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Acorn Investment Trust
Supplement dated July 17, 1998 to
Prospectus dated May 1, 1998
[Replace third paragraph on cover page of the Prospectus with the following]
A Statement of Additional Information (SAI) dated the date of this prospectus,
and any supplement to the SAI, has been filed with the Securities and Exchange
Commission (SEC), and is incorporated herein by reference (is legally considered
a part of this prospectus). The SAI is available free upon request by calling
Acorn at 1-800-9-ACORN-9 (1-800-922-6769).
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ACORN INVESTMENT TRUST
STATEMENT OF
ADDITIONAL INFORMATION
May 1, 1998
Supplemented July 17, 1998
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-800-9-ACORN-9
1-800-922-6769
ACORN FUND
ACORN INTERNATIONAL
ACORN USA
No-Load Funds
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TABLE OF CONTENTS
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Information About the Funds............................. 2
Investment Objectives and Policies...................... 2
Investment Techniques and Risks......................... 2
Investment Restrictions................................. 18
Performance Information................................. 23
Investment Adviser...................................... 25
Distributor............................................. 27
The Trust............................................... 27
Trustees and Officers................................... 28
Purchasing and Redeeming Shares......................... 32
Additional Tax Information.............................. 34
Taxation of Foreign Shareholders........................ 36
Portfolio Transactions.................................. 36
Custodian............................................... 37
Independent Auditors.................................... 38
Appendix - Description of Bond Ratings.................. 39
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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 Fund, Acorn International and Acorn USA dated the date of this SAI 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 Funds
Acorn Fund, Acorn International and Acorn USA are series of Acorn
Investment Trust ("Acorn" or the "Trust"). All three funds are currently open to
new investors; however, Acorn reserves the right to close one or more of the
funds to new investors if the board of trustees of Acorn determines that
additional cash flow would be detrimental to the management of the funds.
A copy of the 1997 Annual Report of the Acorn funds accompanies this SAI.
The Annual Report contains audited financial statements, notes thereto,
supplementary information entitled "Financial Highlights," and a report of
independent auditors, all of which (but no other part of the report) are
incorporated herein by reference. Additional copies of the report may be
obtained from Acorn at no charge by writing or telephoning Acorn at its address
or telephone number shown on the cover page of this SAI.
The discussion below supplements the description in the prospectus of the
funds' investment objectives, policies, and restrictions.
Investment Objectives and Policies
Acorn Fund, Acorn International and Acorn USA invest with the objective of
long-term growth of capital. The funds are not designed for investors seeking
primarily income rather than capital appreciation.
The funds use the techniques and invest in the types of securities
described below and in the prospectus.
Investment Techniques and Risks
Foreign Securities
The funds invest in foreign securities, 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. Under normal market conditions, Acorn International invests at least
75% of its total assets in foreign securities; Acorn Fund's and Acorn USA's
investments in foreign securities are limited to not more than 33% and 10% of
each fund's total assets, respectively. The funds may invest in securities of
foreign issuers directly or in the form of American Depositary Receipts (ADRs),
European Depositary Receipts (EDRs), or other securities representing underlying
shares of foreign issuers. Positions in these securities are not necessarily
denominated in the same currency as the common stocks into which they may be
converted. ADRs are receipts typically issued by an American bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement. Generally ADRs, in registered form,
are designed for use in the U.S. securities markets and EDRs, in bearer form,
are designed for use in European securities markets. The funds may invest in
both "sponsored" and "unsponsored" ADRs. In a sponsored ADR, the issuer
typically pays some or all of the expenses of the depository and agrees to
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provide its regular shareholder communications to ADR holders. An unsponsored
ADR is created independently of the issuer of the underlying security. The ADR
holders generally pay the expenses of the depository and do not have an
undertaking from the issuer of the underlying security to furnish shareholder
communications. Therefore, in the case of an unsponsored ADR, a 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. None of the funds expects to invest 5% or more of its
total assets in unsponsored ADRs.
The funds' investment performance is affected by the strength or weakness
of the U.S. dollar against the currencies of the foreign markets in which its
securities trade or in which they are denominated. 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 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 subcustodial
arrangements. In addition, the costs of investing in foreign securities are
higher than the costs of investing in U.S. securities.
Although the funds 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 controls, the adoption of foreign
government restrictions, or other adverse political, social, or diplomatic
developments that could affect investment in these nations.
The countries in which the funds invest include those listed below. A fund
may not invest in all the countries listed, and it may invest in other countries
as well, when such investments are consistent with that fund's investment
objective and policies.
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Mature Markets Developing Markets Emerging Markets
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Australia Argentina Bangladesh Morocco
Austria Chile Botswana Pakistan
Belgium Greece Brazil Peru
Canada Hong Kong China Philippines
Denmark Indonesia Colombia Poland
Finland Israel Cyprus Sri Lanka
France Korea Czech Republic Swaziland
Germany Malaysia Ecuador Turkey
Ireland Mexico Egypt Uruguay
Italy Portugal Ghana Venezuela
Japan Singapore Hungary Zambia
Luxembourg Taiwan India Zimbabwe
Netherlands Thailand Jordan
New Zealand Kenya
Norway
South Africa
Spain
Sweden
Switzerland
United Kingdom
United States
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It may not be feasible for the funds currently to invest in all of these
countries due to restricted access to their securities markets or inability to
implement satisfactory custodial arrangements.
Currency Exchange Transactions
The funds 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,
foreign exchange dealers or 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 funds may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. The funds' currency
transactions are limited to transaction hedging and portfolio hedging involving
either specific transactions or portfolio positions, except to the extent
described below under "Synthetic Foreign Money Market Positions." Transaction
hedging is the purchase or sale of a forward contract with respect to specific
payables or receivables of a 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 funds may engage in portfolio hedging with respect to
the currency of a particular country in amounts approximating actual or
anticipated
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positions in securities denominated in that currency. When a fund owns or
anticipates owning securities in countries whose currencies are linked, Wanger
Asset Management, L.P. ("WAM"), the funds' investment adviser, may aggregate
such positions as to the currency hedged.
If a fund enters into a forward contract hedging an anticipated purchase of
portfolio securities, assets of that 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, a
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 a 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 that fund is obligated to deliver.
If a fund retains the portfolio security and engages in an offsetting
transaction, that 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 a 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, a 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 a 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 a 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.
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Synthetic Foreign Money Market Positions. The funds may invest in money
market instruments denominated in foreign currencies. In addition to, or in lieu
of, such direct investment, the funds may construct a synthetic foreign money
market position by (a) purchasing a money market instrument denominated in one
currency (generally U.S. dollars) and (b) concurrently entering into a forward
contract to deliver a corresponding amount of that currency in exchange for a
different currency on a future date and at a specified rate of exchange. For
example, a synthetic money market position in Japanese yen could be constructed
by purchasing a U.S. dollar money market instrument, and entering concurrently
into a forward contract to deliver a corresponding amount of U.S. dollars in
exchange for Japanese yen on a specified date and at a specified rate of
exchange. Because of the availability of a variety of highly liquid short-term
U.S. dollar money market instruments, a synthetic money market position
utilizing such U.S. dollar instruments may offer greater liquidity than direct
investment in foreign money market instruments. The results of a direct
investment in a foreign currency and a concurrent construction of a synthetic
position in such foreign currency, in terms of both income yield and gain or
loss from changes in currency exchange rates, in general should be similar, but
would not be identical because the components of the alternative investments
would not be identical. Except to the extent a synthetic foreign money market
position consists of a money market instrument denominated in a foreign
currency, the synthetic foreign money market position shall not be deemed a
"foreign security" for purposes of the policies that, under normal conditions,
(a) Acorn Fund will not invest more than 33% of its total assets in foreign
securities; (b) Acorn USA will not invest more than 10% of its total assets in
foreign securities; and (c) Acorn International will invest at least 75% of its
total assets in foreign securities.
Options and Futures
The funds 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 funds 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 funds' 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.)
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The funds 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 a 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 a fund) upon conversion or
exchange of other securities held in its portfolio.
If an option written by a fund expires, that fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by a fund expires, that 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 a fund desires.
A 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 a fund is an asset of that fund, valued
initially at the premium paid for the option. The premium received for an
option written by a 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 funds 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 a 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. Each 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
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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 a fund seeks
to close out an option position. If a 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
a 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, a 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, a fund foregoes, during the option's life, the opportunity to
profit from currency appreciation.
If trading were suspended in an option purchased or written by one of the
funds, that 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 funds 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; the Russell
2000 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 funds 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.
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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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To the extent required by regulatory authorities having jurisdiction over
the funds, the funds will limit their use of futures contracts and futures
options to hedging transactions. For example, the funds 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 a fund's securities or the price of the
securities that a fund intends to purchase. The funds' 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 funds' exposure to
stock price, interest rate, and currency fluctuations, the funds may be able to
hedge their 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's ability to correctly
predict changes in the level and direction of stock prices, interest rates,
currency exchange rates, and other factors. Should those predictions be
incorrect, a 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 a fund, that fund
is required to deposit with its custodian or broker 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 generally set
by the exchange on which the contract is traded; however, the margin requirement
may be modified during the term of the contract, and the fund's broker may
require margin deposits in excess of the minimum required by the exchange. 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 funds
expect to earn interest income on their initial margin deposits. A futures
contract held by a 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 a fund does not represent a borrowing or loan by the fund but is instead
settlement between that 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 funds will mark-to-market their open
futures positions.
The funds are also required to deposit and maintain margin with respect to
put and call options on futures contracts they write. 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 funds.
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
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month). If an offsetting purchase price is less than the original sale price,
the funds realize a capital gain, or if it is more, the funds realize a capital
loss. Conversely, if an offsetting sale price is more than the original purchase
price, the fund engaging in the transaction 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 funds'
investments being hedged and the securities underlying the standard contracts
available for trading. For example, in the case of index futures contracts, the
composition of the index, including the issuers and the weighting of each issue,
may differ from the composition of a 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 a 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 a
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.
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Limitations on Options and Futures. A 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 that 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, a fund must maintain with its custodian or broker readily-marketable
securities having a fair market value (including any margin) at least equal to
the market value of such contract. When writing a call option on a futures
contract, a fund similarly will maintain with its custodian readily-marketable
securities having a fair market value (including any margin) at least equal to
the amount by which such option is in-the-money until the option expires or is
closed out by the fund.
A 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 a 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 a 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.
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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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No fund will purchase puts, calls, straddles, spreads, or any combination
thereof if by reason of such purchase more than 10% of that fund's total assets
would be invested in such securities.
Taxation of Options and Futures. If a fund exercises a call or put option
that it holds, the premium paid for the option is added to the cost basis of the
security purchased (call) or deducted from the proceeds of the security sold
(put). For cash settlement options and futures options exercised by a fund, the
difference between the cash received at exercise and the premium paid is a
capital gain or loss.
If a call or put option written by a fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by a fund, the difference between the cash
paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by a fund is in-the-money at the time it was written
and the security covering the option was held for more than the long-term
holding period prior to the writing of the option, any loss realized as a result
of a closing purchase transaction will be long-term. The holding period of the
securities covering an in-the-money option will not include the period of time
the option is outstanding.
If a fund writes an equity call option/3/ other than a "qualified covered
call option," as defined in the Internal Revenue Code, any loss on such option
transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If a fund delivers securities under a futures contract, the
fund also realizes a capital gain or loss on those securities.
For federal income tax purposes, a fund generally is required to recognize
for each taxable year its net unrealized gains and losses as of the end of the
year on futures, futures options and non-equity options positions ("year-end
mark-to-market"). Generally, any gain or loss recognized with respect to such
positions (either by year-end mark-to-market or by actual
- --------------------------
/3/ An equity option is defined to mean any option to buy or sell stock, and
any other option the value of which is determined by reference to an index
of stocks of the type that is ineligible to be traded on a commodity
futures exchange (e.g., an option contract on a sub-index based on the
price of nine hotel-casino stocks). The definition of equity option
excludes options on broad-based stock indexes (such as the Standard &
Poor's 500 index).
12
<PAGE>
closing of the positions) is considered to be 60% long-term and 40% short-term,
without regard to the holding periods of the contracts. However, in the case of
positions classified as part of a "mixed straddle," the recognition of losses on
certain positions (including options, futures and futures options positions, the
related securities and certain successor positions thereto) may be deferred to a
later taxable year. Sale of futures contracts or writing of call options (or
futures call options) or buying put options (or futures put options) that are
intended to hedge against a change in the value of securities held by a fund may
affect the holding period of the hedged securities.
If a fund were to enter into a short index future, short index futures
option or short index option position and the fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the fund's stock positions may be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales or
"offsetting notional principal contracts" (as defined by the Act) with respect
to, or futures or "forward contracts" (as defined by the Act) with respect to,
the same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property. The
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
In order for the funds to continue to qualify for federal income tax
treatment as regulated investment companies, at least 90% of each fund's gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or foreign currencies, or other income (including but not
limited to gains from options, futures, or forward contracts). Any net gain
realized from futures (or futures options) contracts will be considered gain
from the sale of securities and therefore be qualifying income for purposes of
the 90% requirement.
The funds intend to distribute to shareholders annually any capital gains
that have been recognized for federal income tax purposes (including year-end
mark-to-market gains) on options and futures transactions, together with gains
on other fund investments, to the extent such gains exceed recognized capital
losses and any net capital loss carryovers of the funds. Shareholders will be
advised of the nature of such capital gain distributions.
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 a 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
13
<PAGE>
many different forms and are known by a variety of names. A fund may enter into
any form of swap agreement if WAM determines it is consistent with that fund's
investment objective and policies, but each fund will limit its use of swap
agreements so that no more than 5% of its total assets will be placed at risk.
A swap agreement tends to shift a fund's investment exposure from one type
of investment to another. For example, if a 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 that 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 a 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 a fund. If a swap agreement calls for
payments by a fund, that 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. WAM expects to be
able to eliminate a fund's 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.
A fund will segregate its assets to cover its current obligations under a
swap agreement. If a 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
that fund's accumulated obligations under the swap agreement over the
accumulated amount the fund is entitled to receive under the agreement. If a
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 that fund's accumulated
obligations under the agreement.
Illiquid Securities
The funds may not invest in illiquid securities, including restricted
securities and OTC derivatives, if as a result they would comprise more than 10%
of the value of the net assets of Acorn Fund, or more than 15% of the value of
the net assets of each of Acorn International and Acorn USA.
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, a 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 a
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
14
<PAGE>
Fund should be in a position where more than 10% of the value of its net assets
are invested in illiquid assets, including restricted securities and OTC
derivatives (or more than 15% of the value of the net assets of each of Acorn
International and Acorn USA), that fund will take appropriate steps to protect
liquidity.
Notwithstanding the above, a 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 funds, 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 a fund's restriction of investing no more than 10%
(for Acorn Fund) or 15% (for Acorn International and Acorn USA) 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
funds' holdings of illiquid securities would be reviewed to determine what, if
any, steps are required to assure that a fund does not invest more than 10% (for
Acorn Fund) or 15% (for Acorn International and Acorn USA) of its assets in
illiquid securities. Investing in Rule 144A securities could have the effect of
increasing the amount of a fund's assets invested in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.
Debt Securities
The funds 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 funds or the portion of a
fund's assets that may be invested in debt securities in a particular ratings
category, except that Acorn International may not invest more than 20% of its
assets in securities rated below investment grade or considered by the Adviser
to be of comparable credit quality. Neither Acorn Fund nor Acorn International
expects to invest more than 5% of its net assets in such securities during the
current fiscal year. Acorn USA 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
15
<PAGE>
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 a fund may have greater difficulty selling 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.
Repurchase Agreements
Repurchase agreements are transactions in which a 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, a fund will enter into repurchase
agreements only with banks and dealers WAM believes 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.
A 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 a
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, each fund intends to comply
with provisions under such Code that would allow it immediately to resell such
collateral.
At present, Acorn USA is the only fund that invests in repurchase
agreements. Acorn Fund and Acorn International have no present intention of
investing in repurchase agreements.
16
<PAGE>
When-Issued and Delayed Delivery Securities; Reverse Repurchase Agreements
The funds 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. A 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. A 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.
A 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 a 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 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 a fund, may increase net
asset value fluctuation. The funds have no present intention of investing in
reverse repurchase agreements.
Temporary Strategies
The funds have 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, a 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 (or, in the case of Acorn
Fund and Acorn International, those of foreign 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 a fund
might employ defensive strategies.
In addition, pending investment of proceeds from new sales of fund shares
or to meet ordinary daily cash needs, a 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.
17
<PAGE>
Portfolio Turnover
Although the funds do 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. The funds' portfolio turnover
rates for the 1997 and 1996 fiscal years, respectively, were as follows: Acorn
Fund, 32% and 33%; Acorn International, 39% and 34%; and Acorn USA, 33% and 20%
(annualized). A high rate of portfolio turnover, if it should occur, would
result in increased transaction expenses which must be borne by each 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.
Line of Credit
Acorn maintains a line of credit with a bank in order to permit borrowing
on a temporary basis to meet share redemption requests in circumstances in which
temporary borrowing may be preferable to liquidation of portfolio securities.
Any borrowings under that line of credit by the funds would be subject to each
fund's restrictions on borrowing under "Investment Restrictions," below.
Investment Restrictions
Acorn Fund
In pursuing its investment objective Acorn Fund will not:
1. Invest more than 5% of its assets (valued at time of investment) in
securities of any one issuer, except in government obligations;
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 the value of 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;
4. Invest more than 5% of its assets (valued at time of investment) in
securities of issuers with less than three years' operation (including
predecessors);
5. Purchase or retain securities of a company if all of the trustees 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;
18
<PAGE>
6. Borrow money except (a) from banks for temporary or emergency purposes
at fixed rates of interest in amounts not exceeding 10% of the value of the
fund's assets at the time of borrowing, and (b) in connection with
transactions in options and in securities index futures [the fund will not
purchase additional securities when its borrowings, less amounts receivable
on sales of portfolio securities, exceed 5% of total assets];
7. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 15% of its assets
at cost, and except in connection with transactions in options and in
securities index futures;
8. 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; but the fund will limit its total
investment in restricted securities and in other securities for which there
is no ready market to not more than 10% of its total assets at the time of
acquisition;
9. 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;
10. Purchase and sell commodities or commodity contracts, except that it
may enter into (a) futures and options on futures and (b) forward
contracts;
11. 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;
12. Sell securities short or maintain a short position, except short sales
against-the-box;
13. Participate in a joint or on a joint or several basis in any trading
account in securities;
14. Invest in companies for the purpose of management or the exercise of
control;
15. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
Acorn International
In pursuing its investment objective Acorn International 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
19
<PAGE>
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 that 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;
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 10% 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. [The fund will not purchase additional
securities when its borrowings, less amounts receivable on sales of
portfolio securities, exceed 5% of total assets.];
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; but the fund will limit its total
investment in restricted securities and in other securities for which there
is no ready market, including repurchase agreements maturing in more than
seven days, to not more than 15% of its total assets at the time of
acquisition;
7. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises that 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) forward
contracts;
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. Sell securities short or maintain a short position, except short sales
against-the-box.
20
<PAGE>
11. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
Acorn USA
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 instrumentalitites;
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 purchase) in parts
of issues of bonds, debentures or other obligations of a type each placed
with financial institutions, (b) investing in repurchase agreements, or (c)
portfolio securities, provided that it may not lend securities if, as a
result, the privately value of all securities loaned would exceed 33% of
its total lending (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;
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<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.
The above restrictions (except the bracketed language) for each fund are
"fundamental," which means that they cannot be changed without the approval of
the lesser of (i) 67% of each fund's shares present at a meeting if more than
50% of the shares outstanding are present or (ii) more than 50% of each fund's
outstanding shares.
In addition, Acorn Fund, Acorn International and Acorn USA are subject to a
number of restrictions that may be changed by the board of trustees without
shareholder approval. Under those non-fundamental restrictions, the funds will
not:
a. Acquire securities of other registered investment companies except in
compliance with the Investment Company Act of 1940;
b. Invest more than 33% of its total assets (valued at time of
investment) in securities of foreign issuers [this restriction applies only
to Acorn Fund];
c. Invest more than 10% of its total assets (valued at the time of
investment) in securities of non-U.S. issuers, not including securities
represented by American Depository Receipts [this restriction applies only
to Acorn USA].
d. Invest in companies for the purpose of management or the exercise of
control;
e. 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;
f. Invest more than 10% of its total assets (valued at the time of
investment) in restricted securities;
g. Invest more than 15% of its net assets (valued at time of investment)
in illiquid securities, including repurchase agreements in maturing in more
than seven days; and
h. 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.
Notwithstanding the foregoing investment restrictions, Acorn International
and Acorn USA may purchase securities pursuant to the exercise of subscription
rights, provided that such purchase will not result in either fund's ceasing to
be a diversified investment company. Japanese and European corporations
frequently issue additional capital stock by means of subscription rights
offerings to existing shareholders at a price substantially below the market
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<PAGE>
price of the shares. The failure to exercise such rights would result in Acorn
International's interest in the issuing company being diluted. The market for
such rights is not well developed in all cases and, accordingly, Acorn
International may not always realize full value on the sale of rights. The
exception applies in cases where the limits set forth in the investment
restrictions would otherwise be exceeded by exercising rights or would have
already been exceeded as a result of fluctuations in the market value of Acorn
International's portfolio securities with the result that the fund would be
forced either to sell securities at a time when it might not otherwise have done
so, or to forego exercising its rights.
Performance Information
From time to time the funds 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 a 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/
Where: P = the amount of an assumed initial investment in shares of a 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
For example, as of December 31, 1997 the Total Return and Average Total
Return on a $1,000 investment in the funds for the following periods were:
<TABLE>
<CAPTION>
ACORN FUND
- ----------
Average Annual
Total Return Total Return
------------ --------------
<S> <C> <C>
1 year............................ 24.98% 24.98%
5 years........................... 126.60% 17.77%
10 years.......................... 433.05% 18.20%
Life of Fund (inception 6/10/70).. 7518.52% 17.01%
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
ACORN INTERNATIONAL
- -------------------
Average Annual
Total Return Total Return
------------ --------------
<S> <C> <C>
1 year............................ 0.19% 0.19%
3 years........................... 31.67% 9.60%
5 years........................... 88.87% 13.56%
Life of Fund (inception 9/23/92).. 101.70% 14.24%
ACORN USA
---------
Average Annual
Total Return Total Return
------------ --------------
1 Year............................ 32.30% 32.30%
Life of Fund (inception 9/4/96)... 54.13% 38.78%
</TABLE>
The funds impose no sales charges and pay no distribution expenses. Income
taxes are not taken into account. Performance figures quoted by the funds are
not necessarily indicative of future results. Each 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 a 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.
The funds may note their mention or recognition in newsletters, newspapers,
magazines, or other media. The funds may similarly note mention or recognition
of WAM, or appearances of principals of WAM, in the media. In advertising and
sales literature, each fund's performance may be compared with those of market
indexes and other mutual funds. In addition to the performance information
described above, a 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 funds may also use statistics to indicate volatility or risk. The
premise of each of these measures is that greater volatility connotes greater
risk undertaken in achieving performance. One measure of volatility is beta.
Beta is the volatility of a fund's total return relative to the movements of a
benchmark index. A beta greater than one indicates volatility greater than the
index, and a beta of less than one indicates a volatility less than the index.
Another measure of volatility is R-squared. It reflects the percentage of a
fund's price movements that are explained by movements in the benchmark index.
An R-squared of 1.00 indicates that all movements of a fund's price are
completely explained by movements in the index. Generally, a higher R-squared
will indicate a more reliable beta figure. Alpha is a measure used to discuss a
fund's relative performance. Alpha measures the actual return of a fund compared
to the expected return of a fund given its risk (as measured by beta). The
expected return of a fund is based on how historical movements of the benchmark
index and historical performance of a fund compare to the benchmark index. The
expected return is
24
<PAGE>
computed by multiplying the advance or decline in a market represented by a
fund's beta. A positive alpha quantifies the value that a fund manager has added
and a negative alpha quantifies the value that a fund manager has lost. Beta and
R-squared are calculated by performing a least squares linear regression using
five years of monthly total return figures for each portfolio and benchmark
combination. Alpha is calculated by taking the difference between the average
monthly portfolio return and the beta-adjusted average monthly benchmark return.
The result of this calculation is then geometrically annualized.
The following are some benchmark indices utilized by the funds: Salomon
Brothers Extended Market Index ("EMI"), an index of the bottom 20% of
institutionally investable capital of countries, selected by Salomon, excluding
the U.S.; Morgan Stanley's Europe, Australasia Far East Index ("EAFE"), an index
of companies throughout the world in proportion to world stock market
capitalizations, excluding the U.S. and Canada; the Standard & Poor's 500 Stock
Index ("S&P 500"), a broad, market-weighted average of U.S. blue-chip companies;
the Standard & Poor's MidCap 400 ("S&P 400"), also a broad, market-weighted
average of U.S. companies in the next tier down in size from the S&P 500; and
the Russell 2000 Index, an index formed by taking the 3,000 largest U.S.
companies and eliminating the largest 1,000, leaving an unweighted index of 2000
small companies. All indexes are unmanaged and included reinvested dividends.
As of June 30, 1998, some statistics for the funds are as follows:
<TABLE>
<CAPTION>
R/2/ Beta Alpha
---- ---- -----
<S> <C> <C> <C>
Acorn Fund
----------
vs. S&P 500 0.53 0.75 -0.01%
vs. Russell 2000 0.88 0.83 3.07%
Acorn International
-------------------
vs. EMI Ex U.S. 0.54 0.67 9.33%
vs. EAFE 0.51 0.61 7.24
</TABLE>
Other measures of volatility and relative performance may be used as
appropriate. All such measures will fluctuate and do not represent future
results.
Investment Adviser
Wanger Asset Management, L.P. ("WAM"), serves as the investment adviser for
the funds and for other institutional accounts. As of the date of this SAI, WAM
has approximately $7.4 billion under management, including the funds. WAM is a
limited partnership managed by its general partner, Wanger Asset Management,
Ltd. ("WAM Ltd."), whose stockholders are Ralph Wanger, Charles P. McQuaid, Leah
J. Zell, Marcel P. Houtzager, Robert A. Mohn and John H. Park. Ralph Wanger is
the president and Howard L. Kastel is the chief executive officer of WAM Ltd. On
matters submitted to the shareholders of WAM Ltd., each shareholder has one vote
(or a lesser vote in the case of new shareholders). With certain exceptions
(including for
25
<PAGE>
extraordinary transactions, for which Mr. Wanger's consent is required),
decisions are made by majority vote. WAM commenced operations in 1992.
WAM furnishes continuing investment supervision to the funds under an
investment advisory agreement (the "Agreement") and is responsible for overall
management of the funds' 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 funds'
prospectus and reports to prospective investors. The Agreement will continue in
effect as to each fund through June 30, 1999, and thereafter from year to year
so long as its continuance as to each fund is approved at least annually by (i)
the board of trustees of Acorn or by the holders of a majority of that fund's
outstanding voting securities as defined by the Investment Company Act of 1940
and (ii) a majority of the members of Acorn's board of trustees who are not
otherwise affiliated with Acorn or WAM, cast in person at a meeting called for
that purpose. Any amendment to the Agreement must be approved in the same
manner. The Agreement may be terminated as to a fund without penalty by the
vote of the board of trustees of Acorn or the shareholders of that fund (by a
majority as defined in the 1940 Act) on sixty days' written notice to WAM or by
WAM on sixty days' notice to the fund, and will terminate automatically in the
event of its assignment. The fees payable by a fund under the Agreement are the
obligation only of that fund and impose no liability on the other funds.
The advisory fees the funds pay to WAM are calculated daily and paid
monthly, at the annual rates shown below, which were effective January 1, 1998:
Acorn Fund
<TABLE>
<CAPTION>
Average Daily Net Assets Rate of Fee
------------------------ -----------
<S> <C>
First $700 million 0.75%
$700 million to $2 billion 0.70%
In excess of $2 billion 0.65%
</TABLE>
Acorn International
<TABLE>
<CAPTION>
Average Daily Net Assets Rate of Fee
------------------------ -----------
<S> <C>
First $100 million 1.20%
$100 million to $500 million 0.95%
In excess of $500 million 0.75%
</TABLE>
Acorn USA
<TABLE>
<CAPTION>
Average Daily Net Assets Rate of Fee
------------------------ -----------
<S> <C>
First $200 million 0.95%
In excess of $200 million 0.90%
</TABLE>
The advisory fees paid by Acorn Fund for 1997, 1996 and 1995, respectively,
were $14,349,000, $12,437,000 and $10,429,000. The investment advisory fees
paid by Acorn International for 1997, 1996 and 1995 were $16,235,000,
$13,255,000 and $11,667,000. For
26
<PAGE>
the year ended December 31, 1997 and from its inception on September 4, 1996 to
December 31, 1996, Acorn USA paid investment advisory fees of $1,199,000 and
$101,000. All advisory fees for periods before January 1, 1998 were paid at the
rates in effect at that time, which, for Acorn Fund were lower than the rates of
fee shown. WAM advanced all of Acorn USA's organizational expenses, which are
being amortized and reimbursed to WAM through September 2001.
Acorn has a separate administrative services agreement with WAM under
which, effective January 1, 1998, WAM receives a fee, calculated daily and paid
monthly, at the annual rate of 0.05 of 1% of each fund's average daily net
assets. The funds pay the cost of custodial, stock transfer, dividend
disbursing, audit and legal services, and membership in trade organizations.
They also pay other expenses such as the cost of maintaining the registration of
their shares under federal law, complying with state securities laws, 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.
Distributor
Shares of each fund are offered for sale by WAM Brokerage Services, L.L.C.
("WAM BD") without any sales commissions, 12b-1 fees or other charges to the
funds or their shareholders. WAM BD is wholly-owned by WAM and WAM Ltd. All
distribution expenses relating to the funds are paid by WAM, including the
payment or reimbursement of any expenses incurred by WAM BD. The Distribution
Agreement will continue in effect through December 31, 1999 and thereafter 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 agreed to pay all expenses in connection with registration of
its shares with the Securities and Exchange Commission and any auditing and
filing fees required in compliance with various state securities 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. WAM BD offers
the funds' shares only on a best efforts basis. WAM BD is located at 227 West
Monroe Street, Suite 3000, Chicago, Illinois 60606.
The Trust
The Trust is a Massachusetts business trust organized under an Agreement
and Declaration of Trust dated April 21, 1992 (the "Declaration of 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 funds are not currently divided
into classes. Acorn Fund, Acorn International and Acorn USA are the only series
of the Trust currently being offered.
27
<PAGE>
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.
Under Massachusetts law, the shareholders of the Trust may, under certain
circumstances believed to be remote, be held personally liable for the Trust's
obligations. However, the Declaration of Trust disclaims liability of
shareholders and the Trust's trustees and officers 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 assets of the Trust of all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
remote, since it is limited to circumstances in which the disclaimer is
inoperative and the Trust itself is unable to meet its obligations.
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.
Trustees and Officers
The trustees and officers of the Trust, their dates of birth and their
principal business activities during the past five years are:
Irving B. Harris, trustee and chairman
Two North LaSalle Street, Suite 400 Chicago, Illinois 60602; date of birth
8/4/1910; 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; date of birth
6/21/1934; trustee and president, Wanger Advisors Trust; principal, Wanger
Asset Management, L.P.
James H. Lorie, trustee and vice chairman
1101 East 58th Street, Chicago, Illinois 60637; date of birth 2/23/1922;
retired; Eli B. and Harriet B. Williams Professor of Business
Administration Emeritus, University of Chicago Graduate School of Business;
director, Thornburg Mortgage Asset Corp. (REIT) and Santa Fe Natural
Tobacco
Leo A. Guthart, trustee
165 Eileen Way, Syosset, New York 11791; date of birth 9/26/1937; 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
28
<PAGE>
Burglary Instruments (supplier of security control panels), First Alert
Professional (alarm dealers), Alarm Net (cellular radio service) and Cylink
Corporation (supplier of encryption equipment)(chairman); director,
AptarGroup, Inc. (producer of dispensing valves, pumps and closures);
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 400, Chicago, Illinois 60602; date of birth
4/13/1934; 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; date of birth 10/12/1935;
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; date of birth
8/27/1953; trustee and senior vice president, Wanger Advisors Trust;
principal and director of research, Wanger Asset Management, L.P.
Roger S. Meier, trustee
1211 S. W. Fifth Avenue, Portland, Oregon 97204; date of birth 1/18/1926;
president, AMCO, Inc. (investment and real estate management); director,
Fred Meyer, Inc. (retail chain); director, Red Lion Inns Limited
Partnership (hotel chain); director and advisory board member, Key Bank of
Oregon (banking); chairman of Investment Council and member of Committee of
Legacy Systems (hospital); executive director and chairman of investment
committee, Portland Art Museum.
Adolph Meyer, Jr., trustee
1511 West Webster Avenue, Chicago, Illinois 60614; date of birth
11/26/1923; president, Gulco Corp. (leather manufacturer).
Marcel P. Houtzager, vice president
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; date of birth
10/26/1960; vice president, Wanger Advisors Trust; principal, analyst and
portfolio manager, Wanger Asset Management, L.P.
Kenneth A. Kalina, assistant treasurer
227 West Monroe Street, Suite 3000, Chicago, Illinois 60603; date of birth
8/4/1959; assistant treasurer, Wanger Advisors Trust; Fund controller,
Wanger Asset Management, L.P., since September 1995; prior thereto,
treasurer of the Stein Roe Mutual Funds.
Merrillyn J. Kosier, senior vice president and secretary
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; date of birth
12/10/1959; senior 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; date of birth
7/22/1957; vice president and treasurer, Wanger Advisors Trust; chief
administrative officer, Wanger
29
<PAGE>
Asset Management, L.P. since April 1995; director, Wanger Investment
Company plc; prior thereto, first vice president, investment accounting,
Kemper Financial Services, Inc.
30
<PAGE>
Robert A. Mohn, vice president
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; date of birth
9/13/1961; vice president, Wanger Advisors Trust; principal, analyst and
portfolio manager, Wanger Asset Management, L.P.
John H. Park, vice president
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; date of birth
5/30/1967; vice president, Wanger Advisors Trust; principal, analyst and
portfolio manager, Wanger Asset Management. L.P. (since 1993); analyst,
Ariel Capital Management, Inc., prior thereto.
Leah J. Zell, vice president
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; date of birth
5/23/1949; vice president, Wanger Advisors Trust; principal, analyst and
portfolio manager, Wanger Asset Management, L.P.
*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. As of December 1, 1997, the trustees and officers of Acorn
as a group owned beneficially less than 1% of the outstanding shares of the
funds.
At March 31, 1998, The State of Illinois Deferred Compensation Plan held
19,141,517 shares, and Charles Schwab & Co., Inc. ("Schwab") held 10,704,590
shares of Acorn Fund as owners of record, but not beneficially (9.05% and 5.06%
of the outstanding shares, respectively). Schwab held 11,597,442 shares of Acorn
International (13.87% of the outstanding shares) as owner of record, but not
beneficially. Schwab held 1,153,211 shares, and National Financial Services
Corporation and Firstcinco Reinvest held 1,032,419 and 1,103,447 shares, of
Acorn USA (7.84%, 7.02% and 7.54% of the outstanding shares, respectively) as
owners of record, but not beneficially.
During 1997 the funds paid fees aggregating $302,000 to board members who
were not affiliated with WAM. The following table sets forth the total
compensation paid by the Trust during the fiscal year ended December 31, 1997 to
each of the trustees of the Trust:
Aggregate Aggregate Aggregate Total
Compensation Compensation Compensation Compensation
Name of Trustee from Acorn from Acorn from Acorn from
Fund International USA Fund Complex(3)
- --------------------------------------------------------------------------------
Irving B. Harris $53,900 $33,340 $1,760 $89,000
Leo A. Guthart 21,665 13,605 730 36,000
Jerome Kahn, Jr. 24,085 14,625 790 39,500
David C. Kleinman 24,085 14,625 790 39,500
31
<PAGE>
James H. Lorie 18,775 11,100 625 30,500
Charles P. McQuaid 0 0 0 0
Roger S. Meier 21,665 13,105 730 35,500
Adolph Meyer, Jr. 19,600 11,740 660 32,000
Ralph Wanger 0 0 0 0
- --------------------------------------------------------------------------------
The officers and trustees affiliated with WAM serve without any
compensation from the Trust. Acorn has adopted a deferred compensation plan (the
"Plan") for its non-interested trustees. Under the Plan, the trustees who are
not "interested persons" of Acorn or WAM ("participating trustees") may defer
receipt of all or a portion of their compensation from the Trust in order to
defer payment of income taxes or for other reasons. The deferred compensation
payable to a participating trustee is credited to a book reserve account as of
the business day such compensation would have been paid to such trustee. The
deferred compensation accrues income from the date of credit in an amount equal
to the amount that would have been earned had such deferred compensation (and
all income earned thereon) been invested and reinvested in shares of one or more
of the funds. If a participating trustee retires, such trustee may elect to
receive payments under the plan in a lump sum or in equal annual installments
over a period of five years. If a participating trustee dies, any amount payable
under the Plan will be paid to that trustee's beneficiaries. Each fund's
obligation to make payments under the Plan is a general obligation of that fund.
No fund is liable for any other fund's obligations to make payments under the
Plan.
Purchasing and Redeeming Shares
Purchases and redemptions are discussed in the funds' prospectus under the
headings "How to Buy Shares" and "How to Sell Shares." All of that information
is incorporated herein by reference.
Acorn may from time to time authorize certain financial services companies,
broker-dealers or their designees ("authorized agents") to accept share purchase
and redemption orders on behalf of the funds. Some of those authorized agents
may charge transaction fees for their services. For purchase orders placed
through an authorized agent, a shareholder will pay the fund's NAV per share
(see "Net Asset Value," below) next computed after the receipt by the authorized
agent of such purchase order, plus any applicable transaction charge imposed by
the agent. For redemption orders placed through an authorized agent, a
shareholder will receive redemption proceeds which reflect the NAV per share
next computed after the receipt by the authorized agent of the redemption order,
less any redemption fees imposed by the agent.
In some instances, an authorized agent will not charge any transaction fees
directly to investors in a fund. However, for accounting and shareholder
servicing services provided by such agent with respect to fund share accounts
held on behalf of its customers, the agent may
32
<PAGE>
charge a fee, generally a percentage of the annual average value of those
accounts. WAM pays any such fees.
Net Asset Value
Share purchase and redemption orders will be priced at a fund's net asset
value next computed after such orders are received and accepted by: (i) Acorn's
transfer agent; (ii) a broker-dealer or other financial services company
authorized by Acorn to accept purchase and redemption orders on the fund's
behalf; or (iii) such authorized broker-dealer's designee. The funds' net asset
values are 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 January, the third Monday in February,
Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving,
and Christmas. If one of those holidays falls on a Saturday or Sunday, the NYSE
will be closed on the preceding Friday or the following Monday, respectively.
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 funds not reasonably practicable.
For purposes of computing the net asset value of a fund share, a security
traded on a securities exchange, or in an over-the-counter market in which
transaction prices are reported, is generally valued at the last sale price at
the time of valuation. A security for which there is no reported sale on the
valuation date is generally 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, or for which the market
quotation is determined not to represent a fair value, 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 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.
Trading in the foreign securities of the funds' portfolios may take place
in various foreign markets at certain times and on certain days (such as
Saturday) when the NYSE is not open for business and the funds do not calculate
their net asset values. Conversely, trading in the funds' foreign securities
may not occur at times and on days when the NYSE is open. Because of the
different trading hours in various foreign markets, the calculation of net asset
value does not take place contemporaneously with the determinations of the
prices of many of the funds' foreign securities. Those timing differences may
have a significant effect on a fund's net asset value.
33
<PAGE>
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 a 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 account value
falls below $1,000 because of share redemptions. 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.
WAM acts as a shareholder servicing agent for the Reich & Tang Money Funds
(the "Money Funds") in connection with an exchange plan between the Acorn funds
and the Money Funds (the "Switch Plan"). For its services it receives a fee at
the rate of 0.35% of the average annual net 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
Each fund intends to continue to qualify to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code (the "Code")
so as to avoid payment of federal income tax on its capital gains and net
investment income currently distributed to its shareholders.
At the time of your purchase, a fund's net asset value may reflect
undistributed income, capital gains, or net unrealized appreciation of
securities held by that fund. A subsequent distribution to you of such amounts,
although constituting a return of your investment, will be taxable either as a
dividend or capital gain distribution, whether received in cash or reinvested in
additional shares. For federal income tax purposes, any distribution that is
paid in January but was declared in the prior calendar year is deemed paid in
the prior calendar year.
You will be subject to income tax at ordinary rates on income dividends and
distributions of net short-term capital gains. Distributions of net mid-term
capital gains are taxable to you as mid-term capital gains (currently taxed at a
maximum rate of 28%); distributions of net long-term capital gains are taxable
to you as long-term capital gains (currently taxed at a maximum of 20%).
Classification as mid-term or long-term gains depends on how long the security
sold had been held by the fund. Long-term gains are those from securities held
more than 18 months; mid-term gains are from securities held more than one year
but not more than18 months.
You will be advised annually as to the source of distributions for tax
purposes. If you are not subject to tax on your income, you will not be
required to pay tax on these amounts. If you
34
<PAGE>
realize a loss on the sale of fund shares held for six months or less, your
short-term loss is recharacterized as long-term to the extent of any long-term
capital gain distributions you have received with respect to those shares.
Under certain circumstances, Acorn may be required to withhold 31% federal
income tax ("backup withholding") from dividend, capital gain and redemption
payments to you. Backup withholding may be required if: (a) you fail to
furnish your social security or other tax identification number; (b) you fail to
certify that your social security or tax identification number is correct and
that you are not subject to backup withholding due to the underreporting of
certain income; or (c) the IRS informs Acorn that your tax identification number
is incorrect. These certifications are contained in the application that you
complete when you open your fund account. Acorn must promptly pay the IRS all
amounts withheld. Therefore, it is usually not possible for Acorn to reimburse
you for amounts withheld. You may, however, claim the amount withheld as a
credit on your federal income tax return.
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 a fund will be increased; if the result is a
loss, the income dividend paid by a fund will be decreased.
Dividends paid by Acorn International are not eligible for the dividends-
received deduction for corporate shareholders, if as expected, none of that
fund's income consists of dividends paid by United States corporations. A
portion of the dividends paid by Acorn Fund and Acorn USA is expected to be
eligible for the dividends-received deduction. Capital gain distributions paid
from the funds are never eligible for this deduction.
Income received by the funds from sources within various foreign countries
will be subject to foreign income taxes withheld at the source. Under the Code,
if more than 50% of the value of a fund's total assets at the close of its
taxable year comprises securities issued by foreign corporations, that fund may
file an election with the IRS to "pass through" to its shareholders the amount
of foreign income taxes paid by that 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 International intends to meet the requirements of the Code to "pass
through" to its shareholders foreign income taxes paid, but there can be no
assurance that it will be able to do so. Each shareholder will be notified
within 60 days after the close of each taxable year of Acorn International, if
the foreign taxes paid by the fund will "pass through" for that year, and, if
so, the amount of each shareholder's pro rata share (by country) of (i) the
foreign taxes paid, and (ii) Acorn International's gross income from foreign
sources. Shareholders who are not liable for federal income taxes, including
retirement plans qualified under Section 401 of the
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Code, will not be affected by any such "pass through" of foreign tax credits.
Acorn Fund and Acorn USA do not expect to be able to "pass through" foreign tax
credits.
Taxation of Foreign Shareholders
The Code provides that dividends from net income, which are deemed to
include for this purpose each shareholder's pro rata share of foreign taxes paid
by Acorn International (see discussion of "pass through" of the foreign tax
credit to U.S. shareholders), will be subject to U.S. tax. For shareholders who
are not engaged in a business in the U.S., this tax would be imposed at the rate
of 30% upon the gross amount of the dividend in the absence of a tax treaty
providing for a reduced rate or exemption from U.S. taxation. Distributions of
net long-term capital gains are not subject to tax unless the foreign
shareholder is a nonresident alien individual who was physically present in the
U.S. during the tax year for more than 182 days.
Portfolio Transactions
Portfolio transactions of the funds are placed with those securities
brokers and dealers that WAM believes will provide the best value in transaction
and research services for each 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 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 each
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 that fund.
The reasonableness of brokerage commissions paid by the funds 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 each
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 funds, and is
responsible for making and initiating the execution of investment decisions by
the funds. However, the board of trustees recognizes that it is important for
WAM, in performing its responsibilities to the funds, to continue to receive and
evaluate the broad spectrum of economic and financial information that many
securities brokers have customarily furnished in connection with
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brokerage transactions, and that in compensating brokers for their services, it
is in the interest of the funds to take into account the value of the
information received for use in advising the funds. The extent, if any, to which
the obtaining of such information may reduce WAM's expenses in providing
management services to the funds 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 funds might
benefit from information obtained by WAM in performing services to others.
Transactions of the funds 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.
Brokerage commissions incurred by the funds during the last three fiscal
years, not including the gross underwriting spread on securities purchased in
underwritten public offerings, were as follows:
<TABLE>
<CAPTION>
Fund 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Acorn Fund $2,952,000 $3,440,000 $2,565,000
Acorn International 5,350,000 3,929,000 3,113,000
Acorn USA 216,000 88,900* --
</TABLE>
*From commencement of operations on September 4, 1996.
During 1997, the funds paid brokerage commissions in connection with
portfolio transactions involving purchases and sales to brokers who furnished
investment research services to the funds, as follows: Acorn Fund paid
approximately $1,549,000 in brokerage commissions on purchases and sales
aggregating approximately $479 million; Acorn International paid approximately
$4,755,000 in brokerage commissions on purchases and sales aggregating
approximately $1,204 million; and Acorn USA paid approximately $71,000 in
brokerage commissions aggregating approximately $28 million.
Acorn and WAM each have adopted a code of ethics that, among other things,
regulates the personal transactions in securities of certain officers,
directors, partners and employees of Acorn and WAM. Although investment
decisions for the funds are made independently from those for other investment
advisory clients of WAM, it may develop that the same investment decision is
made for one or more of the funds and one or more other advisory clients. If
any of the funds 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 ("State Street") is the custodian for the funds. It is responsible
for holding all securities and cash of the funds, receiving and paying for
securities purchased, delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering
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expenses of the funds, and performing other administrative duties, all as
directed by authorized persons of the funds. State Street 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 funds. The funds
have authorized State Street to deposit certain portfolio securities of the
funds in central depository systems as permitted under federal law. The funds
may invest in obligations of State Street and may purchase or sell securities
from or to State Street.
Independent Auditors
Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois
60606 audits and reports on the funds' annual financial statements, reviews
certain regulatory reports and the funds' tax returns, and performs other
professional accounting, auditing, tax, and advisory services when engaged to do
so by the funds.
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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 funds invest 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.
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.
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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 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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