-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GOqXRaaqc9DVJo9rHxPIWY2LZ3ItlyEqbWfXuPXzJ6ihtbAqAYuQQISrEtZFE4A1 hbLYtWCSpnNFt8O2L++LRQ== 0000950131-97-002989.txt : 19970502 0000950131-97-002989.hdr.sgml : 19970502 ACCESSION NUMBER: 0000950131-97-002989 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970501 EFFECTIVENESS DATE: 19970501 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACORN INVESTMENT TRUST CENTRAL INDEX KEY: 0000002110 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 362692100 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-34223 FILM NUMBER: 97593035 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-01829 FILM NUMBER: 97593036 BUSINESS ADDRESS: STREET 1: 227 W MONROE STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126349200 MAIL ADDRESS: STREET 1: 227 W MONROE ST STE 3000 STREET 2: ATTN: BRUCE LAUER CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: ACORN FUND INC DATE OF NAME CHANGE: 19920703 485BPOS 1 ACORN INVESTMENT TRUST POST-EFFECTIVE AMEND. #57 As filed with the Securities and Exchange Commission on May 1, 1997 Securities Act registration no. 2-34223 Investment Company Act file no. 811-1829 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A ______________________________ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 57 and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 32 ______________________________ ACORN INVESTMENT TRUST (Registrant) 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Telephone number: 312/634-9200 ______________________________ Ralph Wanger Janet D. Olsen Acorn Investment Trust Bell, Boyd & Lloyd 227 West Monroe Street, Suite 3000 70 West Madison Street, Suite 3300 Chicago, Illinois 60606 Chicago, Illinois 60602 (Agents for service) _____________________________ Amending Parts A, B, and C, and filing exhibits _____________________________ It is proposed that this filing will become effective: [ ] immediately upon filing pursuant to rule 485(b) [X] on May 1, 1997 pursuant to rule 485(b) [ ] 60 days after filing pursuant to rule 485(a)(1) [ ] on ___________ pursuant to rule 485(a)(1) [ ] 75 days after filing pursuant to rule 485(a)(2) [ ] on ___________ pursuant to rule 485(a)(2). - -------------------------------------------------------------------------------- Registrant has previously elected to register pursuant to Rule 24f-2 an indefinite number of shares of beneficial interest of its series designated Acorn Fund, Acorn International and Acorn USA. On February 26, 1997, Registrant filed its Rule 24f-2 Notice for the fiscal year ended December 31, 1996. - -------------------------------------------------------------------------------- ACORN INVESTMENT TRUST Cross-reference sheet pursuant to rule 495(a) of Regulation C Item Location or caption* - ---- -------------------------------- Part A (prospectus) - Acorn Fund, Acorn International and Acorn USA ------------------------------------------------------------------- 1(a)&(b) Front cover 2(a) Expenses and Performance - Expenses (b)&(c) Contents; The Funds at a Glance 3(a) Financial History (b) Not applicable (c) Performance (d) Performance 4(a)(i) Organization (ii) The Funds at a Glance; The Acorn Philosophy; Securities, Investment Practices, and Risks (b) Securities, Investment Practices, and Risks (c) The Funds at a Glance - Who May Want to Invest; The Acorn Philosophy; Securities, Investment Practices, and Risks 5(a) Organization (b) Organization; Management; The Funds in Detail - Expenses; Expenses and Performance - Expenses; How to Contact Us (c) Organization; Management (d) Not applicable (e) How to Buy Shares; How to Sell Shares; How to Contact Us (f) Expenses and Performance - Expenses; The Funds in Detail - Expenses (g) Not applicable 5A The information called for is contained in the annual report 6(a) Organization; How to Buy Shares; How to Sell Shares; Exchange Plan Restrictions (b) Not applicable (c) Shareholder and Account Policies - Purchases; Shareholder and Account Policies - Redemptions; Exchange Plan Restrictions (d) Not applicable (e) Doing Business With Acorn; How to Buy Shares; How to Sell Shares; Shareholder and Account Policies - Statements and Reports; How to Contact Us (f)&(g) Dividends, Capital Gains, and Taxes 7 Doing Business with Acorn; How to Buy Shares; Shareholder and Account Policies - Purchases; Shareholder and Account Policies - Telephone Exchange Plan (a) Not applicable - -------------------- *References are to captions within the part of the registration statement to which the particular item relates except as otherwise indicated. i Item Location or caption* - ---- -------------------------------- (b) How to Buy Shares; Shareholder and Account Policies - Share Price; Shareholder and Account Policies - Telephone Exchange Plan (c) Not applicable (d) How to Buy Shares; Exchange Plan Restrictions (e)&(f) Not applicable 8(a) Doing Business with Acorn; How to Sell Shares; Shareholder and Account Policies - Redemptions; Shareholder and Account Policies - Telephone Exchange Plan; Exchange Plan Restrictions (b) Shareholder and Account Policies - Purchases (c)&(d) Shareholder and Account Policies - Redemptions 9 Not applicable - --------------- *References are to captions within the part of the registration statement to which the particular item relates except as otherwise indicated. ii
Item Location or caption* - ---- -------------------- Part B (Statement of Additional Information) - Acorn Fund, ---------------------------------------------------------- Acorn International and Acorn USA --------------------------------- 10 Front cover 11 Front cover 12 Part A - Organization 13 (a)-(c) Investment Objectives and Policies; Investment Techniques and Risks; Investment Restrictions (d) Investment Techniques and Risks 14 (a)-(b) Trustees and Officers (c) Not applicable 15 (a) & (b) Not applicable (c) Trustees and Officers 16 (a)(i) Investment Adviser (ii) Trustees and Officers (iii) Investment Adviser (b) Investment Adviser (c)-(g) Not applicable (h) Custodian; Independent Auditors (i) Not applicable 17 (a) Portfolio Transactions (b) Not applicable (c) & (d) Portfolio Transactions (e) Not applicable 18 (a) The Trust (b) Not applicable 19 (a)-(c) Purchasing and Redeeming Shares 20 Additional Tax Information 21 (a)-(b) Distributor 21 (c) Not Applicable 22 Performance Information 23 Information About the Funds
- ----------------- *References are to captions within the part of the registration statement to which the particular item relates except as otherwise indicated. iii
Item Location or caption* - ---- -------------------- Part C (Other Information) -------------------------- 24 Financial statements and exhibits 25 Persons controlled by or under common control with registrant 26 Number of holders of securities 27 Indemnification 28 Business and other connections of investment adviser 29 Principal underwriters 30 Location of accounts and records 31 Management services 32 Undertakings
- ---------------- *References are to captions within the part of the registration statement to which the particular item relates except as otherwise indicated. iv Ralph Wanger's book A Zebra in Lion Country: Ralph Wanger's Investment Survival Guide (Simon & Schuster, 1997) describes the investment philosophies and techniques that have guided Mr. Wanger's management of the Acorn funds. He has been portfolio manager of Acorn Fund since it was founded by Irving Harris in 1970. Shareholders of Acorn Fund, Acorn International or Acorn USA may purchase a copy of A Zebra in Lion Country directly from the publisher at a reduced price of $18.00, including tax, shipping and handling. Wanger Asset Management, L.P. ("WAM") is supplying these books to shareholders at WAM's cost. Through July 31, 1997, WAM will send, at its expense, one copy of A Zebra in Lion Country to each investor making a new investment of $5,000 or more in Acorn Fund, Acorn International or Acorn USA. An investment in any of the funds by the exchange privilege does not qualify to receive a copy of the book. A single investor may acquire multiple copies of the book by making multiple investments, each of $5,000 or more, in any of the Acorn funds on different days. Supplement dated April 30, 1997 to the Prospectus of Acorn Fund, Acorn International and Acorn USA dated April 30, 1997 [PHOTO OF ACORNS] prospectus 1997 ------------------------- The Acorn Family of Funds Prospectus and Application April 30, 1997 Managed by Wanger Asset Management, L.P. Dear Investor: Thank you for your interest in the Acorn Family of Funds. This prospectus outlines the funds' policies and procedures, and contains quick-reference pages for buying or selling shares, fund contacts and more on pages 38-43. Please take the time to read it carefully. The Acorn funds are growth funds managed by Wanger Asset Management, L.P. The flagship, Acorn Fund, is a global fund investing in small to mid-size companies in the U.S. and abroad, and has helped investors reach their long-term goals for more than 26 years. Acorn International, the second fund in the series, invests in small to mid-size companies in about 40 markets overseas. The newest fund, Acorn USA, was launched in September 1996, and invests in small to mid-size companies in the U.S. With the Acorn Family of Funds, investors have the flexibility to balance their weightings of domestic and foreign stocks. Whether you invest in one or all of our funds, each fund is highly diversified, helping to reduce return volatility. At Wanger Asset Management, L.P. (WAM), we employ a team investment approach. The investment team is comprised of the lead portfolio manager, co-portfolio managers, and research analysts. Team members share responsibility for providing ideas, information, and knowledge in managing each of the Acorn funds. We are very proud of our outstanding investment team, which has over 130 years of combined investment experience. We invite you to learn more about some of our distinguished team members on pages 24-25. Investing with the Acorn funds helps you save money. How? All three funds are 100% no-load, which means that all of your money goes to work for you immediately. There are no sales charges, 12b-1 fees or back-end load fees, so all of your dollars are invested at net asset value. Providing quality service is a source of pride for us. We strive daily to make doing business with the Acorn funds as trouble-free as possible. We hope you'll find our fund literature and account forms easy to understand and complete. If you ever need help or have any questions, a friendly shareholder services representative can help. Simply call our toll-free number, 1-800-9-ACORN-9 (1- 800-922-6769) during regular business hours. We invite you to squirrel away your acorns for a day when you really need them, and we look forward to a long and mutually rewarding relationship with you. Happy investing, [sig logo] Ralph Wanger President (Not part of the prospectus.) Please read this prospectus before investing, and keep it on file for future reference. It contains important information, including how the funds invest and the services available to shareholders. A Statement of Additional Information ("SAI") dated April 30, 1997 has been filed with the Securities and Exchange Commission ("SEC"), and is incorporated herein by reference (is legally considered a part of this prospectus). The SAI is available free upon request by calling Acorn at 1-800-9-ACORN-9 (1-800-922-6769). You may also obtain the SAI, as well as other information that has been electronically filed, from the SEC's web site (www.sec.gov). Acorn Fund, Acorn International and Acorn USA invest for long-term capital growth. Each fund invests mostly in stocks of small and medium-size companies. Acorn Fund invests mostly in U.S. companies, but also has significant foreign investments. Acorn International invests in overseas companies. Acorn USA invests in U.S. companies. .LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Acorn Family of Funds . Acorn Fund . Acorn International . Acorn USA No-Load Funds Prospectus and Application April 30, 1997 Acorn Investment Trust 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 Contents The Funds at a Glance 3 >Goal >Strategy >Management >Who May Want to Invest 4 Expenses and Performance 5 >Expenses >Financial History 6 >Performance 10 Your Account 11 >Doing Business with Acorn >How to Buy Shares >How to Sell Shares 12 >Selling Shares in Writing >Redemption Price 13 Choices for Your Account Registration 14 Shareholder and Account Policies 16 >Statements and Reports >Share Price >Purchases >Redemptions 18 >Address Changes >Telephone Transactions 19 >Telephone Exchange Plan 20 >Exchange Plan Restrictions Dividends, Capital Gains, and Taxes 22 >Distribution Options >Taxes >Foreign Income Taxes 23 Meet the Team 24 The Funds in Detail 26 >Organization >Management >Distributor 27 >Expenses 28 >The Acorn Philosophy >Securities, Investment Practices, and Risks 30 >Foreign Securities 31 >Managing Investment Exposure 32 >Illiquid and Restricted Securities 35 >Diversification >Other Investment Companies >Lending and Repurchase Agreements 36 Highlights 37 >Doing Business with Acorn >How to Buy Shares 38 >How to Sell Shares 40 >How to Contact Us 42
2 Acorn Family of Funds >At a Glance Goal Acorn Fund, Acorn International and Acorn USA invest for long-term growth of capital. Strategy The Acorn funds are small to mid-cap growth funds. The funds look for attractively-priced companies that Wanger Asset Management, investment advisor to the funds, thinks will benefit from favorable long-term social, economic, or political trends. The areas of emphasis may change from time to time. Acorn Fund is a global fund investing in the U.S. and abroad. Acorn International concentrates its investments in overseas companies, while Acorn USA invests in U.S. companies. Management Wanger Asset Management, L.P. (WAM) employs a team approach to management of the funds. The management team is comprised of the lead portfolio manager, other WAM portfolio managers and research analysts. Each team member has one or more areas of expertise, and shares responsibility for providing ideas, information, and knowledge in managing the funds. Daily decisions on portfolio selection rest with the lead portfolio manager who utilizes the input and advice of the management team in making purchase and sale determinations. Ralph Wanger is the lead portfolio manager, and Charles P. McQuaid and Terence M. Hogan are the co- portfolio managers of Acorn Fund. Leah J. Zell is the lead portfolio manager of Acorn International and Robert A. Mohn is the lead portfolio manager of Acorn USA. 3 >At a Glance, continued Who May Want to Invest The Acorn funds are designed for investors who want long-term growth of capital rather than income and who have the long-term investment outlook needed for investing in the stocks of small and medium-size companies in the U.S. and overseas. The return generated by each fund's portfolio securities varies from day to day. Performance depends on WAM's skills in identifying the trends that are the basis for the funds' stock selections, and in picking individual stocks, as well as general market and economic conditions. When you sell your shares, they may be worth more or less than you paid for them. The stocks of smaller companies often involve more risk than the stocks of larger companies. Over time, stocks have shown greater growth potential than other types of securities. In the short term, however, stock prices may fluctuate widely in response to company, market, or economic news. The funds are not by themselves a balanced investment plan. To invest you must be a U.S. citizen (or a non-citizen residing in the U.S.) with a social security or tax identification number. See "Your Account" for how to buy and redeem shares. Did You Know? The Funds' 16 member investment team reflects four different nationalities and 18 graduate degrees, including two Ph.D's, a CPA, a statistician, and an attorney. 4 >Expenses and Performance Expenses Shareholder transaction expenses are charges you pay when you buy or sell shares of a fund. Transaction Expenses - --------------------------------------------- Maximum sales charge on purchases and reinvested dividends None Deferred sales charge on redemptions None Exchange fee None Wire transaction fee None Annual fund operating expenses. Each fund pays its own operating expenses, including the management fee to WAM. Expenses are factored into a fund's price or dividends, and are subtracted from the share price daily. They are not charged directly to shareholder accounts. The following are projections based on historical expenses for Acorn Fund and Acorn International; expenses for Acorn USA are estimated. All expenses are calculated as a percentage of average net assets. Acorn Fund - --------------------------------------------- Management fee .46% 12b-1 fee None Other expenses .11% ---- Total fund operating expenses .57% Acorn International - --------------------------------------------- Management fee .85% 12b-1 fee None Other expenses .32% ---- Total fund operating expenses 1.17% Acorn USA - --------------------------------------------- Management fee 1.00% 12b-1 fee None Other expenses (estimated) .85% ---- Total fund operating expenses 1.85% >Example: Let's say, hypothetically, that each fund's annual return is 5% and that its operating expenses are exactly as shown above and to the left. For every $1,000 you invested, here's how much you would have paid in total expenses if you closed your account after the number of years indicated: Acorn Fund - --------------------------------------------- After 1 year $ 6 After 3 years $ 18 After 5 years $ 32 After 10 years $ 71 Acorn International - --------------------------------------------- After 1 year $ 12 After 3 years $ 37 After 5 years $ 64 After 10 years $142 Acorn USA - --------------------------------------------- After 1 year $ 19 After 3 years $ 58 These examples illustrate the effect of expenses, but are not meant to suggest actual or expected costs or returns, all of which may vary. 5 >Expenses and Performance Financial History The financial history of each fund has been audited by Ernst & Young LLP, independent auditors. Their unqualified report is included in Acorn's Annual Report. The financial statements of each fund and the auditors' report are incorporated by reference into the SAI.
Acorn Fund Years ended 12/31, - -------------------------------------------------------------------------------- For a share outstanding throughout each year 1996 1995 Net Asset Value, beginning of year $13.60 $12.24 Income From Investment Operations Net investment income .09 .11 Net gain (loss) on investments, foreign currency and futures (both realized and unrealized) 2.93 2.42 - -------------------------------------------------------------------------------- Total from investment operations 3.02 2.53 Less Distributions Dividends from net investment income (.11) (.09) Distributions from net realized and unrealized gains reportable for federal income taxes (1.47) (1.08) - -------------------------------------------------------------------------------- Total distributions (1.58) (1.17) - -------------------------------------------------------------------------------- Net Asset Value, end of year $15.04 $13.60 - -------------------------------------------------------------------------------- Total Return 22.6% 20.8% Ratios/Supplemental Data Ratio of expenses to average net assets .57% .57% Ratio of net investment income to average net assets .53% .89% Portfolio turnover rate 33% 29% Net assets at end of year (in millions) $2,842 $2,399
The average commission rate paid per share by Acorn Fund on stock transactions during 1996 was $.0194. Financial Highlights Terms Net Asset Value ("NAV") is the value of a single share of a fund. It is computed by adding the value of all of a fund's investments, cash and other assets, subtracting any liabilities and dividing the result by the number of shares outstanding. Net Investment Income (loss) is the per share amount of dividends, interest, and other income earned on securities held by a fund, less fund expenses. Net gain (loss) on investments, foreign currency and futures is the per share increase or decrease in value of the securities, foreign currencies and futures a fund holds. A gain (loss) is realized when securities, foreign currencies and/or futures are sold. A gain (loss) is unrealized when securities, foreign currencies and/or futures increase or decrease in value but are not sold. Dividends from net investment income are the per share amount that a fund paid to shareholders from net investment income. Distributions from net realized and unrealized gains are the per share amount that a fund paid to shareholders from net realized gains on investments and any unrealized gains, resulting from holding passive foreign investment companies ("pfics"). 6
- ------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 1987 $13.95 $11.06 $ 9.32 $ 6.51 $ 8.58 $7.27 $6.48 $ 7.45 .06 .04 .07 .11 .12 .13 .12 .14 (1.10) 3.50 2.16 2.95 (1.62) 1.65 1.47 .12 - ------------------------------------------------------------------------------- (1.04) 3.54 2.23 3.06 (1.50) 1.78 1.59 .26 (.11) (.06) (.08) (.10) (.13) (.11) (.16) (.15) (.56) (.59) (.41) (.15) (.44) (.36) (.64) (1.08) - ------------------------------------------------------------------------------- (.67) (.65) (.49) (.25) (.57) (.47) (.80) (1.23) - ------------------------------------------------------------------------------- $12.24 $13.95 $11.06 $ 9.32 $ 6.51 $8.58 $7.27 $ 6.48 - ------------------------------------------------------------------------------- (7.4%) 32.3% 24.2% 47.3% (17.5%) 24.8% 24.8% 4.4% .62% .65% .67% .72% .82% .73% .80% .82% .55% .30% .72% 1.30% 1.60% 1.59% 1.52% 1.85% 18% 20% 25% 25% 36% 26% 36% 52% $1,983 $2,035 $1,449 $1,150 $ 767 $ 855 $ 563 $ 418
Total Return is the percentage increase or decrease in the value of an investment over a stated period of time. Total Return includes both changes in NAV and income. For the purpose of calculating Total Return, it is assumed that dividends and distributions are reinvested at the NAV on the day after the record date. Ratio of expenses to average net assets is the total of a fund's operating expenses divided by its average net assets for the stated period. It does not reflect reductions in expenses through uninvested cash balances earning interest with a fund's custodian. Ratio of net investment income (loss) to average net assets is a fund's net investment income divided by its average net assets for the stated period. Portfolio turnover rate is a measure of the amount of a fund's buying and selling activity. It is computed by dividing total purchases or sales, whichever is less, by the average monthly market value of a fund's portfolio securities. 7
Expenses and Performance, continued Acorn International Years ended 12/31, - ------------------------------------------------------------------------------- For a share outstanding throughout each period 1996 1995 Net Asset Value, beginning of period $16.59 $15.24 Income From Investment Operations Net investment income (loss) .13 .16 Net gain (loss) on investments and foreign currency (both realized and unrealized) 3.29 1.20 - ------------------------------------------------------------------------------- Total from investment operations 3.42 1.36 Less Distributions Dividends from net investment income (.12) -- Distributions from net realized and unrealized gains reportable for federal income taxes (.28) (.01) - ------------------------------------------------------------------------------- Total distributions (.40) (.01) - ------------------------------------------------------------------------------- Net Asset Value, end of period $19.61 $16.59 =============================================================================== Total Return 20.7% 8.9% Ratios/Supplemental Data Ratio of expenses to average net assets 1.17% 1.22% Ratio of net investment income (loss) to average net assets .51% .90% Portfolio turnover rate 34% 26% Net assets at end of period (in millions) $1,773 $1,276 Inception 9/4 Acorn USA through 12/31, - ------------------------------------------------------------------------------- For a share outstanding throughout each period 1996 Net Asset Value, beginning of period $10.00 Income From Investment Operations Net investment loss (.02) Net gain (loss) on investments (both realized and unrealized) 1.67 - ------------------------------------------------------------------------------- Total from investment operations 1.65 - ------------------------------------------------------------------------------- Net Asset Value, end of period $11.65 =============================================================================== Total Return 16.5% Ratios/Supplemental Data Ratio of expenses to average net assets** 1.85% * Ratio of net investment loss to average net assets (.99%)* Portfolio turnover rate 20% * Net assets at end of period (in millions) $53
8
Inception 9/23 through 12/31, - ---------------------------- 1994 1993 1992 $15.94 $ 10.69 $ 10.00 .07 .00 (.03) (.67) 5.25 .72 - ---------------------------- (.60) 5.25 .69 -- -- -- (.10) -- -- - ---------------------------- (.10) -- -- - ---------------------------- $15.24 $ 15.94 $ 10.69 ============================ (3.8%) 49.1% 6.9% 1.24% 1.21% 2.35%* .48% .06% (1.37%)* 20% 19% 20%* $1,363 $ 907 $ 30
* Annualized ** The ratio of expenses to average net assets for Acorn USA reflects gross custodian fees. This ratio net of custodian fees paid indirectly would have been 1.79%. The average commission rate paid per share by Acorn International on stock transactions during 1996 was $.0008; for Acorn USA, it was $.0567. 9 . Expenses and Performance, continued Performance Mutual fund performance is commonly measured as total return. Total return is the change in value of an investment in a fund over a given period, assuming reinvestment of any dividends and capital gains. Total return reflects actual performance over a stated period of time. Average annual total return is a hypothetical rate of return that, if achieved annually, would have produced the same total return if performance had been constant over the entire period. Average annual total returns smooth out variations in performance; they are not the same as actual year-by-year results. Total returns are based on past results and are not a prediction of future performance. They do not include the effect of income taxes. The funds sometimes show their performance compared to stock indexes (described in the SAI [Statement of Additional Information]), or give their ratings or rankings determined by an unrelated organization. Information about the performance of the funds is contained in Acorn's Annual Report which may be obtained free of charge by calling the Acorn funds at 1-800-9-ACORN-9 (1-800-922-6769). No-Load - -------------------------------------------------------------------------------- Advantage Acorn Fund, Acorn International and Acorn USA are 100% no-load, which means that all of your money goes to work for you immediately. There are no sales charges, 12b-1 fees or back-end load fees, so all of your dollars are invested at net asset value. The Acorn funds invest in companies for the long-term (usually 2-5 years), so our turnover rate is low. This minimizes both trading costs and shareholders' taxes. All these factors add up to greater value for our shareholders. 10 . Your Account Doing Business with Acorn Acorn provides customers with service Monday through Friday, except holidays, from 8:00 a.m. to 4:30 p.m. Central time. To reach Acorn, call: . For fund information, prices, or literature--1-800-9-ACORN-9 (1-800-922-6769) (from outside the U.S. 1-312-634-9240) . To add to your existing account, redeem shares, or exchange shares by telephone--call our transfer agent by 3:00 p.m. Central time at 1-800-962-1585 (outside the U.S. 1-617-774-5000 ext. 6457) . For help in setting up your account or for IRA assistance--call our transfer agent at 1-800-962-1585 (outside the U.S. 1-617-774-5000 ext. 6457) . For 24-hour account balances, 7 days a week -- 1-800-962-1585. How to Buy Shares You can open a new account by: . mailing in an application with your check or money order payable to Acorn Fund, Acorn International or Acorn USA for $1,000 or more (the Acorn funds do not accept third party checks), or . using the exchange plan to move $1,000 or more from an account with Acorn Fund, Acorn International, Acorn USA or one of the Reich & Tang Funds into a new identically-registered account within the Acorn family. . wire-call 1-800-962-1585 to set up your account and to arrange a wire transaction. Not available for IRA accounts. After your account is open, you may add to it by: . wiring money from your bank; . moving money from your bank account by telephone if you participate in the telephone purchase plan; . using the telephone exchange plan to move your investment from one Acorn fund to another, or from one of the Reich & Tang Funds; or . mailing your check or money order payable to Acorn Fund, Acorn International or Acorn USA for $100 or more with the stub from one of your account statements, with a slip from the investment booklet provided by Acorn or with a letter of instruction. (The Acorn funds do not accept third party checks.) You must make your telephone purchases or exchanges from the Acorn funds by 3:00 p.m. Central time. To exchange out of the Reich & Tang Funds, you must call by 11:00 a.m. Central time. See "Telephone Exchange Plan." Your wire purchase money and your application must both be received by Acorn's transfer agent by Closing Time (usually 3:00 p.m. Central time) for you to receive that day's price. If the proceeds of your wire order are received, but your application has not been received by the transfer agent, you will receive the price for the day on which your application is received by the transfer agent. Your application must be received no later than 12:00 p.m. Central time the day after your wire is received, or your wire will be returned to you. 11 >Your Account, continued See "Shareholder and Account Policies" for more exchange plan information. If you are investing through an Acorn IRA or SIMPLE IRA for the first time you will need a special application. Call 1-800-962-1585. For both initial and subsequent IRA investments, please indicate the year for which the investment is being made. Minimum Investments - ------------------------------------- To open an account $1,000 To open an IRA $1,000 To add to an account $ 100 If you sign up for the Automatic Investment Plan and later wish to change the amount or frequency of your automatic investments, or stop future investments, you may do so by simply calling us at 1-800-962-1585 at least one week prior to your next scheduled investment date. How to Sell Shares You can arrange to take money out of your fund account at any time by selling (redeeming) some or all of your shares. Your shares will be sold at the next NAV (share price) calculated after your order is received and accepted. See "Shareholder and Account Policies" for more information about share price. To sell shares in a regular (non-IRA) account, you may use any of the methods described here. To sell shares in an Acorn IRA, your request must be made in writing, except for exchanges between the Acorn funds or to the Reich & Tang Short Term Income Money Market Portfolio, which can be requested before 3:00 p.m. Central time by calling 1-800-962-1585. If you need an IRA Withdrawal Request form, call us at 1-800-9-ACORN-9 (1-800-922-6769). The Telephone Redemption Plan lets you redeem $100 to $50,000 per day by phone. You must make your telephone redemptions by 3:00 p.m. Central time. You automatically have the telephone redemption plan unless you decline it on your application. If you have changed the address on your account by telephone within 60 days of the telephone redemption request, this service is not available. Instead, you must send a letter of instruction signature guaranteed by all account owners. The Systematic Withdrawal Plan lets you set up automatic monthly or quarterly redemptions from your account in specified dollar amounts if you have a $25,000 minimum Acorn account balance. Call 1-800-9-ACORN-9 (1-800-922-6769) for a Doing Business with Acorn form. Selling Shares in Writing Write a "letter of instruction" with: > your name, > the fund's name, > your fund account number, > the dollar amount or number of shares to be redeemed, > the stock certificates representing your shares to be redeemed, if you hold certificates for your shares, and > any other applicable requirements listed in the table on pages 40-41. 12 Mail your letter to: State Street Bank and Trust Co. Attn: Acorn funds P.O. Box 8502 Boston, MA 02266-8502 If you are using overnight mail: Boston Financial Data Services Attn: Acorn funds 2 Heritage Drive, 6th Floor N. Quincy, MA 02171 1-617-774-5000 ext. 6457 Do not sign your stock certificates. Send them by registered or certified mail so that you may receive a confirmation of delivery. Certain requests must include a signature guarantee, designed to protect you and Acorn from fraudulent activities. Your request must be made in writing and include a signature guarantee if any of the following situations applies: > you wish to redeem more than $50,000 worth of shares; > your name has changed by marriage or divorce (send a letter indicating your account number(s) and old and new names, signing the letter in both the old and new names and having both signatures guaranteed) > your address has changed within the last 60 days and you would like to redeem shares; > the check is being mailed to an address different from the one on your account (address of record); > the check is being made payable to someone other than the account owner; > you are instructing us to wire the proceeds to a bank or brokerage account and have not signed up for the telephone redemption by wire plan. You should be able to obtain a signature guarantee from a bank, broker-dealer, credit union (if authorized under state law), securities exchange or association, clearing agency, or savings association. A notary public cannot provide a signature guarantee. Redemption Price The price at which your shares will be redeemed is determined by the time of day our transfer agent receives your redemption request. The price per share is always the next net asset value (NAV) per share calculated after your redemption request, including any required signature guarantee or supporting documents, is received. The funds calculate the NAV as of Closing Time on each day the New York Stock Exchange (NYSE) is open for trading. Closing Time is the close of NYSE regular session trading, which is usually 3:00 p.m. Central time but is sometimes earlier. To get today's price-- > Use the telephone redemption plan to call your redemption request in before Closing Time (note that the Closing Time to exchange out of the Reich & Tang Funds is 11:00 a.m. Central time). > Have your written redemption request, with a signature guarantee, if required, and any supporting documents, delivered to our transfer agent before Closing Time. 13 . Choices for your Account Registration Individual or Joint Ownership - -------------------------------------------------------------------------------- For your general investment needs Individual accounts are owned by one person. Joint accounts can have two or more owners. Gift or Transfer to a Minor (UGMA, UTMA) - -------------------------------------------------------------------------------- To invest for a minor's education or other future needs These custodial accounts provide a way to give money to a minor. The account application must include the minor's social security number. Trust or Established Employee Benefit or Profit-Sharing Plan - -------------------------------------------------------------------------------- For money being invested by a trust, employee benefit plan, or profit-sharing plan The trust or plan must be established before an account can be opened. Corporation or Other Entity - -------------------------------------------------------------------------------- For investment needs of corporations, associations, partnerships, institutions, or other groups You will need to send a certified corporate resolution with your application. Retirement - -------------------------------------------------------------------------------- To shelter your retirement savings from taxes Retirement plans allow individuals to shelter investment income and capital gains from current taxes. Contributions to these accounts may be tax-deductible. IRAs require a special application (call 1-800-9-ACORN-9). . Acorn Individual Retirement Accounts (IRAs) allow anyone of legal age and under 70-1/2 with earned income to save up to $2,000 per tax year. If your spouse has less than $2,000 in earned income, he or she may still contribute up to $2,000 to an IRA, so long as you and your spouse's combined earned income is at least $4,000. . Rollover IRAs retain special tax advantages for certain distributions from employer-sponsored retirement plans. 14 . Simplified Employee Pension Plans (SEP-IRAs) allow small business owners or those with self-employment income to make tax-deductible contributions of up to 15% of the first $160,000 of compensation per year for themselves and any eligible employees. . SIMPLE IRAs must be established by an employer (including a self-employed person), and enable all employees of the employer to elect to have up to $6,000 per year deducted from their paychecks on a before-tax basis and deposited directly into an account maintained for the individual employee. The employer is also generally required to make a contribution for each employee who elects to contribute. SIMPLE IRAs require a special application (call 1-800-962-1585). . Other retirement plans--The fund may be used as an investment in other kinds of retirement plans, including Keogh or corporate profit-sharing and money purchase plans, 403(b) plans, and 401(k) plans. All of these accounts need to be established by the trustee of the plan. Acorn does not offer prototypes of these plans. Acorn ------------------------------------------------------------------------------- facts . Acorn Fund commenced operations in 1970; Acorn International opened to investors in 1992, followed by Acorn USA in 1996. . Number of shareholder accounts: more than 140,000 . Number of portfolio managers and analysts working for the funds: 16 . Wanger Asset Management, the advisor to the Acorn funds, specializes in finding small, niche companies for shareholders. 15 Shareholder and Account Policies Statements and Reports Statements and reports that Acorn sends to you include: Confirmation statements (after every transaction in your account or change in your account registration) Quarterly and year-end account statements Shareholder reports If you would like us to send duplicate statements to someone, simply call us at 1-800-962-1585, and we can take your request over the telephone. Average cost statements for shares redeemed are available upon request for most accounts. If you need copies of your historical account information, please call 1-800-962-1585. There is a small charge for historical account information for prior years. Share Price The funds are open for business each day the New York Stock Exchange (NYSE) is open. The offering price (price to buy one share) and redemption price (price to sell one share) are the fund's net asset value ("NAV") calculated at the next Closing Time after receipt of your order. Closing Time is the time of the close of regular session trading on the NYSE, which is usually 3:00 p.m. Central time but is sometimes earlier. A fund's NAV is the value of a single share. The NAV is computed by adding up the value of the fund's investments, cash, and other assets, subtracting its liabilities, and then dividing the result by the number of shares outstanding. Each fund's portfolio securities and assets are valued primarily on the basis of market quotations from the primary market in which they are traded or, if quotations are not readily available, by a method that the board of trustees believes accurately reflects a fair value. Values of foreign securities are translated from the local currency into U.S. dollars using current exchange rates. Your purchase or redemption of fund shares will be priced at the next NAV calculated after your investment (including the application, if for a new account, and the money) or redemption request is received and accepted by Acorn's transfer agent, or by certain other agents and dealers authorized to accept purchase and redemption requests on Acorn's behalf. An order received before Closing Time will get that day's price. No telephone orders will be accepted after Closing Time. Purchases All of your purchases must be made in U.S. dollars and checks must be drawn on U.S. banks. The Acorn funds do not accept third party checks. Acorn does not accept cash or credit cards. 16 > If payment for your check or telephone purchase order does not clear, your purchase will be canceled and you will be liable for any losses or fees the fund or its transfer agent incurs. > Your Automatic Investment Plan and Telephone Purchase Plan may be immediately terminated in the event that any item is unpaid by your financial institution. > When you make a purchase by telephone, the money is ordinarily drawn from your bank account the day after you call. The Acorn shares are purchased at the NAV calculated the day after you call. Each fund reserves the right to reject any specific purchase order, including certain purchases through the exchange plan. See "Exchange Plan Restrictions." Purchases may be refused if, in WAM's opinion, they are of a size that would disrupt management of the fund. You may purchase or redeem shares of the funds through investment dealers, banks, or other financial institutions. Certain financial institutions that have entered into sales agreements with the Acorn funds may enter confirmed purchase orders or redemption requests on behalf of customers on an expedited basis, including orders by phone, with payment to follow no later than the time when the fund is priced on the following business day. If payment is not received by that time, the financial institution could be held liable for resulting fees or losses. These institutions may charge for their services or place limitations on the extent to which you may use the services offered by Acorn. Any such charges could constitute a substantial portion of a smaller account and may not be in your best interest. There are no charges or limitations imposed by Acorn other than those described in this prospectus if shares are purchased (or redeemed) directly from Acorn. Shares of one or more of the Acorn funds may be purchased through certain financial service companies, without incurring any transaction fee. In addition, certain financial institutions that have entered into agreements with Acorn act as Acorn's agent for the limited purpose of receiving purchase, redemption and exchange requests from their clients on behalf of whom the institution holds shares of one or more of the Acorn funds. Some financial institutions that act as Acorn's agent for those purposes or that otherwise maintain nominee accounts with one of the Acorn funds for their clients for whom they hold fund shares charge an annual fee of up to 0.35% of the average net assets held in such accounts for accounting, shareholder servicing, and distribution services the institution provides with respect to the underlying fund shares. WAM pays any such fees. 17 >Shareholder and Account Policies, continued Redemptions > Normally, redemption proceeds will be mailed within seven days after State Street Bank receives a request for redemption. > Redemption checks are made payable to the record shareholder or shareholders; if you wish for the check to be made payable to someone other than the account owners, you must submit your request in writing, and the signatures of all record shareholders must be guaranteed. See "Selling Shares in Writing." > A fund may hold payment on redemptions until it is reasonably satisfied that it has received payment for a recent purchase made by check, by the Automatic Investment Plan, or by the Telephone Purchase Plan, which can take up to fifteen days. > If you elected to participate in the Telephone Redemption by Wire Plan, Acorn will send payment for your redemption to your bank account by wire transfer. Your bank may impose a fee for the incoming wire. Payment by wire is usually credited to your bank account on the next business day after your call. > Redemptions may be suspended or payment dates postponed on days when the NYSE is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. > Certain accounts (such as trust accounts, corporate accounts and custodial accounts) may require documentation in addition to the redemption request. Call 1-800-962-1585 for more information. If the value of your account falls below $1,000, Acorn reserves the right to close your account and send the proceeds to you. Your shares will be redeemed at the NAV calculated on the day your account is closed. If checks representing (1) redemption proceeds, (2) withdrawals under a systematic withdrawal plan, or (3) dividend and capital gains distributions are returned "undeliverable" or remain uncashed for six months, the checks will be canceled and the proceeds will be reinvested in the fund issuing the check at NAV on the date of cancellation. In addition, after such six-month period, (1) your systematic withdrawal plan will automatically be canceled and future withdrawals will occur only when requested, or (2) your cash election will automatically be changed and future dividends and distributions will be reinvested in your fund. Address Changes You may change your address over a recorded line by calling 1-800-962-1585. Acorn will send a written confirmation of the change to both your old and new addresses. No telephone redemptions may be made for 60 days after a change of address by phone. During those 18 60 days, a signature guarantee will be required for any written redemption request unless your change of address was made in writing with a signature guarantee. Telephone Transactions You may initiate many transactions by telephone. Transactions over a recorded line: > Change your address; > Request duplicate statements to be sent to someone you designate; > Request an average cost statement for shares redeemed (available for most accounts); > Request a current account statement; > Purchase shares through the telephone purchase plan (plan must be pre-established); > Redeem $50,000 or less and have it wired (bank wire-redemption plan must be pre-established; not available for IRA accounts); > Change the frequency or amount, or discontinue the Automatic Investment Plan on your account(s); > Add or discontinue the telephone exchange privilege to your account; > Add or discontinue the telephone redemption by check privilege to your account; > Add automatic exchange (from one Acorn fund to another each month) to your account; > Change your distribution option (does not apply to IRA accounts); > Redeem $50,000 or less, with a check mailed to the address of record (does not apply to IRA accounts, and your address of record must not have changed within the last 60 days); > Exchange money from an individual account to an existing IRA account with an identical registration; > Exchange money between identically-registered accounts in Acorn Fund, Acorn International, Acorn USA or certain Reich & Tang Funds, or exchange money from one fund to establish an identically-registered account in another fund; and > Change the contribution year on an IRA account to the previous year up until April 15 of the following year. Acorn will not be responsible for any losses resulting from unauthorized transactions if it follows reasonable procedures designed to verify the identity of the caller. Those procedures may include recording the call, requesting additional information, and sending written confirmation of telephone transactions. You should verify the accuracy of telephone transactions immediately upon receipt of your confirmation statement. 19 >Shareholder and Account Policies, continued If you do not want to be able to initiate purchase or redemption transactions by telephone, decline these privileges on your account application or call Acorn for instructions at 1-800-962-1585. If you are unable to reach Acorn by phone (for example, during periods of unusual market activity), consider placing your order by mail. Telephone Exchange Plan Acorn's telephone exchange plan permits you to exchange your investment between one Acorn fund and another, or between an Acorn Fund and one of the money market mutual funds participating in the plan (Reich & Tang Funds) upon telephone instructions. The Reich & Tang Funds are: Short Term Income Fund, Money Market Portfolio; Short Term Income Fund, U.S. Government Portfolio; Daily Tax Free Income Fund; California Daily Tax Free Income Fund; Connecticut Daily Tax Free Income Fund; Florida Daily Municipal Income Fund; Michigan Daily Tax Free Income Fund; New Jersey Daily Municipal Income Fund; New York Daily Tax Free Income Fund; North Carolina Daily Municipal Income Fund; and Pennsylvania Daily Municipal Income Fund. Each of the Reich & Tang Funds is a no-load fund managed by Reich & Tang Asset Management, L.P. and offers check-writing privileges (for accounts other than IRAs) in addition to the exchange plan. Only Short Term Income Fund, Money Market Portfolio is available for IRA accounts. The price at which shares are exchanged is determined by the time of day we receive your request. To get today's price: > For an IRA account, call us at 1-800-962-1585 before Closing Time. > If you are exchanging from one Acorn fund into another, or into one of the Reich & Tang Funds, call us at 1-800-962-1585 before Closing Time. > If you are exchanging from one of the Reich & Tang Funds to one of the Acorn funds, call Reich & Tang at 1-800-221-3079 before 11:00 a.m. Central time. Because of the time needed to transfer money between the Acorn funds and the Reich & Tang Funds, you may not exchange into and out of a Reich & Tang Fund on the same or successive days; there must be at least one day between exchanges. Exchange Plan Restrictions > Generally, you will be limited to 4 round-trip exchanges per year (a round- trip being the exchange out of one fund into another fund, and then back again). > The fund you are exchanging into must be qualified for sale in your state. 20 > You may only exchange between accounts that are registered in the same name, address, and taxpayer identification number. > If you are opening a new account by exchange, your exchange must be at least $1,000. > The exchange plan is not available for shares of a fund for which you have been issued certificates. (If you want to exchange shares between funds, call 1-800-962-1585 to get instructions for returning your certificates.) > If your account is subject to backup withholding, you may not use the exchange plan. > Because excessive trading can hurt fund performance and shareholders, the funds reserve the right to temporarily or permanently terminate the exchange privilege of any investor who makes excessive use of the exchange plan. > The funds also reserve the right to refuse exchange purchases by any person or group, if Acorn believes the purchase will be harmful to existing shareholders. > Before exchanging into a fund, you should read its prospectus. > Exchanges may have tax consequences for you. The funds reserve the right to terminate or modify the exchange plan at any time, but will try to give you prior notice whenever they are able to reasonably do so. 21 . Dividends, Capital Gains, and Taxes Each fund distributes substantially all of its net income and capital gains to shareholders each year. Normally, dividends are paid in July and December, and capital gains are distributed in December. Distribution Options When you open an account, specify on your application how you would like to receive your distributions. If you later want to change your distribution option, call us at 1-800-962-1585. The funds offer three options: . Reinvestment Option. Your dividends and capital gain distributions will be automatically reinvested in additional shares of the fund. If you do not indicate a choice on your application, you will be assigned this option. . Income-Only Option. Your capital gain distributions will be automatically reinvested, but you will be sent a check for each dividend. . Cash Option. You will be sent a check for each dividend and capital gain distribution. For IRA accounts, all distributions are automatically reinvested because payment of distributions in cash would be a taxable distribution from your IRA, and might be subject to income tax penalties if you are under 59-1/2 years old. After you are 59-1/2, you may request payment of distributions in cash. When you reinvest, the reinvestment price is the fund's NAV at the close of business on the reinvestment date. The mailing of distribution checks will usually begin on the payment date, which is usually one week after the ex- dividend date. The ex-dividend date is the day after the record date. Taxes As with any investment, you should consider how your investment in a fund will be taxed. If your account is a tax-deferred account (for example, an IRA or an employee benefit plan account), the following tax discussion does not apply. If your account is not a tax-deferred account, however, you should be aware of the following tax rules: Taxes on distributions. Distributions are subject to federal income tax, and may also be subject to state or local taxes. If you live outside the United States, your distributions could also be taxed by the country in which you reside. Your distributions are taxable when they are paid, whether you take them in cash or reinvest them in additional shares. However, distributions declared in December and paid in January are taxable as if they were paid on December 31. For federal tax purposes, each fund's income and short-term capital gain distributions are taxed as dividends; long-term capital gain distributions are taxed as long-term capital gains. Every January, Acorn will send you and the IRS a statement, called a Form 1099-DIV, showing the amount of each taxable distribution you received in the previous 22 year. You may not receive a Form 1099 if total distributions for the year are less than $10.00. Taxes on transactions. Your redemptions--including exchanges between funds or into a money fund--are subject to capital gains tax. A capital gain or loss is the difference between the cost of your shares and the price you receive when you sell them. Whenever you sell shares of any of the Acorn funds, Acorn will send you a confirmation statement showing how many shares you sold and at what price. You will also receive a year-end statement every January. It is up to you or your tax preparer to determine whether any given sale resulted in a capital gain and, if so, the amount of tax to be paid. Be sure to keep your regular account statements; the information they contain will be essential in calculating the amount of your capital gains. Foreign Income Taxes Investment income received by any of the Acorn funds from sources within foreign countries may be subject to foreign income taxes withheld at the source. If a fund pays nonrefundable taxes to foreign governments during the year, the taxes will reduce that fund's dividends but will still be included in your taxable income. You may be able to claim an offsetting credit or deduction on your tax return for your share of foreign taxes paid by Acorn International (but not by Acorn Fund because not enough of Acorn Fund's assets are invested in foreign securities for Acorn Fund to be able to pass through the foreign tax credit). Acorn International will send you this information as part of your annual Form 1099-DIV. When you sign your account application, you will be asked to certify that your social security or taxpayer identification number is correct and that you are not subject to 31% backup withholding for failing to report income to the IRS. If you violate IRS regulations, the IRS can require Acorn to withhold 31% of your taxable distributions and redemptions. Understanding - -------------------------------------------------------------------------------- Distributions As a fund shareholder, you are entitled to your share of a fund's net income and any net gains realized on its investments. The funds' income from dividends and interest, and any net realized short-term capital gain, are paid to you as dividends. A fund realizes capital gains whenever it sells securities for a higher price than it paid for them. Net realized long-term gains are paid to you as capital gain distributions. 23 .Meet the Managers - -------------------------------------------------------------------------------- Ralph Wanger president, chief strategist--Acorn Fund, Acorn International and Acorn USA and lead portfolio manager--Acorn Fund. Mr. Wanger has been involved in managing each of the Acorn funds since each fund began. Mr. Wanger is president of Acorn Investment Trust and has been a member of the board of Acorn and its predecessor since 1970. Mr. Wanger is a principal of Wanger Asset Management, L.P. (WAM). He is a Chartered Financial Analyst (CFA) and received his B.S. and M.S. degrees in Industrial Management from the Massachusetts Institute of Technology. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Charles P. McQuaid co-portfolio manager--Acorn Fund. Mr. McQuaid has contributed to Acorn Fund's growth since 1978. He is senior vice president of Acorn Investment Trust and a member of its board of trustees. Mr. McQuaid is a principal and the Director of Research at WAM. A CFA, he earned a B.B.A. from the University of Massachusetts and M.B.A. from the University of Chicago. Mr. McQuaid focuses on the areas of communications and media. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Terence M. Hogan co-portfolio manager--Acorn Fund. Mr. Hogan is a vice president of Acorn Investment Trust and has been a member of Acorn Fund's management team since 1986. He has been a principal of WAM since 1992. Mr. Hogan is also a CFA, who earned his degrees from Knox College (B.A.) and the Johnson Graduate School at Cornell University (M.B.A.). His investment specialization is consumer goods and services. - -------------------------------------------------------------------------------- 24 - -------------------------------------------------------------------------------- Leah J. Zell lead portfolio manager--Acorn International. Ms. Zell is a vice president of Acorn who has been working with Acorn Fund's international securities since 1984 and has been a part of Acorn International's management team since it began. Ms. Zell earned her undergraduate degree from Radcliffe College and holds a Ph.D. from Harvard University. She is also a Chartered Financial Analyst (CFA). Ms. Zell visits over 100 companies worldwide each year. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Robert A. Mohn lead portfolio manager--Acorn USA. Mr. Mohn is a vice president of Acorn and a principal of WAM. In addition to being lead manager of Acorn USA, Mr. Mohn is also a member of WAM's management team for Acorn Fund, which he joined in 1992. He is a CFA and received his undergraduate degree from Stanford University and his M.B.A. from the University of Chicago. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Marcel P. Houtzager investment analyst--Acorn Fund and Acorn International. Mr. Houtzager, a vice president of Acorn, has been a member of WAM's investment management team for Acorn Fund and Acorn International since 1992. Mr. Houtzager, who is a principal of WAM, is a CFA and a Certified Public Accountant. He received his B.A. from Pomona College and his M.B.A. from the University of California at Berkeley. - -------------------------------------------------------------------------------- 25 .The Funds in Detail Organization Acorn Fund, Acorn International and Acorn USA are series of Acorn Investment Trust ("Acorn" or the "Trust"), an open-end, management investment company. The Acorn Fund, Inc. began operations in 1970, and was reorganized as the Acorn Fund series of the Trust on June 30, 1992. The Trust is a Massachusetts business trust organized on April 21, 1992. Acorn International began operations on September 23, 1992. Acorn USA began operations on September 4, 1996. Each share of a fund is entitled to participate pro rata in any dividends and other distributions declared by the board of trustees with respect to that fund, and all shares of a fund have equal rights in the event of liquidation of that fund. The Trust is governed by a board of trustees, which is responsible for protecting the interests of the shareholders of the funds. The trustees are experienced executives and professionals who meet at regular intervals to oversee the activities of the Trust and the funds. A majority of trustees are not otherwise affiliated with Acorn or WAM. Acorn may hold special meetings of shareholders to elect or remove trustees, change fundamental policies, approve a management contract, or for other purposes. Acorn will mail proxy materials in advance, including a voting card and information about the proposals to be voted on. You are entitled to one vote for each share of a fund that you own. Shareholders not attending these meetings are encouraged to vote by proxy. Management The Acorn funds are managed by Wanger Asset Management, L.P. (WAM), 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; WAM chooses the funds' investments and handles their business affairs, under the direction of the board of trustees.. WAM is a limited partnership managed by its general partner, Wanger Asset Management, Ltd., which is controlled by Ralph Wanger. WAM manages more than $5.6 billion in assets. WAM employs a team approach to management of the Acorn funds. The management teams are comprised of a lead portfolio manager, other WAM portfolio managers and research analysts. Team members share responsibility for providing ideas, information and knowledge in managing the funds, with each team member having one or more particular areas of expertise applicable to the management of the funds. Daily decisions on portfolio selection rest with the lead portfolio manager who utilizes the input and advice of the management team in making purchase and sale determinations. Ralph Wanger is the president and chief strategist of the funds and has been involved in managing all of the Acorn 26 funds since each fund began (June 1970 for Acorn Fund, September 1992 for Acorn International, and September 1996 for Acorn USA). Mr. Wanger has been president and a member of the board of Acorn (and its predecessor, The Acorn Fund, Inc.) since 1970. He is a principal of WAM and was a principal of the Fund's prior advisor until July 1992. Mr. Wanger is primarily responsible for development of the funds' investment strategies and is the lead portfolio manager of Acorn Fund. Charles P. McQuaid and Terence M. Hogan are co-portfolio managers of Acorn Fund. Mr. McQuaid is a senior vice president and a trustee of the Trust. Mr. Hogan is a vice president of the Trust. Mr. McQuaid and Mr. Hogan have been principals of WAM since July 1992. Before that date, Mr. McQuaid was a principal and Mr. Hogan was an analyst with the Trust's prior investment advisor. Mr. McQuaid and Mr. Hogan have been working with Mr. Wanger for 19 and 11 years, respectively. Leah J. Zell is the lead portfolio manager of Acorn International and is a vice president of the Trust. She has been a principal of WAM since July 1992 and was an analyst with the Trust's previous investment advisor. Ms. Zell has been working with Mr. Wanger for 13 years. Robert A. Mohn is a vice president of the Trust and has been the lead portfolio manager of Acorn USA since it began operations in September 1996. Mr. Mohn has been a key member of WAM's domestic analytical team since August 1992, and a principal of WAM since July 1995. Marcel P. Houtzager is a vice president of the Trust, and is a key member of the international investment team. Mr. Houtzager joined WAM as an investment analyst in April 1992, and became a principal in 1995. A specialist in foreign equities, he concentrates his efforts on European stocks, for both the Acorn Fund and Acorn International portfolios. The other executive officers are Merrillyn J. Kosier, vice president and secretary, and Bruce H. Lauer, vice president and treasurer. State Street Bank and Trust Company is each fund's transfer agent and custodian. Distributor Shares of the Acorn funds are offered for sale through WAM Brokerage Services, L.L.C. ("WAM BD") without any sales commission or charges to the funds or their shareholders. WAM BD is wholly-owned by WAM, the funds' investment advisor, and the investment advisor's general partner, Wanger Asset Management, Ltd. WAM BD's address is 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. All distribution expenses relating to the funds are paid by WAM, including the payment or reimbursement of any expenses incurred by WAM BD. 27 .The Funds in Detail, continued Expenses Like all mutual funds, the Acorn funds pay expenses related to their daily operations. Expenses paid out of each fund's assets are reflected in its share price or dividends. The Fund pays a management fee to WAM for managing its investments and business affairs. See "Expenses and Performance." Each fund also pays the fees of its custodian, transfer agent, auditors, and lawyers, and other expenses such as the cost of compliance with federal and state laws, proxy solicitations, shareholder reports, taxes, insurance premiums, and the fees of trustees who are not otherwise affiliated with Acorn or WAM. The Acorn Philosophy Acorn Fund, Acorn International and Acorn USA seek long-term growth of capital. Although income is considered in the selection of securities for the Acorn funds, the funds are not designed for investors seeking primarily income rather than capital appreciation. Acorn prefers small companies. Since large institutions seek highly marketable stocks, the stocks of large companies are studied in detail by security analysts, with the result that all investors know much the same thing about large companies. WAM prefers to work with stocks where values are more attractive because the facts about the companies are not universally known. Thus, the Acorn funds generally concentrate purchases on that segment of the market where the competition is less intense--in companies with a total common stock market capitalization of less than $1 billion. WAM wants to be able to understand any company in which Acorn invests, and smaller companies are easier to comprehend than large firms or conglomerates. When a company develops into a multi-industry giant, it is difficult for even the top management of the company to understand its own business and even harder for an outsider to follow such widespread activities. Since WAM places a premium on understanding Acorn's investments, WAM talks to top management directly whenever possible. This is easier to do with smaller firms. Looking for high quality companies. The funds look for quality businesses, with each investment ideally resting on a solid tripod of growth potential, financial strength, and fundamental value. Not all of the companies in which the funds invest necessarily have all of these characteristics. The sources of growth are a growing marketplace for the company's product, good design, efficient manufacturing, sound marketing, and good profit margins. Financial strength means low debt, adequate working capital, and conservative accounting principles. Strong capitalization gives management the stability and flexibility to reach strategic 28 objectives. In economies with less well-developed capital markets than those of the U.S., a strong balance sheet is an essential component of competitive advantage. Fundamental value means low relative price. The existence of a good company does not necessarily make its stock a good buy. The price of the stock determines value as measured relative to dividends, earnings, cash flow, growth rate, book value, and economic replacement value of assets. The emphasis on fundamentals in relation to price sets the Acorn funds apart from pure "growth" or "value" funds. WAM also believes that finding and understanding high quality companies is important because investing in smaller companies involves relatively higher investment costs. One way to reduce these costs is to invest with a long-term time horizon (at least 2-5 years) and to avoid frequent turnover of the stocks held by the funds. Occasionally, however, securities purchased on a long-term basis may be sold within 12 months after purchase in light of a change in the circumstances of a particular company or industry, or in general market or economic conditions. Investment themes. To find long-term investments and reduce portfolio turnover, the funds seek out areas of the economy that they believe will benefit from favorable long-term economic and political trends. These areas of emphasis may change from time to time, and are usually related to identified investment themes or market niches. A small company can frequently carve out a specialized niche for itself. The niche can be geographic, like that of a regional bank or a community newspaper. It can be technological, based on patents and know-how. Sometimes the niche is a marketing technique. In international investing, the niche can be participation in a fast-growth economy. A well-run business in a growing country has an easier path to a high growth rate. The funds invest primarily in equity securities, including common and preferred stocks, warrants or other similar rights, and convertible securities. The funds may purchase foreign securities in the form of American Depository Receipts (ADRs), European Depository Receipts (EDRs), or other securities representing underlying shares of foreign issuers. The funds may also invest in any other type of security, including debt securities. Under normal market conditions, Acorn International invests at least 75% of its total assets, taken at market value, in foreign securities. Acorn USA may invest up to 10% of its total assets in foreign securities. Acorn Fund's investments in foreign securities are limited to no more than one-third of its total assets. The foreign securities in which the funds invest may be traded in mature markets (for example, Japan, Canada, and the United Kingdom) and in developing 29 .The Funds in Detail, continued markets (Mexico and Indonesia, for example), examples of which are included in the SAI under "Investment Techniques and Risks--Foreign Securities." There are no limits on the funds' geographic asset distribution; at December 31, 1996, Acorn International had investments in 41 countries and Acorn Fund had investments in 34 countries. Acorn USA had no investment in foreign securities at that date. The funds may invest without limit in corporate or government obligations or hold cash or cash equivalents if WAM determines that a temporary defensive position is advisable. If investments in foreign securities appear to be relatively unattractive because of current or anticipated adverse political or economic conditions, Acorn International may hold cash or invest any portion of its assets in securities of the U.S. government and equity and debt securities of U.S. companies, as a temporary defensive strategy. The funds use various techniques to increase or decrease their exposure to the effects of possible changes in security prices, currency exchange rates, or other factors that affect the value of a fund's portfolio. These techniques include buying and selling options, futures contracts, or options on futures contracts, or entering into currency exchange contracts or swap agreements. The investment objective of each Acorn fund is not fundamental and may be changed by the board of trustees without shareholder approval. If there were such a change, you should consider whether your fund would remain an appropriate investment in light of your then current financial position and needs. The funds are not intended, alone or together, to present a balanced investment program. Securities, Investment Practices, and Risks The following pages contain more detailed information about types of investments the funds may make, and strategies WAM may employ in pursuit of each fund's investment objective, including information about the associated risks and restrictions. All policies stated throughout this prospectus, other than those identified as fundamental, can be changed without shareholder approval. A complete statement of each fund's investment restrictions is included in the SAI. Policies and limitations are considered at the time of purchase; the sale of an investment is not required because of a subsequent change in circumstances. WAM may not buy all of these instruments or use all of these techniques to the fullest extent permitted, unless it believes that doing so will help a fund achieve its goal. Common stocks represent an equity (ownership) interest in a corporation. This ownership interest often gives a fund the right to vote on measures affecting the company's organization and 30 operations. Although common stocks have a history of long-term growth in value, their prices tend to fluctuate in the short term. The Acorn funds invest mostly in the securities of smaller companies, that is, companies with a total market capitalization of less than $1 billion. During some periods, the securities of small companies, as a class, have performed better than the securities of large companies, and in some periods they have performed worse. Stocks of small companies tend to be more volatile and less liquid than stocks of large companies. Small companies, as compared to larger companies, may have a shorter history of operations, may not have as great an ability to raise additional capital, may have a less diversified product line making them susceptible to market pressure, and may have a smaller public market for their shares. Restrictions: A fund may not acquire securities of any one issuer, which at the time of investment (a) represent more than 10% of the voting securities of the issuer or (b) have a value greater than 10% of the value of the outstanding securities of the issuer.* Foreign Securities International investing allows you to achieve greater diversification and to take advantage of changes in foreign economies and market conditions. From time to time, many foreign economies have grown faster than the U.S. economy, and the returns on investments in these countries have exceeded those of similar U.S. investments, although there can be no assurance that these conditions will continue. Investments in foreign securities provide opportunities different from those available in the U.S., and risks which in some ways may be greater than in U.S. investments, including: fluctuations in exchange rates of foreign currencies; imposition of exchange control regulations or currency restrictions that would prevent cash from being brought to the United States; less public information with respect to issuers of securities; less governmental supervision of stock exchanges, securities brokers, and issuers of securities; lack of uniform accounting, auditing, and financial reporting standards; lack of uniform settlement periods and trading practices; less liquidity, frequently greater price volatility, and higher transaction costs in foreign markets than in the United States; possible imposition of foreign taxes; possible investments in securities of developing as well as developed countries; and sometimes less advantageous legal, operational, and financial protections applicable to foreign sub-custodial arrangements. Investing in countries outside the U.S. also involves political risk. A foreign government might restrict investments by foreigners, expropriate assets, seize or nationalize foreign - -------------------------------------------------------------------------------- *These restrictions are "fundamental," which means that they cannot be changed without shareholder approval. 31 .The Funds in Detail, continued bank deposits or other assets, establish exchange controls, or enact other policies that could affect investment in these nations. Economies in individual markets may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments positions. Many emerging market countries have experienced extremely high rates of inflation for many years. That has had and may continue to have very negative effects on the economies and securities markets of those countries. The securities markets of emerging countries 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 U.S. There also may be a lower level of monitoring and regulation in emerging markets of traders, insiders, and investors. Enforcement of existing regulations has been extremely limited. The funds may invest in ADRs that are not sponsored by the issuer of the underlying security. To the extent a fund does so, it would probably bear its proportionate share of the expenses of the depository and might have greater difficulty in receiving copies of the issuer's shareholder communications than would be the case with a sponsored ADR. The funds may invest in securities purchased on a when-issued and delayed delivery basis. Although the payment terms of such a security are established at the time a fund enters into the commitment, the security may be delivered and paid for a month or more after the date of purchase, when its value may have changed. A fund will make such commitments only with the intention of actually acquiring the securities, but may sell the securities before settlement date if WAM considers it advisable for investment reasons. Restrictions: Under normal market conditions, Acorn International invests at least 75% of its total assets in foreign securities. Acorn Fund's investments in foreign securities are limited to not more than 33% of its total assets. Acorn USA may invest up to 10% of its total assets in foreign securities, including ADRs. Managing Investment Exposure The funds use various techniques to increase or decrease their exposure to the effects of possible changes in security prices, currency exchange rates or other factors that affect the value of the funds' portfolios. These techniques include buying and selling options, futures contracts, or options on futures contracts, or entering into currency exchange contracts or swap agreements. These techniques are used by WAM to adjust the risk and return characteristics of the funds' portfolios. If WAM judges market conditions incorrectly or employs 32 a strategy that does not correlate well with a fund's investments, or if the counterparty to the transaction does not perform as promised, the transaction could result in a loss. Use of these techniques may increase the volatility of a fund and may involve a small investment of cash relative to the magnitude of the risk assumed. These techniques are used by the funds for hedging, risk management or portfolio management purposes and are not used for speculation. Currency exchange transactions. A currency exchange transaction may be conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market or through a forward foreign currency contract ("forward contract"). A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange-traded, and are usually for less than one year, but may be renewed. Currency exchange transactions may involve currencies of the different countries in which the funds may invest, and serve as hedges against possible variations in the exchange rate between these currencies. The funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or actual or anticipated portfolio positions. Transaction hedging is the purchase or sale of a forward contract with respect to a specific receivable or payable of a fund accruing in connection with the purchase or sale of portfolio securities. Portfolio hedging is the use of a forward contract with respect to an actual or anticipated portfolio security position denominated or quoted in a particular currency. The funds may engage in portfolio hedging with respect to the currency of a particular country in amounts approximating actual or anticipated positions in securities denominated in that currency. When a fund owns or anticipates owning securities in countries whose currencies are linked, WAM may aggregate those positions as to the currency hedged. Although forward contracts may be used to protect a fund from adverse currency movements, the use of such hedges may reduce or eliminate the potentially positive effect of currency revaluations on that fund's total return. Options and futures. Each fund may enter into stock index or currency futures contracts (or options thereon) to hedge a portion of that fund's portfolio, to provide an efficient means of regulating the fund's exposure to the equity markets, or as a hedge against changes in prevailing levels of currency exchange rates. Each fund may write covered call options and purchase put and call options on foreign currencies, securities, and stock indices. Futures contracts and options can be 33 .The Funds in Detail, continued highly volatile. A fund's attempt to use such investments for hedging purposes may not be successful and could result in reduction of that fund's total return. Restrictions: A fund will not use futures contracts for speculation, and will limit its use of futures contracts so that no more than 5% of that fund's total assets would be committed to initial margin deposits or premiums on such contracts. The aggregate market value of each fund's currencies or portfolio securities covering call or put options will not exceed 10% of that fund's net assets. Debt Securities. Bonds and other debt instruments are methods for an issuer to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest, and must repay the amount borrowed at maturity. Debt securities have varying degrees of quality and varying levels of sensitivity to changes in interest rates. "Investment grade" debt securities are those rated within the four highest ratings categories of Standard & Poor's Corporation ("S&P") or Moody's Investors Services, Inc. ("Moody's") or, if unrated, determined by WAM to be of comparable quality. Securities rated BBB or Baa are considered to be medium-grade and to have speculative characteristics. Investment in non-investment grade debt securities is speculative and involves a high degree of risk. Lower-rated debt securities (commonly called "junk bonds") are often considered speculative and involve greater risk of default or price changes due to changes in the issuer's creditworthiness. The market prices of these securities may fluctuate more than higher-rated securities and may decline significantly in periods of general economic difficulty. Money market instruments are high-quality, short-term debt securities that present minimal credit risk. These instruments may carry fixed or variable interest rates. Restrictions: There are no restrictions on the ratings of debt securities in which a fund may invest. Acorn Fund does not intend to invest more than 5% of its net assets in securities rated at or lower than the lowest investment grade. Acorn International will not invest more than 20% of its total assets in debt securities that are below investment grade quality. Acorn USA does not intend to invest more than 20% of its total assets in debt securities, nor more than 5% of its total assets in debt securities rated at or lower than the lowest investment grade. Acorn Fund and Acorn USA may invest without limit in corporate or government obligations, or hold cash or cash equivalents if WAM determines that a temporary defensive position is advisable. If investments in foreign securities appear to be relatively unattractive because of current or anticipated adverse political or 34 economic conditions, Acorn International may hold cash or invest any portion of its assets in securities of the U.S. government and equity and debt securities of U.S. companies, as a temporary defensive strategy. To meet liquidity needs (which, under normal market conditions, are not expected to exceed 25% of total assets) or for temporary defensive purposes, each fund may hold cash in domestic and foreign currencies and may invest in domestic and foreign money market securities. Illiquid and Restricted Securities Some investments may be determined by WAM to be illiquid, which means that they may be difficult to sell promptly at an acceptable price. Other securities, such as securities acquired in private placements, may be sold only pursuant to certain legal restrictions. Difficulty in selling securities may result in delays or a loss, or may be costly to the fund. Restrictions: Acorn Fund may not purchase a security if, as a result, more than 10% of its assets would be invested in illiquid or restricted securities. Acorn International and Acorn USA are similarly restricted with respect to 15% of their assets.* Diversification Diversifying the funds' investment portfolios can reduce the risks of investing. This may include limiting the amount of money invested in any one company or, on a broader scale, limiting the amount invested in any one industry or country. Restrictions: Acorn Fund may not invest more than 5% of its total assets in the securities of any one issuer. Acorn International and Acorn USA are similarly limited with respect to 75% of their total assets, leaving a "basket" of 25% of total assets in which investments may exceed the 5% limit. No fund may invest more than 25% of its total assets in any one industry. These limitations do not apply to U.S. government securities.* Other Investment Companies Certain markets are closed in whole or in part to equity investments by foreigners. The funds may be able to invest in such markets solely or primarily through governmentally-authorized investment companies. Investment in another investment company may involve the payment of a premium above the value of the issuer's portfolio securities, and is subject to market availability. In the case of a purchase of shares of such a company in a public offering, the purchase price may include an underwriting spread. As a shareholder in an investment company, a fund would bear its ratable share of that investment company's expenses, including its advisory and administration fees. At the same time, the fund would continue to pay its own management fees and other expenses. The funds do not intend to invest in such circumstances unless, in the judgment of WAM, the - -------------------------------------------------------------------------------- *These restrictions are "fundamental," which means that they cannot be changed without shareholder approval. 35 .The Funds in Detail, continued potential benefits of such investment justify the payment of any applicable premium or sales charge, and the additional layer of expense. Restrictions: A fund generally may invest up to 10% of its assets in shares of other investment companies and up to 5% of its assets in any one investment company (in each case measured at the time of investment). No investment in another investment company may represent more than 3% of the outstanding voting stock of the acquired investment company at the time of investment. Lending and Repurchase Agreements The funds generally may not make loans, but have the power to invest in repurchase agreements and reverse repurchase agreements (generally as a cash management technique). A repurchase agreement involves a sale of securities to a fund in which the seller agrees to repurchase the securities at a higher price, which includes an amount representing interest on the purchase price, within a specified time. In the event of a bankruptcy of the seller, a fund could experience both losses and delays in liquidating its collateral. Restrictions: A fund may not generally make loans, but may (a) invest in debt securities within the limits described in the prospectus and SAI, (b) invest in repurchase agreements or (c) lend up to 33% of its portfolio securities.* Fund - -------------------------------------------------------------------------------- Facts Remember, you can use your touch-tone telephone to obtain your fund account balance(s) 24 hours a day. Simply call 1-800-962-1585 and follow the automated instructions. - -------------------------------------------------------------------------------- *These restrictions are "fundamental," which means that they cannot be changed without shareholder approval. 36 Highlights .Doing Business with Acorn From time to time you may find it necessary to make changes to your account privileges or registration. The following easy-to-use shareholder forms are available upon request by calling 1-800-9-ACORN-9 (1-800-922-6769): - -------------------------------------------------------------------------------- To accomplish this: Please request this form: For changes to account services . Doing Business with Acorn For re-registering your current . Changing Your Account Registration account For re-registering your Acorn . Broker-Dealer Transfer Form shares held by a broker to an account with Acorn For changes to your IRA . Change of Beneficiary beneficiary designations For transferring money from . IRA Transfer Form an IRA account with another institution to Acorn For redeeming shares from your . IRA Withdrawal Form IRA account 37 Highlights .How to Buy Shares Mail [LOGO] - -------------------------------------------------------------------------------- To open an account: . Complete and sign the application. Make your check payable to "Acorn Fund," "Acorn International," or "Acorn USA." Mail to the address on the application, or for overnight delivery: Boston Financial Data Services Attn: Acorn Funds 2 Heritage Drive, 6th Floor N. Quincy, MA 02171 1-617-774-5000 ext. 6457 . Acorn does not accept third party checks. - -------------------------------------------------------------------------------- To add to an account: . Make your check payable to "Acorn Fund," "Acorn International," or "Acorn USA." Put your fund account number on your check. Use the return envelope that comes with your statements, or mail to the address on your statement. . Acorn does not accept third party checks. Telephone: 1-800-962-1585 [LOGO] - -------------------------------------------------------------------------------- To open an account: . You may not open a new account by telephone. . Exchange between the Acorn funds, or from a Reich & Tang Fund account with the same registration, including name, address, and taxpayer ID number. - -------------------------------------------------------------------------------- To add to an account: . Exchange between accounts with the same registration, including name, address, and taxpayer ID number. . Use the telephone purchase plan to transfer $100 to $50,000 from your bank account. Call first to verify that this service is in place on your account. (This service is not available for IRAs.) You must make your telephone purchases or exchanges from the Acorn funds by 3:00 p.m. Central time. 38 Wire [logo] - -------------------------------------------------------------------------------- To open an account: . Call 1-800-962-1585 to set up your account and to arrange a wire transaction. This is not available for IRA accounts. - -------------------------------------------------------------------------------- To add to an account: . Wire to: State Street Bank & Trust Co. Attn: Mutual Funds Boston, MA 02110 Routing #0110-0002-8 Deposit DDA 9902-990-2 Specify the name of the fund, the account name and the account number. Automatic Investment Plan [logo] - -------------------------------------------------------------------------------- To open an account: . You may not open a new account through the Automatic Investment Plan. - -------------------------------------------------------------------------------- To add to an account: . Sign up on the purchase application for monthly or quarterly transfers of $100 to $50,000 from your bank account, or call 1-800-9-ACORN-9 (1- 800-922-6769) for a Doing Business with Acorn form. If you already have this service, you can easily change the frequency or amount of your automatic investments over the telephone by calling 1-800-962-1585. - -------------------------------------------------------------------------------- TDD service for the deaf and hearing-impaired: 1-800-306-4567 39 Highlights .How to Sell Shares Telephone 1-800-962-1585 [LOGO] - -------------------------------------------------------------------------------- All accounts types, except IRAs: . To verify that the telephone redemption plan is in place, call 1-800- 962-1585. You automatically have this feature on your new account unless you tell us that you do not want it. . Maximum: $50,000; minimum: $100 All account types: . To exchange between identically-registered accounts You must make your telephone redemptions by Closing Time (usually 3:00 p.m. Central time). Mail [LOGO] - -------------------------------------------------------------------------------- Individuals, Joint Owners, Sole Proprietorships, UGMA, UTMA . The letter of instruction must be signed by all persons required to sign for transactions (usually, all owners of the account), exactly as their names appear on the account. - -------------------------------------------------------------------------------- IRAs . The account owner should complete an IRA Withdrawal Request form. Call 1-800-9-ACORN-9 (1-800-922-6769) to request one. - -------------------------------------------------------------------------------- Trust . The trustee(s) must sign the letter indicating capacity as trustee(s). If the account registration does not include the name of the trustee(s), provide a copy of the trust document certified within the last 60 days. - -------------------------------------------------------------------------------- Business or Organization . The person(s) authorized by the corporate resolution to act on the account must sign, in that person's official capacity, and the redemption request must be on corporate letterhead. . Include a corporate resolution certified within 60 days if the amount to be redeemed exceeds $50,000. - -------------------------------------------------------------------------------- Executor, Administrator, Conservator, Guardian . Call 1-800-962-1585 for instructions. 40 Wire [LOGO] - -------------------------------------------------------------------------------- All account types, except IRAs . You must sign up for payment of redemptions by wire before using this feature. Call to verify that this service is in place-- 1-800-962-1585. . Minimum wire: $1,000; maximum: $50,000. You must make your telephone redemptions by Closing time (usually 3:00 p.m. Central time). Automatic Exchange [LOGO] - -------------------------------------------------------------------------------- All account types . Call 1-800-962-1585 to set up monthly or quarterly automatic exchanges of $100 to $50,000 between identically-registered accounts. - -------------------------------------------------------------------------------- TDD service for the deaf and hearing-impaired: 1-800-306-4567 Note: Some redemptions require signature guarantees. Please see page 13. 41 Highlights .How to Contact Us Mail [LOGO] - -------------------------------------------------------------------------------- State Street Bank & Trust Co. . for regular mail delivery, including Attn: Acorn funds purchases, written exchanges, P. O. Box 8502 redemptions, and IRA contributions Boston, MA 02266-8502 Boston Financial Data Services . for overnight deliveries of purchases, Attn: Acorn funds written exchanges, redemptions, or 2 Heritage Drive, 6th Floor IRA contributions N. Quincy, MA 02171 Wanger Asset Management, L.P. . the funds' advisor 227 W. Monroe St., Suite 3000 Chicago, IL 60606-5016 WAM Brokerage Services, L.L.C. . the funds' distributor 227 W. Monroe St., Suite 3000 Chicago, IL 60606-5016 Phone [LOGO] - -------------------------------------------------------------------------------- 1-800-9-ACORN-9 . for fund information, literature, (1-800-922-6769) prices, and performance information (from outside the U.S. 1-312-634-9240) 1-800-962-1585 . for account balances, telephone purchases, exchanges and redemptions, and for IRA informa- tion (from outside the U.S. 1-617-774-5000 ext. 6457) 1-800-221-3079 . to exchange out of a money fund 1-800-306-4567 . TDD service for the deaf and hearing impaired Customer service is available on business days from 8:00 a.m. to 4:30 p.m. Central time. Telephone requests for purchases, redemptions or exchanges from the Acorn funds must be made by Closing Time (usually 3:00 p.m. Central time). 42 Internet [LOGO] - -------------------------------------------------------------------------------- Web site: www.wanger.com E-mail: acorn@wanger.com Wire [LOGO] - -------------------------------------------------------------------------------- State Street Bank & Trust Co. . to wire money from your bank to Attn: Mutual Funds add to an existing account Boston, MA 02110 Routing #0110-0002-8 Deposit DDA 9902-990-2 Specify the name of the fund and the name and the number of your account. 43 [LOGO OF ACORN FAMILY OF FUNDS] P.O. Box 8502 Boston, MA 02266-8502 Application It takes only a few moments to fill out this simple step-by-step application. If you have questions, call us at 1-800-9-ACORN-9, (1-800-922-6769), weekdays, 8:00am--4:30pm, Central time. Please be sure to print your information on this application, then simply sign and return it to us in the postage-paid envelope we've provided or to the address above. (Please do not use this form if you are opening an IRA. Please call us at the telephone number above for an IRA application.) Your Account Registration [_][_][_] [_][_] [_][_][_][_] Social Security Number Use minor's social security number for gifts/transfers to minors or [_][_] [_][_][_][_][_][_][_] Taxpayer ID Number - -------------------------------------------------------------------------------- [_] Individual or Joint* Account - -------------------------------------------------------------------------------- Owner's name: first, middle initial, last - -------------------------------------------------------------------------------- Joint owner's name: first, middle initial, last *Joint tenants with right of survivorship, unless you indicate otherwise. - -------------------------------------------------------------------------------- [_] Gift/Transfer to a Minor (UGMA/UTMA) as custodian for - -------------------------------------------------------------- Custodian's name (one name only): first, middle initial, last under the - -------------------------------------------------------------- Minor's name: first, middle initial, last Uniform Gifts/Transfers to Minors Act. - ------------------------------------------ State - -------------------------------------------------------------------------------- Minor's date of birth - -------------------------------------------------------------------------------- [_] Trust or Established Employee Benefit or Profit-Sharing Plan - -------------------------------------------------------------------------------- Trustee(s') name(s) as trustee(s) of - ------------------------------------------------------- Trustee(s') name(s) - -------------------------------------------------------------------------------- Name of Trust or Plan - -------------------------------------------------------------------------------- Date of Trust or Plan PLEASE INCLUDE A COPY OF FIRST PAGE AND LAST PAGES OF THE TRUST OR PLAN AGREEMENT. - -------------------------------------------------------------------------------- [_] Corporation or Other Entity - -------------------------------------------------------------------------------- Name of corporation or other entity - -------------------------------------------------------------------------------- Type of entity (for example, corporation, partnership, non-profit) PLEASE ATTACH A CERTIFIED COPY OF YOUR CORPORATE RESOLUTION SHOWING THE PERSON(S) AUTHORIZED TO ACT ON THIS ACCOUNT. Institutional Accounts Only - -------------------------------------------------------------------------------- Please complete the following: [_] Defined Benefit [_] Foundation [_] Defined Contribution [_] Endowment [_] 401(k) [_] 403(b) [_] 457 (b) Investment Consulting firm name: ------------------------------------------------ Address - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Street or P.O. Box - -------------------------------------------------------------------------------- City State Zip Code - -------------------------------------------------------------------------------- Daytime phone, including area code [_] U.S. Citizen [_] Non-citizen residing in U.S. To invest, you must be a U.S. citizen (or a non-citizen residing in the U.S.) with a social security or tax identification number. Choose Your Investments - -------------------------------------------------------------------------------- There is an initial investment minimum of $1,000 per Fund. [_] Acorn USA $ -------------------------------------------- [_] Acorn International $ -------------------------------------------- [_] Acorn Fund $ -------------------------------------------- Total Investment $ -------------------------------------------- Make check(s) payable to Acorn USA, Acorn International, and/or Acorn Fund. The Acorn funds do not accept third party checks. Dividend/Capital Gains Payment Options - -------------------------------------------------------------------------------- Please choose how you want to receive your income dividends and capital gains. If no option is checked, all dividends and capital gains will be reinvested automatically. (Check one box.) [_] Reinvest dividends and capital gains to help keep my account growing. [_] Pay dividends and capital gains in cash. [_] Pay dividends in cash; reinvest capital gains. Duplicate Statements - -------------------------------------------------------------------------------- [_] Please also send statments on my account to: - -------------------------------------------------------------------------------- Name - -------------------------------------------------------------------------------- Street or P.O. Box - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- City State Zip Code How Did You Hear About Us? - -------------------------------------------------------------------------------- [_] press mention (specify) [_] advertising (specify) ----------------------- -------------------- [_] I am a current Acorn [_] Ralph Wanger's book: shareholder A Zebra in Lion Country [_] referred by friend/advisor [_] Other (More on the back.) Automatic Investment Plan - -------------------------------------------------------------------------------- To keep building your investments, you can easily add to your fund accounts by joining the automatic investment plan: [_] Automatic Investment Plan: to add to your Acorn account automatically [_] Acorn USA $ ------------------------------ [_] monthly [_] quarterly (check only one box) [_] Acorn International $ ------------------------------ [_] monthly [_] quarterly (check only one box) [_] Acorn Fund $ [_] ------------------------------ [_] monthly quarterly (check only one box) The minimum automatic investment is $100; the maximum is $50,000. Your automatic investment will be drawn from your bank account on or about the 15th of the month; quarterly investments are made in January, April, July and October. Attach a voided check from the bank account you will be using. Bank Transfer Options - -------------------------------------------------------------------------------- To make transactions fast and easy, choose the Telephone Purchase Plan, Telephone Redemption by Wire Plan, or both. It takes about 10 days to set up these plans. Telephone requests for purchases or redemptions must be made by Closing Time (usually 3:00 p.m. Central time). [_] Telephone Purchase Plan: to add to your Acorn Fund account, Acorn International account or Acorn USA account by transferring money from your bank checking account ($100 minimum, $50,000 maximum per transfer.) [_] Telephone Redemptions by Wire: to redeem shares and transfer the money to your bank checking account ($1,000 minimum, $50,000 maximum per transaction.) Attach a voided check from the bank account you will be using. Telephone Plans - -------------------------------------------------------------------------------- You automatically have the ability to exchange and redeem shares by telephone unless you check the boxes below. Proceeds of telephone redemption requests are paid by check, mailed to the address of record and may not be more than $50,000. Exchanges must be between identically-registered accounts and requested by Closing Time (usually 3:00 p.m. Central time). See the prospectus for details. I do not want --- [_] telephone exchanges [_] telephone redemptions Agreement - -------------------------------------------------------------------------------- By signing this form, I certify that: I am of legal age, have received and read the prospectus, and agree to its terms. I understand that each of the account services, including the telephone exchange plan, may be terminated or modified by Acorn in the future. If I fail to give the correct social security or taxpayer identification number or to sign this form, Acorn Fund, Acorn International, or Acorn USA may reject, restrict, or redeem my investment. I authorize Acorn Fund, Acorn International, Acorn USA, and their affiliates and agents to act on any instructions reasonably believed to be genuine for any service authorized on this form (including telephone transactions). I agree that they will not be liable for any resulting loss or expense. I certify that I have read the explanation and agree to the terms and provisions for the services I have elected as set forth in the current prospectus of Acorn Fund, Acorn International, and Acorn USA, as amended from time to time. (If you have elected the Automatic Investment Plan or any Bank Transfer Option) I authorize Acorn Fund, Acorn International, Acorn USA, and their affiliates and agents to initiate (1) credit entries (deposits) (if I have elected the Telephone Redemption Bank Transfer Option), (2) debit entries (withdrawals) (if I have elected to participate in the Automatic Investment Plan or Telephone Purchase Bank Transfer Option), and (3) debit or credit entries and adjustments for any entries made in error to my bank account, for which I have attached a voided check. This authorization will remain effective until I notify Acorn in writing or by telephone at 1-800-962-1585 of its termination and until Acorn has a reasonable time to act on that termination. Under penalty, I certify that (i) the Social Security or Tax Identification Number given is correct and (ii) I am NOT currently subject to IRS backup withholding for failure to report dividend or interest income to the IRS. (Please cross out "NOT" if you are currently subject to withholding.) The IRS does not require your consent to any provision of this document, other than the certifications in this paragraph required to avoid backup withholding. Signature(s) - -------------------------------------------------------------------------------- X - -------------------------------------------------------------------------------- Signature (Sign exactly as name appears in Account Registration) Date X - -------------------------------------------------------------------------------- Signature (Sign exactly as name appears in Account Registration) Date Joint accounts require both signatures. Trust accounts require the signatures of all trustees. Acorn FIRST CLASS - -------------------- U.S. POSTAGE Family of Funds PAID CHICAGO, IL PERMIT NO. 1200 WAM Brokerage Services, L.L.C. P.O. Box 8502 Boston, MA 02266-8502 ACORN INVESTMENT TRUST STATEMENT OF ADDITIONAL INFORMATION April 30, 1997 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 1-800-9-ACORN-9 1-800-922-6769 ACORN FUND ACORN INTERNATIONAL ACORN USA No-Load Funds TABLE OF CONTENTS ----------------- Page ----
Information About the Funds............................. 2 Investment Objectives and Policies...................... 2 Investment Techniques and Risks......................... 2 Investment Restrictions.................................16 Performance Information.................................23 Investment Adviser......................................24 Distributor.............................................25 The Trust...............................................26 Trustees and Officers...................................26 Purchasing and Redeeming Shares.........................29 Additional Tax Information..............................31 Taxation of Foreign Shareholders........................32 Portfolio Transactions..................................32 Custodian...............................................33 Independent Auditors....................................34 Appendix - Description of Bond Ratings..................35
This Statement of Additional Information ("SAI") is not a prospectus but provides information that should be read in conjunction with the prospectus of Acorn Fund, Acorn International and Acorn USA dated April 30, 1997 and any supplement thereto, which may be obtained from Acorn at no charge by writing or telephoning Acorn at its address or telephone number shown above. 1 Information About the Funds Acorn Fund, Acorn International and Acorn USA are series of Acorn Investment Trust ("Acorn" or the "Trust"). All three funds are currently open to new investors; however, Acorn reserves the right to close one or more of the funds to new investors if additional cash flow is deemed detrimental to management of the funds. The 1996 Annual Report of the Acorn funds, a copy of which accompanies this SAI, contains financial statements, notes thereto, supplementary information entitled "Financial Highlights," and a report of independent auditors, all of which (but no other part of the Annual Report) are incorporated herein by reference. Additional copies of the Annual Report may be obtained from Acorn at no charge by writing or telephoning Acorn at its address or telephone number shown on the cover page of this SAI. The discussion below supplements the description in the prospectus of the funds' investment objectives, policies, and restrictions. Investment Objectives and Policies Acorn Fund, Acorn International and Acorn USA invest with the objective of long-term growth of capital. Although income is considered in the selection of securities, the funds are not designed for investors seeking primarily income rather than capital appreciation. The funds use the techniques and invest in the types of securities described below and in the prospectus. Investment Techniques and Risks Foreign Securities The funds invest in foreign securities, which may entail a greater degree of risk (including risks relating to exchange rate fluctuations, tax provisions, or expropriation of assets) than does investment in securities of domestic issuers. Under normal market conditions, Acorn International invests at least 75% of its total assets in foreign securities; Acorn Fund's and Acorn USA's investments in foreign securities are limited to not more than 33% and 10% of each fund's total assets, respectively. The funds may invest in securities of foreign issuers directly or in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), or other securities representing underlying shares of foreign issuers. Positions in these securities are not necessarily denominated in the same currency as the common stocks into which they may be converted. ADRs are receipts typically issued by an American bank or trust company evidencing ownership of the underlying securities. EDRs are European receipts evidencing a similar arrangement. Generally ADRs, in registered form, are designed for use in the U.S. securities markets and EDRs, in bearer form, are designed for use in European securities markets. The funds may invest in both "sponsored" and "unsponsored" ADRs. In a sponsored ADR, the issuer typically pays some or all of the expenses of the depository and agrees to provide its regular shareholder communications to ADR holders. An unsponsored ADR is 2 created independently of the issuer of the underlying security. The ADR holders generally pay the expenses of the depository and do not have an undertaking from the issuer of the underlying security to furnish shareholder communications. Therefore, in the case of an unsponsored ADR, a fund is likely to bear its proportionate share of the expenses of the depository and it may have greater difficulty in receiving shareholder communications than it would have with a sponsored ADR. None of the funds expects to invest 5% or more of its total assets in unsponsored ADRs. The funds' investment performance is affected by the strength or weakness of the U.S. dollar against the currencies of the foreign markets in which its securities trade or in which they are denominated. For example, if the dollar falls in value relative to the Japanese yen, the dollar value of a yen- denominated stock held in the portfolio will rise even though the price of the stock remains unchanged. Conversely, if the dollar rises in value relative to the yen, the dollar value of the yen-denominated stock will fall. (See discussion of transaction hedging and portfolio hedging under "Currency Exchange Transactions.") Investors should understand and consider carefully the risks involved in foreign investing. Investing in foreign securities, positions in which are generally denominated in foreign currencies, and utilization of forward foreign currency exchange contracts involve risks and opportunities not typically associated with investing in U.S. securities. These considerations include: fluctuations in exchange rates of foreign currencies; possible imposition of exchange control regulation or currency restrictions that would prevent cash from being brought back to the United States; less public information with respect to issuers of securities; less governmental supervision of stock exchanges, securities brokers, and issuers of securities; lack of uniform accounting, auditing, and financial reporting standards; lack of uniform settlement periods and trading practices; less liquidity and frequently greater price volatility in foreign markets than in the United States; possible imposition of foreign taxes; possible investment in securities of companies in developing as well as developed countries; and sometimes less advantageous legal, operational, and financial protections applicable to foreign subcustodial arrangements. In addition, the costs of investing in foreign securities are higher than the costs of investing in U.S. securities. Although the funds try to invest in companies and governments of countries having stable political environments, there is the possibility of expropriation or confiscatory taxation, seizure or nationalization of foreign bank deposits or other assets, establishment of exchange controls, the adoption of foreign government restrictions, or other adverse political, social, or diplomatic developments that could affect investment in these nations. The countries in which the funds invest include those listed below. A fund may not invest in all the countries listed, and it may invest in other countries as well, when such investments are consistent with that fund's investment objective and policies. 3 Mature Markets Developing Markets Emerging Markets -------------- ------------------ ----------------
Australia Argentina Bangladesh Morocco Austria Chile Botswana Pakistan Belgium Greece Brazil Peru Canada Hong Kong China Philippines Denmark Indonesia Colombia Poland Finland Israel Cyprus Sri Lanka France Korea Czech Republic Swaziland Germany Malaysia Ecuador Turkey Ireland Mexico Egypt Uruguay Italy Portugal Ghana Venezuela Japan Singapore Hungary Zambia Luxembourg Taiwan India Zimbabwe Netherlands Thailand Jordan New Zealand Kenya Norway South Africa Spain Sweden Switzerland United Kingdom United States
It may not be feasible for the funds currently to invest in all of these countries due to restricted access to their securities markets or inability to implement satisfactory custodial arrangements. Currency Exchange Transactions The funds may enter into currency exchange transactions. A currency exchange transaction may be conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market or through a forward currency exchange contract ("forward contract"). A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange-traded, and are usually for less than one year, but may be renewed. Forward currency transactions may involve currencies of the different countries in which the funds may invest, and serve as hedges against possible variations in the exchange rate between these currencies. The funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions, except to the extent described below under "Synthetic Foreign Money Market Positions." Transaction hedging is the purchase or sale of a forward contract with respect to specific payables or receivables of a fund accruing in connection with the purchase or sale of portfolio securities. Portfolio hedging is the use of a forward contract with respect to a portfolio security position denominated or quoted in a particular currency. The funds may engage in portfolio hedging with respect to the currency of a particular country in amounts approximating actual or anticipated positions in securities 4 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 such forward contract will be segregated on the books of the fund and held by the custodian while the contract is outstanding. At the maturity of a forward contract to deliver a particular currency, a fund may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency. It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a forward contract. Accordingly, it may be necessary for a fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of currency that the fund is obligated to deliver and if a decision is made to sell the security and make delivery of the currency. Conversely, it may be necessary to sell on the spot market some of the currency received upon the sale of the portfolio security if its market value exceeds the amount of currency that fund is obligated to deliver. If a fund retains the portfolio security and engages in an offsetting transaction, that fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If the fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the currency. Should forward prices decline during the period between a fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, a fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A default on the contract would deprive the fund of unrealized profits or force the fund to cover its commitments for purchase or sale of currency, if any, at the current market price. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for a fund to hedge against a devaluation that is so generally anticipated that the fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to a fund of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Since currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved. 5 Synthetic Foreign Money Market Positions. The funds may invest in money market instruments denominated in foreign currencies. In addition to, or in lieu of, such direct investment, the funds may construct a synthetic foreign money market position by (a) purchasing a money market instrument denominated in one currency (generally U.S. dollars) and (b) concurrently entering into a forward contract to deliver a corresponding amount of that currency in exchange for a different currency on a future date and at a specified rate of exchange. For example, a synthetic money market position in Japanese yen could be constructed by purchasing a U.S. dollar money market instrument, and entering concurrently into a forward contract to deliver a corresponding amount of U.S. dollars in exchange for Japanese yen on a specified date and at a specified rate of exchange. Because of the availability of a variety of highly liquid short- term U.S. dollar money market instruments, a synthetic money market position utilizing such U.S. dollar instruments may offer greater liquidity than direct investment in foreign money market instruments. The results of a direct investment in a foreign currency and a concurrent construction of a synthetic position in such foreign currency, in terms of both income yield and gain or loss from changes in currency exchange rates, in general should be similar, but would not be identical because the components of the alternative investments would not be identical. Except to the extent a synthetic foreign money market position consists of a money market instrument denominated in a foreign currency, the synthetic foreign money market position shall not be deemed a "foreign security" for purposes of the policies that, under normal conditions, (a) Acorn Fund will not invest more than 33% of its total assets in foreign securities; (b) Acorn USA will not invest more than 10% of its total assets in foreign securities; and (c) Acorn International will invest at least 75% of its total assets in foreign securities. Options and Futures The funds may purchase and write both call options and put options on securities and on indexes, and enter into interest rate and index futures contracts, and may purchase or sell options on such futures contracts ("futures options") in order to provide additional revenue, or to hedge against changes in security prices or interest rates. The funds may also use other types of options, futures contracts and futures options currently traded or subsequently developed and traded, provided the board of trustees determines that their use is consistent with the funds' investment objective. Options. An option on a security (or index) is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option on an individual security or on a foreign currency has the obligation upon exercise of the option to deliver the underlying security or foreign currency upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security or foreign currency. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. (An index is designed to reflect specified facets of a particular financial or securities market, a specific group of financial instruments or securities, or certain economic indicators.) 6 The funds will write call options and put options only if they are "covered." For example, in the case of a call option on a security, the option is "covered" if a fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional consideration (or, if additional consideration is required, assets having a value at least equal to that amount are segregated on the books of a fund) upon conversion or exchange of other securities held in its portfolio. If an option written by a fund expires, that fund realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by a fund expires, that fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when a fund desires. A fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the fund will realize a capital gain or, if it is less, the fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date. A put or call option purchased by a fund is an asset of that fund, valued initially at the premium paid for the option. The premium received for an option written by a fund is recorded as a deferred credit. The value of an option purchased or written is marked-to-market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices. OTC Derivatives. The funds may buy and sell over-the-counter ("OTC") derivatives. Unlike exchange-traded derivatives, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC derivatives (derivatives not traded on exchanges) generally are established through negotiation with the other party to the contract. While this type of arrangement allows a fund greater flexibility to tailor an instrument to its needs, OTC derivatives generally involve greater credit risk than exchange-traded derivatives, which are guaranteed by the clearing organization of the exchanges where they are traded. Each fund will limit its investments so that no more than 5% of its total assets will be placed at risk in the use of OTC derivatives. See "Illiquid Securities" below for more information on the risks associated with investing in OTC derivatives. Risks Associated with Options. There are several risks associated with transactions in options. For example, there are significant differences between the securities markets, the currency markets, and the options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to 7 whether, when, and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when a fund seeks to close out an option position. If a fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option would expire and become worthless. If a fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security until the option expired. As the writer of a covered call option on a security, a fund foregoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call. As the writer of a covered call option on a foreign currency, a fund foregoes, during the option's life, the opportunity to profit from currency appreciation. If trading were suspended in an option purchased or written by one of the funds, that fund would not able to close out the option. If restrictions on exercise were imposed, the fund might be unable to exercise an option it has purchased. Futures Contracts and Options on Futures Contracts. The funds may use interest rate futures contracts and index futures contracts. An interest rate or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument or the cash value of an index /1/ at a specified price and time. A public market exists in futures contracts covering a number of indexes (including, but not limited to: the Standard & Poor's 500 Index; the Value Line Composite Index; the Russell 2000 Index; and the New York Stock Exchange Composite Index) as well as financial instruments (including, but not limited to: U.S. Treasury bonds; U.S. Treasury notes; Eurodollar certificates of deposit; and foreign currencies). Other index and financial instrument futures contracts are available and it is expected that additional futures contracts will be developed and traded. The funds may purchase and write call and put futures options. Futures options possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. /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. 8 To the extent required by regulatory authorities having jurisdiction over the funds, the funds will limit their use of futures contracts and futures options to hedging transactions. For example, the funds might use futures contracts to hedge against fluctuations in the general level of stock prices, anticipated changes in interest rates, or currency fluctuations that might adversely affect either the value of a fund's securities or the price of the securities that a fund intends to purchase. The funds' hedging may include sales of futures contracts as an offset against the effect of expected declines in stock prices or currency exchange rates or increases in interest rates and purchases of futures contracts as an offset against the effect of expected increases in stock prices or currency exchange rates or declines in interest rates. Although other techniques could be used to reduce the funds' exposure to stock price, interest rate, and currency fluctuations, the funds may be able to hedge their exposure more effectively and perhaps at a lower cost by using futures contracts and futures options. The success of any hedging technique depends on WAM correctly predicting 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, if legally permitted) a specified amount of cash or U.S. government securities or other securities acceptable to the broker ("initial margin"). The margin required for a futures contract is generally set by the exchange on which the contract is traded; however, the margin requirement may be modified during the term of the contract, and the fund's broker may require margin deposits in excess of the minimum required by the exchange. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract, which is returned to the fund upon termination of the contract, assuming all contractual obligations have been satisfied. The funds expect to earn interest income on their initial margin deposits. A futures contract held by a fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking-to-market." Variation margin paid or received by a fund does not represent a borrowing or loan by the fund but is instead settlement between that fund and the broker of the amount one would owe the other if the futures contract had expired at the close of the previous day. In computing daily net asset value, the funds will mark-to-market their open futures positions. The funds are also required to deposit and maintain margin with respect to put and call options on futures contracts they write. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the funds. Although some futures contracts call for making or taking delivery of the underlying securities, usually these obligations are closed out prior to delivery by offsetting purchases or 9 sales of matching futures contracts (same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the funds realize a capital gain, or if it is more, the funds realize a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the fund engaging in the transaction realizes a capital gain, or if it is less, the fund realizes a capital loss. The transaction costs must also be included in these calculations. Risks Associated with Futures. There are several risks associated with the use of futures contracts and futures options as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the portfolio securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as: variations in speculative market demand for futures, futures options, and the related securities, including technical influences in futures and futures options trading and differences between the funds' investments being hedged and the securities underlying the standard contracts available for trading. For example, in the case of index futures contracts, the composition of the index, including the issuers and the weighting of each issue, may differ from the composition of a fund's portfolio, and, in the case of interest rate futures contracts, the interest rate levels, maturities, and creditworthiness of the issues underlying the futures contract may differ from the financial instruments held in a fund's portfolio. A decision as to whether, when, and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected stock price or interest rate trends. Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses. Stock index futures contracts are not normally subject to such daily price change limitations. There can be no assurance that a liquid market will exist at a time when a fund seeks to close out a futures or futures option position. The fund would be exposed to possible loss on the 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. 10 Limitations on Options and Futures. A fund will not enter into a futures contract or purchase an option thereon if, immediately thereafter, the initial margin deposits for futures contracts held by that fund plus premiums paid by it for open futures option positions, less the amount by which any such positions are "in-the-money," /2/ would exceed 5% of the fund's total assets. When purchasing a futures contract or writing a put option on a futures contract, a fund must maintain with its custodian (or broker, if legally permitted) cash or cash equivalents (including any margin) 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 cash or cash equivalents (including any margin) equal to the amount by which such option is in-the-money until the option expires or is closed out by the fund. A fund may not maintain open short positions in futures contracts, call options written on futures contracts, or call options written on indexes if, in the aggregate, the market value of all such open positions exceeds the current value of the securities in its portfolio, plus or minus unrealized gains and losses on the open positions, adjusted for the historical relative volatility of the relationship between the portfolio and the positions. For this purpose, to the extent a fund has written call options on specific securities in its portfolio, the value of those securities will be deducted from the current market value of the securities portfolio. In order to comply with Commodity Futures Trading Commission Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," the "underlying commodity value" of each long position in a commodity contract in which a fund invests will not at any time exceed the sum of: (1) The value of short-term U.S. debt obligations or other U.S. dollar denominated high-quality short-term money market instruments and cash set aside in an identifiable manner, plus any funds deposited as margin on the contract; (2) Unrealized appreciation on the contract held by the broker; and (3) Cash proceeds from existing investments due in not more than 30 days. "Underlying commodity value" means the size of the contract multiplied by the daily settlement price of the contract. No fund will purchase puts, calls, straddles, spreads, or any combination thereof if by reason of such purchase more than 10% of that fund's total assets would be invested in such securities. /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. 11 Swap Agreements. A swap agreement is generally individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on its structure, a swap agreement may increase or decrease a fund's exposure to changes in the value of an index of securities in which the fund might invest, the value of a particular security or group of securities, or foreign currency values. Swap agreements can take many different forms and are known by a variety of names. A fund may enter into any form of swap agreement if WAM determines it is consistent with that fund's investment objective and policies, but each fund will limit its use of swap agreements so that no more than 5% of its total assets will be placed at risk. A swap agreement tends to shift a fund's investment exposure from one type of investment to another. For example, if a fund agrees to exchange payments in dollars at a fixed rate for payments in a foreign currency the amount of which is determined by movements of a foreign securities index, the swap agreement would tend to increase that fund's exposure to foreign stock market movements and foreign currencies. Depending on how it is used, a swap agreement may increase or decrease the overall volatility of a fund's investments and its net asset value. The performance of a swap agreement is determined by the change in the specific currency, market index, security, or other factors that determine the amounts of payments due to and from a fund. If a swap agreement calls for payments by a fund, that fund must be prepared to make such payments when due. If the counterparty's creditworthiness declines, the value of a swap agreement would be likely to decline, potentially resulting in a loss. The fund expects to be able to eliminate its exposure under any swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. A fund will segregate its assets to cover its current obligations under a swap agreement. If a fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of that fund's accumulated obligations under the swap agreement over the accumulated amount the fund is entitled to receive under the agreement. If a fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of that fund's accumulated obligations under the agreement. Illiquid Securities The funds may not invest in illiquid securities, including restricted securities and OTC derivatives, if as a result they would comprise more than 10% of the value of the net assets of Acorn Fund, or more than 15% of the value of the net assets of each of Acorn International and Acorn USA. Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where registration is required, a fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the 12 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 fair value as determined in good faith by the board of trustees. If, through the appreciation of illiquid securities or the depreciation of liquid securities, Acorn Fund should be in a position where more than 10% of the value of its net assets are invested in illiquid assets, including restricted securities and OTC derivatives (or more than 15% of the value of the net assets of each of Acorn International and Acorn USA), that fund will take appropriate steps to protect liquidity. Notwithstanding the above, a fund may purchase securities that have been privately placed but that are eligible for purchase and sale under Rule 144A under the 1933 Act. That rule permits certain qualified institutional buyers, such as the funds, to trade in privately placed securities that have not been registered for sale under the 1933 Act. WAM, under the supervision of the board of trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to a fund's restriction of investing no more than 10% (for Acorn Fund) or 15% (for Acorn International and Acorn USA) of its assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination WAM will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, WAM could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, and (4) nature of the security and of market place trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored and if, as a result of changed conditions, it is determined that a Rule 144A security is no longer liquid, the funds' holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that a fund does not invest more than 10% (for Acorn Fund) or 15% (for Acorn International and Acorn USA) of its assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of a fund's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities. Debt Securities The funds may invest in debt securities, including lower-rated securities (i.e., securities rated BB or lower by Standard & Poor's Corporation ("S&P") or Ba or lower by Moody's Investor Services, Inc. ("Moody's"), commonly called "junk bonds"), and securities that are not rated. There are no restrictions as to the ratings of debt securities acquired by the funds or the portion of a fund's assets that may be invested in debt securities in a particular ratings category, except that Acorn International may not invest more than 20% of its assets in securities rated below investment grade or considered by the Adviser to be of comparable credit quality. Neither Acorn Fund nor Acorn International expects to invest more than 5% of its net assets in such securities during the current fiscal year. Acorn USA does not intend to invest more than 20% of its total assets in debt securities nor more than 5% of its total assets in securities rated at or lower than the lowest investment grade. 13 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 "Net Asset Value." The market value of these securities and their liquidity may be affected by adverse publicity and investor perceptions. A more complete description of the characteristics of bonds in each ratings category is included in the appendix to this SAI. Repurchase Agreements Repurchase agreements are transactions in which a fund purchases a security from a bank or recognized securities dealer and simultaneously commits to resell that security to the bank or dealer at an agreed-upon price, date, and market rate of interest unrelated to the coupon rate or maturity of the purchased security. Although repurchase agreements carry certain risks not associated with direct investments in securities, a fund will enter into repurchase agreements only with banks and dealers believed by WAM to present minimum credit risks in accordance with guidelines approved by the board of trustees. WAM will review and monitor the creditworthiness of such institutions, and will consider the capitalization of the institution, WAM's prior dealings with the institution, any rating of the institution's senior long-term debt by independent rating agencies, and other relevant factors. A fund will invest only in repurchase agreements collateralized at all times in an amount at least equal to the repurchase price plus accrued interest. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase were less than the repurchase price, the fund would suffer a loss. If the financial institution which is party to the repurchase agreement petitions for bankruptcy or otherwise becomes subject to bankruptcy or other liquidation proceedings there may be restrictions on a fund's ability to sell the collateral and the fund could suffer a loss. However, with respect to financial institutions whose bankruptcy or liquidation proceedings are subject to the U.S. Bankruptcy Code, each fund intends to comply with provisions under such Code that would allow it immediately to resell such collateral. 14 At present, Acorn USA is the only fund that invests in repurchase agreements. Acorn Fund and Acorn International have no present intention of investing in repurchase agreements. When-Issued and Delayed Delivery Securities; Reverse Repurchase Agreements The funds may purchase securities on a when-issued or delayed delivery basis. Although the payment and interest terms of these securities are established at the time the fund enters into the commitment, the securities may be delivered and paid for a month or more after the date of purchase, when their value may have changed. A fund makes such commitments only with the intention of actually acquiring the securities, but may sell the securities before the settlement date if WAM deems it advisable for investment reasons. A fund may utilize spot and forward foreign currency exchange transactions to reduce the risk inherent in fluctuations in the exchange rate between one currency and another when securities are purchased or sold on a when-issued or delayed delivery basis. A fund may enter into reverse repurchase agreements with banks and securities dealers. A reverse repurchase agreement is a repurchase agreement in which the fund is the seller of, rather than the investor in, securities and agrees to repurchase them at an agreed-upon time and price. Use of a reverse repurchase agreement may be preferable to a regular sale and later repurchase of securities because it avoids certain market risks and transaction costs. At the time a fund enters into a binding obligation to purchase securities on a when-issued basis or enters into a reverse repurchase agreement, assets of the fund having a value at least as great as the purchase price of the securities to be purchased will be segregated on the books of the fund and held by the custodian throughout the period of the obligation. The use of these investment strategies, as well as any borrowing by a fund, may increase net asset value fluctuation. The funds have no present intention of investing in reverse repurchase agreements. Temporary Strategies The funds have the flexibility to respond promptly to changes in market and economic conditions. In the interest of preserving shareholders' capital, WAM may employ a temporary defensive investment strategy if it determines such a strategy to be warranted. Pursuant to such a defensive strategy, a fund temporarily may hold cash (U.S. dollars, foreign currencies, multinational currency units) and/or invest up to 100% of its assets in high quality debt securities or money market instruments of U.S. issuers (or, in the case of Acorn Fund and Acorn International, those of foreign issuers), and most or all of the fund's investments may be made in the United States and denominated in U.S. dollars. It is impossible to predict whether, when, or for how long a fund might employ defensive strategies. In addition, pending investment of proceeds from new sales of fund shares or to meet ordinary daily cash needs, a fund temporarily may hold cash (U.S. dollars, foreign currencies, or multinational currency units) and may invest any portion of its assets in money market instruments. 15 Portfolio Turnover Although the funds do not purchase securities with a view to rapid turnover, there are no limitations on the length of time that portfolio securities must be held. Portfolio turnover can occur for a number of reasons such as general conditions in the securities markets, more favorable investment opportunities in other securities, or other factors relating to the desirability of holding or changing a portfolio investment. The funds' portfolio turnover rates have been low (in 1996, 33% for Acorn Fund, 34% for Acorn International, and 20% (annualized) for Acorn USA). 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. Investment Restrictions Acorn Fund In pursuing its investment objective Acorn Fund will not: 1. Invest more than 5% of its assets (valued at time of investment) in securities of any one issuer, except in government obligations; 2. Acquire securities of any one issuer which at the time of investment (a) represent more than 10% of the voting securities of issuer or (b) have a value greater than 10% of the outstanding securities of the issuer; 3. Invest more than 25% of its assets (valued at time of investment) in securities of companies in any one industry; 4. Invest more than 5% of its assets (valued at time of investment) in securities of issuers with less than three years' operation (including predecessors); 5. Purchase or retain securities of a company if all of the trustees and officers of the Trust and of its investment adviser who individually own beneficially more than 1/2% of the securities of the company collectively own beneficially more than 5% of such securities; 6. Borrow money except (a) from banks for temporary or emergency purposes at fixed rates of interest in amounts not exceeding 10% of the value of the fund's assets at the time of borrowing, and (b) in connection with transactions in options and in securities index futures [the fund will not purchase additional securities when its borrowings, less amounts receivable on sales of portfolio securities, exceed 5% of total assets]; 16 7. Pledge, mortgage or hypothecate its assets, except for temporary or emergency purposes and then to an extent not greater than 15% of its assets at cost, and except in connection with transactions in options and in securities index futures; 8. Underwrite the distribution of securities of other issuers; however the fund may acquire "restricted" securities which, in the event of a resale, might be required to be registered under the Securities Act of 1933 on the ground that the fund could be regarded as an underwriter as defined by that act with respect to such resale; but the fund will limit its total investment in restricted securities and in other securities for which there is no ready market to not more than 10% of its total assets at the time of acquisition; 9. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises which invest in real estate or interests in real estate; 10. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) forward contracts; 11. Make margin purchases of securities, except for use of such short-term credits as are needed for clearance of transactions and except in connection with transactions in options, futures and options on futures; 12. Sell securities short or maintain a short position, except short sales against-the-box; 13. Participate in a joint or on a joint or several basis in any trading account in securities; 14. Invest in companies for the purpose of management or the exercise of control; 15. Issue any senior security except to the extent permitted under the Investment Company Act of 1940. Restrictions 1 through 15 above (except the portions in brackets) are "fundamental," which means that they cannot be changed without the approval of the lesser of (i) 67% of Acorn Fund's shares present at a meeting if more than 50% of the shares outstanding are present or (ii) more than 50% of Acorn Fund's outstanding shares. It is also a fundamental policy of Acorn Fund to make loans to the extent that investment in debt securities may be considered to constitute the making of loans (subject to the 10% limitation stated in restriction 8 above). In addition, Acorn Fund is subject to a number of restrictions that may be changed by the board of trustees without shareholder approval. Under those non- fundamental restrictions, Acorn Fund will not: a. Invest in oil, gas or other mineral leases or exploration or development programs, although it may invest in marketable securities of enterprises engaged in oil, gas or mineral exploration; 17 b. Invest more than 5% of its net assets (valued at time of investment) in warrants, valued at the lower of cost or market, including not more than 2% of its net assets in warrants not listed on the New York or American stock exchanges; provided that warrants acquired in units or attached to securities shall be deemed to be without value for purposes of this restriction; c. Acquire securities of other registered investment companies except in compliance with the Investment Company Act of 1940 and applicable state law; d. Purchase a put or call option if the aggregate premiums paid for all put and call options exceed 20% of its net assets (less the amount by which any such positions are in-the-money), excluding put and call options purchased as closing transactions; nor e. Invest more than 33% of its total assets (valued at time of investment) in securities of foreign issuers. 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 10% of the value of the fund's total assets at the time of borrowing, and (b) in connection with transactions in options, futures and options on 18 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 1993 on the ground that the fund could be regarded as an underwriter as defined by that act with respect to such resale; but the fund will limit its total investment in restricted securities and in other securities for which there is no ready market, including repurchase agreements maturing in more than seven days, to not more than 15% of its total assets at the time of acquisition; 7. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises that invest in real estate or interests in real estate; 8. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) forward contracts; 9. Make margin purchases of securities, except for use of such short-term credits as are needed for clearance of transactions and except in connection with transactions in options, futures and options on futures; 10. Sell securities short or maintain a short position, except short sales against-the-box. 11. Issue any senior security except to the extent permitted under the Investment Company Act of 1940. Restrictions 1 through 11 above (except the portions in brackets) are "fundamental," which means that they cannot be changed without the approval of the lesser of (i) 67% of Acorn International's shares present at a meeting if more than 50% of the shares outstanding are present of (ii) more than 50% of the shares outstanding are present or (ii) more than 50% of Acorn International's outstanding shares. In addition, Acorn International is subject to a number of restrictions that may be changed by the board of trustees without shareholder approval. Under those non-fundamental restrictions, Acorn International will not: a. Invest in companies for the purpose of management or the exercise of control; b. Invest in oil, gas or other mineral leases or exploration or development programs, although it may invest in marketable securities of enterprises engaged in oil, gas or mineral exploration; c. Invest more than 10% of its net assets (valued at time of investment) in warrants, valued at the lower of cost or market; provided that warrants acquired in units or attached to securities shall be deemed to be without value for purposes of this restriction; 19 d. Invest more than 5% of its total assets (valued at time of investment) in securities of issuers with less than three years' operation (including predecessors); e. Acquire securities of other registered investment companies except in compliance with the Investment Company Act of 1940 and applicable state law; f. Purchase or retain securities of a company if all of the trustees, directors and officers of the Trust and of its investment adviser who individually own beneficially more than 1/2% of the securities of the company collectively own beneficially more than 5% of such securities; 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. Purchase a put or call option if the aggregate premiums paid for all put and call options exceed 20% of its net assets (less the amount by which any such positions are in-the-money), excluding put and call options purchased as closed transactions. Notwithstanding the foregoing investment restrictions, Acorn International may purchase securities pursuant to the exercise of subscription rights, provided that such purchase will not result in the 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 Acorn International's interest in the issuing company being diluted. The market for such rights is not well developed in all cases and, accordingly, Acorn International may not always realize full value on the sale of rights. The exception applies in cases where the limits set forth in the investment restrictions would otherwise be exceeded by exercising rights or would have already been exceeded as a result of fluctuations in the market value of Acorn International's portfolio securities with the result that the fund would be forced either to sell securities at a time when it might not otherwise have done so, or to forego exercising its rights. 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; 20 3. Invest more than 25% of its assets (valued at time of investment) in securities of companies in any one industry, except that restriction does not apply to investments in U.S. government securities; 4. Make loans, but this restriction shall not prevent the Fund from (a) buying a part of an issue of bonds, debentures, or other obligations that are publicly distributed, or from investing up to an aggregate of 15% of its total assets (taken at market value at the time of each purchase) in parts of issues of bonds, debentures or other obligations of a type privately placed with financial institutions, (b) investing in repurchase agreements, or (c) lending portfolio securities, provided that it may not lend securities if, as a result, the aggregate value of all securities loaned would exceed 33% of its total assets (taken at market value at the time of such loan); 5. Borrow money except (a) from banks for temporary or emergency purposes in amounts not exceeding 33% of the value of the Fund's total assets at the time of borrowing, and (b) in connection with transactions in options, futures and options on futures; 6. Underwrite the distribution of securities of other issuers; however, the Fund may acquire "restricted" securities which, in the event of a resale, might be required to be 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. Restrictions 1 through 10 above are "fundamental," which means that they cannot be changed without the approval of the lesser of (i) 67% of Acorn USA's shares present at a meeting if more than 50% of the shares outstanding are present or (ii) more than 50% of Acorn USA's outstanding shares. In addition, Acorn USA is subject to a number of restrictions that may be changed by the board of trustees without shareholder approval. Under those non- fundamental restrictions, Acorn USA will not: a. Invest in companies for the purpose of management or the exercise of control; 21 b. Invest in oil, gas or other mineral leases or exploration or development programs, although it may invest in marketable securities of enterprises engaged in oil, gas or mineral exploration; c. Invest more than 2% of its net assets (valued at the time of investment) in warrants not listed on the New York or American Stock exchanges, nor more than 5% of its net assets (valued at the time of investment) in all warrants, in each case valued at the lower of cost or market; provided that warrants acquired in units or attached to securities shall be deemed to be without value for purposes of this restriction; d. Invest more than 5% of its total assets (valued at time of investment) in securities of issuers (other than issuers of federal agency obligations or securities issued or guaranteed by any foreign country or asset-backed securities) that, together with any predecessors or unconditional guarantors, have been in continuous operation for less than three years ("unseasoned issuers") or (b) more than 15% of its total assets (valued at the time of investment) in restricted securities and securities of unseasoned issuers; e. Acquire securities of other registered investment companies except in compliance with the Investment Company Act of 1940 and applicable state law;/3/ f. Invest more than 15% of its net assets (valued at time of investment) in illiquid securities, including repurchase agreements maturing in more than seven days; g. Purchase or retain securities of a company if all of the trustees, directors and officers of the Trust and of its investment adviser who individually own beneficially more than 1/2% of the securities of the company collectively own beneficially more than 5% of such securities; h. 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; i. Purchase a put or call option if the aggregate premiums paid for all put and call options exceed 20% of its net assets (less the amount by which any such positions are in-the-money), excluding put and call options purchased as closing transactions; 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; k. Invest more than 10% of its total assets (valued at the time of investment) in securities of non-U.S. issuers, including securities represented by American Depository Receipts. 22 Notwithstanding the foregoing investment restrictions, Acorn USA may purchase securities pursuant to the exercise of subscription rights, provided that such purchase will not result in the Fund's ceasing to be a diversified investment company. Performance Information From time to time the funds may quote total return figures. "Total Return" for a period is the percentage change in value during the period of an investment in shares of a fund, including the value of shares acquired through reinvestment of all dividends and capital gains distributions. "Average Annual Total Return" is the average annual compounded rate of change in value represented by the Total Return for the period. Average Annual Total Return is computed as follows: ERV = P(1+T)/n/ Where: P = the amount of an assumed initial investment in shares of a fund T = average annual total return n = number of years from initial investment to the end of the period ERV = ending redeemable value of shares held at the end of the period For example, as of December 31, 1996 the Total Return and Average Total Return on a $1,000 investment in the funds for the following periods were:
ACORN FUND ---------- Average Annual Total Return Total Return ------------ -------------- 1 year............................ 22.6% 22.6% 5 years........................... 125.2% 17.6 10 years.......................... 345.5% 16.1 Life of Fund (inception 6/10/70).. 5,995.7% 16.7 ACORN INTERNATIONAL ------------------- Average Annual Total Return Total Return ------------ -------------- 1 year............................ 20.7% 20.7% 3 years........................... 26.4% 8.1 Life of Fund (inception 9/23/92).. 101.3% 17.8 ACORN USA --------- Average Annual Total Return Total Return ------------ -------------- Life of Fund (inception 9/4/96)... 16.5% 16.5%
23 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. In advertising and sales literature, each fund's performance may be compared with those of market indexes and other mutual funds. In addition to the performance information described above, a fund might use comparative performance as computed in a ranking or rating determined by Lipper Analytical Services, Inc., an independent service that monitors the performance of over 1,000 mutual funds, Morningstar, Inc., or another service. The funds may note their mention or recognition in newsletters, newspapers, magazines, or other media. The funds may similarly note mention or recognition of WAM, or appearances of principals of WAM, in the media. Investment Adviser The funds' investment adviser, Wanger Asset Management, L.P. ("WAM"), furnishes continuing investment supervision to the funds 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. For its services to Acorn Fund WAM receives a quarterly fee (paid in three monthly installments) at the annual rate of .75% of the net asset value of the fund up to $100 million, .50% of the net asset value in excess of $100 million and up to $1.5 billion, and .40% of the net asset value in excess of $1.5 billion, as determined as of the beginning of each calendar quarter. The investment advisory fees of the fund for 1996, 1995, and 1994, were $12,437,000, $10,429,000 and $9,750,000, respectively. For its services to Acorn International, WAM receives a fee paid monthly at the annual rate of 1.25% of the net asset value of the fund up to $100 million, 1% of the net asset value in excess of $100 million and up to $500 million, and .80% of the net asset value in excess of $500 million, as determined as of the beginning of each calendar quarter, reduced by any amount necessary to cause the fund's expenses to be within the limitation described below. The investment advisory fees of Acorn International for 1996, 1995 and 1994 were $13,255,000, $11,667,000 and $11,561,000, respectively. For its services to Acorn USA, WAM receives a fee (calculated daily and paid monthly) at the annual rate of 1.00% of the net asset value of the fund up to $200 million and .95% of the net asset value in excess of $200 million, as determined as of the beginning of each calendar quarter. From its inception on September 4, 1996 to December 31, 1996, Acorn USA paid investment advisory fees of $101,000. 24 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. The investment advisory agreement provides that the total annual expenses of each fund, exclusive of taxes, interest, and extraordinary litigation expenses, but including fees paid to WAM, shall not exceed the limits prescribed by any state in which that fund's shares are being offered for sale. Acorn believes that currently the most restrictive limits are 2.5% of the first $30 million of the average net asset value, 2% of the next $70 million, and 1.5% of the average net asset value in excess of $100 million. Brokers' commissions and other charges relating to the purchase and sale of securities are not regarded as expenses for this purpose. Moreover, for purposes of calculating the expenses subject to this limitation, the excess custodian costs attributable to investments in foreign securities compared to the custodian costs which would have been incurred had the investments been in domestic securities are excluded. For the purpose of determining whether the fund is entitled to any reduction in advisory fee or expense reimbursement, the fund's expenses are calculated monthly and any reduction in fee or reimbursement is made monthly. Each fund's operating expenses have been well below those limitations. WAM advanced all of Acorn International's organizational expenses, which are being amortized and reimbursed to WAM through September, 1997. WAM also advanced all of Acorn USA's organizational expenses, which are being amortized and reimbursed to WAM through September 2001. WAM is a limited partnership managed by its general partner, Wanger Asset Management, Ltd., which is controlled by Ralph Wanger. WAM commenced operations in 1992. Ralph Wanger, Charles P. McQuaid, Terence M. Hogan, Leah J. Zell, Marcel P. Houtzager and Robert A. Mohn, who are officers of the Trust, are principals of WAM. WAM has approximately $5.6 billion under management. Distributor Shares of each fund are distributed by WAM Brokerage Services, L.L.C. ("WAM BD") under a Distribution Agreement as described in the prospectus dated April 30, 1997, which is incorporated herein by reference. The Distribution Agreement continues in effect 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. 25 As agent, WAM BD offers shares of each fund to investors in states where the shares are qualified for sale, at net asset value without sales commissions or other sales loads to the investor. In addition, no sales commission or "12b- 1" payment is paid by the funds. WAM BD offers the funds' shares only on a best efforts basis. The Trust The Declaration of Trust may be amended by a vote of either the Trust's shareholders or its trustees. The Trust may issue an unlimited number of shares, in one or more series as the board of trustees may authorize. Any such series of shares may be further divided, without shareholder approval, into two or more classes of shares having such preferences or special or relative rights or privileges as the trustees may determine. The shares of the funds are not currently divided into classes. Acorn Fund, Acorn International and Acorn USA are the only series of the Trust currently being offered. 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. On any matter submitted to a vote of shareholders, shares are voted in the aggregate and not by individual series except that shares are voted by individual series when required by the Investment Company Act of 1940 or other applicable law, or when the board of trustees determines that the matter affects only the interests of one series, in which case shareholders of the unaffected series are not entitled to vote on such matters. All shares of the Trust are voted together in the election of trustees. Trustees and Officers The trustees and officers of the Trust and their ages and principal business activities during the past five years are: Irving B. Harris, trustee and chairman Two North LaSalle Street, Chicago, Illinois 60602; age 86; chairman of the executive committee and director, Pittway Corporation (multi-product manufacturer and publisher); chairman, William Harris Investors, Inc. (investment adviser); chairman, The Harris Foundation (charitable foundation); director, Teva Pharmaceutical Industries, Inc. (pharmaceutical manufacturer) Ralph Wanger, trustee and president* 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 62; trustee and president, Wanger Advisors Trust; principal, Wanger Asset Management, L.P. since July 1992; prior thereto, principal, Harris Associates L.P. James H. Lorie, trustee and vice chairman 1101 East 58th Street, Chicago, Illinois 60637; age 74; retired; Eli B. and Harriet B. Williams Professor of Business Administration Emeritus, University of Chicago Graduate School of Business; director, Ardco, Inc. (refrigeration equipment 26 manufacturer); director, Thornburg Mortgage Asset Corp. (REIT) and Santa Fe Natural Tabacco Leo A. Guthart, trustee 165 Eileen Way, Syosset, New York 11791; age 58; vice chairman, Pittway Corporation (multi-product manufacturer and publisher); chief executive officer, Pittway Corporation's Security Group of Companies which include ADEMCO (manufacturer of alarm equipment), ADI (distributor of security equipment), Fire Burglary Instruments (supplier of security control panels), First Alert Professional (alarm dealers), Cylink Corporation (supplier of encryption equipment), and Alarm Net (cellular radio service); director, AptarGroup, Inc. (producer of dispensing valves, pumps and closures); director, Cylink Corporation; chairman of the board of trustees, Hofstra University; chairman, Tech Transfer Island Corp. (private investment partnership); director, Long Island Research Institute Jerome Kahn, Jr., trustee Two North LaSalle Street, Suite 400, Chicago, Illinois 60602; age 62; vice president, William Harris Investors, Inc. (investment adviser); director, Pittway Corporation (multi-product manufacturer and publisher) David C. Kleinman, trustee 1101 East 58th Street, Chicago, Illinois 60637; age 60; senior lecturer in business administration, University of Chicago Graduate School of Business; business consultant; director, Irex Corporation (insulation contractor) Charles P. McQuaid, trustee and senior vice president* 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 43; trustee and senior vice president, Wanger Advisors Trust; principal, Wanger Asset Management, L.P. since July 1992; prior thereto, principal, Harris Associates L.P. Roger S. Meier, trustee 1211 S. W. Fifth Avenue, Portland, Oregon 97204; age 70; president, AMCO, Inc. (investment and real estate management); director, Fred Meyer, Inc. (retail chain); director, Red Lion Inns Limited Partnership (hotel chain); director, Key Bank of Oregon (banking); chairman of Investment Council and member of Committee of Legacy Systems (hospital); executive director and chairman of investment committee, Portland Art Museum Adolph Meyer, Jr., trustee 1511 West Webster Avenue, Chicago, Illinois 60614; age 72; president, Gulco Corp. (leather manufacturer) Malcolm N. Smith, trustee (resigned during 1996) 309 Maple Avenue, Highland Park, Illinois 60035; age 75; president, Newmac, Inc. (importers of Sheffield cutlery); prior thereto, president, Macromatic Division, Milwaukee Electronics Corporation (electronic timing devices manufacturer) Terence M. Hogan, vice president 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 34; vice president, 27 Leah J. Zell, vice president 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 47; vice president, Wanger Advisors Trust; principal, analyst, and portfolio manager, Wanger Asset Management, L.P., since July 1992; prior thereto, analyst, Harris Associates L.P. Marcel P. Houtzager, vice president 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 36; principal and investment analyst, Wanger Asset Management, L.P. since April 1992 Robert A. Mohn, vice president 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 35; principal, analyst and portfolio manager, Wanger Asset Management, L.P. since August 1992 Merrillyn J. Kosier, vice president and secretary 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 36; vice president and secretary, Wanger Advisors Trust; director of marketing and shareholder services, Wanger Asset Management, L.P., since September 1993; prior thereto, vice president of marketing, Kemper Financial Services, Inc. Bruce H. Lauer, vice president and treasurer 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; age 39; vice president and treasurer, Wanger Advisors Trust; chief administrative officer, Wanger Asset Management, L.P. since April 1995; prior thereto, first vice president, investment accounting, Kemper Financial Services, Inc. Kenneth A. Kalina, assistant treasurer 227 West Monroe Street, Suite 3000, Chicago, Illinois 60603; age 37; assistant treasurer, Wanger Advisors Trust; Fund controller, Wanger Asset Management, L.P., since September 1995; prior thereto, treasurer of the Stein Roe Mutual Funds *Messrs. McQuaid and Wanger are trustees who are interested persons of Acorn as defined in the Investment Company Act of 1940, and of WAM. Messrs. Harris, Lorie, and Wanger are members, and Mr. McQuaid is an alternate member, of the executive committee, which has authority during intervals between meetings of the board of trustees to exercise the powers of the board, with certain exceptions. At March 31, 1997 the trustees and officers as a group had the power to vote or dispose of 3,595,385 shares (1.88% of the outstanding shares) of Acorn Fund; 1,233,214 shares (1.32% of the outstanding shares) of Acorn International; and 1,008,242 shares (13.32% of the outstanding shares) of Acorn USA. Of these shares, the trustees and officers disclaimed beneficial ownership in the following numbers of shares; 2,413,102 shares of Acorn Fund (1.26% of the outstanding shares); 999,997 shares of Acorn International (1.07% of the outstanding shares); and 433,001 shares of Acorn USA (5.72% of the outstanding shares). The Illinois Deferred Compensation Plan held 16,331,111 shares of Acorn Fund (8.55% of the outstanding shares). Charles Schwab & Co., Inc. held 13,317,126 shares of Acorn International (14.23% of the outstanding shares) as holder of record, but not beneficially. National Financial Service held 940,443 shares of Acorn USA (12.4% of the outstanding shares) as holder of record, but not beneficially. During 1996 the funds paid fees aggregating $216,000 to board members who were not affiliated with WAM. 28 The following table sets forth the total compensation paid by the Trust during the fiscal year ended December 31, 1996 to each of the trustees of the trust. The trust has no retirement or pension plan. The officers and trustees affiliated with WAM serve without any compensation from the Trust.
Aggregate Aggregate Aggregate Total Compensation Compensation Compensation Compensation Name of Trustee from Acorn from Acorn from Acorn from Fund International USA Fund Complex - ----------------------------------------------------------------------------------------------------- Irving B. Harris $43,197 $35,595 $208 $81,000 Leo A. Guthart 9,965 8,480 55 18,500 Jerome Kahn, Jr. 10,965 9,480 55 20,500 David C. Kleinman 11,280 9,660 60 21,000 James H. Lorie 9,465 7,980 55 17,500 Charles P. McQuaid 0 0 0 0 Roger S. Meier 10,215 8,730 55 19,000 Adolph Meyer, Jr. 9,650 8,300 50 18,000 Malcolm N. Smith /4/ 10,965 9,480 55 20,500 Ralph Wanger 0 0 0 0 - -----------------------------------------------------------------------------------------------------
Purchasing and Redeeming Shares Purchases and redemptions are discussed in the funds' prospectus under the headings "How to Buy Shares," "How to Sell Shares," and "Transaction Services." All of that information is incorporated herein by reference. For purposes of computing the net asset value of a share of either fund, 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 sales price at the time of valuation. A security for which there is no reported sale on the valuation date is valued at the mean of the latest bid and ask quotations or, if there is no ask quotation, at the most recent bid quotation. Securities for which quotations are not available and any other assets are valued at a fair value as determined in good faith by the /4/ At December 31, 1996, Mr. Smith had resigned his position as a trustee. 29 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. The funds' net asset values are determined only on days on which the New York Stock Exchange ("NYSE") is open for trading. The NYSE is regularly closed on Saturdays and Sundays and on New Year's Day, the third Monday in February, Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving, and Christmas. If one of these holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding Friday or the following Monday, respectively. Trading in the portfolio securities of the funds may take place in various foreign markets on certain days (such as Saturday) when the funds are not open for business and do not calculate their net asset values. Conversely, trading in the funds' portfolio securities may not occur on days when the funds are open. Therefore, the calculation of net asset value does not take place contemporaneously with the determinations of the prices of many of the funds' portfolio securities and the value of the funds' portfolios may be significantly affected on days when shares of the funds may not be purchased or redeemed. Computation of net asset value (and the sale and redemption of fund shares) may be suspended or postponed during any period when (a) trading on the NYSE is restricted, as determined by the Securities and Exchange Commission, or that exchange is closed for other than customary weekend and holiday closings, (b) the Commission has by order permitted such suspension, or (c) an emergency, as determined by the Commission, exists making disposal of portfolio securities or valuation of the net assets of the funds not reasonably practicable. Acorn has elected to be governed by Rule 18f-1 under the Investment Company Act of 1940 pursuant to which it is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of a fund during any 90- day period for any one shareholder. Redemptions in excess of the above amounts will normally be paid in cash, but may be paid wholly or partly by a distribution in kind of securities. If a redemption is made in kind, the redeeming shareholder would bear any transaction costs incurred in selling the securities received. Due to the relatively high cost of maintaining smaller accounts, Acorn reserves the right to redeem shares in any account for their then-current value (which will be promptly paid to the investor) if at any time the shares in the account do not have a value of at least $1,000. 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. 30 In connection with the Switch Plan, WAM acts as a shareholder servicing agent for the Reich & Tang Money Funds ("Money Funds"). For its services it receives a fee at the rate of 0.35% of the average annual net assets of each account in a Money Fund established through the Switch Plan, pursuant to a 12b-1 plan adopted by the Money Funds. Additional Tax Information Each fund intends to continue to qualify to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code (the "Code") so as to be relieved of federal income tax on its capital gains and net investment income currently distributed to its shareholders. At the time of your purchase, a fund's net asset value may reflect undistributed income, capital gains, or net unrealized appreciation of securities held by that fund. A subsequent distribution to you of such amounts, although constituting a return of your investment, would be taxable either as a dividend or capital gain distribution. Foreign currency gains and losses, including the portion of gain or loss on the sale of debt securities attributable to foreign exchange rate fluctuations, are taxable as ordinary income. If the net effect of these transactions is a gain, the income dividend paid by a fund will be increased; if the result is a loss, the income dividend paid by a fund will be decreased. Dividends paid by Acorn International are not eligible for the dividends- received deduction for corporate shareholders, if as expected, none of that fund's income consists of dividends paid by United States corporations. A portion of the dividends paid by Acorn Fund and Acorn USA is expected to be eligible for the dividends-received deduction. Capital gain distributions paid from the funds are never eligible for this deduction. Income received by the funds from sources within various foreign countries will be subject to foreign income taxes withheld at the source. Under the Code, if more than 50% of the value of a fund's total assets at the close of its taxable year comprises securities issued by foreign corporations, that fund may file an election with the Internal Revenue Service to "pass through" to its shareholders the amount of foreign income taxes paid by that fund. Pursuant to this election, shareholders will be required to: (i) include in gross income, even though not actually received, their respective pro rata share of foreign taxes paid by the fund; (ii) treat their pro rata share of foreign taxes as paid by them; and (iii) either deduct their pro rata share of foreign taxes in computing their taxable income, or use it as a foreign tax credit against U.S. income taxes (but not both). No deduction for foreign taxes may be claimed by a shareholder who does not itemize deductions. Acorn International intends to meet the requirements of the Code to "pass through" to its shareholders foreign income taxes paid, but there can be no assurance that it will be able to do so. Each shareholder will be notified within 60 days after the close of each taxable year of Acorn International, if the foreign taxes paid by the fund will "pass through" for that year, and, if so, the amount of each shareholder's pro rata share (by country) of (i) the foreign taxes paid, and (ii) Acorn International's gross income from foreign sources. Of course, shareholders who 31 are not liable for federal income taxes, such as retirement plans qualified under Section 401 of the Code, will not be affected by any such "pass through" of foreign tax credits. Acorn Fund and Acorn USA do not expect to be able to "pass through" foreign tax credits. Taxation of Foreign Shareholders The Code provides that dividends from net income, which are deemed to include for this purpose each shareholder's pro rata share of foreign taxes paid by Acorn International (see discussion of "pass through" of the foreign tax credit to U.S. shareholders), will be subject to U.S. tax. For shareholders who are not engaged in a business in the U.S., this tax would be imposed at the rate of 30% upon the gross amount of the dividend in the absence of a Tax Treaty providing for a reduced rate or exemption from U.S. taxation. Distributions of net long-term capital gains are not subject to tax unless the foreign shareholder is a nonresident alien individual who was physically present in the U.S. during the tax year for more than 182 days. Portfolio Transactions Portfolio transactions of the funds are placed with those securities brokers and dealers that WAM believes will provide the best value in transaction and research services for each fund, either in a particular transaction or over a period of time. Although some transactions involve only brokerage services, many involve research services as well. In valuing brokerage services, WAM makes a judgment as to which brokers are capable of providing the most favorable net price (not necessarily the lowest commission) and the best execution in a particular transaction. Best execution connotes not only general competence and reliability of a broker, but specific expertise and effort of a broker in overcoming the anticipated difficulties in fulfilling the requirements of particular transactions, because the problems of execution and the required skills and effort vary greatly among transactions. In valuing research services, WAM makes a judgment of the usefulness of research and other information provided to WAM by a broker in managing each fund's investment portfolio. In some cases, the information, e.g., data or recommendations concerning particular securities, relates to the specific transaction placed with the broker, but for the greater part the research consists of a wide variety of information concerning companies, industries, investment strategy, and economic, financial, and political conditions and prospects, useful to WAM in advising that fund. The reasonableness of brokerage commissions paid by the funds in relation to transaction and research services received is evaluated by WAM's staff on an ongoing basis. The general level of brokerage charges and other aspects of each fund's portfolio transactions are reviewed periodically by the board of trustees and its committee on portfolio transactions. WAM is the principal source of information and advice to the funds, and is responsible for making and initiating the execution of investment decisions by the funds. However, the board of trustees recognizes that it is important for WAM, in performing its responsibilities to the funds, to continue to receive and evaluate the broad spectrum of economic and financial 32 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. Brokerage commissions incurred by Acorn Fund for 1996, 1995, and 1994 aggregated approximately $3,440,000, $2,565,000, and $1,870,000, respectively, not including the gross underwriting spread on securities purchased in underwritten public offerings. During 1996 Acorn Fund paid brokerage commissions aggregating approximately $2,435,000 in connection with portfolio transactions involving purchases and sales aggregating approximately $822 million to brokers who furnished investment research services to the fund. Brokerage commissions incurred by Acorn International for 1996, 1995, and 1994 aggregated approximately $3,929,000, $3,113,000, and $3,775,000, respectively, not including the gross underwriting spread on securities purchased in underwritten public offerings. In 1996 Acorn International paid brokerage commissions aggregating approximately $3,614,000 in connection with portfolio transactions involving purchases and sales aggregating approximately $910 million to brokers who furnished investment research services to the fund. Brokerage commissions incurred by Acorn USA in 1996 totalled $88,900, not including the gross underwriting spread on securities purchased in underwritten public offerings. In 1996 Acorn USA paid brokerage commissions aggregating approximately $47,400 in connection with portfolio transactions involving purchases and sales aggregating approximately $15 million to brokers who furnished investment research services to the fund. 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 both of the funds and one or more other advisory clients. If one or both of the funds and other clients purchase or sell the same class of securities on the same day, the transactions will be allocated as to amount and price in a manner considered equitable to each. Custodian State Street Bank and Trust Company, P.O. Box 8502, Boston Massachusetts 02266-8502, 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 33 funds. The custodian 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 the custodian to deposit certain portfolio securities of the funds in central depository systems as permitted under federal law. The funds may invest in obligations of the custodian and may purchase or sell securities from or to the custodian. 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. 34 Appendix - Description of Bond Ratings A rating of a rating service represents the service's opinion as to the credit quality of the security being rated. However, the ratings are general and are not absolute standards of quality or guarantees as to the creditworthiness of an issuer. Consequently, WAM believes that the quality of debt securities in which the funds invest should be continuously reviewed. A rating is not a recommendation to purchase, sell or hold a security, because it does not take into account market value or suitability for a particular investor. When a security has received a rating from more than one service, each rating should be evaluated independently. Ratings are based on current information furnished by the issuer or obtained by the ratings services from other sources which they consider reliable. Ratings may be changed, suspended or withdrawn as a result of changes in or unavailability of such information, or for other reasons. The following is a description of the characteristics of ratings used by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). Moody's Ratings Aaa--Bonds rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. Although the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such bonds. Aa--Bonds rated Aa are judged to be high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa bonds or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risk appear somewhat larger than in Aaa bonds. A--Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. 35 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. 36 The Acorn Family of Funds Annual Report ------------------------------ December 31, 1996 Managed by Wanger Asset Management, L.P.
Acorn Family of Funds Annual Report 1996 .Table of Contents Squirrel Chatter .Excerpt from A Zebra in Lion Country 1 Acorn USA .In a Nutshell 2 .Performance at a Glance 3 .Statement of Investments 10 Acorn Fund .In a Nutshell 2 .Performance at a Glance 5 .Major Portfolio Changes 12 .Statement of Investments 14 .Foreign Portfolio Diversification 20 Acorn International .In a Nutshell 6 .Performance at a Glance 7 .Major Portfolio Changes 21 .Statement of Investments 23 .Portfolio Diversification 30 Acorn Family of Funds .Tax News 3 .The Scarlet A Awards 8 .Reflections on the Year 9 .Report of Independent Auditors 31 .Financial Highlights 32 .Statements of Assets 34 and Liabilities .Statements of Operations 35 .Statements of Changes in 36 Net Assets .Notes to Financial 37 Statements
Press Recognition .On February 3, 1997, BusinessWeek ran a cover story entitled, "The Best Mutual Funds". A prominent financial planner recommended Acorn International for his model portfolio. In the same issue, Acorn Fund was one of three small-cap growth funds featured in a comparison of five-year risk-adjusted returns. .A few days later, on February 10, 1997, Forbes printed a remarkably similar story entitled, "How to Build a Mutual Fund Portfolio." Acorn Fund was one of the four recommended "good buys" among small-company funds. .Squirrel Chatter People ought to invest at least a minimum in Acorn Fund if only to get hold of Acorn's quarterly reports and read the president's tale..... - --Mutual Funds Magazine, July 1996 A Zebra in Lion Country, by Ralph Wanger, is due out in bookstores in April. Published by Simon & Schuster, this book is a witty survival guide to investing. It also features some of Ralph Wanger's letters to shareholders which investors have enjoyed reading over the years. An excerpt from his new book follows: Every bad idea starts from a good idea. We all know this from our own experience. We go to a party and have a glass of champagne. Good idea. We feel better, more relaxed. The party is now more interesting, the toasts more lively, the girls prettier, the dancing more fun. So we have a second glass of champagne. Another good idea. The jokes now have gone from humorous to hilarious, the people you're meeting are the most interesting and glamorous you've ever known, and the dancing is wild and you've never been better at it. But after the third glass, and the fourth... well, what started as a good idea turns into a very bad idea, with your head already beginning to pound from a headache you know will terminate in a humdinger of a hangover. It happens all the time in the stock market. Technology stocks have been the rage for a long time, albeit with some periods of "consolidation." The boom started with a very good idea. American technology leads the world. Personal computers and the software to run them, and other electronic and communications devices, have become inexpensive and relatively easy to use, and we all buy them. Companies like Microsoft, Motorola, Intel are well-run - indeed fabulous - companies. All this is correct, a great investment idea. The people who were in early have made a lot of money. But as the party lengthens, the stocks get taken over by people who don't particularly understand what's happening; they are just playing a trend. New companies are invented to meet their demands. The securities industry, you know, is not a service industry. It is a manufacturing industry. If you want a stock, Wall Street will make it for you. Any business, any kind you want. Recently, the Internet being the rage, the investment bankers have worked overtime creating a stream of IPOs to meet the demand. And people love them, to judge by their P/Es, some of which have soared into the triple-digit stratosphere. Remember back in the early '80's when the hard disk drive for computers was invented? It was an important, crucial invention, and investors were eager to be part of this technology. More than 70 disk drive companies were formed and their stocks were sold to the public. Each company had to get 20 percent of the market share to survive. For some reason, they didn't all do it. Anything can get overdone. In the financial world, things get taken to extremes all the time, like the tulip scandal of 1637. That started with a good idea. The tulip was a terrific invention. The flower had not previously been seen in Europe, and it was a great hit, and new varieties and colors increased its popularity. There was nothing wrong with the idea. But after a few years people started selling tulip bulbs for hundreds of thousands of dollars apiece, if they were of a rare variety, and a good idea went to speculative madness. The tulip was a good idea, disk drives were a good idea, the Internet is a good idea. They have to be good ideas or they would not become widely popular. Come up with a concept that's patently silly or harmful and people won't want it. So, only a good idea can become so popular that it becomes a bad idea. 1 Acorn USA .In a Nutshell Acorn USA's first baby step was a grown-up leap. From launch date (September 4, 1996) through year-end, your Fund rocketed 16.5%, nearly double the return of the small-cap Russell 2000 index. Nobody (including us) can maintain that pace, but we're certainly off to a great start. Acorn USA's stellar performance was not the result of any single stock or sector concentration. Rather, our top stocks were a multi-industrial group, exhibiting the virtue of portfolio diversification. Our best performing energy stock was NGC Corp., a natural gas broker benefiting from buoyant gas prices and utility deregulation. Technology was represented by ACT Manufacturing, an electronics assembler with a bulging backlog of new customers. Health care winner was Steris, a sterilization equipment company recovering from acquisition indigestion. Best banker was Coast Savings, caught in the California S&L merger wave. Our growth utility (no oxymoron) CalEnergy benefited from a strong jolt caused by its recent acquisition of a UK electric company. We even cashed in on some Internet hysteria. Our top tech stock was American Business Information (ABII), a collector and vendor of financial data on small businesses. The stock crashed mid-year on overblown fears that free Internet data sources would send ABII's business the way of the buggy whip. Funny thing... the over-hyped Internet stocks got the whipping, while our Internet 'victim' soared 60%. Be 1997 bull or bear or somewhere in between, we're sticking to the same stock-by-stock fundamentals- based investment style that has so far proved very valuable getting Acorn USA off to a good start. /s/ Robert A. Mohn Robert A. Mohn Portfolio Manager Fund Assets as of 12/31/96: $53.1 million .Acorn USA Top 10 Holdings
CalEnergy 8.2% Power Plants NGC 6.1% Gas Processing/Marketing Coast Savings 4.8% California Savings & Loan GeoScience 4.7% Offshore Seismic Equipment Wackenhut 4.5% Prison Management Respironics 4.2% Sleep Apnea Products Lincare Holdings 3.7% Home Health Care Services World Color Press 3.6% Printing Data Transmission 3.6% Data Services for Farmers Seagull Energy 3.6% Oil/Gas Producer
The Fund's top 10 holdings and portfolio diversification vary with changes in portfolio investments. See the Statement of Investments for a complete list of the Fund's holdings. Fund - ----------------------------------- facts Our e-mail address has changed! The new address is acorn@wanger.com Find out what's new at Acorn. Visit our interactive web site at www.wanger.com 2 .Performance at a Glance Acorn USA Portfolio Diversification .as a % of net assets, as of 12/31/96 [PIE CHART APPEARS HERE]
Information 18.3% Health Care 12.6% Consumer Goods/Services 6.0% Finance 9.0% Industrial Goods/Services 17.9% Energy/Minerals 27.1% Cash 9.1% ------ 100.0%
Acorn Family of Funds .Tax News Residents of Florida and Pennsylvania may be required to pay an intangibles tax or a personal property tax on a portion of the year-end value of any of the Acorn funds. The taxable NAVs for each Acorn fund are listed below:
Taxable NAVs ---------------------------------------- Acorn Acorn Fund International Acorn USA FL Intangibles Tax $14.99 $19.61 $11.65 PA Personal Property Tax $11.94 $17.99 $ 7.27
Relative Performance - ----------------------------------------------------------------- 4th quarter since inception 1996 (9/4/96) Acorn USA 8.7% 16.5% Russell 2000 5.2% 9.0% S&P MidCap 400 6.1% 10.7% S&P 500 8.3% 13.8% Dow-Jones 10.2% 15.7%
The Russell 2000 is formed by taking 3,000 companies and then eliminating the largest 1,000 leaving a good small company index. The S&P MidCap 400 is a market value-weighted index of 400 stocks that are in the next tier down from the S&P 500. The S&P 500 is a broad market-weighted average, still blue-chip dominated. The Dow Jones Industrial Average includes 30 large companies. The beginning value used to compute the Dow Jones "since inception" return in the chart above is as of 8/31/96. All indexes are unmanaged and returns include reinvested dividends. Net Asset Value Per Share 12/31/96: $11.65 A I U IRA - --------------------------------------------------- Reminder Remember, you have until April 15, 1997 to make your 1996 IRA contribution. For an IRA booklet, please call 1-800-9-ACORN-9 (1-800-922-6769). 3 Acorn Fund .In a Nutshell Acorn Fund went up 4.2% in the fourth quarter. That makes eight consecutive up quarters. 1996 was a good year for us. Our gain of 22.6% is a fine absolute result, and ahead of the small-cap market averages (S&P MidCap 400, Russell 2000, Lipper Small Company Growth Funds Index) in the relative performance table on page 5. Our foreign stocks matched our strong domestic results. Our results are analyzed in detail on page 9. Our best stocks in the fourth quarter included some long-term holdings and some new names. We first purchased Expeditors International way back in 1987 for $3.00. The airfreight forwarder flew high for us, soaring 30 percent and boosting the Fund $6 million. ACT Manufacturing gave us a wonderful 46.5%+ performance in the quarter. This contract assembler serves the burgeoning telecommunications industry, and it built a $4.8 million gain. We got a tingle from American Power Conversion, which gained 86% in the quarter. APC makes back-up power supplies for computers. Our summer purchase sparked a fast $4 million fourth quarter gain. U.S. blue chip companies have had an awesome run over the last two years. Small capitalization stocks are up, but not nearly as much. Over the long-run, small company stocks have done better than large-cap stocks in the past. We can't predict the future, but we think the reasons for that superior long-term performance are still true. We're patient, long-term investors, and we're still finding fine companies that have stocks selling at prices we think are fair. /s/ Charles P. McQuaid /s/ Terence M. Hogan Charles P. McQuaid Terence M. Hogan Co-Portfolio Manager Co-Portfolio Manager
Fund Assets as of 12/31/96: $2,842.1 million .Acorn Fund Top 10 Holdings ADVANTA 1.9% Credit Cards Harley Davidson 1.8% Recreational Vehicles Manufacturer Carnival 1.6% Cruise Ship Line Liberty Media 1.6% CATVProgramming AES Corporation 1.6% Global Power Producer Lincare Holdings 1.4% Home Health Care Services Thermo Electron 1.4% Energy Systems/Processing Equipment First USA 1.3% Credit Cards Seagull Energy 1.2% Oil/Gas Producer Borders 1.2% Bookstores
The Fund's top 10 holdings and portfolio diversification vary with changes in portfolio investments. See the Statement of Investments for a complete list of the Fund's holdings, including those described under "In a Nutshell."
Fund - ---------------------------------------------------------------- facts Full Year Distributions ---------------------------------------- Acorn Fund Acorn Int'l Acorn USA Ordinary Income $0.11 $0.12 -- Short-Term Capital Gain $0.13 - -- Long-Term Capital Gain $1.34 $0.28 -- Total Per Share in 1996: $1.58 $0.40 --
4 .Performance at a Glance The Value of a $10,000 Investment in Acorn Fund .June 10, 1970 through December 31, 1996 [GRAPH APPEARS HERE] Average Annual Total Return - --------------------------------------------------- 1 Year 5 Years 10 Years Life of Fund 22.6% 17.6% 16.1% 16.7%
Acorn Fund Mountain Chart Plot Points Date Acorn Fund ($) S & P ($) - ---- -------------- --------- 1970 10,000 10,000 1971 17,828 14,490 1972 19,368 17,242 1973 14,765 14,709 1974 10,691 10,816 1975 13,945 14,842 1976 23,045 18,394 1977 27,168 17,077 1978 31,777 18,200 1979 47,790 21,586 1980 62,594 28,602 1981 58,005 27,195 1982 68,208 33,054 1983 85,389 40,510 1984 89,045 43,051 1985 117,142 56,710 1986 136,843 67,295 1987 142,923 70,828 1988 178,370 82,591 1989 222,681 108,761 1990 183,674 105,386 1991 270,641 137,492 1992 336,210 147,928 1993 444,889 162,882 1994 411,750 165,032 1995 497,407 227,047 9/30/96 584,766 257,697 12/31/96 609,569 279,177 Acorn Fund S&P 500 - ---- -------------- --------- $609,569 $279,177
This graph compares the results of $10,000 invested in Acorn Fund on June 10, 1970 (the date Fund shares were first offered to the public), with all dividends and capital gains reinvested, with the Standard & Poor's 500 Stock Index with dividends reinvested (source: Salomon Brothers Inc Stock Facts and Shaw Data Services, Inc.). Past performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that Fund shares, when redeemed, may be worth more or less than their original cost. Acorn Fund Portfolio Diversification .as a % of net assets, as of 12/31/96 [PIE CHART APPEARS HERE]
Information 17.9% Health Care 9.1% Consumer Goods/Services 9.1% Finance 15.8% Industrial Goods/Services 10.6% Energy/Minerals 10.4% Real Estate 2.8% Foreign 22.3% Cash 2.0% ------ 100.0%
Relative Performance - --------------------------------------------------- 4th quarter Last 12 mos. 1996 Acorn Fund 4.2% 22.6% Dow-Jones 10.2% 28.9% S&P 500 8.3% 23.0% S&P MidCap 400 6.1% 19.2% Russell 2000 5.2% 16.5% Lipper Small Company Growth Funds Index -0.9% 14.5%
The Dow Jones Industrial Average includes 30 large companies. The S&P 500 is a broad market-weighted average, still blue-chip dominated. The S&P MidCap 400 is a market value-weighted index of 400 stocks that are in the next tier down from the S&P 500. The Russell 2000 is formed by taking 3,000 companies and then eliminating the largest 1,000 leaving a good small company index. The Lipper Small Company Growth Funds Index is composed of the 30 largest small company growth funds tracked by Lipper Analytical Services. All indexes are unmanaged and returns include reinvested dividends. Net Asset Value Per Share 12/31/96: $15.04 - ------------------------------------------ 5 Acorn International .In a Nutshell Markets stayed on trend in the fourth quarter. The Goldilocks theory of a U.S. economy neither "too hot nor too cold" powered a strong rally here. Overseas, Europe continued to outperform and Asia to underperform. The Fund made the most money in Sweden, Finland and the U.K., and lost the most in Japan. Acorn International rose 4.1% over the three-month period, 1.3% ahead of our small-cap peers, as reported by Lipper Analytical Services. We finished 1996 with an excellent gain of 20.7%. We take special pride in returning 7.4% more than the average international small-cap fund and 8.9% more than the average international large-cap fund, as reported by Lipper. Our investment philosophy is to find good companies and hold them long-term. This works. WM Data is a shining example. It was the biggest dollar winner in the portfolio for the second year in a row, earning our shareholders $32.4 million in 1996 on top of a $24.7 million gain in 1995. It also helped us define an outsourcing theme which we used to guide us to other names. Of our top five winners in 1996, three were European computer service companies. The U.S. economy has been the strongest major economy in the world in recent years, and many foreign economies have been in recession. They will catch up. As the world economy improves, the earnings of companies in our portfolio (who have stayed profitable when times were tough) should flourish. Happy New Year! /s/ Leah Joy Zell Leah Joy Zell Co-Portfolio Manager
Fund Assets as of 12/31/96: $1,772.5 million .Acorn International Top 10 Holdings WM Data Sweden 3.4% Computer Services/Consulting T T Tieto Finland 2.4% Computer Services/Consulting Rhoen Klinikum Germany 1.5% Hospital Management Fresenius Germany 1.4% Dialysis Equipment/Solutions Getronics Netherlands 1.4% Computer Consulting Korea Mobile Telecom Korea 1.2% Mobile Communications Serco Group United Kingdom 1.2% Facilities Management Hennes & Mauritz Sweden 1.2% Apparel Stores Capita Group United Kingdom 0.9% Outsourcing Government Services Oriflame International United Kingdom 0.9% Natural Cosmetics Sold Door-to-Door
The Fund's top 10 holdings and portfolio diversification vary with changes in portfolio investments. See the Statement of Investments for a complete list of the Fund's holdings, including those described under "In a Nutshell." Fund - ---------------------------------------- facts Tax Forms 1099-DIV and 1099-B were mailed to shareholders in January with an informative Tax Guide. The Tax Guide contains important information about claiming a foreign tax credit/deduction (which is new for Acorn International shareholders this year), the income attributable to U.S. Government Obligations, and cost basis. If you did not receive your 1099(s), please call 1-800-962-1585 for a duplicate copy. 6 .Performance at a Glance The Value of a $10,000 Investment in Acorn International .September 23, 1992 through December 31, 1996 [GRAPH APPEARS HERE] Average Annual Total Return - ---------------------------------- 1 Year 3 Years Life of Fund 20.7% 8.1% 17.8%
Acorn Fund Mountain Chart Plot Points Date Acorn Int'l ($) EAFE ($) - ---- --------------- -------- 09/23/92 10,000 10,000 09/30/92 10,010 10,000 12/31/92 10,690 9,614 03/31/93 12,000 10,767 06/30/93 12,920 11,849 09/30/93 13,910 12,635 12/31/93 15,940 12,745 03/31/94 15,850 13,190 06/30/94 15,550 13,864 09/30/94 16,491 13,877 12/31/94 15,334 13,736 03/31/95 14,811 13,992 06/30/95 15,727 14,093 09/30/95 16,824 14,681 12/31/95 16,703 15,275 03/31/96 18,203 15,717 06/30/96 19,593 15,965 09/30/96 19,362 15,945 12/31/96 20,133 16,199 Acorn Fund EAFE International - ---- -------------- --------- $20,133 $16,199
This graph compares the results of $10,000 invested in Acorn International on September 23, 1992 (the date the Fund began operations), with all dividends and capital gains reinvested, with Morgan Stanley's Europe, Australia and Far East Index (EAFE). The beginning value of EAFE is as of 9/30/92. Past performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that Fund shares, when redeemed, may be worth more or less than their original cost. Acorn International Portfolio Diversification .as a % of net assets, as of 12/31/96 [PIE CHART APPEARS HERE]
Information 24.5% Health Care 7.4% Consumer Goods/Services 24.2% Finance 17.8% Industrial Goods/Services 10.1% Energy/Minerals 5.7% Real Estate 1.3% Transportation 0.7% Cash 8.3% ------ 100.0%
Relative Performance - --------------------------------------------------------- 4th quarter Last 12 mos. 1996 Acorn International 4.1% 20.7% EAFE 1.6% 6.1% Lipper International Small Company Funds Average 2.8% 13.3% Lipper International Funds Average 3.9% 11.8%
EAFE is Morgan Stanley's Europe, Australia and Far East Index, an unmanaged index of companies throughout the world in proportion to world stock market capitalization, excluding the U.S. and Canada. The Lipper International Small Company Funds Average is calculated from the performance of a group of small company international funds, including Acorn International. For the 4th quarter period above, the group consisted of 28 funds. For the 12-month period above, the group consisted of 12 funds. The Lipper International Funds Average is an average of 386 international funds tracked by Lipper Analytical Services. All indexes are unmanaged and returns include reinvested dividends. Net Asset Value Per Share 12/31/96: $19.61 - ------------------------------------------ 7 Acorn Family of Funds .The Scarlet A Awards Wanger Asset Management has 14 skilled investment professionals constantly seeking great stocks. Our ideas come from numerous sources. We do a lot of work to confirm the validity of a stock idea, whether it is initially suggested internally or brought to us by one of our many friends in the brokerage industry. The prestigious Scarlet A award goes to the original source of the idea. The Acorn funds had lots of great stocks in 1996, so only spectacular performers won this year. Each Scarlet A stock soared over 90% and earned our shareholders over $9 million. No stock can grow like that forever (or even for very long), but it's great while it lasts. Acorn International Co-Portfolio Manager Leah Zell is our Stockholm stock stalker, checking in at the Swedish capital twice a year. The international boom in outsourcing continues to be one of our most successful themes, and WM Data stands out as one of our best stocks. This company, a facilities management and data processing organization, carried on its 1995 success and made Acorn International $32 million and Acorn Fund $18.6 million by climbing 91% in 1996. Mikael Randel of Carnegie Securities in Copenhagen wins a Scarlet A for the second year in a row. He introduced Leah to the company back in 1993. Our analysts watch for spinouts, which often outperform the market. Acorn Fund Co-Portfolio Manager Terry Hogan saw K-Mart distributing its specialty retail divisions. Borders Group, a bookstore chain, earned Acorn Fund $17.0 million as it rose 94%. The Scarlet A goes to Terry Hogan for finding this great blue-light special. (If you want to help an Acorn company, buy your copy of A Zebra in Lion Country at Borders or Walden.) We often advocate a patient style of investing. Our willingness to wait for other investors to recognize value paid off with AES Corporation. AES, a global power producer, flickered modest returns for several years, but then surged 95% in 1996, generating a $15.8 million profit for Acorn Fund. Terry Hogan first purchased this stock in 1991 after learning of it from John Hatsopoulos, President of long-time Acorn holding Thermo Electron. Thermo also invested in AES. Scarlet A fans may recall that Thermo Electron appeared on last year's winning list. John Hatsopoulos will receive the coveted Scarlet A this year. The energy sector warmed our hearts and your wallets in 1996. Jason Selch, WAM's oil and gas guru, identified United Meridian in 1996. The Houston-based producer has particular expertise in 3-D seismic and off-shore finds, and has a terrific acquisition record. UMC made $13.9 million for Acorn Fund as it gushed 199% last year. The Scarlet A goes to Hanifen Imhoff's Greg McMichael, who delivered a great study of United Meridian to Jason. We also pay tribute to Ralph Bard, an expert on oil and mining, who helped us over the years. Mr. Bard passed away in late 1996. Jason's second great energy stock was Atwood Oceanics, which provided a $12.1 million profit - a 152% gain. Atwood operates off-shore drilling rigs. The company benefited from rising day-rates for its rigs, which remain well below replacement costs. Atwood was an old-time Acorn holding, dating back to 1990. Mike Breard of Dominick and Dominick presented the idea originally. Mario Cibelli of Robotti & Eng resold the intrinsic value of Atwood Oceanics to Jason, who verified Atwood's attractive attributes and doubled our position. Many thanks to both Mike Breard and Mario Cibelli, two more 1996 Scarlet A winners. Still more wins in the oil service industry were Digicon, a U.S. company in 3-D seismic services, and Veritas, a Canadian company in the same business. Digicon and Veritas merged to become Veritas DGC. The Scarlet A goes to Marshall Adkins, now at Raymond James. Finland is home to TT Tieto and Raision Tehtaat. TT Tieto is a fast-growing computer services/consulting company. This year the stock jumped 160% and brought Acorn International $26 million in profits. Raision Tehtaat is a potato processing co-operative that also deals in paper and pulp specialty chemicals. This stock provided an $18 million profit for Acorn International and a 373% return in 1996. Scarlet A's for both of these great stock ideas go to Leah Zell. Last but not least, we award our first-ever Scarlet A for astute stock selling to Acorn USA Portfolio Manager, Robert Mohn. Rob followed Acorn Fund holding, Mercury Finance. Last year, Mercury's profitable auto loan business shifted into reverse. Rob didn't trust that the company could continue to meet its 20% earnings growth pledge. He began selling the stock in 1996 and completely closed out the position in early 8 January 1997. Soon after, Mercury Finance's CEO resigned as the company publicly admitted to fraudulent earnings statements. Mercury's stock plummeted from $15 to $2 overnight, and now the company is fighting to avoid bankruptcy. Rob's savvy decision saved Acorn shareholders $18 million. Congratulations to all our Scarlet A winners. .Reflections on the Year The "In a Nutshell" section featured in every quarterly shareholder report provides a detailed analysis of your funds' performance for the preceding 3 months. We encourage you to read these performance summaries written by your Co- Portfolio Managers. With this report, we have added to these summaries by reflecting on other factors that contributed to your funds' outstanding performance for the full year. Acorn Fund - -------------------------------------------------------------------------- What contributed to your Fund's performance in 1996? Early in the year, we recognized the potential in the energy sector so we emphasized this group. The commitment paid off. Our oil and gas stocks exploded, up 69% for the year. Perhaps next time you have to pay $1.68 for a gallon of gasoline, you will feel better knowing that you own some oil wells. Our 20 largest holdings were up an average of 29%. These positions represent companies in a number of industries but all share a common factor - they are leaders in their field. Many of the stocks you will recognize, as we have owned them for some time - Harley Davidson, Borders Group and Carnival. Our 20 largest holdings comprised 25% of the total assets in the fund at year-end. Since our biggest positions had above-average results, the Fund as a whole did well. Stock-picking made a difference. Acorn Fund's 20 top-performing stocks were up a whopping 91% on average and made the Fund $249 million. Acorn Fund is highly diversified across companies and industries. The benefit of diversification is to minimize the impact of individual underperforming stocks (although it also limits the total effect of top performers). With over 350 stocks in the portfolio, there will always be some losers. This year, our 20 worst-performing stocks were down an average of 35%, costing the portfolio $90 million. But as you can see from our overall 22.6% return, superior stock selection and diversification paid off this year. Acorn International - ----------------------------------------------------------------------------- There were four key factors that influenced Acorn International's total twelve- month return - stock selection, country allocation, local market returns and currency. The following summary explains where we achieved our outstanding performance in 1996:
Good stock picking + 9.0% Weighting markets correctly + 3.2 Gains in local markets +11.9 Currency - 3.4 ------- +20.7%
Acorn International's 20 top-performing stocks were up an astonishing 118% on average, and made the Fund $204 million. Big winners included WM Data, TT Tieto and Getronics. Our top performers represent a number of industries, but these three companies are European computer consulting firms. By comparison, our 20 worst-performing stocks were down an average of 40%, costing the portfolio $73 million. We gained an advantage over EAFE by overweighting strong markets like Sweden, Finland and the UK, and underweighting weak markets like Japan. This contributed a full three percentage points to your Fund's total 20.7% return. Your Fund also benefited from healthy stock markets overseas. Approximately half of the total return was attributable to country stock market performance. The last factor that impacted your Fund's total return was currency. We purchase international stocks so we must consider the value of the U.S. dollar in relation to other currencies. This past year, the dollar's strength resulted in a currency loss on the portfolio of 3.4%. As you can see, investing overseas is complicated but our 20.7% gain in 1996 was well worth the effort. 9 Acorn USA >Statement of Investments December 31, 1996 Number of Shares Value (000) - --------------------------------------------------------- Common Stocks: 90.9% - ---------------------------------------------------------
Information: 18.3% >Broadcasting/CATV: 1.8% 39,000 C-Tec (b) $ 946 Cable TV/Local Telephone >Programming for CATV/TV/ Satellites: 6.3% 85,400 Data Transmission Network (b) 1,900 Data Services for Farmers 50,000 Tele-Communications, Liberty Media Group (b) 1,428 Cable TV Programming - -------------------------------------------------------- 3,328 >Mobile Communications: 0.9% 26,800 COMARCO (b) 489 Wireless Network Testing >Computer Software/Services: 2.8% 80,000 Simulation Sciences (b) 1,190 Process Control Software 10,300 CACI International (b) 216 Computer Software Systems 9,200 Computer Language Research 99 Commercial Tax Software - -------------------------------------------------------- 1,505 >Consumer Software:0.7% 80,000 The 3DO Company (b) 385 Entertainment Software >Business Information: 0.7% 17,000 American Business Information (b) 378 Provides Data on Small Businesses >Distribution: 0.3% 13,700 Richey Electronics (b) 159 Distributes Electronic Components >Computer Systems: 2.1% 41,700 ACT Manufacturing (b) 1,100 Contract Manufacturing >Components/Peripherals: 2.7% 44,000 Kronos (b) 1,408 Time Accounting Software & Clocks ----- Information: Total 9,698
Health Care: 12.6% >Medical Equipment: 8.1% 128,000 Respironics (b) $ 2,224 Sleep Apnea Products 30,000 Invacare 825 Wheelchairs, Patient Aids & Beds 16,000 Steris (b) 696 Sterilization Equipment 44,000 Kinetic Concepts 539 Hospital Beds - -------------------------------------------------------- 4,284 >Services: 4.5% 48,000 Lincare Holdings (b) 1,968 Home Health Care Services 30,000 United Payors & Providers (b) 412 Medical Claims Repricing - -------------------------------------------------------- 2,380 ----- Health Care: Total 6,664 - -------------------------------------------------------- Consumer Goods/Services: 6.0% >Retail: 2.3% 108,100 Host Marriott Services (b) 986 Runs Airport Restaurants 7,000 Borders Group (b) 251 Bookstores - -------------------------------------------------------- 1,237 >Entertainment/Leisure: 2.5% 30,000 Fairfield Communities (b) 743 Vacation Timeshares 33,000 Showboat 569 Casinos - -------------------------------------------------------- 1,312 >Manufacturers: 1.2% 65,200 Rawlings (b) 652 Baseball Equipment ----- Consumer Goods/Services: Total 3,201 - -------------------------------------------------------- Finance: 9.0% >Savings & Loans: 5.4% 69,000 Coast Savings (b) 2,527 California Savings & Loan 11,000 Peoples Bank Bridgeport 318 Consumer Finance - -------------------------------------------------------- 2,845
See accompanying notes to financial statements 10
Number of Shares Value (000) - ------------------------------------------------------------------------------- .Insurance: 3.0% 51,000 Penn Treaty American (b) $ 1,326 Nursing Home Insurance 11,000 Leucadia National 294 Insurance Holding Company - ------------------------------------------------------------------------------- 1,620 .Other: 0.6% 28,000 Jayhawk (b) 315 Finances Used Autos -------- Finance: Total 4,780 - ------------------------------------------------------------------------------- Industrial Goods/Services: 17.9% .Steel: 5.6% 48,500 Steel Dynamics (b) 928 Steel Mini-Mill 50,000 Atchison Casting (b) 900 Steel Foundries 32,000 Schnitzer Steel 820 Scrap Steel 12,000 Gibraltar Steel (b) 315 Steel Processing - ------------------------------------------------------------------------------- 2,963 .Machinery: 1.0% 30,500 Farr (b) 507 Filters .Industrial Suppliers: 3.2% 33,000 Bearings 920 Distributes Industrial Components 28,000 Lilly Industries, Cl. A 511 Industrial Coatings 18,000 Aftermarket Technology (b) 311 Auto Transmission Remanufacturer - ------------------------------------------------------------------------------- 1,742 .Services: 8.1% 155,200 Wackenhut, Cl. B 2,367 Prison Management 100,000 World Color Press (b) 1,925 Printing - ------------------------------------------------------------------------------- 4,292 -------- Industrial Goods/Services: Total 9,504
Principal Amount or Number of Shares Value (000) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Energy/Minerals: 27.1% .Independent Power: 8.1% 128,000 CalEnergy (b) $ 4,304 Power Plants .Oil/Gas Producers: 7.0% 86,000 Seagull Energy (b) 1,892 Oil & Gas Producer 129,000 Tesoro Petroleum (b) 1,806 Oil Refinery/Gas Reserves - ------------------------------------------------------------------------------- 3,698 .Distribution/Marketing/Refining: 6.5% 139,000 NGC 3,232 Gas Processing/Marketing 9,100 United Cities Natural Gas (b) 205 Natural Gas Distributor - ------------------------------------------------------------------------------- 3,437 .Oil Services: 5.5% 191,000 GeoScience (b) 2,483 Offshore Seismic Equipment Company 4,000 Atwood Oceanics (b) 254 Offshore Drilling Company 10,000 J Ray McDermott (b) 220 Offshore Construction Company - ------------------------------------------------------------------------------- 2,957 -------- Energy/Minerals: Total 14,396 -------- Total Common Stocks: 90.9% 48,243 (Cost: $44,075) Short-Term Obligations:10.5% $2,577 Prudential Funding 1/2/97 6.25% 2,577 $2,576 Capital Services 1/2/97 6.50% 2,576 $400 State Street Bank Repurchase Agreement 1/02/97 2.00%; 12/31/96 Agreement Collateralized by U.S. Treasury Notes 400 - ------------------------------------------------------------------------------- (Amortized Cost: $5,553) 5,553 -------- Total Investments: 101.4% 53,796 (Cost: $49,628) -------- Cash and Other Assets Less Liabilities: (1.4%) (711) -------- Total Net Assets: 100% $53,085 ===============================================================================
- ------------------------------------------------------------------------------- .Notes to Statement of Investments (a) At December 31, 1996, for federal income tax purposes cost of investments was $49,628,000 and net unrealized appreciation was $4,168,000, consisting of gross unrealized appreciation of $5,070,000 and gross unrealized depreciation of $902,000. (b) Non-income producing security. 11 Acorn Fund .Major Portfolio Changes in the Fourth Quarter
Number of Shares ------------------------ 9/30/96 12/31/96 Additions - ------------------------------------------------------------------------------- Information Axime Ex Segin 20,000 50,000 BDM International 104,000 140,000 C-Tec 200,000 300,000 Computer Language Research 183,000 310,000 Gaylord Entertainment 0 300,000 IFR Systems 228,000 300,000 Informix 0 330,000 Kronos 423,000 550,000 Metrika Systems 0 65,000 NTT Data 115 246 Simulation Sciences 0 70,000 Sterling Commerce 0 160,000 TCI Satellite Entertainment 0 130,000 (spinoff from Telecom Inc., Cl. A) Thermo Instrument Systems 535,000 685,000 - ------------------------------------------------------------------------------- Health Care Gedeon Richter 0 20,000 Medeva 2,700,000 3,100,000 Getinge Industrier 0 650,000 Respironics 582,000 1,162,000 HealthCare Compare 0 573,000 MDL Information Systems 185,000 275,000 - ------------------------------------------------------------------------------- Consumer Goods/Services Airtours 0 200,000 Hellenic Bottling 200,000 260,000 Designer Holdings 0 290,000 Esselte 180,000 260,000 Kimberly Clark de Mexico 400,000 500,000 Escada 20,000 30,000 Host Marriott Services 332,000 663,000 - ------------------------------------------------------------------------------- Finance Foremost 197,000 247,000 Baker Fentress 784,000 865,000 Invesco Funding 0 340,000 Cetelem 26,000 70,000 (includes effect of 100% stock dividend) World Acceptance 700,000 1,190,000 Coast Savings 418,000 528,000
Number of Shares ------------------------ 9/30/96 12/31/96 - ------------------------------------------------------------------------------- Industrial Goods/Services Aftermarket Tech 0 108,000 Schnitzer Steel 220,000 300,000 Hunter Douglas 50,000 110,000 Steel Dynamics 0 225,000 Wackenhut, Cl. B 660,000 851,000 World Color Press 760,000 1,185,000 - ------------------------------------------------------------------------------- Energy/Minerals Cemig 190,000,000 235,000,000 Costilla Energy 0 400,000 United Cities Natural Gas 0 80,000 RAO Gazprom 0 62,500 Seagull Energy 600,000 1,600,000 (includes effect of merger with Global Natural Resources) J Ray McDermott 200,000 400,000 Saipem 0 1,000,000 - ------------------------------------------------------------------------------- Real Estate First Washington Realty Trust 80,000 150,000 Homestead Village 0 88,000 Macerich 0 400,000 - ------------------------------------------------------------------------------- Transportation Flughafen Wien 120,000 180,000
12
Number of Shares --------------------- 9/30/96 12/31/96 Sales - ------------------------------------------------------------------------------- Information ACT Manufacturing 505,000 350,000 Bell Microproducts 201,000 0 CACI International 618,000 461,000 Century Communications, Cl. A 500,000 0 Cognos 150,000 100,000 Daktronics 50,000 0 Datum 85,000 0 Jones Intercable, Cl. A 440,000 325,000 Jones Intercable 22,500 0 Learning Company 350,000 0 Oak Industries 500,000 350,000 Providence Journal 400,000 0 Shaw Communications, Cl. B 800,000 580,000 Tele-Communications, Series A TCI Group 1,500,000 1,000,000 Triad Systems 700,000 0 WM Data Nordic 460,000 400,000 - ------------------------------------------------------------------------------- Health Care Pharmaceutical Marketing Services 235,000 0 Renal Treatment Centers 462,000 0 Space Labs Medical 345,000 0 Steris 684,000 0 Thermedics 552,000 268,000 - ------------------------------------------------------------------------------- Consumer Goods/Services Alliance Entertainment 445,000 0 Aucnet 90,000 55,000 (includes effect of 10% stock dividend) Grupo Herdez 4,200,000 0 International Cosmetics 56,100 0 Mayora Indah 1,884,000 0 Mr Max 209,000 134,900 Newell 1,650,000 825,000 Royal 120,000 0 Thai President Foods 200,000 0 Toy Biz 251,000 0 - ------------------------------------------------------------------------------- Finance Cash America 620,000 0 Credicorp 300,000 0 First American 105,000 70,000 Mercury Finance 898,000 818,000 Promise 60,000 20,000 Seoul International Trust 80,000 0 T. Rowe Price 174,000 145,000 Thailand Fund 70,000 30,000 Washington Federal 756,000 645,000 - ------------------------------------------------------------------------------- Industrial Goods/Services Douglas & Lomason 255,000 0 Expeditors International 600,000 1,000,000 (includes effect of 2 for 1 stock split) HA.LO Industries 384,000 353,000 (includes effect of 5 for 4 stock split) Sealed Air 240,000 0 Thermo Electron 1,125,000 975,000 - ------------------------------------------------------------------------------- Energy/Minerals Abraxas Petroleum 360,000 0 AES Corporation 1,000,000 955,000 Devon Energy 500,000 300,000 Louis Dreyfus Natural Gas 440,000 350,000 Pittencrieff Resources 700,000 0 United Meridian 300,000 200,000 Veritas Energy Services 180,000 115,000 - ------------------------------------------------------------------------------- Real Estate Fondo Opcion, Series B 600,000 0
13 Acorn Fund .Statement of Investments December 31, 1996
Number of Shares Value (000) - ----------------------------------------------------------------------------- Common Stocks and Other Equity-Like Securities: 98.0% - ----------------------------------------------------------------------------- Information: 17.9% .Broadcasting/CATV: 1.7% 1,000,000 Tele-Communications, Series A TCI Group (b) $ 13,062 47,000 Tele-Communications, Cum. Pfd. 3,125 300,000 TCA Cable TV 9,037 300,000 C-Tec (b) 7,275 170,000 Argyle Television (b) 4,165 325,000 Jones Intercable, Cl. A (b) 3,372 300,000 Granite Broadcasting (b) 3,187 80,000 Cablevision Systems (b) 2,450 130,000 TCI Satellite Entertainment (b) 1,284 - ----------------------------------------------------------------------------- 46,957 .Programming for CATV/TV/ Satellites: 3.7% 1,600,000 Tele-Communications, Liberty Media Group (b) 45,700 750,000 Data Transmission Network (b) (c) 16,687 700,000 International Family Entertainment (b) 10,850 567,000 United Video Satellite (b) 9,922 300,000 BET Holdings, Cl. A (b) 8,625 300,000 HSN (formerly known as Silver King Communications) (b) 7,125 300,000 Gaylord Entertainment 6,862 - ----------------------------------------------------------------------------- 105,771 .Mobile Communications: 2.1% 500,000 Telephone and Data Systems 18,125 450,000 Cellular Communications of Puerto Rico (b) 8,887 465,000 Vanguard Cellular Systems (b) 7,324 800,000 Mobile Telecommunication Technologies (b) 6,800 355,000 COMARCO (b) (c) 6,479 450,000 PriCellular (b) 5,175 350,000 Palmer Wireless (b) 3,675 300,000 Centennial Cellular (b) 3,637 - ----------------------------------------------------------------------------- 60,102 .Computer Software/Services: 3.0% 259,000 BRC Holdings (b) 11,590 360,000 Analysts International 10,170 461,000 CACI International (b) 9,681 480,000 Systems & Computer Technology (b) 7,680 153,000 Compuware (b) 7,669 Principal Amount or Number of Shares Value (000) - ----------------------------------------------------------------------------- 140,000 BDM International (b) 7,595 330,000 Informix (b) 6,724 210,000 Keane (b) 6,667 160,000 Sterling Commerce (b) 5,640 200,000 American Management Systems (b) 4,900 310,000 Computer Language Research 3,332 208,333 Source Informatics Cv. Pfd. (b) 2,360 70,000 Simulation Sciences (b) 1,041 170,000 Kurzweil Applied Intelligence (b) 510 - ----------------------------------------------------------------------------- 85,559 .Gaming Equipment: 1.1% 1,800,000 International Game Technology 32,850 .Consumer Software: 0.2% 280,000 Activision (b) 3,605 350,000 Spectrum HoloByte (b) 2,625 180,000 The 3DO Company (b) 866 - ----------------------------------------------------------------------------- 7,096 .Business Information: 0.7% 700,000 American Business Information (b) 15,575 885,714 GIGA Cv. Pfd. (b) (c) 3,100 - ----------------------------------------------------------------------------- 18,675 .Computer Systems: 1.7% 600,000 Solectron (b) 32,025 350,000 ACT Manufacturing (b) 9,231 287,000 Altron (b) 6,027 - ----------------------------------------------------------------------------- 47,283 .Instrumentation: 1.3% 685,000 Thermo Instrument Systems (b) 22,691 5,000,000 Thermo Optek, 5% Note Due 10/15/00 5,150 300,000 IFR Systems (b) (c) 4,725 1,500,000 Thermoquest, 5% Note Due 8/15/00 1,545 20,000 Thermoquest (b) 257 100,000 Thermo Bio Analysis (b) 1,350 65,000 Metrika Systems (b) 488 - ----------------------------------------------------------------------------- 36,206 .Distribution: 0.9% 1,000,000 Pioneer-Standard Electronics 13,125 300,000 Kent Electronics (b) 7,725 400,000 Richey Electronics (b) 4,650 - ----------------------------------------------------------------------------- 25,500 .Components/Peripherals: 1.5% 550,000 Kronos (b) (c) 17,600
See accompanying notes to financial statements 14
Number of Shares Value (000) - ----------------------------------------------------------------- 325,000 American Power Conversion (b) $ 8,856 350,000 Oak Industries (b) 8,050 325,000 Planar Systems (b) 3,819 250,000 Exide Electronics Group (b) 3,687 - ----------------------------------------------------------------- 42,012 Information: Total 508,011 - ----------------------------------------------------------------- Health Care: 9.1% .Biotechnology/Drug Delivery: 2.1% 450,000 Watson Pharmaceuticals (b) 20,222 260,000 RP Scherer (b) 13,065 228,000 Biogen (b) 8,835 450,000 Inhale Therapeutic Systems (b) 6,806 800,000 Corvas International (b) 4,500 800,000 Corvas International Warrants (b) 1,600 200,000 Genome Therapeutics (b) 2,150 280,000 CIMA Labs (b) 1,715 - ----------------------------------------------------------------- 58,893 .Medical Equipment: 2.4% 750,000 Invacare 20,625 1,162,000 Respironics (b) (c) 20,190 1,000,000 Kinetic Concepts 12,250 350,000 Affymetrix (b) 6,217 268,000 Thermedics (b) 4,857 267,000 Innovasive Devices (b) 2,069 125,000 Trex Medical (b) 1,625 - ----------------------------------------------------------------- 67,833 .Hospital/Laboratory Supplies: 0.7% 322,000 Sybron International (b) 10,626 273,000 Hillenbrand Industries 9,896 - ----------------------------------------------------------------- 20,522 .Services: 3.9% 1,000,000 Lincare Holdings (b) 41,000 498,000 HBO & Company 29,569 573,000 HealthCare Compare (b) 24,281 505,000 United Payors and Providers (b) 6,944 275,000 MDL Information Systems (b) 5,122 100,000 ThermoTrex (b) 2,738 300,000 Walsh International (b) 2,521 - ----------------------------------------------------------------- 112,175 --------- Health Care: Total 259,423 - ----------------------------------------------------------------- Principal Amount or Number of Shares Value (000) - ----------------------------------------------------------------- Consumer Goods/Services: 9.1% .Retail: 2.0% 980,000 Borders Group (b) 35,157 295,000 Quality Food Centers (b) 9,956 663,000 Host Marriott Services (b) 6,050 200,000 Duckwall Alco Stores (b) 2,850 84,000 Mac Frugal's (b) 2,194 - ----------------------------------------------------------------- 56,207 .Recreational Vehicles: 2.1% 1,100,000 Harley-Davidson 51,700 320,000 Thor Industries 8,080 - ----------------------------------------------------------------- 59,780 .Food: 0.4% 725,000 Shoney's (b) 5,075 634,000 Au Bon Pain (b) (c) 4,121 125,000 Morton's Restaurant Group (b) 2,109 60,000 Dave & Buster's (b) 1,207 - ----------------------------------------------------------------- 12,512 .Entertainment/Leisure: 2.8% 1,400,000 Carnival 46,200 215,000 GC Companies (b) 7,444 276,000 Carmike Cinemas (b) 7,003 472,000 Hollywood Park, Cv. Pfd. 6,254 265,000 Royal Caribbean Cruises 6,194 180,000 Rio Hotel & Casino (b) 2,632 100,000 Showboat 1,725 535,000 Monarch Casino & Resort (b) (c) 1,070 $6,250,000 Grand Palais Casino 14% Note Due 2/25/98 (b) 313 - ----------------------------------------------------------------- 78,835 .Manufacturers: 1.8% 825,000 Newell 25,987 565,000 Wolverine World Wide 16,385 290,000 Designer Holdings (b) 4,676 232,000 Norwood Promotional (b) 4,234 - ----------------------------------------------------------------- 51,282 -------- Consumer Goods/Services: Total 258,616 - ----------------------------------------------------------------- Finance: 15.8% .Banks: 1.1% 380,000 Texas Regional Bancshares 12,920 285,000 Union Planters 11,115
15 Acorn Fund .Statement of Investments
Number of Shares Value (000) - ------------------------------------------------------------------ 70,000 First American $ 4,034 104,000 Riverside National Bank 1,807 - ------------------------------------------------------------------ 29,876 .Savings & Loans: 3.7% 845,000 Peoples Bank Bridgeport 24,399 528,000 Coast Savings (b) 19,338 645,000 Washington Federal 17,092 390,000 Washington Mutual 16,892 260,000 TCF 11,310 538,000 Commonwealth Bancorp 8,070 280,000 Imperial Thrift & Loan (b) 4,200 156,000 Indiana Federal 3,491 - ------------------------------------------------------------------ 104,792 .Insurance: 2.2% 836,000 Baldwin & Lyons, Cl. B 15,362 247,000 Foremost 14,820 351,000 United Fire & Casualty 12,373 350,000 PXRE Corporation 8,663 216,000 Leucadia National 5,778 318,000 ALLIED Life (c) 5,565 - ------------------------------------------------------------------ 62,561 .Money Management: 2.7% 880,000 United Asset Management 23,430 865,000 Baker Fentress 14,597 618,000 SEI 13,751 1,621,000 Phoenix Duff and Phelps 11,550 231,000 BISYS (b) 8,561 145,000 T. Rowe Price 6,308 - ------------------------------------------------------------------ 78,197 .Credit Cards: 4.4% 1,088,000 First USA 37,672 767,000 ADVANTA, Cl. A 32,789 520,000 ADVANTA, Cl. B 21,255 575,000 National Data 25,013 275,000 Concord EFS (b) 7,769 - ------------------------------------------------------------------ 124,498 .Other: 1.7% 1,049,000 Americredit (b) 21,505 818,000 Mercury Finance 10,021 1,190,000 World Acceptance (b) (c) 8,181 496,000 Jayhawk (b) 5,580 310,000 DVI Health Services (b) 4,030 - ------------------------------------------------------------------ 49,317 ------- Finance: Total 449,241 - ------------------------------------------------------------------ Industrial Goods/Services: 10.6% .Steel: 2.0% 1,110,000 Worthington Industries 20,119 440,000 Gibraltar Steel (b) 11,550 300,000 Schnitzer Steel 7,688 374,000 Atchison Casting (b) (c) 6,732 300,000 A M Castle 5,775 225,000 Steel Dynamics (b) 4,303 - ------------------------------------------------------------------ 56,167 .Machinery: 3.1% 975,000 Thermo Electron (b) 40,219 800,000 Baldor Electric 19,700 150,000 Nordson 9,563 675,000 Thermo Fibertek (b) 6,286 135,000 Valmont Industries 5,569 110,000 Applied Power 4,359 189,000 Hein-Werner (b) (c) 1,252 500,000 Stevens International, Cl. A (b) (c) 750 34,000 Stevens International, Cl. B (b) (c) 91 - ------------------------------------------------------------------ 87,789 .Industrial Suppliers: 1.9% 600,000 Unifi 19,275 750,000 Lilly Industries, Cl. A 13,688 320,000 Bearings 8,920 96,000 Mine Safety Appliances 5,112 244,000 U. S. Can (b) 4,118 108,000 Aftermarket Technology (b) 1,863 35,000 Zoltek (b) 1,273 - ------------------------------------------------------------------ 54,249 .Services: 3.6% 1,000,000 Expeditors International of Washington 23,000 1,185,000 World Color Press (b) 22,811 851,000 Wackenhut, Cl. B 12,978 45,000 Wackenhut, Cl. A 776 430,000 Hub Group (b) 11,503
See accompanying notes to financial statements 16
Principal Amount or Number of Shares Value (000) - ----------------------------------------------------------------- 353,000 HA.LO Industries (b) $ 9,708 450,000 Material Sciences (b) 8,100 530,000 Thermo TerraTech (b) 5,234 374,000 Thomas Group (b) (c) 3,366 $2,900,000 Western Water, 9% Cv. Note Due 9/25/05 2,900 119,000 AG Services of America (b) 1,978 - ----------------------------------------------------------------- 102,354 -------- Industrial Goods/Services: Total 300,559 - ----------------------------------------------------------------- Energy/Minerals: 10.4% .Independent Power: 3.0% 955,000 AES Corporation (b) 44,408 1,852 AES Corporation Warrants (b) 38 868,000 CalEnergy (b) 29,187 585,000 Thermo Ecotek (b) 8,921 285,000 Thermo Power (b) 2,262 85,000 Thermo Optek (b) 967 - ----------------------------------------------------------------- 85,783 .Oil/Gas Producers: 3.6% 1,600,000 Seagull Energy (b) 35,200 900,000 Tesoro Petroleum (b) 12,600 700,000 Forest Oil (b) 12,338 300,000 Devon Energy 10,425 200,000 United Meridian (b) 10,350 350,000 Louis Dreyfus Natural Gas (b) 5,994 400,000 Costilla Energy (b) 5,450 200,000 St. Mary Land & Exploration 4,975 800,000 Tipperary (b) (c) 3,700 110,000 Abraxas Petroleum CVR Units (b) 1,133 - ----------------------------------------------------------------- 102,165 .Distribution/Marketing/Refining: 1.6% 750,000 NGC 17,438 630,000 Southern Union (b) 13,860 303,000 Atmos Energy 7,234 150,000 KN Energy 5,888 80,000 United Cities Natural Gas 1,800 - ----------------------------------------------------------------- 46,220 .Oil Services: 1.9% 320,000 Atwood Oceanics (b) 20,320 350,000 Energy Ventures (b) 17,806 400,000 J Ray McDermott (b) 8,800 400,000 Veritas DGC (b) 7,400 - ----------------------------------------------------------------- 54,326 .Mining: 0.3% 300,000 Zeigler Coal Holding 6,413 -------- Energy/Minerals: Total 294,907 - ----------------------------------------------------------------- Real Estate: 2.8% 829,000 The Rouse Company (b) 26,321 400,000 Macerich 10,450 155,000 Forest City Enterprises, Cl. B 9,378 123,000 Forest City Enterprises, Cl. A 7,442 210,000 Equity Residential Properties Trust 8,663 165,000 Weingarten Realty Investors 6,703 150,000 First Washington Realty Trust 3,525 120,000 First Washington Realty Trust, Cv. Pfd. 3,270 243,000 Sunstone Hotel Investors 3,189 88,000 Homestead Village (b) 1,584 1,000 Homestead Village Warrants (b) 8 -------- Real Estate: Total 80,533 - ----------------------------------------------------------------- Foreign Securities: 22.3% .Canada: 0.9% 800,000 Ranger Oil 7,900 200,000 Shaw Industries, Cl. A 4,042 125,000 BCE Mobile Communications (b) 3,702 580,000 Shaw Communications, Cl. B 3,216 100,000 Cognos (b) 2,813 115,000 Veritas Energy Services (exchangeable into Veritas DGC) (b) 2,181 200,000 Cogeco Cable 1,284 - ----------------------------------------------------------------- 25,138 .United Kingdom: 4.0% 1,200,000 Serco Group 13,841 3,100,000 Medeva 13,554 400,000 International CableTel (b) 10,100 2,000,000 Securicor Group, Cl. A 9,566 650,000 Comcast UK Cable Partners (b) 8,856 1,130,000 N. Brown Group 8,673 1,700,000 Invesco 7,549 68,000 Invesco ADS 3,018 340,000 Invesco Funding (b) 1,510 13,600 Invesco Funding LLC (b) 602
17 Acorn Fund .Statement of Investments
Number of Shares Value (000) - ----------------------------------------------------------------- 700,000 Powerscreen International $ 6,768 393,000 Getty Communications, Cl. A (b) 5,895 600,000 Edinburgh Fund Managers 5,791 580,000 Oriflame 5,310 1,200,000 Body Shop International 4,159 200,000 Airtours 2,781 1,000,000 Capital 2,738 350,000 Ethical Holdings (b) 2,034 4,500,000 Electronics Boutique (b) 1,579 - ----------------------------------------------------------------- 114,324 .Germany/Austria: 0.8% 180,000 Flughafen Wien (Austria) 9,166 425,000 United International Holdings (Austria) (b) 5,206 30,000 Escada 4,847 8,000 Binding-Brauerei 2,544 - ----------------------------------------------------------------- 21,763 .Nordic Countries: 3.3% 400,000 WM Data Nordic (Sweden) 34,564 100,000 Hennes & Mauritz, Cl. B (Sweden) 13,825 650,000 Getinge Industrier (Sweden) 12,804 240,000 Autoliv (Sweden) 10,510 725,000 SensoNor (Norway) (b) 6,699 260,000 Esselte, Series A (Sweden) 5,902 220,000 Pricer, Cl. B (Sweden) (b) 5,413 50,000 Sentra, Cl. A (Finland) 1,654 90,000 Benefon (Finland) 1,560 130,000 Sysdeco Group (Norway) (b) 521 - ----------------------------------------------------------------- 93,452 .Netherlands: 0.7% 110,000 Hunter Douglas 7,408 270,000 Getronics 7,320 180,000 Telegraaf Holdings 3,788 - ----------------------------------------------------------------- 18,516 .Switzerland: 0.8% 6,000 Societe Generale de Surveillance 14,701 14,000 Liechtenstein Global Trust 7,152 - ----------------------------------------------------------------- 21,853 .France: 1.2% 45,000 Guilbert 8,786 65,000 Sligos 8,502 70,000 Cetelem 8,079 50,000 Axime Ex Segin (b) 5,771 17,000 Canal Plus 3,747 - ----------------------------------------------------------------- 34,885 .Spain/Portugal: 0.4% 375,000 Filmes Lusomundo (Portugal) (b) 4,314 185,000 Vallehermoso 4,004 70,000 Cortefiel 2,099 - ----------------------------------------------------------------- 10,417 .Italy/Greece: 1.4% 4,300,000 Banca Fideuram 9,423 300,000 Cellular Communications International (b) 8,700 260,000 Hellenic Bottling (Greece) 8,331 1,000,000 Saipem 4,616 170,000 Industrie Natuzzi 3,910 1,100,000 Tecnost 2,952 1,200,000 Costa Crociere 2,904 - ----------------------------------------------------------------- 40,836 .Israel: 0.1% 200,000 Pec Israel Economic (b) 3,350 .Eastern Europe - 0.1% 20,000 Gedeon Richter (Hungary) 1,169 62,500 RAO Gazprom (Russia) (b) 1,103 - ----------------------------------------------------------------- 2,272 .India: 0.2% 300,000 IS Himalaya Fund (b) 3,870 39,393 Housing Development Finance 2,429 - ----------------------------------------------------------------- 6,299 .Hong Kong: 0.5% 4,500,000 Varitronix International 8,145 7,318,000 JCG Holdings 7,143 - ----------------------------------------------------------------- 15,288 .China: 0.4% 810,000 AES China Generating (b) (c) 10,328 200,000 The Investment Company of China (b) 1,366 - ----------------------------------------------------------------- 11,694 .Singapore: 0.4% 5,100,000 Genting International 12,240
See accompanying notes to financial statements 18
Principal Amount or Number of Shares Value (000) - -------------------------------------------------------------- .Malaysia: 0.6% 1,450,000 Resorts World (b) $ 6,603 1,125,000 Kian Joo Can Factory (b) 6,236 440,000 O.Y.L. Industries 4,660 - -------------------------------------------------------------- 17,499 .Thailand: 0.1% 30,000 The Thailand Fund (b) 1,838 3,300,000 Sinpinyo Fund V (b) 1,448 - -------------------------------------------------------------- 3,286 .Korea/Taiwan: 1.4% 120,000 Formosa Fund (Taiwan) (b) 11,340 460,000 President Enterprises (Taiwan) (b) 8,280 5,300 Korea Mobile Telecom 5,431 283,250 Korea Mobile Telecom GDS (b) 3,647 275,000 Kookmin Bank 4,376 110,956 Shinsegae 4,068 7,843 Shinsegae (New) 288 300,000 Korea-Europe Fund 1,530 - -------------------------------------------------------------- 38,960 .Indonesia/Philippines: 0.4% 7,000,000 PILTEL (Philippines) (b) 5,922 195,501 Unilever Indonesia 3,351 1,728,000 Tigaraksa Satria 2,414 - -------------------------------------------------------------- 11,687 .Japan: 1.7% 120,000 Nintendo 8,571 246 NTT Data 7,185 145,000 Noritsu Koki 6,808 100,000 Paramount Bed 6,375 75,000 Secom 4,530 40,000 Nichiei 2,946 90,000 Sankyo 2,629 720,000 Tokyu Land (b) 2,506 130,000 Heiwa 2,038 134,900 Mr. Max 1,790 55,000 Aucnet 1,777 20,000 Promise 982 - -------------------------------------------------------------- 48,137 .Australia / New Zealand: 0.8% 1,700,000 Sky City (New Zealand) 9,261 1,600,000 Village Roadshow 6,265 750,000 Village Roadshow Pfd. 2,037 2,500,000 Burswood Property Trust 3,197 600,000 Petroleum Securities Australia (b) 2,635 - -------------------------------------------------------------- 23,395 .Mexico: 0.7% 500,000 Kimberly Clark de Mexico 9,877 2,000,000 Nadro, Series L 5,971 600,000 Grupo Radio Centro (b) 4,125 170,000 Cofar, Series B 238 - -------------------------------------------------------------- 20,211 .Brazil: 0.5% 235,000,000 Cemig 8,006 12,000,000 Itau Banco PN 5,197 - -------------------------------------------------------------- 13,203 .Other Latin America: 0.9% 4,000,000 Siderca (Argentina) 7,301 130,000 Banco Latinoamericano de Export (Panama) 6,598 160,000 IRSA (Argentina) 5,100 100,000 Panamerican Beverages (Panama) 4,688 160,000 Siderar (Argentina) (b) 461 - -------------------------------------------------------------- 24,148 --------- Foreign: Total 632,853 43,200 Miscellaneous Securities: 0.0% 22 Total Common Stocks and Other --------- Equity-Like Securities: 98.0% 2,784,165 (Cost: $1,651,100) Short-Term Obligations: 2.4% Yield 4.82% -- 6.09% Due 1/02 -- 2/20/97 $19,879 American General Finance 19,861 $18,434 General Motors Acceptance 18,429 $10,568 Hertz 10,555 $10,000 Travelers Insurance 9,989 $10,000 US Treasury Bill 9,933 - -------------------------------------------------------------- (Amortized Cost: $68,767) 68,767 --------- Total Investments: 100.4% 2,852,932 (Cost: $1,719,867) --------- Cash and Other Assets Less Liabilities: (0.4%) (10,880) --------- Total Net Assets: 100% $2,842,052 - --------------------------------------------------------------
19 Acorn Fund .Notes to Statements of Investments (a) At December 31, 1996, for federal income tax purposes cost of investments was $1,727,925,000 and net unrealized appreciation was $1,125,008,000, consisting of gross unrealized appreciation of $1,216,175,000 and gross unrealized depreciation of $91,167,000. (b) Non-income producing security. (c) On December 31, 1996, the Fund held the following percentages of the outstanding voting shares of the affiliated companies (ownership of at least 5%) listed below:
COMARCO................................................................ 7.40% ALLIED Life............................................................ 7.08% Hein-Werner............................................................ 6.86% Data Transmission Network.............................................. 6.81% Atchison Casting....................................................... 6.76% Kronos................................................................. 6.76% Thomas Group........................................................... 6.37% Au Bon Pain............................................................ 6.30% World Acceptance....................................................... 6.30% Tipperary.............................................................. 6.13% Respironics............................................................ 5.90% Monarch Casino & Resort................................................ 5.65% Stevens International.................................................. 5.65% IFR Systems............................................................ 5.59% Giga................................................................... 5.30% AES China Generating................................................... 5.13%
The aggregate cost and value of investments in these companies at December 31, 1996, was $98,155,000 and $113,937,000, respectively. The market value of these securities represents 4.01% of the total net assets at December 31, 1996. During the year ended December 31, 1996, the cost of purchases and proceeds from sales in affiliated companies were $41,214,000 and $31,560,000, respectively. Dividends received from these companies amounted to $126,780 and the net realized gain on sales of investments in such companies amounted to $12,839,000. .Foreign Portfolio Diversification At December 31, 1996, Acorn Fund's foreign portfolio of investments as a percent of net assets was diversified as follows:
Value (000) Percent - -------------------------------------------------------------------------------- .Information Computer Systems $ 57,214 2.0% Mobile Communications 38,528 1.4 Broadcasting/CATV 36,534 1.3 Software/Services 32,073 1.1 Distribution 12,090 0.4 - -------------------------------------------------------------------------------- 176,439 6.2 .Health Care Biotechnology/Drug Delivery 27,280 1.0 Equipment 12,804 0.4 Hospital/Laboratory Supplies 6,375 0.2 - -------------------------------------------------------------------------------- 46,459 1.6 .Consumer Goods/Services Retail 59,615 2.1 Manufacturers 57,590 2.0 Entertainment/Leisure 41,762 1.5 Food 25,497 0.9 - -------------------------------------------------------------------------------- 184,464 6.5 .Finance Money Management 49,285 1.7 Banks 30,466 1.1 Other 28,277 1.0 - -------------------------------------------------------------------------------- 108,028 3.8 .Industrial Goods/Services Services 35,737 1.3 Machinery Processing 16,419 0.6 Steel 461 0.0 - -------------------------------------------------------------------------------- 52,617 1.9 .Energy/Minerals Independent Power 18,334 0.7 Oil/Gas Producers 13,819 0.5 Oil Services 11,917 0.4 - -------------------------------------------------------------------------------- 44,070 1.6 .Real Estate 11,610 0.4 .Transportation 9,166 0.3 -------- ---- Total Foreign Portfolio $632,853 22.3% - --------------------------------------------------------------------------------
See accompanying notes to financial statements 20 Acorn International .Major Portfolio Changes in the Fourth Quarter
Number of Shares ------------------- 9/30/96 12/31/96 Additions - ------------------------------------------------------------------ Europe .Germany/Austria Flughafen Wien 120,000 190,000 Rhoen Klinikum 90,000 100,000 Rhoen Klinikum Pfd. 135,000 165,000 .Denmark Falck 0 16,000 .Sweden Bure Investment 0 300,000 Scala International 0 35,000 Hexagon 0 160,000 Esselte, Series A 225,000 315,000 Getinge Industrier 650,000 800,000 .France Canal Plus 15,000 20,000 Cetelem 42,000 94,000 (includes effect of 100% stock dividend) Groupe Partouche 0 15,000 .United Kingdom Expro International Group 0 500,000 Peek 2,214,000 3,000,000 Planning Sciences 0 150,000 Premier Oil 10,000,000 12,000,000 St James Place 0 3,500,000 .Italy/Greece Attica Enterprises 200,000 400,000 Hellenic Bottling 170,000 275,000 Mediolanum 250,000 400,000 .Netherlands Hunter Douglas 50,000 110,000 .Hungary Gedeon Richter 0 20,000 .Russia RAO Gazprom 0 62,500 - ------------------------------------------------------------------ Asia .Hong Kong Television Broadcast 0 65,000 Vanda Systems 0 1,500,000 .Japan Aderans 0 50,000 Amway Japan 0 70,000 Arrk 0 130,000 Belluna 0 80,000 Chuo Trust & Banking 382,000 570,000 Meitec 275,000 325,000 Mirai Industry 140,000 200,000 NTT Data 215 300 NuSkin Asia Pacific 0 120,000 Orix 0 25,000 Shinki 0 50,000 Tiemco 3,000 50,000 .Korea S1 Corporation 0 10,260 S1 Corporation (New) 0 4,740 .Philippines Mondragon International 0 3,700,000 .Singapore Datacraft Asia 0 430,000 - ------------------------------------------------------------------ Latin America .Brazil Elevadores Atlas 0 150,000 .Argentina IRSA 280,000 320,000 Perez Companc 0 230,000 .Chile Embotelladora Andina 0 70,000 - ------------------------------------------------------------------ Other Countries .Australia Siddons Ramset 0 272,000 Skilled Engineering 1,200,000 1,900,000 .Canada Cinar Films 150,000 215,000 .Israel ZAG Industries 0 75,000
21 Acorn International .Major Portfolio Changes in the Fourth Quarter
Number of Shares ------------------- 9/30/96 12/31/96 Sales - ----------------------------------------------------------------- Europe .Germany/Austria Biotest 80,000 0 BWT 16,500 0 Fresenius Pfd. 14,000 5,000 .Finland Raision Tehtaat, Series V 70,000 0 .Norway Aker Maritime (formerly known as Maritime Group) 300,000 500,000 (includes effect of merger with Maritime Group) Elkjoep Norge 300,000 200,000 Sysdeco 1,000,000 660,000 .Sweden Allgon, Series B 200,000 0 Frontec, Series B 400,000 300,000 WM Data Nordic 800,000 700,000 .United Kingdom Pittencrieff Resources 1,750,000 0 .Switzerland Bobst 2,250 0 .Greece Ergo Bank 120,000 100,000 .Netherlands Toolex Alpha 145,000 0 - ----------------------------------------------------------------- Asia .India Industrial Credit & Investment Corporation of India 987,800 2,200 .Japan Aucnet 165,000 110,000 (includes effect of 10% stock dividend) Daimon 90,000 0 IX Corporation 60,000 0 Japan Information Processing 27,000 0 King 100,000 0 Mr. Max 198,000 120,000 Promise 150,000 70,000 Royal 150,000 0 .Indonesia Mayora Indah 5,416,000 0 Suba Indah 702,000 0 .Thailand International Cosmetics 173,100 0 Srithai Superware 97,200 0 Thai President Foods 300,000 0 - ----------------------------------------------------------------- Latin America .Brazil Banco Itau Pfd. 26,000,000 23,000,000 .Peru Credicorp 370,000 0 - ----------------------------------------------------------------- Other Countries .Australia Command Petroleum Holdings 12,000,000 0 Petroleum Securities Australia 1,700,000 1,400,000 Village Roadshow Pfd. 750,000 0 .Canada Shaw Communications 1,000,000 710,000 Veritas Energy Services (exchangeable into Veritas DGC) 460,000 395,000 .Israel Alliance Tire 397,810 0 .South Africa Kersaf Investments 460,000 0
22 Acorn International .Statement of Investments December 31, 1996
Number of Shares Value (000) - ------------------------------------------------------------------ Common Stocks and Other Equity-Like Securities: 91.7% - ------------------------------------------------------------------ Europe: 50.3% .Germany/Austria: 5.3% 120,000 Fresenius $ 24,139 5,000 Fresenius Pfd. 1,032 Dialysis Equipment & Solutions 165,000 Rhoen Klinikum Pfd. 16,381 100,000 Rhoen Klinikum 10,447 Hospital Management 190,000 Flughafen Wien 9,676 Vienna Airport Authority (Austria) 50,000 Marschollek Lautenschlager 7,787 Financial Planning 40,000 Escada 6,463 Fancy Dresses 400,000 United International Holdings (b) 4,900 Cable Television for Austria & Other Countries (Austria) 15,000 Binding-Brauerei 4,769 Brewer 21,000 Cewe Color Holding 4,769 Photographic Developing & Printing 15,000 Pfleiderer 4,127 Construction Materials 5,000 KTM-Motorradholding (b) 279 Off-Road Motorcycles - ------------------------------------------------------------------ 94,769 .Denmark: 0.6% 16,000 Falck 4,774 Emergency Services 31,000 Kompan International (c) 4,362 Playground Equipment 20,000 Carli Gry (b) 956 Casual Clothing - ------------------------------------------------------------------ 10,092 .Finland: 3.6% 500,000 TT Tieto, Cl. B (c) 42,189 Computer Services/Consulting 100,000 Vaisala, Cl. A 6,509 Meteorological Instruments 370,000 Benefon (c) 6,414 Mobile Telephones 80,000 Fiskars, Series A 5,988 Scissors & Gardening Tools 105,000 Sentra, Cl. A (c) 3,474 Food Retailer - ------------------------------------------------------------------ 64,574 .Norway: 1.4% 1,000,000 SensoNor (b) 9,240 Electronic Sensors for Airbags 500,000 Aker Maritime (formerly known as Maritime Group) 6,812 Oil Field Equipment & Services 200,000 Elkjoeb Norge 5,857 Consumer Electronics Retailer 660,000 Sysdeco (b) 2,646 Software "Toolsets" & Systems - ------------------------------------------------------------------ 24,555 .Sweden: 8.2% 700,000 WM Data Nordic 60,486 Computer Services/Consulting 150,000 Hennes & Mauritz, Cl. B 20,738 Apparel Stores 800,000 Getinge Industrier 15,759 Sterilization & Disinfection Equipment 320,000 Autoliv 14,013 Seatbelts & Airbags 450,000 Pricer, Cl. B (b) 11,072 Electronic Shelf Labels for Supermarkets 315,000 Esselte, Series A 7,151 Office Supplies & Related Equipment 300,000 Frontec, Series B (b) 5,185 Electronic Commerce Software & Services 160,000 Hexagon 4,171 Industrial Conglomerate 300,000 Bure Investment 3,559 Health Care Services & Investments 35,000 Scala International (b) 3,178 Accounting Software - ------------------------------------------------------------------ 145,312 .France: 4.4% 100,000 Sligos 13,080 Computer Services/Credit Card Processing 94,000 Cetelem 10,849 Credit Cards 80,000 Axime Ex Segin (b) 9,233 Computer Services 45,000 Guilbert 8,786 Office Supplies Distributor 62,000 NRJ 7,847 Radio Network 70,000 Spir Communications 6,650 Regional Newspapers 42,000 Virbac 4,985 Drugs for Animals 50,000 Technip 4,684 Engineering & Construction
See accompanying notes to financial statements 23 Acorn International .Statement of Investments
Number of Shares Value (000) - ------------------------------------------------------------------- 20,000 Canal Plus 4,409 Pay TV 40,000 Fininfo 4,232 Financial Data Feeds 30,000 CEP Communications 2,115 Trade Magazines & Book Publisher 15,000 Groupe Partouche 1,226 Casinos 30,000 Groupe AB (b) 431 Television Programming - ------------------------------------------------------------------- 78,527 .United Kingdom: 12.7% 1,800,000 Serco Group 20,761 Facilities Management 2,000,000 Capita Group 16,651 Outsourcing Government Services 1,800,000 Oriflame International 16,480 Natural Cosmetics Sold Door-to-Door 1,550,000 Powerscreen International 14,987 Mobile Crushing & Screening Equipment 3,000,000 Medeva 13,117 Drugs for Hyperactive Children 1,610,000 N. Brown Group 12,357 Mail Order Clothing in Large Sizes 467,000 International CableTel (b) 11,792 Cable TV & Telephone System 3,700,000 City Centre Restaurants 8,738 Fast Food Restaurants 1,700,000 Securicor Group, Cl. A 8,131 Mobile Communications 1,700,000 Rotork 7,491 Valve Actuators for Oil & Water Pipelines 12,000,000 Premier Oil (b) 7,290 Oil & Gas Producer 710,000 Edinburgh Fund Managers 6,853 Investment Management 2,500,000 Capital 6,845 Classy Casinos 500,000 Comcast UK Cable Partners (b) 6,813 Cable TV & Telephone System 1,800,000 Body Shop International 6,238 Natural Cosmetics & Toiletries 410,000 Vosper Thornycroft Holdings 6,097 Naval Shipbuilding 3,500,000 St. James Place 5,900 Life Insurance 1,330,000 Ivory & Sime 5,679 Investment Management 720,000 Seton Healthcare Group 5,600 Pharmaceuticals 700,000 Dorling Kindersley 4,929 Reference Books & CD-ROMs 3,000,000 Peek 4,826 Traffic Control Systems 13,000,000 Electronics Boutique (b) 4,561 Videogame/Computer Software Stores 1,400,000 HALMA 4,540 Fire Detection Devices & Burglar Alarms 900,000 Tunstall 4,135 "I've fallen and I can't get up" Monitors 500,000 Expro International Group 4,043 Oil Field Services 670,000 Ethical Holdings (b) (c) 3,894 Drug Delivery 1,100,000 Bluebird Toys 3,699 "Polly Pocket" Toy Manufacturer 150,000 Planning Sciences (b) 1,800 Database & Business Intelligence Software 5,000 Hozelock Group 39 Manufacturer of Garden Hoses - ------------------------------------------------------------------- 224,286 .Switzerland: 3.0% 6,500 Societe Generale de Surveillance 15,926 Inspection/Testing of Trade Goods 25,000 Phoenix Mecano 13,070 Electrical Components Manufacturer 13,000 Liechtenstein Global Trust 6,641 Banking & Investment Management 7,000 Suedelektra Holding (b) 6,386 Diversified Pool of Commodity-Related Projects 12,000 Societe Generale d'Affichage 5,362 Billboard Advertising 1,500 Disetronic Holding (b) 3,307 Medical Equipment 10,000 Prodega (c) 2,871 Cash-and-Carry Retailer - ------------------------------------------------------------------- 53,563 .Italy/Greece: 5.4% 7,100,000 Banca Fideuram 15,559 Life Insurance & Mutual Funds 2,400,000 Saipem SPA 11,077 Pipeline Construction & Drilling Contractor 550,000 Banca Popolare Di Bergamo 9,043 Regional Bank 275,000 Hellenic Bottling 8,811 Coca-Cola Bottler (Greece) 600,000 Gewiss 7,892 Electrical Plugs & Switches 3,100,000 Costa Crociere 7,503 Mediterranean Cruise Line
See accompanying notes to financial statements 24
Number of Shares Value (000) - ----------------------------------------------------------------------- 2,000,000 Editoriale L'Espresso (b) $ 5,524 Newspapers & Magazines 100,000 Ergo Bank 5,069 Bank (Greece) 200,000 Industrie Natuzzi 4,600 Leather Couches 1,100,000 Banca Di Legnano 4,401 Regional Bank 1,600,000 Tecnost 4,293 ATM, Lotto, Toll Collection Equipment Manufacturer 400,000 Mediolanum (b) 3,775 Life Insurance & Mutual Funds 150,000 Intracom (b) 3,374 Telecommunications Equipment (Greece) 400,000 Attica Enterprises 2,756 Ferry Line (Greece) 80,000 Cellular Communications International (b) 2,320 Mobile Communications - ----------------------------------------------------------------------- 95,997 .Turkey: 0.0% 48,974,000 Sabah Yayincilik 628 Newspapers, Magazines .Spain/Portugal: 1.8% 100,000 Mapfre Vida 6,919 Life Insurance & Mutual Funds 110,000 Campofrio Alimentacion (formerly known as Conservera Campofrio) 5,209 Sausage Maker 160,000 Cortefiel 4,797 Apparel Retailer 200,000 Vallehermoso 4,328 Residential Property Developer & Landlord 250,000 Estoril Sol (b) 2,979 Casino Resort (Portugal) 170,000 Lusotur (b) 2,628 Real Estate/Resort Developer (Portugal) 16,000 Zardoya Otis 1,857 Elevator Maintenance 150,000 Filmes Lusomundo (b) 1,726 Newspapers, Radio, Video, Film Distribution (Portugal) 350,000 Televisao Independente (b) 1,037 Television Station (Portugal) 7,000 Oscar Mayer S.A. 28 Sausage Maker - ----------------------------------------------------------------------- 31,508 .Netherlands: 3.4% 920,000 Getronics 24,944 Computer Consulting 620,000 Kempen (c) 12,186 Stock Brokerage/Investment Management 110,000 Hunter Douglas 7,408 Blinds 280,000 Telegraaf Holdings 5,892 Newspaper Publisher 300,000 Fugro McClelland 5,324 Engineering, Consulting & Surveying 40,000 Wegener 3,704 Newspaper Publisher - ----------------------------------------------------------------------- 59,458 .Hungary: 0.3% 125,000 Cofinec (b) 3,781 Consumer Goods Packaging 20,000 Gedeon Richter 1,169 Generic Drugs - ----------------------------------------------------------------------- 4,950 .Eastern Europe: 0.2% 200,000 Bank Komunalny 1,888 Bank (Poland) 62,500 RAO Gazprom 1,103 Gas Pipelines & Production (Russia) - ----------------------------------------------------------------------- 2,991 -------- Europe: Total 891,210 - ----------------------------------------------------------------------- Asia: 25.8% .China: 0.3% 390,000 AES China Generating (b) 4,973 Independent Power .Hong Kong: 2.8% 11,000,000 JCG Holdings 10,737 Consumer Finance 5,500,000 Varitronix International 9,955 LCD Manufacturer 10,000,000 Li and Fung 8,856 Sourcing of Consumer Goods 20,000,000 Golden Harvest Entertainment 6,723 Movie Distribution & Exhibition 15,000,000 Vitasoy International Holdings 6,545 Soya Milk Manufacturer 12,000,000 Manhattan Card 6,089 Chase's Local Credit Card 1,000,000 Chen Hsong Holdings 608 Plastic Injection Moulding Machines 1,500,000 Vanda Systems 393 Computer Services 65,000 Television Broadcast 260 Television Broadcasting - ----------------------------------------------------------------------- 50,166
25 Acorn International .Statement of Investments
Principal Amount or Number of Shares Value (000) - --------------------------------------------------------------------- .India/Pakistan: 1.0% 82,702 Housing Development Finance $ 5,100 Mortgage Lender 300,000 IS Himalaya Fund (b) 3,870 Closed-End Fund 1,047,800 Zee Telefilms (c) 2,581 Hindi Television Programming & Broadcasting 299,450 Max India 1,834 Rs 50,000 Max India Zero Coupon 306 50,000 Max India New Shares 306 Penicillin & Mobile Phones 810,000 Tube Investment GDR 1,418 Bicycle Manufacturer 219,035 Pakistan State Oil 1,404 Oil Distribution (Pakistan) 342,100 Kotak Mahindra Finance 700 Consumer Finance 2,000,000 Centurion Quantum Growth (b) 223 Closed-End Fund - --------------------------------------------------------------------- 17,742 .Japan: 9.9% 225,000 Noritsu Koki 10,565 Photo Processing Lab Manufacturer 230,000 Hokuto 10,086 Mushroom Grower 163,000 Secom 9,844 Security Alarm Systems 130,000 Nichiei 9,576 Lender to Small & Medium Size Businesses 300 NTT Data 8,762 Data Communications 120,000 Nintendo 8,571 Video Games 220,000 Konami 7,487 Entertainment Software/Hardware 110,000 Sanyo Shinpan 6,871 Consumer Finance 100,000 Paramount Bed 6,375 Hospital Bed Manufacturer 325,000 Meitec 6,188 Engineering Outsourcing 195,000 Sankyo 5,695 Pachinko Machine Manufacturer 200,000 Mirai Industry 5,428 Manufacturer of Plastic Housing Components 110,000 HIS 5,307 Travel Agent 570,000 Chuo Trust & Banking 4,857 Banking 1,330,000 Tokyu Land (b) 4,629 Real Estate 200,000 Central Uni 4,566 Health Care/Medical Equipment 165,000 Lasertec 4,492 Manufacturer of LCD & Photomask Defect Detectors 150,000 Itariyard 4,045 Designer/Wholesaler of Women's Apparel 135,000 Xebio 4,013 Sporting Goods Retailer 255,000 Heiwa 3,998 Pachinko Machine Manufacturer 113,720 Nihon Jumbo 3,958 Photo Processing Lab 120,000 NuSkin Asia Pacific (b) 3,705 Personal Care Products 50,000 Ryohin Keikaku 3,705 Muji Brand Designer & Specialty Retailer 142,000 Mars Engineering 3,609 Gaming Systems & Machinery 110,000 Aucnet 3,554 Used Auto Auctions Via Satellite 70,000 Promise 3,438 Consumer Finance 50,000 Tiemco (b) 3,196 Fishing Equipment 130,000 Arrk 3,002 Industrial Modeling 430,000 Nanto Bank 2,845 Banking 70,000 Amway Japan 2,243 Network Sales 60,000 People 1,809 Sports Clubs 120,000 Mr. Max 1,592 Household Goods & Appliance Retailer 150,000 Cats 1,422 Pest Control 165,000 Sochiko 1,422 Film, Television & Kabuki Producer 50,000 Aderans 1,219 Hairpieces & Wigs 80,000 Belluna 1,199 Catalog Sales 50,000 Shinki 1,154 Corporate & Consumer Lending 25,000 Orix 1,038 Leasing Company - --------------------------------------------------------------------- 175,465 .Korea/Taiwan: 4.3% 20,500 Korea Mobile Telecom 21,007 Mobile Communications
See accompanying notes to financial statements 26
Number of Shares Value (000) - ----------------------------------------------------------------------- 480,000 President Enterprises (b) $ 8,640 Food Manufacturer & Distributor (Taiwan) 80,000 Formosa Fund (b) 7,560 Closed-End Fund (Taiwan) 460,000 Kookmin Bank 7,320 Retail Bank 215,000 Dongbu Fire & Marine Insurance (b) 7,176 Non-Life Insurance 95,000 Daehan City Gas 6,854 Gas Utility 70,000 Taipei Fund (b) 6,405 Closed-End Fund (Taiwan) 230,000 Formosa Growth Fund (b) 3,594 Closed-End Fund (Taiwan) 74,161 Shinsegae 2,719 5,039 Shinsegae (New) (b) 185 Department Stores 10,260 S1 Corporation (b) 1,881 4,740 S1 Corporation (New) (b) 779 Systems Security 150,000 Baring Taiwan Fund (b) 1,575 Closed-End Fund (Taiwan) - ---------------------------------------------------------------------- 75,695 .Malaysia: 2.2% 2,350,000 Malaysian Assurance Alliance 11,445 Insurance 1,900,000 Malaysian Oxygen 9,780 Industrial Gases 1,615,000 Arab Malaysian Finance 9,017 Consumer Finance 770,000 O.Y.L. Industries 8,156 Air Conditioners - ---------------------------------------------------------------------- 38,398 .Indonesia: 1.4% 3,000,000 Bank Niaga 7,111 Banking 1,500,000 Modern Photo Film 4,762 Fuji Film Distributor 2,939,900 Tigaraksa Satria (b) (c) 4,107 Distributor of Consumer Goods 3,000,000 Mustika Ratu 4,063 Traditional Cosmetics 230,000 Unilever 3,943 Consumer Goods - ---------------------------------------------------------------------- 23,986 .Philippines: 1.6% 25,000,000 Int'l Container Terminal Services (b) 13,070 Container Handling Terminals & Port Management 3,000,000 Philippine Savings Bank (b) 7,186 Banking 8,000,000 PILTEL (b) 6,768 Mobile Communications 3,700,000 Mondragon International (b) 1,653 Casinos/Resort - ---------------------------------------------------------------------- 28,677 .Singapore: 1.4% 5,400,000 Genting International 12,960 Cruise Line 2,999,600 Venture Manufacturing 7,463 2,457,000 Venture Manufacturing Warrants 7/26/99 (b) 3,952 Contract Electronics Manufacturer 430,000 Datacraft Asia 718 Network Services - ---------------------------------------------------------------------- 25,093 .Thailand: 0.9% 5,000,000 Shinawatra Satellite 5,655 Satellite Leasing 200,000 Serm Suk 5,343 Pepsi Bottler 320,000 Bangkok Insurance 4,543 Finance/Insurance 2,600,000 Sinpinyo Fund V (b) 1,141 Closed-End Fund - ---------------------------------------------------------------------- 16,682 -------- Asia: Total 456,877 - ---------------------------------------------------------------------- Latin America: 8.1% .Mexico: 2.7% 600,000 Kimberly Clark de Mexico 11,852 Paper Products 450,000 Bufete Industrial (b) 9,563 Engineering & Construction 3,000,000 Nadro, Series L 8,956 Pharmaceutical Distributor 1,200,000 Grupo Industrial Bimbo 7,165 Bread, Baked Goods & Snacks 700,000 Grupo Radio Centro (b) 4,813 Radio Stations & Networks 2,100,000 Fondo Opcion, Series B (b) 1,814 Real Estate Investment Fund 5,500,000 Grupo Herdez, Series B 1,502 Sauces & Condiments 353,375 GBM Atlantico (b) 972 Bank & Brokerage 107,000 Cofar 150 Drug Stores - ---------------------------------------------------------------------- 46,787
27 Acorn International .Statement of Investments
Number of Shares Value (000) - ------------------------------------------------------------------------ .Brazil: 1.8% 23,000,000 Banco Itau Pfd. $ 9,961 Bank 215,000,000 Cemig Pfd. 7,325 Electric Utility 35,000,000 Telemig 4,378 35,000,000 Telemig Pfd. 4,328 Telecommunications 3,000,000 White Martins 4,331 Industrial Gases 150,000 Elevadores Atlas 1,472 Elevator Services 1,000,000 Brazilian Smaller Companies Warrants 475 Closed-End Fund - ------------------------------------------------------------------------ 32,270 .Argentina: 1.5% 6,000,000 Siderca 10,952 Steel Pipe Producer 320,000 IRSA 10,200 Real Estate Management & Development 1,400,000 Cresud (b) 2,478 Agriculture 230,000 Perez Companc (b) 1,617 Oil & Gas Producer 240,000 Siderar (b) 691 Flat Rolled Steel 229,500 Cerveceria Biekert (b) 390 Brewer - ------------------------------------------------------------------------ 26,328 .Chile: 1.0% 280,000 Santa Isabel 6,335 Grocery Stores 150,000 Genesis Chile Fund 5,513 Closed-End Fund 260,000 Banco BHIF (b) 4,257 Financial Services 70,000 Embotelladora Andina 2,135 Coca-Cola Bottler - ------------------------------------------------------------------------ 18,240 .Peru: 0.1% 2,527,334 Enrique Ferreyros 2,433 Heavy Machinery Dealer .Other Latin America: 1.0% 150,000 Banco Latinoamericano de Exportaciones 7,613 Trade Financing (Panama) 100,000 Ceteco Holdings 5,752 Appliances Retailer (Central America) 100,000 Panamerican Beverages 4,688 Coca-Cola Bottler (Panama) 450,000 Global Casinos Cv. Pfd. (b) 340 22,500 Global Casinos (b) 96 Casino Operator (Aruba) - ------------------------------------------------------------------------ 18,489 ------- Latin America: Total 144,547 - ------------------------------------------------------------------------ Other Countries: 7.2% .Australia/New Zealand: 4.1% 4,000,000 Village Roadshow Pfd. Cl. A 10,866 Film Distribution, Exhibition & Production 2,000,000 Publishing & Broadcasting 9,722 Media & TV Broadcasting 1,750,000 Sky City 9,534 Casino & Hotel (New Zealand) 1,900,000 Skilled Engineering 6,414 Temporary Skilled Labor 4,000,000 Austereo 6,354 Radio Stations 1,400,000 Petroleum Securities Australia (b) 6,149 Oil & Gas Producer 3,600,000 Tyndall Australia 6,148 Money Management & Insurance 4,600,000 Sonic Healthcare 5,481 Pathology Labs 3,700,000 Burswood Property Trust 4,732 Perth Casino & Resort 600,000 PDL Holdings 3,243 Electrical Equipment Manufacturer & Distributor (New Zealand) 175,000 Hudson Conway (b) 2,224 Casino Managers 272,000 Siddons Ramset 1,448 Manufacturer & Distributor of Construction Materials ------- 72,315 .Canada: 2.6% 1,000,000 Ranger Oil 9,875 Oil & Gas Producer 435,000 Shaw Industries, Cl.A 8,791 Oil Field Services 395,000 Veritas Energy Services (exchangeable into Veritas DGC) (b) 7,493 Geophysical Contractor 215,000 Cinar Films, Cl. B (b) 5,590 Children's Television Programming 1,400,000 Pan East Petroleum (b) 5,005 Oil & Gas Producer 710,000 Shaw Communications 3,937 Cable TV 500,000 Cogeco (b) 2,626 Cable TV
See accompanying notes to financial statements 28 Number of Shares Value (000) - ------------------------------------------------------------------------------- 300,000 Cogeco Cable $ 1,926 Cable TV 250,000 Fundy Cable (b) 1,386 Cable TV - ------------------------------------------------------------------------------- 46,629 >Israel: 0.5% 325,000 Blue Square Israel (b) 4,631 Supermarkets & Department Stores 200,000 Pec Israel Economic (b) 3,350 Industrial Holdings 75,000 ZAG Industries (b) 1,238 Plastic Hardwares - ------------------------------------------------------------------------------- 9,219 --------- Other: Total 128,163 - ------------------------------------------------------------------------------- Foreign Corporations, Operations in the U.S.: 0.3% 161,000 Carnival 5,313 Cruise Ship Line (Panama) --------- Foreign Corporations, Operations in the U.S.: Total 5,313 4,744 Miscellaneous Securities: 0.0% 12
Principal Amount or Number of Shares Value (000) - ------------------------------------------------------------------------------- Total Common Stocks and Other --------- Equity-Like Securities: 91.7% $1,626,122 (Cost: $1,212,620) Short-Term Obligations: 8.6% Yield 5.40% -- 5.80% Due January 1997 $28,628 Whirlpool Finance 28,596 $23,440 Commercial Credit 23,414 $18,694 Cargill 18,649 $18,315 Sears Acceptance 18,293 $17,765 Prudential Funding 17,740 $14,533 General Motors Acceptance 14,522 $12,834 Hertz 12,822 $12,346 Travelers Insurance 12,321 $6,220 American Brands 6,205 - ------------------------------------------------------------------------------- (Amortized Cost: $152,562) 152,562 --------- Total Investments: 100.3% 1,778,684 (Cost: $1,365,182) --------- Cash and Other Assets Less Liabilities: (0.3)% (6,141) --------- Total Net Assets: 100% $1,772,543 ===============================================================================
.Notes to Statement of Investments (a) At December 31, 1996, for federal income tax purposes cost of investments was $1,375,809,000 and net unrealized appreciation was $402,875,000 consisting of gross unrealized appreciation of $515,699,000 and gross unrealized depreciation of $112,824,000. (b) Non-income producing security. (c) On December 31, 1996, the Fund held the following percentages of the outstanding voting shares of the affiliated companies (ownership of at least 5%) listed below: Prodega (Switzerland)..............................................10.00% Estoril Sol (Portugal)............................................. 9.71% Sentra (Finland)................................................... 9.24% Benefon (Finland).................................................. 8.91% Tigaraksa Satria (Indonesia)....................................... 7.26% Kompan International (Denmark)..................................... 6.58% Kempen (Netherlands)............................................... 6.31% Fondo Opcion....................................................... 6.28% TT Tieto (Finland)................................................. 5.69% Zee Telefilms (India).............................................. 5.61% Ethical Holdings (UK).............................................. 5.14% The aggregate cost and value of investments in these companies at December 31, 1996, was $60,279,000 and $86,872,000 respectively. The market value of these securities represents 4.90% of the total net assets at December 31, 1996. During the year ended December 31, 1996, the cost of purchases and proceeds from sales in affiliated companies were $10,221,000 and $25,879,000, respectively. Net dividends received from these companies amounted to $1,495,000 and net realized gain on sale of investments in such companies amounted to $1,948,000. 29 Acorn International +Portfolio Diversification At December 31, 1996, the Fund's portfolio of investments as a percent of net assets was diversified as follows:
Value (000) Percent - --------------------------------------------------------------------------- +Information Computer Systems $ 115,669 6.5% Software/Services 94,040 5.3 Broadcasting/CATV 77,846 4.4 Distribution 67,860 3.8 Mobile Communications 40,440 2.3 Consumer Electronics 28,882 1.6 Instrumentation 6,517 0.4 Equipment 3,374 0.2 - --------------------------------------------------------------------------- 434,628 24.5 +Health Care Biotechnology/Drug Delivery 40,205 2.3 Hospital/Laboratory Supplies 37,027 2.1 Services 30,387 1.7 Equipment 23,632 1.3 - --------------------------------------------------------------------------- 131,251 7.4 +Consumer Goods/Services Retail 173,969 9.8 Manufacturers 108,279 6.1 Entertainment/Leisure 75,210 4.3 Food 69,982 3.9 Recreational Vehicles 1,697 0.1 - --------------------------------------------------------------------------- 429,137 24.2 +Finance Money Management 100,276 5.7 Banks 74,911 4.2 Insurance 26,425 1.5 Other 112,394 6.4 - --------------------------------------------------------------------------- 314,006 17.8
Value (000) Percent - --------------------------------------------------------------------------- +Industrial Goods/Services Services $ 110,650 6.2% Machinery Processing 57,752 3.3 Steel 6,788 0.4 Forest Products/Construction 4,127 0.2 - --------------------------------------------------------------------------- 179,317 10.1 +Energy/Minerals Oil/Gas Producers 42,163 2.4 Oil Services 32,884 1.8 Independent Power 19,152 1.1 Mining 6,149 0.3 Refining/Marketing 1,404 0.1 - --------------------------------------------------------------------------- 101,752 5.7 +Real Estate 23,599 1.3 +Transportation 12,432 0.7 Total Short Term Obligations 152,562 8.6 ----------------------- Total Investments: $1,778,684 100.3% ===========================================================================
See accompanying notes to financial statements 30 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 and Acorn USA as of December 31, 1996, and the related statements of operations and changes in net assets for the periods indicated thereon, and the financial highlights for the periods indicated thereon. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of December 31, 1996, 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 Acorn Fund, Acorn International and Acorn USA, as of December 31, 1996, the results of their operations and the changes in their net assets for the periods indicated thereon, and the financial highlights for the periods indicated thereon, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois January 31, 1997 31
Acorn Family of Funds .Financial Highlights Acorn Fund Years ended 12/31, - ------------------------------------------------------------------------------------------------------------------------ For a share outstanding throughout each year 1996 1995 Net Asset Value, beginning of year $13.60 $12.24 Income From Investment Operations Net investment income .09 .11 Net realized and unrealized gain (loss) on investments, foreign currency and futures 2.93 2.42 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 3.02 2.53 Less Distributions Dividends from net investment income (.11) (.09) Distributions from net realized and unrealized gains reportable for federal income taxes (1.47) (1.08) - ------------------------------------------------------------------------------------------------------------------------ Total distributions (1.58) (1.17) - ------------------------------------------------------------------------------------------------------------------------ Net Asset Value, end of year $15.04 $13.60 ======================================================================================================================== Total Return 22.6% 20.8% Ratios/Supplemental Data Ratio of expenses to average net assets .57% .57% Ratio of net investment income to average net assets .53% .89% Portfolio turnover rate 33% 29% Net assets at end of year (in millions) $2,842 $2,399 Acorn International Years ended 12/31, - ------------------------------------------------------------------------------------------------------------------------ For a share outstanding throughout each period 1996 1995 Net Asset Value, beginning of period $16.59 $15.24 Income From Investment Operations Net investment income (loss) .13 .16 Net realized and unrealized gain (loss) on investments and foreign currency 3.29 1.20 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 3.42 1.36 Less Distributions Dividends from net investment income (loss) (.12) - Distributions from net realized and unrealized gains reportable for federal income taxes (.28) (.01) - ------------------------------------------------------------------------------------------------------------------------ Total distributions (.40) (.01) - ------------------------------------------------------------------------------------------------------------------------ Net Asset Value, end of period $19.61 $16.59 ======================================================================================================================== Total Return 20.7% 8.9% Ratios/Supplemental Data Ratio of expenses to average net assets 1.17% 1.22% Ratio of net investment income (loss) to average net assets .51% .90% Portfolio turnover rate 34% 26% Net assets at end of period (in millions) $1,773 $1,276
Acorn USA Inception 9/4 through 12/31, - --------------------------------------------------------------------------------------------------------------- For a share outstanding throughout period 1996 Net Asset Value, beginning of period $10.00 Income From Investment Operations Net investment loss (.02) Net realized and unrealized gain (loss) on investments 1.67 - --------------------------------------------------------------------------------------------------------------- Total from investment operations 1.65 - --------------------------------------------------------------------------------------------------------------- Net Asset Value, end of period $11.65 =============================================================================================================== Total Return 16.5% Ratios/Supplemental Data Ratio of expenses to average net assets (d) 1.85%* Ratio of net investment loss to average net assets (.99%)* Portfolio turnover rate 20%* Net assets at end of period (in millions) $53
See accompanying notes to financial statements 32
- ------------------------------------------------------------------------------------ 1994 1993 1992 1991 1990 1989 1988 1987 $13.95 $11.06 $9.32 $6.51 $8.58 $7.27 $6.48 $7.45 .06 .04 .07 .11 .12 .13 .12 .14 (1.10) 3.50 2.16 2.95 (1.62) 1.65 1.47 .12 - ------------------------------------------------------------------------------------ (1.04) 3.54 2.23 3.06 (1.50) 1.78 1.59 .26 (.11) (.06) (.08) (.10) (.13) (.11) (.16) (.15) (.56) (.59) (.41) (.15) (.44) (.36) (.64) (1.08) - ------------------------------------------------------------------------------------ (.67) (.65) (.49) (.25) (.57) (.47) (.80) (1.23) - ------------------------------------------------------------------------------------ $12.24 $13.95 $11.06 $9.32 $6.51 $8.58 $7.27 $6.48 ==================================================================================== (7.4%) 32.3% 24.2% 47.3% (17.5%) 24.8% 24.8% 4.4% .62% .65% .67% .72% .82% .73% .80% .82% .55% .30% .72% 1.30% 1.60% 1.59% 1.52% 1.85% 18% 20% 25% 25% 36% 26% 36% 52% $1,983 $2,035 $1,449 $1,150 $767 $855 $563 $418 Inception 9/23 through 12/31, - ----------------------------------------- 1994 1993 1992 $15.94 $10.69 $10.00 .07 .00 (.03) (.67) 5.25 .72 - ---------------------------------------- (.60) 5.25 .69 - - - (.10) - - - ---------------------------------------- (.10) - - - ---------------------------------------- $15.24 $15.94 $10.69 - ---------------------------------------- (3.8%) 49.1% 6.9% 1.24% 1.21% 2.35%* .48% .06% (1.37%)* 20% 19% 20%* $1,363 $907 $30
(a) Average commission rate paid per share on Acorn Fund stock transactions for the year ended December 31, 1996 was $.0194. (b) Average commission rate paid per share on Acorn International stock transactions for the year ended December 31, 1996 was $.0008. (c) Average commission rate paid per share on Acorn USA stock transactions for the period ended December 31, 1996 was $.0567. (d) 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%. * Annualized 33 Acorn Family of Funds .Statements of Assets and Liabilities
Acorn (in thousands) Acorn Fund International Acorn USA - ------------------------------------------------------------------------------------------------------------------------- 12/31/96 Assets Investments, at value (cost: Acorn Fund $1,719,867; Acorn International $1,365,182; Acorn USA $49,628) $2,852,932 $1,778,684 $53,796 Cash - 1,657 28 Organization costs - 11 100 Receivable for: Securities sold 6,715 6,107 144 Fund shares sold 3,612 1,872 552 Dividends and interest 1,378 1,557 13 Other assets 26 15 - - ------------------------------------------------------------------------------------------------------------------------ Total assets 2,864,663 1,789,903 54,633 Liabilities and Net Assets Net unrealized depreciation on foreign forward currency contracts - 365 - Payable for: Securities purchased 6,620 15,290 1,391 Fund shares redeemed 14,673 725 1 Organization costs - 9 101 Other 1,318 971 55 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 22,611 17,360 1,548 Net assets applicable to Fund shares outstanding $2,842,052 $1,772,543 $53,085 ========================================================================================================================= Fund shares outstanding 188,918 90,383 4,556 ========================================================================================================================= Pricing of Shares Net asset value, offering price and redemption price per share $15.04 $19.61 $11.65 ========================================================================================================================= Analysis of Net Assets Paid-in capital $1,681,710 $1,355,220 $48,898 Accumulated net realized gain on sales of investments, futures and foreign currency transactions 32,756 12,674 19 Net unrealized appreciation of investments and other assets (net of unrealized PFIC gains of $8,057 for Acorn Fund and $10,627 for Acorn International) 1,125,008 402,505 4,168 Undistributed net investment income (loss) 2,578 2,144 - - ------------------------------------------------------------------------------------------------------------------------- Net assets applicable to Fund shares outstanding $2,842,052 $1,772,543 $53,085 =========================================================================================================================
See accompanying notes to financial statements 34
Acorn Family of Funds .Statements of Operations Acorn Acorn Fund International Acorn USA (in thousands) Years ended 12/31 Years ended 12/31 Inception - ------------------------------------------------------------------------------------------------------------------------ 1996 1995 1996 1995 9/4-12/31 1996 Investment Income: Dividends $ 23,043 $ 23,864 $ 24,877 $ 26,345 $ 35 Interest 7,662 9,264 4,023 3,969 48 - ------------------------------------------------------------------------------------------------------------------------ 30,705 33,128 28,900 30,314 83 Foreign taxes withheld (845) (916) (2,681) (2,816) - - ------------------------------------------------------------------------------------------------------------------------ Total investment income 29,860 32,212 26,219 27,498 83 Expenses: Investment advisory 12,437 10,429 13,255 11,667 101 Custodian 1,079 737 2,235 1,804 6 Transfer and dividend disbursing agent 1,030 733 1,558 1,360 27 Reports to shareholders 466 331 706 431 7 Legal and audit 152 118 142 119 27 Registration and blue sky 174 26 108 92 14 Trustees' and other 216 239 209 383 8 - ------------------------------------------------------------------------------------------------------------------------ Total expenses 15,554 12,613 18,213 15,856 190 Less custodian fees paid indirectly - - - - (6) - ------------------------------------------------------------------------------------------------------------------------ Net expenses 15,554 12,613 18,213 15,856 184 - ------------------------------------------------------------------------------------------------------------------------ Net investment income (loss) 14,306 19,599 8,006 11,642 (101) Net Realized and Unrealized Gain (Loss) on Investments, Futures and Foreign Currency Transactions: Net realized gain (loss) on sales of investments 298,665 198,606 48,566 (1,937) 120 Net realized gain (loss) on foreign currency transactions - (118) 1,291 (16,959) - Net realized loss on futures (22,053) (12,798) - - - Change in net unrealized appreciation on investments and foreign currency transactions 250,750 211,069 221,576 114,583 4,168 - ------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain on investments, futures and foreign currency transactions 527,362 396,759 271,433 95,687 4,288 - ------------------------------------------------------------------------------------------------------------------------ Net increase in net assets resulting from operations $541,668 $416,358 $279,439 $107,329 $ 4,187 ========================================================================================================================
See accompanying notes to financial statements 35 Acorn Family of Funds .Statements of Changes in Net Assets
Acorn Acorn Fund International Acorn USA (in thousands) Years ended 12/31 Years ended 12/31 Inception - -------------------------------------------------------------------------------------------------------------------------- 1996 1995 1996 1995 9/4-12/31 1996 From Operations: Net investment income (loss) $ 14,306 $ 19,599 $ 8,006 $ 11,642 $ (101) Net realized gain (loss) on sales of investments, futures and foreign currency transactions 276,612 185,690 49,857 (18,896) 120 Change in net unrealized appreciation of investments and foreign currency transactions 250,750 211,069 221,576 114,583 4,168 - -------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 541,668 416,358 279,439 107,329 4,187 Distributions to Shareholders From: Net investment income (a) (19,687) (14,810) (10,368) - - Net realized gain (261,454) (177,941) (24,680) (1,050) - - -------------------------------------------------------------------------------------------------------------------------- Total distributions to shareholders (281,141) (192,751) (35,048) (1,050) - From Fund Share Transactions: Reinvestment of dividends and capital gain distributions 257,125 173,543 33,033 1,001 - Proceeds from other shares sold 358,315 292,683 386,765 147,138 49,912 - -------------------------------------------------------------------------------------------------------------------------- 615,440 466,226 419,798 148,139 49,912 Payments for shares redeemed (432,510) (274,314) (167,890) (340,704) (1,014) - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from Fund share transactions 182,930 191,912 251,908 (192,565) 48,898 - -------------------------------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 443,457 415,519 496,299 (86,286) 53,085 Net Assets: Beginning of period 2,398,595 1,983,076 1,276,244 1,362,530 - End of period (b) $2,842,052 $2,398,595 $1,772,543 $1,276,244 $ 53,085 ==========================================================================================================================
(a) Includes distributions of unrealized PFIC gains of $2,671 in 1996 and $592 in 1995 for Acorn Fund and $3,813 in 1996 for Acorn International. (b) Includes undistributed net investment income (loss) of $2,578 in 1996 and $5,288 in 1995 for Acorn Fund; $2,144 in 1996 and $693 in 1995 for Acorn International; and $0 in 1996 for Acorn USA. See accompanying notes to financial statements 36 Acorn Family of Funds .Notes to Financial Statements 1. Nature of Operations Acorn Fund, Acorn International and Acorn USA (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. For Acorn Fund, net realized gains include distributions of realized gains from other investment companies of $1,395,520 in 1996 and $877,200 in 1995. For Acorn USA, net realized gains include distributions of realized gains from other investment companies of $21,360 in 1996. .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. There were no futures contracts or forward foreign currency contracts open at December 31, 1996 in Acorn Fund. There were no futures contracts open at December 31, 1996 in Acorn International. Acorn International entered into forward contracts to sell foreign currency, settling March 20 through June 19, 1997, as described below:
U.S. Dollar Unrealized Gain Foreign Amount Currency Proceeds (000) (Loss) (000) - ----------------------------------------------------------------------- 54,000,000 Swiss Franc $40,617 $149 91,000,000 German Mark $58,820 ($506) 200,000,000 Hong Kong Dollar $25,834 ($8) ----- ($365)
37 Acorn Family of Funds .Notes to Financial Statements Acorn USA did not enter into any futures or forward foreign currency contracts during the period ended December 31, 1996. .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 Acorn Fund and Acorn International have complied with the special provisions of the Internal Revenue Code available to investment companies for the years ended December 31, 1996 and December 31, 1995. In accordance with the distribution requirements imposed on investment companies, Acorn Fund and Acorn International paid long-term capital gain distributions in 1996 of $241,989,000 and $24,680,000, respectively, which was sufficient to allow each fund not to incur any income tax. Acorn USA also complied with these provisions for the period ended December 31, 1996 and was not required to pay a distribution. Dividends payable to shareholders are recorded by the Funds on the ex- dividend date. Acorn Fund and Acorn International have elected to mark-to-market their investments in Passive Foreign Investment Companies ("PFICs") for federal income tax purposes. In accordance with this election, Acorn Fund recognized unrealized appreciation on PFICs of $2,671,000 in 1996. Cumulative net unrealized appreciation recognized in prior years on PFICs sold in 1996 amounted to $7,124,000. Distributions to shareholders from net investment income relating to PFICs were $2,671,000 in 1996. In accordance with its PFIC election, for the year ended December 31, 1996, Acorn International recognized unrealized appreciation on PFICs of $3,813,000. The cumulative net unrealized appreciation recognized in prior years on PFICs sold in 1996 amounted to $5,306,000. Distributions to shareholders from net investment income relating to PFICs were $3,813,000. Prior to 1996, the Fund recognized unrealized PFIC gains of $11,427,000, which were offset by accumulated net realized losses on foreign currency transactions and therefore were not required to be distributed. Distributions relating to PFICs are treated as ordinary income for Federal income tax purposes. Reclassifications have been made in 1996 for Acorn USA in the accompanying analysis of net assets from undistributed net investment loss to accumulated net realized gain on sales of investments of $101,000 to reflect differences between financial reporting and income tax bases. 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 agreements with WAM, each fund pays the advisor an annual management fee, payable monthly, at the rates set forth below, which are determined at the beginning of each calendar quarter: Acorn Fund - ------------------------------------------ Net asset value: For the first $100 million .75% Next $1.4 billion .50% Net assets in excess of $1.5 billion .40% Acorn International - ------------------------------------------ Net asset value: For the first $100 million 1.25% Next $400 million 1.00% Net assets in excess of $500 million .80% Acorn USA - ------------------------------------------ Net asset value: For the first $200 million 1.00% Net assets in excess of $200 million .95% 38 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 $115,700 in 1996 and $134,000 in 1995; Acorn International paid $99,700 in 1996 and $89,000 in 1995 and Acorn USA paid $600 in 1996 to trustees not affiliated with WAM. Included in these fees are amounts paid to the Chairman of the Board of $43,200 and $49,000 by Acorn Fund and $37,600 and $32,000 by Acorn International for 1996 and 1995, respectively, and $200 by Acorn USA for 1996. WAM advanced Acorn International $71,000 in connection with the organization and initial registration of the Fund. These costs are being amortized and reimbursed to WAM over the period January, 1993 though September, 1997. 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 though 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. 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) 1996 1995 Shares sold 23,744 21,831 Shares issued in reinvestment of dividend and capital gain distributions 17,382 12,817 -------------- 41,126 34,648 Less shares redeemed 28,523 20,322 -------------- Net increase in shares outstanding 12,603 14,326 ========================================================== Acorn International - ---------------------------------------------------------- (in thousands) 1996 1995 Shares sold 20,757 9,482 Shares issued in reinvestment of dividend and capital gain distributions 1,708 62 -------------- 22,465 9,544 Less shares redeemed 8,994 22,013 Net increase (decrease) in -------------- shares outstanding 13,471 (12,469) ========================================================== Acorn USA - --------------------------------------------------- (in thousands) 1996 Shares sold 4,647 Less shares redeemed 91 ----- Net increase in shares outstanding 4,556 =================================================== 5. Investment transactions Acorn Fund - ------------------------------------------------------------- (in thousands) 1996 1995 Investment securities (excluding money market instruments): Purchases $862,321 $636,015 Proceeds from sales 924,259 584,550 Acorn International - ------------------------------------------------------------- (in thousands) 1996 1995 Investment securities (excluding money market instruments): Purchases $612,766 $318,862 Proceeds from sales 498,234 416,451 Acorn USA - --------------------------------------------------- (in thousands) 1996 Investment securities (excluding money market instruments): Purchases $ 45,708 Proceeds from sales 1,733 ===================================================
39 The Acorn - ---------------------------- Family of Funds .Trustees Irving B. Harris Chairman James H. Lorie Vice Chairman Leo A. Guthart Jerome Kahn, Jr. David C. Kleinman Charles P. McQuaid Roger S. Meier Adolph Meyer, Jr. Malcolm N. Smith Ralph Wanger .Officers Ralph Wanger President Charles P. McQuaid Senior Vice President Terence M. Hogan Vice President Leah J. Zell Vice President Merrillyn J. Kosier Vice President and Secretary Bruce H. Lauer Vice President and Treasurer Kenneth A. Kalina Assistant Treasurer .Investment Advisor Wanger Asset Management, L.P. 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 1-800-9-ACORN-9 (1-800-922-6769) e-mail: acorn@wanger.com web site: www.wanger.com .Distributor WAM Brokerage Services, L.L.C. P.O. Box 8502 Boston, Massachusetts 02266-8502 .Transfer Agent, Dividend Disbursing Agent and Custodian State Street Bank and Trust Company Attention: Acorn Family of Funds P.O. Box 8502 Boston, Massachusetts 02266-8502 1-800-962-1585 .Legal Counsel Bell, Boyd & Lloyd Chicago, Illinois .Independent Auditors Ernst & Young LLP Chicago, Illinois This report, including the audited schedules of investments and financial statements, is submitted for the general information of the shareholders of Acorn Investment Trust. This report is not authorized for distribution unless preceded or accompanied by a prospectus. 40 A Zebra In Lion Country A Zebra in Lion Country: Ralph Wanger's Investment Survival Guide, will hit bookstores in April. Mr. Wanger wants to meet fellow Acorn shareholders! If you live in or around one of the following cities, drop by, introduce yourself, and let him personally sign your copy of the book. >April 8 Barnes & Noble 160 E. 54th Street, New York, NY >April 15 Schwartz Books 219 N. Milwaukee Street, Milwaukee, WI >April 17 Baxter Books 608 2nd Avenue, Minneapolis, MN >April 22 Borders Books & Music North Michigan Avenue, Chicago, IL [PICTURE OF ACORN] The Acorn - ------------------------ Family of Funds WAM Brokerage Services, L.L.C. P.O. Box 8502 Boston, MA 02266-8502 FIRST CLASS U.S. POSTAGE PAID CHICAGO,IL PERMIT NO. 1200 PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits --------------------------------- (a) Financial statements: -------------------- (1) Financial statements included in Part A of this amendment: None (2) Financial statements included in Part B of this amendment: (i) Acorn Fund (incorporated by reference to the following portions of Registrant's 1996 Acorn Investment Trust Annual Report; a copy of the annual report is attached to this amendment, but, except for those portions incorporated by reference, is furnished for the information of the Commission and is not deemed to be filed as part of this amendment): Report of Independent Auditors Statement of Assets and Liabilities at December 31, 1996 Statement of Operations at December 31, 1996 Statement of Changes in Net Assets at December 31, 1996 Statement of Investments at December 31, 1996 Notes to financial statements (ii) Acorn International (incorporated by reference to the following portions of Registrant's 1996 Acorn Investment Trust Annual Report; a copy of the annual report is attached to this amendment, but, except for those portions incorporated by reference, is furnished for the information of the Commission and is not deemed to be filed as part of this amendment): Report of Independent Auditors Statement of Assets and Liabilities at December 31, 1996 Statement of Operations at December 31, 1996 Statement of Changes in Net Assets at December 31, 1996 Statement of Investments at December 31, 1996 Notes to financial statements 1 (iii) Acorn USA (incorporated by reference to the following portions of Registrant's 1996 Acorn Investment Trust Annual Report; a copy of the annual report is attached to this amendment, but, except for those portions incorporated by reference, is furnished for the information of the Commission and is not deemed to be filed as part of this amendment): Report of Independent Auditors Statement of Assets and Liabilities at December 31, 1996 Statement of Operations at December 31, 1996 Statement of Changes in Net Assets at December 31, 1996 Statement of Investments at December 31, 1996 Notes to financial statements (2) Financial statements included in Part C of this amendment: None Note: The following schedules have been omitted for the following reasons: Schedules I and III - The required information is presented in the statements of investments at December 31, 1996. Schedules II, IV and V - The required information is not present. (b) Exhibits: -------- 1. Agreement and declaration of trust** 2.1 Bylaws, as amended September 15, 1992** 2.2 Bylaw amendment adopted February 2, 1993** 3. None 4.1 Specimen share certificate - Acorn Fund*** 4.2 Specimen share certificate - Acorn International*** 4.3 Specimen share certificate - Acorn USA+ 5.1 Investment advisory agreement - Acorn Fund** 5.2 Investment advisory agreement - Acorn International** 5.3 Form of Investment advisory agreement - Acorn USA*** 5.4 Form of Organizational Expenses Agreement between Acorn Investment Trust and Wanger Asset Management, L.P. dated as of September, 1996 *** 2 6.1 Distribution Agreement between Acorn Investment Trust and WAM Brokerage Services, L.L.C. dated as of May 1, 1996** 6.2 Form of Amendment to Distribution Agreement between Acorn Investment Trust and WAM Brokerage Services, L.L.C. dated as of September, 1996 *** 7. None 8.1 Custodian contract between the Registrant and State Street Bank and Trust Company dated July 1, 1992** 8.2 Letter agreement applying custodian contract** 8.3 Form of letter agreement applying custodian contract (exhibit 8.1) to Acorn USA*** 9. None 10.1 Opinion and consent of Bell, Boyd & Lloyd dated June 18, 1996 - Acorn Fund* 10.2 Opinion and consent of Bell, Boyd & Lloyd dated June 18, 1996 - Acorn International* 10.3 Opinion and consent of Bell, Boyd & Lloyd dated June 18, 1996 - Acorn USA*** 11. Consent of Independent Auditors 12. None 13. None 14. IRA plan booklet dated September 1996 including general information, individual retirement plan and custodial agreement and individual retirement account disclosure statement, Internal Revenue Service determination letter, transfer form, application form, and designation of beneficiary form+ 14.1 IRA plan booklet dated January 1997 including general information, individual retirement plan and custodial agreement and individual retirement account disclosure statement, Internal Revenue Service determination letter, transfer form, application form, and designation of beneficiary form 14.2 Form of SIMPLE-IRA plan and application 15. None 16.1 Computation of performance information - Acorn Fund** 16.2 Computation of performance information - Acorn International** 17.1 Financial data schedule - Acorn Fund 17.2 Financial data schedule - Acorn International 17.3 Financial data schedule - Acorn USA 3 - ---------------------------------------- *Previously filed. Incorporated by reference to the exhibit of the same number filed in post-effective amendment No. 49 to the Registrant's registration statement, Securities Act file no. 2-34223 (the "Registration Statement"). **Previously filed. Incorporated by reference to the exhibit of the same number filed in post-effective amendment No. 53 to the Registrant's Registration Statement, filed on April 29, 1996. ***Previously filed. Incorporated by reference to the exhibit of the same number filed in post-effective amendment No. 54 to the Registrant's Registration Statement, filed on June 26, 1996. +Previously filed. Incorporated by reference to the exhibit of the same number filed in post-effective amendment No. 55 to the Registrant's Registration Statement, filed on September 3, 1996. Item 25. Persons Controlled By or Under Common Control with Registrant ------------------------------------------------------------- The Registrant does not consider that there are any persons directly or indirectly controlling, controlled by, or under common control with the Registrant within the meaning of this item. The information in the prospectus for Acorn Fund, Acorn International and Acorn USA under the caption "The Funds in Detail - Organization - Management" and in the statement of additional information for Acorn Fund, Acorn International and Acorn USA under the caption "Investment Adviser" is incorporated by reference. Item 26. Number of Holders of Securities ------------------------------- At January 31, 1997, there were 49,777 record holders of Registrant's shares of beneficial interest of the series designated Acorn Fund; 77,115 record holders of Registrant's shares of beneficial interest of the series designated Acorn International; and 4,260 record holders of Registrant's shares of beneficial interest of the series designated Acorn USA. Item 27. Indemnification --------------- Article VIII of the Agreement and Declaration of Trust of the Registrant (exhibit 1) provides in effect that Registrant shall provide certain indemnification of its trustees and officers. In accordance with Section 17(h) of the Investment Company Act, that provision shall not protect any person against any liability to the Registrant or its shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities 4 (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Registrant, its trustees and officers, its investment adviser and persons affiliated with them are insured under a policy of insurance maintained by Registrant and its investment adviser, within the limits and subject to the limitations of the policy, against certain expenses in connection with the defense of actions, suits or proceedings, and certain liabilities that might be imposed as a result of such actions, suits or proceedings, to which they are parties by reason of being or having been such trustees or officers. The policy expressly excludes coverage for any trustee or officer whose personal dishonesty, fraudulent breach of trust, lack of good faith, or intention to deceive or defraud has been finally adjudicated or may be established or who willfully fails to act prudently. Item 28. Business and Other Connections of Investment Adviser ---------------------------------------------------- The information in the prospectus for Acorn Fund, Acorn International and Acorn USA under the caption "The Funds in Detail - Organization - Management" is incorporated by reference. Neither Wanger Asset Management, L.P. nor its general partner has at any time during the past two years been engaged in any other business, profession, vocation or employment of a substantial nature either for its own account or in the capacity of director, officer, employee, partner or trustee. Item 29. Principal Underwriters ---------------------- WAM Brokerage Services, L.L.C. also acts as principal underwriter for Wanger Advisors Trust. 5
Name Positions and Offices with Positions and Offices with Underwriters Registrant Terence M. Hogan President Vice President Merrillyn J. Kosier Vice President and Secretary Vice President and Secretary
The principal business of each officer of WAM Brokerage Services, L.L.C. is 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. Item 30. Location of Accounts and Records -------------------------------- Bruce H. Lauer, Vice President and Treasurer Acorn Investment Trust 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Item 31. Management Services ------------------- None Item 32. Undertakings ------------ (a) Not applicable. (b) Registrant undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. 6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the registrant has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Chicago, Illinois on April 30, 1997. ACORN INVESTMENT TRUST By /s/ Ralph Wanger --------------------------- Ralph Wanger, President Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed below by the following persons in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/Irving B. Harris Trustee and chairman ) - ----------------------- ) Irving B. Harris ) ) /s/Leo A. Guthart Trustee ) - ----------------------- ) Leo A. Guthart ) ) /s/Jerome Kahn, Jr. Trustee ) - ----------------------- ) Jerome Kahn, Jr. ) ) /s/David C. Kleinman Trustee ) - ----------------------- ) David C. Kleinman ) ) /s/James H. Lorie Trustee ) - ----------------------- ) James H. Lorie ) ) /s/Charles P. McQuaid Trustee ) April 30, 1997 - ----------------------- ) Charles P. McQuaid ) ) /s/Roger S. Meier Trustee ) - ----------------------- ) Roger S. Meier ) ) /s/Adolph Meyer, Jr. Trustee ) - ----------------------- ) Adolph Meyer, Jr. ) ) /s/Ralph Wanger Trustee and President ) - ----------------------- ) Ralph Wanger (principal executive ) officer) ) ) /s/Bruce H. Lauer Treasurer (principal ) - ----------------------- ) Bruce H. Lauer financial and accounting ) officer) )
Index of Exhibits Filed with this Amendment -------------------------------------------
Exhibit Number Exhibit - ------- ------- 11 Consent of independent auditors 14.1 IRA plan booklet dated January 1997 14.2 Form of SIMPLE-IRA plan and application 17.1 Financial data schedule - Acorn Fund 17.2 Financial data schedule - Acorn International 17.3 Financial data schedule - Acorn USA
EX-99.11 2 CONSENT OF INDEPENDENT AUDITORS Exhibit 11 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Financial Highlights" and to the incorporation by reference of our report dated January 31, 1997 in the Registration Statement (Form N-1A) of Acorn Investment Trust, filed with the Securities and Exchange Commission in this Post-Effective Amendment No. 57 to the Registration Statement under the Securities Act of 1933 (File No. 2-34223) and in the Amendment No. 32 to the Registration Statement under the Investment Company Act of 1940 (File No. 811-1829). /s/ ERNST & YOUNG LLP Chicago, Illinois May 1, 1997 EX-99.14.1 3 IRA PLAN BOOKLET DATED JANUARY 1997 Exhibit 14.1 Acorn IRA plan Acorn Fund Acorn International Acorn USA No-Load Funds IRA and SEP-IRA Plan and Applications Managed by Wanger Asset Management, L.P. Dear Investor: Thank you for your interest in the Acorn family of funds. We hope you find this IRA booklet informative and helpful. At Acorn, we understand how important it is to plan for your future. Investing for your retirement today will give your savings the advantage of time and the power of compounding over the long haul. How? An IRA provides the special advantage of tax-deferred compounding. Your investment grows year after year with no annual tax payments of the earnings in your account until you begin to withdraw from your IRA. This means that you can save more with an IRA than with a comparable taxable investment. What's more, all or part of your contribution may be deductible from your current taxes, providing additional tax savings. Investing with the Acorn funds helps you save money. The Acorn funds are 100% no-load, which means that all of your money goes to work for you immediately. What's more, there are no sales charges, and no 12b-1 fees or back-end load fees, so all of your dollars are invested at net asset value. Acorn invests in companies for the long-term (usually 3-5 years), so our turnover rate is low. This minimizes both trading costs and shareholders' taxes. All these factors add up to greater value for our shareholders. Whether you are opening a new IRA, making your annual IRA contribution, moving an existing IRA from another institution, or rolling over money from an employer-sponsored retirement plan, Acorn can help you save for your retirement. This booklet contains everything you need to open an IRA at Acorn. Please take a moment to read it carefully. If you have any questions or need help with any of the forms, please call us at 1-800-962-1585. We invite you to squirrel away your acorns for a day when you really need them, and look forward to a long and mutually rewarding relationship with you. Happy investing, /s/ Ralph Wanger Ralph Wanger President WAM Brokerage Services, L.L.C., Distributor. Member, NASD 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606 General Information about the Individual Retirement Account Plan Can anyone open an Acorn IRA? Once you have reached legal age, you may open or contribute to an Acorn IRA in any year before the year in which you reach age 70 1/2 and in which you have earnings from employment or self-employment. You may make your contribution for any year until April 15 of the following year. How much can I contribute? The annual contribution limit for an IRA is the lesser of $2,000 or 100% of compensation (including alimony and separate maintenance payments) for the year. You may contribute the maximum amount to your IRA even if you and/or your spouse participate in an employer-sponsored retirement program or a Keogh plan (although some or all of your contribution may not be tax-deductible, as explained below). Why use an IRA? One of the keys to successful retirement planning is effectively using the time you have until you actually retire. This means saving regularly and starting now. An IRA is an exceptional way to save for retirement because it offers the opportunity for long-term growth and the benefit of tax-deferred compounding. This means that your earnings, both dividends and capital gains, grow free of current taxes. You pay no taxes on the growth of your IRA until you withdraw from it. The following table shows the effects of tax-deferred compounding of earnings Advantages of Tax-Deferred Compounding [CHART APPEARS HERE] TAXABLE INVESTMENT 10 YEARS 20 YEARS 30 YEARS - -------- -------- -------- $29,400 $86,697 $198,360 TAX-DEFERRED IRA 10 YEARS 20 YEARS 30 YEARS - -------- -------- -------- $35,062 $126,005 $361,887 This chart shows the value of your IRA's tax-deferred advantage. Our example assumes a $2,000 contribution at the beginning of each year for 10, 20, and 30 years, a 31% tax bracket, and a constant earnings rate of 10% annually. - ------------------------------------------------------------------------------- compared to a similar taxable investment. This is a hypothetical example for illustrative purposes only and does not represent the performance of any mutual fund. In addition to the benefits of tax-deferred compounding, you may be able to reduce your current income taxes by taking a tax deduction for a part or all of your contributions in the years in which you add to your IRA. Whether all or part of your annual contribution is deductible depends upon the amount of your income for the year and whether you or your spouse participate in an employer's qualified retirement plan. Even if your contribution for a given year is non- deductible, you may contribute the maximum amount to your IRA for that year. (Please see your tax adviser for additional information and reporting requirements.) General Information about the Individual Retirement Account Plan The following chart shows the extent of your contribution's deductibility under current IRS regulations.
==================================================================================================================================== Adjusted Gross Income (Before IRA Deduction) Retirement Plan Deductibility of a - -------------------------------------------- Joint Filing Single Filing* Participation** $2,000 Contribution ==================================================================================================================================== Under $40,000 Under $25,000 Yes or No Full - ----------------------------------------------------------------------------------------------------------------------------------- $40,000 - $50,000 $25,000 - $35,000 No Full ------------------------------------------------------------- Yes Partial - ----------------------------------------------------------------------------------------------------------------------------------- Over $50,000 Over $35,000 No Full ------------------------------------------------------------- Yes No Deduction ====================================================================================================================================
* Applies to married persons filing separate returns only if they lived apart for the entire year. ** "Yes" refers to either you or your spouse. "No" refers to both you and your spouse. If you don't know your participation status, refer to the pension plan box on your W-2 Form. If your IRA contribution is partially deductible, you can calculate the deductible portion of your contribution amount from the following formula:
============================================================================================================== Formula Example Your Contribution ============================================================================================================== Joint Single 1. Subtract Adjusted Joint AGI = $43,500 AGI = $________ AGI = $________ Gross Income (AGI) $50,000 - $________ #35,000 - $________ from $50,000 (joint) or $50,000-$43,500 = $6,500 = $________ = $________ $35,000 (single) $6,500/5=1,300 / 5 = $________ / = $________ 2. Divide by 5 to get deductible amount* ==============================================================================================================
*If the deductible amount is not a multiple of $10, round up to the next highest $10. If it is $1-199, deduct $200. To calculate combined deduction for you and your spouse's IRA, multiply by 0.4 instead of dividing by 5 (for 1996, multiply by .225). You may contribute only this deductible amount or, if you wish, you may contribute up to the $2,000 annual limit with the excess amount being non- deductible. If you make a non-deductible contribution, you need to file Form 8606 with your tax return. Beginning in 1997, if you and your spouse file a joint tax return, you may each open an IRA and the two of you may contribute a total of $4,000, even if one of you has less than $2,000 in compensation for the year, so long as your combined compensation is at least $4,000. The total contribution may be divided between the two accounts in whatever proportion you and your spouse decide, up to $2,000 for either account. (For 1996, the maximum combined contribution for your IRA and your spouse's IRA was $2,250 if your spouse had no compensation.) See your tax adviser for more information. Opening a new Acorn IRA Investing in an Acorn IRA gives you the opportunity to save for your retirement using four different mutual funds: Acorn Fund, Acorn International, Acorn USA, and Short Term Income Fund Money Market Portfolio. You may invest all of your contributions in one fund or you may divide your contributions among the funds as you choose. To open a new Acorn IRA, complete the application included with this booklet. On the application, check the box for a regular IRA contribution and indicate the tax year for which you are making your IRA contribution. Select the fund(s) in which you want to invest and indicate the amount to be invested in each fund. Tell us whether you want to make regular investments into your Acorn IRA by using the Automatic Investment Plan, and provide us with the beneficiary information requested on the back of the application. Then write a check payable to "State Street Bank" for the total amount you wish to invest (including the $5 set-up fee for each fund in which you are investing) and mail your check with the completed application to Acorn in the pre-addressed envelope provided or to the address shown on the application. Moving funds from another IRA or a qualified plan to an Acorn IRA We can help you move funds from your other IRA custodians or qualified plans to Acorn. This can be done in three ways: a custodian to custodian (or trustee to trustee) transfer (also known as a direct transfer); a 60-day rollover of a distribution you have received from a qualified plan or money you have withdrawn from another IRA; or a direct rollover of a distribution from your employer's qualified retirement plan. Each method is explained below. Direct Transfer Acorn will arrange a direct transfer of assets from your current IRA custodian or trustee directly to Acorn. In a direct transfer, you do not receive the account proceeds during the transfer process. Your money goes directly from your old IRA custodian to Acorn. You may make direct transfers between IRAs as often as you choose. If you would like the transferred money to go into a new Acorn IRA, complete both the transfer form, checking the box for a new Acorn IRA, and the application, checking the box for a Direct Transfer. If the transferred money is to be invested in an existing Acorn IRA, complete only the transfer form. The transfer form tells us about the IRA assets you are transferring and provides information about your current custodian. This information should be on your most recent account statement. Complete the instructions authorizing your current custodian to transfer your account to Acorn and sign the transfer form. Please check with your present custodian to find out whether you will need to obtain a signature guarantee. Send the completed form(s) to Acorn in the envelope provided or to the address shown on the application. General Information about the Individual Retirement Account Plan Acorn will arrange for the transfer of assets from your present custodian. 60-day Rollover from an IRA If you physically receive money that was held in your IRA with another custodian, you must deposit the money into an IRA within 60 days to avoid paying income tax. If this is not done within the 60-day time limit, you will have to pay income tax on the amount you have received, as well as possible penalties if you are under the age of 59-1/2 when you receive the money. You may make only one 60-day rollover per IRA in any twelve-month period. To establish a rollover account with money you have withdrawn from another IRA, complete the Acorn IRA application, checking the box for a 60-day rollover of an existing IRA. Indicate whether the rollover is from a Regular IRA or a Rollover IRA. Be sure that you forward your check in time for the funds to be received by State Street Bank no later than 60 days from the date on which the distribution from your IRA was made. Rollovers from an employer's qualified plan to an Acorn IRA If you have been participating in your employer's qualified retirement plan and are eligible for a distribution from the plan because of a job change, a lay- off, disability, retirement, or termination of the plan, you need to decide what you will do with your retirement plan money before you receive the distribution. Unless you are eligible to leave your money in the plan and want to do so, you have two main alternatives: (1) rollover the amount distributed and keep your money working for you tax-deferred, or (2) take the distribution now--subject to the applicable taxes and penalties. If you take your distribution now (even if you are planning to do a 60-day rollover), your employer must withhold 20% of the distribution for federal income taxes, so you'll receive only 80% of the money to be distributed. You may also be responsible for (a) additional federal income tax (depending on your tax bracket), (b) a penalty tax of 10% for an early withdrawal if you are not yet 59-1/2 (subject to exceptions if you are disabled, spend the distribution on medical expenses, or have separated from service and are at least age 55), and (c) state and local income taxes on your distribution. If you choose to reinvest the amount distributed, you have three options: (1) use a direct rollover to invest the money in an IRA; (2) use a 60-day rollover to invest the money in an IRA; or (3) roll over the distribution into a qualified plan sponsored by a new employer (if the plan accepts rollovers). If you are reinvesting the money in an IRA, a direct rollover is usually better than a 60-day rollover. In a direct rollover, you never receive the distribution (it is sent directly from the plan to the IRA custodian, or the plan gives you a check payable to the IRA custodian). Because a direct rollover is not treated as a distribution to you, no tax is withheld. Direct Rollover To set up your Acorn IRA by making a direct rollover you should complete the enclosed application, check the box for a Rollover IRA from an employer- sponsored plan, and check the appropriate box to tell us whether you are enclosing a check payable to State Street Bank or your employer will be sending the check directly to the bank. If your plan administrator gives you a check payable to State Street Bank, send that check along with the completed application in the pre-addressed envelope provided or to the address on the application. If your plan administrator is going to send a check directly to State Street Bank, send the completed application without the check. We will open the account and have it ready to receive your distribution check. You may call us at 1-800-922-6769 to request your account number if your plan administrator needs it to send the distribution check. 60-Day Rollover from a Qualified Plan If you have already received a distribution directly, you will have had 20% withheld for taxes, but you can still make a 60-day rollover. You will avoid income tax and possible penalties on the amount you deposit in your IRA, up to the entire amount of your distribution (before deduction of the 20% for income tax withholding). You can rollover part of your distribution and keep part, paying income tax and any applicable penalties on the part you keep. If you rollover only the amount of your distribution check (the 80% that was left after the 20% income tax withholding), you will be treated as having kept the 20%, which will be subject to income taxes and any applicable penalties. You can avoid taxes and penalties entirely when you make the 60-day rollover by making up from other funds the 20% that was withheld for tax. The 20% that was withheld is treated just like the income tax that is withheld from your regular paycheck. You include it on your income tax return as tax that has already been paid by you. If all the income tax you have paid (including the 20%, the tax withheld from your pay and any income tax payments you made) is more than the tax you owe, the IRS will send you a refund. If you receive a distribution of property (such as shares of stock) from your employer's plan, you can make a 60-day rollover by selling the property and depositing the sales proceeds within the 60-day period. If you had borrowed against your account in the plan from which you received the distribution, the taxable amount of your distribution may be more than the amount of cash you receive because it will include the unpaid loan balance. In this case, you can avoid paying tax on the unpaid loan balance by using other funds to complete the rollover, in the same way you can make up the 20% tax withholding. General Information about the Individual Retirement Account Plan
- ------------------------------------------------------------------------------------------------------------- Rollover IRA New Employer's Plan - ------------------------------------------------------------------------------------------------------------- Tax Considerations * avoids current taxes * avoids current taxes * money grows tax-deferred * money grows tax-deferred (but you may have to wait to transfer money into plan) - ------------------------------------------------------------------------------------------------------------- Investment Options * a range of investment choices * options vary among plans - ------------------------------------------------------------------------------------------------------------- Withdrawal Options * can take all or part of your * choices vary from plan to plan; money out at any time check with your new employer * earnings taxed when withdrawn; * earnings taxed when withdrawn; 10% 10% penalty applies if younger penalty applies if younger than 591/2 or than 591/2, unless disabled separated from service before age 55, with some exceptions * no mandatory 20% withholding for * 20% withholding for federal income federal income taxes on withdrawals taxes if withdrawal of eligible rollover distributions not rolled over into another plan - ------------------------------------------------------------------------------------------------------------- Other Features * very easy to set up * can add future contributions to * can switch between your Acorn your plan investments tax-free as your * enables you to consolidate your needs and the market changes retirement plan money * offers you easy access to your * may be able to borrow from your investments account * borrowing not permitted - -------------------------------------------------------------------------------------------------------------
The chart above summarizes the key features of your alternatives for reinvesting a distribution from your employer's plan and may help you decide how to keep your money working for your retirement. If you put your plan distribution into the same IRA with regular IRA (annual contributions) money, you forfeit the right to reinvest your plan distribution in another employer's qualified plan in the future. Because combining regular IRA and Rollover IRA funds may also have tax implications when you begin withdrawals from your IRA, you should consult your tax adviser before deciding to commingle your plan distribution with your regular IRA investments. SEP-IRAs An IRA under a Simplified Employee Pension Plan (SEP-IRA) may be an attractive way to save for retirement if you have any income from self-employment, and may also be a way to offer an important benefit to your employees if you are a small business owner. You may open and contribute to a SEP-IRA as a self-employed individual if you provide any service from which you earn income, even if you have a full-time occupation in which you participate in an employer's retirement plan. If you own a small business as a sole proprietor, a partnership, or a corporation (including a Subchapter-S corporation), you can establish a SEP-IRA for yourself and your eligible employees. A SEP-IRA offers the advantage of tax-deferred compounding that is available in a regular IRA, while allowing annual contributions of up to 15% of earned income within the limits imposed by the IRS. In addition to tax-deferred compounding, a SEP-IRA provides full deductibility of each annual contribution from current taxable income. This means that, if your business is incorporated, you can deduct SEP-IRA contributions for yourself and any eligible employees as a business expense, or, if your business is not incorporated, you can (a) deduct contributions for any eligible employees as a business expense and (b) deduct contributions for yourself from your personal income. Setting up a SEP-IRA is simple and flexible. Only a simple information form (Form 5305-SEP, available from the IRS) must be completed and given to eligible employees. The IRS regulations for SEP-IRAs require that all eligible employees (other than union members and non-resident aliens) must be covered; eligible employees are all those who (a) are at least 21 years old, (b) have worked for your business for three of the last five years, and (c) have earned at least $400 in 1996 (an amount adjusted periodically for changes in the cost-of- living). You may establish more liberal requirements to include more of your employees, but you may not impose more restrictive conditions. You must generally contribute the same percentage of earned income (based on W-2 wages) for each eligible employee, but that contribution percentage may vary between 0% and 15% of earned income each year at your discretion. You may be able to contribute a higher percentage for employees (including yourself) who earn more than the Social Security wage base. If your business has other employees, you should consult a qualified tax adviser as to the best contribution formula to use. If you are self-employed, a new SEP-IRA for a given year must be established by April 15 of the following year, with each subsequent year's contribution also due by April 15 of the following year. If you are a business owner establishing SEP-IRAs for yourself and your employees, you must open the accounts by the due date of your business's federal tax return for the tax year for which the contribution will be made. In addition to your SEP-IRA, you may also be able to contribute to a regular IRA, but you should consult your tax adviser about the deductibility of your contributions and about the tax consequences of excess contributions to either account. General Information about the Individual Retirement Account Plan To open a new SEP-IRA at Acorn, complete the enclosed application. If you have employees for whom you are establishing SEP-IRA accounts, please write a separate check for your contribution for each employee. You should also complete IRS Form 5305-SEP (available from the IRS), keep the original for your records, and give a copy to each eligible employee. Do not send Form 5305-SEP to Acorn or file it with the IRS. In addition, if your business has other employees, you may be required to furnish them with certain information to avoid being required to file annual tax returns for the SEP-IRA. To transfer your SEP-IRA to Acorn from another custodian, complete the transfer form, checking the box for a SEP-IRA Transfer. If this is a new Acorn SEP-IRA, you will also need to complete the application, checking the SEP-IRA and Direct Transfer boxes. If you have received SEP-IRA funds from another custodian and are moving your money to Acorn within 60 days of that distribution, complete the application and check the SEP-IRA and 60-Day Rollover boxes. SIMPLE-IRAs SIMPLE-IRAs are a new type of IRA that became available for the first time in 1997. A SIMPLE-IRA is very similar to a SEP-IRA in that it is established by an employer for the benefit of employees. In a SIMPLE-IRA, each eligible employee can generally elect to have up to $6,000 per year of his or her compensation contributed by the employer directly to an IRA on a pre-tax basis. The employer must generally make a matching contribution to the IRA equal to the amount that the employee elects to defer, up to a maximum of 3% of compensation, although there are exceptions to this rule. In general, any employer with not more than 100 eligible employees can establish SIMPLE-IRAs beginning in 1997. The Acorn IRA application and transfer forms cannot be used to open a SIMPLE-IRA. If you are interested in establishing a SIMPLE-IRA, call 1-800-962-1585 for the necessary forms. Making Withdrawals from your Acorn IRA You must begin withdrawing money from your IRA by April 1 of the year after the year in which you reach age 70-1/2. You may start to withdraw funds from your account without penalty when you reach age 59-1/2 or if you are disabled or meet certain other conditions. Any withdrawals you make before you reach age 59-1/2, unless you are disabled or meet certain other IRS qualifications, are subject to tax penalties. Call State Street Bank at 1-800-962-1585 for an Acorn IRA withdrawal request form to make a withdrawal from your IRA or to set up a regular withdrawal plan. State Street Bank can help you in completing this form if you have any questions. If you wish to withdraw only the minimum required distribution for each year after you reach age 70-1/2, State Street Bank can help you make the necessary calculations and set up a periodic withdrawal plan for your distributions. Simply check box C under the Withdrawal Instructions on the Acorn withdrawal request form, provide the other requested information for that section, and complete the remainder of the form. Certain tax penalties may also apply if you withdraw too much money from an IRA in a given year. You should consult your tax adviser concerning the differences among the tax effects which may result from taking the minimum required distribution and those involved in the other available withdrawal options. Account Fees State Street Bank, as custodian, charges the following fees for an Acorn IRA, per fund account: Initial set-up fee........................................... $ 5.00 Annual maintenance fee....................................... $10.00 Disbursement fee............................................. $10.00 (per withdrawal, except for automatic installment payments)
The $5.00 per fund set-up fee will be deducted from your initial IRA contribution; to maximize the contribution that goes to work for you, add $5.00 for each fund in which your initial contribution will be invested (or send us a separate check for the set-up fee). Acorn will also withdraw the annual maintenance fee(s) from your account(s) unless you send a check for those fee(s) when you receive Acorn's annual fee statement at the end of the year. If the disbursement fee applies, Acorn will deduct the $10.00 from each withdrawal.
========================================================= Minimum through beginning Investments 4/30/97 5/1/97 ========================================================= To open an IRA $ 200 $ 1,000 To add to an IRA account $ 100 $ 100
Making an active and worry-free retirement possible means taking the time now to plan for your financial future. We hope that this booklet has been helpful and that you will make an Acorn IRA part of your retirement plan. If you have any questions regarding IRA accounts, please call our transfer agent at 1-800-962-1585. Acorn IRA plan 11 Acorn Investment Trust Individual Retirement Account Disclosure Statement We are required to give you this Disclosure Statement for the purpose of assuring that you are informed and understand the nature of an Individual Retirement Account ("IRA"). This disclosure statement explains the rules governing IRAs. Your Right to Revoke this IRA. You may revoke this IRA at any time within seven days after the later of the date you received this Disclosure Statement or the day you established this IRA. For purposes of revocation, it will be assumed that you received the Disclosure Statement no later than the date of your check or transfer direction with which you opened your IRA. If you did not receive the Disclosure Statement until a later date, your notice of revocation should state the date on which the Disclosure Statement was received. To revoke the IRA, you must either mail or deliver a notice of revocation to the following address: State Street Bank and Trust Company Attention: Acorn Investment Trust P.O. Box 8502 Boston, MA 02266-8502 If a notice of revocation is mailed, it will be deemed mailed on the date of the postmark (or if sent by certified or registered mail, the date of certification or registration) if it is deposited in the mail in the United States, first class postage prepaid and properly addressed. If you revoke your IRA, you are entitled to a return of the entire amount contributed. I. Types of IRAs; Eligibility In General. An IRA is a trust or custodial account established in the United States for the exclusive benefit of an individual and his or her beneficiaries and which, under Section 408(a) of the Internal Revenue Code, meets the following requirements: annual contributions are limited as described below; the trustee or custodian is a bank or other approved financial institution; no part of the IRA can be invested in life insurance contracts; the individual's interest in the IRA is nonforfeitable; the IRA's assets cannot be commingled with other property except for certain permitted common funds; and minimum distributions are required as described below. There are several types of IRAs. For example, there is a "Regular IRA" to which you may make contributions for yourself or for your spouse. There is a "Spousal IRA" which you may be able to set up for your spouse. There is also a "Rollover IRA" which you can set up to receive assets from a qualified plan, annuity or another IRA. There is a SEP-IRA (which is also known as a Simplified Employee Pension Plan) which your employer can establish for you. Finally, there is a SIMPLE-IRA (also known as a Salary Incentive Match Plan IRA) which an employer can use for a salary reduction plan. Following is a general description of the rules which apply to each of these types of IRAs and who is eligible to establish them. A. Regular IRA. You may contribute up to the lesser of $2,000 or 100% of your compensation if you have not reached age 70 1/2 during the taxable year. You may make this contribution even if you or your spouse is an active participant in a qualified employer plan. However, as explained below, the amount of the contribution which is deductible for federal income tax purposes may be limited. Compensation includes wages, salary, commissions, bonuses, tips, etc., and also includes taxable alimony or separate maintenance payments. Compensation does not include income from interest, dividends or other earnings or profits from property, or amounts not includible in your gross income. Your spouse may also establish and contribute to an IRA, even if he or she has less than $2,000 in compensation for the year, provided that you and your spouse file a joint income tax return for the year. Under such an arrangement, you and your spouse may qualify for a total deduction equal to the lesser of $4,000 or 100% of you and your spouse's combined compensation for the taxable year. You can determine how to divide the contribution between the two accounts but you cannot contribute more than $2,000 annually into either one. Beginning in 1997, you may contribute up to $2,000 for each of you and your spouse, provided the combined contributions do not exceed your combined compensation. While you cannot contribute to your IRA in the taxable year in which you reach 70 1/2 you can still contribute to your spouse's IRA if he or she has not reached 70. A Spousal IRA does not involve the creation of a joint account. The account of each spouse is separately owned and treated independently from the account of the other spouse. B. Rollover IRAs. All or a portion of certain distributions from qualified retirement plans, annuities and other IRAs may be "rolled over" tax-free without regard to the limits on annual contributions to a Regular IRA, but no deduction is allowed with respect to such a contribution. There are three basic types of rollovers: rollovers from a qualified pension or profit-sharing plan, rollovers from another IRA, and rollovers from a tax-sheltered annuity. All distributions must be rolled over within 60 days after you receive the distribution to receive tax-free treatment. From a Qualified Plan. In general, you may roll over any portion of a distribution that you receive from a qualified employer-sponsored pension or profit-sharing plan (including a 401(k) plan), except that you cannot roll over (1) one of a series of substantially equal periodic payments (such as an annuity), (2) a minimum distribution required to be made after you reach the age of 70 1/2, or (3) the portion of a distribution that represents the return of your own after-tax contributions. If you receive a distribution of property rather than cash, you can sell the property and roll over the sale proceeds, as long as you complete the rollover within 60 days from the original date of distribution. If you make a rollover from a qualified employer plan to an IRA, you may in turn, under certain circumstances, make a rollover from the IRA into the qualified plan of a subsequent employer. To preserve that right, however, you must keep the rollover IRA separate from any other IRA you may have, since you cannot make a rollover to an employer plan from an IRA to which you have made yearly contributions. Instead of receiving a distribution from a qualified plan and rolling it over, you may also direct the trustee or custodian of any qualified retirement plan to transfer a distribution from the plan directly to an IRA. If a distribution from a plan can be rolled over, the plan is required by law to transfer the distribution directly to an IRA, or another employer's plan, if you so direct. If you do not direct the distribution to be transferred directly to an IRA or another plan, the plan making the distribution will be required to withhold 20% of the distribution for the payment of income taxes, even if you subsequently roll over the distribution. Rollover amounts you receive from a qualified employer plan may not be deposited in your spouse's IRA, but if you should die while still a participant in a qualified plan, in certain cases your spouse may be allowed to make a tax-free rollover to an IRA. The amount of the death payout rolled over by a spouse into an IRA may subsequently be rolled over into another employer's qualified plan or annuity. Beneficiaries other than your spouse are not allowed to roll over distributions they receive after your death. From Another IRA. In general, any distribution or withdrawal that you receive from an IRA can be rolled over into another IRA within 60 days, except that (1) you cannot roll over the minimum distributions you are required to receive after age 70 1/2, (2) you can only make a rollover from one IRA to another once in any twelve-month period, and (3) a distribution from a SIMPLE-IRA that is made within the first two years after you first begin to participate in the SIMPLE-IRA can only be rolled over to another SIMPLE-IRA. You may also request the trustee or custodian of an IRA to make a direct transfer to the trustee or custodian of another IRA. Such direct transfers are not limited to one in a twelve month period. Unlike the trustees of qualified retirement plans, trustees or IRAs are not legally required to make direct transfers, but most of them do. Your spouse may generally roll over distributions that he or she receives from your IRA after your death, but no beneficiaries other than your spouse may do so. Tax Sheltered Annuities. Tax-sheltered annuity plans, sometimes called "403(b) plans", are a retirement benefit offered by certain governmental and not-for- profit employers, such as schools and hospitals. If you receive a distribution from a tax sheltered annuity plan other than in the form of an annuity, it may generally be rolled over to an IRA under rules similar to those that apply to distributions from qualified employer plans, as described above. As with a rollover distribution from an employer plan, you should keep a rollover from a tax sheltered annuity plan in a separate IRA account and not make any other contributions to it (including rollovers from other types of plans) if you with to preserve the right to roll over to another tax sheltered annuity plan in the future. Distributions from other types of governmental retirement plans may or may not be eligible for a rollover depending on whether the employer has chosen to comply with IRS guidelines. Distributions from voluntary deferred compensation plans maintained by government and not-for-profit employers, sometimes known as "Section 457 plans", are not eligible for a rollover to an IRA. Strict requirements must be met to qualify for a tax-free rollover treatment. You should consult your personal tax advisor in connection with rollovers to and from your IRA. C. Simplified Employee Pension (SEP-IRA). An employer may adopt a SEP-IRA and contribute to your SEP-IRA even if you are covered by another retirement plan. The maximum contribution is 15% of your compensation (computed without regard to the contribution) or $30,000 (or such other amount as may be prescribed by the Secretary of the Treasury), whichever is less. The contributions are deductible by the employer and are generally not includible in your income until you receive distributions. You may also be able to elect to have your salary reduced by up to $9,500 (or such higher amount as is specified from time to time by the Secretary of the Treasury) and to contribute the reduction to your SEP- IRA, but only if prior to 1997 your employer had established a special type of SEP-IRA (called a SAR-SEP) that permitted such elections. Beginning in 1997, SAR-SEPs have been replaced by SIMPLE-IRAs (discussed below), and new SAR-SEPs are not permitted. To establish a SEP-IRA, your employer must sign a SEP-IRA plan agreement and provide you with a copy of the agreement as well as certain information concerning the rules applicable to such plans. Your employer can satisfy these requirements by using Form 5205-SEP, which is issued by the Internal Revenue Service. If you are self-employed, you may establish a SEP-IRA for your own benefit, but you may also have to cover any other employees you have. D. Salary Incentive Match Plan (SIMPLE-IRAs). Before 1997, employers with up to 25 eligible employees could allow employees to elect to have a portion of their pay withheld and contributed to a special type of SEP-IRA, called a "salary reduction SEP", or SAR-SEP. Beginning in 1997, SAR-SEPs have been abolished, and a new type of IRA, called a SIMPLE-IRA, has been established instead. Although new SAR-SEPs cannot be established after 1996, SAR-SEPs that were in existence on December 31, 1996, can remain in existence and continue to receive contributions in future years, including contributions for new employees. Beginning in 1997, employers with up to 100 eligible employees can establish SIMPLE-IRAs. In a SIMPLE-IRA, you can elect to have up to $6,000 of your compensation in any year withheld and deposited in an IRA, and your employer must generally make an additional contribution to match the amount that you have withheld, up to a maximum of 3% of your compensation. The employer may elect to lower the maximum matching contribution to as low as 1% in some years, but may not lower the maximum match in more than two years out of every five. The employer may also elect to make a contribution equal to 2% of compensation for all eligible employees in any year instead of making matching contributions. All employees who have been paid at least $5,000 in two prior years and expect to be paid $5,000 in the current year are eligible to participate (excluding nonresident aliens and union workers whose collective bargaining agreement does not provide for them to participate). SIMPLE-IRAs are otherwise very similar to SEP-IRAs. If you wish to establish a SIMPLE-IRA for your employees, you must give all eligible employees notice of their right to elect to defer part of their compensation, and comply with certain other notice requirements. The Acorn IRA application and transfer forms cannot be used to establish a SIMPLE-IRA. Call 1-800-962-1585 to request the necessary forms. II. Contributions In General. As explained in this part, the amount of your IRA contributions which you can deduct is subject to limits. All contributions and transfers to your Acorn IRA must be in cash. Contributions to your Regular IRA may be made up to the due date for filing your tax return for the taxable year Individual Retirement Account Disclosure Statement (excluding extensions thereof) even if you file before the due date. In making contributions, you must indicate the tax year to which the contribution applies. If no tax year is designated, the custodian will assume that the contribution is intended to apply to the calendar year in which it is received. The time limit for designating the applicable tax year is April 15. Contributions made by an employer to your SEP-IRA or SIMPLE-IRA for a calendar year may be made no later than the due date of your employer's tax return (including extensions). In making a SEP-IRA or SIMPLE-IRA contribution, the tax year to which the contribution relates must also be specified or it will be deemed to relate to the calendar year in which it is received. In a SEP-IRA or SIMPLE-IRA, this designation of the tax year of a contribution must be made by the due date for contributions described above. Deductible Contributions. If you are single and are not an "active participant" in a retirement plan maintained by your employer, you can deduct the full amount of your IRA contribution up to the lesser of $2,000 or 100% of your compensation for the year. If you are married, you can deduct the full amount of your IRA contribution so long as neither you nor your spouse is an "active participant" in a retirement plan maintained by your respective employers. These plans include qualified pension, profit-sharing, stock bonus or money purchase plans, 401(k) plans, SEP-IRAs and SIMPLE-IRAs, qualified annuity plans, tax-sheltered annuities and custodial accounts and governmental retirement plans (other than certain plans for reserve members of the armed forces and volunteer firemen, and certain deferred compensation plans commonly known as "Section 457 plans"). In general, you are considered to be an active participant in a plan if an employer contribution or forfeiture was credited to your account during the year in the case of a defined contribution plan or if you have met the minimum age and service requirements, in the case of a defined benefit plan (even if you don't actually accrue a benefit during the year). You are considered to be an active participant in a plan if you make a contribution to the plan during a year even if your employer does not. For active participation, it does not matter whether any interest you have in a plan is vested or unvested. If you or your spouse is an active participant in a plan, the amount of the deduction you can claim for an IRA contribution is reduced or totally denied depending upon the amount by which your adjusted gross income for the year exceeds the "applicable dollar amount." The applicable dollar amount is $25,000 for single people and $40,000 for married individuals filing a joint tax return. If you are married but are filing separate tax returns, your applicable dollar amount is $0. If your adjusted gross income exceeds your applicable dollar amount by more than $10,000, you may not deduct any portion of your IRA contribution. However, if it is between $0 and $10,000 more than your applicable dollar amount, you can claim a tax deduction for part of your contribution. To determine the amount of the deduction, follow these steps. First, determine the amount of the contribution you can make. If, for example, you have compensation in excess of $2,000 you could make a $2,000 contribution to your Regular IRA. Next, subtract the applicable dollar amount from your adjusted gross income. If you are single and your adjusted gross income is $30,000, the difference would be $5,000. Next, divide this difference by $10,000. In the example $5,000/$10,000 equals 50%. Accordingly, the maximum contribution to a Regular IRA you can deduct is 50% of $2,000, or $1,000. If the deduction limitation is not a multiple of $10, round the deduction to the next higher $10. If your adjusted gross income does not exceed $35,000 and you are single or $50,000 and you are married, you can deduct regardless of how the computation comes out. Married persons who file separate returns are treated as unmarried for purposes of these rules if they did not live together at any time during the year. Nonduductible Contributions. Even though you may not be entitled to claim a deduction for contributions to your IRA, you are still allowed to make the contributions to the extent described in "Types of IRAs" above. To the extent that the amount of your contribution exceeds the deduction limit, it is considered a nondeductible contribution. Earnings on these contributions are not taxed until distributed, just like the earnings on deductible contributions. It may, therefore, be worthwhile to make nondeductible contributions. You are required to report the amount of your nondeductible contributions on Form 8606 and attach it to your income tax return. You may be liable for a tax penalty of $50 if you fail to file the form, or $100 if you overstate the amount of your nondeductible contributions. III. Investment and Holding of Contributions Contributions to your IRA, and the earnings thereon, are invested at your election in shares of Acorn Fund, Acorn International or Acorn USA, each a series of Acorn Investment Trust, a no-load mutual fund managed by Wanger Asset Management, L.P., or in Short Term Income Fund, Inc. Money Market Portfolio, a no-load money market fund managed by Reich & Tang Asset Management, L.P., Acorn Fund, Acorn International and Acorn USA are collectively called the "Acorn Funds." The money market fund is available in a telephone exchange plan with the Acorn Funds. You will be able to exchange investments among any of the Acorn Funds and the money fund. In order to place an exchange, you would need to telephone State Street Bank at 1-800-962-1585. IRA planholders may not use the check-writing redemption privileges offered by the money fund. If you wish to add to your IRA plan by putting money into the money fund instead of one of the Acorn Funds, please call State Street Bank for instructions. The assets in your IRA are held in a custodial account exclusively for your benefit and the benefit of such beneficiaries as you may designate in writing delivered to the Custodian. The balance in your IRA represents a separate account which is clearly identified as your property and generally may not be combined for investment with the property of another individual. Your right to the entire balance in your account is nonforfeitable. No part of the assets of your account may be invested in life insurance contracts or in collectibles such as works of art, antiques, coins, stamps, etc. IV. Distributions From Your IRA Distribution During Your Life. The law permits distributions to be made from an IRA without penalty at any time after you attain age 59 1/2, and requires that distributions commence no later than April 1 following the calendar year in which you attain age 70 1/2. Distributions may be in the form of a single payment or, in accordance with regulations, in substantially equal monthly, quarterly or annual payments over your life or the joint lives of you and your designated beneficiary, or over a period certain not extending beyond your life expectancy or the joint and last survivor life expectancy of you and your designated beneficiary. However, if your beneficiary is not your spouse, the law imposes an additional requirement called the minimum distribution incidental benefit requirement. In general, this requirement puts a further limit on the maximum payout period. This further limit is based on a table in the income tax regulations, and if this limit applies to you, you should consult your tax adviser to determine your minimum distribution. In general, your life expectancy, your surviving spouse's life expectancy after your death, and you and your spouse's joint and last survivor life expectancies will all be recalculated each year based upon your (and your spouse's, if applicable) age attained during that year. However, you can also elect to have your (and your spouse's) life expectancies fixed in the year in which distributions are required to begin, which may be advantageous in some circumstances. On the other hand, if your beneficiary is someone other than your surviving spouse, you and your beneficiary's joint and last survivor life expectancy will ordinarily not be recalculated each year, although you may elect to have it recalculated. Each of the elections described above must be made before the date on which distributions are required to commence, and will be irrevocable after that date. You should consult a qualified tax adviser to determine whether you should make any of these elections. If you direct distributions over your life or the joint lives of you and your designated beneficiary, the Custodian will purchase an immediate annuity contract from an insurance company you choose with your IRA and your payments will be made under the annuity. You must provide a completed annuity application from the insurance company of your choosing. Any distribution instruction must specify the reason for the distribution. Examples of such reasons are: premature distributions (i.e. distributions before age 59 1/2), rollovers, disability, death, normal (59 1/2 or over), excess contribution returns and other. Distributions After Your Death. If you die on or after the April following the year in which you reach age 70 1/2, the balance of your IRA must be distributed to your designated beneficiary at least as rapidly as under the method of distribution in effect before your death. If you die before the April following the year in which you reach age 70 1/2, the entire balance of the account must be distributed by December 31 of the year in which the 5th anniversary of your death occurs. However, distribution need not be made within this 5-year period if your beneficiary receives payments over a period measured by his or her life or life expectancy beginning no later than December 31 of the year following the year in which you die. If the beneficiary is your spouse, those installment payments don't have to begin until the later of December 31 of the year following the year in which you die or December 31 of the year in which you would have reached age 70 1/2. In addition, a distribution need not be made within 5 years of your death if your spouse is your beneficiary and he or she elects to treat the entire interest in the IRA (or the remaining part of such interest, if distribution has already begun) as his or her own IRA subject to the regular Individual Retirement Account Disclosure Statement IRA distribution requirements. In such a case, your spouse will be considered to be the covered individual under the IRA. If you die before the entire IRA has been distributed to you and your spouse is not your beneficiary, no additional cash contributions or rollover contributions may be accepted by the IRA. V. Income and Penalty Taxes Income Tax Treatment. Income tax on deductible IRA contributions and earnings on both deductible and nondeductible IRA contributions is generally deferred until you receive distributions. If you have made both deductible and nondeductible contributions to IRAs you maintain, a portion of each distribution you receive from any IRA (whether or not it is the one to which you made nondeductible contributions) will be considered to be a return of nondeductible contributions and therefore not included in your income for tax purposes. The balance of each distribution will be taxed as ordinary income regardless of its original source. The amount of any distribution which is considered to be a return of nondeductible contributions (and, therefore, not taxed) is determined by multiplying the amount of the distribution by a fraction. The numerator of the fraction is the aggregate amount of nondeductible contributions you have made to all of your IRAs over the years and the denominator is the balance in all your IRAs at the end of the year (after adding back any distributions you received during the year). The aggregate amount which can be excluded from income for all years cannot exceed the amount of nondeductible contributions that you made in those years. You must attach Form 8606 to your tax return for any year in which you receive distributions if you have made any nondeductible contributions to an IRA. Taxable distributions from your account are taxed as ordinary income regardless of their original source. They are not eligible for special tax treatment that may apply to lump sum distributions from qualified employer plans. Penalty Tax for Premature Distributions. Your IRA is intended to provide income for you upon retirement. Accordingly, the law generally imposes a penalty on premature distributions. If you receive a taxable distribution from the IRA before reaching age 59-1/2, a nondeductible 10% penalty will be imposed on the portion of the distribution which is included in your gross income. This penalty is in addition to any income tax you must pay on the distribution itself. If you receive a distribution from a SIMPLE-IRA during the first two years after you begin to participate, the penalty tax is 25% rather than 10%. The penalty does not apply to the extent that the distribution is considered a return of nondeductible contributions or a return of an excess contribution which is permitted tax-free (see below). The penalty also will not apply if the distribution is made due to your permanent disability or death or if the distribution is one of a series of substantially equal periodic payments made over your life (or life expectancy) or over the joint lives (or life expectancies) of you and your beneficiary. Beginning in 1997, there are two additional exceptions to the penalty: the penalty does not apply to distributions that do not exceed the amount of tax-deductible medical expenses you incur during the year (or the amount that you could deduct if you itemized your deductions), or that do not exceed the amount of medical insurance premiums that you pay after you have been receiving unemployment compensation for at least 12 weeks, provided that you don't receive the distribution after you have been re-employed for at least 60 days. Finally, the penalty does not apply to the extent the distribution is rolled over to another IRA or (if permitted) qualified plan. Penalty Tax for Excess Contributions. Contributions to an IRA above the permissible limits are nondeductible and are subject to an annual non-deductible excise tax of 6% of the amount of such excess contributions for each year that the excess is not withdrawn or eliminated. The tax is paid by the person for whose benefit the IRA is established. If the person who contributed the excess takes no deduction for it and withdraws the excess amount plus the net earnings attributable to such excess on or before the due date (including extensions) for filing the Federal income tax return for the year for which the contribution was made, the 6% excise tax will not be applied but the 10% tax on premature distributions will be applied to the amount of net earnings. Generally, if the excess is withdrawn after the due date (including extensions) for filing the tax return for the year for which the contribution was made, not only will the excess contribution be subject to the 6% excise tax, but the amount of such excess and the net income attributable to it will also be includible in income; and if you have not attained the age of 59-1/2, or are not disabled, you will also be subject to the previously mentioned 10% penalty tax on premature distributions. The law provides, however, that if an individual has made a contribution (excluding rollover amounts) to an IRA for a year which does not exceed the maximum deductible limit for the year, all or part of which is an excess contribution for which he did not claim a deduction, and he does not correct the excess contribution before the due date (including extensions) for filing his tax return for the year, he, nevertheless, may withdraw the excess amount contributed (without the net income attributable thereto) at any time without incurring the 10% penalty tax on premature distributions or being required to include the amount withdrawn in income. The 6% excise tax will be imposed even in this special situation for the year of the excess contribution and each subsequent year until the excess is withdrawn or eliminated. The rules discussed above generally apply to SEP-IRAs and SIMPLE-IRAs as well. The law also allows you to withdraw tax-free and without penalty an excess contribution, regardless of the amount, made with respect to a rollover contribution (including an attempted rollover contribution), if the excess contribution occurred because you rea- sonably relied on erroneous information required to be supplied by the plan, trust or institution making the distribution that was the subject of the rollover. As an alternative to withdrawing excess contributions made to an IRA, such amounts may be eliminated by making reduced contributions for subsequent years; however, you will be required to pay the 6% excise tax on the amount of the excess for the year of the contribution and for each subsequent year until the amount of the excess is deducted in a later year for which you have not contributed the maximum deductible amount. If a contribution is made to your account in an amount less than the permissible limit in order to correct an excess contribution for a pre-vious year for which you did not claim a deduction, you may under certain circumstances, taking into account the limits on contributions, be allowed to treat the amount of the reduction in the current year's contribution as an additional contribution for the current taxable year. Penalty Tax for Under-Distribution. If after April 1 following the year in which you attain age 70-1/2, the amount distributed is less than the minimum amount required by law to be distributed, a 50% excise tax may be imposed on any such deficiency. The minimum amount required by law to be distributed is generally based on your life expectancy or the joint and survivor life expectancy of you and your beneficiary. However, if your beneficiary is not your spouse, the law imposes an additional requirement which is called the minimum distribution incidental benefit requirement. In general, this requirement is designed to prevent you from naming a beneficiary who is much younger than yourself in order to extend your payout period. You should consult your tax adviser to determine your minimum distribution. This excise tax may also apply if your beneficiary fails to take the minimum required distribution in any year after your death, as described above. The Internal Revenue Service may waive the penalty tax for under-distribution if the deficiency was due to reasonable error and reasonable steps are being taken to correct the deficiency. Penalty Tax for Excess Distributions and Accumulations. A 15% penalty tax is imposed on annual distributions from retirement arrangements (including IRAs) to the extent that such distributions in a year are considered "excess distributions." A distribution is an "Excess distribution" if it exceeds $160,000 (or such higher amount as may be specified by the IRS) during any calendar year. In addition, a 15% penalty tax will be imposed on your estate to the extent that at the time of your death the total balance to your account in all retirement arrangements exceeds the present value of a life annuity of $160,000 (or such higher amount as the IRS may specify) per year. The 15% penalty tax on excess distributions (but not the additional estate tax on excess accumulations) has been suspended for distributions received during 1997, 1998 and 1999. The rules governing the 15% penalty tax are very complex, and may be affected by certain elections which you may have made in prior years. If you have substantial balances in your IRAs and qualified retirement plans, you should consult a qualified tax adviser as to the possible application of this penalty tax. Prohibited Transactions and Pledging Account Assets. If during any taxable year you engage in a so-called "prohibited transaction" with respect to your IRA, the account will lose its tax-exempt status. In this event, the fair market value of all account assets, valued as of the first day of such taxable year, will be deemed distributed to you and the taxable portion will be includible in your gross income for the year. If you are under age 59-1/2, the 10% (or 25%) penalty for premature distributions may also apply. These prohibited transactions generally include any type of financial transaction between the IRA and you or your beneficiary, including borrowing or lending money, buying, selling, or renting property, paying compensation, or a transaction that indirectly benefits you or your bene-ficiary personally. Prohibited transactions may also involve members of your family, companies in which you have an interest, the sponsoring employer in the case of a SEP-IRA or SIMPLE-IRA, any person who provides services to the IRA, and certain affiliates of such persons. However, prohibited transactions involving persons other than you or your beneficiary result in penalty taxes on the person involved, rather than disqualification of the IRA. If you pledge your account or any portion thereof as security for a loan, such pledged portion will be deemed distributed to you and, to the extent that it does not represent a return of nondeductible contributions, includible in your gross income. If you have not yet attained age 59-1/2, an additional tax equal to 10% of the amount pledged will be imposed on such funds includible in gross income. If your spouse engages in a prohibited transaction with respect to his or her account, the results will be the same. Any portion of an IRA used to purchase an Individual Retirement Account Disclosure Statement endowment contract or collectible is also treated as distributed. VI. Miscellaneous Federal Income Tax Withholding. Distributions from an IRA to the covered individual or to a beneficiary are subject to Federal income tax withholding unless the covered individual or beneficiary elects to have no withholding apply. The current withholding rate required by the Internal Revenue Code is 10% for lump sum payments, and regular wage withholding rates for annuities or other periodic payments. Additional information concerning withholding and election forms will be available no later than at the time a distribution is requested. Federal Estate and Gift Taxes. Generally, your IRA will be included in your estate for Federal estate tax purposes. If your spouse is your beneficiary, your IRA may qualify for a deduction for purposes of that tax. An election under an IRA to have a distribution payable to a beneficiary on the death of the covered individual will not be treated as a gift subject to Federal gift tax. Reports to the Internal Revenue Service. As described above, you are required to attach Form 8606 to your return for any year in which you made nondeductible contributions, or receive distributions after making nondeductible contributions. You are required to file Form 5329 with the IRS if you owe one of the IRA penalty taxes. These are the taxes on excess contributions, premature distributions, prohibited transactions and under distributions after age 70-1/2, as described above. Social Security and Self-Employment Taxes. Contributions to a Regular IRA are not deductible for purposes of the social security (FICA) and self-employment taxes. Contributions to a SEP-IRA by your employer are not subject to social security tax unless you elected to reduce your current compensation to receive the contributions under a SAR-SEP established prior to 1997. The amount that you elect to defer under a SIMPLE-IRA is subject to social security tax, but the contributions made by your employer are not. Financial Information. The growth in value of the mutual fund shares held in your account can neither be guaranteed nor projected. Custodian Fees. State Street Bank and Trust Company as the Custodian of your IRA currently charges an acceptance fee of $5.00 per IRA application, and an annual maintenance fee of $10.00 per account, per fund in which you have an investment. An additional $10.00 fee is charged for each disbursement, other than an automatic installment payout. Note that Spousal IRAs require separate accounts. Each spouse's account is subject to the above fees. If you do not add the $5.00 per fund acceptance fee to your initial contribution, it will be deducted from your account. The $10.00 per fund annual maintenance fee will be deducted from your account, unless paid separately when billed in at the end of the year. The Custodian may change any of the above fees from time to time. IRS Approval Status. The Internal Revenue Service has determined that the form of Acorn Investment Trust Individual Retirement Plan and Custodial Agreement, as revised June 30, 1992, is acceptable under the Internal Revenue Code. This determination by the IRS relates only to form and not to the merits of your account. Further information concerning IRAs can be obtained from any district office of the IRS. January 1, 1997 Acorn Investment Trust Individual Retirement Plan and Custodial Agreement (June 30, 1992 Revision) The Acorn Fund, Inc. (the "Fund"), a regulated investment company, has heretofore established The Acorn Fund, Inc. Individual Retirement Plan (the "Plan"). Effective June 30, 1992, The Acorn Fund, Inc. was reorganized as Acorn Investment Trust, a Massachusetts business trust (the "Trust"), and the Trust thereby assumed and succeeded to all of The Acorn Fund, Inc.'s rights and obligations under the Plan, including the power reserved in Section VIII of the Plan to amend the Plan. Pursuant thereto, the Trust hereby amends and restates the Plan in its entirety to read as follows, effective as of June 30, 1992. The Plan is intended to meet the requirements of section 408 of the Internal Revenue Code of 1986, as amended. Some words and phrases used herein have a technical meaning and are defined in Article VIII. I. Eligibility Any person who receives Compensation (including Earned Income of a self-employed individual and alimony or separate maintenance payments of a divorced person) during a taxable year is eligible to adopt this Plan for such year. In addition, any person making a Rollover Contribution or a trustee-to-trustee transfer may adopt the Plan. II. Participation A. Regular IRA. An individual may contribute to his Custodial Account for any taxable year an amount not in excess of the lesser of (1) $2,000 or (2) 100 percent of the Individual's Compensation includible in his gross income for such taxable year. The Fund and the Custodian are not responsible for determining the amount an Individual may contribute. B. Spousal IRA. (1) In addition to the contributions permitted under paragraph A, an Individual who files a joint federal income tax return for any taxable year and whose spouse has no Compensation for that year (or elects to be treated as having no compensation for the year) may contribute an amount to a separate Custodial Account for the benefit of the Individual's spouse. The aggregate amounts contributed to the Custodial Accounts of the Individual and the Individual's spouse for any taxable year may not exceed the lesser of (a) $2,250 or (b) 100 percent of the Compensation includible in the Individual's gross income for that year, but in no event shall the amount contributed to either Custodial Account exceed $2,000. Commencing with the contributions for 1997, an Individual's spouse may establish or contribute to a Custodial Account pursuant to this paragraph B regardless of whether such spouse has Compensation for the year, and the limit set forth in the preceding sentence shall be equal to the lesser or $4,000 or the combined Compensation of the Individual and the Individual's spouse. Either the Individual or the Individual's spouse may make contributions to such Custodial Account, and there shall be no distinction between such Custodial Account and a regular Custodial Account established pursuant to paragraph A. (2) In determining marital status the following shall apply: (a) the determination of whether the Individual is married shall be made as of the close of the taxable year, except that if the Individual's spouse dies during the taxable year such determination shall be made as of the time of such death; and (b) if the Individual is legally separated from his/her spouse under a decree of divorce or of separate maintenance they shall not be considered as married. C. Contributions After Age 70-1/2. The Individual may not make a contribution under paragraph A for any taxable year if he has attained age 70-1/2 before the close of that year, nor under paragraph B if the spouse has attained age 70-1/2 before the close of that year. D. Refund of Excess Contribution. If for any taxable year, the Individual contributes an amount for the Individual or the Individual's spouse under paragraph A or B which exceeds the maximum limits permitted by those paragraphs, such excess contribution shall, upon the written request of the Individual (or the spouse in the case of a Spousal Account), be paid to the Individual (or the spouse in the case of a Spousal Account) by the Custodian. If the refund is made before the due date of the Individual's federal income tax return for that year (including extensions), the refund shall include any income attributable to the excess contribution. E. Rollover Contributions and Transfers. (1) The Individual may also make a Rollover Contribution as defined in Article IX of the Plan. Any Rollover Contribution and the earnings thereon may be held by the Custodian in a separate account for the Individual. (2) In addition, notwithstanding any other provisions hereof, the Individual may cause the custodian or trustee under any other individual retirement account established and maintained by the Individual to transfer all or any part of the funds in such account directly to the Custodian to be held under this Plan. Effective January 1, 1993, the Individual may also cause the trustee of any plan to which Section 401(a)(31) of the Code applies to transfer all or any part of the benefits payable under such plan directly to the Custodian to be held under this Plan. (3) In the case of a Rollover Contribution, the Individual shall certify to the Custodian that the contribution qualifies as such. F. Simplified Employee Pension (SEP-IRA). In the case of an employer contribution on behalf of the Individual to a Simplified Employee Pension, notwithstanding the limitations stated in paragraph A, the contribution for any taxable year shall not exceed the lesser of (1) 15% of the Compensation from the employer includible in the Individual's gross income for the year (determined without regard to the employer contribution to the Simplified Employee Pension), or (2) the amount contributed by the employer to the Simplified Employee Pension and included in gross income (but not in excess of $30,000). Employer contributions to a SEP-IRA may be made on behalf of the Individual after the Individual reaches age 70 1/2. G. Minimum Contributions. A contribution is not required for any year. Each contribution must meet the minimum investment limitations stated from time to time in the prospectus relating to the Fund Shares in which the contribution is to be made. H. Nonforfeitability. The interests of the Individual and the Individual's spouse in their respective Custodial Accounts shall be nonforfeitable at all times. I. Form of Contributions. All contributions and transfers shall be made only in cash. III. Investment of Contributions A. As directed by the Individual in writing, all contributions shall be used by the Custodian to purchase Fund Shares. All income dividends and capital gains distributions shall be reinvested in shares of the Fund which declared such dividends or distributions unless the Individual (or spouse in the case of a Spousal Account) elects in writing, in accordance with an opportunity to do so provided by the Fund declaring the dividend or distribution, to apply such dividend or distribution to purchase other Fund Shares available under the Plan. B. A Telephone Exchange Plan ("Exchange Plan"), as described in the prospectus(es) of the Funds is available hereunder. The Custodian, upon receipt of telephonic instructions from any person representing himself to be the Individual, may redeem any Fund Shares held by the Custodian on behalf of the Individual and apply the proceeds toward the purchase of any other Fund Shares available hereunder, subject to and in accordance with the terms and conditions of the Exchange Plan. The Custodian shall be entitled to rely and act upon such telephonic instructions, and neither the Custodian, the Trust, any other Fund whose shares are available hereunder nor their officers, trustees, directors, employees or agents shall be liable for any liability, cost or expense for acting on any such instructions. In directing any exchange pursuant to the Exchange Plan, the Individual represents that he has obtained a current prospectus of the Fund into which the switch is to be made. The Individual authorizes and directs the Custodian to respond to any telephonic inquiries relating to the status of shares owned, including, but not limited to, the number of shares held. The Individual agrees that the authorizations, directions and restrictions contained herein will continue until the Custodian receives written notice of any change or revocation. The Individual agrees and understands that the Funds and the Custodian reserve the right to refuse any telephonic instructions. C. All Fund Shares acquired by the Custodian shall be registered in the name of the Custodian or its nominee. D. No part of the custodial funds shall be invested in life insurance contracts nor in collectibles (within the meaning of section 408(m) of the Code); nor may the assets of the Custodial Account be commingled with other property except in a common trust fund or common investment fund (within the meaning of section 408(a)(5) of the Code). E. All assets in the Custodial Account shall be held by the Custodian for the exclusive benefit of the Individual and the Individual's designated beneficiary or beneficiaries. IV. Distributions A. As directed in writing by the Individual, the entire interest of the Individual in the Custodial Account shall be distributed, or commence to be distributed, no later than April 1 following the calendar year in which the Individual attains age 70 1/2 (the "required beginning date"). Not later than the required beginning date, the Individual shall elect, in such form and at such time as is acceptable to the Custodian, to have the balance in the Custodial Account distributed: (1) In a single sum payment in cash or Fund Shares; (2) In equal or substantially equal annual installments in cash commencing not later than the required beginning date and over a specified period certain not extending beyond the life expectancy of the Individual, or the joint and last survivor life expectancy of the Individual and his designated beneficiary; or (3) By the purchase of an annuity contract issued by an insurance company selected by the Individual and providing equal or substantially equal monthly, quarterly or annual payments commencing not later than the required beginning date, for the life of the Individual, or, if he so elects, for the lives of the Individual and his designated beneficiary, with any period certain limited to the life expectancy of the Individual or the joint and last survivor life expectancy of the Individual and his designated beneficiary. Even though distributions may have commenced pursuant to option (2) the Individual may receive a distribution of any part or all of the balance in the Custodial Account, either in cash or in Fund Shares, at any time upon written notice to the Custodian. If the Individual fails to elect any of the methods of distribution described above before the required beginning date, distribution to the Individual shall be made on or before the required beginning date in a single distribution in Fund Shares. If the Individual elects option (2) as the mode of distribution, the annual payment required to be made by the Individual's required beginning date is for the calendar year the Individual reached age 70 1/2. The annual payment for each subsequent year, including the year in which the Individual's required beginning date occurs, must be made by December 31 of that year. If the Individual elects option (3) as the mode of distribution, the annuity contract must satisfy the requirements of section 408(b)(1), (3) and (4) of the Code. B. If the Individual dies before his or her entire interest in the Custodial Account is distributed, the entire remaining interest shall be distributed as directed in writing by the beneficiary as follows: (1) If the Individual dies on or after the Individual's required beginning date, distribution must continue to be made in accordance with paragraph A. (2) If the Individual dies before the Individual's required beginning date, the entire remaining interest shall, at the election of the beneficiary or beneficiaries, either (a) Be distributed by December 31 of the year containing the fifth anniversary of the Individual's death, or (b) Be distributed in equal or substantially equal annual payments over a specified period not extending beyond the life expectancy of the designated beneficiary or beneficiaries. The election of either (a) or (b) must be made by December 31 of the year following the year of the Individual's death. If the beneficiary or beneficiaries do not elect either of the distribution options described in (a) or (b), distribution shall be made in accordance with (b) if the beneficiary is the Individual's surviving spouse and in accordance with (a) if the beneficiary or beneficiaries are or include anyone other than the surviving spouse. In the case of distributions under (b), distributions must commence by December 31 of the year following the year of the Individual's death. However, if the Individual's spouse is the beneficiary, distributions need not commence until December 31 of the year the Individual would have attained age 70 1/2, if later. (3) If the designated beneficiary is the Individual's surviving spouse, the spouse may treat the Custodial Account as his or her own individual retirement arrangement (IRA). Such an election shall be deemed to have been made if such surviving spouse makes a regular IRA contribution to the Custodial Account, makes a rollover to or from the Custodial Account or fails to elect any of the preceding provisions. If the Individual dies before his or her entire interest has been distributed and if the beneficiary is other than the surviving spouse, no additional cash contributions or rollover contributions may be accepted in the Custodial Account. C. In the case of distribution over life expectancy in equal or substantially equal annual payments, to determine the minimum annual payment for each year, divide the Individual's entire interest in the Custodial Account as of the close of business on December 31 of the preceding year by the life expectancy of the Individual (or the joint and last survivor life expectancy of the Individual and the Individual's designated beneficiary, or the life expectancy of the designated beneficiary, whichever applies). For this purpose, however, in the case of the year ("second distribution year") following the year in which the Individual reached age 70 1/2, the balance in the Custodial Account as of the close of business on December 31 of the preceding year shall be reduced by any distribution made during the second distribution year on or before April 1 to satisfy the minimum distribution requirement for the year the Individual reached age 70 1/2, as determined in accordance with paragraph J below. D. Effective for distributions after December 31, 1988 and before the Participant's death, notwithstanding any other provisions in this Plan, if the distribution period is longer than the Individual's life expectancy and the Individual's spouse is not the designated beneficiary, the minimum amount required to be distributed each year, beginning with the year the Individual reaches age 70 1/2, shall be determined by dividing the balance in the Custodial Account as of Individual Retirement Plan and Custodial Agreement the close of business on December 31 of the preceding year by the lesser of (1) the joint and last survivor life expectancy of the Individual and his designated beneficiary determined as provided in paragraph C or (2) the applicable divisor determined from the table set forth in Q&A-4 of Proposed Treasury Regulation Section 1.401(a)(9)-2. For this purpose, however, in the case of the year ("second distribution year") following the year in which the Participant reached 70 1/2, balance in the Custodial Account as of the close of business on December 31 of the preceding year shall be reduced by any distribution made during the second distribution year on or before April 1 to satisfy the minimum distribution requirement for the year the Individual reached age 70 1/2. E. The minimum annual payment may be made in a series of installments (e.g., monthly, quarterly, etc.) as long as the total payments for the year made by the date required are not less than the minimum amounts required. F. Any annuity contract purchased for the Individual pursuant to the Plan shall be immediately distributed to the Individual, and the custodial relationship shall terminate upon such distribution. G. Except in the case of the Individual's death or Disability or attainment of age 59 1/2, no distribution shall be made to the Individual of his interest in the Custodial Account unless the Individual gives the Custodian a statement explaining how he or she intends to dispose of the amount to be distributed. H. An Individual shall have the right by written notice to the Custodian to designate one or more beneficiaries to receive any amount to which the Individual may be entitled in the event of his death before the complete distribution of his interest, and to change any such beneficiary. Such designation or change shall be on the Beneficiary Form provided by the Trust, and shall be effective only when filed with the Custodian before the death of the Individual. Such designation may include contingent or successive beneficiaries. If no such designation is in effect on an Individual's death, or if no designated beneficiary is living on the date any payment becomes due after the Individual's death, such payment shall be made to the executor or administrator of the Individual's estate. However, if after the Individual's death, his surviving spouse is receiving payments over a specified period, the surviving spouse may designate a beneficiary to receive the balance of the Custodial Account, if any, on his or her death in accordance with the foregoing rules. I. If any person to whom all or a portion of the Individual's interest is payable is a minor, payment of the minor's interest shall be made on behalf of the minor to the person designated by the Individual in the Beneficiary Form to receive the minor's interest as custodian under the Massachusetts Uniform Transfers to Minors Act or similar statute. If any person to whom all or a portion of the Individual's interest is payable is a minor and if either (a) the Individual has not so designated a person to receive the minor's interest as such custodian, or (b) the person so designated is unable to act (because of incapacity, failing or declining to act, death or otherwise), the Custodian shall: (i) Distribute the interest to the legal guardian of such minor; or (ii) If no guardian has been appointed, designate an adult member of the minor's family, a guardian or a trust company (including the Custodian), as those terms are defined in the Massachusetts Uniform Transfers to Minors Act or similar statute, as custodian for such minor under the Massachusetts Uniform Transfers to Minors Act or similar statute and distribute such minor's interest to the person so designated. The person designated as custodian under the Massachusetts Uniform Transfers to Minors Act or similar statute shall hold, manage and distribute such property in accordance with the provisions of such statute including, if such statute so requires, a total distribution prior to age 21. The distribution of the Individual's interest to the guardian or the person designated as custodian under the Massachusetts Uniform Transfers to Minors Act or similar statute shall be a full discharge of the Custodian to the extent of the distribution so made. J. For purposes of determining the minimum distribution required for any year pursuant to paragraph C, if the applicable life expectancy is the life expectancy of the Individual, the life expectancy of the Individual's surviving spouse, or the joint and last survivor life expectancy of the Individual and his spouse, then, unless the Individual or his surviving spouse otherwise elects as hereinafter provided, such life expectancy shall be determined on the basis of the age attained by the Individual, his or her spouse, or both of them, on their birthdays occurring during the year for which the minimum distribution is calculated (which, in the case of a distribution under paragraph A made in the year which includes the required beginning date for the year in which the Individual attains age 70 1/2, shall be the year in which the Individual attains age 70 1/2). If the applicable life expectancy is that of a beneficiary other than the Individual's surviving spouse, or the joint and last survivor life expectancy of the Individual and a beneficiary other than his surviving spouse, the life expectancy for the first year for which a distribution is required to be made (the "initial life expectancy") shall be determined on the basis of the age attained by the Individual, such beneficiary, or both of them on their birthdays occurring during such year, and the life expectancies for each subsequent year shall be determined by subtracting from the initial life expectancies the number of years that have elapsed since such initial year. Notwithstanding the foregoing, the Individual or, if applicable, the Individual's surviving spouse may elect to have any of the life expectancies described in the first sentence of this Paragraph J determined in the manner described in the second sentence, and the Individual may elect to have the joint and last survivor life expectancy of the Individual and a beneficiary other than his surviving spouse redetermined each year in accordance with section 1.401(a)(9)-1, Q&A E-8(b) of the proposed regulations (or any successor thereto). Any such election shall be made prior to the Individual's required beginning date (or, in the case of an election by a surviving spouse after the Individual's death, prior to the date on which distributions are required to commence under paragraph B) and, after such date, shall be irrevocable. All life expectancies shall be determined in accordance with tables contained or referenced in regulations promulgated under section 401(a)(9) of the Code. K. The provisions of this Article IV shall determine the minimum distributions required to be made from the Custodial Account. Nothing contained herein shall be construed to limit the right of the Individual, or of his or her beneficiaries, to withdraw a larger amount from the Custodial Account than the minimum distribution required hereunder but amounts withdrawn in any year in excess of the minimum distribution required for such year shall not reduce the minimum amount required to be distributed in any subsequent year (except that any amount distributed in the year in which an Individual attains the age of 70 1/2 shall reduce the amount required to be distributed by April 1 of the subsequent year under paragraph A). L. Notwithstanding any provision of this Plan to the contrary, the distribution of an Individual's interest in the Custodial Account shall be made in accordance with the minimum distribution requirements of section 408(b)(6) or section 408(b)(3) of the Code and the regulations thereunder, including the incidental death benefit provisions of section 1.401(a)(9)-2 of the proposed regulations, all of which are incorporated herein by reference (the "minimum distribution requirements"). Any ambiguity in the provisions of this Article IV shall be resolved in a manner consistent with the minimum distribution requirements, and, if any provision of this Article IV is inconsistent with the minimum distribution requirements, the minimum distribution requirements shall control. M. If distributions from the Custodial Account are to be made to the Individual's surviving spouse, or to a trust of which the Individual's surviving spouse is the income beneficiary, the amount which the surviving spouse (or such trust) is entitled to receive in each year shall not be less than the income of the Custodial Account (or of the portion of the Custodial Account with respect to which the surviving spouse or such trust is the beneficiary) for such year, as determined under section 2056(b)(7) of the Code. N. Whenever distributions after the death of the Individual are to be made to the Individual's surviving spouse and to one or more beneficiaries other than the surviving spouse, and any provision of this Article IV or the minimum distribution requirements provides different treatment for the portion of the Custodial Account to be distributed to the surviving spouse, then such portion, and the income earned thereon, shall be separated and treated as a separate Custodial Account with respect to such surviving spouse. O. Notwithstanding anything herein to the contrary, all distributions shall be made by the Custodian in such manner and in such amounts as may be specified in written instructions received from time to time by the Individual or the beneficiary, as the case may be and all such instructions shall be deemed to constitute a certification by the Individual or beneficiary that the distribution so directed is one that the Individual or beneficiary is permitted to receive. In addition, the Custodian shall have no liability with respect to any distribution from the Account in accordance with the directions of the Individual or beneficiary or the failure to make a distribution in the absence of such instructions or any consequences thereof including, but not limited to, excise and other taxes and penalties which might accrue or be assessed, nor shall the Custodian be under any duty to make any inquiry or investigation with respect thereto. Individual Retirement Plan and Custodial Agreement V. Administration Except as otherwise provided in the Plan, the Custodian shall, as directed in writing, on behalf of the Individual: (1) Receive contributions pursuant to the provisions of the Plan; (2) Hold, invest and reinvest the contributions in Fund Shares; (3) Register any property in the Custodial Account in the name of the custodian or its nominee; and (4) Make distributions from the Custodial Account in cash or in Fund Shares pursuant to the provisions of the Plan. The Custodian shall deliver or cause to be executed and delivered to the Individual all notices, prospectuses, financial statements, proxies and proxy soliciting material relating to assets credited to the custodial account. No Fund Shares shall be voted, and no other action shall be taken pursuant to such documents, except upon receipt of adequate written instructions from the Individual. The Custodian shall keep accurate and detailed account of its receipts, investments and disbursements. As soon as practicable after the end of each calendar year, and whenever required by regulations adopted under the Act or the Code, the Custodian shall file with the Individual a written report of the Custodian's transactions relating to the Custodial Account during the period from the last previous accounting, and shall file such other reports with the Internal Revenue Service as may be required of the Custodian by regulation. Unless the Individual sends the Custodian written objection to a report within 60 days after its receipt, the Individual shall be deemed to have approved such report, and in such case the Custodian shall be forever released and discharged with respect to all matters and things included therein. The Custodian may seek a judicial settlement of its accounts. In any such proceeding the only necessary party thereto in addition to the Custodian shall be the Individual unless otherwise required by law. The Custodian shall have no duties whatsoever except such duties as are specifically provided for herein, and no implied covenant or obligation shall be read into this Agreement against the Custodian. The Custodian shall not be liable for a mistake in judgment, for any action taken, or any failure to act, in good faith, or for any loss that is not a result of its gross negligence, except as expressly required by the Act and regulations promulgated thereunder. In performing its duties under this Agreement, the Custodian may hire agents, experts and attorneys and may delegate discretionary powers to, and rely upon information and advice furnished by, such agents, experts and attorneys. The Individual agrees to indemnify and hold the Custodian harmless from and against any liability that the Custodian may incur in the administration of the Custodial Account, unless arising from the Custodian's own gross negligence or willful misconduct. The Custodian shall be under no duty to question any direction of the Individual with respect to the investment of contributions, or to make suggestions to the Individual with respect to the investment, retention or disposition of any contributions or assets held in the Custodial Account. The Custodian shall pay out of the Custodial Account expenses of administration, including the fees of counsel employed by the Custodian, taxes, if any, and its fees for maintaining the Custodial Account, which are set forth in the Disclosure Statement but may be revised from time to time by the Custodian and the Trust. The Custodian may sell Fund Shares and use the proceeds of sale to pay the foregoing fees and expenses. The Custodian may resign as Custodian of any Individual's Custodial Account or as Custodian of all accounts adopted under the provisions of this Plan, in either case upon 30 days' prior notice to the Trust and 30 days' prior notice to each Individual who will be affected by such resignation. If the Trust or the Individual does not appoint a successor custodian within 30 days after the mailing of such notice, the Custodian will terminate the Custodial Account. The Individual shall be solely and fully responsible for all taxes and penalties which might accrue or be assessed with respect to any excess contributions, premature distributions or distributions which are below the annual minimum distribution required. The Custodian shall be entitled to receive and may charge against the Individual's Custodial Account such reasonable compensation for its services in accordance with its fee schedule as from time to time in effect, and shall also be entitled to reimbursement of its expenses as Custodian under this Agreement. The Custodian will notify the Individual in writing of any change in its fee schedule. This Agreement and the Custodial Account created hereby shall be subject to the applicable laws, rules and regulations, as the same may from time to time be amended, of the Federal government and the Commonwealth of Massachusetts and the agencies and instrumentalities of each having jurisdiction thereof, and shall be governed by and construed, administered and enforced according to the law of the Commonwealth of Massachusetts. All contributions to the Custodial Account shall be deemed to take place in the Commonwealth of Massachusetts. The Custodian and Individual hereby waive and agree to waive right to trial by jury in an action or proceeding instituted in respect to this Custodial Account. The Individual further agrees that the venue of any litigation between him and the Custodian with respect to the Custodial Account shall be in the County of Suffolk, Commonwealth of Massachusetts. VI. The Trust The Individual delegates to the Trust the following powers with respect to the Plan: (1) to remove the Custodian and select a successor Custodian; and (2) to amend the Plan with the Custodian's consent as provided in Section VII. The powers herein delegated to the Trust shall be exercised by such officer thereof as the Trust may designate from time to time, and shall be exercised only when similarly exercised with respect to all other Individuals adopting the Plan. Neither the Trust nor any officer director, trustee, board, committee, employee or member of the Trust shall incur any liability of any nature to the Individual or beneficiary or other person in connection with any act done or omitted to be done in good faith in the exercise of any power or authority herein delegated to the Trust. If the Trust shall hereafter determine that it is no longer desirable for the Trust to continue to exercise any of the powers hereby delegated to the Trust, it may relieve itself of any further responsibilities hereunder by notice in writing to the Individual and the Custodian at least 60 days before the date on which the Trust proposes to discontinue the exercise of the powers delegated to it. VII. Amendment; Termination The Individual delegates to the Trust and the Custodian the power to amend the Plan (including retroactive amendment). The Individual may amend his/her Application (including retroactive amendment) by submitting to the Custodian (1) a copy of such amended Application, and (2) evidence satisfactory to the Custodian that the Plan as amended by such amended Application will continue to qualify as an Individual Retirement Account under the provisions of section 408 of the Code. No amendment shall be effective if it would cause or permit (a) any part of the Custodial Account to be diverted to any purpose that is not for the exclusive benefit of the Individual and his/her beneficiaries; (b) the Individual to be deprived of any portion of his/her interest in the Custodial Account, unless such action is taken in order to satisfy qualification requirements under the Code; or (c) the imposition of an additional duty on the Custodian without its written consent. The Individual reserves the right to terminate his/her adoption of this Plan by instrument in writing signed by him/her and filed with the Custodian. VIII. Definitions Whenever used in this Plan, the following terms shall have the meanings set forth below unless otherwise expressly provided herein: A. Act. The Employee Retirement Income Security Act of 1974, as amended from time to time. B. Application. The Individual Retirement Account Application, constituting an agreement between the Individual and the Custodian, by which the Individual adopts the Plan. C. Code. The Internal Revenue Code of 1986, as amended from time to time. Reference to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes that section. D. Compensation. The total compensation received by an Individual during a period, including wages, salaries, professional fees, or other amounts derived from or received for personal service actually rendered (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses) and including earned income, as defined in section 401(c) of the Code (reduced, in the case of a self-employed individual, by any federal income tax deduction taken for contributions to a qualified retirement (Keogh) plan). Compensation does not include amounts derived from or received as earnings or profits from property (including, but not limited to, interest and dividends) or amounts not includible in gross income. Compensation also does not include any amount received as a pension or annuity or as deferred compensation. The term "compensation" shall also include any amount includible in the Individual's gross income under section 71 of the Code with respect to a divorce or separation instrument described in section 71(b)(2)(A) of the Code. E. Custodial Account. The account established for an Individual under the Plan. F. Custodian. The bank named in the Application. G. Disability. The inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long continued and indefinite duration. H. Trust. Acorn Investment Trust, a regulated investment company. I. Fund Shares. Shares issued by the Trust or shares of any other regulated investment company for which the Custodian acts as transfer agent and which may be available hereunder from time to time pursuant to an agreement between the Custodian and the Trust. No Fund shall be available for investment under the Plan (i) before the date the prospectus for that Fund discloses its availability, (ii) with respect to any Participant who resides in any state or other jurisdiction in which shares of the Fund are not available for sale, or (iii) with respect to any Participant not eligible to purchase Fund shares directly, when sales of Fund shares are restricted. J. Individual. An individual who adopts the Plan as provided therein. K. Rollover Contribution. A rollover amount or rollover contribution as described in section 402(a)(5) or 402(a)(7) (as in effect prior to January 1, 1993), 402(c) (effective January 1, 1993), 403(a)(4), 403(b)(8), or 408(d)(3) of the Code, and regulations promulgated thereunder. L. Simplified Employee Pension. An Individual Retirement Account with respect to which the requirements of section 408(k) of the Code are met. The foregoing Individual Retirement Plan and Custodial Agreement of Acorn Investment Trust is adopted by the Individual by signing the Individual Retirement Account Application, which is incorporated herein and made a part hereof. Internal Revenue Service Department of the Treasury Plan Name: IRA Custodial Account Washington D.C. 20224 FFN: 50127960000-001 Case: 9270228 EIN: 36-7008880 Letter Serial No: D113156a PERSON TO CONTACT: Mr. Welty ACORN INVESTMENT TRUST Telephone Number: (202) 622-8380 227 WEST MONROE STREET Refer Reply to: E:EP:Q:2 CHICAGO IL 60606 Date: 10/30/92 Dear Applicant: In our opinion, the form of the prototype trust, custodial account or annuity contract identified above is acceptable under section 408 of the Internal Revenue Code, as amended by the Tax Reform Act of 1986. Each individual who adopts this approved plan will be considered to have a retirement savings program that satisfies the requirements of Code section 408, provided they follow the terms of the program and do not engage in certain transactions specified in Code section 408(e). Please provide a copy of this letter to each person affected. The Internal Revenue Service has not evaluated the merits of this savings program and does not guarantee contributions or investments made under the savings program. Furthermore, this letter does not express any opinion as to the applicability of Code section 4975, regarding prohibited transactions. Code section 408(i) and related regulations require that the trustee, custodian or issuer of a contract provide a disclosure statement to each participant in this program as specified in the regulations. Publication 590, Tax Information on Individual Retirement Arrangements, gives information about the items to be disclosed. The trustee, custodian or issuer of a contract is also required to provide each adopting individual with annual reports of savings program transactions. Your program may have to be amended to include or revise provisions in order to comply with future changes in the law or regulations. If you have any questions concerning IRS processing of this case, call us at the above telephone number. Please refer to the Letter Serial Number and File Folder Number shown in the heading of this letter. Please provide those adopting this plan with your phone number, and advise them to contact your office if they have any questions about the operation of this plan. You should keep this letter as a permanent record. Please notify us if you terminate the form of this plan. Sincerely yours, /s/ John Swieca John Swieca Chief, Employee Plans Qualifications Branch Acorn Investment Trust P.O. Box 8502 Boston, MA 02266-8502 IRA/SEP-IRA Application All sections must be completed. Please type or print clearly. Use this application to open an Acorn IRA or a SEP-IRA. To transfer your IRA directly to Acorn from another custodian, you must also complete the Acorn Investment Trust IRA Transfer Form. There is an acceptance fee of $5.00 per IRA account. If you have any questions, please call one of our friendly customer service representatives at 1-800-9-ACORN-9 (1-800-922-6769), weekdays, 8:00 am to 4:30 pm, Chicago (central) time. YOUR ACCOUNT REGISTRATION Social Security Number: [ _ ][ _ ][ _ ][ _ ][ _ ][ _ ][ _ ][ _ ] (used for tax reporting) Date of Birth: [ _ ][ _ ][ _ ][ _ ][ _ ][ _ ] month, day, year - --------------------------------------------------- Name (first, middle initial, last) - --------------------------------------------------- Street Address and Apartment or P.O. Box - --------------------------------------------------- City State Zip Code ( ) - --------------------------------------------------- Daytime phone, including area code [_] U.S. Citizen [_] Resident Alien To invest, you must be a U.S. citizen (or a non-citizen residing in the U.S.) with a social security or tax identification number. We are required by the National Association of Securities Dealers (NASD) to ask for the following information: - --------------------------------------------------- Your Occupation - --------------------------------------------------- Employer - --------------------------------------------------- Employer's Address [_] I am affiliated with or work for a member of the NASD. CHOOSE YOUR INVESTMENTS A separate IRA account will be established for each box you check below. [_] Acorn USA (820) $ ---------------- [_] Acorn Fund (90) $ ---------------- [_] Acorn International (100) $ ---------------- [_] Short Term Income Money Market Portfolio (104) $ ---------------- Acceptance Fee ($5 per fund) $ ---------------- TOTAL AMOUNT $ ---------------- Make check(s) payable to State Street Bank and Trust Company and write the appropriate fund name on the check. Please indicate on your check the year for which the contribution is made. DUPLICATE STATEMENTS [_] Send duplicate statements for my account to: - --------------------------------------------------- Name (first, middle initial, last) - --------------------------------------------------- Street Address and Apartment or P.O. Box - --------------------------------------------------- City State Zip Code TYPE OF IRA SELECT ONLY ONE CATEGORY [_] Regular IRA Contribution for Tax Year 199_ Check this box if your IRA will be used to make annual contributions up to a maximum of $2,000 per tax year. [_] Direct transfer of an existing IRA Check this box if you wish to authorize Acorn to transfer your existing IRA from another custodian to Acorn. You must also complete the enclosed IRA Transfer Form. Check type of IRA: [_] Regular IRA funded with annual contributions [_] Rollover IRA originally funded with a distribution from an employer-sponsored plan [_] 60-day rollover of an existing IRA Check this box if you are funding this IRA with money you have withdrawn from an IRA at another custodian and are reinvesting it at Acorn. Check type of IRA: [_] Regular IRA funded with annual contributions [_] Rollover IRA originally funded with a distribution from an employer-sponsored plan [_] Rollover IRA from an employer-sponsored plan Check this box only if you are funding this IRA with money you accumulated in an employer's retirement plan which is eligible for rollover. If you combine Rollover IRA and regular IRA funds in the same account, you will forfeit the right to reinvest your Rollover IRA funds in another employer's qualified plan in the future. Combining IRA funds may also have tax implications at distribution. Check method of funding: [_] A check payable to State Street Bank is enclosed. [_] My employer will send a check directly to State Street Bank. [_] SEP-IRA Please see your tax advisor for the maximum contribution limits on your SEP-IRA or SARSEP-IRA. [_] Regular SEP-IRA Contribution for 199___ [_] Regular Salary Reduction SEP-IRA (SARSEP) Contribution for 199___ [_] 60-Day Rollover Check this box if you have withdrawn funds from a SEP-IRA at another custodian and are reinvesting them at Acorn. [_] Direct Transfer Check this box to authorize Acorn to transfer your existing SEP-IRA directly from another custodian. Please complete both this application and an IRA Transfer Form. Be sure to notify your employer. (More on the back.) IRA/SEP-IRA Application, continued AUTOMATIC INVESTMENT PLAN To keep building your investments, you can easily add to your Acorn retirement accounts by joining the automatic investment plan: [_] Automatic Investment Plan: to add to your Acorn IRA or SEP-IRA automatically. [_] Acorn USA $ -------------------------------- [_] monthly [_] quarterly (check only one box) [_] Acorn Fund $ -------------------------------- [_] monthly [_] quarterly (check only one box) [_] Acorn International $ -------------------------------- [_] monthly [_] quarterly (check only one box) [_] Short Term Income Money Market Portfolio $ -------------------------------- [_] monthly [_] quarterly (check only one box) The minimum automatic investment is $100; the annual maximum investment for an IRA is $2,000. Your automatic investment will be drawn from your bank account on or about the 15th of the month; quarterly investments are made in January, April, July, and October. Attach a voided check from your bank checking account that you will be using. IRA BENEFICIARY DESIGNATION Please indicate your beneficiaries here. If you wish to designate additional beneficiaries, please attach additional instructions providing the necessary beneficiary information. - -------------------------------------------------------------------------------- Your Primary Beneficiaries I hereby designate the person(s) named below as primary beneficiary(ies) to receive payment of the value of my IRA account upon my death. If any beneficiary is a trust, please indicate the trust's name and address, the date of the trust, and the trustee's name. 1 - ---------------------------------------------------------------- Name (first, middle, last): 2 - ---------- ---------------------------------------------------- Share %:* Relationship Date of Birth (month, day, year) - ---------------------------------------------------------------- Name (first, middle, last): - ---------- ---------------------------------------------------- Share %:* Relationship Date of Birth (month, day, year) - -------------------------------------------------------------------------------- Your Contingent Beneficiaries If no primary beneficiary is living at the time of my death, I hereby specify that the balance be distributed to my contingent beneficiary(ies) named below. 1 - ---------------------------------------------------------------- Name (first, middle, last): 2 - ---------- ---------------------------------------------------- Share %:* Relationship Date of Birth (month, day, year) - ---------------------------------------------------------------- Name (first, middle, last): - ---------- ---------------------------------------------------- Share %:* Relationship Date of Birth (month, day, year) *Share percentages must be whole, not fractional, numbers, and must add up to 100%. Payment to primary and contingent beneficiaries will be made according to the rules of succession described in the signature section. SIGNATURE Please sign at the end of this section. We must have a signature to open the account. By signing this application I certify that: . I understand that the annual IRA maintenance fee of $10 per fund account will be separately billed or collected by redeeming sufficient shares from each fund account balance. . A $10 fee will apply for each disbursement other than an automatic installment payment. . Acorn may change the fee schedule from time to time, as provided in the Custodial Agreement. Acceptance will be evidenced by a Letter of Acceptance sent by or on behalf of Acorn and State Street Bank and Trust Company. . I understand that if more than one beneficiary is named and no percentages are indicated, payment shall be made in equal shares to my primary beneficiary(ies) who survives me. If a percentage is indicated and a primary beneficiary(ies) does not survive me, the percentage of that beneficiary's designated share shall be divided equally among the surviving primary beneficiary(ies). . I understand that if I choose not to designate any beneficiary(ies), my beneficiary will be my estate (unless state law requires otherwise). I am aware that my beneficiary designation becomes effective when delivered to Acorn and will remain in effect until I deliver to Acorn another beneficiary designation with a later date. . I understand that the beneficiary information provided herein will apply to all Acorn IRAs for which State Street Bank and Trust Company (SSB&T) (or its affiliate and/or any successor custodian appointed pursuant to the terms of such IRAs) acts as custodian, including regular IRAs, SEP-IRAs, and Rollover IRAs, and will replace all previous designation(s) I have made on any of my Acorn IRA accounts. . I hereby adopt the Acorn IRA, appointing SSB&T as Custodian and as agent to perform administrative services. Although SSB&T is a bank, I recognize that neither Acorn Investment Trust nor any mutual fund in which this IRA may be invested is a bank, and that mutual fund shares are not backed or guaranteed by any bank or insured by the FDIC. This agreement shall be construed, administered and enforced according to the laws of the Commonwealth of Massachusetts, except as superseded by federal law or statute. . I further certify that I have, or my employer has, completed and executed Form 5305-SEP or Form 5305A-SEP and furnished to employees all materials required by applicable Department of Labor regulations. I further certify if my employer has adopted a Salary Reduction SEP, that I have entered into a salary reduction agreement. . I have received and read the prospectus for the fund(s) in which I am making a contribution, and have read and understand the IRA Custodial Agreement and Disclosure Statement. I hereby certify under penalties of perjury that my Social Security Number is correct and that I am of legal age to enter into this agreement. . By signing below, I hereby consent to the terms of the Acorn IRA and name the beneficiary(ies) I have designated in the application. X - ------------------------------------ -------------------- Signature Date HOW DID YOU HEAR ABOUT US? [_] press mention (specify) [_] advertising (specify) ----------------------- ---------------------- [_] referred by friend/adviser [_] other ________________ [_] I am a current Acorn shareholder Send this form to State Street Bank and Trust Company in the enclosed postage- paid envelope or to the address on the reverse side. Acorn Investment Trust P.O. Box 8502 Boston, MA 02266-8502 IRA/SEP-IRA Transfer Form All sections must be completed. Please type or print clearly. Use this form to authorize Acorn to transfer your IRA or SEP-IRA directly from another IRA Custodian and invest it at Acorn. Please read the instructions on the back of this form before completing the Transfer Form. If you have any questions, please call one of our friendly customer service representatives at 1-800-9-ACORN-9 (1-800-922-6769), weekdays, 8:00 am to 4:30 pm, Chicago (central) time. ACCOUNT OWNERSHIP Social Security Number: [_][_][_] [_][_] [_][_][_][_] (used for tax reporting) Date of Birth: month, day, year [_][_] [_][_] [_][_] __________________________________________________________ Name (first, middle initial, last) __________________________________________________________ Street Address and Apartment or P.O. Box __________________________________________________________ City State Zip Code (_____)___________________________________________________ Daytime phone, including area code TYPE OF IRA ACCOUNT [_] REGULAR IRA [_] SEP-IRA [_] ROLLOVER IRA* *Check this box ONLY if you are transferring an IRA representing a previous rollover from an employer-sponsored retirement plan. (See explanation on the other side, "IRA Transfer Checklist".) CURRENT IRA CUSTODIAN/TRUSTEE MY IRA IS CURRENTLY INVESTED IN: [_] Mutual fund name [_] CD/Date of Maturity (month-day-year) [_] Transfer the proceeds to my Acorn IRA at maturity. (Send us this Transfer Form at least three weeks prior to maturity. If the CD matures in less than three weeks, call 1-800-9-ACORN-9 (1-800-922-6769) for our overnight delivery address.) [_] Liquidate the CD immediately and transfer the proceeds to my Acorn IRA. (If you liquidate a CD prior to maturity, you may incur a penalty.) [_] Other (Specify) _____________________ MY IRA IS CURRENTLY HELD AT: (Please call your current custodian for the correct address. If this information is not provided, it could significantly delay your transfer.) __________________________________________________________ Name of Present Custodian __________________________________________________________ Name of individual or department responsible for transfers __________________________________________________________ Address of Present Custodian __________________________________________________________ City State Zip Code __________________________________________________________ Telephone Number Account Number of Transferor Custodian (Please attach a copy of your most recent statement) INVESTING YOUR IRA TRANSFER A. Please check one of the following: [_] I am opening a new Acorn IRA and am attaching my completed IRA application. [_] I already own an Acorn IRA into which I am making this transfer. B. Please list the name(s) of the fund(s) into which the transfer proceeds are to be deposited. [_] ACORN USA $__________________ Fund Account # (if existing) __________________ [_] ACORN FUND $__________________ Fund Account # (if existing) __________________ [_] ACORN INTERNATIONAL $__________________ Fund Account # (if existing) __________________ [_] SHORT TERM INCOME Money Market Portfolio $__________________ Fund Account # (if existing) __________________ TOTAL INVESTMENT $__________________ If you do not indicate a fund choice, your transfer proceeds will be invested in the Short Term Income Fund, a money market fund. AUTHORIZATION TO TRANSFER YOUR IRA Check only one of the following: [_] Please liquidate and transfer in cash the IRA account listed at left. [_] Please liquidate and transfer $________ of the assets in the IRA account listed at left to my IRA. [_] Please transfer in-kind my ____Acorn Fund ____Acorn USA ____Acorn International shares listed at left to an IRA with Acorn (see explanation on other side, "IRA Transfer Checklist") AND: [_] liquidate and transfer in cash all other assets in the IRA account listed at left that are not currently invested in the Acorn funds. [_] liquidate and transfer $________ of the other assets in the IRA account listed at left. [_] do not liquidate or transfer any assets in the IRA account listed at left other than those invested in the Acorn funds. (More on the back.) Acorn Investment Trust WAM Brokerage Services, L.L.C. P.O. Box 8502 Boston, MA 02266-8502 IRA (9/96) IRA/SEP-IRA Transfer Form, continued YOUR SIGNATURE I have received and read the prospectus for the fund(s) in which I am making my investment. If I am over 70 1/2, I attest that none of the amount to be transferred will include the required minimum distribution for the current year pursuant to Section 401(a)(9) of the Internal Revenue Code. If I have indicated an IRA Transfer which is different from the IRA I currently maintain (e.g., Regular IRA versus Rollover IRA), I hereby establish a new IRA, the terms of which shall be identical with the terms of the agreement for the Acorn IRA previously established. ________________________________________________________________________________ Your Signature Date (month, day, year) Signature Guarantee: Please call the custodian or other institution you are transferring from to see if a signature guarantee or other documentation is required. ________________________________________________________________________________ Name of Bank or Firm Providing Signature Guarantee Signature of Officer and Title (Be sure to stamp Signature Guarantee) HOW TO TRANSFER YOUR IRA FROM ANOTHER INSTITUTION TO ACORN 1. Carefully read the prospectus of the Acorn fund you have selected. 2. Complete this Transfer Form to authorize Acorn to request your IRA funds directly from another institution. You can make an unlimited number of direct transfers without any tax implications. 3. If you do not already own an Acorn IRA, you must also complete the Acorn IRA Application and check the "Direct Transfer" box. 4. Mail your Transfer Form and Application (if you are opening a new Acorn IRA) in the enclosed postage-paid envelope or to State Street Bank and Trust Company, Attention: Acorn Investment Trust, P.O. Box 8502, Boston, MA 02266- 8502. IRA TRANSFER CHECKLIST X If you combine Rollover IRA and regular IRA funds in the same account, you will forfeit the right to reinvest your Rollover IRA funds in another employer's qualified plan in the future. Combining IRA funds may also have tax implications at distribution. X This Transfer Form cannot be used to transfer individual stocks (except shares of one of the Acorn funds) or bonds in kind. Instead, you must check the box for liquidation and cash transfer of those investments. X If you currently hold Acorn shares in an IRA with another custodian, and you wish to transfer those shares directly to Acorn and avoid liquidating the shares prior to transfer, please check the box for a transfer "in-kind." X Be sure you check with your present IRA custodian to see if a signature guarantee or other documentation is required. X If possible, identify the individual or department responsible for transfers at your present IRA custodian and provide this information where requested on this form. This can help speed up the transfer process. X If you are DIRECTLY rolling over a distribution from an employer-sponsored retirement plan into an Acorn Rollover IRA, please do not use this form. Simply check the correct box on the IRA APPLICATION and send it to State Street Bank and Trust Company at the indicated address. ACORN WILL COMPLETE THIS SECTION LETTER OF ACCEPTANCE AND INSTRUCTIONS FOR TRANSFER TO AN ACORN IRA ACCOUNT To Transferor Custodian: State Street Bank and Trust Company (and/or any successor custodian appointed pursuant to the terms of the Acorn IRA) will accept the transfer described above. Please transfer on a fiduciary-to-fiduciary basis all or part of the designated account as instructed on the other side, and make check payable and mail to the custodian, State Street Bank and Trust Company, Attention: Acorn Investment Trust, P.O. Box 8502, Boston, MA 02266- 8502. ALSO INCLUDE THE FOLLOWING INFORMATION ON THE CHECK: ________________ _____________ Reference Number FBO ___________________________________ _____________ Authorized Acorn Signature Date SEND THIS FORM TO STATE STREET BANK AND TRUST COMPANY IN THE ENCLOSED POSTAGE- PAID ENVELOPE OR TO THE ADDRESS ON THE REVERSE SIDE. EX-99.14.2 4 FORM OF SIMPLE-IRA PLAN AND APPLICATION Exhibit 14.2 Dear Investor: Thank you for your interest in the Acorn Funds. The documents contained in this packet may be used to establish a Salary Incentive Match Plan IRA, also known as a SIMPLE-IRA. SIMPLE-IRAs are a new type of individual retirement account that became available for the first time in 1997. A SIMPLE-IRA plan must be established by an employer (including a self-employed person), and it enables all eligible employees of the employer to elect to have up to $6,000 per year deducted from their paychecks on a before-tax basis and deposited directly into a SIMPLE-IRA maintained for the individual employee. The employer is also generally required to make contributions, as described in more detail below. Because of the differences between a SIMPLE-IRA and other types of IRAs, the forms contained in the regular Acorn Funds IRA booklet cannot be used to establish a SIMPLE-IRA. Instead, you must use the forms contained in this packet. However, the Disclosure Statement contained in the regular IRA booklet includes important information that also applies to a SIMPLE-IRA. You should carefully review the Disclosure Statement included in the Acorn Funds IRA Booklet, before using the forms in this booklet to establish a SIMPLE-IRA. Whether you are opening a new SIMPLE-IRA, making your annual SIMPLE-IRA contribution, or moving an existing SIMPLE-IRA from another institution, Acorn can help you save for your retirement. This booklet (plus the Disclosure Statement in the regular IRA booklet) contains everything you need to open a SIMPLE-IRA at Acorn. Please take a moment to read it carefully. If you have any questions or need help with any of the forms, please call us at 1-800-962-1585. We invite you to squirrel away your acorns for a day when you really need them, and look forward to a long and mutually rewarding relationship with you. Very truly yours, Ralph Wanger President General Information about SIMPLE-Individual Retirement Accounts What is a SIMPLE-IRA? SIMPLE-IRAs are a new type of individual retirement account that became available for the first time in 1997. A SIMPLE-IRA is a special type of IRA, and is generally subject to the same rules that apply to all IRAs. However, as an individual you cannot make contributions directly to a SIMPLE-IRA (except for rollovers as described below). Instead, your employer must establish a SIMPLE- IRA plan, and make contributions to your SIMPLE-IRA on your behalf. As discussed below, an employer can generally establish a SIMPLE-IRA plan in any year in which it has no more than 100 eligible employees and does not maintain any other tax-qualified pension or profit-sharing plan (other than a frozen plan). If your employer establishes a SIMPLE-IRA plan and you are an eligible employee, you can elect to have up to $6,000 of your compensation in any year withheld and deposited in a SIMPLE-IRA on your behalf. Amounts that you elect to have deposited in your SIMPLE-IRA are not subject to federal income tax until you withdraw them (although they are subject to Social Security tax). In addition to the amount that you elect to have deposited in your SIMPLE-IRA, your employer must generally make an additional contribution to match the amount that you have withheld, up to a maximum of 3% of your compensation. The employer may elect to lower the maximum matching contribution to as low as 1% in some years, but may not lower the maximum match in more than two years out of every five. The employer may also elect to make a contribution equal to 2% of compensation for all eligible employees in any year instead of making matching contributions. All employees who have been paid at least $5,000 in two prior years and expect to be paid $5,000 in the current year must be eligible to participate (excluding nonresident aliens and union workers whose collective bargaining agreement does not provide for them to participate). The employer may also allow other employees to participate. Although SIMPLE-IRAs can only be established under a plan set up by an employer, each participating employee is the owner of his or her own SIMPLE-IRA account. All amounts deposited in your SIMPLE-IRA account are fully vested, and can be withdrawn at any time, as with any other type of IRA. However, amounts withdrawn are subject to tax, and tax penalties may also apply to amounts withdrawn before you reach the age of 59 1/2, as described in the Disclosure Statement. SIMPLE-IRA plans can generally be set up by an employer in any year in which it has not more than 100 employees who earned at least $5,000 in compensation in the prior year. However, in order to maintain a SIMPLE-IRA plan, the employer must not make any contributions to, or accrue any additional benefits under, any other tax qualified plan, including SEP-IRAs, tax sheltered annuities (403(b) plans), and governmental plans. In addition to traditional employers, self-employed persons and sole proprietors, nonprofit organizations, and government agencies, may establish SIMPLE-IRA plans if they otherwise qualify. In determining whether an employer has more than 100 employees, the employees of certain employers under common ownership must be combined. An employer that establishes a SIMPLE-IRA plan when it has no more than 100 employees can continue to maintain it for two years after the number of its employees increases to more than 100. Setting Up a SIMPLE-IRA Plan It is important to keep in mind the distinction between a SIMPLE-IRA plan and SIMPLE-IRA accounts. A SIMPLE-IRA plan is a written document established by an employer that specifies which employees are eligible to make contributions to SIMPLE-IRAs. SIMPLE-IRA accounts are the separate accounts established by each participating employee to hold and invest the contributions made on their behalf. An employer that wishes to establish a SIMPLE-IRA plan can use Form 5304-SIMPLE, which has been issued by the IRS for this purpose. Use of this forms is not mandatory, and an employer can also use a customized plan document. (The IRS has also issued Form 5305-SIMPLE, but this form can only be used if all employees are required to initially deposit their SIMPLE-IRA contributions with the same designated financial institution.) This booklet includes a Form 5304-SIMPLE that can be used by an employer that wishes to establish a SIMPLE-IRA plan. The employer will need to complete this Form to determine which employees will be eligible to participate, and how often employees will be able to make and change withholding elections. After completing the Form 5304-SIMPLE, the employer should execute the Form and retain it in its files. In addition, as discussed below, copies must be furnished to each eligible employee. Do not file Form 5304-SIMPLE with the IRS. Once the employer has established a SIMPLE-IRA plan, it must notify all eligible employees of their right to elect to have a portion of their compensation deferred under the plan. Each employee must be permitted to make a deferral election at least during the 60 day period immediately preceding the first day of the year (i.e., during the period from November 2 through December 31 of the preceding year.) However, if the employer establishes the plan later in the year, the 60 day period can precede the effective date of the plan. The employer may permit longer or more frequent election periods if it wishes to do so, but the 60 day election period prior to the beginning of the year is required. The employer must notify each employee of his or her right to make a deferral election immediately prior to the beginning of the required 60 day election period, and must also given each eligible employee a summary description of the plan. A model notice that can be given to each eligible employee is included with the materials immediately following Form 5304-SIMPLE, and the summary description requirement can be satisfied by attaching a copy of the completed Form 5304-SIMPLE to the notice. This notice and summary description must be given each year, NOT just in the first year in which the plan is established. In addition, an employer that establishes a SIMPLE-IRA plan must also furnish all participating employees with information regarding the procedures for withdrawing funds from their SIMPLE-IRA accounts, and the consequences of such withdrawals. Acorn will furnish this information directly to the participating employees who establish their SIMPLE-IRA accounts with Acorn. 2 Establishing a SIMPLE-IRA Account Although the employer establishes the SIMPLE-IRA plan, each participating employee must establish his or her own SIMPLE-IRA account to hold the contributions under the plan. Each employee is the absolute owner of his or her own account, and has the right to make withdrawals at any time. Enclosed with these materials are a copy of the Acorn Funds SIMPLE-IRA Account Agreement, which is used to establish an Acorn Funds SIMPLE-IRA. The Acorn Funds SIMPLE- IRA Account Agreement is in the form of IRS Form 5305-SA, which is automatically deemed acceptable by the Internal Revenue Service. The approval by the IRS relates only to the form of the account and not to the merits of using the account as a retirement plan. In order to establish an Acorn Funds SIMPLE-IRA, a participant must complete the Acorn Funds SIMPLE-IRA Application Form, which is included with these materials, and forward it to Acorn. The Application Form must also be signed by the employer who establishes the SIMPLE-IRA plan. The employer also must be notified to send all contributions made on behalf of the participant to Acorn. The employer should furnish the employee with the necessary forms to accomplish this notification. Moving funds from another SIMPLE-IRA to an Acorn SIMPLE-IRA Acorn can help you to move funds from other SIMPLE-IRA custodians. This can be done in two ways: a custodian to custodian (or trustee to trustee) transfer (also known as a direct transfer), or a 60-day rollover of money you have withdrawn from another SIMPLE-IRA. Each method is explained below. Only funds from another SIMPLE-IRA can be transferred to an Acorn SIMPLE- IRA. Rollovers and direct transfers can NOT be made from any type of IRA other than another SIMPLE-IRA, or from a qualified plan or tax-deferred annuity. However, if you have funds in another SIMPLE-IRA and have participated in the SIMPLE-IRA plan for at least two years, you can roll those funds over into a regular IRA, and don't have to roll them into a SIMPLE-IRA (unless you plan to make additional SIMPLE-IRA contributions in the future.) For more information on permissible rollovers and direct transfers, see the Disclosure Statement. Direct Transfer Acorn will arrange a direct transfer of assets from your current SIMPLE-IRA custodian or trustee directly to Acorn. In a direct transfer you do not receive the account proceeds during the transfer process. Your money goes directly from your old SIMPLE-IRA custodian to Acorn. You may make direct transfers between SIMPLE-IRAs as often as you choose. If you would like the transferred money to go into a new Acorn SIMPLE-IRA, complete both the transfer form, checking the box for a new Acorn SIMPLE-IRA, and the application, 3 checking the box for a Direct Transfer. If the transferred money is to be invested in an existing Acorn SIMPLE-IRA, complete only the transfer form. The transfer form tells us about the SIMPLE-IRA assets you are transferring and provides information about your current custodian. This information should be on your most recent account statement. Complete the instructions authorizing your current custodian to transfer your account to Acorn and sign the transfer form. Please check with your present custodian to find out whether you will need to obtain a signature guarantee. Send the completed form(s) to Acorn in the envelope provided or to the address shown on the application. Acorn will arrange for the transfer of assets from your present custodian. 60-day Rollover from another SIMPLE-IRA If you physically receive money that was held in your SIMPLE-IRA with another custodian, you must deposit the money into an IRA within 60 days to avoid paying income tax. If this is not done within the 60-day time limit, you will have to pay income tax on the amount you have received, as well as possible penalties if you are under the age of 59 when you receive the money. You may make only one 60-day rollover per IRA in any twelve-month period. To establish a rollover account with money you have withdrawn from another SIMPLE-IRA, complete the Acorn SIMPLE-IRA application, checking the box for a 60-day rollover of an existing SIMPLE-IRA. Be sure that you forward your check in time for the funds to be received by State Street Bank no later than 60 days from the date on which the distribution from your SIMPLE-IRA was made. Account Fees State Street Bank, as custodian, charges the following fees for an Acorn SIMPLE-IRA, per fund account: Initial set-up fee $ 5.00 Annual maintenance fee $10.00 Disbursement fee $10.00 (per withdrawal, except for automatic installment payments)
The $5.00 per fund set-up fee will be deducted from your initial IRA contribution; to maximize the contribution that goes to work for you, add $5.00 for each fund in which your initial contribution will be invested to your contribution (or send us a separate check for the set-up fee). Acorn will also withdraw the annual maintenance fee(s) from your account(s) unless you send a check for those fee(s) when you receive Acorn's annual fee statement in November. If the disbursement fee applies, Acorn will deduct the $10.00 from each withdrawal. 4
- -------------------------------------------------------------------------------- Minimum Investments through 4/30/97 beginning 5/1/97 To open an IRA $200 $1,000 To add to an IRA account 100 100 - --------------------------------------------------------------------------------
Making an active and worry-free retirement possible means taking the time now to plan for your financial future. We hope that this booklet has been helpful and that you will make an Acorn SIMPLE-IRA part of your retirement plan. 5 Form 5305-SA (December 1996) Department of the Treasury Internal Revenue Service Acorn Investment Trust Custodial Agreement for a SIMPLE-IRA Account (Under Sections 408(a) and 408(p) of the Internal Revenue Code) (January 1, 1997) Article I The Custodian will accept cash contributions on behalf of the Participant by the Participant's employer under the terms of a SIMPLE plan described in 408(p). In addition, the Custodian will accept transfers or rollovers from other SIMPLE IRAs of the Participant. No other contributions will be accepted by the Custodian. Article II The Participant's interest in the balance in the Custodial Account is nonforfeitable. Article III 1. No part of the custodial funds may be invested in life insurance contracts, nor may the assets of the Custodial Account be commingled with other property except in a common trust fund or common investment fund (within the meaning of section 408(a)(5)). 2. No part of the custodial funds may be invested in collectibles (within the meaning of section 408(m)) except as otherwise permitted by section 408(m)(3), which provides an exception for certain gold and silver coins and coins issued under the laws of any state. Article IV 1. Notwithstanding any provision of this agreement to the contrary, the distribution of the Participant's interest in the Custodial Account shall be made in accordance with the following requirements and shall otherwise comply with section 408(a)(6) and Proposed Regulations section 1.408-8, including the incidental death benefit provisions of Proposed Regulations section 1.401(a)(9)- 2, the provisions of which are incorporated by reference. 2. Unless otherwise elected by the time distributions are required to begin to the Participant under paragraph 3, or to the surviving spouse under paragraph 4, other than in the case of a life annuity, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant and the surviving spouse and shall apply to all subsequent years. The life expectancy of a nonspouse beneficiary may not be recalculated. 6 3. The Participant's entire interest in the Custodial Account must be, or begin to be, distributed by the Participant's required beginning date (April 1 following the calendar year end in which the Participant reaches age 70 1/2). By that date, the Participant may elect, in a manner acceptable to the Custodian, to have the balance in the Custodial Account distributed in: (a) A single sum payment. (b) An annuity contract that provides equal or substantially equal monthly, quarterly, or annual payments over the life of the Participant. (c) An annuity contract that provides equal or substantially equal monthly, quarterly, or annual payments over the joint and last survivor lives of the Participant and his or her designated beneficiary. (d) Equal or substantially equal annual payments over a specified period that may not be longer than the Participant's life expectancy. (e) Equal or substantially equal annual payments over a specified period that may not be longer than the joint life and last survivor expectancy of the Participant and his or her designated beneficiary. 4. If the Participant dies before his or her entire interest is distributed to him or her, the entire remaining interest will be distributed as follows: (a) If the Participant dies on or after distribution of his or her interest has begun, distribution must continue to be made in accordance with paragraph 3. (b) If the Participant dies before distribution of his or her interest has begun, the entire remaining interest will, at the election of the Participant or, if the Participant has not so elected, at the election of the beneficiary or beneficiaries, either (i) Be distributed by December 31 of the year containing the fifth anniversary of the Participant's death, or (ii) Be distributed in equal or substantially equal payments over the life or life expectancy of the designated beneficiary or beneficiaries starting by December 31 of the year following the year of the Participant's death. If, however, the beneficiary is the Participant's surviving spouse, then this distribution is not required to begin before December 31 of the year in which the Participant would have reached age 70 1/2. (c) Except where distribution in the form of an annuity meeting the requirements of section 408(b)(3) and its related regulations has irrevocably commenced, distributions are treated as having begun on the Participant's required beginning date, even though payments may actually have been made before that date. 7 (d) If the Participant dies before his or her entire interest has been distributed and if the beneficiary is other than the surviving spouse, no additional cash contributions or rollover contributions may be accepted in the account. 5. In the case of a distribution over life expectancy in equal or substantially equal annual payments, to determine the minimum annual payment for each year, divide the Participant's entire Interest in the Custodial Account as of the close of business on December 31 of the preceding year by the life expectancy of the Participant (or the joint life and last survivor expectancy of the Participant and the Participant's designated beneficiary, or the life expectancy of the designated beneficiary, whichever applies). In the case of distributions under paragraph 3, determine the initial life expectancy (or joint life and last survivor expectancy) using the attained ages of the Participant and designated beneficiary as of their birthdays in the year the Participant reaches age 70 1/2. In the case of a distribution in accordance with paragraph 4(b)(ii), determine life expectancy using the attained age of the designated beneficiary as of the beneficiary's birthday in the year distributions are required to commence. 6. The owner of two or more individual retirement accounts may use the "alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the minimum distribution requirements described above. This method permits an individual to satisfy these requirements by taking from one individual retirement account the amount required to satisfy the requirement for another. Article V 1. The Participant agrees to provide the Custodian with information necessary for the Custodian to prepare any reports required under sections 408(i) and 408(l)(2) and Regulations sections 1.408-5 and 1.408-6. 2. The Custodian agrees to submit reports to the Internal Revenue Service and the Participant prescribed by the Internal Revenue Service. 3. The Custodian also agrees to provide the Participant's employer the summary description described in section 408(l)(2) unless this SIMPLE IRA is a transfer SIMPLE IRA. Article VI Notwithstanding any other articles which may be added or incorporated, the provisions of Articles I through III and this sentence will be controlling. Any additional articles that are not consistent with section 408(a) and 408(p) and related regulations will be invalid. Article VII This agreement will be amended from time to time to comply with the provisions of the Code and related regulations. Other amendments may be made with the consent of the persons whose signatures appear below. 8 Article VIII 1. Form of Contributions. All contributions and transfers shall be made only in cash. 2. Investment of Contributions. (a) As directed by the Participant in writing, all contributions shall be used by the Custodian to purchase Fund Shares. All income dividends and capital gains distributions shall be reinvested in shares of the Fund which declared such dividends or distributions unless the Participant elects in writing, in accordance with an opportunity to do so provided by the Fund declaring the dividend or distribution, to apply such dividend or distribution to purchase other Fund Shares available under this Agreement. (b) A Telephone Exchange Plan ("Exchange Plan"), as described in the prospectus(es) of the Funds is available hereunder. After the Custodian receives an Exchange Plan authorization deemed by the Custodian to be in proper form, the Custodian, upon receipt of telephonic instructions from any person representing himself to be the Participant, may redeem any Fund Shares held by the Custodian on behalf of the Participant and apply the proceeds toward the purchase of any other Fund Shares available hereunder, subject to and in accordance with the terms and conditions of the Exchange Plan. The Custodian shall be entitled to rely and act upon such telephonic instructions, and neither the Custodian, the Trust, any other Fund whose shares are available hereunder nor their officers, trustees, directors, employees or agents shall be liable for any liability, cost or expense for acting on any such instructions. In directing any exchange pursuant to the Exchange Plan, the Participant represents that he has obtained a current prospectus of the Fund into which the switch is to be made. The Participant authorizes and directs the Custodian to respond to any telephonic inquiries relating to the status of shares owned, including but not limited to the number of shares held. The Participant agrees that the authorizations, directions and restrictions contained herein will continue until the Custodian receives written notice of any change or revocation. The Participant agrees and understands that the Funds and the Custodian reserve the right to refuse any telephonic instructions. (c) All Fund Shares acquired by the Custodian shall be registered in the name of the Custodian or its nominee. 3. Beneficiaries; Distributions to Minors. (a) A Participant shall have the right by written notice to the Custodian to designate one or more beneficiaries to receive any amount to which the Participant may be entitled in the event of his death before the complete distribution of his interest, and to change any such beneficiary. Such designation or change shall be on the Beneficiary Form provided by the Trust, and shall be effective only when filed with the Custodian before the death of the Participant. Such designation may include contingent or successive beneficiaries. If no such designation is in effect on a Participant's death, or if no designated beneficiary is living on the date any payment becomes due after the Participant's death, such payment shall be made to the executor or administrator of the Participant's estate. However, if after the Participant's death, his surviving 9 spouse is receiving payments over a specified period, the surviving spouse may designate a beneficiary to receive the balance of the Custodial Account, if any, on his or her death in accordance with the foregoing rules. (b) If any person to whom all or a portion of the Participant's interest is payable is a minor, payment of the minor's interest shall be made on behalf of the minor to the person designated by the Participant in the Beneficiary Form to receive the minor's interest as custodian under the Massachusetts Uniform Transfers to Minors Act or similar statute. If any person to whom all or a portion of the Participant's interest is payable is a minor and if either the Participant has not so designated a person to receive the minor's interest as such custodian, or the person so designated is unable to act (because of incapacity, failing or declining to act, death or otherwise), the Custodian shall: (i) Distribute the interest to the legal guardian of such minor; or (ii) If no guardian has been appointed, designate an adult member of the minor's family, a guardian or a trust company (including the Custodian), as those terms are defined in the Massachusetts Uniform Transfers to Minors Act or similar statute, as custodian for such minor under the Massachusetts Uniform Transfers to Minors Act or similar statute and distribute such minor's interest to the person so designated. The person designated as custodian under the Massachusetts Uniform Transfers to Minors Act or similar statute shall hold, manage and distribute such property in accordance with the provisions of such statute including, if such statute so requires, a total distribution prior to age 21. The distribution of the Participant's interest to the guardian or the person designated as custodian under the Massachusetts Uniform Transfers to Minors Act or similar statute shall be a full discharge of the Custodian to the extent of the distribution so made. (c) The determination of the Custodian as to the person entitled to receive any distribution from the Custodial Account following the death of the Participant, if made in good faith, shall be conclusive and binding on all persons claiming an interest in the Participant Account; provided that nothing provided herein shall be construed to preclude the Custodian from filing an action in the nature of interpleader or other appropriate proceeding in a court of competent jurisdiction to determine the person entitled to receive such distribution. Any expenses incurred by the Custodian in determining the person entitled to receive a distribution from the Custodial Account, including without limitation attorneys fees in any such action, shall be reimbursed from the Custodial Account. 4. Inalienability of Benefits. The benefits provided hereunder shall not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind of any attempt to cause such benefits to be so subjected shall not be recognized except to the extent as may be required by law. 5. Distributions to Surviving Spouse. If distributions from the Custodial Account are to be made to the Participant's surviving spouse, or to a trust of which the Participant's surviving spouse is the income beneficiary, the amount which the surviving spouse (or such 10 trust) is entitled to receive in each year shall not be less than the income of the Custodial Account (or of the portion of the Custodial Account with respect to which the surviving spouse or such trust is the beneficiary) for such year, as determined under section 2056(b)(7) of the Code. 6. Minimum Distributions; Election not to Recalculate Life Expectancies. The following provisions supplement the provisions of Article IV with respect to minimum required distributions, and shall control over the provisions of Article IV in the event of any inconsistency. All paragraph references in this paragraph 6 are to paragraphs of Article IV unless otherwise provided. (a) If the Participant fails to withdraw the entire balance in the Custodial Account by the April 1 of the year following the year in which he attains age 70 1/2, he shall be deemed to have elected to receive payments under paragraph 3(d) or, if he has a designated beneficiary (as determined under Part D of Proposed Regulations section 1.401(a)(9)-1) under paragraph 3(e). A beneficiary shall be deemed to have elected the method described in paragraph 4(b)(ii) if either he withdraws the minimum amount required for the first year under the method described in paragraph 4(b)(ii) and does not specifically elect the method described in paragraph 4(b)(i) by the end of such year, or if the date specified in paragraph 4(b)(i) occurs first and he has not withdrawn the entire balance in the Custodial Account by that time; otherwise, the beneficiary shall be deemed to have elected the method described in paragraph 4(b)(i). (b) If there is more than one beneficiary entitled to receive distributions on equal priority upon the death of the Participant or a prior beneficiary then, to the extent permitted by Proposed Regulations section 1.401(a)(9)-1, Q&A H-2, and subject to such requirements and limitations as the Custodian may establish, the Custodial Account may be divided into separate accounts for purposes of Article IV and this paragraph. Whenever distributions after the death of the Participant are to be made to the Participant's surviving spouse and to one or more beneficiaries other than the surviving spouse, and any provision of Article IV, this paragraph 6, or the minimum distribution requirements provides different treatment for the portion of the Custodial Account to be distributed to the surviving spouse, then such portion, and the income earned thereon, shall be separated and treated as a separate Custodial Account with respect to such surviving spouse. (c) Notwithstanding the references to "equal or substantially equal" payments, if the Participant or a beneficiary is receiving distributions under paragraph 3(d), 3(e), or 4(b)(ii), he may withdraw amounts that exceed the minimum amount required by paragraph 5 in any year, provided that any excess shall not be credited against the minimum amount required to be withdrawn in subsequent years. Withdrawals may also be made at irregular intervals, provided that the minimum amount required for each year shall be withdrawn by the last day of such year, except that the minimum amount for the year in which the Participant attains age 70 1/2, but no subsequent year, may be withdrawn by April 1 of the following year. (d) In lieu of the methods of recalculating life expectancies annually as specified in paragraph 2, the Participant may elect for purposes of paragraph 3(c) or 3(d), and the Participant's surviving spouse may elect for purposes of paragraph 4(b)(ii), to have his life 11 expectancy, or his and his designated beneficiary's joint and last survivor life expectancy, or the surviving spouse's life expectancy, initially calculated in the year specified in paragraph 5 and thereafter reduced by one year in each subsequent year. All elections described in this paragraph 6(d) shall be made in writing in accordance with procedures established by the Custodian and the Proposed Regulations or successors thereto. Such elections must be made and, if made, shall be irrevocable after the date upon which distributions are required to commence under paragraph 3 or 4(b)(ii). (e) All references to the Proposed Regulations section 1.401(a)(9)-1 and 1.401(a)(9)-2 contained in Article IV and this paragraph 6 include the applicable provisions of Proposed Regulations section 1.408-8 applying such Proposed Regulations to individual retirement accounts, any subsequent amendments to any such Proposed Regulations, and the applicable provisions of the permanent Regulations, when issued, all of which are incorporated by reference and shall control over any contrary provision of this Agreement. Reference to specific provisions of the Proposed Regulations shall not be construed to limit reference to other provisions where appropriate in the interpretation of Article IV and this paragraph 6. (f) For all purposes of Article IV and this paragraph 6, life expectancy and joint-life and last-survivor expectancy are calculated based on information provided by the Participant (or the Participant's authorized agent, beneficiary, executor, or administrator) using the expected return multiples under Treasury Regulations Section 1.72-9. The Custodian will not be liable for errors in such calculations resulting from its reliance on such information. (g) Notwithstanding anything herein to the contrary, all distributions shall be made by the Custodian in such manner and in such amounts as may be specified in written instructions received from time to time by the Participant or the beneficiary, as the case may be and all such instructions shall be deemed to constitute a certification by the Participant or beneficiary that the distribution so directed is one that the Participant or beneficiary is permitted to receive. In addition, the Custodian shall have no liability with respect to any distribution from the Account in accordance with the directions of the Participant or beneficiary or the failure to make a distribution in the absence of such instructions or any consequences thereof including, but not limited to, excise and other taxes and penalties which might accrue or be assessed, nor shall the Custodian be under any duty to make any inquiry or investigation with respect thereto. If any assets held on the Participant's behalf in a Custodial Account are transferred directly to a trustee or Custodian of another individual retirement account described in Code Section 408(a) established for the Participant, it shall be the Participant's responsibility to ensure that any requested minimum distribution required by Article IV is made prior to giving the Custodian such transfer instructions. (h) Any annuity contract purchased for the Participant pursuant to this Agreement shall be immediately distributed to the Participant, and the custodial relationship shall terminate upon such distribution. 12 7. Administration. (a) Except as otherwise provided in this Agreement, the Custodian shall, as directed in writing, on behalf of the Participant: (i) Receive contributions pursuant to the provisions of the Agreement; (ii) Hold, invest and reinvest the contributions in Fund Shares; (iii)Register any property in the Custodial Account in the name of the custodian or its nominee; and (iv) Make distributions from the Custodial Account in cash or in Fund Shares pursuant to the provisions of this Agreement. (b) In addition to the provisions of Article V, the Custodian shall deliver or cause to be executed and delivered to the Participant all notices, prospectuses, financial statements, proxies and proxy soliciting material relating to assets credited to the custodial account. No Fund Shares shall be voted, and no other action shall be taken pursuant to such documents, except upon receipt of adequate written instructions from the Participant. (c) The Custodian shall keep accurate and detailed account of its receipts, investments and disbursements. As soon as practicable after the end of each calendar year, and whenever required by regulations adopted under the Act or the Code, the Custodian shall file with the Participant a written report of the Custodian's transactions relating to the Custodial Account during the period from the last previous accounting, and shall file such other reports with the Internal Revenue Service as may be required of the Custodian by regulation. (d) Unless the Participant sends the Custodian written objection to a report within 60 days after its receipt, the Participant shall be deemed to have approved such report, and in such case the Custodian shall be forever released and discharged with respect to all matters and things included therein. The Custodian may seek a judicial settlement of its accounts. In any such proceeding the only necessary party thereto in addition to the Custodian shall be the Participant unless otherwise required by law. (e) The Custodian shall have no duties whatsoever except such duties as are specifically provided for herein, and no implied covenant or obligation shall be read into this Agreement against the Custodian. The Custodian shall not be liable for a mistake in judgment, for any action taken, or any failure to act, in good faith, or for any loss that is not a result of its gross negligence, except as expressly required by the Act and regulations promulgated thereunder. In performing its duties under this Agreement, the Custodian may hire agents, experts and attorneys and may delegate discretionary powers to, and rely upon information and advice furnished by, such agents, experts and attorneys. 13 (f) The Participant agrees to indemnify and hold the Custodian harmless from and against any liability that the Custodian may incur in the administration of the Custodial Account, unless arising from the Custodian's own gross negligence or willful misconduct. (g) The Custodian shall be under no duty to question any direction of the Participant with respect to the investment of contributions, or to make suggestions to the Participant with respect to the investment, retention or disposition of any contributions or assets held in the Custodial Account. (h) The Custodian shall pay out of the Custodial Account expenses of administration, including the fees of counsel employed by the Custodian, taxes, if any, and its fees for maintaining the Custodial Account, which are set forth in the Disclosure Statement but may be revised from time to time by the Custodian and the Trust. The Custodian may sell Fund Shares and use the proceeds of sale to pay the foregoing fees and expenses. (i) The Custodian may resign as Custodian of any Participant's Custodial Account or as Custodian of all accounts adopted under the provisions of this Plan, in either case upon 30 days' prior notice to the Trust and 30 days' prior notice to each Participant who will be affected by such resignation. If the Trust or the Participant does not appoint a successor custodian within 30 days after the mailing of such notice, the Custodian will terminate the Custodial Account. (j) The Participant shall be solely and fully responsible for all taxes and penalties which might accrue or be assessed with respect to any excess contributions, premature distributions or distributions which are below the annual minimum distribution required. (k) The Custodian shall be entitled to receive and may charge against the Participant's Custodial Account such reasonable compensation for its services in accordance with its fee schedule as from time to time in effect, and shall also be entitled to reimbursement of its expenses as Custodian under this Agreement. The Custodian will notify the Participant in writing of any change in its fee schedule. (l) This Agreement and the Custodial Account created hereby shall be subject to the applicable laws, rules and regulations, as the same may from time to time be amended, of the Federal government and the Commonwealth of Massachusetts and the agencies and instrumentalities of each having jurisdiction thereof, and shall be governed by and construed, administered and enforced according to the law of the Commonwealth of Massachusetts. All contributions to the Custodial Account shall be deemed to take place in the Commonwealth of Massachusetts. (m) The Custodian and Participant hereby waive and agree to waive right to trial by jury in an action or proceeding instituted in respect to this Custodial Account. The Participant further agrees that the venue of any litigation between him and the Custodian with respect to the Custodial Account shall be in the County of Suffolk, Commonwealth of Massachusetts. (n) All communications or notices required or permitted to be given herein shall be deemed to be given upon receipt by the Custodian at P. O. Box 8502, Boston, MA 02266-8502, 14 by the Trust at 227 W. Monroe St., #3000, Chicago, IL, 60606, or the Participant at his most recent address shown in the Custodian's records. The Participant agrees to advise the Custodian promptly, in writing, of any change of address. 8. The Trust (a) The Participant delegates to the Trust the power with respect to this Agreement: (i) to remove the Custodian and select a successor Custodian; and (ii) to amend this Agreement as provided in paragraph 9. (b) The powers herein delegated to the Trust shall be exercised by such officer thereof as the Trust may designate from time to time, and shall be exercised only when similarly exercised with respect to all other Participants establishing SIMPLE-IRA accounts. (c) Neither the Trust nor any officer director, trustee, board, committee, employee or member of the Trust shall incur any liability of any nature to the Participant or beneficiary or other person in connection with any act done or omitted to be done in good faith in the exercise of any power or authority herein delegated to the Trust. (d) If the Trust shall hereafter determine that it is no longer desirable for the Trust to continue to exercise any of the powers hereby delegated to the Trust, it may relieve itself of any further responsibilities hereunder by notice in writing to the Participant and the Custodian at least 60 days before the date on which the Trust proposes to discontinue the exercise of the powers delegated to it. 9. Amendment and Termination. (a) The Participant delegates to the Trust the power to amend this Agreement (including retroactive amendment). A copy of any such amendment shall be furnished to the Custodian, and no such amendment shall have the effect of increasing the duties or obligations of the Custodian until it has been approved by the Custodian. A copy of any such amendment shall also be furnished to the Participant, but no delay in furnishing such copy shall affect the effectiveness of such amendment. (b) The Participant may amend his/her Application (including retroactive amendment) by submitting to the Custodian (i) a copy of such amended Application, and (ii) evidence satisfactory to the Custodian that the Agreement as amended by such amended Application will continue to qualify as a SIMPLE- Individual Retirement Account under the provisions of section 408 of the Code. (b) No amendment shall be effective if it would cause or permit (i) any part of the Custodial Account to be diverted to any purpose that is not for the exclusive benefit of the Participant and his beneficiaries; (ii) the Participant to be deprived of any portion of his interest in the Custodial Account, unless such action is taken in order to satisfy qualification requirements under the Code; or (iii) the imposition of an additional duty on the Custodian without its written consent. 15 (c) The Participant reserves the right to terminate his adoption of this Agreement by instrument in writing signed by him and filed with the Custodian. (d) In the event that the assets of any investment company (including any series of the Trust) in which the Custodial Account is invested are transferred to or acquired by any other investment company or other commingled investment fund which is a permissible investment for an individual retirement account, by merger or otherwise, the Trust may make such amendments to this Agreement, or take such other action, as it may determined to be necessary or appropriate to accomplish such transaction and the exchange of Fund Shares for shares or other appropriate units of ownership in such successor fund. The consent of the Participant shall not be required for any such amendment or action, but the Participant shall be promptly notified thereof, and shall have the right to withdraw the funds in the Custodial Account without fee, charge, load or penalty of any kind. 10. Definitions. Whenever used in this Agreement, the following terms shall have the meanings set forth below unless otherwise expressly provided herein: (a) Act. The Employee Retirement Income Security Act of 1974, as amended from time to time. (b) Agreement. This Custodial Agreement for a SIMPLE-IRA Account, including the Application, as amended from time to time. (c) Application. The SIMPLE-Individual Retirement Account Application, constituting an agreement between the Participant and the Custodian, by which the Participant adopts this Agreement (d) Code. The Internal Revenue Code of 1986, as amended from time to time. Reference to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes that section. (e) Custodial Account. The account established for the Participant pursuant to this Agreement. (f) Custodian. The bank named in the Application. (g) Fund Shares. Shares issued by the Trust or shares of any other regulated investment company for which the Custodian acts as transfer agent and which may be available hereunder from time to time pursuant to an agreement between the Custodian and the Trust. No Fund shall be available for investment under this Agreement (i) before the date the prospectus for that Fund discloses its availability, (ii) with respect to any Participant who resides in any state or other jurisdiction in which shares of the Fund are not available for sale, or (iii) with respect to any Participant not eligible to purchase Fund shares directly, when sales of Fund shares are restricted. 16 (h) Participant. The individual who adopts this Agreement as provided therein. (i) Trust. Acorn Investment Trust, a regulated investment company. 11. Conflict in Provisions. To the extent that any of the provisions of Article VIII shall conflict with the provisions of Articles IV, V, or VII, the provisions of Article VIII shall prevail. 12. Loss of Exemption. If the Custodian receives notice that the Participant's Account has lost its tax-exempt status under section 408 of the Code for any reason, including by reason of a transaction prohibited by section 4975 of the Code, the Custodian shall distribute to the Participant the entire balance in the Account, in cash or in kind, in the sole discretion of the Custodian no later than 90 days after the date the Custodian receives such notice. 17 FORMS THAT MAY BE USED BY AN EMPLOYER TO ESTABLISH A SIMPLE-IRA PLAN In order to establish a SIMPLE-IRA plan, an employer may complete the blanks in Form 5304-SIMPLE contained in the following pages, and execute the Form. This form should be kept with the employer's records. Do not file Form 5304-SIMPLE with the Internal Revenue Service. Form 5304-SIMPLE is a form issued by the Internal Revenue Service, not by Acorn. You must also notify each eligible employee of his or her right to elect to make contributions to a SIMPLE-IRA. This notice must be given to each employee EACH YEAR prior to the beginning of the period during which he or she may elect to make such contributions, which must be at least 60 days in length. A copy of a model notice that can be used for this purpose is enclosed, and immediately follows Form 5304-SIMPLE. A copy of the completed Form 5304-SIMPLE must be attached to this notice. Each employee who wishes to participate must elect to have a portion of his or her compensation withheld and deposited into a SIMPLE-IRA account. A written election form that can be used for this purpose is also enclosed. You can also use any other election form that provides the same information. Finally, each employee who elects to participate must open an Acorn Funds SIMPLE-IRA account. A copy of the SIMPLE-IRA application form should also be furnished to each eligible employee. If the employer makes contributions to all eligible employees, rather than just the employees who elect to participate, and any employee fails to complete a SIMPLE-IRA application, the employer may complete the application for the employee. Form 5304-SIMPLE and the attached notification and election forms are promulgated by the Internal Revenue Service, not by Acorn. Copies of these forms are provided solely as a convenience, and Acorn has no responsibility for these forms or the manner in which they are prepared or utilized by the employer. Each employer may also use individually drafted documents for to establish a SIMPLE-IRA plan, or to notify employees or allow them to elect deferrals. Consult your own tax and legal advisors before using these forms. 18 Form 5304-SIMPLE Savings Incentive Match Plan OMB No. 1545-1502 (December 1996) for Employees of Small ----------------- Employers (SIMPLE) DO NOT File with Department of the Treasury (Not Subject to the Designated the Internal Internal Revenue Service Financial Institution Rules) Revenue Service - -------------------------------------------------------------------------------- _______________________________________establishes the following SIMPLE Name of Employer plan under section 408(p) of the Internal Revenue Code and pursuant to the instructions contained in this form. - -------------------------------------------------------------------------------- Article I--Employee Eligibility Requirements (Complete appropriate box(es) and blanks--see instructions.) - -------------------------------------------------------------------------------- 1 General Eligibility Requirements. The Employer agrees to permit salary reduction contributions to be made in each calendar year to the SIMPLE IRA established by each employee who meets the following requirements (select either 1a or 1b): a[_] Full Eligibility. All employees are eligible. b[_] Limited Eligibility. Eligibility is limited to employees who are described in both (i) and (ii) below: (i) Current compensation. Employees who are reasonably expected to receive at least $_______________in compensation (not to exceed $5,000) for the calendar year. (ii) Prior compensation. Employees who have received at least $__________ in compensation (not to exceed $5,000) during any __________ calendar year(s) (insert 0, 1, or 2) preceding the calendar year. 2 Excludable Employees (OPTIONAL) [_] The Employer elects to exclude employees covered under a collective bargaining agreement for which retirement benefits were the subject of good faith bargaining. - -------------------------------------------------------------------------------- Article II--Salary Reduction Agreements (Complete the box and blank, if appropriate--see instructions.) - -------------------------------------------------------------------------------- 1 Salary Reduction Election. An eligible employee may make a salary reduction election to have his or her compensation for each pay period reduced by a percentage. The total amount of the reduction in the employee's compensation cannot exceed $6,000* for any calendar year. 2 Timing of Salary Reduction Elections a For a calendar year, an eligible employee may make or modify a salary reduction election during the 60-day period immediately preceding January 1 of that year. However, for the year in which the employee becomes eligible to make salary reduction contributions, the period during which the employee may make or modify the election is a 60-day period that includes either the date the employee becomes eligible or the day before. b In addition to the election periods in 2a, eligible employees may make salary reduction elections or modify prior elections_______________________ __________________________________________________(If the Employer chooses this option, insert a period or periods (e.g. semi-annually, quarterly, monthly, or daily) that will apply uniformly to all eligible employees.) c No salary reduction election may apply to compensation that an employee received, or had a right to immediately receive, before execution of the salary reduction election. d An employee may terminate a salary reduction election at any time during the calendar year. [_] If this box is checked, an employee who terminates a salary reduction election not in accordance with 2b may not resume salary reduction contributions during the calendar year. - -------------------------------------------------------------------------------- Article III--Contributions (Complete the blank, if appropriate--see instructions.) - -------------------------------------------------------------------------------- 1 Salary Reduction Contributions. The amount by which the employee agrees to reduce his or her compensation will be contributed by the Employer to the employee's SIMPLE IRA. 2 Other Contributions a Matching Contributions (i) For each calendar year, the Employer will contribute a matching contribution to each eligible employee's SIMPLE IRA equal to the employee's salary reduction contributions up to a limit of 3% of the employee's compensation for the calendar year. (ii) The Employer may reduce the 3% limit for the calendar year in (i) only if: (1) The limit is not reduced below 1%; (2) The limit is not reduced for more than 2 calendar years during the 5-year period ending with the calendar year the reduction is effective; and (3) Each employee is notified of the reduced limit within a reasonable period of time before the employees' 60-day election period for the calendar year (described in Article II, item 2a). b Nonelective Contributions (i) For any calendar year, instead of making matching contributions, the Employer may make nonelective contributions equal to 2% of compensation for the calendar year to the SIMPLE IRA of each eligible employee who has at least $___________________ (not more than $5,000) in compensation for the calendar year. No more than $160,000* in compensation can be taken into account in determining the nonelective contribution for each eligible employee. (ii) For any calendar year, the Employer may make 2% nonelective contributions instead of matching contributions only if: (1) Each eligible employee is notified that a 2% nonelective contribution will be made instead of a matching contribution; and (2) This notification is provided within a reasonable period of time before the employees' 60-day election period for the calendar year (described in Article II, item 2a). 3 Time and Manner of Contributions a The Employer will make the salary reduction contributions (described in 1 above) for each eligible employee to the SIMPLE IRA established at the financial institution selected by that employee no later than 30 days after the end of the month in which the money is withheld from the employee's pay. See instructions. b The Employer will make the matching or nonelective contributions (described in 2a and 2b above) for each eligible employee to the SIMPLE IRA established at the financial institution selected by that employee no later than the due date for filing the Employer's tax return, including extensions, for the taxable year that includes the last day of the calendar year for which the contributions are made. - -------------------------------------------------------------------------------- For Paperwork Reduction Act Notice, see Instructions. Cat No. 23377W Form 5304-SIMPLE (12-96) Form 5304-SIMPLE (12-96) Page 2 - -------------------------------------------------------------------------------- Article IV--Other Requirements and Provisions - -------------------------------------------------------------------------------- 1 Contributions in General. The Employer will make no contributions to the SIMPLE IRAs other than salary reduction contributions (described in Article III, item 1) and matching or nonelective contributions (described in Article III, items 2a and 2b). 2 Vesting Requirements. All contributions made under this SIMPLE plan are fully vested and nonforfeitable. 3 No Withdrawal Restrictions. The Employer may not require the employee to retain any portion of the contributions in his or her SIMPLE IRA or otherwise impose any withdrawal restrictions. 4 Selection of IRA Trustee. The employer must permit each eligible employee to select the financial institution that will serve as the trustee, custodian, or issuer of the SIMPLE IRA to which the employer will make all contributions on behalf of that employee. 5 Amendments To This SIMPLE Plan. This SIMPLE plan may not be amended except to modify the entries inserted in the blanks or boxes provided in Articles I, II, III, VI, and VII 6 Effects Of Withdrawals and Rollovers a An amount withdrawn from the SIMPLE IRA is generally includible in gross income. However, a SIMPLE IRA balance may be rolled over or transferred on a tax-free basis to another IRA designed solely to hold funds under a SIMPLE plan. In addition, an individual may roll over or transfer his or her SIMPLE IRA balance to any IRA on a tax-free basis after a 2-year period has expired since the individual first participated in a SIMPLE plan. Any rollover or transfer must comply with the requirements under section 408. b If an individual withdraws an amount from a SIMPLE IRA during the 2-year period beginning when the individual first participated in a SIMPLE plan and the amount is subject to the additional tax on early distributions under section 72(t), this additional tax is increased from 10% to 25%. - -------------------------------------------------------------------------------- Article V--Definitions - -------------------------------------------------------------------------------- 1 Compensation a General Definition of Compensation. Compensation means the sum of the wages, tips, and other compensation from the Employer subject to federal income tax withholding (as described in section 6051(a)(3)) and the employee's salary reduction contributions made under this plan, and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the Employer on Form W-2 (as described in section 6058(a)(8)). b Compensation for Self-Employed Individuals. For self-employed individuals, compensation means the net earnings from self-employment determined under section 1402(a) prior to subtracting any contributions made pursuant to this plan on behalf of the individual. 2 Employee. Employee means a common-law employee of the Employer. The term employee also includes a self-employed individual and a leased employee described in section 414(n) but does not include a nonresident alien who received no earned income from the Employer that constitutes income from sources within the United States. 3 Eligible Employee. An eligible employee means an employee who satisfies the conditions in Article I, item 1 and is not excluded under Article 1, item 2. 4 SIMPLE IRA. A SIMPLE IRA is an individual retirement account described in section 408(a), or an individual retirement annuity described in section 408(b), to which the only contributions that can be made are contributions under a SIMPLE plan and rollovers or transfers from another SIMPLE IRA. - -------------------------------------------------------------------------------- Article VI--Procedures for Withdrawal. (The employer will provide each employee with the procedures for withdrawals of contributions received by the financial institution selected by that employee, and that financial institution's name and address (by attaching that information or inserting it in the space below) unless: (1) that financial institution's procedures are unavailable. or (2) that financial institution provides the procedures directly to the employee. See Employee Notification section in the instructions.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article VII--Effective Date - -------------------------------------------------------------------------------- This SIMPLE plan is effective______________________________. (See instructions.) * * * * * - --------------------------------- -------------------------------------- Name of Employer By: Signature Date - --------------------------------- -------------------------------------- Address of Employer Name and title *This amount will be adjusted to reflect any annual cost-of-living increases announced by the IRS. - -------------------------------------------------------------------------------- Form 5304-SIMPLE (12-96) Page 3 - -------------------------------------------------------------------------------- Model Notification to Eligible Employees I. Opportunity to Participate in the SIMPLE Plan You are eligible to make salary reduction contributions to the ___________ SIMPLE plan. This notice and the attached summary description provide you with information that you should consider before you decide whether to start, continue, or change your salary reduction agreement. II. Employer Contribution Election For the ___________calendar year, the employer elects to contribute to your SIMPLE IRA (employer must select either (1), (2), or (3)): [_] (1) A matching contribution equal to your salary reduction contributions up to a limit of 3% of your compensation for the year; [_] (2) A matching contribution equal to your salary reduction contributions up to a limit of ____% (employer must insert a number from 1 to 3 and is subject to certain restrictions) of your compensation for the year; or [_] (3) A nonelective contribution equal to 2% of your compensation for the year (limited to $160,000*) if you are an employee who makes at least $___________(employer must insert an amount that is $5,000 or less) in compensation for the year. III. Administrative Procedures If you decide to start or change your salary reduction agreement, you must complete the salary reduction agreement and return it to_______________________ _________________________________________________(employer should designate a place or individual) by__________________________ (employer should insert a date that is not less than 60 days after notice is given). IV. Employee Selection of Financial Institution You must select the financial institution that will serve as the trustee, custodian, or issuer of your SIMPLE IRA and notify your employer of your selection. - -------------------------------------------------------------------------------- Model Salary Reduction Agreement I. Salary Reduction Election Subject to the requirements of the SIMPLE plan of_________________________ _______________(name of employer) I authorize____% or $_______________ (which equals____% of my current rate of pay) to be withheld from my pay for each pay period and contributed to my SIMPLE IRA as a salary contribution. II. Maximum Salary Reduction I understand that the total amount of my salary reduction contributions in any calendar year cannot exceed $6,000.* III. Date Salary Reduction Begins I understand that my salary reduction contributions will start as soon as permitted under the SIMPLE plan and as soon as administratively feasible or, if later,_________________________________(Fill in the date you want the salary reduction contributions to begin. The date must be after you sign this agreement.) IV. Employee Selection of Financial Institution I select the following financial institution to serve as the trustee, custodian, or issuer of my SIMPLE IRA. ---------------------------------------------------------------------- Name of financial institution ---------------------------------------------------------------------- Address of financial institution ---------------------------------------------------------------------- SIMPLE IRA account name and number I understand that I must establish a SIMPLE IRA to receive any contributions made on my behalf under this SIMPLE plan. If the information regarding my SIMPLE IRA is incomplete when I first submit my salary reduction agreement, I realize that it must be completed by the date contributions must be made under the SIMPLE plan. If fail to update my agreement to provide this information by that date, I understand that my employer may select a financial institution for my SIMPLE IRA. V. Duration of Election This salary reduction agreement replaces any earlier agreement and will remain in effect as long as I remain an eligible employee under the SIMPLE plan or until I provide my employer with a request to end my salary reduction contributions or provide a new salary reduction agreement as permitted under this SIMPLE plan. Signature of employee ------------------------------------------------------ Date ------------------------------------------------------ *This amount will be adjusted to reflect any annual cost-of-living increases announced by the IRS. - -------------------------------------------------------------------------------- Form 5304-SIMPLE (12-96) Page 4 - -------------------------------------------------------------------------------- Paperwork Reduction Act Notice You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103. The time needed to complete this form will vary depending on individual circumstances. The estimated average time is: Recordkeeping..........................3 hr., 38 min. Learning about the law or the form.....2 hr., 26 min. Preparing the form............................47 min. If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-00001. DO NOT send this form to this address. Instead, keep it for your records. General Instructions Section references are to the Internal Revenue Code unless otherwise noted. Note: The instructions for this form are designed to assist in the establishment and administration of the SIMPLE plan; they are not intended to supersede any provisions in the SIMPLE plan. Purpose of Form Form 5304-SIMPLE is a model Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plan document that an employer may use to establish a SIMPLE plan described in section 408(p), under which each eligible employee is permitted to select the financial institution for his or her SIMPLE IRA. It is important that you keep this form for your records. DO NOT file this form with the IRS. For more information, see Pub. 560, Retirement Plans for the Self- Employed, and Pub. 590, individual Retirement Arrangements (IRAs). Instructions for the Employer Which Employers May Establish and Maintain a SIMPLE Plan? You are eligible to establish and maintain a SIMPLE plan only if you meet both of the following requirements: 1. Last calendar year, you had no more than 100 employees (including self- employed individuals) who earned $5,000 or more in compensation from you during the year. If you have a SIMPLE plan but later exceed this 100-employee limit, you will be treated as meeting the limit for the two years following the calendar year in which you last satisfied the limit. If the failure to continue to satisfy the 100-employee limit is due to an acquisition or similar transaction involving your business, special rules apply. Consult your tax advisor to find out if you can still maintain the plan after the transaction. 2. You do not maintain during any part of the calendar year another qualified plan with respect to which contributions are made, or benefits are accrued, for service in the calendar year. For this purpose, a qualified plan (defined in section 219(g)(5)) includes a qualified pension plan, a profit-sharing plan, a stock bonus plan, a qualified annuity plan, a tax-sheltered annuity plan, and a simplified employee pension (SEP) plan. Certain related employers (trades or businesses under common control) must be treated as a single employer for purposes of the SIMPLE requirements. These are: (1) a controlled group of corporations under section 414(b); (2) a partnership or sole proprietorship under common control under section 414(c); or (3) an affiliated service group under section 414(m). In addition, if you have leased employees required to be treated as your own employees under the rules of section 414(n), then you must count all such leased employees for the requirements listed above. What is a SIMPLE Plan? A SIMPLE plan is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income for your employees. Under a SIMPLE plan, employees may choose whether to make salary reduction contributions to the SIMPLE plan rather than receiving these amounts as part of their regular compensation. In addition, you will contribute matching or nonelective contributions on behalf of eligible employees (see Employee Eligibility Requirements below and Contributions on page 5). All contributions under this plan will be deposited into a SIMPLE individual retirement account or annuity established for each eligible employee with the financial institution selected by each eligible employee (SIMPLE IRA). The information provided below is intended to help you understand and administer the rules of your SIMPLE plan. When to Use Form 5304-SIMPLE A SIMPLE plan may be established by using this Model Form or any other document that satisfies the statutory requirements. Thus, you are not required go use Form 5304-SIMPLE to establish and maintain a SIMPLE plan. Further do not use Form 5304-SIMPLE if: 1. You want to require that all SIMPLE plan contributions initially go to a financial institution designated by you. (i.e., you do not want to permit each of your eligible employees to choose a financial institution that will initially receive contributions.) However, Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) (for Use With a Designated Financial Institution), may be used in such a case; 2. You want employees who are nonresident aliens receiving no earned income from you that constitutes income from sources within the United States to be eligible under this plan; or 3. You want to establish a SIMPLE 401(k) plan. Completing Form 5304-SIMPLE Page 1 and 2 of Form 5304-SIMPLE contain the operative provisions of your SIMPLE plan. This SIMPLE plan is considered adopted when you have completed all appropriate Form 5304-Simple (12-96) Page 5 - -------------------------------------------------------------------------------- boxes and blanks and it has been executed by you. The SIMPLE plan is a legal document with important tax consequences for you and your employees. You may want to consult with your attorney or tax advisor before adopting this plan. Employee Eligibility Requirements (Article 1) Each year for which this SIMPLE plan is effective, you must permit salary reduction contributions to be made by all of your employees who are reasonably expected to receive at least $5,000 in compensation from you during the year, and who received at least $5,000 in compensation from you in any 2 preceding years. However, you can expand the group of employees who are eligible to participate in the SIMPLE plan by completing the options provided in Article I, items 1a and 1b. To choose full eligibility, check the box in Article I, item 1a. Alternatively, to choose limited eligibility, check the box in Article I, item 1b, and then insert $5,000 or a lower compensation amount (including zero) and 2 or a lower number of years of service in the blanks in (i) and (ii) of Article I, item 1b. In addition, you can exclude from participation those employees covered under a collective bargaining agreement for which retirement benefits were the subject of good faith bargaining. You may do this by checking the box in Article I, item 2. Salary Reduction Agreements (Article II) As indicated in Article II, item 1, a salary reduction agreement permits an eligible employee to make a salary reduction election to have his or her compensation for each pay period reduced by a percentage (expressed as a percentage or dollar amount). The total amount of the reduction in the employee's compensation cannot exceed $6,000* for any calendar year. Timing of Salary Reduction Elections For a calendar year, an eligible employee may make or modify a salary reduction election during the 60-day period immediately preceding January 1 of that year. However, for the year in which the employee becomes eligible to make salary reduction contributions, the period during which the employee may make or modify the election is a 60-day period that includes either the date the employee becomes eligible or the day before. You can extend the 60-day election periods to provide additional opportunities for eligible employees to make or modify salary reduction elections using the blank in Article II, item 2b. For example, you can provide that eligible employees may make new salary reduction elections or modify prior elections for any calendar quarter during the 30 days before that quarter. You may use (but are not required to) the Model Salary Reduction Agreement on page 3 to enable eligible employees to make or modify salary reduction elections. Employees must be permitted to terminate their salary reduction elections at anytime. They may resume salary reduction contributions if permitted under Article II, item 2b. However, by checking the box in Article II, item 2d, you may prohibit an employee who terminates a salary reduction election outside the normal election cycle from resuming salary reduction contributions during the remainder of the calendar year. Contributions (Article III) Only contributions described below may be made to this SIMPLE plan. No additional contributions may be made. Salary Reduction Contributions As indicated in Article III, item 1, salary reduction contributions consist of the amount by which the employee agrees to reduce his or her compensation. You must contribute the salary reduction contributions to the financial institution selected by each eligible employee. Other Contributions Matching Contributions In general, you must contribute a matching contribution to each eligible employee's SIMPLE IRA equal to the employee's salary reduction contributions. This matching contribution cannot exceed 3% of the employee's compensation. See Definition of Compensation, below. You may reduce this 3% limit to a lower percentage, but not lower than 1%. You cannot lower the 3% limit for more than 2 calendar years out of the 5-year period ending with the calendar year the reduction is effective. Note: If any year in the 5-year period described above is a year before you first established any SIMPLE plan, you will be treated as making a 3% matching contribution for that year for purposes of determining when you may reduce the employer matching contribution. In order to elect this option, you must notify the employees of the reduced limit within a reasonable period of time before the applicable 60-day election periods for the year. See Timing of Salary Reduction Elections above. Nonelective contributions.--Instead of making a matching contribution, you may, for any year, make a nonelective contribution equal to 2% of compensation for each eligible employee who has at least $5,000 in compensation for the year. Nonelective contributions may not be based on more than $160,000* of compensation. In order to elect to make nonelective contributions, you must notify employees within a reasonable period of time before the applicable 60-day election periods for such year. See Timing of Salary Reduction Elections above. Note: Insert $5,000 in Article III, item 2b(i) to impose the $5,000 compensation requirement. You may expand the group of employees who are eligible for nonelective contributions by inserting a compensation amount lower than $5,000. Effective Date (Article VII) Insert in Article VII, the date you want the provisions of the SIMPLE plan to become effective. You must insert January 1 of the applicable year unless this is the first year for which you are adopting any SIMPLE plan. If this is the first year for which you are adopting a SIMPLE plan, you may insert any date between January 1 and October 1, inclusive of the applicable year. Do not insert any date before January 1, 1997. *This amount will be adjusted to reflect any annual cost-of-living increases announced by the IRS. EX-27.1 5 FINANCIAL DATA SCHEDULE - ACORN FUND
6 The following information is extracted from and qualified by reference to registrant's report on form N-SAR for the period ended December 31, 1996 and the audited financial statements included in registrant's annual report to shareholders. 1 ACORN FUND 1000 YEAR DEC-31-1996 DEC-31-1996 1719867 2852932 11705 26 0 2864663 6620 0 15991 22611 0 1681710 188918 176315 2578 0 32756 0 1125008 2842052 22198 7662 0 15554 14306 276612 250750 541668 0 19687 261454 0 23744 28523 17382 443457 5288 24722 0 0 12437 0 15554 2709089 13.60 .09 2.93 .11 1.47 0 15.04 .57 0 0
EX-27.2 6 FINANCIAL DATA SCHEDULE - ACORN INTERNATIONAL
6 The following information is extracted from and qualified by reference to registrant's report on form N-SAR for the period ended December 31, 1996 and the audited financial statements included in registrant's annual report to shareholders. 2 ACORN INTERNATIONAL 1000 YEAR DEC-31-1996 DEC-31-1996 1365182 1778684 9536 1683 0 1789903 15290 0 2070 17360 0 1355220 90383 76912 2144 0 12674 0 402505 1772543 22196 4023 0 18213 8006 49857 221576 279439 0 10368 24680 0 20757 8994 1708 496299 693 0 0 7197 13255 0 18213 1559824 16.59 .13 3.29 .12 .28 0 19.61 1.17 0 0
EX-27.3 7 FINANCIAL DATA SCHEDULE - ACORN USA
6 The following information is extracted from and qualified by reference to registrant's report on form N-SAR for the period ended December 31, 1996 and the audited financial statements included in registrant's annual report to shareholders. 3 ACORN USA 1000 YEAR DEC-31-1996 DEC-31-1996 49628 53796 709 128 0 54633 1392 0 156 1548 0 48898 4556 0 0 0 19 0 4168 53085 35 48 0 184 (101) 120 4168 4187 0 0 0 0 4647 91 0 53085 0 0 0 0 101 0 190 31042 10.00 (.02) 1.67 0 0 0 11.65 1.85 0 0
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