497 1 0001.txt SUPPLEMENT DATED JUNE 9, 2000 ACORN FUND ACORN INTERNATIONAL ACORN USA ACORN TWENTY ACORN FOREIGN FORTY Supplement dated June 12, 2000 to Prospectus dated May 1, 2000 of Acorn Investment Trust On June 10, 2000, Wanger Asset Management, L.P. (WAM), the Funds' investment adviser, and Wanger Asset Management, Ltd., the general partner of WAM, entered into an Agreement and Plan of Merger (Merger Agreement) with Liberty Financial Companies, Inc. (Liberty) and WAM Acquisition L.P., a newly formed limited partnership (Liberty Sub). Under the Merger Agreement, Liberty Sub would be merged with and into WAM. WAM would be the surviving entity and would be a wholly-owned subsidiary of Liberty. The merger cannot be consummated unless the Acorn trustees (on behalf of each of the Funds) and the shareholders of Acorn Fund, Acorn International and Acorn USA approve a new investment advisory agreement with WAM (Proposed Advisory Agreement) and certain other conditions are satisfied. The Acorn trustees have not yet approved the Proposed Advisory Agreement. They are expected to meet to consider the terms of the Proposed Advisory Agreement before the end of June 2000. If the trustees approve the Proposed Advisory Agreement, you will receive a proxy statement describing the merger and the Proposed Advisory Agreement in more detail and seeking approval of the Proposed Advisory Agreement by the shareholders of each Fund. Subject to the receipt of the necessary trustee and shareholder approvals and the satisfaction of other conditions contained in the Merger Agreement, it is anticipated that the closing of the merger will occur in the fourth quarter of 2000. At that time, WAM would become a wholly-owned subsidiary of Liberty and would thereafter operate under the name Liberty Wanger Asset Management, L.P. (Liberty WAM). Liberty WAM would continue to be headquartered in Chicago and Ralph Wanger would continue to act as president. Liberty WAM would continue as the investment adviser of the Funds, with the Funds' current portfolio managers continuing to manage the Funds following the same investment strategies and objectives currently in place. It is anticipated that Acorn would enter into new agreements with affiliates of Liberty for the provision of administrative, distribution, transfer agency and other services to the Funds. ACORN INVESTMENT TRUST STATEMENT OF ADDITIONAL INFORMATION May 1, 2000 Supplemented on June 12, 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.......................................77 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 On June 10, 2000, Wanger Asset Management, L.P. ("WAM"), the Funds' investment adviser, and Wanger Asset Management Ltd. ("WAM Ltd."), the general partner of WAM, entered into an Agreement and Plan of Merger ("Merger Agreement") with Liberty Financial Companies, Inc. ("Liberty") and WAM Acquisition L.P., a newly formed limited partnership ("Liberty Sub"). Liberty, 600 Atlantic Avenue, Boston, Massachusetts 02210-2214, is a majority-owned subsidiary of Liberty Mutual Insurance Company. Under the Merger Agreement, Liberty Sub would be merged with and into WAM. WAM would be the surviving entity and would be a wholly-owned subsidiary of Liberty. The merger cannot be consummated unless the Acorn trustees (on behalf of each of the Funds) and the shareholders of Acorn Fund, Acorn International and Acorn USA approve a new investment advisory agreement with WAM ("Proposed Advisory Agreement") and certain other conditions are satisfied. The Acorn trustees have not yet approved the Proposed Advisory Agreement. They are expected to meet to consider the terms of the Proposed Advisory Agreement before the end of June 2000. If the trustees approve the Proposed Advisory Agreement, you will receive a proxy statement describing the merger and the Proposed Advisory Agreement in more detail and seeking approval of the Proposed Advisory Agreement by the shareholders of each Fund. Subject to the receipt of the necessary trustee and shareholder approvals and the satisfaction of other conditions contained in the Merger Agreement, it is anticipated that the closing of the merger will occur in the fourth quarter of 2000. At that time, WAM would become a wholly-owned subsidiary of Liberty and would thereafter operate under the name Liberty Wanger Asset Management, L.P. ("Liberty WAM"). Liberty WAM would continue to be headquartered in Chicago and Ralph Wanger would continue to act as president. Liberty WAM would continue as the investment adviser of the Funds, with the Funds' current portfolio managers continuing to manage the Funds following the same investment strategies and objectives currently in place. It is anticipated that Acorn would enter into new agreements with affiliates of Liberty for the provision of administrative, distribution, transfer agency and other services to the Funds. 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, WAM may aggregate such positions as to the currency hedged. If a Fund enters into a forward contract hedging an anticipated purchase of portfolio securities, assets of 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, 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. WAM is currently undergoing merger negotiations with Liberty Financial Companies, Inc. The Merger Agreement requires that the trustees (on behalf of each of the Funds) and the shareholders of Acorn Fund, Acorn International and Acorn USA approve a new investment advisory agreement with WAM. For more information on the merger negotiations, see page 2 of this SAI. 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. 48 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
49 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. 50 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
51
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
52
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. 53 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
54
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
55 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 56 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. 57 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
58 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
59 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 60 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 61 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 62 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. 63 (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% 64 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 65 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 ========================================================================================================================
66 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 67
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 =========================================================================================
68 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 69
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 ==================================================================================================
70 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 71
------------------------------------------------------------------------- 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
72
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 73 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. 74 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: 75 ------------------------------------------------- (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 =========================================================================== 76 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 77 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. 78