VAN WAGONER FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
for the
Capital Appreciation Fund
Growth Fund
This Statement of Additional Information dated August 28, 1996, as
supplemented December 31, 1996 is meant to be read in conjunction with the
Prospectus dated August 28, 1996, as supplemented December 31, 1996 for
the Capital Appreciation Fund and Growth 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 . . . . . . . . . . . . . . . 12
ADDITIONAL COMPANY INFORMATION . . . . . . . . . . . 15
Directors and Officers . . . . . . . . . . . . . 15
Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . . . . 16
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.
Van Wagoner Capital Appreciation Fund seeks capital appreciation. The
Fund invests in companies that the Adviser believes 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 have the potential for above-
average long-term growth. The Fund will focus on companies that have
mid- to larger-size market capitalizations.
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 and Growth Funds generally will not exceed 150%.
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. In 1996, each of the other Directors was
paid a fee of $500 for each meeting attended. This fee will increase to
$1,000 per meeting in 1997. In addition, each Director 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. The Capital
Appreciation Fund and the Growth Fund will commence operations after the
close of business on December 31, 1996. 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
Investment Advisory Agreements for the Capital Appreciation and Growth
Funds are dated as of August 7, 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. The Investment Advisory Agreements for the Capital Appreciation
and Growth Funds were approved by the vote of a majority of the Directors
who are not parties to the Investment Advisory Agreement or interested
persons of any such party on August 7, 1996. 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 believed to be 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 has
voluntarily agreed to reimburse each Fund to the extent aggregate annual
operating expenses as described above exceed 1.95% of the average daily
net assets of each Fund, until January 1, 1998. 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 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, 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. UMB Bank, n.a.
serves as the custodian and Sunstone Investor Services, LLC, an
affiliate of Sunstone Financial Group, Inc., the Funds' administrator,
serves as the transfer and dividend paying agent for the Funds. Under the
terms of the respective agreements, UMB 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. UMB Bank, n.a. and Sunstone Investor Services, LLC 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 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
Investor Services, LLC, the Funds' transfer agent, 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. Sunstone
Investor Services, LLC is an affiliate of Sunstone Financial Group, Inc.,
the Funds' administrator.
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 category 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
determining 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.
