<PAGE>
WANGER U.S. SMALL CAP
PROSPECTUS
SEPTEMBER 29, 2000
* * * *
Fund shares are available only through variable annuity contracts and variable
life insurance policies of participating insurance companies, and through
certain retirement plans.
* * * *
Although Fund shares have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
---------------------------------
NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE
---------------------------------
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THE TRUST.................................................................. 3
THE FUND................................................................... 4
This section contains the following information about the Fund:
investment goal, principal investment strategy, principal investment
risks, and performance history
OTHER INVESTMENT STRATEGIES AND RISKS...................................... 8
TRUST MANAGEMENT ORGANIZATIONS............................................. 11
The Trustees............................................................ 11
The Adviser: Liberty Wanger Asset Management, L.P....................... 11
Portfolio Managers...................................................... 12
Mixed and Shared Funding................................................ 12
FINANCIAL HIGHLIGHTS....................................................... 13
SHAREHOLDER INFORMATION.................................................... 14
2
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THE TRUST
Wanger Advisors Trust (Trust) includes four separate mutual funds (Funds), each
with its own investment goal and strategies. This prospectus contains
information about Wanger U.S. Small Cap (Fund).
The Fund is an investment option under variable annuity contracts (VA contracts)
and variable life insurance policies (VLI policies) issued by life insurance
companies (Participating Insurance Companies). Some (but not all) Participating
Insurance Companies are affiliated with the investment adviser to the Fund.
Participating Insurance Companies invest in the Fund through separate accounts
that they set up for that purpose. Owners of VA contracts and VLI policies
invest in sub-accounts of those separate accounts through instructions they give
to their insurance company.
Shares of the Fund also may be offered directly to certain pension plans and
retirement arrangements and accounts permitting accumulation of funds on a tax
deferred basis (Retirement Plans).
The prospectuses of the Participating Insurance Companies' separate accounts
describe which Funds are available to the purchasers of their own VA contracts
and VLI policies. The Retirement Plan disclosure documents describe which Funds
are available to participants in the plan.
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THE FUND
INVESTMENT GOAL--WANGER U.S. SMALL CAP
--------------------------------------
Wanger U.S. Small Cap seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGY
-----------------------------
The Fund invests primarily in the stocks of small- and medium-size U.S.
companies. Wanger U.S. Small Cap generally invests in the stocks of companies
with capitalizations of less than $2 billion. Wanger U.S. Small Cap believes
that these smaller companies, which are not as well known by financial analysts,
may offer higher return potential than the stocks of larger companies.
Wanger U.S. Small Cap typically looks for companies with:
. A strong business franchise that offers growth potential.
. Products and services that give the company a competitive advantage.
. A stock price the Fund's advisor believes is reasonable relative to the
assets and earning power of the company.
Wanger U.S. Small Cap invests the majority (under normal market conditions, at
least 65%) of its total assets, at market value at the time of investment, in
companies with total stock market capitalizations of $2 billion or less.
Likewise, under normal market conditions, Wanger U.S. Small Cap generally
invests at least 65% of its total assets in domestic securities.
The portfolio manager may sell a portfolio holding if the security reaches the
portfolio manager's price target or if the company has a deterioration of
fundamentals such as failing to meet key operating benchmarks. The portfolio
manager may also sell a portfolio holding to fund redemptions.
PRINCIPAL INVESTMENT RISKS
--------------------------
There are two basic risks for all mutual funds that invest in stocks:
MANAGEMENT RISK and MARKET RISK. These risks may cause you to lose money by
investing in the Fund.
Management risk means that Liberty Wanger Asset Management, L.P.'s (Liberty
WAM), the Fund's advisor, stock selections and other investment decisions might
produce losses or cause the Fund to underperform when compared to other funds
with similar goals. Market risk means that security prices in a market, sector
or industry may move down. Downward movements will reduce the value of your
investment. Because of management and market risk, there is no guarantee that
the Fund will achieve its investment goal or perform favorably compared with
competing funds.
Since it purchases equity securities, the Fund is subject to EQUITY RISK. This
is the risk that stock prices will fall over short or extended periods of time.
Although the stock market has historically outperformed other asset classes over
the long term, the equity market tends to move in cycles and individual stock
prices may fluctuate drastically from day-to-day and may underperform other
asset classes over an extended period of time. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in
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response. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
Because the Fund invests in stocks, the price of the Fund's shares--its net
asset value per share--fluctuates daily in response to changes in the market
value of the stocks.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
SMALL- AND MEDIUM-CAP COMPANIES
Small- and medium-sized companies and new issuers often have limited product
lines, operating histories, markets, or financial resources. They also may
depend heavily on a small management group. Small-cap companies in particular
are more likely than larger companies to fail or prove unable to grow. Their
securities may trade less frequently, in smaller volumes, and fluctuate more
sharply in price than securities of larger companies.
SECTOR RISK
Sector risk may sometimes be present in the Fund's investments. Companies that
are in different but closely related industries are sometimes described as being
in the same broad economic sector. The values of stocks of many different
companies in a market sector may be similarly affected by particular economic or
market events. Although the Fund does not intend to focus on any particular
sector, at times, the Fund may have a significant portion of its assets invested
in a particular sector. An example of a sector in which the Fund may sometimes
have a significant portion of its assets invested is technology. Technology
companies may be significantly affected by falling prices and profits, and
intense competition. In addition, the rate of technological change for
technology companies is generally higher than for other companies, often
requiring extensive and sustained investment in research and development, and
exposing such companies to the risk of rapid product obsolescence. The price of
many technology stocks has risen based on projections of future earnings and
company growth. If a company does not perform as expected, the price of the
stock could decline significantly. Many technology companies are currently
operating at a loss and may never be profitable.
PERFORMANCE HISTORY
-------------------
The bar chart below shows changes in the Fund's performance from year to year by
illustrating the Fund's calendar-year total returns. The performance table
following the bar chart shows how the Fund's average annual returns compare with
those of a broad measure of market performance for one year, three years and the
life of the Fund. We compare the Fund to the S&P 500 Index and the Russell 2000
Index, which are broad-based measures of market performance. The chart and table
are intended to illustrate some of the risks of investing in the Fund by showing
the changes in the Fund's performance. All returns include the reinvestment of
dividends and distributions. As with all mutual funds, past performance does not
predict the Fund's future performance. The Fund's performance results do not
reflect the cost of insurance and separate account charges which are imposed
under your VA contract or VLI policy, or any charges imposed by your Retirement
Plan.
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CALENDAR-YEAR TOTAL RETURNS
YEAR-BY-YEAR TOTAL RETURNS
[BAR CHART APPEARS HERE]
1996 46.59%
1997 29.41%
1998 8.68%
1999 25.06%
Best quarter: 4th quarter 1999, +17.80%
Worst quarter: 3rd quarter 1998, -17.69%
Since
1 Year 3 Years inception+
------ ------- ----------
Wanger U.S. Small Cap 25.06% 20.71% 26.44%
S&P 500* 21.04% 27.56% 27.47%
Russell 2000* 21.26% 13.08% 16.31%
___________
+ Wanger U.S. Small Cap's inception date was 5/3/1995.
* The S&P 500 Index is a broad market-weighted average of U.S. large, blue-
chip companies. The Russell 2000 Index is a market-weighted index of 2000
small companies formed by taking the largest 3000 companies and eliminating
the largest 1000 of those companies. The indexes are unmanaged and differ
from the Fund's composition; they are not available for direct investment.
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FEES AND EXPENSES
-----------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund, not including fees and expenses of your VA contract, VLI
policy or Retirement Plan.
SHAREHOLDER TRANSACTION EXPENSES
Fees paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
ANNUAL FUND OPERATING EXPENSES
Expenses that are deducted from Fund assets:
Management fees .95%
12b-1 fee None
Other expenses .07%
-------------------------------------------------------
Total annual Fund operating expenses 1.02%
Liberty WAM has undertaken to limit Wanger U.S. Small Cap's annual expenses to
2.00% of its average net assets. This expense limitation is contractual and will
terminate on September 30, 2002.
EXAMPLE
This example is intended to help you compare the cost of investing in other
mutual funds. It assumes a $10,000 investment in Wanger U.S. Small Cap for the
time period indicated, a 5% total return each year, reinvestment of all
dividends and distributions, and that operating expenses remain constant at the
level shown. Your actual returns and costs may be higher or lower.
1 Year $ 104
3 Years $ 325
5 Years $ 563
10 Years $1,248
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OTHER INVESTMENT STRATEGIES AND RISKS
The first portion of this prospectus describes the Fund's principal investment
strategies and their associated risks. This section provides more detail about
the Fund's investment strategies, and describes other investments the Fund may
make and the risks associated with them. In seeking to achieve its investment
goal, the Fund may invest in various types of securities and engage in various
investment techniques, which are not the principal focus of the Fund and
therefore are not described in this prospectus. These types of securities and
investment practices are identified and discussed in the Fund's Statement of
Additional Information, which you may obtain free of charge (see back cover).
Approval by the Fund's shareholders is not required to modify or change the
Fund's investment goal or investment strategies.
THE INFORMATION EDGE
Liberty WAM invests in entrepreneurially managed smaller and mid-sized companies
that it believes are not as well known by financial analysts and whose
domination of a niche creates the opportunity for superior earnings-growth
potential. Liberty WAM may identify what it believes are important economic,
social or technological trends (for example, the growth of out-sourcing as a
business strategy, or the productivity gains from the increasing use of
technology) and try to identify companies it thinks will benefit from those
trends.
In making investments for the Fund, Liberty WAM relies primarily on its
independent, internally generated research to uncover companies that may be less
well known than the more popular names. To find these companies, Liberty WAM
compares growth potential, financial strength and fundamental value among
companies.
<TABLE>
<CAPTION>
Growth Potential Financial Strength Fundamental Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
. superior technology . low debt . reasonable stock price
. innovative marketing . adequate working capital relative to growth potential
. managerial skill . conservative accounting . valuable assets
. market niche position practices
. good earnings prospects . adequate profit margin
. strong demand for product
The realization of this growth A strong balance sheet gives Once Liberty WAM uncovers an
potential would likely produce management greater flexibility attractive company, it
superior performance that is to pursue strategic objectives identifies a price that it
sustainable over time. and is essential to maintaining believes would also make the
a competitive advantage. stock a good value.
-----------------------------------------------------------------------------------------------------
</TABLE>
8
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STOCK STRENGTH COMES FIRST
Liberty WAM's analysts continually screen companies and make more than 1,000
face-to-face visits around the globe each year. To accomplish this, Liberty WAM
analysts talk directly to top management, vendors, suppliers and competitors,
whenever possible.
In managing the Fund, Liberty WAM tries to maintain lower transaction costs by
investing with a long-term time horizon (at least two to five years). However,
securities purchased on a long-term basis may be sold within 12 months after
purchase due to changes in the circumstances of a particular company or
industry, or changes in general market or economic conditions.
STATE INSURANCE RESTRICTIONS
The Fund is sold to Participating Insurance Companies in connection with VA
contracts and VLI policies, and will seek to be available under VA contracts and
VLI policies sold in a number of jurisdictions. Certain states have regulations
or guidelines concerning concentration of investments and other investment
techniques. If applied to the Fund, the Fund may be limited in its ability to
engage in certain techniques and to manage its portfolio with the flexibility
provided herein. In order to permit the Fund to be available under VA contracts
and VLI policies sold in certain states, the Fund may make commitments that are
more restrictive than the investment
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policies and limitations described herein and in the SAI. If the Fund determines
that such a commitment is no longer in the Fund's best interest, the commitment
may be revoked by terminating the availability of the Fund to VA contract owners
and VLI policyholders residing in such states.
TEMPORARY DEFENSIVE POSITIONS
At times, Liberty WAM may determine that adverse market conditions make it
desirable to temporarily suspend the Fund's normal investment activities.
During such times, the Fund may, but is not required to, invest in cash or high-
quality, short-term debt securities, without limit. Taking a temporary
defensive position may prevent the Fund from achieving its investment goal.
HEDGING STRATEGIES
The Fund may enter into a number of hedging strategies, including those that
employ futures and options, to gain or reduce exposure to particular securities
or markets. These strategies, commonly referred to as derivatives, involve the
use of financial instruments whose values depend on, or are derived from, the
value of an underlying security, index or currency. The Fund may use these
strategies to adjust the Fund's sensitivity to changes in interest rates or for
other hedging purposes (i.e. attempting to offset a potential loss in one
position by establishing an interest in an opposite position). Derivative
strategies involve the risk that they may exaggerate a loss, potentially losing
more money than the actual cost of the underlying security, or limit a potential
gain. Also, with some derivative strategies there is the risk that the other
party to the transaction may fail to honor its contract terms, causing a loss to
the Fund.
PORTFOLIO TURNOVER
The Fund does not have limits on portfolio turnover. Turnover may vary
significantly from year to year. Liberty WAM does not expect it to exceed 65%
for the Fund under normal conditions. Portfolio turnover increases transaction
expenses, which reduce the Fund's return.
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TRUST MANAGEMENT ORGANIZATIONS
THE TRUSTEES
The business of the Trust and the Fund is supervised by the Trust's Board of
Trustees. The SAI contains names of and biographical information on the
Trustees.
THE ADVISER: LIBERTY WANGER ASSET MANAGEMENT, L.P.
Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset
Management, L.P. (WAM)), 227 West Monroe Street, Suite 3000, Chicago, IL 60606,
is the Fund's investment advisor. Liberty WAM and its predecessor have managed
mutual funds, including Wanger U.S. Small Cap, since 1992. In its duties as
investment advisor, Liberty WAM runs the Fund's day-to-day business, including
placing all orders for the purchase and sale of the Fund's portfolio securities.
As of June 30, 2000, Liberty WAM managed more than $9 billion in assets.
WAM was renamed Liberty WAM on September 29, 2000 when it became a wholly-owned
subsidiary of Liberty Financial Companies, Inc. (Liberty), which in turn is a
majority owned indirect subsidiary of Liberty Mutual Insurance Company. For
more information about Liberty's acquisition of WAM, see the SAI.
For the period February 1, 1999 to December 31, 1999, the Fund paid Liberty WAM
management fees at 0.95% of the average daily net assets of the Fund.
Additional expenses are incurred under the VA contracts, VLI policies and the
Retirement Plans. These expenses are not described in this prospectus; owners
of VA contracts, VLI policies and Retirement Plan participants should consult
the contract or policy disclosure documents or Retirement Plan information
regarding these expenses.
From time to time, Liberty WAM may pay amounts from its past profits to
Participating Insurance Companies or other organizations that provide
administrative services for the Fund or that provide other services relating to
the Fund to owners of VA contracts, VLI policies and/or participants in
Retirement Plans. These services include, among other things: sub-accounting
services; answering inquiries regarding the Fund; transmitting, on behalf of the
Fund, proxy statements, shareholder reports, updated prospectuses and other
communications regarding the Fund; and such other related services as the Fund,
owners of VA contracts, VLI policies and/or participants in Retirement Plans may
request. The amount of any such payment will be determined by the nature and
extent of the services provided by the Participating Insurance Company or other
organization. Payment of such amounts by Liberty WAM will not increase the fees
paid by the Fund or its shareholders.
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PORTFOLIO MANAGERS
Liberty WAM uses a team to manage the Fund. Team members share responsibility
for providing ideas, information, and knowledge in managing the Fund, and each
team member has one or more particular areas of expertise. The portfolio
managers are responsible for making daily investment decisions, and utilize the
management team's input and advice when making buy and sell determinations.
Robert A. Mohn is a vice president of the Trust and is the lead portfolio
manager of Wanger U.S. Small Cap. Mr. Mohn is also a vice president of Liberty
Acorn Investment Trust, and the lead portfolio manager of Liberty Acorn USA. He
has been a member of the domestic analytical team at Liberty WAM and WAM since
1992, and was a principal of WAM from 1995 to September 29, 2000.
MIXED AND SHARED FUNDING
As described above, the Trust serves as a funding medium for VA contracts and
VLI policies of Participating Insurance Companies and for certain Retirement
Plans, so-called mixed and shared funding. As of the date of this Prospectus,
the Participating Insurance Companies are Keyport Life Insurance Company
(Keyport), Keyport Benefit Life Insurance Company (Keyport Benefit), Aegon
Financial Services Group, Inc., SAFECO Life Insurance Company, PHL Variable Life
Insurance Company, and Phoenix Home Life Mutual Insurance Company (Phoenix).
Keyport and Keyport Benefit are indirect wholly owned subsidiaries of Liberty
Financial Companies, Inc. (LFC). As of March 31, 2000, approximately 71.30% of
the combined voting power of LFC's outstanding voting stock was held by Liberty
Mutual Insurance Company (Liberty Mutual). The Fund may become a funding vehicle
for VA contracts or VLI policies of other Participating Insurance Companies,
including other entities not affiliated with Keyport, Keyport Benefit, LFC or
Liberty Mutual.
The interests of owners of VA contracts and VLI policies could diverge based on
differences in state regulatory requirements, changes in the tax laws or other
unanticipated developments. The Trust does not foresee any such differences or
disadvantages at this time. However, the Trustees will monitor for such
developments to identify any material irreconcilable conflicts and to determine
what action, if any, should be taken in response to such conflicts. If such a
conflict were to occur, one or more separate accounts might be required to
withdraw its investments in the Fund or shares of another Fund may be
substituted. This might force the Fund to sell securities at disadvantageous
prices.
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FINANCIAL HIGHLIGHTS
The financial highlights table that follows is intended to help you understand
the Fund's financial information for the last five fiscal years and for the six
months ended June 30, 2000. The total returns in the table represent the return
that investors earned assuming that they reinvested all dividends and
distributions. Certain information in the table reflects the financial results
for a single Fund share. The information with respect to the six month period
ended June 30, 2000 is unaudited. The information with respect to the last five
fiscal years is audited. For periods up to and including the year ended 1999,
this information is included in the Fund's financial statements, which have been
audited by Ernst & Young LLP, independent auditors, whose reports, along with
the financial statements, are included in the Fund's annual report, which is
available upon request. The Fund's total returns presented below do not reflect
the cost of insurance and other company separate account charges which vary with
the VA contracts, VLI policies or Retirement Plans.
WANGER U.S. SMALL CAP
<TABLE>
<CAPTION>
Six months Year Year Year Year 5/3/95
ended Ended Ended Ended Ended through
6/30/00 1999 1998 1997 1996 12/31/95
(unaudited)
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period. $ 24.88 $ 22.18 $ 21.46 $ 16.97 $ 11.60 $ 10.00
----------- ----------- ----------- ----------- ----------- -----------
Income from Investment Operations
Net investment income (loss) (c)..... 0.01 0.03 (0.05) (0.02) (0.06) (0.05)
Net realized and unrealized gains
on investments..................... (3.21) 4.79 1.93 4.90 5.46 1.65
----------- ----------- ----------- ----------- ----------- -----------
Total from investment operations..... (3.20) 4.82 1.88 4.88 5.40 1.60
----------- ----------- ----------- ----------- ----------- -----------
Less distributions:
From net investment income...... (.03) -- -- -- -- --
From net realized gains......... (3.06) (2.12) (1.16) (.39) (.03) --
----------- ----------- ----------- ----------- ----------- -----------
Total distributions.................. (3.09) (2.12) (1.16) (.39) (.03) --
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period....... $ 18.59 $ 24.88 $ 22.18 $ 21.46 $ 16.97 $ 11.60
----------- ----------- ----------- ----------- ----------- -----------
Total return:
Total investment return (d).......... (14.59%) 25.06% 8.68% 29.41% 46.59% 16.00%
Ratios/supplemental data:
Ratio of expenses to average net
assets (a) (b)..................... 1.01%* 1.02% 1.02% 1.06% 1.21% 2.08%*
Ratio of net investment income (loss)
to average net assets (b).......... .06%* .14% (.25%) (.10%) (.41%) (1.44%)*
Portfolio turnover ratio............. 48%* 35% 34% 34% 46% 59%*
Net assets, end of period............ $362,832,858 $390,709,473 $339,118,881 $270,865,827 $128,957,911 $21,903,536
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects total expenses prior to the reduction of custodian fees
for cash balances it maintains with the custodian ("custodian fees paid
indirectly"). This ratio net of custodian fees paid indirectly would have
been 1.04% for the year ended December 31, 1997, 1.19% for the year ended
December 31, 1996 and 2.00% for the period ended December 31, 1995.
(b) The Fund was reimbursed by Liberty WAM for certain expenses from May 3,
1995 through December 31, 1995. Without the reimbursement, the ratio of
expenses to average net assets (prior to custodian fees paid indirectly)
and the ratio of net investment income to average net assets for the period
ended December 31, 1995 would have been 2.35% and (1.71%), respectively.
(c) Net investment income (loss) per share for the years ended December 31,
1999, 1998, 1997, 1996 and 1995, was based upon the average shares
outstanding during the period.
(d) Total return is not annualized for periods less than one year.
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SHAREHOLDER INFORMATION
SHAREHOLDER AND ACCOUNT POLICIES
The Fund provides Participating Insurance Companies and Retirement Plans with
information Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m.
Central time. For information, prices, literature, or to obtain information
regarding the availability of Fund shares or how Fund shares are redeemed, call
Liberty WAM at 1-800-5-WANGER (800-592-6437).
Shares of the Fund are issued and redeemed in connection with investments in and
payments under certain qualified and non-qualified VA contracts and VLI policies
issued through separate accounts of Participating Insurance Companies. Shares
of the Fund are also offered directly to certain of the following types of
qualified plans and retirement arrangements and accounts, collectively called
Retirement Plans:
. a plan described in section 401(a) of the Internal Revenue Code that includes
a trust exempt from tax under section 501(a);
. an annuity plan described in section 403(a);
. an annuity contract described in section 403(b), including a 403(b)(7)
custodial account;
. a governmental plan under section 414(d) or an eligible deferred compensation
plan under section 457(b); and
. a plan described in section 501(c)(18).
The trust or plan must be established before shares of the Fund can be purchased
by the plan. Neither the Fund nor Liberty WAM offers prototypes of these plans.
The Fund has imposed certain additional restrictions on sales to Retirement
Plans to reduce Fund expenses. To be eligible to invest in the Fund, a
Retirement Plan must be domiciled in a state in which Fund shares may be sold
without payment of a fee to the state. In most states, this policy will require
that a Retirement Plan have at least $5 million in assets and that investment
decisions are made by a Plan fiduciary rather than Plan participants in order
for the Plan to be eligible to invest. The Fund does not intend to offer shares
in states where the sale of Fund shares requires the payment of a fee. A
Retirement Plan may call Liberty WAM at 1-800-5-WANGER (800-592-6437) to
determine if it is eligible to invest.
HOW TO INVEST AND REDEEM
Shares of the Fund may not be purchased or redeemed directly by individual VA
contract owners, VLI policyholders or individual Retirement Plan participants.
VA contract owners, VLI policyholders or Retirement Plan participants should
consult the disclosure documents for their VA contract, VLI policy or the plan
documents for their Retirement Plan, for information on the availability of the
Fund as an investment vehicle for allocations under their VA contract, VLI
policy or Retirement Plan. In the case of a Participating Insurance Company
purchaser, particular purchase and redemption procedures typically are included
in an agreement between the Fund and the Participating Insurance Company. The
Fund may enter into similar agreements with Retirement Plans.
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The Participating Insurance Companies and Retirement Plans place daily orders to
purchase and redeem shares of the Fund. These orders generally reflect the net
effect of instructions they receive from holders of their VA contracts, VLI
policies and Retirement Plan participants and certain other terms of those
contracts, policies and Retirement Plans. The Trust issues and redeems shares
at net asset value without imposing any selling commission, sales load or
redemption charge. However, each VA contract and VLI policy imposes its own
charges and fees on owners of the VA contract and VLI policy and Retirement
Plans may impose such charges on participants in the Retirement Plan. Shares
generally are sold and redeemed at their net asset value next determined after
receipt of purchase or redemption requests from Participating Insurance
Companies and Retirement Plans. The right of redemption may be suspended or
payment postponed whenever permitted by applicable law and regulations.
PURCHASES
To the extent not otherwise provided in any agreement between the Trust and a
Participating Insurance Company or Retirement Plan, shares of the Fund may be
purchased by check or by wire transfer of funds. To be effective, a purchase
order must consist of the money to purchase the shares and (i) information
identifying the purchaser, in the case of a Participating Insurance Company or
Retirement Plan with which the Fund has entered into an agreement, or a
subsequent purchase by a Participating Insurance Company or Retirement Plan that
is already a Fund shareholder, or (ii) a completed purchase application, in the
case of the initial investment by a Retirement Plan with which the Fund does not
have an agreement.
REDEMPTIONS
Subject to the terms of any agreement between the Fund and any Participating
Insurance Company or Retirement Plan, shares may be redeemed by written request
or by telephone (for redemptions of $200,000 or less), with proceeds paid by
check or by wire transfer.
REDEEMING SHARES IN WRITING
A written redemption request must:
. identify the account owner;
. specify the number of shares or dollar amount to be redeemed;
. be signed on behalf of the owner by an individual or individuals authorized
to do so, and include evidence of their authority;
. if the shares to be redeemed have a value of more than $200,000, include a
signature guarantee by an eligible guarantor institution as defined in the
rules under the Securities Exchange Act of 1934 (including a bank, broker-
dealer, credit union (if authorized under state law), national securities
exchange, registered securities association, clearing agency or savings
association, but not a notary public); and include any stock certificates
representing the shares to be redeemed.
A check for the redemption proceeds will be mailed to the address of record
unless payment by wire transfer is requested.
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REDEEMING SHARES BY TELEPHONE
Unless a Retirement Plan shareholder chose on its purchase application not to
have the ability to do so, redemptions of shares having a value of $200,000 or
less may be requested by calling Liberty WAM at 1-800-5-WANGER (800-592-6437).
The Fund will not be responsible for unauthorized transactions if it follows
reasonable procedures to confirm that instructions received by telephone are
genuine, such as requesting identification information that appears on a
Retirement Plan's purchase application and requiring permission to record the
telephone call. If you are unable to reach the Fund or its transfer agent by
telephone, your redemption request would have to be placed by mail.
EXCHANGING SHARES BY TELEPHONE
To the extent not otherwise provided in an agreement between the Fund and a
Retirement Plan shareholder, a Retirement Plan may exchange shares of the Fund
for shares of another Wanger Fund by telephone by calling 1-800-5-WANGER (800-
592-6437). Shares may be exchanged only between identically registered accounts,
and the shares in the new Wanger Fund must be available for sale without payment
of a fee under any applicable state securities law. Because excessive trading
can hurt Fund performance and shareholders, the Fund reserves the right
temporarily or permanently to terminate the exchange privilege of any
shareholder who makes excessive use of the exchange plan. In particular, a
pattern of exchanges that coincide with a market timing strategy may be
disruptive to the Fund. The Fund has limited the number of exchanges to no more
than four per year. The Fund will not be responsible for unauthorized
transactions if it follows reasonable procedures to confirm that instructions
received by telephone are genuine, such as requesting information that appears
on a Retirement Plan's purchase application and requiring permission to record
the telephone call.
Normally, redemption proceeds will be paid within seven days after the Fund or
its agent receives a request for redemption. Redemptions may be suspended or
the payment date postponed on days when the New York Stock Exchange (NYSE) is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
HOW THE FUND'S SHARE PRICE IS DETERMINED
The Fund's share price is its net asset value next determined. Net asset value
is the difference between the values of the Fund's assets and liabilities
divided by the number of shares outstanding. We determine net asset value at
the close of regular trading on the New York Stock Exchange (NYSE)--normally 4
p.m. New York time.
To calculate the net asset value on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day. If there are
no sales that day, we value the security at the most recently quoted bid
price. We value each over-the-counter security or National Association of
Securities Dealers Automated Quotation (Nasdaq) security as of the last sale
price for that day.
16
<PAGE>
When the price of a security is not available, including days when we determine
that the sale or bid price of the security does not reflect that security's
market value, we value the security at a fair value determined in good faith
under procedures established by the Board of Trustees.
We value a security at fair value when events have occurred after the last
available market price and before the close of the NYSE that materially affect
the security's price. In the case of foreign securities, this could include
events occurring after the close of the foreign market and before the close of
the NYSE. The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed for trading
and Participating Insurance Companies and Retirement Plans may not purchase or
redeem shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and distribute, as dividends or capital gains
distributions, at least annually, substantially all of its net investment income
and net profits realized from the sale of portfolio securities, if any, to its
shareholders (Participating Insurance Companies' separate accounts and
Retirement Plan participants). The net investment income of the Fund consists
of all dividends or interest received by the Fund, less expenses (including the
investment advisory fees). Income dividends will be declared and distributed
annually by the Fund. All net short-term and long-term capital gains of the
Fund, net of carry-forward losses, if any, realized during the fiscal year, are
declared and distributed periodically, no less frequently than annually. All
dividends and distributions are reinvested in additional shares of the Fund at
net asset value, as of the record date for the distributions.
TAXES
The Fund intends to qualify every year as a regulated investment company under
the Internal Revenue Code. By so qualifying, the Fund will not be subject to
federal income taxes to the extent that its net investment income and net
realized capital gains are distributed to the shareholders. The Fund also
intends to meet certain diversification requirements applicable to mutual funds
underlying variable insurance products. For more information about the tax
status of the Fund, see Taxes in the Statement of Additional Information.
For information concerning the federal tax consequences to VA contract owners,
VLI policyholders or Retirement Plan participants, see the disclosure documents
from the VA contract, VLI policy or your Retirement Plan administrator. You
should consult your tax advisor about the tax consequences of any investment.
17
<PAGE>
FOR MORE INFORMATION
--------------------------------------------------------------------------------
Adviser: Liberty Wanger Asset Management, L.P.
You can get more information about the Fund's investments in the Fund's semi-
annual and annual reports to shareholders. The annual report contains a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance over the last fiscal year.
You may wish to read the Fund's Statement of Additional Information (SAI) for
more information on the Fund and the securities in which it invests. The SAI is
incorporated into this prospectus by reference, which means that it is
considered to be part of this prospectus.
You can get free copies of the annual and semi-annual reports and the SAI,
request other information and discuss your questions about the Fund by writing:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111
(800) 426-3750
or by calling or writing the Participating Insurance Company which issued your
variable annuity contract or variable life insurance policy or the Retirement
Plan you participate in.
Information about the Fund (including the SAI) can be reviewed and copied at the
Public Reference Room of the Securities and Exchange Commission (SEC) in
Washington, D.C. Information on the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. Reports and other information about the Fund
are available on the EDGAR database on the SEC's Internet site at
http://www.sec.gov. Copies of this information may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
[email protected] or by writing the SEC's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act file number: 811-08748
18
<PAGE>
WANGER INTERNATIONAL SMALL CAP
PROSPECTUS
SEPTEMBER 29, 2000
* * * *
Fund shares are available only through variable annuity contracts and variable
life insurance policies of participating insurance companies, and through
certain retirement plans.
* * * *
Although Fund shares have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
------------------------------------------------
NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE
------------------------------------------------
<PAGE>
THE TRUST..................................................... 3
THE FUND...................................................... 4
This section contains the following information about the Fund:
investment goal, principal investment strategy, principal
investment risks, and performance history
OTHER INVESTMENT STRATEGIES AND RISKS......................... 8
TRUST MANAGEMENT ORGANIZATIONS................................ 11
The Trustees............................................. 11
The Adviser: Liberty Wanger Asset Management, L.P....... 11
Portfolio Managers....................................... 12
Mixed and Shared Funding................................. 12
FINANCIAL HIGHLIGHTS.......................................... 13
SHAREHOLDER INFORMATION....................................... 14
2
<PAGE>
THE TRUST
Wanger Advisors Trust (Trust) includes four separate mutual funds (Funds), each
with its own investment goal and strategies. This prospectus contains
information about Wanger International Small Cap (Fund).
The Fund is an investment option under variable annuity contracts (VA contracts)
and variable life insurance policies (VLI policies) issued by life insurance
companies (Participating Insurance Companies). Some (but not all) Participating
Insurance Companies are affiliated with the investment adviser to the Fund.
Participating Insurance Companies invest in the Fund through separate accounts
that they set up for that purpose. Owners of VA contracts and VLI policies
invest in sub-accounts of those separate accounts through instructions they give
to their insurance company.
Shares of the Fund also may be offered directly to certain pension plans and
retirement arrangements and accounts permitting accumulation of funds on a tax
deferred basis (Retirement Plans).
The prospectuses of the Participating Insurance Companies' separate accounts
describe which Funds are available to the purchasers of their own VA contracts
and VLI policies. The Retirement Plan disclosure documents describe which Funds
are available to participants in the plan.
3
<PAGE>
THE FUND
INVESTMENT GOAL--WANGER INTERNATIONAL SMALL CAP
-----------------------------------------------
Wanger International Small Cap seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGY
-----------------------------
Wanger International Small Cap invests primarily in the stocks of companies
based outside the U.S. with capitalizations of less than $2 billion. Wanger
International Small Cap believes that these smaller companies - particularly
outside the U.S. - that are not as well known by financial analysts may offer
higher return potential than the stocks of larger companies.
Wanger International Small Cap typically looks for companies with:
. A strong business franchise that offers growth potential.
. Products and services that give the company a competitive advantage.
. A stock price that the Fund's advisor believes is reasonable relative to the
assets and earning power of the company.
Wanger International Small Cap invests the majority (under normal market
conditions, at least 65%) of its total assets, at market value at the time of
investment, in companies with total stock market capitalizations of $2 billion
or less. Likewise, under normal market conditions, Wanger International Small
Cap will generally invest at least 65% of its total assets in foreign securities
in developed markets (for example, Japan, Canada and United Kingdom) and
emerging markets (for example, Mexico, Brazil and Korea).
The portfolio manager may sell a portfolio holding if the security reaches the
portfolio manager's price target or if the company has a deterioration of
fundamentals such as failing to meet key operating benchmarks. The portfolio
manager may also sell a portfolio holding to fund redemptions.
PRINCIPAL INVESTMENT RISKS
--------------------------
There are two basic risks for all mutual funds that invest in stocks:
MANAGEMENT RISK and MARKET RISK. These risks may cause you to lose money by
investing in the Fund.
Management risk means that Liberty Wanger Asset Management, L.P.'s (Liberty WAM)
stock selections and other investment decisions might produce losses or cause
the Fund to underperform when compared to other funds with similar goals. Market
risk means that security prices in a market, sector or industry may move down.
Downward movements will reduce the value of your investment. Because of
management and market risk, there is no guarantee that the Fund will achieve its
investment goal or perform favorably compared with competing funds.
Since it purchases equity securities, the Fund is subject to EQUITY RISK. This
is the risk that stock prices will fall over short or extended periods of time.
Although the stock market has historically outperformed other asset classes over
the long term, the equity market tends to move in cycles and individual stock
prices may fluctuate drastically from day-to-day and may underperform other
asset classes over an extended period of time. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in
4
<PAGE>
response. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
Because the Fund invests in stocks, the price of its shares--its net asset value
per share--fluctuates daily in response to changes in the market value of the
stocks.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
FOREIGN SECURITIES
Foreign securities are subject to special risks. Foreign stock markets,
especially in countries with developing stock markets, can be extremely
volatile. The liquidity of foreign securities may be more limited than domestic
securities, which means that the Fund may at times be unable to sell them at
desirable prices. Fluctuations in currency exchange rates impact the value of
foreign securities. Brokerage commissions, custodial fees, and other fees are
generally higher for foreign investments. In addition, foreign governments may
impose withholding taxes which would reduce the amount of income available to
distribute to shareholders. Other risks include: possible delays in settlement
of transactions; less publicly available information about companies; the impact
of political, social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets or imposition of currency
exchange controls.
EMERGING MARKETS
Emerging markets are subject to additional risk. The risks of foreign
investments are typically increased in less developed countries, which are
sometimes referred to as emerging markets. For example, political and economic
structures in these countries may be new and developing rapidly, which may cause
instability. These countries are also more likely to experience high levels of
inflation, deflation or currency devaluations, which could hurt their economies
and securities markets.
SMALL- AND MEDIUM-CAP COMPANIES
Small-and medium-sized companies and new issuers often have limited product
lines, operating histories, markets, or financial resources. They also may
depend heavily on a small management group. Small-cap companies in particular
are more likely than larger companies to fail or prove unable to grow. Their
securities may trade less frequently, in smaller volumes, and fluctuate more
sharply in price than securities of larger companies.
SECTOR RISK
Sector risk may sometimes be present in the Fund's investments. Companies that
are in different but closely related industries are sometimes described as being
in the same broad economic sector. The values of stocks of many different
companies in a market sector may be similarly affected by particular economic or
market events. Although the Fund does not intend to focus on any particular
sector, at times, the Fund may have a significant portion of its assets invested
in a particular sector. An example of a sector in which the Fund may sometimes
have a significant portion of its assets invested is technology. Technology
companies may be significantly affected by falling prices and profits, and
intense competition. In addition, the rate of technological change for
technology companies is generally higher than for other companies, often
requiring extensive and sustained investment in research and development, and
exposing such companies to the risk of rapid product obsolescence. The price of
many technology stocks has risen based on projections of future earnings and
company growth. If a company does not perform as expected, the price of the
stock could decline significantly. Many technology companies are currently
operating at a loss and may never be profitable.
PERFORMANCE HISTORY
-------------------
The bar chart below shows changes in the Fund's performance from year to year by
illustrating the Fund's calendar-year total returns. The performance table
following the bar chart shows how the Fund's average annual returns compare with
those of a broad measure of market performance for one year, three years and the
life of the Fund. We compare the Fund to the EAFE Index and the EMI (World ex-
U.S.) Index, which are broad-based measures of market performance. The chart
and table are intended to illustrate some of the risks of investing in the Fund
by showing the changes in the Fund's performance. All returns include the
reinvestment of dividends and distributions. As with all mutual funds, past
performance does not predict the Fund's future
5
<PAGE>
performance. The Fund's performance results do not reflect the cost of insurance
and separate account charges which are imposed under your VA contract or VLI
policy, or any charges imposed by your Retirement Plan.
The Fund's performance during 1999 was achieved during extraordinary market
conditions and is highly unlikely to be repeated.
CALENDAR-YEAR TOTAL RETURNS
YEAR-BY-YEAR TOTALS RETURNS
[BAR CHART APPEARS HERE]
1996 32.01%
1997 -1.46%
1998 16.33%
1999 126.37%
Best quarter: 4th quarter 1999, +57.43%
Worst quarter: 3rd quarter 1998, -18.56%
Since
1 Year 3 Years inception+
------- -------- -----------
Wanger Int'l Small Cap 126.37% 37.42% 38.70%
EAFE* 26.96% 15.74% 12.75%
EMI (World ex-U.S.)* 23.52% 7.87% 6.85%
-------------------
+ Wanger International Small Cap's inception date was 5/3/1995.
* Morgan Stanley's Europe, Australasia and Far East Index (EAFE) is an
unmanaged index of companies throughout the world in proportion to world stock
market capitalizations, excluding the U.S. and Canada. EMI (World ex.-U.S.) is
Salomon Smith Barney's index of the bottom 20% of institutionally investable
capital of countries, selected by Salomon and excluding the U.S. The indexes
are unmanaged and differ from the Fund's composition; they are not available for
direct investment.
6
<PAGE>
FEES AND EXPENSES
-----------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund, not including fees and expenses of your VA contract, VLI
policy or Retirement Plan.
SHAREHOLDER TRANSACTION EXPENSES
Fees paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
ANNUAL FUND OPERATING EXPENSES
Expenses that are deducted from Fund assets:
Management fees 1.25%
12b-1 fee None
Other expenses .24%
-----------------------------------------------------------
Total annual Fund operating expenses 1.49%
Liberty WAM has undertaken to limit Wanger International Small Cap's annual
expenses to 2.00% of its average net assets. This expense limitation is
contractual and will terminate on September 30, 2002.
EXAMPLE
This example is intended to help you compare the cost of investing in other
mutual funds. It assumes a $10,000 investment in Wanger International Small Cap
for the time period indicated, a 5% total return each year, reinvestment of all
dividends and distributions, and that operating expenses remain constant at the
level shown. Your actual returns and costs may be higher or lower.
1 Year $ 152
3 Years $ 471
5 Years $ 813
10 Years $1,779
7
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
The first portion of this prospectus describes the Fund's principal investment
strategies and their associated risks. This section provides more detail about
the Fund's investment strategies, and describes other investments the Fund may
make and the risks associated with them. In seeking to achieve its investment
goal, the Fund may invest in various types of securities and engage in various
investment techniques, which are not the principal focus of the Fund and
therefore are not described in this prospectus. These types of securities and
investment practices are identified and discussed in the Fund's Statement of
Additional Information, which you may obtain free of charge (see back cover).
Approval by the Fund's shareholders is not required to modify or change the
Fund's investment goal or investment strategies.
THE INFORMATION EDGE
Liberty WAM invests in entrepreneurially managed smaller and mid-sized companies
that it believes are not as well known by financial analysts and whose
domination of a niche creates the opportunity for superior earnings-growth
potential. Liberty WAM may identify what it believes are important economic,
social or technological trends (for example, the growth of outsourcing as a
business strategy, or the productivity gains from the increasing use of
technology) and try to identify companies it thinks will benefit from those
trends.
In making investments for the Fund, Liberty WAM relies primarily on its
independent, internally generated research to uncover companies that may be less
well known than the more popular names. To find these companies, Liberty WAM
compares growth potential, financial strength and fundamental value among
companies.
<TABLE>
<CAPTION>
Growth Potential Financial Strength Fundamental Value
--------------------------------------------------------------------------------------------------
<S> <C> <C>
. superior technology . low debt . reasonable stock price relative
. innovative marketing . adequate working capital to growth potential
. managerial skill . conservative accounting . valuable assets
. market niche practices
. good earnings prospects . adequate profit margin
. strong demand for product
The realization of this growth A strong balance sheet gives Once Liberty WAM uncovers an attractive
potential would likely management greater flexibility company, it identifies a price
produce superior performance to pursue strategic objectives that it believes would also
that is sustainable over time. and is essential to make the stock a good value.
maintaining a competitive
advantage.
-------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
STOCK STRENGTH COMES FIRST
Liberty WAM's analysts continually screen companies and make more than 1,000
face-to-face visits around the globe each year. To accomplish this, Liberty WAM
analysts talk directly to top management, vendors, suppliers and competitors,
whenever possible.
In managing the Fund, Liberty WAM tries to maintain lower transaction costs by
investing with a long-term time horizon (at least two to five years). However,
securities purchased on a long-term basis may be sold within 12 months after
purchase due to changes in the circumstances of a particular company or
industry, or changes in general market or economic conditions.
STATE INSURANCE RESTRICTIONS
The Fund is sold to Participating Insurance Companies in connection with VA
contracts and VLI policies, and will seek to be available under VA contracts and
VLI policies sold in a number of jurisdictions. Certain states have regulations
or guidelines concerning concentration of investments and other investment
techniques. If applied to the Fund, the Fund may be limited in its ability to
engage in certain techniques and to manage its portfolio with the flexibility
provided herein. In order to permit the Fund to be available under VA contracts
and VLI policies sold in certain states, the Fund may make commitments that are
more restrictive than the investment policies and limitations described herein
and in the SAI. If the Fund determines that such a
9
<PAGE>
commitment is no longer in the Fund's best interest, the commitment may be
revoked by terminating the availability of the Fund to VA contract owners and
VLI policyholders residing in such states.
TEMPORARY DEFENSIVE POSITIONS
At times, Liberty WAM may determine that adverse market conditions make it
desirable to temporarily suspend the Fund's normal investment activities.
During such times, the Fund may, but is not required to, invest in cash or high-
quality, short-term debt securities, without limit. Taking a temporary
defensive position may prevent the Fund from achieving its investment goal.
HEDGING STRATEGIES
The Fund may enter into a number of hedging strategies, including those that
employ futures and options, to gain or reduce exposure to particular securities
or markets. These strategies, commonly referred to as derivatives, involve the
use of financial instruments whose values depend on, or are derived from, the
value of an underlying security, index or currency. The Fund may use these
strategies to adjust the Fund's sensitivity to changes in interest rates or for
other hedging purposes (i.e. attempting to offset a potential loss in one
position by establishing an interest in an opposite position). Derivative
strategies involve the risk that they may exaggerate a loss, potentially losing
more money than the actual cost of the underlying security, or limit a potential
gain. Also, with some derivative strategies there is the risk that the other
party to the transaction may fail to honor its contract terms, causing a loss to
the Fund.
PORTFOLIO TURNOVER
The Fund does not have limits on portfolio turnover. Turnover may vary
significantly from year to year. Liberty WAM does not expect it to exceed 125%
for the Fund under normal conditions. Portfolio turnover increases transaction
expenses, which reduce the Fund's return.
10
<PAGE>
TRUST MANAGEMENT ORGANIZATIONS
THE TRUSTEES
The business of the Trust and the Fund is supervised by the Trust's Board of
Trustees. The SAI contains names of and biographical information on the
Trustees.
THE ADVISER: LIBERTY WANGER ASSET MANAGEMENT, L.P.
Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset
Management, L.P.), 227 West Monroe Street, Suite 3000, Chicago, IL 60606, is the
Fund's investment advisor. Liberty WAM and its predecessor have managed mutual
funds, including Wanger International Small Cap, since 1992. In its duties as
investment advisor, Liberty WAM runs the Fund's day-to-day business, including
placing all orders for the purchase and sale of the Fund's portfolio securities.
As of June 30, 2000, Liberty WAM managed more than $9 billion in assets.
WAM was renamed Liberty WAM on September 29, 2000 when it became a wholly-owned
subsidiary of Liberty Financial Companies, Inc. (Liberty), which in turn is a
majority owned indirect subsidiary of Liberty Mutual Insurance Company. For more
information about Liberty's acquisition of WAM, see the SAI.
For the 1999 fiscal year, the Fund paid Liberty WAM management fees at 1.25% of
the average daily net assets of the Fund.
Additional expenses are incurred under the VA contracts, VLI policies and the
Retirement Plans. These expenses are not described in this prospectus; owners
of VA contracts, VLI policies and Retirement Plan participants should consult
the contract or policy disclosure documents or Retirement Plan information
regarding these expenses.
From time to time, Liberty WAM may pay amounts from its past profits to
Participating Insurance Companies or other organizations that provide
administrative services for the Fund or that provide other services relating to
the Fund to owners of VA contracts, VLI policies and/or participants in
Retirement Plans. These services include, among other things: sub-accounting
services; answering inquiries regarding the Fund; transmitting, on behalf of the
Fund, proxy statements, shareholder reports, updated prospectuses and other
communications regarding the Fund; and such other related services as the Fund,
owners of VA contracts, VLI policies and/or participants in Retirement Plans may
request. The amount of any such payment will be determined by the nature and
extent of the services provided by the Participating Insurance Company or other
organization. Payment of such amounts by Liberty WAM will not increase the fees
paid by the Fund or its shareholders.
11
<PAGE>
PORTFOLIO MANAGERS
Liberty WAM uses a team of portfolio managers and analysts to manage the Fund.
Team members share responsibility for providing ideas, information, and
knowledge in managing the Fund, and each team member has one or more particular
areas of expertise. The portfolio managers are responsible for making daily
investment decisions, and utilize the management team's input and advice when
making buy and sell determinations.
Marcel P. Houtzager is a vice president of the Trust and is the lead portfolio
manager of Wanger International Small Cap and co-portfolio manager of Wanger
Foreign Forty. Mr. Houtzager is also a vice president of Liberty Acorn
Investment Trust, and the co-manager of Liberty Acorn Foreign Forty. He has
been part of the international analytical team at Liberty WAM and at
WAM since 1992, and was a principal of WAM from 1995 to September 29, 2000.
Peter A. Zaldivar is a vice president of the Trust and is the co-portfolio
manager of Wanger International Small Cap. Mr. Zaldivar has been an analyst at
Liberty WAM and at WAM since 1996, and was a principal of WAM from January, 2000
to September 29, 2000. Before joining Liberty WAM, he was a vice president and
portfolio manager at Lord Asset Management.
MIXED AND SHARED FUNDING
As described above, the Trust serves as a funding medium for VA contracts and
VLI policies of Participating Insurance Companies and for certain Retirement
Plans, so-called mixed and shared funding. As of the date of this Prospectus,
the Participating Insurance Companies are Keyport Life Insurance Company
(Keyport), Keyport Benefit Life Insurance Company (Keyport Benefit), Aegon
Financial Services Group, Inc., SAFECO Life Insurance Company, PHL Variable Life
Insurance Company, and Phoenix Home Life Mutual Insurance Company. Keyport and
Keyport Benefit are indirect wholly owned subsidiaries of Liberty Financial
Companies, Inc. (LFC). As of March 31, 2000, approximately 71.30% of the
combined voting power of LFC's outstanding voting stock was held by Liberty
Mutual Insurance Company (Liberty Mutual). The Fund may become a funding vehicle
for VA contracts or VLI policies of other Participating Insurance Companies,
including other entities not affiliated with Keyport, Keyport Benefit, LFC or
Liberty Mutual.
The interests of owners of VA contracts and VLI policies could diverge based on
differences in state regulatory requirements, changes in the tax laws or other
unanticipated developments. The Trust does not foresee any such differences or
disadvantages at this time. However, the Trustees will monitor for such
developments to identify any material irreconcilable conflicts and to determine
what action, if any, should be taken in response to such conflicts. If such a
conflict were to occur, one or more separate accounts might be required to
withdraw its investments in the Fund or shares of another Fund may be
substituted. This might force the Fund to sell securities at disadvantageous
prices.
12
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table that follows is intended to help you understand
the Fund's financial information for the last five fiscal years and for the six
months ended June 30, 2000. The total returns in the table represent the return
that investors earned assuming that they reinvested all dividends and
distributions. Certain information in the table reflects the financial results
for a single Fund share. The information with respect to the six month period
ended June 30, 2000 is unaudited. The information with respect to the last five
fiscal years is audited. For periods up to and including the year ended 1999,
this information is included in the Fund's financial statements, which have been
audited by Ernst & Young LLP, independent auditors, whose reports, along with
the financial statements, are included in the Fund's annual report, which is
available upon request. The Fund's total returns presented below do not reflect
the cost of insurance and other company separate account charges which vary with
the VA contracts, VLI policies or Retirement Plans.
WANGER INTERNATIONAL SMALL CAP
<TABLE>
<CAPTION>
Six months
ended Year Year Year Year 5/3/95
6/30/00 Ended Ended Ended Ended through
(unaudited) 1999 1998 1997 1996 12/31/95
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Per share operating performance:
Net asset value, beginning of period $ 43.67 $ 19.62 $ 17.05 $ 17.71 $ 13.45 $ 10.00
------------- ------------- ------------ ------------ ------------ -------------
Income from Investment Operations
Net investment income (loss) (c)... (0.12) (0.13) 0.03 0.02 (0.09) (0.03)
Net realized and unrealized gains on
investments........................ (0.12) 24.52 2.76 (.26) 4.38 3.48
------------- ------------- ------------ ------------ ----------- ------------
Total from investment operations.... (0.24) 24.39 2.79 (.24) 4.29 3.45
------------- ------------- ------------ ------------ ----------- ------------
Less distributions:
From net investment income (loss). -- (.34) (.22) -- -- --
From net realized gains........... (5.13) -- -- (.42) (.03) --
------------- ------------- ------------ ------------ ----------- ------------
Total distributions................. (5.13) (.34) (.22) (.42) (.03) --
------------- ------------- ------------ ------------ ----------- -----------
Net asset value, end of period...... $ 38.30 $ 43.67 $ 19.62 $ 17.05 $ 17.71 $ 13.45
------------- ------------- ------------ ------------ ----------- -----------
Total return:
Total investment return (d)......... (3.13%) 126.37% 16.33% (1.46%) 32.01% 34.50%
Ratios/supplemental data:
Ratio of expenses to average net
assets (a) (b)..................... 1.41%* 1.49% 1.55% 1.60% 1.79% 2.32%*
Ratio of net investment income (loss)
to average net assets (b).......... (.56%)* (.49%) .16% .12% (.56%) (.81%)*
Portfolio turnover ratio............ 78%* 75% 56% 60% 50% 14%*
Net assets, end of period........... $345,317,613 $311,330,972 $141,253,309 $120,660,158 $84,855,082 $11,368,924
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects total expenses prior to the reduction of custodian fees
for cash balances it maintains with the custodian ("custodian fees paid
indirectly"). This ratio net of custodian fees paid indirectly would have
been 1.59% for the year ended December 31, 1997, 1.75% for the year ended
December 31, 1996 and 2.00% for the period ended December 31, 1995.
(b) The Fund was reimbursed by Liberty WAM 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, 1996 and 1995, was based upon the average shares
outstanding during the period.
(d) Total return is not annualized for periods less than one year.
13
<PAGE>
SHAREHOLDER INFORMATION
SHAREHOLDER AND ACCOUNT POLICIES
The Fund provides Participating Insurance Companies and Retirement Plans with
information Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m.
Central time. For information, prices, literature, or to obtain information
regarding the availability of Fund shares or how Fund shares are redeemed, call
Liberty WAM at 1-800-5-WANGER (800-592-6437).
Shares of the Fund are issued and redeemed in connection with investments in and
payments under certain qualified and non-qualified VA contracts and VLI policies
issued through separate accounts of Participating Insurance Companies. Shares
of the Fund are also offered directly to certain of the following types of
qualified plans and retirement arrangements and accounts, collectively called
Retirement Plans:
. a plan described in section 401(a) of the Internal Revenue Code that includes
a trust exempt from tax under section 501(a);
. an annuity plan described in section 403(a);
. an annuity contract described in section 403(b), including a 403(b)(7)
custodial account;
. a governmental plan under section 414(d) or an eligible deferred compensation
plan under section 457(b); and
. a plan described in section 501(c)(18).
The trust or plan must be established before shares of the Fund can be purchased
by the plan. Neither the Fund nor Liberty WAM offers prototypes of these plans.
The Fund has imposed certain additional restrictions on sales to Retirement
Plans to reduce Fund expenses. To be eligible to invest in the Fund, a
Retirement Plan must be domiciled in a state in which Fund shares may be sold
without payment of a fee to the state. In most states, this policy will require
that a Retirement Plan have at least $5 million in assets and that investment
decisions are made by a Plan fiduciary rather than Plan participants in order
for the Plan to be eligible to invest. The Fund does not intend to offer shares
in states where the sale of Fund shares requires the payment of a fee. A
Retirement Plan may call Liberty WAM at 1-800-5-WANGER (800-592-6437) to
determine if it is eligible to invest.
HOW TO INVEST AND REDEEM
Shares of the Fund may not be purchased or redeemed directly by individual VA
contract owners, VLI policyholders or individual Retirement Plan participants.
VA contract owners, VLI policyholders or Retirement Plan participants should
consult the disclosure documents for their VA contract, VLI policy or the plan
documents for their Retirement Plan, for information on the availability of the
Fund as an investment vehicle for allocations under their VA contract, VLI
policy or Retirement Plan. In the case of a Participating Insurance Company
purchaser, particular purchase and redemption procedures typically are included
in an agreement between the Fund and the Participating Insurance Company. The
Fund may enter into similar agreements with Retirement Plans.
14
<PAGE>
The Participating Insurance Companies and Retirement Plans place daily orders to
purchase and redeem shares of the Fund. These orders generally reflect the net
effect of instructions they receive from holders of their VA contracts, VLI
policies and Retirement Plan participants and certain other terms of those
contracts, policies and Retirement Plans. The Trust issues and redeems shares
at net asset value without imposing any selling commission, sales load or
redemption charge. However, each VA contract and VLI policy imposes its own
charges and fees on owners of the VA contract and VLI policy and Retirement
Plans may impose such charges on participants in the Retirement Plan. Shares
generally are sold and redeemed at their net asset value next determined after
receipt of purchase or redemption requests from Participating Insurance
Companies and Retirement Plans. The right of redemption may be suspended or
payment postponed whenever permitted by applicable law and regulations.
PURCHASES
To the extent not otherwise provided in any agreement between the Trust and a
Participating Insurance Company or Retirement Plan, shares of the Fund may be
purchased by check or by wire transfer of funds. To be effective, a purchase
order must consist of the money to purchase the shares and (i) information
identifying the purchaser, in the case of a Participating Insurance Company or
Retirement Plan with which the Fund has entered into an agreement, or a
subsequent purchase by a Participating Insurance Company or Retirement Plan that
is already a Fund shareholder, or (ii) a completed purchase application, in the
case of the initial investment by a Retirement Plan with which the Fund does not
have an agreement.
REDEMPTIONS
Subject to the terms of any agreement between the Fund and any Participating
Insurance Company or Retirement Plan, shares may be redeemed by written request
or by telephone (for redemptions of $200,000 or less), with proceeds paid by
check or by wire transfer.
REDEEMING SHARES IN WRITING
A written redemption request must:
. identify the account owner;
. specify the number of shares or dollar amount to be redeemed;
. be signed on behalf of the owner by an individual or individuals authorized
to do so, and include evidence of their authority;
. if the shares to be redeemed have a value of more than $200,000, include a
signature guarantee by an eligible guarantor institution as defined in the
rules under the Securities Exchange Act of 1934 (including a bank, broker-
dealer, credit union (if authorized under state law), national securities
exchange, registered securities association, clearing agency or savings
association, but not a notary public); and include any stock certificates
representing the shares to be redeemed.
A check for the redemption proceeds will be mailed to the address of record
unless payment by wire transfer is requested.
15
<PAGE>
REDEEMING SHARES BY TELEPHONE
Unless a Retirement Plan shareholder chose on its purchase application not to
have the ability to do so, redemptions of shares having a value of $200,000 or
less may be requested by calling Liberty WAM at 1-800-5-WANGER (800-592-6437).
The Fund will not be responsible for unauthorized transactions if it follows
reasonable procedures to confirm that instructions received by telephone are
genuine, such as requesting identification information that appears on a
Retirement Plan's purchase application and requiring permission to record the
telephone call. If you are unable to reach the Fund or its transfer agent by
telephone, your redemption request would have to be placed by mail.
EXCHANGING SHARES BY TELEPHONE
To the extent not otherwise provided in an agreement between the Fund and a
Retirement Plan shareholder, a Retirement Plan may exchange shares of the Fund
for shares of another Wanger Fund by telephone by calling 1-800-5-WANGER
(800-592-6437). Shares may be exchanged only between identically registered
accounts, and the shares in the new Wanger Fund must be available for sale
without payment of a fee under any applicable state securities law. Because
excessive trading can hurt Fund performance and shareholders, the Fund reserves
the right temporarily or permanently to terminate the exchange privilege of any
shareholder who makes excessive use of the exchange plan. In particular, a
pattern of exchanges that coincide with a market timing strategy may be
disruptive to the Fund. The Fund has limited the number of exchanges to no more
than four per year. The Fund will not be responsible for unauthorized
transactions if it follows reasonable procedures to confirm that instructions
received by telephone are genuine, such as requesting information that appears
on a Retirement Plan's purchase application and requiring permission to record
the telephone call.
Normally, redemption proceeds will be paid within seven days after the Fund or
its agent receives a request for redemption. Redemptions may be suspended or
the payment date postponed on days when the New York Stock Exchange (NYSE) is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
HOW THE FUND'S SHARE PRICE IS DETERMINED
The Fund's share price is its net asset value next determined. Net asset value
is the difference between the values of the Fund's assets and liabilities
divided by the number of shares outstanding. We determine net asset value at
the close of regular trading on the New York Stock Exchange (NYSE)--normally 4
p.m. New York time.
To calculate the net asset value on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day. If there are no
sales that day, we value the security at the most recently quoted bid price. We
value each over-the-counter security or National Association of Securities
Dealers Automated Quotation (Nasdaq) security as of the last sale price for that
day.
16
<PAGE>
When the price of a security is not available, including days when we determine
that the sale or bid price of the security does not reflect that security's
market value, we value the security at a fair value determined in good faith
under procedures established by the Board of Trustees.
We value a security at fair value when events have occurred after the last
available market price and before the close of the NYSE that materially affect
the security's price. In the case of foreign securities, this could include
events occurring after the close of the foreign market and before the close of
the NYSE. The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed for trading
and Participating Insurance Companies and Retirement Plans may not purchase or
redeem shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and distribute, as dividends or capital gains
distributions, at least annually, substantially all of its net investment income
and net profits realized from the sale of portfolio securities, if any, to its
shareholders (Participating Insurance Companies' separate accounts and
Retirement Plan participants). The net investment income of the Fund consists
of all dividends or interest received by the Fund, less expenses (including the
investment advisory fees). Income dividends will be declared and distributed
annually by the Fund. All net short-term and long-term capital gains of the
Fund, net of carry-forward losses, if any, realized during the fiscal year, are
declared and distributed periodically, no less frequently than annually. All
dividends and distributions are reinvested in additional shares of the Fund at
net asset value, as of the record date for the distributions.
TAXES
The Fund intends to qualify every year as a regulated investment company under
the Internal Revenue Code. By so qualifying, the Fund will not be subject to
federal income taxes to the extent that its net investment income and net
realized capital gains are distributed to the shareholders. The Fund also
intends to meet certain diversification requirements applicable to mutual funds
underlying variable insurance products. For more information about the tax
status of the Fund, see Taxes in the Statement of Additional Information.
For information concerning the federal tax consequences to VA contract owners,
VLI policyholders or Retirement Plan participants, see the disclosure documents
from the VA contract, VLI policy or your Retirement Plan administrator. You
should consult your tax advisor about the tax consequences of any investment.
17
<PAGE>
FOR MORE INFORMATION
--------------------------------------------------------------------------------
Adviser: Liberty Wanger Asset Management, L.P.
You can get more information about the Fund's investments in the Fund's semi-
annual and annual reports to shareholders. The annual report contains a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance over the last fiscal year.
You may wish to read the Fund's Statement of Additional Information (SAI) for
more information on the Fund and the securities in which it invests. The SAI is
incorporated into this prospectus by reference, which means that it is
considered to be part of this prospectus.
You can get free copies of the annual and semi-annual reports and the SAI,
request other information and discuss your questions about the Fund by writing:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111
(800) 426-3750
or by calling or writing the Participating Insurance Company which issued your
variable annuity contract or variable life insurance policy or the Retirement
Plan you participate in.
Information about the Fund (including the SAI) can be reviewed and copied at the
Public Reference Room of the Securities and Exchange Commission (SEC) in
Washington, D.C. Information on the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. Reports and other information about the Fund
are available on the EDGAR database on the SEC's Internet site at
http://www.sec.gov. Copies of this information may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
[email protected] or by writing the SEC's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act file number: 811-08748
18
<PAGE>
WANGER TWENTY
PROSPECTUS
SEPTEMBER 29, 2000
* * * *
Fund shares are available only through variable annuity contracts and variable
life insurance policies of participating insurance companies, and through
certain retirement plans.
* * * *
Although Fund shares have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
-------------------------------------------
NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE
-------------------------------------------
<PAGE>
<TABLE>
<S> <C>
THE TRUST.............................................................................. 3
THE FUND............................................................................... 4
This section contains the following information about the Fund: investment
goal, principal investment strategy, principal investment risks, and
performance history
OTHER INVESTMENT STRATEGIES AND RISKS.................................................. 7
TRUST MANAGEMENT ORGANIZATIONS........................................................ 10
The Trustees..................................................................... 10
The Adviser: Liberty Wanger Asset Management, L.P............................... 10
Portfolio Manager................................................................ 11
Mixed and Shared Funding......................................................... 11
FINANCIAL HIGHLIGHTS.................................................................. 12
SHAREHOLDER INFORMATION............................................................... 13
</TABLE>
2
<PAGE>
THE TRUST
Wanger Advisors Trust (Trust) includes four separate mutual funds (Funds), each
with its own investment goal and strategies. This prospectus contains
information about Wanger Twenty (Fund).
The Fund is an investment option under variable annuity contracts (VA contracts)
and variable life insurance policies (VLI policies) issued by life insurance
companies (Participating Insurance Companies). Some (but not all) Participating
Insurance Companies are affiliated with the investment adviser to the Fund.
Participating Insurance Companies invest in the Fund through separate accounts
that they set up for that purpose. Owners of VA contracts and VLI policies
invest in sub-accounts of those separate accounts through instructions they give
to their insurance company.
Shares of the Fund also may be offered directly to certain pension plans and
retirement arrangements and accounts permitting accumulation of funds on a tax
deferred basis (Retirement Plans).
The prospectuses of the Participating Insurance Companies' separate accounts
describe which Funds are available to the purchasers of their own VA contracts
and VLI policies. The Retirement Plan disclosure documents describe which Funds
are available to participants in the plan.
3
<PAGE>
THE FUND
INVESTMENT GOAL--WANGER TWENTY
------------------------------
Wanger Twenty seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGY
-----------------------------
Wanger Twenty invests primarily in the stocks of medium- to larger-size U.S.
companies. Wanger Twenty is a non-diversified fund that takes advantage of its
advisor's research and stock-picking capabilities to invest in a limited number
of companies (between 20-25) with market capitalizations of $2 billion to $12
billion, offering the potential to provide above-average growth over time.
Wanger Twenty believes that companies within this capitalization range are not
as well known by financial analysts, and may offer higher return potential than
the stocks of companies with capitalizations above $12 billion.
Wanger Twenty typically looks for companies with:
. A strong business franchise that offers growth potential.
. Products and services that give the company a competitive advantage.
. A stock price that the Fund's advisor believes is reasonable relative to the
assets and earning power of the company.
The portfolio manager may sell a portfolio holding if the security reaches the
portfolio manager's price target or if the company has a deterioration of
fundamentals such as failing to meet key operating benchmarks. The portfolio
manager may also sell a portfolio holding to fund redemptions.
PRINCIPAL INVESTMENT RISKS
--------------------------
There are two basic risks for all mutual funds that invest in stocks:
MANAGEMENT RISK and MARKET RISK. These risks may cause you to lose money by
investing in the Fund.
Management risk means that Liberty Wanger Asset Management, L.P.'s (Liberty WAM)
stock selections and other investment decisions might produce losses or cause
the Fund to underperform when compared to other funds with similar goals. Market
risk means that security prices in a market, sector or industry may move down.
Downward movements will reduce the value of your investment. Because of
management and market risk, there is no guarantee that the Fund will achieve its
investment goal or perform favorably compared with competing funds.
Since it purchases equity securities, the Fund is subject to EQUITY RISK. This
is the risk that stock prices will fall over short or extended periods of time.
Although the stock market has historically outperformed other asset classes over
the long term, the equity market tends to move in cycles and individual stock
prices may fluctuate drastically from day-to-day and may underperform other
asset classes over an extended period of time. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These price movements may result from factors affecting
individual companies, industries or the securities market as a whole.
Because the Fund invests in stocks, the price of its shares--its net asset value
per share--fluctuates daily in response to changes in the market value of the
stocks.
4
<PAGE>
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MEDIUM-CAP COMPANIES
Medium-sized companies and new issuers often have limited product lines,
operating histories, markets, or financial resources. They also may depend
heavily on a small management group. Their securities may trade less
frequently, in smaller volumes, and fluctuate more sharply in price than
securities of larger companies.
SECTOR RISK
Sector risk may sometimes be present in the Fund's investments. Companies that
are in different but closely related industries are sometimes described as being
in the same broad economic sector. The values of stocks of many different
companies in a market sector may be similarly affected by particular economic or
market events. Although the Fund does not intend to focus on any particular
sector, at times, the Fund may have a significant portion of its assets invested
in a particular sector. An example of a sector in which the Fund may sometimes
have a significant portion of its assets invested is technology. Technology
companies may be significantly affected by falling prices and profits, and
intense competition. In addition, the rate of technological change for
technology companies is generally higher than for other companies, often
requiring extensive and sustained investment in research and development, and
exposing such companies to the risk of rapid product obsolescence. The price of
many technology stocks has risen based on projections of future earnings and
company growth. If a company does not perform as expected, the price of the
stock could decline significantly. Many technology companies are currently
operating at a loss and may never be profitable.
NON-DIVERSIFIED
Wanger Twenty is a non-diversified fund. As a non-diversified mutual fund, the
Fund is allowed to invest a greater percentage of its total assets in the
securities of a single issuer. This may concentrate issuer risk and, therefore,
the Fund may have an increased risk of loss compared to a similar diversified
mutual fund.
PERFORMANCE HISTORY
-------------------
Because Wanger Twenty has not completed one full year of investment performance,
information related to the Fund's performance has not been included in this
prospectus.
FEES AND EXPENSES
-----------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund, not including fees and expenses of your VA contract, VLI
policy or Retirement Plan.
SHAREHOLDER TRANSACTION EXPENSES
Fees paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
ANNUAL FUND OPERATING EXPENSES
Expenses that are deducted from Fund assets:
Management fees .95%
12b-1 fee None
Other expenses 1.17%
-------------- -----
Total annual Fund operating expenses 2.12%
Liberty WAM has undertaken to limit Wanger Twenty's annual expenses to 1.35% of
its average net assets. This expense limitation is contractual and will
terminate on September 30, 2002.
5
<PAGE>
EXAMPLE
This example is intended to help you compare the cost of investing in other
mutual funds. It assumes a $10,000 investment in Wanger Twenty for the time
period indicated, a 5% total return each year, reinvestment of all dividends and
distributions, and that operating expenses remain constant at the level shown.
Your actual returns and costs may be higher or lower. This example does not
include the effect of Liberty WAM's undertaking to limit the Fund's expenses.
1 Year $ 215
3 Years $ 664
5 Years $1,139
10 Years $2,452
6
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
The first portion of this prospectus describes the Fund's principal investment
strategies and their associated risks. This section provides more detail about
the Fund's investment strategies, and describes other investments the Fund may
make and the risks associated with them. In seeking to achieve its investment
goal, the Fund may invest in various types of securities and engage in various
investment techniques, which are not the principal focus of the Fund and
therefore are not described in this prospectus. These types of securities and
investment practices are identified and discussed in the Fund's Statement of
Additional Information, which you may obtain free of charge (see back cover).
Approval by the Fund's shareholders is not required to modify or change the
Fund's investment goal or investment strategies.
THE INFORMATION EDGE
Liberty WAM invests in entrepreneurially managed mid-sized and larger companies
that it believes are not as well known by financial analysts and whose
domination of a niche creates the opportunity for superior earnings-growth
potential. Liberty WAM may identify what it believes are important economic,
social or technological trends (for example, the growth of outsourcing as a
business strategy, or the productivity gains from the increasing use of
technology) and try to identify companies it thinks will benefit from those
trends.
In making investments for the Fund, Liberty WAM relies primarily on its
independent, internally generated research to uncover companies that may be less
well known than the more popular names. To find these companies, Liberty WAM
compares growth potential, financial strength and fundamental value among
companies.
<TABLE>
<CAPTION>
Growth Potential Financial Strength Fundamental Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
. superior technology . low debt . reasonable stock price
. innovative marketing . adequate working capital relative to growth potential
. managerial skills . conservative accounting . valuable assets
. market niche practices
. good earnings . adequate profit margin
prospects
. strong demand for product
The realization of this growth A strong balance sheet gives Once Liberty WAM uncovers an
potential would likely produce management greater flexibility attractive company, it identifies
superior performance that is to pursue strategic objectives a price that it believes would
sustainable over time. and is essential to also make the stock a good value.
maintaining a competitive
advantage.
-------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
STOCK STRENGTH COMES FIRST
Liberty WAM's analysts continually screen companies and make more than 1,000
face-to-face visits around the globe each year. To accomplish this, Liberty WAM
analysts talk directly to top management, vendors, suppliers and competitors,
whenever possible.
In managing the Fund, Liberty WAM tries to maintain lower transaction costs by
investing with a long-term time horizon (at least two to five years). However,
securities purchased on a long-term basis may be sold within 12 months after
purchase due to changes in the circumstances of a particular company or
industry, or changes in general market or economic conditions.
STATE INSURANCE RESTRICTIONS
The Fund is sold to Participating Insurance Companies in connection with VA
contracts and VLI policies, and will seek to be available under VA contracts and
VLI policies sold in a number of jurisdictions. Certain states have regulations
or guidelines concerning concentration of investments and other investment
techniques. If applied to the Fund, the Fund may be limited in
8
<PAGE>
its ability to engage in certain techniques and to manage its portfolios with
the flexibility provided herein. In order to permit the Fund to be available
under VA contracts and VLI policies sold in certain states, the Fund may make
commitments that are more restrictive than the investment policies and
limitations described herein and in the SAI. If the Fund determines that such a
commitment is no longer in the Fund's best interest, the commitment may be
revoked by terminating the availability of the Fund to VA contract owners and
VLI policyholders residing in such states.
TEMPORARY DEFENSIVE POSITIONS
At times, Liberty WAM may determine that adverse market conditions make it
desirable to temporarily suspend the Fund's normal investment activities.
During such times, the Fund may, but is not required to, invest in cash or high-
quality, short-term debt securities, without limit. Taking a temporary
defensive position may prevent the Fund from achieving its investment goal.
HEDGING STRATEGIES
The Fund may enter into a number of hedging strategies, including those that
employ futures and options, to gain or reduce exposure to particular securities
or markets. These strategies, commonly referred to as derivatives, involve the
use of financial instruments whose values depend on, or are derived from, the
value of an underlying security, index or currency. The Fund may use these
strategies to adjust the Fund's sensitivity to changes in interest rates or for
other hedging purposes (i.e. attempting to offset a potential loss in one
position by establishing an interest in an opposite position). Derivative
strategies involve the risk that they may exaggerate a loss, potentially losing
more money than the actual cost of the underlying security, or limit a potential
gain. Also, with some derivative strategies there is the risk that the other
party to the transaction may fail to honor its contract terms, causing a loss to
the Fund.
PORTFOLIO TURNOVER
The Fund does not have limits on portfolio turnover. Turnover may vary
significantly from year to year. Liberty WAM does not expect it to exceed 125%
for the Fund under normal conditions. Portfolio turnover increases transaction
expenses, which reduce the Fund's return.
9
<PAGE>
TRUST MANAGEMENT ORGANIZATIONS
THE TRUSTEES
The business of the Trust and the Fund is supervised by the Trust's Board of
Trustees. The SAI contains names of and biographical information on the
Trustees.
THE ADVISER: LIBERTY WANGER ASSET MANAGEMENT, L.P.
Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset
Management, L.P. (WAM)), 227 West Monroe Street, Suite 3000, Chicago, IL 60606,
is the Fund's investment advisor. Liberty WAM and its predecessor have managed
mutual funds, including Wanger International Small Cap, since 1992. In its
duties as investment advisor, Liberty WAM runs the Fund's day-to-day business,
including placing all orders for the purchase and sale of the Fund's portfolio
securities. As of June 30, 2000, Liberty WAM managed more than $9 billion in
assets.
WAM was renamed Liberty WAM on September 29, 2000 when it became a wholly-owned
subsidiary of Liberty Financial Companies, Inc. (Liberty), which in turn is a
majority owned indirect subsidiary of Liberty Mutual Insurance Company. For more
information about Liberty's acquisition of WAM, see the SAI.
For the period February 1, 1999 to December 31, 1999, the Fund paid Liberty WAM
management fees at 0.95% of the average daily net assets of the Fund.
Additional expenses are incurred under the VA contracts, VLI policies and the
Retirement Plans. These expenses are not described in this prospectus; owners
of VA contracts, VLI policies and Retirement Plan participants should consult
the contract or policy disclosure documents or Retirement Plan information
regarding these expenses.
From time to time, Liberty WAM may pay amounts from its past profits to
Participating Insurance Companies or other organizations that provide
administrative services for the Fund or that provide other services relating to
the Fund to owners of VA contracts, VLI policies and/or participants in
Retirement Plans. These services include, among other things: sub-accounting
services; answering inquiries regarding the Fund; transmitting, on behalf of the
Fund, proxy statements, shareholder reports, updated prospectuses and other
communications regarding the Fund; and such other related services as the Fund,
owners of VA contracts, VLI policies and/or participants in Retirement Plans may
request. The amount of any such payment will be determined by the nature and
extent of the services provided by the Participating Insurance Company or other
organization. Payment of such amounts by Liberty WAM will not increase the fees
paid by the Fund or its shareholders.
10
<PAGE>
PORTFOLIO MANAGER
Liberty WAM uses a team to manage the Fund. Team members share responsibility
for providing ideas, information, and knowledge in managing the Fund, and each
team member has one or more particular areas of expertise. The portfolio
managers are responsible for making daily investment decisions, and utilize the
management team's input and advice when making buy and sell determinations.
John H. Park is a vice president of the Trust, and has managed Wanger Twenty
since its inception in February, 1999. Mr. Park is also a vice president of
Liberty Acorn Investment Trust and lead portfolio manager of Liberty Acorn
Twenty. He has been a key member of the domestic investment team at Liberty WAM
and WAM since 1993, and was a principal of WAM from 1998 to September 29, 2000.
MIXED AND SHARED FUNDING
As described above, the Trust serves as a funding medium for VA contracts and
VLI policies of Participating Insurance Companies and for certain Retirement
Plans, so-called mixed and shared funding. As of the date of this Prospectus,
the Participating Insurance Companies are Keyport Life Insurance Company
(Keyport), Keyport Benefit Life Insurance Company (Keyport Benefit), Aegon
Financial Services Group, Inc., SAFECO Life Insurance Company, PHL Variable Life
Insurance Company and Phoenix Home Life Mutual Insurance Company. Keyport and
Keyport Benefit are indirect wholly owned subsidiaries of Liberty Financial
Companies, Inc. (LFC). As of March 31, 2000, approximately 71.30% of the
combined voting power of LFC's outstanding voting stock was held by Liberty
Mutual Insurance Company (Liberty Mutual). The Fund may become a funding vehicle
for VA contracts or VLI policies of other Participating Insurance Companies,
including other entities not affiliated with Keyport, Keyport Benefit, LFC or
Liberty Mutual.
The interests of owners of VA contracts and VLI policies could diverge based on
differences in state regulatory requirements, changes in the tax laws or other
unanticipated developments. The Trust does not foresee any such differences or
disadvantages at this time. However, the Trustees will monitor for such
developments to identify any material irreconcilable conflicts and to determine
what action, if any, should be taken in response to such conflicts. If such a
conflict were to occur, one or more separate accounts might be required to
withdraw its investments in the Fund or shares of another Fund may be
substituted. This might force the Fund to sell securities at disadvantageous
prices.
11
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table that follows is intended to help you understand
the Fund's financial information since the Fund's inception and for the six
months ended June 30, 2000. The Fund's fiscal year runs from January 1 to
December 31. The total returns in the table represent the return that investors
earned assuming that they reinvested all dividends and distributions. Certain
information in the table reflects the financial results for a single Fund share.
The information with respect to the last six month period ended June 30, 2000 is
unaudited. The information with respect to the period ended December 31, 1999 is
audited. For the period ended 1999, this information is included in the Fund's
financial statements, which have been audited by Ernst & Young LLP, independent
auditors, whose reports, along with the financial statements, are included in
the Fund's annual report, which is available upon request. The Fund's total
returns presented below do not reflect the cost of insurance and other company
separate account charges which vary with the VA contracts, VLI policies or
Retirement Plans.
WANGER TWENTY
<TABLE>
<CAPTION>
Six months 2/1/99
ended through
6/30/00 12/31/99
(unaudited)
<S> <C> <C>
Per share operating performance:
Net asset value, beginning of period.................... $ 13.43 $ 10.00
---------- ----------
Income from Investment Operations
Net investment loss (c)................................. (0.02) (0.08)
Net realized and unrealized gain on investments......... 0.38 3.51
Total from investment operations........................ 0.36 3.43
Less Distributions:
Dividends from net investment income.................... -- --
Distributions from net realized gain.................... (0.55) --
---------- ----------
Total distributions..................................... (0.55) --
Net asset value, end of period.......................... $ 13.24 $ 13.43
========== ==========
Total return:
Total investment return (d)............................. 2.92% 34.30%
Ratios/supplemental data:
Ratio of expenses to average net assets (a) (b)......... 1.43%* 1.41%*
Ratio of net investment loss to average net assets (b).. (0.29%)* (0.77%)*
Portfolio turnover ratio................................ 140%* 113%*
Net assets at end of period............................. $8,531,544 $6,570,131
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects total expenses prior to the reduction of custodian fees
for cash balances the Fund 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 Liberty WAM 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.
12
<PAGE>
SHAREHOLDER INFORMATION
SHAREHOLDER AND ACCOUNT POLICIES
The Fund provides Participating Insurance Companies and Retirement Plans with
information Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m.
Central time. For information, prices, literature, or to obtain information
regarding the availability of Fund shares or how Fund shares are redeemed, call
Liberty WAM at 1-800-5-WANGER (800-592-6437).
Shares of the Fund are issued and redeemed in connection with investments in and
payments under certain qualified and non-qualified VA contracts and VLI policies
issued through separate accounts of Participating Insurance Companies. Shares
of the Fund are also offered directly to certain of the following types of
qualified plans and retirement arrangements and accounts, collectively called
Retirement Plans:
. a plan described in section 401(a) of the Internal Revenue Code that includes
a trust exempt from tax under section 501(a);
. an annuity plan described in section 403(a);
. an annuity contract described in section 403(b), including a 403(b)(7)
custodial account;
. a governmental plan under section 414(d) or an eligible deferred compensation
plan under section 457(b); and
. a plan described in section 501(c)(18).
The trust or plan must be established before shares of the Fund can be purchased
by the plan. Neither the Fund nor Liberty WAM offers prototypes of these plans.
The Fund has imposed certain additional restrictions on sales to Retirement
Plans to reduce Fund expenses. To be eligible to invest in the Fund, a
Retirement Plan must be domiciled in a state in which Fund shares may be sold
without payment of a fee to the state. In most states, this policy will require
that a Retirement Plan have at least $5 million in assets and that investment
decisions are made by a Plan fiduciary rather than Plan participants in order
for the Plan to be eligible to invest. The Fund does not intend to offer shares
in states where the sale of Fund shares requires the payment of a fee. A
Retirement Plan may call Liberty WAM at 1-800-5-WANGER (800-592-6437) to
determine if it is eligible to invest.
HOW TO INVEST AND REDEEM
Shares of the Fund may not be purchased or redeemed directly by individual VA
contract owners, VLI policyholders or individual Retirement Plan participants.
VA contract owners, VLI policyholders or Retirement Plan participants should
consult the disclosure documents for their VA contract, VLI policy or the plan
documents for their Retirement Plan, for information on the availability of the
Fund as an investment vehicle for allocations under their VA contract, VLI
policy or Retirement Plan. In the case of a Participating Insurance Company
purchaser, particular purchase and redemption procedures typically are included
in an agreement between the Fund and the Participating Insurance Company. The
Fund may enter into similar agreements with Retirement Plans.
13
<PAGE>
The Participating Insurance Companies and Retirement Plans place daily orders to
purchase and redeem shares of the Fund. These orders generally reflect the net
effect of instructions they receive from holders of their VA contracts, VLI
policies and Retirement Plan participants and certain other terms of those
contracts, policies and Retirement Plans. The Trust issues and redeems shares
at net asset value without imposing any selling commission, sales load or
redemption charge. However, each VA contract and VLI policy imposes its own
charges and fees on owners of the VA contract and VLI policy and Retirement
Plans may impose such charges on participants in the Retirement Plan. Shares
generally are sold and redeemed at their net asset value next determined after
receipt of purchase or redemption requests from Participating Insurance
Companies and Retirement Plans. The right of redemption may be suspended or
payment postponed whenever permitted by applicable law and regulations.
PURCHASES
To the extent not otherwise provided in any agreement between the Trust and a
Participating Insurance Company or Retirement Plan, shares of the Fund may be
purchased by check or by wire transfer of funds. To be effective, a purchase
order must consist of the money to purchase the shares and (i) information
identifying the purchaser, in the case of a Participating Insurance Company or
Retirement Plan with which the Fund has entered into an agreement, or a
subsequent purchase by a Participating Insurance Company or Retirement Plan that
is already a Fund shareholder, or (ii) a completed purchase application, in the
case of the initial investment by a Retirement Plan with which the Fund does not
have an agreement.
REDEMPTIONS
Subject to the terms of any agreement between the Fund and any Participating
Insurance Company or Retirement Plan, shares may be redeemed by written request
or by telephone (for redemptions of $200,000 or less), with proceeds paid by
check or by wire transfer.
REDEEMING SHARES IN WRITING
A written redemption request must:
. identify the account owner;
. specify the number of shares or dollar amount to be redeemed;
. be signed on behalf of the owner by an individual or individuals authorized
to do so, and include evidence of their authority;
. if the shares to be redeemed have a value of more than $200,000, include a
signature guarantee by an eligible guarantor institution as defined in the
rules under the Securities Exchange Act of 1934 (including a bank, broker-
dealer, credit union (if authorized under state law), national securities
exchange, registered securities association, clearing agency or savings
association, but not a notary public); and include any stock certificates
representing the shares to be redeemed.
A check for the redemption proceeds will be mailed to the address of record
unless payment by wire transfer is requested.
14
<PAGE>
REDEEMING SHARES BY TELEPHONE
Unless a Retirement Plan shareholder chose on its purchase application not to
have the ability to do so, redemptions of shares having a value of $200,000 or
less may be requested by calling Liberty WAM at 1-800-5-WANGER (800-592-6437).
The Fund will not be responsible for unauthorized transactions if it follows
reasonable procedures to confirm that instructions received by telephone are
genuine, such as requesting identification information that appears on a
Retirement Plan's purchase application and requiring permission to record the
telephone call. If you are unable to reach the Fund or its transfer agent by
telephone, your redemption request would have to be placed by mail.
EXCHANGING SHARES BY TELEPHONE
To the extent not otherwise provided in an agreement between the Fund and a
Retirement Plan shareholder, a Retirement Plan may exchange shares of the Fund
for shares of another Fund by telephone by calling Liberty WAM at
1-800-5-WANGER (800-592-6437). Shares may be exchanged only between identically
registered accounts, and the shares in the new Wanger Fund must be available
for sale with out payment of a fee under any applicable state securities law.
Because excessive trading can hurt Fund performance and shareholders, the Fund
reserves the right temporarily or permanently to terminate the exchange
privilege of any shareholder who makes excessive use of the exchange plan. In
particular, a pattern of exchanges that coincide with a market timing strategy
may be disruptive to the Fund. The Fund has limited the number of exchanges to
no more than four per year. The Fund will not be responsible for unauthorized
transactions if it follows reasonable procedures to confirm that instructions
received by telephone are genuine, such as requesting information that appears
on a Retirement Plan's purchase application and requiring permission to record
the telephone call.
Normally, redemption proceeds will be paid within seven days after the Fund or
its agent receives a request for redemption. Redemptions may be suspended or
the payment date postponed on days when the New York Stock Exchange (NYSE) is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
HOW THE FUND'S SHARE PRICE IS DETERMINED
The Fund's share price is its net asset value next determined. Net asset value
is the difference between the values of the Fund's assets and liabilities
divided by the number of shares outstanding. We determine net asset value at
the close of regular trading on the New York Stock Exchange (NYSE)--normally 4
p.m. New York time.
To calculate the net asset value on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day. If there are
no sales that day, we value the security at the most recently quoted bid price.
We value each over-the-counter security or National Association of Securities
Dealers Automated Quotation (Nasdaq) security as of the last sale price for that
day.
15
<PAGE>
When the price of a security is not available, including days when we determine
that the sale or bid price of the security does not reflect that security's
market value, we value the security at a fair value determined in good faith
under procedures established by the Board of Trustees.
We value a security at fair value when events have occurred after the last
available market price and before the close of the NYSE that materially affect
the security's price. In the case of foreign securities, this could include
events occurring after the close of the foreign market and before the close of
the NYSE. The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed for trading
and Participating Insurance Companies and Retirement Plans may not purchase or
redeem shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and distribute, as dividends or capital gains
distributions, at least annually, substantially all of its net investment income
and net profits realized from the sale of portfolio securities, if any, to its
shareholders (Participating Insurance Companies' separate accounts and
Retirement Plan participants). The net investment income of the Fund consists
of all dividends or interest received by the Fund, less expenses (including the
investment advisory fees). Income dividends will be declared and distributed
annually by the Fund. All net short-term and long-term capital gains of the
Fund, net of carry-forward losses, if any, realized during the fiscal year, are
declared and distributed periodically, no less frequently than annually. All
dividends and distributions are reinvested in additional shares of the Fund at
net asset value, as of the record date for the distributions.
TAXES
The Fund intends to qualify every year as a regulated investment company under
the Internal Revenue Code. By so qualifying, the Fund will not be subject to
federal income taxes to the extent that its net investment income and net
realized capital gains are distributed to the shareholders. The Fund also
intends to meet certain diversification requirements applicable to mutual funds
underlying variable insurance products. For more information about the tax
status of the Fund, see Taxes in the Statement of Additional Information.
For information concerning the federal tax consequences to VA contract owners,
VLI policyholders or Retirement Plan participants, see the disclosure documents
from the VA contract, VLI policy or your Retirement Plan administrator. You
should consult your tax advisor about the tax consequences of any investment.
16
<PAGE>
FOR MORE INFORMATION
--------------------
Adviser: Liberty Wanger Asset Management, L.P.
You can get more information about the Fund's investments in the Fund's semi-
annual and annual reports to shareholders. The annual report contains a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance over the last fiscal year.
You may wish to read the Fund's Statement of Additional Information (SAI) for
more information on the Fund and the securities in which it invests. The SAI is
incorporated into this prospectus by reference, which means that it is
considered to be part of this prospectus.
You can get free copies of the annual and semi-annual reports and the SAI,
request other information and discuss your questions about the Fund by writing:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111
(800) 426-3750
or by calling or writing the Participating Insurance Company which issued your
variable annuity contract or variable life insurance policy or the Retirement
Plan you participate in.
Information about the Fund (including the SAI) can be reviewed and copied at the
Public Reference Room of the Securities and Exchange Commission (SEC) in
Washington, D.C. Information on the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. Reports and other information about the Fund
are available on the EDGAR database on the SEC's Internet site at
http://www.sec.gov. Copies of this information may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
[email protected] or by writing the SEC's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act file number: 811-08748
17
<PAGE>
WANGER FOREIGN FORTY
PROSPECTUS
SEPTEMBER 29, 2000
* * * *
Fund shares are available only through variable annuity contracts and variable
life insurance policies of participating insurance companies, and through
certain retirement plans.
* * * *
Although Fund shares have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
---------------------------------------------
NOT FDIC- MAY LOSE VALUE
INSURED NO BANK GUARANTEE
---------------------------------------------
<PAGE>
<TABLE>
<S> <C>
THE TRUST.................................................................... 3
THE FUND..................................................................... 4
This section contains the following information about the Fund:
investment goal, principal investment strategy, principal investment
risks, and performance history
OTHER INVESTMENT STRATEGIES AND RISKS........................................ 7
TRUST MANAGEMENT ORGANIZATIONS............................................... 10
The Trustees............................................................ 10
The Adviser: Liberty Wanger Asset Management, L.P...................... 10
Portfolio Managers...................................................... 11
Mixed and Shared Funding................................................ 11
FINANCIAL HIGHLIGHTS......................................................... 12
SHAREHOLDER INFORMATION...................................................... 13
</TABLE>
2
<PAGE>
THE TRUST
Wanger Advisors Trust (Trust) includes four separate mutual funds (Funds), each
with its own investment goal and strategies. This prospectus contains
information about Wanger Foreign Forty.
The Fund is an investment option under variable annuity contracts (VA contracts)
and variable life insurance policies (VLI policies) issued by life insurance
companies (Participating Insurance Companies). Some (but not all) Participating
Insurance Companies are affiliated with the investment adviser to the Fund.
Participating Insurance Companies invest in the Fund through separate accounts
that they set up for that purpose. Owners of VA contracts and VLI policies
invest in sub-accounts of those separate accounts through instructions they give
to their insurance company.
Shares of the Fund also may be offered directly to certain pension plans and
retirement arrangements and accounts permitting accumulation of funds on a tax
deferred basis (Retirement Plans).
The prospectuses of the Participating Insurance Companies' separate accounts
describe which Funds are available to the purchasers of their own VA contracts
and VLI policies. The Retirement Plan disclosure documents describe which Funds
are available to participants in the plan.
3
<PAGE>
THE FUND
INVESTMENT GOAL--WANGER FOREIGN FORTY
-------------------------------------
Wanger Foreign Forty seeks long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGY
-----------------------------
Wanger Foreign Forty invests primarily in the stocks of medium- to larger-size
companies with market capitalizations of $5 billion to $15 billion. The Fund
invests in at least three countries. Wanger Foreign Forty is a non-diversified
fund that takes advantage of its advisor's research and stock-picking
capabilities to invest in a limited number of foreign companies (between 40-60)
in developed markets (for example, Japan, Canada, and United Kingdom), offering
the potential to provide above-average growth over time. Wanger Foreign Forty
believes that companies within this capitalization range are not as well known
by financial analysts, and may offer higher return potential than the stocks of
companies with capalizations above $15 billion.
Wanger Foreign Forty typically looks for companies with:
. A strong business franchise that offers growth potential.
. Products and services that give the company a competitive advantage.
. A stock price that the Fund's advisor believes is reasonable relative to the
assets and earning power of the company.
Wanger Foreign Forty is an international fund and invests the majority of its
assets in the stocks of foreign companies based in developed markets outside the
U.S.
The portfolio manager may sell a portfolio holding if the security reaches the
portfolio manager's price target or if the company has a deterioration of
fundamentals such as failing to meet key operating benchmarks. The portfolio
manager may also sell a portfolio holding to fund redemptions.
PRINCIPAL INVESTMENT RISKS
--------------------------
There are two basic risks for all mutual funds that invest in stocks:
MANAGEMENT RISK and MARKET RISK. These risks may cause you to lose money by
investing in the Fund.
Management risk means that Liberty Wanger Asset Management, L.P.'s (Liberty WAM)
stock selections and other investment decisions might produce losses or cause
the Fund to underperform when compared to other funds with similar goals. Market
risk means that security prices in a market, sector or industry may move down.
Downward movements will reduce the value of your investment. Because of
management and market risk, there is no guarantee that the Fund will achieve its
investment goal or perform favorably compared with competing funds.
Since it purchases equity securities, the Fund is subject to EQUITY RISK. This
is the risk that stock prices will fall over short or extended periods of time.
Although the stock market has historically outperformed other asset classes over
the long term, the equity market tends to move in cycles and individual stock
prices may fluctuate drastically from day-to-day and may underperform other
asset classes over an extended period of time. Individual companies may report
poor results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. These price movements may result from factors affecting
individual companies, industries or the securities market as a whole.
4
<PAGE>
Because the Fund invests in stocks, the price of its shares--its net asset value
per share--fluctuates daily in response to changes in the market value of the
stocks.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
MEDIUM-CAP COMPANIES
Medium-sized companies and new issuers often have limited product lines,
operating histories, markets, or financial resources. They also may depend
heavily on a small management group. Their securities may trade less
frequently, in smaller volumes, and fluctuate more sharply in price than
securities of larger companies.
FOREIGN SECURITIES
Foreign securities are subject to special risks. Foreign stock markets,
especially in countries with developing stock markets, can be extremely
volatile. The liquidity of foreign securities may be more limited than domestic
securities, which means that the Fund may at times be unable to sell them at
desirable prices. Fluctuations in currency exchange rates impact the value of
foreign securities. Brokerage commissions, custodial fees, and other fees are
generally higher for foreign investments. In addition, foreign governments may
impose withholding taxes which would reduce the amount of income available to
distribute to shareholders. Other risks include: possible delays in settlement
of transactions; less publicly available information about companies; the impact
of political, social or diplomatic events; and possible seizure, expropriation
or nationalization of the company or its assets or imposition of currency
exchange controls.
SECTOR RISK
Sector risk may sometimes be present in the Fund's investments. Companies that
are in different but closely related industries are sometimes described as being
in the same broad economic sector. The values of stocks of many different
companies in a market sector may be similarily affected by particular economic
or market events. Although the Fund does not intend to focus on any particular
sector, at times, the Fund may have a large portion of its assets invested
in a particular sector. An example of a sector in which the Fund may sometimes
have a large portion of its assets invested is technology. Technology
companies may be significantly affected by falling prices and profits, and
intense competition. In addition, the rate of technological change for
technology companies is generally higher than for other companies, often
requiring extensive and sustained investment in research and development, and
exposing such companies to the risk of rapid product obsolescence. The price of
many technology stocks has risen based on projections of future earnings and
company growth. If a company does not perform as expected, the price of the
stock could decline significantly. Many technology companies are currently
operating at a loss and may never be profitable.
NON-DIVERSIFIED
Wanger Foreign Forty is a non-diversified fund that ordinarily holds 40 to 60
stocks. As a non-diversified mutual fund, the Fund is allowed to invest a
greater percentage of its total assets in the securities of a single issuer.
This may concentrate issuer risk and, therefore, the Fund may have an increased
risk of loss compared to a similar diversified mutual fund.
PERFORMANCE HISTORY
-------------------
Because Wanger Foreign Forty has not completed one full year of investment
performance, information related to the Fund's performance has not been included
in this prospectus.
5
<PAGE>
FEES AND EXPENSES
-----------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund, not including fees and expenses of your VA contract, VLI
policy or Retirement Plan.
SHAREHOLDER TRANSACTION EXPENSES
Fees paid directly from your investment:
Maximum sales charge None
Deferred sales charge None
ANNUAL FUND OPERATING EXPENSES
Expenses that are deducted from Fund assets:
Management fees 1.00%
12b-1 fee None
Other expenses 2.45%
-------------------------------------------------------
Total annual Fund operating expenses 3.45%
Liberty WAM has undertaken to limit Wanger Foreign Forty's annual expenses to
1.45% of its average net assets. This expense limitation is contractual and will
terminate on September 30, 2002.
EXAMPLE
This example is intended to help you compare the cost of investing in other
mutual funds. It assumes a $10,000 investment in Wanger Foreign Forty for the
time period indicated, a 5% total return each year, reinvestment of all
dividends and distributions, and that operating expenses remain constant at the
level shown. Your actual returns and costs may be higher or lower. This example
does not include the effect of Liberty WAM's undertaking to limit the Fund's
expenses.
<TABLE>
<S> <C>
Year $ 348
3 Years $1,059
5 Years $1,793
10 Years $3,730
</TABLE>
6
<PAGE>
OTHER INVESTMENT STRATEGIES AND RISKS
The first portion of this prospectus describes the Fund's principal investment
strategies and their associated risks. This section provides more detail about
the Fund's investment strategies, and describes other investments the Fund may
make and the risks associated with them. In seeking to achieve its investment
goal, the Fund may invest in various types of securities and engage in various
investment techniques, which are not the principal focus of the Fund and
therefore are not described in this prospectus. These types of securities and
investment practices are identified and discussed in the Fund's Statement of
Additional Information, which you may obtain free of charge (see back cover).
Approval by the Fund's shareholders is not required to modify or change the
Fund's investment goal or investment strategies.
THE INFORMATION EDGE
Liberty WAM invests in entrepreneurially managed mid-sized and larger companies
that it believes are not as well known by financial analysts and whose
domination of a niche creates the opportunity for superior earnings-growth
potential. Liberty WAM may identify what it believes are important economic,
social or technological trends (for example, the growth of out-sourcing as a
business strategy, or the productivity gains from the increasing use of
technology) and try to identify companies it thinks will benefit from those
trends.
In making investments for the Fund, Liberty WAM relies primarily on its
independent, internally generated research to uncover companies that may be less
well known than the more popular names. To find these companies, Liberty WAM
compares growth potential, financial strength and fundamental value among
companies.
<TABLE>
<CAPTION>
Growth Potential Financial Strength Fundamental Value
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
. superior technology . low debt . reasonable stock price
. innovative marketing . adequate working capital relative to growth potential
. managerial skill . conservative accounting . valuable assets
. market niche practices
. good earnings prospects . adequate profit margin
. strong demand for product
The realization of this growth A strong balance sheet gives Once Liberty WAM uncovers
potential would likely produce management greater flexibility an attractive company, it
superior performance that is to pursue strategic objectives identifies a price that it
sustainable over time. and is essential to believes would also make the
maintaining a competitive stock a good value.
advantage.
---------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
STOCK STRENGTH COMES FIRST
Liberty WAM's analysts continually screen companies and make more than 1,000
face-to-face visits around the globe each year. To accomplish this, Liberty WAM
analysts talk directly to top management, vendors, suppliers and competitors,
whenever possible.
In managing the Fund, Liberty WAM tries to maintain lower transaction costs by
investing with a long-term time horizon (at least two to five years). However,
securities purchased on a long-term basis may be sold within 12 months after
purchase due to changes in the circumstances of a particular company or
industry, or changes in general market or economic conditions.
STATE INSURANCE RESTRICTIONS
The Fund is sold to Participating Insurance Companies in connection with VA
contracts and VLI policies, and will seek to be available under VA contracts and
VLI policies sold in a number of jurisdictions. Certain states have regulations
or guidelines concerning concentration of investments and other investment
techniques. If applied to the Fund, the Fund may be limited in its ability to
engage in certain techniques and to manage its portfolio with the flexibility
provided
8
<PAGE>
herein. In order to permit the Fund to be available under VA contracts and VLI
policies sold in certain states, the Fund may make commitments that are more
restrictive than the investment policies and limitations described herein and in
the SAI. If the Fund determines that such a commitment is no longer in the
Fund's best interest, the commitment may be revoked by terminating the
availability of the Fund to VA contract owners and VLI policyholders residing in
such states.
TEMPORARY DEFENSIVE POSITIONS
At times, Liberty WAM may determine that adverse market conditions make it
desirable to temporarily suspend the Fund's normal investment activities.
During such times, the Fund may, but is not required to, invest in cash or high-
quality, short-term debt securities, without limit. Taking a temporary defensive
position may prevent the Fund from achieving its investment goal.
HEDGING STRATEGIES
The Fund may enter into a number of hedging strategies, including those that
employ futures and options, to gain or reduce exposure to particular securities
or markets. These strategies, commonly referred to as derivatives, involve the
use of financial instruments whose values depend on, or are derived from, the
value of an underlying security, index or currency. The Fund may use these
strategies to adjust the Fund's sensitivity to changes in interest rates or for
other hedging purposes (i.e. attempting to offset a potential loss in one
position by establishing an interest in an opposite position). Derivative
strategies involve the risk that they may exaggerate a loss, potentially losing
more money than the actual cost of the underlying security, or limit a potential
gain. Also, with some derivative strategies there is the risk that the other
party to the transaction may fail to honor its contract terms, causing a loss to
the Fund.
PORTFOLIO TURNOVER
The Fund does not have limits on portfolio turnover. Turnover may vary
significantly from year to year. Liberty WAM does not expect it to exceed 125%
for the Fund under normal conditions. Portfolio turnover increases transaction
expenses, which reduce the Fund's return.
9
<PAGE>
TRUST MANAGEMENT ORGANIZATIONS
THE TRUSTEES
The business of the Trust and the Fund is supervised by the Trust's Board of
Trustees. The SAI contains names of and biographical information on the
Trustees.
THE ADVISER: LIBERTY WANGER ASSET MANAGEMENT, L.P.
Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset
Management, L.P. (WAM)), 227 West Monroe Street, Suite 3000, Chicago, IL 60606,
is the Fund's investment advisor. Liberty WAM and its predecessor have managed
mutual funds, including Wanger Foreign Forty, since 1992. In its duties as
investment advisor, Liberty WAM runs the Fund's day-to-day business, including
placing all orders for the purchase and sale of the Fund's portfolio securities.
As of June 30, 2000, Liberty WAM managed more than $9 billion in assets.
WAM was renamed Liberty WAM on September 29, 2000 when it became a wholly-owned
subsidiary of Liberty Financial Companies, Inc. (Liberty), which in turn is a
majority owned indirect subsidiary of Liberty Mutual Insurance Company. For more
information about Liberty's acquisition of WAM, see the SAI.
For the period February 1, 1999 to December 31, 1999, the Fund paid Liberty WAM
management fees at 1.00% of the average daily net assets of the Fund.
Additional expenses are incurred under the VA contracts, VLI policies and the
Retirement Plans. These expenses are not described in this prospectus; owners of
VA contracts, VLI policies and Retirement Plan participants should consult the
contract or policy disclosure documents or Retirement Plan information regarding
these expenses.
From time to time, Liberty WAM may pay amounts from its past profits to
Participating Insurance Companies or other organizations that provide
administrative services for the Fund or that provide other services relating to
the Fund to owners of VA contracts, VLI policies and/or participants in
Retirement Plans. These services include, among other things: sub-accounting
services; answering inquiries regarding the Fund; transmitting, on behalf of the
Fund, proxy statements, shareholder reports, updated prospectuses and other
communications regarding the Fund; and such other related services as the Fund,
owners of VA contracts, VLI policies and/or participants in Retirement Plans may
request. The amount of any such payment will be determined by the nature and
extent of the services provided by the Participating Insurance Company or other
organization. Payment of such amounts by Liberty WAM will not increase the fees
paid by the Fund or its shareholders.
10
<PAGE>
PORTFOLIO MANAGERS
Liberty WAM uses a team to manage the Fund. Team members share responsibility
for providing ideas, information, and knowledge in managing the Fund, and each
team member has one or more particular areas of expertise. The portfolio
managers are responsible for making daily investment decisions, and utilize the
management team's input and advice when making buy and sell determinations.
Roger D. Edgley is a vice president of the Trust and is the co-portfolio manager
of Wanger Foreign Forty. Mr. Edgley is also a vice president of Liberty Acorn
Investment Trust, and the co-portfolio manager of Liberty Acorn Foreign Forty.
He has been director of international research at Liberty WAM and WAM since
1998, and was a principal of WAM from January 1999 to September 29, 2000. Mr.
Edgley has been a member of the international analytical team at Liberty WAM and
WAM since 1994.
Marcel P. Houtzager is a vice president of the Trust and is the lead portfolio
manager of Wanger International Small Cap and co-portfolio manager of Wanger
Foreign Forty. Mr. Houtzager is also a vice president of Liberty Acorn
Investment Trust, and the co-manager of Liberty Acorn Foreign Forty. He has been
part of the international analytical team at Liberty WAM and WAM since 1992, and
was a principal of WAM from 1995 to September 29, 2000.
MIXED AND SHARED FUNDING
As described above, the Trust serves as a funding medium for VA contracts and
VLI policies of Participating Insurance Companies and for certain Retirement
Plans, so-called mixed and shared funding. As of the date of this Prospectus,
the Participating Insurance Companies are Keyport Life Insurance Company
(Keyport), Keyport Benefit Life Insurance Company (Keyport Benefit), Aegon
Financial Services Group, Inc., SAFECO Life Insurance Company, PHL Variable Life
Insurance Company and Phoenix Home Life Mutual Insurance Company. Keyport and
Keyport Benefit are indirect wholly owned subsidiaries of Liberty Financial
Companies, Inc. (LFC). As of March 31, 2000, approximately 71.30% of the
combined voting power of LFC's outstanding voting stock was held by Liberty
Mutual Insurance Company (Liberty Mutual). The Fund may become a funding vehicle
for VA contracts or VLI policies of other Participating Insurance Companies,
including other entities not affiliated with Keyport, Keyport Benefit, LFC or
Liberty Mutual.
The interests of owners of VA contracts and VLI policies could diverge based on
differences in state regulatory requirements, changes in the tax laws or other
unanticipated developments. The Trust does not foresee any such differences or
disadvantages at this time. However, the Trustees will monitor for such
developments to identify any material irreconcilable conflicts and to determine
what action, if any, should be taken in response to such conflicts. If such a
conflict were to occur, one or more separate accounts might be required to
withdraw its investments in the Fund or shares of another Fund may be
substituted. This might force the Fund to sell securities at disadvantageous
prices.
11
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table that follows is intended to help you understand
the Fund's financial information since the Fund's inception and for the six
months ended June 30, 2000. The Fund's fiscal year runs from January 1 to
December 31. The total returns in the table represent the return that investors
earned assuming that they reinvested all dividends and distributions. Certain
information in the table reflects the financial results for a single Fund share.
The information with respect to the six month period ended June 30, 2000 is
unaudited. The information with respect to the period ended December 31, 1999 is
audited. For the period ended 1999, this information is included in the Fund's
financial statements, which have been audited by Ernst & Young LLP, independent
auditors, whose reports, along with the financial statements, are included in
the Fund's annual report, which is available upon request. The Fund's total
returns presented below do not reflect the cost of insurance and other company
separate account charges which vary with the VA contracts, VLI policies or
Retirement Plans.
WANGER FOREIGN FORTY
<TABLE>
<CAPTION>
Six months 2/1/99
ended through
6/30/00 12/31/99
(unaudited)
<S> <C> <C>
Per share operating performance:
Net asset value, beginning of period.................... $ 18.39 $ 10.00
----------- ----------
Income from Investment Operations
Net investment income (loss)(c)......................... 0.02 (0.01)
Net realized and unrealized gain on investments......... 1.84 8.40
----------- ----------
Total from investment operations........................ 1.86 8.39
Less Distributions:
Dividends from net investment income.................... -- --
Distributions from net realized gain.................... (.96) --
----------- ----------
Total distributions..................................... (.96) --
Net asset value, end of period.......................... $ 19.29 $ 18.39
=========== ==========
Total return:
Total investment return (d)............................. 9.81% 83.90%
Ratios/supplemental data:
Ratio of expenses to average net assets (a) (b)......... 1.45%* 1.59%*
Ratio of net investment loss to average net assets (b).. 0.24%* (0.10%)*
Portfolio turnover ratio................................ 114%* 91%*
Net assets at end of period............................. $11,255,489 $5,826,128
</TABLE>
*Annualized
(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects total expenses prior to the reduction of custodian fees
for cash balances the Fund maintains with the custodian ("custodian fees
paid indirectly"). This ratio net of custodian fees paid indirectly would
have been 1.45% for the period ended December 31, 1999.
(b) The Fund was reimbursed by Liberty WAM 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.
12
<PAGE>
SHAREHOLDER INFORMATION
SHAREHOLDER AND ACCOUNT POLICIES
The Fund provides Participating Insurance Companies and Retirement Plans with
information Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m.
Central time. For information, prices, literature, or to obtain information
regarding the availability of Fund shares or how Fund shares are redeemed, call
Liberty WAM at 1-800-5-WANGER (800-592-6437).
Shares of the Fund are issued and redeemed in connection with investments in and
payments under certain qualified and non-qualified VA contracts and VLI policies
issued through separate accounts of Participating Insurance Companies. Shares of
the Fund are also offered directly to certain of the following types of
qualified plans and retirement arrangements and accounts, collectively called
Retirement Plans:
. a plan described in section 401(a) of the Internal Revenue Code that
includes a trust exempt from tax under section 501(a);
. an annuity plan described in section 403(a);
. an annuity contract described in section 403(b), including a 403(b)(7)
custodial account;
. a governmental plan under section 414(d) or an eligible deferred
compensation plan under section 457(b); and
. a plan described in section 501(c)(18).
The trust or plan must be established before shares of the Fund can be purchased
by the plan. Neither the Fund nor Liberty WAM offers prototypes of these plans.
The Fund has imposed certain additional restrictions on sales to Retirement
Plans to reduce Fund expenses. To be eligible to invest in the Fund, a
Retirement Plan must be domiciled in a state in which Fund shares may be sold
without payment of a fee to the state. In most states, this policy will require
that a Retirement Plan have at least $5 million in assets and that investment
decisions are made by a Plan fiduciary rather than Plan participants in order
for the Plan to be eligible to invest. The Fund does not intend to offer shares
in states where the sale of Fund shares requires the payment of a fee. A
Retirement Plan may call Liberty WAM at 1-800-5-WANGER (800-592-6437) to
determine if it is eligible to invest.
HOW TO INVEST AND REDEEM
Shares of the Fund may not be purchased or redeemed directly by individual VA
contract owners, VLI policyholders or individual Retirement Plan participants.
VA contract owners, VLI policyholders or Retirement Plan participants should
consult the disclosure documents for their VA contract, VLI policy or the plan
documents for their Retirement Plan, for information on the availability of the
Fund as an investment vehicle for allocations under their VA contract, VLI
policy or Retirement Plan. In the case of a Participating Insurance Company
purchaser, particular purchase and redemption procedures typically are included
in an agreement between the Fund and the Participating Insurance Company. The
Fund may enter into similar agreements with Retirement Plans.
13
<PAGE>
The Participating Insurance Companies and Retirement Plans place daily orders to
purchase and redeem shares of the Fund. These orders generally reflect the net
effect of instructions they receive from holders of their VA contracts, VLI
policies and Retirement Plan participants and certain other terms of those
contracts, policies and Retirement Plans. The Trust issues and redeems shares
at net asset value without imposing any selling commission, sales load or
redemption charge. However, each VA contract and VLI policy imposes its own
charges and fees on owners of the VA contract and VLI policy and Retirement
Plans may impose such charges on participants in the Retirement Plan. Shares
generally are sold and redeemed at their net asset value next determined after
receipt of purchase or redemption requests from Participating Insurance
Companies and Retirement Plans. The right of redemption may be suspended or
payment postponed whenever permitted by applicable law and regulations.
PURCHASES
To the extent not otherwise provided in any agreement between the Trust and a
Participating Insurance Company or Retirement Plan, shares of the Fund may be
purchased by check or by wire transfer of funds. To be effective, a purchase
order must consist of the money to purchase the shares and (i) information
identifying the purchaser, in the case of a Participating Insurance Company or
Retirement Plan with which the Fund has entered into an agreement, or a
subsequent purchase by a Participating Insurance Company or Retirement Plan that
is already a Fund shareholder, or (ii) a completed purchase application, in the
case of the initial investment by a Retirement Plan with which the Fund does not
have an agreement.
REDEMPTIONS
Subject to the terms of any agreement between the Fund and any Participating
Insurance Company or Retirement Plan, shares may be redeemed by written request
or by telephone (for redemptions of $200,000 or less), with proceeds paid by
check or by wire transfer.
REDEEMING SHARES IN WRITING
A written redemption request must:
. identify the account owner;
. specify the number of shares or dollar amount to be redeemed;
. be signed on behalf of the owner by an individual or individuals authorized
to do so, and include evidence of their authority;
. if the shares to be redeemed have a value of more than $200,000, include a
signature guarantee by an eligible guarantor institution as defined in the
rules under the Securities Exchange Act of 1934 (including a bank, broker-
dealer, credit union (if authorized under state law), national securities
exchange, registered securities association, clearing agency or savings
association, but not a notary public); and include any stock certificates
representing the shares to be redeemed.
A check for the redemption proceeds will be mailed to the address of record
unless payment by wire transfer is requested.
14
<PAGE>
REDEEMING SHARES BY TELEPHONE
Unless a Retirement Plan shareholder chose on its purchase application not to
have the ability to do so, redemptions of shares having a value of $200,000 or
less may be requested by calling Liberty WAM at 1-800-5-WANGER (800-592-6437).
The Fund will not be responsible for unauthorized transactions if it follows
reasonable procedures to confirm that instructions received by telephone are
genuine, such as requesting identification information that appears on a
Retirement Plan's purchase application and requiring permission to record the
telephone call. If you are unable to reach the Fund or its transfer agent by
telephone, your redemption request would have to be placed by mail.
EXCHANGING SHARES BY TELEPHONE
To the extent not otherwise provided in an agreement between the Fund and a
Retirement Plan shareholder, a Retirement Plan may exchange shares of the Fund
for shares of another Wanger Fund by telephone by calling Liberty WAM at
1-800-5-WANGER (800-592-6437). Shares may be exchanged only between identically
registered accounts, and the shares in the new Wanger Fund must be available for
sale without payment of a fee under any applicable state securities law. Because
excessive trading can hurt Fund performance and shareholders, the Fund reserves
the right temporarily or permanently to terminate the exchange privilege of any
shareholder who makes excessive use of the exchange plan. In particular, a
pattern of exchanges that coincide with a market timing strategy may be
disruptive to the Fund. The Fund has limited the number of exchanges to no more
than four per year. The Fund will not be responsible for unauthorized
transactions if it follows reasonable procedures to confirm that instructions
received by telephone are genuine, such as requesting information that appears
on a Retirement Plan's purchase application and requiring permission to record
the telephone call.
Normally, redemption proceeds will be paid within seven days after the Fund or
its agent receives a request for redemption. Redemptions may be suspended or
the payment date postponed on days when the New York Stock Exchange (NYSE) is
closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
HOW THE FUND'S SHARE PRICE IS DETERMINED
The Fund's share price is its net asset value next determined. Net asset value
is the difference between the values of the Fund's assets and liabilities
divided by the number of shares outstanding. We determine net asset value at
the close of regular trading on the New York Stock Exchange (NYSE)--normally 4
p.m. New York time.
To calculate the net asset value on a given day, we value each stock listed or
traded on a stock exchange at its latest sale price on that day. If there are
no sales that day, we value the security at the most recently quoted bid
price. We value each over-the-counter security or National Association of
Securities Dealers Automated Quotation (Nasdaq) security as of the last sale
price for that day.
15
<PAGE>
When the price of a security is not available, including days when we determine
that the sale or bid price of the security does not reflect that security's
market value, we value the security at a fair value determined in good faith
under procedures established by the Board of Trustees.
We value a security at fair value when events have occurred after the last
available market price and before the close of the NYSE that materially affect
the security's price. In the case of foreign securities, this could include
events occurring after the close of the foreign market and before the close of
the NYSE. The Fund's foreign securities may trade on days when the NYSE is
closed. We will not price shares on days that the NYSE is closed for trading and
Participating Insurance Companies and Retirement Plans may not purchase or
redeem shares.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and distribute, as dividends or capital gains
distributions, at least annually, substantially all of its net investment income
and net profits realized from the sale of portfolio securities, if any, to its
shareholders (Participating Insurance Companies' separate accounts and
Retirement Plan participants). The net investment income of the Fund consists of
all dividends or interest received by the Fund, less expenses (including the
investment advisory fees). Income dividends will be declared and distributed
annually by the Fund. All net short-term and long-term capital gains of the
Fund, net of carry-forward losses, if any, realized during the fiscal year, are
declared and distributed periodically, no less frequently than annually. All
dividends and distributions are reinvested in additional shares of the Fund at
net asset value, as of the record date for the distributions.
TAXES
The Fund intends to qualify every year as a regulated investment company under
the Internal Revenue Code. By so qualifying, the Fund will not be subject to
federal income taxes to the extent that its net investment income and net
realized capital gains are distributed to the shareholders. The Fund also
intends to meet certain diversification requirements applicable to mutual funds
underlying variable insurance products. For more information about the tax
status of the Fund, see Taxes in the Statement of Additional Information.
For information concerning the federal tax consequences to VA contract owners,
VLI policyholders or Retirement Plan participants, see the disclosure documents
from the VA contract, VLI policy or your Retirement Plan administrator. You
should consult your tax advisor about the tax consequences of any investment.
16
<PAGE>
FOR MORE INFORMATION
--------------------
Adviser: Liberty Wanger Asset Management, L.P.
You can get more information about the Fund's investments in the Fund's semi-
annual and annual reports to shareholders. The annual report contains a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance over the last fiscal year.
You may wish to read the Fund's Statement of Additional Information (SAI) for
more information on the Fund and the securities in which it invests. The SAI is
incorporated into this prospectus by reference, which means that it is
considered to be part of this prospectus.
You can get free copies of the annual and semi-annual reports and the SAI,
request other information and discuss your questions about the Fund by writing:
Liberty Funds Distributor, Inc.
One Financial Center
Boston, MA 02111
(800) 426-3750
or by calling or writing the Participating Insurance Company which issued your
variable annuity contract or variable life insurance policy or the Retirement
Plan you participate in.
Information about the Fund (including the SAI) can be reviewed and copied at the
Public Reference Room of the Securities and Exchange Commission (SEC) in
Washington, D.C. Information on the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. Reports and other information about the Fund
are available on the EDGAR database on the SEC's Internet site at
http://www.sec.gov. Copies of this information may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
[email protected] or by writing the SEC's Public Reference Section, Washington,
D.C. 20549-0102.
Investment Company Act file number: 811-08748
17
<PAGE>
WANGER ADVISORS TRUST
One Financial Center, Boston, Massachusetts 02111
STATEMENT OF ADDITIONAL INFORMATION
Dated September 29, 2000
This Statement of Additional Information (SAI) is not a prospectus, but
provides additional information which should be read in conjunction with the
Trust's Prospectus dated September 29, 2000 and any supplement thereto. Audited
financial statements, which are contained in the Funds' December 31, 1999 Annual
Report, and unaudited interim financial statements, which are contained in the
Funds' June 30, 2000 Semiannual Report, are incorporated by reference into this
SAI. The Prospectus, Annual Report and Semiannual Report may be obtained at no
charge by calling Liberty Funds Distributor, Inc. (LFD) at (800) 426-3750, or by
contacting the applicable Participating Insurance Company, the broker-dealers
offering certain variable annuity contracts or variable life insurance policies
issued by the Participating Insurance Company, or the applicable Retirement
Plan.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
General Information and History..................................... 2
Investment Restrictions............................................. 3
Portfolio Turnover.................................................. 7
Purchases and Redemptions........................................... 7
Trustees and Officers............................................... 8
Management Arrangements............................................. 11
Trust Charges and Expenses.......................................... 13
Underwriters........................................................ 13
Code of Ethics...................................................... 14
Custodian........................................................... 14
Portfolio Transactions.............................................. 14
Net Asset Value..................................................... 20
Taxes............................................................... 20
Investment Performance.............................................. 22
Record Shareholders................................................. 25
Independent Auditors................................................ 25
Appendix A - Investment Techniques and Securities................... 26
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY
-------------------------------
Wanger Advisors Trust (the Trust) is an open-end, diversified management
investment company currently consisting of four Funds with differing investment
objectives, policies and restrictions. Currently, the Trust consists of Wanger
U.S. Small Cap Advisor (U.S. Small Cap), Wanger International Small Cap Advisor
(International Small Cap), Wanger Twenty (Wanger Twenty), and Wanger Foreign
Forty (Wanger Foreign Forty) (individually referred to as a Fund, or by the
defined name indicated, or collectively as the Funds).
U.S. Small Cap and 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 the section
entitled "Taxes" for more information.
The Trust issues shares of beneficial interest in each Fund that represent
interests in a separate portfolio of securities and other assets. The Trust is
permitted to offer separate series (Funds) and different classes of shares. The
Trust currently offers one class of shares of each Fund. Sales of shares are
made without a sales charge at each Fund's per share net asset value. The Trust
may add or delete Funds and/or classes from time to time. The Trust is the
funding vehicle for variable annuity contracts (VA contracts) and variable life
insurance policies (VLI policies) offered by the separate accounts of life
insurance companies (Participating Insurance Companies). The Trust is also the
funding vehicle for certain types of pension plans and retirement arrangements
and accounts permitting the accumulation of funds on a tax-deferred basis
(Retirement Plans).
The Trustees of the Trust (Board of Trustees or Trustees) monitor events to
identify any material conflicts that may arise between the interests of the
Participating Insurance Companies and Retirement Plans, or between the interests
of owners of VA contracts, VLI policies and Retirement Plan participants. The
Trust currently does not foresee any disadvantages to the owners of VA contracts
and VLI policies or Retirement Plan participants arising from the fact that
certain interests of owners may differ. Additional information regarding such
differing interests and related risks are described in the Prospectus under
"Mixed and Shared Funding."
The Trust was organized under an Agreement and Declaration of Trust
(Declaration of Trust) as a Massachusetts business trust on August 30, 1994.
The Declaration of Trust may be amended by a vote of either the Trust's
shareholders or the Board. The Trust is authorized to issue an unlimited number
of shares of beneficial interest without par value, in one or more series, each
with one or more classes, as the Board may authorize. Each Fund is a separate
series of the Trust.
Each share of a Fund is entitled to participate pro rata in any dividends
and other distributions declared by the Board with respect to that Fund, and all
shares of a Fund have equal rights in the event of liquidation of that Fund.
Shareholders of a Fund are entitled to one vote for each share of that Fund
held on any matter presented to shareholders. Shares of the Funds will vote
separately as individual series when required by the Investment Company Act of
1940 (the 1940 Act) or other applicable law or when the Board determines that
the matter affects only the interests of one or more Funds, such as, for
example, a proposal to approve an amendment to that Fund's Advisory Agreement,
but shares of all the Funds vote
2
<PAGE>
together, to the extent required by the 1940 Act, in the election or selection
of Trustees and independent accountants.
The shares do not have cumulative voting rights, which means that the
holders of more than 50% of the shares of the Funds voting for the election of
Trustees can elect all of the Trustees, and, in such event, the holders of the
remaining shares will not be able to elect any Trustees.
The Funds are not required by law to hold regular annual meetings of their
shareholders and do not intend to do so. However, special meetings may be
called for purposes such as electing or removing Trustees or changing
fundamental policies.
The Trust is required to hold a shareholders' meeting to elect Trustees to
fill vacancies in the event that less than a majority of Trustees were elected
by shareholders. Trustees may also be removed, with or without cause, by the
vote of two-thirds of the outstanding shares at a meeting called for that
purpose.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Trust's shareholders are the separate accounts of Participating
Insurance Companies and the Retirement Plans. However, the Trust's Declaration
of Trust disclaims liability of the shareholders, the Trustees, or officers of
the Trust for acts or obligations of the Trust, which are binding only on the
assets and property of the Trust (or the applicable Fund thereof) 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. The Declaration of
Trust provides for indemnification out of the Trust's assets (or the applicable
Fund) for all losses and expenses of any shareholder held personally liable for
the obligations of the Trust. Thus, 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
Fund of sustaining a loss on account of liabilities incurred by another Fund
also is believed to be remote.
INVESTMENT RESTRICTIONS
-----------------------
U.S. Small Cap and International Small Cap operate under the investment
restrictions listed below. Restrictions numbered 1 through 10 are fundamental
policies which may not be changed for a Fund without approval of a majority of
the outstanding voting shares of a Fund, defined as the lesser of the vote of
(a) 67% of the shares of a Fund at a meeting where more than 50% of the
outstanding shares are present in person or by proxy or (b) more than 50% of the
outstanding shares of a Fund. Other restrictions are not fundamental policies
and may be changed with respect to a Fund by the Trustees without shareholder
approval.
The following investment restrictions apply to each of U.S. Small Cap and
International Small Cap except as otherwise indicated. U.S. Small Cap and
International Small Cap each may 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;
3
<PAGE>
2. Acquire securities of any one issuer that at the time of investment
(a) represent more than 10% of the voting securities of the issuer or (b)
have a value greater than 10% of the value of the outstanding securities of
the issuer;
3. Invest more than 25% of its assets (valued at the time of investment)
in securities of companies in any one industry;
4. Make loans, but this restriction shall not prevent the Fund from (a)
buying a part of an issue of bonds, debentures, or other obligations that
are publicly distributed, or from investing up to an aggregate of 15% of
its total assets (taken at market value at the time of each purchase) in
parts of issues of bonds, debentures or other obligations of a type
privately placed with financial institutions, (b) investing in repurchase
agreements, or (c) lending portfolio securities, provided that it may not
lend securities if, as a result, the aggregate value of all securities
loaned would exceed 33% of its total assets (taken at market value at the
time of such loan);/1/
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;/2/
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.
U.S. Small Cap and International Small Cap are also subject to the
following restrictions and policies, which are not fundamental and may be
changed by the Trustees without shareholder approval. U.S. Small Cap and
International Small Cap may not:
____________________
/1/ The Funds have no present intention of lending their portfolio securities.
/2/ State insurance laws currently restrict a Fund's borrowings to facilitate
redemptions to no more than 25% of the Fund's net assets.
4
<PAGE>
(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.
Wanger Twenty and Wanger Foreign Forty operate under the investment
restrictions listed below. Restrictions numbered 1 through 11 are fundamental
policies which may not be changed for a Fund without approval of a majority of
the outstanding voting shares of a Fund, defined as the lesser of the vote of
(a) 67% of the shares of a Fund at a meeting where more than 50% of the
outstanding shares are present in person or by proxy or (b) more than 50% of the
outstanding shares of a Fund. Other restrictions are not fundamental policies
and may be changed with respect to a Fund by the Trustees without shareholder
approval.
The following investment restrictions apply to each of Wanger Twenty and
Wanger Foreign Forty except as otherwise indicated. Wanger Twenty and Wanger
Foreign Forty each may 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
5
<PAGE>
registered under the Securities Act of 1933 on the ground that the Fund
could be regarded as an underwriter as defined by that act with respect to
such resale;
8. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real
estate or interests in real estate;
9. Purchase and sell commodities or commodity contracts, except that it
may enter into (a) futures and options on futures and (b) foreign currency
contracts;
10. Make margin purchases of securities, except for use of such short-term
credits as are needed for clearance of transactions and except in
connection with transactions in options, futures, and options on futures;
11. Issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
Wanger Twenty and Wanger Foreign Forty are also subject to the following
restrictions and policies, which are not fundamental and may be changed by the
Trustees without shareholder approval. Wanger Twenty and Wanger Foreign Forty
may 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;
(c) Invest more than 15% of its net assets (valued at time of investment)
in illiquid securities, including repurchase agreements maturing in more
than seven days;
(d) Pledge, mortgage or hypothecate its assets, except as may be necessary
in connection with permitted borrowings or in connection with short sales,
options, futures, and options on futures;
(e) Make short sales of securities unless the Fund owns at least an equal
amount of such securities, or owns securities that are convertible or
exchangeable, without payment of further consideration, into at least an
equal amount of such securities;
(f) [WANGER TWENTY only] Invest more than 15% of its total assets in the
securities of foreign issuers.
(g) [WANGER FOREIGN FORTY only] Invest more than 15% of its total assets
in securities of United States issuers, under normal market conditions.
Notwithstanding the foregoing investment restrictions, any Fund may
purchase securities pursuant to the exercise of subscription rights, provided
that such purchase will not result in the Fund's ceasing to be a diversified
investment company. Japanese and European corporations frequently issue
additional capital stock by means of subscription rights offerings to existing
shareholders at a price substantially below the market price of the shares. The
failure to exercise such rights would result in a Fund's interest in the issuing
company being diluted. The market for such rights is not well developed in all
cases and, accordingly, the Fund may not always realize full value on the sale
of rights. The exception applies in cases where the limits set forth in the
investment restrictions would otherwise be exceeded by exercising rights or
would have
6
<PAGE>
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.
Each Fund is also subject to the following additional restrictions and policies
under certain applicable insurance laws pertaining to variable annuity contract
separate accounts. These policies and restrictions are not fundamental and may
be changed by the Trustees without shareholder approval:
(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.
If a percentage limit with respect to any of the foregoing fundamental and
non-fundamental policies is satisfied at the time of investment or borrowing, a
later increase or decrease in a Fund's assets will not constitute a violation of
the limit.
PORTFOLIO TURNOVER
------------------
The portfolio turnover of each Fund will vary from year to year. Although
no Fund will trade in securities for short-term profits, when circumstances
warrant securities may be sold without regard to the length of time held.
Portfolio turnover for each Fund is shown under "FINANCIAL HIGHLIGHTS" in the
Prospectus. A 100% turnover rate would occur if all of the securities in the
portfolio were sold and either repurchased or replaced within one year.
PURCHASES AND REDEMPTIONS
-------------------------
Purchases and redemptions are discussed in the Prospectus under the heading
"SHAREHOLDER INFORMATION."
Each Fund's net asset value is determined on days on which the New York
Stock Exchange (NYSE) is open for trading. The NYSE is regularly closed on
Saturdays and Sundays
7
<PAGE>
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. Net asset value will not be determined on days when the NYSE is
closed unless, in the judgment of the Trustees, the net asset value of a Fund
should be determined on any such day, in which case the determination will be
made at 4 p.m., Eastern time.
The Trust reserves the right to suspend or postpone redemptions of shares
of any Fund during any period when: (a) trading on the NYSE is restricted, as
determined by the Commission, or the NYSE is closed for other than customary
weekend and holiday closing; (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 the valuation of net assets of such Fund not
reasonably practicable.
The Trust has elected to be governed by Rule 18f-1 under the 1940 Act
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.
TRUSTEES AND OFFICERS
---------------------
The Board of Trustees of the Trust has overall management responsibility
for the Trust and the Funds. The following table sets forth certain information
with respect to the Trustees and officers of the Trust:
<TABLE>
<CAPTION>
Position(s) held Principal occupation(s)
Name, Age; Address with the Trust during past five years
------------------------ ----------------- ----------------------
<S> <C> <C>
Fred D. Hasselbring, 58; Trustee Retail industry, general project development
Four Wheaton Center, and business computer systems consultant;
Suite 416, director and executive administrator,
Wheaton, IL 60187 (3) The Malachi Corp., Inc. (a non-profit corporation)
P. Michael Phelps, 66; Trustee Retired since Jan. 31, 1998; prior thereto, vice
222 E. Chestnut Street, president and corporate secretary, Morton
Apt. 10-B, International, Inc.
Chicago, IL 60611 (2) (3)
Ralph Wanger, 66; Trustee and Director, Wanger Investment Company plc; portfolio
227 West Monroe Street, President manager, Liberty Wanger Asset Management, L.P.
Suite 3000, since July 1992; trustee and president, Liberty
Chicago, IL 60606 (1)(2)(4) Acorn Trust
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
Patricia H. Werhane, 64; Trustee Ruffin Professor of Business Ethics, Darden
104 Falcon Drive, Graduate School of Business Administration,
Charlottesville, VA 22901 (3) University of Virginia, since 1993
Roger D. Edgely, 45; Vice President Vice president, Liberty Acorn Trust; analyst,
227 West Monroe Street, Liberty Wanger Asset Management, L.P., since 1994;
Suite 3000, director of international research, Liberty Wanger
Chicago, IL 60606 Asset Management, L.P., since 1998; co-portfolio
manager, Wanger Foreign Forty since Dec. 1999;
analyst, Crosby Securities prior thereto
Marcel P. Houtzager, 39; Vice President Analyst and portfolio manager, Liberty Wanger
227 West Monroe Street, Asset Management, L.P. and WAM since 1992;
Suite 3000, principal, WAM from 1995 to September 29, 2000
Chicago, IL 60606
Kenneth A. Kalina, 41; Assistant Fund controller, Liberty Wanger Asset Management,
227 West Monroe Street, Treasurer L.P. and WAM since Sept. 1995; chief financial
Suite 3000, officer, Liberty Wanger Asset Management, L.P. and
Chicago, IL 60606 WAM since April 2000; assistant treasurer, Liberty
Acorn Trust; treasurer of the Stein Roe Mutual
Funds prior thereto
Bruce H. Lauer, 43; Vice President, Chief operating officer (since April 1995),
227 West Monroe Street, Assistant Liberty Wanger Asset Management, L.P. and WAM; vice
Suite 3000, Secretary and president, treasurer and assistant secretary,
Chicago, IL 60606 Treasurer Liberty Acorn Trust; director, Wanger Investment
Company plc and New Americas Small Cap Fund; first
vice president, investment accounting, Kemper
Financial Services, Inc. prior thereto
Charles P. McQuaid, 47; Senior Vice Director of research, Liberty Wanger Asset
227 West Monroe Street, President Management, L.P. since July 1992; principal, WAM
Suite 3000, from July 1992 to September 29, 2000; trustee and
Chicago, IL 60606 senior vice president, Liberty Acorn Trust;
co-portfolio manager, Liberty Acorn Fund
Robert A. Mohn, 39; Vice President Analyst and portfolio manager, Liberty Wanger
227 West Monroe Street, Asset Management, L.P. and WAM since Aug. 1992;
Suite 3000, principal, WAM from 1995 to September 29, 2000;
Chicago, IL 60606 vice president, Liberty Acorn Trust
John H. Park, 33; Vice President Analyst and portfolio manager, Liberty Wanger
227 West Monroe Street, Asset Management, L.P. and WAM since July 1993;
Suite 3000, principal, WAM from 1998 to September 29, 2000;
vice president, Liberty Acorn Trust
Chicago, IL 60606
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
Steven A. Radis, 38; Secretary Chief Marketing Officer and Managing Director,
227 West Monroe Street, Liberty Wanger Asset Management, L.P. and WAM, since
Suite 3000, April 1999; prior thereto, Vice President of Corporate
Chicago, IL 60606 and Marketing Communications, Zurich Kemper Life,
Jan. 1998 to March 1999, and First Vice President
Corporate Communications, Zurich Kemper Life, Jan.
1987 to Dec. 1997
Peter A. Zaldivar, 33; Vice President Analyst and portfolio manager, Liberty Wanger
227 West Monroe Street, Asset Management, L.P., since 1996; prior thereto,
Suite 3000, vice president and portfolio manager, Lord Asset
Chicago, IL 60606 Management
Leah J. Zell, 51; Vice President Analyst and portfolio manager, Liberty Wanger
227 West Monroe Street, Asset Management, L.P. and WAM, since July 1992; vice
Suite 3000, president, Liberty Acorn Trust; managing director
Chicago, IL 60606 (4) and member of trust committee, Chai Trust Company
</TABLE>
_________________________
(1) Trustee who is an "interested person" of the Trust and of Liberty Wanger
Asset Management, L.P. as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees, which is
authorized to exercise all powers of the Board with certain statutory
exceptions.
(3) Member of the Audit Committee of the Board, which makes recommendations to
the Board regarding the selection of auditors and confers with the auditors
regarding the scope and results of the audit.
(4) Mr. Wanger and Ms. Zell are married to each other.
As noted above certain Trustees and officers of the Trust also hold
positions with Liberty Wanger Asset Management, L.P. (Liberty WAM). Certain of
the Trustees and officers of the Trust are trustees or officers of Liberty Acorn
Trust, which is also managed by Liberty WAM.
10
<PAGE>
Compensation of Trustees
------------------------
The table set forth below presents certain information regarding the fees
paid to the Trustees for their services in such capacity during the year ended
December 31, 1999. The Trustees are paid an annual retainer plus an attendance
fee for each meeting of the Board or standing committee thereof attended.
Trustees do not receive any pension or retirement benefits from the Trust. No
officers of the Trust or other individuals who are affiliated with the Trust
receive any compensation from the Trust for services provided to it. None of
the Trustees received any fees from any other investment companies affiliated
with the Trust.
<TABLE>
<CAPTION>
Aggregate Aggregate Aggregate Aggregate
Comp. Comp. Comp. from Comp. from Total
from U.S. from Int. Wanger Wanger Comp.
Name Of Trustee Small Cap Small Cap Twenty+ Foreign Forty+ Fund 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.
* Mr. McQuaid was a trustee of the Trust until the date of this SAI.
MANAGEMENT ARRANGEMENTS
-----------------------
Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset
Management, L.P.), serves as the investment advisor for the Funds and for other
institutional accounts. As of June 30, 2000, Liberty WAM had approximately $9
billion under management, including the Funds. Liberty WAM changed its name from
Wanger Asset Management, L.P., (WAM) to its current name on September 29, 2000
when it became a wholly-owned subsidiary of Liberty Financial Companies, Inc.
(LFC). Liberty WAM has advised and managed mutual funds, including the Funds,
since 1992.
As of June 9, 2000, WAM, Wanger Asset Management, Ltd. (WAM's former
general partner), LFC and WAM Acquisition L.P. (Liberty Sub) entered into an
Agreement and Plan of Merger pursuant to which WAM became a wholly owned
subsidiary of LFC. Under the Merger Agreement, Liberty Sub merged with and into
WAM. WAM, the surviving entity, was renamed "Liberty Wanger Asset Management,
L.P." WAM, under its new name Liberty WAM, continues to be each Fund's
investment adviser. The portfolio managers who have managed the Funds continue
to manage the Funds after the Merger, following the same investment strategies
and objectives currently in place.
WAM has entered into employment agreements with each of the former
principals of WAM, including the portfolio managers of each of the Funds.
Pursuant to the terms of the employment agreements, these individuals have
agreed to remain employees of Liberty WAM until December 31, 2005. The
employment agreement of each of the portfolio managers includes an agreement by
each of them that they will not, through December 31, 2005 (with certain
exceptions) participate in any other investment management business, or solicit
any Liberty WAM client or employee to end their relationship with Liberty WAM.
11
<PAGE>
Liberty WAM, at its own expense, provides office space, facilities and
supplies, equipment and personnel for the performance of its functions under
each Fund's Advisory Agreement and pays all compensation of the Trustees,
officers and employees who are employees of Liberty WAM.
Each Fund's Advisory Agreement provides that neither Liberty WAM nor any of
its directors, officers, stockholders (or partners of stockholders), agents, or
employees shall have any liability to the Trust or any shareholder of the Fund
for any error or judgment, mistake of law or any loss arising out of any
investment, or for any other act or omission in the performance by Liberty WAM
of its duties under the Advisory Agreement, except for liability resulting from
willful misfeasance, bad faith or gross negligence on the part of Liberty WAM in
the performance of its duties or from reckless disregard by Liberty WAM of its
obligations and duties under the Advisory Agreement.
Under the Fund's transfer agency and shareholder servicing agreement, the
Funds pay Liberty Funds Services, Inc. (LFS) a monthly fee based on specified
transactions on a per account basis.
12
<PAGE>
TRUST CHARGES AND EXPENSES
--------------------------
Management Fees:
----------------
Each Fund pays Liberty WAM an annual advisory fee based on the following
schedule. Fees are computed and accrued daily and paid monthly. During each
year in the three-year period ended December 31, 1999, pursuant to the Advisory
Agreements, each Fund paid Liberty WAM management fees as follows:
<TABLE>
<CAPTION>
Annual Fee Rate
(as a percent of average net
----------------------------
1999 1998 1997 assets)
---- ---- ---- -------
<S> <C> <C> <C> <C>
U.S. Small Cap $3,172,578 $2,972,442 $1,960,795 First $100 million: 1.00%
$100 million to $250 mill: 0.95%
In excess of $250 million: 0.90%
International Small Cap 2,231,975 1,751,136 1,528,703 First $100 million: 1.30%
$100 million to $250 mill: 1.20%
In excess of $250 million: 1.10%
Wanger Twenty -- -- 0.95% on all assets
Gross advisory fee $ 35,044
Exp. Reimb. (26,027)
----------
Net advisory fee 9,017
Wanger Foreign Forty -- -- 1.00% on all assets
Gross advisory fee $ 19,994
Exp. Reimb. (37,004)
----------
Net advisory fee (17,010)
</TABLE>
Expense Limitation:
-------------------
Liberty WAM has agreed to reimburse all expenses, including management
fees, but excluding interest, taxes, 12b-1, brokerage and extraordinary expenses
of the Funds as follows:
Fund Expenses Exceeding
---- ------------------
U.S. Small Cap 2.00% of average net assets
International Small Cap 2.00% of average net assets
Wanger Twenty 1.35% of average net assets
Wanger Foreign Forty 1.45% of average net assets
Each of the above expense limitations will terminate on September 30, 2002.
UNDERWRITERS
------------
LFD, One Financial Center, Boston, MA 02111, serves as the principal
underwriter of the Trust. LFD, is a subsidiary of LFC. The Underwriting
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 Underwriting Agreement or interested persons
of any such party. Shares of the Funds are offered for sale through LFD on a
best efforts basis without any sales commission or charges to the Funds or Life
Companies or Retirement Plans purchasing Fund
13
<PAGE>
shares. However, each VA contract and VLI policy imposes its own charges and
fees on owners of VA contracts and VLI policies, and Retirement Plans and may
impose such charges on participants in a Retirement Plan.
CODES OF ETHICS
---------------
The Funds, Liberty WAM and LFD have adopted Codes of Ethics pursuant to the
requirements of the Act. These Codes of Ethics permit personnel subject to the
Codes to invest in securities, including securities that may be purchased or
held by the Funds.
CUSTODIAN
---------
State Street Bank and Trust Company (the Bank), 225 Franklin Street,
Boston, Massachusetts 02110, is the custodian for the Trust. It is responsible
for holding all securities and cash of each Fund, receiving and paying for
securities purchased, delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering expenses of the
Trust, and performing other administrative duties, all as directed by authorized
persons. The Bank 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. Portfolio securities purchased in the U.S. are
maintained in the custody of the Bank or other domestic banks or depositories.
Portfolio securities purchased outside of the U.S. are maintained in the custody
of foreign banks and trust companies who are members of the Bank's Global
Custody Network and foreign depositories (foreign sub-custodians).
With respect to foreign sub-custodians, there can be no assurance that a
Fund, and the value of its shares, will not be adversely affected by acts of
foreign governments, financial or operational difficulties of the foreign sub-
custodians, difficulties and costs of obtaining jurisdiction over, or enforcing
judgments against, the foreign sub-custodians or application of foreign law to a
Fund's foreign subcustodial arrangements. Accordingly, an investor should
recognize that the noninvestment risks involved in holding assets abroad are
greater than those associated with investing in the U.S.
The Funds may invest in obligations of the Bank and may purchase or sell
securities from or to the Bank.
PORTFOLIO TRANSACTIONS
----------------------
Liberty Wanger Asset Management, L.P. (Liberty WAM) places the orders for
the purchase and sale of portfolio securities and options and futures contracts
for the Funds. Liberty WAM's overriding objective in selecting brokers and
dealers to effect portfolio transactions is to seek the best combination of net
price and execution. The best net price, giving effect to brokerage
commissions, if any, is an important factor in this decision; however, a number
of other judgmental factors may also enter into the decision. These factors
include Liberty WAM's knowledge of negotiated commission rates currently
available and other current transaction costs; the nature of the security being
purchased or sold; the size of the transaction; the desired timing of the
transaction; the activity existing and expected in the market for the particular
security; confidentiality; the execution, clearance and settlement capabilities
of the broker or dealer selected and others considered; Liberty WAM's knowledge
of the financial condition of the broker or dealer selected and such other
brokers and dealers; and Liberty WAM's knowledge of actual or apparent operation
problems of any broker or dealer.
14
<PAGE>
Recognizing the value of these factors, Liberty WAM may cause a Fund to pay
a brokerage commission in excess of that which another broker may have charged
for effecting the same transaction. Liberty WAM has established internal
policies for the guidance of its trading personnel, specifying minimum and
maximum commissions to be paid for various types and sizes of transactions
effected for the Funds. Liberty WAM has discretion for all trades of the Funds.
Transactions which vary from the guidelines are subject to periodic supervisory
review. These guidelines are reviewed and periodically adjusted, and the
general level of brokerage commissions paid is periodically reviewed by Liberty
WAM. Evaluations of the reasonableness of brokerage commissions, based on the
factors described in the preceding paragraph, are made by Liberty WAM's trading
personnel while effecting portfolio transactions. The general level of
brokerage commissions paid is reviewed by Liberty WAM, and reports are made
annually to the Board of Trustees.
Liberty WAM maintains and periodically updates a list of approved brokers
and dealers which, in Liberty WAM's judgment, are generally capable of providing
best price and execution and are financially stable. Liberty WAM's traders are
directed to use only brokers and dealers on the approved list.
Beginning October 2002, Liberty WAM may place certain trades for the Funds
through its affiliate AlphaTrade, Inc. (ATI), pursuant to procedures adopted by
the Board of Trustees. ATI is a wholly owned subsidiary of Colonial Management
Associates, Inc. ATI is a fully disclosed introducing broker that limits its
activities to electronic execution of transactions in listed equity securities.
The Funds will pay ATI a commission for these transactions. The Funds have
adopted procedures consistent with Investment Company Act Rule 17e-1 governing
such transactions.
CONSISTENT WITH THE RULES OF FAIR PRACTICE OF THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC. AND SUBJECT TO SEEKING BEST COMBINATION OF NET PRICE
AND EXECUTION AND SUCH OTHER POLICIES AS THE TRUSTEES OF THE FUNDS MAY
DETERMINE, LIBERTY WAM MAY CONSIDER SALES OF SHARES OF EACH OF THE FUNDS AS A
FACTOR IN THE SELECTION OF BROKER-DEALERS TO EXECUTE SUCH MUTUAL FUND SECURITIES
TRANSACTIONS.
INVESTMENT RESEARCH PRODUCTS AND SERVICES FURNISHED BY BROKERS AND DEALERS
--------------------------------------------------------------------------
Liberty WAM engages in the long-standing practice in the money management
industry of acquiring research and brokerage products and services ("research
products") from broker-dealer firms in return for directing trades for the Funds
to those firms. In effect, Liberty WAM is using the commission dollars
generated from the Funds to pay for these research products. The money
management industry uses the term "soft dollars" to refer to this industry
practice.
Liberty WAM has a duty to seek the best combination of net price and
execution. Liberty WAM faces a potential conflict of interest with this duty
when it uses Fund trades to obtain soft dollar products. This conflict exists
because Liberty WAM is able to use the soft dollar products in managing its
Funds without paying cash ("hard dollars") for the product. This reduces
Liberty WAM's expenses.
Moreover, under a provision of the federal securities laws applicable to
soft dollars, Liberty WAM is not required to use the soft dollar product in
managing those accounts that generate the trade. Thus, the Funds that generate
the brokerage commission used to acquire the soft dollar product may not benefit
directly from that product. In effect, those Funds are cross subsidizing
Liberty WAM's management of the other Funds that do benefit directly from the
15
<PAGE>
product. This practice is explicitly sanctioned by a provision of the
Securities Exchange Act of 1934, which creates a "safe harbor" for soft dollar
transactions conducted in a specified manner. Although it is inherently
difficult if not impossible to document, Liberty WAM believes that over time
most, if not all, Funds benefit from soft dollar products such that cross
subsidizations even out.
Liberty WAM attempts to reduce or eliminate this conflict by directing Fund
trades for soft dollar products only if Liberty WAM concludes that the broker-
dealer supplying the product is capable of providing a combination of the best
net price and execution on the trade. As noted above, the best net price, while
significant, is one of a number of judgmental factors Liberty WAM considers in
determining whether a particular broker is capable of providing the best net
price and execution. Liberty WAM may cause a Fund to pay a brokerage commission
in a soft dollar trade in excess of that which another broker-dealer might have
charged for the same transaction.
Liberty WAM acquires two types of soft dollar research products: (i)
proprietary research created by the broker-dealer firm executing the trade and
(ii) other products created by third parties that are supplied to Liberty WAM
through the broker-dealer firm executing the trade.
Proprietary research consists primarily of traditional research reports,
recommendations and similar materials produced by the in house research staffs
of broker-dealer firms. This research includes evaluations and recommendations
of specific companies or industry groups, as well as analyses of general
economic and market conditions and trends, market data, contacts and other
related information and assistance. Liberty WAM's research analysts
periodically rate the quality of proprietary research produced by various
broker-dealer firms. Based on these evaluations, Liberty WAM develops target
levels of commission dollars on a firm-by-firm basis. Liberty WAM attempts to
direct trades to each firm to meet these targets.
Liberty WAM also uses soft dollars to acquire products created by third
parties that are supplied to Liberty WAM through broker-dealers executing the
trade (or other broker-dealers who "step in" to a transaction and receive a
portion of the brokerage commission for the trade). These products include the
following:
. Database Services--comprehensive databases containing current and/or
-----------------
historical information on companies and industries. Examples include
historical securities prices, earnings estimates, and SEC filings. These
services may include software tools that allow the user to search the
database or to prepare value-added analyses related to the investment process
(such as forecasts and models used in the portfolio management process).
. Quotation/Trading/News Systems--products that provide real time market data
------------------------------
information, such as pricing of individual securities and information on
current trading, as well as a variety of news services.
. Economic Data/Forecasting Tools--various macro economic forecasting tools,
-------------------------------
such as economic data and economic and political forecasts for various
countries or regions.
. Quantitative/Technical Analysis--software tools that assist in quantitative
-------------------------------
and technical analysis of investment data.
. Fundamental Industry Analysis--industry-specific fundamental investment
-----------------------------
research.
16
<PAGE>
. Other Specialized Tools--other specialized products, such as specialized
-----------------------
economic consulting analyses and attendance at investment oriented
conferences.
Many third-party products include computer software or on-line data feeds.
Certain products also include computer hardware necessary to use the product.
Certain of these third party services may be available directly from the
vendor on a hard dollar basis. Others are available only through broker-dealer
firms for soft dollars. Liberty WAM evaluates each product to determine a cash
("hard dollars") value of the product to Liberty WAM. Liberty WAM then on a
product-by-product basis targets commission dollars in an amount equal to a
specified multiple of the hard dollar value to the broker-dealer that supplies
the product to Liberty WAM. In general, these multiples range from 1.25 to 1.85
times the hard dollar value. Liberty WAM attempts to direct trades to each firm
to meet these targets. (For example, if the multiple is 1.5:1.0, assuming a hard
dollar value of $10,000, Liberty WAM will target to the broker-dealer providing
the product trades generating $15,000 in total commissions.)
The targets that Liberty WAM establishes for both proprietary and for third
party research products typically will reflect discussions that Liberty WAM has
with the broker-dealer providing the product regarding the level of commissions
it expects to receive for the product. However, these targets are not binding
commitments, and Liberty WAM does not agree to direct a minimum amount of
commissions to any broker-dealer for soft dollar products. In setting these
targets, Liberty WAM makes a determination that the value of the product is
reasonably commensurate with the cost of acquiring it. These targets are
established on a calendar year basis. Liberty WAM will receive the product
whether or not commissions directed to the applicable broker-dealer are less
than, equal to or in excess of the target. Liberty WAM generally will carry
over target shortages and excesses to the next year's target. Liberty WAM
believes that this practice reduces the conflicts of interest associated with
soft dollar transactions, since Liberty WAM can meet the non-binding
expectations of broker-dealers providing soft dollar products over flexible time
periods. In the case of third party products, the third party is paid by the
broker-dealer and not by Liberty WAM. Liberty WAM may enter into a contract
with the third party vendor to use the product. (For example, if the product
includes software, Liberty WAM will enter into a license to use the software
from the vendor.)
In certain cases, Liberty WAM may use soft dollars to obtain products that
have both research and non-research purposes. Examples of non-research uses are
administrative and marketing functions. These are referred to as "mixed use"
products. In each case, Liberty WAM makes a good faith evaluation of the
research and non-research uses of these services. These evaluations are based
upon the time spent by Firm personnel for research and non-research uses.
Liberty WAM pays the provider in cash ("hard dollars") for the non-research
portion of its use of these products.
Consistent with industry practice, Liberty WAM does not require that the
Fund that generates the trade receive any benefit from the soft dollar product
obtained through the trade. As noted above, this may result in cross
subsidization of soft dollar products among Funds. As noted therein, this
practice is explicitly sanctioned by a provision of the Securities Exchange Act
of 1934, which creates a "safe harbor" for soft dollar transactions conducted in
a specified manner.
In certain cases, Liberty WAM will direct a trade to one broker-dealer with
the instruction that it execute the trade and pay over a portion of the
commission from the trade to another
17
<PAGE>
broker-dealer who provides Liberty WAM with a soft dollar research product. The
broker-dealer executing the trade "steps out" of a portion of the commission in
favor of the other broker-dealer providing the soft dollar product. Liberty WAM
may engage in step out transactions in order to direct soft dollar commissions
to a broker-dealer which provides research but may not be able to provide best
execution. Brokers who receive step out commissions typically are brokers
providing a third party soft dollar product that is not available on a hard
dollars basis. Liberty WAM has not engaged in step out transactions as a manner
of compensating broker-dealers that sell shares of investment companies managed
by Liberty WAM.
As stated above, Liberty WAM's overriding objective in effecting portfolio
transactions for the Funds is to seek to obtain the best combination of price
and execution. However, consistent with the provisions of the Rules of Conduct
of the National Association of Securities Dealers, Inc., Liberty WAM may, in
selecting broker-dealers to effect portfolio transactions for the Funds, and
where more than one broker-dealer is believed capable of providing the best
combination of net price and execution with respect to a particular transaction,
select a broker-dealer in recognition of its sales of VA contracts or VLI
policies offered by Participating Insurance Companies, or sales of Fund shares
to Retirement Plans. Except as described in the next following sentence,
neither the Trust nor any Fund nor Liberty WAM has entered into any agreement
with, or made any commitment to, any unaffiliated broker-dealer which would bind
Liberty WAM, the Trust or any Fund to compensate any such broker-dealer,
directly or indirectly, for sales of VA contracts or VLI policies. Liberty WAM
has entered into arrangements with sponsors of programs for the sale of VA
contracts or VLI policies issued by Participating Insurance Companies which are
not affiliates of Liberty WAM pursuant to which Liberty WAM pays the sponsor
from Liberty WAM's fee for managing the Funds an amount in respect of the Funds'
assets allocable to the Fund shares held in separate accounts of such
unaffiliated Participating Insurance Companies in respect of VA contracts issued
by such entities and sold through such arrangements. Liberty WAM does not cause
the Trust or any Fund to pay brokerage commissions higher than those obtainable
from other broker-dealers in recognition of such sales of VA contracts or VLI
policies.
The Trust's purchases and sales of securities not traded on securities
exchanges generally are placed by Liberty WAM with market makers for these
securities on a net basis, without any brokerage commissions being paid by the
Trust. Net trading does involve, however, transaction
18
<PAGE>
costs. Included in prices paid to underwriters of portfolio securities is the
spread between the price paid by the underwriter to the issuer and the price
paid by the purchasers. Each Fund's purchases and sales of portfolio securities
in the over-the-counter market usually are transacted with a broker-dealer on a
net basis without any brokerage commission being paid by such Fund, but do
reflect the spread between the bid and asked prices. Liberty WAM may also
transact purchases of some portfolio securities directly with the issuers.
With respect to a Fund's purchases and sales of portfolio securities
transacted with a broker or dealer on a net basis, Liberty WAM may also consider
the part, if any, played by the broker or dealer in bringing the security
involved to Liberty WAM's attention, including investment research related to
the security and provided to the Fund.
The table below shows information on brokerage commissions paid by each of
the Funds during the periods indicated.
<TABLE>
<CAPTION>
U.S. International Wanger Wanger
Small Cap Small Cap Twenty Foreign Forty
--------- ------------- ------ -------------
<S> <C> <C> <C> <C>
Total brokerage commissions paid
during 1999........................ $208,460 $787,215 $15,056 $14,569
Total brokerage commissions paid
during 1998........................ 253,172 518,766 N/A N/A
Total brokerage commissions paid
during 1997........................ 249,054 647,529 N/A N/A
</TABLE>
The increase in the commissions paid by 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.
19
<PAGE>
NET ASSET VALUE
---------------
The net asset value of the shares of each of the Funds is determined by
dividing the total assets of each Fund, less all liabilities (including accrued
expenses), by the total number of shares outstanding.
The proceeds received by each Fund for each purchase or sale of its shares,
and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Fund, and constitute
the underlying assets of that Fund. The underlying assets of each Fund will be
segregated on the books of account, and will be charged with the liabilities in
respect to such Fund and with a share of the general liabilities of the Trust.
TAXES
-----
Each Fund has elected to be treated and to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986
(Code). As a result of such election, for any tax year in which a Fund meets
the investment limitations and the distribution, diversification and other
requirements referred to below, that Fund will not be subject to federal income
tax, and the income of the Fund will be treated as the income of its
shareholders. Under current law, since the shareholders are life insurance
company "segregated asset accounts," they will not be subject to income tax
currently on this income to the extent such income is applied to increase the
values of VA contracts and VLI policies.
Among the conditions for qualification and avoidance of taxation at the
Trust level, Subchapter M imposes investment limitations, distribution
requirements, and requirements relating to the diversification of investments.
The requirements of Subchapter M may affect the investments made by each Fund.
Any of the applicable diversification requirements could require a sale of
assets of a Fund that would affect the net asset value of the Fund.
Pursuant to the requirements of Section 817(h) of the Code, the only
shareholders of the Trust and its Funds will be Participating Insurance
Companies and their separate accounts that fund VA contracts, VLI policies and
other variable insurance contracts, and certain Retirement Plans, which are
pension plans and retirement arrangements and accounts permitting the
accumulation of funds on a tax-deferred basis. The prospectus that describes a
particular VA contract or VLI policy discusses the taxation of both separate
accounts and the owner of such contract or policy. The plan documents
(including the summary plan description) for the Retirement Plan discusses the
taxation of Retirement Plans and the participants therein.
Each Fund intends to comply with the requirements of Section 817(h) and the
related regulations issued thereunder by the Treasury Department. These
provisions impose certain diversification requirements affecting the securities
in which the Funds may invest and other limitations. The diversification
requirements of Section 817(h) of the Code are in addition to the
diversification requirements under Subchapter M and the Investment Company Act
of 1940. The consequences of failure to meet the requirements of Section 817(h)
could result in taxation of the Participating Insurance Companies offering the
VA contracts and VLI policies and immediate taxation of all owners of the
contracts and policies to the extent of appreciation on investment under the
contracts. The Trust believes it is in compliance with these requirements.
The Secretary of the Treasury may issue additional rulings or regulations
that will prescribe the circumstances in which control of the investments of a
segregated asset account by an owner of a variable insurance contract may cause
such owner, rather than the insurance company,
20
<PAGE>
to be treated as the owner of the assets of a segregated asset account. It is
expected that such regulations would have prospective application. However, if a
ruling or regulation were not considered to set forth a new position, the ruling
or regulation could have retroactive effect.
The Trust therefore may find it necessary, and reserves the right to take
action to assure, that a VA contract or VLI policy continues to qualify as an
annuity or insurance contract under federal tax laws. The Trust, for example,
may be required to alter the investment objectives of any Fund or substitute the
shares of one Fund for those of another. No such change of investment
objectives or substitution of securities will take place without notice to the
contract and policy owners with interests invested in the affected Fund and
without prior approval of the Securities and Exchange Commission, or the
approval of a majority of such owners, to the extent legally required.
To the extent a Fund invests in foreign securities, investment income
received by the Fund from sources within foreign countries may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries which entitle a Fund to a reduced rate
of tax or exemption from tax on such income. Gains and losses from foreign
currency dispositions, foreign-currency denominated debt securities and payables
or receivables, and foreign currency forward contracts are subject to special
tax rules that generally cause them to be recharacterized as ordinary income and
losses, and may affect the timing and amount of the Fund's recognition of
income, gain or loss.
It is impossible to determine the effective rate of foreign tax in advance
since the amount of a Fund's assets, if any, to be invested within various
countries will fluctuate and the extent to which tax refunds will be recovered
is uncertain. The Funds intend to operate so as to qualify for treaty-reduced
tax rates where applicable.
The Funds will not be subject to the 4% federal excise tax imposed on
regulated investment companies that do not distribute substantially all their
income and gains each calendar year because that tax does not apply to a
regulated investment company whose only shareholders are segregated asset
accounts of life insurance companies held in connection with VA contracts, VLI
policies and/or Retirement Plans.
The preceding is a brief summary of some relevant tax considerations. This
discussion is not intended as a complete explanation or a substitute for careful
tax planning and consultation with individual tax advisors.
21
<PAGE>
INVESTMENT PERFORMANCE
----------------------
Each of the Funds may quote total return figures from time to time. Total
return on a per share basis is the amount of dividends received per share plus
or minus the change in the net asset value per share for a given period. Total
return percentage may be calculated by dividing the value of a share at the end
of a given period by the value of the share at the beginning of the period and
subtracting one.
Average Annual Total Return is computed as follows:
ERV = P(1+T)/n/
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the end
of the period (or fractional portion).
For example, for a $1,000 investment in the Funds shares, the "Total
Return," the "Total Return Percentage," and the "Average Annual Total Return"
for the following periods ended December 31, 1999 were:
<TABLE>
<CAPTION>
TOTAL TOTAL RETURN AVERAGE ANNUAL
FUND RETURN PERCENTAGE TOTAL RETURN
---- ------ ---------- ------------
<S> <C> <C> <C>
U.S. Small Cap
1 year $1,250.60 25.06% 25.06%
3 year $1,758.90 75.89% 20.71%
Life of Fund (inception 5/3/95) $2,890.90 199.09% 26.44%
International Small Cap
1 year $2,263.70 126.37% 126.37%
3 year $2,594.90 159.49% 37.42%
Life of Fund (inception 5/3/95) $4,607.20 360.72% 38.70%
Wanger Twenty
Life of Fund (inception 2/1/99) $1,343.00 34.30% N/A
Wanger Foreign Forty
Life of Fund (inception 2/1/99) $1,839.00 83.90% N/A
</TABLE>
The figures contained in this "Investment Performance" section assume
reinvestment of all dividends and distributions. They are not necessarily
indicative of future results. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and operating
expenses. Although information such as that shown above 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. The Funds'
total returns do not reflect the cost of insurance and other insurance company
separate account charges which vary with the VA contracts and VLI policies
offered through the separate accounts of the Participating Insurance Companies,
or expenses imposed by Retirement Plans.
In advertising and sales literature, a Fund may compare its performance
with that of other mutual funds, indexes or averages of other mutual funds,
indexes of related financial assets or
22
<PAGE>
data, and other competing investment and deposit products available from or
through other financial institutions. The composition of these indexes or
averages differs from that of the Funds. Any comparison of a Fund to an
alternative investment should consider differences in features and expected
performance.
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.
23
<PAGE>
As of December 31, 1999, some statistics for the Funds are as follows:
R/2/ Beta Alpha
---- ---- -----
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%
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 Liberty 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 and 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.
24
<PAGE>
RECORD SHAREHOLDERS
-------------------
All the shares of the Funds are held of record by sub-accounts of separate
accounts of Participating Insurance Companies on behalf of the owners of VLI
policies and VA contracts, or by Retirement Plans on behalf of the participants
therein. At all meetings of shareholders of the Funds each Participating
Insurance Company will vote the shares held of record by sub-accounts of its
separate accounts only in accordance with the instructions received from the VLI
policy and VA contract owners on behalf of whom such shares are held, and each
Retirement Plan will vote the shares held of record by participants in the
Retirement Plans only in accordance with the instructions received from the
participants on behalf of whom such shares are held. All such shares as to which
no instructions are received will be voted in the same proportion as shares as
to which instructions are received. Accordingly, each Participating Insurance
Company disclaims beneficial ownership of the shares of the Funds held of record
by the sub-accounts of its separate accounts, and each Retirement Plan disclaims
beneficial ownership of the shares of the Funds held of record by its
participants.
At August 31, 2000, the trustees and officers as a group owned beneficially
less than 1% of the outstanding shares of U.S. Small Cap and International Small
Cap. At August 31, 2000, the trustees and officers as a group owned beneficially
13.3% of the outstanding shares of Wanger Twenty and 16.7% 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 approximately 85.01% of the outstanding
shares of International Small Cap, approximately 88.63% of the outstanding
shares of U.S. Small Cap, approximately 96.54% of the outstanding shares of
Wanger Twenty and approximately 94.73% of the outstanding shares of Wanger
Foreign Forty all of which are beneficially owned by Variable Contract owners.
At August 31, 2000, IDS Life Insurance Company, 1IT, IDS Tower 10, T11/229,
Minneapolis, Minnesota 55440, was the record holder of approximately 6.12% of
the outstanding shares of U.S. Small Cap and approximately 12.08% of the
outstanding shares of International Small Cap. At August 31, 2000, Charles P.
McQuaid, 227 West Monroe Street, Suite 3000, Chicago, IL 60606, was the
beneficial owner of approximately 6.10% of the outstanding shares of Wanger
Foreign Forty*.
*As trustee of WAM employees' profit sharing plan, Charles McQuaid has
beneficial interest by virtue of having voting discretion over all shares held
in the plan. Of the shares, Charles McQuaid has economic beneficial interest in
1,891.533 shares of International Small Cap. These percentages also include
shares held under variable insurance contracts owned by Mr. McQuaid and
Mr. Wanger, which shares are also reported under the names of the contract
issuers.
INDEPENDENT AUDITORS
--------------------
The independent auditors for the Funds are Ernst & Young LLP, 233 South
Wacker Drive, Chicago, Illinois 60606. The independent auditors audit and
report on the annual financial statements and provide tax return review services
and assistance and consultation in connection with the review of various SEC
filings. The financial statements of the Trust and reports of independent
auditors appearing in the December 31, 1999, annual report of the Trust are
incorporated in this SAI by reference.
25
<PAGE>
APPENDIX A
----------
INVESTMENT TECHNIQUES AND SECURITIES
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 1940 Act 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 in "Investment
Restrictions") and Section 817(h) of the Code (see "Taxes").
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 1940 Act.
FOREIGN SECURITIES
Each Fund may invest in foreign securities, which may entail a greater
degree of risk (including risks relating to exchange rate fluctuations, tax
provisions, or expropriation of assets) than does investment in securities of
domestic issuers. Under normal market conditions, Wanger Foreign Forty invests
at least 85% of its total assets, and International Small Cap invests at least
65% of its total assets, in each case taken at market value, in foreign
securities; Wanger Twenty's investments in foreign securities are limited to not
more than 15% of its total assets. U.S. Small
26
<PAGE>
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 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
27
<PAGE>
the yen-denominated stock will fall. (See discussion of transaction hedging and
portfolio hedging under "Currency Exchange Transactions," below.)
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward foreign
currency exchange contracts involve risks and opportunities not typically
associated with investing in U.S. securities. These considerations include:
fluctuations in exchange rates of foreign currencies; possible imposition of
exchange control regulation or currency restrictions that would prevent cash
from being brought back to the United States; less public information with
respect to issuers of securities; less governmental supervision of stock
exchanges, securities brokers, and issuers of securities; lack of uniform
accounting, auditing, and financial reporting standards; lack of uniform
settlement periods and trading practices; less liquidity and frequently greater
price volatility in foreign markets than in the United States; possible
imposition of foreign taxes; possible investment in securities of companies in
developing as well as developed countries; and sometimes less advantageous
legal, operational, and financial protections applicable to foreign subcustodial
arrangements. In addition, the costs of investing in foreign securities are
higher than the costs of investing in U.S. securities.
Although the Funds try to invest in companies and governments of countries
having stable political environments, there is the possibility of expropriation
or confiscatory taxation, seizure, or nationalization of foreign bank deposits
or other assets, establishment of exchange controls, the adoption of foreign
government restrictions, or other adverse political, social, or diplomatic
developments that could affect investment in these nations.
CURRENCY EXCHANGE TRANSACTIONS
Each of the Funds may engage in currency exchange transactions to protect
against uncertainty in the level of future currency exchange rates. The Funds
may purchase foreign currencies on a spot or forward basis in conjunction with
their investments in foreign securities and to hedge against fluctuations in
foreign currencies. The Funds also may buy and sell currency futures contracts
and options thereon for such hedging purposes.
A Fund may engage in both "transaction hedging" and "position hedging."
When it engages in transaction hedging, a Fund enters into foreign currency
transactions with respect to specific receivables or payables of the Fund
generally arising in connection with purchases or sales of its portfolio
securities. A Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging a Fund attempts to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payments is declared, and the date on which such payments are made or
received.
A Fund may purchase or sell a foreign currency on a spot (or cash) basis at
the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. A Fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and (if the Fund is so authorized) purchase and sell
foreign currency futures contracts.
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For transaction hedging purposes a Fund which is so authorized may also
purchase exchange-listed and over-the-counter call and put options on foreign
currency futures contracts and on foreign currencies. Over-the-counter options
are considered to be illiquid by the SEC staff. A put option on a futures
contract gives the Fund the right to assume a short position in the futures
contract until expiration of the option. A put option on a currency gives the
Fund the right to sell a currency at an exercise price until the expiration of
the option. A call option on a futures contract gives the Fund the right to
assume a long position in the futures contract until the expiration of the
option. A call option on a currency gives the Fund the right to purchase a
currency at the exercise price until the expiration of the option.
When it engages in position hedging, a Fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the Fund expects to purchase, when
the Fund holds cash or short-term investments). In connection with position
hedging, a Fund which is so authorized may purchase put or call options on
foreign currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. A Fund may enter into short
sales of a foreign currency to hedge a position in a security denominated in
that currency. In such circumstances, the Fund will maintain in a segregated
account with its Custodian an amount of cash or liquid debt securities equal to
the excess of (i) the amount of foreign currency required to cover such short
sale position over (ii) the amount of such foreign currency which could then be
realized through the sale of the foreign securities denominated in the currency
subject to the hedge.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for a Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the Fund is obligated to deliver and if a decision is made
to sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which the Fund can achieve at
some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
value of such currency.
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
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money market position by (a) purchasing a money market instrument denominated in
one currency (generally U.S. dollars) and (b) concurrently entering into a
forward contract to deliver a corresponding amount of that currency in exchange
for a different currency on a future date and at a specified rate of exchange.
For example, a synthetic money market position in Japanese yen could be
constructed by purchasing a U.S. dollar money market instrument and entering
concurrently into a forward contract to deliver a corresponding amount of U.S.
dollars in exchange for Japanese yen on a specified date and at a specified rate
of exchange. Because of the availability of a variety of highly liquid short-
term U.S. dollar money market instruments, a synthetic money market position
utilizing such U.S. dollar instruments may offer greater liquidity than direct
investment in foreign money market instruments. The results of a direct
investment in a foreign currency and a concurrent construction of a synthetic
position in such foreign currency, in terms of both income yield and gain or
loss from changes in currency exchange rates, in general should be similar, but
would not be identical, because the components of the alternative investments
would not be identical. Except to the extent a synthetic foreign money market
position consists of a money market instrument denominated in a foreign
currency, the synthetic foreign money market position shall not be deemed a
"foreign security" for purposes of the policies that, under normal conditions,
U.S. Small Cap will 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, 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, FUTURES AND OTHER DERIVATIVES
Each Fund may purchase and write both call options and put options on
securities, indexes and foreign currencies, and enter into interest rate, index
and foreign currency futures contracts and options on such futures contracts
(futures options) in order to achieve its investment objective, to provide
additional revenue, or to hedge against changes in security prices, interest
rates or currency exchange rates. A Fund also may use other types of options,
futures contracts, futures options, and other types of forward or investment
contracts linked to individual securities, interest rates, foreign currencies,
indices or other benchmarks (derivative products) currently traded or
subsequently developed and traded, provided the Trustees determine that their
use is consistent with the Fund's investment objective.
OPTIONS
A Fund may purchase and write both put and call options on securities,
indexes or foreign currencies in standardized contracts traded on recognized
securities exchanges, boards of trade or similar entities, or quoted on Nasdaq.
A Fund also may purchase agreements, sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer that the Fund might
buy as a temporary defensive measure.
An option on a security (or index or foreign currency) is a contract that
gives the purchase (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 or a specified quantity of
the foreign currency) 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,
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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 other 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 cash consideration
upon conversion or exchange of other securities held in its portfolio (or, if
additional cash consideration is required, cash or cash equivalents in such
amount are held in a segregated account by its custodian).
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, currency 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, currency or index in
relation to the exercise price of the option, the volatility of the underlying
security, currency or index, and the time remaining until expiration.
A put or call option purchased by a Fund is an asset of the Fund, valued
initially at the premium paid for the option. The premium received for an
option written by a Fund is recorded as a deferred credit. The value of an
option purchased or written is marked-to-market daily and is valued at the
closing price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the last bid and
asked prices.
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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 and 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, 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 or a
foreign currency, it would not be able to sell the underlying security or
currency unless 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, the Fund foregoes, during the
option's life, the opportunity to profit from appreciation of the currency
covering the call.
If trading were suspended in an option purchased or written by a Fund, the
Fund would not be able to close out the option. If restrictions on exercise
were imposed, the Fund might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by the Fund is
covered by an option on the same index purchased by the Fund, movements in the
index may result in a loss to the Fund; however, such losses may be mitigated by
changes in the value of the Fund's portfolio securities during the period the
option was outstanding.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A Fund may use interest rate, index and foreign currency futures contracts.
An interest rate, index or foreign currency futures contract provides for the
future sale by one party and purchase by another party of a specified quantity
of a financial instrument, the cash value of an index/3/ or a specified quantity
of a foreign currency at a specified price and time. A public market
______________
/3/ 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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exists in futures contracts covering a number of indexes (including, but not
limited to, the Standard & Poor's 500 Stock Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index), certain financial
instruments (including, but not limited to: U.S. Treasury bonds, U.S. Treasury
notes and 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.
A Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or a 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 a
Fund, such 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 or gain exposure to fluctuations in the general level of stock prices or
anticipated changes in interest rates or currency exchange rates which might
adversely affect either the value of the Fund's securities or the price of the
securities that the Fund intends to purchase. Although other techniques could
be used to reduce that Fund's exposure to stock price and interest rate and
currency fluctuations, the Fund may be able to hedge its exposure more
effectively and perhaps at a lower cost by using futures contracts and futures
options.
A Fund will only enter into futures contracts and futures options that are
standardized and traded on an exchange, board of trade or similar entity or
quoted on an automated quotation system.
The success of any futures transaction depends on Liberty WAM correctly
predicting changes in the level and direction of stock prices, interest rates,
currency exchange rates and other factors. Should those predictions be
incorrect, a Fund's return might have been better had the transaction not been
attempted; however, in the absence of the ability to use futures contracts,
Liberty 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, the Fund
is required to deposit with its custodian (or broker, if legally permitted) 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 set by the exchange on which the contact is traded and may be
modified during the term of the contract. 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. A Fund expects to earn interest income on its
initial margin deposits. A futures contract held by a Fund is valued daily at
the official settlement price of the exchange on which it is traded. Each day
the Fund pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking-to-
market." Variation margin paid or
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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 expired at the close of the previous day.
In computing daily net asset value, a Fund will mark-to-market its open futures
positions.
The Funds are also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. 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 Fund.
Although some futures contracts call for making or taking delivery of the
underlying property, usually these obligations are closed out prior to delivery
by offsetting purchases or sales of matching futures contracts (same exchange,
underlying property and delivery month). If an offsetting purchase price is
less than the original sale price, the Fund engaging in the transaction 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
engaging in the transaction realizes a capital gain, or if it is less, the Fund
realizes a capital loss. The transaction costs must also be included in these
calculations.
Risks Associated with Futures
There are several risks associated with the use of futures contracts and
futures options. 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 the currency
markets and the futures markets that could result in an imperfect correlation
between the markets, causing a given transaction 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 or currencies, including technical influences in futures and
futures options trading and differences between the Fund's investments being
hedged and the securities or currencies underlying the standard contracts
available for trading. For example, in the case of index futures contracts, the
composition of the index, including the issuers and the weighting of each issue,
may differ from the composition of the 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 the Fund's portfolio. A decision as to
whether, when and how to use futures contracts 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 security price, interest rate or
currency exchange rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of
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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 long-term trading history. As
a result, there can be no assurance that an active secondary market will develop
or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES
A Fund will not enter into a futures contract or purchase an option thereon
if, immediately thereafter, the initial margin deposits for futures contracts
held by that Fund plus premiums paid by it for open futures option positions,
less the amount by which any such positions are "in-the-money,"/4/ would exceed
5% of the Fund's total assets.
When purchasing a futures contract or writing a put option on a futures
contract, a Fund must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the market
value of such contract. When writing a call option on a futures contract, the
Fund similarly will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is in-the-money
until the option expires or is closed out by the Fund.
A Fund may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent the 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 (CFTC)
Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," each
Fund will use commodity futures or commodity options contracts solely for bona
fide hedging purposes within the meaning and intent of CFTC Regulation 1.3(z),
or, with respect to positions in commodity futures and commodity options
contracts that do not come within the meaning and intent of CFTC Regulation
1.3(z), the aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the assets of a Fund,
after taking into account unrealized profits and unrealized losses on any such
contracts it has entered into [in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount (as defined in Section 190.01(x)
of the CFTC Regulations) may be excluded in computing such 5%].
TAXATION OF OPTIONS AND FUTURES
If a Fund exercises a call or put option 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
____________________
/4/ 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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sold (put). For cash settlement options and futures options exercised by a 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 was in-the-money at the time it was
written and the security covering the option was held for more than the long-
term holding period prior to the writing of the option, any loss realized as a
result of a closing purchase transaction will be long-term. The holding period
of the securities covering an in-the-money option will not include the period of
time the option is outstanding.
If a Fund writes an equity call option/5/ other than a "qualified covered
call option," as defined in the Internal Revenue Code, any loss on such option
transaction, to the extent it does not exceed the unrealized gains on the
securities covering the option, may be subject to deferral until the securities
covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date or
expiration date. If a Fund delivers securities under a futures contract, the
Fund also realizes a capital gain or loss on those securities.
For federal income tax purposes, a Fund generally is required to recognize
as income for each taxable year its net unrealized gains and losses as of the
end of the year on futures, futures options and non-equity options positions
(year-end mark-to-market). Generally, any gain or loss recognized with respect
to such positions (either by year-end mark-to-market or by actual closing of the
positions) is considered to be 60% long-term and 40% short-term, without regard
to the holding periods of the contracts. However, in the case of positions
classified as part of a "mixed straddle," the recognition of losses on certain
positions (including options, futures and futures options positions, the related
securities and certain successor positions thereto) may be deferred to a later
taxable year. Sale of futures contracts or writing of call options (or futures
call options) or buying put options (or futures put options) that are intended
to hedge against a change in the value of securities held by a Fund: (1) will
affect the holding period of the hedged securities; and (2) may cause unrealized
gain or loss on such securities to be recognized upon entry into the hedge.
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 would be deemed to be
positions in a mixed straddle, subject to the above-mentioned loss deferral
rules.
________________
/5/ 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 Stock Index).
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In order for a Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, and gains from the sale of securities
or foreign currencies, or other income (including but not limited to gains from
options and futures contracts). In addition, gains realized on the sale or
other disposition of securities held for less than three months must be limited
to less than 30% of the Fund's annual gross income. 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. In order to avoid realizing excessive gains on securities held
less than three months, the Fund may be required to defer the closing out of
certain positions beyond the time when it would otherwise be advantageous to do
so.
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 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 Liberty 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. Liberty 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
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exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short. This
technique is called selling short "against the box." Although permitted by their
investment restrictions, the Funds do not currently intend to sell securities
short.
In a short sale against the box, a Fund does not deliver from its portfolio
the securities sold and does not receive immediately the proceeds from the short
sale. Instead, the Fund borrows the securities sold short from a broker-dealer
through which the short sale is executed, and the broker-dealer delivers such
securities, on behalf of the Fund, to the purchaser of such securities. Such
broker-dealer is entitled to retain the proceeds from the short sale until the
Fund delivers to such broker-dealer the securities sold short. In addition, the
Fund is required to pay to the broker-dealer the amount of any dividends paid on
shares sold short. Finally, to secure its obligation to deliver to such broker-
dealer the securities sold short, the Fund must deposit and continuously
maintain in a separate account with 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.
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
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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. The market value of these securities and their liquidity
may be affected by adverse publicity and investor perceptions.
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, Liberty 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 and 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
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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.
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.
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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.
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 Liberty WAM believes present minimal
credit risks in accordance with guidelines approved by the Board of Trustees.
Liberty WAM will review and monitor the creditworthiness of such institutions,
and will consider the capitalization of the institution, Liberty 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.
"WHEN-ISSUED" SECURITIES AND COMMITMENT AGREEMENTS; REVERSE REPURCHASE
AGREEMENTS
Each Fund may purchase and sell securities on a when-issued and delayed-
delivery basis.
When-issued or delayed-delivery transactions arise when securities are
purchased or sold by the Funds with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and
yield to the Funds at the time of entering into the transaction. However,
yields available in the market when delivery takes place may be higher than the
yields on securities to be delivered. When the Funds engage in when-issued and
delayed-delivery transactions, the Funds rely on the buyer or seller, as the
case may be, to consummate the sale. Failure to do so may result in the Funds
missing the opportunity to obtain a price or yield considered to be
advantageous. When-issued and delayed-delivery transactions may be expected to
occur a month or more before delivery is due. However, no payment or
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delivery is made by the Funds until they receive payment or delivery from the
other party to the transaction. A separate account of liquid assets equal to the
value of such purchase commitments will be maintained with the Trust's custodian
until payment is made and will not be available to meet redemption requests.
When-issued and delayed-delivery agreements are subject to risks from changes in
value based upon changes in the level of interest rates and other market
factors, both before and after delivery. The Funds do not accrue any income on
such securities prior to their delivery. To the extent a Fund engages in when-
issued and delayed-delivery transactions, it will do so for the purpose of
acquiring portfolio securities consistent with its investment objectives and
policies and not for the purpose of investment leverage.
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,
Liberty WAM may employ a temporary defensive investment strategy if it
determines such a strategy to be warranted. Pursuant to such a defensive
strategy, each Fund temporarily may hold cash (U.S. dollars, foreign currencies,
multinational currency units) and/or invest up to 100% of its assets in high
quality debt securities or money market instruments of U.S. or foreign issuers,
and most or all of the Fund's investments may be made in the United States and
denominated in U.S. dollars. It is impossible to predict whether, when, or for
how long a Fund might employ defensive strategies.
In addition, pending investment of proceeds from new sales of Fund shares
or to meet ordinary daily cash needs, a Fund temporarily may hold cash (U.S.
dollars, foreign currencies, or multinational currency units) and may invest any
portion of its assets in money market instruments.
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
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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 are acquired through private placement transactions,
directly from the issuer or from security holders, generally at higher yields or
on terms more favorable to investors than comparable publicly traded securities.
Privately placed securities are not readily marketable and ordinarily can be
sold only in privately negotiated transactions to a limited number of purchasers
or in public offerings made pursuant to an effective registration statement
under the Securities Act of 1933. Private or public sales of such securities by
a Fund may involve significant delays and expense. Private sales require
negotiations with one or more purchasers and generally produce less favorable
prices than the sale of comparable unrestricted securities. Public sales
generally involve the time and expense of preparing and processing a
registration statement under the Securities Act of 1933 and may involve the
payment of underwriting commissions; accordingly, the proceeds may be less than
the proceeds from the sale of securities of the same class which are freely
marketable. 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. Liberty 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 Liberty WAM will consider the trading
markets for the specific security taking into account the unregistered nature of
a Rule 144A security. In addition, Liberty 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.
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," above.
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