497 1 0001.txt WANGER ADVISORS TRUST WANGER U.S. SMALL CAP WANGER INTERNATIONAL SMALL CAP WANGER TWENTY WANGER FOREIGN FORTY SUPPLEMENT DATED JUNE 12, 2000 TO PROSPECTUS DATED MAY 1, 2000 OF WANGER ADVISORS TRUST On June 10, 2000, Wanger Asset Management, L.P. (WAM), the Funds' investment adviser, and Wanger Asset Management, Ltd., the general partner of WAM, entered into an Agreement and Plan of Merger (Merger Agreement) with Liberty Financial Companies, Inc. (Liberty) and WAM Acquisition L.P., a newly formed limited partnership (Liberty Sub). Under the Merger Agreement, Liberty Sub would be merged with and into WAM. WAM would be the surviving entity and would be a wholly-owned subsidiary of Liberty. The merger cannot be consummated unless the trustees of the Trust (on behalf of each of the Funds) and the shareholders of Wanger U.S. Small Cap and Wanger International Small Cap approve a new investment advisory agreement with WAM (Proposed Advisory Agreement) and certain other conditions are satisfied. The trustees of the Trust have not yet approved the Proposed Advisory Agreement. They are expected to meet to consider the terms of the Proposed Advisory Agreement before the end of June 2000. If the trustees approve the Proposed Advisory Agreement, you will receive a proxy statement describing the merger and the Proposed Advisory Agreement in more detail and seeking approval of the Proposed Advisory Agreement by the shareholders of each Fund. Subject to the receipt of the necessary trustee and shareholder approvals and the satisfaction of other conditions contained in the Merger Agreement, it is anticipated that the closing of the merger will occur in the fourth quarter of 2000. At that time, WAM would become a wholly-owned subsidiary of Liberty and would thereafter operate under the name Liberty Wanger Asset Management, L.P. (Liberty WAM). Liberty WAM would continue to be headquartered in Chicago and Ralph Wanger would continue to act as president. Liberty WAM would continue as the investment adviser of the Funds, with the Funds' current portfolio managers continuing to manage the Funds following the same investment strategies and objectives currently in place. It is anticipated that the Trust would enter into new agreements with affiliates of Liberty for the provision of administrative, distribution, transfer agency and other services to the Funds. WANGER ADVISORS TRUST 227 West Monroe Street STATEMENT OF ADDITIONAL INFORMATION Suite 3000 MAY 1, 2000 Chicago, Illinois 60606 Supplemented on June 12, 2000 1-800-4-WANGER (1-800-492-6437) WANGER U.S. SMALL CAP WANGER INTERNATIONAL SMALL CAP WANGER TWENTY WANGER FOREIGN FORTY ------------------------------------------------------------------------------- TABLE OF CONTENTS Page ----------------- ---- Information About the Funds...............................................2 Investment Objectives and Policies........................................2 Investment Techniques and Risks...........................................3 Performance Information..................................................24 Investment Adviser.......................................................27 Distributor..............................................................30 The Trust................................................................31 Trustees and Officers; Certain Shareholders..............................32 Purchasing and Redeeming Shares..........................................34 Additional Tax Information...............................................35 Portfolio Transactions...................................................36 Code of Ethics...........................................................38 Custodian................................................................38 Independent Auditors.....................................................39 Financial Statements.....................................................39 Appendix - Description of Bond Ratings...................................62 ------------------------------------------------------------------------------ This Statement of Additional Information ("SAI") is not a prospectus but provides information that should be read in conjunction with the prospectus of WANGER U.S. SMALL CAP, WANGER INTERNATIONAL SMALL CAP, WANGER TWENTY and WANGER FOREIGN FORTY (each, a "Fund," together, the "Funds") dated the date of this SAI and any supplement to the prospectus, which may be obtained from Wanger at no charge by writing or telephoning Wanger at its address or telephone number shown above. The Funds are series of Wanger Advisors Trust (the "Trust"). The Funds are currently available only for allocation to certain life insurance company ("Life Company") separate accounts established for the purpose of funding certain qualified and non-qualified variable annuity or variable life insurance contracts ("Variable Contracts"), and may also be offered directly to certain types of pension plans and retirement arrangements and accounts permitting the accumulation of funds on a tax-deferred basis ("Retirement Plans"), as described in the prospectus. On June 10, 2000, Wanger Asset Management, L.P. ("WAM"), the Funds' investment adviser, and Wanger Asset Management, Ltd. ("WAM Ltd."), the general partner of WAM, entered into an Agreement and Plan of Merger ("Merger Agreement") with Liberty Financial Companies, Inc. ("Liberty") and WAM Acquisition L.P., a newly formed limited partnership ("Liberty Sub"). Liberty, 600 Atlantic Avenue, Boston, Massachusetts 02210-2214, is a majority-owned subsidiary of Liberty Mutual Insurance Company. Under the Merger Agreement, Liberty Sub would be merged with and into WAM. WAM would be the surviving entity and would be a wholly-owned subsidiary of Liberty. The merger cannot be consummated unless the trustees of the Trust (on behalf of each of the Funds) and the shareholders of Wanger U.S. Small Cap and Wanger International Small Cap approve a new investment advisory agreement with WAM ("Proposed Advisory Agreement") and certain other conditions are satisfied. The trustees of the Trust have not yet approved the Proposed Advisory Agreement. They are expected to meet to consider the terms of the Proposed Advisory Agreement before the end of June 2000. If the trustees approve the Proposed Advisory Agreement, you will receive a proxy statement describing the merger and the Proposed Advisory Agreement in more detail and seeking approval of the Proposed Advisory Agreement by the shareholders of each Fund. Subject to the receipt of the necessary trustee and shareholder approvals and the satisfaction of other conditions contained in the Merger Agreement, it is anticipated that the closing of the merger will occur in the fourth quarter of 2000. At that time, WAM would become a wholly-owned subsidiary of Liberty and would thereafter operate under the name Liberty Wanger Asset Management, L.P. ("Liberty WAM"). Liberty WAM would continue to be headquartered in Chicago and Ralph Wanger would continue to act as president. Liberty WAM would continue as the investment adviser of the Funds, with the Funds' current portfolio managers continuing to manage the Funds following the same investment strategies and objectives currently in place. It is anticipated that the Trust would enter into new agreements with affiliates of Liberty for the provision of administrative, distribution, transfer agency and other services to the Funds. INFORMATION ABOUT THE FUNDS WANGER U.S. SMALL CAP invests for long-term capital growth. The Fund generally invests in the stocks of companies with capitalizations of less than $2 billion. Under normal market conditions, the Fund will generally invest at least 65% of its total assets in domestic securities. WANGER INTERNATIONAL SMALL CAP invests for long-term capital growth. The Fund generally invests in stocks of companies with capitalizations of less than $2 billion. Under normal market conditions, the Fund will generally invest at least 65% of its total assets in foreign securities in mature and emerging markets. WANGER TWENTY invests for long-term capital growth. The Fund invests primarily in the stocks of U.S. companies with market capitalizations of $2 billion to $12 billion. WANGER TWENTY is a non-diversified fund that ordinarily focuses its investments in 20 to 25 U.S. companies. WANGER FOREIGN FORTY invests for long-term capital growth. The Fund invests primarily in the stocks of foreign companies with market capitalizations of $5 billion to $15 billion. The Fund is a non-diversified fund that ordinarily has investments in 40 to 60 companies in developed markets. WANGER U.S. SMALL CAP and WANGER INTERNATIONAL SMALL CAP are diversified funds under the federal Securities laws. WANGER TWENTY and WANGER FOREIGN FORTY are non-diversified under the federal securities laws. However, all of the Funds comply with the diversification standards established by the tax laws. See "Investment Techniques and Risks -- Diversification" and "Additional Tax Information" for more information. The Funds are series of the Trust, and each Fund is an open-end, management investment Company. The discussion below supplements the description in the prospectus of each Fund's investment objectives, policies, and restrictions. INVESTMENT OBJECTIVES AND POLICIES Each Fund invests with the objective of long-term capital growth. The Funds are not, alone or together, a balanced investment program, and there can be no assurance that any Fund will achieve its investment objective. Each Fund uses the techniques and invests in the types of securities described below and in the prospectus. 2 INVESTMENT TECHNIQUES AND RISKS COMMON STOCKS The Funds invest mostly in common stocks, which represent an equity interest (ownership) in a corporation. This ownership interest often gives a Fund the right to vote on measures affecting the company's organization and operations. The Funds also invest in other types of equity securities, including preferred stocks and securities convertible into common stocks. Over time, common stocks have historically provided superior long-term capital growth potential. However, stock prices may decline over short or even extended periods. Stock markets tend to move in cycles, with periods of rising stock prices and periods of falling stock prices. As a result, the Funds should be considered long-term investments, designed to provide the best results when held for several years or more. The Funds may not be suitable investments if you have a short-term investment horizon or are unwilling to accept fluctuations in share price, including significant declines over a given period. DIVERSIFICATION Diversification is a means of reducing risk by investing in a broad range of stocks or other securities. Because WANGER TWENTY and WANGER FOREIGN FORTY are non-diversified, those Funds have the ability to take larger positions in a smaller number of issuers. The appreciation or depreciation of a single stock may have a greater impact on the NAV of a non-diversified fund, because it is likely to have a greater percentage of its assets invested in that stock. As a result, the share price of WANGER TWENTY and WANGER FOREIGN FORTY can be expected to fluctuate more than that of broadly diversified funds investing in similar securities. Because they are non-diversified, those Funds are not subject to the limitations under the Investment Company Act of 1940 on the percentage of their assets that they may invest in any one issuer. Each Fund, however, intends to comply with the diversification standards for regulated investment companies under Subchapter M of the Internal Revenue Code (summarized below under "Investment Restrictions") and Section 817(h) of the Code (see "Additional Tax Information"). Although WANGER FOREIGN FORTY is registered as a non-diversified fund, it has (through the date of this SAI) invested as if it were diversified. WANGER FOREIGN FORTY expects that it will begin to invest in a non-diversified manner when it believes market conditions are appropriate to do so. However, if WANGER FOREIGN FORTY'S investments remain diversified through February 1, 2002 (three years after it began operations), the Fund will lose the ability to invest in a non-diversified manner and would thereafter be a diversified fund. WANGER FOREIGN FORTY would not be able to become non-diversified unless it sought and obtained the approval of the holders of a "majority of its outstanding voting securities," as defined in the Investment Company Act of 1940. 3 FOREIGN SECURITIES Each Fund may invest in foreign securities, which may entail a greater degree of risk (including risks relating to exchange rate fluctuations, tax provisions, or expropriation of assets) than does investment in securities of domestic issuers. Under normal market conditions, WANGER FOREIGN FORTY invests at least 85% of its total assets, and WANGER INTERNATIONAL SMALL CAP invests at least 65% of its total assets, in each case taken at market value, in foreign securities; WANGER TWENTY'S investments in foreign securities are limited to not more than 15% of its total assets. WANGER U.S. SMALL CAP may invest up to 35% of its total assets in foreign securities, but the Fund does not have a present intention of investing more than 5% of its assets in foreign securities. WANGER FOREIGN FORTY invests primarily in developed countries but may invest up to 15% of its total assets in securities of companies with broad international interests that are domiciled in the United States or in countries considered "emerging markets," if the operations of those companies are located primarily in developed overseas markets. The Funds use the terms "developed markets" and "emerging markets" as those terms are defined by the International Financial Corporation, a member of the World Bank Group ("IFC"). "Emerging markets" as used by the Funds include markets designated "frontier markets" by the IFC. WANGER FOREIGN FORTY does not intend to invest more than 5% of its total assets in those countries included in the "emerging markets" or "frontier markets" categories. The securities markets of emerging markets are substantially smaller, less developed, less liquid, and more volatile than the securities markets of the United States and other more developed countries. Disclosure and regulatory standards in many respects are less stringent than in the United States. There also may be a lower level of monitoring and regulation of emerging markets of traders, insiders, and investors. Enforcement of existing regulations has been extremely limited. WANGER TWENTY usually limits its investments in foreign companies to those whose operations are primarily in the U.S. The Funds may invest in securities of foreign issuers directly or in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities representing underlying shares of foreign issuers. Positions in these securities are not necessarily denominated in the same currency as the common stocks into which they may be converted. ADRs are receipts typically issued by an American bank or trust company evidencing ownership of the underlying securities. EDRs are European receipts evidencing a similar arrangement. GDRs are receipts that may trade in U.S. or non-U.S. markets. The Funds may invest in sponsored or unsponsored depositary receipts. Generally ADRs, in registered form, are designed for use in the U.S. securities markets and EDRs, in bearer form, are designed for use in European securities markets. The Funds may invest in both "sponsored" and "unsponsored" depositary receipts. In a sponsored depositary receipt, the issuer typically pays some or all of the expenses of the depository and agrees to provide its regular shareholder communications to receipt holders. An 4 unsponsored depositary receipt is created independently of the issuer of the underlying security. The receipt holders generally pay the expenses of the depository and do not have an undertaking from the issuer of the underlying security to furnish shareholder communications. Therefore, in the case of an unsponsored depositary receipt, a Fund is likely to bear its proportionate share of the expenses of the depository and it may have greater difficulty in receiving shareholder communications than it would have with a sponsored depositary receipt. None of the Funds expects to invest 5% or more of its total assets in unsponsored depositary receipts. The Funds' investment performance is affected by the strength or weakness of the U.S. dollar against the currencies of the foreign markets in which its securities trade or in which they are denominated. For example, if the dollar falls in value relative to the Japanese yen, the dollar value of a yen-denominated stock held in the portfolio will rise even though the price of the stock remains unchanged. Conversely, if the dollar rises in value relative to the yen, the dollar value of the yen-denominated stock will fall. (See discussion of transaction hedging and portfolio hedging under "Currency Exchange Transactions," below.) Investors should understand and consider carefully the risks involved in foreign investing. Investing in foreign securities, positions in which are generally denominated in foreign currencies, and utilization of forward foreign currency exchange contracts involve risks and opportunities not typically associated with investing in U.S. securities. These considerations include: fluctuations in exchange rates of foreign currencies; possible imposition of exchange control regulation or currency restrictions that would prevent cash from being brought back to the United States; less public information with respect to issuers of securities; less governmental supervision of stock exchanges, securities brokers, and issuers of securities; lack of uniform accounting, auditing, and financial reporting standards; lack of uniform settlement periods and trading practices; less liquidity and frequently greater price volatility in foreign markets than in the United States; possible imposition of foreign taxes; possible investment in securities of companies in developing as well as developed countries; and sometimes less advantageous legal, operational, and financial protections applicable to foreign subcustodial arrangements. In addition, the costs of investing in foreign securities are higher than the costs of investing in U.S. securities. Although the Funds try to invest in companies and governments of countries having stable political environments, there is the possibility of expropriation or confiscatory taxation, seizure, or nationalization of foreign bank deposits or other assets, establishment of exchange controls, the adoption of foreign government restrictions, or other adverse political, social, or diplomatic developments that could affect investment in these nations. CURRENCY EXCHANGE TRANSACTIONS The Funds may enter into currency exchange transactions. A currency exchange transaction may be conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market or through a forward currency exchange contract ("forward contract"). A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange 5 dealers or broker-dealers, are not exchange-traded, and are usually for less than one year, but may be renewed. Forward currency transactions may involve currencies of the different countries in which a Fund may invest, and serve as hedges against possible variations in the exchange rate between these currencies. The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions, except to the extent described below under "Synthetic Foreign Money Market Positions." Transaction hedging is the purchase or sale of a forward contract with respect to specific payables or receivables of a Fund accruing in connection with the purchase or sale of portfolio securities. Portfolio hedging is the use of a forward contract with respect to a portfolio security position denominated or quoted in a particular currency. A Fund may engage in portfolio hedging with respect to the currency of a particular country in amounts approximating actual or anticipated positions in securities denominated in that currency. When a Fund owns or anticipates owning securities in countries whose currencies are linked, WAM may aggregate such positions as to the currency hedged. If a Fund enters into a forward contract hedging an anticipated purchase of portfolio securities, assets of the Fund having a value at least as great as the Fund's commitment under such forward contract will be segregated on the books of the Fund while the contract is outstanding. At the maturity of a forward contract to deliver a particular currency, the Fund may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency. It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a forward contract. Accordingly, it may be necessary for a Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of currency that the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the currency. Conversely, it may be necessary to sell on the spot market some of the currency received upon the sale of the portfolio security if its market value exceeds the amount of currency that Fund is obligated to deliver. If a Fund retains the portfolio security and engages in an offsetting transaction, the Fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If a Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the currency. Should forward prices decline during the period between a Fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A default on the 6 contract would deprive the Fund of unrealized profits or force the Fund to cover its commitments for purchase or sale of currency, if any, at the current market price. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for a Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to a Fund of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Since currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved. SYNTHETIC FOREIGN MONEY MARKET POSITIONS. The Funds may invest in money market instruments denominated in foreign currencies. In addition to, or in lieu of, such direct investment, the Funds may construct a synthetic foreign money market position by (a) purchasing a money market instrument denominated in one currency (generally U.S. dollars) and (b) concurrently entering into a forward contract to deliver a corresponding amount of that currency in exchange for a different currency on a future date and at a specified rate of exchange. For example, a synthetic money market position in Japanese yen could be constructed by purchasing a U.S. dollar money market instrument and entering concurrently into a forward contract to deliver a corresponding amount of U.S. dollars in exchange for Japanese yen on a specified date and at a specified rate of exchange. Because of the availability of a variety of highly liquid short-term U.S. dollar money market instruments, a synthetic money market position utilizing such U.S. dollar instruments may offer greater liquidity than direct investment in foreign money market instruments. The results of a direct investment in a foreign currency and a concurrent construction of a synthetic position in such foreign currency, in terms of both income yield and gain or loss from changes in currency exchange rates, in general should be similar, but would not be identical, because the components of the alternative investments would not be identical. Except to the extent a synthetic foreign money market position consists of a money market instrument denominated in a foreign currency, the synthetic foreign money market position shall not be deemed a "foreign security" for purposes of the policies that, under normal conditions, WANGER U.S. SMALL CAP will not invest more than 35% of its total assets in foreign securities, WANGER TWENTY will not invest more than 15% of its total assets in foreign securities, WANGER INTERNATIONAL SMALL CAP will generally invest at least 65% of its total assets in foreign securities and WANGER FOREIGN FORTY will generally invest at least 85% of its total assets in foreign securities. OPTIONS AND FUTURES The Funds may purchase and write both call options and put options on securities and on indexes, enter into interest rate and index futures contracts, and may purchase or sell options on such futures contracts ("futures options") in order to provide additional revenue, or to hedge against changes in security prices or interest rates. A Fund may also use other types of options, futures contracts and futures options currently traded or subsequently developed and traded, 7 provided the board of trustees determines that their use is consistent with the Fund's investment objective. OPTIONS. An option on a security (or index) is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option on an individual security or on a foreign currency has the obligation upon exercise of the option to deliver the underlying security or foreign currency upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security or foreign currency. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. An index is designed to reflect specified facets of a particular financial or securities market, a specific group of financial instruments or securities, or certain economic indicators. A Fund will write call options and put options only if they are "covered." For example, in the case of a call option on a security, the option is "covered" if the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional consideration (or, if additional consideration is required, assets having a value at least equal to that amount are segregated on the books of the Fund) upon conversion or exchange of other securities held in its portfolio. If an option written by a Fund expires, the Fund realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by a Fund expires, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when a Fund desires. A Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date. A put or call option purchased by a Fund is an asset of that Fund and is valued initially at the premium paid for the option. The premium received for an option written by the Fund is recorded as a deferred credit. An option purchased or written is "marked-to-market" daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices. 8 OTC DERIVATIVES. The Funds may buy and sell over-the-counter ("OTC") derivatives (derivatives not traded on exchanges). Unlike exchange-traded derivatives, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC derivatives generally are established through negotiation with the other party to the contract. While this type of arrangement allows a Fund greater flexibility to tailor an instrument to its needs, OTC derivatives generally involve greater credit risk than exchange-traded derivatives, which are guaranteed by the clearing organization of the exchanges where they are traded. Each Fund will limit its investments so that no more than 5% of its total assets will be placed at risk in the use of OTC derivatives. See "Illiquid and Restricted Securities" below for more information on the risks associated with investing in OTC derivatives. RISKS ASSOCIATED WITH OPTIONS. There are several risks associated with transactions in options. For example, there are significant differences between the securities markets, the currency markets, and the options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when, and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. If a Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option would expire and become worthless. If a Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security until the option expired. As the writer of a covered call option on a security, a Fund foregoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call. As the writer of a covered call option on a foreign currency, a Fund foregoes, during the option's life, the opportunity to profit from currency appreciation. If trading were suspended in an option purchased or written by a Fund, it would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds may use interest rate futures contracts and index futures contracts. An interest rate or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument or the cash value of an index 1 at a specified price and time. A public market exists in futures contracts covering a number of indexes (including, but not limited to: the Standard & Poor's 500 Index; the Value Line Composite Index; the Russell 2000 Index; and the New York Stock Exchange Composite Index) as well as financial instruments (including, but not limited to: U.S. Treasury bonds; U.S. Treasury notes; Eurodollar certificates of deposit; and foreign currencies). Other index and financial instrument futures contracts are available and it is expected that additional futures contracts will be developed and traded. --------------------------- 1 A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of a securities index is a function of the value of certain specified securities, no physical delivery of those securities is made. 9 The Funds may purchase and write call and put options on futures. Options on futures possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. To the extent required by regulatory authorities having jurisdiction over the Funds, each Fund will limit its use of futures contracts and futures options to hedging transactions. For example, a Fund might use futures contracts to hedge against fluctuations in the general level of stock prices, anticipated changes in interest rates, or currency fluctuations that might adversely affect either the value of its securities or the price of the securities that the Fund intends to purchase. A Fund's hedging may include sales of futures contracts as an offset against the effect of expected declines in stock prices or currency exchange rates or increases in interest rates and purchases of futures contracts as an offset against the effect of expected increases in stock prices or currency exchange rates or declines in interest rates. Although other techniques could be used to reduce the Fund's exposure to stock price, interest rate, and currency fluctuations, a Fund may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options. The success of any hedging technique depends on WAM's ability to correctly predict changes in the level and direction of stock prices, interest rates, currency exchange rates, and other factors. Should those predictions be incorrect, the Fund's return might have been better had hedging not been attempted; however, in the absence of the ability to hedge, WAM might have taken portfolio actions in anticipation of the same market movements with similar investment results but, presumably, at greater transaction costs. When a purchase or sale of a futures contract is made by a Fund, it is required to deposit with its custodian or broker a specified amount of cash or U.S. government securities or other securities acceptable to the broker ("initial margin"). The margin required for a futures contract is generally set by the exchange on which the contract is traded; however, the margin requirement may be modified during the term of the contract, and the Fund's broker may require margin deposits in excess of the minimum required by the exchange. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract, which is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. The Funds expect to earn interest income on their initial margin deposits. A futures contract held by a Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in 10 value of the futures contract. This process is known as "marking-to-market." Variation margin paid or received by a Fund does not represent a borrowing or loan by the Fund but is instead settlement between the Fund and the broker of the amount one would owe the other if the futures contract had been offset at the close of the previous day. In computing daily NAV, the Funds will mark-to-market their open futures positions. The Funds are also required to deposit and maintain margin with respect to put and call options on futures contracts they write. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Funds. Although some futures contracts require making or taking delivery of the underlying securities, usually these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund realizes a capital gain, or if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations. RISKS ASSOCIATED WITH FUTURES. There are several risks associated with the use of futures contracts and futures options as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the portfolio securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as: variations in speculative market demand for futures, futures options, and the related securities, including technical influences in futures and futures options trading and differences between a Fund's investments being hedged and the securities underlying the standard contracts available for trading. For example, in the case of index futures contracts, the composition of the index, including the issues and the weighting of each issue, may differ from the composition of a Fund's portfolio, and, in the case of interest rate futures contracts, the interest rate levels, maturities, and creditworthiness of the issues underlying the futures contract may differ from the financial instruments held in a Fund's portfolio. A decision as to whether, when, and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected stock price or interest rate trends. Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several 11 consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses. Stock index futures contracts are not normally subject to such daily price change limitations. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a futures or futures option position. The Fund would be exposed to possible loss on the position during the interval of inability to close, and would continue to be required to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary (liquid) market will develop or continue to exist. LIMITATIONS ON OPTIONS AND FUTURES. A Fund will not enter into a futures contract or purchase an option thereon if, immediately thereafter, the initial margin deposits for futures contracts held by the Fund plus premiums paid by it for open futures option positions, less the amount by which any such positions are "in-the-money," 2 would exceed 5% of the Fund's total assets. When purchasing a futures contract or writing a put option on a futures contract, a Fund must maintain with its custodian or broker readily-marketable securities having a fair market value (including any margin) at least equal to the market value of such contract. When writing a call option on a futures contract, the Fund similarly will maintain with its custodian or broker readily-marketable securities having a fair market value (including any margin) at least equal to the amount by which such option is in-the-money until the option expires or is closed out by the Fund. A Fund may not maintain open short positions in futures contracts, call options written on futures contracts, or call options written on indexes if, in the aggregate, the market value of all such open positions exceeds the current value of the securities in its portfolio, plus or minus unrealized gains and losses on the open positions, adjusted for the historical relative volatility of the relationship between the portfolio and the positions. For this purpose, to the extent a Fund has written call options on specific securities in its portfolio, the value of those securities will be deducted from the current market value of the securities portfolio. In order to comply with Commodity Futures Trading Commission Regulation 4.5 and thereby avoid being deemed a "commodity pool," the "underlying commodity value" of each long position in a commodity contract in which a Fund invests will not at any time exceed the sum of: --------------------------- 2 A call option is "in-the-money" if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is "in-the-money" if the exercise price exceeds the value of the futures contract that is the subject of the option. 12 (1) the value of short-term U.S. debt obligations or other U.S. dollar denominated high-quality short-term money market instruments and cash set aside in an identifiable manner, plus any funds deposited as margin on the contract; (2) unrealized appreciation on the contract held by the broker; and (3) cash proceeds from existing investments due in not more than 30 days. "Underlying commodity value" means the size of the contract multiplied by the daily settlement price of the contract. TAXATION OF OPTIONS AND FUTURES. If a Fund exercises a call or put option that it holds, the premium paid for the option is added to the cost basis of the security purchased (call) or deducted from the proceeds of the security sold (put). For cash settlement options and futures options exercised by the Fund, the difference between the cash received at exercise and the premium paid is a capital gain or loss. If a call or put option written by a Fund is exercised, the premium is included in the proceeds of the sale of the underlying security (call) or reduces the cost basis of the security purchased (put). For cash settlement options and futures options written by a Fund, the difference between the cash paid at exercise and the premium received is a capital gain or loss. Entry into a closing purchase transaction will result in capital gain or loss. If an option written by a Fund is in-the-money at the time it was written and the security covering the option was held for more than the long-term holding period prior to the writing of the option, any loss realized as a result of a closing purchase transaction will be long-term. The holding period of the securities covering an in-the-money option will not include the period of time the option is outstanding. If a Fund writes an equity call option3 other than a "qualified covered call option," as defined in the Internal Revenue Code, any loss on such option transaction, to the extent it does not exceed the unrealized gains on the securities covering the option, may be subject to deferral until the securities covering the option have been sold. A futures contract held until delivery results in capital gain or loss equal to the difference between the price at which the futures contract was entered into and the settlement price on the earlier of delivery notice date or expiration date. If a Fund delivers securities under a futures contract, the Fund also realizes a capital gain or loss on those securities. --------------------------- 3 An equity option is defined to mean any option to buy or sell stock, and any other option the value of which is determined by reference to an index of stocks of the type that is ineligible to be traded on a commodity futures exchange (e.g., an option contract on a sub-index based on the price of nine hotel-casino stocks). The definition of equity option excludes options on broad-based stock indexes (such as the Standard & Poor's 500 index). 13 For federal income tax purposes, the Funds generally are required to recognize for each taxable year their net unrealized gains and losses as of the end of the year on futures, futures options, and non-equity options positions ("year-end mark-to-market"). Generally, any gain or loss recognized with respect to such positions (either by year-end mark-to-market or by actual closing of the positions) is considered to be 60% long-term and 40% short-term, without regard to the holding periods of the contracts. However, in the case of positions classified as part of a "mixed straddle," the recognition of losses on certain positions (including options, futures and futures options positions, the related securities and certain successor positions thereto) may be deferred to a later taxable year. Sale of futures contracts or writing of call options (or futures call options) or buying put options (or futures put options) that are intended to hedge against a change in the value of securities held by a Fund may affect the holding period of the hedged securities. If a Fund were to enter into a short index future, short index futures option, or short index option position and the Fund's portfolio were deemed to "mimic" the performance of the index underlying such contract, the option or futures contract position and the Fund's stock positions may be deemed to be positions in a mixed straddle, subject to the above-mentioned loss deferral rules. The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale treatment for federal income tax purposes on certain hedging strategies with respect to appreciated securities. Under these rules taxpayers will recognize gain, but not loss, with respect to securities if they enter into short sales or "offsetting notional principal contracts" (as defined by the Act) with respect to, or futures or "forward contracts" (as defined by the Act) with respect to, the same or substantially identical property, or if they enter into such transactions and then acquire the same or substantially identical property. The Secretary of the Treasury is authorized to promulgate regulations that will treat as constructive sales certain transactions that have substantially the same effect as short sales, offsetting notional principal contracts, and futures or forward contracts to deliver the same or substantially similar property. In order for each Fund to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income, i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts). Any net gain realized from futures (or futures options) contracts will be considered gain from the sale of securities and therefore be qualifying income for purposes of the 90% requirement. Each Fund intends to distribute to shareholders annually any capital gains that have been recognized for federal income tax purposes (including year-end mark-to-market gains) on options and futures transactions, together with gains on other Fund investments, to the extent such gains exceed recognized capital losses and any net capital loss carryovers of the Fund. Shareholders will be advised of the nature of such capital gain distributions. For further information, see the discussion under "Additional Tax Information." SWAP AGREEMENTS. A swap agreement is generally individually negotiated and structured to include exposure to one or more of a variety of different types of investments or 14 market factors. Depending on its structure, a swap agreement may increase or decrease a Fund's exposure to changes in the value of an index of securities in which the Fund might invest, the value of a particular security or group of securities, or foreign currency values. Swap agreements can take many different forms and are known by a variety of names. A Fund may enter into any form of swap agreement if WAM determines it is consistent with its investment objective and policies, but each Fund will limit its use of swap agreements so that no more than 5% of its total assets will be invested in such agreements. A swap agreement tends to shift a Fund's investment exposure from one type of investment to another. For example, if a Fund agrees to exchange payments in dollars at a fixed rate for payments in a foreign currency the amount of which is determined by movements of a foreign securities index, the swap agreement would tend to increase the Fund's exposure to foreign stock market movements and foreign currencies. Depending on how it is used, a swap agreement may increase or decrease the overall volatility of a Fund's investments and its NAV. The performance of a swap agreement is determined by the change in the specific currency, market index, security, or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by a Fund, the Fund must be prepared to make such payments when due. If the counterparty's creditworthiness declines, the value of a swap agreement would be likely to decline, potentially resulting in a loss. WAM expects to be able to eliminate each Fund's exposure under any swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. Each Fund will segregate its assets to cover its current obligations under a swap agreement. If a Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of its accumulated obligations under the swap agreement over the accumulated amount the Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of its accumulated obligations under the agreement. SHORT SALES AGAINST THE BOX. Each Fund may make short sales of securities if, at all times when a short position is open, the Fund owns an equal amount of such securities or securities convertible into or exchangeable for, without payment of any further consideration, securities of the same issue as, and equal in amount to, the securities sold short. This technique is called selling short "against the box." Although permitted by their investment restrictions, the Funds do not currently intend to sell securities short. In a short sale against the box, a Fund does not deliver from its portfolio the securities sold and does not receive immediately the proceeds from the short sale. Instead, the Fund borrows the securities sold short from a broker-dealer through which the short sale is executed, and the broker-dealer delivers such securities, on behalf of the Fund, to the purchaser of such securities. Such broker-dealer is entitled to retain the proceeds from the short sale until the Fund delivers to such broker-dealer the securities sold short. In addition, the Fund is required to pay to the broker-dealer the amount of any dividends paid on shares sold short. Finally, to secure its obligation to deliver to such broker-dealer the securities sold short, the Fund must deposit and 15 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. 16 DEBT SECURITIES The Funds may invest in debt securities, including lower-rated securities (i.e., securities rated BB or lower by Standard & Poor's Corporation ("S&P") or Ba or lower by Moody's Investor Services, Inc. ("Moody's"), commonly called "junk bonds"), and securities that are not rated. There are no restrictions as to the ratings of debt securities acquired by the Funds or the portion of each Fund's assets that may be invested in debt securities in a particular ratings category. No Fund intends to invest more than 20% of its total assets in debt securities nor more than 5% of its total assets in securities rated at or lower than the lowest investment grade. Securities rated BBB or Baa are considered to be medium grade and to have speculative characteristics. Lower-rated debt securities are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. Investment in medium- or lower-quality debt securities involves greater investment risk, including the possibility of issuer default or bankruptcy. An economic downturn could severely disrupt the market for such securities and adversely affect the value of such securities. In addition, lower-quality bonds are less sensitive to interest rate changes than higher-quality instruments and generally are more sensitive to adverse economic changes or individual corporate developments. During a period of adverse economic changes, including a period of rising interest rates, the junk bond market may be severely disrupted, and issuers of such bonds may experience difficulty in servicing their principal and interest payment obligations. Medium- and lower-quality debt securities may be less marketable than higher quality debt securities because the market for them is less broad. The market for unrated debt securities is even narrower. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly, and a Fund may have greater difficulty selling its portfolio securities. See "Purchasing and Redeeming Shares." The market value of these securities and their liquidity may be affected by adverse publicity and investor perceptions. A more complete description of the characteristics of bonds in each ratings category is included in the appendix to this SAI. ILLIQUID AND RESTRICTED SECURITIES No Fund may invest in illiquid securities, including restricted securities and OTC derivatives, if as a result, they would comprise more than 15% of the value of its net assets. An illiquid security generally is one that cannot be sold in the ordinary course of business within seven days at substantially the value assigned to it in calculations of a Fund's net asset value. Repurchase agreements maturing in more than seven days, OTC derivatives and restricted securities are generally illiquid; other types of investments may also be illiquid from time to time. If, through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund should be in a position where more than 15% of the value of its net assets are invested in illiquid assets, that Fund will take appropriate steps to protect liquidity. Illiquid securities are priced at a fair value determined in good faith by the board of trustees or its delegate. Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 17 1933 (the "1933 Act"). Where registration is required, a Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at a fair value as determined in good faith by the board of trustees or its delegate. None of the Funds will invest more than 15% of its total assets (valued at the time of investment) in restricted securities. Notwithstanding the above, a Fund may purchase securities that have been privately placed but that are eligible for purchase and sale under Rule 144A under the 1933 Act. That rule permits certain qualified institutional buyers, such as the Funds, to trade in privately placed securities that have not been registered for sale under the 1933 Act. WAM, under the supervision of the board of trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to each Fund's restriction of investing no more than 15% of the value of its assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination WAM will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, WAM could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, and (4) nature of the security and of market place trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored and if, as a result of changed conditions, it is determined that a Rule 144A security is no longer liquid, a Fund's holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that it does not invest more than 15% of its assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of a Fund's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities. REPURCHASE AGREEMENTS Repurchase agreements are transactions in which a Fund purchases a security from a bank or recognized securities dealer and simultaneously commits to resell that security to the bank or dealer at an agreed-upon price, date, and market rate of interest unrelated to the coupon rate or maturity of the purchased security. Although repurchase agreements carry certain risks not associated with direct investments in securities, the Funds will enter into repurchase agreements only with banks and dealers WAM believes present minimal credit risks in accordance with guidelines approved by the board of trustees. WAM will review and monitor the creditworthiness of such institutions, and will consider the capitalization of the institution, WAM's prior dealings with the institution, any rating of the institution's senior long-term debt by independent rating agencies, and other relevant factors. A Fund will invest only in repurchase agreements collateralized at all times in an amount at least equal to the repurchase price plus accrued interest. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase were less than the repurchase price, the Fund would suffer a loss. If the financial institution which is party to the 18 repurchase agreement petitions for bankruptcy or otherwise becomes subject to bankruptcy or other liquidation proceedings there may be restrictions on the Fund's ability to sell the collateral and the Fund could suffer a loss. However, with respect to financial institutions whose bankruptcy or liquidation proceedings are subject to the U.S. Bankruptcy Code, each Fund intends to comply with provisions under such Code that would allow it immediately to resell such collateral. Under normal circumstances, no Fund intends to invest more than 5% of its total assets in repurchase agreements. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS A Fund may purchase securities on a when-issued or delayed delivery basis. Although the payment and interest terms of these securities are established at the time a Fund enters into the commitment, the securities may be delivered and paid for a month or more after the date of purchase, when their value may have changed. A Fund makes such commitments only with the intention of actually acquiring the securities, but may sell the securities before the settlement date if WAM deems it advisable for investment reasons. A Fund may utilize spot and forward foreign currency exchange transactions to reduce the risk inherent in fluctuations in the exchange rate between one currency and another when securities are purchased or sold on a when-issued or delayed delivery basis. A Fund may enter into reverse repurchase agreements with banks and securities dealers. A reverse repurchase agreement is a repurchase agreement in which the Fund is the seller of, rather than the investor in, securities and agrees to repurchase them at an agreed-upon time and price. Use of a reverse repurchase agreement may be preferable to a regular sale and later repurchase of securities because it avoids certain market risks and transaction costs. At the time a Fund enters into a binding obligation to purchase securities on a when-issued basis or enters into a reverse repurchase agreement, assets of the Fund having a value at least as great as the purchase price of the securities to be purchased will be segregated on the books of the Fund and held by its custodian throughout the period of the obligation. The use of these investment strategies, as well as any borrowing by the Fund, may increase NAV fluctuation. The Funds have no present intention of investing in reverse repurchase agreements. TEMPORARY STRATEGIES The Funds have the flexibility to respond promptly to changes in market and economic conditions. In the interest of preserving shareholders' capital, WAM may employ a temporary defensive investment strategy if it determines such a strategy to be warranted. Pursuant to such a defensive strategy, each Fund temporarily may hold cash (U.S. dollars, foreign currencies, multinational currency units) and/or invest up to 100% of its assets in high quality debt securities or money market instruments of U.S. or foreign issuers, and most or all of the Fund's investments may be made in the United States and denominated in U.S. dollars. It is impossible to predict whether, when, or for how long a Fund might employ defensive strategies. In addition, pending investment of proceeds from new sales of Fund shares or to meet ordinary daily cash needs, a Fund temporarily may hold cash (U.S. dollars, foreign currencies, or 19 multinational currency units) and may invest any portion of its assets in money market instruments. PORTFOLIO TURNOVER Although the Funds do not purchase securities with a view to rapid turnover, there are no limitations on the length of time that portfolio securities must be held. Portfolio turnover can occur for a number of reasons such as general conditions in the securities markets, more favorable investment opportunities in other securities, or other factors relating to the desirability of holding or changing a portfolio investment. The portfolio turnover rate for WANGER U.S. SMALL CAP is not expected to exceed 50% under normal market conditions. The portfolio turnover rates of WANGER INTERNATIONAL SMALL CAP, WANGER TWENTY and WANGER FOREIGN FORTY are likely to be greater than 50% but, under normal market conditions, are expected to be no more than about 115%. A high rate of portfolio turnover, if it should occur, would result in increased transaction expenses which must be borne by the Funds. High portfolio turnover may also result in the realization of capital gains or losses and, to the extent net short-term capital gains are realized, any distributions resulting from such gains will be considered ordinary income for federal income tax purposes. LINE OF CREDIT The Trust maintains a line of credit with a group of banks to permit borrowing on a temporary basis to meet share redemption requests in circumstances in which temporary borrowing may be preferable to liquidation of portfolio securities. Any borrowings under that line of credit by the Funds would be subject to the Funds' restrictions on borrowing under "Investment Restrictions," below. INVESTMENT RESTRICTIONS In pursuing their investment objectives, WANGER U.S. SMALL CAP and WANGER INTERNATIONAL SMALL CAP each will not: 1. With respect to 75% of the value of the Fund's total assets, invest more than 5% of its total assets (valued at the time of investment) in securities of a single issuer, except securities issued or guaranteed by the government of the U.S., or any of its agencies or instrumentalities; 2. Acquire securities of any one issuer that at the time of investment (a) represent more than 10% of the voting securities of the issuer or (b) have a value greater than 10% of the value of the outstanding securities of the issuer; 3. Invest more than 25% of its assets (valued at the time of investment) in securities of companies in any one industry; 4. Make loans, but this restriction shall not prevent the Fund from (a) buying a part of an issue of bonds, debentures, or other obligations that are publicly distributed, or from investing up to an aggregate of 15% of its total assets (taken at market value at the time of 20 each purchase) in parts of issues of bonds, debentures or other obligations of a type privately placed with financial institutions, (b) investing in repurchase agreements, or (c) lending portfolio securities, provided that it may not lend securities if, as a result, the aggregate value of all securities loaned would exceed 33% of its total assets (taken at market value at the time of such loan);4 5. Borrow money except (a) from banks for temporary or emergency purposes in amounts not exceeding 33% of the value of the Fund's total assets at the time of borrowing, and (b) in connection with transactions in options, futures and options on futures;5 6. Underwrite the distribution of securities of other issuers; however, the Fund may acquire "restricted" securities which, in the event of a resale, might be required to be registered under the Securities Act of 1933 on the ground that the Fund could be regarded as an underwriter as defined by that act with respect to such resale; but the Fund will limit its total investment in restricted securities and in other securities for which there is no ready market, including repurchase agreements maturing in more than seven days, to not more than 15% of its net assets at the time of acquisition; 7. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises which invest in real estate or interests in real estate; 8. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) forward contracts; 9. Make margin purchases of securities, except for use of such short-term credits as are needed for clearance of transactions and except in connection with transactions in options, futures and options on futures; 10. Issue any senior security except to the extent permitted under the Investment Company Act of 1940. Restrictions 1 through 10 above are "fundamental," which means that they cannot be changed without the approval of the lesser of (i) 67% of the Fund's shares present at a meeting if more than 50% of the shares outstanding are present or (ii) more than 50% of the Fund's outstanding shares. --------------------------- 4 The Funds have no present intention of lending their portfolio securities. --------------------------- 5 State insurance laws currently restrict a Fund's borrowings to facilitate redemptions to no more than 25% of the Fund's net assets. 21 In addition, each Fund is subject to a number of restrictions that may be changed by the Board of Trustees without shareholder approval. Under those non-fundamental restrictions, each Fund will not: (a) Invest in companies for the purpose of management or the exercise of control; (b) Acquire securities of other registered investment companies except in compliance with the Investment Company Act of 1940 and applicable state law; (c) Pledge, mortgage or hypothecate its assets, except as may be necessary in connection with permitted borrowings or in connection with short sales, options, futures and options on futures; (d) Sell securities short or maintain a short position. In pursuing their investment objectives, WANGER TWENTY and WANGER FOREIGN FORTY each will not: 1. Acquire securities of any one issuer, which at the time of investment (a) represent more than 10% of the voting securities of the issuer or (b) have a value greater than 10% of the value of the outstanding securities of the issuer; 2. With respect to 50% of its total assets, purchase the securities of any issuer (other than cash items and U.S. government securities and securities of other investment companies) if such purchase would cause the Fund's holdings of that issuer to exceed more than 5% of the Fund's total assets; 3. Invest more than 25% of its total assets in a single issuer (other than U.S. government securities); 4. Invest more than 25% of its total assets in the securities of companies in a single industry (excluding U.S. government securities); 5. Make loans, but this restriction shall not prevent the Fund from (a) investing in debt securities, (b) investing in repurchase agreements, or (c) lending its portfolio securities, provided that it may not lend securities if, as a result, the aggregate value of all securities loaned would exceed 33% of its total assets (taken at market value at the time of such loan); 6. Borrow money except (a) from banks for temporary or emergency purposes in amounts not exceeding 33% of the value of the Fund's total assets at the time of borrowing, and (b) in connection with transactions in options, futures, and options on futures; 7. Underwrite the distribution of securities of other issuers; however, the Fund may acquire "restricted" securities which, in the event of a resale, might be required to be registered under the Securities Act of 1933 on the ground that the 22 Fund could be regarded as an underwriter as defined by that act with respect to such resale; 8. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises which invest in real estate or interests in real estate; 9. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) foreign currency contracts; 10. Make margin purchases of securities, except for use of such short-term credits as are needed for clearance of transactions and except in connection with transactions in options, futures, and options on futures; 11. Issue any senior security except to the extent permitted under the Investment Company Act of 1940. The above restrictions for each Fund are "fundamental," which means that they cannot be changed without the approval of the lesser of (i) 67% of each Fund's shares present at a meeting if more than 50% of the shares outstanding are present or (ii) more than 50% of each Fund's outstanding shares. In addition, the Funds are subject to a number of restrictions that may be changed by the board of trustees without shareholder approval. Under those non-fundamental restrictions, neither Fund will: (a) Invest in companies for the purpose of management or the exercise of control; (b) Acquire securities of other registered investment companies except in compliance with the Investment Company Act of 1940; (c) Invest more than 15% of its net assets (valued at time of investment) in illiquid securities, including repurchase agreements maturing in more than seven days; (d) Pledge, mortgage or hypothecate its assets, except as may be necessary in connection with permitted borrowings or in connection with short sales, options, futures, and options on futures; (e) Make short sales of securities unless the Fund owns at least an equal amount of such securities, or owns securities that are convertible or exchangeable, without payment of further consideration, into at least an equal amount of such securities; (f) [WANGER TWENTY only] Invest more than 15% of its total assets in the securities of foreign issuers. 23 (g) [WANGER FOREIGN FORTY only] Invest more than 15% of its total assets in securities of United States issuers, under normal market conditions. Notwithstanding the foregoing investment restrictions, any Fund may purchase securities pursuant to the exercise of subscription rights, provided that such purchase will not result in the Fund's ceasing to be a diversified investment company. Japanese and European corporations frequently issue additional capital stock by means of subscription rights offerings to existing shareholders at a price substantially below the market price of the shares. The failure to exercise such rights would result in a Fund's interest in the issuing company being diluted. The market for such rights is not well developed in all cases and, accordingly, the Fund may not always realize full value on the sale of rights. The exception applies in cases where the limits set forth in the investment restrictions would otherwise be exceeded by exercising rights or would have already been exceeded as a result of fluctuations in the market value of the Fund's portfolio securities with the result that the Fund would be forced either to sell securities at a time when it might not otherwise have done so, or to forego exercising the rights. In addition, pursuant to state insurance laws, each Fund is subject to the following guidelines, which may also be changed by the Trustees: (a) Each Fund will be invested in a minimum of five different foreign countries at all times, except that this minimum is reduced to four when foreign country investments comprise less than 80% of the value of the Fund's net assets; to three when less than 60% of such value; to two when less than 40%; and to one when less than 20%. (b) Each Fund will have no more than 20% of its net assets invested in securities of issuers located in any one country; except that a Fund may have an additional 15% of its net assets invested in securities of issuers located in any one of the following countries: Australia; Canada; France; Japan; the United Kingdom; or Germany. (c) A Fund may not acquire the securities of any issuer if, as a result of such investment, more than 10% of the Fund's total assets would be invested in the securities of any one issuer, except that this restriction shall not apply to U.S. Government securities or foreign government securities; and the Fund will not invest in a security if, as a result of such investment, it would hold more than 10% of the outstanding voting securities of any one issuer. (d) Each Fund may borrow no more than 10% of the value of its net assets when borrowing for any general purpose and 25% of net assets when borrowing as a temporary measure to facilitate redemptions. PERFORMANCE INFORMATION From time to time the Funds may quote total return figures. "Total Return" for a period is the percentage change in value during the period of an investment in shares of the Fund, including the value of shares acquired through reinvestment of all dividends and capital gains 24 distributions. "Average Annual Total Return" is the average annual compounded rate of change in value represented by the Total Return for the period. Average Annual Total Return is computed as follows: ERV = P(1+T)n Where: P = the amount of an assumed initial investment in shares of a fund T = average annual total return n = number of years from initial investment to the end of the period ERV = ending redeemable value of shares held at the end of the period For example, the Total Return and Average Total Return on a $1,000 investment in the Funds for the following periods ended December 31, 1999 were:
WANGER U.S. SMALL CAP --------------------- Average Annual Total Return Total Return ------------ -------------- 1 year................................................ 25.06% 25.06% 3 year................................................ 75.89% 20.71% Life of Fund (inception 5/3/95)....................... 199.09% 26.44% WANGER INTERNATIONAL SMALL CAP ------------------------------ Average Annual Total Return Total Return ------------ -------------- 1 year............................................................. 126.37% 126.37% 3 year............................................................. 159.49% 37.42% Life of Fund (inception 5/3/95)...................... 360.72% 38.70% WANGER TWENTY ------------- Average Annual Total Return Total Return ------------ -------------- Life of Fund (inception 2/1/99)....................... 34.30% N/A WANGER FOREIGN FORTY -------------------- Average Annual Total Return Total Return ------------ -------------- Life of Fund (inception 2/1/99)....................... 83.90% N/A
The Funds impose no sales charges and pay no distribution expenses. Income taxes are not taken into account. Performance figures quoted by the Funds are not necessarily indicative of future results. Each Fund's performance is a function of conditions in the securities markets, portfolio management, and operating expenses. Although information about past performance is useful in reviewing a Fund's performance and in providing some basis for comparison with other investment alternatives, it should not be used for comparison with other investments using different reinvestment assumptions or time periods. Fund performance figures do not reflect 25 expenses of the separate accounts of the Life Companies, expenses imposed under the Variable Contracts, or expenses imposed by Retirement Plans. In advertising and sales literature, a Fund's performance may be compared with those of market indexes and other mutual funds. In addition to the performance information described above, the Fund might use comparative performance as computed in a ranking or rating determined by Lipper, Inc., an independent service that monitors the performance of over 1,000 mutual funds, Morningstar, Incorporated, or another service. The Funds [that have been in operation at least three years] may also use statistics to indicate volatility or risk. The premise of each of these measures is that greater volatility connotes greater risk undertaken in achieving performance. The Funds may quote the following measures of volatility: Beta. Beta is the volatility of a fund's total return relative to the movements of a benchmark index. A beta greater than one indicates volatility greater than the index, and a beta of less than one indicates a volatility less than the index. R-squared. R-squared reflects the percentage of a fund's price movements that are explained by movements in the benchmark index. An R-squared of 1.00 indicates that all movements of a fund's price are completely explained by movements in the index. Generally, a higher R-squared will indicate a more reliable beta figure. Alpha. Alpha is a measure used to discuss a fund's relative performance. Alpha measures the actual return of a fund compared to the expected return of a fund given its risk (as measured by beta). The expected return of a fund is based on how historical movements of the benchmark index and historical performance of a fund compare to the benchmark index. The expected return is computed by multiplying the advance or decline in a market represented by a fund's beta. A positive alpha quantifies the value that a fund manager has added and a negative alpha quantifies the value that a fund manager has lost. Standard deviation. Standard deviation quantifies the volatility in the returns of a Fund by measuring the amount of variation in the group of returns that make up a Fund's average return. Standard deviation is generally calculated over a three or five year period using monthly returns and modified to present an annualized standard deviation. Sharpe ratio. A Fund's Sharpe ratio quantifies its total return in excess of the return of a guaranteed investment (90 day U.S. treasury bills), relative to its volatility as measured by its standard deviation. The higher a Fund's Sharpe ratio, the better a Fund's returns have been relative to the amount of investment risk it has taken. Beta and R-squared are calculated by performing a least squares linear regression using three years of monthly total return figures for each portfolio and benchmark combination. Alpha is calculated by taking the difference between the average monthly portfolio return and the beta-adjusted average monthly benchmark return. The result of this calculation is then geometrically annualized. 26
As of December 31, 1999, some statistics for the Funds are as follows: R2 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 WAM's staff may make presentations at conferences or trade shows, appear on television or radio programs, or conduct or participate in telephone conference calls, and the Funds may announce those presentations, appearances or calls to some or all shareholders, or to potential investors in the Funds. Biographical and other information about a Fund's portfolio manager, including information about awards received by that portfolio manager or mentions of the manager in the media, may also be described or quoted in Fund advertisements or sales literature. The following are some benchmark indices utilized by the Funds: Salomon Smith Barney Extended Market Index ("EMI"), an index of the bottom 20% of institutionally investable capital of countries, selected by SSB, excluding the U.S.; the Salomon Smith Barney World ex-U.S. Cap Range $2-$10 billion Index is the $2 to $10 billion (U.S.) subset of SSB's Broad Market Index, which represents a mid cap developed market index, excluding the U.S.; Morgan Stanley's Europe, Australasia Far East Index ("EAFE"), an index of companies throughout the world in proportion to world stock market capitalizations, excluding the U.S. and Canada; the Standard & Poor's 500 Stock Index ("S&P 500"), a broad, market-weighted average of U.S. blue-chip companies; the Standard & Poor's MidCap 400 ("S&P 400"), also a broad, market-weighted average of U.S. companies in the next tier down in size from the S&P 500; and the Russell 2000 Index, an index formed by taking the 3,000 largest U.S. companies and eliminating the largest 1,000, leaving an unweighted index of 2000 small companies. All indexes are unmanaged and include reinvested dividends. The Funds may also compare their performance to the performance of groups of mutual funds, including Lipper Averages and Indexes. Each Lipper Average is the mean return of all mutual funds tracked by Lipper, Inc. in that category, which generally will include the Fund making the comparison. Lipper Indexes measure the performance of the largest funds tracked by Lipper in a designated category. 27 INVESTMENT ADVISER The Funds' investment adviser, Wanger Asset Management, L.P. ("WAM"), serves as the investment adviser for the Funds and for other institutional accounts. As of the date of this SAI, WAM has approximately $9 billion under management, including the Funds. WAM is a limited partnership managed by its general partner, WAM Ltd., whose stockholders are Ralph Wanger, Charles P. McQuaid, Leah J. Zell, Marcel P. Houtzager, Robert A. Mohn, John H. Park, Margaret M. Forster, Roger Edgely, Bruce H. Lauer, and Peter Zaldivar. Ralph Wanger is the president of WAM Ltd. On matters submitted to the shareholders of WAM Ltd., each shareholder has one vote (or a lesser vote in the case of new shareholders). With certain exceptions (including for extraordinary transactions, for which Mr. Wanger's consent is required), decisions are made by majority vote. WAM commenced operations in 1992. WAM furnishes continuing investment supervision to the Funds under investment advisory agreements (the "Agreements") and is responsible for overall management of the Funds' business affairs. It furnishes office space, equipment and personnel to the Funds and assumes the expenses of printing and distributing the Funds' prospectus and reports to prospective investors. The Agreements for WANGER U.S. SMALL CAP and WANGER INTERNATIONAL SMALL CAP will continue in effect as to each of the Funds through December 31, 2000, and thereafter from year to year so long as its continuance is approved at least annually by (i) the board of trustees of the Trust or by the holders of a majority of each Fund's outstanding voting securities as defined by the Investment Company Act of 1940 and (ii) a majority of the members of the Trust's board of trustees who are not otherwise affiliated with the Trust or WAM, cast in person at a meeting called for that purpose. The Agreement for WANGER TWENTY and WANGER FOREIGN FORTY will continue in effect as to each of the Funds through December 31, 2001, and thereafter from year to year so long as its continuance is approved at least annually by (i) the board of trustees of the Trust or by the holders of a majority of each Fund's outstanding voting securities as defined by the Investment Company Act of 1940 and (ii) a majority of the members of the Trust's board of trustees who are not otherwise affiliated with the Trust or WAM, cast in person at a meeting called for that purpose. Any amendment to the Agreements must be approved in the same manner. The Agreements may be terminated as to any Fund without penalty by the vote of the board of trustees of the Trust or the shareholders of that Fund (by a majority as defined in the 1940 Act) on 60 days' written notice to WAM or by WAM on 60 days' notice to the Fund, and will terminate automatically in the event of assignment. 28 The advisory fees the Funds pay to WAM are calculated daily and paid monthly, at the following annual rates:
WANGER U.S. SMALL CAP Average Daily Net Assets Rate of Fee ------------------------ ----------- First $100 million 1.00% $100 million to $250 million 0.95% In excess of $250 million 0.90% WANGER INTERNATIONAL SMALL CAP Average Daily Net Assets Rate of Fee ------------------------ ----------- First $100 million 1.30% $100 million to $250 million 1.20% In excess of $250 million 1.10% WANGER TWENTY Rate of Fee ----------- 0.95% WANGER FOREIGN FORTY Rate of Fee ----------- 1.00%
WAM has undertaken to reimburse WANGER TWENTY and WANGER FOREIGN FORTY to the extent their ordinary operating expenses exceed 1.35% and 1.45%, respectively of its average annual net assets. These expense limitation undertakings are voluntary and may be terminated by either WAM or the Trust on 30 days' written notice to the other. 29 The advisory fees paid by each Fund for the fiscal years ended December 31, 1999, 1998 and 1997 were as follows:
FUND 1999 1998 1997 ----------------------------------- ------------------------ ------------------------ ---------------------------- Wanger U.S. Small Cap $3,172,578 $2,972,442 $1,960,795 Wanger International Small Cap $2,231,975 $1,751,136 $1,528,703 Wanger Twenty Gross advisory fee $35,044 ---- ---- Exp. Reimb. (26,027) ------------ Net advisory fee 9,017 Wanger Foreign Forty Gross advisory fee $19,994 ---- ---- Exp. Reimb. (37,004) ------------ Net advisory fee (17,010)
WAM is currently undergoing merger negotiations with Liberty Financial Companies, Inc. The Merger Agreement requires that the trustees (on behalf of each of the Funds) and the shareholders of Wanger U.S. Small Cap and Wanger International Small Cap approve a new investment advisory agreement with WAM. For more information on the merger negotiations, see page 2 of this SAI. The Funds pay the cost of custodial, stock transfer, dividend disbursing, audit and legal services, and membership in trade organizations. They also pay other expenses such as the cost of maintaining the registration of their shares under federal law, complying with state securities laws, proxy solicitations, printing and distributing notices and copies of the prospectus and shareholder reports furnished to existing shareholders, taxes, insurance premiums, and the fees of trustees not affiliated with WAM. DISTRIBUTOR Shares of each Fund are distributed by WAM Brokerage Services, L.L.C. ("WAM BD") under a Distribution Agreement as described in the prospectus dated May 1, 2000, which is incorporated herein by reference. The Distribution Agreement continues in effect from year to year, provided such continuance is approved annually (i) by a majority of the trustees or by a majority of the outstanding voting securities of the Trust, and (ii) by a majority of the trustees who are not parties to the Agreement or interested persons of any such party. Shares of the Funds are offered for sale through WAM BD on a best efforts basis without any sales commission or charges to the Funds or Life Companies or Retirement Plans purchasing Fund shares. However, each Variable Contract imposes its own charges and fees on owners of Variable Contracts and Retirement Plans and may impose such charges on participants in a Retirement Plan. The Trust has agreed to pay all expenses in connection with registration of its shares with the Securities and Exchange Commission and in compliance with state securities laws. WAM bears all sales and promotional expenses, other than those borne by a Life Company or Retirement Plan. WAM BD is located at 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. 30 THE TRUST The Trust is a Massachusetts business trust organized under an Agreement and Declaration of Trust dated August 30, 1994. The Agreement and Declaration of Trust may be amended by a vote of either the Trust's shareholders or its Trustees. The Trust may issue an unlimited number of shares, in one or more series as the Board of Trustees may authorize. Any such series of shares may be further divided, without shareholder approval, into two or more classes of shares having such preferences or special or relative rights or privileges as the Trustees may determine. The shares of the Funds are not currently divided into classes. The board of trustees may authorize the issuance of additional series if deemed advisable, each with its own investment objective, policies, and restrictions. All shares issued will be fully paid and non-assessable and will have no preemptive or conversion rights. On any matter submitted to a vote of shareholders, shares are voted in the aggregate and not by individual series except that shares are voted by individual series when required by the Investment Company Act of 1940 or other applicable law, or when the board of trustees determines that the matter affects only the interests of one series, in which case shareholders of the unaffected series are not entitled to vote on such matters. All shares of the Trust are voted together in the election of trustees. Shares do not have cumulative voting rights; accordingly, shareholders controlling voting interests of more than 50% of shares of the Funds voting for the election of trustees could elect all of the trustees if they chose to do so, and in such event, shareholders controlling voting interests of the remaining shares would not be able to elect any trustees. Shareholder rights regarding voting are described in the prospectus. These voting rights are based on applicable federal and state laws. To the extent that changes in such laws or regulations thereunder or interpretations thereof eliminate the necessity to submit any such matters to a shareholder vote, or otherwise restrict or limit such voting rights, the Trust reserves the right to act in any manner permitted by such changes. The Trust's Declaration of Trust disclaims liability of the shareholders, trustees, and officers of the Trust for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or contract entered into or executed by the Trust or the board of trustees. The Declaration of Trust provides for indemnification out of the Trust's assets for all losses or expenses of any shareholder held personally liable for the obligations of the Trust. Thus, although shareholders of a business trust may, under certain circumstances, be held personally liable under Massachusetts law for the obligations of the trust, the risk of a shareholder incurring financial loss on account of shareholder liability is believed to be remote because it is limited to circumstances in which the disclaimer is inoperative and the Trust itself is unable to meet its obligations. The risk to any one series of sustaining a loss on account of liabilities incurred by another series is also believed to be remote. 31 TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS The board of trustees has overall responsibility for the Trust's and the Funds' affairs. The trustees have general oversight responsibility for the Funds' operations. The trustees and officers of the Trust (including their dates of birth and their principal business activities during the past five years are) are listed below in alphabetical order:
POSITION(S) NAME AND HELD WITH DATE OF BIRTH THE FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS ------------- ------------- ---------------------------------------------- Fred D. Hasselbring Trustee Retail industry and general business computer systems consultant; director 8/14/1941 and executive administrator, The Malachi Corp., Inc. (a non-profit corporation). Charles P. McQuaid Trustee and Principal and director of research, Wanger Asset Management, L.P. since 8/27/1953 senior vice July 1992; trustee and senior vice president, Acorn Investment Trust; president* co-portfolio manager, Acorn Fund. P. Michael Phelps Trustee Retired since January 31, 1998; prior thereto, vice president and 9/19/1933 corporate secretary, Morton International, Inc. Ralph Wanger Trustee and Director, Wanger Investment Company plc; principal and portfolio manager, 6/21/1934 president* Wanger Asset Management, L.P. since July 1992; trustee and president, Acorn Investment Trust. Patricia H. Werhane Trustee Ruffin Professor of Business Ethics, Darden Graduate School of Business 9/20/1935 Administration, University of Virginia, 1993 - present. Marcel P. Houtzager Vice president Principal (since 1995), analyst and portfolio manager (since 1992), Wanger 10/26/1960 Asset Management, L.P.; chief financial officer and compliance officer, Wanger Asset Management, L.P. (since April 2000). Kenneth A. Kalina Assistant Fund controller, Wanger Asset Management, L.P., since September 1995; 8/4/1959 treasurer assistant treasurer, Acorn Investment Trust; prior thereto, treasurer of the Stein Roe Mutual Funds. Bruce H. Lauer Vice Principal (since January 1, 2000) and chief operating officer (since April 7/22/1957 president, 1995), Wanger Asset Management, L.P., vice president, treasurer and assistant assistant secretary, Acorn Investment Trust; director, Wanger Investment secretary and Company plc and New Americas Small Cap Fund; prior thereto, first vice treasurer president, investment accounting, Kemper Financial Services, Inc. Robert A. Mohn Vice president Principal (since 1995), analyst and portfolio manager (since August 1992), 9/13/1961 Wanger Asset Management, L.P.; vice president, Acorn Investment Trust. John H. Park Vice president Principal (since 1998), analyst and portfolio manager (since July 1993), 5/30/1967 Wanger Asset Management, L.P.; vice president, Acorn Investment Trust. Peter A. Zaldivar Vice president Analyst and portfolio manager, Wanger Asset Management, L.P., since 1996; 5/26/1967 prior thereto, vice president and portfolio manager, Lord Asset Management. 32 POSITION(S) NAME AND HELD WITH DATE OF BIRTH THE FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS ------------- ------------- ---------------------------------------------- Leah J. Zell Vice president Principal, analyst, and portfolio manager, Wanger Asset Management, L.P., 5/23/1949 since July 1992; vice president, Acorn Investment Trust; managing director and member of trust committee, Chai Trust Company. Roger D. Edgely Vice president Vice president, Acorn Investment Trust; principal (since January 1, 2000) 4/18/1955 and analyst (since 1994), Wanger Asset Management L.P.; director of international research, Wanger Asset Management, L.P., since 1998; co-portfolio manager, Wanger Foreign Forty since December 1999; prior thereto, analyst, Crosby Securities. Steven A. Radis Secretary Chief Marketing Officer and Managing Director, Wanger Asset Management, 8/24/1962 L.P., since April 1999; prior thereto, Vice President of Corporate and Marketing Communications, Zurich Kemper Life, January 1998 to March 1999, and First Vice President Corporate Communications, Zurich Kemper Life, January 1987 to December 1997.
*Messrs. McQuaid and Wanger are Trustees who are "interested persons" of the Trust as defined in the Investment Company Act of 1940, and of WAM. Mr. Wanger and Ms. Zell are married to each other. Messrs. McQuaid, Phelps and Wanger are members of the Executive Committee, which has authority during intervals between meetings of the Board of Trustees to exercise the powers of the board, with certain exceptions. Messrs. Hasselbring, Phelps and Ms. Werhane are members of the Audit Committee, which has the authority to make recommendations to the Board of Trustees regarding the selection of independent auditors for the Trust and to confer with the independent auditors regarding the scope and results of each audit. The address for Messrs. Wanger, McQuaid, Edgely, Houtzager, Kalina, Lauer, Mohn, Park, Radis, Zaldivar and Ms. Zell is Wanger Asset Management, L.P., 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. The address for Mr. Hasselbring is One Wheaton Center, Suite 1802, Wheaton, IL 60187. The address for Mr. Phelps is 222 E. Chestnut Street, Apt. 10-B, Chicago, IL 60611. The address for Ms. Werhane is 104 Falcon Drive, Charlottesville, VA 22901. At March 31, 2000, the trustees and officers as a group owned beneficially less than 1% of the outstanding shares of WANGER U.S. SMALL CAP and WANGER INTERNATIONAL SMALL CAP. At March 31, 2000, the trustees and officers as a group owned beneficially 2.33% of the outstanding shares of WANGER TWENTY and 4.55% of the outstanding shares of WANGER FOREIGN FORTY. At that date, Phoenix Home Life Mutual Insurance Company (and its affiliates), One American Row, Hartford, Connecticut 06102-5056, was the record holder of 7,799,432.640 shares (approximately 91.49% of the outstanding shares) of WANGER INTERNATIONAL SMALL CAP, 17,248,017.191 shares (approximately 92.43% of the outstanding shares) of WANGER U.S. SMALL CAP, 552,031.372 shares (approximately 95.64% of the outstanding shares) of WANGER TWENTY 33 and 429,290.370 shares (approximately 92.57% of the outstanding shares) of WANGER FOREIGN FORTY all of which are beneficially owned by Variable Contract owners. At March 31, 2000, American Express Financial Advisors, IDS Tower 10, Minneapolis, MN 55440, was the record holder of 1,006,692.469 shares (approximately 5.39% of the outstanding shares) of WANGER U.S. SMALL CAP and 471,055.687 shares (approximately 5.53% of the outstanding shares) of WANGER INTERNATIONAL SMALL CAP. The following table shows compensation paid by the Trust during the fiscal year ended December 31, 1999 to each Trustee of the Trust who is not an "interested person" of the Trust or of WAM. The Trust does not pay compensation to its officers or to Trustees who are "interested persons." The Trust does not offer any pension or retirement benefits to its trustees.
AGGREGATE TOTAL AGGREGATE AGGREGATE AGGREGATE COMP. FROM COMP. COMP. COMP. COMP. FROM WANGER FROM FROM U.S. FROM INT. WANGER FOREIGN FUND NAME OF TRUSTEE SMALL CAP SMALL CAP TWENTY+ FORTY+ COMPLEX --------------------------- ------------- --------------- --------------- -------------- --------------- 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
+ For the period 2/1/99 (inception date) through 12/31/99. PURCHASING AND REDEEMING SHARES Shares of the Funds may not be purchased or redeemed directly by individual Variable Contract owners or individual Retirement Plan participants. Purchases and redemptions are discussed in the prospectus. For purposes of computing the net asset value of a share of either Fund, a security traded on a securities exchange, or in an over-the-counter market in which transaction prices are reported, is generally valued at the last sale price at the time of valuation. A security for which there is no reported sale on the valuation date is generally valued at the mean of the latest bid and ask quotations or, if there is no ask quotation, at the most recent bid quotation. Securities for which quotations are not readily available, or for which the market quotation is determined not to represent a fair value, and any other assets are valued at a fair value as determined in good faith by the board of trustees. Money market instruments having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. All assets and liabilities initially expressed in foreign currencies are converted into U.S. dollars at the mean of the bid and offer prices of such currencies against U.S. dollars quoted by any major bank or dealer. If such quotations are not readily available, the rate of exchange will be determined in accordance with policies established in good faith by the board of trustees. 34 Each Fund's net asset value is determined only on days on which the New York Stock Exchange ("NYSE") is open for trading. The NYSE is regularly closed on Saturdays and Sundays and on New Year's Day, the third Monday in January, the third Monday in February, Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving, and Christmas. If one of these holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding Friday or the following Monday, respectively. Trading in the portfolio securities of the Funds, particularly WANGER INTERNATIONAL SMALL CAP and WANGER FOREIGN FORTY, may take place in various foreign markets at certain times on certain days (such as Saturday) when the NYSE is not open for business and the Funds do not calculate their net asset values. Conversely, trading in the Funds' portfolio securities may not occur on days when the NYSE is open. Because of the differences in the days and times at which trading occurs in various markets, the calculation of net asset value does not take place contemporaneously with the determinations of the prices of many of the Funds' portfolio securities. The last sale price included in the calculation of a Fund's net asset value may be several hours old at the time when it is included in that calculation, which may have a significant effect on a Fund's net asset value. Computation of net asset value (and the sale and redemption of Fund shares) may be suspended or postponed during any period when (a) trading on the NYSE is restricted, as determined by the Securities and Exchange Commission, or that exchange is closed for other than customary weekend and holiday closings, (b) the Commission has by order permitted such suspension, or (c) an emergency, as determined by the Commission, exists making disposal of portfolio securities or valuation of the net assets of the Funds not reasonably practicable. The Trust has elected to be governed by Rule 18f-1 under the Investment Company Act of 1940 pursuant to which it is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of a Fund during any 90-day period for any one shareholder. Redemptions in excess of the above amounts will normally be paid in cash, but may be paid wholly or partly by a distribution in-kind of securities. If a redemption is made in kind, the redeeming shareholder would bear any transaction costs incurred in selling the securities received. The Agreement and Declaration of Trust also authorizes the Trust to redeem shares under certain other circumstances as may be specified by the board of trustees. ADDITIONAL TAX INFORMATION Shares of the Funds are offered to separate accounts of Life Companies that fund Variable Contracts and may be offered to certain Retirement Plans, which are pension plans and retirement arrangements and accounts permitting the accumulation of funds on a tax-deferred basis. See the disclosure documents for the Variable Contracts or the plan documents (including the summary plan description) for the Retirement Plans for a discussion of the special taxation of insurance companies with respect to the separate accounts and the Variable Contracts, and the holders thereof, or the special taxation of Retirement Plans and the participants therein. Each Fund intends to qualify for treatment as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") so as to 35 avoid payment of federal income tax on its capital gains and net investment income currently distributed to its shareholders. In order to qualify for that treatment, each Fund must distribute to shareholders for each taxable year at least 90% of its investment company taxable income (consisting generally of net investment income, net short-term capital gain, and net gains from certain foreign currency transactions) ("Distribution Requirement") and must meet several additional requirements. These requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in securities or currencies ("Income Requirement"); (2) at the close of each quarter of the Fund's taxable year, at least 50% of the value of its total assets must be represented by cash or cash items, U.S. Government securities, securities of other RICs, and other securities that, with respect to any one issuer, do not exceed 5% of the value of the Fund's total assets and that do not represent more than 10% of the outstanding voting securities of the issuer; and (3) at the close of each quarter of the Fund's taxable year, not more than 25% of the value of its total assets may be invested in securities (other than U.S. Government securities or the securities of other RICs) of any one issuer. As noted in the prospectus, each Fund must, and intends to, comply with the diversification requirements imposed by Section 817(h) of the Code and the regulations thereunder. Those requirements are different from the standards for regulated investment companies under Subchapter M of the Code. For information concerning the consequences of failure to meet the requirements of Section 817(h), see the prospectus for the Variable Contracts. The Funds will not be subject to the 4% federal excise tax imposed on RICs that do not distribute substantially all their income and gains each calendar year because that tax does not apply to a RIC whose only shareholders are segregated asset accounts of life insurance companies held in connection with variable annuity contracts and/or variable life insurance policies or Retirement Plans. The foregoing is only a general summary of some of the important federal income tax considerations generally affecting the Funds and their shareholders. No attempt is made to present a complete explanation of the federal tax treatment of the Funds' activities, and this discussion and the discussion in the prospectuses and/or statements of additional information for variable contracts are not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local or foreign taxes applicable to the variable contracts and the holders thereof. PORTFOLIO TRANSACTIONS Portfolio transactions of the Funds are placed with those securities brokers and dealers that WAM believes will provide the best value in transaction and research services for each Fund, either in a particular transaction or over a period of time. Although some transactions involve only brokerage services, many involve research services as well. 36 In valuing brokerage services, WAM makes a judgment as to which brokers are capable of providing the most favorable net price (not necessarily the lowest commission) and the best execution in a particular transaction. Best execution connotes not only general competence and reliability of a broker, but specific expertise and effort of a broker in overcoming the anticipated difficulties in fulfilling the requirements of particular transactions, because the problems of execution and the required skills and effort vary greatly among transactions. In valuing research services, WAM makes a judgment of the usefulness of research and other information provided to WAM by a broker in managing each Fund's investment portfolio. In some cases, the information, e.g., data or recommendations concerning particular securities, relates to the specific transaction placed with the broker, but for the greater part the research consists of a wide variety of information concerning companies, industries, investment strategy, and economic, financial, and political conditions and prospects, useful to WAM in advising that Fund. In some cases, a Fund may pay a higher commission to a broker that also provides research services to the Fund than it might have paid to a broker that does not provide such research services. The reasonableness of brokerage commissions paid by the Funds in relation to transaction and research services received is evaluated by WAM's staff on an ongoing basis. The general level of brokerage charges and other aspects of each Fund's portfolio transactions are reviewed periodically by the board of trustees. WAM is the principal source of information and advice to the Funds, and is responsible for making and initiating the execution of investment decisions by the Funds. However, the Board of Trustees recognizes that it is important for WAM, in performing its responsibilities to the Funds, to continue to receive and evaluate the broad spectrum of economic and financial information that many securities brokers have customarily furnished in connection with brokerage transactions, and that in compensating brokers for their services, it is in the interest of the Funds to take into account the value of the information received for use in advising the Funds. The extent, if any, to which the obtaining of such information may reduce WAM's expenses in providing management services to the Funds is not determinable. In addition, the Board of Trustees understands that other clients of WAM might benefit from the information obtained for the Funds, in the same manner that the Funds might benefit from information obtained by WAM in performing services to others. Transactions of the Funds in the over-the-counter market and the third market are executed with primary market makers acting as principal except where it is believed that better prices and execution may be obtained otherwise. Brokerage commissions incurred by the Funds during the last three fiscal years, not including the gross underwriting spread on securities purchased in underwritten public offerings, were as follows:
FUND 1999 1998 1997 -------------------------------------------- ----------------- ------------------ ------------------ Wanger U.S. Small Cap $208,460 $253,172 $249,054 37 Wanger International Small Cap 787,215 518,766 647,529 Wanger Twenty 15,056 N/A N/A Wanger Foreign Forty 14,569 N/A N/A
The increase in the commissions paid by WANGER INTERNATIONAL SMALL CAP in 1999 compared to 1998 resulted from an increase in the Fund's assets (from $141 million at December 31, 1998 to $311 million at December 31, 1999) and an increase in portfolio turnover from 56% in 1998 to 75% in 1999. The commissions paid by WANGER TWENTY and WANGER FOREIGN FORTY resulted from the increase in their assets after they began operations in February 1999. Although investment decisions for the Funds are made independently from those for other investment advisory clients of WAM, it may develop that the same investment decision is made for one or more of the Funds and one or more other advisory clients. If one or more of the Funds and other clients purchase or sell the same class of securities on the same day, the transactions will be allocated as to amount and price in a manner considered equitable to each. CODE OF ETHICS The 1940 Act and rules thereunder require that the Trust and WAM establish standards and procedures for the detection and prevention of certain conflicts of interest, including activities by which persons having knowledge of the investments and investment intentions of the Funds might take advantage of that knowledge for their own benefit. The Trust and WAM have adopted a Code of Ethics to meet those concerns and legal requirements. Although the Code does not prohibit employees who have knowledge of the investments and investment intentions of the Funds from engaging in personal securities investing, it does regulate such personal securities investing by these employees as a part of the effort by the Trust and WAM to detect and prevent conflicts of interest. CUSTODIAN State Street Bank and Trust Company, P.O. Box 8502, Boston, Massachusetts 02266-8502, is both the custodian and the transfer agent for the Funds. As custodian, it is responsible for holding all securities and cash of the Funds, receiving and paying for securities purchased, delivering against payment securities sold, receiving and collecting income from investments, making all payments covering expenses of the Funds, and performing other administrative duties, all as directed by authorized persons of the Funds. The custodian does not exercise any supervisory function in such matters as purchase and sale of portfolio securities, payment of dividends, or payment of expenses of the Funds. The Funds have authorized the custodian to deposit certain portfolio securities of the Funds in central depository systems as permitted under federal law. The Funds may invest in obligations of the custodian and may purchase or sell securities from or to the custodian. The custodian may employ one or more sub-custodians located in the United States upon approval by the Board of Trustees of the Trust; and is authorized to employ sub-custodians for the Funds' assets maintained outside the United States. 38 INDEPENDENT AUDITORS Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606 audits and reports on the Funds' annual financial statements, reviews certain regulatory reports and the Funds' federal income tax return, and performs other professional accounting, auditing, tax, and advisory services when engaged to do so by the Funds. FINANCIAL STATEMENTS Wanger Advisors Trust 1999 Annual Report WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31,1999 -------------------------------------------------------------------------------- Number of Value Shares COMMON STOCKS-89.5% INFORMATION-48.4% -------------------------------------------------------------------------------- BROADCASTING-1.3% 250,600 Data Transmission Network (b) $4,322,850 Data Services for Farmers 18,000 Young Broadcasting (b) 918,000 Television Stations -------------------------------------------------------------------------------- 5,240,850 -------------------------------------------------------------------------------- TELEVISION PROGRAMMING-1.8% 128,400 TV Guide (b) 5,521,200 TV Program Guides & Programming 36,900 Classic Communications (b) 1,349,156 Cable Television in Rural Areas -------------------------------------------------------------------------------- 6,870,356 -------------------------------------------------------------------------------- RADIO-0.2% 36,300 Salem Communications (b) 821,287 Radio Stations for Religious Programming -------------------------------------------------------------------------------- TELEPHONE SERVICES-6.1% 389,500 RCN (b) 18,890,750 Metro Market CLEC: Voice, Video & Data Services 94,300 Commonwealth Telephone (b) 4,986,113 Rural Market CLEC: Local, Long Distance & Internet Services -------------------------------------------------------------------------------- 23,876,863 -------------------------------------------------------------------------------- MOBILE COMMUNICATIONS-7.2% 128,000 Telephone and Data Systems 16,128,000 Cellular & Telephone Services 234,500 COMARCO (b) (c) 5,510,750 Wireless Network Testing 173,400 Price Communications (b) 4,822,688 Cellular Telephone Services 73,000 Diversinet (b) 1,606,000 Wireless PKI Security -------------------------------------------------------------------------------- 28,067,438 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- TELECOMMUNICATIONS EQUIPMENT-3.1% 305,900 Aspect Communications (b) $11,968,337 Call Center Equipment -------------------------------------------------------------------------------- BUSINESS INFORMATION/MARKETING SERVICES-2.7% 194,300 CACI International (b) 4,396,037 Technology Services for Government 56,700 Getty Images (b) 2,771,212 Photographs for Publications & Electronic Media 151,000 PRIMEDIA (b) 2,491,500 Specialty Magazines & Other Publications 122,500 Telespectrum Worldwide (b) 872,813 Call Center Services -------------------------------------------------------------------------------- 10,531,562 -------------------------------------------------------------------------------- BUSINESS SOFTWARE-3.0% 501,300 JDA Software Group (b) 8,208,787 Applications Software & Services for Retailers 63,000 Project Software (b) 3,496,500 Enterprise Maintenance Software -------------------------------------------------------------------------------- 11,705,287 -------------------------------------------------------------------------------- TRANSACTION PROCESSORS-2.9% 338,300 National Data 11,481,056 Credit Card & Health Claims Processor -------------------------------------------------------------------------------- COMPUTER HARDWARE/RELATED SYSTEMS-12.3% 423,500 Micros Systems (b) 31,339,000 Information Systems for Restaurants & Hotels 222,900 Kronos (b) 13,374,000 Labor Management Solutions 129,000 American Power Conversion (b) 3,402,375 Uninterruptible Power Systems -------------------------------------------------------------------------------- 48,115,375 -------------------------------------------------------------------------------- SEMICONDUCTORS/RELATED EQUIPMENT-1.4% 232,000 Galileo Technology (b) 5,597,000 Semiconductors for Networking Equipment See accompanying notes to financial statements. 39 Wanger Advisors Trust 1999 Annual Report WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31,1999 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- CONTRACT MANUFACTURING-0.1% 9,000 Applied Power $330,750 Electronic Enclosures & Industrial Products -------------------------------------------------------------------------------- GAMING EQUIPMENT-0.6% 113,000 International Game Technology 2,295,312 Slot Machines & Progressive Jackpots -------------------------------------------------------------------------------- COMPUTER SERVICES-4.7% 294,900 Sykes Enterprises (b) 12,938,737 Call Center Services 630,000 Aztec Technology Partners (b) 2,874,375 Technology Staffing Services 151,700 Computer Task Group 2,247,056 Application Development & Staffing Services 16,600 Meta Group (b) 315,400 IT Publications & Consulting Services -------------------------------------------------------------------------------- 18,375,568 -------------------------------------------------------------------------------- CONSUMER SOFTWARE-0.2% 88,000 3DO Company (b) 800,250 Entertainment Software -------------------------------------------------------------------------------- INTERNET RELATED-0.8% 122,000 Online Resources (b) 2,028,250 Internet Banking 20,000 Radware (b) 862,500 Internet Infrastructure/Internet Traffic -------------------------------------------------------------------------------- 2,890,750 -------------------------------------------------------------------------------- INFORMATION-TOTAL 188,968,041 HEALTH CARE-9.1% -------------------------------------------------------------------------------- BIOTECHNOLOGY/DRUG DELIVERY-1.1% 55,000 Myriad Genetics (b) 2,530,000 Gene Discovery & Diagnostic Products 45,100 Genome Therapeutics (b) 727,238 Gene Discovery Services -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- BIOTECHNOLOGY/DRUG DELIVERY-1.1% (CONT) 31,000 Genset (b) $590,938 Genomics 39,000 Synaptic Pharmaceuticals (b) 263,250 Receptor Targeted Drug Design 32,500 Genzyme Molecular Oncology Division (b) 227,500 Gene Expression Technology & Cancer Drugs -------------------------------------------------------------------------------- 4,338,926 -------------------------------------------------------------------------------- SERVICES-8.0% 504,000 Lincare Holdings (b) 17,482,500 Home Health Care Services 386,000 First Health (b) 10,373,750 PPO Network 552,700 Magellan Health Services (b) 3,488,919 Mental Health Services -------------------------------------------------------------------------------- 31,345,169 -------------------------------------------------------------------------------- HEALTH CARE-TOTAL 35,684,095 CONSUMER GOODS/SERVICES-1.5% -------------------------------------------------------------------------------- NONDURABLES-0.2% 91,700 NuSkin Enterprises (b) 831,031 Personal Care/Herbal Products -------------------------------------------------------------------------------- RETAIL-0.7% 50,500 Whole Foods Market (b) 2,341,938 Natural Food Supermarkets 45,000 MotherNature.com (b) 329,063 Healthy Living E-Commerce -------------------------------------------------------------------------------- 2,671,001 -------------------------------------------------------------------------------- CASINOS-0.2% 115,200 Monarch Casino & Resort (b) 604,800 Casino/Hotel in Reno See accompanying notes to financial statements. 40 Wanger Advisors Trust 1999 Annual Report WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- CONSUMER SERVICES-0.4% 112,000 ITT Educational Services (b) $1,729,000 Technology Oriented Post Secondaty Degree Programs -------------------------------------------------------------------------------- CONSUMER GOODS/SERVICES-TOTAL 5,835,832 FINANCE-10.7% -------------------------------------------------------------------------------- BANKS/SAVINGS & LOANS-1.5% 82,000 Texas Regional Bancshares 2,378,000 TexMex Bank 79,500 Peoples Bank Bridgeport 1,679,438 Connecticut Savings & Loan 51,400 Chittenden 1,522,725 Vermont & West Massachusetts Bank 11,000 TCF Financial 273,625 Great Lakes Bank -------------------------------------------------------------------------------- 5,853,788 -------------------------------------------------------------------------------- FINANCE COMPANIES-2.7% 509,400 AmeriCredit (b) 9,423,900 Auto Lending 232,000 World Acceptance (b) 1,116,500 Personal Loans -------------------------------------------------------------------------------- 10,540,400 -------------------------------------------------------------------------------- INSURANCE-4.3% 586,600 UICI (b) 6,195,963 Health Insurance 21,000 Markel (b) 3,255,000 Specialty Insurance 403,900 Acceptance Insurance (b) 2,347,669 Crop Insurance 92,000 Leucadia National 2,127,500 Insurance Holding Company -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- INSURANCE-4.3% (CONT) 66,000 Protective Life $2,099,625 Life/Dental Insurance 30,000 Terra Nova 900,000 Specialty Insurance -------------------------------------------------------------------------------- 16,925,757 -------------------------------------------------------------------------------- MONEY MANAGEMENT-2.2% 51,000 SEI Investments 6,069,797 Mutual Fund Administration 167,700 Baker Fentress 2,379,244 Closed-End Investment Company -------------------------------------------------------------------------------- 8,449,041 -------------------------------------------------------------------------------- FINANCE-TOTAL 41,768,986 INDUSTRIAL GOODS/SERVICES-4.9% -------------------------------------------------------------------------------- MACHINERY-0.1% 48,700 Farr (b) 474,825 Filters -------------------------------------------------------------------------------- STEEL-0.5% 192,400 Atchison Casting (b) 1,755,650 Steel Foundries -------------------------------------------------------------------------------- SPECIALTY CHEMICALS-0.7% 189,600 Lilly Industries, Cl. A 2,547,750 Industrial Coatings -------------------------------------------------------------------------------- OTHER INDUSTRIAL SERVICES-3.6% 412,100 Insurance Auto Auctions (b) 6,490,575 Auto Salvage Services 516,400 Wackenhut, Cl. B 5,325,375 Prison Management 198,000 Labor Ready 2,400,750 Temporary Manual Labor -------------------------------------------------------------------------------- 14,216,700 -------------------------------------------------------------------------------- INDUSTRIAL GOODS/SERVICES-TOTAL 18,994,925 See accompanying notes to financial statements. 41 Wanger Advisors Trust 1999 Annual Report WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares ENERGY/MINERALS- 13.4% -------------------------------------------------------------------------------- INDEPENDENT POWER-7.1% 737,600 MidAmerican Energy $24,847,900 Growth Utility 38,000 AES Corporation (b) 2,840,500 Power Plants -------------------------------------------------------------------------------- 27,688,400 -------------------------------------------------------------------------------- OIL/GAS PRODUCERS-2.1% 688,900 Tesoro Petroleum (b) 7,965,406 Oil Refinery/Gas Reserves -------------------------------------------------------------------------------- DISTRIBUTION/MARKETING/REFINING-4.2% 304,100 Dynegy 7,393,431 Natural Gas; Electric Processing & Marketing 137,000 Equitable Resources 4,572,375 Natural Gas Utility & Producer 223,000 Atmos Energy 4,557,563 Natural Gas Utility -------------------------------------------------------------------------------- 16,523,369 -------------------------------------------------------------------------------- ENERGY/MINERALS-TOTAL 52,177,175 OTHER INDUSTRIES-1.5% -------------------------------------------------------------------------------- REAL ESTATE-0.6% 47,000 The Rouse Company 998,750 Shopping Malls 25,900 Gaylord Entertainment (b) 775,381 Opryland Hotel & Other Assets 25,000 Cornerstone Properties 365,625 Downtown Office Buildings 21,400 Consolidated Tomoka 272,850 Daytona Beach Area -------------------------------------------------------------------------------- 2,412,606 -------------------------------------------------------------------------------- Principal Amount or Value Number of Shares -------------------------------------------------------------------------------- TRANSPORTATION-0.9% 174,000 Hub Group (b) $3,480,000 Freight Forwarder -------------------------------------------------------------------------------- OTHER INDUSTRIES-TOTAL 5,892,606 TOTAL COMMON STOCKS-89.5% 349,321,660 -------------------------------------------------------------------------------- (COST: $272,240,922) SHORT-TERM OBLIGATIONS-11.2% -------------------------------------------------------------------------------- $19,944,000 Associates First Capital 4.00% Maturing 01/03/00 19,939,568 15,000,000 AT&T Corporation 3.50% Maturing 01/07/00 14,991,250 9,000,000 Abbott Laboratories 3.75% Maturing 01/13/00 8,988,750 -------------------------------------------------------------------------------- (AMORTIZED COST: $43,919,568) 43,919,568 TOTAL INVESTMENTS-100.7% 393,241,228 -------------------------------------------------------------------------------- (COST: $316,160,490) CASH AND OTHER ASSETS LESS LIABILITIES- (0.7%) (2,531,755) -------------------------------------------------------------------------------- TOTAL NET ASSETS-100% $390,709,473 ================================================================================ NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 1999, for federal income tax purposes, cost of investments was $316,759,044 and net unrealized appreciation was $75,482,184 consisting of gross unrealized appreciation of $116,915,906 and gross unrealized depreciation of $40,433,722. (b) Non-income producing security. (c) On December 31, 1999, the fund held 5.47% of the outstanding voting shares of COMARCO. The aggregate cost and value of investments in this company at December 31, 1999, was $4,123,854 and $5,510,750, respectively. The market value of this security represents 1.14% of the total net assets at December 31, 1999. There were no purchases, proceeds from sales of dividends received from this company during the year ended December 31, 1999. See accompanying notes to financial statements. 42 Wanger Advisors Trust 1999 Annual Report WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares COMMON STOCKS-97.4% EUROPE-51.5% -------------------------------------------------------------------------------- GERMANY/AUSTRIA-2.0% 80,000 GFK (b) $3,220,320 Market Research 18,000 Dialog Semiconductor (b) 1,331,401 Custom Semiconductors for Cell Phones 70,000 Entrium (b) 1,070,756 Telephone & Internet Bank 15,000 Austria Technologies 769,858 Printed Circuit Board Manufacturer -------------------------------------------------------------------------------- 6,392,335 -------------------------------------------------------------------------------- NETHERLANDS-8.9% 300,000 Detron Group (b) 6,460,767 Computer Services for Telcos 151,818 Computer Service Solutions (b) 3,941,777 Computer Services 100,000 Versatel (b) 3,522,225 Telecom Services for Business Parks 120,000 Unique International 2,475,621 Temporary Employment 107,500 UCC Holding (b) 2,428,700 Offshore Surveying 60,000 Fugro 2,228,059 Offshore Surveying 80,000 Hunter Douglas 2,173,716 Decorative Window Coverings 40,353 Endemol Entertainment 2,166,503 Game Show Producer 51,666 Kempen 2,053,766 Stock Brokerage/Investment Management 13,000 Fox Kids Europe (b) 166,148 Cartoons -------------------------------------------------------------------------------- 27,617,282 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- FINLAND-2.9% 290,000 Talentum $7,033,381 Trade Journals & Internet Services 100,000 PMJ Automec 1,174,411 Automated Electronics Assemby Equipment 25,000 F-Secure (b) 729,604 Security Software -------------------------------------------------------------------------------- 8,937,396 -------------------------------------------------------------------------------- NORWAY-2.8% 168,200 Enitel (b) 5,023,957 3,100 Enitel Warrants 10/26/04 (b) 19,869 Telecommunication Services 500,000 Visma (b) 3,733,620 Business Software for Ships -------------------------------------------------------------------------------- 8,777,446 -------------------------------------------------------------------------------- SWEDEN-15.2% 450,000 Icon Medialab (b) 15,651,254 Internet Consulting 60,000 Information Highway 9,940,662 Internet Consulting 100,000 Modern Times Group (b) 4,958,581 TV, Newspapers & Electronic Commerce 247,000 Mandator 3,685,917 Computer Services/Consulting 250,000 Semcon 2,937,548 Technical Consultant 15,000 Framtidsfabriken (b) 2,714,294 Internet Consulting 60,000 Connecta (b) 2,044,533 Internet Consulting 55,000 IBS (b) 1,544,563 Business Software 300,000 Micronic Laser Systems (b) 1,339,522 Electronics Production Equipment See accompanying notes to financial statements. 43 Wanger Advisors Trust 1999 Annual Report WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- SWEDEN-15.2% (CONT) 50,000 Entra Data (b) $1,280,771 Business Software 32,000 Effnet Group (b) 1,146,819 Telecommunications Equipment -------------------------------------------------------------------------------- 47,244,464 -------------------------------------------------------------------------------- FRANCE-7.0% 23,800 Prosodie 6,653,624 Automated Call Centers 17,000 FI System (b) 5,166,601 Internet Consulting 15,000 Fininfo 3,773,813 Data Feeds for French Banks & Brokers 40,000 Ipsos (b) 3,304,854 Market Research 35,196 Cegedim 2,479,365 Medical Market Research 23,600 Genset (b) 449,875 Genomics -------------------------------------------------------------------------------- 21,828,132 -------------------------------------------------------------------------------- UNITED KINGDOM-5.6% 600,000 Informa Group (b) 5,898,194 Business Information Provider 1,000,000 Taylor Nelson 4,418,395 Market Research Services 500,000 Hogg Robinson 1,958,795 Corporate Travel Management 250,000 Photobition Group 1,330,769 Production of Graphics for Exhibits 16,000 Baltimore Technologies 1,324,711 Security Software 129,000 Edinburgh Fund Managers (b) 1,106,602 Investment Management -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- UNITED KINGDOM-5.6% (CONT) 75,000 Bloomsbury Publishing (b) $986,869 Publishing 295,000 Chloride Group 464,658 Electrical Equipment Manufacturer/Retailer 135,500 Electronics Boutique 101,789 Videogame/Computer Software Stores -------------------------------------------------------------------------------- 17,590,782 -------------------------------------------------------------------------------- SPAIN/PORTUGAL-2.7% 150,000 Mapfre Vida 3,456,812 Life Insurance/Mutual Funds 200,000 Prosegur 1,789,290 Security Guards 30,000 PT Multimedia (Portugal) (b) 1,704,858 Cable & Satellite Operator 100,000 Filmes Lusomundo (Portugal) (b) 1,408,890 Newspapers, Radio, Video, Film Distribution -------------------------------------------------------------------------------- 8,359,850 -------------------------------------------------------------------------------- SWITZERLAND-0.3% 500 Bachem 801,736 Drug Manufacturer -------------------------------------------------------------------------------- ITALY-4.1% 400,000 Class Editore 6,963,942 Newspapers & On-Line Financial Data 150,000 Banca Pop Commercia e Industria 5,283,338 12,500 Banca Pop Commercia e Industria 396,250 New Shares Regional Bank -------------------------------------------------------------------------------- 12,643,530 -------------------------------------------------------------------------------- EUROPE-TOTAL 160,192,953 See accompanying notes to financial statements. 44 Wanger Advisors Trust 1999 Annual Report WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares ASIA-28.9% -------------------------------------------------------------------------------- HONG KONG-2.6% 328,000 Li & Fung $8,227,954 Sourcing of Consumer Goods -------------------------------------------------------------------------------- JAPAN-10.2% 28,000 Trans Cosmos 11,941,700 Information Technology Services & Investments 28,000 Moshi Moshi Hotline 3,861,880 Telemarketing 11,800 Drake Beam Morin 3,843,686 Employment Outplacement Services 15,500 Nichii Gakkan 3,030,862 7,750 Nichii Gakkan New (b) 1,515,431 Health Care Services 22,000 Pasona Softbank 1,747,432 Temporary Employment Services 16,000 Venture Link 1,385,112 Retail Franchises 6,000 C-Two Network 1,355,766 Discount Food Retailer 7,500 Don Quijote 1,173,824 Retail Franchises 46,300 Nichiei 1,005,439 Commercial Lender 12,100 Wilson Learning 591,803 Corporate Training 40,000 Optex 395,187 Industrial Sensors -------------------------------------------------------------------------------- 31,848,122 -------------------------------------------------------------------------------- TAIWAN-1.9% 500,000 Systex 3,409,272 Systems Integrator & Internet Services 400,000 Hitron Technology (b) 2,396,050 Network Integration & Internet Services -------------------------------------------------------------------------------- 5,805,322 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- MALAYSIA-0.3% 388,000 Computer Systems Advisor $878,117 Systems Integration & Software Services -------------------------------------------------------------------------------- SINGAPORE-11.4% 7,200,000 Omni Industries 13,055,539 Contract Electronics Manufacturer 1,210,400 Star Cruises 12,346,080 Cruise Line 1,080,941 Datacraft Asia 8,971,810 Network Integrator 100,000 Venture Manufacturing 1,146,803 Electronic Manufacturing Services -------------------------------------------------------------------------------- 35,520,232 -------------------------------------------------------------------------------- SOUTH KOREA-2.5% 240,000 S1 Corporation 4,142,668 Home/Business Security Services 10,000 Cheil Jedang 1,153,677 Consumer Staples 15,000 Cheil Communications 1,134,742 Advertising 70,000 Comtec Systems 949,362 Computer Services 84,614 Korea Technology Investment Corp. (b) 516,402 Venture Capital -------------------------------------------------------------------------------- 7,896,851 -------------------------------------------------------------------------------- ASIA-TOTAL 90,176,598 LATIN AMERICA-4.8% -------------------------------------------------------------------------------- MEXICO-2.0% 1,000,000 Corp Interamericana 3,994,723 de Entretenimiento (b) Special Events and Live Entertainment 1,600,000 Grupo Continental 2,330,343 Beverages -------------------------------------------------------------------------------- 6,325,066 See accompanying notes to financial statements. 45 Wanger Advisors Trust 1999 Annual Report WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- BRAZIL-2.8% 300,000 Globo Cabo (b) $5,400,000 Cable Television 100,000 Tele Celular 3,175,000 Mobile Communications -------------------------------------------------------------------------------- 8,575,000 -------------------------------------------------------------------------------- LATIN AMERICA-TOTAL 14,900,066 OTHER COUNTRIES-12.2% -------------------------------------------------------------------------------- AUSTRALIA-4.5% 800,000 ERG 4,493,880 Smart Card Systems for Public Transportation 1,750,000 Powertel (b) 3,081,330 Telecommunications Provider 500,000 Keycorp (b) 2,690,415 Smart Card Technology 750,000 AAPT (b) 2,567,228 Telecommunications Provider 800,000 Powerlan (b) 777,888 Computer Services 200,000 BMC Media.com (b) 381,060 Advertising -------------------------------------------------------------------------------- 13,991,801 -------------------------------------------------------------------------------- CANADA-5.8% 154,000 MDSI Mobil Data Solutions (b) 3,965,500 Wireless Software 200,000 Penn West Petroleum (b) 3,906,250 Oil & Gas Producer 635,000 AltaGas Services (b) 2,634,126 Natural Gas Gatherer and Processor 120,000 Corus Entertainment (b) 2,447,456 CATV Programming & Radio Stations 250,000 Ulster Petroleum (b) 2,221,032 Oil & Gas Producer -------------------------------------------------------------------------------- Principal Amount or Value Number of Shares -------------------------------------------------------------------------------- CANADA-5.8% (CONT) 200,000 Rand A Technology (b) $1,922,013 Value Added Reseller of CAD/CAM Software 43,000 Teklogix International (b) 869,573 Wireless Logistics Tracking Systems -------------------------------------------------------------------------------- 17,965,950 -------------------------------------------------------------------------------- UNITED STATES-0.1% 50,000 Azurix (b) 446,875 Owner & Operator of Water Utilities -------------------------------------------------------------------------------- ISRAEL-1.8% 194,000 Galileo Technology (b) 4,680,250 Communications Semiconductors 20,000 Radware (b) 862,500 Internet Infrastructure & Internet Traffic -------------------------------------------------------------------------------- 5,542,750 -------------------------------------------------------------------------------- OTHER-TOTAL 37,947,376 TOTAL COMMON STOCKS-97.4% 303,216,993 -------------------------------------------------------------------------------- (COST: $ 151,878,149) SHORT-TERM OBLIGATION-2.5% -------------------------------------------------------------------------------- $7,822,000 Associates First Capital 4.00% Maturing 01/03/00 7,820,261 -------------------------------------------------------------------------------- (AMORTIZED COST: $7,820,261) TOTAL INVESTMENTS-99.9% 311,037,254 -------------------------------------------------------------------------------- (COST: $ 159,698,410) CASH AND OTHER ASSETS LESS LIABILITIES-0.1% 293,718 -------------------------------------------------------------------------------- TOTAL NET ASSETS-100% $311,330,972 ================================================================================ NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 1999, for federal income tax purposes, cost of investments was $159,712,819 and net unrealized appreciation was $151,324,435 consisting of gross unrealized appreciation of $158,483,012 and gross unrealized depreciation of $7,158,577. (b) Non-income producing security. (c) At December 31, 1999, $85,778,525 or 27.6% of the Fund's net assets was denominated in the Euro currency. See accompanying notes to financial statements. 46 Wanger Advisors Trust 1999 Annual Report WANGER TWENTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares COMMON STOCKS-92.2% Information-35.0% -------------------------------------------------------------------------------- TELEVISION PROGRAMMING-6.6% 7,600 Liberty Media Group, AT&T (b) $431,300 CATV & Satellite Dish Programming -------------------------------------------------------------------------------- TELEPHONE SERVICES-11.3% 7,800 RCN (b) 378,300 Metro Market CLEC:Voice, Video & Internet Services 6,200 McLeod USA, Inc. (b) 365,025 Super Regional CLEC: Local, Long Distance & Internet Services -------------------------------------------------------------------------------- 743,325 -------------------------------------------------------------------------------- MOBILE COMMUNICATIONS-5.4% 2,800 Telephone and Data Systems 352,800 Cellular & Telephone Franchises -------------------------------------------------------------------------------- BUSINESS INFORMATION-4.6% 6,900 H&R Block 301,875 Tax Preparation -------------------------------------------------------------------------------- TRANSACTION PROCESSORS-3.6% 7,000 National Data 237,562 Credit Card & Health Claims Processor -------------------------------------------------------------------------------- INSTRUMENTATION-3.5% 6,000 Tektronix 233,250 Analytical Instruments -------------------------------------------------------------------------------- INFORMATION-TOTAL 2,300,112 HEALTH CARE-10.3% -------------------------------------------------------------------------------- SERVICES-10.3% 17,000 First Health (b) 456,875 PPO Network 6,300 Lincare Holdings (b) 218,531 Home Health Care Services -------------------------------------------------------------------------------- HEALTH CARE-TOTAL 675,406 Number of Value Shares Consumer Goods/Services-18.9% -------------------------------------------------------------------------------- FURNITURE-3.9% 11,000 Herman Miller $253,000 Office Furniture -------------------------------------------------------------------------------- MANUFACTURERS-3.7% 9,000 Jones Apparel (b) 244,125 Women's Apparel -------------------------------------------------------------------------------- CRUISE LINES-3.2% 4,300 Royal Caribbean Cruises 212,044 Cruises to Caribbean & Alaska -------------------------------------------------------------------------------- CASINOS-4.0% 10,000 Harrah's Entertainment (b) 264,375 Casinos & Riverboats -------------------------------------------------------------------------------- OTHER INDUSTRIAL SERVICES-4.1% 22,000 ServiceMaster 270,875 Facilities Management -------------------------------------------------------------------------------- CONSUMER GOODS/SERVICES-TOTAL 1,244,419 FINANCE-17.7% -------------------------------------------------------------------------------- FINANCE COMPANIES-6.9% 24,500 AmeriCredit (b) 453,250 Auto Lending -------------------------------------------------------------------------------- INSURANCE-5.4% 3,000 Progressive 219,375 Auto Insurance 12,800 UICI (b) 135,200 Insurance/Specialty Finance -------------------------------------------------------------------------------- 354,575 -------------------------------------------------------------------------------- MONEY MANAGEMENT-5.4% 3,000 SEI Investments 357,047 Mutual Fund Administration -------------------------------------------------------------------------------- FINANCE-TOTAL 1,164,872 See accompanying notes to financial statements. 47 Wanger Advisors Trust 1999 Annual Report WANGER TWENTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Principal Amount or Value Number of Shares ENERGY/MINERALS-10.3% -------------------------------------------------------------------------------- INDEPENDENT POWER-10.3% 5,200 AES Corporation (b) $388,700 Power Plants 8,500 MidAmerican Energy 286,344 Growth Utility -------------------------------------------------------------------------------- ENERGY/MINERALS-TOTAL 675,044 TOTAL COMMON STOCKS-92.2% 6,059,853 -------------------------------------------------------------------------------- (COST: $5,290,334) SHORT-TERM OBLIGATIONS-6.6% -------------------------------------------------------------------------------- $325,000 Associates First Capital 4.00% 324,928 Maturing 01/03/00 108,000 State Street Bank Repurchase 108,000 Agreement, 2.00%, Maturing 01/03/00; 12/31/99 Agreement Collateralized by U.S. Treasury Notes -------------------------------------------------------------------------------- (AMORTIZED COST: $432,928) 432,928 TOTAL INVESTMENTS-98.8 % 6,492,781 -------------------------------------------------------------------------------- (COST: $5,723,262) CASH AND OTHER ASSETS LESS LIABILITIES-1.2% 77,350 -------------------------------------------------------------------------------- TOTAL NET ASSETS-100% $6,570,131 ================================================================================ Notes to Statement of Investments: (a) At December 31, 1999, for federal income tax purposes, cost of investments was $5,737,245 and net unrealized appreciation was $755,536 consisting of gross unrealized appreciation of $1,228,678 and gross unrealized depreciation of $473,142. (b) Non-income producing security. See accompanying notes to financial statements. 48 Wanger Advisors Trust 1999 Annual Report WANGER FOREIGN FORTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares COMMON STOCKS AND OTHER EQUITY-LIKE SECURITIES-86.3% EUROPE-56.5% -------------------------------------------------------------------------------- GERMANY-1.4% 600 MobilCom $51,324 Telecommunications Services 900 Rhoen Klinikum 33,059 Hospital Management -------------------------------------------------------------------------------- 84,383 -------------------------------------------------------------------------------- BELGIUM-3.9% 3,000 Audiofina 226,429 Television Broadcaster -------------------------------------------------------------------------------- NETHERLANDS-5.1% 1,500 Getronics 119,554 Computer Services 1,512 ASR Verzekeringsgrp 96,165 Insurance 2,600 Hunter Douglas 70,646 Decorative Window Coverings 1,000 Fox Kids Europe (b) 12,781 Programming/Cartoons -------------------------------------------------------------------------------- 299,146 -------------------------------------------------------------------------------- FINLAND-1.0% 800 Comptel (b) 56,227 Telephone Billing Software -------------------------------------------------------------------------------- SWEDEN-2.4% 2,000 Netcom (b) 140,532 Telecommunication Services -------------------------------------------------------------------------------- FRANCE-3.7% 700 Atos (b) 115,952 Computer Services/Transaction Processing 200 M6 Metropole TV 99,025 Television Broadcaster -------------------------------------------------------------------------------- 214,977 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- UNITED KINGDOM-20.8% 30,000 Airtours $184,167 Packaged Tour Vacations 7,000 Logica 180,597 Computer Software & Services 3,500 Energis (b) 168,158 Telecommunication Services 40,000 St. James Capital 142,810 Life Insurance 7,000 Sema Group 125,977 Computer Software & Services 10,000 Carlton Communications 97,415 Television Broadcaster 750 NTL (b) 93,563 Voice, Video & Data Services 5,000 WPP Group 79,240 Advertising 8,000 Thus (b) 50,145 Telecommunication Services 1,500 Serco Group 47,072 Facilities Management 9,000 Bodycote 43,473 Materials Technology & Metal Processing -------------------------------------------------------------------------------- 1,212,617 -------------------------------------------------------------------------------- IRELAND-1.9% 12,000 Irish Life & Permanent 113,516 Insurance & Savings Products -------------------------------------------------------------------------------- SPAIN-6.3% 3,750 Jazztel (b) 244,219 Telecommunication Services 4,000 Indra Sistemas 75,074 Computer Services 2,000 Mapfre Vida 46,091 Life Insurance/Mutual Funds -------------------------------------------------------------------------------- 365,384 See accompanying notes to financial statements. 49 Wanger Advisors Trust 1999 Annual Report WANGER FOREIGN FORTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Number of Value Shares -------------------------------------------------------------------------------- SWITZERLAND-1.2% 15 Cie Fin Richemont $35,842 Luxury Goods, Tobacco & Pay TV 20 Pargesa Holdings 32,698 Industrial & Media Conglomerate -------------------------------------------------------------------------------- 68,540 -------------------------------------------------------------------------------- ITALY-8.8% 15,236 Editoriale L'Espresso 176,173 Newspapers & Magazines 12,000 Banca Fideuram 142,016 Life Insurance/Mutual Funds 25,000 SEAT Pagine Gialle 82,018 Yellow Pages Publisher 20,000 Saipem 72,256 Offshore Construction 3,000 Autogrill 37,738 Restaurants & Catering for Travelers -------------------------------------------------------------------------------- 510,201 -------------------------------------------------------------------------------- EUROPE-TOTAL 3,291,952 ASIA-17.4% -------------------------------------------------------------------------------- HONG KONG-2.3% 15,000 SmarTone Telecom 72,361 Mobile Telecommunications 100,000 Pacific Century Insurance (b) 60,140 Life Insurance -------------------------------------------------------------------------------- 132,501 -------------------------------------------------------------------------------- JAPAN-7.3% 300 Softbank 287,000 Internet Services/Investment Holdings 500 Nintendo 83,048 Video Games 150 Shohkoh Fund 59,351 Commercial Lender -------------------------------------------------------------------------------- 429,399 Principal Amount or Value Number of Shares -------------------------------------------------------------------------------- SINGAPORE-7.8% 30,000 Star Cruises $306,000 Cruise Line 13,000 Venture Manufacturing 149,084 Electronic Manufacturing Services -------------------------------------------------------------------------------- 455,084 -------------------------------------------------------------------------------- ASIA-TOTAL 1,016,984 OTHER COUNTRIES-12.4% -------------------------------------------------------------------------------- CANADA-5.7% 4,000 Celestica (b) 223,451 Electronic Manufacturing Services 3,000 Canadian Natural Resources (b) 73,113 Oil & Gas Producer 2,000 Power Financial 33,185 Financial Services Holding Company -------------------------------------------------------------------------------- 329,749 -------------------------------------------------------------------------------- ISRAEL-2.4% 4,000 Amdocs (b) 138,000 Telecommunications Billing & Customer Care Software -------------------------------------------------------------------------------- UNITED STATES-4.3% $149,000 Global TeleSystems, 5.75% Cv. 199,101 Note Due 7/1/10 Telecommunications Services 6,000 Azurix (b) 53,625 Owner/Operator of Water Utilities -------------------------------------------------------------------------------- 252,726 -------------------------------------------------------------------------------- OTHER-TOTAL 720,475 See accompanying notes to financial statements. 50 Wanger Advisors Trust 1999 Annual Report WANGER FOREIGN FORTY STATEMENT OF INVESTMENTS DECEMBER 31, 1999 -------------------------------------------------------------------------------- Principal Value Amount TOTAL COMMON STOCKS AND OTHER EQUITY-LIKE SECURITIES-86.3% $5,029,411 -------------------------------------------------------------------------------- (COST: $3,383,399) SHORT-TERM OBLIGATION-5.3% -------------------------------------------------------------------------------- $306,000 Associates First Capital 4.00% Maturing 01/03/00 305,932 -------------------------------------------------------------------------------- (AMORTIZED COST: $305,932) TOTAL INVESTMENTS-91.6% 5,335,343 -------------------------------------------------------------------------------- (COST: $ 3,689,331) CASH AND OTHER ASSETS LESS LIABILITIES-8.4% 490,785 -------------------------------------------------------------------------------- TOTAL NET ASSETS-100% $5,826,128 ================================================================================ Notes to Statement of Investments: (a) At December 31, 1999, for federal income tax purposes, cost of investments was $3,696,293 and net unrealized appreciation was $1,639,050 consisting of gross unrealized appreciation of $1,749,711 and gross unrealized depreciation of $110,661. (b) Non-income producing security. (c) At December 31, 1999, $1,870,263 or 32.1% of the Fund's net assets was denominated in the Euro currency. See accompanying notes to financial statements. 51 Wanger Advisors Trust 1999 Annual Report STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1999
------------------------------------------------------------------------------------------------------------------------------------ WANGER WANGER WANGER WANGER U.S. SMALL CAP INTERNATIONAL TWENTY FOREIGN SMALL CAP FORTY ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments, at value (cost: Wanger U.S. Small Cap $316,160,490; $393,241,228 $311,037,254 $6,492,781 $5,335,343 Wanger International Small Cap $159,698,410; Wanger Twenty $5,723,262; Wanger Foreign Forty $3,689,331) Cash 61 190,820 403 43,463 Organization costs 6,711 6,711 -- -- Receivable for: Securities sold -- 1,746,099 407,406 261,554 Fund shares sold 656,862 583,431 52,950 236,116 Dividends and interest 26,648 144,335 2,296 7,225 Other assets 3,409 4,785 64 31 ------------------------------------------------------------------------------------------------------------------------------------ Total assets 393,934,919 313,713,435 6,955,900 5,883,732 LIABILITIES AND NET ASSETS Payable for: Securities purchased 2,990,622 19,605 359,108 43,488 Fund shares redeemed 195,033 2,281,870 13,357 -- Amount owed to advisor 8,844 7,107 9,017 152 Other 30,947 73,881 4,287 13,964 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 3,225,446 2,382,463 385,769 57,604 ------------------------------------------------------------------------------------------------------------------------------------ Net assets applicable to Fund shares outstanding $390,709,473 $311,330,972 $6,570,131 $5,826,128 ==================================================================================================================================== Fund shares outstanding 15,704,298 7,128,362 489,305 316,780 ==================================================================================================================================== PRICING OF SHARES Net asset value, offering price and redemption price per share $24.88 $43.67 $13.43 $18.39 ==================================================================================================================================== ANALYSIS OF NET ASSETS Paid-in capital $264,394,492 $120,767,930 $5,520,471 $3,780,585 Undistributed net realized gain on sales of investments and foreign currency transactions 48,752,400 39,225,530 280,141 401,583 Net unrealized appreciation of investments and foreign currency transactions (net of unrealized PFIC gains of $5,826 for Wanger Foreign Forty) 77,080,738 151,337,512 769,519 1,640,182 Undistributed net investment income 481,843 -- -- 3,778 ------------------------------------------------------------------------------------------------------------------------------------ Net assets applicable to Fund shares outstanding $390,709,473 $311,330,972 $6,570,131 $5,826,128 See accompanying notes to financial statements.
52 Wanger Advisors Trust 1999 Annual Report STATEMENTS OF OPERATIONS
WANGER WANGER WANGER WANGER U.S. SMALL CAP INTERNATIONAL TWENTY FOREIGN FORTY Inception Inception February 1 February 1 Year Ended Year Ended through through December 31, December 31, December 31, December 31, 1999 1999 1999 1999 ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of foreign taxes of $171,245 for Wanger $2,520,432 $1,669,203 $19,675 $22,542 International Small Cap and $2,131 for Wanger Foreign Forty) Interest 1,350,409 105,490 1,592 4,401 ----------------------------------------------------------------------------------------------------------------------------------- Total investment income 3,870,841 1,774,693 21,267 26,943 EXPENSES: Investment advisory 3,172,578 2,231,975 35,044 19,994 Custodian 48,168 295,019 2,431 8,683 Legal and audit 57,923 47,565 15,250 15,115 Reports to shareholders 14,559 14,811 7,300 7,300 Amortization of organization costs 21,643 19,976 -- -- Transfer agent 21,808 21,716 17,600 17,500 Trustees 31,610 16,817 251 121 Insurance 4,511 2,183 16 8 Other 22,326 10,739 107 57 ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 3,395,126 2,660,801 77,999 68,778 Less custodian fees paid indirectly (6,128) (4,963) (2,173) (2,783) Less reimbursement of expenses by advisor -- -- (26,027) (37,004) ----------------------------------------------------------------------------------------------------------------------------------- Net expenses 3,388,998 2,655,838 49,799 28,991 ----------------------------------------------------------------------------------------------------------------------------------- Net investment income (loss) 481,843 (881,145) (28,532) (2,048) Net realized and unrealized gain on investments: Net realized gain on sales of investments 49,157,155 47,468,114 308,673 401,583 Net change in unrealized appreciation 26,975,880 124,783,648 769,519 1,646,008 ----------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 76,133,035 172,251,762 1,078,192 2,047,591 ----------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $76,614,878 $171,370,617 $1,049,660 $2,045,543 =================================================================================================================================== See accompanying notes to financial statements.
53 Wanger Advisors Trust 1999 Annual Report STATEMENTS OF CHANGES IN NET ASSETS -------------------------- --------------------------- ------------ ------------- WANGER WANGER WANGER WANGER U.S. SMALL CAP INTERNATIONAL TWENTY FOREIGN FORTY Inception Inception February 1 February 1 Year Ended Year Ended Year Ended Year Ended through through December 31, December 31, December 31, December 31, December 31, December 31, 1999 1998 1999 1998 1999 1999 ----------------------------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income (loss) $481,843 $(783,423) $(881,145) $220,138 $(28,532) $(2,048) Net realized gain (loss) on sales of investments 49,157,155 31,406,965 47,468,114 (2,995,916) 308,673 401,583 Net change in unrealized appreciation 26,975,880 (6,414,368) 124,783,648 21,548,547 769,519 1,646,008 ----------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 76,614,878 24,209,174 171,370,617 18,772,769 1,049,660 2,045,543 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income -- -- (2,396,217) (1,532,876) -- -- Net realized gain (31,015,042) (15,422,770) -- -- -- -- ----------------------------------------------------------------------------------------------------------------------------------- Total distributions to shareholders (31,015,042) (15,422,770) (2,396,217) (1,532,876) -- -- FROM FUND SHARE TRANSACTIONS: Reinvestment of dividends and capital gain distributions 30,987,684 15,407,847 2,391,782 1,530,069 -- -- Proceeds from other shares sold 39,307,491 94,608,919 30,696,445 26,836,486 6,997,548 4,072,887 ----------------------------------------------------------------------------------------------------------------------------------- 70,295,175 110,016,766 33,088,227 28,366,555 6,997,548 4,072,887 Payments for shares redeemed (64,304,419) (50,550,116) (31,984,964) (25,013,297) (1,477,077) (292,302) ----------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from Fund share transactions 5,990,756 59,466,650 1,103,263 3,353,258 5,520,471 3,780,585 ----------------------------------------------------------------------------------------------------------------------------------- Total increase in net assets 51,590,592 68,253,054 170,077,663 20,593,151 6,570,131 5,826,128 NET ASSETS: Beginning of period 339,118,881 270,865,827 141,253,309 120,660,158 -- -- ----------------------------------------------------------------------------------------------------------------------------------- End of period $390,709,473 $339,118,881 $311,330,972 $141,253,309 $6,570,131 $5,826,128 ----------------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME $481,843 -- -- $2,396,102 -- $3,778 =================================================================================================================================== See accompanying notes to financial statements. 54 Wanger Advisors Trust 1999 Annual Report WANGER U.S. SMALL CAP FINANCIAL HIGHLIGHTS May 3, 1995 Year ended Year ended Year ended Year ended through December 31, December 31, December 31, December 31, December 31, 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $22.18 $21.46 $16.97 $11.60 $10.00 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (c) .03 (.05) (.02) (.06) (.05) Net realized and unrealized gain on investments 4.79 1.93 4.90 5.46 1.65 ----------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 4.82 1.88 4.88 5.40 1.60 LESS DISTRIBUTIONS Dividends from net investment income -- -- -- -- -- Distributions from net realized gain (2.12) (1.16) (.39) (.03) -- ----------------------------------------------------------------------------------------------------------------------------------- Total distributions (2.12) (1.16) (.39) (.03) -- NET ASSET VALUE, END OF PERIOD $24.88 $22.18 $21.46 $16.97 $11.60 =================================================================================================================================== TOTAL RETURN (D) 25.06% 8.68% 29.41% 46.59% 16.00% RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets (a) (b) 1.02% 1.02% 1.06% 1.21% 2.08%* Ratio of net investment income (loss) to average net assets (b) .14% (.25%) (.10%) (.41%) (1.44%)* Portfolio turnover rate 35% 34% 34% 46% 59%* Net assets at end of period $390,709,473 $339,118,881 $270,865,827 $128,957,911 $21,903,536 -------------------------------------------------------------------------------- *Annualized (a) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custodian fees for cash balances it maintains with the custodian ("custodian fees paid indirectly"). This ratio net of custodian fees paid indirectly would have been 1.04% for the year ended December 31, 1997, 1.19% for the year ended December 31, 1996 and 2.00% for the period ended December 31, 1995. (b) The fund was reimbursed by the Advisor for certain expenses from May 3, 1995 through December 31, 1995. Without the reimbursement, the ratio of expenses (prior to custodian fees paid indirectly) to average net assets and the ratio of net investment income to average net assets for the period ended December 31, 1995, would have been 2.35% and (1.71%), respectively. (c) Net investment income (loss) per share for the years ended December 31, 1999, 1998, 1997 and 1996 was based upon the average shares outstanding during the period. (d) Total return is not annualized for periods less than one year. See accompanying notes to financial statements.
55
Wanger Advisors Trust 1999 Annual Report WANGER INTERNATIONAL SMALL CAP FINANCIAL HIGHLIGHTS May 3, 1995 Year ended Year ended Year ended Year ended through December 31, December 31, December 31, December 31, December 31, 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $19.62 $17.05 $17.71 $13.45 $10.00 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (c) (.13) .03 .02 (.09) (.03) Net realized and unrealized gain (loss) on investments 24.52 2.76 (.26) 4.38 3.48 ----------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 24.39 2.79 (.24) 4.29 3.45 LESS DISTRIBUTIONS Dividends from net investment income (.34) (.22) -- -- -- Distributions from net realized gain and unrealized gain reportable for federal income taxes -- -- (.42) (.03) -- ----------------------------------------------------------------------------------------------------------------------------------- Total distributions (.34) (.22) (.42) (.03) -- NET ASSET VALUE, END OF PERIOD $43.67 $19.62 $17.05 $17.71 $13.45 =================================================================================================================================== TOTAL RETURN (D) 126.37% 16.33% (1.46%) 32.01% 34.50% RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets (a) (b) 1.49% 1.55% 1.60% 1.79% 2.32%* Ratio of net investment income (loss) to average net assets (b) (.49%) .16% .12% (.56%) (.81%)* Portfolio turnover rate 75% 56% 60% 50% 14%* Net assets at end of period $311,330,972 $141,253,309 $120,660,158 $84,855,082 $11,368,924 -------------------------------------------------------------------------------- *Annualized (a) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custodian fees for cash balances it maintains with the custodian ("custodian fees paid indirectly"). This ratio net of custodian fees paid indirectly would have been 1.59% for the year ended December 31, 1997, 1.75% for the year ended December 31, 1996 and 2.00% for the period ended December 31, 1995. (b) The fund was reimbursed by the Advisor for certain expenses from May 3, 1995 through December 31, 1995. Without the reimbursement, the ratio of expenses (prior to custodian fees paid indirectly) to average net assets and the ratio of net investment income to average net assets for the period ended December 31, 1995, would have been 4.20% and (2.69%), respectively. (c) Net investment income (loss) per share for the years ended December 31, 1999, 1998, 1997 and 1996 was based upon the average shares outstanding during the period. (d) Total return is not annualized for periods less than one year. See accompanying notes to financial statements.
56 Wanger Advisors Trust 1999 Annual Report WANGER TWENTY FINANCIAL HIGHLIGHTS February 1, 1999 through December 31, 1999 ------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.00 INCOME FROM INVESTMENT OPERATIONS Net investment loss (c) (.08) Net realized and unrealized gain on investments 3.51 ------------------------------------------------------------------------------- Total from investment operations 3.43 ------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $13.43 =============================================================================== TOTAL RETURN (D) 34.30% RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets (a) (b) 1.41%* Ratio of net investment loss to average net assets (b) (.77%)* Portfolio turnover rate 113%* Net assets at end of period $6,570,131 -------------------------------------------------------------------------------- *Annualized (a) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custodian fees for cash balances it maintains with the custodian ("custodian fees paid indirectly"). This ratio net of custodian fees paid indirectly would have been 1.35% for the period ended December 31, 1999. (b) The fund was reimbursed by the Advisor for certain expenses from February 1, 1999 through December 31, 1999. Without the reimbursement, the ratio of expenses (prior to custodian fees paid indirectly) to average net assets and the ratio of net investment loss to average net assets for the period ended December 31, 1999 would have been 2.12% and (1.48%), respectively. (c) Net investment loss per share for the period ended December 31, 1999 was based upon the average shares outstanding during the period. (d) Total return is not annualized for periods less than one year. See accompanying notes to financial statements. 57 Wanger Advisors Trust 1999 Annual Report WANGER FOREIGN FORTY FINANCIAL HIGHLIGHTS February 1, 1999 through December 31, 1999 ------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.00 INCOME FROM INVESTMENT OPERATIONS Net investment loss (c) (.01) Net realized and unrealized gain on investments 8.40 ------------------------------------------------------------------------------- Total from investment operations 8.39 ------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $18.39 =============================================================================== TOTAL RETURN (D) 83.90% RATIOS/SUPPLEMENTAL DATA Ratio of expenses to average net assets (a) (b) 1.59%* Ratio of net investment loss to average net assets (b) (.10%)* Portfolio turnover rate 91%* Net assets at end of period $5,826,128 -------------------------------------------------------------------------------- *Annualized (a) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custodian fees for cash balances it maintains with the custodian ("custodian fees paid indirectly"). This ratio net of custodian fees paid indirectly would have been 1.45 % for the year ended December 31, 1999. (b) The fund was reimbursed by the Advisor for certain expenses from February 1, 1999 through December 31, 1999. Without the reimbursement, the ratio of expenses (prior to custodian fees paid indirectly) to average net assets and the ratio of net investment loss to average net assets for the period ended December 31, 1999 would have been 3.45% and (1.96%), respectively. (c) Net investment loss per share for the period ended December 31, 1999 was based upon the average shares outstanding during the period. (d) Total return is not annualized for periods less than one year. See accompanying notes to financial statements. 58 Wanger Advisors Trust 1999 Annual Report NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Wanger US Small Cap, Wanger International Small Cap, Wanger Twenty and Wanger Foreign Forty ("the Funds") are series of Wanger Advisors Trust ("the Trust"), an open-end management investment company organized as a Massachusetts business trust. The investment objective of each Fund is to seek long-term growth of capital. The Funds are available only for allocation to certain life insurance company separate accounts established for the purpose of funding qualified and non-qualified variable annuity contracts, and may also be offered directly to certain types of pension plans and retirement arrangements. 2. SIGNIFICANT ACCOUNTING POLICIES SECURITY VALUATION Investments are stated at current value. Securities traded on securities exchanges or in over-the-counter markets in which transaction prices are reported are valued at the last sales price at the time of valuation. Securities for which there are no reported sales on the valuation date are valued at the mean of the latest bid and ask quotation or, if there is no ask quotation, at the most recent bid quotation. Money market instruments having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. Securities for which quotations are not readily available and any other assets are valued as determined in good faith by the Board of Trustees. FOREIGN CURRENCY TRANSLATIONS Values of investments denominated in foreign currencies are converted into U.S. dollars using the spot market rate of exchange at the time of valuation. Purchases and sales of investments and dividend and interest income are translated into U.S. dollars using the spot market rate of exchange prevailing on the respective dates of such transactions. The gain or loss resulting from changes in foreign exchange rates is included with net realized and unrealized gain or loss from investments, as appropriate. SECURITY TRANSACTIONS AND INVESTMENT INCOME Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date, except that certain dividends from foreign securities are recorded as soon as the information is available to the Fund. Interest income is recorded on the accrual basis and includes amortization of discounts on money market instruments and on long-term debt instruments when required for federal income tax purposes. Realized gains and losses from security transactions are reported on an identified cost basis. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. FUND SHARE VALUATION Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange on each day the Exchange is open for trading by dividing the total value of the Fund's investments and other assets, less liabilities, by the number of Fund shares outstanding. CUSTODIAN FEES Custodian fees are reduced based on each Fund's cash balances maintained with the custodian. The amount is disclosed as a reduction of total expenses in the Statements of Operations. FEDERAL INCOME TAXES, DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS The Funds have complied with the special provisions of the Internal Revenue Code available to regulated investment companies and, in the manner provided therein, distribute all of their taxable income, as well as any net realized gain on sales of investments and foreign currency transactions reportable for federal income tax purposes. Wanger International Small Cap has elected to mark-to-market its investments in Passive Foreign Investment Companies ("PFICS") for income tax purposes. In accordance with this election, the Fund had no unrealized appreciation from investments in PFICs at December 31, 1999. Cumulative net unrealized appreciation recognized in prior years on PFICs sold in 1999 amounted to $83,762. Wanger Foreign Forty has also has elected to mark-to-market its investments in Passive Foreign Investment Companies ("PFICS") for income tax purposes. In accordance with this election, the Fund had $5,826 of unrealized appreciation from investments in PFICs at December 31, 1999. Dividends and distributions payable to each Fund's shareholders are recorded by the Fund on the ex-dividend date. Reclassifications have been made in 1999 for Wanger International Small Cap and Wanger Twenty in the accompanying analysis of net assets from undistributed net investment income to net realized gain on the sale of investments of $964,907 and $28,532, respectively. These reclassifications were made to reflect differences between financial reporting and income tax basis and had no impact on net asset value. 3. TRANSACTIONS WITH AFFILIATES The Fund's investment advisor, Wanger Asset Management, L.P., ("WAM") furnishes continuing investment supervision to the Fund and is responsible for overall management of the Fund's business affairs. Each Fund pays WAM a monthly advisory fee based upon average daily net assets at the following rates: WANGER U.S. SMALL CAP Average Daily Net Assets For the first $100 million 1.00% Next $150 million .95% In excess of $250 million .90% 59 Wanger Advisors Trust 1999 Annual Report NOTES TO FINANCIAL STATEMENTS WANGER INTERNATIONAL SMALL CAP Average Daily Net Assets For the first $100 million 1.30% Next $150 million 1.20% In excess of $250 million 1.10% WANGER TWENTY On average daily net assets .95% WANGER FOREIGN FORTY On average daily net assets 1.00% The investment advisory agreement also provides that WAM will reimburse the Funds to the extent that ordinary operating expenses (computed based on net custodian fees) exceed a percentage of average net assets. This amount is 1.50% for Wanger U.S. Small Cap, 1.90% for Wanger International Small Cap, 1.35% for Wanger Twenty and 1.45% for Wanger Foreign Forty. WAM was not required to reimburse Wanger U.S. Small Cap or Wanger International Small Cap under these agreements for the year ended December 31, 1999. Wanger Twenty and Wanger Foreign Forty were reimbursed $26,027 and $37,004, respectively, for the period ended December 31, 1999. Certain officers and trustees of the Trust are also principals of WAM. The Trust makes no direct payments to its officers and trustees who are affiliated with WAM. The Funds paid the following trustees' fees and expenses to trustees not affiliated with WAM: 1999 Wanger U.S. Small Cap $31,610 Wanger International Small Cap 16,817 Wanger Twenty 251 Wanger Foreign Forty 121 WAM advanced $100,000 in connection with the organization and initial registration of Wanger U.S. Small Cap and Wanger International Small Cap. These costs are being amortized and reimbursed to WAM over the period May, 1995 through April, 2000. WAM paid all organization costs associated with the organization of Wanger Twenty and Wanger Foreign Forty. These costs amounted to $ 20,816. WAM will not be reimbursed for these costs by the Funds. WAM Brokerage Services, L.L.C., a wholly-owned subsidiary of WAM, is the distributor of each Fund's shares and receives no compensation for its services 4. BORROWING ARRANGEMENTS Wanger U.S. Small Cap and Wanger International Small Cap participate in a $250,000,000 credit facility which was entered into to facilitate portfolio liquidity. No amounts were borrowed under this facility during 1999. 5. FUND SHARES TRANSACTIONS Proceeds and payments on Fund shares as shown in the statement of changes in net assets are in respect of the following numbers of shares: WANGER U.S. SMALL CAP Year ended Year ended December 31, 1999 December 31, 1998 Shares sold 1,827,456 4,370,518 Shares issued in reinvestment of dividend and capital gain distributions 1,675,771 686,318 ------------------------------------------------------------------------------- 3,503,227 5,056,836 Less shares redeemed 3,089,752 2,389,858 ------------------------------------------------------------------------------- Net increase in shares outstanding 413,475 2,666,978 WANGER INTERNATIONAL SMALL CAP Year ended Year ended December 31, 1999 December 31, 1998 Shares sold 1,101,093 1,389,310 Shares issued in reinvestment of dividend and capital gain distributions 119,889 76,657 ------------------------------------------------------------------------------- 1,220,982 1,465,967 Less shares redeemed 1,290,574 1,346,776 ------------------------------------------------------------------------------- Net decrease in shares outstanding (69,592) 119,191 WANGER TWENTY Period ended December 31, 1999 Shares sold 612,940 Less shares redeemed 123,635 -------------------------------------------------------------------------------- Net increase in shares outstanding 489,305 WANGER FOREIGN FORTY Period ended December 31, 1999 Shares sold 342,192 Less shares redeemed 25,412 -------------------------------------------------------------------------------- Net increase in shares outstanding 316,780 6. INVESTMENT TRANSACTIONS The aggregate costs of purchases and proceeds from sales other than short-term obligations in 1999 were: --------------------------------------------------------------- WANGER U.S. WANGER WANGER WANGER SMALL CAP INTERNATIONAL TWENTY FOREIGN FORTY SMALL CAP PURCHASES $106,139,136 $132,788,428 $8,919,902 $4,748,084 SALES 147,545,241 138,231,907 3,938,241 1,766,268 60 Wanger Advisors Trust 1999 Annual Report REPORT OF INDEPENDENT AUDITORS To the Board of Trustees and Shareholders of Wanger Advisors Trust We have audited the accompanying statements of assets and liabilities, including the schedule of investments of Wanger U.S. Small Cap, Wanger International Small Cap, Wanger Twenty and the Wanger Foreign Forty portfolios, comprising the Wanger Advisors Trust, as of December 31, 1999, the related statements of operations, changes in net assets, and the financial highlights for the periods indicated therein. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of December 31, 1999, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective Funds of the Wanger Advisors Trust as of December 31, 1999, the results of their operations and changes in their net assets and financial highlights for the periods indicated therein, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Chicago, Illinois February 4, 2000 61 APPENDIX - DESCRIPTION OF BOND RATINGS A rating of a rating service represents the service's opinion as to the credit quality of the security being rated. However, the ratings are general and are not absolute standards of quality or guarantees as to the creditworthiness of an issuer. Consequently, WAM believes that the quality of debt securities in which the Funds invest should be continuously reviewed. A rating is not a recommendation to purchase, sell, or hold a security, because it does not take into account market value or suitability for a particular investor. When a security has received a rating from more than one service, each rating should be evaluated independently. Ratings are based on current information furnished by the issuer or obtained by the ratings services from other sources which they consider reliable. Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or for other reasons. The following is a description of the characteristics of ratings used by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). MOODY'S RATINGS Aaa--Bonds rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. Although the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such bonds. Aa--Bonds rated Aa are judged to be high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa bonds or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risk appear somewhat larger than in Aaa bonds. A--Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. 62 B--Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds rated Caa are of poor standing. Such bonds may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds rated Ca represent obligations which are speculative in a high degree. Such bonds are often in default or have other marked shortcomings. S&P RATINGS AAA--Bonds rated AAA have the highest rating. Capacity to pay principal and interest is extremely strong. AA--Bonds rated AA have a very strong capacity to pay principal and interest and differ from AAA bonds only in small degree. A--Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this capacity than for bonds in higher rated categories. BB--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation among such bonds and CC the highest degree of speculation. Although such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. 63