<PAGE>
Wanger Twenty
Wanger Foreign Forty
================================================================================
- --------------------------------------------------------------------------------
Wanger Twenty invests for long-term capital growth. The Fund invests
primarily in the stocks of U.S. companies with market capitalizations of $1
billion to $10 billion. Wanger Twenty ordinarily focuses its investments in 20
to 25 U.S. companies.
- --------------------------------------------------------------------------------
Wanger Foreign Forty invests for long-term capital growth. The Fund
invests primarily in the stocks of foreign companies with market capitalizations
of $1 billion to $10 billion. The Fund ordinarily has investments in 40 to 60
companies in developed markets.
- --------------------------------------------------------------------------------
Shares of Wanger Twenty and Wanger Foreign Forty (each, a "Fund," and
together, the "Funds") 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"). Wanger
Twenty and Wanger Foreign Forty are series of Wanger Advisors Trust. Both Funds
are managed by Wanger Asset Management, L.P. ("WAM").
Please read this prospectus before investing, and keep it on file for
future reference. It contains important information, including how the Funds
invest and the services available to shareholders.
A Statement of Additional Information ("SAI") dated the date of this
prospectus has been filed with the Securities and Exchange Commission ("SEC"),
and, along with any supplement to the SAI, is incorporated herein by reference
(is legally considered a part of this prospectus). The SAI is available free
upon request by calling WAM at 1-800-4-WANGER (1-800-492-6437). You may also
obtain the SAI, as well as other information that has been electronically filed,
from the SEC's web site (www.sec.gov).
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus
December 15, 1998
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
======================================================
<S> <C>
The Funds at a Glance 1
.Goal & Strategy 1
.Management and Organization 1
.Who May Want to Invest 2
.Risks 2
Expenses and Performance 3
.Expenses 3
.Performance 4
Investing in the Funds 5
.Doing Business with the Trust 5
.Who May Invest 5
.How to Invest and Redeem 5
Shareholder Policies 8
.Statements and Reports 8
.Share Price 8
The Funds in Detail 9
.Organization 9
.Management 9
.Other Funds Managed by WAM 11
.Transfer Agent and Custodian 11
.Distributor 11
.Expenses 11
.Availability of the Funds and
Shareholder Rights 12
How the Funds Invest 13
.Wanger Twenty 13
.Wanger Foreign Forty 13
.Looking for High Quality
Companies 14
.General Information 15
Securities, Investment Practices,
and Risks 15
.Common Stocks 15
.Diversification 16
.Foreign Securities 16
.Managing Investment
Exposure 18
.Debt Securities 20
.Illiquid and Restricted
Securities 21
.Other Investment
Companies 21
.Lending and Repurchase
Agreements 21
.When-Issued and Delayed
Delivery Securities 22
.State Insurance Restrictions 22
Dividends and Taxes 23
Wanger Advisors Trust 24
</TABLE>
i
<PAGE>
THE FUNDS AT A GLANCE
================================================================================
Goal and Strategy
- --------------------------------------------------------------------------------
Wanger Twenty invests for long-term capital growth. The Fund invests
primarily in the stocks of U.S. companies with market capitalizations of $1
billion to $10 billion. Wanger Twenty is a non-diversified fund that
ordinarily focuses its investments in 20 to 25 U.S. companies.
Under normal market conditions, Wanger Twenty invests most of its assets in
common stocks, and securities exchangeable or convertible into common stocks of
U.S. companies, but may also invest in other types of securities.
- --------------------------------------------------------------------------------
Wanger Foreign Forty invests for long-term capital growth. The Fund
invests primarily in the stocks of foreign companies with market capitalizations
of $1 billion to $10 billion. The Fund is a non-diversified fund that
ordinarily has investments in 40 to 60 companies in developed markets.
Under normal market conditions, Wanger Foreign Forty invests most of its
total assets in equity securities, including common and preferred stocks,
warrants or other similar rights, and convertible securities, of foreign
companies in at least three developed countries, but may also invest in other
types of securities, including debt securities.
Management and Organization
- --------------------------------------------------------------------------------
The Funds are series of Wanger Advisors Trust (the "Trust"). Wanger Asset
Management, L.P. (WAM), the Funds' investment adviser, employs a team approach
to management of the Funds. The management team consists of the Funds'
portfolio managers, other WAM portfolio managers, and research analysts. Each
team member has one or more areas of expertise, and shares responsibility for
providing ideas, information, and knowledge in managing the Funds. Daily
decisions on portfolio selection rest with the lead portfolio managers or co-
managers who utilize the input and advice of the management team in making
purchase and sale determinations. Ralph Wanger is the chief investment officer
of WAM, and lead strategist for all of the funds managed by WAM.
Wanger Twenty. John H. Park and Mark H. Yost are the co-portfolio managers
of Wanger Twenty. Mr. Park is a vice president of the Trust and a principal of
WAM. He has been a member of WAM's investment management team since July 1993.
Mr. Yost is a vice president of the Trust and has been a member of WAM's
investment management team since October 1995.
Wanger Foreign Forty. Marcel P. Houtzager is the lead portfolio manager of
Wanger Foreign Forty. Mr. Houtzager is a vice president of the Trust and a
principal of WAM. He has been a member of WAM's investment management team
since 1992.
1
<PAGE>
Who May Want to Invest
- --------------------------------------------------------------------------------
The Funds are suitable for investors who are willing to hold their shares
through market fluctuations and the accompanying changes in share values. The
Funds are not appropriate investments for those seeking short-term price
appreciation or for "market-timers." Wanger Twenty and Wanger Foreign Forty 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
Funds are sold only to Life Companies and certain Retirement Plans. See
"Investing in the Funds -- Who May Invest."
Risks
- --------------------------------------------------------------------------------
Over time, stocks have shown greater growth potential than other types of
securities. In the short term, however, stock prices may fluctuate widely in
response to company, market, or economic news. Because they are non-
diversified, the Funds have the ability to take larger positions in a smaller
number of issuers. While WAM believes that a strategy of investing in a limited
number of securities has the potential for higher total returns than a strategy
of investing in a larger number of securities, this may increase the volatility
of the Funds' investment performance. Also, if the securities in which a Fund
invests perform poorly, the Fund could incur greater losses than it might have
had it invested in a larger number of securities.
The value of the Funds' investments and the returns they generate vary from
day to day. Performance depends on WAM's skills in identifying the trends that
are the basis for the Funds' stock selections, and in picking individual stocks,
as well as general market and economic conditions. When you sell your shares,
they may be worth more or less than you paid for them. The Funds are not, alone
or together, a balanced investment plan and there can be no assurance that the
Funds will achieve their investment objectives.
2
<PAGE>
EXPENSES AND PERFORMANCE
================================================================================
Expenses
- --------------------------------------------------------------------------------
Transaction Expenses. Shareholder transaction expenses are charges you pay
when you buy or sell shares of the Funds:
<TABLE>
<S> <C>
Maximum sales charge on purchases and None
reinvested dividends
Deferred sales charge on redemptions None
Redemption fee None
</TABLE>
Annual fund operating expenses. Each Fund pays its own operating expenses,
including the management fee to WAM. Expenses are factored into each Fund's
share price daily, and are not charged directly to shareholder accounts.
The Funds expect to incur the following expenses, expressed as a percentage
of the Fund's average net assets:
<TABLE>
<CAPTION>
Wanger Twenty Wanger Foreign
------------- --------------
Forty
-----
<S> <C> <C>
Management Fee.................................. 0.95% 1.00%
12b-1 fee....................................... None None
Other operating expenses (after reimbursement).. 0.40 0.45
---- ----
Total operating expenses (after reimbursement).. 1.35% 1.45%
</TABLE>
The purpose of the expense table is to help you understand the costs and
expenses of investing in the Funds. WAM has agreed to reimburse Wanger Twenty
for any ordinary operating expenses exceeding 1.35% of its average net assets,
and Wanger Foreign Forty for any ordinary operating expenses exceeding 1.45% of
its average net assets, over each fiscal year. Absent reimbursement, "Other
operating expenses" would be estimated to be 0.68% for Wanger Twenty, and 2.51%
for Wanger Foreign Forty. "Total operating expenses" absent reimbursement would
be estimated to be 1.63% for Wanger Twenty and 3.51% for Wanger Foreign Forty.
The estimate of "Other operating expenses" is based on the estimated expenses
the Funds expect to incur during their initial fiscal year of operations ending
December 31, 1999.
3
<PAGE>
. Example: Let's say, hypothetically, that a Fund's annual return is 5% and
that its operating expenses are exactly as shown above. For every $1,000 you
invested, here's how much you would have paid in total expenses if you closed
your Fund account after the number of years indicated:
Wanger Twenty Wanger Foreign Forty
------------- --------------------
After 1 year $ 14 $15
After 3 years $ 43 $46
The purpose of the example is to illustrate the effect of expenses, but is
not meant to suggest actual or expected costs or returns, all of which may vary.
Because the Funds are new, the above amounts are estimates.
Performance
Mutual fund performance is commonly measured as total return. Total return
is the change in value of an investment in a fund over a given period, assuming
reinvestment of any dividends and capital gains. Total return reflects actual
performance over a stated period of time. Average annual total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same total return if performance had been constant over the entire period.
Average annual total returns smooth out variations in performance; they are not
the same as actual year-by-year results.
Total returns are based on past results and are not a prediction of
future performance. They do not include the effect of income taxes.
The Funds sometimes show their performance compared to stock indexes
(described in the SAI), or give their ratings or rankings determined by an
unrelated organization.
Information about the performance of the Funds is contained in the
Trust's annual report which may be obtained free of charge by calling WAM at: 1-
800-4-WANGER (1-800-492-6437).
Total returns quoted for the Funds include the effect of deducting
each Fund's expenses, but do 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.
4
<PAGE>
INVESTING IN THE FUNDS
- ----------------------
Doing Business with the Trust
The Trust provides Life Companies and Retirement Plans with information
Monday through Friday, except holidays, from 8:00 a.m. to 4:30 p.m. Central
time. For information, prices, literature, or to obtain information regarding
the availability of Fund shares or how Fund shares are redeemed, call WAM at 1-
800-4-WANGER (1-800-492-6437).
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 (1-800-492-6437) to
determine if it is eligible to invest.
How to Invest and Redeem
Shares of Wanger Twenty and Wanger Foreign Forty 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.
5
<PAGE>
No sales commissions of any kind are imposed upon purchases of Fund shares
by Life Companies or Retirement Plans. (However, each Variable Contract imposes
its own charges and fees on owners of the Variable Contract, and Retirement
Plans may impose such charges on participants in the Retirement Plan.) The
price paid for shares is the net asset value ("NAV") next calculated after a
Fund or its agent receives an order to purchase Fund shares. Purchase orders
are considered received when information identifying the purchaser and the money
to pay for the shares are received. Redemptions will be effected through the
Life Companies and Retirement Plan trustees to meet obligations under the
Variable Contracts and the Retirement Plans. In the case of a Life Company
purchaser, particular purchase and redemption procedures typically will be set
forth in an agreement between the Trust and the Life Company. The Trust may
enter into similar agreements with Retirement Plans.
Purchases. To the extent not otherwise provided in any agreement between
the Trust and a Life Company or Retirement Plan, shares of a Fund may be
purchased by check or by wire transfer of funds. To be effective, a purchase
order must consist of the money to purchase the shares and (i) information
identifying the purchaser, in the case of a Life Company or Retirement Plan with
which the Funds have entered into an agreement, or a subsequent purchase by a
Life Company or Retirement Plan that is already a Fund shareholder, or (ii) a
completed purchase application, in the case of the initial investment by a
Retirement Plan with which the Funds do not have an agreement.
Redemptions. Subject to the terms of any agreement between the Funds and
any Life Company or Retirement Plan, shares may be redeemed by written request
or by telephone (for redemptions of $50,000 or less), with proceeds paid by
check or by wire transfer.
Redeeming Shares in Writing. A written redemption request must:
. identify the owner of the account;
. specify the number of shares or dollar amount to be redeemed;
. be signed on behalf of the owner by an individual or individuals
authorized to do so, and include evidence of their authority;
. if the shares to be redeemed have a value of more than $50,000,
include a signature guarantee by an "eligible guarantor institution"
as defined in the rules under the Securities Exchange Act of 1934
(including a bank, broker-dealer, credit union (if authorized under
state law), national securities exchange, registered securities
association, clearing agency or savings association, but not a notary
public); and
. be accompanied by any stock certificates representing the shares to
be redeemed.
A check for the redemption proceeds will be mailed to the address of record
unless payment by wire transfer is requested.
Redeeming Shares by Telephone. Unless a Retirement Plan shareholder chose
on its purchase application not to have the ability to do so, redemptions of
shares having a value of $50,000 or less may be requested by calling the Fund's
transfer agent at 1-800-962-1585. The Fund will not be responsible for
unauthorized transactions if it follows reasonable procedures to confirm that
instructions received by telephone are genuine, such as requesting
identification
6
<PAGE>
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. 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 have limited the number of exchanges to no more
than four 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.
SHAREHOLDER POLICIES
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.
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.
7
<PAGE>
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.
A purchase or redemption of Fund shares will be priced at the next NAV
calculated after the purchase or redemption request is received 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.
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 foreign markets, the
calculation of NAV does not take place at the same time as the determination of
the prices of many foreign securities held by the Funds, particularly Wanger
Foreign Forty. Those timing differences may have a significant effect on a
Fund's NAV.
THE FUNDS IN DETAIL
Organization
Wanger Twenty and Wanger Foreign Forty 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. A majority of the trustees are independent
of WAM.
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.
8
<PAGE>
Management
The Funds are managed by Wanger Asset Management, L.P. (WAM), 227 West
Monroe Street, Suite 3000, Chicago, Illinois 60606; WAM chooses the Funds'
investments and handles their business affairs, under the direction of the board
of trustees. WAM is a limited partnership managed by its general partner,
Wanger Asset Management, Ltd. WAM manages more than $7 billion in assets.
WAM employs a team approach to management of the Funds. The management
team is made up of the lead portfolio manager or co-managers, 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 managers or co-portfolio managers who utilize the input and
advice of the management team in making purchase and sale determinations.
Ralph Wanger is the president of the Trust and the chief investment officer
of WAM. Mr. Wanger is also lead portfolio manager of Acorn Fund and chief
investment strategist of Acorn Investment Trust (Acorn Fund, Acorn
International, Acorn USA, Acorn Twenty and Acorn Foreign Forty). Mr. Wanger has
been president and a member of the board of Acorn Fund and its predecessor since
1970.
John H. Park and Mark H. Yost are the co-portfolio managers of Wanger
Twenty. Mr. Park is a vice president of both the Trust and Acorn Investment
Trust, and is a principal of WAM. He has been a member of WAM's investment
management team since July 1993. Prior to joining WAM, he was an analyst for
Ariel Capital Management. Mr. Park received his Chartered Financial Analyst
(CFA) designation in 1996 and earned both his undergraduate and M.B.A. degrees
from the University of Chicago.
Mr. Yost is a vice president of the Trust and Acorn Investment Trust and
has been a member of WAM's investment management team since October 1995. Mr.
Yost has been co-portfolio manager of Wanger U.S. Smaller Companies Fund, an
investment company offering shares to investors outside the U.S., since its
inception on June 23, 1997. Mr. Yost is also the portfolio manager of the WAM
Yost Partnership, L.P., a smaller company focused limited partnership. Before
joining WAM, Mr. Yost was an investment analyst for First Chicago Corporation.
Mr. Yost received his CFA designation in 1996. Mr. Yost received his B.A. from
St. Olaf College and his M.B.A. from the University of Chicago.
Marcel P. Houtzager is the lead portfolio manager of Wanger Foreign
Forty. Mr. Houtzager is a vice president of the Trust and a principal of WAM.
Mr. Houtzager is also a vice president of Acorn Investment Trust, and has been a
member of WAM's investment management team since 1992. Mr. Houtzager is the
lead portfolio manager of Wanger International Small Cap Advisor, a mutual fund
investing in small cap stocks outside the United States. Mr. Houtzager received
his CFA designation in 1996 and is a Certified Public Accountant. He received
his B.A.
9
<PAGE>
from Pomona College in 1983 and his M.B.A. from the University of California at
Berkeley in 1985.
The other officers of WAM are:
Leah J. Zell is a vice president of the Trust and Acorn Investment Trust,
and is a principal of WAM. She has been analyzing international securities for
Wanger since 1992. Ms. Zell is lead portfolio manager of Wanger International, a
mutual fund investing in smaller foreign companies with assets at June 30, 1998
of more than $1.8 billion. Ms. Zell received her CFA designation in 1987. She
earned her undergraduate degree from Radcliffe College and holds a Ph.D. from
Harvard University.
Since June 23, 1997, Mr. Houtzager and Ms. Zell have co-managed the Wanger
European Smaller Companies Fund, an investment company offering shares to
investors outside the United States.
Charles P. McQuaid is a co-portfolio manager of Acorn Fund. Mr. McQuaid has
contributed to Acorn Fund's growth since 1978. He is a senior vice president of
Acorn Investment Trust and a member of its board of trustees. Mr. McQuaid is a
principal and the Director of Research at WAM. A CFA, he earned his B.B.A. from
the University of Massachusetts and his M.B.A. from the University of Chicago.
Robert A. Mohn is the lead portfolio manager of Acorn USA. Mr. Mohn is a
vice president of Acorn Investment Trust and a principal of WAM. In addition to
being lead manager of Acorn USA, Mr. Mohn is also a member of WAM's management
team for Acorn Fund, which he joined in 1992. He is a CFA and received his
undergraduate degree from Stanford University and his M.B.A. from the University
of Chicago.
Howard L. Kastel is chief executive officer, president, and principal of
WAM. Prior to working in his current position, Mr. Kastel was a partner with the
Chicago law firm McDermott, Will & Emery, where he served as a long time legal
counsel to WAM. In addition to his unique inside knowledge of WAM, he has years
of long-range strategic planning experience. As a litigator and counsel for a
number of top-drawer corporations such as Grant Thornton, he has served as chief
advisor to major national financial, professional, and manufacturing
institutions since 1972. Mr. Kastel earned his B.A. from Harvard University and
his J.D. from Loyola University School of Law (Chicago).
Bruce H. Lauer, vice president and treasurer of the Trust, is also WAM's
Chief Administrative Officer. Prior to joining WAM, Mr. Lauer was First Vice
President of Investment Accounting at Kemper Financial Services.
Other Funds Managed by WAM
- --------------------------------------------------------------------------------
In addition to serving as investment adviser to the Trust, WAM is also
investment adviser to the Acorn Family of Funds, some of which may have
investment objectives and investment strategies that are the same or similar to
the Funds', and may have the same portfolio managers as
10
<PAGE>
the Funds. However, the Funds are separate entities that will have different
investments, and different investment performance, than those other funds.
Transfer Agent and Custodian
- --------------------------------------------------------------------------------
State Street Bank and Trust Company ("State Street") is the Funds' transfer
agent and custodian.
The smooth operation of the Funds depends on the ability of State Street
and the other service providers to the Fund to provide those services without
interruption. Some computer systems used today are unable to process 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 State Street 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
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; in addition, shareholders should be aware that year 2000 problems may
also be encountered by 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, each Fund pays expenses related to its 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
11
<PAGE>
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
(the "1940 Act"), 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
12
<PAGE>
shares held by Retirement Plans will be governed by the terms of such Retirement
Plans. Some Retirement Plans may pass-through voting to plan participants.
Shares held by other Retirement Plans may be voted by the trustees of the
Retirement Plan or by a named fiduciary or an investment manager. Retirement
Plan participants should consult their plan documents for information.
On any matter submitted to a vote of shareholders, all shares of the Trust
then issued and outstanding and entitled to vote shall be voted in the aggregate
and not by Fund, except for matters concerning only one Fund. Certain matters
approved by a vote of shareholders of one Fund of the Trust may not be binding
on a Fund whose shareholders have not approved such matters. The holder of each
share of the Trust shall be entitled to one vote for each full share and a
fractional vote for each fractional share of stock. Shares of one Fund may not
bear the same economic relationship to the Trust as shares of another Fund.
HOW THE FUNDS INVEST
================================================================================
Wanger Twenty and Wanger Foreign Forty seek long-term growth of capital.
The investment philosophy and strategy of each of the Funds is discussed in the
following paragraphs.
Wanger Twenty
- --------------------------------------------------------------------------------
Wanger Twenty invests primarily in the stocks of U.S. companies with market
capitalizations of $1 billion to $10 billion. Wanger Twenty is a non-diversified
fund that ordinarily focuses its investments in 20 to 25 U.S. companies.
Under normal market conditions, Wanger Twenty invests most of its assets in
common stocks, and securities exchangeable or convertible into common stocks, of
U.S. companies, but may also invest in other types of securities. The Fund may
invest up to 15% of its total assets in foreign securities. Generally, the Fund
will invest in the securities of a foreign-based company only if its operations
are primarily located in the United States.
Wanger Twenty looks for high quality companies. As a long-term investor,
the Fund expects that its portfolio turnover rate will not ordinarily exceed 50%
annually.
Wanger Foreign Forty
- --------------------------------------------------------------------------------
Wanger Foreign Forty invests primarily in the stocks of foreign companies
with market capitalizations of $1 billion to $10 billion. The Fund is a non-
diversified fund that ordinarily has investments in 40 to 60 companies in
developed markets.
Under normal market conditions, Wanger Foreign Forty invests at least 85%
of its total assets in equity securities of foreign companies, including common
and preferred stocks, warrants or other similar rights, and convertible
securities, but may also invest in any other type of security, including debt
securities. The Fund ordinarily invests in at least three developed countries.
The Fund may invest up to 15% of its total assets in the securities of U.S.
companies. Generally, the
13
<PAGE>
Fund invests in a U.S. company only if its operations are primarily located
outside the United States.
Like Wanger Twenty, Wanger Foreign Forty looks for high quality companies.
As a long-term investor, the Fund expects that its portfolio turnover rate will
not ordinarily exceed 50% annually.
Looking for high quality companies
- --------------------------------------------------------------------------------
Wanger Twenty and Wanger Foreign Forty look for quality businesses, with
each investment ideally resting on a solid tripod of growth potential, financial
strength, and fundamental value. The emphasis on fundamentals in relation to
price sets the Funds apart from pure "growth" or "value" funds. Not all of the
companies in which the Funds invest necessarily have all of these
characteristics.
The sources of growth are a growing marketplace for the company's product,
good design, efficient manufacturing, sound marketing, and good profit margins.
Financial strength means low debt, adequate working capital, and conservative
accounting principles. Strong capitalization gives management the stability and
flexibility to reach strategic objectives. Fundamental value means low relative
price. The existence of a good company does not necessarily make its stock a
good buy. The price of the stock determines value as measured relative to
dividends, earnings, cash flow, growth rate, book value, and economic
replacement value of assets. Sometimes, value is found in a "special situation."
A special situation arises when WAM believes the securities of a particular
company have been overlooked or undervalued by other investors in connection
with a significant change or development affecting the company's business, and
will, within a reasonable time, appreciate in value regardless of general
business conditions or movements of the market as a whole. Developments creating
special situations might include, among others, the following: liquidations,
reorganizations, recapitalizations or mergers; material litigation;
technological breakthroughs; and new management or management policies. Although
investing in securities of special situation companies offers the potential for
above-average returns, if the anticipated development does not occur or produce
the expected results, the value of those securities may decline.
WAM also believes that finding and understanding high quality companies is
important to reduce taxes and transaction costs. In managing the Funds, WAM
tries to reduce these costs by investing with a long-term time horizon (at least
2-5 years) and avoiding 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.
General Information
- --------------------------------------------------------------------------------
Each Fund 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
14
<PAGE>
anticipated adverse political or economic conditions, Wanger Foreign Forty may
hold cash or invest any portion of its assets in securities of the U.S.
government and equity and debt securities of U.S. companies, as a temporary
defensive measure. 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 their portfolios.
These techniques may include buying and selling options, futures contracts, or
options on futures contracts, or entering into currency exchange contracts or
swap agreements.
The investment objective of each Fund is not fundamental and may be changed
by the board of trustees without shareholder approval. If there were such a
change, you should consider whether a Fund would remain an appropriate
investment in light of your then current financial position and needs. The Funds
are not intended, alone or together, to present a balanced investment program.
SECURITIES, INVESTMENT PRACTICES, AND RISKS
================================================================================
The following pages contain more detailed information about types of
investments each Fund may make, and strategies WAM may employ in pursuit of each
Fund's investment objective, including information about the associated risks
and restrictions. All policies stated throughout this prospectus, other than
those identified as fundamental, can be changed without shareholder approval. A
complete statement of the Fund's investment restrictions is included in the SAI.
Policies and limitations are considered at the time of purchase; the sale of an
investment is not required because of a subsequent change in circumstances.
WAM may not buy all of these instruments or use all of these techniques to
the fullest extent permitted, unless it believes that doing so will help the
Fund achieve its goal.
Common stocks
- --------------------------------------------------------------------------------
The Funds invest mostly in common stocks, which represent an equity
interest (ownership) in a corporation. This ownership interest often gives the
Funds the right to vote on measures affecting the company's organization and
operations. The Funds also invest in other types of equity securities, including
preferred stocks and securities convertible into common stocks. Over time,
common stocks have historically provided superior long-term capital growth
potential. However, stock prices may decline over short or even extended
periods. Stock markets tend to move in cycles, with periods of rising stock
prices and periods of falling stock prices. As a result, the Funds should be
considered long-term investments, designed to provide the best results when held
for several years or more. The Funds may not be suitable investments if you have
a short-term investment horizon or are unwilling to accept fluctuations in share
price, including significant declines over a given period.
Diversification
- --------------------------------------------------------------------------------
Diversification is a means of reducing risk by investing in a broad range
of stocks or other securities. Because they are non-diversified, the Funds have
the ability to take larger positions in a smaller number of issuers. The
appreciation or depreciation of a single stock may have a greater
15
<PAGE>
impact on the NAV of a non-diversified fund, because it is likely to have a
greater percentage of its assets invested in that stock. As a result, each
Fund's share price can be expected to fluctuate more than that of broadly
diversified funds investing in similar securities. Because they are non-
diversified, the Funds are not subject to the limitations under the 1940 Act in
the percentage of their assets that they may invest in any one issuer. Both
Funds, however, intend to comply with the diversification standards for
regulated investment companies under Subchapter M of the Code (summarized below
under "Restrictions") and Section 817(h) of the Code (see "Dividends and
Taxes").
Restrictions:
------------
. A Fund may not acquire securities of any one issuer, which at the time
of investment (a) represent more than 10% of the voting securities of the issuer
or (b) have a value greater than 10% of the value of the outstanding securities
of the issuer;
. With respect to 50% of its total assets, a Fund may not purchase the
securities of any issuer (other than cash items and U.S. government securities
and securities of other investment companies) if such purchase would cause the
Fund's holdings of that issuer to exceed 5% of the Fund's total assets.
. A Fund may not invest more than 25% of its total assets in a single
issuer (other than U.S. government securities); and
. A Fund will not invest more than 25% of its total assets in the
securities of companies in a single industry (excluding U.S. government
securities).*
Foreign Securities
- --------------------------------------------------------------------------------
Wanger Foreign Forty invests primarily in foreign securities. International
investing allows you 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. During other periods, however, some
foreign markets have declined, and there can be no assurance that a country's
economy will remain stable or more favorable than the U.S. economy.
Investments in foreign securities provide opportunities different from
those available in the U.S., and risks which in some ways may be greater than in
U.S. investments, including: fluctuations in exchange rates of foreign
currencies; imposition of exchange control regulations or currency restrictions
that would prevent cash from being brought to the United States; less public
information with respect to issuers of securities; less governmental supervision
of stock exchanges, securities brokers, and issuers of securities; lack of
uniform accounting, auditing, and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity,
- ----------------
* These restrictions are "fundamental," which means that they cannot be
changed without shareholder approval.
16
<PAGE>
frequently greater price volatility, and higher transaction costs in foreign
markets than in the United States; possible imposition of foreign taxes;
possible investments in securities of developing as well as developed countries;
and sometimes less advantageous legal, operational, and financial protections
applicable to foreign sub-custodial arrangements. Investing in countries outside
the U.S. also involves political risk. A foreign government might restrict
investments by foreigners, expropriate assets, seize or nationalize foreign 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.
Wanger Twenty may invest no more than 15% of its total assets in foreign
securities and will generally invest in a foreign-based company only if that
company's operations are primarily located in the United States. Wanger Twenty's
foreign investments may include securities in developed and emerging markets.
The Funds may invest from time to time in securities of foreign issuers
directly or in the form of American Depositary Receipts (ADRs), European
Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other
securities representing underlying shares of foreign issuers. Positions in these
securities are not necessarily denominated in the same currency as the common
stocks into which they may be converted. ADRs are receipts typically issued by
an American bank or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar arrangement. GDRs
are receipts that trade in U.S. or non-U.S. markets.
The Funds may invest in both "sponsored" and "unsponsored" depositary
receipts. In a sponsored depositary receipt, the issuer typically pays some or
all of the expenses of the depository and agrees to provide its regular
shareholder communications to receipt holders. An unsponsored depositary receipt
is created independently of the issuer of the underlying security. The receipt
holders generally pay the expenses of the depository and do not have an
undertaking from the issuer of the underlying security to furnish shareholder
communications. Each Fund may invest in depositary receipts that are not
sponsored by the issuer of the underlying security. To the extent a Fund does
so, it would probably bear its proportionate share of the expenses of the
depository and might have greater difficulty in receiving copies of the issuer's
shareholder communications than would be the case with a sponsored depositary
receipt.
Several European countries, including Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain,
adopted a single, uniform currency known as the "euro," effective January 1,
1999. The euro conversion could have potential adverse effects on the Funds'
ability to value their portfolio holdings in foreign securities, and could
increase the costs associated with the Funds' operations. The Trust and WAM are
working with the providers of services to the Funds in the areas of clearance
and settlement of trades in an effort to avoid any material impact on the Funds
due to the euro conversion; there can be no assurance, however, that the steps
taken by the Trust or WAM will be sufficient to avoid any adverse impact on the
Funds.
Restrictions:
------------
17
<PAGE>
. Under normal market conditions, Wanger Foreign Forty invests at least
85% of its total assets in foreign securities. The Fund ordinarily has
investments in at least three developed countries. The Fund may invest up to 15%
of its total assets in securities of companies in emerging markets.
. Wanger Twenty may invest up to 15% of its total assets in foreign
securities. Wanger Twenty's foreign investments are generally in companies whose
operations are primarily in the U.S., and may include securities in developed
and emerging markets.
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, entering into currency exchange contracts or swap agreements, or
selling securities short against the box.
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 the Funds'
investments, or if the counterparty to the transaction does not perform as
promised, the transaction could result in a loss. Use of these techniques may
increase the volatility of a Fund and may involve a small investment of cash
relative to the magnitude of the risk assumed. These techniques are used by the
Funds for hedging, risk management, or portfolio management purposes and are not
used for speculation.
Currency exchange transactions. A currency exchange transaction may be
conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or
selling currency prevailing in the foreign exchange market or through a forward
foreign currency contract ("forward contract"). A forward contract is an
agreement to purchase or sell a specified currency at a specified future date
(or within a specified time period) and price set at the time of the contract.
Forward contracts are usually entered into with banks, foreign exchange dealers,
or broker-dealers, are not exchange-traded, and are usually for less than one
year, but may be renewed.
Currency exchange transactions may involve currencies of the different
countries in which the Funds may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. The Funds' currency
transactions are limited to transaction hedging and portfolio hedging involving
either specific transactions or actual or anticipated portfolio positions.
Transaction hedging is the purchase or sale of a forward contract with respect
to a specific receivable or payable of a Fund accruing in connection with the
purchase or sale of portfolio securities. Portfolio hedging is the use of a
forward contract with respect to an actual or anticipated portfolio security
position denominated or quoted in a particular currency. The Funds may engage in
portfolio hedging with respect to the currency of a particular country in
amounts approximating actual or anticipated positions in securities denominated
in that currency. When the Funds own or anticipate owning securities in
countries whose currencies are linked, WAM may aggregate those positions as to
the currency hedged. Although forward contracts may be used to protect the Funds
18
<PAGE>
from adverse currency movements, the use of such hedges may reduce or eliminate
the potentially positive effect of currency revaluations on the 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 its portfolio, to
provide an efficient means of regulating its 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.
Short sales against the box. Each Fund may make short sales of securities
if, at all times when a short position is open, the Fund owns an equal amount of
such securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of the same issue as, and equal
in amount to, the securities sold short. This technique is called selling short
"against the box." Selling short against the box may protect the Fund against
the risk of losses in the value of the portfolio securities sold short because
losses on the securities sold short should be wholly or partially offset by
gains in the short position (although this also means that the Fund would be
giving up the opportunity for gain).
19
<PAGE>
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 its 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.
Each Fund 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, Wanger Foreign Forty may hold cash or invest any portion of
its assets in securities of the U.S. government and equity and debt securities
of U.S. companies, as a temporary defensive measure. To meet liquidity needs
(which, under normal market conditions, are not expected to exceed 25% of total
assets) or for temporary defensive purposes, each Fund may hold cash in domestic
and foreign currencies and may invest in domestic and foreign money market
securities.
Restrictions:
------------
. There are no restrictions on the ratings of debt securities in which
the Funds may invest.
20
<PAGE>
. Neither Fund intends to invest more than 20% of its total assets in
debt securities, nor more than 5% of its total assets in debt securities rated
at or lower than the lowest investment grade.
Illiquid and Restricted Securities
- -------------------------------------------------------------------------------
Some investments may be determined by WAM to be illiquid, which means that
they may be difficult to sell promptly at an acceptable price. Other securities,
such as securities acquired in private placements, may be sold only pursuant to
certain legal restrictions. Difficulty in selling securities may result in
delays or a loss, or may be costly to the Funds.
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.
Other Investment Companies
- -------------------------------------------------------------------------------
The Funds may invest from time to time in shares of other mutual funds and
other types of investment companies. Investment in another investment company
may involve the payment of a premium above the value of the issuer's portfolio
securities, and is subject to market availability. In the case of a purchase of
shares of such a company in a public offering, the purchase price may include an
underwriting spread. As a shareholder in an investment company, a Fund would
bear its ratable share of that investment company's expenses, including its
advisory and administration fees. At the same time, the Fund would continue to
pay its own management fees and other expenses. Neither Fund intends to invest
in such circumstances unless, in the judgment of WAM, the potential benefits of
such investment justify the payment of any applicable premium or sales charge,
and the additional layer of expense.
Restrictions:
------------
. Each Fund generally may invest up to 10% of its assets in shares of
other investment companies and up to 5% of its assets in any one investment
company (in each case measured at the time of investment). No investment in
another investment company may represent more than 3% of the outstanding voting
stock of the acquired investment company at the time of investment.
Lending and Repurchase Agreements
- -------------------------------------------------------------------------------
A Fund generally may not make loans, but each Fund has the power to invest
in repurchase agreements and reverse repurchase agreements (generally as a cash
management technique). A repurchase agreement involves a sale of securities to a
Fund in which the seller agrees to repurchase the securities at a higher price,
which includes an amount representing interest on the purchase price, within a
specified time. In the event of a bankruptcy of the seller, the Fund could
experience both losses and delays in liquidating its collateral.
21
<PAGE>
Restrictions:
------------
A Fund may generally not make loans, but may (a) invest in debt securities
within the limits described in the prospectus and SAI, (b) invest in repurchase
agreements, or (c) lend up to 33% of its portfolio securities.*
When-Issued and Delayed Delivery Securities
- -------------------------------------------------------------------------------
Each Fund may invest in securities purchased on a when-issued and delayed
delivery basis. Although the payment terms of such a security are established at
the time a Fund enters into the commitment, the security may be delivered and
paid for a month or more after the date of purchase, when its value may have
changed. A Fund will make such commitments only with the intention of actually
acquiring the securities, but may sell the securities before settlement date if
WAM considers it advisable for investment reasons.
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.
- --------------
* These restrictions are "fundamental," which means that they cannot be
changed without shareholder approval.
22
<PAGE>
DIVIDENDS AND TAXES
===============================================================================
Each Fund intends 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. Those requirements
are different from the diversification standards imposed on each Fund by
Subchapter M of the Code. 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.
23
<PAGE>
WANGER ADVISORS TRUST
===============================================================================
Trustees Fred D. Hasselbring Ralph Wanger
Charles P. McQuaid Patricia H. Werhane
P. Michael Phelps
- --------------------------------------------------------------------------------
Officers Ralph Wanger, President
Marcel P. Houtzager, Vice President
Kenneth A. Kalina, Assistant Treasurer
Bruce H. Lauer, Vice President and Treasurer
Charles P. McQuaid, Senior Vice President
Robert A. Mohn, Vice President
John H. Park, Vice President
Mark H. Yost, Vice President
Leah J. Zell, Vice President
- -------------------------------------------------------------------------------
Transfer Agent, State Street Bank and Trust Company
Dividend Disbursing Attention: Wanger Advisors Trust
Agent and Custodian P.O. Box 8502
Boston, Massachusetts 02266-8502
1-800-962-1585
- -------------------------------------------------------------------------------
Investment Advisor Wanger Asset Management, L.P.
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
1-800-4-WANGER
(1-800-492-6437)
- -------------------------------------------------------------------------------
Legal Counsel Bell, Boyd & Lloyd
Chicago, Illinois
- -------------------------------------------------------------------------------
Auditors Ernst & Young LLP
Chicago, Illinois
24
<PAGE>
WANGER ADVISORS TRUST 227 West Monroe Street
STATEMENT OF ADDITIONAL INFORMATION Suite 3000
December 15, 1998 Chicago, Illinois 60606
1-800-4-WANGER
(1-800-492-6437)
WANGER TWENTY
WANGER FOREIGN FORTY
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
----------------- ----
<S> <C>
Information About the Funds.................. 2
Investment Objectives and Policies........... 2
Investment Techniques and Risks.............. 2
Performance Information...................... 21
Investment Adviser........................... 22
Distributor.................................. 23
The Trust.................................... 23
Trustees and Officers; Certain Shareholders.. 24
Purchasing and Redeeming Shares.............. 26
Additional Tax Information................... 27
Portfolio Transactions....................... 28
Custodian.................................... 30
Independent Auditors......................... 30
Appendix - Description of Bond Ratings....... 31
</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 Twenty and Wanger Foreign Forty (each, a "Fund," together, the "Funds")
dated the date of this SAI and any supplement thereto, which may be obtained
from Wanger at no charge by writing or telephoning Wanger at its address or
telephone number shown above.
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.
<PAGE>
Information About the Funds
Wanger Twenty invests for long-term capital growth. The Fund invests
primarily in the stocks of U.S. companies with market capitalizations of $1
billion to $10 billion. Wanger Twenty is a non-diversified fund that ordinarily
focuses its investments in 20 to 25 U.S. companies.
Wanger Foreign Forty invests for long-term capital growth. The Fund invests
primarily in the stocks of foreign companies with market capitalizations of $1
billion to $10 billion. The Fund is a non-diversified fund that ordinarily has
investments in 40 to 60 companies in developed markets.
The Funds are non-diversified under the federal securities laws. However,
the Funds comply with the diversification standards established by the tax laws.
See "Investment Techniques and Risks--Diversification" and "Additional Tax
Information" for more information.
The discussion below supplements the description in the prospectus of the
Funds' investment objectives, policies, and restrictions. For information about
Wanger U.S. Small Cap and Wanger International Small Cap, the other funds of the
Trust, request a free copy of the prospectus for those funds by writing or
telephoning Wanger at its address or telephone number shown on the cover page of
this SAI.
Investment Objectives and Policies
The Funds invest with the objective of long-term capital growth. The Funds
are not, alone or together, a balanced investment program, and there can be no
assurance that either Fund will achieve its investment objective. The Funds use
the techniques and invest in the types of securities described below and in the
prospectus.
Investment Techniques and Risks
Common Stocks
The Funds invest mostly in common stocks, which represent an equity
interest (ownership) in a corporation. This ownership interest often gives the
Funds the right to vote on measures affecting the company's organization and
operations. The Funds also invest in other types of equity securities,
including preferred stocks and securities convertible into common stocks. Over
time, common stocks have historically provided superior long-term capital growth
potential. However, stock prices may decline over short or even extended
periods. Stock markets tend to move in cycles, with periods of rising stock
prices and periods of falling stock prices. As a result, the Funds should be
considered long-term investments, designed to provide the best results when held
for several years or more. The Funds may not be suitable investments if you
have a short-term investment horizon or are unwilling to accept fluctuations in
share price, including significant declines over a given period.
2
<PAGE>
Diversification
Diversification is a means of reducing risk by investing in a broad range
of stocks or other securities. Because they are non-diversified, the Funds have
the ability to take larger positions in a smaller number of issuers. The
appreciation or depreciation of a single stock may have a greater impact on the
NAV of a non-diversified fund, because it is likely to have a greater percentage
of its assets invested in that stock. As a result, each Fund's share price can
be expected to fluctuate more than that of broadly diversified funds investing
in similar securities. Because they are non-diversified, the Funds are not
subject to the limitations under the Investment Company Act of 1940 on the
percentage of their assets that they may invest in any one issuer. Both Funds,
however, intend to comply with the diversification standards for regulated
investment companies under Subchapter M of the Internal Revenue Code (summarized
below under "Investment Restrictions") and Section 817(h) of the Code (see
"Additional Tax Information").
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, Wanger Foreign Forty invests at least
85% of its total assets in foreign securities; Wanger Twenty investments in
foreign securities are limited to not more than 15% of its total assets.
The Funds may invest in securities of foreign issuers directly or in the
form of American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs), Global Depositary Receipts (GDRs) or other securities representing
underlying shares of foreign issuers. Positions in these securities are not
necessarily denominated in the same currency as the common stocks into which
they may be converted. ADRs are receipts typically issued by an American bank
or trust company evidencing ownership of the underlying securities. EDRs are
European receipts evidencing a similar arrangement. GDRs are receipts that may
trade in U.S. or non-U.S. markets. The Funds may invest in sponsored or
unsponsored depositary receipts. Generally ADRs, in registered form, are
designed for use in the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets.
The Funds may invest in both "sponsored" and "unsponsored" depositary
receipts. In a sponsored depositary receipt, the issuer typically pays some or
all of the expenses of the depository and agrees to provide its regular
shareholder communications to receipt holders. An unsponsored depositary
receipt is created independently of the issuer of the underlying security. The
receipt holders generally pay the expenses of the depository and do not have an
undertaking from the issuer of the underlying security to furnish shareholder
communications. Therefore, in the case of an unsponsored depositary receipt, a
Fund is likely to bear its proportionate share of the expenses of the depository
and it may have greater difficulty in receiving shareholder communications than
it would have with a sponsored depositary receipt. Neither Fund expects to
invest 5% or more of its total assets in unsponsored depositary receipts.
3
<PAGE>
The Funds' investment performance is affected by the strength or weakness
of the U.S. dollar against the currencies of the foreign markets in which its
securities trade or in which they are denominated. For example, if the dollar
falls in value relative to the Japanese yen, the dollar value of a yen-
denominated stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the yen-denominated stock will fall. (See
discussion of transaction hedging and portfolio hedging under "Currency Exchange
Transactions," below.)
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve risks and opportunities not typically
associated with investing in U.S. securities. These considerations include:
fluctuations in exchange rates of foreign currencies; possible imposition of
exchange control regulation or currency restrictions that would prevent cash
from being brought back to the United States; less public information with
respect to issuers of securities; less governmental supervision of stock
exchanges, securities brokers, and issuers of securities; lack of uniform
accounting, auditing, and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater
price volatility in foreign markets than in the United States; possible
imposition of foreign taxes; possible investment in securities of companies in
developing as well as developed countries; and sometimes less advantageous
legal, operational, and financial protections applicable to foreign subcustodial
arrangements. In addition, the costs of investing in foreign securities are
higher than the costs of investing in U.S. securities.
Although the Funds try to invest in companies and governments of countries
having stable political environments, there is the possibility of expropriation
or confiscatory taxation, seizure, or nationalization of foreign bank deposits
or other assets, establishment of exchange controls, the adoption of foreign
government restrictions, or other adverse political, social, or diplomatic
developments that could affect investment in these nations.
Several European countries, including Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain, have
adopted a single, uniform currency known as the "euro," effective January 1,
1999. The euro conversion could have potential adverse effects on the Funds'
ability to value their portfolio holdings in foreign securities, and could
increase the costs associated with the Funds' operations. The Trust and WAM are
working with the providers of services to the Funds in the areas of clearance
and settlement of trades in an effort to avoid any material impact on the Funds
due to the euro conversion; there can be no assurance, however, that the steps
taken by the Trust or WAM will be sufficient to avoid any adverse impact on the
Funds.
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
4
<PAGE>
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 a Fund 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. Either Fund may engage in portfolio hedging with respect
to the currency of a particular country in amounts approximating actual or
anticipated positions in securities denominated in that currency. When a Fund
owns or anticipates owning securities in countries whose currencies are linked,
WAM may aggregate such positions as to the currency hedged.
If a Fund enters into a forward contract hedging an anticipated purchase of
portfolio securities, assets of the Fund having a value at least as great as the
Fund's commitment under such forward contract will be segregated on the books of
the Fund and held by State Street Bank and Trust Company, the Funds' custodian
("State Street") while the contract is outstanding.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for a Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency that fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a 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
5
<PAGE>
the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Fund will suffer a loss
to the extent the price of the currency it has agreed to purchase exceeds the
price of the currency it has agreed to sell. A default on the contract would
deprive the Fund of unrealized profits or force the Fund to cover its
commitments for purchase or sale of currency, if any, at the current market
price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for a Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to a Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
Synthetic Foreign Money Market Positions. The Funds may invest in money
market instruments denominated in foreign currencies. In addition to, or in
lieu of, such direct investment, the Funds may construct a synthetic foreign
money market position by (a) purchasing a money market instrument denominated in
one currency (generally U.S. dollars) and (b) concurrently entering into a
forward contract to deliver a corresponding amount of that 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,
Wanger Twenty will not invest more than 15% of its total assets in foreign
securities and Wanger Foreign Forty will invest at least 85% of its total assets
in foreign securities.
Options and Futures
The Funds may purchase and write both call options and put options on
securities and on indexes, 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
6
<PAGE>
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.)
A Fund 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 the Fund owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional consideration (or,
if additional consideration is required, assets having a value at least equal to
that amount are segregated on the books of the Fund) upon conversion or exchange
of other securities held in its portfolio.
If an option written by a Fund expires, the 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, the Fund realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when a Fund desires.
A Fund will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Fund will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Fund will realize a capital gain or, if it is less,
the Fund will realize a capital loss. The principal factors affecting the
market value of a put or a call option include supply and demand, interest
rates, the current market price of the underlying security or index in relation
to the exercise price of the option, the volatility of the underlying security
or index, and the time remaining until the expiration date.
A put or call option purchased by a Fund is an asset of that Fund and is
valued initially at the premium paid for the option. The premium received for
an option written by the Fund is recorded as a deferred credit. 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.
7
<PAGE>
OTC Derivatives. The Funds may buy and sell over-the-counter ("OTC")
derivatives (derivatives not traded on exchanges). 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 its needs, OTC derivatives generally involve greater
credit risk than exchange-traded derivatives, which are guaranteed by the
clearing organization of the exchanges where they are traded. Each Fund will
limit its investments so that no more than 5% of its total assets will be placed
at risk in the use of OTC derivatives. See "Illiquid Securities" below for more
information on the risks associated with investing in OTC derivatives.
Risks Associated with Options. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities markets, the currency markets, and the options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when, and
how to use options involves the exercise of skill and judgment, and even a well-
conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. If a Fund were unable to close out an option
that it had purchased on a security, it would have to exercise the option in
order to realize any profit or the option would expire and become worthless. If
a Fund were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security until the option
expired. As the writer of a covered call option on a security, a Fund foregoes,
during the option's life, the opportunity to profit from increases in the market
value of the security covering the call option above the sum of the premium and
the exercise price of the call. As the writer of a covered call option on a
foreign currency, a Fund foregoes, during the option's life, the opportunity to
profit from currency appreciation.
If trading were suspended in an option purchased or written by a Fund, it
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 has purchased.
Futures Contracts and Options on Futures Contracts. The Funds may use
interest rate futures contracts and index futures contracts. An interest rate
or index futures contract provides for the future sale by one party and purchase
by another party of a specified quantity of a financial instrument or the cash
value of an index/1/ at a specified price and time. A public market exists in
futures contracts covering a number of indexes (including, but not limited to:
the
/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>
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 options on futures. Options
on futures 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, each Fund will limit its use of futures contracts and futures options
to hedging transactions. For example, a Fund might use futures contracts to
hedge against fluctuations in the general level of stock prices, anticipated
changes in interest rates, or currency fluctuations that might adversely affect
either the value of its securities or the price of the securities that the Fund
intends to purchase. A Fund's 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 Fund's exposure to stock price, interest
rate, and currency fluctuations, a Fund may be able to hedge its exposure more
effectively and perhaps at a lower cost by using futures contracts and futures
options.
The success of any hedging technique depends on WAM's ability to correctly
predict changes in the level and direction of stock prices, interest rates,
currency exchange rates, and other factors. Should those predictions be
incorrect, the 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, it is
required to deposit with State Street or its broker a specified amount of cash
or U.S. government securities or other securities acceptable to the broker
("initial margin"). The margin required for a futures contract is generally set
by the exchange on which the contract is traded; however, the margin requirement
may be modified during the term of the contract, and the Fund's broker may
require margin deposits in excess of the minimum required by the exchange. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract, which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Funds
expect to earn interest income on their initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily
9
<PAGE>
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 the Fund and the
broker of the amount one would owe the other if the futures contract had been
offset at the close of the previous day. In computing daily NAV, the Funds will
mark-to-market their open futures positions.
The Funds are also required to deposit and maintain margin with respect to
put and call options on futures contracts they write. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Funds.
Although some futures contracts require 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 Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
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 issues and the weighting of each issue,
may differ from the composition of a Fund's portfolio, and, in the case of
interest rate futures contracts, the interest rate levels, maturities, and
creditworthiness of the issues underlying the futures contract may differ from
the financial instruments held in a Fund's portfolio. A decision as to whether,
when, and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable
10
<PAGE>
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 (liquid) 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 the 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 State Street or its broker readily-
marketable securities having a fair market value (including any margin) at least
equal to the market value of such contract. When writing a call option on a
futures contract, the Fund similarly will maintain with State Street readily-
marketable securities having a fair market value (including any margin) at least
equal to the amount by which such option is in-the-money until the option
expires or is closed out by the Fund.
A Fund may not maintain open short positions in futures contracts, call
options written on futures contracts, or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent a Fund has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation 4.5
and thereby avoid being deemed a "commodity pool operator," the "underlying
commodity value" of each long position in a commodity contract in which the
Funds invest will not at any time exceed the sum of:
- ------------------
/2/ A call option is "in-the-money" if the value of the futures contract that is
the subject of the option exceeds the exercise price. A put option is "in-the-
money" if the exercise price exceeds the value of the futures contract that is
the subject of the option.
11
<PAGE>
(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.
Neither Fund will purchase puts, calls, straddles, spreads, or any
combination thereof if by reason of such purchase more than 10% of its 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 the Fund,
the difference between the cash received at exercise and the premium paid is a
capital gain or loss.
If a call or put option written by a Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by a Fund, the difference between the cash
paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by a Fund is in-the-money at the time it was written
and the security covering the option was held for more than the long-term
holding period prior to the writing of the option, any loss realized as a result
of a closing purchase transaction will be long-term. The holding period of the
securities covering an in-the-money option will not include the period of time
the option is outstanding.
If a Fund writes an equity call 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.
___________________________
/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>
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If a Fund delivers securities under a futures contract, the
Fund also realizes a capital gain or loss on those securities.
For federal income tax purposes, the Funds generally are required to
recognize for each taxable year their 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 a fund may
affect the holding period of the hedged securities.
If a Fund were to enter into a short index future, short index futures
option, or short index option position and the Fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the Fund's stock positions may be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales or
"offsetting notional principal contracts" (as defined by the Act) with respect
to, or futures or "forward contracts" (as defined by the Act) with respect to,
the same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property. The
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
In order for each Fund 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.
Each Fund intends 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
13
<PAGE>
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 Fund. Shareholders will be advised of the nature of such
capital gain distributions. For further information, see the discussion under
"Additional Tax Information."
Swap Agreements. A swap agreement is generally individually negotiated and
structured to include exposure to 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 its investment objective
and policies, but each Fund will limit its use of swap agreements so that no
more than 5% of its total assets will be invested in such agreements.
A swap agreement tends to shift a Fund's investment exposure from one type
of investment to another. For example, if a Fund agrees to exchange payments in
dollars at a fixed rate for payments in a foreign currency the amount of which
is determined by movements of a foreign securities index, the swap agreement
would tend to increase 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 a Fund's investments and its NAV.
The performance of a swap agreement is determined by the change in the
specific currency, market index, security, or other factors that determine the
amounts of payments due to and from the Fund. If a swap agreement calls for
payments by a 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. WAM expects to be
able to eliminate each Fund's exposure under any swap agreement either by
assignment or by other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
Each Fund will segregate its assets to cover its current obligations under
a swap agreement. If a Fund enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess, if any,
of its accumulated obligations under the swap agreement over the accumulated
amount the Fund is entitled to receive under the agreement. If a Fund enters
into a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of its accumulated obligations under the
agreement.
Short Sales Against the Box. Each Fund may make short sales of securities
if at all times, when a short position is open, the Fund owns an equal amount of
such securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of the same issue as, and equal
in amount to, the securities sold short. This technique is called selling short
"against the box." Although permitted by their investment restrictions, the
Funds do not currently intend to sell securities short.
14
<PAGE>
In a short sale against the box, a Fund does not deliver from its portfolio
the securities sold and does not receive immediately the proceeds from the short
sale. Instead, the Fund borrows the securities sold short from a broker-dealer
through which the short sale is executed, and the broker-dealer delivers such
securities, on behalf of the Fund, to the purchaser of such securities. Such
broker-dealer is entitled to retain the proceeds from the short sale until the
Fund delivers to such broker-dealer the securities sold short. In addition, the
Fund is required to pay to the broker-dealer the amount of any dividends paid on
shares sold short. Finally, to secure its obligation to deliver to such broker-
dealer the securities sold short, the Fund must deposit and continuously
maintain in a separate account with State Street an equivalent amount of the
securities sold short or securities convertible into or exchangeable for such
securities without the payment of additional consideration. The Fund is said to
have a short position in the securities sold until it delivers to the broker-
dealer the securities sold, at which time the Fund receives the proceeds of the
sale. Because the Fund ordinarily will want to continue to hold securities in
its portfolio that are sold short, the Fund will normally close out a short
position by purchasing on the open market and delivering to the broker-dealer an
equal amount of the securities sold short, rather than by delivering portfolio
securities.
Short sales may protect a Fund against the risk of losses in the value of
its portfolio securities because any unrealized losses with respect to such
portfolio securities should be wholly or partially offset by a corresponding
gain in the short position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding loss in the
short position. The extent to which such gains or losses are offset will depend
upon the amount of securities sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the conversion premium. The Funds will incur transaction
costs in connection with short sales.
In addition to enabling the Funds to hedge against market risk, short sales
may afford a Fund an opportunity to earn additional current income to the extent
the Fund is able to enter into arrangements with broker-dealers through which
the short sales are executed to receive income with respect to the proceeds of
the short sales during the period the Fund's short positions remain open.
The Taxpayer Relief Act of 1997 imposed constructive sale treatment for
federal income tax purposes on certain hedging strategies with respect to
appreciated securities. Under these rules taxpayers will recognize gain, but
not loss, with respect to securities if they enter into short sales or
"offsetting notional principal contracts" (as defined by the Act) with respect
to the same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property. The
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales.
Debt Securities
Both 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
15
<PAGE>
Investor Services, Inc. ("Moody's"), commonly called "junk bonds"), and
securities that are not rated. There are no restrictions as to the ratings of
debt securities acquired by either Fund or the portion of each Fund's assets
that may be invested in debt securities in a particular ratings category.
Neither Fund intends to invest more than 20% of its total assets in debt
securities nor more than 5% of its total assets in securities rated at or lower
than the lowest investment grade.
Securities rated BBB or Baa are considered to be medium grade and to have
speculative characteristics. Lower-rated debt securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer default or
bankruptcy. An economic downturn could severely disrupt the market for such
securities and adversely affect the value of such securities. In addition,
lower-quality bonds are less sensitive to interest rate changes than higher-
quality instruments and generally are more sensitive to adverse economic changes
or individual corporate developments. During a period of adverse economic
changes, including a period of rising interest rates, the junk bond market may
be severely disrupted, and issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Medium- and lower-quality debt securities may be less marketable than
higher quality debt securities because the market for them is less broad. The
market for unrated debt securities is even narrower. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly, and a Fund may have greater difficulty selling its
portfolio securities. See "Purchasing and Redeeming Shares." The market value
of these securities and their liquidity may be affected by adverse publicity and
investor perceptions. A more complete description of the characteristics of
bonds in each ratings category is included in the appendix to this SAI.
Illiquid Securities
Neither Fund may invest in illiquid securities, including restricted
securities and OTC derivatives, if as a result, they would comprise more than
15% of the value of its net assets.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at a
fair value as determined in good faith by the board of trustees. If, through
the appreciation of illiquid securities or the depreciation of liquid
securities, either Fund should be in a position where more than 15% of the value
of its net assets are invested in illiquid assets, including restricted
securities and OTC derivatives, that Fund will take appropriate steps to protect
liquidity.
16
<PAGE>
Notwithstanding the above, either 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 each Fund's restriction of investing no more
than 15% of the value of its assets in illiquid securities. A determination of
whether a Rule 144A security is liquid or not is a question of fact. In making
this determination WAM will consider the trading markets for the specific
security taking into account the unregistered nature of a Rule 144A security. In
addition, WAM could consider the (1) frequency of trades and quotes, (2) number
of dealers and potential purchasers, (3) dealer undertakings to make a market,
and (4) nature of the security and of market place trades (e.g., the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of transfer). The liquidity of Rule 144A securities would be monitored and if,
as a result of changed conditions, it is determined that a Rule 144A security is
no longer liquid, a Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that it 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.
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, the Funds will enter into repurchase
agreements only with banks and dealers WAM believes present minimum credit risks
in accordance with guidelines approved by the board of trustees. WAM will review
and monitor the creditworthiness of such institutions, and will consider the
capitalization of the institution, WAM's prior dealings with the institution,
any rating of the institution's senior long-term debt by independent rating
agencies, and other relevant factors.
A Fund will invest only in repurchase agreements collateralized at all
times in an amount at least equal to the repurchase price plus accrued interest.
To the extent that the proceeds from any sale of such collateral upon a default
in the obligation to repurchase were less than the repurchase price, the Fund
would suffer a loss. If the financial institution which is party to the
repurchase agreement petitions for bankruptcy or otherwise becomes subject to
bankruptcy or other liquidation proceedings there may be restrictions on the
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. Under normal circumstances, neither Fund intends to invest more than
5% of its total assets in repurchase agreements.
17
<PAGE>
When-Issued and Delayed Delivery Securities; Reverse Repurchase Agreements
A Fund 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 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 makes such commitments only with the intention of actually
acquiring the securities, but may sell the securities before the settlement date
if WAM deems it advisable for investment reasons. A Fund may utilize spot and
forward foreign currency exchange transactions to reduce the risk inherent in
fluctuations in the exchange rate between one currency and another when
securities are purchased or sold on a when-issued or delayed delivery basis.
A Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement in
which the Fund is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use of a reverse
repurchase agreement may be preferable to a regular sale and later repurchase of
securities because it avoids certain market risks and transaction costs.
At the time a Fund enters into a binding obligation to purchase securities
on a when-issued basis or enters into a reverse repurchase agreement, assets of
the Fund having a value at least as great as the purchase price of the
securities to be purchased will be segregated on the books of the Fund and held
by State Street throughout the period of the obligation. The use of these
investment strategies, as well as any borrowing by the Fund, may increase NAV
fluctuation. The Funds have no present intention of investing in reverse
repurchase agreements.
Temporary Strategies
Both 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, each 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
18
<PAGE>
occur for a number of reasons such as general conditions in the securities
markets, more favorable investment opportunities in other securities, or other
factors relating to the desirability of holding or changing a portfolio
investment. Each Fund's portfolio turnover rate is not expected to exceed 50%
under normal market conditions. A high rate of portfolio turnover, if it should
occur, would result in increased transaction expenses which must be borne by the
Funds. High portfolio turnover may also result in the realization of capital
gains or losses and, to the extent net short-term capital gains are realized,
any distributions resulting from such gains will be considered ordinary income
for federal income tax purposes.
Line of Credit
The Trust maintains a line of credit with a bank to permit borrowing on a
temporary basis to meet share redemption requests in circumstances in which
temporary borrowing may be preferable to liquidation of portfolio securities.
Any borrowings under that line of credit by the Funds would be subject to the
Funds' restrictions on borrowing under "Investment Restrictions," below.
Investment Restrictions
In pursuing their investment objectives, neither Fund will:
1. Acquire securities of any one issuer, which at the time of investment
(a) represent more than 10% of the voting securities of the issuer or (b)
have a value greater than 10% of the value of the outstanding securities of
the issuer;
2. With respect to 50% of its total assets, purchase the securities of
any issuer (other than cash items and U.S. government securities and
securities of other investment companies) if such purchase would cause the
Fund's holdings of that issuer to exceed more than 5% of the Fund's total
assets;
3. Invest more than 25% of its total assets in a single issuer (other
than U.S. government securities);
4. Invest more than 25% of its total assets in the securities of
companies in a single industry (excluding U.S. government securities);
5. Make loans, but this restriction shall not prevent the Fund from (a)
investing in debt securities, (b) investing in repurchase agreements, or
(c) lending its portfolio securities, provided that it may not lend
securities if, as a result, the aggregate value of all securities loaned
would exceed 33% of its total assets (taken at market value at the time of
such loan);
6. Borrow money except (a) from banks for temporary or emergency purposes
in amounts not exceeding 33% of the value of the Fund's total assets at the
time of borrowing, and (b) in connection with transactions in options,
futures, and options on futures;
19
<PAGE>
7. Underwrite the distribution of securities of other issuers; however,
the Fund may acquire "restricted" securities which, in the event of a
resale, might be required to be registered under the Securities Act of 1933
on the ground that the Fund could be regarded as an underwriter as defined
by that act with respect to such resale;
8. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real
estate or interests in real estate;
9. Purchase and sell commodities or commodity contracts, except that it
may enter into (a) futures and options on futures and (b) foreign currency
contracts;
10. Make margin purchases of securities, except for use of such short-term
credits as are needed for clearance of transactions and except in
connection with transactions in options, futures, and options on futures;
11. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
The above restrictions for each Fund are "fundamental," which means that
they cannot be changed without the approval of the lesser of (i) 67% of each
fund's shares present at a meeting if more than 50% of the shares outstanding
are present or (ii) more than 50% of each fund's outstanding shares.
In addition, the Funds are subject to a number of restrictions that may be
changed by the board of trustees without shareholder approval. Under those non-
fundamental restrictions, neither Fund will:
(a) Invest in companies for the purpose of management or the exercise of
control;
(b) Acquire securities of other registered investment companies except in
compliance with the Investment Company Act of 1940;
(c) Invest more than 15% of its net assets (valued at time of investment)
in illiquid securities, including repurchase agreements maturing in more
than seven days;
(d) 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;
(e) Make short sales of securities unless the Fund owns at least an equal
amount of such securities, or owns securities that are convertible or
exchangeable,
20
<PAGE>
without payment of further consideration, into at least an equal amount of
such securities;
(f) [Wanger Twenty only] Invest more than 15% of its total assets in the
securities of foreign issuers.
(g) [Wanger Foreign Forty only] Invest more than 15% of its total assets
in securities of United States issuers, under normal market conditions.
Notwithstanding the foregoing investment restrictions, the Funds may
purchase securities pursuant to the exercise of subscription rights.
Performance Information
From time to time the Funds may quote total return figures. "Total Return"
for a period is the percentage change in value during the period of an
investment in shares of the 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
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. The Funds' performance is a
function of conditions in the securities markets, portfolio management, and
operating expenses. Although information about past performance is useful in
reviewing the Funds' performance and in providing some basis for comparison with
other investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods.
In advertising and sales literature, the Funds' performance may be compared
with those of market indexes and other mutual funds. In addition to the
performance information described above, the Fund might use comparative
performance as computed in a ranking or rating determined by Lipper Analytical
Services, Inc., an independent service that monitors the performance of over
1,000 mutual funds, Morningstar, Inc., or another service.
21
<PAGE>
The Funds may note their mention or recognition in newsletters, newspapers,
magazines, or other media. The Funds may similarly note mention or recognition
of WAM, or appearances of principals of WAM, in the media.
Investment Adviser
The Funds' investment adviser, Wanger Asset Management, L.P. ("WAM"),
serves as the investment adviser for the Funds and for other institutional
accounts. As of the date of this SAI, WAM has approximately $7 billion under
management, including the Funds. WAM is a limited partnership managed by its
general partner, Wanger Asset Management, Ltd. ("WAM Ltd."), whose stockholders
are Ralph Wanger, Charles P. McQuaid, Leah J. Zell, Marcel P. Houtzager, Robert
A. Mohn, 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 exceptions (including for extraordinary
transactions, for which Mr. Wanger's consent is required), decisions are made by
majority vote. WAM commenced operations in 1992.
WAM furnishes continuing investment supervision to the Funds under an
investment advisory agreement (the "Agreement") and is responsible for overall
management of the Funds' business affairs. It furnishes office space, equipment
and personnel to the Funds and assumes the expenses of printing and distributing
the Funds' prospectus and reports to prospective investors. The Agreement will
continue in effect as to each of the Funds through June 30, 1999, and thereafter
from year to year so long as its continuance 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 Trust's 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 the Agreement must be approved in the
same manner. The Agreement may be terminated as to either Fund without penalty
by the vote of the board of trustees of the Trust or the shareholders of that
Fund (by a majority as defined in the 1940 Act) on 60 days' written notice to
WAM or by WAM on 60 days' notice to the Fund, and will terminate automatically
in the event of its assignment.
The advisory fees the Funds pay to WAM are calculated daily and paid
monthly, at the following annual rates: Wanger Twenty, 0.95% of average net
assets; Wanger Foreign Forty, 1.00% of average net assets.
The Funds pay the cost of custodial, stock transfer, dividend disbursing,
audit and legal services, and membership in trade organizations. They also pay
other expenses such as the cost of maintaining the registration of their shares
under federal law, complying with state securities laws, proxy solicitations,
printing and distributing notices and copies of the prospectus and shareholder
reports furnished to existing shareholders, taxes, insurance premiums, and the
fees of trustees not affiliated with WAM.
22
<PAGE>
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 May 1,
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.
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. 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
23
<PAGE>
regulations thereunder or interpretations thereof eliminate the necessity to
submit any such matters to a shareholder vote, or otherwise restrict or limit
such voting rights, the Trust reserves the right to act in any manner permitted
by such changes.
The Trust's Declaration of Trust disclaims liability of the shareholders,
trustees, and officers of the Trust for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation,
or contract entered into or executed by the Trust or the board of trustees. The
Declaration of Trust provides for indemnification out of the Trust's assets for
all losses or expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, although shareholders of a business trust may,
under certain circumstances, be held personally liable under Massachusetts law
for the obligations of the trust, the risk of a shareholder incurring financial
loss on account of shareholder liability is believed to be remote because it is
limited to circumstances in which the disclaimer is inoperative and the Trust
itself is unable to meet its obligations. The risk to any one series of
sustaining a loss on account of liabilities incurred by another series is also
believed to be remote.
Trustees and Officers; Certain Shareholders
The trustees and officers of the Trust (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)
819 Golf Lane, Wheaton, Illinois 60187; 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).
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.
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.
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.
Patricia H. Werhane, trustee (9/20/1935)
104 Falcon Drive, Charlottesville, Virginia 22901; Ruffin Professor of
Business Ethics, Darden Graduate School of Business Administration,
University of Virginia, 1993-present.
24
<PAGE>
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 60606; Fund
controller, Wanger Asset Management, L.P., since September 1995; prior
thereto, treasurer of the Stein Roe Mutual Funds; assistant treasurer,
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.
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.
Mark H. Yost, vice president (6/28/1963)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; analyst and
portfolio manager, Wanger Asset Management, L.P., since October 1995; co-
portfolio manager of Wanger U.S. Smaller Companies Fund since June 1997;
portfolio manager of WAM Yost Partnership, L.P.; prior thereto, investment
analyst, First Chicago Corporation.
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
25
<PAGE>
of the board, with certain exceptions. Messrs. Hasselbring and Phelps 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.
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.
<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(2)
==============================================================================================
<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>
*Mr. Star resigned as a trustee effective June 15, 1998.
Purchasing and Redeeming Shares
Shares of the Funds 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.
26
<PAGE>
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, 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 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
27
<PAGE>
treatment, each 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
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. Those requirements are different from the standards for
regulated investment companies under Subchapter M of the Code. 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.
28
<PAGE>
In valuing brokerage services, WAM makes a judgment as to which brokers are
capable of providing the most favorable net price (not necessarily the lowest
commission) and the best execution in a particular transaction. Best execution
connotes not only general competence and reliability of a broker, but specific
expertise and effort of a broker in overcoming the anticipated difficulties in
fulfilling the requirements of particular transactions, because the problems of
execution and the required skills and effort vary greatly among transactions.
In valuing research services, WAM makes a judgment of the usefulness of
research and other information provided to WAM by a broker in managing each
Fund's investment portfolio. In some cases, the information, e.g., data or
recommendations concerning particular securities, relates to the specific
transaction placed with the broker, but for the greater part the research
consists of a wide variety of information concerning companies, industries,
investment strategy, and economic, financial, and political conditions and
prospects, useful to WAM in advising that Fund.
The reasonableness of brokerage commissions paid by the Funds in relation
to transaction and research services received is evaluated by WAM's staff on an
ongoing basis. The general level of brokerage charges and other aspects of each
Fund's portfolio transactions are reviewed periodically by the board of
trustees.
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.
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.
29
<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.
30
<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.
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.
31
<PAGE>
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.
32
