SUNSTONE FINANCIAL GROUP, INC.
207 E. Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
(414) 271-5885
Fax: (414) 271-5910
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
Re: Van Wagoner Funds, Inc.
(33-98358; 811-9116)
Filing Pursuant to Rule 30b2-1 and Section 24(b) under the Investment
Company Act of 1940
Ladies and Gentlemen:
On behalf of the above-referenced registered investment company, transmitted
herewith for filing pursuant to Rule 30b2-1 and Section 24(b) under the
Investment Company Act of 1940, as amended, is the Funds' Annual Report for the
year ending December 31, 1996. Questions regarding this filing may be directed
to the undersigned at (414) 271-5885.
Sincerely,
/s/ Constance Dye Shannon
Constance Dye Shannon
Legal and Compliance Manager
cc: Richard L. Teigen, Esq.
Encl.
ANNUAL REPORT
(LOGO)
VAN WAGONER FUNDS
DECEMBER 31, 1996
December 31, 1996
DEAR SHAREHOLDER:
Bull or bear, this much is certain: 1996 can be viewed in two distinct lights.
The first half of the year saw small and mid-cap stocks reach unsustainable
highs. In this environment, our Funds returned substantially more than their
respective market indices. The remaining portion of the year saw these same
companies give back substantial portions of the gains achieved earlier. Even
still, our results were positive, with our Funds outperforming their market
indices and finishing in the top 30% of the Lipper<F1> and Morningstar<F2>
categories.
EMERGING
GROWTH FUND
This chart assumes an initial investment of $10,000 made after the close of
business on 12/31/95 (Commencement). Returns shown here and in the table are
based on net change in NAV. Performance figures reflect fee waivers in effect
and represent past performance which is no guarantee of future results. The
investment return and principal value of an investment in Van Wagoner Funds will
fluctuate so that an investor's shares in the Funds, when redeemed, may be worth
more or less than their original cost.
The Nasdaq Composite Index is a market capitalization price only index that
tracks the performance of domestic common stocks traded on the regular Nasdaq
market as well as National Market System-traded foreign common stocks and ADRs.
The Lipper Small Company Growth Funds Index includes the largest 30 funds in the
group that, by prospectus or portfolio practice, limit their investments to
companies on the basis of the size of the company.
TOTAL RETURN
For the period ended 12/31/96
-------------------------------------------
ONE YEAR 26.9%
12/31/95 12/31/96
EMERGING GROWTH FUND $10,000 $12,690
Nasdaq $10,000 $12,271
Lipper Small Company $10,000 $11,450
MICRO-CAP FUND
This chart assumes an initial investment of $10,000 made after the close of
business on 12/31/95 (Commencement). Returns shown here and in the table are
based on net change in NAV. Performance figures reflect fee waivers in effect
and represent past performance which is no guarantee of future results. In the
absence of fee waivers, total return would be reduced. The investment return and
principal value of an investment in Van Wagoner Funds will fluctuate so that an
investor's shares in the Funds, when redeemed, may be worth more or less than
their original cost.
The Russell 2000 is an index of the smallest 2000 companies in the Russell 3000
Index, as ranked by total market capitalization. The Russell 2000 Index is
widely regarded in the industry to accurately capture the universe of small cap
stocks.
The Lipper Small Company Growth Funds Index includes the largest 30 funds in the
group that, by prospectus or portfolio practice, limit their investments to
companies on the basis of the size of the company.
TOTAL RETURN
For the period ended 12/31/96
-------------------------------------------
ONE YEAR 24.5%
12/31/95 12/31/96
MICRO-CAP FUND $10,000 $12,450
Russell 2000 $10,000 $11,649
Lipper Small Company $10,000 $11,450
MID-CAP FUND
This chart assumes an initial investment of $10,000 made after the close of
business on 12/31/95 (Commencement). Returns shown here and in the table are
based on net change in NAV. Performance figures reflect fee waivers in effect
and represent past performance which is no guarantee of future results. In the
absence of fee waivers, total return would be reduced. The investment return and
principal value of an investment in Van Wagoner Funds will fluctuate so that an
investor's shares in the Funds, when redeemed, may be worth more or less than
their original cost.
The S&P MidCap 400 Index is a capitalization weighted index that measures the
performance of the mid-range sector of the U.S. stock market where the median
market capitalization is approximately $700 million.
The Lipper Mid-Cap Funds Index includes the largest 30 funds in the group which,
by prospectus or portfolio practice, limit their investments to companies with
average market capitalizations between $800 million and the average market
capitalization of the Wilshire 4500 Index.
TOTAL RETURN
For the period ended 12/31/96
-------------------------------------------
ONE YEAR 23.9%
12/31/95 12/31/96
MID-CAP FUND $10,000 $12,390
S&P 400 $10,000 $11,920
Lipper Mid-Cap $10,000 $11,630
After the market fell in July, a clear distinction emerged between earlier-
stage, smaller cap companies and more mature large cap companies in terms of
price performance. Large cap companies rallied through the end of the year as
money moved to more liquid companies with more mature businesses. Small and mid-
cap stocks did not experience the same support, and in many cases, continued to
fall. This phenomenon can be seen in examining the leading indices. For example,
while the Dow continued to make new highs, the Russell 2000, a composite of
smaller companies, remained meaningfully off its peak and then struggled to
sustain itself.
Particularly hard hit were the technology and health care stocks. These two
sectors performed brilliantly in the first half of the year and then retreated
during the second half. We maintained our exposure in these two areas as strong
growth in company fundamentals continued to be evident.
Technology remains a major theme of the Funds as demand for the products and
services of our companies continues to be robust. The data communications and
software areas underperformed in the second half, but we believe the long-term
growth prospects look strong and we plan to stay involved while closely
watching valuations. The health care area was hindered by uncertainty during the
presidential election and the renewed sentiment to reduce the federal budget
deficit. Consequently, the Funds have shifted from medical services, which may
be affected by government interventions, such as cutting Medicare programs, to
medical devices. Selected medical device companies look attractive to us based
on their ability to lower costs while improving therapeutic results.
The one sector that did consistently perform well during the entire year was
energy services. Drilling activity in the US has continued to show signs of
strength and we expect results to continue to strengthen in the first half of
1997.
I would like to take this opportunity to update you on several additions to our
investment team. We have added analysts to further our research and analytical
endeavors in targeting the best small cap investment opportunities. Our three
new analysts have already made strong contributions. We also have hired an
additional trader to maintain our high standards of trade execution.
Although 1996 was a strong year for the Van Wagoner Funds, we are very aware of
how hard it is to be a patient investor when markets are not performing well in
the short term. Small and mid-cap investing is an essential growth element of a
well diversified portfolio. Nevertheless, price fluctuation or volatility is
inherent in this asset class. We recommend a long-term horizon for the smaller
cap asset class since these exciting young companies perform relative to their
growth stage rather than on a consistent basis.
I hope that you have been able to enjoy some of the successes the Funds have had
over the last year. The markets promise to be challenging in 1997, but we
believe the companies in the portfolios have strong fundamentals and are well-
positioned for growth.
Sincerely,
/s/ GR Van Wagoner
Garrett R. Van Wagoner
President
<F1> Van Wagoner Funds ranking, category and number of funds for the Emerging
Growth Fund, Micro-Cap Fund and Mid-Cap Fund were: 76 of 385 in the Small
Company Growth category; 108 of 385 in the Small Company Growth category; and 33
of 154 in the Mid Cap category, respectively. Source: Lipper Analytical
Services, Inc. Rankings based on 1996 total return.
<F2> Van Wagoner Funds ranking, category and number of funds for the Emerging
Growth Fund, Micro-Cap Fund and Mid-Cap Fund were: 35 of 188 in the Small Growth
category; 45 of 188 in the Small Growth category; and 34 of 287 in the Mid-Cap
Growth category, respectively. Source: Morningstar, Inc. Rankings based on 1996
total return.
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
FOR FUND INFORMATION
AND SHAREHOLDER SERVICES
CALL 1-800-228-2121.
This report is submitted for the general information of shareholders of Van
Wagoner Funds. It is not authorized for distribution to prospective investors
unless accompanied or preceded by an effective prospectus for the Funds. The
prospectus gives details about charges, investment objectives, risks and
operating policies of the Funds. Read the prospectus carefully.
VAN WAGONER FUNDS
P.O. BOX 1628
MILWAUKEE, WI 53201-1628
