-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jne8C6mPgvAnnmGBMODrQwb+nwTSkujxKct5ECr6RLIH5UfqT9USs+t9jBOtYJpZ 7pYpSmUvxH8pi8RfxghDow== 0000891804-05-002680.txt : 20050907 0000891804-05-002680.hdr.sgml : 20050907 20050907164532 ACCESSION NUMBER: 0000891804-05-002680 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050907 DATE AS OF CHANGE: 20050907 EFFECTIVENESS DATE: 20050907 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WANGER ADVISORS TRUST CENTRAL INDEX KEY: 0000929521 IRS NUMBER: 362692100 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08748 FILM NUMBER: 051073186 BUSINESS ADDRESS: STREET 1: 227 WEST MONROE STREET STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126349200 MAIL ADDRESS: STREET 1: 227 WEST MONROE STREET STE 3000 CITY: CHICAGO STATE: IL ZIP: 60606-5016 N-CSRS 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: 12/31/05 ------------------- Date of reporting period: 06/30/05 ------------------- 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 2005 Semiannual Report [Graphic: squirrel] WANGER ADVISORS FUNDS - -------------------------------------------------------------------------------- managed by Columbia Wanger Asset Management, L.P. [Graphic: squirrel] WANGER U.S. SMALLER COMPANIES 2005 SEMIANNUAL REPORT TABLE OF CONTENTS 1 Understanding Your Expenses 2 Discipline and Creativity 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 19 Management Fee Evaluation of the Senior Officer 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 $23.5 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. COLUMBIA MANAGEMENT IS THE PRIMARY INVESTMENT MANAGEMENT DIVISION OF BANK OF AMERICA CORPORATION. COLUMBIA MANAGEMENT ENTITIES FURNISH INVESTMENT MANAGEMENT SERVICES AND ADVISE INSTITUTIONAL AND MUTUAL FUND PORTFOLIOS. COLUMBIA WAM IS AN SEC-REGISTERED INVESTMENT ADVISER AND WHOLLY OWNED SUBSIDIARY OF BANK OF AMERICA, N.A. COLUMBIA WANGER IS PART OF COLUMBIA MANAGEMENT. 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 WANGER ADVISORS FUNDS. 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 2005 Semiannual 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 ongoing 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 $8,600.00 at the end of the period, the result would be 8.6. 2. In the section of the table below titled "Expenses paid during the period," locate the amount for your fund. You will find this number is in the column labeled "actual." Multiply this number by the result from step 1. Your answer is an estimate of the expenses you paid on your account during the period. January 1, 2005 - June 30, 2005
Account value at the Account value at the Expenses paid during Fund's annualized beginning of the period ($) 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 1,033.52 1,020.08 4.79 4.76 0.95
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 365. Had the investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. 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 6/30/05. COMPARE WITH OTHER FUNDS Since all mutual funds 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 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] DISCIPLINE AND CREATIVITY Photo of: RALPH WANGER RALPH WANGER Founder, Advisor and Trustee Columbia Wanger Asset Management, L.P. A popular new book by Tom Friedman, "The World Is Flat: A Brief History of the Twenty-First Century," recounts how developing countries such as India and China are using modern technology to compete with the United States in both manufacturing and services. He contrasts the success of China and India to the failure of the Arab states to participate in the modern world. He deplores the influence of Yamani, the former Saudi oil minister, who used oil as an economic weapon, and Osama Bin Laden who uses terror as a political weapon. Friedman compares the stagnant current state of Arab culture with its peak in the 12th century. "What makes Yamanism and Bin Ladenism unfortunate as strategies for the Arabic world is that they ignore the examples within the Arab culture and civilization - when it was at its height - of discipline, hard work, knowledge, achievement, scientific inquiry, and pluralism."1 The popular Susan Hockfield was just installed as president of MIT. In her inaugural speech she invoked her list of virtues. She said, "The value of engineering - the rigor; the unflappable curiosity; the discipline and creativity; the appetite for good, old fashioned hard work; the passionate, enthusiastic, can do, hands-on, fix-it-now attitude - these values are and always will be the values of MIT." The rules for success in the world don't seem to have changed very much. Twelfth century Cordoba and 21st century Cambridge are completely different in almost every way, but the characteristics that make you successful have not changed. Any financial analyst or serious investor should apply the engineer's characteristics of discipline, hard work, knowledge and enthusiasm to investing. President Hockfield's linking of discipline and creativity is interesting. It's widely believed that we should diversify and balance our investments. We balance stocks vs. bonds, growth stocks vs. value stocks, big-cap vs. small-cap stocks, and U.S. stocks vs. international, but it is unusual to think of the balance between discipline and creativity; yet this balance is what I believe brings good investment results. Discipline without creativity is sterile - you tend to get an index fund. Index funds run by computer algorithm are boring and backward looking - although they have a significant place in investment portfolios. Creativity without discipline tends to result in wild speculation and money-losing results. We all remember the dot.com's in 1999 when the market was dominated by speculators who ignored valuation in favor of science-fiction fantasies. The resulting bubble was a seductive, narcotic experience for a year or two but of course ended very badly. We believe the Wanger Funds have been successful because our analysts have been able to maintain a balance between discipline and creativity. WE ARE NOT MANUFACTURERS Organizations that are in the business of marketing mutual funds often prefer discipline and are made nervous by creativity. For instance, Raymond "Chip" Mason, chairman of Legg Mason, a major force in the mutual fund business, said recently, "For two years we've been looking to cross the line and become pure asset management. All the regulators have been pointing toward the need to separate the manufacturing and distribution businesses."2 I have been in corporate meetings in which mutual fund portfolio management was called "manufacturing" but this is a strange and inapt metaphor. Manufacturers make products. Mutual funds are not a product. Cap'n Crunch cereal is a product. When you go to the store to buy a new box of Cap'n Crunch you expect the taste and nutrition performance to be exactly like the last box. Manufacturing cereal is very disciplined resulting in high quality and high reliability, so that every box is identical. Since you are a mutual fund shareholder you know that a mutual fund could be a lot better or a lot worse than you expected when you bought it. Investing involves forecasting the future, but forecasting is an uncertain and sloppy process. While discipline is important, you need a lot of creativity as well. Predicting the future does not require a fortune teller with a crystal ball. It is more like watching a skilled athlete. When you go to a baseball game and a batter hits a fly ball to left field, the fielder will see the ball heading his direction and, by experience, run to where the ball is going to land and make what looks like a routine catch. The fielder has to predict the flight of the ball, which for a physicist would require solving a complicated equation, but the player shows that it is not an impossible task. Like the outfielder, we have figured out where trends are likely going to land with reasonable success. As in baseball, the ball can elude the fielder and the batter ends up on second base. Sometimes our analysts miss the ball too, but for the full season we tend to catch more balls than we miss. TWO WHEELS GOOD, FOUR WHEELS BAD Other teams haven't done so well. Forty years ago, major U.S. car makers were among the largest companies in the world and were highly profitable. Since then, the U.S. automotive industry has fallen into a long slump. Their corporate bonds have been downgraded in quality, which is a definite sign of financial problems. I believe that these companies were complacent and arrogant, so the German and Japanese car makers beat them up. 2 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- A long time ago, perhaps 1966, I attended a meeting of the Chicago Science Analysts with the General Time Corporation. The company's main business was making name-brand clocks like Seth Thomas and Big Ben. It also made automobile clocks. The clocks were sold as accessories with the car. They were mechanical clocks because electronic clocks hadn't yet been invented. They worked for about three months and then broke. The U.S. automotive giant that bought the clocks from General Time paid $3.25 per clock and resold it to the customer for $21. I asked the president of General Time why his clocks didn't work better. I knew this was an impertinent question but I wanted to see how he would react. I expected him to take a defensive position retorting that the clocks were fine but weren't being used correctly. To my surprise he admitted that the clocks were lousy and he explained why. General Time couldn't make a good clock for $3.25. The clock needed an additional component that would have made it a sturdy, reliable device, but this improvement would have raised the selling price to $3.75. Its customer, the automobile manufacturer, was adamant about sticking to the lower price. Even to an inexperienced analyst, as I was in 1966, I did not see how the automaker could prosper if it was not delivering a high-quality car. Such a successful company could have paid $3.75 for a clock and sold it for a decent profit even if it kept the price at $21. While this would have been a less enormous markup, the car likely would have been a better vehicle. If the automaker was willing to sell a crummy clock, then I thought that customers would perceive that it was cutting corners on all the other components of the vehicle too. Bad clock, bad car. This willingness to forego quality for price made room for the imports. Why am I bringing up an anecdote from 40 years ago? I think there are some useful lessons here for financial analysts and investors. First, in a management meeting it is okay to ask tough questions. You get more meaningful answers that way. Second, you can find out a lot about a company by talking to its suppliers or customers. Company spokesmen will only give you their own corporate press release. Third, a long-term trend will take a long time to develop but it is enormously important. At the time of my 1966 meeting, U.S. automakers were riding high because foreign car imports were not yet a problem. In 1960, Japan exported only 39,000 vehicles. By 1970, the Japanese were starting to exploit the lower quality of U.S. cars and exported 1.1 million cars. In 1980, exports rose to 6 million and the Japanese were producing more vehicles than U.S. manufacturers. U.S. automotive companies had to react to the loss of market share from high-quality imports. However, once there is a loss of market share, it is not usually readily reversible. DAVID ALWAYS BEATS GOLIATH There are several lessons we can learn from the decline of Arab civilization and the problems of U.S. auto companies: (1) To operate a successful business, the world is too competitive to be complacent. Like baseball players, companies have to fight to keep their position on the team. Great U.S. businesses must constantly compete in the world market and it is darn tough. (2) Big companies are often just big targets. Small companies are hungry to succeed and are constantly focused on improving with the hope of taking some of the flabby giant's customers. (3) History provides a useful context. Discipline, creativity, hard work, knowledge, achievement, and a can-do, hands-on, fix-it-now attitude worked in the past and will work now. (4) We believe small-cap investing works if you can identify the hungry, small companies whose employees embrace our list of exemplary values. The core investment strategy of the Wanger Advisors Funds has always been to try to find small- and mid-cap companies that are on the way up. We don't want to own once-great companies that are now on their way down. This is partly a matter of personal taste, because we find following big, sick companies to be depressing. Even though there are occasional turnarounds in these big companies, it seems to us that is not the way to bet. SO LONG AND BEST REGARDS! This is my final "Squirrel Chatter." I am retiring from Columbia Wanger Asset Management as of September 30. While I considered writing a few more essays, current regulatory rules are not conducive to the free-ranging thought that was characteristic of these essays. I have great confidence in Chuck McQuaid and his team of analysts and portfolio managers to keep the performance of the Funds at a competitive level. Thank you, fellow shareholders, for your support over 35 years. I regard myself as truly fortunate to have been able to build a career in this exciting industry. I am especially proud that we have enabled thousands of our shareholders to pursue their economic goals by investing in our funds. COLUMBIA WAM NEWS We are pleased to announce that Ashish Kohli has joined our domestic analyst team to follow health care. Jason Selch, who followed energy, departed in May. We are searching for his replacement and continue to talk to some promising candidates. Your Wanger Advisors Trust investment team includes 20 investment analysts and portfolio managers. - ------------------ 1 Friedman, Thomas, The World Is Flat: A Brief History of the Twenty-first Century, Farrar, Straus and Giroux, 2005. Page 405. 2 Raymond "Chip" Mason, chairman of Legg Mason, The Wall Street Journal, June 27, 2005, page C1. 3 [Graphic: squirrel] Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- PERFORMANCE REVIEW WANGER U.S. SMALLER COMPANIES PHOTO OF: ROBERT A. MOHN ROBERT A. MOHN Portfolio Manager Wanger U.S. Smaller Companies finished the first half of 2005 up 3.35%, nicely ahead of the Russell 2000 Index's loss of 1.25%. Performance data quoted represents past performance and current performance may be lower or higher. Past performance is no guarantee of future results. The investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Please visit www.columbiafunds.com for daily and most recent month-end performance updates. Rising oil prices lifted energy stocks over the last six months. Our energy portfolio was stocked with companies benefiting not only from higher commodity prices, but also from strong internal production growth. Top holdings Quicksilver, up 74%, and Southwestern Energy, up 85%, had exciting new drilling prospects in the Barnet and Fayetteville gas fields. Cuno, a water filtration company, spiked after announcing it was being acquired. Many of the Fund's holdings had been attractive to larger corporate acquirers. Cuno was the fifth company in the Fund to be bought out this year, joining Western Wireless and Brookstone. Other winners for the six-month period were retailers Chico's FAS, up 51%, and home-goods and furnishings retailer Restoration Hardware, up 44%. Our worst-performing group year-to-date was technology. SeaChange International dropped 60% as sales of its video-on-demand servers fell short. The turnaround at mobile computing and bar-code scanner company Symbol Technologies, down 43%, has taken longer than hoped, which sent its stock lower. The U.S. stock market has been stuck in a see-saw trading range for the past 18 months. Flat markets like this one may not make for exciting business headlines but were just as plentiful with investment opportunities as the good old Roaring Nineties bull markets. 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 6/30/05, the Fund's positions in the stocks mentioned were: Quicksilver Resources, 0.7%; Southwestern Energy, 0.4%; Cuno, 0.7%; Western Wireless, 2.7.%; Brookstone, 0.2%; Chico's FAS, 0.6%; Restoration Hardware, 0.3%; SeaChange International, 0.2%; Symbol Technologies, 0.7%. 4 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- VALUE OF A $10,000 INVESTMENT IN WANGER U.S. SMALLER COMPANIES TOTAL RETURN FOR EACH PERIOD, MAY 3, 1995 (INCEPTION DATE) THROUGH JUNE 30, 2005 AVERAGE ANNUAL RETURN - ------------------------------------------------------------------------------- 1 year 5 years 10 years Life of fund 15.01% 11.78% 15.26% 15.85% LINE CHART: WANGER U.S. SMALLER COMPANIES Russell 2000 5/3/95 10000 10000 9870 10179 6/30/95 10770 10707 11560 11324 11940 11559 9/30/95 12060 11765 11380 11239 11640 11711 12/31/95 11600 12020 11950 12007 12580 12381 3/31/96 13297 12633 14690 13309 15471 13833 6/30/96 15351 13265 14529 12107 15090 12810 9/30/96 15792 13310 15902 13105 16423 13645 12/31/96 17004 14003 17475 14282 16994 13936 3/31/97 16366 13279 16355 13316 17986 14797 6/30/97 19093 15431 20201 16149 20703 16519 9/30/97 22395 17728 21995 16949 21892 16839 12/31/97 22005 17134 21554 16864 23379 18111 3/31/98 24865 18858 25803 18962 24887 17941 6/30/98 25361 17978 23959 16523 20358 13315 9/30/98 20875 14356 21598 14942 22601 15725 12/31/98 23916 16698 23453 16920 22223 15549 3/31/99 22388 15792 24321 17207 25005 17459 6/30/99 26375 18248 27216 17747 25677 17090 9/30/99 25389 17094 26940 17163 28202 18188 12/31/99 29909 20247 28911 19922 30029 23212 3/31/00 29077 21682 26164 20377 24858 19189 6/30/00 25545 20862 25174 20191 26672 21731 9/30/00 26741 21093 26768 20151 25147 18083 12/31/00 27469 19636 27936 20658 27469 19302 3/31/01 26306 18358 29276 19794 30473 20281 6/30/01 31669 20981 31710 19845 30308 19204 9/30/01 26567 16619 27214 17592 28988 18954 12/31/01 30597 20124 30528 19914 29634 19369 3/31/02 32219 20925 32247 21116 30652 20179 6/30/02 28754 19178 25027 16281 24959 16240 9/30/02 23226 15073 24546 15557 26499 16945 12/31/02 25454 16002 24959 15559 24601 15089 3/31/03 24670 15283 26815 16732 29125 18528 6/30/03 29717 18863 31463 20043 33168 20962 9/30/03 32549 20575 35643 22303 36193 23094 12/31/03 36455 23563 38105 24587 37789 24807 3/31/04 37417 25038 36592 23762 37857 24140 6/30/04 38765 25157 36578 23463 36358 23342 9/30/04 37665 24438 38999 24919 41763 27080 12/31/04 43138 27882 42368 26719 43124 27171 3/31/05 42794 26393 40786 24882 42973 26510 6/30/05 44582 27533 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 June 30, 2005, 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. - -------------------------------------------------------------------------------- RESULTS AS OF JUNE 30, 2005 Year 2nd quarter to date 1 year WANGER U.S. SMALLER COMPANIES 4.18% 3.35% 15.01% Russell 2000 4.32 -1.25 9.45 S&P MidCap 400 4.26 3.85 14.03 S&P 500 1.37 -0.81 6.32 NAV AS OF 6/30/05: $32.42 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. - -------------------------------------------------------------------------------- TOP 5 SECTORS As a % of net assets, as of 6/30/05 Information 26.4% Consumer Goods/Services 20.0 Health Care 12.9 Energy/Minerals 12.6 Industrial Goods/Services 9.8 - -------------------------------------------------------------------------------- TOP 10 HOLDINGS As a % of net assets, as of 6/30/05 1. ITT Educational Services 4.1% Technology Oriented Postsecondary Degree Programs 2. Lincare Holdings 2.8% Home Health Care Services 3. Western Wireless 2.7% Rural Cellular Phone Services 4. AmeriCredit 2.3% Auto Lending 5. Micros Systems 2.1% Information Systems for Restaurants & Hotels 6. Esco Technologies 1.9% Automatic Electric Meter Readers 7. Chicago Bridge & Iron 1.9% Engineering & Construction for Petrochemicals & LNG 8. Kronos 1.8% Labor Management Solutions 9. Genlyte Group 1.6% Commercial Lighting Fixtures 10. Abercrombie & Fitch 1.5% Teen Apparel Retailer 5 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares COMMON STOCKS - 90.7% INFORMATION - 26.4% - -------------------------------------------------------------------------------- BUSINESS/CONSUMER SOFTWARE - 7.0% 595,800 Micros Systems (b) $26,662,050 Information Systems for Restaurants & Hotels 563,437 Kronos (b) 22,757,220 Labor Management Solutions 2,030,000 Novell (b) 12,586,000 Security & Identity Management Software 1,030,000 JDA Software Group (b) 11,721,400 Applications/Software & Services for Retailers 429,800 MRO Software (b) 6,279,378 Enterprise Maintenance Software 218,500 SSA Global Technologies (b) 2,622,000 Enterprise Resource Planning (ERP) Software 628,200 E.Piphany (b) 2,186,136 CRM Software 60,000 Maximus 2,117,400 Outsourcer For Government 820,000 Indus International 2,017,200 Enterprise Asset Management Software - -------------------------------------------------------------------------------- 88,948,784 - -------------------------------------------------------------------------------- TELECOMMUNICATION SERVICES - 6.0% 807,000 Western Wireless (b) 34,136,100 Rural Cellular Phone Services 368,300 Commonwealth Telephone 15,435,453 Rural Phone Franchises & CLEC 640,000 American Tower (b) 13,452,800 Communication Towers in USA & Mexico 495,000 Crown Castle International (b) 10,058,400 Communication Towers 46,000 Telephone & Data Systems 1,877,260 46,000 Telephone & Data Systems Cl. S 1,763,640 Cellular & Telephone Services - -------------------------------------------------------------------------------- 76,723,653 - -------------------------------------------------------------------------------- TELECOMMUNICATIONS EQUIPMENT - 2.2% 1,315,000 Tellabs (b) 11,440,500 Telecommunications Equipment 997,800 Aspect Telecommunications (b) 11,205,294 Call Center Equipment 340,000 Andrew (b) 4,338,400 Wireless Infrastructure Equipment - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- 100,000 Symmetricom (b) $1,037,000 Network Timing & Synchronization Devices - -------------------------------------------------------------------------------- 28,021,194 - -------------------------------------------------------------------------------- TRANSACTION PROCESSORS - 1.9% 273,440 Global Payments 18,539,232 Credit Card Processor 448,000 Pegasus Systems (b) 4,995,200 Transaction Processor for Hotel Industry - -------------------------------------------------------------------------------- 23,534,432 - -------------------------------------------------------------------------------- BUSINESS INFORMATION/BUSINESS SERVICES/PUBLISHING - 1.8% 153,700 Getty Images (b) 11,413,762 Photographs for Publications & Electronic Media 443,200 Navigant Consulting (b) 7,826,912 Financial Consulting Firm 200,000 InfoUSA (b) 2,340,000 Business Data for Sales Leads 90,000 Ceridian (b) 1,753,200 HR Services & Payment Processing - -------------------------------------------------------------------------------- 23,333,874 - -------------------------------------------------------------------------------- COMPUTER HARDWARE/RELATED SYSTEMS - 1.8% 880,000 Symbol Technologies 8,685,600 Mobile Computers & Barcode Scanners 81,600 Rogers (b) 3,308,880 PCB Laminates & High Performance Foams 120,000 Unova 3,195,600 Barcode & Wireless LAN Systems 415,800 Seachange International (b) 2,918,916 Systems for Video on Demand & Ad Insertion 195,000 CTS 2,396,550 Electronic Components, Sensors & EMS 50,000 Avocent (b) 1,307,000 Computer Control Switches 35,000 Applied Films (b) 896,000 Thin-Film Glass Coating Equipment 301,205 SensAble Technologies Series C Pfd. (b)(d) 280,121 1,581,292 SensAble Technologies (b)(d) 63,252 Sensory Devices for Computer Based Sculpting - -------------------------------------------------------------------------------- 23,051,919 See accompanying notes to financial statements. 6 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- RADIO - 1.4% 455,900 Salem Communications (b) $9,045,056 Radio Stations for Religious Programming 515,000 Spanish Broadcasting (b) 5,144,850 Spanish Language Radio Stations 130,900 Saga Communications (b) 1,832,600 Radio Stations in Small & Mid-sized Cities 110,000 Cumulus Media, Cl. A 1,295,800 Radio Stations in Small Cities - -------------------------------------------------------------------------------- 17,318,306 - -------------------------------------------------------------------------------- SEMICONDUCTORS/RELATED EQUIPMENT - 1.2% 325,000 Integrated Circuit Systems (b) 6,708,000 Silicon Timing Devices 445,000 Entegris (b) 4,405,500 Semiconductor Wafer Shipping & Handling Products 70,000 Littelfuse (b) 1,949,500 Little Fuses 125,900 IXYS (b) 1,785,262 Power Semiconductors 41,229 Pericom Semiconductor (b) 335,604 Interface Integrated Circuits - -------------------------------------------------------------------------------- 15,183,866 - -------------------------------------------------------------------------------- INSTRUMENTATION - 0.9% 288,000 Tektronix 6,701,760 Analytical Instruments 90,000 Trimble Navigation (b) 3,507,300 GPS-Based Instruments 25,000 Mettler Toledo (b) 1,164,500 Laboratory Equipment - -------------------------------------------------------------------------------- 11,373,560 - -------------------------------------------------------------------------------- INTERNET - 0.7% 355,000 ValueClick (b) 4,377,150 Internet Advertising 355,600 DoubleClick (b) 2,983,484 Internet Advertising & Direct Marketing Statistical Data 310,000 Skillsoft Publishing (b) 1,069,500 Provider of Web-Based Learning Solutions (E-Learning) - -------------------------------------------------------------------------------- 8,430,134 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- COMPUTER SERVICES - 0.5% 753,000 RCM Technologies (b)(c) $3,192,720 Technology Engineering Services 705,500 AnswerThink Consulting 2,504,525 IT Consultant Offering Best Practices Benchmarking 256,600 Analysts International (b) 877,572 Technology Staffing Services - -------------------------------------------------------------------------------- 6,574,817 - -------------------------------------------------------------------------------- TV/SATELLITE BROADCASTING - 0.4% 700,000 Entravision Communications (b) 5,453,000 Spanish Language TV, Radio & Outdoor - -------------------------------------------------------------------------------- CONTRACT MANUFACTURING - 0.3% 220,000 Plexus (b) 3,130,600 Electronic Manufacturing Services - -------------------------------------------------------------------------------- ELECTRONICS DISTRIBUTION - 0.2% 40,000 CDW 2,283,600 Technology Reseller - -------------------------------------------------------------------------------- TELEVISION PROGRAMMING - 0.1% 138,500 Gray Television 1,670,310 Mid Market Affiliated TV Stations - -------------------------------------------------------------------------------- INFORMATION - TOTAL 335,032,049 CONSUMER GOODS/SERVICES - 20.0% - -------------------------------------------------------------------------------- RETAIL - 7.7% 280,000 Abercrombie & Fitch 19,236,000 Teen Apparel Retailer 405,750 Aeropostale (b) 13,633,200 Mall Based Teen Retailer 430,000 Petco Animal Supplies (b) 12,607,600 Pet Supplies & Services 230,000 Chico's FAS (b) 7,884,400 Women's Specialty Retail 265,000 Ann Taylor (b) 6,434,200 Womens Apparel Retailer 198,000 Zale Corp (b) 6,274,620 Specialty Retailer of Jewelry 339,150 Christopher & Banks 6,192,879 Women's Apparel Retailer 163,000 Genesco (b) 6,045,670 Multi-Concept Branded Footware Retailer See accompanying notes to financial statements. 7 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- RETAIL - 7.7% (CONT) 530,000 Restoration Hardware (b) $4,335,400 Home Furnishing Retailer 100,000 Michaels Stores 4,137,000 Craft & Hobby Specialty Retailer 130,000 Sports Authority (b) 4,134,000 Sporting Goods Store 145,750 Hot Topic (b) 2,786,740 Music Inspired Retailer of Apparel, Accessories & Gifts 141,200 Brookstone (b) 2,665,856 Specialty Consumer Product Retailer 60,000 West Marine (b) 1,083,600 Largest Retailer of Boating Supplies 150,000 Gaiam (b) 1,044,000 Healthly Living Catalogs & E-Commerce - -------------------------------------------------------------------------------- 98,495,165 - -------------------------------------------------------------------------------- CONSUMER SERVICES - 5.6% 972,000 ITT Educational Services (b) 51,924,240 Technology Oriented Post Secondary Degree Programs 390,000 Coinstar (b) 8,849,100 Owner/Operator of Coin Counting Machines 426,500 Central Parking 5,864,375 Owner, Operater & Manager of Parking Lots & Garages 80,000 Weight Watchers (b) 4,128,800 Weight Loss Program - -------------------------------------------------------------------------------- 70,766,515 - -------------------------------------------------------------------------------- APPAREL - 2.6% 424,000 Coach (b) 14,233,680 Designer & Retailer of Branded Leather Accessories 254,200 Oxford Industries 10,943,310 Branded & Private Label Apparel 427,000 Steven Madden (b) 7,583,520 Wholesaler/Retailer of Fashion Footware - -------------------------------------------------------------------------------- 32,760,510 - -------------------------------------------------------------------------------- ENTERTAINMENT/LEISURE PRODUCTS - 2.1% 336,300 International Speedway Motors 18,920,238 Largest Motorsport Racetrack Owner & Operator 390,000 Callaway Golf 6,017,700 Premium Golf Clubs & Balls - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- 45,000 Speedway Motorsports $1,645,200 Motorsport Racetrack Owner & Operator - -------------------------------------------------------------------------------- 26,583,138 - -------------------------------------------------------------------------------- FURNITURE & TEXTILES - 1.1% 100,000 HNI 5,115,000 Office Furniture & Fireplaces 110,000 Herman Miller 3,392,400 Office Furniture 33,000 Mohawk Industries (b) 2,722,500 Carpet & Flooring 84,000 American Woodmark 2,520,840 Kitchen Cabinet Manufacturer - -------------------------------------------------------------------------------- 13,750,740 - -------------------------------------------------------------------------------- NON-DURABLES - 0.7% 117,000 Scotts Company (b) 8,331,570 Consumer Lawn & Garden Products 38,900 Prestige Brands (b) 758,550 OTC, Household & Personal Care Products - -------------------------------------------------------------------------------- 9,090,120 - -------------------------------------------------------------------------------- FOOD - 0.1% 62,000 NBTY (b) 1,608,280 Vitamins & Supplements - -------------------------------------------------------------------------------- CASINOS - 0.1% 105,000 Alliance Gaming (b) 1,472,100 Diversified Gaming Company - -------------------------------------------------------------------------------- CONSUMER GOODS/SERVICES - TOTAL 254,526,568 HEALTH CARE - 12.9% - -------------------------------------------------------------------------------- SERVICES - 5.8% 866,000 Lincare Holdings (b) 35,367,440 Home Health Care Services 172,473 Coventry Health Care (b) 12,202,465 PPO Network 180,000 Charles River Laboratories (b) 8,685,000 Pharmaceutical Research 481,800 NDCHealth Group 8,657,946 Health Claims Processing & Drug Marketing Services 405,000 Serologicals (b) 8,606,250 Blood Collection & Antibody Production - -------------------------------------------------------------------------------- 73,519,101 See accompanying notes to financial statements. 8 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- MEDICAL EQUIPMENT - 4.0% 412,000 Edwards Lifesciences (b) $17,724,240 Heart Valves 246,300 Diagnostic Products 11,657,379 Immunodiagnostic Kits 190,000 Arrow International 6,061,000 Disposable Catheters 137,227 Advanced Medical Optics (b) 5,454,773 Medical Devices for Eye Care 93,500 Orthofix International (b) 4,024,240 Bone Fixation & Stimulation Devices 115,700 ICU Medical (b) 3,722,069 Intravenous Therapy Products 90,450 Intermagnetics General (b) 2,782,242 MRI Equipment - -------------------------------------------------------------------------------- 51,425,943 - -------------------------------------------------------------------------------- BIOTECHNOLOGY/DRUG DELIVERY - 1.9% 246,500 Neurocrine Biosciences (b) 10,367,790 Drugs for Sleep, Diabetes, MS & Endometriosis 350,000 AtheroGenics (b) 5,593,000 Drugs for Atherosclerosis 270,000 Nektar Therapeutics (b) 4,546,800 Drug Delivery Technologies 400,000 Lexicon Genetics (b) 1,976,000 Drug Discovery 232,500 Ligand Pharmaceuticals (b) 1,615,875 Drugs for Pain, Cancer, Osteoporosis, & Diabetes 250,000 Locus Discovery, Series D Pfd. (d) 500,000 High Throughput Rational Drug Design - -------------------------------------------------------------------------------- 24,599,465 - -------------------------------------------------------------------------------- PHARMACEUTICALS - 0.8% 315,500 Par Pharmaceuticals (b) 10,036,055 Generics - -------------------------------------------------------------------------------- MEDICAL SUPPLIES - 0.4% 100,700 Techne (b) 4,623,137 Cytokines, Antibodies, Other Reagents For Life Sciences - -------------------------------------------------------------------------------- HEALTH CARE - TOTAL 164,203,701 - -------------------------------------------------------------------------------- Number of Value Shares ENERGY/MINERALS - 12.6% - -------------------------------------------------------------------------------- OIL SERVICES - 6.7% 1,065,000 Chicago Bridge & Iron $24,345,900 Engineering & Construction for Petrochemicals & LNG 490,700 FMC Technologies (b) 15,687,679 Oil & Gas Well Head Manufacturer 580,000 Pride International (b) 14,906,000 Offshore Drilling Contractor 1,231,000 Newpark Resources (b) 9,232,500 Drilling Fluid Services to Oil & Gas Industry 95,000 Carbo Ceramics 7,501,200 Natural Gas Well Stimulants 625,000 Hanover Compressor (b) 7,193,750 Natural Gas Compressor Rental 266,800 Pioneer Drilling (b) 4,071,368 Oil & Gas Well Driller 205,000 Key Energy Services (b) 2,480,500 Oil & Gas Well Workover Services - -------------------------------------------------------------------------------- 85,418,897 - -------------------------------------------------------------------------------- OIL/GAS PRODUCERS - 3.1% 430,000 Ultra Petroleum (b) 13,054,800 Natural Gas Producer 296,000 Western Gas 10,330,400 Oil Producer & Coal Seam Gas Producer 130,000 Quicksilver Resources (b) 8,310,900 Natural Gas & Coal Seam Gas Producer 96,800 Southwestern Energy (b) 4,547,664 Oil & Gas Exploration/Production 450,000 Vaalco Energy (b) 1,557,000 Oil & Gas Producer 71,500 McMoran Exploration (b) 1,394,965 Natural Gas Producers & LNG Developer - -------------------------------------------------------------------------------- 39,195,729 - -------------------------------------------------------------------------------- DISTRIBUTION/MARKETING/REFINING - 2.8% 460,000 Oneok 15,019,000 Natural Gas Utility, Marketing & Processing 208,000 Equitable Resources 14,144,000 Natural Gas Producer & Utility 231,000 Atmos Energy 6,652,800 Natural Gas Utility - -------------------------------------------------------------------------------- 35,815,800 - -------------------------------------------------------------------------------- ENERGY/MINERALS - TOTAL 160,430,426 See accompanying notes to financial statements. 9 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares INDUSTRIAL GOODS/SERVICES - 9.8% - -------------------------------------------------------------------------------- MACHINERY - 3.6% 243,000 Esco Technologies (b) $24,494,400 Automatic Electric Meter Readers 210,000 Ametek 8,788,500 Aerospace/Industrial Instruments 211,800 Nordson 7,260,504 Dispensing Systems for Adhesives & Coatings 78,000 Pentair 3,339,180 Pumps, Water Treatment & Tools 50,000 Kaydon 1,392,500 Specialized Friction & Motion Control Products - -------------------------------------------------------------------------------- 45,275,084 - -------------------------------------------------------------------------------- INDUSTRIAL GOODS - 2.8% 408,000 Genlyte Group (b) 19,885,920 Commercial Lighting Fixtures 165,300 Mine Safety Appliances 7,636,860 Safety Equipment 196,000 Clarcor 5,733,000 Mobile & Industrial Filters 75,000 Donaldson 2,274,750 Industrial Air Filtration - -------------------------------------------------------------------------------- 35,530,530 - -------------------------------------------------------------------------------- WATER - 0.8% 133,000 Cuno (b) 9,501,520 Filtration & Fluids Clarification - -------------------------------------------------------------------------------- CONSTRUCTION - 0.7% 127,600 Florida Rock Industries 9,359,460 Concrete & Aggregates - -------------------------------------------------------------------------------- INDUSTRIAL DISTRIBUTION - 0.6% 100,000 Aviall (b) 3,159,000 Aircraft Replacement Parts Distributor 113,000 Nuco2 (b) 2,900,710 Bulk CO2 Gas Distribution to Restaurants 50,000 Airgas 1,233,500 Industrial Gas Distributor - -------------------------------------------------------------------------------- 7,293,210 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- SPECIALTY CHEMICALS & INDUSTRIAL MATERIALS - 0.5% 357,500 Spartech $6,363,500 Plastics Distribution & Compounding - -------------------------------------------------------------------------------- OUTSOURCING SERVICES - 0.3% 450,000 Quanta Services (b) 3,960,000 Electrical & Telecom Construction Services - -------------------------------------------------------------------------------- LOGISTICS - 0.3% 130,000 Forward Air 3,675,100 Freight Transportation Between Airports - -------------------------------------------------------------------------------- INDUSTRIAL SERVICES - 0.1% 125,000 Clark 1,791,250 Executive Compensation & Benefits Consulting - -------------------------------------------------------------------------------- STEEL - 0.1% 75,000 Gibraltar Industries 1,390,500 Steel Processing - -------------------------------------------------------------------------------- INDUSTRIAL GOODS/SERVICES - TOTAL 124,140,154 FINANCE - 8.0% - -------------------------------------------------------------------------------- INSURANCE - 3.1% 447,000 HCC Insurance Holdings 16,927,890 Specialty Insurance 36,500 Markel (b) 12,373,500 Specialty Insurance 138,000 Leucaudia National 5,330,940 Insurance Holding Company 35,000 Philadelphia Consolidated Holding (b) 2,966,600 Specialty Insurance 77,000 United America Indemnity (b) 1,323,630 Specialty Insurance - -------------------------------------------------------------------------------- 38,922,560 - -------------------------------------------------------------------------------- FINANCE COMPANIES - 2.8% 1,135,400 AmeriCredit (b) 28,952,700 Auto Lending 217,100 World Acceptance (b) 6,523,855 Personal Loans - -------------------------------------------------------------------------------- 35,476,555 See accompanying notes to financial statements. 10 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- BANKS/SAVINGS & LOANS - 1.2% 317,000 TCF Financial $8,203,960 Great Lakes Bank 131,875 Chittenden 3,587,000 Vermont & Western Massachusetts Bank 85,200 Anchor Bancorp Wisconsin 2,578,152 Wisconsin Thrift 20,000 First Financial BankShares 676,800 West Texas Bank 30,000 West Bancorporation 564,000 Des Moines Commercial Bank - -------------------------------------------------------------------------------- 15,609,912 - -------------------------------------------------------------------------------- MONEY MANAGEMENT - 0.9% 321,000 SEI Investments 11,989,350 Mutual Fund Administration & Investment Management - -------------------------------------------------------------------------------- FINANCE - TOTAL 101,998,377 OTHER INDUSTRIES - 1.0% - -------------------------------------------------------------------------------- REGULATED UTILITIES - 0.6% 345,000 Northeast Utilities 7,196,700 Regulated Electric Utility - -------------------------------------------------------------------------------- REAL ESTATE - 0.2% 100,000 Crescent Real Estate Equities 1,875,000 Class A Office Buildings 25,000 Highland Hospitality 261,250 Hotel Real Estate Investment Trust - -------------------------------------------------------------------------------- 2,136,250 - -------------------------------------------------------------------------------- TRANSPORTATION - 0.1% 87,800 Heartland Express 1,705,954 Regional Trucker - -------------------------------------------------------------------------------- WASTE MANAGEMENT - 0.1% 42,800 Waste Connections (b) 1,596,012 Solid Waste Management - -------------------------------------------------------------------------------- OTHER INDUSTRIES- TOTAL 12,634,916 TOTAL COMMON STOCKS - 90.7% 1,152,966,191 - -------------------------------------------------------------------------------- (COST $737,343,416) - -------------------------------------------------------------------------------- Principal Value Amount SHORT-TERM OBLIGATIONS - 9.6% - -------------------------------------------------------------------------------- $32,000,000 Verizon Network 3.26% - 7/8/05 $31,979,716 30,000,000 Prudential Funding 3.10% - 7/1/05 30,000,000 30,000,000 General Electric Capital 3.25% - 7/7/05 29,983,750 26,000,000 Toyota Credit 3.25% - 7/6/05 25,988,264 4,492,000 Repurchase Agreement with State Street Bank & Trust dated 6/30/05 due 7/1/05 at 3.00% collateralized by Federal National Mortgage Association Notes, maturing 3/24/08, market value $4,586,625 (repurchase proceeds: $4,492,374) 4,492,000 - -------------------------------------------------------------------------------- (AMORTIZED COST $122,443,730) 122,443,730 TOTAL INVESTMENTS (COST: $859,787,146) - 100.3% (a) 1,275,409,921 - -------------------------------------------------------------------------------- CASH AND OTHER ASSETS LESS LIABILITIES - (0.3%) (4,031,247) - -------------------------------------------------------------------------------- TOTAL NET ASSETS - 100% $1,271,378,674 - -------------------------------------------------------------------------------- NOTES TO STATEMENT OF INVESTMENTS: (a) At June 30, 2005, for federal income tax purposes cost of investments was $859,787,146 and net unrealized appreciation was $415,622,775 consisting of gross unrealized appreciation of $458,005,672 and gross unrealized depreciation of $42,382,897 (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 June 30, 2005, the Fund held five percent or more of the outstanding voting securities of the following company: RCM Technologies 6.61% The aggregate cost and value of this company at June 30, 2005, was $5,474,962 and $3,192,720, respectively. Investments in affiliate companies represent 0.25% of total net assets at June 30, 2005. The change in unrealized loss in affiliated companies amounted to $595,623 during the six months ended June 30, 2005. There were proceeds from sales of affiliate companies of $0 and net realized losses of $0 during the six months ended June 30, 2005. There was no other investment activity during the period. See accompanying notes to financial statements. 11 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 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 under consistently applied procedures as established by and under the general supervision of the Board of Trustees. At June 30, 2005, these securities amounted to $843,373 which represents 0.1% 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 1,000,000 280,121 SensAble Technologies common 6/28/04 1,581,292 0 63,252 ---------- -------- $2,000,000 $843,373 ========== ======== At June 30, 2005, the Fund held investments in the following sectors: % OF SECTOR NET ASSETS - -------------------------------------------------------------------------------- Information 26.4% Consumer Goods/Services 20.0 Health Care 12.9 Energy/Minerals 12.6 Industrial Goods/Services 9.8 Finance 8.0 Other Industries 1.0 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 2005 Semiannual Report - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2005 (UNAUDITED) - ---------------------------------------------------------------- ASSETS Unaffiliated investments, at cost $854,312,184 Affiliated investments, at cost (See Note 4) 5,474,962 - ---------------------------------------------------------------- Unaffiliated investments, at value $1,272,217,201 Affiliated investments, at value (See Note 4) 3,192,720 Cash 586 Receivable for: Fund shares sold 358,469 Dividends and interest 224,716 Liquidated security 53,982 Foreign tax reclaims 6,495 - ---------------------------------------------------------------- Total Assets 1,276,054,169 LIABILITIES Payable for: Investments purchased 2,655,284 Fund shares repurchased 991,381 Investment advisory fees 913,204 Transfer agent fees 470 Custody fees 523 Trustees' fees 12,613 Legal and audit fees 58,203 Reports to shareholders 25,080 Other liabilities 18,737 - ---------------------------------------------------------------- Total Liabilities 4,675,495 - ---------------------------------------------------------------- Net Assets $1,271,378,674 ================================================================ COMPOSITION OF NET ASSETS Paid-in capital $828,111,613 Undistributed net investment income 3,026,296 Accumulated net realized gain 24,564,008 Net unrealized appreciation on: Investments 415,622,775 Liquidated security 53,982 - ---------------------------------------------------------------- Net Assets $1,271,378,674 ================================================================ Fund shares outstanding 39,218,116 - ---------------------------------------------------------------- Net asset value, offering price and redemption price per share $32.42 ================================================================ STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) - ---------------------------------------------------------------- INVESTMENT INCOME: Dividend income (net of foreign taxes of $9,963) $7,008,317 Interest income 1,531,516 - ---------------------------------------------------------------- Total investment income 8,539,833 EXPENSES: Investment advisory fees 5,271,869 Transfer agent fees 637 Trustees' fees 65,030 Custody fees 18,895 Compliance fees 21,595 Non-recurring costs (See Note 8) 9,743 Other expenses 161,134 - ---------------------------------------------------------------- Total expenses 5,548,903 Fees waived by Investment Advisor (See Note 4) (21,040) Less custody fees paid indirectly (4,583) Non-recurring costs reimbursed (See Note 8) (9,743) - ---------------------------------------------------------------- Net Expenses 5,513,537 - ---------------------------------------------------------------- Net Investment Income 3,026,296 NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS: Net realized gain on investments 30,287,272 Net change in unrealized appreciation (depreciation) on: Unaffiliated investments 9,396,374 Affiliated investments (See Note 4) (595,623) Liquidated security 53,982 - ---------------------------------------------------------------- Net change in unrealized appreciation (depreciation) 8,854,733 - ---------------------------------------------------------------- Net Gain 39,142,005 - ---------------------------------------------------------------- Net Increase in Net Assets from Operations $42,168,301 ================================================================ See accompanying notes to financial statements. 13 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited) Six Months ended Year ended INCREASE (DECREASE) IN NET ASSETS June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income (loss) $ 3,026,296 $ ($4,671,681) Net realized gain on investments 30,287,272 29,992,766 Net change in unrealized appreciation (depreciation) on investments 8,854,733 145,968,200 - ------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 42,168,301 171,289,285 SHARE TRANSACTIONS: Subscriptions 119,222,535 231,841,890 Redemptions (43,565,315) (72,236,517) - ------------------------------------------------------------------------------------------------------------------------------- Net Increase from Share Transactions 75,657,220 159,605,373 - ------------------------------------------------------------------------------------------------------------------------------- Total Increase in Net Assets 117,825,521 330,894,658 NET ASSETS: Beginning of period 1,153,553,153 822,658,495 - ------------------------------------------------------------------------------------------------------------------------------- End of period $1,271,378,674 $1,153,553,153 - ------------------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME $ 3,026,296 $ -- ===============================================================================================================================
See accompanying notes to financial statements. 14 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
(Unaudited) Selected data for a share outstanding Six Months Ended Year Ended December 31, throughout each period June 30, 2005 2004 2003 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $31.37 $26.51 $18.51 $22.25 $19.99 $24.88 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) 0.08 (0.14) (0.11) (0.10) (0.04) 0.02 Net realized and unrealized gain (loss) on investments 0.97 5.00 8.11 (3.64) 2.31 (1.82) - --------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.05 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 $32.42 $31.37 $26.51 $18.51 $22.25 $19.99 ================================================================================================================================= Total Return (b) 3.35% (c)(d) 18.33% 43.22% (16.81)% 11.39% (8.16)% - --------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/ SUPPLEMENTAL DATA: Expenses 0.95% (e)(f) 1.00% (e) 0.99% (e) 1.05% (e) 0.99% 1.00% (e) Net investment income (loss) 0.52% (e)(f) (0.49)% (e) (0.48)% (e) (0.47)% (e) (0.20)% 0.07% (e) Waiver 0.00% (f)(g) -- -- -- -- -- Portfolio turnover rate 9% (c) 15% 10% 16% 18% 36% Net assets, end of period (000's) $1,271,379 $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) Not annualized. (d) Had the investment adviser not waived a portion of expenses, total return would have been reduced. (e) The benefits derived from custody fees paid indirectly had no impact. (f) Annualized. (g) Rounds to less than 0.01%. See accompanying notes to financial statements. 15 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 under consistently applied procedures established by and under the general supervision of 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 Unrealized appreciation and depreciation at June 30, 2005, based on cost of investments for federal income tax purposes, was UNREALIZED UNREALIZED NET UNREALIZED APPRECIATION DEPRECIATION APPRECIATION ------------- ------------- -------------- $458,005,672 $42,382,897 $415,622,775 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 16 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- 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. Effective March 8, 2005, under the Fund's investment management agreement, fees are accrued daily and paid monthly to Columbia WAM at the annual rates show in the table below: AVERAGE DAILY NET ASSETS ANNUAL FEE RATE For the first $100 million 0.99% Next $150 million 0.94% In excess of $250 million 0.89% Prior to March 8, 2005, under the Fund's investment management agreement, fees were 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% 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 were retained at the following annual rates as a percentage of average daily net assets: 0.99% - up to 100 million; 0.94% - $100 million to $250 million; 0.89% - $250 million and over. The fee waiver was effective from January 1, 2005 through March 8, 2005, but applied as if it had gone into effect on December 1, 2004. The investment advisory agreement also provides that Columbia WAM will reimburse the Fund to the extent that ordinary operating expenses, (computed based on the net custodian fees) exceed an annual percentage of 2.00% of average daily net assets. There was no reimbursement for the six months ended June 30, 2005. For the six months ended June 30, 2005, the Fund's annualized effective investment advisory fee rate was 0.90%. 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 six months ended June 30, 2005, the Fund paid $65,030 to trustees not affiliated with Columbia WAM. 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 and has subcontracted with Boston Financial Data Services ("BFDS") to serve as subtransfer agent. For such services, the Transfer Agent receives a fee, paid monthly, at the annual rate of $21.00 per open account. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. An affiliate may include any company in which a fund owns five percent or more of its outstanding voting shares. On June 30, 2005, 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 six months ended June 30, 2005, 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 $372,750. 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 six months ended June 30, 2005. 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: Six months ended Year ended June 30, 2005 December 31, 2004 - -------------------------------------------------------------------------------- Shares sold 3,848,756 8,353,055 - -------------------------------------------------------------------------------- Less shares redeemed 1,407,273 2,612,387 - -------------------------------------------------------------------------------- Net increase in shares outstanding 2,441,483 5,740,668 7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the six months ended June 30, 2005 were $159,172,746 and $91,873,640. 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 with the New York Attorney General ("NYAG") (the "NYAG Settlement") and consented to the entry of a cease-and-desist order by the Securities and Exchange Commission ("SEC") (the "SEC Order"). The SEC Order and the NYAG Settlement are referred to collectively as 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, the Columbia Group 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 17 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) to review the Columbia Group'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 certain Columbia Funds, Nations Funds and other mutual funds management fees 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, settlement amounts described above 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 the Columbia Group and the Fund's independent trustees 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, Columbia Acorn Trust, another mutual fund family advised by Columbia WAM, and the trustees of Columbia Acorn Trust, are named as defendants in class and derivative complaints which have been consolidated in a Multi-District Action in the federal district court for the District of Massachusetts. These lawsuits contend that defendants permitted certain investors to market time their trades in certain Columbia Acorn Funds. The Multi-District Action is ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, cannot currently be made. Columbia WAM, the Columbia Acorn Funds and the trustees of Columbia Acorn Trust are defendants in a consolidated lawsuit filed in the federal district court of Massachusetts 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 the Trust breached certain common laws duties and federal laws. 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 Funds' 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 (the "Fair Valuation Lawsuit"). The plaintiffs' complaint was dismissed by the district court. However, plaintiffs are in the process of appealing that decision. 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 Columbia WAM and affiliated advisers. The trustees of Columbia Acorn Trust and Columbia WAM have been dismissed as defendants in this lawsuit. On March 21, 2005, a class action complaint was filed against the Columbia Acorn Trust and Columbia WAM seeking to rescind the Contingent Deferred Sales Charges assessed upon redemption of Class B shares of Columbia Acorn Funds due to the alleged market timing of the Columbia Acorn Funds. In addition to the rescission of sales charges, plaintiffs seek recovery of actual damages, attorneys' fees and costs. The case has been removed to the federal district court of Massachusetts. The Columbia Acorn Trust and Columbia WAM intend to defend these suits vigorously. 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 against certain funds, their Boards and/or BOA (and affiliated entities). These suits are ongoing. However, based on currently available information, the Columbia Acorn Trust believes that the likelihood that these lawsuits will have a material adverse impact on any fund is remote, and Columbia WAM believes that the lawsuits are not likely to materially affect its ability to provide investment management services to the Funds. For the six months ended June 30, 2005, CMG has assumed $9,743 in consulting services and legal fees incurred by the Fund in connection with these matters. 9. SUBSEQUENT EVENT Effective August 22, 2005, the Fund's distributor will be Columbia Management Distributors, Inc. and the Fund's transfer agent will be Columbia Management Services, Inc. 18 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- [EXCERPTS FROM:] Wanger Advisors Trust Management Fee Evaluation of the Senior Officer Prepared Pursuant to the New York Attorney General's Assurance of Discontinuance July 2005 19 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- Introduction The New York Attorney General's Assurance of Discontinuance ("Order") entered into by Columbia Management Advisors, Inc. ("CMAI") and Columbia Funds Distributor, Inc., ("CFDI" and collectively with "CMAI," "CMG") in February 2005, allows CMAI to manage or advise a mutual fund, including the Wanger Advisors Trust's family of funds (the "WAT Funds" or "WAT" or "Trust"), only if the trustees of the WAT Funds appoint a "Senior Officer" to perform specified duties and responsibilities. One of these responsibilities includes "managing the process by which proposed management fees (including but not limited to, advisory fees) to be charged the WAT Fund[s] are negotiated so that they are negotiated in a manner which is at arms' length and reasonable and consistent with this Assurance of Discontinuance." The Order also provides that the Board of Trustees of the WAT Funds ("Board") must determine the reasonableness of proposed "management fees" by using either an annual competitive bidding process supervised by the Senior Officer or Independent Fee Consultant, or by obtaining "an annual independent written evaluation prepared by or under the direction of the Senior Officer or the Independent Fee Consultant." "Management fees" are only part of the costs and expenses paid by mutual fund shareholders. The expenses can vary depending upon the class of shares held but usually include: (1) investment management or advisory fees to compensate analysts and portfolio managers for stock research and portfolio management, as well as the cost of operating a trading desk; (2) administrative expenses incurred to prepare registration statements and tax returns, calculate the Funds' net asset values, maintain effective compliance procedures and perform recordkeeping services; (3) transfer agency costs for establishing accounts, accepting and disbursing funds, as well as overseeing trading in Fund shares; (4) custodial expenses incurred to hold the securities purchased by the Funds; and (5) distribution expenses, including commissions paid to brokers that sell the Fund shares to investors. Columbia Wanger Asset Management, L.P. ("CWAM"), the adviser to the WAT Funds, has proposed that the Trust enter into an agreement that "bundles" the first two categories listed above: advisory and administrative services. The fees paid under this agreement are referred to as "management fees." Other fund expenses are governed by separate agreements, in particular agreements with two CWAM affiliates: CFDI, the broker-dealer that underwrites and distributes the WAT Funds' shares, and Columbia Funds Services, Inc. ("CFSI"), the Funds' transfer agent. In conformity with the terms of the Order, this evaluation, therefore, addresses only the advisory and administrative contract between CWAM and the Trust, and does not extend to the other agreements. According to the Order, the Senior Officer's evaluation must consider at least the following: (1) Management fees (including components thereof) charged to institutional and other clients of CWAM for like services; (2) Management fees (including any components thereof) charged by other mutual fund companies for like services; (3) Costs to CWAM and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit; (4) Profit margins of CWAM and its affiliates from supplying such services; (5) Possible economies of scale as the WAT Funds grow larger; and (6) The nature and quality of CWAM's services, including the performance of each WAT Fund. On November 17, 2004, the Board appointed me Senior Officer under the Order. The Board also determined not to pursue a competitive bidding process and instead, charged me with the responsibility of evaluating the WAT Funds' proposed advisory and administrative fee contract with CWAM in conformity with the requirements of the Order. This Report is an annual evaluation required under the Order. In discharging their responsibilities, the independent Trustees have also consulted independent, outside counsel. * * * This evaluation was performed in cooperation and regular communication with the Compliance/Contract Renewal Committee of the Board. Process and Independence The objectives of the Order are to ensure the independent evaluation of the advisory fees paid by the WAT Funds as well as to ensure that all relevant factors are considered. In my view, the contract renewal process has been conducted at arms-length and with independence in gathering, considering and evaluating relevant data. For example, the selection of fund peer groups is critical in assessing a fund's relative performance and cost. I have required Lipper and Morningstar, Inc. to prepare their reports without input or commentary from CWAM; the engagement letters with them reflect this requirement. As a result, the peer groups reflected in the Morningstar, Inc. and Lipper reports were determined independently. After submission of the reports, I asked CWAM to comment on them to avoid errors and to establish a clear record of CWAM's views on which funds, in its judgment, constitute an appropriate peer group. Similarly, I discussed CWAM's profitability analysis with its management but also sought the independent views of Ernst &Young on the reasonableness of CWAM's cost allocation methodology and on the adequacy of the financial data it provided. The evaluation of CWAM's profitability was performed in the context of the limited industry data available. My evaluation of the advisory contract was shaped by my experience as WAT's Chief Compliance Officer ("CCO"). As CCO, I report solely to the Board and have no reporting obligation to or employment relationship with CMG or its affiliates, except for administrative purposes. This too contributes to the independence of this evaluation. I have made several comments on compliance matters in evaluating the quality of service provided by CWAM and CMG. 20 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- Finally, this Report, its supporting materials and the data contained in other materials submitted to the Compliance/Contract Renewal Committee of the Board, in my view, provide a thorough factual basis upon which the Board, in consultation with independent counsel as it deems appropriate, may conduct management fee negotiations that are in the best interests of the WAT Funds' shareholders. * * * VI. Conclusions My review of the data and other material above leads to the following conclusions with respect to the factors identified in the Order. 1. Performance. The WAT Funds generally have achieved outstanding performance and rank very favorably against their peers. The international funds have good recent performance records, but weaker long-term performance relative to the domestic WAT Funds. Recent management changes have been followed by improved performance. The domestic WAT Funds and International Select typically achieve their performance with less risk than their competitors; relative risks are greater for International Small Cap. 2. Management Fees relative to Peers. The management fee rankings of the Funds are generally well below the respective medians and, hence, less favorable to shareholders than their peer group funds. 3. Administrative Fees. The WAT Funds pay a bundled fee that combines advisory fees and administrative expense, so ranking these fees separately was not possible. 4. Management Fees relative to Other Accounts. CWAM's focus is its mutual funds. It does not actively seek to manage separate or institutional accounts. The few institutional accounts it does manage vary in rate structures. Some pay advisory fees commensurate with or higher than the WAT Funds. In a few instances, however, sub-advised accounts pay lower management fees than do the WAT Funds. 5. Costs to CWAM and its Affiliates. CWAM's costs do not appear excessive, and, in my view, it uses appropriate methodologies to allocate overhead costs. CWAM's affiliates do not appear to profit indirectly from CWAM's management agreement with the WAT Funds. 6. Profit Margins. CWAM's firm-wide profit margins are at the upper end of the industry, though these comparisons are hampered by limited industry data. High profit margins are not unexpected for firms that manage large, successful funds and have provided outstanding investment performance for investors. Profit margins for the WAT Funds are lower than the margins for other accounts managed by CWAM because of payments made to intermediaries that offer the WAT Funds through variable annuity products. CMAI, the Funds' administrator, currently experiences losses rather than profits, in connection with its activities relating to the WAT Funds. 7. Economies of Scale. Economies of scale do exist at CWAM and will expand, if the assets of the WAT Funds get larger. They are, however, only partially reflected in the management fee schedule for two of the four WAT Funds. If the Funds' assets continue to grow, under the Funds' current fee schedules, shareholders might not benefit in a manner generally commensurate with CWAM's increased profits 8. Nature and quality of services. This category includes a variety of considerations that are difficult to quantify, yet can have a significant bearing on the performance of the WAT Funds. Several areas merit comment. a. Continuity of Management. It is critical that capable and experienced portfolio managers remain committed to the Funds and are able to hire and retain analysts to assist them. CWAM must have in place appropriate incentive plans that align its management's interests with those of investors. Further, CWAM must maintain the independence of its investment process. It should also be supported by effective information technology. b. Compliance. CWAM has an effective compliance program and a variety of related services that are valuable to shareholders, such as, systems to ensure best execution of portfolio transactions and the daily review of security prices to ensure accuracy of the WAT Funds' NAV. c. Administration Services. The WAT Funds benefit from a variety of administrative services that are performed by CWAM and CMAI, including preparation of registration statements, calculation of Fund NAV's, accounting services, shareholder services, and other functions In my opinion, these conclusions, taken together, generally support the reasonableness of the proposed management agreement. In reaching this conclusion, I weighed heavily the outstanding performance of the WAT Funds relative to their peers. Performance is an investor's first concern. The expense incurred by shareholders to enjoy this performance is, however, high relative to competing funds, though expenses for the WAT Funds are (with one exception) comparable to the parallel Acorn Funds. Nonetheless, a more complete breakpoint schedule could address this issue as well as share with investors more fully the benefits of economies of scale. 21 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- VII. Recommendations The Trustees should consider the following proposals to address the issues identified in this Report. Some of these recommendations require the collection and evaluation of more data. This work cannot be accomplished effectively before the expiration of the existing advisory contract on July 31, 2005. Therefore, I recommend that the Trustees consider extending the existing contract pending consideration of these recommendations. These recommendations do not purport to offer the only avenues to address the opinions and conclusions I have expressed in this Report. Economies of scale, for example, can be addressed in a variety of ways in a management contract. Sound business judgment will guide how any particular area is addressed with due consideration given to all the factors that must be weighed in reaching a management agreement that best serves the WAT Fund shareholders. I believe the Trustees should consider the following: 1. Restructure the management fee schedule beyond the current breakpoints to reflect more fully economies of scale. The Trustees might consider several ways to accomplish this objective, including instituting a two-tier fee structure that incorporates a complex- or CWAM-wide fee (including assets held in separate accounts) and a fund specific fee, with each containing breakpoints to reflect their separate economies of scale. Another approach is to consider uniform breakpoints for all WAT Funds, including breakpoints above and below current asset levels. 2. Conduct further study to ensure that the costs paid to insurance company intermediaries are transparent. The Trustees could consider forming an ad hoc committee to gather and evaluate data regarding CWAM's payments to intermediaries and the services provided by those intermediaries. Such a committee might also seek the assistance of a consultant such as E&Y. 3. Administrative Fees. Administrative and advisory fees could be unbundled to allow greater transparency and to permit distinct comparisons among peers. An administrative fee could also be formulated with a breakpoint schedule that shares the economies of scale available with shareholders. 4. Condition contract renewal on submission of an employment agreements or a management incentive plan designed to ensure the continued employment of senior management, under terms that align management's incentives with the interests of the WAT Funds' shareholders. Any incentive plan should be designed to permit CWAM to attract and retain the highest caliber investment professionals and support them with effective and reliable information technology systems. 5. Review with CWAM its anticipated capacity limitations and the degree to which increased staffing and effective incentives may address those issues. Robert P. Scales July 25, 2005 * * * More complete copies of the Management Fee Evaluation of the Senior Officer of the Wanger Advisors Trust, edited to delete certain confidential or proprietary information, are available upon written request to: R. Scott Henderson Bank of America MA-515-11-05 One Financial Center Boston, MA 02111 22 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- This page intentionally left blank. 23 Wanger U.S. Smaller Companies 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] TRUSTEES Patricia H. Werhane, Chairperson Jerome L. Duffy Fred D. Hasselbring Kathryn A. Krueger, M.D. Ralph Wanger OFFICERS Ben Andrews Vice President J. Kevin Connaughton Assistant Treasurer Michael G. Clarke Assistant Treasurer Kenneth A. Kalina Assistant Treasurer Bruce H. Lauer Vice President, Secretary and Treasurer Charles P. McQuaid President Robert A. Mohn Vice President Todd M. Narter Vice President Christopher J. Olson Vice President Vincent P. Pietropaolo Assistant Secretary Robert P. Scales Chief Compliance Officer, Senior Vice President and General Counsel TRANSFER AGENT, DIVIDEND DISBURSING AGENT Columbia Management Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Columbia Management Distributors, 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 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 SHC-44/89022-0705 05/7140 WANGER INTERNATIONAL SMALL CAP 2005 Semiannual Report [Graphic: squirrel] WANGER ADVISORS FUNDS - -------------------------------------------------------------------------------- managed by Columbia Wanger Asset Management, L.P. [Graphic: squirrel] WANGER INTERNATIONAL SMALL CAP 2005 SEMIANNUAL REPORT TABLE OF CONTENTS 1 Understanding Your Expenses 2 Discipline and Creativity 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 18 Management Fee Evaluation of the Senior Officer 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 $23.5 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. COLUMBIA MANAGEMENT IS THE PRIMARY INVESTMENT MANAGEMENT DIVISION OF BANK OF AMERICA CORPORATION. COLUMBIA MANAGEMENT ENTITIES FURNISH INVESTMENT MANAGEMENT SERVICES AND ADVISE INSTITUTIONAL AND MUTUAL FUND PORTFOLIOS. COLUMBIA WAM IS AN SEC-REGISTERED INVESTMENT ADVISER AND WHOLLY OWNED SUBSIDIARY OF BANK OF AMERICA, N.A. COLUMBIA WANGER IS PART OF COLUMBIA MANAGEMENT. 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 WANGER ADVISORS FUNDS. 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 2005 Semiannual 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 ongoing 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 $8,600.00 at the end of the period, the result would be 8.6. 2. In the section of the table below titled "Expenses paid during the period," locate the amount for your fund. You will find this number is in the column labeled "actual." Multiply this number by the result from step 1. Your answer is an estimate of the expenses you paid on your account during the period.
January 1, 2005 - June 30, 2005 - ------------------------------------------------------------------------------------------------------------------------------------ Account value at the Account value at the Expenses paid during Fund's annualized beginning of the period ($) end of the period ($) the period ($) expense ratio (%)* - ------------------------------------------------------------------------------------------------------------------------------------ Actual Hypothetical Actual Hypothetical Actual Hypothetical - ------------------------------------------------------------------------------------------------------------------------------------ Wanger International Small Cap 1,000.00 1,000.00 1,038.28 1,019.29 5.61 5.56 1.11 - ------------------------------------------------------------------------------------------------------------------------------------
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 365. Had the investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. 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 6/30/05. COMPARE WITH OTHER FUNDS Since all mutual funds 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 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] DISCIPLINE AND CREATIVITY PHOTO OF: RALPH WANGER RALPH WANGER Founder, Advisor and Trustee Columbia Wanger Asset Management, L.P. A popular new book by Tom Friedman, "The World Is Flat: A Brief History of the Twenty-First Century," recounts how developing countries such as India and China are using modern technology to compete with the United States in both manufacturing and services. He contrasts the success of China and India to the failure of the Arab states to participate in the modern world. He deplores the influence of Yamani, the former Saudi oil minister, who used oil as an economic weapon, and Osama Bin Laden who uses terror as a political weapon. Friedman compares the stagnant current state of Arab culture with its peak in the 12th century. "What makes Yamanism and Bin Ladenism unfortunate as strategies for the Arabic world is that they ignore the examples within the Arab culture and civilization - when it was at its height - of discipline, hard work, knowledge, achievement, scientific inquiry, and pluralism."1 The popular Susan Hockfield was just installed as president of MIT. In her inaugural speech she invoked her list of virtues. She said, "The value of engineering - the rigor; the unflappable curiosity; the discipline and creativity; the appetite for good, old fashioned hard work; the passionate, enthusiastic, can do, hands-on, fix-it-now attitude - these values are and always will be the values of MIT." The rules for success in the world don't seem to have changed very much. Twelfth century Cordoba and 21st century Cambridge are completely different in almost every way, but the characteristics that make you successful have not changed. Any financial analyst or serious investor should apply the engineer's characteristics of discipline, hard work, knowledge and enthusiasm to investing. President Hockfield's linking of discipline and creativity is interesting. It's widely believed that we should diversify and balance our investments. We balance stocks vs. bonds, growth stocks vs. value stocks, big-cap vs. small-cap stocks, and U.S. stocks vs. international, but it is unusual to think of the balance between discipline and creativity; yet this balance is what I believe brings good investment results. Discipline without creativity is sterile - you tend to get an index fund. Index funds run by computer algorithm are boring and backward looking - although they have a significant place in investment portfolios. Creativity without discipline tends to result in wild speculation and money-losing results. We all remember the dot.com's in 1999 when the market was dominated by speculators who ignored valuation in favor of science-fiction fantasies. The resulting bubble was a seductive, narcotic experience for a year or two but of course ended very badly. We believe the Wanger Funds have been successful because our analysts have been able to maintain a balance between discipline and creativity. WE ARE NOT MANUFACTURERS Organizations that are in the business of marketing mutual funds often prefer discipline and are made nervous by creativity. For instance, Raymond "Chip" Mason, chairman of Legg Mason, a major force in the mutual fund business, said recently, "For two years we've been looking to cross the line and become pure asset management. All the regulators have been pointing toward the need to separate the manufacturing and distribution businesses."2 I have been in corporate meetings in which mutual fund portfolio management was called "manufacturing" but this is a strange and inapt metaphor. Manufacturers make products. Mutual funds are not a product. Cap'n Crunch cereal is a product. When you go to the store to buy a new box of Cap'n Crunch you expect the taste and nutrition performance to be exactly like the last box. Manufacturing cereal is very disciplined resulting in high quality and high reliability, so that every box is identical. Since you are a mutual fund shareholder you know that a mutual fund could be a lot better or a lot worse than you expected when you bought it. Investing involves forecasting the future, but forecasting is an uncertain and sloppy process. While discipline is important, you need a lot of creativity as well. Predicting the future does not require a fortune teller with a crystal ball. It is more like watching a skilled athlete. When you go to a baseball game and a batter hits a fly ball to left field, the fielder will see the ball heading his direction and, by experience, run to where the ball is going to land and make what looks like a routine catch. The fielder has to predict the flight of the ball, which for a physicist would require solving a complicated equation, but the player shows that it is not an impossible task. Like the outfielder, we have figured out where trends are likely going to land with reasonable success. As in baseball, the ball can elude the fielder and the batter ends up on second base. Sometimes our analysts miss the ball too, but for the full season we tend to catch more balls than we miss. TWO WHEELS GOOD, FOUR WHEELS BAD Other teams haven't done so well. Forty years ago, major U.S. car makers were among the largest companies in the world and were highly profitable. Since then, the U.S. automotive industry has fallen into a long slump. Their corporate bonds have been downgraded in quality, which is a definite sign of financial problems. I believe that these companies were complacent and arrogant, so the German and Japanese car makers beat them up. 2 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- A long time ago, perhaps 1966, I attended a meeting of the Chicago Science Analysts with the General Time Corporation. The company's main business was making name-brand clocks like Seth Thomas and Big Ben. It also made automobile clocks. The clocks were sold as accessories with the car. They were mechanical clocks because electronic clocks hadn't yet been invented. They worked for about three months and then broke. The U.S. automotive giant that bought the clocks from General Time paid $3.25 per clock and resold it to the customer for $21. I asked the president of General Time why his clocks didn't work better. I knew this was an impertinent question but I wanted to see how he would react. I expected him to take a defensive position retorting that the clocks were fine but weren't being used correctly. To my surprise he admitted that the clocks were lousy and he explained why. General Time couldn't make a good clock for $3.25. The clock needed an additional component that would have made it a sturdy, reliable device, but this improvement would have raised the selling price to $3.75. Its customer, the automobile manufacturer, was adamant about sticking to the lower price. Even to an inexperienced analyst, as I was in 1966, I did not see how the automaker could prosper if it was not delivering a high-quality car. Such a successful company could have paid $3.75 for a clock and sold it for a decent profit even if it kept the price at $21. While this would have been a less enormous markup, the car likely would have been a better vehicle. If the automaker was willing to sell a crummy clock, then I thought that customers would perceive that it was cutting corners on all the other components of the vehicle too. Bad clock, bad car. This willingness to forego quality for price made room for the imports. Why am I bringing up an anecdote from 40 years ago? I think there are some useful lessons here for financial analysts and investors. First, in a management meeting it is okay to ask tough questions. You get more meaningful answers that way. Second, you can find out a lot about a company by talking to its suppliers or customers. Company spokesmen will only give you their own corporate press release. Third, a long-term trend will take a long time to develop but it is enormously important. At the time of my 1966 meeting, U.S. automakers were riding high because foreign car imports were not yet a problem. In 1960, Japan exported only 39,000 vehicles. By 1970, the Japanese were starting to exploit the lower quality of U.S. cars and exported 1.1 million cars. In 1980, exports rose to 6 million and the Japanese were producing more vehicles than U.S. manufacturers. U.S. automotive companies had to react to the loss of market share from high-quality imports. However, once there is a loss of market share, it is not usually readily reversible. DAVID ALWAYS BEATS GOLIATH There are several lessons we can learn from the decline of Arab civilization and the problems of U.S. auto companies: (1) To operate a successful business, the world is too competitive to be complacent. Like baseball players, companies have to fight to keep their position on the team. Great U.S. businesses must constantly compete in the world market and it is darn tough. (2) Big companies are often just big targets. Small companies are hungry to succeed and are constantly focused on improving with the hope of taking some of the flabby giant's customers. (3) History provides a useful context. Discipline, creativity, hard work, knowledge, achievement, and a can-do, hands-on, fix-it-now attitude worked in the past and will work now. (4) We believe small-cap investing works if you can identify the hungry, small companies whose employees embrace our list of exemplary values. The core investment strategy of the Wanger Advisors Funds has always been to try to find small- and mid-cap companies that are on the way up. We don't want to own once-great companies that are now on their way down. This is partly a matter of personal taste, because we find following big, sick companies to be depressing. Even though there are occasional turnarounds in these big companies, it seems to us that is not the way to bet. SO LONG AND BEST REGARDS! This is my final "Squirrel Chatter." I am retiring from Columbia Wanger Asset Management as of September 30. While I considered writing a few more essays, current regulatory rules are not conducive to the free-ranging thought that was characteristic of these essays. I have great confidence in Chuck McQuaid and his team of analysts and portfolio managers to keep the performance of the Funds at a competitive level. Thank you, fellow shareholders, for your support over 35 years. I regard myself as truly fortunate to have been able to build a career in this exciting industry. I am especially proud that we have enabled thousands of our shareholders to pursue their economic goals by investing in our funds. COLUMBIA WAM NEWS We are pleased to announce that Ashish Kohli has joined our domestic analyst team to follow health care. Jason Selch, who followed energy, departed in May. We are searching for his replacement and continue to talk to some promising candidates. Your Wanger Advisors Trust investment team includes 20 investment analysts and portfolio managers. - -------------------------------------------------------------------------------- 1 Friedman, Thomas, The World Is Flat: A Brief History of the Twenty-first Century, Farrar, Straus and Giroux, 2005. Page 405. 2 Raymond "Chip" Mason, chairman of Legg Mason, The Wall Street Journal, June 27, 2005, page C1. 3 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] Photo of: TODD M. NARTER Photo of: CHRISTOPHER J. OLSON TODD M. NARTER Co-Portfolio Manager CHRISTOPHER J. OLSON Co-Portfolio Manager Wanger International Small Cap finished the first half of 2005 up 3.83%, which put it ahead of the S&P/Citigroup EMI Global ex-US return of 2.79% and well ahead of the MSCI EAFE Index's loss of 1.17%. As has been the case for several years, international small-cap stocks continued to substantially outperform their large- cap counterparts. Performance data quoted represents past performance and current performance may be lower or higher. Past performance is no guarantee of future results. The investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Please visit www.columbiafunds.com for daily and most recent month-end performance updates. Steel pipe manufacturers seemed unlikely candidates as the year-to-date big winners considering the poor performance of the steel sector in general, but one of the Fund's investments, Vallourec, earned this distinction by returning more than 90% to shareholders. Its specialty steel products are critical to the successful development of oil and gas fields globally. In the past year, the company has seen strong volume and price increases as high energy prices stimulated oil and gas companies to increase spending on exploration and pipelines. This type of company has been central to our strategy of taking advantage of an anticipated rebound in oil-field service spending. As Vallourec was among the Fund's top holdings at the beginning of the quarter, its contribution to overall return was substantial. Other positive performers were Samyoung Heat Exchange, the South Korean power plant-related machinery company, which rose 53%, and Perusahaan Gas Negara, an Indonesian gas pipeline operator, up 42%. The U.S. dollar reversed its recent slide against most world currencies year-to-date, appreciating more than 12% against the euro. This compounded otherwise moderate weakness on several of our long-term European winners, such as Nobia (kitchen cabinets) and Sligro Food Group (food distribution), each of which fell more than 10% in dollar terms. Other holdings negatively affecting performance came from various regions, including Fininfo in France and Pacific Brands in Australia. 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 6/30/05, the Fund's positions in the holdings mentioned were: Vallourec, 2.4%; Samyoung Heat Exchange, 0.4%; Perusahaan Gas Negara, 0.5%; Nobia, 0.6%; Sligro Food Group, 0.7%; Fininfo, 0.3%; Pacific Brands, 0.2%. 4 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- VALUE OF $10,000 INVESTMENT IN WANGER INTERNATIONAL SMALL CAP TOTAL RETURN FOR EACH PERIOD, MAY 3, 1995 (INCEPTION DATE) THROUGH JUNE 30, 2005 AVERAGE ANNUAL RETURN - -------------------------------------------------------------------------------- 1 year 5 years 10 years Life of fund 22.73% 0.35% 15.26% 16.06% LINE CHART: WANGER INTERNATIONAL S&P/Citigroup SMALL CAP EMI Global ex-US 5/3/95 10000 10000 5/31/95 10790 9821 6/30/95 10970 9710 11910 10255 12290 10003 9/30/95 12910 10074 12700 9784 12660 9865 12/31/95 13450 10246 14260 10479 15170 10609 3/31/96 15499 10830 16251 11390 16782 11301 6/30/96 17183 11304 16722 10859 17023 10969 9/30/96 17023 11029 17183 10959 17705 11136 12/31/96 17755 10951 18246 10792 18687 11011 3/31/97 18357 10874 18204 10729 18983 11359 6/30/97 19568 11651 19558 11538 18460 11032 9/30/97 19363 11210 18388 10662 17968 10166 12/31/97 17496 9953 18142 10265 19589 11042 3/31/98 21306 11575 21867 11669 21887 11768 6/30/98 21410 11353 21099 11281 17904 9798 9/30/98 17437 9581 18101 10241 19605 10595 12/31/98 20352 10820 20694 10744 20570 10543 3/31/99 21564 10999 23400 11671 23727 11383 6/30/99 25404 11826 27556 12208 28928 12422 9/30/99 29266 12366 30088 12253 36176 12694 12/31/99 46072 13558 46800 13300 56295 13811 3/31/00 54789 13872 46481 12961 42601 12691 6/30/00 44628 13461 43055 13015 45584 13388 9/30/00 41179 12701 36798 11932 33454 11407 12/31/00 33244 11852 34910 12073 32556 11604 3/31/01 29862 10705 30389 11406 31170 11383 6/30/01 29743 10997 28026 10674 27907 10645 9/30/01 23692 9259 24780 9635 25749 10031 12/31/01 26174 10114 25715 9931 25358 10097 3/31/02 27006 10755 28179 10979 28485 11330 6/30/02 27635 10880 24729 9958 23743 9898 9/30/02 21143 8984 21415 9187 22333 9531 12/31/02 22554 9417 22299 9259 21534 9094 3/31/03 21069 9005 22980 9854 24942 10694 6/30/03 25778 11093 26614 11488 27893 12038 9/30/03 29087 12588 31356 13504 32090 13750 12/31/03 33574 14599 35229 15123 36662 15645 3/31/04 36608 16028 35801 15489 35715 15491 6/30/04 37003 15989 36075 15425 36041 15591 9/30/04 37518 16172 38755 16668 41727 17980 12/31/04 43737 18872 44648 19050 47139 19978 3/31/05 45916 19476 44458 18864 44337 18998 6/30/05 45413 19399 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 June 30, 2005, to the S&P/Citigroup EMI Global ex-US Index, with dividends and capital gains 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 $5 billion at the time of initial purchase. 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. - -------------------------------------------------------------------------------- RESULTS TO JUNE 30, 2005 Year 2nd quarter to date 1 year WANGER INTERNATIONAL SMALL CAP -1.10% 3.83% 22.73% S&P/Citigroup EMI Global ex-US -0.40 2.79 21.33 MSCI EAFE -1.01 -1.17 13.65 Lipper International Small Cap Funds Index -0.22 3.62 20.72 NAV AS OF 6/30/05: $26.17 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/Citigroup EMI Global ex-U.S. 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. - -------------------------------------------------------------------------------- TOP 5 COUNTRIES As a % of net assets, as of 6/30/05 United Kingdom 15.8% France 8.6 Netherlands 8.5 Germany 7.9 Ireland 7.1 - -------------------------------------------------------------------------------- TOP 10 HOLDINGS As a % of net assets, as of 6/30/05 1. Vallourec 2.4% Seamless Tubes - France 2. Anglo Irish Bank 1.5% Small Business & Middle Market Banking - Ireland 3. Fugro 1.3% Survey & GPS Services - Netherlands 4. Hexagon 1.3% Measurement Equipment & Polymers - Sweden 5. Koninklijke Ten Cate 1.2% Advanced Textiles & Industrial Fabrics - Netherlands 6. Paragon Group 1.2% Buy-to-Let Finance Company - United Kingdom 7. Smit International 1.1% Harbor & Offshore Towage & Marine Services - Netherlands 8. Major Drilling Group International 1.1% Mining Exploration Driller - Canada 9. April Group 1.1% Insurance Policy Construction - France 10. United Drug 1.1% Pharmaceutical Wholesaler & Outsourcer - Ireland 5 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares COMMON STOCKS AND OTHER EQUITY-LIKE SECURITIES - 95.2% EUROPE - 65.2% - -------------------------------------------------------------------------------- UNITED KINGDOM/IRELAND - 22.9% 880,000 Anglo Irish Bank (Ireland) $10,899,997 Small Business & Middle Market Banking 1,100,000 Paragon Group 8,323,514 Buy-to-Let Finance Company 1,804,700 United Drug (Ireland) 7,743,641 Pharmaceutical Wholesaler & Outsourcer 650,000 Grafton Group (Ireland) 7,521,733 Building Materials Wholesaling & DIY Retailing 525,000 IAWS (Ireland) 7,334,674 Manufacturer of Baked Goods 700,000 Kensington 7,052,464 Non-Conforming Mortgage Company 1,600,000 Charles Taylor Group 6,922,362 Insurance Services 840,000 International Greetings 6,846,106 Private Label Greeting Products 600,000 Business Post Group 6,834,421 UK Parcel & Express Mail Service 445,000 Exel 6,736,429 Global Logistics & Freight Forwarding 811,700 Expro International 6,589,486 Offshore Oil Field Services 951,807 Bloomsbury Publishing 6,418,606 Publishing 335,000 Intermediate Capital 6,251,354 European Provider of Mezzanine Capital 1,429,100 Workspace Group 6,032,658 Real Estate Company 713,600 Ulster Television 5,988,154 Television & Radio Station Operator 1,700,000 Tullow Oil 5,666,659 Oil & Gas Producer 500,000 William Hill 4,810,587 Largest Bookmaker 300,000 Depfa Bank (Ireland) 4,794,050 International Public Sector Finance 275,000 Paddy Power (Ireland) 4,693,392 Irish Betting Services 280,000 Northgate 4,530,746 Light Commercial Vehicle Rental Specialist 500,000 Spectris 4,423,135 Electronic Instruments & Controls - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- 731,274 Vitec Group $4,373,925 Photo, Film, Production & Broadcast Accessories 229,500 Jurys Doyle Hotel (Ireland) 4,303,300 Owner/Operator of Mid-Priced Hotels 155,000 Cobham 3,927,993 Aerospace Components 150,000 Kerry Group (Ireland) 3,699,317 Food Ingredients 250,000 Viridian Group 3,488,637 Northern Ireland Electric Utility 400,000 Care UK 2,984,373 Nursing Home & Psychiatric Care Facilities 825,700 Debt Free Direct Group 2,947,388 Consumer Debt Reduction & Management Solutions 850,000 RPS Group 2,345,444 Environmental Consulting 350,000 Offshore Hydrocarbon Mapping (b) 1,333,910 Exploration Technology Contractor - -------------------------------------------------------------------------------- 165,818,455 - -------------------------------------------------------------------------------- FRANCE/BELGIUM - 9.1% 60,000 Vallourec 17,228,427 Seamless Tubes 253,700 April Group 7,887,421 Insurance Policy Construction 100,000 Imerys 6,873,975 Industrial Minerals Producer 148,800 Iliad 5,557,507 High Speed Internet Service Provider 350,000 SES Global 5,268,263 Satellite Broadcasting Services 55,000 Neopost 4,833,915 Postage Meter Machines 90,000 Norbert Dentressangle 4,243,032 Transport 41,000 Bacou Dalloz 3,353,498 Safety Equipment 61,000 Omega Pharma (Belgium) 3,149,342 OTC Products, Pharmacy & Dental Supplies 62,000 Carbone Lorraine (b) 2,941,959 Advanced Industrial Materials 178,000 Cerep 2,141,071 Health Care 97,000 Fininfo 2,031,695 Data Feeds for French Banks & Brokers - -------------------------------------------------------------------------------- 65,510,105 See accompanying notes to financial statements. 6 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- GERMANY/AUSTRIA - 8.7% 90,000 Wincor Nixdorf (b) $7,352,892 Retail POS Systems & ATM Machines 68,000 Rational 7,315,395 Commercial Oven Manufacturer 155,000 Bilfinger Berger 7,215,432 Construction & Related Services 160,000 GFK 6,308,538 Market Research Services 125,000 Wienerberger (Austria) 5,792,645 Bricks & Clay Roofing Tiles 75,000 Rhoen Klinikum Pfd. 5,193,857 Hospital Management 155,000 Hugo Boss Designs 5,084,433 Fashion Apparel 315,000 Deutsche Beteiligung (b) 4,910,638 Private Equity & Investment Management 97,300 Grenke Leasing 4,123,657 Financing for IT Equipment 383,000 Takkt 3,695,211 Mail Order Retailer of Office & Warehouse Durables 75,000 Vossloh 3,506,921 Rail Infrastructure & Diesel Locomotives 46,000 CTS Eventim 1,930,784 Event Ticket Sales 23,782 Masterflex 800,387 Specialty Hoses for Industrial & Medical Use - -------------------------------------------------------------------------------- 63,230,790 - -------------------------------------------------------------------------------- NETHERLANDS - 8.5% 378,076 Fugro 9,383,338 Survey & GPS Services 96,357 Koninklijke Ten Cate (b) 8,661,182 Advanced Textiles & Industrial Fabrics 179,000 Smit International 8,298,678 Harbor & Offshore Towage & Marine Services 103,000 OPG Groep 7,172,297 Healthcare Supplies & Pharmacies 140,509 Aalberts Industries 6,420,558 Flow Control & Heat Treatment 232,100 United Services Group 6,124,984 Temporary Staffing Services 163,000 IM Tech 5,696,512 Technical Engineering - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- 118,900 Sligro Food Group $4,775,489 Food Service & Wholesaling 310,000 Unit 4 Aggresso (b) 4,730,615 Business & Security Software - -------------------------------------------------------------------------------- 61,263,653 - -------------------------------------------------------------------------------- SWEDEN - 3.5% 457,200 Hexagon 9,228,260 Measurement Equipment & Polymers 367,900 Sweco 6,630,097 Nordic Infrastructure/Environment Consulting 316,000 Nobia 4,586,095 Kitchen Cabinet Manufacturing & Distribution 3,091,200 Biotage (b) 4,178,432 Discovery Chemistry (Microwaves & Purification) 56,400 Medicover 559,613 2,071 Medicover Subscription Rights 20,681 Central European Health Clinics - -------------------------------------------------------------------------------- 25,203,178 - -------------------------------------------------------------------------------- SWITZERLAND - 3.1% 10,400 Sika 6,472,870 Chemicals for Construction & Industrial Application 25,000 Kuehne & Nagel 5,286,306 Freight Forwarding/Logistics 8,000 Geberit International 5,104,782 Plumbing Supplies 6,000 Givaudan 3,480,118 Industrial Fragrances & Flavors 36,710 BKW Energie 2,294,192 Electric Utility - -------------------------------------------------------------------------------- 22,638,268 - -------------------------------------------------------------------------------- ITALY - 2.6% 112,302 Amplifon 7,125,053 Hearing Aid Retailer 500,000 Davide Campari 3,653,306 Spirits & Wine 402,000 Granitifiandre 3,524,862 Innovative Stoneware 130,000 Sabaf 2,552,311 Supplier to White Goods OEMS 1,441,501 Ducati Motor (b) 1,706,648 Motorcycles & Related Merchandise - -------------------------------------------------------------------------------- 18,562,180 See accompanying notes to financial statements. 7 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- SPAIN/PORTUGAL - 1.6% 230,000 Red Electrica $6,348,377 Spanish Power Grid 76,000 Bankinter 3,874,687 Mortgage Lender 99,700 Abengoa 1,155,135 Engineering & Construction - -------------------------------------------------------------------------------- 11,378,199 - -------------------------------------------------------------------------------- FINLAND - 1.2% 480,000 Sponda 4,933,799 Office & Warehouse Property Company 122,000 Jaakko Poyry 3,652,228 Engineering Consultants in Forestry, Energy - -------------------------------------------------------------------------------- 8,586,027 - -------------------------------------------------------------------------------- RUSSIA - 0.9% 213,000 RBC Information Systems (b) 3,535,800 Financial Information, Media, & IT Services 107,000 Mechel Steel Group (b) 2,717,800 Coking Coal - -------------------------------------------------------------------------------- 6,253,600 - -------------------------------------------------------------------------------- GREECE - 0.8% 380,000 Intralot 5,796,831 Lottery & Gaming Systems & Services - -------------------------------------------------------------------------------- CZECH REPUBLIC - 0.8% 46,200 Komercni Banka 5,786,752 Leading Czech Universal Bank - -------------------------------------------------------------------------------- POLAND - 0.7% 132,000 Central Euro Distribution (b) 4,927,560 Spirits & Wine Distribution - -------------------------------------------------------------------------------- NORWAY - 0.5% 192,200 Ekornes 3,717,593 Niche Furniture Manufacturer - -------------------------------------------------------------------------------- DENMARK - 0.3% 10,500 Kobenhavns Lufthavne 2,485,395 Copenhagen Airport Manager - -------------------------------------------------------------------------------- EUROPE - TOTAL 471,158,586 - -------------------------------------------------------------------------------- Number of Value Shares ASIA - 17.3% - -------------------------------------------------------------------------------- JAPAN - 7.0% 117,900 Ito En $6,045,711 Bottled Tea & Other Beverages 253,000 Park 24 4,997,790 Parking Lot Operator 124,000 Daito Trust Construction 4,630,351 Apartment Builder 103,000 Hogy Medical 4,594,172 Disposable Surgical Products 160,000 Shimano 4,540,041 Bicycle Components & Fishing Tackle 250,000 Ushio 4,430,450 Industrial Light Sources 137,000 Meitec 4,204,745 Staffing Company Specializing in R&D Engineers 162,500 Ain Pharmaciez 3,283,967 Dispensing Pharmacy/Drugstore Operator 140,000 Sato 3,122,909 Bar Code Printers & Supplies 265,900 Toyo Technica 3,046,390 Value Added Reseller of Imported Instrumentation 194,000 Wacoal 2,461,462 Women's Specialty Apparel 470,400 Hiroshima Bank 2,138,237 Regional Bank 195,000 Fukuoka Bank 1,151,361 Regional Bank 180,000 Bank of Yokohama (b) 1,034,299 Regional Bank 19,000 Eneserve 566,579 Power Generators 192 Jupiter Telecommunications 161,335 Largest Cable Service Provider in Japan 5,100 NIFCO 77,245 Molded Plastic Components - -------------------------------------------------------------------------------- 50,487,044 - -------------------------------------------------------------------------------- TAIWAN - 4.6% 4,290,000 Taiwan Fu Hsing 4,817,438 Door Lock Manufacturer 4,419,300 Phoenixtec Power 4,741,240 Uninterruptable Power Supplies See accompanying notes to financial statements. 8 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- TAIWAN - 4.6% (CONT) 2,000,000 Advantech $4,713,661 Embedded Computers 539,400 ASE Test (b) 3,473,736 Semiconductor Packaging & Test Services 1,577,616 Springsoft Systems 3,279,267 Electronic Design Automation Software 3,169,000 Chicony Electronics 3,277,789 PC Power Supplies & Keyboards 1,800,000 Sunplus Technology 2,519,439 Fabless Semiconductor Designer 1,644,021 Wah Lee Industrial 2,446,816 Distributor of Chemicals, Materials & Equipment 550,000 Novatek Microelectronics 2,338,624 LCD Related IC Designer 2,530,000 Bank of Kaohsiung 1,786,287 Commercial Banking - -------------------------------------------------------------------------------- 33,394,297 - -------------------------------------------------------------------------------- HONG KONG/CHINA - 2.8% 2,000,000 Hong Kong Exchanges & Clearing 5,180,355 Hong Kong Equity & Derivatives Operator 2,000,000 Techtronic Industries 5,038,295 Manufacturer Power Tools & Motorized Appliances 7,000,000 Global Bio-Chem Technology Group (China) 4,334,769 363,000 Global Bio-Chem Technology Group Warrants (China) 6,072 Refiner of Corn-Based Commodities 11,000,000 Linmark 3,143,718 Sourcing of Consumer Goods 7,819,000 Ngai Lik Industrial 1,542,263 Consumer Electronics Manufacturer 11,782,000 Lerado Group 1,242,295 Baby Strollers & Infant Car Seats Manufacturer - -------------------------------------------------------------------------------- 20,487,767 - -------------------------------------------------------------------------------- SINGAPORE - 1.1% 5,000,000 Comfort Del Gro 4,997,917 Taxi & Mass Transit Service 6,500,000 LMA International 3,072,899 Medical Equipment & Supplies - -------------------------------------------------------------------------------- 8,070,816 - -------------------------------------------------------------------------------- Number of Value Shares or Principal Amount - -------------------------------------------------------------------------------- INDIA - 0.9% 300,000 Housing Development Finance $6,089,929 Premier Mortgage Lender in India - -------------------------------------------------------------------------------- INDONESIA - 0.5% 12,000,000 PT Perusahaan Gas Negara 3,541,026 Gas Pipeline Operator - -------------------------------------------------------------------------------- SOUTH KOREA - 0.4% 205,000 Samyoung Heat Exchange 3,145,344 Power Plant Related Machinery - -------------------------------------------------------------------------------- ASIA - TOTAL 125,216,223 OTHER COUNTRIES - 7.2% - -------------------------------------------------------------------------------- CANADA - 4.2% 823,500 Major Drilling Group International (b) 8,118,920 Mining Exploration Driller 500,000 Shawcor 7,341,318 Oil & Gas Pipeline Products 1,000,000 Kinross Gold (b) 6,110,975 Gold Mining 120,000 Enerflex Systems 2,463,945 Natural Gas Compressor 1,000,000 Northern Orion Resources 2,460,686 Mining of Copper & Gold in Argentina CAD $3,175,000 Main Street Equity, Conv, 7.25%, 9/30/11 (d) 2,070,877 17,000 Main Street Equity (b) 72,721 Canadian Multi-Family Real Estate 250,000 Ivanhoe Mines (b) 1,939,217 Copper Mining in Mongolia - -------------------------------------------------------------------------------- 30,578,659 - -------------------------------------------------------------------------------- AUSTRALIA/NEW ZEALAND - 2.4% 600,000 Billabong International 6,198,593 Action Sports Apparel Brand Manager 1,300,000 Sky City Entertainment (New Zealand) 4,040,002 Casino/Entertainment Complex 70,000 Perpetual Trustees 3,046,406 Australian Mutual Fund Manager 457,200 ABC Learning Center 1,935,851 Childcare Centers 1,009,500 Pacific Brands 1,734,161 Australian Branded Apparel - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 9 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- SOUTH AFRICA - 0.6% 100,000 Edgars Consolidated Stores $ 4,337,930 Leading Retail Conglomerate - -------------------------------------------------------------------------------- OTHER - TOTAL 51,871,602 LATIN AMERICA - 5.5% - -------------------------------------------------------------------------------- BRAZIL - 2.5% 215,000 Natura Cosmeticos 6,860,396 Direct Retailer of Cosmetics 100,000 America Latina Logistics 2,960,801 Rail Operator in Brazil & Argentina 330,000 Porto Seguro 2,952,706 Auto & Life Insurance 135,000,000 Ultrapar 2,360,045 Specialty Chemicals & Liquid Propane Gas Distribution 2,260,000 Caemi 2,118,439 Iron Ore/Kaolin Producer 50,000 Diagnosticos (b) 677,450 Medical Diagnostic Services - -------------------------------------------------------------------------------- 17,929,837 - -------------------------------------------------------------------------------- MEXICO - 2.0% 240,000 Grupo Aeroportaurio Del Sureste 7,644,000 Cancun & Cozumel Airport Operator 1,000,000 Consorcio ARA (b) 3,452,747 Affordable Housing Builder 600,000 URBI Desarrollo (b) 3,294,041 Affordable Housing Builder - -------------------------------------------------------------------------------- 14,390,788 - -------------------------------------------------------------------------------- CHILE - 1.0% 47,000 Sociedad Quimica Y Minera de Chile 4,700,000 Producer of Specialty Fertilizers, Lithium & Iodine 100,000 CorpBanca (b) 2,610,000 Chilean Local Bank - -------------------------------------------------------------------------------- 7,310,000 - -------------------------------------------------------------------------------- LATIN AMERICA - TOTAL 39,630,625 TOTAL COMMON STOCKS AND OTHER EQUITY-LIKE SECURITIES - 95.2% 687,877,036 - -------------------------------------------------------------------------------- (COST $517,846,756) - -------------------------------------------------------------------------------- Principal Amount Value SHORT-TERM OBLIGATIONS - 4.2% - -------------------------------------------------------------------------------- $30,497,000 Repurchase Agreement with State Street Bank & Trust dated 6/30/05, due 7/1/05 at 3.00% collateralized by Federal National Mortgage Association Notes, maturing 2/22/08, market value $31,111,106 (repurchase proceeds: $30,499,541) $30,497,000 - -------------------------------------------------------------------------------- (AMORTIZED COST $30,497,000) 30,497,000 TOTAL INVESTMENTS (COST $ 548,343,756) - 99.4% (a) 718,374,036 - -------------------------------------------------------------------------------- Cash and Other Assets Less Liabilities - 0.6% 4,167,224 - -------------------------------------------------------------------------------- TOTAL NET ASSETS - 100% $722,541,260 NOTES TO STATEMENT OF INVESTMENTS: (a) At June 30, 2005, for federal income tax purposes cost of investments was $548,343,756 and net unrealized appreciation was $170,030,280 consisting of gross unrealized appreciation of $189,376,879 and gross unrealized depreciation of $ 19,346,599. (b) Non-income producing security. (c) On June 30, 2005, the Fund's total investments were denominated in currencies as follows: % of Net Currency Value Assets - -------------------------------------------------------------------------------- Euro Dollars $285,317,890 39.5% British Pounds 114,828,300 15.9 U.S. Dollars 60,105,897 8.3 Japanese Yen 50,487,045 7.0 Other currencies less than 5% of total net assets 207,634,904 28.7 ------------ ---- $718,374,036 99.4% ============ ==== (d) Denotes a restricted security, which is subject to restrictions on resale under federal securities laws. These securities are valued in good faith under consistently applied procedures as established by and under the general supervision of the Board of Trustees. At June 30, 2005, these securities amounted to $2,070,877 which represents 0.3% of net assets. Additional information on this security is as follows: ACQUISITION SECURITY DATE PAR COST VALUE - -------------------------------------------------------------------------------- Mainstreet Equity Conv., 7.25% 9/30/11 10/8/04 CAD$ 3,175,000 $2,527,263 $2,070,877 CAD Canadian Dollar 10 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SMALL CAP PORTFOLIO DIVERSIFICATION (Unaudited) JUNE 30, 2005 AT JUNE 30, 2005, THE FUND'S PORTFOLIO INVESTMENTS AS A PERCENT OF NET ASSETS WAS DIVERSIFIED AS FOLLOWS: Value Percent - ----------------------------------------------------------------- INDUSTRIAL GOODS/SERVICES Other Industrial Services $38,189,491 5.3% Industrial Materials 31,679,603 4.4 Construction 22,455,866 3.1 Machinery 21,924,484 3.0 Steel 17,228,427 2.4 Specialty Chemicals 17,013,033 2.4 Conglomerates 16,803,953 2.3 Outsourcing & Training Services 10,329,729 1.4 Electrical Components 8,358,443 1.2 Industrial Distribution 7,521,733 1.0 - ----------------------------------------------------------------- 191,504,762 26.5 - ----------------------------------------------------------------- CONSUMER GOODS/SERVICES Apparels 18,622,367 2.6 Durable Goods 18,211,220 2.5 Food 15,809,480 2.2 Gaming 15,300,810 2.1 Retail 14,746,950 2.0 Non Durable Goods 13,706,502 1.9 Beverage 9,699,017 1.3 Furniture & Textiles 8,303,688 1.1 Consumer Services 8,175,936 1.1 Goods Distribution 4,927,560 0.7 Travel 4,303,300 0.6 Casinos 4,040,002 0.6 Entertainment 1,930,784 0.3 - ----------------------------------------------------------------- 137,777,616 19.0 - ----------------------------------------------------------------- FINANCE Finance Companies 33,229,123 4.6 Banks 30,200,983 4.2 Insurance 17,762,489 2.5 Savings & Loans 9,964,616 1.4 Money Management 7,957,044 1.1 - ----------------------------------------------------------------- 99,114,255 13.8 Value Percent - ----------------------------------------------------------------- INFORMATION TECHNOLOGY Computer Hardware & Related Equipment $20,085,582 2.8% Business Information & Marketing Services 10,685,677 1.5 Semiconductors & Related Equipment 8,331,799 1.2 Business Software 8,009,882 1.1 Instrumentation 7,469,525 1.0 Publishing 6,418,606 0.9 Television Programming 5,988,154 0.8 Internet Related 5,557,507 0.8 Satellite Broadcasting & Services 5,268,263 0.7 Financial Processors 5,180,355 0.7 Computer Services 3,535,800 0.5 Electronics Distribution 2,446,816 0.3 Contract Manufacturing 1,542,263 0.2 Cable Television 161,335 0.0 - ----------------------------------------------------------------- 90,681,564 12.5 - ----------------------------------------------------------------- ENERGY/MINERALS Oil Services 27,111,997 3.8 Non-Ferrous Metals 14,229,895 2.0 Mining 9,236,142 1.3 Oil/Gas Producers 5,666,659 0.8 Agricultural Commodities (includes Forestry) 4,340,841 0.6 Oil Refining/Marketing/Distribution 3,541,026 0.5 Independent Power 566,579 0.1 - ----------------------------------------------------------------- 64,693,139 9.1 - ----------------------------------------------------------------- OTHER Transportation 30,629,823 4.2 Real Estate 19,856,843 2.7 Regulated Utilities 12,131,206 1.7 - ----------------------------------------------------------------- 62,617,872 8.6 - ----------------------------------------------------------------- HEALTHCARE Pharmaceuticals 13,034,054 1.8 Services 10,736,964 1.5 Medical Equipment 7,251,331 1.0 Hospital/ Laboratory Supplies 5,271,622 0.7 Hospital Management 5,193,857 0.7 - ----------------------------------------------------------------- 41,487,828 5.7 - ----------------------------------------------------------------- TOTAL COMMON STOCKS & OTHER EQUITY-LIKE SECURITIES 687,877,036 95.2 - ----------------------------------------------------------------- SHORT-TERM OBLIGATIONS 30,497,000 4.2 - ----------------------------------------------------------------- TOTAL INVESTMENTS 718,374,036 99.4 - ----------------------------------------------------------------- CASH & OTHER ASSETS LESS LIABILITIES 4,167,224 0.6 - ----------------------------------------------------------------- NET ASSETS $722,541,260 100.0% ================================================================= 11 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2005 (Unaudited) - ---------------------------------------------------------------- ASSETS Investments, at cost $548,343,756 - ---------------------------------------------------------------- Investments, at value $718,374,036 Cash 144 Foreign currency (cost of $3,903,655) 3,884,103 Receivable for: Investments sold 5,552,753 Fund shares sold 898,232 Dividends and interest 1,442,928 Foreign tax reclaims 184,653 - ---------------------------------------------------------------- Total Assets 730,336,849 LIABILITIES Payable for: Investments purchased 7,024,111 Fund shares repurchased 110,838 Investment advisory fees 564,928 Transfer agent fees 518 Trustees' fees 5,020 Reports to shareholders 77,324 Other liabilities 12,850 - ---------------------------------------------------------------- Total Liabilities 7,795,589 - ---------------------------------------------------------------- Net Assets $722,541,260 ================================================================ COMPOSITION OF NET ASSETS Paid-in capital $583,195,788 Undistributed net investment income 1,182,421 Accumulated net realized loss (31,818,062) Net unrealized appreciation (depreciation) on: Investments 170,030,280 Foreign currency translations (49,167) - ---------------------------------------------------------------- Net Assets $722,541,260 ================================================================ Fund shares outstanding 27,607,100 ================================================================ Net asset value, offering price and redemption price per share $26.17 ================================================================ STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (Unaudited) - ---------------------------------------------------------------- INVESTMENT INCOME: Dividend income (net of foreign taxes $737,800) $8,972,689 Interest income 434,457 - ---------------------------------------------------------------- Total investment income 9,407,146 EXPENSES: Investment advisory fees 3,390,595 Transfer agent fees 623 Trustees' fees 34,086 Custody fees 275,971 Compliance fees 11,992 Non-recurring costs (See Note 8) 5,552 Other expenses 143,819 - ---------------------------------------------------------------- Total expenses 3,862,638 Fees waived by Investment Adviser (See Note 4) (188,761) Non-recurring costs reimbursed (See Note 8) (5,552) - ---------------------------------------------------------------- Net Expenses 3,668,325 - ---------------------------------------------------------------- Net Investment Income 5,738,821 NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS AND FOREIGN CURRENCY: Net realized gain (loss) on: Investments 26,321,600 Foreign currency transactions (341,529) - ---------------------------------------------------------------- Net realized gain 25,980,071 - ---------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on: Investments (7,777,610) Foreign currency translations (155,561) - ---------------------------------------------------------------- Net change in unrealized appreciation (depreciation) (7,933,171) - ---------------------------------------------------------------- Net Gain 18,046,900 - ---------------------------------------------------------------- Net Increase in Net Assets from Operations $23,785,721 ================================================================ See accompanying notes to financial statements. 12 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited) Six Months ended Year ended INCREASE (DECREASE) IN NET ASSETS: June 30, 2005 December 31, 2004 - -------------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $5,738,821 $2,772,979 Net realized gain on investments and foreign currency transactions 25,980,071 38,203,442 Net change in unrealized appreciation (depreciation) on investments and foreign currency translations (7,933,171) 90,796,832 - -------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 23,785,721 131,773,253 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (6,966,978) (2,991,364) - -------------------------------------------------------------------------------------------------------------------- Total distributions to shareholders (6,966,978) (2,991,364) SHARE TRANSACTIONS: Subscriptions 120,328,172 172,565,632 Distributions reinvested 6,966,978 2,991,364 Redemptions (28,345,315) (78,291,925) - -------------------------------------------------------------------------------------------------------------------- Net Increase from Share Transactions 98,949,835 97,265,071 - -------------------------------------------------------------------------------------------------------------------- Total Increase in Net Assets 115,768,578 226,046,960 NET ASSETS: Beginning of period 606,772,682 380,725,722 - -------------------------------------------------------------------------------------------------------------------- End of period $722,541,260 $606,772,682 - -------------------------------------------------------------------------------------------------------------------- UNDISTRIBUTED NET INVESTMENT INCOME $1,182,421 $2,410,578 ====================================================================================================================
See accompanying notes to financial statements. 13 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
(Unaudited) Six Months Selected data for a share Ended Year Ended December 31, outstanding throughout each period June 30, 2005 2004 2003 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $25.46 $19.68 $13.27 $15.40 $28.53 $43.67 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) 0.22 0.13 0.13 0.07 0.02 (0.26) Net realized and unrealized gain (loss) on investments and foreign currency transactions 0.77(b) 5.80 6.33 (2.20) (5.12) (9.75) - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 0.99 5.93 6.46 (2.13) (5.10) (10.01) - ----------------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.28) (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 (0.28) (0.15) (0.05) -- (8.03) (5.13) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $26.17 $25.46 $19.68 $13.27 $15.40 $28.53 =================================================================================================================================== Total Return (c) 3.83%(d)(e) 30.27% 48.86% (13.83)% (21.27)% (27.84)% - ----------------------------------------------------------------------------------------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses(f) 1.11%(g) 1.36% 1.41% 1.47% 1.43% 1.41% Net investment income (loss)(f) 1.73%(g) 0.59% 0.85% 0.46% 0.10% (0.68)% Waiver 0.06%(g) -- -- -- -- -- Portfolio turnover rate 14%(d) 47% 45% 54% 56% 67% Net assets, end of period (000's) $722,541 $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) The amount shown for a share outstanding does not correspond with the aggregate net gain on investments for the period due to the timing of repurchases of Fund shares in relation to fluctuating market values of the investments of the Fund. (c) Total return at net asset value assuming all distributions are reinvested. (d) Not annualized. (e) Had the investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (f) The benefits derived from custody fees paid indirectly had no impact. (g) Annualized. See accompanying notes to financial statements. 14 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 under consistently applied procedures established by and under the general supervision of 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 the 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 in to 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, distribute 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%-15%. 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 tax character of distributions paid during the year ended December 31, 2004 was as follows: DECEMBER 31, 2004 ----------------- Distributions paid from: Ordinary Income $2,991,364 15 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) Unrealized appreciation and depreciation at June 30, 2005, based on cost of investments for federal income tax purposes, was: NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION DEPRECIATION APPRECIATION ------------- ------------- -------------- $189,376,879 $(19,346,599) $170,030,280 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 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. Effective March 8, 2005, 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 1.15% Next $150 million 1.00% In excess of $250 million 0.95% Prior to March 8, 2005, under the Fund's investment management agreement, fees were 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% 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 were retained at the following annual rates as a percent of average daily net assets: 1.15% - up to $100 million; 1.00% - $100 million to $250 million; 0.95% - $250 million and over. The fee waiver was effective from January 1, 2005 though March 8, 2005, but applied as if it had gone into effect on December 1, 2004. Effective August 1, 2005, under the fund's investment management agreement, fees will be 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 1.15% Next $150 million 1.00% Next $250 million 0.95% In excess of $500 million 0.85% 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 average daily net assets. There was no reimbursement for the six months ended June 30, 2005. For the six months ended June 30, 2005, the Fund's annualized effective investment advisory fee rate was 0.97%. 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 six months ended June 30, 2005, the Fund paid $34,086 to trustees not affiliated with Columbia WAM. 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 and has subcontracted with Boston Financial Data Services ("BFDS") to serve as subtransfer agent. For such services, the Transfer Agent receives a fee, paid monthly, at the annual rate of $21.00 per open account. The Transfer Agent also receives a reimbursement for certain out-of-pocket expenses. During the six months ended June 30, 2005, 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 $6,221,592 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 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 six months ended June 30, 2005. 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: Six months ended Year ended June 30, 2005 December 31, 2004 - -------------------------------------------------------------------------------- Shares sold 4,602,207 8,009,022 - -------------------------------------------------------------------------------- Shares issued in reinvestment of dividend distributions 252,061 140,969 - -------------------------------------------------------------------------------- Less shares redeemed 1,082,123 3,663,834 - -------------------------------------------------------------------------------- Net increase in shares outstanding 3,772,145 4,486,157 7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the six months ended June 30, 2005 were $202,305,862 and $90,407,265. 16 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 with the New York Attorney General ("NYAG") (the "NYAG Settlement") and consented to the entry of a cease-and-desist order by the Securities and Exchange Commission ("SEC") (the "SEC Order"). The SEC Order and the NYAG Settlement are referred to collectively as 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, the Columbia Group 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 the Columbia Group'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 certain Columbia Funds, Nations Funds and other mutual funds management fees 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, settlement amounts described above 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 the Columbia Group and the Fund's independent trustees 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, Columbia Acorn Trust, another mutual fund family advised by Columbia WAM, and the trustees of Columbia Acorn Trust, are named as defendants in class and derivative complaints which have been consolidated in a Multi-District Action in the federal district court for the District of Massachusetts. These lawsuits contend that defendants permitted certain investors to market time their trades in certain Columbia Acorn Funds. The Multi-District Action is ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, cannot currently be made. Columbia WAM, the Columbia Acorn Funds and the trustees of Columbia Acorn Trust are defendants in a consolidated lawsuit filed in the federal district court of Massachusetts 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 the Trust breached certain common laws duties and federal laws. 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 Funds' 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 (the "Fair Valuation Lawsuit"). The plaintiffs' complaint was dismissed by the district court. However, plaintiffs are in the process of appealing that decision. 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 Columbia WAM and affiliated advisers. The trustees of Columbia Acorn Trust and Columbia WAM have been dismissed as defendants in this lawsuit. On March 21, 2005, a class action complaint was filed against the Columbia Acorn Trust and Columbia WAM seeking to rescind the Contingent Deferred Sales Charges assessed upon redemption of Class B shares of Columbia Acorn Funds due to the alleged market timing of the Columbia Acorn Funds. In addition to the rescission of sales charges, plaintiffs seek recovery of actual damages, attorneys' fees and costs. The case has been removed to the federal district court of Massachusetts. The Columbia Acorn Trust and Columbia WAM intend to defend these suits vigorously. 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 against certain funds, their Boards and/or BOA (and affiliated entities). These suits are ongoing. However, based on currently available information, the Columbia Acorn Trust believes that the likelihood that these lawsuits will have a material adverse impact on any fund is remote, and Columbia WAM believes that the lawsuits are not likely to materially affect its ability to provide investment management services to the Funds. For the six months ended June 30, 2005, CMG has assumed $5,552 in consulting services and legal fees incurred by the Fund in connection with these matters. 9. SUBSEQUENT EVENT Effective August 22, 2005, the Fund's distributor will be Columbia Management Distributors, Inc. and the Fund's transfer agent will be Columbia Management Services, Inc. 17 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- [EXCERPTS FROM:] WANGER ADVISORS TRUST Management Fee Evaluation of the Senior Officer Prepared Pursuant to the New York Attorney General's Assurance of Discontinuance July 2005 18 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- Introduction The New York Attorney General's Assurance of Discontinuance ("Order") entered into by Columbia Management Advisors, Inc. ("CMAI") and Columbia Funds Distributor, Inc., ("CFDI" and collectively with "CMAI," "CMG") in February 2005, allows CMAI to manage or advise a mutual fund, including the Wanger Advisors Trust's family of funds (the "WAT Funds" or "WAT" or "Trust"), only if the trustees of the WAT Funds appoint a "Senior Officer" to perform specified duties and responsibilities. One of these responsibilities includes "managing the process by which proposed management fees (including but not limited to, advisory fees) to be charged the WAT Fund[s] are negotiated so that they are negotiated in a manner which is at arms' length and reasonable and consistent with this Assurance of Discontinuance." The Order also provides that the Board of Trustees of the WAT Funds ("Board") must determine the reasonableness of proposed "management fees" by using either an annual competitive bidding process supervised by the Senior Officer or Independent Fee Consultant, or by obtaining "an annual independent written evaluation prepared by or under the direction of the Senior Officer or the Independent Fee Consultant." "Management fees" are only part of the costs and expenses paid by mutual fund shareholders. The expenses can vary depending upon the class of shares held but usually include: (1) investment management or advisory fees to compensate analysts and portfolio managers for stock research and portfolio management, as well as the cost of operating a trading desk; (2) administrative expenses incurred to prepare registration statements and tax returns, calculate the Funds' net asset values, maintain effective compliance procedures and perform recordkeeping services; (3) transfer agency costs for establishing accounts, accepting and disbursing funds, as well as overseeing trading in Fund shares; (4) custodial expenses incurred to hold the securities purchased by the Funds; and (5) distribution expenses, including commissions paid to brokers that sell the Fund shares to investors. Columbia Wanger Asset Management, L.P. ("CWAM"), the adviser to the WAT Funds, has proposed that the Trust enter into an agreement that "bundles" the first two categories listed above: advisory and administrative services. The fees paid under this agreement are referred to as "management fees." Other fund expenses are governed by separate agreements, in particular agreements with two CWAM affiliates: CFDI, the broker-dealer that underwrites and distributes the WAT Funds' shares, and Columbia Funds Services, Inc. ("CFSI"), the Funds' transfer agent. In conformity with the terms of the Order, this evaluation, therefore, addresses only the advisory and administrative contract between CWAM and the Trust, and does not extend to the other agreements. According to the Order, the Senior Officer's evaluation must consider at least the following: (1) Management fees (including components thereof) charged to institutional and other clients of CWAM for like services; (2) Management fees (including any components thereof) charged by other mutual fund companies for like services; (3) Costs to CWAM and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit; (4) Profit margins of CWAM and its affiliates from supplying such services; (5) Possible economies of scale as the WAT Funds grow larger; and (6) The nature and quality of CWAM's services, including the performance of each WAT Fund. On November 17, 2004, the Board appointed me Senior Officer under the Order. The Board also determined not to pursue a competitive bidding process and instead, charged me with the responsibility of evaluating the WAT Funds' proposed advisory and administrative fee contract with CWAM in conformity with the requirements of the Order. This Report is an annual evaluation required under the Order. In discharging their responsibilities, the independent Trustees have also consulted independent, outside counsel. * * * This evaluation was performed in cooperation and regular communication with the Compliance/Contract Renewal Committee of the Board. Process and Independence The objectives of the Order are to ensure the independent evaluation of the advisory fees paid by the WAT Funds as well as to ensure that all relevant factors are considered. In my view, the contract renewal process has been conducted at arms-length and with independence in gathering, considering and evaluating relevant data. For example, the selection of fund peer groups is critical in assessing a fund's relative performance and cost. I have required Lipper and Morningstar, Inc. to prepare their reports without input or commentary from CWAM; the engagement letters with them reflect this requirement. As a result, the peer groups reflected in the Morningstar, Inc. and Lipper reports were determined independently. After submission of the reports, I asked CWAM to comment on them to avoid errors and to establish a clear record of CWAM's views on which funds, in its judgment, constitute an appropriate peer group. Similarly, I discussed CWAM's profitability analysis with its management but also sought the independent views of Ernst &Young on the reasonableness of CWAM's cost allocation methodology and on the adequacy of the financial data it provided. The evaluation of CWAM's profitability was performed in the context of the limited industry data available. My evaluation of the advisory contract was shaped by my experience as WAT's Chief Compliance Officer ("CCO"). As CCO, I report solely to the Board and have no reporting obligation to or employment relationship with CMG or its affiliates, except for administrative purposes. This too contributes to the independence of this evaluation. I have made several comments on compliance matters in evaluating the quality of service provided by CWAM and CMG. 19 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- Finally, this Report, its supporting materials and the data contained in other materials submitted to the Compliance/Contract Renewal Committee of the Board, in my view, provide a thorough factual basis upon which the Board, in consultation with independent counsel as it deems appropriate, may conduct management fee negotiations that are in the best interests of the WAT Funds' shareholders. * * * VI. Conclusions My review of the data and other material above leads to the following conclusions with respect to the factors identified in the Order. 1. Performance. The WAT Funds generally have achieved outstanding performance and rank very favorably against their peers. The international funds have good recent performance records, but weaker long-term performance relative to the domestic WAT Funds. Recent management changes have been followed by improved performance. The domestic WAT Funds and International Select typically achieve their performance with less risk than their competitors; relative risks are greater for International Small Cap. 2. Management Fees relative to Peers. The management fee rankings of the Funds are generally well below the respective medians and, hence, less favorable to shareholders than their peer group funds. 3. Administrative Fees. The WAT Funds pay a bundled fee that combines advisory fees and administrative expense, so ranking these fees separately was not possible. 4. Management Fees relative to Other Accounts. CWAM's focus is its mutual funds. It does not actively seek to manage separate or institutional accounts. The few institutional accounts it does manage vary in rate structures. Some pay advisory fees commensurate with or higher than the WAT Funds. In a few instances, however, sub-advised accounts pay lower management fees than do the WAT Funds. 5. Costs to CWAM and its Affiliates. CWAM's costs do not appear excessive, and, in my view, it uses appropriate methodologies to allocate overhead costs. CWAM's affiliates do not appear to profit indirectly from CWAM's management agreement with the WAT Funds. 6. Profit Margins. CWAM's firm-wide profit margins are at the upper end of the industry, though these comparisons are hampered by limited industry data. High profit margins are not unexpected for firms that manage large, successful funds and have provided outstanding investment performance for investors. Profit margins for the WAT Funds are lower than the margins for other accounts managed by CWAM because of payments made to intermediaries that offer the WAT Funds through variable annuity products. CMAI, the Funds' administrator, currently experiences losses rather than profits, in connection with its activities relating to the WAT Funds. 7. Economies of Scale. Economies of scale do exist at CWAM and will expand, if the assets of the WAT Funds get larger. They are, however, only partially reflected in the management fee schedule for two of the four WAT Funds. If the Funds' assets continue to grow, under the Funds' current fee schedules, shareholders might not benefit in a manner generally commensurate with CWAM's increased profits 8. Nature and quality of services. This category includes a variety of considerations that are difficult to quantify, yet can have a significant bearing on the performance of the WAT Funds. Several areas merit comment. a. Continuity of Management. It is critical that capable and experienced portfolio managers remain committed to the Funds and are able to hire and retain analysts to assist them. CWAM must have in place appropriate incentive plans that align its management's interests with those of investors. Further, CWAM must maintain the independence of its investment process. It should also be supported by effective information technology. b. Compliance. CWAM has an effective compliance program and a variety of related services that are valuable to shareholders, such as, systems to ensure best execution of portfolio transactions and the daily review of security prices to ensure accuracy of the WAT Funds' NAV. c. Administration Services. The WAT Funds benefit from a variety of administrative services that are performed by CWAM and CMAI, including preparation of registration statements, calculation of Fund NAV's, accounting services, shareholder services, and other functions In my opinion, these conclusions, taken together, generally support the reasonableness of the proposed management agreement. In reaching this conclusion, I weighed heavily the outstanding performance of the WAT Funds relative to their peers. Performance is an investor's first concern. The expense incurred by shareholders to enjoy this performance is, however, high relative to competing funds, though expenses for the WAT Funds are (with one exception) comparable to the parallel Acorn Funds. Nonetheless, a more complete breakpoint schedule could address this issue as well as share with investors more fully the benefits of economies of scale. 20 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- VII. Recommendations The Trustees should consider the following proposals to address the issues identified in this Report. Some of these recommendations require the collection and evaluation of more data. This work cannot be accomplished effectively before the expiration of the existing advisory contract on July 31, 2005. Therefore, I recommend that the Trustees consider extending the existing contract pending consideration of these recommendations. These recommendations do not purport to offer the only avenues to address the opinions and conclusions I have expressed in this Report. Economies of scale, for example, can be addressed in a variety of ways in a management contract. Sound business judgment will guide how any particular area is addressed with due consideration given to all the factors that must be weighed in reaching a management agreement that best serves the WAT Fund shareholders. I believe the Trustees should consider the following: 1. Restructure the management fee schedule beyond the current breakpoints to reflect more fully economies of scale. The Trustees might consider several ways to accomplish this objective, including instituting a two-tier fee structure that incorporates a complex- or CWAM-wide fee (including assets held in separate accounts) and a fund specific fee, with each containing breakpoints to reflect their separate economies of scale. Another approach is to consider uniform breakpoints for all WAT Funds, including breakpoints above and below current asset levels. 2. Conduct further study to ensure that the costs paid to insurance company intermediaries are transparent. The Trustees could consider forming an ad hoc committee to gather and evaluate data regarding CWAM's payments to intermediaries and the services provided by those intermediaries. Such a committee might also seek the assistance of a consultant such as E&Y. 3. Administrative Fees. Administrative and advisory fees could be unbundled to allow greater transparency and to permit distinct comparisons among peers. An administrative fee could also be formulated with a breakpoint schedule that shares the economies of scale available with shareholders. 4. Condition contract renewal on submission of an employment agreements or a management incentive plan designed to ensure the continued employment of senior management, under terms that align management's incentives with the interests of the WAT Funds' shareholders. Any incentive plan should be designed to permit CWAM to attract and retain the highest caliber investment professionals and support them with effective and reliable information technology systems. 5. Review with CWAM its anticipated capacity limitations and the degree to which increased staffing and effective incentives may address those issues. Robert P. Scales July 25, 2005 * * * More complete copies of the Management Fee Evaluation of the Senior Officer of the Wanger Advisors Trust, edited to delete certain confidential or proprietary information, are available upon written request to: R. Scott Henderson Bank of America MA-515-11-05 One Financial Center Boston, MA 02111 21 Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- This page intentionally left blank. Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- This page intentionally left blank. Wanger International Small Cap 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] WANGER ADVISORS TRUST TRUSTEES Patricia H. Werhane, Chairperson Jerome L. Duffy Fred D. Hasselbring Kathryn A. Krueger, M.D. Ralph Wanger OFFICERS Ben Andrews Vice President J. Kevin Connaughton Assistant Treasurer Michael G. Clarke Assistant Treasurer Kenneth A. Kalina Assistant Treasurer Bruce H. Lauer Vice President, Secretary and Treasurer Charles P. McQuaid President Robert A. Mohn Vice President Todd M. Narter Vice President Christopher J. Olson Vice President Vincent P. Pietropaolo Assistant Secretary Robert P. Scales Chief Compliance Officer, Senior Vice President and General Counsel TRANSFER AGENT, DIVIDEND DISBURSING AGENT Columbia Management Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Columbia Management Distributors, 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 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 SHC-44/88226-0705 05/7139 WANGER SELECT 2005 Semiannual Report [Graphic: squirrel] WANGER ADVISORS FUNDS - -------------------------------------------------------------------------------- managed by Columbia Wanger Asset Management, L.P. [Graphic: squirrel] WANGER SELECT 2005 SEMIANNUAL REPORT TABLE OF CONTENTS 1 Understanding Your Expenses 2 Discipline and Creativity 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 15 Management Fee Evaluation of the Senior Officer 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 $23.5 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. COLUMBIA MANAGEMENT IS THE PRIMARY INVESTMENT MANAGEMENT DIVISION OF BANK OF AMERICA CORPORATION. COLUMBIA MANAGEMENT ENTITIES FURNISH INVESTMENT MANAGEMENT SERVICES AND ADVISE INSTITUTIONAL AND MUTUAL FUND PORTFOLIOS. COLUMBIA WAM IS AN SEC-REGISTERED INVESTMENT ADVISER AND WHOLLY OWNED SUBSIDIARY OF BANK OF AMERICA, N.A. COLUMBIA WANGER IS PART OF COLUMBIA MANAGEMENT. 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 WANGER ADVISORS FUNDS. 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 2005 Semiannual 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 ongoing 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 $8,600.00 at the end of the period, the result would be 8.6. 2. In the section of the table below titled "Expenses paid during the period," locate the amount for your fund. You will find this number is in the column labeled "actual." Multiply this number by the result from step 1. Your answer is an estimate of the expenses you paid on your account during the period. January 1, 2005 - June 30, 2005
- ------------------------------------------------------------------------------------------------------------------------------------ Account value at the Account value at the Expenses paid during Fund's annualized beginning of the period ($) end of the period ($) the period ($) expense ratio (%)* - ------------------------------------------------------------------------------------------------------------------------------------ Actual Hypothetical Actual Hypothetical Actual Hypothetical - ------------------------------------------------------------------------------------------------------------------------------------ Wanger Select 1,000.00 1,000.00 991.82 1,020.13 4.64 4.71 0.94 - ------------------------------------------------------------------------------------------------------------------------------------
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 365. Had the investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. 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 6/30/05. COMPARE WITH OTHER FUNDS Since all mutual funds 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 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] DISCIPLINE AND CREATIVITY Photo of: RALPH WANGER RALPH WANGER Founder, Advisor and Trustee Columbia Wanger Asset Management, L.P. A popular new book by Tom Friedman, "The World Is Flat: A Brief History of the Twenty-First Century," recounts how developing countries such as India and China are using modern technology to compete with the United States in both manufacturing and services. He contrasts the success of China and India to the failure of the Arab states to participate in the modern world. He deplores the influence of Yamani, the former Saudi oil minister, who used oil as an economic weapon, and Osama Bin Laden who uses terror as a political weapon. Friedman compares the stagnant current state of Arab culture with its peak in the 12th century. "What makes Yamanism and Bin Ladenism unfortunate as strategies for the Arabic world is that they ignore the examples within the Arab culture and civilization - when it was at its height - of discipline, hard work, knowledge, achievement, scientific inquiry, and pluralism."1 The popular Susan Hockfield was just installed as president of MIT. In her inaugural speech she invoked her list of virtues. She said, "The value of engineering - the rigor; the unflappable curiosity; the discipline and creativity; the appetite for good, old fashioned hard work; the passionate, enthusiastic, can do, hands-on, fix-it-now attitude - these values are and always will be the values of MIT." The rules for success in the world don't seem to have changed very much. Twelfth century Cordoba and 21st century Cambridge are completely different in almost every way, but the characteristics that make you successful have not changed. Any financial analyst or serious investor should apply the engineer's characteristics of discipline, hard work, knowledge and enthusiasm to investing. President Hockfield's linking of discipline and creativity is interesting. It's widely believed that we should diversify and balance our investments. We balance stocks vs. bonds, growth stocks vs. value stocks, big-cap vs. small-cap stocks, and U.S. stocks vs. international, but it is unusual to think of the balance between discipline and creativity; yet this balance is what I believe brings good investment results. Discipline without creativity is sterile - you tend to get an index fund. Index funds run by computer algorithm are boring and backward looking - although they have a significant place in investment portfolios. Creativity without discipline tends to result in wild speculation and money-losing results. We all remember the dot.com's in 1999 when the market was dominated by speculators who ignored valuation in favor of science-fiction fantasies. The resulting bubble was a seductive, narcotic experience for a year or two but of course ended very badly. We believe the Wanger Funds have been successful because our analysts have been able to maintain a balance between discipline and creativity. WE ARE NOT MANUFACTURERS Organizations that are in the business of marketing mutual funds often prefer discipline and are made nervous by creativity. For instance, Raymond "Chip" Mason, chairman of Legg Mason, a major force in the mutual fund business, said recently, "For two years we've been looking to cross the line and become pure asset management. All the regulators have been pointing toward the need to separate the manufacturing and distribution businesses."2 I have been in corporate meetings in which mutual fund portfolio management was called "manufacturing" but this is a strange and inapt metaphor. Manufacturers make products. Mutual funds are not a product. Cap'n Crunch cereal is a product. When you go to the store to buy a new box of Cap'n Crunch you expect the taste and nutrition performance to be exactly like the last box. Manufacturing cereal is very disciplined resulting in high quality and high reliability, so that every box is identical. Since you are a mutual fund shareholder you know that a mutual fund could be a lot better or a lot worse than you expected when you bought it. Investing involves forecasting the future, but forecasting is an uncertain and sloppy process. While discipline is important, you need a lot of creativity as well. Predicting the future does not require a fortune teller with a crystal ball. It is more like watching a skilled athlete. When you go to a baseball game and a batter hits a fly ball to left field, the fielder will see the ball heading his direction and, by experience, run to where the ball is going to land and make what looks like a routine catch. The fielder has to predict the flight of the ball, which for a physicist would require solving a complicated equation, but the player shows that it is not an impossible task. Like the outfielder, we have figured out where trends are likely going to land with reasonable success. As in baseball, the ball can elude the fielder and the batter ends up on second base. Sometimes our analysts miss the ball too, but for the full season we tend to catch more balls than we miss. TWO WHEELS GOOD, FOUR WHEELS BAD Other teams haven't done so well. Forty years ago, major U.S. car makers were among the largest companies in the world and were highly profitable. Since then, the U.S. automotive industry has fallen into a long slump. Their corporate bonds have been downgraded in quality, which is a definite sign of financial problems. I believe that these companies were complacent and arrogant, so the German and Japanese car makers beat them up. 2 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- A long time ago, perhaps 1966, I attended a meeting of the Chicago Science Analysts with the General Time Corporation. The company's main business was making name-brand clocks like Seth Thomas and Big Ben. It also made automobile clocks. The clocks were sold as accessories with the car. They were mechanical clocks because electronic clocks hadn't yet been invented. They worked for about three months and then broke. The U.S. automotive giant that bought the clocks from General Time paid $3.25 per clock and resold it to the customer for $21. I asked the president of General Time why his clocks didn't work better. I knew this was an impertinent question but I wanted to see how he would react. I expected him to take a defensive position retorting that the clocks were fine but weren't being used correctly. To my surprise he admitted that the clocks were lousy and he explained why. General Time couldn't make a good clock for $3.25. The clock needed an additional component that would have made it a sturdy, reliable device, but this improvement would have raised the selling price to $3.75. Its customer, the automobile manufacturer, was adamant about sticking to the lower price. Even to an inexperienced analyst, as I was in 1966, I did not see how the automaker could prosper if it was not delivering a high-quality car. Such a successful company could have paid $3.75 for a clock and sold it for a decent profit even if it kept the price at $21. While this would have been a less enormous markup, the car likely would have been a better vehicle. If the automaker was willing to sell a crummy clock, then I thought that customers would perceive that it was cutting corners on all the other components of the vehicle too. Bad clock, bad car. This willingness to forego quality for price made room for the imports. Why am I bringing up an anecdote from 40 years ago? I think there are some useful lessons here for financial analysts and investors. First, in a management meeting it is okay to ask tough questions. You get more meaningful answers that way. Second, you can find out a lot about a company by talking to its suppliers or customers. Company spokesmen will only give you their own corporate press release. Third, a long-term trend will take a long time to develop but it is enormously important. At the time of my 1966 meeting, U.S. automakers were riding high because foreign car imports were not yet a problem. In 1960, Japan exported only 39,000 vehicles. By 1970, the Japanese were starting to exploit the lower quality of U.S. cars and exported 1.1 million cars. In 1980, exports rose to 6 million and the Japanese were producing more vehicles than U.S. manufacturers. U.S. automotive companies had to react to the loss of market share from high-quality imports. However, once there is a loss of market share, it is not usually readily reversible. DAVID ALWAYS BEATS GOLIATH There are several lessons we can learn from the decline of Arab civilization and the problems of U.S. auto companies: (1) To operate a successful business, the world is too competitive to be complacent. Like baseball players, companies have to fight to keep their position on the team. Great U.S. businesses must constantly compete in the world market and it is darn tough. (2) Big companies are often just big targets. Small companies are hungry to succeed and are constantly focused on improving with the hope of taking some of the flabby giant's customers. (3) History provides a useful context. Discipline, creativity, hard work, knowledge, achievement, and a can-do, hands-on, fix-it-now attitude worked in the past and will work now. (4) We believe small-cap investing works if you can identify the hungry, small companies whose employees embrace our list of exemplary values. The core investment strategy of the Wanger Advisors Funds has always been to try to find small- and mid-cap companies that are on the way up. We don't want to own once-great companies that are now on their way down. This is partly a matter of personal taste, because we find following big, sick companies to be depressing. Even though there are occasional turnarounds in these big companies, it seems to us that is not the way to bet. SO LONG AND BEST REGARDS! This is my final "Squirrel Chatter." I am retiring from Columbia Wanger Asset Management as of September 30. While I considered writing a few more essays, current regulatory rules are not conducive to the free-ranging thought that was characteristic of these essays. I have great confidence in Chuck McQuaid and his team of analysts and portfolio managers to keep the performance of the Funds at a competitive level. Thank you, fellow shareholders, for your support over 35 years. I regard myself as truly fortunate to have been able to build a career in this exciting industry. I am especially proud that we have enabled thousands of our shareholders to pursue their economic goals by investing in our funds. COLUMBIA WAM NEWS We are pleased to announce that Ashish Kohli has joined our domestic analyst team to follow health care. Jason Selch, who followed energy, departed in May. We are searching for his replacement and continue to talk to some promising candidates. Your Wanger Advisors Trust investment team includes 20 investment analysts and portfolio managers. - --------------- 1 Friedman, Thomas, The World Is Flat: A Brief History of the Twenty-first Century, Farrar, Straus and Giroux, 2005. Page 405. 2 Raymond "Chip" Mason, chairman of Legg Mason, The Wall Street Journal, June 27, 2005, page C1. 3 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- [graphic: squirrel] PERFORMANCE REVIEW WANGER SELECT Photo of: Ben Andrews BEN ANDREWS Portfolio Manager Wanger Select year-to-date was down 0.82% versus the S&P MidCap 400 Index's gain of 3.85% and it was even with the S&P 500 Index's loss of 0.81%. During the second quarter, the Fund made up some ground from its weak first quarter. The Fund was up 4.90% in the second quarter beating the S&P 400's gain of 4.26% and the S&P 500's return of 1.37%. Performance data quoted represents past performance and current performance may be lower or higher. Past performance is no guarantee of future results. The investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Please visit www.columbiafunds.com for daily and most recent month-end performance updates. One of the Fund's winners year-to-date was Mine Safety Appliances (MSA), up 27% as strong demand for combat helmets from the U.S. army drove higher than expected earnings. The stock was added in the second quarter. MSA manufactures products designed to protect the safety and health of workers worldwide. On the down side Harley-Davidson lost 18% in the first half of 2005. Harley cut production and its earnings forecast and sales slowed for its heavy-weight bikes. We believe this hiccup will be overcome in the next several quarters. In addition to MSA, there were five new companies added to the portfolio during the quarter (Conseco, Nuveen Investments, Spartech, Tribune, and Worthington) while three were sold (McAfee, Moodys, and Synopsys). We also lost a fourth company when Liberty Media International purchased United Global Communications. The combined company is now called Liberty Global and remains in the portfolio. We continue to search for what we believe are the best risk/return investments for the Fund. As always, we appreciate your investment in Wanger Select. 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 6/30/05, the Fund's positions in the stocks mentioned were: Mine Safety Appliances, 1.5%; Harley-Davidson, 3.9%; Conseco, 2.9%; Nuveen Investments, 1.1%; Spartech, 0.2%; Tribune Company, 1.1%; Worthington Industries, 2.1%; McAfee, 0.0%; Moodys, 0.0%; Synopsys, 0.0%; Liberty Media International, 0.0%; United Global Communications, 0.0%; Liberty Global, 2.6%. 4 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- VALUE OF $10,000 INVESTMENT IN WANGER SELECT TOTAL RETURN FOR EACH PERIOD, FEBRUARY 1, 1999 (INCEPTION DATE) THROUGH JUNE 30, 2005 AVERAGE ANNUAL TOTAL RETURN - -------------------------------------------------------------------------------- 1 year 5 years Life of fund 9.31% 10.64% 13.81% LINE CHART: WANGER SELECT S&P MidCap 400 2/1/99 10000 10000 2/1/99 9750 9476 3/31/99 10530 9741 12150 10510 12220 10555 6/30/99 12530 11120 12510 10884 11420 10511 9/30/99 11410 10186 12250 10705 12510 11267 12/31/99 13430 11937 13090 11601 13100 12413 3/31/00 13697 13451 13049 12982 12695 12820 6/30/00 13822 13008 13404 13214 14782 14689 9/30/00 15064 14588 15127 14094 13749 13030 12/31/00 14699 14027 15231 14339 14313 13521 3/31/01 13791 12515 14762 13896 15555 14220 6/30/01 15221 14162 15054 13951 14427 13495 9/30/01 13592 11816 13895 12339 15388 13257 12/31/01 16035 13942 15764 13869 15398 13887 3/31/02 15920 14879 15043 14810 15482 14560 6/30/02 15210 13494 14302 12187 14699 12248 9/30/02 13979 11262 14814 11750 15451 12429 12/31/02 14814 11919 14709 11570 14751 11295 3/31/03 15023 11390 15889 12217 16787 13229 6/30/03 17277 13398 17998 13873 18718 14503 9/30/03 18311 14281 19084 15360 18979 15896 12/31/03 19365 16164 19908 16514 20472 16911 3/31/04 20481 16982 19906 16425 20220 16766 6/30/04 20962 17147 20000 16347 19750 16304 9/30/04 20168 16787 21035 17056 22362 18072 12/31/04 23104 18828 22278 18348 21965 18963 3/31/05 21844 18753 20987 18024 21934 19110 6/30/05 22913 19552 This graph compares the results of $10,000 invested in Wanger Select on February 1, 1999 (the date the Fund began operations) through June 30, 2005, 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. - -------------------------------------------------------------------------------- RESULTS TO JUNE 30, 2005 Year 2nd quarter to date 1 year WANGER SELECT 4.90% -0.82% 9.31% S&P MidCap 400 4.26 3.85 14.03 S&P 500 1.37 -0.81 6.32 Lipper Mid-Cap Growth Index 3.14 -0.92 7.31 NAV AS OF 6/30/05: $20.34 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. - -------------------------------------------------------------------------------- TOP 5 SECTORS As a % of net assets, as of 6/30/05 Consumer Goods/Services 31.9% Information 26.0 Finance 16.5 Industrial Goods/Services 7.8 Health Care 6.7 - -------------------------------------------------------------------------------- TOP 10 HOLDINGS As a % of net assets, as of 6/30/05 1. ITT Educational Services 5.8% Technology Oriented Postsecondary Degree Programs 2. Tellabs 5.2% Telecommunications Equipment 3. Safeway 5.0% Retail Food & Drug Stores 4. Abercrombie & Fitch 4.5% Teen Apparel Retailer 5. Harley-Davidson 3.9% Motorcycles & Related Merchandise 6. TCF Financial 3.8% Great Lakes Bank 7. Lincare Holdings 3.8% Home Health Care Services 8. Coach 3.6% Designer & Retailer of Branded Leather Accessories 9. American Tower 3.4% Communication Towers in USA & Mexico 10. Pride International 3.2% Offshore Drilling Contractor 5 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER SELECT STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares COMMON STOCKS - 93.0% CONSUMER GOODS/SERVICES - 31.9% - -------------------------------------------------------------------------------- RETAIL - 12.2% 190,000 Safeway $4,292,100 Retail Food & Drug Stores 57,000 Abercrombie & Fitch 3,915,900 Teen Apparel Retailer 51,000 CostCo 2,285,820 Warehouse Superstores - -------------------------------------------------------------------------------- 10,493,820 - -------------------------------------------------------------------------------- CONSUMER SERVICES - 8.7% 94,000 ITT Educational Services (b) 5,021,480 Technology Oriented Post Secondary Degree Programs 47,600 Weight Watchers (b) 2,456,636 Weight Loss Program - -------------------------------------------------------------------------------- 7,478,116 - -------------------------------------------------------------------------------- LEISURE VEHICLES - 3.8% 67,000 Harley-Davidson 3,323,200 Motorcycles & Related Merchandise - -------------------------------------------------------------------------------- APPAREL - 3.6% 92,000 Coach (b) 3,088,440 Designer & Retailer of Branded Leather Accessories - -------------------------------------------------------------------------------- ENTERTAINMENT - 2.5% 38,000 International Speedway Motors 2,137,880 Largest Motorsport Racetrack Owner & Operator - -------------------------------------------------------------------------------- FURNITURE/TEXTILES - 1.1% 31,700 Herman Miller 977,628 Office Furniture - -------------------------------------------------------------------------------- CONSUMER GOODS/SERVICES - TOTAL 27,499,084 INFORMATION - 26.0% - -------------------------------------------------------------------------------- TELECOMMUNICATIONS EQUIPMENT - 5.2% 510,000 Tellabs (b) 4,437,000 Telecommunications Equipment - -------------------------------------------------------------------------------- BUSINESS/CONSUMER SOFTWARE - 3.9% 291,000 Novell (b) 1,804,200 Directory, Operating System & Identity Management Software 137,000 Aspect Communications (b) 1,538,510 Call Center Software - -------------------------------------------------------------------------------- 3,342,710 - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- INTERNET - 3.7% 600,000 Skillsoft Publishing (b) $2,070,000 Provider of Web-Based Learning Solutions (E-Learning) 47,000 IAC/Interactive Corp (b) 1,130,350 Dominate Internet Middleman - -------------------------------------------------------------------------------- 3,200,350 - -------------------------------------------------------------------------------- MOBILE COMMUNICATIONS - 3.4% 140,000 American Tower (b) 2,942,800 Communication Towers in USA & Mexico - -------------------------------------------------------------------------------- TELEVISION PROGRAMMING/CATV - 2.6% 48,102 Liberty Global (formerly known as Liberty Media International) (b) 2,244,920 CATV Holding Company - -------------------------------------------------------------------------------- ELECTRONICS DISTRIBUTION - 1.9% 29,000 CDW 1,655,610 Technology Reseller - -------------------------------------------------------------------------------- INSTRUMENTATION - 1.9% 70,000 Tektronix 1,628,900 Analytical Instruments - -------------------------------------------------------------------------------- BUSINESS INFORMATION/ADVERTISING - 1.6% 35,000 Fair Isaac 1,277,500 Credit Scoring & Decision Analytic Software 5,400 FTI Consulting (b) 112,860 Financial Consulting Firm - -------------------------------------------------------------------------------- 1,390,360 - -------------------------------------------------------------------------------- PUBLISHING - 1.2% 28,000 Tribune Company 985,040 Newspapers & TV Stations - -------------------------------------------------------------------------------- COMPUTER SERVICES - 0.6% 152,000 AnswerThink Consulting (b) 539,600 IT Integration & Best Practice Research - -------------------------------------------------------------------------------- INFORMATION - TOTAL 22,367,290 - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 6 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER SELECT STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares FINANCE - 16.5% - -------------------------------------------------------------------------------- BANKS - 6.1% 128,000 TCF Financial $3,312,640 Great Lakes Bank 57,000 Associated Banc-Corp 1,918,620 Midwest Bank - -------------------------------------------------------------------------------- 5,231,260 - -------------------------------------------------------------------------------- INSURANCE - 5.7% 114,900 Conseco (b) 2,507,118 Individual Life Insurance & Annuity Products 7,100 Markel (b) 2,406,900 Specialty Insurance - -------------------------------------------------------------------------------- 4,914,018 - -------------------------------------------------------------------------------- MONEY MANAGEMENT - 4.7% 48,100 SEI Investments 1,796,535 Mutual Fund Administration & Investment Management 89,000 Janus Capital 1,338,560 Manages Mutual Funds 25,000 Nuveen Investments 940,500 Specialty Mutual Funds - -------------------------------------------------------------------------------- 4,075,595 - -------------------------------------------------------------------------------- FINANCE - TOTAL 14,220,873 INDUSTRIAL GOODS/SERVICES - 7.8% - -------------------------------------------------------------------------------- LOGISTICS - 2.5% 43,000 Expeditors International of Washington 2,141,830 International Freight Forwarder - -------------------------------------------------------------------------------- STEEL - 2.2% 117,000 Worthington Industries 1,848,600 Steel Processing - -------------------------------------------------------------------------------- INDUSTRIAL GOODS - 1.5% 28,400 Mine Safety Appliances 1,312,080 Safety Equipment - -------------------------------------------------------------------------------- OUTSOURCING SERVICES & TRAINING - 1.4% 135,000 Quanta Services (b) 1,188,000 Electrical & Telecom Construction Services - -------------------------------------------------------------------------------- Number of Shares Value or Principal Amount - -------------------------------------------------------------------------------- SPECIALTY CHEMICALS & INDUSTRIAL MATERIALS - 0.2% 11,100 Spartech $197,580 Plastics Distribution & Compounding - -------------------------------------------------------------------------------- INDUSTRIAL GOODS/SERVICES - TOTAL 6,688,090 HEALTH CARE - 6.7% - -------------------------------------------------------------------------------- SERVICES - 6.7% 80,000 Lincare Holdings 3,267,200 Home Health Care Services 35,640 Coventry Health Care (b) 2,521,530 PPO Network - -------------------------------------------------------------------------------- 5,788,730 - -------------------------------------------------------------------------------- HEALTH CARE - TOTAL 5,788,730 ENERGY & MINERALS - 4.1% - -------------------------------------------------------------------------------- OIL SERVICES - 4.1% 107,000 Pride International (b) 2,749,900 Offshore Drilling Contractor 24,000 FMC Technologies (b) 767,280 Oil & Gas Well Head Manufacturer - -------------------------------------------------------------------------------- 3,517,180 - -------------------------------------------------------------------------------- ENERGY & MINERALS - TOTAL 3,517,180 TOTAL COMMON STOCKS - 93.0% 80,081,247 - -------------------------------------------------------------------------------- (COST $65,134,167) SHORT-TERM OBLIGATIONS - 6.3% - -------------------------------------------------------------------------------- $5,404,000 Repurchase Agreement with State Street Bank & Trust dated 6/30/05, due 7/1/05 at 3.00% collateralized by Federal Home Loan Mortgage Association Notes, maturing 9/15/09, market value $5,516,000 (repurchase proceeds: $5,404,450) 5,404,000 - -------------------------------------------------------------------------------- (AMORTIZED COST $5,404,000) 5,404,000 TOTAL INVESTMENTS (COST $70,538,167) - 99.3% (A) 85,485,247 - -------------------------------------------------------------------------------- CASH AND OTHER ASSETS LESS LIABILITIES - 0.7% 630,457 - -------------------------------------------------------------------------------- TOTAL NET ASSETS - 100% $86,115,704 - -------------------------------------------------------------------------------- See accompanying notes to financial statements. 7 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER SELECT STATEMENT OF INVESTMENTS (Unaudited) JUNE 30, 2005 NOTES TO STATEMENT OF INVESTMENTS: (a) At June 30, 2005, cost for federal income tax purposes is $70,538,167. The net unrealized appreciation was $14,947,080 consisting of gross unrealized appreciation of $17,549,993 and gross unrealized depreciation of $2,602,913. (b) Non-income producing security. At June 30, 2005, the Fund held investments in the following sectors: % OF SECTOR NET ASSETS - ----------------------------------------------------------------- Consumer Goods/Services 31.9% Information 26.0 Finance 16.5 Industrial Goods/Services 7.8 Health Care 6.7 Energy & Minerals 4.1 Short-Term Obligations 6.3 Cash and Other Assets Less Liabilities 0.7 -------- 100.0% -------- See accompanying notes to financial statements. 8 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2005 (UNAUDITED) - ---------------------------------------------------------------- ASSETS Investments, at cost $70,538,167 - ---------------------------------------------------------------- Investments, at value $85,485,247 Cash 23 Receivable for: Investments sold 829,242 Fund shares sold 246,914 Dividends and interest 16,009 - ---------------------------------------------------------------- Total Assets 86,577,435 LIABILITIES Payable for: Investments purchased 174,350 Fund shares repurchased 188,181 Investment advisory fees 57,691 Transfer agent fees 421 Trustees' fees 874 Custody fees 125 Reports to shareholders 25,580 Other liabilities 14,509 - ---------------------------------------------------------------- Total Liabilities 461,731 - ---------------------------------------------------------------- Net Assets $86,115,704 ================================================================ COMPOSITION OF NET ASSETS Paid-in capital $68,996,532 Accumulated net investment loss (90,761) Accumulated net realized gain 2,262,853 Net unrealized appreciation on investments 14,947,080 - ---------------------------------------------------------------- Net Assets $86,115,704 ================================================================ Fund shares outstanding 4,233,140 ================================================================ Net asset value, offering price and redemption price per share $20.34 ================================================================ STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) - ---------------------------------------------------------------- INVESTMENT INCOME: Dividends $212,416 Interest Income 66,767 - ---------------------------------------------------------------- Total Investment Income 279,183 EXPENSES: Investment advisory fees 344,898 Transfer agent fees 498 Trustees' fees 4,545 Custody fees 3,614 Compliance fees 1,487 Non-recurring costs (See Note 8) 665 Other expenses 30,173 - ---------------------------------------------------------------- Total expenses 385,880 Fees waived by Investment Adviser (See Note 4) (14,597) Non-recurring costs reimbursed (See Note 8) (665) Less custody fees paid indirectly (674) - ---------------------------------------------------------------- Net Expenses 369,944 - ---------------------------------------------------------------- Net Investment Loss (90,761) NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS: Net realized gain on investments 2,381,373 Net change in unrealized appreciation (depreciation) on investments (2,738,565) - ---------------------------------------------------------------- Net Loss (357,192) - ---------------------------------------------------------------- Net Decrease in Net Assets from Operations $(447,953) ================================================================ See accompanying notes to financial statements. 9 Wanger Select 2005 Semiannual Report STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
(Unaudited) Six Months ended Year ended INCREASE (DECREASE) IN NET ASSETS June 30, 2005 December 31, 2004 - ----------------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment loss $ (90,761) $ (311,671) Net realized gain on investments 2,381,373 5,987,773 Net change in unrealized appreciation (depreciation) on investments (2,738,565) 6,113,815 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from operations (447,953) 11,789,917 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized gains (5,786,576) (56,308) - ----------------------------------------------------------------------------------------------------------------------- Total distributions declared to shareholders (5,786,576) (56,308) SHARE TRANSACTIONS: Subscriptions 11,897,304 29,505,736 Distributions reinvested 5,786,576 56,308 Redemptions (7,798,656) (10,942,589) - ----------------------------------------------------------------------------------------------------------------------- Net Increase from Share Transactions 9,885,224 18,619,455 - ----------------------------------------------------------------------------------------------------------------------- Total Increase in Net Assets 3,650,695 30,353,064 NET ASSETS: Beginning of period 82,465,009 52,111,945 - ----------------------------------------------------------------------------------------------------------------------- End of period $86,115,704 $82,465,009 - ----------------------------------------------------------------------------------------------------------------------- ACCUMULATED NET INVESTMENT LOSS $ (90,761) $ -- =======================================================================================================================
See accompanying notes to financial statements. 10 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
(Unaudited) Six Months Selected data for a share outstanding Ended Year Ended December 31, throughout each period June 30, 2005 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $22.11 $18.55 $14.19 $15.36 $14.08 $13.43 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment loss (a) (0.02) (0.10) (0.11) (0.09) (0.05) (0.03) Net realized and unrealized gain (loss) on investments (0.22) 3.68 4.47 (1.08) 1.33 1.23 - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations (0.24) 3.58 4.36 (1.17) 1.28 1.20 - ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net realized capital gains (1.53) (0.02) -- -- -- (0.55) - ------------------------------------------------------------------------------------------------------------------------------------ Total Distributions Declared to Shareholders (1.53) (0.02) -- -- -- (0.55) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $20.34 $22.11 $18.55 $14.19 $15.36 $14.08 ==================================================================================================================================== Total Return (b) (0.82)%(c)(d) 19.31% 30.73% (7.62)% 9.09% 9.45%(d) - ------------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses 0.94%(e)(g) 1.10%(e) 1.15%(e) 1.18%(e) 1.33%(e) 1.39%(f) Net investment loss (0.23)%(e)(g) (0.49)%(e) (0.65)%(e) (0.62)%(e) (0.34)%(e) (0.24)%(f) Waiver/Reimbursement 0.04%(g) -- -- -- -- 0.21% Portfolio turnover rate 22%(c) 36% 21% 45% 76% 86% Net assets, end of period (000's) $86,116 $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) Not annualized. (d) Had the investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (e) The benefits derived from custody fees paid indirectly had no impact. (f) In accordance with a requirement of the U.S. Securities and Exchange Commission, this ratio reflects total expenses prior to the reduction of custody fees for cash balances the Fund 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. (g) Annualized. 11 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 under consistently applied procedures established by and under the general supervision of 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 tax character of distributions paid during the year ended December 31, 2004 was as follows: DECEMBER 31, 2004 ----------------- Distributions paid from: Ordinary Income* $ -- Long-Term Capital Gain 56,308 *For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions. Unrealized appreciation and depreciation at June 30, 2005, based on cost of investments for federal income tax purposes, was: NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION DEPRECIATION APPRECIATION -------------- -------------- -------------- $17,549,993 $(2,602,913) $14,947,080 12 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) 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. Effective March 8, 2005, under the Fund's investment management agreement, fees are accrued daily and paid monthly to Columbia WAM at the annual rate of 0.85% of average daily net assets. Prior to March 8, 2005, under the Fund's investment management agreement, fees were accrued daily and paid monthly to Columbia WAM at the annual rate of 0.95% of average daily net assets. 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 were retained at the annual rate of 0.85% of average daily net assets. The fee waiver was effective from January 1, 2005 through March 8, 2005, but applied as if it had gone into effect on December 1, 2004. 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 six months ended June 30, 2005. 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 six months ended June 30, 2005, the Fund paid $4,545 to trustees not affiliated with Columbia WAM. 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 and has subcontracted with Boston Financial Data Services ("BFDS") to serve as subtransfer agent. For such services, the Transfer Agent receives a fee, paid monthly, at the annual rate of $21.00 per open account. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. During the six months ended June 30, 2005, 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 $0 and $72,621, 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 annual 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 six months ended June 30, 2005. 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: Six months ended Year ended June 30, 2005 December 31, 2004 - -------------------------------------------------------------------------------- Shares sold 592,630 1,465,607 - -------------------------------------------------------------------------------- Shares issued in reinvestment of dividend distributions 294,782 2,911 - -------------------------------------------------------------------------------- Less shares redeemed 383,985 547,475 - -------------------------------------------------------------------------------- Net increase in shares outstanding 503,427 921,043 7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the six months ended June 30, 2005 were $22,783,181 and $16,661,857. 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 with the New York Attorney General ("NYAG") (the "NYAG Settlement") and consented to the entry of a cease-and-desist order by the Securities and Exchange Commission ("SEC") (the "SEC Order"). The SEC Order and the NYAG Settlement are referred to collectively as 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, the Columbia Group 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 the Columbia Group'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 certain Columbia Funds, Nations Funds and other mutual funds management fees 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. 13 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) Pursuant to the procedures set forth in the SEC order, settlement amounts described above 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 the Columbia Group and the Fund's independent trustees 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, Columbia Acorn Trust, another mutual fund family advised by Columbia WAM, and the trustees of Columbia Acorn Trust, are named as defendants in class and derivative complaints which have been consolidated in a Multi-District Action in the federal district court for the District of Massachusetts. These lawsuits contend that defendants permitted certain investors to market time their trades in certain Columbia Acorn Funds. The Multi-District Action is ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, cannot currently be made. Columbia WAM, the Columbia Acorn Funds and the trustees of Columbia Acorn Trust are defendants in a consolidated lawsuit filed in the federal district court of Massachusetts 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 the Trust breached certain common laws duties and federal laws. 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 Funds' 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 (the "Fair Valuation Lawsuit"). The plaintiffs' complaint was dismissed by the district court. However, plaintiffs are in the process of appealing that decision. 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 Columbia WAM and affiliated advisers. The trustees of Columbia Acorn Trust and Columbia WAM have been dismissed as defendants in this lawsuit. On March 21, 2005, a class action complaint was filed against the Columbia Acorn Trust and Columbia WAM seeking to rescind the Contingent Deferred Sales Charges assessed upon redemption of Class B shares of Columbia Acorn Funds due to the alleged market timing of the Columbia Acorn Funds. In addition to the rescission of sales charges, plaintiffs seek recovery of actual damages, attorneys' fees and costs. The case has been removed to the federal district court of Massachusetts. The Columbia Acorn Trust and Columbia WAM intend to defend these suits vigorously. 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 against certain funds, their Boards and/or BOA (and affiliated entities). These suits are ongoing. However, based on currently available information, the Columbia Acorn Trust believes that the likelihood that these lawsuits will have a material adverse impact on any fund is remote, and Columbia WAM believes that the lawsuits are not likely to materially affect its ability to provide investment management services to the Funds. For the six months ended June 30, 2005, CMG has assumed $665 in consulting services and legal fees incurred by the Fund in connection with these matters. 9. SUBSEQUENT EVENT Effective August 22, 2005, the Fund's distributor will be Columbia Management Distributors, Inc. and the Fund's transfer agent will be Columbia Management Services, Inc. 14 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- [EXCERPTS FROM:] Wanger Advisors Trust Management Fee Evaluation of the Senior Officer Prepared Pursuant to the New York Attorney General's Assurance of Discontinuance July 2005 15 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- Introduction The New York Attorney General's Assurance of Discontinuance ("Order") entered into by Columbia Management Advisors, Inc. ("CMAI") and Columbia Funds Distributor, Inc., ("CFDI" and collectively with "CMAI," "CMG") in February 2005, allows CMAI to manage or advise a mutual fund, including the Wanger Advisors Trust's family of funds (the "WAT Funds" or "WAT" or "Trust"), only if the trustees of the WAT Funds appoint a "Senior Officer" to perform specified duties and responsibilities. One of these responsibilities includes "managing the process by which proposed management fees (including but not limited to, advisory fees) to be charged the WAT Fund[s] are negotiated so that they are negotiated in a manner which is at arms' length and reasonable and consistent with this Assurance of Discontinuance." The Order also provides that the Board of Trustees of the WAT Funds ("Board") must determine the reasonableness of proposed "management fees" by using either an annual competitive bidding process supervised by the Senior Officer or Independent Fee Consultant, or by obtaining "an annual independent written evaluation prepared by or under the direction of the Senior Officer or the Independent Fee Consultant." "Management fees" are only part of the costs and expenses paid by mutual fund shareholders. The expenses can vary depending upon the class of shares held but usually include: (1) investment management or advisory fees to compensate analysts and portfolio managers for stock research and portfolio management, as well as the cost of operating a trading desk; (2) administrative expenses incurred to prepare registration statements and tax returns, calculate the Funds' net asset values, maintain effective compliance procedures and perform recordkeeping services; (3) transfer agency costs for establishing accounts, accepting and disbursing funds, as well as overseeing trading in Fund shares; (4) custodial expenses incurred to hold the securities purchased by the Funds; and (5) distribution expenses, including commissions paid to brokers that sell the Fund shares to investors. Columbia Wanger Asset Management, L.P. ("CWAM"), the adviser to the WAT Funds, has proposed that the Trust enter into an agreement that "bundles" the first two categories listed above: advisory and administrative services. The fees paid under this agreement are referred to as "management fees." Other fund expenses are governed by separate agreements, in particular agreements with two CWAM affiliates: CFDI, the broker-dealer that underwrites and distributes the WAT Funds' shares, and Columbia Funds Services, Inc. ("CFSI"), the Funds' transfer agent. In conformity with the terms of the Order, this evaluation, therefore, addresses only the advisory and administrative contract between CWAM and the Trust, and does not extend to the other agreements. According to the Order, the Senior Officer's evaluation must consider at least the following: (1) Management fees (including components thereof) charged to institutional and other clients of CWAM for like services; (2) Management fees (including any components thereof) charged by other mutual fund companies for like services; (3) Costs to CWAM and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit; (4) Profit margins of CWAM and its affiliates from supplying such services; (5) Possible economies of scale as the WAT Funds grow larger; and (6) The nature and quality of CWAM's services, including the performance of each WAT Fund. On November 17, 2004, the Board appointed me Senior Officer under the Order. The Board also determined not to pursue a competitive bidding process and instead, charged me with the responsibility of evaluating the WAT Funds' proposed advisory and administrative fee contract with CWAM in conformity with the requirements of the Order. This Report is an annual evaluation required under the Order. In discharging their responsibilities, the independent Trustees have also consulted independent, outside counsel. * * * This evaluation was performed in cooperation and regular communication with the Compliance/Contract Renewal Committee of the Board. Process and Independence The objectives of the Order are to ensure the independent evaluation of the advisory fees paid by the WAT Funds as well as to ensure that all relevant factors are considered. In my view, the contract renewal process has been conducted at arms-length and with independence in gathering, considering and evaluating relevant data. For example, the selection of fund peer groups is critical in assessing a fund's relative performance and cost. I have required Lipper and Morningstar, Inc. to prepare their reports without input or commentary from CWAM; the engagement letters with them reflect this requirement. As a result, the peer groups reflected in the Morningstar, Inc. and Lipper reports were determined independently. After submission of the reports, I asked CWAM to comment on them to avoid errors and to establish a clear record of CWAM's views on which funds, in its judgment, constitute an appropriate peer group. Similarly, I discussed CWAM's profitability analysis with its management but also sought the independent views of Ernst &Young on the reasonableness of CWAM's cost allocation methodology and on the adequacy of the financial data it provided. The evaluation of CWAM's profitability was performed in the context of the limited industry data available. My evaluation of the advisory contract was shaped by my experience as WAT's Chief Compliance Officer ("CCO"). As CCO, I report solely to the Board and have no reporting obligation to or employment relationship with CMG or its affiliates, except for administrative purposes. This too contributes to the independence of this evaluation. I have made several comments on compliance matters in evaluating the quality of service provided by CWAM and CMG. 16 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- Finally, this Report, its supporting materials and the data contained in other materials submitted to the Compliance/Contract Renewal Committee of the Board, in my view, provide a thorough factual basis upon which the Board, in consultation with independent counsel as it deems appropriate, may conduct management fee negotiations that are in the best interests of the WAT Funds' shareholders. * * * VI. Conclusions My review of the data and other material above leads to the following conclusions with respect to the factors identified in the Order. 1. Performance. The WAT Funds generally have achieved outstanding performance and rank very favorably against their peers. The international funds have good recent performance records, but weaker long-term performance relative to the domestic WAT Funds. Recent management changes have been followed by improved performance. The domestic WAT Funds and International Select typically achieve their performance with less risk than their competitors; relative risks are greater for International Small Cap. 2. Management Fees relative to Peers. The management fee rankings of the Funds are generally well below the respective medians and, hence, less favorable to shareholders than their peer group funds. 3. Administrative Fees. The WAT Funds pay a bundled fee that combines advisory fees and administrative expense, so ranking these fees separately was not possible. 4. Management Fees relative to Other Accounts. CWAM's focus is its mutual funds. It does not actively seek to manage separate or institutional accounts. The few institutional accounts it does manage vary in rate structures. Some pay advisory fees commensurate with or higher than the WAT Funds. In a few instances, however, sub-advised accounts pay lower management fees than do the WAT Funds. 5. Costs to CWAM and its Affiliates. CWAM's costs do not appear excessive, and, in my view, it uses appropriate methodologies to allocate overhead costs. CWAM's affiliates do not appear to profit indirectly from CWAM's management agreement with the WAT Funds. 6. Profit Margins. CWAM's firm-wide profit margins are at the upper end of the industry, though these comparisons are hampered by limited industry data. High profit margins are not unexpected for firms that manage large, successful funds and have provided outstanding investment performance for investors. Profit margins for the WAT Funds are lower than the margins for other accounts managed by CWAM because of payments made to intermediaries that offer the WAT Funds through variable annuity products. CMAI, the Funds' administrator, currently experiences losses rather than profits, in connection with its activities relating to the WAT Funds. 7. Economies of Scale. Economies of scale do exist at CWAM and will expand, if the assets of the WAT Funds get larger. They are, however, only partially reflected in the management fee schedule for two of the four WAT Funds. If the Funds' assets continue to grow, under the Funds' current fee schedules, shareholders might not benefit in a manner generally commensurate with CWAM's increased profits 8. Nature and quality of services. This category includes a variety of considerations that are difficult to quantify, yet can have a significant bearing on the performance of the WAT Funds. Several areas merit comment. a. Continuity of Management. It is critical that capable and experienced portfolio managers remain committed to the Funds and are able to hire and retain analysts to assist them. CWAM must have in place appropriate incentive plans that align its management's interests with those of investors. Further, CWAM must maintain the independence of its investment process. It should also be supported by effective information technology. b. Compliance. CWAM has an effective compliance program and a variety of related services that are valuable to shareholders, such as, systems to ensure best execution of portfolio transactions and the daily review of security prices to ensure accuracy of the WAT Funds' NAV. c. Administration Services. The WAT Funds benefit from a variety of administrative services that are performed by CWAM and CMAI, including preparation of registration statements, calculation of Fund NAV's, accounting services, shareholder services, and other functions In my opinion, these conclusions, taken together, generally support the reasonableness of the proposed management agreement. In reaching this conclusion, I weighed heavily the outstanding performance of the WAT Funds relative to their peers. Performance is an investor's first concern. The expense incurred by shareholders to enjoy this performance is, however, high relative to competing funds, though expenses for the WAT Funds are (with one exception) comparable to the parallel Acorn Funds. Nonetheless, a more complete breakpoint schedule could address this issue as well as share with investors more fully the benefits of economies of scale. 17 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- VII. Recommendations The Trustees should consider the following proposals to address the issues identified in this Report. Some of these recommendations require the collection and evaluation of more data. This work cannot be accomplished effectively before the expiration of the existing advisory contract on July 31, 2005. Therefore, I recommend that the Trustees consider extending the existing contract pending consideration of these recommendations. These recommendations do not purport to offer the only avenues to address the opinions and conclusions I have expressed in this Report. Economies of scale, for example, can be addressed in a variety of ways in a management contract. Sound business judgment will guide how any particular area is addressed with due consideration given to all the factors that must be weighed in reaching a management agreement that best serves the WAT Fund shareholders. I believe the Trustees should consider the following: 1. Restructure the management fee schedule beyond the current breakpoints to reflect more fully economies of scale. The Trustees might consider several ways to accomplish this objective, including instituting a two-tier fee structure that incorporates a complex- or CWAM-wide fee (including assets held in separate accounts) and a fund specific fee, with each containing breakpoints to reflect their separate economies of scale. Another approach is to consider uniform breakpoints for all WAT Funds, including breakpoints above and below current asset levels. 2. Conduct further study to ensure that the costs paid to insurance company intermediaries are transparent. The Trustees could consider forming an ad hoc committee to gather and evaluate data regarding CWAM's payments to intermediaries and the services provided by those intermediaries. Such a committee might also seek the assistance of a consultant such as E&Y. 3. Administrative Fees. Administrative and advisory fees could be unbundled to allow greater transparency and to permit distinct comparisons among peers. An administrative fee could also be formulated with a breakpoint schedule that shares the economies of scale available with shareholders. 4. Condition contract renewal on submission of an employment agreements or a management incentive plan designed to ensure the continued employment of senior management, under terms that align management's incentives with the interests of the WAT Funds' shareholders. Any incentive plan should be designed to permit CWAM to attract and retain the highest caliber investment professionals and support them with effective and reliable information technology systems. 5. Review with CWAM its anticipated capacity limitations and the degree to which increased staffing and effective incentives may address those issues. Robert P. Scales July 25, 2005 * * * More complete copies of the Management Fee Evaluation of the Senior Officer of the Wanger Advisors Trust, edited to delete certain confidential or proprietary information, are available upon written request to: R. Scott Henderson Bank of America MA-515-11-05 One Financial Center Boston, MA 02111 18 Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- This page intentionally left blank. Wanger Select 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] WANGER ADVISORS TRUST TRUSTEES Patricia H. Werhane, Chairperson Jerome L. Duffy Fred D. Hasselbring Kathryn A. Krueger, M.D. Ralph Wanger OFFICERS Ben Andrews Vice President J. Kevin Connaughton Assistant Treasurer Michael G. Clarke Assistant Treasurer Kenneth A. Kalina Assistant Treasurer Bruce H. Lauer Vice President, Secretary and Treasurer Charles P. McQuaid President Robert A. Mohn Vice President Todd M. Narter Vice President Christopher J. Olson Vice President Vincent P. Pietropaolo Assistant Secretary Robert P. Scales Chief Compliance Officer, Senior Vice President and General Counsel TRANSFER AGENT, DIVIDEND DISBURSING AGENT Columbia Management Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Columbia Management Distributors, 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 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 SHC-44/88911-0705 05/7138 WANGER INTERNATIONAL SELECT 2005 Semiannual Report [Graphic: Squirrel] WANGER ADVISORS FUNDS - -------------------------------------------------------------------------------- managed by Columbia Wanger Asset Management, L.P. [Graphic: Squirrel] WANGER INTERNATIONAL SELECT 2005 SEMIANNUAL REPORT TABLE OF CONTENTS 1 Understanding Your Expenses 2 Discipline and Creativity 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 15 Management Fee Evaluation of the Senior Officer 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 $23.5 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. COLUMBIA MANAGEMENT IS THE PRIMARY INVESTMENT MANAGEMENT DIVISION OF BANK OF AMERICA CORPORATION. COLUMBIA MANAGEMENT ENTITIES FURNISH INVESTMENT MANAGEMENT SERVICES AND ADVISE INSTITUTIONAL AND MUTUAL FUND PORTFOLIOS. COLUMBIA WAM IS AN SEC-REGISTERED INVESTMENT ADVISER AND WHOLLY OWNED SUBSIDIARY OF BANK OF AMERICA, N.A. COLUMBIA WANGER IS PART OF COLUMBIA MANAGEMENT. 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 SHARE OF THE WANGER ADVISORS FUNDS. 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 2005 Semiannual 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 ongoing 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 $8,600.00 at the end of the period, the result would be 8.6. 2. In the section of the table below titled "Expenses paid during the period," locate the amount for your fund. You will find this number is in the column labeled "actual." Multiply this number by the result from step 1. Your answer is an estimate of the expenses you paid on your account during the period.
January 1, 2005 - June 30, 2005 - ------------------------------------------------------------------------------------------------------------------------------------ Account value at the Account value at the Expenses paid during Fund's annualized beginning of the period ($) end of the period ($) the period ($) expense ratio (%)* - ------------------------------------------------------------------------------------------------------------------------------------ Actual Hypothetical Actual Hypothetical Actual Hypothetical - ------------------------------------------------------------------------------------------------------------------------------------ Wanger International Select 1,000.00 1,000.00 1,005.31 1,018.30 6.51 6.56 1.31 - ------------------------------------------------------------------------------------------------------------------------------------
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 365. Had the investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. 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 6/30/05. COMPARE WITH OTHER FUNDS Since all mutual funds 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 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] DISCIPLINE AND CREATIVITY Photo of: Ralph Wanger RALPH WANGER Founder, Advisor and Trustee Columbia Wanger Asset Management, L.P. A popular new book by Tom Friedman, "The World Is Flat: A Brief History of the Twenty-First Century," recounts how developing countries such as India and China are using modern technology to compete with the United States in both manufacturing and services. He contrasts the success of China and India to the failure of the Arab states to participate in the modern world. He deplores the influence of Yamani, the former Saudi oil minister, who used oil as an economic weapon, and Osama Bin Laden who uses terror as a political weapon. Friedman compares the stagnant current state of Arab culture with its peak in the 12th century. "What makes Yamanism and Bin Ladenism unfortunate as strategies for the Arabic world is that they ignore the examples within the Arab culture and civilization - when it was at its height - of discipline, hard work, knowledge, achievement, scientific inquiry, and pluralism."1 The popular Susan Hockfield was just installed as president of MIT. In her inaugural speech she invoked her list of virtues. She said, "The value of engineering - the rigor; the unflappable curiosity; the discipline and creativity; the appetite for good, old fashioned hard work; the passionate, enthusiastic, can do, hands-on, fix-it-now attitude - these values are and always will be the values of MIT." The rules for success in the world don't seem to have changed very much. Twelfth century Cordoba and 21st century Cambridge are completely different in almost every way, but the characteristics that make you successful have not changed. Any financial analyst or serious investor should apply the engineer's characteristics of discipline, hard work, knowledge and enthusiasm to investing. President Hockfield's linking of discipline and creativity is interesting. It's widely believed that we should diversify and balance our investments. We balance stocks vs. bonds, growth stocks vs. value stocks, big-cap vs. small-cap stocks, and U.S. stocks vs. international, but it is unusual to think of the balance between discipline and creativity; yet this balance is what I believe brings good investment results. Discipline without creativity is sterile - you tend to get an index fund. Index funds run by computer algorithm are boring and backward looking - although they have a significant place in investment portfolios. Creativity without discipline tends to result in wild speculation and money-losing results. We all remember the dot.com's in 1999 when the market was dominated by speculators who ignored valuation in favor of science-fiction fantasies. The resulting bubble was a seductive, narcotic experience for a year or two but of course ended very badly. We believe the Wanger Funds have been successful because our analysts have been able to maintain a balance between discipline and creativity. WE ARE NOT MANUFACTURERS Organizations that are in the business of marketing mutual funds often prefer discipline and are made nervous by creativity. For instance, Raymond "Chip" Mason, chairman of Legg Mason, a major force in the mutual fund business, said recently, "For two years we've been looking to cross the line and become pure asset management. All the regulators have been pointing toward the need to separate the manufacturing and distribution businesses."2 I have been in corporate meetings in which mutual fund portfolio management was called "manufacturing" but this is a strange and inapt metaphor. Manufacturers make products. Mutual funds are not a product. Cap'n Crunch cereal is a product. When you go to the store to buy a new box of Cap'n Crunch you expect the taste and nutrition performance to be exactly like the last box. Manufacturing cereal is very disciplined resulting in high quality and high reliability, so that every box is identical. Since you are a mutual fund shareholder you know that a mutual fund could be a lot better or a lot worse than you expected when you bought it. Investing involves forecasting the future, but forecasting is an uncertain and sloppy process. While discipline is important, you need a lot of creativity as well. Predicting the future does not require a fortune teller with a crystal ball. It is more like watching a skilled athlete. When you go to a baseball game and a batter hits a fly ball to left field, the fielder will see the ball heading his direction and, by experience, run to where the ball is going to land and make what looks like a routine catch. The fielder has to predict the flight of the ball, which for a physicist would require solving a complicated equation, but the player shows that it is not an impossible task. Like the outfielder, we have figured out where trends are likely going to land with reasonable success. As in baseball, the ball can elude the fielder and the batter ends up on second base. Sometimes our analysts miss the ball too, but for the full season we tend to catch more balls than we miss. TWO WHEELS GOOD, FOUR WHEELS BAD Other teams haven't done so well. Forty years ago, major U.S. car makers were among the largest companies in the world and were highly profitable. Since then, the U.S. automotive industry has fallen into a long slump. Their corporate bonds have been downgraded in quality, which is a definite sign of financial problems. I believe that these companies were complacent and arrogant, so the German and Japanese car makers beat them up. 2 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- A long time ago, perhaps 1966, I attended a meeting of the Chicago Science Analysts with the General Time Corporation. The company's main business was making name-brand clocks like Seth Thomas and Big Ben. It also made automobile clocks. The clocks were sold as accessories with the car. They were mechanical clocks because electronic clocks hadn't yet been invented. They worked for about three months and then broke. The U.S. automotive giant that bought the clocks from General Time paid $3.25 per clock and resold it to the customer for $21. I asked the president of General Time why his clocks didn't work better. I knew this was an impertinent question but I wanted to see how he would react. I expected him to take a defensive position retorting that the clocks were fine but weren't being used correctly. To my surprise he admitted that the clocks were lousy and he explained why. General Time couldn't make a good clock for $3.25. The clock needed an additional component that would have made it a sturdy, reliable device, but this improvement would have raised the selling price to $3.75. Its customer, the automobile manufacturer, was adamant about sticking to the lower price. Even to an inexperienced analyst, as I was in 1966, I did not see how the automaker could prosper if it was not delivering a high-quality car. Such a successful company could have paid $3.75 for a clock and sold it for a decent profit even if it kept the price at $21. While this would have been a less enormous markup, the car likely would have been a better vehicle. If the automaker was willing to sell a crummy clock, then I thought that customers would perceive that it was cutting corners on all the other components of the vehicle too. Bad clock, bad car. This willingness to forego quality for price made room for the imports. Why am I bringing up an anecdote from 40 years ago? I think there are some useful lessons here for financial analysts and investors. First, in a management meeting it is okay to ask tough questions. You get more meaningful answers that way. Second, you can find out a lot about a company by talking to its suppliers or customers. Company spokesmen will only give you their own corporate press release. Third, a long-term trend will take a long time to develop but it is enormously important. At the time of my 1966 meeting, U.S. automakers were riding high because foreign car imports were not yet a problem. In 1960, Japan exported only 39,000 vehicles. By 1970, the Japanese were starting to exploit the lower quality of U.S. cars and exported 1.1 million cars. In 1980, exports rose to 6 million and the Japanese were producing more vehicles than U.S. manufacturers. U.S. automotive companies had to react to the loss of market share from high-quality imports. However, once there is a loss of market share, it is not usually readily reversible. DAVID ALWAYS BEATS GOLIATH There are several lessons we can learn from the decline of Arab civilization and the problems of U.S. auto companies: (1) To operate a successful business, the world is too competitive to be complacent. Like baseball players, companies have to fight to keep their position on the team. Great U.S. businesses must constantly compete in the world market and it is darn tough. (2) Big companies are often just big targets. Small companies are hungry to succeed and are constantly focused on improving with the hope of taking some of the flabby giant's customers. (3) History provides a useful context. Discipline, creativity, hard work, knowledge, achievement, and a can-do, hands-on, fix-it-now attitude worked in the past and will work now. (4) We believe small-cap investing works if you can identify the hungry, small companies whose employees embrace our list of exemplary values. The core investment strategy of the Wanger Advisors Funds has always been to try to find small- and mid-cap companies that are on the way up. We don't want to own once-great companies that are now on their way down. This is partly a matter of personal taste, because we find following big, sick companies to be depressing. Even though there are occasional turnarounds in these big companies, it seems to us that is not the way to bet. SO LONG AND BEST REGARDS! This is my final "Squirrel Chatter." I am retiring from Columbia Wanger Asset Management as of September 30. While I considered writing a few more essays, current regulatory rules are not conducive to the free-ranging thought that was characteristic of these essays. I have great confidence in Chuck McQuaid and his team of analysts and portfolio managers to keep the performance of the Funds at a competitive level. Thank you, fellow shareholders, for your support over 35 years. I regard myself as truly fortunate to have been able to build a career in this exciting industry. I am especially proud that we have enabled thousands of our shareholders to pursue their economic goals by investing in our funds. COLUMBIA WAM NEWS We are pleased to announce that Ashish Kohli has joined our domestic analyst team to follow health care. Jason Selch, who followed energy, departed in May. We are searching for his replacement and continue to talk to some promising candidates. Your Wanger Advisors Trust investment team includes 20 investment analysts and portfolio managers. - ------------------- 1 Friedman, Thomas, The World Is Flat: A Brief History of the Twenty-first Century, Farrar, Straus and Giroux, 2005. Page 405. 2 Raymond "Chip" Mason, chairman of Legg Mason, The Wall Street Journal, June 27, 2005, page C1. 3 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- [Graphic: squirrel] PERFORMANCE REVIEW WANGER INTERNATIONAL SELECT Photo of: Todd M. Narter Photo of: Christopher J. Olson TODD M. NARTER Co-Portfolio Manager CHRISTOPHER J. OLSON Co-Portfolio Manager Wanger International Select was up 0.53% in the first six-months of the year, slightly below the 0.79% return of the S&P/Citigroup World ex-US Cap Range $2-10B Index and ahead of the MSCI EAFE Index's loss of 1.17%. Performance data quoted represents past performance and current performance may be lower or higher. Past performance is no guarantee of future results. The investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Please visit www.columbiafunds.com for daily and most recent month-end performance updates. Argentina's Tenaris, a manufacturer of seamless pipes used by oil and gas producers, and the Fund's second largest holding, continued its strong performance as the stock gained 65% through the first half of the year. High oil prices continued to drive energy exploration and investment, and tight capacity in the seamless-pipe industry gave Tenaris strong pricing power. Another large holding, SES Global, had good year-to-date performance, up 19% due to continued demand for satellite services from the switch to HDTV. The company also indicated it will launch two new satellites which will increase its capacity even further. SES Global also reported that it will buy back 10% of its outstanding shares, which highlights its strong balance sheet and cash flow. Utilities BKW Energie in Switzerland, a new holding in the second quarter, and Red Electrica in Spain were strong performers as well, up 12% and 25%, respectively. Two of our weaker holdings year-to-date were in Japan. Fast Retailing was down 27% after several months of disappointing same-store sales and Daito Trust Construction was down 21% after several months of weak orders. In addition to BKW Energie, we also added Gambro, which manufactures dialyzers and blood collection and separation equipment; William Hill, a United Kingdom betting shop and internet gaming operator; Jupiter Telecommunications, the largest Japanese cable TV provider; Ito En, a maker of green tea and other beverages; Belgacom, a Belgian telecommunications provider; Bank of Yokohama, one of the largest regional banks in Japan; and IAWS, an Irish manufacturer of baked goods. 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 6/30/05, the Fund's positions in the holdings mentioned were: Tenaris, 4.1%; SES Global, 4.0%; BKW Energie, 0.8%; Red Electrica, 3.0%; Fast Retailing, 0.0%; Daito Trust Construction, 2.8%; Gambro, 0.7%; William Hill, 1.0%; Jupiter Telecommunications, 2.0%; Ito En, 2.3%; Belgacom, 1.6%; Bank of Yokohama, 0.8%; IAWS Group, 2.6%. 4 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- VALUE OF A $10,000 INVESTMENT IN WANGER INTERNATIONAL SELECT TOTAL RETURN FOR EACH PERIOD, FEBRUARY 1, 1999 (INCEPTION DATE) THROUGH JUNE 30, 2005 AVERAGE ANNUAL RETURN - -------------------------------------------------------------------------------- 1 year 5 years Life of fund 15.83% -0.33% 11.30% LINE CHART: S&P/Citigroup World WANGER INTERNATIONAL SELECT ex-US $2-10B 2/1/99 10000 10000 2/28/99 10020 9750 3/31/99 10190 10135 10620 10701 10480 10249 6/30/99 11350 10624 11650 11021 11800 11144 9/30/99 11650 11183 12160 11188 14530 11508 12/31/99 18390 12388 17890 11789 21580 11941 3/31/00 20853 12299 20916 11806 19304 11616 6/30/00 20193 12232 19817 11836 20863 12208 9/30/00 19827 11802 19356 11437 17042 11096 12/31/00 18100 11638 18885 11580 16812 11159 3/31/01 14664 10289 15748 11048 15703 10954 6/30/01 15052 10669 14333 10401 14082 10307 9/30/01 11811 9110 12405 9476 12941 9814 12/31/01 13283 9835 12656 9545 12496 9690 3/31/02 12918 10245 13238 10432 13352 10764 6/30/02 12907 10390 11537 9460 11731 9437 9/30/02 10864 8593 10898 8746 11218 9192 12/31/02 11252 8933 10704 8708 10271 8546 3/31/03 10358 8400 11343 9142 12317 9797 6/30/03 12386 10077 12604 10481 13142 11086 9/30/03 13600 11543 14529 12434 14861 12538 12/31/03 15892 13367 16190 13648 16877 13977 3/31/04 17001 14520 16702 14026 16725 13987 6/30/04 17150 14342 16737 13798 16725 13925 9/30/04 17403 14373 17886 14857 19013 16031 12/31/04 19760 16739 19587 16649 20691 17361 3/31/05 20053 16921 19361 16432 19361 16531 6/30/05 19865 16872 This graph compares the results of $10,000 invested in Wanger International Select on February 1, 1999 (the date the Fund began operations) through June 30, 2005, to the S&P/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 at the time of initial purchase. Prior to 2/1/02, Wanger International Select was a non-diversified 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. RESULTS TO JUNE 30, 2005 - -------------------------------------------------------------------------------- Year 2nd quarter to date 1 year WANGER INTERNATIONAL SELECT -0.94% 0.53% 15.83% S&P/Citigroup World ex-US Cap Range $2-10B -0.29 0.79 17.64 MSCI EAFE -1.01 -1.17 13.65 Lipper International Funds Index -0.60 -0.65 13.45 NAV AS OF 6/30/05: $16.95 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/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. - -------------------------------------------------------------------------------- TOP 5 COUNTRIES As a % of net assets, as of 6/30/05 Japan 17.9% Ireland 13.1 Switzerland 12.4 France 12.2 United Kingdom 10.4 - -------------------------------------------------------------------------------- TOP 10 HOLDINGS As a % of net assets, as of 6/30/05 1. Anglo Irish Bank 4.7% Small Business & Middle Market Banking - Ireland 2. Tenaris 4.1% Steel Pipe for Oil Wells & Pipelines - Argentina 3. Excel 4.1% Global Logistics & Freight Forwarding - United Kingdom 4. Neopost 4.0% Postage Meter Machines - France 5. SES Global 4.0% Satellite Broadcasting Services - Luxembourg 6. Kuehne & Nagel 3.1% Freight Forwarding/Logistics - Switzerland 7. Komercni Banka 3.1% Leading Czech Universal Bank - Czech Republic 8. Red Electrica 3.0% Spanish Power Grid - Spain 9. Depfa Bank 2.9% International Public Sector Finance - Ireland 10. Lion Nathan 2.9% Beer Brewer/ Distributor - Australia 5 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SELECT STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares COMMON STOCKS - 98.8% EUROPE - 62.1% - -------------------------------------------------------------------------------- UNITED KINGDOM/IRELAND - 23.5% 143,000 Anglo Irish Bank (Ireland) $1,771,249 Small Business & Middle Market Banking 103,000 Exel 1,559,218 Global Logistics & Freight Forwarding 68,500 Depfa Bank (Ireland) 1,094,642 International Public Sector Finance 70,000 IAWS Group (Ireland) 977,957 Manufacturer of Baked Goods 220,000 Compass Group 922,826 International Concession & Contract Caterer 55,000 Grafton Group (Ireland) 636,454 Building Materials Wholesaling & DIY Retailing 18,000 Kerry Group (Ireland) 443,918 Food Ingredients 45,000 British Sky Broadcasting (b) 424,039 Digital Satellite Broadcasting 40,000 William Hill 384,847 Largest Bookmaker 20,000 Intermediate Capital 373,215 European Provider of Mezzanine Capital 11,000 Cobham 278,761 Aerospace Components - -------------------------------------------------------------------------------- 8,867,126 - -------------------------------------------------------------------------------- FRANCE/BELGIUM - 13.8% 17,300 Neopost 1,520,486 Postage Meter Machines 100,000 SES Global 1,505,218 Satellite Broadcasting Services 15,000 Imerys 1,031,096 Industrial Minerals Producer 17,600 Belgacom (Belgium) 599,270 Telecom Service Provider 8,200 Essilor International 558,002 Eyeglass Lenses - -------------------------------------------------------------------------------- 5,214,072 - -------------------------------------------------------------------------------- SWITZERLAND - 12.4% 5,550 Kuehne & Nagel 1,173,560 Freight Forwarding/Logistics 7,500 Swatch Group 1,049,458 Watch & Electronics Manufacturer - -------------------------------------------------------------------------------- Number of Value Shares - -------------------------------------------------------------------------------- 1,100 Geberit International $701,907 Plumbing Supplies 5,700 Synthes 623,782 Products for Orthopedic Surgery 1,300 Schindler 467,932 Elevator Manufacturer & Service Provider 630 Givaudan 365,412 Industrial Fragrances & Flavors 5,000 BKW Energie 312,475 Electric Utility - -------------------------------------------------------------------------------- 4,694,526 - -------------------------------------------------------------------------------- CZECH REPUBLIC - 3.1% 9,360 Komercni Banka 1,172,381 Leading Czech Universal Bank - -------------------------------------------------------------------------------- SPAIN - 3.0% 41,000 Red Electrica 1,131,667 Spanish Power Grid - -------------------------------------------------------------------------------- GERMANY - 2.8% 7,500 Deutsche Boerse 585,114 Trading, Clearing & Settlement Services for Financial Markets 7,000 Rhoen Klinikum 483,846 Hospital Management - -------------------------------------------------------------------------------- 1,068,960 - -------------------------------------------------------------------------------- NORWAY - 2.8% 74,300 Den Norske Bank 769,912 Largest Norwegian Bank 8,000 Orkla 293,323 Food & Diversified Consumer Goods - -------------------------------------------------------------------------------- 1,063,235 - -------------------------------------------------------------------------------- SWEDEN - 0.7% 19,400 Gambro 258,877 Products/Services for Renal Care - -------------------------------------------------------------------------------- EUROPE - TOTAL 23,470,844 See accompanying notes to financial statements. 6 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SELECT STATEMENT OF INVESTMENTS (UNAUDITED) JUNE 30, 2005 - -------------------------------------------------------------------------------- Number of Value Shares ASIA - 24.4% - -------------------------------------------------------------------------------- JAPAN - 17.9% 28,000 Daito Trust Construction $1,045,563 Apartment Builder 35,000 Shimano 993,134 Bicycle Components & Fishing Tackle 8,400 Hoya 965,154 Opto-Electrical Components & Eyeglass Lenses 17,100 Ito En 876,859 Bottled Tea & Other Beverages 914 Jupiter Telecommunications 768,024 Largest Cable Service Provider in Japan 41,000 Ushio 726,594 Industrial Light Sources 5,600 Funai Electric 572,576 Consumer Electronics 110,000 Hiroshima Bank 500,013 Regional Bank 55,000 Bank of Yokohama 316,036 Regional Bank - -------------------------------------------------------------------------------- 6,763,953 - -------------------------------------------------------------------------------- HONG KONG/CHINA - 4.1% 350,000 Hong Kong Exchanges & Clearing 906,562 Hong Kong Equity & Derivatives Operator 1,000,000 Global Bio-Chem Technology Group (China) 619,253 Refiner of Corn-Based Commodities - -------------------------------------------------------------------------------- 1,525,815 - -------------------------------------------------------------------------------- SINGAPORE - 2.4% 900,000 Comfort Del Gro 899,625 Taxi & Mass Transit Service - -------------------------------------------------------------------------------- ASIA - TOTAL 9,189,393 OTHER COUNTRIES - 8.2% - -------------------------------------------------------------------------------- CANADA - 5.3% 175,000 Kinross Gold (b) 1,069,421 Gold Mining 24,900 Talisman Energy 931,239 Oil & Gas Producer - -------------------------------------------------------------------------------- 2,000,660 - -------------------------------------------------------------------------------- AUSTRALIA - 2.9% 190,000 Lion Nathan 1,092,302 Beer Brewer/Distributor - -------------------------------------------------------------------------------- OTHER - TOTAL 3,092,962 - -------------------------------------------------------------------------------- Number of Shares Value or Principal Amount LATIN AMERICA - 4.1% - -------------------------------------------------------------------------------- ARGENTINA - 4.1% 20,000 Tenaris $1,565,400 Steel Pipe for Oil Wells & Pipelines - -------------------------------------------------------------------------------- LATIN AMERICA - TOTAL 1,565,400 TOTAL COMMON STOCKS - 98.8% 37,318,599 - -------------------------------------------------------------------------------- (COST $28,469,817) SHORT-TERM OBLIGATIONS - 0.9% - -------------------------------------------------------------------------------- $ 353,000 Repurchase Agreement with State Street Bank & Trust dated 6/30/05, due 7/1/05 at 3.00% collateralized by Federal Home Loan Mortgage Corporation Notes, maturing 11/15/11, market value $362,770 (repurchase proceeds: $353,000) 353,000 - -------------------------------------------------------------------------------- (AMORTIZED COST $353,000) 353,000 TOTAL INVESTMENTS (COST: $28,822,817) - 99.7% (a) (c) 37,671,599 - -------------------------------------------------------------------------------- CASH AND OTHER ASSETS LESS LIABILITIES - 0.3% 118,079 - -------------------------------------------------------------------------------- TOTAL NET ASSETS - 100% $37,789,678 - -------------------------------------------------------------------------------- NOTES TO STATEMENT OF INVESTMENTS: (a) At June 30, 2005, cost for federal income tax purposes is $28,822,817. The net unrealized appreciation was $8,848,782 consisting of gross unrealized appreciation of $9,985,217 and gross unrealized depreciation of $1,136,435. (b) Non-income producing security. (c) On June 30, 2005, the Fund's total investments were denominated in currencies as follows: % of Net Currency Value Assets - -------------------------------------------------------------------------------- Euro Dollars $ 12,338,919 32.7% Japanese Yen 6,763,952 17.9 Swiss Francs 4,694,527 12.4 British Pounds 3,942,906 10.4 Canadian Dollars 2,000,660 5.3 U.S. Dollars 1,918,400 5.1 Other currencies less than 6,012,235 15.9 ------------ ---- 5% of total net assets $ 37,671,599 99.7% ============ ==== See accompanying notes to financial statements. 7 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- WANGER INTERNATIONAL SELECT PORTFOLIO DIVERSIFICATION (UNAUDITED) JUNE 30, 2005 AT JUNE 30, 2005, THE FUND'S PORTFOLIO INVESTMENTS AS A PERCENT OF NET ASSETS WAS DIVERSIFIED AS FOLLOWS: Value Percent - ----------------------------------------------------------------- INDUSTRIAL GOODS/SERVICES Industrial Services $3,200,710 8.5% Industrial Materials 1,733,003 4.6 Steel 1,565,400 4.1 Machinery 1,520,486 4.0 Construction 1,045,563 2.8 Electrical Components 1,005,355 2.7 Industrial Distribution 636,454 1.7 Speciality Chemicals 365,412 1.0 - ----------------------------------------------------------------- 11,072,383 29.4 - ----------------------------------------------------------------- CONSUMER GOODS/SERVICES Durable Goods 2,042,592 5.4 Beverage 1,969,161 5.2 Food 1,421,875 3.8 Restaurants 922,826 2.4 Consumer Electronics 572,576 1.5 Gaming 384,847 1.0 Nondurables 293,323 0.8 - ----------------------------------------------------------------- 7,607,200 20.1 - ----------------------------------------------------------------- FINANCE Banks 5,624,233 14.9 Finance Companies 373,215 1.0 - ----------------------------------------------------------------- 5,997,448 15.9 - ----------------------------------------------------------------- INFORMATION TECHNOLOGY Computer Related Hardware Semiconductors & Related Equipment 965,154 2.6 - ----------------------------------------------------------------- 965,154 2.6 - ----------------------------------------------------------------- Media Satellite Broadcasting and Services 1,505,218 4.0 Cable Television 768,024 2.0 TV Broadcasting 424,039 1.1 - ----------------------------------------------------------------- 2,697,281 7.1 - ----------------------------------------------------------------- Software and Services Financial Processors 1,491,676 3.9 - ----------------------------------------------------------------- 1,491,676 3.9 - ----------------------------------------------------------------- Telecommunications Telephone Services 599,270 1.6 - ----------------------------------------------------------------- 599,270 1.6 - ----------------------------------------------------------------- 5,753,381 15.2 - ----------------------------------------------------------------- ENERGY/MINERALS Non-Ferrous Metals 1,069,421 2.8 Oil/Gas Producers 931,239 2.5 Agricultural Commodities (includes Forestry) 619,253 1.6 - ----------------------------------------------------------------- 2,619,913 6.9 Value Percent - ----------------------------------------------------------------- OTHER Regulated Utilities 1,444,142 3.8 Transportation 899,625 2.4 - ----------------------------------------------------------------- 2,343,767 6.2 - ----------------------------------------------------------------- HEALTHCARE Medical Equipment 1,181,784 3.1 Hospital Management 483,846 1.3 Services 258,877 0.7 - ----------------------------------------------------------------- 1,924,507 5.1 - ----------------------------------------------------------------- TOTAL COMMON STOCKS 37,318,599 98.8 - ----------------------------------------------------------------- SHORT-TERM OBLIGATIONS 353,000 0.9 - ----------------------------------------------------------------- TOTAL INVESTMENTS 37,671,599 99.7 - ----------------------------------------------------------------- CASH AND OTHER ASSETS LESS LIABILITIES 118,079 0.3 - ----------------------------------------------------------------- NET ASSETS $37,789,678 100.0% ================================================================= 8 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2005 (UNAUDITED) - ---------------------------------------------------------------- ASSETS Investments, at cost $28,822,817 - ---------------------------------------------------------------- Investments, at value $37,671,599 Foreign currency (cost of $28,118) 28,135 Receivable for: Fund shares sold 128,821 Dividends and interest 54,685 Foreign tax reclaims 21,991 Expense reimbursement due from Investment Advisor 734 - ---------------------------------------------------------------- Total Assets 37,905,965 LIABILITIES Payable to custodian bank 8,260 Payable for: Investments purchased 41,038 Investment advisory fees 29,632 Transfer agent fees 441 Trustees' fees 639 Audit fees 8,733 Custody fees 7,295 Reports to shareholders 16,404 Other liabilities 3,845 - ---------------------------------------------------------------- Total Liabilities 116,287 - ---------------------------------------------------------------- Net Assets $37,789,678 - ---------------------------------------------------------------- COMPOSITION OF NET ASSETS Paid-in capital $33,105,625 Distributions in excess of net investment income (298,081) Accumulated net realized loss (3,863,714) Net unrealized appreciation (depreciation) on: Investments 8,848,782 Foreign currency translations (2,934) - ---------------------------------------------------------------- Net Assets $37,789,678 ================================================================ Fund shares outstanding 2,229,492 ================================================================ Net asset value, offering price and redemption price per share $16.95 ================================================================ STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED) - ---------------------------------------------------------------- INVESTMENT INCOME Dividend income (net of foreign taxes of $48,122) $532,979 Interest income 10,385 - ---------------------------------------------------------------- Total investment income 543,364 EXPENSES: Investment advisory fees 184,818 Transfer agent fees 457 Trustees' fees 2,249 Custody fees 27,481 Compliance fees 693 Non-recurring costs (See Note 8) 312 Other expenses 29,165 - ---------------------------------------------------------------- Total expenses 245,175 Fees waived by Investment Adviser (See Note 4) (674) Non-recurring costs reimbursed (See Note 8) (312) - ---------------------------------------------------------------- Net Expenses 244,189 - ---------------------------------------------------------------- Net Investment Income 299,175 NET REALIZED AND UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS AND FOREIGN CURRENCY: Net realized gain (loss) on: Investments 734,108 Foreign currency transactions (7,725) - ---------------------------------------------------------------- Net realized gain 726,383 - ---------------------------------------------------------------- Net change in unrealized appreciation (depreciation) on: Investments (892,516) Foreign currency translations (4,327) - ---------------------------------------------------------------- Net change in unrealized appreciation (depreciation) (896,843) - ---------------------------------------------------------------- Net Loss (170,460) - ---------------------------------------------------------------- Net Increase in Net Assets from Operations $128,715 ================================================================ See accompanying notes to financial statements. 9 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited) Six Months ended Year ended INCREASE (DECREASE) IN NET ASSETS June 30, 2005 December 31, 2004 - ----------------------------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $299,175 $82,031 Net realized gain on investments 726,383 3,328,351 Net change in unrealized appreciation (depreciation) on investments and foreign currency translations (896,843) 3,070,465 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 128,715 6,480,847 DISTRIBUTIONS TO SHAREHOLDERS FROM: From net investment income (770,742) (87,061) - ----------------------------------------------------------------------------------------------------------------------------------- Total distributions to shareholders (770,742) (87,061) SHARE TRANSACTIONS: Subscriptions 6,263,708 15,850,018 Distributions reinvested 770,742 87,061 Redemptions (3,834,403) (14,026,796) - ----------------------------------------------------------------------------------------------------------------------------------- Net Increase from Share Transactions 3,200,047 1,910,283 - ----------------------------------------------------------------------------------------------------------------------------------- Total Increase in Net Assets 2,558,020 8,304,069 NET ASSETS: Beginning of period 35,231,658 26,927,589 - ----------------------------------------------------------------------------------------------------------------------------------- End of period $37,789,678 $35,231,658 - ----------------------------------------------------------------------------------------------------------------------------------- (DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME)/ UNDISTRIBUTED NET INVESTMENT INCOME $(298,081) $173,486 ===================================================================================================================================
See accompanying notes to financial statements. 10 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS
(Unaudited) Six Months Selected data for a share outstanding Ended Year Ended December 31, throughout each period June 30, 2005 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $17.19 $13.87 $9.86 $11.64 $17.29 $18.39 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (a) 0.14 0.04 0.04 0.04 (0.03) (0.04) Net realized and unrealized gain (loss) on investments and foreign currency transactions (0.03) 3.33 4.01 (1.82) (4.46) (0.10) - ------------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations 0.11 3.37 4.05 (1.78) (4.49) (0.14) - ------------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.35) (0.05) (0.04) -- (0.02) (0.01) From net realized capital gains -- -- -- -- (1.14) (0.95) - ------------------------------------------------------------------------------------------------------------------------------------ Total Distributions Declared to Shareholders (0.35) (0.05) (0.04) -- (1.16) (0.96) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $16.95 $17.19 $13.87 $9.86 $11.64 $17.29 ==================================================================================================================================== Total Return (b) 0.53%(c)(d) 24.34% 41.24%(d) (15.29)%(d) (26.61)% (1.58)%(d) - ------------------------------------------------------------------------------------------------------------------------------------ RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Expenses(e) 1.31%(f) 1.43% 1.45% 1.45% 1.45% 1.45% Net investment income (loss)(e) 1.61%(f) 0.29% 0.39% 0.35% (0.20)% (0.20)% Waiver/Reimbursement 0.00%(f)(g) -- 0.09% 0.10% -- 0.23% Portfolio turnover rate 19%(c) 71% 59% 113% 72% 96% Net assets, end of period (000's) $37,790 $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) Not annualized. (d) Had the investment adviser not waived or reimbursed a portion of expenses, total return would have been reduced. (e) The benefits derived from custody fees paid indirectly had no impact. (f) Annualized. (g) Rounds to less than 0.01% See accompanying notes to financial statements. 11 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 under consistently applied procedures established by and under the general supervision of 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 prices 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%-15%. 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 tax character of distributions paid during the year ended December 31, 2004 was as follows: DECEMBER 31, 2004 ----------------- Distributions paid from: Ordinary Income $87,061 Unrealized appreciation and depreciation at June 30, 2005, based on cost of investments for federal income tax purposes, was: NET UNREALIZED UNREALIZED UNREALIZED APPRECIATION DEPRECIATION APPRECIATION --------------- --------------- --------------- $9,985,217 $(1,136,435) $8,848,782 12 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 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. Effective March 8, 2005, under the Fund's investment management agreement, fees are accrued daily and paid monthly to Columbia WAM at the annual rate of 0.99% of average daily net assets. Prior to March 8, 2005, under the Fund's investment management agreement, fees were accrued daily and paid monthly to Columbia WAM at the annual rate of 1.00% of average daily net assets. 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 were retained at the annual rate of 0.99% of average daily net assets. The fee waiver was effective from January 1, 2005 through March 8, 2005, but applied as if it had gone into effect on December 1, 2004. 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 six months ended June 30, 2005. 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 six months ended June 30, 2005, the Fund paid $2,249 to trustees not affiliated with Columbia WAM. 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 and has subcontracted with Boston Financial Data Services ("BFDS") to serve as subtransfer agent. For such services, the Transfer Agent receives a fee, paid monthly, at the annual rate of $21.00 per open account. The Transfer Agent also receives reimbursement for certain out-of-pocket expenses. During the six months ended June 30, 2005, 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 $419,565 and $4,475,603, 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 six months ended June 30, 2005. 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: Six months ended Year ended June 30, 2005 December 31, 2004 - -------------------------------------------------------------------------------- Shares sold 365,013 1,041,265 - -------------------------------------------------------------------------------- Shares issued in reinvestment of dividend distributions 43,155 6,025 - -------------------------------------------------------------------------------- Less shares redeemed 227,637 940,310 - -------------------------------------------------------------------------------- Net increase in shares outstanding 180,531 106,980 7. INVESTMENT TRANSACTIONS The aggregate cost of purchases and proceeds from sales other than short-term obligations for the six months ended June 30, 2005 were $10,850,493 and $6,819,863. 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 with the New York Attorney General ("NYAG") (the "NYAG Settlement") and consented to the entry of a cease-and-desist order by the Securities and Exchange Commission ("SEC") (the "SEC Order"). The SEC Order and the NYAG Settlement are referred to collectively as 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, the Columbia Group 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 the Columbia Group'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, 13 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) LLC and BACAP Distributors, LLC to reduce certain Columbia Funds, Nations Funds and other mutual funds management fees 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, settlement amounts described above 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 the Columbia Group and the Fund's independent trustees 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, Columbia Acorn Trust, another mutual fund family advised by Columbia WAM, and the trustees of Columbia Acorn Trust, are named as defendants in class and derivative complaints which have been consolidated in a Multi-District Action in the federal district court for the District of Massachusetts. These lawsuits contend that defendants permitted certain investors to market time their trades in certain Columbia Acorn Funds. The Multi-District Action is ongoing. Accordingly, an estimate of the financial impact of this litigation on any fund, if any, cannot currently be made. Columbia WAM, the Columbia Acorn Funds and the trustees of Columbia Acorn Trust are defendants in a consolidated lawsuit filed in the federal district court of Massachusetts 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 the Trust breached certain common laws duties and federal laws. 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 Funds' 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 (the "Fair Valuation Lawsuit"). The plaintiffs' complaint was dismissed by the district court. However, plaintiffs are in the process of appealing that decision. 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 Columbia WAM and affiliated advisers. The trustees of Columbia Acorn Trust and Columbia WAM have been dismissed as defendants in this lawsuit. On March 21, 2005, a class action complaint was filed against the Columbia Acorn Trust and Columbia WAM seeking to rescind the Contingent Deferred Sales Charges assessed upon redemption of Class B shares of Columbia Acorn Funds due to the alleged market timing of the Columbia Acorn Funds. In addition to the rescission of sales charges, plaintiffs seek recovery of actual damages, attorneys' fees and costs. The case has been removed to the federal district court of Massachusetts. The Columbia Acorn Trust and Columbia WAM intend to defend these suits vigorously. 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 against certain funds, their Boards and/or BOA (and affiliated entities). These suits are ongoing. However, based on currently available information, the Columbia Acorn Trust believes that the likelihood that these lawsuits will have a material adverse impact on any fund is remote, and Columbia WAM believes that the lawsuits are not likely to materially affect its ability to provide investment management services to the Funds. For the six months ended June 30, 2005, CMG has assumed $312 in consulting services and legal fees incurred by the Fund in connection with these matters. 9. SUBSEQUENT EVENT Effective August 22, 2005, the Fund's distributor will be Columbia Management Distributors, Inc. and the Fund's transfer agent will be Columbia Management Services, Inc. 14 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- [EXCERPTS FROM:] WANGER ADVISORS TRUST Management Fee Evaluation of the Senior Officer Prepared Pursuant to the New York Attorney General's Assurance of Discontinuance July 2005 15 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- Introduction The New York Attorney General's Assurance of Discontinuance ("Order") entered into by Columbia Management Advisors, Inc. ("CMAI") and Columbia Funds Distributor, Inc., ("CFDI" and collectively with "CMAI," "CMG") in February 2005, allows CMAI to manage or advise a mutual fund, including the Wanger Advisors Trust's family of funds (the "WAT Funds" or "WAT" or "Trust"), only if the trustees of the WAT Funds appoint a "Senior Officer" to perform specified duties and responsibilities. One of these responsibilities includes "managing the process by which proposed management fees (including but not limited to, advisory fees) to be charged the WAT Fund[s] are negotiated so that they are negotiated in a manner which is at arms' length and reasonable and consistent with this Assurance of Discontinuance." The Order also provides that the Board of Trustees of the WAT Funds ("Board") must determine the reasonableness of proposed "management fees" by using either an annual competitive bidding process supervised by the Senior Officer or Independent Fee Consultant, or by obtaining "an annual independent written evaluation prepared by or under the direction of the Senior Officer or the Independent Fee Consultant." "Management fees" are only part of the costs and expenses paid by mutual fund shareholders. The expenses can vary depending upon the class of shares held but usually include: (1) investment management or advisory fees to compensate analysts and portfolio managers for stock research and portfolio management, as well as the cost of operating a trading desk; (2) administrative expenses incurred to prepare registration statements and tax returns, calculate the Funds' net asset values, maintain effective compliance procedures and perform recordkeeping services; (3) transfer agency costs for establishing accounts, accepting and disbursing funds, as well as overseeing trading in Fund shares; (4) custodial expenses incurred to hold the securities purchased by the Funds; and (5) distribution expenses, including commissions paid to brokers that sell the Fund shares to investors. Columbia Wanger Asset Management, L.P. ("CWAM"), the adviser to the WAT Funds, has proposed that the Trust enter into an agreement that "bundles" the first two categories listed above: advisory and administrative services. The fees paid under this agreement are referred to as "management fees." Other fund expenses are governed by separate agreements, in particular agreements with two CWAM affiliates: CFDI, the broker-dealer that underwrites and distributes the WAT Funds' shares, and Columbia Funds Services, Inc. ("CFSI"), the Funds' transfer agent. In conformity with the terms of the Order, this evaluation, therefore, addresses only the advisory and administrative contract between CWAM and the Trust, and does not extend to the other agreements. According to the Order, the Senior Officer's evaluation must consider at least the following: (1) Management fees (including components thereof) charged to institutional and other clients of CWAM for like services; (2) Management fees (including any components thereof) charged by other mutual fund companies for like services; (3) Costs to CWAM and its affiliates of supplying services pursuant to the management fee agreements, excluding any intra-corporate profit; (4) Profit margins of CWAM and its affiliates from supplying such services; (5) Possible economies of scale as the WAT Funds grow larger; and (6) The nature and quality of CWAM's services, including the performance of each WAT Fund. On November 17, 2004, the Board appointed me Senior Officer under the Order. The Board also determined not to pursue a competitive bidding process and instead, charged me with the responsibility of evaluating the WAT Funds' proposed advisory and administrative fee contract with CWAM in conformity with the requirements of the Order. This Report is an annual evaluation required under the Order. In discharging their responsibilities, the independent Trustees have also consulted independent, outside counsel. * * * This evaluation was performed in cooperation and regular communication with the Compliance/Contract Renewal Committee of the Board. Process and Independence The objectives of the Order are to ensure the independent evaluation of the advisory fees paid by the WAT Funds as well as to ensure that all relevant factors are considered. In my view, the contract renewal process has been conducted at arms-length and with independence in gathering, considering and evaluating relevant data. For example, the selection of fund peer groups is critical in assessing a fund's relative performance and cost. I have required Lipper and Morningstar, Inc. to prepare their reports without input or commentary from CWAM; the engagement letters with them reflect this requirement. As a result, the peer groups reflected in the Morningstar, Inc. and Lipper reports were determined independently. After submission of the reports, I asked CWAM to comment on them to avoid errors and to establish a clear record of CWAM's views on which funds, in its judgment, constitute an appropriate peer group. Similarly, I discussed CWAM's profitability analysis with its management but also sought the independent views of Ernst & Young on the reasonableness of CWAM's cost allocation methodology and on the adequacy of the financial data it provided. The evaluation of CWAM's profitability was performed in the context of the limited industry data available. My evaluation of the advisory contract was shaped by my experience as WAT's Chief Compliance Officer ("CCO"). As CCO, I report solely to the Board and have no reporting obligation to or employment relationship with CMG or its affiliates, except for administrative purposes. This too contributes to the independence of this evaluation. I have made several comments on compliance matters in evaluating the quality of service provided by CWAM and CMG. 16 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- Finally, this Report, its supporting materials and the data contained in other materials submitted to the Compliance/Contract Renewal Committee of the Board, in my view, provide a thorough factual basis upon which the Board, in consultation with independent counsel as it deems appropriate, may conduct management fee negotiations that are in the best interests of the WAT Funds' shareholders. * * * VI. Conclusions My review of the data and other material above leads to the following conclusions with respect to the factors identified in the Order. 1. Performance. The WAT Funds generally have achieved outstanding performance and rank very favorably against their peers. The international funds have good recent performance records, but weaker long-term performance relative to the domestic WAT Funds. Recent management changes have been followed by improved performance. The domestic WAT Funds and International Select typically achieve their performance with less risk than their competitors; relative risks are greater for International Small Cap. 2. Management Fees relative to Peers. The management fee rankings of the Funds are generally well below the respective medians and, hence, less favorable to shareholders than their peer group funds. 3. Administrative Fees. The WAT Funds pay a bundled fee that combines advisory fees and administrative expense, so ranking these fees separately was not possible. 4. Management Fees relative to Other Accounts. CWAM's focus is its mutual funds. It does not actively seek to manage separate or institutional accounts. The few institutional accounts it does manage vary in rate structures. Some pay advisory fees commensurate with or higher than the WAT Funds. In a few instances, however, sub-advised accounts pay lower management fees than do the WAT Funds. 5. Costs to CWAM and its Affiliates. CWAM's costs do not appear excessive, and, in my view, it uses appropriate methodologies to allocate overhead costs. CWAM's affiliates do not appear to profit indirectly from CWAM's management agreement with the WAT Funds. 6. Profit Margins. CWAM's firm-wide profit margins are at the upper end of the industry, though these comparisons are hampered by limited industry data. High profit margins are not unexpected for firms that manage large, successful funds and have provided outstanding investment performance for investors. Profit margins for the WAT Funds are lower than the margins for other accounts managed by CWAM because of payments made to intermediaries that offer the WAT Funds through variable annuity products. CMAI, the Funds' administrator, currently experiences losses rather than profits, in connection with its activities relating to the WAT Funds. 7. Economies of Scale. Economies of scale do exist at CWAM and will expand, if the assets of the WAT Funds get larger. They are, however, only partially reflected in the management fee schedule for two of the four WAT Funds. If the Funds' assets continue to grow, under the Funds' current fee schedules, shareholders might not benefit in a manner generally commensurate with CWAM's increased profits 8. Nature and quality of services. This category includes a variety of considerations that are difficult to quantify, yet can have a significant bearing on the performance of the WAT Funds. Several areas merit comment. a. Continuity of Management. It is critical that capable and experienced portfolio managers remain committed to the Funds and are able to hire and retain analysts to assist them. CWAM must have in place appropriate incentive plans that align its management's interests with those of investors. Further, CWAM must maintain the independence of its investment process. It should also be supported by effective information technology. b. Compliance. CWAM has an effective compliance program and a variety of related services that are valuable to shareholders, such as, systems to ensure best execution of portfolio transactions and the daily review of security prices to ensure accuracy of the WAT Funds' NAV. c. Administration Services. The WAT Funds benefit from a variety of administrative services that are performed by CWAM and CMAI, including preparation of registration statements, calculation of Fund NAV's, accounting services, shareholder services, and other functions In my opinion, these conclusions, taken together, generally support the reasonableness of the proposed management agreement. In reaching this conclusion, I weighed heavily the outstanding performance of the WAT Funds relative to their peers. Performance is an investor's first concern. The expense incurred by shareholders to enjoy this performance is, however, high relative to competing funds, though expenses for the WAT Funds are (with one exception) comparable to the parallel Acorn Funds. Nonetheless, a more complete breakpoint schedule could address this issue as well as share with investors more fully the benefits of economies of scale. 17 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- VII. Recommendations The Trustees should consider the following proposals to address the issues identified in this Report. Some of these recommendations require the collection and evaluation of more data. This work cannot be accomplished effectively before the expiration of the existing advisory contract on July 31, 2005. Therefore, I recommend that the Trustees consider extending the existing contract pending consideration of these recommendations. These recommendations do not purport to offer the only avenues to address the opinions and conclusions I have expressed in this Report. Economies of scale, for example, can be addressed in a variety of ways in a management contract. Sound business judgment will guide how any particular area is addressed with due consideration given to all the factors that must be weighed in reaching a management agreement that best serves the WAT Fund shareholders. I believe the Trustees should consider the following: 1. Restructure the management fee schedule beyond the current breakpoints to reflect more fully economies of scale. The Trustees might consider several ways to accomplish this objective, including instituting a two-tier fee structure that incorporates a complex- or CWAM-wide fee (including assets held in separate accounts) and a fund specific fee, with each containing breakpoints to reflect their separate economies of scale. Another approach is to consider uniform breakpoints for all WAT Funds, including breakpoints above and below current asset levels. 2. Conduct further study to ensure that the costs paid to insurance company intermediaries are transparent. The Trustees could consider forming an ad hoc committee to gather and evaluate data regarding CWAM's payments to intermediaries and the services provided by those intermediaries. Such a committee might also seek the assistance of a consultant such as E&Y. 3. Administrative Fees. Administrative and advisory fees could be unbundled to allow greater transparency and to permit distinct comparisons among peers. An administrative fee could also be formulated with a breakpoint schedule that shares the economies of scale available with shareholders. 4. Condition contract renewal on submission of an employment agreements or a management incentive plan designed to ensure the continued employment of senior management, under terms that align management's incentives with the interests of the WAT Funds' shareholders. Any incentive plan should be designed to permit CWAM to attract and retain the highest caliber investment professionals and support them with effective and reliable information technology systems. 5. Review with CWAM its anticipated capacity limitations and the degree to which increased staffing and effective incentives may address those issues. Robert P. Scales July 25, 2005 * * * More complete copies of the Management Fee Evaluation of the Senior Officer of the Wanger Advisors Trust, edited to delete certain confidential or proprietary information, are available upon written request to: R. Scott Henderson Bank of America MA-515-11-05 One Financial Center Boston, MA 02111 18 Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- This page intentionally left blank. Wanger International Select 2005 Semiannual Report - -------------------------------------------------------------------------------- [Grahic: squirrel] WANGER ADVISORS TRUST TRUSTEES Patricia H. Werhane, Chairperson Jerome L. Duffy Fred D. Hasselbring Kathryn A. Krueger, M.D. Ralph Wanger OFFICERS Ben Andrews Vice President J. Kevin Connaughton Assistant Treasurer Michael G. Clarke Assistant Treasurer Kenneth A. Kalina Assistant Treasurer Bruce H. Lauer Vice President, Secretary and Treasurer Charles P. McQuaid President Robert A. Mohn Vice President Todd M. Narter Vice President Christopher J. Olson Vice President Vincent P. Pietropaolo Assistant Secretary Robert P. Scales Chief Compliance Officer, Senior Vice President and General Counsel TRANSFER AGENT, DIVIDEND DISBURSING AGENT Columbia Management Services, Inc. P.O. Box 8081 Boston, Massachusetts 02266-8081 DISTRIBUTOR Columbia Management Distributors, 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 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 SHC-44/89023-0705 05/7141 ITEM 2. CODE OF ETHICS. Not applicable at this time. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable at this time. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable at this time. 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. There have not been any material changes to the procedures by which shareholders may recommend nominees to the registrant's board of directors, since those procedures were last disclosed in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item. 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: Not applicable at this time. (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 August 24, 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 August 24, 2005 -------------------------------------------------------------------------- By (Signature and Title) /S/ Bruce H. Lauer ------------------------------------------------------ Bruce H. Lauer, Treasurer Date August 24, 2005 -------------------------------------------------------------------------- EX-99.CERT 2 file002.txt CERTIFICATIONS I, Charles P. McQuaid, certify that: 1. I have reviewed this report on Form N-CSR of Wanger Advisors Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) disclosed in this report any change 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; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 24, 2005 /S/ Charles P. McQuaid ------------------------------------ Charles P. McQuaid, President I, Bruce H. Lauer, certify that: 1. I have reviewed this report on Form N-CSR of Wanger Advisors Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) disclosed in this report any change 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; and 5. The registrant's other certifying officers and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 24, 2005 /S/ Bruce H. Lauer --------------------------------- Bruce H. Lauer, Treasurer EX-99.906CERT 3 file003.txt CERTIFICATIONS CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Certified Shareholder Report of Wanger Advisors Trust (the "Trust") on Form N-CSR for the period ending June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof ("the Report"), the undersigned hereby certifies that, to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust. Date: August 24, 2005 /S/ Charles P. McQuaid -------------------------------------------- Charles P. McQuaid, President Date: August 24, 2005 /S/ Bruce H. Lauer -------------------------------------------- Bruce H. Lauer, Treasurer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. ss.1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----