WANGER U.S. SMALL CAP
WANGER INTERNATIONAL SMALL CAP
WANGER TWENTY
WANGER FOREIGN FORTY
SUPPLEMENT DATED JUNE 12, 2000
TO PROSPECTUS DATED MAY 1, 2000 OF WANGER ADVISORS TRUST
On June 10, 2000, Wanger Asset Management, L.P. (WAM), the Funds'
investment adviser, and Wanger Asset Management, Ltd., the general partner of
WAM, entered into an Agreement and Plan of Merger (Merger Agreement) with
Liberty Financial Companies, Inc. (Liberty) and WAM Acquisition L.P., a newly
formed limited partnership (Liberty Sub). Under the Merger Agreement, Liberty
Sub would be merged with and into WAM. WAM would be the surviving entity and
would be a wholly-owned subsidiary of Liberty.
The merger cannot be consummated unless the trustees of the Trust (on
behalf of each of the Funds) and the shareholders of Wanger U.S. Small Cap and
Wanger International Small Cap approve a new investment advisory agreement with
WAM (Proposed Advisory Agreement) and certain other conditions are satisfied.
The trustees of the Trust have not yet approved the Proposed Advisory
Agreement. They are expected to meet to consider the terms of the Proposed
Advisory Agreement before the end of June 2000. If the trustees approve the
Proposed Advisory Agreement, you will receive a proxy statement describing the
merger and the Proposed Advisory Agreement in more detail and seeking approval
of the Proposed Advisory Agreement by the shareholders of each Fund.
Subject to the receipt of the necessary trustee and shareholder
approvals and the satisfaction of other conditions contained in the Merger
Agreement, it is anticipated that the closing of the merger will occur in the
fourth quarter of 2000. At that time, WAM would become a wholly-owned subsidiary
of Liberty and would thereafter operate under the name Liberty Wanger Asset
Management, L.P. (Liberty WAM). Liberty WAM would continue to be headquartered
in Chicago and Ralph Wanger would continue to act as president. Liberty WAM
would continue as the investment adviser of the Funds, with the Funds' current
portfolio managers continuing to manage the Funds following the same investment
strategies and objectives currently in place. It is anticipated that the Trust
would enter into new agreements with affiliates of Liberty for the provision of
administrative, distribution, transfer agency and other services to the Funds.
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WANGER ADVISORS TRUST 227 West Monroe Street
STATEMENT OF ADDITIONAL INFORMATION Suite 3000
MAY 1, 2000 Chicago, Illinois 60606
Supplemented on June 12, 2000 1-800-4-WANGER
(1-800-492-6437)
WANGER U.S. SMALL CAP
WANGER INTERNATIONAL SMALL CAP
WANGER TWENTY
WANGER FOREIGN FORTY
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TABLE OF CONTENTS Page
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Information About the Funds...............................................2
Investment Objectives and Policies........................................2
Investment Techniques and Risks...........................................3
Performance Information..................................................24
Investment Adviser.......................................................27
Distributor..............................................................30
The Trust................................................................31
Trustees and Officers; Certain Shareholders..............................32
Purchasing and Redeeming Shares..........................................34
Additional Tax Information...............................................35
Portfolio Transactions...................................................36
Code of Ethics...........................................................38
Custodian................................................................38
Independent Auditors.....................................................39
Financial Statements.....................................................39
Appendix - Description of Bond Ratings...................................62
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This Statement of Additional Information ("SAI") is not a prospectus
but provides information that should be read in conjunction with the prospectus
of WANGER 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 directly to certain
types of pension plans and retirement arrangements and accounts permitting the
accumulation of funds on a tax-deferred basis ("Retirement Plans"), as described
in the prospectus.
<PAGE>
On June 10, 2000, Wanger Asset Management, L.P. ("WAM"), the Funds'
investment adviser, and Wanger Asset Management, Ltd. ("WAM Ltd."), the general
partner of WAM, entered into an Agreement and Plan of Merger ("Merger
Agreement") with Liberty Financial Companies, Inc. ("Liberty") and WAM
Acquisition L.P., a newly formed limited partnership ("Liberty Sub"). Liberty,
600 Atlantic Avenue, Boston, Massachusetts 02210-2214, is a majority-owned
subsidiary of Liberty Mutual Insurance Company.
Under the Merger Agreement, Liberty Sub would be merged with and into
WAM. WAM would be the surviving entity and would be a wholly-owned subsidiary of
Liberty. The merger cannot be consummated unless the trustees of the Trust (on
behalf of each of the Funds) and the shareholders of Wanger U.S. Small Cap and
Wanger International Small Cap approve a new investment advisory agreement with
WAM ("Proposed Advisory Agreement") and certain other conditions are satisfied.
The trustees of the Trust have not yet approved the Proposed Advisory
Agreement. They are expected to meet to consider the terms of the Proposed
Advisory Agreement before the end of June 2000. If the trustees approve the
Proposed Advisory Agreement, you will receive a proxy statement describing the
merger and the Proposed Advisory Agreement in more detail and seeking approval
of the Proposed Advisory Agreement by the shareholders of each Fund.
Subject to the receipt of the necessary trustee and shareholder
approvals and the satisfaction of other conditions contained in the Merger
Agreement, it is anticipated that the closing of the merger will occur in the
fourth quarter of 2000. At that time, WAM would become a wholly-owned subsidiary
of Liberty and would thereafter operate under the name Liberty Wanger Asset
Management, L.P. ("Liberty WAM"). Liberty WAM would continue to be headquartered
in Chicago and Ralph Wanger would continue to act as president. Liberty WAM
would continue as the investment adviser of the Funds, with the Funds' current
portfolio managers continuing to manage the Funds following the same investment
strategies and objectives currently in place. It is anticipated that the Trust
would enter into new agreements with affiliates of Liberty for the provision of
administrative, distribution, transfer agency and other services to the Funds.
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
$2 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 $2 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 $2
billion to $12 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 $5 billion to $15 billion. The Fund is a non-diversified fund that ordinarily
has investments in 40 to 60 companies in developed markets.
WANGER U.S. SMALL CAP and WANGER INTERNATIONAL SMALL CAP are
diversified funds under the federal Securities laws. 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 Funds are series of the Trust, and each Fund is an open-end,
management investment Company.
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.
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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").
Although WANGER FOREIGN FORTY is registered as a non-diversified fund,
it has (through the date of this SAI) invested as if it were diversified. WANGER
FOREIGN FORTY expects that it will begin to invest in a non-diversified manner
when it believes market conditions are appropriate to do so. However, if WANGER
FOREIGN FORTY'S investments remain diversified through February 1, 2002 (three
years after it began operations), the Fund will lose the ability to invest in a
non-diversified manner and would thereafter be a diversified fund. WANGER
FOREIGN FORTY would not be able to become non-diversified unless it sought and
obtained the approval of the holders of a "majority of its outstanding voting
securities," as defined in the Investment Company Act of 1940.
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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 WANGER 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. WANGER U.S. SMALL CAP may invest up to 35% of
its total assets in foreign securities, but the Fund 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 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 Funds use 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 Funds include markets designated "frontier markets" by
the IFC. WANGER FOREIGN FORTY 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
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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 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
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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 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 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
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contract would deprive the Fund of unrealized profits or force the Fund to cover
its commitments for purchase or sale of currency, if any, at the current market
price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for a Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to a Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
SYNTHETIC FOREIGN MONEY MARKET POSITIONS. The Funds may invest in money
market instruments denominated in foreign currencies. In addition to, or in lieu
of, such direct investment, the Funds may construct a synthetic foreign money
market position by (a) purchasing a money market instrument denominated in one
currency (generally U.S. dollars) and (b) concurrently entering into a forward
contract to deliver a corresponding amount of that currency in exchange for a
different currency on a future date and at a specified rate of exchange. For
example, a synthetic money market position in Japanese yen could be constructed
by purchasing a U.S. dollar money market instrument and entering concurrently
into a forward contract to deliver a corresponding amount of U.S. dollars in
exchange for Japanese yen on a specified date and at a specified rate of
exchange. Because of the availability of a variety of highly liquid short-term
U.S. dollar money market instruments, a synthetic money market position
utilizing such U.S. dollar instruments may offer greater liquidity than direct
investment in foreign money market instruments. The results of a direct
investment in a foreign currency and a concurrent construction of a synthetic
position in such foreign currency, in terms of both income yield and gain or
loss from changes in currency exchange rates, in general should be similar, but
would not be identical, because the components of the alternative investments
would not be identical. Except to the extent a synthetic foreign money market
position consists of a money market instrument denominated in a foreign
currency, the synthetic foreign money market position shall not be deemed a
"foreign security" for purposes of the policies that, under normal conditions,
WANGER U.S. SMALL CAP will not invest more than 35% of its total assets in
foreign securities, WANGER TWENTY will not invest more than 15% of its total
assets in foreign securities, WANGER INTERNATIONAL SMALL CAP will generally
invest at least 65% of its total assets in foreign securities and WANGER FOREIGN
FORTY will generally 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,
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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 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.
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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 and Restricted Securities"
below for more information on the risks associated with investing in OTC
derivatives.
RISKS ASSOCIATED WITH OPTIONS. There are several risks associated with
transactions in options. For example, there are significant differences between
the securities markets, the currency markets, and the options markets that could
result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. A decision as to whether, when, and
how to use options involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree because of market
behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If a Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option would expire and become worthless.
If a Fund were unable to close out a covered call option that it had written on
a security, it would not be able to sell the underlying security until the
option expired. As the writer of a covered call option on a security, a Fund
foregoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call. As the writer of a covered call
option on a foreign currency, a Fund foregoes, during the option's life, the
opportunity to profit from currency appreciation.
If trading were suspended in an option purchased or written by a Fund,
it would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds may use
interest rate futures contracts and index futures contracts. An interest rate or
index futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument or the cash
value of an index 1 at a specified price and time. A public market exists in
futures contracts covering a number of indexes (including, but not limited to:
the Standard & Poor's 500 Index; the Value Line Composite Index; the Russell
2000 Index; and the New York Stock Exchange Composite Index) as well as
financial instruments (including, but not 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.
---------------------------
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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The Funds may purchase and write call and put options on futures.
Options on futures possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
To the extent required by regulatory authorities having jurisdiction
over the Funds, each Fund will limit its use of futures contracts and futures
options to hedging transactions. For example, a Fund might use futures contracts
to hedge against fluctuations in the general level of stock prices, anticipated
changes in interest rates, or currency fluctuations that might adversely affect
either the value of its securities or the price of the securities that the Fund
intends to purchase. A Fund's hedging may include sales of futures contracts as
an offset against the effect of expected declines in stock prices or currency
exchange rates or increases in interest rates and purchases of futures contracts
as an offset against the effect of expected increases in stock prices or
currency exchange rates or declines in interest rates. Although other techniques
could be used to reduce the Fund's exposure to stock price, interest rate, and
currency fluctuations, a Fund may be able to hedge its exposure more effectively
and perhaps at a lower cost by using futures contracts and futures options.
The success of any hedging technique depends on WAM's ability to
correctly predict changes in the level and direction of stock prices, interest
rates, currency exchange rates, and other factors. Should those predictions be
incorrect, the Fund's return might have been better had hedging not been
attempted; however, in the absence of the ability to hedge, WAM might have taken
portfolio actions in anticipation of the same market movements with similar
investment results but, presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by a Fund, it is
required to deposit with its custodian or 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
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value of the futures contract. This process is known as "marking-to-market."
Variation margin paid or received by a Fund does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the broker of
the amount one would owe the other if the futures contract had been offset at
the close of the previous day. In computing daily NAV, the Funds will
mark-to-market their open futures positions.
The Funds are also required to deposit and maintain margin with respect
to put and call options on futures contracts they write. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Funds.
Although some futures contracts require making or taking delivery of
the underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
RISKS ASSOCIATED WITH FUTURES. There are several risks associated with
the use of futures contracts and futures options as hedging techniques. A
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. There can be no guarantee that there
will be a correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for futures,
futures options, and the related securities, including technical influences in
futures and futures options trading and differences between 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
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consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures or futures option position. The Fund
would be exposed to possible loss on the position during the interval of
inability to close, and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary
(liquid) market will develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES. A Fund will not enter into a
futures contract or purchase an option thereon if, immediately thereafter, the
initial margin deposits for futures contracts held by the Fund plus premiums
paid by it for open futures option positions, less the amount by which any such
positions are "in-the-money," 2 would exceed 5% of the Fund's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, a Fund must maintain with its custodian or 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 its custodian or broker
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," 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:
---------------------------
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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(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.
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.
---------------------------
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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For federal income tax purposes, the Funds generally are required to
recognize for each taxable year their net unrealized gains and losses as of the
end of the year on futures, futures options, and non-equity options positions
("year-end mark-to-market"). Generally, any gain or loss recognized with respect
to such positions (either by year-end mark-to-market or by actual closing of the
positions) is considered to be 60% long-term and 40% short-term, without regard
to the holding periods of the contracts. However, in the case of positions
classified as part of a "mixed straddle," the recognition of losses on certain
positions (including options, futures and futures options positions, the related
securities and certain successor positions thereto) may be deferred to a later
taxable year. Sale of futures contracts or writing of call options (or futures
call options) or buying put options (or futures put options) that are intended
to hedge against a change in the value of securities held by a Fund may affect
the holding period of the hedged securities.
If a Fund were to enter into a short index future, short index futures
option, or short index option position and the Fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the Fund's stock positions may be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale
treatment for federal income tax purposes on certain hedging strategies with
respect to appreciated securities. Under these rules taxpayers will recognize
gain, but not loss, with respect to securities if they enter into short sales or
"offsetting notional principal contracts" (as defined by the Act) with respect
to, or futures or "forward contracts" (as defined by the Act) with respect to,
the same or substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical property. The
Secretary of the Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal contracts, and futures
or forward contracts to deliver the same or substantially similar property.
In order for each Fund to qualify for federal income tax treatment as a
regulated investment company, at least 90% of its gross income for a taxable
year must be derived from qualifying income, i.e., dividends, interest, income
derived from loans of securities, and gains from the sale of securities or
foreign currencies, or other income (including but not limited to gains from
options, futures, or forward contracts). Any net gain realized from futures (or
futures options) contracts will be considered gain from the sale of securities
and therefore be qualifying income for purposes of the 90% requirement.
Each Fund intends to distribute to shareholders annually any capital
gains that have been recognized for federal income tax purposes (including
year-end mark-to-market gains) on options and futures transactions, together
with gains on other Fund investments, to the extent such gains exceed recognized
capital losses and any net capital loss carryovers of the Fund. Shareholders
will be advised of the nature of such capital gain distributions. For further
information, see the discussion under "Additional Tax Information."
SWAP AGREEMENTS. A swap agreement is generally individually negotiated
and structured to include exposure to one or more of a variety of different
types of investments or
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market factors. Depending on its structure, a swap agreement may increase or
decrease a Fund's exposure to changes in the value of an index of securities in
which the Fund might invest, the value of a particular security or group of
securities, or foreign currency values. Swap agreements can take many different
forms and are known by a variety of names. A Fund may enter into any form of
swap agreement if WAM determines it is consistent with its investment objective
and policies, but each Fund will limit its use of swap agreements so that no
more than 5% of its total assets will be invested in such agreements.
A swap agreement tends to shift a Fund's investment exposure from one
type of investment to another. For example, if a Fund agrees to exchange
payments in dollars at a fixed rate for payments in a foreign currency the
amount of which is determined by movements of a foreign securities index, the
swap agreement would tend to increase the Fund's exposure to foreign stock
market movements and foreign currencies. Depending on how it is used, a swap
agreement may increase or decrease the overall volatility of a Fund's
investments and its NAV.
The performance of a swap agreement is determined by the change in the
specific currency, market index, security, or other factors that determine the
amounts of payments due to and from the Fund. If a swap agreement calls for
payments by a Fund, the Fund must be prepared to make such payments when due. If
the counterparty's creditworthiness declines, the value of a swap agreement
would be likely to decline, potentially resulting in a loss. WAM expects to be
able to eliminate each Fund's exposure under any swap agreement either by
assignment or by other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
Each Fund will segregate its assets to cover its current obligations
under a swap agreement. If a Fund enters into a swap agreement on a net basis,
it will segregate assets with a daily value at least equal to the excess, if
any, of its accumulated obligations under the swap agreement over the
accumulated amount the Fund is entitled to receive under the agreement. If a
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of its accumulated obligations
under the agreement.
SHORT SALES AGAINST THE BOX. Each Fund may make short sales of
securities if, at all times when a short position is open, the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, without payment of any further consideration, securities of the same issue
as, and equal in amount to, the securities sold short. This technique is called
selling short "against the box." Although permitted by their investment
restrictions, the Funds do not currently intend to sell securities short.
In a short sale against the box, a Fund does not deliver from its
portfolio the securities sold and does not receive immediately the proceeds from
the short sale. Instead, the Fund borrows the securities sold short from a
broker-dealer through which the short sale is executed, and the broker-dealer
delivers such securities, on behalf of the Fund, to the purchaser of such
securities. Such broker-dealer is entitled to retain the proceeds from the short
sale until the Fund 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
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<PAGE>
continuously maintain in a separate account with its custodian an equivalent
amount of the securities sold short or securities convertible into or
exchangeable for such securities without the payment of additional
consideration. The Fund is said to have a short position in the securities sold
until it delivers to the broker-dealer the securities sold, at which time the
Fund receives the proceeds of the sale. Because the Fund ordinarily will want to
continue to hold securities in its portfolio that are sold short, the Fund will
normally close out a short position by purchasing on the open market and
delivering to the broker-dealer an equal amount of the securities sold short,
rather than by delivering portfolio securities.
Short sales may protect a Fund against the risk of losses in the value
of its portfolio securities because any unrealized losses with respect to such
portfolio securities should be wholly or partially offset by a corresponding
gain in the short position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a corresponding loss in the
short position. The extent to which such gains or losses are offset will depend
upon the amount of securities sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the conversion premium. A Fund will incur transaction
costs in connection with short sales.
In addition to enabling a Fund to hedge against market risk, short
sales may afford the Fund an opportunity to earn additional current income to
the extent the Fund is able to enter into arrangements with broker-dealers
through which the short sales are executed to receive income with respect to the
proceeds of the short sales during the period the Fund's short positions remain
open.
The Taxpayer Relief Act of 1997 imposed constructive sale treatment for
federal income tax purposes on certain hedging strategies with respect to
appreciated securities. Under these rules taxpayers will recognize gain, but not
loss, with respect to securities if they enter into short sales or "offsetting
notional principal contracts" (as defined by the Act) with respect to the same
or substantially identical property, or if they enter into such transactions and
then acquire the same or substantially identical property. The Secretary of the
Treasury is authorized to promulgate regulations that will treat as constructive
sales certain transactions that have substantially the same effect as short
sales.
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DEBT SECURITIES
The Funds may invest in debt securities, including lower-rated
securities (i.e., securities rated BB or lower by Standard & Poor's Corporation
("S&P") or Ba or lower by Moody's Investor Services, Inc. ("Moody's"), commonly
called "junk bonds"), and securities that are not rated. There are no
restrictions as to the ratings of debt securities acquired by the Funds or the
portion of 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
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 AND RESTRICTED 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. An illiquid security generally is one that
cannot be sold in the ordinary course of business within seven days at
substantially the value assigned to it in calculations of a Fund's net asset
value. Repurchase agreements maturing in more than seven days, OTC derivatives
and restricted securities are generally illiquid; other types of investments may
also be illiquid from time to time. If, through the appreciation of illiquid
securities or the depreciation of liquid securities, a Fund should be in a
position where more than 15% of the value of its net assets are invested in
illiquid assets, that Fund will take appropriate steps to protect liquidity.
Illiquid securities are priced at a fair value determined in good faith by the
board of trustees or its delegate.
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
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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 or its delegate. None of the Funds will invest more than 15%
of its total assets (valued at the time of investment) in restricted securities.
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 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 minimal
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
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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, 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 its custodian 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
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multinational currency units) and may invest any portion of its assets in money
market instruments.
PORTFOLIO TURNOVER
Although the Funds do not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. Portfolio turnover can occur for a number of reasons
such as general conditions in the securities markets, more favorable investment
opportunities in other securities, or other factors relating to the desirability
of holding or changing a portfolio investment. The portfolio turnover rate for
WANGER U.S. SMALL CAP is not expected to exceed 50% under normal market
conditions. The portfolio turnover rates of WANGER INTERNATIONAL SMALL CAP,
WANGER TWENTY and WANGER FOREIGN FORTY are likely to be greater than 50% but,
under normal market conditions, are expected to be no more than about 115%. 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 group of banks to permit
borrowing on a temporary basis to meet share redemption requests in
circumstances in which temporary borrowing may be preferable to liquidation of
portfolio securities. Any borrowings under that line of credit by the Funds
would be subject to the Funds' restrictions on borrowing under "Investment
Restrictions," below.
INVESTMENT RESTRICTIONS
In pursuing their investment objectives, WANGER U.S. SMALL CAP and WANGER
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
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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, 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.
---------------------------
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.
21
<PAGE>
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;
(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
22
<PAGE>
Fund could be regarded as an underwriter as defined by that act with
respect to such resale;
8. Purchase and sell real estate or interests in real estate, although
it may invest in marketable securities of enterprises which invest in
real estate or interests in real estate;
9. Purchase and sell commodities or commodity contracts, except that
it may enter into (a) futures and options on futures and (b) foreign
currency contracts;
10. Make margin purchases of securities, except for use of such
short-term credits as are needed for clearance of transactions and
except in connection with transactions in options, futures, and
options on futures;
11. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
The above restrictions for each Fund are "fundamental," which means
that they cannot be changed without the approval of the lesser of (i) 67% of
each Fund's shares present at a meeting if more than 50% of the shares
outstanding are present or (ii) more than 50% of each Fund's outstanding shares.
In addition, the Funds are subject to a number of restrictions that may
be changed by the board of trustees without shareholder approval. Under those
non-fundamental restrictions, neither Fund will:
(a) Invest in companies for the purpose of management or the exercise
of control;
(b) Acquire securities of other registered investment companies except
in compliance with the Investment Company Act of 1940;
(c) Invest more than 15% of its net assets (valued at time of
investment) in illiquid securities, including repurchase agreements
maturing in more than seven days;
(d) Pledge, mortgage or hypothecate its assets, except as may be
necessary in connection with permitted borrowings or in connection with
short sales, options, futures, and options on futures;
(e) Make short sales of securities unless the Fund owns at least an
equal amount of such securities, or owns securities that are
convertible or exchangeable, 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.
23
<PAGE>
(g) [WANGER FOREIGN FORTY only] Invest more than 15% of its total
assets in securities of United States issuers, under normal market
conditions.
Notwithstanding the foregoing investment restrictions, any Fund may
purchase securities pursuant to the exercise of subscription rights, provided
that such purchase will not result in the Fund's ceasing to be a diversified
investment company. Japanese and European corporations frequently issue
additional capital stock by means of subscription rights offerings to existing
shareholders at a price substantially below the market price of the shares. The
failure to exercise such rights would result in a Fund's interest in the issuing
company being diluted. The market for such rights is not well developed in all
cases and, accordingly, the Fund may not always realize full value on the sale
of rights. The exception applies in cases where the limits set forth in the
investment restrictions would otherwise be exceeded by exercising rights or
would have already been exceeded as a result of fluctuations in the market value
of the Fund's portfolio securities with the result that the Fund would be forced
either to sell securities at a time when it might not otherwise have done so, or
to forego exercising the rights.
In addition, pursuant to state insurance laws, each Fund is subject to the
following guidelines, which may also be changed by the Trustees:
(a) Each Fund will be invested in a minimum of five different foreign
countries at all times, except that this minimum is reduced to four
when foreign country investments comprise less than 80% of the value of
the Fund's net assets; to three when less than 60% of such value; to
two when less than 40%; and to one when less than 20%.
(b) Each Fund will have no more than 20% of its net assets invested in
securities of issuers located in any one country; except that a Fund
may have an additional 15% of its net assets invested in securities of
issuers located in any one of the following countries: Australia;
Canada; France; Japan; the United Kingdom; or Germany.
(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
24
<PAGE>
distributions. "Average Annual Total Return" is the average annual compounded
rate of change in value represented by the Total Return for the period.
Average Annual Total Return is computed as follows:
ERV = P(1+T)n
Where: P = the amount of an assumed initial investment in shares of a
fund T = average annual total return n = number of years from
initial investment to the end of the period ERV = ending
redeemable value of shares held at the end of the period
For example, the Total Return and Average Total Return on a $1,000
investment in the Funds for the following periods ended December 31, 1999 were:
<TABLE>
<CAPTION>
WANGER U.S. SMALL CAP
--------------------- Average Annual
Total Return Total Return
------------ --------------
<S> <C> <C>
1 year................................................ 25.06% 25.06%
3 year................................................ 75.89% 20.71%
Life of Fund (inception 5/3/95)....................... 199.09% 26.44%
<CAPTION>
WANGER INTERNATIONAL SMALL CAP
------------------------------ Average Annual
Total Return Total Return
------------ --------------
<S> <C> <C>
1 year............................................................. 126.37% 126.37%
3 year............................................................. 159.49% 37.42%
Life of Fund (inception 5/3/95)...................... 360.72% 38.70%
<CAPTION>
WANGER TWENTY
------------- Average Annual
Total Return Total Return
------------ --------------
<S> <C> <C>
Life of Fund (inception 2/1/99)....................... 34.30% N/A
<CAPTION>
WANGER FOREIGN FORTY
-------------------- Average Annual
Total Return Total Return
------------ --------------
<S> <C> <C>
Life of Fund (inception 2/1/99)....................... 83.90% N/A
</TABLE>
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
25
<PAGE>
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, Inc., an
independent service that monitors the performance of over 1,000 mutual funds,
Morningstar, Incorporated, or another service.
The Funds [that have been in operation at least three years] 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. The Funds may quote the following measures of volatility:
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.
R-squared. R-squared 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. 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.
Standard deviation. Standard deviation quantifies the volatility in the
returns of a Fund by measuring the amount of variation in the group of returns
that make up a Fund's average return. Standard deviation is generally calculated
over a three or five year period using monthly returns and modified to present
an annualized standard deviation.
Sharpe ratio. A Fund's Sharpe ratio quantifies its total return in
excess of the return of a guaranteed investment (90 day U.S. treasury bills),
relative to its volatility as measured by its standard deviation. The higher a
Fund's Sharpe ratio, the better a Fund's returns have been relative to the
amount of investment risk it has taken.
Beta and R-squared are calculated by performing a least squares linear
regression using three 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.
26
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1999, some statistics for the Funds are as follows:
R2 Beta Alpha
<S> <C> <C> <C>
WANGER U.S. SMALL CAP
vs. S&P 500 .56 .80 -0.16%
vs. Russell 2000 .84 .78 9.55%
WANGER INTERNATIONAL SMALL CAP
vs. EMI Ex U.S. .61 1.37 25.89%
vs. EAFE .51 1.08 19.11%
</TABLE>
Other measures of volatility and relative performance may be used as
appropriate. All such measures will fluctuate and do not represent future
results.
The Funds may note their mention or recognition in newsletters,
newspapers, magazines, or other media. Portfolio managers and other members 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 following are some benchmark indices utilized by the Funds: Salomon
Smith Barney Extended Market Index ("EMI"), an index of the bottom 20% of
institutionally investable capital of countries, selected by SSB, excluding the
U.S.; the Salomon Smith Barney World ex-U.S. Cap Range $2-$10 billion Index is
the $2 to $10 billion (U.S.) subset of SSB's Broad Market Index, which
represents a mid cap developed market index, 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 include reinvested dividends.
The Funds may also compare their performance to the performance of
groups of mutual funds, including Lipper Averages and Indexes. Each Lipper
Average is the mean return of all mutual funds tracked by Lipper, Inc. in that
category, which generally will include the Fund making the comparison. Lipper
Indexes measure the performance of the largest funds tracked by Lipper in a
designated category.
27
<PAGE>
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 $9 billion under
management, including the Funds. WAM is a limited partnership managed by its
general partner, WAM Ltd., whose stockholders are Ralph Wanger, Charles P.
McQuaid, Leah J. Zell, Marcel P. Houtzager, Robert A. Mohn, John H. Park,
Margaret M. Forster, Roger Edgely, Bruce H. Lauer, and Peter Zaldivar. 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
investment advisory agreements (the "Agreements") 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 Agreements for
WANGER U.S. SMALL CAP and WANGER INTERNATIONAL SMALL CAP will continue in effect
as to each of the Funds through December 31, 2000, 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. The Agreement for WANGER TWENTY and WANGER FOREIGN FORTY will
continue in effect as to each of the Funds through December 31, 2001, 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 Agreements
must be approved in the same manner. The Agreements may be terminated as to any
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 assignment.
28
<PAGE>
The advisory fees the Funds pay to WAM are calculated daily and paid
monthly, at the following annual rates:
<TABLE>
<CAPTION>
<S> <C>
WANGER 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%
WANGER 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%
</TABLE>
WAM has undertaken to reimburse WANGER TWENTY and WANGER FOREIGN FORTY to the
extent their ordinary operating expenses exceed 1.35% and 1.45%, respectively of
its average annual net assets. These expense limitation undertakings are
voluntary and may be terminated by either WAM or the Trust on 30 days' written
notice to the other.
29
<PAGE>
The advisory fees paid by each Fund for the fiscal years ended December 31,
1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
FUND 1999 1998 1997
----------------------------------- ------------------------ ------------------------ ----------------------------
<S> <C> <C> <C>
Wanger U.S. Small Cap $3,172,578 $2,972,442 $1,960,795
Wanger International Small Cap $2,231,975 $1,751,136 $1,528,703
Wanger Twenty
Gross advisory fee $35,044 ---- ----
Exp. Reimb. (26,027)
------------
Net advisory fee 9,017
Wanger Foreign Forty
Gross advisory fee $19,994 ---- ----
Exp. Reimb. (37,004)
------------
Net advisory fee (17,010)
</TABLE>
WAM is currently undergoing merger negotiations with Liberty Financial
Companies, Inc. The Merger Agreement requires that the trustees (on behalf of
each of the Funds) and the shareholders of Wanger U.S. Small Cap and Wanger
International Small Cap approve a new investment advisory agreement with WAM.
For more information on the merger negotiations, see page 2 of this SAI.
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, 2000, 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.
30
<PAGE>
THE TRUST
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust dated August 30, 1994. The Agreement and
Declaration of Trust may be amended by a vote of either the Trust's shareholders
or its Trustees. The Trust may issue an unlimited number of shares, in one or
more series as the Board of Trustees may authorize. Any such series of shares
may be further divided, without shareholder approval, into two or more classes
of shares having such preferences or special or relative rights or privileges as
the Trustees may determine. The shares of the Funds are not currently divided
into classes. The board of trustees may authorize the issuance of additional
series if deemed advisable, each with its own investment objective, policies,
and restrictions. All shares issued will be fully paid and non-assessable and
will have no preemptive or conversion rights.
On any matter submitted to a vote of shareholders, shares are voted in
the aggregate and not by individual series except that shares are voted by
individual series when required by the Investment Company Act of 1940 or other
applicable law, or when the board of trustees determines that the matter affects
only the interests of one series, in which case shareholders of the unaffected
series are not entitled to vote on such matters. All shares of the Trust are
voted together in the election of trustees. Shares do not have cumulative voting
rights; accordingly, shareholders controlling voting interests of more than 50%
of shares of the Funds voting for the election of trustees could elect all of
the trustees if they chose to do so, and in such event, shareholders controlling
voting interests of the remaining shares would not be able to elect any
trustees.
Shareholder rights regarding voting are described in the prospectus.
These voting rights are based on applicable federal and state laws. To the
extent that changes in such laws or regulations thereunder or interpretations
thereof eliminate the necessity to submit any such matters to a shareholder
vote, or otherwise restrict or limit such voting rights, the Trust reserves the
right to act in any manner permitted by such changes.
The Trust's Declaration of Trust disclaims liability of the
shareholders, trustees, and officers of the Trust for acts or obligations of the
Trust and requires that notice of such disclaimer be given in each agreement,
obligation, or contract entered into or executed by the Trust or the board of
trustees. The Declaration of Trust provides for indemnification out of the
Trust's assets for all losses or expenses of any shareholder held personally
liable for the obligations of the Trust. Thus, although shareholders of a
business trust may, under certain circumstances, be held personally liable under
Massachusetts law for the obligations of the trust, the risk of a shareholder
incurring financial loss on account of shareholder liability is believed to be
remote because it is limited to circumstances in which the disclaimer is
inoperative and the Trust itself is unable to meet its obligations. The risk to
any one series of sustaining a loss on account of liabilities incurred by
another series is also believed to be remote.
31
<PAGE>
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>
POSITION(S)
NAME AND HELD WITH
DATE OF BIRTH THE FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------------- ------------- ----------------------------------------------
<S> <C> <C>
Fred D. Hasselbring Trustee Retail industry and general business computer systems consultant; director
8/14/1941 and executive administrator, The Malachi Corp., Inc. (a non-profit
corporation).
Charles P. McQuaid Trustee and Principal and director of research, Wanger Asset Management, L.P. since
8/27/1953 senior vice July 1992; trustee and senior vice president, Acorn Investment Trust;
president* co-portfolio manager, Acorn Fund.
P. Michael Phelps Trustee Retired since January 31, 1998; prior thereto, vice president and
9/19/1933 corporate secretary, Morton International, Inc.
Ralph Wanger Trustee and Director, Wanger Investment Company plc; principal and portfolio manager,
6/21/1934 president* Wanger Asset 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 (since 1995), analyst and portfolio manager (since 1992), Wanger
10/26/1960 Asset Management, L.P.; chief financial officer and compliance officer,
Wanger Asset Management, L.P. (since April 2000).
Kenneth A. Kalina Assistant Fund controller, Wanger Asset Management, L.P., since September 1995;
8/4/1959 treasurer assistant treasurer, Acorn Investment Trust; prior thereto, treasurer of
the Stein Roe Mutual Funds.
Bruce H. Lauer Vice Principal (since January 1, 2000) and chief operating officer (since April
7/22/1957 president, 1995), Wanger Asset Management, L.P., vice president, treasurer and
assistant assistant secretary, Acorn Investment Trust; director, Wanger Investment
secretary and Company plc and New Americas Small Cap Fund; prior thereto, first vice
treasurer president, investment accounting, Kemper Financial Services, Inc.
Robert A. Mohn Vice president Principal (since 1995), analyst and portfolio manager (since August 1992),
9/13/1961 Wanger Asset Management, L.P.; vice president, Acorn Investment Trust.
John H. Park Vice president Principal (since 1998), analyst and portfolio manager (since July 1993),
5/30/1967 Wanger Asset Management, L.P.; vice president, Acorn Investment Trust.
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.
32
<PAGE>
<CAPTION>
POSITION(S)
NAME AND HELD WITH
DATE OF BIRTH THE FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------------- ------------- ----------------------------------------------
<S> <C> <C>
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; managing director
and member of trust committee, Chai Trust Company.
Roger D. Edgely Vice president Vice president, Acorn Investment Trust; principal (since January 1, 2000)
4/18/1955 and analyst (since 1994), Wanger Asset Management L.P.; director of
international research, Wanger Asset Management, L.P., since 1998;
co-portfolio manager, Wanger Foreign Forty since December 1999; prior
thereto, analyst, Crosby Securities.
Steven A. Radis Secretary Chief Marketing Officer and Managing Director, Wanger Asset Management,
8/24/1962 L.P., since April 1999; prior thereto, Vice President of Corporate and
Marketing Communications, Zurich Kemper Life, January 1998 to March
1999, and First Vice President Corporate Communications, Zurich
Kemper Life, January 1987 to December 1997.
</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.
Mr. Wanger and Ms. Zell are married to each other.
Messrs. McQuaid, Phelps and Wanger are members of the Executive
Committee, which has authority during intervals between meetings of the Board of
Trustees to exercise the powers of the board, with certain exceptions. Messrs.
Hasselbring, Phelps and Ms. Werhane are members of the Audit Committee, which
has the authority to make recommendations to the Board of Trustees regarding the
selection of independent auditors for the Trust and to confer with the
independent auditors regarding the scope and results of each audit.
The address for Messrs. Wanger, McQuaid, Edgely, Houtzager, Kalina,
Lauer, Mohn, Park, Radis, Zaldivar and Ms. Zell is Wanger Asset Management,
L.P., 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. The address
for Mr. Hasselbring is One Wheaton Center, Suite 1802, Wheaton, IL 60187. The
address for Mr. Phelps is 222 E. Chestnut Street, Apt. 10-B, Chicago, IL 60611.
The address for Ms. Werhane is 104 Falcon Drive, Charlottesville, VA 22901.
At March 31, 2000, the trustees and officers as a group owned
beneficially less than 1% of the outstanding shares of WANGER U.S. SMALL CAP and
WANGER INTERNATIONAL SMALL CAP. At March 31, 2000, the trustees and officers as
a group owned beneficially 2.33% of the outstanding shares of WANGER TWENTY and
4.55% of the outstanding shares of WANGER FOREIGN FORTY. At that date, Phoenix
Home Life Mutual Insurance Company (and its affiliates), One American Row,
Hartford, Connecticut 06102-5056, was the record holder of 7,799,432.640 shares
(approximately 91.49% of the outstanding shares) of WANGER INTERNATIONAL SMALL
CAP, 17,248,017.191 shares (approximately 92.43% of the outstanding shares) of
WANGER U.S. SMALL CAP, 552,031.372 shares (approximately 95.64% of the
outstanding shares) of WANGER TWENTY
33
<PAGE>
and 429,290.370 shares (approximately 92.57% of the outstanding shares) of
WANGER FOREIGN FORTY all of which are beneficially owned by Variable Contract
owners. At March 31, 2000, American Express Financial Advisors, IDS Tower 10,
Minneapolis, MN 55440, was the record holder of 1,006,692.469 shares
(approximately 5.39% of the outstanding shares) of WANGER U.S. SMALL CAP and
471,055.687 shares (approximately 5.53% of the outstanding shares) of WANGER
INTERNATIONAL SMALL CAP.
The following table shows compensation paid by the Trust during the
fiscal year ended December 31, 1999 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 TOTAL
AGGREGATE AGGREGATE AGGREGATE COMP. FROM COMP.
COMP. COMP. COMP. FROM WANGER FROM
FROM U.S. FROM INT. WANGER FOREIGN FUND
NAME OF TRUSTEE SMALL CAP SMALL CAP TWENTY+ FORTY+ COMPLEX
--------------------------- ------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Fred D. Hasselbring $10,135 $5,547 $80 $38 $15,800
Charles P. McQuaid 0 0 0 0 0
P. Michael Phelps $10,135 $5,547 $80 $38 $15,800
Ralph Wanger 0 0 0 0 0
Patricia H. Werhane $10,135 $5,547 $80 $38 $15,800
</TABLE>
+ For the period 2/1/99 (inception date) through 12/31/99.
PURCHASING AND REDEEMING SHARES
Shares of the Funds may not be purchased or redeemed directly by
individual Variable Contract owners or individual Retirement Plan participants.
Purchases and redemptions are discussed in the prospectus.
For purposes of computing the net asset value of a share of either
Fund, a security traded on a securities exchange, or in an over-the-counter
market in which transaction prices are reported, is generally valued at the last
sale price at the time of valuation. A security for which there is no reported
sale on the valuation date is generally valued at the mean of the latest bid and
ask quotations or, if there is no ask quotation, at the most recent bid
quotation. Securities for which quotations are not readily available, or for
which the market quotation is determined not to represent a fair value, and any
other assets are valued at a fair value as determined in good faith by the board
of trustees. Money market instruments having a maturity of 60 days or less from
the valuation date are valued on an amortized cost basis. All assets and
liabilities initially expressed in foreign currencies are converted into U.S.
dollars at the mean of the bid and offer prices of such currencies against U.S.
dollars quoted by any major bank or dealer. If such quotations are not readily
available, the rate of exchange will be determined in accordance with policies
established in good faith by the board of trustees.
34
<PAGE>
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 WANGER
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 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 Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") so as to
35
<PAGE>
avoid payment of federal income tax on its capital gains and net investment
income currently distributed to its shareholders. 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.
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.
36
<PAGE>
In valuing brokerage services, WAM makes a judgment as to which brokers
are capable of providing the most favorable net price (not necessarily the
lowest commission) and the best execution in a particular transaction. Best
execution connotes not only general competence and reliability of a broker, but
specific expertise and effort of a broker in overcoming the anticipated
difficulties in fulfilling the requirements of particular transactions, because
the problems of execution and the required skills and effort vary greatly among
transactions.
In valuing research services, WAM makes a judgment of the usefulness of
research and other information provided to WAM by a broker in managing each
Fund's investment portfolio. In some cases, the information, e.g., data or
recommendations concerning particular securities, relates to the specific
transaction placed with the broker, but for the greater part the research
consists of a wide variety of information concerning companies, industries,
investment strategy, and economic, financial, and political conditions and
prospects, useful to WAM in advising that Fund.
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.
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 1999 1998 1997
-------------------------------------------- ----------------- ------------------ ------------------
<S> <C> <C> <C>
Wanger U.S. Small Cap $208,460 $253,172 $249,054
37
<PAGE>
Wanger International Small Cap 787,215 518,766 647,529
Wanger Twenty 15,056 N/A N/A
Wanger Foreign Forty 14,569 N/A N/A
</TABLE>
The increase in the commissions paid by WANGER INTERNATIONAL SMALL CAP
in 1999 compared to 1998 resulted from an increase in the Fund's assets (from
$141 million at December 31, 1998 to $311 million at December 31, 1999) and an
increase in portfolio turnover from 56% in 1998 to 75% in 1999. The commissions
paid by WANGER TWENTY and WANGER FOREIGN FORTY resulted from the increase in
their assets after they began operations in February 1999.
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.
CODE OF ETHICS
The 1940 Act and rules thereunder require that the Trust and WAM
establish standards and procedures for the detection and prevention of certain
conflicts of interest, including activities by which persons having knowledge of
the investments and investment intentions of the Funds might take advantage of
that knowledge for their own benefit. The Trust and WAM have adopted a Code of
Ethics to meet those concerns and legal requirements. Although the Code does not
prohibit employees who have knowledge of the investments and investment
intentions of the Funds from engaging in personal securities investing, it does
regulate such personal securities investing by these employees as a part of the
effort by the Trust and WAM to detect and prevent conflicts of interest.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 8502, Boston,
Massachusetts 02266-8502, is both the custodian and the transfer agent for the
Funds. As custodian, 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.
38
<PAGE>
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.
FINANCIAL STATEMENTS
Wanger Advisors Trust 1999 Annual Report
WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31,1999
--------------------------------------------------------------------------------
Number of Value
Shares
COMMON STOCKS-89.5%
INFORMATION-48.4%
--------------------------------------------------------------------------------
BROADCASTING-1.3%
250,600 Data Transmission Network (b) $4,322,850
Data Services for Farmers
18,000 Young Broadcasting (b) 918,000
Television Stations
--------------------------------------------------------------------------------
5,240,850
--------------------------------------------------------------------------------
TELEVISION PROGRAMMING-1.8%
128,400 TV Guide (b) 5,521,200
TV Program Guides & Programming
36,900 Classic Communications (b) 1,349,156
Cable Television in Rural Areas
--------------------------------------------------------------------------------
6,870,356
--------------------------------------------------------------------------------
RADIO-0.2%
36,300 Salem Communications (b) 821,287
Radio Stations for Religious Programming
--------------------------------------------------------------------------------
TELEPHONE SERVICES-6.1%
389,500 RCN (b) 18,890,750
Metro Market CLEC: Voice, Video &
Data Services
94,300 Commonwealth Telephone (b) 4,986,113
Rural Market CLEC: Local, Long Distance &
Internet Services
--------------------------------------------------------------------------------
23,876,863
--------------------------------------------------------------------------------
MOBILE COMMUNICATIONS-7.2%
128,000 Telephone and Data Systems 16,128,000
Cellular & Telephone Services
234,500 COMARCO (b) (c) 5,510,750
Wireless Network Testing
173,400 Price Communications (b) 4,822,688
Cellular Telephone Services
73,000 Diversinet (b) 1,606,000
Wireless PKI Security
--------------------------------------------------------------------------------
28,067,438
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT-3.1%
305,900 Aspect Communications (b) $11,968,337
Call Center Equipment
--------------------------------------------------------------------------------
BUSINESS INFORMATION/MARKETING SERVICES-2.7%
194,300 CACI International (b) 4,396,037
Technology Services for Government
56,700 Getty Images (b) 2,771,212
Photographs for Publications &
Electronic Media
151,000 PRIMEDIA (b) 2,491,500
Specialty Magazines & Other Publications
122,500 Telespectrum Worldwide (b) 872,813
Call Center Services
--------------------------------------------------------------------------------
10,531,562
--------------------------------------------------------------------------------
BUSINESS SOFTWARE-3.0%
501,300 JDA Software Group (b) 8,208,787
Applications Software & Services for Retailers
63,000 Project Software (b) 3,496,500
Enterprise Maintenance Software
--------------------------------------------------------------------------------
11,705,287
--------------------------------------------------------------------------------
TRANSACTION PROCESSORS-2.9%
338,300 National Data 11,481,056
Credit Card & Health Claims Processor
--------------------------------------------------------------------------------
COMPUTER HARDWARE/RELATED SYSTEMS-12.3%
423,500 Micros Systems (b) 31,339,000
Information Systems for Restaurants & Hotels
222,900 Kronos (b) 13,374,000
Labor Management Solutions
129,000 American Power Conversion (b) 3,402,375
Uninterruptible Power Systems
--------------------------------------------------------------------------------
48,115,375
--------------------------------------------------------------------------------
SEMICONDUCTORS/RELATED EQUIPMENT-1.4%
232,000 Galileo Technology (b) 5,597,000
Semiconductors for Networking Equipment
See accompanying notes to financial statements.
39
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31,1999
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
CONTRACT MANUFACTURING-0.1%
9,000 Applied Power $330,750
Electronic Enclosures & Industrial Products
--------------------------------------------------------------------------------
GAMING EQUIPMENT-0.6%
113,000 International Game Technology 2,295,312
Slot Machines & Progressive Jackpots
--------------------------------------------------------------------------------
COMPUTER SERVICES-4.7%
294,900 Sykes Enterprises (b) 12,938,737
Call Center Services
630,000 Aztec Technology Partners (b) 2,874,375
Technology Staffing Services
151,700 Computer Task Group 2,247,056
Application Development & Staffing Services
16,600 Meta Group (b) 315,400
IT Publications & Consulting Services
--------------------------------------------------------------------------------
18,375,568
--------------------------------------------------------------------------------
CONSUMER SOFTWARE-0.2%
88,000 3DO Company (b) 800,250
Entertainment Software
--------------------------------------------------------------------------------
INTERNET RELATED-0.8%
122,000 Online Resources (b) 2,028,250
Internet Banking
20,000 Radware (b) 862,500
Internet Infrastructure/Internet Traffic
--------------------------------------------------------------------------------
2,890,750
--------------------------------------------------------------------------------
INFORMATION-TOTAL 188,968,041
HEALTH CARE-9.1%
--------------------------------------------------------------------------------
BIOTECHNOLOGY/DRUG DELIVERY-1.1%
55,000 Myriad Genetics (b) 2,530,000
Gene Discovery & Diagnostic Products
45,100 Genome Therapeutics (b) 727,238
Gene Discovery Services
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
BIOTECHNOLOGY/DRUG DELIVERY-1.1% (CONT)
31,000 Genset (b) $590,938
Genomics
39,000 Synaptic Pharmaceuticals (b) 263,250
Receptor Targeted Drug Design
32,500 Genzyme Molecular Oncology Division (b) 227,500
Gene Expression Technology & Cancer Drugs
--------------------------------------------------------------------------------
4,338,926
--------------------------------------------------------------------------------
SERVICES-8.0%
504,000 Lincare Holdings (b) 17,482,500
Home Health Care Services
386,000 First Health (b) 10,373,750
PPO Network
552,700 Magellan Health Services (b) 3,488,919
Mental Health Services
--------------------------------------------------------------------------------
31,345,169
--------------------------------------------------------------------------------
HEALTH CARE-TOTAL 35,684,095
CONSUMER GOODS/SERVICES-1.5%
--------------------------------------------------------------------------------
NONDURABLES-0.2%
91,700 NuSkin Enterprises (b) 831,031
Personal Care/Herbal Products
--------------------------------------------------------------------------------
RETAIL-0.7%
50,500 Whole Foods Market (b) 2,341,938
Natural Food Supermarkets
45,000 MotherNature.com (b) 329,063
Healthy Living E-Commerce
--------------------------------------------------------------------------------
2,671,001
--------------------------------------------------------------------------------
CASINOS-0.2%
115,200 Monarch Casino & Resort (b) 604,800
Casino/Hotel in Reno
See accompanying notes to financial statements.
40
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
CONSUMER SERVICES-0.4%
112,000 ITT Educational Services (b) $1,729,000
Technology Oriented Post Secondaty
Degree Programs
--------------------------------------------------------------------------------
CONSUMER GOODS/SERVICES-TOTAL 5,835,832
FINANCE-10.7%
--------------------------------------------------------------------------------
BANKS/SAVINGS & LOANS-1.5%
82,000 Texas Regional Bancshares 2,378,000
TexMex Bank
79,500 Peoples Bank Bridgeport 1,679,438
Connecticut Savings & Loan
51,400 Chittenden 1,522,725
Vermont & West Massachusetts Bank
11,000 TCF Financial 273,625
Great Lakes Bank
--------------------------------------------------------------------------------
5,853,788
--------------------------------------------------------------------------------
FINANCE COMPANIES-2.7%
509,400 AmeriCredit (b) 9,423,900
Auto Lending
232,000 World Acceptance (b) 1,116,500
Personal Loans
--------------------------------------------------------------------------------
10,540,400
--------------------------------------------------------------------------------
INSURANCE-4.3%
586,600 UICI (b) 6,195,963
Health Insurance
21,000 Markel (b) 3,255,000
Specialty Insurance
403,900 Acceptance Insurance (b) 2,347,669
Crop Insurance
92,000 Leucadia National 2,127,500
Insurance Holding Company
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
INSURANCE-4.3% (CONT)
66,000 Protective Life $2,099,625
Life/Dental Insurance
30,000 Terra Nova 900,000
Specialty Insurance
--------------------------------------------------------------------------------
16,925,757
--------------------------------------------------------------------------------
MONEY MANAGEMENT-2.2%
51,000 SEI Investments 6,069,797
Mutual Fund Administration
167,700 Baker Fentress 2,379,244
Closed-End Investment Company
--------------------------------------------------------------------------------
8,449,041
--------------------------------------------------------------------------------
FINANCE-TOTAL 41,768,986
INDUSTRIAL GOODS/SERVICES-4.9%
--------------------------------------------------------------------------------
MACHINERY-0.1%
48,700 Farr (b) 474,825
Filters
--------------------------------------------------------------------------------
STEEL-0.5%
192,400 Atchison Casting (b) 1,755,650
Steel Foundries
--------------------------------------------------------------------------------
SPECIALTY CHEMICALS-0.7%
189,600 Lilly Industries, Cl. A 2,547,750
Industrial Coatings
--------------------------------------------------------------------------------
OTHER INDUSTRIAL SERVICES-3.6%
412,100 Insurance Auto Auctions (b) 6,490,575
Auto Salvage Services
516,400 Wackenhut, Cl. B 5,325,375
Prison Management
198,000 Labor Ready 2,400,750
Temporary Manual Labor
--------------------------------------------------------------------------------
14,216,700
--------------------------------------------------------------------------------
INDUSTRIAL GOODS/SERVICES-TOTAL 18,994,925
See accompanying notes to financial statements.
41
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
ENERGY/MINERALS- 13.4%
--------------------------------------------------------------------------------
INDEPENDENT POWER-7.1%
737,600 MidAmerican Energy $24,847,900
Growth Utility
38,000 AES Corporation (b) 2,840,500
Power Plants
--------------------------------------------------------------------------------
27,688,400
--------------------------------------------------------------------------------
OIL/GAS PRODUCERS-2.1%
688,900 Tesoro Petroleum (b) 7,965,406
Oil Refinery/Gas Reserves
--------------------------------------------------------------------------------
DISTRIBUTION/MARKETING/REFINING-4.2%
304,100 Dynegy 7,393,431
Natural Gas; Electric Processing & Marketing
137,000 Equitable Resources 4,572,375
Natural Gas Utility & Producer
223,000 Atmos Energy 4,557,563
Natural Gas Utility
--------------------------------------------------------------------------------
16,523,369
--------------------------------------------------------------------------------
ENERGY/MINERALS-TOTAL 52,177,175
OTHER INDUSTRIES-1.5%
--------------------------------------------------------------------------------
REAL ESTATE-0.6%
47,000 The Rouse Company 998,750
Shopping Malls
25,900 Gaylord Entertainment (b) 775,381
Opryland Hotel & Other Assets
25,000 Cornerstone Properties 365,625
Downtown Office Buildings
21,400 Consolidated Tomoka 272,850
Daytona Beach Area
--------------------------------------------------------------------------------
2,412,606
--------------------------------------------------------------------------------
Principal Amount or Value
Number of Shares
--------------------------------------------------------------------------------
TRANSPORTATION-0.9%
174,000 Hub Group (b) $3,480,000
Freight Forwarder
--------------------------------------------------------------------------------
OTHER INDUSTRIES-TOTAL 5,892,606
TOTAL COMMON STOCKS-89.5% 349,321,660
--------------------------------------------------------------------------------
(COST: $272,240,922)
SHORT-TERM OBLIGATIONS-11.2%
--------------------------------------------------------------------------------
$19,944,000 Associates First Capital 4.00%
Maturing 01/03/00 19,939,568
15,000,000 AT&T Corporation 3.50%
Maturing 01/07/00 14,991,250
9,000,000 Abbott Laboratories 3.75%
Maturing 01/13/00 8,988,750
--------------------------------------------------------------------------------
(AMORTIZED COST: $43,919,568) 43,919,568
TOTAL INVESTMENTS-100.7% 393,241,228
--------------------------------------------------------------------------------
(COST: $316,160,490)
CASH AND OTHER ASSETS LESS LIABILITIES- (0.7%) (2,531,755)
--------------------------------------------------------------------------------
TOTAL NET ASSETS-100% $390,709,473
================================================================================
NOTES TO STATEMENT OF INVESTMENTS:
(a) At December 31, 1999, for federal income tax purposes, cost of investments
was $316,759,044 and net unrealized appreciation was $75,482,184 consisting
of gross unrealized appreciation of $116,915,906 and gross unrealized
depreciation of $40,433,722.
(b) Non-income producing security.
(c) On December 31, 1999, the fund held 5.47% of the outstanding voting shares
of COMARCO. The aggregate cost and value of investments in this company
at December 31, 1999, was $4,123,854 and $5,510,750, respectively. The
market value of this security represents 1.14% of the total net assets at
December 31, 1999. There were no purchases, proceeds from sales of dividends
received from this company during the year ended December 31, 1999.
See accompanying notes to financial statements.
42
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
COMMON STOCKS-97.4%
EUROPE-51.5%
--------------------------------------------------------------------------------
GERMANY/AUSTRIA-2.0%
80,000 GFK (b) $3,220,320
Market Research
18,000 Dialog Semiconductor (b) 1,331,401
Custom Semiconductors for Cell Phones
70,000 Entrium (b) 1,070,756
Telephone & Internet Bank
15,000 Austria Technologies 769,858
Printed Circuit Board Manufacturer
--------------------------------------------------------------------------------
6,392,335
--------------------------------------------------------------------------------
NETHERLANDS-8.9%
300,000 Detron Group (b) 6,460,767
Computer Services for Telcos
151,818 Computer Service Solutions (b) 3,941,777
Computer Services
100,000 Versatel (b) 3,522,225
Telecom Services for Business Parks
120,000 Unique International 2,475,621
Temporary Employment
107,500 UCC Holding (b) 2,428,700
Offshore Surveying
60,000 Fugro 2,228,059
Offshore Surveying
80,000 Hunter Douglas 2,173,716
Decorative Window Coverings
40,353 Endemol Entertainment 2,166,503
Game Show Producer
51,666 Kempen 2,053,766
Stock Brokerage/Investment Management
13,000 Fox Kids Europe (b) 166,148
Cartoons
--------------------------------------------------------------------------------
27,617,282
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
FINLAND-2.9%
290,000 Talentum $7,033,381
Trade Journals & Internet Services
100,000 PMJ Automec 1,174,411
Automated Electronics Assemby Equipment
25,000 F-Secure (b) 729,604
Security Software
--------------------------------------------------------------------------------
8,937,396
--------------------------------------------------------------------------------
NORWAY-2.8%
168,200 Enitel (b) 5,023,957
3,100 Enitel Warrants 10/26/04 (b) 19,869
Telecommunication Services
500,000 Visma (b) 3,733,620
Business Software for Ships
--------------------------------------------------------------------------------
8,777,446
--------------------------------------------------------------------------------
SWEDEN-15.2%
450,000 Icon Medialab (b) 15,651,254
Internet Consulting
60,000 Information Highway 9,940,662
Internet Consulting
100,000 Modern Times Group (b) 4,958,581
TV, Newspapers & Electronic Commerce
247,000 Mandator 3,685,917
Computer Services/Consulting
250,000 Semcon 2,937,548
Technical Consultant
15,000 Framtidsfabriken (b) 2,714,294
Internet Consulting
60,000 Connecta (b) 2,044,533
Internet Consulting
55,000 IBS (b) 1,544,563
Business Software
300,000 Micronic Laser Systems (b) 1,339,522
Electronics Production Equipment
See accompanying notes to financial statements.
43
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
SWEDEN-15.2% (CONT)
50,000 Entra Data (b) $1,280,771
Business Software
32,000 Effnet Group (b) 1,146,819
Telecommunications Equipment
--------------------------------------------------------------------------------
47,244,464
--------------------------------------------------------------------------------
FRANCE-7.0%
23,800 Prosodie 6,653,624
Automated Call Centers
17,000 FI System (b) 5,166,601
Internet Consulting
15,000 Fininfo 3,773,813
Data Feeds for French Banks & Brokers
40,000 Ipsos (b) 3,304,854
Market Research
35,196 Cegedim 2,479,365
Medical Market Research
23,600 Genset (b) 449,875
Genomics
--------------------------------------------------------------------------------
21,828,132
--------------------------------------------------------------------------------
UNITED KINGDOM-5.6%
600,000 Informa Group (b) 5,898,194
Business Information Provider
1,000,000 Taylor Nelson 4,418,395
Market Research Services
500,000 Hogg Robinson 1,958,795
Corporate Travel Management
250,000 Photobition Group 1,330,769
Production of Graphics for Exhibits
16,000 Baltimore Technologies 1,324,711
Security Software
129,000 Edinburgh Fund Managers (b) 1,106,602
Investment Management
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
UNITED KINGDOM-5.6% (CONT)
75,000 Bloomsbury Publishing (b) $986,869
Publishing
295,000 Chloride Group 464,658
Electrical Equipment Manufacturer/Retailer
135,500 Electronics Boutique 101,789
Videogame/Computer Software Stores
--------------------------------------------------------------------------------
17,590,782
--------------------------------------------------------------------------------
SPAIN/PORTUGAL-2.7%
150,000 Mapfre Vida 3,456,812
Life Insurance/Mutual Funds
200,000 Prosegur 1,789,290
Security Guards
30,000 PT Multimedia (Portugal) (b) 1,704,858
Cable & Satellite Operator
100,000 Filmes Lusomundo (Portugal) (b) 1,408,890
Newspapers, Radio, Video, Film Distribution
--------------------------------------------------------------------------------
8,359,850
--------------------------------------------------------------------------------
SWITZERLAND-0.3%
500 Bachem 801,736
Drug Manufacturer
--------------------------------------------------------------------------------
ITALY-4.1%
400,000 Class Editore 6,963,942
Newspapers & On-Line Financial Data
150,000 Banca Pop Commercia e Industria 5,283,338
12,500 Banca Pop Commercia e Industria 396,250
New Shares
Regional Bank
--------------------------------------------------------------------------------
12,643,530
--------------------------------------------------------------------------------
EUROPE-TOTAL 160,192,953
See accompanying notes to financial statements.
44
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
ASIA-28.9%
--------------------------------------------------------------------------------
HONG KONG-2.6%
328,000 Li & Fung $8,227,954
Sourcing of Consumer Goods
--------------------------------------------------------------------------------
JAPAN-10.2%
28,000 Trans Cosmos 11,941,700
Information Technology Services & Investments
28,000 Moshi Moshi Hotline 3,861,880
Telemarketing
11,800 Drake Beam Morin 3,843,686
Employment Outplacement Services
15,500 Nichii Gakkan 3,030,862
7,750 Nichii Gakkan New (b) 1,515,431
Health Care Services
22,000 Pasona Softbank 1,747,432
Temporary Employment Services
16,000 Venture Link 1,385,112
Retail Franchises
6,000 C-Two Network 1,355,766
Discount Food Retailer
7,500 Don Quijote 1,173,824
Retail Franchises
46,300 Nichiei 1,005,439
Commercial Lender
12,100 Wilson Learning 591,803
Corporate Training
40,000 Optex 395,187
Industrial Sensors
--------------------------------------------------------------------------------
31,848,122
--------------------------------------------------------------------------------
TAIWAN-1.9%
500,000 Systex 3,409,272
Systems Integrator & Internet Services
400,000 Hitron Technology (b) 2,396,050
Network Integration & Internet Services
--------------------------------------------------------------------------------
5,805,322
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
MALAYSIA-0.3%
388,000 Computer Systems Advisor $878,117
Systems Integration & Software Services
--------------------------------------------------------------------------------
SINGAPORE-11.4%
7,200,000 Omni Industries 13,055,539
Contract Electronics Manufacturer
1,210,400 Star Cruises 12,346,080
Cruise Line
1,080,941 Datacraft Asia 8,971,810
Network Integrator
100,000 Venture Manufacturing 1,146,803
Electronic Manufacturing Services
--------------------------------------------------------------------------------
35,520,232
--------------------------------------------------------------------------------
SOUTH KOREA-2.5%
240,000 S1 Corporation 4,142,668
Home/Business Security Services
10,000 Cheil Jedang 1,153,677
Consumer Staples
15,000 Cheil Communications 1,134,742
Advertising
70,000 Comtec Systems 949,362
Computer Services
84,614 Korea Technology Investment Corp. (b) 516,402
Venture Capital
--------------------------------------------------------------------------------
7,896,851
--------------------------------------------------------------------------------
ASIA-TOTAL 90,176,598
LATIN AMERICA-4.8%
--------------------------------------------------------------------------------
MEXICO-2.0%
1,000,000 Corp Interamericana 3,994,723
de Entretenimiento (b)
Special Events and Live Entertainment
1,600,000 Grupo Continental 2,330,343
Beverages
--------------------------------------------------------------------------------
6,325,066
See accompanying notes to financial statements.
45
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
BRAZIL-2.8%
300,000 Globo Cabo (b) $5,400,000
Cable Television
100,000 Tele Celular 3,175,000
Mobile Communications
--------------------------------------------------------------------------------
8,575,000
--------------------------------------------------------------------------------
LATIN AMERICA-TOTAL 14,900,066
OTHER COUNTRIES-12.2%
--------------------------------------------------------------------------------
AUSTRALIA-4.5%
800,000 ERG 4,493,880
Smart Card Systems for Public Transportation
1,750,000 Powertel (b) 3,081,330
Telecommunications Provider
500,000 Keycorp (b) 2,690,415
Smart Card Technology
750,000 AAPT (b) 2,567,228
Telecommunications Provider
800,000 Powerlan (b) 777,888
Computer Services
200,000 BMC Media.com (b) 381,060
Advertising
--------------------------------------------------------------------------------
13,991,801
--------------------------------------------------------------------------------
CANADA-5.8%
154,000 MDSI Mobil Data Solutions (b) 3,965,500
Wireless Software
200,000 Penn West Petroleum (b) 3,906,250
Oil & Gas Producer
635,000 AltaGas Services (b) 2,634,126
Natural Gas Gatherer and Processor
120,000 Corus Entertainment (b) 2,447,456
CATV Programming & Radio Stations
250,000 Ulster Petroleum (b) 2,221,032
Oil & Gas Producer
--------------------------------------------------------------------------------
Principal Amount or Value
Number of Shares
--------------------------------------------------------------------------------
CANADA-5.8% (CONT)
200,000 Rand A Technology (b) $1,922,013
Value Added Reseller of CAD/CAM Software
43,000 Teklogix International (b) 869,573
Wireless Logistics Tracking Systems
--------------------------------------------------------------------------------
17,965,950
--------------------------------------------------------------------------------
UNITED STATES-0.1%
50,000 Azurix (b) 446,875
Owner & Operator of Water Utilities
--------------------------------------------------------------------------------
ISRAEL-1.8%
194,000 Galileo Technology (b) 4,680,250
Communications Semiconductors
20,000 Radware (b) 862,500
Internet Infrastructure & Internet Traffic
--------------------------------------------------------------------------------
5,542,750
--------------------------------------------------------------------------------
OTHER-TOTAL 37,947,376
TOTAL COMMON STOCKS-97.4% 303,216,993
--------------------------------------------------------------------------------
(COST: $ 151,878,149)
SHORT-TERM OBLIGATION-2.5%
--------------------------------------------------------------------------------
$7,822,000 Associates First Capital 4.00%
Maturing 01/03/00 7,820,261
--------------------------------------------------------------------------------
(AMORTIZED COST: $7,820,261)
TOTAL INVESTMENTS-99.9% 311,037,254
--------------------------------------------------------------------------------
(COST: $ 159,698,410)
CASH AND OTHER ASSETS LESS LIABILITIES-0.1% 293,718
--------------------------------------------------------------------------------
TOTAL NET ASSETS-100% $311,330,972
================================================================================
NOTES TO STATEMENT OF INVESTMENTS:
(a) At December 31, 1999, for federal income tax purposes, cost of investments
was $159,712,819 and net unrealized appreciation was $151,324,435 consisting
of gross unrealized appreciation of $158,483,012 and gross unrealized
depreciation of $7,158,577.
(b) Non-income producing security.
(c) At December 31, 1999, $85,778,525 or 27.6% of the Fund's net assets was
denominated in the Euro currency.
See accompanying notes to financial statements.
46
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER TWENTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
COMMON STOCKS-92.2%
Information-35.0%
--------------------------------------------------------------------------------
TELEVISION PROGRAMMING-6.6%
7,600 Liberty Media Group, AT&T (b) $431,300
CATV & Satellite Dish Programming
--------------------------------------------------------------------------------
TELEPHONE SERVICES-11.3%
7,800 RCN (b) 378,300
Metro Market CLEC:Voice, Video &
Internet Services
6,200 McLeod USA, Inc. (b) 365,025
Super Regional CLEC: Local, Long Distance &
Internet Services
--------------------------------------------------------------------------------
743,325
--------------------------------------------------------------------------------
MOBILE COMMUNICATIONS-5.4%
2,800 Telephone and Data Systems 352,800
Cellular & Telephone Franchises
--------------------------------------------------------------------------------
BUSINESS INFORMATION-4.6%
6,900 H&R Block 301,875
Tax Preparation
--------------------------------------------------------------------------------
TRANSACTION PROCESSORS-3.6%
7,000 National Data 237,562
Credit Card & Health Claims Processor
--------------------------------------------------------------------------------
INSTRUMENTATION-3.5%
6,000 Tektronix 233,250
Analytical Instruments
--------------------------------------------------------------------------------
INFORMATION-TOTAL 2,300,112
HEALTH CARE-10.3%
--------------------------------------------------------------------------------
SERVICES-10.3%
17,000 First Health (b) 456,875
PPO Network
6,300 Lincare Holdings (b) 218,531
Home Health Care Services
--------------------------------------------------------------------------------
HEALTH CARE-TOTAL 675,406
Number of Value
Shares
Consumer Goods/Services-18.9%
--------------------------------------------------------------------------------
FURNITURE-3.9%
11,000 Herman Miller $253,000
Office Furniture
--------------------------------------------------------------------------------
MANUFACTURERS-3.7%
9,000 Jones Apparel (b) 244,125
Women's Apparel
--------------------------------------------------------------------------------
CRUISE LINES-3.2%
4,300 Royal Caribbean Cruises 212,044
Cruises to Caribbean & Alaska
--------------------------------------------------------------------------------
CASINOS-4.0%
10,000 Harrah's Entertainment (b) 264,375
Casinos & Riverboats
--------------------------------------------------------------------------------
OTHER INDUSTRIAL SERVICES-4.1%
22,000 ServiceMaster 270,875
Facilities Management
--------------------------------------------------------------------------------
CONSUMER GOODS/SERVICES-TOTAL 1,244,419
FINANCE-17.7%
--------------------------------------------------------------------------------
FINANCE COMPANIES-6.9%
24,500 AmeriCredit (b) 453,250
Auto Lending
--------------------------------------------------------------------------------
INSURANCE-5.4%
3,000 Progressive 219,375
Auto Insurance
12,800 UICI (b) 135,200
Insurance/Specialty Finance
--------------------------------------------------------------------------------
354,575
--------------------------------------------------------------------------------
MONEY MANAGEMENT-5.4%
3,000 SEI Investments 357,047
Mutual Fund Administration
--------------------------------------------------------------------------------
FINANCE-TOTAL 1,164,872
See accompanying notes to financial statements.
47
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER TWENTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Principal Amount or Value
Number of Shares
ENERGY/MINERALS-10.3%
--------------------------------------------------------------------------------
INDEPENDENT POWER-10.3%
5,200 AES Corporation (b) $388,700
Power Plants
8,500 MidAmerican Energy 286,344
Growth Utility
--------------------------------------------------------------------------------
ENERGY/MINERALS-TOTAL 675,044
TOTAL COMMON STOCKS-92.2% 6,059,853
--------------------------------------------------------------------------------
(COST: $5,290,334)
SHORT-TERM OBLIGATIONS-6.6%
--------------------------------------------------------------------------------
$325,000 Associates First Capital 4.00% 324,928
Maturing 01/03/00
108,000 State Street Bank Repurchase 108,000
Agreement, 2.00%, Maturing 01/03/00;
12/31/99 Agreement Collateralized
by U.S. Treasury Notes
--------------------------------------------------------------------------------
(AMORTIZED COST: $432,928) 432,928
TOTAL INVESTMENTS-98.8 % 6,492,781
--------------------------------------------------------------------------------
(COST: $5,723,262)
CASH AND OTHER ASSETS LESS LIABILITIES-1.2% 77,350
--------------------------------------------------------------------------------
TOTAL NET ASSETS-100% $6,570,131
================================================================================
Notes to Statement of Investments:
(a) At December 31, 1999, for federal income tax purposes, cost of investments
was $5,737,245 and net unrealized appreciation was $755,536 consisting of
gross unrealized appreciation of $1,228,678 and gross unrealized
depreciation of $473,142.
(b) Non-income producing security.
See accompanying notes to financial statements.
48
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER FOREIGN FORTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
COMMON STOCKS AND OTHER EQUITY-LIKE
SECURITIES-86.3%
EUROPE-56.5%
--------------------------------------------------------------------------------
GERMANY-1.4%
600 MobilCom $51,324
Telecommunications Services
900 Rhoen Klinikum 33,059
Hospital Management
--------------------------------------------------------------------------------
84,383
--------------------------------------------------------------------------------
BELGIUM-3.9%
3,000 Audiofina 226,429
Television Broadcaster
--------------------------------------------------------------------------------
NETHERLANDS-5.1%
1,500 Getronics 119,554
Computer Services
1,512 ASR Verzekeringsgrp 96,165
Insurance
2,600 Hunter Douglas 70,646
Decorative Window Coverings
1,000 Fox Kids Europe (b) 12,781
Programming/Cartoons
--------------------------------------------------------------------------------
299,146
--------------------------------------------------------------------------------
FINLAND-1.0%
800 Comptel (b) 56,227
Telephone Billing Software
--------------------------------------------------------------------------------
SWEDEN-2.4%
2,000 Netcom (b) 140,532
Telecommunication Services
--------------------------------------------------------------------------------
FRANCE-3.7%
700 Atos (b) 115,952
Computer Services/Transaction Processing
200 M6 Metropole TV 99,025
Television Broadcaster
--------------------------------------------------------------------------------
214,977
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
UNITED KINGDOM-20.8%
30,000 Airtours $184,167
Packaged Tour Vacations
7,000 Logica 180,597
Computer Software & Services
3,500 Energis (b) 168,158
Telecommunication Services
40,000 St. James Capital 142,810
Life Insurance
7,000 Sema Group 125,977
Computer Software & Services
10,000 Carlton Communications 97,415
Television Broadcaster
750 NTL (b) 93,563
Voice, Video & Data Services
5,000 WPP Group 79,240
Advertising
8,000 Thus (b) 50,145
Telecommunication Services
1,500 Serco Group 47,072
Facilities Management
9,000 Bodycote 43,473
Materials Technology & Metal Processing
--------------------------------------------------------------------------------
1,212,617
--------------------------------------------------------------------------------
IRELAND-1.9%
12,000 Irish Life & Permanent 113,516
Insurance & Savings Products
--------------------------------------------------------------------------------
SPAIN-6.3%
3,750 Jazztel (b) 244,219
Telecommunication Services
4,000 Indra Sistemas 75,074
Computer Services
2,000 Mapfre Vida 46,091
Life Insurance/Mutual Funds
--------------------------------------------------------------------------------
365,384
See accompanying notes to financial statements.
49
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER FOREIGN FORTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Number of Value
Shares
--------------------------------------------------------------------------------
SWITZERLAND-1.2%
15 Cie Fin Richemont $35,842
Luxury Goods, Tobacco & Pay TV
20 Pargesa Holdings 32,698
Industrial & Media Conglomerate
--------------------------------------------------------------------------------
68,540
--------------------------------------------------------------------------------
ITALY-8.8%
15,236 Editoriale L'Espresso 176,173
Newspapers & Magazines
12,000 Banca Fideuram 142,016
Life Insurance/Mutual Funds
25,000 SEAT Pagine Gialle 82,018
Yellow Pages Publisher
20,000 Saipem 72,256
Offshore Construction
3,000 Autogrill 37,738
Restaurants & Catering for Travelers
--------------------------------------------------------------------------------
510,201
--------------------------------------------------------------------------------
EUROPE-TOTAL 3,291,952
ASIA-17.4%
--------------------------------------------------------------------------------
HONG KONG-2.3%
15,000 SmarTone Telecom 72,361
Mobile Telecommunications
100,000 Pacific Century Insurance (b) 60,140
Life Insurance
--------------------------------------------------------------------------------
132,501
--------------------------------------------------------------------------------
JAPAN-7.3%
300 Softbank 287,000
Internet Services/Investment Holdings
500 Nintendo 83,048
Video Games
150 Shohkoh Fund 59,351
Commercial Lender
--------------------------------------------------------------------------------
429,399
Principal Amount or Value
Number of Shares
--------------------------------------------------------------------------------
SINGAPORE-7.8%
30,000 Star Cruises $306,000
Cruise Line
13,000 Venture Manufacturing 149,084
Electronic Manufacturing Services
--------------------------------------------------------------------------------
455,084
--------------------------------------------------------------------------------
ASIA-TOTAL 1,016,984
OTHER COUNTRIES-12.4%
--------------------------------------------------------------------------------
CANADA-5.7%
4,000 Celestica (b) 223,451
Electronic Manufacturing Services
3,000 Canadian Natural Resources (b) 73,113
Oil & Gas Producer
2,000 Power Financial 33,185
Financial Services Holding Company
--------------------------------------------------------------------------------
329,749
--------------------------------------------------------------------------------
ISRAEL-2.4%
4,000 Amdocs (b) 138,000
Telecommunications Billing & Customer
Care Software
--------------------------------------------------------------------------------
UNITED STATES-4.3%
$149,000 Global TeleSystems, 5.75% Cv. 199,101
Note Due 7/1/10
Telecommunications Services
6,000 Azurix (b) 53,625
Owner/Operator of Water Utilities
--------------------------------------------------------------------------------
252,726
--------------------------------------------------------------------------------
OTHER-TOTAL 720,475
See accompanying notes to financial statements.
50
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER FOREIGN FORTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999
--------------------------------------------------------------------------------
Principal Value
Amount
TOTAL COMMON STOCKS AND
OTHER EQUITY-LIKE SECURITIES-86.3% $5,029,411
--------------------------------------------------------------------------------
(COST: $3,383,399)
SHORT-TERM OBLIGATION-5.3%
--------------------------------------------------------------------------------
$306,000 Associates First Capital 4.00%
Maturing 01/03/00 305,932
--------------------------------------------------------------------------------
(AMORTIZED COST: $305,932)
TOTAL INVESTMENTS-91.6% 5,335,343
--------------------------------------------------------------------------------
(COST: $ 3,689,331)
CASH AND OTHER ASSETS LESS LIABILITIES-8.4% 490,785
--------------------------------------------------------------------------------
TOTAL NET ASSETS-100% $5,826,128
================================================================================
Notes to Statement of Investments:
(a) At December 31, 1999, for federal income tax purposes, cost of investments
was $3,696,293 and net unrealized appreciation was $1,639,050 consisting of
gross unrealized appreciation of $1,749,711 and gross unrealized
depreciation of $110,661.
(b) Non-income producing security.
(c) At December 31, 1999, $1,870,263 or 32.1% of the Fund's net assets was
denominated in the Euro currency.
See accompanying notes to financial statements.
51
<PAGE>
<TABLE>
Wanger Advisors Trust 1999 Annual Report
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1999
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
WANGER WANGER WANGER WANGER
U.S. SMALL CAP INTERNATIONAL TWENTY FOREIGN
SMALL CAP FORTY
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (cost: Wanger U.S. Small Cap
$316,160,490; $393,241,228 $311,037,254 $6,492,781 $5,335,343
Wanger International Small Cap $159,698,410;
Wanger Twenty $5,723,262; Wanger Foreign
Forty $3,689,331)
Cash 61 190,820 403 43,463
Organization costs 6,711 6,711 -- --
Receivable for:
Securities sold -- 1,746,099 407,406 261,554
Fund shares sold 656,862 583,431 52,950 236,116
Dividends and interest 26,648 144,335 2,296 7,225
Other assets 3,409 4,785 64 31
------------------------------------------------------------------------------------------------------------------------------------
Total assets 393,934,919 313,713,435 6,955,900 5,883,732
LIABILITIES AND NET ASSETS
Payable for:
Securities purchased 2,990,622 19,605 359,108 43,488
Fund shares redeemed 195,033 2,281,870 13,357 --
Amount owed to advisor 8,844 7,107 9,017 152
Other 30,947 73,881 4,287 13,964
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,225,446 2,382,463 385,769 57,604
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $390,709,473 $311,330,972 $6,570,131 $5,826,128
====================================================================================================================================
Fund shares outstanding 15,704,298 7,128,362 489,305 316,780
====================================================================================================================================
PRICING OF SHARES
Net asset value, offering price and redemption
price per share $24.88 $43.67 $13.43 $18.39
====================================================================================================================================
ANALYSIS OF NET ASSETS
Paid-in capital $264,394,492 $120,767,930 $5,520,471 $3,780,585
Undistributed net realized gain on sales of
investments and foreign currency transactions 48,752,400 39,225,530 280,141 401,583
Net unrealized appreciation of investments and foreign
currency transactions (net of unrealized PFIC gains
of $5,826 for Wanger Foreign Forty) 77,080,738 151,337,512 769,519 1,640,182
Undistributed net investment income 481,843 -- -- 3,778
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $390,709,473 $311,330,972 $6,570,131 $5,826,128
See accompanying notes to financial statements.
</TABLE>
52
<PAGE>
<TABLE>
Wanger Advisors Trust 1999 Annual Report
STATEMENTS OF OPERATIONS
<CAPTION>
WANGER WANGER WANGER WANGER
U.S. SMALL CAP INTERNATIONAL TWENTY FOREIGN FORTY
Inception Inception
February 1 February 1
Year Ended Year Ended through through
December 31, December 31, December 31, December 31,
1999 1999 1999 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes of $171,245 for Wanger $2,520,432 $1,669,203 $19,675 $22,542
International Small Cap and $2,131 for
Wanger Foreign Forty)
Interest 1,350,409 105,490 1,592 4,401
-----------------------------------------------------------------------------------------------------------------------------------
Total investment income 3,870,841 1,774,693 21,267 26,943
EXPENSES:
Investment advisory 3,172,578 2,231,975 35,044 19,994
Custodian 48,168 295,019 2,431 8,683
Legal and audit 57,923 47,565 15,250 15,115
Reports to shareholders 14,559 14,811 7,300 7,300
Amortization of organization costs 21,643 19,976 -- --
Transfer agent 21,808 21,716 17,600 17,500
Trustees 31,610 16,817 251 121
Insurance 4,511 2,183 16 8
Other 22,326 10,739 107 57
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,395,126 2,660,801 77,999 68,778
Less custodian fees paid indirectly (6,128) (4,963) (2,173) (2,783)
Less reimbursement of expenses by advisor -- -- (26,027) (37,004)
-----------------------------------------------------------------------------------------------------------------------------------
Net expenses 3,388,998 2,655,838 49,799 28,991
-----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) 481,843 (881,145) (28,532) (2,048)
Net realized and unrealized gain on investments:
Net realized gain on sales of investments 49,157,155 47,468,114 308,673 401,583
Net change in unrealized appreciation 26,975,880 124,783,648 769,519 1,646,008
-----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 76,133,035 172,251,762 1,078,192 2,047,591
-----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $76,614,878 $171,370,617 $1,049,660 $2,045,543
===================================================================================================================================
See accompanying notes to financial statements.
</TABLE>
53
<PAGE>
<TABLE>
Wanger Advisors Trust 1999 Annual Report
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------- --------------------------- ------------ -------------
WANGER WANGER WANGER WANGER
U.S. SMALL CAP INTERNATIONAL TWENTY FOREIGN FORTY
Inception Inception
February 1 February 1
Year Ended Year Ended Year Ended Year Ended through through
December 31, December 31, December 31, December 31, December 31, December 31,
1999 1998 1999 1998 1999 1999
-----------------------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS:
<S> <C> <C> <C> <C> <C> <C>
Net investment income (loss) $481,843 $(783,423) $(881,145) $220,138 $(28,532) $(2,048)
Net realized gain (loss) on sales of
investments 49,157,155 31,406,965 47,468,114 (2,995,916) 308,673 401,583
Net change in unrealized appreciation 26,975,880 (6,414,368) 124,783,648 21,548,547 769,519 1,646,008
-----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 76,614,878 24,209,174 171,370,617 18,772,769 1,049,660 2,045,543
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- (2,396,217) (1,532,876) -- --
Net realized gain (31,015,042) (15,422,770) -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (31,015,042) (15,422,770) (2,396,217) (1,532,876) -- --
FROM FUND SHARE TRANSACTIONS:
Reinvestment of dividends and capital
gain distributions 30,987,684 15,407,847 2,391,782 1,530,069 -- --
Proceeds from other shares sold 39,307,491 94,608,919 30,696,445 26,836,486 6,997,548 4,072,887
-----------------------------------------------------------------------------------------------------------------------------------
70,295,175 110,016,766 33,088,227 28,366,555 6,997,548 4,072,887
Payments for shares redeemed (64,304,419) (50,550,116) (31,984,964) (25,013,297) (1,477,077) (292,302)
-----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from
Fund share transactions 5,990,756 59,466,650 1,103,263 3,353,258 5,520,471 3,780,585
-----------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 51,590,592 68,253,054 170,077,663 20,593,151 6,570,131 5,826,128
NET ASSETS:
Beginning of period 339,118,881 270,865,827 141,253,309 120,660,158 -- --
-----------------------------------------------------------------------------------------------------------------------------------
End of period $390,709,473 $339,118,881 $311,330,972 $141,253,309 $6,570,131 $5,826,128
-----------------------------------------------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME $481,843 -- -- $2,396,102 -- $3,778
===================================================================================================================================
See accompanying notes to financial statements.
54
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER U.S. SMALL CAP FINANCIAL HIGHLIGHTS
May 3, 1995
Year ended Year ended Year ended Year ended through
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $22.18 $21.46 $16.97 $11.60 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (c) .03 (.05) (.02) (.06) (.05)
Net realized and unrealized gain on investments 4.79 1.93 4.90 5.46 1.65
-----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.82 1.88 4.88 5.40 1.60
LESS DISTRIBUTIONS
Dividends from net investment income -- -- -- -- --
Distributions from net realized gain (2.12) (1.16) (.39) (.03) --
-----------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.12) (1.16) (.39) (.03) --
NET ASSET VALUE, END OF PERIOD $24.88 $22.18 $21.46 $16.97 $11.60
===================================================================================================================================
TOTAL RETURN (D) 25.06% 8.68% 29.41% 46.59% 16.00%
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets (a) (b) 1.02% 1.02% 1.06% 1.21% 2.08%*
Ratio of net investment income (loss)
to average net assets (b) .14% (.25%) (.10%) (.41%) (1.44%)*
Portfolio turnover rate 35% 34% 34% 46% 59%*
Net assets at end of period $390,709,473 $339,118,881 $270,865,827 $128,957,911 $21,903,536
--------------------------------------------------------------------------------
*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 income (loss) per share for the years ended December 31,
1999, 1998, 1997 and 1996 was based upon the average shares outstanding
during the period.
(d) Total return is not annualized for periods less than one year.
See accompanying notes to financial statements.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Wanger Advisors Trust 1999 Annual Report
WANGER INTERNATIONAL SMALL CAP FINANCIAL HIGHLIGHTS
May 3, 1995
Year ended Year ended Year ended Year ended through
December 31, December 31, December 31, December 31, December 31,
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.62 $17.05 $17.71 $13.45 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (c) (.13) .03 .02 (.09) (.03)
Net realized and unrealized gain (loss)
on investments 24.52 2.76 (.26) 4.38 3.48
-----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 24.39 2.79 (.24) 4.29 3.45
LESS DISTRIBUTIONS
Dividends from net investment income (.34) (.22) -- -- --
Distributions from net realized gain and unrealized
gain reportable for federal income taxes -- -- (.42) (.03) --
-----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.34) (.22) (.42) (.03) --
NET ASSET VALUE, END OF PERIOD $43.67 $19.62 $17.05 $17.71 $13.45
===================================================================================================================================
TOTAL RETURN (D) 126.37% 16.33% (1.46%) 32.01% 34.50%
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets (a) (b) 1.49% 1.55% 1.60% 1.79% 2.32%*
Ratio of net investment income (loss) to average
net assets (b) (.49%) .16% .12% (.56%) (.81%)*
Portfolio turnover rate 75% 56% 60% 50% 14%*
Net assets at end of period $311,330,972 $141,253,309 $120,660,158 $84,855,082 $11,368,924
--------------------------------------------------------------------------------
*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,
1999, 1998, 1997 and 1996 was based upon the average shares outstanding
during the period.
(d) Total return is not annualized for periods less than one year.
See accompanying notes to financial statements.
</TABLE>
56
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER TWENTY FINANCIAL HIGHLIGHTS
February 1, 1999 through
December 31, 1999
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (c) (.08)
Net realized and unrealized gain on investments 3.51
-------------------------------------------------------------------------------
Total from investment operations 3.43
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.43
===============================================================================
TOTAL RETURN (D) 34.30%
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets (a) (b) 1.41%*
Ratio of net investment loss to average net assets (b) (.77%)*
Portfolio turnover rate 113%*
Net assets at end of period $6,570,131
--------------------------------------------------------------------------------
*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 1.35% for the period ended December 31, 1999.
(b) The fund was reimbursed by the Advisor for certain expenses from February
1, 1999 through December 31, 1999. Without the reimbursement, the ratio of
expenses (prior to custodian fees paid indirectly) to average net assets
and the ratio of net investment loss to average net assets for the period
ended December 31, 1999 would have been 2.12% and (1.48%), respectively.
(c) Net investment loss per share for the period ended December 31, 1999 was
based upon the average shares outstanding during the period.
(d) Total return is not annualized for periods less than one year.
See accompanying notes to financial statements.
57
<PAGE>
Wanger Advisors Trust 1999 Annual Report
WANGER FOREIGN FORTY FINANCIAL HIGHLIGHTS
February 1, 1999 through
December 31, 1999
-------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (c) (.01)
Net realized and unrealized gain on investments 8.40
-------------------------------------------------------------------------------
Total from investment operations 8.39
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $18.39
===============================================================================
TOTAL RETURN (D) 83.90%
RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets (a) (b) 1.59%*
Ratio of net investment loss to average net assets (b) (.10%)*
Portfolio turnover rate 91%*
Net assets at end of period $5,826,128
--------------------------------------------------------------------------------
*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 1.45 % for the year ended December 31, 1999.
(b) The fund was reimbursed by the Advisor for certain expenses from February
1, 1999 through December 31, 1999. Without the reimbursement, the ratio of
expenses (prior to custodian fees paid indirectly) to average net assets
and the ratio of net investment loss to average net assets for the period
ended December 31, 1999 would have been 3.45% and (1.96%), respectively.
(c) Net investment loss per share for the period ended December 31, 1999 was
based upon the average shares outstanding during the period.
(d) Total return is not annualized for periods less than one year.
See accompanying notes to financial statements.
58
<PAGE>
Wanger Advisors Trust 1999 Annual Report
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Wanger US Small Cap, Wanger International Small Cap, Wanger Twenty and Wanger
Foreign Forty ("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
accounting 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. The amount is disclosed as a reduction of total expenses in the
Statements of Operations.
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 had no unrealized appreciation from
investments in PFICs at December 31, 1999. Cumulative net unrealized
appreciation recognized in prior years on PFICs sold in 1999 amounted to
$83,762.
Wanger Foreign Forty has also 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 had $5,826 of unrealized appreciation
from investments in PFICs at December 31, 1999.
Dividends and distributions payable to each Fund's shareholders are recorded
by the Fund on the ex-dividend date.
Reclassifications have been made in 1999 for Wanger International Small Cap
and Wanger Twenty in the accompanying analysis of net assets from undistributed
net investment income to net realized gain on the sale of investments of
$964,907 and $28,532, respectively. These reclassifications were made to reflect
differences between financial reporting and income tax basis and had no impact
on net asset value.
3. TRANSACTIONS 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:
WANGER U.S. SMALL CAP
Average Daily Net Assets
For the first $100 million 1.00%
Next $150 million .95%
In excess of $250 million .90%
59
<PAGE>
Wanger Advisors Trust 1999 Annual Report
NOTES TO FINANCIAL STATEMENTS
WANGER INTERNATIONAL SMALL CAP
Average Daily Net Assets
For the first $100 million 1.30%
Next $150 million 1.20%
In excess of $250 million 1.10%
WANGER TWENTY
On average daily net assets .95%
WANGER FOREIGN FORTY
On average daily net assets 1.00%
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 a percentage of average net assets. This amount is 1.50%
for Wanger U.S. Small Cap, 1.90% for Wanger International Small Cap, 1.35% for
Wanger Twenty and 1.45% for Wanger Foreign Forty. WAM was not required to
reimburse Wanger U.S. Small Cap or Wanger International Small Cap under these
agreements for the year ended December 31, 1999. Wanger Twenty and Wanger
Foreign Forty were reimbursed $26,027 and $37,004, respectively, for the period
ended December 31, 1999.
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. The Funds paid the following trustees' fees and expenses to trustees
not affiliated with WAM:
1999
Wanger U.S. Small Cap $31,610
Wanger International Small Cap 16,817
Wanger Twenty 251
Wanger Foreign Forty 121
WAM advanced $100,000 in connection with the organization and initial
registration of Wanger U.S. Small Cap and Wanger International Small Cap. These
costs are being amortized and reimbursed to WAM over the period May, 1995
through April, 2000. WAM paid all organization costs associated with the
organization of Wanger Twenty and Wanger Foreign Forty. These costs amounted to
$ 20,816. WAM will not be reimbursed for these costs by the Funds.
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
Wanger U.S. Small Cap and Wanger International Small Cap participate in a
$250,000,000 credit facility which was entered into to facilitate portfolio
liquidity. No amounts were borrowed under this facility during 1999.
5. FUND SHARES 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:
WANGER U.S. SMALL CAP Year ended Year ended
December 31, 1999 December 31, 1998
Shares sold 1,827,456 4,370,518
Shares issued in reinvestment of
dividend and capital gain
distributions 1,675,771 686,318
-------------------------------------------------------------------------------
3,503,227 5,056,836
Less shares redeemed 3,089,752 2,389,858
-------------------------------------------------------------------------------
Net increase in shares outstanding 413,475 2,666,978
WANGER INTERNATIONAL SMALL CAP Year ended Year ended
December 31, 1999 December 31, 1998
Shares sold 1,101,093 1,389,310
Shares issued in reinvestment
of dividend and capital gain
distributions 119,889 76,657
-------------------------------------------------------------------------------
1,220,982 1,465,967
Less shares redeemed 1,290,574 1,346,776
-------------------------------------------------------------------------------
Net decrease in shares outstanding (69,592) 119,191
WANGER TWENTY Period ended
December 31, 1999
Shares sold 612,940
Less shares redeemed 123,635
--------------------------------------------------------------------------------
Net increase in shares outstanding 489,305
WANGER FOREIGN FORTY Period ended
December 31, 1999
Shares sold 342,192
Less shares redeemed 25,412
--------------------------------------------------------------------------------
Net increase in shares outstanding 316,780
6. INVESTMENT TRANSACTIONS
The aggregate costs of purchases and proceeds from sales other than short-term
obligations in 1999 were:
---------------------------------------------------------------
WANGER U.S. WANGER WANGER WANGER
SMALL CAP INTERNATIONAL TWENTY FOREIGN FORTY
SMALL CAP
PURCHASES $106,139,136 $132,788,428 $8,919,902 $4,748,084
SALES 147,545,241 138,231,907 3,938,241 1,766,268
60
<PAGE>
Wanger Advisors Trust 1999 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, Wanger International
Small Cap, Wanger Twenty and the Wanger Foreign Forty portfolios, comprising the
Wanger Advisors Trust, as of December 31, 1999, 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 auditing standards generally accepted
in the United States. 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,
1999, 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, 1999,
the results of their operations and changes in their net assets and financial
highlights for the periods indicated therein, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
February 4, 2000
61
<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.
62
<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.
63
