., since July 1992; prior thereto,
analyst, Harris Associates L.P.
Leah J. Zell, vice president
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 47; vice
president, Wanger Advisors Trust; principal, analyst, and portfolio
manager, Wanger Asset Management, L.P., since July 1992; prior thereto,
analyst, Harris Associates L.P.
Merrillyn J. Kosier, vice president and secretary
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 36; vice
president and secretary, Wanger Advisors Trust; director of marketing and
shareholder services, Wanger Asset Management, L.P., since September 1993;
prior thereto, vice president of marketing, Kemper Financial Services, Inc.
Bruce H. Lauer, vice president and treasurer
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 39; vice
president and treasurer, Wanger Advisors Trust; chief administrative
officer, Wanger Asset Management, L.P. since April 1995; prior thereto,
first vice president, investment accounting, Kemper Financial Services,
Inc.
Kenneth A. Kalina, assistant treasurer
227 West Monroe Street, Suite 3000, Chicago, Illinois 60603; age 37;
assistant treasurer, Wanger Advisors Trust; Fund controller, Wanger Asset
Management, L.P., since September 1995; prior thereto, treasurer of the
Stein Roe Mutual Funds
Messrs. McQuaid and Wanger are trustees who are interested persons of Acorn
as defined in the Investment Company Act of 1940, and of WAM. Messrs. Harris,
Lorie, and Wanger are members, and Mr. McQuaid is an alternate member, of the
executive committee, which has authority during intervals between meetings of
the board of trustees to exercise the powers of the board, with certain
exceptions.
No shares of the Fund were outstanding on the date of this Statement of
Additional Information. However, prior to the commencement of public offering of
shares of the Fund,
22
<PAGE>
WAM or one or more of its principals, will purchase shares of the Fund at an
initial price of $10.00 per share.
The following table sets forth the total compensation expected to be paid
by the Trust during the fiscal year ending December 31, 1996 to each of the
trustees of the Trust based on the Trust's current compensation schedule. The
Trust has no retirement or pension plan. The officers and trustees affiliated
with WAM serve without any compensation from the Trust.
<TABLE>
<CAPTION>
TOTAL
AGGREGATE COMPENSATION
NAME OF TRUSTEES COMPENSATION FROM
FROM ACORN USA FUND COMPLEX
- -----------------------------------------------------------------
<S> <C> <C>
Irving B. Harris $ 9,333 $ 81,000
Leo A. Guthart 2,333 18,000
Jerome Kahn, Jr. 2,333 19,500
David C. Kleinman 2,333 19,500
James H. Lorie 2,333 18,000
Charles P. McQuaid 0 0
Roger S. Meier 2,333 18,000
Adolph Meyer, Jr. 2,333 18,000
Malcolm N. Smith 2,333 19,500
Ralph Wanger 0 0
- -----------------------------------------------------------------
Total $25,664 $212,000
</TABLE>
PURCHASING AND REDEEMING SHARES
Purchases and redemptions are discussed in the Fund's prospectus under the
headings "How to Buy Shares," "How to Sell Shares," and "Transaction Services."
All of that information is incorporated herein by reference. In particular, a
minimum investment of $200 is required to open an IRA account.
For purposes of computing the net asset value of a share of the Fund, a
security traded on a securities exchange, or in an over-the-counter market in
which transaction prices are reported, is valued at the last sales price at the
time of valuation. A security for which there is no reported sale on the
valuation date is valued at the mean of the latest bid and ask quotations or, if
there is no ask quotation, at the most recent bid quotation. Securities for
which quotations are not available and any other assets are valued at a fair
value as determined in good faith by the board of trustees. Money market
instruments having a maturity of 60 days or less from the valuation date are
valued on an amortized cost basis. All assets and liabilities initially
expressed in foreign
23
<PAGE>
currencies are converted into U.S. dollars at the mean of the bid and offer
prices of such currencies against U.S. dollars quoted by any major bank or
dealer. If such quotations are not available, the rate of exchange will be
determined in accordance with policies established in good faith by the board of
trustees.
The Fund's net asset values is determined only on days on which the New
York Stock Exchange ("NYSE") is open for trading. The NYSE is regularly closed
on Saturdays and Sundays and on New Year's Day, the third Monday in February,
Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving,
and Christmas. If one of these holidays falls on a Saturday or Sunday, the NYSE
will be closed on the preceding Friday or the following Monday, respectively.
Trading in the portfolio securities of the Fund may take place in various
foreign markets on certain days (such as Saturday) when the Fund is not open for
business and do not calculate their net asset values. Conversely, trading in
the Fund's portfolio securities may not occur on days when the Fund is open.
Therefore, the calculation of net asset value does not take place
contemporaneously with the determinations of the prices of many of the Fund's
portfolio securities and the value of the Fund's portfolios may be significantly
affected on days when shares of the Fund may not be purchased or redeemed.
Computation of net asset value (and the sale and redemption of Fund shares)
may be suspended or postponed during any period when (a) trading on the NYSE is
restricted, as determined by the Securities and Exchange Commission, or that
exchange is closed for other than customary weekend and holiday closings, (b)
the Commission has by order permitted such suspension, or (c) an emergency, as
determined by the Commission, exists making disposal of portfolio securities or
valuation of the net assets of the Fund not reasonably practicable.
Acorn has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 pursuant to which it is obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Fund during any
90-day period for any one shareholder. Redemptions in excess of the above
amounts will normally be paid in cash, but may be paid wholly or partly by a
distribution in kind of securities. If a redemption is made in kind, the
redeeming shareholder would bear any transaction costs incurred in selling the
securities received.
Due to the relatively high cost of maintaining smaller accounts, Acorn
reserves the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time the shares in the
account do not have a value of at least $1,000. An investor will be notified
that the value of his account is less than that minimum and allowed at least 30
days to bring the value of the account up to at least $1,000 before the
redemption is processed. The Agreement and Declaration of Trust also authorizes
Acorn to redeem shares under certain other circumstances as may be specified by
the board of trustees.
Certain financial institutions that have entered into sales agreements with
Acorn may enter confirmed purchase orders or redemption requests on behalf of
customers on an expedited basis, including orders by phone, with payment to
follow no later than the time when net asset value is calculated on the
following business day. If payment is not received by that time, the financial
institution could be held liable for resulting fees or losses. These
institutions may impose charges for their services, and those charges could
constitute a significant portion of a smaller account. Certain privileges
available to record holders of shares of the Fund, including the telephone
exchange privilege, may not be available through brokers and financial
institutions.
In connection with the Switch Plan, WAM acts as a shareholder servicing
agent for the Money Funds. For its services it receives a fee at the rate of
0.35% of the average annual net
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assets of each account in a Money Fund established through the Switch Plan,
pursuant to a 12b-1 plan adopted by the Money Funds.
ADDITIONAL TAX INFORMATION
The Fund intends to qualify and to continue to qualify to be taxed as a
regulated investment company under the Internal Revenue Code so as to be
relieved of federal income tax on its capital gains and net investment income
currently distributed to its shareholders.
At the time of your purchase, the Fund's net asset value may reflect
undistributed income, capital gains, or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to you of such amounts,
although constituting a return of your investment, would be taxable either as a
dividend or capital gain distribution.
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate fluctuations,
are taxable as ordinary income. If the net effect of these transactions is a
gain, the income dividend paid by the Fund will be increased; if the result is a
loss, the income dividend paid by the Fund will be decreased.
A portion of the dividends paid by ACORN USA is expected to be eligible for
the dividends-received deduction. Capital gain distributions paid from the Fund
are never eligible for this deduction.
Income received by the Fund from sources within various foreign countries
will be subject to foreign income taxes withheld at the source. Under the
Internal Revenue Code, if more than 50% of the value of the Fund's total assets
at the close of its taxable year comprises securities issued by foreign
corporations, the Fund may file an election with the Internal Revenue Service to
"pass through" to its shareholders the amount of foreign income taxes paid by
the Fund. Pursuant to this election, shareholders will be required to: (i)
include in gross income, even though not actually received, their respective pro
rata share of foreign taxes paid by the Fund; (ii) treat their pro rata share of
foreign taxes as paid by them; and (iii) either deduct their pro rata share of
foreign taxes in computing their taxable income, or use it as a foreign tax
credit against U.S. income taxes (but not both). No deduction for foreign taxes
may be claimed by a shareholder who does not itemize deductions.
ACORN USA does not expect to be able to "pass through" foreign tax credits.
PORTFOLIO TRANSACTIONS
Portfolio transactions of the Fund are placed with those securities brokers
and dealers that WAM believes will provide the best value in transaction and
research services for the Fund, either in a particular transaction or over a
period of time. Although some transactions involve only brokerage services,
many involve research services as well.
In valuing brokerage services, WAM makes a judgment as to which brokers are
capable of providing the most favorable net price (not necessarily the lowest
commission) and the best
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execution in a particular transaction. Best execution connotes not only general
competence and reliability of a broker, but specific expertise and effort of a
broker in overcoming the anticipated difficulties in fulfilling the requirements
of particular transactions, because the problems of execution and the required
skills and effort vary greatly among transactions.
In valuing research services, WAM makes a judgment of the usefulness of
research and other information provided to WAM by a broker in managing the
Fund's investment portfolio. In some cases, the information, e.g., data or
recommendations concerning particular securities, relates to the specific
transaction placed with the broker, but for the greater part the research
consists of a wide variety of information concerning companies, industries,
investment strategy, and economic, financial, and political conditions and
prospects, useful to WAM in advising the Fund.
The reasonableness of brokerage commissions paid by the Fund in relation to
transaction and research services received is evaluated by WAM's staff on an
ongoing basis. The general level of brokerage charges and other aspects of the
Fund's portfolio transactions are reviewed periodically by the board of trustees
and its committee on portfolio transactions.
WAM is the principal source of information and advice to the Fund, and is
responsible for making and initiating the execution of investment decisions by
the Fund. However, the board of trustees recognizes that it is important for
WAM, in performing its responsibilities to the Fund, to continue to receive and
evaluate the broad spectrum of economic and financial information that many
securities brokers have customarily furnished in connection with brokerage
transactions, and that in compensating brokers for their services, it is in the
interest of the Fund to take into account the value of the information received
for use in advising the Fund. The extent, if any, to which the obtaining of
such information may reduce WAM's expenses in providing management services to
the Fund is not determinable. In addition, the board of trustees understands
that other clients of WAM might benefit from the information obtained for the
Funds, in the same manner that the Fund might benefit from information obtained
by WAM in performing services to others.
Transactions of the Fund in the over-the-counter market and the third
market are executed with primary market makers acting as principal except where
it is believed that better prices and execution may be obtained otherwise.
Although investment decisions for the Fund are made independently from
those for other investment advisory clients of WAM, it may develop that the same
investment decision is made for the Fund and one or more other advisory clients.
If the Fund and other clients purchase or sell the same class of securities on
the same day, the transactions will be allocated as to amount and price in a
manner considered equitable to each.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8502, Boston Massachusetts
02266-8502, is the custodian for the Fund. It is responsible for holding all
securities and cash of the Fund, receiving and paying for securities purchased,
delivering against payment securities sold,
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receiving and collecting income from investments, making all payments covering
expenses of the Fund, and performing other administrative duties, all as
directed by authorized persons of the Fund. The custodian does not exercise any
supervisory function in such matters as purchase and sale of portfolio
securities, payment of dividends, or payment of expenses of the Fund. The Fund
has authorized the custodian to deposit certain portfolio securities of the Fund
in central depository systems as permitted under federal law. The Fund may
invest in obligations of the custodian and may purchase or sell securities from
or to the custodian.
INDEPENDENT AUDITORS
Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois
60606 audits and reports on the Fund's annual financial statements, reviews
certain regulatory reports and the Fund's tax returns, and performs other
professional accounting, auditing, tax, and advisory services when engaged to do
so by Acorn.
APPENDIX - DESCRIPTION OF BOND RATINGS
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general
and are not absolute standards of quality or guarantees as to the
creditworthiness of an issuer. Consequently, WAM believes that the quality of
debt securities in which the Fund invests should be continuously reviewed. A
rating is not a recommendation to purchase, sell or hold a security, because it
does not take into account market value or suitability for a particular
investor. When a security has received a rating from more than one service,
each rating should be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the ratings services from
other sources which they consider reliable. Ratings may be changed, suspended
or withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
The following is a description of the characteristics of ratings used by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P").
MOODY'S RATINGS
Aaa--Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge".
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
Aa--Bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long
term risk appear somewhat larger than in Aaa bonds.
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A--Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B--Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds rated Caa are of poor standing. Such bonds may be in default or
there may be present elements of danger with respect to principal or interest.
Ca--Bonds rated Ca represent obligations which are speculative in a high
degree. Such bonds are often in default or have other marked shortcomings.
S&P RATINGS
AAA--Bonds rated AAA have the highest rating. Capacity to pay principal
and interest is extremely strong.
AA--Bonds rated AA have a very strong capacity to pay principal and
interest and differ from AAA bonds only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this capacity
than for bonds in higher rated categories.
BB--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation
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among such bonds and CC the highest degree of speculation. Although such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
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