<PAGE>
Wanger Advisors Trust
>Wanger U.S. Small Cap
>Wanger International Small Cap
>Wanger Twenty
>Wanger Foreign Forty
100% No-Load Funds
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.
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").
Wanger Advisors Trust
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-800-4-WANGER (1-800-492-6437)
<PAGE>
Contents
At a Glance
>Wanger U.S. Small Cap........................................ 2
>Wanger International Small Cap............................... 4
>Wanger Twenty................................................ 6
>Wanger Foreign Forty......................................... 8
Management of the Funds................................................ 10
>Portfolio Managers........................................... 10
>Management Fees.............................................. 11
How the Funds Invest................................................... 12
>The Wanger Philosophy........................................ 12
>Securities in Which the Funds Invest and Risks............... 13
>Summarizing Risk............................................. 14
>Managing Risk................................................ 15
>Year 2000.................................................... 16
Shareholder and Account Policies....................................... 17
>How to Invest and Redeem..................................... 17
>Statements and Reports....................................... 19
>Share Price.................................................. 19
Taxes.................................................................. 20
Fund Service Providers................................................. 21
>Transfer Agent and Custodian................................. 21
>Distributor.................................................. 21
Financial Highlights................................................... 22
>Wanger U.S. Small Cap........................................ 22
> International Small Cap..................................... 23
<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.
Investment Strategy
The fund is a diversified mutual fund that invests primarily in the stocks of
small-and medium-size U.S. companies.
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:
o A strong business franchise that offers growth potential.
o Products and services that give them a competitive advantage.
o A stock price that its advisor believes is reasonable 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 generally invests 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:
o The stock market goes down.
o Small-cap stocks trail returns of the overall market.
o The stocks selected for the portfolio do not perform as expected.
You May Want To Invest If You:
o Are seeking a stock fund that emphasizes the less-profiled stocks of
small-to medium-sized companies.
o 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:
o Are seeking a significant amount of current dividend income.
o Are unwilling to accept short-term fluctuations in share price.
o Have short-term investment goals or needs.
<PAGE>
U.S. SMALL CAP Performance
The chart and table at right 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 risks of fund
investment.)
[CHART APPEARS HERE]
U.S. Small Cap's highest and lowest performing quarters for the 3 years ended
12/31/1998 were:
<TABLE>
<CAPTION>
Percent Quarter Ending
Change
- -----------------------------------------------
<S> <C> <C>
Highest 17.3% 9/30/97
- -----------------------------------------------
Lowest -17.7% 9/30/98
- -----------------------------------------------
</TABLE>
The fund's past performance is not an indication of future performance.
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 or Retirement Plan disclosure
documents 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.
Total Return [bar chart]
- ------------
1996 46.6%
1997 29.4%
1998 8.7%
Average Annual Total Returns for
Periods ended 12/31/1998:
<TABLE>
<CAPTION>
1 Year Since
Inception*
- -----------------------------------------------
<S> <C> <C>
U.S. Small Cap 8.7% 26.8%
- -----------------------------------------------
S&P 500+ 28.6% 29.3%
- -----------------------------------------------
Russell 2000+ -2.6% 15.0%
- -----------------------------------------------
</TABLE>
* U.S. Small Cap's inception 5/3/1995.
+ 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 U.S. Small Cap will not
mirror the returns of any particular index. The S&P 500 Index is a broad
market-weighted average of U.S. blue-chip companies. The Russell 2000 Index is
an unmanaged, market-weighted index, with dividends reinvested, of 2,000 small
companies, formed by taking the largest 3,000 small companies and eliminating
the largest 1,000 of those companies.
<PAGE>
Fees and Expenses
Shareholder Transaction Expenses
Fees paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
Annual Fund Operating Expenses
Expenses that are deducted from fund assets:
Management fees .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 U.S. Small Cap for the time period indicated ending on December 31, 1998,
earn a 5% return each year, reinvest all of your dividends and distributions,
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
<PAGE>
INTERNATIONAL SMALL CAP
At a Glance
Fund Objective
Wanger International Small Cap (International Small Cap) seeks long-term growth
of capital.
Investment Strategy
International Small Cap is a diversified mutual fund that invests primarily in
stocks of small- and medium-size non-U.S. companies.
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:
o A strong business franchise that offers growth potential.
o Products and services that give them a competitive advantage.
o A stock price that its advisor believes is reasonable 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 International
Small Cap, or International Small Cap could underperform other investments if
any of the following occurs:
o International stock markets go down.
o Foreign small- to mid-cap stocks trail returns of the overall market.
o 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:
o Political or economic instability
o Higher transaction costs
o Currency exchange rate fluctuations
You May Want to Invest if You:
o Are seeking to diversify your existing equity holdings with a fund that
invests in the stocks of companies outside the U.S.
o Are seeking a stock fund that emphasizes the less-profiled stocks of
small- to medium-sized companies.
o 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:
o Are seeking a significant amount of current dividend income.
o Are unwilling to accept short-term fluctuations in share price.
o Have short-term investment goals or needs.
<PAGE>
INTERNATIONAL SMALL CAP
International Small Cap Performance
The chart and table at right 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 risks of fund
investment.)
International Small Cap's highest and lowest quarterly returns during
the three years ended 12/31/1998
Percent Quarter Ending
Change
- ------------------------------------------------
Highest 21.8% 3/31/98
- ------------------------------------------------
Lowest -18.6% 9/30/98
- ------------------------------------------------
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.
Total Return [Bar chart]
- ------------
1996 32.0%
1997 (1.5%)
1998 16.3%
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 (World ex-U.S.)+ 12.2% 2.7%
- ------------------------------------------------
* International Small Cap's inception 5/3/1995. Beginning date for EAFE is
5/31/1995.
+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.
Morgan Stanley's Europe, Australasia and Far East Index (EAFE) is an unmanaged
index of companies throughout the world in proportion to world stock market
capitalizations, excluding the U.S. and Canada. EMI (World 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.
<PAGE>
INTERNATIONAL SMALL CAP
FEES AND EXPENSES
Shareholder Transaction Expenses
Fees paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
Annual Fund Operating Expenses
Expenses that are deducted from fund assets:
Management fees 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 $10,000 in International Small Cap for the time period indicated ending
on December 31, 1998, earn a 5% return each year, reinvest all of your dividends
and distributions, 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
<PAGE>
WANGER TWENTY
At a Glance
Fund Objective
Wanger Twenty seeks long-term growth of capital.
Investment Strategy
Wanger Twenty invests primarily in the stocks of medium- to larger-size U.S.
companies. 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, offering the potential to provide above average growth over time.
Wanger Twenty 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:
o A strong business franchise that offers growth potential.
o Products and services that give them a competitive advantage.
o A stock price that its advisor believes reasonable 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. The performance of each of these
larger holdings will have a greater impact on Wanger Twenty's total return and
may make the fund's returns more volatile than a more diversified fund.
Mid-cap stocks are more volatile and may be less liquid than large-cap stocks.
Mid-cap companies may have a shorter history of operations and a smaller market
for their shares. You could lose money on your investment in Wanger Twenty, or
Wanger Twenty could underperform other investments if any of the following
occurs:
o The stock market goes down.
o Mid-cap stocks trail returns of the overall market.
o The stocks selected for the portfolio do not perform as expected.
You May Want To Invest If You:
o Are seeking to complement your existing domestic equity holdings with a
focused stock fund.
o Are seeking a stock fund that emphasizes the less profiled stocks of
medium-to-larger sized companies.
o 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:
o Are seeking a significant amount of current dividend income.
o Are unwilling to accept short-term fluctuations in share price or the
more volatile returns of a non-diversified fund.
o Have short-term investment goals or needs.
<PAGE>
WANGER TWENTY
Wanger Twenty Performance
"Total return" and "average annual total return" information is not available
for Wanger Twenty because the fund has been in operation less than one full
calendar year.
Fees and Expenses
Shareholder Transaction Expenses
Fees paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
Annual Fund Operating Expenses
Expenses that are deducted from fund assets:
Management fees 0.95%
12b-1 fee None
Other expenses* 0.68%
Total annual fund operating
expenses 1.63%
- -------------------
* "Other expenses" are based on estimated amounts for the current fiscal year.
Wanger Asset Management, L.P. has undertaken to limit Wanger Twenty's annual
expenses to 1.35% of its average net assets. This expense limitation undertaking
is voluntary and is terminable by either the Fund or WAM on 30 days' written
notice to the other.
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, REINVEST ALL OF YOUR DIVIDENDS AND
DISTRIBUTIONS, AND THAT OPERATING EXPENSES REMAIN CONSTANT. YOUR ACTUAL RETURNS
AND COSTS MAY BE HIGHER OR LOWER.
1 YEAR $166
3 YEARS $514
<PAGE>
WANGER FOREIGN FORTY
At a Glance
Fund Objective
Wanger Foreign Forty seeks long-term growth of capital.
Investment Strategy
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. 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, offering 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:
o A strong business franchise that offers growth potential.
o Products and services that give them a competitive advantage.
o A stock price that its advisor believes reasonable 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 Wanger Foreign Forty's total return, and may make Wanger Foreign
Forty's returns more volatile than a more diversified international fund.
Mid-cap stocks are more volatile and may be less liquid than large-cap stocks.
Mid-cap companies may have a shorter history of operations and a smaller market
for their shares. You could lose money on your investment in Wanger Foreign
Forty, or Wanger Foreign Forty could underperform other investments, if any of
the following occurs:
o International stock markets go down.
o Foreign mid- to large-cap stocks trail returns of the overall market.
o 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:
o Political or economic instability.
o Higher transaction costs.
o Currency exchange rate fluctuations.
You May Want To Invest If You:
o Are seeking to complement your existing equity holdings with an
international focused stock fund.
o Are seeking a stock fund that emphasizes the less-profiled stocks of
medium-to-larger sized companies.
o 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:
o Are seeking a significant amount of current dividend income.
o Are unwilling to accept short-term fluctuations in share price or the
more volatile returns of a non-diversified fund.
o Have short-term investment goals or needs.
<PAGE>
WANGER FOREIGN FORTY
Wanger Foreign Forty Performance
"Total return" and "average annual total return" information is not available
for Wanger Foreign Forty because the fund has been in operation less than one
full calendar year.
FEES AND EXPENSES
Shareholder Transaction Expenses
Fees paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
Annual Fund Operating Expenses
Expenses that are deducted from fund assets:
Management fees 1.00%
12b-1 fee None
Other expenses* 2.51%
Total annual fund operating
expenses 3.51%
- -------------------
* "Other expenses" are based on estimated amounts for the current fiscal year.
WAM has undertaken to limit Wanger Foreign Forty's annual expenses to 1.45% of
its average net assets. This expense limitation undertaking is voluntary and is
terminable by either the fund or WAM on 30 days' notice to the other.
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, YOU REINVEST ALL OF YOUR DIVIDENDS AND DISTRIBUTIONS, AND THAT
OPERATING EXPENSES REMAIN CONSTANT. YOUR ACTUAL RETURNS AND COSTS MAY BE HIGHER
OR LOWER.
1 YEAR $354
3 YEARS $1,077
<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 $6.4 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 February, 1999. 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 February, 1999. Mr. Yost is a vice president of Acorn
Investment Trust and a 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, 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
<PAGE>
Management of the Funds
1996. Before joining WAM, he was a vice president and portfolio manager at Lord
Asset Management.
Management Fees
WAM earns the following advisory 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.
<PAGE>
How the Funds Invest
The Wanger Philosophy
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
o Once we uncover a great
o The realization of this o 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 WAM investment 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 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.
<PAGE>
Securities in Which the Funds Invest and Risks
Common Stocks
The Wanger Advisors Trust funds invest mostly in common stocks. COMMON STOCKS
REPRESENT AN EQUITY (OWNERSHIP) INTEREST IN A CORPORATION.
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. U.S. Small Cap 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).
Portfolio Allocation
Under normal conditions, the funds' common stock investments (as a percentage of
total assets) are limited by the following maximum allocations:
% in U.S. % in non-U.S.
Companies Companies
- ---------------------------------------------------
U.S. Small Cap
no limit up to 35%
- ---------------------------------------------------
International
Small Cap up to 35% no limit
- ---------------------------------------------------
Wanger Twenty*
no limit up to 15%
- ---------------------------------------------------
Wanger Foreign
Forty**
up to 15% no limit
*WANGER TWENTY WILL NORMALLY ONLY INVEST IN A NON-U.S. COMPANY WHOSE OPERATIONS
ARE PRIMARILY LOCATED WITHIN THE U.S.
**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.
<PAGE>
Summarizing Risk
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. 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 any of the Wanger Advisors Trust funds a long-term investment.
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 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 may have a negative effect on a fund's NAV and include
fluctuations in exchange rates of foreign currencies; less public information
with respect to issuers of securities; less governmental supervision of stock
exchanges, securities brokers and issuers of securities; different accounting,
auditing and financial reporting standards; different settlement periods and
trading practices; less liquidity, frequently greater price volatility and
higher transaction 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.
Securities markets in 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.
<PAGE>
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:
o None of the funds may invest more than 5% in securities of any one issuer,
except for U.S. government securities.*
o 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 Wanger Twenty and
Wanger Foreign Forty.
State Insurance Restrictions
The funds are sold to 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.
o Each fund may invest without limit in U.S. corporate and government
obligations.
o Each fund may hold cash or cash equivalents.
O 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.
<PAGE>
Shareholder and Account Policies
* 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:
o options,
o futures contracts,
o options on futures contracts,
o currency exchange contracts,
o swap agreements, or
o 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.
In addition, Year 2000 issues may affect the business results and prospects of
issuers of stocks held by a fund. Although WAM considers the status of issuers'
preparations for Year 2000, it has not had a material effect on the decision to
buy or sell securities thus far.
<PAGE>
Shareholder and Account Policies
THE FUNDS PROVIDE LIFE COMPANIES AND RETIREMENT PLANS WITH INFORMATION MONDAY
THROUGH FRIDAY (EXCEPT HOLIDAYS) FROM 8:00 A.M. TO 4:30 P.M. CENTRAL TIME. FOR
INFORMATION, PRICES, LITERATURE, OR TO OBTAIN INFORMATION REGARDING THE
AVAILABILITY OF FUND SHARES OR HOW FUND SHAREHOLDERS ARE REDEEMED, CALL WAM AT
1-800-4-WANGER (1-800-492-6437).
SHARES OF THE FUNDS ARE ISSUED AND REDEEMED IN CONNECTION WITH INVESTMENTS IN
AND PAYMENTS UNDER CERTAIN QUALIFIED AND NON-QUALIFIED VARIABLE CONTRACTS ISSUED
THROUGH SEPARATE ACCOUNTS OF LIFE COMPANIES. SHARES OF THE FUNDS ARE ALSO
OFFERED DIRECTLY TO CERTAIN OF THE FOLLOWING TYPES OF QUALIFIED PLANS AND
RETIREMENT ARRANGEMENTS AND ACCOUNTS, COLLECTIVELY CALLED "RETIREMENT PLANS:"
o a plan described in section 401(a) of the Internal Revenue Code that
includes a trust exempt from tax under section 501(a);
o an annuity plan described in section 403(a);
o an annuity contract described in section 403(b), including a 403(b)(7)
custodial account;
o a governmental plan under section 414(d) or an eligible deferred
compensation plan under section 457(b); and
o a plan described in section 501(c)(18).
The trust or plan must be established before shares of the funds can be
purchased by the plan. Neither the funds nor WAM offers prototypes of these
plans. The funds have imposed certain additional restrictions on sales to
Retirement Plans to reduce fund expenses. To be eligible to invest in the funds,
a Retirement Plan must be domiciled in a state in which fund shares may be sold
without payment of a fee to the state. In most states, this policy will require
that a Retirement Plan have at least $5 million in assets and that investment
decisions are made by a Plan fiduciary rather than Plan participants in order
for the Plan to be eligible to invest. The funds do not intend to offer shares
in states where the sale of fund shares requires the payment of a fee. A
Retirement Plan may call WAM at 1-800-4-WANGER (1-800-492-6437) to determine if
it is eligible to invest.
How to Invest and Redeem
Shares of the funds may not be purchased or redeemed directly by individual
Variable Contract owners or individual Retirement Plan participants. Variable
Contract owners or Retirement Plan participants should consult the disclosure
documents for their Variable Contract, or the plan documents for their
Retirement Plan, for information on the availability of the funds as investment
vehicles for allocations under their Variable Contract or Retirement Plan. In
the case of a Life Company purchaser, particular purchase and redemption
procedures typically are included in an agreement between the funds and the Life
Company. The funds may enter into similar agreements with Retirement Plans.
No sales commissions of any kind are imposed upon purchases of Fund shares by
Life Companies or Retirement Plans. However, each Variable Contract imposes its
own charges and fees on owners of the Variable Contract, and Retirement Plans
may impose such charges on participants in the Retirement Plan.
Purchases. To the extent not otherwise provided in any agreement between the
Trust and a Life Company or Retirement Plan, shares of a fund may be purchased
by check or by wire transfer of funds. To be effective, a purchase order must
consist of the money to purchase the shares and (i) information identifying the
purchaser, in the case of a Life Company or Retirement
<PAGE>
Shareholder and Account Policies
Plan with which the funds have entered into an agreement, or a subsequent
purchase by a Life Company or Retirement Plan that is already a fund
shareholder, or (ii) a completed purchase application, in the case of the
initial investment by a Retirement Plan with which the funds do not have an
agreement.
Redemptions. Subject to the terms of any agreement between the funds and any
Life Company or Retirement Plan, shares may be redeemed by written request or by
telephone (for redemptions of $50,000 or less), with proceeds paid by check or
by wire transfer.
Redeeming Shares in Writing. A written redemption request must:
o identify the owner of the account;
o specify the number of shares or dollar amount to be redeemed;
o be signed on behalf of the owner by an individual or individuals authorized
to do so, and include evidence of their authority;
o if the shares to be redeemed have a value of more than $50,000, include a
signature guarantee by an "eligible guarantor institution" as defined in
the rules under the Securities Exchange Act of 1934 (including a bank,
broker-dealer, credit union (if authorized under state law), national
securities exchange, registered securities association, clearing agency or
savings association, but not a notary public); and
o be accompanied by any stock certificates representing the shares to be
redeemed.
A check for the redemption proceeds will be mailed to the address of record
unless payment by wire transfer is requested.
Redeeming Shares by Telephone. Unless a Retirement Plan shareholder chose on its
purchase application not to have the ability to do so, redemptions of shares
having a value of $50,000 or less may be requested by calling the funds'
transfer agent at 1-800-962-1585. The funds will not be responsible for
unauthorized transactions if they follow reasonable procedures to confirm that
instructions received by telephone are genuine, such as requesting
identification information that appears on a Retirement Plan's purchase
application and requiring permission to record the telephone call. If you are
unable to reach the funds or their transfer agent by telephone, your redemption
request would have to be placed by mail.
Exchanging Shares by Telephone. To the extent not otherwise provided in an
agreement between the funds and a Retirement Plan shareholder, a Retirement Plan
may exchange shares of one fund for shares of another fund by telephone by
calling 1-800-962-1585. Shares may be exchanged only between
identically-registered accounts, and the shares in the new fund must be
available for sale without payment of a fee under any applicable state
securities law. Because excessive trading can hurt fund performance and
shareholders, the funds reserve the right to temporarily or permanently
terminate the exchange privilege of any shareholder who makes excessive use of
the exchange plan. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a fund. The funds have limited the
number of exchanges to no more than four per year. The funds will not be
responsible for unauthorized transactions if they follow reasonable procedures
to confirm that instructions received by telephone are genuine, such as
requesting information that appears on a Retirement Plan's purchase application
and requiring permission to record the telephone call.
<PAGE>
Shareholder and Account Policies
Normally, redemption proceeds will be paid within seven days after a fund or
its agent receives a request for redemption. Redemptions may be suspended or
payment date postponed on days when the New York Stock Exchange ("NYSE") is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
<PAGE>
Shareholder and Account Policies
Statements and Reports
Information sent to Life Companies and Retirement Plans semi-annually includes:
o Schedule of fund investments.
o 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, or for which the market quotation
is determined not to represent fair value, 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 qualify each year as a "regulated investment company" under
the Internal Revenue Code. By so qualifying, a fund will not be subject to
federal income taxes to the extent that its net investment income and net
realized capital gains are distributed to the shareholders. Each fund also
intends to meet certain diversification requirements applicable to mutual funds
underlying variable insurance products. For more information about the tax
status of the funds, see "Additional Tax Information" in the SAI.
The shareholders of the funds are the Life Company separate accounts and the
Retirement Plans. Under current law, owners of Variable Contracts which have
invested in a fund are not subject to federal income tax on fund distributions
or on gains realized upon the sale or redemption of fund shares until they are
withdrawn from the contracts. Similarly, Retirement Plan participants are not
subject to federal income tax on fund distributions or gains until they receive
distributions from the Retirement Plan account.
<PAGE>
For information concerning the federal tax consequences to Variable Contract
owners or Retirement Plan participants, see the disclosure documents from the
Variable Contract or your Retirement Plan administrator. You should consult your
own tax advisor about the tax consequences of any investment.
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 Retirement
Plans 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.
<PAGE>
Financial Highlights
The following tables will help you better understand each fund's performance for
the period from the date of a fund's commencement of operations. 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 the funds' latest
annual shareholder report.
<PAGE>
Financial Highlights
WANGER U.S. SMALL CAP
---------------------
<TABLE>
<CAPTION>
Year ended Year ended Year ended 5/3/95
12/31/98 12/31/97 12/31/96 through
12/3195
- --------------------------------------------------------------------------------------------------------------------------
<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 1.93 4.90 5.46 1.65
investments
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 (.25%) (.10%) (.41%) (1.44%)*
to average net assets (b)
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.
<PAGE>
Financial Highlights
WANGER INTERNATIONAL SMALL CAP
------------------------------
<TABLE>
<CAPTION> 5/3/95
Year ended Year ended Year ended through
12/31/98 12/31/97 12/31/96 12/31/95
- --------------------------------------------------------------------------------------------------------------------------
<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 -- (.42) (.03) --
unrealized gain reportable for federal
income taxes
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) .16% .12% (.56%) (.81%)*
to average net assets (b)
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.
<PAGE>
Wanger Advisors Trust Funds
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 the free copies of the funds' latest semi-annual and annual
shareholder reports and/or the funds' 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.
811-08748
<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 OF CONTENTS Page
- --------------------------------------------------------------------
Information About the Funds....................................2
Investment Objectives and Policies.............................2
Investment Techniques and Risks................................3
Performance Information ......................................24
Investment Adviser ...........................................27
Distributor ..................................................29
The Trust ....................................................29
Trustees and Officers; Certain Shareholders ..................30
Purchasing and Redeeming Shares ..............................32
Additional Tax Information ...................................33
Portfolio Transactions .......................................35
Custodian ....................................................36
Independent Auditors .........................................36
Appendix - Description of Bond Ratings .......................37
Financial Statements..........................................40
- --------------------------------------------------------------------
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 to the prospectus, 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
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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.
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
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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.
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.
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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.
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
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<PAGE>
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 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.
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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 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
1 A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading
day of the contract and the price at which the index contract was
originally written. Although the value of a securities index is a function
of the value of certain specified securities, no physical delivery of
those securities is made.
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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 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.
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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 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.
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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) 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.
2 A call option is "in-the-money" if the value of the futures contract that
is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
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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 option3 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.
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
- ---------------------------
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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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."
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.
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<PAGE>
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 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
15
<PAGE>
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.
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
16
<PAGE>
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 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
17
<PAGE>
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.
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,
18
<PAGE>
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 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
19
<PAGE>
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/
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,
4/ The Funds have no present intention of lending their portfolio securities.
5/ State insurance laws currently restrict a Fund's borrowings to facilitate
redemptions to no more than 25% of the Fund's net assets.
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<PAGE>
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) Acquire securities of other registered investment companies except
in compliance with the Investment Company Act of 1940 and applicable
state law;
21
<PAGE>
(c) 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;
(d) 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 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;
22
<PAGE>
8. Purchase and sell real estate or interests in real estate, although
it may invest in marketable securities of enterprises which invest in
real estate or interests in real estate;
9. Purchase and sell commodities or commodity contracts, except that it
may enter into (a) futures and options on futures and (b) foreign
currency contracts;
10. Make margin purchases of securities, except for use of such
short-term credits as are needed for clearance of transactions and
except in connection with transactions in options, futures, and options
on futures;
11. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
The above restrictions for each Fund are "fundamental," which means
that they cannot be changed without the approval of the lesser of (i) 67% of
each fund's shares present at a meeting if more than 50% of the shares
outstanding are present or (ii) more than 50% of each fund's outstanding shares.
In addition, the Funds are subject to a number of restrictions that may
be changed by the board of trustees without shareholder approval. Under those
non-fundamental restrictions, neither Fund will:
(a) Invest in companies for the purpose of management or the exercise
of control;
(b) Acquire securities of other registered investment companies except
in compliance with the Investment Company Act of 1940;
(c) Invest more than 15% of its net assets (valued at time of
investment) in illiquid securities, including repurchase agreements
maturing in more than seven days;
(d) Pledge, mortgage or hypothecate its assets, except as may be
necessary in connection with permitted borrowings or in connection with
short sales, options, futures, and options on futures;
(e) Make short sales of securities unless the Fund owns at least an
equal amount of such securities, or owns securities that are
convertible or exchangeable, 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.
23
<PAGE>
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.
(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.
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<PAGE>
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:
<TABLE>
<CAPTION>
U.S. Small Cap Average Annual
-------------- Total Return Total Return
------------ --------------
<S> <C> <C>
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%
</TABLE>
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.
25
<PAGE>
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 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.
26
<PAGE>
As of December 31, 1998, some statistics for the Funds are as follows:
<TABLE>
<CAPTION>
R2 Beta Alpha
U.S. Small Cap -- ---- -----
--------------
<S> <C> <C> <C>
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.
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:
27
<PAGE>
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 Wanger Twenty's
expenses not to exceed 1.35% of its average annual net assets, and Wanger
Foreign Forty's expenses not to exceed 1.45% of its average annual net assets.
These expense limitation undertakings are voluntary and may be terminated by
either a Fund or by WAM on 30 days' written notice to the other. The advisory
fees paid by Wanger U.S. Small Cap and Wanger International Small Cap for the
past 3 fiscal years were as follows:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Small Cap $2,972,442 $1,960,795 $704,115
- -------------------------------------------------------------------------------------------------------------------
International Small Cap $1,751,136 $1,528,703 $631,977
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
28
<PAGE>
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.
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,
29
<PAGE>
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 board of trustees has overall responsibility for the Trust's and
the Funds' affairs. The trustees have general oversight responsibility for the
Funds' operations. 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:
<TABLE>
<CAPTION>
Name, and Date of Birth Position(s) Principal Occupation(s) During Past Five Years
- ----------------------- Held with the ----------------------------------------------
Funds
--------------
<S> <C> <C>
Fred D. Hasselbring Trustee Owner, Fred D. Hasselbring and Associates (retail industry computer
(8/14/1941) systems consulting and sales); director and executive administrator, The
Malachi Corp., Inc. (a non-profit corporation).
Charles P. McQuaid Trustee and Principal, Wanger Asset Management, L.P. since July 1992; trustee and
8/27/1953 senior vice senior vice president, Acorn Investment Trust.
president*
P. Michael Phelps Trustee Retired since January 31, 1998; prior thereto, vice president and
9/19/1933 corporate secretary, Morton International, Inc.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Name, and Date of Birth Position(s) Principal Occupation(s) During Past Five Years
- ----------------------- Held with the ----------------------------------------------
Funds
--------------
<S> <C> <C>
Ralph Wanger Trustee and Director, Wanger Investment Company plc; principal, Wanger Asset
6/21/1934 president* Management, L.P. since July 1992; trustee and president, Acorn Investment
Trust.
Patricia H. Werhane Trustee Ruffin Professor of Business Ethics, Darden Graduate School of Business
9/20/1935 Administration, University of Virginia, 1993 - present.
Marcel P. Houtzager Vice president Principal, analyst and portfolio manager, Wanger Asset Management, L.P.
10/26/1960 since April 1992.
Kenneth A. Kalina Assistant Fund controller, Wanger Asset Management, L.P., since September 1995;
treasurer assistant treasurer, Acorn Investment Trust; prior thereto, treasurer of
the Stein Roe Mutual Funds.
Bruce H. Lauer Vice president Chief administrative officer, Wanger Asset Management, L.P., since April
(7/22/1957) and treasurer 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 Principal, analyst and portfolio manager, Wanger Asset Management, L.P.
(9/13/1961) since August 1992.
John H. Park Vice president Principal and analyst, Wanger Asset Management, L.P. since July 1993.
(5/30/1967)
Mark H. Yost Vice president Analyst and portfolio manager, Wanger Asset Management, L.P., since
(6/28/1963) 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 Analyst and portfolio manager, Wanger Asset Management, L.P. since 1996;
(5/26/1967) prior thereto, vice president and portfolio manager, Lord Asset Management.
Leah J. Zell Vice president Principal, analyst, and portfolio manager, Wanger Asset Management, L.P.,
(5/23/1949) since July 1992; vice president, Acorn Investment Trust.
</TABLE>
*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
31
<PAGE>
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 from
Small Cap Small Cap Foreign Fund Complex
Forty+ (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.
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
32
<PAGE>
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.
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
33
<PAGE>
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.
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.
34
<PAGE>
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.
In some cases, a Fund may pay a higher commission to a broker that also
provides research services to the Fund than it might have paid to a broker that
does not provide such research services. The reasonableness of brokerage
commissions paid by the Funds in relation to transaction and research services
received is evaluated by WAM's staff on an ongoing basis. The general level of
brokerage charges and other aspects of each Fund's portfolio transactions are
reviewed periodically by the board of trustees.
WAM is the principal source of information and advice to the Funds, and
is responsible for making and initiating the execution of investment decisions
by the Funds. However, the Board of Trustees recognizes that it is important for
WAM, in performing its responsibilities to the Funds, to continue to receive and
evaluate the broad spectrum of economic and financial information that many
securities brokers have customarily furnished in connection with brokerage
transactions, and that in compensating brokers for their services, it is in the
interest of the Funds to take into account the value of the information received
for use in advising the Funds. The extent, if any, to which the obtaining of
such information may reduce WAM's expenses in providing management services to
the Funds is not determinable. In addition, the Board of Trustees understands
that other clients of WAM might benefit from the information obtained for the
Funds, in the same manner that the Funds might benefit from information obtained
by WAM in performing services to others.
Transactions of the Funds in the over-the-counter market and the third
market are executed with primary market makers acting as principal except where
it is believed that better prices and execution may be obtained otherwise.
35
<PAGE>
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 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.
36
<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.
37
<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.
38
<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>
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
- --------------------------------------------------------------------------------
Instrumentation--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 IntelliQuest Information (b) 2,385,450
Technology Market Research
178,100 InfoUSA, Cl. B 935,025
116,000 InfoUSA, Cl. 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.
8
<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.
9
<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.
10
<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.
11
<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.
12
<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.
13
<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.
14
<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.
15
<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.
16
<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.
17
<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.
18
<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.
19
<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.
20
<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.
21
<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.
22
<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>
23
<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
24
