-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OT24eHf2YVgtkrh+0ziQVCoY/Av2yKrfcoD3m4B9qnBX04FG2j1Cu3EHgD4THxZs 3Y2L3kbfpvH/b09zRK3qUA== 0000950131-00-002909.txt : 20000501 0000950131-00-002909.hdr.sgml : 20000501 ACCESSION NUMBER: 0000950131-00-002909 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000428 EFFECTIVENESS DATE: 20000428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACORN INVESTMENT TRUST CENTRAL INDEX KEY: 0000002110 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 362692100 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 002-34223 FILM NUMBER: 613944 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-01829 FILM NUMBER: 613945 BUSINESS ADDRESS: STREET 1: 227 W MONROE STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126349200 MAIL ADDRESS: STREET 1: 227 W MONROE ST STE 3000 STREET 2: ATTN: BRUCE LAUER CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: ACORN FUND INC DATE OF NAME CHANGE: 19920703 485BPOS 1 THE ACORN FAMILY OF FUNDS PROSPECTUS DATED 5/1/00 As filed with the Securities and Exchange Commission on April 28, 2000 Securities Act registration no. 2-34223 Investment Company Act file no. 811-1829 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A ------------------------------ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 65 and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 40 ------------------------------ ACORN INVESTMENT TRUST (Registrant) 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Telephone number: 312/634-9200 ------------------------------ Ralph Wanger Janet D. Olsen Acorn Investment Trust Bell, Boyd & Lloyd LLC 227 West Monroe Street, Suite 3000 70 West Madison Street, Suite 3300 Chicago, Illinois 60606 Chicago, Illinois 60602 (Agents for service) ----------------------------- Amending Parts A, B, and C, and filing exhibits ------------------------------ It is proposed that this filing will become effective: [ ] immediately upon filing pursuant to rule 485(b) [X] on May 1, 2000 pursuant to rule 485(b) [ ] 60 days after filing pursuant to rule 485(a)(1) [ ] on May 1, 1999 pursuant to rule 485(a)(1) [ ] 75 days after filing pursuant to rule 485(a)(2) [ ] on ___________ pursuant to rule 485(a)(2). - -------------------------------------------------------------------------------- The Acorn Family of Funds Acorn Fund Acorn International Acorn USA Acorn Twenty Acorn Foreign Forty 100% No-Load Funds Acorn Prospectus May 1, 2000 The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. [PHOTO OF ACORNS] Acorn Investment Trust 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 800-9-ACORN-9 (800-922-6769) CONTENTS - -------------------------------------------------------------------------------- 2 AT A GLANCE Acorn Fund 2 Fund Objective, Acorn International 4 Investment Strategy, Acorn USA 6 Risks, Fees and Expenses Acorn Twenty 8 Acorn Foreign Forty 10 - -------------------------------------------------------------------------------- 12 MANAGEMENT OF Portfolio Managers THE FUNDS Management Fees 14 HOW THE FUNDS INVEST The Acorn Family of Funds Investment Philosophy Securities in which the Funds Invest Summarizing Risk Managing Risk 18 SHAREHOLDER'S MANUAL How to Contact Us Investment Minimums Types of Accounts How to Buy Shares How to Sell Shares Signature Guarantee 25 SHAREHOLDER AND Statements and Reports ACCOUNT POLICIES Share Price Address Changes General Information on Telephone Transactions Telephone Exchange Plan and Money Market Funds Exchange Plan Restrictions Authorized Agents 28 DIVIDENDS, CAPITAL Distribution Options GAINS AND TAXES Taxes Foreign Income Taxes 30 FINANCIAL HIGHLIGHTS Acorn Fund Acorn International Acorn USA Acorn Twenty Acorn Foreign Forty For more information call 800-922-6769 or visit our web site at www.acornfunds.com. - -------------------------------------------------------------------------------- AT A GLANCE ACORN FUND . ACRNX - -------------------------------------------------------------------------------- FUND OBJECTIVE Acorn Fund seeks to provide long-term growth of capital. - -------------------------------------------------------------------------------- INVESTMENT STRATEGY Acorn Fund invests primarily in the stocks of small- and medium-sized companies. The fund generally invests in the stocks of companies around the globe with capitalizations of less than $2 billion with the intention of holding them as they grow and selling them when they become large. The fund believes that these smaller, less-profiled companies may offer higher return potential than the stocks of large companies. Acorn Fund typically looks for companies with: . A strong business franchise that offers growth potential. . Products and services that give a company a competitive advantage. . A stock price the fund's advisor believes is reasonable relative to the assets and earning power of the company. Acorn Fund invests the majority of its assets in U.S. companies, but also invests a portion of its holdings in companies in developed and emerging markets outside the U.S. The fund may invest up to 33% of its assets in non-U.S. companies. - -------------------------------------------------------------------------------- YOU MAY WANT TO INVEST IF YOU: . Are seeking to complement your existing equity holdings with a smaller stock fund that has some global exposure. . Are seeking a stock fund that emphasizes the less-profiled stocks of small- to medium-sized companies. . Are seeking growth of your capital over the long term (at least 5 years). YOU MAY NOT WANT TO INVEST IF YOU: . Are seeking a significant amount of current dividend income. . Are unwilling to accept short-term fluctuations in share price. . Are investing for short-term investment goals or needs. - -------------------------------------------------------------------------------- RISKS OF INVESTING IN ACORN FUND [GRAPHIC OMITTED] Throughout this prospectus we've identified the areas that contain specific information about risk. Please read those areas carefully to fully understand your investment. Smaller company stocks are often more volatile and less liquid than the stocks of larger companies. You could lose money on your investment in the fund, or the fund could underperform other investments, if: . The stock market goes down. . Small- to mid-cap stocks trail returns of the overall market. . The stocks selected for the portfolio do not perform as expected. Investments in foreign securities may have special risks in addition to those mentioned above, including: . Political or economic instability. . Higher transaction costs. . Currency exchange rate fluctuations. An investment in the fund is not a bank deposit and is not guaranteed by the FDIC or any other government agency. 2 ACORN FUND PERFORMANCE The following chart and table illustrate annual fund returns for each of the past 10 years as well as a comparison of returns of Acorn Fund, the S&P 500 and the Russell 2000 indexes for the 1-, 5- and 10-year periods ended 12/31/1999. This information helps you assess the variability of the fund's returns over the past 10 years and the potential risks. TOTAL RETURN FOR THE YEARS ENDED 12/31/1999 [BAR CHART APPEARS HERE] Year Return ------ -------- '90 (17.52%) '91 47.35% '92 24.23% '93 32.32% '94 (7.45%) '95 20.80% '96 22.55% '97 24.98% '98 6.02% '99 33.38% Acorn Fund's highest and lowest quarterly returns for the 10 years ended 12/31/1999 quarter ended - -------------------------------------------- highest 21.94% 12/31/99 lowest -23.77% 9/30/90 The fund's past performance is not an indication of future performance. Average annual total returns for years ended 12/31/1999 1 Year 5 Years 10 Years - -------------------------------------------------------- Acorn Fund 33.38% 21.21% 17.06% S&P 500* 21.04% 28.56% 18.19% Russell 2000* 21.26% 16.69% 13.39% * The S&P 500 Index is a broad market-weighted average of large U.S. blue-chip companies. The Russell 2000 Index is a market-weighted index of 2000 small companies formed by taking the largest 3000 companies and eliminating the largest 1000 of those companies. The indexes are unmanaged; the returns shown include reinvested dividends but not the commissions and other costs that would be incurred to invest in the securities comprising an index. Acorn Fund's holdings are not identical to the S&P 500, the Russell 2000 or any other market index. Therefore, the performance of the fund will not mirror the returns of any particular index. - -------------------------------------------------------------------------------- FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the fund. SHAREHOLDER TRANSACTION EXPENSES Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None Exchange fee None Redemption fee None ANNUAL FUND OPERATING EXPENSES Expenses that are deducted from fund assets: Management fees .69% 12b-1 fee None Other expenses .16% ----- Total annual fund operating expenses .85% - -------------------------------------------------------------------------------- EXAMPLE This example is intended to help you compare the cost of investing in the fund with the costs of investing in other mutual funds. It assumes a $10,000 investment in the fund for the time period indicated, a 5% total return each year, reinvestment of all dividends and distributions, and that operating expenses remain constant at the level shown above. Your actual costs may be higher or lower. 1 Year $ 87 3 Years $ 271 5 Years $ 471 10 Years $1,049 For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 3 - -------------------------------------------------------------------------------- AT A GLANCE ACORN INTERNATIONAL . ACINX - -------------------------------------------------------------------------------- FUND OBJECTIVE Acorn International seeks to provide long-term growth of capital. - -------------------------------------------------------------------------------- INVESTMENT STRATEGY Acorn International invests primarily in stocks of non-U.S. small- and medium-sized companies. The fund generally invests in the stocks of companies based outside the U.S. (or whose primary business takes place outside the U.S.) with capitalizations of less than $5 billion with the intention of holding them as they grow and selling them when they become large. The fund believes that smaller, less-profiled companies--particularly outside the U.S.--may offer higher return potential than the stocks of large companies. Acorn International typically looks for companies with: . A strong business franchise that offers growth potential. . Products and services that give the company a competitive advantage. . A stock price the fund's advisor believes is reasonable relative to the assets and earning power of the company. Acorn International is an international fund and invests the majority (under normal market conditions, at least 75%) of its total assets in the stocks of foreign companies based in developed and emerging markets outside the U.S. - -------------------------------------------------------------------------------- YOU MAY WANT TO INVEST IF YOU: . Are seeking to diversify your existing equity holdings with a fund that invests in the stocks of companies outside the U.S. . Are seeking a stock fund that emphasizes the less-profiled stocks of small- to medium-sized companies. . Are seeking growth of your capital over the long term (at least 5 years). YOU MAY NOT WANT TO INVEST IF YOU: . Are seeking a significant amount of current dividend income. . Are unwilling to accept short-term fluctuations in share price. . Are investing for short-term investment goals or needs. - -------------------------------------------------------------------------------- RISKS OF INVESTING IN ACORN INTERNATIONAL [GRAPHIC OMITTED] Smaller and mid-size company stocks are often more volatile and less liquid than the stocks of larger companies. You could lose money on your investment in the fund, or the fund could underperform other investments, if: . International stock markets go down. . Foreign small to mid-cap stocks trail returns of the overall market. . The stocks selected for the portfolio do not perform as expected. Investments in foreign securities may have special risks in addition to those mentioned above, including: . Political or economic instability. . Higher transaction costs. . Currency exchange rate fluctuations. An investment in the fund is not a bank deposit and is not guaranteed by the FDIC or any other government agency. 4 ACORN INTERNATIONAL PERFORMANCE The following chart and table illustrate annual fund returns for the past seven years as well as a comparison of returns of Acorn International, the EAFE Index and EMI Index for the periods listed. This information helps you assess the variability of the fund's returns over the past seven years and the potential risks. TOTAL RETURN FOR THE YEARS ENDED 12/31/1999** [BAR CHART APPEARS HERE] Year Return ------ -------- '93 49.11% '94 (3.80%) '95 8.93% '96 20.65% '97 .19% '98 15.43% '99 79.19% Acorn International's highest and lowest quarterly returns for the seven years ended 12/31/1999 quarter ended - -------------------------------------------- highest 41.63% 12/31/99 lowest -16.05% 9/30/98 The fund's past performance is not an indication of future performance. Average Annual Total Returns for Years ended 12/31/1999 since 1 Year 5 Years inception* - --------------------------------------------------------- Acorn Int'l** 79.19% 22.19% 21.73% EAFE+ 26.96% 12.83% 13.51% EMI (world ex-U.S.)+ 23.52% 7.21% 9.48% * Acorn International's inception date was 9/23/1992. + Morgan Stanley's Europe, Australasia and Far East Index (EAFE) is an index of companies throughout the world in proportion to world stock market capitalizations, excluding the U.S. and Canada. EMI (world ex-U.S.) is Salomon Smith Barney's index of the bottom 20% of institutionally investable capital of countries, selected by Salomon and excluding the U.S. The indexes are unmanaged; the returns shown include reinvested dividends but not the commissions and other costs that would be incurred to invest in the securities comprising an index. Acorn International's holdings are not identical to the EAFE, the EMI or any other market index. Therefore, the performance of the fund will not mirror the returns of any particular index. ** The fund's performance in 1999 was achieved during a period of unusual market conditions which are unlikely to continue. - -------------------------------------------------------------------------------- FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the fund. SHAREHOLDER TRANSACTION EXPENSES Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None Exchange fee None Redemption fee None ANNUAL FUND OPERATING EXPENSES Expenses that are deducted from fund assets: Management fees .81% 12b-1 fee None Other expenses .30% ------ Total annual fund operating expenses 1.11% - -------------------------------------------------------------------------------- EXAMPLE This example is intended to help you compare the cost of investing in the fund with the costs of investing in other mutual funds. It assumes a $10,000 investment in the fund for the time periods indicated, a 5% total return each year, reinvestment of all dividends and distributions, and that operating expenses remain constant at the level shown above. Your actual costs may be higher or lower. 1 Year $ 113 3 Years $ 353 5 Years $ 612 10 Years $1,352 For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 5 - -------------------------------------------------------------------------------- AT A GLANCE ACORN USA . AUSAX - -------------------------------------------------------------------------------- FUND OBJECTIVE Acorn USA seeks to provide long-term growth of capital. - -------------------------------------------------------------------------------- INVESTMENT STRATEGY Acorn USA invests primarily in stocks of small-and medium-sized U.S. companies. The fund generally invests in the stocks of U.S. companies with capitalizations of less than $2 billion with the intention of holding them as they grow and selling them when they become large. The fund believes that these smaller, less-profiled companies may offer higher return potential than the stocks of large companies. Acorn USA typically looks for companies with: . A strong business franchise that offers growth potential. . Products and services that give the company a competitive advantage. . A stock price the fund's advisor believes is reasonable relative to the assets and earning power of the company. - -------------------------------------------------------------------------------- YOU MAY WANT TO INVEST IF YOU: . Are seeking to complement your existing domestic equity holdings with a smaller company growth fund. . Are seeking a stock fund that emphasizes the less-profiled stocks of small- to medium-sized companies. . Are seeking growth of your capital over the long term (at least 5 years). YOU MAY NOT WANT TO INVEST IF YOU: . Are seeking a significant amount of current dividend income. . Are unwilling to accept short-term fluctuations in share price. . Are investing for short-term investment goals or needs. - -------------------------------------------------------------------------------- RISKS OF INVESTING IN ACORN USA [GRAPHIC OMITTED] Smaller company stocks are often more volatile and less liquid than the stocks of larger companies. You could lose money on your investment in the fund, or the fund could underperform other investments, if: . The stock market goes down. . Small- to mid-cap stocks trail returns of the overall market. . The stocks selected for the portfolio do not perform as expected. An investment in the fund is not a bank deposit and is not guaranteed by the FDIC or any other government agency. 6 ACORN USA PERFORMANCE The following chart and table illustrate annual fund returns for the past three years as well as a comparison of returns of Acorn USA and the Russell 2000 Index for the periods listed. This information helps you assess the variability of the fund's returns over the past three years and the potential risks. TOTAL RETURN FOR THE YEARS ENDED 12/31/1999 [GRAPH] 32.30% 5.79% 23.02% '97 '98 '99 Acorn USA's highest and lowest quarterly returns for the three years ended 12/31/1999 quarter ended - --------------------------------------------- highest 18.93% 12/31/99 lowest -19.25% 9/30/98 The fund's past performance is not an indication of future performance. Average Annual Total Returns for Years ended 12/31/1999 since 1 Year 3 Years inception* - --------------------------------------------------------- Acorn USA 23.02% 19.86% 23.33% Russell 2000+ 21.26% 13.08% 14.68% * Acorn USA's inception date was 9/4/1996. + The Russell 2000 Index is a market-weighted index, with dividends reinvested, of 2000 small companies formed by taking the largest 3000 companies and eliminating the largest 1000 of those companies. The index returns do not include the commissions and other costs that would be incurred to invest in the securities comprising the index. Acorn USA's holdings are not identical to the Russell 2000 or any other market index. Therefore, the performance of the fund will not mirror the returns of any particular index. - -------------------------------------------------------------------------------- FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the fund. SHAREHOLDER TRANSACTION EXPENSES Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None Exchange fee None Redemption fee None ANNUAL FUND OPERATING EXPENSES Expenses that are deducted from fund assets: Management fees .93% 12b-1 fee None Other expenses .22% ------ Total annual fund OPERATING EXPENSES 1.15% - -------------------------------------------------------------------------------- EXAMPLE This example is intended to help you compare the cost of investing in the fund with the costs of investing in other mutual funds. It assumes a $10,000 investment in the fund for the time period indicated, a 5% total return each year, reinvestment of all dividends and distributions, and that operating expenses remain constant at the level shown above. Your actual costs may be higher or lower. 1 Year $ 117 3 Years $ 365 5 Years $ 633 10 Years $1,398 For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 7 - -------------------------------------------------------------------------------- AT A GLANCE ACORN TWENTY . ACTWX - -------------------------------------------------------------------------------- FUND OBJECTIVE Acorn Twenty seeks long-term growth of capital. - -------------------------------------------------------------------------------- INVESTMENT STRATEGY Acorn Twenty invests primarily in the stocks of medium- to larger-sized U.S. companies. The fund is a non-diversified fund that takes advantage of its advisor's research and stock-picking capabilities to invest in a limited number of companies (between 20-25) with market capitalizations of $2 billion to $12 billion, offering the potential to provide above-average growth over time. The fund believes that companies within this capitalization range are less profiled, and may offer higher return potential than the stocks of companies with capitalizations above $12 billion. Acorn Twenty typically looks for companies with: . A strong business franchise that offers growth potential. . Products and services that give the company a competitive advantage. . A stock price the fund's advisor believes is reasonable relative to the assets and earning power of the company. - -------------------------------------------------------------------------------- YOU MAY WANT TO INVEST IF YOU: . Are seeking to complement your existing domestic equity holdings with a focused stock fund. . Are seeking a stock fund that emphasizes the less-profiled stocks of medium- to larger-sized companies. . Are seeking growth of your capital over the long term (at least 5 years). YOU MAY NOT WANT TO INVEST IF YOU: . Are seeking a significant amount of current dividend income. . Are unwilling to accept short-term fluctuations in share price or the more volatile returns of a non-diversified fund. . Are investing for short-term investment goals or needs. - -------------------------------------------------------------------------------- RISKS OF INVESTING IN ACORN TWENTY [GRAPHIC OMITTED] Acorn Twenty is a non-diversified fund, meaning each stock may represent a significant part of the overall portfolio. The performance of each of these holdings will have a greater impact on the fund's total return, and may make the fund's returns more volatile than a more diversified fund. Mid-cap stocks are more volatile and may be less liquid than large-cap stocks. Mid-cap companies may have a shorter history of operations and a smaller market for their shares. You could lose money on your investment in the fund, or the fund could underperform other investments, if: . The stock market goes down. . Mid-cap stocks trail returns of the overall market. . The stocks selected for the portfolio do not perform as expected. An investment in the fund is not a bank deposit and is not guaranteed by the FDIC or any other government agency. 8 ACORN TWENTY PERFORMANCE The following chart and table illustrate annual fund returns for the past one year as well as a comparison of the returns of Acorn Twenty and the S&P MidCap 400 Index for the period listed. This information helps you assess the variability of the fund's returns over the past year and the potential risks. [GRAPH] TOTAL RETURN FOR THE YEAR ENDED 12/31/1999 '99 29.30% Acorn Twenty's highest and lowest quarterly returns for the one year ended 12/31/1999 quarter ended - -------------------------------------------- highest 14.35% 12/31/99 lowest -7.13% 9/30/99 The fund's past performance is not an indication of future performance. Average Annual Total Returns for Periods ended 12/31/1999 1 Year Life of Fund* - ---------------------------------------------------- Acorn Twenty 29.30% 34.44% S&P MidCap 400+ 14.72% 24.66% * Acorn Twenty's inception date was 11/23/1998. + The S&P MidCap 400 is an unmanaged, market value-weighted index of 400 midcap U.S. companies. The index returns include reinvested dividends, but do not include the commissions and other costs that would be incurred to invest in the stocks comprising the index. Acorn Twenty's holdings are not identical to the S&P MidCap 400 or any other market index. Therefore the performance of the fund will not mirror the returns of any particular index. - -------------------------------------------------------------------------------- FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the fund. SHAREHOLDER TRANSACTION EXPENSES Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None Exchange fee None Redemption fee None ANNUAL FUND OPERATING EXPENSES Expenses that are deducted from fund assets: Management fees .90% 12b-1 fee None Other expenses .51% ----- Total annual fund operating expenses* 1.41% * Wanger Asset Management has undertaken to reimburse the fund for any ordinary operating expenses exceeding 1.35% of its average annual net assets. This expense limitation is voluntary and is terminable by either the fund or Wanger Asset Management on 30 days' notice to the other. - -------------------------------------------------------------------------------- EXAMPLE This example is intended to help you compare the cost of investing in the fund with the costs of investing in other mutual funds. It assumes a $10,000 investment in the fund for the time period indicated, a 5% total return each year, reinvestment of all dividends and distributions, and that operating expenses remain constant at the level shown above (without giving effect to the advisor's expense limitation). Your actual returns and costs may be higher or lower. 1 Year $ 144 3 Years $ 446 5 Years $ 771 10 Years $1,691 For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 9 - -------------------------------------------------------------------------------- AT A GLANCE ACORN FOREIGN FORTY . ACFFX - -------------------------------------------------------------------------------- FUND OBJECTIVE Acorn Foreign Forty seeks long-term growth of capital. - -------------------------------------------------------------------------------- INVESTMENT STRATEGY Acorn Foreign Forty invests primarily in the stocks of medium- to larger-sized companies based in developed markets outside the U.S. The fund invests in at least three countries. The fund is a non-diversified fund that takes advantage of its advisor's research and stock-picking capabilities to invest in a limited number of foreign companies (between 40-60) with market capitalizations of $5 billion to $15 billion, offering the potential to provide above-average growth over time. The fund believes that companies within this capitalization range are less profiled, and may offer higher return potential than the stocks of companies with capitalizations above $15 billion. Acorn Foreign Forty typically looks for companies with: . A strong business franchise that offers growth potential. . Products and services that give the company a competitive advantage. . A stock price the fund's advisor believes is reasonable relative to the assets and earning power of the company. Acorn Foreign Forty is an international fund and invests the majority of its assets in the stocks of foreign companies based in developed markets outside the U.S. - -------------------------------------------------------------------------------- YOU MAY WANT TO INVEST IF YOU: . Are seeking to complement your existing equity holdings with an international stock fund. . Are seeking a stock fund that emphasizes the less-profiled stocks of medium- to larger-sized companies. . Are seeking growth of your capital over the long term (at least 5 years). YOU MAY NOT WANT TO INVEST IF YOU: . Are seeking a significant amount of current dividend income. . Are unwilling to accept short-term fluctuations in share price or the more volatile returns of a non-diversified fund. . Are investing for short-term investment goals or needs. - -------------------------------------------------------------------------------- RISKS OF INVESTING IN ACORN FOREIGN FORTY [GRAPHIC OMITTED] Acorn Foreign Forty is a non-diversified fund that ordinarily holds 40 to 60 stocks. The fund may take larger positions in some of its stocks than others. The performance of each of these larger holdings will have a greater impact on the fund's total returns, and may make the fund's returns more volatile than a more diversified international fund. Mid-cap stocks are more volatile and may be less liquid than large-cap stocks. Mid-cap companies may have a shorter history of operations and a smaller market for their shares. An investment in the fund is not a bank deposit and is not guaranteed by the FDIC or any other government agency. You could lose money on your investment in the fund, or the fund could underperform other investments, if: . International stock markets go down. . Foreign mid- to large-cap stocks trail returns of the overall market. . The stocks selected for the portfolio do not perform as expected. Investments in foreign securities may have special risks in addition to those mentioned above, including: . Political or economic instability. . Higher transaction costs. . Currency exchange rate fluctuations. 10 ACORN FOREIGN FORTY PERFORMANCE The following chart and table illustrate annual fund returns for the past one year as well as a comparison of returns of Acorn Foreign Forty and the Salomon Smith Barney World ex-U.S. Cap Range $2 to $10 Billion Index for the periods listed. This information helps you assess the variability of the fund's returns over the past year and the potential risks. [GRAPH] TOTAL RETURN FOR THE YEAR ENDED 12/31/1999** '99 81.60% Acorn Foreign Forty's highest and lowest quarterly returns for the one year ended 12/31/1999: quarter ended - ------------------------------------------------------------- highest 46.65% 12/31/99 lowest 3.90% 9/30/99 The fund's past performance is not an indication of future performance. Average Annual Total Returns for Years ended 12/31/1999 1 Year Life of Fund* - ---------------------------------------------------------------------- Acorn Foreign Forty** 81.60% 87.58% SSB Cap Range $2-10B+ 23.52% 24.89% * Acorn Foreign Forty's inception date was 11/23/1998. + The SSB World ex-U.S. Cap Range $2 - 10 Billion Index is Salomon Smith Barney's two to ten billion U.S. dollar security market subset of its Broad Market Index. It represents a midcap developed market index, excluding the U.S. The index returns include reinvested dividends, but do not include the commissions and other costs that would be incurred to invest in the stocks comprising the index. Acorn Foreign Forty's holdings are not identical to the SSB World ex-U.S. Cap Range $2-10 Billion or any other market index. Therefore, the performance of the fund will not mirror the returns of any particular index. ** The fund's performance during 1999 was achieved in a period of unusual market conditions which are unlikely to continue. - -------------------------------------------------------------------------------- FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the fund. SHAREHOLDER TRANSACTION EXPENSES Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None Exchange fee None Redemption fee None ANNUAL FUND OPERATING EXPENSES Expenses that are deducted from fund assets: Management fees .95% 12b-1 fee None Other expenses .62% Total annual fund operating expenses* 1.57% * Wanger Asset Management has undertaken to limit Acorn Foreign Forty's annual expenses to 1.45% of its average net assets. This expense limitation undertaking is voluntary and is terminable by either the fund or WAM on 30 days' notice to the other. - -------------------------------------------------------------------------------- EXAMPLE This example is intended to help you compare the cost of investing in the fund with the costs of investing in other mutual funds. It assumes a $10,000 investment in the fund for the time period indicated, a 5% return each year, reinvestment of all dividends and distributions, and that operating expenses remain constant at the level shown above (without giving effect to the adviser's expense limitation). Your actual returns and costs may be higher or lower. 1 Year $ 160 3 Years $ 496 5 Years $ 855 10 Years $1,867 For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 11 MANAGEMENT OF THE FUNDS - -------------------------------------------------------------------------------- The Acorn Family of Funds is managed by Wanger Asset Management, L.P. (WAM), 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. WAM chooses the funds' investments and handles their business affairs under the direction of the board of trustees. WAM is a limited partnership managed by its general partner, Wanger Asset Management, Ltd. WAM manages more than $9 billion in assets. WAM uses a team to manage the funds. Team members share responsibility for providing ideas, information, and knowledge in managing the funds, and each team member has one or more particular areas of expertise. The portfolio managers are responsible for making daily portfolio selection decisions, and utilize the management team's input and advice when making buy and sell determinations. - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Acorn Fund RALPH WANGER Lead portfolio manager Ralph Wanger is chief strategist of the Acorn Family of Funds and has been involved in managing all of the funds and developing their investment strategies since each fund began. He has been president and a member of the board of trustees of Acorn Investment Trust (Acorn) since 1970, and is a principal of WAM. He is a Chartered Financial Analyst (CFA), and earned his BS and MS degrees in Industrial Management from the Massachusetts Institute of Technology. Acorn Fund CHARLES P. MCQUAID Co-portfolio manager Charles McQuaid is a senior vice president and member of Acorn's board of trustees, and is the director of Domestic Research and a principal of WAM. Mr. McQuaid has been a member of the Acorn Fund management team since 1978. He is a CFA, and earned his BBA from the University of Massachusetts and his MBA from the University of Chicago. Acorn International LEAH J. ZELL Lead portfolio manager Leah Zell is a vice president of Acorn, and a principal of WAM. She has managed Acorn International since its inception in 1992, and was named lead portfolio manager in 1997. She has worked with Acorn Fund's international securities since 1984. Ms. Zell also manages the foreign portfolio of an investment company whose shares are offered only to non-U.S. investors. She is a CFA and earned her BA and PhD from Harvard University. Acorn International MARGARET M. FORSTER Co-portfolio manager Margaret Forster is a vice president of Acorn and became co-portfolio manager of Acorn International in May 1999. She has been a member of the international analytical team since 1994 and a principal of WAM since January 1999. Before joining WAM, Ms. Forster was a professor of finance at Northwestern and Ohio State Universities, and an economist with the International Monetary Fund. She is a CFA. Her degrees include a BS from Universidade de Sao Paulo, Escola Politecnica, Brazil, and an MBA, MS and PhD from Cornell University. 12 Acorn USA ROBERT A. MOHN Lead portfolio manager Robert Mohn is a vice president of Acorn. He has been a member of WAM's domestic analytical team since 1992, and a principal of WAM since 1995. He has managed Acorn USA since its inception in 1996, and also manages a mutual fund underlying variable insurance products and the U.S. portfolio of an investment company whose shares are offered only to non-U.S. investors. He is a CFA and holds a BS from Stanford University and an MBA from the University of Chicago. Acorn Twenty JOHN H. PARK Lead portfolio manager John Park is a vice president of Acorn, and has managed Acorn Twenty since its inception in 1998. He has been a member of WAM's domestic investment team since 1993, and a principal of WAM since 1998. Mr. Park is also manager of a mutual fund underlying variable insurance products. He is a CFA and earned both his BA and MBA degrees from the University of Chicago. Acorn Foreign Forty MARCEL P. HOUTZAGER Co-portfolio manager Marcel Houtzager is a vice president of Acorn, and has managed Acorn Foreign Forty since its inception in 1998. He has been a member of WAM's international analytical team since 1992, and a principal of WAM since 1995. Mr. Houtzager also manages an international mutual fund underlying variable insurance products and the foreign portfolio of an investment company whose shares are offered only to non-U.S. investors. He is a CFA and a CPA, and earned his BA from Pomona College and his MBA from the University of California at Berkeley. Acorn Foreign Forty ROGER D. EDGLEY Co-portfolio manager Roger Edgley is a vice president of Acorn and became co-portfolio manager of Acorn Foreign Forty in December 1999. He has been a member of the international analytical team since 1994, and was named a principal of WAM in January 2000. He is also director of International Research. Before joining WAM in 1994, Mr. Edgley was a securities analyst in Hong Kong. He is a CFA and was educated in the United Kingdom, completing his MSc degree from the London School of Economics. - -------------------------------------------------------------------------------- MANAGEMENT FEES WAM earns the following advisory fees for managing the Acorn Family of Funds: - ----------------------------------------------- FUND NAME FUND FEE AS A % OF AVERAGE NET ASSETS DURING 1999 - ----------------------------------------------- Acorn Fund .69% Acorn International .81% Acorn USA .93% Acorn Twenty .90% Acorn Foreign Forty .95% - ----------------------------------------------- WAM also receives an administrative services fee from each fund at the annual rate of .05% of that fund's average daily net assets. For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 13 How the Funds Invest - -------------------------------------------------------------------------------- THE ACORN FAMILY OF FUNDS INVESTMENT PHILOSOPHY THE INFORMATION EDGE WAM invests in less-profiled, entrepreneurially managed smaller and mid-sized companies that it believes are benefitting from an important economic, social or technological trend and whose domination of a niche creates the opportunity for superior earnings-growth potential. WAM has built its reputation on innovative thinking and unconventional stock picks. We rely primarily on our independent, internally generated research to uncover companies that may be less well known than the more popular names. This is where WAM adds the greatest value to Acorn shareholders. To find these companies, WAM looks for growth potential, financial strength and fundamental value.
Growth Potential Financial Strength Fundamental Value ----------------------------------------------------------------------------------------------------- . superior technology . stability . lower stock price relative to . innovative marketing . reduced risk growth potential and capital- . solid management . competitive advantage ization . dominant or niche position . low debt . growth at a reasonable price . superior earnings prospects . adequate working capital . fast growing economy . conservative accounting practices The realization of this growth A strong balance sheet gives Once we uncover a great com- potential would likely produce management greater flexibility pany, we identify a price that superior performance that is to pursue strategic objectives we believe would also make sustainable over time. and is essential to maintaining the stock a good value. a competitive advantage. -----------------------------------------------------------------------------------------------------
STOCK STRENGTH COMES FIRST WAM's analysts continually screen companies and make more than 1,000 face-to-face visits around the globe each year. We want to know everything we can about each Acorn investment to avoid surprises. To accomplish this, our analysts talk to top management, vendors, suppliers and competitors, whenever possible. We believe that our thorough research helps us maintain lower taxes and transaction costs. In managing the funds, we try to reduce these costs by investing with a long-term time horizon (at least 2-5 years). Occasionally, however, securities purchased on a long-term basis may be sold within 12 months after purchase due to changes in the circumstances of a particular company or industry, or changes in general market or economic conditions. 14 - -------------------------------------------------------------------------------- SECURITIES IN WHICH THE FUNDS INVEST COMMON STOCKS Each of the Acorn funds invests mostly in common stocks. Common stocks represent an equity (ownership) interest in a corporation. Acorn Fund, Acorn International and Acorn USA invest mainly in the common stocks of small and medium-sized companies. Acorn Twenty and Acorn Foreign Forty invest mostly in the stocks of mid- to larger-sized companies. FOREIGN SECURITIES Acorn International and Acorn Foreign Forty invest most of their assets in non-U.S. securities. Acorn Fund invests most of its assets in the U.S., but has moderate foreign investments. Acorn USA and Acorn Twenty invest most of their assets in the U.S., and only intend to invest a part of their assets overseas under certain circumstances (see Portfolio Allocation below). - -------------------------------------------------------------------------------- PORTFOLIO ALLOCATION Under normal conditions, the funds'common stock investments (as a percentage of total assets) are limited by the following maximum allocations: % in U.S. companies % in non-U.S. companies Acorn Fund no limit up to 33% - ----------------------------------------------------------------------------- Acorn International up to 25% no limit - ----------------------------------------------------------------------------- Acorn USA no limit up to 10% - ----------------------------------------------------------------------------- Acorn Twenty* no limit up to 15% - ----------------------------------------------------------------------------- Acorn Foreign Forty** up to 15% no limit - ----------------------------------------------------------------------------- * Acorn Twenty normally invests in a non-U.S. company only if its operations are primarily located within the U.S. ** Acorn Foreign Forty normally invests in a U.S. company only if its operations are primarily located outside the U.S. Acorn's board of trustees may change each fund's investment objective without shareholder approval. - -------------------------------------------------------------------------------- SUMMARIZING RISK [GRAPHIC OMITTED] When you invest in a mutual fund, you are exposed to certain risks. These include the risk that you may receive little or no return on your investment, or that you may even lose part or all of your investment. Investments that provide higher potential reward present greater risk. Likewise, investments with lower potential reward have lower risk. Before investing in one of the Acorn funds, you should carefully consider the risks associated with that particular fund. You should consider an investment in any of the Acorn funds a long-term investment. For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 15 HOW THE FUNDS INVEST continued - -------------------------------------------------------------------------------- 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. SMALL AND MEDIUM COMPANIES Acorn prefers small and medium companies rather than the stocks of large companies. During some periods, the stocks of smaller companies and the stocks of medium companies, as a class, have performed better than the stocks of larger companies, and in some periods they have performed worse. Stocks of smaller- and medium-sized companies may be more volatile and less liquid than the stocks of larger companies. FOREIGN SECURITIES International investing allows you to achieve greater diversification and to take advantage of changes in foreign economies and market conditions. From time to time, many foreign economies have grown faster than the U.S. economy, and the returns on investments in these countries have exceeded those of similar U.S. investments, although there can be no assurance that these conditions will continue. Investments in foreign securities provide opportunities different from those available in the U.S., and risks that in some ways may be greater than in U.S. investments. These risks may have a negative effect on the fund's NAV and include: fluctuations in exchange rates of foreign currencies; less public information with respect to issuers of securities; less governmental supervision of stock exchanges, securities brokers and issuers of securities; different accounting, auditing and financial reporting standards; different settlement periods and trading practices; less liquidity, frequently greater price volatility and higher transaction costs; and the possible imposition of foreign taxes. Investing in countries outside the U.S. may also involve political risk. Economies in individual markets may differ favorably or unfavorably from the U.S. economy in areas such as gross domestic product, rates of inflation, debt structure and currency valuation. Securities markets in emerging countries may be substantially smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and other developed countries. 16 - -------------------------------------------------------------------------------- MANAGING RISK [GRAPHIC OMITTED] WAM uses various techniques and practices to try to reduce the funds'exposure to risk. INVESTMENT LIMITATIONS Each fund has adopted the following investment limitations (generally based upon a percentage of total assets) that cannot be changed without shareholder approval and are designed to limit risk: . Acorn Fund, Acorn International and Acorn USA are "diversified" funds. For Acorn Fund, this means that the fund will not invest more than 5% of its assets in a single issuer, except for U.S. government securities. Acorn International and Acorn USA follow the same restriction, but apply it to only 75% of the fund's total assets. As to the other 25%, Acorn International and Acorn USA may take larger positions, investing more than 5% in a single issuer. . Acorn Twenty is a "non-diversified" fund, which means that the fund invests at least 50% of its total assets so that no more than 5% is invested in a single issuer. . Acorn Foreign Forty is registered as a "non-diversified" fund (like Acorn Twenty) but has invested as if it were diversified. If Acorn Foreign Forty continues to invest in a diversified manner through November 2001 (three years from its commencement of operations), the fund will not be able to take advantage of its non-diversified status without getting shareholder approval to do so. . None of the funds may invest more than 25% in any one issuer or more than 25% in any one industry (in each case with the exception of U.S. government securities). DEFENSIVE INVESTMENT STRATEGIES The funds'portfolio managers may use the following strategies if they believe that a temporary defensive position is advisable. With respect to Acorn International and Acorn Foreign Forty, this includes times when investment in foreign securities appears to be relatively unattractive because of current or anticipated adverse political or economic conditions. . Each fund may invest without limit in U.S. corporate and government obligations. . Each fund may hold cash or cash equivalents. . Each fund may hold cash in domestic and foreign currencies and may invest in domestic and foreign money market securities to meet liquidity needs. (Generally, this is not expected to exceed 25% of total assets.) During these periods, a fund's assets may not be invested in accordance with its strategy, and the fund may not achieve its investment objective. HEDGING STRATEGIES Each fund may (but is not required to) try to hedge against variations in exchange rates, or to protect against exposure in the equity markets. Portfolio managers may try to accomplish this by buying and selling: . put and call options . futures contracts . options on futures contracts . currency exchange contracts . swap agreements If a fund is not successful when using these techniques, total return could be adversely affected. For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 17 SHAREHOLDER'S MANUAL - -------------------------------------------------------------------------------- How to Contact Us Acorn shareholder service representatives are available Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m. Central time. Call one of the toll-free numbers, send us an E-mail or write to us at the address shown in the table below.
- ---------------------------------------------------------------------------------------------------- TELEPHONE SERVICE - ---------------------------------------------------------------------------------------------------- 800-9-ACORN-9 (800-922-6769) . For general fund information . For prices outside the U.S. call 312-634-9240 . For Acorn literature and account forms - ---------------------------------------------------------------------------------------------------- 800-962-1585 . To buy, sell, or exchange shares . To change your address outside the U.S. . To establish an account by phone (existing call 617-328-5000, ext. 55462 shareholders only) (available 9 - 5:30 p.m. EST) . For any other account maintenance or transactions . For IRA assistance . For 24-hour account balances - ---------------------------------------------------------------------------------------------------- 800-221-3079 . For money market fund information or to exchange out of a money fund - ---------------------------------------------------------------------------------------------------- 800-306-4567 . TDD service for the deaf and hearing impaired - ---------------------------------------------------------------------------------------------------- INTERNET - ---------------------------------------------------------------------------------------------------- E-mail: acorn@wanger.com . For your inquiries, comments, thoughts, criticisms - ---------------------------------------------------------------------------------------------------- www.acornfunds.com . For account balances and recent transactions . For Ralph Wanger's market commentary . For daily and historical prices . For general fund information . For fund literature . For distribution estimates and past distribution information - ----------------------------------------------------------------------------------------------------
18
- ---------------------------------------------------------------------------------------------------- MAIL SERVICE - ---------------------------------------------------------------------------------------------------- State Street Bank & Trust Co. For regular mail delivery, including purchases, Attn: Acorn Family of Funds written exchanges, redemptions, and P.O. Box 8502 IRA contributions Boston, MA 02266-8502 - ---------------------------------------------------------------------------------------------------- Boston Financial Data Services For overnight deliveries of purchases, written exchanges, Attn: Acorn Family of Funds redemptions, or IRA contributions 66 Brooks Drive Braintree, MA 02184 - ---------------------------------------------------------------------------------------------------- Wanger Asset Management, L.P. The funds' advisor 227 W. Monroe St., Suite 3000 Chicago, IL 60606-5016 - ---------------------------------------------------------------------------------------------------- WAM Brokerage Services, L.L.C. The funds' distributor 227 W. Monroe Street, Suite 3000 Chicago, IL 60606-5016 - ---------------------------------------------------------------------------------------------------- WIRE - ---------------------------------------------------------------------------------------------------- State Street Bank & Trust Co. To wire money from your financial institution to add to an Attn: Mutual Funds existing account, please specify: Boston, MA 02110 . Fund name Routing #0110-0002-8 . Account number Deposit DDA #9902-990-2 . Name(s) on the account - ----------------------------------------------------------------------------------------------------
For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 19 SHAREHOLDER'S MANUAL continued - -------------------------------------------------------------------------- INVESTMENT MINIMUMS - -------------------------------------------------------------------------- Minimum to Minimum Minimum Type of Account Open an Account Addition Balance - -------------------------------------------------------------------------- Regular $1,000 $100 $1,000 IRA $1,000 $100 $1,000 Custodial (UTMA/UGMA) $1,000 $100 $1,000 Automatic Investment Plan $100 $100 -- Educational IRA $500 $100 $500 - -------------------------------------------------------------------------------- TYPES OF ACCOUNTS . INDIVIDUAL OR JOINT OWNERSHIP Individual accounts are owned by one person. Joint accounts have two or more owners. These accounts are intended for your general investment needs. . RETIREMENT PLANS These plans require a special application. Please call 800-922-6769 or visit www.acornfunds.com to request an application. . ACORN INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow anyone of legal age and under 701/2 with earned income to save up to $2,000 per tax year. If your spouse has less than $2,000 in earned income, he or she may still contribute up to $2,000 to an IRA, so long as you and your spouse's combined earned income is at least $4,000 and you file a joint tax return. Contributions may be deductible, depending on your income and participation in an employer-sponsored plan. . ROLLOVER IRAS retain special tax advantages for certain distributions from employer-sponsored retirement plans. . ROTH IRAS allow single taxpayers with income up to $95,000 per year, and married couples with income up to $150,000 per year, to contribute up to $2,000 each or $4,000 per couple, respectively, per year. Contributions to Roth IRAs are not tax-deductible but withdrawals are not taxable if the Roth IRA has been held at least five years, and you are at least 591/2 or disabled or use the proceeds to purchase a first home (subject to certain restrictions). . SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAs) allow small business owners or those with self-employment income to make tax-deductible contributions of up to 15% of the first $170,000 of compensation per year for themselves and any eligible employees. . SIMPLE-IRAS must be established by an employer, including a self-employed person, and enable all employees of the employer to elect to have up to $6,000 per year deducted from their paychecks on a before-tax basis and deposited directly into an account maintained for the individual employee. The employer is also generally required to make a contribution for each employee who elects to contribute. SIMPLE-IRAs require a special application (call 800-922-6769). . EDUCATION IRAS allow individuals, subject to certain income limitations, to contribute up to $500 annually on behalf of any child under the age of 18. . OTHER RETIREMENT PLANS. Funds may be used as an investment in other kinds of retirement plans, including Keogh or corporate profit sharing and money purchase plans, 403(b) plans, and 401(k) plans. All of these accounts need to be established by the trustee of the plan. Acorn does not offer prototypes of these plans. 20 - -------------------------------------------------------------------------------- . GIFT OR TRANSFER TO A MINOR (UGMA, UTMA) These custodial accounts provide a way to give money to a minor. The gift is irrevocable, and the minor gains control of the account once he or she reaches the age of majority. . TRUST OR ESTABLISHED EMPLOYEE BENEFIT OR PROFIT-SHARING PLAN The trust or plan must be established before you can open an account. Please include the date of the trust or plan and the trustee(s) name(s) on the application. Please send copies of the first and last pages of the trust plan or document with your application. . CORPORATION OR OTHER ENTITY This account is for a corporation, association, partnership or similar institution. Along with your application, you will need to send a copy of the corporate resolution with your application. - -------------------------------------------------------------------------------- OPENING AN ACCOUNT HOW TO OPEN AN ACCOUNT A new investor must be a U.S. resident with a social security or tax identification number. You can open a new account in any of the following ways: Complete the application. Make check or money order payable to Fund Name. Third-party checks will not be accepted except for properly endorsed IRA rollover checks. MAIL TO: Regular mail OVERNIGHT MAIL State Street Bank and Trust Company Boston Financial Data Services Attn: Acorn Family of Funds Attn: Acorn Family of Funds PO Box 8502 66 Brooks Drive Boston, MA 02266-8502 Braintree, MA 02184 617-328-5000 ext. 55462 or 800-962-1585 CURRENT ACORN SHAREHOLDERS Open a new, identically registered (name(s), address and taxpayer I.D. number) Acorn account by: . Telephone Exchange Plan to switch $1,000 or more from your existing Acorn Family of Funds account (or from a money fund offered through the exchange plan) into a new account. . Wire by simply calling 800-962-1585 to arrange for this transaction. (Not available for IRA accounts.) For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 21 SHAREHOLDER'S MANUAL continued - -------------------------------------------------------------------------------- ADD TO AN EXISTING ACORN ACCOUNT Add to your existing account in any of the following ways: Make check or money order payable to Fund Name for $100 or more. Write your account number on the check or use the stub from an Acorn account statement. Mail to either address listed on the previous page. Use the telephone exchange plan to switch money from one Acorn account to another (or from one of the money funds offered through the exchange plan). The registration of the accounts--i.e., name(s), address and taxpayer identification number--must be identical. Wire money from your bank account using the following wire instructions: State Street Bank & Trust Company Attn: Mutual Funds Boston, MA 02110 Routing #0110-0002-8 Deposit DDA #9902-990-2 (specify the fund name, account number and name(s) on account) Use the telephone purchase plan to move money from your bank account to your Acorn fund account. You must select this feature on your account application or add this by completing a "Doing Business With Acorn" form. Note: The price you receive for your purchased shares will be the NAV calculated at Closing Time (usually 3 p.m. Central time) the next business day (see Shareholder and Account Policies--Share Price on page 25). - -------------------------------------------------------------------------------- AUTOMATIC INVESTMENT PLAN Use the automatic investment plan to move money from your financial institution to your Acorn account. Your financial institution account must be ACH (Automated Clearing House) compatible. You may establish automatic investments on a monthly or quarterly basis for $100 or more per period. Quarterly investments occur in January, April, July and October unless you specify other months. The money will be transferred on or about the 15th of the month unless you designate a different day (must be after the 4th of the month). If the day you select falls on a Saturday, Sunday, holiday or any other day when the New York Stock Exchange (NYSE) is closed for trading, Acorn will process the transaction on the next business day. You may change or cancel your automatic investment amount or frequency by calling 800-962-1585 at least one week prior to your next scheduled investment date. - -------------------------------------------------------------------------------- GENERAL POLICIES FOR BUYING ACORN SHARES The following policies apply any time you buy shares of the Acorn funds: . All purchases must be made in U.S. dollars and checks must be drawn on U.S. banks. The Acorn funds do not accept third-party checks, except for properly endorsed IRA rollover checks. Acorn does not accept cash, traveler's checks, credit cards, or credit card checks. . If payment for your check or telephone purchase order does not clear, Acorn will cancel your purchase and you will be liable for any losses or fees the fund or its transfer agent incurs. . Your participation in the automatic investment plan and telephone purchase plan may be immediately terminated if any item is unpaid by your financial institution. . Each fund reserves the right to reject any specific request to buy shares, including purchases through the telephone exchange plan (see Exchange Plan Restrictions). Acorn may refuse a purchase if it could disrupt management of the fund or would not be in the best interests of the fund's existing shareholders. THE ACORN FUNDS DO NOT PERMIT MARKET TIMING AND HAVE ADOPTED POLICIES TO DISCOURAGE THIS PRACTICE. 22 - -------------------------------------------------------------------------------- HOW TO SELL SHARES You may sell your Acorn shares back to the funds in several different ways. Please remember that sales and exchanges are taxable events in non-retirement accounts. Sell your shares by telephone using the telephone redemption plan. The plan lets you sell $100 to $200,000 per day by phone; Mail us a letter of instruction that includes: . your name; . signatures of all persons required to sign for transactions, exactly as their names appear on the account (with the signatures guaranteed as required and described on page 24); . the fund name and account number; . the dollar amount or number of shares you want to sell; and . any unsigned stock certificates representing the shares you want to sell (if applicable). MAIL TO: Regular mail OVERNIGHT MAIL State Street Bank and Trust Company Boston Financial Data Services Attn: Acorn Family of Funds Attn: Acorn Family of Funds PO Box 8502 66 Brooks Drive Boston, MA 02266-8502 Braintree, MA 02184 617-328-5000 ext. 55462 or 800-962-1585 Note: For your protection, you may not sell shares by telephone or by letter of instruction without a signature guarantee if you have changed your account address within the past 30 days. Shares must be redeemed with a letter of instruction (as described above), with all registered account owners' signatures guaranteed. Establish the systematic withdrawal plan on your account. This plan allows you to sell a specified dollar amount of shares from your account on a monthly or quarterly basis. The sale takes place on or around the 23rd day of the month (for monthly redemptions) or the 23rd day of January, April, July and October (for quarterly redemptions). You must have an account balance of at least $25,000 to be eligible for this service. For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 23 SHAREHOLDER'S MANUAL continued - -------------------------------------------------------------------------------- GENERAL POLICIES FOR SELLING ACORN SHARES The following policies apply any time you sell shares of any of the Acorn funds. . Normally, Acorn will mail your sale proceeds within seven days after receiving your request to sell. . Checks are made payable to the shareholder(s) of record, unless otherwise requested in writing with all registered account owners'signatures guaranteed. . If you recently bought your shares and paid by check, automatic investment plan, or telephone purchase plan, the proceeds of your sale may be held until your funds for the purchase have been received (which may take up to 15 days). . If you participate in the telephone redemption by wire/ACH (Automated Clearing House) plan, Acorn will send the proceeds to your bank (or other financial institution) account via wire or ACH transfer. Your bank may impose a fee for the incoming wire. Payment by wire is usually credited to your bank account on the next business day after your call; payment by ACH is usually within two business days. . Acorn may suspend accepting sales of shares or postpone payment dates on days when the NYSE is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. . Certain accounts (such as trust accounts, corporate accounts and custodial accounts) may require documentation in addition to the request to sell. Call 800-962-1585 for more information. . If a check representing: (1) sale proceeds, (2) a withdrawal under the systematic withdrawal plan, or (3) a dividend/capital gains distribution is returned "undeliverable" or remains uncashed for six months, Acorn may cancel the check and reinvest the proceeds in the fund issuing the check at the NAV on the date of cancellation. In addition, after such six-month period: (1) Acorn will terminate your systematic withdrawal plan and future withdrawals will occur only when requested, or (2) Acorn will automatically reinvest future dividends and distributions in your fund. . If the value of your regular account falls below $1,000 because you sold shares, Acorn reserves the right to close your account and send the proceeds to you. Lower minimums apply to certain IRA and automatic investment plan accounts. Acorn will process the sale of your shares at the NAV calculated on the day your account is closed. . Acorn is obligated to pay for shares sold 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. Sales 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 payment for a sale is made in kind, the selling shareholder would bear any transaction costs incurred in selling the securities received. - -------------------------------------------------------------------------------- SIGNATURE GUARANTEE In some cases, you will have to make your redemption request in writing, and have your signature guaranteed. A signature guarantee is designed to protect you and Acorn from fraud. This requirement applies to any of the following situations: . You request a change to your current account registration, including your name, address or are establishing or changing a TOD (Transfer on Death) beneficiary; . You want to sell more than $200,000 in shares; . You want the check mailed to an address other than the address on your account registration; . Your address of record was changed within the past 30 days; . You want the check made payable to someone other than the account owner; . You want to sell shares, and you instruct Acorn to wire the proceeds to a bank or brokerage account, but you do not have the telephone redemption by wire plan on your account; or . Your name has changed by marriage or divorce (send a letter indicating your account number(s) and old and new names, signing the letter in both the old and new names and having both signatures guaranteed). Signature guarantees can be obtained from a commercial bank, broker-dealer, credit union (if authorized under state law), securities exchange or association. A NOTARY PUBLIC CANNOT PROVIDE A SIGNATURE GUARANTEE. 24 SHAREHOLDER AND ACCOUNT POLICIES - -------------------------------------------------------------------------------- STATEMENTS AND REPORTS To keep you informed about your investment, Acorn sends you various account statements and reports, including: . Confirmation statements that verify a buy or sell transaction, unless that transaction is part of the automatic investment plan. Acorn will automatically confirm your automatic investment plan transactions on a quarterly basis unless you request more frequent statements by calling 800-962-1585. . Quarter-end and year-end consolidated account statements. . Quarterly, semiannual and annual Acorn Family of Funds reports. . Average cost statements for certain types of accounts that sold shares during the year. Duplicate statements may be sent to a third party if requested on the account application by the registered account owner or by calling 800-962-1585. If you need copies of your historical account information, please call 800-962-1585. There is a small charge to obtain historical account information for prior years. To reduce expenses, the funds may choose to mail only one report or prospectus to your household even if more than one person in the household has a fund account. By signing the account application, you will consent to this method of delivery. However, you may revoke your consent at any time. Please call 800-962-1585 if you would like to receive an individual copy of each report or prospectus. - -------------------------------------------------------------------------------- SHARE PRICE The funds are open for business each day the NYSE is open. The offering price (the price to buy one share) and the redemption price (price to sell one share) are a fund's net asset value (NAV) calculated at the next Closing Time after Acorn (or an authorized broker-dealer, financial services company, or other agent, some of whom may charge a fee for their services) receives your purchase or redemption order. Closing Time is the time of the close of regular session trading on the NYSE, which is usually 3:00 p.m. Central time. Acorn must receive both your purchase money and your application by Closing Time for you to receive that day's price. Likewise, Acorn must receive your request to sell shares by Closing Time for you to receive that day's price. NOTE: Acorn requires one day to obtain your purchase money for a telephone - ---- purchase order; therefore, a telephone purchase made before Closing Time will get the next business day's NAV. A fund's NAV is the value of a single share of the fund. The NAV is computed by adding the value of a fund's investments, cash, and other assets, subtracting its liabilities, and then dividing the result by the number of shares outstanding. Acorn generally values each fund's portfolio securities and assets on the basis of market quotations from the primary market in which they are traded. In cases when the quotations are not readily available, or the quotation is determined not to represent a fair value, Acorn will use a method that Acorn's trustees believe accurately reflects a fair value. Values of foreign securities are translated from the local currency into U.S. dollars using current exchange rates. Because of the different trading hours in various foreign markets, the calculation of NAV does not take place at the same time as the determination of the prices of many foreign securities held by the funds. These timing differences may have a significant affect on a fund's NAV, on days or at times when you cannot purchase or sell fund shares. For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 25 SHAREHOLDER AND ACCOUNT POLICIES continued - -------------------------------------------------------------------------------- ADDRESS CHANGES You may easily change your address over a recorded telephone line by calling 800-962-1585. Acorn will send written confirmation of the change to both your old and new addresses. You may not sell shares by telephone for 30 days after you change your address by phone. During those 30 days, you must request any sale of fund shares in writing signed by all registered account owners, and your signature(s) must be guaranteed. - -------------------------------------------------------------------------------- GENERAL INFORMATION ON TELEPHONE TRANSACTIONS Acorn will not be responsible for any loss resulting from unauthorized transactions if it follows reasonable procedures designed to verify the identity of the caller. Those procedures may include recording the call, requesting additional information, and sending written confirmation of telephone transactions. You should verify the accuracy of telephone transactions immediately upon receipt of your confirmation statement. If you do not want the flexibility of telephone purchase and redemption for your account, decline those services on your account application, or call 800-962-1585 for instructions. - -------------------------------------------------------------------------------- TELEPHONE EXCHANGE PLAN AND MONEY MARKET FUNDS The Telephone Exchange Plan permits you to use the telephone to switch your investment between one Acorn fund and another, or between an Acorn fund and a money market mutual fund participating in the plan. Currently, the money market mutual funds participating in the plan are the Reich & Tang Funds. The Reich & Tang Funds are: Short Term Income Fund, Money Market Portfolio; Short Term Income Fund, U.S. Government Portfolio; Daily Tax Free Income Fund; California Daily Tax Free Income Fund; Connecticut Daily Tax Free Income Fund; Florida Daily Municipal Income Fund; Michigan Daily Tax Free Income Fund; New Jersey Daily Municipal Income Fund; New York Daily Tax Free Income Fund; North Carolina Daily Municipal Income Fund; and Pennsylvania Daily Municipal Income Fund. Each of the Reich & Tang Funds is a no-load fund managed by Reich & Tang Asset Management, L.P. and offers check writing privileges (for accounts other than IRAs) in addition to the exchange plan. Only Short Term Income Fund, Money Market Portfolio is available for IRA accounts. EXCHANGE REQUESTS MUST BE RECEIVED BY THE TIMES NOTED BELOW TO RECEIVE THAT DAY'S CLOSING PRICE. . To exchange between IRA accounts with Acorn or a participating money market fund, call 800-962-1585 before Closing Time (usually 3 p.m. Central time). . To switch from one Acorn account into another, or from an Acorn account into a participating money market fund, call 800-962-1585 before Closing Time. . To switch from a participating money market fund to an Acorn fund, call 800-221-3079 before 11 a.m. Central time. If we receive your call after the times noted above, we will process your exchange at the NAV calculated on the following business day. Because of the time needed to exchange money between the Acorn funds and a participating money market fund, you may not exchange into and out of a participating money market fund on the same or successive days; there must be at least one day between exchanges. 26 - -------------------------------------------------------------------------------- EXCHANGE PLAN RESTRICTIONS THE ACORN FUNDS DO NOT PERMIT MARKET TIMING AND HAVE ADOPTED POLICIES TO DISCOURAGE THIS PRACTICE. . Generally, you will be permitted to make up to four round-trip exchanges per year (a round trip is an exchange out of one fund into another fund, and then back again). . You may only exchange between accounts that are registered in the same name(s), address, and taxpayer identification number. . Shares of the fund you are exchanging into must be available for sale in your state. . If you are opening a new account by exchange, your exchange must be at least $1,000. The exchange plan is not available for shares of a fund for which you have been issued certificates. . If your account is subject to backup withholding, you may not use the exchange plan. . Acorn may temporarily or permanently terminate the exchange plan privilege of any investor who makes excessive use of the plan. Excessive trading can hurt fund performance and shareholders. . Acorn may refuse exchange purchases by any person or group if Acorn believes the purchase will be harmful to existing shareholders. . Before exchanging into a money market fund, you should read its prospectus. Call 800-9-ACORN-9 (800-922-6769) to obtain a prospectus for a participating money market fund. . Exchanges may result in tax consequences for you. . Acorn may terminate or modify the exchange plan at any time, but will try to give prior notice whenever it is reasonably possible. - -------------------------------------------------------------------------------- AUTHORIZED AGENTS Acorn may authorize certain financial service companies, broker-dealers or their designees (authorized agents) to accept purchase, redemption, and exchange requests from their clients on whose behalf the authorized agent holds shares of the funds. For purchase orders placed through an authorized agent, a shareholder will pay a fund's NAV next computed after the receipt by the authorized agent of such purchase order, plus any applicable transaction charge imposed by the agent. For redemption orders placed through an authorized agent, a shareholder will receive redemption proceeds which reflect the NAV next computed after the receipt by the authorized agent of the redemption order, less any redemption fees imposed by the agent. Some financial institutions that act as Acorn's agent, or that otherwise maintain nominee accounts with the funds for their clients, might charge a fee (usually a percentage of the average net assets held in such accounts). The fee is for accounting, shareholder servicing, and distribution services the institution provides with respect to the underlying fund shares. WAM pays those fees. For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 27 DIVIDENDS, CAPITAL GAINS AND TAXES - -------------------------------------------------------------------------------- Each fund distributes substantially all of its net income and net realized capital gains to shareholders each year. Normally, the funds pay distributions in June and December. - -------------------------------------------------------------------------------- DISTRIBUTION OPTIONS You may receive your fund dividend and/or capital gains distributions in several ways: REINVESTMENT Acorn will automatically reinvest your dividends and capital gains distributions in additional shares of your fund or into another Acorn account. (Acorn will assign this option to your account, reinvesting in the fund paying the distribution, if you do not indicate a choice on your account application.) INCOME-ONLY Acorn will automatically reinvest your capital gains distributions, but will send you a check for each dividend. If you prefer, Acorn will send your dividend proceeds via ACH transfer directly to your bank or financial institution. (You must establish this feature at least 10 days prior to a dividend payment.) CASH Acorn will automatically send you a check for all dividends and capital gains. If you prefer, Acorn will send your distribution proceeds via ACH transfer directly to your bank or financial institution. (You must establish this feature at least 10 days prior to the distribution.) If you do not currently have banking information on your account, we will require a signature guarantee on this request. Acorn will automatically reinvest distributions for IRA owners who are under 591/2 years old. A cash payment of a distribution is a withdrawal of IRA earnings, and is subject to taxes and potential income tax penalties for those under age 591/2. Once you reach 591/2 years old, and are eligible to withdraw the earnings from your IRA, you may request cash payment of distributions. Acorn will reinvest any distributions at the NAV at Closing Time (usually 3 p.m. Central time) on the reinvestment date (ex-dividend). For those not reinvesting their distributions, Acorn will normally begin mailing distribution checks on the payment date, which is usually one week after the ex-dividend date. - -------------------------------------------------------------------------------- TAXES As with any investment, you should carefully consider how your investment in a fund will be taxed. If your account is a tax-deferred or tax-exempt account (for example, an IRA or an employee benefit plan account), the following tax discussion does not apply. If your account is not tax-deferred or tax-exempt, however, you should be aware of the following tax rules: TAXES ON DISTRIBUTIONS Distributions are subject to federal income tax, and may also be subject to state or local taxes. Your distributions are taxable when they are paid, whether you receive them in cash or reinvest them in additional shares. Distributions declared in October, November or December of the prior year and paid in January are taxable as if they were paid on December 31. For federal tax purposes, income and short-term capital gains distributions are taxed as dividends (ordinary income); and long-term capital gains distributions are taxed as long-term capital gains. Every January, Acorn will send you and the IRS a statement called a Form 1099-DIV, which will show the amount of each taxable distribution you received in the previous year. A year-end tax guide will accompany your Form 1099. If the total distributions you received for the year are less than $10.00, you may not receive a Form 1099. 28 - -------------------------------------------------------------------------------- TAXES ON TRANSACTIONS Your redemptions--including exchanges between funds or into a money fund--are treated as sales of the fund's shares and are subject to capital gains tax. A capital gain or loss is the difference between the price you paid (cost) for your shares and the price you receive when you sell them. Whenever you sell shares of a fund, Acorn will send you a confirmation statement showing how many shares you sold and at what price. Acorn will also send you a year-end statement every January, and an average cost statement every February (available for most accounts) for shares you redeemed, to assist you or your tax preparer. It is up to you or your tax preparer to determine whether any given sale resulted in a capital gain and, if so, the amount of tax you owe. Be sure to keep your regular account statements; the information they contain will be essential in calculating the amount of your capital gains. When you sign your account application, you certify that your social security or taxpayer identification number is correct and that you are not subject to 31% backup withholding for failing to report income to the IRS. If you violate IRS regulations, the IRS can require Acorn to withhold 31% of your taxable distributions and redemption proceeds. - -------------------------------------------------------------------------------- FOREIGN INCOME TAXES A fund may receive investment income from sources within foreign countries, and that income may be subject to foreign income taxes at the source. If your fund pays non-refundable taxes to foreign governments during the year, the taxes will reduce that fund's dividends but will still be included in your taxable income. You may be able to claim an offsetting credit or deduction on your tax return for your share of foreign taxes paid by Acorn International or Acorn Foreign Forty. The Acorn tax guide, which is mailed with your Form 1099-DIV each year, will contain detailed information about the foreign tax credit/deduction. For more information call 800-922-6769 or visit our web site at www.acornfunds.com. 29 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The following tables will help you better understand each fund's financial performance for the past five years, or for the period from the date of a fund's commencement of operations, if less than five years. They are excerpted from each fund's financial statements for the fiscal year ended December 31, 1999, audited by Ernst & Young LLP. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in a fund (assuming reinvestment of all dividends and distributions). You may obtain the complete financial statements and auditor's report by calling 800-9-ACORN-9 (800-922-6769) and requesting a free copy of the funds' latest annual shareholder report.
- -------------------------------------------------------------------------------------------------------- Acorn Fund For a share outstanding throughout 1999 1998 1997 1996 1995 each year--years ended 12/31 ---------------------------------------------------------------------------------------- ACRNX . NET ASSET VALUE, BEGINNING OF YEAR $16.85 $16.99 $15.04 $13.60 $12.24 Income from Investment Operations: Net investment income .09 .04 .15 .09 .11 Net realized and unrealized gain on investments, foreign currency and futures 5.22 .91 3.57 2.93 2.42 ---------------------------------------------------------------------------------------- . TOTAL FROM INVESTMENT OPERATIONS 5.31 .95 3.72 3.02 2.53 Less distributions: Dividends from net investment income (.09) (.03) (.16) (.11) (.09) Distributions from net realized and unrealized gains reportable for federal income taxes (3.54) (1.06) (1.61) (1.47) (1.08) ---------------------------------------------------------------------------------------- . TOTAL DISTRIBUTIONS (3.63) (1.09) (1.77) (1.58) (1.17) NET ASSET VALUE, END OF YEAR $18.53 $16.85 $16.99 $15.04 $13.60 ---------------------------------------------------------------------------------------- . TOTAL RETURN 33.4% 6.0% 25.0% 22.6% 20.8% ---------------------------------------------------------------------------------------- Ratios/supplemental data: ---------------------------------------------------------------------------------------- Ratio of expenses to average net assets .85% .84% .56% .57% .57% ---------------------------------------------------------------------------------------- Ratio of net investment income to average net assets .49% .30% .75% .53% .89% ---------------------------------------------------------------------------------------- Portfolio turnover rate 34% 24% 32% 33% 29% ---------------------------------------------------------------------------------------- NET ASSETS AT END OF YEAR (IN MILLIONS) $3,921 $3,549 $3,681 $2,842 $2,399
30
- ---------------------------------------------------------------------------------------------------------------------------------- ACORN INTERNATIONAL For a share outstanding throughout 1999 1998 1997 1996 1995 each year--years ended 12/31 -------------------------------------------------------------------------------------------------------- ACINX . NET ASSET VALUE, BEGINNING OF YEAR $20.82 $18.39 $19.61 $16.59 $15.24 Income from Investment Operations: Net investment income .83 .17 .40 .13 .16 Net realized and unrealized gain (loss) on investments, foreign currency and futures 15.45 2.68 (.34) 3.29 1.20 -------------------------------------------------------------------------------------------------------- . TOTAL FROM INVESTMENT OPERATIONS 16.28 2.85 .06 3.42 1.36 Less distributions: Dividends from net investment income (.22) (.15) (.38) (.12) -- Distributions from net realized and unrealized gains reportable for federal income taxes (1.55) (.27) (.90) (.28) (.01) -------------------------------------------------------------------------------------------------------- . TOTAL DISTRIBUTIONS (1.77) (.42) (1.28) (.40) (.01) . NET ASSET VALUE, END OF YEAR $35.33 $20.82 $18.39 $19.61 $16.59 -------------------------------------------------------------------------------------------------------- . Total return 79.2% 15.4% 0.2% 20.7% 8.9% -------------------------------------------------------------------------------------------------------- Ratios/supplemental data: -------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets 1.11% 1.12% 1.19% 1.17% 1.22% -------------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets .12% .86% .58% .51% .90% -------------------------------------------------------------------------------------------------------- Portfolio turnover rate 46% 37% 39% 34% 26% -------------------------------------------------------------------------------------------------------- NET ASSETS AT END OF YEAR (IN MILLIONS) $2,868 $1,725 $1,623 $1,773 $1,276
31
- ------------------------------------------------------------------------------------------------------------------------ ACORN USA For a share outstanding throughout Year Ended Year Ended Year Ended Inception 9/4/96 each period 12/31/99 12/31/98 12/31/97 Through 12/31/96 -------------------------------------------------------------------------------------------------------- AUSAX . NET ASSET VALUE, BEGINNING OF PERIOD $14.80 $15.12 $11.65 $10.00 Income from Investment Operations: Net investment loss (a) -- (.07) (.07) (.02) Net realized and unrealized gain on investments 3.32 .87 3.83 1.67 -------------------------------------------------------------------------------------------------------- . TOTAL FROM INVESTMENT OPERATIONS 3.32 .80 3.76 1.65 Less distributions: Dividends from net investment income -- -- -- -- Distributions from net realized and unrealized gains reportable for federal income taxes (1.37) (1.12) (.29) -- -------------------------------------------------------------------------------------------------------- . TOTAL DISTRIBUTIONS (1.37) (1.12) (.29) -- . NET ASSET VALUE, END OF PERIOD $16.75 $14.80 $15.12 $11.65 -------------------------------------------------------------------------------------------------------- . TOTAL RETURN (C) 23.0% 5.8% 32.3% 16.5% -------------------------------------------------------------------------------------------------------- Ratios/supplemental data: -------------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (b) 1.15% 1.20% 1.35% 1.85%* -------------------------------------------------------------------------------------------------------- Ratio of net investment loss to average net assets 0.00% (.42%) (.49%) (.99%)* -------------------------------------------------------------------------------------------------------- Portfolio turnover rate 49% 42% 33% 20%* -------------------------------------------------------------------------------------------------------- NET ASSETS AT END OF PERIOD (IN MILLIONS) $371 $281 $185 $53
(a) Net investment loss per share was based upon the average shares outstanding during the period. (b) In accordance with a requirement by the Securities and Exchange Commission, the ratio of expenses to average net assets for Acorn USA reflects gross custodian fees. This ratio net of custodian fees paid indirectly would have been 1.79% for the period ended December 31, 1996. (c) Total return is not annualized for periods less than one year. * Annualized 32
- ----------------------------------------------------------------------------------------------------------------------------- ACORN TWENTY For a share outstanding throughout Year Ended Inception 11/23/98 each period 12/31/99 Through 12/31/98 ----------------------------------------------------------------------------------------- ACTWX . NET ASSET VALUE, BEGINNING OF PERIOD $10.71 $10.00 Income from Investment Operations: Net investment income (loss) (a) (.08) -- Net realized and unrealized gain on investments 3.21 .71 ----------------------------------------------------------------------------------------- . Total from investment operations 3.13 .71 LESS DISTRIBUTIONS: Distributions from net realized and unrealized gains reportable for federal income taxes (.14) -- ----------------------------------------------------------------------------------------- . NET ASSET VALUE, END OF PERIOD $13.70 $10.71 ----------------------------------------------------------------------------------------- . TOTAL RETURN (d) 29.3% 7.1% ----------------------------------------------------------------------------------------- Ratios/supplemental data: ----------------------------------------------------------------------------------------- Ratio of expenses to average net assets (b)(c) 1.37% 1.41%* ----------------------------------------------------------------------------------------- Ratio of net investment income (loss) to average net assets(c) (.62%) .22%* ----------------------------------------------------------------------------------------- Portfolio turnover rate 101% 173%* ----------------------------------------------------------------------------------------- NET ASSETS AT END OF PERIOD (IN MILLIONS) $68 $34
(a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) In accordance with a requirement by the Securities and Exchange Commission, the Acorn Twenty 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 1.35% for the period ended December 31, 1998 and the year ended December 31, 1999. (c) Acorn Twenty was reimbursed by the Advisor for certain net expenses from November 23, 1998 through December 31, 1999. 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 would have been 1.83% and (.21%), respectively, for the period ended 12/31/98 and 1.41% and (.66%), respectively, for the year ended 12/31/99. (d) Total return is not annualized for periods less than one year. * Annualized 33
- ----------------------------------------------------------------------------------------------------------------------------- Acorn For a share outstanding throughout Year Ended Inception 11/23/98 Foreign Forty each period 12/31/99 Through 12/31/98 ------------------------------------------------------------------------------------- ACFFX . NET ASSET VALUE, BEGINNING OF PERIOD $11.00 $10.00 Income from Investment Operations: Net investment loss (a) (.02) (.01) Net realized and unrealized gain on investments 8.98 1.01 ------------------------------------------------------------------------------------- . TOTAL FROM INVESTMENT OPERATIONS 8.96 1.00 Less Distributions: Distributions from net realized and unrealized gains reportable for federal income taxes (.03) -- ------------------------------------------------------------------------------------- . NET ASSET VALUE, END OF PERIOD $19.93 $11.00 ------------------------------------------------------------------------------------- . TOTAL RETURN (D) 81.6% 10.0% ------------------------------------------------------------------------------------- Ratios/supplemental data: ------------------------------------------------------------------------------------- Ratio of expenses to average net assets (b)(c) 1.48% 1.73%* ------------------------------------------------------------------------------------- Ratio of net investment loss to average net assets(c) (.17%) (.78%)* ------------------------------------------------------------------------------------- Portfolio turnover rate 60% 90%* ------------------------------------------------------------------------------------- NET ASSETS AT END OF PERIOD (IN MILLIONS) $107 $16
(a) Net investment loss per share was based upon the average shares outstanding during the period. (b) In accordance with a requirement by the Securities and Exchange Commission, the Acorn Foreign Forty 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 1.45% for the period ended December 31, 1998, and the year ended December 31, 1999. (c) Acorn Foreign Forty was reimbursed by the Advisor for certain net expenses from November 23, 1998 through December 31, 1999. 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 would have been 2.70% and (1.75%), respectively, for the period ended 12/31/98 and 1.57% and (.26%), respectively, for the year ended 12/31/99. (d) Total return is not annualized for periods less than one year. * Annualized 34 Notes - ------------------------------------------------------------------------------- 35 Notes - ------------------------------------------------------------------------------- 36 FOR MORE INFORMATION More information on each fund is available free upon request, including the following: SEMIANNUAL/ANNUAL REPORT Describes the funds' performance and lists portfolio holdings at the end of the six- and 12-month periods. In the funds' annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the funds'performance during the last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) Provides more details about each fund and its policies and operations. A current SAI is on file with the Securities and Exchange Commission (SEC) and is incorporated by reference (is legally considered part of this prospectus). To obtain information: BY TELEPHONE Call 800-922-6769 BY MAIL Write to: The Acorn Family of Funds P.O. Box 8502 Boston, MA 02266-8502 ON THE INTERNET www.acornfunds.com FROM THE SEC Text-only versions of fund documents can be viewed online or downloaded from the SEC's EDGAR database at: http://www.sec.gov You can also obtain copies by visiting the SEC's Public Reference Room in Washington, D.C. Call the SEC at 202-942-8090 for information about the Public Reference Room's operations. You may obtain copies of the information from the EDGAR database by sending your request and a duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-0102. Requests, after sending the appropriate duplicating fee, may also be made electronically at publicinfo@sec.gov. 811-01829 [PHOTO OF ACORNS] ACORN INVESTMENT TRUST STATEMENT OF ADDITIONAL INFORMATION May 1, 2000 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 TABLE OF CONTENTS Page Information About the Funds...................................................2 Investment Objectives and Policies............................................2 Investment Techniques and Risks...............................................3 Investment Restrictions......................................................21 Performance Information......................................................27 Investment Adviser...........................................................33 Distributor..................................................................35 The Trust....................................................................36 Trustees and Officers........................................................36 Purchasing and Redeeming Shares..............................................41 Additional Tax Information...................................................43 Taxation of Foreign Shareholders.............................................44 Portfolio Transactions.......................................................44 Code of Ethics...............................................................47 Custodian....................................................................47 Independent Auditors.........................................................47 Financial Statements.........................................................48 Appendix - Description of Bond Ratings.......................................48 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 (each, a "Fund," together, the "Funds") dated the date of this SAI and any supplement to the prospectus. A copy of the Acorn Family of Funds 1999 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. 1 Information About the Funds Acorn Fund invests mostly in stocks of small and medium-size companies, generally those with market capitalizations of less than $2 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 $5 billion. Acorn USA invests mostly in stocks of small and medium-sized U.S. companies, generally those with market capitalizations of less than $2 billion. Acorn Twenty invests primarily in the stocks of U.S. companies with market capitalizations of $2 billion to $12 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 $5 billion to $15 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"), and each Fund is an open-end, management investment company. 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. 2 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: - ------------------------------------------------------------------ U.S. Foreign Companies Companies - ------------------------------------------------------------------ Fund Maximum Maximum - ------------------------------------------------------------------ Acorn Fund no limit up to 33% Acorn International up to 25% no limit Acorn USA no limit up to 10% Acorn Twenty no limit up to 15% Acorn Foreign Forty up to 15% no limit - ------------------------------------------------------------------ Acorn Twenty usually limits its investments in foreign companies to those whose operations are primarily in the U.S. Acorn Foreign Forty usually limits its investments in U.S. companies to those whose operations are primarily overseas. See also the discussion of foreign securities below. 3 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, however, intend to comply with the diversification standards for regulated investment companies under Subchapter M of the Internal Revenue Code (summarized under "Investment Restrictions"). Although Acorn Foreign Forty is registered as a non-diversified fund, it has (through the date of this SAI) invested as if it were diversified. Acorn Foreign Forty expects that it will begin to invest in a non-diversified manner when it believes market conditions are appropriate to do so. However, if Acorn Foreign Forty's investments remain diversified through November 23, 2001 (three years after it began operations), the Fund will lose the ability to invest in a non-diversified manner and would thereafter be a diversified fund. Acorn Foreign Forty would not be able to become non-diversified unless it sought and obtained the approval of the holders of a "majority of its outstanding voting securities," as defined in the Investment Company Act of 1940. 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: - ------------------------------------------------- Foreign Companies - ------------------------------------------------- Fund Maximum - ------------------------------------------------- Acorn Fund up to 33% Acorn International no limit Acorn USA up to 10% Acorn Twenty up to 15% Acorn Foreign Forty no limit - ------------------------------------------------- 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 Funds use the terms "developed markets" and "emerging markets" as those terms are defined by the International 4 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. Acorn Foreign Forty 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 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 receipts. 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 5 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. Currency Exchange Transactions The Funds may enter into currency exchange transactions. A currency exchange transaction may be conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market or through a forward currency exchange contract ("forward contract"). A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange-traded, and are usually for less than one year, but may be renewed. Forward currency transactions may involve currencies of the different countries in which the Funds may invest, and serve as hedges against possible variations in the exchange rate between these currencies. The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions, except to the extent described below under "Synthetic Foreign Money Market Positions." Transaction hedging is the purchase or sale of a forward contract with respect to specific payables or receivables of a fund accruing in connection with the purchase or sale of portfolio securities. Portfolio hedging is the use of a forward contract with respect to a portfolio security position denominated or quoted in a particular currency. The Funds may engage in portfolio hedging with respect to the currency of a particular country in amounts approximating actual or anticipated 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 6 such forward contract will be segregated on the books of the Fund while the contract is outstanding. At the maturity of a forward contract to deliver a particular currency, a Fund may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency. It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a forward contract. Accordingly, it may be necessary for a Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of currency that the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the currency. Conversely, it may be necessary to sell on the spot market some of the currency received upon the sale of the portfolio security if its market value exceeds the amount of currency that Fund is obligated to deliver. If a Fund retains the portfolio security and engages in an offsetting transaction, that Fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the currency. Should forward prices decline during the period between a Fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, a Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A default on the contract would deprive the Fund of unrealized profits or force the Fund to cover its commitments for purchase or sale of currency, if any, at the current market price. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for a Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to a Fund of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Since currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved. 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 7 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 charts on pages 3 and 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 ------- purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option on an individual security or on a foreign currency has the obligation upon exercise of the option to deliver the underlying security or foreign currency upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security or foreign currency. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. An index is designed to reflect specified facets of a particular financial or securities market, a specific group of financial instruments or securities, or certain economic indicators. The 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 the Fund) upon conversion or exchange of other securities held in its portfolio. 8 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 and Restricted Securities" below for more information on the risks associated with investing in OTC derivatives. Risks Associated with Options. There are several risks associated with ----------------------------- transactions in options. For example, there are significant differences between the securities markets, the currency markets, and the options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when, and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. If a Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option would 9 expire and become worthless. If a Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security until the option expired. As the writer of a covered call option on a security, a Fund foregoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call. As the writer of a covered call option on a foreign currency, a Fund foregoes, during the option's life, the opportunity to profit from currency appreciation. If trading were suspended in an option purchased or written by one of the Funds, that Fund would not able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Futures Contracts and Options on Futures Contracts. The Funds may use -------------------------------------------------- interest rate futures contracts and index futures contracts. An interest rate or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument or the cash value of an index 1 at a specified price and time. A public market exists in futures contracts covering a number of indexes (including, but not limited to: the Standard & Poor's 500 Index; the Value Line Composite Index; the Russell 2000 Index; and the New York Stock Exchange Composite Index) as well as financial instruments (including, but not limited to: U.S. Treasury bonds; U.S. Treasury notes; Eurodollar certificates of deposit; and foreign currencies). Other index and financial instrument futures contracts are available and it is expected that additional futures contracts will be developed and traded. The Funds may purchase and write call and put futures options. Futures options possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. 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 - --------------------------- 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 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 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. 11 Risks Associated with Futures. There are several risks associated with the use of futures contracts and futures options as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the portfolio securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as: variations in speculative market demand for futures, futures options, and the related securities, including technical influences in futures and futures options trading and differences between the Funds' investments being hedged and the securities underlying the standard contracts available for trading. For example, in the case of index futures contracts, the composition of the index, including the issuers and the weighting of each issue, may differ from the composition of a Fund's portfolio, and, in the case of interest rate futures contracts, the interest rate levels, maturities, and creditworthiness of the issues underlying the futures contract may differ from the financial instruments held in a Fund's portfolio. A decision as to whether, when, and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected stock price or interest rate trends. Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses. Stock index futures contracts are not normally subject to such daily price change limitations. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a futures or futures option position. The Fund would be exposed to possible loss on the position during the interval of inability to close, and would continue to be required to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist. 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 12 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 or broker 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," the "underlying commodity value" of each long position in a commodity contract in which a Fund invests will not at any time exceed the sum of: (1) the value of short-term U.S. debt obligations or other U.S. dollar denominated high-quality short-term money market instruments and cash set aside in an identifiable manner, plus any funds deposited as margin on the contract; (2) unrealized appreciation on the contract held by the broker; and (3) cash proceeds from existing investments due in not more than 30 days. "Underlying commodity value" means the size of the contract multiplied by the daily settlement price of the contract. 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 - --------------------------- 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. 13 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 option3 other than a "qualified covered call option," as defined in the Internal Revenue Code, any loss on such option transaction, to the extent it does not exceed the unrealized gains on the securities covering the option, may be subject to deferral until the securities covering the option have been sold. A futures contract held until delivery results in capital gain or loss equal to the difference between the price at which the futures contract was entered into and the settlement price on the earlier of delivery notice date or expiration date. If a Fund delivers securities under a futures contract, the Fund also realizes a capital gain or loss on those securities. For federal income tax purposes, a Fund generally is required to recognize for each taxable year its net unrealized gains and losses as of the end of the year on futures, futures options and non-equity options positions ("year-end mark-to-market"). Generally, any gain or loss recognized with respect to such positions (either by year-end mark-to-market or by actual 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 - ------------------------------------------------ 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 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.) 14 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." Swap Agreements. A swap agreement is generally individually negotiated and --------------- structured to include exposure to one or more of 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. 15 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 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. 16 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 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 its custodian 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 17 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 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. Each of Acorn USA, Acorn Twenty and Acorn Foreign Forty do not intend to invest more than 20% of their total assets in debt securities nor more than 5% of their 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 and Restricted Securities The Funds may not invest in illiquid securities, if as a result they would comprise more than 15% of the value of the net assets of the Fund. An Illiquid security generally is one that cannot be sold in the ordinary course of business within seven days at substantially the value assigned to it in calculations of a Fund's net asset value. Repurchase agreements maturing in 18 more than seven days, OTC derivatives and restricted securities are generally illiquid; other types of investments may also be illiquid from time to time. If, through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund should be in a position where more than 15% of the value of its net assets are invested in illiquid assets, that Fund will take appropriate steps to protect liquidity. Illiquid securities are priced at a fair value determined in good faith by the board of trustees or its delegate. 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. Neither Acorn Fund, Acorn International nor Acorn USA will invest more than 10% of its total assets (valued at the time of investment) in restricted securities. 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 19 only with banks and dealers WAM believes present minimal credit risks in accordance with guidelines approved by the board of trustees. WAM will review and monitor the creditworthiness of such institutions, and will consider the capitalization of the institution, WAM's prior dealings with the institution, any rating of the institution's senior long-term debt by independent rating agencies, and other relevant factors. A Fund will invest only in repurchase agreements collateralized at all times in an amount at least equal to the repurchase price plus accrued interest. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase were less than the repurchase price, the Fund would suffer a loss. If the financial institution which is party to the repurchase agreement petitions for bankruptcy or otherwise becomes subject to bankruptcy or other liquidation proceedings there may be restrictions on a Fund's ability to sell the collateral and the Fund could suffer a loss. However, with respect to financial institutions whose bankruptcy or liquidation proceedings are subject to the U.S. Bankruptcy Code, each Fund intends to comply with provisions under such Code that would allow it immediately to resell such collateral. At present, Acorn USA, Acorn Twenty and Acorn Foreign Forty are the only Funds that invest in repurchase agreements, and then only with respect to not more than 5% of their respective total assets. Acorn Fund and Acorn International have no present intention of investing in repurchase agreements. 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 20 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. 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 portfolio turnover rates of Acorn Fund, Acorn International and Acorn USA are expected to be below about 50%. The portfolio turnover rates of Acorn Twenty and Acorn Foreign Forty are likely to be greater than 50% but, under normal market conditions, are expected to be no more than about 100%. 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 group of banks 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: 21 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 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. Invest more than 5% of its assets (valued at time of investment) in securities of issuers with less than three years' operation (including predecessors); 5. 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; 22 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). 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 23 ready market, including repurchase agreements maturing in more than seven days, to not more than 15% of its total assets at the time of acquisition; 7. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises that invest in real estate or interests in real estate; 8. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) forward contracts; 9. Make margin purchases of securities, except for use of such short-term credits as are needed for clearance of transactions and except in connection with transactions in options, futures and options on futures; 10. Sell securities short or maintain a short position, except short sales against-the-box. 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 24 borrowing, and (b) in connection with transactions in options, futures and options on futures; 6. Underwrite the distribution of securities of other issuers; however, the Fund may acquire "restricted" securities which, in the event of a resale, might be required to be registered under the Securities Act of 1933 on the ground that the Fund could be regarded as an underwriter as defined by that act with respect to such resale; 7. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises which invest in real estate or interests in real estate; 8. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) foreign currency contracts; 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); 25 6. Borrow money except (a) from banks for temporary or emergency purposes in amounts not exceeding 33% of the value of the Fund's total assets at the time of borrowing, and (b) in connection with transactions in options, futures and options on futures; 7. Underwrite the distribution of securities of other issuers; however, the Fund may acquire "restricted" securities which, in the event of a resale, might be required to be registered under the Securities Act of 1933 on the ground that the Fund could be regarded as an underwriter as defined by that act with respect to such resale; 8. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises which invest in real estate or interests in real estate; 9. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) foreign currency contracts; 10. Make margin purchases of securities, except for use of such short-term credits as are needed for clearance of transactions and except in connection with transactions in options, futures and options on futures; 11. Issue any senior security except to the extent permitted under the Investment Company Act of 1940. The above restrictions (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]. d. 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]. 26 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]. f. Invest in companies for the purpose of management or the exercise of control; g. 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; h. 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]; i. 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 j. Make short sales of securities unless the Fund owns at least an equal amount of such securities, or owns securities that are convertible or exchangeable, without payment of further consideration, into at least an equal amount of such securities. 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 27 Where: P = the amount of an assumed initial investment in shares of a Fund T = average annual total return n = number of years from initial investment to the end of the period ERV = ending redeemable value of shares held at the end of the period For example, the Total Return and Average Total Return on a $1,000 investment in each Fund for the following periods ended December 31, 1999 were: ACORN FUND - ---------- Average Annual Total Return Total Return ------------ -------------- 1 year ...................................... 33.38% 33.38% 5 years ..................................... 161.63% 21.21% 10 years .................................... 383.77% 17.06% Life of Fund (inception 6/10/70) ............ 10,672.60% 17.14% ACORN INTERNATIONAL - ------------------- Average Annual Total Return Total Return ------------ -------------- 1 year ...................................... 79.19% 79.19% 3 years ..................................... 107.22% 27.49% 5 years ..................................... 172.34% 22.19% Life of Fund (inception 9/23/92) ............ 317.61% 21.73% ACORN USA - --------- Average Annual Total Return Total Return ------------ -------------- 1 Year ...................................... 23.02% 23.02% 3 Years ..................................... 72.18% 19.86% Life of Fund (inception 9/4/96) ............. 100.59% 23.33% ACORN TWENTY - ------------ Average Annual Total Return Total Return ------------ -------------- 1 Year ...................................... 29.30% 29.30% Life of Fund (inception 11/23/98) ........... 38.48% 34.44% ACORN FOREIGN FORTY - ------------------- Average Annual Total Return Total Return ------------ -------------- 28 1 Year ...................................... 81.60% 81.60% Life of Fund (inception 11/23/98) ........... 99.75% 87.58% The Funds may also quote after tax total returns and tax efficiency. After-tax returns show the Funds' annualized after-tax total returns for the time period specified. After-tax returns with redemptions show the Funds' annualized after-tax total return for the time period specified plus the tax effects of selling your shares of the Funds at the end of the period. To determine these figures, all income, short-term capital gain distributions, and long-term capital gain distributions are assumed to have been taxed at the actual historical maximum tax rate. Those maximum tax rates are applied to distributions prior to reinvestment and the after-tax portion is assumed to have been reinvested in the Funds. State and local taxes are ignored. Tax Efficiency is derived by dividing after-tax returns by pretax returns. The highest possible score would be 100%, which would apply to a Fund that had no taxable distributions. Because many interrelated factors affect tax efficiency, it is difficult to predict tax efficiency. Actual after-tax returns depend on a shareholder's tax situation and may differ from those shown. After-tax returns reflect past tax-effects and are not predictive of future tax effects. As of December 31, 1999, the After-Tax Average Annual Total Return on a $1,000 investment in each Fund for the following periods were: ACORN FUND - ---------- After-tax With After-tax Redemption ----------- ---------------- 1 Year ....................................... 28.54% 24.08% 5 Years ...................................... 18.14% 16.80% 10 Years ..................................... 14.72% 13.78% ACORN FUND'S TAX EFFICIENCY 1 Year........................................ 85.50% 5 Years....................................... 85.53% 10 Years...................................... 86.28% ACORN INTERNATIONAL - ------------------- After-tax With After-tax Redemption ----------- ---------------- 29 1 year........................................ 77.00% 49.13% 5 years ...................................... 21.18% 18.42% Life of Fund (inception 9/23/92).............. 20.98% 18.58% ACORN INTERNATIONAL'S TAX EFFICIENCY 1 Year........................................ 97.23% 5 Years....................................... 95.45% Life of Fund (inception 9/23/92).............. 96.55% ACORN USA - --------- After-tax With After-tax Redemption ----------- ---------------- 1 year........................................ 21.01% 15.61% 3 years ...................................... 18.17% 15.90% Life of Fund (inception 9/4/96)............... 21.17% 18.94% ACORN USA'S TAX EFFICIENCY 1 Year........................................ 91.27% 3 Years....................................... 91.49% Life of Fund (inception 9/4/96)............... 90.74% ACORN TWENTY - ------------ After-tax With After-tax Redemption ----------- ---------------- 1 year........................................ 28.75% 17.70% Life of Fund (inception 11/23/98)............. 33.68% 27.17% ACORN TWENTY'S TAX EFFICIENCY 1 Year........................................ 98.12% Life of Fund (inception 11/23/98)............. 97.79% ACORN FOREIGN FORTY - ------------------- After-tax With After-tax Redemption ----------- ---------------- 30 1 year........................................ 81.43% 49.26% Life of Fund (inception 11/23/98)............. 86.70% 69.80% ACORN FOREIGN FORTY'S TAX EFFICIENCY - ------------------------------------ 1 Year........................................ 99.79% Life of Fund (inception 11/23/98)............. 99.00% The Funds impose no sales charges and pay no distribution expenses. Income taxes are not taken into account. Performance figures quoted by the Funds are not necessarily indicative of future results. Each Fund's performance is a function of conditions in the securities markets, portfolio management, and operating expenses. Although information about past performance is useful in reviewing a Fund's performance and in providing some basis for comparison with other investment alternatives, it should not be used for comparison with other investments using different reinvestment assumptions or time periods. The Funds [that have been in operation at least three years] 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. The Funds may quote the following measures of volatility: 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. R-squared. R-squared 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. 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. Standard deviation. Standard deviation quantifies the volatility in the ------------------ returns of a Fund by measuring the amount of variation in the group of returns that make up a Fund's average return. Standard deviation is generally calculated over a three or five year period using monthly returns and modified to present on annualized standard deviation. 31 Sharpe ratio. A Fund's Sharpe ratio quantifies its total return in excess of the return of a guaranteed investment (90 day U.S. treasury bills), relative to its volatility as measured by its standard deviation. The higher a Fund's Sharpe ratio, the better a Fund's returns have been relative to the amount of investment risk it has taken. Beta and R-squared are calculated by performing a least squares linear regression using three 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. As of December 31, 1999, some statistics for the Funds are as follows: R2 Beta Alpha -- ---- ----- Acorn Fund ---------- vs. S&P 500 0.61 0.87 -2.26% vs. Russell 2000 0.92 0.83 6.50% Acorn International ------------------- vs. EMI Ex U.S. 0.63 1.01 14.43% vs. EAFE 0.56 0.83 10.95% Other measures of volatility and relative performance may be used as appropriate. All such measures will fluctuate and do not represent future results. 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. 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, Inc., an independent service that monitors the performance of over 1,000 mutual funds, Morningstar, Incorporated or another service. The following are some benchmark indices utilized by the Funds: Salomon Smith Barney Extended Market Index ("EMI"), an index of the bottom 20% of institutionally investable capital of countries, selected by SSB, excluding the U.S.; the Salomon Smith Barney World ex-U.S. Cap Range $2-$10 billion Index is the $2 to $10 billion (U.S.) subset of SSB's Broad 32 Market Index, which represents a mid cap developed market index, excluding the U.S.; IFCI Composite Index, the International Finance Corporation's index of 31 emerging markets, which weights securities according to their market capitalizations after adjusting for shares held by other constituents in the index; 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 companies, leaving an unweighted index of 2000 small companies. All indexes are unmanaged and include reinvested dividends. The Funds may also compare their performance to the performance of groups of mutual funds, including Lipper Averages and Indexes. Each Lipper Average is the mean return of all mutual funds tracked by Lipper, Inc. in that category, which generally will include the Fund making the comparison. Lipper Indexes measure the performance of the largest funds tracked by Lipper in a designated category. 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 $9 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, Margaret M. Forster, Roger Edgely, Bruce H. Lauer and Peter Zaldivar. 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, 2000, 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' 33 notice to the Fund, and will terminate automatically in the event of its assignment. The fees payable by a Fund under the Agreement are the obligation only of that Fund and impose no liability on the other Funds. The advisory fees the Funds pay to WAM are calculated daily and paid monthly, at the annual rates shown below: 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% WAM has undertaken to reimburse Acorn Twenty and Acorn Foreign Forty to the extent their ordinary operating expenses exceed 1.35% and 1.45%, respectively of its average annual net assets. This undertaking is voluntary and may be terminated by either WAM or Acorn on 30 days' notice to the other. 34
The advisory fees paid to WAM by each Fund for the fiscal years ended December 31, 1999, 1998, and 1997 were as follows: - --------------------------------------------------------------------------------------------------------- Fund 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- Acorn Fund $23,436,860 $24,905,000 $14,349,000 - --------------------------------------------------------------------------------------------------------- Acorn International $15,668,082 $14,124,000 $16,235,000 - --------------------------------------------------------------------------------------------------------- Acorn USA $2,805,167 $2,336,000 $1,199,000 - --------------------------------------------------------------------------------------------------------- Acorn Twenty gross advisory fee: $503,457 $25,723* --- exp. reimb: (23,136) (12,202) -------------------------------------------- net advisory fee: $480,321 $13,521 - --------------------------------------------------------------------------------------------------------- Acorn Foreign Forty gross advisory fee: $426,095 $11,674* --- exp. reimb: (42,270) (11,875) -------------------------------------------- net advisory fee: $383,825 $ (201) - ---------------------------------------------------------------------------------------------------------
*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 Agreements for Acorn Fund, Acorn International, Acorn USA, Acorn Twenty and Acorn Foreign Forty will continue in effect through June 30, 2000 and thereafter from year to year provided such continuance is approved annually (i) by a majority of the trustees or by a majority of the outstanding voting securities of the Trust, and (ii) by a majority of the trustees who are not parties to the Agreement or interested persons of any such party. The Trust has agreed to pay all expenses in connection with registration of its shares with the Securities and Exchange Commission and any auditing and filing fees required in compliance with various state securities laws. WAM bears all sales and promotional expenses, including the cost of prospectuses and other materials used for sales and promotional purposes by WAM BD. WAM BD offers the Funds' shares only on a best efforts basis. WAM BD is located at 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. 35 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. 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: Name and Date of Birth Position(s) Principal Occupation(s) During Held with the Past Five Years Trust 36 Name and Date of Birth Position(s) Principal Occupation(s) During - ---------------------- ----------- ------------------------------ Held with the Past Five Years ------------- --------------- Trust ----- Irving B. Harris Trustee and Former chairman of the executive 8/4/1910 chairman committee and former director, Pittway Corporation (multi-product manufacturer and publisher); Chairman, William Harris Investors, Inc. (investment adviser); Chairman, The Harris Foundation (charitable foundation). Ralph Wanger* Trustee and Trustee and President, Wanger 6/21/1934 President Advisors Trust; Director, Wanger Investment Company plc; Principal and portfolio manager, Wanger Asset Management, L.P.; President, Wanger Asset Management, Ltd. James H. Lorie Trustee and Retired; Eli B. and Harriet B. 2/23/1922 Vice Chairman Williams Professor of Business Administration Emeritus, University of Chicago Graduate School of Business; director, Thornburg Mortgage Asset Corp. (REIT) and Santa Fe Natural Tobacco. Leo A. Guthart Trustee Vice Chairman, Pittway Corporation 9/26/1937 (multi-product manufacturer and publisher); chief executive officer, Pittway Corporation's Security Group of Companies which include ADEMCO (manufacturer of alarm equipment), ADI (distributor of security equipment), Fire Burglary Instruments (supplier of security control panels), First Alert Professional (alarm dealers), Alarm Net (cellular radio service) and Cylink Corporation (supplier of encryption equipment)(chairman); director, AptarGroup, Inc. (producer of dispensing valves, pumps and closures); former chairman of the board of trustees, Hofstra University; director, Symbol Technologies, Inc.; chairman of the general partner of Long Island Venture Fund, L.P. Jerome Kahn, Jr. Trustee President, William Harris Investors, 4/13/1934 Inc. (investment adviser); former director, Pittway Corporation (multi-product manufacturer and publisher). Steven N. Kaplan Trustee Neubauer Family Professor of 12/21/1959 Entrepreneurship and Finance, Graduate School of Business, University of Chicago; director, ImageMax (provider of document management products and services). David C. Kleinman Trustee Adjunct professor of strategic 10/12/1935 management, University of Chicago Graduate School of Business; Business consultant; Chairman of the Board, Irex Corporation (insulation contractor); Director, Sonic Foundry, Inc. (software); FirstCom Corp. (competitive local exchange carrier); Organics Management Company (organic waste processor); Wisconsin Paper & Products (paper merchant); Plymouth Tube Company (seamless and welded metal tubing); Member of the advisory board, DSC Logistics Company (warehousing and logistics services). Charles P. McQuaid* Trustee and Trustee and Senior Vice President, 8/27/1953 Senior Vice Wanger Advisors Trust; Principal, President portfolio manager and director of research, Wanger Asset Management, L.P. 37 Name and Date of Birth Position(s) Principal Occupation(s) During - ---------------------- ----------- ------------------------------ Held with the Past Five Years ------------- --------------- Trust ----- Roger S. Meier Trustee CEO and Chairman of the Board, AMCO, 1/18/1926 Inc. (investment and real estate management); President, AMCO, Inc. 1986-1999; former director, Fred Meyer, Inc. (retail chain); 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; trustee of Portland Art Museum. Allan B. Muchin Trustee Partner, Katten, Muchin & Zavis 1/10/1936 (law firm). Robert E. Nason Trustee Consultant and private investor 7/29/1936 since 1998; from 1990-1998, Executive partner and chief executive officer, member of the executive committee of Grant Thorton, LLP (public accounting firm) and member of the policy board of Grant Thornton International; director, Fruit of the Loom, Ltd. and Fairfax Insurance Limited (privately owned insurance company). Katherine Schipper Trustee Professor of Accounting, University 10/04/1949 of Chicago Graduate School of Business; Visiting Professor at Fuqua School of Business, Duke University, in the academic year 1999-2000. Margaret M. Forster Vice President Analyst and Portfolio Manager, 1/28/1960 Wanger Asset Management, L.P., since 1994; assistant professor of finance, Kellogg Graduate School of Management, Northwestern University, 1993-1994. Marcel P. Houtzager Vice President Vice President, Wanger Advisors 10/26/1960 Trust; principal, analyst and portfolio manager, Wanger Asset Management, L.P.; Chief financial officer and Compliance officer, Wanger Asset Management L.P., since April 2000. Kenneth A. Kalina Assistant Assistant Treasurer, Wanger Advisors 8/4/1959 Treasurer Trust; Fund controller, Wanger Asset Management, L.P., since September 1995; prior thereto, treasurer of the Stein Roe Mutual Funds. Bruce H. Lauer Vice Vice President, assistant secretary 7/22/1957 President, and treasurer, Wanger Advisors Assistant Trust; principal (since 2000) and Secretary and chief operating officer, Wanger Treasurer Asset Management, L.P. since April 1995; director, Wanger Investment Company plc and New Americas Small Cap Fund; prior thereto, first vice president, investment accounting, Kemper Financial Services, Inc. Steven A. Radis Secretary Chief Marketing Officer and Managing 8/24/1962 Director, Wanger Asset Management, L.P., since April 1999; prior thereto, Vice President of Corporate and Marketing Communications, Zurich Kemper Life, January 1998 to March 1999, and First Vice President Corporate Communications, Zurich Kemper Life, January 1987 to December 1997. Robert A. Mohn Vice President Vice President, Wanger Advisors 9/13/1961 Trust; principal, analyst and portfolio manager, Wanger Asset Management, L.P. John H. Park Vice President Vice President, Wanger Advisors 5/30/1967 Trust; principal, analyst and portfolio manager, Wanger Asset Management. L.P. (since 1993). 38 Name and Date of Birth Position(s) Principal Occupation(s) During - ---------------------- ----------- ------------------------------ Held with the Past Five Years ------------- --------------- Trust ----- Roger Edgely Vice President Vice President, Wanger Advisors 4/18/1955 Trust; Analyst, Wanger Asset Management. L.P., since 1994; Managing director and director of international research, Wanger Asset Management, L.P., since 1998; prior thereto, analyst, Crosby Securities. Leah J. Zell Vice President Vice President, Wanger Advisors 5/23/1949 Trust; principal, analyst and portfolio manager, Wanger Asset Management, L.P. *Messrs. McQuaid and Wanger are trustees who are interested persons of Acorn as defined in the Investment Company Act of 1940, and of WAM. Mr. Wanger and Ms. Zell are married to each other. 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 March 31, 2000, the trustees and officers of Acorn as a group owned beneficially less than 1% of the outstanding shares of Acorn Fund and Acorn International. At March 31, 2000, the trustees and officers of Acorn as a group owned beneficially 2.78% of the outstanding shares of Acorn USA, 3.20% of the outstanding shares of Acorn Twenty, and 2.18% of the outstanding shares of Acorn Foreign Forty. The addresses for Mr. Wanger, Mr. McQuaid, Mr. Edgely, Ms. Forster, Mr. Houtzager, Mr. Kalina, Mr. Lauer, Mr. Mohn, Mr. Park, Mr. Radis and Ms. Zell is Wanger Asset Management, L.P., 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. The address for Messrs. Harris and Kahn is Two North LaSalle Street, Suite 400, Chicago, Illinois 60602. The address for Messrs. Lorie, Kaplan, and Kleinman is 1101 East 58th Street, Chicago, Illinois 60637. The address for Mr. Guthart is 165 Eileen Way, Syosset, New York 11791. The address for Mr. Meier is 1211 S.W. Fifth Avenue, Portland, Oregon 97204. The address for Mr. Machin is 525 W. Monroe Street, Suite 1600, Chicago, Illinois 60661-3693. The address for Mr. Nason is 567 Rockefeller Road, Lake Forest, Illinois 60045. The address for Ms. Schipper is Fuqua School of Business, Duke University, Durham, North Carolina 27708. At March 31, 2000, the State of Illinois Deferred Compensation Plan, 200 West Washington, Springfield, IL 62706, held 23,454,743.7010 shares, Charles Schwab & Co., Inc., 101 Montgomery Street, San Francisco, CA 94104, ("Schwab") held 14,683,990.1330 shares, and National Financial Services Corporation, One World Financial Center, 200 Liberty Street, New York, NY 10281-1003 ("NFS") held 10,895,627.0220 shares of Acorn Fund as owners of record, but not beneficially (10.86%, 6.80% and 5.05% of the outstanding shares, respectively). Schwab held 16,061,338.5040 shares, and NFS held 6,462,439.4690 shares of Acorn International (18.65% and 7.50% of the outstanding shares, respectively) as owners of record, but not beneficially. Schwab held 4,407,935.6480 shares, and NFS held 2,630,068.9460 shares of Acorn USA (19.47% and 11.61% of the outstanding shares, respectively) as owners of record, but not beneficially. Schwab held 459,043.2890 shares, and NFS held 260,869.5390 shares, of 39 Acorn Twenty (9.71% and 5.52% of the outstanding shares, respectively) as owners of record, but not beneficially. Schwab held 1,757,597.0080 shares, and NFS held 846,318.3330 shares of Acorn Foreign Forty (25.72% and 12.39% of the outstanding shares, respectively) as owners of record, but not beneficially. During 1999 the Funds paid fees aggregating $448,500 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, 1999 to each of the trustees of the Trust:
Aggregate Aggregate Aggregate Aggregate Aggregate Total Comp. Comp. Comp.from Comp. from Comp. from Comp. Name of Trustee from Acorn from Acorn Acorn USA Acorn Twenty Acorn Foreign from Fund Int. Forty Fund Complex (5) - ----------------------------------------------------------------------------------------------------------- Irving B. Harris 65,503 33,822 5,299 870 506 $106,000 Leo A. Guthart 24,396 12,176 1,928 320 180 $39,000 Jerome Kahn, Jr. 25,659 13,196 2,090 348 207 $41,500 Steven N. Kaplan* 7,493 4,097 669 134 107 $12,500 David C. Kleinman 28,746 14,780 2,345 394 235 $46,500 James H. Lorie 25,304 12,235 1,943 323 195 $40,000 Charles P. McQuaid 0 0 0 0 0 0 Roger S. Meier 24,387 12,585 1,992 335 201 $39,500 Allan B. Muchin 24,387 12,585 1,992 335 201 $39,500 Robert E. Nason 25,904 13,387 2,124 364 221 $42,000 Katherine Schipper 25,904 13,387 2,124 364 221 $42,000 Ralph Wanger 0 0 0 0 0 0 - -----------------------------------------------------------------------------------------------------------
* Elected to the Board of the Trust effective September 28, 1999. 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 40 payments under the plan in a lump sum or in equal annual installments over a period of five years. If a participating trustee dies, any amount payable under the Plan will be paid to that trustee's beneficiaries. Each Fund's obligation to make payments under the Plan is a general obligation of that Fund. No Fund is liable for any other Fund's obligations to make payments under the Plan. Purchasing and Redeeming Shares Purchases and redemptions are discussed in the Funds' prospectus under the headings "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 41 (c) an emergency, as determined by the Commission, exists making disposal of portfolio securities or valuation of the net assets of the Funds not reasonably practicable. For purposes of computing the NAV of a Fund share, a security traded on a securities exchange, or in an over-the-counter market in which transaction prices are reported, is valued at the last sale price at the time of valuation. A security for which there is no reported sale on the valuation date is valued at the mean of the latest bid and ask quotations or, if there is no ask quotation, at the most recent bid quotation. Securities for which quotations are not available, 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 the exchange plan between the Acorn Funds and the Money Funds. For its services it receives a fee at the rate of 0.35% of the average annual net assets of 42 each account in a Money Fund established by exchange from one of the Acorn Funds, pursuant to a 12b-1 plan adopted by the Money Funds. Additional Tax Information Each Fund intends to continue to qualify to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code") so as to avoid payment of federal income tax on its capital gains and net investment income currently distributed to its shareholders. At the time of your purchase, a Fund's NAV is likely to 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. 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. 43 Dividends paid by Acorn International and Acorn Foreign Forty are generally not eligible for the dividends-received deduction for corporate shareholders because little or none of those Funds' income consists of dividends paid by United States corporations. A portion of the dividends paid by Acorn Fund, Acorn USA and Acorn Twenty is generally 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 44 Fund, either in a particular transaction or over a period of time. Although some transactions involve only brokerage services, many involve research services as well. In valuing brokerage services, WAM makes a judgment as to which brokers are capable of providing the most favorable net price (not necessarily the lowest commission) and the best execution in a particular transaction. Best execution connotes not only general competence and reliability of a broker, but specific expertise and effort of a broker in overcoming the anticipated difficulties in fulfilling the requirements of particular transactions, because the problems of execution and the required skills and effort vary greatly among transactions. In valuing research services, WAM makes a judgment of the usefulness of research and other information provided to WAM by a broker in managing each Fund's investment portfolio. In some cases, the information, e.g., data or recommendations concerning particular securities, relates to the specific transaction placed with the broker, but for the greater part the research consists of a wide variety of information concerning companies, industries, investment strategy, and economic, financial, and political conditions and prospects, useful to WAM in advising that Fund. The reasonableness of brokerage commissions paid by the Funds in relation to transaction and research services received is evaluated by WAM's staff on an ongoing basis. The general level of brokerage charges and other aspects of each Fund's portfolio transactions are reviewed periodically by the board of trustees and its committee on portfolio transactions. WAM is the principal source of information and advice to the Funds, and is responsible for making and initiating the execution of investment decisions by the Funds. However, the board of trustees recognizes that it is important for WAM, in performing its responsibilities to the Funds, to continue to receive and evaluate the broad spectrum of economic and financial information that many securities brokers have customarily furnished in connection with 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. 45 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: Fund 1999 1998 1997 --------------------------------------------------------------------------- Acorn Fund $3,938,000 $2,766,000 $2,952,000 Acorn International 4,457,000 4,111,000 5,350,000 Acorn USA 269,000 305,000 216,000 Acorn Twenty 151,000 53,000* N/A Acorn Foreign Forty 254,000 41,000* N/A * From commencement of operations on November 23, 1998. 46 The increase in the commissions paid by Acorn Fund in 1999 compared to 1998 resulted from an increase in the Fund's assets (from $3.5 billion at December 31, 1998 to $3.9 billion at December 31, 1999) and an increase in portfolio turnover from 24% in 1998 to 34% in 1999, although the Fund's turnover remains very low. The increases in commissions paid by Acorn Twenty and Acorn Foreign Forty resulted from the increases in their assets after they began operations in November 1998. 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. Code of Ethics The 1940 Act and rules thereunder require that the Trust and WAM establish standards and procedures for the detection and prevention of certain conflicts of interest, including activities by which persons having knowledge of the investments and investment intentions of the Funds might take advantage of that knowledge for their own benefit. The Trust and WAM have adopted a Code of Ethics to meet those concerns and legal requirements. Although the Code does not prohibit employees who have knowledge of the investments and investment intentions of the Funds from engaging in personal securities investing, it does regulate such personal securities investing by these employees as a part of the effort by the Trust and WAM to detect and prevent conflicts of interest. 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 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. State Street is also the transfer agent for the Funds. 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. 47 Financial Statements Acorn Twenty >Statement of Investments December 31, 1999
Number of Shares Value (000) - ---------------------------------------------------------------------------------------------- Common Stocks: 92.8% - ---------------------------------------------------------------------------------------------- Information: 34.5% >Television Programming: 6.8% 82,000 Liberty Media Group, AT&T (b) $ 4,653 Cable & Satellite Programming >Telecommunications/Wireline Communications: 11.6% 68,000 McLeod USA (b) 4,003 Super Regional CLEC: Local, Long Distance & Internet Services 82,000 RCN (b) Metro Market CLEC: Voice, Video & 3,977 Internet Services - ---------------------------------------------------------------------------------------------- 7,980 >Instrumentation: 2.3% 41,000 Tektronix Analytical Instruments 1,594 >Mobile Communications: 5.5% 30,000 Telephone and Data Systems Cellular & Telephone Services 3,780 >Transaction Processors: 3.6% 72,000 National Data Credit Card & Health Claims Processor 2,444 >Business Information: 4.7% 73,000 H&R Block Tax Preparation 3,194 ------ Information: Total 23,645 - ---------------------------------------------------------------------------------------------- Health Care: 11.1% >Services: 11.1% 185,000 First Health (b) 4,972 PPO Network 75,000 Lincare Holdings (b) 2,602 Home Health Care Services ------ Health Care: Total 7,574 - ---------------------------------------------------------------------------------------------- Consumer Goods/Services: 14.8% >Cruise Lines: 3.2% 45,000 Royal Caribbean Cruises 2,219 Cruises to Caribbean & Alaska >Casinos: 4.1% 105,000 Harrah's Entertainment (b) 2,776 Casinos & Riverboats >Furniture & Manufacturers: 7.5% 95,000 Jones Apparel (b) 2,577 Women's Apparel 110,000 Herman Miller 2,530 Office Furniture - ---------------------------------------------------------------------------------------------- 5,107 ------ Consumer Goods/Services: Total 10,102 - ---------------------------------------------------------------------------------------------- Principal Amount or Number of Shares Value (000) - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Finance: 17.6% >Finance Companies: 6.9% 255,000 AmeriCredit (b) $ 4,718 Auto Lending >Money Management: 5.5% 31,500 SEI Investments 3,749 Mutual Fund Administration >Insurance: 5.2% 28,000 Progressive 2,048 Auto Insurance 143,000 UICI (b) 1,510 Insurance/Specialty Finance - ---------------------------------------------------------------------------------------------- 3,558 ------- Finance: Total 12,025 - ---------------------------------------------------------------------------------------------- Industrial Goods/Services: 4.0% >Other Industrial Services: 4.0% 225,000 ServiceMaster 2,770 Facilities Management ------- Industrial Goods/Services: Total 2,770 - ---------------------------------------------------------------------------------------------- Energy/Minerals: 10.8% >Independent Power: 10.8% 56,000 AES Corporation (b) 4,186 Power Plants 95,000 MidAmerican Energy 3,200 Growth Utility ------- Energy/Minerals: Total 7,386 ------- Total Common Stocks: 92.8% 63,502 (Cost: $52,064) Short-Term Obligation: 3.3% $ 2,281 Associates First Capital 4.00% Due 1/03/00 2,280 ------- (Amortized Cost: $ 2,280) Total Investments: 96.1% 65,782 (Cost: $54,344) Cash and Other Assets less Liabilities: 3.9% 2,688 ------- Total Net Assets: 100% $68,470 ==============================================================================================
- -------------------------------------------------------------------------------- >Notes to Statement of Investments: (a) At December 31, 1999, for federal income tax purposes, cost of investments was $54,461,000 and net unrealized appreciation was $11,321,000, consisting of gross unrealized appreciation of $16,536,000 and gross unrealized depreciation of $5,215,000. (b) Non-income producing security. 1 Acorn Foreign Fund >Statement of Investments December 31, 1999
Number of Shares Value (000) - ---------------------------------------------------------------- Common Stocks: 95.0% - ---------------------------------------------------------------- Europe: 62.7% >Germany: 1.0% 30,000 Rhoen Klinikum $1,102 Hospital Management >Finland: 1.4% 21,200 Comptel (b) 1,490 Telephone Billing Software >Sweden: 3.9% 60,000 Netcom (b) 4,216 Telecommunication Services >France/Belgium: 8.8% 7,000 M6 Metropole TV 3,466 Television Broadcaster 40,000 Audiofina (Belgium) 3,019 Television Broadcaster 18,000 Atos (b) 2,982 Computer Services/Transaction Processing - ---------------------------------------------------------------- 9,467 >United Kingdom/Ireland: 28.2% 82,000 Energis (b) 3,940 Telecommunication Services 150,000 Logica 3,870 Computer Software & Services 170,000 WPP Group 2,694 Advertising 250,000 Carlton Communications 2,435 Television Broadcaster 660,000 St. James Capital 2,356 Life Insurance 18,000 NTL (b) 2,246 Voice, Video & Data Services 120,000 Sema Group 2,160 Computer Software & Services 120,000 Hays 1,911 Outsourcing Services 100,000 Capita Group 1,825 Outsourcing Services 170,000 Irish Life & Permanent (Ireland) 1,608 Life Insurance 220,000 Thus (b) 1,379 Telecommunication Services 300,000 NFC 1,187 Logistics & Moving Services 90,000 SSL International 1,139 Medical & Footcare Products 30,000 Serco Group 941 Facilities Management 85,000 Airtours 522 Packaged Tour Vacations - ---------------------------------------------------------------- 30,213 >Switzerland: 2.1% 800 Pargesa Holdings $ 1,308 Industrial & Media Conglomerate 390 Cie Fin Richemont 932 Luxury Goods, Tobacco & Pay TV - ---------------------------------------------------------------- 2,240 >Italy: 9.9% 300,000 Banca Fideuram 3,550 Life Insurance & Mutual Funds 800,000 SEAT Pagine Gialle 2,625 Yellow Pages Publishers 208,000 Editoriale L'Espresso 2,405 Newspapers & Magazines 300,000 Saipem 1,084 Offshore Construction 70,000 Mediolanum 964 Life Insurance & Mutual Funds - ---------------------------------------------------------------- 10,628 >Spain: 2.9% 110,000 Indra Sistemas 2,065 Computer Services 43,000 Mapfre Vida 991 Life Insurance & Mutual Funds - ---------------------------------------------------------------- 3,056 >Netherlands: 4.5% 40,000 Getronics 3,188 Computer Services 60,000 Hunter Douglas 1,630 Decorative Window Coverings 5,000 Fox Kids Europe (b) 64 Programming/Cartoons - ---------------------------------------------------------------- 4,882 ------ Europe: Total 67,294 - ---------------------------------------------------------------- Asia: 18.3% >Hong Kong: 1.4% 324,900 SmarTone Telecom 1,567 Mobile Telecommunications >Japan: 9.6% 7,000 Softbank 6,697 Internet Services/Investment Holdings 12,000 Nintendo 1,993 Video Games 4,000 Shohkoh Fund 1,583 Commercial Lender - ---------------------------------------------------------------- 10,273 >Singapore: 7.3% 400,000 Star Cruises 4,080 Cruise Line 325,000 Venture Manufacturing 3,727 Electronic Manufacturing Services - ---------------------------------------------------------------- 7,807 ------ Asia: Total 19,647
2 Acorn Foreign Forty >Statement of Investments, continued
Number of Shares Value(000) - ---------------------------------------------------------------------------- Other Countries: 14.0% >Canada: 7.1% 90,000 Celestica (b) $ 5,028 Electronic Manufacturing Services 70,000 Canadian Natural Resources (b) 1,706 Oil & Gas Producer 50,000 Power Financial 830 Financial Services Holding Company - ---------------------------------------------------------------------------- 7,564 >Israel: 2.9% 90,000 Amdocs (b) 3,105 Telecommunications Billing & Customer Care Software >United States: 4.0% 2,568,000 Global TeleSystems 3,431 Telecommunication Services Principal Amount or Number of Shares Value(000) - ---------------------------------------------------------------------------- 100,000 Azurix (b) $ 894 Owner/Operator of Water Utilities - ---------------------------------------------------------------------------- 4,325 ---------- Other: Total 14,994 ---------- Total Common Stocks: 95.0% $ 101,935 (Cost:$63,840) Short-Term Obligation: 4.2% $4,573 Associates First Capital 4.00% Due 1/03/00 4,572 (Amortized Cost:$4,572) ---------- Total Investments: 99.2% 106,507 (Cost:$68,412) Cash and Other Assets Less Liabilities: 0.8% 844 ---------- Total Net Assets: 100% $ 107,351 - ----------------------------------------------------------------------------
________________________________________________________________________________ >Notes to Statement of Investments: (a) At December 31, 1999, for federal income tax purposes, cost of investments was $64,145,000 and net unrealized appreciation was $37,790,000, consisting of gross unrealized appreciation of $39,336,000 and gross unrealized depreciation of $1,546,000. (b) Non-income producing security. (c) At December 31, 1999, $32,233,000 or 30.0% of the Fund's net assets was denominated in the Euro currency. 3 Acorn USA >Statement of Investments December 31, 1999
Number of Shares Value (000) - -------------------------------------------------------------------------- Common Stocks: 90.2% - -------------------------------------------------------------------------- Information: 48.1% >Broadcasting: 1.7% 209,100 Data Transmission Network (b) $ 3,607 Data Services for Farmers 39,500 Young Broadcasting (b) 2,015 Television Stations 36,300 Salem Communications (b) 821 Radio Stations for Religious Programming - -------------------------------------------------------------------------- 6,443 >Television Programming: 0.8% 68,000 TV Guide 2,924 TV Program Guides & Programming >Telecommunications/Wireline Communications: 3.1% 207,800 RCN (b) 10,078 Metro Market CLEC: Voice, Video & Internet Services 37,100 Classic Communications (b) 1,356 Cable Television in Rural Areas - -------------------------------------------------------------------------- 11,434 >Mobile Communications: 8.5% 186,000 Telephone and Data Systems 23,436 Cellular & Telephone Services 131,400 Price Communications (b) 3,655 Cellular Telephone Services 121,800 Comarco (b) 2,862 Wireless Network Testing 73,000 Diversinet (b) 1,606 Wireless PKI Security - -------------------------------------------------------------------------- 31,559 >Telecommunications Equipment: 2.7% 257,100 Aspect Communications (b) 10,059 Call Center Software >Gaming Equipment: 0.8% 146,000 International Game Technology 2,966 Slot Machines & Progressive Jackpots >Computer Services: 5.4% 312,500 Sykes Enterprises (b) 13,711 Call Center Services 820,000 Aztec Technology Partners (b) 3,741 Technology Staffing Services 151,700 Computer Task Group 2,247 Application Development & Staffing Services 16,700 Meta Group (b) 317 IT Publications & Consulting Services - -------------------------------------------------------------------------- 20,016 >Consumer Software: 0.1% 15,500 Activision (b) 237 Entertainment Software >Business Software: 3.9% 486,300 JDA Software (b) 7,963 Applications/Software & Services for Retailers 119,000 Project Software (b) 6,604 Enterprise Maintenance Software - -------------------------------------------------------------------------- 14,567 >Transaction Processors: 2.7% 298,300 National Data $10,124 Credit Card & Health Claims Processor >Internet: 1.0% 121,000 Online Resources (b) 2,012 Internet Banking Technology 125,000 Navidec (b) 1,500 Internet Computer Services - -------------------------------------------------------------------------- 3,512 >Business Information/ Marketing Services: 3.6% 206,000 CACI International (b) 4,661 Technology Services for Government 130,000 West TeleServices (b) 3,177 Customer Care & Sales Support 169,000 PRIMEDIA (b) 2,788 Specialty Magazines & Other Publications 56,800 Getty Images (b) 2,776 Photographs for Publications & Electronic Media - -------------------------------------------------------------------------- 13,402 >Contract Manufacturing: 0.9% 92,000 Applied Power 3,381 Electronic Enclosures & Industrial Products >Semiconductors/Related Equipment: 1.5% 232,000 Galileo Technology (b) 5,597 Semiconductors for Networking Equipment >Computer Hardware/ Related Systems: 11.4% 526,000 Micros Systems (b) 38,924 Information Systems for Restaurants & Hotels 129,000 American Power Conversion (b) 3,402 Uninterruptable Power Systems - -------------------------------------------------------------------------- 42,326 ------- Information: Total 178,547 - -------------------------------------------------------------------------- Health Care: 8.8% >Biotechnology/Drug Delivery: 1.4% 33,070 Maxygen (b) 2,348 Molecular Breeding 26,700 Myriad Genetics (b) 1,228 Gene Discovery & Diagnostic Products 44,900 Genome Therapeutics (b) 724 Gene Discovery Services 31,000 Genset (b) 591 Genomics 32,500 Genzyme Molecular Oncology Division (b) 227 Gene Expression Technology & Cancer Drugs 5,118
4
Number of Shares Value (000) - ---------------------------------------------------------------------------------- >Services: 7.4% 341,400 Lincare Holdings (b) $ 11,842 Home Health Care Services 390,000 First Health (b) 10,481 PPO Network 816,100 Magellan Health Services (b) 5,152 Mental Health Services - --------------------------------------------------------------------------------- 27,475 -------- Health Care: Total 32,593 - --------------------------------------------------------------------------------- Consumer Goods/Services: 3.2% >Consumer Services: 1.5% 112,000 ITT Educational Services (b) 1,729 Technology Oriented Postsecondary Degree Programs 55,000 Bally Total Fitness (b) 1,468 Fitness Centers 157,600 NuSkin Enterprises (b) 1,428 Personal Care/Herbal Products 122,500 Telespectrum (b) 873 Call Center Services - --------------------------------------------------------------------------------- 5,498 >Retail: 1.7% 375,000 Gadzooks (b) 3,680 Teen Apparel Retailer 58,500 Whole Foods Market (b) 2,713 Natural Food Supermarkets - --------------------------------------------------------------------------------- 6,393 -------- Consumer Goods/Services: Total 11,891 - --------------------------------------------------------------------------------- Finance: 10.4% >Banks: 1.5% 93,500 Chittenden (b) 2,770 Vermont & West Massachusetts Bank 44,000 TCF Financial 1,095 Great Lakes Bank 34,000 Texas Regional Bancshares 986 TexMex Bank 38,000 Peoples Bank Bridgeport 803 Connecticut Savings & Loan - --------------------------------------------------------------------------------- 5,654 >Finance Companies: 3.9% 633,500 AmeriCredit (b) 11,720 Auto Lending 590,000 World Acceptance (b) 2,839 Personal Loans - --------------------------------------------------------------------------------- 14,559 >Money Management: 0.6% 163,000 Phoenix Investment Partners 1,324 Mutual Fund & Pension Manager 52,800 Pioneer Group (b) 832 Equity Mutual Funds - --------------------------------------------------------------------------------- 2,156 Number of Shares Value (000) - --------------------------------------------------------------------------------- >Insurance: 4.4% 637,700 UICI (b) $ 6,736 Insurance/Specialty Finance 392,100 Acceptance Insurance (b) 2,279 Crop Insurance 93,000 Leucadia National 2,151 Insurance Holding Company 13,800 Markel (b) 2,139 Specialty Insurance 66,000 Protective Life 2,100 Life/Dental Insurance 30,000 Terra Nova Bermuda 900 Specialty Re-Insurance - --------------------------------------------------------------------------------- 16,305 -------- Finance: Total 38,674 - --------------------------------------------------------------------------------- Industrial Goods/Services: 6.4% >Steel: 0.2% 79,000 Atchison Casting (b) 721 Steel Foundries >Industrial Goods: 0.2% 140,000 Advanced Lighting Technologies (b) 805 Metal Halide Lighting >Specialty Chemicals: 0.8% 225,600 Lilly Industries, Cl. A 3,031 Industrial Coatings >Other Industrial Services: 5.2% 346,000 Hub Group (b) 6,920 Truck & Rail Freight Forwarder 347,400 Insurance Auto Auctions (b) 5,472 Auto Salvage Services 422,500 Wackenhut, Cl. B 4,357 Prison Management 210,000 Labor Ready (b) 2,546 Temporary Manual Labor - --------------------------------------------------------------------------------- 19,295 -------- Industrial Goods/Services: Total 23,852 - --------------------------------------------------------------------------------- Energy/Minerals: 13.1% >Independent Power: 7.8% 855,400 MidAmerican Energy 28,816 Growth Utility >Oil/Gas Producers: 1.5% 473,800 Tesoro Petroleum (b) 5,478 Oil Refinery/Gas Reserves
5
Number of Shares Value (000) - ---------------------------------------------------------------------------------------------- >Distribution/Marketing/Refining: 3.8% 253,400 Dynegy $ 6,161 Natural Gas & Electric Processing & Marketing 248,000 Atmos Energy 5,068 Natural Gas Utility 92,300 Equitable Resources 3,081 Natural Gas Utility & Producer - ---------------------------------------------------------------------------------------------- 14,310 -------- Energy/Minerals: Total 48,604 - ---------------------------------------------------------------------------------------------- Real Estate: 0.2% 47,000 The Rouse Company 999 Regional Shopping Malls -------- Real Estate: Total 999 Principal Amount Value (000) - ---------------------------------------------------------------------------------------------- Total Common Stocks: 90.2% $335,160 (Cost: $287,478) Short-Term Obligations: 10.5% Yield 4.00% - 4.05% Due 1/03- 1/06/00 $ 17,297 Associates First Capital 17,293 11,260 Motorola Credit 11,254 10,287 Citicorp 10,283 - ---------------------------------------------------------------------------------------------- (Amortized Cost: $38,830) 38,830 -------- Total Investments: 100.7% 373,990 - ---------------------------------------------------------------------------------------------- (Cost: $326,308) Cash and Other Assets Less Liabilities: (0.7%) (2,562) -------- Total Net Assets: 100% $371,428 ==============================================================================================
- -------------------------------------------------------------------------------- >Notes to Statement of Investments: (a) At December 31, 1999, for federal income tax purposes, cost of investments was $326,698,000 and net unrealized appreciation was $47,292,000, consisting of gross unrealized appreciation of $93,617,000 and gross unrealized depreciation of $46,325,000. (b) Non-income producing security. 6 Acorn International >Statement of Investments December 31, 1999
Number of Shares Value (000) - --------------------------------------------------------------------------------------------------------------------- Common Stocks and Other Equity-Like Securities: 96.7% - --------------------------------------------------------------------------------------------------------------------- Europe: 48.7% >Germany/Austria: 3.6% 600,000 Rhoen Klinikum Pfd. $ 21,374 500,000 Rhoen Klinikum 18,366 Hospital Management 250,000 UnitedGlobalCom (Austria) (b) 17,656 Cable Television for Europe, Israel & Australia 240,000 EM.TV & Merchandising 15,458 Children's Media Production, Merchandising & Distribution 50,000 Fresenius, Pfd. 9,158 Dialysis Equipment & Solutions 100,000 Dialog Semiconductor (b) 7,397 Custom Semiconductors for Cell Phones 165,000 Flughafen Wien (Austria) 5,730 Vienna Airport Authority 150,000 Pfeiffer Vacuum Technologies 3,849 Vacuum Pump Manufacturer 28,000 Pixelpark (b) 3,184 Internet Consulting - --------------------------------------------------------------------------------------------------------------------- 102,172 >Finland: 4.7% 1,200,000 TietoEnator 74,872 Computer Services/Consulting 1,500,000 Talentum (c) 36,380 Trade Journals & Internet Services 120,000 Helsinki Telephone 9,987 Telecommunications Provider 625,000 Fiskars, Series A 8,177 Scissors & Gardening Tools 95,400 Spar Finland (c) 3,341 Grocery/Convenience Stores 100,000 F-Secure (b) 2,918 Security Software - --------------------------------------------------------------------------------------------------------------------- 135,675 >Norway: 0.2% 160,000 Enitel (b) 4,779 Telecommunications Provider >Sweden: 5.2% 950,000 WM Data Nordic 58,716 Computer Services/Consulting 160,000 Information Highway (b) 26,508 Internet Consulting 1,085,000 Sigma 23,203 Technical Consulting 1,350,000 Mandator 20,146 Computer Services/Consulting 400,000 Modern Times Group (b) 19,834 TV, Newspapers and Electronic Commerce - --------------------------------------------------------------------------------------------------------------------- 148,407 >France: 4.4% 375,000 Atos (b) $ 62,117 Computer Services/Transaction Processing 62,000 NRJ 42,646 Radio Network 50,000 Fininfo 12,579 Data Feeds for French Banks & Brokers 20,000 Penauille Polyservice 8,011 Industrial Cleaning/Airport Services - --------------------------------------------------------------------------------------------------------------------- 125,353 >United Kingdom/Ireland: 14.2% 2,000,000 Serco Group 62,762 Facilities Management 450,000 NTL (b) 56,138 Voice, Video & Data Services Via Cable Networks 500,000 Baltimore Technologies 41,397 Security Software 2,000,000 Capita Group 36,510 Outsourcing Services 1,500,000 SSL International 18,986 Medical & Footcare Products 500,000 Euro Money Publications 18,174 Financial Publications 3,500,000 Taylor Nelson 15,464 Market Research Services 1,350,000 ITNET 14,885 Outsourcing Services 3,500,000 NFC 13,853 Logistics 150,000 Esat Telecom (Ireland) (b) 13,725 Telecommunications Provider 500,000 Logica 12,900 Computer Services/Consulting 2,125,000 Photobition Group 11,312 Production of Graphics for Exhibits 2,250,000 Bodycote 10,868 Materials Technology & Metal Processing 2,840,000 St. James Capital 10,140 Life Insurance 3,000,000 Smith & Nephew 10,081 Medical Equipment & Supplies 500,000 Flextech (b) 9,289 Cable Channels 1,700,000 Rotork 8,582 Valve Actuators for Oil & Water Pipelines 750,000 Irish Life & Permanent (Ireland) (b) 7,095 Savings Products 3,400,000 HALMA 6,509 Fire, Burglary & Flooding Detection Devices 1,000,000 Thus (b) 6,268 Telecommunications Provider 1,500,000 Hogg Robinson 5,876 Corporate Travel Management 715,000 Fairey Group 5,833 Electronic Products
7
Number of Shares Value (000) - --------------------------------------------------------------------------------------------------------------------- 290,000 Ocean Group $ 5,411 Freight Forwarder 3,206,400 Chloride Group 5,050 Electrical Equipment Manufacturer/Retailer 128,000 FKI (b) 496 Autonomous Manufacturer - --------------------------------------------------------------------------------------------------------------------- 407,604 >Switzerland: 3.7% 80,000 Selecta Group 25,152 Vending Machine Owner/Operator 10,000 Cie Fin Richemont 23,895 Luxury Goods 30,000 Phoenix Mecano 15,091 Electrical Components Manufacturer 15,000 Bon Appetit 14,856 Wholesale Food Distributor and Speciality Restaurant/Retailer 6,500 Sarasin & Cie Bank 13,202 Private Banking 5,000 Bachem 8,017 Peptides 1,600 Julius Baer 4,839 Private Banking 5,000 Societe Generale d'Affichage (b) 2,578 Billboard Advertising - --------------------------------------------------------------------------------------------------------------------- 107,630 >Italy: 8.2% 6,000,000 Editoriale L'Espresso (b) 69,378 Newspaper & Magazine Publisher 4,000,000 Banca Fideuram 47,339 Life Insurance & Mutual Funds 3,000,000 Autogrill 37,738 Restaurants and Catering for Travelers 1,500,000 Class Editori 26,115 Newspapers & On-Line Financial Data 1,500,000 Mediolanum 20,665 Life Insurance & Mutual Funds 4,000,000 SEAT Pagine Gialle 13,123 Yellow Pages Publisher 1,400,000 Aeroporti di Roma 9,130 Airport Management 650,000 Gruppo Coin (b) 7,588 Food & Clothing Retailer 1,250,000 Saipem 4,516 Offshore Oil Services - --------------------------------------------------------------------------------------------------------------------- 235,592 >Spain/Portugal: 1.9% 450,000 Cortefiel 11,774 Apparel Retailer 500,000 Indra Sistemas 9,384 Computer Services/Consulting 400,000 Mapfre Vida 9,218 Life Insurance & Mutual Funds 425,000 Filmes Lusomundo (Portugal) (b)(c) 5,988 Newspapers, Radio, Video, Film Distribution 400,000 Aguas de Barcelona $ 5,853 Water Utility 650,000 Prosegur 5,815 Security Guards 100,000 PT Multimedia (Portugal) (b) 5,683 Cable TV, Satellite Operator & Internet Service Provider - --------------------------------------------------------------------------------------------------------------------- 53,715 >Netherlands: 2.0% 500,000 Getronics 39,851 Computer Services/Consulting 420,000 Kempen 16,695 Stock Brokerage/Investment Management 27,000 Versatel (b) 951 Telecommunications Provider 65,000 Fox Kids Europe (b) 831 Cartoons - --------------------------------------------------------------------------------------------------------------------- 58,328 >Hungary: 0.6% 1,200,000 Matav 8,402 47,000 Matav ADR 1,692 Telecommunications Provider 100,000 Gedeon Richter 6,574 Pharmaceuticals - --------------------------------------------------------------------------------------------------------------------- 16,668 ---------- Europe: Total 1,395,923 - --------------------------------------------------------------------------------------------------------------------- Asia: 28.9% >Hong Kong: 4.0% 30,000,000 Li & Fung 75,256 Sourcing of Consumer Goods 3,500,000 TVB (b) 23,863 Television Broadcasting 3,000,000 SmarTone Telecom 14,472 Mobile Telecommunications Provider - --------------------------------------------------------------------------------------------------------------------- 113,591 >India: 0.0% 1,998,000 Zurich India Quantum (b) 533 Closed-End Fund >Japan: 11.6% 130,000 JAFCO 46,415 Venture Capital Fund 175,000 Orix 39,406 Finance Leasing 85,000 Trans Cosmos 36,252 Information Technology Services & Investments 180,000 Ryohin Keikaku 36,113 Own Brand Specialty Retailer 160,000 Nintendo 26,575 Video Games 75,000 Nidec 21,642 Spindle Motor Manufacturer
8 Acorn International >Statement of Investments, continued Number of Shares Value(000) - ---------------------------------------------------------------------------- 30,000 OBIC $ 21,246 Computer Integrator 15,000 Bellsystem24 16,434 Telemarketing 180,000 Fuji Software ABC 14,086 Computer Services/Consulting 40,000 Otsuka Kagu 10,760 Furniture Retailer 40,000 Benesse 9,625 Correspondence Courses 300,000 Densei Lambda 9,391 Power Supplies 77,000 Taiyo Ink 9,038 Speciality Chemicals 35,000 C Two-Network 7,909 Discount Food Retailer 50,000 Aiful 6,114 Consumer Lending 75,000 Misumi 5,906 Distributor of Capital Goods Components 400,000 Kokuyo 5,321 Office Product Manufacturer & Retailer 800,000 Yamaha 5,196 Musical Instruments Manufacturer 175,000 Nichiei 3,800 Commercial Lender 24,400 Wilson Learning 1,193 Corporate Training - ---------------------------------------------------------------------------- 332,422 >Taiwan: 1.9% 3,000,000 Systex 20,456 Systems Integrator & Internet Services 3,000,000 Hitron Technology (b) 17,970 Network Integration & Internet Services 2,999,500 Chroma Ate (b) 8,793 Test & Measurement Instruments 4,000,000 Phoenixtec Power 7,711 Uninterruptable Power Supply Manufacturer - ---------------------------------------------------------------------------- 54,930 >Malaysia: 0.4% 2,000,000 Unisem 12,842 Semiconductor Assembly >Philippines: 0.1% 36,918,000 Int'l Container Terminal Services (b) 3,344 Container Handling Terminals & Port Management >South Korea: 1.2% 1,000,000 S1 Corporation 17,261 Security Services 100,000 Cheil Jedang 11,537 Consumer Staples 1,000,000 Korea Technology Investments (b) 6,103 Venture Capital - ---------------------------------------------------------------------------- 34,901 >Singapore: 9.7% 9,500,000 Star Cruises $ 96,900 Cruise Line 6,500,000 Venture Manufacturing 74,542 Electronic Manufacturing Services 8,000,000 Datacraft Asia 66,400 Network Integrator 7,500,000 Natsteel Electronics 39,628 Electronic Manufacturing Services - ---------------------------------------------------------------------------- 277,470 --------- Asia: Total 830,033 - ---------------------------------------------------------------------------- Latin America: 4.3% >Mexico: 2.5% 9,000,000 Grupo Industrial Bimbo 20,090 Bread, Baked Goods & Snacks 5,000,000 Corp Interamericana de 19,974 Entretenimiento (b) Special Events & Live Entertainment 3,500,000 Kimberly Clark de Mexico 13,575 Paper Products 5,450,000 Cifra SA Series V (b) 10,940 Discount Stores 5,000,000 Grupo Continental 7,282 Beverages - ---------------------------------------------------------------------------- 71,861 >Brazil: 1.2% 750,000 Embratel 20,438 Long Distance Telecommunications Provider 340,000 TeleSudeste Celular 13,196 Cellular Telecommunications Provider - ---------------------------------------------------------------------------- 33,634 >Argentina: 0.5% 400,000 IRSA GDS 12,938 Real Estate Management & Development 30,000 El Sitio (b) 1,102 Internet Network for Spanish & Portuguese - ---------------------------------------------------------------------------- 14,040 >Peru: 0.1% 7,000,000 Enrique Ferreyros 3,791 Heavy Machinery Dealer --------- Latin America: Total 123,326 - ---------------------------------------------------------------------------- Other Countries: 14.8% >Australia: 3.2% 7,500,000 ERG 42,130 Smart Card Systems for Public Transportation 4,500,000 Computershare 22,174 Financial Software/Services 5,000,000 AAPT (b) 17,115 Telecommunications Provider 2,000,000 KeyCorp (b)(c) 10,762 Smart Card Technology - ---------------------------------------------------------------------------- 92,181 9 Number of Shares Value (000) - -------------------------------------------------------------------------------- >Canada: 5.2% 1,200,000 Celestica (b) $ 67,035 Electronic Manufacturing Services 720,000 Canadian Natural Resources (b) 17,547 Oil & Gas Producer 750,000 Power Financial 12,445 Financial Services Holding Company 500,000 Cinar (b) 12,250 Children's TV Programming 500,000 Corus Entertainment (b) 10,198 CATV Programming & Radio Stations 500,000 Penn West Petroleum (b) 9,766 Oil & Gas Producer 1,200,000 Bracknell (b) 5,393 Electrical Contractor & Facilities Management 400,000 Leitch Technology (b) 4,923 Television Production Equipment 600,000 LGS Group (b) 4,853 Computer Systems Integrator 4,000,000 Dundee Realty (b) 4,038 Real Estate 110,000 Mosaic (b) 852 Outsourcing Market Services - -------------------------------------------------------------------------------- 149,300 >Israel: 2.7% 800,000 Amdocs (b) 27,600 Telecommunications Billing & Customer Care Software 170,000 Gilat Satellite Network (b) 20,188 Satellite Communications Equipment 650,000 Galileo Technology (b) 15,681 Communications Semiconductors 350,000 ECI Telecom 11,069 Telecommunications Equipment 75,000 Radware (b) 3,234 Internet Infrastructure & Internet Traffic - -------------------------------------------------------------------------------- 77,772 Principal Amount of Number of Shares Value(000) - -------------------------------------------------------------------------------- >South Africa: 1.3% 6,000,000 Dimension Data (b) $ 37,674 Networks & Computer Services >Russia: 0.0% $1,500,000 Khanty Mansiysk 10% Notes Due 10/14/02 (b) 750 4,001 Khanty Mansiysk (b) 150 Oil Production in Russia - -------------------------------------------------------------------------------- 900 >United States: 2.4% 400,000 MIH (b) 23,600 Pay-TV 300,000 AES Corporation (b) 22,425 Power Plants 475,000 Global TeleSystems 16,447 Telecommunications Provider 500,000 Azurix (b) 4,469 Owner & Operator of Water Utilities - -------------------------------------------------------------------------------- 66,941 ------------ Other: Total 424,768 Total Common Stocks and Other Equity-Like Securities: 96.7% ------------ 2,774,050 (Cost: $1,188,760) Short-Term Obligations: 3.1% Yield 4.00% Due 1/03 - 1/06/00 $64,438 Associates First Capital 64,424 25,000 Bell Atlantic Financial 24,986 ------------ (Amortized Cost: $89,410) 89,410 ------------ Total Investments: 99.8% 2,863,460 (Cost: $1,278,170) Cash and Other Assets less Liabilities: 0.2% 4,743 ------------ Total Net Assets: 100% $2,868,203 ================================================================================ - -------------------------------------------------------------------------------- >Notes to Statement of Investments: (a) At December 31, 1999, for federal income tax purposes, cost of investments was $1,344,131,000 and net unrealized appreciation was $1,519,329,000, consisting of gross unrealized appreciation of $1,570,379,000 and gross unrealized depreciation of $51,050,000. (b) Non-income producing security. (c) On December 31, 1999, the Fund held the following percentages of the outstanding voting shares of the affiliated companies (ownership of at least 5%) listed below: Talentum (Finland)................ 9.19% KeyCorp (Australia)............ 6.40% Filmes Lusomundo (Portugal)....... 7.08% The aggregate cost and value of investments in these companies at December 31, 1999, was $20,950,000 and $53,129,000, respectively. The market value of these securities represents 1.85% of the total net assets at December 31, 1999. During the period ended December 31, 1999, the cost of purchases and proceeds from sales in affiliated companies was $13,398,000 and $12,962,000 respectively. Net dividends received from these companies amounted to $381,000 and net realized loss on sales on investments in such companies amounted to $15,750,000. (d) At December 31, 1999, $741,228,000 or 25.8% of the Fund's net assets was denominated in the Euro currency. 10 Acorn Fund >Statement of Investments December 31, 1999
Number of Shares Value (000) - --------------------------------------------------------------------------------------------- Common Stocks and Other Equity-Like Securities: 92.2% - --------------------------------------------------------------------------------------------- Information: 38.4% Media >Broadcasting: 1.7% 785,000 Young Broadcasting (b) $ 40,035 Television Stations 819,000 Data Transmission Network (b) (c) 14,128 Data Services for Farmers 100,000 Cumulus Media (b) 5,075 Radio Stations in Small Cities 137,000 Salem Communications (b) 3,100 Radio Stations for Religious Programming 300,000 Shop at Home (b) 2,981 Television Home Shopping Network 250,000 Granite Broadcasting (b) 2,531 Television Stations - --------------------------------------------------------------------------------------- 67,850 >Television Programming CATV: 2.9% 1,500,000 Liberty Media Group, AT&T (b) 85,125 Cable & Satellite Programming 550,000 Playboy Enterprises (b) 13,372 CATV & Satellite Programming, Publishing 500,000 Corus Entertainment (Canada) (b) 10,198 CATV Programming & Radio Stations 300,000 Cinar (Canada) (b) 7,350 Children's TV Programming 9,000 Fox Kids Europe (Netherlands) (b) 115 Cartoons - --------------------------------------------------------------------------------------- 116,160 Telecommunications >Telecommunications/Wireline Communications: 2.3% 250,000 NTL (United Kingdom) (b) 31,188 Voice, Video & Data Services 584,000 RCN (b) 28,324 Metro Market CLEC: Voice, Video & Internet Services 354,000 Commonwealth Telephone (b) 18,718 Rural Market CLEC: Local, Long Distance & Internet Services 200,000 Classic Communications (b) 7,312 Cable Television in Rural Areas 230,000 Startec Global Communications (b) 4,834 International Telecommunications 36,000 Thus (United Kingdom) (b) 226 Emerging Telecommunications - --------------------------------------------------------------------------------------- 90,602 >Mobile Communications: 2.8% 580,000 Telephone and Data Systems 73,080 Cellular & Telephone Services 355,000 Pinnacle Holdings (b) 15,043 Towers for Cellular, PCs & Paging 420,000 Price Communications (b) 11,681 Cellular Telephone Services 355,000 COMARCO (b) (c) 8,342 Wireless Network Testing - --------------------------------------------------------------------------------------- 108,146 Principal Amount or Number of Shares Value (000) - --------------------------------------------------------------------------------------- >Telecommunications Equipment: 0.1% 36,000 Comverse Technology (b) 5,211 Voicemail & Other Enhanced Services Equipment Computer Related Hardware >Computer Hardware/ Related Systems: 2.9% 765,000 Micros Systems (b) 56,610 Information System for Restaurants & Hotels 713,000 Kronos (b) (c) 42,780 Labor Management Solutions 550,000 American Power Conversion (b) 14,506 Uninterruptable Power Systems - --------------------------------------------------------------------------------------- >Semiconductors 113,896 Related Equipment: 0.5% 200,000 Oak Industries (b) 21,225 Communications Components >Gaming Equipment: 2.1% 2,342,000 International Game Technology 47,572 Slot Machines & Progressive Jackpots 450,000 Anchor Gaming (b) 19,547 Slot Machines & Casinos 1,000,000 Aristocrat Leisure (Australia) 14,388 Slot Machines - --------------------------------------------------------------------------------------- 81,507 >Contract Manufacturing: 2.0% 400,000 Solectron (b) 38,050 Electronic Manufacturing Services 200,000 Jabil Circuit (b) 14,600 Electronic Manufacturing Services 350,000 Applied Power 12,862 Electronic Enclosures & Industrial Products 2,000,000 Natsteel Electronics (Singapore) 10,567 Electronic Manufacturing Services 35,000 Plexus (b) 1,540 Electronic Manufacturing Services - --------------------------------------------------------------------------------------- 77,619 >Instrumentation: 1.4% 480,000 Mettler Toledo (b) 18,330 Laboratory Products 520,000 Varian (b) 11,700 Analytical Instruments 613,000 Thermoquest (b) 6,322 $ 1,500,000 Thermoquest, 5% Note Due 8/15/00 1,470 Mass Spectrometry & Chromatography $ 5,000,000 Thermo Optek, 5% Note Due 10/15/00 4,900 265,000 Thermo Optek 3,014 Elemental & Molecular Spectroscopy 98,000 Dionex (b) 4,036 Ion & Liquid Chromatography 266,000 Onix Systems (b) 1,629 Field Measurement & Sensor Equipment 232,000 Metrika Systems (b) 1,392 Gamma Ray Instrumentation - --------------------------------------------------------------------------------------- 52,793
11 Acorn Fund >Statement of Investments, continued
Principal Amount or Number of Shares Value (000) - --------------------------------------------------------------------------------------------- >Business Software: 1.2% 1,075,000 Systems & Computer Technology (b) $ 17,469 Enterprise Software & Services 687,000 JDA Software Group (b) 11,250 Applications/Software & Services for Retailers 200,000 Hyperion Solutions (b) 8,700 Analytical Application Software 300,000 Indus International (b) 3,656 Enterprise Asset Management Software 280,000 MAPICS (b) 3,535 Mid Market ERP Systems 100,000 Entra Data (Sweden) 2,562 Business Software - --------------------------------------------------------------------------------------------- 47,172 >Consumer Software: 0.5% $ 6,500,000 Activision, 6.75% Note Due 1/1/05 6,532 400,000 Activision (b) 6,125 Entertainment Software 245,000 THQ (b) 5,681 Entertainment Software 250,000 3DO Company (b) 2,273 Entertainment Software - --------------------------------------------------------------------------------------------- 20,611 >Computer Services: 5.2% 1,000,000 WM Data Nordic (Sweden) 61,806 Computer Services/Consulting 230,000 Atos (France) (b) 38,098 Computer Services/Transaction Processing 650,000 Sykes Enterprises (b) 28,519 Call Center Services 171,084 Getronics (Netherlands) 13,636 Computer Services/Consulting 500,000 Cambridge Technology (b) 13,125 Software Implementation Services 790,000 Computer Task Group 11,702 Application Development & Staffing Services 642,000 RCM Technologies (b) (c) 11,075 Technology Staffing Services 250,000 American Management Systems (b) 7,844 Software Development Services 1,616,000 Aztec Technology Partners (b) (c) 7,373 Application Development & Maintenance Services 95,000 BISYS (b) 6,199 Processing for Banks 214,000 Analysts International 2,675 Technology Staffing Services 104,000 Meta Group (b) 1,976 IT Publications & Consulting Services - --------------------------------------------------------------------------------------------- 204,028 Software/Services >Business Information/Marketing Services/Publishing: 3.8% 800,000 Getty Images (b) 39,100 Photographs for Publications & Electronic Media 2,400,000 InfoUSA (b) 33,450 Business Data for Sales Leads Number of Shares Value (000) - --------------------------------------------------------------------------------------------- 1,100,000 PRIMEDIA (b) $ 18,150 Specialty Magazines & Other Publications 356,000 Choicepoint (b) 14,729 Fraud Protection Information 450,000 Information Holdings (b) 13,078 Scientific & Medical Publications, Patent Information 445,000 West Teleservices (b) 10,875 Customer Care & Sales Support 403,000 ACNielsen (b) 9,924 Market Research, Information & Analysis 350,000 Acxiom (b) 8,400 Database Marketing Services - --------------------------------------------------------------------------------------------- 147,706 >Internet: 6.6% 235,000 Softbank Corporation (Japan) 224,817 Internet Services/Investment Holdings 470,000 Online Resources (b) 7,814 Internet Banking Technology 100,000 RSA Security (b) 7,750 Enterprise Security Software 197,725 Internet Commerce (b) 5,046 E-Commerce Service Network 2,683 Bigfoot International (b) (c) 4,024 263,158 Bigfoot International, Series A (b) (c) 2,500 Internet Direct Marketing 511,630 NeoPlanet, Series A (b) 2,000 Web Browser 250,000 Musicmaker.com (b) 1,469 Make Your Own Music CD 61,000 Navidec (b) 732 Internet Computer Services 47,855 GIGA (b) 197 29,714 GIGA Warrants (b) 4 Data on Information Technology - --------------------------------------------------------------------------------------------- 256,353 >Electronics Distribution: 0.5% 890,000 Pioneer-Standard Electronics 12,849 Component & Computer Distribution 300,000 Kent Electronics (b) 6,825 Component Distribution & Contract Assembly - --------------------------------------------------------------------------------------------- 19,674 >Transaction Processors: 1.9% 1,874,000 National Data (c) 63,599 Credit Card & Health Claims Processor 380,000 Concord EFS (b) 9,785 Credit Card Processor - --------------------------------------------------------------------------------------------- 73,384 Information: Total 1,503,937 Health Care: 7.7% >Biotechnology/Drug Delivery: 3.7% 525,000 Myriad Genetics (b) (c) 24,150 Gene Discovery & Diagnostic Products 329,000 Protein Design Labs (b) 23,030 Computer Designed Monoclonal Antibodies 450,000 Inhale Therapeutic Systems (b) 19,153 Pulmonary Drug Delivery
12 Number of Shares Value (000) - -------------------------------------------------------------------------- 230,000 CuraGen (b) $ 16,042 Gene Based Drug Development 664,000 Genome Therapeutics (b) 10,707 Gene Discovery Services 160,000 Incyte Pharmaceutical (b) 9,600 Gene Sequencing 7,350,000 Nadro, Series L (Mexico) 9,309 Pharmaceutical Distributor 915,000 Microcide Pharmaceuticals (b) (c) 8,121 Antibiotics 1,508,000 Corvas International (b) (c) 6,692 Rational Drug Design 529,000 NPS Pharmaceuticals (b) 6,480 Small Molecule Drugs 351,000 Guilford Pharmaceuticals (b) 5,967 Drug Delivery & Neurology Drugs 768,000 Synaptic Pharmaceuticals (b) (c) 5,184 Receptor Targeted Drug Design 190,000 Genzyme Molecular Oncology Division (b) 1,330 Gene Expression Technology & Cancer Drugs - -------------------------------------------------------------------------- 145,765 >Medical Equipment: 0.6% 299,000 Wesley Jessen Vision (b) 11,325 Contact Lenses 407,000 Orthofix International (b) 5,825 Bone Fixation & Stimulation Devices 443,000 Acuson (b) 5,565 Ultrasound Devices - -------------------------------------------------------------------------- 22,715 >Hospital/Laboratory Supplies: 0.0% 27,000 Techne (b) 1,487 Cytokines, Antibodies, Other Reagents for Life Sciences >Services: 3.4% 2,038,000 Lincare Holdings (b) 70,693 Home Health Care Services 1,952,000 First Health Group (b) 52,460 PPO Network 1,280,000 Magellan Health Services (b) 8,080 Mental Health Services - -------------------------------------------------------------------------- 131,233 -------- Health Care: Total 301,200 - -------------------------------------------------------------------------- Consumer Goods/Services: 11.8% Goods >Leisure Vehicles: 2.0% 1,000,000 Harley-Davidson 64,062 Motorcycles & Related Merchandise 341,000 Thor Industries 10,379 RV's & Busses 2,200,000 Ducati Motor (Italy) (b) 5,701 Motorcycles & Related Merchandise - -------------------------------------------------------------------------- 80,142 >Furniture: 0.3% 520,000 Herman Miller 11,960 Office Furniture >Beverages: 0.1% 23,000 Binding-Brauerei (Germany) $ 4,583 Brewery >Nondurables: 0.2% 460,000 Helen of Troy (b) 3,335 Personal Care Products 401,000 First Years 3,333 Infant & Toddler Products - -------------------------------------------------------------------------- 6,668 >Durable Goods: 0.2% 312,439 Hunter Douglas (Netherlands) 8,489 Decorative Window Coverings >Textiles/Apparel: 1.0% 730,000 Jones Apparel (b) 19,801 Women's Apparel 725,000 Nautica Enterprises (b) 8,202 Men's Casual Apparel 600,000 Unifi (b) 7,388 Polyester & Nylon Fabrics 85,000 Gildan Activewear (b) 1,541 Cotton T-Shirts - -------------------------------------------------------------------------- 36,932 Services >Retail: 1.9% 1,600,000 Borders Group (b) 25,700 Bookstores 400,000 Whole Foods Market (b) 18,550 Natural Food Supermarkets 1,100,000 N. Brown Group (United Kingdom) 11,009 Mail Order Clothing in Large Sizes 729,000 Gadzooks (b) (c) 7,153 Teen Apparel Retailer 400,000 Panera Bread (b) 3,100 Bakery & Deli Restaurants 200,000 Quiksilver (b) 3,100 Gen Y Clothing 160,000 Gaiam (b) 2,540 Healthy Living Catalog & E-Commerce 100,000 Calloway Golf 1,769 Premium Golf Clubs & Balls 130,000 MotherNature.com (b) 951 Healthy Living E-Commerce - -------------------------------------------------------------------------- 73,872 >Consumer Services: 1.5% 1,250,000 Bally Total Fitness (b) 33,359 National Chain of Fitness Centers 600,000 ITT Educational Services (b) 9,263 Technology Oriented Postsecondary Degree Programs 1,322,600 Airtours (United Kingdom) 8,119 Packaged Tour Vacations 270,000 Steiner Leisure (b) 4,506 Spas & Hair/Skin Products on Cruise Ships 234,000 Education Management (b) 3,276 Postsecondary Education - -------------------------------------------------------------------------- 58,523 13 Acorn Fund >Statement of Investments, continued Number of Shares Value (000) - -------------------------------------------------------------------------- >Casinos: 1.1% 1,080,000 Station Casinos (b) $ 24,233 Casinos & Riverboats 650,000 Isle of Capri Casino (b) 8,572 Five Casinos in Secondary Markets 360,000 Hollywood Park (b) 8,078 Casinos & Card Clubs 535,000 Monarch Casino & Resort (b) (c) 2,809 Casino/Hotel in Reno 63,000 Lakes Gaming (b) 500 Hotel & Casino in Biloxi & Gulfport - -------------------------------------------------------------------------- 44,192 >Cruise Lines: 3.5% 8,130,000 Star Cruises (Singapore) 82,926 Cruising/Casino Operations 1,100,000 Carnival 52,594 Largest Cruise Line 410,000 Royal Olympic Cruise (b) 1,999 Cruises in Mediterranean - -------------------------------------------------------------------------- 137,519 -------- Consumer Goods/Services: Total 462,880 - -------------------------------------------------------------------------- Finance: 13.8% >Banks: 1.6% 799,000 TCF Financial 19,875 Great Lakes Bank 672,000 Texas Regional Bancshares 19,488 TexMex Bank 414,000 Chittenden 12,265 Vermont & West Massachusetts Bank 180,000 CCB Financial 7,841 North Carolina Bank 400,000 Eldorado Bancshares (b) 4,300 California Bank - -------------------------------------------------------------------------- 63,769 >Savings & Loans: 1.3% 1,842,000 Peoples Bank Bridgeport 38,912 Connecticut Savings & Loan 702,000 Commonwealth Bancorp (c) 11,671 Philadelphia Savings & Loan - -------------------------------------------------------------------------- 50,583 >Insurance: 3.4% 600,000 Protective Life 19,088 Life/Dental Insurance 1,291,000 UICI (b) 13,636 Insurance/Specialty Insurance 78,000 Markel (b) 12,090 Specialty Insurance 511,000 Leucadia National 11,817 Insurance Holding Company 820,000 HCC Insurance Holdings 10,814 Aviation Insurance 488,000 Baldwin & Lyons, Cl. B 10,797 Trucking Insurance 300,000 RLI 10,200 Specialty Insurance - -------------------------------------------------------------------------- 154,308 ASR Verzekeringsgroep $ 9,814 (Netherlands) Auto/Life Insurance 675,000 Philadelphia Consolidated 9,788 Holding (b) (c) Specialty Insurance 322,000 Terra Nova Bermuda 9,660 Specialty Re-Insurance 274,000 United Fire & Casualty 6,199 Property & Casualty 210,000 StanCorp Financial 5,289 Group Life, Disability & 401K 612,000 Acceptance Insurance (b) 3,557 Crop Insurance - -------------------------------------------------------------------------- 132,749 >Money Management: 4.6% 555,000 SEI Investments 66,054 Mutual Fund Administration 3,019,000 Phoenix Investment Partners (c) 24,529 Mutual Fund & Pension Manager 1,500,000 Banca Fideuram (Italy) 17,752 Life Insurance & Mutual Funds 1,034,000 Pioneer Group (b) 16,286 Equity Mutual Funds 650,000 Neuberger Berman 16,169 Major Asset Management Company 1,063,000 Baker Fentress 15,081 Closed-End Investment Company 300,000 Affiliated Managers Group (b) 12,131 Mutual Fund & Pension Manager 1,250,000 Edinburgh Fund Managers (United Kingdom) 10,723 Investment Management 200,000 The Investment Company of China (China) (b) 1,112 Closed-End Fund - -------------------------------------------------------------------------- 179,837 >Finance Companies: 2.9% 3,912,000 AmeriCredit (b) (c) 72,372 Auto Lending 750,000 DVI Health Services (b) 11,391 Leases for Big Medical Equipment 570,000 Ace Cash Express (b) (c) 10,545 Check Cashing Stores 1,820,000 World Acceptance (b) (c) 8,759 Personal Loans 1,375,000 Capital Trust (b) (c) 6,875 Mortgage Loans 700,000 Creditrust (b) (c) 5,381 Buys Defaulted Credit Card Paper - -------------------------------------------------------------------------- 115,323 -------- Finance: Total 542,261 - -------------------------------------------------------------------------- Industrial Goods/Services: 8.1% >Steel: 1.0% 820,000 Gibraltar Steel (c) 19,167 Steel Processing 14 Number of Shares Value (000) - ----------------------------------------------------------------------- 650,000 AK Steel $12,269 Carbon & Stainless Steel Producer 420,000 Atchison Casting (b) (c) 3,832 Steel Foundries 245,000 A M Castle 2,879 Steel Distribution - ----------------------------------------------------------------------- 38,147 >Industrial Goods: 0.8% 1,000,000 Clarcor 18,000 Engines, Mobile & Environmental Filtration 538,000 Applied Industrial Technologies 8,944 Industrial Components Distribution 550,000 Advanced Lighting Technologies (b) 3,162 Metal Halide Lighting - ----------------------------------------------------------------------- 30,106 >Specialty Chemicals & Industrial Materials: 0.9% 1,100,000 Lilly Industries, Cl. A 14,781 Industrial Coatings 346,121 SYMEX (b) 9,345 Combinatorial Materials 732,000 RPM 7,457 Specialty Coatings & Paint 100,000 Spartech 3,225 Plastics Distribution & Compounding 139,000 Brunswick Technologies (b) 495 Fiberglass Fabric for Composites - ----------------------------------------------------------------------- 35,303 >Outsourcing Services & Training: 0.9% 2,500,000 Labor Ready (b) (c) 30,313 Temporary Manual Labor 600,000 GP Strategies (b) (c) 3,675 Training Programs 500,000 International Total Services (b) (c) 594 Aviation Services - ----------------------------------------------------------------------- 34,582 >Logistics: 2.7% 1,411,000 Expeditors International of Washington 61,819 International Freight Forwarder 759,000 Hub Group (b) 15,180 Truck & Rail Freight Forwarder 350,000 C H Robinson 13,912 Truck Freight Forwarder 200,000 Forward Air (b) 8,675 Freight Transportation Between Airports 860,000 Airnet Systems (b) (c) 6,127 Check & Other Small Package Shipment - ----------------------------------------------------------------------- 105,713 >Other Industrial Services: 1.8% 1,200,000 Serco Group (United Kingdom) 37,657 Facilities Management 1,526,000 Wackenhut, Cl. B 15,737 31,000 Wackenhut, Cl. A 463 Prison Management 520,000 Mobile Mini (b) $11,180 Leases Portable Storage Units 1,000,000 Aeroporti di Roma (Italy) 6,521 Airport Management - ----------------------------------------------------------------------- 71,558 ------- Industrial Goods/Services: Total 315,409 - ----------------------------------------------------------------------- Energy/Minerals: 7.1% >Independent Power: 2.2% 1,164,000 AES Corporation (b) 87,009 1,852 AES Corporation Warrants (b) 231 Power Plants - ----------------------------------------------------------------------- 87,240 >Oil/Gas Producers: 2.5% 2,100,000 Tesoro Petroleum (b) (c) 24,281 Oil Refinery/Gas Producer 600,000 Devon Energy 19,725 Oil & Gas Producer 1,615,000 Cross Timbers Oil 14,636 Oil & Gas Producer 530,000 Precision Drilling (Canada) (b) 13,558 Oil & Gas Well Driller 385,000 Canadian Natural Resources (Canada) (b) 9,383 Oil & Gas Producer 350,000 Basin Exploration (b) 6,169 Oil & Gas Producer 300,000 Evergreen Resources (b) 5,925 Oil & Gas Producer 400,000 Ulster Petroleums (Canada) (b) 3,554 Oil & Gas Producer 800,000 Tipperary (b) (c) 1,100 Oil & Gas Producer - ----------------------------------------------------------------------- 98,331 >Distribution/Marketing/Refining: 1.8% 900,000 Equitable Resources 30,037 Natural Gas Utility & Producer 1,200,000 Dynegy 29,175 Natural Gas & Electric Processing, Production & Marketing 600,000 Atmos Energy 12,262 Natural Gas Utility - ----------------------------------------------------------------------- 71,474 >Mining: 0.1% 283,000 US Aggregates (b) 3,396 Aggregrates, Ready Mix & Asphalt >Oil Services: 0.5% 205,000 Hanover Compressor (b) 7,739 Natural Gas Compressor Rental 1,120,000 Newpark Resources (b) 6,860 Oilfield Fluid Management & Equipment Rental 1,250,000 Saipem (Italy) 4,516 Offshore Construction - ----------------------------------------------------------------------- 19,115 ------- Energy/Minerals: Total 279,556 15 Acorn Fund >Statement of Investments, continued Number of Shares Value (000) - ----------------------------------------------------------------------- Other Industries: 5.3% >Real Estate: 4.2% 968,000 The Rouse Company $20,570 Regional Shopping Malls 903,125 Security Capital European Realty (b) 18,063 Strategic Real Estate Investments 466,000 Forest City Enterprises, Cl. B 14,475 Shopping Malls 500,000 First Industrial Realty Trust 13,719 Industrial Properties 412,000 IRSA (Argentina) 13,326 Real Estate Management & Development 820,000 Cornerstone Properties 11,992 Downtown Office Buildings 500,000 SL Green Realty 10,875 Downtown Office Buildings 400,000 Manufactured Home Communities 9,725 Manufactured Home Communities 400,000 Macerich Company 8,325 Regional Shopping Malls 699,000 LaSalle Hotel Properties 8,170 Upscale/Full Service Hotels 385,000 First Washington Realty Trust (c) 7,195 240,000 First Washington Realty Trust, Cv. Pfd. (c) 5,730 Community Shopping Centers 250,000 BRE Properties 5,672 Apartments - Class A 200,000 General Growth Properties 5,600 Shopping Malls REIT 250,000 Amli Residential 5,047 Midwestern Apartments 250,000 Summit Properties 4,469 Southeastern Apartments 153,000 Consolidated Tomoka 1,951 16,000 Acres of Florida Land - ----------------------------------------------------------------------- 164,904 >Waste Management: 0.1% 287,000 Stericycle (b) 5,399 Medical Waste Disposal >Regulated Utilities: 1.0% 1,300,000 Azurix (b) 11,619 Water Utility Holding Company Principal Amount or Number of Shares Value (000) - ----------------------------------------------------------------------- 600,000 Conectiv $10,087 Electric Utility in New Jersey, Delaware & Maryland 865,000 Unisource Energy (b) 9,677 Electric Utility in Arizona 130,000 CH Energy 4,290 Electric Utility in New York 200,000 Utilicorp United 3,888 Global Utility Holding Company - ----------------------------------------------------------------------- 39,561 -------- Other Industries: Total 209,864 - ----------------------------------------------------------------------- Other Securities: 0.0% 19 Total Common Stocks and Other ---------- Equity-Like Securities: 92.2% $3,615,126 (Cost: $2,077,035) Short-Term Obligations: 7.7% Yield 4.00%-6.60% Due 1/3-2/3/00 $ 39,106 Aetna 39,073 37,110 Ford Motor Credit 37,098 33,386 GTE Corp 33,333 33,232 Exxon 33,214 29,974 Sears 29,920 28,962 AON 28,905 25,000 Bell Atlantic Financial 24,989 18,308 Citicorp 18,289 16,503 Wal-Mart 16,491 14,943 Associates First Capital 14,940 14,350 US West 14,334 11,907 US Treasury Bill 11,853 --------- (Amortized Cost: $302,439) 302,439 --------- Total Investments: 99.9% 3,917,565 (Cost: $2,379,474) Cash and Other Assets Less Liabilities: 0.1% 3,274 --------- Total Net Assets: 100% $3,920,839 ======================================================================== - ------------------------------------------------------------------------ >Notes to Statement of Investment: (a) At December 31, 1999, for federal income tax purposes, cost of investment was $2,318,230,000 and net unrealized appreciation was $1,536,335,000, consisting of gross unrealized appreciation of $1,771,700,000 and gross unrealized depreciation of $235,365,000. (b) Non-income producing security. 16 (c) On December 31, 1999, the Fund held the following percentages of the outstanding voting shares of the companies listed below: Corvas International............................................ 9.99% Sirena Apparel.................................................. 9.92% World Acceptance................................................ 9.47% First Washington Realty Trust................................... 8.65% COMARCO......................................................... 8.28% Microcide Pharmaceuticals....................................... 8.24% Gadzooks........................................................ 8.17% Airnet Systems.................................................. 7.53% International Total Services.................................... 7.51% Aztec Technology Partners....................................... 7.28% Synaptic Pharmaceuticals........................................ 7.15% Data Transmission Network....................................... 6.99% Phoenix Investment Partners..................................... 6.90% Bigfoot International........................................... 6.54% Tesoro Petroleum................................................ 6.49% Creditrust...................................................... 6.48% Gibraltar Steel................................................. 6.38% Capital Trust................................................... 6.25% RCM Technologies................................................ 5.86% Commonwealth Bancorp............................................ 5.86% Labor Ready..................................................... 5.84% Kronos.......................................................... 5.66% Ace Cash Express................................................ 5.66% Monarch Casino & Resort......................................... 5.64% National Data................................................... 5.53% Atchison Casting................................................ 5.49% GP Strategies................................................... 5.41% Philadelphia Consolidated Holding............................... 5.38% Americredit..................................................... 5.32% Tipperary....................................................... 5.29% Myriad Genetics................................................. 5.19% The aggregate cost and value of investments in these companies at December 31, 1999, was $391,459,000 and $457,372,000, respectively. The market value of these securities represents 11.67% of the total net assets at December 31, 1999. During the year ended December 31, 1999, cost of purchases and proceeds from sales in affiliated companies was $115,904,000 and $38,702,000, respectively. Dividends received from these companies amounted to $2,378,000 and net realized gain on sales of investments in such companies amounted to $18,100,000. (d) On December 31, 1999, the market value of foreign securities represents 17.16% of total net assets. The Fund's foreign portfolio was diversified as follows: Value(000) Percent ---------- ------- Japan............................................ $224,817 5.73% United Kingdom................................... 98,921 2.52% Singapore........................................ 93,493 2.38% Sweden........................................... 64,368 1.64% Canada........................................... 44,042 1.12% France........................................... 38,098 0.97% Italy............................................ 34,490 0.88% Netherlands...................................... 32,055 0.82% Australia........................................ 14,388 0.37% Argentina........................................ 13,326 0.34% Mexico........................................... 9,309 0.24% Germany.......................................... 4,583 0.12% China............................................ 1,112 0.03% Total............................................ $673,002 17.16% 17 Acorn Family of Funds >Report of Independent Auditors To the Board of Trustees and Shareholders of Acorn Investment Trust We have audited the accompanying statements of assets and liabilities, including the schedule of investments of Acorn Fund, Acorn International, Acorn USA, Acorn Twenty and Acorn Foreign Forty, comprising the Acorn Investment Trust, as of December 31, 1999, 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 auditing standards generally accepted in the United States. 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, 1999, 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 Acorn Investment Trust as of December 31, 1999, the results of their operations and changes in their net assets and financial highlights for the periods indicated therein, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Chicago, Illinois February 3, 2000 See accompanying notes to financial statements 18 Acorn Family of Funds >Statements of Assets and Liabilities
Acorn Acorn Acorn Acorn Acorn (in thousands) Fund International USA Twenty Foreign Forty - ------------------------------------------------------------------------------------------------------------------------ 12/31/99 Assets Investments, at value (cost: Acorn Fund $2,379,474; Acorn International $1,278,170; Acorn USA $326,308; Acorn Twenty $54,344; Acorn Foreign Forty $68,412) $3,917,565 $2,863,460 $373,990 $65,782 $106,507 Cash 1 13,086 1 1 618 Organization costs -- -- 36 -- -- Receivable for: Securities sold 3,710 1,676 294 4,410 -- Fund shares sold 2,692 3,816 906 170 478 Dividends and interest 2,744 1,897 23 24 134 Other assets 468 210 28 -- -- - ------------------------------------------------------------------------------------------------------------------------ Total assets 3,927,180 2,884,145 375,278 70,387 107,737 Liabilities and Net Assets Net unrealized depreciation on foreign forward currency contracts -- 1,951 -- -- -- Payable for: Securities purchased 4,681 10,739 3,279 1,872 332 Fund shares redeemed 675 2,088 424 12 11 Organization costs -- -- 36 -- -- Other 985 1,164 111 33 43 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 6,341 15,942 3,850 1,917 386 - ------------------------------------------------------------------------------------------------------------------------ Net assets applicable to Fund shares outstanding $3,920,839 $2,868,203 $371,428 $68,470 $107,351 ======================================================================================================================== Fund shares outstanding 211,618 81,178 22,170 4,996 5,387 ======================================================================================================================== Pricing of Shares Net asset value, offering price and redemption price per share $ 18.53 $ 35.33 $ 16.75 $ 13.70 $ 19.93 ======================================================================================================================== Analysis of Net Assets Paid-in capital $2,171,715 $1,246,840 $317,053 $53,298 $ 68,575 Accumulated net realized gain on sales of investments, futures and foreign currency transactions 208,505 49,089 6,668 3,734 767 Net unrealized appreciation of investments and other assets (net of unrealized PFIC gains of $65,710 for Acorn International and $305 for Acorn Foreign Forty) 1,538,091 1,517,676 47,682 11,438 37,790 Undistributed net investment income 2,528 54,598 25 -- 219 - ------------------------------------------------------------------------------------------------------------------------ Net assets applicable to Fund shares outstanding $3,920,839 $2,868,203 $371,428 $68,470 $107,351 ========================================================================================================================
19 Acorn Family of Funds >Statements of Operations
Acorn Acorn Fund International Year Year Year Year (in thousands) ended 12/31, ended 12/31, ended 12/31, ended 12/31, - ------------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 Investment Income: Dividends $ 34,159 $ 28,483 $ 20,878 $ 26,225 Interest 11,416 13,414 4,883 10,223 - ------------------------------------------------------------------------------------------------------------------------- 45,575 41,897 25,761 36,448 Foreign taxes withheld (330) (513) (2,094) (2,521) - ------------------------------------------------------------------------------------------------------------------------- Total investment income 45,245 41,384 23,667 33,927 Expenses: Investment advisory 23,437 24,905 15,668 14,124 Administration 1,699 1,812 961 858 Custodian 875 924 2,321 1,957 Transfer and dividend disbursing agent 1,312 1,414 1,380 1,384 Reports to shareholders 448 573 446 575 Legal and audit 229 223 136 97 Registration and blue sky 64 55 58 58 Trustees' and other 683 446 399 166 - ------------------------------------------------------------------------------------------------------------------------- Total expenses 28,747 30,352 21,369 19,219 Less custodian fees paid indirectly -- -- -- -- Less reimbursement of expenses by advisor -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Net expenses 28,747 30,352 21,369 19,219 - ------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 16,498 11,032 2,298 14,708 Net Realized and Unrealized Gain (Loss) on Investments, Futures and Foreign Currency Transactions: Net realized gain (loss) on sales of investments 915,362 252,065 205,354 2,408 Net realized gain (loss) on foreign currency transactions (110) (132) 1,133 (6,031) Net realized gain (loss) on futures (6,918) (17,930) (403) 7,811 Change in net unrealized appreciation of investments and foreign currency transactions 92,272 (43,553) 1,054,166 215,847 - ------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments, futures and foreign currency transactions 1,000,606 190,450 1,260,250 220,035 - ------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $1,017,104 $201,482 $1,262,548 $234,743 =========================================================================================================================
See accompanying notes to financial statements 20
Acorn Acorn USA Acorn Twenty Foreign Forty Year Year Year Inception 11/23 Year Inception 11/23 ended 12/31, ended 12/31, ended 12/31, through 12/31, ended 12/31, through 12/31, - ----------------------------------------------------------------------------------------- 1999 1998 1999 1998 1999 1998 $ 2,223 $ 882 $ 280 $ 38 $ 459 $ 6 1,259 1,042 130 7 158 3 - ----------------------------------------------------------------------------------------- 3,482 1,924 410 45 617 9 -- -- -- -- (42) (1) - ----------------------------------------------------------------------------------------- 3,482 1,924 410 45 575 8 2,805 2,336 503 26 426 11 150 124 28 1 22 1 43 39 12 2 85 3 218 246 105 18 60 13 95 126 75 1 53 1 41 32 29 1 29 1 26 33 20 4 25 2 85 43 17 -- 6 -- - ----------------------------------------------------------------------------------------- 3,463 2,979 789 53 706 32 (6) (5) (11) (2) (13) (3) -- -- (23) (12) (42) (11) - ----------------------------------------------------------------------------------------- 3,457 2,974 755 39 651 18 - ----------------------------------------------------------------------------------------- 25 (1,050) (345) 6 (76) (10) 38,768 23,791 5,015 (246) 792 74 -- -- -- -- -- -- -- -- -- -- -- -- 30,941 (14,625) 8,906 2,532 36,932 1,163 - ----------------------------------------------------------------------------------------- 69,709 9,166 13,921 2,286 37,724 1,237 - ----------------------------------------------------------------------------------------- $69,734 $ 8,116 $13,576 $2,292 $37,648 $1,227 =========================================================================================
21 Acorn Family of Funds >Statements of Changes in Net Assets
Acorn Acorn Fund International Year Year Year Year (in thousands) ended 12/31, ended 12/31, ended 12/31, ended 12/31, - ------------------------------------------------------------------------------------------------------------------ 1999 1998 1999 1998 From Operations: Net investment income (loss) $ 16,498 $ 11,032 $ 2,298 $ 14,708 Net realized gain (loss) on sales of investments, futures and foreign currency transactions 908,334 234,003 206,084 4,188 Change in net unrealized appreciation of investments and foreign currency transactions 92,272 (43,553) 1,054,166 215,847 ------------------------------------------------------------------------------------------------------------------ Net increase in net assets resulting from operations 1,017,104 201,482 1,262,548 234,743 Distributions to Shareholders From: Net investment income (16,501) (6,284) (16,992) (12,611) Net realized gain (638,460) (219,264) (119,344) (22,701) - ------------------------------------------------------------------------------------------------------------------ Total distributions to shareholders (654,961) (225,548) (136,336) (35,312) From Fund Share Transactions: Reinvestment of dividend and capital gain distributions 586,161 204,856 128,048 33,102 Proceeds from other shares sold 346,317 490,137 648,562 406,219 - ------------------------------------------------------------------------------------------------------------------ 932,478 694,993 776,610 439,321 Payments for shares redeemed (923,243) (802,923) (760,116) (536,194) - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets from Fund share transactions 9,235 (107,930) 16,494 (96,873) - ------------------------------------------------------------------------------------------------------------------ Total increase (decrease) in net assets 371,378 (131,996) 1,142,706 102,558 Net Assets: Beginning of period 3,549,461 3,681,457 1,725,497 1,622,939 - ------------------------------------------------------------------------------------------------------------------ End of period $3,920,839 $3,549,461 $2,868,203 $1,725,497 ================================================================================================================== Undistributed Net Investment Income $ 2,528 $ 2,531 $ 54,598 $ 5,419 ==================================================================================================================
See accompanying notes to financial statements 22
Acorn Acorn USA Acorn Twenty Foreign Forty Year Year Year Inception 11/23 Year Inception 11/23 ended 12/31, ended 12/31, ended 12/31, through 12/31, ended through 12/31, - -------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 1999 1998 $ 25 $ (1,050) $ (345) $ 6 $ (76) $ (10) 38,768 23,791 5,015 (246) 792 74 30,941 (14,625) 8,906 2,532 36,932 1,163 - -------------------------------------------------------------------------------------------------- 69,734 8,116 13,576 2,292 37,648 1,227 -- -- -- -- -- -- (28,268) (19,532) (705) -- (99) -- - -------------------------------------------------------------------------------------------------- (28,268) (19,532) (705) -- (99) -- 25,972 17,705 658 -- 94 -- 118,916 175,578 34,563 31,688 66,325 14,739 - -------------------------------------------------------------------------------------------------- 144,888 193,283 35,221 31,688 66,419 14,739 (95,877) (85,540) (13,346) (256) (12,402) (181) - -------------------------------------------------------------------------------------------------- 49,011 107,743 21,875 31,432 54,017 14,558 - -------------------------------------------------------------------------------------------------- 90,477 96,327 34,746 33,724 91,566 15,785 280,951 184,624 33,724 -- 15,785 -- - -------------------------------------------------------------------------------------------------- $371,428 $280,951 $ 68,470 $33,724 $107,351 $15,785 ================================================================================================== $ 25 -- -- $ 6 $ 219 $ 9 ==================================================================================================
23 Acorn Family of Funds >Financial Highlights
Years Acorn Fund ended 12/31, - ---------------------------------------------------------------------------------------------------------------- For a share outstanding throughout each period 1999 1998 Net Asset Value, beginning of year $16.85 $16.99 Income From Investment Operations Net investment income .09 .04 Net realized and unrealized gain (loss) on investments, foreign currency and futures 5.22 .91 - ---------------------------------------------------------------------------------------------------------------- Total from investment operations 5.31 .95 Less Distributions Dividends from net investment income (0.09) (0.03) Distributions from net realized and unrealized gains reportable for federal income taxes (3.54) (1.06) - ---------------------------------------------------------------------------------------------------------------- Total distributions (3.63) (1.09) - ---------------------------------------------------------------------------------------------------------------- Net Asset Value, end of year $18.53 $16.85 ================================================================================================================ Total Return 33.4% 6.0% Ratios/Supplemental Data Ratio of expenses to average net assets .85% .84% Ratio of net investment income to average net assets .49% .30% Portfolio turnover rate 34% 24% Net assets at end of period (in millions) $3,921 $3,549 Years Acorn International ended 12/31, - ---------------------------------------------------------------------------------------------------------------- For a share outstanding throughout each period 1999 1998 Net Asset Value, beginning of period $20.82 $18.39 Income From Investment Operations Net investment income (loss) .83 .17 Net realized and unrealized gain (loss) on investments 15.45 2.68 - ---------------------------------------------------------------------------------------------------------------- Total from investment operations 16.28 2.85 Less Distributions Dividends from net investment income (.22) (.15) Distributions from net realized and unrealized gains reportable for federal income taxes (1.55) (.27) - ---------------------------------------------------------------------------------------------------------------- Total distributions (1.77) (.42) - ---------------------------------------------------------------------------------------------------------------- Net Asset Value, end of period $35.33 $20.82 ================================================================================================================ Total Return (a) 79.2% 15.4% Ratios/Supplemental Data Ratio of expenses to average net assets 1.11% 1.12% Ratio of net investment income to average net assets .12% .86% Portfolio turnover rate 46% 37% Net assets at end of period (in millions) $2,868 $1,725 (a) Total return is not annualized for periods less than one year. * Annualized Years Acorn USA ended 12/31, - ---------------------------------------------------------------------------------------------------------------- For a share outstanding throughout each period 1999 1998 Net Asset Value, beginning of period $14.80 $15.12 Income From Investment Operations Net investment gain (loss) (b) -- (.07) Net realized and unrealized gain on investments 3.32 .87 - ---------------------------------------------------------------------------------------------------------------- Total from investment operations 3.32 .80 - ---------------------------------------------------------------------------------------------------------------- Less Distributions Dividends from net investment income -- -- Distributions from net realized and unrealized gains reportable for federal income taxes (1.37) (1.12) - ---------------------------------------------------------------------------------------------------------------- Total distributions (1.37) (1.12) - ---------------------------------------------------------------------------------------------------------------- Net Asset Value, end of period $16.75 $14.80 ================================================================================================================ Total Return (c) 23.0% 5.8% Ratios/Supplemental Data Ratio of expenses to average net assets (a) 1.15% 1.20% Ratio of net investment income (loss) to average net assets 0.00% (.42%) Portfolio turnover rate 49% 42% Net assets at end of period (in millions) $ 371 $ 281
(a) In accordance with a requirement by the Securities and Exchange Commission, the Acorn USA ratio reflects gross custodian fees. This ratio net of custodian fees paid indirectly would have been 1.79% for the year ended December 31, 1996. (b) Net investment income (loss) per share was based upon the average shares outstanding during each period. (c) Total return is not annualized for periods less than one year. * Annualized See accompanying notes to financial statements 24
- ------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 1990 $15.04 $13.60 $12.24 $13.95 $11.06 $ 9.32 $ 6.51 $ 8.58 .15 .09 .11 .06 .04 .07 .11 .12 3.57 2.93 2.42 (1.10) 3.50 2.16 2.95 (1.62) - ------------------------------------------------------------------------- 3.72 3.02 2.53 (1.04) 3.54 2.23 3.06 (1.50) (0.16) (.11) (.09) (.11) (.06) (.08) (.10) (.13) (1.61) (1.47) (1.08) (.56) (.59) (.41) (.15) (.44) - ------------------------------------------------------------------------- (1.77) (1.58) (1.17) (.67) (.65) (.49) (.25) (.57) - ------------------------------------------------------------------------- $16.99 $15.04 $13.60 $12.24 $13.95 $11.06 $ 9.32 $ 6.51 ========================================================================= 25.0% 22.6% 20.8% (7.4%) 32.3% 24.2% 47.3% (17.5%) .56% .57% .57% .62% .65% .67% .72% .82% .75% .53% .89% .55% .30% .72% 1.30% 1.60% 32% 33% 29% 18% 20% 25% 25% 36% $3,681 $2,842 $2,399 $1,983 $2,035 $1,449 $1,150 $ 767 Inception 9/23 through 12/31, - ---------------------------------------------------------- 1997 1996 1995 1994 1993 1992 $19.61 $16.59 $15.24 $15.94 $10.69 10.00 .40 .13 .16 .07 -- (.03) (.34) 3.29 1.20 (.67) 5.25 .72 - ---------------------------------------------------------- .06 3.42 1.36 (.60) 5.25 .69 (.38) (.12) -- -- -- -- (.90) (.28) (.01) (.10) -- -- - ---------------------------------------------------------- (1.28) (.40) (.01) (.10) -- -- - ---------------------------------------------------------- $18.39 $19.61 $16.59 $15.24 $15.94 $ 10.69 ========================================================== 0.2% 20.7% 8.9% (3.8%) 49.1% 6.9% 1.19% 1.17% 1.22% 1.24% 1.21% 2.35%* .58% .51% .90% 0.48% 0.06% (1.37%)* 39% 34% 26% 20% 19% 20%* $1,623 $1,773 $1,276 $1,363 $ 907 $ 30 Inception 9/4 through 12/31, - --------------------- 1997 1996 $11.65 $10.00 (.07) (.02) 3.83 1.67 - --------------------- 3.76 1.65 - --------------------- -- -- (.29) -- - --------------------- (.29) -- - --------------------- $15.12 $11.65 ===================== 32.3% 16.5% 1.35% 1.85%* (.49%) (.99%)* 33% 20%* $ 185 $ 53
25
Year Inception 11/23 Acorn Twenty ended 12/31, through 12/31, - ------------------------------------------------------------------------------------------------------------------------ For a share outstanding throughout each year 1999 1998 Net Asset Value, beginning of period $10.71 $ 10.00 Income From Investment Operations Net investment income (loss) (b) (.08) -- Net realized and unrealized gain on investments 3.21 .71 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 3.13 .71 - ------------------------------------------------------------------------------------------------------------------------ Less Distributions Distributions from net realized and unrealized gains reportable for federal income taxes (.14) -- - ------------------------------------------------------------------------------------------------------------------------ Net Asset Value, end of period $13.70 $ 10.71 - ------------------------------------------------------------------------------------------------------------------------ Total Return (d) 29.3% 7.1% Ratios/Supplemental Data Ratio of expenses to average net assets (a) (c) 1.37% 1.41%* Ratio of net investment income (loss) to average net assets (c) (.62%) 0.22%* Portfolio turnover rate 101% 173%* Net assets at end of period (in millions) $ 68 $ 34 - ------------------------------------------------------------------------------------------------------------------------
(a) In accordance with a requirement by the Securities and Exchange Commission, the Acorn Twenty 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 1.35% for the period ended December 31, 1998 and the year ended December 31, 1999. (b) Net investment income per share was based upon the average shares outstanding during the period. (c) Acorn Twenty was reimbursed by the Advisor for certain net expenses from November 23, 1998 through December 31, 1999. 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 would have been 1.83% and (.21%), respectively, for the period ended 12/31/98 and 1.41% and (.66%), respectively, for the year ended 12/31/99. (d) Total return is not annualized for periods less than one year. *Annualized
Year Inception 11/23 Acorn Foreign Forty ended 12/31, through 12/31, - ---------------------------------------------------------------------------------------------------------------------------- For a share outstanding throughout each year 1999 1998 Net Asset Value, beginning of period $11.00 $ 10.00 Income From Investment Operations Net investment loss (c) (.02) (.01) Net realized and unrealized gain on investments 8.98 1.01 - -------------------------------------------------------------------------------------------------------------------------- Total from investment operations 8.96 1.00 - -------------------------------------------------------------------------------------------------------------------------- Less Distributions Distributions from net realized and unrealized gains reportable for federal income taxes (.03) .00 - -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, end of period $19.93 $ 11.00 - -------------------------------------------------------------------------------------------------------------------------- Total Return (d) 81.6% 10.0% Ratios/Supplemental Data Ratio of expenses to average net assets (a) (c) 1.48% 1.73%* Ratio of net investment loss to average net assets (c) (.17)% (.78)%* Portfolio turnover rate 60% 90%* Net assets at end of period (in millions) $ 107 $ 16 - --------------------------------------------------------------------------------------------------------------------------
(a) In accordance with a requirement by the Securities and Exchange Commission, the Acorn Foreign Forty 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 1.45% for the period ended December 31, 1998 and the year ended December 31, 1999. (b) Net investment loss per share was based upon the average shares outstanding during the period. (c) Acorn Foreign Forty was reimbursed by the Advisor for certain net expenses from November 23, 1998 through December 31, 1999. 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 would have been 2.70% and -1.75%, respectively, for the period ended 12/31/98 and 1.57% and (.26%), respectively, for the year ended 12/31/99. (d) Total return is not annualized for periods less than one year. * Annualized See accompanying notes to financial statements 26 Acorn Family of Funds >Notes to Financial Statements 1. Nature of Operations Acorn Fund, Acorn International, Acorn USA, Acorn Twenty and Acorn Foreign Forty (the "Funds") are series of Acorn Investment 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. 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 available and any other assets are valued at a fair value 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 Funds. Interest income is recorded on the accrual basis and includes amortization of discounts on money market instruments and 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 accounting 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 estimates. >Financial instruments Each Fund may purchase or sell exchange-traded financial futures contracts, which are contracts that obligate that Fund to make or take delivery of a financial instrument or the cash value of a securities index at a specified future date at a specified price. The Funds enter into such contracts to hedge a portion of their portfolio. Gains and losses are reflected as "Net Realized Gain (Loss) on Futures" in the Statements of Operations. Additionally, each Fund may engage in portfolio hedging with respect to changes in currency exchange rates by entering into forward foreign currency contracts to purchase or sell foreign currencies. The Statements of Operations reflect gains and losses as realized for closed forward foreign currency contracts and unrealized for open contracts. A Fund bears the market risk that arises from changes in the value of financial instruments and securities indices (futures contracts) or from changes in foreign currency rates (forward foreign currency contracts) and the credit risk should a counterparty fail to perform under such contracts. None of the funds had futures contracts open at December 31, 1999. Acorn International entered into forward contracts to sell foreign currency as described below: Acorn International
Foreign Settlement U.S. Dollar Unrealized Loss Amount (000) Currency Date Proceeds (000) (000) - -------------------------------------------------------------------------------- 155,000 Hong Kong Dollar 1/10/00 $19,939 $ 439 5,260,000 Japanese Yen 3/10/00 $52,040 $1,512 ------ Total Unrealized Loss $1,951 ======
Acorn USA, Acorn Twenty and Acorn Foreign Forty did not enter into any futures or forward foreign currency contracts during the year ended December 31, 1999. 27 Acorn Family of Funds >Notes to Financial Statements >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 each Fund's investments and other assets, less liabilities, by the respective number of Fund shares outstanding. >Federal income taxes, dividends and distributions to shareholders Each Fund has complied with the special provisions of the Internal Revenue Code available to investment companies. In accordance with the distribution requirements imposed on investment companies, Acorn Fund, Acorn International and Acorn USA paid long-term capital gain distributions in 1999 of $715,158,000, $135,249,000 and $27,669,000, respectively, which was sufficient to allow each fund not to incur any income tax. Acorn Twenty and Acorn Foreign Forty were not required to pay a long-term capital gain distribution. Acorn Fund, Acorn International and Acorn Foreign Forty have elected to mark- to-market their investments in Passive Foreign Investment Companies ("PFICs") for Federal income tax purposes. A summary of transactions relating to PFICs for Acorn International is follows:
Acorn International (000) - ----------------------------------------------------------------------------- Cumulative net unrealized appreciation recognized in prior years at December 31, 1998 $ 311 Unrealized appreciation recognized through December 31, 1999 66,039 Cumulative net unrealized appreciation recognized in prior years on PFICs sold through December 31, 1999 (640) ------- Cumulative net unrealized appreciation recognized in prior years at December 31, 1999 65,710 ------- A summary of transactions relating to PFICs during 1999 follows: Unrealized appreciation recognized 66,039 Gain on the sale of PFICs classified as ordinary income 2,710
At December 31, 1999, Acorn Fund had no cumulative net unrealized appreciation on PFICs. At December 31, 1999, Acorn Foreign Forty had cumulative net unrealized appreciation on PFICs of $305,000, of which $286,000 was recognized in 1999. Distributions relating to PFICs are treated as ordinary income for Federal income tax purposes. Dividends payable to shareholders are recorded by the Funds on the ex-dividend date. Reclassifications have been made in 1999 for Acorn Fund, Acorn International and Acorn USA in the accompanying analysis of net assets from accumulated net realized gain on sale of investments to paid-in-capital of $95,281,000, $19,806,000 and $4,308,000, respectively. A reclassification was also made in Acorn International of $1,526,000 from undistributed net income to paid-in- capital. All reclassifications were made to reflect differences between financial reporting and income tax basis and had no impact on net asset value. 3. Transactions with Affiliates The Funds' investment advisor, Wanger Asset Management, L.P. ("WAM") furnishes continuing investment supervision to the Funds and is responsible for the overall management of the Funds' business affairs. Under the Funds' investment management agreement, fees are accrued daily and paid monthly to WAM at the annual rates shown in the table below for each fund. Acorn Fund - ------------------------------------------------ Net asset value: For the first $700 million .75% Next $1.3 billion .70% Net assets in excess of $2 billion .65% Acorn International - ------------------------------------------------ Net asset value: For the first $100 million 1.20% Next $400 million .95% Net assets in excess of $500 million .75% Acorn USA - ------------------------------------------------ Net asset value: For the first $200 million .95% Net assets in excess of $200 million .90% Acorn Twenty - ------------------------------------------------ On average daily net assets .90% Acorn Foreign Forty - ------------------------------------------------ On average daily net assets .95% WAM has also contracted to provide administrative services to each Fund at an annual rate of .05% of average daily net assets. 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. Acorn Fund paid trustees' fees and expenses of the following: 28 - ------------------------------------------------- (in thousands) 1999 1998 Acorn Fund $ 293 $ 211 Acorn International 150 94 Acorn USA 24 11 Acorn Twenty 4 -- Acorn Foreign Forty 2 -- ----------------- $ 473 $ 316 ----------------- WAM advanced Acorn USA $107,000 in connection with the organization and initial registration of the Fund. These costs are being amortized and reimbursed to WAM over the period September 1996 through August 2001. WAM Brokerage Services, L.L.C., a wholly owned subsidiary of WAM, is the distributor of the Funds' 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 were borrowed under this facility during 1999. 5. Fund Share Transactions Proceeds and payments on Fund shares as shown in the Statements of Changes in Net Assets are in respect of the following numbers of shares: Acorn Fund - --------------------------------------------------------------------------- (in thousands) 1999 1998 Shares sold 19,615 28,471 Shares issued in reinvestment of dividend and capital gain distributions 33,973 12,814 --------------------- 53,588 41,285 Less shares redeemed 52,676 47,224 --------------------- Net increase (decrease) in Shares outstanding 912 (5,939) =========================================================================== Acorn International - --------------------------------------------------------------------------- (in thousands) 1999 1998 Shares sold 25,580 19,818 Shares issued in reinvestment of dividend and capital gain distributions 4,028 1,540 --------------------- 29,608 21,358 Less shares redeemed 31,304 26,757 --------------------- Net decrease in shares outstanding (1,696) (5,399) =========================================================================== Acorn USA - --------------------------------------------------------------------------- (in thousands) 1999 1998 Shares sold 7,922 11,062 Shares isued in reinvestment of dividend and capital gain distributions 1,645 1,270 --------------------- 9,567 12,332 Less shares redeemed 6,383 5,558 --------------------- Net increase in shares outstanding 3,184 6,774 =========================================================================== Acorn Twenty - --------------------------------------------------------------------------- (in thousands) 1999 1998 Shares sold 2,862 3,176 Shares issued in reinvestment of dividend and capital gain distributions 51 -- --------------------- 2,913 3,176 Less shares redeemed 1,067 26 --------------------- Net increase in shares outstanding 1,846 3,150 =========================================================================== Acorn Foreign Forty - --------------------------------------------------------------------------- (in thousands) 1999 1998 Shares sold 4,836 1,453 Shares issued in reinvestment of dividend and capital gain distributions 7 -- --------------------- 4,843 1,453 Less shares redeemed 891 18 --------------------- Net increase in shares outstanding 3,952 1,435 =========================================================================== 6. Investment Transactions Investment Transactions (excluding money market instruments) for each of the Funds are as follows: Acorn Fund - --------------------------------------------------------------------------- (in thousands) 1999 1998 Investment securities: Purchases $1,092,137 $ 830,390 Proceeds from sales 1,809,918 1,048,096 =========================================================================== Acorn International - --------------------------------------------------------------------------- (in thousands) 1999 1998 Investment securities: Purchases $ 846,014 $ 570,304 Proceeds from sales 844,062 709,630 =========================================================================== Acorn USA - --------------------------------------------------------------------------- (in thousands) 1999 1998 Investment securities: Purchases $ 138,244 $ 178,181 Proceeds from sales 135,001 95,639 =========================================================================== Acorn Twenty - --------------------------------------------------------------------------- (in thousands) 1999 1998 Investment securities: Purchases $ 71,463 $ 34,025 Proceeds from sales 53,710 4,483 =========================================================================== Acorn Foreign Forty - --------------------------------------------------------------------------- (in thousands) 1999 1998 Investment securities: Purchases $ 76,252 $ 13,984 Proceeds from sales 26,238 974 =========================================================================== 29 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 48 moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds rated Caa are of poor standing. Such bonds may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds rated Ca represent obligations which are speculative in a high degree. Such bonds are often in default or have other marked shortcomings. S&P Ratings AAA--Bonds rated AAA have the highest rating. Capacity to pay principal and interest is extremely strong. AA--Bonds rated AA have a very strong capacity to pay principal and interest and differ from AAA bonds only in small degree. A--Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this capacity than for bonds in higher rated categories. BB--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation 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. 49 PART C OTHER INFORMATION Item 23 Exhibits: -------- a. Agreement and declaration of trust(1). b. Bylaws, as amended October 24, 1997 (exhibit 2.3 to post-effective amendment no. 60)(2). c.1 Specimen share certificate - Acorn Fund(3). c.2 Specimen share certificate - Acorn International (exhibit 4.2 to post-effective amendment no. 54)(3). c.3 Specimen share certificate - Acorn USA(4). c.4 Specimen shares certificates - Acorn Twenty and Acorn Foreign Forty(5). d.1 Investment Advisory Agreement among Acorn Fund, Acorn International, Acorn USA and Wanger Asset Management, L.P., dated January 1, 1998(6). d.2 Administration Agreement among Acorn Fund, Acorn International, Acorn USA and Wanger Asset Management, L.P., dated January 1, 1998 (exhibit 5.2 to post-effective amendment no. 61)(6). d.3 Organizational Expenses Agreement between Acorn Investment Trust and Wanger Asset Management, L.P. dated September 3, 1996 (exhibit 5.3 to post-effective amendment no. 61)(6). d.4 Supplement to the Investment Advisory Agreement among Acorn Investment Trust and Wanger Asset Management, L.P. relating to Acorn Twenty and Acorn Foreign Forty dated August 17, 1998. d.5 Amendment to the Administrative Agreement between Acorn Investment Trust and Wanger Asset Management, L.P. relating to Acorn Twenty and Acorn Foreign Forty, dated August 17, 1998. e.1 Distribution Agreement between Acorn Investment Trust and WAM Brokerage Services, L.L.C. dated January 1, 1998 (exhibit 6 to post-effective amendment no. 61)(6). e.2 Amendment to the Distribution Agreement between Acorn Investment Trust and WAM Brokerage Services, L.L.C., relating to Acorn Twenty and Acorn Foreign Forty dated August 17, 1998. f. None g.1 Custodian contract between the Registrant and State Street Bank and Trust Company dated July 1, 1992 (exhibit 8.1 to post-effective amendment no. 60)(1) g.2 Letter agreement applying custodian contract relating to Acorn International (exhibit 8.2 to post-effective amendment no. 60)(1). g.3 Letter agreement applying custodian contract (exhibit 8.1) relating to Acorn USA (exhibit no. 8.3 to post-effective amendment no. 61)(6). g.4 Letter agreement applying custodian contract and transfer agency and service agreement (exhibit 8.1) relating to Acorn Twenty and Acorn Foreign Forty, dated August 17, 1998. h. Transfer Agency and Service Agreement between Acorn Investment Trust and State Street Bank and Trust Company dated July 1, 1999. i. Consent of Bell, Boyd & Lloyd LLC. j Consent of Ernst & Young LLP. k. None. l. None. m. None. n. None. p.1 Code of Ethics, as amended effective March 15, 2000. p.2 Code of Ethics for Non-Interested Board Members, as amended May 25, 1999. - ---------------------------------------- (1) Previously filed. Incorporated by reference to exhibit 1 filed in post-effective amendment No. 53 to the registrant's registration statement, Securities Act file number 2-34223 (the "Registration Statement"), filed on April 30, 1996. (2) Previously filed. Incorporated by reference to the exhibit of the same number filed in post-effective amendment No. 60 to the Registration Statement, filed on December 30, 1997. (3) Previously filed. Incorporated by reference to exhibit 4.1 filed in post-effective amendment No. 54 to the Registration Statement, filed on June 18, 1996. (4) Previously filed. Incorporated by reference to exhibit 4.3 filed in post-effective amendment No. 55 to the Registration Statement, filed on September 3, 1996. (5) Previously filed. Incorporated by reference to exhibit 4.4 filed in post-effective amendment No. 62 to the Registration Statement, filed on June 3, 1998. (6) Previously filed. Incorporated by reference to exhibit 5.1 filed in post-effective amendment No. 61 to the Registration Statement filed on April 30, 1998. Item 24. Persons Controlled By or Under Common Control with Registrant ------------------------------------------------------------- The Registrant does not consider that there are any persons directly or indirectly controlling, controlled by, or under common control with the Registrant within the meaning of this item. The information in the prospectus under the caption "The Funds in Detail - Organization - Management" and in the statement of additional information under the caption "Investment Adviser" is incorporated by reference. Item 25. Indemnification Article VIII of the Agreement and Declaration of Trust of the Registrant (exhibit 1) provides in effect that Registrant shall provide certain indemnification of its trustees and officers. In accordance with Section 17(h) of the Investment Company Act, that provision shall not protect any person against any liability to the Registrant or its shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Registrant, its trustees and officers, its investment adviser and persons affiliated with them are insured under a policy of insurance maintained by Registrant and its investment adviser, within the limits and subject to the limitations of the policy, against certain expenses in connection with the defense of actions, suits or proceedings, and certain liabilities that might be imposed as a result of such actions, suits or proceedings, to which they are parties by reason of being or having been such trustees or officers. The policy expressly excludes coverage for any trustee or officer whose personal dishonesty, fraudulent breach of trust, lack of good faith, or intention to deceive or defraud has been finally adjudicated or may be established or who willfully fails to act prudently. Item 26. Business and Other Connections of Investment Adviser The information in the prospectus under the caption "Management of the Funds" is incorporated by reference. Neither Wanger Asset Management, L.P. nor its general partner has at any time during the past two years been engaged in any other business, profession, vocation or employment of a substantial nature either for its own account or in the capacity of director, officer, employee, partner or trustee. Item 27. Principal Underwriters WAM Brokerage Services, L.L.C. also acts as principal underwriter for Wanger Advisors Trust. Name Positions and Offices with Positions and Offices with Underwriters Registrant Bruce H. Lauer President Vice President, Assistant Secretary and Treasurer Marilyn Morrison Vice President and Secretary The principal business of each officer of WAM Brokerage Services, L.L.C. is 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. Item 28. Location of Accounts and Records -------------------------------- Bruce H. Lauer, Vice President, Assistant Secretary and Treasurer Acorn Investment Trust 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Item 29. Management Services ------------------- None Item 30. Undertakings ------------ Not applicable. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the registrant certifies that it meets all of the requirements for effectiveness of this registration statement under Rule 485(b) under the Securities Act and has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, duly authorized, in Chicago, Illinois on April 28, 2000. ACORN INVESTMENT TRUST By /s/ Ralph Wanger ------------------------------------ Ralph Wanger, President
Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed below by the following persons in the capacities and on the dates indicated. Name Title Date ---- ----- ---- /s/ Irving B. Harris Trustee and chairman ) - ------------------------------------ Irving B. Harris ) ) /s/ Leo A. Guthart Trustee ) - ------------------------------------ Leo A. Guthart ) ) /s/ Jerome Kahn, Jr. Trustee ) ----------------------------------- Jerome Kahn, Jr. ) ) /s/ Steven N. Kaplan Trustee ) - ------------------------------------ Steven N. Kaplan ) ) /s/ David C. Kleinman Trustee ) - ------------------------------------ David C. Kleinman ) ) /s/ James H. Lorie Trustee ) - ------------------------------------ James H. Lorie ) ) /s/ Charles P. McQuaid Trustee ) April 28, 2000 - ------------------------------------ Charles P. McQuaid ) ) /s/ Roger S. Meier Trustee ) - ------------------------------------ Roger S. Meier ) ) /s/ Allan B. Muchin Trustee ) - ------------------------------------ Allan B. Muchin ) ) /s/ Robert E. Nason Trustee ) - ------------------------------------ Robert E. Nason ) ) /s/ Katherine Schipper Trustee ) - ------------------------------------ Katherine Schipper ) ) /s/ Ralph Wanger Trustee and President ) - ------------------------------------ Ralph Wanger (principal executive ) officer) ) ) /s/ Bruce H. Lauer Treasurer (principal ) - ------------------------------------ Bruce H. Lauer financial and accounting ) officer) )
Index of Exhibits Filed with this Amendment Exhibit Number Exhibit - ------ ------- h. Transfer Agency and Service Agreement between Acorn Investment Trust and State Street Bank and Trust Company dated July 1, 1999. i. Consent of Bell, Boyd & Lloyd LLC. j Consent of Ernst & Young LLP. p.1 Code of Ethics. p.2 Code of Ethics for Non-Interested Board Members. EX-99.H 2 TRANSFER AGENCY AND SERVICE AGREEMENT Exhibit h TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN ACORN INVESTMENT TRUST AND STATE STREET BANK AND TRUST COMPANY TABLE OF CONTENTS Page 1. Terms of Appointment and Duties..........................................1 2. Third Party Administrators for Defined Contribution Plans ...............3 3. Fees and Expenses........................................................4 4. Representations and Warranties of the Transfer Agent.....................5 5. Representations and Warranties of the Fund...............................6 6. Wire Transfer Operating Guidelines.......................................6 7. Data Access and Proprietary Information..................................8 8. Indemnification..........................................................9 9. Standard of Care........................................................10 10. Confidentiality.........................................................11 11. Covenants of the Fund and the Transfer Agent............................12 12. Termination of Agreement................................................12 13. Assignment and Third Party Beneficiaries................................14 14. Subcontractors..........................................................14 15. Miscellaneous...........................................................15 16. Additional Funds........................................................16 17. Limitations of Liability of the Trustees and Shareholders...............16 TRANSFER AGENCY AND SERVICE AGREEMENT ------------------------------------- AGREEMENT made as of the 1st day of July, 1999, by and between ACORN INVESTMENT TRUST, a Massachusetts business trust, having its principal office and place of business at 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its principal office and place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Transfer Agent"). WHEREAS, the Fund is authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets; WHEREAS, the Fund intends to initially offer shares in five (5) series, such series shall be named in the attached Schedule A which may be amended by the parties from time to time (each such series, together with all other series subsequently established by the Fund and made subject to this Agreement in accordance with Section 17, being herein referred to as a "Portfolio," and ---------- collectively as the "Portfolios"); and WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Transfer Agent as its transfer agent, dividend disbursing agent, custodian of certain retirement plans and agent in connection with certain other activities, and the Transfer Agent desires to accept such appointment. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Terms of Appointment and Duties ------------------------------- 1.1 Transfer Agency Services. Subject to the terms and conditions set forth in this Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints the Transfer Agent to act as, and the Transfer Agent agrees to act as its transfer agent for the Fund's authorized and issued shares of beneficial interest ("Shares"), dividend disbursing agent, custodian of certain retirement plans and agent in connection with any accumulation, open-account or similar plan provided to the shareholders of each of the respective Portfolios of the Fund ("Shareholders") and set out in the currently effective prospectus and statement of additional information ("prospectus") of the Fund on behalf of the applicable Portfolio, including without limitation any periodic investment plan or periodic withdrawal program. In accordance with procedures established from time to time by agreement between the Fund on behalf of each of the Portfolios, as applicable and the Transfer Agent, the Transfer Agent agrees that it will perform the following services: (a) Receive for acceptance, orders for the purchase of Shares, and promptly deliver payment and appropriate documentation thereof to the Custodian of the Fund authorized pursuant to the Declaration of Trust of the Fund (the "Custodian"); (b) Pursuant to purchase orders, issue the appropriate number of Shares and hold such Shares in the appropriate Shareholder account; (c) Receive for acceptance redemption requests and redemption directions and deliver the appropriate documentation thereof to the Custodian; (d) In respect to the transactions in items (a), (b) and (c) above, the Transfer Agent shall execute transactions directly with broker-dealers authorized by the Fund; (e) At the appropriate time as and when it receives monies paid to it by the Custodian with respect to any redemption, pay over or cause to be paid over in the appropriate manner such monies as instructed by the redeeming Shareholders; (f) Effect transfers of Shares by the registered owners thereof upon receipt of appropriate instructions; (g) Prepare and transmit payments for dividends and distributions declared by the Fund on behalf of the applicable Portfolio; (h) Issue replacement certificates for those certificates alleged to have been lost, stolen or destroyed upon receipt by the Transfer Agent of indemnification satisfactory to the Transfer Agent and protecting the Transfer Agent and the Fund, and the Transfer Agent at its option, may issue replacement certificates in place of mutilated stock certificates upon presentation thereof and without such indemnity; (i) Maintain records of account for and advise the Fund and its Shareholders as to the foregoing; and (j) Record the issuance of Shares of the Fund and maintain pursuant to SEC Rule 17Ad-10(e) a record of the total number of Shares of the Fund which are authorized, based upon data provided to it by the Fund, and issued and outstanding. The Transfer Agent shall also provide the Fund on a regular basis with the total number of Shares which are authorized and issued and outstanding and shall have no obligation, when recording the issuance of Shares, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Fund. 1.2 Additional Services. In addition to, and neither in lieu nor in contravention of, the services set forth in the above paragraph, the Transfer Agent shall perform the following services: (a) Other Customary Services. Perform the customary services of a transfer agent, dividend disbursing agent, custodian of certain retirement plans and, as relevant, agent in connection with accumulation, open-account or similar plan (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to: maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing Shareholder proxies, Shareholder reports and prospectuses to current Shareholders, withholding taxes on U.S. resident and non-resident alien accounts, preparing and filing U.S. Treasury Department Forms 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all Shareholders, preparing and 2 mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other confirmable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders, and providing Shareholder account information; (b) Control Book (also known as "Super Sheet"). Maintain a daily record and produce a daily report for the Fund of all transactions and receipts and disbursements of money and securities and deliver a copy of such report for the Fund for each business day to the Fund no later than 9:00 AM Eastern Time, or such earlier time as the Fund may reasonably require, on the next business day; (c) "Blue Sky" Reporting. The responsibility of the Transfer Agent for the Fund's compliance with applicable blue sky requirements is solely limited to the initial establishment of transactions subject to blue sky compliance by the Fund and providing a system which will enable the Fund to monitor the total number of Shares sold in each State. The Fund shall (i) identify to the Transfer Agent in writing those transactions and assets to be treated as exempt from blue sky reporting for each State and (ii) verify the establishment of transactions for each State on the system prior to activation and thereafter monitor the daily activity for each State; (d) National Securities Clearing Corporation (the "NSCC"). (i) in a timely manner and without receipt of supporting documentation from a Shareholder accept and effectuate the registration and maintenance of accounts through Networking and the purchase, redemption, transfer and exchange of shares in such accounts through Fund/SERV (networking and Fund/SERV being programs operated by the NSCC on behalf of NSCC's participants, including the Fund), in accordance with instructions transmitted to and received by the Transfer Agent by transmission from NSCC on behalf of broker-dealers and banks which have been established by, or in accordance with the instructions of authorized persons, as hereinafter defined on the dealer file maintained by the Transfer Agent; (ii) issue instructions to Fund's banks for the settlement of transactions between the Fund and NSCC (acting on behalf of its broker-dealer and bank participants); (iii) provide account and transaction information from the affected Portfolio's records on DST Systems, Inc. computer system TA2000 ("TA2000 System") in accordance with NSCC's Networking and Fund/SERV rules for those broker-dealers; (iv) maintain Shareholder accounts on TA2000 System through Networking; (v) comply with all applicable laws, rules, and regulations, including NSCC rules and procedures relating to Networking; (iv) with respect to Networking, comply with the provisions of each Fund's current prospectus and statement of additional information; (vii) implement and maintain procedures reasonably designed to ensure the accuracy of all transmissions through Networking and to limit the access to, and the inputting of data into, Networking to persons specifically authorized by the Transfer Agent; (viii) otherwise perform any and all duties, functions, procedures and responsibilities pursuant to each NSCC matrix level and as otherwise established by NSCC from time to time; and (ix) conduct the activities noted herein in a businesslike and competent manner. 3 (e) New Procedures. The Transfer Agent and the fund may, from time to time, agree in writing that the Fund or another of the Fund's Agents will perform some or all of the services described in this Section 1, --------- or that additional or different services shall be performed by the Transfer Agent, and any such written agreement will supersede any provisions of this agreement with respect to the subject matter thereof; and (f) Additional Telephone Support Services. If the parties elect to have the Transfer Agent provide additional telephone support services ---------- under this Agreement, the parties will agree to such services, fees and sub-contracting as stated in Schedule 1.2(f) entitled "Telephone Support Services" attached hereto. 2. Third Party Administrators for Defined Contribution Plans --------------------------------------------------------- 2.1 The Fund may decide to make available to certain of its customers, a qualified plan program (the "Program") pursuant to which the customers ("Employers") may adopt certain deferred compensation or other retirement plans ("Plan or Plans") for the benefit of the individual Plan participant (the "Plan Participant"), such Plan(s) being qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended ("Code") and administered by third party administrators which may be plan administrators as defined in the Employee Retirement Income Security Act of 1974, as amended (the "TPA(s)"). 2.2 In accordance with the procedures established in the initial Schedule 2.1 entitled "Third Party Administrator Procedures," as may be amended by the Transfer Agent and the Fund from time to time ("Schedule 2.1"), the Transfer Agent shall: (a) Treat Shareholder accounts established by the Plans in the name of the Trustees, Plans or TPAs as the case may be as omnibus accounts; (b) Maintain omnibus accounts on its records in the name of the TPA or its designee as the Trustee for the benefit of the Plan; and (c) Perform all services under Section 1 as transfer agent of the Fund --------- and not as a record-keeper for the Plans. 2.3 Transactions identified under Section 2 of this Agreement shall be --------- deemed exception services ("Exception Services") when such transactions: (a) Require the Transfer Agent to use methods and procedures other than those usually employed by the Transfer Agent to perform services under Section 1 of this Agreement; --------- (b) Involve the provision of information to the Transfer Agent after the commencement of the nightly processing cycle of the TA2000 System; or (c) Require more manual intervention by the Transfer Agent, either in the entry of data or in the modification or amendment of reports generated by the TA2000 System than is usually required by non- retirement plan and pre-nightly transactions. 4 3. Fees and Expenses ----------------- 3.1 Fee Schedule. For the performance by the Transfer Agent pursuant to this Agreement, the Fund agrees to pay the Transfer Agent an annual maintenance fee for each Shareholder account as set forth in the attached fee schedule ("Schedule 3.1"). Such fees and out-of-pocket expenses and advances identified under Section 3.2 below may be changed from time to time subject to mutual written agreement between the Fund and the Transfer Agent. 3.2 Out-of-Pocket Expenses. In addition to the fee paid under Section 3.1 above, the Fund agrees to reimburse the Transfer Agent for out-of-pocket expenses, including but not limited to confirmation statements, investor processing, postage, forms, audio response, telephone, microfilm, microfiche, records storage, or advances incurred by the Transfer Agent for the items set out in Schedule 3.1 attached hereto. In addition, any other expenses incurred by the Transfer Agent at the request or with the consent of the Fund, will be reimbursed by the Fund. 3.3 Postage. Postage for mailing of dividends, proxies, Fund reports and other mailings to all shareholder accounts shall be advanced to the Transfer Agent by the Fund at least seven (7) days prior to the mailing date of such materials. 3.4 Invoices. The Fund agrees to pay all fees and reimbursable expenses within thirty (30) days following the receipt of the respective billing notice, except for any fees or expenses that are subject to good faith dispute. In the event of such a dispute, the Fund may only withhold that portion of the fee or expense subject to the good faith dispute. The Fund shall notify the Transfer Agent in writing within twenty-one (21) calendar days following the receipt of each billing notice if the Fund is disputing any amounts in good faith. If the Fund does not provide such notice of dispute within the required time, the billing notice will be deemed accepted by the Fund. The Fund shall settle such disputed amounts within five (5) days of the day on which the parties agree on the amount to be paid by payment of the agreed amount. If no agreement is reached, then such disputed amounts shall be settled as may be required by law or legal process. 3.5 Cost of Living Adjustment. Following the Initial Term, unless the parties shall otherwise agree and provided that the service mix and volumes remain consistent as previously provided in the Initial Term, the total fee for all services shall equal the fee that would be charged for the same services based on a fee rate (as reflected in a fee rate schedule) increased by the percentage increase for the twelve-month period of such previous calendar year of the Consumer Price Index for Urban Wage Earners and Clerical Workers, for the Boston area, as published bimonthly by the United States Department of Labor, Bureau of Labor Statistics, or, in the event that publication of such Index is terminated, any successor or substitute index, appropriately adjusted, acceptable to both parties. 3.6 Late Payments. If any undisputed amount in an invoice of the Transfer Agent (for fees or reimbursable expenses) is not paid when due, the Fund shall pay the Transfer Agent interest thereon (from the due date to the date of payment) at a per annum rate equal to 5 one percent (1.0%) plus the Prime Rate (that is, the base rate on corporate loans posted by large domestic banks) published by The Wall Street Journal (or, in the event such rate is not so published, a reasonably equivalent published rate selected by the Fund) on the first day of publication during the month when such amount was due. Notwithstanding any other provision hereof, such interest rate shall be no greater than permitted under applicable provisions of Massachusetts law. 4. Representations and Warranties of the Transfer Agent ---------------------------------------------------- The Transfer Agent represents and warrants to the Fund that: 4.1 It is a trust company duly organized and existing and in good standing under the laws of The Commonwealth of Massachusetts. 4.2 It is duly qualified to carry on its business in The Commonwealth of Massachusetts. 4.3 It is empowered under applicable laws and by its Charter and By-Laws to enter into and perform this Agreement. 4.4 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 4.5 It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 5. Representations and Warranties of the Fund ------------------------------------------ The Fund represents and warrants to the Transfer Agent that: 5.1 It is a business trust duly organized and existing and in good standing under the laws of The Commonwealth of Massachusetts. 5.2 It is empowered under applicable laws and by its Declaration of Trust and By-Laws to enter into and perform this Agreement. 5.3 All corporate proceedings required by said Declaration of Trust and By-Laws have been taken to authorize it to enter into and perform this Agreement. 5.4 It is an open-end and diversified management investment company registered under the Investment Company Act of 1940, as amended. 5.5 A registration statement under the Securities Act of 1933, as amended is currently effective and will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Fund being offered for sale. 6 6. Wire Transfer Operating Guidelines/Articles 4A of the Uniform ------------------------------------------------------------- Commercial Code --------------- 6.1 Obligation of Sender. The Transfer Agent is authorized to promptly debit the appropriate Fund account(s) upon the receipt of a payment order in compliance with the selected security procedure (the "Security Procedure") chosen for funds transfer on the form provided by the Transfer Agent (the "Fund Selection Form") and in the amount of money that the Transfer Agent has been instructed to transfer. The Transfer Agent shall execute payment orders in compliance with the Security Procedure and with the Fund instructions on the execution date provided that such payment order is received by the customary deadline for processing such a request, unless the payment order specifies a later time. All payment orders and communications received after the customary deadline will be deemed to have been received the next business day. 6.2 Security Procedure. The Fund acknowledges that the Security Procedure it has designated on the Fund Selection Form was selected by the Fund from security procedures offered by the Transfer Agent. The Fund shall restrict access to confidential information relating to the Security Procedure to authorized persons as communicated to the Transfer Agent in writing. The Fund must notify the Transfer Agent immediately if it has reason to believe unauthorized persons may have obtained access to such information or of any change in the Fund's authorized personnel. The Transfer Agent shall verify the authenticity of all Fund instructions according to the Security Procedure. 6.3 Account Numbers. The Transfer Agent shall process all payment orders on the basis of the account number contained in the payment order. In the event of a discrepancy between any name indicated on the payment order and the account number, the account number shall take precedence and govern. 6.4 Rejection. The Transfer Agent reserves the right to decline to process or delay the processing of a payment order which (a) is in excess of the collected balance in the account to be charged at the time of the Transfer Agent's receipt of such payment order; (b) if initiating such payment order would cause the Transfer Agent, in the Transfer Agent's sole judgement, to exceed any volume, aggregate dollar, network, time, credit or similar limits which are applicable to the Transfer Agent; or (c) if the Transfer Agent, in good faith, is unable to satisfy itself that the transaction has been properly authorized. 6.5 Cancellation Amendment. The Transfer Agent shall use reasonable efforts to act on all authorized requests to cancel or amend payment orders received in compliance with the Security Procedure provided that such requests are received in a timely manner affording the Transfer Agent reasonable opportunity to act. However, the Transfer Agent assumes no liability if the request for amendment or cancellation cannot be satisfied. 6.6 Errors. The Transfer Agent shall assume no responsibility for failure to detect any erroneous payment order provided that the Transfer Agent complies with the payment order instructions as received and the Transfer Agent complies with the Security Procedure. The Security Procedure is established for the purpose of authenticating payment orders only and not for the detection of errors in payment orders. 7 6.7 Interest. The Transfer Agent shall assume no responsibility for lost interest with respect to the refundable amount of any unauthorized payment order, unless the Transfer Agent is notified of the unauthorized payment order within thirty (30) days of notification by the Transfer Agent of the acceptance of such payment order. 6.8 ACH Credit Entries/Provisional Payments. When the Fund initiates or receives Automated Clearing House credit and debit entries pursuant to these guidelines and the rules of the National Automated Clearing House Association and the New England Clearing House Association, the Transfer Agent will act as an Originating Depository Financial Institution and/or Receiving Depository Financial Institution, as the case may be, with respect to such entries. Credits given by the Transfer Agent with respect to an ACH credit entry are provisional until the Transfer Agent receives final settlement for such entry from the Federal Reserve Bank. If the Transfer Agent does not receive such final settlement, the Fund agrees that the Transfer Agent shall receive a refund of the amount credited to the Fund in connection with such entry, and the party making payment to the Fund via such entry shall not be deemed to have paid the amount of the entry. 6.9 Confirmation. Confirmation of Transfer Agent's execution of payment orders shall ordinarily be provided within twenty four (24) hours notice of which may be delivered through the Transfer Agent's proprietary information systems, or by facsimile or call-back. Fund must report any objections to the execution of an order within thirty (30) days. 7. Data Access and Proprietary Information --------------------------------------- 7.1 The Fund acknowledges that the databases, computer programs, screen formats, report formats, interactive design techniques, and documentation manuals furnished to the Fund by the Transfer Agent as part of the Fund's ability to access certain Fund-related data ("Customer Data") maintained by the Transfer Agent on databases under the control and ownership of the Transfer Agent or other third party ("Data Access Services") constitute copyrighted, trade secret, or other proprietary information (collectively, "Proprietary Information") of substantial value to the Transfer Agent or other third party. In no event shall Proprietary Information be deemed Customer Data. The Fund agrees to treat all Proprietary Information as proprietary to the Transfer Agent and further agrees that it shall not divulge any Proprietary Information to any person or organization except as may be provided hereunder. Without limiting the foregoing, the Fund agrees for itself and its employees and agents to: (a) Use such programs and databases (i) solely on the Fund's computers, or (ii) solely from equipment at the locations agreed to between the Fund and the Transfer Agent and (iii) solely in accordance with the Transfer Agent's applicable user documentation; (b) Refrain from copying or duplicating in any way (other than in the normal course of performing processing on the Fund's computer(s)), the Proprietary Information; 8 (c) Refrain from obtaining unauthorized access to any portion of the Proprietary Information, and if such access is inadvertently obtained, to inform in a timely manner of such fact and dispose of such information in accordance with the Transfer Agent's instructions; (d) Refrain from causing or allowing information transmitted from the Transfer Agent's computer to the Fund's terminal to be retransmitted to any other computer terminal or other device except as expressly permitted by the Transfer Agent (such permission not to be unreasonably withheld); (e) Allow the Fund to have access only to those authorized transactions as agreed to between the Fund and the Transfer Agent; and (f) Honor all reasonable written requests made by the Transfer Agent to protect at the Transfer Agent's expense the rights of the Transfer Agent in Proprietary Information at common law, under federal copyright law and under other federal or state law. 7.2 Proprietary Information shall not include all or any portion of any of the foregoing items that: (i) are or become publicly available without breach of this Agreement; (ii) are released for general disclosure by a written release by the Transfer Agent; or (iii) are already in the possession of the receiving party at the time of receipt without obligation of confidentiality or breach of this Agreement. 7.3 The Fund acknowledges that its obligation to protect the Transfer Agent's Proprietary Information is essential to the business interest of the Transfer Agent and that the disclosure of such Proprietary Information in breach of this Agreement would cause the Transfer Agent immediate, substantial and irreparable harm, the value of which would be extremely difficult to determine. Accordingly, the parties agree that, in addition to any other remedies that may be available in law, equity, or otherwise for the disclosure or use of the Proprietary Information in breach of this Agreement, the Transfer Agent shall be entitled to seek and obtain a temporary restraining order, injunctive relief, or other equitable relief against the continuance of such breach. 7.4 If the Fund notifies the Transfer Agent that any of the Data Access Services do not operate in material compliance with the most recently issued user documentation for such services, the Transfer Agent shall endeavor in a timely manner to correct such failure. Organizations from which the Transfer Agent may obtain certain data included in the Data Access Services are solely responsible for the contents of such data and the Fund agrees to make no claim against the Transfer Agent arising out of the contents of such third-party data, including, but not limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE TRANSFER AGENT EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 9 7.5 If the transactions available to the Fund include the ability to originate electronic instructions to the Transfer Agent in order to (i) effect the transfer or movement of cash or Shares or (ii) transmit Shareholder information or other information, then in such event the Transfer Agent shall be entitled to rely on the validity and authenticity of such instruction without undertaking any further inquiry as long as such instruction is undertaken in conformity with security procedures established by the Transfer Agent from time to time. 7.6 Each party shall take reasonable efforts to advise its employees of their obligations pursuant to this Section 7. The obligations of this --------- Section shall survive termination of this Agreement. 8. Indemnification --------------- 8.1A The Transfer Agent shall not be responsible for, and the Fund shall indemnify and hold the Transfer Agent harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to actions taken in good faith and without negligence or willful misconduct on the part of the Transfer Agent or its agents or subcontractors and arising out of or attributable to: (a) All actions of the Transfer Agent or its agents or subcontractors required to be taken pursuant to this Agreement (including the defense of any law suit in which the Transfer Agent or affiliate is a named party); (b) The Fund's lack of good faith, negligence or willful misconduct; or (c) The negotiation and processing of any checks including without limitation for deposit into the Fund's demand deposit account maintained by the Transfer Agent. 8.1B The Transfer Agent shall not be responsible for, and the Fund shall indemnify and hold the Transfer Agent harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to: (a) Action taken or omitted, by the Transfer Agent, or its agents or subcontractors in reliance on: (i) any information, records, documents, data, stock certificates or services, which are received by the Transfer Agent or its agents or subcontractors by machine readable input, facsimile, CRT data entry, electronic instructions or other similar means authorized by the Fund, and which have been prepared, maintained or performed by the Fund or any other person or firm on behalf of the Fund including but not limited to any broker-dealer, TPA or previous transfer agent or registrar; (ii) any instructions or requests of the Fund or any of its officers; (iii) any instructions or opinions of legal counsel with respect to any matter arising in connection with the services to be performed by the Transfer Agent under this Agreement which are provided to the Transfer Agent after consultation with such legal counsel; or (iv) any paper or document, reasonably believed to be genuine, authentic and signed by the proper person or persons; 10 (b) The offer or sale of Shares in violation of federal or state securities laws or regulations requiring that such Shares be registered or in violation of any stop order or other determination or ruling by any federal or any state agency with respect to the offer or sale of such Shares; or (c) Upon the Fund's request entering into any agreements required by the National Securities Clearing Corporation (the "NSCC") for the transmission of Fund or Shareholder data through the NSCC clearing systems. 8.2 In order that the indemnification provisions contained in this Section ------- 8 shall apply, upon the assertion of a claim for which the Fund may be - required to indemnify the Transfer Agent, the Transfer Agent shall promptly notify the Fund of such assertion, and shall keep the Fund advised with respect to all developments concerning such claim. The Fund shall have the option to participate with the Transfer Agent in the defense of such claim or to defend against said claim in its own name or in the name of the Transfer Agent. The Transfer Agent shall in no case confess any claim or make any compromise in any case in which the Fund may be required to indemnify the Transfer Agent except with the Fund's prior written consent. 9. Standard of Care ---------------- The Transfer Agent shall at all times act in good faith and agrees to use its best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement, but assumes no responsibility and shall not be liable for loss or damage due to errors, including encoding and payment processing errors, unless said errors are caused by its negligence, bad faith, or willful misconduct or that of its employees or agents. The parties agree that any encoding or payment processing errors shall be governed by this standard of care and Section 4-209 of the Uniform Commercial Code is superseded by Section 9 of this Agreement. This standard of care also --------- shall apply to Exception Services, as defined in Section 2.3 herein, ----------- but such application shall take into consideration the manual processing involved in, and time sensitive nature of, Exception Services. 10. Confidentiality --------------- 10.1 The Transfer Agent and the Fund agree that they will not, at any time during the term of this Agreement or after its termination, reveal, divulge, or make known to any person, firm, corporation or other business organization, any customers' lists, trade secrets, cost figures and projections, profit figures and projections, or any other secret or confidential information whatsoever, whether of the Transfer Agent or of the Fund, used or gained by the Transfer Agent or the Fund during performance under this Agreement. The Fund and the Transfer Agent further covenant and agree to retain all such knowledge and information acquired during and after the term of this Agreement respecting such lists, trade secrets, or any secret or confidential information whatsoever in trust for the sole benefit of the Transfer Agent or the Fund and their successors and assigns. In the event of breach of the foregoing by either party, the remedies provided by Section 7.3 shall be ----------- 11 available to the party whose confidential information is disclosed. The above prohibition of disclosure shall not apply to the extent that the Transfer Agent must disclose such data to its sub-contractor or Fund agent for purposes of providing services under this Agreement. 10.2 In the event that any requests or demands are made for the inspection of the Shareholder records of the Fund, other than request for records of Shareholders pursuant to standard subpoenas from state or federal government authorities (i.e., divorce and criminal actions), the Transfer Agent will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. The Transfer Agent expressly reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by counsel that it may be held liable for the failure to exhibit the Shareholder records to such person or if required by law or court order. 11. Covenants of the Fund and the Transfer Agent -------------------------------------------- 11.1 The Fund shall promptly furnish to the Transfer Agent the following: (a) A certified copy of the resolution of the Board of Trustees of the Fund authorizing the appointment of the Transfer Agent and the execution and delivery of this Agreement; and (b) A copy of the Declaration of Trust and By-Laws of the Fund and all amendments thereto. 11.2 The Transfer Agent hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. 11.3 The Transfer Agent shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and the Rules thereunder, the Transfer Agent agrees that all such records prepared or maintained by the Transfer Agent relating to the services to be performed by the Transfer Agent hereunder are the property of the Fund and will be preserved, maintained and made available in accordance with such Section and Rules, and will be surrendered promptly to the Fund on and in accordance with its request. 12. Termination of Agreement ------------------------ 12.1 Term. The initial term of this Agreement (the "Initial Term") shall be three (3) years from the date first stated above unless terminated pursuant to the provisions of this Section 12. Unless a terminating party gives written notice to the other party one hundred and twenty (120) days before the expiration of the Initial Term, this Agreement will renew automatically from year to year after the Initial Term (each such year-to-year renewal term a "Renewal Term"). If one hundred and twenty (120) days before the 12 expiration of the Initial Term or a Renewal Term the parties to this Agreement do not agree upon a Fee Schedule for the upcoming Renewal Term, the fees shall be increased pursuant to Section 3.5 of this Agreement. 12.2 Early Termination. Notwithstanding anything contained in this Agreement, should the Fund desire to move any of its services provided by the Transfer Agent hereunder to a successor service provider prior to the expiration of the then current Initial or Renewal Term, or without the required notice, the Transfer Agent shall make a good faith effort to facilitate the conversion on such prior date; however, there can be no guarantee or assurance that the Transfer Agent will be able to facilitate a conversion of services on such prior date. In connection with the foregoing, should services be converted to a successor service provider, the fees payable to the Transfer Agent shall be calculated as if the services had been performed by the Transfer Agent until the expiration of the then current Initial or Renewal Term and calculated at the asset and/or Shareholder account levels, as the case may be, on the date notice of termination was given to the Transfer Agent, and the payment of all fees to the Transfer Agent as set forth herein shall be accelerated to the business day immediately prior to the conversion or termination of services, except (a) as provided in Section 12.6 below or (b) if the ------------ Fund is liquidated or its assets merged or purchased or the like with or by another entity which does not utilize the services of the Transfer Agent, the fees payable to the Transfer Agent shall be calculated as if the services had been performed by the Transfer Agent until the later of (i) the date on which the Transfer Agent actually ceases performing the services for the Fund and (ii) 120 days after the notice of termination was given to the Transfer Agent. If the Fund's assets are merged or purchased or the like with or by another entity which utilizes the services of the Transfer Agent, the fees payable to the Transfer Agent shall be calculated through the date on which the Transfer Agent ceases performing the services for the Fund. 12.3 Expiration of Term. After the expiration of the Initial Term or Renewal Term whichever currently in effect, should either party exercise its right to terminate, all out-of-pocket expenses or costs associated with the movement of records and material will be borne by the Fund. Additionally, the Transfer Agent reserves the right to charge for any other reasonable expenses associated with such termination. 12.4 Confidential Information. Upon termination of this Agreement, each party shall return to the other party all copies of confidential or proprietary materials or information received from such other party hereunder, other than materials or information required to be retained by such party under applicable laws or regulations. 12.5 Unpaid Invoices. The Transfer Agent may terminate this Agreement immediately upon an unpaid invoice payable by the Fund to the Transfer Agent being outstanding for more than ninety (90) days, except with respect to any amount subject to a good faith dispute within the meaning of Section 3.4 of this Agreement. ----------- 12.6 Material Breach. The Fund may terminate this Agreement by notice to the Transfer Agent, effective at the time specified therein, without further liability for the payment of fees beyond the effective date of such termination, upon the material breach by the 13 Transfer Agent of any provision of this Agreement; provided that, after receiving written notice from the Fund of the existence of such material breach, the Transfer Agent fails to correct such material breach within 10 days after receipt of such notice. 12.7 Bankruptcy. Either party hereto may terminate this Agreement by notice to the other party, effective at any time specified therein, in the event that (a) the other party ceases to carry on its business or (b) an action is commenced by or against the other party under Title 11 of the United States Code or a receiver, conservator or similar officer is appointed for the other party and such suit, conservatorship or receivership is not discharged within thirty (30) days. 13. Assignment and Third Party Beneficiaries ---------------------------------------- 13.1 Except as provided in Section 14.1 below neither this Agreement nor ------------ any rights or obligations hereunder may be assigned by either party without the written consent of the other party. Any attempt to do so in violation of this Section shall be void. Unless specifically stated to the contrary in any written consent to an assignment, no assignment will release or discharge the assignor from any duty or responsibility under this Agreement. 13.2 Except as explicitly stated elsewhere in this Agreement, nothing under this Agreement shall be construed to give any rights or benefits in this Agreement to anyone other than the Transfer Agent and the Fund, and the duties and responsibilities undertaken pursuant to this Agreement shall be for the sole and exclusive benefit of the Transfer Agent and the Fund. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 13.3 This Agreement does not constitute an agreement for a partnership or joint venture between the Transfer Agent and the Fund. Other than as provided in Section 14.1 and Schedule 1.2(f), neither party shall make any commitments with third parties that are binding on the other party without the other party's prior written consent. 14. Subcontractors -------------- 14.1 The Transfer Agent may, without further consent on the part of the Fund, subcontract for the performance hereof with (i) Boston Financial Data Services, Inc., a Massachusetts corporation ("Boston Financial") which is duly registered as a transfer agent pursuant to Section 17A(c)(2) of the Securities Exchange Act of 1934, as amended, (ii) a Boston Financial subsidiary duly registered as a transfer agent or (iii) a Boston Financial affiliate duly registered as a transfer agent; provided, however, that the Transfer Agent shall be fully responsible to the Fund for the acts and omissions of Boston Financial or its subsidiary or affiliate as it is for its own acts and omissions. 14.2 Nothing herein shall impose any duty upon the Transfer Agent in connection with or make the Transfer Agent liable for the actions or omissions to act of unaffiliated third parties in the performance of services ancillary to the services to be performed under this agreement and not acting as agent of the Transfer Agent hereunder, such as by way of example and not limitation, Airborne Services, Federal Express, United Parcel Service, 14 the U.S. Mails, the NSCC and telecommunication companies, provided, if the Transfer Agent selected such company, the Transfer Agent shall have exercised due care in selecting the same. 15. Miscellaneous ------------- 15.1 Amendment. This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Board of Trustees of the Fund. 15.2 Massachusetts Law to Apply. This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts. 15.3 Force Majeure. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. 15.4 Consequential Damages. Neither party to this Agreement shall be liable to the other party for special, indirect or consequential damages under any provision of this Agreement or for any special, indirect or consequential damages arising out of any act or failure to act hereunder. 15.5 Survival. All provisions regarding indemnification, warranty, liability, and limits thereon, and confidentiality and/or protections of proprietary rights and trade secrets shall survive the termination of this Agreement. 15.6 Severability. If any provision or provisions of this Agreement shall be held invalid, unlawful, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired. 15.7 Priorities Clause. In the event of any conflict, discrepancy or ambiguity between the terms and conditions contained in this Agreement and any Schedules or attachments hereto, the terms and conditions contained in this Agreement shall take precedence. 15.8 Waiver. No waiver by either party or any breach or default of any of the covenants or conditions herein contained and performed by the other party shall be construed as a waiver of any succeeding breach of the same or of any other covenant or condition. 15.9 Merger of Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written. 15.10 Counterparts. This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 15 15.11. Reproduction of Documents. This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any commercial photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction shall likewise be admissible in evidence. 15.12 Notices. All notices and other communications as required or permitted hereunder shall be in writing and sent by first class mail, postage prepaid, addressed as follows or to such other address or addresses of which the respective party shall have notified the other. (a) If to State Street Bank and Trust Company, to: State Street Bank and Trust Company c/o Boston Financial Data Services, Inc. 1250 Hancock Street, Suite 300N Quincy, Massachusetts 02169 Attention: Legal Department Facsimile: (617) 483-5850 (b) If to the Fund, to: Wanger Asset Management, L.P. 227 West Monroe, Suite 3000 Chicago, Illinois 60606 Attention: Bruce H. Lauer 16. Additional Funds ---------------- In the event that the Fund establishes one or more series of Shares, in addition to those listed on the attached Schedule A, with respect to which it desires to have the Transfer Agent render services as transfer agent under the terms hereof, it shall so notify the Transfer Agent in writing, and if the Transfer Agent agrees in writing to provide such services, such series of Shares shall become a Portfolio hereunder. 17. Limitations of Liability of the Trustees and Shareholders --------------------------------------------------------- A copy of the Declaration of Trust of the Trust is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Trust as Trustees and not individually and that the obligations of this instrument are not binding upon any of the Trustees, officers or Shareholders individually but are binding only upon the assets and property of the Fund. 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written. ACORN INVESTMENT TRUST BY: /s/ Kenneth A. Kalina ------------------------------------ Kenneth A. Kalina Assistant Treasurer ATTEST: /s/ Linda K. Roth - ------------------------------------ Linda K. Roth STATE STREET BANK AND TRUST COMPANY BY: signature illegible ----------------------------------- Vice Chairman ATTEST: signature illegible - ------------------------------------ 17 SCHEDULE A Acorn Fund Acorn International Acorn Twenty Acorn Foreign Forty Acorn U.S.A. ACORN INVESTMENT TRUST STATE STREET BANK AND TRUST COMPANY BY: /s/ Kenneth A. Kalina BY: signature illegible ------------------------------ ----------------------------------- Kenneth A. Kalina Assistant Treasurer SCHEDULE 1.2(f) ADDITIONAL TELEPHONE SUPPORT FEES AND SERVICES Dated ____________ I. SERVICES 1. Transfer Agent and Telephone Support Functions a. Answer telephone inquiries from [XXX 8 a.m. to 8 p.m. Boston time Monday through Friday except Christmas Day XXX] [XXX OTHER HOLIDAY COVERAGE AVAILABLE?XXX] from [XXX existing customers and prospective customers XXX] of the Fund [XXX for sales literature XXX] in accordance with the telephone script provided by the Fund. b. Answer questions pertaining thereto the extent that such questions are answerable based upon the information supplied to the Transfer Agent by the Fund. c. [XXX As the Fund and the Transfer Agent may agree in writing, the Transfer Agent will receive calls and take written transaction requests from shareholders of the Fund. Transfer Agent transactions include: [XXX telephone redemptions, account maintenance, exchanges, transfers, confirmed purchases, account balances and general inquiries XXX]. Some transactions may result in research which will be done by the Fund. Other calls may be referred directly to the Fund. Fax any referrals to [XXX name of company XXX] on the same day the telephone call is received XXX]; 2. Incorporate new information into the above referenced script upon written instructions from the Fund; 3. Maintain prospect detail information for six (6) months thereafter, provide such information to the Fund in the form that the Fund may reasonably request; 4. Send all literature orders for information from Boston Financial/DST [XXX [how?] [to whom?] XXX] a minimum of [XXX one XXX] transmission per day; 5. Provide the Fund with a [XXX daily/weekly/monthly XXX] telephone report detailing the calls received during the [XXX day/week/month XXX]; 6. [XXX Provide the Fund with monthly conversion reports as selected by the Fund from DST's standard report package. XXX] 7. TARGET SERVICE LEVELS: Average speed of answer is fifteen (15) seconds, abandon rate of no more than 2%, and an overall service level of 85%. The averages will be calculated on a weekly basis. II. SUBCONTRACTORS 1. The Transfer Agent may, without further consent on the part of the Fund, subcontract ministerial telephone support services for the performance hereof. III. FEES STATE STREET BANK AND TRUST COMPANY BY:_______________________________ BY:______________________________ 2 SCHEDULE 2.1 THIRD PARTY ADMINISTRATOR(S) PROCEDURES Dated July 1, 1999 1. On each day on which both the New York Stock Exchange and the Fund are open for business (a "Business Day"), the TPA(s) shall receive, on behalf of and as agent of the Fund, Instructions (as hereinafter defined) from the Plan. Instructions shall mean as to each Fund (i) orders by the Plan for the purchases of Shares, and (ii) requests by the Plan for the redemption of Shares; in each case based on the Plan's receipt of purchase orders and redemption requests by Participants in proper form by the time required by the terms of the Plan, but not later than the time of day at which the net asset value of a Fund is calculated, as described from time to time in that Fund's prospectus. Each Business Day on which the TPA receives Instructions shall be a "Trade Date". 2. The TPA(s) shall communicate the TPA(s)'s acceptance of such Instructions, to the applicable Plan. 3. On the next succeeding Business Day following the Trade Date on which it accepted Instructions for the purchase and redemption of Shares, (TD+1), the TPA(s) shall notify the Transfer Agent of the net amount of such purchases or redemptions, as the case may be, for each of the Plans. In the case of net purchases by any Plan, the TPA(s) shall instruct the Trustees of such Plan to transmit the aggregate purchase price for Shares by wire transfer to the Transfer Agent on (TD+1). In the case of net redemptions by any Plan, the TPA(s) shall instruct the Fund's custodian to transmit the aggregate redemption proceeds for Shares by wire transfer to the Trustees of such Plan on (TD+1). The times at which such notification and transmission shall occur on (TD+1) shall be as mutually agreed upon by each Fund, the TPA(s), and the Transfer Agent. 4. The TPA(s) shall maintain separate records for each Plan, which record shall reflect Shares purchased and redeemed, including the date and price for all transactions, and Share balances. The TPA(s) shall maintain on behalf of each of the Plans a single master account with the Transfer Agent and such account shall be in the name of that Plan, the TPA(s), or the nominee of either thereof as the record owner of Shares owned by such Plan. 5. The TPA(s) shall maintain records of all proceeds of redemptions of Shares and all other distributions not reinvested in Shares. 6. The TPA(s) shall prepare, and transmit to each of the Plans, periodic account statements showing the total number of Shares owned by that Plan as of the statement closing date, purchases and redemptions of Shares by the Plan during the period covered by the statement, and the dividends and other distributions paid to the Plan on Shares during the statement period (whether paid in cash or reinvested in Shares). 7. The TPA(s) shall, at the request and expense of each Fund, transmit to the Plans prospectuses, proxy materials, reports, and other information provided by each Fund for delivery to its shareholders. 8. The TPA(s) shall, at the request of each Fund, prepare and transmit to each Fund or any agent designated by it such periodic reports covering Shares of each Plan as each Fund shall reasonably conclude are necessary to enable the Fund to comply with state Blue Sky requirements. 9. The TPA(s) shall transmit to the Plans confirmation of purchase orders and redemption requests placed by the Plans; and 10. The TPA(s) shall, with respect to Shares, maintain account balance information for the Plan(s) and daily and monthly purchase summaries expressed in Shares and dollar amounts. 11. Plan sponsors may request, or the law may require, that prospectuses, proxy materials, periodic reports and other materials relating to each Fund be furnished to Participants in which event the Transfer Agent or each Fund shall mail or cause to be mailed such materials to Participants. With respect to any such mailing, the TPA(s) shall, at the request of the Transfer Agent or each Fund, provide at the TPA(s)'s expense a complete and accurate set of mailing labels with the name and address of each Participant having an interest through the Plans in Shares. ACORN INVESTMENT TRUST STATE STREET BANK AND TRUST COMPANY BY: /s/ Kenneth A. Kalina BY: signature illegible ------------------------------ -------------------------------- Kenneth A. Kalina Assistant Treasurer 2 SCHEDULE 3.1 FEES AND EXPENSES Dated Effective July 1, 1999 through June 30, 2002 Annual Maintenance Charges - Fees are billable on a monthly basis at the rate of - -------------------------- 1/12 of the annual fee. A charge is made for an account in the month that an account opens or closes. There is a minimum monthly charge of $1500.00 per month. Annual Open Account Fee $14.00 per account for account base greater than 110,000 $16.00 per account for account base equal to or less than 110,000 Annual Closed Account Fee* $1.20 New Account Set up* $4.50 Manual Transactions* $1.75 Telephone Calls* $1.50 Audio Response $.15/Call *Charged per month based on volumes Out-of-Pocket Expenses - Out-of-Pocket expenses include but are not limited to - ---------------------- confirmation statements, investor processing, postage, forms, audio response, telephone, microfilm, microfiche and expenses incurred at the specific direction of the Fund. ACORN INVESTMENT TRUST STATE STREET BANK AND TRUST COMPANY BY: /s/ Kenneth A. Kalina BY: signature illegible ------------------------------- --------------------------------- Kenneth A. Kalina Assistant Treasurer EX-99.I 3 CONSENT OF BELL, BOYD & LLOYD LLC Exhibit i BELL, BOYD & LLOYD LLC Three First National Plaza 70 West Madison Street, Suite 3300 Chicago, Illinois 60602-4207 312 372 1121 Fax: 312 372 2098 April 30, 2000 As counsel for Acorn Investment Trust (the "Registrant"), we consent to the incorporation by reference of our opinion for the Registrant's series designated Acorn Fund, Acorn International and Acorn USA dated April 30, 1998, filed with the Registrant's registration statement on Form N-1A on April 30, 1998, and our opinion for the Registrant's series designated Acorn Twenty and Acorn Foreign Forty dated June 2, 1998, filed with the Registrant's registration statement on Form N-1A on June 3, 1998 (Securities Act file no. 2-34223). In giving this consent we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933. /s/ Bell, Boyd & Lloyd LLC EX-99.J 4 CONSENT OF ERNST & YOUNG LLP CONSENT OF INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Financial Highlights" and "Independent Auditors" and to the use of our report dated February 3, 2000 on the 1999 financial statements of Acorn Fund, Acorn International, Acorn USA, Acorn Twenty and Acorn Foreign Forty, comprising Acorn Investment Trust and its incorporation by reference in the Registration Statement (Form N-1A) and in the related Prospectus and Statement of Additional Information, filed with the Securities and Exchange Commission in this Post- Effective Amendment No. 65 to the Registration Statement under the Securities Act of 1933 (Registration No. 2-34223) and in the Amendment No. 40 to the Registration Statement under the Investment Company Act of 1940 (Registration No. 811-1829). ERNST & YOUNG LLP Chicago, Illinois April 28, 2000 EX-99.P.1 5 CODE OF ETHICS Exhibit p.1 Effective Date: March 15, 2000 Wanger Asset Management, L.P. WAM Brokerage Services, L.L.C. Acorn Investment Trust Wanger Advisors Trust CODE OF ETHICS -------------- This Code of Ethics ("Code") has been adopted by Wanger Asset Management, L.P. ("WAM"), an independent investment advisor, WAM Brokerage Services, L.L.C. ("WAM, LLC"), a registered broker-dealer, Acorn Investment Trust ("Acorn") and Wanger Advisors Trust ("WAT"). The Code applies to all employees of WAM and WAM, LLC (provided by Wanger Asset Management, Ltd.), and all officers and trustees of Acorn and WAT except those trustees who are not "interested persons" of Acorn or WAT, respectively, or of WAM, as defined in the Investment Company Act and rules. The policy of WAM is to avoid any conflict of interest, or the appearance of any conflict of interest, between the interests of WAM, or its officers, partners and employees, and the interests of Acorn, WAT or WAM's advisory clients ("Clients"). The Investment Company Act and Investment Advisers Act and rules require that WAM, Acorn and WAT establish standards and procedures for the detection and prevention of certain conflicts of interest, including activities by which persons having knowledge of the investments and investment intentions of Clients might take advantage of that knowledge for their own benefit. Implementation and monitoring of these standards inevitably places some restrictions on the freedom of the investment activities of those people. This Code of Ethics has been adopted by WAM to meet those concerns and legal requirements. Any questions about the Code or about the applicability of the Code to a personal securities transaction should be directed to WAM's designated compliance officer, Ralph Wanger or Charles P. McQuaid. If none of them are available, questions should be directed to counsel for WAM. I. STATEMENT OF PRINCIPLE General Prohibitions. The Investment Company Act and rules make it illegal for any person covered by the Code, directly or indirectly, in connection with the purchase or sale of a security held or to be acquired by Clients to: a. employ any device, scheme or artifice to defraud Clients; b. make any untrue statement of a material fact, omit to state a material fact or in any way mislead Clients regarding a material fact; Effective Date: March 15, 2000 c. engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon Clients; or d. engage in any manipulative practice with respect to Clients. Personal Securities Transactions. The Code regulates the personal securities transactions as a part of the effort by WAM to detect and prevent conduct that might violate the general prohibitions outlined above. A personal securities transaction is a transaction in a security in which the person subject to this Code has a beneficial interest. Security is interpreted very broadly for this purpose, and includes any right to acquire any security (an option or warrant, for example). You have a beneficial interest in a security in which you have, directly or indirectly, the opportunity to profit or share in any profit derived from action in the security, or in which you have an indirect interest, including beneficial ownership by your spouse or minor children or other dependents living in your household, or your share of securities held by a partnership of which you are a general partner. Technically, the rules under section 16 of the Securities Exchange Act of 1934 will be applied to determine if you have a beneficial interest in a security (even if the security would not be within the scope of section 16). Examples of beneficial interest and a copy of Rule 16a-1(a), defining beneficial ownership, are attached as appendix A. In any situation where the potential for conflict exists, transactions for Clients must take precedence over any personal transaction. The people subject to this Code owe a duty to Clients to conduct their personal securities transactions in a manner which does not interfere with Clients' portfolio transactions or otherwise take inappropriate advantage of their relationship to Clients. Personal securities transactions must comply with the Code of Ethics and should avoid any actual or potential conflict of interest between your interests and Clients' interests. Situations not specifically governed by this Code of Ethics will be resolved in light of this general principle. II. HOW THE CODE'S RESTRICTIONS APPLY The restrictions on personal securities transactions in Section III and the compliance procedures in Section IV differentiate among groups of people based on their positions and responsibilities with WAM. The groups are: investment personnel and access personnel. A. Investment personnel (individually, an "investment person") are those who make, or participate in making, investment decisions for Clients, or who, because of their positions with WAM, have a heightened duty to Clients or who can be expected to have more information about Clients' portfolio transactions. Investment personnel are: . WAM portfolio managers; 2 Effective Date: March 15, 2000 . WAM analysts; . WAM traders; . WAM portfolio accounting personnel; . WAM support staff working directly with portfolio managers, analysts, or traders; and . WAM partners and officers of WAM. B. Access personnel are all employees of WAM or WAM, LLC who are not investment personnel described above. III. RESTRICTIONS ON PERSONAL SECURITIES TRANSACTIONS A. No transactions with Clients. No investment person or access person shall knowingly sell to or purchase from a Client any security or other property, except securities issued by that Client. B. No conflicting transactions. No investment person or access person shall purchase or sell any security, other than a listed index option or futures contract, in which such person has or would thereby acquire a beneficial interest which the person knows or has reason to believe is being purchased or sold or considered for purchase or sale by a Client, until all Clients' transactions have been completed or consideration of such transactions has been abandoned. C. Initial public offerings. No investment person or access person shall acquire any security in an initial public offering, except (i) with the prior consent of the compliance officer, Mr. Wanger or Mr. McQuaid based on a determination that the acquisition does not conflict with the Code or its underlying policies, or the interests of WAM or its Clients, and (ii) in circumstances in which the opportunity to acquire the security has been made available to the person for reasons other than the person's relationship with WAM or its Clients. Such circumstances might include, for example: . an opportunity to acquire securities of an insurance company converting from a mutual ownership structure to a stockholder ownership structure, if the person's ownership of an insurance policy issued by the IPO company or an affiliate of the IPO company conveys the investment opportunity; . an opportunity resulting from the person's pre-existing ownership of an interest in the IPO company or an investor in the IPO company; 3 Effective Date: March 15, 2000 . an opportunity made available to the person's spouse, in circumstances permitting the compliance officer, Mr. Wanger or Mr. McQuaid reasonably to determine that the opportunity is being made available for reasons other than the person's relationship with WAM or its Clients (for example, because of the spouse's employment). D. Private placements. No investment person or access person shall acquire any security in a private placement without the express written prior approval of the designated compliance officer, Mr. Wanger, or Mr. McQuaid. In deciding whether that approval should be granted, each of those persons will consider whether the investment opportunity should be reserved for Clients, and whether the opportunity has been offered because of the person's relationship with Clients. An investment person who has been authorized to acquire a security in a private placement must disclose that investment if he or she later participates in consideration of an investment in that issuer by Clients. Any investment decision for Clients relating to that security must be made by other investment personnel. E. Short-term trading. No investment person may profit from the purchase and sale, or sale and purchase, of the same (or equivalent) securities within 60 days. Any profit so realized will be required to be donated to a charitable organization selected by the investment person and approved by WAM's compliance officer, Mr. Wanger or Mr. McQuaid. This restriction does not apply to any profits from short-term trading in listed index options or futures contracts, or to any transaction which has received the prior approval of the compliance officer, Mr. Wanger or Mr. McQuaid. F. Gifts. No investment person or access person may accept any gift or other thing of more than a $100 value from any person or entity that does business with or on behalf of WAM, or seeks to do business with or on behalf of WAM. Gifts in excess of this value must either be returned to the donor or paid for by the recipient. It is not the intent of the code to prohibit the everyday courtesies of business life. Therefore, excluded from this prohibition are an occasional meal, ticket to a theater, entertainment, or sporting event that is an incidental part of a meeting that has a clear business purpose. G. Service as a director. No investment person or access person may serve as member of the board of directors or trustees of any business organization, other than a civic or charitable organization, without the prior written approval of the compliance officer, Mr. Wanger or Mr. McQuaid based on a determination that the board service would not be inconsistent with the interests of WAM or of its Clients. If an investment person is serving as a board member, that investment person shall not participate in making investment decisions relating to the securities of the company on whose board he or she sits. 4 Effective Date: March 15, 2000 IV. COMPLIANCE PROCEDURES A. Execution of personal securities transactions. All personal securities transactions must be conducted through brokerage accounts that have been identified to the compliance officer. Each such brokerage account must be set up to deliver duplicate copies of all confirmations and statements to the compliance officer. No exceptions to this policy will be made. B. Preclearance. Except as provided below, all personal securities transactions for investment personnel and access personnel must be cleared in advance by the compliance officer, Mr. Wanger or Mr. McQuaid (personal securities transactions for each of whom must be precleared in advance by one of the others). If the proposed trade is not executed within two business days after preclearance, the preclearance will expire and the request must be made again. Transactions in the following securities are exempt from the preclearance requirement but are subject to all other provisions of the Code, including Sections III and IV: 1. securities listed as exempt in Section V; 2. municipal securities; 3. straight debt securities; 4. listed index options and futures; 5. short sales of, or transactions that close or have the economic effect of closing a short position in, securities not held in the portfolio of, or under consideration for purchase by, any Client; and 6. transactions in an account (including an investment advisory account, trust account or other account) of such person (either alone or with others) over which a person other than the investment person or access person (including an investment adviser or trustee) exercises investment discretion if: . the investment person or access person does not know of the proposed transaction until after the transaction has been executed; . the investment person or access person has previously identified the account to WAM's compliance officer and has affirmed to the compliance officer that (in some if not all cases) he or she does not know of proposed transactions in that account until after they are executed. 5 Effective Date: March 15, 2000 This exclusion from the preclearance requirement is based upon the employee not having knowledge of any transaction until after that transaction is executed. Therefore, notwithstanding this general exclusion, if the investment person or access person becomes aware of any transaction in such investment advisory account before it is executed, the investment person must seek preclearance of that transaction before it is executed. C. Blackout periods. 1. Investment personnel. No personal securities transaction of an -------------------- investment person will be cleared (as provided in B., above) if any Client (1) has a conflicting order pending or (2) is actively considering a purchase or sale of the same security. A conflicting order is any order for the same security, or for an option on or a warrant for that security, which has not been fully executed. A purchase or sale of a security is being "actively considered" (a) when a recommendation to purchase or sell has been made for any Client and is pending, or, (b) with respect to the person making the recommendation, when that person is seriously considering making the recommendation. Absent extraordinary circumstances, a personal securities transaction for an investment person will not be approved until the sixth business day after completion of any transaction for any Client. 2. Access personnel. No personal securities transaction of an access ---------------- person may be executed on a day during which any Client has a pending order in the same security until that order is fully executed or withdrawn. D. Disclosure of personal holdings. Each investment person and access person shall disclose his or her personal securities holdings no later than ten days after commencement of employment with WAM (Attachment A), and annually thereafter (Attachment B) as of December 31 of each year. Annual reports shall be delivered to the compliance officer no later than January 30 of the following year. E. Reporting personal securities transactions. 1. Each investment person and access person shall (i) identify to WAM any brokerage or other account in which the person has a beneficial interest and (ii) instruct the broker or custodian to deliver to WAM's compliance officer duplicate confirmations of all transactions and duplicate monthly statements. 6 Effective Date: March 15, 2000 2. Each investment person and access person shall report all personal securities transactions during a month to the designated compliance officer no later than ten days after the end of the month. Monthly transaction reports shall include the following information: For each transaction: . the date of the transaction; . title, interest rate and maturity date (if applicable), number of shares and the principal amount of each security involved; . the nature of the transaction (i.e., purchase, sale, -------- gift, or other type of acquisition or disposition); ---- . the price at which the transaction was effected; . the name of the broker, dealer or bank with or through which the transaction was effected; and . the date the report is submitted. In addition, for each account established during the month in which securities are held for the benefit of an investment person or access person, the monthly report shall include: . the name of the broker, dealer or bank with whom the account was established; . the date the account was established; and . the date the report is submitted. 3. Reports relating to the personal securities transactions of the compliance officer shall be delivered to Mr. Wanger or Mr. McQuaid. F. Reports may be in any form. Monthly transaction reports filed by investment or access personnel pursuant to Section IV(E)(2) of this Code may be in any form (including copies of confirmations or account statements) including the information required by Section IV(E)(2). An investment person or access person will be deemed to have satisfied the monthly reporting requirement, and is not required to file a monthly report of any transactions: 7 Effective Date: March 15, 2000 (1) executed through WAM's trading desk, for which the trading department will provide to WAM's compliance department information about transactions; or (2) executed through brokerage or other accounts identified to WAM and for which duplicate monthly account statements showing all transactions are delivered to WAM. Any personal securities transaction of an investment person or access person which for any reason does not appear in the trading or brokerage records described above shall be reported as required by Section IV(E)(2) of this Code. G. Monitoring of transactions. WAM's compliance officer will monitor the trading patterns of investment personnel and access personnel. The trading of the compliance officer will be monitored by Mr. Wanger or Mr. McQuaid. H. Certification of compliance. Each investment person and access person is required to certify annually that he or she has read and understands the code and recognizes that he or she is subject to the code. Each investment person and access person is also required to certify annually that he or she has disclosed or reported all personal securities transactions required to be disclosed or reported under the code. To accomplish this, the compliance officer shall annually distribute a copy of the code and request certification by all covered persons. The compliance officer shall be responsible for ensuring that all personnel comply with the certification requirement. Each investment person and access person who has not engaged in any personal securities transaction during the preceding year for which a report was required to be filed pursuant to the code shall include a certification to that effect in his or her annual certification. I. Review by the Funds' Boards. The officers of Acorn and WAT shall prepare an Annual Issues and Certification Report to the board that: 1. summarizes existing procedures concerning personal investing and any changes in those procedures during the past year; 2. describes issues that arose during the previous year under the Code or procedures concerning personal investing, including but not limited to information about material violations of the Code and sanctions imposed; 3. certifies to the board that the Fund has adopted procedures reasonably necessary to prevent its investment persons and access persons from violating the Code; and 8 Effective Date: March 15, 2000 4. identifies any recommended changes in existing restrictions or procedures based upon experience under the Code, evolving industry practices, or developments in applicable laws or regulations. V. EXEMPT TRANSACTIONS The provisions of this Code are intended to restrict the personal investment activities of persons subject to the Code only to the extent necessary to accomplish the purposes of the Code. Therefore, the provisions of Section III (Restrictions on Personal Securities Transactions) and Section IV (Compliance Procedures) of this Code shall not apply to: A. Purchases or sales effected in any account over which the persons subject to this Code have no direct or indirect influence or control; B. Purchases or sales of: 1. U.S. government securities; 2. shares of open-end investment companies (mutual funds), including but not limited to shares of any mutual fund managed by WAM; and 3. bank certificates of deposit or commercial paper. C. Purchases or sales over which persons subject to this Code have no control; D. Purchases which are part of an automatic dividend reinvestment plan; E. Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of securities to the extent such rights were acquired from such issuer, and sales of such rights so acquired; and F. Purchases or sales which receive the prior approval of the compliance officer, Mr. Wanger or Mr. McQuaid because they are not inconsistent with this Code or the provisions of Rule 17j-l(a) under the Investment Company Act of 1940. A copy of Rule 17j-1 is attached as Appendix B. VI. CONSEQUENCES FOR FAILURE TO COMPLY WITH THE CODE Compliance with this Code of Ethics is a condition of employment by WAM or WAM, LLC, and retention of office as a trustee or officer of Acorn or WAT. Taking into consideration all relevant circumstances, the executive committee of WAM will determine what action is appropriate for any breach of the provisions of the Code. Possible actions include letters of sanction, suspension, termination of employment, or removal from office. 9 Effective Date: March 15, 2000 Reports filed pursuant to the Code will be maintained in confidence but will be reviewed by WAM to verify compliance with the Code. Additional information may be required to clarify the nature of particular transactions. VII. RETENTION OF RECORDS The compliance officer shall maintain the records listed below for a period of six years at WAM's principal place of business in an easily accessible place: A. a list of all persons subject to the Code during the period; B. receipts signed by all persons subject to the Code acknowledging receipt of copies of the Code and acknowledging that they are subject to it; C. a copy of each code of ethics that has been in effect at any time during the period; D. a copy of each report filed pursuant to the Code and a record of any known violations and actions taken as a result thereof during the period; and E. records evidencing prior approval of, and the rationale supporting, an acquisition by an investment person or access person of securities in a private placement. Adopted effective June 15, 1996 Amended effective January 1, 2000 March 15, 2000 10 Appendix A Examples of Beneficial Ownership For purposes of the Code, you will be deemed to have a beneficial interest in a security if you have the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security. Examples of beneficial ownership under this definition include: . securities you own, no matter how they are registered, and including securities held for you by others (for example, by a custodian or broker, or by a relative, executor or administrator) or that you have pledged to another (as security for a loan, for example); . securities held by a trust of which you are a beneficiary (except that, if your interest is a remainder interest and you do not have or participate in investment control of trust assets, you will not be deemed to have a beneficial interest in securities held by the trust); . securities held by you as trustee or co-trustee, where either you or any member of your immediate family (i.e., spouse, children or descendants, stepchildren, parents and their ancestors, and stepparents, in each case treating a legal adoption as blood relationship) has a beneficial interest (using these rules) in the trust. . securities held by a trust of which you are the settlor, if you have the power to revoke the trust without obtaining the consent of all the beneficiaries and have or participate in investment control; . securities held by any partnership in which you are a general partner, to the extent of your interest in partnership capital or profits; . securities held by a personal holding company controlled by you alone or jointly with others; . securities held by (i) your spouse, unless legally separated, or you and your spouse jointly, or (ii) your minor children or any immediate family member of you or your spouse (including an adult relative), directly or through a trust, who is sharing your home, even if the securities were not received from you and the income from the securities is not actually used for the maintenance of your household; or . securities you have the right to acquire (for example, through the exercise of a derivative security), even if the right is not presently exercisable, or securities as to which, through any other type of arrangement, you obtain benefits substantially equivalent to those of ownership. Appendix A You will not be deemed to have beneficial ownership of securities in the following situations: . securities held by a limited partnership in which you do not have a controlling interest and do not have or share investment control over the partnership's portfolio; and . securities held by a foundation of which you are a trustee and donor, provided that the beneficiaries are exclusively charitable and you have no right to revoke the gift. These examples are not exclusive. There are other circumstances in which you may be deemed to have a beneficial interest in a security. Any questions about whether you have a beneficial interest should be directed to WAM's designated compliance officer, Mr. Wanger or Mr. McQuaid. Appendix B (S)(S)270.17j-1 Personal investment activities of investment company personnel. (a) Definitions. For purposes of this section: (1) Access Person means: (i) Any director, officer, general partner or Advisory Person of a Fund or of a Fund's investment adviser. (A) If an investment adviser is primarily engaged in a business or businesses other than advising Funds or other advisory clients, the term Access Person means any director, officer, general partner or Advisory Person of the investment adviser who, with respect to any Fund, makes any recommendation, participates in the determination of which recommendation will be made, or whose principal function or duties relate to the determination of which recommendation will be made, or who, in connection with his or her duties, obtains any information concerning recommendations on Covered Securities being made by the investment adviser to any Fund. (B) An investment adviser is "primarily engaged in a business or businesses other than advising Funds or other advisory clients" if, for each of its most recent three fiscal years or for the period of time since its organization, whichever is less, the investment adviser derived, on an unconsolidated basis, more than 50 percent of its total sales and revenues and more than 50 percent of its income (or loss), before income taxes and extraordinary items, from the other business or businesses. (ii) Any director, officer or general partner of a principal underwriter who, in the ordinary course of business, makes, participates in or obtains information regarding, the purchase or sale of Covered Securities by the Fund for which the principal underwriter acts, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to the Fund regarding the purchase or sale of Covered Securities. (2) Advisory Person of a Fund or of a Fund's investment adviser means: (i) Any employee of the Fund or investment adviser (or of any company in a control relationship to the Fund or investment adviser) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of Covered Securities by a Fund, or whose functions relate to the making of any recommendations with respect to the purchases or sales; and (ii) Any natural person in a control relationship to the Fund or investment adviser who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of Covered Securities by the Fund. (3) Control has the same meaning as in section 2(a)(9) of the Act [15 U.S.C. 80a-2(a)(9)]. B-1 Appendix B (4) Covered Security means a security as defined in section 2(a)(36) of the Act [15 U.S.C. 80a-2(a)(36)], except that it does not include: (i) Direct obligations of the Government of the United States; (ii) Bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and (iii) Shares issued by open-end Funds. (5) Fund means an investment company registered under the Investment Company Act. (6) An Initial Public Offering means an offering of securities registered under the Securities Act of 1933 [15 U.S.C. 77a], the issuer of which, immediately before the registration, was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934 [15 U.S.C. 78m or 78o(d)]. (7) Investment Personnel of a Fund or of a Fund's investment adviser means: (i) Any employee of the Fund or investment adviser (or of any company in a control relationship to the Fund or investment adviser) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund. (ii) Any natural person who controls the Fund or investment adviser and who obtains information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Fund. (8) A Limited Offering means an offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) or section 4(6) [15 U.S.C. 77d(2) or 77d(6)] or pursuant to rule 504, rule 505, or rule 506 [17 CFR 230.504, 230.505, or 230.506] under the Securities Act of 1933. (9) Purchase or sale of a Covered Security includes, among other things, the writing of an option to purchase or sell a Covered Security. (10) Security Held or to be Acquired by a Fund means: (i) Any Covered Security which, within the most recent 15 days: (A) Is or has been held by the Fund; or (B) Is being or has been considered by the Fund or its investment adviser for purchase by the Fund; and (ii) Any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in paragraph (a)(10)(i) of this section. (b) Unlawful Actions. It is unlawful for any affiliated person of or principal underwriter for a Fund, or any affiliated person of an investment adviser of or principal underwriter for a Fund, in B-2 Appendix B connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by the Fund: (1) To employ any device, scheme or artifice to defraud the Fund; (2) To make any untrue statement of a material fact to the Fund or omit to state a material fact necessary in order to make the statements made to the Fund, in light of the circumstances under which they are made, not misleading; (3) To engage in any act, practice or course of business that operates or would operate as a fraud or deceit on the Fund; or (4) To engage in any manipulative practice with respect to the Fund. (c) Code of Ethics. (1) Adoption and Approval of Code of Ethics. (i) Every Fund (other than a money market fund or a Fund that does not invest in Covered Securities) and each investment adviser of and principal underwriter for the Fund, must adopt a written code of ethics containing provisions reasonably necessary to prevent its Access Persons from engaging in any conduct prohibited by paragraph (b) of this section. (ii) The board of directors of a Fund, including a majority of directors who are not interested persons, must approve the code of ethics of the Fund, the code of ethics of each investment adviser and principal underwriter of the Fund, and any material changes to these codes. The board must base its approval of a code and any material changes to the code on a determination that the code contains provisions reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by paragraph (b) of this section. Before approving a code of a Fund, investment adviser or principal underwriter or any amendment to the code, the board of directors must receive a certification from the Fund, investment adviser or principal underwriter that it has adopted procedures reasonably necessary to prevent Access Persons from violating the investment adviser's or principal underwriter's code of ethics. The Fund's board must approve the code of an investment adviser or principal underwriter before initially retaining the services of the investment adviser or principal underwriter. The Fund's board must approve a material change to a code no later than six months after adoption of the material change. (iii) If a Fund is a unit investment trust, the Fund's principal underwriter or depositor must approve the Fund's code of ethics, as required by paragraph (c)(1)(ii) of this section. If the Fund has more than one principal underwriter or depositor, the principal underwriters and depositors may designate, in writing, which principal underwriter or depositor must conduct the approval required by paragraph (c)(1)(ii) of this section, if they obtain written consent from the designated principal underwriter or depositor. (2) Administration of Code of Ethics. (i) The Fund, investment adviser and principal underwriter must use reasonable diligence and institute procedures reasonably necessary to prevent violations of its code of ethics. B-3 Appendix B (ii) No less frequently than annually, every Fund (other than a unit investment trust) and its investment advisers and principal underwriters must furnish to the Fund's board of directors, and the board of directors must consider, a written report that: (A) Describes any issues arising under the code of ethics or procedures since the last report to the board of directors, including, but not limited to, information about material violations of the code or procedures and sanctions imposed in response to the material violations; and (B) Certifies that the Fund, investment adviser or principal underwriter, as applicable, has adopted procedures reasonably necessary to prevent Access Persons from violating the code. (3) Exception for Principal Underwriters. The requirements of paragraphs (c)(1) and (c)(2) of this section do not apply to any principal underwriter unless: (i) The principal underwriter is an affiliated person of the Fund or of the Fund's investment adviser; or (ii) An officer, director or general partner of the principal underwriter serves as an officer, director or general partner of the Fund or of the Fund's investment adviser. (d) Reporting Requirements of Access Persons. (1) Reports Required. Unless excepted by paragraph (d)(2) of this section, every Access Person of a Fund (other than a money market fund or a Fund that does not invest in Covered Securities) and every Access Person of an investment adviser of or principal underwriter for the Fund, must report to that Fund, investment adviser or principal underwriter: (i) Initial Holdings Reports. No later than 10 days after the person becomes an Access Person, the following information: (A) The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person; (B) The name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and (C) The date that the report is submitted by the Access Person. (ii) Quarterly Transaction Reports. No later than 10 days after the end of a calendar quarter, the following information: (A) With respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect beneficial ownership: B-4 Appendix B (1) The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Covered Security involved; (2) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition); (3) The price of the Covered Security at which the transaction was effected; (4) The name of the broker, dealer or bank with or through which the transaction was effected; and (5) The date that the report is submitted by the Access Person. (B) With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person: (1) The name of the broker, dealer or bank with whom the Access Person established the account; (2) The date the account was established; and (3) The date that the report is submitted by the Access Person. (iii) Annual Holdings Reports. Annually, the following information (which information must be current as of a date no more than 30 days before the report is submitted): (A) The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership; (B) The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and (C) The date that the report is submitted by the Access Person. (2) Exceptions from Reporting Requirements. (i) A person need not make a report under paragraph (d)(1) of this section with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control. (ii) A director of a Fund who is not an "interested person" of the Fund within the meaning of section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)], and who would be required to make a report solely by reason of being a Fund director, need not make: (A) An initial holdings report under paragraph (d)(1)(i) of this section and an annual holdings report under paragraph (d)(1)(iii) of this section; and B-5 (B) A quarterly transaction report under paragraph (d)(1)(ii) of this section, unless the director knew or, in the ordinary course of fulfilling his or her official duties as a Fund director, should have known that during the 15-day period immediately before or after the director's transaction in a Covered Security, the Fund purchased or sold the Covered Security, or the Fund or its investment adviser considered purchasing or selling the Covered Security. (iii) An Access Person to a Fund's principal underwriter need not make a report to the principal underwriter under paragraph (d)(1) of this section if: (A) The principal underwriter is not an affiliated person of the Fund (unless the Fund is a unit investment trust) or any investment adviser of the Fund; and (B) The principal underwriter has no officer, director or general partner who serves as an officer, director or general partner of the Fund or of any investment adviser of the Fund. (iv) An Access Person to an investment adviser need not make a quarterly transaction report to the investment adviser under paragraph (d)(1)(ii) of this section if all the information in the report would duplicate information required to be recorded under ss.ss. 275.204-2(a)(12) or 275.204-2(a)(13) of this chapter. (v) An Access Person need not make a quarterly transaction report under paragraph (d)(1)(ii) of this section if the report would duplicate information contained in broker trade confirmations or account statements received by the Fund, investment adviser or principal underwriter with respect to the Access Person in the time period required by paragraph (d)(1)(ii), if all of the information required by that paragraph is contained in the broker trade confirmations or account statements, or in the records of the Fund, investment adviser or principal underwriter. (3) Review of Reports. Each Fund, investment adviser and principal underwriter to which reports are required to be made by paragraph (d)(1) of this section must institute procedures by which appropriate management or compliance personnel review these reports. (4) Notification of Reporting Obligation. Each Fund, investment adviser and principal underwriter to which reports are required to be made by paragraph (d)(1) of this section must identify all Access Persons who are required to make these reports and must inform those Access Persons of their reporting obligation. (5) Beneficial Ownership. For purposes of this section, beneficial ownership is interpreted in the same manner as it would be under ss. 240.16a-1(a)(2) of this chapter in determining whether a person is the beneficial owner of a security for purposes of section 16 of the Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules and regulations thereunder. Any report required by paragraph (d) of this section may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the Covered Security to which the report relates. (e) Pre-approval of Investments in IPOs and Limited Offerings. Investment Personnel of a Fund or its investment adviser must obtain approval from the Fund or the Fund's investment adviser before B-6 Appendix B directly or indirectly acquiring beneficial ownership in any securities in an Initial Public Offering or in a Limited Offering. (f) Recordkeeping Requirements. (1) Each Fund, investment adviser and principal underwriter that is required to adopt a code of ethics or to which reports are required to be made by Access Persons must, at its principal place of business, maintain records in the manner and to the extent set out in this paragraph (f), and must make these records available to the Commission or any representative of the Commission at any time and from time to time for reasonable periodic, special or other examination: (A) A copy of each code of ethics for the organization that is in effect, or at any time within the past five years was in effect, must be maintained in an easily accessible place; (B) A record of any violation of the code of ethics, and of any action taken as a result of the violation, must be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs; (C) A copy of each report made by an Access Person as required by this section, including any information provided in lieu of the reports under paragraph (d)(2)(v) of this section, must be maintained for at least five years after the end of the fiscal year in which the report is made or the information is provided, the first two years in an easily accessible place; (D) A record of all persons, currently or within the past five years, who are or were required to make reports under paragraph (d) of this section, or who are or were responsible for reviewing these reports, must be maintained in an easily accessible place; and (E) A copy of each report required by paragraph (c)(2)(ii) of this section must be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place. (2) A Fund or investment adviser must maintain a record of any decision, and the reasons supporting the decision, to approve the acquisition by investment personnel of securities under paragraph (e), for at least five years after the end of the fiscal year in which the approval is granted. B-7 ATTACHMENT A ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS Code of Ethics. Wanger Asset Management, L.P. ("WAM"), Acorn Investment Trust ("Acorn") and Wanger Advisors Trust ("WAT") have adopted a written Code of Ethics (the "Code") to avoid potential conflicts of interest by WAM personnel. A copy of the Code is attached to this letter. As a condition of your continued employment with WAM and the retention of your position, if any, as an officer of Acorn or WAT, you are required to read, understand and abide by the Code. Policy and Procedures Concerning Material Non-Public Information. WAM also has adopted a written policy concerning the use and handling of material non-public information (the "Policy"), a copy of which is also attached. Acknowledgment of compliance with the Policy is an additional condition of continued employment with WAM. Compliance Program. The Code and Policy require that all personnel furnish to WAM's compliance officer the names and addresses of any firm with which you have any investment account. You are also required to furnish to WAM's compliance officer copies of your monthly or quarterly account statements, or other documents, showing all purchases or sales of securities in any such account, or which are effected by you or for your benefit, or the benefit of any member of your household. Additionally, you are required to furnish a report of your personal securities holdings within 10 days of commencement of your employment with WAM and annually thereafter. These requirements apply to any investment account, such as an account at a brokerage house, trust account at a bank, custodial account or similar types of accounts. WAM's compliance program also requires that you report any contact with any securities issuer, government or its personnel, or others, that, in the usual course of business, might involve material non-public financial information. Only investment personnel are permitted to make such contacts. The Policy requires that you bring to the attention of the compliance officer any information you receive from any source which might be material non-public information. Any questions concerning the Code or the Policy should be directed to WAM's Compliance Officer. - -------------------------------------------------------------------------------- I affirm that I have read and understand the Code of Ethics ("Code") and the Policy Concerning Material Non-Public Information ("Policy"). I agree to the terms and conditions set forth in the Code and the Policy. - -------------------------------- ---------------- Signature Date ATTACHMENT B ANNUAL AFFIRMATION OF COMPLIANCE I affirm that: 1. I have again read and, during the past year to the best of my knowledge, have complied with the Code of Ethics ("Code") and the Policy Concerning Material Non-Public Information ("Policy"). 2. I have provided to the firm's compliance officer the names and addresses of each investment account that I have with any firm, including, but not limited to, broker-dealers, banks and others. (List of known accounts attached.) 3. I have provided to the compliance officer of the firm copies of account statements showing each and every transaction in any security in which I have a beneficial interest, as defined in the Code during the most recently-ended calendar year or During the most recent calendar year there were no transactions in any security in which I had a beneficial interest required to be reported pursuant to the Code. 4. I have provided to the compliance officer a report of my personal securities holdings as of the end of the most recent calendar year, including the title, number of shares and principal amount of each security in which I have any direct or indirect beneficial ownership. - -------------------------------- ----------------- Signature Date EX-99.P.2 6 CODE OF ETHICS FOR NON-INTERESTED BOARD MEMBERS Exhibit p.2 ACORN INVESTMENT TRUST Code of Ethics for Non-Interested Board Members (adopted effective June 15, 1996, amended May 25, 1999) The Investment Company Act and rules require that Acorn Investment Trust ("Acorn" or the "Fund") establish standards and procedures for the detection and prevention of certain conflicts of interest, including activities by which persons having knowledge of the investments and investment intentions of Acorn might take advantage of that knowledge for their own benefit. For that purpose, Acorn has adopted this Code of Ethics (the "Code") applicable to those members of Acorn's board of trustees who are not affiliated with Acorn or Wanger Asset Management, L.P. ("WAM"), Acorn's investment adviser, and a code of ethics applying to persons affiliated with WAM (the "WAM Code"). Any questions about the Code or about the applicability of the Code to a personal securities transaction should be directed to WAM's designated compliance officer, Ralph Wanger, Charles P. McQuaid, or counsel for the Fund. I. STATEMENT OF PRINCIPLE General Prohibitions. The Investment Company Act and rules make it illegal for any person covered by the Code, directly or indirectly, in connection with the purchase or sale of a security held or to be acquired by the Fund to: a. employ any device, scheme, or artifice to defraud the Funds; b. make to the Funds any untrue statement of a material fact or omit to state to the Funds a material fact necessary in order to make the statements made, in light of circumstances under which they are made, not misleading; c. engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Funds; or d. engage in any manipulative practice with respect to the Funds. Personal Securities Transactions. The Code regulates personal securities transactions as a part of the effort by the Fund to detect and prevent conduct that might violate the general prohibitions outlined above. A personal securities transaction is a transaction in a security in which the person subject to this Code has a beneficial interest. Security is interpreted very broadly for this purpose, and includes any right to acquire any security (an option or warrant, for example). You have a beneficial interest in a security in which you have, directly or indirectly, the opportunity to profit or share in any profit derived from a transaction in the security, or in which you have an indirect interest, including beneficial ownership by your spouse or minor children or other dependents living in your household, or your share of securities held by a partnership of which you are a general partner. Technically, the rules under section 16 of the Securities Exchange Act of 1934 will be applied to determine if you have a beneficial interest in a security (even if the security would not be within the scope of section 16). Examples of beneficial interest and a copy of Rule 16a-1(a), defining beneficial ownership, are attached as Appendix A. In any situation where the potential for conflict exists, transactions for the Fund must take precedence over any personal transaction. The Fund's non-interested trustees owe a duty to the Fund and its shareholders to conduct their personal securities transactions in a manner which does not interfere with the portfolio transactions of the Fund, take inappropriate advantage of their relationship with the Fund, or create any actual or potential conflict of interest between their interests and the interests of the Fund and its shareholders. Situations not specifically governed by this Code of Ethics will be resolved in light of this general principle. II. TO WHOM THE CODE'S RESTRICTIONS APPLY The Code applies to the Fund's outside board members -- those members of the board of Acorn who are not affiliated with WAM, are not officers or 5% shareholders of Acorn, and are not otherwise "interested persons" of WAM. The outside board members subject to the Code are listed on Schedule A hereto. III. RESTRICTIONS ON PERSONAL SECURITIES TRANSACTIONS A. No Transactions with the Funds. No outside board member shall knowingly sell to or purchase from the Fund any security or other property, except securities issued by the Fund. B. No Conflicting Transactions. No outside board member shall purchase or sell any security in which such person has or would thereby acquire a beneficial interest which the person knows or has reason to believe is being purchased or sold or considered for purchase or sale by the Fund, until the Fund's transactions have been completed or consideration of such transactions has been abandoned. 2 IV. COMPLIANCE PROCEDURES A. Reporting Personal Securities Transactions. 1. An outside board member shall report to WAM's compliance officer, within ten days after the end of the calendar quarter in which a reportable transaction occurs, any personal securities transaction in which the outside board member, at the time of the transaction, knew, or in the ordinary course of fulfilling his duties as a trustee should have known, that on the day of the transaction or within 15 days before or after that day a purchase or sale of that security was made by or considered for the Fund. B. Form of Reports. Reports of personal securities transactions may be in any form (including copies of confirmations or monthly statements) but must include (i) the date of the transaction, the title and number of shares, and the principal amount of each security involved; (ii) the nature of the transaction (i.e., purchase, sale, gift, or other type of acquisition or disposition); (iii) the price at which the transaction was effected; (iv) the name of the broker, dealer, or bank with or through whom the transaction was effected; and (v) the name of the reporting person. C. Monitoring of Transactions. WAM's compliance officer will review the reports of personal securities transactions of the Fund's outside board members. D. Certification of Compliance. Each outside board member is required to certify annually that he or she has read and understands the Code and recognizes that he or she is subject to the Code. To accomplish this, the Secretary of the Fund shall annually distribute a copy of the Code and request certification. E. Review by the Fund's Board. The officers of the Fund shall prepare an annual report to the board that: 1. summarizes existing procedures concerning personal investing and any changes in those procedures during the past year; 2. identifies any violations of the Code requiring significant remedial action during the past year; and 3. identifies any recommended changes in existing restrictions or procedures based upon experience under the Code, evolving industry practices, or developments in applicable laws or regulations. 3 V. EXEMPT TRANSACTIONS The provisions of this Code are intended to restrict the personal investment activities of persons subject to the Code only to the extent necessary to accomplish the purposes of the Code. Therefore, the provisions of Section III (Restrictions on Personal Securities Transactions) and Section IV (Compliance Procedures) of this Code shall not apply to: A. Purchases or sales effected in any account over which the persons subject to this Code have no direct or indirect influence or control; B. Purchases or sales of: 1. U.S. government securities; 2. shares of open-end investment companies (mutual funds), including but not limited to shares of any series of Acorn or WAT; and 3. bank certificates of deposit or commercial paper. C. Purchases or sales over which neither the person subject to this Code nor the Fund has control; D. Purchases that are part of an automatic dividend reinvestment plan; E. Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of securities to the extent such rights were acquired from such issuer, and sales of such rights so acquired; and F. Purchases or sales that receive the prior approval of the Fund's compliance officer, Mr. Wanger, or Mr. McQuaid because they are not inconsistent with this Code or the provisions of Rule 17j-1(a) under the Investment Company Act of 1940. A copy of Rule 17j-1 is attached as Appendix B. VI. CONSEQUENCES OF FAILURE TO COMPLY WITH THE CODE Compliance with this Code of Ethics is a condition of retention of positions with the Fund. The Fund's board of trustees shall determine what action is appropriate for any breach of the provisions of the Code by an outside board member, which may include removal from the board. Reports filed pursuant to the Code will be maintained in confidence but will be reviewed by WAM or the Fund to verify compliance with the Code. Additional information may be required to clarify the nature of particular transactions. 4 VII. RETENTION OF RECORDS WAM's designated compliance officer shall maintain the records listed below for a period of five years at the Fund's principal place of business in an easily accessible place: A. a list of all persons subject to the Code during the period; B. receipts signed by all persons subject to the Code acknowledging receipt of copies of the Code and acknowledging that they are subject to it; C. a copy of each code of ethics that has been in effect at any time during the period; and D. a copy of each report filed pursuant to the Code and a record of any known violation and action taken as a result thereof during the period. * * * * * Adopted 5/28/96 Amended 5/25/99 5 Schedule A Leo A. Guthart Irving B. Harris Jerome Kahn, Jr. David C. Kleinman James H. Lorie Roger S. Meier Allan B. Muchin Robert E. Nason Katherine Schipper ACORN INVESTMENT TRUST Code of Ethics Affirmation I affirm that I have received a copy of the Acorn Investment Trust Code of Ethics for Non-Interested Board Members (the "Code") and have read and understand it. I acknowledge that I am subject to the Code and will comply with the Code in all respects. Date: ________________ ------------------------------ Signature -----END PRIVACY-ENHANCED MESSAGE-----