-----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, HhNwPFVuzHWJtSweGJU5Flbky5k658Iin/Y/GLnpXLYL/Xssn53jMZicHRyQSFsE AdAXyY5JcfeFs8nGYLB6PQ== 0000950131-97-002706.txt : 19970423 0000950131-97-002706.hdr.sgml : 19970423 ACCESSION NUMBER: 0000950131-97-002706 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970421 EFFECTIVENESS DATE: 19970421 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: 1933 Act SEC FILE NUMBER: 033-83548 FILM NUMBER: 97584574 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08748 FILM NUMBER: 97584575 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 As filed with the Securities and Exchange Commission on April 21, 1997 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. 3 and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 4 --------------------------------------- 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, 1997 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) - ------------------------------------------------------------------------------- Registrant has elected to register pursuant to Rule 24f-2 an indefinite number of shares of beneficial interest of its series designated Wanger U.S. Small Cap and Wanger International Small Cap. On February 26, 1997, Registrant filed its Rule 24f-2 Notice for the fiscal year ended December 31, 1996. - ------------------------------------------------------------------------------- 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 - Expenses 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 Not applicable Performance 6. Capital Stock and Other Securities Investing in the Funds; Dividends and Taxes 7. Purchase of Securities Being Offered 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 14. Management of the Registrant Trustees and Officers 15. Control Persons and Principal The Trust; Trustees and Officers Holders of Securities 16. Investment Advisory and Other Services Investment Adviser; Custodian; 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. - -------------------------------------------------------------------------------- [Graphic of a Squirrel] Wanger Advisors Trust Wanger U.S. Small Cap Wanger International Small Cap Prospectus April 30, 1997 Wanger 97 CONTENTS -------- The Funds at a Glance.................................................1 Expenses and Performance..............................................2 Investing in the Funds................................................7 The Wanger Investment Objective and Policies.........................10 Securities, Investment Practices, and Risks..........................12 Organization and Management..........................................17 Dividends and Taxes..................................................21
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 WANGER U.S. SMALL CAP 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. Prospectus April 30, 1997 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 is comprised of 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 is 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 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 varies 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. 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........................................................... 0.99% 12b-1 Fee................................................................ None Other Expenses........................................................... 0.22% - -------------------------------------------------------------------------------- Total Fund Operating Expenses............................................ 1.21% - -------------------------------------------------------------------------------- Wanger International Small Cap Management Fee........................................................... 1.30% 12b-1 Fee................................................................ None Other Expenses........................................................... 0.49% - -------------------------------------------------------------------------------- Total Fund Operating Expenses............................................ 1.79% 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 .20% for U.S. Small Cap and .45% for International Small Cap. Total Fund Operating Expenses would have been 1.19% and 1.75%, respectively. Starting in 1996, WAM has voluntarily agreed to reimburse each Fund in the event that the management fee and certain operating expenses of that Fund in any fiscal year exceed 1.50% of average daily net assets for U.S. Small Cap and 1.90% of average daily net assets for International Small Cap. See "Investment Adviser" in the SAI. 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 above. For every $1,000 you invested, here's how much would have been paid in total expenses if shares of each Fund were redeemed after the number of years indicated:
Wanger U.S. Small Cap After 1 year..............................................................$ 12 After 3 years.............................................................$ 38 After 5 years.............................................................$ 67 After 10 years............................................................$148 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Wanger International Small Cap After 1 year..............................................................$ 18 After 3 years.............................................................$ 56 After 5 years.............................................................$ 97 After 10 years............................................................$213 - --------------------------------------------------------------------------------
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. 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.
Year ended May 3, 1995 through December 31, 1996 December 31, 1995 - ---------------------------------------------------------------------------------------------------- Wanger U.S. Small Cap Net asset value, beginning of period $ 11.60 $ 10.00 Income from investment operations Net investment loss (c) (.06) (.05) Net realized and unrealized gain on investments 5.46 1.65 --------------------------------------------------------------------------------------------------- Total from investment operations 5.40 1.60 Less distributions Dividends from net investment income ---- ---- Distributions from net realized gain (.03) ---- --------------------------------------------------------------------------------------------------- Total distributions (.03) ---- Net asset value, end of period $ 16.97 $ 11.60 - ---------------------------------------------------------------------------------------------------- Total return 46.59% 16.00% Ratios/supplemental data: Ratio of expenses to average net assets (a) (b) 1.21% 2.08%* Ratio of net investment loss to average net assets (b) (.41%) (1.44%)* Portfolio turnover rate 46.00% 59.00%* Net assets at end of period (000s omitted) $128,958 $ 21,904 The average commissions paid per share on stock transactions for the year ended December 31, 1996 was $.0581. - ----------------------------------------------------------------------------------------------------
*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 1.19% for the year ended December 31, 1996 and 2.00% for the period ended December 31, 1995. (b) The Fund was reimbursed by the Advisor for certain expenses from May 3, 1995 through December 31, 1995. Without the reimbursement, the ratio of expenses 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 year ended December 31, 1996 was based upon the average shares outstanding during the year.
Year ended May 3, 1995 through December 31, 1996 December 31, 1995 - ---------------------------------------------------------------------------------------------------- Wanger International Small Cap Net asset value, beginning of period $ 13.45 $ 10.00 Income from investment operations Net investment loss (c) (.09) (.03) Net realized and unrealized gain on investments 4.38 3.48 - ---------------------------------------------------------------------------------------------------- Total from investment operations 4.29 3.45 Less distributions ---- ---- Dividends from net investment income ---- ---- Distributions from net realized gain (.03) ---- - ---------------------------------------------------------------------------------------------------- Total distributions (.03) ---- Net asset value, end of period $ 17.71 $ 13.45 - ---------------------------------------------------------------------------------------------------- Total return 32.01% 34.50% Ratios/supplemental data: Ratio of expenses to average net assets (a) (b) 1.79% 2.32%* Ratio of net investment loss to average net assets (b) (.56%) (0.81%)* Portfolio turnover rate 50.00% 14.00%* Net assets at end of period (000s omitted) $84,855 $ 11,369 The average commissions paid per share on stock transactions for the year ended December 31, 1996 was $.0130. - ----------------------------------------------------------------------------------------------------
*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 1.75% for the year ended December 31, 1996 and 2.00% for the period ended December 31, 1995. (b) The Fund was reimbursed by the Advisor for certain expenses from May 3, 1995 through December 31, 1995. Without the reimbursement, the ratio of expenses 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 loss per share for the year ended December 31, 1996 was based upon the average shares outstanding during the year. 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 any 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 vehicles. Investing in the Funds 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. 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 Fund's 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.) 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. A purchase or redemption of Fund shares will be priced at the next NAV 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. 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 that grows 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. 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. Common stocks 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. Although common stocks have a history of long-term growth in value, their prices tend to fluctuate in the short term. 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./*/ 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 - ----------------- /*/ These restrictions are "fundamental," which means that they cannot be changed without shareholder approval. 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. 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. 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,/**/ 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 The 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. 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. - ----------------- /*/ These restrictions are "fundamental," which means that they cannot be changed without shareholder approval. /**/ The Funds have no present intention of lending their portfolio securities. 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, which 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., controlled by Ralph Wanger. WAM manages approximately $5.6 billion in assets. WAM employs a team approach to management of the Funds. The management teams are comprised of 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 the president of WAM and its chief investment strategist. He is also the chairman of the board of trustees of the Trust. Mr. Wanger is also lead portfolio manager of Acorn Fund 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 and was a principal of Acorn Fund's prior adviser until July 1992. Marcel P. Houtzager is a vice president of the Trust, and is the lead 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 has been a key member of WAM's domestic analytical team since August 1992, and 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 has been a principal of WAM since July 1992 and before that date was a principal of Acorn's prior investment adviser. He has worked with Mr. Wanger for 19 years. Terence M. Hogan, another member of the U.S. Small Cap team, is a vice president of the Trust. He is also a vice president of Acorn Investment Trust, and is a co-manager of Acorn Fund. He has been a principal of WAM since July 1992 and was an analyst with Acorn's prior investment adviser before that date. Mr. Hogan has spent 11 years working with Mr. Wanger. 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 manager of Acorn International. She has been a principal of WAM since July 1992 and was an analyst with Acorn's prior investment adviser before that date. Ms. Zell has been working with Mr. Wanger for 13 years. Merrillyn J. Kosier, vice president, Bruce H. Lauer, vice president and treasurer, and Paula L. Rogers, vice president and secretary, 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. 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. 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. 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 Robert A. Mohn, Vice President Charles P. McQuaid, Senior Vice President Terence M. Hogan, Vice President Leah J. Zell, Vice President Merrillyn J. Kosier, Vice President Bruce H. Lauer, Vice President and Treasurer Paula L. Rogers, Vice President and Secretary Kenneth A. Kalina, Assistant Treasurer 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 Advisor 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 ADVISORS TRUST STATEMENT OF ADDITIONAL INFORMATION April 30, 1997 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.......................................15 PERFORMANCE INFORMATION.......................................18 INVESTMENT ADVISER............................................19 DISTRIBUTOR...................................................21 THE TRUST.....................................................21 TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS...................22 PURCHASING AND REDEEMING SHARES...............................25 ADDITIONAL TAX INFORMATION....................................26 PORTFOLIO TRANSACTIONS........................................27 CUSTODIAN.....................................................28 INDEPENDENT AUDITORS..........................................29 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, 1997 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. The Trust's 1996 annual report, a copy of which accompanies this SAI, 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 into this SAI 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. 2 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 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 6 option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date. A put or call option purchased by a Fund is an asset of that Fund, 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 was 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. 7 Futures Contracts and Options on Futures Contracts. The Funds may use interest rate futures contracts and index futures contracts. An interest rate or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a financial instrument or the cash value of an index/1/ at a specified price and time. A public market exists in futures contracts covering a number of indexes (including, but not limited to: the Standard & Poor's 500 Index; the Value Line Composite Index; the Russell 2000 Index; and the New York Stock Exchange Composite Index) as well as financial instruments (including, but not limited to: U.S. Treasury bonds; U.S. Treasury notes; Eurodollar certificates of deposit; and foreign currencies). Other index and financial instrument futures contracts are available and it is expected that additional futures contracts will be developed and traded. 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. - ---------------- /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 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 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 9 contracts, the interest rate levels, maturities, and creditworthiness of the issues underlying the futures contract may differ from the financial instruments held in a Fund's portfolio. A decision as to whether, when, and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected stock price or interest rate trends. Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several 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 - ---------------- /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 positions exceeds the current value of the securities in its portfolio, plus or minus unrealized gains and losses on the open positions, adjusted for the historical relative volatility of the relationship between the portfolio and the positions. For this purpose, to the extent a Fund has written call options on specific securities in its portfolio, the value of those securities will be deducted from the current market value of the securities portfolio. In order to comply with Commodity Futures Trading Commission Regulation 4.5 and thereby avoid being deemed a "commodity pool 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. 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. 11 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 liquid assets (such as cash, U.S. government securities, or other liquid high grade debt obligations) 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 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 12 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. 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 13 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 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. 14 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 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. 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);/3/ - ---------------- /3/ The Funds have no present intention of lending their portfolio securities. 15 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;/4/ 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; - ---------------- /4/ State insurance laws currently restrict a Fund's borrowings to facilitate redemptions to no more than 25% of the Fund's net assets. 16 (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%. 17 (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: n ERV = P(1 +T) 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, 1996 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................................ 46.6% 46.6% Life of Fund (inception 5/3/95)....... 70.04% 37.4% 18 International Small Cap Average Annual ----------------------- Total Return Total Return ------------ -------------- 1 year................................. 32.0% 32.0% Life of Fund (inception 5/3/95)........ 77.6% 41.0% 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, 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 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 19 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. 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. 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. The investment advisory agreements require WAM to reimburse a Fund in the event that the total annual expenses of the Fund that are payable in any fiscal year, including the advisory fee but excluding taxes, interest, brokerage commissions and similar fees, and certain extraordinary litigation expenses, exceed the limits prescribed by any state in which that Fund's shares are qualified for sale. Total annual expenses, and the amount by which total annual expenses may exceed these limits, will be determined as of the close of each business day of the year. The Trust does not believe that any such state expense limitation is currently applicable. If the states in which a Fund's shares are qualified for sale impose no limits on total expenses, then 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, 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 20 excess of this limitation will be made monthly and will be paid to the Fund by reduction of WAM's advisory fee. 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. WAM is a limited partnership managed by its general partner, Wanger Asset Management, Ltd., which is controlled by Ralph Wanger. WAM commenced operations in 1992. Ralph Wanger, Charles P. McQuaid, Terence M. Hogan, Leah J. Zell, Marcel Houtzager and Robert A. Mohn, are limited partners of WAM. WAM has approximately $5.6 billion under management. 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, 1997, 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 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. THE TRUST 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 21 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. TRUSTEES AND OFFICERS; CERTAIN SHAREHOLDERS The Trustees and officers of the Trust and their principal business activities during the past five years are: Ralph Wanger, trustee and president* (age 63) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, Wanger Asset Management, L.P. since July 1992; prior thereto, principal, Harris Associates L.P.; trustee and president, Acorn Investment Trust. Charles P. McQuaid, trustee and senior vice president* (age 44) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, Wanger Asset Management, L.P. since July 1992; prior thereto, principal, Harris Associates L.P.; trustee and senior vice president, Acorn Investment Trust. Fred D. Hasselbring, trustee (age 55) 1338 N. Bell Avenue, Chicago, Illinois 60622; owner, Fred D. Hasselbring and Associates (retail industry computer systems consulting and sales). 22 P. Michael Phelps, trustee (age 63) 100 North Riverside Plaza, Chicago, Illinois 60606-1596; vice president and corporate secretary, Morton International, Inc. James A. Star, trustee (age 36) 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. Terence M. Hogan, vice president (age 35) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, analyst, and portfolio manager, Wanger Asset Management, L.P., since July 1992; prior thereto, analyst, Harris Associates L.P.; vice president, Acorn Investment Trust. Leah J. Zell, vice president (age 48) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, analyst, and portfolio manager, Wanger Asset Management, L.P., since July 1992; prior thereto, analyst, Harris Associates L.P.; vice president, Acorn Investment Trust. Marcel P. Houtzager, vice president (age 36) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal and investment analyst, Wanger Asset Management, L.P. since April 1992. Robert A. Mohn, vice president (age 35) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; principal, analyst and portfolio manager, Wanger Asset Management, L.P. since August 1992. Merrillyn J. Kosier, vice president (age 37) 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.; vice president and secretary, Acorn Investment Trust. Bruce H. Lauer, vice president and treasurer (age 39) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; chief administrative officer, Wanger Asset Management, L.P., since April 1995; prior thereto, first vice president, investment accounting, Kemper Financial Services, Inc.; vice president and treasurer, Acorn Investment Trust. 23 Paula L. Rogers, vice president and secretary (age 38) 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606; vice president of institutional marketing, Wanger Asset Management, L.P., since June 1996; vice president, Goldman Sachs & Co., 1994-1996; prior thereto, second vice president, The Northern Trust Company. Kenneth A. Kalina, assistant treasurer (age 37) 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. *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, 1997, 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 5,919,345 shares (approximately 98% of the outstanding shares) of International Small Cap, and 9,236,333 shares (approximately 98% 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, 1996 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. 24
=========================================================================================== 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 $4,800 $4,800 $ 9,600 Trustee P. Michael Phelps $5,300 $5,300 $10,600 Trustee James A. Star $5,300 $5,300 $10,600 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 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 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 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 a current exchange rate. 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 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 may take place in various foreign markets on certain days (such as Saturday) when the Funds are not open for business and do not calculate their net asset values. Conversely, trading in the Funds' portfolio securities may not occur on days when the Funds are open. Therefore, the calculation of net asset value does not take place contemporaneously with the determinations of the prices of many of the Funds' portfolio securities and the value of the Funds' portfolios may be significantly affected on days when shares of the Funds may not be purchased or redeemed. 25 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) the Fund must derive less than 30% of its gross income each taxable year from the sale or other disposition of securities, or any of the following, that were held for less than three months -- options, futures or forward contracts (other than those on foreign currencies), or foreign currencies (or options, futures or forward contracts thereon) that are not directly related to the Fund's principal business of investing in securities (or options and futures with respect thereto) ("Short-Short Limitation"); (3) at the close of each quarter of the Fund's taxable year, at least 50% of the value of its total assets must be represented by cash or cash items, U.S. Government securities, securities of 26 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 (4) 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, relates to the specific transaction placed with the broker, but for the greater part the research consists of a wide 27 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. Brokerage commissions incurred by International Small Cap during the same time periods were $49,559 and $422,414, respectively. 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. 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 28 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. 29 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 Wanger Advisors Trust 1996 Annual Report Contents 1 Squirrel Chatter 3 Funds at a Glance 4 Performance Review Wanger U.S. Small Cap 6 Performance Review Wanger International Small Cap 8 Statement of Investments Wanger U.S. Small Cap 12 Statement of Investments Wanger International Small Cap 16 Portfolio Diversification Wanger International Small Cap 17 Statements of Assets and Liabilities 18 Statements of Operations 19 Statements of Changes in Net Assets 20 Financial Highlights Wanger U.S. Small Cap 21 Financial Highlights Wanger International Small Cap 22 Notes to Financial Statements Wanger Asset Management, L.P., ("WAM") is one of the leading global small-cap equity managers in the U.S. with 26 years of small-cap investment experience. WAM manages over $5.4 billion in equities and is the investment adviser to Wanger U.S. Small Cap, Wanger International Small Cap, Acorn Fund, Acorn International and Acorn USA. WAM uses a unique style of catching trends with small, attractively-priced niche companies. For more complete information about our funds including the Acorn Funds, fees and expenses, call WAM Brokerage Services, L.L.C., distributor, at 1-800-5WANGER for a prospectus. Read it carefully before you invest or send money. Wanger [LOGO] [9]6 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- [LOGO] Squirrel Chatter Ralph Wanger is the President of Wanger Asset Management, L.P., and the portfolio manager of Wanger Advisors Trust and Acorn Investment Trust. Mr. Wanger has been featured in Forbes, Money, The Wall Street Journal, Newsweek and Barron's. Mr. Wanger was also featured in Bill Griffeth's 1994 book, The Mutual Fund Masters. In a USA Today national survey, professional money managers were asked to name their favorite investment professional. Wanger was voted #1. A Zebra in Lion Country, by Ralph Wanger, is due out in bookstores in March. Published by Simon & Schuster, this book is a witty survival guide to investing. It also features some of Wanger's letters to Acorn Fund shareholders which investors have enjoyed reading over the years. An excerpt from this new book follows. Every bad idea starts from a good idea. We all know this from our own experience. We go to a party and have a glass of champagne. Good idea. We feel better, more relaxed. The party is now more interesting, the toasts more lively, the girls prettier, the dancing more fun. So we have a second glass of champagne. Another good idea. The jokes now have gone from humorous to hilarious, the people you're meeting are the most interesting and glamorous you've ever known, and the dancing is wild and you've never been better at it. But after the third glass, and the fourth... well, what started as a good idea turns into a very bad idea, with your head already beginning to pound from a headache you know will terminate in a humdinger of a hangover. It happens all the time in the stock market. Technology stocks have been the rage for a long time, albeit with some periods of "consolidation." The boom started with a very good idea. American technology leads the world. Personal computers and the software to run them, and other electronic and communications devices, have become inexpensive and relatively easy to use, and we all buy them. Companies like Microsoft, Motorola, Intel are well-run--indeed fabulous-- companies. All this is correct, a great investment idea. The people who were in early have made a lot of money. But as the party lengthens, the stocks get taken over by people who don't particularly understand what's happening; they are just playing a trend. (continued) 1 Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- [LOGO] Squirrel Chatter (continued) New companies are invented to meet their demands. The securities industry, you know, is not a service industry. It is a manufacturing industry. If you want a stock, Wall Street will make it for you. Any business, any kind you want. Recently, the Internet being the rage, the investment bankers have worked overtime creating a stream of IPOs to meet the demand. And people love them, to judge by their P/Es, some of which have soared into the triple-digit stratosphere. Remember back in the early '80's when the hard disk drive for computers was invented? It was an important, crucial invention, and investors were eager to be part of this technology. More than 70 disk drive companies were formed and their stocks were sold to the public. Each company had to get 20 percent of the market share to survive. For some reason, they didn't all do it. Anything can get overdone. In the financial world, things get taken to extremes all the time, like the tulip scandal of 1637. That started with a good idea. The tulip was a terrific invention. The flower had not previously been seen in Europe, and it was a great hit, and new varieties and colors increased its popularity. There was nothing wrong with the idea. But after a few years people started selling tulip bulbs for hundreds of thousands of dollars a piece, if they were of a rare variety, and a good idea went to speculative madness. The tulip was a good idea, disk drives were a good idea, the Internet is a good idea. They have to be good ideas or they would not become widely popular. Come up with a concept that's patently silly or harmful and people won't want it. So, only a good idea can become so popular that it becomes a bad idea. [PHOTO OF RALPH WANGER APPEARS HERE] Ralph Wanger, President 2 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Funds at a Glance - -------------------------------------------------------------------------------- Wanger U.S. Small Cap Results to December 31, 1996
4th Quarter Last 12 months Wanger U.S. Small Cap 7.7% 46.6% Russell 2000 5.2% 16.5% S&P MidCap 400 6.1% 19.2% S&P 500 8.3% 23.0% Dow-Jones 10.2% 28.9% 966 Variable Insurance Funds Average 13.4%
Net Asset Value per share as of 12/31/96: $16.97 The Russell 2000 is formed by taking 3,000 companies and then eliminating the largest 1,000 leaving a good small company index. The S&P MidCap 400 is a market value-weighted index of 400 stocks that are in the next tier down from the S&P 500. The S&P 500 is a broad market-weighted average, still blue chip dominated. The Dow Jones Industrial Average includes 30 large companies. The Lipper Variable Funds average includes both funds. All indices are unmanaged and include reinvested dividends. - --------------------------------------------------------------------------------
Wanger International Small Cap Results to December 31, 1996 4th Quarter Last 12 months Wanger Int'l Small Cap 4.3% 32.0% EAFE 1.6% 6.1% Lipper International Small Co. 2.8% 13.3% Funds Average Lipper International Fund Index 5.2% 14.4% 966 Variable Insurance Funds Average 13.4% 71 International Variable Insurance Funds Average 14.9%
Net Asset Value per share as of 12/31/96: $17.71 EAFE is Morgan Stanley's Europe, Australia and Far East Index, an index of companies throughout the world in proportion to world market capitalization, excluding the U.S. and Canada. The Lipper International Small Company Funds Average is comprised of 12 small company international funds. The Lipper International Fund Index is an equal-weighted index of the 30 largest international funds. The Lipper Variable Funds average include both funds; the International Average includes Wanger Int'l Small Cap. All indices are unmanaged and include reinvested dividends. - -------------------------------------------------------------------------------- Wanger U.S. Small Cap Top 5 Industries As a % of net assets, as of 12/31/96
Energy/Minerals 23.9% Information 17.9% Industrial Goods/Services 14.4% Finance 14.0% Health Care 13.2%
- -------------------------------------------------------------------------------- Wanger International Small Cap Top 5 Countries As a % of net assets, as of 12/31/96
United Kingdom 16.1% Japan 14.6% Sweden 7.6% Singapore 5.8% Australia 5.5%
- -------------------------------------------------------------------------------- Wanger U.S. Small Cap Top 10 Holdings
CalEnergy 4.9 % Respironics 2.8 % Power Plants Sleep Apnea Products Tesoro Petroleum 3.8 % Wackenhut 2.7% Oil Refinery/Gas Reserves Prison Management NGC 3.8% Atwood Oceanics 2.6% Gas Processing/Marketing Offshore Drilling Lincare Holdings 3.6 % Coast Savings 2.4% Home Health Care Services California Savings/Loan Seagull Energy 3.6 % Kronos 2.4 % Oil/Gas Producer Time Accounting Software & Clocks
- -------------------------------------------------------------------------------- Wanger International Small Cap Top 10 Holdings
TT Tieto 3.4% Oriflame International 2.0% Computer Services/ Natural Cosmetics Consulting--Finland United Kingdom Tyndall 2.9% Kempen 2.0% Money Management/ Stock Brokerage/Investment Insurance--Australia Management--Netherlands Genting International 2.8% Grupo Radio Centro 1.9% Cruise Line--Singapore Radio Broadcasting/ Networks Mexico Getinge Industrier 2.3% Sterilization & Disinfection International Container 1.9% Equipment--Sweden Terminal Services Container Handling Terminals Medeva 2.1% & Port Management--Philippines Pharmaceuticals United Kingdom Premier Oil 1.8% Oil/Gas Producer United Kingdom - --------------------------------------------------------------------------------
The funds' top 10 holdings and portfolio diversification vary with changes in portfolio investments. See the Statements of Investments for complete lists of the funds' holdings, including those described under "Performance Review." 3 Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger U.S. Small Cap Performance Review Wanger U.S. Small Cap had a career year in 1996. One number says it all: +46.6%. Your Fund's 46.6% return was the third best of all 966 variable insurance funds in the U.S. tracked by Lipper Analytical Services, Inc. This ranking is based on the one year total return ending 12/31/96. In other words, we ranked in the top 0.3% of our class. That's summa summa cum laude material. At the head of our own class were our oil and gas stocks. We accumulated an outsized energy position in the first half of the year, buying up bustling companies like NGC Corp. (natural gas brokerage), Atwood Oceanics (deep-sea drilling rigs), Seagull Energy and United Meridian (oil & gas explorers) on the cheap. Ten-gallon hats off to Jason Selch, our resident oilman, for tapping into those gusher stocks. Small-cap investing was at a handicap last year. Small-cap indices like the Russell 2000 (+ 16.5%) lagged behind the S&P 500's 23% return as mutual fund managers poured their record cash inflows into the most liquid large-cap stocks. The popularity of index investing and the revival of the Nifty Fifty were both signs of the market's big-cap fetish. We produced our own nifty returns without the benefit of bigness. We jumped into energy stocks early in the year when the stocks were slow to follow the price of oil's lead. And we stayed clear of the fancy-multiple high-tech stocks that soared in the first quarter, but littered the new lows list soon after. Our other big winners were a multi-industrial group. Technology was represented by ACT Manufacturing, an electronics assembler with a bulging backlog of new customers. Health care winner was Steris, a sterilization equipment company recovering from acquisition indigestion. Our growth utility (no oxymoron) CalEnergy was buoyed by its recent acquisition of a UK electric company. And our best banker was Texas Regional, the grandest bank in the Rio Grande Valley. Small-cap investing can be volatile and 1996 will be a hard act to follow. Our team of analysts will continue to work hard to reward the confidence you've shown in us. - -------------------------------------------------------------------------------- Fund Facts The U.S. stock market was red hot and the large company indexes, like the S&P 500 and the Dow Jones Industrial Average, enjoyed another banner year. Remember, the S&P 500 is a broad market-weighted, blue-chip dominated index and the Dow Jones is made up of the 30 largest U.S. companies' returns. Most Wanger U.S. Small Cap companies are not found in the S&P 500 or the Dow; rather, the Fund primarily invests in small and mid-size companies in the U.S. 4 [LOGO] [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger U.S. Small Cap Results to December 31, 1996 The Value of a $10,000 Investment in Total Return for Each Period Wanger U.S. Small Cap May 3, 1995 through December 31, 1996 Wanger U.S. Small Cap $17,004 Russell 2000 $13,756 [GRAPH APPEARS HERE] - ------------------------------------------------------------------------------- This graph compares the results of $10,000 invested in Wanger U.S. Small Cap on May 3, 1995 (the date the Fund began operations) with the Russell 2000 with dividends reinvested. Past performances does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that Fund shares, when redeemed, may be worth more or less than their original cost. Average Annual Total Return 1 year: 46.6% Life: 37.4% 5 Wanger Advisors Trust 1996 Annual Report Performance Review - -------------------------------------------------------------------------------- Wanger International Small Cap Wanger International Small Cap had a spectacular year in 1996. Our total return for the year was 32%. Lipper Analytical Services, Inc. tracks 966 variable insurance mutual funds; our total return for 1996 ranked us #16, in the top 2%. We are one of 71 international variable insurance mutual funds; we were #2 in the international arena. Our return was more than double that of the average of our competitors. How did we do it? Market conditions were mixed with the most commonly used international stock index, EAFE, up only 6% for the year. That we were able to produce a return over five times as large was in part achieved by underweighting Japanese stocks (the Jasdaq index of smaller Japanese companies was down almost 14% in 1996, on top of which the Japanese Yen declined about 11%) and overweighting European stocks (a number of European stock markets were up over 20% and most of their currencies declined less than the Yen). A second important factor which helped us to outperform was our exposure to energy and technology stocks. The former sector took off along with the price of oil, and the latter benefited from the current profit growth wave in the industry, along with newfound interest by U.S. institutions tired of paying sky high prices for domestic technology stocks. Finally, our bottom up, research driven approach to stock picking paid off with our analysts by and large outperforming their respective countries and sectors in 1996. For example, our aforementioned energy portfolio benefited from the skill and enthusiasm brought to bear by our intrepid Jason Selch, whose stocks in the fund rose an incredible 176% in 1996. How much risk did we take? Recall that in the investing world, risk is usually measured by the degree to which prices bounce up and down. We all know that by this measure cash is the best behaved (least volatile) asset, followed by short- term bonds, then long-term bonds, blue chip stocks, and finally smaller company stocks. Where does your Fund fit in in 1996? This might surprise you, but our weekly volatility during 1996 was somewhere between long-term bonds and blue chip stocks, even though the Fund invests in smaller company stocks and even though individual foreign markets can be quite volatile (1). Your Fund enjoyed lower volatility in 1996 than the blue chips because of its high level of diversification across countries (over 25) and industries (more than 20). To illustrate, our top five performers in 1996 included the Finnish computer consultant TT Tieto, Canadian oil service company Shaw, Dutch mutual fund manager Kempen, Argentine steel producer Siderca, and Australian life insurer Tyndall. We like these stocks because they have high management ownership, low or no research coverage by brokerage analysts, and above average returns on equity. Our globe trotting team of security analysts is already at work trying to uncover more niche companies to add to your portfolio in 1997!! - -------------------------------------------------------------------------------- (1) We calculated the weekly volatility (technically the standard deviation of the weekly returns) in 1996 for each of these asset classes and observed the following: Cash 0% Bonds (Lipper U.S. Government Bond Index) 0.8% Wanger International Small Cap 1.1% Blue chip stocks (S&P 500 Index) 1.7% Small company stocks (NASDAQ Composite Index) 2.0% Volatility or variability in expected return is one measure of risk. Higher numbers indicate greater volatility. The information shown represents relative volatility over past periods and does not necessarily indicate relative future volatility. 6 [LOGO] Wanger Advisors Trust 1996 Annual Report - ------------------------------------------------------------------------------ Wanger International Small Cap Results to December 31, 1996 - ------------------------------------------------------------------------------ [WANGER INTERNATIONAL SMALL CAP GRAPH APPEARS HERE] The value of a $10,000 Investment in Wanger International Small Cap Wanger International Small Cap $17,755 EAFE $11,293 - ------------------------------------------------------------------------------ This graph compares the results of $10,000 invested in Wanger International Small Cap on May 3, 1995 (the date the Fund began operations) with Morgan Stanley's Europe, Australia and Far East Index (EAFE). Past performances does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that Fund shares, when redeemed, may be worth more or less than their original cost. Average Annual Total Return 1 year: 32.0% Life: 41.0% 7 Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger U.S. Small Cap Statement of Investments December 31, 1996
- -------------------------------------------------------------------------------- Number Value of Shares Common Stocks and Other Equity-Like Securities--90.3% Information--17.9% - -------------------------------------------------------------------------------- Broadcasting/CATV--1.9% 100,000 C-Tec(b) $ 2,425,000 Cable TV/Local Telephone - -------------------------------------------------------------------------------- Programming for CATV/TV/Satellites--6.4% 113,400 Data Transmission (b) 2,523,150 Data Services for Farmers 88,000 Tele-Communications, Liberty Media Group (b) 2,513,500 Cable TV Programming 70,000 Gaylord Entertainment 1,601,250 Cable TV Programming 58,000 International Family Entertainment (b) 899,000 Cable TV Programming 42,000 United Video Satellite (b) 735,000 Cable TV Programming - -------------------------------------------------------------------------------- Total 8,271,900 - -------------------------------------------------------------------------------- Mobile Communications--1.9% 112,500 COMARCO (b) 2,053,125 Wireless Network Testing 40,000 Palmer Wireless (b) 420,000 Cellular Phone Services - -------------------------------------------------------------------------------- Total 2,473,125 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Number Value of Shares Computer Software/Services--4.2% 103,600 CACI International, ClA (b) 2,175,600 Computer Software Systems 46,600 Analysts International 1,316,450 Contract Programming 80,000 Simulation Sciences (b) 1,190,000 Process Control Software 14,000 Compuware (b) 701,750 Computer Services & Software - -------------------------------------------------------------------------------- Total 5,383,800 - -------------------------------------------------------------------------------- Computer Systems--1.1% 55,400 ACT Manufacturing (b) $ 1,461,175 Contract Manufacturing - -------------------------------------------------------------------------------- Components/Peripherals--2.4% 96,000 Kronos (b) 3,072,000 Time Accounting Software & Clocks - -------------------------------------------------------------------------------- Information Total 23,087,000 Healthcare--13.2% - -------------------------------------------------------------------------------- Biotechnology/Drug Delivery--1.4% 40,000 Watson Pharmaceuticals (b) 1,797,500 Generic Pharmaceuticals - -------------------------------------------------------------------------------- Medical Equipment--7.1% 210,000 Respironics (b) 3,648,750 Sleep Apnea Products 59,100 Steris (b) 2,570,850 Sterilization Equipment 76,000 Invacare 2,090,000 Wheelchairs, Patient Aids & Beds 70,000 Kinetic Concepts 857,500 Hospital Beds - -------------------------------------------------------------------------------- Total 9,167,100 - -------------------------------------------------------------------------------- Services--4.7% 114,000 Lincare Holdings (b) 4,674,000 Home Health Care Services 100,800 United Payors & Providers (b) 1,386,000 Medical Claims Repricing - -------------------------------------------------------------------------------- Total 6,060,000 - -------------------------------------------------------------------------------- Health Care Total 17,024,600
See accompanying notes to financial statements. 8 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger U.S. Small Cap Statement of Investments December 31, 1996
- -------------------------------------------------------------------------------- Number Value of Shares Consumber Goods/services--6.9% - -------------------------------------------------------------------------------- Retail--3.1% 322,900 Host Mariott Services (b) $ 2,946,463 Runs Airport Restaurants 30,000 Borders Group (b) 1,076,250 Bookstores - -------------------------------------------------------------------------------- Total 4,022,713 - -------------------------------------------------------------------------------- Entertainment/Leisure--1.4% 63,000 Showboat 1,086,750 Casino/Hotels 42,000 Rio Hotel & Casino (b) 614,250 Casino/Hotel 60,000 Monarch Casino & Resort (b) 120,000 Casino/Hotel - -------------------------------------------------------------------------------- Total 1,821,000 - -------------------------------------------------------------------------------- Food--0.4% 70,000 Shoney's (b) 490,000 Restaurants - -------------------------------------------------------------------------------- Manufacturers--2.0% 163,500 Rawlings (b) 1,635,000 Baseball Equipment 28,000 Newell 882,000 Household Goods - -------------------------------------------------------------------------------- Total 2,517,000 - -------------------------------------------------------------------------------- Consumer Goods/Services Total 8,850,713
- -------------------------------------------------------------------------------- Number Value of Shares Finance--14.0% - -------------------------------------------------------------------------------- Banks/Savings & Loans--7.4% 84,000 Coast Savings (b) 3,076,500 California Savings & Loan 60,000 Texas Regional Bancshares 2,040,000 TexMex Bank 56,000 Peoples Bank Bridgeport 1,617,000 Consumer Finance 106,000 Imperial Thrift & Loan (b) 1,590,000 California Thrift 80,000 Commonwealth Bancorp 1,200,000 Pennsylvania Savings & Loan - -------------------------------------------------------------------------------- Total 9,523,500 - -------------------------------------------------------------------------------- Insurance--1.6% 64,000 Penn Treaty American (b) 1,664,000 Nursing Home Equipment 17,000 Leucadia National 454,750 Insurance Holding Company - -------------------------------------------------------------------------------- Total 2,118,750 - -------------------------------------------------------------------------------- Money Management--2.7% 125,000 Baker Fentress 2,109,375 Closed-End Investment Company 63,000 SEI 1,401,750 Mutual Fund Distributor - -------------------------------------------------------------------------------- Total 3,511,125 - -------------------------------------------------------------------------------- Credit Cards--1.1% 31,000 National Data 1,348,500 Credit Card & Medical Claims Processor - -------------------------------------------------------------------------------- Other--1.2% 86,500 Jayhawk (b) 973,125 Used Auto Finance 28,000 Americredit (b) 574,000 Used Auto Finance - -------------------------------------------------------------------------------- Total 1,547,125 - -------------------------------------------------------------------------------- Finance Total 18,049,000
See accompanying notes to financial statements 9 Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger U.S. Small Cap Statement of Investments December 31, 1996
- -------------------------------------------------------------------------------- Number Value of Shares Industrial Goods/Services--14.4% Machinery--0.4% 30,500 Farr (b) $507,062 Filters - -------------------------------------------------------------------------------- Steel--5.5% 135,900 Atchison Casting (b) 2,446,200 Steel Foundries 91,000 Worthington Industries 1,649,375 Steel Processing 56,000 Gibraltar Steel (b) 1,470,000 Steel Processing 105,000 Universal Stainless (b) 918,750 Semi-finished Stainless Steel Producer 35,300 Steel Dynamics (b) 675,113 Steel Mini-Mill - -------------------------------------------------------------------------------- Total 7,159,438 - -------------------------------------------------------------------------------- Industrial Suppliers--3.2% 92,000 Applied Industrial Technologies 2,564,500 Distribution of Industrial Components 75,000 Lilly Industries, Cl. A 1,368,750 Industrial Coatings 10,500 Aftermarket Technology (b) 181,125 Auto Transmission Remanufacturer - -------------------------------------------------------------------------------- Total 4,114,375 - -------------------------------------------------------------------------------- Services--5.3% 230,600 Wackenhut, Cl. B 3,516,650 Prison Management 100,000 World Color Press (b) 1,925,000 Printing 50,000 Hub Group (b) 1,337,500 Freight Forwarder - -------------------------------------------------------------------------------- Total 6,779,150 - -------------------------------------------------------------------------------- Industrial Goods/Services Total 18,560,025
- -------------------------------------------------------------------------------- Number Value of Shares Energy/Minerals--23.9% - -------------------------------------------------------------------------------- Independent Power--6.1% 189,000 CalEnergy (b) $6,355,125 Power Plants 19,000 AES Corporation (b) 883,500 Power Plants 38,500 Thermo Ecotek (b) 587,125 Biomass Operator - -------------------------------------------------------------------------------- Total 7,825,750 - -------------------------------------------------------------------------------- Oil/Gas Producers--8.6% 352,000 Tesoro Petroleum (b) 4,928,000 Oil Refinery/Gas Reserves 209,000 Seagull Energy (b) 4,598,000 Oil & Gas Producer 22,000 United Meridian (b) 1,138,500 Oil & Gas Producer 100,000 Tipperary (b) 462,500 Oil & Gas Producer - -------------------------------------------------------------------------------- Total 11,127,000 - -------------------------------------------------------------------------------- Distribution/Marketing/Refining--4.2% 210,000 NGC 4,882,500 Gas Processing/Marketing 23,000 United Cities Natural Gas 517,500 Natural Gas Utility - -------------------------------------------------------------------------------- Total 5,400,000 - -------------------------------------------------------------------------------- Oil Services--5.0% 53,700 Atwood Oceanics (b) 3,409,950 Offshore Drilling 145,000 GeoScience (b) 1,885,000 Offshore Seismic Equipment 53,000 J Ray McDermott (b) 1,166,000 Offshore Construction - -------------------------------------------------------------------------------- Total 6,460,950 - -------------------------------------------------------------------------------- Energy/Minerals Total 30,813,700
See accompanying notes to financial statements. 10 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger U.S. Small Cap
- -------------------------------------------------------------------------------- Principal Amount Value Total Common Stocks and Other Equity-Like Securities--90.3% $116,385,038 - -------------------------------------------------------------------------------- (Cost: $96,923,306) Short-Term Obligation--7.5% 9,690,000 $9,690,000 State Street Bank Repurchase Agreement 4.75% 01/02/97; 12/31/96 Agreement Collateralized by U.S. Treasury Bonds - -------------------------------------------------------------------------------- (Cost: $9,690,000) Total Investments--97.8% 126,075,038 - -------------------------------------------------------------------------------- (Cost: $106,613,306) Cash and Other Assets Less Liabilities--2.2% 2,882,873 - -------------------------------------------------------------------------------- Total Net Assets--100% $128,957,911
- -------------------------------------------------------------------------------- Notes to Statement of Investments: (a) At December 31, 1996, for federal income tax purposes cost of investments was $106,613,306 and net unrealized appreciation was $19,461,732, consisting of gross unrealized appreciation of $21,927,316 and gross unrealized depreciation of $2,465,584. (b) Non-income producing security. See accompanying notes to financial statements. 11 Wanger Advisors Trust 1996 Annual Report
- -------------------------------------------------------------------------------- Wanger International Small Cap Statement of Investments December 31, 1996 - --------------------------------------------------------------------------- Number Value of Shares Common Stocks and Other Equity-Like Securities-93.3% Europe-42.3% - --------------------------------------------------------------------------- Germany/Austria-2.0% 10,000 Rhoen Klinikum Ord. $1,044,708 1,200 Rhoen Klinikum Pfd. 119,136 Hospital Management 2,500 Cewe Color Holdings 567,776 Photographic Developing/Printing - --------------------------------------------------------------------------- Total 1,731,620 - --------------------------------------------------------------------------- Denmark-0.8% 5,000 Kompan International (b) 703,521 Playground Equipment - --------------------------------------------------------------------------- Netherlands-2.0% 86,000 Kempen (b) 1,690,369 Stock Brokerage/Investment Management - --------------------------------------------------------------------------- Finland-3.4% 34,000 TT Tieto, Cl. B 2,868,865 Computer Services/Consulting - --------------------------------------------------------------------------- Norway-0.9% 62,500 P4 Radio Helo Norge (b) 567,701 Commercial Radio Station 55,000 Sysdeco Group (b) 220,503 Software "Tool" Sets & Systems - --------------------------------------------------------------------------- Total 788,204 - --------------------------------------------------------------------------- Sweden-7.6% 100,000 Getinge Industrier 1,969,830 Sterilization & Disinfection Equipment 50,000 Esselte, Series A 1,135,032 Office Supplies & Related Equipment 60,000 Mandator (b) 984,183 Computer Services/Consulting 8,000 Scala International (b) 726,421 Accounting Software 40,000 Frontec, Series B. (b) 691,271 Computer Services & Software
- --------------------------------------------------------------------------- Number of Shares Value
- -------------------------------------------------------------------------- Sweden-7.6% (cont.) 20,000 Tryckindustri $ 600,469 Printer 13,714 Pricer, Cl. B (b) 337,427 Electronic Shelf Labels for Supermarkets - --------------------------------------------------------------------------- Total 6,444,633 - --------------------------------------------------------------------------- France-2.6% 12,000 Axime Ex Segin (b) 1,384,935 Computer Services/Consulting 7,250 Fininfo 767,004 Financial Data Feeds - --------------------------------------------------------------------------- Total 2,151,939 - --------------------------------------------------------------------------- United Kingdom/Ireland-16.1% 402,361 Medeva 1,759,272 Drugs for Hyperactive Children 185,000 Oriflame International 1,693,759 Natural Cosmetics Sold Door-to-Door 2,500,000 Premier Oil (b) 1,518,779 Oil & Gas Producer 799,700 St James Place 1,347,999 Life Insurance 40,000 Euro Money Publications 960,039 Financial Publications & Databases 117,000 Seton Healthcare Group 910,010 Pharmaceuticals 170,000 Tunstall 781,123 Monitoring Equipment 80,000 Edinburgh Fund Managers 772,139 Investment Management 223,500 Bluebird Toys 751,564 "Polly Pocket" Toy Manufacturer 2,000,000 Electronics Boutique (b) 701,633 Videogame/Computer Software Stores 58,500 Serco Group 674,749 Facilities Management 80,000 N. Brown Group 614,014 Mail Order Clothing in Large Sizes
See accompanying notes to financial statements. 12 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger International Small Cap Statement of Investments December 31, 1996
- -------------------------------------------------------------------------------- Number Value of Shares - -------------------------------------------------------------------------------- United Kingdom/Ireland-16.1% (cont.) 65,000 Dorling Kindersley $457,730 Reference Books & CD-ROMs 35,000 Planning Sciences (b) 420,000 Database & Business Intelligence Software 13,000 International Cabletel (b) 328,250 Cable TV & Telephone System - -------------------------------------------------------------------------------- Total 13,691,060 - -------------------------------------------------------------------------------- Portugal-0.6% 45,400 Filmes Lusomundo (b) 522,283 Newspapers, Radio, Video, Film Distribution - -------------------------------------------------------------------------------- Switzerland-1.9% 2,000 Societe Generale d'Affichage 893,655 Billboard Advertising 1,400 Phoenix Mecano 731,903 Electrical Components - -------------------------------------------------------------------------------- Total 1,625,558 - -------------------------------------------------------------------------------- Hungary-0.2% 5,000 Cofinec (b) 151,250 Consumer Goods Packaging - -------------------------------------------------------------------------------- Italy/Greece-4.2% 399,000 Banca Fideuram 874,362 Life Insurance & Mutual Funds 120,000 Athens Medical Center 841,474 Hospitals (Greece) 300,000 Costa Crociere 726,077 Mediterranean Cruise Line 30,000 Intracom (b) 674,881 Telecommunications Equipment (Greece) 15,000 Cellular Communications International (b) 435,000 Mobile Communications - -------------------------------------------------------------------------------- Total 3,551,794 - -------------------------------------------------------------------------------- Europe Total 35,921,096
- -------------------------------------------------------------------------------- Number Value of Shares Asia-30.7% - -------------------------------------------------------------------------------- Hong Kong/China-2.7% 3,500,000 Golden Harvest Entertainment 1,176,471 Movie Distribution & Exhibition 1,300,000 Li and Fung 1,151,260 Sourcing of Consumer Goods - -------------------------------------------------------------------------------- Total 2,327,731 - -------------------------------------------------------------------------------- Japan-14.6% 30,000 Hokuto 1,315,585 Mushroom Grower 51,600 Central Uni 1,178,082 Health Care/Medical Equipment 30,000 Konami 1,020,936 Entertainment Software/Hardware 20,300 HIS 979,409 Travel Agent 15,000 Tiemco (b) 958,904 Fishing Equipment 40,000 Arrk 923,581 Industrial Modeling 30,000 People 904,627 Sports Clubs 25,000 Nihon Jumbo 870,165 Photo Processing Lab 27,000 NuSkin Asia Pacific (b) 833,625 Personal Care Products 10,000 Ryohin Keikaku 740,932 Specialty Consumer Goods Retailer 11,400 Paramount Bed 726,803 Hospital Bed Manufacturer 30,000 Shinki 692,685 Corporate & Consumer Lending 10,500 Noritsu Koki 493,021 Photo Processing Lab Manufacturer 32,000 Belluna 479,711 Catalog Sales 10,000 Mars Engineering 254,157 150 Mars Engineering Warrants 1/25/00 18,750 Gaming Systems & Machinery - -------------------------------------------------------------------------------- Total 12,390,973
See accompanying notes to financial statements. 13 Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger International Small Cap Statement of Investments December 31, 1996
- -------------------------------------------------------------------------------- Number Value of Shares - -------------------------------------------------------------------------------- Malaysia-1.7% 300,000 Malaysian Assurance Alliance $1,461,097 Insurance - -------------------------------------------------------------------------------- Indonesia/Philippines-2.6% 3,000,000 Int'l Container Terminal Services (b) 1,568,441 Container Handling Terminals & Port Management (Philippines) 600,000 PILTEL (b) 507,605 Mobile Communications (Philippines) 214,800 Suba Indah 131,835 Beverage and Food - -------------------------------------------------------------------------------- Total 2,207,881 - -------------------------------------------------------------------------------- India-0.5% 30,000 IS Himalaya Fund (b) 387,000 Closed-End Fund - -------------------------------------------------------------------------------- Korea-1.8% 35,000 Dongbu Fire & Marine Insurance (b) 1,168,267 Non-Life Insurance 1,500 S-1 Corporation New (b) 246,600 500 S-1 Corporation 91,662 Alarm Monitoring - -------------------------------------------------------------------------------- Total 1,506,529 - -------------------------------------------------------------------------------- Singapore-5.8% 1,000,000 Genting International 2,400,000 Cruise Line 599,956 Venture Manufacturing 1,492,599 411,134 Venture Manufacturing Warrants 7/26/99 (b) 661,318 Contract Electronics Manufacturer 200,000 Datacraft Asia 334,000 Computer Consulting - -------------------------------------------------------------------------------- Total 4,887,917 - -------------------------------------------------------------------------------- Thailand-1.0% 769,000 Shinawatra Satellite 869,774 Satellite Leasing - -------------------------------------------------------------------------------- Asia Total 26,038,902
- -------------------------------------------------------------------------------- Number Value of Shares Latin America-9.2% - -------------------------------------------------------------------------------- Mexico-3.4% 235,000 Grupo Radio Centro (b) 1,615,625 Radio Broadcasting/Networks 417,000 Nadro, Series L 1,244,855 Pharmaceutical Distribution - -------------------------------------------------------------------------------- Total 2,860,480 - -------------------------------------------------------------------------------- Argentina-3.8% 700,000 Siderca 1,277,755 Seamless Pipe for Oil Wells 120,000 Patagonia 1,128,226 Supermarkets 412,000 Cresud (b) 729,386 Agriculture 28,000 Siderar (b) 80,656 Flat Rolled Steel - -------------------------------------------------------------------------------- Total 3,216,023 - -------------------------------------------------------------------------------- Other Latin America-2.0% 15,000 Genesis Chile Fund 551,250 Closed-End Fund (Chile) 50,000 Elevadores Atlas 490,809 Elevator Services (Brazil) 8,000 Ceteco Holdings 460,169 Appliances Retailer (Central America) 550,000 Brazilian Smaller Companies Warrants 261,250 Closed-End Fund - -------------------------------------------------------------------------------- Total 1,763,478 - -------------------------------------------------------------------------------- Latin America Total 7,839,981
See accompanying notes to financial statements. 14 [LOGO] Wanger Advisors Trust 1996 Annual Report - --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1996 - -------------------------------------------------------------------------------- Number Value of Shares Other Countries--11.1% - -------------------------------------------------------------------------------- Australia--5.5% 1,417,976 Tyndall $ 2,421,542 Money Management & Insurance 800,000 Austereo 1,270,880 Radio Broadcasting 500,000 Australian Hospital Care (b) 992,875 Hospital Management - -------------------------------------------------------------------------------- Total 4,685,297 - -------------------------------------------------------------------------------- Israel--1.2% 70,100 Blue Square Israel (b) 998,925 Supermarkets & Department Stores - -------------------------------------------------------------------------------- Canada--4.4% 70,000 Shaw Industries 1,414,606 Oil Field Services 140,000 Ranger Oil 1,382,500 Oil & Gas Producer 250,000 Pan East Petroleum (b) 893,704 Oil & Gas Producer - -------------------------------------------------------------------------------- Total 3,690,810 - -------------------------------------------------------------------------------- Other Countries Total 9,375,032
- -------------------------------------------------------------------------------- Principal Amount Value
Total Common Stocks and Other Equity-Like Securities--93.3% $79,175,011 - -------------------------------------------------------------------------------- (Cost: $71,170,835) Short-Term Obligation--6.1% 5,185,000 $5,185,000 State Street Bank Repurchase Agreement 4.75% 01/02/97; 12/31/96 Agreement Collateralized by U.S. Treasury Bonds - -------------------------------------------------------------------------------- (Cost: $5,185,000) Total Investments--99.4% 84,360,011 - -------------------------------------------------------------------------------- (Cost: $76,355,835) Cash and Other Assets Less Liabilities--0.6% 495,071 - -------------------------------------------------------------------------------- Total Net Assets--100% $84,855,082 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Notes to Statement of Investments: (a) At December 31, 1996, for federal income tax purposes cost of investments was $76,543,791 and net unrealized appreciation was $7,816,220 consisting of gross unrealized appreciation of $13,081,776 and gross unrealized depreciation of $5,265,556. (b) Non-income producing security. See accompanying notes to financial statements. 15 Wanger Advisors Trust 1996 Annual Report - --------------------------------------------------------------------------------
Wanger International Small Cap Portfolio Diversification December 31, 1996 - -------------------------------------------------------------------------------- Percent Value At December 31, 1996, the Fund's portfolio of investments as a percentage of net assets was diversified as follows - -------------------------------------------------------------------------------- Information 10.3% Software/Services $ 8,734,816 4.4 Broadcasting/CATV 3,782,456 2.1 Mobile Communications 1,812,379 1.7 Distribution 1,417,769 0.9 Consumer Electronics 731,903 0.8 Equipment 674,881 - -------------------------------------------------------------------------------- 20.2 Total 17,154,204 - -------------------------------------------------------------------------------- Health Care 5.3 Biotechnology/Drug Delivery 4,436,420 3.7 Equipment 3,147,912 3.2 Services 2,746,250 2.0 Hospital/Laboratory Supplies 1,719,678 - -------------------------------------------------------------------------------- 14.2 Total 12,050,260 - -------------------------------------------------------------------------------- Consumer Goods/Services 11.7 Retail 9,974,101 7.9 Entertainment/Leisure 6,738,105 6.2 Manufacturers 5,229,551 2.6 Food 2,176,806 - -------------------------------------------------------------------------------- 28.4 Total 24,118,563
- -------------------------------------------------------------------------------- Percent Value
- -------------------------------------------------------------------------------- Finance 9.8% Money Management $ 8,305,911 3.2 Other 2,752,369 3.1 Insurance 2,629,364 - -------------------------------------------------------------------------------- 16.1 Total 13,687,644 - -------------------------------------------------------------------------------- Industrial Goods/Services 8.3 Services 7,010,946 0.1 Steel 80,656 - -------------------------------------------------------------------------------- 8.4 Total 7,091,602 - -------------------------------------------------------------------------------- Energy/Minerals 4.5 Oil/Gas Producers 3,794,983 1.5 Oil Services 1,277,755 - -------------------------------------------------------------------------------- 6.0 Total 5,072,738 - -------------------------------------------------------------------------------- 93.3 Total Common Stocks and 79,175,011 Other Equity-Like Securities - -------------------------------------------------------------------------------- 6.1 Short-Term Obligations 5,185,000 - -------------------------------------------------------------------------------- 0.6 Cash and Other Assets less Liabilities 495,071 - -------------------------------------------------------------------------------- 100.0 Net Assets $84,855,082
See accompanying notes to financial statements. 16 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Statements of Assets and Liabilities December 31, 1996
Wanger U.S. Wanger Small Cap International Small Cap - -------------------------------------------------------------------------------- Assets Investments, at value (cost: Wanger U.S. Small Cap $106,613,306; Wanger International Small Cap $76,355,835) $126,075,038 $84,360,011 Cash 5,875 360,529 Organization costs 66,641 66,641 Receivable for: Securities sold 1,454,509 102,948 Fund shares sold 2,802,009 674,765 Dividends and interest 35,315 60,965 - -------------------------------------------------------------------------------- Total assets 130,439,387 85,625,859 - -------------------------------------------------------------------------------- Liabilities and Net Assets Payable for: Securities purchased 1,373,760 651,443 Amount owed to advisor 66,812 66,693 Other 40,904 52,641 - -------------------------------------------------------------------------------- Total liabilities 1,481,476 770,777 - -------------------------------------------------------------------------------- Net assets applicable to Fund shares outstanding $128,957,911 $84,855,082 - -------------------------------------------------------------------------------- Fund shares outstanding 7,598,121 4,791,121 - -------------------------------------------------------------------------------- Pricing of Shares Net asset value, offering price and redemption price per share $16.97 $17.71 - -------------------------------------------------------------------------------- Analysis of Net Assets Paid-in capital $105,966,024 $74,585,481 Undistributed net realized gain on sales of investments and foreign currency transactions 3,530,155 2,453,188 Unrealized appreciation of investments and foreign currency transactions 19,461,732 7,816,413 (net of unrealized PFIC gains of $187,956 for Wanger International Small Cap) Net investment loss -- -- - -------------------------------------------------------------------------------- Net assets applicable to Fund shares outstanding $128,957,911 $84,855,082 - --------------------------------------------------------------------------------
See accompanying notes to financial statements. 17
Wanger Advisors Trust 1996 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- Statements of Operations For the Year Ended December 31, 1996 Wanger U.S. Wanger International Small Cap Small Cap - ----------------------------------------------------------------------------------------------------------------------------------- Investment Income: Dividends (net of foreign taxes of $51,646 for Wanger International Small Cap) $ 338,661 $ 474,929 Interest 217,556 106,849 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment income 556,217 581,778 - ----------------------------------------------------------------------------------------------------------------------------------- Expenses: Investment advisory 704,115 631,977 Legal and audit fees 56,103 56,023 Amortization of organization costs 20,031 20,031 Transfer agent 18,440 18,174 Reports to shareholders 16,857 17,483 Trustees' 15,524 15,400 Insurance 7,017 7,037 Custodian 17,508 102,609 Other 5,055 6,375 - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 860,650 875,109 Less custodian fees paid indirectly (17,508) (20,862) - ----------------------------------------------------------------------------------------------------------------------------------- Net expenses 843,142 854,247 - ----------------------------------------------------------------------------------------------------------------------------------- Net investment loss (286,925) (272,469) Net realized and unrealized gain on investments: Net realized gain on sales of investments 3,926,442 2,570,609 Net change in unrealized appreciation 19,022,289 6,894,415 - ----------------------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 22,948,731 9,465,024 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $22,661,806 $9,192,555 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. 18 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Statements of Changes in Net Assets
--------------------------------------- --------------------------------------- Wanger U.S. Small Cap Wanger International Small Cap Year ended May 3, 1995 through Year ended May 3, 1995 through December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------------------- From operations: Net investment loss $(286,925) $(102,659) $(272,469) $(27,334) Net realized gain on sales of investments 3,926,442 59,816 2,570,609 53,290 Net change in unrealized appreciation 19,022,289 439,443 6,894,415 1,109,954 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 22,661,806 396,600 9,192,555 1,135,910 Distributions to shareholders from: Net investment income - - (6,530) - Net realized gain (66,519) - (52,334) - - ----------------------------------------------------------------------------------------------------------------------------------- Total distribution to shareholders (66,519) - (58,864) - From Fund share transactions: Reinvestment of dividends and capital gain distributions 66,519 - 58,864 - Proceeds from shares sold 91,019,446 24,819,962 67,872,674 11,951,601 - ----------------------------------------------------------------------------------------------------------------------------------- 91,085,965 24,819,962 67,931,538 11,951,601 Payments for shares redeemed (6,626,877) (3,438,708) (3,579,071) (1,844,269) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from Fund share transactions 84,459,088 21,381,254 64,352,467 10,107,332 - ----------------------------------------------------------------------------------------------------------------------------------- Total increase in net assets 107,054,375 21,777,854 73,486,158 11,243,242 - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets: Beginning of Period 21,903,536 125,682 11,368,924 125,682 - ----------------------------------------------------------------------------------------------------------------------------------- End of Period (a) $128,957,911 $21,903,536 $84,855,082 $11,368,924 ===================================================================================================================================
(a) Includes accumulated net investment loss of $102,659 for Wanger U.S. Small Cap and $27,401 for Wanger International Small Cap in 1995. See accompanying notes to financial statements. 19 Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger U.S. Small Cap Financial Highlights
Year ended May 3, 1995 through December 31, 1996 December 31, 1995 - --------------------------------------------------------------------------------------------------- Net Asset Value, beginning of period $ 11.60 $ 10.00 Income From Investment Operations Net investment loss (c) (.06) (.05) Net realized and unrealized gain on investments 5.46 1.65 - --------------------------------------------------------------------------------------------------- Total from investment operations 5.40 1.60 Less Distributions Dividends from net investment income -- -- Distributions from net realized gain (0.03) -- - -------------------------------------------------------------------------------------------------- Total distributions (0.03) -- Net Asset Value, end of period $ 16.97 $ 11.60 - -------------------------------------------------------------------------------------------------- Total Return 46.59% 16.00% Ratios/Supplemental Data: Ratio of expenses to average net assets (a)(b) 1.21% 2.08% * Ratio of net investment loss to average net assets (b) (.41%) (1.44%)* Portfolio turnover rate 46% 59% * Net assets at end of period $128,957,911 $21,903,536 The average commissions paid per share on stock transactions for the year ended December 31, 1996 was $.0581. - ---------------------------------------------------------------------------------------------------
*Annualized (a) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects gross custodian fees. This ratio net of custodian fees paid indirectly would have been 1.19% for the year ended December 31, 1996 and 2.00% for the period ended December 31, 1995. (b) The Fund was reimbursed by the Advisor for certain net 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 year ended December 31, 1996 was based upon the average shares outstanding during the year. See accompanying notes to financial statements. 20 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Wanger International Small Cap Financial Highlights
Year ended May 3, 1995 through December 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------ Net Asset Value, beginning of period $13.45 $10.00 Income From Investment Operations Net investment loss (c) (.09) (.03) Net realized and unrealized gain on investments 4.38 3.48 - ------------------------------------------------------------------------------------------------------------------------ Total from investment operations 4.29 3.45 Less Distributions Dividends from net investment income -- -- Distributions from net realized gain (.03) -- - ------------------------------------------------------------------------------------------------------------------------ Total distributions (.03) -- Net Asset Value, end of period $17.71 $13.45 - ------------------------------------------------------------------------------------------------------------------------ Total Return 32.01% 34.50% Ratios/Supplemental Data Ratio of expenses to average net assets (a) (b) 1.79% 2.32% * Ratio of net investment loss to average net assets (b) (0.56%) (0.81%)* Portfolio turnover rate 50% 14% * Net assets at end of period 84,855,082 11,368,924 The average commissions paid per share on stock transactions for the year ended December 31, 1996 was $.0130. - ------------------------------------------------------------------------------------------------------------------------
*Annualized (a) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects gross custodian fees. This ratio net of custodian fees paid indirectly would have been 1.75% for the year ended December 31, 1996 and 2.00% for the period ended December 31, 1995. (b) The Fund was reimbursed by the Advisor for certain expenses from May 3, 1995 through December 31, 1995. Without the reimbursement, the ratio of expenses to average net assets and the ratio of net investment income to average net assets for the period ended December 31, 1995 would have been 4.20% and (2.69)%, respectively. (c) Net investment loss per share for the year ended December 31, 1996 was based upon the average shares outstanding during the year. See accompanying notes to financial statements. 21 Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Notes to Financial Statements 1. Nature of operations Wanger U.S. Small Cap and Wanger International Small Cap ("the Funds") are series of Wanger Advisors Trust ("the Trust"), an open-end management investment company organized as a Massachusetts business trust. The investment objective of each Fund is to seek long-term growth of capital. The Funds are available only for allocation to certain life insurance company separate accounts established for the purpose of funding qualified and non-qualified variable annuity contracts, and may also be offered directly to certain types of pension plans and retirement arrangements. 2. Significant Accounting Policies Security valuation Investments are stated at current value. Securities traded on securities exchanges or in over-the-counter markets in which transaction prices are reported are valued at the last sales price at the time of valuation. Securities for which there are no reported sales on the valuation date are valued at the mean of the latest bid and ask quotation or, if there is no ask quotation, at the most recent bid quotation. Money market instruments having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. Securities for which quotations are not readily available and any other assets are valued at a fair value as determined in good faith by the Board of Trustees. Foreign currency translations Values of investments denominated in foreign currencies are converted into U.S. dollars using the spot market rate of exchange at the time of valuation. Purchases and sales of investments and dividend and interest income are translated into U.S. dollars using the spot market rate of exchange prevailing on the respective dates of such transactions. The gain or loss resulting from changes in foreign exchange rates is included with net realized and unrealized gain or loss from investments as appropriate. Security transactions and investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date, except that certain dividends from foreign securities are recorded as soon as the information is available to the Fund. Interest income is recorded on the accrual basis and includes amortization of discounts on money market instruments and on long-term debt instruments when required for federal income tax purposes. Realized gains and losses from security transactions are reported on an identified cost basis. Net realized gains for Wanger U.S. Small Cap include distributions of realized gains from other investment companies of $202,920 in 1996. Fund share valuation Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange on each day the Exchange is open for trading by dividing the total value of the Fund's investments and other assets, less liabilities, by the number of Fund shares outstanding. Custodian fees Custodian fees are reduced based on each Fund's cash balances maintained with the custodian. This presentation does not affect the determination of net investment income. Federal income taxes, dividends and distributions to shareholders The Funds have complied with the special provisions of the Internal Revenue Code available to regulated investment companies and, in the manner provided therein, distribute all of their taxable income, as well as any net realized gain on sales of investments and foreign currency transactions reportable for federal income tax purposes. Wanger International Small Cap has elected to mark-to-market its investment in Passive Foreign Investment Companies ("PFICS") for income tax purposes. In accordance with this election, the Fund recognized cumulative net unrealized appreciation on PFICS of $210,309 for the year ended December 31, 1996. The amount for 1996 is treated as ordinary income for federal income tax purposes, and as such, is used to offset the net investment loss incurred by the Fund. Cumulative net unrealized appreciation recognized in prior years on PFICs sold in 1996 amounted to $22,353. Dividends and distributions payable to its shareholders are recorded by the Fund on the ex-dividend date. Reclassifications have been made in 1996 for Wanger U.S. Small Cap and Wanger International Small Cap in the accompanying analysis of net assets from accumulated net investment loss to undistributed net realized gains on sales of investments of $389,584 and $96,091, respectively, to reflect differences between financial reporting and income tax bases. 22 [LOGO] Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Notes to Financial Statements 3. Transactions with Affiliates The Fund's investment advisor, Wanger Asset Management, L.P. ("WAM"), furnishes continuing investment supervision to the Funds and is responsible for overall management of the Funds' business affairs. Each Fund pays WAM a monthly advisory fee based upon average daily net assets at the following rates:
Wanger U.S. Wanger International Small Cap Small Cap - -------------------------------------------------------------------------------- Average Daily Net Assets: For the first $100 million 1.00% 1.30% Next $150 million .95% 1.20% In excess of $250 million .90% 1.10% - --------------------------------------------------------------------------------
The investment advisory agreements also provide that WAM will reimburse the Funds to the extent that ordinary operating expenses (computed based on net custodian fees) exceed 1.50% (2.00% in 1995) for Wanger U.S. Small Cap and 1.90% (2.00% in 1995) for Wanger International Small Cap, of average net assets. WAM was not required to reimburse the Funds under these agreements for the year ended December 31, 1996. Certain officers and trustees of the Trust are also principals of WAM. The Trust makes no direct payments to its officers and trustees who are affiliated with WAM. Wanger U.S. Small Cap and Wanger International Small Cap incurred trustees' fees and expenses of $15,524 and $15,400 respectively, for the year ended December 31, 1996 to trustees not affiliated with WAM. WAM advanced $100,000 to each Fund in connection with their organization and initial registration. These costs are being amortized and reimbursed to WAM over the period May, 1995 through April, 2000. WAM Brokerage Services, L.L.C., a wholly-owned subsidiary of WAM, is the distributor of each Fund's shares and receives no compensation for its services. - -------------------------------------------------------------------------------- 4. Fund Share Transactions Proceeds and payments on Fund shares as shown in the statements of changes in net assets are in respect of the following numbers of shares:
--------------------------------------- --------------------------------------- Wanger U.S. Small Cap Wanger International Small Cap Year ended Period ended Year ended Period ended December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Shares sold 6,137,385 2,170,461 4,154,432 986,106 Shares issued in reinvestment of dividend and capital gain distributions 5,157 - 3,911 - - ----------------------------------------------------------------------------------------------------------------------------------- 6,142,542 2,170,461 4,158,343 986,106 Less shares redeemed 432,817 294,633 212,404 153,492 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in shares outstanding 5,709,725 1,875,828 3,945,939 832,614 ===================================================================================================================================
5. Investment transactions The aggregate cost of purchases and proceeds from sales other than short-term obligations for the year ended December 31, 1996 were:
Purchases Sales Wanger U.S. Small Cap $103,202,082 $30,342,586 Wanger International Small Cap 82,019,311 23,145,432
23 Wanger Advisors Trust 1996 Annual Report - -------------------------------------------------------------------------------- Report of Independent Auditors To the Shareholders and the Board of Trustees of Wanger Advisors Trust We have audited the accompanying statements of assets and liabilities, including the statements of investments, of the Wanger Advisors Trust, comprising the U.S. Small Cap and Wanger International Small Cap portfolios, as of December 31, 1996, the related statements of operations for the year then ended and changes in net assets and the financial highlights for the periods indicated thereon. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of December 31, 1996, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the respective portfolios of the Wanger Advisors Trust as of December 31, 1996, the results of their operations for the year then ended and changes in net assets and financial highlights for the periods indicated thereon, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois January 31, 1997 24
Wanger Advisors Trust Trustees Transfer Agent, Fred D. Hasselbring Dividend Disbursing Agent Charles P. McQuaid and Custodian P. Michael Phelps James A. Star State Street Bank Ralph Wanger and Trust Company Attention: Officers Wanger Advisors Trust P.O. Box 8502 Ralph Wanger Boston, Massachusetts President 02266-8502 Charles P. McQuaid Distributor Senior Vice President WAM Brokerage Services, L.L.C. Terence M. Hogan 227 West Monroe Street Vice President Suite 3000 Chicago, Illinois 60606 Leah J. Zell 1-800-5-WANGER Vice President (1-800-592-6437) Merrillyn J. Kosier Investment Advisor Vice President and Wanger Asset Secretary Management, L.P. 227 West Monroe Street Bruce H. Lauer Suite 3000 Vice President and Chicago, Illinois 60606 Treasurer 1-800-5-WANGER (1-800-592-6437) Kenneth A. Kalina Assistant Treasurer Legal Counsel Bell, Boyd & Lloyd Chicago, Illinois Independent Auditors Ernst & Young LLP Chicago, Illinois
This report, including the audited schedules of investments and financial statements, is submitted for the general information of the shareholders of the Wanger Advisors Trust. This report is not authorized for distribution unless preceded or accompanied by a prospectus. 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 Adviser (incorporated by reference to the following portions of Registrant's 1996 Wangers Advisors Trust Annual Report; a copy of the annual report is attached to this amendment, but, except for those portions incorporated by reference, is furnished for the information of the Commission and is not deemed to be filed as part of this amendment): Report of Independent Auditors Statement of Assets and Liabilities at December 31, 1996 Statement of Operations for the period ended December 31, 1996 Statement of Changes in Net Assets for the period ended December 31, 1996 Statement of Investments at December 31, 1996 Notes to financial statements (ii) Wanger International Small Cap Adviser (incorporated by reference to the following portions of Registrant's 1996 Wangers Advisors Trust Annual Report; a copy of the annual report is attached to this amendment, but, except for those portions incorporated by reference, is furnished for the information of the Commission and is not deemed to be filed as part of this amendment): Report of Independent Auditors Statement of Assets and Liabilities at December 31, 1996 Statement of Operations for the period ended December 31, 1996 Statement of Changes in Net Assets for the period ended December 31, 1996 Statement of Investments at December 31, 1996 Notes to financial statements C-1 (2) 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, 1996. 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.(2) 5(b). Investment Advisory Agreement - Wanger International Small Cap.(2) 6. Distribution Agreement between Wanger Advisors Trust and WAM Brokerage Services, L.L.C. dated May 1, 1996.(2) 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). 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). 9(a)(3) Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and Providian Life and Health Insurance Company (formerly National Home Life Assurance Company) dated May 19, 1995 (2) (amendment dated December 16, 1996). C-2 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 dated December 16, 1996. 9(a)(5) Participation Agreement between Wanger Advisors Trust and SAFECO Life Insurance Company dated September 27, 1995 and Amendment No. 1 dated December 18, 1996. 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 February 15, 1995.(2) 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 Registrant's Registration Statement filed on April 19, 1996. 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. C-3 Item 26. Number of Holders of Securities As of January 31, 1997, there were 19 record holders of the Registrant's shares of beneficial interest of the series designated Wanger U.S. Small Cap and 31 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 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. C-4 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 Terence M. Hogan President Vice President and Trustee Merrillyn J. Kosier Vice President and Vice President Secretary The principal business of each officer of WAM Brokerage Services, 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 Item 31. Management Services Not applicable. C-5 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 21, 1996. 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/Terence M. Hogan Trustee ) - ------------------------ ) Terence M. Hogan ) ) /s/Charles P. McQuaid Trustee ) - ------------------------ ) Charles P. McQuaid ) ) /s/P. Michael Phelps Trustee ) April 21, 1996 - ------------------------ ) P. Michael Phelps ) ) /s/James A. Star Trustee ) - ------------------------ ) James A. Star ) ) /s/Ralph Wanger Trustee and President ) - ------------------------ (principal executive ) Ralph Wanger officer) ) ) /s/Leah J. Zell Trustee ) - ------------------------ ) Leah J. Zell ) ) /s/Bruce H. Lauer Treasurer (principal ) - ------------------------ financial and accounting ) Bruce H. Lauer officer) )
Index of Exhibits Filed with this Amendment ------------------------------------------- Exhibit Number Exhibit - ------- ------- 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 (amendment dated December 16, 1996) 9(a)(2) Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and PHL Variable Insurance Company dated February 23, 1995 (amendment dated December 16, 1996) 9(a)(3) Amendment No. 1 to the Participation Agreement between Wanger Advisors Trust and Providian Life and Health Insurance Company (formerly National Home Life Assurance Company) dated May 19, 1995 (amendment dated December 16, 1996). 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 dated December 16, 1996 9(a)(5) Participation Agreement between Wanger Advisors Trust and Safeco Life Insurance Company dated September 27, 1995 and Amendment No. 1 dated December 18, 1996 11 Consent of Independent Auditors 17(a) Financial data schedule - Wanger U.S. Small Cap 17(b) Financial data schedule - Wanger International Small Cap EX-99.9.A.1 2 AMEND 1 TO THE PARTICIPATION AGREE-WANGER/PHOENIX EXHIBIT 9(a)(1) AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT THIS AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT ("Amendment No. 1"), made and entered into as of this 16th day of December, 1996, supplementing and amending the Participation Agreement made and entered into the 18th day of April, 1995 (the "Original Participation Agreement," and together with this Amendment No. 1, the "Agreement") by and between WANGER ADVISORS TRUST, an unincorporated business trust formed under the laws of Massachusetts (the "Trust"), and PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY, a New York life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified in the Agreement. WHEREAS, the Trust currently serves as an investment vehicle for certain accounts of the Company pursuant to the Original Participation Agreement; and WHEREAS, the Trust has applied for an order from the Securities and Exchange Commission (the "SEC") (File No. 812-10198), granting Participating Insurance Companies (as defined in the Original Participation Agreement) and variable annuity and variable life separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined in the Original Participation Agreement) and Rules 6e-2(b)(15) and 6e- 3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust and each Series thereof to be sold to and held by variable annuity and variable life insurance separate accounts of life insurance companies that may or may not be affiliated with one another and qualified pension and retirement plans outside of the separate account context (the "Exemptive Order"); and WHEREAS, the Company and the Trust have agreed to hereby supplement and amend the Original Participation Agreement in order to reflect the conditions and undertakings that are expected to be imposed on the Company and the Trust by virtue of such Exemptive Order; NOW, THEREFORE, in consideration of their mutual promises, the Trust and the Company agree as follows: SECTION 1. Definitions For all purposes of this Amendment No. 1, except as otherwise expressly provided or unless the context otherwise requires: (1) All references in this Amendment No. 1 and the Original Participation Agreement to designated "Articles" and other subdivisions are to the designated Articles and other subdivisions of the Original Participation Agreement. The words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of similar import refer to this Amendment No. 1 as a whole and not to any particular "Section" or other subdivision. (2) All terms used herein and not otherwise defined shall have the same meanings as those given to such terms in the Original Participation Agreement, and include the plural as well as the singular, and the Original Participation Agreement is hereby amended to included any terms defined herein. (3) Any references to the "Agreement" in the Original Participation Agreement are hereby amended to include, collectively, the Original Participation Agreement and this Amendment No. 1. SECTION 2. Amendment to Article VII Article VII of the Original Participation Agreement is hereby amended to read as follows: "ARTICLE VII. Potential Conflicts and Compliance With Exemptive Order 7.1. The Trust Board will monitor the Trust for the existence of any material irreconcilable conflict between the interests of the Contract Owners of all Participating Accounts and of Qualified Participants investing in the Trust and each Series thereof. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Series are managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; (f) a decision by a Participating Insurance Company to disregard the voting instructions of contract owners; or (g) if applicable, a decision by a Qualified Entity to disregard the voting instructions of Qualified Participants. The Trust Board shall promptly inform the Company in writing if it determines that a material irreconcilable conflict exists and the implications thereof. 7.2 The Company shall report any potential or existing conflicts to the Trust Board. The Company will be responsible for assisting the Trust Board in carrying out its responsibilities by providing the Trust Board with all information reasonably necessary for the Trust Board to consider any issues raised. This responsibility includes, but is not limited to, an obligation by the Company to inform the Trust Board whenever it has determined to disregard Contract Owner voting instructions. Such responsibilities shall be carried out by the Participants with a view only to the interests of Contract Owners. 7.3. If it is determined by a majority of the Trust Board, or a majority of the members of the Trust Board who are not interested persons of the Trust, the Investment Adviser or any sub-adviser to any of the Series (the "Independent Trustees"), that a material irreconcilable conflict exists between the interests of 2 the Contract Owners of the Company's Participating Accounts and of other Participating Accounts and Qualified Participants investing in the Trust and each Series thereof, the Company shall, at its expense and to the extent reasonably practicable (as determined by a majority of the Independent Trustees), take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict. Such measures may include: (a) withdrawing, without charge or penalty to the Company, the assets allocable to some or all of the separate accounts from the Trust or any Series and reinvesting such assets in a different investment medium, which may include another Series of the Trust, or submitting the question of whether such segregation should be implemented to a vote of all affected Contract Owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract Owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract Owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Trust's election, to withdraw the Account's investment in the Trust and terminate this Agreement and no charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Trust gives written notice that this provision is being implemented, and until the end of that six month period the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six months after the Trust Board informs the Company in writing that it has determined that such decision has created a material irreconcilable conflict, and that said conflict cannot be remedied by any other means. Until the end of the foregoing six month period, the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the Independent Trustees shall determine whether any proposed action adequately remedies any material irreconcilable conflict, but in no event will the Trust or the Investment Adviser be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by 3 vote of a majority of Contract Owners materially adversely affected by the material irreconcilable conflict. In the event that the Trust Board determines that any proposed action does not adequately remedy any material irreconcilable conflict, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six (6) months after the Trust Board informs the Company in writing of the foregoing determination, without charge or penalty to the Company. 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then (a) the Trust and/or the Company, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Article V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 7.8 The Company shall at least annually submit to the Trust Board such reports, materials or data as the Trust Board may reasonably request so that the Trust Board may fully carry out its obligations under the Exemptive Order; provided, however, that the Board may require the submission of such reports on data on a more frequent basis if it so deems appropriate. 7.9 The Company, or any affiliate, will maintain at its home office, available to the SEC, (a) a list of its officers, directors and employees who participate directly in the management of administration of any Account and/or (b) a list of its agents who, as registered representatives, offer and sell Contracts." SECTION 3. Schedules Schedules 1, 2 and 3 to the Original Participation Agreement are hereby amended to read as Schedules 1, 2 and 3 to this Amendment No.1, respectively. SECTION 4. Miscellaneous 4.1 The captions in this Amendment No. 1 are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 This Amendment No. 1 may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 4.3 If any provision of this Amendment No. 1 shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 4 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 1 to be executed in its name and behalf by its duly authorized office on the date specified below. PHOENIX HOME LIFE MUTUAL INSURANCE COMPANY (Company) Date: December 16, 1996 By: /s/ Dona D. Young Name: Dona D. Young Title: Executive Vice President, Individual Insurance and General Counsel WANGER ADVISORS TRUST (Trust) Date: December 16, 1996 By: /s/ Charles P. McQuaid Name: Charles P. McQuaid Title: Senior Vice President 5 EX-99.9.A.2 3 AMEND 1 TO THE PARTICIPATION AGREE-WANGER/PHL EXHIBIT 9(a)(2) AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT THIS AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT ("Amendment No. 1"), made and entered into as of this 16th day of December, 1996, supplementing and amending the Participation Agreement made and entered into the 23rd day of February, 1995 (the "Original Participation Agreement," and together with this Amendment No. 1, the "Agreement") by and between WANGER ADVISORS TRUST, an unincorporated business trust formed under the laws of Massachusetts (the "Trust"), and PHL VARIABLE INSURANCE COMPANY, a Connecticut life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified in the Agreement. WHEREAS, the Trust currently serves as an investment vehicle for certain accounts of the Company pursuant to the Original Participation Agreement; and WHEREAS, the Trust has applied for an order from the Securities and Exchange Commission (the "SEC") (File No. 812-10198), granting Participating Insurance Companies (as defined in the Original Participation Agreement) and variable annuity and variable life separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined in the Original Participation Agreement) and Rules 6e-2(b)(15) and 6e- 3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust and each Series thereof to be sold to and held by variable annuity and variable life insurance separate accounts of life insurance companies that may or may not be affiliated with one another and qualified pension and retirement plans outside of the separate account context (the "Exemptive Order"); and WHEREAS, the Company and the Trust have agreed to hereby supplement and amend the Original Participation Agreement in order to reflect the conditions and undertakings that are expected to be imposed on the Company and the Trust by virtue of such Exemptive Order; NOW, THEREFORE, in consideration of their mutual promises, the Trust and the Company agree as follows: SECTION 1. Definitions ----------- For all purposes of this Amendment No. 1, except as otherwise expressly provided or unless the context otherwise requires: (1) All references in this Amendment No. 1 and the Original Participation Agreement to designated "Articles" and other subdivisions are to the designated Articles and other subdivisions of the Original Participation Agreement. The words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of similar import refer to this Amendment No. 1 as a whole and not to any particular "Section" or other subdivision. (2) All terms used herein and not otherwise defined shall have the same meanings as those given to such terms in the Original Participation Agreement, and include the plural as well as the singular, and the Original Participation Agreement is hereby amended to included any terms defined herein. (3) Any references to the "Agreement" in the Original Participation Agreement are hereby amended to include, collectively, the Original Participation Agreement and this Amendment No. 1. SECTION 2. Amendment to Article VII ------------------------ Article VII of the Original Participation Agreement is hereby amended to read as follows: "ARTICLE VII. Potential Conflicts and Compliance With --------------------------------------- Exemptive Order --------------- 7.1. The Trust Board will monitor the Trust for the existence of any material irreconcilable conflict between the interests of the Contract Owners of all Participating Accounts and of Qualified Participants investing in the Trust and each Series thereof. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Series are managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; (f) a decision by a Participating Insurance Company to disregard the voting instructions of contract owners; or (g) if applicable, a decision by a Qualified Entity to disregard the voting instructions of Qualified Participants. The Trust Board shall promptly inform the Company in writing if it determines that a material irreconcilable conflict exists and the implications thereof. 7.2 The Company shall report any potential or existing conflicts to the Trust Board. The Company will be responsible for assisting the Trust Board in carrying out its responsibilities by providing the Trust Board with all information reasonably necessary for the Trust Board to consider any issues raised. This responsibility includes, but is not limited to, an obligation by the Company to inform the Trust Board whenever it has determined to disregard Contract Owner voting instructions. Such responsibilities shall be carried out by the Participants with a view only to the interests of Contract Owners. 7.3. If it is determined by a majority of the Trust Board, or a majority of the members of the Trust Board who are not interested persons of the Trust, the Investment Adviser or any sub-adviser to any of the Series (the "Independent Trustees"), that a material irreconcilable conflict exists between the interests of the Contract Owners of the Company's Participating Accounts and of other Participating Accounts and Qualified Participants investing in the Trust and each 2 Series thereof, the Company shall, at its expense and to the extent reasonably practicable (as determined by a majority of the Independent Trustees), take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict. Such measures may include: (a) withdrawing, without charge or penalty to the Company, the assets allocable to some or all of the separate accounts from the Trust or any Series and reinvesting such assets in a different investment medium, which may include another Series of the Trust, or submitting the question of whether such segregation should be implemented to a vote of all affected Contract Owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract Owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract Owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Trust's election, to withdraw the Account's investment in the Trust and terminate this Agreement and no charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Trust gives written notice that this provision is being implemented, and until the end of that six month period the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six months after the Trust Board informs the Company in writing that it has determined that such decision has created a material irreconcilable conflict, and that said conflict cannot be remedied by any other means. Until the end of the foregoing six month period, the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the Independent Trustees shall determine whether any proposed action adequately remedies any material irreconcilable conflict, but in no event will the Trust or the Investment Adviser be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract Owners materially adversely affected by the material irreconcilable conflict. In the event that the Trust Board determines that 3 any proposed action does not adequately remedy any material irreconcilable conflict, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six (6) months after the Trust Board informs the Company in writing of the foregoing determination, without charge or penalty to the Company. 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then (a) the Trust and/or the Company, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Article V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 7.8 The Company shall at least annually submit to the Trust Board such reports, materials or data as the Trust Board may reasonably request so that the Trust Board may fully carry out its obligations under the Exemptive Order; provided, however, that the Board may require the submission of such reports on data on a more frequent basis if it so deems appropriate. 7.9 The Company, or any affiliate, will maintain at its home office, available to the SEC, (a) a list of its officers, directors and employees who participate directly in the management of administration of any Account and/or (b) a list of its agents who, as registered representatives, offer and sell Contracts." SECTION 3. Schedules --------- Schedules 1, 2 and 3 to the Original Participation Agreement are hereby amended to read as Schedules 1, 2 and 3 to this Amendment No.1, respectively. SECTION 4. Miscellaneous ------------- 4.1 The captions in this Amendment No. 1 are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 This Amendment No. 1 may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 4.3 If any provision of this Amendment No. 1 shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 4 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 1 to be executed in its name and behalf by its duly authorized office on the date specified below. PHL VARIABLE INSURANCE COMPANY (Company) Date: December 16, 1996 By: /s/ Dona D. Young Name: Dona D. Young Title: Executive Vice President WANGER ADVISORS TRUST (Trust) Date: December 16, 1996 By: /s/ Charles P.McQuaid Name: Charles P. McQuaid Title: Senior Vice President 5 EX-99.9.A.3 4 AMEND 1 TO THE PARTICIPATION AGREE-WANGER/PROVIDIAN EXHIBIT 9(a)(3) AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT THIS AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT, made and entered into as of this 16th day of December, 1996, supplementing and amending the Participation Agreement made and entered into the 19th day of May, 1995 (the "Original Participation Agreement," and together with this Amendment No. 1, the "Agreement") by and between WANGER ADVISORS TRUST, an unincorporated business trust formed under the laws of Massachusetts (the "Trust"), and PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY, (formerly named National Home Life Assurance Company) a Missouri life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified in the Agreement. WHEREAS, the Trust currently serves as an investment vehicle for certain accounts of the Company pursuant to the Original Participation Agreement; and WHEREAS, the Trust has applied for an order from the Securities and Exchange Commission (the "SEC") (File No. 812-10198), granting Participating Insurance Companies (as defined in the Original Participation Agreement) and variable annuity and variable life separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined in the Original Participation Agreement) and Rules 6e-2(b)(15) and 6e- 3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust and each Series thereof to be sold to and held by variable annuity and variable life insurance separate accounts of life insurance companies that may or may not be affiliated with one another and qualified pension and retirement plans outside of the separate account context (the "Exemptive Order"); and WHEREAS, the Company and the Trust have agreed to hereby supplement and amend the Original Participation Agreement in order to reflect the conditions and undertakings that are expected to be imposed on the Company and the Trust by virtue of such Exemptive Order; NOW, THEREFORE, in consideration of their mutual promises, the Trust and the Company agree as follows: SECTION 1. Definitions ----------- For all purposes of this Amendment No. 1, except as otherwise expressly provided or unless the context otherwise requires: (1) All references in this Amendment No. 1 and the Original Participation Agreement to designated "Articles" and other subdivisions are to the designated Articles and other subdivisions of the Original Participation Agreement. The words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of similar import refer to this Amendment No. 1 as a whole and not to any particular "Section" or other subdivision. (2) All terms used herein and not otherwise defined shall have the same meanings as those given to such terms in the Original Participation Agreement, and include the plural as well as the singular, and the Original Participation Agreement is hereby amended to included any terms defined herein. (3) Any references to the "Agreement" in the Original Participation Agreement are hereby amended to include, collectively, the Original Participation Agreement and this Amendment No. 1. SECTION 2. Amendment to Article VII ------------------------ Article VII of the Original Participation Agreement is hereby amended to read in its entirety as follows: "ARTICLE VII. Potential Conflicts and Compliance With --------------------------------------- Exemptive Order --------------- 7.1. The Trust Board will monitor the Trust for the existence of any material irreconcilable conflict between the interests of the Contract Owners of all Participating Accounts and of Qualified Participants investing in the Trust and each Series thereof. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Series are managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; (f) a decision by a Participating Insurance Company to disregard the voting instructions of contract owners; or (g) if applicable, a decision by a Qualified Entity to disregard the voting instructions of Qualified Participants. The Trust Board shall promptly inform the Company in writing if it determines that a material irreconcilable conflict exists and the implications thereof. 7.2 The Company shall report any potential or existing conflicts to the Trust Board. The Company will be responsible for assisting the Trust Board in carrying out its responsibilities by providing the Trust Board with all information reasonably necessary for the Trust Board to consider any issues raised. This responsibility includes, but is not limited to, an obligation by the Company to inform the Trust Board whenever it has determined to disregard Contract Owner voting instructions. Such responsibilities shall be carried out by the Participants with a view only to the interests of Contract Owners. 7.3. If it is determined by a majority of the Trust Board, or a majority of the members of the Trust Board who are not interested persons of the Trust, the Investment Adviser or any sub-adviser to any of the Series (the "Independent 2 Trustees"), that a material irreconcilable conflict exists, the Company shall, at its expense and to the extent reasonably practicable (as determined by a majority of the Independent Trustees), take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict including: (a) withdrawing the assets allocable to some or all of the separate accounts from the Trust or any Series and reinvesting such assets in a different investment medium, which may include another Series of the Trust, or submitting the question of whether such segregation should be implemented to a vote of all affected Contract Owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract Owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract Owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Trust's election, to withdraw the Account's investment in the Trust and terminate this Agreement and no charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Trust gives written notice that this provision is being implemented, and until the end of that six month period the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six months after the Trust Board informs the Company in writing that it has determined that such decision has created a material irreconcilable conflict. Until the end of the foregoing six month period, the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the Independent Trustees shall determine whether any proposed action adequately remedies any material irreconcilable conflict, but in no event will the Trust or the Investment Adviser be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract Owners materially adversely affected by the material irreconcilable conflict. In the event that the Trust Board determines that any proposed action does not adequately remedy any material irreconcilable 3 conflict, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six (6) months after the Trust Board informs the Company in writing of the foregoing determination. 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then (a) the Trust and/or the Company, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Article V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 7.8 The Company shall at least annually submit to the Trust Board such reports, materials or data as the Trust Board may reasonably request so that the Trust Board may fully carry out its obligations under the Exemptive Order; provided, however, that the Board may require the submission of such reports on data on a more frequent basis if it so deems appropriate. 7.9 The Company, or any affiliate, will maintain at its home office, available to the SEC, (a) a list of its officers, directors and employees who participate directly in the management of administration of any Account and/or (b) a list of its agents who, as registered representatives, offer and sell Contracts." SECTION 3. Schedules --------- Schedules 1, 2 and 3 to the Original Participation Agreement are hereby amended to read as Schedules 1, 2 and 3 to this Amendment No.1, respectively. SECTION 4. Miscellaneous ------------- 4.1 The captions in this Amendment No. 1 are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 This Amendment No. 1 may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 4.3 If any provision of this Amendment No. 1 shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 4 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 1 to be executed in its name and behalf by its duly authorized office on the date specified below. PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY (Company) Date: December 16, 1996 By: /s/ Gregory J. Garvin Name: Gregory J. Garvin Title: Vice President WANGER ADVISORS TRUST (Trust) Date: December 16, 1996 By: /s/ Charles P. McQuaid Name: Charles P. McQuaid Title: Senior Vice President 5 EX-99.9.A.4 5 PARTICIPATION AGREEMENT - WANGER/FIRST PROVIDIAN EXHIBIT 9(a)(4) PARTICIPATION AGREEMENT THIS AGREEMENT, made and entered into this 15th day of November, 1996 by and between WANGER ADVISORS TRUST, an unincorporated business trust formed under the laws of Massachusetts (the "Trust"), and FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY, a New York life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified herein. WHEREAS, the Trust is a series-type mutual fund offering shares of beneficial interest (the "Trust shares") consisting of one or more separate series ("Series") of shares ("Series shares"), each such series representing an interest in a particular managed portfolio of securities and other assets; and WHEREAS, the Trust was established for the purpose of serving as an investment vehicle for (i) separate accounts supporting variable annuity contracts and variable life insurance policies to be offered by insurance companies, and (ii) certain pension and retirement plans receiving favorable tax treatment under the Internal Revenue Code of 1986, as amended; and WHEREAS, the Company desires that the Trust serve as an investment vehicle for certain separate accounts of the Company; NOW, THEREFORE, in consideration of their mutual promises, the Trust and the Company agree as follows: ARTICLE I. Additional Definitions ---------------------- 1.1. "Account" -- each separate account of the Company described more specifically in Schedule 1 to this Agreement. 1.2. "Business Day" -- each day that the Trust is open for business as provided in the Trust Prospectus. 1.3. "Code" -- the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. 1.4. "Contracts" -- the class or classes of variable annuity contracts issued by the Company and described more specifically on Schedule 2 to this Agreement. 1.5. "Contract Owners" -- the owners of the Contracts, as distinguished from all Product Owners. 1.6. "Investment Adviser" -- the investment manager of the Trust, Wanger Asset Management, L.P. 1.7. "Participating Account" -- a separate account investing all or a portion of its assets in the Trust, including the Account. 1.8. "Participating Insurance Company" -- any insurance company investing in the Trust on its behalf or on behalf of a Participating Account, including the Company. 1.9. "Products" -- variable annuity contracts and variable life insurance policies supported by Participating Accounts investing assets attributable thereto in the Trust, including the Contracts. 1.10. "Product Owners" -- owners of Products. 1.11. "Prospectus" -- with respect to a class of Contracts, each version of the definitive prospectus or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act ("Contracts Prospectus"). With respect to Trust shares, each version of the definitive prospectus or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act with respect to a series of the Trust listed on Schedule 3 to this Agreement ("Trust Prospectus"). With respect to any provision of this Agreement requiring a party to take action in accordance with a Prospectus, such reference thereto shall be deemed to be to the version last filed prior to the taking of such action. For purposes of Article VIII, the term "Prospectus" shall include any statement of additional information incorporated therein. 1.12. "Qualified Entity" -- A person or plan, including a pension or retirement plan receiving favorable tax treatment under the Code, that qualifies to purchase shares of the Trust under Section 817(h) of the Code. A natural person having an indirect interest in the Trust by virtue of such natural person's participation in a Qualified Entity is a "Qualified Participant." 1.13. "Registration Statement" -- with respect to the Trust Shares or a class of Contracts, the registration statement filed with the SEC to register the securities issued thereby under the 1933 Act, or the most recently filed amendment thereto, in either case in the form in which it was declared or became effective. The Contracts Registration Statement is described more specifically on Schedule 2 to this Agreement. The Trust Registration Statement was filed on Form N-1A (File No. 33-83598). 1.14. "1940 Act Registration Statement" -- with respect to the Trust or the Account, the registration statement filed with the SEC to register such entity as an investment company under the 1940 Act, or the most recently filed amendment thereto. The Account 1940 Act Registration Statement is described more specifically on Schedule 2 to this Agreement. The Trust 1940 Act Registration Statement was filed on Form N-1A (File No. 811-8748). 1.15. "Statement of Additional Information" -- with respect to the Trust or a class of Contracts, each version of the definitive statement of additional information or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act. 1.16. "SEC" -- the Securities and Exchange Commission. 2 1.17. "1933 Act" -- the Securities Act of 1933, as amended. 1.18. "1940 Act" -- the Investment Company Act of 1940, as amended. ARTICLE II. Sale of Trust Shares -------------------- 2.1. The Trust shall make shares of those Series listed on Schedule 3 to this Agreement available for purchase by the Company on behalf of the Account, such purchases to be effected at net asset value in accordance with Section 2.3 of this Agreement. Notwithstanding the foregoing, (i) other than those Series listed on Schedule 3, Trust Series in existence now or that may be established in the future will be made available to the Company only as the Trust and the Company may agree pursuant to Article XI hereof, and (ii) the Board of Trustees of the Trust (the "Trust Board") may suspend or terminate the offering of Trust shares of any Series, if such action is required by law or by regulatory authorities having jurisdiction or if, in the sole discretion of the Trust Board acting in good faith and in light of its fiduciary duties under Federal and any applicable state laws, suspension or termination is necessary in the best interests of the shareholders of any Series (it being understood that "shareholders" for this purpose shall mean Product Owners and Qualified Participants). 2.2. The Trust shall redeem, at the Company's request, any full or fractional shares of the Trust held by the Company on behalf of the Account, such redemptions to be effected at net asset value in accordance with Section 2.3 of this Agreement. Notwithstanding the foregoing, (i) the Company shall not redeem Trust shares attributable to Contract Owners except in the circumstances permitted in Section 2.7 of this Agreement, and (ii) the Trust may delay redemption of Trust shares of any Series to the extent permitted by the 1940 Act, any rules, regulations or orders thereunder, and the Trust Prospectus. 2.3. (a) The Trust hereby appoints the Company as its designee for the limited purpose of receiving purchase and redemption requests from the Account based on allocations of net amounts to the Account or subaccounts thereof under the Contracts and other transactions relating to the Contracts or the Account. Purchase and redemption requests shall be processed by the Trust at the net asset value per share next calculated after the Trust receives such request. The Trust shall calculate its net asset value per share at the Trust's close of business on each Business Day (as defined from time to time in the Trust Prospectus), and which as of the date of execution of this Agreement is the time of the close of regular session trading on the New York Stock Exchange, which is generally 4:00 p.m. Eastern Time. Receipt of any such request on any Business Day by the Company as designee of the Trust prior to the Trust's close of business shall constitute receipt by the Trust on that same Business Day, provided that the Trust receives notice of such request by 10 a.m. Eastern Time on the next following Business Day. (b) The Company shall pay for shares of each Series on the same day that it notifies the Trust of a purchase request for such shares. Payment for Series shares shall be made 3 in Federal funds transmitted to the Trust by wire by 2:30 p.m. Eastern Time on the day the Trust is notified of the purchase request for Series shares (unless the Trust determines and so advises the Company that sufficient proceeds are available from redemption of shares of other Series effected pursuant to redemption requests tendered by the Company on behalf of the Account). If payment in Federal funds for any purchase is not received, or is received by the Trust after 3 p.m. Eastern Time on such Business Day, the Company shall promptly, upon the Trust's request, reimburse the Trust for any charges, costs, fees, interest or other expenses incurred by the Trust in connection with any advances to, or borrowings or overdrafts by, the Trust, or any similar expenses incurred by the Trust, as a result of portfolio transactions effected or dilution suffered by the Trust based upon such failure to receive the funds by 3:00 p.m. Eastern Time. If Federal funds are not received on time, such funds will be invested, and Series shares purchased thereby will be issued, as soon as practicable. Upon receipt of Federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Trust. (c) Payment for Series shares redeemed by the Account or the Company shall be made in Federal funds transmitted by wire to the Company or any other designated person by 3:00 p.m. Eastern Time on the Business Day during which the Trust is properly notified of the redemption order of Series shares (unless redemption proceeds are to be applied to the purchase of Trust shares of other Series in accordance with Section 2.3(b) of this Agreement), except that (i) the Trust reserves the right to delay payment of redemption proceeds to the extent permitted under Section 22(e) of the 1940 Act; and (ii) the Trust reserves the right to effect payment of redemptions in kind, but only to the extent described in the Trust Prospectus. The Trust shall not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds under the Contracts; the Company alone shall be responsible for such action. 2.4. The Trust shall use reasonable efforts to make the net asset value per share for each Series available to the Company by 6:30 p.m. Eastern Time each Business Day, and shall use its best efforts to make the net asset value available to the Company by 7:00 p.m. Eastern Time each Business Day, and in any event, as soon as reasonably practicable after the net asset value per share for such Series is calculated, and shall calculate such net asset value in accordance with the Trust Prospectus. Neither the Trust, any Series, the Investment Adviser, nor any of their affiliates shall be liable for any information provided to the Company pursuant to this Agreement which information is based on incorrect information supplied by the Company or any other Participating Company to the Trust or the Investment Adviser. 2.5. The Trust shall furnish notice to the Company as soon as reasonably practicable of any income dividends or capital gain distributions payable on any Series shares. The Trust shall notify the Company promptly of the number of Series shares so issued as payment of such dividends and distributions. The Company, on its behalf and on behalf of the Account, hereby elects to receive all such dividends and distributions as are payable on any Series shares in the form of additional shares of that Series. The Company reserves the right, on its behalf and on behalf of the Account, to revoke this election and to receive all such dividends and capital gains distributions in cash. 4 2.6. Issuance and transfer of Trust shares shall be by book entry only. Stock certificates will not be issued to the Company or the Account. Purchase and redemption orders for Trust shares shall be recorded in an appropriate ledger for the Account or the appropriate subaccount of the Account. 2.7. (a) The Company shall invest amounts available for investment under the Contracts in the Series of the Trust specified in Schedule 3 in accordance with allocation instructions received from Contract Owners, it being understood that no changes shall be made to Schedule 3 without the prior written consent of the Trust and the Investment Adviser. The Company may withdraw the Account's investment in the Trust or a Series of the Trust only: (i) as necessary to facilitate Contract Owner requests; (ii) upon a determination by a majority of the Trust Board, or a majority of disinterested Trust Board members, that an irreconcilable material conflict exists among the interests of (x) all Product Owners or (y) the interests of the Participating Insurance Companies and/or Qualified Entities investing in the Trust; (iii) in the event that the shares of another investment company are substituted for series shares in accordance with the terms of the Contracts upon the (x) requisite vote of the Contract Owners having an interest in the affected Series and the written consent of the Trust (unless otherwise required by applicable law) or (y) upon issuance of an SEC exemptive order pursuant to Section 26(b) of the 1940 Act permitting such substitution; or (iv) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application. (b) The Company shall not, without prior written notice to the Trust (unless otherwise required by applicable law), take any action to operate the Account as a management investment company under the 1940 Act. (c) The Company shall not, without the prior written consent of the Trust (unless otherwise required by applicable law), solicit, induce or encourage Contract Owners to change or modify the Trust or change the Trust's investment adviser. (d) Notwithstanding Section 2.7(a) of this Agreement, the Company and the Trust acknowledge that the arrangement contemplated by this Agreement is not exclusive; Trust shares may be sold to other insurance companies; and the cash value of the Contracts may be invested in other investment companies, provided, however, that (a) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of the Trust; or (b) the Company gives the Trust 45 days written notice of its intention to make such other investment company available as a funding vehicle for the Contracts; or (c) such other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and appears on Schedule 3 to this Agreement; or (d) the Trust consents to the use of such other investment company, such consent not to be unreasonably withheld. 2.8. The Trust shall sell Trust shares only to Participating Insurance Companies and their separate accounts and to Qualified Entities. The Trust shall not sell Trust shares to any 5 insurance company or separate account unless an agreement containing provisions substantially the same as Article V and Article VII of this Agreement is in effect to govern such sales. ARTICLE III. Representations and Warranties ------------------------------ 3.1. The Company represents and warrants that: (i) the Company is an insurance company duly organized and in good standing under New York law; (ii) the Account is a validly existing separate account, duly established and maintained in accordance with applicable law; (iii) the Account 1940 Act Registration Statement has been filed with the SEC in accordance with the provisions of the 1940 Act and the Account is duly registered as a unit investment trust thereunder; (iv) the Contracts Registration Statement has been declared effective by the SEC; (v) the Contracts will be issued in compliance in all material respects with all applicable Federal and state laws; and (vi) the Contracts currently are and at the time of issuance will be treated as annuity contracts under applicable provisions of the Code. 3.2. The Trust represents and warrants that: (i) the Trust is an unincorporated business trust duly formed and validly existing under Massachusetts law; (ii) the Trust 1940 Act Registration Statement has been filed with the SEC in accordance with the provisions of the 1940 Act and the Trust is duly registered as an open-end management investment company thereunder; (iii) the Trust Registration Statement has been declared effective by the SEC; (iv) the Trust shares will be issued in compliance in all material respects with all applicable federal laws; (v) the Trust will remain registered under and will comply in all material respects with the 1940 Act; (vi) the Trust currently qualifies as a "regulated investment company" under Subchapter M of the Code and is in compliance with Section 817(h) of the Code; and (vii) the Trust's investment policies are in material compliance with any investment restrictions set forth on Schedule 4 to this Agreement. Subject to Section 4.5 of this Agreement, the Trust makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) otherwise complies with the insurance laws or regulations of any state. Further, the Trust shall register and qualify its shares for sale under the securities laws of any state only if and to the extent that such registration and qualification is deemed to be advisable by the Trust. 3.3. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or trust action, as applicable, by such party, and, when so executed and delivered, this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 3.4. Each party represents and warrants that all of its directors, officers and employees dealing with the money and/or securities of the Trust are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Trust in an amount not less than the amount required by the federal securities laws or any self-regulatory organization applicable to such party. The aforesaid bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. Each party agrees to make 6 reasonable efforts to see that this bond or another bond containing these provisions is always in effect, and each agrees to notify the other party promptly in the event that such coverage no longer applies. ARTICLE IV. Filings, Information and Expenses --------------------------------- 4.1. The Trust shall amend the Trust Registration Statement and the Trust 1940 Act Registration Statement from time to time as required in order to effect the continuous offering of Trust shares and to maintain the Trust's registration under the 1940 Act for so long as Trust shares are sold or any Trust shares are outstanding. 4.2. The Company shall amend the Contracts Registration Statement and the Account 1940 Act Registration Statement from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law. The Company shall maintain a current effective Contracts Registration Statement and the Account's registration under the 1940 Act for so long as the Contracts are outstanding, unless (a) a no-action letter from the SEC has been obtained by the Company to the effect that such registration statement need no longer be maintained; or (b) the Company has supplied the Trust with an opinion of counsel to the effect that maintaining such registration statement is no longer required; or (c) the Company has notified the Trust in writing that, with respect to such registration statement, the Company meets the terms and conditions of, and is relying on, Great West Life & Annuity Insurance Company (pub. avail. Oct. 23, 1990), and any subsequent no-action letter released by the staff of the SEC addressing the same subject matter. The Company shall file, register, qualify and obtain approval of the Contracts for sale to the extent required by applicable insurance and securities laws of the various states. 4.3. The Trust shall provide the Company with as many copies of the Trust Prospectus as the Company may reasonably request. If requested by the Company in lieu thereof, the Trust shall provide such documentation (including a final copy of the Trust Prospectus in 8-1/2" X 11" size camera-ready form at the Trust's expense) and other assistance as is reasonably necessary in order for the Company once each year (or more frequently if the Trust Prospectus is more frequently amended) to have the Contracts Prospectus and Trust Prospectus printed together in one document. 4.4. The Company shall deliver Contracts, Contracts and Trust Prospectuses, Contracts and Trust Statements of Additional Information, and all amendments or supplements to any of the foregoing to Contract Owners and prospective Contract Owners, all in accordance with the federal securities laws. 4.5. The Company shall inform the Trust of any investment restrictions imposed by New York insurance law that may become applicable to the Trust from time to time as a result of the Account's investment therein (including, but not limited to, restrictions with respect to fees and expenses and investment policies), other than those set forth on Schedule 4 to this Agreement. In addition, the Company shall inform the Trust of any other investment restrictions 7 imposed by state insurance law that the Company is aware may become applicable to the Trust from time to time as a result of the Account's investment therein (including, but not limited to, restrictions with respect to fees and expenses and investment policies), other than those set forth on Schedule 4 to this Agreement. Upon receipt of any such information from the Company, the Trust shall determine whether it is in the best interests of shareholders (it being understood that "shareholders" for this purpose shall mean Product Owners and Qualified Participants) to comply with any such restrictions. If the Trust, acting reasonably and in good faith, determines that it is not in the best interests of shareholders, the Trust shall so inform the Company, and the Trust and the Company shall discuss alternative accommodations in the circumstances. If the Trust determines that it is in the best interests of shareholders to comply with such restrictions, the Trust and the Company shall amend Schedule 4 to this Agreement to reflect such restrictions. The Trust shall comply with Schedule 4 to this Agreement as in effect from time to time. 4.6. All expenses incident to each party's performance under this Agreement (including expenses expressly assumed by such party pursuant to this Agreement) shall be paid by such party to the extent permitted by law. (a) Expenses assumed by the Trust include, but are not limited to, the costs of: registration and qualification of the Trust shares under the federal securities laws; preparation and filing with the SEC of the Trust Prospectus, Trust Registration Statement, Trust proxy materials and shareholder reports; the printing and mailing of all proxy statements and periodic reports; the preparation of camera-ready copy of Trust Prospectuses and Statements of Additional Information required to be provided by the Trust to its then-current shareholders; preparation of all statements and notices required by any Federal or state securities law; all taxes on the issuance or transfer of Trust shares; payment of all applicable fees, including, without limitation, all fees due under Rule 24f-2 relating to the Trust; and any expenses permitted to be paid or assumed by the Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act. The Trust shall pay no fee or other compensation to the Company under this Agreement, and shall not be charged for the costs of printing and mailing to prospective Contract Owners copies of the Trust Prospectus, Trust Statement of Additional Information, notices, proxy statements, periodic reports, or other printed materials. (b) Expenses assumed by the Company include, but are not limited to, the costs of: registration and qualification of the Contracts under the federal securities laws; preparation and filing with the SEC of the Contracts Prospectus, Contracts Registration Statement, and Contract Owner reports; payment of all applicable fees, including, without limitation, all fees due under Rule 24f-2 relating to the Contracts; and the printing and mailing of all periodic reports, Contracts Prospectuses, Statements of Additional Information, and notices to current and prospective Contract Owners required by any Federal or state insurance law other than those paid for by the Trust. 4.7. No piece of advertising or sales literature or other promotional material in which the Trust is named shall be used, except with the prior written consent of the Trust. Any such piece shall be furnished to the Trust for such consent prior to its use. The Trust shall respond to any request for written consent on a prompt and timely basis, but failure to respond shall not 8 relieve the Company of the obligation to obtain the prior written consent of the Trust. The Trust may at any time in its sole discretion revoke such written consent, and upon notification of such revocation, the Company shall no longer use the material subject to such revocation. The Trust may delegate its rights and responsibilities under this provision to the Investment Adviser. 4.8. No piece of advertising or sales literature or other promotional material in which the Company is named shall be used, except with the prior written consent of the Company. Any such piece shall be furnished to the Company for such consent prior to its use. The Company shall respond to any request for written consent on a prompt and timely basis, but failure to respond shall not relieve the Trust of the obligation to obtain the prior written consent of the Company. The Company may at any time in its sole discretion revoke such written consent, and upon notification of such revocation, the Trust shall no longer use the material subject to such revocation. 4.9. The Company shall not give any information or make any representations or statements on behalf of the Trust or concerning the Trust other than the information or representations contained in the Trust Registration Statement or Trust Prospectus or in reports or proxy statements for the Trust which are in the public domain or approved in writing by the Trust for distribution to Contract Owners, or in sales literature or other promotional material approved in accordance with Section 4.7 of this Agreement, except with the prior written consent of the Trust. 4.10. The Trust shall not give any information or make any representations on behalf of the Company or concerning the Company, the Account or the Contracts other than the information or representations contained in the Contracts Registration Statement or Contracts Prospectus or in reports of the Account which are in the public domain or approved in writing by the Company for distribution to Contract Owners, or in sales literature or other promotional material approved in accordance with Section 4.8 of this Agreement, except with the prior written consent of the Company. 4.11. Each party shall provide to the other at least one complete copy of all Registration Statements, Prospectuses, Statements of Additional Information, periodic and other shareholder or Contract Owner reports, proxy statements, solicitations of voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments or supplements to any of the above, that relate to the Trust, the Contracts or the Account, as the case may be, promptly after the filing by or on behalf of such party of such document with the SEC or other regulatory authorities. Each party shall provide to the other any complaints from Contract Owners pertaining to the Contracts. 4.12. Each party shall provide to the other upon request copies of draft versions of any Registration Statements, Prospectuses, Statements of Additional Information, periodic and other shareholder or Contract Owner reports, proxy statements, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments or supplements to any of the above, to the extent that the other party reasonably needs such information for purposes of preparing a report or other filing to be 9 filed with or submitted to a regulatory agency. If a party requests any such information before it has been filed, the other party will provide the requested information if then available and in the version then available at the time of such request. 4.13. Each party hereto shall cooperate with the other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and shall permit each other and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. However, such access shall not extend to attorney-client privileged information. 4.14. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, any material constituting sales literature or advertising under the NASD rules, the 1940 Act or the 1933 Act. 4.15. No party shall use any other party's names, logos, trademarks or service marks, whether registered or unregistered, without the prior written consent of such party. 4.16. To the extent required by applicable law, including the administrative requirements of regulatory authorities, or as mutually agreed between the Company and the Trust, the Company reserves the right to modify the Contracts in any respect whatsoever. The Company reserves the right in its sole discretion to suspend the sale of Contracts, in whole or in part, or to accept or reject any application for the purchase of a Contract. The Company agrees to notify the Trust promptly upon the occurrence of any event the Company believes might necessitate a material modification of the Contracts or suspension of Contract sales; in the case of an anticipated material modification of the Contracts, written notice of such modification shall be provided to the Trust at least sixty (60) days prior to the date that such material modification of the Contracts shall be effective. ARTICLE V. Voting of Trust Shares ---------------------- With respect to any matter put to vote by the holders of Trust shares or Series shares ("Voting Shares"), the Company shall: (a) solicit voting instructions from Contract Owners to which Voting Shares are attributable; (b) vote Voting Shares of each Series attributable to Contract Owners in accordance with instructions or proxies timely received from such Contract Owners; (c) vote Voting Shares of each Series attributable to Contract Owners for which no instructions have been received in the same proportion as Voting Shares of such Series for which instructions have been timely received; and 10 (d) vote Voting Shares of each Series held by the Company on its own behalf or on behalf of the Account that are not attributable to Contract Owners in the same proportion as Voting Shares of such Series for which instructions have been timely received. The Company shall be responsible for assuring that voting privileges for the Account are calculated in a manner consistent with the provisions set forth above. 11 ARTICLE VI. Compliance with Code -------------------- 6.1. The Trust shall comply with Section 817(h) of the Code and the regulations issued thereunder to the extent applicable to the Trust as a fund underlying the Account, and shall notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 6.2. The Trust shall maintain its qualification as a registered investment company (under Subchapter M of the Code or any successor or similar provision), and shall notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 6.3. The Company shall ensure the continued treatment of the Contracts as annuity contracts or life insurance policies, whichever is appropriate, under applicable provisions of the Code and shall notify the Trust immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. ARTICLE VII. Potential Conflicts ------------------- The parties to this Agreement acknowledge that the Trust may file an application with the SEC to request an order granting relief from various provisions of the 1940 Act and the rules thereunder to the extent necessary to permit Trust shares to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies, as well as by Qualified Entities. Any conditions or undertakings that may be imposed on the Company and the Trust by virtue of such order shall be incorporated herein by this reference, as of the date such order is granted, as though set forth herein in full, and the parties to this Agreement shall comply with such conditions and undertakings to the extent applicable to each such party. The Trust will not enter into a participation agreement with any other Participating Insurance Company unless it imposes the same conditions and undertakings imposed by virtue of such order and incorporated by reference herein on the parties to such agreement. ARTICLE VIII. Indemnification --------------- 8.1. The Company shall indemnify and hold harmless the Trust and each person who controls the Trust within the meaning of such term under Section 15 of the 1933 Act (but not any Participating Insurance Companies or Qualified Entities) and any officer, trustee, director, employee or agent of the foregoing, against any and all losses, claims, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities: 12 (a) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Contracts Registration Statement, Contracts Prospectus, sales literature or other promotional material for the Contracts or the Contracts themselves (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission or such alleged statement or alleged omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of the Trust for use in the Contracts Registration Statement, Contracts Prospectus or in the Contracts or sales literature or promotional material for the Contracts (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement or alleged untrue statement of a material fact contained in the Trust Registration Statement, Trust Prospectus or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Trust by or on behalf of the Company; or (c) arise out of or are based upon any wrongful conduct of the Company or persons under its control (or subject to its authorization or supervision) with respect to the sale or distribution of the Contracts or Trust shares; or (d) arise as a result of any failure by the Company, or persons under its control (or subject to its authorization), to perform its obligations under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the undertaking specified in Article VI of this Agreement, unless such failure is a result of the Trust's material breach of this Agreement); or (e) arise out of any material breach by the Company of this Agreement, including but not limited to any failure to transmit a request for redemption or purchase of Trust shares on a timely basis in accordance with the procedures set forth in Article II. This indemnification will be in addition to any liability that the Company may otherwise have; provided, however, that no person otherwise entitled to indemnification pursuant to this Section 8.1 shall be entitled to indemnification if such loss, claim, damage or liability is due to the willful misfeasance, bad faith, gross negligence or reckless disregard of duty by the person seeking indemnification. 8.2. The Trust shall indemnify and hold harmless the Company and each person who controls the Company within the meaning of such term under Section 15 of the 1933 Act and any officer, director, employee or agent of the foregoing, against any and all losses, claims, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably 13 incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities: (a) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Trust Registration Statement, Trust Prospectus or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission or alleged statement or alleged omission was made in reliance upon and in conformity with information furnished in writing by or on behalf of the Company to the Trust for use in the Trust Registration Statement, Trust Prospectus or sales literature or promotional material for the Trust (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement or alleged untrue statement of a material fact contained in the Contracts Registration Statement, Contracts Prospectus or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon information furnished in writing by or on behalf of the Trust to the Company; or (c) arise out of or are based upon wrongful conduct of the Trust or persons under its control (or subject to its authorization) with respect to the sale or distribution of the Contracts or the Trust shares; or (d) arise as a result of any failure by the Trust to perform its obligations under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the undertakings specified in Article VI of this Agreement, unless such failure is a result of the Company's material breach of this Agreement); or (e) arise out of any material breach by the Trust of this Agreement. For purposes of Section 8.2(c) above, persons under the Trust's control or subject to its authorization shall not include any persons under the Company's control or subject to the Company's authorization or supervision. This indemnification will be in addition to any liability that the Trust may otherwise have; provided, however, that no person otherwise entitled to indemnification pursuant to this Section 8.2 shall be entitled to indemnification if such loss, claim, damage or liability is due to the willful misfeasance, bad faith, gross negligence or reckless disregard of duty by the person seeking indemnification. 14 8.3. After receipt by a party entitled to indemnification ("indemnified party") under this Article VIII of notice of the commencement of any action, if a claim in respect thereof is to be made by the indemnified party against any person obligated to provide indemnification under this Article VIII ("indemnifying party"), such indemnified party will notify the indemnifying party in writing of the commencement thereof as soon as practicable thereafter, provided that the omission to so notify the indemnifying party will not relieve it from any liability under this Article VIII, except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give such notice. The indemnifying party, upon the request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article VIII. The indemnification provisions contained in this Article VIII shall survive any termination of this Agreement. ARTICLE IX. Applicable Law -------------- 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Massachusetts, without giving effect to the principles of conflicts of laws. 9.2. This Agreement shall be subject to the provisions of the 1933 Act, 1940 Act and Securities Exchange Act of 1934, as amended, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant, and the terms hereof shall be limited, interpreted and construed in accordance therewith. ARTICLE X. Termination ----------- 10.1. This Agreement shall not terminate as to any Series of the Trust until the Account no longer invests in that Series and the Company has confirmed in writing to the Trust that it no 15 longer intends to invest in such Series. However, certain obligations of, or restrictions on, the parties to this Agreement may terminate as provided in Sections 10.2 and 10.3 and the Company may be required to redeem shares pursuant to Section 10.4 or in circumstances contemplated by Article VII. 10.2. The obligation of the Trust to make Series shares available to the Company for purchase pursuant to Article II of this Agreement shall terminate at the option of the Trust upon written notice to the Company as provided below: (a) at any time more than two years after the date of this Agreement, upon 60 days prior written notice; (b) upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the operation of the Account, the administration of the Contracts or the purchase of Trust shares, or an expected or anticipated ruling, judgment or outcome which would, in the Trust's reasonable judgment exercised in good faith, materially impair the Company's ability to meet and perform the Company's obligations and duties hereunder, such termination effective upon 15 days prior written notice; (c) in the event that any Contracts are not registered, issued, sold, or administered in accordance with applicable Federal and/or state law, including Federal income tax law ("Non-Complying Contracts"), then with respect to such Non-Complying Contracts, such termination effective upon 5 days prior written notice; (d) if the Trust shall determine, in its sole judgment exercised in good faith, that either (1) the Company shall have suffered a material adverse change in its business or financial condition or (2) the Company shall have been the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Trust, such termination effective upon 30 days prior written notice; (e) upon the Company's assignment of this Agreement (including, without limitation, any transfer of the Contracts or the Account to another insurance company pursuant to an assumption reinsurance agreement) unless the Trust consents thereto, such termination effective upon 30 days prior written notice; (f) if the Company is in material breach of any provision of this Agreement, which breach has not been cured to the satisfaction of the Trust within 30 days after written notice of such breach has been delivered to the Company; or (g) upon termination, as to a Series, pursuant to Section 10.1 or notice from the Company pursuant to Section 10.3, such termination hereunder effective upon 15 days prior written notice unless a longer notice and cure period is provided in Section 10.1 or Section 10.3, as applicable, in which case the longer notice and cure period shall apply. 16 Notwithstanding an exercise of its option to terminate its obligation to make Shares available to the Company, the Trust shall continue to make Trust shares available to the extent necessary to permit owners of Contracts in effect on the effective date of such termination (hereinafter referred to as "Existing Contracts") to reallocate investments in the Trust, redeem investments in the Trust and/or invest in the Trust upon the making of additional purchase payments under the Existing Contracts. Existing Contracts shall not include Non-Complying Contracts, if any. In the event that the Trust terminates this Agreement, the Trust shall promptly notify the Company whether the Trust is electing to make Trust shares available after termination for Non-Complying Contracts (or a class thereof). In determining whether to make Shares available for such Non-Complying Contracts (or a class thereof), the Trust shall act in good faith giving due consideration to the interests of owners of such Non-Complying Contracts (or a class thereof). 10.3. Subject to compliance with applicable law, the Company may elect to cease investing in a Series or the Trust or promoting a Series or the Trust as an investment option under the Contracts, or withdraw its investment in a Series or the Trust, upon the occurrence of one of the following events, upon 30 days prior written notice to the Trust, unless otherwise provided below: (a) at any time more than two years after the effective date of this Agreement, upon 60 days prior written notice; (b) as to a Series, if shares of such Series are not reasonably available to meet the requirements of the Contracts as determined by the Company, and the Trust, after receiving written notice from the Company of such non-availability, fails to make available a sufficient number of Trust shares to meet the requirements of the Contracts within 10 days after receipt thereof, it being understood that, in such event, the Company's rights pursuant to this Section 10.3 shall be limited to such Series; (c) as to the Trust, upon institution of formal proceedings against the Trust by the NASD, the SEC or any state securities or insurance commission or any other regulatory body, upon 15 days prior written notice; (d) as to a Series or the Trust, as applicable, if such Series or the Trust ceases to qualify as a Regulated Investment Company under Subchapter M of the Code, or under any successor or similar provision, or if such Series or the Trust may fail to so qualify, and the Trust, upon written request, fails to provide reasonable assurance acceptable to the Company that it will take action to cure or correct such failure, it being understood that, if the event does not involve all Series, the Company's rights pursuant to this Section 10.3 shall be limited to the affected Series; (e) as to a Series or the Trust, as applicable, if such Series or the Trust fails to meet the diversification requirements specified in Section 817(h) of the Code and any regulations thereunder and the Trust, upon written request, fails to provide reasonable assurance acceptable to the Company that it will take action to cure or correct such failure, it being understood that, if the event does not involve all Series, the Company's rights pursuant to this Section 10.3 shall be limited to the affected Series; 17 (f) as to a Series or the Trust, as applicable, if such Series or Trust ceased to qualify as a Regulated Investment Company or failed to meet the diversification requirements specified in Section 817(h) of the Code, and the Trust failed to cure such failure within the time period agreed upon when reasonable assurances were accepted by the Company, it being understood that, if the failure does not involve all Series, the Company's rights pursuant to this Section 10.3 shall be limited to the affected Series; (g) as to a Series or the Trust, as applicable, if the Trust informs the Company pursuant to Section 4.5 that such Series or the Trust will not comply with investment restrictions as requested by the Company and the Trust and the Company are unable to agree upon any reasonable alternative accommodations, it being understood that, if the event does not involve all Series, the Company's rights pursuant to this Section 10.3 shall be limited to the affected Series; (h) if the Trust is in material breach of a provision of this Agreement, which breach has not been cured to the satisfaction of the Company within 30 days after written notice of such breach has been delivered to the Trust; (i) with respect to any Series, in the event any of the Series shares are not registered, issued or sold in accordance with applicable state and/or Federal law or such law precludes the use of such Series shares as the underlying investment medium of the Contracts, such termination effective upon 5 days prior written notice; or (j) if the Company shall determine, in its sole judgment exercised in good faith, that either (1) the Trust or the Investment Adviser shall have suffered a material adverse change in its business or financial condition or (2) the Trust or the Investment Adviser shall have been the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Contracts, such termination effective upon 30 days prior written notice. 10.4. The parties understand and acknowledge that it is essential for compliance with Section 817(h) of the Code that the Contracts qualify as annuity contracts or life insurance policies, as applicable, under the Code. Accordingly, if any of the Contracts cease to qualify as annuity contracts or life insurance policies, as applicable, under the Code, or if any such Contracts may fail to so qualify (in either case, other than solely as a result of the Trust's failure to comply with Section 817(h) of the Code), the Trust shall have the right to require the Company to redeem Trust shares attributable to such Non-Complying Contracts upon notice to the Company and the Company shall so redeem such shares in order to ensure that the Trust complies with the provisions of Section 817(h) of the Code applicable to ownership of Trust Shares. Notice to the Company shall specify the period of time the Company has to redeem the Trust shares or to make other arrangements satisfactory to the Trust and its counsel, such period of time to be determined with reference to the requirements of Section 817(h) of the Code. The Company agrees to redeem Trust shares in the circumstances described herein. 18 ARTICLE XI. Applicability to New Accounts and New Contracts ----------------------------------------------- The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect, as appropriate, changes in or relating to the Contracts or Series, or additions of new classes of Contracts to be issued by the Company through separate accounts investing in the Trust. The provisions of this Agreement shall be equally applicable to each such class of Contracts, Series and Accounts, effective as of the date of amendment of such Schedule, unless the context otherwise requires. ARTICLE XII. 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 Trust Board 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. ARTICLE XIII. Notices ------- Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Trust: Merrillyn J. Kosier Vice President Wanger Advisors Trust 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 If to the Company: John P. Fendig Providian Corporation 400 West Market Street Louisville, Kentucky 40202 with a copy to: First Providian Life and Health Insurance Company Attention: Marketing Director 19 520 Columbia Drive Johnson City, New York 13790 ARTICLE XIV. Miscellaneous ------------- 14.1. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 14.2. This Agreement may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 14.3. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 14.4. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 14.5. Subject to the requirements of legal process and regulatory authority, the Trust shall treat as confidential the names and addresses of the Contract Owners and all information reasonably identified as confidential in writing by the Company and except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information without the express written consent of the Company until such time as it may come into the public domain. 14.6. This Agreement or any of the rights and obligations hereunder may not be assigned by any party hereto without the prior written consent of all other parties. 14.7. Notwithstanding the provisions of Article VII of this Agreement, the Trust acknowledges that it has no intention to file an application with SEC to permit Trust shares to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies. 20 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized officer on the date specified below. FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY (Company) Date: November 18, 1996 By: /s/ Gregory J. Garvin Name: Gregory J. Garvin Title: Vice President WANGER ADVISORS TRUST (Trust) By: /s/ Charles P. McQuaid Name: Charles P. McQuaid Title: Senior Vice President 21 Schedule 1 ---------- Accounts of the Company Investing in the Trust Effective as of the date the Agreement was executed, the following separate accounts are subject to the Agreement:
================================================================================ Name of Account and Date SEC 1940 Act Type of Subaccounts Established by Registration Product Board of Number Supported by Directors of Account the Company ================================================================================ First Providian Life and November 4, 1994 811-9062 Variable Health Insurance Company Annuity Separate Account C - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
Effective as of _____________, the following separate accounts are hereby added to this Schedule 1 and made subject to the Agreement:
================================================================================ Name of Account and Date SEC 1940 Act Type of Subaccounts Established by Registration Product Board of Number Supported by Directors of Account the Company ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 1 in accordance with Article XI of the Agreement. /s/ Charles P. McQuaid /s/ Gregory J. Garvin Wanger Advisors Trust First Providian Life and Health Insurance Company i Schedule 2 ---------- Classes of Contracts Supported by Separate Accounts Listed on Schedule 1 Effective as of the date the Agreement was executed, the following classes of Contracts are subject to the Agreement:
================================================================================ SEC 1933 Act Name of Supporting Contract Marketing Name Registration Number Account ================================================================================ First Providian Life and File No. 33-94204 First Providian Life Health Insurance and Health Insurance Advisor's Edge Company Separate Account C - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
Effective as of _______, the following classes of Contracts are hereby added to this Schedule 2 and made subject to the Agreement:
================================================================================ SEC 1933 Act Name of Supporting Contract Marketing Name Registration Number Account ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 2 in accordance with Article XI of the Agreement. /s/ Charles P. McQuaid /s/ Gregory J. Garvin Wanger Advisors Trust First Providian Life and Health Insurance Company ii Schedule 3 ---------- Trust Series Available Under Each Class of Contracts Effective as of the date the Agreement was executed, the following Trust Series are available under the Contracts:
================================================================================ Contracts Marketing Name Trust Series ================================================================================ First Providian Life and Health . Wanger U.S. Small Cap Insurance Advisor's Edge Advisor . Wanger International Small Cap Advisor - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
Effective as of the date the Agreement was executed, the following other funding vehicles are available under the Contracts:
================================================================================ Contracts Marketing Name Funding Vehicle ================================================================================ First Providian Life and Health . DFA Investment Dimensions Insurance Advisor's Edge Group, Inc. . Insurance Management Series (Federated) . The Montgomery Funds III . Weiss, Peck & Greer - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
Effective as of __________________, this Schedule 3 is hereby amended to reflect the following changes in Trust Series: iii
======================================================================= Contracts Marketing Name Trust Series ======================================================================= - ----------------------------------------------------------------------- - ----------------------------------------------------------------------- =======================================================================
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 3 in accordance with Article XI of the Agreement. /s/ Charles P. McQuaid /s/ Gregory J. Garvin Wanger Advisors Trust First Providian Life and Health Insurance Company iv Schedule 4 ---------- Investment Restrictions Applicable to the Trust Effective as of the date the Agreement was executed, the following New York investment restrictions are applicable to the Trust: NONE Effective as of ___________________, this Schedule 4 is hereby amended to reflect the following changes: IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 4 in accordance with Article XI of the Agreement. /s/ Charles P. McQuaid /s/ Gregory J. Garvin Wanger Advisors Trust First Providian Life and Health Insurance Company v AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT THIS AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT, made and entered into as of this 16th day of December, 1996, supplementing and amending the Participation Agreement made and entered into the 15th day of November, 1996 (the "Original Participation Agreement," and together with this Amendment No. 1, the "Agreement") by and between WANGER ADVISORS TRUST, an unincorporated business trust formed under the laws of Massachusetts (the "Trust"), and FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY, a New York life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified in the Agreement. WHEREAS, the Trust currently serves as an investment vehicle for certain accounts of the Company pursuant to the Original Participation Agreement; and WHEREAS, the Trust has applied for an order from the Securities and Exchange Commission (the "SEC") (File No. 812-10198), granting Participating Insurance Companies (as defined in the Original Participation Agreement) and variable annuity and variable life separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined in the Original Participation Agreement) and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust and each Series thereof to be sold to and held by variable annuity and variable life insurance separate accounts of life insurance companies that may or may not be affiliated with one another and qualified pension and retirement plans outside of the separate account context (the "Exemptive Order"); and WHEREAS, the Company and the Trust have agreed to hereby supplement and amend the Original Participation Agreement in order to reflect the conditions and undertakings that are expected to be imposed on the Company and the Trust by virtue of such Exemptive Order; NOW, THEREFORE, in consideration of their mutual promises, the Trust and the Company agree as follows: SECTION 1. Definitions For all purposes of this Amendment No. 1, except as otherwise expressly provided or unless the context otherwise requires: (1) All references in this Amendment No. 1 and the Original Participation Agreement to designated "Articles" and other subdivisions are to the designated Articles and other subdivisions of the Original Participation Agreement. The words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of similar import refer to this Amendment No. 1 as a whole and not to any particular "Section" or other subdivision. (2) All terms used herein and not otherwise defined shall have the same meanings as those given to such terms in the Original Participation Agreement, and include the plural as well as the singular, and the Original Participation Agreement is hereby amended to included any terms defined herein. (3) Any references to the "Agreement" in the original Participation Agreement are hereby amended to include, collectively, the Original Participation Agreement and this Amendment No. 1. SECTION 2. Amendment to Article VII Article VII of the Original Participation Agreement is hereby amended to read in its entirety as follows: "ARTICLE VII. Potential Conflicts and Compliance With Exemptive Order 7.1 The Trust Board will monitor the Trust for the existence of any material irreconcilable conflict between the interests of the Contract Owners of all Participating Accounts and of Qualified Participants investing in the Trust and each Series thereof. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Series are managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; (f) a decision by a Participating Insurance Company to disregard the voting instructions of contract owners; or (g) if applicable, a decision by a Qualified Entity to disregard the voting instructions of Qualified Participants. The Trust Board shall promptly inform the Company in writing if it determines that a material irreconcilable conflict exists and the implications thereof. 7.2 The Company shall report any potential or existing conflicts to the Trust Board. The Company will be responsible for assisting the Trust Board in carrying out its responsibilities by providing the Trust Board with all information reasonably necessary for the Trust Board to consider any issues raised. This responsibility includes, but is not limited to, an obligation by the Company to inform the Trust Board whenever it has determined to disregard Contract Owner voting instructions. Such responsibilities shall be carried out by the Participants with a view only to the interests of Contract Owners. 7.3 If it is determined by a majority of the Trust Board, or a majority of the members of the Trust Board who are not interested persons of the Trust, the Investment Adviser or any sub-adviser to any of the Series (the "Independent Trustees"), that a material irreconcilable conflict exists, the Company shall, at its expense and to the extent reasonably practicable (as determined by a majority of 9 the Independent Trustees), take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict including: (a) withdrawing the assets allocable to some or all of the separate accounts from the Trust or any Series and reinvesting such assets in a different investment medium, which may include another Series of the Trust, or submitting the question of whether such segregation should be implemented to a vote of all affected Contract Owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract Owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract Owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Trust's election, to withdraw the Account's investment in the Trust and terminate this Agreement and no charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Trust gives written notice that this provision is being implemented, and until the end of that six month period the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six months after the Trust Board informs the Company in writing that it has determined that such decision has created a material irreconcilable conflict. Until the end of the foregoing six month period, the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the Independent Trustees shall determine whether any proposed action adequately remedies any material irreconcilable conflict, but in no event will the Trust or the Investment Adviser be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract Owners materially adversely affected by the material irreconcilable conflict. In the event that the Trust Board determines that any proposed action does not adequately remedy any material irreconcilable conflict, then the Company will withdraw the Account's investment in the Trust 10 and terminate this Agreement within six (6) months after the Trust Board informs the Company in writing of the foregoing determination. 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then (a) the Trust and/or the Company, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Article V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 7.8 The Company shall at least annually submit to the Trust Board such reports, materials or data as the Trust Board may reasonably request so that the Trust Board may fully carry out its obligations under the Exemptive Order; provided, however, that the Board may require the submission of such reports on data on a more frequent basis if it so deems appropriate. 7.9 The Company, or any affiliate, will maintain at its home office, available to the SEC, (a) a list of its officers, directors and employees who participate directly in the management of administration of any Account and/or (b) a list of its agents who, as registered representatives, offer and sell Contracts." SECTION 3. Schedules Schedules 1,2 and 3 to the Original Participation Agreement are hereby amended to read as Schedules 1, 2 and 3 to this Amendment No. 1, respectively. SECTION 4. Miscellaneous 4.1 The captions in this Amendment No. 1 are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 This Amendment No. 1 may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 4.3 If any provisions of this Amendment No. 1 shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 1 to be executed in its name and behalf by its duly authorized office on the date specified below. FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY (Company) Date: December 16, 1996 By: /s/ Gregory J. Garvin Name: Gregory J. Garvin Title: Vice President WAGNER ADVISORS TRUST (Trust) By: /s/ Charles P. McQuaid Name: Charles P. McQuaid Title: Senior Vice President 12 EX-99.9.A.5 6 PARTICIPATION AGREEMENT - WANGER/SAFECO EXHIBIT 9(a)(5) PARTICIPATION AGREEMENT THIS AGREEMENT, made and entered into this 27th day of September, 1995 by and between WANGER ADVISORS TRUST, an unincorporated business trust formed under the laws of Massachusetts (the "Trust"), and SAFECO LIFE INSURANCE COMPANY, a Washington life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified herein. WHEREAS, the Trust is a series-type mutual fund offering shares of beneficial interest (the "Trust shares") consisting of one or more separate series ("Series") of shares ("Series shares"), each such series representing an interest in a particular managed portfolio of securities and other assets; and WHEREAS, the Trust was established for the purpose of serving as an investment vehicle for (i) separate accounts supporting variable annuity contracts and variable life insurance policies to be offered by insurance companies, and (ii) certain pension and retirement plans receiving favorable tax treatment under the Internal Revenue Code of 1986, as amended; and WHEREAS, the Company desires that the Trust serve as an investment vehicle for certain separate accounts of the Company; NOW, THEREFORE, in consideration of their mutual promises, the Trust and the Company agree as follows: ARTICLE I. Additional Definitions 1.1. "Account" -- each separate account of the Company described more specifically in Schedule 1 to this Agreement. 1.2. "Business Day" -- each day that the Trust is open for business as provided in the Trust Prospectus. 1.3. "Code" -- the Internal Revenue Code of 1986, as amended. 1.4. "Contracts" -- the class or classes of variable annuity contracts or variable life insurance contracts issued by the Company and described more specifically on Schedule 2 to this Agreement. 1.5. "Contract Owners" -- the owners of the Contracts, as distinguished from all Product Owners. 1.6. "Investment Adviser" -- the investment manager of the Trust. 1.7. "Participating Account" -- a separate account investing all or a portion of its assets in the Trust, including the Account. 1.8. "Participating Insurance Company" -- any insurance company investing in the Trust on its behalf or on behalf of a Participating Account, including the Company. 1.9. "Products" -- variable annuity contracts and variable life insurance policies supported by Participating Accounts investing assets attributable thereto in the Trust, including the Contracts. 1.10. "Product Owners" -- owners of Products. 1.11. "Prospectus" -- with respect to a class of Contracts, each version of the definitive prospectus or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act ("Contracts Prospectus"). With respect to Trust shares, each version of the definitive prospectus or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act with respect to a series of the Trust listed on Schedule 3 to this Agreement ("Trust Prospectus"). With respect to any provision of this Agreement requiring a party to take action in accordance with a Prospectus, such reference thereto shall be deemed to be to the version last filed prior to the taking of such action. For purposes of Article VIII, the term "Prospectus" shall include any statement of additional information incorporated therein. 1.12. "Qualified Entity" -- A person or plan, including a pension or retirement plan receiving favorable tax treatment under the Code, that qualifies to purchase shares of the Trust under Section 817(h) of the Code. A natural person having an indirect interest in the Trust by virtue of such natural person's participation in a Qualified Entity is a "Qualified Participant." 1.13. "Registration Statement" -- with respect to the Trust Shares ("Trust Registration Statement") or a class of Contracts ("Contracts Registration Statement"), the registration statement filed with the SEC to register the securities issued thereby under the 1933 Act, or the most recently filed amendment thereto, in either case in the form in which it was declared or became effective. The Contracts Registration Statement is described more specifically on Schedule 2 to this Agreement. The Trust Registration Statement was filed on Form N-1A (File No. 33-83548). 1.14. "1940 Act Registration Statement" -- with respect to the Trust or the Account, the registration statement filed with the SEC to register such entity as an investment company under the 1940 Act, or the most recently filed amendment thereto. The Account 1940 Act Registration Statement is described more specifically on Schedule 2 to this Agreement. The Trust 1940 Act Registration Statement was filed on Form N-1A (File No. 811-8748). -2- 1.15. "Statement of Additional Information" -- with respect to the Trust or a class of Contracts, each version of the definitive statement of additional information or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act. 1.16. "SEC" -- the Securities and Exchange Commission. 1.17. "1933 Act" -- the Securities Act of 1933, as amended. 1.18. "1940 Act" -- the Investment Company Act of 1940, as amended. ARTICLE II. Sale of Trust Shares 2.1. The Trust shall make shares of those Series listed on Schedule 3 to this Agreement available for purchase by the Company on behalf of the Account, such purchases to be effected at net asset value in accordance with Section 2.3 of this Agreement. Notwithstanding the foregoing, (i) Trust Series in existence now or that may be established in the future and not listed on Schedule 3 will be made available to the Company only as the Trust and the Company may agree pursuant to Article XI hereof, and (ii) the Board of Trustees of the Trust (the "Trust Board") may suspend or terminate the offering of Trust shares of any Series in any jurisdiction, if such action is required by law or by regulatory authorities having jurisdiction or if, in the sole discretion of the Trust Board acting in good faith and in light of its fiduciary duties under Federal and any applicable state laws, suspension or termination is necessary or in the best interests of the shareholders of any Series (it being understood that "shareholders" for this purpose shall mean Product Owners and Qualified Participants). 2.2. The Trust shall redeem, at the Company's request, any full or fractional shares of the Trust held by the Company on behalf of the Account, such redemptions to be effected at net asset value in accordance with Section 2.3 of this Agreement. Notwithstanding the foregoing, (i) the Company shall not redeem Trust shares attributable to Contract Owners except in the circumstances permitted in Section 2.7 of this Agreement, and (ii) the Trust may delay redemption of Trust shares of any Series to the extent permitted by the 1940 Act, any rules, regulations or orders thereunder, or as described in the Trust Prospectus. 2.3. (a) The Trust hereby appoints the Company as its designee for the limited purpose of receiving purchase and redemption requests from the Account based on allocations of net amounts to the Account or subaccounts thereof under the Contracts and other transactions relating to the Contracts or the Account. Purchase and redemption requests shall be processed by the Trust at the net asset value per share next calculated after the Trust receives and accepts such request. The Trust shall calculate its net asset value per share at the Trust's close of business on each Business Day (as defined from time to time in the Trust -3- Prospectus, and which as of the date of execution of this Agreement is the time of the close of regular session trading on the New York Stock Exchange, which is generally 4:00 p.m. Eastern Time). Receipt of any such request on any Business Day by the Company as designee of the Trust prior to the Trust's close of business shall constitute receipt by the Trust on that same Business Day, provided that the Trust receives notice of such request by 10:30 a.m. Eastern Time on the next following Business Day. (b) The Company shall pay for shares of each Series on the same day that it notifies the Trust of a purchase request for such shares. Payment for Series shares shall be made in Federal funds transmitted to the Trust by wire to be received by the Trust by 1:00 p.m. Eastern Time on the day the Trust is notified of the purchase request for Series shares (unless the Trust determines and so advises the Company that sufficient proceeds are available from redemption of shares of other Series effected pursuant to redemption requests tendered by the Company on behalf of the Account). If payment in Federal funds for any purchase is not received, or is received by the Trust after 3:00 p.m. Eastern Time on such Business Day, the Company shall promptly, upon the Trust's request, reimburse the Trust for any charges, costs, fees, interest or other expenses incurred by the Trust in connection with any advances to, or borrowings or overdrafts by, the Trust, or any similar expenses incurred by the Trust, as a result of non-payment or late payment. (c) Payment for Series shares redeemed by the Account or the Company shall be made in Federal funds transmitted by wire to the Company or any other designated person by 3:00 p.m. Eastern Time on the next Business Day after the Trust is properly notified of the redemption order of Series shares (unless redemption proceeds are to be applied to the purchase of Trust shares of other Series in accordance with Section 2.3(b) of this Agreement), except that (i) if payment of the redemption proceeds would require the Trust to dispose of portfolio securities or otherwise incur additional costs, proceeds shall be wired to the Company within seven days and the Trust shall notify the Company of such delay by 3 p.m. Eastern Time on such Business Day; and (ii) the Trust reserves the right to delay payment of redemption proceeds to the extent permitted under Section 22(e) of the 1940 Act; and (iii) the Trust reserves the right to effect payment of redemptions in kind, but only to the extent described in the Trust Prospectus. The Trust shall not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds by the Company; the Company alone shall be responsible for such action. -4- 2.4. The Trust shall use reasonable efforts to make the net asset value per share for each Series available to the Company by 6:00 p.m. Eastern Time each Business Day and shall use its best efforts to make the net asset value available to the Company by 7:00 p.m. Eastern Time each Business Day, and in any event, as soon as reasonably practicable after the net asset value per share for such Series is calculated, and shall calculate such net asset value in accordance with the Trust Prospectus. Neither the Trust, any Series, the Investment Adviser, nor any of their affiliates shall be liable for any information provided to the Company pursuant to this Agreement which information is based on incorrect information supplied by the Company or any other Participating Company to the Trust or the Investment Adviser. 2.5. The Trust shall furnish notice to the Company as soon as reasonably practicable of any income dividends or capital gain distributions payable on any Series shares. The Trust shall notify the Company promptly of the number of Series shares so issued as payment of such dividends and distributions. The Company, on its behalf and on behalf of the Account, hereby elects to receive all such dividends and distributions as are payable on any Series shares in the form of additional shares of that Series. The Company reserves the right, on its behalf and on behalf of the Account, to revoke this election and to receive all such dividends in cash. 2.6. Issuance and transfer of Trust shares shall be by book entry only. Stock certificates will not be issued to the Company or the Account. Purchase and redemption orders for Trust shares shall be recorded in an appropriate ledger for the Account or the appropriate subaccount of the Account. 2.7. (a) The Company shall invest amounts available for investment under the Contracts in the Series of the Trust specified in Schedule 3 in accordance with allocation instructions received from Contract Owners, it being understood that no changes shall be made to Schedule 3 without the prior written consent of the Trust and the Investment Adviser. The Company may withdraw the Account's investment in the Trust or a Series of the Trust only: (i) as necessary to facilitate Contract Owner requests; (ii) upon a determination by a majority of the Trust Board, or a majority of disinterested Trust Board members, that an irreconcilable material conflict exists among the interests of (x) some or all Product Owners or (y) the interests of some or all of the Participating Insurance Companies and/or Qualified Entities investing in the Trust; or (iii) in the event that the shares of another investment company are substituted for series shares in accordance with the terms of the Contracts upon the (x) requisite vote of the Contract Owners having an interest in the affected Series and the written consent of the Trust (unless otherwise required by applicable law); (y) upon issuance of an SEC exemptive order pursuant to Section 26(b) of the 1940 Act permitting such substitution; or (z) as may otherwise be permitted under applicable law. -5- (b) The Company shall not, without the prior written consent of the Trust (unless otherwise required by applicable law), take any action to operate the Account as a management investment company under the 1940 Act. (c) The Trust shall not, without the prior written consent of the Company (unless otherwise required by applicable law), take any action to operate the Trust as a unit investment trust under the 1940 Act. (d) The Company shall not, without the prior written consent of the Trust (unless otherwise required by applicable law), solicit, induce or encourage Contract Owners to change or modify the Trust or change the Trust's investment adviser. (e) The Company and the Trust acknowledge that the arrangement contemplated by this Agreement is not exclusive; Trust shares may be sold to other insurance companies; and the cash value of the Contracts may be invested in other investment companies, provided, however, that (a) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of the Trust; or (b) the Company gives the Trust 45 days written notice of its intention to make such other investment company available as a funding vehicle for the Contracts; or (c) such other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and the Company so informs the Trust prior to the execution of this Agreement; or (d) the Trust consents to the use of such other investment company, such consent not to be unreasonably withheld. 2.8. The Trust shall sell Trust shares only to Participating Insurance Companies and their separate accounts and to Qualified Entities. The Trust shall not sell Trust shares to any insurance company or separate account unless an agreement complying with Article VII of this Agreement is in effect to govern such sales. 2.9 The Trust shall provide to the Company within 5 business days after the end of each month a monthly statement of account reflecting all transactions by the Company during that month. ARTICLE III. Representations and Warranties 3.1. The Company represents and warrants that: (i) the Company is an insurance company duly organized and in good standing under applicable law; (ii) the Account is a validly existing separate account, duly established and maintained in accordance with applicable law; (iii) the Account 1940 Act Registration Statement has been filed with the SEC in accordance with the provisions of the 1940 Act and the Account is duly registered as a unit investment trust thereunder; (iv) the Contracts Registration Statement has been declared effective by the SEC; (v) -6- the Contracts will be issued in compliance in all material respects with all applicable Federal and state laws; and (vi) the Contracts currently are and at the time of issuance will be treated as annuity contracts under applicable provisions of the Code. 3.2. The Trust represents and warrants that: (i) the Trust is an unincorporated business trust duly formed under Massachusetts law; (ii) the Trust 1940 Act Registration Statement has been filed with the SEC in accordance with the provisions of the 1940 Act and the Trust is duly registered as an open- end management investment company thereunder; (iii) the Trust Registration Statement has been declared effective by the SEC; (iv) Trust shares sold pursuant to this Agreement have been duly authorized for issuance in accordance with applicable law; (v) the Trust believes that it (x) currently qualifies as a "regulated investment company" under Subchapter M of the Code and (y) currently complies with Section 817(h) of the Code and regulations thereunder; and (vi) the Trust's investment policies are in material compliance with any investment restrictions set forth on Schedule 4 to this Agreement. The Trust, however, makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) otherwise complies with the insurance laws or regulations of any state. 3.3. Each party represents that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate or trust action, as applicable, by such party, and, when so executed and delivered, this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. ARTICLE IV. Filings, Information and Expenses 4.1. The Trust shall amend the Trust Registration Statement and the Trust 1940 Act Registration Statement from time to time as required in order to effect the continuous offering of Trust shares and to maintain the Trust's registration under the 1940 Act for so long as Trust shares are sold. 4.2. The Company shall amend the Contracts Registration Statement and the Account 1940 Act Registration Statement from time to time as required in order to effect the continuous offering of the Contracts or as may otherwise be required by applicable law. The Company shall maintain a current effective Contracts Registration Statement and the Account's registration under the 1940 Act for so long as the Contracts are outstanding, unless (a) a no-action letter from the SEC has been obtained by the Company to the effect that such registration statement need no longer be maintained; or (b) the Company has supplied the Trust with an opinion of counsel to the effect that maintaining such registration statement is no longer required; or (c) the Company has notified the Trust in writing that, with respect to such registration statement, the Company -7- meets the terms and conditions of, and is relying on, Great West Life & Annuity Insurance Company (pub. avail. Oct. 23, 1990), and any subsequent no-action letter released by the staff of the SEC addressing the same subject matter. The Company shall file, register, qualify and obtain approval of the Contracts for sale to the extent required by applicable insurance and securities laws of the various states. 4.3 The Trust shall provide the Company with as many copies of the Trust Prospectus as the Company may reasonably request. If requested by the Company in lieu thereof, the Trust shall provide such documentation (including a final copy of the Trust Prospectus as set in type at the Trust's expense) and other assistance as is reasonably necessary in order for the Company once each year (or more frequently if the Trust Prospectus is more frequently amended) to have the Contracts Prospectus and Trust Prospectus printed together in one document. 4.4 The Company shall deliver Contracts, Contracts and Trust Prospectuses, Contracts and Trust Statements of Additional Information, and all amendments or supplements to any of the foregoing to Contract Owners and prospective Contract Owners, as required by applicable federal securities laws. 4.5. The Company shall: (a) inform the Trust of any state in which the Trust is required under such state's securities laws to register the offering of its shares pursuant to this participation agreement; and (b) inform the Trust of any investment restrictions imposed by state insurance law that may become applicable to the Trust from time to time as a result of the Account's investment therein (including, but not limited to, restrictions with respect to fees and expenses and investment policies), other than those set forth on Schedule 4 to this Agreement. 4.6. Upon receipt of information from the Company pursuant to Section 4.5(b), the Trust shall determine whether it is in the best interests of shareholders (it being understood that "shareholders" for this purpose shall mean Product Owners and Qualified Participants) to comply with any such restrictions. If the Trust determines that it is not in the best interests of shareholders, the Trust shall so inform the Company, and the Trust and the Company shall discuss alternative accommodations in the circumstances. If the Trust determines that it is in the best interests of shareholders to comply with such restrictions, the Trust and the Company shall amend Schedule 4 to this Agreement to reflect such restrictions. 4.7. All expenses incident to each party's performance under this Agreement (including expenses expressly assumed by such party pursuant to this Agreement) shall be paid by the such party to the extent permitted by law. -8- (a) Expenses assumed by the Trust include, but are not limited to, the costs of: registration and qualification of the Trust shares under the federal securities laws; preparation and filing with the SEC of the Trust Prospectus, Trust Registration Statement, Trust proxy materials and shareholder reports; the printing and mailing of all proxy statements and periodic reports; the preparation of Trust Prospectuses and Statements of Additional Information required to be provided by the Trust to its then- current shareholders; preparation of all statements and notices required by any Federal or state securities law; all taxes on the issuance or transfer of Trust shares; and any expenses permitted to be paid or assumed by the Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act. The Trust shall pay no fee or other compensation to the Company under this Agreement, and shall not be charged for the costs of printing and mailing to prospective Contract Owners copies of the Trust Prospectus, Trust Statement of Additional Information, notices, proxy statements, periodic reports, or other printed materials. (b) Expenses assumed by the Company include, but are not limited to, the costs of: registration and qualification of the Contracts under the federal securities laws; preparation and filing with the SEC of the Contracts Prospectus, Contracts Registration Statement, and Contract Owner reports; and the printing and mailing of all periodic reports, Contracts Prospectuses, Statements of Additional Information, and notices to current and prospective Contract Owners required by any Federal or state insurance law other than those paid for by the Trust. 4.8. No piece of advertising or sales literature or other promotional material in which the Trust is named shall be used, except with the prior written consent of the Trust. Any such piece shall be furnished to the Trust for such consent prior to its use. The Trust shall respond to any request for written consent on a prompt and timely basis, but failure to respond shall not relieve the Company of the obligation to obtain the prior written consent of the Trust. The Trust may at any time in its sole discretion revoke such written consent, and upon notification of such revocation, the Company shall no longer use the material subject to such revocation. The Trust may delegate its rights and responsibilities under this provision to the Investment Adviser. However, should the Trust or its delegate revoke such consent, it agrees to reimburse the Company for all costs of producing, printing and filing of such material incurred prior to notification that consent has been revoked. 4.9. The Company shall not give any information or make any representations or statements on behalf of the Trust or concerning the Trust other than the information or representations contained in the Trust Registration Statement or Trust Prospectus or in reports or -9- proxy statements for the Trust which are in the public domain or approved in writing by the Trust for distribution to Contract Owners, or in sales literature or other promotional material approved in accordance with Section 4.8 of this Agreement, except with the prior written consent of the Trust. 4.10. The Trust shall not give any information or make any representations on behalf of the Company or concerning the Company, the Account or the Contracts other than the information or representations contained in the Contracts Registration Statement or Contracts Prospectus or in reports of the Account which are in the public domain or approved in writing by the Company for distribution to Contract Owners, or in sales literature or other promotional material approved in writing by the Company, except with the prior written consent of the Company. 4.11. Each party shall provide to the other at least one complete copy of all Registration Statements, Prospectuses, Statements of Additional Information, periodic and other shareholder or Contract Owner reports, proxy statements, solicitations of voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments or supplements to any of the above, that relate to the Trust, the Contracts or the Account, as the case may be, promptly after the filing by or on behalf of such party of such document with the SEC or other regulatory authorities. 4.12. Each party shall provide to the other upon request copies of draft versions of any Registration Statements, Prospectuses, Statements of Additional Information, periodic and other shareholder or Contract Owner reports, proxy statements, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments or supplements to any of the above, to the extent that the other party reasonably needs such information for purposes of preparing a report or other filing to be filed with or submitted to a regulatory agency. If a party requests any such information before it has been filed, the other party will provide the requested information if then available and in the version then available at the time of such request. 4.13. Each party hereto shall cooperate with the other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and shall permit each other and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. However, such access shall not extend to attorney-client privileged information. 4.14. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, any material constituting sales literature or advertising under the NASD rules, the 1940 Act or the 1933 Act. -10- 4.15. The Trust agrees to provide the Company within ten (10) days after the end of each month (i) performance information consisting of (x) the total return of each Series then listed in Schedule 3 hereto through the end of that month, and (y) the average annual total return of each such Series for the one-, five-, and ten-year periods ended as of the most recent calendar quarter, or the life of such Series, if shorter, in each case calculated in accordance with the methods of calculation described in the Trust Prospectus; (ii) a listing of the 10 portfolio companies in which each such Series had its largest investments at the end of that month; and (iii) a summary of the allocation of each such Series' investments among industry groups. ARTICLE V. Voting of Trust Shares With respect to any matter put to vote by the holders of Trust shares or Series shares ("Voting Shares"), the Company shall: (a) solicit voting instructions from Contract Owners to which Voting Shares are attributable; (b) vote Voting Shares of each Series attributable to Contract Owners in accordance with instructions or proxies timely received from such Contract Owners; (c) unless permitted under applicable law, vote Voting Shares of each Series attributable to Contract Owners for which no instructions have been received in the same proportion as Voting Shares of such Series for which instructions have been timely received; and (d) unless permitted under applicable law, vote Voting Shares of each Series held by the Company on its own behalf or on behalf of the Account that are not attributable to Contract Owners in the same proportion as Voting Shares of such Series for which instructions have been timely received. The Company shall be responsible for assuring that voting privileges for the Account are calculated in a manner consistent with the provisions set forth above. ARTICLE VI. Compliance with Code 6.1. The Trust undertakes to comply with Section 817(h) of the Code, and all regulations issued thereunder. 6.2. The Trust undertakes to maintain its qualification as a registered investment company (under Subchapter M or any successor or similar provision), and undertakes to notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. -11- 6.3. The Company undertakes to maintain the treatment of the Contracts as annuity contracts or life insurance policies, whichever is appropriate, under applicable provisions of the Code and shall notify the Trust immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 6.4. The Trust undertakes to provide the Company within fifteen (15) days after the end of each calendar quarter a letter from an appropriate Trust officer certifying to the continued accuracy of the Trust's representations in sections 6.1 and 6.2 of this Agreement with respect to any Series then listed on Schedule 3 to this Agreement, and providing a detailed listing of the individual securities and other assets, if any, held by each such Series as of the end of such calendar quarter. ARTICLE VII. Potential Conflicts The parties to this Agreement acknowledge that the Trust may file an application with the SEC to request an order granting relief from various provisions of the 1940 Act and the rules thereunder to the extent necessary to permit Trust shares to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies, as well as by Qualified Entities. Any conditions or undertakings that may be imposed on the Company and the Trust by virtue of such order shall be incorporated herein by this reference, as of the date such order is granted, as though set forth herein in full, and the parties to this Agreement shall comply with such conditions and undertakings to the extent applicable to each such party. The Trust will not enter into a participation agreement with any other Participating Insurance Company unless it imposes the same conditions and undertakings imposed by virtue of such order and incorporated by reference herein on the parties to such agreement. ARTICLE VIII. Indemnification --------------- 8.1. The Company shall indemnify and hold harmless the Trust and each person who controls or is associated with the Trust within the meaning of such terms under the federal securities laws (but not any Participating Insurance Companies or Qualified Entities) and any officer, trustee, director, employee or agent of the foregoing, against any and all losses, claims, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities: (a) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Contracts Registration Statement, Contracts Prospectus, sales literature or other promotional material for the Contracts or the Contracts themselves (or any amendment or supplement to -12- any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission or such alleged statement or alleged omission was made in reliance upon and in conformity with information furnished in writing to the Company by the Trust for use in the Contracts Registration Statement, Contracts Prospectus or in the Contracts or sales literature or promotional material for the Contracts (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement or alleged untrue statement of a material fact contained in the Trust Registration Statement, Trust Prospectus or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Trust by or on behalf of the Company; or (c) arise out of or are based upon any wrongful conduct of the Company or persons under its control (or subject to its authorization or supervision) with respect to the sale or distribution of the Contracts or Trust shares; or (d) arise as a result of any failure by the Company to perform its obligations under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the undertaking specified in Article VI of this Agreement, unless such failure is a result of the Trust's material breach of this Agreement); or (e) arise out of any material breach by the Company of this Agreement, including but not limited to any failure to transmit a request for redemption or purchase of Trust shares on a timely basis in accordance with the procedures set forth in Article II. This indemnification will be in addition to any liability that the Company may otherwise have; provided, however, that no person otherwise entitled to indemnification pursuant to this Section 8.1 shall be entitled to indemnification if such loss, claim, damage or liability is due to the willful misfeasance, bad faith, gross negligence or reckless disregard of duty by the person seeking indemnification. -13- 8.2. The Trust shall indemnify and hold harmless the Company and each person who controls or is associated with the Company within the meaning of such terms under the federal securities laws and any officer, director, employee or agent of the foregoing, against any and all losses, claims, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities: (a) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Trust Registration Statement, Trust Prospectus or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission or alleged statement or alleged omission was made in reliance upon and in conformity with information furnished in writing by the Company to the Trust for use in the Trust Registration Statement, Trust Prospectus or sales literature or promotional material for the Trust (or any amendment or supplement to any of the foregoing); or (b) arise out of any untrue statement or alleged untrue statement of a material fact contained in the Contracts Registration Statement, Contracts Prospectus or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon information furnished in writing by the Trust to the Company; or (c) arise out of or are based upon wrongful conduct of the Trust with respect to the sale of Trust shares; or (d) arise as a result of any failure by the Trust to perform its obligations under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the undertakings specified in Article VI of this Agreement, unless such failure is a result of the Company's material breach of this Agreement); or (e) arise out of any material breach by the Trust of this Agreement. -14- This indemnification will be in addition to any liability that the Trust may otherwise have; provided, however, that no person otherwise entitled to indemnification pursuant to this Section 8.2 shall be entitled to indemnification if such loss, claim, damage or liability is due to the willful misfeasance, bad faith, gross negligence or reckless disregard of duty by the person seeking indemnification. 8.3. After receipt by a party entitled to indemnification ("indemnified party") under this Article VIII of notice of the commencement of any action, if a claim in respect thereof is to be made by the indemnified party against any person obligated to provide indemnification under this Article VIII ("indemnifying party"), such indemnified party will notify the indemnifying party in writing of the commencement thereof as soon as practicable thereafter, provided that the failure to so notify the indemnifying party will not relieve the indemnifying party from any liability under this Article VIII, except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give such notice. The indemnifying party, upon the request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent, or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article VIII. The indemnification provisions contained in this Article VIII shall survive any termination of this Agreement. ARTICLE IX. Applicable Law -------------- 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflicts of laws. 9.2. This Agreement shall be subject to the provisions of the 1933 Act, 1940 Act and Securities Exchange Act of 1934, as amended, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant, and the terms hereof shall be limited, interpreted and construed in accordance therewith. -15- ARTICLE X. Termination ----------- 10.1 This Agreement shall not terminate until the Trust is dissolved, liquidated, or merged into another entity, or, as to any Series of the Trust, an Account no longer invests in that Series. However, certain obligations of, or restrictions on, the parties to this Agreement may terminate as provided in Sections 10.2 and 10.3. 10.2 The obligation of the Trust to sell shares to the Company pursuant to Article II of this Agreement shall terminate at the option of the Trust: (a) upon six months' notice to the Company; (b) upon 30 days' notice to the Company: (1) upon institution of formal proceedings against the Company by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the operation of the Account, the administration of the Contracts or the purchase of Trust shares, or an expected or anticipated ruling, judgment or outcome which would, in the Trust's reasonable judgment, materially impair the Company's ability to meet and perform the Company's obligations and duties hereunder; (2) in the event any of the Contracts are not registered, issued or sold in accordance with applicable Federal and/or state law; (3) if the Contracts cease to qualify as annuity contracts under the Code, or if the Trust reasonably believes that the Contracts may fail to so qualify; (4) if the Trust shall determine, in its sole judgment exercised in good faith, that either (1) the Company shall have suffered a material adverse change in its business or financial condition or (2) the Company shall have been the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of the Trust; (5) upon the Company's assignment of this Agreement (including, without limitation, any transfer of the Contracts or the Account to another insurance company pursuant to an assumption reinsurance agreement) unless the Trust consents thereto; or -16- (6) upon termination pursuant to Section 10.1 or notice from the Company pursuant to Section 10.3. In exercising its option to terminate its obligation to sell Shares to the Company, the Trust shall continue to make its shares available to the extent required by applicable law and may elect to continue to make Trust shares available to the extent necessary to permit owners of Contracts in effect on the effective date of such termination (hereinafter referred to as "Existing Contracts") to reallocate investments in the Trust, redeem investments in the Trust and/or invest in the Trust upon the making of additional purchase payments under the Existing Contracts. The Trust shall promptly notify the Company whether the Trust is electing to make Trust shares so available after termination. 10.3. The restrictions on the Company under Section 2.7 of this Agreement shall terminate at the option of the Company: (a) upon six months' notice to the Trust; (b) upon 30 days' notice to the Trust: (1) if shares of any Series are not reasonably available to meet the requirements of the Contracts as determined by the Company, and the Trust, after receiving written notice from the Company of such non-availability, fails to make available a sufficient number of Trust shares to meet the requirements of the Contracts within 5 days after receipt thereof; (2) upon institution of formal proceedings against the Trust by the NASD, the SEC or any state securities or insurance commission or any other regulatory body; (3) if the Trust ceases to qualify as a Regulated Investment Company under Subchapter M of the Code, or under any successor or similar provision, or if the Company reasonably believes based on an opinion of counsel satisfactory to the Trust that the Trust may fail to so qualify, and the Trust, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure; (4) if the Trust fails to meet the diversification requirements specified in Section 817(h) of the Code and any regulations thereunder and the Trust, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure; or -17- (5) if the Trust informs the Company pursuant to Section 4.6 that the Trust will not comply with investment restrictions as requested by the Company and the Trust and the Company are unable to agree upon any reasonable alternative accommodations. 10.4. This Article X shall not apply to any termination made pursuant to Article VII or any conditions or undertakings incorporated by reference in Article VII, and the effect of such Article VII termination shall be governed by the provisions set forth or incorporated by reference therein. ARTICLE XI. Applicability to New Accounts and New Contracts The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect, as appropriate, changes in or relating to the Contracts or Series, or additions of new classes of Contracts to be issued by the Company through separate accounts investing in the Trust. The provisions of this Agreement shall be equally applicable to each such class of Contracts, Series and Accounts, effective as of the date of amendment of such Schedule, unless the context otherwise requires. ARTICLE XII. 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 Trust Board 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. ARTICLE XIII. Notices Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Trust: Name: Merrillyn J. Kosier Title: Vice President Wanger Advisors Trust 227 West Monroe Street, Suite 3000 Chicago, Illinois 60606 -18- If to the Company: Name: Gregory Clarke Title: Vice President SAFECO Life Insurance Company P. O. Box 34690 Seattle, Washington 98124-1690 ARTICLE XIV. Miscellaneous 14.1. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 14.2. This Agreement may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 14.3. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized officer on the date specified below. SAFECO LIFE INSURANCE COMPANY (Company) Date: September 30, 1995 By: /s/ Gregory Clarke Name: Gregory Clarke Title: Vice President WANGER ADVISORS TRUST (Trust) Date: September 27, 1995 By: /s/ Ralph Wanger Name: Ralph Wanger Title: President -19- Schedule 1 Accounts of the Company Investing in the Trust Effective as of the date the Agreement was executed, the following separate accounts are subject to the Agreement:
=============================================================================== Name of Account and Date SEC 1940 Act Type of Subaccounts Established by Registration Product Board of Number Supported by Directors of Account the Company =============================================================================== SAFECO Life Insurance Company Separate Account C 9/14/93 811-8052 Variable Annuity - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
Effective as of _____________, the following separate accounts are hereby added to this Schedule 1 and made subject to the Agreement:
================================================================================ Name of Account and Date SEC 1940 Act Type of Subaccounts Established by Registration Product Board of Number Supported by Directors of Account the Company ================================================================================ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ================================================================================
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 1 in accordance with Article XI of the Agreement. /s/ Ralph Wanger /s/ Gregory Clarke Wanger Advisors Trust SAFECO Life Insurance Company -20- Schedule 2 Classes of Contracts Supported by Separate Accounts Listed on Schedule 1 Effective as of the date the Agreement was executed, the following classes of Contracts are subject to the Agreement:
=============================================================================== Contract Marketing Name SEC 1933 Act Registration Name of Supporting Number Account =============================================================================== SAFECO Life Insurance Company Separate MainSail 33-60331 Account C - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ ==============================================================================
Effective as of _______, the following classes of Contracts are hereby added to this Schedule 2 and made subject to the Agreement:
============================================================================== Contract Marketing Name SEC 1933 Act Registration Name of Supporting Number Account ============================================================================== - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ ==============================================================================
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 2 in accordance with Article XI of the Agreement. /s/ Ralph Wanger /s/ Gregory Clarke Wanger Advisors Trust SAFECO Life Insurance Company -21- Schedule 3 Trust Series Available Under Each Class of Contracts Effective as of the date the Agreement was executed, the following Trust Series are available under the Contracts:
================================================================ Contract Marketing Name Trust Series ================================================================ MainSail Wanger U.S. Small Cap Advisor ---------------------------------------------------------------- ---------------------------------------------------------------- ================================================================
Effective as of __________________, this Schedule 3 is hereby amended to reflect the following changes in Trust Series:
================================================================ Contract Marketing Name Trust Series ================================================================ ---------------------------------------------------------------- ---------------------------------------------------------------- ================================================================
IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 3 in accordance with Article XI of the Agreement. /s/ Ralph Wanger /s/ Gregory Clarke Wanger Advisors Trust SAFECO Life Insurance Company -22- Schedule 4 Investment Restrictions Applicable to the Trust Effective as of the date the Agreement was executed, the following investment restrictions are applicable to the Trust: None. Effective as of ___________________, 199____, this Schedule 4 is hereby amended to reflect the following changes: IN WITNESS WHEREOF, the Trust and the Company hereby amend this Schedule 4 in accordance with Article XI of the Agreement. /s/ Ralph Wanger /s/ Gregory Clarke Wanger Advisors Trust SAFECO Life Insurance Company -23- AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT THIS AMENDMENT NO. 1 TO THE PARTICIPATION AGREEMENT ("Amendment No. 1"), made and entered into this 18th day of December, 1996, supplementing and amending the Participation Agreement made and entered into the 27th day of September, 1995 (the "Original Participation Agreement," and together with this First Supplemental Amendment to Participation Agreement, the "Agreement") by and between WANGER ADVISORS TRUST, an unincorporated business trust formed under the laws of Massachusetts (the "Trust"), and SAFECO LIFE INSURANCE COMPANY, a Washington life insurance company (the "Company"), on its own behalf of each separate account of the Company identified in the Agreement. WHEREAS, the Trust currently serves as an investment vehicle for certain accounts of the Company pursuant to the Original Participation Agreement; and WHEREAS, the Trust has applied for an order from the Securities and Exchange Commission (the "SEC") (File No. 812-10198), granting Participating Insurance Companies (as defined in the Original Participation Agreement) and variable annuity and variable life separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act (as defined in the Original Participation Agreement) and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Trust and each Series thereof to be sold to and held by variable annuity and variable life insurance separate accounts of life insurance companies that may or may not be affiliated with one another and qualified pension and retirement plans outside of the separate account context (the "Exemptive Order"); and WHEREAS, the Company and the Trust have agreed to hereby supplement and amend the Original Participation Agreement in order to reflect the conditions and undertakings that are expected to be imposed on the Company and the Trust by virtue of such Exemptive Order; NOW, THEREFORE, in consideration of their mutual promises, the Trust and the Company agree as follows: SECTION 1. Definitions For all purposes of this Amendment No. 1, except as otherwise expressly provided or unless the context otherwise requires: (1) All references in this Amendment No. 1 and the Original Participation Agreement to designated "Articles" and other subdivisions are to the designated Articles and other subdivisions of the Original Participation Agreement. The words "herein," "hereof," "hereto," "hereby" and "hereunder" and other words of similar import refer to this Amendment No. 1 as a whole and not to any particular "Section" or other subdivision. (2) All terms used herein and not otherwise defined shall have the same meanings as those given to such terms in the Original Participation Agreement, and include the plural as well as the singular, and the Original Participation Agreement is hereby amended to include any terms defined herein. (3) Any references to the "Agreement" in the Original Participation Agreement are hereby amended to include, collectively, the Original Participation Agreement and this Amendment No. 1. SECTION 2. Amendment to Article VII Article VII of the Original Participation Agreement is hereby amended to read as follows: "ARTICLE VII. Potential Conflicts and Compliance With Exemptive Order 7.1 The Trust Board will monitor the Trust for the existence of any material irreconcilable conflict between the interests of the Contract Owners of all Participating Accounts and of Qualified Participants investing in the Trust and each Series thereof. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Series are managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; (f) a decision by a Participating Insurance Company to disregard the voting instructions of contract owners; or (g) if applicable, a decision by a Qualified Entity to disregard the voting instructions of Qualified Participants. The Trust Board shall promptly inform the Company in writing if it determines that a material irreconcilable conflict exists and the implications thereof. 7.2 The Company shall report any potential or existing conflicts to the Trust Board. The Company will be responsible for assisting the Trust Board in carrying out its responsibilities by providing the Trust Board with all information reasonably necessary for the Trust Board to consider any issues raised. This responsibility includes, but is not limited to, an obligation by the Company to inform the Trust Board whenever it has determined to disregard Contract Owner voting instructions. Such responsibilities shall be carried out by the Participants with a view only to the interests of Contract Owners. 7.3 If it is determined by a majority of the Trust Board, or a majority of the members of the Trust Board who are not interested persons of the Trust, the Investment Adviser or any sub-adviser to any of the Series (the "Independent Trustees"), that a material irreconcilable conflict exists, the Company shall, at its 2 expense and to the extent reasonably practicable (as determined by a majority of the Independent Trustees), take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict including: (a) withdrawing the assets allocable to some or all of the separate accounts from the Trust or any Series and reinvesting such assets in a different investment medium, which may include another Series of the Trust, or submitting the question of whether such segregation should be implemented to a vote of all affected Contract Owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract Owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard Contract Owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Trust's election, to withdraw the Account's investment in the Trust and terminate this Agreement and no charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal and termination must take place within six (6) months after the Trust gives written notice that this provision is being implemented, and until the end of that six month period the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the Account's investment in the Trust and terminate this Agreement within six months after the Trust Board informs the Company in writing that it has determined that such decision has created a material irreconcilable conflict. Until the end of the foregoing six month period, the Investment Adviser and the Trust shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Trust. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the Independent Trustees shall determine whether any proposed action adequately remedies any material irreconcilable conflict, but in no event will the Trust or the Investment Adviser be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract Owners materially adversely affected by the material irreconcilable conflict. In the event that the Trust Board determines that any proposed action does not adequately remedy any material irreconcilable conflict, then the Company will withdraw the Account's investment in the Trust 3 and terminate this Agreement within six (6) months after the Trust Board informs the Company in writing of the foregoing determination. 7.7 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Exemptive Order) on terms and conditions materially different from those contained in the Exemptive Order, then (a) the Trust and/or the Company, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Article V and Sections 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 7.8 The Company shall at least annually submit to the Trust Board such reports, materials or data as the Trust Board may reasonably request so that the Trust Board may fully carry out its obligations under the Exemptive Order; provided, however, that the Board may require the submission of such reports on data on a more frequent basis if it so deems appropriate. 7.9 The Company, or any affiliate, will maintain at its home office, available to the SEC, (a) a list of its officers, directors and employees who participate directly in the management of administration of any Account and/or (b) a list of its agents who, as registered representatives, offer and sell contracts." SECTION 3. Schedules --------- Schedules 1, 2 and 3 to the Original Participation Agreement are hereby amended to read as Schedules 1, 2 and 3 to this Amendment No. 1, respectively. SECTION 4. Miscellaneous ------------- 4.1 The captions in this Amendment No. 1 are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 This Amendment No. 1 may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 4.3 If any provision of this Amendment No. 1 shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 4 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 1 to be executed in its name and behalf by its duly authorized office on the date specified below. SAFECO LIFE INSURANCE COMPANY (Company) Date: January 27, 1997 By: /s/ Gregory Clarke Name: Gregory Clarke Title: Vice President WANGER ADVISORS TRUST (Trust) Date: January 17, 1997 By: /s/ Charles P. McQuaid Name: Charles P. McQuaid Title: Senior Vice President 5 EX-99.11 7 CONSENT OF INDEPENDENT AUDITORS Exhibit 11 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Financial Highlights" and to the incorporation by reference of our report dated January 31, 1997 in the Registration Statement (Form N-1A) of Wanger Advisors Trust, filed with the Securities and Exchange Commission in this Post-Effective Amendment No. 3 to the Registration Statement under the Securities Act of 1933 (File No. 33-83548) and in this Amendment No. 4 to the Registration Statement under the Investment Company Act of 1940 (File No. 811-8748). /s/ ERNST & YOUNG LLP Chicago, Illinois April 18, 1997 EX-27.1 8 FDS - WANGER U.S. SMALL CAP
6 1 WANGER US SMALL CAP 1000 YEAR DEC-31-1996 DEC-31-1996 106613 126075 4292 72 0 130439 1374 0 107 1481 0 105966 7598 1888 0 0 3530 0 19462 128958 339 217 0 843 (287) 3927 19022 22662 0 0 67 0 6137 433 6 107054 (103) 60 0 0 704 0 861 71075 11.60 (.06) 5.46 0 .03 0 16.97 1.21 0 0
EX-27.2 9 FDS - WANGER INTERNATIONAL SMALL CAP
6 2 WANGER INTERNATIONAL SMALL CAP 1000 YEAR DEC-31-1996 DEC-31-1996 76356 84360 839 427 0 85626 651 0 120 771 0 74585 4791 845 (96) 0 2549 0 7816 84855 475 107 0 854 (272) 2571 6894 9193 0 7 52 0 4154 212 4 73486 (27) 53 0 0 632 0 875 48677 13.45 (.09) 4.38 0 .03 0 17.71 1.79 0 0
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