<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1998
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. 6
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7
----------------------------------------------
WANGER ADVISORS TRUST
(Registrant)
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
Telephone number: 312/634-9200
----------------------------------------------
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)
----------------------------------------------
Amending Parts A, B and C, and filing exhibits
----------------------------------------------
It is proposed that this filing will become effective:
[_] immediately upon filing pursuant to rule 485(b)
[X] on April 30, 1998 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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<PAGE>
WANGER ADVISORS TRUST
Cross reference sheet pursuant to rule 495(a) of Regulation C
<TABLE>
<CAPTION>
Item No. Location or caption*
- -------- --------------------
<S> <C>
Part A (Prospectus)
Wanger U.S. Small Cap
Wanger International Small Cap
-------------------------------
1. Cover Page Cover Page.
2. Synopsis Expenses and Performance
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
Performance Not applicable
6. Capital Stock and Other Securities Investing in the Funds; Organization
and Management; Dividends and Taxes
7. Purchase of Securities Being Offered Organization and Management;
Investing in the Funds
8. Redemption or Repurchase Investing in the Funds
9. Pending Legal Proceedings Not applicable
</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>
<TABLE>
<CAPTION>
Item No. Location or caption*
- -------- --------------------
<S> <C>
Part B (Statement of Additional Information)
Wanger U.S. Small Cap
Wanger International Small Cap
------------------------------
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;
Investment Restrictions
14. Management of the Fund Trustees and Officers; Certain
Shareholders
15. Control Persons and Principal The Trust; Trustees and Officers;
Holders of Securities Certain Shareholders
16. Investment Advisory and Investment Adviser; Custodian;
Other Services 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>
<TABLE>
<CAPTION>
Item No. Location or caption*
- -------- --------------------
<S> <C>
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
</TABLE>
- ---------------
*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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Wanger Advisors Trust
Wanger U.S. Small Cap
Wanger International Small Cap
Prospectus
April 30, 1998
Wanger 98
<PAGE>
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Wanger 98
Contents
2 The Funds at a Glance
3 Expenses and Performance
4 Financial Highlights
6 Investing in the Funds
9 The Wanger Investment Objective and Policies
10 Securities, Investment Practices, and Risks
14 Organization and Management
16 Dividends and Taxes
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Wanger Asset Management, L.P.
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-800-4-WANGER
(1-800-492-6437)
<PAGE>
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Wanger Advisors Trust Prospectus
Wanger U.S. Small Cap April 30, 1998
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.
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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.
1
<PAGE>
Wanger Advisors Trust Prospectus April 30, 1998
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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
comprises 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 are 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 P.
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 vary 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.
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.
2
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Wanger Advisors Trust Prospectus April 30, 1998
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Expenses and Performance
Expenses
Transaction expenses are charges paid when shares of the Funds are purchased or
sold.
Maximum sales charge on purchases and reinvested dividends None
Deferred sales charge on redemption None
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.
Wanger U.S. Small Cap
Management Fee 0.97%
12b-1 Fee None
Other Expenses 0.09%
- -----------------------------------------------
Total Fund Operating Expenses 1.06%
Wanger International Small Cap
Management Fee 1.28%
12b-1 Fee None
Other Expenses 0.32%
- -----------------------------------------------
Total Fund Operating Expenses 1.60%
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 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 0.07%
for U.S. Small Cap and 0.31% for International Small Cap. Total Fund Operating
Expenses would have been 1.04% and 1.59%, respectively.
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 in the table to the left. 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:
Wanger U.S. Small Cap
After 1 year $ 11
After 3 years $ 34
After 5 years $ 58
After 10 years $129
Wanger International Small Cap
After 1 year $ 16
After 3 years $ 50
After 5 years $ 87
After 10 years $190
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.
3
<PAGE>
Wanger Advisors Trust Prospectus April 30, 1998
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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. You may obtain
a free copy of the Trust's Annual Report by calling 1-800-4 WANGER.
<TABLE>
<CAPTION>
Year ended Year ended May 3, 1995 through
December 31, 1997 December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wanger U.S. Small Cap
Net asset value, beginning of period $ 16.97 $ 11.60 $ 10.00
Income from investment operations
Net investment loss (c) (.02) (.06) (.05)
Net realized and unrealized gain on investments 4.90 5.46 1.65
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.88 5.40 1.60
Less distributions
Dividends from net investment income -- -- --
Distributions from net realized gain (.39) (.03) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions (.39) (.03) --
Net asset value, end of period $ 21.46 $ 16.97 $ 11.60
- -----------------------------------------------------------------------------------------------------------------------
Total return 29.41% 46.59% 16.00%
Ratios/supplemental data:
Ratio of expenses to average net assets (a) (b) 1.06% 1.21% 2.08%*
Ratio of net investment loss to average net assets (b) (.10%) (.41%) (1.44%)*
Portfolio turnover rate 34% 46% 59%*
Net assets at end of period $270,865,827 $128,957,911 $21,903,536
- -----------------------------------------------------------------------------------------------------------------------
</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 1.04% for the year ended December 31,
1997, 1.19% for the year ended December 31, 1996 and 2.00% for the period
ended December 31, 1995.
(b) The Fund was reimbursed by the Adviser 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 years ended December 31, 1997 and
December 31, 1996 was based upon the average shares outstanding during the
period.
4
<PAGE>
Wanger Advisors Trust Prospectus April 30, 1998
<TABLE>
<CAPTION>
Year ended Year ended May 3, 1995 through
December 31, 1997 December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Wanger International Small Cap
Net asset value, beginning of period $ 17.71 $ 13.45 $ 10.00
Income from investment operations
Net investment income (loss) (c) .02 (.09) (.03)
Net realized and unrealized gain on investments (.26) 4.38 3.48
- --------------------------------------------------------------------------------------------------------------------------------
Total from investment operations (.24) 4.29 3.45
Less distributions
Dividends from net investment income -- --
Distributions from net realized gain (.42) (.03) --
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions (.42) (.03) --
Net asset value, end of period $ 17.05 $ 17.71 $ 13.45
- --------------------------------------------------------------------------------------------------------------------------------
Total Return (1.46%) 32.01% 34.50%
Ratios/supplemental data:
Ratio of expenses to average net assets (a) (b) 1.60% 1.79% 2.32%*
Ratio of net investment income (loss) to average net assets (b) .12% (.56%) (.81%)*
Portfolio turnover rate 60% 50% 14%*
Net assets at end of period $120,660,158 $84,855,082 $11,368,924
- --------------------------------------------------------------------------------------------------------------------------------
</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 1.59% for the year ended December 31,
1997, 1.75% for the year ended December 31, 1996 and 2.00% for the period
ended December 31, 1995.
(b) The Fund was reimbursed by the Adviser 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 income (loss) per share for the years ended December 31,
1997 and December 31, 1996 was based upon the average shares outstanding
during the period.
5
<PAGE>
Wanger Advisors Trust Prospectus April 30, 1998
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Investing in the Funds
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 all 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 alternatives.
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.
6
<PAGE>
Wanger Advisors Trust Prospectus April 30, 1998
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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.
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 Funds'
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 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.)
7
<PAGE>
Wanger Advisors Trust Prospectus April 30, 1998
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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. Because of the different trading hours in various markets, the
calculation of the net asset value does not take place contemporaneously with
the determination of the prices of many foreign securities held by the Funds,
particularly International Small Cap. These timing differences may have a
significant effect on NAV.
A purchase or redemption of Fund shares will be priced at the NAV next
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.
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.
8
<PAGE>
Wanger Advisors Trust Prospectus April 30, 1998
- --------------------------------------------------------------------------------
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 of a company that has grown 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.
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.
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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
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.
Equity Securities
U.S. Small Cap and International Small Cap invest mostly in common stocks,
which 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. Over time, common stocks have
historically provided superior long-term capital growth potential. However,
stock prices may decline over short or even extended periods. Stock markets tend
to move in cycles, with periods of rising stock prices and periods of falling
stock prices. As a result, the Funds should be considered long-term investments,
designed to provide the best results when held for several years or more. The
Funds may not be suitable investments if you have a short-term investment
horizon or are unwilling to accept fluctuations in share prices, including
significant declines over a given period.
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.*
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*These restrictions are "fundamental," which means that they cannot be changed
without shareholder approval.
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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 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.
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.
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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.
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.
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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.
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,/1/ 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
Each 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.
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* These restrictions are "fundamental," which means that they cannot be
changed without shareholder approval.
/1/ The Funds have no present intention of lending their portfolio securities.
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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.
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; WAM chooses the Funds' investments and
handles their business affairs under the direction of the Board of Trustees. WAM
is a limited partnership managed by its general partner, Wanger Asset
Management, Ltd. WAM manages more than $7 billion in assets. WAM employs a team
approach to management of the Funds. The management teams comprise 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 chief investment officer of WAM. He is also the chairman of
the board of trustees of the Trust. Mr. Wanger is also lead portfolio manager of
Acorn Fund and president 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.
Marcel P. Houtzager is a vice president of the Trust, and is the lead
portfolio 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 is a key member of WAM's
domestic analytical team, and has been 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 is a principal of WAM. He has worked with Mr. Wanger
for 20 years.
John H. Park is a vice president of the Trust and a principal of WAM. Mr.
Park joined WAM's investment management team in July 1993 as a domestic
analyst, and was an analyst with Ariel Capital Management prior thereto. Mr.
Park's investment expertise is in the health care industry.
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 portfolio manager of Acorn International. She
is a principal of WAM and has been working with Mr. Wanger for 14 years.
Merrillyn J. Kosier, senior vice president and secretary and Bruce H.
Lauer, vice president and treasurer, 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.
Some of the computer systems used today are unable to process and calculate
date-related information because they are not programmed to distinguish between
the year 2000 and the year 1900. WAM, like many other businesses, is taking
steps to ensure that the computer systems on which the smooth operation of the
Funds depends will continue to function properly. WAM is working with the
service providers to the Funds, such as the transfer agency, custodian, and
various broker-dealers through which portfolio securities of the Funds are
traded, to arrange for testing of internal and external systems. Based on the
information currently available, WAM does not anticipate any material impact on
the delivery of services currently
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Wanger Advisors Trust Prospectus April 30, 1998
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provided. There can be no assurance, however, that the steps taken by WAM in
preparation for the Year 2000 will be sufficient to avoid any adverse impact on
the Funds, and shareholders may also be affected by Year 2000 problems
encountered by the Life Companies or Retirement Plans.
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.
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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.
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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.
16
<PAGE>
Wanger Advisors Trust Prospectus April 30, 1998
- --------------------------------------------------------------------------------
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
Kenneth A. Kalina
Assistant Treasurer
Merrillyn J. Kosier
Senior Vice President and Secretary
Bruce H. Lauer
Vice President and Treasurer
Charles P. McQuaid
Senior Vice President
Robert A. Mohn
Vice President
John H. Park
Vice President
Leah J. Zell
Vice President
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 Adviser
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 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
STATEMENT OF
ADDITIONAL
INFORMATION
April 30, 1998
227 West Monroe Street
Chicago, Illinois 60606
Telephone: 1-800-4-WANGER
____________________________
WANGER U.S. SMALL CAP
WANGER INTERNATIONAL SMALL CAP
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INFORMATION ABOUT THE FUNDS................................................. 2
INVESTMENT OBJECTIVES AND POLICIES.......................................... 2
INVESTMENT TECHNIQUES AND RISKS............................................. 2
INVESTMENT RESTRICTIONS..................................................... 17
PERFORMANCE INFORMATION..................................................... 20
INVESTMENT ADVISER.......................................................... 21
DISTRIBUTOR................................................................. 23
THE TRUST................................................................... 24
TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS................................. 25
PURCHASING AND REDEEMING SHARES............................................. 27
ADDITIONAL TAX INFORMATION.................................................. 28
PORTFOLIO TRANSACTIONS...................................................... 29
CUSTODIAN................................................................... 31
INDEPENDENT AUDITORS........................................................ 31
APPENDIX....................................................................A-1
</TABLE>
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, 1998 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.
1
<PAGE>
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.
A copy of the Trust's 1997 Annual Report accompanies this SAI. The Annual Report
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 herein 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.
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
2
<PAGE>
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.
3
<PAGE>
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.
4
<PAGE>
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.
5
<PAGE>
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 option include supply and demand, interest rates, the
current market price of the underlying
6
<PAGE>
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 were 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.
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
7
<PAGE>
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.
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
- -------------------
/1/ A futures contract on an index is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index contract was originally written.
Although the value of a securities index is a function of the value of certain
specified securities, no physical delivery of those securities is made.
8
<PAGE>
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
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
9
<PAGE>
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 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
- -------------------
/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.
10
<PAGE>
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.
Taxation of Options and Futures. If a Fund exercises a call or put option that
it holds, the premium paid for the option is added to the cost basis of the
security purchased (call) or deducted from the proceeds of the security sold
(put). For cash settlement options and futures options exercised by that Fund,
the difference between the cash received at exercise and the premium paid is a
capital gain or loss.
If a call or put option written by a Fund is exercised, the premium is included
in the proceeds of the sale of the underlying security (call) or reduces the
cost basis of the security purchased (put). For cash settlement options and
futures options written by a Fund, the difference between the cash paid at
exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or loss.
If an option written by a Fund is in-the-money at the time it was written and
the security covering the option was held for more than the long-term holding
period prior to the writing of the option, any loss realized as a result of a
closing purchase transaction will be long-term. The holding period of the
securities covering an in-the-money option will not include the period of time
the option is outstanding.
11
<PAGE>
If a Fund writes an equity call option/3/ other than a "qualified covered call
option," as defined in the Internal Revenue Code, any loss on such option
transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
A futures contract held until delivery results in capital gain or loss equal to
the difference between the price at which the futures contract was entered into
and the settlement price on the earlier of delivery notice date or expiration
date. If a Fund delivers securities under a futures contract, that Fund also
realizes a capital gain or loss on those securities.
For Federal income tax purposes, a Fund generally is required to recognize for
each taxable year its net unrealized gains and losses as of the end of the year
on futures, futures options and non-equity options positions ("year-end mark-to-
market"). Generally, any gain or loss recognized with respect to such positions
(either by year-end mark-to-market or by actual closing of the positions) is
considered to be 60% long-term and 40% short-term, without regard to the holding
periods of the contracts. However, in the case of positions classified as part
of a "mixed straddle," the recognition of losses on certain positions (including
options, futures and futures options positions, the related securities and
certain successor positions thereto) may be deferred to a later taxable year.
Sale of futures contracts or writing of call options (or futures call options)
or buying put options (or futures put options) that are intended to hedge
against a change in the value of securities held by the Fund may affect the
holding period of the hedged securities.
If a Fund were to enter into a short index future, short index futures option or
short index option position and the Fund's portfolio were deemed to "mimic" the
performance of the index underlying such contract, the option or futures
contract position and the Fund's stock positions may be deemed to be positions
in a mixed straddle, subject to the above-mentioned loss deferral rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale treatment
for Federal income tax purposes on certain hedging strategies with respect to
appreciated securities. Under these rules taxpayers will recognize gain, but not
loss, with respect to securities if they enter into short sales of "offsetting
notional principal contracts" (as defined by the Act) with respect to, or
futures or "forward contracts" (as defined by the Act) with respect to, the same
or substantially identical property, or if they enter into such transactions and
then acquire the same or substantially identical property. These changes
generally apply to constructive sales after June 8, 1997. The Secretary of the
Treasury is authorized to promulgate regulations that will treat as constructive
sales certain transactions that have substantially the same effect as short
sales,
- -------------------
/3/ An equity option is defined to mean any option to buy or sell stock, and any
other option the value of which is determined by reference to an index of stocks
of the type that is ineligible to be traded on a commodity futures exchange
(e.g., an option contract on a sub-index based on the price of nine hotel-casino
stocks). The definition of equity option excludes options on broad-based stock
indexes (such as the Standard & Poor's 500 index).
12
<PAGE>
offsetting notional principal contracts, and futures or forward contracts to
deliver the same or substantially similar property.
In order for each Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, and gains from the sale of securities
or foreign currencies, or other income (including but not limited to gains from
options, futures, or forward contracts). Any net gain realized from futures (or
futures options) contracts will be considered gain from the sale of securities
and therefore be qualifying income for purposes of the 90% requirement.
The Funds intend to distribute to shareholders annually any capital gains that
have been recognized for Federal income tax purposes (including year-end mark-
to-market gains) on options and futures transactions, together with gains on
other Fund investments, to the extent such gains exceed recognized capital
losses and any net capital loss carryovers of the Funds. Shareholders will be
advised of the nature of such capital gain distributions.
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. 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 assets 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
13
<PAGE>
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 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.
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<PAGE>
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 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
15
<PAGE>
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.
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
16
<PAGE>
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 and realization of capital gains or losses. The
rate of portfolio turnover for U.S. Small Cap for the year ended December 31,
1996 was 46% and for the year ended December 31, 1997 was 34%. The rate of
portfolio turnover for International Small Cap for the year ended December 31,
1996 was 50% and for the year ended December 31, 1997 was 60%.
Line of Credit
- --------------
The Trust maintains a line of credit with a bank in order to permit borrowing on
a temporary basis to meet share redemption requests in circumstances in which
temporary borrowing may be preferable to liquidation of portfolio securities.
Any borrowings under that line of credit by the Trust would be subject to the
Trust's restrictions on borrowing under "Investment Restrictions," below.
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);/4/
- -------------------
/4/ The Funds have no present intention of lending their portfolio securities.
17
<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;/5/
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;
- -------------------
/5/ State insurance laws currently restrict a Fund's borrowings to facilitate
redemptions to no more than 25% of the Fund's net assets.
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<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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<PAGE>
(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:
ERV = P(1 +T)/n/
Where: P = the amount of an assumed initial investment in shares of a
Fund
T = average annual total return
n = number of years from initial investment to the end of the
period
ERV = ending redeemable value of shares held at the end of the
period
For example, as of December 31, 1997 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................................. 29.4% 29.4%
Life of Fund (inception 5/3/95)........ 120.1% 34.4%
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<PAGE>
International Small Cap
----------------------- Average Annual
Total Return Total Return
------------ --------------
1 year................................... -1.5% -1.5%
Life of Fund (inception 5/3/95).......... 75.0% 23.3%
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, Wanger Asset Management, L.P. ("WAM"), is a
limited partnership managed by its general partner, Wanger Asset Management,
Ltd. ("WAM Ltd."). WAM serves as the investment adviser for the Funds and for
other institutional accounts. WAM commenced operations in 1992. WAM is a limited
partnership managed by its general partner, Wanger Asset Management, Ltd. ("WAM
Ltd."), whose stockholders are Ralph Wanger, Leah J. Zell, Charles P. McQuaid,
Marcel P. Houtzager, Robert A. Mohn and John H. Park. Ralph Wanger is the
president and Howard L. Kastel is the chief executive officer of WAM Ltd. On
matters submitted to the shareholders of WAM Ltd., each shareholder has one vote
(or a lesser vote in the case of new shareholders). With certain limited
exceptions, decisions are made by majority vote. At March 31, 1998 WAM had more
than $7 billion under management, including the Funds.
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
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<PAGE>
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 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; and for the
fiscal year ended December 31, 1997, the advisory fees were $1,960,795.
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;
and for the fiscal year ended December 31, 1997, the advisory fees were
$1,528,703.
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.
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,
22
<PAGE>
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 excess of this limitation will be made monthly and will be paid to
the Fund by reduction of WAM's advisory fee. The expenses of each Fund have been
below the limit at which reimbursement would be required during 1996 and 1997.
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.
Each Fund's investment advisory agreement with WAM was effective on January 1,
1998 and will continue in effect through December 31, 1999, and thereafter from
year to year so long as its continuance as to each Fund is approved at least
annually by (i) the board of trustees of the Trust or by the holders of a
majority of each Fund's outstanding voting securities as defined by the
Investment Company Act of 1940 and (ii) a majority of the members of the board
of trustees who are not otherwise affiliated with the Trust or WAM, cast in
person at a meeting called for that purpose. Any amendment to each new agreement
must be approved in the same manner. The agreements may be terminated as to a
Fund without penalty by the vote of the board of trustees of the Trust or the
shareholders of a Fund (by a majority as defined in the 1940 Act) on sixty days'
written notice to WAM or by WAM on sixty days' notice to the Fund, and will
terminate automatically in the event of its assignment. The fees payable by a
Fund under each agreement are the obligation only of that Fund and impose no
liability on the other Fund.
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,
1998, 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 on a best efforts basis 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. WAM bears all sales and promotional expenses, other than those
borne by a Life Company or Retirement Plan. WAM BD is located at 227 West Monroe
Street, Suite 3000, Chicago, Illinois 60606.
23
<PAGE>
THE TRUST
The Trust is a Massachusetts business trust organized under an Agreement and
Declaration of Trust dated August 30, 1994. 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 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.
24
<PAGE>
TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS
The Trustees and officers of the Trust (including their dates of birth and their
principal business activities during the past five years are) are listed below
in alphabetical order:
Fred D. Hasselbring, trustee (8/14/1941)
1338 N. Bell Avenue, Chicago, Illinois 60622; owner, Fred D. Hasselbring
and Associates (retail industry computer systems consulting and sales);
director and executive administrator, The Malachi Corp., Inc. (a non-profit
corporation).
Marcel P. Houtzager, vice president (10/26/1960)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
analyst and portfolio manager, Wanger Asset Management, L.P. since April
1992.
Kenneth A. Kalina, assistant treasurer (8/4/1959)
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.
Merrillyn J. Kosier, senior vice president and secretary (12/10/1959)
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.; senior vice president and secretary, Acorn
Investment Trust.
Bruce H. Lauer, vice president and treasurer (7/22/1957)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; chief
administrative officer, Wanger Asset Management, L.P., since April 1995;
vice president and treasurer, Acorn Investment Trust; director Wanger
Investment Company PLC; prior thereto, first vice president, investment
accounting, Kemper Financial Services, Inc.
Charles P. McQuaid, trustee and senior vice president* (8/27/1953)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
Wanger Asset Management, L.P. since July 1992; trustee and senior vice
president, Acorn Investment Trust.
Robert A. Mohn, vice president (9/13/1961)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
analyst and portfolio manager, Wanger Asset Management, L.P. since August
1992.
John H. Park, vice president (5/30/1967)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal and
analyst, Wanger Asset Management, L.P. since July 1993; prior thereto,
analyst, Ariel Capital Management.
25
<PAGE>
P. Michael Phelps, trustee (9/19/1933)
222 East Chestnut Street, Chicago, Illinois 60611; retired since January
31, 1998; prior thereto, vice president and corporate secretary, Morton
International, Inc.
James A. Star, trustee (2/27/1961)
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.
Ralph Wanger, trustee and president* (6/21/1934)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
Wanger Asset Management, L.P. since July 1992; trustee and president, Acorn
Investment Trust.
Leah J. Zell, vice president (5/23/1949)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
analyst, and portfolio manager, Wanger Asset Management, L.P., since July
1992; vice president, 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, 1998, 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 6,949,254.017 shares (approximately 96.8% of the outstanding shares)
of International Small Cap, and 13,716,365.170 shares (approximately 97.4% 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, 1997 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.
26
<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 $5,800 $5,800 $11,600
Trustee
P. Michael Phelps $6,550 $6,550 $13,100
Trustee
James A. Star $5,800 $5,800 $11,600
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 generally 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 generally 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, or for which the
market quotation is determined not to represent a fair value, and any other
assets are valued at a fair value as determined in good faith by the Board of
Trustees. Money market instruments having a maturity of 60 days or less from the
valuation date are valued on an amortized cost basis. All assets and liabilities
initially expressed in foreign currencies are converted into U.S. dollars at the
mean of the bid and offer prices of such currencies against U.S. dollars quoted
by any major bank or dealer. If such quotations are not readily available, the
rate of exchange will be determined in accordance with policies established in
good faith by the board of trustees.
The Funds' net asset values are determined only on days on which the New York
Stock Exchange ("NYSE") is open for trading. The NYSE is regularly closed on
Saturdays and Sundays and on New Year's Day, the third Monday in January, 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, particularly International
Small Cap, may take place in various foreign markets at certain times on certain
days (such as Saturday) when the NYSE is not open for business and the Funds do
not calculate their net asset values. Conversely,
27
<PAGE>
trading in the Funds' portfolio securities may not occur on days when the NYSE
is open. Because of the differences in the days and times at which trading
occurs in various markets, the calculation of net asset value does not take
place contemporaneously with the determinations of the prices of many of the
Funds' portfolio securities. The last sale price included in the calculation of
a Fund's net asset value may be several hours old at the time when it is
included in that calculation, which may have a significant effect on a Fund's
net asset value.
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) at the close of each
quarter of the Fund's taxable year, at
28
<PAGE>
least 50% of the value of its total assets must be represented by cash or cash
items, U.S. Government securities, securities of 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 (3) 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,
29
<PAGE>
relates to the specific transaction placed with the broker, but for the greater
part the research consists of a wide variety of information concerning
companies, industries, investment strategy, and economic, financial, and
political conditions and prospects, useful to WAM in advising that Fund.
The reasonableness of brokerage commissions paid by the Funds in relation to
transaction and research services received is evaluated by WAM's staff on an
ongoing basis. The general level of brokerage charges and other aspects of each
Fund's portfolio transactions are reviewed periodically by the Board of
Trustees.
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; for the fiscal year ended
December 31, 1997 the brokerage commissions were $249,054. Brokerage commissions
incurred by International Small Cap during the same time periods were $49,559,
$422,414 and $647,529, respectively.
The Trust and WAM have adopted codes of ethics that, among other things,
regulate the personal transactions in securities of certain officers, directors,
trustees, partners and employees of the Trust and WAM. Although investment
decisions for the Funds are made independently from those for other investment
advisory clients of WAM, it may develop that the same investment decision is
made for one or 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.
30
<PAGE>
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 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.
31
<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>
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 (incorporated by reference to the following
portions of Registrant's 1997 Wanger Advisors Trust Annual
Report; a copy of the report was filed with the Commission on
February copy 27, 1998, and is not included in this amendment):
Statement of Investments at December 31, 1997
Statement of Assets and Liabilities at December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended
December 31, 1996 and 1997
Financial Highlights for the period ended December 31, 1995
and for the years ended December 31, 1996 and 1997
Notes to financial statements
Report of Independent Auditors
(ii) Wanger International Small Cap (incorporated by reference to the
following portions of Registrant's 1997 Wanger Advisors Trust
Annual Report; a copy of the report was filed with the Commission
on February 27, 1998, and is not included in this amendment):
Statement of Investments at December 31, 1997
Statement of Assets and Liabilities at December 31, 1997
Statement of Operations for the year ended December 31, 1997
Statement of Changes in Net Assets for the years ended
December 31, 1996 and 1997
Financial Highlights for the period ended December 31, 1995
and for the years ended December 31, 1996 and 1997
Notes to financial statements
Report of Independent Auditors
C-1
<PAGE>
(3) 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, 1997.
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, dated
January 1, 1998.
5(b). Investment Advisory Agreement - Wanger International Small Cap,
dated January 1, 1998.
6. Distribution Agreement between Wanger Advisors Trust and WAM
Brokerage Services, L.L.C. dated January 1, 1998.
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).(3)
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). (3)
9(a)(3) Amendment No. 1 to the Participation Agreement between Wanger
Advisors Trust and Providian Life and Health Insurance Company
(formerly National
C-2
<PAGE>
Home Life Assurance Company) dated May 19, 1995 (2) (amendment
dated December 16, 1996).(3)
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 December 16, 1996.(3)
9(a)(5) Participation Agreement between Wanger Advisors Trust and SAFECO
Life Insurance Company dated September 27, 1995 and Form of
Amendment No. 1 dated December 18, 1996.(3)
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 April 27
1998.
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 the Registration Statement filed on
April 19, 1996.
(3) Incorporated by reference to the exhibit of the same number filed with
post-effective amendment no. 3 to the Registration Statement filed on
April 30, 1997.
(4) Incorporated by reference to the exhibit of the same number filed with
post-effective amendment no. 5 to the Registration Statement filed on
November 3, 1997.
C-3
<PAGE>
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.
Item 26. Number of Holders of Securities
- ------- -------------------------------
As of March 1, 1998, there were 25 record holders of the
Registrant's shares of beneficial interest of the series designated
Wanger U.S. Small Cap and 44 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
C-4
<PAGE>
registrant and its investment adviser, within the limits and subject
to the limitations of the policy, against certain expenses in
connection with the defense of actions, suits or proceedings, and
certain liabilities that might be imposed as a result of such actions,
suits or proceedings, to which they are parties by reason of being or
having been such trustees or officers. The policy expressly excludes
coverage for any trustee or officer whose personal dishonesty,
fraudulent breach of trust, lack of good faith, or intention to
deceive or defraud has been finally adjudicated or may be established
or who willfully fails to act prudently.
Item 28. Business and Other Connections of Investment Adviser
- ------- ----------------------------------------------------
The information in the prospectus 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
Bruce H. Lauer President Vice President and Treasurer
Merrillyn J. Kosier Senior Vice President and Senior Vice President
Secretary
The principal business of each officer of WAM Brokerage 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
C-5
<PAGE>
Item 31. Management Services
- ------- -------------------
Not applicable.
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 29, 1998.
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>
/s/ Fred D. Hasselbring )
- ----------------------- Trustee )
Fred D. Hasselbring )
)
/s/ Charles P. McQuaid )
- ----------------------- Trustee )
Charles P. McQuaid )
)
/s/ P. Michael Phelps )
- ----------------------- Trustee )
P. Michael Phelps ) April 29, 1998
)
/s/ James A. Star )
- ----------------------- Trustee )
James A. Star )
)
/s/ Ralph Wanger )
- ----------------------- Trustee and President )
Ralph Wanger (principal executive )
officer) )
)
/s/ Bruce H. Lauer )
- ----------------------- Treasurer (principal )
Bruce H. Lauer financial and accounting )
officer)
</TABLE>
<PAGE>
Index of Exhibits Filed with this Amendment
-------------------------------------------
<TABLE>
<CAPTION>
Exhibit EDGAR
Number Exhibit No. Exhibit
- ------- ----------- -------
<S> <C> <C>
5(a) EX-99.B5.1 Investment Advisory Agreement - Wanger
U.S. Small Cap, dated January 1, 1998
5(b) EX-99.B5.2 Investment Advisory Agreement - Wanger
International Small Cap, dated January 1, 1998
6 EX-99.6 Distribution Agreement between Wanger Advisors
Trust and WAM Brokerage Services, L.L.C.,
dated January 1, 1998
10 EX-99.B10 Legal opinion and consent of Bell Boyd & Lloyd
dated April 27, 1998
11 EX-99.B11 Consent of Independent Auditors
17(a) EX-27.1 Financial data schedule - Wanger U.S. Small Cap
17(b) EX-27.2 Financial data schedule - Wanger International
Small Cap
</TABLE>
<PAGE>
Exhibit 5A
INVESTMENT ADVISORY AGREEMENT
between
Wanger Advisors Trust
and
Wanger Asset Management, L.P.
for
WANGER U.S. SMALL-CAP ADVISOR
WANGER ADVISORS TRUST, a Massachusetts business trust registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end diversified
management investment company (the "Trust"), and WANGER ASSET MANAGEMENT, L.P.,
a Delaware limited partnership registered under the Investment Advisers Act of
1940 as an investment adviser ("WAM"), agree that:
1. Engagement of WAM. WAM shall manage the investment and reinvestment of
the assets of Wanger U.S. Small Cap Advisor, a series of the Trust (the "Fund"),
subject to the supervision of the Board of Trustees of the Trust, for the period
and on the terms set forth in this agreement. WAM shall give due consideration
to the investment policies and restrictions and the other statements concerning
the Fund in the Trust's agreement and declaration of trust, bylaws, and
registration statement under the 1940 Act and the Securities Act of 1933 (the
"1933 Act"), and to the provisions of the Internal Revenue Code of 1986, as
amended, applicable to the Fund as a regulated investment company. WAM shall be
deemed for all purposes to be an independent contractor and not an agent of the
Trust or the Fund, and unless otherwise expressly provided or authorized, shall
have no authority to act or represent the Trust or the Fund in any way.
WAM is authorized to make the decisions to buy and sell securities,
options, futures contracts and any other investments in which the Fund may
invest pursuant to its investment objectives, policies and restrictions, to
place the Fund's portfolio transactions with broker-dealers, and to negotiate
the terms of such transactions, including brokerage commissions on brokerage
transactions, on behalf of the Fund. WAM is authorized to exercise discretion
with the Fund's policy concerning allocation of its portfolio brokerage,
consistent with the Trust's registration statement and under the supervision of
the Trust's Board of Trustees, and as permitted by law, including but not
limited to Section 28(e) of the Securities Exchange Act of 1934, and in so doing
shall not be required to make any reduction in its investment advisory fees.
2. Expenses to be Paid by WAM. WAM shall furnish to the Trust, at WAM's
expense, office space and all necessary office facilities, equipment and
personnel for managing that portion of the Trust's business relating to the
Fund. WAM shall also assume and pay all other expenses incurred by it in
connection with managing the assets of the Fund, including expenses in
connection with placement of securities orders, all expenses of printing and
distributing the Fund's prospectus and reports to prospective investors (except
to the extent such expenses are allocated to a party other than the Trust in
<PAGE>
any participation or operating agreement to which the Trust is a party), and all
expenses in determination of daily price computations, portfolio accounting and
related bookkeeping. WAM may, at WAM's expense, contract with any other person
or persons to provide services in connection with daily price computations,
portfolio accounting and related bookkeeping under such terms as it deems
reasonable and it shall have the authority to direct the activities of such
other person or persons in the manner it deems appropriate.
3. Expenses to be Paid by the Trust. The Trust shall pay all charges of
depositories, custodians and other agencies for the safekeeping and servicing of
its cash, securities and other property and of its transfer agents and
registrars and its dividend disbursing and redemption agents, if any; all
charges of legal counsel and of independent auditors; all expenses of qualifying
and maintaining the registration of shares of the Fund under the federal and
applicable state securities laws of such United States jurisdictions as the
Trust may from time to time reasonably designate; all compensation of trustees
other than those affiliated with WAM and all expenses incurred in connection
with their services to the Trust; all costs of borrowing money; all expenses of
publication of notices and reports to the Fund's shareholders and to
governmental bodies or regulatory agencies; all expenses of proxy solicitations
of the Fund or of the Board of Trustees of the Trust; all expenses of
shareholder meetings; all expenses of typesetting of the Fund's prospectus and
of printing and mailing copies of the prospectus furnished to each then-existing
shareholder or beneficial owner (except as may be otherwise provided in any
participation or operating agreement to which the Trust is a party); all taxes
and fees payable to federal, state or other governmental agencies, domestic or
foreign, all stamp or other taxes; all expenses of printing and mailing
certificates for shares of the Fund; all expenses of bond and insurance coverage
required by law or deemed advisable by the Trust's Board of Trustees; all
expenses of maintaining the registration of the Trust under the 1940 Act and all
fees, dues and other expenses related to membership of the Trust in any trade
association or other investment company organization.
In addition to the payment of expenses, the Fund shall also pay all
brokers' commissions and other charges relative to the purchase and sale of
portfolio securities for the Fund. Any expenses borne by the Trust that are
attributable solely to the organization, operation or business of the Fund shall
be paid solely out of the Fund assets.
The Trust's organizational expenses which were advanced to the Trust by WAM
shall be amortized over a period of 60 months beginning with the month following
the commencement of the Trust's operations, and the Trust shall reimburse WAM
during the period such amortization by paying to WAM on the last business day of
each month an amount equal to the organizational expenses amortized during that
month.
Any expense borne by the Trust that is not solely attributable to the Fund,
nor solely to any other series of shares of the Trust, shall be apportioned in
such manner as WAM determines is fair and appropriate, or as otherwise specified
by the Board of Trustees of the Trust.
<PAGE>
4. Compensation of WAM. For the services to be rendered and the charges
and expenses to be assumed and to be paid by WAM hereunder, the Fund shall pay
to WAM a fee accrued daily and paid monthly at the annual rate of 1.00% of the
average daily net asset value of the Fund up to $100 million, 0.95% of the
average daily net asset value of the Fund in excess of $100 million and up to
$250 million, and 0.90% of the average daily net asset value of the Fund in
excess of $250 million.
5. Limitation of Expenses of the Fund. The total expenses of the Fund,
exclusive of taxes, of interest and of extraordinary litigation expenses, but
including fees paid to WAM, shall not in any fiscal year of the Fund exceed the
most restrictive limits prescribed by any state in which the Fund's shares are
then qualified for sale, and WAM agrees to reimburse the Fund for any sums
expended for such expenses in excess of that amount. If the states in which the
Fund's shares are qualified for sale impose no limits on total expenses, then
WAM agrees to reimburse the Fund in the event the fee and expenses payable by
the Fund in any fiscal year exceed 2.0%. For purposes of calculating the
expenses subject to this limitation, (i) brokers' commissions and other charges
relating to the purchase and sale of portfolio securities 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, shall not be regarded as expenses. Reimbursement, if any,
shall be made by reduction of the fees otherwise payable to WAM under this
agreement, no less frequently than quarterly.
6. Services of WAM Not Exclusive. The services of WAM to the Fund
hereunder are not to be deemed exclusive, and WAM shall be free to render
similar services to others so long as its services under this agreement are not
impaired by such other activities.
7. Services Other Than as Manager. WAM (or an affiliate of WAM) may act
as broker for the Fund in connection with the purchase or sale of securities by
or to the Fund if and to the extent permitted by procedures adopted from time to
time by the Board of Trustees of the Trust. Such brokerage services are not
within the scope of the duties of WAM under this agreement, and, within the
limits permitted by law and the Board of Trustees of the Trust, WAM (or an
affiliate of WAM) may receive brokerage commissions, fees or other remuneration
from the Fund for such services in addition to its fee for services as WAM.
Within the limits permitted by law, WAM may receive compensation from the Fund
for other services performed by it for the Fund which are not within the scope
of the duties of WAM under this agreement.
8. Limitation of Liability of WAM. WAM shall not be liable to the Trust
or its shareholders for any loss suffered by the Trust or its shareholders from
or as a consequence of any act or omission of WAM, or of any of the partners,
employees or agents of WAM, in connection with or pursuant to this agreement,
except by reason of willful misfeasance, bad faith or gross negligence on the
part of WAM in the performance of its duties or by reason of reckless disregard
by WAM of its obligations and duties under this agreement.
<PAGE>
9. Use of WAM's Name. The Trust may use the name "Wanger Advisors Trust"
or any other name using the name "Wanger" only for so long as this agreement or
any extension, renewal or amendment hereof remains in effect, including any
similar agreement with any organization which shall have succeeded to the
business of WAM as investment adviser. At such time as this agreement or any
extension, renewal or amendment hereof, or such similar agreement, shall no
longer be in effect, the Trust will (by amendment of its Agreement and
Declaration of Trust, if necessary) cease to use any name using the name
"Wanger," any name similar thereto or any other name indicating that it is
advised by or otherwise connected with WAM or with any organization which shall
have succeeded to WAM's business as investment adviser. WAM's consent to the
use of the name "Wanger" by the Trust shall not prevent WAM's permitting any
other enterprise, including other investment companies, to use that name.
10. Duration and Renewal. This agreement shall be effective January 1,
1998, or if later, the date approved by both (a) the vote of a "majority of the
outstanding voting shares of the Fund" (which term as used throughout this
agreement shall be construed in accordance with the definition of "vote of a
majority of the outstanding voting securities of a company" in section 2(a)(42)
of the 1940 Act), and (b) the vote of a majority of trustees who are not parties
to this agreement or interested persons of any party to this agreement, cast in
person at a meeting called for the purpose of voting on approval of this
agreement. Unless terminated as provided in Section 11, this agreement shall
continue in effect until December 31, 1999, and thereafter from year to year
only so long as such continuance is specifically approved at least annually (a)
by a majority of those trustees who are not interested persons of the Trust or
of WAM, voting in person at a meeting called for the purpose of voting on such
approval, and (b) by either the Board of Trustees of the Trust or vote of the
holders of a majority of the outstanding shares of the Fund.
11. Termination. This agreement may be terminated at any time, without
payment of any penalty, by the Board of Trustees of the Trust, or by a vote of
the holders of a majority of the outstanding shares of the Fund, upon 60 days'
written notice to WAM. This agreement may be terminated by WAM at any time upon
60 days' written notice to the Trust. This agreement shall terminate
automatically in the event of its assignment (as defined in Section 2(a)(4) of
the 1940 Act).
12. 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 trustees 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.
13. Amendment. This agreement may not be amended without the affirmative
vote (a) of a majority of those trustees who are not "interested persons" (as
defined in section 2(a)(19) of the 1940 Act) of the Trust or of WAM, voting in
person at a meeting
<PAGE>
called for the purpose of voting on such approval, and (b) of the holders of a
majority of the outstanding shares of the Fund, where required by the 1940 Act
or other applicable law, or otherwise deemed appropriate by the Board of
Trustees of the Trust.
Dated: January 1, 1998
WANGER ADVISORS TRUST WANGER ASSET MANAGEMENT, L.P.,
by Wanger Asset Management, Ltd.,
its General Partner
By /s/ Merrillyn J. Kosier By /s/ Robert A. Mohn
--------------------------------------- ------------------------------
Merrillyn J. Kosier, Senior Vice President Robert A. Mohn, Principal
and Secretary
<PAGE>
Exhibit 5B
INVESTMENT ADVISORY AGREEMENT
between
Wanger Advisors Trust
and
Wanger Asset Management, L.P.
for
WANGER INTERNATIONAL SMALL-CAP ADVISOR
WANGER ADVISORS TRUST, a Massachusetts business trust registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end diversified
management investment company (the "Trust"), and WANGER ASSET MANAGEMENT, L.P.,
a Delaware limited partnership registered under the Investment Advisers Act of
1940 as an investment adviser ("WAM"), agree that:
1. Engagement of WAM. WAM shall manage the investment and reinvestment of
the assets of Wanger International Small Cap Advisor, a series of the Trust (the
"Fund"), subject to the supervision of the Board of Trustees of the Trust, for
the period and on the terms set forth in this agreement. WAM shall give due
consideration to the investment policies and restrictions and the other
statements concerning The Fund in the Trust's agreement and declaration of
trust, bylaws, and registration statement under the 1940 Act and the Securities
Act of 1933 (the "1933 Act"), and to the provisions of the Internal Revenue Code
of 1986, as amended, applicable to the Fund as a regulated investment company.
WAM shall be deemed for all purposes to be an independent contractor and not an
agent of the Trust or the Fund, and unless otherwise expressly provided or
authorized, shall have no authority to act or represent the Trust or the Fund in
any way.
WAM is authorized to make the decisions to buy and sell securities,
options, futures contracts and any other investments in which the Fund may
invest pursuant to its investment objectives, policies and restrictions, to
place the Fund's portfolio transactions with broker-dealers, and to negotiate
the terms of such transactions, including brokerage commissions on brokerage
transactions, on behalf of the Fund. WAM is authorized to exercise discretion
with the Fund's policy concerning allocation of its portfolio brokerage,
consistent with the Trust's registration statement and under the supervision of
the Trust's Board of Trustees, and as permitted by law, including but not
limited to Section 28(e) of the Securities Exchange Act of 1934, and in so doing
shall not be required to make any reduction in its investment advisory fees.
2. Expenses to be Paid by WAM. WAM shall furnish to the Trust, at WAM's
expense, office space and all necessary office facilities, equipment and
personnel for managing that portion of the Trust's business relating to the
Fund. WAM shall also assume and pay all other expenses incurred by it in
connection with managing the assets of the Fund, including expenses in
connection with placement of securities orders, all expenses of printing and
distributing the Fund's prospectus and reports to prospective
<PAGE>
investors (except to the extent such expenses are allocated to a party other
than the Trust in any participation or operating agreement to which the Trust is
a party), and all expenses in determination of daily price computations,
portfolio accounting, and related bookkeeping. WAM may, at WAM's expense,
contract with any other person or persons to provide services in connection with
daily price computations, portfolio accounting and related bookkeeping under
such terms as it deems reasonable and it shall have the authority to direct the
activities of such other person or persons in the manner it deems appropriate.
3. Expenses to be Paid by the Trust. The Trust shall pay all charges of
depositories, custodians and other agencies for the safekeeping and servicing of
its cash, securities and other property and of its transfer agents and
registrars and its dividend disbursing and redemption agents, if any; all
charges of legal counsel and of independent auditors; all expenses of qualifying
and maintaining the registration of shares of the Fund under the federal and
applicable state securities laws of such United States jurisdictions as the
Trust may from time to time reasonably designate; all compensation of trustees
other than those affiliated with WAM and all expenses incurred in connection
with their services to the Trust; all costs of borrowing money; all expenses of
publication of notices and reports to the Fund's shareholders and to
governmental bodies or regulatory agencies; all expenses of proxy solicitations
of the Fund or of the Board of Trustees of the Trust; all expenses of
shareholder meetings; all expenses of typesetting of the Fund's prospectus and
of printing and mailing copies of the prospectus furnished to each then-existing
shareholder or beneficial owner (except as may be otherwise provided in any
participation or operating agreement to which the Trust is a party); all taxes
and fees payable to federal, state or other governmental agencies, domestic or
foreign, all stamp or other taxes; all expenses of printing and mailing
certificates for shares of the Fund; all expenses of bond and insurance coverage
required by law or deemed advisable by the Trust's Board of Trustees; all
expenses of maintaining the registration of the Trust under the 1940 Act and all
fees, dues and other expenses related to membership of the Trust in any trade
association or other investment company organization.
In addition to the payment of expenses, the Fund shall also pay all
brokers' commissions and other charges relative to the purchase and sale of
portfolio securities for the Fund. Any expenses borne by the Trust that are
attributable solely to the organization, operation or business of the Fund shall
be paid solely out of the Fund assets.
The Trust's organizational expenses which were advanced to the Trust by WAM
shall be amortized over a period of 60 months beginning with the month following
the commencement of the Trust's operations, and the Trust shall reimburse WAM
during the period such amortization by paying to WAM on the last business day of
each month an amount equal to the organizational expenses amortized during that
month.
Any expense borne by the Trust that is not solely attributable to the Fund,
nor solely to any other series of shares of the Trust, shall be apportioned in
such manner as
2
<PAGE>
WAM determines is fair and appropriate, or as otherwise specified by the Board
of Trustees of the Trust.
4. Compensation of WAM. For the services to be rendered and the charges
and expenses to be assumed and to be paid by WAM hereunder, the Fund shall pay
to WAM a fee accrued daily and paid monthly at the annual rate of 1.30% of the
average daily net asset value of the Fund up to $100 million, 1.20% of the
average daily net asset value of the Fund in excess of $100 million and up to
$250 million, and 1.10% of the average daily net asset value of the Fund in
excess of $250 million.
5. Limitation of Expenses of the Fund. The total expenses of the Fund,
exclusive of taxes, of interest and of extraordinary litigation expenses, but
including fees paid to WAM, shall not in any fiscal year of the Fund exceed the
most restrictive limits prescribed by any state in which the Fund's shares are
then qualified for sale, and WAM agrees to reimburse the Fund for any sums
expended for such expenses in excess of that amount. If the states in which the
Fund's shares are qualified for sale impose no limits on total expenses, then
WAM agrees to reimburse the Fund in the event the fee and expenses payable by
the Fund in any fiscal year exceed 2.0%. For purposes of calculating the
expenses subject to this limitation, (i) brokers' commissions and other charges
relating to the purchase and sale of portfolio securities 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, shall not be regarded as expenses. Reimbursement, if any,
shall be made by reduction of the fees otherwise payable to WAM under this
agreement, no less frequently than quarterly.
6. Services of WAM Not Exclusive. The services of WAM to the Fund
hereunder are not to be deemed exclusive, and WAM shall be free to render
similar services to others so long as its services under this agreement are not
impaired by such other activities.
7. Services Other Than as Manager. WAM (or an affiliate of WAM) may act
as broker for the Fund in connection with the purchase or sale of securities by
or to the Fund if and to the extent permitted by procedures adopted from time to
time by the Board of Trustees of the Trust. Such brokerage services are not
within the scope of the duties of WAM under this agreement, and, within the
limits permitted by law and the Board of Trustees of the Trust, WAM (or an
affiliate of WAM) may receive brokerage commissions, fees or other remuneration
from the Fund for such services in addition to its fee for services as WAM.
Within the limits permitted by law, WAM may receive compensation from the Fund
for other services performed by it for the Fund which are not within the scope
of the duties of WAM under this agreement.
8. Limitation of Liability of WAM. WAM shall not be liable to the Trust
or its shareholders for any loss suffered by the Trust or its shareholders from
or as a consequence of any act or omission of WAM, or of any of the partners,
employees or agents of WAM, in connection with or pursuant to this agreement,
except by reason of willful misfeasance,
3
<PAGE>
bad faith or gross negligence on the part of WAM in the performance of its
duties or by reason of reckless disregard by WAM of its obligations and duties
under this agreement.
9. Use of WAM's Name. The Trust may use the name "Wanger Advisors Trust"
or any other name using the name "Wanger" only for so long as this agreement or
any extension, renewal or amendment hereof remains in effect, including any
similar agreement with any organization which shall have succeeded to the
business of WAM as investment adviser. At such time as this agreement or any
extension, renewal or amendment hereof, or such similar agreement, shall no
longer be in effect, the Trust will (by amendment of its Agreement and
Declaration of Trust, if necessary) cease to use any name using the name
"Wanger," any name similar thereto or any other name indicating that it is
advised by or otherwise connected with WAM or with any organization which shall
have succeeded to WAM's business as investment adviser. WAM's consent to the
use of the name "Wanger" by the Trust shall not prevent WAM's permitting any
other enterprise, including other investment companies, to use that name.
10. Duration and Renewal. This agreement shall be effective January 1,
1998, or if later, the date approved by both (a) the vote of a "majority of the
outstanding voting shares of the Fund" (which term as used throughout this
agreement shall be construed in accordance with the definition of "vote of a
majority of the outstanding voting securities of a company" in section 2(a)(42)
of the 1940 Act), and (b) the vote of a majority of trustees who are not parties
to this agreement or interested persons of any party to this agreement, cast in
person at a meeting called for the purpose of voting on approval of this
agreement. Unless terminated as provided in Section 11, this agreement shall
continue in effect until December 31, 1999, and thereafter from year to year
only so long as such continuance is specifically approved at least annually (a)
by a majority of those trustees who are not interested persons of the Trust or
of WAM, voting in person at a meeting called for the purpose of voting on such
approval, and (b) by either the Board of Trustees of the Trust or vote of the
holders of a majority of the outstanding shares of the Fund.
11. Termination. This agreement may be terminated at any time, without
payment of any penalty, by the Board of Trustees of the Trust, or by a vote of
the holders of a majority of the outstanding shares of the Fund, upon 60 days'
written notice to WAM. This agreement may be terminated by WAM at any time upon
60 days' written notice to the Trust. This agreement shall terminate
automatically in the event of its assignment (as defined in Section 2(a)(4) of
the 1940 Act).
12. 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 trustees 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.
4
<PAGE>
13. Amendment. This agreement may not be amended without the affirmative
vote (a) of a majority of those trustees who are not "interested persons" (as
defined in section 2(a)(19) of the 1940 Act) of the Trust or of WAM, voting in
person at a meeting called for the purpose of voting on such approval, and (b)
of the holders of a majority of the outstanding shares of the Fund, where
required by the 1940 Act or other applicable law, or otherwise deemed
appropriate by the Board of Trustees of the Trust.
Dated: January 1, 1998
WANGER ADVISORS TRUST WANGER ASSET MANAGEMENT, L.P.
By Wanger Asset Management, Ltd.,
Its General Partner
By /s/ Merrillyn J. Kosier By /s/ Robert A. Mohn
--------------------------------- --------------------------------
Merrillyn J. Kosier, Senior Vice Robert A. Mohn, Principal
President and Secretary
5
<PAGE>
Exhibit 6
DISTRIBUTION AGREEMENT
BETWEEN
WANGER ADVISORS TRUST
AND
WAM BROKERAGE SERVICES, L.L.C.
THIS DISTRIBUTION AGREEMENT (the "Agreement") is made as of this 1st day of
January, 1998 by and between WANGER ADVISORS TRUST, a business trust organized
and existing under the laws of the Commonwealth of Massachusetts ("WAT"), and
WAM BROKERAGE SERVICES, L.L.C., a limited liability company organized and
existing under the laws of the State of Illinois ("WAM BD").
RECITALS:
WHEREAS, WAT is engaged in business as an open-end management investment
company registered under the Investment Company Act of 1940, as amended ("1940
Act");
WHEREAS, WAM BD is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended ("1934 Act"), and the laws of each state
(including the District of Columbia and Puerto Rico) in which it engages in
business to the extent such law requires, and is a member of the National
Association of Securities Dealers ("NASD") (such registrations and membership
are referred to collectively as the "Registrations");
WHEREAS, WAT desires WAM BD to act as the distributor in the public
offering of its shares of beneficial interest (hereinafter called "Shares")
which are divided into two series, Wanger U.S. Small Cap Advisor and Wanger
International Small Cap Advisor(hereinafter called, collectively, the "Funds"
and, individually, the "Fund");
WHEREAS, WAT has entered into investment advisory agreements with Wanger
Asset Management, L.P. ("WAM"), an affiliate of WAM BD, pursuant to which WAM
has agreed to pay all expenses incurred in the sale and promotion of shares of
WAT;
NOW, THEREFORE, the parties hereto agree as follows:
1. Appointment. WAT appoints WAM BD to act as principal underwriter (as
such term is defined in Section 2(a)(29) of the 1940 Act of its Shares.
2. Delivery of WAT Documents. WAT has furnished WAM BD with properly
certified or authenticated copies of each of the following in effect on the date
hereof and shall furnish WAM BD from time to time properly certified or
authenticated copies of all amendments or supplements thereto:
(a) Agreement and Declaration of Trust;
(b) By-Laws;
<PAGE>
(c) Resolutions of its Board of Trustees (hereinafter referred to as
the "Board") selecting WAM BD as distributor and approving this
form of agreement and authorizing its execution.
WAT shall furnish WAM BD promptly with copies of any registration
statements filed by it with the Securities and Exchange Commission ("SEC") under
the Securities Act of 1933 (the "1933 Act") or the 1940 Act, together with any
financial statements and exhibits included therein, and all amendments or
supplements thereto hereafter filed.
WAT also shall furnish WAM BD such other certificates or documents which
WAM BD may from time to time, in its discretion, reasonably deem necessary or
appropriate in the proper performance of its duties.
3. Solicitation of Orders for Purchase of Shares.
(a) Subject to the provisions of Paragraphs 5, 6 and 8 hereof, and to such
minimum purchase and investor eligibility requirements as may from time to time
be indicated in WAT's Prospectus, WAM BD is authorized to solicit, as agent on
behalf of WAT, unconditional orders for purchases of WAT's Shares authorized for
issuance and registered under the 1933 Act, provided that:
(1) WAM BD shall act solely as a disclosed agent on behalf of and for
the account of WAT;
(2) WAT's transfer agent shall receive directly from investors all
payments for the purchase of WAT's Shares and also shall pay
directly to shareholders amounts due to them for the redemption
or repurchase of all WAT's Shares, with WAM BD having no rights
or duties to accept such payment or to effect such redemptions or
repurchases; if a payment for the purchase of WAT's Shares be
delivered to WAM BD, such payment shall not be negotiated by WAM
BD but shall be delivered as soon as reasonably practicable to
WAT's transfer agent;
(3) WAM BD shall confirm all orders received for purchase of WAT's
Shares which confirmation shall clearly state (i) that WAM BD is
acting as agent of WAT in the transaction, (ii) that all
certificates for redemption, remittances and registration
instructions should be sent directly to WAT and (iii) WAT's
mailing address;
(4) WAM BD shall have no liability for payment for purchases of WAT's
Shares it sells as agent; and
(5) Each order to purchase Shares of WAT received by WAM BD shall be
subject to acceptance by an officer of WAT in Chicago and entry
of the order on WAT's records or shareholder accounts and is not
binding until so accepted and entered.
2
<PAGE>
The purchase price to the public of WAT's Shares shall be the public
offering price as defined in Paragraph 7 hereof.
(b) In consideration of the rights granted to WAM BD under this Agreement,
WAM BD will use its best efforts (but only in states in which WAM BD may
lawfully do so) to solicit from investors unconditional orders to purchase
Shares of WAT. WAT shall make available to WAM BD, at WAM BD's cost, such
number of copies of WAT's currently effective Prospectus and Statement of
Additional Information and copies of all information, financial statements and
other papers which WAM BD may reasonably request for use in connection with the
distribution of Shares.
4. Selling Agreements. WAM BD is authorized, as agent on behalf of WAT,
to enter into agreements with other broker-dealers providing for the
solicitation of unconditional orders for purchases of WAT's Shares authorized
for issuance and registered under the 1933 Act. All such agreements shall be
either in the form of agreement attached hereto or in such other form as may be
approved by the officers of WAT ("Selling Agreement"). All solicitations made
by other broker-dealers pursuant to a Selling Agreement shall be subject to the
same terms as are applied by this Agreement to solicitations made by WAM BD.
5. Solicitation of Orders to Purchase Shares by WAT. The rights granted
to WAM BD shall be non-exclusive in that WAT reserves the right to solicit
purchases from, and sell its Shares to, investors, including insurance company
separate accounts through which Fund shares are offered in connection with
variable annuity contracts or other arrangements. Further, WAT reserves the
right to issue Shares in connection with the merger or consolidation of any
other investment company, trust or personal holding company with WAT, or WAT's
acquisition, by the purchase or otherwise, of all or substantially all of the
assets of an investment company, trust or personal holding company, or
substantially all of the outstanding shares or interests of any such entity.
Any right granted to WAM BD to solicit purchases of Shares will not apply to
Shares that may be offered by WAT to shareholders by virtue of their being
shareholders of WAT.
6. Shares Covered by this Agreement. This Agreement relates to the
solicitation of orders to purchase Shares that are duly authorized and
registered and available for sale by WAT, including redeemed or repurchased
Shares if and to the extent that they may be legally sold and if, but only if,
WAT authorizes WAM BD to sell them.
7. Public Offering Price. All solicitations by WAM BD pursuant to this
Agreement shall be for orders to purchase Shares of WAT at the public offering
price. The public offering price for each accepted subscription for WAT's
Shares will be the net asset value per share of the particular Fund subscribed
for next determined by WAT after it accepts such subscription. The net asset
value per share shall be determined in the manner provided in WAT's Agreement
and Declaration of Trust as now in effect or as they may be amended, and as
reflected in WAT's then current Prospectus and Statement of Additional
Information.
8. Suspension of Sales. If and whenever the determination of a Fund's net
asset value is suspended and until such suspension is terminated, no further
orders for Shares of such
3
<PAGE>
Fund shall be accepted by WAT except such unconditional orders placed with WAT
and accepted by it before the suspension. In addition, WAT reserves the right
to suspend sales of Shares if, in the judgment of the Board of WAT, it is in the
best interest of WAT to do so, such suspension to continue for such period as
may be determined by WAT's Board; and in that event, (i) at the direction of
WAT, WAM BD shall suspend its solicitation of orders to purchase Shares of WAT
until otherwise instructed by WAT and (ii) no orders to purchase Shares shall be
accepted by WAT while such suspension remains in effect unless otherwise
directed by its Board.
9. Authorized Representations. WAT is not authorized by WAM BD to give on
behalf of WAM BD any information or to make any representations other than the
information and representations contained in WAT's registration statement filed
with the SEC under the 1933 Act and/or the 1940 Act as it may be amended from
time to time.
WAM BD is not authorized by WAT to give on behalf of WAT or any Fund any
information or to make any representations in connection with the sale of Shares
other than the information and representations contained in WAT's registration
statement filed with the SEC under the 1933 Act and/or the 1940 Act, covering
Shares, as such registration statement or WAT's prospectus may be amended or
supplemented from time to time, or contained in shareholder reports or other
material that may be prepared by or on behalf of WAT or approved by WAT for WAM
BD's use. No person other than WAM BD is authorized to act as principal
underwriter (as such term is defined in the 1940 Act, as amended) for WAT.
10. Registration of Additional Shares. WAT hereby agrees to register an
indefinite number of Shares pursuant to Rule 24f-2 under the 1940 Act, as
amended. WAT will, in cooperation with WAM BD, take such action as may be
necessary from time to time to permit such Shares (so registered or otherwise
qualified for sale under the 1933 Act) to be sold in any state mutually
agreeable to WAM BD and WAT, and to maintain such qualification; provided,
however, that nothing herein shall be deemed to prevent WAT from taking action,
without approval of WAM BD, to permit its Shares to be sold in any state it
deems appropriate.
11. Conformity With Law. WAM BD agrees that in soliciting orders to
purchase Shares it shall conform in all respects with applicable federal and
state laws and the rules and regulations of the NASD. WAM BD will use its best
efforts to maintain its Registrations in good standing during the term of this
Agreement and will promptly notify WAT and WAM, in the event of the suspension
or termination of any of the Registrations.
12. Independent Contractor. WAM BD shall be an independent contractor and
neither WAM BD, nor any of its members, managers, officers, directors, employees
or representatives is or shall be an employee of WAT in the performance of WAM
BD's duties hereunder. WAM BD shall be responsible for its own conduct and the
employment, control and conduct of its agents and employees and for injury to
such agents or employees or to others through its agents and employees and
agrees to pay all employee taxes thereunder.
13. Indemnification. WAM BD agrees to indemnify and hold harmless WAT and
each of the members of its Board and its officers, employees and representatives
and each
4
<PAGE>
person, if any, who controls WAT within the meaning of Section 15 of the 1933
Act against any and all losses, liabilities, damages, claims and expenses
(including the reasonable costs of investigating or defending any alleged loss,
liability, damage, claim or expense and reasonable legal counsel fees incurred
in connection therewith) to which WAT or such of the members of its Board and of
its officers, employees, representatives, or controlling person or persons may
become subject under the 1933 Act, under any other statute, at common law, or
otherwise, arising out of the acquisition or sale of any Shares of WAT by any
person which (i) may be based upon any wrongful act by WAM BD or any of WAM BD's
members, managers, directors, officers, employees or representatives, or (ii)
may be based upon any untrue statement or alleged untrue statement of a material
fact contained in a registration statement, Prospectus, Statement of Additional
Information, shareholder report or other information covering Shares of WAT
filed or made public by WAT or any amendment thereof or supplement thereto 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 if
such statement or omission was made in reliance upon information furnished to
WAT by WAM BD in writing. In no case (i) is WAM BD's indemnity in favor of WAT,
or any person indemnified, to be deemed to protect WAT or such indemnified
person against any liability to which WAT or such person would otherwise be
subject by reason of willful misfeasance, bad faith or negligence in the
performance of its or his duties or by reason of its or his reckless disregard
of its or his obligations and duties under this Agreement, or (ii) is WAM BD to
be liable under its indemnity agreement contained in this paragraph with respect
to any claim made against WAT or any person indemnified unless WAT or such
person, as the case may be, shall have notified WAM BD in writing of the claim
within a reasonable time after the summons, or other first written notification,
giving information of the nature of the claim served upon WAT or upon such
person (or after WAT or such person shall have received notice of such service
on any designated agent). However, failure to notify WAM BD of any such claim
shall not relieve WAM BD from any liability which WAM BD may have to WAT or any
person against whom such action is brought otherwise than on account of WAM BD's
indemnity agreement contained in this Paragraph.
WAM BD shall be entitled to participate, at its own expense, in the
defense, or, if WAM BD so elects, to assume the defense of any suit brought to
enforce any such claim but, if WAM BD elects to assume that defense, such
defense shall be conducted by legal counsel chosen by WAM BD and satisfactory to
the persons indemnified who are defendants in the suit. In the event that WAM
BD elects to assume the defense of any such suit and retain such legal counsel,
persons indemnified who are defendants in the suit shall bear the fees and
expenses of any additional legal counsel retained by them. If WAM BD does not
elect to assume the defense of any such suit, WAM BD will reimburse persons
indemnified who are defendants in such suit for the reasonable fees of any legal
counsel retained by them in such litigation.
WAT agrees to indemnify and hold harmless WAM BD and each of its members,
managers, directors, officers, employees, and representatives and each person,
if any, who controls WAM BD within the meaning of Section 15 of the 1933 Act
against any and all losses, liabilities, damages, claims or expenses (including
the damage, claim or expense and reasonable legal counsel fees incurred in
connection therewith) to which WAM BD or such of its members, managers,
directors, officers, employees, representatives or controlling person or persons
may
5
<PAGE>
otherwise become subject under the 1933 Act, under any other statute, at common
law, or otherwise arising out of the acquisition of any Shares by any person
which (i) may be based upon any wrongful act by WAT or any of the members of
WAT's Board, or WAT's officers, employees or representatives other than WAM BD,
or (ii) may be based upon any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, Prospectus, Statement of
Additional Information, shareholder report or other information covering Shares
filed or made public by WAT or any amendment thereof or supplement thereto, 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 unless
such statement or omission was made in reliance upon information furnished by
WAM BD to WAT. In no case (i) is WAT's indemnity in favor of WAM BD or any
person indemnified to be deemed to protect WAM BD or such indemnified person
against any liability to which WAM BD or such indemnified person would otherwise
be subject by reason of willful misfeasance, bad faith, or negligence in the
performance of its or his duties or by reason of its or his reckless disregard
of its or his obligations and duties under this Agreement, or (ii) is WAT to be
liable under its indemnity agreement contained in this Paragraph with respect to
any claim made against WAM BD or any person indemnified unless WAM BD, or such
person, as the case may be, shall have notified WAT in writing of the claim
within a reasonable time after the summons, or other first written notification,
giving information of the nature of the claim served upon WAM BD or upon such
person (or after WAM BD or such person shall have received notice of such
service on any designated agent). However, failure to notify WAT of any such
claim shall not relieve WAT from any liability which WAT may have to WAM BD or
any person against whom such action is brought otherwise than on account of
WAT's indemnity agreement contained in this Paragraph.
WAT shall be entitled to participate, at its own expense, in the defense
or, if WAT so elects, to assume the defense of any suit brought to enforce such
claim but, if WAT elects to assume the defense, such defense shall be conducted
by legal counsel chosen by WAT and satisfactory to the persons indemnified who
are defendants in the suit. In the event that WAT elects to assume the defense
of any such suit and retain such legal counsel, the persons indemnified who are
defendants in the suit shall bear the fees and expenses of any additional legal
counsel retained by them. If WAT does not elect to assume the defense of any
such suit, WAT will reimburse the persons indemnified who are defendants in such
suit for the reasonable fees and expenses of any legal counsel retained by them
in such litigation.
14. Duration and Termination of this Agreement. This Agreement shall
become effective upon its execution ("Effective Date") and unless terminated as
provided herein, shall remain in effect through December 31, 1999, and from year
to year thereafter, but only so long as such continuance is specifically
approved at least annually by (a) a vote of majority of the members of the Board
of WAT who are not interested persons of WAM BD or WAT, voting in person at a
meeting called for the purpose of voting on such approval, and (b) the vote of
either the Board of WAT or a majority of the outstanding Shares of WAT. This
Agreement may be terminated at any time, without the payment or any penalty (a)
on 60 days' written notice, by the Board of WAT or by or by a vote of a majority
of the outstanding Shares of WAT, or by WAM BD, or (b) immediately, on written
notice by the Board of WAT, in the event of termination or suspension of any of
the Registrations. This Agreement will automatically terminate in the event
6
<PAGE>
of its assignment. In interpreting the provisions of this Paragraph 14, the
definitions contained in Section 2(a) of the 1940 Act (particularly the
definitions of "interested person," "assignment" and "majority of the
outstanding shares") shall be applied.
15. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by each party against which enforcement of the change, waiver,
discharge or termination is sought. If WAT should at any time deem it necessary
or advisable in the best interests of WAT that any amendment of this Agreement
be made in order to comply with the recommendations or requirements of the SEC
or any other governmental authority or to obtain any advantage under state or
Federal tax laws and notifies WAM BD of the form of such amendment and the
reasons therefore, and if WAM BD should decline to assent to such amendment, WAT
may terminate this Agreement forthwith. If WAM BD should at any time request
that a change be made in WAT's Agreement and Declaration of Trust, By-Laws or
its methods of doing business, in order to comply with any requirements of
Federal law or regulations of the SEC, or of a national securities association
of which WAM BD is or may be a member, relating to the sale of Shares, and WAT
should not make such necessary changes within a reasonable time, WAM BD may
terminate this Agreement forthwith.
16. Liability. It is understood and expressly stipulated that neither the
shareholders of WAT nor the members of the Board of WAT shall be personally
liable hereunder. The obligations of WAT are not personally binding upon, nor
shall resort to the private property of, any of the members of the Board of WAT
nor of the shareholders, officers, employees or agents of WAT, but only WAT's
property shall be bound.
17. Miscellaneous. The captions in this Agreement are included for
convenience or reference only, and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed simultaneously in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
18. Notice. Any notice required or permitted to be given by a party to
this Agreement or to any other party hereunder shall be deemed sufficient if
delivered in person or sent by registered or certified mail, postage prepaid,
addressed by the party giving notice to each such other party at the address
provided below or to the last address furnished by each such other party to the
party giving notice.
If to WAT: 227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
Attn: Bruce H. Lauer
7
<PAGE>
If to WAM BD: 227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
Attn: Merrillyn J. Kosier
If to WAM: 227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
Attn: Bruce H. Lauer
WAM BROKERAGE SERVICES, L.L.C.
By: /s/ Merrillyn J. Kosier
------------------------------------------
Merrillyn J. Kosier, Vice President
WANGER ADVISORS TRUST
By: /s/ Merrillyn J. Kosier
------------------------------------------
Merrillyn J. Kosier, Senior Vice President
and Secretary
ACKNOWLEDGED:
WANGER ASSET MANAGEMENT, L.P.
By: /s/ Robert A. Mohn
---------------------------
Robert A. Mohn, Principal
8
<PAGE>
Exhibit 10
[LETTERHEAD OF BELL, BOYD & LLOYD]
Three First National Plaza
70 West Madison Street, Suite 3300
Chicago, Illinois 60602-4207
312-372-1121
Fax 312-372-2098
April 27, 1998
Wanger Advisors Trust
227 West Monroe Street, #3000
Chicago, Illinois 60606
Ladies and Gentlemen:
Share of Beneficial Interest
Without Par Value
----------------------------
We have acted as counsel for Wanger Advisors Trust (the "Trust") in
connection with the registration under the Securities Act of 1933 (the "Act") of
an indefinite number of shares of beneficial interest, without par value, of the
series of the Trust designated Wanger U.S. Small Cap Advisor and Wanger
International Small Cap Advisor (each a Series) in registration statement no.
33-83548 on form N-1A (the "Registration Statement").
In this connection we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, records,
certificates and other papers as we deemed it necessary to examine for the
purpose of this opinion, including the Agreement and Declaration of Trust (the
"Trust Agreement") and bylaws of the Trust, actions of the board of trustees of
the Trust authorizing the issuance of shares of each Series, the form of
certificates to evidence such shares, and the Registration Statement.
Based on the foregoing examination, we are of the opinion that:
1. The Trust is an unincorporated voluntary association legally
organized and validly existing under the laws of The Commonwealth of
Massachusetts.
2. Upon the issuance and delivery of the shares of each Series in
accordance with the Trust Agreement and the actions of the board of
trustees authorizing the issuance of such shares, and the receipt by the
Trust of the authorized consideration therefor, the shares so issued will
be validly issued and outstanding, fully paid and nonassessable.
With respect to the opinion stated in paragraph 2 above, we wish to point
out that the shareholders of a Massachusetts business trust may under some
circumstances be subject to assessment at the instance of creditors to pay the
obligations of such trust in the event that its assets are insufficient for the
purpose.
<PAGE>
Wanger Advisors Trust
April 27, 1998
Page 2
In giving this opinion we have relied upon the attached opinion of Sullivan
& Worcester to us dated April 23, 1998.
We consent to the filing of this opinion as an exhibit to the Registration
Statement. In giving this consent, we do not admit that we are in the category
of persons whose consent is required under section 7 of the Act.
Very truly yours,
/s/ Bell, Boyd & Lloyd
BELL, BOYD & LLOYD
<PAGE>
[LETTERHEAD OF SULLIVAN & WORCESTER LLP]
One Post Office Square
Boston, Massachusetts 02109
617-338-2800
Fax 617-338-2880
Boston
April 23, 1998
Bell, Boyd & Lloyd
Three First National Plaza
- - Suite 3300
70 West Madison Street
Chicago, Illinois 60602
Re: Wanger Advisors Trust
---------------------
Ladies and Gentlemen:
You have requested our opinion as to certain matters of Massachusetts law
relating to the organization and shares of Wanger Advisors Trust, a
Massachusetts trust with transferable shares (the "Trust"), established under a
Declaration of Trust dated August 30, 1994 (the "Declaration").
We have reviewed the Declaration and the actions taken by the trustees of
the Trust (the "Trustees") to organize the Trust and to authorize the issuance
and sale of shares of beneficial interest, without nominal or par value (the
"Shares"), of the series known as Wanger U.S. Small Cap Advisor and Wanger
International Small Cap Advisor, respectively, established and designated by
resolutions adopted by the Trustees on December 15, 1994 (each, a "Series"). In
this connection we have examined the By-laws of the Trust, the Prospectus (the
"Prospectus") and Statement of Additional Information (the "SAI") included in
Post-Effective Amendment No. 6 to the Trust's Registration Statement on Form
N-1A under the Securities Act of 1933, as amended (the "Securities Act"),
Registration No. 33-83548, and Amendment No. 7 to its Registration Statement
under the Investment Company Act of 1940, as amended, Registration No. 811-8748
(collectively, the "Registration Statement"), which you have advised us is about
to be filed with the SEC, certificates of Trustees, of officers of the Trust and
of public officials as to matters of fact, and such other documents and
instruments, and such questions of law and fact, as we have considered necessary
or appropriate for purposes of the opinions expressed herein. We have assumed
the genuineness of the signatures on, and the authenticity of, all documents
furnished to us, and the conformity to the originals of documents submitted to
us as copies, which facts we have not independently verified.
Based upon and subject to the foregoing, we hereby advise you that, in our
opinion, under the laws of Massachusetts:
<PAGE>
Bell, Boyd & Lloyd -2- April 23, 1998
1. The Trust is validly existing as a trust with transferable shares of
the type commonly called a Massachusetts business trust.
2. The Trust is authorized to issue an unlimited number of Shares of each
Series; the presently outstanding Shares (the "Outstanding Shares")
and the Shares to be offered for sale by the Prospectus (the
"Additional Shares") have been duly and validly authorized by all
requisite action of the Trustees, and no action of the shareholders of
the Trust, or of either Series thereof, is required in such
connection.
3. The Outstanding Shares are, and when the Additional Shares have been
duly sold, issued and paid for as contemplated by the Prospectus and
the SAI such Additional Shares will be, validly and legally issued,
and the Outstanding Shares are, and when so sold, issued and paid for
the Additional Shares will be, fully paid and non-assessable by the
Trust.
With respect to the opinion stated in paragraph 3 above, we wish to point
out that the shareholders of a Massachusetts business trust may under some
circumstances be subject to assessment at the instance of creditors to pay the
obligations of such trust in the event that its assets are insufficient for the
purpose.
This letter expresses our opinions as to the provisions of the Declaration
and the laws of Massachusetts applying to business trusts generally, but does
not extend to the Massachusetts Securities Act, or to federal securities or
other laws.
You may rely upon the foregoing opinions in rendering your opinion letter
on the same matters which is to be filed with the Amendment as an exhibit to the
Registration Statement, and we hereby consent to the reference to us in the
Prospectus, and to the filing of this letter with the SEC as an exhibit to the
Registration Statement. In giving such consent, we do not thereby concede that
we fall within the category of persons whose consent is required under Section 7
of the Securities Act.
Very truly yours,
/s/ Sullivan & Worcester LLP
SULLIVAN & WORCESTER LLP
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
February 4, 1998 for Wanger Advisors Trust (comprised of the Wanger U.S. Small
Cap and Wanger International Small Cap portfolios) in the Registration
Statement (Form N-1A) and its incorporation by reference in the related
Prospectus and Statement of Additional Information, filed with the Securities
and Exchange Commission in this Post-Effective Amendment No. 6 to the
Registration Statement under the Securities Act of 1933 (Registration No.
33-83548) and in the Amendment No. 7 to the Registration Statement under the
Investment Company Act of 1940 (Registration No. 811-8748).
/s/ Ernst & Young LLP
Chicago, Illinois
April 24, 1998
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<PAGE>
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The following information is extracted from and qualified by reference to
registrant's report on form N-SAR for the year ended December 31, 1997 and the
financial statements included in registrant's annual reports to shareholders.
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<ARTICLE> 6
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The following information is extracted from and qualified by reference to
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financial statements included in registrant's annual reports to shareholders.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> WANGER INTERNATIONAL SMALL CAP ADVISOR
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