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Acorn Twenty
Acorn Foreign Forty
Subscription Offer
Through November 20, 1998, shares of Acorn Twenty and Acorn Foreign Forty
(each, a "Fund," and together, the "Funds") are being offered by subscription.
Subscribing for Fund shares allows you to reserve shares that will be issued by
that Fund on November 23, 1998 at the initial offering price (net asset value)
of $10.00 per share. You can subscribe by sending in your completed and signed
purchase application, along with your check. Your check will be held, uncashed,
until November 23, 1998, the date the Funds will begin operations and your
account will be opened. There can be no assurance that either Fund's net asset
value after the close of the Subscription Period will be more than $10.00 per
share.
Supplement dated August 17, 1998 to the
Prospectus dated August 17, 1998 of Acorn Twenty
and Acorn Foreign Forty, each a series of Acorn Investment Trust
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THE FUNDS AT A GLANCE
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Goal and Strategy
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ACORN TWENTY invests for long-term capital growth. The Fund invests
primarily in the stocks of U.S. companies with market capitalizations of $1
billion to $10 billion. Acorn Twenty is a non-diversified fund that ordinarily
focuses its investments in 20 to 25 U.S. companies.
Under normal market conditions, Acorn Twenty invests most of its assets in
common stocks, and securities exchangeable or convertible into common stocks of
U.S. companies, but may also invest in other types of securities.
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Acorn Foreign Forty invests for long-term capital growth. The Fund invests
primarily in the stocks of foreign companies with market capitalizations of $1
billion to $10 billion. The Fund is a non-diversified fund that ordinarily has
investments in 40 to 60 companies and invests primarily in developed markets.
Under normal market conditions, Acorn Foreign Forty invests most of its
total assets in equity securities, including common and preferred stocks,
warrants or other similar rights, and convertible securities, of foreign
companies in at least three developed countries, but may also invest in other
types of securities, including debt securities.
Management and Organization
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The Funds are series of Acorn Investment Trust ("Acorn" or the "Trust").
Wanger Asset Management, L.P. (WAM), the Funds' investment adviser, employs a
team approach to management of the Funds. The management team consists of the
Funds' portfolio managers, other WAM portfolio managers, and research analysts.
Each team member has one or more areas of expertise, and shares responsibility
for providing ideas, information, and knowledge in managing the Funds. Daily
decisions on portfolio selection rest with the lead portfolio managers or co-
managers who utilize the input and advice of the management team in making
purchase and sale determinations. Ralph Wanger is the chief investment officer
of WAM, and lead strategist for all of the Acorn funds.
Acorn Twenty. John H. Park and Mark H. Yost are the co-portfolio managers
of Acorn Twenty. Mr. Park is a vice president of the Trust and a principal of
WAM. He has been a member of WAM's investment management team since July 1993.
Mr. Yost has been a member of WAM's investment management team since October
1995.
Acorn Foreign Forty. Marcel P. Houtzager and Leah J. Zell are the co-
portfolio managers of Acorn Foreign Forty. Mr. Houtzager is a vice president of
the Trust and a principal of WAM. He has been a member of WAM's investment
management team since 1992.
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Ms. Zell is a vice president of the Trust and a principal of WAM. She has
been analyzing international securities for Acorn since 1984.
Who May Want to Invest
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The Funds are suitable for investors who are willing to hold their shares
through market fluctuations and the accompanying changes in share values. The
Funds are not appropriate investments for those seeking short-term price
appreciation or for "market-timers."
Risks
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Over time, stocks have shown greater growth potential than other types of
securities. In the short term, however, stock prices may fluctuate widely in
response to company, market, or economic news. Because they are non-
diversified, the Funds have the ability to take larger positions in a smaller
number of issuers. While WAM believes that a strategy of investing in a limited
number of securities has the potential for higher total returns than a strategy
of investing in a larger number of securities, this may increase the volatility
of the Funds' investment performance. Also, if the securities in which a Fund
invests perform poorly, the Fund could incur greater losses than it might have
had it invested in a larger number of securities.
The value of the Funds' investments and the returns they generate vary from
day to day. Performance depends on WAM's skills in identifying the trends that
are the basis for the Funds' stock selections, and in picking individual stocks,
as well as general market and economic conditions. When you sell your shares,
they may be worth more or less than you paid for them. The Funds are not, alone
or together, a balanced investment plan and there can be no assurance that the
Funds will achieve their investment objectives.
Buying and Selling Shares
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The minimum initial investment in a Fund is $1,000 (lower for some IRAs).
You may buy shares directly from the Funds without payment of any sales charges.
There are no "12b-1" fees or redemption fees. To invest you must be a U.S.
resident with a social security or tax identification number.
See "Your Account" for how to buy and sell shares.
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EXPENSES AND PERFORMANCE
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Expenses
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Transaction Expenses. Shareholder transaction expenses are charges you pay
--------------------
when you buy or sell shares of the Funds:
Maximum sales charge on purchases and reinvested None
dividends
Deferred sales charge on redemptions None
Redemption fee None
Exchange fee None
Wire transaction fee None
Annual fund operating expenses. Each Fund pays its own operating expenses,
including the management fee to WAM. Expenses are factored into each Fund's
share price daily, and are not charged directly to shareholder accounts.
The Funds expect to incur the following expenses, expressed as a percentage
of the Fund's average net assets:
<TABLE>
<CAPTION>
Acorn Twenty Acorn Foreign Forty
------------- --------------------
<S> <C> <C>
Management Fee....................................... 0.90% 0.95%
12b-1 fee............................................ None None
Other expenses
Administration fee.............................. 0.05 0.05
Other operating expenses (after reimbursement).. 0.40 0.45
---- ----
Total operating expenses (after reimbursement)....... 1.35% 1.45%
</TABLE>
The purpose of the expense table is to help you understand the costs and
expenses of investing in the Funds. WAM has agreed to reimburse Acorn Twenty
for any ordinary operating expenses exceeding 1.35% of its average net assets,
and Acorn Foreign Forty for any ordinary operating expenses exceeding 1.45% of
its average net assets, over each fiscal year. Absent reimbursement, "Other
operating expenses" would be estimated to be 3.65% for Acorn Twenty, and 3.98%
for Acorn Foreign Forty. "Total operating expenses" absent reimbursement would
be estimated to be 4.60% for Acorn Twenty and 4.98% for Acorn Foreign Forty.
The estimate of "Other operating expenses" is based on the estimated expenses
the Funds expect to incur during their initial partial fiscal year ending
December 31, 1998.
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>Example: Let's say, hypothetically, that a Fund's annual return is 5% and
that its operating expenses are exactly as shown above. For every $1,000 you
invested, here's how much you would have paid in total expenses if you closed
your Fund account after the number of years indicated:
Acorn Twenty Acorn Foreign Forty
------------ -------------------
After 1 year $ 14 $ 15
After 3 years $ 43 $ 46
The purpose of the example is to illustrate the effect of expenses, but is
not meant to suggest actual or expected costs or returns, all of which may vary.
Because the Funds are new, the above amounts are estimates.
Performance
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Mutual fund performance is commonly measured as total return. Total return
is the change in value of an investment in a fund over a given period, assuming
reinvestment of all dividends and capital gains. Total return reflects actual
performance over a stated period of time. Average annual total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same total return if performance had been constant over the entire period.
Average annual total returns smooth out variations in performance; they are not
the same as actual year-by-year results.
Total returns are based on past results and are not a prediction of future
performance. They do not include the effect of income taxes.
The Funds sometimes show their performance compared to stock indexes
(described in the SAI), or give their ratings or rankings determined by
unrelated organizations.
YOUR ACCOUNT
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Doing Business with Acorn
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Acorn provides investors with service Monday through Friday, except
holidays, from 8:00 a.m. to 4:30 p.m. Central time.
To reach Acorn, call:
>For fund information, prices, or literature--1-800-9-ACORN-9
(1-800-922-6769) (from outside the U.S. 1-312-634-9240)
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. To add to your existing account, redeem shares, or exchange shares by
telephone--call our transfer agent at 1-800-962-1585 (outside the U.S. 1-
617-328-5000 ext. 6457). Your transaction request must be received by 3:00
p.m. Central time (Closing Time) to receive that day's price. Transaction
requests received after Closing Time will receive the price next calculated
after receipt of the request. See "Shareholder and Account Policies--Share
Price."
. For help in setting up your account or for IRA assistance--call our
transfer agent at 1-800-962-1585 (outside the U.S. 1-617-328-5000 ext.
6457)
. For 24-hour account balances, 7 days a week--1-800-962-1585.
Choices for Your Account Registration
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Acorn will register your account in any of the ways described below.
Individual or Joint Ownership
For your general investment needs
Individual accounts are owned by one person. Joint accounts can have two or
more owners.
Accounts for Minors
To invest for a minor's education or other future needs
.Gift or Transfer to Minor (UGMA/UTMA) custodial accounts provide a way to
give money to a minor. The Account Application must include the
minor's social security number.
.Education IRAs may be established on behalf of a beneficiary under age 18
to save for his or her education. Distributions from an Education IRA
are tax-free as long as the proceeds are used to pay for "qualified
higher education expenses." Single taxpayers with income up to
$95,000 per year, and married couples with income up to $150,000 per
year, are allowed to contribute up to $500 per year per beneficiary.
The $500 annual maximum contribution is subject to reduction if the
contributor's income exceeds those amounts. For more information
about the tax advantages and consequences of investing in any of these
plans, please consult your tax adviser.
Transfer on Death (TOD)
To designate a beneficiary for your non-retirement account
TOD registration enables you to designate an individual or entity to
receive the proceeds of your fund account upon your death. TOD registration
differs from a joint account--with TOD registration, the account owner
retains full control over the disposition of shares held in the account
during his or her lifetime, and may change or remove the beneficiary at any
time without the consent of the beneficiary. TOD registration may not be
available to residents of certain states. Call 1-800-962-1585 for more
information.
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Trust or Established Employee Benefit or Profit-Sharing Plan
------------------------------------------------------------
For money being invested by a trust, employee benefit plan, or profit-
sharing plan
The trust or plan must be established before an account can be opened.
Corporation or Other Entity
---------------------------
For investment needs of corporations, associations, partnerships,
institutions, or other groups
You will need to send a certified corporate resolution with your Account
Application.
Retirement Plans
----------------
To shelter your retirement savings from taxes
Retirement plans allow individuals to shelter investment income and capital
gains from current taxes. Contributions to these accounts may be tax-
deductible. IRAs require a special application (call 1-800-962-1585).
>Traditional IRAs allow anyone of legal age and under 70 1/2 with earned
income to save up to $2,000 per tax year. If your spouse has less than
$2,000 in earned income, he or she may still contribute up to $2,000
to an IRA, as long as you and your spouse's combined earned income is
at least $4,000.
> Rollover IRAs retain special tax advantages for certain distributions
from employer-sponsored retirement plans.
> Roth IRAs allow single taxpayers with earned income up to $95,000 per
year, and married couples with earned income up to $150,000 per year,
to contribute up to $2,000, or $4,000, respectively, per year.
Contributions to Roth IRAs are not tax-deductible, but withdrawals are
not taxable if the Roth IRA has been held at least five years, and you
are at least 59 1/2, disabled, or use the proceeds (up to $10,000) to
purchase a first home.
> Simplified Employee Pension Plans (SEP-IRAs) allow small business owners
or those with self-employment income to make tax-deductible
contributions of up to 15% of the first $160,000 of compensation per
year for themselves and any eligible employees.
> SIMPLE-IRAs must be established by an employer (including a self-employed
person), and enable all employees of the employer to elect to have up
to $6,000 per year deducted from their paychecks on a before-tax basis
and deposited directly into an account maintained for the individual
employee. The employer is also generally required to make a
contribution for each employee who elects to contribute. SIMPLE-IRAs
require a special application (call 1-800-962-1585).
> Other retirement plans--The Fund may be used as an investment in other
kinds of retirement plans, including Keogh or corporate profit-sharing
and money purchase
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plans, 403(b) plans, and 401(k) plans. All of these accounts need to
be established by the trustee of the plan. Acorn does not offer
prototypes of these plans.
For more information about the tax advantages and consequences of
investing in any of these plans, please consult your tax adviser.
How to Buy Shares
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You can open a new account by:
> mailing in an Account Application with your check or money order payable
to "Acorn Twenty" or "Acorn Foreign Forty" for $1,000 or more (the Acorn
funds do not accept third party checks, except for IRA rollover checks that
are properly endorsed);
> using the exchange plan to move $1,000 or more from an account with Acorn
Fund, Acorn International, Acorn USA (each of which is a series of Acorn
Investment Trust) or one of the Reich & Tang Funds into a new identically
registered account in Acorn Twenty or Acorn Foreign Forty. See
"Shareholder and Account Policies" for more exchange plan information; or
> wire by calling 1-800-962-1585 to set up your account and to arrange a
wire transaction. Note: You may not need to submit a new Account
Application if you are a current Acorn shareholder. When you call, a
representative will assist you. Not available for IRA accounts.
After your account is open, you may add to it by:
> wiring money from your bank;
> moving money via ACH transfer from your bank account by telephone if you
participate in the Telephone Purchase Plan (select this option on the
Account Application or request a Doing Business with Acorn form to
establish);
> using the Telephone Exchange Plan to move your investment from another
Acorn fund to Acorn Twenty or Acorn Foreign Forty, or from one of the Reich
& Tang Funds;
> using the Automatic Investment Plan to move money from your financial
institution via ACH transfer to your Acorn Twenty or Acorn Foreign Forty
account on a monthly or quarterly basis; or
> mailing your check or money order payable to "Acorn Twenty" or "Acorn
Foreign Forty" for $100 or more with the stub from one of your account
statements, with a slip from the investment booklet provided by Acorn or
with a letter of instruction. The Acorn funds do not accept third party
checks, except for IRA rollover checks that are properly endorsed.
7
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The Acorn funds use the Automated Clearing House (ACH) to transfer money to
and from your fund accounts and participating financial institutions.
Participants in the ACH network include banks, savings banks, brokerage houses,
money market funds, and credit unions which electronically process transactions
primarily through the Federal Reserve System.
Your purchase money and your Account Application must both be received by
Closing Time (usually 3:00 p.m. Central time) for you to receive that day's
price. An order is considered received when the Account Application (for a new
account) or information identifying the account and the money are received and
accepted by Acorn's transfer agent, or by certain authorized agents, some of
which may charge a fee for their services. See "Shareholder and Account
Policies--Share Price" for information about share price and transactions with
certain financial services companies and broker-dealers. If the proceeds of your
wire order are received, but your Account Application has not been received, you
will receive the price for the day on which your Account Application is
received. Your Account Application must be received no later than 12:00 noon
Central time the day after your wire is received, or your wire will be returned
to you.
If you are investing through an Acorn IRA (any kind) for the first time you
will need a special application. Call 1-800-962-1585. For both initial and
subsequent IRA investments, please indicate the year for which the investment is
being made.
Minimum Investments
To open an account $1,000
To open a Traditional or Roth IRA $1,000
To open an Education IRA $ 500
To add to an account $ 100
The Automatic Investment Plan allows you to request a transfer of money
(minimum $100; maximum $50,000) from your pre-designated bank account to your
fund account on a monthly or quarterly basis. Quarterly investments will be
made in January, April, July, and October. The money will be transferred on or
about the 15th of the month unless you designate a different day. If the day
you selected falls on a Saturday, Sunday, holiday, or any other day on which the
NYSE is closed for trading, the transaction will be processed on the next
business day. To participate in the Automatic Investment Plan, complete the
information on the Account Application or request a Doing Business with Acorn
form.
If you sign up for the Automatic Investment Plan and later wish to change
the amount or frequency of your automatic investments, or stop future
investments, you may do so by calling us at 1-800-962-1585 at least one week
prior to your next scheduled investment date.
More details about how to buy shares are in "A Quick Reference Guide" at
the back of this prospectus.
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How to Sell Shares
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You can arrange to take money out of your fund account at any time by
selling (redeeming) some or all of your shares. Your shares will be sold at the
NAV (share price) next calculated after your order is received and accepted.
(See "Shareholder and Account Policies--Share Price" for more information about
share price and transactions with certain financial services companies and
broker-dealers). To sell shares in a regular (non-IRA) account, you may use any
of the methods described here. To sell shares in an Acorn IRA, your request
must be made in writing, except for exchanges between the Acorn funds or to the
Reich & Tang Short Term Income Fund Money Market Portfolio, which can be
requested by calling 1-800-962-1585. If you need an IRA Withdrawal Request
form, call us at 1-800-9-ACORN-9 (1-800-922-6769).
Selling Shares by Telephone
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The Telephone Redemption Plan lets you redeem $100 to $50,000 per day by
phone. You must make your telephone redemptions by Closing Time to receive that
day's NAV. Transaction requests received after Closing Time will receive the
NAV next calculated after receipt of the request. You automatically have the
Telephone Redemption Plan unless you decline it on your Account Application. If
you have changed the address on your account by telephone within 60 days of the
telephone redemption request, this service is not available. Instead, you must
send a letter of instruction signed by all account owners with the signatures
guaranteed. See "Signature Guarantee."
The Systematic Withdrawal Plan lets you establish automatic monthly or
quarterly redemptions from your account in specified dollar amounts if you have
a $25,000 minimum Acorn account balance. If you wish to establish this feature,
call 1-800-9-ACORN-9 (1-800-922-6769) for a Doing Business with Acorn form.
More details about how to sell shares are in "A Quick Reference Guide" at
the back of this prospectus.
Selling Shares in Writing
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Write a letter of instruction including:
> your name,
> the fund's name,
> your fund account number,
> the dollar amount or number of shares to be redeemed,
> the stock certificates representing your shares to be redeemed, if you
hold certificates for your shares, and
9
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> any other applicable requirements listed under "A Quick Reference Guide
--How to Sell Shares."
Mail your letter to:
State Street Bank and Trust Co.
Attn: Acorn Family of Funds
P.O. Box 8502
Boston, MA 02266-8502
If you are using overnight mail:
Boston Financial Data Services
Attn: Acorn Family of Funds
66 Brooks Drive
Braintree, MA 02184
1-617-328-5000 ext. 6457
Do not sign your stock certificates. Send them by registered or certified
mail so that you may receive a confirmation of delivery.
Signature Guarantee
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Certain requests must include a signature guarantee, designed to protect
you and Acorn from fraudulent activities. Your request must be made in writing
and include a signature guarantee if any of the following situations applies:
> you wish to redeem more than $50,000 worth of shares;
> your name has changed by marriage or court order (complete a Changing
Your Account Registration form or send a letter indicating your account
number(s) and old and new names, signing the letter in both the old and new
names and having both signatures guaranteed);
> you wish to establish TOD registration on an existing account or change a
TOD beneficiary (see "Your Account--Choices for Your Account
Registration");
> your address has changed within the last 60 days and you would like to
redeem shares;
> the check is being mailed to an address different from the one on your
account (address of record);
> the check is being made payable to someone other than the account owner;
or
> you are instructing us to wire the proceeds to a bank or brokerage
account and have not signed up for the Telephone Redemption Plan.
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You should be able to obtain a signature guarantee from a bank, broker-
dealer, credit union (if authorized under state law), securities exchange or
association, clearing agency, or savings association. A notary public cannot
provide a signature guarantee.
Redemption Price
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The price at which your shares will be redeemed is determined by the time
of day Acorn's transfer agent, or another authorized agent, receives your
redemption request.
Closing Time is the close of New York Stock Exchange (NYSE) regular session
trading, which is usually 3:00 p.m. Central time but is sometimes earlier.
To get today's price--
. Use the Telephone Redemption Plan to call your redemption request in
before Closing Time (note that the Closing Time to exchange out of the
Reich & Tang Funds is 11:00 a.m. Central time).
. Have your written redemption request, with a signature guarantee, if
required, and any supporting documents, delivered to Acorn's transfer
agent, or another authorized agent, before Closing Time.
SHAREHOLDER AND ACCOUNT POLICIES
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Statements and Reports
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Statements and reports that Acorn sends to you include:
. Confirmation statements (after every transaction in your account or
change in your account registration), excluding automatic investment plan
purchases, which are confirmed on a quarterly consolidated account
statement. Automatic Investment Plan accounts using the 15th of each month
(or the 15th of the first month of each quarter) as the investment date may
also have purchases confirmed monthly instead of just quarterly. Call
1-800-962-1585 to request this service.
. Quarterly and year-end consolidated account statements
. Shareholder reports
If you would like us to send duplicate statements to someone, simply call
us at 1-800-962-1585, and we can take your request over the telephone. Average
cost statements for shares redeemed are available upon request for most
accounts.
If you need copies of your historical account information, please call
1-800-962-1585. There is a small charge for historical account information for
prior years.
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Share Price
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The funds are open for business each day the NYSE is open. The offering
price (price to buy one share) and redemption price (price to sell one share)
are the fund's net asset value (NAV) calculated at the next Closing Time after
receipt of your purchase or redemption order by Acorn or by a broker-dealer or
financial services company authorized by Acorn to accept purchase and redemption
orders on its behalf. Closing Time is the time of the close of regular session
trading on the NYSE, which is usually 3:00 p.m. Central time but is sometimes
earlier.
A Fund's NAV is the value of a single share. The NAV is computed by adding
up the value of the fund's investments, cash, and other assets, subtracting its
liabilities, and then dividing the result by the number of shares outstanding.
Each Fund's portfolio securities and assets are valued primarily on the
basis of market quotations from the primary market in which they are traded or,
if quotations are not readily available, by a method that the board of trustees
believes accurately reflects a fair value. Values of foreign securities are
translated from the local currency into U.S. dollars using current exchange
rates. Because of the different trading hours in various foreign markets, the
calculation of NAV does not take place at the same time as the determination of
the prices of many foreign securities held by the Funds. Those timing
differences may have a significant effect on a Fund's NAV.
Your purchase or redemption of Fund shares will be priced at the NAV next
calculated after your investment (including the Account Application, if for a
new account, and the money) or redemption request is received by Acorn's
transfer agent, or by certain other agents and dealers authorized to accept
purchase and redemption requests on Acorn's behalf. An order received before
Closing Time will get that day's price. Telephone orders received after Closing
Time will be processed at the NAV next calculated after receipt of the order.
Purchases
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. All of your purchases must be made in U.S. dollars and checks must be
drawn on U.S. banks. Acorn does not accept third party checks, except for
IRA rollover checks that are properly endorsed.
. Acorn does not accept cash, credit cards, or credit card checks.
. If payment for your check or telephone purchase order does not clear,
your purchase will be canceled and you will be liable for any losses or
fees the fund or its transfer agent incurs.
. Your Automatic Investment Plan and Telephone Purchase Plan may be
immediately terminated if any item is unpaid by your financial institution.
. When you make a purchase by telephone, the money is ordinarily drawn from
your bank account the day after you call. Fund shares are purchased at the
NAV next calculated after you call. See "Doing Business with Acorn."
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Acorn reserves the right to reject any specific purchase order, including
certain purchases through the exchange plan. See "Exchange Plan Restrictions." A
purchase may be refused if, in WAM's opinion, it would disrupt management of the
Funds or would not be in the best interests of a Fund's existing shareholders.
Transactions with Dealers
- --------------------------------------------------------------------------------
You may purchase or redeem shares of a Fund through investment dealers,
banks, or other financial institutions. Certain financial institutions that have
entered into sales agreements with Acorn may enter confirmed purchase orders or
redemption requests on behalf of customers on an expedited basis, including
orders by phone, with payment to follow no later than the time when the Funds
are priced on the following business day. If payment is not received by that
time, the financial institution could be held liable for resulting fees or
losses. These institutions may charge for their services or place limitations on
the extent to which you may use the services offered by Acorn. Any such charges
could constitute a substantial portion of a smaller account and may not be in
your best interest. There are no charges or limitations imposed by Acorn other
than those described in this prospectus if shares are purchased (or redeemed)
directly from Acorn.
Acorn may from time to time authorize certain financial services companies,
broker-dealers or their designees ("authorized agents") to accept purchase,
redemption, and exchange requests from their clients on whose behalf the
authorized agent holds shares of the Funds. For purchase orders placed through
an authorized agent, a shareholder will pay a Fund's NAV 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 next computed after the receipt by the authorized agent of the
redemption order, less any redemption fees imposed by the agent. Some financial
institutions that act as Acorn's agent or that otherwise maintain nominee
accounts with the Funds for their clients for whom they hold fund shares might
not charge any transaction fees directly to investors in the Funds. However,
such companies may charge a fee (usually a percentage of the average net assets
held in such accounts) for accounting, shareholder servicing, and distribution
services the institution provides with respect to the underlying fund shares.
WAM pays any such fees.
Redemptions
- --------------------------------------------------------------------------------
. Normally, redemption proceeds will be mailed within seven days after your
redemption request is received by Acorn's transfer agent or another
authorized agent.
. Redemption checks are made payable to the shareholders of record; if you
wish for the check to be made payable to someone other than the account
owners, you must submit your request in writing, and the signatures of all
shareholders of record must be guaranteed. See "Your Account Signature
Guarantee."
13
<PAGE>
. Each Fund may hold payment on redemptions until it is reasonably
satisfied that it has received payment for a recent purchase made by check,
by the Automatic Investment Plan, or by the Telephone Purchase Plan, which
can take up to 15 days.
. If you elected to participate in the Telephone Redemption Plan, Acorn can
send payment for your redemption to your bank account by wire or ACH
transfer. Your bank may impose a fee for the incoming wire. Payment by wire
is usually credited to your bank account on the next business day after
your call.
. Redemptions may be suspended or payment dates postponed on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE
is restricted, or as permitted by the SEC.
. Certain accounts (such as trust accounts, corporate accounts, and
custodial accounts) may require documentation in addition to the redemption
request. Call 1-800-962-1585 for more information.
If the value of your account falls below $1,000 because of redemptions,
Acorn reserves the right to close your account and send the proceeds to you.
Your shares will be redeemed at the NAV calculated on the day your account is
closed.
If checks representing (1) redemption proceeds, (2) withdrawals under a
systematic withdrawal plan, or (3) dividend and capital gains distributions are
returned "undeliverable" or remain uncashed for six months, the checks will be
canceled and the proceeds will be reinvested in the Fund issuing the check at
the NAV on the date of cancellation. In addition, after such six-month period,
(1) your systematic withdrawal plan will automatically be canceled and future
withdrawals will occur only when requested, or (2) your cash election will
automatically be changed and future dividends and distributions will be
reinvested.
Address Changes
- --------------------------------------------------------------------------------
You may change your address over a recorded line by calling 1-800-962-1585.
Acorn will send a written confirmation of the change to both your old and new
addresses. No telephone redemptions may be made for 60 days after a change of
address by phone. During those 60 days, a signature guarantee will be required
for any written redemption request unless your change of address was made in
writing with a signature guarantee.
Telephone Transactions
- --------------------------------------------------------------------------------
You may initiate many transactions by telephone.
Transactions over a recorded line (1-800-962-1585):
. Change your address;
. Request duplicate statements to be sent to someone you designate;
14
<PAGE>
. Request an average cost statement for shares redeemed (available for most
accounts);
. Request a current account statement;
. Purchase shares through the Telephone Purchase Plan (plan must be pre-
established);
. Redeem $50,000 or less and request a wire or ACH transfer to your bank
account (bank account information must be pre-designated on your fund
account registration; not available for IRA accounts);
. Change the frequency or amount, or discontinue the Automatic Investment
Plan on your account(s);
. Add or discontinue the Telephone Exchange Plan to your account;
. Add or discontinue the Telephone Redemption Plan to your account;
. Add the Automatic Exchange Plan to your account (to exchange between one
Acorn fund and another each month or quarter);
. Change your distribution option, not including the cash payment via ACH
option (does not apply to IRA accounts);
. Redeem $50,000 or less, with a check mailed to the address of record
(does not apply to IRA accounts, and your address of record must not have
changed within the last 60 days);
. Exchange money from a non-IRA individual account to an existing IRA
account with an identical registration;
. Exchange money between identically registered accounts in Acorn Twenty,
Acorn Foreign Forty, Acorn Fund, Acorn International, Acorn USA, or certain
Reich & Tang Funds, or exchange money from one fund to establish an
identically registered account in another fund;
. Change the contribution year on an IRA account to the previous year up
until April 15 of the following year; and
. Copy the account options on your account to other identically registered
accounts.
Acorn will not be responsible for any loss resulting from unauthorized
transactions if it follows reasonable procedures designed to verify the identity
of the caller. Those procedures may include recording the call, requesting
additional information, and sending written confirmation of telephone
transactions.
You should verify the accuracy of telephone transactions immediately upon
receipt of your confirmation statement. If you do not want to be able to
purchase or redeem shares by telephone,
15
<PAGE>
decline these privileges on your Account Application or call Acorn for
instructions at 1-800-962-1585.
If you are unable to reach Acorn by phone (for example, during periods of
unusual market activity), consider placing your order by mail.
Telephone Exchange Plan and Money Market Funds
- --------------------------------------------------------------------------------
Acorn's Telephone Exchange Plan permits you to exchange your investment
between one Acorn fund and another, or between an Acorn fund and one of the
money market mutual funds participating in the plan (Reich & Tang Funds) upon
telephone instructions.
Money Funds
The following Reich & Tang Funds are available under the Telephone Exchange
Plan: Short Term Income Fund, Money Market Portfolio; Short Term Income Fund,
U.S. Government Portfolio; Daily Tax Free Income Fund; California Daily Tax Free
Income Fund; Connecticut Daily Tax Free Income Fund; Florida Daily Municipal
Income Fund; Michigan Daily Tax Free Income Fund; New Jersey Daily Municipal
Income Fund; New York Daily Tax Free Income Fund; North Carolina Daily Municipal
Income Fund; and Pennsylvania Daily Municipal Income Fund.
Each of the Reich & Tang Funds is a no-load fund managed by Reich & Tang
Asset Management, L.P. and offers check writing privileges (for accounts other
than IRAs) in addition to the Exchange Plan. Only Short Term Income Fund, Money
Market Portfolio is available for IRA accounts.
The price at which shares are exchanged is determined by the time of day
your request is received. To get today's price:
. For an IRA account, call us at 1-800-962-1585 before Closing Time.
. If you are exchanging from one Acorn fund into another, or into one of the
Reich & Tang Funds, call us at 1-800-962-1585 before Closing Time.
. If you are exchanging from one of the Reich & Tang Funds to one of the
Acorn funds, call Reich & Tang at 1-800-221-3079 before 11:00 a.m. Central
time.
If your call is received after the times noted above, your exchange will be
processed at the NAV next calculated after receipt of your call.
Because of the time needed to transfer money between the Acorn funds and
the Reich & Tang Funds, you may not exchange into and out of a Reich & Tang Fund
on the same or successive days; there must be at least one day between
exchanges.
16
<PAGE>
Exchange Plan Restrictions
- --------------------------------------------------------------------------------
. Generally, you will be limited to 4 round trip exchanges per year (a
round trip is an exchange out of one fund into another fund, and then back
again).
. Shares of the fund you are exchanging into must be available for sale in
your state.
. You may only exchange between accounts that are registered in the same
name, address, and taxpayer identification number.
. If you are opening a new account by exchange, your exchange must be at
least $1,000.
. The Exchange Plan is not available for shares of a fund for which you
have been issued certificates. (If you want to exchange shares between
funds, call 1-800-962-1585 to get instructions for returning your
certificates.)
. If your account is subject to backup withholding, you may not use the
Exchange Plan.
. Because excessive trading can hurt fund performance and shareholders,
Acorn reserves the right to temporarily or permanently terminate the
exchange privilege of any investor who makes excessive use of the Exchange
Plan.
. Acorn also reserves the right to refuse exchange purchases by any person
or group, if Acorn believes the purchase will be harmful to existing
shareholders.
. Before exchanging into a fund, you should read its prospectus. Call
1-800-922-6769 for a prospectus.
. Exchanges may have tax consequences for you.
Acorn reserves the right to terminate or modify the Exchange Plan at any
time, but will try to give you prior notice whenever they are reasonably able to
do so.
DIVIDENDS, CAPITAL GAINS AND TAXES
================================================================================
Each Fund distributes substantially all of its net income and net realized
capital gains to shareholders each year. Normally, dividends are paid in June
and December, and capital gains are distributed in December.
Distribution Options
- --------------------------------------------------------------------------------
When you open an account, specify on your Account Application how you would
like to receive your distributions. If you ever want to change your distribution
option, call us at 1-800-962-1585. The Fund offers three options:
17
<PAGE>
. Reinvestment Option. Both your dividends and capital gain distributions
will be automatically reinvested in additional shares of your Fund. If you do
not indicate a choice on your Account Application, you will be assigned this
option.
. Income-Only Option. Your capital gain distributions will be automatically
reinvested, but you may receive a check for each dividend, or have the
proceeds sent to your pre-designated financial institution via ACH transfer.
. Cash Option. You will be sent a check for each dividend and capital gain
distribution or you may have the proceeds sent to your pre-designated bank
account via ACH transfer.
For IRA accounts, all distributions are automatically reinvested because
payment of distributions in cash would be a taxable distribution from your IRA,
and might be subject to income tax penalties if you are under 59 1/2 years old.
After you are 59 1/2, you may request payment of distributions in cash.
When you reinvest, the reinvestment price is the Fund's NAV at Closing Time
on the reinvestment date. The mailing of distribution checks will usually begin
on the payment date, which is usually one week after the ex-dividend date. The
ex-dividend date is the day after the record date.
Taxes
- --------------------------------------------------------------------------------
As with any investment, you should consider how your investment in a Fund
will be taxed. If your account is a tax-deferred or tax-exempt account (for
example, an IRA or an employee benefit plan account), the following tax
discussion does not apply. If your account is not tax-deferred or tax-exempt,
however, you should be aware of the following tax rules:
Taxes on distributions. Distributions are subject to federal income tax,
and may also be subject to state or local taxes. Your distributions are taxable
when they are paid, whether you take them in cash or reinvest them in additional
shares. However, distributions declared in December and paid in January are
taxable as if they were paid on December 31.
For federal tax purposes, income and short-term capital gain distributions
are taxed as dividends; mid-term capital gain distributions are taxed as mid-
term capital gains (currently taxed at a maximum rate of 28%); and long-term
capital gain distributions are taxed as long-term capital gains (currently taxed
at a maximum rate of 20%). Classification as a mid-term or long-term gain
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 than 18 months. Every January,
Acorn will send you and the IRS a statement, called a Form 1099-DIV, showing the
amount of each taxable distribution you received in the previous year. A year-
end tax guide will accompany your Form 1099. You may not receive a Form 1099 if
the total distributions you received for the year are less than $10.00.
18
<PAGE>
Taxes on transactions. Your redemptions--including exchanges between funds
or into a money fund--are subject to capital gains tax. A capital gain or loss
is the difference between the cost of your shares and the price you receive when
you sell them.
Whenever you sell shares of a Fund, Acorn will send you a confirmation
statement showing how many shares you sold and at what price. You will also
receive a year-end statement every January. Acorn sends you an average cost
statement for shares you redeemed to assist you or your tax preparer. It is up
to you or your tax preparer to determine whether any given sale resulted in a
capital gain and, if so, the amount of tax to be paid. Be sure to keep your
regular account statements; the information they contain will be essential in
calculating the amount of your capital gains.
Foreign Income Taxes
- -------------------------------------------------------------------------------
Investment income received by a Fund from sources within foreign countries
may be subject to foreign income taxes at the source. If a Fund pays
nonrefundable taxes to foreign governments during the year, the taxes will
reduce that Fund's dividends but will still be included in your taxable income.
You may be able to claim an offsetting credit or deduction on your tax return
for your share of foreign taxes paid by Acorn Foreign Forty (but not Acorn
Twenty because not enough of Acorn Twenty's assets are invested in foreign
securities for Acorn Twenty to be able to pass through the foreign tax credit).
Acorn Foreign Forty will send you this information along with your annual Form
1099-DIV and year-end tax guide.
When you sign your account Account Application, you will be asked to
certify that your social security or taxpayer identification number is correct
and that you are not subject to 31% backup withholding for failing to report
income to the IRS. If you violate IRS regulations, the IRS can require Acorn to
withhold 31% of your taxable distributions and redemptions.
THE FUNDS IN DETAIL
================================================================================
Organization
- --------------------------------------------------------------------------------
Acorn Twenty and Acorn Foreign Forty are each series of Acorn Investment
Trust ("Acorn" or the "Trust"), an open-end, management investment company. The
Trust is a Massachusetts business trust organized on April 21, 1992. The other
series of the Trust are Acorn Fund, Acorn International and Acorn USA.
Each share of a Fund is entitled to participate pro rata in any dividends
and other distributions declared by the board of trustees with respect to the
Fund, and all shares of the Fund have equal rights in the event of liquidation
of the Fund.
The Trust is governed by a board of trustees, which is responsible for
protecting the interests of the shareholders of the Acorn funds. The trustees
are experienced executives and professionals who meet at regular intervals to
oversee the activities of the Trust. A majority of the trustees are independent
of WAM.
19
<PAGE>
Acorn may hold special meetings of shareholders to elect or remove
trustees, change fundamental policies, approve a management contract, or for
other purposes. Acorn will mail proxy materials in advance, including a voting
card and information about the proposals to be voted on. You are entitled to one
vote for each share of a Fund and any other Acorn fund that you own.
Shareholders not attending these meetings are encouraged to vote by proxy.
Management
- -------------------------------------------------------------------------------
The Funds are managed by Wanger Asset Management, L.P. (WAM), 227 West
Monroe Street, Suite 3000, Chicago, Illinois 60606; WAM chooses the Funds'
investments and handles their business affairs, under the direction of the board
of trustees. WAM is a limited partnership managed by its general partner, Wanger
Asset Management, Ltd. WAM manages more than $7 billion in assets.
WAM employs a team approach to management of the Funds. The management team
is made up of the lead portfolio manager or co-managers, other WAM portfolio
managers and research analysts. Team members share responsibility for providing
ideas, information and knowledge in managing the funds, with each team member
having one or more particular areas of expertise applicable to the management of
the funds. Daily decisions on portfolio selection rest with the lead portfolio
managers or co-portfolio managers who utilize the input and advice of the
management team in making purchase and sale determinations.
Ralph Wanger is the president of the Trust and chief investment officer of
WAM. He has been involved in managing all of the Acorn funds since each fund
began. Mr. Wanger has been a member of the board of Acorn (and its predecessor,
The Acorn Fund, Inc.) since 1970, and is a principal of WAM. Mr. Wanger is
primarily responsible for development of the investment strategies followed by
each of the Acorn funds.
John H. Park and Mark H. Yost are the co-portfolio managers of Acorn
Twenty. Mr. Park is a vice president of the Trust and a principal of WAM. He has
been a member of WAM's investment management team since July 1993. Prior to
joining WAM, he was an analyst for Ariel Capital Management. Mr. Park received
his Chartered Financial Analyst (CFA) designation in 1996 and earned both his
undergraduate and M.B.A. degrees from the University of Chicago. Mr. Yost has
been a member of WAM's investment management team since October 1995. Mr. Yost
has been co-portfolio manager of Wanger U.S. Smaller Companies Fund, an
investment company offering shares to investors outside the U.S., since its
inception on June 23, 1997. Mr. Yost is also the portfolio manager of the WAM
Yost Partnership, L.P., a smaller company focused limited partnership. Before
joining WAM, Mr. Yost was an investment analyst for First Chicago Corporation.
Mr. Yost received his CFA designation in 1996. Mr. Yost received his B.A. from
St. Olaf College and his M.B.A. from the University of Chicago.
Marcel P. Houtzager and Leah J. Zell are the co-portfolio managers of Acorn
Foreign Forty. Mr. Houtzager is a vice president of the Trust and a principal of
WAM. He has been a member of WAM's investment management team since 1992. Mr.
Houtzager is the lead portfolio manager of Wanger International Small Cap
Advisor, a mutual fund investing in small cap stocks
20
<PAGE>
outside the United States. Mr. Houtzager received his CFA designation in 1996
and is a Certified Public Accountant. He received his B.A. from Pomona College
in 1983 and his M.B.A. from the University of California at Berkeley in 1985.
Ms. Zell is a vice president of the Trust and a principal of WAM. She has
been analyzing international securities for Acorn since 1984. Ms. Zell is lead
portfolio manager of Acorn International, a mutual fund investing in smaller
foreign companies with assets at June 30, 1998 of more than $1.8 billion. Ms.
Zell received her CFA designation in 1987. She earned her undergraduate degree
from Radcliffe College and holds a Ph.D. from Harvard University.
Since June 23, 1997, Mr. Houtzager and Ms. Zell have co-managed the Wanger
European Smaller Companies Fund, an investment company offering shares to
investors outside the United States.
Transfer Agent and Custodian
- -------------------------------------------------------------------------------
State Street Bank and Trust Company ("State Street") is the Funds' transfer
agent and custodian.
The smooth operation of the Funds depends on the ability of State Street
and the other service providers to the Fund to provide those services without
interruption. Some computer systems used today are unable to process date-
related information because they are not programmed to distinguish between the
year 2000 and the year 1900. WAM, like many other businesses, is taking steps to
ensure that the computer systems on which the smooth operation of the Funds
depends will continue to function properly. WAM is working with the service
providers to the Funds, such as State Street and various broker-dealers through
which portfolio securities of the Funds are traded, to arrange for testing of
internal and external systems. Based on the information currently available, WAM
does not anticipate any material impact on the delivery of services currently
provided. There can be no assurance, however, that the steps taken by WAM in
preparation for the year 2000 will be sufficient to avoid any adverse impact on
the Funds.
Distributor
- -------------------------------------------------------------------------------
Shares of the Funds are offered for sale through WAM Brokerage Services,
L.L.C. (WAM BD) without any sales commission or charges to the Funds or their
shareholders. WAM BD is wholly-owned by WAM, the Funds' investment advisor, and
the investment advisor's general partner, Wanger Asset Management, Ltd. WAM BD's
address is 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. All
distribution expenses relating to the Funds are paid by WAM, including the
payment or reimbursement of any expenses incurred by WAM BD.
Expenses
- -------------------------------------------------------------------------------
Like all mutual funds, each Fund pays expenses related to its daily
operations. Expenses paid out of a Fund's assets are reflected in its share
price or dividends. Each Fund pays management and administration fees to WAM for
managing its investments and business affairs.
21
<PAGE>
See "Expenses and Performance." For services furnished by WAM, Acorn Twenty pays
an annual management fee of 0.90% of its average daily net assets. Acorn Foreign
Forty pays an annual management fee of 0.95% of its average daily net assets.
While the management fee is a significant component of each Fund's annual
operating costs, the Funds have other expenses as well. The Funds have a
separate administrative services agreement with WAM under which WAM receives a
fee, calculated daily and paid monthly, at the annual rate of 0.05 of 1% of its
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 its 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.
HOW THE FUNDS INVEST
================================================================================
Acorn Twenty and Acorn Foreign Forty seek long-term growth of capital. The
investment philosophy and strategy of each of the Funds is discussed in the
following paragraphs.
Acorn Twenty
- --------------------------------------------------------------------------------
Acorn Twenty invests primarily in the stocks of U.S. companies with market
capitalizations of $1 billion to $10 billion. Acorn Twenty is a non-diversified
fund that ordinarily focuses its investments in 20 to 25 U.S. companies.
Under normal market conditions, Acorn Twenty invests most of its assets in
common stocks, and securities exchangeable or convertible into common stocks, of
U.S. companies, but may also invest in other types of securities. The Fund may
invest up to 15% of its total assets in foreign securities. Generally, the Fund
will invest in the securities of a foreign-based company only if its operations
are primarily located in the United States.
Like all the Acorn funds, Acorn Twenty looks for high quality companies. As
a long-term investor, the Fund expects that its portfolio turnover rate will not
ordinarily exceed 50% annually.
Acorn Foreign Forty
- --------------------------------------------------------------------------------
Acorn Foreign Forty invests primarily in the stocks of foreign companies
with market capitalizations of $1 billion to $10 billion. The Fund is a non-
diversified fund that ordinarily has investments in 40 to 60 companies and
invests in developed markets.
Under normal market conditions, Acorn Foreign Forty invests at least 85% of
its total assets in equity securities of foreign companies, including common and
preferred stocks, warrants or other similar rights, and convertible securities,
but may also invest in any other type of security, including debt securities.
The Fund ordinarily invests in at least three countries. The Fund invests
primarily in developed countries but may invest up to 15% of its total assets in
securities of companies in emerging markets. The Fund's investments in emerging
markets are generally in
22
<PAGE>
companies that receive a significant portion of their revenues from, or have a
significant portion of their assets in, developed markets. The Fund does not
invest in "frontier" markets. The Funds use the definitions of "developed,"
"emerging," and "frontier" markets published from time to time by the
International Financial Corporation, a member of the World Bank Group. The Fund
may invest up to 15% of its total assets in the securities of U.S. companies.
Generally, the Fund invests in a U.S. company only if its operations are
primarily located outside the United States.
Like all the Acorn funds, Acorn Foreign Forty looks for high quality
companies. As a long-term investor, the Fund expects that its portfolio turnover
rate will not ordinarily exceed 50% annually.
Looking for high quality companies
- --------------------------------------------------------------------------------
Acorn Twenty and Acorn Foreign Forty look for quality businesses, with each
investment ideally resting on a solid tripod of growth potential, financial
strength, and fundamental value. The emphasis on fundamentals in relation to
price sets the Funds apart from pure "growth" or "value" funds. Not all of the
companies in which the Funds invest necessarily have all of these
characteristics.
The sources of growth are a growing marketplace for the company's product,
good design, efficient manufacturing, sound marketing, and good profit margins.
Financial strength means low debt, adequate working capital, and conservative
accounting principles. Strong capitalization gives management the stability and
flexibility to reach strategic objectives. Fundamental value means low relative
price. The existence of a good company does not necessarily make its stock a
good buy. The price of the stock determines value as measured relative to
dividends, earnings, cash flow, growth rate, book value, and economic
replacement value of assets. Sometimes, value is found in a "special situation."
A special situation arises when WAM believes the securities of a particular
company have been overlooked or undervalued by other investors in connection
with a significant change or development affecting the company's business, and
will, within a reasonable time, appreciate in value regardless of general
business conditions or movements of the market as a whole. Developments creating
special situations might include, among others, the following: liquidations,
reorganizations, recapitalizations or mergers; material litigation;
technological breakthroughs; and new management or management policies. Although
investing in securities of special situation companies offers the potential for
above-average returns, if the anticipated development does not occur or produce
the expected results, the value of those securities may decline.
WAM also believes that finding and understanding high quality companies is
important to reduce taxes and transaction costs. In managing the Funds, WAM
tries to reduce these costs by investing with a long-term time horizon (at least
2-5 years) and avoiding frequent turnover of the stocks held by the Funds.
Occasionally, however, securities purchased on a long-term basis may be sold
within 12 months after purchase in light of a change in the circumstances of a
particular company or industry, or in general market or economic conditions.
General Information
- --------------------------------------------------------------------------------
23
<PAGE>
Each Fund may invest without limit in corporate or government obligations
or hold cash or cash equivalents if WAM determines that a temporary defensive
position is advisable. If investments in foreign securities appear to be
relatively unattractive because of current or anticipated adverse political or
economic conditions, Acorn Foreign Forty may hold cash or invest any portion of
its assets in securities of the U.S. government and equity and debt securities
of U.S. companies, as a temporary defensive measure. The Funds use various
techniques to increase or decrease their exposure to the effects of possible
changes in security prices, currency exchange rates, or other factors that
affect the value of its portfolio. These techniques may include buying and
selling options, futures contracts, or options on futures contracts, or entering
into currency exchange contracts or swap agreements.
The investment objective of each Fund is not fundamental and may be changed
by the board of trustees without shareholder approval. If there were such a
change, you should consider whether a Fund would remain an appropriate
investment in light of your then current financial position and needs. The Funds
are not intended, alone or together, to present a balanced investment program.
SECURITIES, INVESTMENT PRACTICES, AND RISKS
================================================================================
The following pages contain more detailed information about types of
investments each Fund may make, and strategies WAM may employ in pursuit of each
Fund's investment objective, including information about the associated risks
and restrictions. All policies stated throughout this prospectus, other than
those identified as fundamental, can be changed without shareholder approval. A
complete statement of the Fund's investment restrictions is included in the SAI.
Policies and limitations are considered at the time of purchase; the sale of an
investment is not required because of a subsequent change in circumstances.
WAM may not buy all of these instruments or use all of these techniques to
the fullest extent permitted, unless it believes that doing so will help the
Fund achieve its goal.
Common stocks
- --------------------------------------------------------------------------------
The Funds invest mostly in common stocks, which represent an equity
interest (ownership) in a corporation. This ownership interest often gives the
Funds the right to vote on measures affecting the company's organization and
operations. The Funds also invest in other types of equity securities, including
preferred stocks and securities convertible into common stocks. Over time,
common stocks have historically provided superior long-term capital growth
potential. However, stock prices may decline over short or even extended
periods. Stock markets tend to move in cycles, with periods of rising stock
prices and periods of falling stock prices. As a result, the Funds should be
considered long-term investments, designed to provide the best results when held
for several years or more. The Funds may not be suitable investments if you have
a short-term investment horizon or are unwilling to accept fluctuations in share
price, including significant declines over a given period.
Diversification
- --------------------------------------------------------------------------------
24
<PAGE>
Diversification is a means of reducing risk by investing in a broad range
of stocks or other securities. Because they are non-diversified, the Funds have
the ability to take larger positions in a smaller number of issuers. The
appreciation or depreciation of a single stock may have a greater impact on the
NAV of a non-diversified fund, because it is likely to have a greater percentage
of its assets invested in that stock. As a result, each Fund's share price can
be expected to fluctuate more than that of broadly diversified funds investing
in similar securities. Because they are non-diversified, the Funds are not
subject to the limitations under the Investment Company Act of 1940 in the
percentage of their assets that they may invest in any one issuer. Both Funds
however, intend to comply with the diversification standards for regulated
investment companies under Subchapter M of the Internal Revenue Code (summarized
below under "Restrictions").
Restrictions:
------------
. A Fund may not 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;
. With respect to 50% of its total assets, a Fund may not purchase the
securities of any issuer (other than cash items and U.S. government securities
and securities of other investment companies) if such purchase would cause the
Fund's holdings of that issuer to exceed 5% of the Fund's total assets.
. A Fund may not invest more than 25% of its total assets in a single
issuer (other than U.S. government securities); and
. A Fund will not invest more than 25% of its total assets in the
securities of companies in a single industry (excluding U.S. government
securities).*
Foreign Securities
- --------------------------------------------------------------------------------
Acorn Foreign Forty invests primarily in foreign securities. International
investing allows you to take advantage of changes in foreign economies and
market conditions. From time to time, many foreign economies have grown faster
than the U.S. economy, and the returns on investments in these countries have
exceeded those of similar U.S. investments. During other periods, however, some
foreign markets have declined, and there can be no assurance that a country's
economy will remain stable or more favorable than the U.S. economy.
Investments in foreign securities provide opportunities different from
those available in the U.S., and risks which in some ways may be greater than in
U.S. investments, including: fluctuations in exchange rates of foreign
currencies; imposition of exchange control regulations or currency restrictions
that would prevent cash from being brought to the United States; less public
information with respect to issuers of securities; less governmental supervision
of stock exchanges,
- ------------------------
* These restrictions are "fundamental," which means that they cannot be changed
without shareholder approval.
25
<PAGE>
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, frequently greater price volatility, and
higher transaction costs in foreign markets than in the United States; possible
imposition of foreign taxes; possible investments in securities of developing as
well as developed countries; and sometimes less advantageous legal, operational,
and financial protections applicable to foreign sub-custodial arrangements.
Investing in countries outside the U.S. also involves political risk. A foreign
government might restrict investments by foreigners, expropriate assets, seize
or nationalize foreign bank deposits or other assets, establish exchange
controls, or enact other policies that could affect investment in these nations.
Economies in individual markets may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource self-
sufficiency, and balance of payments positions.
Acorn Foreign Forty invests primarily in developed markets, but, as
discussed above under "How the Funds Invest-- Acorn Foreign Forty," the Fund may
invest up to 15% of its total assets in emerging markets. The securities markets
of emerging countries are substantially smaller, less developed, less liquid,
and more volatile than the securities markets of the U.S. and other more
developed countries. Disclosure and regulatory standards in many respects are
less stringent than in the United States. There also may be a lower level of
monitoring and regulation in emerging markets of traders, insiders, and
investors. Enforcement of existing regulations has been extremely limited.
Acorn Twenty may invest no more than 15% of its total assets in foreign
securities and will generally invest in a foreign-based company only if that
company's operations are primarily located in the United States. Acorn Twenty's
foreign investments may include securities in developed and emerging markets.
The Funds may invest from time to time 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.
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 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. Each Fund may invest in ADRs
that are not sponsored by the issuer of the underlying security. To the extent a
Fund does so, it would probably bear its proportionate share of the expenses of
the depository and might have greater difficulty in receiving copies of the
issuer's shareholder communications than would be the case with a sponsored ADR.
26
<PAGE>
Each Fund may invest in securities purchased on a when-issued and delayed
delivery basis. Although the payment terms of such a security are established at
the time a Fund enters into the commitment, the security may be delivered and
paid for a month or more after the date of purchase, when its value may have
changed. A Fund will make such commitments only with the intention of actually
acquiring the securities, but may sell the securities before settlement date if
WAM considers it advisable for investment reasons.
Restrictions:
------------
. Under normal market conditions, Acorn Foreign Forty invests at least 85%
of its total assets in foreign securities. The Fund ordinarily has investments
in at least three developed countries. The Fund may invest up to 15% of its
total assets in securities of companies in emerging markets.
. Acorn Twenty may invest up to 15% of its total assets in foreign
securities. Acorn Twenty's foreign investments are generally in companies whose
operations are primarily in the U.S., and may include securities in developed
and emerging markets.
Managing Investment Exposure
- --------------------------------------------------------------------------------
The Funds use various techniques to increase or decrease their exposure to
the effects of possible changes in security prices, currency exchange rates or
other factors that affect the value of the Funds' portfolios. These techniques
include buying and selling options, futures contracts, or options on futures
contracts, entering into currency exchange contracts or swap agreements, or
selling securities short against the box.
These techniques are used by WAM to adjust the risk and return
characteristics of the Funds' portfolios. If WAM judges market conditions
incorrectly or employs a strategy that does not correlate well with the Funds'
investments, or if the counterparty to the transaction does not perform as
promised, the transaction could result in a loss. Use of these techniques may
increase the volatility of a Fund and may involve a small investment of cash
relative to the magnitude of the risk assumed. These techniques are used by the
Funds for hedging, risk management, or portfolio management purposes and are not
used for speculation.
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
foreign currency 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.
Currency exchange 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 actual or anticipated portfolio positions.
27
<PAGE>
Transaction hedging is the purchase or sale of a forward contract with respect
to a specific receivable or payable 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 an actual or anticipated 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 positions in securities denominated
in that currency. When the Funds own or anticipate owning securities in
countries whose currencies are linked, WAM may aggregate those positions as to
the currency hedged. Although forward contracts may be used to protect the Funds
from adverse currency movements, the use of such hedges may reduce or eliminate
the potentially positive effect of currency revaluations on the Fund's total
return.
Options and futures. Each Fund may enter into stock index or currency
futures contracts (or options thereon) to hedge a portion of its portfolio, to
provide an efficient means of regulating its exposure to the equity markets, or
as a hedge against changes in prevailing levels of currency exchange rates. Each
Fund may write covered call options and purchase put and call options on foreign
currencies, securities, and stock indices. Futures contracts and options can be
highly volatile. A Fund's attempt to use such investments for hedging purposes
may not be successful and could result in reduction of that Fund's total return.
Short sales against the box. Each Fund may make short sales of securities
if, at all times when a short position is open, the Fund owns an equal amount of
such securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of the same issue as, and equal
in amount to, the securities sold short. This technique is called selling short
"against the box." Selling short against the box may protect the Fund against
the risk of losses in the value of the portfolio securities sold short because
losses on the securities sold short should be wholly or partially offset by
gains in the short position (although this also means that the Fund would be
giving up the opportunity for gain).
Restrictions:
------------
. A Fund will not use futures contracts for speculation, and will limit
its use of futures contracts so that no more than 5% of its total assets would
be committed to initial margin deposits or premiums on such contracts.
. The aggregate market value of each Fund's currencies or portfolio
securities covering call or put options will not exceed 10% of that Fund's net
assets.
Debt Securities
- --------------------------------------------------------------------------------
Bonds and other debt instruments are methods for an issuer to borrow money
from investors. The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity. Debt securities have
varying degrees of quality and varying levels of sensitivity to changes in
interest rates.
"Investment grade" debt securities are those rated within the four highest
ratings categories of Standard & Poor's Corporation ("S&P") or Moody's Investors
Services, Inc. ("Moody's") or, if
28
<PAGE>
unrated, determined by WAM to be of comparable quality. Securities rated BBB or
Baa are considered to be medium-grade and to have speculative characteristics.
Investment in non-investment grade debt securities is speculative and involves a
high degree of risk.
Lower-rated debt securities (commonly called "junk bonds") are often
considered speculative and involve greater risk of default or price changes due
to changes in the issuer's creditworthiness. The market prices of these
securities may fluctuate more than higher-rated securities and may decline
significantly in periods of general economic difficulty.
Money market instruments are high-quality, short-term debt securities that
present minimal credit risk. These instruments may carry fixed or variable
interest rates.
Each Fund may invest without limit in corporate or government obligations,
or hold cash or cash equivalents if WAM determines that a temporary defensive
position is advisable. If investments in foreign securities appear to be
relatively unattractive because of current or anticipated adverse political or
economic conditions, Acorn Foreign Forty may hold cash or invest any portion of
its assets in securities of the U.S. government and equity and debt securities
of U.S. companies, as a temporary defensive measure. To meet liquidity needs
(which, under normal market conditions, are not expected to exceed 25% of total
assets) or for temporary defensive purposes, each Fund may hold cash in domestic
and foreign currencies and may invest in domestic and foreign money market
securities.
Restrictions:
------------
. There are no restrictions on the ratings of debt securities in which the
Funds may invest.
. Neither Fund intends to invest more than 20% of its total assets in debt
securities, nor more than 5% of its total assets in debt securities rated at or
lower than the lowest investment grade.
Illiquid and Restricted Securities
- --------------------------------------------------------------------------------
Some investments may be determined by WAM to be illiquid, which means that
they may be difficult to sell promptly at an acceptable price. Other
securities, such as securities acquired in private placements, may be sold only
pursuant to certain legal restrictions. Difficulty in selling securities may
result in delays or a loss, or may be costly to the Funds.
Restrictions:
------------
. Neither Fund may purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid or restricted securities.
Other Investment Companies
- --------------------------------------------------------------------------------
29
<PAGE>
The Funds may invest from time to time in shares of other mutual funds and
other types of investment companies. Investment in another investment company
may involve the payment of a premium above the value of the issuer's portfolio
securities, and is subject to market availability. In the case of a purchase of
shares of such a company in a public offering, the purchase price may include an
underwriting spread. As a shareholder in an investment company, a Fund would
bear its ratable share of that investment company's expenses, including its
advisory and administration fees. At the same time, the Fund would continue to
pay its own management fees and other expenses. Neither Fund intends to invest
in such circumstances unless, in the judgment of WAM, the potential benefits of
such investment justify the payment of any applicable premium or sales charge,
and the additional layer of expense.
Restrictions:
------------
. Each Fund generally may invest up to 10% of its assets in shares of
other investment companies and up to 5% of its assets in any one investment
company (in each case measured at the time of investment). No investment in
another investment company may represent more than 3% of the outstanding voting
stock of the acquired investment company at the time of investment.
Lending and Repurchase Agreements
- --------------------------------------------------------------------------------
A Fund generally may not make loans, but each Fund has the power to invest
in repurchase agreements and reverse repurchase agreements (generally as a cash
management technique). A repurchase agreement involves a sale of securities to
a Fund in which the seller agrees to repurchase the securities at a higher
price, which includes an amount representing interest on the purchase price,
within a specified time. In the event of a bankruptcy of the seller, the Fund
could experience both losses and delays in liquidating its collateral.
Restrictions:
------------
. A Fund may generally not make loans, but may (a) invest in debt
securities within the limits described in the prospectus and SAI, (b) invest in
repurchase agreements, or (c) lend up to 33% of its portfolio securities.*
- -------------------
* These restrictions are "fundamental," which means that they cannot be
changed without shareholder approval.
30
<PAGE>
A QUICK REFERENCE GUIDE
How to Buy Shares
- --------------------------------------------------------------------------------
Mail
To open an account:
. Complete and sign the Account Application. Make your check payable to
"Acorn Twenty" or "Acorn Foreign Forty."
Mail to the address on the Account Application, or for overnight
delivery:
Boston Financial Data Services
Attn: Acorn Family of Funds
66 Brooks Drive
Braintree, MA 02184
1-617-328-5000 ext. 6457
. Acorn does not accept third party checks, except properly endorsed IRA
rollover checks.
To add to an account:
. Make your check payable to "Acorn Twenty" or "Acorn Foreign Forty." Put
your fund account number on your check.
Use the return envelope that comes with your statements, or mail
to the address on your statement.
. Acorn does not accept third party checks, except properly endorsed IRA
rollover checks.
Telephone: 1-800-962-1585
To open an account:
. You generally may not open a new account by telephone; however, you may
open a new account by faxing your Account Application to us and wiring
your purchase money. Note: You may not need to submit a new Account
Application if you are a current Acorn shareholder. When you call, a
representative will assist you. See "Your Account--How to Buy Shares."
. Exchange between the Acorn funds, or from a Reich & Tang Fund account
with the same registration, including name, address, and taxpayer ID
number.
To add to an account:
31
<PAGE>
. Exchange between accounts with the same registration, including name,
address, and taxpayer ID number.
. Use the Telephone Purchase Plan to transfer $100 to $50,000 from your
bank account. Call first to verify that this service is in place on
your account. (This service is not available for IRAs.)
You must make your telephone purchases or exchanges from the Acorn funds by
Closing Time (usually 3:00 p.m. Central time) to receive that day's
price.
Wire
To open an account:
. Call 1-800-962-1585 to set up your account and to arrange a wire
transaction. Note: You may not need to submit a new Account
Application if you are a current Acorn shareholder. When you call, a
representative will assist you. (This service is not available for
IRA accounts.)
To add to an account:
. Wire to:
State Street Bank & Trust Co.
Attn: Mutual Funds
Boston, MA 02110
Routing #0110-0002-8
Deposit DDA 9902-990-2
Specify "Acorn Twenty" or "Acorn Foreign Forty," the account name and the
account number.
Minimum wire amount: $100.
Automatic Investment Plan
To open an account:
. You may not open a new account through the Automatic Investment Plan.
To add to an account:
. Sign up on the Account Application for monthly or quarterly
transfers of $100 to $50,000 from your bank account, or call 1-800-9-ACORN-
9 (1-800-922-6769) for a Doing Business with Acorn form to establish this
on your account. If you already have this service, you can easily change
the frequency or amount of your automatic investments over the telephone by
calling 1-800-962-1585.
32
<PAGE>
TDD service for the deaf and hearing-impaired: 1-800-306-4567
How to Sell Shares
- --------------------------------------------------------------------------------
Telephone 1-800-962-1585
All accounts types, except IRAs:
. To verify that the Telephone Redemption Plan is in place, call
1-800-962-1585. You automatically have this feature on your new account
unless you tell us that you do not want it. To receive redemption proceeds
via ACH transfer, complete the information on the Account Application or
request a Doing Business with Acorn form to establish this on your account.
. Minimum: $100; maximum: $50,000;
All account types:
. To exchange between identically registered accounts:
. You must make your telephone redemptions by Closing Time
(usually 3:00 p.m. Central time) to receive that day's price.
Mail
Individuals, Joint Owners, Sole Proprietorships, UGMA, UTMA
. The letter of instruction must be signed by all persons
required to sign for transactions (usually, all owners of the account),
exactly as their names appear on the account.
IRAs
. The account owner should complete an IRA Withdrawal Request
form. Call 1-800-9-ACORN-9 (1-800-962-1585) to request this form.
Trust
. The trustee(s) must sign the letter indicating capacity as
trustee(s). If the account registration does not include the name of the
trustee(s), provide a copy of the trust document certified within the last
60 days.
Business or Organization
. The person(s) authorized by the corporate resolution to act on
the account must sign, in that person's official capacity, and the
redemption request must be on corporate letterhead.
33
<PAGE>
. If redeeming more than $50,000, include a corporate resolution
certified within 60 days and a letter of instruction with the signature
guaranteed.
Executor, Administrator, Conservator, Guardian
. Call 1-800-962-1585 for instructions.
Wire
All account types, except IRAs
. You must sign up for payment of redemptions by wire before using this
feature. Call to verify that this service is in place--1-800-962-1585.
. Minimum wire: $1,000; maximum: $50,000.
. Minimum ACH transfer: $100; maximum: $50,000
. You must make your telephone redemptions by Closing Time (usually 3:00
p.m. Central time) to receive that day's price.
Automatic Exchange
All account types
. Call 1-800-962-1585 to set up monthly or quarterly automatic exchanges of
$100 to $50,000 between identically registered accounts. Your automatic
exchange will occur on or about the 15th day of each month unless you
designate a different day (if quarterly, in January, April, July and
October).
TDD service for the deaf and hearing-impaired: 1-800-306-4567
Note: Some redemptions require signature guarantees. Please see the
information under "Your Account--Signature Guarantee."
How to Contact Us
- --------------------------------------------------------------------------------
Mail
. for regular mail delivery, including purchases, written exchanges,
redemptions, and IRA contributions:
State Street Bank & Trust Co.
Attn: Acorn Family of Funds
P. O. Box 8502
Boston, MA 02266-8502
34
<PAGE>
. for overnight deliveries of purchases, written exchanges, redemptions, or
IRA contributions
Boston Financial Data Services
Attn: Acorn Family of Funds
66 Brooks Drive
Braintree, MA 02184
. the Funds' advisor
Wanger Asset Management, L.P.
227 W. Monroe St., Suite 3000
Chicago, IL 60606-5016
. the Funds' distributor
WAM Brokerage Services, L.L.C.
227 W. Monroe St., Suite 3000
Chicago, IL 60606-5016
Telephone
. for Fund information, literature, prices, and performance information
1-800-9-ACORN-9 (1-800-922-6769) (from outside the U.S. 1-312-634-9240)
. for account balances, telephone purchases, exchanges and redemptions, and
for IRA information 1-800-962-1585 (from outside the U.S.: 1-617-328-5000
ext. 6457)
. to exchange out of a money fund 1-800-221-3079
. TDD service for the deaf and hearing impaired 1-800-306-4567
Customer service is available on business days from 8:00 a.m. to 4:30 p.m.
Central time.
Telephone requests for purchases, redemptions or exchanges from the Acorn
funds must be made by Closing Time (usually 3:00 p.m. Central time) to
receive that day's price.
Internet
Web site: www.wanger.com
E-mail: [email protected]
Wire
. to wire money from your bank to add to an existing account
35
<PAGE>
State Street Bank & Trust Co.
Attn: Mutual Funds
Boston, MA 02110
Routing #0110-0002-8
Deposit DDA 9902-990-2
Specify "Acorn Twenty" or "Acorn Foreign Forty" and the name and the number
of your account.
36
<PAGE>
DOING BUSINESS WITH ACORN
================================================================================
From time to time you may find it necessary to make changes to your account
privileges or registration. The following easy-to-use shareholder forms are
available upon request by calling 1-800-9-ACORN-9 (1-800-922-6769):
To accomplish this: Please request this form:
For changes to account services . Doing Business with Acorn
For re-registering your current . Changing Your Account Registration
account
For re-registering your Acorn . Broker-Dealer Transfer Form
shares held by a broker to an
account with Acorn
For changes to your IRA . Change of Beneficiary
beneficiary designations
For transferring money from . IRA Transfer Form
an IRA account with another
institution to Acorn
For redeeming shares from your . Education IRA Withdrawal
Education IRA account Request Form
For redeeming shares from your . IRA Withdrawal Form
IRA account
For adding or deleting accounts . Consolidated Account Statement
to/from your Consolidated Maintenance Form
Account Statement
37
<PAGE>
ACORN INVESTMENT TRUST 227 West Monroe Street
STATEMENT OF ADDITIONAL INFORMATION Suite 3000
August 17, 1998 Chicago, Illinois 60606
1-800-9-ACORN-9
(1-800-922-6769)
ACORN TWENTY
ACORN FOREIGN FORTY
No-Load Funds
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
-----------------
Page
----
Information About the Funds.................................................. 1
Investment Objectives and Policies........................................... 2
Investment Techniques and Risks.............................................. 2
Performance Information...................................................... 21
Investment Adviser........................................................... 22
Distributor.................................................................. 23
The Trust.................................................................... 23
Trustees and Officers........................................................ 24
Purchasing and Redeeming Shares.............................................. 28
Additional Tax Information................................................... 30
Portfolio Transactions....................................................... 31
Custodian.................................................................... 32
Independent Auditors......................................................... 32
Appendix - Description of Bond Ratings....................................... 33
- --------------------------------------------------------------------------------
This Statement of Additional Information ("SAI") is not a prospectus but
provides information that should be read in conjunction with the prospectus of
Acorn Twenty and Acorn Foreign Forty (each, a "Fund," together, the "Funds")
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.
Information About the Funds
Acorn Twenty invests primarily in the stocks of U.S. companies with market
capitalizations of $1 billion to $10 billion. Acorn Twenty is a non-diversified
fund that ordinarily focuses its investments in 20 to 25 U.S. companies.
Acorn Foreign Forty invests for long-term capital growth. The Fund invests
primarily in the stocks of foreign companies with market capitalizations of $1
billion to $10 billion. The
<PAGE>
Fund is a non-diversified fund that ordinarily has investments in 40 to 60
companies and invests in developed markets.
The Funds are non-diversified under the federal securities laws. However,
the Funds comply with the diversification standards established by the tax laws.
See "Investment Techniques and Risks--Diversification" for more information.
The Funds are series of Acorn Investment Trust ("Acorn" or the "Trust").
The discussion below supplements the description in the prospectus of the Funds'
investment objectives, policies, and restrictions. For information about any of
the other Acorn funds, request a copy of that fund's prospectus and SAI, which
may be obtained free of charge by writing or telephoning Acorn at its address or
telephone number shown on the cover page of this SAI.
Investment Objectives and Policies
The Funds invest with the objective of long-term growth of capital. The
Funds are not, alone or together, a balanced investment program, and there can
be no assurance that either Fund will achieve its investment objective.
The Funds use the techniques and invest in the types of securities
described below and in the prospectus.
Investment Techniques and Risks
Common Stocks
The Funds invest mostly in common stocks, which represent an equity
interest (ownership) in a corporation. This ownership interest often gives the
Funds the right to vote on measures affecting the company's organization and
operations. The Funds also invest in other types of equity securities, including
preferred stocks and securities convertible into common stocks. Over time,
common stocks have historically provided superior long-term capital growth
potential. However, stock prices may decline over short or even extended
periods. Stock markets tend to move in cycles, with periods of rising stock
prices and periods of falling stock prices. As a result, the Funds should be
considered long-term investments, designed to provide the best results when held
for several years or more. The Funds may not be suitable investments if you have
a short-term investment horizon or are unwilling to accept fluctuations in share
price, including significant declines over a given period.
Diversification
Diversification is a means of reducing risk by investing in a broad range
of stocks or other securities. Because they are non-diversified, the Funds have
the ability to take larger positions in a smaller number of issuers. The
appreciation or depreciation of a single stock may have a greater impact on the
NAV of a non-diversified fund, because it is likely to have a greater percentage
of its assets invested in that stock. As a result, each Fund's share price can
be expected to fluctuate more than that of broadly diversified funds investing
in similar securities.
2
<PAGE>
Because they are non-diversified, the Funds are not subject to the limitations
under the Investment Company Act of 1940 in the percentage of their assets that
they may invest in any one issuer. Both Funds however, intend to comply with the
diversification standards for regulated investment companies under Subchapter M
of the Internal Revenue Code (summarized below under "Investment Restrictions").
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 Foreign Forty invests at least
85% of its total assets in foreign securities; Acorn Twenty investments in
foreign securities are limited to not more than 15% of its total assets.
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 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. Neither Fund
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," below.)
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
3
<PAGE>
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.
Acorn Foreign Forty invests primarily in developed countries but may invest
up to 15% of its total assets in securities of companies in emerging markets.
Acorn Foreign Forty's investments in emerging markets are generally in companies
that receive a significant portion of their revenues from, or have a significant
portion of their assets in, developed markets. Although there is no limit on the
percentage of its assets that may be invested in emerging markets, Acorn
Twenty's aggregate investments in foreign securities (including both developed
and emerging markets) are limited to no more than 15% of its total assets. The
Funds use the definitions of "developed," "emerging," and "frontier" markets
published from time to time by the International Financial Corporation, a member
of the World Bank Group ("IFC"). The Funds do not invest in "frontier" markets.
The securities markets of emerging markets are substantially smaller, less
developed, less liquid, and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States. There
also may be a lower level of monitoring and regulation of emerging markets of
traders, insiders, and investors. Enforcement of existing regulations has been
extremely limited.
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.
4
<PAGE>
Forward currency transactions may involve currencies of the different
countries in which a Fund 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. Either Fund may engage in portfolio hedging with respect to
the currency of a particular country in amounts approximating actual or
anticipated positions in securities denominated in that currency. When a Fund
owns or anticipates owning securities in countries whose currencies are linked,
WAM 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 the Fund having a value at least as great as the
Fund's commitment under such forward contract will be segregated on the books of
the Fund and held by State Street Bank and Trust Company, the Funds' custodian
("State Street") while the contract is outstanding.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for 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, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a 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, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
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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.
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,
Acorn Twenty will not invest more than 15% of its total assets in foreign
securities and Acorn Foreign Forty will invest at least 85% 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, 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
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<PAGE>
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.)
A Fund will write call options and put options only if they are "covered."
For example, in the case of a call option on a security, the option is "covered"
if the Fund owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional consideration (or,
if additional consideration is required, assets having a value at least equal to
that amount are segregated on the books of the Fund) upon conversion or exchange
of other securities held in its portfolio.
If an option written by a Fund expires, the Fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by a Fund expires, the Fund realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when 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 and is
valued initially at the premium paid for the option. The premium received for an
option written by the Fund is recorded as a deferred credit. 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 (derivatives not traded on exchanges). 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
generally are established through negotiation with the other party to the
contract. While this type of arrangement allows the Funds greater flexibility to
tailor
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an instrument to its needs, OTC derivatives generally involve greater credit
risk than exchange-traded derivatives, which are guaranteed by the clearing
organization of the exchanges where they are traded. The Funds will limit their
investments so that no more than 5% of its total assets will be placed at risk
in the use of OTC derivatives. See "Illiquid Securities" below for more
information on the risks associated with investing in OTC derivatives.
Risks Associated with Options. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities markets, the currency markets, and the options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when, and
how to use options involves the exercise of skill and judgment, and even a well-
conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
There can be no assurance that a liquid market will exist when 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 a Fund, it
would not be 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
/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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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 options on futures. Options
on futures possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
To the extent required by regulatory authorities having jurisdiction over
the Funds, the Fund will limit their use of futures contracts and futures
options to hedging transactions. For example, a Fund might use futures contracts
to hedge against fluctuations in the general level of stock prices, anticipated
changes in interest rates, or currency fluctuations that might adversely affect
either the value of its securities or the price of the securities that the Fund
intends to purchase. A Fund's hedging may include sales of futures contracts as
an offset against the effect of expected declines in stock prices or currency
exchange rates or increases in interest rates and purchases of futures contracts
as an offset against the effect of expected increases in stock prices or
currency exchange rates or declines in interest rates. Although other techniques
could be used to reduce the Fund's exposure to stock price, interest rate, and
currency fluctuations, a Fund may be able to hedge its exposure more effectively
and perhaps at a lower cost by using futures contracts and futures options.
The success of any hedging technique depends on WAM'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, the Fund's return might have been better had hedging not been
attempted; however, in the absence of the ability to hedge, WAM might have taken
portfolio actions in anticipation of the same market movements with similar
investment results but, presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by a Fund, it is
required to deposit with State Street or its 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 the Fund and the broker of the amount one would owe the other
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<PAGE>
if the futures contract had been offset at the close of the previous day. In
computing daily NAV, 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 require making or taking delivery of the
underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
Risks Associated with Futures. There are several risks associated with the
use of futures contracts and futures options as hedging techniques. A purchase
or sale of a futures contract may result in losses in excess of the amount
invested in the futures contract. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. In addition, there are significant differences between
the securities and futures markets that could result in an imperfect correlation
between the markets, causing a given hedge not to achieve its objectives. The
degree of imperfection of correlation depends on circumstances such as:
variations in speculative market demand for futures, futures options, and the
related securities, including technical influences in futures and futures
options trading and differences between the 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 issues 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
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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 (liquid) market will develop
or continue to exist.
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 the Fund plus premiums paid by it
for open futures option positions, less the amount by which any such positions
are "in-the-money,"/2/ would exceed 5% of the Fund's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, a Fund must maintain with State Street or its 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, the Fund similarly will maintain with State Street 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 the
Funds invest will not at any time exceed the sum of:
- --------------------
/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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(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.
Neither Fund will purchase puts, calls, straddles, spreads, or any
combination thereof if by reason of such purchase more than 10% of its 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 the 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.
__________________________
/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).
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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, the Funds generally are required to
recognize for each taxable year their 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 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 of
"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 each Fund to qualify for federal income tax treatment as a
regulated investment company, at least 90% of its 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.
Each Fund intends 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
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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 Fund. Shareholders will be advised of the nature of such
capital gain distributions.
For further information, see the discussion under "Additional Tax
Information."
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 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 its 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 invested in such agreements.
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 the Fund's exposure to foreign stock market movements and
foreign currencies. Depending on how it is used, a swap agreement may increase
or decrease the overall volatility of a Fund's investments and its NAV.
The performance of a swap agreement is determined by the change in the
specific currency, market index, security, or other factors that determine the
amounts of payments due to and from the Fund. If a swap agreement calls for
payments by a Fund, the Fund must be prepared to make such payments when due. If
the counterparty's creditworthiness declines, the value of a swap agreement
would be likely to decline, potentially resulting in a loss. WAM expects to be
able to eliminate each 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.
Each 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 its
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 its accumulated obligations under the agreement.
Short Sales Against the Box. Each Fund may make short sales of securities
if at all times, when a short position is open, the Fund owns an equal amount of
such securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of the same issue as, and equal
in amount to, the securities sold short. This technique is called selling short
"against the box." Although permitted by its investment restrictions, the Funds
do not currently intend to sell securities short.
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In a short sale against the box, a Fund does not deliver from its portfolio
the securities sold and does not receive immediately the proceeds from the short
sale. Instead, the Fund borrows the securities sold short from a broker-dealer
through which the short sale is executed, and the broker-dealer delivers such
securities, on behalf of the Fund, to the purchaser of such securities. Such
broker-dealer is entitled to retain the proceeds from the short sale until the
Fund delivers to such broker-dealer the securities sold short. In addition, the
Fund is required to pay to the broker-dealer the amount of any dividends paid on
shares sold short. Finally, to secure its obligation to deliver to such broker-
dealer the securities sold short, the Fund must deposit and continuously
maintain in a separate account with State Street an equivalent amount of the
securities sold short or securities convertible into or exchangeable for such
securities without the payment of additional consideration. The Fund is said to
have a short position in the securities sold until it delivers to the broker-
dealer the securities sold, at which time the Fund receives the proceeds of the
sale. Because the Fund ordinarily will want to continue to hold securities in
its portfolio that are sold short, the Fund will normally close out a short
position by purchasing on the open market and delivering to the broker-dealer an
equal amount of the securities sold short, rather than by delivering portfolio
securities.
Short sales may protect a Fund against the risk of losses in the value of
its portfolio securities because any unrealized losses with respect to such
portfolio securities should be wholly or partially offset by a corresponding
gain in the short position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding loss in the
short position. The extent to which such gains or losses are offset will depend
upon the amount of securities sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the conversion premium. The Funds will incur transaction
costs in connection with short sales.
In addition to enabling the Funds to hedge against market risk, short sales
may afford a Fund an opportunity to earn additional current income to the extent
the Fund is able to enter into arrangements with broker-dealers through which
the short sales are executed to receive income with respect to the proceeds of
the short sales during the period the Fund's short positions remain open.
The Taxpayer Relief Act of 1997 (see page 13) 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 of
"offsetting notional principal 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.
Debt Securities
Both 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
15
<PAGE>
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 either Fund or the portion of each Fund's assets
that may be invested in debt securities in a particular ratings category.
Neither Fund intends to invest more than 20% of its total assets in debt
securities nor more than 5% of its total assets in securities rated at or lower
than the lowest investment grade.
Securities rated BBB or Baa are considered to be medium grade and to have
speculative characteristics. Lower-rated debt securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer default or
bankruptcy. An economic downturn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition,
lower-quality bonds are less sensitive to interest rate changes than higher-
quality instruments and generally are more sensitive to adverse economic changes
or individual corporate developments. During a period of adverse economic
changes, including a period of rising interest rates, the junk bond market may
be severely disrupted, and issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Medium- and lower-quality debt securities may be less marketable than
higher quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and a Fund may have greater difficulty selling its
portfolio securities. See "Purchasing and Redeeming Shares 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.
Illiquid Securities
Neither Fund may invest in illiquid securities, including restricted
securities and OTC derivatives, if as a result, they would comprise more than
15% of the value of its net assets.
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,
either Fund should be in a position where more than 15% of the value of its net
assets are invested in illiquid assets, including restricted securities and OTC
derivatives, that Fund will take appropriate steps to protect liquidity.
16
<PAGE>
Notwithstanding the above, either 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 each Fund's restriction of investing no more
than 15% of the value 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, a Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that it does not invest
more than 15% of its assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of a Fund's assets
invested in illiquid securities if qualified institutional buyers are unwilling
to purchase such securities.
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, the Funds 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 the
Fund's ability to sell the collateral and the Fund could suffer a loss. However,
with respect to financial institutions whose bankruptcy or liquidation
proceedings are subject to the U.S. Bankruptcy Code, each Fund intends to comply
with provisions under such Code that would allow it immediately to resell such
collateral. Under normal circumstances, neither Fund intends to invest more than
5% of its total assets in repurchase agreements.
17
<PAGE>
When-Issued and Delayed Delivery Securities; Reverse Repurchase Agreements
A Fund may purchase securities on a when-issued or delayed delivery basis.
Although the payment and interest terms of these securities are established at
the time a 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 State Street throughout the period of the obligation. The use of these
investment strategies, as well as any borrowing by the Fund, may increase NAV
fluctuation. The Funds have no present intention of investing in reverse
repurchase agreements.
Temporary Strategies
Both 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, each 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. or 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.
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<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. Each Fund's portfolio turnover
rate is not expected to exceed 50% under normal market conditions. A high rate
of portfolio turnover, if it should occur, would result in increased transaction
expenses which must be borne by the Funds. 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 the
Funds' restrictions on borrowing under "Investment Restrictions," below.
Investment Restrictions
In pursuing their investment objectives, neither Fund will:
1. 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;
2. With respect to 50% of its total assets, purchase the securities of any
issuer (other than cash items and U.S. government securities and securities
of other investment companies) if such purchase would cause the Fund's
holdings of that issuer to exceed more than 5% of the Fund's total assets;
3. Invest more than 25% of its total assets in a single issuer (other than
U.S. government securities);
4. Invest more than 25% of its total assets in the securities of companies
in a single industry (excluding U.S. government securities);
5. Make loans, but this restriction shall not prevent the Fund from (a)
investing in debt securities, (b) investing in repurchase agreements, or
(c) lending its 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);
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<PAGE>
6. 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;
7. 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;
8. 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;
9. Purchase and sell commodities or commodity contracts, except that it may
enter into (a) futures and options on futures and (b) foreign currency
contracts;
10. 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;
11. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
The above restrictions 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, the Funds are subject to a number of restrictions that may be
changed by the board of trustees without shareholder approval. Under those non-
fundamental restrictions, neither Fund will:
(a) Invest in companies for the purpose of management or the exercise of
control;
(b) Acquire securities of other registered investment companies except in
compliance with the Investment Company Act of 1940;
(c) Invest more than 15% of its net assets (valued at time of investment)
in illiquid securities, including repurchase agreements maturing in more
than seven days;
20
<PAGE>
(d) 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;
(e) 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;
(f) [Acorn Twenty only] Invest more than 15% of its total assets in the
securities of foreign issuers.
(g) [Acorn Foreign Forty only] Invest more than 15% of its total assets in
securities of United States issuers, under normal market conditions.
Notwithstanding the foregoing investment restrictions, the Funds may
purchase securities pursuant to the exercise of subscription 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 the Fund, including the value of shares acquired through
reinvestment of all dividends and capital gains distributions. "Average Annual
Total Return" is the average annual compounded rate of change in value
represented by the Total Return for the period.
Average Annual Total Return is computed as follows:
ERV = P(1+T)/n/
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
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. The Funds' performance is a
function of conditions in the securities markets, portfolio management, and
operating expenses. Although information about past performance is useful in
reviewing the Funds' performance and in providing some basis for comparison with
other investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
In advertising and sales literature, the Funds' performance may be compared
with those of market indexes and other mutual funds. In addition to the
performance information described
21
<PAGE>
above, the Fund might use comparative performance as computed in a ranking or
rating determined by Lipper Analytical Services, Inc., an independent service
that monitors the performance of over 1,000 mutual funds, Morningstar, Inc., or
another service.
The 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.
Investment Adviser
Wanger Asset Management, L.P. ("WAM"), serves as the investment adviser for
the Funds, the other Acorn funds, and institutional accounts. As of the date of
this SAI, WAM has approximately $7 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 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 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 of the Funds through June 30, 1999, and thereafter
from year to year so long as its continuance is approved at least annually by
(i) the board of trustees of Acorn Investment Trust or by the holders of a
majority of each 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 either
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 60 days'
written notice to WAM or by WAM on 60 days' notice to the Fund, and will
terminate automatically in the event of its assignment.
The advisory fees the Funds pay to WAM are calculated daily and paid
monthly, at the following annual rates: Acorn Twenty, 0.90% of average net
assets; Acorn Foreign Forty, 0.95% of average net assets.
Acorn has a separate administrative services agreement with WAM under which
WAM provides various administrative and clerical services such as the
maintenance of books and records, the calculation and publication of each Fund's
net asset value, and the calculation of dividends, distributions and performance
data for each Fund. WAM also furnishes corporate secretarial services to Acorn
and provides Acorn with administrative offices and data processing
22
<PAGE>
facilities. Under the administrative services agreement, WAM receives a fee,
calculated daily and paid monthly, at the annual rate of 0.05 of 1% of the
Funds' 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 the Funds 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 June 30, 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 Acorn funds are not currently
divided into classes. The board of trustees may authorize the issuance of
additional series of the Trust 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
23
<PAGE>
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, 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 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).
Jerome Kahn, Jr., trustee
Two North LaSalle Street, Suite 400, Chicago, Illinois 60602; date of birth
4/13/1934;
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<PAGE>
vice president, William Harris Investors, Inc. (investment adviser);
director, Pittway Corporation (multi-product manufacturer and publisher).
25
<PAGE>
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 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).
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.
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.
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 (since 1998),
analyst and portfolio manager, Wanger Asset Management, L.P. (since July
1993); prior thereto, analyst, Ariel Capital Management.
Merrillyn J. Kosier, senior vice president and secretary
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; date of birth
12/10/1959; 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 Asset Management, L.P. since April 1995;
prior thereto, first vice president, investment accounting, Kemper
Financial Services, Inc.
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<PAGE>
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.
*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 May 1, 1998, the trustees and officers of Acorn as a
group owned beneficially less than 1% of the outstanding shares of the funds.
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:
<TABLE>
<CAPTION>
Aggregate Aggregate Aggregate Total
Compensation Compensation Compensation Compensation
from Acorn from Acorn from Acorn from
Name of Trustee Fund International USA Fund Complex(3)
================================================================================
<S> <C> <C> <C> <C>
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
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
- --------------------------------------------------------------------------------
</TABLE>
The officers and trustees affiliated with WAM serve without any
compensation from the Trust. Acorn has adopted a deferred compensation plan (the
"Plan") which permits the trustees who are not "interested persons" of Acorn or
WAM ("participating trustees") to defer receipt of all or a portion of their
compensation from the Trust. Under the Plan, participating trustees may defer
receipt of all or a portion of their compensation 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
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<PAGE>
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 other Fund will be 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 "Your Account--How to Buy Shares" and "Your Account--How to Sell
Shares." All of that information is incorporated herein by reference.
Acorn may authorize from time to time 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 net asset value
("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 the Funds. 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 charge a fee (usually a
percentage of the average net assets held in such accounts) for accounting,
shareholder servicing, and distribution services the institution pays with
respect to the underlying Fund shares. WAM pays any such fees.
Net Asset Value
Share purchase and redemption orders will be priced at each Fund's NAV next
computed after such orders are received 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 Funds' behalf; or (iii) such authorized
broker-dealer's designee. Each Fund's NAV is determined only on days on which
the New York Stock Exchange ("NYSE") is open for trading. The NYSE is regularly
closed on Saturdays and Sundays and on New Year's Day, the third Monday in
January, the third Monday in February, Good Friday, the last Monday in May,
Independence Day, Labor Day, Thanksgiving, and Christmas. If one of these
holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding
Friday or the following Monday, respectively.
Computation of NAV (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
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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 NAV 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 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 valued
at the mean of the latest bid and ask quotations or, if there is no ask
quotation, at the most recent bid quotation. Securities for which quotations are
not available and any other assets are valued at a fair value as determined in
good faith by the board of trustees. Money market instruments having a maturity
of 60 days or less from the valuation date are valued on an amortized cost
basis. All assets and liabilities initially expressed in foreign 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 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 NAVs.
Conversely, trading in a Fund's foreign securities may not occur at times and on
days when the NYSE is open. Because of the different trading hours in the
various foreign markets, the calculation of NAV 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 NAV.
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 NAV 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 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
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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 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 NAV may reflect undistributed
income, capital gains, or net unrealized appreciation of securities held by the
Fund. A subsequent distribution to you of such amounts, although constituting a
return of your investment, 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 rate of 20%).
Classification as mid-term or long-term gain 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 than 18 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 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, a Fund 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 the Fund that your tax identification number is
incorrect.
These certifications are contained in the application that you complete
when you open your Fund account. Each Fund must promptly pay the IRS all amounts
withheld. Therefore, it is usually not possible for a Fund 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
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the net effect of these transactions is a gain, the income dividend paid by the
Funds will be increased; if the result is a loss, the income dividend paid by
the Funds will be decreased.
A portion of the dividends paid by the Funds is expected to be eligible for
the dividends-received deduction. Capital gain distributions paid from the Fund
are never eligible for this deduction.
Income received by the 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, the Fund may
file an election with the IRS to "pass through" to its shareholders the amount
of foreign income taxes paid by the Fund. Pursuant to this election,
shareholders will be required to: (i) include in gross income, even though not
actually received, their respective pro rata share of foreign taxes paid by the
Fund; (ii) treat their pro rata share of foreign taxes as paid by them; and
(iii) either deduct their pro rata share of foreign taxes in computing their
taxable income, or use it as a foreign tax credit against U.S. income taxes (but
not both). No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. The Funds do not expect to be able to "pass
through" foreign tax credits.
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 Fund in relation to
transaction and research services received is evaluated by WAM's staff on an
ongoing basis. The general level of brokerage charges and other aspects of the
Funds' portfolio transactions are reviewed periodically by the board of
trustees.
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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 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.
The Funds 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 the Funds 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 the Funds and one or more other advisory clients. If 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, is the custodian for the Acorn funds. It is responsible for holding
all securities and cash of the Acorn funds, receiving and paying for securities
purchased, delivering against payment securities sold, receiving and collecting
income from investments, making all payments covering 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 Acorn funds. The Acorn funds have authorized State
Street to deposit certain portfolio securities of the funds in central
depository systems as permitted under federal law. The Acorn funds may invest in
obligations of the custodian 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 Acorn funds' tax returns, and performs other
professional accounting, auditing, tax, and advisory services when engaged to do
so by the Acorn 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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