N-CSR 1 file001.txt WANGER ADVISORS TRUST UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-8748 Wanger Advisors Trust ------------------------------------------------------ (Exact name of registrant as specified in charter) One Financial Center, Boston, Massachusetts 02111 ------------------------------------------------------ (Address of principal executive offices) (Zip code) Vincent Pietropaolo, Esq. Columbia Management Group, Inc. One Financial Center Boston, MA 02111 -------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 1-617-772-3698 Date of fiscal year end: 12/31/04 ------------ Date of reporting period: 12/31/04 ------------ Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. ITEM 1. REPORTS TO STOCKHOLDERS. WANGER U.S. SMALLER COMPANIES 2004 Annual Report [LOGO] Wanger Advisors Funds -------------------------------------------------------------------------------- managed by Columbia Wanger Asset Management, L.P. [LOGO] Wanger Advisors Funds 2004 Annual Report TABLE OF CONTENTS 1 Understanding Your Expenses 2 The Miracle Year 4 Performance Review 6 Statement of Investments 13 Statement of Assets and Liabilities 13 Statement of Operations 14 Statements of Changes in Net Assets 15 Financial Highlights 16 Notes to Financial Statements 20 Report of Independent Registered Public Accounting Firm 21 Board of Trustees and Management of Wanger Advisors Trust COLUMBIA WANGER ASSET MANAGEMENT, L.P. ("COLUMBIA WAM") IS ONE OF THE LEADING GLOBAL SMALL-CAP EQUITY MANAGERS IN THE U.S. WITH MORE THAN 30 YEARS OF SMALL-CAP INVESTMENT EXPERIENCE. COLUMBIA WAM MANAGES MORE THAN $22 BILLION IN EQUITIES AND IS THE INVESTMENT ADVISER TO WANGER U.S. SMALLER COMPANIES, WANGER INTERNATIONAL SMALL CAP, WANGER SELECT, WANGER INTERNATIONAL SELECT AND THE COLUMBIA ACORN FAMILY OF FUNDS. FOR MORE COMPLETE INFORMATION ABOUT OUR FUNDS, INCLUDING THE COLUMBIA ACORN FUNDS, OUR FEES, RISKS ASSOCIATED WITH INVESTING, OR EXPENSES, CALL 1-888-4-WANGER FOR A PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. THIS REPORT IS NOT AN OFFER OF THE SHARES OF THE COLUMBIA ACORN FUND FAMILY. THE DISCUSSION IN THE REPORT OF PORTFOLIO COMPANIES IS FOR ILLUSTRATION ONLY AND IS NOT A RECOMMENDATION OF INDIVIDUAL STOCKS. THE INFORMATION IS BELIEVED TO BE ACCURATE, BUT THE INFORMATION AND THE VIEWS OF THE PORTFOLIO MANAGERS MAY CHANGE AT ANY TIME WITHOUT NOTICE AND THE PORTFOLIO MANAGERS MAY ALTER A FUND'S PORTFOLIO HOLDINGS BASED ON THESE VIEWS AND THE FUND'S CIRCUMSTANCES AT THAT TIME. Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- UNDERSTANDING YOUR EXPENSES As a fund shareholder, you incur two types of costs. There are transaction costs, which generally include sales charges on purchases and may include redemption or exchange fees. There are also continuing costs, which generally include investment advisory, Rule 12b-1 fees, and other fund expenses. The information on this page is intended to help you understand your ongoing costs of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. ANALYZING YOUR FUND'S EXPENSES To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors in the fund during the reporting period. The information in the following table is based on an initial investment of $1,000.00, which is invested at the beginning of the reporting period and held for the entire period. Expense information is calculated two ways and each method provides you with different information. The amount listed in the "actual" column is calculated using actual operating expenses and total return for the fund. The amount listed in the "hypothetical" column assumes that the return each year is 5% before expenses and then applies each Fund's actual expense ratio for the period to the hypothetical return. You should not use the hypothetical account values and expenses to estimate either your actual account balance at the end of the period or the expenses you paid during the reporting period. See the "Compare with other funds" information for details on using the hypothetical data. ESTIMATING YOUR ACTUAL EXPENSES To estimate the expenses that you paid over the period, first you will need your account balance at the end of the period. 1. Divide your ending account balance by $1,000.00. For example, if an account balance was $8,600.00 at the end of the period, the result would be 8.6. 2. In the section of the table below titled "Expenses paid during the period," locate the amount for your fund. You will find this number is in the column labeled "actual." Multiply this number by the result from step 1. Your answer is an estimate of the expenses you paid on your account during the period. July 1, 2004 - December 31, 2004
--------------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT THE ACCOUNT VALUE AT THE EXPENSES PAID DURING FUND'S ANNUALIZED BEGINNING OF THE PERIOD($) END OF THE PERIOD ($) THE PERIOD ($) EXPENSE RATIO (%)* --------------------------------------------------------------------------------------------------------------------------- ACTUAL HYPOTHETICAL ACTUAL HYPOTHETICAL ACTUAL HYPOTHETICAL --------------------------------------------------------------------------------------------------------------------------- Wanger U.S. Smaller Companies 1,000.00 1,000.00 1,112.81 1,020.16 5.26 5.03 0.99 ---------------------------------------------------------------------------------------------------------------------------
EXPENSES PAID DURING THE PERIOD ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, THEN MULTIPLIED BY THE NUMBER OF DAYS IN THE FUND'S MOST RECENT FISCAL HALF-YEAR AND DIVIDED BY 366. IT IS IMPORTANT TO NOTE THAT THE EXPENSE AMOUNTS SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONLY ONGOING COSTS OF INVESTING IN THE FUND. AS A SHAREHOLDER OF THE FUND, YOU DO NOT INCUR ANY TRANSACTION COSTS, SUCH AS SALES CHARGES, REDEMPTION OR EXCHANGE FEES. EXPENSES PAID DURING THE PERIOD DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. THE HYPOTHETICAL EXAMPLE PROVIDED IS USEFUL IN COMPARING ONGOING COSTS ONLY AND WILL NOT HELP YOU DETERMINE THE RELATIVE TOTAL COSTS OF OWNING DIFFERENT FUNDS WHOSE SHAREHOLDERS MAY INCUR TRANSACTION COSTS. * FOR THE SIX MONTHS ENDED 12/31/04. COMPARE WITH OTHER FUNDS Since all mutual fund companies are required to include the same hypothetical calculations about expenses in shareholder reports, you can use this information to compare the ongoing cost of investing in the fund with other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples of other funds. As you compare hypothetical examples of other funds, it is important to note that hypothetical examples are meant to highlight the continuing cost of investing in a fund and do not reflect any transactional costs, such as sales charges or redemption or exchange fees, that may be incurred by shareholders of other funds. Expenses paid during the period do not include any insurance charges imposed by your insurance company's separate accounts. 1 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] THE MIRACLE YEAR Photo of RALPH WANGER RALPH WANGER FOUNDER, ADVISOR AND TRUSTEE COLUMBIA WANGER ASSET MANAGEMENT, L.P. 1905 was a year of surprises. The first surprise was the victory of the Japanese over the Russians in the Russo-Japanese War. In May 1905, the untested Japanese Navy annihilated the Russian fleet at Tsushima. This was the first time a non-white country had beaten the main force of a European colonial power. The second unexpected event was in physics. 2005 will be celebrated as the centennial of Albert Einstein's "Miracle Year." The journal, ANNALEN DER PHYSIK, volume 17, published three articles in September 1905 all written by Einstein, an obscure clerk in the Swiss patent office in Bern. He had an undergraduate degree in physics but no Ph.D (it was granted a year later). Each of the articles were on a different subject and each one revolutionized its branch of physics. Einstein's papers created 20th century physics almost single-handedly. ATOMS In 1905 there were different theories about the structure of matter. If you take a glass of water and pour nine-tenths of it out, you still have a glass with water in it. What happens if you repeat this process of throwing out 90% of the water in the glass? After you repeat the process a few more times, you have such a small amount of water that you can only see it under a microscope, and in a few more steps the water drop will be too small to be seen even under the microscope. Can you continue the boring job of splitting water forever or do you finally get to a point where it isn't water anymore? Of course we know the answer: Once you get down to a single molecule of water you can't split it and still say that you have water left. Many leading scientists did not accept the atomic theory in 1905. Einstein looked at the process called Brownian Motion in which a grain of pollen or other small object moves around in a random way. (The same mathematical process makes stock prices jiggle.) He deduced that this motion was caused by billions of atoms bumping into the pollen grain in an irregular pattern. He was even able to calculate the size of the atoms involved, thus proving that atoms really existed. PHOTONS In 1905 there was still a basic debate about the nature of light. The greatest achievement of 19th century physics was Maxwell's set of partial differential equations governing electromagnetic fields, including light. Maxwell's equations required that light be a wave. The great Max Planck had introduced the idea of a quantum of energy in 1900 to get an equation that tracked the spectrum of heat radiation, but most scientists doubted that a light quantum was "real." Heinrich Hertz, Philip Lenard and others showed that when a beam of ultraviolet light shines on a piece of metal you produce an electrical current in the metal. There was no way to explain the photoelectric effect according to the Maxwell wave theory of light. The second paper Einstein wrote dealt with the problem of the photoelectric effect. If you cut the amount of energy in a beam of light by 90% and keep reducing it, you still have a beam of light. If you keep slicing the amount of light, does the beam of light keep getting smaller and smaller forever or do you get down to an "atom" of light that can't be split further? Einstein proved that there was a tiny amount of light that could not be further divided. The least amount of light that exists is a single photon (or quantum) of light. 1 The photoelectric effect is explained by photons acting as particles, not as a wave. Einstein's discovery of the photon had a number of interesting effects. First, it led to the development of quantum mechanics and thus to most of 20th century physics. Second, it won Einstein his only Nobel Prize. Third, it uncovered a paradox that still puzzles students, the duality of light. If you run an experiment to show that light is a wave, you can prove it's a wave. If you run an experiment to show that it's a particle, you can prove it's a particle. This duality principle contradicts common sense but when you study science you have to get used to it. The fourth effect was that it made Lenard a life-long enemy of Einstein. Philip Lenard, who received the Nobel Prize in 1905 for his own work on cathode rays, was close to the solution but Einstein ended up getting the credit. Lenard became an unrelenting foe of Einstein, and influenced the Nobel committee's decision not to give Einstein the prize for his theory of relativity. Later on, Lenard became an ardent Nazi. RELATIVITY In 1905, there was also a debate in scientific circles about speed. If you were in a really powerful rocket ship in space, and you pushed the throttle forward, you would speed up. If you kept on increasing the power, would you go ever faster, or was there an absolute speed limit in the universe that you could not exceed? 2 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- The third paper became the best known, Einstein's special theory of relativity. It explained that there was a cosmic speed limit, the speed of light. Very odd things happen when your rocket ship is moving close to the speed of light. Time slows down and you get shorter, under the Lorentz contraction equation, giving rise to the limerick: A sexy young techie named Fisk, Had a motion exceedingly brisk. So fast was his action The Lorentz contraction Shortened his rod to a disk. In a very brief paper published later in 1905, Einstein added in a note that his theory of relativity implied the equation E=mc 2. That solved the paradox of radioactivity; Mme Curie's radium was producing much more energy then could be explained by 19th century physics. Einstein showed that radioactive energy was caused by turning a small amount of mass into a lot of energy. So we had this technical journal containing three papers written by a man unknown in science, a non-Ph.D, a non-academic, writing on a German-dominated field with all the fussiness about rank and reputation that you would expect. Would anyone care? Einstein did not receive any communication from any physicists for the first couple months after he published, but in early 1906 Max Planck read and understood the papers. He wrote to Einstein and sent his assistant, another important physicist, Max von Laue, to visit Einstein in Bern. Planck's subsequent endorsement made Einstein acceptable to the community of physicists, and his papers became required study for all physicists, as they remain. The compelling human question: How the heck did Einstein do it? How could one human being produce three revolutionary papers in one year, on three different subjects, while carrying a full-time job at the patent office to boot? We can admire but not explain. The "Miracle Year" commemorates one of the greatest feats of the human mind ever. 1 PLANCK AND EINSTEIN HAD DISCOVERED THE QUANTUM JUMP, WHICH WAS THE SMALLEST THING THAT COULD POSSIBLY EXIST IN THE UNIVERSE. MODERN WRITERS, FOR REASONS DIFFICULT TO EXPLAIN, NOW USE THE PHRASE QUANTUM JUMP TO MEAN A BIG EVENT. WHEN NON-SCIENTISTS START THROWING AROUND SCIENTIFIC TERMS WITHOUT UNDERSTANDING THEM, FUNNY THINGS HAPPEN. DON'T GET ME STARTED ON THE HEISENBERG UNCERTAINTY PRINCIPLE. INCIDENTALLY, ALBERT EINSTEIN'S FATHER, HERMANN, WAS BORN IN THE WURTTEMBERG VILLAGE OF BUCHAU, WHERE HIS FAMILY HAD LIVED FOR GENERATIONS. HERMANN MOVED 20 MILES FROM BUCHAU TO THE CITY OF ULM, WHERE ALBERT WAS BORN. MY GREAT-GREAT GRANDFATHER, JOSEPH KOHN, WAS ALSO FROM BUCHAU AND HE HAD MANY EINSTEINS IN HIS FAMILY TREE. I AM VERY PROUD OF THE EINSTEIN CONNECTION. SOURCES: "EINSTEIN: A CELEBRATION," SEMINAR AT THE ASPEN INSTITUTE, AUGUST 8-11, 2004. EINSTEIN, ALBERT, "IDEAS AND OPINIONS," CROWN PUBLISHERS, 1954. KAKU, MICHIO, "EINSTEIN COSMOS: HOW ALBERT EINSTEIN'S VISION TRANSFORMED OUR UNDERSTANDING OF SPACE AND TIME," ATLAS BOOKS, 2004. "DISCOVER" MAGAZINE, "SPECIAL EINSTEIN ISSUE," SEPTEMBER 2004. A SPECIAL THANKS TO DOUG STONE OF YALE UNIVERSITY FOR EDITING THIS ESSAY. 3 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] PERFORMANCE REVIEW WANGER U.S. SMALLER COMPANIES Photo of ROBERT A. MOHN ROBERT A. MOHN PORTFOLIO MANAGER Wanger U.S. Smaller Companies ended the year up 18.33%. Fund performance matched the benchmark Russell 2000, also up 18.33%. There was a great deal of pessimism about the market and the political environment going into the final quarter of 2004. Because of this, many institutional investors were reported to be building up cash positions. After the elections, the money came back into the markets, fueling a fierce fourth quarter rally. Some of our biggest winners were health care stocks, which benefited from the year-end market surge. Lincare Holdings, a provider of home health care services, increased 42% in the year on news of a higher than expected government dispensing fee for respiratory medication. Edwards Lifesciences's heart valves were big sellers, pumping the stock up 37% for the year. Technology stocks also did well. Micros Systems, a developer of reservation systems used in hotels and restaurants, gained 80% for the year. On the telecom side, Western Wireless gained 59% in 2004 (and even more so far in 2005 on news that Alltel will be buying the company). While slightly cooler in the fourth quarter, energy stocks were strong 2004 performers. Quicksilver, a natural gas producer, was up an impressive 128% for the year. Chicago Bridge & Iron, a leading designer and manufacturer of tanks used to convert liquified natural gas into pipeline gas, was added to the Fund in '04 and immediately went to work. For the year the stock was up 65%. The laggards for the year included southeast supermarket chain Winn Dixie Stores, down 58%. The Fund no longer holds the stock. Novell, a developer of open source software, failed to meet earnings targets and declined 36% for the year. NDCHealth Group fell 27% as ancillary businesses, outside its core health care claims processing business, collapsed. Generally speaking, we think companies are operating in a healthy economy that should provide growth going forward. We will continue to search for what we believe are winning small-cap stocks selling at good prices. SMALL-CAP STOCKS ARE OFTEN MORE VOLATILE AND LESS LIQUID THAN THE STOCKS OF LARGER COMPANIES. SMALL COMPANIES MAY HAVE A SHORTER HISTORY OF OPERATIONS THAN LARGER COMPANIES AND MAY HAVE A LESS DIVERSIFIED PRODUCT LINE, MAKING THEM MORE SUSCEPTIBLE TO MARKET PRESSURE. AS OF 12/31/04, THE FUND'S POSITIONS IN THE HOLDINGS MENTIONED WERE: LINCARE HOLDINGS, 3.2%; EDWARDS LIFESCIENCES, 1.5%; MICROS SYSTEMS, 2.2%; WESTERN WIRELESS, 2.2%; QUICKSILVER, 0.5%; CHICAGO BRIDGE & IRON, 1.9%; WINN DIXIE STORES, 0.0%; NOVELL, 0.9%; NDCHEALTH GROUP, 0.8%. 4 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- VALUE OF A $10,000 INVESTMENT IN WANGER U.S. SMALLER COMPANIES TOTAL RETURN FOR EACH PERIOD, MAY 3, 1995 (INCEPTION DATE) THROUGH DECEMBER 31, 2004 [LINE GRAPH APPEARS HERE] WANGER U.S SMALLER COMPANIES RUSSELL 2000: 5/3/1995 10000 10000 5/31/1995 9870 10179 6/30/1995 10770 10707 7/31/1995 11560 11324 8/31/1995 11940 11559 9/30/1995 12060 11765 10/31/1995 11380 11239 11/30/1995 11640 11711 12/31/1995 11600 12020 1/31/1996 11950 12007 2/29/1996 12580 12381 3/31/1996 13297 12633 4/30/1996 14690 13309 5/31/1996 15471 13833 6/30/1996 15351 13265 7/31/1996 14529 12107 8/31/1996 15090 12810 9/30/1996 15792 13310 10/31/1996 15902 13105 11/30/1996 16423 13645 12/31/1996 17004 14003 1/31/1997 17475 14282 2/28/1997 16994 13936 3/31/1997 16366 13279 4/30/1997 16355 13316 5/31/1997 17986 14797 6/30/1997 19093 15431 7/31/1997 20201 16149 8/31/1997 20703 16519 9/30/1997 22395 17728 10/31/1997 21995 16949 11/30/1997 21892 16839 12/31/1997 22005 17134 1/31/1998 21554 16864 2/28/1998 23379 18111 3/31/1998 24865 18858 4/30/1998 25803 18962 5/31/1998 24887 17941 6/30/1998 25361 17978 7/31/1998 23959 16523 8/31/1998 20358 13315 9/30/1998 20875 14356 10/31/1998 21598 14942 11/30/1998 22601 15725 12/31/1998 23916 16698 1/31/1999 23453 16920 2/28/1999 22223 15549 3/31/1999 22388 15792 4/30/1999 24321 17207 5/31/1999 25005 17459 6/30/1999 26375 18248 7/31/1999 27216 17747 8/31/1999 25677 17090 9/30/1999 25389 17094 10/31/1999 26940 17163 11/30/1999 28202 18188 12/31/1999 29909 20247 1/31/2000 28911 19922 2/29/2000 30029 23212 3/31/2000 29077 21682 4/30/2000 26164 20377 5/31/2000 24858 19189 6/30/2000 25545 20862 7/31/2000 25174 20191 8/31/2000 26672 21731 9/30/2000 26741 21093 10/31/2000 26768 20151 11/30/2000 25147 18083 12/31/2000 27469 19636 1/31/2001 27936 20658 2/28/2001 27469 19302 3/31/2001 26306 18358 4/30/2001 29276 19794 5/31/2001 30473 20281 6/30/2001 31669 20981 7/31/2001 31710 19845 8/31/2001 30308 19204 9/30/2001 26567 16619 10/31/2001 27214 17592 11/30/2001 28988 18954 12/31/2001 30597 20124 1/31/2002 30528 19914 2/28/2002 29634 19369 3/31/2002 32219 20925 4/30/2002 32247 21116 5/31/2002 30652 20179 6/30/2002 28754 19178 7/31/2002 25027 16281 8/31/2002 24959 16240 9/30/2002 23226 15073 10/31/2002 24546 15557 11/30/2002 26499 16945 12/31/2002 25454 16002 1/31/2003 24959 15559 2/28/2003 24601 15089 3/31/2003 24670 15283 4/30/2003 26815 16732 5/31/2003 29125 18528 6/30/2003 29717 18863 7/31/2003 31463 20043 8/31/2003 33168 20962 9/30/2003 32549 20575 10/31/2003 35643 22303 11/30/2003 36193 23094 12/31/2003 36455 23563 1/31/2004 38105 24587 2/29/2004 37789 24807 3/31/2004 37417 25038 4/30/2004 36592 23762 5/31/2004 37857 24140 6/30/2004 38765 25157 7/31/2004 36578 23463 8/31/2004 36358 23342 9/30/2004 37665 24438 10/31/2004 38999 24919 11/30/2004 41763 27080 12/31/2004 43138 27882 AVERAGE ANNUAL RETURN -------------------------------- 1 year 5 years Life of fund 18.33% 7.60% 16.33% This graph compares the results of $10,000 invested in Wanger U.S. Smaller Companies on May 3,1995 (the date the Fund began operations) through December 31, 2004 with the Russell 2000. Dividends and capital gains are reinvested. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONS. Wanger U.S. Smaller Companies is a diversified fund that invests primarily in the stocks of small- and medium-size U.S. companies. Smaller company stocks are often more volatile or less liquid than the stocks of larger companies. PERFORMANCE SHOWN HERE IS PAST PERFORMANCE, WHICH CANNOT GUARANTEE FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER. 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. PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. FOR MONTHLY PERFORMANCE UPDATES, PLEASE CONTACT US AT 1-888-4-WANGER. PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER. -------------------------------------------------------------------------------- RESULTS AS OF DECEMBER 31, 2004 4TH QUARTER 1 YEAR WANGER U.S. SMALLER COMPANIES 14.53% 18.33% Russell 2000 14.09 18.33 S&P MidCap 400 12.16 16.48 S&P 500 9.23 10.88 NAV AS OF 12/31/04: $31.37 PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER. The Russell 2000 is formed by taking the 3,000 largest U.S. companies and then eliminating the largest 1,000, leaving a mainly small company index. The S&P MidCap 400 is a market value-weighted index of 400 U.S. stocks that are in the next tier down from the S&P 500. The S&P 500 is a broad market-weighted average of blue-chip U.S. companies. All indexes are unmanaged and include reinvested dividends. It is not possible to invest directly in an index. Portfolio holdings will vary in the future. -------------------------------------------------------------------------------- TOP 5 INDUSTRIES As a % of net assets, as of 12/31/04 Information 28.5% Consumer Goods/Services 18.2 Health Care 12.5 Energy/Minerals 12.1 Finance 9.4 -------------------------------------------------------------------------------- TOP 10 HOLDINGS As a % of net assets, as of 12/31/04 1. ITT Educational Services 4.0% TECHNOLOGY ORIENTED POST SECONDARY DEGREE PROGRAMS 2. Lincare Holdings 3.2% HOME HEALTH CARE SERVICES 3. Kronos 2.8% LABOR MANAGEMENT SOLUTIONS 4. AmeriCredit 2.4% AUTO LENDING 5. Micros Systems 2.2% INFORMATION SYSTEMS FOR RESTAURANTS & HOTELS 6. Western Wireless 2.2% RURAL CELLULAR PHONE SERVICES 7. Chicago Bridge & Iron 1.9% ENGINEERING & CONSTRUCTION FOR PETROCHEMICALS & LNG 8. Equitable Resources 1.9% NATURAL GAS UTILITY & PRODUCER 9. Esco Technologies 1.6% AUTOMATIC ELECTRIC METER READERS 10. Commonwealth Telephone 1.6% RURAL PHONE FRANCHISES & CLEC 5 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES COMMON STOCKS-90.7% INFORMATION-28.5% ------------------------------------------------------------------------------ BUSINESS/CONSUMER SOFTWARE - 8.8% 622,825 Kronos (b) $ 31,845,042 LABOR MANAGEMENT SOLUTIONS 322,900 Micros Systems (b) 25,205,574 INFORMATION SYSTEMS FOR RESTAURANTS & HOTELS 1,030,000 JDA Software Group (b) 14,028,600 APPLICATIONS/SOFTWARE & SERVICES FOR RETAILERS 1,510,000 Novell (b) 10,192,500 SECURITY & IDENTITY MANAGEMENT SOFTWARE 710,600 Mapics (b) 7,496,830 MID MARKET ERP SOFTWARE 429,800 MRO Software (b) 5,595,996 ENTERPRISE MAINTENANCE SOFTWARE 628,200 E.Piphany (b) 3,034,206 CRM SOFTWARE 60,000 Maximus (b) 1,867,200 OUTSOURCER FOR GOVERNMENT 820,000 Indus International (b) 1,753,980 ENTERPRISE ASSET MANAGEMENT SOFTWARE 66,800 SPSS (b) 1,044,752 STATISTICAL/BUSINESS ANALYSIS SOFTWARE ------------------------------------------------------------------------------ 102,064,680 ------------------------------------------------------------------------------ MOBILE COMMUNICATIONS - 3.3% 857,000 Western Wireless (b) 25,110,100 RURAL CELLULAR PHONE SERVICES 495,000 Crown Castle International (b) 8,236,800 COMMUNICATION TOWERS 46,000 Telephone & Data Systems 3,539,700 CELLULAR & TELEPHONE SERVICES 40,000 American Tower (b) 736,000 COMMUNICATION TOWERS IN USA & MEXICO ------------------------------------------------------------------------------ 37,622,600 ------------------------------------------------------------------------------ COMPUTER HARDWARE/RELATED SYSTEMS - 3.1% 720,000 Symbol Technologies 12,456,000 MOBILE COMPUTERS & BARCODE SCANNERS 415,800 Seachange International (b) 7,251,552 SYSTEMS FOR VIDEO ON DEMAND & AD INSERTION 960,000 3Com (b) 4,003,200 NETWORKING EQUIPMENT 81,600 Rogers (b) 3,516,960 PCB LAMINATES & HIGH PERFORMANCE FOAMS ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ 120,000 Unova (b) $ 3,034,800 BARCODE & WIRELESS LAN SYSTEMS 195,000 CTS 2,591,550 ELECTRONIC COMPONENTS, SENSORS & EMS 50,000 Avocent (b) 2,026,000 COMPUTER CONTROL SWITCHES 35,000 Applied Films (b) 754,600 THIN-FILM GLASS COATING EQUIPMENT 301,205 SensAble Technologies Series C Pfd. (b)(d) 275,813 1,581,292 SensAble Technologies (b)(d) 31,626 SENSORY DEVICES FOR COMPUTER BASED SCULPTING ------------------------------------------------------------------------------ 35,942,101 ------------------------------------------------------------------------------ BUSINESS INFORMATION/BUSINESS SERVICES/PUBLISHING - 2.1% 153,700 Getty Images (b) 10,582,245 PHOTOGRAPHS FOR PUBLICATIONS & ELECTRONIC MEDIA 345,000 Navigant Consulting (b) 9,177,000 FINANCIAL CONSULTING FIRM 200,000 InfoUSA (b) 2,238,000 BUSINESS DATA FOR SALES LEADS 90,000 Ceridian (b) 1,645,200 HR SERVICES & PAYMENT PROCESSING ------------------------------------------------------------------------------ 23,642,445 ------------------------------------------------------------------------------ TRANSACTION PROCESSORS - 1.9% 273,440 Global Payments 16,007,178 CREDIT CARD PROCESSOR 448,000 Pegasus Systems (b) 5,644,800 TRANSACTION PROCESSOR FOR HOTEL INDUSTRY ------------------------------------------------------------------------------ 21,651,978 ------------------------------------------------------------------------------ TELECOMMICATIONS/WIRELINE COMMUNICATIONS - 1.6% 368,300 Commonwealth Telephone (b) 18,289,778 RURAL PHONE FRANCHISES & CLEC ------------------------------------------------------------------------------ RADIO - 1.6% 355,900 Salem Communications (b) 8,879,705 RADIO STATIONS FOR RELIGIOUS PROGRAMMING 515,000 Spanish Broadcasting (b) 5,438,400 SPANISH LANGUAGE RADIO STATIONS 130,900 Saga Communications (b) 2,205,665 RADIO STATIONS IN SMALL & MID-SIZED CITIES See accompanying notes to financial statements. 6 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ RADIO - 1.6% (CONT) 110,000 Cumulus Media, Cl. A (b) $ 1,658,800 RADIO STATIONS IN SMALL CITIES ------------------------------------------------------------------------------ 18,182,570 ------------------------------------------------------------------------------ TELECOMMUNICATIONS EQUIPMENT - 1.3% 837,800 Aspect Telecommunications (b) 9,333,092 CALL CENTER EQUIPMENT 340,000 Andrew (b) 4,634,200 WIRELESS INFRASTRUCTURE EQUIPMENT 100,000 Symmetricom (b) 971,000 NETWORK TIMING & SYNCHRONIZATION DEVICES ------------------------------------------------------------------------------ 14,938,292 ------------------------------------------------------------------------------ SEMICONDUCTORS/RELATED EQUIPMENT - 1.2% 325,000 Integrated Circuit Systems (b) 6,799,000 SILICON TIMING DEVICES 360,000 Pericom Semiconductor (b) 3,394,800 SEMICONDUCTORS: INTERFACE INTEGRATED CIRCUITS 70,000 Littelfuse (b) 2,391,200 LITTLE FUSES 125,900 IXYS (b) 1,299,288 POWER SEMICONDUCTORS ------------------------------------------------------------------------------ 13,884,288 ------------------------------------------------------------------------------ INSTRUMENTATION - 1.1% 288,000 Tektronix 8,700,480 ANALYTICAL INSTRUMENTS 90,000 Trimble Navigation (b) 2,973,600 GPS-BASED INSTRUMENTS 25,000 Mettler Toledo (b) 1,282,750 LABORATORY EQUIPMENT ------------------------------------------------------------------------------ 12,956,830 ------------------------------------------------------------------------------ INTERNET - 0.8% 355,000 ValueClick (b) 4,732,150 INTERNET ADVERTISING 355,600 DoubleClick (b) 2,766,568 INTERNET ADVERTISING & DIRECT MARKETING STATISTICAL DATA 310,000 Skillsoft Publishing (b) 1,751,500 PROVIDER OF WEB-BASED LEARNING SOLUTIONS (E-LEARNING) ------------------------------------------------------------------------------ 9,250,218 ------------------------------------------------------------------------------ COMPUTER SERVICES - 0.7% 753,000 RCM Technologies (b)(c) 3,788,343 TECHNOLOGY ENGINEERING SERVICES ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ 705,500 AnswerThink Consulting (b) $ 3,287,630 IT INTEGRATOR FOR FORTUNE 2000 256,600 Analysts International (b) 1,026,400 TECHNOLOGY STAFFING SERVICES ------------------------------------------------------------------------------ 8,102,373 ------------------------------------------------------------------------------ TV/SATELLITE BROADCASTING - 0.4% 600,000 Entravision Communications (b) 5,010,000 SPANISH LANGUAGE TV, RADIO & OUTDOOR TELEVISION PROGRAMMING - 0.4% 138,500 Gray Television 2,146,750 MID MARKET AFFILIATED TV STATIONS 310,000 Mediacom Communications (b) 1,937,500 CABLE TELEVISION FRANCHISES ------------------------------------------------------------------------------ 4,084,250 ------------------------------------------------------------------------------ CONTRACT MANUFACTURING - 0.2% 220,000 Plexus (b) 2,862,200 ELECTRONIC MANUFACTURING SERVICES ------------------------------------------------------------------------------ INFORMATION - TOTAL 328,484,603 CONSUMER GOODS/SERVICES - 18.2% ------------------------------------------------------------------------------ RETAIL - 7.2% 280,000 Abercrombie & Fitch 13,146,000 TEEN APPAREL RETAILER 405,750 Aeropostale (b) 11,941,223 MALL BASED TEEN RETAILER 290,000 Petco Animal Supplies (b) 11,449,200 PET SUPPLIES & SERVICES 339,150 Christopher & Banks 6,257,318 WOMEN'S APPAREL RETAILER 198,000 Zale Corp (b) 5,914,260 SPECIALTY RETAILER OF JEWELRY 265,000 Ann Taylor (b) 5,705,450 WOMENS APPAREL RETAILER 115,000 Chico's Fas (b) 5,235,950 WOMEN'S SPECIALTY RETAIL 163,000 Genesco (b) 5,075,820 MULTI-CONCEPT BRANDED FOOTWARE RETAILER 130,000 Sports Authority (b) 3,347,500 SPORTING GOODS STORE See accompanying notes to financial statements. 7 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ RETAIL - 7.2% (CONT) 100,000 Michaels Stores $ 2,997,000 CRAFT & HOBBY SPECIALTY RETAILER 129,900 Brookstone (b) 2,539,545 SPECIALTY CONSUMER PRODUCT RETAILER 145,750 Hot Topic (b) 2,505,443 MUSIC INSPIRED RETAILER OF APPAREL, ACCESSORIES & GIFTS 388,404 Restoration Hardware (b) 2,229,439 HOME FURNISHING RETAILER 48,200 Urban Outfitters (b) 2,140,080 ECLECTIC HOME & APPAREL RETAILER 60,000 West Marine (b) 1,485,000 LARGEST RETAILER OF BOATING SUPPLIES 150,000 Gaiam (b) 922,500 HEALTHLY LIVING CATALOG & E-COMMERCE ------------------------------------------------------------------------------ 82,891,728 ------------------------------------------------------------------------------ CONSUMER SERVICES - 5.7% 972,000 ITT Educational Services (b) 46,218,600 TECHNOLOGY ORIENTED POST SECONDARY DEGREE PROGRAMS 390,000 Coinstar (b) 10,463,700 OWNER/OPERATOR OF COIN COUNTING MACHINES 413,500 Central Parking 6,264,525 OWNER, OPERATER & MANAGER OF PARKING LOTS & GARAGES 80,000 Weight Watchers (b) 3,285,600 WEIGHT LOSS PROGRAM ------------------------------------------------------------------------------ 66,232,425 ------------------------------------------------------------------------------ APPAREL - 2.7% 212,000 Coach (b) 11,956,800 DESIGNER & RETAILER OF BRANDED LEATHER ACCESSORIES 254,200 Oxford Industries 10,498,460 BRANDED & PRIVATE LABEL APPAREL 427,000 Steven Madden (b) 8,053,220 WHOLESALER/RETAILER OF FASHION FOOTWARE ------------------------------------------------------------------------------ 30,508,480 ------------------------------------------------------------------------------ ENTERTAINMENT/LEISURE PRODUCTS - 1.1% 111,300 International Speedway Motors 5,876,640 LARGEST MOTORSPORT RACETRACK OWNER & OPERATOR 390,000 Callaway Golf 5,265,000 PREMIUM GOLF CLUBS & BALLS 45,000 Speedway Motorsports 1,763,100 MOTORSPORT RACETRACK OWNER & OPERATOR ------------------------------------------------------------------------------ 12,904,740 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ FURNITURE & TEXTILES - 1.0% 84,000 American Woodmark $ 3,669,120 KITCHEN CABINET MANUFACTURER 110,000 Herman Miller 3,039,300 OFFICE FURNITURE 33,000 Mohawk Industries (b) 3,011,250 CARPET & FLOORING 40,000 HNI 1,722,000 OFFICE FURNITURE & FIREPLACES ------------------------------------------------------------------------------ 11,441,670 ------------------------------------------------------------------------------ NON-DURABLES - 0.3% 47,000 Scotts Company (b) 3,455,440 CONSUMER LAWN & GARDEN PRODUCTS ------------------------------------------------------------------------------ FOOD - 0.1% 62,000 NBTY (b) 1,488,620 VITAMINS & SUPPLEMENTS ------------------------------------------------------------------------------ CASINOS - 0.1% 105,000 Alliance Gaming (b) 1,450,050 DIVERSIFIED GAMING COMPANY ------------------------------------------------------------------------------ CONSUMER GOODS/SERVICES - TOTAL 210,373,153 HEALTH CARE - 12.5% ------------------------------------------------------------------------------ SERVICES - 5.5% 866,000 Lincare Holdings (b) 36,934,900 HOME HEALTH CARE SERVICES 963,000 First Health Group (b) 18,017,730 PPO NETWORK 481,800 NDCHealth Group 8,956,662 HEALTH CLAIMS PROCESSING & DRUG MARKETING SERVICES ------------------------------------------------------------------------------ 63,909,292 ------------------------------------------------------------------------------ MEDICAL EQUIPMENT - 3.5% 412,000 Edwards Lifesciences (b) 16,999,120 HEART VALVES 166,300 Diagnostic Products 9,154,815 IMMUNODIAGNOSTIC KITS 248,600 Visx (b) 6,431,281 LASER EYE SURGERY EQUIPMENT 93,500 Orthofix International (b) 3,691,287 BONE FIXATION & STIMULATION DEVICES See accompanying notes to financial statements. 8 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ MEDICAL EQUIPMENT - 3.5% (CONT) 115,700 ICU Medical (b) $ 3,163,238 INTRAVENOUS THERAPY PRODUCTS 35,000 CTI Molecular Imaging (b) 496,650 MEDICAL DIAGNOSTIC DEVICES 15,450 Intermagnetics General (b) 392,585 MRI EQUIPMENT ------------------------------------------------------------------------------ 40,328,976 ------------------------------------------------------------------------------ BIOTECHNOLOGY/DRUG DELIVERY - 2.3% 350,000 AtheroGenics (b) 8,246,000 DRUGS FOR ATHEROSCLEROSIS 270,000 Nektar Therapeutics (b) 5,464,800 DRUG DELIVERY TECHNOLOGIES 86,500 Neurocrine Biosciences (b) 4,264,450 DRUGS FOR SLEEP, DIABETES, MS & ENDOMETRIOSIS 310,000 Ligand Pharmaceuticals (b) 3,608,400 DRUGS FOR PAIN, CANCER, OSTEOPOROSIS, & DIABETES 400,000 Lexicon Genetics (b) 3,102,000 DRUG DISCOVERY 154,231 SYRRX, Series C (b)(d) 771,155 X-RAY CRYSTALLOGRAPHY 250,000 Locus Discovery, Series D Pfd. (b)(d) 500,000 HIGH THROUGHPUT RATIONAL DRUG DESIGN ------------------------------------------------------------------------------ 25,956,805 ------------------------------------------------------------------------------ PHARMACEUTICALS - 0.9% 237,000 Par Pharmaceuticals (b) 9,807,060 GENERICS ------------------------------------------------------------------------------ MEDICAL SUPPLIES - 0.3% 100,700 Techne (b) 3,917,230 CYTOKINES, ANTIBODIES, OTHER REAGENTS FOR LIFE SCIENCES ------------------------------------------------------------------------------ HEALTH CARE - TOTAL 143,919,363 ENERGY/MINERALS - 12.1% ------------------------------------------------------------------------------ OIL SERVICES - 6.0% 550,000 Chicago Bridge & Iron 22,000,000 ENGINEERING & CONSTRUCTION FOR PETROCHEMICALS & LNG 490,700 FMC Technologies (b) 15,800,540 OIL & GAS WELL HEAD MANUFACTURER 625,000 Hanover Compressor (b) 8,831,250 NATURAL GAS COMPRESSOR RENTAL 105,000 Carbo Ceramics 7,245,000 NATURAL GAS WELL STIMULANTS ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ 1,231,000 Newpark Resources (b) $ 6,339,650 DRILLING FLUID SERVICES TO OIL & GAS INDUSTRY 195,000 Pride International (b) 4,005,300 OFFSHORE DRILLING CONTRACTOR 205,000 Key Energy Services (b) 2,419,000 OIL & GAS WELL WORKOVER SERVICES 215,000 Pioneer Drilling (b) 2,169,350 OIL & GAS WELL DRILLER ------------------------------------------------------------------------------ 68,810,090 ------------------------------------------------------------------------------ DISTRIBUTION/MARKETING/REFINING - 3.5% 358,000 Equitable Resources 21,716,280 NATURAL GAS UTILITY & PRODUCER 460,000 Oneok 13,073,200 NATURAL GAS UTILITY, MARKETING & PROCESSING 231,000 Atmos Energy 6,317,850 NATURAL GAS UTILITY ------------------------------------------------------------------------------ 41,107,330 ------------------------------------------------------------------------------ OIL/GAS PRODUCERS - 2.6% 215,000 Ultra Petroleum (b) 10,347,950 NATURAL GAS PRODUCER 296,000 Western Gas 8,658,000 OIL PRODUCER & COAL SEAM GAS PRODUCER 150,000 Quicksilver Resources 5,517,000 NATURAL GAS & COAL SEAM GAS PRODUCER 48,400 Southwestern Energy (b) 2,453,396 OIL & GAS EXPLORATION/PRODUCTION 75,000 Range Resources 1,534,500 OIL & GAS PRODUCER 71,500 McMoRan Exploration (b) 1,337,050 NATURAL GAS PRODUCERS & LNG DEVELOPER ------------------------------------------------------------------------------ 29,847,896 ------------------------------------------------------------------------------ ENERGY/MINERALS - TOTAL 139,765,316 FINANCE - 9.4% ------------------------------------------------------------------------------ INSURANCE - 3.4% 447,000 HCC Insurance Holdings 14,804,640 SPECIALTY INSURANCE 39,000 Markel (b) 14,196,000 SPECIALTY INSURANCE 92,000 Leucaudia National 6,392,160 INSURANCE HOLDING COMPANY See accompanying notes to financial statements. 9 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ INSURANCE - 3.4% (CONT) 35,000 Philadelphia Consolidated Holding (b) $ 2,314,900 SPECIALTY INSURANCE 77,000 United National Group (b) 1,433,740 SPECIALTY INSURANCE ------------------------------------------------------------------------------ 39,141,440 ------------------------------------------------------------------------------ FINANCE COMPANIES - 2.9% 1,135,400 AmeriCredit (b) 27,760,530 AUTO LENDING 217,100 World Acceptance (b) 5,972,420 PERSONAL LOANS ------------------------------------------------------------------------------ 33,732,950 ------------------------------------------------------------------------------ BANKS/SAVINGS & LOANS - 1.9% 317,000 TCF Financial 10,188,380 GREAT LAKES BANK 131,875 Chittenden 3,788,769 VERMONT & WESTERN MASSACHUSETTS BANK 53,000 Downey Financial 3,021,000 CALIFORNIA HOME LENDER 80,025 Texas Regional Bancshares 2,615,216 TEXMEX BANK 85,200 Anchor Bancorp Wisconsin 2,483,580 WISCONSIN THRIFT 10,000 West Bancorporation 176,100 DES MOINES SMALL BUSINESS BANK 2,900 First Financial Bankshares 129,949 WEST TEXAS COMMUNITY BANK ------------------------------------------------------------------------------ 22,402,994 ------------------------------------------------------------------------------ MONEY MANAGEMENT - 1.2% 321,000 SEI Investments 13,459,530 MUTUAL FUND ADMINISTRATION & INVESTMENT MANAGEMENT ------------------------------------------------------------------------------ FINANCE - TOTAL 108,736,914 INDUSTRIAL GOODS/SERVICES - 9.3% ------------------------------------------------------------------------------ MACHINERY - 2.6% 243,000 Esco Technologies (b) 18,625,950 AUTOMATIC ELECTRIC METER READERS 210,000 Ametek 7,490,700 AEROSPACE/INDUSTRIAL INSTRUMENTS 78,000 Pentair 3,397,680 PUMPS, WATER TREATMENT & TOOLS ------------------------------------------------------------------------------ 29,514,330 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ INDUSTRIAL GOODS - 2.4% 152,000 Genlyte Group (b) $ 13,023,360 COMMERCIAL LIGHTING FIXTURES 135,300 Mine Safety Appliances 6,859,710 SAFETY EQUIPMENT 98,000 Clarcor 5,367,460 MOBILE & INDUSTRIAL FILTERS 75,000 Donaldson 2,443,500 INDUSTRIAL AIR FILTRATION ------------------------------------------------------------------------------ 27,694,030 ------------------------------------------------------------------------------ INDUSTRIAL SERVICES - 1.0% 412,100 Insurance Auto Auctions (b) 9,239,282 AUTO SALVAGE SERVICES 125,000 Clark (b) 1,940,000 EXECUTIVE COMPENSATION & BENEFITS CONSULTING ------------------------------------------------------------------------------ 11,179,282 ------------------------------------------------------------------------------ LOGISTICS - 0.7% 109,000 Hub Group (b) 5,691,980 TRUCK & RAIL FREIGHT FORWARDER 59,600 Forward Air (b) 2,664,120 FREIGHT TRANSPORTATION BETWEEN AIRPORTS ------------------------------------------------------------------------------ 8,356,100 ------------------------------------------------------------------------------ WATER - 0.7% 133,000 Cuno (b) 7,900,200 FILTRATION & FLUIDS CLARIFICATION ------------------------------------------------------------------------------ CONSTRUCTION - 0.7% 127,600 Florida Rock Industries 7,596,028 CONCRETE & AGGREGATES ------------------------------------------------------------------------------ INDUSTRIAL DISTRIBUTION - 0.5% 100,000 Aviall (b) 2,297,000 AIRCRAFT REPLACEMENT PARTS DISTRIBUTOR 100,000 Nuco2 (b) 2,219,000 BULK CO2 GAS DISTRIBUTION TO RESTAURANTS 50,000 Airgas 1,325,500 INDUSTRIAL GAS DISTRIBUTOR ------------------------------------------------------------------------------ 5,841,500 See accompanying notes to financial statements. 10 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES SPECIALTY CHEMICALS & INDUSTRIAL MATERIALS - 0.4% 114,400 Spartech $ 3,099,096 PLASTICS DISTRIBUTION & COMPOUNDING 70,000 Schulman 1,498,700 PLASTICS DISTRIBUTION & COMPOUNDING ------------------------------------------------------------------------------ 4,597,796 ------------------------------------------------------------------------------ OUTSOURCING SERVICES - 0.2% 288,900 Quanta Services (b) 2,311,200 ELECTRICAL & TELECOM CONSTRUCTION SERVICES ------------------------------------------------------------------------------ STEEL - 0.2% 75,000 Gibraltar Steel 1,771,500 STEEL PROCESSING ------------------------------------------------------------------------------ INDUSTRIAL GOODS/SERVICES - TOTAL 106,761,966 OTHER INDUSTRIES - 0.7% ------------------------------------------------------------------------------ REGULATED UTILITIES - 0.5% 345,000 Northeast Utilities 6,503,250 REGULATED ELECTRIC UTILITY ------------------------------------------------------------------------------ REAL ESTATE - 0.2% 100,000 Crescent Real Estate Equities 1,826,000 CLASS A OFFICE BUILDINGS 25,000 Highland Hospitality 281,000 HOTEL REAL ESTATE INVESTMENT TRUST ------------------------------------------------------------------------------ 2,107,000 ------------------------------------------------------------------------------ OTHER INDUSTRIES - TOTAL 8,610,250 TOTAL COMMON STOCKS (COST: $639,829,541) - 90.7% 1,046,651,565 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ PRINCIPAL VALUE AMOUNT SHORT-TERM OBLIGATIONS - 9.6% -------------------------------------------------------------------------------- $28,000,000 Colgate Palmolive 2.17% 1/07/05 (e)$27,989,873 27,000,000 American General Finance 2.27% 1/03/05 26,996,595 27,000,000 American Express Credit 2.26% 1/04/05 26,994,915 27,000,000 Toyota Credit 2.30% 1/05/05 26,993,100 1,967,000 Repurchase Agreement with State Street Bank & Trust Co., 1,967,000 dated 12/31/04, due 1/03/05 at 1.90% collateralized by Federal National Mortgage Association Notes, maturing 1/05/05, market value $2,008,995 (repurchase proceeds: $1,967,311) ------------------------------------------------------------------------------ (AMORTIZED COST: $110,941,483) 110,941,483 Total Investments (Cost: $750,771,024) - 100.3% (a) 1,157,593,048 ------------------------------------------------------------------------------ Cash and Other Assets Less Liabilities - (0.3%) (4,039,895) ------------------------------------------------------------------------------ Total Net Assets - 100% $ 1,153,553,153 ------------------------------------------------------------------------------ NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 2004, for federal income tax purposes cost of investments was $751,166,437 and net unrealized appreciation was $406,426,611 consisting of gross unrealized appreciation of $434,455,384 and gross unrealized depreciation of $28,028,773. (b) Non-income producing security. (c) An affiliate may include any company in which the Fund owns five percent or more of its outstanding voting shares. On December 31, 2004, the Fund held five percent or more of the outstanding voting securities of the following companies: RCM Technologies 6.63% The aggregate cost and value of this company at December 31, 2004, was $5,474,962 and $3,788,343, respectively. Investments in affiliate companies represent 0.33% of total net assets at December 31, 2004. The change in unrealized loss in affiliated companies amounted to $1,761,267 during the twelve months ended December 31, 2004. There was no other investment activity during the period. See accompanying notes to financial statements. 11 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2004 NOTES TO STATEMENT OF INVESTMENTS (CONT): (d) Denotes a restricted security, which is subject to restrictions on resale under federal securities laws. These securities are valued in good faith by the Board of Trustees. At December 31, 2004, these securities amounted to $1,578,594 which represents 0.14% of net assets. Additional information on these securities is as follows: ACQUISITION SECURITY DATES SHARES COST VALUE -------------------------------------------------------------------------------- Locus Discovery, Series D Pfd. 9/5/01 250,000 $ 1,000,000 $ 500,000 SensAble Technologies Series C Pfd. 4/4/00 301,205 1,000,000 275,813 SensAble Technologies common 6/28/04 1,581,292 0 31,626 SYRRX, Series C 1/8/01 154,231 1,002,502 771,155 ----------- ----------- $ 3,002,502 $ 1,578,594 =========== =========== (e) Security exempt from registration under Section 4(2) of the Securities Act of 1933. This security may only be resold in exempt transactions to qualified buyers. Private resales of this security to qualified institutional buyers are also exempt from registration pursuant to Rule 144A under the Securities Act of 1933. At December 31, 2004, the value of this security represents 2.43% of net assets. At December 31, 2004, the Fund held investments in the following sectors: % OF SECTOR NET ASSETS ---------------------------------------------------------------------- Information 28.5% Consumer Goods/Services 18.2 Health Care 12.5 Energy/Minerals 12.1 Finance 9.4 Industrial Goods/Services 9.3 Other Industries 0.7 Short-Term Obligations 9.6 Cash and Other Assets Less Liabilities (0.3) ---------- 100.0% ---------- See accompanying notes to financial statements. 12 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 ------------------------------------------------------------------------------ ASSETS Unaffiliated investments, at cost $ 745,296,062 Affiliated investments, at cost (See Note 4) 5,474,962 ------------------------------------------------------------------------------ Unaffiliated investments, at value $1,153,804,705 Affiliated investments, at value (See Note 4) 3,788,343 Cash 579 Receivable for: Fund shares sold 202,369 Dividends and interest 190,155 Foreign tax reclaims 2,200 Other assets 14,967 ------------------------------------------------------------------------------ Total Assets 1,158,003,318 LIABILITIES Payable for: Investments purchased 2,770,838 Fund shares repurchased 1,540,327 Transfer agent fees 72 Trustees' fees 6,347 Custody fees 2,663 Legal and audit fees 71,910 Registration fees 16,352 Reports to shareholders 29,817 Other liabilities 11,839 ------------------------------------------------------------------------------ Total Liabilities 4,450,165 ------------------------------------------------------------------------------ Net Assets $1,153,553,153 ============================================================================== COMPOSITION OF NET ASSETS Paid in capital $ 752,454,393 Accumulated net realized loss (5,723,264) Net unrealized appreciation on investments 406,822,024 ------------------------------------------------------------------------------ Net Assets $1,153,553,153 ------------------------------------------------------------------------------ Fund shares outstanding 36,776,633 ------------------------------------------------------------------------------ Net asset value, offering price and redemption price per share $ 31.37 ============================================================================== STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 ------------------------------------------------------------------------------ INVESTMENT INCOME: Dividend income (net of foreign taxes of $7,970) $ 3,705,086 Interest income 1,119,869 ------------------------------------------------------------------------------ Total investment income 4,824,955 EXPENSES: Investment advisory fees 8,747,399 Reports to shareholders 276,826 Legal and audit fees 211,322 Transfer agent fees 2,269 Trustees' fees 150,206 Custody fees 37,241 Non-recurring costs (See Note 8) 50,701 Compliance fees 13,923 Other expenses 60,305 ------------------------------------------------------------------------------ Total expenses 9,550,192 Less custody fees paid indirectly (2,855) Non-recurring costs reimbursed (See Note 8) (50,701) ------------------------------------------------------------------------------ Net Expenses 9,496,636 ------------------------------------------------------------------------------ Net Investment Income (Loss) (4,671,681) NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS: Net realized gain on investments 29,992,766 Net change in unrealized appreciation (depreciation) on: Unaffiliated investments 147,729,467 Affiliated investments (See Note 4) (1,761,267) ------------------------------------------------------------------------------ Net change in unrealized appreciation (depreciation) 145,968,200 ------------------------------------------------------------------------------ Net Gain 175,960,966 ------------------------------------------------------------------------------ Net Increase in Net Assets from Operations $ 171,289,285 ============================================================================== See accompanying notes to financial statements. 13 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED INCREASE (DECREASE) IN NET ASSETS DECEMBER 31, 2004 DECEMBER 31, 2003 ------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income (loss) $ (4,671,681) $ (2,916,699) Net realized gain on investments 29,992,766 16,030,419 Net change in unrealized appreciation (depreciation) on investments 145,968,200 208,755,524 ------------------------------------------------------------------------------------------------------ Net increase in net assets resulting from operations 171,289,285 221,869,244 SHARE TRANSACTIONS: Subscriptions 231,841,890 218,524,438 Redemptions (72,236,517) (89,461,181) ------------------------------------------------------------------------------------------------------ Net Increase from Share Transactions 159,605,373 129,063,257 ------------------------------------------------------------------------------------------------------ Total Increase in Net Assets 330,894,658 350,932,501 NET ASSETS: Beginning of period 822,658,495 471,725,994 ------------------------------------------------------------------------------------------------------ End of period $ 1,153,553,153 $ 822,658,495 ------------------------------------------------------------------------------------------------------ UNDISTRIBUTED NET INVESTMENT INCOME $ -- $ 163,258 ======================================================================================================
See accompanying notes to financial statements. 14 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2004 2003 2002 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 26.51 $ 18.51 $ 22.25 $ 19.99 $ 24.88 --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) (0.14) (0.11) (0.10) (0.04) 0.02 Net realized and unrealized gain (loss) on investments 5.00 8.11 (3.64) 2.31 (1.82) --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 4.86 8.00 (3.74) 2.27 (1.80) --------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income -- -- -- (0.01) (0.03) From net realized capital gains -- -- -- -- (3.06) --------------------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders -- -- -- (0.01) (3.09) --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 31.37 $ 26.51 $ 18.51 $ 22.25 $ 19.99 ================================================================================================================================= Total Return (b) 18.33% 43.22% (16.81)% 11.39% (8.16)% --------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses 1.00%(c) 0.99%(c) 1.05%(c) 0.99% 1.00%(c) Net investment income (loss) (0.49)%(c) (0.48)%(c) (0.47)%(c) (0.20)% 0.07%(c) Portfolio turnover rate 15% 10% 16% 18% 36% Net assets, end of period (000's) $ 1,153,553 $ 822,658 $ 471,726 $ 498,186 $ 403,306
-------------------------------------------------------------------------------- (a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions are reinvested. (c) The benefits derived from custody fees paid indirectly had no impact. See accompanying notes to financial statements. 15 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Wanger U.S. Smaller Companies (the "Fund"), is a series of Wanger Advisors Trust (the "Trust"), an open-end management investment company organized as a Massachusetts business trust. The investment objective of the Fund is to seek long-term growth of capital. The Fund is 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 Securities of the Fund are valued at market value or, if a market quotation for a security is not readily available or is deemed not to be reliable because of events or circumstances that have occurred between the market quotation and the time as of which the security is to be valued, the security is valued at a fair value determined in accordance with procedures established by the Board of Trustees. 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. If a security is traded principally on the Nasdaq Stock Market Inc., the Nasdaq Official Closing Price will be applied. Securities for which there are no reported sales on the valuation date are valued at the latest bid quotation. Short-term debt obligations having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. Securities for which quotations are not readily available and any other assets are valued as determined in good faith by the Board of Trustees. The Trust has retained an independent statistical fair value pricing service to assist in the fair valuation process for securities principally traded in a foreign market in order to adjust for possible changes in value that may occur between the close of the foreign exchange and the time at which fund shares are priced. If a security is valued at a "fair value", that value may be different from the last quoted market price for the security. REPURCHASE AGREEMENTS The Fund may engage in repurchase agreement transactions. The Fund, through its custodians, receives delivery of underlying securities collateralizing each repurchase agreement. The Fund's investment advisor determines that the value of the underlying securities is at all times at least equal to the repurchase price including interest. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 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 an accrual basis and includes amortization of discounts on short-term debt obligations and on long-term debt obligations when required for federal income tax purposes. Short-term debt obligations having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis, which approximates fair value. Realized gains and losses from security transactions are reported on an identified cost basis. The Fund estimates components of distributions from Real Estate Investment Trusts ("REITS"). Distributions received in excess of income are recorded as a reduction of the cost of the related investments. Results of operations for the year reflect a change in estimate of these components using more current tax reporting received from REIT investments. The change in estimate has no impact on the Fund's net assets. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from registration. In some cases, the issuer of restricted securities has agreed to register such securities for resale at the issuer's expense either upon demand by the Fund or in connection with another registered offering of the securities. Many restricted securities may be resold in the secondary market in transactions exempt from registration. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resale. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. FUND SHARE VALUATION Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange ("the 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. CUSTODY FEES/CREDITS Custody fees are reduced based on the Fund's cash balances maintained with the custodian. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. The amount is disclosed as a reduction of total expenses in the Statement of Operations. FEDERAL INCOME TAXES The Fund has complied with the provisions of the Internal Revenue Code available to regulated investment companies and, in the manner provided therein, distributes all its taxable income, as well as any net realized gain on sales of investments and foreign currency transactions reportable for federal income tax purposes. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on the ex-date. 3. FEDERAL TAX INFORMATION The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. Reclassifications are made to the Fund's capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. For the year ended December 31, 2004, permanent book and tax basis differences resulting primarily from differing treatments for net operating losses and REIT adjustments were identified and reclassified among the components of the Fund's net assets as follows: Accumulated Accumulated Net Investment Net Realized Loss LossPaid In Capital -------------- ------------- -------------- $4,751,216 $67,255 $(4,818,471) Net investment income and net realized gains (losses), as disclosed on the Statement of Operations, and net assets were not affected by this reclassification. 16 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS As of December 31, 2004, the components of distributable earnings on a tax basis were as follows: UNDISTRIBUTED UNDISTRIBUTED ORDINARY LONG-TERM NET UNREALIZED INCOME CAPITAL GAINS APPRECIATION* ------------- ------------- -------------- $-- $-- $406,426,611 * The differences between book-basis and tax-basis net unrealized appreciation/depreciation are primarily due to deferral of losses from wash sales. Unrealized appreciation and depreciation at December 31, 2004, based on cost of investments for federal income tax purposes, was: NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION DEPRECIATION APPRECIATION ------------- ------------- -------------- $434,455,384 $(28,028,773) $406,426,611 The following capital loss carryforwards, determined as of December 31, 2004, are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code: YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARD --------- -------------- 2010 $5,327,851 Expired capital loss carryforwards, if any, are recorded as a reduction of paid-in capital. Capital loss carryforwards of $30,060,021 were utilized during the year ended December 31, 2004 for the Fund. 4. TRANSACTIONS WITH AFFILIATES Columbia Wanger Asset Management, L.P., ("Columbia WAM") an indirect wholly-owned subsidiary of Columbia Management Group, Inc., which in turn is a wholly owned subsidiary of Bank of America Corporation ("BOA"), furnishes continuing investment supervision to the Fund and is responsible for the overall management of the Fund's business affairs. Prior to April 1, 2004, Columbia was a wholly-owned subsidiary of Fleet National Bank, which in turn was a wholly-owned subsidiary of FleetBoston Financial Corporation ("Fleet"). On April 1, 2004, Fleet was acquired by BOA. Under the Fund's investment management agreement, fees are accrued daily and paid monthly to Columbia WAM at the annual rates shown in the table below: AVERAGE DAILY NET ASSETS ANNUAL FEE RATE For the first $100 million 1.00% Next $150 million 0.95% In excess of $250 million 0.90% For the year ended December 31, 2004, the Fund's effective investment advisory fee rate was 0.92%. The investment advisory agreement also provides that Columbia WAM will reimburse the Fund to the extent that ordinary operating expenses (computed based on net custodian fees) exceed an annual percentage of 2.00% of the average daily net assets. There was no reimbursement for the year ended December 31, 2004. In accordance with the terms of the NYAG Settlement (as defined and discussed further under Note 8 to these Financial Statements - "Legal Proceedings"), Columbia WAM waived a portion of the fees payable under the Fund's investment management agreement so that those fees are retained at the following rates as a percentage of average daily net assets: 0.990% - up to $100 million; 0.940% - $100 million to $250 million; 0.890% - $250 million and over. The fee waiver was effective as of February 10, 2005 but applied as if it had gone into effect on December 1, 2004. The financial statements, as of December 31, 2004, are not reflective of these changes. Certain officers and trustees of the Trust are also officers of Columbia WAM. The Trust makes no direct payments to its officers and trustees who are affiliated with Columbia WAM. For the year ended December 31, 2004, the Fund paid $150,206 to trustees not affiliated with Columbia WAM. Effective April 2004, the Board of Trustees appointed a Chief Compliance Officer to the Fund in accordance with federal securities regulations. The Fund will pay its pro-rata share of the expenses associated with the Office of the Chief Compliance Officer. These expenses are disclosed separately on the Statement of Operations. Columbia Funds Distributor, Inc. ("CFDI"), an indirect wholly-owned subsidiary of BOA, serves as the principal underwriter of the Trust and receives no compensation for its services. Columbia Funds Services, Inc. (the "Transfer Agent"), an indirect wholly-owned subsidiary of BOA, provides shareholder services to the Fund. For such services, the Transfer Agent receives a fee, paid monthly, at the annual rate of $28.00 per open account. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. Effective February 1, 2004 the Transfer Agent made the decision to waive the reimbursement for certain out-of-pocket expenses. Prior to February 1, 2004, the Transfer Agent was entitled to receive a flat rate charge based on the number of shareholder accounts and transactions. An affiliate may include any company in which a fund owns five percent or more of its outstanding voting shares. On December 31, 2004, the Fund held five percent or more of the outstanding voting securities of one or more companies. Details of investments in those affiliated companies are presented on page 11. During the year ended December 31, 2004, the Fund engaged in purchases and sales transactions with funds that have a common investment advisor (or affiliated investment advisors), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with the provisions of Rule 17a-7 under the Investment Company Act of 1940 and were $0 and $1,094,400, respectively. 5. BORROWING ARRANGEMENTS The Trust participates in a $150,000,000 credit facility, which was entered into to facilitate portfolio liquidity. Interest is charged to each participating fund based on its borrowings at a rate per annum equal to the Federal Funds rate plus 0.50%. In addition, a commitment fee of 0.10% per annum is accrued and apportioned among the participating funds based on their pro-rata portion of the unutilized line of credit. The commitment fee is included in "Other expenses" on the Statement of Operations. No amounts were borrowed under this facility for the year ended December 31, 2004. 6. FUND SHARE TRANSACTIONS Proceeds and payments on Fund shares as shown in the statement of changes in net assets are in respect of the following numbers of shares: YEAR ENDED YEAR ENDED DECEMBER 31, 2004 DECEMBER 31, 2003 -------------------------------------------------------------------------------- Shares sold 8,353,055 9,675,283 -------------------------------------------------------------------------------- Less shares redeemed 2,612,387 4,118,462 -------------------------------------------------------------------------------- Net increase in shares outstanding 5,740,668 5,556,821 7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the year ended December 31, 2004 were $237,217,747 and $127,578,937. 17 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 8. LEGAL PROCEEDINGS On March 15, 2004, Columbia Management Advisors, Inc. ("Columbia Management"), the advisor to the Columbia Funds, and CFDI (collectively with Columbia Management, "Columbia") the distributor of the shares of the Columbia Funds, the Columbia Acorn Funds and the Wanger Advisors Trust Funds (collectively, "the Columbia Family of Funds"), entered into agreements in principle with the staff of the U.S. Securities and Exchange Commission ("SEC") and the Office of the New York Attorney General ("NYAG") to resolve the proceedings brought in connection with the SEC's and NYAG's investigations of frequent trading and market timing in certain Columbia mutual funds. Columbia WAM, the advisor to the Columbia Acorn Funds and the Wanger Advisors Trust Funds, was not a respondent in either proceeding nor were any of its officers or directors. On February 9, 2005, Columbia entered into an Assurance of Discontinuance (the "NYAG Settlement") with the NYAG and consented to the entry of a cease-and-desist order by the SEC (the "SEC Order" and together, the "Settlements"). The Settlements contain substantially the same terms and conditions as outlined in the agreements in principle. Although none of the Wanger Advisors Trust Funds is a party to the Settlement orders, under the terms of the Settlements and in order for Columbia Management to continue to provide administrative services to the Wanger Advisors Funds, the Board of Trustees of the Wanger Advisors Trust Funds agreed to conform to certain governance requirements, including the election of an independent board chair. Under the terms of the SEC Order, Columbia has agreed, among other things, to: pay $70 million in disgorgement and $70 million in civil money penalties; cease and desist from violations of the antifraud provisions and certain other provisions of the federal securities laws; maintain certain compliance and ethics oversight structures; retain an independent consultant to review Columbia's applicable supervisory, compliance, control and other policies and procedures; and retain an independent distribution consultant (see below). The NYAG Settlement also, among other things, requires Columbia and its affiliates, Banc of America Capital Management, LLC and BACAP Distributors, LLC to reduce management fees paid by the Columbia Family of Funds, Nations Funds and other related mutual funds collectively by $32 million per year for five years, for a projected total of $160 million in management fee reductions based on net assets as of March 15, 2004. Pursuant to the procedures set forth in the SEC Order, the settlement amounts will be distributed in accordance with a distribution plan to be developed by an independent distribution consultant, who is acceptable to the SEC staff and the independent trustees of the funds. The distribution plan must be based on a methodology developed in consultation with Columbia and the independent trustees of the funds and not unacceptable to the staff of the SEC. More specific information on the distribution plan will be communicated by Columbia WAM and/or its affiliates at a later date. Columbia WAM, the Columbia Acorn Trust, another mutual fund family advised by Columbia WAM, and the trustees of Columbia Acorn Trust are defendants in several derivative and class action lawsuits that allege, in summary, defendants permitted investors to engage in improper trading of shares of various funds in violation of certain federal and state laws. All of these lawsuits have been consolidated with similar suits in a Multi-District Litigation proceeding in Baltimore, Maryland and consolidated class action and derivative complaints have been filed. The Columbia Acorn Trust and Columbia WAM are also defendants in a class action lawsuit that alleges, in summary, that the Columbia Acorn Trust and Columbia WAM exposed shareholders of Columbia Acorn International Fund to trading by market timers by allegedly (a) failing to properly evaluate daily whether a significant event affecting the value of that Fund's securities had occurred after foreign markets had closed but before the calculation of the Fund's net asset value ("NAV"); (b) failing to implement the Fund's portfolio valuation and share pricing policies and procedures; and (c) failing to know and implement applicable rules and regulations concerning the calculation of NAV. Columbia WAM and the trustees of Columbia Acorn Trust are also defendants in a lawsuit alleging that Columbia WAM used Fund assets to make undisclosed payments to brokers as an incentive for the brokers to market the Columbia Acorn Funds over other mutual funds to investors. The complaint alleges Columbia WAM and the trustees of Columbia Acorn Trust breached certain common laws duties and federal laws. On January 11, 2005 a putative class action lawsuit was filed in federal district court in Massachusetts against, among others, the Trustees of the Columbia Acorn Trust and Columbia WAM. The lawsuit alleges that defendants violated common law duties to fund shareholders as well as sections of the Investment Company Act of 1940, by failing to ensure that the Columbia Acorn Trust funds and other affiliated funds participated in securities class action settlements for which the funds were eligible. Specifically, plaintiffs allege that defendants failed to submit Proof of Claims in connection with settlements of securities class action lawsuits filed against companies in which the funds held positions. The complaint seeks compensatory and punitive damages, and the disgorgement of all fees paid to the Columbia WAM and affiliated advisers. The Columbia Acorn Trust and Columbia WAM intend to defend these suits vigorously. The Columbia Acorn Trust does not believe that the pending actions will have a material adverse effect on the financial statements of any Columbia Acorn Fund, and Columbia WAM does not believe that the pending actions will have a material adverse effect on its ability to perform under its contracts with the Fund. As a result of these matters or any adverse publicity or other developments resulting from them, there may be increased redemptions or reduced sales of Fund shares, which could increase transaction costs or operating expenses, or have other adverse consequences for the Fund. In connection with the events described in detail above, various parties have filed suit again certain funds, their Boards and/or BOA (and affiliated entities). These suits are ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, cannot be currently made. For the year ended December 31, 2004, CMG has assumed $50,701 in consulting services and legal fees incurred by the Fund in connection with these matters. 18 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Effective April 13, 2004, the audit committee of the Trust requested that Ernst & Young LLP ("E&Y") resign as the auditors of the Fund. Also effective July 14, 2004, upon the recommendation of the audit committee, the Trust selected PricewaterhouseCoopers LLP ("PWC") as independent registered public accounting firm to audit the books and records of the Fund for its fiscal year ending December 31, 2004. The cessation of the relationship with E&Y was based on the impairment of E&Y's independence resulting from the consummation of the merger of FleetBoston Financial Corporation and Bank of America Corporation and accordingly, E&Y's ability to provide audit services to the Fund. E&Y's report on the financial statements of the Fund for the past two years did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the period E&Y was engaged, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to E&Y's satisfaction, would have caused it to make reference to that matter in connection with its report. 19 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM_ To the Board of Trustees and Shareholders of Wanger U.S. Smaller Companies Fund: In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Wanger U.S. Smaller Companies Fund (a series of the Wanger Advisors Trust, hereinafter referred to as the "Fund") at December 31, 2004, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. The statement of changes in net assets for the year ended December 31, 2003 and financial highlights of the Fund for the periods ended December 31, 2003 and prior were audited by other independent auditors report dated February 6, 2004 expressed an unqualified opinion on those financial statements. PricewaterhouseCoopers LLP Chicago, Illinois February 14, 2005 20 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST The Board of Trustees of the Trust has overall management responsibility for the Trust and the Funds. Each trustee serves a term of unlimited duration, provided that a majority of trustees always has been elected by shareholders. The trustees appoint their own successors, provided that at least two-thirds of the trustees, after such appointment, have been elected by shareholders. Shareholders may remove a trustee, with or without cause, upon the vote of two-thirds of the Trust's outstanding shares at any meeting called for that purpose. A trustee may be removed, with or without cause, upon the vote of a majority of the trustees. The names of the trustees and officers of the Trust, the date each was first elected or appointed to office, their principal business occupations during at least the last five years, and other directorships they hold are shown below. Each trustee serves in such capacity for each of the four series of the Trust. The business address of each trustee and officer of the Trust is Columbia Wanger Asset Management, L.P., 227 West Monroe, Suite 3000, Chicago, Illinois 60606, except for Messrs. Clark, Connaughton, and Pietropaolo, whose address is Columbia Management Group, Inc., 245 Summer Street, Boston, Massachusetts, 02210. Wanger's Statement of Additional Information includes additional information about Columbia Wanger's trustees and officers. You may obtain a free copy of the Statement of Additional Information on our website, www.wanger.com, or by writing or calling toll-free: Columbia Wanger Asset Management, L.P. Shareholder Services Group 227 W. Monroe, Suite 3000 Chicago, IL 60606 888-4-Wanger (888-492-6437)
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OTHER DECEMBER 31, 2004 TO OFFICE PAST FIVE YEARS DIRECTORSHIPS ------------------------------ ----------- ---------------------------------------- ------------- TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST: JEROME L. DUFFY, 68, 2003 Retired since December 31, 1997; prior None. Trustee thereto, senior vice president, Kemper Financial Services and treasurer, Kemper Funds. FRED D. HASSELBRING, 63, 1994 Retail industry, general project None. Trustee development and business computer systems consultant; voice over specialist for industrial and institutional applications; former chairman of the board of the Trust (September 2004 to November 2004); former lead independent trustee (August 2003 to September 2004). KATHRYN A. KRUEGER, M.D., 47, 2003 Medical Fellow I, Cardiovascular None. Trustee Therapeutic Area, Lilly Research Laboratories (May 2004 to present); Medical Advisor, Cardiovascular Therapeutic Area, Lilly Research Laboratories (January 2003 to April 2004); Medical Director, Cardiovascular Therapeutic Area, Lilly Research Laboratories (October 2002 to December 2002); Medical Director, Neptune Product Team, Lilly Research Laboratories (October 2001 to October 2002); Acting Director and Senior Clinical Research Physician, Lilly Research Laboratories (April 2001 to September 2001); Senior Clinical Research Physician, Lilly Research Laboratories (January 2000 to March 2001); Clinical Research Physician, Lilly Research Laboratories (June 1996 to December 1999). PATRICIA H. WERHANE, 69, 1998 Ruffin Professor of Business Ethics, None. Chair of the Board and Trustee Darden Graduate School of Business Administration, University of Virginia, since 1993; Senior Fellow since 2004 and Co-Director of the Olsson Center for Applied Ethics, Darden Graduate School of Business Administration, University of Virginia, from 2001-2004; and Wicklander Chair of Business Ethics and Director of the Institute for Business and Professional Ethics, DePaul University (since September 2003). TRUSTEE WHO IS AN INTERESTED PERSON OF WANGER ADVISORS TRUST: RALPH WANGER, 70, 1994 Founder, former president, chief Columbia Trustee investment officer and portfolio Acorn manager, Columbia Wanger Asset Trust. Management, L.P. (CWAM) (1992-2003); former president, Columbia Acorn Trust from April 1992 through September 2003; former president, Wanger Advisors Trust (1994 through September 2003); principal, WAM from July 1992 until September 2000; president, WAM Ltd. from July 1992 to September 2000; director, Wanger Investment Company plc.; Director, CWAM.
21 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OTHER DECEMBER 31, 2004 TO OFFICE PAST FIVE YEARS DIRECTORSHIPS ------------------------------ ----------- ---------------------------------------- -------------- OFFICERS OF WANGER ADVISORS TRUST: BEN ANDREWS, 39, 2004 Analyst and portfolio manager, CWAM None. Vice President since 1998; vice president, Columbia Acorn Trust. J. KEVIN CONNAUGHTON, 40, 2001 Treasurer of the Columbia Funds and of None. Assistant Treasurer the Liberty All-Star Funds since December 2000 (formerly controller of the Columbia Funds and of the Columbia All-Star Funds from February 1998 to October 2000); treasurer of the Galaxy Funds since September 2002; treasurer, Columbia Management Multi-Strategy Hedge Fund, LLC since December 2002 (prior thereto, vice president of Colonial Management Associates from February 1998 to October 2000). MICHAEL G. CLARKE, 34, 2004 Chief accounting officer of the Columbia None. Assistant Treasurer Funds, Liberty Funds, Stein Roe Funds and All-Star Funds since October 2004; Controller of the Columbia Funds, Liberty Funds, Stein Roe Funds and All-Star Funds from May 2004 to October 2004; Assistant Treasurer from June 2002 to May 2004; Vice President, Product Strategy & Development of the Liberty Funds and Stein Roe Funds from February 2001 to June 2002; Assistant Treasurer of the Liberty Funds, Stein Roe Funds and the All-Star Funds from August 1999 to February 2001. KENNETH A. KALINA, 45, 1995 Chief Compliance Officer, CWAM since May None. Assistant Treasurer 2004; treasurer and Chief financial officer, CWAM since April 2000; assistant treasurer, Columbia Acorn Trust; fund controller, CWAM since September 1995; director, New Americas Small Cap Fund. BRUCE H. LAUER, 47, 1995 Chief operating officer, CWAM since None. Vice President, Secretary April 1995; principal, WAM from January and Treasurer 2000 to September 2000; vice president, treasurer and secretary, Columbia Acorn Trust; director, Wanger Investment Company plc and New Americas Small Cap Fund. CHARLES P. MCQUAID, 51, 1994 President, CWAM since October 2003; Columbia President Chief investment officer, CWAM since Acorn September 2003; senior vice president of Trust. the Trust from 1994 through September 2003; portfolio manager since 1995 and director of research since July 1992 through December 2003; CWAM interim director of international research from October 2003 until December 2004; principal, WAM from July 1995 to September 2000; trustee since 1992 and president since 2003, Columbia Acorn Trust. ROBERT A. MOHN, 43, 1997 Director of domestic research, CWAM, None. Vice President since March 2004; analyst and portfolio manager, CWAM since August 1992; principal, WAM from 1995 to September 2000; vice president, Columbia Acorn Trust. TODD M. NARTER, 41, 2001 Analyst and portfolio manager, CWAM None. Vice President since June 1997; vice president, Columbia Acorn Trust. CHRISTOPHER J. OLSON, 40, 2001 Analyst and portfolio manager, CWAM None. Vice President since January 2001; vice president, Columbia Acorn Trust; prior to 2001, director and portfolio strategy analyst with UBS Asset Management/Brinson Partners. VINCENT P. PIETROPAOLO, 39, 2001 Assistant General Counsel, Bank of None. Assistant Secretary America (and its predecessors) since December 1999. ROBERT SCALES, 52, 2004 Deputy General Counsel, Grant Thornton None. Chief Compliance Officer, LLP (2002-2004); Associate General Senior Vice President Counsel, UBS PaineWebber (broker-dealer) and General Counsel (1997-2002).
22 Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- This page intentionally left blank. Wanger U.S. Smaller Companies 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] WANGER ADVISORS TRUST TRANSFER AGENT, DIVIDEND DISBURSING AGENT Columbia Funds Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Columbia Funds Distributor, Inc. One Financial Center Boston, Massachusetts 02111-2621 INVESTMENT ADVISER Columbia Wanger Asset Management, L.P. 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 www.wanger.com 1-888-4-WANGER (1-888-492-6437) LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP Chicago, Illinois This report, including the 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. A description of the fund's proxy voting policies and procedures is available (i) on the fund's website, www.wanger.com; (ii) on the Securities and Exchange Commission's website at www.sec.gov, and (iii) without charge, upon request, by calling 888-492-6437. Information regarding how the fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004 is available from the SEC's website. The fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. 24 WANGER ADVISORS TRUST SHR-02/094 U-0205 05/4317 WANGER INTERNATIONAL SMALL CAP 2004 Annual Report [LOGO] WANGER ADVISORS FUND -------------------------------------------------------------------------------- MANAGED BY COLUMBIA WANGER ASSETS MANAGEMENT,L.P. [LOGO] WANGER INTERNATIONAL SMALL CAP 2004 ANNUAL REPORT TABLE OF CONTENTS 1 Understanding Your Expenses 2 The Miracle Year 4 Performance Review 6 Statement of Investments 12 Statement of Assets and Liabilities 12 Statement of Operations 13 Statements of Changes in Net Assets 14 Financial Highlights 15 Notes to Financial Statements 19 Report of Independent Registered Public Accounting Firm 20 Board of Trustees and Management of Wanger Advisors Trust COLUMBIA WANGER ASSET MANAGEMENT, L.P. ("COLUMBIA WAM") IS ONE OF THE LEADING GLOBAL SMALL-CAP EQUITY MANAGERS IN THE U.S. WITH MORE THAN 30 YEARS OF SMALL-CAP INVESTMENT EXPERIENCE. COLUMBIA WAM MANAGES MORE THAN $22 BILLION IN EQUITIES AND IS THE INVESTMENT ADVISER TO WANGER U.S. SMALLER COMPANIES, WANGER INTERNATIONAL SMALL CAP, WANGER SELECT, WANGER INTERNATIONAL SELECT AND THE COLUMBIA ACORN FAMILY OF FUNDS. FOR MORE COMPLETE INFORMATION ABOUT OUR FUNDS, INCLUDING THE COLUMBIA ACORN FUNDS, OUR FEES, RISKS ASSOCIATED WITH INVESTING, OR EXPENSES, CALL 1-888-4-WANGER FOR A PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. THIS REPORT IS NOT AN OFFER OF THE SHARES OF THE COLUMBIA ACORN FUND FAMILY. THE DISCUSSION IN THE REPORT OF PORTFOLIO COMPANIES IS FOR ILLUSTRATION ONLY AND IS NOT A RECOMMENDATION OF INDIVIDUAL STOCKS. THE INFORMATION IS BELIEVED TO BE ACCURATE, BUT THE INFORMATION AND THE VIEWS OF THE PORTFOLIO MANAGERS MAY CHANGE AT ANY TIME WITHOUT NOTICE AND THE PORTFOLIO MANAGERS MAY ALTER A FUND'S PORTFOLIO HOLDINGS BASED ON THESE VIEWS AND THE FUND'S CIRCUMSTANCES AT THAT TIME. Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- UNDERSTANDING YOUR EXPENSES As a fund shareholder, you incur two types of costs. There are transaction costs, which generally include sales charges on purchases and may include redemption or exchange fees. There are also continuing costs, which generally include investment advisory, Rule 12b-1 fees, and other fund expenses. The information on this page is intended to help you understand your ongoing costs of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. ANALYZING YOUR FUND'S EXPENSES To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors in the fund during the reporting period. The information in the following table is based on an initial investment of $1,000.00, which is invested at the beginning of the reporting period and held for the entire period. Expense information is calculated two ways and each method provides you with different information. The amount listed in the "actual" column is calculated using actual operating expenses and total return for the fund. The amount listed in the "hypothetical" column assumes that the return each year is 5% before expenses and then applies each Fund's actual expense ratio for the period to the hypothetical return. You should not use the hypothetical account values and expenses to estimate either your actual account balance at the end of the period or the expenses you paid during the reporting period. See the "Compare with other funds" information for details on using the hypothetical data. ESTIMATING YOUR ACTUAL EXPENSES To estimate the expenses that you paid over the period, first you will need your account balance at the end of the period. 1. Divide your ending account balance by $1,000.00. For example, if an account balance was $8,600.00 at the end of the period, the result would be 8.6. 2. In the section of the table below titled "Expenses paid during the period," locate the amount for your fund. You will find this number is in the column labeled "actual." Multiply this number by the result from step 1. Your answer is an estimate of the expenses you paid on your account during the period. July 1, 2004 - December 31, 2004
-------------------------------------------------------------------------------------------------------------------------------- ACCOUNT VALUE AT THE ACCOUNT VALUE AT THE EXPENSES PAID DURING FUND'S ANNUALIZED BEGINNING OF THE PERIOD ($) END OF THE PERIOD ($) THE PERIOD ($) EXPENSE RATIO (%)* -------------------------------------------------------------------------------------------------------------------------------- ACTUAL HYPOTHETICAL ACTUAL HYPOTHETICAL ACTUAL HYPOTHETICAL -------------------------------------------------------------------------------------------------------------------------------- Wanger International Small Cap 1,000.00 1,000.00 1,181.99 1,018.30 7.46 6.90 1.36 --------------------------------------------------------------------------------------------------------------------------------
EXPENSES PAID DURING THE PERIOD ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, THEN MULTIPLIED BY THE NUMBER OF DAYS IN THE FUND'S MOST RECENT FISCAL HALF-YEAR AND DIVIDED BY 366. IT IS IMPORTANT TO NOTE THAT THE EXPENSE AMOUNTS SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONLY ONGOING COSTS OF INVESTING IN THE FUND. AS A SHAREHOLDER OF THE FUND, YOU DO NOT INCUR ANY TRANSACTION COSTS, SUCH AS SALES CHARGES, REDEMPTION OR EXCHANGE FEES. EXPENSES PAID DURING THE PERIOD DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. THE HYPOTHETICAL EXAMPLE PROVIDED IS USEFUL IN COMPARING ONGOING COSTS ONLY AND WILL NOT HELP YOU DETERMINE THE RELATIVE TOTAL COSTS OF OWNING DIFFERENT FUNDS WHOSE SHAREHOLDERS MAY INCUR TRANSACTION COSTS. * FOR THE SIX MONTHS ENDED 12/31/04. COMPARE WITH OTHER FUNDS Since all mutual fund companies are required to include the same hypothetical calculations about expenses in shareholder reports, you can use this information to compare the ongoing cost of investing in the fund with other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples of other funds. As you compare hypothetical examples of other funds, it is important to note that hypothetical examples are meant to highlight the continuing cost of investing in a fund and do not reflect any transactional costs, such as sales charges or redemption or exchange fees, that may be incurred by shareholders of other funds. Expenses paid during the period do not include any insurance charges imposed by your insurance company's separate accounts. 1 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] THE MIRACLE YEAR Photo of RALPH WANGER RALPH WANGER FOUNDER, ADVISOR AND TRUSTEE COLUMBIA WANGER ASSET MANAGEMENT, L.P. 1905 was a year of surprises. The first surprise was the victory of the Japanese over the Russians in the Russo-Japanese War. In May 1905, the untested Japanese Navy annihilated the Russian fleet at Tsushima. This was the first time a non-white country had beaten the main force of a European colonial power. The second unexpected event was in physics. 2005 will be celebrated as the centennial of Albert Einstein's "Miracle Year." The journal, ANNALEN DER PHYSIK, volume 17, published three articles in September 1905 all written by Einstein, an obscure clerk in the Swiss patent office in Bern. He had an undergraduate degree in physics but no Ph.D (it was granted a year later). Each of the articles were on a different subject and each one revolutionized its branch of physics. Einstein's papers created 20th century physics almost single-handedly. ATOMS In 1905 there were different theories about the structure of matter. If you take a glass of water and pour nine-tenths of it out, you still have a glass with water in it. What happens if you repeat this process of throwing out 90% of the water in the glass? After you repeat the process a few more times, you have such a small amount of water that you can only see it under a microscope, and in a few more steps the water drop will be too small to be seen even under the microscope. Can you continue the boring job of splitting water forever or do you finally get to a point where it isn't water anymore? Of course we know the answer: Once you get down to a single molecule of water you can't split it and still say that you have water left. Many leading scientists did not accept the atomic theory in 1905. Einstein looked at the process called Brownian Motion in which a grain of pollen or other small object moves around in a random way. (The same mathematical process makes stock prices jiggle.) He deduced that this motion was caused by billions of atoms bumping into the pollen grain in an irregular pattern. He was even able to calculate the size of the atoms involved, thus proving that atoms really existed. PHOTONS In 1905 there was still a basic debate about the nature of light. The greatest achievement of 19th century physics was Maxwell's set of partial differential equations governing electromagnetic fields, including light. Maxwell's equations required that light be a wave. The great Max Planck had introduced the idea of a quantum of energy in 1900 to get an equation that tracked the spectrum of heat radiation, but most scientists doubted that a light quantum was "real." Heinrich Hertz, Philip Lenard and others showed that when a beam of ultraviolet light shines on a piece of metal you produce an electrical current in the metal. There was no way to explain the photoelectric effect according to the Maxwell wave theory of light. The second paper Einstein wrote dealt with the problem of the photoelectric effect. If you cut the amount of energy in a beam of light by 90% and keep reducing it, you still have a beam of light. If you keep slicing the amount of light, does the beam of light keep getting smaller and smaller forever or do you get down to an "atom" of light that can't be split further? Einstein proved that there was a tiny amount of light that could not be further divided. The least amount of light that exists is a single photon (or quantum) of light. 1 The photoelectric effect is explained by photons acting as particles, not as a wave. Einstein's discovery of the photon had a number of interesting effects. First, it led to the development of quantum mechanics and thus to most of 20th century physics. Second, it won Einstein his only Nobel Prize. Third, it uncovered a paradox that still puzzles students, the duality of light. If you run an experiment to show that light is a wave, you can prove it's a wave. If you run an experiment to show that it's a particle, you can prove it's a particle. This duality principle contradicts common sense but when you study science you have to get used to it. The fourth effect was that it made Lenard a life-long enemy of Einstein. Philip Lenard, who received the Nobel Prize in 1905 for his own work on cathode rays, was close to the solution but Einstein ended up getting the credit. Lenard became an unrelenting foe of Einstein, and influenced the Nobel committee's decision not to give Einstein the prize for his theory of relativity. Later on, Lenard became an ardent Nazi. RELATIVITY In 1905, there was also a debate in scientific circles about speed. If you were in a really powerful rocket ship in space, and you pushed the throttle forward, you would speed up. If you kept on increasing the power, would you go ever faster, or was there an absolute speed limit in the universe that you could not exceed? 2 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- The third paper became the best known, Einstein's special theory of relativity. It explained that there was a cosmic speed limit, the speed of light. Very odd things happen when your rocket ship is moving close to the speed of light. Time slows down and you get shorter, under the Lorentz contraction equation, giving rise to the limerick: A sexy young techie named Fisk, Had a motion exceedingly brisk. So fast was his action The Lorentz contraction Shortened his rod to a disk. In a very brief paper published later in 1905, Einstein added in a note that his theory of relativity implied the equation E=mc 2. That solved the paradox of radioactivity; Mme Curie's radium was producing much more energy then could be explained by 19th century physics. Einstein showed that radioactive energy was caused by turning a small amount of mass into a lot of energy. So we had this technical journal containing three papers written by a man unknown in science, a non-Ph.D, a non-academic, writing on a German-dominated field with all the fussiness about rank and reputation that you would expect. Would anyone care? Einstein did not receive any communication from any physicists for the first couple months after he published, but in early 1906 Max Planck read and understood the papers. He wrote to Einstein and sent his assistant, another important physicist, Max von Laue, to visit Einstein in Bern. Planck's subsequent endorsement made Einstein acceptable to the community of physicists, and his papers became required study for all physicists, as they remain. The compelling human question: How the heck did Einstein do it? How could one human being produce three revolutionary papers in one year, on three different subjects, while carrying a full-time job at the patent office to boot? We can admire but not explain. The "Miracle Year" commemorates one of the greatest feats of the human mind ever. 1 PLANCK AND EINSTEIN HAD DISCOVERED THE QUANTUM JUMP, WHICH WAS THE SMALLEST THING THAT COULD POSSIBLY EXIST IN THE UNIVERSE. MODERN WRITERS, FOR REASONS DIFFICULT TO EXPLAIN, NOW USE THE PHRASE QUANTUM JUMP TO MEAN A BIG EVENT. WHEN NON-SCIENTISTS START THROWING AROUND SCIENTIFIC TERMS WITHOUT UNDERSTANDING THEM, FUNNY THINGS HAPPEN. DON'T GET ME STARTED ON THE HEISENBERG UNCERTAINTY PRINCIPLE. INCIDENTALLY, ALBERT EINSTEIN'S FATHER, HERMANN, WAS BORN IN THE WURTTEMBERG VILLAGE OF BUCHAU, WHERE HIS FAMILY HAD LIVED FOR GENERATIONS. HERMANN MOVED 20 MILES FROM BUCHAU TO THE CITY OF ULM, WHERE ALBERT WAS BORN. MY GREAT-GREAT GRANDFATHER, JOSEPH KOHN, WAS ALSO FROM BUCHAU AND HE HAD MANY EINSTEINS IN HIS FAMILY TREE. I AM VERY PROUD OF THE EINSTEIN CONNECTION. SOURCES: "EINSTEIN: A CELEBRATION," SEMINAR AT THE ASPEN INSTITUTE, AUGUST 8-11, 2004. EINSTEIN, ALBERT, "IDEAS AND OPINIONS," CROWN PUBLISHERS, 1954. KAKU, MICHIO, "EINSTEIN COSMOS: HOW ALBERT EINSTEIN'S VISION TRANSFORMED OUR UNDERSTANDING OF SPACE AND TIME," ATLAS BOOKS, 2004. "DISCOVER" MAGAZINE, "SPECIAL EINSTEIN ISSUE," SEPTEMBER 2004. A SPECIAL THANKS TO DOUG STONE OF YALE UNIVERSITY FOR EDITING THIS ESSAY. 3 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] PERFORMANCE REVIEW WANGER INTERNATIONAL SMALL CAP Photo of TODD M. NARTER Photo of CHRISTOPHER J. OLSON TODD M. NARTER CHRISTOPHER J. OLSON CO-PORTFOLIO MANAGER CO-PORTFOLIO MANAGER Wanger International Small Cap rose 30.27% in 2004. The Fund finished the year ahead of the Citigroup EMI Global ex-US Index, up 29.27%. Wanger International Small Cap also substantially outperformed the large-cap MSCI EAFE Index, up 20.25% in 2004. A weak U.S. dollar, particularly against the euro, aided performance throughout the year. The Fund's biggest percentage winners in 2004 came from very different industries and regions of the world. Edgars Consolidated Stores, a South African retailer first purchased in 2004, returned 151% for the year on strong earnings growth. Another new 2004 purchase, Natura Cosmeticos, a manufacturer and direct seller of Brazilian cosmetics, gained 139% for the year. ComfortDelGro, a Singaporean transport company expanding into taxicab franchises in China, was the third best annual performer, returning 107%. Within Europe, Amplifon, an Italian manufacturer of hearing aids, surged 95%. Other winners included Aalberts Industries, a Netherlands diversified industrial company, which rose over 90%, and Tullow Oil, up 93%, an UK-based oil exploration company benefiting from the rise in energy prices. Technology-related stocks were among the leading detractors to portfolio performance during the year. ASE Test, a Taiwanese tester of semiconductor devices, was the Funds largest percentage loser, declining 55% on weak earnings. Ngai Lik Industrial, a Hong Kong-based manufacturer of audio equipment, declined 37% as higher raw material costs squeezed margins. Another loser was Kappa Create, a Japanese sushi chain operator. Rising over 50% from January to June, the stock declined sharply in the second half when increased competition caused reduced sales. The stock ended the year down 31%. International small caps have outperformed large caps for a fifth year in a row and valuations are now close to long-term average valuations relative to large caps, whereas two years ago they traded at a moderate discount. Fortunately, our international small-cap universe is comprised of over 4,400 potential investment opportunities from which we need to extract but a few. With a dedicated team of nine international analysts we feel we have the resources to sift through this universe and still find attractive investment candidates for our shareholders. INVESTMENTS IN FOREIGN SECURITIES HAVE SPECIAL RISKS, INCLUDING POLITICAL OR ECONOMIC INSTABILITY, HIGHER COSTS, DIFFERENT REGULATIONS, ACCOUNTING STANDARDS, TRADING PRACTICES AND LEVELS OF INFORMATION, AND CURRENCY EXCHANGE RATE FLUCTUATIONS. SMALL-CAP STOCKS ARE OFTEN MORE VOLATILE AND LESS LIQUID THAN THE STOCKS OF LARGER COMPANIES. SMALL COMPANIES MAY HAVE A SHORTER HISTORY OF OPERATIONS THAN LARGER COMPANIES AND MAY HAVE A LESS DIVERSIFIED PRODUCT LINE, MAKING THEM MORE SUSCEPTIBLE TO MARKET PRESSURE. AS OF 12/31/04, THE FUND'S POSITIONS IN THE HOLDINGS MENTIONED WERE: EDGARS CONSOLIDATED STORES, 0.9%; NATURA COSMETICOS, 1.0%; COMFORTDELGRO, 0.6%; AMPLIFON, 1.5%; AALBERTS INDUSTRIES, 1.1%; TULLOW OIL, 0.8%; ASE TEST, 0.4%; NGAI LIK INDUSTRIAL, 0.4%; KAPPA CREATE, 0.5%. 4 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- VALUE OF A $10,000 INVESTMENT IN TOTAL RETURN FOR EACH PERIOD, WANGER INTERNATIONAL SMALL CAP MAY 3, 1995 (INCEPTION DATE) THROUGH DECEMBER 31, 2004 [LINE CHART APPEARS HERE] WANGER CITIGROUP INTERNATIONAL EMI GLOBAL SMALL CAP ex-US 5/3/1995 10000 10000 5/31/1995 10790 9821 6/30/1995 10970 9710 7/31/1995 11910 10255 8/31/1995 12290 10003 9/30/1995 12910 10074 10/31/1995 12700 9784 11/30/1995 12660 9865 12/31/1995 13450 10246 1/31/1996 14260 10479 2/29/1996 15170 10609 3/31/1996 15499 10830 4/30/1996 16251 11390 5/31/1996 16782 11301 6/30/1996 17183 11304 7/31/1996 16722 10859 8/31/1996 17023 10969 9/30/1996 17023 11029 10/31/1996 17183 10959 11/30/1996 17705 11136 12/31/1996 17755 10951 1/31/1997 18246 10792 2/28/1997 18687 11011 3/31/1997 18357 10874 4/30/1997 18204 10729 5/31/1997 18983 11359 6/30/1997 19568 11651 7/31/1997 19558 11538 8/31/1997 18460 11032 9/30/1997 19363 11210 10/31/1997 18388 10662 11/30/1997 17968 10166 12/31/1997 17496 9953 1/31/1998 18142 10265 2/28/1998 19589 11042 3/31/1998 21306 11575 4/30/1998 21867 11669 5/31/1998 21887 11768 6/30/1998 21410 11353 7/31/1998 21099 11281 8/31/1998 17904 9798 9/30/1998 17437 9581 10/31/1998 18101 10241 11/30/1998 19605 10595 12/31/1998 20352 10820 1/31/1999 20694 10744 2/28/1999 20570 10543 3/31/1999 21564 10999 4/30/1999 23400 11671 5/31/1999 23727 11383 6/30/1999 25404 11826 7/31/1999 27556 12208 8/31/1999 28928 12422 9/30/1999 29266 12366 10/31/1999 30088 12253 11/30/1999 36176 12694 12/31/1999 46072 13558 1/31/2000 46800 13300 2/29/2000 56295 13811 3/31/2000 54789 13872 4/30/2000 46481 12961 5/31/2000 42601 12691 6/30/2000 44628 13461 7/31/2000 43055 13015 8/31/2000 45584 13388 9/30/2000 41179 12701 10/31/2000 36798 11932 11/30/2000 33454 11407 12/31/2000 33244 11852 1/31/2001 34910 12073 2/28/2001 32556 11604 3/31/2001 29862 10705 4/30/2001 30389 11406 5/31/2001 31170 11383 6/30/2001 29743 10997 7/31/2001 28026 10674 8/31/2001 27907 10645 9/30/2001 23692 9259 10/31/2001 24780 9635 11/30/2001 25749 10031 12/31/2001 26174 10114 1/31/2002 25715 9931 2/28/2002 25358 10097 3/31/2002 27006 10755 4/30/2002 28179 10979 5/31/2002 28485 11330 6/30/2002 27635 10880 7/31/2002 24729 9958 8/31/2002 23743 9898 9/30/2002 21143 8984 10/31/2002 21415 9187 11/30/2002 22333 9531 12/31/2002 22554 9417 1/31/2003 22299 9259 2/28/2003 21534 9094 3/31/2003 21069 9005 4/30/2003 22980 9854 5/31/2003 24942 10694 6/30/2003 25778 11093 7/31/2003 26614 11488 8/31/2003 27893 12038 9/30/2003 29087 12588 10/31/2003 31356 13504 11/30/2003 32090 13750 12/31/2003 33574 14599 1/31/2004 35229 15123 2/29/2004 36662 15645 3/31/2004 36608 16028 4/30/2004 35801 15489 5/31/2004 35715 15491 6/30/2004 37003 15989 7/31/2004 36075 15425 8/31/2004 36041 15591 9/30/2004 37518 16172 10/31/2004 38755 16668 11/30/2004 41727 17980 12/31/2004 43737 18872 Average Annual Return --------------------------------- 1 year 5 years Life of fund 30.27% -1.03% 16.49% This graph compares the results of $10,000 invested in Wanger International Small Cap on May 3,1995 (the date the Fund began operations) through December 31, 2004 with the Citigroup EMI Global ex-US. Dividends and capital gains are reinvested. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONS. Wanger International Small Cap is a diversified fund that invests primarily in the stocks of non-U.S. companies with capitalizations of less than $3 billion. Smaller company stocks are often more volatile or less liquid than the stocks of larger companies. Investments in foreign securities have special risks, including political or economic instability, higher costs, different regulations, accounting standards, trading practices and levels of information and currency exchange rate fluctuations. PERFORMANCE SHOWN HERE IS PAST PERFORMANCE, WHICH CANNOT GUARANTEE FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER. 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. PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. FOR MONTHLY PERFORMANCE UPDATES, PLEASE CONTACT US AT 1-888-4-WANGER. PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER. -------------------------------------------------------------------------------- RESULTS TO DECEMBER 31, 2004 4TH QUARTER 1 YEAR WANGER INTERNATIONAL SMALL CAP 16.58% 30.27% Citigroup EMI Global ex-US 16.70 29.27 MSCI EAFE 15.32 20.25 Lipper International Small Cap Funds Index 16.27 29.50 NAV AS OF 12/31/04: $25.46 PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER. The Citigroup EMI Global ex-US is an index of the bottom 20% of institutionally investable capital of developed and emerging countries, selected by the index sponsor, outside the United States. MSCI EAFE is Morgan Stanley's Europe, Australasia and Far East Index, an index of companies throughout the world in proportion to world stock market capitalization, excluding the U.S. and Canada. Lipper Indexes include the largest funds tracked by Lipper, Inc. in the named category. The Lipper International Small Cap Funds Index is made up of the 10 largest non-U.S. funds investing in small-cap companies. All indexes are unmanaged and returns include reinvested dividends. It is not possible to invest directly in an index. Portfolio holdings will vary in the future. -------------------------------------------------------------------------------- TOP 5 COUNTRIES As a % of net assets, as of 12/31/04 United Kingdom 13.3% Japan 10.8 Ireland 7.8 Netherlands 7.6 France 7.2 -------------------------------------------------------------------------------- TOP 10 HOLDINGS As a % of net assets, as of 12/31/04 1. Anglo Irish Bank 2.0% SMALL BUSINESS & MIDDLE MARKET BANKING - IRELAND 2. Major Drilling Group International 1.5% MINING EXPLORATION DRILLER - CANADA 3. Vallourec 1.5% SEAMLESS TUBES - FRANCE 4. Amplifon 1.5% HEARING AID RETAILER - ITALY 5. Grafton Group 1.3% BUILDERS, WHOLESALERS & DIY RETAILING - IRELAND 6. Fugro 1.3% SURVEY & GPS SERVICES - NETHERLANDS 7. PT Perusahaan Gas Negara 1.2% GAS PIPELINE OPERATOR - INDONESIA 8. Hexagon 1.2% DIVERSIFIED ENGINEERING - SWEDEN 9. Koninklijke Ten Cate 1.2% ADVANCED TEXTILES & INDUSTRIAL FABRICS - NETHERLANDS 10. United Drug 1.1% PHARMACEUTICAL WHOLESALER & OUTSOURCER - IRELAND 5 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES COMMON STOCKS AND OTHER EQUITY-LIKE SECURITIES - 91.9% EUROPE - 59.8% ------------------------------------------------------------------------------ UNITED KINGDOM/IRELAND - 21.2% 500,000 Anglo Irish Bank (Ireland) $ 12,122,772 SMALL BUSINESS & MIDDLE MARKET BANKING 739,000 Grafton Group (Ireland) 8,007,802 BUILDERS, WHOLESALERS & DIY RETAILING 1,455,000 United Drug (Ireland) 6,858,374 PHARMACEUTICAL WHOLESALER & OUTSOURCER 700,000 Kensington 6,392,823 NON-CONFORMING MORTGAGE COMPANY 525,000 Business Post Group 6,263,692 UK PARCEL & EXPRESS MAIL SERVICE 350,000 IAWS Group (Ireland) 5,783,714 MANUFACTURER OF BAKED GOODS 400,000 Exel 5,542,810 GLOBAL LOGISTICS & FREIGHT FORWARDING 1,200,000 Charles Taylor Group 5,381,816 INSURANCE 840,000 International Greetings 5,288,669 PRIVATE LABEL GREETING PRODUCTS 300,000 Depfa Bank (Ireland) (e) 5,017,383 INTERNATIONAL PUBLIC SECTOR FINANCE 294,000 Jurys Doyle Hotel (Ireland) 4,906,106 OWNER/OPERATOR OF MID-PRICED HOTELS 200,000 Kerry Group (Ireland) 4,781,384 FOOD INGREDIENTS 1,621,000 Tullow Oil 4,737,886 OIL & GAS PRODUCER 800,000 Bloomsbury Publishing 4,645,841 PUBLISHING 221,000 Intermediate Capital 4,616,900 EUROPEAN PROVIDER OF MEZZANINE CAPITAL 1,556,000 RPS Group 4,540,447 ENVIRONMENTAL CONSULTING 600,000 Expro International 4,128,359 OFFSHORE OIL FIELD SERVICES 245,000 Northgate 4,010,104 LIGHT COMMERCIAL VEHICLE RENTAL SPECIALIST 90,000 Workspace Group 3,760,371 REAL ESTATE COMPANY 500,000 Care UK 3,699,040 NURSING HOME & PSYCHIATRIC CARE FACILITIES 155,000 Cobham 3,674,795 AEROSPACE COMPONENTS ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ 500,000 Spectris $ 3,660,708 ELECTRONIC INSTRUMENTS & CONTROLS 750,000 French Connection 3,528,942 CLOTHING WHOLESALER & RETAILER 250,000 Viridian Group 3,497,797 NORTHERN IRELAND ELECTRIC UTILITY 350,000 Vitec Group 1,918,518 PHOTO, FILM PRODUCTION & BROADCAST ACCESSORIES 350,000 Offshore Hydrocarbon Mapping (b) 1,583,112 EXPLORATION TECHNOLOGY CONTRACTOR ------------------------------------------------------------------------------ 128,350,165 ------------------------------------------------------------------------------ GERMANY/AUSTRIA - 7.7% 125,000 Wienerberger (Austria) (e) 5,957,302 BRICKS & CLAY ROOFING TILES 70,000 Wincor Nixdorf (b) (e) 5,617,372 RETAIL POS SYSTEMS & ATM MACHINES 155,000 Hugo Boss Designs (e) 5,141,069 FASHION APPAREL 75,000 Rhoen-Klinikum Pfd. (e) 4,580,502 HOSPITAL MANAGEMENT 315,000 Deutsche Beteiligung (b)(e) 4,500,513 PRIVATE EQUITY & INVESTMENT MANAGEMENT 110,000 GFK (e) 4,266,759 MARKET RESEARCH SERVICES 45,200 Rational (e) 4,191,118 COMMERCIAL OVEN MANUFACTURER 383,000 Takkt (e) 4,019,999 MAIL ORDER RETAILER OF OFFICE & WAREHOUSE DURABLES 65,000 Grenke Leasing (e) 3,069,403 FINANCING FOR IT EQUIPMENT 70,000 Bilfinger Berger (e) 2,868,230 CONSTRUCTION & RELATED SERVICES 50,000 Vossloh (e) 2,461,668 RAIL INFRASTRUCTURE & DIESEL LOCOMOTIVES ------------------------------------------------------------------------------ 46,673,935 ------------------------------------------------------------------------------ FRANCE/BELGIUM - 7.6% 60,000 Vallourec 8,939,698 SEAMLESS TUBES 60,000 Imerys 5,018,421 INDUSTRIAL MINERALS PRODUCER 90,000 Norbert Dentressangle 4,973,723 TRANSPORT See accompanying notes to financial statements. 6 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ FRANCE/BELGIUM - 7.6% (CONT) 55,000 Neopost $ 4,261,256 POSTAGE METER MACHINES 41,000 Camaieu 4,065,124 WOMEN'S APPAREL RETAILER 100,000 Iliad 3,776,345 HIGH SPEED INTERNET SERVICE PROVIDER 41,000 Bacou Dalloz 3,276,535 SAFETY EQUIPMENT 97,000 Fininfo 2,990,356 DATA FEEDS FOR FRENCH BANKS & BROKERS 61,000 Omega Pharma (Belgium) 2,912,513 OTC PRODUCTS, PHARMACY & DENTAL SUPPLIES 103,000 April Group 2,650,756 INSURANCE POLICY CONSTRUCTION 178,000 Cerep (b) 2,519,505 HEALTH CARE 19,000 Carbone Lorraine (b) 1,003,684 ADVANCED INDUSTRIAL MATERIALS ------------------------------------------------------------------------------ 46,387,916 ------------------------------------------------------------------------------ NETHERLANDS - 7.6% 92,347 Fugro 7,680,156 SURVEY & GPS SERVICES 96,000 Koninklijke Ten Cate (b) 7,047,733 ADVANCED TEXTILES & INDUSTRIAL FABRICS 138,000 Aalberts Industries 6,673,078 FLOW CONTROL & HEAT TREATMENT 103,000 OPG Groep 5,999,079 HEALTHCARE SUPPLIES & PHARMACIES 116,000 Sligro Food Group 5,703,527 FOOD SERVICE & WHOLESALING 217,000 United Services Goup 5,055,534 TEMPORARY STAFFING SERVICES 138,000 IM Tech 4,850,599 TECHNICAL ENGINEERING 37,600 Hunter Douglas 1,998,971 WINDOW SHADES & VENETIAN BLINDS 65,000 Unit 4 Aggresso (b) 1,003,684 BUSINESS & SECURITY SOFTWARE 23,000 AM NV 222,436 PROPERTY DEVELOPER ------------------------------------------------------------------------------ 46,234,797 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ SWEDEN - 3.3% 150,000 Hexagon (e) $7,125,164 DIVERSIFIED ENGINEERING 289,000 Sweco (e) 5,510,113 NORDIC INFRASTRUCTURE/ENVIRONMENT CONSULTING 316,000 Nobia (e) 5,217,878 KITCHEN CABINET MANUFACTURING & DISTRIBUTION 1,660,000 Biotage (b) (e) 2,432,472 DISCOVERY CHEMISTRY (MICROWAVES & PURIFICATION) ------------------------------------------------------------------------------ 20,285,627 ------------------------------------------------------------------------------ ITALY - 3.2% 160,000 Amplifon (e) 8,844,181 HEARING AID RETAILER 402,000 Granitifiandre (e) 3,632,815 INNOVATIVE STONEWARE 50,000 Davide Campari 3,216,031 SPIRITS & WINE 200,000 Credit Emiliano (e) 1,979,807 REGIONAL BANK 1,400,000 Ducati Motor (b)(e) 1,667,099 MOTORCYCLES & RELATED MERCHANDISE ------------------------------------------------------------------------------ 19,339,933 ------------------------------------------------------------------------------ SWITZERLAND - 2.0% 10,400 Sika (e) 6,213,224 CHEMICALS FOR CONSTRUCTION & INDUSTRIAL APPLICATION 8,000 Geberit International (e) 5,833,514 PLUMBING SUPPLIES ------------------------------------------------------------------------------ 12,046,738 ------------------------------------------------------------------------------ FINLAND - 1.9% 480,000 Sponda (e) 4,667,023 OFFICE & WAREHOUSE PROPERTY COMPANY 122,000 Jaakko Poyry (e) 3,668,666 ENGINEERING CONSULTANTS IN FORESTRY & ENERGY 189,000 Amer Group (e) 3,290,803 BRANDED SPORTING GOODS ------------------------------------------------------------------------------ 11,626,492 See accompanying notes to financial statements. 7 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ SPAIN - 1.5% 76,000 Bankinter (e) $ 4,033,792 MORTGAGE LENDER 279,100 Abengoa (e) 2,747,225 ENGINEERING & CONSTRUCTION 100,000 Red Electrica (e) 2,238,143 SPANISH POWER GRID ------------------------------------------------------------------------------ 9,019,160 ------------------------------------------------------------------------------ NORWAY - 0.9% 238,000 Ekornes (e) 5,161,409 NICHE FURNITURE MANUFACTURER ------------------------------------------------------------------------------ CZECH REPUBLIC - 0.8% 34,200 Komercni Banka (e) 4,975,962 LEADING CZECH UNIVERSAL BANK ------------------------------------------------------------------------------ POLAND - 0.8% 167,000 Central European Distribution 4,933,180 SPIRITS & WINE DISTRIBUTION ------------------------------------------------------------------------------ GREECE - 0.8% 190,000 Intralot 4,637,536 LOTTERY & GAMING SYSTEMS & SERVICES ------------------------------------------------------------------------------ DENMARK - 0.4% 10,500 Kobenhavns Lufthavne (e) 2,223,655 COPENHAGEN AIRPORT MANAGER ------------------------------------------------------------------------------ RUSSIA - 0.1% 29,300 Mechel Steel Group (b) 654,855 MET COAL ASSETS OBSCURED BY STEEL BIZ ------------------------------------------------------------------------------ EUROPE - TOTAL 362,551,360 ASIA - 21.0% ------------------------------------------------------------------------------ JAPAN - 10.8% 124,000 Daito Trust Construction 5,883,986 APARTMENT BUILDER 116,000 ARRK 4,744,949 PROTOTYPES & MOLDS FOR NEW PRODUCT DEVELOPMENT 386,000 Wacoal 4,637,955 WOMEN'S SPECIALTY APPAREL 123,500 Meitec 4,593,752 STAFFING COMPANY SPECIALIZING IN RD ENGINEERS ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ 273,500 NIFCO $ 4,570,020 MOLDED PLASTIC COMPONENTS 160,000 Shimano 4,559,547 BICYCLE COMPONENTS & FISHING TACKLE 129,600 Sugi Pharmacy 4,395,321 DRUGSTORE OPERATOR 225,000 Park 24 4,023,762 PARKING LOT OPERATOR 111,000 Eneserve 4,023,257 POWER GENERATORS 179,000 Ushio 3,331,323 INDUSTRIAL LIGHT SOURCES 162,500 Ain Pharmaciez 3,240,260 DISPENSING PHARMACY/DRUGSTORE OPERATOR 265,900 Toyo Technica 3,069,372 VALUE ADDED RESELLER OF IMPORTED INSTRUMENTATION 94,600 Kappa Create 2,824,368 SUSHI CHAIN RESTAURANT OPERATOR 58,000 Hogy Medical 2,725,212 DISPOSABLE SURGICAL PRODUCTS 33,000 Fast Retailing 2,503,005 APPAREL RETAILER 470,400 Hiroshima Bank 2,485,124 REGIONAL BANK 83,600 Chiyoda Integre 1,684,864 PLASTIC COMPONENTS FOR CONSUMER ELECTRONICS 195,000 Fukuoka Bank 1,281,565 REGIONAL BANK 180,000 Bank of Yokohama (b) 1,130,753 REGIONAL BANK ------------------------------------------------------------------------------ 65,708,395 ------------------------------------------------------------------------------ TAIWAN - 3.4% 4,419,300 Phoenixtec Power 5,324,290 UNINTERRUPTABLE POWER SUPPLIES 3,217,000 Taiwan Fu Hsing 3,501,359 DOOR LOCK MANUFACTURER 395,000 ASE Test (b) 2,670,200 SEMICONDUCTOR PACKAGING & TEST SERVICES 1,083,616 Springsoft Systems 2,317,895 ELECTRONIC DESIGN AUTOMATION SOFTWARE 2,119,000 Chicony Electronics 2,152,995 PC POWER SUPPLIES & KEYBOARDS See accompanying notes to financial statements. 8 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ TAIWAN - 3.4% (CONT) 1,644,021 Wah Lee Industrial $ 2,146,174 DISTRIBUTOR OF CHEMICALS, MATERIALS & EQUIPMENT 2,530,000 Bank of Kaohsiung 2,013,495 COMMERCIAL BANKING 137,000 Advantech 331,834 EMBEDDED COMPUTERS ------------------------------------------------------------------------------ 20,458,242 ------------------------------------------------------------------------------ HONG KONG/CHINA - 3.3% 7,000,000 Global Bio-Chem Technology Group (China) 4,637,849 375,000 Global Bio-Chem Technology Group Warrants (China) 17,850 REFINER OF CORN-BASED COMMODITIES 2,000,000 Techtronic Industries 4,374,116 MANUFACTURER OF POWER TOOLS & MOTORIZED APPLIANCES 11,000,000 Linmark 3,962,434 SOURCING OF CONSUMER GOODS 1,000,000 Hong Kong Exchanges & Clearing 2,682,362 HONG KONG EQUITY & DERIVATIVES OPERATOR 10,000,000 Ngai Lik Industrial 2,521,549 CONSUMER ELECTRONICS MANUFACTURER 12,000,000 Lerado Group 1,790,814 BABY STROLLERS & INFANT CAR SEATS MANUFACTURER ------------------------------------------------------------------------------ 19,986,974 ------------------------------------------------------------------------------ INDONESIA - 1.2% 35,000,000 PT Perusahaan Gas Negara (e) 7,162,886 GAS PIPELINE OPERATOR ------------------------------------------------------------------------------ INDIA - 0.9% 300,000 Housing Development Finance 5,313,988 PREMIER MORTGAGE LENDER IN INDIA ------------------------------------------------------------------------------ SOUTH KOREA - 0.8% 31,582 Yuhan (e) 2,654,381 OTC & PRESCRIPTION DRUG MANUFACTURER 205,000 Samyoung Heat Exchange (e) 2,101,958 POWER PLANT RELATED MACHINERY ------------------------------------------------------------------------------ 4,756,339 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES OR PRINCIPAL AMOUNT ------------------------------------------------------------------------------ SINGAPORE - 0.6% 4,000,000 ComfortDelGro $ 3,797,158 TAXI & MASS TRANSIT SERVICE ------------------------------------------------------------------------------ ASIA - TOTAL 127,183,982 OTHER COUNTRIES - 7.9% ------------------------------------------------------------------------------ CANADA - 4.3% 823,500 Major Drilling Group International (b) 9,125,984 MINING EXPLORATION DRILLER 600,000 Fairborne Energy (b) 6,024,247 OIL & GAS PRODUCER CAD$ Main Street Equity 3,175,000 Conv., 7.25%, 09/30/11 (d) 2,486,771 CANADIAN MULTI-FAMILY REAL ESTATE 120,000 Enerflex Systems 2,355,706 NATURAL GAS COMPRESSOR 300,000 Kinross Gold (b) 2,112,236 GOLD MINING 100,000 Corus Entertainment 2,083,073 TELEVISION PROGRAMMING & RADIO STATIONS 250,000 Ivanhoe Mines (b) 1,801,858 COPPER MINING IN MONGOLIA ------------------------------------------------------------------------------ 25,989,875 ------------------------------------------------------------------------------ AUSTRALIA/NEW ZEALAND - 2.7% 600,000 Billabong International 5,368,563 SURFWEAR APPAREL MANUFACTURER 1,222,500 Sky City Entertainment (New Zealand) 4,723,966 CASINO/ENTERTAINMENT COMPLEX 70,000 Perpetual Trustees 3,440,725 AUSTRALIAN MUTUAL FUND MANAGER 1,300,000 Pacific Brands 3,240,674 AUSTRALIAN BRANDED APPAREL ------------------------------------------------------------------------------ 16,773,928 ------------------------------------------------------------------------------ SOUTH AFRICA - 0.9% 100,000 Edgars Consolidated Stores 5,354,296 LEADING RETAIL CONGLOMERATE ------------------------------------------------------------------------------ OTHER COUNTRIES - TOTAL 48,118,099 See accompanying notes to financial statements. 9 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES OR PRINCIPAL AMOUNT ------------------------------------------------------------------------------ LATIN AMERICA - 3.2% MEXICO - 1.7% 220,000 Grupo Aeroportaurio Del Sureste $ 6,017,000 CANCUN & COZUMEL AIRPORT OPERATOR 1,000,000 Consorcio ARA (b) 3,005,293 AFFORDABLE HOUSING BUILDER 375,000 URBI Desarrollo (b) 1,638,333 AFFORDABLE HOUSING BUILDER ------------------------------------------------------------------------------ 10,660,626 ------------------------------------------------------------------------------ BRAZIL - 1.0% 200,000 Natura Cosmeticos 5,835,843 DIRECT RETAILER OF COSMETICS 44,750 Diagnosticos (b) 402,683 LARGEST PRIVATE DIAGNOSTIC SERVICES COMPANY IN BRAZIL ------------------------------------------------------------------------------ 6,238,526 ------------------------------------------------------------------------------ CHILE - 0.5% 100,000 CorpBanca (b) 2,875,000 CHILEAN LOCAL BANK ------------------------------------------------------------------------------ LATIN AMERICA - TOTAL 19,774,152 TOTAL COMMON STOCKS AND OTHER EQUITY-LIKE SECURITIES (COST: $379,819,703) - 91.9% 557,627,593 SHORT-TERM OBLIGATIONS - 7.1% ------------------------------------------------------------------------------ $42,975,000 Repurchase Agreement with State Street Bank & Trust Co., dated 12/31/04, due 1/03/05 at 1.90% collateralized by Federal National Mortgage Association notes, maturing 1/05/05, market value $43,838,070 (repurchase proceeds: $42,981,804) 42,975,000 ------------------------------------------------------------------------------ (AMORTIZED COST: $42,975,000) 42,975,000 TOTAL INVESTMENTS (COST: $422,794,703) - 99.0% (a)(c) 600,602,593 ------------------------------------------------------------------------------ Cash and Other Assets Less Liabilities - 1.0% 6,170,089 ------------------------------------------------------------------------------ Total Net Assets - 100% $ 606,772,682 NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 2004, for federal income tax purposes cost of investments was $427,824,239 and net unrealized appreciation was $172,778,354 consisting of gross unrealized appreciation of $181,296,783 and gross unrealized depreciation of $8,518,429. (b) Non-income producing security. (c) On December 31, 2004, the Fund's total investments were denominated in currencies as follows: % OF NET CURRENCY VALUE ASSETS ------------------------------------------------------------------------------ Euro Dollars $ 231,397,301 38.2% British Pounds 80,872,630 13.3 Japanese Yen 65,708,395 10.8 U.S. Dollars 60,125,235 9.9 Other currencies less than 5% of total net assets 162,499,032 26.8 ------------- ---------- $ 600,602,593 99.0% ============= ========== (d) Denotes a restricted security, which is subject to restrictions on resale under federal securities laws. This security is valued in good faith by the Board of Trustees. At December 31, 2004, this security amounted to $2,486,771, which represents 0.41% of net assets. Additional information on this security is as follows: ACQUISITION SECURITY DATE PAR COST VALUE ------------------------------------------------------------------------------ Main Street Equity Conv., 7.25%, 09/30/11 10/8/04 $3,175,000 $2,527,263 $2,486,771 (e) Represents a security valued by an independent statistical fair value pricing service at 12/31/04. Foreign securities which had a market holiday on 12/31/04 were valued under this method. See Security Valuation in Note 2 for further information. 10 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP PORTFOLIO DIVERSIFICATION DECEMBER 31, 2004 AT DECEMBER 31, 2004, THE FUND'S PORTFOLIO INVESTMENTS AS A PERCENT OF NET ASSETS WAS DIVERSIFIED AS FOLLOWS: VALUE PERCENT ------------------------------------------------------------------------------ INDUSTRIAL GOODS/SERVICES Industrial Services $ 33,857,364 5.6% Industrial Materials 31,126,186 5.1 Construction 18,210,877 3.0 Conglomerates 16,545,467 2.7 Machinery 13,016,000 2.1 Outsourcing & Training Services 9,649,286 1.6 Steel 8,939,698 1.5 Electrical Components 8,690,982 1.4 Industrial Distribution 8,007,802 1.3 Specialty Chemicals 6,213,224 1.0 ------------------------------------------------------------------------------ 154,256,886 25.3 ------------------------------------------------------------------------------ CONSUMER GOODS/SERVICES Retail 31,931,129 5.3 Apparels 22,350,695 3.7 Food 16,268,625 2.7 Durable Goods 12,519,280 2.1 Furniture & Textiles 12,378,258 2.0 Non Durable Goods 11,124,512 1.8 Consumer Services 5,814,576 1.0 Goods Distribution 4,933,180 0.8 Travel 4,906,106 0.8 Casinos 4,723,966 0.8 Gaming 4,637,536 0.8 Leisure Products 3,290,803 0.5 Beverage 3,216,031 0.5 Restaurants 2,824,368 0.5 ------------------------------------------------------------------------------ 140,919,065 23.3 ------------------------------------------------------------------------------ FINANCE Banks 33,881,861 5.6 Finance Companies 18,089,230 3.0 Savings & Loans 9,347,780 1.5 Insurance 8,032,572 1.3 Money Management 7,941,238 1.3 77,292,681 12.7 VALUE PERCENT ------------------------------------------------------------------------------ ENERGY/MINERALS Oil Services $ 15,747,333 2.6% Non-Ferrous Metals 11,238,220 1.9 Oil/Gas Producers 10,762,133 1.8 Oil Refining/Marketing/Distribution 7,162,886 1.2 Agricultural Commodities 4,655,699 0.8 Independent Power 4,023,257 0.7 Mining 2,456,713 0.4 ------------------------------------------------------------------------------ 56,046,241 9.4 ------------------------------------------------------------------------------ INFORMATION TECHNOLOGY Computer Hardware & Related Equipment 13,426,491 2.2 Business Information & Marketing Services 11,797,562 1.9 Instrumentation 6,730,080 1.1 Publishing 4,645,841 0.8 Internet Related 3,776,345 0.6 Business Software 3,321,579 0.6 Financial Processors 2,682,362 0.4 Semiconductors & Related Equipment 2,670,200 0.4 Contract Manufacturing 2,521,549 0.4 Electronics Distribution 2,146,174 0.4 Television Programming 2,083,073 0.3 ------------------------------------------------------------------------------ 55,801,256 9.1 ------------------------------------------------------------------------------ OTHER Transportation 17,011,536 2.8 Real Estate 15,780,227 2.6 Regulated Utilities 5,735,940 0.9 ------------------------------------------------------------------------------ 38,527,703 6.3 ------------------------------------------------------------------------------ HEALTHCARE Pharmaceuticals 14,944,773 2.5 Services 9,698,119 1.6 Hospital Management 4,580,502 0.8 Hospital/ Laboratory Supplies 3,127,895 0.5 Medical Equipment 2,432,472 0.4 ------------------------------------------------------------------------------ 34,783,761 5.8 ------------------------------------------------------------------------------ TOTAL COMMON STOCKS AND OTHER EQUITY-LIKE SECURITIES 557,627,593 91.9 ------------------------------------------------------------------------------ SHORT-TERM OBLIGATIONS 42,975,000 7.1 ------------------------------------------------------------------------------ TOTAL INVESTMENTS 600,602,593 99.0 ------------------------------------------------------------------------------ CASH & OTHER ASSETS LESS LIABILITIES 6,170,089 1.0 ------------------------------------------------------------------------------ NET ASSETS 606,772,682 100.0% ============================================================================== 11 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 ============================================================================== ASSETS Investments, at cost $ 422,794,703 ------------------------------------------------------------------------------ Investments, at value $ 600,602,593 Cash 811 Foreign currency (cost of $6,395,269) 6,481,930 Receivable for: Investments sold 1,329,964 Fund shares sold 153,966 Dividends and interest 533,353 Foreign tax reclaims 123,717 ------------------------------------------------------------------------------ Total Assets 609,226,334 LIABILITIES Payable for: Investments purchased 1,592,128 Fund shares repurchased 769,822 Transfer agent fees 44 Trustees' fees 3,050 Custody fees 34,704 Legal and audit fees 42,309 Other liabilities 11,595 ------------------------------------------------------------------------------ Total Liabilities 2,453,652 ------------------------------------------------------------------------------ Net Assets $ 606,772,682 ============================================================================== COMPOSITION OF NET ASSETS Paid in capital $ 484,245,953 Undistributed net investment income 2,410,578 Accumulated net realized loss (57,798,133) Net unrealized appreciation on: Investments 177,807,890 Foreign currency translations 106,394 ------------------------------------------------------------------------------ Net Assets $ 606,772,682 ============================================================================== Fund shares outstanding 23,834,955 ============================================================================== Net asset value, offering price and redemption price per share $ 25.46 ============================================================================== STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 ============================================================================== INVESTMENT INCOME: Dividend income (net of foreign taxes of $1,035,281) $ 8,772,449 Interest income 363,722 ------------------------------------------------------------------------------ Total investment income 9,136,171 EXPENSES: Investment advisory fees 5,493,529 Reports to shareholders 179,770 Legal and audit fees 96,953 Transfer agent fees 2,269 Trustees' fees 70,268 Custody fees 479,439 Compliance fees 6,957 Non-recurring costs (See Note 8) 24,900 Other expenses 34,102 ------------------------------------------------------------------------------ Total Expenses 6,388,187 Less custody fees paid indirectly (95) Non-recurring costs reimbursed (See Note 8) (24,900) ------------------------------------------------------------------------------ Net Expenses 6,363,192 ------------------------------------------------------------------------------ Net Investment Income 2,772,979 NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS: Net realized gain on: Investments 37,890,695 Foreign currency transactions 312,747 ------------------------------------------------------------------------------ Net realized gain 38,203,442 ------------------------------------------------------------------------------ Net change in unrealized appreciation (depreciation) on: Investments 90,729,335 Foreign currency translations 67,497 ------------------------------------------------------------------------------ Net change in unrealized appreciation (depreciation) 90,796,832 ------------------------------------------------------------------------------ Net Gain 129,000,274 ------------------------------------------------------------------------------ Net Increase in Net Assets from Operations $ 131,773,253 ============================================================================== See accompanying notes to financial statements. 12 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED INCREASE (DECREASE) IN NET ASSETS DECEMBER 31, 2004 DECEMBER 31, 2003 --------------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 2,772,979 $ 2,281,656 Net realized gain (loss) on investments and foreign currency transactions 38,203,442 (3,515,007) Net change in unrealized appreciation (depreciation) on investments and foreign currency transactions 90,796,832 115,867,350 --------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 131,773,253 114,633,999 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (2,991,364) (778,511) --------------------------------------------------------------------------------------------------------------------- Total distributions to shareholders (2,991,364) (778,511) SHARE TRANSACTIONS: Subscriptions 172,565,632 152,933,800 Distributions reinvested 2,991,364 778,511 Redemptions (78,291,925) (102,925,641) --------------------------------------------------------------------------------------------------------------------- Net Increase from Share Transactions 97,265,071 50,786,670 --------------------------------------------------------------------------------------------------------------------- Total Increase in Net Assets 226,046,960 164,642,158 NET ASSETS: Beginning of period 380,725,722 216,083,564 --------------------------------------------------------------------------------------------------------------------- End of period $ 606,772,682 $ 380,725,722 --------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME $ 2,410,578 $ 2,935,123 =====================================================================================================================
See accompanying notes to financial statements. 13 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2004 2003 2002 2001 2000 -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 19.68 $ 13.27 $ 15.40 $ 28.53 $ 43.67 -------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) 0.13 0.13 0.07 0.02 (0.26) Net realized and unrealized gain (loss) on investments and foreign currency transactions 5.80 6.33 (2.20) (5.12) (9.75) -------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 5.93 6.46 (2.13) (5.10) (10.01) -------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.15) (0.05) -- -- -- From net realized gain and unrealized gain reportable for federal income taxes -- -- -- (8.03) (5.13) -------------------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders (0.15) (0.05) -- (8.03) (5.13) -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 25.46 $ 19.68 $ 13.27 $ 15.40 $ 28.53 ================================================================================================================================ Total Return (b) 30.27% 48.86% (13.83)% (21.27)% (27.84)% -------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses (c) 1.36% 1.41% 1.47% 1.43% 1.41% Net investment income (loss) (c) 0.59% 0.85% 0.46% 0.10% (0.68)% Portfolio turnover rate 47% 45% 54% 56% 67% Net assets, end of period (000's) $ 606,773 $ 380,726 $ 216,084 $ 230,626 $ 271,675
-------------------------------------------------------------------------------- (a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions are reinvested. (c) The benefits derived from custody fees paid indirectly had no impact. See accompanying notes to financial statements. 14 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Wanger International Small Cap (the "Fund"), is a series of Wanger Advisors Trust (the "Trust"), an open-end management investment company organized as a Massachusetts business trust. The investment objective of the Fund is to seek long-term growth of capital. The Fund is 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 Securities of the Fund are valued at market value or, if a market quotation for a security is not readily available or is deemed not to be reliable because of events or circumstances that have occurred between the market quotation and the time as of which the security is to be valued, the security is valued at a fair value determined in accordance with procedures established by the Board of Trustees. 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. If a security is traded principally on the Nasdaq Stock Market Inc., the Nasdaq Official Closing Price will be applied. Securities for which there are no reported sales on the valuation date are valued at the latest bid quotation. Short-term debt obligations having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. Securities for which quotations are not readily available and any other assets are valued as determined in good faith by the Board of Trustees. The Trust has retained an independent statistical fair value pricing service to assist in the fair valuation process for securities principally traded in a foreign market in order to adjust for possible changes in value that may occur between the close of the foreign exchanges and the time at which fund shares are priced. If a security is valued at a "fair value", that value may be different from the last quoted market price for the security. REPURCHASE AGREEMENTS The Fund may engage in repurchase agreement transactions. The Fund, through its custodians, receives delivery of underlying securities collateralizing each repurchase agreement. The Fund's investment advisor determines that the value of the underlying securities is at all times at least equal to the repurchase price including interest. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 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 an accrual basis and includes amortization of discounts on short-term debt obligations and on long-term debt obligations when required for federal income tax purposes. Short-term debt obligations having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis, which approximates fair value. Realized gains and losses from security transactions are reported on an identified cost basis. RESTRICTED SECURITIES Restricted securities are securities that may only be resold upon registration under federal securities laws or in transactions exempt from registration. In some cases, the issuer of restricted securities has agreed to register such securities for resale at the issuer's expense either upon demand by the Fund/Trust or in connection with another registered offering of the securities. Many restricted securities may be resold in the secondary market in transactions exempt from registration. Such restricted securities may be determined to be liquid under criteria established by the Board of Trustees. The Fund will not incur any registration costs upon such resale. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. FUND SHARE VALUATION Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange ("the 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. CUSTODY FEES/CREDITS Custody fees are reduced based on the Fund's cash balances maintained with the custodian. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. The amount is disclosed as a reduction of total expenses in the Statement of Operations. FEDERAL INCOME TAXES The Fund has complied with the provisions of the Internal Revenue Code available to regulated investment companies and, in the manner provided therein, distributes all its taxable income, as well as any net realized gain on sales of investments and foreign currency transactions reportable for federal income tax purposes. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required. FOREIGN CAPITAL GAINS TAXES Realized gains in certain countries may be subject to foreign taxes at the fund level, at rates ranging from 10%-30%. The Fund accrues for such foreign taxes on net realized and unrealized gains at the appropriate rate for each jurisdiction. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on the ex-date. 3. FEDERAL TAX INFORMATION The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. Reclassifications are made to the Fund's capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. For the year ended December 31, 2004, permanent differences resulting primarily from differing treatments for foreign currency transactions, foreign 15 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS capital gain tax reclasses and passive foreign company adjustments ("PFIC") were identified and reclassified among the components of the Fund's net assets as follows: UNDISTRIBUTED ACCUMULATED NET INVESTMENT NET REALIZED UNREALIZED INCOME LOSS APPRECIATION -------------- ------------ ------------ $(306,160) $(307,968) $614,128 Net investment income and net realized gains (losses), as disclosed on the Statement of Operations, and net assets were not affected by this reclassification. The tax character of distributions paid during the years ended December 31, 2004 and December 31, 2003 was as follows: DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------- ----------------- Distributions paid from: Ordinary Income $2,991,364 $778,511 As of December 31, 2004, the components of distributable earnings on a tax basis were as follows: UNDISTRIBUTED UNDISTRIBUTED NET ORDINARY LONG-TERM UNREALIZED INCOME CAPITAL GAINS APPRECIATION* ------------ ------------- ------------ $6,913,269 $-- $172,886,626 * The differences between book-basis and tax-basis net unrealized appreciation/depreciation are primarily due to deferral of losses from wash sales, foreign currency transactions and PFIC adjustments. Unrealized appreciation and depreciation at December 31, 2004, based on cost of investments for federal income tax purposes, was: NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION APPRECIATION DEPRECIATION (DEPRECIATION) -------------- ------------ -------------- $181,296,783 $(8,518,429) $172,778,354 The following capital loss carryforwards, determined as of December 31, 2004, are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code: YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARDS ---------- ------------- 2009 $ 18,435,084 2010 36,103,588 2011 2,734,494 ------------- Total $ 52,273,166 Expired capital loss carryforwards, if any, are recorded as a reduction of paid-in capital. Capital loss carryforwards of $37,528,270 were utilized during the year ended December 31, 2004 for the Fund. 4. TRANSACTIONS WITH AFFILIATES Columbia Wanger Asset Management, L.P., ("Columbia WAM") an indirect wholly-owned subsidiary of Columbia Management Group, Inc., which in turn is a wholly owned subsidiary of Bank of America Corporation ("BOA"), furnishes continuing investment supervision to the Fund and is responsible for the overall management of the Fund's business affairs. Prior to April 1, 2004, Columbia was a wholly-owned subsidiary of Fleet National Bank, which in turn was a wholly-owned subsidiary of FleetBoston Financial Corporation ("Fleet"). On April 1, 2004, Fleet was acquired by BOA. Under the Fund's investment management agreement, fees are accrued daily and paid monthly to Columbia WAM at the annual rates shown in the table below: AVERAGE DAILY NET ASSETS ANNUAL FEE RATE For the first $100 million 1.30% Next $150 million 1.20% In excess of $250 million 1.10% For the year ended December 31, 2004, the Fund's effective investment advisory fee rate was 1.17%. The investment advisory agreement also provides that Columbia WAM will reimburse the Fund to the extent that ordinary operating expenses (computed based on net custodian fees) exceed an annual percentage of 2.00% of the average daily net assets. There was no reimbursement for the year ended December 31, 2004. In accordance with the terms of the NYAG Settlement (as defined and discussed further under Note 8 to these Financial Statements - "Legal Proceedings"), Columbia WAM waived a portion of the fees payable under the Fund's investment management agreement so that those fees are retained at the following rates as a percent of average daily net assets: 1.150% - up to $100 million; 1.000% - $100 million to $250 million; 0.950% - $250 million and over. The fee waiver was effective as of February 10, 2005 but applied as if it had gone into effect on December 1, 2004. The financial statements, as of December 31, 2004, are not reflective of these changes. Certain officers and trustees of the Trust are also officers of Columbia WAM. The Trust makes no direct payments to its officers and trustees who are affiliated with Columbia WAM. For the year ended December 31, 2004, the Fund paid $70,268 to trustees not affiliated with Columbia WAM. Effective April 2004, the Board of Trustees appointed a Chief Compliance Officer to the Fund in accordance with federal securities regulations. The Fund will pay its pro-rata share of the expenses associated with the Office of the Chief Compliance Officer. These expenses are disclosed separately on the Statement of Operations. Columbia Funds Distributor, Inc. ("CFDI"), an indirect wholly-owned subsidiary of BOA, serves as the principal underwriter of the Trust and receives no compensation for its services. Columbia Funds Services, Inc. (the "Transfer Agent"), an indirect wholly-owned subsidiary of BOA, provides shareholder services to the Fund. For such services, the Transfer Agent receives a fee, paid monthly, at the annual rate of $28.00 per open account. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. Effective February 1, 2004 the Transfer Agent made the decision to waive the reimbursement for certain out-of-pocket expenses. Prior to February 1, 2004, the Transfer Agent was entitled to receive a flat rate charge based on the number of shareholder accounts and transactions. During the year ended December 31, 2004, the Fund engaged in purchases and sales transactions with funds that have a common investment advisor (or affiliated investment advisors), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with the provisions of Rule 17a-7 under the Investment Company Act of 1940 and were $11,599 and $3,626,822, respectively. 16 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 5. BORROWING ARRANGEMENTS The Trust participates in a $150,000,000 credit facility, which was entered into to facilitate portfolio liquidity. Interest is charged to each participating fund based on its borrowings at a rate per annum equal to the Federal Funds rate plus 0.50%. In addition, a commitment fee of 0.10% per annum is accrued and apportioned among the participating funds based on their pro-rata portion of the unutilized line of credit. The commitment fee is included in "Other expenses" on the Statement of Operations. No amounts were borrowed under this facility for the year ended December 31, 2004. 6. FUND SHARE TRANSACTIONS Proceeds and payments on Fund shares as shown in the statement of changes in net assets are in respect of the following numbers of shares: YEAR ENDED YEAR ENDED DECEMBER 31, 2004 DECEMBER 31, 2003 ------------------------------------------------------------------------------- Shares sold 8,009,022 10,174,171 ------------------------------------------------------------------------------- Shares issued in reinvestment of dividend distributions 140,969 61,737 ------------------------------------------------------------------------------- Less shares redeemed 3,663,834 7,169,275 ------------------------------------------------------------------------------- Net increase in shares outstanding 4,486,157 3,066,633 7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the year ended December 31, 2004 were $279,998,219 and $210,236,220. 8. LEGAL PROCEEDINGS On March 15, 2004, Columbia Management Advisors, Inc. ("Columbia Management"), the advisor to the Columbia Funds, and CFDI (collectively with Columbia Management, "Columbia") the distributor of the shares of the Columbia Funds, the Columbia Acorn Funds and the Wanger Advisors Trust Funds (collectively, "the Columbia Family of Funds"), entered into agreements in principle with the staff of the U.S. Securities and Exchange Commission ("SEC") and the Office of the New York Attorney General ("NYAG") to resolve the proceedings brought in connection with the SEC's and NYAG's investigations of frequent trading and market timing in certain Columbia mutual funds. Columbia WAM, the advisor to the Columbia Acorn Funds and the Wanger Advisors Trust Funds, was not a respondent in either proceeding nor were any of its officers or directors. On February 9, 2005, Columbia entered into an Assurance of Discontinuance (the "NYAG Settlement") with the NYAG and consented to the entry of a cease-and-desist order by the SEC (the "SEC Order" and together, the "Settlements"). The Settlements contain substantially the same terms and conditions as outlined in the agreements in principle. Although none of the Wanger Advisors Trust Funds is a party to the Settlement orders, under the terms of the Settlements and in order for Columbia Management to continue to provide administrative services to the Wanger Advisors Funds, the Board of Trustees of the Wanger Advisors Trust Funds agreed to conform to certain governance requirements, including the election of an independent board chair. Under the terms of the SEC Order, Columbia has agreed, among other things, to: pay $70 million in disgorgement and $70 million in civil money penalties; cease and desist from violations of the antifraud provisions and certain other provisions of the federal securities laws; maintain certain compliance and ethics oversight structures; retain an independent consultant to review Columbia's applicable supervisory, compliance, control and other policies and procedures; and retain an independent distribution consultant (see below). The NYAG Settlement also, among other things, requires Columbia and its affiliates, Banc of America Capital Management, LLC and BACAP Distributors, LLC to reduce management fees paid by the Columbia Family of Funds, Nations Funds and other related mutual funds collectively by $32 million per year for five years, for a projected total of $160 million in management fee reductions based on net assets as of March 15, 2004. Pursuant to the procedures set forth in the SEC Order, the settlement amounts will be distributed in accordance with a distribution plan to be developed by an independent distribution consultant, who is acceptable to the SEC staff and the independent trustees of the funds. The distribution plan must be based on a methodology developed in consultation with Columbia and the independent trustees of the funds and not unacceptable to the staff of the SEC. More specific information on the distribution plan will be communicated by Columbia WAM and/or its affiliates at a later date. Columbia WAM, the Columbia Acorn Trust, another mutual fund family advised by Columbia WAM, and the trustees of Columbia Acorn Trust are defendants in several derivative and class action lawsuits that allege, in summary, defendants permitted investors to engage in improper trading of shares of various funds in violation of certain federal and state laws. All of these lawsuits have been consolidated with similar suits in a Multi-District Litigation proceeding in Baltimore, Maryland and consolidated class action and derivative complaints have been filed. The Columbia Acorn Trust and Columbia WAM are also defendants in a class action lawsuit that alleges, in summary, that the Columbia Acorn Trust and Columbia WAM exposed shareholders of Columbia Acorn International Fund to trading by market timers by allegedly (a) failing to properly evaluate daily whether a significant event affecting the value of that Fund's securities had occurred after foreign markets had closed but before the calculation of the Fund's net asset value ("NAV"); (b) failing to implement the Fund's portfolio valuation and share pricing policies and procedures; and (c) failing to know and implement applicable rules and regulations concerning the calculation of NAV. Columbia WAM and the trustees of Columbia Acorn Trust are also defendants in a lawsuit alleging that Columbia WAM used Fund assets to make undisclosed payments to brokers as an incentive for the brokers to market the Columbia Acorn Funds over other mutual funds to investors. The complaint alleges Columbia WAM and the trustees of Columbia Acorn Trust breached certain common laws duties and federal laws. On January 11, 2005 a putative class action lawsuit was filed in federal district court in Massachusetts against, among others, the Trustees of the Columbia Acorn Trust and Columbia WAM. The lawsuit alleges that defendants violated common law duties to fund shareholders as well as sections of the Investment Company Act of 1940, by failing to ensure that the Columbia Acorn Trust funds and other affiliated funds participated in securities class action settlements for which the funds were eligible. Specifically, plaintiffs allege that defendants failed to submit Proof of Claims in connection with settlements of securities class action lawsuits filed against companies in which the funds held positions. The complaint seeks compensatory and punitive damages, and the disgorgement of all fees paid to the Columbia WAM and affiliated advisers. The Columbia Acorn Trust and Columbia WAM intend to defend these suits vigorously. The Columbia Acorn Trust does not believe that the pending actions will have a material adverse effect on the financial statements of any Columbia Acorn Fund, and Columbia WAM does not believe that the pending actions will have a material adverse effect on its ability to perform under its contracts with the Fund. As a result of these matters or any adverse publicity or other developments resulting from them, there may be increased redemptions or reduced sales of Fund shares, which could increase transaction costs or operating expenses, or have other adverse consequences for the Fund. In connection with the events described in detail above, various parties have filed suit again certain funds, their Boards and/or BOA (and affiliated entities). These suits are ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, cannot be currently made. For the year ended December 31, 2004, CMG has assumed $24,900 in consulting services and legal fees incurred by the Fund in connection with these matters. 17 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Effective April 13, 2004, the audit committee of the Trust requested that Ernst & Young LLP ("E&Y") resign as the auditors of the Fund. Also effective July 14, 2004, upon the recommendation of the audit committee, the Trust selected PricewaterhouseCoopers LLP ("PWC") as independent registered public accounting firm to audit the books and records of the Fund for its fiscal year ending December 31, 2004. The cessation of the relationship with E&Y was based on the impairment of E&Y's independence resulting from the consummation of the merger of FleetBoston Financial Corporation and Bank of America Corporation and accordingly, E&Y's ability to provide audit services to the Fund. E&Y's report on the financial statements of the Fund for the past two years did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the period E&Y was engaged, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to E&Y's satisfaction, would have caused it to make reference to that matter in connection with its report. 18 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of Wanger International Small Cap Fund: In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Wanger International Small Cap Fund (a series of the Wanger Advisors Trust, hereinafter referred to as the "Fund") at December 31, 2004, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. The statement of changes in net assets for the year ended December 31, 2003 and financial highlights of the Fund for the periods ended December 31, 2003 and prior were audited by other independent auditors whose report dated February 6, 2004 expressed an unqualified opinion on those financial statements. PricewaterhouseCoopers LLP Chicago, Illinois February 14, 2005 19 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST The Board of Trustees of the Trust has overall management responsibility for the Trust and the Funds. Each trustee serves a term of unlimited duration, provided that a majority of trustees always has been elected by shareholders. The trustees appoint their own successors, provided that at least two-thirds of the trustees, after such appointment, have been elected by shareholders. Shareholders may remove a trustee, with or without cause, upon the vote of two-thirds of the Trust's outstanding shares at any meeting called for that purpose. A trustee may be removed, with or without cause, upon the vote of a majority of the trustees. The names of the trustees and officers of the Trust, the date each was first elected or appointed to office, their principal business occupations during at least the last five years, and other directorships they hold are shown below. Each trustee serves in such capacity for each of the four series of the Trust. The business address of each trustee and officer of the Trust is Columbia Wanger Asset Management, L.P., 227 West Monroe, Suite 3000, Chicago, Illinois 60606, except for Messrs. Clark, Connaughton, and Pietropaolo, whose address is Columbia Management Group, Inc., 245 Summer Street, Boston, Massachusetts, 02210. Wanger's Statement of Additional Information includes additional information about Columbia Wanger's trustees and officers. You may obtain a free copy of the Statement of Additional Information on our website, www.wanger.com, or by writing or calling toll-free: Columbia Wanger Asset Management, L.P. Shareholder Services Group 227 W. Monroe, Suite 3000 Chicago, IL 60606 888-4-Wanger (888-492-6437)
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OTHER DECEMBER 31, 2004 TO OFFICE PAST FIVE YEARS DIRECTORSHIPS ------------------------------ ------------------ --------------------------------------------- ------------- TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST: JEROME L. DUFFY, 68, 2003 Retired since December 31, 1997; prior None. Trustee thereto, senior vice president, Kemper Financial Services and treasurer, Kemper Funds. FRED D. HASSELBRING, 63, 1994 Retail industry, general project development None. Trustee and business computer systems consultant; voice over specialist for industrial and institutional applications; former chairman of the board of the Trust (September 2004 to November 2004); former lead independent trustee (August 2003 to September 2004). KATHRYN A. KRUEGER, M.D., 47, 2003 Medical Fellow I, Cardiovascular Therapeutic None. Trustee Area, Lilly Research Laboratories (May 2004 to present); Medical Advisor, Cardiovascular Therapeutic Area, Lilly Research Laboratories (January 2003 to April 2004); Medical Director, Cardiovascular Therapeutic Area, Lilly Research Laboratories (October 2002 to December 2002); Medical Director, Neptune Product Team, Lilly Research Laboratories (October 2001 to October 2002); Acting Director and Senior Clinical Research Physician, Lilly Research Laboratories (April 2001 to September 2001); Senior Clinical Research Physician, Lilly Research Laboratories (January 2000 to March 2001); Clinical Research Physician, Lilly Research Laboratories (June 1996 to December 1999). PATRICIA H. WERHANE, 69, 1998 Ruffin Professor of Business Ethics, Darden None. Chair of the Board and Trustee Graduate School of Business Administration, University of Virginia, since 1993; Senior Fellow since 2004 and Co-Director of the Olsson Center for Applied Ethics, Darden Graduate School of Business Administration, University of Virginia, from 2001-2004; and Wicklander Chair of Business Ethics and Director of the Institute for Business and Professional Ethics, DePaul University (since September 2003). TRUSTEE WHO IS AN INTERESTED PERSON OF WANGER ADVISORS TRUST: RALPH WANGER, 70, 1994 Founder, former president, chief investment Columbia Trustee officer and portfolio manager, Columbia Acorn Wanger Asset Management, L.P. (CWAM) Trust. (1992-2003); former president, Columbia Acorn Trust from April 1992 through September 2003; former president, Wanger Advisors Trust (1994 through September 2003); principal, WAM from July 1992 until September 2000; president, WAM Ltd. from July 1992 to September 2000; director, Wanger Investment Company plc.; Director, CWAM.
20 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OTHER DECEMBER 31, 2004 TO OFFICE PAST FIVE YEARS DIRECTORSHIPS ------------------------------ ------------------ --------------------------------------------- ------------- OFFICERS OF WANGER ADVISORS TRUST: BEN ANDREWS, 39, 2004 Analyst and portfolio manager, CWAM since None. Vice President 1998; vice president, Columbia Acorn Trust. J. KEVIN CONNAUGHTON, 40, 2001 Treasurer of the Columbia Funds and of the None. Assistant Treasurer Liberty All-Star Funds since December 2000 (formerly controller of the Columbia Funds and of the Columbia All-Star Funds from February 1998 to October 2000); treasurer of the Galaxy Funds since September 2002; treasurer, Columbia Management Multi-Strategy Hedge Fund, LLC since December 2002 (prior thereto, vice president of Colonial Management Associates from February 1998 to October 2000). MICHAEL G. CLARKE, 34, 2004 Chief accounting officer of the Columbia None. Assistant Treasurer Funds, Liberty Funds, Stein Roe Funds and All-Star Funds since October 2004; Controller of the Columbia Funds, Liberty Funds, Stein Roe Funds and All-Star Funds from May 2004 to October 2004; Assistant Treasurer from June 2002 to May 2004; Vice President, Product Strategy & Development of the Liberty Funds and Stein Roe Funds from February 2001 to June 2002; Assistant Treasurer of the Liberty Funds, Stein Roe Funds and the All-Star Funds from August 1999 to February 2001. KENNETH A. KALINA, 45, 1995 Chief Compliance Officer, CWAM since May None. Assistant Treasurer 2004; treasurer and Chief financial officer, CWAM since April 2000; assistant treasurer, Columbia Acorn Trust; fund controller, CWAM since September 1995; director, New Americas Small Cap Fund. BRUCE H. LAUER, 47, 1995 Chief operating officer, CWAM since April None. Vice President, Secretary 1995; principal, WAM from January 2000 to and Treasurer September 2000; vice president, treasurer and secretary, Columbia Acorn Trust; director, Wanger Investment Company plc and New Americas Small Cap Fund. CHARLES P. MCQUAID, 51, 1994 President, CWAM since October 2003; Chief Columbia President investment officer, CWAM since September Acorn 2003; senior vice president of the Trust from Trust 1994 through September 2003; portfolio manager since 1995 . and director of research since July 1992 through December 2003; CWAM interim director of international research from October 2003 until December 2004; principal, WAM from July 1995 to September 2000; trustee since 1992 and president since 2003, Columbia Acorn Trust. ROBERT A. MOHN, 43, 1997 Director of domestic research, CWAM, since None. Vice President March 2004; analyst and portfolio manager, CWAM since August 1992; principal, WAM from 1995 to September 2000; vice president, Columbia Acorn Trust. TODD M. NARTER, 41, 2001 Analyst and portfolio manager, CWAM since None. Vice President June 1997; vice president, Columbia Acorn Trust. CHRISTOPHER J. OLSON, 40, 2001 Analyst and portfolio manager, CWAM since None. Vice President January 2001; vice president, Columbia Acorn Trust; prior to 2001, director and portfolio strategy analyst with UBS Asset Management/Brinson Partners. VINCENT P. PIETROPAOLO, 39, 2001 Assistant General Counsel, Bank of America None. Assistant Secretary (and its predecessors) since December 1999. ROBERT SCALES, 52, 2004 Deputy General Counsel, Grant Thornton LLP None. Chief Compliance Officer, (2002-2004); Associate General Counsel, UBS Senior Vice President PaineWebber (broker-dealer) (1997-2002). and General Counsel
21 Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- This page intentionally left blank. Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- This page intentionally left blank. Wanger International Small Cap 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] WANGER ADVISORS TRUST TRANSFER AGENT, DIVIDEND DISBURSING AGENT Columbia Funds Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Columbia Funds Distributor, Inc. One Financial Center Boston, Massachusetts 02111-2621 INVESTMENT ADVISER Columbia Wanger Asset Management, L.P. 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 www.wanger.com 1-888-4-WANGER (1-888-492-6437) LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP Chicago, Illinois This report, including the 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. A description of the fund's proxy voting policies and procedures is available (i) on the fund's website, www.wanger.com; (ii) on the Securities and Exchange Commission's website at www.sec.gov, and (iii) without charge, upon request, by calling 888-492-6437. Information regarding how the fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004 is available from the SEC's website. The fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. 24 Wanger Advisors Trust SHR-02/467U-0205 05/4314 WANGER SELECT 2004 Annual Report [Logo] WANGER ADVISORS FUNDS ---------------------------------------------------------- MANAGED BY COLUMBIA WANGER ASSET MANAGMENT, L.P. [Logo] WANGER SELECT 2004 ANNUAL REPORT TABLE OF CONTENTS 1 Understanding Your Expenses 2 The Miracle Year 4 Performance Review 6 Statement of Investments 8 Statement of Assets and Liabilities 8 Statement of Operations 9 Statements of Changes in Net Assets 10 Financial Highlights 11 Notes to Financial Statements 15 Report of Independent Registered Public Accounting Firm 16 Federal Income Tax Information 17 Board of Trustees and Management of Wanger Advisors Trust COLUMBIA WANGER ASSET MANAGEMENT, L.P. ("COLUMBIA WAM") IS ONE OF THE LEADING GLOBAL SMALL-CAP EQUITY MANAGERS IN THE U.S. WITH MORE THAN 30 YEARS OF SMALL-CAP INVESTMENT EXPERIENCE. COLUMBIA WAM MANAGES MORE THAN $22 BILLION IN EQUITIES AND IS THE INVESTMENT ADVISER TO WANGER U.S. SMALLER COMPANIES, WANGER INTERNATIONAL SMALL CAP, WANGER SELECT, WANGER INTERNATIONAL SELECT AND THE COLUMBIA ACORN FAMILY OF FUNDS. FOR MORE COMPLETE INFORMATION ABOUT OUR FUNDS, INCLUDING THE COLUMBIA ACORN FUNDS, OUR FEES, RISKS ASSOCIATED WITH INVESTING, OR EXPENSES, CALL 1-888-4-WANGER FOR A PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. THIS REPORT IS NOT AN OFFER OF THE SHARES OF THE COLUMBIA ACORN FUND FAMILY. THE DISCUSSION IN THE REPORT OF PORTFOLIO COMPANIES IS FOR ILLUSTRATION ONLY AND IS NOT A RECOMMENDATION OF INDIVIDUAL STOCKS. THE INFORMATION IS BELIEVED TO BE ACCURATE, BUT THE INFORMATION AND THE VIEWS OF THE PORTFOLIO MANAGERS MAY CHANGE AT ANY TIME WITHOUT NOTICE AND THE PORTFOLIO MANAGERS MAY ALTER A FUND'S PORTFOLIO HOLDINGS BASED ON THESE VIEWS AND THE FUND'S CIRCUMSTANCES AT THAT TIME. Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- UNDERSTANDING YOUR EXPENSES As a fund shareholder, you incur two types of costs. There are transaction costs, which generally include sales charges on purchases and may include redemption or exchange fees. There are also continuing costs, which generally include investment advisory, Rule 12b-1 fees, and other fund expenses. The information on this page is intended to help you understand your ongoing costs of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. ANALYZING YOUR FUND'S EXPENSES To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors in the fund during the reporting period. The information in the following table is based on an initial investment of $1,000.00, which is invested at the beginning of the reporting period and held for the entire period. Expense information is calculated two ways and each method provides you with different information. The amount listed in the "actual" column is calculated using actual operating expenses. The amount listed in the "hypothetical" column assumes that the return each year is 5% before expenses and then applies each Fund's actual expense ratio for the period to the hypothetical return. You should not use the hypothetical account values and expenses to estimate either your actual account balance at the end of the period or the expenses you paid during the reporting period. See the "Compare with other funds" information for details on using the hypothetical data. ESTIMATING YOUR ACTUAL EXPENSES To estimate the expenses that you paid over the period, first you will need your account balance at the end of the period. 1. Divide your ending account balance by $1,000.00. For example, if an account balance was $8,600.00 at the end of the period, the result would be 8.6. 2. In the section of the table below titled "Expenses paid during the period," locate the amount for your fund. You will find this number is in the column labeled "actual." Multiply this number by the result from step 1. Your answer is an estimate of the expenses you paid on your account during the period. July 1, 2004 - December 31, 2004
-------------------------------------------------------------------------------------------------------------------- Account value at the Account value at the Expenses paid during Fund's annualized beginning of the period ($ ) end of the period ($) the period ($) expense ratio (%)* -------------------------------------------------------------------------------------------------------------------- Actual Hypothetical Actual Hypothetical Actual Hypothetical -------------------------------------------------------------------------------------------------------------------- Wanger Select 1,000.00 1,000.00 1,102.20 1,019.61 5.81 5.58 1.10 --------------------------------------------------------------------------------------------------------------------
EXPENSES PAID DURING THE PERIOD ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, THEN MULTIPLIED BY THE NUMBER OF DAYS IN THE FUND'S MOST RECENT FISCAL HALF-YEAR AND DIVIDED BY 366. IT IS IMPORTANT TO NOTE THAT THE EXPENSE AMOUNTS SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONLY ONGOING COSTS OF INVESTING IN THE FUND. AS A SHAREHOLDER OF THE FUND, YOU DO NOT INCUR ANY TRANSACTION COSTS, SUCH AS SALES CHARGES, REDEMPTION OR EXCHANGE FEES. EXPENSES PAID DURING THE PERIOD DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS.~ THE HYPOTHETICAL EXAMPLE PROVIDED IS USEFUL IN COMPARING ONGOING COSTS ONLY AND WILL NOT HELP YOU DETERMINE THE RELATIVE TOTAL COSTS OF OWNING DIFFERENT FUNDS WHOSE SHAREHOLDERS MAY INCUR TRANSACTION COSTS. * FOR THE SIX MONTHS ENDED 12/31/04. COMPARE WITH OTHER FUNDS Since all mutual fund companies are required to include the same hypothetical calculations about expenses in shareholder reports, you can use this information to compare the ongoing cost of investing in the fund with other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples of other funds. As you compare hypothetical examples of other funds, it is important to note that hypothetical examples are meant to highlight the continuing cost of investing in a fund and do not reflect any transactional costs, such as sales charges or redemption or exchange fees, that may be incurred by shareholders of other funds. Expenses paid during the period do not include any insurance charges imposed by your insurance company's separate accounts. 1 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- [LOGO ] THE MIRACLE YEAR Photo of RALPH WANGER RALPH WANGER FOUNDER, ADVISOR AND TRUSTEE COLUMBIA WANGER ASSET MANAGEMENT, L.P. 1905 was a year of surprises. The first surprise was the victory of the Japanese over the Russians in the Russo-Japanese War. In May 1905, the untested Japanese Navy annihilated the Russian fleet at Tsushima. This was the first time a non-white country had beaten the main force of a European colonial power. The second unexpected event was in physics. 2005 will be celebrated as the centennial of Albert Einstein's "Miracle Year." The journal, ANNALEN DER PHYSIK, volume 17, published three articles in September 1905 all written by Einstein, an obscure clerk in the Swiss patent office in Bern. He had an undergraduate degree in physics but no Ph.D (it was granted a year later). Each of the articles were on a different subject and each one revolutionized its branch of physics. Einstein's papers created 20th century physics almost single-handedly. ATOMS In 1905 there were different theories about the structure of matter. If you take a glass of water and pour nine-tenths of it out, you still have a glass with water in it. What happens if you repeat this process of throwing out 90% of the water in the glass? After you repeat the process a few more times, you have such a small amount of water that you can only see it under a microscope, and in a few more steps the water drop will be too small to be seen even under the microscope. Can you continue the boring job of splitting water forever or do you finally get to a point where it isn't water anymore? Of course we know the answer: Once you get down to a single molecule of water you can't split it and still say that you have water left. Many leading scientists did not accept the atomic theory in 1905. Einstein looked at the process called Brownian Motion in which a grain of pollen or other small object moves around in a random way. (The same mathematical process makes stock prices jiggle.) He deduced that this motion was caused by billions of atoms bumping into the pollen grain in an irregular pattern. He was even able to calculate the size of the atoms involved, thus proving that atoms really existed. PHOTONS In 1905 there was still a basic debate about the nature of light. The greatest achievement of 19th century physics was Maxwell's set of partial differential equations governing electromagnetic fields, including light. Maxwell's equations required that light be a wave. The great Max Planck had introduced the idea of a quantum of energy in 1900 to get an equation that tracked the spectrum of heat radiation, but most scientists doubted that a light quantum was "real." Heinrich Hertz, Philip Lenard and others showed that when a beam of ultraviolet light shines on a piece of metal you produce an electrical current in the metal. There was no way to explain the photoelectric effect according to the Maxwell wave theory of light. The second paper Einstein wrote dealt with the problem of the photoelectric effect. If you cut the amount of energy in a beam of light by 90% and keep reducing it, you still have a beam of light. If you keep slicing the amount of light, does the beam of light keep getting smaller and smaller forever or do you get down to an "atom" of light that can't be split further? Einstein proved that there was a tiny amount of light that could not be further divided. The least amount of light that exists is a single photon (or quantum) of light. 1 The photoelectric effect is explained by photons acting as particles, not as a wave. Einstein's discovery of the photon had a number of interesting effects. First, it led to the development of quantum mechanics and thus to most of 20th century physics. Second, it won Einstein his only Nobel Prize. Third, it uncovered a paradox that still puzzles students, the duality of light. If you run an experiment to show that light is a wave, you can prove it's a wave. If you run an experiment to show that it's a particle, you can prove it's a particle. This duality principle contradicts common sense but when you study science you have to get used to it. The fourth effect was that it made Lenard a life-long enemy of Einstein. Philip Lenard, who received the Nobel Prize in 1905 for his own work on cathode rays, was close to the solution but Einstein ended up getting the credit. Lenard became an unrelenting foe of Einstein, and influenced the Nobel committee's decision not to give Einstein the prize for his theory of relativity. Later on, Lenard became an ardent Nazi. RELATIVITY In 1905, there was also a debate in scientific circles about speed. If you were in a really powerful rocket ship in space, and you pushed the throttle forward, you would speed up. If you kept on increasing the power, would you go ever faster, or was there an absolute speed limit in the universe that you could not exceed? 2 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- The third paper became the best known, Einstein's special theory of relativity. It explained that there was a cosmic speed limit, the speed of light. Very odd things happen when your rocket ship is moving close to the speed of light. Time slows down and you get shorter, under the Lorentz contraction equation, giving rise to the limerick: A sexy young techie named Fisk, Had a motion exceedingly brisk. So fast was his action The Lorentz contraction Shortened his rod to a disk. In a very brief paper published later in 1905, Einstein added in a note that his theory of relativity implied the equation E=mc2. That solved the paradox of radioactivity; Mme Curie's radium was producing much more energy then could be explained by 19th century physics. Einstein showed that radioactive energy was caused by turning a small amount of mass into a lot of energy. So we had this technical journal containing three papers written by a man unknown in science, a non-Ph.D, a non-academic, writing on a German-dominated field with all the fussiness about rank and reputation that you would expect. Would anyone care? Einstein did not receive any communication from any physicists for the first couple months after he published, but in early 1906 Max Planck read and understood the papers. He wrote to Einstein and sent his assistant, another important physicist, Max von Laue, to visit Einstein in Bern. Planck's subsequent endorsement made Einstein acceptable to the community of physicists, and his papers became required study for all physicists, as they remain. The compelling human question: How the heck did Einstein do it? How could one human being produce three revolutionary papers in one year, on three different subjects, while carrying a full-time job at the patent office to boot? We can admire but not explain. The "Miracle Year" commemorates one of the greatest feats of the human mind ever. 1 PLANCK AND EINSTEIN HAD DISCOVERED THE QUANTUM JUMP, WHICH WAS THE SMALLEST THING THAT COULD POSSIBLY EXIST IN THE UNIVERSE. MODERN WRITERS, FOR REASONS DIFFICULT TO EXPLAIN, NOW USE THE PHRASE QUANTUM JUMP TO MEAN A BIG EVENT. WHEN NON-SCIENTISTS START THROWING AROUND SCIENTIFIC TERMS WITHOUT UNDERSTANDING THEM, FUNNY THINGS HAPPEN. DON'T GET ME STARTED ON THE HEISENBERG UNCERTAINTY PRINCIPLE. INCIDENTALLY, ALBERT EINSTEIN'S FATHER, HERMANN, WAS BORN IN THE WURTTEMBERG VILLAGE OF BUCHAU, WHERE HIS FAMILY HAD LIVED FOR GENERATIONS. HERMANN MOVED 20 MILES FROM BUCHAU TO THE CITY OF ULM, WHERE ALBERT WAS BORN. MY GREAT-GREAT GRANDFATHER, JOSEPH KOHN, WAS ALSO FROM BUCHAU AND HE HAD MANY EINSTEINS IN HIS FAMILY TREE. I AM VERY PROUD OF THE EINSTEIN CONNECTION. SOURCES: "EINSTEIN: A CELEBRATION," SEMINAR AT THE ASPEN INSTITUTE, AUGUST 8-11, 2004. EINSTEIN, ALBERT, "IDEAS AND OPINIONS," CROWN PUBLISHERS, 1954. KAKU, MICHIO, "EINSTEIN COSMOS: HOW ALBERT EINSTEIN'S VISION TRANSFORMED OUR UNDERSTANDING OF SPACE AND TIME," ATLAS BOOKS, 2004. "DISCOVER" MAGAZINE, "SPECIAL EINSTEIN ISSUE," SEPTEMBER 2004. A SPECIAL THANKS TO DOUG STONE OF YALE UNIVERSITY FOR EDITING THIS ESSAY. 3 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- [LOGO ] PERFORMANCE REVIEW WANGER SELECT* Photo of BEN ANDREWS BEN ANDREWS PORTFOLIO MANAGER It was a good year for Wanger Select. The Fund gained 19.31% during 2004, outperforming the S&P MidCap 400's 16.48% return and the S&P 500's 10.88% gain. McAfee, ITT Educational Services and Abercrombie & Fitch all did well for the Fund for the annual period. McAfee was up 83% for the 12 months while ITT Educational Services increased 65%. Together these two stocks made up over 6% of the Fund's return for the year. Abercrombie & Fitch, up an impressive 91% in the year, was another big contributor to Fund performance. On the downside, Skillsoft cost the Fund some performance as the stock slid due to continued pricing pressure from its largest competitor, Netg. Skillsoft was down 29% for the 12 months. The largest detractors to performance, however, were Synopsys, down 42%, and Interpublic Group, down 32%. We are evaluating whether or not Synopsys has turn around potential. Interpublic Group was sold in the fourth quarter. Also during the fourth quarter, Oracle purchased one of the Fund's holdings, PeopleSoft, after a lengthy and much publicized takeover battle. During the 17-month negotiation process for PeopleSoft, its board of directors received a lot of bad press for not having the shareholders' best interests in mind. Our firm's due diligence refuted this and we backed the board. In the end, the board's moves did put its customer and shareholder interests first when trying to negotiate with a very adversarial suitor. We received the cash proceeds from the PeopleSoft transaction two days before the end of the year. We also added six new names to the portfolio during the final three months of the year while deleting one (PeopleSoft). New ideas include an investment in the cable industry with UnitedGlobalCom and Liberty Media International. Both stocks focus on serving foreign markets. The Fund also purchased IAC/InterActive, one of the five big Internet companies, as its stock price reached a two-year low. FMC Technologies was added as we believe offshore deep-water oil drilling will increase over the next several years. The Fund also purchased Aspect Communications and AnswerThink Consulting. WANGER SELECT IS A NON-DIVERSIFIED FUND. THE PERFORMANCE OF EACH OF ITS HOLDINGS WILL HAVE A GREATER IMPACT ON THE FUND'S TOTAL RETURN, AND MAY MAKE THE FUND'S RETURNS MORE VOLATILE THAN A MORE DIVERSIFIED FUND. MID-CAP STOCKS TEND TO BE MORE VOLATILE AND MAY BE LESS LIQUID THAN THE STOCKS OF LARGER COMPANIES. As of 12/31/04, the Fund's positions in the holdings mentioned were: McAfee, 7.4%; ITT Educational Services, 5.4%; Abercrombie & Fitch, 3.6%; Skillsoft, 4.0%; Netg, 0.0%; Synopsys, 1.5%; Interpublic Group, 0.0%; Oracle, 0.0%; PeopleSoft, 0.0%; UnitedGlobalCom, 0.9%; Liberty Media International, 0.9%; IAC/InterActive, 1.6%; FMC Technologies, 0.9%; Aspect Communications, 0.1%; AnswerThink Consulting, 0.2%. * Wanger Twenty was renamed Wanger Select on May, 1, 2004. 4 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- VALUE OF A $10,000 INVESTMENT IN WANGER SELECT* TOTAL RETURN FOR EACH PERIOD, FEBRUARY 1, 1999 (INCEPTION DATE) THROUGH DECEMBER 31, 2004 [LINE CHART APPEARS HERE] WANGER S&P SELECT MIDCAP 400 2/01/1999 9750 9476.42 3/31/1999 10530 9741.15 4/30/1999 12150 10509.5 5/31/1999 12220 10555.1 6/30/1999 12530 11120.2 7/31/1999 12510 10883.9 8/31/1999 11420 10510.9 9/30/1999 11410 10186.3 10/31/1999 12250 10705.4 11/30/1999 12510 11267.2 12/31/1999 13430 11936.9 1/31/2000 13090 11600.7 2/29/2000 13100 12412.6 3/31/2000 13696.7 13451.5 4/30/2000 13049.5 12981.8 5/31/2000 12694.5 12819.8 6/30/2000 13822 13008.1 7/31/2000 13404.4 13213.6 8/31/2000 14782.4 14688.9 9/30/2000 15064.3 14588.3 10/31/2000 15126.9 14093.6 11/30/2000 13748.9 13029.8 12/31/2000 14698.9 14026.6 1/31/2001 15231.3 14339 2/28/2001 14312.6 13520.7 3/31/2001 13790.7 12515.5 4/30/2001 14761.5 13896.1 5/31/2001 15555 14219.7 6/30/2001 15220.9 14162.3 7/31/2001 15053.9 13951.4 8/31/2001 14427.5 13495 9/30/2001 13592.3 11816.4 10/31/2001 13895.1 12339.1 11/30/2001 15387.9 13257 12/31/2001 16035.2 13941.9 1/31/2002 15763.8 13869.5 2/28/2002 15398.4 13886.5 3/31/2002 15920.3 14879.2 4/30/2002 15043.4 14809.6 5/31/2002 15481.9 14559.9 6/30/2002 15210.5 13494.2 7/31/2002 14302.2 12187.1 8/31/2002 14698.9 12248.4 9/30/2002 13978.6 11261.6 10/31/2002 14813.8 11749.6 11/30/2002 15450.6 12429.3 12/31/2002 14813.8 11918.6 1/31/2003 14709.4 11570.2 2/28/2003 14751.1 11294.7 3/31/2003 15022.5 11389.9 4/30/2003 15889 12216.9 5/31/2003 16786.8 13229.3 6/30/2003 17277.5 13398 7/31/2003 17997.8 13873.3 8/31/2003 18718.2 14502.6 9/30/2003 18311 14280.6 10/31/2003 19083.5 15360.4 11/30/2003 18979.1 15895.6 12/31/2003 19365.4 16163.8 1/31/2004 19908.3 16514.1 2/29/2004 20472 16910.6 3/31/2004 20481.1 16982.4 4/30/2004 19906.4 16425 5/31/2004 20219.9 16765.7 6/30/2004 20961.8 17147.3 7/31/2004 20000.5 16347.2 8/31/2004 19749.7 16304.4 9/30/2004 20167.6 16787.2 10/31/2004 21035 17055.8 11/30/2004 22362 18071.5 12/31/2004 23,104 18,828.2 AVERAGE ANNUAL RETURN ------------------------------ 1 Year 5 years Life of fund 19.31% 11.46% 15.21% This graph compares the results of $10,000 invested in Wanger Select on February 1, 1999 (the date the Fund began operations) through December 31, 2004, to the S&P MidCap 400 Index, with dividends and capital gains reinvested. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONS. Part of the performance shown is due to the Fund's purchase of securities in IPOs. The impact of IPO purchases declines as a Fund grows large. Wanger Select is a non-diversified fund that invests primarily in the stocks of medium- to larger-size U.S. companies. Each stock may represent a significant part of its overall portfolio. The performance of each of these larger holdings will have a greater impact on Wanger Select's total return and may make the fund's returns more volatile than a more diversified fund. Mid-cap stocks are more volatile and may be less liquid than large-cap stocks. Performance results reflect any voluntary waivers or reimbursements of Fund expenses by the Advisor or its affiliates. Absent these waivers or reimbursement arrangements, performance results would have been lower. PERFORMANCE SHOWN HERE IS PAST PERFORMANCE, WHICH CANNOT GUARANTEE FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER. 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. PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. FOR MONTHLY PERFORMANCE UPDATES, PLEASE CONTACT US AT 1-888-4-WANGER. PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER. -------------------------------------------------------------------------------- RESULTS TO DECEMBER 31, 2004 4TH QUARTER 1 YEAR WANGER SELECT 14.56% 19.31% S&P MidCap 400 12.16 16.48 S&P 500 9.23 10.88 Lipper Mid-Cap Growth Index 13.78 14.03 NAV AS OF 12/31/04: $22.11 PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER. The S&P MidCap 400 is a market value-weighted index of 400 U.S. stocks that are in the next tier down from the S&P 500. The S&P 500 is a broad market-weighted average of blue-chip U.S. companies. The Lipper Mid-Cap Growth Index measures the performance of the 30 largest mid-cap growth funds tracked by Lipper. All indexes are unmanaged and include reinvested dividends. It is not possible to invest directly in an index. Portfolio holdings will vary in the future. * Wanger Twenty was renamed Wanger Select on May 1, 2004. -------------------------------------------------------------------------------- TOP 5 INDUSTRIES As a % of net assets, as of 12/31/04 Information 32.7% Consumer Goods/Services 30.6 Finance 14.5 Health Care 8.7 Industrial Goods/Services 2.7 -------------------------------------------------------------------------------- TOP 10 HOLDINGS As a % of net assets, as of 12/31/04 1. McAfee 7.4% SECURITY SOFTWARE & SERVICES 2. ITT Educational Services 5.4% TECHNOLOGY ORIENTED POST SECONDARY DEGREE PROGRAMS 3. TCF Financial 5.0% GREAT LAKES BANK 4. Harley-Davidson 4.9% MOTORCYCLES & RELATED MERCHANDISE 5. First Health 4.5% PPO NETWORK 6. Lincare Holdings 4.1% HOME HEALTH CARE SERVICES 7. Safeway 4.0% RETAIL FOOD & DRUG STORES 8. Skillsoft 4.0% PROVIDER OF WEB-BASED LEARNING SOLUTIONS 9. Tellabs 3.8% TELECOMMUNICATIONS EQUIPMENT 10. Abercrombie & Fitch 3.6% TEEN APPAREL RETAILER 5 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- WANGER SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------- NUMBER OF VALUE SHARES COMMON STOCKS - 90.1% INFORMATION - 32.7% ------------------------------------------------------------------------- BUSINESS/CONSUMER SOFTWARE - 9.8% 210,000 McAfee (b) $ 6,075,300 SECURITY SOFTWARE & SERVICES 64,700 Synopsys (b) 1,269,414 SOFTWARE FOR DESIGNING SEMICONDUCTOR CHIPS 101,300 Novell (b) 683,775 DIRECTORY, OPERATING SYSTEM & IDENTITY MANAGEMENT SOFTWARE 4,800 Aspect Communications (b) 53,472 CALL CENTER SOFTWARE ------------------------------------------------------------------------- 8,081,961 ------------------------------------------------------------------------- BUSINESS INFORMATION/ADVERTISING - 6.1% 31,000 Moody's 2,692,350 RATINGS SERVICE FOR CREDIT OBLIGATIONS 63,000 Fair Isaac 2,310,840 CREDIT SCORING & DECISION ANALYTIC SOFTWARE ------------------------------------------------------------------------- 5,003,190 ------------------------------------------------------------------------- INTERNET - 5.6% 588,100 Skillsoft (b) 3,322,765 PROVIDER OF WEB-BASED LEARNING SOLUTIONS (E-LEARNING) 47,000 IAC/InterActive 1,298,140 DOMINATE INTERNET MIDDLEMAN ------------------------------------------------------------------------- 4,620,905 ------------------------------------------------------------------------- TELECOMMUNICATIONS EQUIPMENT - 3.8% 364,000 Tellabs (b) 3,126,760 TELECOMMUNICATIONS EQUIPMENT ------------------------------------------------------------------------- MOBILE COMMUNICATIONS - 3.0% 135,000 American Tower (b) 2,484,000 COMMUNICATION TOWERS IN USA & MEXICO ------------------------------------------------------------------------- INSTRUMENTATION - 2.6% 65,000 Tektronix 1,963,650 ANALYTICAL INSTRUMENTS ------------------------------------------------------------------------- NUMBER OF VALUE SHARES TELEVISION PROGRAMMING/CATV - 1.8% 16,000 Liberty Media International (b) $ 739,680 CATV HOLDING COMPANY 75,000 UnitedGlobalCom (b) 724,500 VIDEO, VOICE & DATA SERVICES OUTSIDE THE USA ------------------------------------------------------------------------- 1,464,180 ------------------------------------------------------------------------- COMPUTER SERVICES - 0.2% 41,900 AnswerThink Consulting (b) 195,254 IT INTEGRATOR FOR FORTUNE 2000 ------------------------------------------------------------------------- INFORMATION - TOTAL 26,939,900 CONSUMER GOODS/SERVICES - 30.6% ------------------------------------------------------------------------- RETAIL - 10.3% 169,000 Safeway (b) 3,336,060 RETAIL FOOD & DRUG STORES 64,000 Abercrombie & Fitch 3,004,800 TEEN APPAREL RETAILER 45,000 Costco 2,178,450 WAREHOUSE SUPERSTORES ------------------------------------------------------------------------- 8,519,310 ------------------------------------------------------------------------- CONSUMER SERVICES - 7.7% 93,000 ITT Educational Services (b) 4,422,150 TECHNOLOGY ORIENTED POST SECONDARY DEGREE PROGRAMS 47,600 Weight Watchers (b) 1,954,932 WEIGHT LOSS PROGRAM ------------------------------------------------------------------------- 6,377,082 ------------------------------------------------------------------------- LEISURE VEHICLES - 4.9% 67,000 Harley-Davidson 4,070,250 MOTORCYCLES & RELATED MERCHANDISE ------------------------------------------------------------------------- APPAREL - 3.2% 46,000 Coach (b) 2,594,400 DESIGNER & RETAILER OF BRANDED LEATHER ACCESSORIES ------------------------------------------------------------------------- FURNITURE/TEXTILES - 2.6% 78,000 Herman Miller 2,155,140 OFFICE FURNITURE See accompanying notes to financial statements. 6 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- WANGER SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------- NUMBER OF VALUE SHARES ------------------------------------------------------------------------- ENTERTAINMENT - 1.9% 29,000 International Speedway Motors $ 1,531,200 LARGEST MOTORSPORT RACETRACK OWNER & OPERATOR ------------------------------------------------------------------------- CONSUMER GOODS/SERVICES - TOTAL 25,247,382 FINANCE - 14.5% ------------------------------------------------------------------------- BANKS - 7.3% 128,000 TCF Financial 4,113,920 GREAT LAKES BANK 57,000 Associated Banc-Corp 1,892,970 MIDWEST BANK ------------------------------------------------------------------------- 6,006,890 ------------------------------------------------------------------------- MONEY MANAGEMENT - 4.1% 48,100 SEI Investments 2,016,833 MUTUAL FUND ADMINISTRATION & INVESTMENT MANAGEMENT 82,000 Janus Capital 1,378,420 MANAGES MUTUAL FUNDS ------------------------------------------------------------------------- 3,395,253 ------------------------------------------------------------------------- INSURANCE - 3.1% 7,100 Markel (b) 2,584,400 SPECIALTY INSURANCE ------------------------------------------------------------------------- FINANCE - TOTAL 11,986,543 HEALTH CARE - 8.7% ------------------------------------------------------------------------- SERVICES - 8.7% 199,000 First Health Group (b) 3,723,290 PPO NETWORK 80,000 Lincare Holdings (b) 3,412,000 HOME HEALTH CARE SERVICES ------------------------------------------------------------------------- HEALTH CARE - TOTAL 7,135,290 INDUSTRIAL GOODS/SERVICES - 2.7% ------------------------------------------------------------------------- LOGISTICS - 2.7% 40,000 Expeditors International of Washington 2,235,200 INTERNATIONAL FREIGHT FORWARDER ------------------------------------------------------------------------- INDUSTRIAL GOODS/SERVICES - TOTAL 2,235,200 ------------------------------------------------------------------------- NUMBER OF SHARES VALUE OR PRINCIPAL AMOUNT ------------------------------------------------------------------------- ENERGY & MINERALS - 0.9% OIL SERVICES - 0.9% 24,000 FMC Technologies (b) $ 772,800 OIL & GAS WELL HEAD MANUFACTURER ------------------------------------------------------------------------- ENERGY & MINERALS - TOTAL 772,800 TOTAL COMMON STOCKS (COST: $56,631,470) - 90.1% 74,317,115 ------------------------------------------------------------------------- SHORT-TERM OBLIGATIONS - 10.2% ------------------------------------------------------------------------- $ 8,407,000 Repurchase Agreement with State Street Bank & Trust Co., dated 12/31/04, due 1/03/05 at 1.90% collateralized by a Federal Home Loan Bank Note, maturing 4/02/18, market value $8,577,713 (repurchase proceeds: $8,408,331) ------------------------------------------------------------------------- (AMORTIZED COST: $8,407,000) 8,407,000 Total Investments (Cost: $65,038,470) - 100.3% (a) 82,724,115 ------------------------------------------------------------------------- Cash and Other Assets Less Liabilities - (0.3%) (259,106) ------------------------------------------------------------------------- TOTAL NET ASSETS - 100% $82,465,009 ------------------------------------------------------------------------- NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 2004, cost for federal income tax purposes is $65,143,798. The net unrealized appreciation was $17,580,317 consisting of gross unrealized appreciation of $19,288,651 and gross unrealized depreciation of $1,708,334. (b) Non-income producing security. At December 31, 2004, the Fund held investments in the following sectors: % OF SECTOR NET ASSETS ------------------------------------------------------------ Information 32.7% Consumer Goods/Services 30.6 Finance 14.5 Health Care 8.7 Industrial Goods/Services 2.7 Energy & Minerals 0.9 Short-Term Obligations 10.2 Cash and Other Assets Less Liabilities (0.3) ----- 100.0% ----- See accompanying notes to financial statements. 7 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 ------------------------------------------------------------------------- ASSETS Investments, at cost $65,038,470 ------------------------------------------------------------------------- Investments, at value $74,317,115 Repurchase agreements 8,407,000 Cash 801 Receivable for: Fund shares sold 83,396 Dividends and interest 10,909 ------------------------------------------------------------------------- Total Assets 82,819,221 LIABILITIES Payable for: Investments purchased 13,464 Fund shares repurchased 302,857 Transfer agent fees 35 Trustees' fees 393 Custody fees 391 Reports to shareholders 13,432 Other liabilities 23,640 ------------------------------------------------------------------------- Total Liabilities 354,212 ------------------------------------------------------------------------- Net Assets $82,465,009 ========================================================================= COMPOSITION OF NET ASSETS Paid in capital $59,111,308 Accumulated net realized gain 5,668,056 Net unrealized appreciation on investments 17,685,645 ------------------------------------------------------------------------- Net Assets $82,465,009 ========================================================================= Fund shares outstanding 3,729,713 ------------------------------------------------------------------------- Net asset value, offering price and redemption price per share $ 22.11 ========================================================================= STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 ------------------------------------------------------------------------- INVESTMENT INCOME: Dividend income $300,393 Interest income 81,601 ------------------------------------------------------------------------- Total Investment Income 381,994 EXPENSES: Investment advisory fees 598,432 Transfer agent fees 1,875 Trustees' fees 10,118 Custody fees 4,930 Reports to shareholders 38,114 Compliance fees 928 Non-recurring costs (See Note 8) 3,354 Other expenses 39,357 ------------------------------------------------------------------------- Total Expenses 697,108 Less custody fees paid indirectly (89) Non-recurring costs reimbursed (See Note 8) (3,354) ------------------------------------------------------------------------- Net Expenses 693,665 ------------------------------------------------------------------------- Net Investment Loss (311,671) NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS: Net realized gain on investments 5,987,773 Net change in unrealized appreciation (depreciation) on investments 6,113,815 ------------------------------------------------------------------------- Net Gain 12,101,588 ------------------------------------------------------------------------- Net Increase in Net Assets from Operations $11,789,917 ========================================================================= See accompanying notes to financial statements. 8 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED DECEMBER 31,2004 DECEMBER 31, 2003 INCREASE (DECREASE) IN NET ASSETS -------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment loss $ (311,671) $ (244,604) Net realized gain on investments 5,987,773 562,443 Net change in unrealized appreciation (depreciation) on investments 6,113,815 9,417,172 -------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 11,789,917 9,735,011 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized gains (56,308) -- -------------------------------------------------------------------------------------- Total distributions to shareholders (56,308) -- SHARE TRANSACTIONS: Subscriptions 29,505,736 20,698,376 Distributions reinvested 56,308 -- Redemptions (10,942,589) (4,445,362) -------------------------------------------------------------------------------------- Net Increase from Share Transactions 18,619,455 16,253,014 -------------------------------------------------------------------------------------- Total Increase in Net Assets 30,353,064 25,988,025 NET ASSETS: Beginning of period 52,111,945 26,123,920 -------------------------------------------------------------------------------------- End of period $ 82,465,009 $ 52,111,945 -------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME $ -- $ -- ======================================================================================
See accompanying notes to financial statements. 9 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
Year Ended December 31, Selected data for a share outstanding throughout each period 2004 2003 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 18.55 $ 14.19 $ 15.36 $ 14.08 $ 13.43 ------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment loss (a) (0.10) (0.11) (0.09) (0.05) (0.03) Net realized and unrealized gain (loss) on investments 3.68 4.47 (1.08) 1.33 1.23 ------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.58 4.36 (1.17) 1.28 1.20 ------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net realized capital gains (0.02) -- -- -- (0.55) ------------------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders (0.02) -- -- -- (0.55) ------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 22.11 $ 18.55 $ 14.19 $ 15.36 $ 14.08 ================================================================================================================================ Total Return (b) 19.31% 30.73% (7.62)% 9.09% 9.45%(c) ------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses 1.10%(d) 1.15%(d) 1.18%(d) 1.33%(d) 1.39%(e) Net investment loss (0.49)%(d) (0.65)%(d) (0.62)%(d) (0.34)%(d) (0.24)%(e) Reimbursement -- -- -- -- 0.21% Portfolio turnover rate 36% 21% 45% 76% 86% Net assets, end of period (000's) $ 82,465 $52,112 $26,124 $21,429 $12,129
-------------------------------------------------------------------------------- (a) Net investment loss per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions reinvested. (c) Had the Advisor not reimbursed a portion of its expenses, total return would have been reduced. (d) The benefits derived from custody fees paid indirectly had no impact. (e) In accordance with a requirement of the Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custody fees for cash balances it maintains with the custodian ("custody fees paid indirectly"). The ratios of expenses to average daily net assets and net investment income to average daily net assets net of custody fees paid indirectly would have been 1.35% and (0.20%), respectively, for the year ended December 31, 2000. See accompanying notes to financial statements. 10 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Wanger Select (known prior to May 1, 2004 as Wanger Twenty)(the "Fund"), is a series of Wanger Advisors Trust (the "Trust"), an open-end management investment company organized as a Massachusetts business trust. The investment objective of the Fund is to seek long-term growth of capital. The Fund is 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 Securities of the Fund are valued at market value or, if a market quotation for a security is not readily available or is deemed not to be reliable because of events or circumstances that have occurred between the market quotation and the time as of which the security is to be valued, the security is valued at a fair value determined in accordance with procedures established by the Board of Trustees. 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. If a security is traded principally on the Nasdaq Stock Market Inc., the Nasdaq Official Closing Price will be applied. Securities for which there are no reported sales on the valuation date are valued at the latest bid quotation. Short-term debt obligations having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. Securities for which quotations are not readily available and any other assets are valued as determined in good faith by the Board of Trustees. The Trust has retained an independent statistical fair value pricing service to assist in the fair valuation process for securities principally traded in a foreign market in order to adjust for possible changes in value that may occur between the close of the foreign exchange and the time at which fund shares are priced. If a security is valued at a "fair value", that value may be different from the last quoted market price for the security. REPURCHASE AGREEMENTS The Fund may engage in repurchase agreement transactions. The Fund, through its custodians, receives delivery of underlying securities collateralizing each repurchase agreement. The Fund's investment advisor determines that the value of the underlying securities is at all times at least equal to the repurchase price including interest. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 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 an accrual basis and includes amortization of discounts on short-term debt obligations and on long-term debt obligations when required for federal income tax purposes. Short-term debt obligations having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis, which approximates fair value. Realized gains and losses from security transactions are reported on an identified cost basis. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. FUND SHARE VALUATION Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange ("the 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. CUSTODY FEES/CREDITS Custody fees are reduced based on the Fund's cash balances maintained with the custodian. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such agreement. The amount is disclosed as a reduction of total expenses in the Statement of Operations. FEDERAL INCOME TAXES The Fund has complied with the provisions of the Internal Revenue Code available to regulated investment companies and, in the manner provided therein, distributes all their taxable income, as well as any net realized gain on sales of investments and foreign currency transactions reportable for federal income tax purposes. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on the ex-date. 3. FEDERAL TAX INFORMATION The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. Reclassifications are made to the Fund's capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. For the year ended December 31, 2004, permanent differences resulting primarily from differing treatments for net operating losses were identified and reclassified among the components of the Fund's net assets as follows: ACCUMULATED ACCUMULATED PAID IN NET INVESTMENT LOSS NET REALIZED GAIN CAPITAL ------------------- -------------------- -------- $311,671 $(311,669) $(2) Net investment income and net realized gains (losses), as disclosed on the Statement of Operations, and net assets were not affected by this reclassification. The tax character of distributions paid during the years ended December 31, 2004 and December 31, 2003 was as follows: DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------- ----------------- Distributions paid from: Ordinary Income $ -- $ -- Long-Term Capital Gain 56,308 -- 11 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS As of December 31, 2004, the components of distributable earnings on a tax basis were as follows: UNDISTRIBUTED UNDISTRIBUTED ORDINARY LONG-TERM NET UNREALIZED INCOME CAPITAL GAINS APPRECIATION* ------------- -------------- -------------- $550,044 $5,223,340 $17,580,317 * The differences between book-basis and tax-basis net unrealized appreciation/depreciation are primarily due to deferral of losses from wash sales. Unrealized appreciation and depreciation at December 31, 2004, based on cost of investments for federal income tax purposes, was: NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION DEPRECIATION APPRECIATION ------------- ------------- ------------ $19,288,651 $(1,708,334) $17,580,317 4. TRANSACTIONS WITH AFFILIATES Columbia Wanger Asset Management, L.P., ("Columbia WAM") an indirect wholly-owned subsidiary of Columbia Management Group, Inc., which in turn is a wholly owned subsidiary of Bank of America Corporation ("BOA"), furnishes continuing investment supervision to each Fund and is responsible for the overall management of each Fund's business affairs. Prior to April 1, 2004, Columbia was a wholly-owned subsidiary of Fleet National Bank, which in turn was a wholly-owned subsidiary of FleetBoston Financial Corporation ("Fleet"). On April 1, 2004, Fleet was acquired by BOA. Under the Fund's investment management agreement, fees are accrued daily and paid monthly to Columbia WAM at the annual rate of 0.95% of average daily net assets. The investment advisory agreement also provides that Columbia WAM will reimburse the Fund to the extent that ordinary operating expenses (computed based on net custodian fees) exceed an annual percentage of 1.35% of average daily net assets. There was no reimbursement for the year ended December 31, 2004. In accordance with the terms of the NYAG Settlement (as defined and discussed further under Note 8 to these financial statements - "Legal Proceedings"), Columbia WAM waived a portion of the fees payable under the Fund's investment management agreement so that those fees are retained at 0.850% on average daily net assets. The fee waiver was effective as of February 10, 2005 but applied as if it had gone into effect on December 1, 2004. The financial statements, as of December 31, 2004, are not reflective of these changes. Certain officers and trustees of the Trust are also officers of Columbia WAM. The Trust makes no direct payments to its officers and trustees who are affiliated with Columbia WAM. The Fund paid $10,118 to trustees not affiliated with Columbia WAM for the year ended December 31, 2004. Effective April 2004, the Board of Trustees appointed a Chief Compliance Officer to the Fund in accordance with federal securities regulations. The Fund will pay its pro-rata share of the expenses associated with the Office of the Chief Compliance Officer. These expenses are disclosed separately on the Statement of Operations. Columbia Funds Distributor, Inc. ("CFDI"), an indirect wholly-owned subsidiary of BOA, serves as the principal underwriter of the Trust and receives no compensation for its services. Columbia Funds Services, Inc. (the "Transfer Agent"), an indirect wholly-owned subsidiary of BOA, provides shareholder services to the Fund. For such services, the Transfer Agent receives a fee, paid monthly, at the annual rate of $28.00 per open account. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. Effective February 1, 2004 the Transfer Agent made the decision to waive the reimbursement for certain out-of-pocket expenses. Prior to February 1, 2004, the Transfer Agent was entitled to receive a flat rate charge based on the number of shareholder accounts and transactions. During the year ended December 31, 2004, the Fund engaged in purchase and sales transactions with funds that have a common investment advisor (or affiliated investment advisors), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with the provisions of Rule 17a-7 under the Investment Company Act of 1940 and were $64,400 and $0, respectively. 5. BORROWING ARRANGEMENTS The Trust participates in a $150,000,000 credit facility, which was entered into to facilitate portfolio liquidity. Interest is charged to each participating fund based on its borrowings at rate per annum equal to the Federal Funds rate plus 0.50%. In addition, a commitment fee of 0.10% per annum is accrued and apportioned among the participating funds based on their pro-rata portion of the unutilized line of credit. The commitment fee is included in "Other expenses" on the Statement of Operations. No amounts were borrowed under this facility for the year ended December 31, 2004. 6. FUND SHARE TRANSACTIONS Proceeds and payments on Fund shares as shown in the statement of changes in net assets are in respect of the following numbers of shares: YEAR ENDED YEAR ENDED DECEMBER 31, 2004 DECEMBER 31, 2003 ---------------------------------------------------------------------- Shares sold 1,465,607 1,249,090 ---------------------------------------------------------------------- Shares issued in reinvestment of dividend distributions 2,911 -- ---------------------------------------------------------------------- Less shares redeemed 547,475 281,941 ---------------------------------------------------------------------- Net increase in shares outstanding 921,043 967,149 7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the year ended December 31, 2004 were $34,726,401 and $20,726,726. 8. LEGAL PROCEEDINGS On March 15, 2004, Columbia Management Advisors, Inc. ("Columbia Management"), the advisor to the Columbia Funds, and CFDI (collectively with Columbia Management, "Columbia") the distributor of the shares of the Columbia Funds, the Columbia Acorn Funds and the Wanger Advisors Trust Funds (collectively, "the Columbia Family of Funds"), entered into agreements in principle with the staff of the U.S. Securities and Exchange Commission ("SEC") and the Office of the New York Attorney General ("NYAG") to resolve the proceedings brought in connection with the SEC's and NYAG's investigations of frequent trading and market timing in certain Columbia mutual funds. Columbia WAM, the advisor to the Columbia Acorn Funds and the Wanger Advisors Trust Funds, was not a respondent in either proceeding nor were any of its officers or directors. On February 9, 2005, Columbia entered into an Assurance of Discontinuance (the "NYAG Settlement") with the NYAG and consented to the entry of a cease-and-desist order by the SEC (the "SEC Order" and together, the "Settlements"). The Settlements contain substantially the same terms and conditions as outlined in the agreements in principle. Although none of the Wanger Advisors Trust Funds is a party to the Settlement orders, under the terms of the Settlements and in order for Columbia Management to continue to provide administrative services to the Wanger Advisors Funds, the Board of Trustees of the Wanger Advisors Trust Funds agreed to conform to certain governance requirements, including the election of an independent board chair. Under the terms of the SEC Order, Columbia has agreed, among other things, to: pay $70 million in disgorgement and $70 million in civil money penalties; cease and desist from violations of the antifraud provisions and certain other provisions of the federal securities laws; maintain certain compliance and ethics oversight structures; retain an independent consultant to review Columbia's applicable supervisory, compliance, control and other 12 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS policies and procedures; and retain an independent distribution consultant (see below). The NYAG Settlement also, among other things, requires Columbia and its affiliates, Banc of America Capital Management, LLC and BACAP Distributors, LLC to reduce management fees paid by the Columbia Family of Funds, Nations Funds and other related mutual funds collectively by $32 million per year for five years, for a projected total of $160 million in management fee reductions based on net assets as of March 15, 2004. Pursuant to the procedures set forth in the SEC Order, the settlement amounts will be distributed in accordance with a distribution plan to be developed by an independent distribution consultant, who is acceptable to the SEC staff and the independent trustees of the funds. The distribution plan must be based on a methodology developed in consultation with Columbia and the independent trustees of the funds and not unacceptable to the staff of the SEC. More specific information on the distribution plan will be communicated by Columbia WAM and/or its affiliates at a later date. Columbia WAM, the Columbia Acorn Trust, another mutual fund family advised by Columbia WAM, and the trustees of Columbia Acorn Trust are defendants in several derivative and class action lawsuits that allege, in summary, defendants permitted investors to engage in improper trading of shares of various funds in violation of certain federal and state laws. All of these lawsuits have been consolidated with similar suits in a Multi-District Litigation proceeding in Baltimore, Maryland and consolidated class action and derivative complaints have been filed. The Columbia Acorn Trust and Columbia WAM are also defendants in a class action lawsuit that alleges, in summary, that the Columbia Acorn Trust and Columbia WAM exposed shareholders of Columbia Acorn International Fund to trading by market timers by allegedly (a) failing to properly evaluate daily whether a significant event affecting the value of that Fund's securities had occurred after foreign markets had closed but before the calculation of the Fund's net asset value ("NAV"); (b) failing to implement the Fund's portfolio valuation and share pricing policies and procedures; and (c) failing to know and implement applicable rules and regulations concerning the calculation of NAV. Columbia WAM and the trustees of Columbia Acorn Trust are also defendants in a lawsuit alleging that Columbia WAM used Fund assets to make undisclosed payments to brokers as an incentive for the brokers to market the Columbia Acorn Funds over other mutual funds to investors. The complaint alleges Columbia WAM and the trustees of Columbia Acorn Trust breached certain common laws duties and federal laws. On January 11, 2005 a putative class action lawsuit was filed in federal district court in Massachusetts against, among others, the Trustees of the Columbia Acorn Trust and Columbia WAM. The lawsuit alleges that defendants violated common law duties to fund shareholders as well as sections of the Investment Company Act of 1940, by failing to ensure that the Columbia Acorn Trust funds and other affiliated funds participated in securities class action settlements for which the funds were eligible. Specifically, plaintiffs allege that defendants failed to submit Proof of Claims in connection with settlements of securities class action lawsuits filed against companies in which the funds held positions. The complaint seeks compensatory and punitive damages, and the disgorgement of all fees paid to the Columbia WAM and affiliated advisers. The Columbia Acorn Trust and Columbia WAM intend to defend these suits vigorously. The Columbia Acorn Trust does not believe that the pending actions will have a material adverse effect on the financial statements of any Columbia Acorn Fund, and Columbia WAM does not believe that the pending actions will have a material adverse effect on its ability to perform under its contracts with the Funds. As a result of these matters or any adverse publicity or other developments resulting from them, there may be increased redemptions or reduced sales of Fund shares, which could increase transaction costs or operating expenses, or have other adverse consequences for the Funds. In connection with the events described in detail above, various parties have filed suit again certain funds, their Boards and/or BOA (and affiliated entities). These suits are ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, cannot be currently made. For the year ended December 31, 2004, CMG has assumed $3,354 in consulting services and legal fees incurred by the Fund in connection with these matters. 13 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Effective April 13, 2004, the audit committee of the Trust requested that Ernst & Young LLP ("E&Y") resign as the auditors of the Fund. Also effective July 14, 2004, upon the recommendation of the audit committee, the Trust selected PricewaterhouseCoopers LLP ("PWC") as independent registered public accounting firm to audit the books and records of the Fund for its fiscal year ending December 31, 2004. The cessation of the relationship with E&Y was based on the impairment of E&Y's independence resulting from the consummation of the merger of FleetBoston Financial Corporation and Bank of America Corporation and accordingly, E&Y's ability to provide audit services to the Fund. E&Y's report on the financial statements of the Fund for the past two years did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the period E&Y was engaged, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to E&Y's satisfaction, would have caused it to make reference to that matter in connection with its report. 14 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of Wanger Select Fund: In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Wanger Select Fund (a series of the Wanger Advisors Trust, hereinafter referred to as the "Fund") at December 31, 2004, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. The statement of changes in net assets for the year ended December 31, 2003 and the financial highlights of the Fund for the periods ended December 31, 2003 and prior were audited by other independent auditors whose report dated February 6, 2004 expressed an unqualified opinion on those financial statements. PricewaterhouseCoopers LLP Chicago, Illinois February 14, 2005 15 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended December 31, 2004, the Wanger Select Fund designates long-term capital gains of $5,231,386. 16 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST The Board of Trustees of the Trust has overall management responsibility for the Trust and the Funds. Each trustee serves a term of unlimited duration, provided that a majority of trustees always has been elected by shareholders. The trustees appoint their own successors, provided that at least two-thirds of the trustees, after such appointment, have been elected by shareholders. Shareholders may remove a trustee, with or without cause, upon the vote of two-thirds of the Trust's outstanding shares at any meeting called for that purpose. A trustee may be removed, with or without cause, upon the vote of a majority of the trustees. The names of the trustees and officers of the Trust, the date each was first elected or appointed to office, their principal business occupations during at least the last five years, and other directorships they hold are shown below. Each trustee serves in such capacity for each of the four series of the Trust. The business address of each trustee and officer of the Trust is Columbia Wanger Asset Management, L.P., 227 West Monroe, Suite 3000, Chicago, Illinois 60606, except for Messrs. Clark, Connaughton, and Pietropaolo, whose address is Columbia Management Group, Inc., 245 Summer Street, Boston, Massachusetts, 02210. Wanger's Statement of Additional Information includes additional information about Columbia Wanger's trustees and officers. You may obtain a free copy of the Statement of Additional Information on our website, www. wanger.com, or by writing or calling toll-free: Columbia Wanger Asset Management, L.P. Shareholder Services Group 227 W. Monroe, Suite 3000 Chicago, IL 60606 888-4-Wanger (888-492-6437)
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OTHER DECEMBER 31, 2004 TO OFFICE PAST FIVE YEARS DIRECTORSHIPS ------------------------- --------- ----------------------------------------------------------- ------------- TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST: JEROME L. DUFFY, 68, 2003 Retired since December 31, 1997; prior thereto, senior vice None. Trustee president, Kemper Financial Services and treasurer, Kemper Funds. FRED D. HASSELBRING, 63, 1994 Retail industry, general project development and business None. Trustee computer systems consultant; voice over specialist for industrial and institutional applications; former chairman of the board of the Trust (September 2004 to November 2004); former lead independent trustee (August 2003 to September 2004). KATHRYN A. KRUEGER, M.D., 47, 2003 Medical Fellow I, Cardiovascular Therapeutic Area, Lilly None. Trustee Research Laboratories (May 2004 to present); Medical Advisor, Cardiovascular Therapeutic Area, Lilly Research Laboratories (January 2003 to April 2004); Medical Director, Cardiovascular Therapeutic Area, Lilly Research Laboratories (October 2002 to December 2002); Medical Director, Neptune Product Team, Lilly Research Laboratories (October 2001 to October 2002); Acting Director and Senior Clinical Research Physician, Lilly Research Laboratories (April 2001 to September 2001); Senior Clinical Research Physician, Lilly Research Laboratories (January 2000 to March 2001); Clinical Research Physician, Lilly Research Laboratories (June 1996 to December 1999). PATRICIA H. WERHANE, 69, 1998 Ruffin Professor of Business Ethics, Darden Graduate School None. Chair of the Board and Trustee of Business Administration, University of Virginia, since 1993; Senior Fellow since 2004 and Co-Director of the Olsson Center for Applied Ethics, Darden Graduate School of Business Administration, University of Virginia, from 2001-2004; and Wicklander Chair of Business Ethics and Director of the Institute for Business and Professional Ethics, DePaul University (since September 2003). TRUSTEE WHO IS AN INTERESTED PERSON OF WANGER ADVISORS TRUST: RALPH WANGER, 70, 1994 Founder, former president, chief investment officer and Columbia Trustee portfolio manager, Columbia Wanger Asset Management, L.P. Acorn (CWAM) (1992-2003); former president, Columbia Acorn Trust Trust. from April 1992 through September 2003; former president, Wanger Advisors Trust (1994 through September 2003); principal, WAM from July 1992 until September 2000; president, WAM Ltd. from July 1992 to September 2000; director, Wanger Investment Company plc.; Director, CWAM.
17 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OTHER DECEMBER 31, 2004 TO OFFICE PAST FIVE YEARS DIRECTORSHIPS ------------------------- --------- ----------------------------------------------------------- ------------- OFFICERS OF WANGER ADVISORS TRUST: BEN ANDREWS, 39, 2004 Analyst and portfolio manager, CWAM since 1998; vice None. Vice President president, Columbia Acorn Trust. J. KEVIN CONNAUGHTON, 40, 2001 Treasurer of the Columbia Funds and of the Liberty All-Star None. Assistant Treasurer Funds since December 2000 (formerly controller of the Columbia Funds and of the Columbia All-Star Funds from February 1998 to October 2000); treasurer of the Galaxy Funds since September 2002; treasurer, Columbia Management Multi-Strategy Hedge Fund, LLC since December 2002 (prior thereto, vice president of Colonial Management Associates from February 1998 to October 2000). MICHAEL G. CLARKE, 34, 2004 Chief accounting officer of the Columbia Funds, Liberty None. Assistant Treasurer Funds, Stein Roe Funds and All-Star Funds since October 2004; Controller of the Columbia Funds, Liberty Funds, Stein Roe Funds and All-Star Funds from May 2004 to October 2004; Assistant Treasurer from June 2002 to May 2004; Vice President, Product Strategy & Development of the Liberty Funds and Stein Roe Funds from February 2001 to June 2002; Assistant Treasurer of the Liberty Funds, Stein Roe Funds and the All-Star Funds from August 1999 to February 2001. KENNETH A. KALINA, 45, 1995 Chief Compliance Officer, CWAM since May 2004; treasurer and None. Assistant Treasurer Chief financial officer, CWAM since April 2000; assistant treasurer, Columbia Acorn Trust; fund controller, CWAM since September 1995; director, New Americas Small Cap Fund. BRUCE H. LAUER, 47, 1995 Chief operating officer, CWAM since April 1995; principal, None. Vice President, Secretary WAM from January 2000 to September 2000; vice president, and Treasurer treasurer and secretary, Columbia Acorn Trust; director, Wanger Investment Company plc and New Americas Small Cap Fund. CHARLES P. MCQUAID, 51, 1994 President, CWAM since October 2003; Chief investment Columbia President officer, CWAM since September 2003; senior vice president of Acorn the Trust from 1994 through September 2003; portfolio Trust. manager since 1995 Trust. and director of research since July 1992 through December 2003; CWAM interim director of international research from October 2003 until December 2004; principal, WAM from July 1995 to September 2000; trustee since 1992 and president since 2003, Columbia Acorn Trust. ROBERT A. MOHN, 43, 1997 Director of domestic research, CWAM, since March 2004; None. Vice President analyst and portfolio manager, CWAM since August 1992; principal, WAM from 1995 to September 2000; vice president, Columbia Acorn Trust. TODD M. NARTER, 41, 2001 Analyst and portfolio manager, CWAM since June 1997; vice None. Vice President president, Columbia Acorn Trust. CHRISTOPHER J. OLSON, 40, 2001 Analyst and portfolio manager, CWAM since January 2001; vice None. Vice President president, Columbia Acorn Trust; prior to 2001, director and portfolio strategy analyst with UBS Asset Management/Brinson Partners. VINCENT P. PIETROPAOLO, 39, 2001 Assistant General Counsel, Bank of America (and its None. Assistant Secretary predecessors) since December 1999. ROBERT SCALES, 52, 2004 Deputy General Counsel, Grant Thornton LLP (2002-2004); None. Chief Compliance Officer, Associate General Counsel, UBS PaineWebber (broker-dealer) Senior Vice President (1997-2002). and General Counsel
18 Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- This page intentionally left blank. Wanger Select 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] WANGER ADVISORS TRUST TRANSFER AGENT, DIVIDEND DISBURSING AGENT Columbia Funds Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Columbia Funds Distributor, Inc. One Financial Center Boston, Massachusetts 02111-2621 INVESTMENT ADVISER Columbia Wanger Asset Management, L.P. 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 www.wanger.com 1-888-4-WANGER (1-888-492-6437) LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP Chicago, Illinois This report, including the 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. A description of the fund's proxy voting policies and procedures is available (i) on the fund's website, www.wanger.com; (ii) on the Securities and Exchange Commission's website at www.sec.gov, and (iii) without charge, upon request, by calling 888-492-6437. Information regarding how the fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004 is available from the SEC's website. The fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. 20 WANGER ADVISORS TRUST SHR-02/468U-0205 05/4315 WANGER INTERNATIONAL SELECT 2004 Annual Report [LOGO] WANGER ADVISORS FUNDS -------------------------------------------------------------------------------- MANAGED BY COLUMBIA WANGER ASSET MANAGEMENT, L.P. [LOGO] WANGER INTERNATIONAL SELECT 2004 ANNUAL REPORT TABLE OF CONTENTS 1 Understanding Your Expenses 2 The Miracle Year 4 Performance Review 6 Statement of Investments 9 Statement of Assets and Liabilities 9 Statement of Operations 10 Statements of Changes in Net Assets 11 Financial Highlights 12 Notes to Financial Statements 16 Report of Independent Registered Public Accounting Firm 17 Board of Trustees and Management of Wanger Advisors Trust COLUMBIA WANGER ASSET MANAGEMENT, L.P. ("COLUMBIA WAM") IS ONE OF THE LEADING GLOBAL SMALL-CAP EQUITY MANAGERS IN THE U.S. WITH MORE THAN 30 YEARS OF SMALL-CAP INVESTMENT EXPERIENCE. COLUMBIA WAM MANAGES MORE THAN $22 BILLION IN EQUITIES AND IS THE INVESTMENT ADVISER TO WANGER U.S. SMALLER COMPANIES, WANGER INTERNATIONAL SMALL CAP, WANGER SELECT, WANGER INTERNATIONAL SELECT AND THE COLUMBIA ACORN FAMILY OF FUNDS. FOR MORE COMPLETE INFORMATION ABOUT OUR FUNDS, INCLUDING THE COLUMBIA ACORN FUNDS, OUR FEES, RISKS ASSOCIATED WITH INVESTING, OR EXPENSES, CALL 1-888-4-WANGER FOR A PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. THIS REPORT IS NOT AN OFFER OF THE SHARES OF THE COLUMBIA ACORN FUND FAMILY. THE DISCUSSION IN THE REPORT OF PORTFOLIO COMPANIES IS FOR ILLUSTRATION ONLY AND IS NOT A RECOMMENDATION OF INDIVIDUAL STOCKS. THE INFORMATION IS BELIEVED TO BE ACCURATE, BUT THE INFORMATION AND THE VIEWS OF THE PORTFOLIO MANAGERS MAY CHANGE AT ANY TIME WITHOUT NOTICE AND THE PORTFOLIO MANAGERS MAY ALTER A FUND'S PORTFOLIO HOLDINGS BASED ON THESE VIEWS AND THE FUND'S CIRCUMSTANCES AT THAT TIME. Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- UNDERSTANDING YOUR EXPENSES As a fund shareholder, you incur two types of costs. There are transaction costs, which generally include sales charges on purchases and may include redemption or exchange fees. There are also continuing costs, which generally include investment advisory, Rule 12b-1 fees, and other fund expenses. The information on this page is intended to help you understand your ongoing costs of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. ANALYZING YOUR FUND'S EXPENSES To illustrate these ongoing costs, we have provided an example and calculated the expenses paid by investors in the fund during the reporting period. The information in the following table is based on an initial investment of $1,000.00, which is invested at the beginning of the reporting period and held for the entire period. Expense information is calculated two ways and each method provides you with different information. The amount listed in the "actual" column is calculated using actual operating expenses and total return for the fund. The amount listed in the "hypothetical" column assumes that the return each year is 5% before expenses and then applies each Fund's actual expense ratio for the period to the hypothetical return. You should not use the hypothetical account values and expenses to estimate either your actual account balance at the end of the period or the expenses you paid during the reporting period. See the "Compare with other funds" information for details on using the hypothetical data. ESTIMATING YOUR ACTUAL EXPENSES To estimate the expenses that you paid over the period, first you will need your account balance at the end of the period. 1. Divide your ending account balance by $1,000.00. For example, if an account balance was $8,600.00 at the end of the period, the result would be 8.6. 2. In the section of the table below titled "Expenses paid during the period," locate the amount for your fund. You will find this number is in the column labeled "actual." Multiply this number by the result from step 1. Your answer is an estimate of the expenses you paid on your account during the period. July 1, 2004 - December 31, 2004
------------------------------------------------------------------------------------------------------------------------------------ ACCOUNT VALUE AT THE ACCOUNT VALUE AT THE EXPENSES PAID DURING FUND'S ANNUALIZED BEGINNING OF THE PERIOD ($) END OF THE PERIOD ($) THE PERIOD ($) EXPENSE RATIO (%)* ------------------------------------------------------------------------------------------------------------------------------------ ACTUAL HYPOTHETICAL ACTUAL HYPOTHETICAL ACTUAL HYPOTHETICAL ------------------------------------------------------------------------------------------------------------------------------------ Wanger International Select 1,000.00 1,000.00 1,152.08 1,017.85 7.84 7.35 1.45 ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES PAID DURING THE PERIOD ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, THEN MULTIPLIED BY THE NUMBER OF DAYS IN THE FUND'S MOST RECENT FISCAL HALF-YEAR AND DIVIDED BY 366. IT IS IMPORTANT TO NOTE THAT THE EXPENSE AMOUNTS SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONLY ONGOING COSTS OF INVESTING IN THE FUND. AS A SHAREHOLDER OF THE FUND, YOU DO NOT INCUR ANY TRANSACTION COSTS, SUCH AS SALES CHARGES, REDEMPTION OR EXCHANGE FEES. EXPENSES PAID DURING THE PERIOD DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. THE HYPOTHETICAL EXAMPLE PROVIDED IS USEFUL IN COMPARING ONGOING COSTS ONLY AND WILL NOT HELP YOU DETERMINE THE RELATIVE TOTAL COSTS OF OWNING DIFFERENT FUNDS WHOSE SHAREHOLDERS MAY INCUR TRANSACTION COSTS. * FOR THE SIX MONTHS ENDED 12/31/04. COMPARE WITH OTHER FUNDS Since all mutual fund companies are required to include the same hypothetical calculations about expenses in shareholder reports, you can use this information to compare the ongoing cost of investing in the fund with other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples of other funds. As you compare hypothetical examples of other funds, it is important to note that hypothetical examples are meant to highlight the continuing cost of investing in a fund and do not reflect any transactional costs, such as sales charges or redemption or exchange fees, that may be incurred by shareholders of other funds. Expenses paid during the period do not include any insurance charges imposed by your insurance company's separate accounts. 1 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] THE MIRACLE YEAR Photo of RALPH WANGER RALPH WANGER FOUNDER, ADVISOR AND TRUSTEE COLUMBIA WANGER ASSET MANAGEMENT, L.P. 1905 was a year of surprises. The first surprise was the victory of the Japanese over the Russians in the Russo-Japanese War. In May 1905, the untested Japanese Navy annihilated the Russian fleet at Tsushima. This was the first time a non-white country had beaten the main force of a European colonial power. The second unexpected event was in physics. 2005 will be celebrated as the centennial of Albert Einstein's "Miracle Year." The journal, ANNALEN DER PHYSIK, volume 17, published three articles in September 1905 all written by Einstein, an obscure clerk in the Swiss patent office in Bern. He had an undergraduate degree in physics but no Ph.D (it was granted a year later). Each of the articles were on a different subject and each one revolutionized its branch of physics. Einstein's papers created 20th century physics almost single-handedly. ATOMS In 1905 there were different theories about the structure of matter. If you take a glass of water and pour nine-tenths of it out, you still have a glass with water in it. What happens if you repeat this process of throwing out 90% of the water in the glass? After you repeat the process a few more times, you have such a small amount of water that you can only see it under a microscope, and in a few more steps the water drop will be too small to be seen even under the microscope. Can you continue the boring job of splitting water forever or do you finally get to a point where it isn't water anymore? Of course we know the answer: Once you get down to a single molecule of water you can't split it and still say that you have water left. Many leading scientists did not accept the atomic theory in 1905. Einstein looked at the process called Brownian Motion in which a grain of pollen or other small object moves around in a random way. (The same mathematical process makes stock prices jiggle.) He deduced that this motion was caused by billions of atoms bumping into the pollen grain in an irregular pattern. He was even able to calculate the size of the atoms involved, thus proving that atoms really existed. PHOTONS In 1905 there was still a basic debate about the nature of light. The greatest achievement of 19th century physics was Maxwell's set of partial differential equations governing electromagnetic fields, including light. Maxwell's equations required that light be a wave. The great Max Planck had introduced the idea of a quantum of energy in 1900 to get an equation that tracked the spectrum of heat radiation, but most scientists doubted that a light quantum was "real." Heinrich Hertz, Philip Lenard and others showed that when a beam of ultraviolet light shines on a piece of metal you produce an electrical current in the metal. There was no way to explain the photoelectric effect according to the Maxwell wave theory of light. The second paper Einstein wrote dealt with the problem of the photoelectric effect. If you cut the amount of energy in a beam of light by 90% and keep reducing it, you still have a beam of light. If you keep slicing the amount of light, does the beam of light keep getting smaller and smaller forever or do you get down to an "atom" of light that can't be split further? Einstein proved that there was a tiny amount of light that could not be further divided. The least amount of light that exists is a single photon (or quantum) of light. 1 The photoelectric effect is explained by photons acting as particles, not as a wave. Einstein's discovery of the photon had a number of interesting effects. First, it led to the development of quantum mechanics and thus to most of 20th century physics. Second, it won Einstein his only Nobel Prize. Third, it uncovered a paradox that still puzzles students, the duality of light. If you run an experiment to show that light is a wave, you can prove it's a wave. If you run an experiment to show that it's a particle, you can prove it's a particle. This duality principle contradicts common sense but when you study science you have to get used to it. The fourth effect was that it made Lenard a life-long enemy of Einstein. Philip Lenard, who received the Nobel Prize in 1905 for his own work on cathode rays, was close to the solution but Einstein ended up getting the credit. Lenard became an unrelenting foe of Einstein, and influenced the Nobel committee's decision not to give Einstein the prize for his theory of relativity. Later on, Lenard became an ardent Nazi. RELATIVITY In 1905, there was also a debate in scientific circles about speed. If you were in a really powerful rocket ship in space, and you pushed the throttle forward, you would speed up. If you kept on increasing the power, would you go ever faster, or was there an absolute speed limit in the universe that you could not exceed? 2 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- The third paper became the best known, Einstein's special theory of relativity. It explained that there was a cosmic speed limit, the speed of light. Very odd things happen when your rocket ship is moving close to the speed of light. Time slows down and you get shorter, under the Lorentz contraction equation, giving rise to the limerick: A sexy young techie named Fisk, Had a motion exceedingly brisk. So fast was his action The Lorentz contraction Shortened his rod to a disk. In a very brief paper published later in 1905, Einstein added in a note that his theory of relativity implied the equation E=mc 2. That solved the paradox of radioactivity; Mme Curie's radium was producing much more energy then could be explained by 19th century physics. Einstein showed that radioactive energy was caused by turning a small amount of mass into a lot of energy. So we had this technical journal containing three papers written by a man unknown in science, a non-Ph.D, a non-academic, writing on a German-dominated field with all the fussiness about rank and reputation that you would expect. Would anyone care? Einstein did not receive any communication from any physicists for the first couple months after he published, but in early 1906 Max Planck read and understood the papers. He wrote to Einstein and sent his assistant, another important physicist, Max von Laue, to visit Einstein in Bern. Planck's subsequent endorsement made Einstein acceptable to the community of physicists, and his papers became required study for all physicists, as they remain. The compelling human question: How the heck did Einstein do it? How could one human being produce three revolutionary papers in one year, on three different subjects, while carrying a full-time job at the patent office to boot? We can admire but not explain. The "Miracle Year" commemorates one of the greatest feats of the human mind ever. 1 PLANCK AND EINSTEIN HAD DISCOVERED THE QUANTUM JUMP, WHICH WAS THE SMALLEST THING THAT COULD POSSIBLY EXIST IN THE UNIVERSE. MODERN WRITERS, FOR REASONS DIFFICULT TO EXPLAIN, NOW USE THE PHRASE QUANTUM JUMP TO MEAN A BIG EVENT. WHEN NON-SCIENTISTS START THROWING AROUND SCIENTIFIC TERMS WITHOUT UNDERSTANDING THEM, FUNNY THINGS HAPPEN. DON'T GET ME STARTED ON THE HEISENBERG UNCERTAINTY PRINCIPLE. INCIDENTALLY, ALBERT EINSTEIN'S FATHER, HERMANN, WAS BORN IN THE WURTTEMBERG VILLAGE OF BUCHAU, WHERE HIS FAMILY HAD LIVED FOR GENERATIONS. HERMANN MOVED 20 MILES FROM BUCHAU TO THE CITY OF ULM, WHERE ALBERT WAS BORN. MY GREAT-GREAT GRANDFATHER, JOSEPH KOHN, WAS ALSO FROM BUCHAU AND HE HAD MANY EINSTEINS IN HIS FAMILY TREE. I AM VERY PROUD OF THE EINSTEIN CONNECTION. SOURCES: "EINSTEIN: A CELEBRATION," SEMINAR AT THE ASPEN INSTITUTE, AUGUST 8-11, 2004. EINSTEIN, ALBERT, "IDEAS AND OPINIONS," CROWN PUBLISHERS, 1954. KAKU, MICHIO, "EINSTEIN COSMOS: HOW ALBERT EINSTEIN'S VISION TRANSFORMED OUR UNDERSTANDING OF SPACE AND TIME," ATLAS BOOKS, 2004. "DISCOVER" MAGAZINE, "SPECIAL EINSTEIN ISSUE," SEPTEMBER 2004. A SPECIAL THANKS TO DOUG STONE OF YALE UNIVERSITY FOR EDITING THIS ESSAY. 3 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- [LOGO] PERFORMANCE REVIEW WANGER INTERNATIONAL SELECT* Photo of TODD M. NARTER TODD M. NARTER CO-PORTFOLIO MANAGER Photo of CHRISTOPHER J. OLSON CHRISTOPHER J. OLSON CO-PORTFOLIO MANAGER International markets surged in 2004. Wanger International Select ended the year up 24.34%, a solid return but behind the 25.22% return for the Citigroup World ex-US Cap Range $2-10B Index. The relative underperformance was due in large part to holding some cash as the markets rallied in the fourth quarter of the year. We opted to take profits in a number of positions to look for better values elsewhere. We believe that the Fund is well positioned for future growth. Letting our winners run was a successful strategy this past year. Anglo Irish Bank was the Fund's largest contributor to performance. The stock finished the year up 56% and is the Fund's largest position. Other significant winners for the Fund included large holdings with great franchises. Neopost, a maker of franking machines in France and the Fund's second largest position, had another strong year, up 58%. Tenaris, a maker of steel pipes for the oil and gas industry, jumped 49%. Lion Nathan, the major beer brewer and distributor in Australia and New Zealand, rose 55% and Daito Trust Construction, a major apartment builder and manager in Japan, finished the year up 62%. Several stocks in the portfolio reduced the Fund's gains. Topping the list of poor performers in the Fund this year was Sugi Pharmacy, a drugstore chain in Japan. Shares were down 13% as the company reported higher costs than expected during its expansion program. Funai Electric, a maker of consumer electronic products in Japan, was down 13% as the retail environment in the United States was weaker than expected. Other weak performers included Venture, an electronic manufacturing services company in Singapore, down 15%, and Compass Group, a catering services provider in the UK, which fell 29% on an earnings downgrade driven by a weak dollar and issues with a supplier. Share prices have risen strongly in the past two years. While stocks are not as cheap as they once were, we continue to find well-run companies with good strategies and strong balance sheets that we believe will be good investments. MID-CAP STOCKS TEND TO BE MORE VOLATILE AND MAY BE LESS LIQUID THAN THE STOCKS OF LARGER COMPANIES. INVESTMENTS IN FOREIGN SECURITIES HAVE SPECIAL RISKS, INCLUDING POLITICAL OR ECONOMIC INSTABILITY, HIGHER COSTS, DIFFERENT REGULATIONS, ACCOUNTING STANDARDS, TRADING PRACTICES AND LEVELS OF INFORMATION, AND CURRENCY EXCHANGE RATE FLUCTUATIONS. As of 12/31/04, the Fund's positions in the holdings mentioned were: Anglo Irish Bank, 6.3%; Neopost, 4.2%; Tenaris, 2.1%; Lion Nathan, 3.8%; Daito Trust Construction, 3.4%; Sugi Pharmacy, 1.9%; Funai Electric, 2.4%; Venture, 0.9%; Compass Group, 2.0%. * Wanger Foreign Forty was renamed Wanger International Select on May 1, 2004. 4 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- VALUE OF A $10,000 INVESTMENT IN TOTAL RETURN FOR EACH PERIOD, WANGER INTERNATIONAL SELECT* FEBRUARY 1, 1999 (INCEPTION DATE) THROUGH DECEMBER 31, 2004 [LINE CHART APPEARS HERE] WANGER INTERNATIONAL CITIGROUP WORLD SELECT EX-US $2-10B -------------------- --------------- 2/01/1999 10020 9749.77 3/31/1999 10190 10135.2 4/30/1999 10620 10700.9 5/31/1999 10480 10249.1 6/30/1999 11350 10623.5 7/31/1999 11650 11020.5 8/31/1999 11800 11144.4 9/30/1999 11650 11183.3 10/31/1999 12160 11188.5 11/30/1999 14530 11507.9 12/31/1999 18390 12387.9 1/31/2000 17890 11789.1 2/29/2000 21580 11940.8 3/31/2000 20853 12298.7 4/30/2000 20915.8 11806 5/31/2000 19303.7 11615.9 6/30/2000 20193.5 12231.9 7/31/2000 19816.6 11836.4 8/31/2000 20863.4 12208.1 9/30/2000 19827.1 11802.4 10/31/2000 19356 11436.7 11/30/2000 17042.5 11096.1 12/31/2000 18099.8 11637.7 1/31/2001 18884.9 11579.9 2/28/2001 16812.2 11159.3 3/31/2001 14664.2 10288.7 4/30/2001 15748.3 11048.3 5/31/2001 15702.7 10953.9 6/30/2001 15052.2 10668.9 7/31/2001 14333.2 10401.2 8/31/2001 14082.2 10306.9 9/30/2001 11811.2 9109.73 10/31/2001 12404.6 9475.62 11/30/2001 12941 9814.29 12/31/2001 13283.4 9835.46 1/31/2002 12655.7 9545.09 2/28/2002 12495.9 9690.43 3/31/2002 12918.2 10244.8 4/30/2002 13237.7 10432.4 5/31/2002 13351.8 10763.9 6/30/2002 12906.8 10390.2 7/31/2002 11537.3 9459.68 8/31/2002 11731.3 9437.26 9/30/2002 10864 8592.87 10/31/2002 10898.3 8746.3 11/30/2002 11217.8 9191.66 12/31/2002 11252 8932.62 1/31/2003 10704.3 8708.44 2/28/2003 10270.6 8545.54 3/31/2003 10357.9 8399.58 4/30/2003 11343.3 9141.85 5/31/2003 12317.2 9797.43 6/30/2003 12386 10076.9 7/31/2003 12603.7 10481.4 8/31/2003 13142.2 11085.7 9/30/2003 13600.5 11542.5 10/31/2003 14528.6 12433.7 11/30/2003 14860.9 12538.3 12/31/2003 15892.1 13367.3 1/31/2004 16190 13648.3 2/29/2004 16877.4 13976.5 3/31/2004 17001 14520 4/30/2004 16702.1 14025.9 5/31/2004 16725.1 13987 6/30/2004 17150.4 14341.7 7/31/2004 16736.6 13798.2 8/31/2004 16725.1 13925.2 9/30/2004 17403.3 14372.6 10/31/2004 17886.1 14856.8 11/30/2004 19012.6 16031 12/31/2004 19760.0 16739.0 AVERAGE ANNUAL RETURN ------------------------------- 1 year 5 years Life of fund 24.34% 1.45% 12.20% This graph compares the results of $10,000 invested in Wanger International Select on February 1, 1999 (the date the Fund began operations) through December 31, 2004, to the Citigroup World ex-US Cap Range $2-10B Index, with dividends and capital gains reinvested. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONS. Wanger International Select is a diversified fund that invests in the stocks of medium- to larger-size companies with market capitalizations of $2 to $25 billion. Prior to 2/1/02, Wanger International Select was a non-diversified fund, meaning that the performance of its holdings would have a greater impact on Wanger International Select's total return and may make the fund's returns more volatile than a more diversified international fund. Mid-cap stocks are more volatile and may be less liquid than large-cap stocks. Investments in foreign securities have special risks, including political or economic instability, higher costs, different regulations, accounting standards, trading practices and levels of information, and currency exchange rate fluctuations. Performance results reflect any voluntary waivers or reimbursements of Fund expenses by the Advisor or its affiliates. Absent these waivers or reimbursement arrangements, performance results would have been lower. PERFORMANCE SHOWN HERE IS PAST PERFORMANCE, WHICH CANNOT GUARANTEE FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER. 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. PERFORMANCE CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT SHOWN. FOR MONTHLY PERFORMANCE UPDATES, PLEASE CONTACT US AT 1-888-4-WANGER. PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER. -------------------------------------------------------------------------------- RESULTS TO DECEMBER 31, 2004 4TH QUARTER 1 YEAR WANGER INTERNATIONAL SELECT 13.54% 24.34% Citigroup World ex-US Cap Range $2-10B 16.46 25.22 MSCI EAFE 15.32 20.25 Lipper International Funds Index 14.39 18.59 NAV AS OF 12/31/04: $17.19 PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER. The Citigroup World ex-U.S. Cap Range $2-10B is a subset of the broad market, selected by the index sponsor, representing the mid-cap developed market, excluding the United States. MSCI EAFE is Morgan Stanley's Europe, Australasia and Far East Index, a widely recognized international benchmark that comprises 20 major markets in Europe, Australia and the Far East. Lipper Indexes include the largest funds tracked by Lipper, Inc. in the named category. The Lipper International Funds Index is made up of the 30 largest non-U.S. funds. All indexes are unmanaged and returns include reinvested dividends. It is not possible to invest directly in an index. Portfolio holdings will vary in the future. * Wanger Foreign Forty was renamed Wanger International Select on May 1, 2004. -------------------------------------------------------------------------------- TOP 5 COUNTRIES As a % of net assets, as of 12/31/04 Japan 20.9% Ireland 13.4 Switzerland 11.2 United Kingdom 8.3 France 8.2 -------------------------------------------------------------------------------- TOP 10 HOLDINGS As a % of net assets, as of 12/31/04 1. Anglo Irish Bank 6.3% SMALL BUSINESS & MIDDLE MARKET BANKING - IRELAND 2. Neopost 4.2% POSTAGE METER MACHINES - FRANCE 3. Komercni Banka 4.1% LEADING CZECH UNIVERSAL BANK - CZECH REPUBLIC 4. Exel 3.9% GLOBAL LOGISTICS & FREIGHT FORWARDING - UNITED KINGDOM 5. Lion Nathan 3.8% BEER BREWER/DISTRIBUTOR - AUSTRALIA 6. SES Global 3.5% SATELLITE BROADCASTING SERVICES - LUXEMBOURG 7. Daito Trust Construction 3.4% APARTMENT BUILDER - JAPAN 8. Depfa Bank 3.3% INTERNATIONAL PUBLIC SECTOR FINANCE - IRELAND 9. Shimano 3.0% BICYCLE COMPONENTS & FISHING TACKLE - JAPAN 10. Hoya 2.7% OPTO-ELECTRICAL COMPONENTS & EYEGLASS LENSES - JAPAN 5 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES COMMON STOCKS-95.0% EUROPE - 58.4% ------------------------------------------------------------------------------ UNITED KINGDOM/IRELAND - 21.7% 91,000 Anglo Irish Bank (Ireland) $ 2,206,344 SMALL BUSINESS & MIDDLE MARKET BANKING 100,000 Exel 1,385,703 GLOBAL LOGISTICS & FREIGHT FORWARDING 70,000 Depfa Bank (Ireland) (d) 1,170,723 INTERNATIONAL PUBLIC SECTOR FINANCE 150,000 Compass Group 707,945 INTERNATIONAL CONCESSION & CONTRACT CATERER 63,000 Grafton Group (Ireland) 682,668 BUILDERS, WHOLESALERS & DIY RETAILING 28,000 Kerry Group (Ireland) 669,394 FOOD INGREDIENTS 45,000 British Sky Broadcasting (b) 484,708 DIGITAL SATELLITE BROADCASTING 11,000 Cobham 260,792 AEROSPACE COMPONENTS 4,000 Intermediate Capital 83,564 EUROPEAN PROVIDER OF MEZZANINE CAPITAL ------------------------------------------------------------------------------ 7,651,841 ------------------------------------------------------------------------------ SWITZERLAND - 11.2% 1,200 Geberit International (d) 875,027 PLUMBING SUPPLIES 3,400 Kuehne & Nagel (d) 729,398 FREIGHT FORWARDING/LOGISTICS 4,700 Swatch Group (d) 688,630 WATCH & ELECTRONICS MANUFACTURER 6,100 Synthes Startec (d) 680,946 PRODUCTS FOR ORTHOPEDIC SURGERY 1,700 Schindler (d) 671,459 ELEVATOR MANUFACTURER & SERVICE PROVIDER 435 Givaudan (d) 286,012 INDUSTRIAL FRAGRANCES & FLAVORS ------------------------------------------------------------------------------ 3,931,472 ------------------------------------------------------------------------------ FRANCE - 8.2% 19,300 Neopost 1,495,313 POSTAGE METER MACHINES 9,900 Imerys 828,040 INDUSTRIAL MINERALS PRODUCER 7,100 Essilor International 554,417 EYEGLASS LENSES ------------------------------------------------------------------------------ 2,877,770 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ CZECH REPUBLIC - 4.1% 9,900 Komercni Banka (d) $ 1,440,410 LEADING CZECH UNIVERSAL BANK ------------------------------------------------------------------------------ LUXEMBOURG - 3.5% 95,000 SES Global 1,235,304 SATELLITE BROADCASTING SERVICES ------------------------------------------------------------------------------ NORWAY - 3.3% 92,300 Den Norske Bank (d) 905,565 LARGEST NORWEGIAN BANK 8,000 Orkla (d) 261,509 FOOD & DIVERSIFIED CONSUMER GOODS ------------------------------------------------------------------------------ 1,167,074 ------------------------------------------------------------------------------ GERMANY - 2.8% 8,200 Rhoen-Klinikum (d) 502,770 HOSPITAL MANAGEMENT 8,000 Deutsche Boerse (d) 479,592 TRADING, CLEARING & SETTLEMENT SERVICES FOR FINANCIAL MARKETS ------------------------------------------------------------------------------ 982,362 ------------------------------------------------------------------------------ SPAIN - 2.2% 35,200 Red Electrica (d) 787,826 SPANISH POWER GRID ------------------------------------------------------------------------------ ITALY - 1.4% 30,000 Autogrill (b)(d) 499,192 RESTAURANTS & CATERING FOR TRAVELERS ------------------------------------------------------------------------------ EUROPE - TOTAL 20,573,251 ------------------------------------------------------------------------------ ASIA - 26.3% JAPAN - 20.9% 25,000 Daito Trust Construction (d) 1,186,287 APARTMENT BUILDER 37,000 Shimano (d) 1,054,395 BICYCLE COMPONENTS & FISHING TACKLE 8,400 Hoya (d) 948,395 OPTO-ELECTRICAL COMPONENTS & EYEGLASS LENSES 6,900 Funai Electric (d) 855,980 CONSUMER ELECTRONICS 41,000 Ushio (d) 763,041 INDUSTRIAL LIGHT SOURCES See accompanying notes to financial statements. 6 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2004 ------------------------------------------------------------------------------ NUMBER OF VALUE SHARES ------------------------------------------------------------------------------ JAPAN - 20.9% (CONT.) 19,300 Sugi Pharmacy (d) $ 654,550 DRUGSTORE OPERATOR 110,000 Hiroshima Bank (d) 581,130 REGIONAL BANK 6,900 Fast Retailing (d) 523,356 APPAREL RETAILER 190 Dentsu (d) 510,999 ADVERTISING AGENCY 14,000 Olympus Optical (d) 298,329 MEDICAL EQUIPMENT & CAMERAS ------------------------------------------------------------------------------ 7,376,462 HONG KONG/CHINA - 3.3% 309,000 Hong Kong Exchanges & Clearing 828,850 HONG KONG EQUITY & DERIVATIVES OPERATOR 500,000 Global Bio-Chem Technology Group (China) 331,275 CHINESE REFINER OF CORN-BASED COMMODITIES ------------------------------------------------------------------------------ 1,160,125 ------------------------------------------------------------------------------ SINGAPORE - 2.1% 450,000 Comfort Group 427,180 TAXI & MASS TRANSIT SERVICE 31,000 Venture 301,873 ELECTRONIC CONTRACT MANUFACTURER ------------------------------------------------------------------------------ 729,053 ASIA - TOTAL 9,265,640 ------------------------------------------------------------------------------ OTHER COUNTRIES - 8.2% CANADA - 4.4% 26,900 Talisman Energy 725,089 OIL & GAS PRODUCER 30,000 Noranda 526,434 DIVERSIFIED MINING HOLDING COMPANY 40,000 Kinross Gold (b) 281,631 GOLD MINING ------------------------------------------------------------------------------ 1,533,154 ------------------------------------------------------------------------------ AUSTRALIA - 3.8% 200,000 Lion Nathan 1,344,094 BEER BREWER/DISTRIBUTOR ------------------------------------------------------------------------------ OTHER COUNTRIES - TOTAL 2,877,248 ------------------------------------------------------------------------------ NUMBER OF SHARES VALUE OR PRINCIPAL AMOUNT ------------------------------------------------------------------------------ LATIN AMERICA - 2.1% ARGENTINA - 2.1% 15,000 Tenaris $ 733,500 STEEL PIPE FOR OIL WELLS & PIPELINES ------------------------------------------------------------------------------ LATIN AMERICA - TOTAL 733,500 TOTAL COMMON STOCKS (COST: $23,708,342) - 95.0% 33,449,639 ------------------------------------------------------------------------------ SHORT-TERM OBLIGATIONS - 5.4% ------------------------------------------------------------------------------ $1,916,000 Repurchase Agreement with State Street Bank & Trust Co., dated 12/31/04, due 1/03/05 at 1.90%, collateralized by Federal Home Loan Bank Notes, maturing 4/02/18, market value $1,957,631 (repurchase proceeds: $1,916,303) ------------------------------------------------------------------------------ (AMORTIZED COST: $1,916,000) 1,916,000 TOTAL INVESTMENTS (COST: $25,624,341) - 100.4% (A) (C) 35,365,639 ------------------------------------------------------------------------------ CASH AND OTHER ASSETS LESS LIABILITIES - (0.4%) (133,981) ------------------------------------------------------------------------------ TOTAL NET ASSETS - 100% $35,231,658 ------------------------------------------------------------------------------ NOTES TO STATEMENT OF INVESTMENTS: (a) At December 31, 2004, cost for federal income tax purposes is $26,232,065. The net unrealized appreciation was $9,133,574 consisting of gross unrealized appreciation of $9,546,892 and gross unrealized depreciation of $413,318. (b) Non-income producing security. (c) On December 31, 2004, the Fund's total investments were denominated in currencies as follows: % of Net CURRENCY VALUE ASSETS --------------------------------------------------------------------- Euro Dollars $11,111,583 31.5% Japanese Yen 7,376,462 20.9 Swiss Francs 3,931,472 11.2 British Pounds 2,922,712 8.3 U.S. Dollars 2,649,500 7.5 Other currencies less than 5% of total net assets 7,373,910 21.0 ----------- -------- 35,365,639 100.4% =========== ======== (d) Represents a security valued by an independent statistical fair value pricing service at 12/31/04. Foreign securities which had a market holiday on 12/31/04 were valued under this method. See Security Valuation in Note 2 for further information. See accompanying notes to financial statements. 7 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- WANGER INTERNATIONAL SELECT PORTFOLIO DIVERSIFICATION DECEMBER 31, 2004 AT DECEMBER 31, 2004, THE FUND'S PORTFOLIO INVESTMENTS AS A PERCENT OF NET ASSETS WAS DIVERSIFIED AS FOLLOWS: VALUE PERCENT ------------------------------------------------------------------------------ INDUSTRIAL GOODS/SERVICES Industrial Services $ 2,786,560 7.9% Industrial Materials 1,703,067 4.8 Machinery 1,495,313 4.2 Construction 1,186,287 3.4 Electrical Components 1,023,833 2.9 Steel 733,500 2.1 Industrial Distribution 682,668 2.0 Speciality Chemicals 286,012 0.8 ------------------------------------------------------------------------------ 9,897,240 28.1 ------------------------------------------------------------------------------ CONSUMER GOODS/SERVICES Durable Goods 1,743,025 5.0 Beverage 1,344,094 3.8 Restaurants 1,207,137 3.4 Retail 1,177,906 3.3 Food 930,903 2.7 Consumer Electronics 855,980 2.4 ------------------------------------------------------------------------------ 7,259,045 20.6 ------------------------------------------------------------------------------ FINANCE Banks 6,304,172 17.9 Finance Companies 83,564 0.2 ------------------------------------------------------------------------------ 6,387,736 18.1 VALUE PERCENT ------------------------------------------------------------------------------ INFORMATION TECHNOLOGY COMPUTER RELATED HARDWARE Semiconductors & Related Equipment $ 948,395 2.7% Contract Manufacturing 301,873 0.9 ------------------------------------------------------------------------------ 1,250,268 3.6 MEDIA Satellite Broadcasting and Services 1,235,304 3.5 TV Broadcasting 484,708 1.4 ------------------------------------------------------------------------------ 1,720,012 4.9 SOFTWARE AND SERVICES Financial Processors 1,308,442 3.7 Advertising 510,999 1.5 ------------------------------------------------------------------------------ 1,819,441 5.2 ------------------------------------------------------------------------------ 4,789,721 13.7 ------------------------------------------------------------------------------ HEALTHCARE Medical Equipment 1,533,692 4.4 Hospital Management 502,770 1.4 ------------------------------------------------------------------------------ 2,036,462 5.8 ------------------------------------------------------------------------------ ENERGY/MINERALS Oil/Gas Producers 725,089 2.1 Mining 526,434 1.5 Agricultural Commodities 331,275 0.9 Non-Ferrous Metals 281,631 0.8 ------------------------------------------------------------------------------ 1,864,429 5.3 ------------------------------------------------------------------------------ OTHER Regulated Utilities 787,826 2.2 Transportation 427,180 1.2 ------------------------------------------------------------------------------ 1,215,006 3.4 ------------------------------------------------------------------------------ TOTAL COMMON STOCKS 33,449,639 95.0 ------------------------------------------------------------------------------ SHORT-TERM OBLIGATIONS 1,916,000 5.4 ------------------------------------------------------------------------------ TOTAL INVESTMENTS 35,365,639 100.4 ------------------------------------------------------------------------------ CASH AND OTHER ASSETS LESS LIABILITIES (133,981) (0.4) ------------------------------------------------------------------------------ NET ASSETS $ 35,231,658 100.0% ================================================================================ 8 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 ------------------------------------------------------------------------------ ASSETS Investments, at cost $ 25,624,341 ------------------------------------------------------------------------------ Investments, at value $ 35,365,639 Cash 302 Foreign currency (cost of $18,796) 18,704 Receivable for: Investments sold 10,840 Fund shares sold 17,373 Dividends and interest 46,267 Foreign tax reclaims 8,857 Expense reimbursement due from Investment Advisor 735 ------------------------------------------------------------------------------ Total Assets 35,468,717 LIABILITIES Payable for: Investments purchased 31,414 Fund shares repurchased 170,791 Transfer agent fees 57 Trustees' fees 253 Audit fees 19,000 Custody fees 4,959 Reports to shareholders 7,768 Other liabilities 2,817 ------------------------------------------------------------------------------ Total Liabilities 237,059 ------------------------------------------------------------------------------ Net Assets $ 35,231,658 ============================================================================== COMPOSITION OF NET ASSETS Paid in capital $ 29,905,578 Undistributed net investment income 173,486 Accumulated net realized loss (4,590,097) Net unrealized appreciation on: Investments 9,741,298 Foreign currency translations 1,393 ------------------------------------------------------------------------------ Net Assets $ 35,231,658 ============================================================================== Fund shares outstanding 2,048,961 ============================================================================== Net asset value, offering price and redemption price per share $ 17.19 ============================================================================== STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004 ------------------------------------------------------------------------------ INVESTMENT INCOME Dividend income (net of foreign taxes of $52,789) $ 464,788 Interest income 21,310 ------------------------------------------------------------------------------ Total investment income 486,098 EXPENSES: Investment advisory fees 281,849 Transfer agent fees 1,826 Trustees' fees 6,323 Custody fees 47,787 Audit fees 23,472 Reports to shareholders 25,755 Compliance fees 404 Non-recurring costs (See Note 8) 1,500 Other expenses 16,657 ------------------------------------------------------------------------------ Total Expenses 405,573 Less custody fees paid indirectly (6) Non-recurring costs reimbursed (See Note 8) (1,500) ------------------------------------------------------------------------------ Net Expenses 404,067 ------------------------------------------------------------------------------ Net Investment Income 82,031 NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS: Net realized gain (loss) on: Investments 3,329,294 Foreign currency transactions (943) ------------------------------------------------------------------------------ Net realized gain 3,328,351 ------------------------------------------------------------------------------ Net change in unrealized appreciation (depreciation) on: Investments 3,073,053 Foreign currency translations (2,588) ------------------------------------------------------------------------------ Net change in unrealized appreciation (depreciation) 3,070,465 ------------------------------------------------------------------------------ Net Gain 6,398,816 ------------------------------------------------------------------------------ Net Increase in Net Assets from Operations $ 6,480,847 ============================================================================== See accompanying notes to financial statements. 9 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED INCREASE (DECREASE) IN NET ASSETS DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------- ----------------- FROM OPERATIONS: Net investment income $ 82,031 $ 67,099 Net realized gain (loss) on investments and foreign currency transactions 3,328,351 (474,983) Net change in unrealized appreciation (depreciation) on investments and foreign currency transactions 3,070,465 7,046,414 ------------------------------------------------------------------------------------------------------------------------ Net increase in net assets resulting from operations 6,480,847 6,638,530 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (87,061) (50,019) ------------------------------------------------------------------------------------------------------------------------ Total distributions to shareholders (87,061) (50,019) SHARE TRANSACTIONS: Subscriptions 15,850,018 14,037,658 Distributions reinvested 87,061 50,019 Redemptions (14,026,796) (7,831,407) ------------------------------------------------------------------------------------------------------------------------ Net Increase from Share Transactions 1,910,283 6,256,270 ------------------------------------------------------------------------------------------------------------------------ Total Increase in Net Assets 8,304,069 12,844,781 NET ASSETS: Beginning of period 26,927,589 14,082,808 ------------------------------------------------------------------------------------------------------------------------ End of period $ 35,231,658 $ 26,927,589 ------------------------------------------------------------------------------------------------------------------------ UNDISTRIBUTED NET INVESTMENT INCOME $ 173,486 $ 82,012 ========================================================================================================================
See accompanying notes to financial statements. 10 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.87 $ 9.86 $ 11.64 $ 17.29 $ 18.39 ---------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) 0.04 0.04 0.04 (0.03) (0.04) Net realized and unrealized gain (loss) on investments and foreign currency transactions 3.33 4.01 (1.82) (4.46) (0.10) ---------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.37 4.05 (1.78) (4.49) (0.14) ---------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.05) (0.04) -- (0.02) (0.01) From net realized capital gains -- -- -- (1.14) (0.95) ---------------------------------------------------------------------------------------------------------------------------------- Total Distributions Declared to Shareholders (0.05) (0.04) -- (1.16) (0.96) ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 17.19 $ 13.87 $ 9.86 $ 11.64 $ 17.29 ================================================================================================================================== Total Return (b) 24.34% 41.24%(c) (15.29)%c) (26.61)% (1.58)%(c) ---------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS: Expenses (d) 1.43% 1.45% 1.45% 1.45% 1.45% Net investment income (loss) (d) 0.29% 0.39% 0.35% (0.20)% (0.20)% Reimbursement -- 0.09% 0.10% -- 0.23% Portfolio turnover rate 71% 59% 113% 72% 96% Net assets, end of period (000's) $ 35,232 $ 26,928 $ 14,083 $ 15,431 $ 15,496
-------------------------------------------------------------------------------- (a) Net investment income (loss) per share was based upon the average shares outstanding during the period. (b) Total return at net asset value assuming all distributions reinvested. (c) Had the Advisor not reimbursed a portion of expenses, total return would be reduced. (d) The benefits derived from custody fees paid indirectly had no impact. See accompanying notes to financial statements. 11 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Wanger International Select (known prior to May 1, 2004 as Wanger Foreign Forty) (the "Fund") is a series of Wanger Advisors Trust (the "Trust"), an open-end management investment company organized as a Massachusetts business trust. The investment objective of the Fund is to seek long-term growth of capital. The Fund is 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 Securities of the Fund are valued at market value or, if a market quotation for a security is not readily available or is deemed not to be reliable because of events or circumstances that have occurred between the market quotation and the time as of which the security is to be valued, the security is valued at a fair value determined in accordance with procedures established by the Board of Trustees. 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. If a security is traded principally on the Nasdaq Stock Market Inc., the Nasdaq Official Closing Price will be applied. Securities for which there are no reported sales on the valuation date are valued at the latest bid quotation. Short-term debt obligations having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis. Securities for which quotations are not readily available and any other assets are valued as determined in good faith by the Board of Trustees. The Trust has retained an independent statistical fair value pricing service to assist in the fair valuation process for securities principally traded in a foreign market in order to adjust for possible changes in value that may occur between the close of the foreign exchange and the time at which Fund shares are priced. If a security is valued at a "fair value", that value may be different from the last quoted market price for the security. REPURCHASE AGREEMENTS The Fund may engage in repurchase agreement transactions. The Fund, through its custodians, receives delivery of underlying securities collateralizing each repurchase agreement. The Fund's investment advisor determines that the value of the underlying securities is at all times at least equal to the repurchase price including interest. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 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 an accrual basis and includes amortization of discounts on short-term debt obligations and on long-term debt obligations when required for federal income tax purposes. Short-term debt obligations having a maturity of 60 days or less from the valuation date are valued on an amortized cost basis, which approximates fair value. Realized gains and losses from security transactions are reported on an identified cost basis. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated. FUND SHARE VALUATION Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of trading on the New York Stock Exchange ("the 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. CUSTODY FEES/CREDITS Custody fees are reduced based on the Fund's cash balances maintained with the custodian.The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangement in an income-producing asset if it had not entered into such an agreement. The amount is disclosed as a reduction of total expenses in the Statement of Operations. FEDERAL INCOME TAXES The Fund has complied with the provisions of the Internal Revenue Code available to regulated investment companies and, in the manner provided therein, distributes all its taxable income, as well as any net realized gain on sales of investments and foreign currency transactions reportable for federal income tax purposes. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required. FOREIGN CAPITAL GAINS TAXES Realized gains in certain countries may be subject to foreign taxes at the fund level, at rates ranging from 10%-30%. The Fund accrues for such foreign taxes on net realized and unrealized gains at the appropriate rate for each jurisdiction. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders are recorded on the ex-date. 3. FEDERAL TAX INFORMATION The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. Reclassifications are made to the Fund's capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. For the year ended December 31, 2004, permanent differences resulting primarily from differing treatments for foreign currency transactions and passive foreign investment company adjustments ("PFICs") were identified and reclassified among the components of the Fund's net assets as follows: UNDISTRIBUTED ACCUMULATED PAID IN NET INVESTMENT INCOME NET REALIZED LOSS CAPITAL --------------------- ----------------- ------- $96,504 $(96,502) $(2) Net investment income and net realized gains (losses), as disclosed on the Statement of Operations, and net assets were not affected by this reclassification. The tax character of distributions paid during the years ended December 31, 2004 and December 31, 2003 was as follows: 12 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 DECEMBER 31, 2003 ----------------- ----------------- Distributions paid from: Ordinary Income $87,061 $50,019 As of December 31, 2004, the components of distributable earnings on a tax basis were as follows: UNDISTRIBUTED UNDISTRIBUTED ORDINARY LONG-TERM NET UNREALIZED INCOME CAPITAL GAINS APPRECIATION* ------------- -------------- -------------- $765,798 $-- $9,134,912 * The differences between book-basis and tax-basis net unrealized appreciation/depreciation are primarily due to deferral of losses from wash sales and PFIC adjustments. Unrealized appreciation and depreciation at December 31, 2004, based on cost of investments for federal income tax purposes, was: NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION DEPRECIATION APPRECIATION ------------ ------------ ------------ $9,546,892 $(413,318) $9,133,574 The following capital loss carryforwards, determined as of December 31, 2004, are available to reduce taxable income arising from future net realized gains on investments, if any, to the extent permitted by the Internal Revenue Code: YEAR OF CAPITAL LOSS EXPIRATION CARRYFORWARDS ---------- -------------- 2010 $ 3,592,626 2011 982,004 -------------- Total $ 4,574,630 Expired capital loss carryforwards, if any, are recorded as a reduction of paid-in capital. Capital loss carryforwards of $3,213,886 were utilized during the year ended December 31, 2004 for the Fund. 4. TRANSACTIONS WITH AFFILIATES Columbia Wanger Asset Management, L.P., ("Columbia WAM") an indirect wholly-owned subsidiary of Columbia Management Group, Inc., which in turn is a wholly owned subsidiary of Bank of America Corporation ("BOA"), furnishes continuing investment supervision to the Fund and is responsible for the overall management of the Fund's business affairs. Prior to April 1, 2004, Columbia was a wholly-owned subsidiary of Fleet National Bank, which in turn was a wholly-owned subsidiary of FleetBoston Financial Corporation ("Fleet"). On April 1, 2004, Fleet was acquired by BOA. Under the Fund's investment management agreement, fees are accrued daily and paid monthly to Columbia WAM at the annual percentage of 1.00% of average daily net assets. The investment advisory agreement also provides that Columbia WAM will reimburse the Fund to the extent that ordinary operating expenses (computed based on net custodian fees) exceed an annual rate of 1.45% of average daily net assets. There was no reimbursement for the year ended December 31, 2004. In accordance with the terms of the NYAG Settlement (as defined and discussed further under Note 8 to these Financial Statements - "Legal Proceedings"), Columbia WAM waived a portion of the fees payable under the Fund's investment management agreement so that those fees are retained at 0.990% on average daily net assets. The fee waiver was effective as of February 10, 2005 but applied as if it had gone into effect on December 1, 2004. The financial statements, as of December 31, 2004, are not reflective of these changes. Certain officers and trustees of the Trust are also officers of Columbia WAM. The Trust makes no direct payments to its officers and trustees who are affiliated with Columbia WAM. The Fund paid $6,323 to trustees not affiliated with Columbia WAM for the year ended December 31, 2004. Effective April 2004, the Board of Trustees appointed a Chief Compliance Officer to the Fund in accordance with federal securities regulations. The Fund will pay its pro-rata share of the expenses associated with the Office of the Chief Compliance Officer. These expenses are disclosed separately on the Statement of Operations. Columbia Funds Distributor, Inc. ("CFDI"), an indirect wholly-owned subsidiary of BOA, serves as the principal underwriter of the Trust and receives no compensation for its services. Columbia Funds Services, Inc. (the "Transfer Agent"), an indirect wholly-owned subsidiary of BOA, provides shareholder services to the Fund. For such services, the Transfer Agent receives a fee, paid monthly, at the annual rate of $28.00 per open account. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. Effective February 1, 2004 the Transfer Agent made the decision to waive the reimbursement for certain out-of-pocket expenses. Prior to February 1, 2004, the Transfer Agent was entitled to receive a flat rate charge based on the number of shareholder accounts and transactions. During the year ended December 31, 2004, the Fund engaged in purchases and sales transactions with funds that have a common investment advisor (or affiliated investment advisors), common Directors/Trustees, and/or common Officers. These purchase and sale transactions complied with the provisions of Rule 17a-7 under the Investment Company Act of 1940 and were $405,544 and $1,192,967, respectively. 5. BORROWING ARRANGEMENTS The Trust participates in a $150,000,000 credit facility, which was entered into to facilitate portfolio liquidity. Interest is charged to each participating fund based on its borrowings at a rate per annum equal to the Federal Funds rate plus 0.50%. In addition, a commitment fee of 0.10% per annum is accrued and apportioned among the participating funds based on their pro-rata portion of the unutilized line of credit. The commitment fee is included in "Other expenses" on the Statement of Operations. No amounts were borrowed under this facility for the year ended December 31, 2004. 6. FUND SHARE TRANSACTIONS Proceeds and payments on Fund shares as shown in the statement of changes in net assets are in respect of the following numbers of shares: YEAR ENDED YEAR ENDED DECEMBER 31, 2004 DECEMBER 31, 2003 -------------------------------------------------------------------------------- Shares sold 1,041,265 1,237,004 -------------------------------------------------------------------------------- Shares issued in reinvestment of dividend distributions 6,025 5,607 -------------------------------------------------------------------------------- Less shares redeemed 940,310 728,804 -------------------------------------------------------------------------------- Net increase in shares outstanding 106,980 513,807 7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the year ended December 31, 2004 were $20,505,298 and $19,332,247. 8. LEGAL PROCEEDINGS On March 15, 2004, Columbia Management Advisors, Inc. ("Columbia Management"), the advisor to the Columbia Funds, and CFDI (collectively with Columbia Management, "Columbia") the distributor of the shares of the Columbia Funds, the Columbia Acorn Funds and the Wanger Advisors Trust Funds (collectively, "the Columbia Family of Funds"), entered into agreements 13 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS in principle with the staff of the U.S. Securities and Exchange Commission ("SEC") and the Office of the New York Attorney General ("NYAG") to resolve the proceedings brought in connection with the SEC's and NYAG's investigations of frequent trading and market timing in certain Columbia mutual funds. Columbia WAM, the advisor to the Columbia Acorn Funds and the Wanger Advisors Trust Funds, was not a respondent in either proceeding nor were any of its officers or directors. On February 9, 2005, Columbia entered into an Assurance of Discontinuance (the "NYAG Settlement") with the NYAG and consented to the entry of a cease-and-desist order by the SEC (the "SEC Order" and together, the "Settlements"). The Settlements contain substantially the same terms and conditions as outlined in the agreements in principle. Although none of the Wanger Advisors Trust Funds is a party to the Settlement orders, under the terms of the Settlements and in order for Columbia Management to continue to provide administrative services to the Wanger Advisors Funds, the Board of Trustees of the Wanger Advisors Trust Funds agreed to conform to certain governance requirements, including the election of an independent board chair. Under the terms of the SEC Order, Columbia has agreed, among other things, to: pay $70 million in disgorgement and $70 million in civil money penalties; cease and desist from violations of the antifraud provisions and certain other provisions of the federal securities laws; maintain certain compliance and ethics oversight structures; retain an independent consultant to review Columbia's applicable supervisory, compliance, control and other policies and procedures; and retain an independent distribution consultant (see below). The NYAG Settlement also, among other things, requires Columbia and its affiliates, Banc of America Capital Management, LLC and BACAP Distributors, LLC to reduce management fees paid by the Columbia Family of Funds, Nations Funds and other related mutual funds collectively by $32 million per year for five years, for a projected total of $160 million in management fee reductions based on net assets as of March 15, 2004. Pursuant to the procedures set forth in the SEC Order, the settlement amounts will be distributed in accordance with a distribution plan to be developed by an independent distribution consultant, who is acceptable to the SEC staff and the independent trustees of the funds. The distribution plan must be based on a methodology developed in consultation with Columbia and the independent trustees of the funds and not unacceptable to the staff of the SEC. More specific information on the distribution plan will be communicated by Columbia WAM and/or its affiliates at a later date. Columbia WAM, the Columbia Acorn Trust, another mutual fund family advised by Columbia WAM and the trustees of Columbia Acorn Trust, are defendants in several derivative and class action lawsuits that allege, in summary, defendants permitted investors to engage in improper trading of shares of various funds in violation of certain federal and state laws. All of these lawsuits have been consolidated with similar suits in a Multi-District Litigation proceeding in Baltimore, Maryland and consolidated class action and derivative complaints have been filed. The Columbia Acorn Trust and Columbia WAM are also defendants in a class action lawsuit that alleges, in summary, that the Columbia Acorn Trust and Columbia WAM exposed shareholders of Columbia Acorn International Fund to trading by market timers by allegedly (a) failing to properly evaluate daily whether a significant event affecting the value of that Fund's securities had occurred after foreign markets had closed but before the calculation of the Fund's net asset value ("NAV"); (b) failing to implement the Fund's portfolio valuation and share pricing policies and procedures; and (c) failing to know and implement applicable rules and regulations concerning the calculation of NAV. Columbia WAM and the trustees of Columbia Acorn Trust are also defendants in a lawsuit alleging that Columbia WAM used Fund assets to make undisclosed payments to brokers as an incentive for the brokers to market the Columbia Acorn Funds over other mutual funds to investors. The complaint alleges Columbia WAM and the trustees of Columbia Acorn Trust breached certain common laws duties and federal laws. On January 11, 2005 a putative class action lawsuit was filed in federal district court in Massachusetts against, among others, the Trustees of the Columbia Acorn Trust and Columbia WAM. The lawsuit alleges that defendants violated common law duties to fund shareholders as well as sections of the Investment Company Act of 1940, by failing to ensure that the Columbia Acorn Trust funds and other affiliated funds participated in securities class action settlements for which the funds were eligible. Specifically, plaintiffs allege that defendants failed to submit Proof of Claims in connection with settlements of securities class action lawsuits filed against companies in which the funds held positions. The complaint seeks compensatory and punitive damages, and the disgorgement of all fees paid to the Columbia WAM and affiliated advisers. The Columbia Acorn Trust and Columbia WAM intend to defend these suits vigorously. The Columbia Acorn Trust does not believe that the pending actions will have a material adverse effect on the financial statements of any Columbia Acorn Fund, and Columbia WAM does not believe that the pending actions will have a material adverse effect on its ability to perform under its contracts with the Funds. As a result of these matters or any adverse publicity or other developments resulting from them, there may be increased redemptions or reduced sales of Fund shares, which could increase transaction costs or operating expenses, or have other adverse consequences for the Fund. In connection with the events described in detail above, various parties have filed suit again certain funds, their Boards and/or BOA (and affiliated entities). These suits are ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, cannot be currently made. For the year ended December 31, 2004, CMG has assumed $1,500 in consulting services and legal fees incurred by the Fund in connection with these matters. 14 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Effective April 13, 2004, the audit committee of the Trust requested that Ernst & Young LLP ("E&Y") resign as the auditors of the Fund. Also effective July 14, 2004, upon the recommendation of the audit committee, the Trust selected PricewaterhouseCoopers LLP ("PWC") as independent registered public accounting firm to audit the books and records of the Fund for its fiscal year ending December 31, 2004. The cessation of the relationship with E&Y was based on the impairment of E&Y's independence resulting from the consummation of the merger of FleetBoston Financial Corporation and Bank of America Corporation and accordingly, E&Y's ability to provide audit services to the Fund. E&Y's report on the financial statements of the Fund for the past two years did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the period E&Y was engaged, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to E&Y's satisfaction, would have caused it to make reference to that matter in connection with its report. 15 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of Wanger International Select Fund: In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Wanger International Select Fund (a series of the Wanger Advisors Trust, hereinafter referred to as the "Fund") at December 31, 2004, the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. The statement of changes in net assets for the year ended December 31, 2003 and financial highlights of the Fund for the periods ended December 31, 2003 and prior were audited by other independent auditors whose report dated February 6, 2004 expressed an unqualified opinion on those financial statements. PricewaterhouseCoopers LLP Chicago, Illinois February 14, 2005 16 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST The Board of Trustees of the Trust has overall management responsibility for the Trust and the Funds. Each trustee serves a term of unlimited duration, provided that a majority of trustees always has been elected by shareholders. The trustees appoint their own successors, provided that at least two-thirds of the trustees, after such appointment, have been elected by shareholders. Shareholders may remove a trustee, with or without cause, upon the vote of two-thirds of the Trust's outstanding shares at any meeting called for that purpose. A trustee may be removed, with or without cause, upon the vote of a majority of the trustees. The names of the trustees and officers of the Trust, the date each was first elected or appointed to office, their principal business occupations during at least the last five years, and other directorships they hold are shown below. Each trustee serves in such capacity for each of the four series of the Trust. The business address of each trustee and officer of the Trust is Columbia Wanger Asset Management, L.P., 227 West Monroe, Suite 3000, Chicago, Illinois 60606, except for Messrs. Clark, Connaughton, and Pietropaolo, whose address is Columbia Management Group, Inc., 245 Summer Street, Boston, Massachusetts, 02210. Wanger's Statement of Additional Information includes additional information about Columbia Wanger's trustees and officers. You may obtain a free copy of the Statement of Additional Information on our website, www.wanger.com, or by writing or calling toll-free: Columbia Wanger Asset Management, L.P. Shareholder Services Group 227 W. Monroe, Suite 3000 Chicago, IL 60606 888-4-Wanger (888-492-6437)
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OTHER DECEMBER 31, 2004 TO OFFICE PAST FIVE YEARS DIRECTORSHIPS ------------------------ ------------ --------------------------------------------------------- -------------- TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST: JEROME L. DUFFY, 68, 2003 Retired since December 31, 1997; prior thereto, senior None. Trustee vice president, Kemper Financial Services and treasurer, Kemper Funds. FRED D. HASSELBRING, 63, 1994 Retail industry, general project development and business None. Trustee computer systems consultant; voice over specialist for industrial and institutional applications; former chairman of the board of the Trust (September 2004 to November 2004); former lead independent trustee (August 2003 to September 2004). KATHRYN A. KRUEGER, M.D., 47, 2003 Medical Fellow I, Cardiovascular Therapeutic Area, Lilly None. Trustee Research Laboratories (May 2004 to present); Medical Advisor, Cardiovascular Therapeutic Area, Lilly Research Laboratories (January 2003 to April 2004); Medical Director, Cardiovascular Therapeutic Area, Lilly Research Laboratories (October 2002 to December 2002); Medical Director, Neptune Product Team, Lilly Research Laboratories (October 2001 to October 2002); Acting Director and Senior Clinical Research Physician, Lilly Research Laboratories (April 2001 to September 2001); Senior Clinical Research Physician, Lilly Research Laboratories (January 2000 to March 2001); Clinical Research Physician, Lilly Research Laboratories (June 1996 to December 1999). PATRICIA H. WERHANE, 69, 1998 Ruffin Professor of Business Ethics, Darden Graduate None. Chair of the Board and Trustee School of Business Administration, University of Virginia, since 1993; Senior Fellow since 2004 and Co-Director of the Olsson Center for Applied Ethics, Darden Graduate School of Business Administration, University of Virginia, from 2001-2004; and Wicklander Chair of Business Ethics and Director of the Institute for Business and Professional Ethics, DePaul University (since September 2003). TRUSTEE WHO IS AN INTERESTED PERSON OF WANGER ADVISORS TRUST: RALPH WANGER, 70, 1994 Founder, former president, chief investment officer and Columbia Trustee portfolio manager, Columbia Wanger Asset Management, L.P. Acorn (CWAM) (1992-2003); former president, Columbia Acorn Trust. Trust from April 1992 through September 2003; former president, Wanger Advisors Trust (1994 through September 2003); principal, WAM from July 1992 until September 2000; president, WAM Ltd. from July 1992 to September 2000; director, Wanger Investment Company plc.; Director, CWAM.
17 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
NAME, POSITION(S) WITH YEAR FIRST WANGER ADVISORS TRUST ELECTED OR AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OTHER DECEMBER 31, 2004 TO OFFICE PAST FIVE YEARS DIRECTORSHIPS ------------------------ ------------ --------------------------------------------------------- -------------- OFFICERS OF WANGER ADVISORS TRUST: BEN ANDREWS, 39, 2004 Analyst and portfolio manager, CWAM since 1998; vice None. Vice President president, Columbia Acorn Trust. J. KEVIN CONNAUGHTON, 40, 2001 Treasurer of the Columbia Funds and of the Liberty None. Assistant Treasurer All-Star Funds since December 2000 (formerly controller of the Columbia Funds and of the Columbia All-Star Funds from February 1998 to October 2000); treasurer of the Galaxy Funds since September 2002; treasurer, Columbia Management Multi-Strategy Hedge Fund, LLC since December 2002 (prior thereto, vice president of Colonial Management Associates from February 1998 to October 2000). MICHAEL G. CLARKE, 34, 2004 Chief accounting officer of the Columbia Funds, Liberty None. Assistant Treasurer Funds, Stein Roe Funds and All-Star Funds since October 2004; Controller of the Columbia Funds, Liberty Funds, Stein Roe Funds and All-Star Funds from May 2004 to October 2004; Assistant Treasurer from June 2002 to May 2004; Vice President, Product Strategy & Development of the Liberty Funds and Stein Roe Funds from February 2001 to June 2002; Assistant Treasurer of the Liberty Funds, Stein Roe Funds and the All-Star Funds from August 1999 to February 2001. KENNETH A. KALINA, 45, 1995 Chief Compliance Officer, CWAM since May 2004; treasurer None. Assistant Treasurer and Chief financial officer, CWAM since April 2000; assistant treasurer, Columbia Acorn Trust; fund controller, CWAM since September 1995; director, New Americas Small Cap Fund. BRUCE H. LAUER, 47, 1995 Chief operating officer, CWAM since April 1995; None. Vice President, Secretary principal, WAM from January 2000 to September 2000; vice and Treasurer president, treasurer and secretary, Columbia Acorn Trust; director, Wanger Investment Company plc and New Americas Small Cap Fund. CHARLES P. MCQUAID, 51, 1994 President, CWAM since October 2003; Chief investment Columbia President officer, CWAM since September 2003; senior vice president Acorn of the Trust from 1994 through September 2003; portfolio Trust. manager since 1995 and director of research since July 1992 through December 2003; CWAM interim director of international research from October 2003 until December 2004; principal, WAM from July 1995 to September 2000; trustee since 1992 and president since 2003, Columbia Acorn Trust. ROBERT A. MOHN, 43, 1997 Director of domestic research, CWAM, since March 2004; None. Vice President analyst and portfolio manager, CWAM since August 1992; principal, WAM from 1995 to September 2000; vice president, Columbia Acorn Trust. TODD M. NARTER, 41, 2001 Analyst and portfolio manager, CWAM since June 1997; vice None. Vice President president, Columbia Acorn Trust. CHRISTOPHER J. OLSON, 40, 2001 Analyst and portfolio manager, CWAM since January 2001; None. Vice President vice president, Columbia Acorn Trust; prior to 2001, director and portfolio strategy analyst with UBS Asset Management/Brinson Partners. VINCENT P. PIETROPAOLO, 39, 2001 Assistant General Counsel, Bank of America (and its None. Assistant Secretary predecessors) since December 1999. ROBERT SCALES, 52, 2004 Deputy General Counsel, Grant Thornton LLP (2002-2004); None. Chief Compliance Officer, Associate General Counsel, UBS PaineWebber Senior Vice President (broker-dealer) (1997-2002). and General Counsel
18 Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- This page intentionally left blank. Wanger International Select 2004 Annual Report -------------------------------------------------------------------------------- WANGER ADVISORS TRUST TRANSFER AGENT, DIVIDEND DISBURSING AGENT Columbia Funds Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Columbia Funds Distributor, Inc. One Financial Center Boston, Massachusetts 02111-2621 INVESTMENT ADVISER Columbia Wanger Asset Management, L.P. 227 West Monroe Street Suite 3000 Chicago, Illinois 60606 www.wanger.com 1-888-4-WANGER (1-888-492-6437) LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP Chicago, Illinois This report, including the 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. A description of the fund's proxy voting policies and procedures is available (i) on the fund's website, www.wanger.com; (ii) on the Securities and Exchange Commission's website at www.sec.gov, and (iii) without charge, upon request, by calling 888-492-6437. Information regarding how the fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004 is available from the SEC's website. The fund files a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. 20 WANGER ADVISORS TRUST SHR-02/469U-0205 05/4316 ITEM 2. CODE OF ETHICS. (a) The registrant has, as of the end of the period covered by this report, adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. (b) During the period covered by this report, there were not any amendments to a provision of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any waivers or implicit waivers to a provision of the code of ethics adopted in 2(a) above. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The registrant's Board of Trustees has determined that Jerome L. Duffy, who is a member of the registrant's Board of Trustees and Audit Committee, qualifies as an audit committee financial expert. Mr. Duffy is an independent trustee, as defined in paragraph (a)(2) of this item's instructions. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Effective July 14, 2004, the registrant engaged new independent accountants. Unless otherwise noted, fees disclosed below represent fees paid or accrued to the current and predecessor principal accountants while each was engaged by the registrant. (a) Aggregate Audit Fees billed by the principal accountant for professional services rendered during the fiscal years ended December 31, 2004 and December 31, 2003 are approximately as follows: 2004 2003 $82,000 $78,800 Audit Fees include amounts related to the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. (b) Aggregate Audit-Related Fees billed by the principal accountant for professional services rendered during the fiscal years ended December 31, 2004 and December 31, 2003 are approximately as follows: 2004 2003 $10,400 $16,000 Audit-Related Fees include amounts for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported in Audit Fees above. In both fiscal years 2004 and 2003, Audit-Related Fees include certain agreed-upon procedures performed for semi-annual shareholder reports. (c) Aggregate Tax Fees billed by the principal accountant for professional services rendered during the fiscal years ended December 31, 2004 and December 31, 2003 are approximately as follows: 2004 2003 $11,000 $12,100 Tax Fees in both fiscal years 2004 and 2003 consist primarily of the review of annual tax returns and include amounts for professional services by the predecessor principal accountant for tax compliance, tax advice and tax planning. (d) Aggregate All Other Fees billed by the principal accountant for professional services rendered during the fiscal years ended December 31, 2004 and December 31, 2003 are as follows: 2004 2003 $0 $0 All Other Fees include amounts for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) above. None of the amounts described in paragraphs (a) through (d) above were approved pursuant to the "de minimis" exception under paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES The policy of the registrant's Audit Committee is to specifically pre-approve (i) all audit and non-audit (including audit related, tax and all other) services provided by the registrant's independent auditor to the registrant and individual funds (collectively "Fund Services") and (ii) all non-audit services provided by the registrant's independent auditor to the funds' adviser or a control affiliate of the adviser, that relate directly to the funds' operations and financial reporting (collectively "Fund-related Adviser Services"). A "control affiliate" is an entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the funds, and the term "adviser" is deemed to exclude any unaffiliated sub-adviser whose role is primarily portfolio management and is sub-contracted or overseen by another investment adviser. If such Fund Services or Fund-related Adviser Services are required during the period between the Audit Committee's regularly scheduled meetings, the Chairman of the Audit Committee has the authority to pre-approve the service, with reporting to the full Audit Committee at the next regularly scheduled meeting. The Audit Committee will waive pre-approval of Fund Services or Fund-related Adviser Services provided that the requirements under paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are met. (e)(2) The percentage of services described in paragraphs (b) through (d) of this Item approved pursuant to the "de minimis" exception under paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X during both fiscal years ended December 31, 2004 and December 31, 2003 was zero. (f) Not applicable. (g) All non-audit fees billed by the registrant's accountant for services rendered to the registrant for the fiscal years ended December 31, 2004 and December 31, 2003 are disclosed in (b) through (d) of this Item. During the fiscal years ended December 31, 2004 and December 31, 2003, there were no Audit-Related Fees or Tax Fees that were approved for services to the investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant under paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. During the fiscal years ended December 31, 2004 and December 31, 2003, All Other Fees that were approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X were approximately $93,500 and $95,000, respectively. For both fiscal years, All Other Fees relate to internal controls reviews of the registrant's transfer agent performed by the current principal accountant. The percentage of Audit-Related Fees, Tax Fees and All Other Fees required to be approved under paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X that were approved under the "de minimis" exception during both fiscal years ended December 31, 2004 and December 31, 2003 was zero. (h) The registrant's Audit Committee of the Board of Directors has considered whether the provision of non-audit services that were rendered to the registrant's adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, is compatible with maintaining the principal accountant's independence. The Audit Committee determined that the provision of such services is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS The registrant's "Schedule I - Investments in securities of unaffiliated issuers" (as set forth in 17 CFR 210.12-12) is included in Item 1 of this Form N-CSR. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On September 29, 2004, the registrant adopted procedures for consideration of Trustee candidates submitted by shareholders. The Trust's Governance Committee (the "Committee") is responsible for identifying and nominating candidates for appointment as Trustees. Although the registrant's investment adviser, Trustees, or shareholders may submit suggested candidates for Independent Trustees to the Committee, neither the Committee nor the Independent Trustees as a group shall consider those candidates on a preferential basis as opposed to other possible candidates. Any shareholders may submit the name of a candidate for consideration by the Committee by submitting the recommendation to the Trust's Secretary in accordance with the procedures. A copy of these procedures, which include the information required to be submitted in a shareholder nomination, may be obtained by contacting the Secretary of the Trust, at the address of the principal executive offices of the Trust. The Secretary will forward any such recommendation to the Chairman of the Committee promptly upon receipt. Recommendations for candidates for Trustees will be evaluated, among other things, in light of whether the number of Trustees is expected to change and whether the Trustees expect any vacancies. Shareholder recommendations will be kept on file until active recruitment is underway. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive officer and principal financial officers, based on their evaluation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing of this report, have concluded that such controls and procedures are adequately designed to ensure that information required to be disclosed by the registrant in Form N-CSR is accumulated and communicated to the registrant's management, including the principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of ethics required to be disclosed under Item 2 of Form N-CSR attached hereto as Exhibit 99.CODE ETH. (a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.CERT. (a)(3) Not applicable. (b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) Wanger Advisors Trust ------------------------------------------------------------------ By (Signature and Title) /S/ Charles P. McQuaid ------------------------------------------------------ Charles P. McQuaid, President Date February 28, 2005 -------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title) /S/ Charles P. McQuaid ------------------------------------------------------ Charles P. McQuaid, President Date February 28, 2005 -------------------------------------------------------------------------- By (Signature and Title) /S/ Bruce H. Lauer ------------------------------------------------------ Bruce H. Lauer, Treasurer Date February 28, 2005 --------------------------------------------------------------------------