As filed with the Securities and Exchange Commission on July 30, 1996
Securities Act Registration No. 33-98358
Investment Company Act Registration No. 811-9116
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Post-Effective Amendment No. 2 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 3 [x]
(Check appropriate box or boxes)
VAN WAGONER FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
One Bush Street
Suite 1150
San Francisco, CA 94104
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (800) 228-2121
Garrett R. Van Wagoner Copy to:
Van Wagoner Funds, Inc. Richard L. Teigen, Esq.
One Bush Street, Suite 1150 Foley & Lardner
San Francisco, CA 94104 777 East Wisconsin Avenue
(Name and Address of Agent for Service) Milwaukee, WI 53202
Registrant has registered an indefinite number of shares of its
common stock under The Securities Act of 1933 and will file its required
Rule 24f-2 Notice for Registrant's fiscal year ending December 31, 1996
prior to March 2, 1997.
Approximate Date of Proposed Public offering: as soon as practible
after the Registration Statement becomes effective.
It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b)
(x) on August 28, 1996 pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(i)
( ) on (date) pursuant to paragraph (a)(i)
( ) 75 days after filing pursuant to paragraph (a)(ii)
( ) on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
( ) this Post-Effective Amendment designates a new effective date
for a previously filed Post-Effective Amendment.
VAN WAGONER FUNDS, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts
A and B of Form N-1A).
Caption or Subheading in
Prospectus or Statement of
Item No. on Form N-1A Additional Information
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Expense Summary
3. Condensed Financial Financial Highlights
Information
4. General Description of Van Wagoner Funds, Inc.;
Registrant Investment Objectives, Policies
and Risk Considerations;
Investment Limitations
5. Management of the Fund Management of the Funds
5A. Management's Discussion of *
Fund Performance
6. Capital Stock and Other Capital Structure; Dividends and
Securities Distributions; Taxes; Shareholder
Reports and Information
7. Purchase of Securities Being How to Purchase Shares; Pricing of
Offered Fund Shares; How to Exchange
Shares; Retirement Plans; Service
and Distribution Plan
8. Redemption or Repurchase How to Redeem Shares; Pricing of
Fund Shares; How to Exchange
Shares
9. Legal Proceedings *
PART B - INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and * *
History
13. Investment Objectives and Additional Investment Information;
Policies Investment Restrictions
14. Management of the Fund Additional Company Information;
Shareholder Meetings
15. Control Persons and Principal Additional Company Information
Holders of Securities
16. Investment Advisory and Other Additional Company Information
Services
17. Brokerage Allocation and Other Portfolio Transactions and
Policies Brokerage
18. Capital Stock and Other Description of Shares
Securities
19. Purchase, Redemption and Included in the Prospectus under
Pricing of Securities Being the heading "How to Purchase
Offered Shares," "Pricing of Shares" and
"How to Redeem Shares" and in the
Statement of Additional
Information under the headings
"Individual Retirement Plans" and
"Determination of Net Asset Value"
20. Tax Status Included in the Prospectus under
the headings "Taxes" and
"Dividends and Distributions" and
in the Statement of Additional
Information under the heading
"Taxes" and "Additional Investment
Information"
21. Underwriters Distribution of Shares
22. Calculation of Performance Included in the Prospectus under
Data the heading "Fund Performance" and
in the Statement of Additional
Information under the heading
"Performance Information"
23. Financial Statements Financial Statements
___________________
* Answer negative or inapplicable.
** Complete answer to Item is contained in the Prospectus.
<PAGE>
Propsectus
August 28,1996
VanWagoner Funds
VanWagoner
Capital Management, Inc.
Investment Adviser
NOT PART OF THE PROSPECTUS
Dear Investor:
Thank you for your interest in the Van Wagoner Funds. We hope this letter and
prospectus will help you more fully understand the potential benefits and risks
of growth stock investing and determine whether it is consistent with your long-
term (5 or more years) investment goals.
Growth Stock Investing
Investing in small- to mid-size companies has the potential to be an exciting
and rewarding investment opportunity. Many young companies today are on the
brink of explosive growth, through development of innovative products and/or
services. However, investing in these young companies presents risks and price
volatility greater than those associated with larger, more mature companies. For
the investor who is patient and mindful of these risks the potential rewards of
growth stock investing can be substantial.
Investment Style
Van Wagoner Funds' investment style is most accurately described as Growth Stock
Investing. When researching and investing in growth oriented companies, our
focus is placed on understanding each business by speaking directly with company
management, industry consultants and analysts. We believe this "hands on"
approach gives us greater insight and allows us to make the most informed
decisions.
We seek out companies that share a common theme: the ability to thrive in
rapidly growing industries, the delivery of innovative products and services and
management teams who are financially rewarded by their success.
Again, we appreciate your interest in the Van Wagoner Funds and look forward to
helping you achieve your financial goals.
Sincerely,
/s/ Garrett R. Van Wagoner
Garrett R. Van Wagoner
President
This letter and information on the next page are followed by a prospectus which
describes in detail the Funds' objectives, investment policies, risks, fees and
other matters of interest. Please read it carefully before investing.
NOT PART OF THE PROSPECTUS
THE VAN WAGONER FUNDS
The Van Wagoner Funds is a Family of no-load mutual funds presently consisting
of six diversified investment portfolios designed to offer investors a range of
equity-oriented investment opportunities.
Van Wagoner Emerging Growth Fund
Van Wagoner Micro-Cap Fund
Van Wagoner Mid-Cap Fund
Van Wagoner Capital Appreciation Fund
Van Wagoner Growth Fund
Van Wagoner Post-Venture Fund
VAN WAGONER FUNDS
ARE DESIGNED FOR:
- -An aggressive equity investor seeking growth opportunities.
- -A long-term investor who is willing to accept short-term volatility.
- -An investor who understands the benefits of a professionally managed and well-
diversified portfolio.
- -An investor seeking a growth element within a diversified portfolio.
ABOUT THE INVESTMENT ADVISER
Garrett R. Van Wagoner is portfolio manager and President of the Van Wagoner
Funds. He manages all six portfolios: Emerging Growth, Micro-Cap, Mid-Cap,
Capital Appreciation, Growth and Post-Venture. Prior to founding Van Wagoner
Capital Management in January 1996, Mr. Van Wagoner managed the Govett Smaller
Companies Fund for three years. He also worked with Bessemer Trust, N.A. and has
over 18 years experience of equity portfolio management. He is a graduate of
Bucknell University.
PROSPECTUS
August 28, 1996
Van Wagoner
Capital Management, Inc.
Investment Adviser
VAN WAGONER FUNDS, INC.
Van Wagoner Funds, Inc. (the "Company") is a no-load, open-end management
investment company, commonly known as a mutual fund. The Company presently
consists of three diversified investment portfolios designed to offer investors
a range of equity-oriented investment opportunities. Each investment portfolio
is individually referred to as a "Fund" and collectively as the "Funds."
Van Wagoner Capital Management, Inc. serves as the investment adviser to the
Funds. Garrett R. Van Wagoner, founder and President of Van Wagoner Capital
Management, Inc., manages the investment program of the Funds and is primarily
responsible for the day-to-day management of each Fund's portfolio.
Van Wagoner Emerging Growth Fund seeks long-term capital appreciation. The
Emerging Growth Fund invests primarily in equity securities of companies
believed by the Fund's investment adviser to have the potential for above-
average long-term growth in market value. The Emerging Growth Fund may invest in
companies of all sizes.
Van Wagoner Micro-Cap Fund seeks capital appreciation. The Micro-Cap Fund
invests primarily in equity securities of companies with market capitalizations
of less than $350 million.
Van Wagoner Mid-Cap Fund seeks capital appreciation. The Mid-Cap Fund invests
primarily in equity securities of companies with market capitalizations between
$500 million and $5 billion.
Van Wagoner Capital Appreciation Fund seeks capital appreciation. The Fund
invests in companies that the Adviser believes to have the potential for long-
term growth in their business. The Capital Appreciation Fund focuses on
companies with small- to mid-size market capitalizations.
Van Wagoner Growth Fund seeks capital appreciation. The Fund invests in
companies that the Adviser believes to have the potential for above-average
long-term growth. The Fund will focus on companies that have mid- to larger-size
market capitalizations.
Van Wagoner Post-Venture Fund seeks capital appreciation. The Fund invests
primarily in companies considered by the Adviser to be in their post-venture
capital stage. Under normal market conditions, the Fund will invest at least 65%
of its total assets in securities of companies that have received venture
capital financing during the early stages of the company's existence or the
early stages of the development of a new product or service, or as part of a
reorganization, restructuring or recapitalization.
This Prospectus sets forth concisely the information about the Funds that you
should know before investing. You are advised to read this Prospectus carefully
and keep it for future reference.
A Statement of Additional Information, dated August , 1996, which is
incorporated herein by reference, has been filed with the Securities and
Exchange Commission. The Statement of Additional Information, which may be
revised from time to time, contains further information about the Funds and is
available, without charge, by writing to the Funds at P.O. Box 1628, Milwaukee,
WI 53201-1628, or calling 1-800-228-2121. If you wish to contact the Funds via
an overnight delivery, send it to: Van Wagoner Funds, Inc., 207 East Buffalo
Street, Suite 315, Milwaukee, WI 53202-5712.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
Expense Summary 3
Financial Highlights 5
Van Wagoner Funds, Inc. 6
Investment Objectives, Policies and Risk Considerations 6
Investment Limitations 14
Management of the Funds 15
Pricing of Fund Shares 18
How to Purchase Shares 19
How to Exchange Shares 22
How to Redeem Shares 25
Dividends and Distributions 28
Shareholder Reports and Information 28
Retirement Plans 29
Service and Distribution Plan 30
Taxes 30
Capital Structure 31
Transfer and Dividend Disbursing Agent, Custodian and
Independent Accountants 32
Fund Performance 32
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Funds. The Prospectus does not constitute an offering by the Funds in any
jurisdiction in which such offering may not lawfully be made.
EXPENSE SUMMARY
The following table is designed to assist you in understanding the expenses you
will bear directly or indirectly as a shareholder of Van Wagoner Funds, Inc.
Shareholder Transaction Expenses are charges that you pay when buying or selling
shares of a Fund. Annual Fund Operating Expenses are paid out of a Fund's assets
and include fees for portfolio management, maintenance of shareholder accounts,
general Fund administration, shareholder servicing, accounting and other
services. The Annual Operating Expenses are the expenses expected to be incurred
by each Fund during the current fiscal year. Actual total operating expenses may
be higher or lower than those indicated. An example based on the summary is also
shown.
EMERGING
GROWTH MICRO-CAP MID-CAP
FUND FUND FUND
---- ---- ----
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases None None None
Maximum Sales Load Imposed
on Reinvested Dividends None None None
Deferred Sales Load Imposed
on Redemptions None None None
Redemption Fees(1) None None None
Exchange Fees(2) $5.00 $5.00 $5.00
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees 1.25% 1.50% 1.00%
12b-1 Fees(3) 0.25% 0.25% 0.25%
Other Expenses (net of
reimbursement)(4)(5) 0.37% 0.20% 0.70%
Total Operating Expenses (net of
reimbursement)(5) 1.87% 1.95% 1.95%
CAPITAL POST-
APPRECIATION GROWTH VENTURE
FUND FUND FUND
----- ------ ------
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases None None None
Maximum Sales Load Imposed
on Reinvested Dividends None None None
Deferred Sales Load Imposed
on Redemptions None None None
Redemption Fees(1) None None None
Exchange Fees(2) $5.00 $5.00 $5.00
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees 1.25% 1.00% 1.50%
12b-1 Fees(3) 0.25% 0.25% 0.25%
Other Expenses (net of
reimbursement)(4)(5) 0.45% 0.70% 0.20%
Total Operating Expenses (net of
reimbursement)(5) 1.95% 1.95% 1.95%
(1) A fee of $10.00 is charged for each wire redemption.
(2) A fee of $5.00 is charged for telephone exchanges but no fee is charged for
written exchange requests.
(3) The maximum level of distribution expenses is 0.25% per annum of each Fund's
average net assets. See "Service and Distribution Plan" for further details.
The distribution expenses for long-term shareholders may total more than the
maximum sales charge that would have been permissible if imposed entirely as
an initial sales charge.
(4) Such expenses include custodian, transfer agency and administration fees and
other customary Fund expenses.
(5) The Funds' investment adviser has voluntarily agreed to limit the total
operating expenses of the Emerging Growth, Micro-Cap, Mid-Cap, Capital
Appreciation, Growth and Post-Venture Funds (excluding interest, taxes,
brokerage and extraordinary expense) to an annual rate of 1.95%, respectively,
of each Fund's average net assets until January 1, 1997. After such date, the
expense limitation may be terminated or revised at any time. The Funds
estimate that absent the limitation, Other Expenses of the Micro-Cap, Mid-Cap,
Capital Appreciation, Growth and Post-Venture Funds would initially be
approximately 0.78%, 0.83%, 0.71%, 1.30% and 1.30%, respectively, and the
Total Annual Operating Expenses of the Funds would initially be approximately
2.53%, 2.08%, 2.21%, 2.55% and 3.05%, respectively.
EXAMPLE
Based on the foregoing table, you would pay the following expenses on a $1,000
investment, assuming (i) a 5% annual return and (ii) redemption at the end of
each time period:
Emerging Capital Post-
Growth Micro-Cap Mid-Cap Appreciation Growth Venture
Fund Fund Fund Fund Fund Fund
---- ---- ---- ---- ---- ----
One Year $19 $20 $20 $20 $20 $20
Three Years $59 $62 $62 $62 $62 $62
The examples shown above should not be considered representations of past or
future expenses or rates of return. Van Wagoner Funds are new and actual
operating expenses and investment return may be more or less than those shown.
Information about the actual performance of the Funds will be contained in the
Funds' future annual reports to shareholders, which may be obtained without
charge when they become available.
FINANCIAL HIGHLIGHTS
The financial information for each Fund share outstanding during the periods
specified in the following table has been derived from the financial records of
each Fund. The table should be read in conjunction with the financial statements
and related notes included in the Semi-Annual Report to Shareholders. The
Capital Appreciation Fund, Growth Fund and Post-Venture Fund commenced
operations on August , 1996.
----
Six Months Ended June 30, 1996 (Unaudited)
Emerging
Growth Micro-Cap Mid-Cap
Fund(1) Fund(1) Fund(1)
------- ------- -------
Net Asset Value, Beginning of Period $10.00 $10.00 $10.00
Income (Loss) from Investment Operations:
Net investment income (loss) (0.03) 0.01 (0.1)
Net realized and unrealized gains
on investments 5.00 3.57 3.61
-------- -------- --------
Total from investment operations 4.97 3.58 3.60
-------- -------- --------
Net Asset Value, End of Period $14.97 $13.58 $13.60
======== ======== ========
Total Return(2) 49.70% 35.80% 36.00%
Supplemental Data and Ratios:
Net assets, end of period (000s) $782,529 $139,740 $93,361
Ratio of net expenses to average
net assets(3)(4) 1.87% 1.95% 1.95%
Ratio of net investment income (loss) to
average net assets(3)(4) (0.82)% 0.27% (0.39)%
Portfolio turnover rate 34% 27% 53%
Average commission rate paid on portfolio
investment transactions $0.0578 $0.0550 $0.0572
(1) Commenced operations on December 31, 1995
(2) Not annualized
(3) Annualized
(4) Without fees waived, the ratio of net expenses to average net assets would
have been 2.54% for the Micro-Cap Fund and 2.42% for the Mid-Cap Fund. The
ratio of net investment income (loss) to average net assets would have been
(0.32)% for the Micro-Cap Fund and (0.86)% for the Mid-Cap Fund. The annual
expense ratio of each Fund is capped at 1.95% through January 1, 1997.
VAN WAGONER FUNDS, INC.
Van Wagoner Funds, Inc. (the "Company") is a no-load, open-end management
investment company, commonly known as a mutual fund, which is registered under
the Investment Company Act of 1940 (the "1940 Act"). The Company presently
consists of six diversified investment portfolios: Van Wagoner Emerging Growth
Fund, Van Wagoner Micro-Cap Fund, Van Wagoner Mid-Cap Fund, Van Wagoner Capital
Appreciation Fund, Van Wagoner Growth Fund and Van Wagoner Post-Venture Fund
(each investment portfolio is individually referred to as a "Fund" and
collectively as the "Funds"). The Funds offer a range of equity-oriented
investment opportunities.
Van Wagoner Capital Management, Inc. (the "Adviser") serves as the investment
adviser to the Funds. Garrett R. Van Wagoner, founder and President of the
Adviser, is primarily responsible for the day-to-day management of each Fund's
investment portfolio. Mr. Van Wagoner has had over 17 years of experience as a
securities analyst and portfolio manager including serving as the portfolio
manager of the Govett Smaller Companies Fund from March 1993 until December
1995. See "Management of the Funds."
Each Fund obtains its assets by continuously selling its shares to the
public. Proceeds from such sales are invested by the Fund in securities of other
companies. The resources of many investors are thus combined and each individual
investor has an interest in every one of the securities owned, thereby providing
diversification in a variety of industries. The Adviser furnishes professional
management to select and watch over its investments. As an open-end investment
company, the Fund will redeem any of its outstanding shares on demand of the
owner at the next determined net asset value. Registration of the Funds under
the 1940 Act does not involve supervision of the Funds' management or policies
by the Securities and Exchange Commission.
INVESTMENT OBJECTIVES, POLICIES
AND RISK CONSIDERATIONS
General
The investment objective of each of the Funds is to seek capital appreciation.
Each Fund pursues its investment objective by investing primarily in equity
securities subject to certain separate investment policies described below.
Equity securities are common stocks, preferred stocks, warrants to purchase
common stocks or preferred stocks, and securities convertible into common or
preferred stocks. When selecting securities, the Adviser will consider certain
criteria including, but not limited to, (1) the prospects for a company's
product, (2) the potential for the company's industry, (3) management ability,
(4) the relationship of the price of the security to its estimated value, and
(5) relevant market, economic and political considerations. Securities in which
the Funds may invest may still be in the development stage, may be older
companies that appear to be entering a new era of growth due to management
changes, development of new technology or other events, or may be companies with
high growth rates.
Because shares of each Fund represent an investment in securities with
fluctuating market prices, you should understand that the net asset value per
share of each Fund will vary as the aggregate value of a Fund's portfolio
securities increases or decreases. An investment in the Funds should be
considered a long-term investment. The Funds are not designed to meet investors'
short-term financial needs, nor is any single Fund or a combination of the Funds
intended to provide a complete or balanced investment program.
The investment objectives, policies and practices of each Fund, unless
otherwise specifically stated, are not fundamental and may be changed by the
Board of Directors without shareholder approval. See "Investment Limitations."
Because of the risks inherent in all investments, there can be no assurance that
the objectives of the Funds will be met. The descriptions that follow are
designed to help you choose the Fund that best fits your investment objectives.
Emerging Growth Fund
The investment objective of the Emerging Growth Fund is long-term capital
appreciation. The Fund seeks to achieve this objective by investing in companies
that the Adviser believes to have the potential for above-average long-term
growth in market value. The Adviser will focus generally on investments in
companies that have innovative new products and services, strong management
teams, and strong financial condition. The Adviser will also focus on companies
which have a unique capability, whether it be new product development, research
and development expertise or marketing advantage which the Adviser believes
should provide the potential for the company to sustain its growth rate over
several years. In selecting investments for the Emerging Growth Fund, the
Adviser is not limited as to the size of the companies in which it may invest
and may therefore invest in companies of all sizes. See "Other Investment
Policies and Risks."
Micro-Cap Fund
The investment objective of the Micro-Cap Fund is capital appreciation. The Fund
seeks to achieve this investment objective by investing, under normal market
conditions, at least 65% of its total assets in equity securities of companies
that, at the time of purchase, have market capitalizations of less than $350
million. The Adviser will focus generally on investments in companies that have
strong management teams and the Adviser perceives to have the ability to grow
significantly over the next several years. These companies may still be in the
developmental stage and may have limited product lines. See "Other Investment
Policies and Risks."
Mid-Cap Fund
The investment objective of the Mid-Cap Fund is capital appreciation. In seeking
to achieve this investment objective the Fund will invest, under normal market
conditions, at least 65% of its total assets in equity securities of companies
that, at the time of purchase, have market capitalizations between $500 million
and $5 billion. The Adviser will focus on companies that are more established
than those in the Micro-Cap Fund, but are still undergoing growth due to a new,
improved or upgraded product, service or business operation. See "Other
Investment Policies and Risks."
Capital Appreciation Fund
The investment objective of the Capital Appreciation Fund is capital
appreciation. The Fund seeks to achieve this investment objective by investing
in companies that the Adviser believes to have the potential for long-term
growth in their business. The Adviser will focus on companies that have
characteristics the Adviser believes could allow for rapid growth including
innovative products or services, capable management, strong balance sheets
and/or a unique competitive strength. Although the Adviser may invest in
companies of all sizes, the Adviser also expects to focus on companies that, at
the time of purchase, have small- or mid-size market capitalizations.
Growth Fund
The investment objective of the Growth Fund is capital appreciation. The Fund
seeks to achieve this objective by investing in companies that the Adviser
believes to have the potential for above-average long-term growth. The Adviser
will focus on companies that are more established than traditional emerging
growth companies but that the Adviser believes have the potential for above-
average growth due to new products or services, changes in financial or other
conditions, new revitalized management or other factors. The Adviser also
expects to focus on companies that, at the time of purchase, have mid- to
larger-size market capitalizations, although the Adviser may invest in companies
of all sizes.
Post-Venture Fund
The investment objective of the Post-Venture Fund is capital appreciation. The
Fund seeks to achieve its objective by investing in companies that the Adviser
believes to have the potential for above-average growth in market value. The
Fund will invest primarily in companies considered by the Adviser to be in their
post-venture capital stage. Under normal market conditions, the Fund will invest
at least 65% of its total assets in securities of companies that have received
venture capital financing during the early stages of the company's existence or
as part of a reorganization, restructuring or recapitalization. It is
anticipated that the Fund will focus on investing primarily in companies during
or after they have engaged in the early stages of their public existence. The
Fund may invest in companies of all sizes.
Other Investment Policies and Risks
In addition to the investment policies described above (and subject to
certain restrictions described below), each of the Funds may invest in the
following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below. A more
complete discussion of certain of these securities and investment techniques and
the associated risks is contained in the Statement of Additional Information.
Smaller Capitalization Companies. Each Fund may invest a substantial portion of
its assets in companies with modest capitalization, as well as start-up
companies. While the Adviser believes that small- and medium-sized companies as
well as start-up companies can provide greater growth potential than larger,
more mature companies, investing in the securities of such companies also
involves greater risk, potential price volatility and cost. These companies
often involve higher risks because they lack the management experience,
financial resources, product diversification, markets, distribution channels and
competitive strengths of larger companies. In addition, in many instances, the
frequency and volume of their trading is substantially less than is typical of
larger companies. Therefore, the securities of smaller companies as well as
start-up companies may be subject to wider price fluctuations. The spreads
between the bid and asked prices of the securities of these companies in the
U.S. over-the-counter market typically are larger than the spreads for more
actively traded securities. As a result, a Fund could incur a loss if it
determined to sell such a security shortly after its acquisition. When making
large sales, a Fund may have to sell portfolio holdings at discounts from quoted
prices or may have to make a series of small sales over an extended period of
time due to the trading volume of smaller company securities.
Investors should be aware that, based on the foregoing factors, an investment in
the Funds may be subject to greater price fluctuations than an investment in a
fund that invests primarily in larger, more established companies. The Adviser's
research efforts may also play a greater role in selecting securities for the
Funds than in a fund that invests in larger, more established companies. Each
Fund may invest up to 10% of its net assets in securities of issuers which,
together with any predecessor entity, have a record of less than three years of
continuous operation.
Foreign Securities. Each Fund may invest without limitation in securities of
foreign issuers which are publicly traded in the United States, either directly
or through sponsored and unsponsored American Depository Receipts ("ADRs").
ADRs typically are issued by a U.S. bank or trust company and evidence ownership
of underlying securities issued by a foreign corporation. Unsponsored ADRs
differ from sponsored ADRs in that the establishment of unsponsored ADRs are not
approved by the issuer of the underlying securities. As a result, available
information concerning the issuer may not be as current or reliable as the
information for sponsored ADRs, and the price of unsponsored ADRs may be more
volatile.
Investments in foreign securities involve special risks and costs and
opportunities which are in addition to those inherent in domestic investments.
Political, economic or social instability of the issuer or the country of issue,
the possibility of expropriation or confiscatory taxation, limitations on the
removal of assets or diplomatic developments, and the possibility of adverse
changes in investment or exchange control regulations are among the inherent
risks. Foreign companies are not subject to the regulatory requirements of U.S.
companies and, as such, there may be less publicly available information about
such companies. Moreover, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Dividends and interest payable
on a Fund's foreign portfolio securities may be subject to foreign withholding
taxes. To the extent such taxes are not offset by credits or deductions allowed
to investors under U.S. federal income tax law, such taxes may reduce the net
return to shareholders. See "Taxes" in the Statement of Additional
Information. Because of these and other factors, securities of foreign companies
acquired by the Funds may be subject to greater fluctuation than securities of
domestic companies.
Hedging Strategies. The Funds may use various hedging strategies to attempt to
reduce the overall level of risk for an individual security, or group of
securities, or to reduce the investment risk of the Funds. There can be no
assurance that such efforts will succeed. Each Fund may write (i.e., sell)
covered call and secured put options, and buy put or call options, which are
sometimes referred to as derivatives, for hedging purposes. These options may
relate to particular securities or stock indices, and may or may not be listed
on a securities exchange and may or may not be issued by the Options Clearing
Corporation. Each Fund will not purchase put and call options where the
aggregate premiums on its outstanding options exceed 5% of its net assets at the
time of purchase, and will not write options on more than 25% of the value of
its net assets (measured at the time an option is written). Options trading is a
highly specialized activity that entails greater than ordinary investment risks.
In addition, unlisted options are not subject to the protections afforded
purchasers of listed options issued by the Options Clearing Corporation, which
performs the obligations of its members if they default. The primary risks
associated with the use of options are: (1) the imperfect correlation between
the change in market value of the instruments held by a Fund and the price of
the option; (2) possible lack of a liquid secondary market; (3) losses caused by
unanticipated market movements; and (4) the Adviser's ability to predict
correctly the direction of securities prices and economic factors. For further
discussion of risks involved with the use of options, see "Additional
Investment Information - Hedging Strategies" in the Statement of Additional
Information.
Warrants and Rights. Each Fund may invest up to 5% of its net assets in
warrants or rights, valued at the lower of cost or market, which entitle the
holder to buy equity securities during a specific period of time. A Fund will
make such investments only if the underlying equity securities are deemed
appropriate by the Adviser for inclusion in a Fund's portfolio. Included in the
5% amount, but not to exceed 2% of net assets, are warrants and rights whose
underlying securities are not traded on principal domestic or foreign exchanges.
Warrants and rights acquired by a Fund in units or attached to securities are
not subject to these restrictions.
Convertible Securities. Each Fund may invest in convertible securities. A
convertible security may be converted either at a stated price or rate within a
specified period of time into a specified number of shares of common stock. By
investing in convertible securities, a Fund seeks the opportunity, through the
conversion feature, to participate in a portion of the capital appreciation of
the common stock into which the securities are convertible, while earning higher
current income than is available from the common stock. Typically, the
convertible debt securities in which the Funds will invest will be of a quality
less than investment grade (so-called "junk bonds"). The Funds will, however,
limit their investment in non-investment grade convertible debt securities to no
more than 5% of their net assets at the time of purchase and will not acquire
convertible debt securities rated below B by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P"), or unrated securities
deemed by the Adviser to be of comparable quality. Securities rated B are
considered predominantly speculative and generally lack the characteristics of a
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the bond over any long period of time may be
small. Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by a Fund. The Adviser will consider such an event in determining
whether the Fund should continue to hold the security. The Adviser expects,
however, to sell promptly any convertible debt securities that fall below a B
rating quality as a result of these events. See the Statement of Additional
Information for a description of applicable debt ratings.
Money Market Instruments. In times when the Adviser believes that adverse
economic or market conditions justify such actions, each Fund may invest
temporarily up to 100% of its assets in short-term, high quality money market
instruments. The Funds may also invest in such instruments pending investment,
to meet anticipated redemption requests, and/or to retain the flexibility to
respond promptly to changes in market and economic conditions. It is impossible
to predict when or for how long the Adviser may employ these strategies.
Each of the Funds may invest in commercial paper and other cash
equivalents rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's,
commercial paper master notes (which are demand instruments bearing interest at
rates which are fixed to known lending rates and automatically adjusted when
such lending rates change) of issuers whose commercial paper is rated A-1 or A-2
by S&P or Prime-1 or Prime-2 by Moody's, and unrated debt securities which are
deemed by the Adviser to be of comparable quality. Each of the Funds may also
invest in United States Treasury Bills and Notes, certificates of deposit of
domestic branches of U.S. banks and corporate bonds with remaining maturities of
13 months or less. For debt obligations other than commercial paper, these
securities are limited to those rated at least Aa by Moody's or AA by S&P, or
unrated but deemed by the Adviser to be of comparable quality.
Each Fund's investment in money market instruments for the foregoing
reasons may also include securities issued by other investment companies that
invest in high quality, short-term debt securities (i.e., money market
instruments). In addition to the advisory fees and other expenses a Fund bears
directly in connection with its own operations, as a shareholder of another
investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses, and such fees and other
expenses will be borne indirectly by the Fund's shareholders.
In addition to the foregoing, each Fund may enter into repurchase agreements. In
a repurchase agreement, a Fund buys an interest-bearing security at one price
and simultaneously agrees to sell it back at a mutually agreed upon time and
price. The repurchase price reflects an agreed-upon interest rate during the
time the Fund's money is invested in the security. Since the security purchased
constitutes security for the repurchase obligation, a repurchase agreement can
be considered as a loan collateralized by the security purchased. The Fund's
risk is the ability of the seller to pay the agreed-upon price on the delivery
date. If the seller defaults, the Fund may incur costs in disposing of the
collateral, which would reduce the amount realized thereon. If the seller seeks
relief under the bankruptcy laws, the disposition of the collateral may be
delayed or limited. To the extent the value of the security decreases, the Fund
could experience a loss. Repurchase agreements will be acquired in accordance
with procedures established by the Company's Board of Directors which are
designed to evaluate the creditworthiness of the other parties to the repurchase
agreements.
Portfolio Turnover and Brokerage Allocation. In order to achieve each Fund's
investment objective, the Adviser will generally purchase and sell securities
without regard to the length of time the security has been held and,
accordingly, it can be expected that the rate of portfolio turnover may be
substantial. The Adviser intends to purchase a given security whenever it
believes it will contribute to the stated objective of a Fund, even if the same
security has only recently been sold. In selling a given security, the Adviser
keeps in mind that profits from sales of securities held less than three months
must be limited in order to meet the requirements of Subchapter M of the
Internal Revenue Code. Subject to the foregoing, the Funds may sell a given
security, no matter for how long or for how short a period it has been held in
the portfolio, and no matter whether the sale is at a gain or loss, if the
Adviser believes that it is not fulfilling its purpose. Since investment
decisions are based on the anticipated contribution of the security in question
to the applicable Fund's objectives, the rate of portfolio turnover is
irrelevant when the Adviser believes a change is in order to achieve those
objectives, and each of the Fund's annual portfolio turnover rate may vary from
year to year.
High portfolio turnover in any year will result in the payment by a Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains. Distributions to
shareholders of such investment gains, to the extent they consist of net short-
term capital gains, will be considered ordinary income for federal income tax
purposes.
Miscellaneous. Each of the Funds may invest up to 5% of its net assets in
illiquid securities. Securities eligible to be resold pursuant to Rule 144A
under the Securities Act of 1933, as amended, may be considered liquid. In
addition, if a Fund anticipates that a price of a security will decline, it may
engage in short sales if, at the time of the short sale, the Fund owns or has
the right to acquire an equal amount of the security being sold short at no
additional cost (so-called "short sales against the box").
INVESTMENT LIMITATIONS
Each Fund has adopted certain fundamental investment restrictions that may be
changed only with the approval by a majority of a Fund's outstanding shares. The
following description summarizes several of the Funds' fundamental restrictions
which have been adopted to maintain portfolio diversification and reduce risk.
No Fund may:
1. purchase the securities of any issuer if the purchase would cause more than
5% of the value of a Fund's total assets to be invested in securities of any
one issuer (except securities of the U.S. government or any agency or
instrumentality thereof), or purchase more than 10% of the outstanding voting
securities of any one issuer, except that up to 25% of a Fund's total assets
may be invested without regard to these limitations;
2. invest 25% or more of its total assets at the time of purchase in securities
of issuers whose principal business activities are in the same industry; and
3. borrow money except for temporary purposes in amounts up to 33 1/3% of the
value of its total assets at the time of borrowing.
A list of the Funds' objectives, policies and restrictions, both fundamental and
nonfundamental, is set forth in the Statement of Additional Information. In
order to provide a degree of flexibility, the Funds' investment objectives, as
well as other policies which are not deemed fundamental, may be modified by the
Board of Directors without shareholder approval. Any change in a Fund's
investment objective may result in the Fund having investment objectives
different from the objectives which the shareholder considered appropriate at
the time of investment in the Fund. However, each Fund will not change its
investment objective without written notice to shareholders sent at least 30
days in advance of any such change.
MANAGEMENT OF THE FUNDS
As a Maryland corporation, the business affairs of the Company are managed by
its Board of Directors. The Company, on behalf of each of the Funds, has entered
into investment advisory agreements with Van Wagoner Capital Management, Inc., 1
Bush Street, Suite 1150, San Francisco, CA 94104 (the "Investment Advisory
Agreements"). Pursuant to such Investment Advisory Agreements, the Adviser
furnishes continuous investment advisory services to each of the Funds.
Investment Adviser
The Adviser was organized on October 24, 1995 as a Delaware corporation to
become the investment adviser to the Funds. Garrett R. Van Wagoner, the
President and a director of the Adviser, is the sole shareholder of the Adviser,
and is the portfolio manager for each of the Funds. Mr. Van Wagoner has over 18
years of experience as a securities analyst and portfolio manager. Prior to
managing the Funds, Mr. Van Wagoner served as the portfolio manager of the
Govett Smaller Companies Fund, a portfolio of The Govett Funds, Inc., from March
1993 until December 1995. Prior thereto, he was Senior Vice President at
Bessemer Trust, N.A., since 1982, where he was responsible for its emerging
growth stock investment program.
As portfolio manager of the Govett Smaller Companies Fund, Mr. Van Wagoner was
responsible for its day-to-day management and the selection of its investments.
Average annual returns for the one-year period ended December 31, 1995 and for
the entire period during which Mr. Van Wagoner managed the Govett Smaller
Companies Fund compared with the performance of the Nasdaq Composite Index and
the S&P 500 were:
Govett Nasdaq
Smaller Composite
Companies Fund(1) Index(2) S&P 500(3)
----------------- -------- ----------
One Year 69.0% 39.9% 37.6%
March 1, 1993 through
December 31, 1995 54.7% 17.2% 15.4%
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions and is net of fund expenses. The
expense ratio of the Govett Smaller Companies Fund was capped at 1.95% for the
period March 1, 1993 through December 31, 1995. The expense ratio of the
Emerging Growth Fund will be capped initially at 1.95%.
(2) The Nasdaq Composite Index is a broad-based, unmanaged index that represents
the general performance of the stocks of smaller companies. It does not
include any commissions or fees that would be paid by an investor purchasing
the securities it represents. The Index is adjusted to reflect reinvestment of
dividends.
(3) The S&P 500 is an unmanaged index of 500 selected stocks, most of which are
listed on the New York Stock Exchange. The Index is heavily weighted toward
stocks with large market capitalization and represents approximately two-
thirds of the total market value of all domestic stocks.
The foregoing is provided to illustrate past performance of Mr. Van Wagoner in
managing a portfolio similar to the Emerging Growth Fund. The foregoing
information is considered relevant because the Govett Smaller Companies Fund was
managed by Mr. Van Wagoner, the portfolio manager of the Emerging Growth Fund,
using the same investment objective and substantially similar policies and
strategies as those used by the Emerging Growth Fund. Unlike the Emerging Growth
Fund, which is not limited as to the capitalization of portfolio securities, the
Govett Smaller Companies Fund was required to invest at least 65% of its total
assets in companies with individual market capitalizations which would, at the
time of purchase, place them in the same size range as companies included in the
Nasdaq Composite Index, excluding its top 75 companies. Of course, past
performance is not indicative of future performance and investment returns will
fluctuate reflecting market conditions and changes in company-specific
fundamentals of portfolio securities. Mr. Van Wagoner has also managed other
accounts with investment objectives similar to the Emerging Growth Fund but did
not manage such accounts until June 1994.
Pursuant to the Investment Advisory Agreements between the Adviser and the
Company on behalf of the Funds, the Adviser furnishes continuous investment
advisory services and management to each of the Funds. Prior to its organization
in October 1995, the Adviser had no prior operating history. Although the
Adviser, as a recently formed entity, has had no prior experience advising a
registered investment company, Mr. Van Wagoner, who is the sole shareholder of
the Adviser and who is the founder and President of the Adviser, has had 17
years of experience as a securities analyst and portfolio manager, including
approximately three years during which he served as the portfolio manager of the
Govett Smaller Companies Fund, a mutual fund with a similar investment objective
to the Emerging Growth Fund.
The Adviser supervises and manages the investment portfolios of the Funds, and
subject to such policies as the Board of Directors of the Company may determine,
directs the purchase or sale of investment securities in the day-to-day
management of the Funds' investment portfolios. Under the Agreement, the
Adviser, at its own expense and without reimbursement from the Funds, furnishes
office space and all necessary office facilities, equipment and executive
personnel for making the investment decisions necessary for managing the Funds
and maintaining its organization, and will pay the salaries and fees of all
officers and directors of the Funds (except the fees paid to disinterested
directors). For the foregoing, the Adviser will receive a monthly fee of 1/12 of
1.25%, 1.50%, 1.00%, 1.25%, 1.00% and 1.50% on the average daily net assets of
the Emerging Growth, Micro-Cap, Mid-Cap, Capital Appreciation, Growth and Post-
Venture Funds, respectively. The rate of the advisory fees is higher than that
paid by most mutual funds.
Administration
Pursuant to an Administration and Fund Accounting Agreement (the
"Administration Agreement"), Sunstone Financial Group, Inc. (the
"Administrator" or "Sunstone"), 207 East Buffalo Street, Suite 400,
Milwaukee, WI 53202-5712, acts as administrator for the Funds. The
Administrator, at its own expense and without reimbursement from the Funds,
furnishes office space and all necessary office facilities, equipment, supplies
and clerical and executive personnel for performing the services required to be
performed by it under the Administration Agreement. For its administrative
services (which include clerical, compliance, regulatory, fund accounting and
other services), the Administrator receives from each Fund a fee, computed daily
and payable monthly, based on each Fund's average net assets at the annual rate
of 0.18 of 1.0% on the first $50,000,000 of average net assets, 0.105 of 1.0% on
the next $50,000,000 of average net assets, 0.055 of 1.0% on the next
$150,000,000 of average net assets, and 0.03 of 1.0% on average net assets in
excess of $250,000,000, subject to an annual minimum of $75,000 per Fund, plus
out-of-pocket expenses. In addition, the Administrator received from the Funds
$60,000 for organizational services provided by the Administrator, plus out-of-
pocket expenses. In addition to the foregoing services and fees, Sunstone acts
as the transfer agent and dividend disbursing agent for the Funds pursuant to a
Transfer Agent Agreement by and between the Company on behalf of the Funds, and
Sunstone. See "Transfer and Dividend Disbursing Agent, Custodian and
Independent Accountants."
Expenses
The Funds pay all of their own expenses, including without limitation, the cost
of preparing and printing their registration statements required under the
Securities Act of 1933 and the 1940 Act and any amendments thereto, the expense
of registering their shares with the Securities and Exchange Commission and the
various states, the printing and distribution costs of prospectuses mailed to
existing investors, reports to investors, reports to government authorities and
proxy statements, fees paid to directors who are not interested persons of the
Adviser, interest charges, taxes, legal expenses, association membership dues,
auditing services, insurance premiums, brokerage commissions and expenses in
connection with portfolio transactions, fees and expenses of the custodian of
the Funds' assets, printing and mailing expenses and charges and expenses of
dividend disbursing agents, accounting services agents, registrars and stock
transfer agents.
PRICING OF FUND SHARES
The price you pay when buying a Fund's shares, and the price you receive when
selling (redeeming) a Fund's shares, is the net asset value of the shares next
determined after receipt of a purchase or redemption request in proper form. No
front end sales charge or commission of any kind is added by the Fund upon a
purchase and no charge is deducted upon a redemption. The Funds currently charge
a $10 fee for each redemption made by wire. See "How to Redeem Shares."
The per share net asset value of a Fund is determined by dividing the total
value of its net assets (meaning its assets less its liabilities) by the total
number of its shares outstanding at that time. The net asset value is determined
as of the close of regular trading (currently 4:00 p.m. Eastern time) on the New
York Stock Exchange on each day the New York Stock Exchange is open for trading.
This determination is applicable to all transactions in shares of a Fund prior
to that time and after the previous time as of which the net asset value was
determined. Accordingly, investments accepted or redemption requests received in
proper form prior to the close of regular trading on a day the New York Stock
Exchange is open for trading will be valued as of the close of trading, and
investments accepted or redemption requests received in proper form after that
time will be valued as of the close of the next trading day.
Investments are considered received only when your check, wired funds or
electronically transferred funds are received by the Funds. Investments by
telephone pursuant to your prior authorization to the Funds to draw on your bank
account are considered received when the proceeds from the bank account are
received by the Funds, which generally takes two to three banking days.
Securities which are traded on a recognized stock exchange are valued at the
last sale price on the securities exchange on which such securities are
primarily traded. Securities traded on only over-the-counter markets are valued
on the basis of closing over-the-counter trade prices. Securities for which
there were no transactions are valued at the closing bid prices. Debt securities
(other than short-term instruments) are valued at prices furnished by a pricing
service, subject to review and possible revision by the Funds' Adviser. Any
modification of the price of a debt security furnished by a pricing service is
made pursuant to procedures adopted by the Company's Board of Directors. Debt
instruments maturing within 60 days are valued by the amortized cost method. Any
securities for which market quotations are not readily available are valued at
their fair value as determined in good faith by the Adviser under the
supervision of the Company's Board of Directors.
HOW TO PURCHASE SHARES
All of the Funds are no-load, so you may purchase, redeem or exchange shares
directly at net asset value without paying a sales charge. Because the Funds'
net asset value changes daily, your purchase price will be the next net asset
value determined after the Funds receive and accept your purchase order.
See "Pricing of Fund Shares."
Initial Minimum Additional Minimum
Investment Investment
Type of Account ---------- ----------
Regular $1,000 $50
Automatic Investment Plan $500 $50
Individual Retirement Account $500 $50
Gift to Minors $500 $50
Each Fund reserves the right to reject any order for the purchase of its shares
or to limit or suspend, without prior notice, the offering of its shares. The
required minimum investments may be waived in the case of qualified retirement
plans.
How to Open Your Account by Mail. Please complete the Purchase Application. You
may duplicate any application or you can obtain additional copies of the
Purchase Application and a copy of the IRA Purchase Application from the Funds
by calling 1-800-228-2121. (Please note that you must use a different form for
an IRA.)
Your completed Purchase Application should be mailed directly to:
Van Wagoner Funds, Inc.
P.O. Box 1628
Milwaukee, WI 53201-1628
To purchase shares by overnight or express mail, please use the following
street address:
Van Wagoner Funds, Inc.
207 East Buffalo Street, Suite 315
Milwaukee, WI 53202-5712
All applications must be accompanied by payment in the form of a check made
payable to "Van Wagoner Funds." All purchases must be made in U.S. dollars and
checks must be drawn on U.S. banks. No cash, credit cards or third party checks
will be accepted. When a purchase is made by check and a redemption is made
shortly thereafter, the Funds will delay the mailing of a redemption check until
the purchase check has cleared your bank, which may take 7 business days from
the purchase date. If you contemplate needing to exchange or redeem your
investment shortly after purchase, you should purchase the shares by wire as
discussed below.
How to Open Your Account by Wire. You may make purchases by direct wire
transfers. To ensure proper credit to your account, you must call the Funds at
1-800-228-2121 for instructions and to obtain an investor account number prior
to wiring funds. Funds should be wired through the Federal Reserve System as
follows:
UMB Bank, n.a.
A.B.A. Number 101000695
For credit to Van Wagoner Funds, Inc.
Account Number 9870610183
For further credit to:
(investor account number)
(name or account registration)
(Social Security or Tax Identification Number)
(identify which Fund to purchase)
You must promptly complete a Purchase Application and mail it to the Funds at
the following address: Van Wagoner Funds, Inc., P.O. Box 1628, Milwaukee, WI
53201-1628. If you wish to send it via overnight delivery, you may send it to:
Van Wagoner Funds, Inc., 207 East Buffalo Street, Suite 315, Milwaukee, WI
53202-5712. An original Purchase Application must be received by the Funds to
establish privileges and to verify your account information. Payment of
redemption proceeds may be delayed and taxes may be withheld unless the Funds
receive a properly completed and executed Purchase Application. The Funds
reserve the right to refuse a telephone transaction if they believe it advisable
to do so.
If you have any questions, call the Funds at 1-800-228-2121.
How to Add to Your Account By Mail. You may make additional investments by mail
or by wire in the minimums listed previously. When adding to an account by mail,
you should send the Funds your check, together with a subsequent investment slip
from a recent statement. If this investment slip is unavailable, you should send
a signed note giving the full name of the account and the account number.
Purchases will not be available for exchange or redemption for 7 business days.
This delay allows the Funds to verify that proceeds used to purchase Fund shares
will not be returned due to insufficient funds and is intended to protect the
remaining investors from loss.
How to Add to Your Account By Electronic Funds Transfer. You may also make
additional investments by telephone or in writing through electronic funds
transfers if you have previously selected this service. By selecting this
service, you authorize the Funds to draw on your preauthorized bank account as
shown on the records of the Funds and receive the proceeds by electronic funds
transfer. Electronic funds transfers may be made commencing 10 business days
after receipt by the Funds of your request to adopt this service. The period
allows the Funds to verify your bank information. Investments made by phone in
any one account must be in an amount of at least $50. Investments made by
electronic funds transfer will be effective at the net asset value next computed
after receipt by the Funds of the proceeds from your bank account. Purchases
will not be available for exchange or redemption for 7 business days. This delay
allows the Funds to verify that proceeds used to purchase Fund shares will not
be returned due to insufficient funds and is intended to protect the remaining
investors from loss. Changes to bank information must be made in writing and
signed by all registered holders of the account with the signatures guaranteed
by a commercial bank or trust company in the United States, a member firm of the
National Association of Securities Dealers, Inc. or other eligible guarantor
institution. (A notary public is not an acceptable guarantor.) See "Pricing of
Fund Shares." This service may be selected by completing the appropriate
section on the Purchase Application.
How to Add to Your Account By Wire. For additional investments made by wire
transfer, you should use the wiring instructions listed previously. Be sure to
include your account number. Wired funds are considered received in good order
on the day they are deposited in the Funds' account if they reach the Funds'
bank account by the Funds' cut-off time for purchases and all required
information is provided in the wire instructions. The wire instructions will
determine the terms of the purchase transaction.
Automatic Investment Plan. You may make purchases of shares of each Fund
automatically on a regular basis ($50 minimum per transaction). You must meet
the Automatic Investment Plan's ("the Plan") minimum initial investment of
$500 before the Plan may be established. Under the Plan, your designated bank or
other financial institution debits a preauthorized amount on your account each
month and applies the amount to the purchase of Fund shares. The Funds require
10 business days after their receipt of your request to initiate the Plan to
verify your account information. Generally, the Plan will begin on the next date
scheduled by the Funds for the Plan following this 10 business day period. The
Plan can be implemented with any financial institution that is a member of the
Automated Clearing House. No service fee is currently charged by the Funds for
participation in the Plan. You will receive a statement on a quarterly basis
showing the purchases made under the Plan. A $20 fee will be imposed by the
Funds if sufficient funds are not available in your account or your account has
been closed at the time of the automatic transaction. Purchases will not be
available for exchange or redemption for 7 business days. This delay allows the
Funds to verify that proceeds used to purchase Fund shares will not be returned
due to insufficient funds and is intended to protect the remaining investors
from loss. You may adopt the Plan at the time an account is opened by completing
the appropriate section of the Purchase Application. You may obtain an
application to establish the Automatic Investment Plan after an account is
opened by calling the Funds at 1-800-228-2121. In the event you discontinue
participation in the Plan, the Funds reserve the right to redeem your Fund
account involuntarily, upon 60 days' written notice, if the account's net asset
value is $1,000 or less. Redeeming all funds from your account does not ensure
that the Plan will be discontinued. You must specify that you wish to terminate
the Plan when closing your account.
Purchasing Shares Through Other Institutions. If you purchase shares through a
program of services offered or administered by a broker-dealer, financial
institution, or other service provider, you should read the program materials,
including information relating to fees, in addition to the Funds' Prospectus.
Certain services of a Fund may not be available or may be modified in connection
with the program of services provided. The Funds may only accept requests to
purchase additional shares into a broker-dealer street name account from the
broker-dealer.
Certain broker-dealers, financial institutions, or other service providers that
have entered into an agreement with the Company may enter purchase orders on
behalf of their customers by phone, with payment to follow within several days
as specified in the agreement. The Funds may effect such purchase orders at the
net asset value next determined after receipt of the telephone purchase order.
It is the responsibility of the broker-dealer, financial institution, or other
service provider to place the order with the Funds on a timely basis. If payment
is not received within the time specified in the agreement, the broker-dealer,
financial institution, or other service provider could be held liable for any
resulting fees or losses.
Miscellaneous. The Funds will charge a $20 service fee against your account for
any check or electronic funds transfer that is returned unpaid and your purchase
will be cancelled. You will also be responsible for any losses suffered by the
Funds as a result. In order to relieve you of responsibility for the safekeeping
and delivery of stock certificates, the Funds do not issue certificates.
HOW TO EXCHANGE SHARES
Shares of any Van Wagoner Fund may be exchanged for shares of another Van
Wagoner Fund that is available for investment at any time. This exchange offer
is available only in states where shares of such other Fund may be legally sold.
Each exchange is subject to the minimum initial investment required for each
Fund. You may make additional exchanges for $500 or more. You may open a new
account or purchase additional shares by making an exchange from an existing Van
Wagoner Fund account. New accounts will have the same registration as the
existing accounts as well as the same privileges, unless otherwise specified.
Exchanges may be made either in writing or by telephone; however, a $5 fee will
be charged by the Funds to your account for each exchange made by telephone.
This fee will be charged to the account from which the Funds are being
withdrawn. To exchange by telephone, you must follow the instructions below
under "How to Redeem by Telephone." For accounts established after August --,
1996, the privilege to initiate telephone exchanges and inquiries is made
available to shareholders automatically. Shareholders may elect to waive the
right to the telephone exchange and inquiry privilege by completing the
appropriate section on the Purchase Application. To elect the telephone exchange
and inquiry privilege after the account has been established either because you
established your account prior to August --, 1996 or you waived the privilege
when establishing your account after August --, 1996, you must send a written
request to the Funds. The request must be signed by each registered holder of
the account with signatures guaranteed by a commercial bank or trust company in
the United States, a member firm of the National Association of Securities
Dealers, Inc. or other eligible guarantor institution. (A notary public is not
an acceptable guarantor.) You must obtain the prospectus for the appropriate Van
Wagoner Fund, and you are advised to read it carefully, before authorizing any
investment in shares of a Van Wagoner Fund.
In addition to the ability to exchange among Van Wagoner Funds, you may exchange
all or a portion of their investment from the Van Wagoner Funds to the Northern
U.S. Government Money Market Fund (the "Money Market Fund"). This expanded
exchange feature is subject to the minimum purchase and redemption amounts set
forth in this Prospectus ($1,000 minimum, $500 subsequent). You must obtain a
copy of the Money Market Fund prospectus from the Funds, and you are advised to
read it carefully, before authorizing any investment in shares of the Money
Market Fund.
For exchanges between Van Wagoner Funds, the value to be exchanged and the price
of the shares being purchased will be the net asset value next determined by the
Funds after receipt and acceptance of proper instructions for the exchange. If
you desire to use the expanded exchange privilege, you should contact the Funds
at 1-800-228-2121 for further information about the procedures and the effective
times for exchanges. Generally, exchange requests received in proper order and
accepted by the Funds by 3:00 p.m. (Central time) or the close of the New York
Stock Exchange, if different, on a day during which each Fund's net asset value
is determined will be effective that day for both the Fund being purchased and
the Fund being redeemed. Please note that when exchanging from a Fund to the
Money Market Fund, you will begin accruing income from the Money Market Fund the
day following the exchange. When exchanging less than all of the balance from
the Money Market Fund to a Fund, your exchange proceeds will exclude accrued and
unpaid income from the Money Market Fund through the date of exchange. When
exchanging your entire balance from the Money Market Fund, accrued income will
automatically be exchanged into a Fund when the income is collected and paid
from the Money Market Fund, at the end of the month. An exchange from one Fund
to another or to the Money Market Fund is treated the same as an ordinary sale
and purchase for federal income tax purposes.
Funds purchased by check or electronic funds transfer will not be available for
exchange for 7 business days. This delay allows the Funds to verify that the
check proceeds used to purchase Fund shares will not be returned due to
insufficient funds and is intended to protect the remaining investors from loss.
If you intend to exchange shares soon after their purchase, you should purchase
the shares by wire or contact the Funds at 1-800-228-2121 for further
information.
Because of the risks associated with common stock investments, the Funds are
intended to be long-term investment vehicles and not designed to provide
investors with a means of speculating on short-term stock market movements. In
addition, because excessive trading can hurt the Funds' performance and
shareholders, the Funds reserve the right to temporarily or permanently
terminate, with or without advance notice, the exchange privilege of any
investor who makes excessive use of the exchange privilege (e.g., more than five
exchanges per calendar year). Your exchanges may be restricted or refused if a
Fund receives or anticipates simultaneous orders affecting significant portions
of a Fund's assets. In particular, a pattern of exchanges with a "market
timer" strategy may be disruptive to the Funds.
Additional documentation may be required for exchange requests if shares are
registered in the name of a corporation, partnership or fiduciary. Contact the
Funds for additional information concerning the exchange privilege.
Automatic Exchange Plan
You may make automatic monthly exchanges from one Van Wagoner Fund account to
another or from one Money Market Fund account to a Fund account ($50 minimum per
transaction). An exchange from one Fund to another is treated the same as an
ordinary sale and purchase for federal income tax purposes and generally, you
will realize a capital gain or loss. You must meet the Funds' minimum initial
investment requirements before this plan is established. You may adopt the plan
at the time an account is opened by completing the appropriate section of the
Purchase Application. You may obtain an application to establish the Automatic
Exchange Plan after an account is open by calling the Funds at 1-800-228-2121.
HOW TO REDEEM SHARES
You may redeem shares of the Funds at any time. The price at which the shares
will be redeemed is the net asset value per share next determined after proper
redemption instructions are received by the Funds. See "Pricing of Fund
Shares." There are no charges for the redemption of shares except that a fee of
$10 is charged for each wire redemption and a fee is charged when redeeming
shares in an Individual Retirement Account. Depending upon the redemption price
you receive, you may realize a capital gain or loss for federal income tax
purposes.
How to Redeem by Mail. To redeem shares by mail, simply send an unconditional
written request to the Funds specifying the number of shares or dollar amount to
be redeemed, the name of the Fund, the name(s) on the account registration and
the account number. If the dollar amount requested to be redeemed is greater
than the current account value as determined by the net asset value on the
effective date of the redemption, the entire account balance will be redeemed. A
request for redemption must be signed exactly as the shares are registered. If
the amount requested is greater than $25,000, the proceeds are to be sent to a
person other than the shareholder(s) of record or to a location other than the
address of record, each signature must be guaranteed by a commercial bank or
trust company in the United States, a member firm of the National Association of
Securities Dealers, Inc. or other eligible guarantor institution. (A notary
public is not an acceptable guarantor.) Guarantees must be signed by an
authorized signatory of the bank, trust company, or member firm and "Signature
Guaranteed" must appear with the signature. Additional documentation may be
required for the redemption of shares held in corporate, partnership or
fiduciary accounts. In case of any questions, contact the Funds in advance.
The Funds will mail payment for redemption within seven days after it receives
proper instructions for redemption. However, the Funds will delay payment for 7
business days on redemptions of recent purchases made by check. This allows the
Funds to verify that the check used to purchase Fund shares will not be returned
due to insufficient funds and is intended to protect the remaining investors
from loss.
How to Redeem by Telephone. For accounts established after August --, 1996 the
privilege to initiate telephone redemptions is automatically available to
shareholders when the account is established. You may elect to waive the
telephone redemption privilege by completing the appropriate section on the
purchase application. After the account has been established, the privilege may
be waived by sending a written request signed by all registered holders of the
account with signatures guaranteed. (A notary public is not an acceptable
guarantor.) Accounts established prior to August --, 1996 did not have the
privilege automatically available and were required to complete the appropriate
section on the Purchase Application. To authorize the telephone redemption
privilege after the account is established, either because your account was
established prior to August --, 1996, or you waived the privilege for an account
established after August --, 1996, you must send a written request to the Funds.
The request must be signed by each registered holder of the account with
signatures guaranteed by a commercial bank or trust company in the United
States, a member firm of the National Association of Securities Dealers, Inc. or
other eligible guarantor institution. (A notary public is not an acceptable
guarantor.) Shares may be redeemed, in an amount up to $25,000, by calling the
Funds at 1-800-228-2121. Proceeds redeemed by telephone will be mailed to your
address, or wired or transmitted by electronic funds transfer to your
preauthorized bank account as shown on the records of the Funds. A redemption
request in excess of $25,000 must be made in writing and signed by each
registered holder of the account with signatures guaranteed by a commercial bank
or trust company in the United States, a member firm of the National Association
of Securities Dealers, Inc. or other eligible guarantor institution. (A notary
public is not an acceptable guarantor.) A telephone redemption request will not
be processed within 30 calendar days after an address change. The redemption
request must be in writing and signed by each registered holder of the account
with signatures guaranteed. (A notary public is not an acceptable guarantor.)
Telephone redemptions must be in amounts of $500 or more.
Payment of the redemption proceeds for Fund shares redeemed by telephone where
you request wire payment will normally be made in federal funds on the next
business day. There is currently a $10 fee for each wire redemption. It will be
deducted from your redemption proceeds. Electronically transferred funds will
ordinarily arrive at your bank within two to three banking days after
transmission. To change the designated account, send a written request with the
signature(s) guaranteed to the Funds. Once the funds are transmitted, the time
of receipt and the availability of the funds are not within the Funds' control.
The Funds reserve the right to delay payment for a period of up to seven days
after receipt of the redemption request.
The Funds reserve the right to refuse a telephone redemption or exchange
transaction if it believes it is advisable to do so. Procedures for redeeming or
exchanging shares of the Funds by telephone may be modified or terminated by the
Funds at any time. In an effort to prevent unauthorized or fraudulent redemption
or exchange requests by telephone, the Funds have implemented procedures
designed to reasonably assure that telephone instructions are genuine. These
procedures include: requesting verification of certain personal information;
recording telephone transactions; confirming transactions in writing; and
restricting transmittal of redemption proceeds to preauthorized designations.
Other procedures may be implemented from time to time. If reasonable procedures
are not implemented, the Funds may be liable for any loss due to unauthorized or
fraudulent transactions. In all other cases, you are liable for any loss for
unauthorized transactions.
You should be aware that during periods of substantial economic or market
change, telephone or wire redemptions may be difficult to implement. If you are
unable to contact the Funds by telephone, you may also redeem shares by
delivering or mailing the redemption request to: Van Wagoner Funds, Inc., P.O.
Box 1628, Milwaukee, WI 53201-1628. If you wish to send the information via
overnight delivery, you may send it to: Van Wagoner Funds, Inc., 207 East
Buffalo Street, Suite 315, Milwaukee, WI 53202-5712. Redemption requests made
via fax will not be accepted by the Funds.
Additional Investment Information
When redeeming shares from the Money Market Fund, if you redeem less than all of
the balance of your account, your redemption proceeds will exclude accrued and
unpaid income through the date of the redemption. When redeeming your entire
balance from the Money Market Fund, accrued income will be paid separately when
the income is collected and paid from the Money Market Fund, at the end of the
month.
The Funds reserve the right to suspend or postpone redemptions during any period
when: trading on the New York Stock Exchange ("Exchange") is restricted, as
determined by the Securities and Exchange Commission ("SEC"), or that the
Exchange is closed for other than customary weekend and holiday closing; the SEC
has by order permitted such suspension; or an emergency, as determined by the
SEC, exists, making disposal of portfolio securities or valuation of net assets
of a Fund not reasonably practicable.
Due to the relatively high cost of maintaining small accounts, if your account
balance falls below the $1,000 minimum as a result of a redemption or exchange
or if you discontinue the Automatic Investment Plan before your account balance
reaches the required minimum, you will be given a 60-day notice to reestablish
the minimum balance or activate an Automatic Investment Plan. If this
requirement is not met, your account may be closed and the proceeds sent to you.
If your account balance in the Money Market Fund is redeemed, accrued interest
will be paid at the end of the following month.
Systematic Withdrawal Plan. The Funds offer a Systematic Withdrawal Plan which
allows you to designate that a fixed amount ($50 minimum per transaction limited
to those shareholders with a balance of $10,000 or greater) at the inception of
the Plan be distributed to you at regular intervals. The redemption takes place
on the 5th or 20th of the month, but if the day you designate falls on a
Saturday, Sunday or legal holiday, the distribution shall be made on the prior
business day. Any changes made to distribution information must be made in
writing and signed by each registered holder of the account with signatures
guaranteed by a commercial bank or trust company in the United States, a member
firm of the National Association of Securities Dealers, Inc. or other eligible
guarantor institution. (A notary public is not an acceptable guarantor.)
The Systematic Withdrawal Plan may be terminated by you at any time without
charge or penalty, and the Funds reserve the right to terminate or modify the
Systematic Withdrawal Plan upon 60 days' written notice. Withdrawals involve
redemption of Fund shares and may result in a gain or loss for federal income
tax purposes. An application for participation in the Systematic Withdrawal Plan
may be obtained from the Funds by calling 1-800-228-2121.
DIVIDENDS AND DISTRIBUTIONS
The Funds intend to pay dividends from net investment income annually and
distribute substantially all net realized capital gains at least annually. Each
Fund may make additional distributions if necessary to avoid imposition of a 4%
excise tax or other tax on undistributed income and gains. You may elect to
reinvest all income dividends and capital gains distributions in shares of a
Fund or receive cash as designated on the Purchase Application. You may change
your election at any time by sending written notification to the Funds. The
election is effective for distributions with a dividend record date on or after
the date that the Funds receive notice of the election. If you do not specify an
election, all income dividends and capital gains distributions will
automatically be reinvested in full and fractional shares of the Fund. Shares
will be purchased at the net asset value in effect on the business day after the
dividend record date and will be credited to your account on such date.
Reinvested dividends and distributions receive the same tax treatment as those
paid in cash. Dividends and capital gains distributions, if any, will reduce the
net asset value of a Fund by the amount of the dividend or capital gains
distribution.
SHAREHOLDER REPORTS AND INFORMATION
The Funds will provide the following statements and reports:
Automated Teleresponse Service. Shareholders using a touch-tone telephone can
access information about the Funds 24 hours a day, 7 days a week. When calling
the Funds at 1-800-228-2121, shareholders may choose to use the automated
information feature or, during regular business hours (7:00 a.m. to 7:00 p.m.
Central time, Monday through Friday), speak with a representative of the Funds.
The automated service provides the information most frequently requested by
shareholders. After calling 1-800-228-2121 shareholders can:
1. Determine closing prices for each Fund and learn how the price of a
Fund has changed from the previous day.
2. After September 1, 1996, learn account balance(s), the last 5 transac-
tions completed and order duplicate forms and statements.
For total return information, call the Funds at 1-800-228-2121.
Confirmation Statements. Except for Automatic Investment Plans, after each
transaction that affects the account balance or account registration, you will
receive a confirmation statement. Participants in the Automatic Investment Plan
will receive quarterly confirmations of all automatic transactions.
Account Statements. All shareholders will receive quarterly account
statements.
Financial Reports. Financial reports are provided to shareholders semi-
annually. Annual reports will include audited financial statements. To reduce
Fund expenses, one copy of each report will be mailed to each Taxpayer
Identification Number even though the investor may have more than one account in
a Fund.
If you need additional copies of previous statements, you may order statements
for the current and preceding year at no charge. Statements for earlier years
are available for $5 each. Call 1-800-228-2121 to order past statements. If you
need information on your account with the Funds or if you wish to submit any
applications, redemption requests, inquiries or notifications, you should
contact: Van Wagoner Funds, Inc., P.O. Box 1628, Milwaukee, WI 53201-1628 or
call 1-800-228-2121. If you wish to send the information via overnight delivery,
you may send it to: Van Wagoner Funds, Inc., 207 East Buffalo Street, Suite 315,
Milwaukee, WI 53202-5712.
RETIREMENT PLANS
The Funds have a program under which you may establish an Individual Retirement
Account ("IRA") with the Funds and purchase shares through such account. The
minimum initial investment in each Fund for an IRA is $500. The Funds also offer
a tax-sheltered custodial account designed to qualify under Section 403(b)(7) of
the Internal Revenue Code which is available for use by employees of certain
educational, non-profit, hospital and charitable organizations.
The Funds may be used as investment vehicles for established defined
contribution plans, including simplified employee (including SAR-SEPs), 401(k),
profit-sharing and money purchase pension plans ("Retirement Plans").
You may obtain additional information regarding Retirement Plans by
calling the Funds at 1-800-228-2121.
SERVICE AND DISTRIBUTION PLAN
The Funds have adopted a Service and Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the 1940 Act. The Plan authorizes payments by the Funds in
connection with the distribution of their shares at an annual rate, as
determined from time to time by the Board of Directors, of up to 0.25% of a
Fund's average daily net assets.
Payments may be made by each Fund under the Plan for the purpose of financing
any activity primarily intended to result in the sales of shares of the Fund as
determined by the Board of Directors. Such activities include advertising,
compensation for sales and sales marketing activities of financial institutions
and others, such as dealers or other distributors, shareholder account
servicing, production and dissemination of prospectuses and sales and marketing
materials, and capital or other expenses of associated equipment, rent,
salaries, bonuses, interest and other overhead. To the extent any activity is
one which a Fund may finance without a Plan, the Fund may also make payments to
finance such activity outside of the Plan and not subject to its limitations.
Payments under the Plan are not tied exclusively to actual distribution and
service expenses, and the payments may exceed distribution and service expenses
actually incurred.
TAXES
Each Fund intends to qualify for treatment as a regulated investment company
under the Code. In each taxable year that a Fund so qualifies, such Fund (but
not its shareholders) will be relieved of federal income tax on that part of its
investment company taxable income and net capital gain that is distributed to
shareholders.
Dividends from a Fund's investment company taxable income (whether paid in cash
or reinvested in additional shares) are taxable to its shareholders as ordinary
income to the extent of the Fund's earnings and profits. Distributions of a
Fund's net capital gain, when designated as such, are taxable to its
shareholders as long-term capital gain, regardless of how long they have held
their Fund shares and whether such distributions are paid in cash or reinvested
in additional Fund shares. Each Fund provides federal tax information to its
shareholders annually, including information about dividends and other
distributions paid during the preceding year.
The Funds will be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividend payments and redemption and exchange
proceeds if you fail to provide a certified Social Security or Tax
Identification Number or IRS Form W-8.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting each Fund and its shareholders. See "Taxes"
in the Statement of Additional Information for further discussion. There may be
other federal, state or local tax considerations applicable to you as an
investor. You therefore are urged to consult your tax adviser regarding any tax-
related issues.
CAPITAL STRUCTURE
The Funds constitute a single corporation (the "Company") that was organized
as a Maryland corporation on October 18, 1995. The Company's authorized capital
consists of a single class of 1,000,000,000 shares of Common Stock, $0.0001 par
value. The Common Stock is divisible into an unlimited number of "series,"
each of which is a separate Fund. Each share of a Fund represents an equal
proportionate interest in that Fund. As a shareholder, you will be entitled: (1)
to one vote per full share of Common Stock; (2) to such distributions as may be
legally declared by the Company's Board of Directors; and (3) upon liquidation,
to share in the assets available for distribution. There are no conversion or
sinking fund provisions applicable to the shares, and shareholders have no
preemptive rights and may not cumulate their votes in the election of directors.
Consequently the holders of more than 50% of the shares of Common Stock voting
for the election of directors can elect the entire Board of Directors, and in
such event, the holders of the remaining shares voting for the election of
directors will not be able to elect any person or persons to the Board of
Directors. Unless it is required by the 1940 Act, it will not be necessary for
the Funds to hold annual meetings of shareholders. As a result, shareholders may
not consider each year the election of directors or the appointment of auditors.
The Company, however, has adopted provisions in its Bylaws for the removal of
directors by the shareholders. See "Shareholder Meetings" in the Statement of
Additional Information.
Shares of Common Stock are redeemable and are transferable. All shares issued
and sold by the Funds will be fully paid and nonassessable. Fractional shares of
Common Stock entitle the holder to the same rights as whole shares of Common
Stock. The Funds will not issue certificates evidencing shares of Common Stock
purchased. Instead, your account will be credited with the number of shares
purchased, relieving you of responsibility for safekeeping of certificates and
the need to deliver them upon redemption. The Transfer Agent will issue written
confirmations for all purchases of Common Stock.
The Board of Directors may classify or reclassify any unissued shares of the
Funds and may designate or redesignate the name of any outstanding class of
shares of the Funds. As a general matter, shares are voted in the aggregate and
not by class, except where class voting would be required by Maryland law or the
1940 Act (e.g., a change in investment policy or approval of an investment
advisory agreement). All consideration received from the sale of shares of any
class of the Funds' shares, together with all income, earnings, profits and
proceeds thereof, would belong to that class and would be charged with the
liabilities in respect of that class and of that class' shares of the general
liabilities of the Funds in the proportion that the total net assets of the
class bear to the total net assets of all classes of the Funds' shares. The net
asset value of a share of any class would be based on the assets belonging to
that class less the liabilities charged to that class, and dividends could be
paid on shares of any class of Common Stock only out of lawfully available
assets belonging to that class. In the event of liquidation or dissolution of
the Funds, the holders of each class would be entitled, out of the assets of the
Funds available for distribution, to the assets belonging to that class.
TRANSFER AND DIVIDEND DISBURSING
AGENT, CUSTODIAN AND
INDEPENDENT ACCOUNTANTS
Sunstone Financial Group, Inc., 207 East Buffalo Street, Suite 400, Milwaukee,
WI 53202-5712, acts as each Fund's Transfer and Dividend Disbursing Agent.
Sunstone also serves as the Funds' administrator. See "Management of the
Funds." UMB Bank, n.a., which has its principal address at 928 Grand Avenue,
Kansas City, MO, 64141, acts as Custodian of the Funds' investments. Neither the
Transfer and Dividend Disbursing Agent nor the Custodian has any part in
deciding the Funds' investment policies or which securities are to be purchased
or sold for the Funds' portfolios. Price Waterhouse LLP, 100 East Wisconsin
Avenue, Milwaukee, WI 53202, has been selected to serve as independent
accountants of the Company for the fiscal year ending December 31, 1996.
FUND PERFORMANCE
From time to time, the Funds may advertise their "average annual total return"
over various periods of time. An average annual total return refers to the rate
of return which, if applied to an initial investment at the beginning of a
stated period and compounded over the period, would result in the redeemable
value of the investment at the end of the stated period assuming reinvestment of
all dividends and distributions and reflecting the effect of all recurring fees.
An investor's principal in each Fund and the Fund's return are not guaranteed
and will fluctuate according to market conditions. When considering "average"
total return figures for periods longer than one year, you should note that a
Fund's annual total return for any one year in the period might have been
greater or less than the average for the entire period. Each Fund also may use
"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in the Fund for a specific period
(again reflecting changes in the Fund's share price and assuming reinvestment of
dividends and distributions).
Each Fund may quote the Fund's average annual total and/or aggregate total
return for various time periods in advertisements or communications to
shareholders. The Fund may also compare its performance to that of other mutual
funds and to stock and other relevant indices or to rankings prepared by
independent services or industry publications. For example, a Fund's total
return may be compared to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc., Value Line Mutual Fund Survey and CDA Investment
Technologies, Inc. Total return data as reported in such national financial
publications as The Wall Street Journal, The New York Times, Investor's Business
Daily, USA Today, Barron's, Money and Forbes as well as in publications of a
local or regional nature, may be used in comparing Fund performance.
Each Fund's total return may also be compared to such indices as the Dow Jones
Industrial Average, Standard & Poor's 500 Composite Stock Price Index, Nasdaq
Composite OTC Index or Nasdaq Industrials Index, Consumer Price Index and
Russell 2000 Index. Further information on performance measurement may be found
in the Statement of Additional Information.
Performance quotations of a Fund represent the Fund's past performance and
should not be considered as representative of future results. The investment
return and principal value of an investment in a Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. The methods used to compute a Fund's total return and yield are described
in more detail in the Statement of Additional Information.
For Fund information
and Shareholder Services
call 1-800-228-2121.
Van Wagoner Funds
P.O. Box 1628
Milwaukee, WI 53201-1628
<PAGE>
VAN WAGONER FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
for the
Emerging Growth Fund
Micro-Cap Fund
Mid-Cap Fund
This Statement of Additional Information dated August 29, 1996, is
meant to be read in conjunction with the Prospectus dated August 29, 1996,
for the Emerging Growth Fund, Micro-Cap Fund and Mid-Cap Fund,
(collectively referred to as the "Funds") and is incorporated by reference
in its entirety into the Prospectus. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of these
Funds should be made solely upon the information contained herein. Copies
of the Prospectus for the Funds may be obtained by writing Van Wagoner
Funds, Inc., P.O. Box 1628, Milwaukee, Wisconsin 53201-1628. Capitalized
terms used but not defined herein have the same meanings as in the
Prospectus.
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT INFORMATION . . . . . . . . . . 3
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . 13
ADDITIONAL COMPANY INFORMATION . . . . . . . . . . . 15
Directors and Officers . . . . . . . . . . . . . 16
Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . . . . 17
Investment Adviser . . . . . . . . . . . . . . . 17
Administrator . . . . . . . . . . . . . . . . . 18
Custodian, Transfer Agent and Dividend
Paying Agent . . . . . . . . . . . . . . . . . . 19
Legal Counsel . . . . . . . . . . . . . . . . . 19
Independent Accountants . . . . . . . . . . . . 19
DISTRIBUTION OF SHARES . . . . . . . . . . . . . . . 19
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . 20
TAXES . . . . . . . . . . . . . . . . . . . . . . . . 21
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . 24
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . 25
INDIVIDUAL RETIREMENT PLANS . . . . . . . . . . . . . 26
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . 26
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . 29
OTHER INFORMATION . . . . . . . . . . . . . . . . . . 29
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 31
APPENDIX A (Description of Securities Ratings) . . . A-1
________________
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information
or in the Prospectus in connection with the offering made by the
Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Funds. The Prospectus
does not constitute an offering by the Funds in any jurisdiction in which
such offering may not lawfully be made.
ADDITIONAL INVESTMENT INFORMATION
The following supplements the investment objectives and policies of
the Funds as set forth in their Prospectus.
Van Wagoner Emerging Growth Fund seeks long-term capital
appreciation. The Emerging Growth Fund invests primarily in equity
securities of companies believed by the Adviser to have the potential for
above-average long-term growth in market value. The Emerging Growth Fund
may invest in companies of all sizes.
Van Wagoner Micro-Cap Fund seeks capital appreciation. The Micro-Cap
Growth Fund invests primarily in equity securities of companies with
market capitalizations of less than $350 million. (The Fund was formerly
called the Micro-Cap Growth Fund).
Van Wagoner Mid-Cap Fund seeks capital appreciation. The Mid-Cap
Growth Fund invests primarily in equity securities of companies with
market capitalizations between $500 million and $5 billion. (The Fund was
formerly called the Mid-Cap Growth Fund).
Money Market Instruments. Each Fund may invest in a variety of money
market instruments for temporary defensive purposes, pending investment,
to meet anticipated redemption requests and/or to retain the flexibility
to respond promptly to changes in market and economic conditions.
Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and
finance companies. Certificates of deposit are generally negotiable
certificates issued against funds deposited in a commercial bank for a
definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by
an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Fixed time
deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on
demand by the investor, but may be subject to early withdrawal penalties
that vary depending upon market conditions and the remaining maturity of
the obligation. There are no contractual restrictions on the right to
transfer a beneficial interest in a fixed time deposit to a third party,
although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to deposit liabilities of the bank and pari passu
with other senior, unsecured obligations of the bank. Bank notes are
classified as "other borrowings" on a bank's balance sheet, while deposit
notes and certificates of deposit are classified as deposits. Bank notes
are not insured by the Federal Deposit Insurance Corporation or any other
insurer. Deposit notes are insured by the Federal Deposit Insurance
Corporation only to the extent of $100,000 per depositor per bank.
Repurchase Agreements. Each Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement
to repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Although the securities subject to a repurchase agreement
may bear maturities exceeding one year, settlement for the repurchase
agreement will never be more than one year after a Fund's acquisition of
the securities and normally will be within a shorter period of time.
Securities subject to repurchase agreements are held either by the Funds'
custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement
in an amount exceeding the repurchase price (including accrued interest).
Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to a Fund is
limited to the ability of the seller to pay the agreed upon sum on the
repurchase date; in the event of default, the repurchase agreement
provides that a Fund is entitled to sell the underlying collateral. If
the value of the collateral declines after the agreement is entered into,
however, and if the seller defaults under a repurchase agreement when the
value of the underlying collateral is less than the repurchase price, a
Fund could incur a loss of both principal and interest. The Adviser
monitors the value of the collateral at the time the agreement is entered
into and at all times during the term of the repurchase agreement in an
effort to determine that the value of the collateral always equals or
exceeds the agreed upon repurchase price to be paid to a Fund. If the
seller were to be subject to a federal bankruptcy proceeding, the ability
of a Fund to liquidate the collateral could be delayed or impaired because
of certain provisions of the bankruptcy laws.
United States Government Obligations. Each of the Funds may invest
in Treasury securities which differ only in their interest rates,
maturities and times of issuance. Treasury Bills have initial maturities
of one year or less; Treasury Notes have initial maturities of one to ten
years; and Treasury Bonds generally have initial maturities of greater
than ten years.
Illiquid Securities. Each of the Funds may invest up to 5% of its
net assets in illiquid securities (i.e., securities that cannot be
disposed of within seven days in the normal course of business at
approximately the amount at which the Fund has valued the securities).
The Board of Directors or its delegate has the ultimate authority to
determine which securities are liquid or illiquid for purposes of this
limitation. Certain securities exempt from registration or issued in
transactions exempt from registration ("restricted securities") under the
Securities Act of 1933, as amended ("Securities Act") that may be resold
pursuant to Rule 144A or Regulation S under the Securities Act, may be
considered liquid. The Board has delegated to the Adviser the day-to-day
determination of the liquidity of a security, although it has retained
oversight and ultimate responsibility for such determinations. Although
no definite quality criteria are used, the Board has directed the Adviser
to consider such factors as (i) the nature of the market for a security
(including the institutional private or international resale market), (ii)
the terms of these securities or other instruments allowing for the
disposition to a third party or the issuer thereof (e.g., certain
repurchase obligations and demand instruments), (iii) the availability of
market quotations (e.g., for securities quoted in PORTAL system), and (iv)
other permissible relevant factors. Certain securities are deemed
illiquid by the Securities and Exchange Commission including repurchase
agreements maturing in greater than seven days and options not listed on a
securities exchange or not issued by the Options Clearing Corporation.
These securities will be treated as illiquid and subject to the Funds'
limitation on illiquid securities.
Restricted securities may be sold in privately negotiated or other
exempt transactions, qualified non-U.S. transactions, such as under
Regulation S, or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable time may elapse between the decision to sell
and the sale date. If, during such period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Board.
If through the appreciation of illiquid securities or the
depreciation of illiquid securities, a Fund should be in a position where
more than 5% of the value of its net assets are invested in illiquid
assets, including restricted securities which are not readily marketable,
the Fund will take such steps as it deems advisable, if any, to reduce the
percentage of such securities to 5% or less of the value of its net
assets.
Hedging Strategies. The Funds may engage in hedging activities.
They may utilize a variety of financial instruments, including options, in
an attempt to reduce the investment risks of the Funds.
Hedging instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund
owns or intends to acquire. Hedging instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad
equity market sectors in which a Fund has invested or expects to invest.
The use of hedging instruments is subject to applicable regulations of the
Securities and Exchange Commission (the "SEC"), the several options
exchanges upon which they are traded and various state regulatory
authorities. In addition, a Fund's ability to use hedging instruments
will be limited to tax considerations.
Options. General. Each Fund may purchase and write (i.e. sell) put
and call options. Such options may relate to particular securities or
stock indices, and may or may not be listed on a domestic or foreign
securities exchange and may or may not be issued by the Options Clearing
Corporation. Options trading is a highly specialized activity that
entails greater than ordinary investment risk. Options may be more
volatile than the underlying instruments, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than
an investment in the underlying instruments themselves.
A call option for a particular security gives the purchaser of the
option the right to buy, and the writer (seller) the obligation to sell,
the underlying security at the stated exercise price at any time prior to
the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for
undertaking the obligation under the option contract. A put option for a
particular security gives the purchaser the right to sell the security at
the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security.
Stock index options are put options and call options on various stock
indexes. In most respects, they are identical to listed options on common
stocks. The primary difference between stock options and index options
occurs when index options are exercised. In the case of stock options,
the underlying security, common stock, is delivered. However, upon the
exercise of an index option, settlement does not occur by delivery of the
securities comprising the index. The option holder who exercises the
index option receives an amount of cash if the closing level of the stock
index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to the difference between the
closing price of the stock index and the exercise price of the option
expressed in dollars times a specified multiple. A stock index fluctuates
with changes in the market value of the stocks included in the index. For
example, some stock index options are based on a broad market index, such
as the Standard & Poor's 500 or the Value Line Composite Index or a
narrower market index, such as the Standard & Poor's 100. Indexes may
also be based on an industry or market segment, such as the AMEX Oil and
Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are currently traded on the following exchanges: the Chicago
Board Options Exchange, the New York Stock Exchange, the American Stock
Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange.
A Fund's obligation to sell an instrument subject to a call option
written by it, or to purchase an instrument subject to a put option
written by it, may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e.,
same underlying instrument, exercise price and expiration date) as the
option previously written. A closing purchase transaction will ordinarily
be effected to realize a profit on an outstanding option, to prevent an
underlying instrument from being called, to permit the sale of the
underlying instrument or to permit the writing of a new option containing
different terms on such underlying instrument. The cost of such a
liquidation purchase plus transactions costs may be greater than the
premium received upon the original option, in which event the Fund will
have incurred a loss in the transaction. There is no assurance that a
liquid secondary market will exist for any particular option. An option
writer, unable to effect a closing purchase transaction, will not be able
to sell the underlying instrument or liquidate the assets held in the
segregated account until the option expires or the optioned instrument is
delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or
appreciation in the instrument during such period.
If an option purchased by a Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If a Fund enters into a
closing sale transaction on an option purchased by it, the Fund will
realize a gain if the premium received by the Fund on the closing
transaction is more than the premium paid to purchase the option, or a
loss if it is less. If an option written by a Fund expires on the
stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is
sold). If an option written by a Fund is exercised, the proceeds of the
sale will be increased by the net premium originally received and the Fund
will realize a gain or loss.
Federal Tax Treatment of Options. Certain option transactions have
special tax results for the Funds. Expiration of a call option written by
a Fund will result in short-term capital gain. If the call option is
exercised, the Fund will realize a gain or loss from the sale of the
security covering the call option and, in determining such gain or loss,
the option premium will be included in the proceeds of the sale.
If a Fund writes options other than "qualified covered call options,"
as defined in Section 1092 of the Internal Revenue Code of 1986, as
amended (the "Code"), or purchases puts, any losses on such options
transactions, to the extent they do not exceed the unrealized gains on the
securities covering the options, may be subject to deferral until the
securities covering the options have been sold.
In the case of transactions involving "nonequity options," as defined
in Code Section 1256, the Funds will treat any gain or loss arising from
the lapse, closing out or exercise of such positions as 60% long-term and
40% short-term capital gain or loss as required by Section 1256 of the
Code. In addition, such positions must be marked-to-market as of the last
business day of the year, and gain or loss must be recognized for federal
income tax purposes in accordance with the 60%/40% rule discussed above
even though the position has not been terminated. A "nonequity option"
includes options involving stock indexes such as the Standard & Poor's 500
and 100 indexes.
Certain Risks Regarding Options. There are several risks associated
with transactions in options. For example, there are significant
differences between the securities and options markets that could result
in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid
secondary market for particular options, whether traded over-the-counter
or on an exchange, may be absent for reasons which include the following:
there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or the Options Clearing Corporation may not at
all times be adequate to handle current trading value; or one or more
exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Successful use by the Funds of options on stock indexes will be
subject to the ability of the Adviser to correctly predict movements in
the directions of the stock market. This requires different skills and
techniques than predicting changes in the prices of individual securities.
In addition, a Fund's ability to effectively hedge all or a portion of the
securities in its portfolio, in anticipation of or during a market
decline, through transactions in put options on stock indexes, depends on
the degree to which price movements in the underlying index correlate with
the price movements of the securities held by a Fund. Inasmuch as a
Fund's securities will not duplicate the components of an index, the
correlation will not be perfect. Consequently, each Fund will bear the
risk that the prices of its securities being hedged will not move in the
same amount as the prices of its put options on the stock indexes. It is
also possible that there may be a negative correlation between the index
and a Fund's securities which would result in a loss on both such
securities and the options on stock indexes acquired by the Fund.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
markets that cannot be reflected in the options markets. The purchase of
options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary
portfolio securities transactions. The purchase of stock index options
involves the risk that the premium and transaction costs paid by a Fund in
purchasing an option will be lost as a result of unanticipated movements
in prices of the securities comprising the stock index on which the option
is based.
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time,
and for some options no secondary market on an exchange or elsewhere may
exist. If a Fund is unable to close out a call option on securities that
it has written before the option is exercised, the Fund may be required to
purchase the optioned securities in order to satisfy its obligation under
the option to deliver such securities. If a Fund is unable to effect a
closing sale transaction with respect to options on securities that is has
purchased, it would have to exercise the option in order to realize any
profit and would incur transaction costs upon the purchase and sale of the
underlying securities.
Cover for Options Positions. Transactions using options (other than
options that a Fund has purchased) expose a Fund to an obligation to
another party. A Fund will not enter into any such transactions unless it
owns either (1) an offsetting ("covered") position in securities or other
options or (2) cash, receivables and short-term debt securities with a
value sufficient at all times to cover its potential obligations not
covered as provided in (1) above. Each Fund will comply with Securities
and Exchange Commission (the "SEC") guidelines regarding cover for these
instruments and, if the guidelines so require, set aside cash, U.S.
government securities or other liquid, high-grade debt securities in a
segregated account with its Custodian in the prescribed amount. Under
current SEC guidelines, the Funds will segregate assets to cover
transactions in which the Funds write or sell options.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding option is open, unless they are
replaced with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Investment Companies. Each Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (a)
not more than 5% of the value of the Fund's total assets will be invested
in the securities of any one investment company; (b) not more than 10% of
the value of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (c) not more than 3% of
the outstanding voting stock of any one investment company will be owned
by the Fund or by the Company as a whole.
Warrants. The Funds may purchase warrants and similar rights, which
are privileges issued by corporations enabling the owners to subscribe to
and purchase a specified number of shares of the corporation at a
specified price during a specific period of time. The purchase of
warrants involves the risk that a Fund could lose the purchase value of a
warrant if the right to subscribe to additional shares is not exercised
prior to the warrant's expiration. Also, the purchase of warrants
involves the risk that the effective price paid for the warrant added to
the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in
the level of the underlying security. A Fund will not invest more than 5%
of its total assets, taken at market value, in warrants, or more than 2%
of its total assets, taken at market value, in warrants not listed on the
New York or American Stock Exchanges or a major foreign exchange.
Warrants attached to other securities acquired by a Fund are not subject
to this restriction.
Convertible Securities. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible securities mature or are redeemed, converted
and exchanged. Prior to conversion, convertible securities have
characteristics similar to ordinary debt securities or preferred stocks in
that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers.
Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk of loss of
principal than the corporation's common stock.
In selecting convertible securities for the Funds, the Adviser will
consider among other factors, its evaluation of the creditworthiness of
the issuers of the securities; the interest or dividend income generated
by the securities; the potential for capital appreciation of the
securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common
stocks; whether the securities are entitled to the benefits of sinking
funds or other protective conditions; diversification of a Fund's
portfolio as to issuers; and whether the securities are rated by a rating
agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a
conversion privilege) and their conversion value (their worth, at market
value, if converted into the underlying common stock). The investment
value of convertible securities is influenced by changes in interest
rates, with investment value declining as interest rates increase and
increasing as interest rates decline, and by the credit standing of the
issuer and other factors. The conversion value of convertible securities
is determined by the market price of the underlying common stock. If the
conversion value is low relative to the investment value, the price of the
convertible securities is governed principally by their investment value.
To the extent the market price of the underlying common stock approaches
or exceeds the conversion price, the price of the convertible securities
will be increasingly influenced by their conversion value. In addition,
convertible securities generally sell at a premium over their conversion
value determined by the extent to which investors place value on the right
to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for a Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from
a general lowering of interest rates, or a combination of both.
Conversely, a reduction in the credit standing of an issuer whose
securities are held by a Fund or a general increase in interest rates may
be expected to result in capital depreciation to the Fund.
Typically, the convertible debt securities in which the Funds will
invest will be of a quality less than investment grade (so-called "junk
bonds"). The Funds will, however, limit their investment in non-
investment grade convertible debt securities to no more than 5% of the
respective net assets at the time of purchase and will not acquire
convertible debt securities rated below B by Moody's or S&P, or unrated
securities deemed by the Adviser to be of comparable quality. Junk bonds,
while generally offering higher yields than investment grade securities
with similar maturities, involve greater risks, including the possibility
of default or bankruptcy. They are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal.
The special risk considerations in connection with investments in these
securities are discussed below. Refer to Appendix A of this Statement of
Additional Information for a discussion of securities ratings.
Effect on Interest Rates and Economic Changes. The junk bond market
is relatively new and its growth has paralleled a long economic expansion.
As a result, it is not clear how this market may withstand a prolonged
recession or economic downturn. Such an economic downturn could severely
disrupt the market for and adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation
when interest rates decline and depreciation when interest rates rise.
The market values of junk bond securities tend to reflect individual
corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Junk bond securities also tend to be more sensitive to
economic conditions than are higher-rated categories. During an economic
downturn or a sustained period of rising interest rates, highly leveraged
issuers of junk bond securities may experience financial stress and may
not have sufficient revenues to meet their payment obligations. The risk
of loss due to default by an issuer of these securities is significantly
greater than issuers of higher-rated securities because such securities
are generally unsecured and are often subordinated to other creditors.
Further, if the issuer of a junk bond security defaulted, a Fund might
incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased
volatility in the market prices of these securities and thus in a Fund's
net asset value.
As previously stated, the value of a junk bond security will
generally decrease in a rising interest rate market, and accordingly so
will a Fund's net asset value. If a Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of
its portfolio securities without regard to their investment merits. Due
to the limited liquidity of junk bond securities, a Fund may be forced to
liquidate these securities at a substantial discount. Any such
liquidation would reduce a Fund's asset base over which expenses could be
allocated and could result in a reduced rate of return for the Fund.
Payment Expectations. Junk bond securities typically contain
redemption, call or prepayment provisions which permit the issuer of such
securities containing such provisions to redeem the securities at its
discretion. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, a
Fund may have to replace the securities with a lower yielding security,
which could result in a lower return for the Fund.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of junk
bond securities and, therefore may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make
timely changes in a rating to reflect changes in the economy or in the
condition of the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in junk bond securities will be more
dependent on the Adviser's credit analysis than would be the case with
investments in investment grade debt securities. The Adviser employs its
own credit research and analysis, which includes a study of existing debt,
capital structure, ability to service debt and to pay dividends, the
issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Adviser continually monitors each Fund's
investments and carefully evaluates whether to dispose of or to retain
junk bond securities whose credit ratings or credit quality may have
changed.
Liquidity and Valuation. A Fund may have difficulty disposing of
certain junk bond securities because there may be a thin trading market
for such securities. Because not all dealers maintain markets in all junk
bond securities there is no established retail secondary market for many
of these securities. The Funds anticipate that such securities could be
sold only to a limited number of dealers or institutional investors. To
the extent a secondary trading market does exist, it is generally not as
liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of
the security. The lack of a liquid secondary market for certain
securities may also make it more difficult for a Fund to obtain accurate
market quotations for purposes of valuing the Fund. Market quotations are
generally available on many junk bond issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of junk bond securities, especially in a
thinly traded market.
New and Proposed Legislation. Recent legislation has been adopted,
and from time to time, proposals have been discussed, regarding new
legislation designed to limit the use of certain junk bond securities by
certain issuers. It is not currently possible to determine the impact of
the recent legislation or the proposed legislation on the junk bond
securities market. However, it is anticipated that if additional
legislation is enacted or proposed, it could have a material affect on the
value of these securities and the existence of a secondary trading market
for the securities.
In general, investments in non-investment grade convertible
securities are subject to a significant risk of a change in the credit
rating or financial condition of the issuing entity. Investments in
convertible securities of medium or lower quality are also likely to be
subject to greater market fluctuations and to greater risk of loss of
income and principal due to default than investments of higher-rated fixed
income securities. Such lower-rated securities generally tend to reflect
short-term corporate and market developments to a greater extent than
higher-rated securities, which react more to fluctuations in the general
level of interest rates. A Fund will generally reduce risk to the
investor by diversification, credit analysis and attention to current
developments in trends of both the economy and financial markets.
However, while diversification reduces the effect on a Fund of any single
investment, it does not reduce the overall risk of investing in lower-
rated securities.
Calculation of Portfolio Turnover Rate. The portfolio turnover rate
for the Funds is calculated by dividing the lesser of purchases or sales
of portfolio investments for the reporting period by the monthly average
value of the portfolio investments owned during the reporting period. The
calculation excludes all securities, including options, whose maturities
or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption
of shares and by requirements which enable the Funds to receive favorable
tax treatment. The Funds are not restricted by policy with regard to
portfolio turnover and will make changes in their investment portfolios
from time to time as business and economic conditions as well as market
prices may dictate. It is anticipated the portfolio turnover rate for the
Emerging Growth, Micro-Cap and Mid-Cap Funds generally will not exceed
125%, 150%, and 150%, respectively. However, these should not be
considered as limiting factors.
INVESTMENT RESTRICTIONS
Consistent with each Fund's investment objective, each Fund has
adopted certain investment restrictions. The following restrictions
supplement those set forth in the Prospectus. Unless otherwise noted,
whenever an investment restriction states a maximum percentage of a Fund's
assets that may be invested in any security or other asset, such
percentage restriction will be determined immediately after and as a
result of a Fund's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the
investment complies with a Fund's investment limitations except with
respect to a Fund's restrictions on borrowings as set forth in restriction
8 below.
A Fund's fundamental restrictions cannot be changed without the
approval of the holders of the lesser of: (i) 67% of the Fund's shares
present or represented at a shareholders meeting at which the holders of
more than 50% of such shares are present or represented; or (ii) more than
50% of the outstanding shares of the Fund.
The following are the Funds' fundamental investment restrictions.
Each Fund may not:
1. Issue senior securities, except as permitted under the Investment
Company Act of 1940 (the "Investment Company Act"); provided, however, a
Fund may engage in transactions involving options, futures and options on
futures contracts.
2. Lend money or securities (except by purchasing debt securities or
entering into repurchase agreements or lending portfolio securities).
3. With respect to seventy-five percent (75%) of its total assets,
purchase (a) the securities of any issuer (except securities of the U.S.
government or any agency or instrumentality thereof), if such purchase
would cause more than five percent (5%) of the value of the Fund's total
assets to be invested in securities of any one issuer or (b) more than ten
percent (10%) of the outstanding voting securities of any one issuer.
4. Purchase the securities of any issuer if, as a result, 25% or
more of the value of its total assets, determined at the time an
investment is made, exclusive of U.S. government securities, are in
securities issued by companies primarily engaged in the same industry.
5. Act as an underwriter or distributor of securities other than
shares of the Funds except to the extent that a Fund's participation as
part of a group in bidding or by bidding alone, for the purchase or
permissible investments directly from an issuer or selling shareholders
for the Fund's own portfolio may be deemed to be an underwriting, and
except to the extent that a Fund may be deemed an underwriter under the
Securities Act, by virtue of disposing of portfolio securities.
6. Purchase or sell real estate (but this shall not prevent the Fund
from investing in securities that are backed by real estate or issued by
companies that invest or deal in real estate or in participation interests
in pools of real estate mortgage loans exclusive of investments in real
estate limited partnerships).
7. Borrow money, except that a Fund may borrow money from a bank for
temporary or emergency purposes (not for leveraging) in an amount not
exceeding 33 1/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
exceed 33 1/3% of the Fund's total assets by reason of a decline in net
asset value will be reduced within three days to the extent necessary to
comply with the 33 1/3% limitation. Transactions involving options,
futures and options on futures, will not be deemed to be borrowings if
properly covered by a segregated account where appropriate.
8. Purchase or sell physical commodities or commodities contracts
unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund from engaging in
transactions involving foreign currencies, futures contracts, options on
futures contracts or options, or from investing in securities or other
instruments backed by physical commodities).
The following investment restrictions are not fundamental, and may be
changed without shareholder approval.
Each Fund may not:
1. Purchase warrants, valued at the lower of cost or market, in
excess of 5% of a Fund's net assets. Included in that amount, but not to
exceed 2% of net assets, are warrants whose underlying securities are not
traded on principal domestic or foreign exchanges. Warrants acquired by
the Fund in units or attached to securities are not subject to these
restrictions.
2. Purchase securities of other investment companies except to the
extent permitted by the Investment Company Act and the rules and
regulations thereunder.
3. Make investments for the purpose of exercising control or
management of any company except that a Fund may vote portfolio securities
in the Fund's discretion.
4. Invest in securities of issuers which have a record of less than
three (3) years continuous operation, including the operation of any
predecessor business of a company which came into existence as a result of
a merger, consolidation, reorganization or purchase of substantially all
of the assets of such predecessor business, if such purchase would cause
the value of the Fund's investments in all such companies to exceed 10% of
the value of its total assets.
5. Acquire illiquid securities if, as a result of such investments,
more than five percent (5%) of the Fund's net assets (taken at market
value at the time of each investment) would be invested in illiquid
securities. "Illiquid securities" means securities that cannot be
disposed of within seven days in the normal course of business at
approximately the amount at which the Fund has valued the securities.
6. Purchase securities on margin (except to obtain such short-term
credits as are necessary for the clearance of purchases and sales of
securities) or participate in a joint trading account; provided, however,
the Fund may (i) purchase or sell futures contracts, (ii) make initial and
variation margin payments in connection with purchases or sales of futures
contracts or options on futures contracts, (iii) write or invest in put or
call options on securities and indexes, and (iv) engage in foreign
currency transactions. (The "bunching" of orders for the sale or purchase
of marketable portfolio securities with other accounts under the
management of the Adviser to save brokerage costs or average prices among
them is not deemed to result in a securities trading account.)
7. Borrow money except for temporary bank borrowings (not in excess
of five percent (5%) of the value of its total assets) for emergency or
extraordinary purposes, or engage in reverse repurchase agreements, or
pledge any of its assets except to secure borrowings and only to an extent
not greater than ten percent (10%) of the value of the Fund's net assets;
provided, however, a Fund may engage in transactions involving options.
Each Fund will not purchase any security while borrowings representing
more than 5% of its total assets are outstanding.
8. Purchase any interest in any oil, gas or any other mineral
exploration or development program, including any oil, gas or mineral
leases.
Each Fund may make commitments more restrictive than the
restrictions listed above so as to permit the sale of shares of the Fund
in certain states. Should a Fund determine that a commitment is no longer
in the best interest of the Fund and its shareholders, the Fund reserves
the right to revoke the commitment by terminating the sale of Fund shares
in the state involved.
In determining industry classification with respect to the Funds,
the Adviser intends to use the industry classification titles in the
Standard Industrial Classification Manual.
A guarantee of a security is not deemed to be a security issued
by the guarantor when the value of all securities issued and guaranteed by
the guarantor, and owned by a Fund, does not exceed 10% of the value of
the Fund's total assets.
ADDITIONAL COMPANY INFORMATION
Directors and Officers. Information regarding the Board of Directors
and officers of the Funds, including their principal business occupations
during at least the last five years, is set forth below. Each director
who is an "interested person," as defined in the 1940 Act, is indicated by
an asterisk. Except where otherwise indicated, each of the individuals
below has served in his or her present capacity with the Company since
November 1995. The address of each of the officers and directors is c/o
Van Wagoner Funds, 1 Bush Street, Suite 1150, San Francisco, California,
94104.
*Garrett R. Van Wagoner, President, Treasurer, Secretary and Director
Mr. Van Wagoner is the President, Treasurer, Secretary, Director and
sole shareholder of the Adviser, and has served in such capacities since
the organization of the Adviser in October 1995. He was the portfolio
manager of the Govett Smaller Companies Fund, a portfolio of The Govett
Funds, Inc., from March 1993 until December 31, 1995. Prior thereto, he
was Senior Vice President at Bessemer Trust, N.A., since 1982, where he
was responsible for its emerging growth stock investment program.
Larry P. Arnold, Director
Larry P. Arnold, Private investor since 1993. Founder and Managing
General Partner of Wessels Arnold & Henderson from June 1986 to January
1993. Senior Vice President of Piper Jaffray & Hopwood from 1979 to March
1986. Director of Sparta Foods, Inc.
Robert S. Colman, Director
Robert S. Colman, Founding Partner of Colman Furlong & Co. from
February 1991 to present. Partner of Colman Helfet & Co. from August 1989
to January 1991. Sole proprietor of R.S. Colman Company from January 1989
until July 1989. Partner of Robertson, Colman & Stephens from November
1978 to December 1988. Director of Access HealthNet, Inc., Cleveland-
Cliffs, Inc., HealthCare COMPARE Corp. and New Image Industries, Inc.
Peter R. Kris, Vice President
Mr. Kris is Vice President of the Company and has served in such
capacity since March 1996. He was Vice President of Govett and Company
Limited from May 1992 until February 1996. Mr. Kris was an Account
Executive with Charles Schwab and Company from March 1992 to May 1992, and
prior thereto he was employed for two years by State Street Bank & Trust
as Portfolio Accounting Manager.
The Director of the Company who is an officer of the Adviser receives
no remuneration from the Funds. Each of the other Directors is paid a fee
of $500 for each meeting attended and is reimbursed for the expenses of
attending meetings. The table below sets forth the estimated compensation
of the Directors for the fiscal year ending December 31, 1996.
COMPENSATION TABLE
Pension or
Retirement
Benefits Estimated Total
Accrued As Annual Compensation
Aggregate Part of Benefits from Company
Compensation Company Upon Paid to
Name of Person from Company Expenses Retirement Directors
Garrett R. Van
Wagoner $0 $0 $0 $0
Larry P. Arnold $2,000 $0 $0 $2,000
Robert S. Colman $2,000 $0 $0 $2,000
Control Persons and Principal Holders of Securities. As of June 30,
1996, the Funds were aware that the following persons or entities owned a
controlling interest (ownership of greater than 25%) or owned of record
5% or more of the outstanding shares of each of the Funds. Shareholders
with a controlling interest could effect the outcome of proxy voting or
the direction of management of the Company.
SERIES B - VAN WAGONER EMERGING GROWTH FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA
94104, 30%; National Financial Services Corp.*, 200 Liberty Street, One
World Financial Center, New York, NY 10281-1003, 19%; Donaldson, Lufkin &
Jenrette*, P.O. Box 2052, Jersey City, NJ 07303, 7%.
SERIES A - VAN WAGONER MICRO-CAP GROWTH FUND
Charles Schwab & Co.*, 101 Montgomery Street, San Francisco, CA 94104,
30%; National Financial Services Corp. *, 200 Liberty Street, One World
Financial Center, New York, NY 10281-1003, 20%; Donaldson, Lufkin &
Jenrette*, P.O. Box 3052, Jersey City, NJ 07303, 6%.
SERIES C - VAN WAGONER MID-CAP GROWTH FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA
94104, 34%; National Financial Services Corp.*, 200 Liberty Street, One
World Financial Center, New York, NY 10281-1003, 20%; Donaldson, Lufkin &
Jenrette*, P.O. Box 2052, Jersey City, NJ 07303, 6%.
As of June 30, 1996, the directors and officers as a group owned 1% of the
outstanding shares of the Mid-Cap Growth Fund and less than 1% of the
outstanding shares of the Emerging Growth Fund and Micro-Cap Growth Fund.
*Shareholders of record, not beneficial owners.
Investment Adviser. The investment adviser to the Funds is Van
Wagoner Capital Management, Inc. (the "Adviser"). Mr. Van Wagoner is the
founder and President of the Adviser and owns all of the outstanding
common stock of the Adviser. As such, he controls the Adviser. Pursuant
to Investment Advisory Agreements entered into between the Company on
behalf of each of the Funds and the Adviser (the "Investment Advisory
Agreements"), the Adviser provides continuous investment advisory services
to the Funds. The Adviser also provides the Funds with office space,
equipment and personnel necessary to operate and administer the Funds'
business and to supervise the provision of services by third parties. The
Investment Advisory Agreements for the Emerging Growth, Micro-Cap and Mid-
Cap Funds are dated as of December 31, 1995. The Investment Advisory
Agreements have an initial term of two years and thereafter are required
to be approved annually by the Board of Directors of the Company or by
vote of a majority of the respective Fund's outstanding voting securities
(as defined in the 1940 Act). Each annual renewal must also be approved
by the vote of a majority of the respective Fund's directors who are not
parties to the Investment Advisory Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting
on such approval. Each Investment Advisory Agreement was approved by the
vote of a majority of the Directors who are not parties to the respective
Investment Advisory Agreement or interested persons of any such party on
December 8, 1995, and by the initial shareholder of the Emerging Growth,
Micro-Cap and Mid-Cap Funds on December 8, 1995. The Investment Advisory
Agreements are terminable without penalty with respect to a Fund, on 60
days' written notice by the Directors, by vote of a majority of a Fund's
outstanding voting securities, or by the Adviser, and will terminate
automatically in the event of its assignment.
As compensation for its services, each Fund pays to the Adviser a
monthly advisory fee at the annual rate specified in the respective
Prospectus. From time to time, the Adviser may voluntarily waive all or a
portion of its fee for one or more Funds. The organizational expenses of
the Funds were advanced by the Adviser and will be reimbursed by each Fund
over a period of not more than 60 months.
The Investment Advisory Agreements require the Adviser to reimburse a
Fund in the event that the expenses and charges payable by the Fund in any
fiscal year, including the advisory fee but excluding taxes, interest,
brokerage commissions, and similar fees, exceed a percentage of the
average net asset value of the Fund for such year which is the most
restrictive percentage provided by the state laws of the various states in
which the Funds' common stock is qualified for sale. As of the date of
this Statement of Additional Information, the percentage applicable to
each Fund is 2 1/2% on the first $30,000,000 of its average net assets, 2%
on the next $70,000,000 of its average net assets and 1 1/2% on net assets
in excess of $100,000,000. Additionally, the Adviser voluntarily agreed
to reimburse each Fund to the extent aggregate annual operating expenses
as described above exceeded 1.95% of the average daily net assets of each
Fund, for each Fund's first twelve months of operation. The Adviser may
voluntarily continue to waive all or a portion of the advisory fees
otherwise payable by the Funds. Such a waiver may be terminated at any
time in the Adviser's discretion. Reimbursement of expenses in excess of
the applicable limitation will be made on a monthly basis and will be paid
to each Fund by reducing the Adviser's fee, subject to later adjustment,
month by month, for the remainder of each Fund's fiscal year. The Adviser
may from time to time voluntarily absorb expenses for one or more Funds in
addition to the reimbursement of expenses in excess of the foregoing.
Each Investment Advisory Agreement provides that the Adviser shall
not be liable to the respective Fund or its shareholders for any error of
judgment or mistake of law or for anything other than willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or
duties. The Investment Advisory Agreements also provide that nothing
therein shall limit the freedom of the Adviser and its affiliates to
render investment supervisory and corporate administrative services to
other investment companies, to act as investment adviser or investment
counselor to other persons, firms or corporations, or to engage in other
business activities.
Administrator. Sunstone Financial Group, Inc. (the "Administrator"
or "Sunstone") provides various administrative and fund accounting
services to the Funds (which includes clerical, compliance, regulatory,
fund accounting and other services) pursuant to an Administration and Fund
Accounting Agreement with the Company on behalf of the Funds. The
Administration and Fund Accounting Agreement will remain in effect for an
initial 1 year term ending December 31, 1996 and thereafter as long as its
continuance is specifically approved at least annually by the Board of
Directors of the Company and the Administrator. The Administration and
Fund Accounting Agreement may be terminated on not less than 90 days'
notice after the expiration of the initial term, without the payment of
any penalty, by the Board of Directors of the Company or by the
Administrator. Under the Administration and Fund Accounting Agreement,
the Administrator is not liable for any loss suffered by the Funds or
their shareholders in connection with the performance of the
Administration and Fund Accounting Agreement, except a loss resulting from
willful misfeasance, bad faith or negligence on the part of the
Administrator in the performance of its duties. The Administration and
Fund Accounting Agreement also provides that the Administrator may provide
similar services to others including other investment companies.
Custodian, Transfer Agent and Dividend Paying Agent. United Missouri
Bank, n.a. serves as the custodian and Sunstone serves as the transfer and
dividend paying agent for the Funds. Under the terms of the respective
agreements, United Missouri Bank, n.a. is responsible for the receipt and
delivery of each Fund's securities and cash, and Sunstone is responsible
for processing purchase and redemption requests for the securities of each
Fund as well as the recordkeeping of ownership of each Fund's securities,
payment of dividends as declared by the Directors and the issuance of
confirmations of transactions and annual statements to shareholders.
United Missouri Bank, n.a. and Sunstone do not exercise any supervisory
functions over the management of the Funds or the purchase and sale of
securities.
Legal Counsel. Foley & Lardner, with offices at 777 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202, serves as counsel to the Funds.
Independent Accountants. Price Waterhouse LLP are the independent
accountants for the Funds. They are responsible for performing an audit
of each Fund's year-end financial statements as well as providing
accounting and tax advice to the management of the Funds.
DISTRIBUTION OF SHARES
As set forth in the Prospectus, the Funds have adopted a Service
and Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the 1940
Act. The Plan authorizes payments by the Funds in connection with the
distribution of their shares at an annual rate, as determined from time to
time by the Board of Directors, of up to 0.25% of each Fund's average
daily net assets.
The Plan was adopted in anticipation that the Funds will benefit from
the Plan through increased sales of shares of each Fund, thereby reducing
each Fund's expense ratio and providing an asset size that allows the
Adviser greater flexibility in management. The Plan may be terminated at
any time by a vote of the directors of the Funds who are not interested
persons of the Funds and who have no direct or indirect financial interest
in the Plan or any agreement related thereto (the "Rule 12b-1 Directors")
or by a vote of a majority of the outstanding shares of Common Stock.
Messrs. Arnold and Colman are currently the Rule 12b-1 Directors. Any
change in the Plan that would materially increase the distribution
expenses of the Funds provided for in the Plan requires approval of the
shareholders and the Board of Directors, including the Rule 12b-1
Directors.
While the Plan is in effect, the selection and nomination of
directors who are not interested persons of the Funds will be committed to
the discretion of the directors of the Funds who are not interested
persons of the Funds. The Board of Directors must review the amount and
purposes of expenditures pursuant to the Plan quarterly as reported to it
by the officers of the Company. Unless otherwise terminated, the Plan
will continue in effect for as long as its continuance is specifically
approved at least annually by the Board of Directors, including the Rule
12b-1 Directors.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities
for each Fund, for the placement of its portfolio business and the
negotiation of the commissions to be paid on such transactions, subject to
the supervision of the Company's Board of Directors. It is the policy of
the Adviser to seek the best execution at the best security price
available with respect to each transaction, in light of the overall
quality of brokerage and research services provided to the Adviser.
The Adviser will place orders pursuant to its investment
determination for the Funds either directly with the issuer or with any
broker or dealer. In executing portfolio transactions and selecting
brokers or dealers, the Adviser will use its best effort to seek on behalf
of a Fund the best overall terms available. In selecting brokers and
assessing the best overall terms available for any transaction, the
Adviser shall consider all factors that it deems relevant, including the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and
reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. The most favorable price to a Fund
means the best net price without regard to the mix between purchase or
sale price and commission, if any. Over-the-counter securities are
generally purchased or sold directly with principal market makers who
retain the difference in their cost in the security and its selling price.
In some instances, the Adviser may determine that better prices are
available from non-principal market makers who are paid commissions
directly.
In evaluating the best overall terms available, and in selecting the
broker-dealer to execute a particular transaction, the Adviser may also
consider the brokerage and research services (as those terms are defined
in Section 28(e) of the Securities Exchange Act of 1934) provided to the
Funds and/or other accounts over which the Adviser or an affiliate of the
Adviser exercises investment discretion. While the Adviser believes these
services have substantial value, they are considered supplemental to its
own efforts in the performance of its duties. Other clients of the
Adviser may indirectly benefit from the availability of these services to
the Adviser, and the Funds may indirectly benefit from services available
to the Adviser as a result of transactions for other clients. The Adviser
is authorized to pay to a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio transaction for a
Fund which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if, but only if,
the Adviser determines in good faith that such commission was reasonable
in relation to the value of the brokerage and research services provided
by such broker or dealer - viewed in terms of that particular transaction
or in terms of the overall responsibilities the Adviser has to the Funds.
In no instance, however, will portfolio securities be purchased from or
sold to the Adviser, or any affiliated person of either the Company or the
Adviser, acting as principal in the transaction, except to the extent
permitted by the Securities and Exchange Commission through rules,
regulations, decisions and no-action letters.
The Adviser may retain advisory clients in addition to the Funds and
place portfolio transactions for these accounts. Research services
furnished by firms through which the Funds effect their securities
transactions may be used by the Adviser in servicing all of its accounts;
not all of such services may be used by the Adviser in connection with the
Funds. In the opinion of the Adviser, it will not be possible to
separately measure the benefits from research services to each of the
accounts (including the Funds) to be managed by the Adviser. Because the
volume and nature of the trading activities of the accounts will not be
uniform, the amount of commissions in excess of those charged by another
broker paid by each account for brokerage and research services will vary.
However, such costs to the Funds will not, in the opinion of the Adviser,
be disproportionate to the benefits to be received by the Funds on a
continuing basis.
The Adviser intends to seek to allocate portfolio transactions
equitably among its accounts whenever concurrent decisions are made to
purchase or sell securities by a Fund and another advisory account. In
some cases, this procedure could have an adverse effect on the price or
the amount of securities available to a Fund. In making such allocations
between a Fund and other advisory accounts, if any, the main factors to be
considered by the Adviser will be the respective investment objectives,
the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of
investment commitments generally held, and the opinions of the persons
responsible for recommending the investment.
TAXES
General
In order to qualify for treatment as a regulated investment company
("RIC") under the Code, each Fund must distribute to its shareholders for
each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital
gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional
requirements. With respect to each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities or
foreign currencies, or other income (including gains from options, futures
or forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale
or other disposition of securities, or any of the following, that were
held for less than three months options, futures or forward contracts
(other than those on foreign currencies), or foreign currencies (or
options, futures or forward contracts thereon) that are not directly
related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the Fund's taxable year,
at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. government securities, securities of other RICs, and
other securities, with these other securities limited, with respect to any
one issuer, to an amount that does not exceed 5% of the value of the
Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Fund in, and payable
to shareholders of record as of a date in, October, November or December
of any year will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid
by the Fund during the following January. Accordingly, those
distributions will be taxed to shareholders for the year in which that
December 31 falls.
A portion of the dividends from a Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may
be eligible for the dividends-received deduction allowed to corporations.
The eligible portion may not exceed the aggregate dividends received by a
Fund from U.S. corporations. However, dividends received by a corporate
shareholder and deducted by it pursuant to the dividends-received
deduction are subject to the alternative minimum tax.
If shares of a Fund are sold at a loss after being held for six
months or less, the loss will be treated as long-term, instead of short-
term, capital loss to the extent of any capital gain distributions
received on those shares. Investors also should be aware that if shares
are purchased shortly before the record date for any distribution, the
shareholder will pay full price for the shares and receive some portion of
the price back as a taxable dividend or capital gain distribution.
Each Fund will be subject to a nondeductible 4% excise tax to the
extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain
net income for the one-year period ending on October 31 of that year, plus
certain other amounts.
Foreign Taxes
Dividends and interest received by the Funds may be subject to
income, withholding, or other taxes imposed by foreign countries that
would reduce the yield on each Fund's portfolio securities. Tax
conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign
investors. If more than 50% of the value of a Fund's total assets at the
close of its taxable year consists of securities of foreign corporations,
the Fund will be eligible to, and may, file an election with the Internal
Revenue Service that will enable its shareholders, in effect, to receive
the benefit of the foreign tax credit with respect to any foreign income
taxes paid by it. Pursuant to the election, the Fund will treat those
taxes as dividends paid to its shareholders and each shareholder will be
required to (1) include in gross income, and treat as paid by him, his
proportionate share of those taxes, (2) treat his share of those taxes and
of any dividend paid by the Fund that represents income from foreign
sources as his own income from those sources, and (3) either deduct the
taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign
tax credit against his federal income tax. Each Fund will report to its
shareholders shortly after each taxable year their respective shares of
the Fund's income from sources within, and taxes paid to, foreign
countries if it makes this election.
Passive Foreign Investment Companies
If a Fund acquires stock in certain non-U.S. corporations that
receive at least 75% of their annual gross income from passive sources
(such as sources that produce interest, dividends, rental, royalty or
capital gain income) or hold at least 50% of their assets in such passive
sources ("passive foreign investment companies"), the Fund could be
subject to federal income tax and additional interest charges on "excess
distributions" received from such companies or gains from the sale of
stock in such companies, even if all income or gain actually received by
the Fund is timely distributed to its shareholders. The Fund would not be
able to pass through to its shareholders any credit or deduction for such
tax. In some cases, elections may be available that would ameliorate
these adverse tax consequences, but such elections would require the Fund
to include certain amounts as income or gain (subject to the distribution
requirements described above) without a concurrent receipt of cash and
could result in the conversion of capital gain to ordinary income. A Fund
may limit its investments in passive foreign investment companies or
dispose of such investments if potential adverse tax consequences are
deemed material in particular situations.
Non U.S. Shareholders
Distributions of net investment income by a Fund to a shareholder
who, as to the United States, is a nonresident alien individual,
nonresident alien fiduciary of a trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder") will be subject to U.S.
withholding tax at a rate of 30% (or lower treaty rate). Withholding will
not apply if a dividend paid by a Fund to a foreign shareholder is
"effectively connected with the conduct of a U.S. trade or business," in
which case the reporting and withholding requirements applicable to
domestic taxpayers will apply. Distributions of net capital gain are not
subject to withholding, but in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be
subject to U.S. income tax at a rate of 30% (or lower treaty rate) if the
individual is physically present in the United States for more than 182
days during the taxable year and the distributions are attributable to a
fixed place of business maintained by an individual in the United States.
The foregoing is a general and abbreviated summary of certain U.S.
federal income tax considerations affecting such Fund and its
shareholders. Investors are urged to consult their own tax advisers for
more detailed information and for information regarding any foreign, state
and local taxes applicable to distributions received from a Fund.
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized as
a Maryland corporation on October 18, 1995. The Company's Charter
authorizes the Board of Directors to issue up to 1,000,000,000 shares of
common stock, par value $0.0001 per share. Each share of the Funds has
equal voting, dividend, distribution and liquidation rights.
Shares of the Funds have no preemptive rights and only such
conversion or exchange rights as the Board may grant in its discretion.
When issued for payment as described in the Prospectus, the Company's
shares will be fully paid and non-assessable.
Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held, and will vote in the
aggregate and not by class or series except as otherwise required by the
1940 Act or the Maryland General Corporation Law.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an
investment company such as the Funds shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding
shares of each fund affected by the matter. A Fund is affected by a
matter unless it is clear that the interests of each Fund in the matter
are substantially identical or that the matter does not affect any
interest of the Funds. Under Rule 18f-2 the approval of an investment
advisory agreement or 12b-1 distribution plan or any change in a
fundamental investment policy would be effectively acted upon with respect
to a Fund only if approved by a majority of the outstanding shares of such
Fund. However, the rule also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts and the election of directors may be effectively acted upon by
shareholders of the Company voting without regard to particular Funds.
Notwithstanding any provision of the Maryland General Corporation Law
requiring for any purpose the concurrence of a proportion greater than a
majority of all votes entitled to be cast at a meeting at which a quorum
is present, the affirmative vote of the holders of a majority of the total
number of shares of the Funds outstanding (or of a class or series of the
Funds, as applicable) will be effective, except to the extent otherwise
required by the 1940 Act and rules thereunder. In addition, the Articles
of Incorporation provide that, to the extent consistent with the General
Corporation Law of Maryland and other applicable law, the By-Laws may
provide for authorization to be given by the affirmative vote of the
holders of less than a majority of the total number of shares of the Funds
outstanding (or of a class or series).
SHAREHOLDER MEETINGS
The Maryland Statutes permit registered investment companies, such as
the Funds, to operate without an annual meeting of shareholders under
specified circumstances if an annual meeting is not required by the 1940
Act. The Company has adopted the appropriate provisions in its By-Laws
and may, at its discretion, not hold an annual meeting in any year in
which the election of directors is not required to be acted on by
shareholders under the 1940 Act.
The Company's By-Laws also contain procedures for the removal of
directors by its shareholders. At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be
cast thereon, remove any director or directors from office and may elect a
successor or successors to fill any resulting vacancies for the unexpired
terms of removed directors.
Upon the written request of the holders of shares entitled to not
less than ten percent (10%) of all the votes entitled to be cast at such
meeting, the Secretary of the Fund shall promptly call a special meeting
of shareholders for the purpose of voting upon the question of removal of
any director. Whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and who
hold in the aggregate either shares having a net asset value of at least
$25,000 or at least one percent (1%) of the total outstanding shares,
whichever is less, shall apply to the Company's Secretary in writing,
stating that they wish to communicate with other shareholders with a view
to obtaining signatures to submit a request for a meeting as described
above and accompanied by a form of communication and request which they
wish to transmit, the Secretary shall within five business days after such
application either: (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the
Funds; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the
proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (2)
of the last sentence of the preceding paragraph, the Secretary, upon the
written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall,
with reasonable promptness, mail such material to all shareholders of
record at their addresses as recorded on the books unless within five
business days after such tender the Secretary shall mail to such
applicants and file with the SEC, together with a copy of the material to
be mailed, a written statement signed by at least a majority of the Board
of Directors to the effect that in their opinion either such material
contains untrue statements of fact or omits to state facts necessary to
make the statements contained therein not misleading, or would be in
violation of applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the SEC may, and if demanded by the Board of
Directors or by such applicants shall, enter an order either sustaining
one or more of such objections or refusing to sustain any of them. If the
SEC shall enter an order refusing to sustain any of such objections, or
if, after the entry of an order sustaining one or more of such objections,
the SEC shall find, after notice and opportunity for hearing, that all
objections so sustained have been met, and shall enter an order so
declaring, the Secretary shall mail copies of such material of all
shareholders with reasonable promptness after the entry of such order and
the renewal of such tender.
RETIREMENT PLANS
Individuals who receive compensation or earned income, even if they
are active participants in a qualified retirement plan (or certain similar
retirement plans), may establish their own tax-sheltered Individual
Retirement Account ("IRA"). The Funds offer a prototype IRA plan which
may be adopted by individuals. There is currently no charge for
establishing an account, although there is an annual maintenance fee.
Earnings on amounts held in an IRA are not taxed until withdrawal.
However, the amount of deduction, if any, allowed for IRA contributions is
limited for individuals who are active participants in an employer-
maintained retirement plan and whose incomes exceed specific limits.
A description of applicable service fees and certain limitations on
contributions and withdrawals, as well as application forms, are available
from the transfer agent upon request at 1-800-228-2121. The IRA documents
contain a disclosure statement which the Internal Revenue Service requires
to be furnished to individuals who are considering adopting the IRA.
Because a retirement program involves commitments covering future years,
it is important that the investment objective of the Funds be consistent
with the participant's retirement objectives. Premature withdrawals from
a retirement plan will result in adverse tax consequences. Consultation
with a competent financial and tax adviser regarding the foregoing
retirement plans is recommended.
The Funds also offer a tax-sheltered custodial account designed to
qualify under section 430(b)(7) of the Internal Revenue Code which is
available for use b employees of certain educationl, non-profit, hospital
and charitable organizations.
PERFORMANCE INFORMATION
The Funds may from time to time advertise performance data such as
"average annual total return" and "total return." To facilitate the
comparability of historical performance data from one mutual fund to
another, the SEC has developed guidelines for the calculation of average
annual total return.
The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $10,000 investment ("initial
investment") in the Fund's shares on the first day of the period and
computing the "redeemable value" of that investment at the end of the
period. The redeemable value is then divided by the initial investment,
and this quotient is taken to the Nth root (N representing the number of
years in the period) and 1 is subtracted from the result, which is then
expressed as a percentage. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset
value on the reinvestment dates during the period. This calculation can
be expressed as follows:
N
P(1 + T) = ERV
Where: T= average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms of
years.
Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in a Fund's shares on the
first day of the period and computing the "ending value" of that
investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result
as a percentage. The calculation assumes that all income and capital
gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the investment over the period or
as a cumulative total return which represents the change in value of an
investment over a stated period and may be quoted as a percentage or as a
dollar amount.
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending
redeemable value is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
The Funds' performance figures will be based upon historical results
and will not necessarily be indicative of future performance. The Funds'
returns and net asset value will fluctuate and the net asset value of
shares when sold may be more or less than their original cost. Any
additional fees charged by a dealer or other financial services firm would
reduce the returns described in this section.
The total return for the period from the commencement of operations
(December 31, 1995) through June 30, 1996 for each of the Emerging Growth
Fund, Micro-Cap Growth Fund and Mid-Cap Fund, were 49.7%, 35.8% and 36.0%,
respectively. Such performance results reflect reimbursements made by the
Adviser during the period from December 31, 1995 through June 30, 1996 to
keep the ratio of net expenses to average net assets of each Fund at or
below 1.95%.
From time to time, in marketing and other literature, the Funds'
performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with
similar investment goals, as tracked by independent organizations. Among
these organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds by overall
performance, investment objective and assets, may be cited. Lipper
performance figures are based on changes in net asset value, with all
income and capital gains dividends reinvested. Such calculations do not
include the effect of any sales charges imposed by other funds. The Funds
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings.
The Funds' performance may also be compared to the performance of
other mutual funds by Morningstar, Inc., which ranks funds on the basis of
historical risk and total return. Morningstar's rankings range from five
stars (highest) to one star (lowest) and represent Morningstar's
assessment of the historical risk level and total return of a fund as a
weighted average for 3, 5, and 10 year periods. Ranking are not absolute
or necessarily predictive of future performance.
Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning the Funds, including reprints of or
selections from, editorials or articles about the Funds. Sources for Fund
performance and articles about the Funds may include publications such as
Money, Forbes, Kiplinger's, Financial World, Business Week, U.S. News and
World Report, the Wall Street Journal, Barron's and a variety of
investment newsletters.
The Funds may compare their performance to a wide variety of indices
and measures of inflation including the Standard & Poor's Index of 500
Stocks and the NASDAQ Over-the-Counter Composite Index. There are
differences and similarities between the investments that the Funds may
purchase for their respective portfolios and the investments measured by
these indices.
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a
Fund's net asset value or performance relative to a market index. One
measure of volatility is beta. Beta is the volatility of a fund relative
to the total market as represented by the Standard & Poor's 500 Stock
Index. A beta of more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation.
Standard deviation is used to measure variability of net asset value or
total return around an average, over a specified period of time. The
premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Marketing and other Company literature may include a description of
the potential risks and rewards associated with an investment in the
Funds. The description may include a "risk/return spectrum" which
compares a Fund to other Van Wagoner Funds or broad categories of funds,
such as money market, bond or equity funds, in terms of potential risks
and returns. Risk/return spectrums also may depict funds that invest in
both domestic and foreign securities or a combination of bond and equity
securities. Money market funds are designed to maintain a constant $1.00
share price and have a fluctuating yield. Share price, yield and total
return of a bond fund will fluctuate. The share price and return of an
equity fund also will fluctuate. The description may also compare a Fund
to bank products, such as certificates of deposit. Unlike mutual funds,
certificates of deposit are insured up to $100,000 by the U.S. government
and offer a fixed rate of return.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus, the net asset value of the Funds will
be determined as of the close of trading on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. Additionally, if any of the aforementioned holidays falls
on a Saturday, the New York Stock Exchange will not be open for trading on
the preceding Friday, and when any such holiday falls on a Sunday, the New
York Stock Exchange will not be open for trading on the following Monday
unless unusual business conditions exist, such as the ending of a monthly
or the yearly accounting period.
Shares of the Funds may be exchanged for shares of the Northern U.S.
Government Money Market Fund as provided in the Prospectus. Sunstone
Financial Group, Inc. receives a service fee from the Northern U.S.
Government Money Market Fund at the annual rate of 0.25 of 1% of the
average daily net asset value of the shares of the Fund exchanged into the
Northern U.S. Government Money Market Fund.
OTHER INFORMATION
It is possible that conditions may exist in the future which would,
in the opinion of the Board of Directors, make it undesirable for a Fund
to pay for redemptions in cash. In such cases the Board may authorize
payment to be made in portfolio securities of a Fund. However, the Funds
have obligated themselves under the 1940 Act to redeem for cash all shares
presented for redemption by any one shareholder up to $250,000 (or 1% of a
Fund's net assets if that is less) in any 90-day period. Securities
delivered in payment of redemptions are valued at the same value assigned
to them in computing the net asset value per share. Shareholders
receiving such securities generally will incur brokerage costs when
selling such securities.
Payment for shares of a Fund may, in the discretion of the Adviser,
be made in the form of securities that are permissible investments for the
Fund as described in the Prospectus. For further information about this
form of payment, contact the Transfer Agent. In connection with an in-
kind securities payment, the Funds will require, among other things, that
the securities be valued on the day of purchase in accordance with the
pricing methods used by the Fund and that the Fund receive satisfactory
assurances that it will have good and marketable title to the securities
received by it; that the securities be in proper form for transfer to the
Fund; and that adequate information be provided concerning the basis and
other tax matters relating to the securities. In addition, so long as
shares in a Fund are offered or sold in Texas, any securities that are
accepted as payment for the shares of the Fund will be limited to
securities that are issued in transactions that involve a bona fide
reorganization or statutory merger, or will be limited to other
acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Funds; (b) are acquired for investment and
not for resale; (c) are liquid securities that are not restricted as to
transfer either by law or liquidity of market; and (d) have a value that
is readily ascertainable (and not established only by valuation
procedures) as evidenced by a listing on the American Stock Exchange, New
York Stock Exchange or NASDAQ or as evidenced by their status as U.S.
Government Securities, bank certificates of deposit, banker's acceptances,
corporate and other debt securities that are actively traded, money market
securities and other like securities with a readily ascertainable value.
The Prospectus and this Statement of Additional Information do not
contain all the information included in the Registration Statement filed
with the Commission under the Securities Act with respect to the
securities offered by the Funds' Prospectus. Certain portions of the
Registration Statement have been omitted from the Prospectus and this
Statement of Additional Information, pursuant to the rules and regulations
of the Commission. The Registration Statement including the exhibits
filed therewith may be examined at the office of the Commission in
Washington, D.C.
Statements contained in the Prospectus or in this Statement of
Additional Information as to the contents of any contract or other
documents referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as
an exhibit to the Registration Statement of which the Prospectus and this
Statement of Additional Information form a part, each such statement being
qualified in all respects by such reference.
FINANCIAL STATEMENTS
The following financial statement has been audited and is attached hereto:
1. Report of Independent Accountants.
2. Statement of Assets and Liabilities as of November 27, 1995.
3. Notes to Financial Statement.
The following unaudited financial statements dated June 30, 1996 are
attached hereto:
1. Statements of Assets and Liabilities as of June 30, 1996
2. Statements of Operations for the six months ended June 30,
1996
3. Statements of Changes in Net Assets for the six months ended
June 30, 1996
4. Financial Highlights for the six months ended June 30, 1996
5. Schedules of Investments as of June 30, 1996
6. Notes to Financial Statements
<PAGE>
Report of Independent Accountants
To the Shareholder and Board
of Directors of Van Wagoner Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of the
Micro-Cap Fund, the Emerging Growth Fund, and the Mid-Cap Fund, (three of
the portfolios of Van Wagoner Funds, Inc. (the "Funds")) at November 27,
1995, in conformity with generally accepted accounting principles. This
financial statement is the responsibility of the Funds' management; our
responsibility is to express an opinion on this financial statement based
on our audit. We conducted our audit of this financial statement in
accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Milwaukee, Wisconsin
November 30, 1995
<PAGE>
Van Wagoner Funds, Inc.
Statement of Assets and Liabilities
November 27, 1995
Emerging
Micro-Cap Growth Mid-Cap
ASSETS Fund Fund Fund
Cash $ 33,333 $ 33,334 $ 33,333
Unamortized organization costs 22,420 22,420 22,420
Prepaid initial registration
expenses 13,818 13,819 13,818
------ ------ ------
Total Assets 69,571 69,573 69,571
------ ------ ------
LIABILITIES
Accrued professional fees 21,170 21,170 21,170
Accounts payable 14,318 14,319 14,318
Payable to Adviser 750 750 750
------ ------ ------
Total Liabilities 36,238 36,239 36,238
------ ------ ------
NET ASSETS $33,333 $33,334 $33,333
====== ====== ======
Capital shares, $0.0001 par
value; 100,000,000 shares
authorized per portfolio $33,333 $33,334 $33,333
====== ====== ======
Shares outstanding 3,333 3,333 3,333
===== ====== =====
Net asset value, redemption
price and offering price
per share (net
assets/shares outstanding) $10.00 $10.00 $10.00
===== ===== =====
The accompanying notes to financial statement are an integral part of this
statement
<PAGE>
Van Wagoner Funds, Inc.
Notes to Financial Statement
November 27, 1995
(1) Organization
Van Wagoner Funds, Inc. (the "Funds") was organized in October, 1995
as a Maryland corporation and is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company issuing its shares in series, each
series representing a distinct portfolio with its own investment
objectives and policies. The only series presently authorized are the
Micro-Cap Fund, the Emerging Growth Fund and the Mid-Cap Fund. The
Funds have had no operations other than those relating to
organizational matters, including the sale of 10,000 shares to
capitalize the Funds, which were sold to Van Wagoner Capital
Management, Inc. (the "Adviser") on November 27, 1995 for cash in the
amount of $100,000.
(2) Significant Accounting Policies
(a) Organization Costs
Costs incurred by the Funds in connection with their organization,
registration and the initial public offering of shares have been
deferred and will be amortized over the period of benefit, but not
to exceed five years from the date upon which the Funds commence
their investment activities. If any of the original shares of a
Fund purchased by the Adviser are redeemed by any holder thereof
prior to the end of the amortization period, the redemption
proceeds will be reduced by the pro rata share of the unamortized
expenses as of the date of redemption. The pro rata share by
which the proceeds are reduced will be derived by dividing the
number of original shares of the Funds being redeemed by the total
number of original shares outstanding at the time of redemption.
(b) Federal Income Taxes
Each Fund intends to comply with the requirements of the Internal
Revenue Code necessary to qualify as a regulated investment
company and to make the requisite distributions of income to its
shareholders which will be sufficient to relieve it from all or
substantially all Federal income taxes.
(3) Investment Adviser
The Funds have an agreement with the Adviser to furnish investment
advisory services to the Funds. Under the terms of this agreement,
the Adviser is compensated at the following percentage of average
daily net assets for each Fund: 1.50% for the Micro-Cap Fund, 1.25%
for the Emerging Growth Fund and 1.00% for the Mid-Cap Fund. The
Adviser has agreed to voluntarily reduce fees for expenses (exclusive
of brokerage, interest, taxes and extraordinary expenses) that exceed
the expense limitation of 1.95% for each Fund until January 1, 1997.
(4) Service and Distribution Plan
Pursuant to Rule 12b-1 under the 1940 Act, the Funds have adopted a
Service and Distribution Plan (the "Plan"). Under the Plan, each Fund
is authorized to pay expenses incurred for the purpose of financing
activities intended to result in the sale of shares of the Funds at an
annual rate of up to 0.25% of each Fund's average daily net assets.
<PAGE>
Van Wagoner Emerging Growth Fund
Schedule of Investments
June 30, 1996
(Unaudited)
Number
of Shares Value
- --------- -----
COMMON STOCKS 95.61%
Chemicals 1.14%
289,400 NuCo2, Inc.* $ 8,899,050
------------
Commercial Services -
Miscellaneous 2.76%
317,000 CRA Managed Care, Inc.* 14,185,750
121,200 Pediatrix Medical Group, Inc.* 5,878,200
48,000 RTW, Inc.* 1,512,000
------------
21,575,950
------------
Commercial Services -
Security/Safety 0.06%
74,000 Video Sentry Corp.* 481,000
------------
Computers -
Integrated Systems 1.43%
45,000 Cyberguard Corp.* 776,250
300,750 Wind River Systems* 10,375,875
------------
11,152,125
------------
Computers -
Local Networks 14.17%
227,100 3COM Corp.* 10,389,825
201,000 ACT Networks, Inc.* 6,532,500
176,200 Arbor Software Corp.* 10,527,950
471,900 Ascend Communications, Inc.* 26,544,375
188,400 Cisco Systems, Inc.* 10,668,150
261,800 FORE Systems, Inc.* 9,457,525
677,100 Vanstar Corp.* 11,341,425
546,750 Xylan Corp.* 25,423,875
------------
110,885,625
------------
Computers - Peripherals 5.27%
587,200 Gandalf Technologies, Inc.* 4,697,600
54,650 Security Dynamics
Technologies, Inc.* 4,494,962
375,000 U.S. Robotics Corp.* 32,062,500
------------
41,255,062
------------
Computers -
Retail/Wholesale 1.15%
227,700 CHS Electronics, Inc.* 3,073,950
698,300 Intelligent Electronics, Inc. 5,935,550
------------
9,009,500
------------
Computers - Software 16.31%
52,500 Atria Software, Inc.* $ 2,625,000
613,250 Avant! Corp.* 14,258,062
67,000 Baan Co., N.V.* 2,278,000
101,300 CBT Group PLC ADR* 4,685,125
212,000 Cooper & Chyan Technology, Inc.* 4,637,500
29,000 Cybercash, Inc.* 1,587,750
205,000 Datalogix International, Inc.* 1,486,250
175,000 Forte Software, Inc.* 9,143,750
51,600 HNC Software, Inc.* 2,386,500
289,522 Integrated Systems, Inc.* 11,598,975
252,787 McAfee Associates, Inc.* 12,386,563
533,300 Meta-Software, Inc.* 9,199,425
186,100 Netscape Communications Corp.* 11,584,725
80,000 Objective Systems Integrators, Inc.* 2,920,000
211,400 OrCAD, Inc.* 2,959,600
117,000 Prism Solutions, Inc.* 2,749,500
334,900 Pure Software, Inc.* 11,386,600
11,400 Remedy Corp.* 832,200
96,800 SQA, Inc.* 2,710,400
11,550 Scopus Technology, Inc.* 179,025
151,500 Sterling Commerce, Inc.* 5,624,438
340,700 Sync Research, Inc.* 4,854,975
79,000 Verity, Inc.* 2,271,250
131,500 Workgroup Technology Corp.* 3,303,937
------------
127,649,550
------------
Electronics -
Scientific Instruments 0.69%
166,800 Input/Output, Inc.* 5,400,150
------------
Energy - Services 2.75%
174,000 ENSCO International, Inc.* 5,655,000
42,000 Energy Ventures, Inc.* 1,365,000
339,600 Nabors Industries, Inc.* 5,518,500
247,600 Rowan Cos., Inc.* 3,652,100
178,700 Weatherford Enterra, Inc.* 5,361,000
------------
21,551,600
------------
Financial Services 1.75%
345,200 Medaphis Corp.* 13,721,700
------------
Hotel/Motel 0.49%
55,000 HFS, Inc.* 3,850,000
------------
Insurance 0.27%
117,000 RISCORP, Inc.* $ 2,135,250
------------
Machinery -
Mining/Construction 0.75%
78,700 JLG Industries, Inc. 5,843,475
------------
Medical/Dental Supplies 1.16%
374,900 Physician Sales & Service, Inc.* 9,091,325
------------
Medical -
Biomedical/Genetics 0.64%
32,500 Celgene Corp.* 373,750
137,300 Pharmaceutical Product
Development, Inc.* 4,599,550
------------
4,973,300
------------
Medical - Ethical Drugs 0.34%
134,200 SEQUUS Pharmaceuticals, Inc.* 2,669,322
------------
Medical -
Information Services 8.49%
29,100 CyCare Systems, Inc.* 1,516,837
267,550 Enterprise Systems, Inc.* 7,357,625
108,000 HBO & Co. 7,317,000
150,700 HCIA, Inc.* 9,494,100
434,500 HPR, Inc.* 9,233,125
159,000 Mecon, Inc.* 3,597,375
157,800 Oacis Healthcare Holding Corp.* 1,814,700
565,100 Summit Medical Systems, Inc.* 11,019,450
528,000 Transition Systems, Inc.* 15,048,000
------------
66,398,212
------------
Medical - Instruments 3.58%
343,100 Heartport, Inc.* 10,378,775
78,200 Hologic, Inc.* 3,460,350
195,000 IRIDEX Corp.* 2,925,000
219,500 Sofamor Danek Group, Inc.* 6,091,125
297,000 Vitalcom, Inc.* 5,123,250
------------
27,978,500
------------
Medical - Nursing Homes 0.24%
69,800 Arbor Health Care Co.* 1,902,050
------------
Medical -
Outpatient/Home 9.29%
61,800 American HomePatient, Inc.* $ 2,734,650
385,100 Apria Healthcare Group, Inc.* 12,082,513
336,150 Genesis Health Ventures, Inc.* 10,546,706
61,200 OccuSystems, Inc.* 2,287,350
148,800 Pediatric Services of America, Inc.* 3,385,200
421,700 Renal Treatment Centers, Inc.* 12,123,875
390,311 TheraTx, Inc.* 7,415,909
278,250 Total Renal Care Holdings, Inc.* 11,756,062
316,000 Vivra, Inc.* 10,388,500
------------
72,720,765
------------
Medical - Products 4.00%
213,200 ATS Medical, Inc.* 2,158,650
303,500 Aksys, Ltd.* 4,628,375
272,200 Angeion Corp.* 2,109,550
146,100 CardioGenesis Corp.* 1,972,350
63,000 Cytyc Corp.* 1,630,125
228,500 Endosonics Corp.* 4,084,438
94,500 Parexel International Corp.* 4,559,625
154,500 Quintiles Transnational Corp.* 10,158,375
------------
31,301,488
------------
Medical - Supplies 2.40%
196,000 Gulf South Medical Supply, Inc.* 7,644,000
420,000 Omnicare, Inc. 11,130,000
------------
18,774,000
------------
Medical - Wholesale/Drug 3.03%
470,950 AmeriSource Health Corp.,
Class A* 15,659,088
103,000 Express Scripts, Inc., Class A* 4,738,000
110,400 NCS HealthCare, Inc.* 3,339,600
------------
23,736,688
------------
Oil & Gas 4.91%
141,500 Coflexip SA ADR 2,458,563
98,000 Diamond Offshore Drilling, Inc.* 5,610,500
209,100 Digicon, Inc.* 3,502,425
398,000 Global Marine, Inc.* 5,522,250
115,000 Petroleum Geo-Services A/S ADR* 3,263,125
40,000 Smith International, Inc.* 1,205,000
177,500 Sonat Offshore Drilling Co. 8,963,750
180,000 Tidewater, Inc. 7,897,500
------------
38,423,113
------------
Retail/Wholesale -
Jewelry 0.98%
276,500 Claire's Stores, Inc. $ 7,638,312
------------
Retail/Wholesale -
Office Supplies 3.59%
225,900 Corporate Express, Inc.* 9,036,000
453,500 U.S. Office Products Co.* 19,047,000
------------
28,083,000
------------
Telecommunications -
Equipment 3.72%
291,600 Cascade Communications Corp.* 19,828,800
36,100 Pairgain Technologies, Inc.* 2,238,200
125,000 Stratacom, Inc.* 7,031,250
------------
29,098,250
------------
Telecommunications -
Services 0.25%
153,050 Computer Telephone Corp.* 1,989,650
------------
Total Common Stocks
(cost $699,773,679) 748,188,012
------------
WARRANTS 0.02%
196,000 ATS Medical, Inc. -
expires 3/2/97* 147,000
------------
Total Warrants
(cost $260,827) 147,000
------------
Principal
Amount Value
- --------- -----
REPURCHASE AGREEMENTS 3.70%
$28,930,000 UMB Bank, n.a., 4.80%, dated
6/28/96, repurchase price
$28,941,413, maturing 7/1/96
(collateralized by U.S. Treasury
Notes, 6.125%, 5/31/97) $ 28,930,000
------------
Total Repurchase Agreements
(cost $28,930,000) 28,930,000
------------
Total Investments 99.33%
(cost $728,964,506) 777,265,012
Cash and Other Assets less
Liabilities 0.67% 5,263,778
------------
NET ASSETS 100.00% $782,528,790
============
* Non-income producing
See notes to financial statements.
Van Wagoner Micro-Cap Fund
Schedule of Investments
June 30, 1996
(Unaudited)
Number
of Shares Value
- ----------- -----
COMMON STOCKS 74.21%
Apparel/Shoes 0.11%
1,000 Designer Holdings Ltd.* $ 26,625
5,800 Loehmann's Holdings, Inc.* 133,400
------------
160,025
------------
Buildings 0.41%
17,000 NCI Building Systems, Inc.* 573,750
------------
Chemicals 2.17%
98,600 NuCo2, Inc.* 3,031,950
------------
Commercial Services -
Miscellaneous 2.83%
50,500 CRA Managed Care, Inc.* 2,259,875
27,800 ClinTrials Research, Inc.* 1,153,700
17,200 RTW, Inc.* 541,800
------------
3,955,375
------------
Computers -
Integrated Systems 0.75%
800 Cyberguard Corp.* 13,800
30,000 Wind River Systems* 1,035,000
------------
1,048,800
------------
Computers -
Local Networks 3.23%
74,300 ACT Networks, Inc.* 2,414,750
125,000 Vanstar Corp.* 2,093,750
------------
4,508,500
------------
Computers - Peripherals 1.19%
75,800 3D Systems Corp.* 1,667,600
------------
Computers -
Retail/Wholesale 2.18%
125,000 CHS Electronics, Inc.* 1,687,500
159,900 Intelligent Electronics, Inc. 1,359,150
------------
3,046,650
------------
Computers - Software 15.24%
147,000 ANSYS, Inc.* $ 1,929,375
1,200 Aspect Development, Inc.* 30,600
91,400 Avant! Corp.* 2,125,050
31,450 Cooper & Chyan Technology, Inc.* 687,969
18,400 Cybercash, Inc.* 1,007,400
35,000 Datalogix International, Inc.* 253,750
63,600 Datastream Systems, Inc.* 2,241,900
1,000 Edify Corp.* 26,500
179,750 Mechanical Dynamics, Inc.* 2,718,719
105,000 Meta-Software, Inc.* 1,811,250
56,000 ON Technology Corp.* 574,000
15,000 Open Market, Inc.* 365,625
128,000 OrCAD, Inc.* 1,792,000
15,000 Prism Solutions, Inc.* 352,500
71,100 SQA, Inc.* 1,990,800
20,600 Scopus Technology, Inc.* 319,300
45,000 Sync Research, Inc.* 641,250
64,000 Verity, Inc.* 1,840,000
23,200 Workgroup Technology Corp.* 582,900
------------
21,290,888
------------
Consumer Products -
Miscellaneous 0.53%
43,000 Koala Corp.* 736,375
------------
Electrical - Connectors 0.77%
51,900 Sheldahl, Inc.* 1,083,413
------------
Electronics 0.03%
5,000 Affinity Technology Group* 42,500
------------
Electronics - Semiconductor
Manufacturers 0.62%
99,000 ELEXSYS International, Inc.* 866,250
------------
Energy - Services 1.43%
26,700 Energy Ventures, Inc.* 867,750
111,400 Marine Drilling Co., Inc.* 1,127,925
------------
1,995,675
------------
Hardware 1.46%
67,700 Orchard Supply Hardware
Stores Corp.* 2,039,463
------------
Hotel/Motel 0.08%
5,000 Suburban Lodges of
America, Inc.* $ 115,625
------------
Information Services 0.09%
3,500 Data Processing Resources Corp.* 96,687
1,000 IntelliQuest Information
Group, Inc.* 32,750
------------
129,437
------------
Insurance 1.09%
83,300 RISCORP, Inc.* 1,520,225
------------
Medical -
Biomedical/Genetics 4.00%
113,000 Cardiac Pathways Corp.* 1,638,500
113,000 Cardiovascular Dynamics, Inc.* 1,384,250
3,800 Millennium Pharmaceuticals, Inc.* 58,900
75,000 Pharmaceutical Product
Development, Inc.* 2,512,500
------------
5,594,150
------------
Medical - Ethical Drugs 0.57%
40,000 SEQUUS Pharmaceuticals, Inc.* 795,625
------------
Medical -
Information Services 10.50%
16,200 Amisys Managed Care Systems* 417,150
45,000 CyCare Systems, Inc.* 2,345,625
60,050 Enterprise Systems, Inc.* 1,651,375
97,900 HPR, Inc.* 2,080,375
93,000 Mecon, Inc.* 2,104,125
139,800 Oacis Healthcare Holding Corp.* 1,607,700
96,100 Summit Medical Systems, Inc.* 1,873,950
1,000 The Registry, Inc.* 29,250
89,800 Transition Systems, Inc.* 2,559,300
------------
14,668,850
------------
Medical - Instruments 2.93%
43,300 ArthroCare Corp.* 779,400
15,000 Heartport, Inc.* 453,750
20,200 Hologic, Inc.* 893,850
46,000 IRIDEX Corp.* 690,000
73,700 Vitalcom, Inc.* 1,271,325
------------
4,088,325
------------
Medical - Nursing
Homes 1.47%
75,500 Arbor Health Care Co.* $ 2,057,375
------------
Medical - Outpatient/
Home 4.53%
40,100 American HomePatient, Inc.* 1,774,425
17,100 OccuSystems, Inc.* 639,112
48,900 Pediatric Services of America, Inc.* 1,112,475
28,000 Renal Care Group, Inc.* 903,000
100,000 TheraTx, Inc.* 1,900,000
------------
6,329,012
------------
Medical - Products 7.68%
101,650 ATS Medical, Inc.* 1,029,206
164,000 Aksys, Ltd.* 2,501,000
138,500 Angeion Corp.* 1,073,375
12,500 Biopsys Medical, Inc.* 250,000
107,000 CardioGenesis Corp.* 1,444,500
17,000 Cytyc Corp.* 439,875
97,400 Endosonics Corp.* 1,741,025
46,700 Parexel International Corp.* 2,253,275
------------
10,732,256
------------
Medical - Supplies 0.03%
1,000 Gulf South Medical Supply, Inc.* 39,000
------------
Medical -
Wholesale/Drug 1.68%
71,000 NCS HealthCare, Inc.* 2,147,750
5,100 Schein (Henry), Inc.* 195,075
------------
2,342,825
------------
Oil & Gas 2.45%
105,000 Coflexip SA ADR 1,824,375
34,700 Digicon, Inc.* 581,225
41,600 Rutherford-Moran Oil Corp.* 1,014,000
------------
3,419,600
------------
Pharmaceuticals 1.36%
200,000 NABI, Inc.* 1,900,000
------------
Retail -
Home Furnishings 0.02%
1,000 Cost Plus, Inc.* 27,750
------------
Retail - Personal Care 0.35%
22,000 Garden Botanika, Inc.* $ 484,000
------------
Retail/Wholesale -
Office Supplies 0.01%
500 U.S. Office Products Co.* 21,000
------------
Telecommunications -
Equipment 0.39%
22,600 Galileo Electro-Optics Corp.* 542,400
------------
Telecommunications -
Services 1.79%
99,500 Computer Telephone Corp.* 1,293,500
100,000 MobileMedia Corp.* 1,212,500
------------
2,506,000
------------
Transportation 0.24%
15,000 Trico Marine Services, Inc.* 333,750
------------
Total Common Stocks
(cost $100,346,676) 103,694,419
------------
WARRANTS 0.03%
60,500 ATS Medical, Inc. -
expires 3/2/97* 45,375
------------
Total Warrants
(cost $88,099) 45,375
------------
Principal
Amount Value
- ----------- -----
U.S. TREASURY BILLS 13.95%
$19,500,000 7/5/96 $ 19,495,667
------------
Total U.S. Treasury Bills
(cost $19,495,667) 19,495,667
------------
REPURCHASE AGREEMENTS 14.47%
20,217,000 UMB Bank, n.a., 4.80%,
dated 6/28/96, repurchase
price $20,224,976, maturing
7/1/96 (collateralized by
U.S. Treasury Notes,
5.375%, 5/31/98) 20,217,000
------------
Total Repurchase Agreements
(cost $20,217,000) 20,217,000
------------
Total Investments 102.66%
(cost $140,147,442) 143,452,461
Liabilities less Other
Assets (2.66)% (3,712,804)
------------
NET ASSETS 100.00% $139,739,657
============
* Non-income producing
See notes to financial statements.
Van Wagoner Mid-Cap Fund
Schedule of Investments
June 30, 1996
(Unaudited)
Number
of Shares Value
- ----------- -----
COMMON STOCKS 79.25%
Commercial Services -
Miscellaneous 1.45%
27,900 Pediatrix Medical Group, Inc.* $ 1,353,150
------------
Computers -
Local Networks 11.56%
40,000 3COM Corp.* 1,830,000
20,300 Arbor Software Corp.* 1,212,925
53,500 Ascend Communications, Inc.* 3,009,375
15,000 Cisco Systems, Inc.* 849,375
30,800 FORE Systems, Inc.* 1,112,650
59,700 Xylan Corp.* 2,776,050
------------
10,790,375
------------
Computers -
Peripherals 4.72%
124,400 Gandalf Technologies, Inc.* 995,200
5,100 Security Dynamics
Technologies, Inc.* 419,475
35,000 U.S. Robotics Corp.* 2,992,500
------------
4,407,175
------------
Computers - Software 13.15%
12,900 Atria Software, Inc.* 645,000
28,000 Baan Co., N.V.* 952,000
24,000 CBT Group PLC ADR* 1,110,000
1,900 Citrix Systems, Inc.* 72,200
25,000 Forte Software, Inc.* 1,306,250
18,000 HNC Software, Inc.* 832,500
34,000 Integrated Systems, Inc.* 1,362,125
27,000 McAfee Associates, Inc.* 1,323,000
23,500 Netscape Communications Corp.* 1,462,875
40,050 Pure Software, Inc.* 1,361,700
13,000 Remedy Corp.* 949,000
4,000 Scopus Technology, Inc.* 62,000
50 Spyglass, Inc.* 1,072
22,500 Sterling Commerce, Inc.* 835,312
------------
12,275,034
------------
Electronics -
Scientific Instruments 0.77%
22,300 Input/Output, Inc.* 721,963
------------
Energy - Services 3.46%
30,000 ENSCO International, Inc.* $ 975,000
65,200 Nabors Industries, Inc.* 1,059,500
45,300 Rowan Cos., Inc.* 668,175
17,600 Weatherford Enterra, Inc.* 528,000
------------
3,230,675
------------
Financial Services 2.13%
50,000 Medaphis Corp.* 1,987,500
------------
Hotel/Motel 1.50%
20,000 HFS, Inc.* 1,400,000
------------
Machinery -
Mining/Construction 1.18%
14,850 JLG Industries, Inc. 1,102,613
------------
Medical/Dental - Supplies 1.53%
59,000 Physician Sales & Service, Inc.* 1,430,750
------------
Medical - Ethical Drugs 0.11%
5,000 SEQUUS Pharmaceuticals, Inc.* 99,453
------------
Medical -
Information Services 1.54%
2,000 HBO & Co. 135,500
17,000 HCIA, Inc.* 1,071,000
6,000 IDX Systems Corp.* 234,000
------------
1,440,500
------------
Medical - Instruments 2.48%
39,700 Heartport, Inc.* 1,200,925
40,200 Sofamor Danek Group, Inc.* 1,115,550
------------
2,316,475
------------
Medical -
Outpatient/Home 11.06%
47,200 Apria Healthcare Group, Inc.* 1,480,900
36,150 Genesis Health Ventures, Inc.* 1,134,206
6,000 Lincare Holdings, Inc.* 235,500
30,000 OccuSystems, Inc.* 1,121,250
48,200 Renal Treatment Centers, Inc.* 1,385,750
24,300 RoTech Medical Corp.* 473,850
75,300 Total Renal Care Holdings, Inc.* 3,181,425
40,000 Vivra, Inc.* 1,315,000
------------
10,327,881
------------
Medical - Products 1.41%
20,000 Quintiles Transnational Corp.* $ 1,315,000
------------
Medical - Supplies 3.47%
38,000 Gulf South Medical Supply, Inc.* 1,482,000
66,300 Omnicare, Inc. 1,756,950
------------
3,238,950
------------
Medical - Wholesale/Drug 3.37%
56,600 AmeriSource Health Corp.,
Class A* 1,881,950
27,500 Express Scripts, Inc., Class A* 1,265,000
------------
3,146,950
------------
Oil & Gas 6.41%
24,000 Diamond Offshore Drilling, Inc.* 1,374,000
60,000 Global Marine, Inc.* 832,500
15,000 Petroleum Geo-Services A/S ADR* 425,625
27,500 Smith International, Inc.* 828,437
25,000 Sonat Offshore Drilling Co. 1,262,500
28,700 Tidewater, Inc. 1,259,213
------------
5,982,275
------------
Retail - Department Stores 0.18%
5,000 Saks Holdings, Inc.* 170,625
------------
Retail/Wholesale - Jewelry 1.48%
50,000 Claire's Stores, Inc. 1,381,250
------------
Retail/Wholesale -
Office Supplies 3.09%
30,000 Corporate Express, Inc.* 1,200,000
40,000 U.S. Office Products Co.* 1,680,000
------------
2,880,000
------------
Telecommunications -
Equipment 3.20%
30,800 Cascade Communications Corp.* 2,094,400
4,300 Pairgain Technologies, Inc.* 266,600
9,000 Stratacom, Inc.* 506,250
3,000 Westell Technologies, Inc.* 117,750
------------
2,985,000
------------
Total Common Stocks
(cost $69,961,431) 73,983,594
------------
Principal
Amount Value
- ----------- -----
U.S. TREASURY BILLS 6.96%
$6,500,000 7/5/96 $ 6,498,555
------------
Total U.S. Treasury Bills
(cost $6,498,555) 6,498,555
------------
REPURCHASE AGREEMENTS 14.16%
13,222,000 UMB Bank, n.a., 4.80%, dated
6/28/96, repurchase price
$13,227,217, maturing 7/1/96
(collateralized by U.S. Treasury
Notes, 5.375%, 5/31/98) 13,222,000
------------
Total Repurchase Agreements
(cost $13,222,000) 13,222,000
------------
Total Investments 100.37%
(cost $89,681,986) 93,704,149
Liabilities less Cash and Other
Assets (0.37)% (343,469)
------------
NET ASSETS 100.00% $93,360,680
============
* Non-income producing
See notes to financial statements.
Van Wagoner Funds
Statements of Assets and Liabilities
June 30, 1996
(Unaudited)
Emerging Micro-Cap Mid-Cap
Growth Fund Fund Fund
----------- ---- ----
ASSETS:
Investments, at value
(cost $700,034,506,
$119,930,442 and $76,459,986,
respectively) $748,335,012 $123,235,461 $80,482,149
Repurchase agreements, at value
(cost $28,930,000,
$20,217,000 and $13,222,000,
respectively) 28,930,000 20,217,000 13,222,000
Receivable for investments sold 14,550,073 84,318 366,525
Organizational expenses, net of
accumulated amortization 33,204 33,204 33,204
Receivable from investment adviser - 144,624 82,884
Interest and dividends receivable 17,470 13,667 7,935
Cash 126,206 - 5,385
Prepaid expenses and other assets 107,618 43,376 33,187
----------- ----------- ----------
Total Assets 792,099,583 143,771,650 94,233,269
----------- ----------- ----------
LIABILITIES:
Payable for investments purchased 8,466,685 3,704,935 659,430
Accrued investment advisory fee 851,643 252,335 111,941
Accrued distribution fee 86,493 16,115 10,313
Accrued expenses and other
liabilities 165,972 58,608 90,905
----------- ----------- ----------
Total Liabilities 9,570,793 4,031,993 872,589
----------- ----------- ----------
NET ASSETS $782,528,790 $139,739,657 $93,360,680
============ ============ ===========
NET ASSETS CONSIST OF:
Capital stock 5,228 1,029 687
Paid-in-capital 742,691,540 135,801,788 90,283,773
Undistributed net investment
income - 69,206 -
Accumulated net realized gain
(loss) on investments (8,468,484) 562,615 (945,943)
Net unrealized appreciation
on investments 48,300,506 3,305,019 4,022,163
----------- ----------- ----------
Net Assets $782,528,790 $139,739,657 $93,360,680
============ ============ ===========
CAPITAL STOCK, $0.0001 par value
Authorized 100,000,000 100,000,000 100,000,000
Issued and outstanding 52,282,682 10,293,606 6,865,943
NET ASSET VALUE, REDEMPTION PRICE,
AND OFFERING PRICE PER SHARE
(NET ASSETS/SHARES OUTSTANDING) $14.97 $13.58 $13.60
====== ====== ======
See notes to financial statements.
Van Wagoner Funds
Statements of Operations
Six Months Ended June 30, 1996
(Unaudited)
Emerging Micro-Cap Mid-Cap
Growth Fund Fund Fund
------------ ----- -----
INVESTMENT INCOME:
Interest $ 1,674,202 $ 540,129 $ 265,504
Dividends 37,933 135 5,499
----------- ---------- ----------
Total Investment Income 1,712,135 540,264 271,003
----------- ---------- ----------
EXPENSES:
Investment advisory fees 2,040,230 365,060 173,217
12b-1 fees 408,046 60,843 43,304
Transfer agent fees and expenses 265,928 77,831 95,385
Federal and state registration fees 141,175 41,393 49,004
Fund accounting and administration fees 115,395 42,590 30,665
Printing and postage expenses 40,160 6,412 4,589
Custody fees 14,700 7,087 6,141
Professional fees 8,852 9,029 9,029
Amortization of organization costs 3,520 3,520 3,520
Directors' fees and expenses 2,083 2,083 2,083
Miscellaneous 8,166 3,354 2,851
---------- ---------- ----------
Total expenses before waiver 3,048,255 619,202 419,788
Less: Waiver of expenses - (144,624) (82,016)
---------- ---------- ----------
Net Expenses 3,048,255 474,578 337,772
---------- ---------- ----------
NET INVESTMENT INCOME (LOSS) (1,336,120) 65,686 (66,769)
---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on
investments (8,468,484) 562,615 (945,943)
Change in unrealized appreciation
on investments 48,300,506 3,305,019 4,022,163
---------- ---------- ----------
Net Gain on Investments 39,832,022 3,867,634 3,076,220
---------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $38,495,902 $3,933,320 $3,009,451
=========== ========== ==========
See notes to financial statements.
Van Wagoner Funds
Statements of Changes in Net Assets
Six Months Ended June 30, 1996
(Unaudited)
Emerging Micro-Cap Mid-Cap
Growth Fund Fund Fund
----------- ----- -----
OPERATIONS:
Net investment income (loss) $ (1,336,120) $ 65,686 $ (66,769)
Net realized gain (loss) on
investments (8,468,484) 562,615 (945,943)
Change in unrealized appreciation
on investments 48,300,506 3,305,019 4,022,163
------------- ------------- ------------
Net increase in net assets
resulting from operations 38,495,902 3,933,320 3,009,451
------------- ------------- ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 951,590,685 159,995,437 117,107,749
Redemption of shares (207,591,131) (24,222,433) (26,789,853)
------------- ------------- ------------
Net increase from share
transactions 743,999,554 135,773,004 90,317,896
------------- ------------- ------------
TOTAL INCREASE IN NET ASSETS 782,495,456 139,706,324 93,327,347
NET ASSETS:
Beginning of period 33,334 33,333 33,333
------------- ------------- ------------
End of period (including
undistributed net investment
income of $0, $69,206 and $0,
respectively) $782,528,790 $139,739,657 $93,360,680
============ ============ ===========
See notes to financial statements.
FINANCIAL HIGHLIGHTS
Van Wagoner Funds
Six Months Ended June 30, 1996
(Unaudited)
Emerging Micro-Cap Mid-Cap
Growth Fund(1) Fund(1) Fund(1)
------------- ------- -------
Net Asset Value, Beginning
of Period $10.00 $10.00 $10.00
Income (Loss) From
Investment Operations:
Net investment income (loss) (0.03) 0.01 (0.01)
Net realized and unrealized gains
on investments 5.00 3.57 3.61
--------- -------- -------
Total from investment operations 4.97 3.58 3.60
--------- -------- -------
Net Asset Value, End of Period $14.97 $13.58 $13.60
====== ====== ======
Total Return(2) 49.70% 35.80% 36.00%
Supplemental Data and Ratios:
Net assets, end of period (000s) $782,529 $139,740 $93,361
Ratio of net expenses to average
net assets(3)(4) 1.87% 1.95% 1.95%
Ratio of net investment income
(loss) to average net assets(3)(4) (0.82)% 0.27% (0.39)%
Portfolio turnover rate 34% 27% 53%
Average commission rate paid on
portfolio investment transactions $0.0578 $0.0550 $0.0572
(1) Commenced operations on December 31, 1995
(2) Not annualized
(3) Annualized
(4) Without fees waived, the ratio of net expenses to average net assets would
have been 2.54% for the Micro-Cap Fund and 2.42% for the Mid-Cap Fund. The ratio
of net investment income (loss) to average net assets would have been (0.32)%
for the Micro-Cap Fund and (0.86)% for the Mid-Cap Fund. The annual expense
ratio of each Fund is capped at 1.95% through January 1, 1997.
See notes to financial statements.
Van Wagoner Funds
Notes to Financial Statements
June 30, 1996
(Unaudited)
1.Organization
Van Wagoner Funds, Inc. (the "Company") was organized on October 18, 1995 as a
Maryland corporation and is registered under the Investment Company Act of 1940
(the "1940 Act") as an open-end management investment company. The Emerging
Growth Fund, the Micro-Cap Fund and the Mid-Cap Fund (collectively "the Funds")
are separate, diversified investment portfolios of Van Wagoner Funds, Inc. The
Funds commenced operations on December 31, 1995.
2.Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
financial statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") which permit management to make certain estimates
and assumptions at the date of the financial statements.
(a) Investment Valuation - A security traded on a recognized stock exchange is
valued at the last sale price prior to the time when assets are valued on the
principal exchange on which the security is traded. If no sale is reported on
the valuation date, the most current bid price will be used. All other
securities for which over-the-counter market quotations are readily available
are valued at the most current closing price. Debt securities which will mature
in more than 60 days are valued at prices furnished by a pricing service.
Securities which will mature in 60 days or less are valued at amortized cost,
which approximates market value. Any securities for which market quotations are
not readily available are valued at their fair value as determined in good faith
by the Fund's investment adviser pursuant to guidelines established by the Board
of Directors.
(b) Repurchase Agreements - During the term of a repurchase agreement, the
market value of the underlying collateral, including accrued interest, is
required to equal or exceed the market value of the repurchase agreement. The
underlying collateral for all repurchase agreements is held by the Funds'
custodian.
(c) Organization Costs - Costs incurred by the Funds in connection with their
organization, registration and the initial public offering of shares have been
deferred and will be amortized over the period of benefit, but not to exceed
five years. If any of the original shares of a Fund are redeemed by any holder
thereof prior to the end of the amortization period, the redemption proceeds
will be reduced by the pro rata share of the unamortized expenses as of the date
of redemption. The pro rata share by which the proceeds are reduced will be
derived by dividing the number of original shares of the Funds being redeemed by
the total number of original shares outstanding at the time of redemption.
(d) Expenses - The Funds are charged for those expenses that are directly
attributable to each portfolio, such as advisory and custodian fees. Expenses
that are not directly attributable to a portfolio are typically allocated among
the portfolios in proportion to their respective net assets.
(e) Federal Income Taxes - Each Fund intends to comply with the requirements of
the Internal Revenue Code necessary to qualify as a regulated investment company
and to make the requisite distributions of income to its shareholders which will
be sufficient to relieve it from all or substantially all federal income taxes.
(f) Distributions to Shareholders - Dividends from net investment income and net
realized capital gains, if any, will be declared and paid at least annually.
Distributions to shareholders are recorded on the ex-dividend date. The Fund may
periodically make reclassifications among certain of its capital accounts as a
result of the timing and characterization of certain income and capital gains
distributions determined in accordance with federal tax regulations, which may
differ from GAAP.
(g) Other - Investment transactions are accounted for on the trade date plus
one. Each Fund determines the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold with the
net sale proceeds. Dividend income is recognized on the ex-dividend date and
interest income is recognized on an accrual basis.
3. Capital Share Transactions
The Funds are authorized to issue a total of 500,000,000 shares of common stock
in series with a par value of $0.0001 per share. The Board of Directors is
empowered to issue other series of the Company's shares without shareholder
approval.
Each share of stock will have a pro rata interest in the assets of the Fund to
which the stock of that series relates and will have no interest in the assets
of any other Fund.
Transactions in shares of the Funds for the six months ended June 30, 1996 were
as follows:
Emerging Micro-Cap Mid-Cap
Growth Fund Fund Fund
----------- ----- -----
Shares sold 66,245,553 12,055,117 8,851,868
Shares redeemed (13,966,204) (1,764,844) (1,989,258)
------------ ----------- -----------
Net increase 52,279,349 10,290,273 6,862,610
============ =========== ===========
4.Investment Advisory Agreement
The Funds have an agreement with Van Wagoner Capital Management, Inc. (the
"Adviser") to furnish investment advisory services to the Funds. Under the terms
of this agreement, the Adviser is compensated at the following percentage of
average daily net assets for each Fund: 1.25% for the Emerging Growth Fund,
1.50% for the Micro-Cap Fund and 1.00% for the Mid-Cap Fund. The Adviser has
agreed to voluntarily reduce fees for expenses (exclusive of brokerage,
interest, taxes and extraordinary expenses) that exceed the expense limitation
of 1.95% for each Fund until January 1, 1997. Expenses of $144,624 and $82,884
were waived in the Micro-Cap and Mid-Cap Funds, respectively.
5.Service and Distribution Plan
The Funds have adopted a Service and Distribution Plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. The Plan authorizes payments by the Funds in
connection with the distribution of their shares at an annual rate, as
determined from time to time by the Board of Directors, of up to 0.25% of a
Fund's average daily net assets. Under the Plan, each Fund is authorized to pay
expenses incurred for the purpose of financing any activity primarily intended
to result in the sale of shares of each Fund.
6.Investment Transactions
The aggregate purchases and sales of securities, excluding short-term
investments, for the Funds for the six months ended June 30, 1996 were as
follows:
Emerging Micro-Cap Mid-Cap
Growth Fund Fund Fund
----------- ------ ------
Purchases $822,181,045 $109,542,184 $87,073,782
Sales 113,678,055 9,670,024 16,166,408
For the six months ended June 30, 1996, there were no purchases or sales of
long-term U.S. Government securities.
The cost of securities for the Emerging Growth Fund, Micro-Cap Fund and Mid-Cap
Fund is $732,515,236, $140,260,117 and $89,812,559, respectively. At June 30,
1996, gross unrealized appreciation and depreciation on investments for federal
income tax purposes were as follows:
Emerging Micro-Cap Mid-Cap
Growth Fund Fund Fund
------------ ----- -----
Unrealized appreciation $84,812,101 $9,379,210 $7,427,734
(Unrealized depreciation) (40,062,325) (6,186,866) (3,536,144)
------------ ----------- -----------
Net unrealized appreciation
on investments $44,749,776 $3,192,344 $3,891,590
============ =========== ===========
7. Transactions with Affiliates
The following is an analysis of 1996 transactions in the Emerging Growth Fund
with "affiliated companies" as defined by the Investment Company Act of 1940:
Amount of
Gain
Amount of (Loss)
Share Activity Dividends Realized
--------------------------------------- Credited on Sale
Balance Balance to Income of Shares
Security Name 12/31/95 Purchases Sales 6/30/96 in 1996 in 1996
- -------------- -------- --------- ----- ------- ------- --------
Iridex Corp. - 195,000 - 195,000 - -
Meta-Software, Inc. - 533,300 - 533,300 - -
Oacis Healthcare
Holding Corp. - 157,800 - 157,800 - -
Summit Medical
Systems, Inc. - 565,100 - 565,100 - -
<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt having an original maturity of
no more than 365 days. The following summarizes the rating categories
used by Standard & Poor's for commercial paper in which the Funds may
invest:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics
are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues
designated "A-1."
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating
categories used by Moody's for commercial paper in which the Funds may
invest:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following capacities: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range
of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps
employs three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the
highest rating category. The following summarizes the rating categories
used by Duff & Phelps for commercial paper in which the Funds may invest:
"Duff 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access
to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing
funding need may enlarge total financing requirements, access to capital
markets is good.
Fitch short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years. The highest
rating category of Fitch for short-term obligations is "F-1." Fitch
employs two designations, "F-1+" and "F-1," within the highest category.
The following summarizes the rating categories used by Fitch for short-
term obligations in which the Funds may invest:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly
less in degree than issues rated "F-1+."
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by a
bank holding company or an entity within the holding company structure.
The following summarizes the ratings used by Thomson BankWatch in which
the Funds may invest:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - this designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes
the rating categories used by IBCA for short-term debt ratings in which
the Funds may invest:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
Corporate Long-Term Debt Ratings
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration obligors
such as guarantors, insurers, or lessees. The debt rating is not a
recommendation to purchase, sell, or hold a security, inasmuch as it does
not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of,
such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the
obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
Investment Grade
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small
degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
Speculative Grade
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of
speculation and 'C' the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BBB-'
rating.
B - Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied 'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
'CCC' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied 'CCC-' debt rating.
The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no
interest is being paid.
D - Debt rated 'D' is in payment default. The 'D' rating cateogy is
used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such period. The 'D'
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes Bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determing the credit risk associated with a particular security. The
ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue,
its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and any guarantor, as well as the economic and political environment that
might affect the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature of taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to
be reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result
of changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated 'AAA.' Because bonds rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of the issuers is generally
rated 'F-1+.'
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely
to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with
higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings ('BB to 'C') represent Fitch's assessment of the likelihood of
timely payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the
rating ('DDD' to 'D') is an assessment of the ultimate recovery value
through reorganization or liquidation.
The rating takes into consideration special features of the issue,
its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and any guarantor, as well as the economic and political environment that
might affect the issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect
the differences in the degrees of credit risk. Moreover, the character of
the risk factor varies from industry to industry and between corporate,
health care and municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout
the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD
and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued
on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks
related to such factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost structure, and management
depth and expertise. The projected viability of the obligor at the trough
of the cycle is a critical determination.
Each rating also takes into account the legal form of the security
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.).
The extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the
different security classes in the capital structure, the overall credit
strength of the issuer, and the nature of covenant protection. Review of
indenture restrictions is important to the analysis of a company's
operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of BBB-' and higher
fall within the definition of investment grade securities, as defined by
bank and insurance supervisory authorities.
Rating Scale Definition
AAA Highest credit quality. The risk factors
are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors
AA are strong. Risk is modest, but may vary
AA- slightly from time to time because of
economic conditions.
A+ Protection factors are average but
A adequate. However, risk factors are more
A- variable and greater in periods of
economic areas.
BBB+ Below average protection factors but still
BBB considered sufficient for prudent
BBB- investment. Considerable variability in
risk during economic cycles.
BB+ Below investment grade but deemed likely to
BB meet obligations when due. Present or
BB- prospective financial protection factors
fluctuate according to industry conditions
or company fortunes. Overall quality may
move up or down frequently within this
category.
B+ Below investment grade and possessing risk
B that obligations will not be met when due.
B- Financial protection factors will fluctuate
widely according to economic cycles.
CCC Well below investment grade securities.
Considerable uncertainty exists as to
timely payment of principal, interest or
preferred dividends. Protection factors
are narrow and risk can be substantial with
unfavorable economic/industry conditions,
and/or with unfavorable company
developments.
DD Default debt obligations. Issuer failed to
meet scheduled principal and/or interest
DP payments.
Preferred stock with dividend arrearages.
<PAGE>
VAN WAGONER FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
for the
Capital Appreciation Fund
Growth Fund
Post-Venture Fund
This Statement of Additional Information dated August 29, 1996, is
meant to be read in conjunction with the Prospectus dated August 29, 1996,
for the Capital Appreciation Fund, Growth Fund and Post-Venture Fund
(collectively referred to as the "Funds") and is incorporated by reference
in its entirety into the Prospectus. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of these
Funds should be made solely upon the information contained herein. Copies
of the Prospectus for the Funds may be obtained by writing Van Wagoner
Funds, Inc., P.O. Box 1628, Milwaukee, Wisconsin 53201-1628. Capitalized
terms used but not defined herein have the same meanings as in the
Prospectus.
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT INFORMATION . . . . . . . . . . 3
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . 13
ADDITIONAL COMPANY INFORMATION . . . . . . . . . . . 15
Directors and Officers . . . . . . . . . . . . . 16
Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . . . . . 17
Investment Adviser . . . . . . . . . . . . . . . 17
Administrator . . . . . . . . . . . . . . . . . 18
Custodian, Transfer Agent and Dividend
Paying Agent . . . . . . . . . . . . . . . . . . 19
Legal Counsel . . . . . . . . . . . . . . . . . 19
Independent Accountants . . . . . . . . . . . . 19
DISTRIBUTION OF SHARES . . . . . . . . . . . . . . . 19
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . 20
TAXES . . . . . . . . . . . . . . . . . . . . . . . . 21
DESCRIPTION OF SHARES . . . . . . . . . . . . . . . . 24
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . 25
INDIVIDUAL RETIREMENT PLANS . . . . . . . . . . . . . 26
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . 26
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . 29
OTHER INFORMATION . . . . . . . . . . . . . . . . . . 29
APPENDIX A (Description of Securities Ratings) . . . A-1
________________
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information
or in the Prospectus in connection with the offering made by the
Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Funds. The Prospectus
does not constitute an offering by the Funds in any jurisdiction in which
such offering may not lawfully be made.
ADDITIONAL INVESTMENT INFORMATION
The following supplements the investment objectives and policies of
the Funds as set forth in their Prospectus.
Capital Appreciation Fund seeks capital appreciation. The Fund
invests in companies that the Adviser believes to have the potential for
long-term growth in their business. The Fund focuses on companies with
small- to mid- size market capitalizations.
Growth Fund seeks capital appreciation. The Fund invests in
companies that the Adviser believes to have the potential for above-
average long-term growth. The Adviser will focus on companies that have
mid- to larger market capitalizations.
Post-Venture Fund seeks capital appreciation. The Fund invests
primarily in companies considered by the Adviser to be in their post-
venture capital stage. Under normal market conditions, the Fund will
invest at least 65% of its total assets in securities of companies that
have received venture capital financing during the early stages of the
company's existence or the early stages of the development of a new
product or service, or as part of of a reorganization, restructuring or
recapitalization.
Money Market Instruments. Each Fund may invest in a variety of money
market instruments for temporary defensive purposes, pending investment,
to meet anticipated redemption requests and/or to retain the flexibility
to respond promptly to changes in market and economic conditions.
Commercial paper represents short-term unsecured promissory notes issued
in bearer form by banks or bank holding companies, corporations and
finance companies. Certificates of deposit are generally negotiable
certificates issued against funds deposited in a commercial bank for a
definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by
an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Fixed time
deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on
demand by the investor, but may be subject to early withdrawal penalties
that vary depending upon market conditions and the remaining maturity of
the obligation. There are no contractual restrictions on the right to
transfer a beneficial interest in a fixed time deposit to a third party,
although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to deposit liabilities of the bank and pari passu
with other senior, unsecured obligations of the bank. Bank notes are
classified as "other borrowings" on a bank's balance sheet, while deposit
notes and certificates of deposit are classified as deposits. Bank notes
are not insured by the Federal Deposit Insurance Corporation or any other
insurer. Deposit notes are insured by the Federal Deposit Insurance
Corporation only to the extent of $100,000 per depositor per bank.
Repurchase Agreements. Each Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement
to repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). Although the securities subject to a repurchase agreement
may bear maturities exceeding one year, settlement for the repurchase
agreement will never be more than one year after a Fund's acquisition of
the securities and normally will be within a shorter period of time.
Securities subject to repurchase agreements are held either by the Funds'
custodian or subcustodian (if any), or in the Federal Reserve/Treasury
Book-Entry System. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement
in an amount exceeding the repurchase price (including accrued interest).
Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to a Fund is
limited to the ability of the seller to pay the agreed upon sum on the
repurchase date; in the event of default, the repurchase agreement
provides that a Fund is entitled to sell the underlying collateral. If
the value of the collateral declines after the agreement is entered into,
however, and if the seller defaults under a repurchase agreement when the
value of the underlying collateral is less than the repurchase price, a
Fund could incur a loss of both principal and interest. The Adviser
monitors the value of the collateral at the time the agreement is entered
into and at all times during the term of the repurchase agreement in an
effort to determine that the value of the collateral always equals or
exceeds the agreed upon repurchase price to be paid to a Fund. If the
seller were to be subject to a federal bankruptcy proceeding, the ability
of a Fund to liquidate the collateral could be delayed or impaired because
of certain provisions of the bankruptcy laws.
United States Government Obligations. Each of the Funds may invest
in Treasury securities which differ only in their interest rates,
maturities and times of issuance. Treasury Bills have initial maturities
of one year or less; Treasury Notes have initial maturities of one to ten
years; and Treasury Bonds generally have initial maturities of greater
than ten years.
Illiquid Securities. Each of the Funds may invest up to 5% of its
net assets in illiquid securities (i.e., securities that cannot be
disposed of within seven days in the normal course of business at
approximately the amount at which the Fund has valued the securities).
The Board of Directors or its delegate has the ultimate authority to
determine which securities are liquid or illiquid for purposes of this
limitation. Certain securities exempt from registration or issued in
transactions exempt from registration ("restricted securities") under the
Securities Act of 1933, as amended ("Securities Act") that may be resold
pursuant to Rule 144A or Regulation S under the Securities Act, may be
considered liquid. The Board has delegated to the Adviser the day-to-day
determination of the liquidity of a security, although it has retained
oversight and ultimate responsibility for such determinations. Although
no definite quality criteria are used, the Board has directed the Adviser
to consider such factors as (i) the nature of the market for a security
(including the institutional private or international resale market), (ii)
the terms of these securities or other instruments allowing for the
disposition to a third party or the issuer thereof (e.g., certain
repurchase obligations and demand instruments), (iii) the availability of
market quotations (e.g., for securities quoted in PORTAL system), and (iv)
other permissible relevant factors. Certain securities are deemed
illiquid by the Securities and Exchange Commission including repurchase
agreements maturing in greater than seven days and options not listed on a
securities exchange or not issued by the Options Clearing Corporation.
These securities will be treated as illiquid and subject to the Funds'
limitation on illiquid securities.
Restricted securities may be sold in privately negotiated or other
exempt transactions, qualified non-U.S. transactions, such as under
Regulation S, or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, a Fund may be obligated to pay all or part of the registration
expenses and a considerable time may elapse between the decision to sell
and the sale date. If, during such period, adverse market conditions were
to develop, a Fund might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Board.
If through the appreciation of illiquid securities or the
depreciation of illiquid securities, a Fund should be in a position where
more than 5% of the value of its net assets are invested in illiquid
assets, including restricted securities which are not readily marketable,
the Fund will take such steps as it deems advisable, if any, to reduce the
percentage of such securities to 5% or less of the value of its net
assets.
Hedging Strategies. The Funds may engage in hedging activities.
They may utilize a variety of financial instruments, including options, in
an attempt to reduce the investment risks of the Funds.
Hedging instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a Fund
owns or intends to acquire. Hedging instruments on stock indices, in
contrast, generally are used to hedge against price movements in broad
equity market sectors in which a Fund has invested or expects to invest.
The use of hedging instruments is subject to applicable regulations of the
Securities and Exchange Commission (the "SEC"), the several options
exchanges upon which they are traded and various state regulatory
authorities. In addition, a Fund's ability to use hedging instruments
will be limited to tax considerations.
Options. General. Each Fund may purchase and write (i.e. sell) put
and call options. Such options may relate to particular securities or
stock indices, and may or may not be listed on a domestic or foreign
securities exchange and may or may not be issued by the Options Clearing
Corporation. Options trading is a highly specialized activity that
entails greater than ordinary investment risk. Options may be more
volatile than the underlying instruments, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than
an investment in the underlying instruments themselves.
A call option for a particular security gives the purchaser of the
option the right to buy, and the writer (seller) the obligation to sell,
the underlying security at the stated exercise price at any time prior to
the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for
undertaking the obligation under the option contract. A put option for a
particular security gives the purchaser the right to sell the security at
the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security.
Stock index options are put options and call options on various stock
indexes. In most respects, they are identical to listed options on common
stocks. The primary difference between stock options and index options
occurs when index options are exercised. In the case of stock options,
the underlying security, common stock, is delivered. However, upon the
exercise of an index option, settlement does not occur by delivery of the
securities comprising the index. The option holder who exercises the
index option receives an amount of cash if the closing level of the stock
index upon which the option is based is greater than, in the case of a
call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to the difference between the
closing price of the stock index and the exercise price of the option
expressed in dollars times a specified multiple. A stock index fluctuates
with changes in the market value of the stocks included in the index. For
example, some stock index options are based on a broad market index, such
as the Standard & Poor's 500 or the Value Line Composite Index or a
narrower market index, such as the Standard & Poor's 100. Indexes may
also be based on an industry or market segment, such as the AMEX Oil and
Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are currently traded on the following exchanges: the Chicago
Board Options Exchange, the New York Stock Exchange, the American Stock
Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange.
A Fund's obligation to sell an instrument subject to a call option
written by it, or to purchase an instrument subject to a put option
written by it, may be terminated prior to the expiration date of the
option by the Fund's execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e.,
same underlying instrument, exercise price and expiration date) as the
option previously written. A closing purchase transaction will ordinarily
be effected to realize a profit on an outstanding option, to prevent an
underlying instrument from being called, to permit the sale of the
underlying instrument or to permit the writing of a new option containing
different terms on such underlying instrument. The cost of such a
liquidation purchase plus transactions costs may be greater than the
premium received upon the original option, in which event the Fund will
have incurred a loss in the transaction. There is no assurance that a
liquid secondary market will exist for any particular option. An option
writer, unable to effect a closing purchase transaction, will not be able
to sell the underlying instrument or liquidate the assets held in the
segregated account until the option expires or the optioned instrument is
delivered upon exercise with the result that the writer in such
circumstances will be subject to the risk of market decline or
appreciation in the instrument during such period.
If an option purchased by a Fund expires unexercised, the Fund
realizes a loss equal to the premium paid. If a Fund enters into a
closing sale transaction on an option purchased by it, the Fund will
realize a gain if the premium received by the Fund on the closing
transaction is more than the premium paid to purchase the option, or a
loss if it is less. If an option written by a Fund expires on the
stipulated expiration date or if a Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is
sold). If an option written by a Fund is exercised, the proceeds of the
sale will be increased by the net premium originally received and the Fund
will realize a gain or loss.
Federal Tax Treatment of Options. Certain option transactions have
special tax results for the Funds. Expiration of a call option written by
a Fund will result in short-term capital gain. If the call option is
exercised, the Fund will realize a gain or loss from the sale of the
security covering the call option and, in determining such gain or loss,
the option premium will be included in the proceeds of the sale.
If a Fund writes options other than "qualified covered call options,"
as defined in Section 1092 of the Internal Revenue Code of 1986, as
amended (the "Code"), or purchases puts, any losses on such options
transactions, to the extent they do not exceed the unrealized gains on the
securities covering the options, may be subject to deferral until the
securities covering the options have been sold.
In the case of transactions involving "nonequity options," as defined
in Code Section 1256, the Funds will treat any gain or loss arising from
the lapse, closing out or exercise of such positions as 60% long-term and
40% short-term capital gain or loss as required by Section 1256 of the
Code. In addition, such positions must be marked-to-market as of the last
business day of the year, and gain or loss must be recognized for federal
income tax purposes in accordance with the 60%/40% rule discussed above
even though the position has not been terminated. A "nonequity option"
includes options involving stock indexes such as the Standard & Poor's 500
and 100 indexes.
Certain Risks Regarding Options. There are several risks associated
with transactions in options. For example, there are significant
differences between the securities and options markets that could result
in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid
secondary market for particular options, whether traded over-the-counter
or on an exchange, may be absent for reasons which include the following:
there may be insufficient trading interest in certain options;
restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the
facilities of an exchange or the Options Clearing Corporation may not at
all times be adequate to handle current trading value; or one or more
exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market on that
exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Successful use by the Funds of options on stock indexes will be
subject to the ability of the Adviser to correctly predict movements in
the directions of the stock market. This requires different skills and
techniques than predicting changes in the prices of individual securities.
In addition, a Fund's ability to effectively hedge all or a portion of the
securities in its portfolio, in anticipation of or during a market
decline, through transactions in put options on stock indexes, depends on
the degree to which price movements in the underlying index correlate with
the price movements of the securities held by a Fund. Inasmuch as a
Fund's securities will not duplicate the components of an index, the
correlation will not be perfect. Consequently, each Fund will bear the
risk that the prices of its securities being hedged will not move in the
same amount as the prices of its put options on the stock indexes. It is
also possible that there may be a negative correlation between the index
and a Fund's securities which would result in a loss on both such
securities and the options on stock indexes acquired by the Fund.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
markets that cannot be reflected in the options markets. The purchase of
options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary
portfolio securities transactions. The purchase of stock index options
involves the risk that the premium and transaction costs paid by a Fund in
purchasing an option will be lost as a result of unanticipated movements
in prices of the securities comprising the stock index on which the option
is based.
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time,
and for some options no secondary market on an exchange or elsewhere may
exist. If a Fund is unable to close out a call option on securities that
it has written before the option is exercised, the Fund may be required to
purchase the optioned securities in order to satisfy its obligation under
the option to deliver such securities. If a Fund is unable to effect a
closing sale transaction with respect to options on securities that is has
purchased, it would have to exercise the option in order to realize any
profit and would incur transaction costs upon the purchase and sale of the
underlying securities.
Cover for Options Positions. Transactions using options (other than
options that a Fund has purchased) expose a Fund to an obligation to
another party. A Fund will not enter into any such transactions unless it
owns either (1) an offsetting ("covered") position in securities or other
options or (2) cash, receivables and short-term debt securities with a
value sufficient at all times to cover its potential obligations not
covered as provided in (1) above. Each Fund will comply with Securities
and Exchange Commission (the "SEC") guidelines regarding cover for these
instruments and, if the guidelines so require, set aside cash, U.S.
government securities or other liquid, high-grade debt securities in a
segregated account with its Custodian in the prescribed amount. Under
current SEC guidelines, the Funds will segregate assets to cover
transactions in which the Funds write or sell options.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding option is open, unless they are
replaced with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or segregated accounts could impede
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Investment Companies. Each Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (a)
not more than 5% of the value of the Fund's total assets will be invested
in the securities of any one investment company; (b) not more than 10% of
the value of its total assets will be invested in the aggregate in
securities of investment companies as a group; and (c) not more than 3% of
the outstanding voting stock of any one investment company will be owned
by the Fund or by the Company as a whole.
Warrants. The Funds may purchase warrants and similar rights, which
are privileges issued by corporations enabling the owners to subscribe to
and purchase a specified number of shares of the corporation at a
specified price during a specific period of time. The purchase of
warrants involves the risk that a Fund could lose the purchase value of a
warrant if the right to subscribe to additional shares is not exercised
prior to the warrant's expiration. Also, the purchase of warrants
involves the risk that the effective price paid for the warrant added to
the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in
the level of the underlying security. A Fund will not invest more than 5%
of its total assets, taken at market value, in warrants, or more than 2%
of its total assets, taken at market value, in warrants not listed on the
New York or American Stock Exchanges or a major foreign exchange.
Warrants attached to other securities acquired by a Fund are not subject
to this restriction.
Convertible Securities. Convertible securities entitle the holder to
receive interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible securities mature or are redeemed, converted
and exchanged. Prior to conversion, convertible securities have
characteristics similar to ordinary debt securities or preferred stocks in
that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers.
Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk of loss of
principal than the corporation's common stock.
In selecting convertible securities for the Funds, the Adviser will
consider among other factors, its evaluation of the creditworthiness of
the issuers of the securities; the interest or dividend income generated
by the securities; the potential for capital appreciation of the
securities and the underlying common stocks; the prices of the securities
relative to other comparable securities and to the underlying common
stocks; whether the securities are entitled to the benefits of sinking
funds or other protective conditions; diversification of a Fund's
portfolio as to issuers; and whether the securities are rated by a rating
agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment
value (determined by yield in comparison with the yields of other
securities of comparable maturity and quality that do not have a
conversion privilege) and their conversion value (their worth, at market
value, if converted into the underlying common stock). The investment
value of convertible securities is influenced by changes in interest
rates, with investment value declining as interest rates increase and
increasing as interest rates decline, and by the credit standing of the
issuer and other factors. The conversion value of convertible securities
is determined by the market price of the underlying common stock. If the
conversion value is low relative to the investment value, the price of the
convertible securities is governed principally by their investment value.
To the extent the market price of the underlying common stock approaches
or exceeds the conversion price, the price of the convertible securities
will be increasingly influenced by their conversion value. In addition,
convertible securities generally sell at a premium over their conversion
value determined by the extent to which investors place value on the right
to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for a Fund may result from an improvement in the
credit standing of an issuer whose securities are held in the Fund or from
a general lowering of interest rates, or a combination of both.
Conversely, a reduction in the credit standing of an issuer whose
securities are held by a Fund or a general increase in interest rates may
be expected to result in capital depreciation to the Fund.
Typically, the convertible debt securities in which the Funds will
invest will be of a quality less than investment grade (so-called "junk
bonds"). The Funds will, however, limit their investment in non-
investment grade convertible debt securities to no more than 5% of the
respective net assets at the time of purchase and will not acquire
convertible debt securities rated below B by Moody's or S&P, or unrated
securities deemed by the Adviser to be of comparable quality. Junk bonds,
while generally offering higher yields than investment grade securities
with similar maturities, involve greater risks, including the possibility
of default or bankruptcy. They are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal.
The special risk considerations in connection with investments in these
securities are discussed below. Refer to Appendix A of this Statement of
Additional Information for a discussion of securities ratings.
Effect on Interest Rates and Economic Changes. The junk bond market
is relatively new and its growth has paralleled a long economic expansion.
As a result, it is not clear how this market may withstand a prolonged
recession or economic downturn. Such an economic downturn could severely
disrupt the market for and adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation
when interest rates decline and depreciation when interest rates rise.
The market values of junk bond securities tend to reflect individual
corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Junk bond securities also tend to be more sensitive to
economic conditions than are higher-rated categories. During an economic
downturn or a sustained period of rising interest rates, highly leveraged
issuers of junk bond securities may experience financial stress and may
not have sufficient revenues to meet their payment obligations. The risk
of loss due to default by an issuer of these securities is significantly
greater than issuers of higher-rated securities because such securities
are generally unsecured and are often subordinated to other creditors.
Further, if the issuer of a junk bond security defaulted, a Fund might
incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased
volatility in the market prices of these securities and thus in a Fund's
net asset value.
As previously stated, the value of a junk bond security will
generally decrease in a rising interest rate market, and accordingly so
will a Fund's net asset value. If a Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of
its portfolio securities without regard to their investment merits. Due
to the limited liquidity of junk bond securities, a Fund may be forced to
liquidate these securities at a substantial discount. Any such
liquidation would reduce a Fund's asset base over which expenses could be
allocated and could result in a reduced rate of return for the Fund.
Payment Expectations. Junk bond securities typically contain
redemption, call or prepayment provisions which permit the issuer of such
securities containing such provisions to redeem the securities at its
discretion. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, a
Fund may have to replace the securities with a lower yielding security,
which could result in a lower return for the Fund.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated
securities. They do not, however, evaluate the market value risk of junk
bond securities and, therefore may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make
timely changes in a rating to reflect changes in the economy or in the
condition of the issuer that affect the market value of the security.
Consequently, credit ratings are used only as a preliminary indicator of
investment quality. Investments in junk bond securities will be more
dependent on the Adviser's credit analysis than would be the case with
investments in investment grade debt securities. The Adviser employs its
own credit research and analysis, which includes a study of existing debt,
capital structure, ability to service debt and to pay dividends, the
issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Adviser continually monitors each Fund's
investments and carefully evaluates whether to dispose of or to retain
junk bond securities whose credit ratings or credit quality may have
changed.
Liquidity and Valuation. A Fund may have difficulty disposing of
certain junk bond securities because there may be a thin trading market
for such securities. Because not all dealers maintain markets in all junk
bond securities there is no established retail secondary market for many
of these securities. The Funds anticipate that such securities could be
sold only to a limited number of dealers or institutional investors. To
the extent a secondary trading market does exist, it is generally not as
liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of
the security. The lack of a liquid secondary market for certain
securities may also make it more difficult for a Fund to obtain accurate
market quotations for purposes of valuing the Fund. Market quotations are
generally available on many junk bond issues only from a limited number of
dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of junk bond securities, especially in a
thinly traded market.
New and Proposed Legislation. Recent legislation has been adopted,
and from time to time, proposals have been discussed, regarding new
legislation designed to limit the use of certain junk bond securities by
certain issuers. It is not currently possible to determine the impact of
the recent legislation or the proposed legislation on the junk bond
securities market. However, it is anticipated that if additional
legislation is enacted or proposed, it could have a material affect on the
value of these securities and the existence of a secondary trading market
for the securities.
In general, investments in non-investment grade convertible
securities are subject to a significant risk of a change in the credit
rating or financial condition of the issuing entity. Investments in
convertible securities of medium or lower quality are also likely to be
subject to greater market fluctuations and to greater risk of loss of
income and principal due to default than investments of higher-rated fixed
income securities. Such lower-rated securities generally tend to reflect
short-term corporate and market developments to a greater extent than
higher-rated securities, which react more to fluctuations in the general
level of interest rates. A Fund will generally reduce risk to the
investor by diversification, credit analysis and attention to current
developments in trends of both the economy and financial markets.
However, while diversification reduces the effect on a Fund of any single
investment, it does not reduce the overall risk of investing in lower-
rated securities.
Calculation of Portfolio Turnover Rate. The portfolio turnover rate
for the Funds is calculated by dividing the lesser of purchases or sales
of portfolio investments for the reporting period by the monthly average
value of the portfolio investments owned during the reporting period. The
calculation excludes all securities, including options, whose maturities
or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption
of shares and by requirements which enable the Funds to receive favorable
tax treatment. The Funds are not restricted by policy with regard to
portfolio turnover and will make changes in their investment portfolios
from time to time as business and economic conditions as well as market
prices may dictate. It is anticipated the portfolio turnover rate for the
Capital Appreciation, Growth and Post-Venture Funds generally will not
exceed 150% each. However, these should not be considered as limiting
factors.
INVESTMENT RESTRICTIONS
Consistent with each Fund's investment objective, each Fund has
adopted certain investment restrictions. The following restrictions
supplement those set forth in the Prospectus. Unless otherwise noted,
whenever an investment restriction states a maximum percentage of a Fund's
assets that may be invested in any security or other asset, such
percentage restriction will be determined immediately after and as a
result of a Fund's acquisition of such security or other asset.
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the
investment complies with a Fund's investment limitations except with
respect to a Fund's restrictions on borrowings as set forth in restriction
8 below.
A Fund's fundamental restrictions cannot be changed without the
approval of the holders of the lesser of: (i) 67% of the Fund's shares
present or represented at a shareholders meeting at which the holders of
more than 50% of such shares are present or represented; or (ii) more than
50% of the outstanding shares of the Fund.
The following are the Funds' fundamental investment restrictions.
Each Fund may not:
1. Issue senior securities, except as permitted under the
Investment Company Act of 1940 (the "Investment Company Act"); provided,
however, a Fund may engage in transactions involving options, futures and
options on futures contracts.
2. Lend money or securities (except by purchasing debt securities
or entering into repurchase agreements or lending portfolio securities).
3. With respect to seventy-five percent (75%) of its total assets,
purchase (a) the securities of any issuer (except securities of the U.S.
government or any agency or instrumentality thereof), if such purchase
would cause more than five percent (5%) of the value of the Fund's total
assets to be invested in securities of any one issuer or (b) more than ten
percent (10%) of the outstanding voting securities of any one issuer.
4. Purchase the securities of any issuer if, as a result, 25% or
more of the value of its total assets, determined at the time an
investment is made, exclusive of U.S. government securities, are in
securities issued by companies primarily engaged in the same industry.
5. Act as an underwriter or distributor of securities other than
shares of the Funds except to the extent that a Fund's participation as
part of a group in bidding or by bidding alone, for the purchase or
permissible investments directly from an issuer or selling shareholders
for the Fund's own portfolio may be deemed to be an underwriting, and
except to the extent that a Fund may be deemed an underwriter under the
Securities Act, by virtue of disposing of portfolio securities.
6. Purchase or sell real estate (but this shall not prevent the
Fund from investing in securities that are backed by real estate or issued
by companies that invest or deal in real estate or in participation
interests in pools of real estate mortgage loans exclusive of investments
in real estate limited partnerships).
7. Borrow money, except that a Fund may borrow money from a bank
for temporary or emergency purposes (not for leveraging) in an amount not
exceeding 33 1/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
exceed 33 1/3% of the Fund's total assets by reason of a decline in net
asset value will be reduced within three days to the extent necessary to
comply with the 33 1/3% limitation. Transactions involving options,
futures and options on futures, will not be deemed to be borrowings if
properly covered by a segregated account where appropriate.
8. Purchase or sell physical commodities or commodities contracts
unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund from engaging in
transactions involving foreign currencies, futures contracts, options on
futures contracts or options, or from investing in securities or other
instruments backed by physical commodities).
The following investment restrictions are not fundamental, and may be
changed without shareholder approval.
Each Fund may not:
1. Purchase warrants, valued at the lower of cost or market, in
excess of 5% of a Fund's net assets. Included in that amount, but not to
exceed 2% of net assets, are warrants whose underlying securities are not
traded on principal domestic or foreign exchanges. Warrants acquired by
the Fund in units or attached to securities are not subject to these
restrictions.
2. Purchase securities of other investment companies except to the
extent permitted by the Investment Company Act and the rules and
regulations thereunder.
3. Make investments for the purpose of exercising control or
management of any company except that a Fund may vote portfolio securities
in the Fund's discretion.
4. Invest in securities of issuers which have a record of less than
three (3) years continuous operation, including the operation of any
predecessor business of a company which came into existence as a result of
a merger, consolidation, reorganization or purchase of substantially all
of the assets of such predecessor business, if such purchase would cause
the value of the Fund's investments in all such companies to exceed 10% of
the value of its total assets.
5. Acquire illiquid securities if, as a result of such investments,
more than five percent (5%) of the Fund's net assets (taken at market
value at the time of each investment) would be invested in illiquid
securities. "Illiquid securities" means securities that cannot be
disposed of within seven days in the normal course of business at
approximately the amount at which the Fund has valued the securities.
6. Purchase securities on margin (except to obtain such short-term
credits as are necessary for the clearance of purchases and sales of
securities) or participate in a joint trading account; provided, however,
the Fund may (i) purchase or sell futures contracts, (ii) make initial and
variation margin payments in connection with purchases or sales of futures
contracts or options on futures contracts, (iii) write or invest in put or
call options on securities and indexes, and (iv) engage in foreign
currency transactions. (The "bunching" of orders for the sale or purchase
of marketable portfolio securities with other accounts under the
management of the Adviser to save brokerage costs or average prices among
them is not deemed to result in a securities trading account.)
7. Borrow money except for temporary bank borrowings (not in excess
of five percent (5%) of the value of its total assets) for emergency or
extraordinary purposes, or engage in reverse repurchase agreements, or
pledge any of its assets except to secure borrowings and only to an extent
not greater than ten percent (10%) of the value of the Fund's net assets;
provided, however, a Fund may engage in transactions involving options.
Each Fund will not purchase any security while borrowings representing
more than 5% of its total assets are outstanding.
8. Purchase any interest in any oil, gas or any other mineral
exploration or development program, including any oil, gas or mineral
leases.
Each Fund may make commitments more restrictive than the
restrictions listed above so as to permit the sale of shares of the Fund
in certain states. Should a Fund determine that a commitment is no longer
in the best interest of the Fund and its shareholders, the Fund reserves
the right to revoke the commitment by terminating the sale of Fund shares
in the state involved.
In determining industry classification with respect to the
Funds, the Adviser intends to use the industry classification titles in
the Standard Industrial Classification Manual.
A guarantee of a security is not deemed to be a security issued
by the guarantor when the value of all securities issued and guaranteed by
the guarantor, and owned by a Fund, does not exceed 10% of the value of
the Fund's total assets.
ADDITIONAL COMPANY INFORMATION
Directors and Officers. Information regarding the Board of Directors
and officers of the Funds, including their principal business occupations
during at least the last five years, is set forth below. Each director
who is an "interested person," as defined in the 1940 Act, is indicated by
an asterisk. Except where otherwise indicated, each of the individuals
below has served in his or her present capacity with the Company since
November 1995. The address of each of the officers and directors is c/o
Van Wagoner Funds, 1 Bush Street, Suite 1150, San Francisco, California,
94104.
*Garrett R. Van Wagoner, President, Treasurer, Secretary and Director
Mr. Van Wagoner is the President, Treasurer, Secretary, Director and
sole shareholder of the Adviser, and has served in such capacities since
the organization of the Adviser in October 1995. He was the portfolio
manager of the Govett Smaller Companies Fund, a portfolio of The Govett
Funds, Inc., from March 1993 until December 31, 1995. Prior thereto, he
was Senior Vice President at Bessemer Trust, N.A., since 1982, where he
was responsible for its emerging growth stock investment program.
Larry P. Arnold, Director
Larry P. Arnold, Private investor since 1993. Founder and Managing
General Partner of Wessels Arnold & Henderson from June 1986 to January
1993. Senior Vice President of Piper Jaffray & Hopwood from 1979 to March
1986. Director of Sparta Foods, Inc.
Robert S. Colman, Director
Robert S. Colman, Founding Partner of Colman Furlong & Co. from
February 1991 to present. Partner of Colman Helfet & Co. from August 1989
to January 1991. Sole proprietor of R.S. Colman Company from January 1989
until July 1989. Partner of Robertson, Colman & Stephens from November
1978 to December 1988. Director of Access HealthNet, Inc., Cleveland-
Cliffs, Inc., HealthCare COMPARE Corp. and New Image Industries, Inc.
Peter R. Kris, Vice President
Mr. Kris is Vice President of the Company and has served in such
capacity since March 1996. He was Vice President of Govett and Company
Limited from May 1992 until February 1996. Mr. Kris was an Account
Executive with Charles Schwab and Company from March 1992 to May 1992, and
prior thereto he was employed for two years by State Street Bank & Trust
as Portfolio Accounting Manager.
The Director of the Company who is an officer of the Adviser receives
no remuneration from the Funds. Each of the other Directors is paid a fee
of $500 for each meeting attended and is reimbursed for the expenses of
attending meetings. The table below sets forth the estimated compensation
of the Directors for the fiscal year ending December 31, 1996.
COMPENSATION TABLE
Pension or
Retirement
Benefits Estimated Total
Accrued As Annual Compensation
Aggregate Part of Benefits from Company
Name of Compensation Company Upon Paid to
Person from Company Expenses Retirement Directors
Garrett R.
Van Wagoner $0 $0 $0 $0
Larry P.
Arnold $2,000 $0 $0 $2,000
Robert S.
Colman $2,000 $0 $0 $2,000
Principal Shareholder. As of August __, 1996, the Adviser owned all
of the outstanding shares of each of the Funds described herein.
Shareholders with a controlling interest could effect the outcome of proxy
voting or the direction of management of the Company.
Investment Adviser. The investment adviser to the Funds is Van
Wagoner Capital Management, Inc. (the "Adviser"). Mr. Van Wagoner is the
founder and President of the Adviser and owns all of the outstanding
common stock of the Adviser. As such, he controls the Adviser. Pursuant
to Investment Advisory Agreements entered into between the Company on
behalf of each of the Funds and the Adviser (the "Investment Advisory
Agreements"), the Adviser provides continuous investment advisory services
to the Funds. The Adviser also provides the Funds with office space,
equipment and personnel necessary to operate and administer the Funds'
business and to supervise the provision of services by third parties. The
Advisory Agreements for the Capital Appreciation, Growth and Post-Venture
Funds are dated August __, 1996.The Investment Advisory Agreements have an
initial term of two years and thereafter are required to be approved
annually by the Board of Directors of the Company or by vote of a majority
of the respective Fund's outstanding voting securities (as defined in the
1940 Act). Each annual renewal must also be approved by the vote of a
majority of the respective Fund's directors who are not parties to the
Investment Advisory Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such
approval. Each Investment Advisory Agreement was approved by the vote of
a majority of the Directors who are not parties to the respective
Investment Advisory Agreement or interested persons of any such party on
August ___, 1996 for the Capital Appreciation, Growth and Post Venture
Funds. The Investment Advisory Agreements are terminable without penalty
with respect to a Fund, on 60 days' written notice by the Directors, by
vote of a majority of a Fund's outstanding voting securities, or by the
Adviser, and will terminate automatically in the event of its assignment.
As compensation for its services, each Fund pays to the Adviser a
monthly advisory fee at the annual rate specified in the Prospectus. From
time to time, the Adviser may voluntarily waive all or a portion of its
fee for one or more Funds. The organizational expenses of the Funds were
advanced by the Adviser and will be reimbursed by each Fund over a period
of not more than 60 months.
The Investment Advisory Agreements require the Adviser to reimburse a
Fund in the event that the expenses and charges payable by the Fund in any
fiscal year, including the advisory fee but excluding taxes, interest,
brokerage commissions, and similar fees, exceed a percentage of the
average net asset value of the Fund for such year which is the most
restrictive percentage provided by the state laws of the various states in
which the Funds' common stock is qualified for sale. As of the date of
this Statement of Additional Information, the percentage applicable to
each Fund is 2 1/2% on the first $30,000,000 of its average net assets, 2%
on the next $70,000,000 of its average net assets and 1 1/2% on net assets
in excess of $100,000,000. Additionally, the Adviser voluntarily agreed
to reimburse each Fund to the extent aggregate annual operating expenses
as described above exceeded 1.95% of the average daily net assets of each
Fund, for each Fund's first twelve months of operation. The Adviser may
voluntarily continue to waive all or a portion of the advisory fees
otherwise payable by the Funds. Such a waiver may be terminated at any
time in the Adviser's discretion. Reimbursement of expenses in excess of
the applicable limitation will be made on a monthly basis and will be paid
to each Fund by reducing the Adviser's fee, subject to later adjustment,
month by month, for the remainder of each Fund's fiscal year. The Adviser
may from time to time voluntarily absorb expenses for one or more Funds in
addition to the reimbursement of expenses in excess of the foregoing.
Each Investment Advisory Agreement provides that the Adviser shall
not be liable to the respective Fund or its shareholders for any error of
judgment or mistake of law or for anything other than willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or
duties. The Investment Advisory Agreements also provide that nothing
therein shall limit the freedom of the Adviser and its affiliates to
render investment supervisory and corporate administrative services to
other investment companies, to act as investment adviser or investment
counselor to other persons, firms or corporations, or to engage in other
business activities.
Administrator. Sunstone Financial Group, Inc. (the "Administrator"
or "Sunstone") provides various administrative and fund accounting
services to the Funds (which includes clerical, compliance, regulatory,
fund accounting and other services) pursuant to an Administration and Fund
Accounting Agreement with the Company on behalf of the Funds. The
Administration and Fund Accounting Agreement will remain in effect for an
initial 1 year term ending December 31, 1996 and thereafter as long as its
continuance is specifically approved at least annually by the Board of
Directors of the Company and the Administrator. The Administration and
Fund Accounting Agreement may be terminated on not less than 90 days'
notice after the expiration of the initial term, without the payment of
any penalty, by the Board of Directors of the Company or by the
Administrator. Under the Administration and Fund Accounting Agreement,
the Administrator is not liable for any loss suffered by the Funds or
their shareholders in connection with the performance of the
Administration and Fund Accounting Agreement, except a loss resulting from
willful misfeasance, bad faith or negligence on the part of the
Administrator in the performance of its duties. The Administration and
Fund Accounting Agreement also provides that the Administrator may provide
similar services to others including other investment companies.
Custodian, Transfer Agent and Dividend Paying Agent. United Missouri
Bank, n.a. serves as the custodian and Sunstone serves as the transfer and
dividend paying agent for the Funds. Under the terms of the respective
agreements, United Missouri Bank, n.a. is responsible for the receipt and
delivery of each Fund's securities and cash, and Sunstone is responsible
for processing purchase and redemption requests for the securities of each
Fund as well as the recordkeeping of ownership of each Fund's securities,
payment of dividends as declared by the Directors and the issuance of
confirmations of transactions and annual statements to shareholders.
United Missouri Bank, n.a. and Sunstone do not exercise any supervisory
functions over the management of the Funds or the purchase and sale of
securities.
Legal Counsel. Foley & Lardner, with offices at 777 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202, serves as counsel to the Funds.
Independent Accountants. Price Waterhouse LLP are the independent
accountants for the Funds. They are responsible for performing an audit
of each Fund's year-end financial statements as well as providing
accounting and tax advice to the management of the Funds.
DISTRIBUTION OF SHARES
As set forth in the Prospectus, the Funds have adopted a Service
and Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the 1940
Act. The Plan authorizes payments by the Funds in connection with the
distribution of their shares at an annual rate, as determined from time to
time by the Board of Directors, of up to 0.25% of each Fund's average
daily net assets.
The Plan was adopted in anticipation that the Funds will benefit from
the Plan through increased sales of shares of each Fund, thereby reducing
each Fund's expense ratio and providing an asset size that allows the
Adviser greater flexibility in management. The Plan may be terminated at
any time by a vote of the directors of the Funds who are not interested
persons of the Funds and who have no direct or indirect financial interest
in the Plan or any agreement related thereto (the "Rule 12b-1 Directors")
or by a vote of a majority of the outstanding shares of Common Stock.
Messrs. Arnold and Colman are currently the Rule 12b-1 Directors. Any
change in the Plan that would materially increase the distribution
expenses of the Funds provided for in the Plan requires approval of the
shareholders and the Board of Directors, including the Rule 12b-1
Directors.
While the Plan is in effect, the selection and nomination of
directors who are not interested persons of the Funds will be committed to
the discretion of the directors of the Funds who are not interested
persons of the Funds. The Board of Directors must review the amount and
purposes of expenditures pursuant to the Plan quarterly as reported to it
by the officers of the Company. Unless otherwise terminated, the Plan
will continue in effect for as long as its continuance is specifically
approved at least annually by the Board of Directors, including the Rule
12b-1 Directors.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities
for each Fund, for the placement of its portfolio business and the
negotiation of the commissions to be paid on such transactions, subject to
the supervision of the Company's Board of Directors. It is the policy of
the Adviser to seek the best execution at the best security price
available with respect to each transaction, in light of the overall
quality of brokerage and research services provided to the Adviser.
The Adviser will place orders pursuant to its investment
determination for the Funds either directly with the issuer or with any
broker or dealer. In executing portfolio transactions and selecting
brokers or dealers, the Adviser will use its best effort to seek on behalf
of a Fund the best overall terms available. In selecting brokers and
assessing the best overall terms available for any transaction, the
Adviser shall consider all factors that it deems relevant, including the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and
reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. The most favorable price to a Fund
means the best net price without regard to the mix between purchase or
sale price and commission, if any. Over-the-counter securities are
generally purchased or sold directly with principal market makers who
retain the difference in their cost in the security and its selling price.
In some instances, the Adviser may determine that better prices are
available from non-principal market makers who are paid commissions
directly.
In evaluating the best overall terms available, and in selecting the
broker-dealer to execute a particular transaction, the Adviser may also
consider the brokerage and research services (as those terms are defined
in Section 28(e) of the Securities Exchange Act of 1934) provided to the
Funds and/or other accounts over which the Adviser or an affiliate of the
Adviser exercises investment discretion. While the Adviser believes these
services have substantial value, they are considered supplemental to its
own efforts in the performance of its duties. Other clients of the
Adviser may indirectly benefit from the availability of these services to
the Adviser, and the Funds may indirectly benefit from services available
to the Adviser as a result of transactions for other clients. The Adviser
is authorized to pay to a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio transaction for a
Fund which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction if, but only if,
the Adviser determines in good faith that such commission was reasonable
in relation to the value of the brokerage and research services provided
by such broker or dealer - viewed in terms of that particular transaction
or in terms of the overall responsibilities the Adviser has to the Funds.
In no instance, however, will portfolio securities be purchased from or
sold to the Adviser, or any affiliated person of either the Company or the
Adviser, acting as principal in the transaction, except to the extent
permitted by the Securities and Exchange Commission through rules,
regulations, decisions and no-action letters.
The Adviser may retain advisory clients in addition to the Funds and
place portfolio transactions for these accounts. Research services
furnished by firms through which the Funds effect their securities
transactions may be used by the Adviser in servicing all of its accounts;
not all of such services may be used by the Adviser in connection with the
Funds. In the opinion of the Adviser, it will not be possible to
separately measure the benefits from research services to each of the
accounts (including the Funds) to be managed by the Adviser. Because the
volume and nature of the trading activities of the accounts will not be
uniform, the amount of commissions in excess of those charged by another
broker paid by each account for brokerage and research services will vary.
However, such costs to the Funds will not, in the opinion of the Adviser,
be disproportionate to the benefits to be received by the Funds on a
continuing basis.
The Adviser intends to seek to allocate portfolio transactions
equitably among its accounts whenever concurrent decisions are made to
purchase or sell securities by a Fund and another advisory account. In
some cases, this procedure could have an adverse effect on the price or
the amount of securities available to a Fund. In making such allocations
between a Fund and other advisory accounts, if any, the main factors to be
considered by the Adviser will be the respective investment objectives,
the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of
investment commitments generally held, and the opinions of the persons
responsible for recommending the investment.
TAXES
General
In order to qualify for treatment as a regulated investment company
("RIC") under the Code, each Fund must distribute to its shareholders for
each taxable year at least 90% of its investment company taxable income
(consisting generally of net investment income, net short-term capital
gain and net gains from certain foreign currency transactions)
("Distribution Requirement") and must meet several additional
requirements. With respect to each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of securities or
foreign currencies, or other income (including gains from options, futures
or forward contracts) derived with respect to its business of investing in
securities or those currencies ("Income Requirement"); (2) the Fund must
derive less than 30% of its gross income each taxable year from the sale
or other disposition of securities, or any of the following, that were
held for less than three months -- options, futures or forward contracts
(other than those on foreign currencies), or foreign currencies (or
options, futures or forward contracts thereon) that are not directly
related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) ("Short-Short
Limitation"); (3) at the close of each quarter of the Fund's taxable year,
at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. government securities, securities of other RICs, and
other securities, with these other securities limited, with respect to any
one issuer, to an amount that does not exceed 5% of the value of the
Fund's total assets and that does not represent more than 10% of the
issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by a Fund in, and payable
to shareholders of record as of a date in, October, November or December
of any year will be deemed to have been paid by the Fund and received by
the shareholders on December 31 of that year if the distributions are paid
by the Fund during the following January. Accordingly, those
distributions will be taxed to shareholders for the year in which that
December 31 falls.
A portion of the dividends from a Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may
be eligible for the dividends-received deduction allowed to corporations.
The eligible portion may not exceed the aggregate dividends received by a
Fund from U.S. corporations. However, dividends received by a corporate
shareholder and deducted by it pursuant to the dividends-received
deduction are subject to the alternative minimum tax.
If shares of a Fund are sold at a loss after being held for six
months or less, the loss will be treated as long-term, instead of short-
term, capital loss to the extent of any capital gain distributions
received on those shares. Investors also should be aware that if shares
are purchased shortly before the record date for any distribution, the
shareholder will pay full price for the shares and receive some portion of
the price back as a taxable dividend or capital gain distribution.
Each Fund will be subject to a nondeductible 4% excise tax to the
extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain
net income for the one-year period ending on October 31 of that year, plus
certain other amounts.
Foreign Taxes
Dividends and interest received by the Funds may be subject to
income, withholding, or other taxes imposed by foreign countries that
would reduce the yield on each Fund's portfolio securities. Tax
conventions between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not
impose taxes on capital gains in respect of investments by foreign
investors. If more than 50% of the value of a Fund's total assets at the
close of its taxable year consists of securities of foreign corporations,
the Fund will be eligible to, and may, file an election with the Internal
Revenue Service that will enable its shareholders, in effect, to receive
the benefit of the foreign tax credit with respect to any foreign income
taxes paid by it. Pursuant to the election, the Fund will treat those
taxes as dividends paid to its shareholders and each shareholder will be
required to (1) include in gross income, and treat as paid by him, his
proportionate share of those taxes, (2) treat his share of those taxes and
of any dividend paid by the Fund that represents income from foreign
sources as his own income from those sources, and (3) either deduct the
taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign
tax credit against his federal income tax. Each Fund will report to its
shareholders shortly after each taxable year their respective shares of
the Fund's income from sources within, and taxes paid to, foreign
countries if it makes this election.
Passive Foreign Investment Companies
If a Fund acquires stock in certain non-U.S. corporations that
receive at least 75% of their annual gross income from passive sources
(such as sources that produce interest, dividends, rental, royalty or
capital gain income) or hold at least 50% of their assets in such passive
sources ("passive foreign investment companies"), the Fund could be
subject to federal income tax and additional interest charges on "excess
distributions" received from such companies or gains from the sale of
stock in such companies, even if all income or gain actually received by
the Fund is timely distributed to its shareholders. The Fund would not be
able to pass through to its shareholders any credit or deduction for such
tax. In some cases, elections may be available that would ameliorate
these adverse tax consequences, but such elections would require the Fund
to include certain amounts as income or gain (subject to the distribution
requirements described above) without a concurrent receipt of cash and
could result in the conversion of capital gain to ordinary income. A Fund
may limit its investments in passive foreign investment companies or
dispose of such investments if potential adverse tax consequences are
deemed material in particular situations.
Non U.S. Shareholders
Distributions of net investment income by a Fund to a shareholder
who, as to the United States, is a nonresident alien individual,
nonresident alien fiduciary of a trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder") will be subject to U.S.
withholding tax at a rate of 30% (or lower treaty rate). Withholding will
not apply if a dividend paid by a Fund to a foreign shareholder is
"effectively connected with the conduct of a U.S. trade or business," in
which case the reporting and withholding requirements applicable to
domestic taxpayers will apply. Distributions of net capital gain are not
subject to withholding, but in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be
subject to U.S. income tax at a rate of 30% (or lower treaty rate) if the
individual is physically present in the United States for more than 182
days during the taxable year and the distributions are attributable to a
fixed place of business maintained by an individual in the United States.
The foregoing is a general and abbreviated summary of certain U.S.
federal income tax considerations affecting such Fund and its
shareholders. Investors are urged to consult their own tax advisers for
more detailed information and for information regarding any foreign, state
and local taxes applicable to distributions received from a Fund.
DESCRIPTION OF SHARES
The Company is an open-end management investment company organized as
a Maryland corporation on October 18, 1995. The Company's Charter
authorizes the Board of Directors to issue up to 1,000,000,000 shares of
common stock, par value $0.0001 per share. Each share of the Funds has
equal voting, dividend, distribution and liquidation rights.
Shares of the Funds have no preemptive rights and only such
conversion or exchange rights as the Board may grant in its discretion.
When issued for payment as described in the Prospectus, the Company's
shares will be fully paid and non-assessable.
Shareholders are entitled to one vote for each full share held, and
fractional votes for fractional shares held, and will vote in the
aggregate and not by class or series except as otherwise required by the
1940 Act or the Maryland General Corporation Law.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an
investment company such as the Funds shall not be deemed to have been
effectively acted upon unless approved by a majority of the outstanding
shares of each fund affected by the matter. A Fund is affected by a
matter unless it is clear that the interests of each Fund in the matter
are substantially identical or that the matter does not affect any
interest of the Funds. Under Rule 18f-2 the approval of an investment
advisory agreement or 12b-1 distribution plan or any change in a
fundamental investment policy would be effectively acted upon with respect
to a Fund only if approved by a majority of the outstanding shares of such
Fund. However, the rule also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts and the election of directors may be effectively acted upon by
shareholders of the Company voting without regard to particular Funds.
Notwithstanding any provision of the Maryland General Corporation Law
requiring for any purpose the concurrence of a proportion greater than a
majority of all votes entitled to be cast at a meeting at which a quorum
is present, the affirmative vote of the holders of a majority of the total
number of shares of the Funds outstanding (or of a class or series of the
Funds, as applicable) will be effective, except to the extent otherwise
required by the 1940 Act and rules thereunder. In addition, the Articles
of Incorporation provide that, to the extent consistent with the General
Corporation Law of Maryland and other applicable law, the By-Laws may
provide for authorization to be given by the affirmative vote of the
holders of less than a majority of the total number of shares of the Funds
outstanding (or of a class or series).
SHAREHOLDER MEETINGS
The Maryland Statutes permit registered investment companies, such as
the Funds, to operate without an annual meeting of shareholders under
specified circumstances if an annual meeting is not required by the 1940
Act. The Company has adopted the appropriate provisions in its By-Laws
and may, at its discretion, not hold an annual meeting in any year in
which the election of directors is not required to be acted on by
shareholders under the 1940 Act.
The Company's By-Laws also contain procedures for the removal of
directors by its shareholders. At any meeting of shareholders, duly
called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be
cast thereon, remove any director or directors from office and may elect a
successor or successors to fill any resulting vacancies for the unexpired
terms of removed directors.
Upon the written request of the holders of shares entitled to not
less than ten percent (10%) of all the votes entitled to be cast at such
meeting, the Secretary of the Fund shall promptly call a special meeting
of shareholders for the purpose of voting upon the question of removal of
any director. Whenever ten or more shareholders of record who have been
such for at least six months preceding the date of application, and who
hold in the aggregate either shares having a net asset value of at least
$25,000 or at least one percent (1%) of the total outstanding shares,
whichever is less, shall apply to the Company's Secretary in writing,
stating that they wish to communicate with other shareholders with a view
to obtaining signatures to submit a request for a meeting as described
above and accompanied by a form of communication and request which they
wish to transmit, the Secretary shall within five business days after such
application either: (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the
Funds; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the
proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (2)
of the last sentence of the preceding paragraph, the Secretary, upon the
written request of such applicants, accompanied by a tender of the
material to be mailed and of the reasonable expenses of mailing, shall,
with reasonable promptness, mail such material to all shareholders of
record at their addresses as recorded on the books unless within five
business days after such tender the Secretary shall mail to such
applicants and file with the SEC, together with a copy of the material to
be mailed, a written statement signed by at least a majority of the Board
of Directors to the effect that in their opinion either such material
contains untrue statements of fact or omits to state facts necessary to
make the statements contained therein not misleading, or would be in
violation of applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the SEC may, and if demanded by the Board of
Directors or by such applicants shall, enter an order either sustaining
one or more of such objections or refusing to sustain any of them. If the
SEC shall enter an order refusing to sustain any of such objections, or
if, after the entry of an order sustaining one or more of such objections,
the SEC shall find, after notice and opportunity for hearing, that all
objections so sustained have been met, and shall enter an order so
declaring, the Secretary shall mail copies of such material of all
shareholders with reasonable promptness after the entry of such order and
the renewal of such tender.
RETIREMENT PLANS
Individuals who receive compensation or earned income, even if they
are active participants in a qualified retirement plan (or certain similar
retirement plans), may establish their own tax-sheltered Individual
Retirement Account ("IRA"). The Funds offer a prototype IRA plan which
may be adopted by individuals. There is currently no charge for
establishing an account, although there is an annual maintenance fee.
Earnings on amounts held in an IRA are not taxed until withdrawal.
However, the amount of deduction, if any, allowed for IRA contributions is
limited for individuals who are active participants in an employer-
maintained retirement plan and whose incomes exceed specific limits.
A description of applicable service fees and certain limitations on
contributions and withdrawals, as well as application forms, are available
from the transfer agent upon request at 1-800-228-2121. The IRA documents
contain a disclosure statement which the Internal Revenue Service requires
to be furnished to individuals who are considering adopting the IRA.
Because a retirement program involves commitments covering future years,
it is important that the investment objective of the Funds be consistent
with the participant's retirement objectives. Premature withdrawals from
a retirement plan will result in adverse tax consequences. Consultation
with a competent financial and tax adviser regarding the foregoing
retirement plans is recommended.
The Funds also offer a tax-sheltered custodial account designed to
qualify under section 403(b)(7) of the Internal Revenue Code which is
available for use by employees of certain educational, non-profit,
hospital and charitable organizations.
PERFORMANCE INFORMATION
The Funds may from time to time advertise performance data such as
"average annual total return" and "total return." To facilitate the
comparability of historical performance data from one mutual fund to
another, the SEC has developed guidelines for the calculation of average
annual total return.
The average annual total return for a Fund for a specific period is
found by first taking a hypothetical $10,000 investment ("initial
investment") in the Fund's shares on the first day of the period and
computing the "redeemable value" of that investment at the end of the
period. The redeemable value is then divided by the initial investment,
and this quotient is taken to the Nth root (N representing the number of
years in the period) and 1 is subtracted from the result, which is then
expressed as a percentage. The calculation assumes that all income and
capital gains dividends paid by the Fund have been reinvested at net asset
value on the reinvestment dates during the period. This calculation can
be expressed as follows:
N
P(1 + T) = ERV
Where: T= average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at
the beginning of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms of years.
Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in a Fund's shares on the
first day of the period and computing the "ending value" of that
investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result
as a percentage. The calculation assumes that all income and capital
gains dividends paid by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the investment over the period or
as a cumulative total return which represents the change in value of an
investment over a stated period and may be quoted as a percentage or as a
dollar amount.
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period. The ending
redeemable value is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
The Funds' performance figures will be based upon historical results
and will not necessarily be indicative of future performance. The Funds'
returns and net asset value will fluctuate and the net asset value of
shares when sold may be more or less than their original cost. Any
additional fees charged by a dealer or other financial services firm would
reduce the returns described in this section.
From time to time, in marketing and other literature, the Funds'
performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with
similar investment goals, as tracked by independent organizations. Among
these organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds by overall
performance, investment objective and assets, may be cited. Lipper
performance figures are based on changes in net asset value, with all
income and capital gains dividends reinvested. Such calculations do not
include the effect of any sales charges imposed by other funds. The Funds
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings.
The Funds' performance may also be compared to the performance of
other mutual funds by Morningstar, Inc., which ranks funds on the basis of
historical risk and total return. Morningstar's rankings range from five
stars (highest) to one star (lowest) and represent Morningstar's
assessment of the historical risk level and total return of a fund as a
weighted average for 3, 5, and 10 year periods. Ranking are not absolute
or necessarily predictive of future performance.
Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning the Funds, including reprints of or
selections from, editorials or articles about the Funds. Sources for Fund
performance and articles about the Funds may include publications such as
Money, Forbes, Kiplinger's, Financial World, Business Week, U.S. News and
World Report, the Wall Street Journal, Barron's and a variety of
investment newsletters.
The Funds may compare their performance to a wide variety of indices
and measures of inflation including the Standard & Poor's Index of 500
Stocks and the NASDAQ Over-the-Counter Composite Index. There are
differences and similarities between the investments that the Funds may
purchase for their respective portfolios and the investments measured by
these indices.
Occasionally statistics may be used to specify a Fund's volatility or
risk. Measures of volatility or risk are generally used to compare a
Fund's net asset value or performance relative to a market index. One
measure of volatility is beta. Beta is the volatility of a fund relative
to the total market as represented by the Standard & Poor's 500 Stock
Index. A beta of more than 1.00 indicates volatility greater than the
market, and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation.
Standard deviation is used to measure variability of net asset value or
total return around an average, over a specified period of time. The
premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Marketing and other Company literature may include a description of
the potential risks and rewards associated with an investment in the
Funds. The description may include a "risk/return spectrum" which
compares a Fund to other Van Wagoner Funds or broad categories of funds,
such as money market, bond or equity funds, in terms of potential risks
and returns. Risk/return spectrums also may depict funds that invest in
both domestic and foreign securities or a combination of bond and equity
securities. Money market funds are designed to maintain a constant $1.00
share price and have a fluctuating yield. Share price, yield and total
return of a bond fund will fluctuate. The share price and return of an
equity fund also will fluctuate. The description may also compare a Fund
to bank products, such as certificates of deposit. Unlike mutual funds,
certificates of deposit are insured up to $100,000 by the U.S. government
and offer a fixed rate of return.
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus, the net asset value of the Funds will
be determined as of the close of trading on each day the New York Stock
Exchange is open for trading. The New York Stock Exchange is open for
trading Monday through Friday except New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. Additionally, if any of the aforementioned holidays falls
on a Saturday, the New York Stock Exchange will not be open for trading on
the preceding Friday, and when any such holiday falls on a Sunday, the New
York Stock Exchange will not be open for trading on the following Monday
unless unusual business conditions exist, such as the ending of a monthly
or the yearly accounting period.
Shares of the Funds may be exchanged for shares of the Northern U.S.
Government Money Market Fund as provided in the Prospectus. Sunstone
Financial Group, Inc. receives a service fee from the Northern U.S.
Government Money Market Fund at the annual rate of 0.25 of 1% of the
average daily net asset value of the shares of the Fund exchanged into the
Northern U.S. Government Money Market Fund.
OTHER INFORMATION
It is possible that conditions may exist in the future which would,
in the opinion of the Board of Directors, make it undesirable for a Fund
to pay for redemptions in cash. In such cases the Board may authorize
payment to be made in portfolio securities of a Fund. However, the Funds
have obligated themselves under the 1940 Act to redeem for cash all shares
presented for redemption by any one shareholder up to $250,000 (or 1% of a
Fund's net assets if that is less) in any 90-day period. Securities
delivered in payment of redemptions are valued at the same value assigned
to them in computing the net asset value per share. Shareholders
receiving such securities generally will incur brokerage costs when
selling such securities.
Payment for shares of a Fund may, in the discretion of the Adviser,
be made in the form of securities that are permissible investments for the
Fund as described in the Prospectus. For further information about this
form of payment, contact the Transfer Agent. In connection with an in-
kind securities payment, the Funds will require, among other things, that
the securities be valued on the day of purchase in accordance with the
pricing methods used by the Fund and that the Fund receive satisfactory
assurances that it will have good and marketable title to the securities
received by it; that the securities be in proper form for transfer to the
Fund; and that adequate information be provided concerning the basis and
other tax matters relating to the securities. In addition, so long as
shares in a Fund are offered or sold in Texas, any securities that are
accepted as payment for the shares of the Fund will be limited to
securities that are issued in transactions that involve a bona fide
reorganization or statutory merger, or will be limited to other
acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Funds; (b) are acquired for investment and
not for resale; (c) are liquid securities that are not restricted as to
transfer either by law or liquidity of market; and (d) have a value that
is readily ascertainable (and not established only by valuation
procedures) as evidenced by a listing on the American Stock Exchange, New
York Stock Exchange or NASDAQ or as evidenced by their status as U.S.
Government Securities, bank certificates of deposit, banker's acceptances,
corporate and other debt securities that are actively traded, money market
securities and other like securities with a readily ascertainable value.
The Prospectus and this Statement of Additional Information do not
contain all the information included in the Registration Statement filed
with the Commission under the Securities Act with respect to the
securities offered by the Funds' Prospectus. Certain portions of the
Registration Statement have been omitted from the Prospectus and this
Statement of Additional Information, pursuant to the rules and regulations
of the Commission. The Registration Statement including the exhibits
filed therewith may be examined at the office of the Commission in
Washington, D.C.
Statements contained in the Prospectus or in this Statement of
Additional Information as to the contents of any contract or other
documents referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as
an exhibit to the Registration Statement of which the Prospectus and this
Statement of Additional Information form a part, each such statement being
qualified in all respects by such reference.
<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt having an original maturity of
no more than 365 days. The following summarizes the rating categories
used by Standard & Poor's for commercial paper in which the Funds may
invest:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics
are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues
designated "A-1."
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating
categories used by Moody's for commercial paper in which the Funds may
invest:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following capacities: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range
of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is
maintained.
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps
employs three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the
highest rating category. The following summarizes the rating categories
used by Duff & Phelps for commercial paper in which the Funds may invest:
"Duff 1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access
to alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental
protection factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing
funding need may enlarge total financing requirements, access to capital
markets is good.
Fitch short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years. The highest
rating category of Fitch for short-term obligations is "F-1." Fitch
employs two designations, "F-1+" and "F-1," within the highest category.
The following summarizes the rating categories used by Fitch for short-
term obligations in which the Funds may invest:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly
less in degree than issues rated "F-1+."
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by a
bank holding company or an entity within the holding company structure.
The following summarizes the ratings used by Thomson BankWatch in which
the Funds may invest:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - this designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes
the rating categories used by IBCA for short-term debt ratings in which
the Funds may invest:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
Corporate Long-Term Debt Ratings
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration obligors
such as guarantors, insurers, or lessees. The debt rating is not a
recommendation to purchase, sell, or hold a security, inasmuch as it does
not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of,
such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default - capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the
obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
Investment Grade
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small
degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
Speculative Grade
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of
speculation and 'C' the highest. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BBB-'
rating.
B - Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will
likely impair capacity or willingness to pay interest and repay principal.
The 'B' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied 'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
'CCC' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied 'B' or 'B-' rating.
CC - Debt rated 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' rating.
C - Debt rated 'C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied 'CCC-' debt rating.
The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no
interest is being paid.
D - Debt rated 'D' is in payment default. The 'D' rating cateogy is
used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such period. The 'D'
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Moody's Long-Term Debt Ratings
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risk appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes Bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect
to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determing the credit risk associated with a particular security. The
ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue,
its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and any guarantor, as well as the economic and political environment that
might affect the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature of taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to
be reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result
of changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated 'AAA.' Because bonds rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable
future developments, short-term debt of the issuers is generally
rated 'F-1+.'
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely
to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with
higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings ('BB to 'C') represent Fitch's assessment of the likelihood of
timely payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the
rating ('DDD' to 'D') is an assessment of the ultimate recovery value
through reorganization or liquidation.
The rating takes into consideration special features of the issue,
its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer
and any guarantor, as well as the economic and political environment that
might affect the issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect
the differences in the degrees of credit risk. Moreover, the character of
the risk factor varies from industry to industry and between corporate,
health care and municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout
the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD, DD
and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued
on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks
related to such factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost structure, and management
depth and expertise. The projected viability of the obligor at the trough
of the cycle is a critical determination.
Each rating also takes into account the legal form of the security
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.).
The extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the
different security classes in the capital structure, the overall credit
strength of the issuer, and the nature of covenant protection. Review of
indenture restrictions is important to the analysis of a company's
operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of BBB-' and higher
fall within the definition of investment grade securities, as defined by
bank and insurance supervisory authorities.
Rating Scale Definition
AAA Highest credit quality. The risk factors
are negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors
AA are strong. Risk is modest, but may vary
AA- slightly from time to time because of
economic conditions.
A+ Protection factors are average but
A adequate. However, risk factors are more
A- variable and greater in periods of
economic areas.
BBB+ Below average protection factors but still
BBB considered sufficient for prudent
BBB- investment. Considerable variability in
risk during economic cycles.
BB+ Below investment grade but deemed likely to
BB meet obligations when due. Present or
BB- prospective financial protection factors
fluctuate according to industry conditions
or company fortunes. Overall quality may
move up or down frequently within this
category.
B+ Below investment grade and possessing risk
B that obligations will not be met when due.
B- Financial protection factors will fluctuate
widely according to economic cycles.
CCC Well below investment grade securities.
Considerable uncertainty exists as to
timely payment of principal, interest or
preferred dividends. Protection factors
are narrow and risk can be substantial with
unfavorable economic/industry conditions,
and/or with unfavorable company
developments.
DD Default debt obligations. Issuer failed to
meet scheduled principal and/or interest
DP payments.
Preferred stock with dividend arrearages.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a. Financial Statements (all included in Part B):
The following audited financial statements are included in
Part B:
Report of Independent Accountants.
Statement of Assets and Liabilities as of November 27,
1995.
Notes to Financial Statement.
The following unaudited financial statements are included in
Part B:
Statements of Assets and Liabilities as of June 30, 1996
Statements of Operations for the six months ended June 30,
1996
Statements of Changes in Net Assets for the six months
ended June 30, 1996
Financial Highlights for the six months ended June 30, 1996
Schedules of Investments as of June 30, 1996
Notes to Financial Statements
b. Exhibits
1.1 Registrant's Articles of Incorporation. (Incorporated
by reference to Exhibit 1.1 of Pre-Effective Amendment
No. 1 to Registrant's Registration Statement on Form
N-1A)
1.2 Articles of Amendment. (Incorporated by reference to
Exhibit 1.2 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
1.3 Article Supplementary (Incorporated by reference to
Exhibit 1.3 of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
1.4 Article Supplementary (Incorporated by reference to
Exhibit 1.4 of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
1.5 Articles of Amendment (Incorporated by reference to
Exhibit 1.5 of Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
2. Registrant's By-Laws. (Incorporated by reference to
Exhibit 2 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
3. None.
4. None.
5.1 Investment Advisory Agreements by and between
Registrant on behalf of the Emerging Growth Fund,
Micro-Cap Fund and Mid-Cap Fund and Van Wagoner
Capital Management, Inc. (Incorporated by reference to
Exhibit 5 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
5.2 Form of Investment Advisory Agreements by and between
Registrant on behalf of the Capital Appreciation,
Growth and Post-Venture portfolios and Van Wagoner
Capital Management, Inc. (Incorporated by reference to
Exhibit 5.2 of Post-Effective Amendment No.1 to
Registrant's Registration Statement on Form N-1A)
6.1 None.
6.2 None.
7. None.
8.1 Custodian Agreement by and between Registrant and
United Missouri Bank, N.A. (Incorporated by reference
to Exhibit 8.1 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
9.1 Administration and Fund Accounting Agreement by and
between Registrant and Sunstone Financial Group, Inc.
(Incorporated by reference to Exhibit 9.1 of Pre-
Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A)
9.2 Transfer Agency Agreement by and between Registrant
and Sunstone Financial Group, Inc. (Incorporated by
reference to Exhibit 9.2 of Pre-Effective Amendment
No. 1 to Registrant's Registration Statement on Form
N-1A)
9.3 Amended and Restated Schedules A and B to the
Administration and Fund Accounting Agreement by and
between Registrant and Sunstone Financial Group, Inc.
9.4 Amended and Restated Schedules A and C to the Transfer
Agency Agreement by and between Registrant and
Sunstone Financial Group, Inc.
10. Opinion of Foley & Lardner, counsel for Registrant.
(Incorporated by reference to Exhibit 10 of Pre-
Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A)
11. Consent of Independent Accountants.
12. None.
13.1 Subscription Agreement. (Incorporated by reference to
Exhibit 13.1 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
13.2 Organizational Expenses Agreement. (Incorporated by
reference to Exhibit 13.2 of Pre-Effective Amendment
No. 1 to Registrant's Registration Statement on Form
N-1A)
14. Form of Individual Retirement Custodial Account
Agreement and Disclosure Statement. (Incorporated by
reference to Exhibit 14 of Pre-Effective Amendment No.
1 to Registrant's Registration Statement on Form N-1A)
15. Registrant's Service and Distribution Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
(Incorporated by reference to Exhibit 15 of Pre-
Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A)
16. Computation of Performance Figures (Incorporated by
reference to Exhibit 16 of Registrant's Registration
Statement on Form N-1A).
17. Financial Data Schedules.
18. None.
Item 25. Persons Controlled by or Under Common Control with Registrant.
Registrant neither controls any person nor is under common control
with any other person.
Item 26. Number of Holders of Securities.
Number of Record
Title of Class Holders as of June 30, 1996
Emerging Growth 27,777
Common Stock, $0.0001 par value Micro-Cap 10,168
Mid-Cap 6,656
Capital Appreciation 0
Growth 0
Post-Venture 0
Item 27. Indemnification.
Pursuant to the authority of the Maryland General Corporation Law,
particularly Section 2-418 thereof, Registrant's Board of Directors has
adopted the following bylaw which is in full force and effect and has not
been modified or cancelled:
Article VII
GENERAL PROVISIONS
Section 7. Indemnification.
A. The Corporation shall indemnify all of its corporate
representatives against expenses, including attorneys fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by
them in connection with the defense of any action, suit or proceeding, or
threat or claim of such action, suit or proceeding, whether civil,
criminal, administrative, or legislative, no matter by whom brought, or in
any appeal in which they or any of them are made parties or a party by
reason of being or having been a corporate representative, if the
corporate representative acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation
and with respect to any criminal proceeding, if he had no reasonable cause
to believe his conduct was unlawful provided that the corporation shall
not indemnify corporate representatives in relation to matters as to which
any such corporate representative shall be adjudged in such action, suit
or proceeding to be liable for gross negligence, willful misfeasance, bad
faith, reckless disregard of the duties and obligations involved in the
conduct of his office, or when indemnification is otherwise not permitted
by the Maryland General Corporation Law.
B. In the absence of an adjudication which expressly absolves the
corporate representative, or in the event of a settlement, each corporate
representative shall be indemnified hereunder only if there has been a
reasonable determination based on a review of the facts that
indemnification of the corporate representative is proper because he has
met the applicable standard of conduct set forth in paragraph A. Such
determination shall be made: (i) by the board of directors, by a majority
vote of a quorum which consists of directors who are not parties to the
action, suit or proceeding, or if such a quorum cannot be obtained, then
by a majority vote of a committee of the board consisting solely of two or
more directors, not, at the time, parties to the action, suit or
proceeding and who were duly designated to act in the matter by the full
board in which the designated directors who are parties to the action,
suit or proceeding may participate; or (ii) by special legal counsel
selected by the board of directors or a committe of the board by vote as
set forth in (i) of this paragraph, or, if the requisite quorum of the
full board cannot be obtained therefor and the committee cannot be
established, by a majority vote of the full board in which directors who
are parties to the action, suit or proceeding may participate.
C. The termination of any action, suit or proceeding by judgement,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall create a rebuttable presumption that the person was
guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard to the duties and obligations involved in the conduct of his or
her office, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
D. Expenses, including attorneys' fees, incurred in the preparation
of and/or presentation of the defense of a civil or criminal action, suit
or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding as authorized in the manner
provided in Section 2-418(F) of the Maryland General Corporation Law upon
receipt of: (i) an undertaking by or on behalf of the corporate
representative to repay such amount unless it shall ultimately be
determined that he or she is entitled to be indemnified by the corporation
as authorized in this bylaw; and (ii) a written affirmation by the
corporate representative of the corporate representative's good faith
belief that the standard of conduct necessary for indemnification by the
corporation has been met.
E. The indemnification provided by this bylaw shall not be deemed
exclusive of any other rights to which those indemnified may be entitled
under these bylaws, any agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his or her official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person subject to the limitations imposed from
time to time by the Investment Company Act of 1940, as amended.
F. This corporation shall have the power to purchase and maintain
insurance on behalf of any corporate representative against any liability
asserted against him or her and incurred by his or her in such capacity or
arising out of his or her status as such, whether or not the corporation
would have the power to indemnify his or her against such liability under
this bylaw provided that no insurance may be purchased or maintained to
protect any corporate representative against liability for gross
negligence, willful misfeasance, bad faith or reckless disregard of the
duties and obligations involved in the conduct of his or her office.
G. "Corporate Representative" means an individual who is or was a
director, officer, agent or employee of the corporation or who serves or
served another corporation, partnership, joint venture, trust or other
enterprise in one of these capacities at the request of the corporation
and who, by reason of his or her position, is, was, or is threatened to be
made, a party to a proceeding described herein.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by
a director, officer or controlling person of the Registrant in a
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
The Adviser was organized in October 1995 for the purpose of
providing investment supervisory services for the Registrant. The Adviser
is not, nor has it been, engaged in any other business since its
inception. Certain information regarding the director and officer of the
Adviser including any business, profession, vocation or employment in
which such person is or has been at any time during the past two fiscal
years engaged for his or her own account or in the capacity of director,
officer, employee, partner or trustee, is set forth under "MANAGEMENT OF
THE FUND" in the Prospectus and under "ADDITIONAL COMPANY INFORMATION" in
the Statement of Additional Information and is incorporated herein by
reference.
Item 29. Principal Underwriters
Not Applicable.
Item 30. Location of Accounts and Records.
All accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are in the possession of the Registrant, at
Registrant's corporate offices, except (1) records held and maintained by
United Missouri Bank, n.a. relating to its functions as custodian and (2)
records held and maintained by Sunstone Financial Group, Inc., 207 East
Buffalo Street, Suite 400, Milwaukee, Wisconsin, 53202, relating to its
functions as administrator, fund accountant and transfer agent.
Item 31. Management Services.
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings.
(a) Registrant undertakes to provide its Annual Report upon request
without charge to any recipient of a Prospectus.
(b) Registrant undertakes to file a post-effective amendment to this
Registration Statement within four to six months of the effective date of
this Registration Statement which will contain financial statements (which
need not be certified) as of and for the time period reasonably close or
as soon as practicable to the date of such Registration Statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Amended Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Amended Registration Statement on Form N-1A to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City
of San Francisco, State of California, on the 25th day of July, 1996.
VAN WAGONER FUNDS, INC.
(Registrant)
By: /s/ Garrett R. Van Wagoner
Garrett R. Van Wagoner
President
Pursuant to the requirements of the Securities Act of 1933, this
Amended Registration Statement on Form N-1A has been signed below by the
following persons in the capacities and on the dates indicated.
Name Title Date
/s/ Garrett R. Van Wagoner President; Director July 25, 1996
Garrett R. Van Wagoner (principal
executive officer
and principal
financial and
accounting officer)
/s/ Larry Arnold Director July 24, 1996
Larry Arnold
/s/ Robert S. Colman Director July 25, 1996
Robert S. Colman
<PAGE>
EXHIBIT INDEX
1.1 Registrant's Articles of Incorporation. (Incorporated by
reference to Exhibit 1.1 of Pre-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A)
1.2 Articles of Amendment. (Incorporated by reference to
Exhibit 1.2 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
1.3 Article Supplementary (Incorporated by reference to Exhibit
1.3 of Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
1.4 Article Supplementary (Incorporated by reference to Exhibit
1.4 of Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
1.5 Articles of Amendment (Incorporated by reference to Exhibit
1.5 of Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
2. Registrant's By-Laws. (Incorporated by reference to Exhibit
2 of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
3. None.
4. None.
5.1 Investment Advisory Agreements by and between Registrant on
behalf of the Emerging Growth Fund, Micro-Cap Fund and Mid-
Cap Fund and Van Wagoner Capital Management, Inc.
(Incorporated by reference to Exhibit 5 of Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on
Form N-1A)
5.2 Form of Investment Advisory Agreements by and between
Registrant on behalf of the Capital Appreciation, Growth
and Post-Venture portfolios and Van Wagoner Capital
Management, Inc. (Incorporated by reference to Exhibit 5.2
of Post-Effective Amendment No.1 to Registrant's
Registration Statement on Form N-1A.
6.1 None.
6.2 None.
7. None.
8.1 Custodian Agreement by and between Registrant and United
Missouri Bank, N.A. (Incorporated by reference to Exhibit
8.1 of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
9.1 Administration and Fund Accounting Agreement by and between
Registrant and Sunstone Financial Group, Inc. (Incorporated
by reference to Exhibit 9.1 of Pre-Effective Amendment No.
1 to Registrant's Registration Statement on Form N-1A)
9.2 Transfer Agency Agreement by and between Registrant and
Sunstone Financial Group, Inc. (Incorporated by reference
to Exhibit 9.2 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
9.3 Amended and Restated Schedules A and B to the
Administration and Fund Accounting Agreement by and between
Registrant and Sunstone Financial Group, Inc.
9.4 Amended and Restated Schedules A and C to the Transfer
Agency Agreement by and between Registrant and Sunstone
Financial Group, Inc.
10. Opinion of Foley & Lardner, counsel for Registrant.
(Incorporated by reference to Exhibit 10 of Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on
Form N-1A)
11. Consent of Independent Accountants.
12. None.
13.1 Subscription Agreement. (Incorporated by reference to
Exhibit 13.1 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
13.2 Organizational Expenses Agreement. (Incorporated by
reference to Exhibit 13.2 of Pre-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A)
14. Form of Individual Retirement Custodial Account Agreement
and Disclosure Statement. (Incorporated by reference to
Exhibit 14 of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
15. Registrant's Service and Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940.
(Incorporated by reference to Exhibit 15 of Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on
Form N-1A)
16. Computation of Performance Figures (Incorporated by
reference to Exhibit 16 of Registrant's Registration
Statement on Form N-1A).
17. Financial Data Schedules.
18. None.
Exhibit 9.3
Amended and Restated
Schedule A
to the
Administration and Fund Accounting Agreement
by and between
Van Wagoner Funds, Inc.
and
Sunstone Financial Group, Inc.
Intending to be legally bound, the undersigned hereby amend and restate
Schedule A to the aforesaid Agreement to include the following investment
portfolios effective as of the date hereof:
Van Wagoner Micro-Cap Fund
Van Wagoner Emerging Growth Fund
Van Wagoner Mid-Cap Fund
Van Wagoner Capital Appreciation Fund
Van Wagoner Growth Fund
Van Wagoner Post-Venture Fund
This amended Schedule A is dated and effective as of this ___ day of
________, 1996.
VAN WAGONER FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
By: By:
Garrett Van Wagoner Miriam M. Allison
President President
<PAGE>
Amended and Restated
Schedule B
to the
Administration and Fund Accounting Agreement
by and between
Van Wagoner Funds, Inc.
and
Sunstone Financial Group, Inc.
Intending to be legally bound, the undersigned hereby amend and restate
Schedule B to the aforesaid Agreement to include the following fees for
the following investment portfolios effective as of the date hereof:
Minimum
Name of Fund Annual Fees Annual Fee
Micro-Cap Growth Up to $50 Million 18.0 basis points $75,000
$50 Million to $100 Million 10.5 basis points
$100 Million to $250 Million 5.5 basis points
Over $250 Million 3.0 basis points
Emerging Growth Up to $50 Million 18.0 basis points $75,000
$50 Million to $100 Million 10.5 basis points
$100 Million to $250 Million 5.5 basis points
Over $250 Million 3.0 basis points
Mid-Cap Growth Up to $50 Million 18.0 basis points $75,000
$50 Million to $100 Million 10.5 basis points
$100 Million to $250 Million 5.5 basis points
Over $250 Million 3.0 basis points
Capital
Appreciation Up to $50 Million 18.0 basis points $75,000
$50 Million to $100 Million 10.5 basis points
$100 Million to $250 Million 5.5 basis points
Over $250 Million 3.0 basis points
Growth Up to $50 Million 18.0 basis points $75,000
$50 Million to $100 Million 10.5 basis points
$100 Million to $250 Million 5.5 basis points
Over $250 Million 3.0 basis points
Post-Venture Up to $50 Million 18.0 basis points $75,000
$50 Million to $100 Million 10.5 basis points
$100 Million to $250 Million 5.5 basis points
Over $250 Million 3.0 basis points
The Corporation shall also pay/reimburse the Administrator's out-of-pocket
expenses as described in the Agreement.
This amended Schedule B is dated and effective as of this ___ day of
_________, 1996.
VAN WAGONER FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
By:_______________________ By: ______________________
Garrett Van Wagoner Miriam M. Allison
President President
Exhibit 9.4
Amended and Restated
Schedule A
to the
Transfer Agency Agreement
by and between
Van Wagoner Funds, Inc.
and
Sunstone Financial Group, Inc.
Intending to be legally bound, the undersigned hereby amend and restate
Schedule A to the aforesaid Agreement to include the following investment
portfolios:
Van Wagoner Micro-Cap Fund
Van Wagoner Emerging Growth Fund
Van Wagoner Mid-Cap Fund
Van Wagoner Capital Appreciation Fund
Van Wagoner Growth Fund
Van Wagoner Post-Venture Fund
This amended Schedule A is dated and effective as of this ____ day of
______, 1996.
VAN WAGONER FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
By:_________________________ By:_________________________
Garrett Van Wagoner Miriam M. Allison
President President
<PAGE>
Amended and Restated
Schedule C
to the
Transfer Agent Agreement
by and between
Van Wagoner Funds, Inc.
and
Sunstone Financial Group, Inc.
Intending to be legally bound, the undersigned hereby amend and restate
Schedule C to the aforesaid Agreement to include the following fees for
the following investment portfolios effective as of the date hereof:
[x] Fees for Van Wagoner Funds
Base annual fee:
Micro-Cap $ 2,500
Emerging Growth 2,500
Mid-Cap 2,500
Capital Appreciation 2,500
Growth 2,500
Post-Venture 2,500
Annual shareholder account fee: 21.00 open accounts
3.00 closed accounts
Minimum annual fee:
Micro-Cap 22,000
Emerging Growth 22,000
Mid-Cap 22,000
Capital Appreciation 22,000
Growth 22,000
Post-Venture 22,000
The fee assumes a single class of shares, implementation of a 12b-1 plan;
availability of automatic investment plans and systematic withdrawal plans
(using Sunstone's regular processing date); annual dividend distributions;
annual capital gains distributions; and all standard reports.
[X] One-time set-up fees
(per fund family)
NSCC FundSERV set-up $2,500
NSCC networking 1,500
Northern Money Market Fund(s) (per fund) 2,500
Fund set-up (per fund) 2,000
VRU set-up 2,000
Remote access per location 500
[X] Account maintenance and processing fees
(per occurrence)
Shareholder account set-up 2.50
Omnibus account transaction 2.50
Locating lost shareholders 8.00
Taxpayer ID number solicitation 1.50
VRU transaction processing .25
[X] Out-of-pocket expenses
Per check processing (dividend, capital
gains, redemption) .25
Per statement and confirm processing .25
Per tax form processing .15
Per label printing for proxy or marketing purposes .05
Production of ad hoc reports 100.00 minimum
Bulk mailings/insert handling charge
1 insert .25
2 - 3 inserts (per piece) .20
4 - 5 inserts (per piece) .15
Bank account service fees and any other
bank charges At cost
Statement paper At cost
Envelopes At cost
Tax forms At cost
Postage and express delivery charges At cost
Telephone and long distance charges At cost
Fax charges At cost
P.O. box rental At cost
800-phone number At cost
Inventory and records storage At cost
FundSERV charges At cost
Remote access ID
First user 250.00
Each additional user 100.00
[X] Custom Programming
Additional fees may apply for special programming to meet your
servicing requirements or to create custom reports.
[X] Additional fees which will be passed on to shareholders
Outgoing wire fee Varies by bank
Account transcripts older than 2 years
(per year, per fund) 5.00
Non-sufficient funds Varies by bank
IRA/SEP processing/403(b)
Annual maintenance or custodial fee (per account) 15.00
Account termination (transfer or rollover) 15.00
Telephone exchange fee 5.00
[X] Dedicated Shareholder Services Representative
(per person) $60,000 per year
increased annually
by the CPI plus 2%
Out-of-pocket expenses (e.g., travel, blue
sky licenses) At cost
This amended Schedule C is dated and effective as of this 15th day of
July, 1996.
VAN WAGONER FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
By:______________________ By:_________________________
Garrett Van Wagoner Miriam M. Allison
President President
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the
registration statement on Form N-1A (the "Registration Statement") of our
report dated November 27, 1995, relating to the statement of assets and
liabilities as of November 27, 1995 of Van Wagoner Funds, Inc., which
appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which
constitutes part of this Registration Statement. We also consent to the
reference to us under the heading "Independent Accountants" in such
Statement of Additional Information and to the reference to us under the
heading "Transfer and Dividend Disbursing Agent, Custodian and Certified
Public Accountants" in such Prospectus.
Price Waterhouse LLP
Milwaukee, Wisconsin
July 26, 1996
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