<PAGE>
As filed with the Securities and Exchange Commission on February 26, 1999
Securities Act Registration No. 33-83548
Investment Company Act File No. 811-8748
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 8
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9
-----------------------------------
WANGER ADVISORS TRUST
(Registrant)
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
Telephone number: 312/634-9200
------------------------------------
Ralph Wanger Janet D. Olsen
Wanger Advisors Trust Bell, Boyd & Lloyd
227 West Monroe Street, Suite 3000 Three First National Plaza
Chicago, Illinois 60606 70 West Madison Street, Suite
Chicago, Illinois 60602-4207 3300
(Agents for service)
-------------------------------------------------
Amending Parts A, B and C, and filing exhibits
-------------------------------------------------
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to rule 485(b)
[ ] on April 30, 1998 pursuant to rule 485(b)
[ ] 60 days after filing pursuant to rule 485(a)(1)
[X] on May 1, 1999 pursuant to rule 485(a)(1)
[ ] 75 days after filing pursuant to rule 485(a)(2)
[] on ____________ pursuant to rule 485(a)(2)
<PAGE>
WANGER ADVISORS TRUST
>Wanger U.S. Small Cap
>Wanger International Small Cap
>Wanger Twenty
>Wanger Foreign Forty
100% No-Load Funds
Shares of Wanger U.S. Small Cap, Wanger International Small Cap, Wanger Twenty
and Wanger Foreign Forty 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").
PROSPECTUS
May 1, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
Wanger Advisors Trust
227 West Monroe Street Suite 3000 Chicago, Illinois 60606
1-800-4-WANGER (1-800-492-6437)
<PAGE>
WANGER ADVISORS TRUST
CONTENTS
AT A GLANCe (Fund Objective, Risks, Fees and Expenses)................. 3
>Wanger U.S. Small Cap........................................ 3
>Wanger International Small Cap............................... 6
>Wanger Twenty................................................ 9
>Wanger Foreign Forty......................................... 12
MANAGEMENT OF THE FUNDS................................................ 13
HOW THE FUNDS INVEST................................................... 15
>The Information Edge......................................... 16
>Portfolio Allocation......................................... 18
>Managing Risk................................................ 19
>Year 2000.................................................... 20
SHAREHOLDER AND ACCOUNT POLICIES....................................... 20
>Statements and Reports....................................... 20
>Share Price.................................................. 20
TAXES.................................................................. 20
FUND SERVICE PROVIDERS................................................. 21
>Transfer Agent and Custodian................................. 21
>Distributor.................................................. 21
FINANCIAL HIGHLIGHTS................................................... 22
2
<PAGE>
U.S. SMALL CAP
AT A GLANCE
FUND OBJECTIVE
Wanger U.S. Small Cap ("U.S. Small Cap") seeks long-term growth of capital. The
Fund is a diversified mutual fund that invests primarily in the stocks of small-
and medium-size U.S. companies.
INVESTMENT STRATEGY
U.S. Small Cap generally invests in the stocks of companies with
capitalizations of less than $1 billion with the intention of holding them as
they grow and selling them when they become large.
U.S. Small Cap believes that these smaller, less profiled companies may offer
higher return potential than the stocks of large companies.
U.S. Small Cap typically looks for the stocks of companies with:
. Companies with a strong business franchise that offer growth potential.
. Products and services that give them a competitive advantage.
. A strong balance sheet and solid management.
. A reasonable stock price relative to the assets and earning power of the
company.
U.S. Small Cap invests the majority (under normal market conditions, at least
65%) of its total assets, at market value at the time of investment, in
companies with total stock market capitalizations of $1 billion or less.
Likewise, under normal market conditions, U.S. Small Cap will generally invest
at least 65% of its total assets in domestic securities.
* RISKS OF INVESTING IN U.S. SMALL CAP
Smaller company stocks are often more volatile or less liquid than the stocks of
larger companies.
You could lose money on your investment in U.S. Small Cap, or U.S. Small Cap
could underperform other investments if any of the following occurs:
. The stock market goes down.
. Small-cap stocks trail returns of the overall market.
. The stocks selected for the portfolio do not perform as expected.
YOU MAY WANT TO INVEST IF YOU:
. Are seeking a stock fund that emphasizes the less-profiled stocks of small-to
medium-sized companies.
. Are seeking growth of your capital over the long-term (at least 5 years.)
Shares of U.S. Small Cap are sold only to Life Companies and certain Retirement
Plans. See "Investing in the Funds."
YOU MAY NOT WANT TO INVEST IF YOU:
. Are seeking a significant amount of current dividend income.
. Are unwilling to accept short-term fluctuations in share price.
. Have short-term investment goals or needs.
3
<PAGE>
U.S. SMALL CAP
U.S. SMALL CAP PERFORMANCE
The chart and table below illustrate annual Fund returns for each of the past 3
years as well as a comparison of returns of U.S. Small Cap, the S&P 500 and the
Russell 2000 for the periods listed.
This information is intended to help you assess the variability of fund
returns over the past 3 years (and consequently the potential rewards and risks
of fund investment.)
U.S. Small Cap's holdings are not identical to the S&P 500, the Russell 2000
or any other market index. Therefore, the performance of the Fund will not
mirror the returns of any particular index.
Date Return
- ---------------------
12/31/96 46.59%
- ---------------------
12/31/97 29.41%
- ---------------------
12/31/98 8.68%
- ---------------------
For the 3 years ended 12/31/1998, U.S. Small Cap's highest and lowest quarterly
returns were 17.3% and -17.7%, respectively, for the quarters ended 9/30/97 and
9/30/98.
The fund's past performance is not an indication of future performance.
<TABLE>
<CAPTION>
Average Annual Total Returns for
Periods Ended 12/31/1998
- ----------------------------------------------
1 Year Since
Inception*
- ----------------------------------------------
<S> <C> <C>
U.S. Small Cap 8.7% 26.8%
- ----------------------------------------------
S&P 500+ 28.6% 27.9%
- ----------------------------------------------
Russell 2000+ -2.6% 14.4%
- ----------------------------------------------
</TABLE>
* U.S. Small Cap's inception 5/3/1995.
(dagger)The S&P 500 Index is a broad market-weighted average of U.S. blue-chip
companies. The Russell 2000 Index is a market capitalization-weighted index of
small companies, formed by taking the largest 3,000 companies and eliminating
the largest 1,000 companies.
Total returns quoted for the fund include the effect of deducting the fund's
expenses, but do not include charges and expenses attributable to a particular
Variable Contract or Retirement Plan. Because shares of the fund 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 for information on relevant charges and expenses. Excluding these charges
from quotations of the fund's performance has the effect of increasing the
performance quoted. These charges should be considered when comparing the fund's
performance to other investment alternatives.
4
<PAGE>
U.S. SMALL CAP
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Paid directly from your investment.
Maximum sales charge None
Deferred sales charge None
ANNUAL FUND OPERATING EXPENSES
Deducted from fund assets:
Management Fee .96%
12b-1 Fee None
Other Expenses .06%
-----
Total annual fund operating
expenses 1.02%
EXAMPLE. This example is intended to help you compare the cost of investing in
the fund with the costs of investing in other mutual funds. It assumes you
invest $10,000 in the U.S. Small Cap for the time period indicated ending on
December 31, 1998, earn a 5% return each year, and that operating expenses
remain constant. Your actual returns and costs may be higher or lower.
1 Year $ 104
3 Years $ 325
5 Years $ 563
10 Years $1,248
5
<PAGE>
INTERNATIONAL SMALL CAP
AT A GLANCE
FUND OBJECTIVE
Wanger International Small Cap ("International Small Cap") seeks long-term
growth of capital. International Small Cap is a diversified mutual fund that
invests primarily in stocks of small- and medium-size non-U.S. companies.
INVESTMENT STRATEGY
International Small Cap generally invests in the stocks of companies based
outside of the U.S. (or whose primary business takes place outside of the U.S.)
with capitalizations of less than $1 billion with the intention of holding them
as they grow and selling them when they become large.
International Small Cap believes that these smaller, less profiled companies -
particularly outside of the U.S. - may offer higher return potential than the
stocks of large companies.
International Small Cap typically looks for the stocks of companies with:
. Companies with a strong business franchise that offer growth potential.
. Products and services that give them a competitive advantage.
. A strong balance sheet and solid management.
. A reasonable stock price relative to the assets and earning power of the
company.
International Small Cap invests the majority (under normal market conditions,
at least 65%) of its total assets, at market value at the time of investment, in
companies with total stock market capitalizations of $1 billion or less.
Likewise, under normal market conditions, International Small Cap will generally
invest at least 65% of its total assets in foreign securities in mature and
emerging markets.
* RISKS OF INVESTING IN INTERNATIONAL SMALL CAP
Smaller company stocks are often more volatile or less liquid than the stocks of
larger companies. You could lose money on your investment in the fund, or the
fund could underperform other investments if any of the following occurs:
. International stock markets go down.
. Foreign small- to mid-cap stocks trail returns of the overall market.
. The stocks selected for the portfolio do not perform as expected.
Investments in foreign securities may have special risks in addition to those
mentioned above, including:
. Political or economic instability
. Higher transaction costs
. Currency exchange rate fluctuations
YOU MAY WANT TO INVEST IF YOU:
. Are seeking to diversify your existing equity holdings with a fund that
invests in the stocks of companies outside the U.S.
. Are seeking a stock fund that emphasizes the less-profiled stocks of small-
to medium-sized companies.
. Are seeking growth of your capital over the long-term (at least 5 years.)
Shares of International Small Cap are sold only to Life Companies and certain
Retirement Plans. See "Investing in the Funds."
YOU MAY NOT WANT TO INVEST IF YOU:
. Are seeking a significant amount of current dividend income.
. Are unwilling to accept short-term fluctuations in share price.
. Have short-term investment goals or needs.
6
<PAGE>
INTERNATIONAL SMALL CAP
INTERNATIONAL SMALL CAP PERFORMANCE
The chart and table below illustrate annual fund returns for the past 3 years as
well as a comparison of returns of International Small Cap, EAFE and EMI for the
periods listed.
This information is intended to help you assess the variability of fund
returns over the past 3 years (and consequently the potential rewards and risks
of fund investment.)
International Small Cap's holdings are not identical to the EAFE, the EMI or
any other market index. Therefore, the performance of International Small Cap
will not mirror the returns of any particular index.
<TABLE>
<CAPTION>
- -------------------------------
WAT (International)
Date Return
- -------------------------------
<S> <C>
12/31/96 32.01%
- -------------------------------
12/31/97 -1.46%
- -------------------------------
12/31/98 16.33%
- -------------------------------
</TABLE>
As of 12/31/1998, the International Small Cap's highest and lowest quarterly
returns were 21.8% and -18.6%, respectively, for the quarters ended 3/31/98 and
9/30/98. The fund's past performance is not an indication of future performance.
Average Annual Total Returns for
Periods Ended 12/31/1998
- ----------------------------------------------------
1 Year Since
Inception*
- --------------------- --------------- --------------
Int'l Small Cap 16.3% 21.4%
- --------------------- --------------- --------------
EAFE+ 20.0% 9.2%
- --------------------- --------------- --------------
EMI (ex-U.S.)dagger 12.2% 2.7%
- ----------------------------------------------------
* International Small Cap's inception 5/3/1995.
Beginning date for EAFE and EMI (ex-U.S.) is 5/31/1995.
(dagger) Morgan Stanley's Europe, Australasia and Far East Index (EAFE) is an
unmanaged index of companies throughout the world in proportion to work stock
market capitalizations, excluding the U.S. and Canada. EMI (ex-U.S.) is Salomon
Brothers' index of the bottom 20% of institutionally investable capital of
countries, selected by Salomon and excluding the U.S.
Total returns quoted for the fund include the effect of deducting the fund's
expenses, but do not include charges and expenses attributable to a particular
Variable Contract or Retirement Plan. Because shares of the fund 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 for information on relevant charges and expenses. Excluding these charges
from quotations of the fund's performance has the effect of increasing the
performance quoted. These changes should be considered when comparing the fund's
performance to other investment alternatives.
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Paid directly from your investment.
Maximum sales charge None
Deferred sales charge None
ANNUAL FUND OPERATING EXPENSES
Deducted from fund assets:
Management fee.... 1.27%
-----
12b-1 fee......... None
Other expenses.... .28%
-----
Total annual fund operating
expenses..... 1.55%
EXAMPLE. This example is intended to help you compare the cost of investing in
the fund with the costs of investing in other mutual funds. It assumes you
invest
7
<PAGE>
INTERNATIONAL SMALL CAP
$10,000 in International Small Cap for the time period indicated ending on
December 31, 1998, earn a 5% return each year, and that operating expenses
remain constant. Your actual returns and costs may be higher or lower.
1 Year $ 158
3 Years $ 490
5 Years $ 845
10 Years $1,845
8
<PAGE>
WANGER TWENTY
AT A GLANCE
FUND OBJECTIVE
Wanger Twenty seeks long-term growth of capital. Wanger Twenty invests primarily
in the stocks of medium- to larger-size U.S. companies.
INVESTMENT STRATEGY
Wanger Twenty is a non-diversified fund that takes advantage of its advisor's
research and stock-picking capabilities to invest in a limited number of
companies (between 20-25) with market capitalizations of $1 billion to $10
billion. The performance of each holding may have a greater impact on Wanger
Twenty's total return offering the potential to provide above average growth
over time.
The Fund believes that companies within this capitalization range are less
profiled, and may offer higher return potential, than the stocks of companies
with capitalizations above $10 billion.
Wanger Twenty typically looks for the stocks of companies with:
. Companies with a strong business franchise that offer growth potential.
. Products and services that give them a competitive advantage.
. A strong balance sheet and solid management.
. A reasonable stock price relative to the assets and earning power of the
company.
*RISKS OF INVESTING IN WANGER TWENTY
Wanger is a non-diversified fund. Therefore, each stock may represent a
significant part of its overall portfolio. Wanger Twenty is designed for
investors who are willing to accept the potentially greater price fluctuations
of a non-diversified fund. You could lose money on your investment in Wanger
Twenty, or Wanger Twenty could underperform other investments if any of the
following occurs:
. The stock market goes down.
. Mid-cap stocks trail returns of the overall market.
. The stocks selected for the portfolio do not perform as expected.
YOU MAY WANT TO INVEST IF YOU:
. Are seeking to complement your existing domestic equity holdings with a
focused stock fund.
. Are seeking a stock fund that emphasizes the less profiled stocks of
medium-to-larger sized companies.
. Are seeking growth of your capital over the long-term (at least 5 years.)
Shares of Wanger Twenty are sold only to Life Companies and certain Retirement
Plans. See "Investing in the Funds."
YOU MAY NOT WANT TO INVEST IF YOU:
. Are seeking a significant amount of current dividend income.
. Are unwilling to accept short-term fluctuations in share price.
. Have short-term investment goals or needs.
9
<PAGE>
WANGER TWENTY
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
ANNUAL FUND OPERATING EXPENSES
Deducted from fund assets:
Management Fee.... 0.95%
-------
12b-1 Fee......... None
Other Expenses*... 0.68%
-------
Total annual fund operating
expenses (gross)(dagger) 1.63%
-------
- -------------------
* "Other expenses" are based on estimated amounts for the current fiscal
year.
(dagger) WAM has undertaken to limit Wanger Twenty's annual expenses to 1.35% of
its average net assets.
EXAMPLE. This example is intended to help you compare the cost of investing in
Wanger Twenty with the costs of investing in other mutual funds. It assumes you
invest $10,000 in Wanger Twenty for the time period indicated ending on December
31, 1998, earn a 5% return each year, and that operating expenses remain
constant. Your actual returns and costs may be higher or lower.
1 Year $166
3 Years $514
10
<PAGE>
WANGER FOREIGN FORTY
AT A GLANCE
FUND OBJECTIVE
Wanger Foreign Forty seeks long-term growth of capital. Wanger Foreign Forty
invests primarily in the stocks of medium- to larger-size companies with market
capitalizations of $1 billion to $10 billion. The Fund invests in at least three
countries.
INVESTMENT STRATEGY
Wanger Foreign Forty is a non-diversified fund that takes advantage of its
advisor's research and stock-picking capabilities to invest in a limited number
of foreign companies (between 40-60) in developed markets. The performance of
each holding may have a greater impact on the Wanger Foreign Forty's total
return offer the potential to provide above average growth over time.
Wanger Foreign Forty believes that companies within this capitalization range
are less profiled, and may offer higher return potential, than the stocks of
companies with capitalizations above $10 billion.
Wanger Foreign Forty typically looks for the stocks of companies with:
. Companies with a strong business franchise that offer growth potential.
. Products and services that give them a competitive advantage.
. A strong balance sheet and solid management.
. A reasonable stock price relative to the assets and earning power of the
company.
Wanger Foreign Forty is an international fund and invests the majority of its
assets in the stocks of foreign companies based in developed markets outside the
U.S.
* RISKS OF INVESTING IN WANGER FOREIGN FORTY
Wanger Foreign Forty is a non-diversified fund that ordinarily holds 40 to 60
stocks. Wanger Foreign Forty takes larger positions in some of its stocks than
others. The performance of each of these larger holdings will have a greater
impact on the Wanger Foreign Forty's total returns, and may make the Wanger
Foreign Forty's returns more volatile in the short-term than a more diversified
international fund.. You could lose money on your investment in Wanger Foreign
Forty, or the Wanger Foreign Forty could underperform other investments if any
of the following occurs:
. International stock markets go down.
. Foreign small-to mid-cap stocks trail returns of the overall market.
. The stocks selected for the portfolio do not perform as expected.
Investments in foreign securities may have special risks in addition to those
mentioned above, including:
. Political or economic instability.
. Higher transaction costs.
. Currency exchange rate fluctuations.
YOU MAY WANT TO INVEST IF YOU:
. Are seeking to complement your existing equity holdings with an international
stock fund that offers higher return potential.
. Are seeking a stock fund that emphasizes the less-profiled stocks of
medium-to-larger sized companies.
. Are seeking growth of your capital over the long-term (at least 5 years.)
Shares of Wanger Foreign Forty are sold only to Life Companies and certain
Retirement Plans. See "Investing in the Funds."
YOU MAY NOT WANT TO INVEST IF YOU:
. Are seeking a significant amount of current dividend income.
. Are unwilling to accept short-term fluctuations in share price.
. Have short-term investment goals or needs.
11
<PAGE>
WANGER FOREIGN FORTY
FEES AND EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Paid directly from your investment.
Maximum sales charge None
Deferred sales charge None
ANNUAL FUND OPERATING EXPENSES
Deducted from fund assets:
Management fee 1.00%
12b-1 fee None
Other expenses* 2.51%
-------
Total annual fund operating
expenses(dagger) 3.51%
-------
- -------------------
* "Other expenses" are based on estimated amounts for the current fiscal
year.
(dagger) WAM has undertaken to limit Wanger Foreign Forty's annual expenses to
1.45% of its average net assets.
EXAMPLE. This example is intended to help you compare the cost of investing in
the fund with the costs of investing in other mutual funds. It assumes you
invest $10,000 in Wanger Foreign Forty for the time period indicated, earn a 5%
return each year, and that operating expenses remain constant. Your actual
returns and costs may be higher or lower.
1 Year $ 354
3 Years $1,077
12
<PAGE>
MANAGEMENT OF THE FUNDS
The Wanger Advisors Trust 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 uses a team approach when managing the funds. The management teams consist
of a 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, and each team member has one
or more particular areas of expertise. The lead portfolio manager and
co-managers are responsible for making daily portfolio selection decisions, and
utilize the management team's input and advice when making buy and sell
determinations.
PORTFOLIO MANAGERS
RALPH WANGER
Ralph Wanger is chief investment strategist of WAM. He is chairman of the board
of Wanger Advisors Trust (the "Trust"). Mr. Wanger is also lead portfolio
manager of Acorn Fund. He has been president and a member of the board of
trustees of Acorn Investment Trust since 1970, and is a principal of WAM.
ROBERT A. MOHN
Lead portfolio manager, U.S. Small Cap
Robert Mohn is a vice president of the Trust and is the lead portfolio manager
of U.S. Small Cap. Mr. Mohn is also a vice president of Acorn Investment Trust,
and the lead portfolio manager of Acorn USA. He has been a key member of WAM's
domestic analytical team since 1992, and a principal of WAM since 1995.
MARCEL P. HOUTZAGER
Lead portfolio manager, International Small Cap and Wanger Foreign Forty
Marcel Houtzager is a vice president of the Trust and is the lead portfolio
manager of International Small Cap and Wanger Foreign Forty. Mr. Houtzager is
also a vice president of Acorn Investment Trust, and the lead portfolio manager
of Acorn Foreign Forty. He has been a key member of WAM's international
analytical team since 1992, and a principal of WAM since 1995.
CHARLES P. MCQUAID
Charles P. McQuaid is a member of the management team of U.S. Small Cap. He is a
trustee and senior vice president of the Trust. He is also a trustee and senior
vice president of Acorn Investment Trust and co-manager of Acorn Fund. Mr.
McQuaid is a principal of WAM and has worked with Mr. Wanger for 20 years.
JOHN H. PARK
Co-portfolio manager, Wanger Twenty
John Park is a vice president of the Trust, and has co-managed Wanger Twenty
since its inception in 1998. Mr. Park is also a vice president of Acorn
Investment Trust and co-portfolio manager of Acorn Twenty. He has been a key
member of WAM's domestic investment team since 1993, and a principal of WAM
since 1998.
MARK H. YOST
Co-portfolio manager, Wanger Twenty
Mark Yost is a vice president of the Trust, and has co-managed Wanger Twenty
since its inception in 1998. Mr. Yost is also a vice president of Acorn
Investment Trust and co-portfolio manager of Acorn Twenty. He has been a key
member of WAM's domestic investment team since 1995.
PETER A. ZALDIVAR
Co-portfolio manager, Wanger International Small Cap
Peter Zaldivar is a vice president of the Trust and is the co-portfolio manager
of Wanger International Small Cap. Mr. Zaldivar has been an analyst at WAM since
1996. Before joining WAM, he was a vice president and portfolio manager at Lord
Asset Management.
13
<PAGE>
Management of the Funds
MANAGEMENT FEES
WAM earns the following fees for managing the Wanger Advisors Trust funds:
Fee as a % of Average
Net Assets
(12/31/98)
Fund
----
U.S. Small Cap 0.96%
Int'l Small Cap 1.27%
Wanger Twenty 0.95%
Wanger Foreign Forty 1.00%
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 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.
14
<PAGE>
How the Funds Invest
THE INFORMATION EDGE
WAM has built a reputation on innovative thinking and unconventional stock
picks. We rely primarily on our independent, internally-generated research to
uncover companies that may be less profiled than the more popular names. This is
where WAM adds the greatest value to shareholders.
WAM's research process is constantly uncovering quality companies that exhibit
exciting characteristics - companies that rest on a solid tripod of growth
potential, financial strength and fundamental value.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Growth Potential Financial Strength Fundamental Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
>superior technology >stability >lower stock price relative to
>innovative marketing >reduced risk growth potential and capitalization
>solid management >competitive advantage >growth at a reasonable price
>strategic or niche position
>superior earnings prospects
>fast growing economy
. Once we uncover a great
. The realization of this . A strong balance sheet company, we identify a price
growth potential would likely gives management greater that we believe would also
produce superior performance flexibility to pursue make the stock a good value.
that is sustainable over time. strategic objectives and is
essential to maintaining a
competitive advantage.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
STOCK STRENGTH COMES FIRST
WAM primarily follows a "bottom-up" approach to portfolio construction, placing
greater emphasis on the merits of each individual stock.
Our analysts continually screen companies, including making over 1,000
face-to-face visits around the globe each year. We want to know everything we
can about each Acorn investments to avoid surprises. To accomplish this, our
analysts talk directly to top management whenever possible.
Sometimes, WAM's analysts will use a "top-down" investment approach to
generate ideas for new investments. This approach is broader in scope than a
bottom-up approach. Here, the analytical teams identify current investment
themes, or trends, and set regional and industry allocations.
We believe that our thorough research helps us maintain lower taxes and
transaction costs. In managing the funds, we try to reduce these costs by
investing with a long-term time horizon (at least 2-5 years). 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.
15
<PAGE>
How the Funds Invest
COMMON STOCKS
The Wanger Advisors Trust funds invest mostly in common stocks. Common stocks
represent an equity (ownership) interest in a corporation. The funds may also
invest in other types of equity securities, including preferred stocks and
stocks that are convertible into common stocks.
U.S. Small Cap and International Small Cap invest mainly in the common stocks of
small and medium-size companies, with market capitalizations of less than $1
billion. Wanger Twenty and Wanger Foreign Forty invest mostly in the stocks of
companies with market capitalizations of $1-$10 billion.
FOREIGN SECURITIES
International Small Cap and Wanger Foreign Forty invest most of their assets in
non-U.S. securities. Small Cap U.S. and Wanger Twenty invest most of their
assets in the U.S., and only intend to invest a part of their assets overseas
under certain circumstances (see Portfolio Allocation below).
The foreign securities in which the funds invest are similar to U.S. common
stocks. These include American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs) and other securities underlying shares of foreign issuers.
PORTFOLIO ALLOCATION
Under normal conditions, the funds' common stock investments (as a percentage of
total assets) are limited by the following maximum allocations:
International Small Cap
. 100% in non-U.S. companies
. 35% in U.S. companies
U.S. Small Cap
. 100% in U.S. companies
. 35% in non-U.S. companies.
Wanger Twenty
. 100% in U.S. companies
. 15% in non-U.S. companies. (Wanger Twenty will normally only invest in a non-
U.S. company whose operations are primarily located within the U.S.)
Wanger Foreign Forty
. 100% in non-U.S. companies
. 15% in U.S. companies. (Wanger Foreign Forty will normally only invest in a
U.S. company whose operations are primarily located outside of the U.S.)
WANGER'S BOARD OF TRUSTEES MAY CHANGE EACH FUND'S INVESTMENT OBJECTIVE WITHOUT
SHAREHOLDER APPROVAL.
When you invest in a mutual fund, you are exposed to certain risks. These
include the risk that you may receive little or no return on your investment, or
that you may even lose part or all of your investment. Investments that provide
higher potential reward also present greater risk. You can lose money by
investing in a fund. Likewise, investments with lower potential reward have
lower risk. Before investing in one of the Wanger Advisors Trust funds, you
should carefully consider the risks associated with that particular fund.
Because of these risks, you should consider an investment in the any of the
Wanger Advisors Trust funds a long-term investment.
16
<PAGE>
Summarizing Risk
Throughout this prospectus we've identified the areas that contain specific
information about risk with *. Please read those areas carefully to fully
understand your investment
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.
SMALL AND MEDIUM COMPANIES
The Wanger Advisors Trust funds prefer small and medium companies over the
stocks of companies of large companies. During some periods, the securities of
smaller companies and the stocks of medium companies, as a class, have performed
better than the securities of larger companies, and in some periods they have
performed worse. Securities of smaller companies may be more volatile and less
liquid than the stocks of large companies.
FOREIGN SECURITIES
International investing allows you to achieve greater diversification and to
take advantage of changes in foreign economies and market conditions. From time
to time, many foreign economies have grown faster than the U.S. economy, and the
returns on investments in these countries have exceeded those of similar U.S.
investments, although there can be no assurance that these conditions will
continue.
Investments in foreign securities provide opportunities different from those
available in the U.S., and risks that in some ways may be greater than in U.S.
investments. These risks include fluctuations in exchange rates of foreign
currencies; less public information with respect to issuers of securities; less
governmental supervision in how securities are issued or transacted; less
liquidity, frequently greater price volatility and higher transactions costs and
the possible imposition of foreign taxes. Investing in countries outside the
U.S. may also involve political risk. Economies in individual markets may differ
favorably or unfavorably from the U.S. economy in such respects as gross
domestic product, rates of inflation, debt structure and currency valuation.
Emerging countries may be substantially smaller, less developed, less liquid,
and more volatile than the securities markets of the U.S. and other developed
countries.
17
<PAGE>
How the Funds Invest
Managing Risk
WAM uses various techniques and practices to mitigate the funds' exposure to
risk.
*INVESTMENT LIMITATIONS
Each fund has adopted the following certain investment limitations (generally
based upon a percentage of total assets) that cannot be changed without
shareholder approval and are designed to limit risk:
. None of the funds may invest more than 5% in securities of any one issuer,
except for U.S. government securities.*
. None of the funds may invest more than 25% in any one issuer or more than 25%
in any one industry (in each case with the exception of U.S. government
securities).
*This restriction applies to only 75% of the total assets of International Small
Cap and U.S. Small Cap, and to only 50% of the total assets of the total assets
of Wanger Twenty and Wanger Foreign Forty.
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 herein and in the statement of additional
information. If a fund determines that such a commitment is no longer in the
fund's best interest, the commitment may be revoked by terminating the
availability of the fund to Variable Contract owners residing in such states.
*DEFENSIVE INVESTMENT STRATEGIES
The funds' portfolio managers may use the following strategies if they believe
that a temporary defensive position is advisable. With respect to International
Small Cap and Wanger Foreign Forty, this includes times when investment in
foreign securities appears to be relatively unattractive because of current or
anticipated adverse political or economic conditions.
. Each fund may invest without limit in U.S. corporate and government
obligations.
. Each fund may hold cash or cash equivalents.
. Each fund may hold cash in domestic and foreign currencies and may invest
in domestic and foreign money market securities to meet liquidity needs.
(Generally, this is not expected to exceed 25% of total assets.)
DURING THESE PERIODS, A FUND'S ASSETS MAY NOT BE INVESTED IN ACCORDANCE WITH ITS
STRATEGY, AND THE FUND MAY NOT ACHIEVE ITS INVESTMENT OBJECTIVE.
18
<PAGE>
How the Funds Invest
*Hedging Strategies
Each fund may hedge against variations in exchange rates, or to protect against
exposure in the equity markets. Portfolio managers try to accomplish this by
buying and selling
. options,
. futures contracts,
. options on futures contract,
. currency exchange contracts,
. swap agreements, or
. put and call options.
If a fund is not successful when using these techniques, total return could be
adversely affected.
*Year 2000
Some of today's computer systems cannot process date-related information because
they are not programmed to distinguish between the year 2000 and the year 1900
(commonly referred to as the Year 2000 problem or Y2K). WAM is working closely
with the funds' service providers to ensure the proper functioning of the
computer systems on which the funds depend for smooth operation. 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.
19
<PAGE>
Shareholder and Account 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
(the price to buy one share) and the redemption price (price to sell one share)
are a 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.
NAV. A fund's NAV ("Net Asset Value") is the value of a single share of the
fund. The NAV is computed by adding up the value of a 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 the Closing Time will get the next day's price.
Each fund's portfolio securities are generally valued primarily on the basis of
market quotations from the primary market in which they are traded. In cases
when the quotations are not readily available, the Trust will use a method that
its trustees believe 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.
These timing differences may have a significant effect on a fund's NAV.
Taxes
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
20
<PAGE>
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 statement of additional information for
additional discussion.
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.
Fund Service Providers
Transfer Agent and Custodian
State Street Bank and Trust Company
Attn: Wanger Advisors Trust
PO Box 8502
Boston, MA 02266-8502
Distributor
WAM Brokerage Service, L.L.C.
227 W. Monroe Street
Suite 3000
Chicago, IL 60606-5016
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 Retirements
may impose such charges on participants in a Retirement Plan. WAM BD is wholly
owned by WAM, the funds' investment advisor, and the investment advisor's
general partner, Wanger Asset Management, Ltd. WAM pays all distribution
expenses relating to the funds, including payment or reimbursement of any
expenses incurred by WAM BD.
21
<PAGE>
Financial Highlights
The following tables will help you better understand each fund's performance for
the past five years, or for the period from the date of a fund's commencement of
operations, if less than five years. They are excerpted from each fund's
financial statements for the fiscal year ended December 31, 1998, audited by
Ernst & Young LLP. Certain information reflects financial results for a single
fund share. The total returns in the table represent the rate that an investor
would have earned (or lost) on an investment in a fund (assuming reinvestment of
all dividends and distributions). You may obtain the complete financial
statements and auditor's report by calling 1-800-4-WANGER (1-800-492-6437) and
requesting a free copy of a fund's latest annual shareholder report.
22
<PAGE>
Financial Highlights
WANGER U.S. SMALL CAP
---------------------
<TABLE>
<CAPTION>
Year ended Year ended Year ended May 3, 1995
December 31, December 31, December 31, through December 31,
1998 1997 1996 31, 1995
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of period $21.46 $16.97 $11.60 $10.00
Income From Investment Operations
Net investment loss (c) (.05) (.02) (.06) (.05)
Net realized and unrealized gain on
investments 1.93 4.90 5.46 1.65
-------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.88 4.88 5.40 1.60
Less Distributions
Dividends from net investment income -- -- -- --
Distributions from net realized gain (1.16) (.39) (.03) --
-------------------------------------------------------------------------------------------------------------------------
Total distributions (1.16) (.39) (.03) --
Net Asset Value, end of period $22.18 $21.46 $16.97 $11.60
================================================================================
Total Return 8.68% 29.41% 46.59% 16.00%
Ratios/Supplemental Data
Ratio of expenses to average net
assets (a) (b) 1.02% 1.06% 1.21% 2.08%*
Ratio of net investment loss
to average net assets (b) (.25%) (.10%) (.41%) (1.44%)*
Portfolio turnover rate 34% 34% 46% 59%*
Net assets at end of period $339,118,881 $270,865,827 $128,957,911 $21,903,536
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange
Commission, this ratio reflects total expenses prior to the reduction
of custodian fees for cash balances it maintains with the custodian
("custodian fees paid indirectly"). This ratio net of custodian fees
paid indirectly would have been 1.04% for the year ended December 31,
1997, 1.19% for the year ended December 31, 1996 and 2.00% for the
period ended December 31, 1995.
(b) The fund was reimbursed by WAM for certain expenses from May 3, 1995
through December 31, 1995. Without the reimbursement, the ratio of
expenses to average net assets (prior to custodian fees paid
indirectly) and the ratio of net investment income to average net
assets for the period ended December 31, 1995 would have been 2.35% and
(1.71%), respectively.
(c) Net investment loss per share for the years ended December 31, 1998,
1997 and 1996 was based upon the average shares outstanding during the
period.
23
<PAGE>
Financial Highlights
WANGER INTERNATIONAL SMALL CAP
<TABLE>
<CAPTION>
Year ended Year ended Year ended May 3, 1995
December 31, December 31, December 31, through December
1998 1997 1996 31, 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of period
Income From Investment Operations $17.05 $17.71 $13.45 $10.00
Net investment income (loss) (c) .03 .02 (.09) (.03)
Net realized and unrealized gain on
investments 2.76 (.26) 4.38 3.48
-------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.79 (.24) 4.29 3.45
Less Distributions
Dividends from net investment income (.22) -- -- --
Distributions from net realized gain and
unrealized gain reportable for federal
income taxes -- (.42) (.03) --
-------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.42) (.03) --
Net Asset Value, end of period $19.62 $17.05 $17.71 $13.45
===============================================================================
Total Return 16.33% (1.46%) 32.01% 34.50%
Ratios/Supplemental Data
Ratio of expenses to average net
assets (a) (b) 1.55% 1.60% 1.79% 2.32%*
Ratio of net investment income (loss)
to average net assets (b) .16% .12% (.56%) (.81%)*
Portfolio turnover rate 56% 60% 50% 14%*
Net assets at end of period 141,253,309 120,660,158 84,855,082 11,368,924
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange
Commission, this ratio reflects total expenses prior to the reduction
of custodian fees for cash balances it maintains with the custodian
("custodian fees paid indirectly"). This ratio net of custodian fees
paid indirectly would have been 1.59% for the year ended December 31,
1997, 1.75% for the year ended December 31, 1996 and 2.00% for the
period ended December 31, 1995.
(b) The fund was reimbursed by WAM for certain expenses from May 3, 1995
through December 31, 1995. Without the reimbursement, the ratio of
expenses to average net assets (prior to custodian fees paid
indirectly) and the ratio of net investment income to average net
assets for the period ended December 31, 1995 would have been 4.20% and
(2.69%) respectively.
(c) Net investment income (loss) per share for the years ended December 31,
1998, 1997 and 1996 was based upon the average shares outstanding
during the period.
24
<PAGE>
Wanger Advisors Trust Funds
This prospectus is intended for use in connection with Variable Contracts. The
Wanger Advisors Trust funds' semiannual and annual reports to shareholders
contain additional information about the funds. These reports provide commentary
on market conditions and investment strategies that affected each fund's
performance over the past six- and 12-month periods. The Statement of Additional
Information (also known as the "SAI") also contains detailed information about
the Wanger Advisors Trust funds' policies and operations. The SAI is
incorporated in this prospectus by reference.
You may obtain free copies of a fund's latest semi-annual and annual shareholder
reports and/or a fund's SAI. Simply call 1-800-4-WANGER (1-800-492-6437) to make
your request, or write to Wanger Advisors Trust, PO Box 8502, Boston,
Massachusetts, 02266-8502.
You may also obtain this and other information about the Wanger Advisors Trust
funds directly from the Securities and Exchange Commission (SEC). You may visit
the SEC online at http://www.sec.gov or in person at the SEC's Public Reference
Room in Washington DC. You may also request information by calling the SEC at
1-800-SEC-0330 (1-800-732-0330), or sending your request and the appropriate
duplicating fee to the SEC's Public Reference Section, Washington, DC
20549-6009.
<PAGE>
WANGER ADVISORS TRUST 227 West Monroe Street
STATEMENT OF ADDITIONAL INFORMATION Suite 3000
May 1, 1999 Chicago, Illinois 60606
1-800-4-WANGER
(1-800-492-6437)
WANGER U.S. SMALL CAP
WANGER INTERNATIONAL SMALL CAP
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................................. 3
Performance Information......................................... 25
Investment Adviser.............................................. 27
Distributor..................................................... 29
The Trust....................................................... 29
Trustees and Officers; Certain Shareholders..................... 30
Purchasing and Redeeming Shares................................. 33
Additional Tax Information...................................... 34
Portfolio Transactions.......................................... 35
Custodian....................................................... 36
Independent Auditors............................................ 37
Appendix - Description of Bond Ratings.......................... 38
Financial Statements............................................ 40
</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 U.S. SMALL CAP, WANGER INTERNATIONAL SMALL CAP, 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"). The 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 or variable life insurance
contracts ("Variable Contracts"), and may also be offered
<PAGE>
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.
INFORMATION ABOUT THE FUNDS
WANGER U.S. SMALL CAP invests for long-term capital growth. The Fund
generally invests in the stocks of companies with capitalizations of less than
$1 billion. Under normal market conditions, the Fund will generally invest at
least 65% of its total assets in domestic securities.
WANGER INTERNATIONAL SMALL CAP invests for long-term capital growth. The
Fund generally invests in stocks of companies with capitalizations of less than
$1 billion. Under normal market conditions, the Fund will generally invest at
least 65% of its total assets in foreign securities in mature and emerging
markets.
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.
WANGER TWENTY and WANGER FOREIGN FORTY are non-diversified under the
federal securities laws. However, all of 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 each
Fund's investment objectives, policies, and restrictions.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund invests 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 any Fund will achieve its investment objective. Each Fund
uses the techniques and invests in the types of securities described below and
in the prospectus.
2
<PAGE>
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 a
Fund 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 WANGER TWENTY and WANGER FOREIGN FORTY
are non-diversified, those Funds have the ability to take larger positions in a
smaller number of issuers. The appreciation or depreciation of a single stock
may have a greater impact on the NAV of a non-diversified fund, because it is
likely to have a greater percentage of its assets invested in that stock. As a
result, the share price of WANGER TWENTY and WANGER FOREIGN FORTY can be
expected to fluctuate more than that of broadly diversified funds investing in
similar securities. Because they are non-diversified, those Funds are not
subject to the limitations under the Investment Company Act of 1940 on the
percentage of their assets that they may invest in any one issuer. Each Fund,
however, intends 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
Each Fund may 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, and INTERNATIONAL SMALL CAP invests at least
65% of its total assets, in each case taken at market value, in foreign
securities; WANGER TWENTY'S investments in foreign securities are limited to not
more than 15% of its total assets. U.S. SMALL CAP does not have a present
intention of investing more than 5% of its assets in foreign securities.
WANGER FOREIGN FORTY invests primarily in developed countries but may
invest up to 15% of its total assets in securities of companies with broad
international interests that are
3
<PAGE>
domiciled in the United States or in countries considered "emerging markets," if
the operations of those companies are located primarily in developed overseas
markets. The Fund uses the terms "developed markets" and "emerging markets" as
those terms are defined by the International Financial Corporation, a member of
the World Bank Group ("IFC"). "Emerging markets" as used by the Fund includes
markets designated "frontier markets" by the IFC. The Fund does not intend to
invest more than 5% of its total assets in those countries included in the
"emerging markets" or "frontier markets" categories.
The securities markets of emerging markets are substantially smaller, less
developed, less liquid, and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States. There
also may be a lower level of monitoring and regulation of emerging markets of
traders, insiders, and investors. Enforcement of existing regulations has been
extremely limited.
WANGER TWENTY usually limits its investments in foreign companies to those
whose operations are primarily in the U.S.
The Funds may invest in securities of foreign issuers directly or in the
form of American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs), Global Depositary Receipts (GDRs) or other securities representing
underlying shares of foreign issuers. Positions in these securities are not
necessarily denominated in the same currency as the common stocks into which
they may be converted. ADRs are receipts typically issued by an American bank
or trust company evidencing ownership of the underlying securities. EDRs are
European receipts evidencing a similar arrangement. GDRs 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. None of the Funds expects to
invest 5% or more of its total assets in unsponsored depositary receipts.
The Funds' investment performance is affected by the strength or weakness
of the U.S. dollar against the currencies of the foreign markets in which its
securities trade or in which they are denominated. For example, if the dollar
falls in value relative to the Japanese yen, the dollar value of a yen-
denominated stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of
4
<PAGE>
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.
CURRENCY EXCHANGE TRANSACTIONS
The Funds may enter into currency exchange transactions. A currency
exchange transaction may be conducted either on a spot (i.e., cash) basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market or through a forward currency exchange contract ("forward contract"). A
forward contract is an agreement to purchase or sell a specified currency at a
specified future date (or within a specified time period) and price set at the
time of the contract. Forward contracts are usually entered into with banks,
foreign exchange dealers or broker-dealers, are not exchange-traded, and are
usually for less than one year, but may be renewed.
5
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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. A 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 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.
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<PAGE>
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,
U.S. SMALL Cap will generally invest at least 65% of its total assets in
domestic securities, WANGER TWENTY will not invest more than 15% of its total
assets in foreign securities, INTERNATIONAL SMALL CAP will generally invest at
least 65% 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. A Fund may also use other types of options, futures
contracts and futures options currently traded or subsequently developed and
traded, provided the board of trustees determines that their use is consistent
with the Fund's investment objective.
7
<PAGE>
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.
OTC DERIVATIVES. The Funds may buy and sell over-the-counter ("OTC")
---------------
derivatives (derivatives not traded on exchanges). Unlike exchange-traded
derivatives, which are
8
<PAGE>
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 a Fund greater flexibility to tailor an instrument to
its needs, OTC derivatives generally involve greater credit risk than exchange-
traded derivatives, which are guaranteed by the clearing organization of the
exchanges where they are traded. Each Fund will limit its investments so that no
more than 5% of its total assets will be placed at risk in the use of OTC
derivatives. See "Illiquid Securities" below for more information on the risks
associated with investing in OTC derivatives.
RISKS ASSOCIATED WITH OPTIONS. There are several risks associated with
-----------------------------
transactions in options. For example, there are significant differences between
the securities markets, the currency markets, and the options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to 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 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
/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.
9
<PAGE>
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 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
10
<PAGE>
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 a Fund's 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 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
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<PAGE>
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 a Fund
invests will not at any time exceed the sum of:
(1) The value of short-term U.S. debt obligations or other U.S. dollar
denominated high-quality short-term money market instruments and cash
set aside in an identifiable manner, plus any funds deposited as
margin on the contract;
/2/ 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.
12
<PAGE>
(2) Unrealized appreciation on the contract held by the broker; and
(3) Cash proceeds from existing investments due in not more than 30 days.
"Underlying commodity value" means the size of the contract multiplied by
the daily settlement price of the contract.
No Fund will purchase puts, calls, straddles, spreads, or any combination
thereof if by reason of such purchase more than 10% of 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.
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.
___________________________
/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).
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<PAGE>
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 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."
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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.
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
15
<PAGE>
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. A Fund will incur transaction
costs in connection with short sales.
In addition to enabling a Fund to hedge against market risk, short sales
may afford the 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
The Funds may invest in debt securities, including lower-rated securities
(i.e., securities rated BB or lower by Standard & Poor's Corporation ("S&P") or
Ba or lower by Moody's Investor Services, Inc. ("Moody's"), commonly called
"junk bonds"), and securities that are not rated. There are no restrictions as
to the ratings of debt securities acquired by either Fund or the portion of each
Fund's assets that may be invested in debt securities in a particular ratings
category. No 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.
16
<PAGE>
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
No 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, any 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.
Notwithstanding the above, a Fund may purchase securities that have been
privately placed but that are eligible for purchase and sale under Rule 144A
under the 1933 Act. That rule permits certain qualified institutional buyers,
such as the Funds, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. WAM, under the supervision of the board
of trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to each Fund's restriction of investing no more than
15% of the
17
<PAGE>
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, no Fund intends to invest more than 5%
of its total assets in repurchase agreements.
18
<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
The Funds have the flexibility to respond promptly to changes in market and
economic conditions. In the interest of preserving shareholders' capital, WAM
may employ a temporary defensive investment strategy if it determines such a
strategy to be warranted. Pursuant to such a defensive strategy, 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
19
<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, U.S. SMALL CAP and INTERNATIONAL SMALL
CAP each will not:
1. With respect to 75% of the value of the Fund's total assets, invest
more than 5% of its total assets (valued at the time of investment) in
securities of a single issuer, except securities issued or guaranteed by
the government of the U.S., or any of its agencies or instrumentalities;
2. Acquire securities of any one issuer that at the time of investment
(a) represent more than 10% of the voting securities of the issuer or (b)
have a value greater than 10% of the value of the outstanding securities of
the issuer;
3. Invest more than 25% of its assets (valued at the time of investment)
in securities of companies in any one industry;
4. Make loans, but this restriction shall not prevent the Fund from (a)
buying a part of an issue of bonds, debentures, or other obligations that
are publicly distributed, or from investing up to an aggregate of 15% of
its total assets (taken at market value at the time of each purchase) in
parts of issues of bonds, debentures or other obligations of a type
privately placed with financial institutions, (b) investing in repurchase
agreements, or (c) lending portfolio securities, provided that it may not
lend securities if, as a result, the aggregate value of all securities
loaned would exceed 33% of its total assets (taken at market value at the
time of such loan);/4/
/4/ The Funds have no present intention of lending their portfolio securities.
20
<PAGE>
5. Borrow money except (a) from banks for temporary or emergency purposes
in amounts not exceeding 33% of the value of the Fund's total assets at the
time of borrowing, and (b) in connection with transactions in options,
futures and options on futures;/5/
6. Underwrite the distribution of securities of other issuers; however,
the Fund may acquire "restricted" securities which, in the event of a
resale, might be required to be registered under the Securities Act of 1933
on the ground that the Fund could be regarded as an underwriter as defined
by that act with respect to such resale; but the Fund will limit its total
investment in restricted securities and in other securities for which there
is no ready market, including repurchase agreements maturing in more than
seven days, to not more than 15% of its net assets at the time of
acquisition;
7. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real
estate or interests in real estate;
8. Purchase and sell commodities or commodity contracts, except that it
may enter into (a) futures and options on futures and (b) forward
contracts;
9. Make margin purchases of securities, except for use of such short-term
credits as are needed for clearance of transactions and except in
connection with transactions in options, futures and options on futures;
10. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
Restrictions 1 through 10 above are "fundamental," which means that they
cannot be changed without the approval of the lesser of (i) 67% of the Fund's
shares present at a meeting if more than 50% of the shares outstanding are
present or (ii) more than 50% of the Fund's outstanding shares.
In addition, each Fund is subject to a number of restrictions that may be
changed by the Board of Trustees without shareholder approval. Under those non-
fundamental restrictions, each Fund will not:
(a) Invest in companies for the purpose of management or the exercise of
control;
(b) Invest in oil, gas or other mineral leases or exploration or
development programs, although it may invest in marketable securities of
enterprises engaged in oil, gas or mineral exploration;
/5/ State insurance laws currently restrict a Fund's borrowings to facilitate
redemptions to no more than 25% of the Fund's net assets.
21
<PAGE>
(c) Invest more than 10% of its net assets (valued at the time of
investment) in warrants, valued at the lower of cost or market; provided
that warrants acquired in units or attached to securities shall be deemed
to be without value for purposes of this restriction;
(d) Invest more than 5% of its total assets (valued at time of investment)
in securities of issuers with less than three years' operation (including
predecessors);
(e) Acquire securities of other registered investment companies except in
compliance with the Investment Company Act of 1940 and applicable state
law;
(f) Purchase or retain securities of a company if all of the Trustees,
directors and officers of the Trust and of WAM who individually own
beneficially more than 1/2% of the securities of the company collectively
own beneficially more than 5% of such securities;
(g) Pledge, mortgage or hypothecate its assets, except as may be necessary
in connection with permitted borrowings or in connection with short sales,
options, futures and options on futures;
(h) Purchase a put or call option if the aggregate premiums paid for all
put and call options exceed 20% of its net assets (less the amount by which
any such positions are in-the-money), excluding put and call options
purchased as closing transactions;
(i) Sell securities short or maintain a short position.
In pursuing their investment objectives, WANGER TWENTY and WANGER FOREIGN
FORTY each will not:
1. Acquire securities of any one issuer, which at the time of investment
(a) represent more than 10% of the voting securities of the issuer or (b)
have a value greater than 10% of the value of the outstanding securities of
the issuer;
2. With respect to 50% of 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
22
<PAGE>
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;
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;
23
<PAGE>
(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, 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, any Fund may
purchase securities pursuant to the exercise of subscription rights, provided
that such purchase will not result in the Fund's ceasing to be a diversified
investment company. Japanese and European corporations frequently issue
additional capital stock by means of subscription rights offerings to existing
shareholders at a price substantially below the market price of the shares. The
failure to exercise such rights would result in a Fund's interest in the issuing
company being diluted. The market for such rights is not well developed in all
cases and, accordingly, the Fund may not always realize full value on the sale
of rights. The exception applies in cases where the limits set forth in the
investment restrictions would otherwise be exceeded by exercising rights or
would have already been exceeded as a result of fluctuations in the market value
of the Fund's portfolio securities with the result that the Fund would be forced
either to sell securities at a time when it might not otherwise have done so, or
to forego exercising the rights.
In addition, pursuant to state insurance laws, each Fund is subject to the
following guidelines, which may also be changed by the Trustees:
(a) Each Fund will be invested in a minimum of five different foreign
countries at all times, except that this minimum is reduced to four when
foreign country investments comprise less than 80% of the value of the
Fund's net assets; to three when less than 60% of such value; to two when
less than 40%; and to one when less than 20%.
(b) Each Fund will have no more than 20% of its net assets invested in
securities of issuers located in any one country; except that a Fund may
have an additional 15% of its net assets invested in securities of issuers
located in any one of the following countries: Australia; Canada; France;
Japan; the United Kingdom; or Germany.
24
<PAGE>
(c) A Fund may not acquire the securities of any issuer if, as a result of
such investment, more than 10% of the Fund's total assets would be invested
in the securities of any one issuer, except that this restriction shall not
apply to U.S. Government securities or foreign government securities; and
the Fund will not invest in a security if, as a result of such investment,
it would hold more than 10% of the outstanding voting securities of any one
issuer.
(d) Each Fund may borrow no more than 10% of the value of its net assets
when borrowing for any general purpose and 25% of net assets when borrowing
as a temporary measure to facilitate redemptions.
PERFORMANCE INFORMATION
From time to time the Funds may quote total return figures. "Total Return"
for a period is the percentage change in value during the period of an
investment in shares of 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
For example, as of December 31, 1998 the Total Return and Average Total
Return on a $1,000 investment in the funds for the following periods were:
U.S. SMALL CAP Average Annual
--------------- Total Return Total Return
--------------- ---------------
1 year............................ 8.7% 8.7%
Life of Fund (inception 5/3/95)... 139.2% 26.8%
INTERNATIONAL SMALL CAP Average Annual
---------------------------------- Total Return Total Return
-------------- ---------------
1 year........................... 16.3% 16.3%
Life of Fund (inception 5/3/95).. 103.5% 21.4%
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<PAGE>
As of December 31, 1998, WANGER TWENTY and WANGER FOREIGN FORTY had not yet
commenced operations.
The Funds impose no sales charges and pay no distribution expenses. Income
taxes are not taken into account. Performance figures quoted by the Funds are
not necessarily indicative of future results. Each Fund's performance is a
function of conditions in the securities markets, portfolio management, and
operating expenses. Although information about past performance is useful in
reviewing a Fund's performance and in providing some basis for comparison with
other investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods. Fund
performance figures do not reflect expenses of the separate accounts of the Life
---
Companies, expenses imposed under the Variable Contracts, or expenses imposed by
Retirement Plans.
In advertising and sales literature, a Fund's 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.
The Funds may note their mention or recognition in newsletters, newspapers,
magazines, or other media. Portfolio managers and other member of WAM's staff
may make presentations at conferences or trade shows, appear on television or
radio programs, or conduct or participate in telephone conference calls, and the
Funds may announce those presentations, appearances or calls to some or all
shareholders, or to potential investors in the Funds. Biographical and other
information about a Fund's portfolio manager, including information about awards
received by that portfolio manager or mentions of the manager in the media, may
also be described or quoted in Fund advertisements or sales literature.
The Funds may also use statistics to indicate volatility or risk. The
premise of each of these measures is that greater volatility connotes greater
risk undertaken in achieving performance. One measure of volatility is beta.
Beta is the volatility of a fund's total return relative to the movements of a
benchmark index. A beta greater than one indicates volatility greater than the
index, and a beta of less than one indicates a volatility less than the index.
Another measure of volatility is R-squared. It reflects the percentage of a
fund's price movements that are explained by movements in the benchmark index.
An R-squared of 1.00 indicates that all movements of a fund's price are
completely explained by movements in the index. Generally, a higher R-squared
will indicate a more reliable beta figure. Alpha is a measure used to discuss a
fund's relative performance. Alpha measures the actual return of a fund compared
to the expected return of a fund given its risk (as measured by beta). The
expected return of a fund is based on how historical movements of the benchmark
index and historical performance of a fund compare to the benchmark index. The
expected return is computed by multiplying the advance or decline in a market
represented by a fund's beta. A positive alpha quantifies the value that a fund
manager has added and a negative alpha quantifies the value that a fund manager
has lost. Beta and R-squared are calculated by performing a least squares linear
regression using five years of monthly total return figures for each portfolio
and
26
<PAGE>
benchmark combination. Alpha is calculated by taking the difference between the
average monthly portfolio return and the beta-adjusted average monthly benchmark
return. The result of this calculation is then geometrically annualized.
The following are some benchmark indices utilized by the Funds:
Salomon Brothers Extended Market Index ("EMI"), an index of the bottom 20% of
institutionally investable capital of countries, selected by Salomon, excluding
the U.S.; Morgan Stanley's Europe, Australasia Far East Index ("EAFE"), an index
of companies throughout the world in proportion to world stock market
capitalizations, excluding the U.S. and Canada; the Standard & Poor's 500 Stock
Index ("S&P 500"), a broad, market-weighted average of U.S. blue-chip companies;
the Standard & Poor's MidCap 400 ("S&P 400"), also a broad, market-weighted
average of U.S. companies in the next tier down in size from the S&P 500; and
the Russell 2000 Index, an index formed by taking the 3,000 largest U.S.
companies and eliminating the largest 1,000, leaving an unweighted index of 2000
small companies. All indexes are unmanaged and included reinvested dividends.
As of December 31, 1998, some statistics for the Funds are as follows:
<TABLE>
<CAPTION>
R2 Beta Alpha
-- ---- -----
<S> <C> <C> <C>
U.S. SMALL CAP
--------------
vs. S&P 500 .52 .77 5.59%
vs. Russell 2000 .84 .79 21.64%
INTERNATIONAL SMALL CAP
-----------------------
vs. EMI Ex U.S. .78 1.05 11.72%
vs. EAFE .60 .82 7.40%
</TABLE>
Other measures of volatility and relative performance may be used as
appropriate. All such measures will fluctuate and do not represent future
results.
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, John H. Park and Margaret M. Forster. Ralph Wanger is the president of
WAM Ltd. On matters submitted to the shareholders of WAM Ltd., each shareholder
has one vote (or a lesser vote in the case of new shareholders). With certain
exceptions (including for extraordinary transactions, for which Mr. Wanger's
consent is required), decisions are made by majority vote. WAM commenced
operations in 1992.
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<PAGE>
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:
U.S. SMALL CAP
Average Daily Net Assets Rate of Fee
------------------------ -----------
First $100 million 1.00%
$100 million to $250 million 0.95%
In excess of $250 million 0.90%
INTERNATIONAL SMALL CAP
Average Daily Net Assets Rate of Fee
------------------------ -----------
First $100 million 1.30%
$100 million to $250 million 1.20%
In excess of $250 million 1.10%
WANGER TWENTY
Rate of Fee
-----------
0.95%
WANGER FOREIGN FORTY
Rate of Fee
-----------
1.00%
These fees may be reduced by any amount necessary to cause a Fund's expenses to
be within the limitation described below.
28
<PAGE>
The investment advisory fees of U.S. SMALL CAP for the fiscal period for
the fiscal year ended December 31, 1996 were $704,115; for the fiscal year ended
December 31, 1997 were $1,960,795; and for the fiscal year ended December 31,
1998 were $2,972,442. The investment advisory fees of INTERNATIONAL SMALL CAP
for the fiscal year ended December 31, 1996 were $631,977; for the fiscal year
ended December 31, 1997 were $1,528,703; and for the fiscal year ended December
31, 1998 were $1,751,136.
The Funds pay the cost of custodial, stock transfer, dividend disbursing,
audit and legal services, and membership in trade organizations. They also pay
other expenses such as the cost of maintaining the registration of their shares
under federal law, complying with state securities laws, proxy solicitations,
printing and distributing notices and copies of the prospectus and shareholder
reports furnished to existing shareholders, taxes, insurance premiums, and the
fees of trustees not affiliated with WAM.
DISTRIBUTOR
Shares of each Fund are 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.
29
<PAGE>
On any matter submitted to a vote of shareholders, shares are voted in the
aggregate and not by individual series except that shares are voted by
individual series when required by the Investment Company Act of 1940 or other
applicable law, or when the board of trustees determines that the matter affects
only the interests of one series, in which case shareholders of the unaffected
series are not entitled to vote on such matters. All shares of the Trust are
voted together in the election of trustees. Shares do not have cumulative voting
rights; accordingly, shareholders controlling voting interests of more than 50%
of shares of the Funds voting for the election of trustees could elect all of
the trustees if they chose to do so, and in such event, shareholders controlling
voting interests of the remaining shares would not be able to elect any
trustees.
Shareholder rights regarding voting are described in the prospectus. These
voting rights are based on applicable federal and state laws. To the extent
that changes in such laws or regulations thereunder or interpretations thereof
eliminate the necessity to submit any such matters to a shareholder vote, or
otherwise restrict or limit such voting rights, the Trust reserves the right to
act in any manner permitted by such changes.
The Trust's Declaration of Trust disclaims liability of the shareholders,
trustees, and officers of the Trust for acts or obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation,
or contract entered into or executed by the Trust or the board of trustees. The
Declaration of Trust provides for indemnification out of the Trust's assets for
all losses or expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, although shareholders of a business trust may,
under certain circumstances, be held personally liable under Massachusetts law
for the obligations of the trust, the risk of a shareholder incurring financial
loss on account of shareholder liability is believed to be remote because it is
limited to circumstances in which the disclaimer is inoperative and the Trust
itself is unable to meet its obligations. The risk to any one series of
sustaining a loss on account of liabilities incurred by another series is also
believed to be remote.
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.
30
<PAGE>
P. Michael Phelps, trustee (9/19/1933)
222 East Chestnut Street, Chicago, Illinois 60611; retired since January
31, 1998; prior thereto, vice president and corporate secretary, Morton
International, Inc.
Ralph Wanger, trustee and president* (6/21/1934)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; director,
Wanger Investment Company, plc; 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.
Marcel P. Houtzager, vice president (10/26/1960)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
analyst and portfolio manager, Wanger Asset Management, L.P. since April
1992.
Kenneth A. Kalina, assistant treasurer (8/4/1959)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60603; Fund
controller, Wanger Asset Management, L.P., since September 1995;
assistant treasurer, Acorn Investment Trust; prior thereto, treasurer of
the Stein Roe Mutual Funds.
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, treasurer and assistant secretary, 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.
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.
Peter A. Zaldivar, vice president (__/__/19__)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; analyst and
portfolio manager, Wanger Asset Management, L.P. since 1996; prior
thereto, vice president and portfolio manager, Lord Asset Management.
31
<PAGE>
Leah J. Zell, vice president (5/23/1949)
227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal,
analyst, and portfolio manager, Wanger Asset Management, L.P., since July
1992; vice president, Acorn Investment Trust.
*Messrs. McQuaid and Wanger are Trustees who are "interested persons" of
the Trust as defined in the Investment Company Act of 1940, and of WAM.
Messrs. McQuaid, Phelps and Wanger are members of the Executive Committee,
which has authority during intervals between meetings of the Board of Trustees
to exercise the powers of the board, with certain exceptions. Messrs.
Hasselbring 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.
At January 31, 1999, the trustees and officers as a group owned
beneficially less than 1% of the outstanding shares of each of the Funds. At
that date, Phoenix Home Life Mutual Insurance Company (and its affiliates), One
American Row, Hartford, Connecticut 06115, was the record holder of
6,919,308.324 shares (approximately 96.8 % of the outstanding shares) of
INTERNATIONAL SMALL CAP, and 14,650,628.809 shares (approximately 97.9% of the
outstanding shares) of U.S. SMALL CAP, all of which are beneficially owned by
Variable Contract owners.
The following table shows compensation paid by the Trust during the fiscal
year ended December 31, 1998 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>
AGGREGATE AGGREGATE AGGREGATE AGGREGATE TOTAL
COMP. COMP. COMP. FROM COMP. FROM COMP.
NAME OF TRUSTEE FROM U.S. FROM INT. WANGER TWENTY+ WANGER FOREIGN FROM
SMALL CAP SMALL CAP FORTY+ FUND COMPLEX (4)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fred D. Hasselbring $7,200 $7,200 0 0 $14,400
Charles P. McQuaid 0 0 0 0 0
P. Michael Phelps $7,200 $7,200 0 0 $14,400
James A. Star* $2,650 $2,650 0 0 $5,300
Ralph Wanger 0 0 0 0 0
Patricia H. Werhane** $3,534 $3,534 0 0 $7,068
</TABLE>
- ----------
+ Since December 15, 1998.
* Resigned from board of trustees effective June 15, 1998.
** Elected to board of trustees July 27, 1998.
32
<PAGE>
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.
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.
Each Fund's net asset value is determined only on days on which the New
York Stock Exchange ("NYSE") is open for trading. The NYSE is regularly closed
on Saturdays and Sundays and on New Year's Day, the third Monday in January, the
third Monday in February, Good Friday, the last Monday in May, Independence Day,
Labor Day, Thanksgiving, and Christmas. If one of 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 and WANGER FOREIGN FORTY, 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.
33
<PAGE>
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 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.
34
<PAGE>
The Funds will not be subject to the 4% federal excise tax imposed on RICs
that do not distribute substantially all their income and gains each calendar
year because that tax does not apply to a RIC whose only shareholders are
segregated asset accounts of life insurance companies held in connection with
variable annuity contracts and/or variable life insurance policies or Retirement
Plans.
The foregoing is only a general summary of some of the important federal
income tax considerations generally affecting the Funds and their shareholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the Funds' activities, and this discussion and the discussion in
the prospectuses and/or statements of additional information for variable
contracts are not intended as a substitute for careful tax planning.
Accordingly, potential investors are urged to consult their own tax advisers for
more detailed information and for information regarding any state, local or
foreign taxes applicable to the variable contracts and the holders thereof.
PORTFOLIO TRANSACTIONS
Portfolio transactions of the Funds are placed with those securities
brokers and dealers that WAM believes will provide the best value in transaction
and research services for each Fund, either in a particular transaction or over
a period of time. Although some transactions involve only brokerage services,
many involve research services as well.
In valuing brokerage services, WAM makes a judgment as to which brokers are
capable of providing the most favorable net price (not necessarily the lowest
commission) and the best execution in a particular transaction. Best execution
connotes not only general competence and reliability of a broker, but specific
expertise and effort of a broker in overcoming the anticipated difficulties in
fulfilling the requirements of particular transactions, because the problems of
execution and the required skills and effort vary greatly among transactions.
In valuing research services, WAM makes a judgment of the usefulness of
research and other information provided to WAM by a broker in managing each
Fund's investment portfolio. In some cases, the information, e.g., data or
recommendations concerning particular securities, relates to the specific
transaction placed with the broker, but for the greater part the research
consists of a wide 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
35
<PAGE>
information that many securities brokers have customarily furnished in
connection with brokerage transactions, and that in compensating brokers for
their services, it is in the interest of the Funds to take into account the
value of the information received for use in advising the Funds. The extent, if
any, to which the obtaining of such information may reduce WAM's expenses in
providing management services to the Funds is not determinable. In addition, the
Board of Trustees understands that other clients of WAM might benefit from the
information obtained for the Funds, in the same manner that the Funds might
benefit from information obtained by WAM in performing services to others.
Transactions of the Funds in the over-the-counter market and the third
market are executed with primary market makers acting as principal except where
it is believed that better prices and execution may be obtained otherwise.
Brokerage commissions incurred by the Funds during the last three fiscal
years, not including the gross underwriting spread on securities purchased in
underwritten public offerings, were as follows:
<TABLE>
<CAPTION>
FUND 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Small Cap $253,172 $249,054 $243,598
International Small Cap 518,766 647,529 422,414
Wanger Twenty N/A N/A N/A
Wanger Foreign Forty N/A N/A N/A
</TABLE>
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 more of the Funds and one or more other advisory clients. If one
or more of the Funds and other clients purchase or sell the same class of
securities on the same day, the transactions will be allocated as to amount and
price in a manner considered equitable to each.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8502, Boston, Massachusetts
02266-8502, is the custodian for the Funds. It is responsible for holding all
securities and cash of the Funds, receiving and paying for securities purchased,
delivering against payment securities sold, receiving and collecting income from
investments, making all payments covering expenses of the Funds, and performing
other administrative duties, all as directed by authorized persons of the Funds.
The custodian does not exercise any supervisory function in such matters as
purchase and sale of portfolio securities, payment of dividends, or payment of
expenses of the Funds. The Funds have 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
36
<PAGE>
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.
37
<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.
38
<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.
39
<PAGE>
FINANCIAL STATEMENTS
Wanger Advisors Trust--1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Common Stocks--93.0%
Information--39.4%
- --------------------------------------------------------------------------------
Broadcasting--2.1%
250,600 Data Transmission Network (b) $7,236,075
Data Services for Farmers
- --------------------------------------------------------------------------------
Television Programming--5.3%
222,000 Liberty Media Group, 10,225,875
Tele-Communications (b)
CATV & Satellite Dish Programming
330,200 United Video Satellite Group (b) 7,800,975
CATV & Satellite Dish Programming
- --------------------------------------------------------------------------------
18,026,850
- --------------------------------------------------------------------------------
Telephone Services--5.1%
577,600 RCN Corporation (b) 10,216,300
Metro Market: Voice, Video & Data Services
193,300 Commonwealth Telephone (b) 6,475,550
Rural Market: Local, Long Distance
& Internet Access
68,600 Startec Global Communications (b) 660,275
International Telecommunications
- --------------------------------------------------------------------------------
17,352,125
- --------------------------------------------------------------------------------
Mobile Communications--6.6%
411,000 Centennial Cellular (b) 16,851,000
Cellular Franchises
234,500 COMARCO (b) 5,628,000
Wireless Network Testing
- --------------------------------------------------------------------------------
22,479,000
- --------------------------------------------------------------------------------
Telecommunications Equipment--2.2%
425,900 Aspect Telecommunications (b) 7,346,775
Call Center Equipment
- --------------------------------------------------------------------------------
Instrument--0.7%
85,000 Mettler Toledo (b) 2,385,314
Laboratory Products
- --------------------------------------------------------------------------------
Business Software--1.5%
314,000 JDA Software 3,041,875
Software & Services for Retailers
137,600 Systems & Computer Technology (b) 1,892,000
Enterprise Software & Services
- --------------------------------------------------------------------------------
4,933,875
- --------------------------------------------------------------------------------
Business Information and
Marketing Services--1.1%
353,400 Intelligent Information (b) 2,385,450
Technology Market Research
178,100 InfoUSA, C1. B 935,025
116,000 InfoUSA, C1. A 565,500
Business Data for Sales Leads
- --------------------------------------------------------------------------------
3,885,975
- --------------------------------------------------------------------------------
Transaction Processors--3.6%
247,300 National Data 12,040,418
Credit Card & Health Claims Processor
- --------------------------------------------------------------------------------
Computer Hardware & Related Systems--8.0%
417,100 Micros Systems (b) 13,712,164
Information Systems for Restaurants & Hotels
300,600 Kronos (b) 13,320,337
Time Accounting Software & Clocks
- --------------------------------------------------------------------------------
27,032,501
- --------------------------------------------------------------------------------
Gaming Equipment--0.8%
113,000 International Game Technology 2,747,315
Slot Machines & Progressive Jackpots
- --------------------------------------------------------------------------------
Computer Services--2.4%
222,900 Sykes Enterprises (b) 6,798,450
Call Center Services
344,000 Aztec Technology Partners (b) 1,247,000
Technology Staffing Services
- --------------------------------------------------------------------------------
8,045,450
- --------------------------------------------------------------------------------
Information--Total 133,511,673
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Health Care--9.7%
- --------------------------------------------------------------------------------
Biotechnology/Drug Delivery--0.5%
117,000 Synaptic Pharmaceuticals (b) $1,755,000
Receptor Targeted Drug Design
- --------------------------------------------------------------------------------
Health Care Services--9.2%
506,800 Lincare Holdings (b) 20,557,075
Home Health Care Services
475,000 First Health (b) 7,867,187
PPO Network
321,500 Magellan Health Services (b) 2,692,563
Mental Health Services
- --------------------------------------------------------------------------------
31,116,825
- --------------------------------------------------------------------------------
Health Care--Total 32,871,825
Consumer Goods/Services--2.7%
- --------------------------------------------------------------------------------
Retail--2.5%
809,000 Host Marriott Services (b) 8,393,375
Fast Food Kiosks in Airports
- --------------------------------------------------------------------------------
Casinos--0.2%
115,200 Monarch Casino & Resort (b) 604,800
Casino/Hotel in Reno
- --------------------------------------------------------------------------------
Consumer Goods/Services--Total 8,998,175
Finance--14.0%
- --------------------------------------------------------------------------------
Banks/Savings & Loans--2.8%
111,500 Washington Mutual 4,257,906
West Coast Savings & Loan
90,000 Texas Regional Bancshares 2,255,625
TexMex Bank
67,500 Peoples Bank Bridgeport 1,864,687
Mortgage & Credit Card Lender
157,500 Coast Contingency Rights (b) 1,043,439
Litigation Claim Against US Government
- --------------------------------------------------------------------------------
9,421,657
- --------------------------------------------------------------------------------
Finance Companies--0.7%
232,000 World Acceptance (b) 1,508,000
Personal Loans
70,000 Americredit 966,875
Auto Lending
- --------------------------------------------------------------------------------
2,474,875
- --------------------------------------------------------------------------------
Insurance--7.8%
348,600 UICI (b) 8,540,700
Health Insurance
403,900 Acceptance Insurance (b) 8,178,975
Crop Insurance
21,000 Markel (b) 3,801,000
Property & Casualty Insurance
135,000 AmerUs Life Holdings 3,020,625
Annuities/Life Insurance
92,000 Leucadia National 2,898,000
Insurance Holding Company
- --------------------------------------------------------------------------------
26,439,300
- --------------------------------------------------------------------------------
Money Management--2.7%
66,000 SEI Investments 6,558,750
Mutual Fund Administration
167,817 Baker Fentress 2,569,697
Closed-End Investment Company
- --------------------------------------------------------------------------------
9,128,447
- --------------------------------------------------------------------------------
Finance--Total 47,464,279
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Industrial Goods/Services--8.5%
- --------------------------------------------------------------------------------
Machinery--1.3%
270,700 Farr (b) $2,740,837
Filters
91,000 Vallen (b) 1,820,000
Safety Products Distribution
- --------------------------------------------------------------------------------
4,560,837
- --------------------------------------------------------------------------------
Steel--1.2%
232,400 Atchison Casting (b) 2,149,700
Steel Foundries
126,400 Schnitzer Steel 1,817,000
Scrap Steel Processor
- --------------------------------------------------------------------------------
3,966,700
- --------------------------------------------------------------------------------
Specialty Chemicals--1.1%
189,600 Lilly Industries, Cl. A 3,780,150
Industrial Coatings
- --------------------------------------------------------------------------------
Other Industrial Services--4.9%
476,200 Wackenhut, Cl. B 10,446,637
Prison Management
398,700 Insurance Auto Auctions (b) 4,734,562
Auto Salvage Services
140,900 Compass International Services (b) 1,497,062
Collection Agencies
- --------------------------------------------------------------------------------
16,678,261
- --------------------------------------------------------------------------------
Industrial Goods/Services--Total 28,985,948
Energy/Minerals--15.9%
- --------------------------------------------------------------------------------
Independent Power--7.6%
689,600 CalEnergy (b) 23,920,500
Power Plants/Competitive Utility
38,000 AES Corporation (b) 1,800,250
Power Plants
- --------------------------------------------------------------------------------
25,720,750
- --------------------------------------------------------------------------------
Oil/Gas Producers--2.5%
698,900 Tesoro Petroleum (b) 8,474,163
Oil Refinery/Gas Reserves
139,000 Tipperary (b) 147,687
Oil & Gas Producer
- --------------------------------------------------------------------------------
8,621,850
- --------------------------------------------------------------------------------
Oil Refining/Marketing/Distribution--4.5%
258,000 Atmos Energy 8,320,500
Natural Gas Utility
137,000 Equitable Resources 3,990,125
Natural Gas Utility & Producer
279,100 Dynegy 3,052,656
Natural Gas Processing/Marketing
- --------------------------------------------------------------------------------
15,363,281
- --------------------------------------------------------------------------------
Oil Services--1.3%
93,000 J Ray McDermott (b) 2,272,687
Offshore Construction Company
198,000 GeoScience (b) 2,165,625
Offshore Seismic Equipment
- --------------------------------------------------------------------------------
4,438,312
- --------------------------------------------------------------------------------
Energy/Minerals--Total 54,144,193
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares or Principal
Amount
<S> <C>
Other Industries--2.8%
- --------------------------------------------------------------------------------
Real Estate--1.8%
125,600 Forest City Enterprises Cl. A $3,297,000
Shopping Centers
64,900 Gaylord Entertainment (b) 1,955,112
Opryland Hotel & Other Assets
45,000 Cornerstone Properties 703,125
Downtown Office Buildings
- --------------------------------------------------------------------------------
5,955,237
- --------------------------------------------------------------------------------
Transportation--1.0%
174,000 Hub Group (b) 3,371,250
Freight Forwarder
66,000 Trailer Bridge (b) 101,062
Tug & Barge Transportation
- --------------------------------------------------------------------------------
3,472,312
- --------------------------------------------------------------------------------
Other Industries--Total 9,427,549
Total Common Stocks--93.0% 315,403,642
- --------------------------------------------------------------------------------
(Cost: $265,298,784)
- --------------------------------------------------------------------------------
Short-Term Obligations--7.6%
$13,412,000 Ford Motor Credit 5.21% Maturing 01/04/99 13,406,177
$12,469,000 State Street Bank Repurchase Agreement 12,469,000
4.25% Maturing 01/04/99; 12/31/98 Agreement
Collateralized by U.S. Treasury Notes
- --------------------------------------------------------------------------------
(Amortized Cost: $25,875,177) 25,875,177
- --------------------------------------------------------------------------------
Total Investments--100.6% 341,278,819
(Cost: $291,173,961)
Cash and Other Assets Less Liabilities--(0.6%) (2,159,938)
- --------------------------------------------------------------------------------
Total Net Assets--100% $339,118,881
================================================================================
</TABLE>
Notes to Statement of Investments:
(a) At December 31, 1998, for federal income tax purposes cost of investments
was $291,578,447 and net unrealized appreciation was $49,700,372 consisting
of gross unrealized appreciation of $79,338,202 and gross unrealized
depreciation of $29,637,830.
(b) Non-income producing security.
See accompanying notes to financial statements.
43
<PAGE>
Wanger Advisors Trust--1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Common Stocks--96.6%
Europe--66.0%
- --------------------------------------------------------------------------------
Germany/Austria--3.1%
34,000 Rhoen Klinikum $ 3,378,362
Hospital Management
160,000 Scala Business Solutions 1,037,684
GIC Units (b)
ERP Software (Austria)
- --------------------------------------------------------------------------------
4,416,046
- --------------------------------------------------------------------------------
Denmark--1.1%
20,000 Vest Wood 1,602,639
Furniture
- --------------------------------------------------------------------------------
Netherlands--5.9%
92,000 Hunter Douglas 3,049,182
Decorative Window Coverings
44,000 Kempen 2,339,851
Stock Brokerage/Investment Management
100,000 Unique International 2,291,255
Human Resources
26,051 Computer Service Solutions (b) 617,720
Computer Services
- --------------------------------------------------------------------------------
8,298,008
- --------------------------------------------------------------------------------
Finland--7.5%
248,800 Talentum 4,176,640
Trade Journals & Multimedia
90,000 Tieto, Cl. B 4,034,838
Computer Services/Consulting
150,000 Elcoteq Network 1,629,339
Electrical Components
70,000 Rapala Normark (b) 608,286
Fishing & Hunting Equipment
1,550 Spar Finland 67,346
Grocery/Convenience Stores
- --------------------------------------------------------------------------------
10,516,449
- --------------------------------------------------------------------------------
Norway--0.3%
149,800 P4 Radio Hele Norge 462,042
Commercial Radio Station
7,490 Electric Farm (b) 1,970
Internet Services
- --------------------------------------------------------------------------------
464,012
- --------------------------------------------------------------------------------
Sweden--6.6%
125,000 Elanders 2,344,000
Printer
230,800 Semcon 1,907,720
Technical Consulting
125,000 Caran 1,542,105
Engineering Consulting
300,000 Micronic Laser Systems (b) 1,406,400
Electronics Production Equipment
175,000 Mandator 1,370,931
Computer Services/Consulting
350,000 Gylling Optima Class Q (b) 410,200
325,000 Gylling Optima Class B (b) 400,947
Batteries
- --------------------------------------------------------------------------------
9,382,303
- --------------------------------------------------------------------------------
France--2.7%
15,000 Fininfo 2,658,336
Financial Data Feeds
14,919 Cie des Signaux 1,094,985
Computer Services/Telecom Equipment
- --------------------------------------------------------------------------------
3,753,321
- --------------------------------------------------------------------------------
United Kingdom--20.2%
350,000 Seton Scholl Healthcare Group 4,877,011
Pharmaceuticals
400,000 Parity 3,810,100
IT Staffing & Services
60,000 NTL (b) 3,386,250
Voice, Video & Data Services
</TABLE>
See accompanying notes to financial statements.
44
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C> <C>
United Kingdom--cont.
- --------------------------------------------------------------------------------
1,000,000 Workplace Technologies $3,277,685
Network Integration
600,000 Informa Group 2,840,105
Trade Journals & Conferences
2,000,000 Electronics Boutique 2,687,036
Videogame/Computer Software Stores
1,500,000 Taylor Nelson 1,896,731
Market Research
500,000 Hogg Robinson 1,717,875
Corporate Travel Management
58,600 Euro Money Publications 1,364,981
Financial Publications
400,000 Oriflame International 1,141,366
Cosmetics Sold Door-to-Door
50,600 Vosper Thornycroft 646,986
Naval Shipbuilding
129,000 Edinburgh Fund Managers 531,210
Investment Management
350,000 Dialog (b) 337,751
Online Business Information
- --------------------------------------------------------------------------------
28,515,087
- --------------------------------------------------------------------------------
Spain/Portugal--6.3%
100,000 Mapfre Vida 3,768,645
Life Insurance/Mutual Funds
250,000 Prosegur 2,919,991
Security Guards
100,000 Filmes Lusomundo (b) 1,254,012
Newspapers, Radio, Video,
Film Distribution (Portugal)
18,200 Jeronimo Martins 995,642
Hypermarkets/Supermarkets (Portugal)
- --------------------------------------------------------------------------------
8,938,290
- --------------------------------------------------------------------------------
Switzerland--4.7%
4,000 Phoenix Mecano 2,402,621
Electrical Components
1,500 Pargesa 2,369,860
Industrial & Media Conglomerate
3,000 Affichage 1,170,731
Billboard Advertising
2,600 Hiestand 681,470
Bakery
- --------------------------------------------------------------------------------
6,624,682
- --------------------------------------------------------------------------------
Italy/Greece--7.6%
600,000 Autogrill 4,832,190
Tollway Restaurants
150,000 Banca Pop Commercia e Industria 3,015,570
Regional Bank
150,000 Athens Medical Center 2,943,224
Hospitals (Greece)
- --------------------------------------------------------------------------------
10,790,984
- --------------------------------------------------------------------------------
Europe--Total 93,301,821
Asia--19.6%
- --------------------------------------------------------------------------------
Hong Kong--2.9%
1,640,000 Li and Fung 3,397,570
Sourcing of Consumer Goods
950,000 Dickson Concepts 735,740
Luxury Goods Retailer
- --------------------------------------------------------------------------------
4,133,310
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31,1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Value
Shares
<S> <C>
Japan--6.8%
90,000 NuSkin Enterprises (b) $2,126,250
Cosmetics Sold Door-to-Door
60,000 Enix Corporation 1,962,765
Game Software Developer
13,800 Ryohin Keikaku 1,841,223
Specialty Consumer Goods Retailer
75,000 Kawasumi Labs 1,476,065
Medical Supplies
75,700 Shinki 932,830
Loans to Consumers and Small Businesses
16,000 Nichii Gakkan 666,666
Hospital Administrative Services
12,500 Hokuto 304,742
Mushroom Grower
49,500 Tecmo 302,792
Game Software Developer
- --------------------------------------------------------------------------------
9,613,333
- --------------------------------------------------------------------------------
Malaysia--0.2%
388,000 Computer Systems Advisor 270,100
Systems Integration & Software Services
- --------------------------------------------------------------------------------
Singapore--9.7%
1,037,000 Venture Manufacturing 3,959,454
Electronic Manufacturing Services
1,700,400 Star Cruises (b) 3,587,844
Cruise Line
8,000,000 Omni Industries 2,569,696
Electronic Manufacturing Services
800,000 Datacraft Asia 1,416,000
Network Systems Integration
4,233,000 Datapulse Technology (b) 1,192,936
CD-ROM Replication
350,000 Natsteel Electronics 890,909
Electronic Manufacturing Services
- --------------------------------------------------------------------------------
13,616,839
- --------------------------------------------------------------------------------
Asia--Total 27,633,582
Latin America--4.3%
- --------------------------------------------------------------------------------
Mexico--3.2%
800,000 Grupo Continental 1,937,310
Coca-Cola Bottler
641,000 Corp Interamericana 1,749,950
de Entretenimiento (b)
Special Events & Live Entertainment
1,240,000 Nadro, Series L 789,888
Pharmaceutical Distribution
- --------------------------------------------------------------------------------
4,477,148
- --------------------------------------------------------------------------------
Brazil--1.1%
150,000 Elevadores Atlas 1,613,837
Elevator Services
- --------------------------------------------------------------------------------
Latin America--Total 6,090,985
Other Countries--6.7%
- --------------------------------------------------------------------------------
Australia--1.6%
1,128,352 Tyndall Australia 1,730,329
Money Management & Insurance
362,965 Anaconda Nickel (b) 556,606
Nickel Mining
- --------------------------------------------------------------------------------
2,286,935
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
Wanger Advisors Trust--1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31,1998
<TABLE>
<CAPTION>
Number of Value
Shares or
Principal
Amount
<S> <C>
- --------------------------------------------------------------------------------
Canada--3.9%
270,000 LGS Group (b) $2,021,485
Computer Systems Integration
100,000 MDSI Mobil Data Solutions (b) 1,787,500
Wireless Software
122,900 Shaw Industries 1,000,165
Oil Field Services
50,000 Architel Systems (b) 651,041
Software for Telecommunications
- --------------------------------------------------------------------------------
5,460,191
- --------------------------------------------------------------------------------
Israel--0.6%
30,000 Galileo Technology (b) 810,000
Semiconductors
- --------------------------------------------------------------------------------
South Africa--0.6%
552,700 Energy Africa (b) 845,566
Oil & Gas Producer
- --------------------------------------------------------------------------------
Other--Total 9,402,692
Total Common Stocks--96.6% 136,429,080
- --------------------------------------------------------------------------------
(Cost: $109,875,402)
Short-Term Obligation--3.3% 4,723,000
- --------------------------------------------------------------------------------
$4,723,000 State Street Bank Repurchase Agreement
3.25% 01/04/99; 12/31/98 Agreement
Collateralized by U.S. Treasury Notes
(Cost: $4,723,000)
Total Investments--99.9% 141,152,080
- --------------------------------------------------------------------------------
(Cost: $ 114,598,402)
Cash and Other Assets Less Liabilities--0.1% 101,229
- --------------------------------------------------------------------------------
Total Net Assets--100% $141,253,309
================================================================================
</TABLE>
Notes to Statement of Investments:
(a) At December 31, 1998, for federal income tax purposes cost of investments
was $114,696,573 and net unrealized appreciation was $26,455,507 consisting
of gross unrealized appreciation of $37,317,390 and gross unrealized
depreciation of $10,861,883.
(b) Non-income producing security.
See accompanying notes to financial statements.
47
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Portfolio Diversification December 31, 1998
At December 31, 1998 the Fund's portfolio of investments
as a percentage of net assets was diversified as follows:
<TABLE>
<CAPTION>
Value Percent
- -----------------------------------------------------------------
<S> <C> <C>
Information
Computer Services $ 19,821,559 14.0%
Publishing 9,139,634 6.5
Contract Manufacturing 8,612,997 6.1
Business Information &
Marketing Services 4,892,818 3.5
Business Software 4,528,832 3.2
CATV 3,386,250 2.4
Semiconductors & Related Equipment 2,216,400 1.6
Gaming Equipment 1,962,766 1.4
Domestic Consumer Software 1,787,500 1.3
Advertising 1,170,732 0.8
Radio 464,008 0.3
- -----------------------------------------------------------------
57,983,496 41.1
- -----------------------------------------------------------------
Health Care
Hospital Management 6,321,587 4.5
Pharmaceuticals 4,877,012 3.5
Hospital/Laboratory Supplies 1,476,064 1.0
Health Care Services 666,667 0.5
- -----------------------------------------------------------------
13,341,330 9.5
- -----------------------------------------------------------------
Consumer Goods/Services
Retail 6,259,642 4.4
Travel 5,305,717 3.8
Restaurants 4,832,189 3.4
Nondurables 3,267,616 2.3
Beverages 1,937,310 1.4
Furniture/Textile 1,602,640 1.2
Food 986,214 0.7
Consumer Goods Distribution 857,235 0.6
Leisure Products 608,287 0.4
International Consumer Software 302,793 0.2
Other Durable Goods 3,860,330 2.7
Other Entertainment 1,749,949 1.2
- -----------------------------------------------------------------
31,569,922 22.3
- -----------------------------------------------------------------
Finance
Insurance 3,768,642 2.6
Banks 3,015,570 2.1
Closed-End Funds 2,369,858 1.7
Brokerage 2,339,852 1.7
Money Management 2,261,537 1.6
Finance Companies 932,828 0.7
- -----------------------------------------------------------------
14,688,287 10.4
- -----------------------------------------------------------------
Industrial Goods/Services
Outsourcing and Training Services 10,150,924 7.2
Electrical Components 4,031,961 2.8
Other Industrial Services 1,613,838 1.1
Machinery 646,985 0.5
- -----------------------------------------------------------------
16,443,708 11.6
- -----------------------------------------------------------------
Energy/Minerals
Oil Services 1,000,163 0.7
Oil/Gas Producers 845,567 0.6
Non-Ferrous Metals 556,607 0.4
- -----------------------------------------------------------------
2,402,337 1.7
- -----------------------------------------------------------------
Total Common Stocks 136,429,080 96.6
Short-Term Obligations 4,723,000 3.3
- -----------------------------------------------------------------
Cash and Other Assets Less Liabilities 101,229 0.1
- -----------------------------------------------------------------
Net Assets $141,253,309 100.0%
- -----------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
<TABLE>
<CAPTION>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------------------------------------------
Statements of Assets and Liabilities December 31, 1998
Wanger U.S. Wanger International
Small Cap Small Cap
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at value (cost: Wanger U.S. Small Cap $291,173,961; $341,278,819 $141,152,080
Wanger International Small Cap $114,598,402)
Cash 900 --
Organization costs 26,688 26,688
Receivable for:
Securities sold 128,796 320,926
Fund shares sold 455,068 18,010
Dividends and interest 78,895 158,549
Other assets 3,366 2,275
- ---------------------------------------------------------------------------------------------------------------------
Total assets 341,972,532 141,678,528
Liabilities and Net Assets
Cash Overdraft -- 19,998
Payable for:
Securities purchased 2,644,341 255,760
Fund shares redeemed 142,326 53,377
Amount owed to advisor 27,098 26,732
Other 39,886 69,352
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 2,853,651 425,219
- ---------------------------------------------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $339,118,881 $141,253,309
- ---------------------------------------------------------------------------------------------------------------------
Fund shares outstanding 15,290,823 7,197,954
- ---------------------------------------------------------------------------------------------------------------------
Pricing of Shares
Net asset value, offering price and redemption price per share $22.18 $19.62
- ---------------------------------------------------------------------------------------------------------------------
Analysis of Net Assets
Paid-in capital $258,403,736 $119,664,782
Undistributed net realized gain (loss) on sales of investments 30,610,287 (7,277,677)
Net unrealized appreciation of investments and foreign currency
transactions
(net of unrealized PFIC gains of $83,762 for Wanger International Small Cap) 50,104,858 26,470,102
Undistributed net investment income -- 2,396,102
- ---------------------------------------------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $339,118,881 $141,253,309
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Statements of Operations For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Wanger U.S. Wanger International
Small Cap Small Cap
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Dividends (net of foreign taxes of $220,936 for Wanger International Small Cap) $ 1,186,818 $ 1,946,183
Interest 1,201,904 408,617
- -----------------------------------------------------------------------------------------------------------------------------
Total investment income 2,388,722 2,354,800
- -----------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory 2,972,442 1,751,136
Custodian 42,548 233,512
Legal and audit 44,236 42,701
Reports to shareholders 35,986 36,902
Amortization of organization costs 19,976 19,976
Transfer agent 22,675 19,500
Trustees 20,787 20,787
Insurance 3,067 2,450
Other 16,257 8,483
- -----------------------------------------------------------------------------------------------------------------------------
Total expenses 3,177,974 2,135,447
Less custodian fees paid indirectly (5,829) (785)
- -----------------------------------------------------------------------------------------------------------------------------
Net expenses 3,172,145 2,134,662
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (783,423) 220,138
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on sales of investments 31,406,965 (2,995,916)
Net change in unrealized appreciation of investments (6,414,368) 21,548,547
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 24,992,597 18,552,631
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 24,209,174 $ 18,772,769
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
-------------------------------------- --------------------------------------
Wanger U.S. Small Cap Wanger International Small Cap
Year ended Year ended Year ended Year ended
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
From operations:
Net investment income (loss) $ (783,423) $ (206,969) $ 220,138 $ 148,271
Net realized gain (loss) on sales of investments 31,406,965 15,616,554 (2,995,916) (616,933)
Net change in unrealized appreciation (6,414,368) 37,057,494 21,548,547 (2,999,052)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 24,209,174 52,467,079 18,772,769 (3,467,714)
Distributions to shareholders from:
Net investment income -- -- (1,532,876) --
Net realized gain (15,422,770) (3,530,225) -- (2,453,253)
- --------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (15,422,770) (3,530,225) (1,532,876) (2,453,253)
From Fund share transactions:
Reinvestment of dividends and capital
gain distributions 15,407,847 3,530,225 1,530,069 2,453,253
Proceeds from other shares sold 94,608,919 109,491,784 26,836,486 54,111,870
- --------------------------------------------------------------------------------------------------------------------------------
110,016,766 113,022,009 28,366,555 56,565,123
Payments for shares redeemed (50,550,116) (20,050,947) (25,013,297) (14,839,080)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from
Fund share transactions 59,466,650 92,971,062 3,353,258 41,726,043
- --------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 68,253,054 141,907,916 20,593,151 35,805,076
- --------------------------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of period 270,865,827 128,957,911 120,660,158 84,855,082
- --------------------------------------------------------------------------------------------------------------------------------
End of period (a) $339,118,881 $270,865,827 $141,253,309 $120,660,158
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes accumulated net investment income
of $2,396,211 and $1,532,855 for Wanger International Small Cap
at December 31, 1998 and 1997, respectively.
See accompanying notes to financial statements.
51
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger U.S. Small Cap Financial Highlights
<TABLE>
<CAPTION>
Year ended Year ended Year ended May 3, 1995 through
December 31, 1998 December 31, 1997 December 31, 1996 December 31,1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of period $ 21.46 $ 16.97 $ 11.60 $ 10.00
Income From Investment Operations
Net investment loss (c) (.05) (.02) (.06) (.05)
Net realized and unrealized gain on investments 1.93 4.90 5.46 1.65
- ----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.88 4.88 5.40 1.60
Less Distributions
Dividends from net investment income -- -- -- --
Distributions from net realized gain (1.16) (.39) (.03) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (1.16) (.39) (.03) --
Net Asset Value, end of period $ 22.18 $ 21.46 $ 16.97 $ 11.60
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 8.68% 29.41% 46.59% 16.00%
Ratios/Supplemental Data
Ratio of expenses to average net assets (a) (b) 1.02% 1.06% 1.21% 2.08%
Ratio of net investment loss to average net assets (b) (.25%) (.10%) (.41%) (1.44%)
Portfolio turnover rate 34% 34% 46% 59%
Net assets at end of period $339,118,881 $270,865,827 $128,957,911 $21,903,536
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects total expenses prior to the reduction of custodian fees
for cash balances it maintains with the custodian ("custodian fees paid
indirectly"). This ratio net of custodian fees paid indirectly would have
been 1.04% for the year ended December 31, 1997, 1.19% for the year ended
December 31, 1996 and 2.00% for the period ended December 31, 1995.
(b) The fund was reimbursed by the Advisor for certain expenses from May 3,
1995 through December 31, 1995. Without the reimbursement, the ratio of
expenses (prior to custodian fees paid indirectly) to average net assets
and the ratio of net investment income to average net assets for the period
ended December 31, 1995 would have been 2.35% and (1.71%), respectively.
(c) Net investment loss per share for the years ended December 31, 1998, 1997
and 1996 was based upon the average shares outstanding during the period.
See accompanying notes to financial statements.
52
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Financial Highlights
<TABLE>
<CAPTION>
Year ended Year ended Year ended May 3, 1995 through
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C>
====================================================================================================================================
Net Asset Value, beginning of period $17.05 $17.71 $13.45 $10.00
Income From Investment Operations
Net investment income (loss)(c) .03 .02 (.09) (.03)
Net realized and unrealized gain on investments 2.76 (.26) (4.38) (3.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.79 (.24) 4.29 3.45
Less Distributions
Dividends from net investment income (.22) -- -- --
Distributions from net realized gain and unrealized
gain reportable for federal income taxes -- (.42) (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.42) (.03) --
Net Asset Value, end of period $19.62 $17.05 $17.71 $13.45
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 16.33% (1.46%) 32.01% 34.50%
Ratios/Supplemental Data Ratio of expenses to
average net assets (a)(b) 1.55% 1.60% 1.79% 2.32%*
Ratio of net investment income (loss)
to average net assets (b) .16% .12% (.56%) (.81%)*
Portfolio turnover rate 56% 60% 50% 14%*
Net assets at end of period 141,253,309 120,660,158 84,855,082 11,368,924
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects total expenses prior to the reduction of custodian fees
for cash balances it maintains with the custodian ("custodian fees paid
indirectly"). This ratio net of custodian fees paid indirectly would have
been 1.59% for the year ended December 31, 1997, 1.75% for the year ended
December 31, 1996 and 2.00% for the period ended December 31, 1995.
(b) The fund was reimbursed by the Advisor for certain expenses from May 3, 1995
through December 31, 1995. Without the reimbursement, the ratio of expenses
(prior to custodian fees paid indirectly) to average net assets and the
ratio of net investment income to average net assets for the period ended
December 31, 1995 would have been 4.20% and (2.69%), respectively.
(c) Net investment income (loss) per share for the years ended December 31,
1998, 1997 and 1996 was based upon the average shares outstanding during the
period.
See accompanying notes to financial statements.
53
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements
1. Nature of Operations
Wanger U.S. Small Cap and Wanger International Small Cap ("the Funds") are
series of Wanger Advisors Trust ("the Trust"), an open-end management investment
company organized as a Massachusetts business trust. The investment objective of
each Fund is to seek long-term growth of capital. The Funds are available only
for allocation to certain life insurance company separate accounts established
for the purpose of funding qualified and non-qualified variable annuity
contracts, and may also be offered directly to certain types of pension plans
and retirement arrangements.
2. Significant Accounting Policies
Security valuation
Investments are stated at current value. Securities traded on securities
exchanges or in over-the-counter markets in which transaction prices are
reported are valued at the last sales price at the time of valuation. Securities
for which there are no reported sales on the valuation date are valued at the
mean of the latest bid and ask quotation or, if there is no ask quotation, at
the most recent bid quotation. Money market instruments having a maturity of 60
days or less from the valuation date are valued on an amortized cost basis.
Securities for which quotations are not readily available and any other assets
are valued as determined in good faith by the Board of Trustees.
Foreign currency translations
Values of investments denominated in foreign currencies are converted into U.S.
dollars using the spot market rate of exchange at the time of valuation.
Purchases and sales of investments and dividend and interest income are
translated into U.S. dollars using the spot market rate of exchange prevailing
on the respective dates of such transactions. The gain or loss resulting from
changes in foreign exchange rates is included with net realized and unrealized
gain or loss from investments, as appropriate.
Security transactions and investment income
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed) and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the information is available to the Fund. Interest income is recorded on the
accrual basis and includes amortization of discounts on money market instruments
and on long-term debt instruments when required for federal income tax purposes.
Realized gains and losses from security transactions are reported on an
identified cost basis.
Use of estimates
The preparation of financial statements in conformity with generally accepted
counting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimated.
Fund share valuation
Fund shares are sold and redeemed on a continuing basis at net asset value. Net
asset value per share is determined daily as of the close of trading on the New
York Stock Exchange on each day the Exchange is open for trading by dividing the
total value of the Fund's investments and other assets, less liabilities, by the
number of Fund shares outstanding.
Custodian fees
Custodian fees are reduced based on each Fund's cash balances maintained with
the custodian. This presentation does not affect the determination of Fund
shares outstanding.
Federal income taxes, dividends and distributions to shareholders
The Funds have complied with the special provisions of the Internal Revenue Code
available to regulated investment companies and, in the manner provided therein,
distribute all of their taxable income, as well as any net realized gain on
sales of investments and foreign currency transactions reportable for federal
income tax purposes.
Wanger International Small Cap has elected to mark-to-market its investments
in Passive Foreign Investment Companies ("PFICS") for income tax purposes. In
accordance with this election, the Fund recognized unrealized appreciation on
PFICs of $83,762 for the year ended December 31, 1998. Cumulative net unrealized
appreciation recognized in prior years on PFICs sold in 1998 amounted to
$1,391,583.
Wanger International Small Cap intends to utilize provisions of the federal
income tax law that allows it to carry a realized capital loss forward for eight
years following the year of the loss and offset such losses against future
realized gains. At December 31, 1998, the Fund had a capital loss carryforward
of $7,263,202 of which $382,694 will expire December 31, 2005 and $6,880,508
will expire December 31, 2006.
Dividends and distributions payable to each Fund's shareholders are recorded
by the Fund on the ex-dividend date.
Reclassifications have been made in 1998 for Wanger U.S. Small Cap in the
accompanying analysis of net assets from undistributed net investment income
to net realized gain on the sale of investments of $783,423 to reflect
differences between financial reporting and income tax basis and had no impact
on net asset value. Reclassifications have also been made in 1998 for Wanger
International Small Cap from accumulated net realized gain on sale of
investments to undistributed net investment income of $2,092,223 to reflect
differences between financial reporting and income tax basis.
54
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements
3. Transaction with Affiliates
The Fund's investment advisor, Wanger Asset Management, L.P., ("WAM") furnishes
continuing investment supervision to the Fund and is responsible for overall
management of the Fund's business affairs. Each Fund pays WAM a monthly
advisory fee based upon average daily net assets at the following rates:
<TABLE>
<CAPTION>
Wanger U.S. Wanger International
Small Cap Small Cap
- ------------------------------------------------------------------
<S> <C> <C>
Average Daily Net Assets:
For the first $100 million 1.00% 1.30%
Next $150 million .95% 1.20%
In excess of $250 million .90% 1.10%
- ------------------------------------------------------------------
</TABLE>
The investment advisory agreement also provides that WAM will reimburse the
Funds to the extent that ordinary operating expenses (computed based on net
custodian fees) exceed 1.50% for Wanger U.S. Small Cap and 1.90% for Wanger
International Small Cap, of average net assets. WAM was not required to
reimburse the Funds under these agreements for the year ended December 31, 1998.
Certain officers and trustees of the Trust are also principals of WAM. The
Trust makes no direct payments to its officers and trustees who are affiliated
with WAM. Wanger U.S. Small Cap and Wanger International Small Cap each incurred
trustees' fees and expenses of $20,787 for the year ended December 31, 1998 to
trustees not affiliated with WAM.
WAM advanced $100,000 in connection with the organization and initial
registration of the Fund. These costs are being amortized and reimbursed to WAM
over the period May, 1995 through April, 2000.
WAM Brokerage Services, L.L.C., a wholly-owned subsidiary of WAM, is the
distributor of each Fund's shares and receives no compensation for its services.
4. Borrowing Arrangements
The trust participates in a $250,000,000 credit facility which was entered into
to facilitate portfolio liquidity. No amounts have been borrowed under this
facility.
5. Fund Share Transactions
Proceeds and payments on Fund shares as shown in the statement of changes in net
assets are in respect of the following numbers of shares:
<TABLE>
<CAPTION>
------------------------------------------ --------------------------------------
Wanger U.S.Small Cap Wanger International Small Cap
Year ended Year ended Year ended Year ended
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,370,518 5,806,192 1,389,310 2,963,636
Shares issued in reinvestment of dividend and
capital gain distributions 686,318 210,886 76,657 136,747
- -----------------------------------------------------------------------------------------------------------------------------
5,056,836 6,017,078 1,465,967 3,100,383
Less shares redeemed 2,389,858 991,354 1,346,776 812,741
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in shares outstanding 2,666,978 5,025,724 119,191 2,287,642
=============================================================================================================================
</TABLE>
6. Investment Transactions
The aggregate costs of purchases and proceeds from sales other than short-term
obligations for the year ended December 31, 1998 were:
<TABLE>
<CAPTION>
<S> <C> <C>
Wanger U.S. Wanger International
Small Cap Small Cap
Purchases $139,040,448 $80,409,567
Sales 97,581,546 71,890,345
- ------------------------------------------------------------------------
</TABLE>
55
<PAGE>
Wanger Advisors Trust 1998 Annual Report
- --------------------------------------------------------------------------------
Report of Independent Auditors
To the Board of Trustees and Shareholders of
Wanger Advisors Trust
We have audited the accompanying statements of assets and liabilities, including
the schedule of investments of Wanger U.S. Small Cap and the Wanger
International Small Cap portfolios, comprising the Wanger Advisors Trust, as of
December 31, 1998, the related statements of operations, changes in net assets,
and the financial highlights for the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds of the Wanger Advisors Trust as of December 31, 1998,
the results of their operations and changes in their net assets and financial
highlights for the periods indicated therein, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 12, 1999
56
<PAGE>
PART C
------
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
- ------- ---------------------------------
Exhibits:
--------
a. Agreement and Declaration of Trust (exhibit 1 to post-effective
amendment No. 2). (2)
b. By-laws (exhibit 2 to post-effective amendment No. 2). (2)
c.1. Specimen Share Certificate - Wanger U.S. Small Cap (exhibit 4(a) to
post-effective amendment No. 1). (1)
c.2. Specimen Share Certificate - Wanger International Small Cap (exhibit
4(b) to post-effective amendment No. 1). (1)
d.1. Investment Advisory Agreement - Wanger U.S. Small Cap, dated January
1, 1998 (exhibit 5(a) to post-effective amendment No. 6). (5)
d.2. Investment Advisory Agreement - Wanger International Small Cap, dated
January 1, 1998 (exhibit 5(b) to post-effective amendment No. 6). (5)
d.3. Investment Advisory Agreement - Wanger Twenty and Wanger Foreign
Forty.
e.1. Distribution Agreement between Wanger Advisors Trust and WAM
Brokerage Services, L.L.C. dated January 1, 1998 (exhibit 6(a) to
post-effective amendment No. 6). (5)
e.2. Amendment to Distribution Agreement between Wanger Advisors Trust and
WAM Brokerage Services, L.L.C.
f. None.
g.1. Custodian Contract between Wanger Advisors Trust and State Street
Bank and Trust Company (exhibit 8(a) to post-effective amendment No.
2). (2)
g.2. Letter Agreement between Wanger Advisors Trust and State Street Bank
and Trust Company applying Custodian Contract and Transfer Agency and
Service Agreement to Wanger Twenty and Wanger Foreign Forty.
h.1. Amendment No. 1 to the Participation Agreement between Wanger
Advisors Trust and Phoenix Home Life Mutual Insurance Company dated
April 18, 1995 (exhibit 9(a)(1) to post-effective amendment No. 2) (2)
(amendment dated December 16, 1996) (exhibit 9(a)(1) to post-effective
amendment No. 3). (3)
h.2. Amendment No. 1 to the Participation Agreement between Wanger
Advisors Trust and PHL Variable Insurance Company dated February 23,
1995 (exhibit 9(a)(2) to post-effective amendment No. 2) (2)
(amendment dated December 16, 1996) (exhibit 9(a)(2) to post-effective
amendment No. 3). (3)
<PAGE>
h.3. Amendment No. 1 to the Participation Agreement between Wanger
Advisors Trust and Providian Life and Health Insurance Company
(formerly National Home Life Assurance Company) dated May 19, 1995
(exhibit 9(a)(3) to post-effective amendment No. 2) (2) (amendment
dated December 16, 1996) (exhibit 9(a)(3) to post-effective amendment
No. 3). (3)
h.4. Participation Agreement between Wanger Advisors Trust and First
Providian Life and Health Insurance Company dated November 15, 1996,
and Amendment No. 1 December 16, 1996 (exhibit 9(a)(4) to post-
effective amendment No. 3). (3)
h.5. Participation Agreement between Wanger Advisors Trust and SAFECO Life
Insurance Company dated September 27, 1995 and Form of Amendment No. 1
dated December 18, 1996 (exhibit 9(a)(5) to post-effective amendment
No. 3). (3)
h.6. Transfer Agency and Service Agreement between Wanger Advisors Trust
and State Street Bank and Trust Company (exhibit 9(b) to post-
effective amendment No. 2). (2)
i. Consent of Bell, Boyd & Lloyd.
j. Consent of Independent Auditors.
k. None.
l. Subscription Agreement (exhibit 13 to post-effective amendment No. 2).
(2)
m. None.
n.1. Financial data schedule Wanger U.S. Small Cap
n.2 Financial data schedule - Wanger International Small Cap.
o. None.
______________________________
(1) Incorporated by reference to the exhibit filed with post-effective amendment
no. 1 to Registrant's registration statement on form N-1A, Securities Act
registration no. 33-83548 (the "Registration Statement") filed on August 25,
1995.
(2) Incorporated by reference to the exhibit filed with post-effective
amendment no. 2 to the Registration Statement filed on April 19, 1996.
(3) Incorporated by reference to the exhibit filed with post-effective
amendment no. 3 to the Registration Statement filed on April 30, 1997.
(4) Incorporated by reference to the exhibit filed with post-effective
amendment no. 5 to the Registration Statement filed November on 3, 1997.
(5) Incorporated by reference to the exhibit filed with post-effective
amendment no. 6 to the Registration Statement filed April 28, 1998.
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
- ------- -------------------------------------------------------------
The registrant does not consider that there are any persons
directly or indirectly controlling, controlled by, or under common
control with, the Registrant within the meaning of this item. The
information in the prospectus under the caption "Organization and
Management" and in the Statement of Additional Information under the
caption "Investment Adviser" is incorporated by reference.
ITEM 25. INDEMNIFICATION
- ------- ---------------
Article VIII of the Agreement and Declaration of Trust of the
registrant (Exhibit 1 included herein) provides in effect that the
Registrant shall provide certain indemnification of its trustees and
officers. In accordance with Section 17(h) of the Investment Company
Act of 1940, that provision shall not protect any person against any
liability to the registrant or its shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
Trustees, officers and controlling persons of the Registrant pursuant
to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 1940
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer, or
controlling person of the Registrant in connection with the successful
defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant, its trustees and officers, its investment adviser
and persons affiliated with them are insured under a policy of
insurance maintained by registrant and its investment adviser, within
the limits and subject to the limitations of the policy, against
certain expenses in connection with the defense of actions, suits or
proceedings, and certain liabilities that might be imposed as a result
of such actions, suits or proceedings, to which they are parties by
reason of being or having been such trustees or officers. The policy
expressly excludes coverage for any trustee or officer whose personal
dishonesty, fraudulent breach of trust, lack of good faith, or
intention to deceive or defraud has been finally adjudicated or may be
established or who willfully fails to act prudently.
<PAGE>
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
- ------- ----------------------------------------------------
The information in the prospectus under the caption "Management
of the Funds" is incorporated by reference. Neither Wanger Asset
Management, L.P. nor its general partner has at any time during the
past two years been engaged in any other business, profession,
vocation or employment of a substantial nature either for its own
account or in the capacity of director, officer, employee, partner or
trustee.
ITEM 27. PRINCIPAL UNDERWRITER
- ------- ---------------------
WAM Brokerage Services, L.L.C. also acts as principal underwriter for
Acorn Investment Trust.
NAME POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH
UNDERWRITERS REGISTRANT
Bruce H. Lauer President Vice President and Treasurer
The principal business of each officer of WAM Brokerage L.L.C. is 227 West
Monroe Street, Suite 3000, Chicago, Illinois 60606.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
- ------- --------------------------------
Bruce H. Lauer, Vice President and Treasurer
Wanger Advisors Trust
227 West Monroe Street, Suite 3000
Chicago, Illinois 60606
ITEM 29. MANAGEMENT SERVICES
- ------- -------------------
Not applicable.
ITEM 30. UNDERTAKINGS
- ------- ------------
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this amendment to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Chicago, Illinois on February 26, 1999.
WANGER ADVISORS TRUST
By: /S/ RALPH WANGER
______________________________
Ralph Wanger, President
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/S/ FRED D. HASSELBRING
_________________________ Trustee )
Fred D. Hasselbring )
)
/S/ CHARLES P. McQUAID
_________________________ Trustee )
Charles P. McQuaid )
)
/S/ P. MICHAEL PHELPS
_________________________ Trustee )
P. Michael Phelps )
/S/ PATRICIA H. WERHANE )
_________________________ Trustee )
Patricia H. Werhane )
)
/S/ RALPH WANGER
_________________________ Trustee and President ) February 26, 1999
Ralph Wanger (principal executive )
officer) )
/S/ BRUCE H. LAUER )
_________________________ Treasurer (principal )
Bruce H. Lauer financial and accounting )
officer)
</TABLE>
<PAGE>
INDEX OF EXHIBITS FILED WITH THIS AMENDMENT
-------------------------------------------
EXHIBIT EDGAR
NUMBER EXHIBIT NO. EXHIBIT
- ------ ----------- -------
d.3 Investment Advisory Agreement Wanger
Twenty and Wanger Foreign Forty
e.2 Amendment to Distribution Agreement
between Wanger Advisors Trust and WAM
Brokerage Services, L.L.C.
g.2 Letter Agreement between Wanger Advisors
Trust and State Street Bank and Trust
Company applying Custodian Contract and
Transfer Agency and Service Agreement to
Wanger Twenty and Wanger Foreign Forty
i. Consent of Bell Boyd & Lloyd
j. Consent of Independent Auditors
n.1 Financial data schedule - Wanger U.S.
Small Cap
h.2 Financial data schedule - Wanger
International Small Cap
<PAGE>
EXHIBIT D.3
INVESTMENT ADVISORY AGREEMENT
WANGER ADVISORS TRUST, a Massachusetts business trust registered under the
Investment Company Act of 1940 (the "1940 act") as an open-end management
investment company (the "Trust"), and WANGER ASSET MANAGEMENT, L.P., a Delaware
limited partnership registered under the Investment Advisers act of 1940 as an
investment adviser ("WAM"), agree that:
1. ENGAGEMENT OF WAM. WAM shall manage the investment and reinvestment of
the assets of Wanger Twenty and Wanger Foreign Forty, series of the Trust (each,
a "Fund," and collectively, the "Funds"), subject to the supervision of the
Board of Trustees of the Trust, for the period and on the terms set forth in
this agreement. If the Trust establishes one or more series in addition to the
Funds named above with respect to which it desires to retain WAM as investment
adviser hereunder, and if WAM is willing to provide such services under this
agreement, the Trust and WAM may add such new series to this agreement, by
written supplement to this agreement. Such supplement shall include a schedule
of compensation to be paid to WAM by the Trust with respect to such series and
such other modifications of the terms of this agreement with respect to such
series as the Trust and WAM may agree. Upon execution of such a supplement by
the Trust and WAM, that series will become a Fund hereunder and shall be subject
to the provisions of this agreement to the same extent as the Funds named above,
except as modified by the supplement.
WAM shall give due consideration to the investment policies and
restrictions and the other statements concerning the Funds in the Trust's
agreement and declaration of trust, bylaws, and registration statement under the
1940 Act and the Securities Act of 1933 (the "1933 Act"), and to the provisions
of the Internal Revenue Code of 1986, as amended, applicable to the Funds as
regulated investment companies. WAM shall be deemed for all purposes to be an
independent contractor and not an agent of the Trust or the Funds, and unless
otherwise expressly provided or authorized, shall have no authority to act or
represent the Trust or the Funds in any way.
WAM is authorized to make the decisions to buy and sell securities,
options, futures contracts and any other investments in which the Funds may
invest pursuant to its investment objectives, policies and restrictions, to
place the Funds' portfolio transactions with broker-dealers, and to negotiate
the terms of such transactions, including brokerage commissions on brokerage
transactions, on behalf of the Funds. WAM is authorized to exercise discretion
with each Fund's policy concerning allocation of its portfolio brokerage,
consistent with the Trust's registration statement and under the supervision of
the Trust's Board of Trustees, and as permitted by law, including but not
limited to Section 28(e) of the Securities Exchange Act of 1934, and in so doing
shall not be required to make any reduction in its investment advisory fees.
<PAGE>
2. EXPENSES TO BE PAID BY WAM. WAM shall furnish to the Trust, at WAM's
expense, office space and all necessary office facilities, equipment and
personnel for managing that portion of the Trust's business relating to the
Funds. WAM shall also assume and pay all other expenses incurred by it in
connection with managing the assets of the Funds, including expenses in
connection with placement of securities orders, all expenses of printing and
distributing the Funds' prospectus and reports to prospective investors (except
to the extent such expenses are allocated to a party other than the Trust in any
participation or operating agreement to which the Trust is a party), and all
expenses in determination of daily price computations, portfolio accounting and
related bookkeeping. WAM may, at WAM's expense, contract with any other person
or persons to provide services in connection with daily price computations,
portfolio accounting and related bookkeeping under such terms as it deems
reasonable and it shall have the authority to direct the activities of such
other person or persons in the manner it deems appropriate.
3. EXPENSES TO BE PAID BY THE TRUST. The Trust shall pay all charges of
depositories, custodians and other agencies for the safekeeping and servicing of
its cash, securities and other property and of its transfer agents and
registrars and its dividend disbursing and redemption agents, if any; all
charges of legal counsel and of independent auditors; all expenses of qualifying
and maintaining the registration of shares of the Fund under the federal and
applicable state securities laws of such United States jurisdictions as the
Trust may from time to time reasonably designate; all compensation of trustees
other than those affiliated with WAM and all expenses incurred in connection
with their services to the Trust; all costs of borrowing money; all expenses of
publication of notices and reports to the Funds' shareholders and to
governmental bodies or regulatory agencies; all expenses of proxy solicitations
of the Funds or of the Board of Trustees of the Trust; all expenses of
shareholder meetings; all expenses of typesetting of the Funds' prospectus and
of printing and mailing copies of the prospectus furnished to each then-existing
shareholder or beneficial owner (except as may be otherwise provided in any
participation or operating agreement to which the Trust is a party); all taxes
and fees payable to federal, state or other governmental agencies, domestic or
foreign, all stamp or other taxes; all expenses of printing and mailing
certificates for shares of the Funds; all expenses of bond and insurance
coverage required by law or deemed advisable by the Trust's Board of Trustees;
all expenses of maintaining the registration of the Trust under the 1940 Act and
all fees, dues and other expenses related to membership of the Trust in any
trade association or other investment company organization.
In addition to the payment of expenses, each Fund shall also pay all
brokers' commissions and other charges relative to the purchase and sale of
portfolio securities for that Fund. Any expenses borne by the Trust that are
attributable solely to the organization, operation or business of a Fund shall
be paid solely out of that Fund assets.
The Trust's organizational expenses which were advanced to the Trust by WAM
shall be amortized over a period of 60 months beginning with the month following
the commencement of the Trust's operations, and the Trust shall reimburse WAM
during the
<PAGE>
period such amortization by paying to WAM on the last business day of
each month an amount equal to the organizational expenses amortized during that
month.
Any expense borne by the Trust that is not solely attributable to a Fund,
nor solely to any other series of shares of the Trust, shall be apportioned in
such manner as WAM determines is fair and appropriate, or as otherwise specified
by the Board of Trustees of the Trust.
4. COMPENSATION OF WAM. For the services to be rendered and the expenses
to be assumed and to be paid by WAM under this agreement, the Trust shall pay to
WAM fees accrued daily and paid monthly at the annual rates shown below:
Wanger Twenty .95%
Wanger Foreign Forty 1.00%
5. LIMITATION OF EXPENSES OF THE FUND. The total expenses of the Fund,
exclusive of taxes, of interest and of extraordinary litigation expenses, but
including fees paid to WAM, shall not in any fiscal year of the Fund exceed the
most restrictive limits prescribed by any state in which the Fund's shares are
then qualified for sale, and WAM agrees to reimburse the Fund for any sums
expended for such expenses in excess of that amount. If the states in which the
Fund's shares are qualified for sale impose no limits on total expenses, then
WAM agrees to reimburse Wanger Twenty in the event the fee and expenses payable
by the Fund in any fiscal year exceed 1.35%, and Wanger Foreign Forty in the
event the fee and expenses payable by the Fund in any fiscal year exceed 1.45%.
For purposes of calculating the expenses subject to this limitation, (i)
brokers' commissions and other charges relating to the purchase and sale of
portfolio securities and (ii) the excess custodian costs attributable to
investments in foreign securities compared to the custodian costs which would
have been incurred had the investments been in domestic securities, shall not be
regarded as expenses. Reimbursement, if any, shall be made by reduction of the
fees otherwise payable to WAM under this agreement, no less frequently than
quarterly.
6. SERVICES OF WAM NOT EXCLUSIVE. The services of WAM to the Funds
hereunder are not to be deemed exclusive, and WAM shall be free to render
similar services to others so long as its services under this agreement are not
impaired by such other activities.
7. SERVICES OTHER THAN AS MANAGER. WAM (or an affiliate of WAM) may act
as broker for the Funds in connection with the purchase or sale of securities by
or to the Funds if and to the extent permitted by procedures adopted from time
to time by the Board of Trustees of the Trust. Such brokerage services are not
within the scope of the duties of WAM under this agreement, and, within the
limits permitted by law and the Board of Trustees of the Trust, WAM (or an
affiliate of WAM) may receive brokerage commissions, fees or other remuneration
from the Funds for such services in addition to its fee for services as WAM.
Within the limits permitted by law, WAM may receive compensation
<PAGE>
from the Funds for other services performed by it for the Funds which are not
within the scope of the duties of WAM under this agreement.
8. LIMITATION OF LIABILITY OF WAM. WAM shall not be liable to the Trust or
its shareholders for any loss suffered by the Trust or its shareholders from or
as a consequence of any act or omission of WAM, or of any of the partners,
employees or agents of WAM, in connection with or pursuant to this agreement,
except by reason of willful misfeasance, bad faith or gross negligence on the
part of WAM in the performance of its duties or by reason of reckless disregard
by WAM of its obligations and duties under this agreement.
9. USE OF WAM'S NAME. The Trust may use the name "Wanger Advisors Trust"
or any other name using the name "Wanger" only for so long as this agreement or
any extension, renewal or amendment hereof remains in effect, including any
similar agreement with any organization which shall have succeeded to the
business of WAM as investment adviser. At such time as this agreement or any
extension, renewal or amendment hereof, or such similar agreement, shall no
longer be in effect, the Trust will (by amendment of its Agreement and
Declaration of Trust, if necessary) cease to use any name using the name
"Wanger," any name similar thereto or any other name indicating that it is
advised by or otherwise connected with WAM or with any organization which shall
have succeeded to WAM's business as investment adviser. WAM's consent to the
use of the name "Wanger" by the Trust shall not prevent WAM's permitting any
other enterprise, including other investment companies, to use that name.
10. DURATION AND RENEWAL. This agreement shall be effective January 1,
1999, or if later, the date approved by both (a) the vote of a "majority of the
outstanding voting shares of each Fund" (which term as used throughout this
agreement shall be construed in accordance with the definition of "vote of a
majority of the outstanding voting securities of a company" in section 2(a)(42)
of the 1940 Act), and (b) the vote of a majority of trustees who are not parties
to this agreement or interested persons of any party to this agreement, cast in
person at a meeting called for the purpose of voting on approval of this
agreement. Unless terminated as provided in Section 11, this agreement shall
continue in effect until December 31, 2001, and thereafter from year to year
only so long as such continuance is specifically approved at least annually (a)
by a majority of those trustees who are not interested persons of the Trust or
of WAM, voting in person at a meeting called for the purpose of voting on such
approval, and (b) by either the Board of Trustees of the Trust or vote of the
holders of a majority of the outstanding shares of each Fund.
11. TERMINATION. This agreement may be terminated at any time, without
payment of any penalty, by the Board of Trustees of the Trust, or by a vote of
the holders of a majority of the outstanding shares of each Fund, upon 60 days'
written notice to WAM. This agreement may be terminated by WAM at any time upon
60 days' written notice to the Trust. This agreement shall terminate
automatically in the event of its assignment (as defined in Section 2(a)(4) of
the 1940 Act).
<PAGE>
12. NON-LIABILITY OF TRUSTEES AND SHAREHOLDERS. Any obligation of the
Trust hereunder shall be binding only upon the assets of the Trust (or
applicable series thereof) and shall not be binding upon any trustee, officer,
employee, agent or shareholder of the Trust. Neither the authorization of any
action by the trustees or shareholders of the Trust nor the execution of this
agreement on behalf of the Trust shall impose any liability upon any trustee,
officer or shareholder of the Trust.
13. AMENDMENT. This agreement may not be amended without the affirmative
vote (a) of a majority of those trustees who are not "interested persons" (as
defined in section 2(a)(19) of the 1940 Act) of the Trust or of WAM, voting in
person at a meeting called for the purpose of voting on such approval, and (b)
of the holders of a majority of the outstanding shares of each Fund, where
required by the 1940 Act or other applicable law, or otherwise deemed
appropriate by the Board of Trustees of the Trust.
Dated: December 15, 1998
WANGER ADVISORS TRUST WANGER ASSET MANAGEMENT, L.P.,
by Wanger Asset Management, Ltd., its
General Partner
By /s/ Bruce H. Lauer By /s/ Bruce H. Lauer
<PAGE>
EXHIBIT E.2
AMENDMENT TO
DISTRIBUTION AGREEMENT
between
WANGER ADVISORS TRUST
and
WAM BROKERAGE SERVICES, L.L.C.
This Amendment to the Distribution Agreement is made this 15th day of
December, 1998 by and between WANGER ADVISORS TRUST, a business trust organized
and existing under the laws of the Commonwealth of Massachusetts ("WAT") and WAM
BROKERAGE SERVICES, L.L.C., a limited liability company organized and existing
under the laws of the State of Illinois ("WAM BD").
RECITALS
The Trust and WAM BD entered into a Distribution Agreement (the
"Agreement") dated January 1, 1998 by which WAT appointed WAM BD as principal
underwriter of its shares of beneficial interest (hereinafter called "Shares")
which are currently divided into two series, Wanger U.S. Small Cap Advisor and
Wanger International Small Cap Advisor (hereinafter called, collectively, the
"Funds" and, individually, the "Fund").
The Agreement permits the parties to amend the Agreement "by an instrument
in writing signed by each party against which enforcement of the change, waiver,
discharge or termination is sought." WAT has designated and wishes to offer for
sale to the public shares of two additional series, Wanger Twenty and Wanger
Foreign Forty, and may from time to time hereafter wish to offer for sale to the
public Shares of yet additional series.
WAT has entered into an investment advisory agreement dated January 1, 1999
with Wanger Asset Management, L.P. ("WAM"), an affiliate of WAM BD, pursuant to
which WAM has agreed to pay all expenses incurred in the sale and promotion of
Shares of WAT.
THEREFORE, WAT and WAM BD agree:
As used in the Distribution Agreement, "Shares" shall include the shares of
beneficial interest of the series of WAT designated Wanger Twenty and Wanger
Foreign Forty.
<PAGE>
EXHIBIT E.2
ATTEST: WAM BROKERAGE SERVICES, L.L.C.
/s/ Merrillyn J. Kosier By: /s/ Bruce H. Lauer
Secretary
ATTEST: WANGER ADVISORS TRUST
/s/ Merrillyn J. Kosier By: /s/ Bruce H. Lauer
Secretary
ACKNOWLEDGED:
WANGER ASSET MANAGEMENT, L.P.
By: /s/ Ralph Wanger
ATTEST:
/s/ Bruce H. Lauer
Secretary
<PAGE>
Exhibit g.2
Wanger Advisors Trust
227 West Monroe
Suite 3000
Chicago, Illinois 60606-5016
1-800-4-WANGER
(1-800-492-6437)
December 15, 1998
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
Ladies and Gentlemen:
This is to advise you that Wanger Advisors Trust (the "Trust") has
established two new series of shares to be known as Wanger Twenty and Wanger
Foreign Forty. In accordance with the Additional Funds provision in Section 17
of the Custodian Contract dated January 20, 1995, as amended from time to time,
and in Article 10 of the Transfer Agency and Service Agreement dated January 12,
1995 between the Trust and State Street Bank and Trust Company, the Trust hereby
requests that you act as Custodian and Transfer Agent for each new series.
Please indicate your acceptance of this appointment as Custodian and
Transfer Agent by executing three copies of this Letter Agreement, returning two
copies to us and retaining one copy for your records.
WANGER ADVISORS TRUST
By: /s/ Bruce H. Lauer
Bruce H. Lauer
Vice President and Treasurer
Agreed to this 29 day of December, 1998.
STATE STREET BANK AND TRUST COMPANY
By: /s/ Ronald E. Logue
Ronald E. Logue
Executive Vice President
<PAGE>
Exhibit i
BELL, BOYD & LLOYD
Three First National Plaza
70 West Madison Street, Suite 3300
Chicago, Illinois 60602-4207
312 372 1121
Fax: 312 372 2098
February 26, 1999
As counsel for Wanger Advisors Trust (the "Registrant"), we consent to the
incorporation by reference of our opinion for the Registrant's series designated
Wanger U.S. Small Cap and Wanger International Small Cap dated April 27, 1998,
filed with the Registrant's registration statement on Form N-1A on April 29,
1998, and our opinion for the Registrant's series designated Wanger Twenty and
Wanger Foreign Forty September 30, 1998, filed with the Registrant's
registration statement on Form N-1A on September 30, 1998 (Securities Act File
no. 33-83548).
In giving this consent we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
/s/ Bell, Boyd & Lloyd
<PAGE>
Exhibit j
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
February 12, 1999 on the 1998 financial statements of Wanger U.S. Small Cap and
Wanger International Small Cap, comprising Wanger Advisors Trust, and its
incorporation by reference in the Registration Statement (Form N-1A) and in the
related Prospectus and Statement of Additional Information, filed with the
Securities and Exchange Commission in this Post-Effective Amendment No. 8 to the
Registration Statement under the Securities Act of 1933 (Registration No.
33-83548) and in the Amendment No. 9 to the Registration Statement under the
Investment Company Act of 1940 (Registration No. 811-8748).
/s/ Ernst & Young LLP
Chicago, Illinois
February 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
The following information is extracted from and qualified by reference
to registrant's report on form N-SAR for the year ended December 31, 1998 and
the financial statements included in registrant's annual reports to
shareholders.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> WANGER US SMALL CAP ADVISOR
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 291174
<INVESTMENTS-AT-VALUE> 341279
<RECEIVABLES> 668
<ASSETS-OTHER> 31
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 341973
<PAYABLE-FOR-SECURITIES> 2644
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 210
<TOTAL-LIABILITIES> 2854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 258404
<SHARES-COMMON-STOCK> 15291
<SHARES-COMMON-PRIOR> 12624
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 30610
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50105
<NET-ASSETS> 339119
<DIVIDEND-INCOME> 1187
<INTEREST-INCOME> 1202
<OTHER-INCOME> 0
<EXPENSES-NET> 3172
<NET-INVESTMENT-INCOME> (783)
<REALIZED-GAINS-CURRENT> 31407
<APPREC-INCREASE-CURRENT> (6415)
<NET-CHANGE-FROM-OPS> 24209
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 15423
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4371
<NUMBER-OF-SHARES-REDEEMED> 2390
<SHARES-REINVESTED> 686
<NET-CHANGE-IN-ASSETS> 68253
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 15410
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2972
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3178
<AVERAGE-NET-ASSETS> 311692
<PER-SHARE-NAV-BEGIN> 21.46
<PER-SHARE-NII> (.05)
<PER-SHARE-GAIN-APPREC> 1.93
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.18
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
The following information is extracted from and qualified by reference to
registrant's report on form N-SAR for the year ended December 31, 1998 and the
financial statements included in registrant's annual reports to shareholders.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> WANGER INTERNATIONAL SMALL CAP ADVISOR
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 114598
<INVESTMENTS-AT-VALUE> 141152
<RECEIVABLES> 497
<ASSETS-OTHER> 29
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 141678
<PAYABLE-FOR-SECURITIES> 256
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 169
<TOTAL-LIABILITIES> 425
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 119665
<SHARES-COMMON-STOCK> 7198
<SHARES-COMMON-PRIOR> 7079
<ACCUMULATED-NII-CURRENT> 2396
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7278)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 26470
<NET-ASSETS> 141253
<DIVIDEND-INCOME> 1946
<INTEREST-INCOME> 409
<OTHER-INCOME> 0
<EXPENSES-NET> 2135
<NET-INVESTMENT-INCOME> 220
<REALIZED-GAINS-CURRENT> (2996)
<APPREC-INCREASE-CURRENT> 21549
<NET-CHANGE-FROM-OPS> 18773
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1533
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1389
<NUMBER-OF-SHARES-REDEEMED> 1347
<SHARES-REINVESTED> 77
<NET-CHANGE-IN-ASSETS> 20593
<ACCUMULATED-NII-PRIOR> 1533
<ACCUMULATED-GAINS-PRIOR> (798)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1751
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2135
<AVERAGE-NET-ASSETS> 137375
<PER-SHARE-NAV-BEGIN> 17.05
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 2.76
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .22
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.62
<EXPENSE-RATIO> 1.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
