<PAGE>
As filed with the Securities and Exchange Commission on April 21, 1997
Securities Act Registration No. 33-83548
Investment Company Act File No. 811-8748
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 3
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
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WANGER ADVISORS TRUST
(Registrant)
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
Telephone number: 312/634-9200
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Ralph Wanger Janet D. Olsen
Wanger Advisors Trust Bell, Boyd & Lloyd
227 West Monroe Street, Suite 3000 Three First National Plaza
Chicago, Illinois 60606 70 West Madison Street, Suite 3300
Chicago, Illinois 60602-4207
(Agents for service)
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Amending Parts A, B and C, and filing exhibits
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It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to rule 485(b)
[X] on April 30, 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)
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Registrant has elected to register pursuant to Rule 24f-2 an indefinite number
of shares of beneficial interest of its series designated Wanger U.S. Small Cap
and Wanger International Small Cap. On February 26, 1997, Registrant filed its
Rule 24f-2 Notice for the fiscal year ended December 31, 1996.
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<PAGE>
WANGER ADVISORS TRUST
Cross reference sheet pursuant to rule 495(a) of Regulation C
Item No. Location or caption/*/
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Part A (Prospectus)
Wanger U.S. Small Cap
Wanger International Small Cap
------------------------------
1. Cover Page Cover Page
2. Synopsis Expenses and Performance - Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant The Funds at a Glance; Expenses and
Performance; The Wanger Investment
Objective and Policies; Securities,
Investment Practices, and Risks;
Organization and Management
5. Management of the Fund Expenses and Performance;
Organization and Management
5A. Management's Discussion of Fund Not applicable
Performance
6. Capital Stock and Other Securities Investing in the Funds; Dividends and
Taxes
7. Purchase of Securities Being Offered Investing in the Funds
8. Redemption or Repurchase Investing in the Funds
9. Pending Legal Proceedings Not applicable
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*References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE>
Item No. Location or caption*
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Part B (Statement of Additional Information)
Wanger U.S. Small Cap
Wanger International Small Cap
-----------------------------------------
<TABLE>
<C> <S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Information About the Funds
13. Investment Objectives and Policies Investment Objectives and Policies;
Investment Techniques and Risks
14. Management of the Registrant Trustees and Officers
15. Control Persons and Principal The Trust; Trustees and Officers
Holders of Securities
16. Investment Advisory and Other Services Investment Adviser; Custodian; Independent
Auditors
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities The Trust
19. Purchase, Redemption, and Pricing of Purchasing and Redeeming Shares
Securities Being Offered
20. Tax Status Additional Tax Information
21. Underwriters Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Information About the Funds
</TABLE>
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*References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE>
Item No. Location or caption*
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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
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* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE>
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[Graphic of a Squirrel] Wanger Advisors Trust
Wanger U.S. Small Cap
Wanger International Small Cap
Prospectus
April 30, 1997
Wanger 97
<PAGE>
CONTENTS
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<TABLE>
<S> <C>
The Funds at a Glance.................................................1
Expenses and Performance..............................................2
Investing in the Funds................................................7
The Wanger Investment Objective and Policies.........................10
Securities, Investment Practices, and Risks..........................12
Organization and Management..........................................17
Dividends and Taxes..................................................21
</TABLE>
Wanger Asset Management, L.P.
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-800-4-WANGER
(1-800-492-6437)
<PAGE>
WANGER ADVISORS TRUST
WANGER U.S. SMALL CAP
WANGER INTERNATIONAL SMALL CAP
Wanger U.S. Small Cap and Wanger International Small Cap (each, a "Fund";
together, the "Funds"), series of Wanger Advisors Trust (the "Trust"), invest
for long-term capital growth. Each Fund invests primarily in stocks of small and
medium-size companies. Wanger U.S. Small Cap invests primarily in U.S.
companies, and Wanger International Small Cap invests primarily in non-U.S.
companies. Both Funds are managed by Wanger Asset Management, L.P. ("WAM").
Shares of Wanger U.S. Small Cap and Wanger International Small Cap are offered
to life insurance companies ("Life Companies") for allocation to certain
separate accounts established for the purpose of funding qualified and non-
qualified variable annuity or variable life insurance contracts ("Variable
Contracts"), and may also be offered directly to certain pension plans and
retirement arrangements and accounts permitting accumulation of funds on a tax-
deferred basis ("Retirement Plans").
______________________________
Please read this prospectus before investing, and keep it on file for future
reference. It contains important information about how the Funds invest and the
availability of Fund shares.
A Statement of Additional Information ("SAI") dated the date of this prospectus
has been filed with the Securities and Exchange Commission, and is incorporated
herein by reference. The SAI is available free upon request by calling WAM at:
1-800-4-WANGER.
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.
Prospectus
April 30, 1997
<PAGE>
The Funds at a Glance
Goal
Wanger U.S. Small Cap ("U.S. Small Cap") and Wanger International Small Cap
("International Small Cap") invest for long-term growth of capital.
Strategy
U.S. Small Cap and International Small Cap invest primarily in stocks of small
and medium-size companies. The Funds look for attractively-priced companies that
Wanger Asset Management, L.P., investment adviser to the Funds, thinks will
benefit from favorable long-term social, economic, or political trends. The
areas of emphasis change from time to time. U.S. Small Cap invests primarily in
U.S. companies. International Small Cap invests primarily in non-U.S. companies.
Management
Wanger Asset Management, L.P. ("WAM") chooses investments for the Funds. 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. Team members share responsibility for providing ideas,
information, knowledge and expertise in managing the Funds. Each team member has
one or more areas of expertise that is applied to the management of the Fund.
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
decisions.
Robert A. Mohn is the lead portfolio manager of U.S. Small Cap and Marcel
Houtzager is the lead portfolio manager of International Small Cap.
Who May Want To Invest
U.S. Small Cap and International Small Cap 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. Shares of the Fund are sold only to Life
Companies and certain Retirement Plans. See "Investing in the Fund -- Who May
Invest."
The value of each Fund's investments and the return it generates varies from day
to day. Performance depends on WAM's skill in identifying the trends that are
the basis for the Fund's stock selections, and in picking individual stocks, as
well as general market and economic conditions.
<PAGE>
The stocks of small companies often involve more risk than the stocks of larger
companies. Over time, these 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 do
not pursue income, and are not by themselves a balanced investment plan.
Expenses and Performance
Expenses
Transaction expenses are charges paid when shares of the Funds are purchased or
sold.
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Maximum sales charge on purchases
and reinvested dividends................................................None
Deferred sales charge on redemption.....................................None
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Annual Fund operating expenses. Each Fund pays its own operating expenses
including the management fee to WAM. Expenses are factored into the Fund's price
or dividends, are subtracted from the share price daily, and are not charged
directly to shareholders. All Fund operating expenses are calculated as a
percentage of average net assets.
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Wanger U.S. Small Cap
Management Fee........................................................... 0.99%
12b-1 Fee................................................................ None
Other Expenses........................................................... 0.22%
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Total Fund Operating Expenses............................................ 1.21%
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Wanger International Small Cap
Management Fee........................................................... 1.30%
12b-1 Fee................................................................ None
Other Expenses........................................................... 0.49%
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Total Fund Operating Expenses............................................ 1.79%
The management fees shown are based on the following schedule: for U.S. Small
Cap, 1.00% of the net asset value of the Fund up to $100 million, 0.95% of the
net asset value of the Fund in excess of $100 million and up to $250 million,
and 0.90% of the net asset value in excess of $250 million; for International
Small Cap, 1.30% of the net asset value of the Fund up to $100
<PAGE>
million, 1.20% of the net asset value of the Fund in excess of $100 million and
up to $250 million, and 1.10% of the net asset value in excess of $250 million.
The "Other Expenses" are at the rates incurred during the last fiscal year. As
required by SEC rules, "Other Expenses" reflects gross custody fees. Net of
custodian fees paid indirectly, "Other Expenses" would have been .20% for U.S.
Small Cap and .45% for International Small Cap. Total Fund Operating Expenses
would have been 1.19% and 1.75%, respectively. Starting in 1996, WAM has
voluntarily agreed to reimburse each Fund in the event that the management fee
and certain operating expenses of that Fund in any fiscal year exceed 1.50% of
average daily net assets for U.S. Small Cap and 1.90% of average daily net
assets for International Small Cap. See "Investment Adviser" in the SAI.
UNDERSTANDING EXPENSES
Operating a mutual fund involves a variety of expenses for portfolio management,
accounting, tax reporting, and other services. These costs are paid from the
fund's assets; any quoted share price or return is after expenses.
Example: Let's say, hypothetically, that each Fund's annual return is 5% and
that its operating expenses are exactly as shown above. For every $1,000 you
invested, here's how much would have been paid in total expenses if shares of
each Fund were redeemed after the number of years indicated:
<TABLE>
<CAPTION>
Wanger U.S. Small Cap
<S> <C>
After 1 year..............................................................$ 12
After 3 years.............................................................$ 38
After 5 years.............................................................$ 67
After 10 years............................................................$148
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Wanger International Small Cap
After 1 year..............................................................$ 18
After 3 years.............................................................$ 56
After 5 years.............................................................$ 97
After 10 years............................................................$213
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</TABLE>
The table and examples illustrate the effect of direct and indirect expenses,
but are not meant to suggest actual or expected costs or returns, all of which
may vary.
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by Ernst & Young LLP, independent
auditors. Their unqualified report, and the Funds' financial statements, are
included in the Trust's Annual Report. The financial statements of each fund and
the auditors' report are incorporated by reference into the SAI.
<TABLE>
<CAPTION>
Year ended May 3, 1995 through
December 31, 1996 December 31, 1995
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<S> <C> <C>
Wanger U.S. Small Cap
Net asset value, beginning of period $ 11.60 $ 10.00
Income from investment operations
Net investment loss (c) (.06) (.05)
Net realized and unrealized gain on investments 5.46 1.65
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Total from investment operations 5.40 1.60
Less distributions
Dividends from net investment income ---- ----
Distributions from net realized gain (.03) ----
---------------------------------------------------------------------------------------------------
Total distributions (.03) ----
Net asset value, end of period $ 16.97 $ 11.60
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Total return 46.59% 16.00%
Ratios/supplemental data:
Ratio of expenses to average net assets (a) (b) 1.21% 2.08%*
Ratio of net investment loss to average net assets (b) (.41%) (1.44%)*
Portfolio turnover rate 46.00% 59.00%*
Net assets at end of period (000s omitted) $128,958 $ 21,904
The average commissions paid per share on stock transactions
for the year ended December 31, 1996 was $.0581.
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</TABLE>
*Annualized
(a) In accordance with a requirement by the Securities and Exchange Commission,
this ratio reflects gross custodian fees. This ratio net of custodian fees
paid indirectly would have been 1.19% for the year ended December 31, 1996
and 2.00% for the period ended December 31, 1995.
<PAGE>
(b) The Fund was reimbursed by the Advisor for certain expenses from May 3, 1995
through December 31, 1995. Without the reimbursement, the ratio of expenses
to average net assets and the ratio of net investment loss to average net
assets for the period ended December 31, 1995 would have been 2.35% and
(1.71%), respectively.
(c) Net investment loss per share for the year ended December 31, 1996 was based
upon the average shares outstanding during the year.
<TABLE>
<CAPTION>
Year ended May 3, 1995 through
December 31, 1996 December 31, 1995
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<S> <C> <C>
Wanger International Small Cap
Net asset value, beginning of period $ 13.45 $ 10.00
Income from investment operations
Net investment loss (c) (.09) (.03)
Net realized and unrealized gain on investments 4.38 3.48
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Total from investment operations 4.29 3.45
Less distributions ---- ----
Dividends from net investment income ---- ----
Distributions from net realized gain (.03) ----
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Total distributions (.03) ----
Net asset value, end of period $ 17.71 $ 13.45
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Total return 32.01% 34.50%
Ratios/supplemental data:
Ratio of expenses to average net assets (a) (b) 1.79% 2.32%*
Ratio of net investment loss to average net assets (b) (.56%) (0.81%)*
Portfolio turnover rate 50.00% 14.00%*
Net assets at end of period (000s omitted) $84,855 $ 11,369
The average commissions paid per share on stock transactions
for the year ended December 31, 1996 was $.0130.
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</TABLE>
*Annualized
(a) In accordance with a requirement by the Securities and Exchange Commission,
this ratio reflects gross custodian fees. This ratio net of custodian fees
paid indirectly would have been 1.75% for the year ended December 31, 1996
and 2.00% for the period ended December 31, 1995.
<PAGE>
(b) The Fund was reimbursed by the Advisor for certain expenses from May 3, 1995
through December 31, 1995. Without the reimbursement, the ratio of expenses
to average net assets and the ratio of net investment loss to average net
assets for the period ended December 31, 1995 would have been 4.20% and
(2.69%), respectively.
(c) Net investment loss per share for the year ended December 31, 1996 was based
upon the average shares outstanding during the year.
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), or give their ratings or rankings determined by an
unrelated organization.
Information about the performance of the Funds is contained in the Trust's
annual report which may be obtained free of charge by calling WAM at: 1-800-4-
WANGER.
Total returns quoted for the Funds include the effect of deducting each Fund's
expenses, but will not include charges and expenses attributable to a particular
Variable Contract or Retirement Plan. Because shares of the Funds may only be
purchased through a Variable Contract or an eligible Retirement Plan, an
individual owning a Variable Contract or participating in a Retirement Plan
should carefully review the Variable Contract disclosure documents or Retirement
Plan information for information on relevant charges and expenses. Excluding
these charges from quotations of each Fund's performance has the effect of
increasing the performance quoted. These charges should be considered when
comparing a Fund's performance to other investment vehicles.
<PAGE>
Investing in the Funds
Doing Business With The Trust
The Trust provides Life Companies and Retirement Plans with information Monday
through Friday, except holidays, from 8:00 a.m. to 4:30 p.m. Central time. For
information, prices, literature, or to obtain information regarding the
availability of Fund shares or how Fund shares are redeemed, call WAM at
1-800-4-WANGER.
Who May Invest
Shares of the Funds are issued and redeemed in connection with investments in
and payments under certain qualified and non-qualified Variable Contracts issued
through separate accounts of the Life Companies. Shares of the Funds may also be
offered directly to certain of the following types of qualified plans and
retirement arrangements and accounts, collectively called "Retirement Plans":
. a plan described in section 401(a) of the Internal Revenue Code that includes
a trust exempt from tax under section 501(a);
. an annuity plan described in section 403(a);
. an annuity contract described in section 403(b), including a 403(b)(7)
custodial account;
. a governmental plan under section 414(d) or an eligible deferred compensation
plan under section 457(b); and
. a plan described in section 501(c)(18).
The trust or plan must be established before shares of the Funds can be
purchased by the plan. Neither the Funds nor WAM offers prototypes of these
plans. The Funds have imposed certain additional restrictions on sales to
Retirement Plans to reduce their expenses. To be eligible to invest in the
Funds, a Retirement Plan must be domiciled in a state in which Fund shares may
be sold without payment of a fee to the state. In most states, this policy will
require that a Retirement Plan have at least $5 million in assets and that
investment decisions are made by a Plan fiduciary rather than Plan participants
in order for the Plan to be eligible to invest. The Funds do not intend to offer
shares in states where the sale of Fund shares requires the payment of a fee. A
Retirement Plan may call WAM at 1-800-4-WANGER to determine if it is eligible to
invest.
How to Invest and Redeem
Shares of U.S. Small Cap and International Small Cap may not be purchased or
redeemed directly by individual Variable Contract owners or individual
Retirement Plan participants. Variable Contract owners or Retirement Plan
participants should consult the disclosure documents for their Variable
Contract, or the plan documents (including the summary plan description) for
their Retirement Plan, regarding the provisions of the Variable Contract or of
the Retirement Plan which govern the availability of the Fund as an investment
vehicle for allocations under their Variable Contract or Retirement Plan.
<PAGE>
No sales commissions of any kind are imposed upon purchases of Fund shares by
Life Companies or Retirement Plans. (However, each Variable Contract imposes its
own charges and fees on owners of the Variable Contract, and Retirement Plans
may impose such charges on participants in the Retirement Plan.) The price paid
for shares is the net asset value ("NAV") next calculated after a Fund or its
agent receives and accepts an order to purchase Fund shares. Purchase orders are
considered received when information identifying the purchaser and the money to
pay for the shares are received. Redemptions will be effected through the Life
Companies and Retirement Plan trustees to meet obligations under the Variable
Contracts and the Retirement Plans. In the case of a Life Company purchaser,
particular purchase and redemption procedures typically will be set forth in an
agreement between the Trust and the Life Company. The Trust may enter into
similar agreements with Retirement Plans.
Purchases. To the extent not otherwise provided in any agreement between the
Trust and a Life Company or Retirement Plan, shares of a Fund may be purchased
by check or by wire transfer of funds. To be effective, a purchase order must
consist of the money to purchase the shares and (i) information identifying the
purchaser, in the case of a Life Company or Retirement Plan with which the Funds
have entered into an agreement, or a subsequent purchase by a Life Company or
Retirement Plan that is already a Fund shareholder, or (ii) a completed purchase
application, in the case of the initial investment by a Retirement Plan with
which the Funds do not have an agreement.
Redemptions. Subject to the terms of any agreement between the Funds and any
Life Company or Retirement Plan, shares may be redeemed by written request or by
telephone (for redemptions of $50,000 or less), with proceeds paid by check or
by wire transfer.
Redeeming Shares in Writing. A written redemption request must:
. identify the owner of the account;
. specify the number of shares or dollar amount to be redeemed;
. be signed on behalf of the owner by an individual or individuals
authorized to do so, and include evidence of their authority;
. if the shares to be redeemed have a value of more than $50,000, include
a signature guarantee by an "eligible guarantor institution" as defined
in the rules under the Securities Exchange Act of 1934 (including a
bank, broker-dealer, credit union (if authorized under state law),
national securities exchange, registered securities association,
clearing agency or savings association, but not a notary public); and
. be accompanied by any stock certificates representing the shares to be
redeemed.
A check for the redemption proceeds will be mailed to the address of record
unless payment by wire transfer is requested.
Redeeming Shares by Telephone. Unless a Retirement Plan shareholder chose on
its purchase application not to have the ability to do so, redemptions of shares
having a value of $50,000 or less may be requested by calling the Fund's
transfer agent at 1-800-962-1585. The Fund will not be responsible for
unauthorized transactions if it follows reasonable procedures to confirm that
instructions received by telephone are genuine, such as requesting
identification information that appears on a Retirement Plan's purchase
application and requiring permission to
<PAGE>
record the telephone call. If you are unable to reach the Funds or their
transfer agent by telephone, your redemption request would have to be placed by
mail.
Exchanging Shares by Telephone. To the extent not otherwise provided in an
agreement between the Trust and a Retirement Plan shareholder, a Retirement Plan
may exchange shares of one Fund for shares of the other Fund by telephone by
calling 1-800-962-1585. Shares may be exchanged only between identically-
registered accounts, and the shares in the new Fund must be available for sale
without payment of a fee under any applicable state securities law. Shares for
which share certificates have been issued may not be exchanged by telephone. (If
you want to return your certificates, call the Funds' transfer agent at 1-800-
962-1585 for instructions.) Because excessive trading can hurt Fund performance
and shareholders, the Funds reserve the right to temporarily or permanently
terminate the exchange privilege of any shareholder who makes excessive use of
the exchange plan. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund. The Funds may limit the
number of exchanges per year. The Funds will not be responsible for unauthorized
transactions if they follow reasonable procedures to confirm that instructions
received by telephone are genuine, such as requesting information that appears
on a Retirement Plan's purchase application and requiring permission to record
the telephone call.
Normally, redemption proceeds will be paid within seven days after a Fund or
its agent receives a request for redemption. Redemptions may be suspended or
payment date postponed on days when the New York Stock Exchange ("NYSE") is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
Share Price
The Funds are open for business each day the NYSE is open. The offering price
(price to buy one share) and redemption price (price to sell one share) are the
Fund's net asset value ("NAV") calculated at the next Closing Time after receipt
of an 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.
A purchase or redemption of Fund shares will be priced at the next NAV
calculated after the purchase or redemption request is received and accepted by
the Funds or their agent. An order received before Closing Time will get that
day's price; an order received after Closing Time will get the next day's price.
<PAGE>
Statements and Reports
Information sent to Life Companies and Retirement Plans semi-annually includes:
. Schedule of Fund investments.
. Reports to shareholders.
Call WAM at: 1-800-4-WANGER for copies of Fund reports.
The Wanger Investment Objective and Policies
U.S. Small Cap and International Small Cap seek long-term growth of capital.
Although income is considered in the selection of securities for U.S. Small Cap,
neither Fund is designed for investors seeking primarily income rather than
capital appreciation.
The Fund 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. U.S.
Small Cap and International Small Cap thus generally concentrate purchases on
that segment of the market where the competition is less intense -- companies
with a total common stock market capitalization of less than $1 billion. WAM
wants to be able to understand any company in which the Funds invest, 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 the Funds' investments, when possible WAM talks to top
management directly. That is easier to do with smaller firms.
Under normal market conditions, each Fund invests at least 65% of its total
assets, at market value at the time of investment, in companies with total stock
market capitalizations of $1 billion or less. The dollar value of the
capitalization range may change as overall market capitalization ranges change.
The Funds are not required to sell a security that grows to a size greater than
$1 billion.
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.
<PAGE>
The sources of growth may be a growing marketplace for the company's product,
good design, efficient manufacturing, sound marketing, or good profit margins.
Financial strength means low debt, adequate working capital, and conservative
accounting principles. Strong capitalization gives management the stability and
flexibility to reach strategic objectives. 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 a 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 U.S. Small Cap
and International Small Cap 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 its rate of
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 frequently can carve out a specialized
niche for itself. The niche can be geographic, like that of a regional bank or
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, International Small Cap will generally invest
at least 65% of its total assets, taken at market value, in foreign securities.
The foreign securities in which the Funds invest may be traded in mature markets
and in emerging markets. Each Fund's investment restrictions do not require it
to invest in a minimum or maximum number of countries; however, state insurance
laws may impose diversification or other requirements on the Funds' foreign
investing. 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, International Small Cap may hold cash or invest any
portion of its assets in securities of the U.S. government, its agencies and
instrumentalities, and equity and debt securities of U.S. companies, as a
temporary defensive strategy. The Funds use various techniques to increase or
decrease its 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
<PAGE>
contracts, or options on futures contracts, or entering into currency exchange
contracts or swap agreements.
The investment objective of either U.S. Small Cap and International Small Cap
may be changed by the Board of Trustees without shareholder approval. If there
were such a change, investors should consider whether that Fund would remain an
appropriate investment in light of 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 risks and restrictions
associated with these instrument types and investment practices. 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 instruments 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
full 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 operations. Although common stocks have a history
of long-term growth in value, their prices tend to fluctuate in the short term.
U.S. Small Cap and International Small Cap invest mostly in the securities of
smaller companies, that is, companies with a total common stock market
capitalization of less than $1 billion at the time of the initial investment.
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
with 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: Neither Fund may 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
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. International investing
- -----------------
/*/ These restrictions are "fundamental," which means that they cannot be
changed without shareholder approval.
<PAGE>
allows greater diversification and provides an ability 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.
Investors should understand and consider carefully the greater 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 certain risks and opportunities not
typically associated with investing in U.S. securities. These include:
fluctuations in exchange rates of foreign currencies; 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 sub-custodial arrangements. In
addition, the costs of investing in foreign securities are higher than the cost
of investing in U.S. securities.
Investing in countries outside the U.S. also involves political risk. A
foreign government might restrict investments by foreigners, expropriate assets,
seize or nationalize foreign bank deposits or other assets, establish exchange
controls, or enact other policies that could affect investment in these nations.
Economies in individual markets may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource self-
sufficiency and balance of payments positions. Many emerging market countries
have experienced extremely high rates of inflation for many years. That has had
and may continue to have side 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 are in many respects 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 the 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 these securities are established
at the time a Fund enters into the commitment, the securities may be delivered
and paid for a month or more after the date of purchase, when their value may
have changed. A Fund 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.
<PAGE>
Restrictions: Under normal market conditions, International Small Cap invests
at least 65% of its total assets in foreign securities. U.S. Small Cap will
generally invest at least 65% of its total assets in domestic securities.
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 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 not 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
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.
<PAGE>
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 such 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. 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 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 and are called cash equivalents.
U.S. Small Cap 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, International Small Cap may hold cash or invest any
portion of its assets in securities of the U.S. government, its agencies or
instrumentalities, 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 its total assets) or for
temporary defensive purposes, each Fund may hold cash in domestic and foreign
currencies and may invest in domestic and foreign money market securities.
Restrictions: There are no restrictions on the ratings of debt securities
owned 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 neither Fund may
invest more than 20% of its assets in securities rated below investment grade or
considered by WAM to be of comparable credit quality. Neither Fund expects to
invest more than 5% of its net assets in such securities during the current
fiscal year.
<PAGE>
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 in
compliance with certain legal restrictions. Difficulty in selling securities
may result in delays or a loss, or may be costly to the Fund.
Restrictions: Neither Fund may purchase a security if, as a result, more than
15% of its net assets would be invested in illiquid or restricted securities./*/
Lending and Repurchase Agreements
The Funds generally may not make loans, but will invest in repurchase
agreements. 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 bankruptcy of the seller the Fund could
experience both losses and delays in liquidating its collateral.
Restrictions: Neither Fund may make loans, but this restriction shall not
prevent a 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)./*/
Diversification
The Fund's investment portfolio is well diversified to reduce risk.
Restrictions: Neither Fund may, with respect to 75% of its total assets,
invest more than 5% of its total assets in the securities of any one issuer.
Neither Fund may invest more than 25% of its total assets in any one industry.
This limitation does 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. The Funds do
not intend to invest in other investment companies unless, in the judgment of
WAM, the potential benefits of such investment justify the payment of any
applicable premium or sales charge. 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.
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 stock
of the acquired investment company at the time of investment.
State Insurance Restrictions
The Funds are sold to the Life Companies in connection with Variable Contracts,
and will seek to be available under Variable Contracts sold in a number of
jurisdictions. Certain states have regulations or guidelines concerning
concentration of investments and other investment techniques. If applied to the
Funds, the Funds may be limited in their ability to engage in certain techniques
and to manage their portfolios with the flexibility provided herein. In order
to permit a Fund to be available under Variable Contracts sold in certain
states, each Fund may make commitments that are more restrictive than the
investment policies and limitations described above and in the statement of
additional information. If a Fund determines that such a commitment is no
longer in the Fund's best interests, the commitment may be revoked by
terminating the availability of the Fund to Variable Contract owners residing in
such states.
Organization and Management
Organization
U.S. Small Cap and International Small Cap are series of Wanger Advisors Trust,
an open-end, management investment company. The Trust is a Massachusetts
business trust organized under an agreement and declaration of trust dated
August 30, 1994. 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, review contractual
arrangements with companies that provide services to the Funds and the Trust,
and review performance.
- -----------------
/*/ These restrictions are "fundamental," which means that they cannot be
changed without shareholder approval.
/**/ The Funds have no present intention of lending their portfolio securities.
<PAGE>
The Trust may hold special meetings of shareholders. These meetings may be
called to elect or remove Trustees, change fundamental policies, approve a
management contract, or for other purposes. The Funds will mail proxy materials
in advance, including a voting card and information about the proposals to be
voted on. (The Trust is not required to hold annual meetings of shareholders
and does not intend to do so.) For further information on the rights of
shareholders of the Funds, see "Availability of the Funds and Shareholder
Rights" below.
Management
The Funds are managed by Wanger Asset Management, L.P., 227 West Monroe Street,
Suite 3000, Chicago, Illinois 60606, which 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., controlled by Ralph Wanger. WAM manages approximately $5.6
billion in assets. WAM employs a team approach to management of the 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 of WAM and its chief investment strategist. He
is also the chairman of the board of trustees of the Trust. Mr. Wanger is also
lead portfolio manager of Acorn Fund and chief investment strategist of Acorn
Investment Trust (Acorn Fund, Acorn International and Acorn USA). Mr. Wanger
has been president and a member of the board of Acorn Fund and its predecessor
since 1970. He is a principal of WAM and was a principal of Acorn Fund's prior
adviser until July 1992.
Marcel P. Houtzager is a vice president of the Trust, and is the lead manager
of International Small Cap. A specialist in foreign equities, Mr. Houtzager
joined WAM as an investment analyst in April 1992, becoming a principal in 1995.
Mr. Houtzager is also a vice president of Acorn Investment Trust.
Robert A. Mohn is a vice president of the Trust and is the lead portfolio
manager of U.S. Small Cap. Mr. Mohn is also a vice president of Acorn
Investment Trust, and the lead manager of Acorn USA. Mr. Mohn has been a key
member of WAM's domestic analytical team since August 1992, and a principal of
WAM since July 1995.
Charles P. McQuaid is a member of the management team of U.S. Small Cap. Mr.
McQuaid is a trustee and senior vice president of the Trust. He is also a
trustee and senior vice president of Acorn Investment Trust, and is a co-manager
of Acorn Fund. Mr. McQuaid has been a principal of WAM since July 1992 and
before that date was a principal of Acorn's prior investment adviser. He has
worked with Mr. Wanger for 19 years.
Terence M. Hogan, another member of the U.S. Small Cap team, is a vice
president of the Trust. He is also a vice president of Acorn Investment Trust,
and is a co-manager of Acorn Fund. He has been a principal of WAM since July
1992 and was an analyst with Acorn's prior investment adviser before that date.
Mr. Hogan has spent 11 years working with Mr. Wanger.
Leah J. Zell is a member of International Small Cap's management team and is a
vice president of the Trust. Ms. Zell is also a vice president of Acorn
Investment Trust, and is the lead manager of Acorn International. She has been a
principal of WAM since July 1992 and was an analyst with Acorn's prior
investment adviser before that date. Ms. Zell has been working with Mr. Wanger
for 13 years.
Merrillyn J. Kosier, vice president, Bruce H. Lauer, vice president and
treasurer, and Paula L. Rogers, vice president and secretary, are the other
executive officers of the Trust.
State Street Bank and Trust Company is each Fund's transfer agent, shareholder
servicing agent and custodian.
Distributor
Shares of the Funds are offered for sale through WAM Brokerage Services, L.L.C.
("WAM BD") without any sales commission or charges to the Funds or Life
Companies or Retirement Plans purchasing Fund shares. However, each Variable
Contract imposes its own charges and fees on owners of Variable Contracts and
Retirement Plans may impose such charges on participants in a Retirement Plan.
WAM BD is wholly-owned by WAM, the Funds' investment adviser, and the investment
adviser's general partner, Wanger Asset Management, Ltd. WAM BD's address is
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. All distribution
and promotional expenses relating to the Funds are paid by WAM, including the
payment or reimbursement of any expenses incurred by WAM BD.
Expenses
Like all mutual funds, U.S. Small Cap and International Small Cap pay expenses
related to their daily operations. Expenses paid out of each Fund's assets are
reflected in its share price or dividends.
Each Fund pays a management fee to WAM for managing its investments and
business affairs, as set forth under "Expenses and Performance." While the
management fee is a significant component of each Fund's annual operating costs,
the Funds have other expenses as well. Each Fund pays the fees of its
custodian, transfer agents, auditors and lawyers. It also pays 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 the Trust or WAM.
Additional expenses are incurred under the Variable Contracts and the
Retirement Plans. These expenses are not described in this prospectus; Variable
Contract owners and Retirement Plan participants should consult the Variable
Contract disclosure documents or Retirement Plan information regarding these
expenses.
From time to time, WAM may pay amounts from its past profits to Life Companies
or other organizations that provide administrative services for the Funds or
that provide to owners of Variable Contracts and/or participants in Retirement
Plans other services relating to the Funds. These services may include, among
other things: sub-accounting services; answering inquiries regarding the Funds;
transmitting, on behalf of the Funds, proxy statements, shareholder reports,
updated prospectuses and other communications regarding the Funds; and such
other related services as the Funds, owners of Variable Contracts, and/or
participants in Retirement Plans may request. The amount of any such payment
will be determined by the nature and extent of the services provided by the Life
Company or other organization. Payment of such amounts by WAM will not increase
the fees paid by the Funds or their shareholders.
Availability of the Funds and
Shareholder Rights
Shares of the Funds will be sold only to separate accounts of Life Companies,
and to certain Retirement Plans as described under "Investing in the Funds --
Who May Invest." The Trustees of the Trust may refuse to sell shares of the
Funds to any person, or suspend or terminate the offering of shares if such
action is required by law or by regulatory authorities having jurisdiction or
is, in the sole discretion of the Trustees acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, necessary in
the best interests of the shareholders of the Funds.
Each Fund offers its shares to (i) Variable Contracts (including variable
annuity and variable life insurance contracts) offered through Life Companies
which may or may not be affiliated with each other and (ii) Retirement Plans.
Due to differences in tax treatment and other considerations, the interests of
various Variable Contract owners and Retirement Plan participants may conflict.
The Board of Trustees of the Trust will monitor the Funds for any material
conflicts that may arise and will determine what action, if any, should be
taken. If a conflict occurs, the Board of Trustees may require one or more Life
Companies' separate accounts and/or Retirement Plans to withdraw its investments
in the Funds. As a result, a Fund may be forced to sell securities at
disadvantageous prices. In addition, the Board of Trustees may refuse to sell
shares of the Funds to any Variable Contract or Retirement Plan or may suspend
or terminate the offering of shares of the Funds if such action is required by
law or regulatory authority or is in the best interests of the shareholders of
the Funds.
Pursuant to current interpretations of the Investment Company Act of 1940, as
amended, the Life Companies will solicit voting instructions from Variable
Contract owners with respect to any matters that are presented to a vote of
shareholders. The exercise of voting rights on shares held by Retirement Plans
will be governed by the terms of such Retirement Plans. Some Retirement Plans
may pass-through voting to plan participants. Shares held by other Retirement
Plans may be voted by the trustees of the Retirement Plan or by a named
fiduciary or an investment manager. Retirement Plan participants should consult
their plan documents for information.
On any matter submitted to a vote of shareholders, all shares of the Trust
then issued and outstanding and entitled to vote shall be voted in the aggregate
and not by Fund, except for matters concerning only one Fund. Certain matters
approved by a vote of shareholders of one Fund of the Trust may not be binding
on a Fund whose shareholders have not approved such matters. The holder of each
share of the Trust shall be entitled to one vote for each full share and a
fractional vote for each fractional share of stock. Shares of one Fund may not
bear the same economic relationship to the Trust as shares of another Fund.
<PAGE>
Dividends and Taxes
Each Fund intends to continue to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code"). As
such, a Fund is not subject to federal income tax on that part of its investment
company taxable income (consisting generally of net investment income, net gains
from certain foreign currency transactions, and net realized short-term capital
gain, if any) and any net realized capital gain (the excess of net realized
long-term capital gain over net realized short-term capital loss) that it
distributes to its shareholders. It is the intention of each Fund to distribute
all such income and gains.
All dividends are distributed to the separate accounts and to the Retirement
Plans and will be automatically reinvested in Trust shares. Dividends and
distributions made by the Funds to the separate accounts are taxable, if at all,
to the Life Companies; they are not taxable to Variable Contract owners.
Dividends and distributions made by the Funds to the Retirement Plans are not
taxable to the Retirement Plans or to the participants thereunder.
For a discussion of the taxation of the Life Companies and separate accounts,
as well as the tax treatment of the Variable Contracts and the owners thereof,
see the disclosure documents for the Variable Contracts. For information
regarding the taxation of Retirement Plans as well as the participants
thereunder, see the plan administrator and plan documents for the Retirement
Plan. Prospective investors are urged to consult their tax advisers.
Each Fund intends to comply with the diversification requirements imposed by
Section 817(h) of the Code and the regulations thereunder. These requirements
are in addition to the diversification requirements imposed on each Fund by
Subchapter M of the Code and the 1940 Act. Section 817(h) places certain
limitations on the assets of a separate account that may be invested in
securities of a single issuer, and, because Section 817(h) and the regulations
thereunder treat a Fund's assets as assets of the related separate account,
these limitations also apply to the Fund's assets that may be invested in
securities of a single issuer. Generally, the regulations provide that, as of
the end of each calendar quarter, or within 30 days thereafter, no more than 55%
of a Fund's total assets may be represented by any one investment, no more than
70% by any two investments, no more than 80% by any three investments, and no
more than 90% by any four investments. For purposes of Section 817(h), all
securities of the same issuer, all interests in the same real property project,
and all interests in the same commodity are treated as a single investment.
Generally, compliance by the Funds with the requirements of Section 817(h) and
the regulations thereunder is not prevented by reason of the fact that shares in
a Fund may be held by the trustee of a qualified pension or other retirement
plan. Failure of a Fund to satisfy the Section 817(h) requirements could result
in adverse tax consequences to the Life Companies and Variable Contract owners.
The foregoing is only a summary of some of the important federal income tax
considerations generally affecting the Funds and their shareholders; see the SAI
for additional discussion.
<PAGE>
Wanger Advisors Trust
Trustees
Fred D. Hasselbring
Charles P. McQuaid
P. Michael Phelps
James A. Star
Ralph Wanger
Officers
Ralph Wanger, President
Marcel P. Houtzager, Vice President
Robert A. Mohn, Vice President
Charles P. McQuaid, Senior Vice President
Terence M. Hogan, Vice President
Leah J. Zell, Vice President
Merrillyn J. Kosier, Vice President
Bruce H. Lauer, Vice President and Treasurer
Paula L. Rogers, Vice President and Secretary
Kenneth A. Kalina, Assistant Treasurer
Transfer Agent,
Dividend Disbursing Agent
and Custodian
State Street Bank
and Trust Company
Attention:
Wanger Advisors Trust
P.O. Box 8502
Boston, Massachusetts
02266-8502
Investment Advisor
Wanger Asset
Management, L.P.
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-800-4-WANGER
(1-800-492-6437)
Legal Counsel
Bell, Boyd & Lloyd
Chicago, Illinois
Auditors
Ernst & Young LLP
Chicago, Illinois
<PAGE>
WANGER ADVISORS TRUST
STATEMENT OF
ADDITIONAL
INFORMATION
April 30, 1997
227 West Monroe Street
Chicago, Illinois 60606
Telephone: 1-800-4-WANGER
____________________________
WANGER U.S. SMALL CAP
WANGER INTERNATIONAL SMALL CAP
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TABLE OF CONTENTS
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INFORMATION ABOUT THE FUNDS....................................2
INVESTMENT OBJECTIVES AND POLICIES.............................2
INVESTMENT TECHNIQUES AND RISKS................................2
INVESTMENT RESTRICTIONS.......................................15
PERFORMANCE INFORMATION.......................................18
INVESTMENT ADVISER............................................19
DISTRIBUTOR...................................................21
THE TRUST.....................................................21
TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS...................22
PURCHASING AND REDEEMING SHARES...............................25
ADDITIONAL TAX INFORMATION....................................26
PORTFOLIO TRANSACTIONS........................................27
CUSTODIAN.....................................................28
INDEPENDENT AUDITORS..........................................29
APPENDIX.....................................................A-1
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This Statement of Additional Information ("SAI") is not a prospectus but
provides information that should be read in conjunction with the prospectus of
Wanger Advisors Trust dated April 30, 1997 and any supplement thereto, which may
be obtained from the Trust at no charge by writing or telephoning Wanger Asset
Management, L.P., the Trust's investment adviser, at the address or telephone
number shown above.
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INFORMATION ABOUT THE FUNDS
Wanger U.S. Small Cap ("U.S. Small Cap") and Wanger International Small Cap
("International Small Cap") (each, a "Fund"; together, the "Funds") are series
of Wanger Advisors Trust (the "Trust"). Both Funds are currently available only
for allocation to certain life insurance company ("Life Company") separate
accounts established for the purpose of funding certain qualified and non-
qualified variable annuity contracts ("Variable Contracts"), and may also be
offered directly to certain types of pension plans and retirement arrangements
and accounts permitting the accumulation of funds on a tax-deferred basis
("Retirement Plans"), as described in the prospectus.
The Trust's 1996 annual report, a copy of which accompanies this SAI, contains
audited 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 into this SAI by reference.
Additional copies of the annual report may be obtained without charge by writing
or telephoning Wanger Asset Management, L.P. at the 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
U.S. Small Cap and International Small Cap invest with the objective of long-
term growth of capital. Although income is considered by U.S. Small Cap in the
selection of securities, the Funds are not designed for investors seeking
primarily income rather than capital appreciation. Both Funds are managed by
Wanger Asset Management, L.P. ("WAM").
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, International Small Cap invests at least 65% of
its total assets, taken at market value, in foreign securities. U.S. Small Cap
does not have a current intention to invest more than 5% of its net assets in
foreign securities.
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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. A Fund may invest in both "sponsored" and
"unsponsored" ADRs. In a sponsored ADR, the issuer typically pays some or all of
the expenses of the depository and agrees to provide its regular shareholder
communications to ADR holders. An unsponsored ADR is created independently of
the issuer of the underlying security. The ADR holders generally pay the
expenses of the depository and do not have an undertaking from the issuer of the
underlying security to furnish shareholder communications. Neither Fund expects
to invest more than 5% of its total assets in unsponsored ADRs.
A Fund's investment performance is affected by the strength or weakness of the
U.S. dollar against the currencies of the foreign markets in which the Fund's
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 the
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 investments in securities of companies in developing as well as
developed countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial arrangements.
Although the Funds try to invest in companies and governments of countries
having stable political environments, there is the possibility of expropriation
or confiscatory taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of foreign
government restrictions, or other adverse political, social, or diplomatic
developments that could affect investment in these nations.
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Currency Exchange Transactions
The Funds may enter into currency exchange transactions. A currency exchange
transaction may be conducted either on a spot (i.e., cash) basis at the spot
rate for purchasing or selling currency prevailing in the foreign exchange
market or through a forward currency exchange contract ("forward contract"). A
forward contract is an agreement to purchase or sell a specified currency at a
specified future date (or within a specified time period) and price set at the
time of the contract. Forward contracts are usually entered into with banks,
foreign exchange dealers or broker-dealers, are not exchange traded, and are
usually for less than one year, but may be renewed.
Forward currency transactions may involve currencies of the different countries
in which the Funds may invest, and serve as hedges against possible variations
in the exchange rate between these currencies. The Funds' currency transactions
are limited to transaction hedging and portfolio hedging involving either
specific transactions or portfolio positions, except to the extent described
below under "Synthetic Foreign Money Market Positions." Transaction hedging is
the purchase or sale of a forward contract with respect to specific payables or
receivables of a Fund accruing in connection with the purchase or sale of
portfolio securities. Portfolio hedging is the use of a forward contract with
respect to a portfolio security position denominated or quoted in a particular
currency. The Funds may engage in portfolio hedging with respect to the currency
of a particular country in amounts approximating actual or anticipated positions
in securities denominated in that currency. When either 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, liquid assets of that Fund, such as cash, U.S. government
securities, or other liquid high grade debt obligations, having a value equal to
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 the Fund is obligated to deliver.
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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 the
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. Because currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
Synthetic Foreign Money Market Positions. The Funds may invest in money market
instruments denominated in foreign currencies. In addition to, or in lieu of,
such direct investment, the Funds may construct a synthetic foreign money market
position by (a) purchasing a money market instrument denominated in one
currency, generally U.S. dollars, and (b) concurrently entering into a forward
contract to deliver a corresponding amount of that currency in exchange for a
different currency on a future date and at a specified rate of exchange. For
example, a synthetic money market position in Japanese yen could be constructed
by purchasing a U.S. dollar money market instrument, and entering concurrently
into a forward contract to deliver a corresponding amount of U.S. dollars in
exchange for Japanese yen on a specified date and at a specified rate of
exchange. Because of the availability of a variety of highly liquid short-term
U.S. dollar money market instruments, a synthetic money market position
utilizing such U.S. dollar instruments may offer greater liquidity than direct
investment in foreign money market instruments. The results of a direct
investment in a foreign currency and a concurrent construction of a synthetic
position in such foreign currency, in terms of both income yield and gain or
loss from changes in currency exchange rates, in general should be similar, but
would not be identical because the components of the alternative investments
would not be identical. Except to the extent a synthetic foreign money market
position consists of a money market instrument denominated in a foreign
currency, the synthetic foreign money market position shall not be deemed a
"foreign security" for purposes of the policies that, under normal conditions,
(a) U.S. Small Cap will generally invest at least 65% of its total assets in
domestic securities, and (b) International Small Cap will generally invest at
least 65% of its total assets in foreign securities.
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Options and Futures
The Funds may purchase and write both call options and put options on securities
and on indexes, and enter into interest rate and index futures contracts, and
may purchase or sell options on such futures contracts ("futures options") in
order to provide additional revenue, or to hedge against changes in security
prices or interest rates. The Funds may also use other types of options, futures
contracts and futures options currently traded or subsequently developed and
traded, provided the Board of Trustees determines that their use is consistent
with the Funds' investment objective.
Options. An option on a security (or index) is a contract that gives the
purchaser (holder) of the option, in return for a premium, the right to buy from
(call) or sell to (put) the seller (writer) of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option (normally not exceeding nine
months). The writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver the
underlying security or foreign currency upon payment of the exercise price or to
pay the exercise price upon delivery of the underlying security or foreign
currency. Upon exercise, the writer of an option on an index is obligated to pay
the difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial or securities
market, a specific group of financial instruments or securities, or certain
economic indicators.)
The Funds will write call options and put options only if they are "covered."
For example, in the case of a call option on a security, the option is "covered"
if a Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or cash equivalents in such
amount are held in a segregated account by its custodian) 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
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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
(derivatives not traded on exchange). Unlike exchange-traded derivatives, which
are standardized with respect to the underlying instrument, expiration date,
contract size, and strike price, the terms of OTC derivatives generally are
established through negotiation with the other party to the contract. While this
type of arrangement allows the Funds greater flexibility to tailor an instrument
to their 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 among
the securities markets, the currency markets, and the options markets that could
result in an imperfect correlation among these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when, and
how to use options involves the exercise of skill and judgment, and even a well-
conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. If a Fund were unable to close out an option that
it had purchased on a security, it would have to exercise the option in order to
realize any profit or the option would expire and become worthless. If a Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security until the option
expired. As the writer of a covered call option on a security, a Fund forgoes,
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 was suspended in an option purchased or written by one of the Funds,
that Fund would not be able to close out the option. If restrictions on exercise
were imposed, the Fund might be unable to exercise an option it had purchased.
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Futures Contracts and Options on Futures Contracts. The Funds may use interest
rate futures contracts and index futures contracts. An interest rate or index
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument or the cash
value of an index/1/ at a specified price and time. A public market exists in
futures contracts covering a number of indexes (including, but not limited to:
the Standard & Poor's 500 Index; the Value Line Composite Index; the Russell
2000 Index; and the New York Stock Exchange Composite Index) as well as
financial instruments (including, but not limited to: U.S. Treasury bonds; U.S.
Treasury notes; Eurodollar certificates of deposit; and foreign currencies).
Other index and financial instrument futures contracts are available and it is
expected that additional futures contracts will be developed and traded.
The Funds may purchase and write call and put futures options. Futures options
possess many of the same characteristics as options on securities and indexes
(discussed above). A futures option gives the holder the right, in return for
the premium paid, to assume a long position (call) or short position (put) in a
futures contract at a specified exercise price at any time during the period of
the option. Upon exercise of a call option, the holder acquires a long position
in the futures contract and the writer is assigned the opposite short position.
In the case of a put option, the opposite is true.
To the extent required by regulatory authorities having jurisdiction over the
Funds, the Funds will limit their use of futures contracts and futures options
to hedging transactions. For example, 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.
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/1/ A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. Although the value of a securities index is a function of the value of
certain specified securities, no physical delivery of those securities is made.
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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 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
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contracts, the interest rate levels, maturities, and creditworthiness of the
issues underlying the futures contract may differ from the financial instruments
held in a Fund's portfolio. A decision as to whether, when, and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected stock
price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Stock index
futures contracts are not normally subject to such daily price change
limitations.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures or futures option position. The Fund would be
exposed to possible loss on the position during the interval of inability to
close, and would continue to be required to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
Limitations on Options and Futures. A Fund will not enter into a futures
contract or purchase an option thereon if, immediately thereafter, the initial
margin deposits for futures contracts held by that Fund plus premiums paid by it
for open futures option positions, less the 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
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/2/ A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
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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.
Each Fund's options and futures transactions are also subject to certain non-
fundamental investment restrictions set forth under "Investment Restrictions" in
this SAI. Moreover, neither 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.
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 the 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 the Fund's investment exposure from one type of
investment to another. For example, if the Fund agrees to exchange payments in
dollars at a fixed rate for payments in a foreign currency the amount of which
is determined by movements of a foreign securities index, the swap agreement
would tend to increase the Fund's exposure to foreign stock market movements and
foreign currencies. Depending on how it is used, a swap agreement may increase
or decrease the overall volatility of the 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 the Fund.
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If a swap agreement calls for payments by the Fund, the Fund must be prepared to
make such payments when due. If the counterparty's creditworthiness declines,
the value of a swap agreement would be likely to decline, potentially resulting
in a loss. 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.
The Fund will segregate liquid assets (such as cash, U.S. government securities,
or other liquid high grade debt obligations) of the Fund to cover its current
obligations under swap agreements. If the 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 the Fund's accumulated obligations under the swap agreement
over the accumulated amount the Fund is entitled to receive under the agreement.
If the 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 the Fund's accumulated
obligations under the agreement.
Illiquid Securities
A Fund may not invest in illiquid securities, including restricted securities
and OTC derivatives, if as a result they would comprise more than 15% of the
value of the net assets of the Fund.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the Securities Act of 1933 (the "1933 Act"). Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at fair
value as determined in good faith by the Board of Trustees. If through the
appreciation of illiquid securities or the depreciation of liquid securities,
either U.S. Small Cap or International Small Cap should be in a position where
more than 15% of the value of its net assets is invested in illiquid assets,
including restricted securities and OTC derivatives, that Fund will take
appropriate steps to protect liquidity.
Notwithstanding the foregoing, 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 15%
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 will be monitored and if, as a result of
changed
12
<PAGE>
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 15% of
its assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of a Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.
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 neither Fund will invest more than 20% of its assets in securities
rated below investment grade or considered by WAM to be of comparable credit
quality. Neither Fund expects to invest more than 5% of its net assets in such
securities during the current fiscal year.
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
13
<PAGE>
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.
When-Issued and Delayed Delivery Securities
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.
At the time a Fund enters into a binding obligation to purchase securities on a
when-issued or delayed delivery basis, liquid 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.
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. or foreign issuers, and most or
all of the Fund's investments may be made in the United States and denominated
in U.S. dollars. It is impossible to predict whether, when, or for how long a
Fund might employ defensive strategies.
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<PAGE>
In addition, pending investment of proceeds from new sales of Fund shares or to
meet ordinary daily cash needs, a Fund temporarily may hold cash (U.S. dollars,
foreign currencies, or multinational currency units) and may invest any portion
of its assets in money market instruments.
Portfolio Turnover
Although the Funds do not purchase securities with a view to rapid turnover,
there are no limitations on the length of time that portfolio securities must be
held. Portfolio turnover can occur for a number of reasons such as general
conditions in the securities markets, more favorable investment opportunities in
other securities, or other factors relating to the desirability of holding or
changing a portfolio investment. The Funds' anticipated portfolio turnover rates
are less than 100% for each Fund. A high rate of portfolio turnover, if it
should occur, would result in increased transaction expenses which must be borne
by each Fund.
INVESTMENT RESTRICTIONS
In pursuing their investment objectives, U.S. Small Cap and International Small
Cap each 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 the 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 the 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);/3/
- ----------------
/3/ The Funds have no present intention of lending their portfolio securities.
15
<PAGE>
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;/4/
6. Underwrite the distribution of securities of other issuers; however, the
Fund may acquire "restricted" securities which, in the event of a resale,
might be required to be registered under the Securities Act of 1933 on the
ground that the Fund could be regarded as an underwriter as defined by that
act with respect to such resale; but the Fund will limit its total
investment in restricted securities and in other securities for which there
is no ready market, including repurchase agreements maturing in more than
seven days, to not more than 15% of its net 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 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) 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. 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 the Fund's shares
present at a meeting if more than 50% of the shares outstanding are present or
(ii) more than 50% of the Fund's outstanding shares.
In addition, each 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, each Fund 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;
- ----------------
/4/ State insurance laws currently restrict a Fund's borrowings to
facilitate redemptions to no more than 25% of the Fund's net assets.
16
<PAGE>
(c) Invest more than 10% of its net assets (valued at the 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;
(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 WAM 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 closing transactions;
(i) Sell securities short or maintain a short position.
Notwithstanding the foregoing investment restrictions, either Fund 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 a Fund's interest in the issuing company
being diluted. The market for such rights is not well developed in all cases
and, accordingly, the Fund may not always realize full value on the sale of
rights. The exception applies in cases where the limits set forth in the
investment restrictions would otherwise be exceeded by exercising rights or
would have already been exceeded as a result of fluctuations in the market value
of the Fund'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 the rights.
In addition, pursuant to state insurance laws, each Fund is subject to the
following guidelines, which may also be changed by the Trustees:
(a) Each Fund will be invested in a minimum of five different foreign
countries at all times, except that this minimum is reduced to four when
foreign country investments comprise less than 80% of the value of the
Fund's net assets; to three when less than 60% of such value; to two when
less than 40%; and to one when less than 20%.
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(b) Each Fund will have no more than 20% of its net assets invested in
securities of issuers located in any one country; except that a Fund may
have an additional 15% of its net assets invested in securities of issuers
located in any one of the following countries: Australia; Canada; France;
Japan; the United Kingdom; or Germany.
(c) A Fund may not acquire the securities of any issuer if, as a result of
such investment, more than 10% of the Fund's total assets would be invested
in the securities of any one issuer, except that this restriction shall not
apply to U.S. Government securities or foreign government securities; and
the Fund will not invest in a security if, as a result of such investment,
it would hold more than 10% of the outstanding voting securities of any one
issuer.
(d) Each Fund may borrow no more than 10% of the value of its net assets
when borrowing for any general purpose and 25% of net assets when borrowing
as a temporary measure to facilitate redemptions.
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:
n
ERV = P(1 +T)
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:
U.S. Small Cap Average Annual
-------------- Total Return Total Return
------------ --------------
1 year................................ 46.6% 46.6%
Life of Fund (inception 5/3/95)....... 70.04% 37.4%
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<PAGE>
International Small Cap Average Annual
----------------------- Total Return Total Return
------------ --------------
1 year................................. 32.0% 32.0%
Life of Fund (inception 5/3/95)........ 77.6% 41.0%
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. Fund
performance figures do not reflect expenses of the separate accounts of the Life
Companies, expenses imposed under the Variable Contracts, or expenses imposed by
the Retirement Plans.
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., VARDS, or another service.
The Funds may note their mention or recognition, or the mention or recognition
of WAM or its principals, in newsletters, newspapers, magazines, or other media.
INVESTMENT ADVISER
The Funds' investment adviser, WAM, furnishes continuing investment advice to
the Funds and is responsible for overall management of the Funds' business
affairs. It furnishes office space and all necessary office facilities,
equipment, and personnel to the Funds; it assumes all other expenses incurred by
WAM in connection with managing the assets of the Funds, including expenses in
connection with placement of securities orders, expenses in determination of
daily price computations, portfolio accounting and related bookkeeping; and
assumes the expenses of printing and distributing the Funds' prospectus and
reports to prospective investors. At its own expense, WAM may contract with any
other person or persons to provide services in connection with daily price
computations, portfolio accounting and related bookkeeping.
For its services to U.S. Small Cap, WAM receives a fee accrued daily and paid
monthly at the annual rate of 1.0% of the net asset value of the Fund up to $100
million, 0.95% of the net asset value in excess of $100 million and up to $250
million, and 0.90% of the net asset value in excess of $250 million. These fees
may be reduced by any amount necessary to cause the Fund's expenses to be within
the limitation described below. The investment advisory fees of the Fund for
the fiscal
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<PAGE>
period from May 3, 1995 to December 31, 1995 were $71,496; for the fiscal year
ended December 31, 1996, the advisory fees were $704,115.
For its services to International Small Cap, WAM receives a fee accrued daily
and paid monthly at the annual rate of 1.30% of the net asset value of the Fund
up to $100 million, 1.20% of the net asset value in excess of $100 million and
up to $250 million, and 1.10% of the net asset value in excess of $250 million.
These fees may be reduced by any amount necessary to cause the Fund's expenses
to be within the limitation described below. The investment advisory fees of
the Fund for the fiscal period from May 3, 1995 to December 31, 1995 were
$43,726; for the fiscal year ended December 31, 1996, the advisory fees were
$631,977.
The Trust pays all charges of depositories, custodians and other agents for the
safekeeping and servicing of the Funds' cash, securities and other property; all
charges of the Funds' transfer agents and registrars, and the Funds' dividend
disbursing and redemption agents, if any; and all charges of independent
auditors and legal counsel. The Trust also pays other expenses such as the cost
of qualifying and maintaining the registration of shares of the Funds and the
cost of compliance with federal and state securities laws; typesetting of the
Funds' prospectus and of printing and mailing copies of the prospectus furnished
to each then-existing shareholder or beneficial owner; printing and mailing
certificates for shares of the Funds; publishing reports and notices to the
Funds' shareholders and to governmental bodies or regulatory agencies; proxy
solicitations of the Funds or of the Board of Trustees of the Trust; shareholder
meetings; fees and taxes payable to federal, state or governmental agencies,
domestic or foreign; insurance premiums required by law or deemed advisable by
the Trust's Board of Trustees; all costs of borrowing money; all expenses of
maintaining the registration of the Trust under the Investment Company Act of
1940, all fees, dues and other expenses related to membership of the Trust in
any trade association or other investment company organization; the fees of
Trustees who are not otherwise affiliated with the Trust or WAM, and all
expenses incurred in connection with their services to the Trust. The Trust
also pays all brokers' commissions and other charges relative to the purchase
and sale of portfolio securities for the Funds.
The investment advisory agreements require WAM to reimburse a Fund in the event
that the total annual expenses of the Fund that are payable in any fiscal year,
including the advisory fee but excluding taxes, interest, brokerage commissions
and similar fees, and certain extraordinary litigation expenses, exceed the
limits prescribed by any state in which that Fund's shares are qualified for
sale. Total annual expenses, and the amount by which total annual expenses may
exceed these limits, will be determined as of the close of each business day of
the year. The Trust does not believe that any such state expense limitation is
currently applicable. If the states in which a Fund's shares are qualified for
sale impose no limits on total expenses, then WAM has voluntarily agreed to
reimburse the Fund in the event the fees and expenses payable by the Fund in any
fiscal year (as described above) exceed 1.90% for Wanger International Small Cap
and 1.50% for Wanger U.S. Small Cap of average daily net assets. The following
items are excluded for purposes of calculating the expenses subject to this
limitation: (i) credits, if any, that a Fund may receive that have the effect
of offsetting certain of those expenses; and (ii) 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. Reimbursement of expenses in
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<PAGE>
excess of this limitation will be made monthly and will be paid to the Fund by
reduction of WAM's advisory fee. WAM may from time to time absorb expenses for a
Fund in addition to the reimbursement of expenses in excess of applicable
limitations.
WAM advanced all of the Trust's organizational expenses, which are being
amortized and reimbursed to WAM over a five year period.
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 Houtzager and Robert A. Mohn, are limited partners 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. Shares of
the Funds are offered for sale through WAM BD without any sales commission or
charges to the Funds or Life Companies or Retirement Plans purchasing Fund
shares. However, each Variable Contract imposes its own charges and fees on
owners of Variable Contracts and Retirement Plans and may impose such charges on
participants in a Retirement Plan. The Trust has agreed to pay all expenses in
connection with registration of its shares with the Securities and Exchange
Commission and in compliance with state securities laws.
THE TRUST
The Agreement and 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. U.S. Small Cap and International Small Cap
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
21
<PAGE>
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. Shares do not have
cumulative voting rights; accordingly, shareholders controlling voting interests
of more than 50% of shares of the Funds voting for the election of Trustees
could elect all of the Trustees if they chose to do so, and in such event,
shareholders controlling voting interests of the remaining shares would not be
able to elect any Trustees.
Shareholder rights regarding voting are described in the prospectus. These
voting rights are based on applicable federal and state laws. To the extent that
changes in such laws or regulations thereunder or interpretations thereof
eliminate the necessity to submit any such matters to a shareholder vote, or
otherwise restrict or limit such voting rights, the Trust reserves the right to
act in any manner permitted by such changes.
The Trust's Declaration of Trust disclaims liability of the shareholders,
trustees, and officers of the Trust for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation,
or contract entered into or executed by the Trust or the board of trustees. The
Declaration of Trust provides for indemnification out of the Trust's assets for
all losses or expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, although shareholders of a business trust may,
under certain circumstances, be held personally liable under Massachusetts law
for the obligations of the trust, the risk of a shareholder incurring financial
loss on account of shareholder liability is believed to be remote because it is
limited to circumstances in which the disclaimer is inoperative and the Trust
itself is unable to meet its obligations. The risk to any one series of
sustaining a loss on account of liabilities incurred by another series is also
believed to be remote.
TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS
The Trustees and officers of the Trust and their principal business activities
during the past five years are:
Ralph Wanger, trustee and president* (age 63)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
Wanger Asset Management, L.P. since July 1992; prior thereto, principal,
Harris Associates L.P.; trustee and president, Acorn Investment Trust.
Charles P. McQuaid, trustee and senior vice president* (age 44)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
Wanger Asset Management, L.P. since July 1992; prior thereto, principal,
Harris Associates L.P.; trustee and senior vice president, Acorn Investment
Trust.
Fred D. Hasselbring, trustee (age 55)
1338 N. Bell Avenue, Chicago, Illinois 60622; owner, Fred D. Hasselbring
and Associates (retail industry computer systems consulting and sales).
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<PAGE>
P. Michael Phelps, trustee (age 63)
100 North Riverside Plaza, Chicago, Illinois 60606-1596; vice president and
corporate secretary, Morton International, Inc.
James A. Star, trustee (age 36)
222 N. LaSalle Street, Suite 2000, Chicago, Illinois 60601; vice president,
Henry Crown and Company, a diversified private holding company, since
October 1994; portfolio manager and investment analyst, Harris Associates
L.P., June 1991 to October 1994; attorney, Kirkland and Ellis, prior to
June 1991.
Terence M. Hogan, vice president (age 35)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
analyst, and portfolio manager, Wanger Asset Management, L.P., since July
1992; prior thereto, analyst, Harris Associates L.P.; vice president, Acorn
Investment Trust.
Leah J. Zell, vice president (age 48)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
analyst, and portfolio manager, Wanger Asset Management, L.P., since July
1992; prior thereto, analyst, Harris Associates L.P.; vice president, Acorn
Investment Trust.
Marcel P. Houtzager, vice president (age 36)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal and
investment analyst, Wanger Asset Management, L.P. since April 1992.
Robert A. Mohn, vice president (age 35)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
analyst and portfolio manager, Wanger Asset Management, L.P. since August
1992.
Merrillyn J. Kosier, vice president (age 37)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; director of
marketing and shareholder services, Wanger Asset Management, L.P., since
September 1993; prior thereto, vice president of marketing, Kemper
Financial Services, Inc.; vice president and secretary, Acorn Investment
Trust.
Bruce H. Lauer, vice president and treasurer (age 39)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; chief
administrative officer, Wanger Asset Management, L.P., since April 1995;
prior thereto, first vice president, investment accounting, Kemper
Financial Services, Inc.; vice president and treasurer, Acorn Investment
Trust.
23
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Paula L. Rogers, vice president and secretary (age 38)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; vice president
of institutional marketing, Wanger Asset Management, L.P., since June 1996;
vice president, Goldman Sachs & Co., 1994-1996; prior thereto, second vice
president, The Northern Trust Company.
Kenneth A. Kalina, assistant treasurer (age 37)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60603; Fund
controller, Wanger Asset Management, L.P., since September 1995; prior
thereto, treasurer of the Stein Roe Mutual Funds; assistant treasurer,
Acorn Investment Trust.
*Messrs. McQuaid and Wanger are Trustees who are "interested persons" of the
Trust as defined in the Investment Company Act of 1940, and of WAM.
Messrs. McQuaid, Phelps and Wanger are members 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. Messrs. Hasselbring,
Phelps, and Star are members of the Audit Committee, which has the authority to
make recommendations to the Board of Trustees regarding the selection of
independent auditors for the Trust and to confer with the independent auditors
regarding the scope and results of each audit.
At March 31, 1997, the trustees and officers as a group owned beneficially
less than 1% of the outstanding shares of each of U.S. Small Cap and
International Small Cap. At that date, Phoenix Home Life Mutual Insurance
Company (and its affiliates), One American Row, Hartford, Connecticut 06115, was
the record holder of 5,919,345 shares (approximately 98% of the outstanding
shares) of International Small Cap, and 9,236,333 shares (approximately 98% of
the outstanding shares) of U.S. Small Cap, all of which are beneficially owned
by Variable Contract owners.
The following table shows compensation paid by the Trust during the fiscal year
ended December 31, 1996 to each Trustee of the Trust who is not an "interested
person" of the Trust or of WAM. The Trust does not pay compensation to its
officers or to Trustees who are "interested persons." The Trust does not offer
any pension or retirement benefits to its trustees.
24
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================
Name of Person, Aggregate Compensation Aggregate Compensation Total
Position From Wanger U.S. From Wanger International Compensation
Small Cap Advisor Small Cap Advisor From Fund Complex
===========================================================================================
<S> <C> <C> <C>
Fred D. Hasselbring $4,800 $4,800 $ 9,600
Trustee
P. Michael Phelps $5,300 $5,300 $10,600
Trustee
James A. Star $5,300 $5,300 $10,600
Trustee
</TABLE>
PURCHASING AND REDEEMING SHARES
Shares of U.S. Small Cap and International Small Cap may not be purchased or
redeemed directly by individual Variable Contract owners or individual
Retirement Plan participants. Purchases and redemptions are discussed in the
prospectus. 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 sale price at the
time of valuation. A security for which there is no reported sale on the
valuation date is valued at the mean of the latest bid and ask quotations or, if
there is no ask quotation, at the most recent bid quotation. Securities for
which quotations are not readily available and any other assets are valued at a
fair value as determined in good faith by the Board of Trustees. Money market
instruments having a maturity of 60 days or less from the valuation date are
valued on an amortized cost basis. All assets and liabilities initially
expressed in foreign currencies are converted into U.S. dollars at a current
exchange rate.
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.
25
<PAGE>
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.
The Trust 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. The Agreement and Declaration of Trust also authorizes the
Trust to redeem shares under certain other circumstances as may be specified by
the Board of Trustees.
ADDITIONAL TAX INFORMATION
Shares of the Funds are offered to separate accounts of Life Companies that fund
Variable Contracts and may be offered to certain Retirement Plans, which are
pension plans and retirement arrangements and accounts permitting the
accumulation of funds on a tax-deferred basis. See the disclosure documents for
the Variable Contracts or the plan documents (including the summary plan
description) for the Retirement Plans for a discussion of the special taxation
of insurance companies with respect to the separate accounts and the Variable
Contracts, and the holders thereof, or the special taxation of Retirement Plans
and the participants therein.
Each Fund intends to continue to qualify for treatment as a regulated investment
company ("RIC") under the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for that treatment, the Fund must distribute to
shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of net investment income, net short-term
capital gain, and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in securities or currencies ("Income Requirement"); (2) the Fund must derive
less than 30% of its gross income each taxable year from the sale or other
disposition of securities, or any of the following, that were held for less than
three months -- options, futures or forward contracts (other than those on
foreign currencies), or foreign currencies (or options, futures or forward
contracts thereon) that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect
thereto) ("Short-Short Limitation"); (3) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash or cash items, U.S. Government securities, securities of
26
<PAGE>
other RICs, and other securities that, with respect to any one issuer, do not
exceed 5% of the value of the Fund's total assets and that do not represent more
than 10% of the outstanding voting securities of the issuer; and (4) at the
close of each quarter of the Fund's taxable year, not more than 25% of the value
of its total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
As noted in the prospectus, each Fund must, and intends to, comply with the
diversification requirements imposed by Section 817(h) of the Code and the
regulations thereunder. For information concerning the consequences of failure
to meet the requirements of Section 817(h), see the prospectus for the Variable
Contracts.
The Funds will not be subject to the 4% federal excise tax imposed on RICs that
do not distribute substantially all their income and gains each calendar year
because that tax does not apply to a RIC whose only shareholders are segregated
asset accounts of life insurance companies held in connection with variable
annuity contracts and/or variable life insurance policies or Retirement Plans.
The foregoing is only a general summary of some of the important federal income
tax considerations generally affecting the Funds and their shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the Funds' activities, and this discussion and the discussion in the
prospectuses and/or statements of additional information for variable contracts
are not intended as a substitute for careful tax planning. Accordingly,
potential investors are urged to consult their own tax advisers for more
detailed information and for information regarding any state, local, or foreign
taxes applicable to the variable contracts and the holders thereof.
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
27
<PAGE>
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.
WAM is the principal source of information and advice to the Funds, and is
responsible for making and initiating the execution of investment decisions by
the Funds. However, the Board of Trustees recognizes that it is important for
WAM, in performing its responsibilities to the Funds, to continue to receive and
evaluate the broad spectrum of economic and financial information that many
securities brokers have customarily furnished in connection with brokerage
transactions, and that in compensating brokers for their services, it is in the
interest of the Funds to take into account the value of the information received
for use in advising the Funds. The extent, if any, to which the obtaining of
such information may reduce WAM's expenses in providing management services to
the Funds is not determinable. In addition, the Board of Trustees understands
that other clients of WAM might benefit from the information obtained for the
Funds, in the same manner that the Funds might benefit from information obtained
by WAM in performing services to others.
Transactions of the Funds in the over-the-counter market and the third market
are executed with primary market makers acting as principal except where it is
believed that better prices and execution may be obtained otherwise.
Brokerage commissions incurred by U.S. Small Cap for the fiscal period from May
3, 1995 to December 31, 1995 were $59,273; for the fiscal year ended December
31, 1996 the brokerage commissions were $243,598. Brokerage commissions incurred
by International Small Cap during the same time periods were $49,559 and
$422,414, respectively.
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 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
28
<PAGE>
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. The custodian may employ one or more sub-custodians located in
the United States upon approval by the Board of Trustees of the Trust; and is
authorized to employ sub-custodians for the Funds' assets maintained outside the
United States.
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' federal income tax return, and performs other
professional accounting, auditing, tax, and advisory services when engaged to do
so by the Funds.
29
<PAGE>
APPENDIX
Description of Bond Ratings
A rating of a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, WAM believes that the quality of debt securities in which
the Funds invest should be continuously reviewed. A rating is not a
recommendation to purchase, sell or hold a security, because it does not take
into account market value or suitability for a particular investor. When a
security has received a rating from more than one service, each rating should be
evaluated independently. Ratings are based on current information furnished by
the issuer or obtained by the ratings services from other sources which they
consider reliable. Ratings may be changed, suspended or withdrawn as a result
of changes in or unavailability of such information, or for other reasons.
The following is a description of the characteristics of ratings used by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P").
Moody's Ratings
Aaa--Bonds rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt-
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. Although the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such bonds.
Aa--Bonds rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long
term risk appear somewhat larger than in Aaa bonds.
A--Bonds rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
A-1
<PAGE>
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.
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.
A-2
<PAGE>
Wanger Advisors Trust
1996 Annual Report
Contents
1 Squirrel Chatter
3 Funds at a Glance
4 Performance Review
Wanger U.S. Small Cap
6 Performance Review
Wanger International
Small Cap
8 Statement of Investments
Wanger U.S. Small Cap
12 Statement of Investments
Wanger International
Small Cap
16 Portfolio Diversification
Wanger International
Small Cap
17 Statements of Assets
and Liabilities
18 Statements of Operations
19 Statements of Changes in
Net Assets
20 Financial Highlights
Wanger U.S. Small Cap
21 Financial Highlights
Wanger International
Small Cap
22 Notes to Financial Statements
Wanger Asset Management, L.P., ("WAM") is one of the leading global small-cap
equity managers in the U.S. with 26 years of small-cap investment experience.
WAM manages over $5.4 billion in equities and is the investment adviser to
Wanger U.S. Small Cap, Wanger International Small Cap, Acorn Fund, Acorn
International and Acorn USA.
WAM uses a unique style of catching trends with small, attractively-priced
niche companies. For more complete information about our funds including the
Acorn Funds, fees and expenses, call WAM Brokerage Services, L.L.C.,
distributor, at 1-800-5WANGER for a prospectus. Read it carefully before you
invest or send money.
Wanger
[LOGO] [9]6
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
[LOGO] Squirrel Chatter
Ralph Wanger is the President of Wanger Asset Management, L.P., and the
portfolio manager of Wanger Advisors Trust and Acorn Investment Trust. Mr.
Wanger has been featured in Forbes, Money, The Wall Street Journal, Newsweek and
Barron's. Mr. Wanger was also featured in Bill Griffeth's 1994 book, The Mutual
Fund Masters. In a USA Today national survey, professional money managers were
asked to name their favorite investment professional. Wanger was voted #1.
A Zebra in Lion Country, by Ralph Wanger, is due out in bookstores in
March. Published by Simon & Schuster, this book is a witty survival guide to
investing. It also features some of Wanger's letters to Acorn Fund shareholders
which investors have enjoyed reading over the years. An excerpt from this 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.
(continued)
1
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
[LOGO] Squirrel Chatter (continued)
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 a piece, 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.
[PHOTO OF RALPH WANGER APPEARS HERE]
Ralph Wanger, President
2
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Funds at a Glance
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap
Results to December 31, 1996
<TABLE>
<CAPTION>
4th Quarter Last 12 months
<S> <C> <C>
Wanger U.S. Small Cap 7.7% 46.6%
Russell 2000 5.2% 16.5%
S&P MidCap 400 6.1% 19.2%
S&P 500 8.3% 23.0%
Dow-Jones 10.2% 28.9%
966 Variable Insurance
Funds Average 13.4%
</TABLE>
Net Asset Value per share as of 12/31/96: $16.97
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 Lipper
Variable Funds average includes both funds. All indices are unmanaged and
include reinvested dividends.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Wanger International Small Cap
Results to December 31, 1996
4th Quarter Last 12 months
<S> <C> <C>
Wanger Int'l Small Cap 4.3% 32.0%
EAFE 1.6% 6.1%
Lipper International Small Co. 2.8% 13.3%
Funds Average
Lipper International Fund Index 5.2% 14.4%
966 Variable Insurance
Funds Average 13.4%
71 International Variable Insurance
Funds Average 14.9%
</TABLE>
Net Asset Value per share as of 12/31/96: $17.71
EAFE is Morgan Stanley's Europe, Australia and Far East Index, an index of
companies throughout the world in proportion to world market capitalization,
excluding the U.S. and Canada. The Lipper International Small Company Funds
Average is comprised of 12 small company international funds. The Lipper
International Fund Index is an equal-weighted index of the 30 largest
international funds. The Lipper Variable Funds average include both funds; the
International Average includes Wanger Int'l Small Cap. All indices are unmanaged
and include reinvested dividends.
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Top 5 Industries
As a % of net assets, as of 12/31/96
<TABLE>
<CAPTION>
<S> <C>
Energy/Minerals 23.9%
Information 17.9%
Industrial Goods/Services 14.4%
Finance 14.0%
Health Care 13.2%
</TABLE>
- --------------------------------------------------------------------------------
Wanger International Small Cap Top 5 Countries
As a % of net assets, as of 12/31/96
<TABLE>
<CAPTION>
<S> <C>
United Kingdom 16.1%
Japan 14.6%
Sweden 7.6%
Singapore 5.8%
Australia 5.5%
</TABLE>
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Top 10 Holdings
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CalEnergy 4.9 % Respironics 2.8 %
Power Plants Sleep Apnea Products
Tesoro Petroleum 3.8 % Wackenhut 2.7%
Oil Refinery/Gas Reserves Prison Management
NGC 3.8% Atwood Oceanics 2.6%
Gas Processing/Marketing Offshore Drilling
Lincare Holdings 3.6 % Coast Savings 2.4%
Home Health Care Services California Savings/Loan
Seagull Energy 3.6 % Kronos 2.4 %
Oil/Gas Producer Time Accounting
Software & Clocks
</TABLE>
- --------------------------------------------------------------------------------
Wanger International Small Cap Top 10 Holdings
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TT Tieto 3.4% Oriflame International 2.0%
Computer Services/ Natural Cosmetics
Consulting--Finland United Kingdom
Tyndall 2.9% Kempen 2.0%
Money Management/ Stock Brokerage/Investment
Insurance--Australia Management--Netherlands
Genting International 2.8% Grupo Radio Centro 1.9%
Cruise Line--Singapore Radio Broadcasting/
Networks Mexico
Getinge Industrier 2.3%
Sterilization & Disinfection International Container 1.9%
Equipment--Sweden Terminal Services
Container Handling Terminals
Medeva 2.1% & Port Management--Philippines
Pharmaceuticals
United Kingdom Premier Oil 1.8%
Oil/Gas Producer
United Kingdom
- --------------------------------------------------------------------------------
</TABLE>
The funds' top 10 holdings and portfolio diversification vary with changes in
portfolio investments. See the Statements of Investments for complete lists of
the funds' holdings, including those described under "Performance Review."
3
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Performance Review
Wanger U.S. Small Cap had a career year in 1996. One number says it all: +46.6%.
Your Fund's 46.6% return was the third best of all 966 variable insurance funds
in the U.S. tracked by Lipper Analytical Services, Inc. This ranking is based on
the one year total return ending 12/31/96. In other words, we ranked in the top
0.3% of our class. That's summa summa cum laude material.
At the head of our own class were our oil and gas stocks. We accumulated an
outsized energy position in the first half of the year, buying up bustling
companies like NGC Corp. (natural gas brokerage), Atwood Oceanics (deep-sea
drilling rigs), Seagull Energy and United Meridian (oil & gas explorers) on the
cheap. Ten-gallon hats off to Jason Selch, our resident oilman, for tapping into
those gusher stocks.
Small-cap investing was at a handicap last year. Small-cap indices like the
Russell 2000 (+ 16.5%) lagged behind the S&P 500's 23% return as mutual fund
managers poured their record cash inflows into the most liquid large-cap stocks.
The popularity of index investing and the revival of the Nifty Fifty were both
signs of the market's big-cap fetish. We produced our own nifty returns without
the benefit of bigness. We jumped into energy stocks early in the year when the
stocks were slow to follow the price of oil's lead. And we stayed clear of the
fancy-multiple high-tech stocks that soared in the first quarter, but littered
the new lows list soon after.
Our other big winners were a multi-industrial group. 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. Our growth utility (no oxymoron)
CalEnergy was buoyed by its recent acquisition of a UK electric company. And our
best banker was Texas Regional, the grandest bank in the Rio Grande Valley.
Small-cap investing can be volatile and 1996 will be a hard act to follow. Our
team of analysts will continue to work hard to reward the confidence you've
shown in us.
- --------------------------------------------------------------------------------
Fund Facts
The U.S. stock market was red hot and the large company indexes, like the S&P
500 and the Dow Jones Industrial Average, enjoyed another banner year. Remember,
the S&P 500 is a broad market-weighted, blue-chip dominated index and the Dow
Jones is made up of the 30 largest U.S. companies' returns. Most Wanger U.S.
Small Cap companies are not found in the S&P 500 or the Dow; rather, the Fund
primarily invests in small and mid-size companies in the U.S.
4
<PAGE>
[LOGO]
[LOGO] Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Results to December 31, 1996
The Value of a $10,000 Investment in Total Return for Each Period
Wanger U.S. Small Cap May 3, 1995 through December 31, 1996
Wanger U.S. Small Cap
$17,004
Russell 2000
$13,756
[GRAPH APPEARS HERE]
- -------------------------------------------------------------------------------
This graph compares the results of $10,000 invested in Wanger U.S. Small Cap on
May 3, 1995 (the date the Fund began operations) with the Russell 2000 with
dividends reinvested. Past performances 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.
Average Annual Total Return
1 year: 46.6% Life: 37.4%
5
<PAGE>
Wanger Advisors Trust 1996 Annual Report
Performance Review
- --------------------------------------------------------------------------------
Wanger International Small Cap
Wanger International Small Cap had a spectacular year in 1996. Our total return
for the year was 32%. Lipper Analytical Services, Inc. tracks 966 variable
insurance mutual funds; our total return for 1996 ranked us #16, in the top 2%.
We are one of 71 international variable insurance mutual funds; we were #2 in
the international arena. Our return was more than double that of the average of
our competitors.
How did we do it? Market conditions were mixed with the most commonly used
international stock index, EAFE, up only 6% for the year. That we were able to
produce a return over five times as large was in part achieved by underweighting
Japanese stocks (the Jasdaq index of smaller Japanese companies was down almost
14% in 1996, on top of which the Japanese Yen declined about 11%) and
overweighting European stocks (a number of European stock markets were up over
20% and most of their currencies declined less than the Yen).
A second important factor which helped us to outperform was our exposure to
energy and technology stocks. The former sector took off along with the price of
oil, and the latter benefited from the current profit growth wave in the
industry, along with newfound interest by U.S. institutions tired of paying sky
high prices for domestic technology stocks.
Finally, our bottom up, research driven approach to stock picking paid off with
our analysts by and large outperforming their respective countries and sectors
in 1996.
For example, our aforementioned energy portfolio benefited from the skill and
enthusiasm brought to bear by our intrepid Jason Selch, whose stocks in the fund
rose an incredible 176% in 1996.
How much risk did we take? Recall that in the investing world, risk is usually
measured by the degree to which prices bounce up and down. We all know that by
this measure cash is the best behaved (least volatile) asset, followed by short-
term bonds, then long-term bonds, blue chip stocks, and finally smaller company
stocks. Where does your Fund fit in in 1996? This might surprise you, but our
weekly volatility during 1996 was somewhere between long-term bonds and blue
chip stocks, even though the Fund invests in smaller company stocks and even
though individual foreign markets can be quite volatile (1).
Your Fund enjoyed lower volatility in 1996 than the blue chips because of its
high level of diversification across countries (over 25) and industries (more
than 20). To illustrate, our top five performers in 1996 included the Finnish
computer consultant TT Tieto, Canadian oil service company Shaw, Dutch mutual
fund manager Kempen, Argentine steel producer Siderca, and Australian life
insurer Tyndall.
We like these stocks because they have high management ownership, low or no
research coverage by brokerage analysts, and above average returns on equity.
Our globe trotting team of security analysts is already at work trying to
uncover more niche companies to add to your portfolio in 1997!!
- --------------------------------------------------------------------------------
(1) We calculated the weekly volatility (technically the standard deviation of
the weekly returns) in 1996 for each of these asset classes and observed the
following:
Cash 0%
Bonds (Lipper U.S. Government Bond Index) 0.8%
Wanger International Small Cap 1.1%
Blue chip stocks (S&P 500 Index) 1.7%
Small company stocks (NASDAQ Composite Index) 2.0%
Volatility or variability in expected return is one measure of risk. Higher
numbers indicate greater volatility. The information shown represents relative
volatility over past periods and does not necessarily indicate relative future
volatility.
6
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- ------------------------------------------------------------------------------
Wanger International Small Cap Results to December 31, 1996
- ------------------------------------------------------------------------------
[WANGER INTERNATIONAL SMALL CAP GRAPH APPEARS HERE]
The value of a $10,000 Investment in
Wanger International Small Cap
Wanger International Small Cap
$17,755
EAFE
$11,293
- ------------------------------------------------------------------------------
This graph compares the results of $10,000 invested in Wanger International
Small Cap on May 3, 1995 (the date the Fund began operations) with Morgan
Stanley's Europe, Australia and Far East Index (EAFE). Past performances 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.
Average Annual Total Return
1 year: 32.0% Life: 41.0%
7
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
Common Stocks and Other Equity-Like
Securities--90.3%
Information--17.9%
- --------------------------------------------------------------------------------
<S> <C> <C>
Broadcasting/CATV--1.9%
100,000 C-Tec(b) $ 2,425,000
Cable TV/Local Telephone
- --------------------------------------------------------------------------------
Programming for CATV/TV/Satellites--6.4%
113,400 Data Transmission (b) 2,523,150
Data Services for Farmers
88,000 Tele-Communications,
Liberty Media Group (b) 2,513,500
Cable TV Programming
70,000 Gaylord Entertainment 1,601,250
Cable TV Programming
58,000 International Family Entertainment (b) 899,000
Cable TV Programming
42,000 United Video Satellite (b) 735,000
Cable TV Programming
- --------------------------------------------------------------------------------
Total 8,271,900
- --------------------------------------------------------------------------------
Mobile Communications--1.9%
112,500 COMARCO (b) 2,053,125
Wireless Network Testing
40,000 Palmer Wireless (b) 420,000
Cellular Phone Services
- --------------------------------------------------------------------------------
Total 2,473,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
Computer Software/Services--4.2%
<S> <C> <C>
103,600 CACI International, ClA (b) 2,175,600
Computer Software Systems
46,600 Analysts International 1,316,450
Contract Programming
80,000 Simulation Sciences (b) 1,190,000
Process Control Software
14,000 Compuware (b) 701,750
Computer Services & Software
- --------------------------------------------------------------------------------
Total 5,383,800
- --------------------------------------------------------------------------------
Computer Systems--1.1%
55,400 ACT Manufacturing (b) $ 1,461,175
Contract Manufacturing
- --------------------------------------------------------------------------------
Components/Peripherals--2.4%
96,000 Kronos (b) 3,072,000
Time Accounting Software & Clocks
- --------------------------------------------------------------------------------
Information Total 23,087,000
Healthcare--13.2%
- --------------------------------------------------------------------------------
Biotechnology/Drug Delivery--1.4%
40,000 Watson Pharmaceuticals (b) 1,797,500
Generic Pharmaceuticals
- --------------------------------------------------------------------------------
Medical Equipment--7.1%
210,000 Respironics (b) 3,648,750
Sleep Apnea Products
59,100 Steris (b) 2,570,850
Sterilization Equipment
76,000 Invacare 2,090,000
Wheelchairs, Patient Aids & Beds
70,000 Kinetic Concepts 857,500
Hospital Beds
- --------------------------------------------------------------------------------
Total 9,167,100
- --------------------------------------------------------------------------------
Services--4.7%
114,000 Lincare Holdings (b) 4,674,000
Home Health Care Services
100,800 United Payors & Providers (b) 1,386,000
Medical Claims Repricing
- --------------------------------------------------------------------------------
Total 6,060,000
- --------------------------------------------------------------------------------
Health Care Total 17,024,600
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
Consumber Goods/services--6.9%
- --------------------------------------------------------------------------------
<S> <C>
Retail--3.1%
322,900 Host Mariott Services (b) $ 2,946,463
Runs Airport Restaurants
30,000 Borders Group (b) 1,076,250
Bookstores
- --------------------------------------------------------------------------------
Total 4,022,713
- --------------------------------------------------------------------------------
Entertainment/Leisure--1.4%
63,000 Showboat 1,086,750
Casino/Hotels
42,000 Rio Hotel & Casino (b) 614,250
Casino/Hotel
60,000 Monarch Casino & Resort (b) 120,000
Casino/Hotel
- --------------------------------------------------------------------------------
Total 1,821,000
- --------------------------------------------------------------------------------
Food--0.4%
70,000 Shoney's (b) 490,000
Restaurants
- --------------------------------------------------------------------------------
Manufacturers--2.0%
163,500 Rawlings (b) 1,635,000
Baseball Equipment
28,000 Newell 882,000
Household Goods
- --------------------------------------------------------------------------------
Total 2,517,000
- --------------------------------------------------------------------------------
Consumer Goods/Services Total 8,850,713
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
Finance--14.0%
- --------------------------------------------------------------------------------
Banks/Savings & Loans--7.4%
<S> <C> <C>
84,000 Coast Savings (b) 3,076,500
California Savings & Loan
60,000 Texas Regional Bancshares 2,040,000
TexMex Bank
56,000 Peoples Bank Bridgeport 1,617,000
Consumer Finance
106,000 Imperial Thrift & Loan (b) 1,590,000
California Thrift
80,000 Commonwealth Bancorp 1,200,000
Pennsylvania Savings & Loan
- --------------------------------------------------------------------------------
Total 9,523,500
- --------------------------------------------------------------------------------
Insurance--1.6%
64,000 Penn Treaty American (b) 1,664,000
Nursing Home Equipment
17,000 Leucadia National 454,750
Insurance Holding Company
- --------------------------------------------------------------------------------
Total 2,118,750
- --------------------------------------------------------------------------------
Money Management--2.7%
125,000 Baker Fentress 2,109,375
Closed-End Investment Company
63,000 SEI 1,401,750
Mutual Fund Distributor
- --------------------------------------------------------------------------------
Total 3,511,125
- --------------------------------------------------------------------------------
Credit Cards--1.1%
31,000 National Data 1,348,500
Credit Card & Medical Claims Processor
- --------------------------------------------------------------------------------
Other--1.2%
86,500 Jayhawk (b) 973,125
Used Auto Finance
28,000 Americredit (b) 574,000
Used Auto Finance
- --------------------------------------------------------------------------------
Total 1,547,125
- --------------------------------------------------------------------------------
Finance Total 18,049,000
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
<S> <C> <C>
Industrial Goods/Services--14.4%
Machinery--0.4%
30,500 Farr (b) $507,062
Filters
- --------------------------------------------------------------------------------
Steel--5.5%
135,900 Atchison Casting (b) 2,446,200
Steel Foundries
91,000 Worthington Industries 1,649,375
Steel Processing
56,000 Gibraltar Steel (b) 1,470,000
Steel Processing
105,000 Universal Stainless (b) 918,750
Semi-finished Stainless Steel Producer
35,300 Steel Dynamics (b) 675,113
Steel Mini-Mill
- --------------------------------------------------------------------------------
Total 7,159,438
- --------------------------------------------------------------------------------
Industrial Suppliers--3.2%
92,000 Applied Industrial Technologies 2,564,500
Distribution of Industrial Components
75,000 Lilly Industries, Cl. A 1,368,750
Industrial Coatings
10,500 Aftermarket Technology (b) 181,125
Auto Transmission Remanufacturer
- --------------------------------------------------------------------------------
Total 4,114,375
- --------------------------------------------------------------------------------
Services--5.3%
230,600 Wackenhut, Cl. B 3,516,650
Prison Management
100,000 World Color Press (b) 1,925,000
Printing
50,000 Hub Group (b) 1,337,500
Freight Forwarder
- --------------------------------------------------------------------------------
Total 6,779,150
- --------------------------------------------------------------------------------
Industrial Goods/Services Total 18,560,025
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
Energy/Minerals--23.9%
- --------------------------------------------------------------------------------
Independent Power--6.1%
<S> <C> <C>
189,000 CalEnergy (b) $6,355,125
Power Plants
19,000 AES Corporation (b) 883,500
Power Plants
38,500 Thermo Ecotek (b) 587,125
Biomass Operator
- --------------------------------------------------------------------------------
Total 7,825,750
- --------------------------------------------------------------------------------
Oil/Gas Producers--8.6%
352,000 Tesoro Petroleum (b) 4,928,000
Oil Refinery/Gas Reserves
209,000 Seagull Energy (b) 4,598,000
Oil & Gas Producer
22,000 United Meridian (b) 1,138,500
Oil & Gas Producer
100,000 Tipperary (b) 462,500
Oil & Gas Producer
- --------------------------------------------------------------------------------
Total 11,127,000
- --------------------------------------------------------------------------------
Distribution/Marketing/Refining--4.2%
210,000 NGC 4,882,500
Gas Processing/Marketing
23,000 United Cities Natural Gas 517,500
Natural Gas Utility
- --------------------------------------------------------------------------------
Total 5,400,000
- --------------------------------------------------------------------------------
Oil Services--5.0%
53,700 Atwood Oceanics (b) 3,409,950
Offshore Drilling
145,000 GeoScience (b) 1,885,000
Offshore Seismic Equipment
53,000 J Ray McDermott (b) 1,166,000
Offshore Construction
- --------------------------------------------------------------------------------
Total 6,460,950
- --------------------------------------------------------------------------------
Energy/Minerals Total 30,813,700
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Amount Value
<S> <C>
Total Common Stocks and Other
Equity-Like Securities--90.3% $116,385,038
- --------------------------------------------------------------------------------
(Cost: $96,923,306)
Short-Term Obligation--7.5% 9,690,000
$9,690,000 State Street Bank Repurchase
Agreement 4.75% 01/02/97;
12/31/96 Agreement Collateralized by U.S. Treasury Bonds
- --------------------------------------------------------------------------------
(Cost: $9,690,000)
Total Investments--97.8% 126,075,038
- --------------------------------------------------------------------------------
(Cost: $106,613,306)
Cash and Other Assets Less Liabilities--2.2% 2,882,873
- --------------------------------------------------------------------------------
Total Net Assets--100% $128,957,911
</TABLE>
- --------------------------------------------------------------------------------
Notes to Statement of Investments:
(a) At December 31, 1996, for federal income tax purposes cost of investments
was $106,613,306 and net unrealized appreciation was $19,461,732,
consisting of gross unrealized appreciation of $21,927,316 and gross
unrealized depreciation of $2,465,584.
(b) Non-income producing security.
See accompanying notes to financial statements.
11
<PAGE>
Wanger Advisors Trust 1996 Annual Report
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1996
<S> <C> <C>
- ---------------------------------------------------------------------------
Number Value
of Shares
Common Stocks and Other Equity-Like
Securities-93.3%
Europe-42.3%
- ---------------------------------------------------------------------------
Germany/Austria-2.0%
10,000 Rhoen Klinikum Ord. $1,044,708
1,200 Rhoen Klinikum Pfd. 119,136
Hospital Management
2,500 Cewe Color Holdings 567,776
Photographic Developing/Printing
- ---------------------------------------------------------------------------
Total 1,731,620
- ---------------------------------------------------------------------------
Denmark-0.8%
5,000 Kompan International (b) 703,521
Playground Equipment
- ---------------------------------------------------------------------------
Netherlands-2.0%
86,000 Kempen (b) 1,690,369
Stock Brokerage/Investment Management
- ---------------------------------------------------------------------------
Finland-3.4%
34,000 TT Tieto, Cl. B 2,868,865
Computer Services/Consulting
- ---------------------------------------------------------------------------
Norway-0.9%
62,500 P4 Radio Helo Norge (b) 567,701
Commercial Radio Station
55,000 Sysdeco Group (b) 220,503
Software "Tool" Sets & Systems
- ---------------------------------------------------------------------------
Total 788,204
- ---------------------------------------------------------------------------
Sweden-7.6%
100,000 Getinge Industrier 1,969,830
Sterilization & Disinfection Equipment
50,000 Esselte, Series A 1,135,032
Office Supplies & Related Equipment
60,000 Mandator (b) 984,183
Computer Services/Consulting
8,000 Scala International (b) 726,421
Accounting Software
40,000 Frontec, Series B. (b) 691,271
Computer Services & Software
</TABLE>
- ---------------------------------------------------------------------------
Number
of Shares Value
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
Sweden-7.6% (cont.)
<S> <C> <C>
20,000 Tryckindustri $ 600,469
Printer
13,714 Pricer, Cl. B (b) 337,427
Electronic Shelf Labels for Supermarkets
- ---------------------------------------------------------------------------
Total 6,444,633
- ---------------------------------------------------------------------------
France-2.6%
12,000 Axime Ex Segin (b) 1,384,935
Computer Services/Consulting
7,250 Fininfo 767,004
Financial Data Feeds
- ---------------------------------------------------------------------------
Total 2,151,939
- ---------------------------------------------------------------------------
United Kingdom/Ireland-16.1%
402,361 Medeva 1,759,272
Drugs for Hyperactive Children
185,000 Oriflame International 1,693,759
Natural Cosmetics Sold Door-to-Door
2,500,000 Premier Oil (b) 1,518,779
Oil & Gas Producer
799,700 St James Place 1,347,999
Life Insurance
40,000 Euro Money Publications 960,039
Financial Publications & Databases
117,000 Seton Healthcare Group 910,010
Pharmaceuticals
170,000 Tunstall 781,123
Monitoring Equipment
80,000 Edinburgh Fund Managers 772,139
Investment Management
223,500 Bluebird Toys 751,564
"Polly Pocket" Toy Manufacturer
2,000,000 Electronics Boutique (b) 701,633
Videogame/Computer Software Stores
58,500 Serco Group 674,749
Facilities Management
80,000 N. Brown Group 614,014
Mail Order Clothing in Large Sizes
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>
- --------------------------------------------------------------------------------
United Kingdom/Ireland-16.1% (cont.)
65,000 Dorling Kindersley $457,730
Reference Books & CD-ROMs
35,000 Planning Sciences (b) 420,000
Database & Business Intelligence Software
13,000 International Cabletel (b) 328,250
Cable TV & Telephone System
- --------------------------------------------------------------------------------
Total 13,691,060
- --------------------------------------------------------------------------------
Portugal-0.6%
45,400 Filmes Lusomundo (b) 522,283
Newspapers, Radio, Video, Film Distribution
- --------------------------------------------------------------------------------
Switzerland-1.9%
2,000 Societe Generale d'Affichage 893,655
Billboard Advertising
1,400 Phoenix Mecano 731,903
Electrical Components
- --------------------------------------------------------------------------------
Total 1,625,558
- --------------------------------------------------------------------------------
Hungary-0.2%
5,000 Cofinec (b) 151,250
Consumer Goods Packaging
- --------------------------------------------------------------------------------
Italy/Greece-4.2%
399,000 Banca Fideuram 874,362
Life Insurance & Mutual Funds
120,000 Athens Medical Center 841,474
Hospitals (Greece)
300,000 Costa Crociere 726,077
Mediterranean Cruise Line
30,000 Intracom (b) 674,881
Telecommunications Equipment (Greece)
15,000 Cellular Communications International (b) 435,000
Mobile Communications
- --------------------------------------------------------------------------------
Total 3,551,794
- --------------------------------------------------------------------------------
Europe Total 35,921,096
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>
Asia-30.7%
- --------------------------------------------------------------------------------
Hong Kong/China-2.7%
3,500,000 Golden Harvest Entertainment 1,176,471
Movie Distribution & Exhibition
1,300,000 Li and Fung 1,151,260
Sourcing of Consumer Goods
- --------------------------------------------------------------------------------
Total 2,327,731
- --------------------------------------------------------------------------------
Japan-14.6%
30,000 Hokuto 1,315,585
Mushroom Grower
51,600 Central Uni 1,178,082
Health Care/Medical Equipment
30,000 Konami 1,020,936
Entertainment Software/Hardware
20,300 HIS 979,409
Travel Agent
15,000 Tiemco (b) 958,904
Fishing Equipment
40,000 Arrk 923,581
Industrial Modeling
30,000 People 904,627
Sports Clubs
25,000 Nihon Jumbo 870,165
Photo Processing Lab
27,000 NuSkin Asia Pacific (b) 833,625
Personal Care Products
10,000 Ryohin Keikaku 740,932
Specialty Consumer Goods Retailer
11,400 Paramount Bed 726,803
Hospital Bed Manufacturer
30,000 Shinki 692,685
Corporate & Consumer Lending
10,500 Noritsu Koki 493,021
Photo Processing Lab Manufacturer
32,000 Belluna 479,711
Catalog Sales
10,000 Mars Engineering 254,157
150 Mars Engineering Warrants 1/25/00 18,750
Gaming Systems & Machinery
- --------------------------------------------------------------------------------
Total 12,390,973
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>
- --------------------------------------------------------------------------------
Malaysia-1.7%
300,000 Malaysian Assurance Alliance $1,461,097
Insurance
- --------------------------------------------------------------------------------
Indonesia/Philippines-2.6%
3,000,000 Int'l Container Terminal Services (b) 1,568,441
Container Handling Terminals
& Port Management (Philippines)
600,000 PILTEL (b) 507,605
Mobile Communications (Philippines)
214,800 Suba Indah 131,835
Beverage and Food
- --------------------------------------------------------------------------------
Total 2,207,881
- --------------------------------------------------------------------------------
India-0.5%
30,000 IS Himalaya Fund (b) 387,000
Closed-End Fund
- --------------------------------------------------------------------------------
Korea-1.8%
35,000 Dongbu Fire & Marine Insurance (b) 1,168,267
Non-Life Insurance
1,500 S-1 Corporation New (b) 246,600
500 S-1 Corporation 91,662
Alarm Monitoring
- --------------------------------------------------------------------------------
Total 1,506,529
- --------------------------------------------------------------------------------
Singapore-5.8%
1,000,000 Genting International 2,400,000
Cruise Line
599,956 Venture Manufacturing 1,492,599
411,134 Venture Manufacturing Warrants 7/26/99 (b) 661,318
Contract Electronics Manufacturer
200,000 Datacraft Asia 334,000
Computer Consulting
- --------------------------------------------------------------------------------
Total 4,887,917
- --------------------------------------------------------------------------------
Thailand-1.0%
769,000 Shinawatra Satellite 869,774
Satellite Leasing
- --------------------------------------------------------------------------------
Asia Total 26,038,902
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>
Latin America-9.2%
- --------------------------------------------------------------------------------
Mexico-3.4%
235,000 Grupo Radio Centro (b) 1,615,625
Radio Broadcasting/Networks
417,000 Nadro, Series L 1,244,855
Pharmaceutical Distribution
- --------------------------------------------------------------------------------
Total 2,860,480
- --------------------------------------------------------------------------------
Argentina-3.8%
700,000 Siderca 1,277,755
Seamless Pipe for Oil Wells
120,000 Patagonia 1,128,226
Supermarkets
412,000 Cresud (b) 729,386
Agriculture
28,000 Siderar (b) 80,656
Flat Rolled Steel
- --------------------------------------------------------------------------------
Total 3,216,023
- --------------------------------------------------------------------------------
Other Latin America-2.0%
15,000 Genesis Chile Fund 551,250
Closed-End Fund (Chile)
50,000 Elevadores Atlas 490,809
Elevator Services (Brazil)
8,000 Ceteco Holdings 460,169
Appliances Retailer (Central America)
550,000 Brazilian Smaller Companies Warrants 261,250
Closed-End Fund
- --------------------------------------------------------------------------------
Total 1,763,478
- --------------------------------------------------------------------------------
Latin America Total 7,839,981
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Wanger International Small Cap Statement of Investments December 31, 1996
- --------------------------------------------------------------------------------
Number Value
of Shares
Other Countries--11.1%
- --------------------------------------------------------------------------------
<S> <C> <C>
Australia--5.5%
1,417,976 Tyndall $ 2,421,542
Money Management & Insurance
800,000 Austereo 1,270,880
Radio Broadcasting
500,000 Australian Hospital Care (b) 992,875
Hospital Management
- --------------------------------------------------------------------------------
Total 4,685,297
- --------------------------------------------------------------------------------
Israel--1.2%
70,100 Blue Square Israel (b) 998,925
Supermarkets & Department Stores
- --------------------------------------------------------------------------------
Canada--4.4%
70,000 Shaw Industries 1,414,606
Oil Field Services
140,000 Ranger Oil 1,382,500
Oil & Gas Producer
250,000 Pan East Petroleum (b) 893,704
Oil & Gas Producer
- --------------------------------------------------------------------------------
Total 3,690,810
- --------------------------------------------------------------------------------
Other Countries Total 9,375,032
</TABLE>
- --------------------------------------------------------------------------------
Principal Amount Value
<TABLE>
<CAPTION>
<S> <C>
Total Common Stocks and Other
Equity-Like Securities--93.3% $79,175,011
- --------------------------------------------------------------------------------
(Cost: $71,170,835)
Short-Term Obligation--6.1% 5,185,000
$5,185,000 State Street Bank Repurchase
Agreement 4.75% 01/02/97;
12/31/96 Agreement Collateralized by U.S. Treasury Bonds
- --------------------------------------------------------------------------------
(Cost: $5,185,000)
Total Investments--99.4% 84,360,011
- --------------------------------------------------------------------------------
(Cost: $76,355,835)
Cash and Other Assets Less Liabilities--0.6% 495,071
- --------------------------------------------------------------------------------
Total Net Assets--100% $84,855,082
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Notes to Statement of Investments:
(a) At December 31, 1996, for federal income tax purposes cost of investments
was $76,543,791 and net unrealized appreciation was $7,816,220 consisting
of gross unrealized appreciation of $13,081,776 and gross unrealized
depreciation of $5,265,556.
(b) Non-income producing security.
See accompanying notes to financial statements.
15
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Wanger International Small Cap Portfolio Diversification December 31, 1996
- --------------------------------------------------------------------------------
Percent Value
<S> <C>
At December 31, 1996, the
Fund's portfolio
of investments as a
percentage of net assets
was diversified as follows
- --------------------------------------------------------------------------------
Information
10.3% Software/Services $ 8,734,816
4.4 Broadcasting/CATV 3,782,456
2.1 Mobile Communications 1,812,379
1.7 Distribution 1,417,769
0.9 Consumer Electronics 731,903
0.8 Equipment 674,881
- --------------------------------------------------------------------------------
20.2 Total 17,154,204
- --------------------------------------------------------------------------------
Health Care
5.3 Biotechnology/Drug Delivery 4,436,420
3.7 Equipment 3,147,912
3.2 Services 2,746,250
2.0 Hospital/Laboratory Supplies 1,719,678
- --------------------------------------------------------------------------------
14.2 Total 12,050,260
- --------------------------------------------------------------------------------
Consumer Goods/Services
11.7 Retail 9,974,101
7.9 Entertainment/Leisure 6,738,105
6.2 Manufacturers 5,229,551
2.6 Food 2,176,806
- --------------------------------------------------------------------------------
28.4 Total 24,118,563
</TABLE>
- --------------------------------------------------------------------------------
Percent Value
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Finance
<S> <C>
9.8% Money Management $ 8,305,911
3.2 Other 2,752,369
3.1 Insurance 2,629,364
- --------------------------------------------------------------------------------
16.1 Total 13,687,644
- --------------------------------------------------------------------------------
Industrial Goods/Services
8.3 Services 7,010,946
0.1 Steel 80,656
- --------------------------------------------------------------------------------
8.4 Total 7,091,602
- --------------------------------------------------------------------------------
Energy/Minerals
4.5 Oil/Gas Producers 3,794,983
1.5 Oil Services 1,277,755
- --------------------------------------------------------------------------------
6.0 Total 5,072,738
- --------------------------------------------------------------------------------
93.3 Total Common Stocks and 79,175,011
Other Equity-Like Securities
- --------------------------------------------------------------------------------
6.1 Short-Term Obligations 5,185,000
- --------------------------------------------------------------------------------
0.6 Cash and Other Assets less Liabilities 495,071
- --------------------------------------------------------------------------------
100.0 Net Assets $84,855,082
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities December 31, 1996
<TABLE>
<CAPTION>
Wanger U.S. Wanger
Small Cap International
Small Cap
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at value (cost: Wanger U.S. Small
Cap $106,613,306; Wanger International Small
Cap $76,355,835) $126,075,038 $84,360,011
Cash 5,875 360,529
Organization costs 66,641 66,641
Receivable for:
Securities sold 1,454,509 102,948
Fund shares sold 2,802,009 674,765
Dividends and interest 35,315 60,965
- --------------------------------------------------------------------------------
Total assets 130,439,387 85,625,859
- --------------------------------------------------------------------------------
Liabilities and Net Assets
Payable for:
Securities purchased 1,373,760 651,443
Amount owed to advisor 66,812 66,693
Other 40,904 52,641
- --------------------------------------------------------------------------------
Total liabilities 1,481,476 770,777
- --------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $128,957,911 $84,855,082
- --------------------------------------------------------------------------------
Fund shares outstanding 7,598,121 4,791,121
- --------------------------------------------------------------------------------
Pricing of Shares
Net asset value, offering price and redemption
price per share $16.97 $17.71
- --------------------------------------------------------------------------------
Analysis of Net Assets
Paid-in capital $105,966,024 $74,585,481
Undistributed net realized gain on sales of
investments and foreign currency transactions 3,530,155 2,453,188
Unrealized appreciation of investments and
foreign currency transactions 19,461,732 7,816,413
(net of unrealized PFIC gains of $187,956
for Wanger International Small Cap)
Net investment loss -- --
- --------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $128,957,911 $84,855,082
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
Wanger Advisors Trust 1996 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
Statements of Operations For the Year Ended December 31, 1996
Wanger U.S. Wanger International
Small Cap Small Cap
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Income:
<S> <C> <C>
Dividends (net of foreign taxes of $51,646 for Wanger International Small Cap) $ 338,661 $ 474,929
Interest 217,556 106,849
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment income 556,217 581,778
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory 704,115 631,977
Legal and audit fees 56,103 56,023
Amortization of organization costs 20,031 20,031
Transfer agent 18,440 18,174
Reports to shareholders 16,857 17,483
Trustees' 15,524 15,400
Insurance 7,017 7,037
Custodian 17,508 102,609
Other 5,055 6,375
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 860,650 875,109
Less custodian fees paid indirectly (17,508) (20,862)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses 843,142 854,247
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment loss (286,925) (272,469)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 3,926,442 2,570,609
Net change in unrealized appreciation 19,022,289 6,894,415
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 22,948,731 9,465,024
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $22,661,806 $9,192,555
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
--------------------------------------- ---------------------------------------
Wanger U.S. Small Cap Wanger International Small Cap
Year ended May 3, 1995 through Year ended May 3, 1995 through
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment loss $(286,925) $(102,659) $(272,469) $(27,334)
Net realized gain on sales of investments 3,926,442 59,816 2,570,609 53,290
Net change in unrealized appreciation 19,022,289 439,443 6,894,415 1,109,954
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 22,661,806 396,600 9,192,555 1,135,910
Distributions to shareholders from:
Net investment income - - (6,530) -
Net realized gain (66,519) - (52,334) -
- -----------------------------------------------------------------------------------------------------------------------------------
Total distribution to shareholders (66,519) - (58,864) -
From Fund share transactions:
Reinvestment of dividends and capital gain
distributions 66,519 - 58,864 -
Proceeds from shares sold 91,019,446 24,819,962 67,872,674 11,951,601
- -----------------------------------------------------------------------------------------------------------------------------------
91,085,965 24,819,962 67,931,538 11,951,601
Payments for shares redeemed (6,626,877) (3,438,708) (3,579,071) (1,844,269)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from Fund share
transactions 84,459,088 21,381,254 64,352,467 10,107,332
- -----------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 107,054,375 21,777,854 73,486,158 11,243,242
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period 21,903,536 125,682 11,368,924 125,682
- -----------------------------------------------------------------------------------------------------------------------------------
End of Period (a) $128,957,911 $21,903,536 $84,855,082 $11,368,924
===================================================================================================================================
</TABLE>
(a) Includes accumulated net investment loss of $102,659 for Wanger U.S. Small
Cap and $27,401 for Wanger International Small Cap in 1995.
See accompanying notes to financial statements.
19
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Financial Highlights
<TABLE>
<CAPTION>
Year ended May 3, 1995 through
December 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, beginning of period $ 11.60 $ 10.00
Income From Investment Operations
Net investment loss (c) (.06) (.05)
Net realized and unrealized gain on investments 5.46 1.65
- ---------------------------------------------------------------------------------------------------
Total from investment operations 5.40 1.60
Less Distributions
Dividends from net investment income -- --
Distributions from net realized gain (0.03) --
- --------------------------------------------------------------------------------------------------
Total distributions (0.03) --
Net Asset Value, end of period $ 16.97 $ 11.60
- --------------------------------------------------------------------------------------------------
Total Return 46.59% 16.00%
Ratios/Supplemental Data:
Ratio of expenses to average net assets (a)(b) 1.21% 2.08% *
Ratio of net investment loss to average net assets (b) (.41%) (1.44%)*
Portfolio turnover rate 46% 59% *
Net assets at end of period $128,957,911 $21,903,536
The average commissions paid per share on stock transactions for the
year ended December 31, 1996 was $.0581.
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects gross custodian fees. This ratio net of custodian fees
paid indirectly would have been 1.19% for the year ended December 31, 1996
and 2.00% for the period ended December 31, 1995.
(b) The Fund was reimbursed by the Advisor for certain net expenses from May 3,
1995 through December 31, 1995. Without the reimbursement, the ratio of
expenses to average net assets and the ratio of net investment loss to
average net assets for the period ended December 31, 1995 would have been
2.35% and (1.71%), respectively.
(c) Net investment loss per share for the year ended December 31, 1996 was
based upon the average shares outstanding during the year.
See accompanying notes to financial statements.
20
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Financial Highlights
<TABLE>
<CAPTION>
Year ended May 3, 1995 through
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, beginning of period $13.45 $10.00
Income From Investment Operations
Net investment loss (c) (.09) (.03)
Net realized and unrealized gain on investments 4.38 3.48
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.29 3.45
Less Distributions
Dividends from net investment income -- --
Distributions from net realized gain (.03) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (.03) --
Net Asset Value, end of period $17.71 $13.45
- ------------------------------------------------------------------------------------------------------------------------
Total Return 32.01% 34.50%
Ratios/Supplemental Data
Ratio of expenses to average net assets (a) (b) 1.79% 2.32% *
Ratio of net investment loss to average net assets (b) (0.56%) (0.81%)*
Portfolio turnover rate 50% 14% *
Net assets at end of period 84,855,082 11,368,924
The average commissions paid per share on stock transactions
for the year ended December 31, 1996 was $.0130.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects gross custodian fees. This ratio net of custodian fees
paid indirectly would have been 1.75% for the year ended December 31, 1996
and 2.00% for the period ended December 31, 1995.
(b) The Fund was reimbursed by the Advisor for certain expenses from May 3, 1995
through December 31, 1995. Without the reimbursement, the ratio of expenses
to average net assets and the ratio of net investment income to average net
assets for the period ended December 31, 1995 would have been 4.20% and
(2.69)%, respectively.
(c) Net investment loss per share for the year ended December 31, 1996 was
based upon the average shares outstanding during the year.
See accompanying notes to financial statements.
21
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements
1. Nature of operations
Wanger U.S. Small Cap and Wanger International Small Cap ("the Funds") are
series of Wanger Advisors Trust ("the Trust"), an open-end management investment
company organized as a Massachusetts business trust. The investment objective of
each Fund is to seek long-term growth of capital. The Funds are available only
for allocation to certain life insurance company separate accounts established
for the purpose of funding qualified and non-qualified variable annuity
contracts, and may also be offered directly to certain types of pension plans
and retirement arrangements.
2. Significant Accounting Policies
Security valuation
Investments are stated at current value. Securities traded on securities
exchanges or in over-the-counter markets in which transaction prices are
reported are valued at the last sales price at the time of valuation. Securities
for which there are no reported sales on the valuation date are valued at the
mean of the latest bid and ask quotation or, if there is no ask quotation, at
the most recent bid quotation. Money market instruments having a maturity of 60
days or less from the valuation date are valued on an amortized cost basis.
Securities for which quotations are not readily available and any other assets
are valued 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 Fund. Interest income is recorded on the
accrual basis and includes amortization of discounts on money market instruments
and on long-term debt instruments when required for federal income tax purposes.
Realized gains and losses from security transactions are reported on an
identified cost basis. Net realized gains for Wanger U.S. Small Cap include
distributions of realized gains from other investment companies of $202,920 in
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 the Fund's investments and other assets, less liabilities, by the
number of Fund shares outstanding.
Custodian fees
Custodian fees are reduced based on each Fund's cash balances maintained with
the custodian. This presentation does not affect the determination of net
investment income.
Federal income taxes, dividends and distributions to shareholders
The Funds have complied with the special provisions of the Internal Revenue Code
available to regulated investment companies and, in the manner provided therein,
distribute all of their taxable income, as well as any net realized gain on
sales of investments and foreign currency transactions reportable for federal
income tax purposes.
Wanger International Small Cap has elected to mark-to-market its investment
in Passive Foreign Investment Companies ("PFICS") for income tax purposes. In
accordance with this election, the Fund recognized cumulative net unrealized
appreciation on PFICS of $210,309 for the year ended December 31, 1996. The
amount for 1996 is treated as ordinary income for federal income tax purposes,
and as such, is used to offset the net investment loss incurred by the Fund.
Cumulative net unrealized appreciation recognized in prior years on PFICs sold
in 1996 amounted to $22,353.
Dividends and distributions payable to its shareholders are recorded by the
Fund on the ex-dividend date.
Reclassifications have been made in 1996 for Wanger U.S. Small Cap and
Wanger International Small Cap in the accompanying analysis of net assets from
accumulated net investment loss to undistributed net realized gains on sales of
investments of $389,584 and $96,091, respectively, to reflect differences
between financial reporting and income tax bases.
22
<PAGE>
[LOGO]
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements
3. Transactions with Affiliates
The Fund's investment advisor, Wanger Asset Management, L.P. ("WAM"), furnishes
continuing investment supervision to the Funds and is responsible for overall
management of the Funds' business affairs. Each Fund pays WAM a monthly advisory
fee based upon average daily net assets at the following rates:
<TABLE>
<CAPTION>
Wanger U.S. Wanger International
Small Cap Small Cap
- --------------------------------------------------------------------------------
<S> <C> <C>
Average Daily Net Assets:
For the first $100 million 1.00% 1.30%
Next $150 million .95% 1.20%
In excess of $250 million .90% 1.10%
- --------------------------------------------------------------------------------
</TABLE>
The investment advisory agreements also provide that WAM will reimburse the
Funds to the extent that ordinary operating expenses (computed based on net
custodian fees) exceed 1.50% (2.00% in 1995) for Wanger U.S. Small Cap and 1.90%
(2.00% in 1995) for Wanger International Small Cap, of average net assets. WAM
was not required to reimburse the Funds under these agreements for the year
ended December 31, 1996.
Certain officers and trustees of the Trust are also principals of WAM. The
Trust makes no direct payments to its officers and trustees who are affiliated
with WAM. Wanger U.S. Small Cap and Wanger International Small Cap incurred
trustees' fees and expenses of $15,524 and $15,400 respectively, for the year
ended December 31, 1996 to trustees not affiliated with WAM.
WAM advanced $100,000 to each Fund in connection with their organization
and initial registration. These costs are being amortized and reimbursed to WAM
over the period May, 1995 through April, 2000.
WAM Brokerage Services, L.L.C., a wholly-owned subsidiary of WAM, is the
distributor of each Fund's shares and receives no compensation for its services.
- --------------------------------------------------------------------------------
4. 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:
<TABLE>
<CAPTION>
--------------------------------------- ---------------------------------------
Wanger U.S. Small Cap Wanger International Small Cap
Year ended Period ended Year ended Period ended
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,137,385 2,170,461 4,154,432 986,106
Shares issued in reinvestment of dividend and
capital gain distributions 5,157 - 3,911 -
- -----------------------------------------------------------------------------------------------------------------------------------
6,142,542 2,170,461 4,158,343 986,106
Less shares redeemed 432,817 294,633 212,404 153,492
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in shares outstanding 5,709,725 1,875,828 3,945,939 832,614
===================================================================================================================================
</TABLE>
5. Investment transactions
The aggregate cost of purchases and proceeds from sales other than short-term
obligations for the year ended December 31, 1996 were:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Wanger U.S. Small Cap $103,202,082 $30,342,586
Wanger International Small Cap 82,019,311 23,145,432
</TABLE>
23
<PAGE>
Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Report of Independent Auditors
To the Shareholders and the Board of Trustees
of Wanger Advisors Trust
We have audited the accompanying statements of assets and liabilities, including
the statements of investments, of the Wanger Advisors Trust, comprising the U.S.
Small Cap and Wanger International Small Cap portfolios, as of December 31,
1996, the related statements of operations for the year then ended and changes
in net assets 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
each of the respective portfolios of the Wanger Advisors Trust as of December
31, 1996, the results of their operations for the year then ended and changes in
net assets and financial highlights for the periods indicated thereon, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 31, 1997
24
<PAGE>
<TABLE>
<CAPTION>
Wanger Advisors Trust
<S> <C>
Trustees Transfer Agent,
Fred D. Hasselbring Dividend Disbursing Agent
Charles P. McQuaid and Custodian
P. Michael Phelps
James A. Star State Street Bank
Ralph Wanger and Trust Company
Attention:
Officers Wanger Advisors Trust
P.O. Box 8502
Ralph Wanger Boston, Massachusetts
President 02266-8502
Charles P. McQuaid Distributor
Senior Vice President WAM Brokerage
Services, L.L.C.
Terence M. Hogan 227 West Monroe Street
Vice President Suite 3000
Chicago, Illinois 60606
Leah J. Zell 1-800-5-WANGER
Vice President (1-800-592-6437)
Merrillyn J. Kosier Investment Advisor
Vice President and Wanger Asset
Secretary Management, L.P.
227 West Monroe Street
Bruce H. Lauer Suite 3000
Vice President and Chicago, Illinois 60606
Treasurer 1-800-5-WANGER
(1-800-592-6437)
Kenneth A. Kalina
Assistant Treasurer Legal Counsel
Bell, Boyd & Lloyd
Chicago, Illinois
Independent Auditors
Ernst & Young LLP
Chicago, Illinois
</TABLE>
This report, including the audited schedules of investments and financial
statements, is submitted for the general information of the shareholders of the
Wanger Advisors Trust. This report is not authorized for distribution unless
preceded or accompanied by a prospectus.
<PAGE>
PART C
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) Wanger U.S. Small Cap Adviser (incorporated by reference to the
following portions of Registrant's 1996 Wangers Advisors 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 for the period ended
December 31, 1996
Statement of Changes in Net Assets for the period ended
December 31, 1996
Statement of Investments at December 31, 1996
Notes to financial statements
(ii) Wanger International Small Cap Adviser (incorporated by reference
to the following portions of Registrant's 1996 Wangers Advisors
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 for the period ended
December 31, 1996
Statement of Changes in Net Assets for the period ended
December 31, 1996
Statement of Investments at December 31, 1996
Notes to financial statements
C-1
<PAGE>
(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)
2. By-laws.(2)
3. None
4(a). Specimen Share Certificate - Wanger U.S. Small Cap. (1)
4(b). Specimen Share Certificate - Wanger International Small Cap. (1)
5(a). Investment Advisory Agreement - Wanger U.S. Small Cap.(2)
5(b). Investment Advisory Agreement - Wanger International Small
Cap.(2)
6. Distribution Agreement between Wanger Advisors Trust and WAM
Brokerage Services, L.L.C. dated May 1, 1996.(2)
7. None.
8. Custodian Contract between Wanger Advisors Trust and State Street
Bank and Trust Company.(2)
9(a)(1) Amendment No. 1 to the Participation Agreement between Wanger
Advisors Trust and Phoenix Home Life Mutual Insurance Company
dated April 18, 1995 (2) (amendment dated December 16, 1996).
9(a)(2) Amendment No. 1 to the Participation Agreement between Wanger
Advisors Trust and PHL Variable Insurance Company dated February
23, 1995 (2) (amendment dated December 16, 1996).
9(a)(3) Amendment No. 1 to the Participation Agreement between Wanger
Advisors Trust and Providian Life and Health Insurance Company
(formerly National Home Life Assurance Company) dated May 19,
1995 (2) (amendment dated December 16, 1996).
C-2
<PAGE>
9(a)(4) Participation Agreement between Wanger Advisors Trust and First
Providian Life and Health Insurance Company dated November 15,
1996, and Amendment No. 1 dated December 16, 1996.
9(a)(5) Participation Agreement between Wanger Advisors Trust and SAFECO
Life Insurance Company dated September 27, 1995 and Amendment
No. 1 dated December 18, 1996.
9(b). Transfer Agency and Service Agreement between Wanger Advisors
Trust and State Street Bank and Trust Company.(2)
10. Legal opinion and consent of Bell, Boyd & Lloyd dated
February 15, 1995.(2)
11. Consent of Independent Auditors.
12. None.
13. Subscription Agreement.(2)
14. None.
15. None.
16(a). Computation of performance information - Wanger U.S. Small
Cap.(2)
16(b). Computation of performance information - Wanger International
Small Cap.(2)
17(a) Financial data schedule - Wanger U.S. Small Cap.
17(b) Financial data schedule - Wanger International Small Cap.
18 Form of Purchase Application.(2)
______________________________
(1) Incorporated by reference to the exhibit of the same number filed with
post-effective amendment no. 1 to Registrant's registration statement on
form N-1A, Securities Act registration no. 33-83548 (the "Registration
Statement") filed on August 25, 1995.
(2) Incorporated by reference to the exhibit of the same number filed with
post-effective amendment no. 2 to Registrant's Registration Statement filed
on April 19, 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 under the caption "Organization and
Management" and in the Statement of Additional Information under the
caption "Investment Adviser" is incorporated by reference.
C-3
<PAGE>
Item 26. Number of Holders of Securities
As of January 31, 1997, there were 19 record holders of the
Registrant's shares of beneficial interest of the series designated
Wanger U.S. Small Cap and 31 record holders of the Registrant's shares
of beneficial interest of the series designated Wanger International
Small Cap.
Item 27. Indemnification
Article VIII of the Agreement and Declaration of Trust of the
registrant (Exhibit 1 included herein) provides in effect that the
Registrant shall provide certain indemnification of its trustees and
officers. In accordance with Section 17(h) of the Investment Company
Act of 1940, 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 (the "Securities Act") 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 1940
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer, or
controlling person of the Registrant in connection with 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 1940 Act and will be governed by the final
adjudication of such issue.
The 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.
C-4
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
The information in the prospectus under the caption "Organization
and 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 Underwriter
WAM Brokerage Services, L.L.C. also acts as principal underwriter for
Acorn Investment Trust.
Name Positions and Offices Positions and Offices
with Underwriters with Registrant
Terence M. Hogan President Vice President and
Trustee
Merrillyn J. Kosier Vice President and Vice President
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
Wanger Advisors Trust
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
Item 31. Management Services
Not applicable.
C-5
<PAGE>
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) The 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.
The Registrant undertakes, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of
a director or directors and to assist in communications with other
shareholders as required by Section 16(c).
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
rule 485(b) under the Securities Act of 1933 and 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 21, 1996.
WANGER ADVISORS 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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C> <C>
/s/Fred D. Hasselbring Trustee )
- ------------------------ )
Fred D. Hasselbring )
)
/s/Terence M. Hogan Trustee )
- ------------------------ )
Terence M. Hogan )
)
/s/Charles P. McQuaid Trustee )
- ------------------------ )
Charles P. McQuaid )
)
/s/P. Michael Phelps Trustee ) April 21, 1996
- ------------------------ )
P. Michael Phelps )
)
/s/James A. Star Trustee )
- ------------------------ )
James A. Star )
)
/s/Ralph Wanger Trustee and President )
- ------------------------ (principal executive )
Ralph Wanger officer) )
)
/s/Leah J. Zell Trustee )
- ------------------------ )
Leah J. Zell )
)
/s/Bruce H. Lauer Treasurer (principal )
- ------------------------ financial and accounting )
Bruce H. Lauer officer) )
</TABLE>
<PAGE>
Index of Exhibits Filed with this Amendment
-------------------------------------------
Exhibit
Number Exhibit
- ------- -------
9(a)(1) Amendment No. 1 to the Participation
Agreement between Wanger Advisors Trust
and Phoenix Home Life Mutual Insurance
Company dated April 18, 1995 (amendment
dated December 16, 1996)
9(a)(2) Amendment No. 1 to the Participation
Agreement between Wanger Advisors Trust
and PHL Variable Insurance Company
dated February 23, 1995 (amendment
dated December 16, 1996)
9(a)(3) Amendment No. 1 to the Participation
Agreement between Wanger Advisors
Trust and Providian Life and Health
Insurance Company (formerly National
Home Life Assurance Company) dated
May 19, 1995 (amendment dated December
16, 1996).
9(a)(4) Participation Agreement between Wanger
Advisors Trust and First Providian Life
and Health Insurance Company dated November
15, 1996, and Amendment No. 1 dated
December 16, 1996
9(a)(5) Participation Agreement between Wanger
Advisors Trust and Safeco Life Insurance
Company dated September 27, 1995 and
Amendment No. 1 dated December 18, 1996
11 Consent of Independent Auditors
17(a) Financial data schedule - Wanger U.S. Small
Cap
17(b) Financial data schedule - Wanger International
Small Cap
<PAGE>
EXHIBIT 9(a)(1)
AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT
THIS AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT ("Amendment No. 1"),
made and entered into as of this 16th day of December, 1996, supplementing and
amending the Participation Agreement made and entered into the 18th day of
April, 1995 (the "Original Participation Agreement," and together with this
Amendment No. 1, the "Agreement") by and between WANGER ADVISORS TRUST, an
unincorporated business trust formed under the laws of Massachusetts (the
"Trust"), and PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY, a New York life
insurance company (the "Company"), on its own behalf and on behalf of each
separate account of the Company identified in the Agreement.
WHEREAS, the Trust currently serves as an investment vehicle for certain
accounts of the Company pursuant to the Original Participation Agreement; and
WHEREAS, the Trust has applied for an order from the Securities and
Exchange Commission (the "SEC") (File No. 812-10198), granting Participating
Insurance Companies (as defined in the Original Participation Agreement) and
variable annuity and variable life separate accounts exemptions from the
provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined
in the Original Participation Agreement) and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust
and each Series thereof to be sold to and held by variable annuity and variable
life insurance separate accounts of life insurance companies that may or may not
be affiliated with one another and qualified pension and retirement plans
outside of the separate account context (the "Exemptive Order"); and
WHEREAS, the Company and the Trust have agreed to hereby supplement and
amend the Original Participation Agreement in order to reflect the conditions
and undertakings that are expected to be imposed on the Company and the Trust by
virtue of such Exemptive Order;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Company agree as follows:
SECTION 1. Definitions
For all purposes of this Amendment No. 1, except as otherwise expressly
provided or unless the context otherwise requires:
(1) All references in this Amendment No. 1 and the Original Participation
Agreement to designated "Articles" and other subdivisions are to the designated
Articles and other subdivisions of the Original Participation Agreement. The
words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of
similar import refer to this Amendment No. 1 as a whole and not to any
particular "Section" or other subdivision.
<PAGE>
(2) All terms used herein and not otherwise defined shall have the same
meanings as those given to such terms in the Original Participation Agreement,
and include the plural as well as the singular, and the Original Participation
Agreement is hereby amended to included any terms defined herein.
(3) Any references to the "Agreement" in the Original Participation
Agreement are hereby amended to include, collectively, the Original
Participation Agreement and this Amendment No. 1.
SECTION 2. Amendment to Article VII
Article VII of the Original Participation Agreement is hereby amended to
read as follows:
"ARTICLE VII. Potential Conflicts and Compliance With
Exemptive Order
7.1. The Trust Board will monitor the Trust for the existence of any
material irreconcilable conflict between the interests of the Contract
Owners of all Participating Accounts and of Qualified Participants
investing in the Trust and each Series thereof. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) an action by
any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a
public ruling, private letter ruling, no-action or interpretative letter,
or any similar action by insurance, tax, or securities regulatory
authorities; (c) an administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any Series are
managed; (e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract owners; (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners; or (g) if applicable, a decision by a Qualified Entity to
disregard the voting instructions of Qualified Participants. The Trust
Board shall promptly inform the Company in writing if it determines that a
material irreconcilable conflict exists and the implications thereof.
7.2 The Company shall report any potential or existing conflicts to
the Trust Board. The Company will be responsible for assisting the Trust
Board in carrying out its responsibilities by providing the Trust Board
with all information reasonably necessary for the Trust Board to consider
any issues raised. This responsibility includes, but is not limited to, an
obligation by the Company to inform the Trust Board whenever it has
determined to disregard Contract Owner voting instructions. Such
responsibilities shall be carried out by the Participants with a view only
to the interests of Contract Owners.
7.3. If it is determined by a majority of the Trust Board, or a
majority of the members of the Trust Board who are not interested persons
of the Trust, the Investment Adviser or any sub-adviser to any of the
Series (the "Independent Trustees"), that a material irreconcilable
conflict exists between the interests of
2
<PAGE>
the Contract Owners of the Company's Participating Accounts and of other
Participating Accounts and Qualified Participants investing in the Trust
and each Series thereof, the Company shall, at its expense and to the
extent reasonably practicable (as determined by a majority of the
Independent Trustees), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict. Such measures may include:
(a) withdrawing, without charge or penalty to the Company, the assets
allocable to some or all of the separate accounts from the Trust or any
Series and reinvesting such assets in a different investment medium, which
may include another Series of the Trust, or submitting the question of
whether such segregation should be implemented to a vote of all affected
Contract Owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected Contract Owners the option of making such a change; and (b)
establishing a new registered management investment company or managed
separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract Owner voting instructions and
that decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Trust's election, to withdraw the
Account's investment in the Trust and terminate this Agreement and no
charge or penalty will be imposed as a result of such withdrawal. Any such
withdrawal and termination must take place within six (6) months after the
Trust gives written notice that this provision is being implemented, and
until the end of that six month period the Investment Adviser and the Trust
shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Trust.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts
with the majority of other state regulators, then the Company will withdraw
the Account's investment in the Trust and terminate this Agreement within
six months after the Trust Board informs the Company in writing that it has
determined that such decision has created a material irreconcilable
conflict, and that said conflict cannot be remedied by any other means.
Until the end of the foregoing six month period, the Investment Adviser and
the Trust shall continue to accept and implement orders by the Company for
the purchase (and redemption) of shares of the Trust.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the Independent Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in no
event will the Trust or the Investment Adviser be required to establish a
new funding medium for the Contracts. The Company shall not be required by
Section 7.3 to establish a new funding medium for the Contracts if an offer
to do so has been declined by
3
<PAGE>
vote of a majority of Contract Owners materially adversely affected by the
material irreconcilable conflict. In the event that the Trust Board
determines that any proposed action does not adequately remedy any material
irreconcilable conflict, then the Company will withdraw the Account's
investment in the Trust and terminate this Agreement within six (6) months
after the Trust Board informs the Company in writing of the foregoing
determination, without charge or penalty to the Company.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Exemptive Order) on terms and conditions
materially different from those contained in the Exemptive Order, then (a)
the Trust and/or the Company, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Article
V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue
in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
7.8 The Company shall at least annually submit to the Trust Board such
reports, materials or data as the Trust Board may reasonably request so
that the Trust Board may fully carry out its obligations under the
Exemptive Order; provided, however, that the Board may require the
submission of such reports on data on a more frequent basis if it so deems
appropriate.
7.9 The Company, or any affiliate, will maintain at its home office,
available to the SEC, (a) a list of its officers, directors and employees
who participate directly in the management of administration of any Account
and/or (b) a list of its agents who, as registered representatives, offer
and sell Contracts."
SECTION 3. Schedules
Schedules 1, 2 and 3 to the Original Participation Agreement are hereby
amended to read as Schedules 1, 2 and 3 to this Amendment No.1, respectively.
SECTION 4. Miscellaneous
4.1 The captions in this Amendment No. 1 are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
4.2 This Amendment No. 1 may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
4.3 If any provision of this Amendment No. 1 shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
No. 1 to be executed in its name and behalf by its duly authorized office on the
date specified below.
PHOENIX HOME LIFE MUTUAL
INSURANCE COMPANY
(Company)
Date: December 16, 1996 By: /s/ Dona D. Young
Name: Dona D. Young
Title: Executive Vice President, Individual
Insurance and General Counsel
WANGER ADVISORS TRUST
(Trust)
Date: December 16, 1996 By: /s/ Charles P. McQuaid
Name: Charles P. McQuaid
Title: Senior Vice President
5
<PAGE>
EXHIBIT 9(a)(2)
AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT
THIS AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT ("Amendment No. 1"),
made and entered into as of this 16th day of December, 1996, supplementing and
amending the Participation Agreement made and entered into the 23rd day of
February, 1995 (the "Original Participation Agreement," and together with this
Amendment No. 1, the "Agreement") by and between WANGER ADVISORS TRUST, an
unincorporated business trust formed under the laws of Massachusetts (the
"Trust"), and PHL VARIABLE INSURANCE COMPANY, a Connecticut life insurance
company (the "Company"), on its own behalf and on behalf of each separate
account of the Company identified in the Agreement.
WHEREAS, the Trust currently serves as an investment vehicle for certain
accounts of the Company pursuant to the Original Participation Agreement; and
WHEREAS, the Trust has applied for an order from the Securities and
Exchange Commission (the "SEC") (File No. 812-10198), granting Participating
Insurance Companies (as defined in the Original Participation Agreement) and
variable annuity and variable life separate accounts exemptions from the
provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined
in the Original Participation Agreement) and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust
and each Series thereof to be sold to and held by variable annuity and variable
life insurance separate accounts of life insurance companies that may or may not
be affiliated with one another and qualified pension and retirement plans
outside of the separate account context (the "Exemptive Order"); and
WHEREAS, the Company and the Trust have agreed to hereby supplement and
amend the Original Participation Agreement in order to reflect the conditions
and undertakings that are expected to be imposed on the Company and the Trust by
virtue of such Exemptive Order;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Company agree as follows:
SECTION 1. Definitions
-----------
For all purposes of this Amendment No. 1, except as otherwise expressly
provided or unless the context otherwise requires:
(1) All references in this Amendment No. 1 and the Original Participation
Agreement to designated "Articles" and other subdivisions are to the designated
Articles and other subdivisions of the Original Participation Agreement. The
words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of
similar import refer to this Amendment No. 1 as a whole and not to any
particular "Section" or other subdivision.
(2) All terms used herein and not otherwise defined shall have the same
meanings as those given to such terms in the Original Participation Agreement,
and include the plural as well
<PAGE>
as the singular, and the Original Participation Agreement is hereby amended to
included any terms defined herein.
(3) Any references to the "Agreement" in the Original Participation
Agreement are hereby amended to include, collectively, the Original
Participation Agreement and this Amendment No. 1.
SECTION 2. Amendment to Article VII
------------------------
Article VII of the Original Participation Agreement is hereby amended to
read as follows:
"ARTICLE VII. Potential Conflicts and Compliance With
---------------------------------------
Exemptive Order
---------------
7.1. The Trust Board will monitor the Trust for the existence of any
material irreconcilable conflict between the interests of the Contract
Owners of all Participating Accounts and of Qualified Participants
investing in the Trust and each Series thereof. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) an action by
any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a
public ruling, private letter ruling, no-action or interpretative letter,
or any similar action by insurance, tax, or securities regulatory
authorities; (c) an administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any Series are
managed; (e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract owners; (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners; or (g) if applicable, a decision by a Qualified Entity to
disregard the voting instructions of Qualified Participants. The Trust
Board shall promptly inform the Company in writing if it determines that a
material irreconcilable conflict exists and the implications thereof.
7.2 The Company shall report any potential or existing conflicts to
the Trust Board. The Company will be responsible for assisting the Trust
Board in carrying out its responsibilities by providing the Trust Board
with all information reasonably necessary for the Trust Board to consider
any issues raised. This responsibility includes, but is not limited to, an
obligation by the Company to inform the Trust Board whenever it has
determined to disregard Contract Owner voting instructions. Such
responsibilities shall be carried out by the Participants with a view only
to the interests of Contract Owners.
7.3. If it is determined by a majority of the Trust Board, or a
majority of the members of the Trust Board who are not interested persons
of the Trust, the Investment Adviser or any sub-adviser to any of the
Series (the "Independent Trustees"), that a material irreconcilable
conflict exists between the interests of the Contract Owners of the
Company's Participating Accounts and of other Participating Accounts and
Qualified Participants investing in the Trust and each
2
<PAGE>
Series thereof, the Company shall, at its expense and to the extent
reasonably practicable (as determined by a majority of the Independent
Trustees), take whatever steps are necessary to remedy or eliminate the
material irreconcilable conflict. Such measures may include: (a)
withdrawing, without charge or penalty to the Company, the assets allocable
to some or all of the separate accounts from the Trust or any Series and
reinvesting such assets in a different investment medium, which may include
another Series of the Trust, or submitting the question of whether such
segregation should be implemented to a vote of all affected Contract Owners
and, as appropriate, segregating the assets of any appropriate group (i.e.,
annuity contract owners, life insurance contract owners, or variable
contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected Contract
Owners the option of making such a change; and (b) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract Owner voting instructions and
that decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Trust's election, to withdraw the
Account's investment in the Trust and terminate this Agreement and no
charge or penalty will be imposed as a result of such withdrawal. Any such
withdrawal and termination must take place within six (6) months after the
Trust gives written notice that this provision is being implemented, and
until the end of that six month period the Investment Adviser and the Trust
shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Trust.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts
with the majority of other state regulators, then the Company will withdraw
the Account's investment in the Trust and terminate this Agreement within
six months after the Trust Board informs the Company in writing that it has
determined that such decision has created a material irreconcilable
conflict, and that said conflict cannot be remedied by any other means.
Until the end of the foregoing six month period, the Investment Adviser and
the Trust shall continue to accept and implement orders by the Company for
the purchase (and redemption) of shares of the Trust.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the Independent Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in no
event will the Trust or the Investment Adviser be required to establish a
new funding medium for the Contracts. The Company shall not be required by
Section 7.3 to establish a new funding medium for the Contracts if an offer
to do so has been declined by vote of a majority of Contract Owners
materially adversely affected by the material irreconcilable conflict. In
the event that the Trust Board determines that
3
<PAGE>
any proposed action does not adequately remedy any material irreconcilable
conflict, then the Company will withdraw the Account's investment in the
Trust and terminate this Agreement within six (6) months after the Trust
Board informs the Company in writing of the foregoing determination,
without charge or penalty to the Company.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Exemptive Order) on terms and conditions
materially different from those contained in the Exemptive Order, then (a)
the Trust and/or the Company, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Article
V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue
in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
7.8 The Company shall at least annually submit to the Trust Board such
reports, materials or data as the Trust Board may reasonably request so
that the Trust Board may fully carry out its obligations under the
Exemptive Order; provided, however, that the Board may require the
submission of such reports on data on a more frequent basis if it so deems
appropriate.
7.9 The Company, or any affiliate, will maintain at its home office,
available to the SEC, (a) a list of its officers, directors and employees
who participate directly in the management of administration of any Account
and/or (b) a list of its agents who, as registered representatives, offer
and sell Contracts."
SECTION 3. Schedules
---------
Schedules 1, 2 and 3 to the Original Participation Agreement are hereby
amended to read as Schedules 1, 2 and 3 to this Amendment No.1, respectively.
SECTION 4. Miscellaneous
-------------
4.1 The captions in this Amendment No. 1 are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
4.2 This Amendment No. 1 may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
4.3 If any provision of this Amendment No. 1 shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
No. 1 to be executed in its name and behalf by its duly authorized office on the
date specified below.
PHL VARIABLE INSURANCE COMPANY
(Company)
Date: December 16, 1996 By: /s/ Dona D. Young
Name: Dona D. Young
Title: Executive Vice President
WANGER ADVISORS TRUST
(Trust)
Date: December 16, 1996 By: /s/ Charles P.McQuaid
Name: Charles P. McQuaid
Title: Senior Vice President
5
<PAGE>
EXHIBIT 9(a)(3)
AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT
THIS AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT, made and entered into as
of this 16th day of December, 1996, supplementing and amending the Participation
Agreement made and entered into the 19th day of May, 1995 (the "Original
Participation Agreement," and together with this Amendment No. 1, the
"Agreement") by and between WANGER ADVISORS TRUST, an unincorporated business
trust formed under the laws of Massachusetts (the "Trust"), and PROVIDIAN LIFE
AND HEALTH INSURANCE COMPANY, (formerly named National Home Life Assurance
Company) a Missouri life insurance company (the "Company"), on its own behalf
and on behalf of each separate account of the Company identified in the
Agreement.
WHEREAS, the Trust currently serves as an investment vehicle for certain
accounts of the Company pursuant to the Original Participation Agreement; and
WHEREAS, the Trust has applied for an order from the Securities and
Exchange Commission (the "SEC") (File No. 812-10198), granting Participating
Insurance Companies (as defined in the Original Participation Agreement) and
variable annuity and variable life separate accounts exemptions from the
provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined
in the Original Participation Agreement) and Rules 6e-2(b)(15) and 6e-
3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust
and each Series thereof to be sold to and held by variable annuity and variable
life insurance separate accounts of life insurance companies that may or may not
be affiliated with one another and qualified pension and retirement plans
outside of the separate account context (the "Exemptive Order"); and
WHEREAS, the Company and the Trust have agreed to hereby supplement and
amend the Original Participation Agreement in order to reflect the conditions
and undertakings that are expected to be imposed on the Company and the Trust by
virtue of such Exemptive Order;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Company agree as follows:
SECTION 1. Definitions
-----------
For all purposes of this Amendment No. 1, except as otherwise expressly
provided or unless the context otherwise requires:
(1) All references in this Amendment No. 1 and the Original Participation
Agreement to designated "Articles" and other subdivisions are to the designated
Articles and other subdivisions of the Original Participation Agreement. The
words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of
similar import refer to this Amendment No. 1 as a whole and not to any
particular "Section" or other subdivision.
<PAGE>
(2) All terms used herein and not otherwise defined shall have the same
meanings as those given to such terms in the Original Participation Agreement,
and include the plural as well as the singular, and the Original Participation
Agreement is hereby amended to included any terms defined herein.
(3) Any references to the "Agreement" in the Original Participation
Agreement are hereby amended to include, collectively, the Original
Participation Agreement and this Amendment No. 1.
SECTION 2. Amendment to Article VII
------------------------
Article VII of the Original Participation Agreement is hereby amended to
read in its entirety as follows:
"ARTICLE VII. Potential Conflicts and Compliance With
---------------------------------------
Exemptive Order
---------------
7.1. The Trust Board will monitor the Trust for the existence of any
material irreconcilable conflict between the interests of the Contract
Owners of all Participating Accounts and of Qualified Participants
investing in the Trust and each Series thereof. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) an action by
any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a
public ruling, private letter ruling, no-action or interpretative letter,
or any similar action by insurance, tax, or securities regulatory
authorities; (c) an administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any Series are
managed; (e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract owners; (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners; or (g) if applicable, a decision by a Qualified Entity to
disregard the voting instructions of Qualified Participants. The Trust
Board shall promptly inform the Company in writing if it determines that a
material irreconcilable conflict exists and the implications thereof.
7.2 The Company shall report any potential or existing conflicts to
the Trust Board. The Company will be responsible for assisting the Trust
Board in carrying out its responsibilities by providing the Trust Board
with all information reasonably necessary for the Trust Board to consider
any issues raised. This responsibility includes, but is not limited to, an
obligation by the Company to inform the Trust Board whenever it has
determined to disregard Contract Owner voting instructions. Such
responsibilities shall be carried out by the Participants with a view only
to the interests of Contract Owners.
7.3. If it is determined by a majority of the Trust Board, or a
majority of the members of the Trust Board who are not interested persons
of the Trust, the Investment Adviser or any sub-adviser to any of the
Series (the "Independent
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Trustees"), that a material irreconcilable conflict exists, the Company
shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the Independent Trustees), take whatever steps
are necessary to remedy or eliminate the material irreconcilable conflict
including: (a) withdrawing the assets allocable to some or all of the
separate accounts from the Trust or any Series and reinvesting such assets
in a different investment medium, which may include another Series of the
Trust, or submitting the question of whether such segregation should be
implemented to a vote of all affected Contract Owners and, as appropriate,
segregating the assets of any appropriate group (i.e., annuity contract
owners, life insurance contract owners, or variable contract owners of one
or more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected Contract Owners the option of
making such a change; and (b) establishing a new registered management
investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract Owner voting instructions and
that decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Trust's election, to withdraw the
Account's investment in the Trust and terminate this Agreement and no
charge or penalty will be imposed as a result of such withdrawal. Any such
withdrawal and termination must take place within six (6) months after the
Trust gives written notice that this provision is being implemented, and
until the end of that six month period the Investment Adviser and the Trust
shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Trust.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts
with the majority of other state regulators, then the Company will withdraw
the Account's investment in the Trust and terminate this Agreement within
six months after the Trust Board informs the Company in writing that it has
determined that such decision has created a material irreconcilable
conflict. Until the end of the foregoing six month period, the Investment
Adviser and the Trust shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Trust.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the Independent Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in no
event will the Trust or the Investment Adviser be required to establish a
new funding medium for the Contracts. The Company shall not be required by
Section 7.3 to establish a new funding medium for the Contracts if an offer
to do so has been declined by vote of a majority of Contract Owners
materially adversely affected by the material irreconcilable conflict. In
the event that the Trust Board determines that any proposed action does not
adequately remedy any material irreconcilable
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conflict, then the Company will withdraw the Account's investment in the
Trust and terminate this Agreement within six (6) months after the Trust
Board informs the Company in writing of the foregoing determination.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Exemptive Order) on terms and conditions
materially different from those contained in the Exemptive Order, then (a)
the Trust and/or the Company, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Article
V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue
in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
7.8 The Company shall at least annually submit to the Trust Board such
reports, materials or data as the Trust Board may reasonably request so
that the Trust Board may fully carry out its obligations under the
Exemptive Order; provided, however, that the Board may require the
submission of such reports on data on a more frequent basis if it so deems
appropriate.
7.9 The Company, or any affiliate, will maintain at its home office,
available to the SEC, (a) a list of its officers, directors and employees
who participate directly in the management of administration of any Account
and/or (b) a list of its agents who, as registered representatives, offer
and sell Contracts."
SECTION 3. Schedules
---------
Schedules 1, 2 and 3 to the Original Participation Agreement are hereby
amended to read as Schedules 1, 2 and 3 to this Amendment No.1, respectively.
SECTION 4. Miscellaneous
-------------
4.1 The captions in this Amendment No. 1 are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
4.2 This Amendment No. 1 may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
4.3 If any provision of this Amendment No. 1 shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
No. 1 to be executed in its name and behalf by its duly authorized office on the
date specified below.
PROVIDIAN LIFE AND
HEALTH INSURANCE COMPANY
(Company)
Date: December 16, 1996 By: /s/ Gregory J. Garvin
Name: Gregory J. Garvin
Title: Vice President
WANGER ADVISORS TRUST
(Trust)
Date: December 16, 1996 By: /s/ Charles P. McQuaid
Name: Charles P. McQuaid
Title: Senior Vice President
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EXHIBIT 9(a)(4)
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into this 15th day of November, 1996 by
and between WANGER ADVISORS TRUST, an unincorporated business trust formed under
the laws of Massachusetts (the "Trust"), and FIRST PROVIDIAN LIFE AND HEALTH
INSURANCE COMPANY, a New York life insurance company (the "Company"), on its own
behalf and on behalf of each separate account of the Company identified herein.
WHEREAS, the Trust is a series-type mutual fund offering shares of
beneficial interest (the "Trust shares") consisting of one or more separate
series ("Series") of shares ("Series shares"), each such series representing an
interest in a particular managed portfolio of securities and other assets; and
WHEREAS, the Trust was established for the purpose of serving as an
investment vehicle for (i) separate accounts supporting variable annuity
contracts and variable life insurance policies to be offered by insurance
companies, and (ii) certain pension and retirement plans receiving favorable tax
treatment under the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Company desires that the Trust serve as an investment vehicle
for certain separate accounts of the Company;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Company agree as follows:
ARTICLE I. Additional Definitions
----------------------
1.1. "Account" -- each separate account of the Company described more
specifically in Schedule 1 to this Agreement.
1.2. "Business Day" -- each day that the Trust is open for business as
provided in the Trust Prospectus.
1.3. "Code" -- the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
1.4. "Contracts" -- the class or classes of variable annuity contracts
issued by the Company and described more specifically on Schedule 2 to this
Agreement.
1.5. "Contract Owners" -- the owners of the Contracts, as distinguished
from all Product Owners.
1.6. "Investment Adviser" -- the investment manager of the Trust, Wanger
Asset Management, L.P.
<PAGE>
1.7. "Participating Account" -- a separate account investing all or a
portion of its assets in the Trust, including the Account.
1.8. "Participating Insurance Company" -- any insurance company investing
in the Trust on its behalf or on behalf of a Participating Account, including
the Company.
1.9. "Products" -- variable annuity contracts and variable life insurance
policies supported by Participating Accounts investing assets attributable
thereto in the Trust, including the Contracts.
1.10. "Product Owners" -- owners of Products.
1.11. "Prospectus" -- with respect to a class of Contracts, each version
of the definitive prospectus or supplement thereto filed with the SEC pursuant
to Rule 497 under the 1933 Act ("Contracts Prospectus"). With respect to Trust
shares, each version of the definitive prospectus or supplement thereto filed
with the SEC pursuant to Rule 497 under the 1933 Act with respect to a series of
the Trust listed on Schedule 3 to this Agreement ("Trust Prospectus"). With
respect to any provision of this Agreement requiring a party to take action in
accordance with a Prospectus, such reference thereto shall be deemed to be to
the version last filed prior to the taking of such action. For purposes of
Article VIII, the term "Prospectus" shall include any statement of additional
information incorporated therein.
1.12. "Qualified Entity" -- A person or plan, including a pension or
retirement plan receiving favorable tax treatment under the Code, that qualifies
to purchase shares of the Trust under Section 817(h) of the Code. A natural
person having an indirect interest in the Trust by virtue of such natural
person's participation in a Qualified Entity is a "Qualified Participant."
1.13. "Registration Statement" -- with respect to the Trust Shares or
a class of Contracts, the registration statement filed with the SEC to register
the securities issued thereby under the 1933 Act, or the most recently filed
amendment thereto, in either case in the form in which it was declared or became
effective. The Contracts Registration Statement is described more specifically
on Schedule 2 to this Agreement. The Trust Registration Statement was filed on
Form N-1A (File No. 33-83598).
1.14. "1940 Act Registration Statement" -- with respect to the Trust or
the Account, the registration statement filed with the SEC to register such
entity as an investment company under the 1940 Act, or the most recently filed
amendment thereto. The Account 1940 Act Registration Statement is described more
specifically on Schedule 2 to this Agreement. The Trust 1940 Act Registration
Statement was filed on Form N-1A (File No. 811-8748).
1.15. "Statement of Additional Information" -- with respect to the
Trust or a class of Contracts, each version of the definitive statement of
additional information or supplement thereto filed with the SEC pursuant to Rule
497 under the 1933 Act.
1.16. "SEC" -- the Securities and Exchange Commission.
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<PAGE>
1.17. "1933 Act" -- the Securities Act of 1933, as amended.
1.18. "1940 Act" -- the Investment Company Act of 1940, as amended.
ARTICLE II. Sale of Trust Shares
--------------------
2.1. The Trust shall make shares of those Series listed on Schedule 3 to
this Agreement available for purchase by the Company on behalf of the Account,
such purchases to be effected at net asset value in accordance with Section 2.3
of this Agreement. Notwithstanding the foregoing, (i) other than those Series
listed on Schedule 3, Trust Series in existence now or that may be established
in the future will be made available to the Company only as the Trust and the
Company may agree pursuant to Article XI hereof, and (ii) the Board of Trustees
of the Trust (the "Trust Board") may suspend or terminate the offering of Trust
shares of any Series, if such action is required by law or by regulatory
authorities having jurisdiction or if, in the sole discretion of the Trust Board
acting in good faith and in light of its fiduciary duties under Federal and any
applicable state laws, suspension or termination is necessary in the best
interests of the shareholders of any Series (it being understood that
"shareholders" for this purpose shall mean Product Owners and Qualified
Participants).
2.2. The Trust shall redeem, at the Company's request, any full or
fractional shares of the Trust held by the Company on behalf of the Account,
such redemptions to be effected at net asset value in accordance with Section
2.3 of this Agreement. Notwithstanding the foregoing, (i) the Company shall not
redeem Trust shares attributable to Contract Owners except in the circumstances
permitted in Section 2.7 of this Agreement, and (ii) the Trust may delay
redemption of Trust shares of any Series to the extent permitted by the 1940
Act, any rules, regulations or orders thereunder, and the Trust Prospectus.
2.3.
(a) The Trust hereby appoints the Company as its designee for the
limited purpose of receiving purchase and redemption requests from the Account
based on allocations of net amounts to the Account or subaccounts thereof under
the Contracts and other transactions relating to the Contracts or the Account.
Purchase and redemption requests shall be processed by the Trust at the net
asset value per share next calculated after the Trust receives such request. The
Trust shall calculate its net asset value per share at the Trust's close of
business on each Business Day (as defined from time to time in the Trust
Prospectus), and which as of the date of execution of this Agreement is the time
of the close of regular session trading on the New York Stock Exchange, which is
generally 4:00 p.m. Eastern Time. Receipt of any such request on any Business
Day by the Company as designee of the Trust prior to the Trust's close of
business shall constitute receipt by the Trust on that same Business Day,
provided that the Trust receives notice of such request by 10 a.m. Eastern Time
on the next following Business Day.
(b) The Company shall pay for shares of each Series on the same day
that it notifies the Trust of a purchase request for such shares. Payment for
Series shares shall be made
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<PAGE>
in Federal funds transmitted to the Trust by wire by 2:30 p.m. Eastern Time on
the day the Trust is notified of the purchase request for Series shares (unless
the Trust determines and so advises the Company that sufficient proceeds are
available from redemption of shares of other Series effected pursuant to
redemption requests tendered by the Company on behalf of the Account). If
payment in Federal funds for any purchase is not received, or is received by the
Trust after 3 p.m. Eastern Time on such Business Day, the Company shall
promptly, upon the Trust's request, reimburse the Trust for any charges, costs,
fees, interest or other expenses incurred by the Trust in connection with any
advances to, or borrowings or overdrafts by, the Trust, or any similar expenses
incurred by the Trust, as a result of portfolio transactions effected or
dilution suffered by the Trust based upon such failure to receive the funds by
3:00 p.m. Eastern Time. If Federal funds are not received on time, such funds
will be invested, and Series shares purchased thereby will be issued, as soon as
practicable. Upon receipt of Federal funds so wired, such funds shall cease to
be the responsibility of the Company and shall become the responsibility of the
Trust.
(c) Payment for Series shares redeemed by the Account or the Company
shall be made in Federal funds transmitted by wire to the Company or any other
designated person by 3:00 p.m. Eastern Time on the Business Day during which the
Trust is properly notified of the redemption order of Series shares (unless
redemption proceeds are to be applied to the purchase of Trust shares of other
Series in accordance with Section 2.3(b) of this Agreement), except that (i) the
Trust reserves the right to delay payment of redemption proceeds to the extent
permitted under Section 22(e) of the 1940 Act; and (ii) the Trust reserves the
right to effect payment of redemptions in kind, but only to the extent described
in the Trust Prospectus. The Trust shall not bear any responsibility whatsoever
for the proper disbursement or crediting of redemption proceeds under the
Contracts; the Company alone shall be responsible for such action.
2.4. The Trust shall use reasonable efforts to make the net asset value
per share for each Series available to the Company by 6:30 p.m. Eastern Time
each Business Day, and shall use its best efforts to make the net asset value
available to the Company by 7:00 p.m. Eastern Time each Business Day, and in any
event, as soon as reasonably practicable after the net asset value per share for
such Series is calculated, and shall calculate such net asset value in
accordance with the Trust Prospectus. Neither the Trust, any Series, the
Investment Adviser, nor any of their affiliates shall be liable for any
information provided to the Company pursuant to this Agreement which information
is based on incorrect information supplied by the Company or any other
Participating Company to the Trust or the Investment Adviser.
2.5. The Trust shall furnish notice to the Company as soon as reasonably
practicable of any income dividends or capital gain distributions payable on any
Series shares. The Trust shall notify the Company promptly of the number of
Series shares so issued as payment of such dividends and distributions. The
Company, on its behalf and on behalf of the Account, hereby elects to receive
all such dividends and distributions as are payable on any Series shares in the
form of additional shares of that Series. The Company reserves the right, on its
behalf and on behalf of the Account, to revoke this election and to receive all
such dividends and capital gains distributions in cash.
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<PAGE>
2.6. Issuance and transfer of Trust shares shall be by book entry only.
Stock certificates will not be issued to the Company or the Account. Purchase
and redemption orders for Trust shares shall be recorded in an appropriate
ledger for the Account or the appropriate subaccount of the Account.
2.7.
(a) The Company shall invest amounts available for investment under
the Contracts in the Series of the Trust specified in Schedule 3 in accordance
with allocation instructions received from Contract Owners, it being understood
that no changes shall be made to Schedule 3 without the prior written consent of
the Trust and the Investment Adviser. The Company may withdraw the Account's
investment in the Trust or a Series of the Trust only: (i) as necessary to
facilitate Contract Owner requests; (ii) upon a determination by a majority of
the Trust Board, or a majority of disinterested Trust Board members, that an
irreconcilable material conflict exists among the interests of (x) all Product
Owners or (y) the interests of the Participating Insurance Companies and/or
Qualified Entities investing in the Trust; (iii) in the event that the shares of
another investment company are substituted for series shares in accordance with
the terms of the Contracts upon the (x) requisite vote of the Contract Owners
having an interest in the affected Series and the written consent of the Trust
(unless otherwise required by applicable law) or (y) upon issuance of an SEC
exemptive order pursuant to Section 26(b) of the 1940 Act permitting such
substitution; or (iv) as required by state and/or federal laws or regulations or
judicial or other legal precedent of general application.
(b) The Company shall not, without prior written notice to the Trust
(unless otherwise required by applicable law), take any action to operate the
Account as a management investment company under the 1940 Act.
(c) The Company shall not, without the prior written consent of the
Trust (unless otherwise required by applicable law), solicit, induce or
encourage Contract Owners to change or modify the Trust or change the Trust's
investment adviser.
(d) Notwithstanding Section 2.7(a) of this Agreement, the Company and
the Trust acknowledge that the arrangement contemplated by this Agreement is not
exclusive; Trust shares may be sold to other insurance companies; and the cash
value of the Contracts may be invested in other investment companies, provided,
however, that (a) such other investment company, or series thereof, has
investment objectives or policies that are substantially different from the
investment objectives and policies of the Trust; or (b) the Company gives the
Trust 45 days written notice of its intention to make such other investment
company available as a funding vehicle for the Contracts; or (c) such other
investment company was available as a funding vehicle for the Contracts prior to
the date of this Agreement and appears on Schedule 3 to this Agreement; or (d)
the Trust consents to the use of such other investment company, such consent not
to be unreasonably withheld.
2.8. The Trust shall sell Trust shares only to Participating Insurance
Companies and their separate accounts and to Qualified Entities. The Trust shall
not sell Trust shares to any
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<PAGE>
insurance company or separate account unless an agreement containing provisions
substantially the same as Article V and Article VII of this Agreement is in
effect to govern such sales.
ARTICLE III. Representations and Warranties
------------------------------
3.1. The Company represents and warrants that: (i) the Company is an
insurance company duly organized and in good standing under New York law; (ii)
the Account is a validly existing separate account, duly established and
maintained in accordance with applicable law; (iii) the Account 1940 Act
Registration Statement has been filed with the SEC in accordance with the
provisions of the 1940 Act and the Account is duly registered as a unit
investment trust thereunder; (iv) the Contracts Registration Statement has been
declared effective by the SEC; (v) the Contracts will be issued in compliance in
all material respects with all applicable Federal and state laws; and (vi) the
Contracts currently are and at the time of issuance will be treated as annuity
contracts under applicable provisions of the Code.
3.2. The Trust represents and warrants that: (i) the Trust is an
unincorporated business trust duly formed and validly existing under
Massachusetts law; (ii) the Trust 1940 Act Registration Statement has been filed
with the SEC in accordance with the provisions of the 1940 Act and the Trust is
duly registered as an open-end management investment company thereunder; (iii)
the Trust Registration Statement has been declared effective by the SEC; (iv)
the Trust shares will be issued in compliance in all material respects with all
applicable federal laws; (v) the Trust will remain registered under and will
comply in all material respects with the 1940 Act; (vi) the Trust currently
qualifies as a "regulated investment company" under Subchapter M of the Code and
is in compliance with Section 817(h) of the Code; and (vii) the Trust's
investment policies are in material compliance with any investment restrictions
set forth on Schedule 4 to this Agreement. Subject to Section 4.5 of this
Agreement, the Trust makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) otherwise complies with the insurance laws or regulations of any
state. Further, the Trust shall register and qualify its shares for sale under
the securities laws of any state only if and to the extent that such
registration and qualification is deemed to be advisable by the Trust.
3.3. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate or trust action, as applicable, by
such party, and, when so executed and delivered, this Agreement will be the
valid and binding obligation of such party enforceable in accordance with its
terms.
3.4. Each party represents and warrants that all of its directors,
officers and employees dealing with the money and/or securities of the Trust are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less than the
amount required by the federal securities laws or any self-regulatory
organization applicable to such party. The aforesaid bond shall include coverage
for larceny and embezzlement and shall be issued by a reputable bonding company.
Each party agrees to make
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<PAGE>
reasonable efforts to see that this bond or another bond containing these
provisions is always in effect, and each agrees to notify the other party
promptly in the event that such coverage no longer applies.
ARTICLE IV. Filings, Information and Expenses
---------------------------------
4.1. The Trust shall amend the Trust Registration Statement and the Trust
1940 Act Registration Statement from time to time as required in order to effect
the continuous offering of Trust shares and to maintain the Trust's registration
under the 1940 Act for so long as Trust shares are sold or any Trust shares are
outstanding.
4.2. The Company shall amend the Contracts Registration Statement and the
Account 1940 Act Registration Statement from time to time as required in order
to effect the continuous offering of the Contracts or as may otherwise be
required by applicable law. The Company shall maintain a current effective
Contracts Registration Statement and the Account's registration under the 1940
Act for so long as the Contracts are outstanding, unless (a) a no-action letter
from the SEC has been obtained by the Company to the effect that such
registration statement need no longer be maintained; or (b) the Company has
supplied the Trust with an opinion of counsel to the effect that maintaining
such registration statement is no longer required; or (c) the Company has
notified the Trust in writing that, with respect to such registration statement,
the Company meets the terms and conditions of, and is relying on, Great West
Life & Annuity Insurance Company (pub. avail. Oct. 23, 1990), and any subsequent
no-action letter released by the staff of the SEC addressing the same subject
matter. The Company shall file, register, qualify and obtain approval of the
Contracts for sale to the extent required by applicable insurance and securities
laws of the various states.
4.3. The Trust shall provide the Company with as many copies of the Trust
Prospectus as the Company may reasonably request. If requested by the Company in
lieu thereof, the Trust shall provide such documentation (including a final copy
of the Trust Prospectus in 8-1/2" X 11" size camera-ready form at the Trust's
expense) and other assistance as is reasonably necessary in order for the
Company once each year (or more frequently if the Trust Prospectus is more
frequently amended) to have the Contracts Prospectus and Trust Prospectus
printed together in one document.
4.4. The Company shall deliver Contracts, Contracts and Trust
Prospectuses, Contracts and Trust Statements of Additional Information, and all
amendments or supplements to any of the foregoing to Contract Owners and
prospective Contract Owners, all in accordance with the federal securities laws.
4.5. The Company shall inform the Trust of any investment restrictions
imposed by New York insurance law that may become applicable to the Trust from
time to time as a result of the Account's investment therein (including, but not
limited to, restrictions with respect to fees and expenses and investment
policies), other than those set forth on Schedule 4 to this Agreement. In
addition, the Company shall inform the Trust of any other investment
restrictions
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<PAGE>
imposed by state insurance law that the Company is aware may become applicable
to the Trust from time to time as a result of the Account's investment therein
(including, but not limited to, restrictions with respect to fees and expenses
and investment policies), other than those set forth on Schedule 4 to this
Agreement. Upon receipt of any such information from the Company, the Trust
shall determine whether it is in the best interests of shareholders (it being
understood that "shareholders" for this purpose shall mean Product Owners and
Qualified Participants) to comply with any such restrictions. If the Trust,
acting reasonably and in good faith, determines that it is not in the best
interests of shareholders, the Trust shall so inform the Company, and the Trust
and the Company shall discuss alternative accommodations in the circumstances.
If the Trust determines that it is in the best interests of shareholders to
comply with such restrictions, the Trust and the Company shall amend Schedule 4
to this Agreement to reflect such restrictions. The Trust shall comply with
Schedule 4 to this Agreement as in effect from time to time.
4.6. All expenses incident to each party's performance under this
Agreement (including expenses expressly assumed by such party pursuant to this
Agreement) shall be paid by such party to the extent permitted by law.
(a) Expenses assumed by the Trust include, but are not limited to, the
costs of: registration and qualification of the Trust shares under the federal
securities laws; preparation and filing with the SEC of the Trust Prospectus,
Trust Registration Statement, Trust proxy materials and shareholder reports; the
printing and mailing of all proxy statements and periodic reports; the
preparation of camera-ready copy of Trust Prospectuses and Statements of
Additional Information required to be provided by the Trust to its then-current
shareholders; preparation of all statements and notices required by any Federal
or state securities law; all taxes on the issuance or transfer of Trust shares;
payment of all applicable fees, including, without limitation, all fees due
under Rule 24f-2 relating to the Trust; and any expenses permitted to be paid or
assumed by the Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940
Act. The Trust shall pay no fee or other compensation to the Company under this
Agreement, and shall not be charged for the costs of printing and mailing to
prospective Contract Owners copies of the Trust Prospectus, Trust Statement of
Additional Information, notices, proxy statements, periodic reports, or other
printed materials.
(b) Expenses assumed by the Company include, but are not limited to,
the costs of: registration and qualification of the Contracts under the federal
securities laws; preparation and filing with the SEC of the Contracts
Prospectus, Contracts Registration Statement, and Contract Owner reports;
payment of all applicable fees, including, without limitation, all fees due
under Rule 24f-2 relating to the Contracts; and the printing and mailing of all
periodic reports, Contracts Prospectuses, Statements of Additional Information,
and notices to current and prospective Contract Owners required by any Federal
or state insurance law other than those paid for by the Trust.
4.7. No piece of advertising or sales literature or other promotional
material in which the Trust is named shall be used, except with the prior
written consent of the Trust. Any such piece shall be furnished to the Trust for
such consent prior to its use. The Trust shall respond to any request for
written consent on a prompt and timely basis, but failure to respond shall not
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<PAGE>
relieve the Company of the obligation to obtain the prior written consent of the
Trust. The Trust may at any time in its sole discretion revoke such written
consent, and upon notification of such revocation, the Company shall no longer
use the material subject to such revocation. The Trust may delegate its rights
and responsibilities under this provision to the Investment Adviser.
4.8. No piece of advertising or sales literature or other promotional
material in which the Company is named shall be used, except with the prior
written consent of the Company. Any such piece shall be furnished to the Company
for such consent prior to its use. The Company shall respond to any request for
written consent on a prompt and timely basis, but failure to respond shall not
relieve the Trust of the obligation to obtain the prior written consent of the
Company. The Company may at any time in its sole discretion revoke such written
consent, and upon notification of such revocation, the Trust shall no longer use
the material subject to such revocation.
4.9. The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust
other than the information or representations contained in the Trust
Registration Statement or Trust Prospectus or in reports or proxy statements for
the Trust which are in the public domain or approved in writing by the Trust for
distribution to Contract Owners, or in sales literature or other promotional
material approved in accordance with Section 4.7 of this Agreement, except with
the prior written consent of the Trust.
4.10. The Trust shall not give any information or make any representations
on behalf of the Company or concerning the Company, the Account or the Contracts
other than the information or representations contained in the Contracts
Registration Statement or Contracts Prospectus or in reports of the Account
which are in the public domain or approved in writing by the Company for
distribution to Contract Owners, or in sales literature or other promotional
material approved in accordance with Section 4.8 of this Agreement, except with
the prior written consent of the Company.
4.11. Each party shall provide to the other at least one complete copy of
all Registration Statements, Prospectuses, Statements of Additional Information,
periodic and other shareholder or Contract Owner reports, proxy statements,
solicitations of voting instructions, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments or supplements to any of the above, that relate to the Trust, the
Contracts or the Account, as the case may be, promptly after the filing by or on
behalf of such party of such document with the SEC or other regulatory
authorities. Each party shall provide to the other any complaints from Contract
Owners pertaining to the Contracts.
4.12. Each party shall provide to the other upon request copies of draft
versions of any Registration Statements, Prospectuses, Statements of Additional
Information, periodic and other shareholder or Contract Owner reports, proxy
statements, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments or supplements to any of the above, to the extent
that the other party reasonably needs such information for purposes of preparing
a report or other filing to be
9
<PAGE>
filed with or submitted to a regulatory agency. If a party requests any such
information before it has been filed, the other party will provide the requested
information if then available and in the version then available at the time of
such request.
4.13. Each party hereto shall cooperate with the other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit each other and such
authorities reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. However, such access shall not extend to attorney-client
privileged information.
4.14. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any material
constituting sales literature or advertising under the NASD rules, the 1940 Act
or the 1933 Act.
4.15. No party shall use any other party's names, logos, trademarks or
service marks, whether registered or unregistered, without the prior written
consent of such party.
4.16. To the extent required by applicable law, including the
administrative requirements of regulatory authorities, or as mutually agreed
between the Company and the Trust, the Company reserves the right to modify the
Contracts in any respect whatsoever. The Company reserves the right in its sole
discretion to suspend the sale of Contracts, in whole or in part, or to accept
or reject any application for the purchase of a Contract. The Company agrees to
notify the Trust promptly upon the occurrence of any event the Company believes
might necessitate a material modification of the Contracts or suspension of
Contract sales; in the case of an anticipated material modification of the
Contracts, written notice of such modification shall be provided to the Trust at
least sixty (60) days prior to the date that such material modification of the
Contracts shall be effective.
ARTICLE V. Voting of Trust Shares
----------------------
With respect to any matter put to vote by the holders of Trust shares or
Series shares ("Voting Shares"), the Company shall:
(a) solicit voting instructions from Contract Owners to which Voting
Shares are attributable;
(b) vote Voting Shares of each Series attributable to Contract Owners
in accordance with instructions or proxies timely received from such Contract
Owners;
(c) vote Voting Shares of each Series attributable to Contract Owners
for which no instructions have been received in the same proportion as Voting
Shares of such Series for which instructions have been timely received; and
10
<PAGE>
(d) vote Voting Shares of each Series held by the Company on its own
behalf or on behalf of the Account that are not attributable to Contract Owners
in the same proportion as Voting Shares of such Series for which instructions
have been timely received.
The Company shall be responsible for assuring that voting privileges for
the Account are calculated in a manner consistent with the provisions set forth
above.
11
<PAGE>
ARTICLE VI. Compliance with Code
--------------------
6.1. The Trust shall comply with Section 817(h) of the Code and the
regulations issued thereunder to the extent applicable to the Trust as a fund
underlying the Account, and shall notify the Company immediately upon having a
reasonable basis for believing that it has ceased to so qualify or that it might
not so qualify in the future.
6.2. The Trust shall maintain its qualification as a registered investment
company (under Subchapter M of the Code or any successor or similar provision),
and shall notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
6.3. The Company shall ensure the continued treatment of the Contracts as
annuity contracts or life insurance policies, whichever is appropriate, under
applicable provisions of the Code and shall notify the Trust immediately upon
having a reasonable basis for believing that the Contracts have ceased to be so
treated or that they might not be so treated in the future.
ARTICLE VII. Potential Conflicts
-------------------
The parties to this Agreement acknowledge that the Trust may file an
application with the SEC to request an order granting relief from various
provisions of the 1940 Act and the rules thereunder to the extent necessary to
permit Trust shares to be sold to and held by variable annuity and variable life
insurance separate accounts of both affiliated and unaffiliated Participating
Insurance Companies, as well as by Qualified Entities. Any conditions or
undertakings that may be imposed on the Company and the Trust by virtue of such
order shall be incorporated herein by this reference, as of the date such order
is granted, as though set forth herein in full, and the parties to this
Agreement shall comply with such conditions and undertakings to the extent
applicable to each such party. The Trust will not enter into a participation
agreement with any other Participating Insurance Company unless it imposes the
same conditions and undertakings imposed by virtue of such order and
incorporated by reference herein on the parties to such agreement.
ARTICLE VIII. Indemnification
---------------
8.1. The Company shall indemnify and hold harmless the Trust and each
person who controls the Trust within the meaning of such term under Section 15
of the 1933 Act (but not any Participating Insurance Companies or Qualified
Entities) and any officer, trustee, director, employee or agent of the
foregoing, against any and all losses, claims, damages or liabilities, joint or
several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of, any action,
suit or proceeding or any claim asserted), to which they or any of them may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities:
12
<PAGE>
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Contracts Registration
Statement, Contracts Prospectus, sales literature or other promotional material
for the Contracts or the Contracts themselves (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances in which they were made; provided that this obligation to
indemnify shall not apply if such statement or omission or such alleged
statement or alleged omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of the Trust for
use in the Contracts Registration Statement, Contracts Prospectus or in the
Contracts or sales literature or promotional material for the Contracts (or any
amendment or supplement to any of the foregoing) or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Trust Registration Statement, Trust Prospectus or
sales literature or other promotional material of the Trust (or any amendment or
supplement to any of the foregoing), or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances in which
they were made, if such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Trust by or on behalf of
the Company; or
(c) arise out of or are based upon any wrongful conduct of the Company
or persons under its control (or subject to its authorization or supervision)
with respect to the sale or distribution of the Contracts or Trust shares; or
(d) arise as a result of any failure by the Company, or persons under
its control (or subject to its authorization), to perform its obligations under
the terms of this Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the undertaking specified in Article VI
of this Agreement, unless such failure is a result of the Trust's material
breach of this Agreement); or
(e) arise out of any material breach by the Company of this Agreement,
including but not limited to any failure to transmit a request for redemption or
purchase of Trust shares on a timely basis in accordance with the procedures set
forth in Article II.
This indemnification will be in addition to any liability that the Company may
otherwise have; provided, however, that no person otherwise entitled to
indemnification pursuant to this Section 8.1 shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
person seeking indemnification.
8.2. The Trust shall indemnify and hold harmless the Company and each
person who controls the Company within the meaning of such term under Section 15
of the 1933 Act and any officer, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably
13
<PAGE>
incurred in connection with, and any amounts paid in settlement of, any action,
suit or proceeding or any claim asserted), to which they or any of them may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Trust Registration
Statement, Trust Prospectus or sales literature or other promotional material of
the Trust (or any amendment or supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they were made;
provided that this obligation to indemnify shall not apply if such statement or
omission or alleged statement or alleged omission was made in reliance upon and
in conformity with information furnished in writing by or on behalf of the
Company to the Trust for use in the Trust Registration Statement, Trust
Prospectus or sales literature or promotional material for the Trust (or any
amendment or supplement to any of the foregoing) or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Contracts Registration Statement, Contracts
Prospectus or sales literature or other promotional material for the Contracts
(or any amendment or supplement to any of the foregoing), or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances in which they were made, if such statement or omission was made in
reliance upon information furnished in writing by or on behalf of the Trust to
the Company; or
(c) arise out of or are based upon wrongful conduct of the Trust or
persons under its control (or subject to its authorization) with respect to the
sale or distribution of the Contracts or the Trust shares; or
(d) arise as a result of any failure by the Trust to perform its
obligations under the terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with the undertakings
specified in Article VI of this Agreement, unless such failure is a result of
the Company's material breach of this Agreement); or
(e) arise out of any material breach by the Trust of this Agreement.
For purposes of Section 8.2(c) above, persons under the Trust's control or
subject to its authorization shall not include any persons under the Company's
control or subject to the Company's authorization or supervision.
This indemnification will be in addition to any liability that the
Trust may otherwise have; provided, however, that no person otherwise entitled
to indemnification pursuant to this Section 8.2 shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
person seeking indemnification.
14
<PAGE>
8.3. After receipt by a party entitled to indemnification ("indemnified
party") under this Article VIII of notice of the commencement of any action, if
a claim in respect thereof is to be made by the indemnified party against any
person obligated to provide indemnification under this Article VIII
("indemnifying party"), such indemnified party will notify the indemnifying
party in writing of the commencement thereof as soon as practicable thereafter,
provided that the omission to so notify the indemnifying party will not relieve
it from any liability under this Article VIII, except to the extent that the
omission results in a failure of actual notice to the indemnifying party and
such indemnifying party is damaged solely as a result of the failure to give
such notice. The indemnifying party, upon the request of the indemnified party,
shall retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
A successor by law of the parties to this Agreement shall be entitled
to the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. Applicable Law
--------------
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Massachusetts,
without giving effect to the principles of conflicts of laws.
9.2. This Agreement shall be subject to the provisions of the 1933 Act,
1940 Act and Securities Exchange Act of 1934, as amended, and the rules and
regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant, and the terms hereof shall
be limited, interpreted and construed in accordance therewith.
ARTICLE X. Termination
-----------
10.1. This Agreement shall not terminate as to any Series of the Trust
until the Account no longer invests in that Series and the Company has confirmed
in writing to the Trust that it no
15
<PAGE>
longer intends to invest in such Series. However, certain obligations of, or
restrictions on, the parties to this Agreement may terminate as provided in
Sections 10.2 and 10.3 and the Company may be required to redeem shares pursuant
to Section 10.4 or in circumstances contemplated by Article VII.
10.2. The obligation of the Trust to make Series shares available to the
Company for purchase pursuant to Article II of this Agreement shall terminate at
the option of the Trust upon written notice to the Company as provided below:
(a) at any time more than two years after the date of this Agreement,
upon 60 days prior written notice;
(b) upon institution of formal proceedings against the Company by
the NASD, the SEC, the insurance commission of any state or any other regulatory
body regarding the Company's duties under this Agreement or related to the sale
of the Contracts, the operation of the Account, the administration of the
Contracts or the purchase of Trust shares, or an expected or anticipated ruling,
judgment or outcome which would, in the Trust's reasonable judgment exercised in
good faith, materially impair the Company's ability to meet and perform the
Company's obligations and duties hereunder, such termination effective upon 15
days prior written notice;
(c) in the event that any Contracts are not registered, issued, sold,
or administered in accordance with applicable Federal and/or state law,
including Federal income tax law ("Non-Complying Contracts"), then with respect
to such Non-Complying Contracts, such termination effective upon 5 days prior
written notice;
(d) if the Trust shall determine, in its sole judgment exercised in
good faith, that either (1) the Company shall have suffered a material adverse
change in its business or financial condition or (2) the Company shall have been
the subject of material adverse publicity which is likely to have a material
adverse impact upon the business and operations of the Trust, such termination
effective upon 30 days prior written notice;
(e) upon the Company's assignment of this Agreement (including,
without limitation, any transfer of the Contracts or the Account to another
insurance company pursuant to an assumption reinsurance agreement) unless the
Trust consents thereto, such termination effective upon 30 days prior written
notice;
(f) if the Company is in material breach of any provision of this
Agreement, which breach has not been cured to the satisfaction of the Trust
within 30 days after written notice of such breach has been delivered to the
Company; or
(g) upon termination, as to a Series, pursuant to Section 10.1 or
notice from the Company pursuant to Section 10.3, such termination hereunder
effective upon 15 days prior written notice unless a longer notice and cure
period is provided in Section 10.1 or Section 10.3, as applicable, in which case
the longer notice and cure period shall apply.
16
<PAGE>
Notwithstanding an exercise of its option to terminate its obligation to make
Shares available to the Company, the Trust shall continue to make Trust shares
available to the extent necessary to permit owners of Contracts in effect on the
effective date of such termination (hereinafter referred to as "Existing
Contracts") to reallocate investments in the Trust, redeem investments in the
Trust and/or invest in the Trust upon the making of additional purchase payments
under the Existing Contracts. Existing Contracts shall not include Non-Complying
Contracts, if any. In the event that the Trust terminates this Agreement, the
Trust shall promptly notify the Company whether the Trust is electing to make
Trust shares available after termination for Non-Complying Contracts (or a class
thereof). In determining whether to make Shares available for such Non-Complying
Contracts (or a class thereof), the Trust shall act in good faith giving due
consideration to the interests of owners of such Non-Complying Contracts (or a
class thereof).
10.3. Subject to compliance with applicable law, the Company may elect to
cease investing in a Series or the Trust or promoting a Series or the Trust as
an investment option under the Contracts, or withdraw its investment in a Series
or the Trust, upon the occurrence of one of the following events, upon 30 days
prior written notice to the Trust, unless otherwise provided below:
(a) at any time more than two years after the effective date of this
Agreement, upon 60 days prior written notice;
(b) as to a Series, if shares of such Series are not reasonably
available to meet the requirements of the Contracts as determined by the
Company, and the Trust, after receiving written notice from the Company of such
non-availability, fails to make available a sufficient number of Trust shares to
meet the requirements of the Contracts within 10 days after receipt thereof, it
being understood that, in such event, the Company's rights pursuant to this
Section 10.3 shall be limited to such Series;
(c) as to the Trust, upon institution of formal proceedings against
the Trust by the NASD, the SEC or any state securities or insurance commission
or any other regulatory body, upon 15 days prior written notice;
(d) as to a Series or the Trust, as applicable, if such Series or the
Trust ceases to qualify as a Regulated Investment Company under Subchapter M of
the Code, or under any successor or similar provision, or if such Series or the
Trust may fail to so qualify, and the Trust, upon written request, fails to
provide reasonable assurance acceptable to the Company that it will take action
to cure or correct such failure, it being understood that, if the event does not
involve all Series, the Company's rights pursuant to this Section 10.3 shall be
limited to the affected Series;
(e) as to a Series or the Trust, as applicable, if such Series or the
Trust fails to meet the diversification requirements specified in Section 817(h)
of the Code and any regulations thereunder and the Trust, upon written request,
fails to provide reasonable assurance acceptable to the Company that it will
take action to cure or correct such failure, it being understood that, if the
event does not involve all Series, the Company's rights pursuant to this Section
10.3 shall be limited to the affected Series;
17
<PAGE>
(f) as to a Series or the Trust, as applicable, if such Series or
Trust ceased to qualify as a Regulated Investment Company or failed to meet the
diversification requirements specified in Section 817(h) of the Code, and the
Trust failed to cure such failure within the time period agreed upon when
reasonable assurances were accepted by the Company, it being understood that, if
the failure does not involve all Series, the Company's rights pursuant to this
Section 10.3 shall be limited to the affected Series;
(g) as to a Series or the Trust, as applicable, if the Trust informs
the Company pursuant to Section 4.5 that such Series or the Trust will not
comply with investment restrictions as requested by the Company and the Trust
and the Company are unable to agree upon any reasonable alternative
accommodations, it being understood that, if the event does not involve all
Series, the Company's rights pursuant to this Section 10.3 shall be limited to
the affected Series;
(h) if the Trust is in material breach of a provision of this
Agreement, which breach has not been cured to the satisfaction of the Company
within 30 days after written notice of such breach has been delivered to the
Trust;
(i) with respect to any Series, in the event any of the Series shares
are not registered, issued or sold in accordance with applicable state and/or
Federal law or such law precludes the use of such Series shares as the
underlying investment medium of the Contracts, such termination effective upon 5
days prior written notice; or
(j) if the Company shall determine, in its sole judgment exercised in
good faith, that either (1) the Trust or the Investment Adviser shall have
suffered a material adverse change in its business or financial condition or (2)
the Trust or the Investment Adviser shall have been the subject of material
adverse publicity which is likely to have a material adverse impact upon the
business and operations of the Contracts, such termination effective upon 30
days prior written notice.
10.4. The parties understand and acknowledge that it is essential for
compliance with Section 817(h) of the Code that the Contracts qualify as annuity
contracts or life insurance policies, as applicable, under the Code.
Accordingly, if any of the Contracts cease to qualify as annuity contracts or
life insurance policies, as applicable, under the Code, or if any such Contracts
may fail to so qualify (in either case, other than solely as a result of the
Trust's failure to comply with Section 817(h) of the Code), the Trust shall have
the right to require the Company to redeem Trust shares attributable to such
Non-Complying Contracts upon notice to the Company and the Company shall so
redeem such shares in order to ensure that the Trust complies with the
provisions of Section 817(h) of the Code applicable to ownership of Trust
Shares. Notice to the Company shall specify the period of time the Company has
to redeem the Trust shares or to make other arrangements satisfactory to the
Trust and its counsel, such period of time to be determined with reference to
the requirements of Section 817(h) of the Code. The Company agrees to redeem
Trust shares in the circumstances described herein.
18
<PAGE>
ARTICLE XI. Applicability to New Accounts and New Contracts
-----------------------------------------------
The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect, as appropriate, changes in or relating to the
Contracts or Series, or additions of new classes of Contracts to be issued by
the Company through separate accounts investing in the Trust. The provisions of
this Agreement shall be equally applicable to each such class of Contracts,
Series and Accounts, effective as of the date of amendment of such Schedule,
unless the context otherwise requires.
ARTICLE XII. Non-Liability of Trustees and Shareholders
------------------------------------------
Any obligation of the Trust hereunder shall be binding only upon the assets
of the Trust (or applicable Series thereof) and shall not be binding upon any
trustee, officer, employee, agent or shareholder of the Trust. Neither the
authorization of any action by the Trust Board or shareholders of the Trust, nor
the execution of this Agreement on behalf of the Trust, shall impose any
liability upon any trustee, officer, or shareholder of the Trust.
ARTICLE XIII. Notices
-------
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Merrillyn J. Kosier
Vice President
Wanger Advisors Trust
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
If to the Company:
John P. Fendig
Providian Corporation
400 West Market Street
Louisville, Kentucky 40202
with a copy to:
First Providian Life and Health Insurance Company
Attention: Marketing Director
19
<PAGE>
520 Columbia Drive
Johnson City, New York 13790
ARTICLE XIV. Miscellaneous
-------------
14.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
14.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
14.3. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
14.4. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
14.5. Subject to the requirements of legal process and regulatory
authority, the Trust shall treat as confidential the names and addresses of the
Contract Owners and all information reasonably identified as confidential in
writing by the Company and except as permitted by this Agreement, shall not
disclose, disseminate or utilize such names and addresses and other confidential
information without the express written consent of the Company until such time
as it may come into the public domain.
14.6. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party hereto without the prior written consent of all
other parties.
14.7. Notwithstanding the provisions of Article VII of this Agreement, the
Trust acknowledges that it has no intention to file an application with SEC to
permit Trust shares to be sold to and held by variable annuity and variable life
insurance separate accounts of both affiliated and unaffiliated Participating
Insurance Companies.
20
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and behalf by its duly authorized officer on the date
specified below.
FIRST PROVIDIAN LIFE AND
HEALTH INSURANCE COMPANY
(Company)
Date: November 18, 1996 By: /s/ Gregory J. Garvin
Name: Gregory J. Garvin
Title: Vice President
WANGER ADVISORS TRUST
(Trust)
By: /s/ Charles P. McQuaid
Name: Charles P. McQuaid
Title: Senior Vice President
21
<PAGE>
Schedule 1
----------
Accounts of the Company
Investing in the Trust
Effective as of the date the Agreement was executed, the following separate
accounts are subject to the Agreement:
<TABLE>
<CAPTION>
================================================================================
Name of Account and Date SEC 1940 Act Type of
Subaccounts Established by Registration Product
Board of Number Supported by
Directors of Account
the Company
================================================================================
<S> <C> <C> <C>
First Providian Life and November 4, 1994 811-9062 Variable
Health Insurance Company Annuity
Separate Account C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
Effective as of _____________, the following separate accounts are hereby added
to this Schedule 1 and made subject to the Agreement:
<TABLE>
<CAPTION>
================================================================================
Name of Account and Date SEC 1940 Act Type of
Subaccounts Established by Registration Product
Board of Number Supported by
Directors of Account
the Company
================================================================================
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 1 in
accordance with Article XI of the Agreement.
/s/ Charles P. McQuaid /s/ Gregory J. Garvin
Wanger Advisors Trust First Providian Life and Health
Insurance Company
i
<PAGE>
Schedule 2
----------
Classes of Contracts
Supported by Separate Accounts
Listed on Schedule 1
Effective as of the date the Agreement was executed, the following classes of
Contracts are subject to the Agreement:
<TABLE>
<CAPTION>
================================================================================
SEC 1933 Act Name of Supporting
Contract Marketing Name Registration Number Account
================================================================================
<S> <C> <C>
First Providian Life and File No. 33-94204 First Providian Life
Health Insurance and Health Insurance
Advisor's Edge Company Separate
Account C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
Effective as of _______, the following classes of Contracts are hereby added
to this Schedule 2 and made subject to the Agreement:
<TABLE>
<CAPTION>
================================================================================
SEC 1933 Act Name of Supporting
Contract Marketing Name Registration Number Account
================================================================================
<S> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 2 in
accordance with Article XI of the Agreement.
/s/ Charles P. McQuaid /s/ Gregory J. Garvin
Wanger Advisors Trust First Providian Life and Health Insurance
Company
ii
<PAGE>
Schedule 3
----------
Trust Series Available Under
Each Class of Contracts
Effective as of the date the Agreement was executed, the following Trust
Series are available under the Contracts:
<TABLE>
<CAPTION>
================================================================================
Contracts Marketing Name Trust Series
================================================================================
<S> <C>
First Providian Life and Health . Wanger U.S. Small Cap
Insurance Advisor's Edge Advisor
. Wanger International Small
Cap Advisor
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
Effective as of the date the Agreement was executed, the following other
funding vehicles are available under the Contracts:
<TABLE>
<CAPTION>
================================================================================
Contracts Marketing Name Funding Vehicle
================================================================================
<S> <C>
First Providian Life and Health . DFA Investment Dimensions
Insurance Advisor's Edge Group, Inc.
. Insurance Management Series
(Federated)
. The Montgomery Funds III
. Weiss, Peck & Greer
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
Effective as of __________________, this Schedule 3 is hereby amended to
reflect the following changes in Trust Series:
iii
<PAGE>
<TABLE>
<CAPTION>
=======================================================================
Contracts Marketing Name Trust Series
=======================================================================
<S> <C>
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
=======================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 3 in
accordance with Article XI of the Agreement.
/s/ Charles P. McQuaid /s/ Gregory J. Garvin
Wanger Advisors Trust First Providian Life and Health Insurance
Company
iv
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Schedule 4
----------
Investment Restrictions
Applicable to the Trust
Effective as of the date the Agreement was executed, the following New York
investment restrictions are applicable to the Trust:
NONE
Effective as of ___________________, this Schedule 4 is hereby amended to
reflect the following changes:
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 4 in
accordance with Article XI of the Agreement.
/s/ Charles P. McQuaid /s/ Gregory J. Garvin
Wanger Advisors Trust First Providian Life and Health Insurance
Company
v
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AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT
THIS AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT, made and entered into as
of this 16th day of December, 1996, supplementing and amending the Participation
Agreement made and entered into the 15th day of November, 1996 (the "Original
Participation Agreement," and together with this Amendment No. 1, the
"Agreement") by and between WANGER ADVISORS TRUST, an unincorporated business
trust formed under the laws of Massachusetts (the "Trust"), and FIRST PROVIDIAN
LIFE AND HEALTH INSURANCE COMPANY, a New York life insurance company (the
"Company"), on its own behalf and on behalf of each separate account of the
Company identified in the Agreement.
WHEREAS, the Trust currently serves as an investment vehicle for certain
accounts of the Company pursuant to the Original Participation Agreement; and
WHEREAS, the Trust has applied for an order from the Securities and
Exchange Commission (the "SEC") (File No. 812-10198), granting Participating
Insurance Companies (as defined in the Original Participation Agreement) and
variable annuity and variable life separate accounts exemptions from the
provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined
in the Original Participation Agreement) and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust
and each Series thereof to be sold to and held by variable annuity and variable
life insurance separate accounts of life insurance companies that may or may not
be affiliated with one another and qualified pension and retirement plans
outside of the separate account context (the "Exemptive Order"); and
WHEREAS, the Company and the Trust have agreed to hereby supplement and
amend the Original Participation Agreement in order to reflect the conditions
and undertakings that are expected to be imposed on the Company and the Trust by
virtue of such Exemptive Order;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Company agree as follows:
SECTION 1. Definitions
For all purposes of this Amendment No. 1, except as otherwise expressly
provided or unless the context otherwise requires:
(1) All references in this Amendment No. 1 and the Original Participation
Agreement to designated "Articles" and other subdivisions are to the designated
Articles and other subdivisions of the Original Participation Agreement. The
words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of
similar import refer to this Amendment No. 1 as a whole and not to any
particular "Section" or other subdivision.
(2) All terms used herein and not otherwise defined shall have the same
meanings as those given to such terms in the Original Participation Agreement,
and include the plural as well
<PAGE>
as the singular, and the Original Participation Agreement is hereby amended to
included any terms defined herein.
(3) Any references to the "Agreement" in the original Participation
Agreement are hereby amended to include, collectively, the Original
Participation Agreement and this Amendment No. 1.
SECTION 2. Amendment to Article VII
Article VII of the Original Participation Agreement is hereby amended to
read in its entirety as follows:
"ARTICLE VII. Potential Conflicts and Compliance With
Exemptive Order
7.1 The Trust Board will monitor the Trust for the existence of any
material irreconcilable conflict between the interests of the Contract
Owners of all Participating Accounts and of Qualified Participants
investing in the Trust and each Series thereof. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) an action by
any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a
public ruling, private letter ruling, no-action or interpretative letter,
or any similar action by insurance, tax, or securities regulatory
authorities; (c) an administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any Series are
managed; (e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract owners; (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners; or (g) if applicable, a decision by a Qualified Entity to
disregard the voting instructions of Qualified Participants. The Trust
Board shall promptly inform the Company in writing if it determines that a
material irreconcilable conflict exists and the implications thereof.
7.2 The Company shall report any potential or existing conflicts to
the Trust Board. The Company will be responsible for assisting the Trust
Board in carrying out its responsibilities by providing the Trust Board
with all information reasonably necessary for the Trust Board to consider
any issues raised. This responsibility includes, but is not limited to, an
obligation by the Company to inform the Trust Board whenever it has
determined to disregard Contract Owner voting instructions. Such
responsibilities shall be carried out by the Participants with a view only
to the interests of Contract Owners.
7.3 If it is determined by a majority of the Trust Board, or a
majority of the members of the Trust Board who are not interested persons
of the Trust, the Investment Adviser or any sub-adviser to any of the
Series (the "Independent Trustees"), that a material irreconcilable
conflict exists, the Company shall, at its expense and to the extent
reasonably practicable (as determined by a majority of
9
<PAGE>
the Independent Trustees), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict including: (a) withdrawing
the assets allocable to some or all of the separate accounts from the Trust
or any Series and reinvesting such assets in a different investment medium,
which may include another Series of the Trust, or submitting the question
of whether such segregation should be implemented to a vote of all affected
Contract Owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the
affected Contract Owners the option of making such a change; and (b)
establishing a new registered management investment company or managed
separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract Owner voting instructions and
that decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Trust's election, to withdraw the
Account's investment in the Trust and terminate this Agreement and no
charge or penalty will be imposed as a result of such withdrawal. Any such
withdrawal and termination must take place within six (6) months after the
Trust gives written notice that this provision is being implemented, and
until the end of that six month period the Investment Adviser and the Trust
shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Trust.
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company
will withdraw the Account's investment in the Trust and terminate this
Agreement within six months after the Trust Board informs the Company in
writing that it has determined that such decision has created a material
irreconcilable conflict. Until the end of the foregoing six month period,
the Investment Adviser and the Trust shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the
Trust.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the Independent Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in no
event will the Trust or the Investment Adviser be required to establish a
new funding medium for the Contracts. The Company shall not be required by
Section 7.3 to establish a new funding medium for the Contracts if an offer
to do so has been declined by vote of a majority of Contract Owners
materially adversely affected by the material irreconcilable conflict. In
the event that the Trust Board determines that any proposed action does not
adequately remedy any material irreconcilable conflict, then the Company
will withdraw the Account's investment in the Trust
10
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and terminate this Agreement within six (6) months after the Trust Board
informs the Company in writing of the foregoing determination.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the 1940 Act or the rules promulgated thereunder with respect
to mixed or shared funding (as defined in the Exemptive Order) on terms and
conditions materially different from those contained in the Exemptive
Order, then (a) the Trust and/or the Company, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are
applicable; and (b) Article V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
7.8 The Company shall at least annually submit to the Trust Board
such reports, materials or data as the Trust Board may reasonably request
so that the Trust Board may fully carry out its obligations under the
Exemptive Order; provided, however, that the Board may require the
submission of such reports on data on a more frequent basis if it so deems
appropriate.
7.9 The Company, or any affiliate, will maintain at its home office,
available to the SEC, (a) a list of its officers, directors and employees
who participate directly in the management of administration of any Account
and/or (b) a list of its agents who, as registered representatives, offer
and sell Contracts."
SECTION 3. Schedules
Schedules 1,2 and 3 to the Original Participation Agreement are hereby
amended to read as Schedules 1, 2 and 3 to this Amendment No. 1, respectively.
SECTION 4. Miscellaneous
4.1 The captions in this Amendment No. 1 are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
4.2 This Amendment No. 1 may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
4.3 If any provisions of this Amendment No. 1 shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
No. 1 to be executed in its name and behalf by its duly authorized office on the
date specified below.
FIRST PROVIDIAN LIFE AND
HEALTH INSURANCE COMPANY
(Company)
Date: December 16, 1996 By: /s/ Gregory J. Garvin
Name: Gregory J. Garvin
Title: Vice President
WAGNER ADVISORS TRUST
(Trust)
By: /s/ Charles P. McQuaid
Name: Charles P. McQuaid
Title: Senior Vice President
12
<PAGE>
EXHIBIT 9(a)(5)
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into this 27th day of September, 1995 by
and between WANGER ADVISORS TRUST, an unincorporated business trust formed under
the laws of Massachusetts (the "Trust"), and SAFECO LIFE INSURANCE COMPANY, a
Washington life insurance company (the "Company"), on its own behalf and on
behalf of each separate account of the Company identified herein.
WHEREAS, the Trust is a series-type mutual fund offering shares of
beneficial interest (the "Trust shares") consisting of one or more separate
series ("Series") of shares ("Series shares"), each such series representing an
interest in a particular managed portfolio of securities and other assets; and
WHEREAS, the Trust was established for the purpose of serving as an
investment vehicle for (i) separate accounts supporting variable annuity
contracts and variable life insurance policies to be offered by insurance
companies, and (ii) certain pension and retirement plans receiving favorable tax
treatment under the Internal Revenue Code of 1986, as amended; and
WHEREAS, the Company desires that the Trust serve as an investment vehicle
for certain separate accounts of the Company;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Company agree as follows:
ARTICLE I. Additional Definitions
1.1. "Account" -- each separate account of the Company described more
specifically in Schedule 1 to this Agreement.
1.2. "Business Day" -- each day that the Trust is open for business as
provided in the Trust Prospectus.
1.3. "Code" -- the Internal Revenue Code of 1986, as amended.
1.4. "Contracts" -- the class or classes of variable annuity contracts or
variable life insurance contracts issued by the Company and described more
specifically on Schedule 2 to this Agreement.
1.5. "Contract Owners" -- the owners of the Contracts, as distinguished
from all Product Owners.
1.6. "Investment Adviser" -- the investment manager of the Trust.
<PAGE>
1.7. "Participating Account" -- a separate account investing all or a
portion of its assets in the Trust, including the Account.
1.8. "Participating Insurance Company" -- any insurance company investing
in the Trust on its behalf or on behalf of a Participating Account, including
the Company.
1.9. "Products" -- variable annuity contracts and variable life insurance
policies supported by Participating Accounts investing assets attributable
thereto in the Trust, including the Contracts.
1.10. "Product Owners" -- owners of Products.
1.11. "Prospectus" -- with respect to a class of Contracts, each version of
the definitive prospectus or supplement thereto filed with the SEC pursuant to
Rule 497 under the 1933 Act ("Contracts Prospectus"). With respect to Trust
shares, each version of the definitive prospectus or supplement thereto filed
with the SEC pursuant to Rule 497 under the 1933 Act with respect to a series of
the Trust listed on Schedule 3 to this Agreement ("Trust Prospectus"). With
respect to any provision of this Agreement requiring a party to take action in
accordance with a Prospectus, such reference thereto shall be deemed to be to
the version last filed prior to the taking of such action. For purposes of
Article VIII, the term "Prospectus" shall include any statement of additional
information incorporated therein.
1.12. "Qualified Entity" -- A person or plan, including a pension or
retirement plan receiving favorable tax treatment under the Code, that qualifies
to purchase shares of the Trust under Section 817(h) of the Code. A natural
person having an indirect interest in the Trust by virtue of such natural
person's participation in a Qualified Entity is a "Qualified Participant."
1.13. "Registration Statement" -- with respect to the Trust Shares ("Trust
Registration Statement") or a class of Contracts ("Contracts Registration
Statement"), the registration statement filed with the SEC to register the
securities issued thereby under the 1933 Act, or the most recently filed
amendment thereto, in either case in the form in which it was declared or became
effective. The Contracts Registration Statement is described more specifically
on Schedule 2 to this Agreement. The Trust Registration Statement was filed on
Form N-1A (File No. 33-83548).
1.14. "1940 Act Registration Statement" -- with respect to the Trust or
the Account, the registration statement filed with the SEC to register such
entity as an investment company under the 1940 Act, or the most recently filed
amendment thereto. The Account 1940 Act Registration Statement is described
more specifically on Schedule 2 to this Agreement. The Trust 1940 Act
Registration Statement was filed on Form N-1A (File No. 811-8748).
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1.15. "Statement of Additional Information" -- with respect to the Trust or
a class of Contracts, each version of the definitive statement of additional
information or supplement thereto filed with the SEC pursuant to Rule 497 under
the 1933 Act.
1.16. "SEC" -- the Securities and Exchange Commission.
1.17. "1933 Act" -- the Securities Act of 1933, as amended.
1.18. "1940 Act" -- the Investment Company Act of 1940, as amended.
ARTICLE II. Sale of Trust Shares
2.1. The Trust shall make shares of those Series listed on Schedule 3 to
this Agreement available for purchase by the Company on behalf of the Account,
such purchases to be effected at net asset value in accordance with Section 2.3
of this Agreement. Notwithstanding the foregoing, (i) Trust Series in existence
now or that may be established in the future and not listed on Schedule 3 will
be made available to the Company only as the Trust and the Company may agree
pursuant to Article XI hereof, and (ii) the Board of Trustees of the Trust (the
"Trust Board") may suspend or terminate the offering of Trust shares of any
Series in any jurisdiction, if such action is required by law or by regulatory
authorities having jurisdiction or if, in the sole discretion of the Trust Board
acting in good faith and in light of its fiduciary duties under Federal and any
applicable state laws, suspension or termination is necessary or in the best
interests of the shareholders of any Series (it being understood that
"shareholders" for this purpose shall mean Product Owners and Qualified
Participants).
2.2. The Trust shall redeem, at the Company's request, any full or
fractional shares of the Trust held by the Company on behalf of the Account,
such redemptions to be effected at net asset value in accordance with Section
2.3 of this Agreement. Notwithstanding the foregoing, (i) the Company shall not
redeem Trust shares attributable to Contract Owners except in the circumstances
permitted in Section 2.7 of this Agreement, and (ii) the Trust may delay
redemption of Trust shares of any Series to the extent permitted by the 1940
Act, any rules, regulations or orders thereunder, or as described in the Trust
Prospectus.
2.3.
(a) The Trust hereby appoints the Company as its designee for the
limited purpose of receiving purchase and redemption requests from the
Account based on allocations of net amounts to the Account or subaccounts
thereof under the Contracts and other transactions relating to the
Contracts or the Account. Purchase and redemption requests shall be
processed by the Trust at the net asset value per share next calculated
after the Trust receives and accepts such request. The Trust shall
calculate its net asset value per share at the Trust's close of business on
each Business Day (as defined from time to time in the Trust
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Prospectus, and which as of the date of execution of this Agreement is the
time of the close of regular session trading on the New York Stock
Exchange, which is generally 4:00 p.m. Eastern Time). Receipt of any such
request on any Business Day by the Company as designee of the Trust prior
to the Trust's close of business shall constitute receipt by the Trust on
that same Business Day, provided that the Trust receives notice of such
request by 10:30 a.m. Eastern Time on the next following Business Day.
(b) The Company shall pay for shares of each Series on the same day
that it notifies the Trust of a purchase request for such shares. Payment
for Series shares shall be made in Federal funds transmitted to the Trust
by wire to be received by the Trust by 1:00 p.m. Eastern Time on the day
the Trust is notified of the purchase request for Series shares (unless the
Trust determines and so advises the Company that sufficient proceeds are
available from redemption of shares of other Series effected pursuant to
redemption requests tendered by the Company on behalf of the Account). If
payment in Federal funds for any purchase is not received, or is received
by the Trust after 3:00 p.m. Eastern Time on such Business Day, the Company
shall promptly, upon the Trust's request, reimburse the Trust for any
charges, costs, fees, interest or other expenses incurred by the Trust in
connection with any advances to, or borrowings or overdrafts by, the Trust,
or any similar expenses incurred by the Trust, as a result of non-payment
or late payment.
(c) Payment for Series shares redeemed by the Account or the Company
shall be made in Federal funds transmitted by wire to the Company or any
other designated person by 3:00 p.m. Eastern Time on the next Business Day
after the Trust is properly notified of the redemption order of Series
shares (unless redemption proceeds are to be applied to the purchase of
Trust shares of other Series in accordance with Section 2.3(b) of this
Agreement), except that (i) if payment of the redemption proceeds would
require the Trust to dispose of portfolio securities or otherwise incur
additional costs, proceeds shall be wired to the Company within seven days
and the Trust shall notify the Company of such delay by 3 p.m. Eastern Time
on such Business Day; and (ii) the Trust reserves the right to delay
payment of redemption proceeds to the extent permitted under Section 22(e)
of the 1940 Act; and (iii) the Trust reserves the right to effect payment
of redemptions in kind, but only to the extent described in the Trust
Prospectus. The Trust shall not bear any responsibility whatsoever for the
proper disbursement or crediting of redemption proceeds by the Company; the
Company alone shall be responsible for such action.
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2.4. The Trust shall use reasonable efforts to make the net asset value
per share for each Series available to the Company by 6:00 p.m. Eastern Time
each Business Day and shall use its best efforts to make the net asset value
available to the Company by 7:00 p.m. Eastern Time each Business Day, and in any
event, as soon as reasonably practicable after the net asset value per share for
such Series is calculated, and shall calculate such net asset value in
accordance with the Trust Prospectus. Neither the Trust, any Series, the
Investment Adviser, nor any of their affiliates shall be liable for any
information provided to the Company pursuant to this Agreement which information
is based on incorrect information supplied by the Company or any other
Participating Company to the Trust or the Investment Adviser.
2.5. The Trust shall furnish notice to the Company as soon as reasonably
practicable of any income dividends or capital gain distributions payable on any
Series shares. The Trust shall notify the Company promptly of the number of
Series shares so issued as payment of such dividends and distributions. The
Company, on its behalf and on behalf of the Account, hereby elects to receive
all such dividends and distributions as are payable on any Series shares in the
form of additional shares of that Series. The Company reserves the right, on its
behalf and on behalf of the Account, to revoke this election and to receive all
such dividends in cash.
2.6. Issuance and transfer of Trust shares shall be by book entry only.
Stock certificates will not be issued to the Company or the Account. Purchase
and redemption orders for Trust shares shall be recorded in an appropriate
ledger for the Account or the appropriate subaccount of the Account.
2.7.
(a) The Company shall invest amounts available for investment under
the Contracts in the Series of the Trust specified in Schedule 3 in
accordance with allocation instructions received from Contract Owners, it
being understood that no changes shall be made to Schedule 3 without the
prior written consent of the Trust and the Investment Adviser. The Company
may withdraw the Account's investment in the Trust or a Series of the Trust
only: (i) as necessary to facilitate Contract Owner requests; (ii) upon a
determination by a majority of the Trust Board, or a majority of
disinterested Trust Board members, that an irreconcilable material conflict
exists among the interests of (x) some or all Product Owners or (y) the
interests of some or all of the Participating Insurance Companies and/or
Qualified Entities investing in the Trust; or (iii) in the event that the
shares of another investment company are substituted for series shares in
accordance with the terms of the Contracts upon the (x) requisite vote of
the Contract Owners having an interest in the affected Series and the
written consent of the Trust (unless otherwise required by applicable law);
(y) upon issuance of an SEC exemptive order pursuant to Section 26(b) of
the 1940 Act permitting such substitution; or (z) as may otherwise be
permitted under applicable law.
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(b) The Company shall not, without the prior written consent of the
Trust (unless otherwise required by applicable law), take any action to
operate the Account as a management investment company under the 1940 Act.
(c) The Trust shall not, without the prior written consent of the
Company (unless otherwise required by applicable law), take any action to
operate the Trust as a unit investment trust under the 1940 Act.
(d) The Company shall not, without the prior written consent of the
Trust (unless otherwise required by applicable law), solicit, induce or
encourage Contract Owners to change or modify the Trust or change the
Trust's investment adviser.
(e) The Company and the Trust acknowledge that the arrangement
contemplated by this Agreement is not exclusive; Trust shares may be sold
to other insurance companies; and the cash value of the Contracts may be
invested in other investment companies, provided, however, that (a) such
other investment company, or series thereof, has investment objectives or
policies that are substantially different from the investment objectives
and policies of the Trust; or (b) the Company gives the Trust 45 days
written notice of its intention to make such other investment company
available as a funding vehicle for the Contracts; or (c) such other
investment company was available as a funding vehicle for the Contracts
prior to the date of this Agreement and the Company so informs the Trust
prior to the execution of this Agreement; or (d) the Trust consents to the
use of such other investment company, such consent not to be unreasonably
withheld.
2.8. The Trust shall sell Trust shares only to Participating Insurance
Companies and their separate accounts and to Qualified Entities. The Trust shall
not sell Trust shares to any insurance company or separate account unless an
agreement complying with Article VII of this Agreement is in effect to govern
such sales.
2.9 The Trust shall provide to the Company within 5 business days after
the end of each month a monthly statement of account reflecting all transactions
by the Company during that month.
ARTICLE III. Representations and Warranties
3.1. The Company represents and warrants that: (i) the Company is an
insurance company duly organized and in good standing under applicable law; (ii)
the Account is a validly existing separate account, duly established and
maintained in accordance with applicable law; (iii) the Account 1940 Act
Registration Statement has been filed with the SEC in accordance with the
provisions of the 1940 Act and the Account is duly registered as a unit
investment trust thereunder; (iv) the Contracts Registration Statement has been
declared effective by the SEC; (v)
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the Contracts will be issued in compliance in all material respects with all
applicable Federal and state laws; and (vi) the Contracts currently are and at
the time of issuance will be treated as annuity contracts under applicable
provisions of the Code.
3.2. The Trust represents and warrants that: (i) the Trust is an
unincorporated business trust duly formed under Massachusetts law; (ii) the
Trust 1940 Act Registration Statement has been filed with the SEC in accordance
with the provisions of the 1940 Act and the Trust is duly registered as an open-
end management investment company thereunder; (iii) the Trust Registration
Statement has been declared effective by the SEC; (iv) Trust shares sold
pursuant to this Agreement have been duly authorized for issuance in accordance
with applicable law; (v) the Trust believes that it (x) currently qualifies as a
"regulated investment company" under Subchapter M of the Code and (y) currently
complies with Section 817(h) of the Code and regulations thereunder; and (vi)
the Trust's investment policies are in material compliance with any investment
restrictions set forth on Schedule 4 to this Agreement. The Trust, however,
makes no representation as to whether any aspect of its operations (including,
but not limited to, fees and expenses and investment policies) otherwise
complies with the insurance laws or regulations of any state.
3.3. Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate or trust action, as applicable, by
such party, and, when so executed and delivered, this Agreement will be the
valid and binding obligation of such party enforceable in accordance with its
terms.
ARTICLE IV. Filings, Information and Expenses
4.1. The Trust shall amend the Trust Registration Statement and the Trust
1940 Act Registration Statement from time to time as required in order to effect
the continuous offering of Trust shares and to maintain the Trust's registration
under the 1940 Act for so long as Trust shares are sold.
4.2. The Company shall amend the Contracts Registration Statement and the
Account 1940 Act Registration Statement from time to time as required in order
to effect the continuous offering of the Contracts or as may otherwise be
required by applicable law. The Company shall maintain a current effective
Contracts Registration Statement and the Account's registration under the 1940
Act for so long as the Contracts are outstanding, unless (a) a no-action letter
from the SEC has been obtained by the Company to the effect that such
registration statement need no longer be maintained; or (b) the Company has
supplied the Trust with an opinion of counsel to the effect that maintaining
such registration statement is no longer required; or (c) the Company has
notified the Trust in writing that, with respect to such registration statement,
the Company
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meets the terms and conditions of, and is relying on, Great West Life & Annuity
Insurance Company (pub. avail. Oct. 23, 1990), and any subsequent no-action
letter released by the staff of the SEC addressing the same subject matter. The
Company shall file, register, qualify and obtain approval of the Contracts for
sale to the extent required by applicable insurance and securities laws of the
various states.
4.3 The Trust shall provide the Company with as many copies of the Trust
Prospectus as the Company may reasonably request. If requested by the Company in
lieu thereof, the Trust shall provide such documentation (including a final copy
of the Trust Prospectus as set in type at the Trust's expense) and other
assistance as is reasonably necessary in order for the Company once each year
(or more frequently if the Trust Prospectus is more frequently amended) to have
the Contracts Prospectus and Trust Prospectus printed together in one document.
4.4 The Company shall deliver Contracts, Contracts and Trust Prospectuses,
Contracts and Trust Statements of Additional Information, and all amendments or
supplements to any of the foregoing to Contract Owners and prospective Contract
Owners, as required by applicable federal securities laws.
4.5. The Company shall:
(a) inform the Trust of any state in which the Trust is required
under such state's securities laws to register the offering of its
shares pursuant to this participation agreement; and
(b) inform the Trust of any investment restrictions imposed by state
insurance law that may become applicable to the Trust from time to time as
a result of the Account's investment therein (including, but not limited
to, restrictions with respect to fees and expenses and investment
policies), other than those set forth on Schedule 4 to this Agreement.
4.6. Upon receipt of information from the Company pursuant to Section
4.5(b), the Trust shall determine whether it is in the best interests of
shareholders (it being understood that "shareholders" for this purpose shall
mean Product Owners and Qualified Participants) to comply with any such
restrictions. If the Trust determines that it is not in the best interests of
shareholders, the Trust shall so inform the Company, and the Trust and the
Company shall discuss alternative accommodations in the circumstances. If the
Trust determines that it is in the best interests of shareholders to comply with
such restrictions, the Trust and the Company shall amend Schedule 4 to this
Agreement to reflect such restrictions.
4.7. All expenses incident to each party's performance under this
Agreement (including expenses expressly assumed by such party pursuant to this
Agreement) shall be paid by the such party to the extent permitted by law.
-8-
<PAGE>
(a) Expenses assumed by the Trust include, but are not limited to, the
costs of: registration and qualification of the Trust shares under the
federal securities laws; preparation and filing with the SEC of the Trust
Prospectus, Trust Registration Statement, Trust proxy materials and
shareholder reports; the printing and mailing of all proxy statements and
periodic reports; the preparation of Trust Prospectuses and Statements of
Additional Information required to be provided by the Trust to its then-
current shareholders; preparation of all statements and notices required by
any Federal or state securities law; all taxes on the issuance or transfer
of Trust shares; and any expenses permitted to be paid or assumed by the
Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act. The
Trust shall pay no fee or other compensation to the Company under this
Agreement, and shall not be charged for the costs of printing and mailing
to prospective Contract Owners copies of the Trust Prospectus, Trust
Statement of Additional Information, notices, proxy statements, periodic
reports, or other printed materials.
(b) Expenses assumed by the Company include, but are not limited to,
the costs of: registration and qualification of the Contracts under the
federal securities laws; preparation and filing with the SEC of the
Contracts Prospectus, Contracts Registration Statement, and Contract Owner
reports; and the printing and mailing of all periodic reports, Contracts
Prospectuses, Statements of Additional Information, and notices to current
and prospective Contract Owners required by any Federal or state insurance
law other than those paid for by the Trust.
4.8. No piece of advertising or sales literature or other promotional
material in which the Trust is named shall be used, except with the prior
written consent of the Trust. Any such piece shall be furnished to the Trust for
such consent prior to its use. The Trust shall respond to any request for
written consent on a prompt and timely basis, but failure to respond shall not
relieve the Company of the obligation to obtain the prior written consent of the
Trust. The Trust may at any time in its sole discretion revoke such written
consent, and upon notification of such revocation, the Company shall no longer
use the material subject to such revocation. The Trust may delegate its rights
and responsibilities under this provision to the Investment Adviser. However,
should the Trust or its delegate revoke such consent, it agrees to reimburse the
Company for all costs of producing, printing and filing of such material
incurred prior to notification that consent has been revoked.
4.9. The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust
other than the information or representations contained in the Trust
Registration Statement or Trust Prospectus or in reports or
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<PAGE>
proxy statements for the Trust which are in the public domain or approved in
writing by the Trust for distribution to Contract Owners, or in sales literature
or other promotional material approved in accordance with Section 4.8 of this
Agreement, except with the prior written consent of the Trust.
4.10. The Trust shall not give any information or make any representations
on behalf of the Company or concerning the Company, the Account or the Contracts
other than the information or representations contained in the Contracts
Registration Statement or Contracts Prospectus or in reports of the Account
which are in the public domain or approved in writing by the Company for
distribution to Contract Owners, or in sales literature or other promotional
material approved in writing by the Company, except with the prior written
consent of the Company.
4.11. Each party shall provide to the other at least one complete copy of
all Registration Statements, Prospectuses, Statements of Additional Information,
periodic and other shareholder or Contract Owner reports, proxy statements,
solicitations of voting instructions, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments or supplements to any of the above, that relate to the Trust, the
Contracts or the Account, as the case may be, promptly after the filing by or on
behalf of such party of such document with the SEC or other regulatory
authorities.
4.12. Each party shall provide to the other upon request copies of draft
versions of any Registration Statements, Prospectuses, Statements of Additional
Information, periodic and other shareholder or Contract Owner reports, proxy
statements, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments or supplements to any of the above, to the extent
that the other party reasonably needs such information for purposes of preparing
a report or other filing to be filed with or submitted to a regulatory agency.
If a party requests any such information before it has been filed, the other
party will provide the requested information if then available and in the
version then available at the time of such request.
4.13. Each party hereto shall cooperate with the other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit each other and such
authorities reasonable access to its books and records in connection with any
investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. However, such access shall not extend to attorney-client
privileged information.
4.14. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any material
constituting sales literature or advertising under the NASD rules, the 1940 Act
or the 1933 Act.
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<PAGE>
4.15. The Trust agrees to provide the Company within ten (10) days after
the end of each month (i) performance information consisting of (x) the total
return of each Series then listed in Schedule 3 hereto through the end of that
month, and (y) the average annual total return of each such Series for the one-,
five-, and ten-year periods ended as of the most recent calendar quarter, or the
life of such Series, if shorter, in each case calculated in accordance with the
methods of calculation described in the Trust Prospectus; (ii) a listing of the
10 portfolio companies in which each such Series had its largest investments at
the end of that month; and (iii) a summary of the allocation of each such
Series' investments among industry groups.
ARTICLE V. Voting of Trust Shares
With respect to any matter put to vote by the holders of Trust shares or
Series shares ("Voting Shares"), the Company shall:
(a) solicit voting instructions from Contract Owners to which Voting
Shares are attributable;
(b) vote Voting Shares of each Series attributable to Contract Owners
in accordance with instructions or proxies timely received from such
Contract Owners;
(c) unless permitted under applicable law, vote Voting Shares of each
Series attributable to Contract Owners for which no instructions have been
received in the same proportion as Voting Shares of such Series for which
instructions have been timely received; and
(d) unless permitted under applicable law, vote Voting Shares of each
Series held by the Company on its own behalf or on behalf of the Account
that are not attributable to Contract Owners in the same proportion as
Voting Shares of such Series for which instructions have been timely
received.
The Company shall be responsible for assuring that voting privileges for
the Account are calculated in a manner consistent with the provisions set forth
above.
ARTICLE VI. Compliance with Code
6.1. The Trust undertakes to comply with Section 817(h) of the Code, and
all regulations issued thereunder.
6.2. The Trust undertakes to maintain its qualification as a registered
investment company (under Subchapter M or any successor or similar provision),
and undertakes to notify the Company immediately upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so qualify
in the future.
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<PAGE>
6.3. The Company undertakes to maintain the treatment of the Contracts as
annuity contracts or life insurance policies, whichever is appropriate, under
applicable provisions of the Code and shall notify the Trust immediately upon
having a reasonable basis for believing that the Contracts have ceased to be so
treated or that they might not be so treated in the future.
6.4. The Trust undertakes to provide the Company within fifteen (15) days
after the end of each calendar quarter a letter from an appropriate Trust
officer certifying to the continued accuracy of the Trust's representations in
sections 6.1 and 6.2 of this Agreement with respect to any Series then listed on
Schedule 3 to this Agreement, and providing a detailed listing of the individual
securities and other assets, if any, held by each such Series as of the end of
such calendar quarter.
ARTICLE VII. Potential Conflicts
The parties to this Agreement acknowledge that the Trust may file an
application with the SEC to request an order granting relief from various
provisions of the 1940 Act and the rules thereunder to the extent necessary to
permit Trust shares to be sold to and held by variable annuity and variable life
insurance separate accounts of both affiliated and unaffiliated Participating
Insurance Companies, as well as by Qualified Entities. Any conditions or
undertakings that may be imposed on the Company and the Trust by virtue of such
order shall be incorporated herein by this reference, as of the date such order
is granted, as though set forth herein in full, and the parties to this
Agreement shall comply with such conditions and undertakings to the extent
applicable to each such party. The Trust will not enter into a participation
agreement with any other Participating Insurance Company unless it imposes the
same conditions and undertakings imposed by virtue of such order and
incorporated by reference herein on the parties to such agreement.
ARTICLE VIII. Indemnification
---------------
8.1. The Company shall indemnify and hold harmless the Trust and each
person who controls or is associated with the Trust within the meaning of such
terms under the federal securities laws (but not any Participating Insurance
Companies or Qualified Entities) and any officer, trustee, director, employee or
agent of the foregoing, against any and all losses, claims, damages or
liabilities, joint or several (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amounts paid in
settlement of, any action, suit or proceeding or any claim asserted), to which
they or any of them may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
Contracts Registration Statement, Contracts Prospectus, sales
literature or other promotional material for the Contracts or the
Contracts themselves (or any amendment or supplement to
-12-
<PAGE>
any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances in which they were made; provided that this obligation
to indemnify shall not apply if such statement or omission or such alleged
statement or alleged omission was made in reliance upon and in conformity
with information furnished in writing to the Company by the Trust for use
in the Contracts Registration Statement, Contracts Prospectus or in the
Contracts or sales literature or promotional material for the Contracts (or
any amendment or supplement to any of the foregoing) or otherwise for use
in connection with the sale of the Contracts or Trust shares; or
(b) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Trust Registration Statement, Trust
Prospectus or sales literature or other promotional material of the Trust
(or any amendment or supplement to any of the foregoing), or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances in which they were made, if such statement or omission
was made in reliance upon and in conformity with information furnished in
writing to the Trust by or on behalf of the Company; or
(c) arise out of or are based upon any wrongful conduct of the Company
or persons under its control (or subject to its authorization or
supervision) with respect to the sale or distribution of the Contracts or
Trust shares; or
(d) arise as a result of any failure by the Company to perform its
obligations under the terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with the undertaking
specified in Article VI of this Agreement, unless such failure is a result
of the Trust's material breach of this Agreement); or
(e) arise out of any material breach by the Company of this Agreement,
including but not limited to any failure to transmit a request for
redemption or purchase of Trust shares on a timely basis in accordance with
the procedures set forth in Article II.
This indemnification will be in addition to any liability that the Company may
otherwise have; provided, however, that no person otherwise entitled to
indemnification pursuant to this Section 8.1 shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
person seeking indemnification.
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<PAGE>
8.2. The Trust shall indemnify and hold harmless the Company and each
person who controls or is associated with the Company within the meaning of such
terms under the federal securities laws and any officer, director, employee or
agent of the foregoing, against any and all losses, claims, damages or
liabilities, joint or several (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amounts paid in
settlement of, any action, suit or proceeding or any claim asserted), to which
they or any of them may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Trust Registration
Statement, Trust Prospectus or sales literature or other promotional
material of the Trust (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances in which they were made; provided that this obligation to
indemnify shall not apply if such statement or omission or alleged
statement or alleged omission was made in reliance upon and in conformity
with information furnished in writing by the Company to the Trust for use
in the Trust Registration Statement, Trust Prospectus or sales literature
or promotional material for the Trust (or any amendment or supplement to
any of the foregoing); or
(b) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Contracts Registration Statement, Contracts
Prospectus or sales literature or other promotional material for the
Contracts (or any amendment or supplement to any of the foregoing), or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made, if such
statement or omission was made in reliance upon information furnished in
writing by the Trust to the Company; or
(c) arise out of or are based upon wrongful conduct of the Trust with
respect to the sale of Trust shares; or
(d) arise as a result of any failure by the Trust to perform its
obligations under the terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with the
undertakings specified in Article VI of this Agreement, unless such failure
is a result of the Company's material breach of this Agreement); or
(e) arise out of any material breach by the Trust of this Agreement.
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<PAGE>
This indemnification will be in addition to any liability that the Trust may
otherwise have; provided, however, that no person otherwise entitled to
indemnification pursuant to this Section 8.2 shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
person seeking indemnification.
8.3. After receipt by a party entitled to indemnification ("indemnified
party") under this Article VIII of notice of the commencement of any action, if
a claim in respect thereof is to be made by the indemnified party against any
person obligated to provide indemnification under this Article VIII
("indemnifying party"), such indemnified party will notify the indemnifying
party in writing of the commencement thereof as soon as practicable thereafter,
provided that the failure to so notify the indemnifying party will not relieve
the indemnifying party from any liability under this Article VIII, except to the
extent that the omission results in a failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a result of
the failure to give such notice. The indemnifying party, upon the request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be liable for
any settlement of any proceeding effected without its written consent but if
settled with such consent, or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
A successor by law of the parties to this Agreement shall be entitled to
the benefits of the indemnification contained in this Article VIII. The
indemnification provisions contained in this Article VIII shall survive any
termination of this Agreement.
ARTICLE IX. Applicable Law
--------------
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts, without giving effect to the principles of conflicts of laws.
9.2. This Agreement shall be subject to the provisions of the 1933 Act,
1940 Act and Securities Exchange Act of 1934, as amended, and the rules and
regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant, and the terms hereof shall
be limited, interpreted and construed in accordance therewith.
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<PAGE>
ARTICLE X. Termination
-----------
10.1 This Agreement shall not terminate until the Trust is dissolved,
liquidated, or merged into another entity, or, as to any Series of the Trust, an
Account no longer invests in that Series. However, certain obligations of, or
restrictions on, the parties to this Agreement may terminate as provided in
Sections 10.2 and 10.3.
10.2 The obligation of the Trust to sell shares to the Company pursuant to
Article II of this Agreement shall terminate at the option of the Trust:
(a) upon six months' notice to the Company;
(b) upon 30 days' notice to the Company:
(1) upon institution of formal proceedings against the
Company by the NASD, the SEC, the insurance commission of
any state or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale
of the Contracts, the operation of the Account, the
administration of the Contracts or the purchase of Trust
shares, or an expected or anticipated ruling, judgment or
outcome which would, in the Trust's reasonable judgment,
materially impair the Company's ability to meet and perform
the Company's obligations and duties hereunder;
(2) in the event any of the Contracts are not registered, issued
or sold in accordance with applicable Federal and/or state law;
(3) if the Contracts cease to qualify as annuity contracts under
the Code, or if the Trust reasonably believes that the Contracts may
fail to so qualify;
(4) if the Trust shall determine, in its sole judgment exercised
in good faith, that either (1) the Company shall have suffered a
material adverse change in its business or financial condition or (2)
the Company shall have been the subject of material adverse publicity
which is likely to have a material adverse impact upon the business
and operations of the Trust;
(5) upon the Company's assignment of this Agreement (including,
without limitation, any transfer of the Contracts or the Account to
another insurance company pursuant to an assumption reinsurance
agreement) unless the Trust consents thereto; or
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<PAGE>
(6) upon termination pursuant to Section 10.1 or notice from the
Company pursuant to Section 10.3.
In exercising its option to terminate its obligation to sell Shares to the
Company, the Trust shall continue to make its shares available to the extent
required by applicable law and may elect to continue to make Trust shares
available to the extent necessary to permit owners of Contracts in effect on the
effective date of such termination (hereinafter referred to as "Existing
Contracts") to reallocate investments in the Trust, redeem investments in the
Trust and/or invest in the Trust upon the making of additional purchase payments
under the Existing Contracts. The Trust shall promptly notify the Company
whether the Trust is electing to make Trust shares so available after
termination.
10.3. The restrictions on the Company under Section 2.7 of this Agreement
shall terminate at the option of the Company:
(a) upon six months' notice to the Trust;
(b) upon 30 days' notice to the Trust:
(1) if shares of any Series are not reasonably
available to meet the requirements of the Contracts as
determined by the Company, and the Trust, after receiving
written notice from the Company of such non-availability,
fails to make available a sufficient number of Trust shares
to meet the requirements of the Contracts within 5 days
after receipt thereof;
(2) upon institution of formal proceedings against the Trust by
the NASD, the SEC or any state securities or insurance commission or
any other regulatory body;
(3) if the Trust ceases to qualify as a Regulated Investment
Company under Subchapter M of the Code, or under any successor or
similar provision, or if the Company reasonably believes based on an
opinion of counsel satisfactory to the Trust that the Trust may fail
to so qualify, and the Trust, upon written request, fails to provide
reasonable assurance that it will take action to cure or correct such
failure;
(4) if the Trust fails to meet the diversification requirements
specified in Section 817(h) of the Code and any regulations thereunder
and the Trust, upon written request, fails to provide reasonable
assurance that it will take action to cure or correct such failure; or
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<PAGE>
(5) if the Trust informs the Company pursuant to Section 4.6
that the Trust will not comply with investment restrictions as
requested by the Company and the Trust and the Company are unable to
agree upon any reasonable alternative accommodations.
10.4. This Article X shall not apply to any termination made pursuant to
Article VII or any conditions or undertakings incorporated by reference in
Article VII, and the effect of such Article VII termination shall be governed by
the provisions set forth or incorporated by reference therein.
ARTICLE XI. Applicability to New Accounts and New Contracts
The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect, as appropriate, changes in or relating to the
Contracts or Series, or additions of new classes of Contracts to be issued by
the Company through separate accounts investing in the Trust. The provisions of
this Agreement shall be equally applicable to each such class of Contracts,
Series and Accounts, effective as of the date of amendment of such Schedule,
unless the context otherwise requires.
ARTICLE XII. Non-Liability of Trustees and Shareholders
Any obligation of the Trust hereunder shall be binding only upon the assets
of the Trust (or applicable Series thereof) and shall not be binding upon any
trustee, officer, employee, agent or shareholder of the Trust. Neither the
authorization of any action by the Trust Board or shareholders of the Trust, nor
the execution of this Agreement on behalf of the Trust, shall impose any
liability upon any trustee, officer, or shareholder of the Trust.
ARTICLE XIII. Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Trust:
Name: Merrillyn J. Kosier
Title: Vice President
Wanger Advisors Trust
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
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<PAGE>
If to the Company:
Name: Gregory Clarke
Title: Vice President
SAFECO Life Insurance Company
P. O. Box 34690
Seattle, Washington 98124-1690
ARTICLE XIV. Miscellaneous
14.1. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
14.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
14.3. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and behalf by its duly authorized officer on the date
specified below.
SAFECO LIFE INSURANCE COMPANY
(Company)
Date: September 30, 1995
By: /s/ Gregory Clarke
Name: Gregory Clarke
Title: Vice President
WANGER ADVISORS TRUST
(Trust)
Date: September 27, 1995
By: /s/ Ralph Wanger
Name: Ralph Wanger
Title: President
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<PAGE>
Schedule 1
Accounts of the Company
Investing in the Trust
Effective as of the date the Agreement was executed, the following separate
accounts are subject to the Agreement:
<TABLE>
<CAPTION>
===============================================================================
Name of Account and Date SEC 1940 Act Type of
Subaccounts Established by Registration Product
Board of Number Supported by
Directors of Account
the Company
===============================================================================
<S> <C> <C> <C>
SAFECO Life Insurance
Company Separate
Account C 9/14/93 811-8052 Variable
Annuity
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
Effective as of _____________, the following separate accounts are hereby added
to this Schedule 1 and made subject to the Agreement:
<TABLE>
<CAPTION>
================================================================================
Name of Account and Date SEC 1940 Act Type of
Subaccounts Established by Registration Product
Board of Number Supported by
Directors of Account
the Company
================================================================================
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 1 in
accordance with Article XI of the Agreement.
/s/ Ralph Wanger /s/ Gregory Clarke
Wanger Advisors Trust SAFECO Life Insurance Company
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<PAGE>
Schedule 2
Classes of Contracts
Supported by Separate Accounts
Listed on Schedule 1
Effective as of the date the Agreement was executed, the following classes of
Contracts are subject to the Agreement:
<TABLE>
<CAPTION>
===============================================================================
Contract Marketing Name SEC 1933 Act Registration Name of Supporting
Number Account
===============================================================================
<S> <C> <C>
SAFECO Life Insurance
Company Separate
MainSail 33-60331 Account C
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
==============================================================================
</TABLE>
Effective as of _______, the following classes of Contracts are hereby added to
this Schedule 2 and made subject to the Agreement:
<TABLE>
<CAPTION>
==============================================================================
Contract Marketing Name SEC 1933 Act Registration Name of Supporting
Number Account
==============================================================================
<S> <C> <C>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
==============================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 2 in
accordance with Article XI of the Agreement.
/s/ Ralph Wanger /s/ Gregory Clarke
Wanger Advisors Trust SAFECO Life Insurance Company
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<PAGE>
Schedule 3
Trust Series Available Under
Each Class of Contracts
Effective as of the date the Agreement was executed, the following Trust Series
are available under the Contracts:
<TABLE>
<CAPTION>
================================================================
Contract Marketing Name Trust Series
<S> <C>
================================================================
MainSail Wanger U.S. Small Cap
Advisor
----------------------------------------------------------------
----------------------------------------------------------------
================================================================
</TABLE>
Effective as of __________________, this Schedule 3 is hereby amended to reflect
the following changes in Trust Series:
<TABLE>
<CAPTION>
================================================================
Contract Marketing Name Trust Series
<S> <C>
================================================================
----------------------------------------------------------------
----------------------------------------------------------------
================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 3 in
accordance with Article XI of the Agreement.
/s/ Ralph Wanger /s/ Gregory Clarke
Wanger Advisors Trust SAFECO Life Insurance Company
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<PAGE>
Schedule 4
Investment Restrictions
Applicable to the Trust
Effective as of the date the Agreement was executed, the following investment
restrictions are applicable to the Trust:
None.
Effective as of ___________________, 199____, this Schedule 4 is hereby amended
to reflect the following changes:
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 4 in
accordance with Article XI of the Agreement.
/s/ Ralph Wanger /s/ Gregory Clarke
Wanger Advisors Trust SAFECO Life Insurance Company
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<PAGE>
AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT
THIS AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT ("Amendment No. 1"),
made and entered into this 18th day of December, 1996, supplementing and
amending the Participation Agreement made and entered into the 27th day of
September, 1995 (the "Original Participation Agreement," and together with this
First Supplemental Amendment to Participation Agreement, the "Agreement") by and
between WANGER ADVISORS TRUST, an unincorporated business trust formed under the
laws of Massachusetts (the "Trust"), and SAFECO LIFE INSURANCE COMPANY, a
Washington life insurance company (the "Company"), on its own behalf of each
separate account of the Company identified in the Agreement.
WHEREAS, the Trust currently serves as an investment vehicle for certain
accounts of the Company pursuant to the Original Participation Agreement; and
WHEREAS, the Trust has applied for an order from the Securities and
Exchange Commission (the "SEC") (File No. 812-10198), granting Participating
Insurance Companies (as defined in the Original Participation Agreement) and
variable annuity and variable life separate accounts exemptions from the
provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined
in the Original Participation Agreement) and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust
and each Series thereof to be sold to and held by variable annuity and variable
life insurance separate accounts of life insurance companies that may or may not
be affiliated with one another and qualified pension and retirement plans
outside of the separate account context (the "Exemptive Order"); and
WHEREAS, the Company and the Trust have agreed to hereby supplement and
amend the Original Participation Agreement in order to reflect the conditions
and undertakings that are expected to be imposed on the Company and the Trust by
virtue of such Exemptive Order;
NOW, THEREFORE, in consideration of their mutual promises, the Trust and
the Company agree as follows:
SECTION 1. Definitions
For all purposes of this Amendment No. 1, except as otherwise expressly
provided or unless the context otherwise requires:
(1) All references in this Amendment No. 1 and the Original Participation
Agreement to designated "Articles" and other subdivisions are to the designated
Articles and other subdivisions of the Original Participation Agreement. The
words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of
similar import refer to this Amendment No. 1 as a whole and not to any
particular "Section" or other subdivision.
<PAGE>
(2) All terms used herein and not otherwise defined shall have the same
meanings as those given to such terms in the Original Participation Agreement,
and include the plural as well as the singular, and the Original Participation
Agreement is hereby amended to include any terms defined herein.
(3) Any references to the "Agreement" in the Original Participation
Agreement are hereby amended to include, collectively, the Original
Participation Agreement and this Amendment No. 1.
SECTION 2. Amendment to Article VII
Article VII of the Original Participation Agreement is hereby amended to
read as follows:
"ARTICLE VII. Potential Conflicts and Compliance With
Exemptive Order
7.1 The Trust Board will monitor the Trust for the existence of any
material irreconcilable conflict between the interests of the Contract
Owners of all Participating Accounts and of Qualified Participants
investing in the Trust and each Series thereof. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) an action by
any state insurance regulatory authority; (b) a change in applicable
federal or state insurance, tax, or securities laws or regulations, or a
public ruling, private letter ruling, no-action or interpretative letter,
or any similar action by insurance, tax, or securities regulatory
authorities; (c) an administrative or judicial decision in any relevant
proceeding; (d) the manner in which the investments of any Series are
managed; (e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract owners; (f) a decision by a
Participating Insurance Company to disregard the voting instructions of
contract owners; or (g) if applicable, a decision by a Qualified Entity to
disregard the voting instructions of Qualified Participants. The Trust
Board shall promptly inform the Company in writing if it determines that a
material irreconcilable conflict exists and the implications thereof.
7.2 The Company shall report any potential or existing conflicts to
the Trust Board. The Company will be responsible for assisting the Trust
Board in carrying out its responsibilities by providing the Trust Board
with all information reasonably necessary for the Trust Board to consider
any issues raised. This responsibility includes, but is not limited to, an
obligation by the Company to inform the Trust Board whenever it has
determined to disregard Contract Owner voting instructions. Such
responsibilities shall be carried out by the Participants with a view only
to the interests of Contract Owners.
7.3 If it is determined by a majority of the Trust Board, or a
majority of the members of the Trust Board who are not interested persons
of the Trust, the Investment Adviser or any sub-adviser to any of the
Series (the "Independent Trustees"), that a material irreconcilable
conflict exists, the Company shall, at its
2
<PAGE>
expense and to the extent reasonably practicable (as determined by a
majority of the Independent Trustees), take whatever steps are necessary to
remedy or eliminate the material irreconcilable conflict including: (a)
withdrawing the assets allocable to some or all of the separate accounts
from the Trust or any Series and reinvesting such assets in a different
investment medium, which may include another Series of the Trust, or
submitting the question of whether such segregation should be implemented
to a vote of all affected Contract Owners and, as appropriate, segregating
the assets of any appropriate group (i.e., annuity contract owners, life
insurance contract owners, or variable contract owners of one or more
Participating Insurance Companies) that votes in favor of such segregation,
or offering to the affected Contract Owners the option of making such a
change; and (b) establishing a new registered management investment company
or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard Contract Owner voting instructions and
that decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Trust's election, to withdraw the
Account's investment in the Trust and terminate this Agreement and no
charge or penalty will be imposed as a result of such withdrawal. Any such
withdrawal and termination must take place within six (6) months after the
Trust gives written notice that this provision is being implemented, and
until the end of that six month period the Investment Adviser and the Trust
shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Trust.
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company
will withdraw the Account's investment in the Trust and terminate this
Agreement within six months after the Trust Board informs the Company in
writing that it has determined that such decision has created a material
irreconcilable conflict. Until the end of the foregoing six month period,
the Investment Adviser and the Trust shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the
Trust.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the Independent Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but in no
event will the Trust or the Investment Adviser be required to establish a
new funding medium for the Contracts. The Company shall not be required by
Section 7.3 to establish a new funding medium for the Contracts if an offer
to do so has been declined by vote of a majority of Contract Owners
materially adversely affected by the material irreconcilable conflict. In
the event that the Trust Board determines that any proposed action does not
adequately remedy any material irreconcilable conflict, then the Company
will withdraw the Account's investment in the Trust
3
<PAGE>
and terminate this Agreement within six (6) months after the Trust Board
informs the Company in writing of the foregoing determination.
7.7 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of
the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Exemptive Order) on terms and conditions
materially different from those contained in the Exemptive Order, then (a)
the Trust and/or the Company, as appropriate, shall take such steps as may
be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Article
V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue
in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
7.8 The Company shall at least annually submit to the Trust Board
such reports, materials or data as the Trust Board may reasonably request
so that the Trust Board may fully carry out its obligations under the
Exemptive Order; provided, however, that the Board may require the
submission of such reports on data on a more frequent basis if it so deems
appropriate.
7.9 The Company, or any affiliate, will maintain at its home
office, available to the SEC, (a) a list of its officers, directors and
employees who participate directly in the management of administration of
any Account and/or (b) a list of its agents who, as registered
representatives, offer and sell contracts."
SECTION 3. Schedules
---------
Schedules 1, 2 and 3 to the Original Participation Agreement are hereby
amended to read as Schedules 1, 2 and 3 to this Amendment No. 1, respectively.
SECTION 4. Miscellaneous
-------------
4.1 The captions in this Amendment No. 1 are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
4.2 This Amendment No. 1 may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
4.3 If any provision of this Amendment No. 1 shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
No. 1 to be executed in its name and behalf by its duly authorized office on the
date specified below.
SAFECO LIFE INSURANCE
COMPANY
(Company)
Date: January 27, 1997 By: /s/ Gregory Clarke
Name: Gregory Clarke
Title: Vice President
WANGER ADVISORS TRUST
(Trust)
Date: January 17, 1997 By: /s/ Charles P. McQuaid
Name: Charles P. McQuaid
Title: Senior Vice President
5
<PAGE>
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 Wanger Advisors Trust, filed with the
Securities and Exchange Commission in this Post-Effective Amendment No. 3 to the
Registration Statement under the Securities Act of 1933 (File No. 33-83548) and
in this Amendment No. 4 to the Registration Statement under the Investment
Company Act of 1940 (File No. 811-8748).
/s/ ERNST & YOUNG LLP
Chicago, Illinois
April 18, 1997
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<PAGE>
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