-----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, Ge03S0m6exOF9Cjyvb3wMvmcp7SbnoNu5xh1LGC9SLwWBc4Fyc3DjouqOpkvxpAe aW5yU0p9cYlJn1k+PRIY0Q== 0000950131-98-002860.txt : 19980430 0000950131-98-002860.hdr.sgml : 19980430 ACCESSION NUMBER: 0000950131-98-002860 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980429 EFFECTIVENESS DATE: 19980429 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WANGER ADVISORS TRUST CENTRAL INDEX KEY: 0000929521 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-83548 FILM NUMBER: 98604351 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-08748 FILM NUMBER: 98604352 BUSINESS ADDRESS: STREET 1: 227 WEST MONROE STREET STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126349200 FORMER COMPANY: FORMER CONFORMED NAME: WANGER ADVISORS TRUT DATE OF NAME CHANGE: 19940902 485BPOS 1 WANGER ADVISORS TRUST AMENDMENT #6 As filed with the Securities and Exchange Commission on April 29, 1998 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. 6 and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 7 ---------------------------------------------- WANGER ADVISORS TRUST (Registrant) 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 Telephone number: 312/634-9200 ---------------------------------------------- Ralph Wanger Janet D. Olsen Wanger Advisors Trust Bell, Boyd & Lloyd 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 April 30, 1998 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 ADVISORS TRUST Cross reference sheet pursuant to rule 495(a) of Regulation C
Item No. Location or caption* - -------- -------------------- Part A (Prospectus) Wanger U.S. Small Cap Wanger International Small Cap ------------------------------- 1. Cover Page Cover Page. 2. Synopsis Expenses and Performance 3. Condensed Financial Information Financial Highlights 4. General Description of Registrant The Funds at a Glance; Expenses and Performance; The Wanger Investment Objective and Policies; Securities, Investment Practices, and Risks; Organization and Management 5. Management of the Fund Expenses and Performance; Organization and Management 5A. Management's Discussion of Fund Performance Not applicable 6. Capital Stock and Other Securities Investing in the Funds; Organization and Management; Dividends and Taxes 7. Purchase of Securities Being Offered Organization and Management; Investing in the Funds 8. Redemption or Repurchase Investing in the Funds 9. Pending Legal Proceedings Not applicable
- --------------- *References are to captions within the part of the registration statement to which the particular item relates except as otherwise indicated.
Item No. Location or caption* - -------- -------------------- Part B (Statement of Additional Information) Wanger U.S. Small Cap Wanger International Small Cap ------------------------------ 10. Cover Page Cover Page 11. Table of Contents Table of Contents 12. General Information and History Information About the Funds 13. Investment Objectives and Policies Investment Objectives and Policies; Investment Techniques and Risks; Investment Restrictions 14. Management of the Fund Trustees and Officers; Certain Shareholders 15. Control Persons and Principal The Trust; Trustees and Officers; Holders of Securities Certain Shareholders 16. Investment Advisory and Investment Adviser; Custodian; Other Services Independent Auditors 17. Brokerage Allocation Portfolio Transactions 18. Capital Stock and Other Securities The Trust 19. Purchase, Redemption, and Pricing of Purchasing and Redeeming Shares Securities Being Offered 20. Tax Status Additional Tax Information 21. Underwriters Distributor 22. Calculation of Performance Data Performance Information 23. Financial Statements Information About the Funds
- --------------- *References are to captions within the part of the registration statement to which the particular item relates except as otherwise indicated.
Item No. Location or caption* - -------- -------------------- Part C (Other Information) -------------------------- 24 Financial statements and exhibits 25 Persons controlled by or under common control with registrant 26 Number of holders of securities 27 Indemnification 28 Business and other connections of investment adviser 29 Principal underwriters 30 Location of accounts and records 31 Management services 32 Undertakings
- --------------- *References are to captions within the part of the registration statement to which the particular item relates except as otherwise indicated. - -------------------------------------------------------------------------------- Wanger Advisors Trust Wanger U.S. Small Cap Wanger International Small Cap Prospectus April 30, 1998 Wanger 98 - -------------------------------------------------------------------------------- Wanger 98 Contents 2 The Funds at a Glance 3 Expenses and Performance 4 Financial Highlights 6 Investing in the Funds 9 The Wanger Investment Objective and Policies 10 Securities, Investment Practices, and Risks 14 Organization and Management 16 Dividends and Taxes - -------------------------------------------------------------------------------- Wanger Asset Management, L.P. 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 1-800-4-WANGER (1-800-492-6437) - -------------------------------------------------------------------------------- Wanger Advisors Trust Prospectus Wanger U.S. Small Cap April 30, 1998 Wanger International Small Cap Wanger U.S. Small Cap and Wanger International Small Cap (each, a "Fund"; together, the "Funds"), series of Wanger Advisors Trust (the "Trust"), invest for long-term capital growth. Each Fund invests primarily in stocks of small and medium-size companies. Wanger U.S. Small Cap invests primarily in U.S. companies, and Wanger International Small Cap invests primarily in non-U.S. companies. Both Funds are managed by Wanger Asset Management, L.P. ("WAM"). Shares of Wanger U.S. Small Cap and Wanger International Small Cap are offered to life insurance companies ("Life Companies") for allocation to certain separate accounts established for the purpose of funding qualified and non- qualified variable annuity or variable life insurance contracts ("Variable Contracts"), and may also be offered directly to certain pension plans and retirement arrangements and accounts permitting accumulation of funds on a tax- deferred basis ("Retirement Plans"). - -------------------------------------------------------------------------------- Please read this prospectus before investing, and keep it on file for future reference. It contains important information about how the Funds invest and the availability of Fund shares. A Statement of Additional Information ("SAI") dated the date of this prospectus has been filed with the Securities and Exchange Commission, and is incorporated herein by reference. The SAI is available free upon request by calling WAM at: 1-800-4-WANGER. - -------------------------------------------------------------------------------- LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 1 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- The Funds at a Glance Goal Wanger U.S. Small Cap ("U.S. Small Cap") and Wanger International Small Cap ("International Small Cap") invest for long-term growth of capital. Strategy U.S. Small Cap and International Small Cap invest primarily in stocks of small and medium-size companies. The Funds look for attractively priced companies that Wanger Asset Management, L.P., investment adviser to the Funds, thinks will benefit from favorable long-term social, economic, or political trends. The areas of emphasis change from time to time. U.S. Small Cap invests primarily in U.S. companies. International Small Cap invests primarily in non-U.S. companies. Management Wanger Asset Management, L.P. ("WAM") chooses investments for the Funds. WAM employs a team approach to management of the Funds. The management team comprises the lead portfolio manager, other WAM portfolio managers and research analysts. Team members share responsibility for providing ideas, information, knowledge and expertise in managing the Funds. Each team member has one or more areas of expertise that are applied to the management of the Fund. Daily decisions on portfolio selection rest with the lead portfolio manager who utilizes the input and advice of the management team in making purchase and sale decisions. Robert A. Mohn is the lead portfolio manager of U.S. Small Cap and Marcel P. Houtzager is the lead portfolio manager of International Small Cap. Who May Want To Invest U.S. Small Cap and International Small Cap are designed for investors who want long-term growth of capital rather than income and who have the long-term investment outlook needed for investing in the stocks of small and medium-size companies in the U.S. and overseas. Shares of the Fund are sold only to Life Companies and certain Retirement Plans. See "Investing in the Fund -- Who May Invest." The value of each Fund's investments and the return it generates vary from day to day. Performance depends on WAM's skill in identifying the trends that are the basis for the Fund's stock selections, and in picking individual stocks, as well as general market and economic conditions. The stocks of small companies often involve more risk than the stocks of larger companies. Over time, these stocks have shown greater growth potential than other types of securities. In the short term, however, stock prices may fluctuate widely in response to company, market, or economic news. The Funds do not pursue income, and are not by themselves a balanced investment plan. 2 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Expenses and Performance Expenses Transaction expenses are charges paid when shares of the Funds are purchased or sold. Maximum sales charge on purchases and reinvested dividends None Deferred sales charge on redemption None Annual Fund Operating Expenses Each Fund pays its own operating expenses including the management fee to WAM. Expenses are factored into the Fund's price or dividends, are subtracted from the share price daily, and are not charged directly to shareholders. All Fund operating expenses are calculated as a percentage of average net assets. Wanger U.S. Small Cap Management Fee 0.97% 12b-1 Fee None Other Expenses 0.09% - ----------------------------------------------- Total Fund Operating Expenses 1.06% Wanger International Small Cap Management Fee 1.28% 12b-1 Fee None Other Expenses 0.32% - ----------------------------------------------- Total Fund Operating Expenses 1.60% The management fees shown are based on the following schedule: for U.S. Small Cap, 1.00% of the net asset value of the Fund up to $100 million, 0.95% of the net asset value of the Fund in excess of $100 million and up to $250 million, and 0.90% of the net asset value in excess of $250 million; for International Small Cap, 1.30% of the net asset value of the Fund up to $100 million, 1.20% of the net asset value of the Fund in excess of $100 million and up to $250 million, and 1.10% of the net asset value in excess of $250 million. The "Other Expenses" are at the rates incurred during the last fiscal year. As required by SEC rules, "Other Expenses" reflects gross custody fees. Net of custodian fees paid indirectly, "Other Expenses" would have been 0.07% for U.S. Small Cap and 0.31% for International Small Cap. Total Fund Operating Expenses would have been 1.04% and 1.59%, respectively. Understanding Expenses Operating a mutual fund involves a variety of expenses for portfolio management, accounting, tax reporting, and other services. These costs are paid from the fund's assets; any quoted share price or return is after expenses. Example: Let's say, hypothetically, that each Fund's annual return is 5% and that its operating expenses are exactly as shown in the table to the left. For every $1,000 you invested, here's how much would have been paid in total expenses if shares of each Fund were redeemed after the number of years indicated: Wanger U.S. Small Cap After 1 year $ 11 After 3 years $ 34 After 5 years $ 58 After 10 years $129 Wanger International Small Cap After 1 year $ 16 After 3 years $ 50 After 5 years $ 87 After 10 years $190 The table and examples illustrate the effect of direct and indirect expenses, but are not meant to suggest actual or expected costs or returns, all of which may vary. 3 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Financial Highlights - -------------------------------------------------------------------------------- The following information has been audited by Ernst & Young LLP, independent auditors. Their unqualified report, and the Funds' financial statements, are included in the Trust's Annual Report. The financial statements of each Fund and the auditors' report are incorporated by reference into the SAI. You may obtain a free copy of the Trust's Annual Report by calling 1-800-4 WANGER.
Year ended Year ended May 3, 1995 through December 31, 1997 December 31, 1996 December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------- Wanger U.S. Small Cap Net asset value, beginning of period $ 16.97 $ 11.60 $ 10.00 Income from investment operations Net investment loss (c) (.02) (.06) (.05) Net realized and unrealized gain on investments 4.90 5.46 1.65 - ----------------------------------------------------------------------------------------------------------------------- Total from investment operations 4.88 5.40 1.60 Less distributions Dividends from net investment income -- -- -- Distributions from net realized gain (.39) (.03) -- - ----------------------------------------------------------------------------------------------------------------------- Total distributions (.39) (.03) -- Net asset value, end of period $ 21.46 $ 16.97 $ 11.60 - ----------------------------------------------------------------------------------------------------------------------- Total return 29.41% 46.59% 16.00% Ratios/supplemental data: Ratio of expenses to average net assets (a) (b) 1.06% 1.21% 2.08%* Ratio of net investment loss to average net assets (b) (.10%) (.41%) (1.44%)* Portfolio turnover rate 34% 46% 59%* Net assets at end of period $270,865,827 $128,957,911 $21,903,536 - -----------------------------------------------------------------------------------------------------------------------
*Annualized (a) In accordance with a requirement by the Securities and Exchange Commission, this ratio reflects gross custodian fees. This ratio, net of custodian fees paid indirectly, would have been 1.04% for the year ended December 31, 1997, 1.19% for the year ended December 31, 1996 and 2.00% for the period ended December 31, 1995. (b) The Fund was reimbursed by the Adviser for certain expenses from May 3, 1995 through December 31, 1995. Without the reimbursement, the ratio of expenses to average net assets and the ratio of net investment loss to average net assets for the period ended December 31, 1995 would have been 2.35% and (1.71%), respectively. (c) Net investment loss per share for the years ended December 31, 1997 and December 31, 1996 was based upon the average shares outstanding during the period. 4 Wanger Advisors Trust Prospectus April 30, 1998
Year ended Year ended May 3, 1995 through December 31, 1997 December 31, 1996 December 31, 1995 - -------------------------------------------------------------------------------------------------------------------------------- Wanger International Small Cap Net asset value, beginning of period $ 17.71 $ 13.45 $ 10.00 Income from investment operations Net investment income (loss) (c) .02 (.09) (.03) Net realized and unrealized gain on investments (.26) 4.38 3.48 - -------------------------------------------------------------------------------------------------------------------------------- Total from investment operations (.24) 4.29 3.45 Less distributions Dividends from net investment income -- -- Distributions from net realized gain (.42) (.03) -- - -------------------------------------------------------------------------------------------------------------------------------- Total distributions (.42) (.03) -- Net asset value, end of period $ 17.05 $ 17.71 $ 13.45 - -------------------------------------------------------------------------------------------------------------------------------- Total Return (1.46%) 32.01% 34.50% Ratios/supplemental data: Ratio of expenses to average net assets (a) (b) 1.60% 1.79% 2.32%* Ratio of net investment income (loss) to average net assets (b) .12% (.56%) (.81%)* Portfolio turnover rate 60% 50% 14%* Net assets at end of period $120,660,158 $84,855,082 $11,368,924 - --------------------------------------------------------------------------------------------------------------------------------
*Annualized (a) In accordance with a requirement by the Securities and Exchange Commission, this ratio reflects gross custodian fees. This ratio, net of custodian fees paid indirectly, would have been 1.59% for the year ended December 31, 1997, 1.75% for the year ended December 31, 1996 and 2.00% for the period ended December 31, 1995. (b) The Fund was reimbursed by the Adviser for certain expenses from May 3, 1995 through December 31, 1995. Without the reimbursement, the ratio of expenses to average net assets and the ratio of net investment loss to average net assets for the period ended December 31, 1995 would have been 4.20% and (2.69%), respectively. (c) Net investment income (loss) per share for the years ended December 31, 1997 and December 31, 1996 was based upon the average shares outstanding during the period. 5 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Investing in the Funds Performance Mutual fund performance is commonly measured as total return. Total return is the change in value of an investment in a fund over a given period, assuming reinvestment of all dividends and capital gains. Total return reflects actual performance over a stated period of time. Average annual total return is a hypothetical rate of return that, if achieved annually, would have produced the same total return if performance had been constant over the entire period. Average annual total returns smooth out variations in performance; they are not the same as actual year-by-year results. Total returns are based on past results and are not a prediction of future performance. They do not include the effect of income taxes. The Funds sometimes show their performance compared to stock indexes (described in the SAI), or give their ratings or rankings determined by an unrelated organization. Information about the performance of the Funds is contained in the Trust's annual report which may be obtained free of charge by calling WAM at: 1-800-4-WANGER. Total returns quoted for the Funds include the effect of deducting each Fund's expenses, but will not include charges and expenses attributable to a particular Variable Contract or Retirement Plan. Because shares of the Funds may only be purchased through a Variable Contract or an eligible Retirement Plan, an individual owning a Variable Contract or participating in a Retirement Plan should carefully review the Variable Contract disclosure documents or Retirement Plan information for information on relevant charges and expenses. Excluding these charges from quotations of each Fund's performance has the effect of increasing the performance quoted. These charges should be considered when comparing a Fund's performance to other investment alternatives. Doing Business With The Trust The Trust provides Life Companies and Retirement Plans with information Monday through Friday, except holidays, from 8:00 a.m. to 4:30 p.m. Central time. For information, prices, literature, or to obtain information regarding the availability of Fund shares or how Fund shares are redeemed, call WAM at 1-800-4-WANGER. Who May Invest Shares of the Funds are issued and redeemed in connection with investments in and payments under certain qualified and non-qualified Variable Contracts issued through separate accounts of the Life Companies. Shares of the Funds may also be offered directly to certain of the following types of qualified plans and retirement arrangements and accounts, collectively called "Retirement Plans": . a plan described in section 401(a) of the Internal Revenue Code that includes a trust exempt from tax under section 501(a); . an annuity plan described in section 403(a); . an annuity contract described in section 403(b), including a 403(b)(7) custodial account; . a governmental plan under section 414(d) or an eligible deferred compensation plan under section 457(b); and . a plan described in section 501(c)(18). The trust or plan must be established before shares of the Funds can be purchased by the plan. Neither the Funds nor WAM offers prototypes of these plans. The Funds have imposed certain additional restrictions on sales to Retirement Plans to reduce their expenses. To be eligible to invest in the Funds, a Retirement Plan must be domiciled in a state in which Fund shares may be sold without payment of a fee to the state. In most states, this policy will require that a Retirement Plan have at least $5 million in assets and that investment decisions are made by a Plan fiduciary rather than Plan participants in order for the Plan to be eligible to invest. The Funds do not intend to offer shares in states where the sale of Fund shares requires the payment of a fee. A Retirement Plan may call WAM at 1-800-4-WANGER to determine if it is eligible to invest. 6 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- How to Invest and Redeem Shares of U.S. Small Cap and International Small Cap may not be purchased or redeemed directly by individual Variable Contract owners or individual Retirement Plan participants. Variable Contract owners or Retirement Plan participants should consult the disclosure documents for their Variable Contract, or the plan documents (including the summary plan description) for their Retirement Plan, regarding the provisions of the Variable Contract or of the Retirement Plan which govern the availability of the Fund as an investment vehicle for allocations under their Variable Contract or Retirement Plan. No sales commissions of any kind are imposed upon purchases of Fund shares by Life Companies or Retirement Plans. (However, each Variable Contract imposes its own charges and fees on owners of the Variable Contract, and Retirement Plans may impose such charges on participants in the Retirement Plan.) The price paid for shares is the net asset value ("NAV") next calculated after a Fund or its agent receives and accepts an order to purchase Fund shares. Purchase orders are considered received when information identifying the purchaser and the money to pay for the shares are received. Redemptions will be effected through the Life Companies and Retirement Plan trustees to meet obligations under the Variable Contracts and the Retirement Plans. In the case of a Life Company purchaser, particular purchase and redemption procedures typically will be set forth in an agreement between the Trust and the Life Company. The Trust may enter into similar agreements with Retirement Plans. Purchases. To the extent not otherwise provided in any agreement between the Trust and a Life Company or Retirement Plan, shares of a Fund may be purchased by check or by wire transfer of funds. To be effective, a purchase order must consist of the money to purchase the shares and (i) information identifying the purchaser, in the case of a Life Company or Retirement Plan with which the Funds have entered into an agreement, or a subsequent purchase by a Life Company or Retirement Plan that is already a Fund shareholder, or (ii) a completed purchase application, in the case of the initial investment by a Retirement Plan with which the Funds do not have an agreement. Redemptions. Subject to the terms of any agreement between the Funds and any Life Company or Retirement Plan, shares may be redeemed by written request or by telephone (for redemptions of $50,000 or less), with proceeds paid by check or by wire transfer. Redeeming Shares in Writing. A written redemption request must: . identify the owner of the account; . specify the number of shares or dollar amount to be redeemed; . be signed on behalf of the owner by an individual or individuals authorized to do so, and include evidence of their authority; . if the shares to be redeemed have a value of more than $50,000, include a signature guarantee by an "eligible guarantor institution" as defined in the rules under the Securities Exchange Act of 1934 (including a bank, broker-dealer, credit union (if authorized under state law), national securities exchange, registered securities association, clearing agency or savings association, but not a notary public); and . be accompanied by any stock certificates representing the shares to be redeemed. A check for the redemption proceeds will be mailed to the address of record unless payment by wire transfer is requested. Redeeming Shares by Telephone. Unless a Retirement Plan shareholder chose on its purchase application not to have the ability to do so, redemptions of shares having a value of $50,000 or less may be requested by calling the Funds' transfer agent at 1-800-962-1585. The 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 Funds or their transfer agent by telephone, your redemption request would have to be placed by mail. Exchanging Shares by Telephone. To the extent not otherwise provided in an agreement between the Trust and a Retirement Plan shareholder, a Retirement Plan may exchange shares of one Fund for shares of the other Fund by telephone by calling 1-800-962-1585. Shares may be exchanged only between identically- registered accounts, and the shares in the new Fund must be available for sale without payment of a fee under any applicable state securities law. Shares for which share certificates have been issued may not be exchanged by telephone. (If you want to return your certificates, call the Funds' transfer agent at 1-800- 962-1585 for instructions.) 7 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Because excessive trading can hurt Fund performance and shareholders, the Funds reserve the right to temporarily or permanently terminate the exchange privilege of any shareholder who makes excessive use of the exchange plan. In particular, a pattern of exchanges that coincide with a "market timing" strategy may be disruptive to a Fund. The Funds may limit the number of exchanges per year. The Funds will not be responsible for unauthorized transactions if they follow reasonable procedures to confirm that instructions received by telephone are genuine, such as requesting information that appears on a Retirement Plan's purchase application and requiring permission to record the telephone call. Normally, redemption proceeds will be paid within seven days after a Fund or its agent receives a request for redemption. Redemptions may be suspended or payment date postponed on days when the New York Stock Exchange ("NYSE") is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. Share Price The Funds are open for business each day the NYSE is open. The offering price (price to buy one share) and redemption price (price to sell one share) are the Fund's net asset value ("NAV") calculated at the next Closing Time after receipt of an order. Closing Time is the time of the close of regular session trading on the NYSE, which is usually 3:00 p.m. Central time, but is sometimes earlier. A Fund's NAV is the value of a single share. The NAV is computed by adding up the value of the Fund's investments, cash, and other assets, subtracting its liabilities, and then dividing the result by the number of shares outstanding. Each Fund's portfolio securities and assets are valued primarily on the basis of market quotations from the primary market in which they are traded or, if quotations are not readily available, by a method that the Board of Trustees believes accurately reflects a fair value. Values of foreign securities are translated from the local currency into U.S. dollars using current exchange rates. Because of the different trading hours in various markets, the calculation of the net asset value does not take place contemporaneously with the determination of the prices of many foreign securities held by the Funds, particularly International Small Cap. These timing differences may have a significant effect on NAV. A purchase or redemption of Fund shares will be priced at the NAV next calculated after the purchase or redemption request is received and accepted by the Funds or their agent. An order received before Closing Time will get that day's price; an order received after Closing Time will get the next day's price. Statements and Reports Information sent to Life Companies and Retirement Plans semi-annually includes: . Schedule of Fund investments. . Reports to shareholders. Call WAM at: 1-800-4-WANGER for copies of Fund reports. 8 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- The Wanger Investment Objective and Policies U.S. Small Cap and International Small Cap seek long-term growth of capital. Although income is considered in the selection of securities for U.S. Small Cap, neither Fund is designed for investors seeking primarily income rather than capital appreciation. The Fund prefers small companies. Since large institutions seek highly marketable stocks, the stocks of large companies are studied in detail by security analysts, with the result that all investors know much the same thing about large companies. WAM prefers to work with stocks where values are more attractive because the facts about the companies are not universally known. U.S. Small Cap and International Small Cap thus generally concentrate purchases on that segment of the market where the competition is less intense -- companies with a total common stock market capitalization of less than $1 billion. WAM wants to be able to understand any company in which the Funds invest, and smaller companies are easier to comprehend than large firms or conglomerates. When a company develops into a multi-industry giant, it is difficult for even the top management of the company to understand its own business and even harder for an outsider to follow such widespread activities. Since WAM places a premium on understanding the Funds' investments, when possible WAM talks to top management directly. That is easier to do with smaller firms. Under normal market conditions, each Fund invests at least 65% of its total assets, at market value at the time of investment, in companies with total stock market capitalizations of $1 billion or less. The dollar value of the capitalization range may change as overall market capitalization ranges change. The Funds are not required to sell a security of a company that has grown to a size greater than $1 billion. Looking for high quality companies. The Funds look for quality businesses, with each investment ideally resting on a solid tripod of growth potential, financial strength, and fundamental value. Not all of the companies in which the Funds invest necessarily have all of these characteristics. The sources of growth may be a growing marketplace for the company's product, good design, efficient manufacturing, sound marketing, or good profit margins. Financial strength means low debt, adequate working capital, and conservative accounting principles. Strong capitalization gives management the stability and flexibility to reach strategic objectives. In economies with less well developed capital markets than those of the U.S., a strong balance sheet is an essential component of competitive advantage. Fundamental value means low relative price. The existence of a good company does not necessarily make its stock a good buy. The price of a stock determines value as measured relative to dividends, earnings, cash flow, growth rate, book value, and economic replacement value of assets. The emphasis on fundamentals in relation to price sets U.S. Small Cap and International Small Cap apart from pure "growth" or "value" funds. WAM also believes that finding and understanding high quality companies is important because investing in smaller companies involves relatively higher investment costs. One way to reduce these costs is to invest with a long-term time horizon (at least 2-5 years) and to avoid frequent turnover of the stocks held by the Funds. Occasionally, however, securities purchased on a long-term basis may be sold within 12 months after purchase in light of a change in the circumstances of a particular company or industry, or in general market or economic conditions. Investment themes. To find long-term investments and reduce its rate of turnover, the Funds seek out areas of the economy that they believe will benefit from favorable long-term economic and political trends. These areas of emphasis may change from time to time, and are usually related to identified investment themes or market niches. A small company frequently can carve out a specialized niche for itself. The niche can be geographic, like that of a regional bank or community newspaper. It can be technological, based on patents and know-how. Sometimes the niche is a marketing technique. In international investing, the niche can be participation in a fast-growth economy. A well-run business in a growing country has an easier path to a high growth rate. The Funds invest primarily in equity securities, including common and preferred stocks, warrants or other similar rights, and convertible securities. The Funds may purchase foreign securities in the form of American Depository Receipts (ADRs), European Depository Receipts (EDRs), or other securities representing underlying shares of foreign issuers. The Funds may also invest in any other type of security, including debt securities. Under normal market conditions, International Small Cap will generally invest at least 65% of its total assets, taken at market value, in foreign securities. The foreign securities in which the Funds invest may be traded in mature markets and in emerging markets. Each Fund's investment restrictions do not require it to invest in a minimum or maximum number of countries; however, state insurance laws may impose diversification or other requirements on the Funds' foreign investing. 9 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- The Funds may invest without limit in corporate or government obligations or hold cash or cash equivalents if WAM determines that a temporary defensive position is advisable. If investments in foreign securities appear to be relatively unattractive because of current or anticipated adverse political or economic conditions, International Small Cap may hold cash or invest any portion of its assets in securities of the U.S. government, its agencies and instrumentalities, and equity and debt securities of U.S. companies, as a temporary defensive strategy. The Funds use various techniques to increase or decrease its exposure to the effects of possible changes in security prices, currency exchange rates, or other factors that affect the value of a Fund's portfolio. These techniques include buying and selling options, futures contracts, or options on futures contracts, or entering into currency exchange contracts or swap agreements. The investment objective of either U.S. Small Cap and International Small Cap may be changed by the Board of Trustees without shareholder approval. If there were such a change, investors should consider whether that Fund would remain an appropriate investment in light of then current financial position and needs. The Funds are not intended, alone or together, to present a balanced investment program. Securities, Investment Practices, and Risks The following pages contain more detailed information about types of investments the Funds may make, and strategies WAM may employ in pursuit of each Fund's investment objective, including information about the risks and restrictions associated with these instrument types and investment practices. All policies stated throughout this prospectus, other than those identified as fundamental, can be changed without shareholder approval. A complete statement of each Fund's investment restrictions is included in the SAI. Policies and limitations are considered at the time of purchase; the sale of instruments is not required because of a subsequent change in circumstances. WAM may not buy all of these instruments or use all of these techniques to the full extent permitted unless it believes that doing so will help a Fund achieve its goal. Equity Securities U.S. Small Cap and International Small Cap invest mostly in common stocks, which represent an equity (ownership) interest in a corporation. This ownership interest often gives a Fund the right to vote on measures affecting the company's organization and operations. 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 prices, including significant declines over a given period. U.S. Small Cap and International Small Cap invest mostly in the securities of smaller companies, that is, companies with a total common stock market capitalization of less than $1 billion at the time of the initial investment. During some periods, the securities of small companies, as a class, have performed better than the securities of large companies, and in some periods they have performed worse. Stocks of small companies tend to be more volatile and less liquid than stocks of large companies. Small companies, as compared with larger companies, may have a shorter history of operations, may not have as great an ability to raise additional capital, may have a less diversified product line making them susceptible to market pressure, and may have a smaller public market for their shares. Restrictions: Neither Fund may 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.* - -------------------------------------------------------------------------------- *These restrictions are "fundamental," which means that they cannot be changed without shareholder approval. 10 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Foreign Securities Investments in foreign securities provide opportunities different from those available in the U.S., and risks which in some ways may be greater than in U.S. investments. International investing allows greater diversification and provides an ability to take advantage of changes in foreign economies and market conditions. From time to time, many foreign economies have grown faster than the U.S. economy, and the returns on investments in these countries have exceeded those of similar U.S. investments, although there can be no assurance that these conditions will continue. Investors should understand and consider carefully the greater 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 certain risks and opportunities not typically associated with investing in U.S. securities. These include: fluctuations in exchange rates of foreign currencies; 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 sub- custodial arrangements. In addition, the costs of investing in foreign securities are higher than the cost of investing in U.S. securities. Investing in countries outside the U.S. also involves political risk. A foreign government might restrict investments by foreigners, expropriate assets, seize or nationalize foreign bank deposits or other assets, establish exchange controls, or enact other policies that could affect investment in these nations. Economies in individual markets may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rates of inflation, currency depreciation, capital reinvestment, resource self- sufficiency and balance of payments positions. Many emerging market countries have experienced extremely high rates of inflation for many years. That has had and may continue to have side effects on the economies and securities markets of those countries. The securities markets of emerging countries 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 are in many respects less stringent than in the U.S. There also may be a lower level of monitoring and regulation in emerging markets of traders, insiders, and investors. Enforcement of existing regulations has been extremely limited. The Funds may invest in ADRs that are not sponsored by the issuer of the underlying security. To the extent the Fund does so, it would probably bear its proportionate share of the expenses of the depository and might have greater difficulty in receiving copies of the issuer's shareholder communications than would be the case with a sponsored ADR. The Funds may invest in securities purchased on a when-issued and delayed delivery basis. Although the payment terms of these securities are established at the time a Fund enters into the commitment, the securities may be delivered and paid for a month or more after the date of purchase, when their value may have changed. A Fund will make such commitments only with the intention of actually acquiring the securities, but may sell the securities before settlement date if WAM considers it advisable for investment reasons. Restrictions: Under normal market conditions, International Small Cap invests at least 65% of its total assets in foreign securities. U.S. Small Cap will generally invest at least 65% of its total assets in domestic securities. Managing Investment Exposure The Funds use various techniques to increase or decrease their exposure to the effects of possible changes in security prices, currency exchange rates or other factors that affect the value of the Funds' portfolios. These techniques include buying and selling options, futures contracts, or options on futures contracts, or entering into currency exchange contracts or swap agreements. These techniques are used by WAM to adjust the risk and return characteristics of the Funds' portfolios. If WAM judges market conditions incorrectly or employs a strategy that does not correlate well with a Fund's investments, or if the counterparty to the transaction does not perform as promised, the transaction could result in a loss. Use of these techniques may increase the volatility of a Fund and may involve a small investment of cash relative to the magnitude of the risk assumed. These techniques are used by the Funds for hedging, risk management or portfolio management purposes and not for speculation. 11 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Currency exchange transactions. A currency exchange transaction may be conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market or through a forward currency exchange contract ("forward contract"). A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange-traded and are usually for less than one year, but may be renewed. Currency exchange transactions may involve currencies of the different countries in which the Funds may invest, and serve as hedges against possible variations in the exchange rate between these currencies. The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or actual or anticipated portfolio positions. Transaction hedging is the purchase or sale of a forward contract with respect to a specific receivable or payable of a Fund accruing in connection with the purchase or sale of portfolio securities. Portfolio hedging is the use of a forward contract with respect to an actual or anticipated portfolio security position denominated or quoted in a particular currency. The Funds may engage in portfolio hedging with respect to the currency of a particular country in amounts approximating actual or anticipated positions in securities denominated in such currency. When a Fund owns or anticipates owning securities in countries whose currencies are linked, WAM may aggregate such positions as to the currency hedged. Although forward contracts may be used to protect a Fund from adverse currency movements, the use of such hedges may reduce or eliminate the potentially positive effect of currency revaluations on that Fund's total return. Options and futures. Each Fund may enter into stock index or currency futures contracts (or options thereon) to hedge a portion of that Fund's portfolio, to provide an efficient means of regulating the Fund's exposure to the equity markets, or as a hedge against changes in prevailing levels of currency exchange rates. Each Fund may write covered call options and purchase put and call options on foreign currencies, securities, and stock indices. Futures contracts and options can be highly volatile. A Fund's attempt to use such investments for hedging purposes may not be successful and could result in reduction of that Fund's total return. Restrictions: A Fund will not use futures contracts for speculation, and will limit its use of futures contracts so that no more than 5% of that Fund's total assets would be committed to initial margin deposits or premiums on such contracts. The aggregate market value of each Fund's currencies or portfolio securities covering call or put options will not exceed 10% of that Fund's net assets. Debt Securities Bonds and other debt instruments are methods for an issuer to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest, and must repay the amount borrowed at maturity. Debt securities have varying degrees of quality and varying levels of sensitivity to changes in interest rates. "Investment grade" debt securities are those rated within the four highest ratings categories of Standard & Poor's Corporation ("S&P") or Moody's Investors Services, Inc. ("Moody's") or, if unrated, determined by WAM to be of comparable quality. Securities rated BBB or Baa are considered to be medium grade and to have speculative characteristics. Investment in non-investment grade debt securities is speculative and involves a high degree of risk. Lower-rated debt securities (commonly called "junk bonds") are often considered speculative and involve greater risk of default or price changes due to changes in the issuer's creditworthiness. The market prices of these securities may fluctuate more than higher-rated securities and may decline significantly in periods of general economic difficulty. Money market instruments are high-quality, short-term debt securities that present minimal credit risk. These instruments may carry fixed or variable interest rates and are called cash equivalents. U.S. Small Cap may invest without limit in corporate or government obligations, or hold cash or cash equivalents if WAM determines that a temporary defensive position is advisable. If investments in foreign securities appear to be relatively unattractive because of current or anticipated adverse political or economic conditions, International Small Cap may hold cash or invest any portion of its assets in securities of the U.S. government, its agencies or instrumentalities, and equity and debt securities of U.S. companies, as a temporary defensive strategy. To meet liquidity needs (which, under normal market conditions, are not expected to exceed 25% of its total assets) or for temporary defensive purposes, each Fund may hold cash in domestic and foreign currencies and may invest in domestic and foreign money market securities. 12 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Restrictions: There are no restrictions on the ratings of debt securities owned by the Funds or the portion of a Fund's assets that may be invested in debt securities in a particular ratings category, except that neither Fund may invest more than 20% of its assets in securities rated below investment grade or considered by WAM to be of comparable credit quality. Neither Fund expects to invest more than 5% of its net assets in such securities during the current fiscal year. Illiquid and Restricted Securities Some investments may be determined by WAM to be illiquid, which means that they may be difficult to sell promptly at an acceptable price. Other securities, such as securities acquired in private placements, may be sold only in compliance with certain legal restrictions. Difficulty in selling securities may result in delays or a loss, or may be costly to the Fund. Restrictions: Neither Fund may purchase a security if, as a result, more than 15% of its net assets would be invested in illiquid or restricted securities.* Lending and Repurchase Agreements The Funds generally may not make loans, but will invest in repurchase agreements. A repurchase agreement involves a sale of securities to a Fund in which the seller agrees to repurchase the securities at a higher price, which includes an amount representing interest on the purchase price, within a specified time. In the event of bankruptcy of the seller the Fund could experience both losses and delays in liquidating its collateral. Restrictions: Neither Fund may make loans, but this restriction shall not prevent a 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,/1/ 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).* Diversification Each Fund's investment portfolio is well diversified to reduce risk. Restrictions: Neither Fund may, with respect to 75% of its total assets, invest more than 5% of its total assets in the securities of any one issuer. Neither Fund may invest more than 25% of its total assets in any one industry. This limitation does not apply to U.S. government securities.* Other Investment Companies Certain markets are closed in whole or in part to equity investments by foreigners. The Funds may be able to invest in such markets solely or primarily through governmentally authorized investment companies. Investment in another investment company may involve the payment of a premium above the value of the issuer's portfolio securities, and is subject to market availability. In the case of a purchase of shares of such a company in a public offering, the purchase price may include an underwriting spread. The Funds do not intend to invest in other investment companies unless, in the judgment of WAM, the potential benefits of such investment justify the payment of any applicable premium or sales charge. As a shareholder in an investment company, a Fund would bear its ratable share of that investment company's expenses, including its advisory and administration fees. At the same time the Fund would continue to pay its own management fees and other expenses. Restrictions: A Fund generally may invest up to 10% of its assets in shares of other investment companies and up to 5% of its assets in any one investment company (in each case measured at the time of investment). No investment in another investment company may represent more than 3% of the outstanding stock of the acquired investment company at the time of investment. State Insurance Restrictions The Funds are sold to the Life Companies in connection with Variable Contracts, and will seek to be available under Variable Contracts sold in a number of jurisdictions. Certain states have regulations or guidelines concerning concentration of investments and other investment techniques. If applied to the Funds, the Funds may be limited in their ability to engage in certain techniques and to manage their portfolios with the flexibility provided herein. In order to permit a Fund to be available under Variable Contracts sold in certain states, each Fund may make commitments that are more restrictive than the investment policies and limitations described above and in the statement of additional information. If a Fund determines that such a commitment is no longer in the Fund's best interests, the commitment may be revoked by terminating the availability of the Fund to Variable Contract owners residing in such states. - -------------------------------------------------------------------------------- * These restrictions are "fundamental," which means that they cannot be changed without shareholder approval. /1/ The Funds have no present intention of lending their portfolio securities. 13 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Organization and Management Organization U.S. Small Cap and International Small Cap are series of Wanger Advisors Trust, an open-end, management investment company. The Trust is a Massachusetts business trust organized under an agreement and declaration of trust dated August 30, 1994. Each share of a Fund is entitled to participate pro rata in any dividends and other distributions declared by the Board of Trustees with respect to that Fund, and all shares of a Fund have equal rights in the event of liquidation of that Fund. The Trust is governed by a Board of Trustees, which is responsible for protecting the interests of the shareholders of the Funds. The Trustees are experienced executives and professionals who meet at regular intervals to oversee the activities of the Trust and the Funds, review contractual arrangements with companies that provide services to the Funds and the Trust, and review performance. The Trust may hold special meetings of shareholders. These meetings may be called to elect or remove Trustees, change fundamental policies, approve a management contract, or for other purposes. The Funds will mail proxy materials in advance, including a voting card and information about the proposals to be voted on. (The Trust is not required to hold annual meetings of shareholders and does not intend to do so.) For further information on the rights of shareholders of the Funds, see "Availability of the Funds and Shareholder Rights" below. Management The Funds are managed by Wanger Asset Management, L.P., 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; WAM chooses the Funds' investments and handles their business affairs under the direction of the Board of Trustees. WAM is a limited partnership managed by its general partner, Wanger Asset Management, Ltd. WAM manages more than $7 billion in assets. WAM employs a team approach to management of the Funds. The management teams comprise a lead portfolio manager, other WAM portfolio managers and research analysts. Team members share responsibility for providing ideas, information and knowledge in managing the Funds, with each team member having one or more particular areas of expertise applicable to the management of the Funds. Daily decisions on portfolio selection rest with the lead portfolio manager who utilizes the input and advice of the management team in making purchase and sale determinations. Ralph Wanger is chief investment officer of WAM. He is also the chairman of the board of trustees of the Trust. Mr. Wanger is also lead portfolio manager of Acorn Fund and president and chief investment strategist of Acorn Investment Trust (Acorn Fund, Acorn International and Acorn USA). Mr. Wanger has been president and a member of the board of Acorn Fund and its predecessor since 1970. He is a principal of WAM. Marcel P. Houtzager is a vice president of the Trust, and is the lead portfolio manager of International Small Cap. A specialist in foreign equities, Mr. Houtzager joined WAM as an investment analyst in April 1992, becoming a principal in 1995. Mr. Houtzager is also a vice president of Acorn Investment Trust. Robert A. Mohn is a vice president of the Trust and is the lead portfolio manager of U.S. Small Cap. Mr. Mohn is also a vice president of Acorn Investment Trust, and the lead manager of Acorn USA. Mr. Mohn is a key member of WAM's domestic analytical team, and has been a principal of WAM since July 1995. Charles P. McQuaid is a member of the management team of U.S. Small Cap. Mr. McQuaid is a trustee and senior vice president of the Trust. He is also a trustee and senior vice president of Acorn Investment Trust, and is a co-manager of Acorn Fund. Mr. McQuaid is a principal of WAM. He has worked with Mr. Wanger for 20 years. John H. Park is a vice president of the Trust and a principal of WAM. Mr. Park joined WAM's investment management team in July 1993 as a domestic analyst, and was an analyst with Ariel Capital Management prior thereto. Mr. Park's investment expertise is in the health care industry. Leah J. Zell is a member of International Small Cap's management team and is a vice president of the Trust. Ms. Zell is also a vice president of Acorn Investment Trust, and is the lead portfolio manager of Acorn International. She is a principal of WAM and has been working with Mr. Wanger for 14 years. Merrillyn J. Kosier, senior vice president and secretary and Bruce H. Lauer, vice president and treasurer, are the other executive officers of the Trust. State Street Bank and Trust Company is each Fund's transfer agent, shareholder servicing agent and custodian. Some of the computer systems used today are unable to process and calculate date-related information because they are not programmed to distinguish between the year 2000 and the year 1900. WAM, like many other businesses, is taking steps to ensure that the computer systems on which the smooth operation of the Funds depends will continue to function properly. WAM is working with the service providers to the Funds, such as the transfer agency, custodian, and various broker-dealers through which portfolio securities of the Funds are traded, to arrange for testing of internal and external systems. Based on the information currently available, WAM does not anticipate any material impact on the delivery of services currently 14 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- provided. There can be no assurance, however, that the steps taken by WAM in preparation for the Year 2000 will be sufficient to avoid any adverse impact on the Funds, and shareholders may also be affected by Year 2000 problems encountered by the Life Companies or Retirement Plans. Distributor Shares of the Funds are offered for sale through WAM Brokerage Services, L.L.C. ("WAM BD") without any sales commission or charges to the Funds or Life Companies or Retirement Plans purchasing Fund shares. However, each Variable Contract imposes its own charges and fees on owners of Variable Contracts and Retirement Plans may impose such charges on participants in a Retirement Plan. WAM BD is wholly owned by WAM, the Funds' investment adviser, and the investment adviser's general partner, Wanger Asset Management, Ltd. WAM BD's address is 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. All distribution and promotional expenses relating to the Funds are paid by WAM, including the payment or reimbursement of any expenses incurred by WAM BD. Expenses Like all mutual funds, U.S. Small Cap and International Small Cap pay expenses related to their daily operations. Expenses paid out of each Fund's assets are reflected in its share price or dividends. Each Fund pays a management fee to WAM for managing its investments and business affairs, as set forth under "Expenses and Performance." While the management fee is a significant component of each Fund's annual operating costs, the Funds have other expenses as well. Each Fund pays the fees of its custodian, transfer agents, auditors and lawyers. It also pays other expenses such as the cost of compliance with federal and state laws, proxy solicitations, shareholder reports, taxes, insurance premiums, and the fees of Trustees who are not otherwise affiliated with the Trust or WAM. Additional expenses are incurred under the Variable Contracts and the Retirement Plans. These expenses are not described in this prospectus; Variable Contract owners and Retirement Plan participants should consult the Variable Contract disclosure documents or Retirement Plan information regarding these expenses. From time to time, WAM may pay amounts from its past profits to Life Companies or other organizations that provide administrative services for the Funds or that provide to owners of Variable Contracts and/or participants in Retirement Plans other services relating to the Funds. These services may include, among other things: sub-accounting services; answering inquiries regarding the Funds; transmitting, on behalf of the Funds, proxy statements, shareholder reports, updated prospectuses and other communications regarding the Funds; and such other related services as the Funds, owners of Variable Contracts, and/or participants in Retirement Plans may request. The amount of any such payment will be determined by the nature and extent of the services provided by the Life Company or other organization. Payment of such amounts by WAM will not increase the fees paid by the Funds or their shareholders. Availability of the Funds and Shareholder Rights Shares of the Funds will be sold only to separate accounts of Life Companies, and to certain Retirement Plans as described under "Investing in the Funds -- Who May Invest." The Trustees of the Trust may refuse to sell shares of the Funds to any person, or suspend or terminate the offering of shares if such action is required by law or by regulatory authorities having jurisdiction or is, 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, necessary in the best interests of the shareholders of the Funds. Each Fund offers its shares to (i) Variable Contracts (including variable annuity and variable life insurance contracts) offered through Life Companies which may or may not be affiliated with each other and (ii) Retirement Plans. Due to differences in tax treatment and other considerations, the interests of various Variable Contract owners and Retirement Plan participants may conflict. The Board of Trustees of the Trust will monitor the Funds for any material conflicts that may arise and will determine what action, if any, should be taken. If a conflict occurs, the Board of Trustees may require one or more Life Companies' separate accounts and/or Retirement Plans to withdraw its investments in the Funds. As a result, a Fund may be forced to sell securities at disadvantageous prices. In addition, the Board of Trustees may refuse to sell shares of the Funds to any Variable Contract or Retirement Plan or may suspend or terminate the offering of shares of the Funds if such action is required by law or regulatory authority or is in the best interests of the shareholders of the Funds. Pursuant to current interpretations of the Investment Company Act of 1940, as amended, the Life Companies will solicit voting instructions from Variable Contract owners with respect to any matters that are presented to a vote of shareholders. The exercise of voting rights on shares held by Retirement Plans will be governed by the terms of such Retirement Plans. Some Retirement Plans may pass-through voting to plan participants. Shares held by other Retirement Plans may be voted by the trustees of the Retirement Plan or by a named fiduciary or an investment manager. Retirement Plan participants should consult their plan documents for information. 15 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- On any matter submitted to a vote of shareholders, all shares of the Trust then issued and outstanding and entitled to vote shall be voted in the aggregate and not by Fund, except for matters concerning only one Fund. Certain matters approved by a vote of shareholders of one Fund of the Trust may not be binding on a Fund whose shareholders have not approved such matters. The holder of each share of the Trust shall be entitled to one vote for each full share and a fractional vote for each fractional share of stock. Shares of one Fund may not bear the same economic relationship to the Trust as shares of another Fund. - -------------------------------------------------------------------------------- Dividends and Taxes Each Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended ("Code"). As such, a Fund is not subject to federal income tax on that part of its investment company taxable income (consisting generally of net investment income, net gains from certain foreign currency transactions, and net realized short-term capital gain, if any) and any net realized capital gain (the excess of net realized long-term capital gain over net realized short-term capital loss) that it distributes to its shareholders. It is the intention of each Fund to distribute all such income and gains. All dividends are distributed to the separate accounts and to the Retirement Plans and will be automatically reinvested in Trust shares. Dividends and distributions made by the Funds to the separate accounts are taxable, if at all, to the Life Companies; they are not taxable to Variable Contract owners. Dividends and distributions made by the Funds to the Retirement Plans are not taxable to the Retirement Plans or to the participants thereunder. For a discussion of the taxation of the Life Companies and separate accounts, as well as the tax treatment of the Variable Contracts and the owners thereof, see the disclosure documents for the Variable Contracts. For information regarding the taxation of Retirement Plans as well as the participants thereunder, see the plan administrator and plan documents for the Retirement Plan. Prospective investors are urged to consult their tax advisers. Each Fund intends to comply with the diversification requirements imposed by Section 817(h) of the Code and the regulations thereunder. These requirements are in addition to the diversification requirements imposed on each Fund by Subchapter M of the Code and the 1940 Act. Section 817(h) places certain limitations on the assets of a separate account that may be invested in securities of a single issuer, and, because Section 817(h) and the regulations thereunder treat a Fund's assets as assets of the related separate account, these limitations also apply to the Fund's assets that may be invested in securities of a single issuer. Generally, the regulations provide that, as of the end of each calendar quarter, or within 30 days thereafter, no more than 55% of a Fund's total assets may be represented by any one investment, no more than 70% by any two investments, no more than 80% by any three investments, and no more than 90% by any four investments. For purposes of Section 817(h), all securities of the same issuer, all interests in the same real property project, and all interests in the same commodity are treated as a single investment. Generally, compliance by the Funds with the requirements of Section 817(h) and the regulations thereunder is not prevented by reason of the fact that shares in a Fund may be held by the trustee of a qualified pension or other retirement plan. Failure of a Fund to satisfy the Section 817(h) requirements could result in adverse tax consequences to the Life Companies and Variable Contract owners. The foregoing is only a summary of some of the important federal income tax considerations generally affecting the Funds and their shareholders; see the SAI for additional discussion. 16 Wanger Advisors Trust Prospectus April 30, 1998 - -------------------------------------------------------------------------------- Wanger Advisors Trust Trustees Fred D. Hasselbring Charles P. McQuaid P. Michael Phelps James A. Star Ralph Wanger Officers Ralph Wanger President Marcel P. Houtzager Vice President Kenneth A. Kalina Assistant Treasurer Merrillyn J. Kosier Senior Vice President and Secretary Bruce H. Lauer Vice President and Treasurer Charles P. McQuaid Senior Vice President Robert A. Mohn Vice President John H. Park Vice President Leah J. Zell Vice President Transfer Agent, Dividend Disbursing Agent and Custodian State Street Bank and Trust Company Attention: Wanger Advisors Trust P.O. Box 8502 Boston, Massachusetts 02266-8502 Investment Adviser Wanger Asset Management, L.P. 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 1-800-4-WANGER (1-800-492-6437) Legal Counsel Bell, Boyd & Lloyd Chicago, Illinois Auditors Ernst & Young LLP Chicago, Illinois - -------------------------------------------------------------------------------- Wanger Asset Management, L.P. 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 1-800-4-WANGER (1-800-492-6437) WANGER ADVISORS TRUST STATEMENT OF ADDITIONAL INFORMATION April 30, 1998 227 West Monroe Street Chicago, Illinois 60606 Telephone: 1-800-4-WANGER ____________________________ WANGER U.S. SMALL CAP WANGER INTERNATIONAL SMALL CAP TABLE OF CONTENTS -----------------
Page ---- INFORMATION ABOUT THE FUNDS................................................. 2 INVESTMENT OBJECTIVES AND POLICIES.......................................... 2 INVESTMENT TECHNIQUES AND RISKS............................................. 2 INVESTMENT RESTRICTIONS..................................................... 17 PERFORMANCE INFORMATION..................................................... 20 INVESTMENT ADVISER.......................................................... 21 DISTRIBUTOR................................................................. 23 THE TRUST................................................................... 24 TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS................................. 25 PURCHASING AND REDEEMING SHARES............................................. 27 ADDITIONAL TAX INFORMATION.................................................. 28 PORTFOLIO TRANSACTIONS...................................................... 29 CUSTODIAN................................................................... 31 INDEPENDENT AUDITORS........................................................ 31 APPENDIX....................................................................A-1
This Statement of Additional Information ("SAI") is not a prospectus but provides information that should be read in conjunction with the prospectus of Wanger Advisors Trust dated April 30, 1998 and any supplement thereto, which may be obtained from the Trust at no charge by writing or telephoning Wanger Asset Management, L.P., the Trust's investment adviser, at the address or telephone number shown above. 1 INFORMATION ABOUT THE FUNDS Wanger U.S. Small Cap ("U.S. Small Cap") and Wanger International Small Cap ("International Small Cap") (each, a "Fund"; together, the "Funds") are series of Wanger Advisors Trust (the "Trust"). Both Funds are currently available only for allocation to certain life insurance company ("Life Company") separate accounts established for the purpose of funding certain qualified and non- qualified variable annuity contracts ("Variable Contracts"), and may also be offered directly to certain types of pension plans and retirement arrangements and accounts permitting the accumulation of funds on a tax-deferred basis ("Retirement Plans"), as described in the prospectus. A copy of the Trust's 1997 Annual Report accompanies this SAI. The Annual Report contains audited financial statements, notes thereto, supplementary information entitled "Financial Highlights," and a report of independent auditors, all of which (but no other part of the Annual Report) are incorporated herein by reference. Additional copies of the Annual Report may be obtained without charge by writing or telephoning Wanger Asset Management, L.P. at the address or telephone number shown on the cover page of this SAI. The discussion below supplements the description in the prospectus of the Funds' investment objectives, policies, and restrictions. INVESTMENT OBJECTIVES AND POLICIES U.S. Small Cap and International Small Cap invest with the objective of long- term growth of capital. Although income is considered by U.S. Small Cap in the selection of securities, the Funds are not designed for investors seeking primarily income rather than capital appreciation. Both Funds are managed by Wanger Asset Management, L.P. ("WAM"). The Funds use the techniques and invest in the types of securities described below and in the prospectus. INVESTMENT TECHNIQUES AND RISKS Foreign Securities The Funds invest in foreign securities, which may entail a greater degree of risk (including risks relating to exchange rate fluctuations, tax provisions, or expropriation of assets) than does investment in securities of domestic issuers. Under normal market conditions, International Small Cap invests at least 65% of its total assets, taken at market value, in foreign securities. U.S. Small Cap does not have a current intention to invest more than 5% of its net assets in foreign securities. The Funds may invest in securities of foreign issuers directly or in the form of American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), or other securities 2 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. 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. A Fund may invest in both "sponsored" and "unsponsored" ADRs. In a sponsored ADR, the issuer typically pays some or all of the expenses of the depository and agrees to provide its regular shareholder communications to ADR holders. An unsponsored ADR is created independently of the issuer of the underlying security. The ADR 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. Neither Fund expects to invest more than 5% of its total assets in unsponsored ADRs. A Fund's investment performance is affected by the strength or weakness of the U.S. dollar against the currencies of the foreign markets in which the Fund's securities trade or in which they are denominated. For example, if the dollar falls in value relative to the Japanese yen, the dollar value of a yen- denominated stock held in the portfolio will rise even though the price of the stock remains unchanged. Conversely, if the dollar rises in value relative to the yen, the dollar value of the yen-denominated stock will fall. (See the discussion of transaction hedging and portfolio hedging under "Currency Exchange Transactions.") 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 investments in securities of companies in developing as well as developed countries; and sometimes less advantageous legal, operational, and financial protections applicable to foreign sub-custodial arrangements. 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. 3 Currency Exchange Transactions The Funds may enter into currency exchange transactions. A currency exchange transaction may be conducted either on a spot (i.e., cash) basis at the spot rate for purchasing or selling currency prevailing in the foreign exchange market or through a forward currency exchange contract ("forward contract"). A forward contract is an agreement to purchase or sell a specified currency at a specified future date (or within a specified time period) and price set at the time of the contract. Forward contracts are usually entered into with banks, foreign exchange dealers or broker-dealers, are not exchange traded, and are usually for less than one year, but may be renewed. Forward currency transactions may involve currencies of the different countries in which the Funds may invest, and serve as hedges against possible variations in the exchange rate between these currencies. The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions, except to the extent described below under "Synthetic Foreign Money Market Positions." Transaction hedging is the purchase or sale of a forward contract with respect to specific payables or receivables of a Fund accruing in connection with the purchase or sale of portfolio securities. Portfolio hedging is the use of a forward contract with respect to a portfolio security position denominated or quoted in a particular currency. The Funds may engage in portfolio hedging with respect to the currency of a particular country in amounts approximating actual or anticipated positions in securities denominated in that currency. When either Fund owns or anticipates owning securities in countries whose currencies are linked, WAM may aggregate such positions as to the currency hedged. If a Fund enters into a forward contract hedging an anticipated purchase of portfolio securities, liquid assets of that Fund, such as cash, U.S. government securities, or other liquid high grade debt obligations, having a value equal to the Fund's commitment under such forward contract will be segregated on the books of the Fund and held by the custodian while the contract is outstanding. At the maturity of a forward contract to deliver a particular currency, a Fund may either sell the portfolio security related to such contract and make delivery of the currency, or it may retain the security and either acquire the currency on the spot market or terminate its contractual obligation to deliver the currency by purchasing an offsetting contract with the same currency trader obligating it to purchase on the same maturity date the same amount of the currency. It is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a forward contract. Accordingly, it may be necessary for a Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of currency that the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the currency. Conversely, it may be necessary to sell on the spot market some of the currency received upon the sale of the portfolio security if its market value exceeds the amount of currency that the Fund is obligated to deliver. 4 If a Fund retains the portfolio security and engages in an offsetting transaction, that Fund will incur a gain or a loss to the extent that there has been movement in forward contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the currency. Should forward prices decline during the period between a Fund's entering into a forward contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, a Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. A default on the contract would deprive the Fund of unrealized profits or force the Fund to cover its commitments for purchase or sale of the currency, if any, at the current market price. Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for a Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The cost to a Fund of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period, and prevailing market conditions. Because currency exchange transactions are usually conducted on a principal basis, no fees or commissions are involved. Synthetic Foreign Money Market Positions. The Funds may invest in money market instruments denominated in foreign currencies. In addition to, or in lieu of, such direct investment, the Funds may construct a synthetic foreign money market position by (a) purchasing a money market instrument denominated in one currency, generally U.S. dollars, and (b) concurrently entering into a forward contract to deliver a corresponding amount of that currency in exchange for a different currency on a future date and at a specified rate of exchange. For example, a synthetic money market position in Japanese yen could be constructed by purchasing a U.S. dollar money market instrument, and entering concurrently into a forward contract to deliver a corresponding amount of U.S. dollars in exchange for Japanese yen on a specified date and at a specified rate of exchange. Because of the availability of a variety of highly liquid short-term U.S. dollar money market instruments, a synthetic money market position utilizing such U.S. dollar instruments may offer greater liquidity than direct investment in foreign money market instruments. The results of a direct investment in a foreign currency and a concurrent construction of a synthetic position in such foreign currency, in terms of both income yield and gain or loss from changes in currency exchange rates, in general should be similar, but would not be identical because the components of the alternative investments would not be identical. Except to the extent a synthetic foreign money market position consists of a money market instrument denominated in a foreign currency, the synthetic foreign money market position shall not be deemed a "foreign security" for purposes of the policies that, under normal conditions, (a) U.S. Small Cap will generally invest at least 65% of its total assets in domestic securities, and (b) International Small Cap will generally invest at least 65% of its total assets in foreign securities. 5 Options and Futures The Funds may purchase and write both call options and put options on securities and on indexes, and enter into interest rate and index futures contracts, and may purchase or sell options on such futures contracts ("futures options") in order to provide additional revenue, or to hedge against changes in security prices or interest rates. The Funds may also use other types of options, futures contracts and futures options currently traded or subsequently developed and traded, provided the Board of Trustees determines that their use is consistent with the Funds' investment objective. Options. An option on a security (or index) is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option on an individual security or on a foreign currency has the obligation upon exercise of the option to deliver the underlying security or foreign currency upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security or foreign currency. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. (An index is designed to reflect specified facets of a particular financial or securities market, a specific group of financial instruments or securities, or certain economic indicators.) The Funds 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 a Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount are held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. If an option written by a Fund expires, that 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, that Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when a Fund desires. A Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying 6 security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date. A put or call option purchased by a Fund is an asset of that Fund, 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. OTC Derivatives. The Funds may buy and sell over-the-counter ("OTC") derivatives (derivatives not traded on exchange). 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 the Funds greater flexibility to tailor an instrument to their needs, OTC derivatives generally involve greater credit risk than exchange-traded derivatives, which are guaranteed by the clearing organization of the exchanges where they are traded. Each Fund will limit its investments so that no more than 5% of its total assets will be placed at risk in the use of OTC derivatives. See "Illiquid Securities" below for more information on the risks associated with investing in OTC derivatives. Risks Associated with Options. There are several risks associated with transactions in options. For example, there are significant differences among the securities markets, the currency markets, and the options markets that could result in an imperfect correlation among these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when, and how to use options involves the exercise of skill and judgment, and even a well- conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. If a Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option would expire and become worthless. If a Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security until the option expired. As the writer of a covered call option on a security, a Fund forgoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call. As the writer of a covered call option on a foreign currency, a Fund foregoes, during the option's life, the opportunity to profit from currency appreciation. If trading were suspended in an option purchased or written by one of the Funds, that 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 had purchased. Futures Contracts and Options on Futures Contracts. The Funds may use interest rate futures contracts and index futures contracts. An interest rate or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a 7 financial instrument or the cash value of an index/1/ at a specified price and time. A public market exists in futures contracts covering a number of indexes (including, but not limited to: the Standard & Poor's 500 Index; the Value Line Composite Index; the Russell 2000 Index; and the New York Stock Exchange Composite Index) as well as financial instruments (including, but not limited to: U.S. Treasury bonds; U.S. Treasury notes; Eurodollar certificates of deposit; and foreign currencies). Other index and financial instrument futures contracts are available and it is expected that additional futures contracts will be developed and traded. The Funds may purchase and write call and put futures options. Futures options possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (call) or short position (put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short position. In the case of a put option, the opposite is true. To the extent required by regulatory authorities having jurisdiction over the Funds, the Funds will limit their use of futures contracts and futures options to hedging transactions. For example, the Funds might use futures contracts to hedge against fluctuations in the general level of stock prices, anticipated changes in interest rates, or currency fluctuations that might adversely affect either the value of a Fund's securities or the price of the securities that a Fund intends to purchase. The Funds' hedging may include sales of futures contracts as an offset against the effect of expected declines in stock prices or currency exchange rates or increases in interest rates and purchases of futures contracts as an offset against the effect of expected increases in stock prices or currency exchange rates or declines in interest rates. Although other techniques could be used to reduce the Funds' exposure to stock price, interest rate, and currency fluctuations, the Funds may be able to hedge their exposure more effectively and perhaps at a lower cost by using futures contracts and futures options. The success of any hedging technique depends on WAM 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 hedging not been attempted; however, in the absence of the ability to hedge, WAM might have taken portfolio actions in anticipation of the same market movements with similar investment results but, presumably, at greater transaction costs. When a purchase or sale of a futures contract is made by a Fund, that Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of cash or U.S. government - ------------------- /1/ A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of a securities index is a function of the value of certain specified securities, no physical delivery of those securities is made. 8 securities or other securities acceptable to the broker ("initial margin"). The margin required for a futures contract is generally set by the exchange on which the contract is traded; however, the margin requirement may be modified during the term of the contract, and the Fund's broker may require margin deposits in excess of the minimum required by the exchange. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract, which is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. The Funds expect to earn interest income on their initial margin deposits. A futures contract held by a Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking-to-market." Variation margin paid or received by a Fund does not represent a borrowing or loan by the Fund but is instead settlement between that 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, the Funds will mark-to-market their open futures positions. The Funds are also required to deposit and maintain margin with respect to put and call options on futures contracts they write. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Funds. Although some futures contracts call for making or taking delivery of the underlying securities, usually these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the Funds realize a capital gain, or if it is more, the Funds realize 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 as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the portfolio securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as: variations in speculative market demand for futures, futures options, and the related securities, including technical influences in futures and futures options trading and differences between the Funds' investments being hedged and the securities underlying the standard contracts available for trading. For example, in the case of index futures contracts, the composition of the index, including the issuers and the weighting of each issue, may differ from the composition of a Fund's portfolio, and, in the case of interest rate futures contracts, the interest rate levels, maturities, and creditworthiness of the issues underlying the futures contract may differ from the financial instruments held in a Fund's portfolio. A decision as to whether, when, and how to hedge involves the exercise of skill and judgment, and even a 9 well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected stock price or interest rate trends. Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses. Stock index futures contracts are not normally subject to such daily price change limitations. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a futures or futures option position. The Fund would be exposed to possible loss on the position during the interval of inability to close, and would continue to be required to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary 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,"/2/ would exceed 5% of the Fund's total assets. When purchasing a futures contract or writing a put option on a futures contract, a Fund must maintain with its custodian (or broker, 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, a 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 a Fund has - ------------------- /2/ A call option is "in-the-money" if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is "in-the- money" if the exercise price exceeds the value of the futures contract that is the subject of the option. 10 written call options on specific securities in its portfolio, the value of those securities will be deducted from the current market value of the securities portfolio. In order to comply with Commodity Futures Trading Commission Regulation 4.5 and thereby avoid being deemed a "commodity pool operator," the "underlying commodity value" of each long position in a commodity contract in which a Fund invests will not at any time exceed the sum of: (1) The value of short-term U.S. debt obligations or other U.S. dollar denominated high-quality short-term money market instruments and cash set aside in an identifiable manner, plus any funds deposited as margin on the contract; (2) Unrealized appreciation on the contract held by the broker; and (3) Cash proceeds from existing investments due in not more than 30 days. "Underlying commodity value" means the size of the contract multiplied by the daily settlement price of the contract. Each Fund's options and futures transactions are also subject to certain non- fundamental investment restrictions set forth under "Investment Restrictions" in this SAI. Moreover, neither Fund will purchase puts, calls, straddles, spreads, or any combination thereof if by reason of such purchase more than 10% of that Fund's total assets would be invested in such securities. Taxation of Options and Futures. If a Fund exercises a call or put option that it holds, the premium paid for the option is added to the cost basis of the security purchased (call) or deducted from the proceeds of the security sold (put). For cash settlement options and futures options exercised by that Fund, the difference between the cash received at exercise and the premium paid is a capital gain or loss. If a call or put option written by a Fund is exercised, the premium is included in the proceeds of the sale of the underlying security (call) or reduces the cost basis of the security purchased (put). For cash settlement options and futures options written by a Fund, the difference between the cash paid at exercise and the premium received is a capital gain or loss. Entry into a closing purchase transaction will result in capital gain or loss. If an option written by a Fund is in-the-money at the time it was written and the security covering the option was held for more than the long-term holding period prior to the writing of the option, any loss realized as a result of a closing purchase transaction will be long-term. The holding period of the securities covering an in-the-money option will not include the period of time the option is outstanding. 11 If a Fund writes an equity call option/3/ 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, that Fund also realizes a capital gain or loss on those securities. For Federal income tax purposes, a Fund generally is required to recognize for each taxable year its net unrealized gains and losses as of the end of the year on futures, futures options and non-equity options positions ("year-end mark-to- market"). Generally, any gain or loss recognized with respect to such positions (either by year-end mark-to-market or by actual closing of the positions) is considered to be 60% long-term and 40% short-term, without regard to the holding periods of the contracts. However, in the case of positions classified as part of a "mixed straddle," the recognition of losses on certain positions (including options, futures and futures options positions, the related securities and certain successor positions thereto) may be deferred to a later taxable year. Sale of futures contracts or writing of call options (or futures call options) or buying put options (or futures put options) that are intended to hedge against a change in the value of securities held by the Fund may affect the holding period of the hedged securities. If a Fund were to enter into a short index future, short index futures option or short index option position and the Fund's portfolio were deemed to "mimic" the performance of the index underlying such contract, the option or futures contract position and the Fund's stock positions may be deemed to be positions in a mixed straddle, subject to the above-mentioned loss deferral rules. The Taxpayer Relief Act of 1997 (the "Act") imposed constructive sale treatment for Federal income tax purposes on certain hedging strategies with respect to appreciated securities. Under these rules taxpayers will recognize gain, but not loss, with respect to securities if they enter into short sales of "offsetting notional principal contracts" (as defined by the Act) with respect to, or futures or "forward contracts" (as defined by the Act) with respect to, the same or substantially identical property, or if they enter into such transactions and then acquire the same or substantially identical property. These changes generally apply to constructive sales after June 8, 1997. 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, - ------------------- /3/ An equity option is defined to mean any option to buy or sell stock, and any other option the value of which is determined by reference to an index of stocks of the type that is ineligible to be traded on a commodity futures exchange (e.g., an option contract on a sub-index based on the price of nine hotel-casino stocks). The definition of equity option excludes options on broad-based stock indexes (such as the Standard & Poor's 500 index). 12 offsetting notional principal contracts, and futures or forward contracts to deliver the same or substantially similar property. In order for each 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, futures, or forward contracts). Any net gain realized from futures (or futures options) contracts will be considered gain from the sale of securities and therefore be qualifying income for purposes of the 90% requirement. The Funds intend to distribute to shareholders annually any capital gains that have been recognized for Federal income tax purposes (including year-end mark- to-market gains) on options and futures transactions, together with gains on other Fund investments, to the extent such gains exceed recognized capital losses and any net capital loss carryovers of the Funds. Shareholders will be advised of the nature of such capital gain distributions. Swap Agreements. A swap agreement is generally individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on its structure, a swap agreement may increase or decrease a Fund's exposure to changes in the value of an index of securities in which the Fund might invest, the value of a particular security or group of securities, or foreign currency values. Swap agreements can take many different forms and are known by a variety of names. A Fund may enter into any form of swap agreement if WAM determines it is consistent with the Fund's 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 placed at risk. A swap agreement tends to shift the Fund's investment exposure from one type of investment to another. For example, if the 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 the Fund's investments and its net asset value. 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 the 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. The Fund expects to be able to eliminate its exposure under any swap agreement either by assignment or by other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. The Fund will segregate assets of the Fund to cover its current obligations under swap agreements. If the 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 the Fund's accumulated obligations under the swap agreement over the accumulated amount the Fund is entitled to receive under the agreement. If the Fund 13 enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the Fund's accumulated obligations under the agreement. Illiquid Securities A Fund may not invest in illiquid securities, including restricted securities and OTC derivatives, if as a result they would comprise more than 15% of the value of the net assets of the Fund. Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where registration is required, a Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in good faith by the Board of Trustees. If through the appreciation of illiquid securities or the depreciation of liquid securities, either U.S. Small Cap or International Small Cap should be in a position where more than 15% of the value of its net assets is invested in illiquid assets, including restricted securities and OTC derivatives, that Fund will take appropriate steps to protect liquidity. Notwithstanding the foregoing, a Fund may purchase securities that have been privately placed but that are eligible for purchase and sale under Rule 144A under the 1933 Act. That rule permits certain qualified institutional buyers, such as the Funds, to trade in privately placed securities that have not been registered for sale under the 1933 Act. WAM, under the supervision of the Board of Trustees, will consider whether securities purchased under Rule 144A are illiquid and thus subject to a Fund's restriction of investing no more than 15% of its assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination WAM will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security. In addition, WAM could consider the (1) frequency of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer undertakings to make a market, and (4) nature of the security and of market place trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities will be monitored and if, as a result of changed conditions, it is determined that a Rule 144A security is no longer liquid, the Funds' holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that a Fund 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. 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. 14 There are no restrictions as to the ratings of debt securities acquired by the Funds or the portion of a Fund's assets that may be invested in debt securities in a particular ratings category except that neither Fund will invest more than 20% of its assets in securities rated below investment grade or considered by WAM to be of comparable credit quality. Neither Fund expects to invest more than 5% of its net assets in such securities during the current fiscal year. Securities rated BBB or Baa are considered to be medium grade and to have speculative characteristics. Lower-rated debt securities are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal. Investment in medium- or lower-quality debt securities involves greater investment risk, including the possibility of issuer default or bankruptcy. An economic downturn could severely disrupt the market for such securities and adversely affect the value of such securities. In addition, lower-quality bonds are less sensitive to interest rate changes than higher- quality instruments and generally are more sensitive to adverse economic changes or individual corporate developments. During a period of adverse economic changes, including a period of rising interest rates, the junk bond market may be severely disrupted, and issuers of such bonds may experience difficulty in servicing their principal and interest payment obligations. Medium- and lower-quality debt securities may be less marketable than higher- quality debt securities because the market for them is less broad. The market for unrated debt securities is even narrower. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly, and a Fund may have greater difficulty selling its portfolio securities. See "Net Asset Value." The market value of these securities and their liquidity may be affected by adverse publicity and investor perceptions. A more complete description of the characteristics of bonds in each ratings category is included in the appendix to this SAI. 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, a Fund will enter into repurchase agreements only with banks and dealers believed by WAM to present minimum credit risks in accordance with guidelines approved by the board of trustees. WAM will review and monitor the creditworthiness of such institutions, and will consider the capitalization of the institution, WAM's prior dealings with the institution, any rating of the institution's senior long-term debt by independent rating agencies, and other relevant factors. A Fund will invest only in repurchase agreements collateralized at all times in an amount at least equal to the repurchase price plus accrued interest. To the extent that the proceeds from any sale of such collateral upon a default in the obligation to repurchase were less than the repurchase price, the Fund would suffer a loss. If the financial institution which is party to the repurchase agreement petitions for bankruptcy or otherwise becomes subject to bankruptcy or other 15 liquidation proceedings there may be restrictions on a Fund's ability to sell the collateral and the Fund could suffer a loss. However, with respect to financial institutions whose bankruptcy or liquidation proceedings are subject to the U.S. Bankruptcy Code, each Fund intends to comply with provisions under such Code that would allow it immediately to resell such collateral. When-Issued and Delayed Delivery Securities The Funds may purchase securities on a when-issued or delayed delivery basis. Although the payment and interest terms of these securities are established at the time the Fund enters into the commitment, the securities may be delivered and paid for a month or more after the date of purchase, when their value may have changed. A Fund makes such commitments only with the intention of actually acquiring the securities, but may sell the securities before the settlement date if WAM deems it advisable for investment reasons. A Fund may utilize spot and forward foreign currency exchange transactions to reduce the risk inherent in fluctuations in the exchange rate between one currency and another when securities are purchased or sold on a when-issued or delayed delivery basis. At the time a Fund enters into a binding obligation to purchase securities on a when-issued or delayed delivery basis, liquid 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 the custodian throughout the period of the obligation. The use of these investment strategies, as well as any borrowing by a Fund, may increase net asset value fluctuation. Temporary Strategies The Funds have the flexibility to respond promptly to changes in market and economic conditions. In the interest of preserving shareholders' capital, WAM may employ a temporary defensive investment strategy if it determines such a strategy to be warranted. Pursuant to such a defensive strategy, a Fund temporarily may hold cash (U.S. dollars, foreign currencies, multinational currency units) and/or invest up to 100% of its assets in high quality debt securities or money market instruments of U.S. or foreign issuers, and most or all of the Fund's investments may be made in the United States and denominated in U.S. dollars. It is impossible to predict whether, when, or for how long a Fund might employ defensive strategies. In addition, pending investment of proceeds from new sales of Fund shares or to meet ordinary daily cash needs, a Fund temporarily may hold cash (U.S. dollars, foreign currencies, or multinational currency units) and may invest any portion of its assets in money market instruments. Portfolio Turnover Although the Funds do not purchase securities with a view to rapid turnover, there are no limitations on the length of time that portfolio securities must be held. Portfolio turnover can occur for a number of reasons such as general conditions in the securities markets, more favorable investment opportunities in other securities, or other factors relating to the desirability 16 of holding or changing a portfolio investment. The Funds' anticipated portfolio turnover rates are less than 100% for each Fund. A high rate of portfolio turnover, if it should occur, would result in increased transaction expenses which must be borne by each Fund and realization of capital gains or losses. The rate of portfolio turnover for U.S. Small Cap for the year ended December 31, 1996 was 46% and for the year ended December 31, 1997 was 34%. The rate of portfolio turnover for International Small Cap for the year ended December 31, 1996 was 50% and for the year ended December 31, 1997 was 60%. Line of Credit - -------------- The Trust maintains a line of credit with a bank in order 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 Trust would be subject to the Trust's restrictions on borrowing under "Investment Restrictions," below. INVESTMENT RESTRICTIONS In pursuing their investment objectives, U.S. Small Cap and International Small Cap each will not: 1. With respect to 75% of the value of the Fund's total assets, invest more than 5% of its total assets (valued at the time of investment) in securities of a single issuer, except securities issued or guaranteed by the government of the U.S., or any of its agencies or instrumentalities; 2. Acquire securities of any one issuer that at the time of investment (a) represent more than 10% of the voting securities of the issuer or (b) have a value greater than 10% of the value of the outstanding securities of the issuer; 3. Invest more than 25% of its assets (valued at the time of investment) in securities of companies in any one industry; 4. Make loans, but this restriction shall not prevent the Fund from (a) buying a part of an issue of bonds, debentures, or other obligations that are publicly distributed, or from investing up to an aggregate of 15% of its total assets (taken at market value at the time of each purchase) in parts of issues of bonds, debentures or other obligations of a type privately placed with financial institutions, (b) investing in repurchase agreements, or (c) lending portfolio securities, provided that it may not lend securities if, as a result, the aggregate value of all securities loaned would exceed 33% of its total assets (taken at market value at the time of such loan);/4/ - ------------------- /4/ The Funds have no present intention of lending their portfolio securities. 17 5. Borrow money except (a) from banks for temporary or emergency purposes in amounts not exceeding 33% of the value of the Fund's total assets at the time of borrowing, and (b) in connection with transactions in options, futures and options on futures;/5/ 6. Underwrite the distribution of securities of other issuers; however, the Fund may acquire "restricted" securities which, in the event of a resale, might be required to be registered under the Securities Act of 1933 on the ground that the Fund could be regarded as an underwriter as defined by that act with respect to such resale; but the Fund will limit its total investment in restricted securities and in other securities for which there is no ready market, including repurchase agreements maturing in more than seven days, to not more than 15% of its net assets at the time of acquisition; 7. Purchase and sell real estate or interests in real estate, although it may invest in marketable securities of enterprises which invest in real estate or interests in real estate; 8. Purchase and sell commodities or commodity contracts, except that it may enter into (a) futures and options on futures and (b) forward contracts; 9. Make margin purchases of securities, except for use of such short-term credits as are needed for clearance of transactions and except in connection with transactions in options, futures and options on futures; 10. Issue any senior security except to the extent permitted under the Investment Company Act of 1940. Restrictions 1 through 10 above are "fundamental," which means that they cannot be changed without the approval of the lesser of (i) 67% of the Fund's shares present at a meeting if more than 50% of the shares outstanding are present or (ii) more than 50% of the Fund's outstanding shares. In addition, each Fund is subject to a number of restrictions that may be changed by the Board of Trustees without shareholder approval. Under those non- fundamental restrictions, each Fund will not: (a) Invest in companies for the purpose of management or the exercise of control; (b) Invest in oil, gas or other mineral leases or exploration or development programs, although it may invest in marketable securities of enterprises engaged in oil, gas or mineral exploration; - ------------------- /5/ State insurance laws currently restrict a Fund's borrowings to facilitate redemptions to no more than 25% of the Fund's net assets. 18 (c) Invest more than 10% of its net assets (valued at the time of investment) in warrants, valued at the lower of cost or market; provided that warrants acquired in units or attached to securities shall be deemed to be without value for purposes of this restriction; (d) Invest more than 5% of its total assets (valued at time of investment) in securities of issuers with less than three years' operation (including predecessors); (e) Acquire securities of other registered investment companies except in compliance with the Investment Company Act of 1940 and applicable state law; (f) Purchase or retain securities of a company if all of the Trustees, directors and officers of the Trust and of WAM who individually own beneficially more than 1/2% of the securities of the company collectively own beneficially more than 5% of such securities; (g) 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; (h) Purchase a put or call option if the aggregate premiums paid for all put and call options exceed 20% of its net assets (less the amount by which any such positions are in-the-money), excluding put and call options purchased as closing transactions; (i) Sell securities short or maintain a short position. Notwithstanding the foregoing investment restrictions, either Fund may purchase securities pursuant to the exercise of subscription rights, provided that such purchase will not result in the Fund's ceasing to be a diversified investment company. Japanese and European corporations frequently issue additional capital stock by means of subscription rights offerings to existing shareholders at a price substantially below the market price of the shares. The failure to exercise such rights would result in a Fund's interest in the issuing company being diluted. The market for such rights is not well developed in all cases and, accordingly, the Fund may not always realize full value on the sale of rights. The exception applies in cases where the limits set forth in the investment restrictions would otherwise be exceeded by exercising rights or would have already been exceeded as a result of fluctuations in the market value of the Fund's portfolio securities with the result that the Fund would be forced either to sell securities at a time when it might not otherwise have done so, or to forego exercising the rights. In addition, pursuant to state insurance laws, each Fund is subject to the following guidelines, which may also be changed by the Trustees: (a) Each Fund will be invested in a minimum of five different foreign countries at all times, except that this minimum is reduced to four when foreign country investments comprise less than 80% of the value of the Fund's net assets; to three when less than 60% of such value; to two when less than 40%; and to one when less than 20%. 19 (b) Each Fund will have no more than 20% of its net assets invested in securities of issuers located in any one country; except that a Fund may have an additional 15% of its net assets invested in securities of issuers located in any one of the following countries: Australia; Canada; France; Japan; the United Kingdom; or Germany. (c) A Fund may not acquire the securities of any issuer if, as a result of such investment, more than 10% of the Fund's total assets would be invested in the securities of any one issuer, except that this restriction shall not apply to U.S. Government securities or foreign government securities; and the Fund will not invest in a security if, as a result of such investment, it would hold more than 10% of the outstanding voting securities of any one issuer. (d) Each Fund may borrow no more than 10% of the value of its net assets when borrowing for any general purpose and 25% of net assets when borrowing as a temporary measure to facilitate redemptions. PERFORMANCE INFORMATION From time to time the Funds may quote total return figures. "Total Return" for a period is the percentage change in value during the period of an investment in shares of a Fund, including the value of shares acquired through reinvestment of all dividends and capital gains distributions. "Average Annual Total Return" is the average annual compounded rate of change in value represented by the Total Return for the period. Average Annual Total Return is computed as follows: ERV = P(1 +T)/n/ Where: P = the amount of an assumed initial investment in shares of a Fund T = average annual total return n = number of years from initial investment to the end of the period ERV = ending redeemable value of shares held at the end of the period For example, as of December 31, 1997 the Total Return and Average Total Return on a $1,000 investment in the funds for the following periods were: U.S. Small Cap -------------- Average Annual Total Return Total Return ------------ -------------- 1 year................................. 29.4% 29.4% Life of Fund (inception 5/3/95)........ 120.1% 34.4% 20 International Small Cap ----------------------- Average Annual Total Return Total Return ------------ -------------- 1 year................................... -1.5% -1.5% Life of Fund (inception 5/3/95).......... 75.0% 23.3% The Funds impose no sales charges and pay no distribution expenses. Income taxes are not taken into account. Performance figures quoted by the Funds are not necessarily indicative of future results. Each Fund's performance is a function of conditions in the securities markets, portfolio management, and operating expenses. Although information about past performance is useful in reviewing a Fund's performance and in providing some basis for comparison with other investment alternatives, it should not be used for comparison with other investments using different reinvestment assumptions or time periods. Fund performance figures do not reflect expenses of the separate accounts of the Life Companies, expenses imposed under the Variable Contracts, or expenses imposed by the Retirement Plans. In advertising and sales literature, each Fund's performance may be compared with those of market indexes and other mutual funds. In addition to the performance information described above, a Fund might use comparative performance as computed in a ranking or rating determined by Lipper Analytical Services, Inc., an independent service that monitors the performance of over 1,000 mutual funds, Morningstar, Inc., VARDS, or another service. The Funds may note their mention or recognition, or the mention or recognition of WAM or its principals, in newsletters, newspapers, magazines, or other media. INVESTMENT ADVISER The Funds' investment adviser, Wanger Asset Management, L.P. ("WAM"), is a limited partnership managed by its general partner, Wanger Asset Management, Ltd. ("WAM Ltd."). WAM serves as the investment adviser for the Funds and for other institutional accounts. WAM commenced operations in 1992. WAM is a limited partnership managed by its general partner, Wanger Asset Management, Ltd. ("WAM Ltd."), whose stockholders are Ralph Wanger, Leah J. Zell, Charles P. McQuaid, Marcel P. Houtzager, Robert A. Mohn and John H. Park. Ralph Wanger is the president and Howard L. Kastel is the chief executive officer of WAM Ltd. On matters submitted to the shareholders of WAM Ltd., each shareholder has one vote (or a lesser vote in the case of new shareholders). With certain limited exceptions, decisions are made by majority vote. At March 31, 1998 WAM had more than $7 billion under management, including the Funds. WAM furnishes continuing investment advice to the Funds and is responsible for overall management of the Funds' business affairs. It furnishes office space and all necessary office facilities, equipment, and personnel to the Funds; it assumes all other expenses incurred by WAM in connection with managing the assets of the Funds, including expenses in connection with placement of securities orders, expenses in determination of daily price computations, portfolio accounting and related bookkeeping; and assumes the expenses of printing and 21 distributing the Funds' prospectus and reports to prospective investors. At its own expense, WAM may contract with any other person or persons to provide services in connection with daily price computations, portfolio accounting and related bookkeeping. For its services to U.S. Small Cap, WAM receives a fee accrued daily and paid monthly at the annual rate of 1.0% of the net asset value of the Fund up to $100 million, 0.95% of the net asset value in excess of $100 million and up to $250 million, and 0.90% of the net asset value in excess of $250 million. These fees may be reduced by any amount necessary to cause the Fund's expenses to be within the limitation described below. The investment advisory fees of the Fund for the fiscal period from May 3, 1995 to December 31, 1995 were $71,496; for the fiscal year ended December 31, 1996, the advisory fees were $704,115; and for the fiscal year ended December 31, 1997, the advisory fees were $1,960,795. For its services to International Small Cap, WAM receives a fee accrued daily and paid monthly at the annual rate of 1.30% of the net asset value of the Fund up to $100 million, 1.20% of the net asset value in excess of $100 million and up to $250 million, and 1.10% of the net asset value in excess of $250 million. These fees may be reduced by any amount necessary to cause the Fund's expenses to be within the limitation described below. The investment advisory fees of the Fund for the fiscal period from May 3, 1995 to December 31, 1995 were $43,726; for the fiscal year ended December 31, 1996, the advisory fees were $631,977; and for the fiscal year ended December 31, 1997, the advisory fees were $1,528,703. The Trust pays all charges of depositories, custodians and other agents for the safekeeping and servicing of the Funds' cash, securities and other property; all charges of the Funds' transfer agents and registrars, and the Funds' dividend disbursing and redemption agents, if any; and all charges of independent auditors and legal counsel. The Trust also pays other expenses such as the cost of qualifying and maintaining the registration of shares of the Funds and the cost of compliance with federal and state securities laws; typesetting of the Funds' prospectus and of printing and mailing copies of the prospectus furnished to each then-existing shareholder or beneficial owner; printing and mailing certificates for shares of the Funds; publishing reports and notices to the Funds' shareholders and to governmental bodies or regulatory agencies; proxy solicitations of the Funds or of the Board of Trustees of the Trust; shareholder meetings; fees and taxes payable to federal, state or governmental agencies, domestic or foreign; insurance premiums required by law or deemed advisable by the Trust's Board of Trustees; all costs of borrowing money; all expenses of maintaining the registration of the Trust under the Investment Company Act of 1940, all fees, dues and other expenses related to membership of the Trust in any trade association or other investment company organization; the fees of Trustees who are not otherwise affiliated with the Trust or WAM, and all expenses incurred in connection with their services to the Trust. The Trust also pays all brokers' commissions and other charges relative to the purchase and sale of portfolio securities for the Funds. WAM has voluntarily agreed to reimburse the Fund in the event the fees and expenses payable by the Fund in any fiscal year (as described above) exceed 1.90% for Wanger International Small Cap and 1.50% for Wanger U.S. Small Cap of average daily net assets. The following items are excluded for purposes of calculating the expenses subject to this limitation: (i) credits, if any, 22 that a Fund may receive that have the effect of offsetting certain of those expenses; 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. Reimbursement of expenses in excess of this limitation will be made monthly and will be paid to the Fund by reduction of WAM's advisory fee. The expenses of each Fund have been below the limit at which reimbursement would be required during 1996 and 1997. WAM may from time to time absorb expenses for a Fund in addition to the reimbursement of expenses in excess of applicable limitations. WAM advanced all of the Trust's organizational expenses, which are being amortized and reimbursed to WAM over a five year period. Each Fund's investment advisory agreement with WAM was effective on January 1, 1998 and will continue in effect through December 31, 1999, and thereafter from year to year so long as its continuance as to each Fund is approved at least annually by (i) the board of trustees of the Trust or by the holders of a majority of each Fund's outstanding voting securities as defined by the Investment Company Act of 1940 and (ii) a majority of the members of the board of trustees who are not otherwise affiliated with the Trust or WAM, cast in person at a meeting called for that purpose. Any amendment to each new agreement must be approved in the same manner. The agreements may be terminated as to a Fund without penalty by the vote of the board of trustees of the Trust or the shareholders of a Fund (by a majority as defined in the 1940 Act) on sixty days' written notice to WAM or by WAM on sixty days' notice to the Fund, and will terminate automatically in the event of its assignment. The fees payable by a Fund under each agreement are the obligation only of that Fund and impose no liability on the other Fund. DISTRIBUTOR Shares of each Fund are distributed by WAM Brokerage Services, L.L.C. ("WAM BD") under a Distribution Agreement as described in the prospectus dated April 30, 1998, which is incorporated herein by reference. The Distribution Agreement continues in effect from year to year, provided such continuance is approved annually (i) by a majority of the trustees or by a majority of the outstanding voting securities of the Trust, and (ii) by a majority of the trustees who are not parties to the Agreement or interested persons of any such party. Shares of the Funds are offered for sale through WAM BD on a best efforts basis without any sales commission or charges to the Funds or Life Companies or Retirement Plans purchasing Fund shares. However, each Variable Contract imposes its own charges and fees on owners of Variable Contracts and Retirement Plans and may impose such charges on participants in a Retirement Plan. The Trust has agreed to pay all expenses in connection with registration of its shares with the Securities and Exchange Commission and in compliance with state securities laws. WAM bears all sales and promotional expenses, other than those borne by a Life Company or Retirement Plan. WAM BD is located at 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. 23 THE TRUST The Trust is a Massachusetts business trust organized under an Agreement and Declaration of Trust dated August 30, 1994. The Agreement and Declaration of Trust may be amended by a vote of either the Trust's shareholders or its Trustees. The Trust may issue an unlimited number of shares, in one or more series as the Board of Trustees may authorize. Any such series of shares may be further divided, without shareholder approval, into two or more classes of shares having such preferences or special or relative rights or privileges as the Trustees may determine. The shares of the Funds are not currently divided into classes. U.S. Small Cap and International Small Cap are the only series of the Trust currently being offered. The Board of Trustees may authorize the issuance of additional series if deemed advisable, each with its own investment objective, policies, and restrictions. All shares issued will be fully paid and non-assessable and will have no preemptive or conversion rights. On any matter submitted to a vote of shareholders, shares are voted in the aggregate and not by individual series except that shares are voted by individual series when required by the Investment Company Act of 1940 or other applicable law, or when the Board of Trustees determines that the matter affects only the interests of one series, in which case shareholders of the unaffected series are not entitled to vote on such matters. All shares of the Trust are voted together in the election of Trustees. Shares do not have cumulative voting rights; accordingly, shareholders controlling voting interests of more than 50% of shares of the Funds voting for the election of Trustees could elect all of the Trustees if they chose to do so, and in such event, shareholders controlling voting interests of the remaining shares would not be able to elect any Trustees. Shareholder rights regarding voting are described in the prospectus. These voting rights are based on applicable federal and state laws. To the extent that changes in such laws or regulations thereunder or interpretations thereof eliminate the necessity to submit any such matters to a shareholder vote, or otherwise restrict or limit such voting rights, the Trust reserves the right to act in any manner permitted by such changes. The Trust's Declaration of Trust disclaims liability of the shareholders, trustees, and officers of the Trust for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or contract entered into or executed by the Trust or the board of trustees. The Declaration of Trust provides for indemnification out of the Trust's assets for all losses or expenses of any shareholder held personally liable for the obligations of the Trust. Thus, although shareholders of a business trust may, under certain circumstances, be held personally liable under Massachusetts law for the obligations of the trust, the risk of a shareholder incurring financial loss on account of shareholder liability is believed to be remote because it is limited to circumstances in which the disclaimer is inoperative and the Trust itself is unable to meet its obligations. The risk to any one series of sustaining a loss on account of liabilities incurred by another series is also believed to be remote. 24 TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS The Trustees and officers of the Trust (including their dates of birth and their principal business activities during the past five years are) are listed below in alphabetical order: Fred D. Hasselbring, trustee (8/14/1941) 1338 N. Bell Avenue, Chicago, Illinois 60622; owner, Fred D. Hasselbring and Associates (retail industry computer systems consulting and sales); director and executive administrator, The Malachi Corp., Inc. (a non-profit corporation). Marcel P. Houtzager, vice president (10/26/1960) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, analyst and portfolio manager, Wanger Asset Management, L.P. since April 1992. Kenneth A. Kalina, assistant treasurer (8/4/1959) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60603; Fund controller, Wanger Asset Management, L.P., since September 1995; prior thereto, treasurer of the Stein Roe Mutual Funds; assistant treasurer, Acorn Investment Trust. Merrillyn J. Kosier, senior vice president and secretary (12/10/1959) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; director of marketing and shareholder services, Wanger Asset Management, L.P., since September 1993; prior thereto, vice president of marketing, Kemper Financial Services, Inc.; senior vice president and secretary, Acorn Investment Trust. Bruce H. Lauer, vice president and treasurer (7/22/1957) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; chief administrative officer, Wanger Asset Management, L.P., since April 1995; vice president and treasurer, Acorn Investment Trust; director Wanger Investment Company PLC; prior thereto, first vice president, investment accounting, Kemper Financial Services, Inc. Charles P. McQuaid, trustee and senior vice president* (8/27/1953) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, Wanger Asset Management, L.P. since July 1992; trustee and senior vice president, Acorn Investment Trust. Robert A. Mohn, vice president (9/13/1961) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, analyst and portfolio manager, Wanger Asset Management, L.P. since August 1992. John H. Park, vice president (5/30/1967) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal and analyst, Wanger Asset Management, L.P. since July 1993; prior thereto, analyst, Ariel Capital Management. 25 P. Michael Phelps, trustee (9/19/1933) 222 East Chestnut Street, Chicago, Illinois 60611; retired since January 31, 1998; prior thereto, vice president and corporate secretary, Morton International, Inc. James A. Star, trustee (2/27/1961) 222 N. LaSalle Street, Suite 2000, Chicago, Illinois 60601; vice president, Henry Crown and Company, a diversified private holding company, since October 1994; portfolio manager and investment analyst, Harris Associates L.P., June 1991 to October 1994; attorney, Kirkland and Ellis, prior to June 1991. Ralph Wanger, trustee and president* (6/21/1934) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, Wanger Asset Management, L.P. since July 1992; trustee and president, Acorn Investment Trust. Leah J. Zell, vice president (5/23/1949) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, analyst, and portfolio manager, Wanger Asset Management, L.P., since July 1992; vice president, Acorn Investment Trust. *Messrs. McQuaid and Wanger are Trustees who are "interested persons" of the Trust as defined in the Investment Company Act of 1940, and of WAM. Messrs. McQuaid, Phelps and Wanger are members of the Executive Committee, which has authority during intervals between meetings of the Board of Trustees to exercise the powers of the board, with certain exceptions. Messrs. Hasselbring, Phelps, and Star are members of the Audit Committee, which has the authority to make recommendations to the Board of Trustees regarding the selection of independent auditors for the Trust and to confer with the independent auditors regarding the scope and results of each audit. At March 31, 1998, the trustees and officers as a group owned beneficially less than 1% of the outstanding shares of each of U.S. Small Cap and International Small Cap. At that date, Phoenix Home Life Mutual Insurance Company (and its affiliates), One American Row, Hartford, Connecticut 06115, was the record holder of 6,949,254.017 shares (approximately 96.8% of the outstanding shares) of International Small Cap, and 13,716,365.170 shares (approximately 97.4% of the outstanding shares) of U.S. Small Cap, all of which are beneficially owned by Variable Contract owners. The following table shows compensation paid by the Trust during the fiscal year ended December 31, 1997 to each Trustee of the Trust who is not an "interested person" of the Trust or of WAM. The Trust does not pay compensation to its officers or to Trustees who are "interested persons." The Trust does not offer any pension or retirement benefits to its trustees. 26
=========================================================================================== Name of Person, Aggregate Compensation Aggregate Compensation Total Position From Wanger U.S. From Wanger International Compensation Small Cap Advisor Small Cap Advisor From Fund Complex =========================================================================================== Fred D. Hasselbring $5,800 $5,800 $11,600 Trustee P. Michael Phelps $6,550 $6,550 $13,100 Trustee James A. Star $5,800 $5,800 $11,600 Trustee
PURCHASING AND REDEEMING SHARES Shares of U.S. Small Cap and International Small Cap may not be purchased or redeemed directly by individual Variable Contract owners or individual Retirement Plan participants. Purchases and redemptions are discussed in the prospectus. That information is incorporated herein by reference. For purposes of computing the net asset value of a share of either Fund, a security traded on a securities exchange, or in an over-the-counter market in which transaction prices are reported, is generally valued at the last sale price at the time of valuation. A security for which there is no reported sale on the valuation date is generally valued at the mean of the latest bid and ask quotations or, if there is no ask quotation, at the most recent bid quotation. Securities for which quotations are not readily available, or for which the market quotation is determined not to represent a fair value, and any other assets are valued at a fair value as determined in good faith by the Board of Trustees. Money market instruments having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. All assets and liabilities initially expressed in foreign currencies are converted into U.S. dollars at the mean of the bid and offer prices of such currencies against U.S. dollars quoted by any major bank or dealer. If such quotations are not readily available, the rate of exchange will be determined in accordance with policies established in good faith by the board of trustees. The Funds' net asset values are determined only on days on which the New York Stock Exchange ("NYSE") is open for trading. The NYSE is regularly closed on Saturdays and Sundays and on New Year's Day, the third Monday in January, the third Monday in February, Good Friday, the last Monday in May, Independence Day, Labor Day, Thanksgiving, and Christmas. If one of these holidays falls on a Saturday or Sunday, the NYSE will be closed on the preceding Friday or the following Monday, respectively. Trading in the portfolio securities of the Funds, particularly International Small Cap, may take place in various foreign markets at certain times on certain days (such as Saturday) when the NYSE is not open for business and the Funds do not calculate their net asset values. Conversely, 27 trading in the Funds' portfolio securities may not occur on days when the NYSE is open. Because of the differences in the days and times at which trading occurs in various markets, the calculation of net asset value does not take place contemporaneously with the determinations of the prices of many of the Funds' portfolio securities. The last sale price included in the calculation of a Fund's net asset value may be several hours old at the time when it is included in that calculation, which may have a significant effect on a Fund's net asset value. Computation of net asset value (and the sale and redemption of Fund shares) may be suspended or postponed during any period when (a) trading on the NYSE is restricted, as determined by the Securities and Exchange Commission, or that exchange is closed for other than customary weekend and holiday closings, (b) the Commission has by order permitted such suspension, or (c) an emergency, as determined by the Commission, exists making disposal of portfolio securities or valuation of the net assets of the Funds not reasonably practicable. The Trust has elected to be governed by Rule 18f-1 under the Investment Company Act of 1940 pursuant to which it is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of a Fund during any 90- day period for any one shareholder. Redemptions in excess of the above amounts will normally be paid in cash, but may be paid wholly or partly by a distribution in-kind of securities. If a redemption is made in kind, the redeeming shareholder would bear any transaction costs incurred in selling the securities received. The Agreement and Declaration of Trust also authorizes the Trust to redeem shares under certain other circumstances as may be specified by the Board of Trustees. ADDITIONAL TAX INFORMATION Shares of the Funds are offered to separate accounts of Life Companies that fund Variable Contracts and may be offered to certain Retirement Plans, which are pension plans and retirement arrangements and accounts permitting the accumulation of funds on a tax-deferred basis. See the disclosure documents for the Variable Contracts or the plan documents (including the summary plan description) for the Retirement Plans for a discussion of the special taxation of insurance companies with respect to the separate accounts and the Variable Contracts, and the holders thereof, or the special taxation of Retirement Plans and the participants therein. Each Fund intends to continue to qualify for treatment as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"). In order to qualify for that treatment, the Fund must distribute to shareholders for each taxable year at least 90% of its investment company taxable income (consisting generally of net investment income, net short-term capital gain, and net gains from certain foreign currency transactions) ("Distribution Requirement") and must meet several additional requirements. These requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in securities or currencies ("Income Requirement"); (2) at the close of each quarter of the Fund's taxable year, at 28 least 50% of the value of its total assets must be represented by cash or cash items, U.S. Government securities, securities of other RICs, and other securities that, with respect to any one issuer, do not exceed 5% of the value of the Fund's total assets and that do not represent more than 10% of the outstanding voting securities of the issuer; and (3) at the close of each quarter of the Fund's taxable year, not more than 25% of the value of its total assets may be invested in securities (other than U.S. Government securities or the securities of other RICs) of any one issuer. As noted in the prospectus, each Fund must, and intends to, comply with the diversification requirements imposed by Section 817(h) of the Code and the regulations thereunder. For information concerning the consequences of failure to meet the requirements of Section 817(h), see the prospectus for the Variable Contracts. The Funds will not be subject to the 4% federal excise tax imposed on RICs that do not distribute substantially all their income and gains each calendar year because that tax does not apply to a RIC whose only shareholders are segregated asset accounts of life insurance companies held in connection with variable annuity contracts and/or variable life insurance policies or Retirement Plans. The foregoing is only a general summary of some of the important federal income tax considerations generally affecting the Funds and their shareholders. No attempt is made to present a complete explanation of the federal tax treatment of the Funds' activities, and this discussion and the discussion in the prospectuses and/or statements of additional information for variable contracts are not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local or foreign taxes applicable to the variable contracts and the holders thereof. PORTFOLIO TRANSACTIONS Portfolio transactions of the Funds are placed with those securities brokers and dealers that WAM believes will provide the best value in transaction and research services for each Fund, either in a particular transaction or over a period of time. Although some transactions involve only brokerage services, many involve research services as well. In valuing brokerage services, WAM makes a judgment as to which brokers are capable of providing the most favorable net price (not necessarily the lowest commission) and the best execution in a particular transaction. Best execution connotes not only general competence and reliability of a broker, but specific expertise and effort of a broker in overcoming the anticipated difficulties in fulfilling the requirements of particular transactions, because the problems of execution and the required skills and effort vary greatly among transactions. In valuing research services, WAM makes a judgment of the usefulness of research and other information provided to WAM by a broker in managing each Fund's investment portfolio. In some cases, the information, e.g., data or recommendations concerning particular securities, 29 relates to the specific transaction placed with the broker, but for the greater part the research consists of a wide variety of information concerning companies, industries, investment strategy, and economic, financial, and political conditions and prospects, useful to WAM in advising that Fund. The reasonableness of brokerage commissions paid by the Funds in relation to transaction and research services received is evaluated by WAM's staff on an ongoing basis. The general level of brokerage charges and other aspects of each Fund's portfolio transactions are reviewed periodically by the Board of Trustees. WAM is the principal source of information and advice to the Funds, and is responsible for making and initiating the execution of investment decisions by the Funds. However, the Board of Trustees recognizes that it is important for WAM, in performing its responsibilities to the Funds, to continue to receive and evaluate the broad spectrum of economic and financial information that many securities brokers have customarily furnished in connection with brokerage transactions, and that in compensating brokers for their services, it is in the interest of the Funds to take into account the value of the information received for use in advising the Funds. The extent, if any, to which the obtaining of such information may reduce WAM's expenses in providing management services to the Funds is not determinable. In addition, the Board of Trustees understands that other clients of WAM might benefit from the information obtained for the Funds, in the same manner that the Funds might benefit from information obtained by WAM in performing services to others. Transactions of the Funds in the over-the-counter market and the third market are executed with primary market makers acting as principal except where it is believed that better prices and execution may be obtained otherwise. Brokerage commissions incurred by U.S. Small Cap for the fiscal period from May 3, 1995 to December 31, 1995 were $59,273; for the fiscal year ended December 31, 1996 the brokerage commissions were $243,598; for the fiscal year ended December 31, 1997 the brokerage commissions were $249,054. Brokerage commissions incurred by International Small Cap during the same time periods were $49,559, $422,414 and $647,529, respectively. The Trust and WAM have adopted codes of ethics that, among other things, regulate the personal transactions in securities of certain officers, directors, trustees, partners and employees of the Trust and WAM. Although investment decisions for the Funds are made independently from those for other investment advisory clients of WAM, it may develop that the same investment decision is made for one or both of the Funds and one or more other advisory clients. If one or both of the Funds and other clients purchase or sell the same class of securities on the same day, the transactions will be allocated as to amount and price in a manner considered equitable to each. 30 CUSTODIAN State Street Bank and Trust Company, P.O. Box 8502, Boston, Massachusetts 02266- 8502, is the custodian for the Funds. It is responsible for holding all securities and cash of the Funds, receiving and paying for securities purchased, delivering against payment securities sold, receiving and collecting income from investments, making all payments covering expenses of the Funds, and performing other administrative duties, all as directed by authorized persons of the Funds. The custodian does not exercise any supervisory function in such matters as purchase and sale of portfolio securities, payment of dividends, or payment of expenses of the Funds. The Funds have authorized the custodian to deposit certain portfolio securities of the Funds in central depository systems as permitted under federal law. The Funds may invest in obligations of the custodian and may purchase or sell securities from or to the custodian. The custodian may employ one or more sub-custodians located in the United States upon approval by the Board of Trustees of the Trust; and is authorized to employ sub-custodians for the Funds' assets maintained outside the United States. INDEPENDENT AUDITORS Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606 audits and reports on the Funds' annual financial statements, reviews certain regulatory reports and the Funds' federal income tax return, and performs other professional accounting, auditing, tax, and advisory services when engaged to do so by the Funds. 31 APPENDIX Description of Bond Ratings A rating of a rating service represents the service's opinion as to the credit quality of the security being rated. However, the ratings are general and are not absolute standards of quality or guarantees as to the creditworthiness of an issuer. Consequently, WAM believes that the quality of debt securities in which the Funds invest should be continuously reviewed. A rating is not a recommendation to purchase, sell or hold a security, because it does not take into account market value or suitability for a particular investor. When a security has received a rating from more than one service, each rating should be evaluated independently. Ratings are based on current information furnished by the issuer or obtained by the ratings services from other sources which they consider reliable. Ratings may be changed, suspended or withdrawn as a result of changes in or unavailability of such information, or for other reasons. The following is a description of the characteristics of ratings used by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). Moody's Ratings Aaa--Bonds rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. Although the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such bonds. Aa--Bonds rated Aa are judged to be high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa bonds or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risk appear somewhat larger than in Aaa bonds. A--Bonds rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa--Bonds rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. A-1 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. 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. A-2 PART C ------ Item 24. Financial Statements and Exhibits - ------- --------------------------------- (a) Financial statements: --------------------- (1) Financial statements included in Part A of this amendment: None (2) Financial statements included in Part B of this amendment: (i) Wanger U.S. Small Cap (incorporated by reference to the following portions of Registrant's 1997 Wanger Advisors Trust Annual Report; a copy of the report was filed with the Commission on February copy 27, 1998, and is not included in this amendment): Statement of Investments at December 31, 1997 Statement of Assets and Liabilities at December 31, 1997 Statement of Operations for the year ended December 31, 1997 Statement of Changes in Net Assets for the years ended December 31, 1996 and 1997 Financial Highlights for the period ended December 31, 1995 and for the years ended December 31, 1996 and 1997 Notes to financial statements Report of Independent Auditors (ii) Wanger International Small Cap (incorporated by reference to the following portions of Registrant's 1997 Wanger Advisors Trust Annual Report; a copy of the report was filed with the Commission on February 27, 1998, and is not included in this amendment): Statement of Investments at December 31, 1997 Statement of Assets and Liabilities at December 31, 1997 Statement of Operations for the year ended December 31, 1997 Statement of Changes in Net Assets for the years ended December 31, 1996 and 1997 Financial Highlights for the period ended December 31, 1995 and for the years ended December 31, 1996 and 1997 Notes to financial statements Report of Independent Auditors C-1 (3) Financial statements included in Part C of this amendment: None Note: The following schedules have been omitted for the following reasons: Schedules I and III - The required information is presented in the statements of investments at December 31, 1997. Schedules II, IV and V - The required information is not present. (b) Exhibits: -------- 1. Agreement and Declaration of Trust.(2) 2. By-laws.(2) 3. None 4(a). Specimen Share Certificate - Wanger U.S. Small Cap.(1) 4(b). Specimen Share Certificate - Wanger International Small Cap.(1) 5(a). Investment Advisory Agreement - Wanger U.S. Small Cap, dated January 1, 1998. 5(b). Investment Advisory Agreement - Wanger International Small Cap, dated January 1, 1998. 6. Distribution Agreement between Wanger Advisors Trust and WAM Brokerage Services, L.L.C. dated January 1, 1998. 7. None. 8. Custodian Contract between Wanger Advisors Trust and State Street Bank and Trust Company.(2) 9(a)(1) Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and Phoenix Home Life Mutual Insurance Company dated April 18, 1995 (2) (amendment dated December 16, 1996).(3) 9(a)(2) Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and PHL Variable Insurance Company dated February 23, 1995 (2) (amendment dated December 16, 1996). (3) 9(a)(3) Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and Providian Life and Health Insurance Company (formerly National C-2 Home Life Assurance Company) dated May 19, 1995 (2) (amendment dated December 16, 1996).(3) 9(a)(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.(3) 9(a)(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.(3) 9(b). Transfer Agency and Service Agreement between Wanger Advisors Trust and State Street Bank and Trust Company.(2) 10 Legal opinion and consent of Bell, Boyd & Lloyd dated April 27 1998. 11. Consent of Independent Auditors. 12. None. 13. Subscription Agreement.(2) 14. None. 15. None. 16(a). Computation of performance information - Wanger U.S. Small Cap.(2) 16(b). Computation of performance information - Wanger International Small Cap.(2) 17(a) Financial data schedule - Wanger U.S. Small Cap. 17(b) Financial data schedule - Wanger International Small Cap. 18 Form of Purchase Application.(2) - ---------------- (1) Incorporated by reference to the exhibit of the same number 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 the exhibit of the same number filed with post-effective amendment no. 2 to the Registration Statement filed on April 19, 1996. (3) Incorporated by reference to the exhibit of the same number filed with post-effective amendment no. 3 to the Registration Statement filed on April 30, 1997. (4) Incorporated by reference to the exhibit of the same number filed with post-effective amendment no. 5 to the Registration Statement filed on November 3, 1997. C-3 Item 25. 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 "Organization and Management" and in the Statement of Additional Information under the caption "Investment Adviser" is incorporated by reference. Item 26. Number of Holders of Securities - ------- ------------------------------- As of March 1, 1998, there were 25 record holders of the Registrant's shares of beneficial interest of the series designated Wanger U.S. Small Cap and 44 record holders of the Registrant's shares of beneficial interest of the series designated Wanger International Small Cap. Item 27. Indemnification - ------- --------------- Article VIII of the Agreement and Declaration of Trust of the registrant (Exhibit 1 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 C-4 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 28. Business and Other Connections of Investment Adviser - ------- ---------------------------------------------------- The information in the prospectus under the caption "Organization and Management" is incorporated by reference. Neither 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 29. Principal Underwriter - -------- --------------------- WAM Brokerage Services, L.L.C. also acts as principal underwriter for Acorn Investment Trust. Name Positions and Offices Positions and Offices with Underwriters with Registrant Bruce H. Lauer President Vice President and Treasurer Merrillyn J. Kosier Senior Vice President and Senior Vice President Secretary The principal business of each officer of WAM Brokerage L.L.C. is 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606. Item 30. Location of Accounts and Records - ------- -------------------------------- Bruce H. Lauer, Vice President and Treasurer Wanger Advisors Trust 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 C-5 Item 31. Management Services - ------- ------------------- Not applicable. Item 32. Undertakings - ------- ------------ (a) Not applicable. (b) Not applicable. (c) The Registrant undertakes to furnish each person to whom a Prospectus is delivered with a copy of the Registrant's latest annual report to shareholders, upon request and without charge. The Registrant undertakes, if requested to do so by the holders of at least 10% of the Registrant's outstanding shares, to call a meeting of shareholders for the purpose of voting upon the question of removal of a director or directors and to assist in communications with other shareholders as required by Section 16(c). C-6 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 of the requirements for effectiveness of this registration statement pursuant to rule 485(b) under the Securities Act of 1933 and has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Chicago, Illinois on April 29, 1998. 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/ Charles P. McQuaid ) - ----------------------- Trustee ) Charles P. McQuaid ) ) /s/ P. Michael Phelps ) - ----------------------- Trustee ) P. Michael Phelps ) April 29, 1998 ) /s/ James A. Star ) - ----------------------- Trustee ) James A. Star ) ) /s/ Ralph Wanger ) - ----------------------- Trustee and President ) Ralph Wanger (principal executive ) officer) ) ) /s/ Bruce H. Lauer ) - ----------------------- Treasurer (principal ) Bruce H. Lauer financial and accounting ) officer)
Index of Exhibits Filed with this Amendment -------------------------------------------
Exhibit EDGAR Number Exhibit No. Exhibit - ------- ----------- ------- 5(a) EX-99.B5.1 Investment Advisory Agreement - Wanger U.S. Small Cap, dated January 1, 1998 5(b) EX-99.B5.2 Investment Advisory Agreement - Wanger International Small Cap, dated January 1, 1998 6 EX-99.6 Distribution Agreement between Wanger Advisors Trust and WAM Brokerage Services, L.L.C., dated January 1, 1998 10 EX-99.B10 Legal opinion and consent of Bell Boyd & Lloyd dated April 27, 1998 11 EX-99.B11 Consent of Independent Auditors 17(a) EX-27.1 Financial data schedule - Wanger U.S. Small Cap 17(b) EX-27.2 Financial data schedule - Wanger International Small Cap
EX-99.B5.1 2 INVESTMENT ADVISORY AGMNT. U.S. SMALL CAP Exhibit 5A INVESTMENT ADVISORY AGREEMENT between Wanger Advisors Trust and Wanger Asset Management, L.P. for WANGER U.S. SMALL-CAP ADVISOR WANGER ADVISORS TRUST, a Massachusetts business trust registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end diversified management investment company (the "Trust"), and WANGER ASSET MANAGEMENT, L.P., a Delaware limited partnership registered under the Investment Advisers Act of 1940 as an investment adviser ("WAM"), agree that: 1. Engagement of WAM. WAM shall manage the investment and reinvestment of the assets of Wanger U.S. Small Cap Advisor, a series of the Trust (the "Fund"), subject to the supervision of the Board of Trustees of the Trust, for the period and on the terms set forth in this agreement. WAM shall give due consideration to the investment policies and restrictions and the other statements concerning the Fund 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 Fund as a regulated investment company. WAM shall be deemed for all purposes to be an independent contractor and not an agent of the Trust or the Fund, and unless otherwise expressly provided or authorized, shall have no authority to act or represent the Trust or the Fund in any way. WAM is authorized to make the decisions to buy and sell securities, options, futures contracts and any other investments in which the Fund may invest pursuant to its investment objectives, policies and restrictions, to place the Fund's portfolio transactions with broker-dealers, and to negotiate the terms of such transactions, including brokerage commissions on brokerage transactions, on behalf of the Fund. WAM is authorized to exercise discretion with the 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. 2. Expenses to be Paid by WAM. WAM shall furnish to the Trust, at 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 Fund. WAM shall also assume and pay all other expenses incurred by it in connection with managing the assets of the Fund, including expenses in connection with placement of securities orders, all expenses of printing and distributing the Fund's 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. WAM may, at WAM's expense, contract with any other person or persons to provide services in connection with daily price computations, portfolio accounting and related bookkeeping under such terms as it deems reasonable and it shall have the authority to direct the activities of such other person or persons in the manner it deems appropriate. 3. Expenses to be Paid by the Trust. The Trust shall pay all charges of depositories, 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; all charges of legal counsel and of independent auditors; all expenses of qualifying and maintaining the registration of shares of the Fund under the federal and applicable state securities laws of such United States jurisdictions as the Trust may from time to time reasonably designate; all compensation of trustees other than those affiliated with WAM and all expenses incurred in connection with their services to the Trust; all costs of borrowing money; all expenses of publication of notices and reports to the Fund's shareholders and to governmental bodies or regulatory agencies; all expenses of proxy solicitations of the Fund or of the Board of Trustees of the Trust; all expenses of shareholder meetings; all expenses of typesetting of the Fund's prospectus and of printing and mailing copies of the prospectus furnished to each then-existing shareholder or beneficial owner (except as may be otherwise provided in any participation or operating agreement to which the Trust is a party); all taxes and fees payable to federal, state or other governmental agencies, domestic or foreign, all stamp or other taxes; all expenses of printing and mailing certificates for shares of the Fund; all expenses of bond and insurance coverage required by law or deemed advisable by the Trust's Board of Trustees; all expenses of maintaining the registration of the Trust under the 1940 Act and all fees, dues and other expenses related to membership of the Trust in any trade association or other investment company organization. In addition to the payment of expenses, the Fund shall also pay all brokers' commissions and other charges relative to the purchase and sale of portfolio securities for the Fund. Any expenses borne by the Trust that are attributable solely to the organization, operation or business of the Fund shall be paid solely out of the Fund assets. The Trust's organizational expenses which were advanced to the Trust by WAM shall be amortized over a period of 60 months beginning with the month following the commencement of the Trust's operations, and the Trust shall reimburse WAM during the period such amortization by paying to WAM on the last business day of each month an amount equal to the organizational expenses amortized during that month. Any expense borne by the Trust that is not solely attributable to the Fund, nor solely to any other series of shares of the Trust, shall be apportioned in such manner as WAM determines is fair and appropriate, or as otherwise specified by the Board of Trustees of the Trust. 4. Compensation of WAM. For the services to be rendered and the charges and expenses to be assumed and to be paid by WAM hereunder, the Fund shall pay to WAM a fee accrued daily and paid monthly at the annual rate of 1.00% of the average daily net asset value of the Fund up to $100 million, 0.95% of the average daily net asset value of the Fund in excess of $100 million and up to $250 million, and 0.90% of the average daily net asset value of the Fund in excess of $250 million. 5. Limitation of Expenses of the Fund. The total expenses of the Fund, exclusive of taxes, of interest and of extraordinary litigation expenses, but including fees paid to WAM, shall not in any fiscal year of the Fund exceed the most restrictive limits prescribed by any state in which the Fund's shares are then qualified for sale, and WAM agrees to reimburse the Fund for any sums expended for such expenses in excess of that amount. If the states in which the Fund's shares are qualified for sale impose no limits on total expenses, then WAM agrees to reimburse the Fund in the event the fee and expenses payable by the Fund in any fiscal year exceed 2.0%. 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 WAM under this agreement, no less frequently than quarterly. 6. Services of WAM Not Exclusive. The services of WAM to the Fund hereunder are not to be deemed exclusive, and 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. 7. Services Other Than as Manager. WAM (or an affiliate of WAM) may act as broker for the Fund in connection with the purchase or sale of securities by or to the Fund 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 WAM under this agreement, and, within the limits permitted by law and the Board of Trustees of the Trust, WAM (or an affiliate of WAM) may receive brokerage commissions, fees or other remuneration from the Fund for such services in addition to its fee for services as WAM. Within the limits permitted by law, WAM may receive compensation from the Fund for other services performed by it for the Fund which are not within the scope of the duties of WAM under this agreement. 8. Limitation of Liability of WAM. WAM shall not be liable to the Trust or its shareholders for any loss suffered by the Trust or its shareholders from or as a consequence of any act or omission of WAM, or of any of the partners, employees or agents of WAM, in connection with or pursuant to this agreement, except by reason of willful misfeasance, bad faith or gross negligence on the part of WAM in the performance of its duties or by reason of reckless disregard by WAM of its obligations and duties under this agreement. 9. Use of WAM's Name. The Trust may use the name "Wanger Advisors Trust" or any other name using the name "Wanger" only for so long as this agreement or any extension, renewal or amendment hereof remains in effect, including any similar agreement with any organization which shall have succeeded to the business of 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 "Wanger," any name similar thereto or any other name indicating that it is advised by or otherwise connected with WAM or with any organization which shall have succeeded to WAM's business as investment adviser. WAM's consent to the use of the name "Wanger" by the Trust shall not prevent WAM's permitting any other enterprise, including other investment companies, to use that name. 10. Duration and Renewal. This agreement shall be effective January 1, 1998, or if later, the date approved by both (a) the vote of a "majority of the outstanding voting shares of the Fund" (which term as used throughout this agreement shall be construed in accordance with the definition of "vote of a majority of the outstanding voting securities of a company" in section 2(a)(42) of the 1940 Act), and (b) the vote of a majority of trustees who are not parties to this agreement or interested persons of any party to this agreement, cast in person at a meeting called for the purpose of voting on approval of this agreement. Unless terminated as provided in Section 11, this agreement shall continue in effect until December 31, 1999, 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 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 the Fund. 11. 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 the Fund, upon 60 days' written notice to WAM. This agreement may be terminated by 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). 12. Non-Liability of Trustees and Shareholders. 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. 13. Amendment. This agreement may not be amended without the affirmative vote (a) of a majority of those trustees who are not "interested persons" (as defined in section 2(a)(19) of the 1940 Act) of the Trust or of WAM, voting in person at a meeting called for the purpose of voting on such approval, and (b) of the holders of a majority of the outstanding shares of the Fund, where required by the 1940 Act or other applicable law, or otherwise deemed appropriate by the Board of Trustees of the Trust. Dated: January 1, 1998 WANGER ADVISORS TRUST WANGER ASSET MANAGEMENT, L.P., by Wanger Asset Management, Ltd., its General Partner By /s/ Merrillyn J. Kosier By /s/ Robert A. Mohn --------------------------------------- ------------------------------ Merrillyn J. Kosier, Senior Vice President Robert A. Mohn, Principal and Secretary EX-99.B5.2 3 INVESTMENT ADVISORY AGMNT. INT. SMALL CAP Exhibit 5B INVESTMENT ADVISORY AGREEMENT between Wanger Advisors Trust and Wanger Asset Management, L.P. for WANGER INTERNATIONAL SMALL-CAP ADVISOR WANGER ADVISORS TRUST, a Massachusetts business trust registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end diversified management investment company (the "Trust"), and WANGER ASSET MANAGEMENT, L.P., a Delaware limited partnership registered under the Investment Advisers Act of 1940 as an investment adviser ("WAM"), agree that: 1. Engagement of WAM. WAM shall manage the investment and reinvestment of the assets of Wanger International Small Cap Advisor, a series of the Trust (the "Fund"), subject to the supervision of the Board of Trustees of the Trust, for the period and on the terms set forth in this agreement. WAM shall give due consideration to the investment policies and restrictions and the other statements concerning The Fund 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 Fund as a regulated investment company. WAM shall be deemed for all purposes to be an independent contractor and not an agent of the Trust or the Fund, and unless otherwise expressly provided or authorized, shall have no authority to act or represent the Trust or the Fund in any way. WAM is authorized to make the decisions to buy and sell securities, options, futures contracts and any other investments in which the Fund may invest pursuant to its investment objectives, policies and restrictions, to place the Fund's portfolio transactions with broker-dealers, and to negotiate the terms of such transactions, including brokerage commissions on brokerage transactions, on behalf of the Fund. WAM is authorized to exercise discretion with the 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. 2. Expenses to be Paid by WAM. WAM shall furnish to the Trust, at 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 Fund. WAM shall also assume and pay all other expenses incurred by it in connection with managing the assets of the Fund, including expenses in connection with placement of securities orders, all expenses of printing and distributing the Fund's 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. WAM may, at WAM's expense, contract with any other person or persons to provide services in connection with daily price computations, portfolio accounting and related bookkeeping under such terms as it deems reasonable and it shall have the authority to direct the activities of such other person or persons in the manner it deems appropriate. 3. Expenses to be Paid by the Trust. The Trust shall pay all charges of depositories, 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; all charges of legal counsel and of independent auditors; all expenses of qualifying and maintaining the registration of shares of the Fund under the federal and applicable state securities laws of such United States jurisdictions as the Trust may from time to time reasonably designate; all compensation of trustees other than those affiliated with WAM and all expenses incurred in connection with their services to the Trust; all costs of borrowing money; all expenses of publication of notices and reports to the Fund's shareholders and to governmental bodies or regulatory agencies; all expenses of proxy solicitations of the Fund or of the Board of Trustees of the Trust; all expenses of shareholder meetings; all expenses of typesetting of the Fund's prospectus and of printing and mailing copies of the prospectus furnished to each then-existing shareholder or beneficial owner (except as may be otherwise provided in any participation or operating agreement to which the Trust is a party); all taxes and fees payable to federal, state or other governmental agencies, domestic or foreign, all stamp or other taxes; all expenses of printing and mailing certificates for shares of the Fund; all expenses of bond and insurance coverage required by law or deemed advisable by the Trust's Board of Trustees; all expenses of maintaining the registration of the Trust under the 1940 Act and all fees, dues and other expenses related to membership of the Trust in any trade association or other investment company organization. In addition to the payment of expenses, the Fund shall also pay all brokers' commissions and other charges relative to the purchase and sale of portfolio securities for the Fund. Any expenses borne by the Trust that are attributable solely to the organization, operation or business of the Fund shall be paid solely out of the Fund assets. The Trust's organizational expenses which were advanced to the Trust by WAM shall be amortized over a period of 60 months beginning with the month following the commencement of the Trust's operations, and the Trust shall reimburse WAM during the period such amortization by paying to WAM on the last business day of each month an amount equal to the organizational expenses amortized during that month. Any expense borne by the Trust that is not solely attributable to the Fund, nor solely to any other series of shares of the Trust, shall be apportioned in such manner as 2 WAM determines is fair and appropriate, or as otherwise specified by the Board of Trustees of the Trust. 4. Compensation of WAM. For the services to be rendered and the charges and expenses to be assumed and to be paid by WAM hereunder, the Fund shall pay to WAM a fee accrued daily and paid monthly at the annual rate of 1.30% of the average daily net asset value of the Fund up to $100 million, 1.20% of the average daily net asset value of the Fund in excess of $100 million and up to $250 million, and 1.10% of the average daily net asset value of the Fund in excess of $250 million. 5. Limitation of Expenses of the Fund. The total expenses of the Fund, exclusive of taxes, of interest and of extraordinary litigation expenses, but including fees paid to WAM, shall not in any fiscal year of the Fund exceed the most restrictive limits prescribed by any state in which the Fund's shares are then qualified for sale, and WAM agrees to reimburse the Fund for any sums expended for such expenses in excess of that amount. If the states in which the Fund's shares are qualified for sale impose no limits on total expenses, then WAM agrees to reimburse the Fund in the event the fee and expenses payable by the Fund in any fiscal year exceed 2.0%. 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 WAM under this agreement, no less frequently than quarterly. 6. Services of WAM Not Exclusive. The services of WAM to the Fund hereunder are not to be deemed exclusive, and 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. 7. Services Other Than as Manager. WAM (or an affiliate of WAM) may act as broker for the Fund in connection with the purchase or sale of securities by or to the Fund 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 WAM under this agreement, and, within the limits permitted by law and the Board of Trustees of the Trust, WAM (or an affiliate of WAM) may receive brokerage commissions, fees or other remuneration from the Fund for such services in addition to its fee for services as WAM. Within the limits permitted by law, WAM may receive compensation from the Fund for other services performed by it for the Fund which are not within the scope of the duties of WAM under this agreement. 8. Limitation of Liability of WAM. WAM shall not be liable to the Trust or its shareholders for any loss suffered by the Trust or its shareholders from or as a consequence of any act or omission of WAM, or of any of the partners, employees or agents of WAM, in connection with or pursuant to this agreement, except by reason of willful misfeasance, 3 bad faith or gross negligence on the part of WAM in the performance of its duties or by reason of reckless disregard by WAM of its obligations and duties under this agreement. 9. Use of WAM's Name. The Trust may use the name "Wanger Advisors Trust" or any other name using the name "Wanger" only for so long as this agreement or any extension, renewal or amendment hereof remains in effect, including any similar agreement with any organization which shall have succeeded to the business of 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 "Wanger," any name similar thereto or any other name indicating that it is advised by or otherwise connected with WAM or with any organization which shall have succeeded to WAM's business as investment adviser. WAM's consent to the use of the name "Wanger" by the Trust shall not prevent WAM's permitting any other enterprise, including other investment companies, to use that name. 10. Duration and Renewal. This agreement shall be effective January 1, 1998, or if later, the date approved by both (a) the vote of a "majority of the outstanding voting shares of the Fund" (which term as used throughout this agreement shall be construed in accordance with the definition of "vote of a majority of the outstanding voting securities of a company" in section 2(a)(42) of the 1940 Act), and (b) the vote of a majority of trustees who are not parties to this agreement or interested persons of any party to this agreement, cast in person at a meeting called for the purpose of voting on approval of this agreement. Unless terminated as provided in Section 11, this agreement shall continue in effect until December 31, 1999, 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 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 the Fund. 11. 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 the Fund, upon 60 days' written notice to WAM. This agreement may be terminated by 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). 12. Non-Liability of Trustees and Shareholders. 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. 4 13. Amendment. This agreement may not be amended without the affirmative vote (a) of a majority of those trustees who are not "interested persons" (as defined in section 2(a)(19) of the 1940 Act) of the Trust or of WAM, voting in person at a meeting called for the purpose of voting on such approval, and (b) of the holders of a majority of the outstanding shares of the Fund, where required by the 1940 Act or other applicable law, or otherwise deemed appropriate by the Board of Trustees of the Trust. Dated: January 1, 1998 WANGER ADVISORS TRUST WANGER ASSET MANAGEMENT, L.P. By Wanger Asset Management, Ltd., Its General Partner By /s/ Merrillyn J. Kosier By /s/ Robert A. Mohn --------------------------------- -------------------------------- Merrillyn J. Kosier, Senior Vice Robert A. Mohn, Principal President and Secretary 5 EX-99.6 4 DISTRIBUTION AGREEMENT Exhibit 6 DISTRIBUTION AGREEMENT BETWEEN WANGER ADVISORS TRUST AND WAM BROKERAGE SERVICES, L.L.C. THIS DISTRIBUTION AGREEMENT (the "Agreement") is made as of this 1st day of January, 1998 by and between WANGER ADVISORS TRUST, a business trust organized and existing under the laws of the Commonwealth of Massachusetts ("WAT"), and WAM BROKERAGE SERVICES, L.L.C., a limited liability company organized and existing under the laws of the State of Illinois ("WAM BD"). RECITALS: WHEREAS, WAT is engaged in business as an open-end management investment company registered under the Investment Company Act of 1940, as amended ("1940 Act"); WHEREAS, WAM BD is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended ("1934 Act"), and the laws of each state (including the District of Columbia and Puerto Rico) in which it engages in business to the extent such law requires, and is a member of the National Association of Securities Dealers ("NASD") (such registrations and membership are referred to collectively as the "Registrations"); WHEREAS, WAT desires WAM BD to act as the distributor in the public offering of its shares of beneficial interest (hereinafter called "Shares") which are divided into two series, Wanger U.S. Small Cap Advisor and Wanger International Small Cap Advisor(hereinafter called, collectively, the "Funds" and, individually, the "Fund"); WHEREAS, WAT has entered into investment advisory agreements with Wanger Asset Management, L.P. ("WAM"), an affiliate of WAM BD, pursuant to which WAM has agreed to pay all expenses incurred in the sale and promotion of shares of WAT; NOW, THEREFORE, the parties hereto agree as follows: 1. Appointment. WAT appoints WAM BD to act as principal underwriter (as such term is defined in Section 2(a)(29) of the 1940 Act of its Shares. 2. Delivery of WAT Documents. WAT has furnished WAM BD with properly certified or authenticated copies of each of the following in effect on the date hereof and shall furnish WAM BD from time to time properly certified or authenticated copies of all amendments or supplements thereto: (a) Agreement and Declaration of Trust; (b) By-Laws; (c) Resolutions of its Board of Trustees (hereinafter referred to as the "Board") selecting WAM BD as distributor and approving this form of agreement and authorizing its execution. WAT shall furnish WAM BD promptly with copies of any registration statements filed by it with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 (the "1933 Act") or the 1940 Act, together with any financial statements and exhibits included therein, and all amendments or supplements thereto hereafter filed. WAT also shall furnish WAM BD such other certificates or documents which WAM BD may from time to time, in its discretion, reasonably deem necessary or appropriate in the proper performance of its duties. 3. Solicitation of Orders for Purchase of Shares. (a) Subject to the provisions of Paragraphs 5, 6 and 8 hereof, and to such minimum purchase and investor eligibility requirements as may from time to time be indicated in WAT's Prospectus, WAM BD is authorized to solicit, as agent on behalf of WAT, unconditional orders for purchases of WAT's Shares authorized for issuance and registered under the 1933 Act, provided that: (1) WAM BD shall act solely as a disclosed agent on behalf of and for the account of WAT; (2) WAT's transfer agent shall receive directly from investors all payments for the purchase of WAT's Shares and also shall pay directly to shareholders amounts due to them for the redemption or repurchase of all WAT's Shares, with WAM BD having no rights or duties to accept such payment or to effect such redemptions or repurchases; if a payment for the purchase of WAT's Shares be delivered to WAM BD, such payment shall not be negotiated by WAM BD but shall be delivered as soon as reasonably practicable to WAT's transfer agent; (3) WAM BD shall confirm all orders received for purchase of WAT's Shares which confirmation shall clearly state (i) that WAM BD is acting as agent of WAT in the transaction, (ii) that all certificates for redemption, remittances and registration instructions should be sent directly to WAT and (iii) WAT's mailing address; (4) WAM BD shall have no liability for payment for purchases of WAT's Shares it sells as agent; and (5) Each order to purchase Shares of WAT received by WAM BD shall be subject to acceptance by an officer of WAT in Chicago and entry of the order on WAT's records or shareholder accounts and is not binding until so accepted and entered. 2 The purchase price to the public of WAT's Shares shall be the public offering price as defined in Paragraph 7 hereof. (b) In consideration of the rights granted to WAM BD under this Agreement, WAM BD will use its best efforts (but only in states in which WAM BD may lawfully do so) to solicit from investors unconditional orders to purchase Shares of WAT. WAT shall make available to WAM BD, at WAM BD's cost, such number of copies of WAT's currently effective Prospectus and Statement of Additional Information and copies of all information, financial statements and other papers which WAM BD may reasonably request for use in connection with the distribution of Shares. 4. Selling Agreements. WAM BD is authorized, as agent on behalf of WAT, to enter into agreements with other broker-dealers providing for the solicitation of unconditional orders for purchases of WAT's Shares authorized for issuance and registered under the 1933 Act. All such agreements shall be either in the form of agreement attached hereto or in such other form as may be approved by the officers of WAT ("Selling Agreement"). All solicitations made by other broker-dealers pursuant to a Selling Agreement shall be subject to the same terms as are applied by this Agreement to solicitations made by WAM BD. 5. Solicitation of Orders to Purchase Shares by WAT. The rights granted to WAM BD shall be non-exclusive in that WAT reserves the right to solicit purchases from, and sell its Shares to, investors, including insurance company separate accounts through which Fund shares are offered in connection with variable annuity contracts or other arrangements. Further, WAT reserves the right to issue Shares in connection with the merger or consolidation of any other investment company, trust or personal holding company with WAT, or WAT's acquisition, by the purchase or otherwise, of all or substantially all of the assets of an investment company, trust or personal holding company, or substantially all of the outstanding shares or interests of any such entity. Any right granted to WAM BD to solicit purchases of Shares will not apply to Shares that may be offered by WAT to shareholders by virtue of their being shareholders of WAT. 6. Shares Covered by this Agreement. This Agreement relates to the solicitation of orders to purchase Shares that are duly authorized and registered and available for sale by WAT, including redeemed or repurchased Shares if and to the extent that they may be legally sold and if, but only if, WAT authorizes WAM BD to sell them. 7. Public Offering Price. All solicitations by WAM BD pursuant to this Agreement shall be for orders to purchase Shares of WAT at the public offering price. The public offering price for each accepted subscription for WAT's Shares will be the net asset value per share of the particular Fund subscribed for next determined by WAT after it accepts such subscription. The net asset value per share shall be determined in the manner provided in WAT's Agreement and Declaration of Trust as now in effect or as they may be amended, and as reflected in WAT's then current Prospectus and Statement of Additional Information. 8. Suspension of Sales. If and whenever the determination of a Fund's net asset value is suspended and until such suspension is terminated, no further orders for Shares of such 3 Fund shall be accepted by WAT except such unconditional orders placed with WAT and accepted by it before the suspension. In addition, WAT reserves the right to suspend sales of Shares if, in the judgment of the Board of WAT, it is in the best interest of WAT to do so, such suspension to continue for such period as may be determined by WAT's Board; and in that event, (i) at the direction of WAT, WAM BD shall suspend its solicitation of orders to purchase Shares of WAT until otherwise instructed by WAT and (ii) no orders to purchase Shares shall be accepted by WAT while such suspension remains in effect unless otherwise directed by its Board. 9. Authorized Representations. WAT is not authorized by WAM BD to give on behalf of WAM BD any information or to make any representations other than the information and representations contained in WAT's registration statement filed with the SEC under the 1933 Act and/or the 1940 Act as it may be amended from time to time. WAM BD is not authorized by WAT to give on behalf of WAT or any Fund any information or to make any representations in connection with the sale of Shares other than the information and representations contained in WAT's registration statement filed with the SEC under the 1933 Act and/or the 1940 Act, covering Shares, as such registration statement or WAT's prospectus may be amended or supplemented from time to time, or contained in shareholder reports or other material that may be prepared by or on behalf of WAT or approved by WAT for WAM BD's use. No person other than WAM BD is authorized to act as principal underwriter (as such term is defined in the 1940 Act, as amended) for WAT. 10. Registration of Additional Shares. WAT hereby agrees to register an indefinite number of Shares pursuant to Rule 24f-2 under the 1940 Act, as amended. WAT will, in cooperation with WAM BD, take such action as may be necessary from time to time to permit such Shares (so registered or otherwise qualified for sale under the 1933 Act) to be sold in any state mutually agreeable to WAM BD and WAT, and to maintain such qualification; provided, however, that nothing herein shall be deemed to prevent WAT from taking action, without approval of WAM BD, to permit its Shares to be sold in any state it deems appropriate. 11. Conformity With Law. WAM BD agrees that in soliciting orders to purchase Shares it shall conform in all respects with applicable federal and state laws and the rules and regulations of the NASD. WAM BD will use its best efforts to maintain its Registrations in good standing during the term of this Agreement and will promptly notify WAT and WAM, in the event of the suspension or termination of any of the Registrations. 12. Independent Contractor. WAM BD shall be an independent contractor and neither WAM BD, nor any of its members, managers, officers, directors, employees or representatives is or shall be an employee of WAT in the performance of WAM BD's duties hereunder. WAM BD shall be responsible for its own conduct and the employment, control and conduct of its agents and employees and for injury to such agents or employees or to others through its agents and employees and agrees to pay all employee taxes thereunder. 13. Indemnification. WAM BD agrees to indemnify and hold harmless WAT and each of the members of its Board and its officers, employees and representatives and each 4 person, if any, who controls WAT within the meaning of Section 15 of the 1933 Act against any and all losses, liabilities, damages, claims and expenses (including the reasonable costs of investigating or defending any alleged loss, liability, damage, claim or expense and reasonable legal counsel fees incurred in connection therewith) to which WAT or such of the members of its Board and of its officers, employees, representatives, or controlling person or persons may become subject under the 1933 Act, under any other statute, at common law, or otherwise, arising out of the acquisition or sale of any Shares of WAT by any person which (i) may be based upon any wrongful act by WAM BD or any of WAM BD's members, managers, directors, officers, employees or representatives, or (ii) may be based upon any untrue statement or alleged untrue statement of a material fact contained in a registration statement, Prospectus, Statement of Additional Information, shareholder report or other information covering Shares of WAT filed or made public by WAT or any amendment thereof or supplement thereto 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 information furnished to WAT by WAM BD in writing. In no case (i) is WAM BD's indemnity in favor of WAT, or any person indemnified, to be deemed to protect WAT or such indemnified person against any liability to which WAT or such person would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of its or his duties or by reason of its or his reckless disregard of its or his obligations and duties under this Agreement, or (ii) is WAM BD to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against WAT or any person indemnified unless WAT or such person, as the case may be, shall have notified WAM BD in writing of the claim within a reasonable time after the summons, or other first written notification, giving information of the nature of the claim served upon WAT or upon such person (or after WAT or such person shall have received notice of such service on any designated agent). However, failure to notify WAM BD of any such claim shall not relieve WAM BD from any liability which WAM BD may have to WAT or any person against whom such action is brought otherwise than on account of WAM BD's indemnity agreement contained in this Paragraph. WAM BD shall be entitled to participate, at its own expense, in the defense, or, if WAM BD so elects, to assume the defense of any suit brought to enforce any such claim but, if WAM BD elects to assume that defense, such defense shall be conducted by legal counsel chosen by WAM BD and satisfactory to the persons indemnified who are defendants in the suit. In the event that WAM BD elects to assume the defense of any such suit and retain such legal counsel, persons indemnified who are defendants in the suit shall bear the fees and expenses of any additional legal counsel retained by them. If WAM BD does not elect to assume the defense of any such suit, WAM BD will reimburse persons indemnified who are defendants in such suit for the reasonable fees of any legal counsel retained by them in such litigation. WAT agrees to indemnify and hold harmless WAM BD and each of its members, managers, directors, officers, employees, and representatives and each person, if any, who controls WAM BD within the meaning of Section 15 of the 1933 Act against any and all losses, liabilities, damages, claims or expenses (including the damage, claim or expense and reasonable legal counsel fees incurred in connection therewith) to which WAM BD or such of its members, managers, directors, officers, employees, representatives or controlling person or persons may 5 otherwise become subject under the 1933 Act, under any other statute, at common law, or otherwise arising out of the acquisition of any Shares by any person which (i) may be based upon any wrongful act by WAT or any of the members of WAT's Board, or WAT's officers, employees or representatives other than WAM BD, or (ii) may be based upon any untrue statement or alleged untrue statement of a material fact contained in a registration statement, Prospectus, Statement of Additional Information, shareholder report or other information covering Shares filed or made public by WAT or any amendment thereof or supplement thereto, 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 unless such statement or omission was made in reliance upon information furnished by WAM BD to WAT. In no case (i) is WAT's indemnity in favor of WAM BD or any person indemnified to be deemed to protect WAM BD or such indemnified person against any liability to which WAM BD or such indemnified person would otherwise be subject by reason of willful misfeasance, bad faith, or negligence in the performance of its or his duties or by reason of its or his reckless disregard of its or his obligations and duties under this Agreement, or (ii) is WAT to be liable under its indemnity agreement contained in this Paragraph with respect to any claim made against WAM BD or any person indemnified unless WAM BD, or such person, as the case may be, shall have notified WAT in writing of the claim within a reasonable time after the summons, or other first written notification, giving information of the nature of the claim served upon WAM BD or upon such person (or after WAM BD or such person shall have received notice of such service on any designated agent). However, failure to notify WAT of any such claim shall not relieve WAT from any liability which WAT may have to WAM BD or any person against whom such action is brought otherwise than on account of WAT's indemnity agreement contained in this Paragraph. WAT shall be entitled to participate, at its own expense, in the defense or, if WAT so elects, to assume the defense of any suit brought to enforce such claim but, if WAT elects to assume the defense, such defense shall be conducted by legal counsel chosen by WAT and satisfactory to the persons indemnified who are defendants in the suit. In the event that WAT elects to assume the defense of any such suit and retain such legal counsel, the persons indemnified who are defendants in the suit shall bear the fees and expenses of any additional legal counsel retained by them. If WAT does not elect to assume the defense of any such suit, WAT will reimburse the persons indemnified who are defendants in such suit for the reasonable fees and expenses of any legal counsel retained by them in such litigation. 14. Duration and Termination of this Agreement. This Agreement shall become effective upon its execution ("Effective Date") and unless terminated as provided herein, shall remain in effect through December 31, 1999, and from year to year thereafter, but only so long as such continuance is specifically approved at least annually by (a) a vote of majority of the members of the Board of WAT who are not interested persons of WAM BD or WAT, voting in person at a meeting called for the purpose of voting on such approval, and (b) the vote of either the Board of WAT or a majority of the outstanding Shares of WAT. This Agreement may be terminated at any time, without the payment or any penalty (a) on 60 days' written notice, by the Board of WAT or by or by a vote of a majority of the outstanding Shares of WAT, or by WAM BD, or (b) immediately, on written notice by the Board of WAT, in the event of termination or suspension of any of the Registrations. This Agreement will automatically terminate in the event 6 of its assignment. In interpreting the provisions of this Paragraph 14, the definitions contained in Section 2(a) of the 1940 Act (particularly the definitions of "interested person," "assignment" and "majority of the outstanding shares") shall be applied. 15. Amendment of this Agreement. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by each party against which enforcement of the change, waiver, discharge or termination is sought. If WAT should at any time deem it necessary or advisable in the best interests of WAT that any amendment of this Agreement be made in order to comply with the recommendations or requirements of the SEC or any other governmental authority or to obtain any advantage under state or Federal tax laws and notifies WAM BD of the form of such amendment and the reasons therefore, and if WAM BD should decline to assent to such amendment, WAT may terminate this Agreement forthwith. If WAM BD should at any time request that a change be made in WAT's Agreement and Declaration of Trust, By-Laws or its methods of doing business, in order to comply with any requirements of Federal law or regulations of the SEC, or of a national securities association of which WAM BD is or may be a member, relating to the sale of Shares, and WAT should not make such necessary changes within a reasonable time, WAM BD may terminate this Agreement forthwith. 16. Liability. It is understood and expressly stipulated that neither the shareholders of WAT nor the members of the Board of WAT shall be personally liable hereunder. The obligations of WAT are not personally binding upon, nor shall resort to the private property of, any of the members of the Board of WAT nor of the shareholders, officers, employees or agents of WAT, but only WAT's property shall be bound. 17. Miscellaneous. The captions in this Agreement are included for convenience or reference only, and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 18. Notice. Any notice required or permitted to be given by a party to this Agreement or to any other party hereunder shall be deemed sufficient if delivered in person or sent by registered or certified mail, postage prepaid, addressed by the party giving notice to each such other party at the address provided below or to the last address furnished by each such other party to the party giving notice. If to WAT: 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 Attn: Bruce H. Lauer 7 If to WAM BD: 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 Attn: Merrillyn J. Kosier If to WAM: 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 Attn: Bruce H. Lauer WAM BROKERAGE SERVICES, L.L.C. By: /s/ Merrillyn J. Kosier ------------------------------------------ Merrillyn J. Kosier, Vice President WANGER ADVISORS TRUST By: /s/ Merrillyn J. Kosier ------------------------------------------ Merrillyn J. Kosier, Senior Vice President and Secretary ACKNOWLEDGED: WANGER ASSET MANAGEMENT, L.P. By: /s/ Robert A. Mohn --------------------------- Robert A. Mohn, Principal 8 EX-99.B10 5 OPINION AND CONSENT BELL BOYD AND LLOYD Exhibit 10 [LETTERHEAD OF BELL, BOYD & LLOYD] Three First National Plaza 70 West Madison Street, Suite 3300 Chicago, Illinois 60602-4207 312-372-1121 Fax 312-372-2098 April 27, 1998 Wanger Advisors Trust 227 West Monroe Street, #3000 Chicago, Illinois 60606 Ladies and Gentlemen: Share of Beneficial Interest Without Par Value ---------------------------- We have acted as counsel for Wanger Advisors Trust (the "Trust") in connection with the registration under the Securities Act of 1933 (the "Act") of an indefinite number of shares of beneficial interest, without par value, of the series of the Trust designated Wanger U.S. Small Cap Advisor and Wanger International Small Cap Advisor (each a Series) in registration statement no. 33-83548 on form N-1A (the "Registration Statement"). In this connection we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, records, certificates and other papers as we deemed it necessary to examine for the purpose of this opinion, including the Agreement and Declaration of Trust (the "Trust Agreement") and bylaws of the Trust, actions of the board of trustees of the Trust authorizing the issuance of shares of each Series, the form of certificates to evidence such shares, and the Registration Statement. Based on the foregoing examination, we are of the opinion that: 1. The Trust is an unincorporated voluntary association legally organized and validly existing under the laws of The Commonwealth of Massachusetts. 2. Upon the issuance and delivery of the shares of each Series in accordance with the Trust Agreement and the actions of the board of trustees authorizing the issuance of such shares, and the receipt by the Trust of the authorized consideration therefor, the shares so issued will be validly issued and outstanding, fully paid and nonassessable. With respect to the opinion stated in paragraph 2 above, we wish to point out that the shareholders of a Massachusetts business trust may under some circumstances be subject to assessment at the instance of creditors to pay the obligations of such trust in the event that its assets are insufficient for the purpose. Wanger Advisors Trust April 27, 1998 Page 2 In giving this opinion we have relied upon the attached opinion of Sullivan & Worcester to us dated April 23, 1998. We consent to the filing of this opinion as an exhibit to the Registration Statement. 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 Act. Very truly yours, /s/ Bell, Boyd & Lloyd BELL, BOYD & LLOYD [LETTERHEAD OF SULLIVAN & WORCESTER LLP] One Post Office Square Boston, Massachusetts 02109 617-338-2800 Fax 617-338-2880 Boston April 23, 1998 Bell, Boyd & Lloyd Three First National Plaza - - Suite 3300 70 West Madison Street Chicago, Illinois 60602 Re: Wanger Advisors Trust --------------------- Ladies and Gentlemen: You have requested our opinion as to certain matters of Massachusetts law relating to the organization and shares of Wanger Advisors Trust, a Massachusetts trust with transferable shares (the "Trust"), established under a Declaration of Trust dated August 30, 1994 (the "Declaration"). We have reviewed the Declaration and the actions taken by the trustees of the Trust (the "Trustees") to organize the Trust and to authorize the issuance and sale of shares of beneficial interest, without nominal or par value (the "Shares"), of the series known as Wanger U.S. Small Cap Advisor and Wanger International Small Cap Advisor, respectively, established and designated by resolutions adopted by the Trustees on December 15, 1994 (each, a "Series"). In this connection we have examined the By-laws of the Trust, the Prospectus (the "Prospectus") and Statement of Additional Information (the "SAI") included in Post-Effective Amendment No. 6 to the Trust's Registration Statement on Form N-1A under the Securities Act of 1933, as amended (the "Securities Act"), Registration No. 33-83548, and Amendment No. 7 to its Registration Statement under the Investment Company Act of 1940, as amended, Registration No. 811-8748 (collectively, the "Registration Statement"), which you have advised us is about to be filed with the SEC, certificates of Trustees, of officers of the Trust and of public officials as to matters of fact, and such other documents and instruments, and such questions of law and fact, as we have considered necessary or appropriate for purposes of the opinions expressed herein. We have assumed the genuineness of the signatures on, and the authenticity of, all documents furnished to us, and the conformity to the originals of documents submitted to us as copies, which facts we have not independently verified. Based upon and subject to the foregoing, we hereby advise you that, in our opinion, under the laws of Massachusetts: Bell, Boyd & Lloyd -2- April 23, 1998 1. The Trust is validly existing as a trust with transferable shares of the type commonly called a Massachusetts business trust. 2. The Trust is authorized to issue an unlimited number of Shares of each Series; the presently outstanding Shares (the "Outstanding Shares") and the Shares to be offered for sale by the Prospectus (the "Additional Shares") have been duly and validly authorized by all requisite action of the Trustees, and no action of the shareholders of the Trust, or of either Series thereof, is required in such connection. 3. The Outstanding Shares are, and when the Additional Shares have been duly sold, issued and paid for as contemplated by the Prospectus and the SAI such Additional Shares will be, validly and legally issued, and the Outstanding Shares are, and when so sold, issued and paid for the Additional Shares will be, fully paid and non-assessable by the Trust. With respect to the opinion stated in paragraph 3 above, we wish to point out that the shareholders of a Massachusetts business trust may under some circumstances be subject to assessment at the instance of creditors to pay the obligations of such trust in the event that its assets are insufficient for the purpose. This letter expresses our opinions as to the provisions of the Declaration and the laws of Massachusetts applying to business trusts generally, but does not extend to the Massachusetts Securities Act, or to federal securities or other laws. You may rely upon the foregoing opinions in rendering your opinion letter on the same matters which is to be filed with the Amendment as an exhibit to the Registration Statement, and we hereby consent to the reference to us in the Prospectus, and to the filing of this letter with the SEC as an exhibit to the Registration Statement. In giving such consent, we do not thereby concede that we fall within the category of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, /s/ Sullivan & Worcester LLP SULLIVAN & WORCESTER LLP EX-99.B11 6 INDEPENDENT AUDITORS CONSENT Exhibit 11 CONSENT OF INDEPENDENT AUDITORS We consent to the references to our firm under the caption "Financial Highlights" and "Independent Auditors" and to the use of our report dated February 4, 1998 for Wanger Advisors Trust (comprised of the Wanger U.S. Small Cap and Wanger International Small Cap portfolios) in the Registration Statement (Form N-1A) and its incorporation by reference in the related Prospectus and Statement of Additional Information, filed with the Securities and Exchange Commission in this Post-Effective Amendment No. 6 to the Registration Statement under the Securities Act of 1933 (Registration No. 33-83548) and in the Amendment No. 7 to the Registration Statement under the Investment Company Act of 1940 (Registration No. 811-8748). /s/ Ernst & Young LLP Chicago, Illinois April 24, 1998 EX-27.1 7 F.D.S. WANGER U.S. SMALL CAP
6 The following information is extracted from and qualified by reference to registrant's report on form N-SAR for the year ended December 31, 1997 and the financial statements included in registrant's annual reports to shareholders. 01 WANGER US SMALL CAP ADVISOR 1000 YEAR DEC-31-1997 DEC-31-1997 217284 273803 596 54 0 274453 3500 0 87 3587 0 198937 12624 7598 0 0 15410 0 56519 270866 1169 724 0 2100 (207) 15617 37057 52467 0 0 3530 0 5806 991 211 141908 0 3530 0 0 1961 0 2100 199960 16.97 (.02) 4.90 0 .39 0 21.46 1.06 0 0
EX-27.2 8 F.D.S. WANGER INTERNATIONAL SMALL CAP
6 The following information is extracted from and qualified by reference to registrant's report on form N-SAR for the year ended December 31, 1997 and the financial statements included in registrant's annual reports to shareholders. 02 WANGER INTERNATIONAL SMALL CAP ADVISOR 1000 YEAR DEC-31-1997 DEC-31-1997 115446 120455 482 87 0 121024 253 0 111 364 0 116312 7079 4791 1533 0 (798) 0 3613 120660 1720 329 0 1901 148 (617) (2999) (3468) 0 0 2453 0 2964 813 137 35805 0 2453 0 0 1529 0 1901 117337 17.71 .02 (.26) 0 .42 0 17.05 1.60 0 0
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