VAN WAGONER FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
EMERGING GROWTH FUND
MICRO-CAP FUND
MID-CAP FUND
POST-VENTURE FUND
This Statement of Additional Information dated April 30, 1997 as
supplemented August 1, 1997, is meant to be read in conjunction with the
Prospectus dated April 30, 1997, for the Emerging Growth Fund, Micro-Cap Fund,
Mid-Cap Fund and Post-Venture Fund (collectively referred to as the "Funds")
and is incorporated by reference in its entirety into the Prospectus. Because
this Statement of Additional Information is not itself a prospectus, no
investment in shares of these Funds should be made solely upon the information
contained herein. Copies of the Prospectus for the Funds may be obtained by
writing Van Wagoner Funds, Inc., P.O. Box 1628, Milwaukee, Wisconsin 53201-1628.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
TABLE OF CONTENTS
Page
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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 ................................................. 19
Custodian, Transfer Agent and Dividend Paying Agent ........... 19
Legal Counsel ................................................ 19
Independent Accountants ....................................... 20
DISTRIBUTION OF SHARES........................................... 20
PORTFOLIO TRANSACTIONS AND BROKERAGE............................. 20
TAXES............................................................ 22
DESCRIPTION OF SHARES............................................ 25
SHAREHOLDER MEETINGS............................................. 25
RETIREMENT PLANS................................................. 27
PERFORMANCE INFORMATION.......................................... 27
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE................................. 30
OTHER INFORMATION................................................ 30
FINANCIAL STATEMENTS............................................. 32
APPENDIX A (Description of Securities Ratings)................... A-1
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR IN
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUNDS. THE PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE FUNDS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
ADDITIONAL INVESTMENT INFORMATION
The following supplements the investment objectives and policies of the
Funds as set forth in their Prospectus.
VAN WAGONER EMERGING GROWTH FUND seeks long-term capital appreciation. The
Emerging Growth Fund invests primarily in equity securities of companies
believed by the Adviser to have the potential for above-average long-term growth
in market value. The Emerging Growth Fund may invest in companies of all sizes.
VAN WAGONER MICRO-CAP FUND seeks capital appreciation. The Micro-Cap Fund
invests primarily in equity securities of companies with market capitalizations
of less than $350 million.
VAN WAGONER MID-CAP FUND seeks capital appreciation. The Mid-Cap Fund
invests primarily in equity securities of companies with market capitalizations
between $500 million and $5 billion.
VAN WAGONER POST-VENTURE FUND seeks capital appreciation. The Fund invests
primarily in companies considered by the Adviser to be in their post-venture
capital stage. Under normal market conditions, the Fund will invest at least
65% of its total assets in securities of companies that have received venture
capital financing during the early stages of the company's existence or the
early stages of the development of a new product or service, or as part of a
reorganization, restructuring or recapitalization.
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 (the
"SEC") 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
liquid 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 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 by 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
and subject to the rules of 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" subject to the rules
of Code Section 1256 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 it 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 or liquid 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 SEC guidelines regarding cover for these instruments and, if the
guidelines so require, set aside cash or liquid 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 or
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.
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. The current portfolio turnover
rates for the Funds are set forth in the prospectus.
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 of 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 represent 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. Age 41.
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. Age 54.
ROBERT S. COLMAN, DIRECTOR
Partner since February 1991 of Colman Furlong & Co. and since 1996 the
founder of Colman Partners, both private merchant banking firms. Mr. Colman is
a Director of Cleveland Cliffs, Inc. and HealthCare COMPARE Corp. Age 55.
PETER R. KRIS, VICE PRESIDENT
Mr. Kris is Vice President of the Company and has served in such capacity
since February 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. Age 31.
The Director of the Company who is an officer of the Adviser receives no
remuneration from the Funds. In 1997, each of the other Directors will be paid
a fee of $1,000 for each meeting attended. In addition, each Director is
reimbursed for the expenses of attending meetings. The table below sets forth
the compensation of the Directors for the fiscal year ending December 31, 1996.
COMPENSATION TABLE
Aggregate Total Compensation
Compensation from from Company Paid
Name of Person Company to Directors
- -------------- ----------------- ------------------
Garrett R. Van Wagoner $0 $0
Larry P. Arnold $1,500 $1,500
Robert S. Colman $1,500 $1,500
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. As of April 1, 1997,
the Funds were aware that the following persons or entities owned a controlling
interest (ownership of greater than 25%) or owned of record 5% or more of the
outstanding shares of each of the Funds.
VAN WAGONER EMERGING GROWTH FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA 94104,
25%; National Financial Services Corp.*, 200 Liberty Street, One World Financial
Center, New York, NY 10281-1003, 14%.
VAN WAGONER MICRO-CAP FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA 94104,
26%; National Financial Services Corp. *, 200 Liberty Street, One World
Financial Center, New York, NY 10281-1003, 17%.
VAN WAGONER MID-CAP FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA 94104,
24%; National Financial Services Corp.*, 200 Liberty Street, One World Financial
Center, New York, NY 10281-1003, 15%.
VAN WAGONER POST-VENTURE FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA 94104,
18%; National Financial Services Corp.*, 200 Liberty Street, One World Financial
Center, New York, NY 10281-1003, 17%.
As of April 1, 1997, the directors and officers as a group owned 1% of the
outstanding shares of the Mid-Cap Fund, 2% of the outstanding shares of the
Post-Venture Fund and less than 1% of the outstanding shares of the Emerging
Growth Fund and Micro-Cap Fund.
*Shareholders of record, not beneficial owners.
INVESTMENT ADVISER. The investment adviser to the Funds is Van Wagoner
Capital Management, Inc. (the "Adviser"). Mr. Van Wagoner is the founder and
President of the Adviser and owns all of the outstanding common stock of the
Adviser. As such, he controls the Adviser. Pursuant to Investment Advisory
Agreements entered into between the Company on behalf of each of the Funds and
the Adviser (the "Investment Advisory Agreements"), the Adviser provides
continuous investment advisory services to the Funds. The Adviser also provides
the Funds with office space, equipment and personnel necessary to operate and
administer the Funds' business and to supervise the provision of services by
third parties. The Investment Advisory Agreements for the Emerging Growth,
Micro-Cap and Mid-Cap Funds are dated as of December 31, 1995. The Investment
Advisory Agreement for the Post-Venture Fund is 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 Emerging Growth, Micro-Cap and Mid-Cap
Funds were approved by the vote of a majority of the Directors who are not
parties to the respective Investment Advisory Agreement or interested persons of
any such party on December 8, 1995, and by the initial shareholder of the
Emerging Growth, Micro-Cap and Mid-Cap Funds on December 8, 1995. The
Investment Advisory Agreement for the Post-Venture Fund was 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, and by the
initial shareholder of the Post-Venture Fund 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 such Fund's common
stock is qualified for sale or if the states in which the shares of such Fund
are qualified for sale impose no such restrictions, 2%. As of the date of this
Statement of Additional Information, no such state law provision was applicable
to any of the Funds. 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.
For the fiscal year ended December 31, 1996, the Adviser accrued the
following management fees and waived a portion of its management fees in the
following amounts*:
Emerging Growth Fund
Gross Management Fees $6,508,760
Waived Management Fees $178,686
Micro-Cap Fund
Gross Management Fees $1,397,953
Waived Management Fees $563,718
Mid-Cap Fund
Gross Management Fees $834,015
Waived Management Fees $80,281
*The Post-Venture Fund commenced operations after the close of business on
December 31, 1996.
ADMINISTRATOR. Sunstone Financial Group, Inc. (the "Administrator")
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. For the fiscal year ended December 31,
1996, the fees paid to the Administrator were $280,175, $130,643 and $120,846
for the Emerging Growth Fund, Micro-Cap Fund and Mid-Cap Fund, respectively.
(The Post-Venture Fund commenced operations after the close of business on
December 31, 1996). In addition, the Administrator received from the Funds
$60,000 for organizational services provided by the Administrator, plus out-of-
pocket expenses.
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 Investor Services, LLC 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.
For the fiscal year ended December 31, 1996, the Funds* paid a total of
$1,743,248 in 12b-1 fees. Sunstone Financial Group, Inc. received compensation
in the amount of $134,128 pursuant to its Distribution Agreement and the balance
was spent for printing and mailing of prospectuses to other than current
shareholders, advertising, compensation to dealers and other distribution
purposes. (* The Post-Venture Fund commenced operations after the close of
business on December 31, 1996.)
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.
During the year ended December 31, 1996, the Funds paid the following
brokerage commissions*:
Emerging Growth Fund $1,962,362
Micro-Cap Fund 260,568
Mid-Cap Fund 321,769
*The Post-Venture Fund commenced operations after the close of business on
December 31, 1996.
None of the brokers to whom commissions were paid during the fiscal year
ended December 31, 1996 provided research services to the Adviser.
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. Each Fund
intends to declare and distribute dividends during each year sufficient to
prevent imposition of the excise tax.
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 or treaties 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.
PERFORMANCE INFORMATION
The Funds may from time to time advertise performance data such as "average
annual total return" and "total return." To facilitate the comparability of
historical performance data from one mutual fund to another, the SEC has
developed guidelines for the calculation of average annual total return.
The average annual total return for a Fund for a specific period is found
by first taking a hypothetical $10,000 investment ("initial investment") in the
Fund's shares on the first day of the period and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted from
the result, which is then expressed as a percentage. The calculation assumes
that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period. This
calculation can be expressed as follows:
N
P(1+T) = ERV
Where: T= average annual total return.
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the beginning
of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms of years.
Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in a Fund's shares on the first day
of the period and computing the "ending value" of that investment at the end of
the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The calculation
assumes that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Total return may also be shown as the increased dollar value of the investment
over the period or as a cumulative total return which represents the change in
value of an investment over a stated period and may be quoted as a percentage or
as a dollar amount.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value is determined
by assuming complete redemption of the hypothetical investment and the deduction
of all nonrecurring charges at the end of the period covered by the
computations.
The Funds' performance figures will be based upon historical results and
will not necessarily be indicative of future performance. The Funds' returns
and net asset value will fluctuate and the net asset value of shares when sold
may be more or less than their original cost. Any additional fees charged by a
dealer or other financial services firm would reduce the returns described in
this section.
The total return for the fiscal year ended December 31, 1996 for each of
the Emerging Growth Fund, Micro-Cap Fund and Mid-Cap Fund, were 26.90%, 24.50%
and 23.90%, respectively. Such performance results reflect reimbursements made
by the Adviser during the fiscal year ended December 31, 1996 to keep the ratio
of net expenses to average net assets of each Fund at or below 1.95%. The total
return for the period from the commencement of operations (after the close of
business on December 31, 1996) through March 31, 1997, for the Post-Venture Fund
was (17.10)%. Such performance results reflect reimbursement made by the
Adviser (after the close of business on December 31, 1996 through March 31,
1997) to keep the ratio of net expenses to average net assets for the Fund at or
below 1.95%.
From time to time, in marketing and other literature, the Funds'
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objective and assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income and capital gains dividends
reinvested. Such calculations do not include the effect of any sales charges
imposed by other funds. The Funds will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the performance of other
mutual funds by Morningstar, Inc., which ranks funds on the basis of historical
risk and total return. Morningstar's rankings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for 3, 5, and 10
year periods. Rankings 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.
In connection with the determination of the Funds' net asset values, options
written or purchased by the Funds are valued at the last sales price if such
last sales price is between the current bid and asked prices. Otherwise, options
are valued at the mean between the current bid and asked prices.
To illustrate the method of computing the offering price of shares of the
Funds*, the offering price on December 31, 1996 was as follows:
Emerging
Growth Micro-Cap Mid-Cap
Net Assets $638,159,476 $140,698,454 $137,740,482
divided by
Shares Outstanding 50,275,260 11,303,250 11,114,950
equals
Net Asset Value Per Share $12.69 $12.45 $12.39
(Offering & Redemption Price)
*The Post-Venture Fund commenced operations after the close of business on
December 31, 1996.
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 Funds 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
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.
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Commission under the Securities Act with respect to the securities offered by
the Funds' Prospectus. Certain portions of the Registration Statement have been
omitted from the Prospectus and this Statement of Additional Information,
pursuant to the rules and regulations of the Commission. The Registration
Statement including the exhibits filed therewith may be examined at the office
of the Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other documents referred to
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
The following audited financial statements dated December 31, 1996 for the
Emerging Growth Fund, Micro-Cap Fund and Mid-Cap Fund are attached hereto:
1. Schedules of Investments as of December 31, 1996
2. Statements of Assets and Liabilities as of December 31, 1996
3. Statements of Operations for the Year Ended December 31, 1996
4. Statements of Changes in Net Assets for the Year Ended December 31,
1996
5. Financial Highlights for the Year Ended December 31, 1996
6. Notes to Financial Statements
7. Report of Independent Accountants
The following unaudited financial statements dated March 31, 1997 for the Post-
Venture Fund are attached hereto:
1. Schedule of Investments as of March 31, 1997
2. Statement of Assets and Liabilities as of March 31, 1997
3. Statement of Operations for the Three Months Ended March 31, 1997
4. Statement of Changes in Net Assets for the Three Months Ended March 31,
1997
5. Financial Highlights for the Three Months Ended March 31, 1997
6. Notes to Financial Statements
*****
VAN WAGONER EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS 101.20%
CHEMICALS 0.49%
235,000 NuCo2, Inc.<F3><F4> $ 3,128,438
------------
COMMERCIAL SERVICES -
MISCELLANEOUS 1.72%
296,500 Pediatrix Medical Group, Inc.<F3> 10,970,500
------------
COMMERCIAL SERVICES -
SECURITY/SAFETY 0.68%
200,000 Check Point Software
Technologies, Ltd.<F3> 4,350,000
------------
COMPUTERS - INTEGRATED
SYSTEMS 1.67%
225,000 Wind River Systems, Inc.<F3> 10,659,375
------------
COMPUTERS - LOCAL
NETWORKS 10.81%
400,000 Arbor Software Corp.<F3> 9,700,000
475,000 Ascend Communications, Inc.<F3> 29,509,375
400,000 Citrix Systems, Inc.<F3> 15,625,000
500,000 Xylan Corp.<F3> 14,125,000
------------
68,959,375
------------
COMPUTERS - MEMORY
DEVICES 3.72%
460,000 Legato Systems, Inc.<F3> 15,007,500
175,000 Veritas Software Corp.<F3> 8,706,250
------------
23,713,750
------------
COMPUTERS - PERIPHERALS 1.36%
275,000 Security Dynamics
Technologies, Inc.<F3> 8,662,500
------------
COMPUTERS - RETAIL/
WHOLESALE 0.75%
600,000 Intelligent Electronics, Inc.<F3> 4,800,000
------------
COMPUTERS - SERVICES 2.78%
375,000 Viasoft, Inc.<F3> 17,718,750
------------
COMPUTERS - SOFTWARE 24.40%
950,000 Avant! Corp.<F3><F4> 30,162,500
NUMBER
OF SHARES VALUE
--------- -----
COMPUTERS - SOFTWARE 24.40% (CONT'D.)
250,000 CBT Group PLC ADR<F3> $ 13,562,500
400,000 Clarify, Inc.<F3> 19,200,000
75,000 Forte Software, Inc.<F3> 2,456,250
350,000 McAfee Associates, Inc.<F3> 15,400,000
200,000 Netscape Communications Corp.<F3> 11,375,000
450,000 Pure Atria Corp.<F3> 11,137,500
300,000 Remedy Corp.<F3> 16,125,000
475,000 SQA, Inc.<F3><F4> 15,793,750
250,000 Technology Modeling
Associates, Inc.<F3><F4> 3,312,500
550,000 Vantive Corp.<F3> 17,187,500
------------
155,712,500
------------
ENERGY - SERVICES 4.53%
150,000 Energy Ventures, Inc.<F3> 7,631,250
175,000 ENSCO International, Inc.<F3> 8,487,500
400,000 Nabors Industries, Inc.<F3> 7,700,000
225,000 Rowan Cos., Inc.<F3> 5,090,625
------------
28,909,375
------------
MACHINERY 0.75%
300,000 JLG Industries, Inc. 4,800,000
------------
MEDICAL - BIOMEDICAL/
GENETICS 0.46%
250,000 Cardiac Pathways Corp.<F3><F4> 2,968,750
------------
MEDICAL - INFORMATION
SERVICES 2.02%
200,000 HBO & Co. 11,875,000
150,000 Oacis Healthcare Holding Corp.<F3> 1,012,500
------------
12,887,500
------------
MEDICAL - INSTRUMENTS 0.90%
250,000 Heartport, Inc.<F3> 5,718,750
------------
MEDICAL - OUTPATIENT/
HOME 1.27%
300,000 OccuSystems, Inc.<F3> 8,100,000
------------
MEDICAL - PRODUCTS 5.78%
125,000 Parexel International Corp.<F3> 6,453,125
550,000 Pharmaceutical Product
Development, Inc.<F3> 13,887,500
VAN WAGONER EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS (cont'd.)
NUMBER
OF SHARES VALUE
--------- -----
MEDICAL - PRODUCTS 5.78% (CONT'D.)
250,000 Quintiles Transnational Corp.<F3> $ 16,562,500
------------
36,903,125
------------
MEDICAL - WHOLESALE/DRUG 1.94%
425,000 NCS HealthCare, Inc.<F3><F4> 12,378,125
------------
OIL & GAS 10.54%
600,000 Comstock Resources, Inc.<F3> 7,800,000
155,000 Diamond Offshore Drilling, Inc.<F3> 8,835,000
100,000 Falcon Drilling Co., Inc.<F3> 3,925,000
440,000 Global Marine, Inc.<F3> 9,075,000
650,000 Noble Drilling Corp.<F3> 12,918,750
175,000 Reading & Bates Corp.<F3> 4,637,500
100,000 Smith International, Inc.<F3> 4,487,500
120,000 Tidewater, Inc. 5,430,000
125,000 Transocean Offshore, Inc. 7,828,125
100,000 Varco International, Inc.<F3> 2,312,500
------------
67,249,375
------------
POLLUTION CONTROL - SERVICES 0.19%
33,400 Newpark Resources, Inc.<F3> 1,244,150
------------
TELECOMMUNICATIONS -
EQUIPMENT 23.69%
720,000 Adtran, Inc.<F3> 29,880,000
500,600 Cascade Communications Corp.<F3> 27,595,575
250,000 Natural Microsystems Corp.<F3> 7,875,000
1,100,000 PairGain Technologies, Inc.<F3> 33,481,250
525,000 Premisys Communications, Inc.<F3> 17,718,750
400,000 Sync Research, Inc.<F3> 5,500,000
775,000 Tellabs, Inc.<F3> 29,159,375
------------
151,209,950
------------
TELECOMMUNICATIONS -
SERVICES 0.75%
200,000 Objective Systems
Integrators, Inc.<F3> 4,775,000
------------
Total Common Stocks
(cost $607,580,180) 645,819,288
------------
NUMBER
OF SHARES VALUE
--------- -----
WARRANTS 0.01%
196,000 ATS Medical, Inc. -
expires 3/2/97<F3> $ 73,500
------------
Total Warrants
(cost $260,827) 73,500
------------
PRINCIPAL
AMOUNT
- ---------
SHORT-TERM INVESTMENTS 0.00%
$2,310 UMB Bank, n.a., Money Market
Fiduciary 2,310
------------
Total Short-Term Investments
(cost $2,310) 2,310
------------
Total Investments 101.21%
(cost $607,843,317) 645,895,098
Other Liabilities
less Assets (1.21)% (7,735,622)
------------
NET ASSETS 100.00% $638,159,476
============
<F3> Non-income producing
<F4> Affiliated company - see Note 6
See notes to financial statements.
VAN WAGONER MICRO-CAP FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS 91.99%
BUILDINGS 1.23%
50,000 NCI Building Systems, Inc.<F5> $1,725,000
------------
CHEMICALS 0.99%
105,000 NuCo2, Inc.<F5><F6> 1,397,813
------------
COMMERCIAL SERVICES -
MISCELLANEOUS 1.91%
41,000 Abacus Direct Corp.<F5> 768,750
84,450 ClinTrials Research, Inc.<F5> 1,921,237
------------
2,689,987
------------
COMMERCIAL SERVICES -
SECURITY/SAFETY 1.55%
100,000 Check Point Software
Technologies, Ltd.<F5> 2,175,000
------------
COMPUTERS - INTEGRATED
SYSTEMS 3.59%
225,000 Peerless Systems Corp.<F5> 3,825,000
100,000 Western Micro Technology, Inc.<F5> 1,225,000
------------
5,050,000
------------
COMPUTERS - LOCAL
NETWORKS 4.71%
70,000 ACT Networks, Inc.<F5> 2,555,000
65,500 Ascend Communications, Inc.<F5> 4,069,188
------------
6,624,188
------------
COMPUTERS - RETAIL/
WHOLESALE 1.99%
350,000 Intelligent Electronics, Inc.<F5> 2,800,000
------------
COMPUTERS - SERVICES 1.18%
350,000 Dynamic Healthcare
Technologies, Inc.<F5> 1,662,500
------------
COMPUTERS - SOFTWARE 22.14%
225,000 ANSYS, Inc.<F5> 3,037,500
40,000 Clarify, Inc.<F5> 1,920,000
275,000 Mechanical Dynamics, Inc.<F5><F6> 3,815,625
200,000 OrCAD, Inc.<F5><F6> 2,200,000
75,000 Rogue Wave Software, Inc.<F5> 1,181,250
NUMBER
OF SHARES VALUE
--------- -----
COMPUTERS - SOFTWARE 22.14% (CONT'D.)
100,000 Simulation Sciences, Inc.<F5> $ 1,487,500
100,000 SQA, Inc.<F5><F6> 3,325,000
287,500 Technology Modeling
Associates, Inc.<F5><F6> 3,809,375
300,000 Walker Interactive Systems, Inc.<F5> 4,068,750
275,000 XcelleNet, Inc.<F5> 4,434,375
150,000 Xionics Document
Technologies, Inc.<F5> 1,875,000
------------
31,154,375
------------
CONSUMER PRODUCTS -
MISCELLANEOUS 0.38%
40,100 Koala Corp.<F5> 541,350
------------
ELECTRONICS - SEMICONDUCTOR
MANUFACTURING 1.41%
100,000 ELEXSYS International, Inc.<F5> 1,987,500
------------
ENERGY - SERVICES 3.21%
50,000 Energy Ventures, Inc.<F5> 2,543,750
100,000 Marine Drilling Co., Inc.<F5> 1,968,750
------------
4,512,500
------------
MEDICAL - BIOMEDICAL/
GENETICS 5.69%
400,000 Cardiac Pathways Corp.<F5><F6> 4,750,000
250,000 Cardiovascular Dynamics, Inc.<F5> 3,250,000
------------
8,000,000
------------
MEDICAL - INFORMATION
SERVICES 0.33%
10,000 The Registry, Inc.<F5> 461,250
------------
MEDICAL - INSTRUMENTS 2.13%
30,000 Hologic, Inc.<F5> 742,500
300,000 IRIDEX Corp.<F5><F6> 2,250,000
------------
2,992,500
------------
MEDICAL - PRODUCTS 18.50%
520,000 Aksys, Ltd.<F5> 4,485,000
1,025,000 Angeion Corp.<F5> 3,587,500
325,000 ATS Medical, Inc.<F5> 2,518,750
385,000 CardioGenesis Corp.<F5> 4,331,250
100,000 Cytyc Corp.<F5> 2,700,000
VAN WAGONER MICRO-CAP FUND
SCHEDULE OF INVESTMENTS (cont'd.)
NUMBER
OF SHARES VALUE
--------- -----
MEDICAL - PRODUCTS 18.50% (CONT'D.)
175,000 EndoSonics Corp.<F5> $ 2,668,750
50,000 Parexel International Corp.<F5> 2,581,250
125,000 Pharmaceutical Product
Development, Inc.<F5> 3,156,250
------------
26,028,750
------------
MEDICAL - WHOLESALE/DRUG 2.07%
100,000 NCS HealthCare, Inc.<F5><F6> 2,912,500
------------
OIL & GAS 4.50%
50,000 Benton Oil & Gas Co.<F5> 1,131,250
150,000 Comstock Resources, Inc.<F5> 1,950,000
5,000 Drilex International, Inc.<F5> 60,000
15,000 Patterson Energy, Inc.<F5> 386,250
100,000 Rutherford-Moran Oil Corp.<F5> 2,800,000
------------
6,327,500
------------
PHARMACEUTICALS 0.78%
125,000 NABI, Inc.<F5> 1,093,750
------------
TELECOMMUNICATIONS -
EQUIPMENT 8.38%
40,000 Adtran, Inc.<F5> 1,660,000
101,000 Galileo Corp.<F5> 2,537,625
175,000 Natural Microsystems Corp.<F5> 5,512,500
25,000 Powerwave Technologies, Inc.<F5> 365,625
125,000 Sync Research, Inc.<F5> 1,718,750
------------
11,794,500
------------
TELECOMMUNICATIONS -
SERVICES 2.27%
400,000 CTC Communications Corp.<F5><F6> 3,200,000
------------
TRANSPORTATION 1.71%
50,000 Trico Marine Services, Inc.<F5> 2,400,000
------------
UTILITIES - TELEPHONE 1.34%
30,000 Seacor Holdings, Inc.<F5> 1,890,000
------------
Total Common Stocks
(cost $117,130,574) 129,420,963
------------
NUMBER
OF SHARES VALUE
--------- -----
REAL ESTATE INVESTMENT TRUSTS 2.65%
100,000 Redwood Trust, Inc. $ 3,725,000
------------
Total Real Estate Investment Trusts
(cost $3,175,000) 3,725,000
------------
WARRANTS 0.02%
60,500 ATS Medical, Inc. -
expires 3/2/97<F5> 22,687
------------
Total Warrants
(cost $88,099) 22,687
------------
PRINCIPAL
AMOUNT
--------
REPURCHASE AGREEMENTS 9.23%
$12,990,000 UMB Bank, n.a., 5.875%, dated
12/31/96, repurchase price
$12,994,182, maturing
1/2/97 (collateralized by
U.S. Treasury Notes,
6.50%, 5/15/97) 12,990,000
------------
Total Repurchase Agreements
(cost $12,990,000) 12,990,000
------------
SHORT-TERM INVESTMENTS 0.00%
6,885 UMB Bank, n.a., Money Market
Fiduciary 6,885
------------
Total Short-Term Investments
(cost $6,885) 6,885
------------
Total Investments 103.89%
(cost $133,390,558) 146,165,535
Other Liabilities
less Assets (3.89)% (5,467,081)
------------
NET ASSETS 100.00% $140,698,454
============
<F5> Non-income producing
<F6> Affiliated company - see Note 6
See notes to financial statements.
VAN WAGONER MID-CAP FUND
SCHEDULE OF INVESTMENTS
December 31, 1996
NUMBER
OF SHARES VALUE
--------- -----
COMMON STOCKS 96.44%
COMMERCIAL SERVICES -
MISCELLANEOUS 2.01%
75,000 Pediatrix Medical Group, Inc.<F7> $ 2,775,000
------------
COMPUTERS - INTEGRATED
SYSTEMS 1.72%
50,000 Wind River Systems, Inc.<F7> 2,368,750
------------
COMPUTERS - LOCAL
NETWORKS 11.74%
75,000 Arbor Software Corp.<F7> 1,818,750
100,000 Ascend Communications, Inc.<F7> 6,212,500
100,000 Citrix Systems, Inc.<F7> 3,906,250
150,000 Xylan Corp.<F7> 4,237,500
------------
16,175,000
------------
COMPUTERS - MEMORY
DEVICES 4.77%
125,000 Legato Systems, Inc.<F7> 4,078,125
50,000 Veritas Software Corp.<F7> 2,487,500
------------
6,565,625
------------
COMPUTERS - MINI/MICRO 1.72%
60,000 Rational Software Corp.<F7> 2,373,750
------------
COMPUTERS - PERIPHERALS 1.72%
75,000 Security Dynamics
Technologies, Inc.<F7> 2,362,500
------------
COMPUTERS - SERVICES 2.92%
85,000 Viasoft, Inc.<F7> 4,016,250
------------
COMPUTERS - SOFTWARE 22.79%
200,000 Avant! Corp.<F7><F8> 6,350,000
50,000 CBT Group PLC ADR<F7> 2,712,500
75,000 Clarify, Inc.<F7> 3,600,000
75,000 i2 Technologies, Inc.<F7> 2,868,750
75,000 McAfee Associates, Inc.<F7> 3,300,000
25,000 Netscape Communications Corp.<F7> 1,421,875
100,000 Pure Atria Corp.<F7> 2,475,000
70,000 Remedy Corp.<F7> 3,762,500
NUMBER
OF SHARES VALUE
--------- -----
COMPUTERS - SOFTWARE 22.79% (CONT'D.)
8,000 Saville Systems Ireland
PLC ADR<F7> $ 325,000
25,000 Siebel Systems, Inc.<F7> 675,000
125,000 Vantive Corp.<F7> 3,906,250
------------
31,396,875
------------
ENERGY - SERVICES 3.37%
35,000 ENSCO International, Inc.<F7> 1,697,500
100,000 Nabors Industries, Inc.<F7> 1,925,000
45,300 Rowan Cos., Inc.<F7> 1,024,913
------------
4,647,413
------------
MACHINERY 1.16%
100,000 JLG Industries, Inc. 1,600,000
------------
MEDICAL - INFORMATION
SERVICES 2.16%
50,000 HBO & Co. 2,968,750
------------
MEDICAL - INSTRUMENTS 1.25%
75,000 Heartport, Inc.<F7> 1,715,625
------------
MEDICAL - OUTPATIENT/
HOME 1.25%
63,800 OccuSystems, Inc.<F7> 1,722,600
------------
MEDICAL - PRODUCTS 2.40%
50,000 Quintiles Transnational Corp.<F7> 3,312,500
------------
MEDICAL - SUPPLIES 1.17%
50,000 Omnicare, Inc. 1,606,250
------------
OIL & GAS 10.17%
50,000 Falcon Drilling Co., Inc.<F7> 1,962,500
100,000 Global Marine, Inc.<F7> 2,062,500
150,000 Noble Drilling Corp.<F7> 2,981,250
50,000 Reading & Bates Corp.<F7> 1,325,000
40,000 Smith International, Inc.<F7> 1,795,000
25,000 Transocean Offshore, Inc. 1,565,625
100,000 Varco International, Inc.<F7> 2,312,500
------------
14,004,375
------------
VAN WAGONER MID-CAP FUND
SCHEDULE OF INVESTMENTS (cont'd.)
NUMBER
OF SHARES VALUE
--------- -----
POLLUTION CONTROL - SERVICES 2.03%
75,000 Newpark Resources, Inc.<F7> $ 2,793,750
------------
TELECOMMUNICATIONS -
EQUIPMENT 20.53%
123,200 Adtran, Inc.<F7> 5,112,800
100,000 Cascade Communications Corp.<F7> 5,512,500
225,000 PairGain Technologies, Inc.<F7> 6,848,437
125,000 Premisys Communications, Inc.<F7> 4,218,750
175,000 Tellabs, Inc.<F7> 6,584,375
------------
28,276,862
------------
TELECOMMUNICATIONS - SERVICES 1.56%
90,000 Objective Systems
Integrators, Inc.<F7> 2,148,750
------------
Total Common Stocks
(cost $125,426,768) 132,830,625
------------
PRINCIPAL
AMOUNT
---------
REPURCHASE AGREEMENTS 1.16%
$1,600,000 UMB Bank, n.a., 5.875%, dated
12/31/96, repurchase price
$1,600,515, maturing 1/2/97
(collateralized by U.S. Treasury
Notes, 6.50%, 5/15/97) 1,600,000
------------
Total Repurchase Agreements
(cost $1,600,000) 1,600,000
------------
SHORT-TERM INVESTMENTS 0.65%
898,338 UMB Bank, n.a., Money
Market Fiduciary 898,338
------------
Total Short-Term Investments
(cost $898,338) 898,338
------------
VALUE
-----
Total Investments 98.25%
(cost $127,925,106) $135,328,963
Other Assets
less Liabilities 1.75% 2,411,519
------------
NET ASSETS 100.00% $137,740,482
============
<F7> Non-income producing
<F8> Affiliated company - see Note 6
See notes to financial statements.
VAN WAGONER FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1996
EMERGING MICRO-CAP MID-CAP
GROWTH FUND FUND FUND
----------- --------- -------
ASSETS:
Investments, at value:
Nonaffiliated issuers
(cost $546,731,584,
$107,339,221 and $121,834,981,
respectively) $578,151,035 $120,755,222 $128,978,963
Affiliated issuers (cost
$61,111,733, $26,051,337
and $6,090,125, respectively) 67,744,063 25,410,313 6,350,000
Receivable for investments sold 25,848,467 14,712,477 14,939,380
Receivable from investment adviser 154,153 105,051 41,169
Organizational expenses, net
of accumulated amortization 29,360 29,360 29,360
Interest and dividends receivable 6,230 49,307 2,672
Receivable for shares sold 4,999 -- --
Prepaid expenses and other assets 60,438 26,700 26,686
------------ ------------ ------------
Total Assets 671,998,745 161,088,430 150,368,230
------------ ------------ ------------
LIABILITIES:
Payable for investments purchased 30,306,922 19,953,845 12,237,494
Payable to custodian 1,531,052 -- --
Accrued investment advisory fee 687,367 172,437 124,548
Accrued distribution fee 315,294 61,377 69,986
Payable for shares redeemed 272,041 9,239 6,995
Accrued expenses and other
liabilities 726,593 193,078 188,725
------------ ------------ ------------
Total Liabilities 33,839,269 20,389,976 12,627,748
------------ ------------ ------------
NET ASSETS $638,159,476 $140,698,454 $137,740,482
============ ============ ============
NET ASSETS CONSIST OF:
Capital stock $ 5,028 $ 1,130 $ 1,112
Paid-in-capital 718,929,554 148,214,100 145,043,525
Accumulated net realized loss
on investments (118,826,887) (20,291,753) (14,708,012)
Net unrealized appreciation
on investments 38,051,781 12,774,977 7,403,857
------------ ------------ ------------
Net Assets $638,159,476 $140,698,454 $137,740,482
============ ============ ============
CAPITAL STOCK, $0.0001 PAR VALUE
Authorized 200,000,000 100,000,000 100,000,000
Issued and outstanding 50,275,260 11,303,250 11,114,950
NET ASSET VALUE, REDEMPTION
PRICE, AND OFFERING PRICE
PER SHARE (NET ASSETS/SHARES
OUTSTANDING) $12.69 $12.45 $12.39
====== ====== ======
See notes to financial statements.
VAN WAGONER FUNDS
STATEMENTS OF OPERATIONS
Year Ended December 31, 1996
EMERGING MICRO-CAP MID-CAP
GROWTH FUND FUND FUND
----------- --------- -------
INVESTMENT INCOME:
Interest $ 2,282,856 $ 801,575 $ 624,962
Dividends 116,520 43,277 30,254
------------ ------------ ------------
Total Investment Income 2,399,376 844,852 655,216
------------ ------------ ------------
EXPENSES:
Investment advisory fees 6,508,760 1,397,953 834,015
Transfer agent fees and expenses 1,496,248 400,321 340,542
12b-1 fees 1,301,752 232,992 208,504
Federal and state registration fees 371,689 110,551 106,959
Fund accounting and
administration fees 280,175 130,643 120,846
Printing and postage expenses 273,222 47,422 37,461
Custody fees 48,802 19,168 17,343
Professional fees 23,637 23,637 23,637
Amortization of organization costs 7,364 7,364 7,364
Directors' fees and expenses 4,668 4,668 4,668
Miscellaneous 16,035 6,338 5,271
------------ ------------ ------------
Total expenses before waiver 10,332,352 2,381,057 1,706,610
Less: Waiver of expenses (178,686) (563,718) (80,281)
------------ ------------ ------------
Net Expenses 10,153,666 1,817,339 1,626,329
------------ ------------ ------------
NET INVESTMENT LOSS (7,754,290) (972,487) (971,113)
------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on
investments (118,833,259) (20,296,388) (14,710,318)
Change in unrealized
appreciation on investments 38,051,781 12,774,977 7,403,857
------------ ------------ ------------
Net Loss on Investments (80,781,478) (7,521,411) (7,306,461)
------------ ------------ ------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(88,535,768) $(8,493,898) $(8,277,574)
============ ============ ============
See notes to financial statements.
VAN WAGONER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31, 1996
EMERGING MICRO-CAP MID-CAP
GROWTH FUND FUND FUND
----------- --------- -------
OPERATIONS:
Net investment loss $ (7,754,290) $ (972,487) $ (971,113)
Net realized loss on investments (118,833,259) (20,296,388) (14,710,318)
Change in unrealized
appreciation on investments 38,051,781 12,774,977 7,403,857
------------ ------------ ------------
Net decrease in net assets
resulting from operations (88,535,768) (8,493,898) (8,277,574)
------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 1,363,297,233 245,071,240 244,490,946
Redemption of shares (636,635,323) (95,912,221) (98,506,223)
------------ ------------ ------------
Net increase from share
transactions 726,661,910 149,159,019 145,984,723
------------ ------------ ------------
TOTAL INCREASE IN NET ASSETS 638,126,142 140,665,121 137,707,149
NET ASSETS:
Beginning of period 33,334 33,333 33,333
------------ ------------ ------------
End of period $638,159,476 $140,698,454 $137,740,482
============ ============ ============
TRANSACTIONS IN SHARES:
Shares sold 96,673,050 18,977,746 18,740,673
Shares redeemed (46,401,123) (7,677,829) (7,629,056)
------------ ------------ ------------
Net increase 50,271,927 11,299,917 11,111,617
============ ============ ============
See notes to financial statements.
VAN WAGONER FUNDS
FINANCIAL HIGHLIGHTS
Year Ended December 31, 1996
For a Fund share outstanding throughout the year.
EMERGING MICRO-CAP MID-CAP
GROWTH FUND FUND FUND
----------- --------- -------
Net Asset Value, Beginning
of Period $10.00 $10.00 $10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment loss (0.15) (0.09) (0.09)
Net realized and unrealized
gains on investments 2.84<F9> 2.54<F9> 2.48<F9>
-------- -------- --------
Total from investment operations 2.69 2.45 2.39
-------- -------- --------
Net Asset Value, End of Period $12.69 $12.45 $12.39
======== ======== ========
Total Return 26.90% 24.50% 23.90%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $638,159 $140,698 $137,740
Ratio of net expenses to
average net assets<F10> 1.95% 1.95% 1.95%
Ratio of net investment loss
to average net assets<F10> (1.49)% (1.04)% (1.16)%
Portfolio turnover rate 159% 153% 173%
Average commission rate paid
on portfolio investment
transactions $0.0531 $0.0474 $0.0516
<F9> The amount shown may not accord with the aggregate gains and losses of
portfolio securities due to the timing of sales and redemptions of Fund
shares.
<F10> Without fees waived, the ratio of net expenses to average net assets
would have been 1.98% for the Emerging Growth Fund, 2.55% for the Micro-
Cap Fund and 2.05% for the Mid-Cap Fund. The ratio of net investment
loss to average net assets would have been (1.52)% for the Emerging
Growth Fund, (1.64)% for the Micro-Cap Fund and (1.26)% for the Mid-Cap
Fund. The annual expense ratio of each Fund is capped at 1.95% through
January 1, 1998.
See notes to financial statements.
VAN WAGONER FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. ORGANIZATION
Van Wagoner Funds, Inc. (the "Company") was organized on October 18, 1995
as a Maryland corporation and is registered under the Investment Company
Act of 1940 (the "1940 Act") as an open-end management investment
company. The Emerging Growth Fund, Micro-Cap Fund and Mid-Cap Fund
(collectively "the Funds") are separate, diversified investment
portfolios of Van Wagoner Funds, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") which permit management to make
certain estimates and assumptions at the date of the financial statements.
(A) INVESTMENT VALUATION - A security traded on a recognized stock
exchange is valued at the last sale price. If no sale is reported, the
most current bid price will be used. All other securities for which
over-the-counter market quotations are readily available are valued at
the most current closing price. Debt securities which will mature in
more than 60 days are valued at prices furnished by a pricing service.
Securities which will mature in 60 days or less are valued at
amortized cost, which approximates market value. Any securities for
which market quotations are not readily available are valued at their
fair value as determined in good faith by the Funds' investment
adviser under the supervision of the Board of Directors.
(B) REPURCHASE AGREEMENTS - During the term of a repurchase agreement, the
market value of the underlying collateral, including accrued interest,
is required to equal or exceed the market value of the repurchase
agreement. The underlying collateral for all repurchase agreements is
held by the Funds' custodian.
NOTES TO FINANCIAL STATEMENTS (cont'd.)
(C) ORGANIZATION COSTS - Costs incurred by the Funds in connection with
their organization, registration and the initial public offering of
shares have been deferred and will be amortized over the period of
benefit, but not to exceed five years. If any of the original shares
of a Fund are redeemed by any holder thereof prior to the end of the
amortization period, the redemption proceeds will be reduced by the
pro rata share of the unamortized expenses as of the date of
redemption. The pro rata share by which the proceeds are reduced will
be derived by dividing the number of original shares of the Funds
being redeemed by the total number of original shares outstanding at
the time of redemption.
(D) EXPENSES - The Funds are charged for those expenses that are directly
attributable to each portfolio, such as advisory and custodian fees.
Expenses that are not directly attributable to a portfolio are
typically allocated among the portfolios in proportion to their
respective net assets.
(E) FEDERAL INCOME TAXES - Each Fund intends to comply with the
requirements of the Internal Revenue Code necessary to qualify as a
regulated investment company and to make the requisite distributions
of income to its shareholders which will be sufficient to relieve it
from all or substantially all federal income taxes.
As of December 31, 1996, the Emerging Growth, Micro-Cap and Mid-Cap
Funds had federal income tax capital loss carryforwards of
$80,675,019, $11,452,503 and $10,849,236, respectively. The entire
federal income tax loss carryforward for each Fund expires in 2004.
(F) DISTRIBUTIONS TO SHAREHOLDERS - Dividends from net investment income
and net realized capital gains, if any, will be declared and paid at
least annually. Distributions to shareholders are recorded on the ex-
dividend date. The Fund may periodically make reclassifications among
certain of its capital accounts as a result of the timing and
characterization of certain income and capital gains or losses
determined in accordance with federal tax regulations, which may
differ from GAAP.
(G) OTHER - Investment transactions are accounted for on a trade date
basis. Each Fund determines the gain or loss realized from the
investment transactions by comparing the original cost of the security
lot sold with the net sale proceeds. Dividend income is recognized on
the ex-dividend date and interest income is recognized on an accrual
basis.
NOTES TO FINANCIAL STATEMENTS (cont'd.)
3. INVESTMENT ADVISORY AGREEMENT
The Funds have an agreement with Van Wagoner Capital Management, Inc. (the
"Adviser") to furnish investment advisory services to the Funds. Under
the terms of this agreement, the Adviser is compensated at the following
percentage of average daily net assets for each Fund: 1.25% for the
Emerging Growth Fund, 1.50% for the Micro-Cap Fund and 1.00% for the Mid-
Cap Fund. The Adviser has agreed to voluntarily reduce fees for expenses
(exclusive of brokerage, interest, taxes and extraordinary expenses) that
exceed 1.95% for each Fund until January 1, 1998. Expenses of $178,686,
$563,718 and $80,281 were waived in the Emerging Growth, Micro-Cap and Mid-
Cap Funds, respectively.
4. SERVICE AND DISTRIBUTION PLAN
The Funds have adopted a Service and Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. The Plan authorizes payments by
the Funds in connection with the distribution of their shares at an annual
rate, as determined from time to time by the Board of Directors, of up to
0.25% of a Fund's average daily net assets.
5. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Funds for the year ended December 31, 1996 were as
follows:
EMERGING MICRO-CAP MID-CAP
GROWTH FUND FUND FUND
------------ --------- --------
Purchases $1,498,712,282 $263,108,538 $267,588,293
Sales 792,109,151 126,719,452 131,752,183
For the year ended December 31, 1996, there were no purchases or sales of
long-term U.S. Government securities.
NOTES TO FINANCIAL STATEMENTS (cont'd.)
The cost of securities on a tax basis for the Emerging Growth Fund, Micro-
Cap Fund and Mid-Cap Fund is $617,424,329, $134,133,529 and $131,475,743,
respectively. At December 31, 1996, gross unrealized appreciation and
depreciation on investments for federal income tax purposes were as
follows:
EMERGING MICRO-CAP MID-CAP
GROWTH FUND FUND FUND
------------ --------- --------
Unrealized appreciation $83,058,276 $17,404,666 $13,657,220
(Unrealized depreciation) (54,587,507) (5,372,660) (9,804,000)
----------- ----------- -----------
Net unrealized
appreciation
on investments $28,470,769 $12,032,006 $ 3,853,220
=========== =========== ===========
6. TRANSACTIONS WITH AFFILIATED COMPANIES
An affiliated company is a company in which one or more Funds has ownership
of at least 5% of the voting securities. Companies which are affiliates of
each Fund are as follows:
<TABLE>
<CAPTION>
AMOUNT OF
AMOUNT OF GAIN (LOSS)
DIVIDENDS REALIZED
SHARE ACTIVITY CREDITED ON SALE
------------------------------------------------------- TO INCOME OF SHARES
BALANCE PURCHASES/ SALES/ BALANCE IN FISCAL IN FISCAL
SECURITY NAME 12/31/95 ADDITIONS REDUCTIONS 12/31/96 1996 1996
- -------------- -------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
EMERGING GROWTH FUND
Avant! Corp.<F11> - 1,049,381 99,381 950,000 - $ 155,468
Cardiac Pathways Corp.<F11> - 705,000 455,000 250,000 - (1,119,428)
CTC Communications Corp.<F11> - 396,050 396,050 - - (1,229,446)
Enterprise Systems, Inc.<F11> - 311,550 311,550 - - (3,813,070)
IRIDEX Corp.<F11> - 235,000 235,000 - - (1,071,875)
Mechanical Dynamics, Inc.<F11> - 224,000 224,000 - - (133,390)
Mecon, Inc.<F11> - 259,000 259,000 - - (2,640,437)
Meta-Software, Inc.<F11> - 633,300 633,300 - - (114,486)
NCS HealthCare, Inc.<F11> - 425,000 - 425,000 - -
NuCo2, Inc.<F11> - 406,400 171,400 235,000 - (2,171,491)
OrCAD, Inc.<F11> - 211,400 211,400 - - (622,225)
SQA, Inc.<F11> - 493,200 18,200 475,000 - (54,755)
</TABLE>
<TABLE>
NOTES TO FINANCIAL STATEMENTS (cont'd.)
<CAPTION>
AMOUNT OF
AMOUNT OF GAIN (LOSS)
DIVIDENDS REALIZED
SHARE ACTIVITY CREDITED ON SALE
------------------------------------------------------- TO INCOME OF SHARES
BALANCE PURCHASES/ SALES/ BALANCE IN FISCAL IN FISCAL
SECURITY NAME 12/31/95 ADDITIONS REDUCTIONS 12/31/96 1996 1996
- -------------- -------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
EMERGING GROWTH FUND (CONT'D.)
Summit Medical Systems, Inc.<F11> - 639,100 639,100 - - $ (7,742,208)
Technology Modeling
Associates, Inc.<F11> - 250,000 - 250,000 - -
Vitalcom, Inc.<F11> - 487,000 487,000 - - (4,360,084)
--- ------------
- $(23,845,552)
=== ============
MICRO-CAP FUND
Avant! Corp.<F11> - 188,846 188,846 - - 351,241
Cardiac Pathways Corp.<F11> - 608,000 208,000 400,000 - (672,329)
CTC Communications Corp.<F11> - 406,000 6,000 400,000 - (39,069)
Enterprise Systems, Inc.<F11> - 97,050 97,050 - - (1,073,633)
IRIDEX Corp.<F11> - 305,000 5,000 300,000 - (26,875)
Mechanical Dynamics, Inc.<F11> - 298,750 23,750 275,000 - 11,624
Mecon, Inc.<F11> - 100,000 100,000 - - (255,403)
Meta-Software, Inc.<F11> - 155,000 155,000 - - -
NCS HealthCare, Inc.<F11> - 100,000 - 100,000 - -
NuCo2, Inc.<F11> - 108,600 3,600 105,000 - (49,500)
OrCAD, Inc.<F11> - 200,000 - 200,000 - -
SQA, Inc.<F11> - 105,300 5,300 100,000 - (15,945)
Summit Medical Systems, Inc.<F11> - 156,600 156,600 - - (2,099,600)
Technology Modeling
Associates, Inc.<F11> - 287,500 - 287,500 - -
Vitalcom, Inc.<F11> - 178,500 178,500 - - (1,413,868)
--- ------------
- $ (5,256,482)
=== ============
MID-CAP FUND
Avant! Corp.<F11> - 208,846 8,846 200,000 - (2,212)
IRIDEX Corp.<F11> - 4,000 4,000 - - 28,000
SQA, Inc.<F11> - 5,000 5,000 - - (625)
Vitalcom, Inc.<F11> - 4,000 4,000 - - 31,000
--- ------------
- $ 28,163
=== ============
<FN>
<F11> Non-income producing
</TABLE>
VAN WAGONER FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Van Wagoner Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Emerging Growth Fund, the
Micro-Cap Fund and the Mid-Cap Fund (each a portfolio of Van Wagoner Funds,
Inc., (the "Funds")) at December 31, 1996, the results of each of their
operations, the changes in each of their net assets and the financial highlights
for the year then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian and the application of alternative procedures for unsettled
securities, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Milwaukee, Wisconsin
January 23, 1997
VAN WAGONER POST-VENTURE FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
(UNAUDITED)
Number
of Shares Value
--------- -----
COMMON STOCKS 82.99%
Commercial Services - Miscellaneous 1.56%
10,000 Pediatrix Medical Group, Inc. <F1> $ 328,750
----------
COMPUTERS - INTEGRATED SYSTEMS 4.74%
25,000 Peerless Systems Corp. <F1> 290,625
30,000 Wind River Systems, Inc. <F1> 708,750
----------
999,375
----------
COMPUTERS - LOCAL NETWORKS 5.73%
15,000 Ascend Communications, Inc. <F1> 611,250
45,000 Citrix Systems, Inc. <F1> 596,250
----------
1,207,500
----------
COMPUTERS - MEMORY DEVICES 2.39%
17,000 Veritas Software Corp. <F1> 503,625
----------
COMPUTERS - MINI/MICRO 2.44%
25,000 Rational Software Corp. <F1> 515,625
----------
COMPUTERS - SERVICES 5.39%
35,000 Viasoft, Inc. <F1> 1,137,500
----------
COMPUTERS - SOFTWARE 23.37%
25,000 ANSYS, Inc. <F1> 203,125
45,000 Avant! Corp. <F1><F2> 1,220,625
27,700 Clarify, Inc. <F1> 668,263
6,000 McAfee Associates, Inc. <F1> 265,500
30,000 Pure Atria Corp. <F1> 511,875
30,000 Remedy Corp. <F1> 1,147,500
30,000 Rogue Wave Software, Inc. <F1> 273,750
15,000 Vantive Corp. <F1> 307,500
20,000 XcelleNet, Inc. <F1> 330,000
----------
4,928,138
----------
VAN WAGONER POST-VENTURE FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
Number
of Shares Value
--------- -----
ELECTRONICS - SEMICONDUCTOR EQUIPMENT 1.42%
4,000 ASM Lithography Holding N.V. <F1> $ 300,000
----------
FINANCE - CONSUMER LOANS 0.44%
12,500 National Auto Finance Co., Inc. <F1> 93,750
----------
MEDICAL - BIOMEDICAL/GENETICS 3.49%
7,500 Cardiac Pathways Corp. <F1><F2> 61,875
67,500 Cardiovascular Dynamics, Inc. <F1><F2> 675,000
----------
736,875
----------
MEDICAL - ETHICAL DRUGS 1.70%
10,000 Dura Pharmaceuticals, Inc. <F1> 357,500
----------
MEDICAL - INSTRUMENTS 1.78%
5,000 Heartport, Inc. <F1> 122,500
35,000 Photoelectron Corp. <F1> 253,750
----------
376,250
----------
MEDICAL - OUTPATIENT/HOME 3.47%
17,500 OccuSystems, Inc. <F1> 393,750
15,000 Renal Treatment Centers, Inc. <F1> 337,500
----------
731,250
----------
MEDICAL - PRODUCTS 4.49%
16,000 Aksys, Ltd. <F1> 148,000
20,000 CardioGenesis Corp. <F1> 260,000
30,000 EndoSonics Corp. <F1> 285,000
5,000 Paraxel International Corp. <F1> 115,000
7,000 Pharmaceutical Product Development, Inc. <F1> 140,000
----------
948,000
----------
MEDICAL - WHOLESALE/DRUG 1.61%
15,000 NCS HealthCare, Inc. <F1><F2> 339,375
----------
VAN WAGONER POST-VENTURE FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
Number
of Shares Value
--------- -----
OIL & GAS 6.36%
45,000 Comstock Resources, Inc. <F1> $ 388,125
25,000 Edge Petroleum Corp. <F1> 400,000
20,000 Patterson Energy, Inc. <F1><F2> 552,500
----------
1,340,625
----------
TELECOMMUNICATIONS - EQUIPMENT 12.61%
9,000 Advanced Fibre Communications, Inc. <F1> 290,250
10,000 CIENA Corp. <F1> 284,375
15,000 Natural Microsystems Corp. <F1> 298,125
10,000 P-COM, Inc. <F1> 260,000
21,000 PairGain Technologies, Inc. <F1> 622,125
15,000 Powerwave Technologies, Inc. <F1> 268,125
30,000 Sync Research, Inc. <F1> 94,218
15,000 Tellabs, Inc. <F1> 541,875
----------
2,659,093
----------
TOTAL COMMON STOCKS (COST $22,161,349) 17,503,231
----------
PREFERRED STOCK 1.19%
35,714 Netro Corp. PPL Series C PFD <F1><F3><F4> 249,998
----------
TOTAL PREFERRED STOCK (COST $249,998) 249,998
----------
Number
of Contracts
- -------------
OPTIONS PURCHASED 2.55%
5,572 Put Option on Morgan Stanley High-Technology Index
Expiring June 30, 1997 at 359 133,059
2,491 Put Option on Nasdaq 100 Index
Expiring June 30, 1997 at 803.30 113,341
VAN WAGONER POST-VENTURE FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
Number
of Contracts Value
- ------------- -----
OPTIONS PURCHASED 2.55% (continued)
7,206 Put Option on Russell 2000 Index
Expiring June 30, 1997 at 347 $ 94,254
4,430 Put Option on S&P 500 Index
Expiring June 30, 1997 at 790 198,375
----------
TOTAL OPTIONS PURCHASED (COST $446,585) 539,029
----------
Principal
Amount
---------
REPURCHASE AGREEMENTS 12.93%
$2,727,000 UMB Bank, n.a., 5.70%, dated 03/31/97,
repurchase price $2,728,097, maturing
04/1/97 (collateralized by
U.S. Treasury Note, 5.125%, 6/30/98) 2,727,000
----------
TOTAL REPURCHASE AGREEMENTS (COST $2,727,000) 2,727,000
----------
TOTAL INVESTMENTS (COST $25,584,932) 99.66% 21,019,258
Other Assets less Liabilities 0.34% 70,755
----------
NET ASSETS 100.00% $21,090,013
===========
<F1> Non-income producing
<F2> Affiliated company - see Note 6
<F3> Purchased in a private placement transaction; resale to the public may
require registration or sale only to qualified institutional buyers.
<F4> Valued under procedures established by the Board of Directors.
See notes to financial statements.
VAN WAGONER POST-VENTURE FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
(UNAUDITED)
ASSETS:
Investments, at value:
Nonaffiliated issuers (cost $19,701,063) $ 15,442,883
Affiliated issuers (cost $3,156,869) 2,849,375
Repurchase agreements, at value (cost $2,727,000) 2,727,000
Receivable for investments sold 1,332,739
Receivable from investment adviser 69,879
Interest and dividends receivable 1,725
Prepaid expenses and other assets 17,742
------------
Total Assets 22,441,343
------------
LIABILITIES:
Payable for investments purchased 786,585
Payable to custodian 436,845
Accrued investment advisory fee 68,696
Accrued distribution fee 7,059
Accrued expenses and other liabilities 52,145
------------
Total Liabilities 1,351,330
------------
NET ASSETS $21,090,013
============
NET ASSETS CONSIST OF:
Capital stock $ 254
Paid-in-capital 26,350,462
Accumulated net realized loss on investments (695,029)
Net unrealized depreciation on investments (4,565,674)
------------
Net Assets $21,090,013
============
CAPITAL STOCK, $0.0001 par value
Authorized 100,000,000
Issued and outstanding 2,543,716
NET ASSET VALUE, REDEMPTION PRICE,
AND OFFERING PRICE PER SHARE (NET
ASSETS/SHARES OUTSTANDING) $8.29
=====
See notes to financial statements.
VAN WAGONER POST-VENTURE FUND
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
INVESTMENT INCOME:
Interest $ 74,048
Dividends 500
---------
Total Investment Income 74,548
---------
EXPENSES:
Investment advisory fees 88,464
Transfer agent fees and expenses 43,847
Fund accounting and administration fees 15,206
Distribution fees 14,744
Federal and state registration fees 7,349
Printing and postage expenses 5,913
Professional fees 5,062
Custody fees 2,935
Directors' fees and expenses 575
Miscellaneous 787
---------
Total expenses before waiver 184,882
Less: Waiver of expenses (69,879)
---------
Net Expenses 115,003
---------
NET INVESTMENT LOSS (40,455)
---------
REALIZED AND UNREALIZED LOSS:
Net realized loss on investments (695,029)
Change in unrealized depreciation on
investments (4,565,674)
-----------
Net Loss on Investments (5,260,703)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(5,301,158)
============
See notes to financial statements.
VAN WAGONER POST-VENTURE FUND
STATEMENT OF CHANGES IN NET ASSETS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
OPERATIONS:
Net investment loss $ (40,455)
Net realized loss on investments (695,029)
Change in unrealized depreciation on investments (4,565,674)
-----------
Net decrease in net assets resulting from
operations (5,301,158)
-----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 35,795,603
Redemption of shares (9,404,432)
-----------
Net increase from share transactions 26,391,171
-----------
TOTAL INCREASE IN NET ASSETS 21,090,013
NET ASSETS:
Beginning of period -
End of period $21,090,013
===========
TRANSACTIONS IN SHARES:
Shares sold 3,538,073
Shares redeemed (994,357)
-----------
Net increase 2,543,716
===========
See notes to financial statements.
VAN WAGONER POST-VENTURE FUND
FINANCIAL HIGHLIGHTS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
Net Asset Value, Beginning of Period $10.00
LOSS FROM INVESTMENT OPERATIONS:
Net investment loss (0.02)
Net realized and unrealized losses on investments (1.69)
------
Total from investment operations (1.71)
------
NET ASSET VALUE, END OF PERIOD $8.29
======
TOTAL RETURN <F1>
(17.10)%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $21,090
Ratio of net expenses to average net assets<F2><F3> 1.95%
Ratio of net investment loss to average
net assets <F2><F3> (0.69)%
Portfolio turnover rate 67%
Average commission rate paid on portfolio
investment transactions $0.0366
<F1> Not annualized
<F2> Annualized
<F3> Without fees waived, the ratio of net expenses to average net
assets would have been 3.14%, and the ratio of net investment loss to
average net assets would have been (1.88)%. The annual expense ratio
of the Fund is capped at 1.95% through January 1, 1998.
See notes to financial statements.
WAGONER POST-VENTURE FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) Organization
------------
Van Wagoner Funds, Inc. (the "Company") was organized on October 18, 1995
as a Maryland corporation and is registered under the Investment Company
Act of 1940 (the "1940 Act") as an open-end management investment
company. The Post-Venture Fund (the "Fund") is a separate, diversified
investment portfolio of Van Wagoner Funds, Inc. The Fund commenced
operations after the close of business on December 31, 1996.
(2) Significant Accounting Policies
-------------------------------
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles
("GAAP"). The presentation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that effect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(a) Investment Valuation - A security traded on a recognized stock
exchange is valued at the last sale price prior to the time when
assets are valued on the principal exchange on which the security is
traded. If no sale is reported on the valuation date, the most
current bid price will be used. All other securities for which over-
the-counter market quotations are readily available are valued at the
most current closing price. Debt securities which will mature in more
than 60 days are valued at prices furnished by a pricing service.
Securities which will mature in 60 days or less are valued at
amortized cost, which approximates market value. Any securities for
which market quotations are not readily available are valued at their
fair value as determined in good faith by the Fund's investment
adviser pursuant to guidelines established by the Board of Directors.
(b) Repurchase Agreements - During the term of a repurchase agreement, the
market value of the underlying collateral, including accrued interest,
is required to equal or exceed the market value of the repurchase
agreement. The underlying collateral for all repurchase agreements is
held by the Fund's custodian.
VAN WAGONER POST-VENTURE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
(c) Expenses - The Fund is charged for those expenses that are directly
attributable to it, such as advisory and custodian fees. Expenses
that are not directly attributable to a portfolio are typically
allocated among the portfolios in proportion to their respective net
assets.
(d) Federal Income Taxes - The Fund intends to comply with the
requirements of the Internal Revenue Code necessary to qualify as a
regulated investment company and to make the requisite distributions
of income to its shareholders which will be sufficient to relieve it
from all or substantially all federal income taxes.
(e) Distributions to Shareholders - Dividends from net investment income
and net realized capital gains, if any, will be declared and paid at
least annually. Distributions to shareholders are recorded on the ex-
dividend date. The Fund may periodically make reclassifications among
certain of its capital accounts as a result of the timing and
characterization of certain income and capital gains distributions
determined in accordance with federal tax regulations, which may
differ from GAAP.
(f) Other - Investment transactions are accounted for on the trade date
basis. The Fund determines the gain or loss realized from the
investment transactions by comparing the original cost of the security
lot sold with the net sale proceeds. Dividend income is recognized on
the ex-dividend date and interest income is recognized on an accrual
basis.
(3) Investment Advisory Agreement
-----------------------------
The Fund has an agreement with Van Wagoner Capital Management, Inc. (the
"Adviser") to furnish investment advisory services to the Fund. Under
the terms of this agreement, the Adviser is compensated at the rate of
1.50% of the Fund's average daily net assets. The Adviser has agreed to
voluntarily reduce fees for expenses (exclusive of brokerage, interest,
taxes and extraordinary expenses) that exceed the expense limitation of
1.95% for the Fund until January 1, 1998. Expenses of $69,879 were waived
in the Fund.
VAN WAGONER POST-VENTURE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
(4) Service and Distribution Plan
-----------------------------
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant to
Rule 12b-1 under the 1940 Act. The Plan authorizes payments by the Fund in
connection with the distribution of its shares at an annual rate, as determined
from time to time by the Board of Directors, of up to 0.25% of the Fund's
average daily net assets.
(5) Investment Transactions
-----------------------
The aggregate purchases and sales of securities, excluding short-term
investments, for the Fund for the three months ended March 31, 1997 were as
follows:
Purchases $33,122,756
Sales 10,016,380
For the three months ended March 31, 1997, there were no purchases or sales
of long-term U.S. Government securities.
At March 31, 1997, gross unrealized appreciation and depreciation on
investments, based on a cost basis for tax purposes of $25,697,712, were as
follows:
Unrealized appreciation $ 341,805
(Unrealized depreciation) (5,020,259)
Net unrealized depreciation ----------
on investments $(4,678,454)
==========
VAN WAGONER POST-VENTURE FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
(6) Transactions with Affiliated Companies
--------------------------------------
An affiliated company is a company in which one or more Funds has ownership
of at least 5% of the voting securities. Companies which are affiliates of
the Fund are as follows:
Share Activity
---------------------------------------
Amount of
Amount of Gain (Loss)
Dividends Realized on
Credited to Sale of
Balance Purchases/ Sales/ Balance Income in Shares in
Security Name 12/31/96 Additions Reductions 3/31/97 Fiscal 1997 Fiscal 1997
- ------------- -------- --------- ---------- ------- ----------- -----------
Avant! Corp.* - 45,000 - 45,000 - -
Cardiac
Pathways Corp.* - 7,500 - 7,500 - -
Cardiovascular
Dynamics, Inc.* - 67,500 - 67,500 - -
NCS HealthCare,
Inc.* - 15,000 - 15,000 - -
Patterson
Energy, Inc.* - 20,000 - 20,000 - -
Template
Software, Inc.* - 30,000 30,000 - - $(43,188)
------- ---------
$ - $(43,188)
======= =========
* Non-income producing
APPENDIX A
Commercial Paper Ratings
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The following summarizes the rating categories used by Standard &
Poor's for commercial paper in which the Funds may invest:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper in which the Funds may invest:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
capacities: leading market positions in well-established industries; high rates
of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well-
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
The three rating categories of Duff & Phelps for investment grade commercial
paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs three
designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper in which the Funds may invest:
"Duff 1+" - Debt possesses highest certainty of timely payment. Short-
term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding need may
enlarge total financing requirements, access to capital markets is good.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The highest rating
category of Fitch for short-term obligations is "F-1." Fitch employs two
designations, "F-1+" and "F-1," within the highest category. The following
summarizes the rating categories used by Fitch for short-term obligations in
which the Funds may invest:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely or
incomplete payment of principal or interest of unsubordinated instruments having
a maturity of one year or less which are issued by a bank holding company or an
entity within the holding company structure. The following summarizes the
ratings used by Thomson BankWatch in which the Funds may invest:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings in which the Funds may
invest:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely repayment.
Corporate Long-Term Debt Ratings
- --------------------------------
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees. The debt rating is not a recommendation to
purchase, sell, or hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
BB - Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B - Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
CC - Debt rated "CC" typically is applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C - Debt rated "C" typically is applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI - The rating "CI" is reserved for income bonds on which no interest is
being paid.
D - Debt rated "D" is in payment default. The "D" rating cateogy is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such period. The "D" rating also will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes Bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determing the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature of taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated 'AAA.'
Because bonds rated in the 'AAA' and 'AA' categories are not
significantly vulnerable to foreseeable future developments, short-
term debt of the issuers is generally rated 'F-1+.'
A Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories cannot fully reflect the differences
in the degrees of credit risk. Moreover, the character of the risk factor
varies from industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD
and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor.
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important to
the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of 'BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
RATING
SCALE DEFINITION
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AAA Highest credit quality. The risk factors are
negligible, being only slightly more than for risk-
free U.S. Treasury debt.
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AA+ High credit quality. Protection factors are strong.
AA Risk is modest, but may vary slightly from time to
AA- time because of economic conditions.
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A+ Protection factors are average but adequate.
A However, risk factors are more variable and greater
A- in periods of economic areas.
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BBB+ Below average protection factors but still
BBB considered sufficient for prudent investment.
BBB- Considerable variability in risk during economic
cycles.
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BB+ Below investment grade but deemed likely to meet
BB obligations when due. Present or prospective
BB- financial protection factors fluctuate according to
industry conditions or company fortunes. Overall
quality may move up or down frequently within this
category.
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B+ Below investment grade and possessing risk that
B obligations will not be met when due. Financial
B- protection factors will fluctuate widely according
to economic cycles.
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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.
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DD Default debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
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