-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JvZzjYJBnPDaXzaSd1/CIhvfukNC/TDEz3h/HyWj5HsgWKsoTPVyH2ILGu9HO0Wc 5M9RZTGRHljLMbhfMJDFBA== 0000891804-02-000696.txt : 20020416 0000891804-02-000696.hdr.sgml : 20020416 ACCESSION NUMBER: 0000891804-02-000696 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20020410 EFFECTIVENESS DATE: 20020501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WANGER ADVISORS TRUST CENTRAL INDEX KEY: 0000929521 IRS NUMBER: 362692100 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-83548 FILM NUMBER: 02607092 BUSINESS ADDRESS: STREET 1: 227 WEST MONROE STREET STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126349200 MAIL ADDRESS: STREET 1: 227 WEST MONROE STREET STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606-5016 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WANGER ADVISORS TRUST CENTRAL INDEX KEY: 0000929521 IRS NUMBER: 362692100 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08748 FILM NUMBER: 02607093 BUSINESS ADDRESS: STREET 1: 227 WEST MONROE STREET STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126349200 MAIL ADDRESS: STREET 1: 227 WEST MONROE STREET STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606-5016 485BPOS 1 file002.txt WANGER ADVISORS TRUST As filed with the Securities and Exchange Commission on April 10, 2002 Securities Act Registration No. 33-83548 Investment Company Act File No. 811-8748 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 - -------------------------------------------------------------------------------- FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Post-Effective Amendment No. 14 and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 15 ---------------------------------- WANGER ADVISORS TRUST (Registrant) 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Telephone number: 312/634-9200 ---------------------------------- Ralph Wanger Stacy H. Winick Wanger Advisors Trust Bell, Boyd & Lloyd LLC 227 West Monroe Street, Suite 3000 Three First National Plaza Chicago, Illinois 60606 70 West Madison Street, Suite 3300 Chicago, Illinois 60602-4207 (Agents for service) ---------------------------------- Amending Parts A, B and C, and filing exhibits ---------------------------------- It is proposed that this filing will become effective: [ ] immediately upon filing pursuant to rule 485(b) [X] on May 1, 2002 pursuant to rule 485(b) [ ] 60 days after filing pursuant to rule 485(a)(1) [ ] on ____________ pursuant to rule 485(a)(1) [ ] 75 days after filing pursuant to rule 485(a)(2) [ ] on ____________ pursuant to rule 485(a)(2) WANGER FOREIGN FORTY PROSPECTUS MAY 1, 2002 * * * * Fund shares are available only through variable annuity contracts and variable life insurance policies of participating insurance companies, and through certain retirement plans. * * * * Although Fund shares have been registered with the Securities and Exchange Commission, the Commission has not approved or disapproved any shares offered in this prospectus or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------------ ----------------- NOT FDIC-INSURED MAY LOSE VALUE NO BANK GUARANTEE ------------------------------ ----------------- THE TRUST......................................................................3 THE FUND.......................................................................4 This section contains the following information about the Fund: investment goal, principal investment strategy, principal investment risks, and performance history OTHER INVESTMENT STRATEGIES AND RISKS..........................................8 TRUST MANAGEMENT ORGANIZATIONS................................................10 The Trustees.........................................................10 The Advisor: Liberty Wanger Asset Management, L.P. .................10 Portfolio Managers...................................................11 Mixed and Shared Funding.............................................11 FINANCIAL HIGHLIGHTS..........................................................12 SHAREHOLDER INFORMATION.......................................................13 2 THE TRUST Wanger Advisors Trust (Trust) includes four separate mutual funds (Funds), each with its own investment goal and strategies. This prospectus contains information about Wanger Foreign Forty (Fund). The Fund is an investment option under variable annuity contracts (VA contracts) and variable life insurance policies (VLI policies) issued by life insurance companies (Participating Insurance Companies). Participating Insurance Companies invest in the Fund through separate accounts that they set up for that purpose. Owners of VA contracts and VLI policies invest in sub-accounts of those separate accounts through instructions they give to their insurance company. Shares of the Fund also may be offered directly to certain pension plans and retirement arrangements and accounts permitting accumulation of funds on a tax-deferred basis (Retirement Plans). The prospectuses of the Participating Insurance Companies' separate accounts describe which Funds are available to the purchasers of their own VA contracts and VLI policies. The Retirement Plan disclosure documents describe which Funds are available to participants in the plan. 3 THE FUND INVESTMENT GOAL--WANGER FOREIGN FORTY Wanger Foreign Forty seeks long-term growth of capital. PRINCIPAL INVESTMENT STRATEGY Wanger Foreign Forty invests primarily in the stocks of medium- to larger-size companies with market capitalizations of $2 to $25 billion at the time of purchase. The Fund invests in at least three countries. Wanger Foreign Forty takes advantage of its advisor's research and stock-picking capabilities to invest in a limited number of foreign companies (between 40-60) in developed markets (for example, Japan, Canada, and United Kingdom), offering the potential to provide above-average growth over time. Wanger Foreign Forty believes that companies within this capitalization range, which are not as well known by financial analysts, may offer higher return potential than the stocks of companies with capitalizations above $25 billion. Wanger Foreign Forty typically looks for companies with: o A strong business franchise that offers growth potential. o Products and services that give the company a competitive advantage. o A stock price that the Fund's advisor believes is reasonable relative to the assets and earning power of the company. Wanger Foreign Forty is an international fund and, under normal circumstances, invests at least 80% of its net assets (plus any borrowings for investment purposes) in the stocks of foreign companies based in developed markets outside the United States. The portfolio manager may sell a portfolio holding if the security reaches the portfolio manager's price target or if the company has a deterioration of fundamentals such as failing to meet key operating benchmarks. The portfolio manager may also sell a portfolio holding to fund redemptions. PRINCIPAL INVESTMENT RISKS There are two basic risks for all mutual funds that invest in stocks: MANAGEMENT RISK and market risk. These risks may cause you to lose money by investing in the Fund. Management risk means that Liberty Wanger Asset Management, L.P.'s (Liberty WAM) stock selections and other investment decisions might produce losses or cause the Fund to underperform when compared to other funds with similar goals. Market risk means that security prices in a market, sector or industry may fall, reducing the value of your investment. Because of management and market risk, there is no guarantee that the Fund will achieve its investment goal or perform favorably compared with comparable funds. Since the Fund purchases equity securities, it is subject to EQUITY RISK. This is the risk that stock prices will fall over short or extended periods of time. Although the stock market has historically outperformed other asset classes over the long term, the equity market tends to move in cycles. Individual stock prices may fluctuate drastically from day-to-day and may underperform other asset classes over an extended period of time. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in 4 response. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Because the Fund invests in stocks, the price of its shares -- its net asset value per share -- fluctuates daily in response to changes in the market value of the stocks. An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. FOREIGN SECURITIES Foreign securities are subject to special risks. Foreign markets, especially in countries with developing stock markets, can be extremely volatile. The liquidity of foreign securities may be more limited than domestic securities, which means that the Fund may at times be unable to sell securities at desirable prices. Fluctuations in currency exchange rates impact the value of foreign securities. Brokerage commissions, custodial fees, and other fees are generally higher for foreign investments. Other risks include: possible delays in settlement of transactions or in the notification of income; less publicly available information about companies; the impact of political, social or diplomatic events; possible seizure, expropriation or nationalization of the company or its assets; and possible imposition of currency exchange controls. SMALLER COMPANIES Smaller companies, including small and medium-cap companies, are more likely than larger companies to have limited product lines, operating histories, markets, or financial resources. They may depend heavily on a small management group. Small-cap companies in particular are more likely than larger companies to fail or prove unable to grow. Their securities may trade less frequently, may trade in smaller volumes and may fluctuate more sharply in price than securities of larger companies. In addition, small-cap companies may not be widely followed by the investment community, which can lower the demand for their stocks. The securities issued by mid-cap companies may have more risk than those of larger companies. These securities may be more susceptible to market downturns, and their prices could be more volatile. SECTOR RISK Sector risk may sometimes be present in the Fund's investments. Companies that are in different but closely related industries are sometimes described as being in the same broad economic sector. The values of stocks of different companies in a market sector may be similarly affected by particular economic or market events. Although the Fund does not intend to focus on any particular sector, at times, the Fund may have a significant portion of its assets invested in a particular sector. 5 PERFORMANCE HISTORY The bar chart below illustrates the Fund's calendar-year total returns. The performance table following the bar chart shows how the Fund's average annual returns compare with those of a broad measure of market performance for one year and the life of the Fund. We compare the Fund to the EAFE Index and the SSB World ex-U.S. Cap Range $2-10B Index, which are broad-based measures of market performance. The chart and table are intended to illustrate some of the risks of investing in the Fund by showing the changes in the Fund's performance. All returns include the reinvestment of dividends and distributions. As with all mutual funds, past performance does not predict the Fund's future performance. The Fund's performance results do not reflect the cost of insurance and separate account charges which are imposed under your VA contract or VLI policy, or any charges imposed by your Retirement Plan. Returns and value of an investment will vary, resulting in a gain or a loss on sale. Calendar-Year Total Returns [GRAPH APPEARS HERE] YEAR-BY-YEAR TOTAL RETURNS 2000 -1.58% 2001 -26.61% Best quarter: 1st quarter 2000, 13.39% Worst quarter: 3rd quarter 2001, -21.53% 6 SINCE 1 YEAR INCEPTION+ Wanger Foreign Forty -26.61% 10.23% EAFE* -21.44% -5.05% SSB World ex-U.S. Cap Range $2-10B* -15.49% -0.57% - ----------------- + Wanger Foreign Forty's inception date was 2/1/1999. The Fund's performance during 1999 was achieved during extraordinary market conditions. * Morgan Stanley's Europe, Australasia and Far East Index (EAFE) is an unmanaged index of companies throughout the world in proportion to world stock market capitalizations, excluding the U.S. and Canada. SSB World ex-U.S. Cap Range $2-10B is a subset of Salomon Smith Barney's Broad Market Index, representing a mid-cap developed market index excluding the U.S. The indexes are unmanaged and differ from the Fund's composition; they are not available for direct investment. FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund, not including fees and expenses of your VA contract, VLI policy or Retirement Plan. SHAREHOLDER TRANSACTION EXPENSES Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None ANNUAL FUND OPERATING EXPENSES Expenses that are deducted from Fund assets: Management fees 1.00% 12b-1 fee None Other expenses 0.45 - ------------------------------------------------------------------ Total annual Fund operating expenses 1.45% Liberty WAM has undertaken to limit Wanger Foreign Forty's annual expenses to 1.45% of its average net assets. This expense limitation is contractual and will terminate on September 30, 2002. EXAMPLE This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes a $10,000 investment in Wanger Foreign Forty for the time periods indicated, a 5% total return each year, reinvestment of all dividends and distributions, and that operating expenses remain the same. Your actual returns and costs may be higher or lower. This example does not include the effect of Liberty WAM's undertaking to limit the Fund's expenses. 1 Year $148 3 Years $459 5 Years $792 10 Years $1,735 7 OTHER INVESTMENT STRATEGIES AND RISKS The Fund's principal investment strategies and their associated risks are described above. This section provides more detail about the Fund's investment strategies, and describes other investments the Fund may make and the risks associated with them. In seeking to achieve its investment goal, the Fund may invest in various types of securities and engage in various investment techniques, which are not the principal focus of the Fund and therefore are not described in this prospectus. These types of securities and investment practices are identified and discussed in the Fund's Statement of Additional Information (SAI), which you may obtain free of charge (see back cover). Except as otherwise noted, approval by the Fund's shareholders is not required to modify or change the Fund's investment goal or investment strategies. THE INFORMATION EDGE Liberty WAM invests in entrepreneurially managed mid-sized and larger companies that it believes are not as well known by financial analysts and whose domination of a niche creates the opportunity for superior earnings-growth potential. Liberty WAM may identify what it believes are important economic, social or technological trends (for example, the growth of out-sourcing as a business strategy, or the productivity gains from the increasing use of technology) and try to identify companies it thinks will benefit from those trends. In making investments for the Fund, Liberty WAM relies primarily on its independent, internally generated research to uncover companies that may be less well known than the more popular names. To find these companies, Liberty WAM compares growth potential, financial strength and fundamental value among companies.
Growth Potential Financial Strength Fundamental Value - ----------------------------------------- -------------------------------------- ------------------------------------- |X| superior technology |X| low debt |X| reasonable stock price |X| innovative marketing |X| adequate working capital relative to growth potential |X| managerial skill |X| conservative accounting |X| valuable assets |X| market niche practices |X| good earnings prospects |X| adequate profit margin |X| strong demand for product The realization of this growth A strong balance sheet gives Once Liberty WAM uncovers an potential would likely produce superior management greater flexibility to attractive company, it identifies a performance that is sustainable over pursue strategic objectives and is price that it believes would also time. essential to maintaining a make the stock a good value. competitive advantage. - ----------------------------------------- -------------------------------------- -------------------------------------
8 STOCK STRENGTH COMES FIRST Liberty WAM's analysts continually screen companies and make more than 1,000 face-to-face visits around the globe each year. To accomplish this, Liberty WAM analysts talk directly to top management, vendors, suppliers and competitors, whenever possible. In managing the Fund, Liberty WAM tries to maintain lower transaction costs by investing with a long-term time horizon (at least two to five years). However, securities purchased on a long-term basis may be sold within 12 months after purchase due to changes in the circumstances of a particular company or industry, or changes in general market or economic conditions. STATE INSURANCE RESTRICTIONS The Fund is sold to Participating Insurance Companies in connection with VA contracts and VLI policies, and will seek to be available under VA contracts and VLI policies sold in a number of jurisdictions. Certain states have regulations or guidelines concerning concentration of investments and other investment techniques. If applied to the Fund, the Fund may be limited in its ability to engage in certain techniques and to manage its portfolio with the flexibility provided herein. In order to permit the Fund to be available under VA contracts and VLI policies sold in certain states, the Fund may make commitments that are more restrictive than the investment policies and limitations described herein and in the SAI. If the Fund determines that such a commitment is no longer in the Fund's best interest, the commitment may be revoked by terminating the availability of the Fund to VA contract owners and VLI policyholders residing in such states. TEMPORARY DEFENSIVE POSITIONS At times, Liberty WAM may determine that adverse market conditions make it desirable to temporarily suspend the Fund's normal investment activities. During such times, the Fund may, but is not required to, invest in cash or high-quality, short-term debt securities, without limit. Taking a temporary defensive position may prevent the Fund from achieving its investment goal. HEDGING STRATEGIES The Fund may enter into a number of hedging strategies, including those that employ futures and options, to gain or reduce exposure to particular securities or markets. These strategies, commonly referred to as derivatives, involve the use of financial instruments whose values depend on, or are derived from, the value of an underlying security, index or currency. The Fund may use these strategies to adjust the Fund's sensitivity to changes in interest rates or for other hedging purposes (i.e. attempting to offset a potential loss in one position by establishing an interest in an opposite position). Derivative strategies involve the risk that they may exaggerate a loss, potentially losing more money than the actual cost of the underlying security, or limit a potential gain. Also, with some derivative strategies there is the risk that the other party to the transaction may fail to honor its contract terms, causing a loss to the Fund. 9 PORTFOLIO TURNOVER The Fund does not have limits on portfolio turnover. Turnover may vary significantly from year to year. Liberty WAM does not expect the Fund's turnover to exceed 125% under normal conditions. Portfolio turnover increases transaction expenses, which reduce the Fund's return. TRUST MANAGEMENT ORGANIZATIONS THE TRUSTEES The business of the Trust and the Fund is supervised by the Trust's Board of Trustees. The SAI contains names of and biographical information on the Trustees. THE ADVISOR: LIBERTY WANGER ASSET MANAGEMENT, L.P. Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset Management, L.P. (WAM)), 227 West Monroe Street, Suite 3000, Chicago, IL 60606, is the Fund's investment advisor. Liberty WAM and its predecessor have managed mutual funds, including Wanger Foreign Forty, since 1992. In its duties as investment advisor, Liberty WAM runs the Fund's day-to-day business, including placing all orders for the purchase and sale of the Fund's portfolio securities. As of December 31, 2001, Liberty WAM managed more than $8.7 billion in assets. For the fiscal year 2001, the Fund paid Liberty WAM management fees at 1.00% of the average daily net assets of the Fund. Additional expenses are incurred under the VA contracts, VLI policies and the Retirement Plans. These expenses are not described in this prospectus; owners of VA contracts, VLI policies and Retirement Plan participants should consult the contract or policy disclosure documents or Retirement Plan information regarding these expenses. From time to time, Liberty WAM may pay amounts from its past profits to Participating Insurance Companies or other organizations that provide administrative services for the Fund or that provide other services relating to the Fund to owners of VA contracts, VLI policies and/or participants in Retirement Plans. These services include, among other things: sub-accounting services; answering inquiries regarding the Fund; transmitting, on behalf of the Fund, proxy statements, shareholder reports, updated prospectuses and other communications regarding the Fund; and such other related services as the Fund, owners of VA contracts, VLI policies and/or participants in Retirement Plans may request. The amount of any such payment will be determined by the nature and extent of the services provided by the Participating Insurance Company or other organization. Payment of such amounts by Liberty WAM will not increase the fees paid by the Fund or its shareholders. 10 PORTFOLIO MANAGERS Liberty WAM uses a team to manage the Fund. Team members share responsibility for providing ideas, information, and knowledge in managing the Fund, and each team member has one or more particular areas of expertise. The portfolio managers are responsible for making daily investment decisions, and utilize the management team's input and advice when making buy and sell determinations. Chris Olson and Todd Narter are co-portfolio managers of both Wanger International Small Cap and Wanger Foreign Forty. Mr. Olson has been a member of the international analytical team at Liberty WAM since January 2001 and has co-managed Wanger Foreign Forty and Wanger International Small Cap since September 2001. Mr. Olson also is a co-portfolio manager of Liberty Acorn Foreign Forty, a series of Liberty Acorn Trust. Prior to joining Liberty WAM, Mr. Olson was most recently a director and portfolio strategy analyst with UBS Asset Management/Brinson Partners. He is a CFA and earned a BA from Middlebury College, a MBA from the University of Pennsylvania's Wharton School of Business and a MA in International Studies from the University of Pennsylvania's School of Arts and Sciences. Mr. Narter has been a member of the international analytical team at Liberty WAM since June 1997 and has co-managed Wanger Foreign Forty and Wanger International Small Cap since September 2001. Mr. Narter also is a co-portfolio manager of Liberty Acorn Foreign Forty, a series of Liberty Acorn Trust. Prior to joining Liberty WAM, Mr. Narter spent seven years working in Japan in the electronics industry, mainly as a product manager for Teradyne. He is a CFA and earned a BS from the University of Texas and a MS from Stanford University. MIXED AND SHARED FUNDING As described previously, the Trust serves as a funding medium for VA contracts and VLI policies of Participating Insurance Companies and for certain Retirement Plans, so-called mixed and shared funding. As of the date of this prospectus, the Participating Insurance Companies are Keyport Life Insurance Company (Keyport), Keyport Benefit Life Insurance Company (Keyport Benefit), Aegon Financial Services Group, Inc., SAFECO Life Insurance Company, PHL Variable Life Insurance Company, Phoenix Home Life Mutual Insurance Company, American Enterprise Life Insurance Company, IDS Life Insurance Company, IDS Life Insurance Company of New York, and Sun Life Assurance Company of Canada (U.S.). The Fund may become a funding vehicle for VA contracts or VLI policies of other Participating Insurance Companies. The interests of owners of VA contracts and VLI policies could diverge based on differences in state regulatory requirements, changes in the tax laws or other unanticipated developments. The Trust does not foresee any such differences or disadvantages at this time. However, the Trustees will monitor for such developments to identify any material irreconcilable conflicts and to determine what action, if any, should be taken in response to such conflicts. If such a conflict were to occur, one or more separate accounts might be required to withdraw its investments in the Fund or shares of another Fund may be substituted. This might force the Fund to sell securities at lower prices. 11 FINANCIAL HIGHLIGHTS The financial highlights table that follows is intended to help you understand the Fund's financial performance. Information is shown since the Fund's inception and for the Fund's last three fiscal years, which run from January 1 to December 31, unless otherwise indicated. Certain information in the table reflects the financial results for a single Fund share. The total returns in the table represent the return that you would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information is included in the Fund's financial statements, which have been audited by Ernst & Young LLP, independent auditors, whose report, along with the Fund's audited financial statements, is included in the Fund's annual report. You can request a free annual report by calling 1-888-4-WANGER (1-888-492-6437). The Fund's total returns presented below do not reflect the cost of insurance and other company separate account charges which vary with the VA contracts, VLI policies or Retirement Plans. WANGER FOREIGN FORTY
FEBRUARY 1, 1999 SELECTED DATA FOR A SHARE OUTSTANDING YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, THROUGHOUT EACH PERIOD DECEMBER 31, 2001 DECEMBER 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $17.29 $18.39 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment loss (a) (0.03) (0.04) (0.01) Net realized and unrealized gain (loss) on investments and foreign currency transactions (4.46) (0.10) 8.40 - ------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (4.49) (0.14) 8.39 LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.02) (0.01) ---- From net realized capital gains (1.14) (0.95) ---- - ------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders (1.16) (0.96) ---- - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $11.64 $17.29 $18.39 - ------------------------------------------------------------------------------------------------------------------- Total Return (b) (26.61)% (1.58%)(c) 83.90% (c)(d) RATIOS TO AVERAGE NET ASSETS: Expenses 1.45% (e) 1.45% (e) 1.59% (f)(g) Net investment loss (0.20)% (e) (0.20%)(e) (0.10%)(f)(g) Reimbursement --- 0.23% 1.86% (g) Portfolio turnover rate 72% 96% 91% (g) Net assets, end of period (000's) $15,431 $15,496 $5,826 (a) Net investment loss per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions reinvested. (c) Had the Advisor not reimbursed a portion of expenses, total return would have been reduced. (d) Not annualized. (e) The benefits derived from custody fees paid indirectly had no impact. (f) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custody fees for cash balances it maintains with the custodian ("custodian fees paid indirectly"). The ratios of expenses to average daily net assets and net investment income to average daily net assets net of custody fees paid indirectly would have been 1.45% and 0.04%, respectively, for the period ended December 31, 1999. (g) Annualized.
12 SHAREHOLDER INFORMATION SHAREHOLDER AND ACCOUNT POLICIES The Fund provides Participating Insurance Companies and Retirement Plans with information Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m. Central time. For information, prices, literature, or to obtain information regarding the availability of Fund shares or how Fund shares are redeemed, call Liberty WAM at 1-888-4-WANGER (1-888-492-6437). Shares of the Fund are issued and redeemed in connection with investments in and payments under certain qualified and non-qualified VA contracts and VLI policies issued through separate accounts of Participating Insurance Companies. Shares of the Fund are also offered directly to certain of the following types of qualified plans and retirement arrangements and accounts, collectively called Retirement Plans: o a plan described in section 401(a) of the Internal Revenue Code that includes a trust exempt from tax under section 501(a); o an annuity plan described in section 403(a); o an annuity contract described in section 403(b), including a 403(b)(7) custodial account; o a governmental plan under section 414(d) or an eligible deferred compensation plan under section 457(b); and o a plan described in section 501(c)(18). The trust or plan must be established before shares of the Fund can be purchased by the plan. Neither the Fund nor Liberty WAM offers prototypes of these plans. The Fund has imposed certain additional restrictions on sales to Retirement Plans to reduce Fund expenses. To be eligible to invest in the Fund, a Retirement Plan must be domiciled in a state in which Fund shares may be sold without payment of a fee to the state. In most states, this policy will require that a Retirement Plan have at least $5 million in assets and that investment decisions are made by a Plan fiduciary rather than Plan participants in order for the Plan to be eligible to invest. The Fund does not intend to offer shares in states where the sale of Fund shares requires the payment of a fee. A Retirement Plan may call Liberty WAM at 1-888-4-WANGER (1-888-492-6437) to determine if it is eligible to invest. HOW TO INVEST AND REDEEM Shares of the Fund may not be purchased or redeemed directly by individual VA contract owners, VLI policyholders or individual Retirement Plan participants. VA contract owners, VLI policyholders or Retirement Plan participants should consult the disclosure documents for their VA contract, VLI policy or the plan documents for their Retirement Plan, for information on the availability of the Fund as an investment vehicle for allocations under their VA contract, VLI policy or Retirement Plan. In the case of a Participating Insurance Company purchaser, particular purchase and redemption procedures typically are included in an agreement between the Fund and the Participating Insurance Company. The Fund may enter into similar agreements with Retirement Plans. The Participating Insurance Companies and Retirement Plans place daily orders to purchase and redeem shares of the Fund. These orders generally reflect the net effect of instructions they receive from holders of their VA contracts, VLI policies and Retirement Plan participants and 13 certain other terms of those contracts, policies and Retirement Plans. The Trust issues and redeems shares at net asset value without imposing any selling commission, sales load or redemption charge. However, each VA contract and VLI policy imposes its own charges and fees on owners of the VA contract and VLI policy and Retirement Plans may impose such charges on participants in the Retirement Plan. Shares generally are sold and redeemed at their net asset value next determined after receipt of purchase or redemption requests from Participating Insurance Companies and Retirement Plans. The right of redemption may be suspended or payment postponed whenever permitted by applicable law and regulations. PURCHASES To the extent not otherwise provided in any agreement between the Trust and a Participating Insurance Company or Retirement Plan, shares of the Fund may be purchased by check or by wire transfer of funds. To be effective, a purchase order must consist of the money to purchase the shares and (i) information identifying the purchaser, in the case of a Participating Insurance Company or Retirement Plan with which the Fund has entered into an agreement, or a subsequent purchase by a Participating Insurance Company or Retirement Plan that is already a Fund shareholder, or (ii) a completed purchase application, in the case of the initial investment by a Retirement Plan with which the Fund does not have an agreement. REDEMPTIONS Subject to the terms of any agreement between the Fund and any Participating Insurance Company or Retirement Plan, shares may be redeemed by written request or by telephone (for redemptions of $200,000 or less), with proceeds paid by check or by wire transfer. REDEEMING SHARES IN WRITING A written redemption request must: o identify the account owner; o specify the number of shares or dollar amount to be redeemed; o be signed on behalf of the owner by an individual or individuals authorized to do so, and include evidence of their authority; o if the shares to be redeemed have a value of more than $200,000, include a signature guarantee by an eligible guarantor institution as defined in the rules under the Securities Exchange Act of 1934 (including a bank, broker-dealer, credit union (if authorized under state law), national securities exchange, registered securities association, clearing agency or savings association, but not a notary public); and o include any stock certificates representing the shares to be redeemed. A check for the redemption proceeds will be mailed to the address of record unless payment by wire transfer is requested. 14 REDEEMING SHARES BY TELEPHONE Unless a Retirement Plan shareholder chose on its purchase application not to have the ability to do so, redemptions of shares having a value of $200,000 or less may be requested by calling Liberty WAM at 1-888-4-WANGER (1-888-492-6437). The Fund will not be responsible for unauthorized transactions if it follows reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting identification information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. If you are unable to reach the Fund or its transfer agent by telephone, your redemption request would have to be placed by mail. EXCHANGING SHARES BY TELEPHONE To the extent not otherwise provided in an agreement between the Fund and a Retirement Plan shareholder, a Retirement Plan may exchange shares of the Fund for shares of another Wanger Fund by telephone by calling Liberty WAM at 1-888-4-WANGER (1-888-492-6437). Shares may be exchanged only between identically registered accounts, and the shares in the new Wanger Fund must be available for sale without payment of a fee under any applicable state securities law. Because excessive trading can hurt Fund performance and shareholders, the Fund reserves the right temporarily or permanently to terminate the exchange privilege of any shareholder who makes excessive use of the exchange plan. In particular, a pattern of exchanges that coincide with a market timing strategy may be disruptive to the Fund. The Fund has limited the number of exchanges to no more than four per year. The Fund will not be responsible for unauthorized transactions if it follows reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. Normally, redemption proceeds will be paid within seven days after the Fund or its agent receives a request for redemption. Redemptions may be suspended or the payment date postponed on days when the New York Stock Exchange (NYSE) is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. HOW THE FUND'S SHARE PRICE IS DETERMINED The Fund's share price is its net asset value next determined. Net asset value is the difference between the values of the Fund's assets and liabilities divided by the number of shares outstanding. We determine net asset value at the close of regular trading on the New York Stock Exchange (NYSE), normally 4 p.m. Eastern time. To calculate the net asset value on a given day, we value each stock listed or traded on a stock exchange at its latest sale price on that day. If there are no sales that day, we value the security at the most recently quoted bid price. We value each over-the-counter security or National Association of Securities Dealers Automated Quotation (Nasdaq) security as of the last sale price for that day. When the price of a security is not available, including days when we determine that the sale or bid price of the security does not reflect that security's market value, we value the security at a fair value determined in good faith under procedures established by the Board of Trustees. 15 We value a security at fair value when events have occurred after the last available market price and before the close of the NYSE that materially affect the security's price. In the case of foreign securities, this could include events occurring after the close of the foreign market and before the close of the NYSE. The Fund's foreign securities may trade on days when the NYSE is closed. We will not price shares on days that the NYSE is closed for trading and Participating Insurance Companies and Retirement Plans may not purchase or redeem shares. DIVIDENDS AND DISTRIBUTIONS The Fund intends to declare and distribute, as dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of portfolio securities, if any, to its shareholders (Participating Insurance Companies' separate accounts and Retirement Plan participants). The net investment income of the Fund consists of all dividends or interest received by the Fund, less expenses (including the investment advisory fees). Income dividends will be declared and distributed annually by the Fund. All net short-term and long-term capital gains of the Fund, net of carry-forward losses, if any, realized during the fiscal year, are declared and distributed periodically, at least annually. All dividends and distributions are reinvested in additional shares of the Fund at net asset value, as of the record date for the distributions. TAXES The Fund intends to qualify every year as a regulated investment company under the Internal Revenue Code. By so qualifying, the Fund will not be subject to federal income taxes to the extent that its net investment income and net realized capital gains are distributed to the shareholders. The Fund also intends to meet certain diversification requirements applicable to mutual funds underlying variable insurance products. For more information about the tax status of the Fund, see Taxes in the SAI. For information concerning the federal tax consequences to VA contract owners, VLI policyholders or Retirement Plan participants, see the disclosure documents from the VA contract, VLI policy or your Retirement Plan administrator. You should consult your tax advisor about the tax consequences of any investment. 16 FOR MORE INFORMATION Advisor: Liberty Wanger Asset Management, L.P. Additional information about the Fund's investments is available in the Fund's semiannual and annual reports to shareholders. The annual report contains a discussion of the market conditions and investment strategies that significantly affected the Fund's performance over the last fiscal year. You may wish to read the Fund's SAI for more information on the Fund and the securities in which it invests. The SAI is incorporated into this prospectus by reference, which means that it is considered to be part of this prospectus. You can get free copies of the annual and semiannual reports and the SAI, request other information and discuss your questions about the Fund by writing: Liberty Wanger Asset Management, L.P. Shareholder Services Group 227 West Monroe, Suite 3000 Chicago, IL 60606 1 (888) 4-WANGER (1-888-492-6437) www.wanger.com Or by calling or writing the Participating Insurance Company which issued your variable annuity contract or variable life insurance policy or the Retirement Plan you participate in. Information about the Fund (including the SAI) can be reviewed and copied at the Public Reference Room of the Securities and Exchange Commission (SEC) in Washington, D.C. Information on the Public Reference Room may be obtained by calling the SEC at 202-942-8090. Reports and other information about the Fund are available on the EDGAR database on the SEC's Internet site at http://www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. Investment Company Act file number: 811-08748 17 WANGER INTERNATIONAL SMALL CAP PROSPECTUS MAY 1, 2002 * * * * Fund shares are available only through variable annuity contracts and variable life insurance policies of participating insurance companies, and through certain retirement plans. * * * * Although Fund shares have been registered with the Securities and Exchange Commission, the Commission has not approved or disapproved any shares offered in this prospectus or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------------ ----------------- NOT FDIC-INSURED MAY LOSE VALUE NO BANK GUARANTEE ------------------------------ ----------------- THE TRUST......................................................................3 THE FUND.......................................................................4 This section contains the following information about the Fund: investment goal, principal investment strategy, principal investment risks, and performance history OTHER INVESTMENT STRATEGIES AND RISKS..........................................9 TRUST MANAGEMENT ORGANIZATIONS................................................11 The Trustees........................................................11 The Advisor: Liberty Wanger Asset Management, L.P. ................11 Portfolio Managers..................................................12 Mixed and Shared Funding............................................12 FINANCIAL HIGHLIGHTS..........................................................13 SHAREHOLDER INFORMATION.......................................................14 2 THE TRUST Wanger Advisors Trust (Trust) includes four separate mutual funds (Funds), each with its own investment goal and strategies. This prospectus contains information about Wanger International Small Cap (Fund). The Fund is an investment option under variable annuity contracts (VA contracts) and variable life insurance policies (VLI policies) issued by life insurance companies (Participating Insurance Companies). Participating Insurance Companies invest in the Fund through separate accounts that they set up for that purpose. Owners of VA contracts and VLI policies invest in sub-accounts of those separate accounts through instructions they give to their insurance company. Shares of the Fund also may be offered directly to certain pension plans and retirement arrangements and accounts permitting accumulation of funds on a tax-deferred basis (Retirement Plans). The prospectuses of the Participating Insurance Companies' separate accounts describe which Funds are available to the purchasers of their own VA contracts and VLI policies. The Retirement Plan disclosure documents describe which Funds are available to participants in the plan. 3 THE FUND INVESTMENT GOAL--WANGER INTERNATIONAL SMALL CAP Wanger International Small Cap seeks long-term growth of capital. PRINCIPAL INVESTMENT STRATEGY Wanger International Small Cap invests primarily in stocks of companies based outside the U.S. with market capitalizations of less than $2 billion at the time of purchase. As long as a stock continues to meet the Fund's other investment criteria, the Fund may choose to hold the stock even if it grows beyond an arbitrary capitalization limit. Wanger International Small Cap believes that these smaller companies - particularly outside the U.S. - which are not as well known by financial analysts may offer higher return potential than the stocks of larger companies. Wanger International Small Cap typically looks for companies with: o A strong business franchise that offers growth potential. o Products and services that give the company a competitive advantage. o A stock price that the Fund's advisor believes is reasonable relative to the assets and earning power of the company. Under normal circumstances, Wanger International Small Cap invests at least 80% of its net assets (plus any borrowings for investment purposes), at market value at the time of investment, in companies with total stock market capitalizations of $2 billion or less. Likewise, under normal market conditions, Wanger International Small Cap will generally invest at least 65% of its total assets in foreign securities in developed markets (for example, Japan, Canada and United Kingdom) and emerging markets (for example, Mexico, Brazil and Korea). The portfolio manager may sell a portfolio holding if the security reaches the portfolio manager's price target or if the company has a deterioration of fundamentals such as failing to meet key operating benchmarks. The portfolio manager may also sell a portfolio holding to fund redemptions. PRINCIPAL INVESTMENT RISKS There are two basic risks for all mutual funds that invest in stocks: MANAGEMENT RISK and MARKET RISK. These risks may cause you to lose money by investing in the Fund. Management risk means that Liberty Wanger Asset Management, L.P.'s (Liberty WAM) stock selections and other investment decisions might produce losses or cause the Fund to underperform when compared to other funds with similar goals. Market risk means that security prices in a market, sector or industry may fall, reducing the value of your investment. Because of management and market risk, there is no guarantee that the Fund will achieve its investment goal or perform favorably compared with comparable funds. Since the Fund purchases equity securities, it is subject to EQUITY RISK. This is the risk that stock prices will fall over short or extended periods of time. Although the stock market has historically outperformed other asset classes over the long term, the equity market tends to move in cycles. Individual stock prices may fluctuate drastically from day-to-day and may 4 underperform other asset classes over an extended period of time. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Because the Fund invests in stocks, the price of its shares -- its net asset value per share -- fluctuates daily in response to changes in the market value of the stocks. An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. FOREIGN SECURITIES Foreign securities are subject to special risks. Foreign markets, especially in countries with developing stock markets, can be extremely volatile. The liquidity of foreign securities may be more limited than domestic securities, which means that the Fund may at times be unable to sell securities at desirable prices. Fluctuations in currency exchange rates impact the value of foreign securities. Brokerage commissions, custodial fees, and other fees are generally higher for foreign investments. Other risks include: possible delays in settlement of transactions or in the notification of income; less publicly available information about companies; the impact of political, social or diplomatic events; possible seizure, expropriation or nationalization of the company or its assets; and possible imposition of currency exchange controls. EMERGING MARKETS Emerging markets are subject to additional risk. The risks of foreign investments are typically increased in less developed countries, which are sometimes referred to as emerging markets. For example, political and economic structures in these countries may be new and developing rapidly, which may cause instability. These countries are also more likely to experience high levels of inflation, deflation or currency devaluations, which could hurt their economies and securities markets. SMALLER COMPANIES Smaller companies, including small and medium-cap companies, are more likely than larger companies to have limited product lines, operating histories, markets, or financial resources. They may depend heavily on a small management group. Small-cap companies in particular are more likely than larger companies to fail or prove unable to grow. Their securities may trade less frequently, may trade in smaller volumes and may fluctuate more sharply in price than securities of larger companies. In addition, small-cap companies may not be widely followed by the investment community, which can lower the demand for their stocks. The securities issued by mid-cap companies may have more risk than those of larger companies. These securities may be more susceptible to market downturns, and their prices could be more volatile. 5 SECTOR RISK Sector risk may sometimes be present in the Fund's investments. Companies that are in different but closely related industries are sometimes described as being in the same broad economic sector. The values of stocks of different companies in a market sector may be similarly affected by particular economic or market events. Although the Fund does not intend to focus on any particular sector, at times the Fund may have a significant portion of its assets invested in a particular sector. PERFORMANCE HISTORY The bar chart below illustrates the Fund's calendar-year total returns. The performance table following the bar chart shows how the Fund's average annual returns compare with those of a broad measure of market performance for one year, five years and the life of the Fund. We compare the Fund to the EAFE Index, EMI World ex-U.S. Index and the EMI Global ex-U.S. Index, which are broad-based measures of market performance. The chart and table are intended to illustrate some of the risks of investing in the Fund by showing the changes in the Fund's performance. All returns include the reinvestment of dividends and distributions. As with all mutual funds, past performance does not predict the Fund's future performance. The Fund's performance results do not reflect the cost of insurance and separate account charges which are imposed under your VA contract or VLI policy, or any charges imposed by your Retirement Plan. Returns and value of an investment will vary, resulting in a gain or a loss on sale. The Fund's performance during 1999 was achieved during extraordinary market conditions. CALENDAR-YEAR TOTAL RETURNS [GRAPH APPEARS HERE] YEAR-BY-YEAR TOTAL RETURNS 1996 32.01% 1997 -1.46% 1998 16.33% 1999 126.37% 2000 -27.84% 2001 -21.27% Best Quarter: 4th quarter 1999, +57.43% Worst Quarter: 3rd quarter 2001, -20.34% 6 SINCE 1 YEAR 5 YEARS INCEPTION+ -------- --------- ---------- Wanger International Small Cap -21.27% 8.07% 15.53% EAFE* -21.44% 0.89% 2.34% EMI World ex-U.S.* -15.70% -1.03% 0.68% EMI Global ex-U.S.* -14.66% -1.57% 0.12% + Wanger International Small Cap's inception date was 5/3/1995. * Morgan Stanley's Europe, Australasia and Far East Index (EAFE) is an unmanaged index of companies throughout the world in proportion to world stock market capitalizations, excluding the U.S. and Canada. EMI World ex-U.S. is Salomon Smith Barney's index of the bottom 20% of institutionally investable capital of countries, selected by Salomon and excluding the U.S. The EMI Global ex-U.S. is Salomon Smith Barney's index of the bottom 20% of institutionally investable capital of developed and emerging countries as selected by Salomon, excluding the U.S. The EMI Global ex-U.S. is rebalanced once a year in June. Beginning in 2001, the Fund's broad-based securities market index was changed from the EMI World ex-U.S. to the EMI Global ex-U.S., which has a component of emerging countries. Liberty WAM believes the EMI Global ex-U.S. better aligns with how the Fund invests. The indexes are unmanaged and differ from the Fund's composition; they are not available for direct investment. 7 FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund, not including fees and expenses of your VA contract, VLI policy or Retirement Plan. SHAREHOLDER TRANSACTION EXPENSES Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None ANNUAL FUND OPERATING EXPENSES Expenses that are deducted from Fund assets: Management fees 1.24% 12b-1 fee None Other expenses .19% - ------------------------------------------------------------------- Total annual Fund operating expenses 1.43% Liberty WAM has undertaken to limit Wanger International Small Cap's annual expenses to 2.00% of its average net assets. This expense limitation is contractual and will terminate on September 30, 2002. EXAMPLE This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes a $10,000 investment in Wanger International Small Cap for the time periods indicated, a 5% total return each year, reinvestment of all dividends and distributions, and that operating expenses remain the same. Your actual returns and costs may be higher or lower. 1 Year $146 3 Years $452 5 Years $782 10 Years $1,713 8 OTHER INVESTMENT STRATEGIES AND RISKS The Fund's principal investment strategies and their associated risks are described above. This section provides more detail about the Fund's investment strategies, and describes other investments the Fund may make and the risks associated with them. In seeking to achieve its investment goal, the Fund may invest in various types of securities and engage in various investment techniques, which are not the principal focus of the Fund and therefore are not described in this prospectus. These types of securities and investment practices are identified and discussed in the Fund's Statement of Additional Information (SAI), which you may obtain free of charge (see back cover). Except as otherwise noted, approval by the Fund's shareholders is not required to modify or change the Fund's investment goal or investment strategies. THE INFORMATION EDGE Liberty WAM invests in entrepreneurially managed smaller and mid-sized companies that it believes are not as well known by financial analysts and whose domination of a niche creates the opportunity for superior earnings-growth potential. Liberty WAM may identify what it believes are important economic, social or technological trends (for example, the growth of out-sourcing as a business strategy or the productivity gains from the increasing use of technology) and try to identify companies it thinks will benefit from those trends. In making investments for the Fund, Liberty WAM relies primarily on its independent, internally generated research to uncover companies that may be less well known than the more popular names. To find these companies, Liberty WAM compares growth potential, financial strength and fundamental value among companies.
Growth Potential Financial Strength Fundamental Value - ----------------------------------------- -------------------------------------- ------------------------------------- |X| superior technology |X| low debt |X| reasonable stock price |X| innovative marketing |X| adequate working capital relative to growth potential |X| managerial skill |X| conservative accounting |X| valuable assets |X| market niche practices |X| good earnings prospects |X| adequate profit margin |X| strong demand for product A strong balance sheet gives Once Liberty WAM uncovers an The realization of this growth management greater flexibility to attractive company, it identifies a potential would likely produce superior pursue strategic objectives and is price that it believes would also performance that is sustainable over essential to maintaining a make the stock a good value. time. competitive advantage. - ----------------------------------------- -------------------------------------- -------------------------------------
STOCK STRENGTH COMES FIRST Liberty WAM's analysts continually screen companies and make more than 1,000 face-to-face visits around the globe each year. To accomplish this, Liberty WAM analysts talk directly to top management, vendors, suppliers and competitors, whenever possible. 9 In managing the Fund, Liberty WAM tries to maintain lower transaction costs by investing with a long-term time horizon (at least two to five years). However, securities purchased on a long-term basis may be sold within 12 months after purchase due to changes in the circumstances of a particular company or industry, or changes in general market or economic conditions. STATE INSURANCE RESTRICTIONS The Fund is sold to Participating Insurance Companies in connection with VA contracts and VLI policies, and will seek to be available under VA contracts and VLI policies sold in a number of jurisdictions. Certain states have regulations or guidelines concerning concentration of investments and other investment techniques. If applied to the Fund, the Fund may be limited in its ability to engage in certain techniques and to manage its portfolio with the flexibility provided herein. In order to permit the Fund to be available under VA contracts and VLI policies sold in certain states, the Fund may make commitments that are more restrictive than the investment policies and limitations described herein and in the SAI. If the Fund determines that such a commitment is no longer in the Fund's best interest, the commitment may be revoked by terminating the availability of the Fund to VA contract owners and VLI policyholders residing in such states. TEMPORARY DEFENSIVE POSITIONS At times, Liberty WAM may determine that adverse market conditions make it desirable to temporarily suspend the Fund's normal investment activities. During such times, the Fund may, but is not required to, invest in cash or high-quality, short-term debt securities, without limit. Taking a temporary defensive position may prevent the Fund from achieving its investment goal. HEDGING STRATEGIES The Fund may enter into a number of hedging strategies, including those that employ futures and options, to gain or reduce exposure to particular securities or markets. These strategies, commonly referred to as derivatives, involve the use of financial instruments whose values depend on, or are derived from, the value of an underlying security, index or currency. The Fund may use these strategies to adjust the Fund's sensitivity to changes in interest rates or for other hedging purposes (i.e. attempting to offset a potential loss in one position by establishing an interest in an opposite position). Derivative strategies involve the risk that they may exaggerate a loss, potentially losing more money than the actual cost of the underlying security, or limit a potential gain. Also, with some derivative strategies there is the risk that the other party to the transaction may fail to honor its contract terms, causing a loss to the Fund. 10 PORTFOLIO TURNOVER The Fund does not have limits on portfolio turnover. Turnover may vary significantly from year to year. Liberty WAM does not expect the Fund's turnover to exceed 100% under normal conditions. Portfolio turnover increases transaction expenses, which reduce the Fund's return. TRUST MANAGEMENT ORGANIZATIONS THE TRUSTEES The business of the Trust and the Fund is supervised by the Trust's Board of Trustees. The SAI contains names of and biographical information on the Trustees. THE ADVISOR: LIBERTY WANGER ASSET MANAGEMENT, L.P. Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset Management, L.P. (WAM)), 227 West Monroe Street, Suite 3000, Chicago, IL 60606, is the Fund's investment advisor. Liberty WAM and its predecessor have managed mutual funds, including Wanger International Small Cap, since 1992. In its duties as investment advisor, Liberty WAM runs the Fund's day-to-day business, including placing all orders for the purchase and sale of the Fund's portfolio securities. As of December 31, 2001, Liberty WAM managed more than $8.7 billion in assets. For the fiscal year 2001, the Fund paid Liberty WAM management fees at 1.24% of the average daily net assets of the Fund. Additional expenses are incurred under the VA contracts, VLI policies and the Retirement Plans. These expenses are not described in this prospectus; owners of VA contracts, VLI policies and Retirement Plan participants should consult the contract or policy disclosure documents or Retirement Plan information regarding these expenses. From time to time, Liberty WAM may pay amounts from its past profits to Participating Insurance Companies or other organizations that provide administrative services for the Fund or that provide other services relating to the Fund to owners of VA contracts, VLI policies and/or participants in Retirement Plans. These services include, among other things: sub-accounting services; answering inquiries regarding the Fund; transmitting, on behalf of the Fund, proxy statements, shareholder reports, updated prospectuses and other communications regarding the Fund; and such other related services as the Fund, owners of VA contracts, VLI policies and/or participants in Retirement Plans may request. The amount of any such payment will be determined by the nature and extent of the services provided by the Participating Insurance Company or other organization. Payment of such amounts by Liberty WAM will not increase the fees paid by the Fund or its shareholders. 11 PORTFOLIO MANAGERS Liberty WAM uses a team to manage the Fund. Team members share responsibility for providing ideas, information, and knowledge in managing the Fund, and each team member has one or more particular areas of expertise. The portfolio managers are responsible for making daily investment decisions, and utilize the management team's input and advice when making buy and sell determinations. Chris Olson and Todd Narter are co-portfolio managers of both Wanger International Small Cap and Wanger Foreign Forty. Mr. Olson has been a member of the international analytical team at Liberty WAM since January 2001 and has co-managed Wanger International Small Cap and Wanger Foreign Forty since September 2001. Mr. Olson also is a co-portfolio manager of Liberty Acorn Foreign Forty, a series of Liberty Acorn Trust. Prior to joining Liberty WAM, Mr. Olson was most recently a director and portfolio strategy analyst with UBS Asset Management/Brinson Partners. He is a CFA and earned a BA from Middlebury College, a MBA from the University of Pennsylvania's Wharton School of Business and a MA in International Studies from the University of Pennsylvania's School of Arts and Sciences. Mr. Narter has been a member of the international analytical team at Liberty WAM since June 1997 and has co-managed Wanger International Small Cap and Wanger Foreign Forty since September 2001. Mr. Narter also is a co-portfolio manager of Liberty Acorn Foreign Forty, a series of Liberty Acorn Trust. Prior to joining Liberty WAM, Mr. Narter spent seven years working in Japan in the electronics industry, mainly as a product manager for Teradyne. He is a CFA and earned a BS from the University of Texas and a MS from Stanford University. MIXED AND SHARED FUNDING As described previously, the Trust serves as a funding medium for VA contracts and VLI policies of Participating Insurance Companies and for certain Retirement Plans, so-called mixed and shared funding. As of the date of this prospectus, the Participating Insurance Companies are Keyport Life Insurance Company (Keyport), Keyport Benefit Life Insurance Company (Keyport Benefit), Aegon Financial Services Group, Inc., SAFECO Life Insurance Company, PHL Variable Life Insurance Company, Phoenix Home Life Mutual Insurance Company, American Enterprise Life Insurance Company, IDS Life Insurance Company, IDS Life Insurance Company of New York, and Sun Life Assurance Company of Canada (U.S.). The Fund may become a funding vehicle for VA contracts or VLI policies of other Participating Insurance Companies. The interests of owners of VA contracts and VLI policies could diverge based on differences in state regulatory requirements, changes in the tax laws or other unanticipated developments. The Trust does not foresee any such differences or disadvantages at this time. However, the Trustees will monitor for such developments to identify any material irreconcilable conflicts and to determine what action, if any, should be taken in response to such conflicts. If such a conflict were to occur, one or more separate accounts might be required to withdraw its investments in the Fund or shares of another Fund may be substituted. This might force the Fund to sell securities at lower prices. 12 FINANCIAL HIGHLIGHTS The financial highlights table that follows is intended to help you understand the Fund's financial performance. Information is shown for the Fund's last five fiscal years, which run from January 1 to December 31. Certain information in the table reflects the financial results for a single Fund share. The total returns in the table represent the return that you would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information is included in the Fund's financial statements, which have been audited by Ernst & Young LLP, independent auditors, whose report, along with the Fund's audited financial statements, is included in the Fund's annual report. You can request a free annual report by calling 1-888-4-WANGER (1-888-492-6437). The Fund's total returns presented below do not reflect the cost of insurance and other company separate account charges which vary with the VA contracts, VLI policies or Retirement Plans.
WANGER INTERNATIONAL SMALL CAP Year ended Year ended Year ended Year ended Year ended Selected data for a share December 31, December 31, December 31, December 31, December 31, outstanding throughout each period 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 28.53 $ 43.67 $ 19.62 $ 17.05 $ 17.71 Income From Investment Operations: Net investment income (loss) (a) 0.02 (0.26) (0.13) 0.03 0.02 Net realized and unrealized gain (loss) on investments and foreign currency transactions (5.12) (9.75) 24.52 2.76 (0.26) ---------- ---------- ---------- ---------- ---------- Total from Investment Operations (5.10) (10.01) 24.39 2.79 (0.24) LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (loss) -- -- (0.34) (0.22) -- From net realized gain and unrealized gain reportable for federal income taxes (8.03) (5.13) -- -- (0.42) ---------- ---------- ---------- ---------- ---------- Total Distributions Declared to (8.03) (5.13) (0.34) (0.22) (0.42) Shareholders NET ASSET VALUE, END OF PERIOD $ 15.40 $ 28.53 $ 43.67 $ 19.62 $ 17.05 - ------------------------------ ---------- ---------- ---------- ---------- ---------- Total Return (b) (21.27%) (27.84%) 126.37% 16.33% (1.46%) RATIOS TO AVERAGE NET ASSETS: Expenses 1.43% (c) 1.41% (c) 1.49% (c) 1.55% (c) 1.60% (d) Net investment income (loss) 0.10% (c) (0.68%) (c) (0.49%)(c) 0.16% (c) 0.12% (d) Portfolio turnover rate 56% 67% 75% 56% 60% Net assets, end of period (000's) $ 230,626 $ 271,675 $ 311,331 $ 141,253 $ 120,660 (a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions are reinvested. (c) The benefits derived from custody fees paid indirectly had no impact. (d) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custody fees for cash balances it maintains with the custodian ("custodian fees paid indirectly"). The ratios of expenses to average daily net assets and net investment income to average daily net assets net of custody fees paid indirectly would have been 1.59% and 0.13%, respectively, for the year ended December 31, 1997. 13
SHAREHOLDER INFORMATION SHAREHOLDER AND ACCOUNT POLICIES The Fund provides Participating Insurance Companies and Retirement Plans with information Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m. Central time. For information, prices, literature, or to obtain information regarding the availability of Fund shares or how Fund shares are redeemed, call Liberty WAM at 1-888-4-WANGER (1-888-492-6437). Shares of the Fund are issued and redeemed in connection with investments in and payments under certain qualified and non-qualified VA contracts and VLI policies issued through separate accounts of Participating Insurance Companies. Shares of the Fund are also offered directly to certain of the following types of qualified plans and retirement arrangements and accounts, collectively called Retirement Plans: o a plan described in section 401(a) of the Internal Revenue Code that includes a trust exempt from tax under section 501(a); o an annuity plan described in section 403(a); o an annuity contract described in section 403(b), including a 403(b)(7) custodial account; o a governmental plan under section 414(d) or an eligible deferred compensation plan under section 457(b); and o a plan described in section 501(c)(18). The trust or plan must be established before shares of the Fund can be purchased by the plan. Neither the Fund nor Liberty WAM offers prototypes of these plans. The Fund has imposed certain additional restrictions on sales to Retirement Plans to reduce Fund expenses. To be eligible to invest in the Fund, a Retirement Plan must be domiciled in a state in which Fund shares may be sold without payment of a fee to the state. In most states, this policy will require that a Retirement Plan have at least $5 million in assets and that investment decisions are made by a Plan fiduciary rather than Plan participants in order for the Plan to be eligible to invest. The Fund does not intend to offer shares in states where the sale of Fund shares requires the payment of a fee. A Retirement Plan may call Liberty WAM at 1-888-4-WANGER (1-888-492-6437) to determine if it is eligible to invest. HOW TO INVEST AND REDEEM Shares of the Fund may not be purchased or redeemed directly by individual VA contract owners, VLI policyholders or individual Retirement Plan participants. VA contract owners, VLI policyholders or Retirement Plan participants should consult the disclosure documents for their VA contract, VLI policy or the plan documents for their Retirement Plan, for information on the availability of the Fund as an investment vehicle for allocations under their VA contract, VLI policy or Retirement Plan. In the case of a Participating Insurance Company purchaser, particular purchase and redemption procedures typically are included in an agreement between the Fund and the Participating Insurance Company. The Fund may enter into similar agreements with Retirement Plans. 14 The Participating Insurance Companies and Retirement Plans place daily orders to purchase and redeem shares of the Fund. These orders generally reflect the net effect of instructions they receive from holders of their VA contracts, VLI policies and Retirement Plan participants and certain other terms of those contracts, policies and Retirement Plans. The Trust issues and redeems shares at net asset value without imposing any selling commission, sales load or redemption charge. However, each VA contract and VLI policy imposes its own charges and fees on owners of the VA contract and VLI policy and Retirement Plans may impose such charges on participants in the Retirement Plan. Shares generally are sold and redeemed at their net asset value next determined after receipt of purchase or redemption requests from Participating Insurance Companies and Retirement Plans. The right of redemption may be suspended or payment postponed whenever permitted by applicable law and regulations. PURCHASES To the extent not otherwise provided in any agreement between the Trust and a Participating Insurance Company or Retirement Plan, shares of the Fund may be purchased by check or by wire transfer of funds. To be effective, a purchase order must consist of the money to purchase the shares and (i) information identifying the purchaser, in the case of a Participating Insurance Company or Retirement Plan with which the Fund has entered into an agreement, or a subsequent purchase by a Participating Insurance Company or Retirement Plan that is already a Fund shareholder, or (ii) a completed purchase application, in the case of the initial investment by a Retirement Plan with which the Fund does not have an agreement. REDEMPTIONS Subject to the terms of any agreement between the Fund and any Participating Insurance Company or Retirement Plan, shares may be redeemed by written request or by telephone (for redemptions of $200,000 or less), with proceeds paid by check or by wire transfer. REDEEMING SHARES IN WRITING A written redemption request must: o identify the account owner; o specify the number of shares or dollar amount to be redeemed; o be signed on behalf of the owner by an individual or individuals authorized to do so, and include evidence of their authority; o if the shares to be redeemed have a value of more than $200,000, include a signature guarantee by an eligible guarantor institution as defined in the rules under the Securities Exchange Act of 1934 (including a bank, broker-dealer, credit union (if authorized under state law), national securities exchange, registered securities association, clearing agency or savings association, but not a notary public); and o include any stock certificates representing the shares to be redeemed. A check for the redemption proceeds will be mailed to the address of record unless payment by wire transfer is requested. 15 REDEEMING SHARES BY TELEPHONE Unless a Retirement Plan shareholder chose on its purchase application not to have the ability to do so, redemptions of shares having a value of $200,000 or less may be requested by calling Liberty WAM at 1-888-4-WANGER (1-888-492-6437). The Fund will not be responsible for unauthorized transactions if it follows reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting identification information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. If you are unable to reach the Fund or its transfer agent by telephone, your redemption request would have to be placed by mail. EXCHANGING SHARES BY TELEPHONE To the extent not otherwise provided in an agreement between the Fund and a Retirement Plan shareholder, a Retirement Plan may exchange shares of the Fund for shares of another Wanger Fund by telephone by calling Liberty WAM at 1-888-4-WANGER (1-888-492-6437). Shares may be exchanged only between identically registered accounts, and the shares in the new Wanger Fund must be available for sale without payment of a fee under any applicable state securities law. Because excessive trading can hurt Fund performance and shareholders, the Fund reserves the right temporarily or permanently to terminate the exchange privilege of any shareholder who makes excessive use of the exchange plan. In particular, a pattern of exchanges that coincide with a market timing strategy may be disruptive to the Fund. The Fund has limited the number of exchanges to no more than four per year. The Fund will not be responsible for unauthorized transactions if it follows reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. Normally, redemption proceeds will be paid within seven days after the Fund or its agent receives a request for redemption. Redemptions may be suspended or the payment date postponed on days when the New York Stock Exchange (NYSE) is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. HOW THE FUND'S SHARE PRICE IS DETERMINED The Fund's share price is its net asset value next determined. Net asset value is the difference between the values of the Fund's assets and liabilities divided by the number of shares outstanding. We determine net asset value at the close of regular trading on the New York Stock Exchange (NYSE), normally 4 p.m. Eastern time. To calculate the net asset value on a given day, we value each stock listed or traded on a stock exchange at its latest sale price on that day. If there are no sales that day, we value the security at the most recently quoted bid price. We value each over-the-counter security or National Association of Securities Dealers Automated Quotation (Nasdaq) security as of the last sale price for that day. When the price of a security is not available, including days when we determine that the sale or bid price of the security does not reflect that security's market value, we value the security at a fair value determined in good faith under procedures established by the Board of Trustees. 16 We value a security at fair value when events have occurred after the last available market price and before the close of the NYSE that materially affect the security's price. In the case of foreign securities, this could include events occurring after the close of the foreign market and before the close of the NYSE. The Fund's foreign securities may trade on days when the NYSE is closed. We will not price shares on days that the NYSE is closed for trading and Participating Insurance Companies and Retirement Plans may not purchase or redeem shares. DIVIDENDS AND DISTRIBUTIONS The Fund intends to declare and distribute, as dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of portfolio securities, if any, to its shareholders (Participating Insurance Companies' separate accounts and Retirement Plan participants). The net investment income of the Fund consists of all dividends or interest received by the Fund, less expenses (including the investment advisory fees). Income dividends will be declared and distributed annually by the Fund. All net short-term and long-term capital gains of the Fund, net of carry-forward losses, if any, realized during the fiscal year, are declared and distributed periodically, at least annually. All dividends and distributions are reinvested in additional shares of the Fund at net asset value, as of the record date for the distributions. TAXES The Fund intends to qualify every year as a regulated investment company under the Internal Revenue Code. By so qualifying, the Fund will not be subject to federal income taxes to the extent that its net investment income and net realized capital gains are distributed to the shareholders. The Fund also intends to meet certain diversification requirements applicable to mutual funds underlying variable insurance products. For more information about the tax status of the Fund, see Taxes in the SAI. For information concerning the federal tax consequences to VA contract owners, VLI policyholders or Retirement Plan participants, see the disclosure documents from the VA contract, VLI policy or your Retirement Plan administrator. You should consult your tax advisor about the tax consequences of any investment. 17 FOR MORE INFORMATION Advisor: Liberty Wanger Asset Management, L.P. Additional information about the Fund's investments is available in the Fund's semiannual and annual reports to shareholders. The annual report contains a discussion of the market conditions and investment strategies that significantly affected the Fund's performance over the last fiscal year. You may wish to read the Fund's SAI for more information on the Fund and the securities in which it invests. The SAI is incorporated into this prospectus by reference, which means that it is considered to be part of this prospectus. You can get free copies of the annual and semiannual reports and the SAI, request other information and discuss your questions about the Fund by writing: Liberty Wanger Asset Management, L.P. Shareholder Services Group 227 West Monroe, Suite 3000 Chicago, IL 60606 1 (888) 4-WANGER (1-888-492-6437) www.wanger.com Or by calling or writing the Participating Insurance Company which issued your variable annuity contract or variable life insurance policy or the Retirement Plan you participate in. Information about the Fund (including the SAI) can be reviewed and copied at the Public Reference Room of the Securities and Exchange Commission (SEC) in Washington, D.C. Information on the Public Reference Room may be obtained by calling the SEC at 202-942-8090. Reports and other information about the Fund are available on the EDGAR database on the SEC's Internet site at http://www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. Investment Company Act file number: 811-08748 18 WANGER TWENTY PROSPECTUS MAY 1, 2002 * * * * Fund shares are available only through variable annuity contracts and variable life insurance policies of participating insurance companies, and through certain retirement plans. * * * * Although Fund shares have been registered with the Securities and Exchange Commission, the Commission has not approved or disapproved any shares offered in this prospectus or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------------ ----------------- NOT FDIC-INSURED MAY LOSE VALUE NO BANK GUARANTEE ------------------------------ ----------------- THE TRUST......................................................................3 THE FUND.......................................................................4 This section contains the following information about the Fund: investment goal, principal investment strategy, principal investment risks, and performance history OTHER INVESTMENT STRATEGIES AND RISKS..........................................8 TRUST MANAGEMENT ORGANIZATIONS................................................10 The Trustees.........................................................10 The Advisor: Liberty Wanger Asset Management, L.P. .................10 Portfolio Manager....................................................11 Mixed and Shared Funding.............................................11 FINANCIAL HIGHLIGHTS..........................................................12 SHAREHOLDER INFORMATION.......................................................13 2 THE TRUST Wanger Advisors Trust (Trust) includes four separate mutual funds (Funds), each with its own investment goal and strategies. This prospectus contains information about Wanger Twenty (Fund). The Fund is an investment option under variable annuity contracts (VA contracts) and variable life insurance policies (VLI policies) issued by life insurance companies (Participating Insurance Companies). Participating Insurance Companies invest in the Fund through separate accounts that they set up for that purpose. Owners of VA contracts and VLI policies invest in sub-accounts of those separate accounts through instructions they give to their insurance company. Shares of the Fund also may be offered directly to certain pension plans and retirement arrangements and accounts permitting accumulation of funds on a tax-deferred basis (Retirement Plans). The prospectuses of the Participating Insurance Companies' separate accounts describe which Funds are available to the purchasers of their own VA contracts and VLI policies. The Retirement Plan disclosure documents describe which Funds are available to participants in the plan. 3 THE FUND INVESTMENT GOAL--WANGER TWENTY Wanger Twenty seeks long-term growth of capital. PRINCIPAL INVESTMENT STRATEGY Wanger Twenty invests primarily in the stocks of medium- to larger-size U.S. companies. Wanger Twenty is a non-diversified fund that takes advantage of its advisor's research and stock-picking capabilities to invest in a limited number of companies (between 20-25) with market capitalizations under $15 billion, offering the potential to provide above-average growth over time. Wanger Twenty believes that companies within this capitalization range, which are not as well known by financial analysts, may offer higher return potential than the stocks of companies with capitalizations above $15 billion. Wanger Twenty typically looks for companies with: o A strong business franchise that offers growth potential. o Products and services that give the company a competitive advantage. o A stock price that the Fund's advisor believes is reasonable relative to the assets and earning power of the company. The portfolio manager may sell a portfolio holding if the security reaches the portfolio manager's price target or if the company has a deterioration of fundamentals such as failing to meet key operating benchmarks. The portfolio manager may also sell a portfolio holding to fund redemptions. PRINCIPAL INVESTMENT RISKS There are two basic risks for all mutual funds that invest in stocks: MANAGEMENT RISK and MARKET RISK. These risks may cause you to lose money by investing in the Fund. Management risk means that Liberty Wanger Asset Management, L.P.'s (Liberty WAM) stock selections and other investment decisions might produce losses or cause the Fund to underperform when compared to other funds with similar goals. Market risk means that security prices in a market, sector or industry may fall, reducing the value of your investment. Because of management and market risk, there is no guarantee that the Fund will achieve its investment goal or perform favorably compared with comparable funds. Since the Fund purchases equity securities, it is subject to equity risk. This is the risk that stock prices will fall over short or extended periods of time. Although the stock market has historically outperformed other asset classes over the long term, the equity market tends to move in cycles. Individual stock prices may fluctuate drastically from day-to-day and may underperform other asset classes over an extended period of time. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. 4 Because the Fund invests in stocks, the price of its shares -- its net asset value per share -- fluctuates daily in response to changes in the market value of the stocks. An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. MID-CAP COMPANIES The securities issued by mid-cap companies may have more risk than those of larger companies. These securities may be more susceptible to market downturns, and their prices could be more volatile. SECTOR RISK Sector risk may sometimes be present in the Fund's investments. Companies that are in different but closely related industries are sometimes described as being in the same broad economic sector. The values of stocks of different companies in a market sector may be similarly affected by particular economic or market events. Although the Fund does not intend to focus on any particular sector, at times, the Fund may have a significant portion of its assets invested in a particular sector. NON-DIVERSIFIED Wanger Twenty is a non-diversified fund. As a non-diversified mutual fund, the Fund is allowed to invest a greater percentage of its total assets in the securities of a single issuer. This may concentrate issuer risk and, therefore, the Fund may have an increased risk of loss compared to a similar diversified mutual fund. PERFORMANCE HISTORY The bar chart that follows illustrates the Fund's calendar-year total returns. The performance table following the bar chart shows how the Fund's average annual returns compare with those of a broad measure of market performance for one year and the life of the Fund. We compare the Fund to the S&P MidCap 400 Index, the S&P 500 Index and the Russell 2000 Index, which are broad-based measures of market performance. The chart and table are intended to illustrate some of the risks of investing in the Fund by showing the changes in the Fund's performance. All returns include the reinvestment of dividends and distributions. As with all mutual funds, past performance does not predict the Fund's future performance. The Fund's performance results do not reflect the cost of insurance and separate account charges which are imposed under your VA contract or VLI policy, or any charges imposed by your Retirement Plan. Returns and value of an investment will vary, resulting in a gain or a loss on sale. 5 CALENDAR-YEAR TOTAL RETURNS YEAR-BY-YEAR TOTAL RETURNS [GRAPH APPEARS HERE] 2000 9.45% 2001 9.09% Best quarter: 4th quarter 2001, 17.97% Worst quarter: 3rd quarter 2001, -10.70% SINCE 1 YEAR INCEPTION+ Wanger Twenty* 9.09% 17.58% S&P MidCap 400** -0.60% 12.08% S&P 500** -11.89% -2.44% Russell 2000** 2.49% 6.13% - ------------------ + Wanger Twenty's inception date was 2/1/1999. * Part of the performance shown is due to the Fund's purchase of securities in IPO's. The impact of IPO purchases declines as a Fund grows larger. ** The S&P MidCap 400 Index is a broad market-weighted index of 400 stocks that are in the next tier down from the S&P 500. The S&P 500 Index is a broad market-weighted average of U.S. large, blue-chip companies. The Russell 2000 Index is a market-weighted index of 2000 small companies formed by taking the largest 3000 companies and eliminating the largest 1000 of those companies. The indexes are unmanaged and differ from the Fund's composition; they are not available for direct investment. 6 FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund, not including fees and expenses of your VA contract, VLI policy or Retirement Plan. Shareholder Transaction Expenses Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None Annual Fund Operating Expenses Expenses that are deducted from Fund assets: Management fees .95% 12b-1 fee None Other expenses 0.38% - ------------------------------------------------------------------- Total annual Fund operating expenses 1.33% Liberty WAM has undertaken to limit Wanger Twenty's annual expenses to 1.35% of its average net assets. This expense limitation is contractual and will terminate on September 30, 2002. EXAMPLE This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes a $10,000 investment in Wanger Twenty for the time periods indicated, a 5% total return each year, reinvestment of all dividends and distributions, and that operating expenses remain the same. Your actual returns and costs may be higher or lower. This example does not include the effect of Liberty WAM's undertaking to limit the Fund's expenses. 1 Year $135 3 Years $421 5 Years $729 10 Years $1,601 7 OTHER INVESTMENT STRATEGIES AND RISKS The Fund's principal investment strategies and their associated risks are described above. This section provides more detail about the Fund's investment strategies, and describes other investments the Fund may make and the risks associated with them. In seeking to achieve its investment goal, the Fund may invest in various types of securities and engage in various investment techniques, which are not the principal focus of the Fund and therefore are not described in this prospectus. These types of securities and investment practices are identified and discussed in the Fund's Statement of Additional Information (SAI), which you may obtain free of charge (see back cover). Except as otherwise noted, approval by the Fund's shareholders is not required to modify or change the Fund's investment goal or investment strategies. THE INFORMATION EDGE Liberty WAM invests in entrepreneurially managed mid-sized and larger companies that it believes are not as well known by financial analysts and whose domination of a niche creates the opportunity for superior earnings-growth potential. Liberty WAM may identify what it believes are important economic, social or technological trends (for example, the growth of out-sourcing as a business strategy or the productivity gains from the increasing use of technology) and try to identify companies it thinks will benefit from those trends. In making investments for the Fund, Liberty WAM relies primarily on its independent, internally generated research to uncover companies that may be less well known than the more popular names. To find these companies, Liberty WAM compares growth potential, financial strength and fundamental value among companies.
Growth Potential Financial Strength Fundamental Value - ----------------------------------------- -------------------------------------- ------------------------------------- |X| superior technology |X| low debt |X| reasonable stock price |X| innovative marketing |X| adequate working capital relative to growth potential |X| managerial skill |X| conservative accounting |X| valuable assets |X| market niche practices |X| good earnings prospects |X| adequate profit margin |X| strong demand for product A strong balance sheet gives Once Liberty WAM uncovers an The realization of this growth management greater flexibility to attractive company, it identifies a potential would likely produce superior pursue strategic objectives and is price that it believes would also performance that is sustainable over essential to maintaining a make the stock a good value. time. competitive advantage. - ----------------------------------------- -------------------------------------- -------------------------------------
STOCK STRENGTH COMES FIRST Liberty WAM's analysts continually screen companies and make more than 1,000 face-to-face visits around the globe each year. To accomplish this, Liberty WAM analysts talk directly to top management, vendors, suppliers and competitors, whenever possible. 8 In managing the Fund, Liberty WAM tries to maintain lower transaction costs by investing with a long-term time horizon (at least two to five years). However, securities purchased on a long-term basis may be sold within 12 months after purchase due to changes in the circumstances of a particular company or industry, or changes in general market or economic conditions. STATE INSURANCE RESTRICTIONS The Fund is sold to Participating Insurance Companies in connection with VA contracts and VLI policies, and will seek to be available under VA contracts and VLI policies sold in a number of jurisdictions. Certain states have regulations or guidelines concerning concentration of investments and other investment techniques. If applied to the Fund, the Fund may be limited in its ability to engage in certain techniques and to manage its portfolio with the flexibility provided herein. In order to permit the Fund to be available under VA contracts and VLI policies sold in certain states, the Fund may make commitments that are more restrictive than the investment policies and limitations described herein and in the SAI. If the Fund determines that such a commitment is no longer in the Fund's best interest, the commitment may be revoked by terminating the availability of the Fund to VA contract owners and VLI policyholders residing in such states. TEMPORARY DEFENSIVE POSITIONS At times, Liberty WAM may determine that adverse market conditions make it desirable to temporarily suspend the Fund's normal investment activities. During such times, the Fund may, but is not required to, invest in cash or high-quality, short-term debt securities, without limit. Taking a temporary defensive position may prevent the Fund from achieving its investment goal. HEDGING STRATEGIES The Fund may enter into a number of hedging strategies, including those that employ futures and options, to gain or reduce exposure to particular securities or markets. These strategies, commonly referred to as derivatives, involve the use of financial instruments whose values depend on, or are derived from, the value of an underlying security, index or currency. The Fund may use these strategies to adjust the Fund's sensitivity to changes in interest rates or for other hedging purposes (i.e. attempting to offset a potential loss in one position by establishing an interest in an opposite position). Derivative strategies involve the risk that they may exaggerate a loss, potentially losing more money than the actual cost of the underlying security, or limit a potential gain. Also, with some derivative strategies there is the risk that the other party to the transaction may fail to honor its contract terms, causing a loss to the Fund. 9 PORTFOLIO TURNOVER The Fund does not have limits on portfolio turnover. Turnover may vary significantly from year-to-year. Liberty WAM does not expect the Fund's turnover to exceed 125% under normal conditions. Portfolio turnover increases transaction expenses, which reduce the Fund's return. TRUST MANAGEMENT ORGANIZATIONS THE TRUSTEES The business of the Trust and the Fund is supervised by the Trust's Board of Trustees. The SAI contains names of and biographical information on the Trustees. THE ADVISOR: LIBERTY WANGER ASSET MANAGEMENT, L.P. Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset Management, L.P. (WAM)), 227 West Monroe Street, Suite 3000, Chicago, IL 60606, is the Fund's investment advisor. Liberty WAM and its predecessor have managed mutual funds, including Wanger Twenty, since 1992. In its duties as investment advisor, Liberty WAM runs the Fund's day-to-day business, including placing all orders for the purchase and sale of the Fund's portfolio securities. As of December 31, 2001, Liberty WAM managed more than $8.7 billion in assets. For the fiscal year 2001, the Fund paid Liberty WAM management fees at 0.95% of the average daily net assets of the Fund. Additional expenses are incurred under the VA contracts, VLI policies and the Retirement Plans. These expenses are not described in this prospectus; owners of VA contracts, VLI policies and Retirement Plan participants should consult the contract or policy disclosure documents or Retirement Plan information regarding these expenses. From time to time, Liberty WAM may pay amounts from its past profits to Participating Insurance Companies or other organizations that provide administrative services for the Fund or that provide other services relating to the Fund to owners of VA contracts, VLI policies and/or participants in Retirement Plans. These services include, among other things: sub-accounting services; answering inquiries regarding the Fund; transmitting, on behalf of the Fund, proxy statements, shareholder reports, updated prospectuses and other communications regarding the Fund; and such other related services as the Fund, owners of VA contracts, VLI policies and/or participants in Retirement Plans may request. The amount of any such payment will be determined by the nature and extent of the services provided by the Participating Insurance Company or other organization. Payment of such amounts by Liberty WAM will not increase the fees paid by the Fund or its shareholders. 10 PORTFOLIO MANAGER Liberty WAM uses a team to manage the Fund. Team members share responsibility for providing ideas, information, and knowledge in managing the Fund, and each team member has one or more particular areas of expertise. The portfolio managers are responsible for making daily investment decisions, and utilize the management team's input and advice when making buy and sell determinations. John H. Park is a vice president of the Trust, and has managed Wanger Twenty since its inception in February, 1999. Mr. Park is also a vice president of Liberty Acorn Trust and lead portfolio manager of Liberty Acorn Twenty. He has been a key member of the domestic investment team at Liberty WAM and WAM since 1993, and was a principal of WAM from 1998 to September 29, 2000. MIXED AND SHARED FUNDING As described previously, the Trust serves as a funding medium for VA contracts and VLI policies of Participating Insurance Companies and for certain Retirement Plans, so-called mixed and shared funding. As of the date of this prospectus, the Participating Insurance Companies are Keyport Life Insurance Company (Keyport), Keyport Benefit Life Insurance Company (Keyport Benefit), Aegon Financial Services Group, Inc., SAFECO Life Insurance Company, PHL Variable Life Insurance Company, Phoenix Home Life Mutual Insurance Company, American Enterprise Life Insurance Company, IDS Life Insurance Company, IDS Life Insurance Company of New York, and Sun Life Assurance Company of Canada (U.S.). The Fund may become a funding vehicle for VA contracts or VLI policies of other Participating Insurance Companies. The interests of owners of VA contracts and VLI policies could diverge based on differences in state regulatory requirements, changes in the tax laws or other unanticipated developments. The Trust does not foresee any such differences or disadvantages at this time. However, the Trustees will monitor for such developments to identify any material irreconcilable conflicts and to determine what action, if any, should be taken in response to such conflicts. If such a conflict were to occur, one or more separate accounts might be required to withdraw its investments in the Fund or shares of another Fund may be substituted. This might force the Fund to sell securities at lower prices. 11 FINANCIAL HIGHLIGHTS The financial highlights table that follows is intended to help you understand the Fund's financial performance. Information is shown since the Fund's inception and for the Fund's last three fiscal years, which run from January 1 to December 31, unless otherwise indicated. Certain information in the table reflects the financial results for a single Fund share. The total returns in the table represent the return that you would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information is included in the Fund's financial statements, which have been audited by Ernst & Young LLP, independent auditors, whose report, along with the Fund's audited financial statements, is included in the Fund's annual report. You can request a free annual report by calling 1-888-4-WANGER (1-888-492-6437). The Fund's total returns presented below do not reflect the cost of insurance and other company separate account charges which vary with the VA contracts, VLI policies or Retirement Plans. WANGER TWENTY
FEBRUARY 1, 1999 Selected data for a share outstanding YEAR ENDED YEAR ENDED THROUGH throughout each period DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 - ---------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $14.08 $13.43 $10.00 INCOME FROM INVESTMENT OPERATIONS: Net investment loss (a) (0.05) (0.03) (0.08) Net realized and unrealized gain on investments 1.33 1.23 3.51 - ---------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.28 1.20 3.43 LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income -- -- -- From net realized capital gains -- (0.55) -- - ---------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders -- (0.55) -- - ---------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $15.36 $14.08 $13.43 - ---------------------------------------------------------------------------------------------------------- Total Return (b) 9.09% 9.45% (c) 34.30% (c)(d) RATIOS TO AVERAGE NET ASSETS: Expenses 1.33% (e) 1.39% (f) 1.41% (f)(g) Net investment loss (0.34%)(e) (0.24%)(f) (0.77%)(f)(g) Reimbursement -- 0.21% 0.71% (g) Portfolio turnover rate 76% 86% 113% (g) Net assets, end of period (000's) $21,429 $12,129 $6,570 (a) Net investment loss per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions reinvested. (c) Had the Advisor not reimbursed a portion of expenses, total return would have been reduced. (d) Not annualized. (e) The benefits derived from custody fees paid indirectly had no impact. (f) 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"). The ratios of expenses to average daily net assets and net investment income to average daily net assets net of custody fees paid indirectly would have been 1.35% and (0.20%), respectively, for the year ended December 31, 2000 and 1.35% and (0.71%), respectively, for the period ended December 31, 1999. (g) Annualized
12 SHAREHOLDER INFORMATION SHAREHOLDER AND ACCOUNT POLICIES The Fund provides Participating Insurance Companies and Retirement Plans with information Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m. Central time. For information, prices, literature, or to obtain information regarding the availability of Fund shares or how Fund shares are redeemed, call Liberty WAM at 1-888-4-WANGER (1-888-492-6437). Shares of the Fund are issued and redeemed in connection with investments in and payments under certain qualified and non-qualified VA contracts and VLI policies issued through separate accounts of Participating Insurance Companies. Shares of the Fund are also offered directly to certain of the following types of qualified plans and retirement arrangements and accounts, collectively called Retirement Plans: o a plan described in section 401(a) of the Internal Revenue Code that includes a trust exempt from tax under section 501(a); o an annuity plan described in section 403(a); o an annuity contract described in section 403(b), including a 403(b)(7) custodial account; o a governmental plan under section 414(d) or an eligible deferred compensation plan under section 457(b); and o a plan described in section 501(c)(18). The trust or plan must be established before shares of the Fund can be purchased by the plan. Neither the Fund nor Liberty WAM offers prototypes of these plans. The Fund has imposed certain additional restrictions on sales to Retirement Plans to reduce Fund expenses. To be eligible to invest in the Fund, a Retirement Plan must be domiciled in a state in which Fund shares may be sold without payment of a fee to the state. In most states, this policy will require that a Retirement Plan have at least $5 million in assets and that investment decisions are made by a Plan fiduciary rather than Plan participants in order for the Plan to be eligible to invest. The Fund does not intend to offer shares in states where the sale of Fund shares requires the payment of a fee. A Retirement Plan may call Liberty WAM at 1-888-4-WANGER (1-888-492-6437) to determine if it is eligible to invest. HOW TO INVEST AND REDEEM Shares of the Fund may not be purchased or redeemed directly by individual VA contract owners, VLI policyholders or individual Retirement Plan participants. VA contract owners, VLI policyholders or Retirement Plan participants should consult the disclosure documents for their VA contract, VLI policy or the plan documents for their Retirement Plan, for information on the availability of the Fund as an investment vehicle for allocations under their VA contract, VLI policy or Retirement Plan. In the case of a Participating Insurance Company purchaser, particular purchase and redemption procedures typically are included in an agreement between the Fund and the Participating Insurance Company. The Fund may enter into similar agreements with Retirement Plans. 13 The Participating Insurance Companies and Retirement Plans place daily orders to purchase and redeem shares of the Fund. These orders generally reflect the net effect of instructions they receive from holders of their VA contracts, VLI policies and Retirement Plan participants and certain other terms of those contracts, policies and Retirement Plans. The Trust issues and redeems shares at net asset value without imposing any selling commission, sales load or redemption charge. However, each VA contract and VLI policy imposes its own charges and fees on owners of the VA contract and VLI policy and Retirement Plans may impose such charges on participants in the Retirement Plan. Shares generally are sold and redeemed at their net asset value next determined after receipt of purchase or redemption requests from Participating Insurance Companies and Retirement Plans. The right of redemption may be suspended or payment postponed whenever permitted by applicable law and regulations. PURCHASES To the extent not otherwise provided in any agreement between the Trust and a Participating Insurance Company or Retirement Plan, shares of the Fund may be purchased by check or by wire transfer of funds. To be effective, a purchase order must consist of the money to purchase the shares and (i) information identifying the purchaser, in the case of a Participating Insurance Company or Retirement Plan with which the Fund has entered into an agreement, or a subsequent purchase by a Participating Insurance Company or Retirement Plan that is already a Fund shareholder, or (ii) a completed purchase application, in the case of the initial investment by a Retirement Plan with which the Fund does not have an agreement. REDEMPTIONS Subject to the terms of any agreement between the Fund and any Participating Insurance Company or Retirement Plan, shares may be redeemed by written request or by telephone (for redemptions of $200,000 or less), with proceeds paid by check or by wire transfer. REDEEMING SHARES IN WRITING A written redemption request must: o identify the account owner; o specify the number of shares or dollar amount to be redeemed; o be signed on behalf of the owner by an individual or individuals authorized to do so, and include evidence of their authority; o if the shares to be redeemed have a value of more than $200,000, include a signature guarantee by an eligible guarantor institution as defined in the rules under the Securities Exchange Act of 1934 (including a bank, broker-dealer, credit union (if authorized under state law), national securities exchange, registered securities association, clearing agency or savings association, but not a notary public); and o include any stock certificates representing the shares to be redeemed. A check for the redemption proceeds will be mailed to the address of record unless payment by wire transfer is requested. 14 REDEEMING SHARES BY TELEPHONE Unless a Retirement Plan shareholder chose on its purchase application not to have the ability to do so, redemptions of shares having a value of $200,000 or less may be requested by calling Liberty WAM at 1-888-4-WANGER (1-888-492-6437). The Fund will not be responsible for unauthorized transactions if it follows reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting identification information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. If you are unable to reach the Fund or its transfer agent by telephone, your redemption request would have to be placed by mail. EXCHANGING SHARES BY TELEPHONE To the extent not otherwise provided in an agreement between the Fund and a Retirement Plan shareholder, a Retirement Plan may exchange shares of the Fund for shares of another Fund by telephone by calling Liberty WAM at 1-888-4-WANGER (1-888-492-6437). Shares may be exchanged only between identically registered accounts, and the shares in the new Wanger Fund must be available for sale without payment of a fee under any applicable state securities law. Because excessive trading can hurt Fund performance and shareholders, the Fund reserves the right temporarily or permanently to terminate the exchange privilege of any shareholder who makes excessive use of the exchange plan. In particular, a pattern of exchanges that coincide with a market timing strategy may be disruptive to the Fund. The Fund has limited the number of exchanges to no more than four per year. The Fund will not be responsible for unauthorized transactions if it follows reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. Normally, redemption proceeds will be paid within seven days after the Fund or its agent receives a request for redemption. Redemptions may be suspended or the payment date postponed on days when the New York Stock Exchange (NYSE) is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. HOW THE FUND'S SHARE PRICE IS DETERMINED The Fund's share price is its net asset value next determined. Net asset value is the difference between the values of the Fund's assets and liabilities divided by the number of shares outstanding. We determine net asset value at the close of regular trading on the New York Stock Exchange (NYSE), normally 4 p.m. Eastern time. To calculate the net asset value on a given day, we value each stock listed or traded on a stock exchange at its latest sale price on that day. If there are no sales that day, we value the security at the most recently quoted bid price. We value each over-the-counter security or National Association of Securities Dealers Automated Quotation (Nasdaq) security as of the last sale price for that day. When the price of a security is not available, including days when we determine that the sale or bid price of the security does not reflect that security's market value, we value the security at a fair value determined in good faith under procedures established by the Board of Trustees. 15 We value a security at fair value when events have occurred after the last available market price and before the close of the NYSE that materially affect the security's price. In the case of foreign securities, this could include events occurring after the close of the foreign market and before the close of the NYSE. The Fund's foreign securities may trade on days when the NYSE is closed. We will not price shares on days that the NYSE is closed for trading and Participating Insurance Companies and Retirement Plans may not purchase or redeem shares. DIVIDENDS AND DISTRIBUTIONS The Fund intends to declare and distribute, as dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of portfolio securities, if any, to its shareholders (Participating Insurance Companies' separate accounts and Retirement Plan participants). The net investment income of the Fund consists of all dividends or interest received by the Fund, less expenses (including the investment advisory fees). Income dividends will be declared and distributed annually by the Fund. All net short-term and long-term capital gains of the Fund, net of carry-forward losses, if any, realized during the fiscal year, are declared and distributed periodically, at least annually. All dividends and distributions are reinvested in additional shares of the Fund at net asset value, as of the record date for the distributions. TAXES The Fund intends to qualify every year as a regulated investment company under the Internal Revenue Code. By so qualifying, the Fund will not be subject to federal income taxes to the extent that its net investment income and net realized capital gains are distributed to the shareholders. The Fund also intends to meet certain diversification requirements applicable to mutual funds underlying variable insurance products. For more information about the tax status of the Fund, see Taxes in the SAI. For information concerning the federal tax consequences to VA contract owners, VLI policyholders or Retirement Plan participants, see the disclosure documents from the VA contract, VLI policy or your Retirement Plan administrator. You should consult your tax advisor about the tax consequences of any investment. 16 FOR MORE INFORMATION Advisor: Liberty Wanger Asset Management, L.P. Additional information about the Fund's investments is available in the Fund's semiannual and annual reports to shareholders. The annual report contains a discussion of the market conditions and investment strategies that significantly affected the Fund's performance over the last fiscal year. You may wish to read the Fund's SAI for more information on the Fund and the securities in which it invests. The SAI is incorporated into this prospectus by reference, which means that it is considered to be part of this prospectus. You can get free copies of the annual and semiannual reports and the SAI, request other information and discuss your questions about the Fund by writing: Liberty Wanger Asset Management, L.P. Shareholder Services Group 227 West Monroe, Suite 3000 Chicago, IL 60606 1 (888) 4-WANGER (1-888-492-6437) www.wanger.com Or by calling or writing the Participating Insurance Company which issued your variable annuity contract or variable life insurance policy or the Retirement Plan you participate in. Information about the Fund (including the SAI) can be reviewed and copied at the Public Reference Room of the Securities and Exchange Commission (SEC) in Washington, D.C. Information on the Public Reference Room may be obtained by calling the SEC at 202-942-8090. Reports and other information about the Fund are available on the EDGAR database on the SEC's Internet site at http://www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. Investment Company Act file number: 811-08748 17 WANGER U.S. SMALLER COMPANIES PROSPECTUS MAY 1, 2002 * * * * Fund shares are available only through variable annuity contracts and variable life insurance policies of participating insurance companies, and through certain retirement plans. * * * * Although Fund shares have been registered with the Securities and Exchange Commission, the Commission has not approved or disapproved any shares offered in this prospectus or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------------ ----------------- NOT FDIC-INSURED MAY LOSE VALUE NO BANK GUARANTEE ------------------------------ ----------------- THE TRUST......................................................................3 THE FUND.......................................................................4 This section contains the following information about the Fund: investment goal, principal investment strategy, principal investment risks, and performance history OTHER INVESTMENT STRATEGIES AND RISKS..........................................8 TRUST MANAGEMENT ORGANIZATIONS................................................10 The Trustees............................................................10 The Advisor: Liberty Wanger Asset Management, L.P. .....................10 Portfolio Managers......................................................10 Mixed and Shared Funding................................................11 FINANCIAL HIGHLIGHTS..........................................................12 SHAREHOLDER INFORMATION.......................................................13 2 THE TRUST Wanger Advisors Trust (Trust) includes four separate mutual funds (Funds), each with its own investment goal and strategies. This prospectus contains information about Wanger U.S. Smaller Companies, formerly named Wanger U.S. Small Cap (Fund). The Fund is an investment option under variable annuity contracts (VA contracts) and variable life insurance policies (VLI policies) issued by life insurance companies (Participating Insurance Companies). Participating Insurance Companies invest in the Fund through separate accounts that they set up for that purpose. Owners of VA contracts and VLI policies invest in sub-accounts of those separate accounts through instructions they give to their insurance company. Shares of the Fund also may be offered directly to certain pension plans and retirement arrangements and accounts permitting accumulation of funds on a tax-deferred basis (Retirement Plans). The prospectuses of the Participating Insurance Companies' separate accounts describe which Funds are available to the purchasers of their own VA contracts and VLI policies. The Retirement Plan disclosure documents describe which Funds are available to participants in the plan. 3 THE FUND INVESTMENT GOAL--WANGER U.S. SMALLER COMPANIES Wanger U.S. Smaller Companies seeks long-term growth of capital. PRINCIPAL INVESTMENT STRATEGY The Fund invests primarily in the stocks of small- and medium-size U.S. companies. Wanger U.S. Smaller Companies generally invests in stocks of companies with market capitalizations of less than $5 billion at the time of purchase. As long as a stock continues to meet the Fund's other investment criteria, the Fund may choose to hold the stock even if it grows beyond an arbitrary capitalization limit. Wanger U.S. Smaller Companies believes that these smaller companies, which are not as well known by financial analysts, may offer higher return potential than the stocks of larger companies. Wanger U.S. Smaller Companies typically looks for companies with: o A strong business franchise that offers growth potential. o Products and services that give the company a competitive advantage. o A stock price that the Fund's advisor believes is reasonable relative to the assets and earning power of the company. Under normal circumstances, Wanger U.S. Smaller Companies invests at least 80% of its net assets (plus any borrowings for investment purposes), at market value at the time of investment, in companies with total stock market capitalizations of $5 billion or less. Likewise, under normal market conditions, Wanger U.S. Smaller Companies invests at least 80% of its net assets (plus any borrowings for investment purposes) in domestic securities. The portfolio manager may sell a portfolio holding if the security reaches the portfolio manager's price target or if the company has a deterioration of fundamentals such as failing to meet key operating benchmarks. The portfolio manager may also sell a portfolio holding to fund redemptions. PRINCIPAL INVESTMENT RISKS There are two basic risks for all mutual funds that invest in stocks: MANAGEMENT RISK and MARKET RISK. These risks may cause you to lose money by investing in the Fund. Management risk means that Liberty Wanger Asset Management, L.P.'s (Liberty WAM) stock selections and other investment decisions might produce losses or cause the Fund to underperform when compared to other funds with similar goals. Market risk means that security prices in a market, sector or industry may fall, reducing the value of your investment. Because of management and market risk, there is no guarantee that the Fund will achieve its investment goal or perform favorably compared with comparable funds. Since the Fund purchases equity securities, it is subject to EQUITY RISK. This is the risk that stock prices will fall over short or extended periods of time. Although the stock market has historically outperformed other asset classes over the long term, the equity market tends to move in cycles. Individual stock prices may fluctuate drastically from day-to-day and may underperform other asset classes over an extended period of time. Individual companies may 4 report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. Because the Fund invests in stocks, the price of its shares -- its net asset value per share -- fluctuates daily in response to changes in the market value of the stocks. An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. SMALLER COMPANIES Smaller companies, including small and medium-cap companies, are more likely than larger companies to have limited product lines, operating histories, markets or financial resources. They may depend heavily on a small management group. Small-cap companies in particular are more likely than larger companies to fail or prove unable to grow. Their securities may trade less frequently, may trade in smaller volumes and may fluctuate more sharply in price than stocks of larger companies. In addition, small-cap companies may not be widely followed by the investment community, which can lower the demand for their stocks. The securities issued by mid-cap companies may have more risk than those of larger companies. These securities may be more susceptible to market downturns, and their prices could be more volatile. SECTOR RISK Sector risk may sometimes be present in the Fund's investments. Companies that are in different but closely related industries are sometimes described as being in the same broad economic sector. The values of stocks of different companies in a market sector may be similarly affected by particular economic or market events. Although the Fund does not intend to focus on any particular sector, at times the Fund may have a significant portion of its assets invested in a particular sector. PERFORMANCE HISTORY The bar chart that follows shows changes in the Fund's performance from year-to-year by illustrating the Fund's calendar-year total returns. The performance table following the bar chart shows how the Fund's average annual returns compare with those of a broad measure of market performance for one year, five years and the life of the Fund. We compare the Fund to the S&P 500 Index and the Russell 2000 Index, which are broad-based measures of market performance. The chart and table are intended to illustrate some of the risks of investing in the Fund by showing the changes in the Fund's performance. All returns include the reinvestment of dividends and distributions. As with all mutual funds, past performance does not predict the Fund's future performance. The Fund's performance results do not reflect the cost of insurance and separate account charges which are imposed under your VA contract or VLI policy, or any charges imposed by your Retirement Plan. Returns and value of an investment will vary, resulting in a gain or a loss on sale. 5 CALENDAR-YEAR TOTAL RETURNS [GRAPH APPEARS HERE] YEAR-BY-YEAR TOTAL RETURNS 1996 46.59% 1997 29.41% 1998 8.68% 1999 25.06% 2000 -8.16% 2001 11.39% Best quarter: 2nd quarter 2001, 20.39% Worst quarter: 3rd quarter 1998, -17.69% SINCE 1 YEAR 5 YEARS INCEPTION+ Wanger U.S. Smaller Companies 11.39% 12.47% 18.27% S&P 500* -11.89% 10.70% 14.65% Russell 2000* 2.49% 7.52% 11.06% - ------------------ + Wanger U.S. Smaller Companies' inception date was 5/3/1995. * The S&P 500 Index is a broad market-weighted average of U.S. large blue-chip companies. The Russell 2000 Index is a market-weighted index of 2000 small companies formed by taking the largest 3000 companies and eliminating the largest 1000 of those companies. The indexes are unmanaged and differ from the Fund's composition; they are not available for direct investment. 6 FEES AND EXPENSES This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund, not including fees and expenses of your VA contract, VLI policy or Retirement Plan. Shareholder Transaction Expenses Fees paid directly from your investment: Maximum sales charge None Deferred sales charge None Annual Fund Operating Expenses Expenses that are deducted from Fund assets: Management fees .94% 12b-1 fee None Other expenses .05% - ------------------------------------------------------------------ Total annual Fund operating expenses 0.99% Liberty WAM has undertaken to limit Wanger U.S. Smaller Companies' annual expenses to 2.00% of its average net assets. This expense limitation is contractual and will terminate on September 30, 2002. EXAMPLE This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes a $10,000 investment in Wanger U.S. Smaller Companies for the time periods indicated, a 5% total return each year, reinvestment of all dividends and distributions, and that operating expenses remain the same. Your actual returns and costs may be higher or lower. 1 Year $101 3 Years $315 5 Years $547 10 Years $1,213 7 OTHER INVESTMENT STRATEGIES AND RISKS The Fund's principal investment strategies and their associated risks are described above. This section provides more detail about the Fund's investment strategies, and describes other investments the Fund may make and the risks associated with them. In seeking to achieve its investment goal, the Fund may invest in various types of securities and engage in various investment techniques, which are not the principal focus of the Fund and therefore are not described in this prospectus. These types of securities and investment practices are identified and discussed in the Fund's Statement of Additional Information (SAI), which you may obtain free of charge (see back cover). Except as otherwise noted, approval by the Fund's shareholders is not required to modify or change the Fund's investment goal or any of its investment strategies. THE INFORMATION EDGE Liberty WAM invests in entrepreneurially managed smaller and mid-sized companies that it believes are not as well known by financial analysts and whose domination of a niche creates the opportunity for superior earnings-growth potential. Liberty WAM may identify what it believes are important economic, social or technological trends (for example, the growth of out-sourcing as a business strategy or the productivity gains from the increasing use of technology) and try to identify companies it thinks will benefit from those trends. In making investments for the Fund, Liberty WAM relies primarily on its independent, internally generated research to uncover companies that may be less well known than the more popular names. To find these companies, Liberty WAM compares growth potential, financial strength and fundamental value among companies.
Growth Potential Financial Strength Fundamental Value - ----------------------------------------- -------------------------------------- ------------------------------------- |X| superior technology |X| low debt |X| reasonable stock price |X| innovative marketing |X| adequate working capital relative to growth potential |X| managerial skill |X| conservative accounting |X| valuable assets |X| market niche practices |X| good earnings prospects |X| adequate profit margin |X| strong demand for product A strong balance sheet gives Once Liberty WAM uncovers an The realization of this growth management greater flexibility to attractive company, it identifies a potential would likely produce superior pursue strategic objectives and is price that it believes would also performance that is sustainable over essential to maintaining a make the stock a good value. time. competitive advantage. - ----------------------------------------- -------------------------------------- -------------------------------------
STOCK STRENGTH COMES FIRST Liberty WAM's analysts continually screen companies and make more than 1,000 face-to-face visits around the globe each year. To accomplish this, Liberty WAM analysts talk directly to top management, vendors, suppliers and competitors, whenever possible. 8 In managing the Fund, Liberty WAM tries to maintain lower transaction costs by investing with a long-term time horizon (at least two to five years). However, securities purchased on a long-term basis may be sold within 12 months after purchase due to changes in the circumstances of a particular company or industry, or changes in general market or economic conditions. STATE INSURANCE RESTRICTIONS The Fund is sold to Participating Insurance Companies in connection with VA contracts and VLI policies, and will seek to be available under VA contracts and VLI policies sold in a number of jurisdictions. Certain states have regulations or guidelines concerning concentration of investments and other investment techniques. If applied to the Fund, the Fund may be limited in its ability to engage in certain techniques and to manage its portfolio with the flexibility provided herein. In order to permit the Fund to be available under VA contracts and VLI policies sold in certain states, the Fund may make commitments that are more restrictive than the investment policies and limitations described herein and in the SAI. If the Fund determines that such a commitment is no longer in the Fund's best interest, the commitment may be revoked by terminating the availability of the Fund to VA contract owners and VLI policyholders residing in such states. TEMPORARY DEFENSIVE POSITIONS At times, Liberty WAM may determine that adverse market conditions make it desirable to temporarily suspend the Fund's normal investment activities. During such times, the Fund may, but is not required to, invest in cash or high-quality, short-term debt securities, without limit. Taking a temporary defensive position may prevent the Fund from achieving its investment goal. HEDGING STRATEGIES The Fund may enter into a number of hedging strategies, including those that employ futures and options, to gain or reduce exposure to particular securities or markets. These strategies, commonly referred to as derivatives, involve the use of financial instruments whose values depend on, or are derived from, the value of an underlying security, index or currency. The Fund may use these strategies to adjust the Fund's sensitivity to changes in interest rates or for other hedging purposes (i.e. attempting to offset a potential loss in one position by establishing an interest in an opposite position). Derivative strategies involve the risk that they may exaggerate a loss, potentially losing more money than the actual cost of the underlying security, or limit a potential gain. Also, with some derivative strategies there is the risk that the other party to the transaction may fail to honor its contract terms, causing a loss to the Fund. 9 PORTFOLIO TURNOVER The Fund does not have limits on portfolio turnover. Turnover may vary significantly from year to year. Liberty WAM does not expect the Fund's turnover to exceed 65% under normal conditions. Portfolio turnover increases transaction expenses, which reduce the Fund's return. TRUST MANAGEMENT ORGANIZATIONS THE TRUSTEES The business of the Trust and the Fund is supervised by the Trust's Board of Trustees. The SAI contains names of and biographical information on the Trustees. THE ADVISOR: LIBERTY WANGER ASSET MANAGEMENT, L.P. Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset Management, L.P. (WAM)), 227 West Monroe Street, Suite 3000, Chicago, IL 60606, is the Fund's investment advisor. Liberty WAM and its predecessor have managed mutual funds, including Wanger U.S. Smaller Companies, since 1992. In its duties as investment advisor, Liberty WAM runs the Fund's day-to-day business, including placing all orders for the purchase and sale of the Fund's portfolio securities. As of December 31, 2001, Liberty WAM managed more than $8.7 billion in assets. For the fiscal year 2001, the Fund paid Liberty WAM management fees at 0.94% of the average daily net assets of the Fund. Additional expenses are incurred under the VA contracts, VLI policies and the Retirement Plans. These expenses are not described in this prospectus; owners of VA contracts, VLI policies and Retirement Plan participants should consult the contract or policy disclosure documents or Retirement Plan information regarding these expenses. From time to time, Liberty WAM may pay amounts from its past profits to Participating Insurance Companies or other organizations that provide administrative services for the Fund or that provide other services relating to the Fund to owners of VA contracts, VLI policies and/or participants in Retirement Plans. These services include, among other things: sub-accounting services; answering inquiries regarding the Fund; transmitting, on behalf of the Fund, proxy statements, shareholder reports, updated prospectuses and other communications regarding the Fund; and such other related services as the Fund, owners of VA contracts, VLI policies and/or participants in Retirement Plans may request. The amount of any such payment will be determined by the nature and extent of the services provided by the Participating Insurance Company or other organization. Payment of such amounts by Liberty WAM will not increase the fees paid by the Fund or its shareholders. PORTFOLIO MANAGER Liberty WAM uses a team to manage the Fund. Team members share responsibility for providing ideas, information, and knowledge in managing the Fund, and each team member has one or more particular areas of expertise. The portfolio managers are responsible for making 10 daily investment decisions, and utilize the management team's input and advice when making buy and sell determinations. Robert A. Mohn is a vice president of the Trust and is the lead portfolio manager of Wanger U.S. Smaller Companies. Mr. Mohn is also a vice president of Liberty Acorn Trust, and the lead portfolio manager of Liberty Acorn USA. He has been a member of the domestic analytical team at Liberty WAM and WAM since 1992, and was a principal of WAM from 1995 to September 29, 2000. MIXED AND SHARED FUNDING As described previously, the Trust serves as a funding medium for VA contracts and VLI policies of Participating Insurance Companies and for certain Retirement Plans, so-called mixed and shared funding. As of the date of this prospectus, the Participating Insurance Companies are Keyport Life Insurance Company (Keyport), Keyport Benefit Life Insurance Company (Keyport Benefit), Aegon Financial Services Group, Inc., SAFECO Life Insurance Company, PHL Variable Life Insurance Company, Phoenix Home Life Mutual Insurance Company, American Enterprise Life Insurance Company, IDS Life Insurance Company, IDS Life Insurance Company of New York, and Sun Life Assurance Company of Canada (U.S.). The Fund may become a funding vehicle for VA contracts or VLI policies of other Participating Insurance Companies. The interests of owners of VA contracts and VLI policies could diverge based on differences in state regulatory requirements, changes in the tax laws or other unanticipated developments. The Trust does not foresee any such differences or disadvantages at this time. However, the Trustees will monitor for such developments to identify any material irreconcilable conflicts and to determine what action, if any, should be taken in response to such conflicts. If such a conflict were to occur, one or more separate accounts might be required to withdraw its investments in the Fund or shares of another Fund may be substituted. This might force the Fund to sell securities at lower prices. 11 FINANCIAL HIGHLIGHTS The financial highlights table that follows is intended to help you understand the Fund's financial performance. Information is shown for the Fund's last five fiscal years, which run from January 1 to December 31. Certain information in the table reflects the financial results for a single Fund share. The total returns in the table represent the return that you would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information is included in the Fund's financial statements, which have been audited by Ernst & Young LLP, independent auditors, whose report, along with the Fund's audited financial statements, is included in the Fund's annual report. You can request a free annual report by calling 1-888-4-WANGER (1-888-492-6437). The Fund's total returns presented below do not reflect the cost of insurance and other company separate account charges which vary with the VA contracts, VLI policies or Retirement Plans.
WANGER U.S. SMALLER COMPANIES YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED Selected data for a share outstanding DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, throughout each period 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 19.99 $ 24.88 $ 22.18 $ 21.46 $ 16.97 INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) (0.04) 0.02 0.03 (.05) (0.02) Net realized and unrealized gain (loss) on investments $ 2.31 $ (1.82) 4.79 1.93 4.90 -------------- --------------- -------------- -------------- -------------- Total from Investment Operations $ 2.27 $ (1.80) 4.82 1.88 4.88 LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.01) (0.03) -- -- -- From net realized capital gains $ -- $ (3.06) (2.12) (1.16) (0.39) -------------- --------------- -------------- -------------- -------------- Total Distributions Declared to $ (0.01) $ (3.09) (2.12) (1.16) (0.39) Shareholders NET ASSET VALUE, END OF PERIOD $ 22.25 $ 19.99 $ 24.88 $ 22.18 $ 21.46 - ------------------------------ -------------- -------------- -------------- -------------- -------------- Total Return (b) 11.39% (8.16%) 25.06% 8.68% 29.41% RATIOS TO AVERAGE NET ASSETS: Expenses 0.99% 1.00% (c) 1.02% (c) 1.02% (c) 1.06% (d) Net investment income (loss) (0.20%) 0.07% (c) 0.14% (c) (.25%)(c) (.10%)(d) Portfolio turnover rate 18% 36% 35% 34% 34% Net assets, end of period (000's) $ 498,186 $ 403,306 $ 390,709 $ 339,119 $ 270,866 (a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions are reinvested. (c) The benefits derived from custody fees paid indirectly had no impact. (d) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custody fees for cash balances it maintains with the custodian ("custodian fees paid indirectly"). The ratios of expenses to average daily net assets and net investment income to average daily net assets net of custody fees paid indirectly would have been 1.04% and (0.08%), respectively, for the year ended December 31, 1997.
12 SHAREHOLDER INFORMATION SHAREHOLDER AND ACCOUNT POLICIES The Fund provides Participating Insurance Companies and Retirement Plans with information Monday through Friday (except holidays) from 8:00 a.m. to 4:30 p.m. Central time. For information, prices, literature, or to obtain information regarding the availability of Fund shares or how Fund shares are redeemed, call Liberty WAM at 1-888-4-WANGER (1-888-492-6437). Shares of the Fund are issued and redeemed in connection with investments in and payments under certain qualified and non-qualified VA contracts and VLI policies issued through separate accounts of Participating Insurance Companies. Shares of the Fund are also offered directly to certain of the following types of qualified plans and retirement arrangements and accounts, collectively called Retirement Plans: o a plan described in section 401(a) of the Internal Revenue Code that includes a trust exempt from tax under section 501(a); o an annuity plan described in section 403(a); o an annuity contract described in section 403(b), including a 403(b)(7) custodial account; o a governmental plan under section 414(d) or an eligible deferred compensation plan under section 457(b); and o a plan described in section 501(c)(18). The trust or plan must be established before shares of the Fund can be purchased by the plan. Neither the Fund nor Liberty WAM offers prototypes of these plans. The Fund has imposed certain additional restrictions on sales to Retirement Plans to reduce Fund expenses. To be eligible to invest in the Fund, a Retirement Plan must be domiciled in a state in which Fund shares may be sold without payment of a fee to the state. In most states, this policy will require that a Retirement Plan have at least $5 million in assets and that investment decisions are made by a Plan fiduciary rather than Plan participants in order for the Plan to be eligible to invest. The Fund does not intend to offer shares in states where the sale of Fund shares requires the payment of a fee. A Retirement Plan may call Liberty WAM at 1-888-4-WANGER (1-888-492-6437) to determine if it is eligible to invest. HOW TO INVEST AND REDEEM Shares of the Fund may not be purchased or redeemed directly by individual VA contract owners, VLI policyholders or individual Retirement Plan participants. VA contract owners, VLI policyholders or Retirement Plan participants should consult the disclosure documents for their VA contract, VLI policy or the plan documents for their Retirement Plan, for information on the availability of the Fund as an investment vehicle for allocations under their VA contract, VLI policy or Retirement Plan. In the case of a Participating Insurance Company purchaser, particular purchase and redemption procedures typically are included in an agreement between the Fund and the Participating Insurance Company. The Fund may enter into similar agreements with Retirement Plans. 13 The Participating Insurance Companies and Retirement Plans place daily orders to purchase and redeem shares of the Fund. These orders generally reflect the net effect of instructions they receive from holders of their VA contracts, VLI policies and Retirement Plan participants and certain other terms of those contracts, policies and Retirement Plans. The Trust issues and redeems shares at net asset value without imposing any selling commission, sales load or redemption charge. However, each VA contract and VLI policy imposes its own charges and fees on owners of the VA contract and VLI policy and Retirement Plans may impose such charges on participants in the Retirement Plan. Shares generally are sold and redeemed at their net asset value next determined after receipt of purchase or redemption requests from Participating Insurance Companies and Retirement Plans. The right of redemption may be suspended or payment postponed whenever permitted by applicable law and regulations. PURCHASES To the extent not otherwise provided in any agreement between the Trust and a Participating Insurance Company or Retirement Plan, shares of the Fund may be purchased by check or by wire transfer of funds. To be effective, a purchase order must consist of the money to purchase the shares and (i) information identifying the purchaser, in the case of a Participating Insurance Company or Retirement Plan with which the Fund has entered into an agreement, or a subsequent purchase by a Participating Insurance Company or Retirement Plan that is already a Fund shareholder, or (ii) a completed purchase application, in the case of the initial investment by a Retirement Plan with which the Fund does not have an agreement. REDEMPTIONS Subject to the terms of any agreement between the Fund and any Participating Insurance Company or Retirement Plan, shares may be redeemed by written request or by telephone (for redemptions of $200,000 or less), with proceeds paid by check or by wire transfer. REDEEMING SHARES IN WRITING A written redemption request must: o identify the account owner; o specify the number of shares or dollar amount to be redeemed; o be signed on behalf of the owner by an individual or individuals authorized to do so, and include evidence of their authority; o if the shares to be redeemed have a value of more than $200,000, include a signature guarantee by an eligible guarantor institution as defined in the rules under the Securities Exchange Act of 1934 (including a bank, broker-dealer, credit union (if authorized under state law), national securities exchange, registered securities association, clearing agency or savings association, but not a notary public); and o include any stock certificates representing the shares to be redeemed. A check for the redemption proceeds will be mailed to the address of record unless payment by wire transfer is requested. 14 REDEEMING SHARES BY TELEPHONE Unless a Retirement Plan shareholder chose on its purchase application not to have the ability to do so, redemptions of shares having a value of $200,000 or less may be requested by calling Liberty WAM at 1-888-4-WANGER (1-888-492-6437). The Fund will not be responsible for unauthorized transactions if it follows reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting identification information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. If you are unable to reach the Fund or its transfer agent by telephone, your redemption request would have to be placed by mail. EXCHANGING SHARES BY TELEPHONE To the extent not otherwise provided in an agreement between the Fund and a Retirement Plan shareholder, a Retirement Plan may exchange shares of the Fund for shares of another Wanger Fund by telephone by calling Liberty WAM at 1-888-4-WANGER (1-888-492-6437). Shares may be exchanged only between identically registered accounts, and the shares in the new Wanger Fund must be available for sale without payment of a fee under any applicable state securities law. Because excessive trading can hurt Fund performance and shareholders, the Fund reserves the right temporarily or permanently to terminate the exchange privilege of any shareholder who makes excessive use of the exchange plan. In particular, a pattern of exchanges that coincide with a market timing strategy may be disruptive to the Fund. The Fund has limited the number of exchanges to no more than four per year. The Fund will not be responsible for unauthorized transactions if it follows reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. Normally, redemption proceeds will be paid within seven days after the Fund or its agent receives a request for redemption. Redemptions may be suspended or the payment date postponed on days when the New York Stock Exchange (NYSE) is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. HOW THE FUND'S SHARE PRICE IS DETERMINED The Fund's share price is its net asset value next determined. Net asset value is the difference between the values of the Fund's assets and liabilities divided by the number of shares outstanding. We determine net asset value at the close of regular trading on the New York Stock Exchange (NYSE), normally 4 p.m. Eastern time. To calculate the net asset value on a given day, we value each stock listed or traded on a stock exchange at its latest sale price on that day. If there are no sales that day, we value the security at the most recently quoted bid price. We value each over-the-counter security or National Association of Securities Dealers Automated Quotation (Nasdaq) security as of the last sale price for that day. When the price of a security is not available, including days when we determine that the sale or bid price of the security does not reflect that security's market value, we value the security at a fair value determined in good faith under procedures established by the Board of Trustees. 15 We value a security at fair value when events have occurred after the last available market price and before the close of the NYSE that materially affect the security's price. In the case of foreign securities, this could include events occurring after the close of the foreign market and before the close of the NYSE. The Fund's foreign securities may trade on days when the NYSE is closed. We will not price shares on days that the NYSE is closed for trading and Participating Insurance Companies and Retirement Plans may not purchase or redeem shares. DIVIDENDS AND DISTRIBUTIONS The Fund intends to declare and distribute, as dividends or capital gains distributions, at least annually, substantially all of its net investment income and net profits realized from the sale of portfolio securities, if any, to its shareholders (Participating Insurance Companies' separate accounts and Retirement Plan participants). The net investment income of the Fund consists of all dividends or interest received by the Fund, less expenses (including the investment advisory fees). Income dividends will be declared and distributed annually by the Fund. All net short-term and long-term capital gains of the Fund, net of carry-forward losses, if any, realized during the fiscal year, are declared and distributed periodically, no less frequently than annually. All dividends and distributions are reinvested in additional shares of the Fund at net asset value, as of the record date for the distributions. TAXES The Fund intends to qualify every year as a regulated investment company under the Internal Revenue Code. By so qualifying, the Fund will not be subject to federal income taxes to the extent that its net investment income and net realized capital gains are distributed to the shareholders. The Fund also intends to meet certain diversification requirements applicable to mutual funds underlying variable insurance products. For more information about the tax status of the Fund, see Taxes in the SAI. For information concerning the federal tax consequences to VA contract owners, VLI policyholders or Retirement Plan participants, see the disclosure documents from the VA contract, VLI policy or your Retirement Plan administrator. You should consult your tax advisor about the tax consequences of any investment. 16 FOR MORE INFORMATION Advisor: Liberty Wanger Asset Management, L.P. Additional information about the Fund's investments is available in the Fund's semiannual and annual reports to shareholders. The annual report contains a discussion of the market conditions and investment strategies that significantly affected the Fund's performance over the last fiscal year. You may wish to read the Fund's SAI for more information on the Fund and the securities in which it invests. The SAI is incorporated into this prospectus by reference, which means that it is considered to be part of this prospectus. You can get free copies of the annual and semiannual reports and the SAI, request other information and discuss your questions about the Fund by writing: Liberty Wanger Asset Management, L.P. Shareholder Services Group 227 West Monroe, Suite 3000 Chicago, IL 60606 1 (888) 4-WANGER (1-888-492-6437) www.wanger.com Or by calling or writing the Participating Insurance Company which issued your variable annuity contract or variable life insurance policy or the Retirement Plan you participate in. Information about the Fund (including the SAI) can be reviewed and copied at the Public Reference Room of the Securities and Exchange Commission (SEC) in Washington, D.C. Information on the Public Reference Room may be obtained by calling the SEC at 202-942-8090. Reports and other information about the Fund are available on the EDGAR database on the SEC's Internet site at http://www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. Investment Company Act file number: 811-08748 17 WANGER ADVISORS TRUST One Financial Center, Boston, Massachusetts 02111 STATEMENT OF ADDITIONAL INFORMATION Dated May 1, 2002 This Statement of Additional Information (SAI) is not a prospectus, but provides additional information which should be read in conjunction with the Trust's prospectus dated May 1, 2002 and any supplement thereto. Audited financial statements, which are contained in the Funds' December 31, 2001 Annual Report, are incorporated by reference into this SAI. The prospectus and annual report may be obtained at no charge by calling Liberty Funds Distributor, Inc. (LFD) at (800) 426-3750, or by contacting the applicable participating insurance company, the broker-dealers offering certain variable annuity contracts or variable life insurance policies issued by the participating insurance company, or the applicable retirement plan. TABLE OF CONTENTS Page General Information and History.......................................2 Investment Restrictions...............................................3 Portfolio Turnover....................................................8 Purchases and Redemptions.............................................8 Trustees and Officers.................................................9 Management Arrangements..............................................13 Trust Charges and Expenses...........................................15 Underwriter..........................................................16 Code of Ethics.......................................................16 Custodian............................................................16 Portfolio Transactions...............................................17 Net Asset Value......................................................21 Taxes................................................................22 Investment Performance...............................................24 Record Shareholders..................................................27 Independent Auditors.................................................28 Appendix A - Investment Techniques and Securities....................29 GENERAL INFORMATION AND HISTORY Wanger Advisors Trust (the Trust) is an open-end, diversified management investment company currently consisting of four Funds with differing investment objectives, policies and restrictions. Currently, the Trust consists of Wanger U.S. Smaller Companies Advisor, formerly named Wanger U.S. Small Cap Advisor through April 30, 2002 (U.S. Smaller Companies), Wanger International Small Cap Advisor (International Small Cap), Wanger Twenty (Wanger Twenty), and Wanger Foreign Forty (Wanger Foreign Forty) (individually referred to as a Fund, or by the defined name indicated, or collectively as the Funds). U.S. Smaller Companies, International Small Cap and Wanger Foreign Forty are diversified funds under the federal securities laws. Wanger Twenty is non-diversified under the federal securities laws. However, all of the Funds comply with the diversification standards established by the tax laws. See the section entitled "Taxes" for more information. The Trust issues shares of beneficial interest in each Fund that represent interests in a separate portfolio of securities and other assets. The Trust is permitted to offer separate series (Funds) and different classes of shares. The Trust currently offers one class of shares of each Fund. Sales of shares are made without a sales charge at each Fund's per share net asset value. The Trust may add or delete Funds and/or classes from time to time. The Trust is the funding vehicle for variable annuity contracts (VA contracts) and variable life insurance policies (VLI policies) offered by the separate accounts of life insurance companies (participating insurance companies). The Trust is also the funding vehicle for certain types of pension plans and retirement arrangements and accounts permitting the accumulation of funds on a tax-deferred basis (retirement plans). The trustees of the Trust (board of trustees or trustees) monitor events to identify any material conflicts that may arise between the interests of the participating insurance companies and retirement plans, or between the interests of owners of VA contracts, VLI policies and retirement plan participants. The Trust currently does not foresee any disadvantages to the owners of VA contracts and VLI policies or retirement plan participants arising from the fact that certain interests of owners may differ. Additional information regarding such differing interests and related risks are described in the prospectus under "Mixed and Shared Funding." The Trust was organized under an Agreement and Declaration of Trust (Declaration of Trust) as a Massachusetts business trust on August 30, 1994. The Declaration of Trust may be amended by a vote of either the Trust's shareholders or the Board. The Trust is authorized to issue an unlimited number of shares of beneficial interest without par value, in one or more series, each with one or more classes, as the board may authorize. Each Fund is a separate series of the Trust. Each share of a Fund is entitled to participate pro rata in any dividends and other distributions declared by the board with respect to that Fund, and all shares of a Fund have equal rights in the event of liquidation of that Fund. Shareholders of a Fund are entitled to one vote for each share of that Fund held on any matter presented to shareholders. Shares of the Funds will vote separately as individual series when required by the Investment Company Act of 1940 (the 1940 Act), or other applicable law 2 or when the board determines that the matter affects only the interests of one or more Funds, such as, for example, a proposal to approve an amendment to that Fund's Advisory Agreement, but shares of all the Funds vote together, to the extent required by the 1940 Act, in the election or selection of trustees and independent accountants. The shares do not have cumulative voting rights, which means that the holders of more than 50% of the shares of the Funds voting for the election of trustees can elect all of the trustees, and, in such event, the holders of the remaining shares will not be able to elect any trustees. The Funds are not required by law to hold regular annual meetings of their shareholders and do not intend to do so. However, special meetings may be called for purposes such as electing or removing trustees or changing fundamental policies. The Trust is required to hold a shareholders' meeting to elect trustees to fill vacancies in the event that less than a majority of trustees were elected by shareholders. Trustees may also be removed, with or without cause, by the vote of two-thirds of the outstanding shares at a meeting called for that purpose. Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable for the obligations of the Trust. The Trust's shareholders are the separate accounts of participating insurance companies and the retirement plans. However, the Trust's Declaration of Trust disclaims liability of the shareholders, the trustees, or officers of the Trust for acts or obligations of the Trust, which are binding only on the assets and property of the Trust (or the applicable Fund thereof) and requires that notice of such disclaimer be given in each agreement, obligation, or contract entered into or executed by the Trust or the board. The Declaration of Trust provides for indemnification out of the Trust's assets (or the applicable Fund) for all losses and expenses of any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is believed to be remote because it is limited to circumstances in which the disclaimer is inoperative and the Trust itself is unable to meet its obligations. The risk to any one Fund of sustaining a loss on account of liabilities incurred by another Fund also is believed to be remote. INVESTMENT RESTRICTIONS U.S. Smaller Companies and International Small Cap operate under the investment restrictions listed below. Restrictions numbered 1 through 10 are fundamental policies which may not be changed for a Fund without approval of a majority of the outstanding voting shares of a Fund, defined as the lesser of the vote of (a) 67% of the shares of a Fund at a meeting where more than 50% of the outstanding shares are present in person or by proxy or (b) more than 50% of the outstanding shares of a Fund. Other restrictions are not fundamental policies and may be changed with respect to a Fund by the trustees without shareholder approval. The following investment restrictions apply to each of U.S. Smaller Companies and International Small Cap except as otherwise indicated. U.S. Smaller Companies and International Small Cap each may not: 1. With respect to 75% of the value of the Fund's total assets, invest more than 5% of its total assets (valued at the time of investment) in securities of a single issuer, except 3 securities issued or guaranteed by the government of the U.S., or any of its agencies or instrumentalities; 2. Acquire securities of any one issuer that at the time of investment (a) represent more than 10% of the voting securities of the issuer or (b) have a value greater than 10% of the value of the outstanding securities of the issuer; 3. Invest more than 25% of its assets (valued at the time of investment) in securities of companies in any one industry; 4. Make loans, but this restriction shall not prevent the Fund from (a) buying a part of an issue of bonds, debentures, or other obligations that are publicly distributed, or from investing up to an aggregate of 15% of its total assets (taken at market value at the time of each purchase) in parts of issues of bonds, debentures or other obligations of a type privately placed with financial institutions, (b) investing in repurchase agreements, or (c) lending portfolio securities, provided that it may not lend securities if, as a result, the aggregate value of all securities loaned would exceed 33% of its total assets (taken at market value at the time of such loan);(1) 5. Borrow money except (a) from banks for temporary or emergency purposes in amounts not exceeding 33% of the value of the Fund's total assets at the time of borrowing, and (b) in connection with transactions in options, futures and options on futures;(2) 6. Underwrite the distribution of securities of other issuers; however, the Fund may acquire "restricted" securities which, in the event of a resale, might be required to be registered under the Securities Act of 1933 on the ground that the Fund could be regarded as an underwriter as defined by that act with respect to such resale; but the Fund will limit its total investment in restricted securities and in other securities for which there is no ready market, including repurchase agreements maturing in more than seven days, to not more than 15% of its net assets at the time of acquisition; 7. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises which invest in real estate or interests in real estate; 8. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) forward contracts; 9. Make margin purchases of securities, except for use of such short-term credits as are needed for clearance of transactions and except in connection with transactions in options, futures and options on futures; 10. Issue any senior security except to the extent permitted under the Investment Company Act of 1940. - ---------- 1 The Funds have no present intention of lending their portfolio securities. 2 State insurance laws currently restrict a Fund's borrowings to facilitate redemptions to no more than 25% of the Fund's net assets. 4 U.S. Smaller Companies and International Small Cap are also subject to the following restrictions and policies, which are not fundamental and may be changed by the trustees without shareholder approval. U.S. Smaller Companies and International Small Cap may not: (a) [INTERNATIONAL SMALL CAP ONLY] under normal circumstances, invest less than 80% of its net assets (plus any borrowings for investment purposes), at market value at the time of investment, in companies with total stock market capitalizations of $2 billion or less. International Small Cap will notify shareholders at least 60 days prior to any change in its 80% policy; (b) [U.S. SMALLER COMPANIES ONLY] under normal circumstances, invest less than 80% of its net assets (plus any borrowings for investment purposes), at market value at the time of investment, in companies with total stock market capitalizations of $5 billion or less. U.S. Smaller Companies will notify shareholders at least 60 days prior to any change in its 80% policy; (c) [U.S. SMALLER COMPANIES ONLY] under normal circumstances, invest less than 80% of its net assets (plus any borrowings for investment purposes) in domestic securities. U.S. Smaller Companies will notify shareholders at least 60 days prior to any change in its 80% policy; (d) Invest in companies for the purpose of management or the exercise of control; (e) Acquire securities of other registered investment companies except in compliance with the Investment Company Act of 1940 and applicable state law; (f) 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; (g) Sell securities short or maintain a short position. Wanger Twenty and Wanger Foreign Forty operate under the investment restrictions listed below. Restrictions numbered 1 through 12 are fundamental policies which may not be changed for a Fund without approval of a majority of the outstanding voting shares of a Fund, defined as the lesser of the vote of (a) 67% of the shares of a Fund at a meeting where more than 50% of the outstanding shares are present in person or by proxy or (b) more than 50% of the outstanding shares of a Fund. Other restrictions are not fundamental policies and may be changed with respect to a Fund by the trustees without shareholder approval. The following investment restrictions apply to each of Wanger Twenty and Wanger Foreign Forty except as otherwise indicated. Wanger Twenty and Wanger Foreign Forty each may not: 1. [WANGER FOREIGN FORTY ONLY] 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; 5 2. 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; 3. 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; 4. Invest more than 25% of its total assets in a single issuer (other than U.S. government securities); 5. Invest more than 25% of its total assets in the securities of companies in a single industry (excluding U.S. government securities); 6. 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); 7. 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; 8. 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; 9. 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; 10. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) foreign currency contracts; 11. 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; 12. Issue any senior security except to the extent permitted under the Investment Company Act of 1940. Wanger Twenty and Wanger Foreign Forty are also subject to the following restrictions and policies, which are not fundamental and may be changed by the trustees without shareholder approval. Wanger Twenty and Wanger Foreign Forty may not: (a) [WANGER FOREIGN FORTY ONLY] under normal circumstances, invest less than 80% of its net assets (plus any borrowings for investment purposes) in the stocks of foreign 6 companies based in developed markets outside the U.S. Wanger Foreign Forty will notify shareholders at least 60 days prior to any change in its 80% policy; (b) Invest in companies for the purpose of management or the exercise of control; (c) Acquire securities of other registered investment companies except in compliance with the Investment Company Act of 1940; (d) 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; (e) 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; (f) 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; (g) [WANGER TWENTY only] Invest more than 15% of its total assets in the securities of foreign issuers. (h) [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. Each Fund is also subject to the following additional restrictions and policies under certain applicable insurance laws pertaining to variable annuity contract separate accounts. These policies and restrictions are not fundamental and may be changed by the trustees without shareholder approval: (a) Each Fund will be invested in a minimum of five different foreign countries at all times, except that this minimum is reduced to four when foreign country investments comprise less than 80% of the value of the Fund's net assets; to three when less than 60% of such value; to two when less than 40%; and to one when less than 20%. 7 (b) Each Fund will have no more than 20% of its net assets invested in securities of issuers located in any one country; except that a Fund may have an additional 15% of its net assets invested in securities of issuers located in any one of the following countries: Australia; Canada; France; Japan; the United Kingdom; or Germany. (c) A Fund may not acquire the securities of any issuer if, as a result of such investment, more than 10% of the Fund's total assets would be invested in the securities of any one issuer, except that this restriction shall not apply to U.S. Government securities or foreign government securities; and the Fund will not invest in a security if, as a result of such investment, it would hold more than 10% of the outstanding voting securities of any one issuer. (d) Each Fund may borrow no more than 10% of the value of its net assets when borrowing for any general purpose and 25% of net assets when borrowing as a temporary measure to facilitate redemptions. If a percentage limit with respect to any of the foregoing fundamental and non-fundamental policies is satisfied at the time of investment or borrowing, a later increase or decrease in a Fund's assets will not constitute a violation of the limit. PORTFOLIO TURNOVER The portfolio turnover of each Fund will vary from year to year. Although no Fund will trade in securities for short-term profits, when circumstances warrant securities may be sold without regard to the length of time held. Portfolio turnover for each Fund is shown under "FINANCIAL HIGHLIGHTS" in the prospectus. A 100% turnover rate would occur if all of the securities in the portfolio were sold and either repurchased or replaced within one year. PURCHASES AND REDEMPTIONS Purchases and redemptions are discussed in the prospectus under the heading "SHAREHOLDER INFORMATION." Each Fund's net asset value is determined on days on which the New York Stock Exchange (NYSE) is open for trading. The NYSE is regularly closed on Saturdays and Sundays and on New Year's Day, the third Monday in January, the third Monday in February, Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving and Christmas. If one of these holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding Friday or the following Monday, respectively. Net asset value will not be determined on days when the NYSE is closed unless, in the judgment of the trustees, the net asset value of a Fund should be determined on any such day, in which case the determination will be made at 4 p.m., Eastern time. The Trust reserves the right to suspend or postpone redemptions of shares of any Fund during any period when: (a) trading on the NYSE is restricted, as determined by the Commission, or the NYSE is closed for other than customary weekend and holiday closing; (b) the Commission has by order permitted such suspension; or (c) an emergency, as determined by the Commission, exists, making disposal of portfolio securities or the valuation of net assets of such Fund not reasonably practicable. The Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which it is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset 8 value of a Fund during any 90-day period for any one shareholder. Redemptions in excess of the above amounts will normally be paid in cash, but may be paid wholly or partly by a distribution in-kind of securities. If a redemption is made in kind, the redeeming shareholder would bear any transaction costs incurred in selling the securities received. The Agreement and Declaration of Trust also authorizes the Trust to redeem shares under certain other circumstances as may be specified by the board of trustees. TRUSTEES AND OFFICERS The board of trustees of the Trust has overall management responsibility for the Trust and the Funds. The board of trustees serve indefinite terms of unlimited duration provided that a majority of trustees always has been elected by shareholders. The trustees appoint their own successors, provided that at least two-thirds of the trustees, after such appointment, have been elected by shareholders. Shareholders may remove a trustee, with or without cause, upon the vote of two-thirds of the Trust's outstanding shares at any meeting called for that purpose. A trustee may be removed with or without cause upon the vote of a majority of the trustees. The names of the trustees and officers of the Trust, the date each was first elected or appointed to office, their principal business occupations and other directorships they have held during at least the last five years, are shown below.
NUMBER OF YEAR FIRST PORTFOLIOS IN NAME, POSITION(S) WITH WANGER ELECTED OR FUND COMPLEX ADVISORS TRUST AND AGE AT APPOINTED TO PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY OTHER JANUARY 1, 2002 OFFICE PAST FIVE YEARS TRUSTEE DIRECTORSHIPS --------------- ------ --------------- ------- ------------- TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST: Fred D. Hasselbring, 60, 1994 Retail industry, general project development and 4 None. Trustee (3)(5) business computer systems consultant; voice over specialist for industrial and institutional applications. P. Michael Phelps, 68, 1994 Retired since January 31, 1998; prior thereto, 4 None. Trustee (2)(3)(5) vice president and corporate secretary, Morton International, Inc. Patricia H. Werhane, 66, 1998 Ruffin Professor of Business Ethics, Darden 4 None. Trustee (3)(5) Graduate School of Business Administration, University of Virginia, since 1993; Co-Director of the Olsson Center for Applied Ethics, Darden Graduate School of Business Administration, University of Virginia, since September 2001. 9 YEAR FIRST PORTFOLIOS IN NAME, POSITION(S) WITH WANGER ELECTED OR FUND COMPLEX ADVISORS TRUST AND AGE AT APPOINTED TO PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY OTHER JANUARY 1, 2002 OFFICE PAST FIVE YEARS TRUSTEE DIRECTORSHIPS --------------- ------ --------------- ------- ------------- TRUSTEES WHO ARE AN INTERESTED PERSON OF WANGER ADVISORS TRUST: Ralph Wanger, 67, 1994 President, chief investment officer and portfolio 9 Liberty Trustee and President manager, Liberty WAM and WAM since July 1992; Acorn (1)(2)(4) president, Liberty Acorn Trust; principal, WAM Trust. from July 1992 until September 29, 2000; president, WAM Ltd. from July 1992 to September 29, 2000; president and director, WAM Acquisition GP, Inc. since September 29, 2000; director, Wanger Investment Company plc NUMBER OF PORTFOLIOS IN YEAR FIRST FUND COMPLEX FOR NAME, POSITION(S) WITH WANGER ELECTED OR WHICH OFFICER ADVISORS TRUST AND AGE AT APPOINTED TO PRINCIPAL OCCUPATION(S) DURING ACTS IN SAME OTHER JANUARY 1, 2002 OFFICE PAST FIVE YEARS CAPACITY DIRECTORSHIPS --------------- ------ --------------- -------- ------------- OFFICERS OF WANGER ADVISORS TRUST: J. Kevin Connaughton, 37, 2001 Treasurer of the Liberty Funds and of the Liberty 9 None. Assistant Treasurer All-Star Funds since December 2000 (formerly controller of the Liberty Funds and of the Liberty All-Star Funds from February 1998 to October 2000); treasurer of the Stein Roe Funds since February 2001 (formerly controller from May 2000 to February 2001); Senior Vice President of Liberty Funds Group since January 2001; (formerly vice president of Colonial Management Associates from February 1998 to October 2000); senior tax manager, Coopers & Lybrand, LLP from April 1996 to January 1998. Kevin S. Jacobs, 41, 2001 Assistant vice president, Liberty Funds Group 9 None. Assistant Secretary since June 2000; senior legal product manager, First Union Corp. September 1999 to June 2000; prior thereto, senior legal product manager, Colonial Management Associates. Kenneth A. Kalina, 42, 1995 Chief financial officer, Liberty WAM and WAM 9 None. Assistant Treasurer since April 2000; assistant treasurer, Liberty Acorn Trust; fund controller, Liberty WAM and WAM since September 1995; prior thereto, treasurer of the Stein Roe Mutual Funds; director, New Americas Small Cap Fund. 10 NUMBER OF PORTFOLIOS IN YEAR FIRST FUND COMPLEX FOR NAME, POSITION(S) WITH WANGER ELECTED OR WHICH OFFICER ADVISORS TRUST AND AGE AT APPOINTED TO PRINCIPAL OCCUPATION(S) DURING ACTS IN SAME OTHER JANUARY 1, 2002 OFFICE PAST FIVE YEARS CAPACITY DIRECTORSHIPS --------------- ------ --------------- -------- ------------- Bruce H. Lauer, 44, 1995 Chief operating officer, Liberty WAM and WAM 9 None. Vice President, Secretary and since April 1995; principal, WAM from January Treasurer 2000 to September 29, 2000; vice president, treasurer and secretary, Liberty Acorn Trust; director, Wanger Investment Company plc and New Americas Small Cap Fund. Jean Loewenberg, 56, 2002 Group Senior Counsel, Fleet National Bank. 9 None. Assistant Secretary Charles P. McQuaid, 48, 1994 Director of research, Liberty WAM and WAM since 9 Liberty Senior Vice President July 1992; principal, WAM from July 1992 to Acorn September 29, 2000; senior vice Trust. president, Liberty Acorn Trust. Robert A. Mohn, 40, 1997 Analyst and portfolio manager, Liberty WAM and 9 None. Vice President WAM since August 1992; principal, WAM from 1995 to September 29, 2000; vice president, Liberty Acorn Trust. Todd Narter, 37, 2001 Analyst and portfolio manager, Liberty WAM and 9 None. Vice President WAM since June 1997; vice president, Liberty Acorn Trust; prior thereto, product manager for Teradyne (1990-1997). Christopher Olson, 37, 2001 Analyst and portfolio manager, Liberty WAM since 9 None. Vice President January 2001; vice president, Liberty Acorn Trust; prior thereto, director and portfolio strategy analyst with UBS Asset Management/Brinson Partners. John H. Park, 34, 1998 Analyst and portfolio manager, Liberty WAM and 9 None. Vice President WAM since July 1993; principal, WAM from 1998 to September 29, 2000; vice president, Liberty Acorn Trust. Vincent P. Pietropaolo, 36, 2001 Vice president and counsel, Liberty Funds Group 9 None. Assistant Secretary since December 1999; Associate, Morgan Lewis & Bockius, October 1998 to December 1999; product manager, Putnam Investments April 1997 to October 1998; contracting attorney May 1996 to April 1997. Joseph Turo, 34, 2002 Senior Counsel, FleetBoston Financial since 9 None. Assistant Secretary August 1997; prior thereto, Associate, Ropes & Gray. 11 NUMBER OF PORTFOLIOS IN YEAR FIRST FUND COMPLEX FOR NAME, POSITION(S) WITH WANGER ELECTED OR WHICH OFFICER ADVISORS TRUST AND AGE AT APPOINTED TO PRINCIPAL OCCUPATION(S) DURING ACTS IN SAME OTHER JANUARY 1, 2002 OFFICE PAST FIVE YEARS CAPACITY DIRECTORSHIPS --------------- ------ --------------- -------- ------------- Leah J. Zell, 52, 1994 Analyst, and portfolio manager, Liberty WAM and 9 None. Vice President (4) WAM since July 1992; vice president, Liberty Acorn Trust; director and managing member of trust committee, Chai Trust Company.
- ------------------------- (1) Trustee who is an "interested person" of the Trust and of Liberty WAM, as defined in the Investment Company Act of 1940, because he is an officer of the Trust and an employee of Liberty WAM. (2) Member of the Executive Committee of the board of trustees, which is authorized to exercise all powers of the Board with certain statutory exceptions. The Executive Committee did not meet during 2001. (3) Member of the Audit Committee of the board, which makes recommendations to the board regarding the selection of auditors and confers with the auditors regarding the scope and results of the audit. The Audit Committee met three times during 2001. Mr. Hasselbring is chairman of the Audit Committee. (4) Mr. Wanger and Ms. Zell are married to each other. (5) Member of the Governance Committee of the board, which makes recommendations to the board regarding committees of the board and committee assignments, makes recommendations to the board regarding the composition of the board and candidates for election as non-interested trustees, oversees the process for evaluating the functioning of the board, and makes recommendations to the board regarding the compensation of trustees who are not affiliated with any investment adviser, administrator or distributor of the Funds. The Governance Committee will not consider shareholder recommendations regarding candidates for election as trustees; however, such recommendations may be made in the form of a shareholder proposal to be presented at any future meeting of shareholders of the Funds. The Governance Committee did not meet during 2001. As noted above certain trustees and officers of the Trust also hold positions with Liberty Wanger Asset Management, L.P. (Liberty WAM). Certain of the trustees and officers of the Trust are trustees or officers of Liberty Acorn Trust, which is also managed by Liberty WAM. The address for Mr. Hasselbring is Four Wheaton Center, Suite 416, 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. The address for Messrs. Wanger, McQuaid, Kalina, Lauer, Mohn, Narter, Olson, Park, and Ms. Zell is Liberty Wanger Asset Management, L.P., 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. The address for Messrs. Connaughton, Jacobs, Pietropaolo, Turo and Ms. Jean Loewenberg is Liberty Funds Distributor, Inc., One Financial Center, Boston, MA 02111. COMPENSATION OF TRUSTEES The table set forth below presents certain information regarding the fees paid to the trustees for their services in such capacity during the year ended December 31, 2001. The trustees are paid an annual retainer plus an attendance fee for each meeting of the Board or standing committee thereof attended. Trustees do not receive any pension or retirement benefits from the Trust. No officers of the Trust or other individuals who are affiliated with the Trust receive any compensation from the Trust for services provided to it. None of the trustees received any fees from any other investment companies affiliated with the Trust. 12
AGGREGATE AGGREGATE AGGREGATE AGGREGATE COMP. TOTAL COMP. COMP. COMP. FROM WANGER COMP. FROM U.S. FROM INT. FROM WANGER FOREIGN FORTY FROM FUND NAME OF TRUSTEE SMALLER SMALL CAP TWENTY COMPLEX COMPANIES --------------------------- -------------- --------------- ---------------- ------------------- ----------------- TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST: Fred D. Hasselbring $20,992.04 $12,950.11 $768.15 $923.04 $35,633.34 P. Michael Phelps $21,940.44 $13,431.35 $806.70 $954.84 $37,133.33 Patricia H. Werhane $20,992.04 $12,950.11 $768.15 $923.03 $35,633.33 TRUSTEES WHO ARE INTERESTED PERSONS OF WANGER ADVISORS TRUST: Ralph Wanger 0 0 0 0 0
MANAGEMENT ARRANGEMENTS Liberty Wanger Asset Management, L.P. (Liberty WAM) (formerly Wanger Asset Management, L.P.), serves as the investment advisor for the Funds and for other institutional accounts. As of December 31, 2001, Liberty WAM had approximately $8.7 billion under management, including the Funds. Liberty WAM changed its name from Wanger Asset Management, L.P., (WAM) to its current name on September 29, 2000. Liberty WAM is a wholly owned subsidiary of Columbia Management Group, Inc., which in turn is a wholly owned subsidiary of Fleet National Bank, which in turn is a wholly owned subsidiary of FleetBoston Financial Corporation. Liberty WAM has advised and managed mutual funds, including the Funds, since 1992. Each Fund's Advisory Agreement automatically terminated on November 1, 2001 when Fleet acquired the asset management business of LFC. At a meeting of the board of trustees held on August 15, 2001, called in part for the purpose of voting on the approval of new Advisory Agreements with Liberty WAM that were substantially identical to the previous Advisory Agreements, the new Advisory Agreements were approved through July 31, 2003 by the unanimous vote of the "non-interested" trustees of the Trust voting separately. The trustees considered information about, among other things: (1) Liberty WAM and its respective personnel, resources and investment process; (2) the terms of the new Advisory Agreements; (3) the nature and quality of services provided by Liberty WAM; (4) the investment performance of each Fund and of similar funds managed by other advisors; (5) the profitability to Liberty WAM of its relationship with the Funds; (6) fall-out benefits from that relationship; (7) compensation payable by the Funds to affiliates of the Advisor for other services; (8) economies of scale; and (9) comparative fees and expense ratios. The trustees also considered the terms of an agreement between the Trust and Fleet National Bank (the "Fleet Agreement") in which Fleet agreed that during the initial term of the new Advisory Agreements, except as otherwise authorized by the Trustees, it would: (1) preserve the autonomy of the Trust; (2) preserve the independence of Liberty WAM, including its investment philosophy and approach to investment operations, research and talent; (3) allow Liberty WAM considerable latitude to recruit and compensate (on competitive terms) investment management personnel; (4) not interfere with Liberty WAM's relationships with regional brokers unless regulatory or compliance concerns dictate and permit 13 Liberty WAM to continue to allocate the commissions and soft dollar payments as it has in the past; and (5) maintain the trading desk at Liberty WAM for domestic and international trading activities. In addition, the Trustees considered matters relating to the possible effects on Liberty WAM and the Funds of the acquisition of the asset management business of LFC by Fleet, including: (1) the terms of the Fleet Agreement; (2) certain actions taken by LFC and Liberty WAM to help retain and incent their key personnel; (3) the general reputation, financial resources and business activities of Fleet and its parent organization; (4) the potential benefits of scale from combining the asset management businesses of Fleet and LFC, including the ability to attract and retain key personnel and enhance technology and customer service; (5) the stated intention of Fleet to provide investment professionals of Liberty WAM with access to greater resources as a result of the acquisition. Finally, the Trustees considered Fleet's agreement to use all reasonable efforts to assure compliance with Section 15(f) of the 1940 Act. Section 15(f) provides that a mutual fund investment advisor or its affiliates may receive benefits or compensation in connection with a change of control of the investment advisor if two conditions are satisfied. First, for three years after the change of control, at least 75% of the members of the board of any registered investment company advised by the advisor must consist of persons who are not "interested persons," as defined in the 1940 Act, of the advisor. Section, no "unfair burden" may be imposed on any such registered investment company as a result of the change of control transaction or any express or implied terms, conditions or understandings applicable to the transaction. "Unfair burden" means any arrangement, during the two years after the transaction, by which the investment advisor or any "interested person" of the advisor receives or is entitled to receive any compensation, directly or indirectly, from such investment company or its security holders (other than fees for bona fide investment advisory or other services) or from any other person in connection with the purchase or sale of securities or other property to, from or on behalf of such investment company. Each Advisory Agreement will continue from year to year thereafter so long as such continuation is approved at least annually by (1) the board of trustees or the vote of a majority of the outstanding voting securities of the Fund, and (2) a majority of the trustees who are not interested persons of any party to the Agreement, cast in person at a meeting called for the purpose of voting on such approval. Each Advisory Agreement may be terminated at any time, without penalty, by either the Trust or Liberty WAM upon 60 days' written notice, and automatically terminates in the event of its assignment as defined in the 1940 Act. The shareholders of each Fund approved the new Advisory Agreements with Liberty WAM at a shareholders meeting held on October 24, 2001. Liberty WAM, at its own expense, provides office space, facilities and supplies, equipment and personnel for the performance of its functions under each Fund's Advisory Agreement and pays all compensation of the trustees, officers and employees who are employees of Liberty WAM. Each Fund's Advisory Agreement provides that neither Liberty WAM nor any of its directors, officers, stockholders (or partners of stockholders), agents, or employees shall have any liability to the Trust or any shareholder of the Fund for any error or judgment, mistake of law 14 or any loss arising out of any investment, or for any other act or omission in the performance by Liberty WAM of its duties under the Advisory Agreement, except for liability resulting from willful misfeasance, bad faith or gross negligence on the part of Liberty WAM in the performance of its duties or from reckless disregard by Liberty WAM of its obligations and duties under the Advisory Agreement. Under the Fund's transfer agency and shareholder servicing agreement, the Funds pay Liberty Funds Services, Inc. (LFS) a monthly fee based on specified transactions on a per account basis. The address of LFS is One Financial Center, Boston, Massachusetts 02111. TRUST CHARGES AND EXPENSES MANAGEMENT FEES: Each Fund pays Liberty WAM an annual advisory fee based on the following schedule. Fees are computed and accrued daily and paid monthly. During each year in the three-year period ended December 31, 2001, pursuant to the Advisory Agreements, each Fund paid Liberty WAM management fees as follows:
ANNUAL FEE RATE (AS A PERCENT OF AVERAGE NET 2001 2000 1999 ASSETS) ---- ---- ---- ------- Wanger U.S. Smaller Companies $ 4,127,294 $ 3,597,280 $ 3,172,578 First $100 million: 1.00% $100 million to $250 mill: 0.95% In excess of $250 million: 0.90% Wanger International Small Cap 3,083,791 4,044,255 2,231,975 First $100 million: 1.30% $100 million to $250 mill: 1.20% In excess of $250 million: 1.10% Wanger Twenty 0.95% on all assets Gross advisory fee 153,808 83,967 $35,044 Exp. Reimb. 0 18,163 (26,027) ------------ ------ -------- Net advisory fee 153,808 65,804 9,017 Wanger Foreign Forty 1.00% on all assets Gross advisory fee 160,523 111,079 $19,994 Exp. Reimb. 0 25,643 (37,004) ------------ ------- -------- Net advisory fee 160,523 85,436 (17,010)
EXPENSE LIMITATION: Liberty WAM has agreed to reimburse all expenses, including management fees, but excluding interest, taxes, 12b-1, brokerage and extraordinary expenses of the Funds as follows: FUND EXPENSES EXCEEDING ---- ------------------ Wanger U.S. Smaller Companies 2.00% of average net assets Wanger International Small Cap 2.00% of average net assets Wanger Twenty 1.35% of average net assets Wanger Foreign Forty 1.45% of average net assets Each of the above expense limitations will terminate on September 30, 2002. 15 UNDERWRITER LFD, One Financial Center, Boston, MA 02111, serves as the principal underwriter of the Trust. LFD is a subsidiary of Colonial Management Associates, Inc., which is an indirect subsidiary of FleetBoston Financial Corporation. The Underwriting Agreement continues in effect from year to year, provided such continuance is approved annually (i) by a majority of the trustees or by a majority of the outstanding voting securities of the Trust, and (ii) by a majority of the trustees who are not parties to the Underwriting Agreement or interested persons of any such party. Shares of the Funds are offered for sale on a continuous basis through LFD 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 VA contract and VLI policy imposes its own charges and fees on owners of VA contracts and VLI policies, and retirement plans and may impose such charges on participants in a retirement plan. CODES OF ETHICS The Funds, Liberty WAM and LFD have adopted Codes of Ethics pursuant to the requirements of the Act. These Codes of Ethics permit personnel subject to the Codes to invest in securities, including securities that may be purchased or held by the Funds. CUSTODIAN State Street Bank and Trust Company (the Bank), 225 Franklin Street, Boston, Massachusetts 02110, is the custodian for the Trust. It is responsible for holding all securities and cash of each Fund, receiving and paying for securities purchased, delivering against payment securities sold, receiving and collecting income from investments, making all payments covering expenses of the Trust, and performing other administrative duties, all as directed by authorized persons. The Bank does not exercise any supervisory function in such matters as purchase and sale of portfolio securities, payment of dividends or payment of expenses of the Funds. Portfolio securities purchased in the U.S. are maintained in the custody of the Bank or other domestic banks or depositories. Portfolio securities purchased outside of the U.S. are maintained in the custody of foreign banks and trust companies who are members of the Bank's Global Custody Network and foreign depositories (foreign sub-custodians). With respect to foreign sub-custodians, there can be no assurance that a Fund, and the value of its shares, will not be adversely affected by acts of foreign governments, financial or operational difficulties of the foreign sub-custodians, difficulties and costs of obtaining jurisdiction over, or enforcing judgments against, the foreign sub-custodians or application of foreign law to a Fund's foreign subcustodial arrangements. Accordingly, an investor should recognize that the noninvestment risks involved in holding assets abroad are greater than those associated with investing in the U.S. The Funds may invest in obligations of the Bank and may purchase or sell securities from or to the Bank. 16 PORTFOLIO TRANSACTIONS Liberty Wanger Asset Management, L.P. (Liberty WAM) places the orders for the purchase and sale of portfolio securities and options and futures contracts for the Funds. Liberty WAM's overriding objective in selecting brokers and dealers to effect portfolio transactions is to seek the best combination of net price and execution. The best net price, giving effect to brokerage commissions, if any, is an important factor in this decision; however, a number of other judgmental factors may also enter into the decision. These factors include Liberty WAM's knowledge of negotiated commission rates currently available and other current transaction costs; the nature of the security being purchased or sold; the size of the transaction; the desired timing of the transaction; the activity existing and expected in the market for the particular security; confidentiality; the execution, clearance and settlement capabilities of the broker or dealer selected and others considered; Liberty WAM's knowledge of the financial condition of the broker or dealer selected and such other brokers and dealers; and Liberty WAM's knowledge of actual or apparent operation problems of any broker or dealer. Recognizing the value of these factors, Liberty WAM may cause a Fund to pay a brokerage commission in excess of that which another broker may have charged for effecting the same transaction. Liberty WAM has established internal policies for the guidance of its trading personnel, specifying minimum and maximum commissions to be paid for various types and sizes of transactions effected for the Funds. Liberty WAM has discretion for all trades of the Funds. Transactions which vary from the guidelines are subject to periodic supervisory review. These guidelines are reviewed and periodically adjusted, and the general level of brokerage commissions paid is periodically reviewed by Liberty WAM. Evaluations of the reasonableness of brokerage commissions, based on the factors described in the preceding paragraph, are made by Liberty WAM's trading personnel while effecting portfolio transactions. The general level of brokerage commissions paid is reviewed by Liberty WAM, and reports are made annually to the board of trustees. Liberty WAM maintains and periodically updates a list of approved brokers and dealers which, in Liberty WAM's judgment, are generally capable of providing best price and execution and are financially stable. Liberty WAM's traders are directed to use only brokers and dealers on the approved list. Beginning October 2002, Liberty WAM may place certain trades for the Funds through its affiliate AlphaTrade, Inc. (ATI), pursuant to procedures adopted by the board of trustees. ATI is a wholly owned subsidiary of Colonial Management Associates, Inc. ATI is a fully disclosed introducing broker that limits its activities to electronic execution of transactions in listed equity securities. The Funds will pay ATI a commission for these transactions. The Funds have adopted procedures consistent with Investment Company Act Rule 17e-1 governing such transactions. Liberty WAM may place trades for the Funds through Quick & Reilly, Inc., Robertson Stephens, Inc. or Fleet Securities, Inc., each affiliates of Liberty WAM, pursuant to procedures adopted by the board of trustees. The Funds will pay these affiliates a commission for these transactions. The Funds have adopted procedures consistent with Investment Company Act Rule 17e-1 governing such transactions. CONSISTENT WITH THE RULES OF FAIR PRACTICE OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. AND SUBJECT TO SEEKING BEST COMBINATION OF NET PRICE AND EXECUTION AND SUCH OTHER POLICIES AS THE TRUSTEES OF THE FUNDS MAY DETERMINE, LIBERTY WAM MAY CONSIDER SALES OF SHARES OF EACH OF THE FUNDS AS A FACTOR IN THE SELECTION OF BROKER-DEALERS TO EXECUTE SUCH MUTUAL FUND SECURITIES TRANSACTIONS. 17 INVESTMENT RESEARCH PRODUCTS AND SERVICES FURNISHED BY BROKERS AND DEALERS Liberty WAM engages in the long-standing practice in the money management industry of acquiring research and brokerage products and services ("research products") from broker-dealer firms in return for directing trades for the Funds to those firms. In effect, Liberty WAM is using the commission dollars generated from the Funds to pay for these research products. The money management industry uses the term "soft dollars" to refer to this industry practice. Liberty WAM has a duty to seek the best combination of net price and execution. Liberty WAM faces a potential conflict of interest with this duty when it uses Fund trades to obtain soft dollar products. This conflict exists because Liberty WAM is able to use the soft dollar products in managing its Funds without paying cash ("hard dollars") for the product. This reduces Liberty WAM's expenses. Moreover, under a provision of the federal securities laws applicable to soft dollars, Liberty WAM is not required to use the soft dollar product in managing those accounts that generate the trade. Thus, the Funds that generate the brokerage commission used to acquire the soft dollar product may not benefit directly from that product. In effect, those Funds are cross subsidizing Liberty WAM's management of the other Funds that do benefit directly from the product. This practice is explicitly sanctioned by a provision of the Securities Exchange Act of 1934, which creates a "safe harbor" for soft dollar transactions conducted in a specified manner. Although it is inherently difficult if not impossible to document, Liberty WAM believes that over time most, if not all, Funds benefit from soft dollar products such that cross subsidizations even out. Liberty WAM attempts to reduce or eliminate this conflict by directing Fund trades for soft dollar products only if Liberty WAM concludes that the broker-dealer supplying the product is capable of providing a combination of the best net price and execution on the trade. As noted above, the best net price, while significant, is one of a number of judgmental factors Liberty WAM considers in determining whether a particular broker is capable of providing the best net price and execution. Liberty WAM may cause a Fund to pay a brokerage commission in a soft dollar trade in excess of that which another broker-dealer might have charged for the same transaction. Liberty WAM acquires two types of soft dollar research products: (i) proprietary research created by the broker-dealer firm executing the trade and (ii) other products created by third parties that are supplied to Liberty WAM through the broker-dealer firm executing the trade. Proprietary research consists primarily of traditional research reports, recommendations and similar materials produced by the in house research staffs of broker-dealer firms. This research includes evaluations and recommendations of specific companies or industry groups, as well as analyses of general economic and market conditions and trends, market data, contacts and other related information and assistance. Liberty WAM's research analysts periodically rate the quality of proprietary research produced by various broker-dealer firms. Based on these evaluations, Liberty WAM develops target levels of commission dollars on a firm-by-firm basis. Liberty WAM attempts to direct trades to each firm to meet these targets. Liberty WAM also uses soft dollars to acquire products created by third parties that are supplied to Liberty WAM through broker-dealers executing the trade (or other broker-dealers 18 who "step in" to a transaction and receive a portion of the brokerage commission for the trade). These products include the following: o Database Services--comprehensive databases containing current and/or historical information on companies and industries. Examples include historical securities prices, earnings estimates, and SEC filings. These services may include software tools that allow the user to search the database or to prepare value-added analyses related to the investment process (such as forecasts and models used in the portfolio management process). o Quotation/Trading/News Systems--products that provide real time market data information, such as pricing of individual securities and information on current trading, as well as a variety of news services. o Economic Data/Forecasting Tools--various macro economic forecasting tools, such as economic data and economic and political forecasts for various countries or regions. o Quantitative/Technical Analysis--software tools that assist in quantitative and technical analysis of investment data. o Fundamental Industry Analysis--industry-specific fundamental investment research. o Other Specialized Tools--other specialized products, such as specialized economic consulting analyses and attendance at investment oriented conferences. Many third-party products include computer software or on-line data feeds. Certain products also include computer hardware necessary to use the product. Certain of these third party services may be available directly from the vendor on a hard dollar basis. Others are available only through broker-dealer firms for soft dollars. Liberty WAM evaluates each product to determine a cash ("hard dollars") value of the product to Liberty WAM. Liberty WAM then on a product-by-product basis targets commission dollars in an amount equal to a specified multiple of the hard dollar value to the broker-dealer that supplies the product to Liberty WAM. In general, these multiples range from 1.25 to 1.85 times the hard dollar value. Liberty WAM attempts to direct trades to each firm to meet these targets. (For example, if the multiple is 1.5:1.0, assuming a hard dollar value of $10,000, Liberty WAM will target to the broker-dealer providing the product trades generating $15,000 in total commissions.) The targets that Liberty WAM establishes for both proprietary and for third party research products typically will reflect discussions that Liberty WAM has with the broker-dealer providing the product regarding the level of commissions it expects to receive for the product. However, these targets are not binding commitments, and Liberty WAM does not agree to direct a minimum amount of commissions to any broker-dealer for soft dollar products. In setting these targets, Liberty WAM makes a determination that the value of the product is reasonably commensurate with the cost of acquiring it. These targets are established on a calendar year basis. Liberty WAM will receive the product whether or not commissions directed to the applicable broker-dealer are less than, equal to or in excess of the target. Liberty WAM generally will carry over target shortages and excesses to the next year's target. Liberty WAM believes that this practice reduces the conflicts of interest associated with soft dollar transactions, since Liberty WAM can meet the non-binding expectations of broker-dealers providing soft dollar 19 products over flexible time periods. In the case of third party products, the third party is paid by the broker-dealer and not by Liberty WAM. Liberty WAM may enter into a contract with the third party vendor to use the product. (For example, if the product includes software, Liberty WAM will enter into a license to use the software from the vendor.) In certain cases, Liberty WAM may use soft dollars to obtain products that have both research and non-research purposes. Examples of non-research uses are administrative and marketing functions. These are referred to as "mixed use" products. In each case, Liberty WAM makes a good faith evaluation of the research and non-research uses of these services. These evaluations are based upon the time spent by firm personnel for research and non-research uses. Liberty WAM pays the provider in cash ("hard dollars") for the non-research portion of its use of these products. Consistent with industry practice, Liberty WAM does not require that the Fund that generates the trade receive any benefit from the soft dollar product obtained through the trade. As noted above, this may result in cross subsidization of soft dollar products among Funds. As noted therein, this practice is explicitly sanctioned by a provision of the Securities Exchange Act of 1934, which creates a "safe harbor" for soft dollar transactions conducted in a specified manner. In certain cases, Liberty WAM will direct a trade to one broker-dealer with the instruction that it execute the trade and pay over a portion of the commission from the trade to another broker-dealer who provides Liberty WAM with a soft dollar research product. The broker-dealer executing the trade "steps out" of a portion of the commission in favor of the other broker-dealer providing the soft dollar product. Liberty WAM may engage in step out transactions in order to direct soft dollar commissions to a broker-dealer which provides research but may not be able to provide best execution. Brokers who receive step out commissions typically are brokers providing a third party soft dollar product that is not available on a hard dollars basis. Liberty WAM has not engaged in step out transactions as a manner of compensating broker-dealers that sell shares of investment companies managed by Liberty WAM. As stated above, Liberty WAM's overriding objective in effecting portfolio transactions for the Funds is to seek to obtain the best combination of price and execution. However, consistent with the provisions of the Rules of Conduct of the National Association of Securities Dealers, Inc., Liberty WAM may, in selecting broker-dealers to effect portfolio transactions for the Funds, and where more than one broker-dealer is believed capable of providing the best combination of net price and execution with respect to a particular transaction, select a broker-dealer in recognition of its sales of VA contracts or VLI policies offered by participating insurance companies, or sales of Fund shares to retirement plans. Except as described in the next following sentence, neither the Trust nor any Fund nor Liberty WAM has entered into any agreement with, or made any commitment to, any unaffiliated broker-dealer which would bind Liberty WAM, the Trust or any Fund to compensate any such broker-dealer, directly or indirectly, for sales of VA contracts or VLI policies. Liberty WAM has entered into arrangements with sponsors of programs for the sale of VA contracts or VLI policies issued by participating insurance companies which are not affiliates of Liberty WAM pursuant to which Liberty WAM pays the sponsor from Liberty WAM's fee for managing the Funds an amount in respect of the Funds' assets allocable to the Fund shares held in separate accounts of such unaffiliated participating insurance companies in respect of VA contracts issued by such entities 20 and sold through such arrangements. Liberty WAM does not cause the Trust or any Fund to pay brokerage commissions higher than those obtainable from other broker-dealers in recognition of such sales of VA contracts or VLI policies. The Trust's purchases and sales of securities not traded on securities exchanges generally are placed by Liberty WAM with market makers for these securities on a net basis, without any brokerage commissions being paid by the Trust. Net trading does involve, however, transaction costs. Included in prices paid to underwriters of portfolio securities is the spread between the price paid by the underwriter to the issuer and the price paid by the purchasers. Each Fund's purchases and sales of portfolio securities in the over-the-counter market usually are transacted with a broker-dealer on a net basis without any brokerage commission being paid by such Fund, but do reflect the spread between the bid and asked prices. Liberty WAM may also transact purchases of some portfolio securities directly with the issuers. With respect to a Fund's purchases and sales of portfolio securities transacted with a broker or dealer on a net basis, Liberty WAM may also consider the part, if any, played by the broker or dealer in bringing the security involved to Liberty WAM's attention, including investment research related to the security and provided to the Fund. The table below shows information on brokerage commissions paid by each of the Funds during the periods indicated.
WANGER U.S. WANGER SMALLER INTERNATIONAL WANGER WANGER COMPANIES SMALL CAP TWENTY FOREIGN FORTY --------- --------- ------ ------------- Total brokerage commissions paid during 2001.......................... $ 322,556 $ 771,292 $ 40,359 $ 60,781 Total brokerage commissions paid during 2000.......................... $ 300,190 $ 1,677,559 $ 61,252 $ 63,111 Total brokerage commissions paid during 1999................................. $ 208,460 $ 787,215 $ 15,056 $ 14,569
The brokerage commissions paid by Wanger International Small Cap decreased in 2001 as a result of a decrease in the size of the Fund. NET ASSET VALUE The net asset value of the shares of each of the Funds is determined by dividing the total assets of each Fund, less all liabilities (including accrued expenses), by the total number of shares outstanding. The proceeds received by each Fund for each purchase or sale of its shares, and all income, earnings, profits and proceeds thereof, subject only to the rights of creditors, will be specifically allocated to such Fund, and constitute the underlying assets of that Fund. The underlying assets of each Fund will be segregated on the books of account, and will be charged with the liabilities in respect to such Fund and with a share of the general liabilities of the Trust. 21 TAXES Each Fund has elected to be treated and to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986 (Code). As a result of such election, for any tax year in which a Fund meets the investment limitations and the distribution, diversification and other requirements referred to below, that Fund will not be subject to federal income tax, and the income of the Fund will be treated as the income of its shareholders. Under current law, since the shareholders are life insurance company "segregated asset accounts," they will not be subject to income tax currently on this income to the extent such income is applied to increase the values of VA contracts and VLI policies. If a Fund were to fail to qualify under Subchapter M, it would be required to pay taxes on any income and realized capital gains, reducing the amount of income and realized capital gains that would otherwise be available for distribution to Fund shareholders. Among the conditions for qualification and avoidance of taxation at the Trust level, Subchapter M imposes investment limitations, distribution requirements, and requirements relating to the diversification of investments. The requirements of Subchapter M may affect the investments made by each Fund. Any of the applicable diversification requirements could require a sale of assets of a Fund that would affect the net asset value of the Fund. Pursuant to the requirements of Section 817(h) of the Code, the only shareholders of the Trust and its Funds will be participating insurance companies and their separate accounts that fund VA contracts, VLI policies and other variable insurance contracts, and certain retirement plans, which are pension plans and retirement arrangements and accounts permitting the accumulation of funds on a tax-deferred basis. The prospectus that describes a particular VA contract or VLI policy discusses the taxation of both separate accounts and the owner of such contract or policy. The plan documents (including the summary plan description) for the retirement plan discuss the taxation of retirement plans and the participants therein. Each Fund intends to comply with the requirements of Section 817(h) and the related regulations issued thereunder by the Treasury Department. These provisions impose certain diversification requirements affecting the securities in which the Funds may invest and other limitations. The diversification requirements of Section 817(h) of the Code are in addition to the diversification requirements under Subchapter M and the Investment Company Act of 1940. The consequences of failure to meet the requirements of Section 817(h) could result in taxation of the participating insurance companies offering the VA contracts and VLI policies and immediate taxation of all owners of the contracts and policies to the extent of appreciation on investment under the contracts. The Trust believes it is in compliance with these requirements. The Secretary of the Treasury may issue additional rulings or regulations that will prescribe the circumstances in which control of the investments of a segregated asset account by an owner of a variable insurance contract may cause such owner, rather than the insurance company, to be treated as the owner of the assets of a segregated asset account. It is expected that such regulations would have prospective application. However, if a ruling or regulation were not considered to set forth a new position, the ruling or regulation could have retroactive effect. The Trust therefore may find it necessary, and reserves the right, to take action to assure that a VA contract or VLI policy continues to qualify as an annuity or insurance contract under federal tax laws. The Trust, for example, may be required to alter the investment objectives of 22 any Fund or substitute the shares of one Fund for those of another. No such change of investment objectives or substitution of securities will take place without notice to the contract and policy owners with interests invested in the affected Fund and without prior approval of the Securities and Exchange Commission, or the approval of a majority of such owners, to the extent legally required. To the extent a Fund invests in foreign securities, investment income received by the Fund from sources within foreign countries may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries which entitle a Fund to a reduced rate of tax or exemption from tax on such income. Gains and losses from foreign currency dispositions, foreign-currency denominated debt securities and payables or receivables, and foreign currency forward contracts are subject to special tax rules that generally cause them to be recharacterized as ordinary income and losses, and may affect the timing and amount of the Fund's recognition of income, gain or loss. It is impossible to determine the effective rate of foreign tax in advance since the amount of a Fund's assets, if any, to be invested within various countries will fluctuate and the extent to which tax refunds will be recovered is uncertain. The Funds intend to operate so as to qualify for treaty-reduced tax rates where applicable. The Funds will not be subject to the 4% federal excise tax imposed on regulated investment companies that do not distribute substantially all their income and gains each calendar year because that tax does not apply to a regulated investment company whose only shareholders are segregated asset accounts of life insurance companies held in connection with VA contracts, VLI policies and/or retirement plans. The preceding is a brief summary of some relevant tax considerations. This discussion is not intended as a complete explanation or a substitute for careful tax planning and consultation with individual tax advisors. 23 INVESTMENT PERFORMANCE Each of the Funds may quote total return figures from time to time. Total return on a per share basis is the amount of dividends received per share plus or minus the change in the net asset value per share for a given period. Total return percentage may be calculated by dividing the value of a share at the end of a given period (including dividends reinvested) by the value of the share at the beginning of the period and subtracting one. Average Annual Total Return is computed as follows: ERV = P(1+T)(n) Where: P = a hypothetical initial payment of $1,000 T = average annual total return (n) = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period at the end of the period (or fractional portion). For example, for a $1,000 investment in the Funds shares, the "Average Annual Total Return" for the following periods ended December 31, 2001 was: AVERAGE ANNUAL FUND TOTAL RETURN Wanger U.S. Smaller Companies 1 year 11.39% 5 years 12.47% Life of Fund (inception 5/3/95) 18.27% Wanger International Small Cap 1 year -21.27% 5 years 8.07% Life of Fund (inception 5/3/95) 15.53% Wanger Twenty 1 year 9.09% Life of Fund (inception 2/1/99) 17.58% Wanger Foreign Forty 1 year -26.61% Life of Fund (inception 2/1/99) 10.23% The figures contained in this "Investment Performance" section assume reinvestment of all dividends and distributions. They are not necessarily indicative of future results. The performance of a Fund is a result of conditions in the securities markets, portfolio management, and operating expenses. Although information such as that shown above is useful in reviewing a Fund's performance and in providing some basis for comparison with other investment alternatives, it should not be used for comparison with other investments using different reinvestment assumptions or time periods. The Funds' total returns do not reflect the cost of insurance and other insurance company separate account charges which vary with the VA contracts and VLI policies offered through the separate accounts of the participating insurance companies, or expenses imposed by retirement plans. 24 In advertising and sales literature, a Fund may compare its performance with that of other mutual funds, indexes or averages of other mutual funds, indexes of related financial assets or data, and other competing investment and deposit products available from or through other financial institutions. The composition of these indexes or averages differs from that of the Funds. Any comparison of a Fund to an alternative investment should consider differences in features and expected performance. The Funds that have been in operation at least three years may also use statistics to indicate volatility or risk. The premise of each of these measures is that greater volatility connotes greater risk undertaken in achieving performance. The Funds may quote the following measures of volatility: Beta. Beta is the volatility of a fund's total return relative to the movements of a benchmark index. A beta greater than one indicates volatility greater than the index, and a beta of less than one indicates a volatility less than the index. R-squared. R-squared reflects the percentage of a fund's price movements that are explained by movements in the benchmark index. An R-squared of 1.00 indicates that all movements of a fund's price are completely explained by movements in the index. Generally, a higher R-squared will indicate a more reliable beta figure. Alpha. Alpha is a measure used to discuss a fund's relative performance. Alpha measures the actual return of a fund compared to the expected return of a fund given its risk (as measured by beta). The expected return of a fund is based on how historical movements of the benchmark index and historical performance of a fund compare to the benchmark index. The expected return is computed by multiplying the advance or decline in a market represented by a fund's beta. A positive alpha quantifies the value that a fund manager has added and a negative alpha quantifies the value that a fund manager has lost. Standard deviation. Standard deviation quantifies the volatility in the returns of a fund by measuring the amount of variation in the group of returns that make up a fund's average return. Standard deviation is generally calculated over a three or five year period using monthly returns and modified to present an annualized standard deviation. Sharpe ratio. A fund's Sharpe ratio quantifies its total return in excess of the return of a guaranteed investment (90 day U.S. treasury bills), relative to its volatility as measured by its standard deviation. The higher a fund's Sharpe ratio, the better a fund's returns have been relative to the amount of investment risk it has taken. Beta and R-squared are calculated by performing a least squares linear regression using three years of monthly total return figures for each portfolio and benchmark combination. Alpha is calculated by taking the difference between the average monthly portfolio return and the beta-adjusted average monthly benchmark return. The result of this calculation is then geometrically annualized. 25 As of December 31, 2001, some statistics for the Funds are as follows:
R2 Beta Alpha -- ---- ----- WANGER U.S. SMALLER COMPANIES vs. S&P 500 0.49 0.73 3.69% vs. Russell 2000 0.77 0.72 5.21% WANGER INTERNATIONAL SMALL CAP vs. EMI Global ex-U.S. 0.66 1.40 14.60% vs. EMI World ex-U.S. 0.63 1.40 13.79% vs. EAFE 0.51 1.17 9.88%
Other measures of volatility and relative performance may be used as appropriate. All such measures will fluctuate and do not represent future results. The Funds may note their mention or recognition in newsletters, newspapers, magazines, or other media. Portfolio managers and other members of Liberty WAM's staff may make presentations at conferences or trade shows, appear on television or radio programs, or conduct or participate in telephone conference calls, and the Funds may announce those presentations, appearances or calls to some or all shareholders, or to potential investors in the Funds. Biographical and other information about a Fund's portfolio manager, including information about awards received by that portfolio manager or mentions of the manager in the media, may also be described or quoted in Fund advertisements or sales literature. The following are some benchmark indices utilized by the Funds: the EMI Global ex-U.S., an index of the bottom 20% of institutionally investable capital of developed and emerging countries, selected by Salomon Smith Barney, outside the U.S.; the Salomon Smith Barney World ex-U.S. Cap Range $2-$10 billion Index is the $2 to $10 billion (U.S.) subset of SSB's Broad Market Index, which represents a mid-cap developed market index, excluding the U.S.; Morgan Stanley's Europe, Australasia and Far East Index (EAFE), an index of companies throughout the world in proportion to world stock market capitalizations, excluding the U.S. and Canada; the Standard & Poor's 500 Stock Index (S&P 500), a broad, market-weighted average of U.S. blue-chip companies; the Standard & Poor's MidCap 400 (S&P 400), also a broad, market-weighted average of U.S. companies in the next tier down in size from the S&P 500; and the Russell 2000 Index, an index formed by taking the 3,000 largest U.S. companies and eliminating the largest 1,000, leaving an unweighted index of 2,000 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. 26 RECORD SHAREHOLDERS All the shares of the Funds are held of record by sub-accounts of separate accounts of participating insurance companies on behalf of the owners of VLI policies and VA contracts, or by retirement plans on behalf of the participants therein. At all meetings of shareholders of the Funds each participating insurance company will vote the shares held of record by sub-accounts of its separate accounts only in accordance with the instructions received from the VLI policy and VA contract owners on behalf of whom such shares are held, and each retirement plan will vote the shares held of record by participants in the retirement plans only in accordance with the instructions received from the participants on behalf of whom such shares are held. All such shares as to which no instructions are received will be voted in the same proportion as shares as to which instructions are received. Accordingly, each participating insurance company disclaims beneficial ownership of the shares of the Funds held of record by the sub-accounts of its separate accounts, and each retirement plan disclaims beneficial ownership of the shares of the Funds held of record by its participants. The following table shows the dollar range of equity securities of the Funds "beneficially" owned (within the meaning of that term as defined in rule 16a-1(a)(2) under the Securities Exchange Act of 1934) by each trustee as of December 31, 2001:
- ---------------------------------------------------------------------------------------------------------------------- NAME OF TRUSTEE NAME OF FUND DOLLAR RANGE OF EQUITY AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN EACH FUND SECURITIES IN ALL REGISTERED INVESTMENT COMPANIES OVERSEEN BY TRUSTEE IN FAMILY OF INVESTMENT COMPANIES - ---------------------------------------------------------------------------------------------------------------------- TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST: - ---------------------------------------------------------------------------------------------------------------------- Fred D. Hasselbring Wanger U.S. Smaller None Companies None Wanger International Small Cap None Wanger Twenty None Wanger Foreign Forty None - ---------------------------------------------------------------------------------------------------------------------- Michael P. Phelps Wanger U.S. Smaller None Companies None Wanger International Small Cap None Wanger Twenty None Wanger Foreign Forty None - ---------------------------------------------------------------------------------------------------------------------- Patricia Werhane Wanger U.S. Smaller None Companies None Wanger International Small Cap None Wanger Twenty None Wanger Foreign Forty None - ---------------------------------------------------------------------------------------------------------------------- 27 - ---------------------------------------------------------------------------------------------------------------------- NAME OF TRUSTEE NAME OF FUND DOLLAR RANGE OF EQUITY AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN EACH FUND SECURITIES IN ALL REGISTERED INVESTMENT COMPANIES OVERSEEN BY TRUSTEE IN FAMILY OF INVESTMENT COMPANIES - ---------------------------------------------------------------------------------------------------------------------- TRUSTEES WHO ARE INTERESTED PERSONS OF WANGER ADVISORS TRUST: - ---------------------------------------------------------------------------------------------------------------------- Ralph Wanger Wanger U.S. Smaller over $100,000 Companies $10,000 - $50,000 Wanger International Small Cap over $100,000 Wanger Twenty None Wanger Foreign Forty None - ----------------------------------------------------------------------------------------------------------------------
At March 15, 2002, the trustees and officers as a group owned beneficially less than 1% of the outstanding shares of U.S. Smaller Companies and International Small Cap.* At March 15, 2002, the trustees and officers as a group owned beneficially 1.6% of the outstanding shares of Wanger Twenty and 1.3% of the outstanding shares of Wanger Foreign Forty.* At March 15, 2002, Phoenix Home Life Mutual Insurance Company (and its affiliates), One American Row, Hartford, Connecticut 06102-5056, was the record holder of approximately 64.80% of the outstanding shares of International Small Cap, approximately 67.20% of the outstanding shares of U.S. Smaller Companies, approximately 66.35% of the outstanding shares of Wanger Twenty and approximately 82.88% of the outstanding shares of Wanger Foreign Forty all of which are beneficially owned by variable contract owners. At March 15, 2002, IDS Life, 1IT, IDS Tower 10, T11/229, Minneapolis, Minnesota 55440, was the record holder of approximately 26.15% of the outstanding shares of U.S. Smaller Companies and approximately 25.74% of the outstanding shares of International Small Cap, all of which are owned by variable contract owners. At March 15, 2002, Keyport Life Insurance Company (and its affiliates), 125 High Street, Boston, Massachusetts 02110, was the record holder of approximately 7.06% of the outstanding shares of International Small Cap, 32.45% of the outstanding shares of Wanger Twenty and approximately 15.72% of the outstanding shares of Wanger Foreign Forty, all of which are owned by variable contract owners. As of March 15, 2002, none of the independent trustees owned beneficially or of record any shares of Liberty WAM or LFD, or of any person directly or indirectly controlling, controlled by, or under common control with Liberty WAM or LFD. *These percentages also include shares held under variable insurance contracts owned by Mr. McQuaid and Mr. Wanger, which shares are also reported under the names of the contract issuers. INDEPENDENT AUDITORS The independent auditors for the Funds are Ernst & Young LLP, 233 South Wacker Drive, Chicago, Illinois 60606. The independent auditors audit and report on the annual financial statements and provide tax return review services and assistance and consultation in connection with the review of various SEC filings. The financial statements of the Trust and reports of independent auditors appearing in the December 31, 2001, annual report of the Trust are incorporated in this SAI by reference. 28 APPENDIX A INVESTMENT TECHNIQUES AND SECURITIES COMMON STOCKS The Funds invest mostly in common stocks, which represent an equity interest (ownership) in a corporation. This ownership interest often gives a Fund the right to vote on measures affecting the company's organization and operations. The Funds also invest in other types of equity securities, including preferred stocks and securities convertible into common stocks. Over time, common stocks have historically provided superior long-term capital growth potential. However, stock prices may decline over short or even extended periods. Stock markets tend to move in cycles, with periods of rising stock prices and periods of falling stock prices. As a result, the Funds should be considered long-term investments, designed to provide the best results when held for several years or more. The Funds may not be suitable investments if you have a short-term investment horizon or are unwilling to accept fluctuations in share price, including significant declines over a given period. DIVERSIFICATION Diversification is a means of reducing risk by investing in a broad range of stocks or other securities. Because Wanger Twenty is non-diversified, it has 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 can be expected to fluctuate more than that of a broadly diversified fund investing in similar securities. Because Wanger Twenty is non-diversified, it is not subject to the limitations under the 1940 Act on the percentage of its assets that it may invest in any one issuer. Wanger Twenty, however, intends to comply with the diversification standards for regulated investment companies under Subchapter M of the Internal Revenue Code (summarized in "Investment Restrictions") and Section 817(h) of the Code (see "Taxes"). Although Wanger Foreign Forty was previously registered as a non-diversified fund, its investments remained diversified through February 1, 2002 (three years after it began operations). As a result, the Fund lost the ability to invest in a non-diversified manner and is now considered a diversified fund. Wanger Foreign Forty will not be able to become non-diversified unless it seeks and obtains the approval of the holders of a "majority of its outstanding voting securities," as defined in the 1940 Act. FOREIGN SECURITIES Each Fund may invest in foreign securities, which may entail a greater degree of risk (including risks relating to exchange rate fluctuations, tax provisions, or expropriation of assets) than does investment in securities of domestic issuers. Under normal circumstances, Wanger Foreign Forty invests at least 80% of its net assets (plus any borrowings for investment purposes), and International Small Cap invests at least 65% of its total assets, in each case taken at market value, in foreign securities; Wanger Twenty's investments in foreign securities are limited to not more than 15% of its total assets. U.S. Smaller Companies may invest up to 35% 29 of its total assets in foreign securities, but the Fund does not have a present intention of investing more than 5% of its assets in foreign securities. Wanger Foreign Forty invests primarily in developed countries but may invest up to 15% of its total assets in securities of companies with broad international interests that are domiciled in the United States or in countries considered "emerging markets," if the operations of those companies are located primarily in developed overseas markets. The Funds use the terms "developed markets" and "emerging markets" as those terms are defined by the International Financial Corporation, a member of the World Bank Group (IFC). "Emerging markets" as used by the Funds include markets designated "frontier markets" by the IFC. Wanger Foreign Forty does not intend to invest more than 5% of its total assets in those countries included in the "emerging markets" or "frontier markets" categories. The securities markets of emerging markets are substantially smaller, less developed, less liquid, and more volatile than the securities markets of the United States and other more developed countries. Disclosure and regulatory standards in many respects are less stringent than in the United States. There also may be a lower level of monitoring and regulation of emerging markets of traders, insiders, and investors. Enforcement of existing regulations has been extremely limited. Wanger Twenty usually limits its investments in foreign companies to those whose operations are primarily in the U.S. The Funds may invest in securities of foreign issuers directly or in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other securities representing underlying shares of foreign issuers. Positions in these securities are not necessarily denominated in the same currency as the common stocks into which they may be converted. ADRs are receipts typically issued by an American bank or trust company evidencing ownership of the underlying securities. EDRs are European receipts evidencing a similar arrangement. GDRs are receipts that may trade in U.S. or non-U.S. markets. The Funds may invest in sponsored or unsponsored depositary receipts. Generally ADRs, in registered form, are designed for use in the U.S. securities markets and EDRs, in bearer form, are designed for use in European securities markets. The Funds may invest in both "sponsored" and "unsponsored" depositary receipts. In a sponsored depositary receipt, the issuer typically pays some or all of the expenses of the depository and agrees to provide its regular shareholder communications to receipt holders. An unsponsored depositary receipt is created independently of the issuer of the underlying security. The receipt holders generally pay the expenses of the depository and do not have an undertaking from the issuer of the underlying security to furnish shareholder communications. Therefore, in the case of an unsponsored depositary receipt, a Fund is likely to bear its proportionate share of the expenses of the depository and it may have greater difficulty in receiving shareholder communications than it would have with a sponsored depositary receipt. None of the Funds expects to invest 5% or more of its total assets in unsponsored depositary receipts. The Funds' investment performance is affected by the strength or weakness of the U.S. dollar against the currencies of the foreign markets in which its securities trade or in which they are denominated. For example, if the dollar falls in value relative to the Japanese yen, the dollar value of a yen-denominated stock held in the portfolio will rise even though the price of the stock 30 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 Each of the Funds may engage in currency exchange transactions to protect against uncertainty in the level of future currency exchange rates. The Funds may purchase foreign currencies on a spot or forward basis in conjunction with their investments in foreign securities and to hedge against fluctuations in foreign currencies. The Funds also may buy and sell currency futures contracts and options thereon for such hedging purposes. A Fund may engage in both "transaction hedging" and "position hedging." When it engages in transaction hedging, a Fund enters into foreign currency transactions with respect to specific receivables or payables of the Fund generally arising in connection with purchases or sales of its portfolio securities. A Fund will engage in transaction hedging when it desires to "lock in" the U.S. dollar price of a security it has agreed to purchase or sell, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging a Fund attempts to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payments is declared, and the date on which such payments are made or received. A Fund may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. A Fund may also enter into contracts to purchase or sell foreign currencies at a 31 future date ("forward contracts") and (if the Fund is so authorized) purchase and sell foreign currency futures contracts. For transaction hedging purposes a Fund which is so authorized may also purchase exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. Over-the-counter options are considered to be illiquid by the SEC staff. A put option on a futures contract gives the Fund the right to assume a short position in the futures contract until expiration of the option. A put option on a currency gives the Fund the right to sell a currency at an exercise price until the expiration of the option. A call option on a futures contract gives the Fund the right to assume a long position in the futures contract until the expiration of the option. A call option on a currency gives the Fund the right to purchase a currency at the exercise price until the expiration of the option. When it engages in position hedging, a Fund enters into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which its portfolio securities are denominated (or an increase in the value of currency for securities which the Fund expects to purchase, when the Fund holds cash or short-term investments). In connection with position hedging, a Fund which is so authorized may purchase put or call options on foreign currency and foreign currency futures contracts and buy or sell forward contracts and foreign currency futures contracts. A Fund may enter into short sales of a foreign currency to hedge a position in a security denominated in that currency. In such circumstances, the Fund will maintain in a segregated account with its Custodian an amount of cash or liquid debt securities equal to the excess of (i) the amount of foreign currency required to cover such short sale position over (ii) the amount of such foreign currency which could then be realized through the sale of the foreign securities denominated in the currency subject to the hedge. The precise matching of the amounts of foreign currency exchange transactions and the value of the portfolio securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the dates the currency exchange transactions are entered into and the dates they mature. It is impossible to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward or futures contract. Accordingly, it may be necessary for a Fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security or securities being hedged is less than the amount of foreign currency the Fund is obligated to deliver and if a decision is made to sell the security or securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security or securities if the market value of such security or securities exceeds the amount of foreign currency the Fund is obligated to deliver. Transaction and position hedging do not eliminate fluctuations in the underlying prices of the securities which the Fund owns or intends to purchase or sell. They simply establish a rate of exchange which the Fund can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in value of such currency. 32 SYNTHETIC FOREIGN MONEY MARKET POSITIONS The Funds may invest in money market instruments denominated in foreign currencies. In addition to, or in lieu of, such direct investment, the Funds may construct a synthetic foreign money market position by (a) purchasing a money market instrument denominated in one currency (generally U.S. dollars) and (b) concurrently entering into a forward contract to deliver a corresponding amount of that currency in exchange for a different currency on a future date and at a specified rate of exchange. For example, a synthetic money market position in Japanese yen could be constructed by purchasing a U.S. dollar money market instrument and entering concurrently into a forward contract to deliver a corresponding amount of U.S. dollars in exchange for Japanese yen on a specified date and at a specified rate of exchange. Because of the availability of a variety of highly liquid short-term U.S. dollar money market instruments, a synthetic money market position utilizing such U.S. dollar instruments may offer greater liquidity than direct investment in foreign money market instruments. The results of a direct investment in a foreign currency and a concurrent construction of a synthetic position in such foreign currency, in terms of both income yield and gain or loss from changes in currency exchange rates, in general should be similar, but would not be identical, because the components of the alternative investments would not be identical. Except to the extent a synthetic foreign money market position consists of a money market instrument denominated in a foreign currency, the synthetic foreign money market position shall not be deemed a "foreign security" for purposes of the policies that, under normal conditions, U.S. Smaller Companies will not invest more than 35% of its total assets in foreign securities, Wanger Twenty will not invest more than 15% of its total assets in foreign securities, International Small Cap will generally invest at least 65% of its total assets in foreign securities and Wanger Foreign Forty will invest at least 80% of its net assets (plus any borrowings for investment purposes) in foreign securities. OPTIONS, FUTURES AND OTHER DERIVATIVES Each Fund may purchase and write both call options and put options on securities, indexes and foreign currencies, and enter into interest rate, index and foreign currency futures contracts and options on such futures contracts (futures options) in order to achieve its investment objective, to provide additional revenue, or to hedge against changes in security prices, interest rates or currency exchange rates. A Fund also may use other types of options, futures contracts, futures options, and other types of forward or investment contracts linked to individual securities, interest rates, foreign currencies, indices or other benchmarks (derivative products) currently traded or subsequently developed and traded, provided the trustees determine that their use is consistent with the Fund's investment objective. OPTIONS A Fund may purchase and write both put and call options on securities, indexes or foreign currencies in standardized contracts traded on recognized securities exchanges, boards of trade or similar entities, or quoted on Nasdaq. A Fund also may purchase agreements, sometimes called cash puts, which may accompany the purchase of a new issue of bonds from a dealer that the Fund might buy as a temporary defensive measure. An option on a security (or index or foreign currency) is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to 33 (put) the seller (writer) of the option the security underlying the option (or the cash value of the index or a specified quantity of the foreign currency) at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option on an individual security or on a foreign currency has the obligation upon exercise of the option to deliver the underlying security or foreign currency upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security or foreign currency. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. (An index is designed to reflect specified facets of a particular financial or securities market, a specific group of financial instruments or securities, or certain other economic indicators.) A Fund will write call options and put options only if they are "covered." For example, in the case of a call option on a security, the option is "covered" if the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration upon conversion or exchange of other securities held in its portfolio (or, if additional cash consideration is required, cash or cash equivalents in such amount are held in a segregated account by its custodian). If an option written by a Fund expires, the Fund realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by a Fund expires, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security, currency or index, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when a Fund desires. A Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security, currency or index in relation to the exercise price of the option, the volatility of the underlying security, currency or index, and the time remaining until expiration. A put or call option purchased by a Fund is an asset of the Fund, valued initially at the premium paid for the option. The premium received for an option written by a Fund is recorded as a deferred credit. The value of an option purchased or written is marked-to-market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices. 34 OTC DERIVATIVES The Funds may buy and sell over-the-counter (OTC) derivatives (derivatives not traded on exchanges). Unlike exchange-traded derivatives, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC derivatives generally are established through negotiation with the other party to the contract. While this type of arrangement allows a Fund greater flexibility to tailor an instrument to its needs, OTC derivatives generally involve greater credit risk than exchange-traded derivatives, which are guaranteed by the clearing organization of the exchanges where they are traded. Each Fund will limit its investments so that no more than 5% of its total assets will be placed at risk in the use of OTC derivatives. See "Illiquid and Restricted Securities" below for more information on the risks associated with investing in OTC derivatives. Risks Associated with Options There are several risks associated with transactions in options. For example, there are significant differences between the securities and the currency markets and the options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. If a Fund were unable to close out an option that it had purchased, it would have to exercise the option in order to realize any profit or the option would expire and become worthless. If a Fund were unable to close out a covered call option that it had written on a security or a foreign currency, it would not be able to sell the underlying security or currency unless the option expired. As the writer of a covered call option on a security, a Fund foregoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call. As the writer of a covered call option on a foreign currency, the Fund foregoes, during the option's life, the opportunity to profit from appreciation of the currency covering the call. If trading were suspended in an option purchased or written by a Fund, the Fund would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Fund's portfolio securities during the period the option was outstanding. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS A Fund may use interest rate, index and foreign currency futures contracts. An interest rate, index or foreign currency futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument, the cash value of an 35 index(3) or a specified quantity of a foreign currency 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 Stock Index, the Value Line Composite Index and the New York Stock Exchange Composite Index), certain financial instruments (including, but not limited to: U.S. Treasury bonds, U.S. Treasury notes and Eurodollar certificates of deposit) and foreign currencies. Other index and financial instrument futures contracts are available and it is expected that additional futures contracts will be developed and traded. A Fund may purchase and write call and put futures options. Futures options possess many of the same characteristics as options on securities, indexes and foreign currencies (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or a short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. To the extent required by regulatory authorities having jurisdiction over a Fund, such Fund will limit its use of futures contracts and futures options to hedging transactions. For example, a Fund might use futures contracts to hedge against or gain exposure to fluctuations in the general level of stock prices or anticipated changes in interest rates or currency exchange rates which might adversely affect either the value of the Fund's securities or the price of the securities that the Fund intends to purchase. Although other techniques could be used to reduce that Fund's exposure to stock price and interest rate and currency fluctuations, the Fund may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options. A Fund will only enter into futures contracts and futures options that are standardized and traded on an exchange, board of trade or similar entity or quoted on an automated quotation system. The success of any futures transaction depends on Liberty WAM correctly predicting changes in the level and direction of stock prices, interest rates, currency exchange rates and other factors. Should those predictions be incorrect, a Fund's return might have been better had the transaction not been attempted; however, in the absence of the ability to use futures contracts, Liberty WAM might have taken portfolio actions in anticipation of the same market movements with similar investment results but, presumably, at greater transaction costs. When a purchase or sale of a futures contract is made by a Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of cash or U.S. Government securities or other securities acceptable to the broker (initial margin). The margin required for a futures contract is set by the exchange on which the contact is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract, which is returned to the Fund upon - ---------- 3 A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of a securities index is a function of the value of certain specified securities, no physical delivery of those securities is made. 36 termination of the contract, assuming all contractual obligations have been satisfied. A Fund expects to earn interest income on its initial margin deposits. A futures contract held by a Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking-to-market." Variation margin paid or received by a Fund does not represent a borrowing or loan by the Fund but is instead settlement between the Fund and the broker of the amount one would owe the other if the futures contract had expired at the close of the previous day. In computing daily net asset value, a Fund will mark-to-market its open futures positions. The Funds are also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option and other futures positions held by the Fund. Although some futures contracts call for making or taking delivery of the underlying property, usually these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying property and delivery month). If an offsetting purchase price is less than the original sale price, the Fund engaging in the transaction realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund engaging in the transaction realizes a capital gain, or if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations. Risks Associated with Futures There are several risks associated with the use of futures contracts and futures options. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the portfolio securities being hedged. In addition, there are significant differences between the securities and the currency markets and the futures markets that could result in an imperfect correlation between the markets, causing a given transaction not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as: variations in speculative market demand for futures, futures options and the related securities or currencies, including technical influences in futures and futures options trading and differences between the Fund's investments being hedged and the securities or currencies underlying the standard contracts available for trading. For example, in the case of index futures contracts, the composition of the index, including the issuers and the weighting of each issue, may differ from the composition of the Fund's portfolio, and, in the case of interest rate futures contracts, the interest rate levels, maturities, and creditworthiness of the issues underlying the futures contract may differ from the financial instruments held in the Fund's portfolio. A decision as to whether, when and how to use futures contracts involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected security price, interest rate or currency exchange rate trends. Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that 37 the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses. Stock index futures contracts are not normally subject to such daily price change limitations. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a futures or futures option position. The Fund would be exposed to possible loss on the position during the interval of inability to close, and would continue to be required to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant long-term trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist. LIMITATIONS ON OPTIONS AND FUTURES A Fund will not enter into a futures contract or purchase an option thereon if, immediately thereafter, the initial margin deposits for futures contracts held by that Fund plus premiums paid by it for open futures option positions, less the amount by which any such positions are "in-the-money,"(4) would exceed 5% of the Fund's total assets. When purchasing a futures contract or writing a put option on a futures contract, a Fund must maintain with its custodian (or broker, if legally permitted) cash or cash equivalents (including any margin) equal to the market value of such contract. When writing a call option on a futures contract, the Fund similarly will maintain with its custodian cash or cash equivalents (including any margin) equal to the amount by which such option is in-the-money until the option expires or is closed out by the Fund. A Fund may not maintain open short positions in futures contracts, call options written on futures contracts or call options written on indexes if, in the aggregate, the market value of all such open positions exceeds the current value of the securities in its portfolio, plus or minus unrealized gains and losses on the open positions, adjusted for the historical relative volatility of the relationship between the portfolio and the positions. For this purpose, to the extent the Fund has written call options on specific securities in its portfolio, the value of those securities will be deducted from the current market value of the securities portfolio. In order to comply with Commodity Futures Trading Commission (CFTC) Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," each Fund will use commodity futures or commodity options contracts solely for bona fide hedging purposes within the meaning and intent of CFTC Regulation 1.3(z), or, with respect to positions in commodity futures and commodity options contracts that do not come within the meaning and intent of CFTC Regulation 1.3(z), the aggregate initial margin and premiums required to establish such - ---------- 4 A call option is "in-the-money" if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is "in-the-money" if the exercise price exceeds the value of the futures contract that is the subject of the option. 38 positions will not exceed 5% of the fair market value of the assets of a Fund, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into [in the case of an option that is in-the-money at the time of purchase, the in-the-money amount (as defined in Section 190.01(x) of the CFTC Regulations) may be excluded in computing such 5%]. TAXATION OF OPTIONS AND FUTURES If a Fund exercises a call or put option it holds, the premium paid for the option is added to the cost basis of the security purchased (call) or deducted from the proceeds of the security sold (put). For cash settlement options and futures options exercised by a Fund, the difference between the cash received at exercise and the premium paid is a capital gain or loss. If a call or put option written by a Fund is exercised, the premium is included in the proceeds of the sale of the underlying security (call) or reduces the cost basis of the security purchased (put). For cash settlement options and futures options written by a Fund, the difference between the cash paid at exercise and the premium received is a capital gain or loss. Entry into a closing purchase transaction will result in capital gain or loss. If an option written by a Fund was in-the-money at the time it was written and the security covering the option was held for more than the long-term holding period prior to the writing of the option, any loss realized as a result of a closing purchase transaction will be long-term. The holding period of the securities covering an in-the-money option will not include the period of time the option is outstanding. If a Fund writes an equity call option(5) other than a "qualified covered call option," as defined in the Internal Revenue Code, any loss on such option transaction, to the extent it does not exceed the unrealized gains on the securities covering the option, may be subject to deferral until the securities covering the option have been sold. A futures contract held until delivery results in capital gain or loss equal to the difference between the price at which the futures contract was entered into and the settlement price on the earlier of delivery notice date or expiration date. If a Fund delivers securities under a futures contract, the Fund also realizes a capital gain or loss on those securities. For federal income tax purposes, a Fund generally is required to recognize as income for each taxable year its net unrealized gains and losses as of the end of the year on futures, futures options and non-equity options positions (year-end mark-to-market). Generally, any gain or loss recognized with respect to such positions (either by year-end mark-to-market or by actual closing of the positions) is considered to be 60% long-term and 40% short-term, without regard to the holding periods of the contracts. However, in the case of positions classified as part of a "mixed straddle," the recognition of losses on certain positions (including options, futures and futures options positions, the related securities and certain successor positions thereto) may be deferred to a later taxable year. Sale of futures contracts or writing of call options (or futures call options) - ---------- 5 An equity option is defined to mean any option to buy or sell stock, and any other option the value of which is determined by reference to an index of stocks of the type that is ineligible to be traded on a commodity futures exchange (e.g., an option contract on a sub-index based on the price of nine hotel-casino stocks). The definition of equity option excludes options on broad-based stock indexes (such as the Standard & Poor's 500 Stock Index). 39 or buying put options (or futures put options) that are intended to hedge against a change in the value of securities held by a Fund: (1) will affect the holding period of the hedged securities; and (2) may cause unrealized gain or loss on such securities to be recognized upon entry into the hedge. If a Fund were to enter into a short index future, short index futures option or short index option position and the Fund's portfolio were deemed to "mimic" the performance of the index underlying such contract, the option or futures contract position and the Fund's stock positions would be deemed to be positions in a mixed straddle, subject to the above-mentioned loss deferral rules. In order for a Fund to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, and gains from the sale of securities or foreign currencies, or other income (including but not limited to gains from options and futures contracts). In addition, gains realized on the sale or other disposition of securities held for less than three months must be limited to less than 30% of the Fund's annual gross income. Any net gain realized from futures (or futures options) contracts will be considered gain from the sale of securities and therefore be qualifying income for purposes of the 90% requirement. In order to avoid realizing excessive gains on securities held less than three months, the Fund may be required to defer the closing out of certain positions beyond the time when it would otherwise be advantageous to do so. SWAP AGREEMENTS A swap agreement is generally individually negotiated and structured to include exposure to one or more of a variety of different types of investments or market factors. Depending on its structure, a swap agreement may increase or decrease a Fund's exposure to changes in the value of an index of securities in which the Fund might invest, the value of a particular security or group of securities, or foreign currency values. Swap agreements can take many different forms and are known by a variety of names. A Fund may enter into any form of swap agreement if Liberty WAM determines it is consistent with its investment objective and policies, but each Fund will limit its use of swap agreements so that no more than 5% of its total assets will be invested in such agreements. A swap agreement tends to shift a Fund's investment exposure from one type of investment to another. For example, if a Fund agrees to exchange payments in dollars at a fixed rate for payments in a foreign currency the amount of which is determined by movements of a foreign securities index, the swap agreement would tend to increase the Fund's exposure to foreign stock market movements and foreign currencies. Depending on how it is used, a swap agreement may increase or decrease the overall volatility of a Fund's investments and its NAV. The performance of a swap agreement is determined by the change in the specific currency, market index, security, or other factors that determine the amounts of payments due to and from the Fund. If a swap agreement calls for payments by a Fund, the Fund must be prepared to make such payments when due. If the counterparty's creditworthiness declines, the value of a swap agreement would be likely to decline, potentially resulting in a loss. Liberty WAM expects to be able to eliminate each Fund's exposure under any swap agreement either by 40 assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. Each Fund will segregate its assets to cover its current obligations under a swap agreement. If a Fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of its accumulated obligations under the swap agreement over the accumulated amount the Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of its accumulated obligations under the agreement. SHORT SALES AGAINST THE BOX Each Fund may make short sales of securities if, at all times when a short position is open, the Fund owns an equal amount of such securities or securities convertible into or exchangeable for, without payment of any further consideration, securities of the same issue as, and equal in amount to, the securities sold short. This technique is called selling short "against the box." Although permitted by their investment restrictions, the Funds do not currently intend to sell securities short. In a short sale against the box, a Fund does not deliver from its portfolio the securities sold and does not receive immediately the proceeds from the short sale. Instead, the Fund borrows the securities sold short from a broker-dealer through which the short sale is executed, and the broker-dealer delivers such securities, on behalf of the Fund, to the purchaser of such securities. Such broker-dealer is entitled to retain the proceeds from the short sale until the Fund delivers to such broker-dealer the securities sold short. In addition, the Fund is required to pay to the broker-dealer the amount of any dividends paid on shares sold short. Finally, to secure its obligation to deliver to such broker-dealer the securities sold short, the Fund must deposit and continuously maintain in a separate account with 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 41 with respect to the proceeds of the short sales during the period the Fund's short positions remain open. The Taxpayer Relief Act of 1997 imposed constructive sale treatment for federal income tax purposes on certain hedging strategies with respect to appreciated securities. Under these rules taxpayers will recognize gain, but not loss, with respect to securities if they enter into short sales or "offsetting notional principal contracts" (as defined by the Act) with respect to the same or substantially identical property, or if they enter into such transactions and then acquire the same or substantially identical property. The Secretary of the Treasury is authorized to promulgate regulations that will treat as constructive sales certain transactions that have substantially the same effect as short sales. DEBT SECURITIES The Funds may invest in debt securities, including lower-rated securities (i.e., securities rated BB or lower by Standard & Poor's Corporation (S&P) or Ba or lower by Moody's Investor Services, Inc. (Moody's), commonly called "junk bonds"), and securities that are not rated. There are no restrictions as to the ratings of debt securities acquired by the Funds or the portion of each Fund's assets that may be invested in debt securities in a particular ratings category. No Fund intends to invest more than 20% of its total assets in debt securities nor more than 5% of its total assets in securities rated at or lower than the lowest investment grade. Securities rated BBB or Baa are considered to be medium grade and to have speculative characteristics. Lower-rated debt securities are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. Investment in medium- or lower-quality debt securities involves greater investment risk, including the possibility of issuer default or bankruptcy. An economic downturn could severely disrupt the market for such securities and adversely affect the value of such securities. In addition, lower-quality bonds are less sensitive to interest rate changes than higher-quality instruments and generally are more sensitive to adverse economic changes or individual corporate developments. During a period of adverse economic changes, including a period of rising interest rates, the junk bond market may be severely disrupted, and issuers of such bonds may experience difficulty in servicing their principal and interest payment obligations. Medium- and lower-quality debt securities may be less marketable than higher quality debt securities because the market for them is less broad. The market for unrated debt securities is even narrower. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly, and a Fund may have greater difficulty selling its portfolio securities. The market value of these securities and their liquidity may be affected by adverse publicity and investor perceptions. A rating of a rating service represents the service's opinion as to the credit quality of the security being rated. However, the ratings are general and are not absolute standards of quality or guarantees as to the creditworthiness of an issuer. Consequently, Liberty WAM believes that the quality of debt securities in which the Funds invest should be continuously reviewed. A rating is not a recommendation to purchase, sell, or hold a security, because it does not take into account market value or suitability for a particular investor. When a security has received a rating from more than one service, each rating should be evaluated independently. Ratings are based on current information furnished by the issuer or obtained by the ratings services from 42 other sources which they consider reliable. Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or for other reasons. The following is a description of the characteristics of ratings used by Moody's and S&P. MOODY'S RATINGS Aaa--Bonds rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. Although the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such bonds. Aa--Bonds rated Aa are judged to be high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa bonds or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risk appear somewhat larger than in Aaa bonds. A--Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba--Bonds rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B--Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa--Bonds rated Caa are of poor standing. Such bonds may be in default or there may be present elements of danger with respect to principal or interest. Ca--Bonds rated Ca represent obligations which are speculative in a high degree. Such bonds are often in default or have other marked shortcomings. 43 S&P RATINGS AAA--Bonds rated AAA have the highest rating. Capacity to pay principal and interest is extremely strong. AA--Bonds rated AA have a very strong capacity to pay principal and interest and differ from AAA bonds only in small degree. A--Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories. BBB--Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this capacity than for bonds in higher rated categories. BB--B--CCC--CC--Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation among such bonds and CC the highest degree of speculation. Although such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. REPURCHASE AGREEMENTS Repurchase agreements are transactions in which a Fund purchases a security from a bank or recognized securities dealer and simultaneously commits to resell that security to the bank or dealer at an agreed-upon price, date, and market rate of interest unrelated to the coupon rate or maturity of the purchased security. Although repurchase agreements carry certain risks not associated with direct investments in securities, the Funds will enter into repurchase agreements only with banks and dealers Liberty WAM believes present minimal credit risks in accordance with guidelines approved by the board of trustees. Liberty WAM will review and monitor the creditworthiness of such institutions, and will consider the capitalization of the institution, Liberty WAM's prior dealings with the institution, any rating of the institution's senior long-term debt by independent rating agencies, and other relevant factors. "WHEN-ISSUED" SECURITIES AND COMMITMENT AGREEMENTS; REVERSE REPURCHASE AGREEMENTS Each Fund may purchase and sell securities on a when-issued and delayed-delivery basis. When-issued or delayed-delivery transactions arise when securities are purchased or sold by the Funds with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Funds at the time of entering into the transaction. However, yields available in the market when delivery takes place may be higher than the yields on securities to be delivered. When the Funds engage in when-issued and delayed-delivery transactions, the Funds rely on the buyer or seller, as the case may be, to consummate the sale. Failure to do so may result in the Funds missing the opportunity to obtain 44 a price or yield considered to be advantageous. When-issued and delayed-delivery transactions may be expected to occur a month or more before delivery is due. However, no payment or delivery is made by the Funds until they receive payment or delivery from the other party to the transaction. A separate account of liquid assets equal to the value of such purchase commitments will be maintained with the Trust's custodian until payment is made and will not be available to meet redemption requests. When-issued and delayed-delivery agreements are subject to risks from changes in value based upon changes in the level of interest rates and other market factors, both before and after delivery. The Funds do not accrue any income on such securities prior to their delivery. To the extent a Fund engages in when-issued and delayed-delivery transactions, it will do so for the purpose of acquiring portfolio securities consistent with its investment objectives and policies and not for the purpose of investment leverage. A Fund may enter into reverse repurchase agreements with banks and securities dealers. A reverse repurchase agreement is a repurchase agreement in which the Fund is the seller of, rather than the investor in, securities and agrees to repurchase them at an agreed-upon time and price. Use of a reverse repurchase agreement may be preferable to a regular sale and later repurchase of securities because it avoids certain market risks and transaction costs. At the time a Fund enters into a binding obligation to purchase securities on a when-issued basis or enters into a reverse repurchase agreement, assets of the Fund having a value at least as great as the purchase price of the securities to be purchased will be segregated on the books of the Fund and held by its custodian throughout the period of the obligation. The use of these investment strategies, as well as any borrowing by the Fund, may increase NAV fluctuation. The Funds have no present intention of investing in reverse repurchase agreements. TEMPORARY STRATEGIES The Funds have the flexibility to respond promptly to changes in market and economic conditions. In the interest of preserving shareholders' capital, Liberty WAM may employ a temporary defensive investment strategy if it determines such a strategy to be warranted. Pursuant to such a defensive strategy, each Fund temporarily may hold cash (U.S. dollars, foreign currencies, multinational currency units) and/or invest up to 100% of its assets in high quality debt securities or money market instruments of U.S. or foreign issuers, and most or all of the Fund's investments may be made in the United States and denominated in U.S. dollars. It is impossible to predict whether, when, or for how long a Fund might employ defensive strategies. In addition, pending investment of proceeds from new sales of Fund shares or to meet ordinary daily cash needs, a Fund temporarily may hold cash (U.S. dollars, foreign currencies, or multinational currency units) and may invest any portion of its assets in money market instruments. ILLIQUID AND RESTRICTED SECURITIES No Fund may invest in illiquid securities, including restricted securities and OTC derivatives, if as a result, they would comprise more than 15% of the value of its net assets. An illiquid security generally is one that cannot be sold in the ordinary course of business within seven days at substantially the value assigned to it in calculations of a Fund's net asset value. Repurchase agreements maturing in more than seven days, OTC derivatives and restricted securities are generally illiquid; other types of investments may also be illiquid from time to 45 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 are acquired through private placement transactions, directly from the issuer or from security holders, generally at higher yields or on terms more favorable to investors than comparable publicly traded securities. Privately placed securities are not readily marketable and ordinarily can be sold only in privately negotiated transactions to a limited number of purchasers or in public offerings made pursuant to an effective registration statement under the Securities Act of 1933. Private or public sales of such securities by a Fund may involve significant delays and expense. Private sales require negotiations with one or more purchasers and generally produce less favorable prices than the sale of comparable unrestricted securities. Public sales generally involve the time and expense of preparing and processing a registration statement under the Securities Act of 1933 and may involve the payment of underwriting commissions; accordingly, the proceeds may be less than the proceeds from the sale of securities of the same class which are freely marketable. Restricted securities will be priced at a fair value as determined in good faith by the board of trustees or its delegate. None of the Funds will invest more than 15% of its total assets (valued at the time of investment) in restricted securities. Notwithstanding the above, a Fund may purchase securities that have been privately placed but that are eligible for purchase and sale under Rule 144A under the 1933 Act. That rule permits certain qualified institutional buyers, such as the Funds, to trade in privately placed securities that have not been registered for sale under the 1933 Act. Liberty WAM, under the supervision of the board of trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to each Fund's restriction of investing no more than 15% of the value of its assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination Liberty WAM will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, Liberty WAM could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, and (4) nature of the security and of market place trades (e.g., the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored and if, as a result of changed conditions, it is determined that a Rule 144A security is no longer liquid, a Fund's holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that it does not invest more than 15% of its assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of a Fund's assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities. LINE OF CREDIT The Trust maintains a line of credit with a group of banks to permit borrowing on a temporary basis to meet share redemption requests in circumstances in which temporary borrowing may be preferable to liquidation of portfolio securities. Any borrowings under that line of credit by the Funds would be subject to the Funds' restrictions on borrowing under "Investment Restrictions," above. 46 PART C ITEM 23. EXHIBITS Exhibits: -------- a. Agreement and Declaration of Trust. (3) b. By-laws, as amended effective September 29, 2000. (12) c.1. Specimen Share Certificate - Wanger U.S. Small Cap. (1) c.2. Specimen Share Certificate - Wanger International Small Cap. (2) d. Investment Advisory Agreement between Wanger Advisors Trust (on behalf of Wanger U.S. Small Cap, Wanger International Small Cap, Wanger Twenty and Wanger Foreign Forty) and Liberty Wanger Asset Management, L.P., dated November 1, 2001. e. Underwriting Agreement between Wanger Advisors Trust and Liberty Funds Distributor, Inc. dated November 1, 2001. f. None. g.1. Custodian Contract between Wanger Advisors Trust and State Street Bank and Trust Company. (4) g.2. Letter Agreement between Wanger Advisors Trust and State Street Bank and Trust Company applying Custodian Contract to Wanger Twenty and Wanger Foreign Forty. (11) g.3. Amendment to Custodian Contract between Wanger Advisors Trust and State Street Bank and Trust Company dated December 5, 2000. (13) h.1. Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and Phoenix Home Life Mutual Insurance Company dated April 18, 1995 (exhibit 9(a)(1) to post-effective amendment No. 2) (2) (amendment dated December 16, 1996) (exhibit 9(a)(1) to post-effective amendment No. 3). (6) h.2. Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and PHL Variable Insurance Company dated February 23, 1995 (exhibit 9(a)(2) to post-effective amendment No. 2) (2) (amendment dated December 16, 1996) (exhibit 9(a)(2) to post-effective amendment No. 3). (7) h.3. Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and Aegon Financial Services Group, Inc. (formerly Providian Life and Health Insurance Company and formerly National Home Life Assurance Company) dated May 19, 1995 (exhibit 9(a)(3) to post-effective amendment No. 2) (2) (amendment dated December 16, 1996) (exhibit 9(a)(3) to post-effective amendment No. 3). (8) h.4. Participation Agreement between Wanger Advisors Trust and First Providian Life and Health Insurance Company dated November 15, 1996, and Amendment No. 1 December 16, 1996. (9) h.5. Participation Agreement between Wanger Advisors Trust and SAFECO Life Insurance Company dated September 27, 1995 and Form of Amendment No. 1 dated December 18, 1996. (10) h.6. Shareholders' Servicing and Transfer Agent Agreement between Wanger Advisors Trust and Liberty Funds Services, Inc. dated September 29, 2000. (13) h.7. Participation Agreement between Wanger Advisors Trust and Keyport Benefit Life Insurance Company dated September 29, 2000. (13) h.8. Participation Agreement between Wanger Advisors Trust and Keyport Life Insurance Company dated September 29, 2000. (13) h.9. Participation Agreement between Wanger Advisors Trust, Liberty Wanger Asset Management, L.P. and American Enterprise Life Insurance Company dated August 30, 1999. h.10.Participation Agreement between Wanger Advisors Trust, Liberty Wanger Asset Management, L.P. and IDS Life Insurance Company dated August 30, 1999. h.11.Participation Agreement between Wanger Advisors Trust, Liberty Wanger Asset Management, L.P. and IDS Life Insurance Company of New York dated August 30, 1999. h.12.Form of Participation Agreement between Wanger Advisors Trust, Liberty Funds Distributor, Inc. and Sun Life Assurance Company of Canada (U.S.) dated April 1, 2002. i. Consent of Bell, Boyd & Lloyd LLC. j. Consent of Independent Auditors. k. None. l. Subscription Agreement. (5) m. None. n. None. p.1. Code of Ethics, as amended September 29, 2000. (13) p.2. Code of Ethics for Non-Interested Board Members, as amended June 5, 2001. p.3. Code of Ethics of Liberty Funds Distributor, Inc., the principal underwriter of the Funds. (13) ------------------------------ (1) Incorporated by reference to exhibit 4(a) filed with post-effective amendment no. 1 to Registrant's registration statement on form N-1A, Securities Act registration no. 33-83548 (the "Registration Statement") filed on August 25, 1995. (2) Incorporated by reference to exhibit 4(b) filed with post-effective amendment no. 1 to the Registration Statement filed on August 25, 1995. (3) Incorporated by reference to exhibit 1 filed with post-effective amendment no. 2 to the Registration Statement filed on April 19, 1996. (4) Incorporated by reference to exhibit 8(a) filed with post-effective amendment no. 2 to the Registration Statement filed on April 19, 1996. (5) Incorporated by reference to exhibit 13 filed with post-effective amendment no. 2 to the Registration Statement filed on April 19, 1996. (6) Incorporated by reference to exhibit 9(a)(1) filed with post-effective amendment no. 3 to the Registration Statement filed on April 30, 1997. (7) Incorporated by reference to exhibit 9(a)(2) filed with post-effective amendment no. 3 to the Registration Statement filed on April 30, 1997. (8) Incorporated by reference to exhibit 9(a)(3) filed with post-effective amendment no. 3 to the Registration Statement filed on April 30, 1997. (9) Incorporated by reference to exhibit 9(a)(4) filed with post-effective amendment no. 3 to the Registration Statement filed on April 30, 1997. (10) Incorporated by reference to exhibit 9(a)(5) filed with post-effective amendment no. 3 to the Registration Statement filed on April 30, 1997. (11) Incorporated by reference to exhibit g.2 filed with post-effective amendment no. 8 to the Registration Statement filed February 26, 1999. (12) Incorporated by reference to exhibit b.2 filed with post-effective amendment no. 12 to the Registration Statement filed September 29, 2000. (13) Incorporated by reference to the exhibit of the same number filed in post-effective amendment no. 13 to the Registration Statement filed April 25, 2001. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT The Registrant does not consider that there are any persons directly or indirectly controlling, controlled by, or under common control with, the Registrant within the meaning of this item. The information in the prospectus under the caption "Trust Management Organizations" and in the Statement of Additional Information under the caption "Management Arrangements" is incorporated by reference. ITEM 25. INDEMNIFICATION Article VIII of the Agreement and Declaration of Trust of the Registrant (Exhibit a included herein) provides in effect that the Registrant shall provide certain indemnification of its trustees and officers. In accordance with Section 17(h) of the Investment Company Act of 1940, that provision shall not protect any person against any liability to the Registrant or its shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to Trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1940 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Trustee, officer, or controlling person of the Registrant in connection with the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1940 Act and will be governed by the final adjudication of such issue. The Registrant, its trustees and officers, its investment adviser and persons affiliated with them are insured under a policy of insurance maintained by Registrant and its investment adviser, within the limits and subject to the limitations of the policy, against certain expenses in connection with the defense of actions, suits or proceedings, and certain liabilities that might be imposed as a result of such actions, suits or proceedings, to which they are parties by reason of being or having been such trustees or officers. The policy expressly excludes coverage for any trustee or officer whose personal dishonesty, fraudulent breach of trust, lack of good faith, or intention to deceive or defraud has been finally adjudicated or may be established or who willfully fails to act prudently. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER The information in the prospectus under the caption "Trust Management Organizations" is incorporated by reference. Neither Liberty Wanger Asset Management, L.P. nor its general partner has at any time during the past two years been engaged in any other business, profession, vocation or employment of a substantial nature either for its own account or in the capacity of director, officer, employee, partner or trustee. ITEM 27. PRINCIPAL UNDERWRITER (a) Liberty Funds Distributor, Inc. ("LFDI"), a subsidiary of Colonial Management Associates, Inc., is the Registrant's principal underwriter. LFDI acts in such capacity for each series of Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III, Liberty Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty Funds Trust VII, Liberty Variable Investment Trust, SteinRoe Variable Investment Trust, Liberty-Stein Roe Advisor Trust, Liberty-Stein Roe Funds Income Trust, Liberty-Stein Roe Funds Municipal Trust, Liberty-Stein Roe Funds Investment Trust, Liberty Floating Rate Fund, Liberty-Stein Roe Institutional Floating Rate Income Fund, Liberty Variable Investment Trust, Liberty-Stein Roe Funds Trust, Liberty Floating Rate Advantage Fund, Wanger Advisors Trust and Liberty Acorn Trust. (b) The table below lists each director or officer of the principal underwriter named in the answer to Item 20.
NAME AND PRINCIPAL POSITIONS AND OFFICES WITH POSITIONS AND OFFICES WITH BUSINESS ADDRESS* UNDERWRITER REGISTRANT Abusheery, Greg Vice President None Aldi, Andrew Vice President None Anderson, Judith Vice President None Antone, Louis E. Vice President None Ash, James Vice President None Babbitt, Debra Senior Vice President and None Compensation Officer Banks, Keith Director President Bartlett, John Managing Director None Blakeslee, James Senior Vice President None Blumenfeld, Alexander Vice President None Bozek, James Senior Vice President None Brown, Beth Senior Vice President None Campbell, Patrick Vice President None Carinio, Angela Vice President None Clapp, Elizabeth A. Managing Director None Claiborne, Doug Vice President None Climer, Quentin Vice President None Conley, Brook Vice President None Cook, Edward Vice President None Costello, Matthew Vice President None Couto, Scott Vice President None Davey, Cynthia Senior Vice President None Denny, Jeffrey Vice President None Desilets, Marian Vice President Assistant Secretary Devaney, James Senior Vice President None DiMaio, Stephen Vice President None Downey, Christopher Vice President None Ellis, Thomas Vice President None Emerson, Kim P. Senior Vice President None Erickson, Cynthia G. Senior Vice President None Evans, C. Frazier Managing Director None Evitts, Stephen Vice President None Feldman, David Managing Director None Feloney, Joseph Senior Vice President None Ferullo, Jeanne Vice President None Fisher, James Vice President None Ford, David Vice President None Fragasso, Philip Managing Director None Gentile, Russell Vice President None Goldberg, Matthew Senior Vice President None Grace, Anthony Vice President None Gubala, Jeffrey Vice President None Guenard, Brian Vice President None Harrington, Tom Senior Vice President None Hartnett, Kelly Vice President None Hodgkins, Joseph Senior Vice President None Huennekens, James Vice President None Hussey, Robert Managing Director None Iudice, Jr., Philip Treasurer and Chief Financial Officer None Jackson, Lyman Vice President None Jarstfer, Marlys Vice President None Johnston, Kenneth Vice President None Jones, Cynthia Vice President None Kelley, Terry M. Vice President None Kelson, David W. Senior Vice President None Kelson, Jr., David Vice President None Lewis, Blair Vice President None Loewenberg, Jean Clerk None Lynch, Andrew Managing Director None Lynn, Jerry Vice President None Marcelonis, Sheila Vice President None Marsh, Curtis Senior Vice President None Martin, Peter Senior Vice President None McCombs, Gregory Senior Vice President None McKenzie, Mary Vice President None Menchin, Catherine Senior Vice President None Miller, Anthony Vice President None Moberly, Ann R. Senior Vice President None Morse, Jonathan Vice President None Nickodemus, Paul Vice President None O'Shea, Kevin Managing Director None Palombo, Joseph R. Director and Chief Operating Trustee and Chairman of the Officer Board Piken, Keith Senior Vice President None Ratto, Gregory Vice President None Reed, Christopher B. Senior Vice President None Ross, Gary Senior Vice President None Santosuosso, Louise Senior Vice President None Schomburg, James Vice President None Schug, Derek Vice President None Schulman, David Senior Vice President None Scully-Power, Adam Vice President None Sellers, Gregory Vice President None Shea, Terence Vice President None Sideropoulos, Lou Senior Vice President None Sinatra, Peter Vice President None Smith, Darren Vice President None Soares, Jeffrey Vice President None Soester, Trisha Vice President None Sprieck, Susan Vice President None Studer, Eric Vice President None Sullivan, Paul Vice President None Sweeney, Maureen Vice President None Tambone, James Chief Executive Officer; None Co-President; Director Tasiopoulos, Lou Co-President; Director None Torrisi, Susan Vice President None Tufts, Peter Vice President None VanEtten, Keith H. Senior Vice President None Wagner, Rebecca Vice President None Waldron, Thomas Vice President None Warfield, James Vice President None Wess, Valerie Senior Vice President None White, John Vice President None Yates, Susan Vice President None Young, Deborah Senior Vice President None
- ------------------------- *The principal business address of each officer of Liberty Funds Distributor, Inc. is One Financial Center, Boston, MA 02111. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS Bruce H. Lauer, Vice President, Secretary and Treasurer Wanger Advisors Trust 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 ITEM 29. MANAGEMENT SERVICES Not applicable. ITEM 30. UNDERTAKINGS Not applicable. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all the requirements for effectiveness of this registration statement under Rule 485(b) under the Securities Act and has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, duly authorized, in Chicago, Illinois on April 10, 2002. WANGER ADVISORS TRUST By: /s/ Ralph Wanger ------------------ Ralph Wanger, President Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed below by the following persons in the capacities and on the dates indicated.
Name Title Date /s/ Fred D. Hasselbring Trustee ) - ------------------------------------ Fred D. Hasselbring ) ) /s/ P. Michael Phelps Trustee ) - ------------------------------------ P. Michael Phelps ) April 10, 2002 ) /s/ Patricia H. Werhane Trustee ) - ------------------------------------ Patricia H. Werhane ) ) /s/ Ralph Wanger Trustee and President ) - ------------------------------------ (principal executive Ralph Wanger officer) ) ) ) /s/ Bruce H. Lauer Treasurer (principal ) - ------------------------------------ financial and accounting Bruce H. Lauer officer) )
INDEX OF EXHIBITS FILED WITH THIS AMENDMENT EXHIBIT NUMBER EXHIBIT d. Investment Advisory Agreement between Wanger Advisors Trust (on behalf of Wanger U.S. Small Cap, Wanger International Small Cap, Wanger Twenty and Wanger Foreign Forty) and Liberty Wanger Asset Management, L.P., dated November 1, 2001. e. Underwriting Agreement between Wanger Advisors Trust and Liberty Funds Distributor, Inc. dated November 1, 2001. h.9. Participation Agreement between Wanger Advisors Trust, Liberty Wanger Asset Management, L.P., and American Enterprise Life Insurance Company dated August 30, 1999. h.10. Participation Agreement between Wanger Advisors Trust, Liberty Wanger Asset Management, L.P. and IDS Life Insurance Company dated August 30, 1999. h.11 Participation Agreement between Wanger Advisors Trust, Liberty Wanger Asset Management, L.P. and IDS Life Insurance Company of New York dated August 30, 1999. h.12 Form of Participation Agreement between Wanger Advisors Trust, Liberty Funds Distributor, Inc. and Sun Life Assurance Company of Canada (U.S.) dated April 1, 2002. i. Consent of Bell Boyd & Lloyd LLC. j. Consent of Independent Auditors. p.2. Code of Ethics for Non-Interested Board Members, as amended June 5, 2001. EX-99.D 4 file003.txt INVESTMENT ADVISORY AGREEMENT INVESTMENT ADVISORY AGREEMENT WANGER ADVISORS TRUST, a Massachusetts business trust registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end management investment company (the "Trust"), and LIBERTY WANGER ASSET MANAGEMENT, L.P., a Delaware limited partnership registered under the Investment Advisers Act of 1940 as an investment adviser ("Liberty WAM"), agree that: 1. ENGAGEMENT OF LIBERTY WAM. Liberty WAM shall manage the investment and reinvestment of the assets of Wanger U.S. Small Cap Advisor, Wanger International Small Cap Advisor, Wanger Twenty and Wanger Foreign Forty, series of the Trust (each, a "Fund," and collectively, the "Funds"), subject to the supervision of the Board of Trustees of the Trust, for the period and on the terms set forth in this agreement. If the Trust establishes one or more series in addition to the Funds named above with respect to which it desires to retain Liberty WAM as investment adviser hereunder, and if Liberty WAM is willing to provide such services under this agreement, the Trust and Liberty WAM may add such new series to this agreement, by written supplement to this agreement. Such supplement shall include a schedule of compensation to be paid to Liberty WAM by the Trust with respect to such series and such other modifications of the terms of this agreement with respect to such series as the Trust and Liberty WAM may agree. Upon execution of such a supplement by the Trust and Liberty WAM, that series will become a Fund hereunder and shall be subject to the provisions of this agreement to the same extent as the Funds named above, except as modified by the supplement. Liberty WAM shall give due consideration to the investment policies and restrictions and the other statements concerning the Funds in the Trust's agreement and declaration of trust, bylaws, and registration statement under the 1940 Act and the Securities Act of 1933 (the "1933 Act"), and to the provisions of the Internal Revenue Code of 1986, as amended, applicable to the Funds as regulated investment companies. Liberty WAM shall be deemed for all purposes to be an independent contractor and not an agent of the Trust or the Funds, and unless otherwise expressly provided or authorized, shall have no authority to act or represent the Trust or the Funds in any way. Liberty WAM is authorized to make the decisions to buy and sell securities, options, futures contracts and any other investments in which the Funds may invest pursuant to its investment objectives, policies and restrictions, to place the Funds' portfolio transactions with broker-dealers, and to negotiate the terms of such transactions, including brokerage commissions on brokerage transactions, on behalf of the Funds. Liberty WAM is authorized to exercise discretion with each Fund's policy concerning allocation of its portfolio brokerage, consistent with the Trust's registration statement and under the supervision of the Trust's Board of Trustees, and as permitted by law, including but not limited to Section 28(e) of the Securities Exchange Act of 1934, and in so doing shall not be required to make any reduction in its investment advisory fees. Liberty WAM may, where it deems it to be advisable, aggregate orders with other securities of the same type to be sold or purchased by one or more Funds with like orders on behalf of other clients of Liberty WAM (as well as clients of other investment advisers affiliated with Liberty WAM, in the event that Liberty WAM and such affiliated investment advisers share common trading facilities). In such event, Liberty WAM (or Liberty WAM and its affiliated advisers, as the case may be) will allocate the shares so sold or purchased, as well as the expenses incurred in the transaction, in a manner it (or it and they) consider to be equitable and fair and consistent with its (or its or their) fiduciary obligations to clients. 2. ADMINISTRATIVE SERVICES. Liberty WAM shall supervise the business and affairs of the Trust and each Fund and shall provide such services and facilities as may be required for effective administration of the Trust and Funds as are not provided by employees or other agents engaged by the Trust; provided that Liberty WAM shall not have any obligation to provide under this agreement any such services which are the subject of a separate agreement or arrangement between the Trust and Liberty WAM, any affiliate of Liberty WAM, or any third party administrator. 3. USE OF AFFILIATED COMPANIES AND SUBCONTRACTORS. In connection with the services to be provided by Liberty WAM under this agreement, Liberty WAM may, to the extent it deems appropriate, and subject to compliance with the requirements of applicable laws and regulations and upon receipt of approval of the Trustees, make use of (i) its affiliated companies and their directors, trustees, officers, and employees and (ii) subcontractors selected by Liberty WAM, provided that Liberty WAM shall supervise and remain fully responsible for the services of all such third parties in accordance with and to the extent provided by this agreement. All costs and expenses associated with services provided by any such third parties shall be borne by Liberty WAM or such parties. 4. BOOKS AND RECORDS. In compliance with the requirements of Rule 31a-3 under the 1940 Act, Liberty WAM agrees to maintain records relating to its services under this agreement, and further agrees that all records that it maintains for the Trust are the property of the Trust and to surrender promptly to the Trust any of such records upon the Trust's request; provided that Liberty WAM may at its own expense make and retain copies of any such records. Liberty WAM further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act. 5. EXPENSES TO BE PAID BY LIBERTY WAM. Liberty WAM shall furnish to the Trust, at Liberty WAM's expense, office space and all necessary office facilities, equipment and personnel for managing that portion of the Trust's business relating to the Funds. Liberty WAM shall also assume and pay all other expenses incurred by it in connection with managing the assets of the Funds, including expenses in connection with placement of securities orders, all expenses of printing and distributing the Funds' prospectus and reports to prospective investors (except to the extent such expenses are allocated to a party other than the Trust in any participation or operating agreement to which the Trust is a party), and all expenses in determination of daily price computations, portfolio accounting and related bookkeeping. 6. EXPENSES TO BE PAID BY THE TRUST. Except as otherwise provided in this agreement or any other contract to which the Trust is a party, the Trust shall pay all expenses incidental to its organization, operations and business, including, without limitation: (a) all charges of depositories, custodians, sub-custodians and other agencies for the safekeeping and servicing of its cash, securities and other property and of its transfer agents and registrars and its dividend disbursing and redemption agents, if any; (b) all charges of legal counsel and of independent auditors; (c) all compensation of trustees other than those affiliated with Liberty WAM or the Trust's administrator, if any, and all expenses incurred in connection with their services to the Trust; (d) all expenses of preparing, printing and distributing notices, proxy solicitation materials and reports to shareholders of the Funds; (e) all expenses of meetings of shareholders of the Funds; (f) all expenses of registering and maintaining the registration of the Trust under the 1940 Act and of shares of the Funds under the 1933 Act, including all expenses of preparation, filing and printing of annual or more frequent revisions of the Funds' registration statements under the 1940 Act and 1933 Act, and of supplying each then existing shareholder or beneficial owner of shares of the Funds of a copy of each revised prospectus or supplement thereto, and of supplying a copy of the statement of additional information upon request to any then existing shareholder; (g) all costs of borrowing money; (h) all expenses of publication of notices and reports to shareholders and to governmental bodies or regulatory agencies; (i) all taxes and fees payable to federal, state or other governmental agencies, domestic or foreign, and all stamp or other taxes; (j) all expenses of printing and mailing certificates for shares of a Fund; (k) all expenses of bond and insurance coverage required by law or deemed advisable by the Board; (l) all expenses of qualifying and maintaining qualification of, or providing appropriate notification of intention to sell relating to, shares of the Funds under the securities laws of the various states and other jurisdictions, and of registration and qualification of the Trust under any other laws applicable to the Trust or its business activities; (m) all fees, dues and other expenses related to membership of the Trust in any trade association or other investment company organization; and (n) any extraordinary expenses. In addition to the payment of expenses, the Trust shall also pay all brokers' commissions and other charges relating to the purchase and sale of portfolio securities for each Fund. Any expense borne by the Trust that is not solely attributable to a Fund, nor solely to any other series of shares of the Trust, shall be 2 apportioned in such manner as Liberty WAM determines is fair and appropriate, or as otherwise specified by the Board of Trustees of the Trust. 7. COMPENSATION OF LIBERTY WAM. For the services to be rendered and the expenses to be assumed and to be paid by Liberty WAM under this agreement, the Trust on behalf of the respective Funds shall pay to Liberty WAM fees accrued daily and paid monthly at the annual rates (as the percentage of the Fund's net assets) shown below: WANGER U.S. SMALL CAP 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 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 All Assets............................................. 0.95% WANGER FOREIGN FORTY All Assets............................................. 1.00% 8. LIMITATION OF EXPENSES OF THE FUND. The total expenses of Wanger U.S. Small Cap, Wanger International Small Cap, Wanger Twenty and Wanger Foreign Forty through September 29, 2002, exclusive of taxes, of interest and of extraordinary litigation expenses, but including fees paid to Liberty WAM, as a percentage of the Fund's net assets, shall not exceed 2.0%, 2.0%, 1.35% or 1.45% per annum, respectively, and Liberty WAM agrees to reimburse each Fund for any sums expended for such expenses in excess of that amount. For purposes of calculating the expenses subject to this limitation, (i) brokers' commissions and other charges relating to the purchase and sale of portfolio securities and (ii) the excess custodian costs attributable to investments in foreign securities compared to the custodian costs which would have been incurred had the investments been in domestic securities, shall not be regarded as expenses. Reimbursement, if any, shall be made by reduction of the fees otherwise payable to Liberty WAM under this agreement, no less frequently than quarterly. Notwithstanding the foregoing, the limitations on total expenses set forth above in this Section 8 shall not apply to any class of shares of a Fund established after the effective date of this agreement. 9. SERVICES OF LIBERTY WAM NOT EXCLUSIVE. The services of Liberty WAM to the Funds hereunder are not to be deemed exclusive, and Liberty WAM shall be free to render similar services to others so long as its services under this agreement are not impaired by such other activities. 10. SERVICES OTHER THAN AS MANAGER. Liberty WAM (or an affiliate of Liberty WAM) may act as broker for the Funds in connection with the purchase or sale of securities by or to the Funds if and to the extent permitted by procedures adopted from time to time by the Board of Trustees of the Trust. Such brokerage services are not within the scope of the duties of Liberty WAM under this agreement, and, within the limits permitted by law and the Board of Trustees of the Trust, Liberty WAM (or an affiliate of Liberty WAM) may receive brokerage commissions, fees or other remuneration from the Funds for such services in addition to its fee for services under this agreement. Within the limits permitted by law, Liberty WAM or an affiliate of Liberty WAM may receive compensation from the Funds for other services performed by it for the Funds which are not within the scope of the duties of Liberty WAM under this agreement. The Trust hereby authorizes any entity or person associated with Liberty WAM that is a member of a national securities exchange to effect any transaction on the exchange for the account of a Fund to the extent permitted by and in accordance with Section 11(a) of the Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder. The Trust hereby consents to the retention by such entity or person of compensation for such transactions in accordance with Rule 11a-2(T)(a)(iv). 3 11. LIMITATION OF LIABILITY OF LIBERTY WAM. To the extent permitted by applicable law, neither Liberty WAM nor any of its partners, officers, agents, employees or affiliates shall be liable to the Trust or its shareholders for any loss suffered by the Trust or its shareholders as a result of any error of judgment, or any loss arising out of any investment, or as a consequence of any other act or omission of Liberty WAM or any of its affiliates in the performance of Liberty WAM's duties under this agreement, except for liability resulting from willful misfeasance, bad faith or gross negligence on the part of Liberty WAM or such affiliate, or by reason of reckless disregard by Liberty WAM or such affiliate of the obligations and duties of Liberty WAM under this agreement. 12. USE OF "WANGER" OR "LIBERTY" NAME. The Trust may use the name "Wanger Advisors Trust" or any name using the name "Liberty" or "Wanger" or any combination or derivation of either of them only for so long as this agreement or any extension, renewal or amendment hereof remains in effect, including any similar agreement with any organization that shall remain affiliated with Liberty Financial Companies, Inc. and that shall have succeeded to the business of Liberty WAM as investment adviser. At such time as this agreement or any extension, renewal or amendment hereof, or such similar agreement, shall no longer be in effect, the Trust will (by amendment of its agreement and Declaration of Trust, if necessary) cease to use any name using the name "Liberty" or "Wanger" or any combination or derivation of either of them or any name similar thereto or any other name indicating that it is advised by or otherwise connected with Liberty WAM or with any organization which shall have succeeded to Liberty WAM's business as investment adviser. Liberty WAM's consent to the use of the name "Wanger" by the Trust shall not prevent Liberty WAM's permitting any other enterprise, including other investment companies, to use that name. 13. DURATION AND RENEWAL. This agreement shall be effective on November 1, 2001. Unless terminated as provided in Section 14, this agreement shall continue in effect until July 31, 2003, and thereafter from year to year only so long as such continuance is specifically approved at least annually (a) by a majority of those trustees who are not interested persons of the Trust or of Liberty WAM, voting in person at a meeting called for the purpose of voting on such approval, and (b) by either the Board of Trustees of the Trust or vote of the holders of a majority of the outstanding shares of each Fund. 14. TERMINATION. This agreement may be terminated at any time, without payment of any penalty, by the Board of Trustees of the Trust, or by a vote of the holders of a majority of the outstanding shares of each Fund, upon 60 days' written notice to Liberty WAM. This agreement may be terminated by Liberty WAM at any time upon 60 days' written notice to the Trust. This agreement shall terminate automatically in the event of its assignment (as defined in Section 2(a)(4) of the 1940 Act). 15. NON-LIABILITY OF TRUSTEES AND SHAREHOLDERS. A copy of the declaration of trust of the Trust is on file with the Secretary of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trust by officers of the Trust as officers and not individually. Any obligation of the Trust hereunder shall be binding only upon the assets of the Trust (or applicable series thereof) and shall not be binding upon any trustee, officer, employee, agent or shareholder of the Trust. Neither the authorization of any action by the trustees or shareholders of the Trust nor the execution of this agreement on behalf of the Trust shall impose any liability upon any trustee, officer or shareholder of the Trust. 16. AMENDMENT. This agreement may be amended in accordance with the 1940 Act. 17. NOTICES. Any notice, demand, change of address or other communication to be given in connection with this agreement shall be given in writing and shall be given by personal delivery, by registered or certified mail or by transmittal by facsimile or other electronic medium addressed to the recipient as follows (or at such other address or addresses as a party may provide to the other from time to time, by notice): 4 If to Liberty WAM: Liberty Wanger Asset Management, L.P. Attention: Bruce H. Lauer 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Telephone: 312 634-9200 Facsimile: 312 634-0016 with a copy to: If to Wanger Advisors Trust: Wanger Advisors Trust 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Telephone: 312 634-9200 Facsimile: 312 634-1919 with a copy to: Bell, Boyd & Lloyd LLC Attention: Cameron S. Avery Three First National Plaza, Suite 3300 Chicago, Illinois 60602 Telephone: 312/372-1121 Facsimile: 312/372-2098 All notices shall be conclusively deemed to have been given on the day of actual delivery thereof and, if given by registered or certified mail, on the fifth business day following the deposit thereof in the mail and, if given by facsimile or other electronic medium, on the day of transmittal thereof (upon electronic confirmation of receipt thereof). Dated as of the effective time of this agreement WANGER ADVISORS TRUST LIBERTY WANGER ASSET MANAGEMENT, L.P., By WAM Acquisition GP, Inc. Its General Partner By: /s/ Ralph Wanger By: /s/ Bruce H. Lauer ------------------------------------- ------------------------ 5 EX-99.E 5 file004.txt UNDERWRITING AGREEMENT UNDERWRITING AGREEMENT BETWEEN WANGER ADVISORS TRUST AND LIBERTY FUNDS DISTRIBUTOR, INC. THIS UNDERWRITING AGREEMENT ("Agreement"), is hereby made by and between Wanger Advisors Trust, a business trust organized and existing under the laws of the Commonwealth of Massachusetts (hereinafter called the "Fund"), and Liberty Funds Distributor, Inc., a corporation organized and existing under the laws of the Commonwealth of Massachusetts (hereinafter called the "Distributor"). WITNESSETH: WHEREAS, the Fund is an open-end investment company registered under the Investment Company Act of 1940 (the "1940 Act"), the shares of beneficial interest ("Shares") of which are registered under the Securities Act of 1933 (the "1933 Act"); and WHEREAS, the Fund has agreed to sell its Shares to certain qualified retirement plans ("Plans") and to the separate accounts ("Separate Accounts") of various insurance companies investing in the Fund pursuant to a Participation Agreement in order to fund such Separate Accounts (the "Participating Insurance Companies") and certain variable life insurance policies and variable annuity contracts (the "Contracts") issued by such insurance companies; and WHEREAS, the Distributor is a broker-dealer registered under the Securities Exchange Act of 1934 (the "1934 Act") and is a member of the National Association of Securities Dealers, Inc. (the "NASD") and the Securities Investor Protection Corporation; and WHEREAS, the Distributor is able and willing to serve as the principal underwriter for sales of the Fund's Shares to Plans and certain Separate Accounts maintained by Participating Insurance Companies in connection with the sale of the Contracts written by such entities; and WHEREAS, the Fund desires to appoint the Distributor as the principal underwriter for the Fund's Shares that the Fund will sell to Plans and to Separate Accounts for the purpose of funding Contracts and any other variable insurance products issued by Participating Insurance Companies funded through their Separate Accounts under a Participation Agreement facilitated by the Distributor, and the Distributor is willing to accept such appointment. WHEREAS, Liberty Wanger Asset Management, L.P. ("Liberty WAM"), investment adviser to the Fund, or its affiliates, may pay expenses incurred in the sale and promotion of the Fund except as provided in any 12b-1 plan adopted by the Fund; and NOW, THEREFORE, in consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties as follows: 1. The Fund hereby appoints the Distributor as a principal underwriter and distributor for the Fund, on the terms and conditions herein provided, to sell its Shares to the Separate Accounts of Participating Insurance Companies, under Participation Agreements facilitated by the Distributor, and to the Plans in jurisdictions wherein Shares of the Fund may legally be offered to the Plans and Separate Accounts for sale, it being understood that the Fund in its absolute discretion may issue or sell Shares directly to holders of Shares of the Fund upon such terms and conditions and for such consideration, if any, as it may determine, whether in connection with the distribution of subscription or purchase rights, the payment or reinvestment of dividends or distributions, or otherwise. The Distributor shall act solely as a disclosed agent on behalf of and for account of the Fund. The Fund or its transfer agent shall receive directly from the Separate Accounts or Plans all payments for purchase of Shares of the Fund, and shall pay directly to the Plans and Separate Accounts all amounts due them upon redemption of such Shares, and the Distributor shall have no liability for the payment for purchase of Shares of the Fund which it sells as agent. 2. The Distributor hereby accepts its appointment as a principal underwriter and distributor for the Fund's Shares with respect to the transactions contemplated by Section 1 above. The Distributor shall be subject to the direction and control of the Fund in the sale of its Shares and shall not be obligated to sell any specific number of Shares of any Fund. 3. The Fund will use its best efforts to keep effectively registered under the 1933 Act for sales herein contemplated such Shares as the Distributor shall reasonably request and as the Securities and Exchange Commission (the "SEC") shall permit to be so registered. 4. Notwithstanding any other provision hereof, the Fund may terminate, suspend or withdraw the offering of Shares whenever, in its sole discretion, it deems such action to be desirable. 5. Shares of the Fund shall be sold, repurchased or redeemed at the current net asset value per share as determined in the manner and at the times as set forth in the current prospectus(es) for the Fund, without addition of selling commission, sales load, or redemption charge. The Distributor will receive no compensation from the Fund for the performance of its duties hereunder, except as otherwise specifically provided. 6. The Distributor, or its agent, shall issue and deliver on behalf of the Fund such confirmations of sales to the Plans and Separate Accounts made by the Distributor as agent pursuant to this Agreement as may be required. Certificates, if any, shall be issued or Shares registered on the record books of the Fund or its transfer or similar agent in such names and denominations as the Distributor may specify. 7. The Fund will furnish to the Distributor from time to time such information with respect to the Fund and its Shares as the Distributor may reasonably request for use in connection with the sale and distribution of Shares of the Fund. The Fund will furnish to the Distributor in reasonable quantities, upon request by the Distributor, copies of annual and interim reports of the Fund. 8. The Distributor will not use, distribute, or disseminate or authorize the use, distribution, or dissemination, in connection with the sale and distribution of Shares of the Fund, any statements other than those contained in the Fund's current registration statement, except such supplemental literature or advertising as shall be lawful under federal and any state securities laws and regulations. The Distributor will furnish the Fund with copies of all material containing such statements. Neither the Distributor nor any other person is authorized by the Fund to give any information or to make any representations, other than those contained in the 2 registration statement (or related prospectus(es) or statement(s) of additional information), or any advertising or sales literature authorized by reasonable officers of the Fund. The Distributor shall cause any sales literature, advertising, or other similar materials to be filed with and reviewed by the NASD, the SEC, or any other required securities regulatory body, as appropriate. 9. The Fund shall use its best efforts to qualify and maintain the qualification of an appropriate number of Shares of each series of Shares of the Fund for sale under the federal securities laws and file any notices relating to the sale of Shares required by applicable state law or regulation as the Distributor may reasonably request. The Fund shall promptly notify the Distributor if the registration under Federal securities laws is suspended or terminated, or if any governmental body or agency institutes proceedings to terminate the offer and sale of any Fund Shares in any jurisdiction. 10. The Distributor shall order Shares of the Fund from the Fund only to the extent that it shall have received purchase orders therefor. The Distributor will not make any short sales of Shares of the Fund. 11. In selling or re-acquiring Shares of the Fund the Distributor will in all respects conform with applicable federal and state laws and the rules and regulations of the NASD. The Distributor will observe and be bound by all the provisions of the Fund's Agreement and Declaration of Trust (and of any fundamental policies adopted by the Fund pursuant to the 1940 Act, written notice of which shall have been given to the Distributor) which at the time in any way require, limit, restrict or prohibit or otherwise regulate any action on the part of the Distributor. 12. The Distributor will conform to the provisions hereof and the registration statement at the time in effect under the 1933 Act and 1940 Act with respect to the Fund and the Fund's Shares, and the Distributor shall not withhold the placing of purchase orders so as to make a profit thereby. 13. The Fund will pay or cause to be paid expenses (including the fees and disbursements of its own counsel) and all taxes and fees payable to any federal, state, or other governmental agencies on account of the registration or qualifications of securities issued by the Fund or otherwise. The Fund will also pay or cause to be paid expenses incident to the issuance of Shares of beneficial interest, such as the cost of share certificates, issue taxes, and fees of the transfer agent. The Distributor will pay all expenses in connection with its own operations. All other expenses related hereto shall be borne by the Fund or parties related to the Fund. 14. The Distributor, or its agent, shall maintain all books and records required by the 1934 Act and rules thereunder with respect to purchase, redemption, or repurchase of Fund Shares underwritten by the Distributor. All books and records required to be maintained by this paragraph shall be maintained and preserved in conformity with the requirements of Rule 17a-3 and 17a-4 under the 1934 Act, be and remain the property of the Distributor, and be at all times subject to inspection by the SEC in accordance with Section 17(a) of the 1934 Act. The Distributor shall itself maintain the books and records relating to the Distributor's general assets and liabilities or financial statements, the computation of its aggregate indebtedness or net 3 capital, employment records or any other records not specifically relating to particular purchases, redemptions, or repurchases of Fund Shares. 15. The Distributor shall be an independent contractor with respect to the Fund and nothing herein contained shall constitute the Distributor, its agents or representatives, or any employee thereof as employees of the Fund in connection with the sale of Shares of the Fund. The Distributor is responsible for its own conduct and the employment, control and conduct of its agents, representatives, or employees. The Distributor assumes full responsibility for its agents, representatives, and employees under applicable statutes and agrees to pay all applicable employer taxes. 16. The Distributor shall indemnify and hold harmless the Fund and each of its directors and officers (or former officers and directors) and each person, if any, who controls the Fund (collectively, "Indemnitees") against any loss, liability, claim, damage, or expense (including the reasonable cost of investigating and defending against the same and any counsel fees reasonably incurred in connection therewith) incurred by any Indemnitees under the 1933 Act or under common law or otherwise which arise out of or are based upon (1) any untrue or alleged untrue statement of a material fact contained in information furnished by the Distributor to the Fund for use in the Fund's registration statement, prospectus(es) and statement(s) of additional information or any supplements thereto (hereinafter collectively referred to as the "prospectus," unless otherwise noted), or annual or interim reports to shareholders, (2) any omission or alleged omission to state a material fact in connection with such information furnished by the Distributor to the Fund which is required to be stated in any of such documents or necessary to make such information not misleading, (3) any misrepresentation or omission or alleged misrepresentation or omission to state a material fact on the part of the Distributor or any agent or employee of the Distributor or any other person for whose acts the Distributor is responsible, unless such misrepresentation or omission or alleged misrepresentation or omission was made in reliance on written information furnished by the Fund, (4) any untrue or alleged untrue statement of a material fact, any omission or alleged omission to state a material fact, or any other misrepresentation or omission or alleged omission to state a material fact, on the part of the Distributor or any agent or employee of the Distributor or any other person for whose acts the Distributor is responsible, contained in or incorporated into any sales literature or similar materials prepared by the Distributor or any such agent or employee of the Distributor unless such misrepresentation or omission or alleged misrepresentation or omission was made in reliance on written information furnished by the Fund, or (5) the willful misconduct or failure to exercise reasonable care and diligence on the part of any such persons enumerated in clauses (3) and (4) of this Section 16 with respect to services rendered under this Agreement. This indemnity provision, however, shall not operate to protect any officer or Trustee of the Fund from any liability to the Fund or any shareholder by reason or willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of such officer or Trustee. In case any action shall be brought against any Indemnitee, the Distributor shall not be liable under its indemnity agreement contained in this Section with respect to any claim made against any Indemnitee, unless the Indemnitee shall have notified the Distributor in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim that shall have been served upon the Indemnitee (or after the Indemnitee shall 4 have received notice of such service on any designated agent). Failure to notify the Distributor of any such claim shall not relieve it from liability which it may have to the person against whom such action is brought otherwise than on account of its indemnity agreement contained in this Section. The Distributor will be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Distributor elects to assume the defense, such defense shall be conducted by counsel chosen by it and satisfactory to the Indemnitees which are defendants in the suit. In the event the Distributor elects to assume the defense of any such suit and retain such counsel, the Indemnitees which are defendants in the suit shall bear the fees and expenses of any additional counsel retained by them, but, in case the Distributor does not elect to assume the defense of any such suit, the Distributor will reimburse the Indemnitees which are defendants in the suit for the reasonable fees and expenses of any counsel retained by them. The Distributor shall promptly notify the Fund of the commencement of any litigation or proceedings in connection with the issuance or sale of the Shares. The Fund will indemnify and hold harmless the Distributor against any loss, liability, claim, damage or expense, to which the Distributor may become subject insofar as such loss, liability, claim, damage or expense (or action in respect thereof) arises out of or is based upon any untrue or alleged untrue statement of material fact contained in the Fund's registration statement (or related prospectus) or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse the Distributor for any legal or other expenses reasonably incurred by it in connection with investigating or defending against such loss, claim, damage, liability, or action; provided, however, that the Fund shall not be liable in any such case to the extent that any such loss, claim, damage, liability, or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Fund's prospectus in reliance upon and in conformity with written information furnished by the Distributor specifically for use in the preparation thereof. The Fund shall not indemnify the Distributor for any action where a participant in a Plan or a purchaser of the Contracts was not furnished or sent or given, at or prior to written confirmation of the sale of the Contracts, a copy of the then current prospectus for the Fund. 17. This Agreement shall become effective on November 1, 2001. After this Agreement is effective, it shall continue in effect until July 31, 2003 and from year to year thereafter, but only so long as such continuance is specifically approved in the manner required by the 1940 Act. Either party hereto may terminate this Agreement without payment of any penalty on any date by giving the other party at least six months prior written notice of such termination specifying the date fixed therefor. Without prejudice to any other remedies of the Fund, in any such event the Fund may terminate this Agreement at any time immediately upon any failure of fulfillment of any of the obligations of the Distributor hereunder. 18. This Agreement shall automatically terminate in the event of its assignment. Without limiting the generality of the foregoing, the term "assignment" when used in this Agreement, shall have the meaning specified in the 1940 Act and the rules thereunder. 5 19. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at its principal executive offices (or such other address as such other party may designate by notice under this Section 19). 20. All parties hereto are expressly put on notice of the Fund's Agreement and Declaration of Trust dated August 30, 1994, and any amendments thereto, all of which are on file with the Secretary of the Commonwealth of Massachusetts, and the limitation of shareholder and trustee liability contained therein. This Agreement has been executed by and on behalf of the Fund by its representatives as such representatives and not individually, and the obligations of the Fund hereunder are not binding upon any of the Trustees, officers, employees, agents, or shareholders of the Fund individually but are binding upon only the assets and property of the Fund. With respect to any claim by the Distributor for recovery of any liability of the Fund arising hereunder allocated to a particular series of the Fund if there be more than one (whether in accordance with the express terms hereof or otherwise), the Distributor shall have recourse solely against the assets of that Fund to satisfy such claim and shall have no recourse against the assets of any other Fund for such purpose. 21. This Agreement shall be construed in accordance with the laws of the Commonwealth of Massachusetts and the applicable provisions of the 1940 Act and rules thereunder. To the extent the applicable law of the Commonwealth of Massachusetts or any provisions herein conflict with applicable provisions of the 1940 Act or rules thereunder, the latter shall control. IN WITNESS WHEREOF, the Fund and the Distributor have each caused this Agreement to be executed as of effective date of this Agreement. WANGER ADVISORS TRUST By: _________________________________ ATTEST: Assistant Secretary LIBERTY FUNDS DISTRIBUTOR, INC. By: /s/ James Tambone ------------------------------ ATTEST: Kevin S. Jacobs, Assistant Clerk 6 EX-99.H.9 6 file005.txt PARTICIPATION AGREEMENT PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And AMERICAN ENTERPRISE LIFE INSURANCE COMPANY THIS AGREEMENT, made and entered into as of this 30th day of August, 1999, by and among WANGER ADVISORS TRUST, an open-end management investment company organized under the laws of the Commonwealth of Massachusetts (the "Fund"), LIBERTY WANGER ASSET MANAGEMENT, L.P., a limited partnership organized under the laws of Delaware (the "Adviser") and AMERICAN ENTERPRISE LIFE INSURANCE COMPANY, an Indiana life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company named in Schedule 1 to this Agreement, as may be amended from time to time, (each account referred to as the "Account"). WHEREAS, the Fund was established for the purpose of serving as the investment vehicle for (i) insurance company separate accounts supporting variable annuity contracts and variable life insurance policies to be offered by insurance companies that have entered into participation agreements with the Fund (the "Participating Insurance Companies"), and (ii) certain pension and retirement plans ("Qualified Entities") receiving favorable tax treatment under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"); and WHEREAS, beneficial interests in the Fund are divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets (each a "Portfolio" and collectively, the "Portfolios"); and WHEREAS, the Fund has received an order from the Securities & Exchange Commission (the "SEC") granting Participating Insurance Companies and their separate accounts relief from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940 (the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund and each Portfolio thereof to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies and certain qualified pension and retirement plans outside of the separate account context (the "Exemptive Order"); and WHEREAS, the Company has registered or, prior to offering for sale will register, certain variable annuity contracts and/or variable life insurance polices (the "Contracts") under the Securities Act of 1933 (the "1933 Act"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares of the Portfolios named in Schedule 2 to this Agreement, as may be amended from time to time, on behalf of the Account to fund the Contracts; NOW, THEREFORE, in consideration of their mutual promises, the parties agree as follows: ARTICLE I. SALE AND REDEMPTION OF FUND SHARES 1.1. The Fund will sell to the Company those shares of the Portfolios that each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt and acceptance by the Fund (or its agent). Shares of a particular Portfolio of the Fund will be ordered in such quantities and at such times as determined by the Company to be necessary to meet the requirements of the Contracts. The Board of Trustees of the Fund (the "Fund Board") may refuse to sell shares of any Portfolio to any person, or suspend or 2 terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Fund Board, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.2. The Fund will redeem any full or fractional shares of any Portfolio when requested by the Company on behalf of an Account at the net asset value next computed after receipt by the Fund (or its agent) of the request for redemption, as established in accordance with the provisions of the then current prospectus of a Portfolio. Notwithstanding the foregoing, (i) the Company shall not redeem Fund shares attributable to Contract owners except in the circumstances permitted in Section 1.12, and (ii) the Fund may delay redemption of Fund shares of any Portfolio to the extent permitted by the 1940 Act and any rules thereunder, or as described in a Portfolio's prospectus. 1.3. For purposes of Sections 1.1 and 1.2, the Fund hereby appoints the Company as its agent for the limited purpose of receiving purchase and redemption orders resulting from investment in and payments under the Contracts. Receipt by the Company will constitute receipt by the Fund provided that: (a) such orders are received by the Company in good order prior to the time the net asset value of each Portfolio is priced in accordance with its prospectus (such time referred to as the "Close of Trading"); and (b) the Fund receives notice of such orders by 9:00 a.m. Central Time on the next following Business Day. "Business Day" will mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. 1.4. The Company will pay for a purchase order on the same Business Day as the Fund receives notice of the purchase order in accordance with Section 1.3. 3 Payment for such purchase order will be made in Federal funds transmitted by wire to the Fund. Such wire transfer will be initiated by the Company's bank by 1:00 p.m. Central Time. The Fund will pay for a redemption order on the same Business Day as the Fund receives notice of the redemption order in accordance with Section 1.3. Payment for such redemption order will be made in Federal funds transmitted by wire to the Company or any other person properly designated in writing by the Company. The Fund reserves the right to suspend payment consistent with Section 22(e) of the Investment Company Act of 1940, as amended (the "1940 Act") and any rules thereunder. If payment for a redemption order would require a Portfolio to dispose of portfolio securities or otherwise incur additional costs, payment will be made within five days and the Fund will promptly notify the Company of such delay. The Fund will not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds by the Company; the Company alone will be responsible for such action. 1.5. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Purchase and redemption orders for Fund shares will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.6. The Fund will furnish same-day notice (by wire or telephone, followed by written confirmation) to the Company of the declaration of any income, dividends or capital gain distributions payable on each Portfolio's shares. The Company hereby elects to receive all such dividends and distributions as are payable on the Portfolio shares in the form of additional shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such dividends and distributions in cash. The Fund will notify the Company of the number of shares so issued as payment of such dividends and distributions. 4 1.7. The Fund will make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated. The Fund will use its reasonable best efforts to make such net asset value per share available by 5:30 p.m. Central Time, and will use its best efforts to make such net asset value per share available by 6:00 p.m. Central Time each Business Day. The Fund will notify the Company as soon as possible if it is determined that the net asset value per share will be available after 6:00 p.m. Central Time on any Business Day, and the Fund and the Company will mutually agree upon a final deadline for timely receipt of the net asset value on such Business Day. 1.8. Any material errors in the calculation of net asset value, dividends or capital gain information will be reported immediately upon discovery to the Company. An error will be deemed "material" based on the Fund's interpretation of the SEC's position and policy with regard to materiality, as it may be modified from time to time. If the Company is provided with materially incorrect net asset value information, the Company will be entitled to an adjustment to the number of shares purchased or redeemed to reflect the correct net asset value per share. Neither the Fund, the Adviser, nor any of their affiliates will be liable for any information provided to the Company pursuant to this Agreement which information is based on incorrect information supplied by or on behalf of the Company to the Fund or the Adviser. 1.9. The Fund agrees that its shares will be sold only to Participating Insurance Companies and their separate accounts and to Qualified Entities to the extent permitted by the Exemptive Order. No shares of any Portfolio will be sold directly to the general public. The Company agrees that Fund shares will be used only for the purposes of funding the Contracts and Accounts listed in Schedule 1, as amended from time to time. 5 1.10.The Company and the Fund acknowledge that the arrangement contemplated by this Agreement is not exclusive; the cash value of the Contracts may be invested in other investment companies, provided, however, that (i) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of the Fund underlying the Contracts specified; or (ii) the Company gives the Fund thirty days written notice of its intention to make such other investment company available as a funding vehicle for the Contracts; or (iii) such other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and the Company so informs the Fund prior to the execution of this Agreement; or (iv) the Fund consents to the use of such other investment company, such consent not to be unreasonably withheld. 1.11.The Fund agrees that all Participating Insurance Companies will have the obligations and responsibilities regarding pass-through voting and conflicts of interest corresponding to those contained in Section 3.4 and Article IV of this Agreement. 1.12.The Company may withdraw the Account's investment in the Fund or a series thereof only: (i) as necessary to facilitate Contract owner requests; (ii) upon a determination by a majority of the Fund Board, or a majority of disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of (x) some or all Contract owners or owners of other variable annuity contracts and variable life insurance policies supported by accounts investing assets attributable thereto in the Fund or (y) some or all of the Participating Insurance Companies and/or a person or plan that qualifies to purchase shares of the Fund that is investing in the Fund; or (iii) in the event that shares of another investment company are substituted for Portfolio shares in accordance with the terms of the Contracts upon the (x) requisite vote of the Contract owners having an interest in the affected 6 Portfolio and the requisite written consent of the Fund (unless otherwise required by applicable law); (y) upon issuance of an SEC exemptive order pursuant to Section 26(b) of the 1940 Act permitting such substitution; or (z) as may otherwise be permitted under applicable law. ARTICLE II. REPRESENTATIONS AND WARRANTIES 2.1. The Company represents and warrants that: (a) it is an insurance company duly organized and in good standing under applicable law; (b) it has legally and validly established or, prior to offering the Contracts for sale will legally and validly establish, each Account as a separate account under applicable state law; (c) it has registered or, prior to offering the Contracts for sale will register, to the extent necessary each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts; (d) it has filed or will file to the extent necessary the Contracts' registration statements under the 1933 Act and these registration statements will be declared effective by the SEC prior to offering the Contracts; (e) the Contracts will be filed and qualified and/or approved for sale, as applicable, under the insurance laws and regulations of the states in which the Contracts will be offered prior to the sale of Contracts in such states; 7 (f) it will amend the registration statement under the 1933 Act for the Contracts and the registration statement under the 1940 Act for the Account from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law, but in any event it will maintain a current effective Contracts' and Account's registration statement for so long as the Contracts are outstanding unless the Company has supplied the Fund with an SEC no-action letter, opinion of counsel or other evidence satisfactory to the Fund's counsel to the effect that maintaining such registration statement on a current basis is no longer required; (g) it has adopted and implement internal controls reasonably designed to prevent purchase and redemption orders received after the Close of Trading on any given Business Day from being aggegated with orders received before the Close of Trading on that Business Day; and (h) all orders that the Company transmits to the Fund or it's agent for processing as of a particular Business Day will relate only to instructions received by the Company prior to the Close of Trading on that Business Day. 2.2. The Company represents and warrants that the Contracts are intended to be treated as annuity or life insurance contracts under applicable provisions of the Internal Revenue Code, and that it will make every effort to maintain such treatment and that it will notify the Fund and the Adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.3. The Fund represents and warrants that: (a) it is duly organized and validly existing under applicable state law; 8 (b) it has registered with the SEC as an open-end management investment company under the 1940 Act; (c) Fund shares of the Portfolios offered and sold pursuant to this Agreement will be registered under the 1933 Act and duly authorized for issuance in accordance with applicable law; (d) it is registered under the 1940 Act; (e) it will amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares; (f) it believes that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future; and (g) it will qualify the shares of the Portfolios for sale in accordance with the laws of the various states to the extent deemed advisable by the Fund. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies, objectives and restrictions) complies with the insurance laws and regulations of any state. The Fund agrees that it will furnish the information required by state insurance laws so that the Company can obtain the authority needed to issue the Contracts in the various states. 9 2.4. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it reserves the right to make such payments in the future. To the extent that the Fund decides to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have its Fund Board, a majority of whom are not "interested" persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.5. The Fund represents and warrants that it believes that the Fund's investment policies are in material compliance with any investment restriction set forth in Schedule 3, including restrictions relating to the diversification requirements for variable annuity, endowment, or life insurance contracts as set forth in Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time. Without limiting the scope of the foregoing, the Fund further represents and warrants that it believes that it currently complies with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time, and any amendments or other modifications to such Section or Regulation. In the event of a breach of this representation and warranty, the Fund will take all reasonable steps: (a) to notify the Company of such breach; and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Treasury Regulation 1.817-5. 2.6. Each party represents and warrants that, as applicable, all of its directors, officers, employees, investment advisers, and other individuals/entities each having access to the funds and/or securities of the Fund are and will continue to be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than the minimal coverage as required currently by Rule 10 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid bond includes coverage for larceny and embezzlement and is issued by a reputable bonding company. ARTICLE III. OBLIGATIONS OF THE PARTIES 3.1. The Fund will prepare and be responsible for filing with the SEC and any state regulators requiring such filing all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of the Fund. The Fund will bear the costs of registration and qualification of its shares, preparation and filing of documents listed in this Section 3.1 and all taxes to which an issuer is subject on the issuance and transfer of its shares. 3.2. At the option of the Company, the Fund will either: (a) provide the Company with as many copies of the Fund's current prospectus, statement of additional information, annual report, semi-annual report and other shareholder communications, including any amendments or supplements to any of the foregoing, as the Company will reasonably request; or (b) provide the Company with a camera-ready copy, computer disk or other medium agreed to by the parties of such documents in a form suitable for printing. The Fund will bear the cost of typesetting and printing such documents and of distributing such documents to existing Contract owners. The Company will bear the cost of distributing such documents to prospective Contract owners and applicants as required. 3.3. The Fund, at its expense, either will: (a) distribute its proxy materials directly to the appropriate Contract owners; or 11 (b) provide the Company or its mailing agent with copies of its proxy materials in such quantity as the Company will reasonably require and the Company will distribute the materials to existing Contract owners and will bill the Fund for the reasonable cost of such distribution. The Fund will bear the cost of tabulation of proxy votes. 3.4. With respect to any matter put to vote of the holders of Fund shares or Portfolio shares ("Voting Shares"), if and to the extent required by law the Company will: (a) provide for the solicitation of voting instructions from Contract owners; (b) vote Voting Shares of each Portfolio held in the Account in accordance with instructions or proxies timely received from Contract owners; and (c) vote Voting Shares of the Portfolios held in the Account for which no timely instructions have been received, in the same proportion as Voting Shares of such Portfolio for which instructions have been received from the Company's Contract owners; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. The Company will be responsible for assuring that voting privileges for the Account are determined in a manner consistent with the provisions set forth above. 3.5. The Company will prepare and be responsible for filing with the SEC and any state regulators requiring such filing all shareholder reports, notices, 12 prospectuses and statements of additional information of the Contracts. The Company will bear the cost of registration and qualification of the Contracts and preparation and filing of documents listed in this Section 3.5. The Company also will bear the cost of typesetting, printing and distributing the documents listed in this Section 3.5 to existing and prospective Contract owners. 3.6. The Company will furnish, or will cause to be furnished, to the Fund or the Adviser, each piece of sales literature or other promotional material in which the Fund or the Adviser is named, at least ten (10) Business Days prior to its use. No such material will be used if the Fund or the Adviser reasonably objects to such use within five (5) Business Days after receipt of such material. 3.7. The Company will not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement, prospectus or statement of additional information for Fund shares, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in published reports for the Fund which are in the public domain or approved by the Fund or the Adviser for distribution, or in sales literature or other material provided by the Fund or by the Adviser, except with the written permission of the Fund or the Adviser. The Fund and the Adviser agree to respond to any request for approval on a prompt and timely basis. Nothing in this Section 3.7 will be construed as preventing the Company or its employees or agents from giving advice on investment in the Fund. 13 3.8. The Adviser will furnish, or will cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company or its separate account is named, at least ten (10) Business Days prior to its use. No such material will be used if the Company reasonably objects to such use within five (5) Business Days after receipt of such material. 3.9. The Fund and the Adviser will not give any information or make any representations or statements on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement, prospectus or statement of additional information for the Contracts, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in published reports for each Account or the Contracts which are in the public domain or approved by the Company for distribution to Contract owners, or in sales literature or other material provided by the Company, except with the written permission of the Company. The Company agrees to respond to any request for approval on a prompt and timely basis. 3.10. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, proxy statements, and all amendments to any of the above, that relate to the Fund or its shares, promptly after the filing of such document with the SEC. 3.11. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, solicitations for voting instructions, and all amendments to any of the above, that relate to the Contracts or each Account, promptly after the filing of such document with the SEC. 14 3.12. For purposes of this Article III, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical), radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media, (e.g., on-line networks such as the Internet or other electronic messages), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials and any other material constituting sales literature or advertising under the rules of the National Association of Securities Dealers, Inc. (the "NASD"), the 1933 Act or the 1940 Act. 3.13. The Fund and the Adviser hereby consent to the Company's use of the name Wanger Advisors Trust and the names of the Portfolios listed on Schedule 2, as may be amended from time to time, in connection with marketing the Contracts, subject to the terms of Sections 3.6 and 3.7 of this Agreement. Such consent will terminate with the termination of this Agreement. 3.14. The Adviser will be responsible for calculating the performance information for the Fund. The Company will be responsible for calculating the performance information for the Contracts. The Adviser will be liable to the Company for any material mistakes it makes in calculating the performance information for the Fund which cause losses to the Company. The Company will be liable to the Adviser for any material mistakes it makes in calculating the performance information for the Contracts that cause losses to the 15 Adviser. Each party will be liable for any material mistakes it makes in reproducing the performance information for Contracts or the Fund, as appropriate. The Fund and the Adviser agree to provide the Company with performance information for the Fund on a timely basis to enable the Company to calculate performance information for the Contracts in accordance with applicable state and federal law. ARTICLE IV. POTENTIAL CONFLICTS 4.1. The Fund Board will monitor the Fund for the existence of any irreconcilable material conflict among the interests of the contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by Participating Insurance Companies or by variable annuity and variable life insurance contract owners; (f) a decision by an insurer to disregard the voting instructions of contract owners; or (g) if applicable, a decision by a Qualified Entity to disregard the voting instructions of a person participating in such entity. The Fund Board will promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. A majority of the Fund Board will consist of persons who are not "interested" persons of the Fund. 4.2. The Company will report any potential or existing conflicts of which it is aware to the Fund Board. The Company agrees to assist the Fund Board in carrying out its responsibilities, as delineated in the Exemptive Order, by 16 providing the Fund Board with all information reasonably necessary for the Fund Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Fund Board whenever Contract owner voting instructions are to be disregarded. The Fund Board will record in its minutes, or other appropriate records, all reports received by it and all action with regard to a conflict. 4.3. If it is determined by a majority of the Fund Board, or a majority of its disinterested directors, that an irreconcilable material conflict exists, the Company and other Participating Insurance Companies will, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested directors), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (a) withdrawing the assets allocable to some or all of the Accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., variable annuity Contract owners or variable life insurance contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 4.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions, and such disregard of voting instructions could conflict with the majority of contract owner voting instructions, and the Company's judgment represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's 17 investment in the Fund and terminate this Agreement with respect to such Account; provided, however, that such withdrawal and termination will be limited to the extent required by the foregoing irreconcilable material conflict as determined by a majority of the disinterested directors of the Fund Board. No charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice to the Company that this provision is being implemented. Until the end of such six-month period the Adviser and Fund will, to the extent permitted by law and any exemptive relief previously granted to the Fund, continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 4.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state insurance regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account; provided, however, that such withdrawal and termination will be limited to the extent required by the foregoing irreconcilable material conflict as determined by a majority of the disinterested directors of the Fund Board. No charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice to the Company that this provision is being implemented. Until the end of such six-month period the Adviser and Fund will, to the extent permitted by law and any exemptive relief previously granted to the Fund, continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 4.6. For purposes of Sections 4.3 through 4.6 of this Agreement, a majority of the disinterested members of the Fund Board will determine whether any proposed action adequately remedies any irreconcilable material conflict, but 18 in no event will the Fund or the Adviser be required to establish a new funding medium for the Contracts. The Company will not be required by this Article IV to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners affected by the irreconcilable material conflict. 4.7. The Company will at least annually submit to the Fund Board such reports, materials or data as the Fund Board may reasonably request so that the Fund Board may fully carry out the duties imposed upon it as delineated in the Exemptive Order, and said reports, materials and data will be submitted more frequently if deemed appropriate by the Fund Board. 4.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then: (a) the Fund and/or the Company, as appropriate, will take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 4.1, 4.2, 4.3, 4.4, and 4.5 of this Agreement will continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 4.9. The Company, or any affiliate, will maintain at its home office, available to the SEC (a) a list of its officers, directors and employees who participate directly in the management or administration of any Accounts and/or (b) a list of its agents who, as registered representatives, offer and sell Contracts. ARTICLE V. INDEMNIFICATION 19 5.1. Indemnification By The Company (a) The Company agrees to indemnify and hold harmless the Fund and each person, if any, who controls or is associated with the Fund within the meaning of such terms under the federal securities laws (but not any Participating Insurance Companies or Qualified Entities) and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 5.1) against any and all losses, claims, expenses, damages, liabilities, joint or several (including amounts paid in settlement with the written consent of the Company) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based on any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Contracts or contained in the Contracts or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of the Fund for use in the registration statement, prospectus or 20 statement of additional information for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in the Fund registration statement, prospectus, statement of additional information or sales literature or other promotional material of the Fund (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Fund in writing by or on behalf of the Company or persons under its control; or (3) arise out of or are based on any wrongful conduct of, or violation of applicable federal or state law by, the Company or persons under its control or subject to its authorization or supervision with respect to the purchase of Fund shares or the sale, marketing or distribution of the Contracts; or (4) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; (including but not limited to a failure, whether unintentional or in good faith or otherwise, to comply with the provisions of Section 2.2 of the Agreement, unless such failure is a result of the Fund's material breach of the Agreement); 21 (5) arise out of any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company or persons under its control or subject to its authorization or supervision; (6) arise out of any failure by the Company to prevent orders received after the Close of Trading on a Business Day from being aggregated and communicated to the Fund or it's agent with orders received before the Close of Trading on that Business Day; or (7) arise out of any errors within the reasonable control of the Company that result in late transmission of orders to the Fund or it's agent; except to the extent provided in Sections 5.1(b) and 5.3 hereof. This indemnification will be in addition to any liability that the Company otherwise may have. (b) No party will be entitled to indemnification under Section 5.1(a) if such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties promptly will notify the Company of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 22 5.2. Indemnification By The Fund (a) The Fund agrees to indemnify and hold harmless the Company and each person, if any, who controls or is associated with the Company within the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 5.2) against any and all losses, claims, expenses, damages, liabilities, joint or several (including amounts paid in settlement with the written consent of the Fund) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based on any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Fund or other information on the Fund provided in writing to the Company (or any amendment or supplement to any of the foregoing), or arise out of or are based on the omission or alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Fund in writing by or on behalf of the Company for use in the registration statement, prospectus or statement of additional information for the Fund or 23 in sales literature of the Fund (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in the Contract registration statement, prospectus or statement of additional information or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of the Fund or persons under its control; or (3) arise out of or are based on any wrongful conduct of, or violation of applicable federal and state law by, the Fund or persons under its control or subject to its authorization with respect to the sale of Fund shares; or (4) arise as a result of any failure by the Fund or persons under its control or subject to its authorization to provide the services and furnish the materials under the terms of this Agreement including, but not limited to, a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements and procedures related thereto specified in Section 2.5 of this Agreement or any material errors in or untimely calculation or reporting of the daily net asset value per share or dividend or capital gain distribution rate (referred to in this 24 Section 5.2(a)(4) as an "error"); provided, that the foregoing will not apply where such error is the result of incorrect information supplied by or on behalf of the Company to the Fund, and will be limited to (i) reasonable administrative costs necessary to correct such error, provided that the Fund has approved such costs and the method in which the error is to be corrected, which approval will not be unreasonably withheld, and (ii) amounts which the Company has paid out of its own resources to make Contract owners whole as a result of such error; or (5) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement, or arise out of or result from any other material breach of this Agreement by the Fund or Adviser or persons under their respective control or subject to their authorization or supervision; except to the extent provided in Sections 5.2(b) and 5.3 hereof. (b) No party will be entitled to indemnification under Section 5.2(a) if such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties will promptly notify and the Fund of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Contracts or the operation of the Account. 25 5.3. Indemnification Procedure Any person obligated to provide indemnification under this Article V ("Indemnifying Party" for the purpose of this Section 5.3) will not be liable under the indemnification provisions of this Article V with respect to any claim made against a party entitled to indemnification under this Article V ("Indemnified Party" for the purpose of this Section 5.3) unless such Indemnified Party will have notified the Indemnifying Party in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim will have been served upon such Indemnified Party (or after such party will have received notice of such service on any designated agent), but failure to notify the Indemnifying Party of any such claim will not relieve the Indemnifying Party from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of the indemnification provision of this Article V, except to the extent that the failure to notify results in the failure of actual notice to the Indemnifying Party and such Indemnifying Party is damaged solely as a result of failure to give such notice. In case any such action is brought against the Indemnified Party, the Indemnifying Party will be entitled to participate, at its own expense, in the defense thereof. The Indemnifying Party also will be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Indemnifying Party to the Indemnified Party of the Indemnifying Party's election to assume the defense thereof, the Indemnified Party will bear the fees and expenses of any additional counsel retained by it, and the Indemnifying Party will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation, unless: (a) the Indemnifying Party and the Indemnified Party will have mutually agreed to the retention of such counsel; or (b) the named parties to any such proceeding (including any impleaded parties) 26 include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Indemnifying Party will not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there is a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement will be entitled to the benefits of the indemnification contained in this Article V. The indemnification provisions contained in this Article V will survive any termination of this Agreement. 5.4 Limitation of Liability Except as expressly stated herein, as between the parties, in no event will any party to this Agreement be responsible to any other party for any incidental, indirect, consequential, punitive or exemplary damages of any kind arising from this Agreement, including without limitation, lost revenues, loss of profits or loss of business. 5.5 Arbitration Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, will be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules and Title 9 of the U.S. Code. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The number of arbitrators will be three, one of whom will be appointed by the Company or an affiliate; one of whom will be appointed by the Fund and/or the Adviser or an affiliate; and the third of whom will be selected by mutual agreement, if possible, within 30 days of the selection of the second arbitrator 27 and thereafter by the administering authority. The place of arbitration will be Minneapolis, Minnesota. The arbitrators will have no authority to award punitive damages or any other damages not measured by the prevailing party's actual damages, and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of this Agreement. Any party may make an application to the arbitrators seeking injunctive relief to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved. Any party may apply to any court having jurisdiction hereof and seek injunctive relief in order to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved. ARTICLE VI. APPLICABLE LAW 6.1. This Agreement will be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Minnesota. 6.2. This Agreement will be subject to the provisions of the 1933 Act, the Securities Exchange Act of 1934 and the 1940 Act, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to, the Exemptive Order) and the terms hereof will be interpreted and construed in accordance therewith. 28 ARTICLE VII. TERMINATION 7.1. This Agreement will terminate: (a) at the option of any party, with or without cause, with respect to some or all of the Portfolios, upon sixty (60) days' advance written notice to the other party or, if the Company is required to obtain exemptive relief from the SEC to effect a substitution of some or all of the Portfolios, such later date as such exemptive order is received by the Company, unless otherwise agreed to in writing by the parties; (b) upon 30 days' notice by the Company to the Fund if shares of the Portfolio are not reasonably available to meet the requirements of the Contracts as determined in good faith by the Company, and the Fund, after receiving written notice from the Company of such non-availability, fails to make available a sufficient number of Fund shares to meet the requirements of the Contracts within five days after receipt thereof; or (c) at the option of the Company, upon receipt of the Company's written notice by the Fund, with respect to any Portfolio in the event any of the Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by Company; or (d) upon 30 days' notice by the Fund to the Company upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the 29 sale of the Contracts, the administration of the Contracts, the operation of the Account, or the purchase of the Fund shares, provided that the Fund determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Company's ability to perform its obligations under this Agreement; or (e) upon 30 days' notice by the Company to the Fund, upon institution of formal proceedings against the Fund or the Adviser by the NASD, the SEC, or any state securities or insurance department or any other regulatory body, regarding the Fund's or the Adviser's duties under this Agreement or related to the sale of Fund shares or the administration of the Fund, provided that the Company determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Fund's ability to perform its obligations under this Agreement; or (f) upon 30 days' notice by the Company if the Fund ceases to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, or under any successor or similar provision, or if the Company reasonably and in good faith believes, based on an opinion of counsel reasonably satisfactory to the Fund, that the Fund may fail to so qualify and the Fund, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure; or (g) upon 30 days' notice by the Company to the Fund if the Fund fails to meet the diversification requirements specified in Article II hereof and the Fund fails to provide reasonable assurance that it will take action to cure or correct such failure; or (h) upon 30 days' written notice by one party to another upon the other party's material breach of any provision of this Agreement; or 30 (i) upon 60 days' written notice by the Company, if the Company determines in its sole judgment exercised in good faith, that the Fund has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Company; or (j) upon 60 days' written notice by the Fund to the Company, if the Fund determines in its sole judgment exercised in good faith, that the Company has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Fund; or (k) at the option of the Company or the Fund upon receipt of any necessary regulatory approvals and/or the vote of the Contract owners having an interest in the Account (or any subaccount) to substitute the shares of another investment company for the corresponding Portfolio shares of the Fund in accordance with the terms of the Contracts for which those Portfolio shares had been selected to serve as the underlying investment media. The Company will give sixty (60) days' prior written notice to the Fund of the date of any proposed vote or other action taken to replace the Fund's shares; or (l) at the option of the Company or the Fund upon a determination by a majority of the Fund Board, or a majority of the disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of: (i) all contract owners of variable insurance products of all separate accounts; or (ii) the interests of the Participating Insurance 31 Companies investing in the Fund as set forth in Article IV of this Agreement; or (m) at the option of the Fund in the event any of the Contracts are not issued or sold in accordance with applicable federal and/or state law. Termination will be effective immediately upon such occurrence without notice. (n) upon 30 day's notice by the Fund to the Company if the Contracts cease to qualify as annuity contracts under the Internal Revenue Code, or the Fund reasonably and in good faith believes, based on an opinion of counsel reasonably satisfactory to the Company, that the Contracts may fail to so qualify. 7.2. Notwithstanding any termination of this Agreement, the Fund and the Adviser will, at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, the owners of the Existing Contracts will be permitted to reallocate investments in the Portfolios (as in effect on such date), redeem investments in the Portfolios and/or invest in the Portfolios upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 7.2 will not apply to any terminations under Article IV and the effect of such Article IV terminations will be governed by Article IV of this Agreement. 7.3. The provisions of Article V will survive the termination of this Agreement and as long as shares of the Fund are held under Existing Contracts in accordance with Section 7.2, the provisions of this Agreement will survive the termination of this Agreement with respect to those Existing Contracts. 32 ARTICLE VIII. NOTICES Any notice will be deemed duly given when sent by registered or certified mail (or other method agreed to by the parties) to each other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other parties. If to the Company: American Enterprise Life Insurance Company 1765 AXP Financial Center Minneapolis, MN 55474 ATTN: Executive Vice President, Annuities 33 With a copy to: American Express Financial Advisors Inc. 50607 AXP Financial Center Minneapolis, MN 55474 ATTN: General Counsel's Office If to the Fund or the Adviser: Bruce H. Lauer 227 W. Monroe St., Suite 3000 Chicago, Illinois 60606 With a copy to: Cameron S. Avery Bell, Boyd & Lloyd LLC 70 W. Madison St., Suite 3300 Chicago, Illinois 60602 ARTICLE IX. MISCELLANEOUS 9.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the directors, trustees, officers, partners, employees, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 9.2. Notwithstanding anything to the contrary contained in this Agreement, in addition to and not in lieu of other provisions in this Agreement: (a) "Confidential Information" includes but is not limited to all proprietary and confidential information of the Company and its subsidiaries, affiliates and licensees (collectively the "Protected Parties" 34 for purposes of this Section 9.2), including without limitation all information regarding the customers of the Protected Parties; or the accounts, account numbers, names, addresses, social security numbers or any other personal identifier of such customers; or any information derived therefrom. (b) Neither the Fund nor the Adviser may use or disclose Confidential Information for any purpose other than to carry out the purpose for which Confidential Information was provided to Fund and/or Adviser as set forth in the Agreement; and the Fund and the Adviser agree to cause all their employees, agents and representatives, or any other party to whom the Fund and/or the Adviser may provide access to or disclose Confidential Information to limit the use and disclosure of Confidential Information to that purpose. (c) The Fund and the Adviser acknowledge that all computer programs and procedures or other information developed or used by the Protected Parties or any of their employees or agents in connection with the Company's performance of its duties under this Agreement are the valuable property of the Protected Parties. (d) The Fund and the Adviser agree to implement appropriate measures designed to ensure the security and confidentiality of Confidential Information, to protect such information against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of, Confidential Information that could result in substantial harm or inconvenience to any customer of the Protected Parties; the Fund and the Adviser further agree to cause all their agents, representatives or subcontractors of, or any other party to whom the Fund and/or the Adviser may provide access to or disclose Confidential Information to 35 implement appropriate measures designed to meet the objectives set forth in this Section 9.2. (e) The Fund and the Adviser acknowledge that any breach of the agreements in this Section 9.2 would result in immediate and irreparable harm to the Protected Parties for which there would be no adequate remedy at law and agree that in the event of such a breach, the Protected Parties will be entitled to equitable relief by way of temporary and permanent injunctions, as well as such other relief as any court of competent jurisdiction deems appropriate. 9.3. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 9.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. 9.5. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement will not be affected thereby. 9.6. This Agreement will not be assigned by any party hereto without the prior written consent of all the parties. 9.7. Each party to this Agreement will cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and will permit each other and such authorities reasonable access to its books and records in connection with 36 any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 9.8. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or board action, as applicable, by such party and when so executed and delivered this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 9.9. The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect changes in or relating to the Contracts, the Accounts or the Portfolios of the Fund or other applicable terms of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized representative as of the date specified above.
WANGER ADVISORS TRUST LIBERTY WANGER ASSET MANAGEMENT, L.P. by its General Partner, WAM Acquisition GP, Inc. By: /s/ Bruce H. Lauer By: /s/ Bruce H. Lauer ------------------------------------------- -------------------------------- Name: Bruce H. Lauer Name: Bruce H. Lauer Title: Vice President, Secretary and Treasurer Title: Senior Vice President and Secretary AMERICAN ENTERPRISE LIFE INSURANCE COMPANY ATTEST: By: /s/ Gumer C. Alvero By: /s/ Mary Ellyn Minenko -------------------------------------------- --------------------------------- Name: Gumer C. Alvero Name: Mary Ellyn Minenko Title: Executive Vice President, Annuities Title: Assistant Secretary
37 SCHEDULE 1 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And AMERICAN ENTERPRISE LIFE INSURANCE COMPANY The following Accounts of American Enterprise Life Insurance Company are permitted in accordance with the provisions of this Agreement to invest in Portfolios of the Fund shown in Schedule 2: American Enterprise Variable Annuity Account American Enterprise Variable Life Account 38 SCHEDULE 2 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And AMERICAN ENTERPRISE LIFE INSURANCE COMPANY The Accounts shown on Schedule 1 may invest in the following Portfolios: Wanger International Small Cap Wanger U.S. Small Cap 39 SCHEDULE 3 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And AMERICAN ENTERPRISE LIFE INSURANCE COMPANY The following investment restrictions apply to the Fund's investment policies: 40 EX-99.H.10 7 file006.txt PARTICIPATION AGREEMENT PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And IDS LIFE INSURANCE COMPANY THIS AGREEMENT, made and entered into as of this 30th day of August, 1999, by and among WANGER ADVISORS TRUST, an open-end management investment company organized under the laws of the Commonwealth of Massachusetts (the "Fund"), LIBERTY WANGER ASSET MANAGEMENT, L.P., a limited partnership organized under the laws of Delaware (the "Adviser") and IDS LIFE INSURANCE COMPANY, a Minnesota life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company named in Schedule 1 to this Agreement, as may be amended from time to time, (each account referred to as the "Account"). WHEREAS, the Fund was established for the purpose of serving as the investment vehicle for (i) insurance company separate accounts supporting variable annuity contracts and variable life insurance policies to be offered by insurance companies that have entered into participation agreements with the Fund (the "Participating Insurance Companies"), and (ii) certain pension and retirement plans ("Qualified Entities") receiving favorable tax treatment under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"); and WHEREAS, beneficial interests in the Fund are divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets (each a "Portfolio" and collectively, the "Portfolios"); and WHEREAS, the Fund has received an order from the Securities & Exchange Commission (the "SEC") granting Participating Insurance Companies and their separate accounts relief from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940 (the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund and each Portfolio thereof to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies and certain qualified pension and retirement plans outside of the separate account context (the "Exemptive Order"); and WHEREAS, the Company has registered or, prior to offering for sale will register, certain variable annuity contracts and/or variable life insurance polices (the "Contracts") under the Securities Act of 1933 (the "1933 Act"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares of the Portfolios named in Schedule 2 to this Agreement, as may be amended from time to time, on behalf of the Account to fund the Contracts; NOW, THEREFORE, in consideration of their mutual promises, the parties agree as follows: ARTICLE I. SALE AND REDEMPTION OF FUND SHARES 1.1. The Fund will sell to the Company those shares of the Portfolios that each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt and acceptance by the Fund (or its agent). Shares of a particular Portfolio of the Fund will be ordered in such quantities and at such times as determined by the Company to be necessary to meet the requirements of the Contracts. The Board of Trustees of the Fund (the "Fund Board") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Fund Board, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.2. The Fund will redeem any full or fractional shares of any Portfolio when requested by the Company on behalf of an Account at the net asset value next computed after receipt by the Fund (or its agent) of the request for redemption, as established in accordance with the provisions of the then current prospectus of a Portfolio. Notwithstanding the foregoing, (i) the Company shall not redeem Fund shares attributable to Contract owners except in the circumstances permitted in Section 1.12, and (ii) the Fund may delay redemption of Fund shares of any Portfolio to the extent permitted by the 1940 Act and any rules thereunder, or as described in a Portfolio's prospectus. 1.3. For purposes of Sections 1.1 and 1.2, the Fund hereby appoints the Company as its agent for the limited purpose of receiving purchase and redemption orders resulting from investment in and payments under the Contracts. Receipt by the Company will constitute receipt by the Fund provided that: (a) such orders are received by the Company in good order prior to the time the net asset value of each Portfolio is priced in accordance with its prospectus (such time referred to as the "Close of Trading"); and (b) the Fund receives notice of such orders by 9:00 a.m. Central Time on the next following Business Day. "Business Day" will mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. 1.4. The Company will pay for a purchase order on the same Business Day as the Fund receives notice of the purchase order in accordance with Section 1.3. Payment for such purchase order will be made in Federal funds transmitted by wire to the Fund. Such wire transfer will be initiated by the Company's bank by 1:00 p.m. Central Time. The Fund will pay for a redemption order on the same Business Day as the Fund receives notice of the redemption order in accordance with Section 1.3. Payment for such redemption order will be made in Federal funds transmitted by wire to the Company or any other person properly designated in writing by the Company. The Fund reserves the right to suspend payment consistent with Section 22(e) of the Investment Company Act of 1940, as amended (the "1940 Act") and any rules thereunder. If payment for a redemption order would require a Portfolio to dispose of portfolio securities or otherwise incur additional costs, payment will be made within five days and the Fund will promptly notify the Company of such delay. The Fund will not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds by the Company; the Company alone will be responsible for such action. 1.5. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Purchase and redemption orders for Fund shares will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.6. The Fund will furnish same-day notice (by wire or telephone, followed by written confirmation) to the Company of the declaration of any income, dividends or capital gain distributions payable on each Portfolio's shares. The Company hereby elects to receive all such dividends and distributions as are payable on the Portfolio shares in the form of additional shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such dividends and distributions in cash. The Fund will notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.7. The Fund will make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated. The Fund will use its reasonable best efforts to make such net asset value per share available by 5:30 p.m. Central Time, and will use its best efforts to make such net asset value per share available by 6:00 p.m. Central Time each Business Day. The Fund will notify the Company as soon as possible if it is determined that the net asset value per share will be available after 6:00 p.m. Central Time on any Business Day, and the Fund and the Company will mutually agree upon a final deadline for timely receipt of the net asset value on such Business Day. 1.8. Any material errors in the calculation of net asset value, dividends or capital gain information will be reported immediately upon discovery to the Company. An error will be deemed "material" based on the Fund's interpretation of the SEC's position and policy with regard to materiality, as it may be modified from time to time. If the Company is provided with materially incorrect net asset value information, the Company will be entitled to an adjustment to the number of shares purchased or redeemed to reflect the correct net asset value per share. Neither the Fund, the Adviser, nor any of their affiliates will be liable for any information provided to the Company pursuant to this Agreement which information is based on incorrect information supplied by or on behalf of the Company to the Fund or the Adviser. 1.9. The Fund agrees that its shares will be sold only to Participating Insurance Companies and their separate accounts and to Qualified Entities to the extent permitted by the Exemptive Order. No shares of any Portfolio will be sold directly to the general public. The Company agrees that Fund shares will be used only for the purposes of funding the Contracts and Accounts listed in Schedule 1, as amended from time to time. 1.10. The Company and the Fund acknowledge that the arrangement contemplated by this Agreement is not exclusive; the cash value of the Contracts may be invested in other investment companies, provided, however, that (i) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of the Fund underlying the Contracts specified; or (ii) the Company gives the Fund thirty days written notice of its intention to make such other investment company available as a funding vehicle for the Contracts; or (iii) such other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and the Company so informs the Fund prior to the execution of this Agreement; or (iv) the Fund consents to the use of such other investment company, such consent not to be unreasonably withheld. 1.11. The Fund agrees that all Participating Insurance Companies will have the obligations and responsibilities regarding pass-through voting and conflicts of interest corresponding to those contained in Section 3.4 and Article IV of this Agreement. 1.12. The Company may withdraw the Account's investment in the Fund or a series thereof only: (i) as necessary to facilitate Contract owner requests; (ii) upon a determination by a majority of the Fund Board, or a majority of disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of (x) some or all Contract owners or owners of other variable annuity contracts and variable life insurance policies supported by accounts investing assets attributable thereto in the Fund or (y) some or all of the Participating Insurance Companies and/or a person or plan that qualifies to purchase shares of the Fund that is investing in the Fund; or (iii) in the event that shares of another investment company are substituted for Portfolio shares in accordance with the terms of the Contracts upon the (x) requisite vote of the Contract owners having an interest in the affected Portfolio and the requisite written consent of the Fund (unless otherwise required by applicable law); (y) upon issuance of an SEC exemptive order pursuant to Section 26(b) of the 1940 Act permitting such substitution; or (z) as may otherwise be permitted under applicable law. ARTICLE II. REPRESENTATIONS AND WARRANTIES 2.1. The Company represents and warrants that: (a) it is an insurance company duly organized and in good standing under applicable law; (b) it has legally and validly established or, prior to offering the Contracts for sale will legally and validly establish, each Account as a separate account under applicable state law; (c) it has registered or, prior to offering the Contracts for sale will register, to the extent necessary each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts; (d) it has filed or will file to the extent necessary the Contracts' registration statements under the 1933 Act and these registration statements will be declared effective by the SEC prior to offering the Contracts; (e) the Contracts will be filed and qualified and/or approved for sale, as applicable, under the insurance laws and regulations of the states in which the Contracts will be offered prior to the sale of Contracts in such states; (f) it will amend the registration statement under the 1933 Act for the Contracts and the registration statement under the 1940 Act for the Account from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law, but in any event it will maintain a current effective Contracts' and Account's registration statement for so long as the Contracts are outstanding unless the Company has supplied the Fund with an SEC no-action letter, opinion of counsel or other evidence satisfactory to the Fund's counsel to the effect that maintaining such registration statement on a current basis is no longer required; (g) it has adopted and implement internal controls reasonably designed to prevent purchase and redemption orders received after the Close of Trading on any given Business Day from being aggegated with orders received before the Close of Trading on that Business Day; and (h) all orders that the Company transmits to the Fund or it's agent for processing as of a particular Business Day will relate only to instructions received by the Company prior to the Close of Trading on that Business Day. 2.2. The Company represents and warrants that the Contracts are intended to be treated as annuity or life insurance contracts under applicable provisions of the Internal Revenue Code, and that it will make every effort to maintain such treatment and that it will notify the Fund and the Adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.3. The Fund represents and warrants that: (a) it is duly organized and validly existing under applicable state law; (b) it has registered with the SEC as an open-end management investment company under the 1940 Act; (c) Fund shares of the Portfolios offered and sold pursuant to this Agreement will be registered under the 1933 Act and duly authorized for issuance in accordance with applicable law; (d) it is registered under the 1940 Act; (e) it will amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares; (f) it believes that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future; and (g) it will qualify the shares of the Portfolios for sale in accordance with the laws of the various states to the extent deemed advisable by the Fund. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies, objectives and restrictions) complies with the insurance laws and regulations of any state. The Fund agrees that it will furnish the information required by state insurance laws so that the Company can obtain the authority needed to issue the Contracts in the various states. 2.4. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it reserves the right to make such payments in the future. To the extent that the Fund decides to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have its Fund Board, a majority of whom are not "interested" persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.5. The Fund represents and warrants that it believes that the Fund's investment policies are in material compliance with any investment restriction set forth in Schedule 3, including restrictions relating to the diversification requirements for variable annuity, endowment, or life insurance contracts as set forth in Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time. Without limiting the scope of the foregoing, the Fund further represents and warrants that it believes that it currently complies with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time, and any amendments or other modifications to such Section or Regulation. In the event of a breach of this representation and warranty, the Fund will take all reasonable steps: (a) to notify the Company of such breach; and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Treasury Regulation 1.817-5. 2.6. Each party represents and warrants that, as applicable, all of its directors, officers, employees, investment advisers, and other individuals/entities each having access to the funds and/or securities of the Fund are and will continue to be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid bond includes coverage for larceny and embezzlement and is issued by a reputable bonding company. ARTICLE III. OBLIGATIONS OF THE PARTIES 3.1. The Fund will prepare and be responsible for filing with the SEC and any state regulators requiring such filing all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of the Fund. The Fund will bear the costs of registration and qualification of its shares, preparation and filing of documents listed in this Section 3.1 and all taxes to which an issuer is subject on the issuance and transfer of its shares. 3.2. At the option of the Company, the Fund will either: (a) provide the Company with as many copies of the Fund's current prospectus, statement of additional information, annual report, semi-annual report and other shareholder communications, including any amendments or supplements to any of the foregoing, as the Company will reasonably request; or (b) provide the Company with a camera-ready copy, computer disk or other medium agreed to by the parties of such documents in a form suitable for printing. The Fund will bear the cost of typesetting and printing such documents and of distributing such documents to existing Contract owners. The Company will bear the cost of distributing such documents to prospective Contract owners and applicants as required. 3.3. The Fund, at its expense, either will: (a) distribute its proxy materials directly to the appropriate Contract owners; or (b) provide the Company or its mailing agent with copies of its proxy materials in such quantity as the Company will reasonably require and the Company will distribute the materials to existing Contract owners and will bill the Fund for the reasonable cost of such distribution. The Fund will bear the cost of tabulation of proxy votes. 3.4. With respect to any matter put to vote of the holders of Fund shares or Portfolio shares ("Voting Shares"), if and to the extent required by law the Company will: (a) provide for the solicitation of voting instructions from Contract owners; (b) vote Voting Shares of each Portfolio held in the Account in accordance with instructions or proxies timely received from Contract owners; and (c) vote Voting Shares of the Portfolios held in the Account for which no timely instructions have been received, in the same proportion as Voting Shares of such Portfolio for which instructions have been received from the Company's Contract owners; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. The Company will be responsible for assuring that voting privileges for the Account are determined in a manner consistent with the provisions set forth above. 3.5. The Company will prepare and be responsible for filing with the SEC and any state regulators requiring such filing all shareholder reports, notices, prospectuses and statements of additional information of the Contracts. The Company will bear the cost of registration and qualification of the Contracts and preparation and filing of documents listed in this Section 3.5. The Company also will bear the cost of typesetting, printing and distributing the documents listed in this Section 3.5 to existing and prospective Contract owners. 3.6. The Company will furnish, or will cause to be furnished, to the Fund or the Adviser, each piece of sales literature or other promotional material in which the Fund or the Adviser is named, at least ten (10) Business Days prior to its use. No such material will be used if the Fund or the Adviser reasonably objects to such use within five (5) Business Days after receipt of such material. 3.7. The Company will not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement, prospectus or statement of additional information for Fund shares, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in published reports for the Fund which are in the public domain or approved by the Fund or the Adviser for distribution, or in sales literature or other material provided by the Fund or by the Adviser, except with the written permission of the Fund or the Adviser. The Fund and the Adviser agree to respond to any request for approval on a prompt and timely basis. Nothing in this Section 3.7 will be construed as preventing the Company or its employees or agents from giving advice on investment in the Fund. 3.8. The Adviser will furnish, or will cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company or its separate account is named, at least ten (10) Business Days prior to its use. No such material will be used if the Company reasonably objects to such use within five (5) Business Days after receipt of such material. 3.9. The Fund and the Adviser will not give any information or make any representations or statements on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement, prospectus or statement of additional information for the Contracts, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in published reports for each Account or the Contracts which are in the public domain or approved by the Company for distribution to Contract owners, or in sales literature or other material provided by the Company, except with the written permission of the Company. The Company agrees to respond to any request for approval on a prompt and timely basis. 3.10. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, proxy statements, and all amendments to any of the above, that relate to the Fund or its shares, promptly after the filing of such document with the SEC. 3.11. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, solicitations for voting instructions, and all amendments to any of the above, that relate to the Contracts or each Account, promptly after the filing of such document with the SEC. 3.12. For purposes of this Article III, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical), radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media, (e.g., on-line networks such as the Internet or other electronic messages), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials and any other material constituting sales literature or advertising under the rules of the National Association of Securities Dealers, Inc. (the "NASD"), the 1933 Act or the 1940 Act. 3.13. The Fund and the Adviser hereby consent to the Company's use of the name Wanger Advisors Trust and the names of the Portfolios listed on Schedule 2, as may be amended from time to time, in connection with marketing the Contracts, subject to the terms of Sections 3.6 and 3.7 of this Agreement. Such consent will terminate with the termination of this Agreement. 3.14. The Adviser will be responsible for calculating the performance information for the Fund. The Company will be responsible for calculating the performance information for the Contracts. The Adviser will be liable to the Company for any material mistakes it makes in calculating the performance information for the Fund which cause losses to the Company. The Company will be liable to the Adviser for any material mistakes it makes in calculating the performance information for the Contracts that cause losses to the Adviser. Each party will be liable for any material mistakes it makes in reproducing the performance information for Contracts or the Fund, as appropriate. The Fund and the Adviser agree to provide the Company with performance information for the Fund on a timely basis to enable the Company to calculate performance information for the Contracts in accordance with applicable state and federal law. ARTICLE IV. POTENTIAL CONFLICTS 4.1. The Fund Board will monitor the Fund for the existence of any irreconcilable material conflict among the interests of the contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by Participating Insurance Companies or by variable annuity and variable life insurance contract owners; (f) a decision by an insurer to disregard the voting instructions of contract owners; or (g) if applicable, a decision by a Qualified Entity to disregard the voting instructions of a person participating in such entity. The Fund Board will promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. A majority of the Fund Board will consist of persons who are not "interested" persons of the Fund. 4.2. The Company will report any potential or existing conflicts of which it is aware to the Fund Board. The Company agrees to assist the Fund Board in carrying out its responsibilities, as delineated in the Exemptive Order, by providing the Fund Board with all information reasonably necessary for the Fund Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Fund Board whenever Contract owner voting instructions are to be disregarded. The Fund Board will record in its minutes, or other appropriate records, all reports received by it and all action with regard to a conflict. 4.3. If it is determined by a majority of the Fund Board, or a majority of its disinterested directors, that an irreconcilable material conflict exists, the Company and other Participating Insurance Companies will, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested directors), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (a) withdrawing the assets allocable to some or all of the Accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., variable annuity Contract owners or variable life insurance contract owners of one or more Participating Insurance Companies) that in favor of such segregation, or offering to the affected votes Contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 4.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions, and such disregard of voting instructions could conflict with the majority of contract owner voting instructions, and the Company's judgment represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account; provided, however, that such withdrawal and termination will be limited to the extent required by the foregoing irreconcilable material conflict as determined by a majority of the disinterested directors of the Fund Board. No charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice to the Company that this provision is being implemented. Until the end of such six-month period the Adviser and Fund will, to the extent permitted by law and any exemptive relief previously granted to the Fund, continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 4.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state insurance regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account; provided, however, that such withdrawal and termination will be limited to the extent required by the foregoing irreconcilable material conflict as determined by a majority of the disinterested directors of the Fund Board. No charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice to the Company that this provision is being implemented. Until the end of such six-month period the Adviser and Fund will, to the extent permitted by law and any exemptive relief previously granted to the Fund, continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 4.6. For purposes of Sections 4.3 through 4.6 of this Agreement, a majority of the disinterested members of the Fund Board will determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund or the Adviser be required to establish a new funding medium for the Contracts. The Company will not be required by this Article IV to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners affected by the irreconcilable material conflict. 4.7. The Company will at least annually submit to the Fund Board such reports, materials or data as the Fund Board may reasonably request so that the Fund Board may fully carry out the duties imposed upon it as delineated in the Exemptive Order, and said reports, materials and data will be submitted more frequently if deemed appropriate by the Fund Board. 4.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then: (a) the Fund and/or the Company, as appropriate, will take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 4.1, 4.2, 4.3, 4.4, and 4.5 of this Agreement will continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 4.9. The Company, or any affiliate, will maintain at its home office, available to the SEC (a) a list of its officers, directors and employees who participate directly in the management or administration of any Accounts and/or (b) a list of its agents who, as registered representatives, offer and sell Contracts. ARTICLE V. INDEMNIFICATION 5.1. Indemnification By The Company (a) The Company agrees to indemnify and hold harmless the Fund and each person, if any, who controls or is associated with the Fund within the meaning of such terms under the federal securities laws (but not any Participating Insurance Companies or Qualified Entities) and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 5.1) against any and all losses, claims, expenses, damages, liabilities, joint or several (including amounts paid in settlement with the written consent of the Company) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based on any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Contracts or contained in the Contracts or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of the Fund for use in the registration statement, prospectus or statement of additional information for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in the Fund registration statement, prospectus, statement of additional information or sales literature or other promotional material of the Fund (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Fund in writing by or on behalf of the Company or persons under its control; or (3) arise out of or are based on any wrongful conduct of, or violation of applicable federal or state law by, the Company or persons under its control or subject to its authorization or supervision with respect to the purchase of Fund shares or the sale, marketing or distribution of the Contracts; or (4) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; (including but not limited to a failure, whether unintentional or in good faith or otherwise, to comply with the provisions of Section 2.2 of the Agreement, unless such failure is a result of the Fund's material breach of the Agreement); (5) arise out of any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company or persons under its control or subject to its authorization or supervision; (6) arise out of any failure by the Company to prevent orders received after the Close of Trading on a Business Day from being aggregated and communicated to the Fund or it's agent with orders received before the Close of Trading on that Business Day; or (7) arise out of any errors within the reasonable control of the Company that result in late transmission of orders to the Fund or it's agent; except to the extent provided in Sections 5.1(b) and 5.3 hereof. This indemnification will be in addition to any liability that the Company otherwise may have. (b) No party will be entitled to indemnification under Section 5.1(a) if such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties promptly will notify the Company of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 5.2. Indemnification By The Fund (a) The Fund agrees to indemnify and hold harmless the Company and each person, if any, who controls or is associated with the Company within the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 5.2) against any and all losses, claims, expenses, damages, liabilities, joint or several (including amounts paid in settlement with the written consent of the Fund) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based on any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Fund or other information on the Fund provided in writing to the Company (or any amendment or supplement to any of the foregoing), or arise out of or are based on the omission or alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Fund in writing by or on behalf of the Company for use in the registration statement, prospectus or statement of additional information for the Fund or in sales literature of the Fund (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in the Contract registration statement, prospectus or statement of additional information or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of the Fund or persons under its control; or (3) arise out of or are based on any wrongful conduct of, or violation of applicable federal and state law by, the Fund or persons under its control or subject to its authorization with respect to the sale of Fund shares; or (4) arise as a result of any failure by the Fund or persons under its control or subject to its authorization to provide the services and furnish the materials under the terms of this Agreement including, but not limited to, a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements and procedures related thereto specified in Section 2.5 of this Agreement or any material errors in or untimely calculation or reporting of the daily net asset value per share or dividend or capital gain distribution rate (referred to in this Section 5.2(a)(4) as an "error"); provided, that the foregoing will not apply where such error is the result of incorrect information supplied by or on behalf of the Company to the Fund, and will be limited to (i) reasonable administrative costs necessary to correct such error, provided that the Fund has approved such costs and the method in which the error is to be corrected, which approval will not be unreasonably withheld, and (ii) amounts which the Company has paid out of its own resources to make Contract owners whole as a result of such error; or (5) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement, or arise out of or result from any other material breach of this Agreement by the Fund or Adviser or persons under their respective control or subject to their authorization or supervision; except to the extent provided in Sections 5.2(b) and 5.3 hereof. (b) No party will be entitled to indemnification under Section 5.2(a) if such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties will promptly notify and the Fund of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Contracts or the operation of the Account. 5.3. Indemnification Procedure Any person obligated to provide indemnification under this Article V ("Indemnifying Party" for the purpose of this Section 5.3) will not be liable under the indemnification provisions of this Article V with respect to any claim made against a party entitled to indemnification under this Article V ("Indemnified Party" for the purpose of this Section 5.3) unless such Indemnified Party will have notified the Indemnifying Party in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim will have been served upon such Indemnified Party (or after such party will have received notice of such service on any designated agent), but failure to notify the Indemnifying Party of any such claim will not relieve the Indemnifying Party from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of the indemnification provision of this Article V, except to the extent that the failure to notify results in the failure of actual notice to the Indemnifying Party and such Indemnifying Party is damaged solely as a result of failure to give such notice. In case any such action is brought against the Indemnified Party, the Indemnifying Party will be entitled to participate, at its own expense, in the defense thereof. The Indemnifying Party also will be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Indemnifying Party to the Indemnified Party of the Indemnifying Party's election to assume the defense thereof, the Indemnified Party will bear the fees and expenses of any additional counsel retained by it, and the Indemnifying Party will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation, unless: (a) the Indemnifying Party and the Indemnified Party will have mutually agreed to the retention of such counsel; or (b) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Indemnifying Party will not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there is a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement will be entitled to the benefits of the indemnification contained in this Article V. The indemnification provisions contained in this Article V will survive any termination of this Agreement. 5.4 Limitation of Liability Except as expressly stated herein, as between the parties, in no event will any party to this Agreement be responsible to any other party for any incidental, indirect, consequential, punitive or exemplary damages of any kind arising from this Agreement, including without limitation, lost revenues, loss of profits or loss of business. 5.5 Arbitration Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, will be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules and Title 9 of the U.S. Code. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The number of arbitrators will be three, one of whom will be appointed by the Company or an affiliate; one of whom will be appointed by the Fund and/or the Adviser or an affiliate; and the third of whom will be selected by mutual agreement, if possible, within 30 days of the selection of the second arbitrator and thereafter by the administering authority. The place of arbitration will be Minneapolis, Minnesota. The arbitrators will have no authority to award punitive damages or any other damages not measured by the prevailing party's actual damages, and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of this Agreement. Any party may make an application to the arbitrators seeking injunctive relief to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved. Any party may apply to any court having jurisdiction hereof and seek injunctive relief in order to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved. ARTICLE VI. APPLICABLE LAW 6.1. This Agreement will be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Minnesota. 6.2. This Agreement will be subject to the provisions of the 1933 Act, the Securities Exchange Act of 1934 and the 1940 Act, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to, the Exemptive Order) and the terms hereof will be interpreted and construed in accordance therewith. ARTICLE VII. TERMINATION 7.1. This Agreement will terminate: (a) at the option of any party, with or without cause, with respect to some or all of the Portfolios, upon sixty (60) days' advance written notice to the other party or, if the Company is required to obtain exemptive relief from the SEC to effect a substitution of some or all of the Portfolios, such later date as such exemptive order is received by the Company, unless otherwise agreed to in writing by the parties; (b) upon 30 days' notice by the Company to the Fund if shares of the Portfolio are not reasonably available to meet the requirements of the Contracts as determined in good faith by the Company, and the Fund, after receiving written notice from the Company of such non-availability, fails to make available a sufficient number of Fund shares to meet the requirements of the Contracts within five days after receipt thereof; or (c) at the option of the Company, upon receipt of the Company's written notice by the Fund, with respect to any Portfolio in the event any of the Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by Company; or (d) upon 30 days' notice by the Fund to the Company upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the administration of the Contracts, the operation of the Account, or the purchase of the Fund shares, provided that the Fund determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Company's ability to perform its obligations under this Agreement; or (e) upon 30 days' notice by the Company to the Fund, upon institution of formal proceedings against the Fund or the Adviser by the NASD, the SEC, or any state securities or insurance department or any other regulatory body, regarding the Fund's or the Adviser's duties under this Agreement or related to the sale of Fund shares or the administration of the Fund, provided that the Company determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Fund's ability to perform its obligations under this Agreement; or (f) upon 30 days' notice by the Company if the Fund ceases to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, or under any successor or similar provision, or if the Company reasonably and in good faith believes, based on an opinion of counsel reasonably satisfactory to the Fund, that the Fund may fail to so qualify and the Fund, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure; or (g) upon 30 days' notice by the Company to the Fund if the Fund fails to meet the diversification requirements specified in Article II hereof and the Fund fails to provide reasonable assurance that it will take action to cure or correct such failure; or (h) upon 30 days' written notice by one party to another upon the other party's material breach of any provision of this Agreement; or (i) upon 60 days' written notice by the Company, if the Company determines in its sole judgment exercised in good faith, that the Fund has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Company; or (j) upon 60 days' written notice by the Fund to the Company, if the Fund determines in its sole judgment exercised in good faith, that the Company has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Fund; or (k) at the option of the Company or the Fund upon receipt of any necessary regulatory approvals and/or the vote of the Contract owners having an interest in the Account (or any subaccount) to substitute the shares of another investment company for the corresponding Portfolio shares of the Fund in accordance with the terms of the Contracts for which those Portfolio shares had been selected to serve as the underlying investment media. The Company will give sixty (60) days' prior written notice to the Fund of the date of any proposed vote or other action taken to replace the Fund's shares; or (l) at the option of the Company or the Fund upon a determination by a majority of the Fund Board, or a majority of the disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of: (i) all contract owners of variable insurance products of all separate accounts; or (ii) the interests of the Participating Insurance Companies investing in the Fund as set forth in Article IV of this Agreement; or (m) at the option of the Fund in the event any of the Contracts are not issued or sold in accordance with applicable federal and/or state law. Termination will be effective immediately upon such occurrence without notice. (n) upon 30 day's notice by the Fund to the Company if the Contracts cease to qualify as annuity contracts under the Internal Revenue Code, or the Fund reasonably and in good faith believes, based on an opinion of counsel reasonably satisfactory to the Company, that the Contracts may fail to so qualify. 7.2. Notwithstanding any termination of this Agreement, the Fund and the Adviser will, at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, the owners of the Existing Contracts will be permitted to reallocate investments in the Portfolios (as in effect on such date), redeem investments in the Portfolios and/or invest in the Portfolios upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 7.2 will not apply to any terminations under Article IV and the effect of such Article IV terminations will be governed by Article IV of this Agreement. 7.3. The provisions of Article V will survive the termination of this Agreement and as long as shares of the Fund are held under Existing Contracts in accordance with Section 7.2, the provisions of this Agreement will survive the termination of this Agreement with respect to those Existing Contracts. ARTICLE VIII. NOTICES Any notice will be deemed duly given when sent by registered or certified mail (or other method agreed to by the parties) to each other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other parties. If to the Company: IDS Life Insurance Company 1765 AXP Financial Center Minneapolis, MN 55474 ATTN: Executive Vice President, Annuities With a copy to: American Express Financial Advisors Inc. 50607 AXP Financial Center Minneapolis, MN 55474 ATTN: General Counsel's Office If to the Fund or the Adviser: Bruce H. Lauer 227 W. Monroe St., Suite 3000 Chicago, Illinois 60606 With a copy to: Cameron S. Avery Bell, Boyd & Lloyd LLC 70 W. Madison St., Suite 3300 Chicago, Illinois 60602 ARTICLE IX. MISCELLANEOUS 9.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the directors, trustees, officers, partners, employees, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 9.2. Notwithstanding anything to the contrary contained in this Agreement, in addition to and not in lieu of other provisions in this Agreement: (a) "Confidential Information" includes but is not limited to all proprietary and confidential information of the Company and its subsidiaries, affiliates and licensees (collectively the "Protected Parties" for purposes of this Section 9.2), including without limitation all information regarding the customers of the Protected Parties; or the accounts, account numbers, names, addresses, social security numbers or any other personal identifier of such customers; or any information derived therefrom. (b) Neither the Fund nor the Adviser may use or disclose Confidential Information for any purpose other than to carry out the purpose for which Confidential Information was provided to Fund and/or Adviser as set forth in the Agreement; and the Fund and the Adviser agree to cause all their employees, agents and representatives, or any other party to whom the Fund and/or the Adviser may provide access to or disclose Confidential Information to limit the use and disclosure of Confidential Information to that purpose. (c) The Fund and the Adviser acknowledge that all computer programs and procedures or other information developed or used by the Protected Parties or any of their employees or agents in connection with the Company's performance of its duties under this Agreement are the valuable property of the Protected Parties. (d) The Fund and the Adviser agree to implement appropriate measures designed to ensure the security and confidentiality of Confidential Information, to protect such information against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of, Confidential Information that could result in substantial harm or inconvenience to any customer of the Protected Parties; the Fund and the Adviser further agree to cause all their agents, representatives or subcontractors of, or any other party to whom the Fund and/or the Adviser may provide access to or disclose Confidential Information to implement appropriate measures designed to meet the objectives set forth in this Section 9.2. (e) The Fund and the Adviser acknowledge that any breach of the agreements in this Section 9.2 would result in immediate and irreparable harm to the Protected Parties for which there would be no adequate remedy at law and agree that in the event of such a breach, the Protected Parties will be entitled to equitable relief by way of temporary and permanent injunctions, as well as such other relief as any court of competent jurisdiction deems appropriate. 9.3. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 9.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. 9.5. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement will not be affected thereby. 9.6. This Agreement will not be assigned by any party hereto without the prior written consent of all the parties. 9.7. Each party to this Agreement will cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and will permit each other and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 9.8. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or board action, as applicable, by such party and when so executed and delivered this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 9.9. The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect changes in or relating to the Contracts, the Accounts or the Portfolios of the Fund or other applicable terms of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized representative as of the date specified above.
WANGER ADVISORS TRUST LIBERTY WANGER ASSET MANAGEMENT, L.P. by its General Partner, WAM Acquisition GP, Inc. By: /s/ Bruce H. Lauer By: /s/ Bruce H. Lauer ------------------------------------------------ -------------------------------- Name: Bruce H. Lauer Name: Bruce H. Lauer Title: Vice President, Secretary and Treasurer Title: Senior Vice President and Secretary IDS LIFE INSURANCE COMPANY ATTEST: By: /s/ Gumer C. Alvero By: /s/ Mary Ellyn Minenko ------------------------------------------------ -------------------------- Name: Gumer C. Alvero Name: Mary Ellyn Minenko Title: Executive Vice President, Annuities Title: Assistant Secretary
SCHEDULE 1 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And IDS LIFE INSURANCE COMPANY The following Accounts of IDS Life Insurance Company are permitted in accordance with the provisions of this Agreement to invest in Portfolios of the Fund shown in Schedule 2: IDS Life Variable Life Separate Account IDS Life Variable Account 10 SCHEDULE 2 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And IDS LIFE INSURANCE COMPANY The Accounts shown on Schedule 1 may invest in the following Portfolios: Wanger International Small Cap Wanger U.S. Small Cap SCHEDULE 3 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And IDS LIFE INSURANCE COMPANY The following investment restrictions apply to the Fund's investment policies: EX-99.H.11 8 file007.txt PARTICIPATION AGREEMENT PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And IDS LIFE INSURANCE COMPANY OF NEW YORK THIS AGREEMENT, made and entered into as of this 30th day of August, 1999, by and among WANGER ADVISORS TRUST, an open-end management investment company organized under the laws of the Commonwealth of Massachusetts (the "Fund"), LIBERTY WANGER ASSET MANAGEMENT, L.P., a limited partnership organized under the laws of Delaware (the "Adviser") and IDS LIFE INSURANCE COMPANY OF NEW YORK, a New York life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company named in Schedule 1 to this Agreement, as may be amended from time to time, (each account referred to as the "Account"). WHEREAS, the Fund was established for the purpose of serving as the investment vehicle for (i) insurance company separate accounts supporting variable annuity contracts and variable life insurance policies to be offered by insurance companies that have entered into participation agreements with the Fund (the "Participating Insurance Companies"), and (ii) certain pension and retirement plans ("Qualified Entities") receiving favorable tax treatment under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"); and WHEREAS, beneficial interests in the Fund are divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets (each a "Portfolio" and collectively, the "Portfolios"); and WHEREAS, the Fund has received an order from the Securities & Exchange Commission (the "SEC") granting Participating Insurance Companies and their separate accounts relief from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940 (the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund and each Portfolio thereof to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies and certain qualified pension and retirement plans outside of the separate account context (the "Exemptive Order"); and WHEREAS, the Company has registered or, prior to offering for sale will register, certain variable annuity contracts and/or variable life insurance polices (the "Contracts") under the Securities Act of 1933 (the "1933 Act"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares of the Portfolios named in Schedule 2 to this Agreement, as may be amended from time to time, on behalf of the Account to fund the Contracts; NOW, THEREFORE, in consideration of their mutual promises, the parties agree as follows: ARTICLE I. SALE AND REDEMPTION OF FUND SHARES 1.1. The Fund will sell to the Company those shares of the Portfolios that each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt and acceptance by the Fund (or its agent). Shares of a particular Portfolio of the Fund will be ordered in such quantities and at such times as determined by the Company to be necessary to meet the requirements of the Contracts. The Board of Trustees of the Fund (the "Fund Board") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Fund Board, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.2. The Fund will redeem any full or fractional shares of any Portfolio when requested by the Company on behalf of an Account at the net asset value next computed after receipt by the Fund (or its agent) of the request for redemption, as established in accordance with the provisions of the then current prospectus of a Portfolio. Notwithstanding the foregoing, (i) the Company shall not redeem Fund shares attributable to Contract owners except in the circumstances permitted in Section 1.12, and (ii) the Fund may delay redemption of Fund shares of any Portfolio to the extent permitted by the 1940 Act and any rules thereunder, or as described in a Portfolio's prospectus. 1.3. For purposes of Sections 1.1 and 1.2, the Fund hereby appoints the Company as its agent for the limited purpose of receiving purchase and redemption orders resulting from investment in and payments under the Contracts. Receipt by the Company will constitute receipt by the Fund provided that: (a) such orders are received by the Company in good order prior to the time the net asset value of each Portfolio is priced in accordance with its prospectus (such time referred to as the "Close of Trading"); and (b) the Fund receives notice of such orders by 9:00 a.m. Central Time on the next following Business Day. "Business Day" will mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. 1.4. The Company will pay for a purchase order on the same Business Day as the Fund receives notice of the purchase order in accordance with Section 1.3. Payment for such purchase order will be made in Federal funds transmitted by wire to the Fund. Such wire transfer will be initiated by the Company's bank by 1:00 p.m. Central Time. The Fund will pay for a redemption order on the same Business Day as the Fund receives notice of the redemption order in accordance with Section 1.3. Payment for such redemption order will be made in Federal funds transmitted by wire to the Company or any other person properly designated in writing by the Company. The Fund reserves the right to suspend payment consistent with Section 22(e) of the Investment Company Act of 1940, as amended (the "1940 Act") and any rules thereunder. If payment for a redemption order would require a Portfolio to dispose of portfolio securities or otherwise incur additional costs, payment will be made within five days and the Fund will promptly notify the Company of such delay. The Fund will not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds by the Company; the Company alone will be responsible for such action. 1.5. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Purchase and redemption orders for Fund shares will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.6. The Fund will furnish same-day notice (by wire or telephone, followed by written confirmation) to the Company of the declaration of any income, dividends or capital gain distributions payable on each Portfolio's shares. The Company hereby elects to receive all such dividends and distributions as are payable on the Portfolio shares in the form of additional shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such dividends and distributions in cash. The Fund will notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.7. The Fund will make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated. The Fund will use its reasonable best efforts to make such net asset value per share available by 5:30 p.m. Central Time, and will use its best efforts to make such net asset value per share available by 6:00 p.m. Central Time each Business Day. The Fund will notify the Company as soon as possible if it is determined that the net asset value per share will be available after 6:00 p.m. Central Time on any Business Day, and the Fund and the Company will mutually agree upon a final deadline for timely receipt of the net asset value on such Business Day. 1.8. Any material errors in the calculation of net asset value, dividends or capital gain information will be reported immediately upon discovery to the Company. An error will be deemed "material" based on the Fund's interpretation of the SEC's position and policy with regard to materiality, as it may be modified from time to time. If the Company is provided with materially incorrect net asset value information, the Company will be entitled to an adjustment to the number of shares purchased or redeemed to reflect the correct net asset value per share. Neither the Fund, the Adviser, nor any of their affiliates will be liable for any information provided to the Company pursuant to this Agreement which information is based on incorrect information supplied by or on behalf of the Company to the Fund or the Adviser. 1.9. The Fund agrees that its shares will be sold only to Participating Insurance Companies and their separate accounts and to Qualified Entities to the extent permitted by the Exemptive Order. No shares of any Portfolio will be sold directly to the general public. The Company agrees that Fund shares will be used only for the purposes of funding the Contracts and Accounts listed in Schedule 1, as amended from time to time. 1.10. The Company and the Fund acknowledge that the arrangement contemplated by this Agreement is not exclusive; the cash value of the Contracts may be invested in other investment companies, provided, however, that (i) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of the Fund underlying the Contracts specified; or (ii) the Company gives the Fund thirty days written notice of its intention to make such other investment company available as a funding vehicle for the Contracts; or (iii) such other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and the Company so informs the Fund prior to the execution of this Agreement; or (iv) the Fund consents to the use of such other investment company, such consent not to be unreasonably withheld. 1.11. The Fund agrees that all Participating Insurance Companies will have the obligations and responsibilities regarding pass-through voting and conflicts of interest corresponding to those contained in Section 3.4 and Article IV of this Agreement. 1.12. The Company may withdraw the Account's investment in the Fund or a series thereof only: (i) as necessary to facilitate Contract owner requests; (ii) upon a determination by a majority of the Fund Board, or a majority of disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of (x) some or all Contract owners or owners of other variable annuity contracts and variable life insurance policies supported by accounts investing assets attributable thereto in the Fund or (y) some or all of the Participating Insurance Companies and/or a person or plan that qualifies to purchase shares of the Fund that is investing in the Fund; or (iii) in the event that shares of another investment company are substituted for Portfolio shares in accordance with the terms of the Contracts upon the (x) requisite vote of the Contract owners having an interest in the affected Portfolio and the requisite written consent of the Fund (unless otherwise required by applicable law); (y) upon issuance of an SEC exemptive order pursuant to Section 26(b) of the 1940 Act permitting such substitution; or (z) as may otherwise be permitted under applicable law. ARTICLE II. REPRESENTATIONS AND WARRANTIES 2.1. The Company represents and warrants that: (a) it is an insurance company duly organized and in good standing under applicable law; (b) it has legally and validly established or, prior to offering the Contracts for sale will legally and validly establish, each Account as a separate account under applicable state law; (c) it has registered or, prior to offering the Contracts for sale will register, to the extent necessary each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts; (d) it has filed or will file to the extent necessary the Contracts' registration statements under the 1933 Act and these registration statements will be declared effective by the SEC prior to offering the Contracts; (e) the Contracts will be filed and qualified and/or approved for sale, as applicable, under the insurance laws and regulations of the states in which the Contracts will be offered prior to the sale of Contracts in such states; (f) it will amend the registration statement under the 1933 Act for the Contracts and the registration statement under the 1940 Act for the Account from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law, but in any event it will maintain a current effective Contracts' and Account's registration statement for so long as the Contracts are outstanding unless the Company has supplied the Fund with an SEC no-action letter, opinion of counsel or other evidence satisfactory to the Fund's counsel to the effect that maintaining such registration statement on a current basis is no longer required; (g) it has adopted and implement internal controls reasonably designed to prevent purchase and redemption orders received after the Close of Trading on any given Business Day from being aggegated with orders received before the Close of Trading on that Business Day; and (h) all orders that the Company transmits to the Fund or it's agent for processing as of a particular Business Day will relate only to instructions received by the Company prior to the Close of Trading on that Business Day. 2.2. The Company represents and warrants that the Contracts are intended to be treated as annuity or life insurance contracts under applicable provisions of the Internal Revenue Code, and that it will make every effort to maintain such treatment and that it will notify the Fund and the Adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.3. The Fund represents and warrants that: (a) it is duly organized and validly existing under applicable state law; (b) it has registered with the SEC as an open-end management investment company under the 1940 Act; (c) Fund shares of the Portfolios offered and sold pursuant to this Agreement will be registered under the 1933 Act and duly authorized for issuance in accordance with applicable law; (d) it is registered under the 1940 Act; (e) it will amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares; (f) it believes that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future; and (g) it will qualify the shares of the Portfolios for sale in accordance with the laws of the various states to the extent deemed advisable by the Fund. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies, objectives and restrictions) complies with the insurance laws and regulations of any state. The Fund agrees that it will furnish the information required by state insurance laws so that the Company can obtain the authority needed to issue the Contracts in the various states. 2.4. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it reserves the right to make such payments in the future. To the extent that the Fund decides to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have its Fund Board, a majority of whom are not "interested" persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.5. The Fund represents and warrants that it believes that the Fund's investment policies are in material compliance with any investment restriction set forth in Schedule 3, including restrictions relating to the diversification requirements for variable annuity, endowment, or life insurance contracts as set forth in Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time. Without limiting the scope of the foregoing, the Fund further represents and warrants that it believes that it currently complies with Section 817(h) of the Internal Revenue Code and Treasury Regulation 1.817-5, as amended from time to time, and any amendments or other modifications to such Section or Regulation. In the event of a breach of this representation and warranty, the Fund will take all reasonable steps: (a) to notify the Company of such breach; and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Treasury Regulation 1.817-5. 2.6. Each party represents and warrants that, as applicable, all of its directors, officers, employees, investment advisers, and other individuals/entities each having access to the funds and/or securities of the Fund are and will continue to be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid bond includes coverage for larceny and embezzlement and is issued by a reputable bonding company. ARTICLE III. OBLIGATIONS OF THE PARTIES 3.1. The Fund will prepare and be responsible for filing with the SEC and any state regulators requiring such filing all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of the Fund. The Fund will bear the costs of registration and qualification of its shares, preparation and filing of documents listed in this Section 3.1 and all taxes to which an issuer is subject on the issuance and transfer of its shares. 3.2. At the option of the Company, the Fund will either: (a) provide the Company with as many copies of the Fund's current prospectus, statement of additional information, annual report, semi-annual report and other shareholder communications, including any amendments or supplements to any of the foregoing, as the Company will reasonably request; or (b) provide the Company with a camera-ready copy, computer disk or other medium agreed to by the parties of such documents in a form suitable for printing. The Fund will bear the cost of typesetting and printing such documents and of distributing such documents to existing Contract owners. The Company will bear the cost of distributing such documents to prospective Contract owners and applicants as required. 3.3. The Fund, at its expense, either will: (a) distribute its proxy materials directly to the appropriate Contract owners; or (b) provide the Company or its mailing agent with copies of its proxy materials in such quantity as the Company will reasonably require and the Company will distribute the materials to existing Contract owners and will bill the Fund for the reasonable cost of such distribution. The Fund will bear the cost of tabulation of proxy votes. 3.4. With respect to any matter put to vote of the holders of Fund shares or Portfolio shares (OVoting SharesO), if and to the extent required by law the Company will: (a) provide for the solicitation of voting instructions from Contract owners; (b) vote Voting Shares of each Portfolio held in the Account in accordance with instructions or proxies timely received from Contract owners; and (c) vote Voting Shares of the Portfolios held in the Account for which no timely instructions have been received, in the same proportion as Voting Shares of such Portfolio for which instructions have been received from the Company's Contract owners; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. The Company will be responsible for assuring that voting privileges for the Account are determined in a manner consistent with the provisions set forth above. 3.5. The Company will prepare and be responsible for filing with the SEC and any state regulators requiring such filing all shareholder reports, notices, prospectuses and statements of additional information of the Contracts. The Company will bear the cost of registration and qualification of the Contracts and preparation and filing of documents listed in this Section 3.5. The Company also will bear the cost of typesetting, printing and distributing the documents listed in this Section 3.5 to existing and prospective Contract owners. 3.6. The Company will furnish, or will cause to be furnished, to the Fund or the Adviser, each piece of sales literature or other promotional material in which the Fund or the Adviser is named, at least ten (10) Business Days prior to its use. No such material will be used if the Fund or the Adviser reasonably objects to such use within five (5) Business Days after receipt of such material. 3.7. The Company will not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement, prospectus or statement of additional information for Fund shares, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in published reports for the Fund which are in the public domain or approved by the Fund or the Adviser for distribution, or in sales literature or other material provided by the Fund or by the Adviser, except with the written permission of the Fund or the Adviser. The Fund and the Adviser agree to respond to any request for approval on a prompt and timely basis. Nothing in this Section 3.7 will be construed as preventing the Company or its employees or agents from giving advice on investment in the Fund. 3.8. The Adviser will furnish, or will cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company or its separate account is named, at least ten (10) Business Days prior to its use. No such material will be used if the Company reasonably objects to such use within five (5) Business Days after receipt of such material. 3.9. The Fund and the Adviser will not give any information or make any representations or statements on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement, prospectus or statement of additional information for the Contracts, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in published reports for each Account or the Contracts which are in the public domain or approved by the Company for distribution to Contract owners, or in sales literature or other material provided by the Company, except with the written permission of the Company. The Company agrees to respond to any request for approval on a prompt and timely basis. 3.10. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, proxy statements, and all amendments to any of the above, that relate to the Fund or its shares, promptly after the filing of such document with the SEC. 3.11. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, statements of additional information, reports, solicitations for voting instructions, and all amendments to any of the above, that relate to the Contracts or each Account, promptly after the filing of such document with the SEC. 3.12. For purposes of this Article III, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical), radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media, (e.g., on-line networks such as the Internet or other electronic messages), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials and any other material constituting sales literature or advertising under the rules of the National Association of Securities Dealers, Inc. (the "NASD"), the 1933 Act or the 1940 Act. 3.13. The Fund and the Adviser hereby consent to the Company's use of the name Wanger Advisors Trust and the names of the Portfolios listed on Schedule 2, as may be amended from time to time, in connection with marketing the Contracts, subject to the terms of Sections 3.6 and 3.7 of this Agreement. Such consent will terminate with the termination of this Agreement. 3.14. The Adviser will be responsible for calculating the performance information for the Fund. The Company will be responsible for calculating the performance information for the Contracts. The Adviser will be liable to the Company for any material mistakes it makes in calculating the performance information for the Fund which cause losses to the Company. The Company will be liable to the Adviser for any material mistakes it makes in calculating the performance information for the Contracts that cause losses to the Adviser. Each party will be liable for any material mistakes it makes in reproducing the performance information for Contracts or the Fund, as appropriate. The Fund and the Adviser agree to provide the Company with performance information for the Fund on a timely basis to enable the Company to calculate performance information for the Contracts in accordance with applicable state and federal law. ARTICLE IV. POTENTIAL CONFLICTS 4.1. The Fund Board will monitor the Fund for the existence of any irreconcilable material conflict among the interests of the contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by Participating Insurance Companies or by variable annuity and variable life insurance contract owners; (f) a decision by an insurer to disregard the voting instructions of contract owners; or (g) if applicable, a decision by a Qualified Entity to disregard the voting instructions of a person participating in such entity. The Fund Board will promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. A majority of the Fund Board will consist of persons who are not "interested" persons of the Fund. 4.2. The Company will report any potential or existing conflicts of which it is aware to the Fund Board. The Company agrees to assist the Fund Board in carrying out its responsibilities, as delineated in the Exemptive Order, by providing the Fund Board with all information reasonably necessary for the Fund Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Fund Board whenever Contract owner voting instructions are to be disregarded. The Fund Board will record in its minutes, or other appropriate records, all reports received by it and all action with regard to a conflict. 4.3. If it is determined by a majority of the Fund Board, or a majority of its disinterested directors, that an irreconcilable material conflict exists, the Company and other Participating Insurance Companies will, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested directors), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (a) withdrawing the assets allocable to some or all of the Accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., variable annuity Contract owners or variable life insurance contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 4.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract owner voting instructions, and such disregard of voting instructions could conflict with the majority of contract owner voting instructions, and the Company's judgment represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account; provided, however, that such withdrawal and termination will be limited to the extent required by the foregoing irreconcilable material conflict as determined by a majority of the disinterested directors of the Fund Board. No charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice to the Company that this provision is being implemented. Until the end of such six-month period the Adviser and Fund will, to the extent permitted by law and any exemptive relief previously granted to the Fund, continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 4.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state insurance regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account; provided, however, that such withdrawal and termination will be limited to the extent required by the foregoing irreconcilable material conflict as determined by a majority of the disinterested directors of the Fund Board. No charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice to the Company that this provision is being implemented. Until the end of such six-month period the Adviser and Fund will, to the extent permitted by law and any exemptive relief previously granted to the Fund, continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 4.6. For purposes of Sections 4.3 through 4.6 of this Agreement, a majority of the disinterested members of the Fund Board will determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund or the Adviser be required to establish a new funding medium for the Contracts. The Company will not be required by this Article IV to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners affected by the irreconcilable material conflict. 4.7. The Company will at least annually submit to the Fund Board such reports, materials or data as the Fund Board may reasonably request so that the Fund Board may fully carry out the duties imposed upon it as delineated in the Exemptive Order, and said reports, materials and data will be submitted more frequently if deemed appropriate by the Fund Board. 4.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then: (a) the Fund and/or the Company, as appropriate, will take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 4.1, 4.2, 4.3, 4.4, and 4.5 of this Agreement will continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 4.9. The Company, or any affiliate, will maintain at its home office, available to the SEC (a) a list of its officers, directors and employees who participate directly in the management or administration of any Accounts and/or (b) a list of its agents who, as registered representatives, offer and sell Contracts. ARTICLE V. INDEMNIFICATION 5.1. Indemnification By The Company (a) The Company agrees to indemnify and hold harmless the Fund and each person, if any, who controls or is associated with the Fund within the meaning of such terms under the federal securities laws (but not any Participating Insurance Companies or Qualified Entities) and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 5.1) against any and all losses, claims, expenses, damages, liabilities, joint or several (including amounts paid in settlement with the written consent of the Company) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based on any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Contracts or contained in the Contracts or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of the Fund for use in the registration statement, prospectus or statement of additional information for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in the Fund registration statement, prospectus, statement of additional information or sales literature or other promotional material of the Fund (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Fund in writing by or on behalf of the Company or persons under its control; or (3) arise out of or are based on any wrongful conduct of, or violation of applicable federal or state law by, the Company or persons under its control or subject to its authorization or supervision with respect to the purchase of Fund shares or the sale, marketing or distribution of the Contracts; or (4) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; (including but not limited to a failure, whether unintentional or in good faith or otherwise, to comply with the provisions of Section 2.2 of the Agreement, unless such failure is a result of the Fund's material breach of the Agreement); (5) arise out of any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company or persons under its control or subject to its authorization or supervision; (6) arise out of any failure by the Company to prevent orders received after the Close of Trading on a Business Day from being aggregated and communicated to the Fund or it's agent with orders received before the Close of Trading on that Business Day; or (7) arise out of any errors within the reasonable control of the Company that result in late transmission of orders to the Fund or it's agent; except to the extent provided in Sections 5.1(b) and 5.3 hereof. This indemnification will be in addition to any liability that the Company otherwise may have. (b) No party will be entitled to indemnification under Section 5.1(a) if such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties promptly will notify the Company of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 5.2. Indemnification By The Fund (a) The Fund agrees to indemnify and hold harmless the Company and each person, if any, who controls or is associated with the Company within the meaning of such terms under the federal securities laws and any director, trustee, officer, partner, employee or agent of the foregoing (collectively, the "Indemnified Parties" for purposes of this Section 5.2) against any and all losses, claims, expenses, damages, liabilities, joint or several (including amounts paid in settlement with the written consent of the Fund) or litigation (including reasonable legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements: (1) arise out of or are based on any untrue statement or alleged untrue statement of any material fact contained in the registration statement, prospectus or statement of additional information for the Fund or other information on the Fund provided in writing to the Company (or any amendment or supplement to any of the foregoing), or arise out of or are based on the omission or alleged omission to state therein a material fact required to be stated or necessary to make such statements not misleading in light of the circumstances in which they were made; provided that this agreement to indemnify will not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Fund in writing by or on behalf of the Company for use in the registration statement, prospectus or statement of additional information for the Fund or in sales literature of the Fund (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (2) arise out of or are based on any untrue statement or alleged untrue statement of a material fact contained in the Contract registration statement, prospectus or statement of additional information or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of the Fund or persons under its control; or (3) arise out of or are based on any wrongful conduct of, or violation of applicable federal and state law by, the Fund or persons under its control or subject to its authorization with respect to the sale of Fund shares; or (4) arise as a result of any failure by the Fund or persons under its control or subject to its authorization to provide the services and furnish the materials under the terms of this Agreement including, but not limited to, a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements and procedures related thereto specified in Section 2.5 of this Agreement or any material errors in or untimely calculation or reporting of the daily net asset value per share or dividend or capital gain distribution rate (referred to in this Section 5.2(a)(4) as an "error"); provided, that the foregoing will not apply where such error is the result of incorrect information supplied by or on behalf of the Company to the Fund, and will be limited to (i) reasonable administrative costs necessary to correct such error, provided that the Fund has approved such costs and the method in which the error is to be corrected, which approval will not be unreasonably withheld, and (ii) amounts which the Company has paid out of its own resources to make Contract owners whole as a result of such error; or (5) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement, or arise out of or result from any other material breach of this Agreement by the Fund or Adviser or persons under their respective control or subject to their authorization or supervision; except to the extent provided in Sections 5.2(b) and 5.3 hereof. (b) No party will be entitled to indemnification under Section 5.2(a) if such loss, claim, damage, liability or litigation is due to the willful misfeasance, bad faith, or gross negligence in the performance of such party's duties under this Agreement, or by reason of such party's reckless disregard of its obligations or duties under this Agreement by the party seeking indemnification. (c) The Indemnified Parties will promptly notify and the Fund of the commencement of any litigation, proceedings, complaints or actions by regulatory authorities against them in connection with the issuance or sale of the Contracts or the operation of the Account. 5.3. Indemnification Procedure Any person obligated to provide indemnification under this Article V ("Indemnifying Party" for the purpose of this Section 5.3) will not be liable under the indemnification provisions of this Article V with respect to any claim made against a party entitled to indemnification under this Article V ("Indemnified Party" for the purpose of this Section 5.3) unless such Indemnified Party will have notified the Indemnifying Party in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim will have been served upon such Indemnified Party (or after such party will have received notice of such service on any designated agent), but failure to notify the Indemnifying Party of any such claim will not relieve the Indemnifying Party from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of the indemnification provision of this Article V, except to the extent that the failure to notify results in the failure of actual notice to the Indemnifying Party and such Indemnifying Party is damaged solely as a result of failure to give such notice. In case any such action is brought against the Indemnified Party, the Indemnifying Party will be entitled to participate, at its own expense, in the defense thereof. The Indemnifying Party also will be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Indemnifying Party to the Indemnified Party of the Indemnifying Party's election to assume the defense thereof, the Indemnified Party will bear the fees and expenses of any additional counsel retained by it, and the Indemnifying Party will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation, unless: (a) the Indemnifying Party and the Indemnified Party will have mutually agreed to the retention of such counsel; or (b) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Indemnifying Party will not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there is a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement will be entitled to the benefits of the indemnification contained in this Article V. The indemnification provisions contained in this Article V will survive any termination of this Agreement. 5.4 Limitation of Liability Except as expressly stated herein, as between the parties, in no event will any party to this Agreement be responsible to any other party for any incidental, indirect, consequential, punitive or exemplary damages of any kind arising from this Agreement, including without limitation, lost revenues, loss of profits or loss of business. 5.5 Arbitration Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, will be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules and Title 9 of the U.S. Code. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The number of arbitrators will be three, one of whom will be appointed by the Company or an affiliate; one of whom will be appointed by the Fund and/or the Adviser or an affiliate; and the third of whom will be selected by mutual agreement, if possible, within 30 days of the selection of the second arbitrator and thereafter by the administering authority. The place of arbitration will be Minneapolis, Minnesota. The arbitrators will have no authority to award punitive damages or any other damages not measured by the prevailing party's actual damages, and may not, in any event, make any ruling, finding or award that does not conform to the terms and conditions of this Agreement. Any party may make an application to the arbitrators seeking injunctive relief to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved. Any party may apply to any court having jurisdiction hereof and seek injunctive relief in order to maintain the status quo until such time as the arbitration award is rendered or the controversy is otherwise resolved. ARTICLE VI. APPLICABLE LAW 6.1. This Agreement will be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Minnesota. 6.2. This Agreement will be subject to the provisions of the 1933 Act, the Securities Exchange Act of 1934 and the 1940 Act, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to, the Exemptive Order) and the terms hereof will be interpreted and construed in accordance therewith. ARTICLE VII. TERMINATION 7.1. This Agreement will terminate: (a) at the option of any party, with or without cause, with respect to some or all of the Portfolios, upon sixty (60) days' advance written notice to the other party or, if the Company is required to obtain exemptive relief from the SEC to effect a substitution of some or all of the Portfolios, such later date as such exemptive order is received by the Company, unless otherwise agreed to in writing by the parties; (b) upon 30 days' notice by the Company to the Fund if shares of the Portfolio are not reasonably available to meet the requirements of the Contracts as determined in good faith by the Company, and the Fund, after receiving written notice from the Company of such non-availability, fails to make available a sufficient number of Fund shares to meet the requirements of the Contracts within five days after receipt thereof; or (c) at the option of the Company, upon receipt of the Company's written notice by the Fund, with respect to any Portfolio in the event any of the Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by Company; or (d) upon 30 days' notice by the Fund to the Company upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the administration of the Contracts, the operation of the Account, or the purchase of the Fund shares, provided that the Fund determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Company's ability to perform its obligations under this Agreement; or (e) upon 30 days' notice by the Company to the Fund, upon institution of formal proceedings against the Fund or the Adviser by the NASD, the SEC, or any state securities or insurance department or any other regulatory body, regarding the Fund's or the Adviser's duties under this Agreement or related to the sale of Fund shares or the administration of the Fund, provided that the Company determines in its sole judgment, exercised in good faith, that any such proceeding would have a material adverse effect on the Fund's ability to perform its obligations under this Agreement; or (f) upon 30 days' notice by the Company if the Fund ceases to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code, or under any successor or similar provision, or if the Company reasonably and in good faith believes, based on an opinion of counsel reasonably satisfactory to the Fund, that the Fund may fail to so qualify and the Fund, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure; or (g) upon 30 days' notice by the Company to the Fund if the Fund fails to meet the diversification requirements specified in Article II hereof and the Fund fails to provide reasonable assurance that it will take action to cure or correct such failure; or (h) upon 30 days' written notice by one party to another upon the other party's material breach of any provision of this Agreement; or (i) upon 60 days' written notice by the Company, if the Company determines in its sole judgment exercised in good faith, that the Fund has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Company; or (j) upon 60 days' written notice by the Fund to the Company, if the Fund determines in its sole judgment exercised in good faith, that the Company has suffered a material adverse change in its business, operations or financial condition since the date of this Agreement or is the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Fund; or (k) at the option of the Company or the Fund upon receipt of any necessary regulatory approvals and/or the vote of the Contract owners having an interest in the Account (or any subaccount) to substitute the shares of another investment company for the corresponding Portfolio shares of the Fund in accordance with the terms of the Contracts for which those Portfolio shares had been selected to serve as the underlying investment media. The Company will give sixty (60) days' prior written notice to the Fund of the date of any proposed vote or other action taken to replace the Fund's shares; or (l) at the option of the Company or the Fund upon a determination by a majority of the Fund Board, or a majority of the disinterested Fund Board members, that an irreconcilable material conflict exists among the interests of: (i) all contract owners of variable insurance products of all separate accounts; or (ii) the interests of the Participating Insurance Companies investing in the Fund as set forth in Article IV of this Agreement; or (m) at the option of the Fund in the event any of the Contracts are not issued or sold in accordance with applicable federal and/or state law. Termination will be effective immediately upon such occurrence without notice. (n) upon 30 day's notice by the Fund to the Company if the Contracts cease to qualify as annuity contracts under the Internal Revenue Code, or the Fund reasonably and in good faith believes, based on an opinion of counsel reasonably satisfactory to the Company, that the Contracts may fail to so qualify. 7.2. Notwithstanding any termination of this Agreement, the Fund and the Adviser will, at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as OExisting ContractsO). Specifically, without limitation, the owners of the Existing Contracts will be permitted to reallocate investments in the Portfolios (as in effect on such date), redeem investments in the Portfolios and/or invest in the Portfolios upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 7.2 will not apply to any terminations under Article IV and the effect of such Article IV terminations will be governed by Article IV of this Agreement. 7.3. The provisions of Article V will survive the termination of this Agreement and as long as shares of the Fund are held under Existing Contracts in accordance with Section 7.2, the provisions of this Agreement will survive the termination of this Agreement with respect to those Existing Contracts. ARTICLE VIII. NOTICES Any notice will be deemed duly given when sent by registered or certified mail (or other method agreed to by the parties) to each other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other parties. If to the Company: IDS Life Insurance Company of New York 249 AXP Financial Center Minneapolis, MN 55474 ATTN: President With a copy to: American Express Financial Advisors Inc. 50607 AXP Financial Center Minneapolis, MN 55474 ATTN: General Counsel's Office If to the Fund or the Adviser: Bruce H. Lauer 227 W. Monroe St., Suite 3000 Chicago, Illinois 60606 With a copy to: Cameron S. Avery Bell, Boyd & Lloyd LLC 70 W. Madison St., Suite 3300 Chicago, Illinois 60602 ARTICLE IX. MISCELLANEOUS 9.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the directors, trustees, officers, partners, employees, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 9.2. Notwithstanding anything to the contrary contained in this Agreement, in addition to and not in lieu of other provisions in this Agreement: (a) "Confidential Information" includes but is not limited to all proprietary and confidential information of the Company and its subsidiaries, affiliates and licensees (collectively the "Protected Parties" for purposes of this Section 9.2), including without limitation all information regarding the customers of the Protected Parties; or the accounts, account numbers, names, addresses, social security numbers or any other personal identifier of such customers; or any information derived therefrom. (b) Neither the Fund nor the Adviser may use or disclose Confidential Information for any purpose other than to carry out the purpose for which Confidential Information was provided to Fund and/or Adviser as set forth in the Agreement; and the Fund and the Adviser agree to cause all their employees, agents and representatives, or any other party to whom the Fund and/or the Adviser may provide access to or disclose Confidential Information to limit the use and disclosure of Confidential Information to that purpose. (c) The Fund and the Adviser acknowledge that all computer programs and procedures or other information developed or used by the Protected Parties or any of their employees or agents in connection with the Company's performance of its duties under this Agreement are the valuable property of the Protected Parties. (d) The Fund and the Adviser agree to implement appropriate measures designed to ensure the security and confidentiality of Confidential Information, to protect such information against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of, Confidential Information that could result in substantial harm or inconvenience to any customer of the Protected Parties; the Fund and the Adviser further agree to cause all their agents, representatives or subcontractors of, or any other party to whom the Fund and/or the Adviser may provide access to or disclose Confidential Information to implement appropriate measures designed to meet the objectives set forth in this Section 9.2. (e) The Fund and the Adviser acknowledge that any breach of the agreements in this Section 9.2 would result in immediate and irreparable harm to the Protected Parties for which there would be no adequate remedy at law and agree that in the event of such a breach, the Protected Parties will be entitled to equitable relief by way of temporary and permanent injunctions, as well as such other relief as any court of competent jurisdiction deems appropriate. 9.3. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 9.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. 9.5. If any provision of this Agreement will be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement will not be affected thereby. 9.6. This Agreement will not be assigned by any party hereto without the prior written consent of all the parties. 9.7. Each party to this Agreement will cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and will permit each other and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 9.8. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or board action, as applicable, by such party and when so executed and delivered this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 9.9. The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect changes in or relating to the Contracts, the Accounts or the Portfolios of the Fund or other applicable terms of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized representative as of the date specified above.
WANGER ADVISORS TRUST LIBERTY WANGER ASSET MANAGEMENT, L.P. by its General Partner, WAM Acquisition GP, Inc. By: /s/ Bruce H. Lauer By: /s/ Bruce H. Lauer -------------------------------------------- --------------------------- Name: Bruce H. Lauer Name: Bruce H. Lauer Title: Vice President, Secretary and Treasurer Title: Senior Vice President and Secretary IDS LIFE INSURANCE COMPANY OF NEW YORK ATTEST: By: /s/ Timothy V. Bechtold By: /s/ Mary Ellyn Minenko --------------------------------------- -------------------------- Name: Timothy V. Bechtold Name: Mary Ellyn Minenko Title: President Title: Assistant Secretary
SCHEDULE 1 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And IDS LIFE INSURANCE COMPANY OF NEW YORK The following Accounts of IDS Life Insurance Company of New York are permitted in accordance with the provisions of this Agreement to invest in Portfolios of the Fund shown in Schedule 2: IDS Life of New York Variable Annuity Account IDS Life of New York Account 8 SCHEDULE 2 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And IDS LIFE INSURANCE COMPANY The Accounts shown on Schedule 1 may invest in the following Portfolios: Wanger International Small Cap Wanger U.S. Small Cap SCHEDULE 3 PARTICIPATION AGREEMENT By and Among WANGER ADVISORS TRUST And LIBERTY WANGER ASSET MANAGEMENT, L.P. And IDS LIFE INSURANCE COMPANY The following investment restrictions apply to the Fund's investment policies: EX-99.H.12 9 file008.txt PARTICIPATION AGREEMENT PARTICIPATION AGREEMENT as of April 1, 2002 among Wanger Advisors Trust Liberty Funds Distributor, Inc. and Sun Life Assurance Company of Canada (U.S.) CONTENTS Section Subject Matter 1. Parties and Purpose 2. Representations and Warranties 3. Purchase and Redemption of Trust Portfolio Shares 4. Fees, Expenses, Prospectuses, Proxy Materials and Reports 5. Voting 6. Sales Material, Information and Trademarks 7. Indemnification 8. Notices 9. Termination 10. Miscellaneous SCHEDULES TO THIS AGREEMENT A. The Company B. Accounts of the Company C. Available Portfolios and Classes of Shares of the Trust D. Contracts of the Company E. Addresses for Notices 1. PARTIES AND PURPOSE This agreement (the "Agreement") made and entered into this 1st day of April, 2002, is between certain portfolios, specified in Schedule C, of Wanger Advisors Trust, an open-end management investment company organized as a business trust under Massachusetts law (the "Trust"), Liberty Funds Distributor, Inc., a Massachusetts corporation which is the principal underwriter for the Trust (the "Underwriter," and together with the Trust, "we" or "us") and the insurance company identified on Schedule A ("you"), on your own behalf and on behalf of its Separate Accounts, each of which is a segregated asset account maintained by you that is listed on Schedule B, as that schedule may be amended from time to time ("Account" or "Accounts"). The purpose of this Agreement is to entitle you, on behalf of the Accounts, to purchase the shares, and classes of shares, of portfolios of the Trust ("Portfolios") that are identified on Schedule C, solely for the purpose of funding benefits of your variable life insurance policies or variable annuity contracts ("Contracts") that are identified on Schedule D. This Agreement does not authorize any other purchases or redemptions of shares of the Trust. 2. REPRESENTATIONS AND WARRANTIES 2.1 REPRESENTATIONS AND WARRANTIES BY YOU You represent and warrant that: 2.1.1 You are an insurance company duly organized and in good standing under the laws of your state of incorporation. 2.1.2 All of your directors, officers, employees, investment advisors, and other individuals or entities dealing with the money and/or securities of the Trust are and shall be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than $5 million. Such bond shall include coverage for larceny and embezzlement and shall be issued by a reputable fidelity insurance company. You agree that any amounts received under such bond or coverage in connection with claims that arise from the arrangements described in this Agreement will be held by you for the benefit of the Trust. You agree to make all reasonable efforts to see that this bond or another bond containing such provisions is always in effect, and you agree to notify us in the event that such coverage no longer applies. 2.1.3 Each Account is a duly organized, validly existing segregated asset account under applicable state insurance law and interests in each Account are offered exclusively through the purchase of or transfer into a "variable contract" within the meaning of such terms under Section 817 of the Internal Revenue Code of 1986, as amended ("Code") and the regulations thereunder. You will use your best efforts to continue to meet such definitional requirements, and will notify us immediately upon having a reasonable basis for believing that such requirements have ceased to be met or that they might not be met in the future. 2.1.4 Each Account either: (i) has been registered or, prior to any issuance or sale of the Contracts, will be registered as a unit investment trust under the Investment Company Act of 1940 ("1940 Act") to serve as a segregated investment account for Contracts, to the extent required by the 1940 Act; or (ii) has not been so registered in proper reliance upon an exemption from registration under Section 3(c) of the 1940 Act; if the Account is exempt from registration as an investment company under Section 3(c) of the 1940 Act, you will use your best efforts to maintain such exemption and will notify us immediately upon having a reasonable basis for believing that such exemption no longer applies or might not apply in the future. 2.1.5 The Contracts or interests in the Accounts: (i) are or, prior to any issuance or sale will be, registered as securities under the Securities Act of 1933, as amended (the "1933 Act"), to the extent required by the 1933 Act; or (ii) are not registered because they are properly exempt from registration under Section 3(a)(2) of the 1933 Act or will be offered exclusively in transactions that are properly exempt from registration under Section 4(2) or Regulation D of the 1933 Act, in which case you will make every effort to maintain such exemption and will notify us immediately upon having a reasonable basis for believing that such exemption no longer applies or might not apply in the future. 2.1.6 The Contracts: (i) will be sold by broker-dealers, or their registered representatives, who are registered with the Securities and Exchange Commission ("SEC") under the Securities and Exchange Act of 1934, as amended (the "1934 Act") and who are members in good standing of the National Association of Securities Dealers, Inc. (the "NASD"); and (ii) will be issued in compliance in all material respects with all applicable federal and state laws including without limitation the 1933 Act and the 1940 Act. 2 2.1.7 The Contracts currently are and will be treated as endowment contracts, annuity contracts or life insurance contracts under applicable provisions of the Code and you will use your best efforts to maintain such treatment; you will notify us immediately upon having a reasonable basis for believing that any of the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.1.8 The fees and charges deducted under each Contract, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by you. 2.1.9 You will use shares of the Trust only for the purpose of funding benefits of the Contracts through the Accounts. 2.1.10 Contracts will not be sold outside of the United States. 2.1.11 With respect to any Accounts which are exempt from registration under the 1940 Act in reliance on 3(c)(1) or Section 3(c)(7) thereof: 2.1.11.1 the principal underwriter for each such Account and any subaccounts thereof is a registered broker-dealer with the SEC under the 1934 Act and a member in good standing of the NASD; and 2.1.11.2 with regard to each Portfolio, you, on behalf of the corresponding subaccount, will: (a) vote such shares held by it in the same proportion as the vote of all other holders of such shares; and (b) refrain from substituting shares of another security for such shares unless the SEC has approved such substitution in the manner provided in Section 26 of the 1940 Act. 2.2 REPRESENTATIONS AND WARRANTIES BY THE TRUST The Trust represents and warrants that: 2.2.1 It is duly organized and in good standing under the laws of the Commonwealth of Massachusetts and the shares of the Portfolios of the Trust are duly authorized for issuance and sold in compliance with the laws of the Commonwealth of Massachusetts and all applicable federal and any state securities laws. 2.2.2 All of its trustees, officers, employees and other individuals/entities dealing with the money and/or securities of a Portfolio are and shall be at all times covered by a joint fidelity bond or similar coverage for the benefit of the Trust in an amount not less that the minimum coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such bond shall include coverage for larceny and embezzlement with no deductible and be issued by a reputable fidelity insurance company. The Trust agrees to make all reasonable efforts to see that this bond or another bond containing such provisions is always in effect, and agrees to notify you in the event that such coverage no longer applies. 2.2.3 It is registered as an open-end management investment company under the 1940 Act. 3 2.2.4 Each class of shares of the Portfolios of the Trust is registered under the 1933 Act. 2.2.5 It will amend its registration statement under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. 2.2.6 It will comply, in all material respects, with the 1933 and 1940 Acts and the rules and regulations thereunder. 2.2.7 It is currently qualified as a "regulated investment company" under Subchapter M of the Code, it will maintain such qualification under Subchapter M (or any successor or similar provision), and will notify you immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.2.8 The Trust will comply with the diversification requirements for variable annuity, endowment or life insurance contracts set forth in Section 817(h) of the Code, and the rules and regulations thereunder, including without limitation Treasury Regulation 1.817-5. Upon having a reasonable basis for believing any Portfolio has ceased to comply with Regulation 1.817-5, the Trust will notify you immediately and will take all reasonable steps to adequately diversify the Portfolio to achieve compliance. 2.2.9 (a) With respect to Class A shares, the Trust currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise. (b) With respect to Class B shares, the Trust has adopted a Rule 12b-1 Plan under which it makes payments to finance distribution expenses. The Trust represents and warrants that it has a Board of Trustees, a majority of whom are not interested persons of the Trust, which has formulated and approved its Rule 12b-1 Plans to finance distribution expenses of the Trust and that any changes to the Trust's Rule 12b-1 Plans will be approved by a similarly constituted Board of Trustees. To the extent that any Class of the Trust finances its distribution expenses pursuant to a Plan adopted under rule 12b-1, the Trust undertakes to comply with any then current SEC interpretations concerning rule 12b-1 or any successor provisions. 2.2.10 Each investment adviser or subadviser to any Portfolio of the Trust is and shall remain duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and any applicable federal and state securities law and that they shall perform their obligations for the Trust in compliance with the applicable Laws of the Commonwealth of Massachusetts any applicable federal and state securities laws. 2.2.11 The Trust makes no representations as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) complies with the insurance laws or regulations of any state. 2.3 REPRESENTATIONS AND WARRANTIES BY THE UNDERWRITER The Underwriter represents and warrants that: 2.3.1 It is registered as a broker dealer with the SEC under the 1934 Act, and is a member in good standing of the NASD. 4 2.4 WARRANTY AND AGREEMENT BY BOTH YOU AND US We received an order from the SEC dated _______ (file no. _________), which grants exemptions from certain provisions of the 1940 Act and the regulations thereunder to the extent necessary to permit shares of the Trust to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies and qualified pension and retirement plans outside the separate account context. You and we both warrant and agree that both you and we will comply with the Shared Funding Order as though such conditions were set forth verbatim in this Agreement, including, without limitation, the provisions regarding potential conflicts of interest between the separate accounts which invest in the Trust and regarding contract owner voting privileges. In order for the Trust's Board of Trustees to perform its duty to monitor for conflicts of interest, you agree to inform us of the occurrence of any of the events specified in the Shared Funding Order to the extent that such event may or does result in a material conflict of interest as defined in that order. 3. PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES 3.1 We will make shares of the Portfolios available to the Accounts for the benefit of the Contracts. The shares will be available for purchase at the net asset value per share next computed after we (or our agent) receive a purchase order, as established in accordance with the provisions of the then current prospectus of the Trust. Notwithstanding the foregoing, the Trust's Board of Trustees ("Trustees") may refuse to sell shares of any Portfolio to any person, or may suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or if, in the sole discretion of the Trustees, acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, they deem such action to be in the best interests of the shareholders of such Portfolio. 3.2 We agree that shares of the Trust will be sold only to life insurance companies which have entered into fund participation agreements with the Trust ("Participating Insurance Companies") and their separate accounts or to qualified pension and retirement plans in accordance with the terms of the Shared Funding Order. No shares of any Portfolio will be sold to the general public. 3.3 You shall be the designee for us for receipt of purchase orders and requests for redemption resulting from investment in and payments under the Contracts ("Instructions"). The Business Day on which such Instructions are received in proper form by you by the close of trading will be the date as of which Portfolio shares shall be deemed purchased, exchanged, or redeemed as a result of such Instructions, provided you transmit such instructions to us no later than 9:30 a.m. Eastern Time on the next Business Day. Instructions received in proper form by you after the close of trading on any given Business Day shall be treated as if received on the next following Business Day. Instructions we receive from you after 9:30 a.m. Eastern Time shall be processed on the next Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Trust calculates its net asset value pursuant to the rules of the SEC and its current prospectus. 3.4 We shall calculate the net asset value per share of each Portfolio on each Business Day, and shall communicate these net asset values to you or your designated agent on a daily basis as soon as reasonably practical after the calculation is completed (normally by 6:30 p.m. Eastern time). 5 3.5 You shall submit payment for the purchase of shares of a Portfolio on behalf of an Account no later than 2 p.m. Eastern time on the next Business Day after we receive the purchase order. Payment shall be made in federal funds transmitted by wire to the Trust or to its designated custodian. 3.6 We will redeem any full or fractional shares of any Portfolio, when requested by you on behalf of an Account, at the net asset value next computed after receipt by us (or our agent) of the request for redemption, in accordance with Section 3.3 above. I Payment will be made in federal funds transmitted by wire to you or your agent by 2 p.m. Eastern time on the next Business Day after we receive the redemption order. Payment shall not be delayed except in accordance with the 1940 Act, and in no event shall payment be delayed for a greater period than is permitted by the 1940 Act. Payments for the purchase or redemption of shares by you may be netted against one another on any Business Day for the purpose of determining the amount of any wire transfer on that Business Day. 3.7 Issuance and transfer of the Portfolio shares will be by book entry only. Stock certificates will not be issued to you or the Accounts. Portfolio shares purchased from the Trust will be recorded in the appropriate title for each Account or the appropriate subaccount of each Account. 3.8 We shall furnish, on or before the ex-dividend date, notice to you of any income dividends or capital gain distributions payable on the shares of any Portfolio. You hereby elect to receive all such income dividends and capital gain distributions as are payable on shares of a Portfolio in additional shares of that Portfolio, and you reserve the right to change this election in the future. We will notify you of the number of shares so issued as payment of such dividends and distributions. 4. FEES, EXPENSES, PROSPECTUSES, PROXY MATERIALS AND REPORTS 4.1 We shall pay no fee or other compensation to you under this Agreement except as provided on Schedule F, if attached. 4.2 We shall prepare and be responsible for filing with the SEC, and any state regulators requiring such filing, all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of the Trust. We shall bear the costs of preparation and filing of the documents listed in the preceding sentence, registration and qualification of the Trust's shares of the Portfolios. 4.3 We shall to provide you, on a timely basis, with such information about the Trust, the Portfolios and each Adviser, in such form as you may reasonably require, as you shall reasonably request in connection with the preparation of disclosure documents and annual and semi-annual reports pertaining to the Contracts. 4.4 At your option, we shall provide you, at our expense, with either, (i) for each Contract owner, one copy of each of the following documents on each occasion that such document is required by law or regulation to be delivered to such Contract owner: the Trust's current prospectus, annual report, semi-annual report and other shareholder communications, including any amendments or supplements to any of the foregoing, pertaining specifically to the Portfolios ("Designated Portfolio Documents"); or (ii) a camera ready copy of such 6 Designated Portfolio Documents, in a form suitable for printing and from which information relating to series of the Trust other than the Portfolios had been deleted to the extent practicable. In connection with clause (ii) of this paragraph, we will pay for proportional printing costs for such Designated Portfolio documents in order to provide one copy for each Contract owner on each occasion that such document is required by law or regulation to be delivered to Contract owners. We shall provide you with a copy of the Trust's current statement of additional information (the "SAI"), including any amendments or supplements, in a form suitable for you to duplicate. We shall bear the expense of duplicating the SAI for distribution to Contract owners. The expenses of furnishing, including mailing, the documents referred to in this paragraph shall be borne by you, except that we shall bear the expenses of furnishing such documents to Contract owners. For each of the documents provided to you in accordance with clause (i) of this paragraph 4.4, we shall provide you, upon your request and at your expense, additional copies. In no event shall we be responsible for the costs of printing or delivery of Designated Portfolio Documents to potential Contract owners. 4.5 We shall provide you, at our expense, with copies of any Trust-sponsored proxy materials in such quantity as you shall reasonably require for distribution to Contract owners who are invested in a designated subaccount. We shall bear the costs of distributing proxy materials (or similar materials such as voting solicitation instructions) to Contract owners. 5. VOTING 5.1 All Participating Insurance Companies shall have the obligations and responsibilities regarding pass-through voting and conflicts of interest corresponding to those contained in the Shared Funding Order. 5.2 If and to the extent required by law, you shall: (i) solicit voting instructions from Contract owners; (ii) vote the Trust shares in accordance with the instructions received from Contract owners; and (iii) vote Trust shares for which no instructions have been received in the same proportion as Trust shares of such Portfolio for which instructions have been received; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. You reserve the right to vote Trust shares held in any Account in your own right, to the extent permitted by law. You and your agents will in no way recommend or oppose or interfere with the solicitation of proxies for Portfolio shares held to fund the Contracts without our prior written consent, which consent may be withheld in our sole discretion. 6. SALES MATERIAL, INFORMATION AND TRADEMARKS 6.1 For purposes of this Section 6, "Sales literature or other Promotional material" includes, but is not limited to, portions of the following that use any logo or other trademark related to the Trust, or Underwriter or its affiliates, or refer to the Trust: advertisements (such as material published or designed for use in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, electronic communication or other public media), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts or any other advertisement, sales literature or published article or electronic communication), educational or training materials or other communications distributed or made generally available to some or all agents or employees in any media, and prospectuses, statements of additional information, shareholder reports and proxy materials. 6.2 You shall furnish, or cause to be furnished to us or our designee, at least one complete copy of each registration statement, prospectus, statement of additional information, private 7 placement memorandum, retirement plan disclosure information or other disclosure documents or similar information, as applicable (collectively "Disclosure Documents"), as well as any report, solicitation for voting instructions, Sales literature or other Promotional materials, and all amendments to any of the above that relate to the Contracts or the Accounts prior to its first use. You shall furnish, or shall cause to be furnished, to us or our designee each piece of Sales literature or other Promotional material in which the Trust or an Adviser is named, at least three (3) Business Days prior to its proposed use. No such material shall be used unless we or our designee approve such material and its proposed use. 6.3 We shall promptly inform you of the results of any examination by the SEC or other regulatory authority that relates to the Trust or its Shares, and shall provide you with a copy of the relevant portions of any deficiency letter or other correspondence or written report regarding any such examination. You and your agents shall not give any information or make any representations or statements on behalf of the Trust or concerning the Trust, the Underwriter or an Adviser, other than information or representations contained in and accurately derived from the registration statement or prospectus for the Trust shares (as such registration statement and prospectus may be amended or supplemented from time to time), annual and semi-annual reports of the Trust, Trust-sponsored proxy statements, or in Sales literature or other Promotional material approved by the Trust or its designee, except as required by legal process or regulatory authorities or with the written permission of the Trust or its designee. 6.4 We shall not give any information or make any representations or statements on behalf of you or concerning you, the Accounts or the Contracts other than information or representations contained in and accurately derived from Disclosure Documents for the Contracts (as such Disclosure Documents may be amended or supplemented from time to time), or in materials approved by you for distribution, including Sales literature or other Promotional materials, except as required by legal process or regulatory authorities or with your written permission. 6.5 Except as provided in Section 6.2, you shall not use any designation comprised in whole or part of the name or mark "Stein Roe" or any logo or other trademark relating to the Trust or the Underwriter without prior written consent, and upon termination of this Agreement for any reason, you shall cease all use of any such name or mark as soon as reasonably practicable. 7. INDEMNIFICATION 7.1 INDEMNIFICATION BY YOU 7.1.1 You agree to indemnify and hold harmless the Underwriter, the Trust and each of its Trustees, officers, employees and agents and each person, if any, who controls the Trust within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually the "Indemnified Party" for purposes of this Section 7.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with your written consent, which consent shall not be unreasonably withheld) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses") to which the Indemnified Parties may become subject under any statute or regulation, at common law or otherwise, insofar as such Losses are related to the sale or acquisition of shares of the Trust or the Contracts and 7.1.1.1 arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in a Disclosure Document for the Contracts or in the 8 Contracts themselves or in sales literature generated or approved by you on behalf of the Contracts or Accounts (or any amendment or supplement to any of the foregoing) (collectively, "Company Documents" for the purposes of this Section 7), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to you by or on behalf of us for use in Company Documents or otherwise for use in connection with the sale of the Contracts or Trust shares; or 7.1.1.2 arise out of or result from statements or representations (other than statements or representations contained in and accurately derived from Trust Documents as defined below in Section 7.2) or wrongful conduct of you or persons under your control, with respect to the sale or acquisition of the Contracts or Trust shares; or 7.1.1.3 arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Trust Documents as defined below in Section 7.2 or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission was made in reliance upon and accurately derived from written information furnished to the Trust by or on behalf of you; or 7.1.1.4 arise out of or result from any failure by you to provide the services or furnish the materials required under the terms of this Agreement; 7.1.1.5 arise out of or result from any material breach of any representation and/or warranty made by you in this Agreement or arise out of or result from any other material breach of this Agreement by you, as limited by and in accordance with the provisions of Sections 7.1.2 and 7.1.3 hereof; or 7.1.1.6 arise out of or result from a Contract failing to be considered a life insurance policy or an annuity Contract, whichever is appropriate, under applicable provisions of the Code thereby depriving the Trust of its compliance with Section 817(h) of the Code. 7.1.2 You shall not be liable under this indemnification provision with respect to any Losses to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to the Trust or Underwriter, whichever is applicable. 7.1.3 You shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified you in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify you of any such claim shall not relieve you from any liability which youmay have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, you shall be entitled to participate, at your own expense, in the defense of such action. Unless the Indemnified Party releases you from any further obligations under this Section 7.1, you also shall be entitled to assume the defense thereof, with counsel satisfactory 9 to the party named in the action. After notice from you to such party of your election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and you will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.1.4 The Indemnified Parties will promptly notify you of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Trust shares or the Contracts or the operation of the Trust. 7.2 INDEMNIFICATION BY THE UNDERWRITER 7.2.1 The Underwriter agrees to indemnify and hold harmless you, and each of your directors and officers and each person, if any, who controls you within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually the "Indemnified Party" for purposes of this Section 7.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Underwriter, which consent shall not be unreasonably withheld) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses") to which the Indemnified Parties may become subject under any statute or regulation, at common law or otherwise, insofar as such Losses are related to the sale or acquisition of the shares of the Trust or the Contracts and: 7.2.1.1 arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement, prospectus or sales literature of the Trust (or any amendment or supplement to any of the foregoing) (collectively, the "Trust Documents" for purposes of this Section 7) or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to us by or on behalf of you for use in Trust Documents or otherwise for use in connection with the sale of the Contracts or Trust shares; or 7.2.1.2 arise out of or result from statements or representations (other than statements or representations contained in and accurately derived from Company Documents or wrongful conduct of the Trust, Adviser or Underwriter or persons under their control, with respect to the sale or distribution of the Contracts or Trust shares; or 7.2.1.3 arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Company Documents, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon and accurately derived from written information furnished to you by or on behalf of the Trust; or 7.2.1.4 arise out of or result from any failure by us to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the qualification representation specified above in Section 2.2.7 and the diversification requirements specified above in Section 2.2.8; or 10 7.2.1.5 arise out of or result from any material breach of any representation and/or warranty made by the Underwriter in this Agreement or arise out of or result from any other material breach of this Agreement by the Underwriter; as limited by and in accordance with the provisions of Sections 7.2.2 and 7.2.3 hereof. 7.2.2 The Underwriter shall not be liable under this indemnification provision with respect to any Losses to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to you or the Accounts, whichever is applicable. 7.2.3 The Underwriter shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Underwriter in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Underwriter of any such claim shall not relieve the Underwriter from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Underwriter shall be entitled to participate, at its own expense, in the defense of such action. Unless the Indemnified Party releases the Underwriter from any further obligations under this Section 7.2, the Underwriter also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Underwriter to such party of the Underwriter's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Underwriter will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.2.4 You agree promptly to notify the Underwriter of the commencement of any litigation or proceedings against you or the Indemnified Parties in connection with the issuance or sale of the Contracts or the operation of each Account. 7.3 INDEMNIFICATION BY THE TRUST 7.3.1 The Trust agrees to indemnify and hold harmless you, and each of your directors and officers and each person, if any, who controls you within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually the "Indemnified Party" for purposes of this Section 7.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Trust, which consent shall not be unreasonably withheld) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses") to which the Indemnified Parties may become subject under any statute or regulation, at common law or otherwise, insofar as such Losses result from the gross negligence, bad faith or willful misconduct of the Board of Trustees or any member thereof, are related to the operations of the Trust, and arise out of or result from any material breach of any representation and/or warranty made by the Trust in this Agreement or arise out of or result from any other material breach of this Agreement by the Trust; as limited by and in accordance with the provisions of Sections 7.3.2 and 7.3.3 hereof. It is understood and expressly stipulated that neither the holders of shares 11 of the Trust nor any Trustee, officer, agent or employee of the Trust shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Trust only shall be liable. 7.3.2 The Trust shall not be liable under this indemnification provision with respect to any Losses to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to you, the Trust, the Underwriter or each Account, whichever is applicable. 7.3.3 The Trust shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Trust in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claims shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Trust of any such claim shall not relieve the Trust from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Trust shall be entitled to participate, at its own expense, in the defense of such action. Unless the Indemnified Party releases the Trust from any further obligations under this Section 7.3, the Trust also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Trust to such party of the Trust's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Trust will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.3.4 You and the Underwriter agree promptly to notify the Trust of the commencement of any litigation or proceedings against the Indemnified Parties in connection with this Agreement, the issuance or sale of the Contracts, the operation of each Account, or the issuance or sale or acquisition of the Trust shares or the operation of the Trust. 8. NOTICES Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth in Schedule E below or at such other address as such party may from time to time specify in writing to the other party. 9. TERMINATION 9.1 This Agreement may be terminated by any party in its entirety or with respect to one, some or all Portfolios for any reason by sixty (60) days advance written notice delivered to the other parties. This Agreement shall terminate immediately in the event of its assignment by any party without the prior written approval of the other parties, or as otherwise required by law. 9.2 This Agreement may be terminated immediately by us upon written notice to you if: 9.2.1 you notify the Trust or the Underwriter that the exemption from registration under Section 3(c) of the 1940 Act no longer applies, or might not apply in the future, to the unregistered Accounts, or that the exemption from registration under Section 4(2) or Regulation D promulgated under the 1933 Act no longer applies or might not apply in 12 the future, to interests under the unregistered Contracts; or 9.2.2 either one or both of the Trust or the Underwriter respectively, shall determine, in their sole judgment exercised in good faith, that you have suffered a material adverse change in your business, operations, financial condition or prospects since the date of this Agreement or are the subject of material adverse publicity; or 9.3 This Agreement may be terminated immediately by you upon written notice to us if you shall determine, in your sole judgment exercised in good faith, that either one or both of the Trust or the Underwriter have suffered a material adverse change in their business, operations, financial condition or prospects since the date of this Agreement or are the subject of material adverse publicity. 9.4 If this Agreement is terminated for any reason, except as required by the Shared Funding Order or pursuant to Section 9.2.1, above, we shall, at your option, continue to make available additional shares of any Portfolio and redeem shares of any Portfolio pursuant to all of the terms and conditions of this Agreement for all Contracts in effect on the effective date of termination of this Agreement. If this Agreement is terminated as required by the Shared Funding Order, its provisions shall govern. 9.5 The provisions of Sections 2 (Representations and Warranties) and 7 (Indemnification) shall survive the termination of this Agreement. All other applicable provisions of this Agreement shall survive the termination of this Agreement, as long as shares of the Trust are held on behalf of Contract owners in accordance with Section 9.3, except that we shall have no further obligation to sell Trust shares with respect to Contracts issued after termination. 9.6 You shall not redeem Trust shares attributable to the Contracts (as opposed to Trust shares attributable to your assets held in the Account) except: (i) as necessary to implement Contract owner initiated or approved transactions; (ii) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application (hereinafter referred to as a "Legally Required Redemption"); or (iii) as permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon request, you shall promptly furnish to us the opinion of your counsel (which counsel shall be reasonably satisfactory to us) to the effect that any redemption pursuant to clause (ii) above is a Legally Required Redemption. 10. MISCELLANEOUS 10.1 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions of this Agreement or otherwise affect their construction or effect. 10.2 This Agreement may be executed simultaneously in two or more counterparts, all of which taken together shall constitute one and the same instrument. 10.3 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 10.4 This Agreement shall be construed and its provisions interpreted under and in accordance with the laws of the Commonwealth of Massachusetts. It shall also be subject to the provisions of the federal securities laws and the rules and regulations thereunder, to any orders of the SEC on behalf of the Trust granting it exemptive relief, and to the conditions of 13 such orders. We shall promptly forward copies of any such orders to you. 10.5 The parties to this Agreement agree that the assets and liabilities of each Portfolio of the Trust are separate and distinct from the assets and liabilities of each other Portfolio. No Portfolio shall be liable or shall be charged for any debt, obligation or liability of any other Portfolio. 10.6 Each party to this Agreement shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD, the Internal Revenue Service, and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 10.7 Each party to this Agreement shall treat as confidential all information reasonably identified as confidential in writing by any other party to this Agreement, and, except as permitted by this Agreement or as required by legal process or regulatory authorities, shall not disclose, disseminate, or use such names and addresses and other confidential information until such time as they may come into the public domain, without the express written consent of the affected party to this Agreement. Without limiting the foregoing, no party to this Agreement shall disclose any information that such party has been advised is proprietary, except such information that such party is required to disclose by any appropriate governmental authority (including, without limitation, the SEC, the NASD, and state securities and insurance regulators). 10.8 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties to this Agreement are entitled to under state and federal laws. 10.9 Neither this Agreement nor any rights or obligations created by it may be assigned by any party without the prior written approval of the other parties. 10.10 No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by both parties. 14 IN WITNESS WHEREOF, each of the parties have caused their duly authorized officers to execute this Agreement. The Company: Sun Life Assurance Company of Canada (U.S.) ------------------------------------------- By: ------------------------------ Name: Title: By: ------------------------------ Name: Title: The Trust: Wanger Advisors Trust ONLY ON BEHALF OF EACH PORTFOLIO LISTED ON SCHEDULE C HEREOF. By: ------------------------------ Name: Title: The Underwriter: Liberty Funds Distributor, Inc. ------------------------------- By: ------------------------------ Name: Title: 15 SCHEDULE A THE COMPANY Sun Life Assurance Company of Canada (U.S.) One Sun Life Executive Park Wellesley Hills, Massachusetts 02481 Organized as a corporation under Delaware law 16
SCHEDULE B ACCOUNTS OF THE COMPANY - ---------- ---------------------------------------- --------------------------------------------- 1. Name: Sun Life of Canada U.S. Variable Account F - ---------- ---------------------------------------- --------------------------------------------- Date Established: July 13, 1989 - ---------- ---------------------------------------- --------------------------------------------- SEC Registration Number: 811-05846 - ---------- ---------------------------------------- ---------------------------------------------
17 SCHEDULE C AVAILABLE PORTFOLIOS AND CLASSES OF SHARES OF THE TRUST Wanger Advisors Trust Wanger U.S. Small Cap Wanger International Small Cap Wanger Twenty Wanger Foreign Forty 18
SCHEDULE D Contracts of the Company - ------------------------- ------------------------------ ------------------------------- -------------------------------- CONTRACT 1 CONTRACT 2 CONTRACT 3 - ------------------------- ------------------------------ ------------------------------- -------------------------------- CONTRACT/PRODUCT NAME All-Star - ------------------------- ------------------------------ ------------------------------- -------------------------------- REGISTERED (Y/N) Yes - ------------------------- ------------------------------ ------------------------------- -------------------------------- SEC REGISTRATION NUMBER 811-05846 - ------------------------- ------------------------------ ------------------------------- -------------------------------- REPRESENTATIVE FORM NUMBERS - ------------------------- ------------------------------ ------------------------------- -------------------------------- SEPARATE ACCOUNT Sun Life of Canada U.S. NAME/DATE ESTABLISHED Variable Account F/ July 13, 1989 - ------------------------- ------------------------------ ------------------------------- -------------------------------- SEC REGISTRATION NUMBER 333-74844 - ------------------------- ------------------------------ ------------------------------- --------------------------------
19 SCHEDULE E ADDRESSES FOR NOTICES To the Company: Sun Life Assurance Company of Canada (U.S.) One Sun Life Executive Park Wellesley Hills, Massachusetts 02481 Attention: Maura A. Murphy, Esq. To the Trust: Wanger Advisors Trust 227 W. Monroe, Suite 3000 Chicago, Illinois Attention: To the Underwriter: Liberty Funds Distributors, Inc. One Financial Center Boston, Massachusetts Attention: 20 EX-99.I 10 file009.txt CONSENT OF BELL BOYD AND LLOYD LLC Exhibit i BELL, BOYD & LLOYD LLC Three First National Plaza 70 West Madison Street, Suite 3300 Chicago, Illinois 60602-4207 312 372 1121 Fax: 312 372 2098 April 10, 2002 As counsel for Wanger Advisors Trust (the "Registrant"), we consent to the incorporation by reference of our opinion for the Registrant's series designated Wanger U.S. Smaller Companies (formerly named Wanger U.S. Small Cap) and Wanger International Small Cap dated April 27, 1998, filed with the Registrant's registration statement on Form N-1A on April 29, 1998, and our opinion for the Registrant's series designated Wanger Twenty and Wanger Foreign Forty dated September 30, 1998, filed with the Registrant's registration statement on Form N-1A on September 30, 1998 (Securities Act file no. 33-83548). In giving this consent we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933. /s/ Bell, Boyd & Lloyd LLC EX-99.J 11 file010.txt CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Financial Highlights," and "Independent Auditors" in the Registration Statement (Form N-1A) of the Wanger Advisors Trust filed with the Securities and Exchange Commission and to the incorporation by reference therein and in the related Prospectus of our reports dated February 8, 2002 in this Post-Effective Amendment No. 14 to the Registration Statement under the Securities Act of 1933 (Registration No. 33-83548) and in this Amendment No. 15 to the Registration Statement under the Investment Company Act of 1940 (Registration No. 811-8748). /s/ERNST & YOUNG LLP Chicago, Illinois April 4, 2002 EX-99.P.2 12 file011.txt CODE OF ETHICS Exhibit p.2 WANGER ADVISORS TRUST CODE OF ETHICS FOR NON-INTERESTED BOARD MEMBERS (ADOPTED EFFECTIVE JUNE 15, 1996; AMENDED EFFECTIVE JUNE 8, 1999, SEPTEMBER 29, 2000 AND JUNE 5, 2001) The Investment Company Act and rules require that Wanger Advisors Trust ("WAT" or the "Fund") 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 WAT might take advantage of that knowledge for their own benefit. For that purpose, WAT has adopted this Code of Ethics (the "Code") applicable to those members of WAT's board of trustees who are not affiliated with WAT or Liberty Wanger Asset Management, L.P. ("Liberty WAM"), WAT's investment adviser. Any questions about the Code or about the applicability of the Code to a personal securities transaction should be directed to Liberty WAM's designated compliance officer or chief operating officer, or counsel for the Fund. I. STATEMENT OF PRINCIPLE GENERAL PROHIBITIONS. The Investment Company Act and rules make it illegal for any person covered by the Code, directly or indirectly, in connection with the purchase or sale of a security held or to be acquired by the Fund to: a. employ any device, scheme, or artifice to defraud the Funds; b. make to the Funds any untrue statement of a material fact or omit to state to the Funds a material fact necessary in order to make the statements made, in light of circumstances under which they are made, not misleading; c. engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Funds; or d. engage in any manipulative practice with respect to the Funds. PERSONAL SECURITIES TRANSACTIONS. The Code regulates personal securities transactions as a part of the effort by the Fund to detect and prevent conduct that might violate the general prohibitions outlined above. A personal securities transaction is a transaction in a SECURITY in which the person subject to this Code has a BENEFICIAL INTEREST. SECURITY is interpreted very broadly for this purpose, and includes any right to acquire any security (an option or warrant, for example). You have a BENEFICIAL INTEREST in a security in which you have, directly or indirectly, the opportunity to profit or share in any profit derived from a transaction in the security, or in which you have an indirect interest, including beneficial ownership by your spouse or minor children or other dependents living in your household, or your share of securities held by a partnership of which you are a general partner. Technically, the rules under section 16 of the Securities Exchange Act of 1934 will be applied to determine if you have a beneficial interest in a security (even if the security would not be within the scope of section 16). Examples of beneficial interest and a copy of Rule 16a-1(a), defining beneficial ownership, are attached as Appendix A. In any situation where the potential for conflict exists, transactions for the Fund must take precedence over any personal transaction. The Fund's non-interested trustees owe a duty to the Fund and its shareholders to conduct their personal securities transactions in a manner which does not interfere with the portfolio transactions of the Fund, take inappropriate advantage of their relationship with the Fund, or create any actual or potential conflict of interest between their interests and the interests of the Fund and its shareholders. Situations not specifically governed by this Code of Ethics will be resolved in light of this general principle. II. TO WHOM THE CODE'S RESTRICTIONS APPLY The Code applies to the Fund's outside board members -- those members of the board of WAT who are not affiliated with Liberty WAM, are not officers or 5% shareholders of WAT, and are not otherwise "interested persons" of Liberty WAM. The outside board members subject to the Code are listed on Schedule A hereto. III. RESTRICTIONS ON PERSONAL SECURITIES TRANSACTIONS A. NO TRANSACTIONS WITH THE FUNDS. No outside board member shall knowingly sell to or purchase from the Fund any security or other property, except securities issued by the Fund. B. NO CONFLICTING TRANSACTIONS. No outside board member shall purchase or sell any security in which such person has or would thereby acquire a beneficial interest which the person knows or has reason to believe is being purchased or sold or considered for purchase or sale by the Fund, until the Fund's transactions have been completed or consideration of such transactions has been abandoned. IV. COMPLIANCE PROCEDURES A. REPORTING PERSONAL SECURITIES TRANSACTIONS. 1. An outside board member shall report to Liberty WAM's compliance officer, within ten days after the end of the calendar quarter in which a reportable transaction occurs, any personal securities transaction in which the outside board member, at the time of the transaction, knew, or in the ordinary course of fulfilling his duties as a trustee should have known, that on the day of the transaction or within 15 days before or after that day a purchase or sale of that security was made by or considered for the Fund. 2 B. FORM OF REPORTS. Reports of personal securities transactions may be in any form (including copies of confirmations or monthly statements) but must include (i) the date of the transaction, the title and number of shares, and the principal amount of each security involved; (ii) the nature of the transaction (i.e., purchase, sale, gift, or other type of acquisition or disposition); (iii) the price at which the transaction was effected; (iv) the name of the broker, dealer, or bank with or through whom the transaction was effected; and (v) the name of the reporting person. C. MONITORING OF TRANSACTIONS. Liberty WAM's compliance officer will review the reports of personal securities transactions of the Fund's outside board members. D. CERTIFICATION OF COMPLIANCE. Each outside board member is required to certify annually that he or she has read and understands the Code and recognizes that he or she is subject to the Code. To accomplish this, the Secretary of the Fund shall annually distribute a copy of the Code and request certification. E. REVIEW BY THE FUND'S BOARD. The officers of the Fund shall prepare an annual report to the board that: 1. summarizes existing procedures concerning personal investing and any changes in those procedures during the past year; 2. identifies any violations of the Code requiring significant remedial action during the past year; and 3. identifies any recommended changes in existing restrictions or procedures based upon experience under the Code, evolving industry practices, or developments in applicable laws or regulations. V. EXEMPT TRANSACTIONS The provisions of this Code are intended to restrict the personal investment activities of persons subject to the Code only to the extent necessary to accomplish the purposes of the Code. Therefore, the provisions of Section III (Restrictions on Personal Securities Transactions) and Section IV (Compliance Procedures) of this Code shall not apply to: A. Purchases or sales effected in any account over which the persons subject to this Code have no direct or indirect influence or control; B. Purchases or sales of: 1. U.S. government securities; 2. shares of open-end investment companies (mutual funds), including but not limited to shares of any series of WAT or Acorn; and 3. bank certificates of deposit or commercial paper. C. Purchases or sales over which neither the person subject to this Code nor the Fund has control; 3 D. Purchases that are part of an automatic dividend reinvestment plan; E. Purchases effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of securities to the extent such rights were acquired from such issuer, and sales of such rights so acquired; F. Purchases or sales in an account managed by an independent investment adviser with discretion where the trustee has no advance knowledge of the transactions before they had been executed; and G. Purchases or sales that receive the prior approval of the Fund's compliance officer or chief operating officer because they are not inconsistent with this Code or the provisions of Rule 17j-1(a) under the Investment Company Act of 1940. A copy of Rule 17j-1 is attached as Appendix B. VI. CONSEQUENCES OF FAILURE TO COMPLY WITH THE CODE Compliance with this Code of Ethics is a condition of retention of positions with the Fund. The Fund's board of trustees shall determine what action is appropriate for any breach of the provisions of the Code by an outside board member, which may include removal from the board. Reports filed pursuant to the Code will be maintained in confidence but will be reviewed by Liberty WAM or the Fund to verify compliance with the Code. Additional information may be required to clarify the nature of particular transactions. VII. RETENTION OF RECORDS Liberty WAM's designated compliance officer shall maintain the records listed below for a period of five years at the Fund's principal place of business in an easily accessible place: A. a list of all persons subject to the Code during the period; B. receipts signed by all persons subject to the Code acknowledging receipt of copies of the Code and acknowledging that they are subject to it; C. a copy of each code of ethics that has been in effect at any time during the period; and D. a copy of each report filed pursuant to the Code and a record of any known violation and action taken as a result thereof during the period. * * * * * 4 Exhibit p.2 SCHEDULE A Fred D. Hasselbring P. Michael Phelps Patricia Werhane APPENDIX A EXAMPLES OF BENEFICIAL OWNERSHIP For purposes of the Code, you will be deemed to have a beneficial interest in a security if you have the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security. Examples of beneficial ownership under this definition include: o securities you own, no matter how they are registered, and including securities held for you by others (for example, by a custodian or broker, or by a relative, executor or administrator) or that you have pledged to another (as security for a loan, for example); o securities held by a trust of which you are a beneficiary (except that, if your interest is a remainder interest and you do not have or participate in investment control of trust assets, you will not be deemed to have a beneficial interest in securities held by the trust); o securities held by you as trustee or co-trustee, where either you or any member of your immediate family (i.e., spouse, children or descendants, stepchildren, parents and their ancestors, and stepparents, in each case treating a legal adoption as blood relationship) has a beneficial interest (using these rules) in the trust; o securities held by a trust of which you are the settlor, if you have the power to revoke the trust without obtaining the consent of all the beneficiaries and have or participate in investment control; o securities held by any partnership in which you are a general partner, to the extent of your interest in partnership capital or profits; o securities held by a personal holding company controlled by you alone or jointly with others; o securities held by (i) your spouse, unless legally separated, or you and your spouse jointly, or (ii) your minor children or any immediate family member of you or your spouse (including an adult relative), directly or through a trust, who is sharing your home, even if the securities were not received from you and the income from the securities is not actually used for the maintenance of your household; or o securities you have the right to acquire (for example, through the exercise of a derivative security), even if the right is not presently exercisable, or securities as to which, through any other type of arrangement, you obtain benefits substantially equivalent to those of ownership. You will NOT be deemed to have beneficial ownership of securities in the following situations: o securities held by a limited partnership in which you do not have a controlling interest and do not have or share investment control over the partnership's portfolio; and o securities held by a foundation of which you are a trustee and donor, provided that the beneficiaries are exclusively charitable and you have no right to revoke the gift. APPENDIX A THESE EXAMPLES ARE NOT EXCLUSIVE. THERE ARE OTHER CIRCUMSTANCES IN WHICH YOU MAY BE DEEMED TO HAVE A BENEFICIAL INTEREST IN A SECURITY. ANY QUESTIONS ABOUT WHETHER YOU HAVE A BENEFICIAL INTEREST SHOULD BE DIRECTED TO LIBERTY WAM'S DESIGNATED COMPLIANCE OFFICER OR CHIEF OPERATING OFFICER. ATTACHMENT A WANGER ADVISORS TRUST CODE OF ETHICS AFFIRMATION I affirm that I have received a copy of the Wanger Advisors Trust Code of Ethics for Non-Interested Board Members (the "Code") and have read and understand it. I acknowledge that I am subject to the Code and will comply with the Code in all respects. Date: ________________ ______________________________ Signature -----END PRIVACY-ENHANCED MESSAGE-----