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ACORN INVESTMENT TRUST
STATEMENT OF
ADDITIONAL INFORMATION
May 1, 1999
Supplemented September 28, 1999
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-800-9-ACORN-9
1-800-922-6769
ACORN FUND
ACORN INTERNATIONAL
ACORN USA
ACORN TWENTY
ACORN FOREIGN FORTY
No-Load Funds
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TABLE OF CONTENTS
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Page
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Information About the Funds.......................... 2
Investment Objectives and Policies................... 2
Investment Techniques and Risks...................... 3
Investment Restrictions.............................. 21
Performance Information.............................. 27
Investment Adviser................................... 30
Distributor.......................................... 32
The Trust............................................ 33
Trustees and Officers................................ 34
Purchasing and Redeeming Shares...................... 38
Additional Tax Information........................... 39
Taxation of Foreign Shareholders..................... 41
Portfolio Transactions............................... 41
Custodian............................................ 43
Independent Auditors................................. 44
Appendix - Description of Bond Ratings............... 45
Financial Statements................................. 47
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This Statement of Additional Information ("SAI") is not a prospectus
but provides information that should be read in conjunction with the prospectus
of Acorn Fund, Acorn International, Acorn USA, Acorn Twenty and Acorn Foreign
Forty dated the date of this SAI and any supplement to the prospectus. A copy of
the Acorn Family of Funds 1998 annual report to shareholders accompanies this
SAI. A copy of the prospectus and additional copies of the annual reports can
be obtained from Acorn at no charge by writing or telephoning Acorn at its
address or telephone number shown above.
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Information About the Funds
Acorn Fund invests mostly in stocks of small and medium-size companies,
generally those with market capitalizations of less than $1 billion. Of those
stocks, Acorn Fund invests mostly in U.S. companies, but also may have
significant foreign investments.
Acorn International concentrates its investments in stocks of small and
medium-size non-U.S. companies, generally those with market capitalizations of
less than $1 billion.
Acorn USA invests mostly in stocks of small and medium-sized U.S.
companies, generally those with market capitalizations of less than $1 billion.
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. Acorn Foreign Forty is a non-diversified fund that
ordinarily has investments in 40 to 60 companies in developed markets.
Acorn Fund, Acorn International and Acorn USA are diversified funds under
the federal securities laws. Acorn Twenty and Acorn Foreign Forty are non-
diversified under the federal securities laws. However, each of the funds
complies 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").
All five funds are currently open to new investors; however, Acorn reserves the
right to close one or more of the funds to new investors if the board of
trustees of Acorn determines that additional cash flow would be detrimental to
the management of the funds.
The discussion below supplements the description in the prospectus of each
fund's investment objective, policies, and restrictions.
Investment Objectives and Policies
Acorn Fund, Acorn International, Acorn USA, Acorn Twenty and Acorn Foreign
Forty invest with the objective of long-term growth of capital. The funds are
not designed for investors seeking primarily income rather than capital
appreciation. The funds are not, alone or together, a balanced investment
program, and there can be no assurance that any of the funds will achieve its
investment objective.
The funds use the techniques and invest in the types of securities
described below and in the prospectus.
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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. Under normal
conditions, the funds' common stock investments (as a percent of total assets)
are allocated as follows:
<TABLE>
<CAPTION>
U.S.* Companies Foreign
Companies
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Fund Maximum Maximum
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<S> <C> <C>
Acorn Fund 100% 33%
Acorn International 25% 100%
Acorn USA 100% 10%
Acorn Twenty 100% 15%
Acorn Foreign Forty 15% 100%
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</TABLE>
Acorn Twenty usually limits its investments in foreign companies to those whose
operations are primarily in the U.S.
* For Acorn Foreign Forty, includes U.S. investments (usually limited to
companies whose operations are primarily overseas).
See also the discussion of foreign securities below.
Diversification
Diversification is a means of reducing risk by investing in a broad range
of stocks or other securities. Because Acorn Twenty and Acorn Foreign Forty are
non-diversified, those 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, the share price of Acorn Twenty and Acorn Foreign Forty can be expected
to fluctuate more than that of broadly diversified funds investing in similar
securities. Because they are non-diversified, those 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,
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however, intend to comply with the diversification standards for regulated
investment companies under Subchapter M of the Internal Revenue Code summarized
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. As noted above, under normal market conditions, each fund may invest
in foreign securities (as a percentage of total assets) as set forth below:
<TABLE>
<CAPTION>
Foreign
Companies
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Fund Maximum
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<S> <C>
Acorn Fund 33%
Acorn International 100%
Acorn USA 10%
Acorn Twenty 15%
Acorn Foreign Forty 100%
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</TABLE>
Acorn Foreign Forty invests primarily in developed countries but may invest
up to 15% of its total assets in securities of companies with broad
international interests that are domiciled in the United States or in countries
considered "emerging markets," if the operations of those companies are located
primarily in developed overseas markets. The Fund uses the terms "developed
markets" and "emerging markets" as those terms are defined by the International
Financial Corporation, a member of the World Bank Group ("IFC"). "Emerging
markets" as used by the Fund includes markets designated "frontier markets" by
the IFC. The Fund does not intend to invest more than 5% of its total assets in
those countries included in the "emerging markets" or "frontier markets"
categories.
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.
Acorn Twenty usually limits its investments in foreign companies to those
whose operations are primarily in the U.S.
The funds may invest in securities of foreign issuers directly or in the
form of American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs), Global Depositary Receipts (GDRs) 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
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evidencing a similar arrangement. GDRs trade in both U.S. and non-U.S. markets.
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" depositary
receipts. In a sponsored depositary receipt, the issuer typically pays some or
all of the expenses of the depository and agrees to provide its regular
shareholder communications to depositary receipt holders. An unsponsored
depositary receipt is created independently of the issuer of the underlying
security. The depositary receipt 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 depositary receipt, 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
depositary receipt. None of the funds expects to invest 5% or more of its total
assets in unsponsored depositary receipt.
The funds' investment performance is affected by the strength or weakness
of the U.S. dollar against the currencies of the foreign markets in which its
securities trade or in which they are denominated. For example, if the dollar
falls in value relative to the Japanese yen, the dollar value of a yen-
denominated stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the yen-denominated stock will fall. (See
discussion of transaction hedging and portfolio hedging under "Currency Exchange
Transactions.")
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve risks and opportunities not typically
associated with investing in U.S. securities. These considerations include:
fluctuations in exchange rates of foreign currencies; possible imposition of
exchange control regulation or currency restrictions that would prevent cash
from being brought back to the United States; less public information with
respect to issuers of securities; less governmental supervision of stock
exchanges, securities brokers, and issuers of securities; lack of uniform
accounting, auditing, and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater
price volatility in foreign markets than in the United States; possible
imposition of foreign taxes; possible investment in securities of companies in
developing as well as developed countries; and sometimes less advantageous
legal, operational, and financial protections applicable to foreign subcustodial
arrangements. In addition, the costs of investing in foreign securities are
higher than the costs of investing in U.S. securities.
Although the funds try to invest in companies and governments of countries
having stable political environments, there is the possibility of expropriation
or confiscatory taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of foreign
government restrictions, or other adverse political, social, or diplomatic
developments that could affect investment in these nations.
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The countries in which the funds invest include those listed below. A fund
may not invest in all the countries listed, and it may invest in other countries
as well, when such investments are consistent with that fund's investment
objective and policies.
<TABLE>
Mature Markets Developing Markets Emerging Markets
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<S> <C> <C> <C>
Australia Argentina Bangladesh Morocco
Austria Chile Botswana Pakistan
Belgium Greece Brazil Peru
Canada Hong Kong China Philippines
Denmark Indonesia Colombia Poland
Finland Israel Cyprus Sri Lanka
France Korea Czech Republic Swaziland
Germany Malaysia Ecuador Turkey
Ireland Mexico Egypt Uruguay
Italy Portugal Ghana Venezuela
Japan Singapore Hungary Zambia
Luxembourg Taiwan India Zimbabwe
Netherlands Thailand Jordan
New Zealand Kenya
Norway
South Africa
Spain
Sweden
Switzerland
United Kingdom
United States
</TABLE>
It may not be feasible for the funds currently to invest in all of these
countries due to restricted access to their securities markets or inability to
implement satisfactory custodial arrangements.
Currency Exchange Transactions
The funds may enter into currency exchange transactions. A currency
exchange transaction may be conducted either on a spot (i.e., cash) basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market or through a forward currency exchange contract ("forward contract"). A
forward contract is an agreement to purchase or sell a specified currency at a
specified future date (or within a specified time period) and price set at the
time of the contract. Forward contracts are usually entered into with banks,
foreign exchange dealers or broker-dealers, are not exchange-traded, and are
usually for less than one year, but may be renewed.
Forward currency transactions may involve currencies of the different
countries in which the funds may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. The funds' currency
transactions are limited to transaction hedging and portfolio hedging involving
either specific transactions or portfolio positions, except to the extent
described below under "Synthetic Foreign Money Market Positions." Transaction
hedging is the purchase or sale of a forward contract with respect to specific
payables or receivables of a fund accruing in connection with the purchase or
sale of portfolio securities.
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Portfolio hedging is the use of a forward contract with respect to a portfolio
security position denominated or quoted in a particular currency. The funds may
engage in portfolio hedging with respect to the currency of a particular country
in amounts approximating actual or anticipated positions in securities
denominated in that currency. When a fund owns or anticipates owning securities
in countries whose currencies are linked, Wanger Asset Management, L.P. ("WAM"),
the funds' investment adviser, may aggregate such positions as to the currency
hedged.
If a fund enters into a forward contract hedging an anticipated purchase of
portfolio securities, assets of that fund having a value at least as great as
the fund's commitment under such forward contract will be segregated on the
books of the fund and held by the custodian while the contract is outstanding.
At the maturity of a forward contract to deliver a particular currency, a
fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for a fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency that fund is obligated to deliver.
If a fund retains the portfolio security and engages in an offsetting
transaction, that fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between a fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, a fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the fund of unrealized
profits or force the fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for a fund to hedge against a devaluation that is so
generally anticipated that the fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to a fund of
engaging in currency exchange transactions
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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 investment limits set forth in the chart
on page 4.
Options and Futures
The funds may purchase and write both call options and put options on
securities and on indexes, and enter into interest rate and index futures
contracts, and may purchase or sell options on such futures contracts ("futures
options") in order to provide additional revenue, or to hedge against changes in
security prices or interest rates. The funds may also use other types of
options, futures contracts and futures options currently traded or subsequently
developed and traded, provided the board of trustees determines that their use
is consistent with the funds' investment objective.
Options. An option on a security (or index) is a contract that gives the
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purchaser (holder) of the option, in return for a premium, the right to buy from
(call) or sell to (put) the seller (writer) of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option (normally not exceeding nine
months). The writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver the
underlying security or foreign currency upon payment of the exercise price or to
pay the exercise price upon delivery of the underlying security or foreign
currency. Upon exercise, the writer of an option on an index is obligated to
pay the difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An index is
designed to reflect specified facets of a
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particular financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators.)
The funds will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the option
is "covered" if a fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional consideration
(or, if additional consideration is required, assets having a value at least
equal to that amount are segregated on the books of a fund) upon conversion or
exchange of other securities held in its portfolio.
If an option written by a fund expires, that fund realizes a capital gain
equal to the premium received at the time the option was written. If an option
purchased by a fund expires, that fund realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when a fund desires.
A fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the fund will realize a capital gain or, if it is less,
the fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
A put or call option purchased by a fund is an asset of that fund, valued
initially at the premium paid for the option. The premium received for an
option written by a fund is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid and
asked prices.
OTC Derivatives. The funds may buy and sell over-the-counter ("OTC")
---------------
derivatives. Unlike exchange-traded derivatives, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of OTC derivatives (derivatives not traded on exchanges)
generally are established through negotiation with the other party to the
contract. While this type of arrangement allows a fund greater flexibility to
tailor an instrument to its needs, OTC derivatives generally involve greater
credit risk than exchange-traded derivatives, which are guaranteed by the
clearing organization of the exchanges where they are traded. Each fund will
limit its investments so that no more than 5% of its total assets will be placed
at risk in the use of OTC derivatives. See "Illiquid Securities" below for more
information on the risks associated with investing in OTC derivatives.
9
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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 one of the
funds, that fund would not able to close out the option. If restrictions on
exercise were imposed, the fund might be unable to exercise an option it has
purchased.
Futures Contracts and Options on Futures Contracts. The funds may use
--------------------------------------------------
interest rate futures contracts and index futures contracts. An interest rate
or index futures contract provides for the future sale by one party and purchase
by another party of a specified quantity of a financial instrument or the cash
value of an index /1/ at a specified price and time. A public market exists in
-
futures contracts covering a number of indexes (including, but not limited to:
the Standard & Poor's 500 Index; the Value Line Composite Index; the Russell
2000 Index; and the New York Stock Exchange Composite Index) as well as
financial instruments (including, but not limited to: U.S. Treasury bonds; U.S.
Treasury notes; Eurodollar certificates of deposit; and foreign currencies).
Other index and financial instrument futures contracts are available and it is
expected that additional futures contracts will be developed and traded.
The funds may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long
__________________________________
/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.
10
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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 funds 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 the fund's securities or the price of the
securities that the fund intends to purchase. The fund's hedging may include
sales of futures contracts as an offset against the effect of expected declines
in stock prices or currency exchange rates or increases in interest rates and
purchases of futures contracts as an offset against the effect of expected
increases in stock prices or currency exchange rates or declines in interest
rates. Although other techniques could be used to reduce the funds' exposure to
stock price, interest rate, and currency fluctuations, the funds may be able to
hedge their exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The success of any hedging technique depends on WAM's ability to correctly
predict changes in the level and direction of stock prices, interest rates,
currency exchange rates, and other factors. Should those predictions be
incorrect, a fund's return might have been better had hedging not been
attempted; however, in the absence of the ability to hedge, WAM might have taken
portfolio actions in anticipation of the same market movements with similar
investment results but, presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by a fund, that fund
is required to deposit with its custodian or broker a specified amount of cash
or U.S. government securities or other securities acceptable to the broker
("initial margin"). The margin required for a futures contract is generally set
by the exchange on which the contract is traded; however, the margin requirement
may be modified during the term of the contract, and the fund's broker may
require margin deposits in excess of the minimum required by the exchange. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract, which is returned to the fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The funds
expect to earn interest income on their initial margin deposits. A futures
contract held by a fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking-to-market." Variation margin paid or received
by a fund does not represent a borrowing or loan by the fund but is instead
settlement between that fund and the broker of the amount one would owe the
other if the futures contract had expired at the close of the previous day. In
computing daily net asset value ("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
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of the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other futures
positions held by the funds.
Although some futures contracts call for making or taking delivery of the
underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the funds realize a capital
gain, or if it is more, the funds realize a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the fund
engaging in the transaction realizes a capital gain, or if it is less, the fund
realizes a capital loss. The transaction costs must also be included in these
calculations.
Risks Associated with Futures. There are several risks associated with the
-----------------------------
use of futures contracts and futures options as hedging techniques. A purchase
or sale of a futures contract may result in losses in excess of the amount
invested in the futures contract. There can be no guarantee that there will be
a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for futures,
futures options, and the related securities, including technical influences in
futures and futures options trading and differences between the funds'
investments being hedged and the securities underlying the standard contracts
available for trading. For example, in the case of index futures contracts, the
composition of the index, including the issuers and the weighting of each issue,
may differ from the composition of a fund's portfolio, and, in the case of
interest rate futures contracts, the interest rate levels, maturities, and
creditworthiness of the issues underlying the futures contract may differ from
the financial instruments held in a fund's portfolio. A decision as to whether,
when, and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time when a
fund seeks to close out a futures or futures option position. The fund would be
exposed to possible loss on the
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position during the interval of inability to close, and would continue to be
required to meet margin requirements until the position is closed. In addition,
many of the contracts discussed above are relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
Limitations on Options and Futures. A fund will not enter into a futures
----------------------------------
contract or purchase an option thereon if, immediately thereafter, the initial
margin deposits for futures contracts held by that fund plus premiums paid by it
for open futures option positions, less the amount by which any such positions
are "in-the-money," /2/ would exceed 5% of the fund's total assets.
-
When purchasing a futures contract or writing a put option on a futures
contract, a fund must maintain with its custodian or broker readily-marketable
securities having a fair market value (including any margin) at least equal to
the market value of such contract. When writing a call option on a futures
contract, a fund similarly will maintain with its custodian readily-marketable
securities having a fair market value (including any margin) at least equal to
the amount by which such option is in-the-money until the option expires or is
closed out by the fund.
A fund may not maintain open short positions in futures contracts, call
options written on futures contracts, or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent a fund has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," the "underlying
commodity value" of each long position in a commodity contract in which a fund
invests will not at any time exceed the sum of:
(1) The value of short-term U.S. debt obligations or other U.S. dollar
denominated high-quality short-term money market instruments and cash
set aside in an identifiable manner, plus any funds deposited as
margin on the contract;
(2) Unrealized appreciation on the contract held by the broker; and
______________________________
/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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(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.
No fund will purchase puts, calls, straddles, spreads, or any combination
thereof if by reason of such purchase more than 10% of that fund's total assets
would be invested in such securities.
Taxation of Options and Futures. If a fund exercises a call or put
--------------------------------
option that it holds, the premium paid for the option is added to the cost basis
of the security purchased (call) or deducted from the proceeds of the security
sold (put). For cash settlement options and futures options exercised by a
fund, the difference between the cash received at exercise and the premium paid
is a capital gain or loss.
If a call or put option written by a fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by a fund, the difference between the cash
paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by a fund is in-the-money at the time it was written
and the security covering the option was held for more than the long-term
holding period prior to the writing of the option, any loss realized as a result
of a closing purchase transaction will be long-term. The holding period of the
securities covering an in-the-money option will not include the period of time
the option is outstanding.
If a fund writes an equity call option/3/ other than a "qualified covered
call option," as defined in the Internal Revenue Code, any loss on such option
transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If a fund delivers securities under a futures contract, the
fund also realizes a capital gain or loss on those securities.
___________________________
/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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For federal income tax purposes, a fund generally is required to recognize
for each taxable year its net unrealized gains and losses as of the end of the
year on futures, futures options and non-equity options positions ("year-end
mark-to-market"). Generally, any gain or loss recognized with respect to such
positions (either by year-end mark-to-market or by actual closing of the
positions) is considered to be 60% long-term and 40% short-term, without regard
to the holding periods of the contracts. However, in the case of positions
classified as part of a "mixed straddle," the recognition of losses on certain
positions (including options, futures and futures options positions, the related
securities and certain successor positions thereto) may be deferred to a later
taxable year. Sale of futures contracts or writing of call options (or futures
call options) or buying put options (or futures put options) that are intended
to hedge against a change in the value of securities held by a fund may affect
the holding period of the hedged securities.
If a fund were to enter into a short index future, short index futures
option or short index option position and the fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the fund's stock positions may be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales or
"offsetting notional principal contracts" (as defined by the Act) with respect
to, or futures or "forward contracts" (as defined by the Act) with respect to,
the same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property. The
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
In order for the funds to continue to qualify for federal income tax
treatment as regulated investment companies, at least 90% of each fund's gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or foreign currencies, or other income (including but not
limited to gains from options, futures, or forward contracts). Any net gain
realized from futures (or futures options) contracts will be considered gain
from the sale of securities and therefore be qualifying income for purposes of
the 90% requirement.
The funds intend to distribute to shareholders annually any capital gains
that have been recognized for federal income tax purposes (including year-end
mark-to-market gains) on options and futures transactions, together with gains
on other fund investments, to the extent such gains exceed recognized capital
losses and any net capital loss carryovers of the funds. Shareholders will be
advised of the nature of such capital gain distributions.
For further information, see the discussion under "Additional Tax
Information."
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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 that fund's investment
objective and policies, but each fund will limit its use of swap agreements so
that no more than 5% of its total assets will be 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 that fund's exposure to foreign stock market movements
and foreign currencies. Depending on how it is used, a swap agreement may
increase or decrease the overall volatility of a fund's investments and its 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 a fund. If a swap agreement calls for
payments by a fund, that fund must be prepared to make such payments when due.
If the counterparty's creditworthiness declines, the value of a swap agreement
would be likely to decline, potentially resulting in a loss. WAM expects to be
able to eliminate a fund's exposure under any swap agreement either by
assignment or by other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
A fund will segregate its assets to cover its current obligations under a
swap agreement. If a fund enters into a swap agreement on a net basis, it will
segregate assets with a daily value at least equal to the excess, if any, of
that fund's accumulated obligations under the swap agreement over the
accumulated amount the fund is entitled to receive under the agreement. If a
fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of that fund's accumulated
obligations under the agreement.
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.
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
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<PAGE>
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 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
The funds may invest in debt securities, including lower-rated securities
(i.e., securities rated BB or lower by Standard & Poor's Corporation ("S&P") or
Ba or lower by Moody's Investor Services, Inc. ("Moody's"), commonly called
"junk bonds"), and securities that are not rated. There are no restrictions as
to the ratings of debt securities acquired by the funds or the portion of a
fund's assets that may be invested in debt securities in a particular ratings
category, except that Acorn International may not invest more than 20% of its
assets in securities rated
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<PAGE>
below investment grade or considered by the Adviser to be of comparable credit
quality. Neither Acorn Fund nor Acorn International expects to invest more than
5% of its net assets in such securities during the current fiscal year. Acorn
USA, Acorn Twenty and Acorn Foreign Forty does not intend to invest more than
20% of its total assets in debt securities nor more than 5% of its total assets
in securities rated at or lower than the lowest investment grade.
Securities rated BBB or Baa are considered to be medium grade and to have
speculative characteristics. Lower-rated debt securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer default or
bankruptcy. An economic downturn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition,
lower-quality bonds are less sensitive to interest rate changes than higher-
quality instruments and generally are more sensitive to adverse economic changes
or individual corporate developments. During a period of adverse economic
changes, including a period of rising interest rates, the junk bond market may
be severely disrupted, and issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Medium- and lower-quality debt securities may be less marketable than
higher-quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and 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
The funds may not invest in illiquid securities, including restricted
securities and OTC derivatives, if as a result they would comprise more than 10%
of the value of the net assets of Acorn Fund, or more than 15% of the value of
the net assets of each of Acorn International, Acorn USA, Acorn Twenty and Acorn
Foreign Forty.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration is
required, a fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at a
fair value as determined in good faith by the board of trustees. If, through
the appreciation of illiquid securities or the depreciation of liquid
securities, Acorn Fund should be in a position where more than 10% of the value
of its net assets are invested in illiquid assets, including restricted
securities and OTC derivatives (or more than 15% of the
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<PAGE>
value of the net assets of each of Acorn International, Acorn USA, Acorn Twenty
and Acorn Foreign Forty), that fund will take appropriate steps to protect
liquidity.
Notwithstanding the above, a fund may purchase securities that have been
privately placed but that are eligible for purchase and sale under Rule 144A
under the 1933 Act. That rule permits certain qualified institutional buyers,
such as the funds, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. WAM, under the supervision of the board
of trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to a fund's restriction of investing no more than 10%
(for Acorn Fund) or 15% (for Acorn International, Acorn USA, Acorn Twenty and
Acorn Foreign Forty) of its assets in illiquid securities. A determination of
whether a Rule 144A security is liquid or not is a question of fact. In making
this determination WAM will consider the trading markets for the specific
security taking into account the unregistered nature of a Rule 144A security.
In addition, WAM could consider the (1) frequency of trades and quotes, (2)
number of dealers and potential purchasers, (3) dealer undertakings to make a
market, and (4) nature of the security and of market place trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of transfer). The liquidity of Rule 144A securities would be
monitored and if, as a result of changed conditions, it is determined that a
Rule 144A security is no longer liquid, the funds' holdings of illiquid
securities would be reviewed to determine what, if any, steps are required to
assure that a fund does not invest more than the specified percentage 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, a fund will enter into repurchase
agreements only with banks and dealers WAM believes present minimum credit risks
in accordance with guidelines approved by the board of trustees. WAM will
review and monitor the creditworthiness of such institutions, and will consider
the capitalization of the institution, WAM's prior dealings with the
institution, any rating of the institution's senior long-term debt by
independent rating agencies, and other relevant factors.
A fund will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued interest.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase were less than the repurchase price, the fund
would suffer a loss. If the financial institution which is party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
bankruptcy or other liquidation proceedings there may be restrictions on a
fund's ability to sell the collateral and the fund could suffer a loss.
However, with respect to financial institutions whose bankruptcy or
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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.
Each fund will limit its investments in repurchase agreements to not
more than 5% of its total assets.
When-Issued and Delayed Delivery Securities; Reverse Repurchase Agreements
The funds may purchase securities on a when-issued or delayed delivery
basis. Although the payment and interest terms of these securities are
established at the time the fund enters into the commitment, the securities may
be delivered and paid for a month or more after the date of purchase, when their
value may have changed. A fund makes such commitments only with the intention
of actually acquiring the securities, but may sell the securities before the
settlement date if WAM deems it advisable for investment reasons. A fund may
utilize spot and forward foreign currency exchange transactions to reduce the
risk inherent in fluctuations in the exchange rate between one currency and
another when securities are purchased or sold on a when-issued or delayed
delivery basis.
A fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
At the time a fund enters into a binding obligation to purchase securities
on a when-issued basis or enters into a reverse repurchase agreement, assets of
the fund having a value at least as great as the purchase price of the
securities to be purchased will be segregated on the books of the fund and held
by the custodian throughout the period of the obligation. The use of these
investment strategies, as well as any borrowing by a fund, may increase NAV
fluctuation. The funds have no present intention of investing in reverse
repurchase agreements.
Temporary Strategies
The funds have the flexibility to respond promptly to changes in market and
economic conditions. In the interest of preserving shareholders' capital, WAM
may employ a temporary defensive investment strategy if it determines such a
strategy to be warranted. Pursuant to such a defensive strategy, a fund
temporarily may hold cash (U.S. dollars, foreign currencies, multinational
currency units) and/or invest up to 100% of its assets in high quality debt
securities or money market instruments of U.S. issuers (or, in the case of Acorn
Fund, Acorn International and Acorn Foreign Forty, those of foreign issuers),
and most or all of the fund's investments may be made in the United States and
denominated in U.S. dollars. It is impossible to predict whether, when, or for
how long a fund might employ defensive strategies.
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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.
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. Under normal conditions, the
funds' portfolio turnover rate will be below 50%. A high rate of portfolio
turnover, if it should occur, would result in increased transaction expenses
which must be borne by each fund. High portfolio turnover may also result in
the realization of capital gains or losses and, to the extent net short-term
capital gains are realized, any distributions resulting from such gains will be
considered ordinary income for federal income tax purposes.
Line of Credit
Acorn maintains a line of credit with a bank in order to permit borrowing
on a temporary basis to meet share redemption requests in circumstances in which
temporary borrowing may be preferable to liquidation of portfolio securities.
Any borrowings under that line of credit by the funds would be subject to each
fund's restrictions on borrowing under "Investment Restrictions," below.
Investment Restrictions
Acorn Fund
In pursuing its investment objective Acorn Fund will not:
1. Invest more than 5% of its assets (valued at time of investment) in
securities of any one issuer, except in government obligations;
2. Acquire securities of any one issuer which at the time of investment
(a) represent more than 10% of the voting securities of the issuer or
(b) have a value greater than 10% of the outstanding securities of
the issuer;
3. Invest more than 25% of its assets (valued at time of investment) in
securities of companies in any one industry;
4. Invest more than 5% of its assets (valued at time of investment) in
securities of issuers with less than three years' operation (including
predecessors);
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5. Borrow money except (a) from banks for temporary or emergency purposes
in amounts not exceeding 33% of the value of the fund's assets at the time
of borrowing, and (b) in connection with transactions in options and in
securities index futures [the fund will not purchase additional securities
when its borrowings, less amounts receivable on sales of portfolio
securities, exceed 5% of total assets];
6. Pledge, mortgage or hypothecate its assets, except in connection with
permitted borrowings;
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; but the fund will limit its total
investment in restricted securities and in other securities for which there
is no ready market to not more than 10% of its total assets at the time of
acquisition;
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) forward
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. Sell securities short or maintain a short position, except short sales
against-the-box;
12. Participate in a joint or on a joint or several basis in any trading
account in securities;
13. Invest in companies for the purpose of management or the exercise of
control;
14. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940;
15. Make loans, but this restriction shall not prevent the Fund from (a)
buying a part of an issue of bonds, debentures, or other obligations that
are publicly distributed, or from investing up to an aggregate of 15% of
its total assets (taken at market value at the time of each purchase) in
parts of issues of bonds, debentures or other obligations of a type
privately placed with financial institutions, (b) investing in repurchase
agreements, or (c) lending portfolio securities, provided that it may not
lend securities if, as a result, the aggregate value of all securities
loaned would exceed 33% of its total assets (taken at market value at the
time of such loan).
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Acorn International
In pursuing its investment objective Acorn International will not:
1. With respect to 75% of the value of the fund's total assets, invest
more than 5% of its total assets (valued at time of investment) in
securities of a single issuer, except securities issued or guaranteed by
the government of the U.S., or any of its agencies or instrumentalities;
2. Acquire securities of any one issuer that at the time of investment (a)
represent more than 10% of the voting securities of the issuer or (b) have
a value greater than 10% of the value of the outstanding securities of the
issuer;
3. Invest more than 25% of its assets (valued at time of investment) in
securities of companies in any one industry;
4. Make loans, but this restriction shall not prevent the fund from (a)
buying a part of an issue of bonds, debentures, or other obligations that
are publicly distributed, or from investing up to an aggregate of 15% of
its total assets (taken at market value at the time of each purchase) in
parts of issues of bonds, debentures or other obligations of a type
privately placed with financial institutions, (b) investing in repurchase
agreements, or (c) lending portfolio securities, provided that it may not
lend securities if, as a result, the aggregate value of all securities
loaned would exceed 33% of its total assets (taken at market value at the
time of such loan);
5. Borrow money except (a) from banks for temporary or emergency purposes
in amounts not exceeding 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. [The fund will not purchase additional
securities when its borrowings, less amounts receivable on sales of
portfolio securities, exceed 5% of total assets.];
6. Underwrite the distribution of securities of other issuers; however the
fund may acquire "restricted" securities which, in the event of a resale,
might be required to be registered under the Securities Act of 1933 on the
ground that the fund could be regarded as an underwriter as defined by that
act with respect to such resale; but the fund will limit its total
investment in restricted securities and in other securities for which there
is no ready market, including repurchase agreements maturing in more than
seven days, to not more than 15% of its total assets at the time of
acquisition;
7. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises that invest in real
estate or interests in real estate;
23
<PAGE>
8. Purchase and sell commodities or commodity contracts, except that it
may enter into (a) futures and options on futures and (b) forward
contracts;
9. Make margin purchases of securities, except for use of such short-term
credits as are needed for clearance of transactions and except in
connection with transactions in options, futures and options on futures;
10. Sell securities short or maintain a short position, except short sales
against-the-box.
11. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
Acorn USA
In pursuing its investment objective Acorn USA will not:
1. With respect to 75% of the value of the Fund's total assets, invest
more than 5% of its total assets (valued at time of investment) in
securities of a single issuer, except securities issued or guaranteed by
the government of the U.S., or any of its agencies or instrumentalities;
2. Acquire securities of any one issuer which at the time of investment
(a) represent more than 10% of the voting securities of the issuer or (b)
have a value greater than 10% of the value of the outstanding securities of
the issuer;
3. Invest more than 25% of its assets (valued at time of investment) in
securities of companies in any one industry, except that this restriction
does not apply to investments in U.S. government securities;
4. Make loans, but this restriction shall not prevent the Fund from (a)
buying a part of an issue of bonds, debentures, or other obligations that
are publicly distributed, or from investing up to an aggregate of 15% of
its total assets (taken at market value at the time of each purchase) in
parts of issues of bonds, debentures or other obligations of a type
privately placed with financial institutions, (b) investing in repurchase
agreements, or (c) lending portfolio securities, provided that it may not
lend securities if, as a result, the aggregate value of all securities
loaned would exceed 33% of its total assets (taken at market value at the
time of such loan);
5. Borrow money except (a) from banks for temporary or emergency purposes
in amounts not exceeding 33% of the value of the Fund's total assets at the
time of borrowing, and (b) in connection with transactions in options,
futures and options on futures;
6. Underwrite the distribution of securities of other issuers; however,
the Fund may acquire "restricted" securities which, in the event of a
resale, might be required to be
24
<PAGE>
registered under the Securities Act of 1933 on the ground that the Fund
could be regarded as an underwriter as defined by that act with respect to
such resale;
7. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real
estate or interests in real estate;
8. Purchase and sell commodities or commodity contracts, except that it
may enter into (a) futures and options on futures and (b) foreign currency
contracts;
9. Make margin purchases of securities, except for use of such short-term
credits as are needed for clearance of transactions and except in
connection with transactions in options, futures and options on futures;
10. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
Acorn Twenty and Acorn Foreign Forty
In pursuing its investment objective each of Acorn Twenty and Acorn Foreign
Forty will not:
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 the value of the Fund's 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 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);
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;
25
<PAGE>
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 (except the bracketed language) for each fund are
"fundamental," which means that they cannot be changed without the approval of
the lesser of (i) 67% of each fund's shares present at a meeting if more than
50% of the shares outstanding are present or (ii) more than 50% of each fund's
outstanding shares.
In addition, Acorn Fund, Acorn International, Acorn USA, Acorn Twenty and
Acorn Foreign Forty are subject to a number of restrictions that may be changed
by the board of trustees without shareholder approval. Under those non-
fundamental restrictions, the funds will not:
a. Acquire securities of other registered investment companies except in
compliance with the Investment Company Act of 1940;
b. Invest more than 33% of its total assets (valued at time of investment)
in securities of foreign issuers [this restriction applies only to Acorn
Fund];
c. Invest more than 15% of its total assets in the securities of foreign
issuers [this restriction applies only to Acorn Twenty].
c. Invest more than 10% of its total assets (valued at the time of
investment) in securities of non-U.S. issuers, not including securities
represented by American Depository Receipts [this restriction applies only
to Acorn USA].
e. Invest more than 15% of its total assets in securities of United States
issuers, under normal market conditions [this restriction applies only to
Acorn Foreign Forty].
d. Invest in companies for the purpose of management or the exercise of
control;
26
<PAGE>
e. Pledge, mortgage or hypothecate its assets, except as may be necessary
in connection with permitted borrowings or in connection with short sales,
options, futures and options on futures;
f. Invest more than 10% of its total assets (valued at the time of
investment) in restricted securities [this restriction applies only to
Acorn Fund, Acorn International and Acorn USA];
g. Invest more than 15% of its net assets (valued at time of investment)
in illiquid securities, including repurchase agreements in maturing in more
than seven days; and
h. Make short sales of securities unless the Fund owns at least an equal
amount of such securities, or owns securities that are convertible or
exchangeable, without payment of further consideration, into at least an
equal amount of such securities.
Notwithstanding the foregoing investment restrictions, Acorn International,
Acorn USA, Acorn Twenty and Acorn Foreign Forty may purchase securities pursuant
to the exercise of subscription rights, provided that, in the case of Acorn
International and Acorn USA, such purchase will not result in either fund's
ceasing to be a diversified investment company. Japanese and European
corporations frequently issue additional capital stock by means of subscription
rights offerings to existing shareholders at a price substantially below the
market price of the shares. The failure to exercise such rights would result in
a fund's interest in the issuing company being diluted. The market for such
rights is not well developed in all cases and, accordingly, a fund may not
always realize full value on the sale of rights. The exception applies in cases
where the limits set forth in the investment restrictions would otherwise be
exceeded by exercising rights or would have already been exceeded as a result of
fluctuations in the market value of Acorn International's portfolio securities
with the result that the fund would be forced either to sell securities at a
time when it might not otherwise have done so, or to forego exercising its
rights.
Performance Information
From time to time the funds may quote total return figures. "Total Return"
for a period is the percentage change in value during the period of an
investment in shares of a fund, including the value of shares acquired through
reinvestment of all dividends and capital gains distributions. "Average Annual
Total Return" is the average annual compounded rate of change in value
represented by the Total Return for the period.
Average Annual Total Return is computed as follows:
ERV = P(1+T)/n/
Where: P = the amount of an assumed initial investment in shares of a fund
T = average annual total return
n = number of years from initial investment to the end of the
period
ERV = ending redeemable value of shares held at the end of the
period
27
<PAGE>
For example, as of December 31, 1998 the Total Return and Average Total
Return on a $1,000 investment in each fund for the following periods were:
<TABLE>
<CAPTION>
ACORN FUND
- ---------- Average Annual
Total Return Total Return
------------ --------------
<S> <C> <C>
1 year............................. 6.02% 6.02%
5 years............................ 81.55% 12.67%
10 years........................... 352.81% 16.29%
Life of Fund (inception 6/10/70)... 7976.85% 16.61%
ACORN INTERNATIONAL
- ------------------- Average Annual
Total Return Total Return
-------------- --------------
1 year............................. 15.43% 15.43%
3 years............................ 39.53% 11.74%
5 years............................ 46.20% 7.89%
Life of Fund (inception 9/23/92)... 133.05% 14.45%
ACORN USA
- --------- Average Annual
Total Return Total Return
------------- --------------
1 Year............................. 5.79% 5.79%
Life of Fund (inception 9/4/96).... 63.05% 23.46%
ACORN TWENTY
- ------------ Average Annual
Total Return Total Return
------------- --------------
Life of Fund (inception 11/23/98) 7.10% N/A
ACORN FOREIGN FORTY
- -------------------
Average Annual
Total Return Total Return
-------------- --------------
Life of Fund (inception 11/23/98) 10.00% N/A
</TABLE>
The funds impose no sales charges and pay no distribution expenses. Income
taxes are not taken into account. Performance figures quoted by the funds are
not necessarily indicative of future results. Each fund's performance is a
function of conditions in the securities markets, portfolio management, and
operating expenses. Although information about past performance is useful in
reviewing a fund's performance and in providing some basis for comparison with
other investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
28
<PAGE>
The funds may note their mention or recognition in newsletters, newspapers,
magazines, or other media. Portfolio managers and other members of WAM's staff
may make presentations at conferences or trade shows, appear on television or
radio programs, or conduct or participate in telephone conference calls, and the
Funds may announce those presentations, appearances or calls to some or all
shareholders, or to potential investors in the Funds. Biographical and other
information about a Fund's portfolio manager, including information about awards
received by that portfolio manager or mentions of the manager in the media, may
also be described or quoted in Fund advertisements or sales literature.
Ralph Wanger's book, A Zebra in Lion Country: Ralph Wanger's Investment
Survival Guide (Simon & Schuster, 1997) may be advertised from time to time, and
mention of the book may be made in fund sales literature. Mr. Wanger's book
describes the investment philosophies and techniques that have guided his
management of the Acorn funds over the last few decades. He has been portfolio
manager of Acorn Fund since it was founded by Irving Harris in 1970. On May
22-23, 1999 only, copies of Mr. Wanger's book will be available free of charge
to attendees of the Los Angeles Times 3rd Annual Investment Strategies
Conference.
In advertising and sales literature, each fund's performance may be
compared with those of market indexes and other mutual funds. In addition to
the performance information described above, a fund might use comparative
performance as computed in a ranking or rating determined by Lipper Analytical
Services, Inc., an independent service that monitors the performance of over
1,000 mutual funds, Morningstar, Inc., or another service.
The funds may also use statistics to indicate volatility or risk. The
premise of each of these measures is that greater volatility connotes greater
risk undertaken in achieving performance. One measure of volatility is beta.
Beta is the volatility of a fund's total return relative to the movements of a
benchmark index. A beta greater than one indicates volatility greater than the
index, and a beta of less than one indicates a volatility less than the index.
Another measure of volatility is R-squared. It reflects the percentage of a
fund's price movements that are explained by movements in the benchmark index.
An R-squared of 1.00 indicates that all movements of a fund's price are
completely explained by movements in the index. Generally, a higher R-squared
will indicate a more reliable beta figure. Alpha is a measure used to discuss a
fund's relative performance. Alpha measures the actual return of a fund
compared to the expected return of a fund given its risk (as measured by beta).
The expected return of a fund is based on how historical movements of the
benchmark index and historical performance of a fund compare to the benchmark
index. The expected return is computed by multiplying the advance or decline in
a market represented by a fund's beta. A positive alpha quantifies the value
that a fund manager has added and a negative alpha quantifies the value that a
fund manager has lost. Beta and R-squared are calculated by performing a least
squares linear regression using five years of monthly total return figures for
each portfolio and benchmark combination. Alpha is calculated by taking the
difference between the average monthly portfolio return and the beta-adjusted
average monthly benchmark return. The result of this calculation is then
geometrically annualized.
The following are some benchmark indices utilized by the funds: Salomon
Brothers Extended Market Index ("EMI"), an index of the bottom 20% of
institutionally investable capital of countries, selected by Salomon, excluding
the U.S.; Morgan Stanley's Europe, Australasia Far East Index ("EAFE"), an index
of companies throughout the world in proportion to world stock market
capitalizations, excluding the U.S. and Canada; the Standard & Poor's 500 Stock
Index ("S&P 500"), a broad, market-weighted average of U.S. blue-chip companies;
the Standard & Poor's MidCap 400 ("S&P 400"), also a broad, market-weighted
average of U.S. companies in the next tier down in size from the S&P 500; and
the Russell 2000 Index, an index formed by taking the largest 3,000 small
companies in the U.S. and eliminating the largest 1,000 of those
29
<PAGE>
companies, leaving an unweighted index of 2000 small companies. All indexes are
unmanaged and include reinvested dividends.
As of December 31, 1998, some statistics for the funds are as follows:
<TABLE>
<CAPTION>
R2 Beta Alpha
---------- ---- ------
Acorn Fund
----------
<S> <C> <C> <C>
vs. S&P 500 0.70 0.89 -6.90%
vs. Russell 2000 0.82 0.79 5.74%
Acorn International
--------------------
vs. EMI Ex U.S. 0.68 0.80 4.29%
vs. EAFE 0.63 0.70 1.58%
</TABLE>
Other measures of volatility and relative performance may be used as
appropriate. All such measures will fluctuate and do not represent future
results.
Investment Adviser
Wanger Asset Management, L.P. ("WAM"), serves as the investment adviser for
the funds and for other institutional accounts. As of the date of this SAI, WAM
has approximately $7 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, John H. Park. and Margaret M.
Forster. Ralph Wanger is the president 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; it assumes substantially all expenses for
bookkeeping, and assumes the expenses of printing and distributing the funds'
prospectus and reports to prospective investors. The Agreement will continue in
effect as to each fund through June 30, 1999, and thereafter from year to year
so long as its continuance as to each fund is approved at least annually by (i)
the board of trustees of Acorn or by the holders of a majority of that fund's
outstanding voting securities as defined by the Investment Company Act of 1940
and (ii) a majority of the members of Acorn's board of trustees who are not
otherwise affiliated with Acorn or WAM, cast in person at a meeting called for
that purpose. Any amendment to the Agreement must be approved in the same
manner. The Agreement may be terminated as to a fund without penalty by the
vote of the board of trustees of Acorn or the shareholders of that fund (by a
majority as defined in the 1940 Act) on sixty days' written notice to WAM or by
WAM on sixty days' notice to the fund, and will terminate
30
<PAGE>
automatically in the event of its assignment. The fees payable by a fund under
the Agreement are the obligation only of that fund and impose no liability on
the other funds.
The advisory fees the funds pay to WAM are calculated daily and paid
monthly, at the annual rates shown below:
Acorn Fund
Average Daily Net Assets Rate of Fee
------------------------ -----------
First $700 million 0.75%
$700 million to $2 billion 0.70%
In excess of $2 billion 0.65%
Acorn International
Average Daily Net Assets Rate of Fee
------------------------ -----------
First $100 million 1.20%
$100 million to $500 million 0.95%
In excess of $500 million 0.75%
Acorn USA
Average Daily Net Assets Rate of Fee
------------------------ -----------
First $200 million 0.95%
In excess of $200 million 0.90%
Acorn Twenty
Rate of Fee
-----------
0.90%
Acorn Foreign Forty
Rate of Fee
-----------
0.95%
31
<PAGE>
The advisory fees paid to WAM by each fund for the fiscal years ended
December 31. 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Fund 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acorn Fund $24,905,000 $14,349,000 $12,437,000
- ------------------------------------------------------------------------------------------------------------------------
Acorn International $14,124,000 $16,235,000 $13,255,000
- ------------------------------------------------------------------------------------------------------------------------
Acorn USA $ 2,336,000 $ 1,199,000 $ 101,000
- ------------------------------------------------------------------------------------------------------------------------
Acorn Twenty $ 26,000** --- ---
- ------------------------------------------------------------------------------------------------------------------------
Acorn Foreign Forty $ 11,000** --- ---
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*From inception on September 4, 1996.
**From inception on November 23, 1998.
Acorn has 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 each fund's average daily net assets. The funds pay the cost of
custodial, stock transfer, dividend disbursing, audit and legal services, and
membership in trade organizations. They also pay other expenses such as the
cost of maintaining the registration of their shares under federal law,
complying with state securities laws, proxy solicitations, printing and
distributing notices and copies of the prospectus and shareholder reports
furnished to existing shareholders, taxes, insurance premiums and the fees of
trustees not affiliated with WAM.
Distributor
Shares of each fund are offered for sale by WAM Brokerage Services, L.L.C.
("WAM BD") without any sales commissions, 12b-1 fees or other charges to the
funds or their shareholders. WAM BD is wholly-owned by WAM and WAM Ltd. All
distribution expenses relating to the funds are paid by WAM, including the
payment or reimbursement of any expenses incurred by WAM BD. The Distribution
Agreement for Acorn Fund, Acorn International and Acorn USA will continue in
effect through December 31, 1999 and thereafter from year to year provided such
continuance is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of the Trust, and (ii) by a
majority of the trustees who are not parties to the Agreement or interested
persons of any such party. The Distribution Agreement for Acorn Twenty and Acorn
Foreign Forty 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.
32
<PAGE>
WAM BD offers the funds' shares only on a best efforts basis. WAM BD is located
at 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606.
The Trust
The Trust is a Massachusetts business trust organized under an Agreement
and Declaration of Trust dated April 21, 1992 (the "Declaration of Trust"). The
Declaration of Trust may be amended by a vote of either the Trust's shareholders
or its trustees. The Trust may issue an unlimited number of shares, in one or
more series as the board of trustees may authorize. Any such series of shares
may be further divided, without shareholder approval, into two or more classes
of shares having such preferences or special or relative rights or privileges as
the trustees may determine. The shares of the funds are not currently divided
into classes. Acorn Fund, Acorn International, Acorn USA, Acorn Twenty and
Acorn Foreign Forty are the only series of the Trust currently being offered.
The board of trustees may authorize the issuance of additional series if deemed
advisable, each with its own investment objective, policies and restrictions.
All shares issued will be fully paid and non-assessable and will have no
preemptive or conversion rights.
Under Massachusetts law, the shareholders of the Trust may, under certain
circumstances believed to be remote, be held personally liable for the Trust's
obligations. However, the Declaration of Trust disclaims liability of
shareholders and the Trust's trustees and officers for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation or contract entered into or executed by the Trust or the
board of trustees. The Declaration of Trust provides for indemnification out of
the assets of the Trust of all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
remote, since it is limited to circumstances in which the disclaimer is
inoperative and the Trust itself is unable to meet its obligations.
On any matter submitted to a vote of shareholders, shares are voted in the
aggregate and not by individual series except that shares are voted by
individual series when required by the Investment Company Act of 1940 or other
applicable law, or when the board of trustees determines that the matter affects
only the interests of one series, in which case shareholders of the unaffected
series are not entitled to vote on such matters. All shares of the Trust are
voted together in the election of trustees.
33
<PAGE>
Trustees and Officers
The board of trustees has overall responsibility for the Trust's and the
Funds' affairs. The trustees and officers of the Trust, their dates of birth
and their principal business activities during the past five years are:
<TABLE>
<CAPTION>
Name and Date of Position(s) Principal Occupation(s) During Past Five Years
- ---------------- ---------- -----------------------------------------------
Birth Held with the
- ----- -------------
Trust
-----
<C> <S> <C>
Irving B. Harris Trustee and Chairman of the executive committee and director, Pittway Corporation
8/4/1910 chairman (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 Trustee and President, Wanger Advisors Trust; Director, Wanger Investment
6/21/1934 President Company plc; Principal, Wanger Asset Management, L.P.
James H. Lorie Trustee and Vice Eli B. and Harriet B. Williams Professor of Business Administration
2/23/1922 Chairman Emeritus, University of Chicago Graduate School of Business; director,
Thornburg Mortgage Asset Corp. (REIT) and Santa Fe Natural Tobacco
Leo A. Guthart Trustee Vice Chairman, Pittway Corporation (multi-product manufacturer and
9/26/1937 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); director, Long Island Research Institute.
Jerome Kahn, Jr. Trustee President, William Harris Investors, Inc. (investment adviser); director,
4/13/1934 Pittway Corporation (multi-product manufacturer and publisher)
David C. Kleinman Trustee Senior lecturer in business administration, University of Chicago Graduate
10/12/1935 School of Business; business consultant; Director, Irex Corporation
(insulation contractor)
Charles P. McQuaid* Trustee and Trustee and Senior Vice President, Wanger Advisors Trust; Principal and
8/27/1953 Senior Vice Director of Research, Wanger Asset Management, L.P.
President
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Name and Date of Position(s) Principal Occupation(s) During Past Five Years
- ---------------- ---------- -----------------------------------------------
Birth Held with the
- ----- -------------
Trust
-----
<S> <C> <C>
Roger S. Meier Trustee President, AMCO, Inc. (investment and real estate management); director,
1/18/1926 Fred Meyer, Inc. (retail chain); Director, Red Lion Inns Limited
Partnership (hotel chain); Director and advisory board member, Key Bank of
Oregon (banking); Chairman of Investment Council and member of Committee
of Legacy Systems (hospital); Executive Director and Chairman of
investment committee, Portland Art Museum
Allan B. Muchin Trustee Partner, Katten, Muchin & Zavis (law firm); Director, Alberto-Culver
1/10/1936 Company (toiletries).
Robert E. Nason Trustee Director, Hach Company (manufacturer and distributor of water testing and
7/29/1936 monitoring products and agents); Director, Fairfax Insurance Limited
(privately owned insurance company); from 1990-1998, Executive Partner and
chief executive officer, member of the executive committee and member of
the policy board of Grant Thornton International (public accounting firm).
Katherine Schipper Trustee Eli B. and Harriet B. Williams Professor of Accounting, KPMG Peat Marwick
10/04/1949 Faculty Research Scholar and Director of the Institute of Professional
Accounting, University of Chicago Graduate School of Business.
Margaret M. Forster Vice President Analyst and Portfolio Manager, Wanger Asset Management, L.P., since 1994;
1/28/1960 assistant professor of finance, Kellogg Graduate School of Management,
Northwestern University, 1993-1994.
Marcel P. Houtzager Vice President Vice President, Wanger Advisors Trust; Principal, analyst and portfolio
10/26/1960 manager, Wanger Asset Management, L.P.
Kenneth A. Kalina Assistant Assistant Treasurer, Wanger Advisors Trust; Fund controller, Wanger Asset
8/4/1959 Treasurer Management, L.P., since September 1995; prior thereto, treasurer of the
Stein Roe Mutual Funds.
Bruce H. Lauer Vice President, Vice President and treasurer, Wanger Advisors Trust; chief administrative
7/22/1957 Assistant officer, Wanger Asset Management, L.P. since April 1995; director, Wanger
Secretary and Investment Company plc; prior thereto, first vice president, investment
Treasurer accounting, Kemper Financial Services, Inc.
Robert A. Mohn Vice President Vice President, Wanger Advisors Trust; principal, analyst and portfolio
9/13/1961 manager, Wanger Asset Management, L.P.
John H. Park Vice President Vice President, Wanger Advisors Trust; principal, analyst and portfolio
5/30/1967 manager, Wanger Asset Management. L.P. (since 1993); analyst.
Mark H. Yost Vice President Analyst and portfolio manager, Wanger Asset Management. L.P., since
6/28/1963 October 1995; co-portfolio manager, Wanger U.S. Smaller Companies Fund
since June 2997; portfolio manager of WAM Yost Partnership, L.P.; prior
thereto, investment analyst, First Chicago Corporation.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Name and Date of Position(s) Principal Occupation(s) During Past Five Years
- ---------------- ---------- -----------------------------------------------
Birth Held with the
- ----- -------------
Trust
-----
<S> <C> <C>
Leah J. Zell Vice President Vice President, Wanger Advisors Trust; principal, analyst and portfolio
5/23/1949 manager, Wanger Asset Management, L.P.
</TABLE>
*Messrs. McQuaid and Wanger are trustees who are interested persons of
Acorn as defined in the Investment Company Act of 1940, and of WAM. Messrs.
Harris, Lorie, and Wanger are members, and Mr. McQuaid is an alternate member,
of the executive committee, which has authority during intervals between
meetings of the board of trustees to exercise the powers of the board, with
certain exceptions. As of December 1, 1998, the trustees and officers of Acorn
as a group owned beneficially less than 1% of the outstanding shares of the
funds.
Mr. Wanger and Ms. Zell are married to each other.
At January 31, 1999, the State of Illinois Deferred Compensation Plan, 604
Stratton Office Building, Springfield, IL 62706, held 19,974,389 shares, and
Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, CA 94104,
("Schwab") held 11,379,160 shares of Acorn Fund as owners of record, but not
beneficially (9.80% and 5.58% of the outstanding shares, respectively). Schwab
held 12,682,052 shares of Acorn International (15.40% of the outstanding shares)
as owner of record, but not beneficially. Schwab held 2,323,554 shares, and
National Financial Services Corporation, P.O. Box 3098, Church Street Station,
New York, NY 10008, Donaldson Lufkin & Jenrette Securities Corp, P.O. Box 2052,
Jersey City, NJ 07303, and Firstcinco Reinvest, P.O. Box 640229, Cincinnati, OH
45264, held 1,304,791, 1,213,449 and 1,158,744 shares, of Acorn USA (12.39%,
6.96%, 6.47% and 6.18% of the outstanding shares, respectively) as owners of
record, but not beneficially.
During 1998 the funds paid fees aggregating $302,000 to board members who
were not affiliated with WAM. The following table sets forth the total
compensation, (including any amounts deferred, as described below) paid by the
Trust during the fiscal year ended December 31, 1998 to each of the trustees of
the Trust:
36
<PAGE>
<TABLE>
<CAPTION>
Aggregate Aggregate Aggregate Aggregate Aggregate Total
- ------------------------- Comp. Comp. Comp.from Comp. from Comp. from Comp.
from Acorn from Acorn Acorn USA Acorn Acorn from
Name of Trustee Fund Int. Twenty+ Foreign Fund
Forty+ Complex (5)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Irving B. Harris 60,800 27,500 2,700 0 0 $91,000
Leo A. Guthart 23,450 10,500 1,050 0 0 $35,000
Jerome Kahn, Jr. 23,450 10,500 1,050 0 0 $35,000
David C. Kleinman 23,450 10,500 1,050 0 0 $35,000
James H. Lorie 23,950 10,500 1,050 0 0 $35,500
Charles P. McQuaid 0 0 0 0 0 0
Roger S. Meier 23,450 10,500 1,050 0 0 $35,000
Adolph Meyer, Jr.* 19,430 8,700 870 0 0 $29,000
Allan B. Muchin** 1,452 650 65 0 0 $ 2,167
Robert E. Nason** 1,452 650 65 0 0 $ 2,167
Katherine Schipper** 1,452 650 65 0 0 $ 2,167
Ralph Wanger 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Since November 23, 1998.
* Served on the Board of the Trust until December 31, 1998.
** Elected to the Board of the Trust effective December 1, 1998.
The officers and trustees affiliated with WAM serve without any
compensation from the Trust. Acorn has adopted a deferred compensation plan
(the "Plan") for its non-interested trustees. Under the Plan, the trustees who
are not "interested persons" of Acorn or WAM ("participating trustees") may
defer receipt of all or a portion of their compensation from the Trust in order
to defer payment of income taxes or for other reasons. The deferred
compensation payable to a participating trustee is credited to a book reserve
account as of the business day such compensation would have been paid to such
trustee. The deferred compensation accrues income from the date of credit in an
amount equal to the amount that would have been earned had such deferred
compensation (and all income earned thereon) been invested and reinvested in
shares of one or more of the funds. If a participating trustee retires, such
trustee may elect to receive payments under the plan in a lump sum or in equal
annual installments over a period of five years. If a participating trustee
dies, any amount payable under the Plan will be paid to that trustee's
beneficiaries. Each fund's obligation to make payments under the Plan is a
general obligation of that fund. No fund is liable for any other fund's
obligations to make payments under the Plan.
37
<PAGE>
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 from time to time authorize certain financial services companies,
broker-dealers or their designees ("authorized agents") to accept share purchase
and redemption orders on behalf of the funds. Some of those authorized agents
may charge transaction fees for their services. For purchase orders placed
through an authorized agent, a shareholder will pay the fund's NAV per share
(see "Purchasing and Redeeming Shares - Net Asset Value," below) next computed
after the receipt by the authorized agent of such purchase order, plus any
applicable transaction charge imposed by the agent. For redemption orders
placed through an authorized agent, a shareholder will receive redemption
proceeds which reflect the NAV per share next computed after the receipt by the
authorized agent of the redemption order, less any redemption fees imposed by
the agent.
In some instances, an authorized agent will not charge any transaction fees
directly to investors in a fund. However, for accounting and shareholder
servicing services provided by such agent with respect to fund share accounts
held on behalf of its customers, the agent may charge a fee, generally a
percentage of the annual average value of those accounts. WAM pays any such
fees.
Net Asset Value
Share purchase and redemption orders will be priced at a fund's NAV next
computed after such orders are received and accepted by: (i) Acorn's transfer
agent; (ii) a broker-dealer or other financial services company authorized by
Acorn to accept purchase and redemption orders on the fund's behalf; or (iii)
such authorized broker-dealer's designee. 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 those 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 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
38
<PAGE>
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, or for which the market quotation is
determined not to represent a fair value, and any other assets are valued at a
fair value as determined in good faith by the board of trustees. Money market
instruments having a maturity of 60 days or less from the valuation date are
valued on an amortized cost basis. All assets and liabilities initially
expressed in foreign currencies are converted into U.S. dollars at the mean of
the bid and offer prices of such currencies against U.S. dollars quoted by any
major bank or dealer. If such quotations are not available, the rate of exchange
will be determined in accordance with policies established in good faith by the
board of trustees.
Trading in the foreign securities of the funds' portfolios may take place
in various foreign markets at certain times and on certain days (such as
Saturday) when the NYSE is not open for business and the funds do not calculate
their NAVs. Conversely, trading in the funds' foreign securities may not occur
at times and on days when the NYSE is open. Because of the different trading
hours in various foreign markets, the calculation of 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 Agreement and Declaration of Trust also authorizes
Acorn to redeem shares under certain other circumstances as may be specified by
the board of trustees.
WAM acts as a shareholder servicing agent for the Reich & Tang Money Funds
(the "Money Funds") in connection with an exchange plan between the Acorn funds
and the Money Funds (the "Switch Plan"). For its services it receives a fee at
the rate of 0.35% of the average annual net assets of each account in a Money
Fund established through the Switch Plan, pursuant to a 12b-1 plan adopted by
the Money Funds.
Additional Tax Information
Each fund intends to continue to qualify to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code (the "Code")
so as to avoid payment of
39
<PAGE>
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 that
fund. A subsequent distribution to you of such amounts, although constituting a
return of your investment, will be taxable either as a dividend or capital gain
distribution, whether received in cash or reinvested in additional shares. For
federal income tax purposes, any distribution that is paid in January but that
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. The Internal Revenue Service
Restructuring and Reform Act of 1998 eliminated the requirement that capital
assets be held for more than 18 months in order to be taxed at the lowest rate
in effect under current law, and instead permits capital assets to be so taxed
if held for more than one year. This change applies generally to sales
transactions which occur during taxable years ending after December 31, 1997.
You will be subject to income tax at ordinary rates on income dividends and
distributions of net short-term capital gain. Distributions of net long-term
capital gains are taxable to you as long-term capital gains (currently taxed at
a maximum rate of 20%) regardless of the length of time you have held your
shares. Long-term gains are those derived from securities held by the Fund for
more than one year.
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, Acorn may be required to withhold 31% federal
income tax ("backup withholding") from dividend, capital gain and redemption
payments to you. Backup withholding may be required if: (a) you fail to
furnish your social security or other tax identification number; (b) you fail to
certify that your social security or tax identification number is correct and
that you are not subject to backup withholding due to the underreporting of
certain income; or (c) the IRS informs Acorn that your tax identification number
is incorrect.
These certifications are contained in the application that you complete
when you open your fund account. Acorn must promptly pay the IRS all amounts
withheld. Therefore, it is usually not possible for Acorn to reimburse you for
amounts withheld. You may, however, claim the amount withheld as a credit on
your federal income tax return.
Foreign currency gains and losses, including the portion of gain or loss on
the sale of debt securities attributable to foreign exchange rate fluctuations,
are taxable as ordinary income. If the net effect of these transactions is a
gain, the income dividend paid by a fund will be increased; if the result is a
loss, the income dividend paid by a fund will be decreased.
Dividends paid by Acorn International and Acorn Foreign Forty are not
eligible for the dividends-received deduction for corporate shareholders, if as
expected, none of that fund's
40
<PAGE>
income consists of dividends paid by United States corporations. A portion of
the dividends paid by Acorn Fund, Acorn USA and Acorn Twenty is expected to be
eligible for the dividends-received deduction. Capital gain distributions paid
from the funds are never eligible for this deduction.
Income received by the funds from sources within various foreign countries
will be subject to foreign income taxes withheld at the source. Under the Code,
if more than 50% of the value of a fund's total assets at the close of its
taxable year comprises securities issued by foreign corporations, that fund may
file an election with the IRS to "pass through" to its shareholders the amount
of foreign income taxes paid by that fund. Pursuant to this election,
shareholders will be required to: (i) include in gross income, even though not
actually received, their respective pro rata share of foreign taxes paid by the
fund; (ii) treat their pro rata share of foreign taxes as paid by them; and
(iii) either deduct their pro rata share of foreign taxes in computing their
taxable income, or use it as a foreign tax credit against U.S. income taxes (but
not both). No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions.
Each of Acorn International and Acorn Foreign Forty intends to meet the
requirements of the Code to "pass through" to its shareholders foreign income
taxes paid, but there can be no assurance that it will be able to do so. Each
shareholder will be notified within 60 days after the close of each taxable year
of Acorn International or Acorn Foreign Forty, if the foreign taxes paid by the
fund will "pass through" for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign taxes paid, and
(ii) the fund's gross income from foreign sources. Shareholders who are not
liable for federal income taxes, including retirement plans qualified under
Section 401 of the Code, will not be affected by any such "pass through" of
foreign tax credits. Acorn Fund, Acorn USA and Acorn Twenty do not expect to be
able to "pass through" foreign tax credits.
Taxation of Foreign Shareholders
The Code provides that dividends from net income, which are deemed to
include for this purpose each shareholder's pro rata share of foreign taxes paid
by Acorn International and Acorn Foreign Forty (see discussion of "pass through"
of the foreign tax credit to U.S. shareholders), will be subject to U.S. tax.
For shareholders who are not engaged in a business in the U.S., this tax would
be imposed at the rate of 30% upon the gross amount of the dividend in the
absence of a tax treaty providing for a reduced rate or exemption from U.S.
taxation. Distributions of net long-term capital gains are not subject to tax
unless the foreign shareholder is a nonresident alien individual who was
physically present in the U.S. during the tax year for more than 182 days.
Portfolio Transactions
Portfolio transactions of the funds are placed with those securities
brokers and dealers that WAM believes will provide the best value in transaction
and research services for each fund, either in a particular transaction or over
a period of time. Although some transactions involve only brokerage services,
many involve research services as well.
41
<PAGE>
In valuing brokerage services, WAM makes a judgment as to which brokers are
capable of providing the most favorable net price (not necessarily the lowest
commission) and the best execution in a particular transaction. Best execution
connotes not only general competence and reliability of a broker, but specific
expertise and effort of a broker in overcoming the anticipated difficulties in
fulfilling the requirements of particular transactions, because the problems of
execution and the required skills and effort vary greatly among transactions.
In valuing research services, WAM makes a judgment of the usefulness of
research and other information provided to WAM by a broker in managing each
fund's investment portfolio. In some cases, the information, e.g., data or
recommendations concerning particular securities, relates to the specific
transaction placed with the broker, but for the greater part the research
consists of a wide variety of information concerning companies, industries,
investment strategy, and economic, financial, and political conditions and
prospects, useful to WAM in advising that fund.
The reasonableness of brokerage commissions paid by the funds in relation
to transaction and research services received is evaluated by WAM's staff on an
ongoing basis. The general level of brokerage charges and other aspects of each
fund's portfolio transactions are reviewed periodically by the board of trustees
and its committee on portfolio transactions.
WAM is the principal source of information and advice to the funds, and is
responsible for making and initiating the execution of investment decisions by
the funds. However, the board of trustees recognizes that it is important for
WAM, in performing its responsibilities to the funds, to continue to receive and
evaluate the broad spectrum of economic and financial information that many
securities brokers have customarily furnished in connection with 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.
42
<PAGE>
Brokerage commissions incurred by each fund during the last three fiscal
years, not including the gross underwriting spread on securities purchased in
underwritten public offerings, were as follows:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acorn Fund $2,766,000 $2,952,000 $3,440,000
Acorn International 4,111,000 5,350,000 3,929,000
Acorn USA 305,000 216,000 88,900*
Acorn Twenty 53,000** N/A N/A
Acorn Foreign Forty 41,000** N/A N/A
</TABLE>
* From commencement of operations on September 4, 1996.
** From commencement of operations on November 23, 1998.
During 1998, each fund paid brokerage commissions in connection with
portfolio transactions involving purchases and sales to brokers who furnished
investment research services to the funds, as follows:
<TABLE>
<CAPTION>
Fund Brokerage Commissions Purchases and Sales
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Acorn Fund $1,268,000 $448 million
- --------------------------------------------------------------------------------------------------------------
Acorn International $3,619,000 $1,019 million
- --------------------------------------------------------------------------------------------------------------
Acorn USA $ 80,000 $37 million
- --------------------------------------------------------------------------------------------------------------
Acorn Twenty $ 22,000 $9 million
- --------------------------------------------------------------------------------------------------------------
Acorn Foreign Forty $ 37,000 $12 million
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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 Acorn and WAM. Although investment
decisions for the funds are made independently from those for other investment
advisory clients of WAM, it may develop that the same investment decision is
made for one or more of the funds and one or more other advisory clients. If
any of the funds and other clients purchase or sell the same class of securities
on the same day, the transactions will be allocated as to amount and price in a
manner considered equitable to each.
Custodian
State Street Bank and Trust Company, P.O. Box 8502, Boston Massachusetts
02266-8502 ("State Street") is the custodian for the funds. It is responsible
for holding all securities and cash of the funds, receiving and paying for
securities purchased, delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering expenses of the
funds, and performing other administrative duties, all as directed by authorized
43
<PAGE>
persons of the funds. State Street does not exercise any supervisory function
in such matters as purchase and sale of portfolio securities, payment of
dividends, or payment of expenses of the funds. The funds have authorized State
Street to deposit certain portfolio securities of the funds in central
depository systems as permitted under federal law. The funds may invest in
obligations of State Street and may purchase or sell securities from or to State
Street.
Independent Auditors
Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois
60606 audits and reports on the funds' annual financial statements, reviews
certain regulatory reports and the funds' tax returns, and performs other
professional accounting, auditing, tax, and advisory services when engaged to do
so by the funds.
44
<PAGE>
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.
45
<PAGE>
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.
46
<PAGE>
FINANCIAL STATEMENTS
Wanger Advisors Trust--1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Common Stocks--93.0%
Information--39.4%
- --------------------------------------------------------------------------------
Broadcasting--2.1%
250,600 Data Transmission Network (b) $7,236,075
Data Services for Farmers
- --------------------------------------------------------------------------------
Television Programming--5.3%
222,000 Liberty Media Group, 10,225,875
Tele-Communications (b)
CATV & Satellite Dish Programming
330,200 United Video Satellite Group (b) 7,800,975
CATV & Satellite Dish Programming
- --------------------------------------------------------------------------------
18,026,850
- --------------------------------------------------------------------------------
Telephone Services--5.1%
577,600 RCN Corporation (b) 10,216,300
Metro Market: Voice, Video & Data Services
193,300 Commonwealth Telephone (b) 6,475,550
Rural Market: Local, Long Distance
& Internet Access
68,600 Startec Global Communications (b) 660,275
International Telecommunications
- --------------------------------------------------------------------------------
17,352,125
- --------------------------------------------------------------------------------
Mobile Communications--6.6%
411,000 Centennial Cellular (b) 16,851,000
Cellular Franchises
234,500 COMARCO (b) 5,628,000
Wireless Network Testing
- --------------------------------------------------------------------------------
22,479,000
- --------------------------------------------------------------------------------
Telecommunications Equipment--2.2%
425,900 Aspect Telecommunications (b) 7,346,775
Call Center Equipment
- --------------------------------------------------------------------------------
Instrument--0.7%
85,000 Mettler Toledo (b) 2,385,314
Laboratory Products
- --------------------------------------------------------------------------------
Business Software--1.5%
314,000 JDA Software 3,041,875
Software & Services for Retailers
137,600 Systems & Computer Technology (b) 1,892,000
Enterprise Software & Services
- --------------------------------------------------------------------------------
4,933,875
- --------------------------------------------------------------------------------
Business Information and
Marketing Services--1.1%
353,400 Intelligent Information (b) 2,385,450
Technology Market Research
178,100 InfoUSA, C1. B 935,025
116,000 InfoUSA, C1. A 565,500
Business Data for Sales Leads
- --------------------------------------------------------------------------------
3,885,975
- --------------------------------------------------------------------------------
Transaction Processors--3.6%
247,300 National Data 12,040,418
Credit Card & Health Claims Processor
- --------------------------------------------------------------------------------
Computer Hardware & Related Systems--8.0%
417,100 Micros Systems (b) 13,712,164
Information Systems for Restaurants & Hotels
300,600 Kronos (b) 13,320,337
Time Accounting Software & Clocks
- --------------------------------------------------------------------------------
27,032,501
- --------------------------------------------------------------------------------
Gaming Equipment--0.8%
113,000 International Game Technology 2,747,315
Slot Machines & Progressive Jackpots
- --------------------------------------------------------------------------------
Computer Services--2.4%
222,900 Sykes Enterprises (b) 6,798,450
Call Center Services
344,000 Aztec Technology Partners (b) 1,247,000
Technology Staffing Services
- --------------------------------------------------------------------------------
8,045,450
- --------------------------------------------------------------------------------
Information--Total 133,511,673
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Health Care--9.7%
- --------------------------------------------------------------------------------
Biotechnology/Drug Delivery--0.5%
117,000 Synaptic Pharmaceuticals (b) $1,755,000
Receptor Targeted Drug Design
- --------------------------------------------------------------------------------
Health Care Services--9.2%
506,800 Lincare Holdings (b) 20,557,075
Home Health Care Services
475,000 First Health (b) 7,867,187
PPO Network
321,500 Magellan Health Services (b) 2,692,563
Mental Health Services
- --------------------------------------------------------------------------------
31,116,825
- --------------------------------------------------------------------------------
Health Care--Total 32,871,825
Consumer Goods/Services--2.7%
- --------------------------------------------------------------------------------
Retail--2.5%
809,000 Host Marriott Services (b) 8,393,375
Fast Food Kiosks in Airports
- --------------------------------------------------------------------------------
Casinos--0.2%
115,200 Monarch Casino & Resort (b) 604,800
Casino/Hotel in Reno
- --------------------------------------------------------------------------------
Consumer Goods/Services--Total 8,998,175
Finance--14.0%
- --------------------------------------------------------------------------------
Banks/Savings & Loans--2.8%
111,500 Washington Mutual 4,257,906
West Coast Savings & Loan
90,000 Texas Regional Bancshares 2,255,625
TexMex Bank
67,500 Peoples Bank Bridgeport 1,864,687
Mortgage & Credit Card Lender
157,500 Coast Contingency Rights (b) 1,043,439
Litigation Claim Against US Government
- --------------------------------------------------------------------------------
9,421,657
- --------------------------------------------------------------------------------
Finance Companies--0.7%
232,000 World Acceptance (b) 1,508,000
Personal Loans
70,000 Americredit 966,875
Auto Lending
- --------------------------------------------------------------------------------
2,474,875
- --------------------------------------------------------------------------------
Insurance--7.8%
348,600 UICI (b) 8,540,700
Health Insurance
403,900 Acceptance Insurance (b) 8,178,975
Crop Insurance
21,000 Markel (b) 3,801,000
Property & Casualty Insurance
135,000 AmerUs Life Holdings 3,020,625
Annuities/Life Insurance
92,000 Leucadia National 2,898,000
Insurance Holding Company
- --------------------------------------------------------------------------------
26,439,300
- --------------------------------------------------------------------------------
Money Management--2.7%
66,000 SEI Investments 6,558,750
Mutual Fund Administration
167,817 Baker Fentress 2,569,697
Closed-End Investment Company
- --------------------------------------------------------------------------------
9,128,447
- --------------------------------------------------------------------------------
Finance--Total 47,464,279
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Industrial Goods/Services--8.5%
- --------------------------------------------------------------------------------
Machinery--1.3%
270,700 Farr (b) $2,740,837
Filters
91,000 Vallen (b) 1,820,000
Safety Products Distribution
- --------------------------------------------------------------------------------
4,560,837
- --------------------------------------------------------------------------------
Steel--1.2%
232,400 Atchison Casting (b) 2,149,700
Steel Foundries
126,400 Schnitzer Steel 1,817,000
Scrap Steel Processor
- --------------------------------------------------------------------------------
3,966,700
- --------------------------------------------------------------------------------
Specialty Chemicals--1.1%
189,600 Lilly Industries, Cl. A 3,780,150
Industrial Coatings
- --------------------------------------------------------------------------------
Other Industrial Services--4.9%
476,200 Wackenhut, Cl. B 10,446,637
Prison Management
398,700 Insurance Auto Auctions (b) 4,734,562
Auto Salvage Services
140,900 Compass International Services (b) 1,497,062
Collection Agencies
- --------------------------------------------------------------------------------
16,678,261
- --------------------------------------------------------------------------------
Industrial Goods/Services--Total 28,985,948
Energy/Minerals--15.9%
- --------------------------------------------------------------------------------
Independent Power--7.6%
689,600 CalEnergy (b) 23,920,500
Power Plants/Competitive Utility
38,000 AES Corporation (b) 1,800,250
Power Plants
- --------------------------------------------------------------------------------
25,720,750
- --------------------------------------------------------------------------------
Oil/Gas Producers--2.5%
698,900 Tesoro Petroleum (b) 8,474,163
Oil Refinery/Gas Reserves
139,000 Tipperary (b) 147,687
Oil & Gas Producer
- --------------------------------------------------------------------------------
8,621,850
- --------------------------------------------------------------------------------
Oil Refining/Marketing/Distribution--4.5%
258,000 Atmos Energy 8,320,500
Natural Gas Utility
137,000 Equitable Resources 3,990,125
Natural Gas Utility & Producer
279,100 Dynegy 3,052,656
Natural Gas Processing/Marketing
- --------------------------------------------------------------------------------
15,363,281
- --------------------------------------------------------------------------------
Oil Services--1.3%
93,000 J Ray McDermott (b) 2,272,687
Offshore Construction Company
198,000 GeoScience (b) 2,165,625
Offshore Seismic Equipment
- --------------------------------------------------------------------------------
4,438,312
- --------------------------------------------------------------------------------
Energy/Minerals--Total 54,144,193
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares or Principal
Amount
<S> <C>
Other Industries--2.8%
- --------------------------------------------------------------------------------
Real Estate--1.8%
125,600 Forest City Enterprises Cl. A $3,297,000
Shopping Centers
64,900 Gaylord Entertainment (b) 1,955,112
Opryland Hotel & Other Assets
45,000 Cornerstone Properties 703,125
Downtown Office Buildings
- --------------------------------------------------------------------------------
5,955,237
- --------------------------------------------------------------------------------
Transportation--1.0%
174,000 Hub Group (b) 3,371,250
Freight Forwarder
66,000 Trailer Bridge (b) 101,062
Tug & Barge Transportation
- --------------------------------------------------------------------------------
3,472,312
- --------------------------------------------------------------------------------
Other Industries--Total 9,427,549
Total Common Stocks--93.0% 315,403,642
- --------------------------------------------------------------------------------
(Cost: $265,298,784)
- --------------------------------------------------------------------------------
Short-Term Obligations--7.6%
$13,412,000 Ford Motor Credit 5.21% Maturing 01/04/99 13,406,177
$12,469,000 State Street Bank Repurchase Agreement 12,469,000
4.25% Maturing 01/04/99; 12/31/98 Agreement
Collateralized by U.S. Treasury Notes
- --------------------------------------------------------------------------------
(Amortized Cost: $25,875,177) 25,875,177
- --------------------------------------------------------------------------------
Total Investments--100.6% 341,278,819
(Cost: $291,173,961)
Cash and Other Assets Less Liabilities--(0.6%) (2,159,938)
- --------------------------------------------------------------------------------
Total Net Assets--100% $339,118,881
================================================================================
</TABLE>
Notes to Statement of Investments:
(a) At December 31, 1998, for federal income tax purposes cost of investments
was $291,578,447 and net unrealized appreciation was $49,700,372 consisting
of gross unrealized appreciation of $79,338,202 and gross unrealized
depreciation of $29,637,830.
(b) Non-income producing security.
See accompanying notes to financial statements.
50
<PAGE>
Wanger Advisors Trust--1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Common Stocks--96.6%
Europe--66.0%
- --------------------------------------------------------------------------------
Germany/Austria--3.1%
34,000 Rhoen Klinikum $ 3,378,362
Hospital Management
160,000 Scala Business Solutions 1,037,684
GIC Units (b)
ERP Software (Austria)
- --------------------------------------------------------------------------------
4,416,046
- --------------------------------------------------------------------------------
Denmark--1.1%
20,000 Vest Wood 1,602,639
Furniture
- --------------------------------------------------------------------------------
Netherlands--5.9%
92,000 Hunter Douglas 3,049,182
Decorative Window Coverings
44,000 Kempen 2,339,851
Stock Brokerage/Investment Management
100,000 Unique International 2,291,255
Human Resources
26,051 Computer Service Solutions (b) 617,720
Computer Services
- --------------------------------------------------------------------------------
8,298,008
- --------------------------------------------------------------------------------
Finland--7.5%
248,800 Talentum 4,176,640
Trade Journals & Multimedia
90,000 Tieto, Cl. B 4,034,838
Computer Services/Consulting
150,000 Elcoteq Network 1,629,339
Electrical Components
70,000 Rapala Normark (b) 608,286
Fishing & Hunting Equipment
1,550 Spar Finland 67,346
Grocery/Convenience Stores
- --------------------------------------------------------------------------------
10,516,449
- --------------------------------------------------------------------------------
Norway--0.3%
149,800 P4 Radio Hele Norge 462,042
Commercial Radio Station
7,490 Electric Farm (b) 1,970
Internet Services
- --------------------------------------------------------------------------------
464,012
- --------------------------------------------------------------------------------
Sweden--6.6%
125,000 Elanders 2,344,000
Printer
230,800 Semcon 1,907,720
Technical Consulting
125,000 Caran 1,542,105
Engineering Consulting
300,000 Micronic Laser Systems (b) 1,406,400
Electronics Production Equipment
175,000 Mandator 1,370,931
Computer Services/Consulting
350,000 Gylling Optima Class Q (b) 410,200
325,000 Gylling Optima Class B (b) 400,947
Batteries
- --------------------------------------------------------------------------------
9,382,303
- --------------------------------------------------------------------------------
France--2.7%
15,000 Fininfo 2,658,336
Financial Data Feeds
14,919 Cie des Signaux 1,094,985
Computer Services/Telecom Equipment
- --------------------------------------------------------------------------------
3,753,321
- --------------------------------------------------------------------------------
United Kingdom--20.2%
350,000 Seton Scholl Healthcare Group 4,877,011
Pharmaceuticals
400,000 Parity 3,810,100
IT Staffing & Services
60,000 NTL (b) 3,386,250
Voice, Video & Data Services
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C> <C>
United Kingdom--cont.
- --------------------------------------------------------------------------------
1,000,000 Workplace Technologies $3,277,685
Network Integration
600,000 Informa Group 2,840,105
Trade Journals & Conferences
2,000,000 Electronics Boutique 2,687,036
Videogame/Computer Software Stores
1,500,000 Taylor Nelson 1,896,731
Market Research
500,000 Hogg Robinson 1,717,875
Corporate Travel Management
58,600 Euro Money Publications 1,364,981
Financial Publications
400,000 Oriflame International 1,141,366
Cosmetics Sold Door-to-Door
50,600 Vosper Thornycroft 646,986
Naval Shipbuilding
129,000 Edinburgh Fund Managers 531,210
Investment Management
350,000 Dialog (b) 337,751
Online Business Information
- --------------------------------------------------------------------------------
28,515,087
- --------------------------------------------------------------------------------
Spain/Portugal--6.3%
100,000 Mapfre Vida 3,768,645
Life Insurance/Mutual Funds
250,000 Prosegur 2,919,991
Security Guards
100,000 Filmes Lusomundo (b) 1,254,012
Newspapers, Radio, Video,
Film Distribution (Portugal)
18,200 Jeronimo Martins 995,642
Hypermarkets/Supermarkets (Portugal)
- --------------------------------------------------------------------------------
8,938,290
- --------------------------------------------------------------------------------
Switzerland--4.7%
4,000 Phoenix Mecano 2,402,621
Electrical Components
1,500 Pargesa 2,369,860
Industrial & Media Conglomerate
3,000 Affichage 1,170,731
Billboard Advertising
2,600 Hiestand 681,470
Bakery
- --------------------------------------------------------------------------------
6,624,682
- --------------------------------------------------------------------------------
Italy/Greece--7.6%
600,000 Autogrill 4,832,190
Tollway Restaurants
150,000 Banca Pop Commercia e Industria 3,015,570
Regional Bank
150,000 Athens Medical Center 2,943,224
Hospitals (Greece)
- --------------------------------------------------------------------------------
10,790,984
- --------------------------------------------------------------------------------
Europe--Total 93,301,821
Asia--19.6%
- --------------------------------------------------------------------------------
Hong Kong--2.9%
1,640,000 Li and Fung 3,397,570
Sourcing of Consumer Goods
950,000 Dickson Concepts 735,740
Luxury Goods Retailer
- --------------------------------------------------------------------------------
4,133,310
</TABLE>
See accompanying notes to financial statements.
52
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31,1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Japan--6.8%
90,000 NuSkin Enterprises (b) $2,126,250
Cosmetics Sold Door-to-Door
60,000 Enix Corporation 1,962,765
Game Software Developer
13,800 Ryohin Keikaku 1,841,223
Specialty Consumer Goods Retailer
75,000 Kawasumi Labs 1,476,065
Medical Supplies
75,700 Shinki 932,830
Loans to Consumers and Small Businesses
16,000 Nichii Gakkan 666,666
Hospital Administrative Services
12,500 Hokuto 304,742
Mushroom Grower
49,500 Tecmo 302,792
Game Software Developer
- --------------------------------------------------------------------------------
9,613,333
- --------------------------------------------------------------------------------
Malaysia--0.2%
388,000 Computer Systems Advisor 270,100
Systems Integration & Software Services
- --------------------------------------------------------------------------------
Singapore--9.7%
1,037,000 Venture Manufacturing 3,959,454
Electronic Manufacturing Services
1,700,400 Star Cruises (b) 3,587,844
Cruise Line
8,000,000 Omni Industries 2,569,696
Electronic Manufacturing Services
800,000 Datacraft Asia 1,416,000
Network Systems Integration
4,233,000 Datapulse Technology (b) 1,192,936
CD-ROM Replication
350,000 Natsteel Electronics 890,909
Electronic Manufacturing Services
- --------------------------------------------------------------------------------
13,616,839
- --------------------------------------------------------------------------------
Asia--Total 27,633,582
Latin America--4.3%
- --------------------------------------------------------------------------------
Mexico--3.2%
800,000 Grupo Continental 1,937,310
Coca-Cola Bottler
641,000 Corp Interamericana 1,749,950
de Entretenimiento (b)
Special Events & Live Entertainment
1,240,000 Nadro, Series L 789,888
Pharmaceutical Distribution
- --------------------------------------------------------------------------------
4,477,148
- --------------------------------------------------------------------------------
Brazil--1.1%
150,000 Elevadores Atlas 1,613,837
Elevator Services
- --------------------------------------------------------------------------------
Latin America--Total 6,090,985
Other Countries--6.7%
- --------------------------------------------------------------------------------
Australia--1.6%
1,128,352 Tyndall Australia 1,730,329
Money Management & Insurance
362,965 Anaconda Nickel (b) 556,606
Nickel Mining
- --------------------------------------------------------------------------------
2,286,935
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
Wanger Advisors Trust--1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31,1998
<TABLE>
<CAPTION>
Number of Value
Shares or
Principal
Amount
<S> <C>
- --------------------------------------------------------------------------------
Canada--3.9%
270,000 LGS Group (b) $2,021,485
Computer Systems Integration
100,000 MDSI Mobil Data Solutions (b) 1,787,500
Wireless Software
122,900 Shaw Industries 1,000,165
Oil Field Services
50,000 Architel Systems (b) 651,041
Software for Telecommunications
- --------------------------------------------------------------------------------
5,460,191
- --------------------------------------------------------------------------------
Israel--0.6%
30,000 Galileo Technology (b) 810,000
Semiconductors
- --------------------------------------------------------------------------------
South Africa--0.6%
552,700 Energy Africa (b) 845,566
Oil & Gas Producer
- --------------------------------------------------------------------------------
Other--Total 9,402,692
Total Common Stocks--96.6% 136,429,080
- --------------------------------------------------------------------------------
(Cost: $109,875,402)
Short-Term Obligation--3.3% 4,723,000
- --------------------------------------------------------------------------------
$4,723,000 State Street Bank Repurchase Agreement
3.25% 01/04/99; 12/31/98 Agreement
Collateralized by U.S. Treasury Notes
(Cost: $4,723,000)
Total Investments--99.9% 141,152,080
- --------------------------------------------------------------------------------
(Cost: $ 114,598,402)
Cash and Other Assets Less Liabilities--0.1% 101,229
- --------------------------------------------------------------------------------
Total Net Assets--100% $141,253,309
================================================================================
</TABLE>
Notes to Statement of Investments:
(a) At December 31, 1998, for federal income tax purposes cost of investments
was $114,696,573 and net unrealized appreciation was $26,455,507 consisting
of gross unrealized appreciation of $37,317,390 and gross unrealized
depreciation of $10,861,883.
(b) Non-income producing security.
See accompanying notes to financial statements.
54
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Portfolio Diversification December 31, 1998
At December 31, 1998 the Fund's portfolio of investments
as a percentage of net assets was diversified as follows:
<TABLE>
<CAPTION>
Value Percent
- -----------------------------------------------------------------
<S> <C> <C>
Information
Computer Services $ 19,821,559 14.0%
Publishing 9,139,634 6.5
Contract Manufacturing 8,612,997 6.1
Business Information &
Marketing Services 4,892,818 3.5
Business Software 4,528,832 3.2
CATV 3,386,250 2.4
Semiconductors & Related Equipment 2,216,400 1.6
Gaming Equipment 1,962,766 1.4
Domestic Consumer Software 1,787,500 1.3
Advertising 1,170,732 0.8
Radio 464,008 0.3
- -----------------------------------------------------------------
57,983,496 41.1
- -----------------------------------------------------------------
Health Care
Hospital Management 6,321,587 4.5
Pharmaceuticals 4,877,012 3.5
Hospital/Laboratory Supplies 1,476,064 1.0
Health Care Services 666,667 0.5
- -----------------------------------------------------------------
13,341,330 9.5
- -----------------------------------------------------------------
Consumer Goods/Services
Retail 6,259,642 4.4
Travel 5,305,717 3.8
Restaurants 4,832,189 3.4
Nondurables 3,267,616 2.3
Beverages 1,937,310 1.4
Furniture/Textile 1,602,640 1.2
Food 986,214 0.7
Consumer Goods Distribution 857,235 0.6
Leisure Products 608,287 0.4
International Consumer Software 302,793 0.2
Other Durable Goods 3,860,330 2.7
Other Entertainment 1,749,949 1.2
- -----------------------------------------------------------------
31,569,922 22.3
- -----------------------------------------------------------------
Finance
Insurance 3,768,642 2.6
Banks 3,015,570 2.1
Closed-End Funds 2,369,858 1.7
Brokerage 2,339,852 1.7
Money Management 2,261,537 1.6
Finance Companies 932,828 0.7
- -----------------------------------------------------------------
14,688,287 10.4
- -----------------------------------------------------------------
Industrial Goods/Services
Outsourcing and Training Services 10,150,924 7.2
Electrical Components 4,031,961 2.8
Other Industrial Services 1,613,838 1.1
Machinery 646,985 0.5
- -----------------------------------------------------------------
16,443,708 11.6
- -----------------------------------------------------------------
Energy/Minerals
Oil Services 1,000,163 0.7
Oil/Gas Producers 845,567 0.6
Non-Ferrous Metals 556,607 0.4
- -----------------------------------------------------------------
2,402,337 1.7
- -----------------------------------------------------------------
Total Common Stocks 136,429,080 96.6
Short-Term Obligations 4,723,000 3.3
- -----------------------------------------------------------------
Cash and Other Assets Less Liabilities 101,229 0.1
- -----------------------------------------------------------------
Net Assets $141,253,309 100.0%
- -----------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
<TABLE>
<CAPTION>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------------------------------------------
Statements of Assets and Liabilities December 31, 1998
Wanger U.S. Wanger International
Small Cap Small Cap
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at value (cost: Wanger U.S. Small Cap $291,173,961; $341,278,819 $141,152,080
Wanger International Small Cap $114,598,402)
Cash 900 --
Organization costs 26,688 26,688
Receivable for:
Securities sold 128,796 320,926
Fund shares sold 455,068 18,010
Dividends and interest 78,895 158,549
Other assets 3,366 2,275
- ---------------------------------------------------------------------------------------------------------------------
Total assets 341,972,532 141,678,528
Liabilities and Net Assets
Cash Overdraft -- 19,998
Payable for:
Securities purchased 2,644,341 255,760
Fund shares redeemed 142,326 53,377
Amount owed to advisor 27,098 26,732
Other 39,886 69,352
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 2,853,651 425,219
- ---------------------------------------------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $339,118,881 $141,253,309
- ---------------------------------------------------------------------------------------------------------------------
Fund shares outstanding 15,290,823 7,197,954
- ---------------------------------------------------------------------------------------------------------------------
Pricing of Shares
Net asset value, offering price and redemption price per share $22.18 $19.62
- ---------------------------------------------------------------------------------------------------------------------
Analysis of Net Assets
Paid-in capital $258,403,736 $119,664,782
Undistributed net realized gain (loss) on sales of investments 30,610,287 (7,277,677)
Net unrealized appreciation of investments and foreign currency
transactions
(net of unrealized PFIC gains of $83,762 for Wanger International Small Cap) 50,104,858 26,470,102
Undistributed net investment income -- 2,396,102
- ---------------------------------------------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $339,118,881 $141,253,309
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
56
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Statements of Operations For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Wanger U.S. Wanger International
Small Cap Small Cap
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Dividends (net of foreign taxes of $220,936 for Wanger International Small Cap) $ 1,186,818 $ 1,946,183
Interest 1,201,904 408,617
- -----------------------------------------------------------------------------------------------------------------------------
Total investment income 2,388,722 2,354,800
- -----------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory 2,972,442 1,751,136
Custodian 42,548 233,512
Legal and audit 44,236 42,701
Reports to shareholders 35,986 36,902
Amortization of organization costs 19,976 19,976
Transfer agent 22,675 19,500
Trustees 20,787 20,787
Insurance 3,067 2,450
Other 16,257 8,483
- -----------------------------------------------------------------------------------------------------------------------------
Total expenses 3,177,974 2,135,447
Less custodian fees paid indirectly (5,829) (785)
- -----------------------------------------------------------------------------------------------------------------------------
Net expenses 3,172,145 2,134,662
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (783,423) 220,138
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on sales of investments 31,406,965 (2,995,916)
Net change in unrealized appreciation of investments (6,414,368) 21,548,547
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 24,992,597 18,552,631
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 24,209,174 $ 18,772,769
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
57
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
-------------------------------------- --------------------------------------
Wanger U.S. Small Cap Wanger International Small Cap
Year ended Year ended Year ended Year ended
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (783,423) $ (206,969) $ 220,138 $ 148,271
Net realized gain (loss) on sales of investments 31,406,965 15,616,554 (2,995,916) (616,933)
Net change in unrealized appreciation (6,414,368) 37,057,494 21,548,547 (2,999,052)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 24,209,174 52,467,079 18,772,769 (3,467,714)
Distributions to shareholders from:
Net investment income -- -- (1,532,876) --
Net realized gain (15,422,770) (3,530,225) -- (2,453,253)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (15,422,770) (3,530,225) (1,532,876) (2,453,253)
From Fund share transactions:
Reinvestment of dividends and capital
gain distributions 15,407,847 3,530,225 1,530,069 2,453,253
Proceeds from other shares sold 94,608,919 109,491,784 26,836,486 54,111,870
- --------------------------------------------------------------------------------------------------------------------------------
110,016,766 113,022,009 28,366,555 56,565,123
Payments for shares redeemed (50,550,116) (20,050,947) (25,013,297) (14,839,080)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from
Fund share transactions 59,466,650 92,971,062 3,353,258 41,726,043
- --------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 68,253,054 141,907,916 20,593,151 35,805,076
- --------------------------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of period 270,865,827 128,957,911 120,660,158 84,855,082
- --------------------------------------------------------------------------------------------------------------------------------
End of period (a) $339,118,881 $270,865,827 $141,253,309 $120,660,158
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes accumulated net investment income
of $2,396,211 and $1,532,855 for Wanger International Small Cap
at December 31, 1998 and 1997, respectively.
See accompanying notes to financial statements.
58
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Financial Highlights
<TABLE>
<CAPTION>
Year ended Year ended Year ended May 3, 1995 through
December 31, 1998 December 31, 1997 December 31, 1996 December 31,1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of period $ 21.46 $ 16.97 $ 11.60 $ 10.00
Income From Investment Operations
Net investment loss (c) (.05) (.02) (.06) (.05)
Net realized and unrealized gain on investments 1.93 4.90 5.46 1.65
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.88 4.88 5.40 1.60
Less Distributions
Dividends from net investment income -- -- -- --
Distributions from net realized gain (1.16) (.39) (.03) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.16) (.39) (.03) --
Net Asset Value, end of period $ 22.18 $ 21.46 $ 16.97 $ 11.60
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 8.68% 29.41% 46.59% 16.00%
Ratios/Supplemental Data
Ratio of expenses to average net assets (a) (b) 1.02% 1.06% 1.21% 2.08%
Ratio of net investment loss to average net assets (b) (.25%) (.10%) (.41%) (1.44%)
Portfolio turnover rate 34% 34% 46% 59%
Net assets at end of period $339,118,881 $270,865,827 $128,957,911 $21,903,536
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects total expenses prior to the reduction of custodian fees
for cash balances it maintains with the custodian ("custodian fees paid
indirectly"). This ratio net of custodian fees paid indirectly would have
been 1.04% for the year ended December 31, 1997, 1.19% for the year ended
December 31, 1996 and 2.00% for the period ended December 31, 1995.
(b) The fund was reimbursed by the Advisor for certain expenses from May 3,
1995 through December 31, 1995. Without the reimbursement, the ratio of
expenses (prior to custodian fees paid indirectly) to average net assets
and the ratio of net investment income to average net assets for the period
ended December 31, 1995 would have been 2.35% and (1.71%), respectively.
(c) Net investment loss per share for the years ended December 31, 1998, 1997
and 1996 was based upon the average shares outstanding during the period.
See accompanying notes to financial statements.
59
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Financial Highlights
<TABLE>
<CAPTION>
Year ended Year ended Year ended May 3, 1995 through
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C>
====================================================================================================================================
Net Asset Value, beginning of period $17.05 $17.71 $13.45 $10.00
Income From Investment Operations
Net investment income (loss)(c) .03 .02 (.09) (.03)
Net realized and unrealized gain on investments 2.76 (.26) (4.38) (3.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.79 (.24) 4.29 3.45
Less Distributions
Dividends from net investment income (.22) -- -- --
Distributions from net realized gain and unrealized
gain reportable for federal income taxes -- (.42) (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.42) (.03) --
Net Asset Value, end of period $19.62 $17.05 $17.71 $13.45
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 16.33% (1.46%) 32.01% 34.50%
Ratios/Supplemental Data Ratio of expenses to
average net assets (a)(b) 1.55% 1.60% 1.79% 2.32%*
Ratio of net investment income (loss)
to average net assets (b) .16% .12% (.56%) (.81%)*
Portfolio turnover rate 56% 60% 50% 14%*
Net assets at end of period 141,253,309 120,660,158 84,855,082 11,368,924
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects total expenses prior to the reduction of custodian fees
for cash balances it maintains with the custodian ("custodian fees paid
indirectly"). This ratio net of custodian fees paid indirectly would have
been 1.59% for the year ended December 31, 1997, 1.75% for the year ended
December 31, 1996 and 2.00% for the period ended December 31, 1995.
(b) The fund was reimbursed by the Advisor for certain expenses from May 3, 1995
through December 31, 1995. Without the reimbursement, the ratio of expenses
(prior to custodian fees paid indirectly) to average net assets and the
ratio of net investment income to average net assets for the period ended
December 31, 1995 would have been 4.20% and (2.69%), respectively.
(c) Net investment income (loss) per share for the years ended December 31,
1998, 1997 and 1996 was based upon the average shares outstanding during the
period.
See accompanying notes to financial statements.
60
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements
1. Nature of Operations
Wanger U.S. Small Cap and Wanger International Small Cap ("the Funds") are
series of Wanger Advisors Trust ("the Trust"), an open-end management investment
company organized as a Massachusetts business trust. The investment objective of
each Fund is to seek long-term growth of capital. The Funds are available only
for allocation to certain life insurance company separate accounts established
for the purpose of funding qualified and non-qualified variable annuity
contracts, and may also be offered directly to certain types of pension plans
and retirement arrangements.
2. Significant Accounting Policies
Security valuation
Investments are stated at current value. Securities traded on securities
exchanges or in over-the-counter markets in which transaction prices are
reported are valued at the last sales price at the time of valuation. Securities
for which there are no reported sales on the valuation date are valued at the
mean of the latest bid and ask quotation or, if there is no ask quotation, at
the most recent bid quotation. Money market instruments having a maturity of 60
days or less from the valuation date are valued on an amortized cost basis.
Securities for which quotations are not readily available and any other assets
are valued as determined in good faith by the Board of Trustees.
Foreign currency translations
Values of investments denominated in foreign currencies are converted into U.S.
dollars using the spot market rate of exchange at the time of valuation.
Purchases and sales of investments and dividend and interest income are
translated into U.S. dollars using the spot market rate of exchange prevailing
on the respective dates of such transactions. The gain or loss resulting from
changes in foreign exchange rates is included with net realized and unrealized
gain or loss from investments, as appropriate.
Security transactions and investment income
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed) and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the information is available to the Fund. Interest income is recorded on the
accrual basis and includes amortization of discounts on money market instruments
and on long-term debt instruments when required for federal income tax purposes.
Realized gains and losses from security transactions are reported on an
identified cost basis.
Use of estimates
The preparation of financial statements in conformity with generally accepted
counting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimated.
Fund share valuation
Fund shares are sold and redeemed on a continuing basis at net asset value. Net
asset value per share is determined daily as of the close of trading on the New
York Stock Exchange on each day the Exchange is open for trading by dividing the
total value of the Fund's investments and other assets, less liabilities, by the
number of Fund shares outstanding.
Custodian fees
Custodian fees are reduced based on each Fund's cash balances maintained with
the custodian. This presentation does not affect the determination of Fund
shares outstanding.
Federal income taxes, dividends and distributions to shareholders
The Funds have complied with the special provisions of the Internal Revenue Code
available to regulated investment companies and, in the manner provided therein,
distribute all of their taxable income, as well as any net realized gain on
sales of investments and foreign currency transactions reportable for federal
income tax purposes.
Wanger International Small Cap has elected to mark-to-market its investments
in Passive Foreign Investment Companies ("PFICS") for income tax purposes. In
accordance with this election, the Fund recognized unrealized appreciation on
PFICs of $83,762 for the year ended December 31, 1998. Cumulative net unrealized
appreciation recognized in prior years on PFICs sold in 1998 amounted to
$1,391,583.
Wanger International Small Cap intends to utilize provisions of the federal
income tax law that allows it to carry a realized capital loss forward for eight
years following the year of the loss and offset such losses against future
realized gains. At December 31, 1998, the Fund had a capital loss carryforward
of $7,263,202 of which $382,694 will expire December 31, 2005 and $6,880,508
will expire December 31, 2006.
Dividends and distributions payable to each Fund's shareholders are recorded
by the Fund on the ex-dividend date.
Reclassifications have been made in 1998 for Wanger U.S. Small Cap in the
accompanying analysis of net assets from undistributed net investment income
to net realized gain on the sale of investments of $783,423 to reflect
differences between financial reporting and income tax basis and had no impact
on net asset value. Reclassifications have also been made in 1998 for Wanger
International Small Cap from accumulated net realized gain on sale of
investments to undistributed net investment income of $2,092,223 to reflect
differences between financial reporting and income tax basis.
61
<PAGE>
Wanger Advisors Trust 1998 Annual Report
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Notes to Financial Statements
3. Transaction with Affiliates
The Fund's investment advisor, Wanger Asset Management, L.P., ("WAM") furnishes
continuing investment supervision to the Fund and is responsible for overall
management of the Fund's business affairs. Each Fund pays WAM a monthly
advisory fee based upon average daily net assets at the following rates:
<TABLE>
<CAPTION>
Wanger U.S. Wanger International
Small Cap Small Cap
- ------------------------------------------------------------------
<S> <C> <C>
Average Daily Net Assets:
For the first $100 million 1.00% 1.30%
Next $150 million .95% 1.20%
In excess of $250 million .90% 1.10%
- ------------------------------------------------------------------
</TABLE>
The investment advisory agreement also provides that WAM will reimburse the
Funds to the extent that ordinary operating expenses (computed based on net
custodian fees) exceed 1.50% for Wanger U.S. Small Cap and 1.90% for Wanger
International Small Cap, of average net assets. WAM was not required to
reimburse the Funds under these agreements for the year ended December 31, 1998.
Certain officers and trustees of the Trust are also principals of WAM. The
Trust makes no direct payments to its officers and trustees who are affiliated
with WAM. Wanger U.S. Small Cap and Wanger International Small Cap each incurred
trustees' fees and expenses of $20,787 for the year ended December 31, 1998 to
trustees not affiliated with WAM.
WAM advanced $100,000 in connection with the organization and initial
registration of the Fund. These costs are being amortized and reimbursed to WAM
over the period May, 1995 through April, 2000.
WAM Brokerage Services, L.L.C., a wholly-owned subsidiary of WAM, is the
distributor of each Fund's shares and receives no compensation for its services.
4. Borrowing Arrangements
The trust participates in a $250,000,000 credit facility which was entered into
to facilitate portfolio liquidity. No amounts have been borrowed under this
facility.
5. Fund Share Transactions
Proceeds and payments on Fund shares as shown in the statement of changes in net
assets are in respect of the following numbers of shares:
<TABLE>
<CAPTION>
------------------------------------------ --------------------------------------
Wanger U.S.Small Cap Wanger International Small Cap
Year ended Year ended Year ended Year ended
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,370,518 5,806,192 1,389,310 2,963,636
Shares issued in reinvestment of dividend and
capital gain distributions 686,318 210,886 76,657 136,747
- -----------------------------------------------------------------------------------------------------------------------------
5,056,836 6,017,078 1,465,967 3,100,383
Less shares redeemed 2,389,858 991,354 1,346,776 812,741
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in shares outstanding 2,666,978 5,025,724 119,191 2,287,642
=============================================================================================================================
</TABLE>
6. Investment Transactions
The aggregate costs of purchases and proceeds from sales other than short-term
obligations for the year ended December 31, 1998 were:
<TABLE>
<CAPTION>
<S> <C> <C>
Wanger U.S. Wanger International
Small Cap Small Cap
Purchases $139,040,448 $80,409,567
Sales 97,581,546 71,890,345
- ------------------------------------------------------------------------
</TABLE>
62
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Report of Independent Auditors
To the Board of Trustees and Shareholders of
Wanger Advisors Trust
We have audited the accompanying statements of assets and liabilities, including
the schedule of investments of Wanger U.S. Small Cap and the Wanger
International Small Cap portfolios, comprising the Wanger Advisors Trust, as of
December 31, 1998, the related statements of operations, changes in net assets,
and the financial highlights for the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds of the Wanger Advisors Trust as of December 31, 1998,
the results of their operations and changes in their net assets and financial
highlights for the periods indicated therein, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 12, 1999
63
