December 31, 1997
Dear Shareholder:
This has been an especially difficult year for Van Wagoner Capital Management.
Some of the forces behind our performance are exactly those that make growth
stocks volatile. Others have led us to make changes that should improve our
results. Let me briefly discuss the issues we face and the actions we're taking.
1. GROWTH STOCK INVESTING IS CURRENTLY OUT OF FAVOR WITH THE MARKET.
Early in 1997, concerns about the U.S. economy fueled a shift for
small, lesser-known companies to larger companies offering more
liquidity. Small-cap technology stocks took a beating. Still, the
fundamentals of our holdings stayed positive. This, plus good economic
news, led to dramatic rebounds from May to mid-October. It looked like
we'd have another strong year - until the economic crisis in Southeast
Asia hit. Wall Street's reaction to the turmoil was swift: any company
with Asian exposure saw stock prices fall sharply.
WHAT WE'RE DOING: We did reduce or sell our positions in companies
whose results will suffer due to Asia's economic problems. But we'll
continue to hold companies with only limited exposure to Asia that
show strong prospects and whose stocks we believe are undervalued.
2. THE MARKET ENTERED A NEW PHASE IN 1997. This year various forces
affected prices as never before. There are more retail investors and
more traders ready to hedge quickly. Broad industry fundamentals,
technical chart patterns, and the rumor mill became more important in
determining stock prices. In this environment, our strong fundamental
research wasn't enough.
WHAT WE'RE DOING: We will continue with our fundamental approach. I'm
convinced that fully understanding the companies in which we invest
will ultimately pay off. In fact, as of the December pre-reporting
period, a number of high-profile companies missed their stated
earnings goal - but one of the companies we held missed its
fundamental targets.
While remaining dedicated to our style of investment, we are not going to just
wait for the markets to change for performance to improve. We are increasing and
incorporating a greater awareness of who else owns the stocks we hold, or are
interested in, and their investment style. We believe this will enhance our
trading strategies, and should improve results.
I want to thank you, our shareholders, for holding firm during a frustrating
year. I know that can be difficult when markets are not performing well, even
when you understand the long-term potential. We look forward to a new year
where we believe our fundamental approach and the dedication of our research
staff will reward your patience.
Sincerely,
/s/ Garrett R. Van Wagoner
CAPITAL APPRECIATION FUND
Capital S&P
Appreciation 500 Stock
Fund Index
_________ _________
12/31/96 $10,000 $10,000
12/31/97 $10,456 $13,336
_____________________________
TOTAL RETURN
For the period ended 12/31/97
_____________________________
ONE YEAR 4.56%
_____________________________
This chart assumes an initial investment of $10,000 made after the close of
business on 12/31/96 (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 S&P 500 Stock Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The Index is heavily
weighted toward stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks.
GROWTH FUND
S&P
Growth 500 Stock
Fund Index
_________ _________
12/31/96 $10,000 $10,000
12/31/97 $10,574 $13,336
_____________________________
TOTAL RETURN
For the period ended 12/31/97
_____________________________
ONE YEAR 5.74%
_____________________________
This chart assumes an initial investment of $10,000 made after the close of
business on 12/31/96 (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 S&P 500 Stock Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The Index is heavily
weighted toward stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks.
VAN WAGONER CAPITAL APPRECIATION FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
Number
of Shares Value
- ---------- ---------
COMMON STOCKS 90.40%
COMMERCIAL SERVICES - SECURITY/SAFETY 4.69%
1,500 Check Point Software Technologies Ltd.* $61,125
---------
COMPUTERS - LOCAL NETWORKS 8.64%
1,000 Cisco Systems, Inc.* 55,750
750 Citrix Systems, Inc.* 57,000
---------
112,750
---------
COMPUTERS - MEMORY DEVICES 7.28%
1,000 Legato Systems, Inc.* 44,000
1,000 Veritas Software Corp.* 51,000
---------
95,000
---------
COMPUTERS - MINI/MICRO 3.22%
500 Dell Computer Corp.* 42,000
---------
COMPUTERS - SOFTWARE 18.27%
4,000 Avant! Corp.* 67,000
2,500 J.D. Edwards & Co.* 73,750
1,000 Manugistics Group, Inc.* 44,625
1,000 Networks Associates Inc.* 52,875
---------
238,250
---------
ELECTRONICS - MISCELLANEOUS COMPONENTS 5.06%
2,500 Sawtek Inc.* 65,938
---------
ELECTRONICS - SEMICONDUCTOR MANUFACTURING 5.94%
1,000 Jabil Circuit, Inc.* 39,750
1,000 Vitesse Semiconductor Corp.* 37,750
---------
77,500
---------
ENERGY - SERVICES 3.97%
1,000 EVI, Inc.* 51,750
---------
MULTI INDUSTRY 1.51%
500 Veritas DGC Inc.* 19,750
---------
Number
of Shares Value
- ---------- ---------
OIL & GAS - DRILLING 2.66%
500 Noble Drilling Corp.* $15,312
500 Patterson Energy, Inc.* 19,344
---------
34,656
---------
OIL & GAS - EXPLORATION & PRODUCTION 4.58%
5,000 Comstock Resources, Inc.* 59,688
---------
OIL & GAS - FIELD SERVICES 4.40%
250 BJ Services Co.* 17,984
750 Friede Goldman International, Inc.* 22,406
1,000 Global Industries Ltd.* 17,000
---------
57,390
---------
OIL & GAS - INTERNATIONAL SPECIALTY 3.37%
2,000 Gulf Indonesia Resources Ltd.* 44,000
---------
OIL & GAS - MACHINERY & EQUIPMENT 5.51%
1,000 Dril-Quip, Inc.* 35,125
250 Smith International, Inc.* 15,344
1,000 Varco International, Inc.* 21,437
---------
71,906
---------
POLLUTION CONTROL - SERVICES 1.34%
1,000 Newpark Resources, Inc.* 17,500
---------
TELECOMMUNICATIONS - EQUIPMENT 8.69%
1,000 CIENA Corp.* 61,125
2,000 Premisys Communications, Inc.* 52,250
---------
113,375
---------
TELECOMMUNICATIONS - SERVICES 1.27%
750 RSL Communications, Ltd. Class A* 16,500
---------
TOTAL COMMON STOCKS (COST $1,115,269) 1,179,078
---------
Principal
Amount Value
- ---------- ---------
REPURCHASE AGREEMENTS 49.60%
$647,000 UMB Bank, n.a., 5.80%, dated 12/31/97,
repurchase price $647,206, maturing
1/2/98 (collateralized by U.S.
Treasury Notes, 5.875%, 2/28/99) $647,000
---------
Total Repurchase Agreements (cost $647,000) 647,000
---------
SHORT-TERM INVESTMENTS 0.04%
534 UMB Bank, n.a., Money Market Fiduciary 534
---------
Total Short-Term Investments (cost $534) 534
---------
Total Investments (cost $1,762,803) 140.04% 1,826,612
Other Liabilities less Assets (40.04)% (522,263)
---------
NET ASSETS 100.00% $1,304,349
=========
* Non-income producing
See notes to financial statements.
VAN WAGONER GROWTH FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
Number
of Shares Value
---------- ------
COMMON STOCKS 88.89%
Commercial Services - Security/Safety 4.62%
1,500 Check Point Software Technologies Ltd.* $61,125
---------
COMPUTERS - LOCAL NETWORKS 8.53%
1,000 Cisco Systems, Inc.* 55,750
750 Citrix Systems, Inc.* 57,000
---------
112,750
---------
COMPUTERS - MEMORY DEVICES 9.11%
1,000 Legato Systems, Inc. * 44,000
1,500 Veritas Software Corp. * 76,500
---------
120,500
---------
COMPUTERS - MINI/MICRO 3.18%
500 Dell Computer Corp. * 42,000
---------
COMPUTERS - SOFTWARE 18.01%
4,000 Avant! Corp. * 67,000
2,500 J.D. Edwards & Co. * 73,750
1,000 Manugistics Group, Inc. * 44,625
1,000 Networks Associates Inc. * 52,875
---------
238,250
---------
ELECTRONICS - MISCELLANEOUS COMPONENTS 4.99%
2,500 Sawtek Inc. * 65,938
---------
ELECTRONICS - SEMICONDUCTOR MANUFACTURING 5.86%
1,000 Jabil Circuit, Inc. * 39,750
1,000 Vitesse Semiconductor Corp. * 37,750
---------
77,500
---------
ENERGY - SERVICES 3.91%
1,000 EVI, Inc. * 51,750
---------
MULTI INDUSTRY 1.49%
500 Veritas DGC Inc. * 19,750
---------
Number
of Shares Value
- ---------- ---------
OIL & GAS - DRILLING 2.62%
500 Noble Drilling Corp. * $15,312
500 Patterson Energy, Inc. * 19,344
---------
34,656
---------
OIL & GAS - EXPLORATION & PRODUCTION 3.61%
4,000 Comstock Resources, Inc. * 47,750
---------
OIL & GAS - FIELD SERVICES 3.05%
250 BJ Services Co. * 17,984
750 Friede Goldman International, Inc. * 22,406
---------
40,390
---------
OIL & GAS - INTERNATIONAL SPECIALTY 3.33%
2,000 Gulf Indonesia Resources Ltd. * 44,000
---------
OIL & GAS - MACHINERY & EQUIPMENT 5.44%
1,000 Dril-Quip, Inc. * 35,125
250 Smith International, Inc. * 15,344
1,000 Varco International, Inc. * 21,438
---------
71,907
---------
POLLUTION CONTROL - SERVICES 1.32%
1,000 Newpark Resources, Inc. * 17,500
---------
TELECOMMUNICATIONS - EQUIPMENT 8.57%
1,000 CIENA Corp. * 61,125
2,000 Premisys Communications, Inc. * 52,250
---------
113,375
---------
TELECOMMUNICATIONS - SERVICES 1.25%
750 RSL Communications, Ltd. Class A * 16,500
---------
TOTAL COMMON STOCKS (COST $1,093,065) 1,175,641
---------
Principal
Amount Value
- ----------- -----
REPURCHASE AGREEMENTS 50.58%
$669,000 UMB Bank, n.a., 5.80%, dated 12/31/97,
repurchase price $669,106, maturing
1/2/98 (collateralized by U.S.
Treasury Notes, 5.875%, 2/28/99) $669,000
---------
TOTAL REPURCHASE AGREEMENTS (COST $669,000) 669,000
---------
SHORT-TERM INVESTMENTS 0.01%
98 UMB Bank, n.a., Money Market Fiduciary 98
---------
Total Short-Term Investments (cost $98) 98
---------
TOTAL INVESTMENTS (COST $1,762,163) 139.48% 1,844,739
Other Liabilities less Assets (39.48)% (522,159)
---------
NET ASSETS 100.00% $1,322,580
=========
* Non-income producing
See notes to financial statements.
VAN WAGONER FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
Capital
Appreciation Growth
Fund Fund
------------- -------
ASSETS:
Investments, at value (cost $1,115,803
and $1,093,163, respectively) $1,179,612 $1,175,739
Repurchase agreements, at value
(cost $647,000 and
$669,000, respectively) 647,000 669,000
Receivable from investment adviser 9,052 8,820
Interest and dividends receivable 200 242
Prepaid expenses and other assets 3,094 3,094
--------- ---------
Total Assets 1,838,958 1,856,895
--------- ---------
LIABILITIES:
Payable for investments purchased 514,219 514,219
Accrued investment advisory fee 1,392 1,123
Accrued expenses and other liabilities 18,998 18,973
--------- ---------
Total Liabilities 534,609 534,315
--------- ---------
NET ASSETS $1,304,349 $1,322,580
========= =========
NET ASSETS CONSIST OF:
Capital stock $14 $14
Paid-in-capital 1,478,043 1,431,964
Accumulated net realized loss on investments (69,320) (69,856)
Accumulated distributions in excess of
net realized gains (168,197) (122,118)
Net unrealized appreciation on investments 63,809 82,576
--------- ---------
Net Assets $1,304,349 $1,322,580
========= =========
CAPITAL STOCK, $0.0001 PAR VALUE
Authorized 100,000,000 100,000,000
Issued and outstanding 143,621 138,071
NET ASSET VALUE, REDEMPTION PRICE,
AND OFFERING PRICE PER SHARE (NET
ASSETS/SHARES OUTSTANDING) $ 9.08 $ 9.58
========= =========
See notes to financial statements.
VAN WAGONER FUNDS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Capital
Appreciation Growth
Fund Fund
------------- -------
INVESTMENT INCOME:
Interest $6,303 $5,654
Dividends 498 644
---------- ----------
Total Investment Income 6,801 6,298
---------- ----------
EXPENSES:
Fund accounting and administration fees 61,667 61,667
State registration fees 23,626 23,625
Professional fees 17,164 17,142
Investment advisory fees 14,327 11,376
Custody fees 8,658 8,524
Printing and postage expenses 4,425 4,425
Directors' fees and expenses 3,589 3,589
Miscellaneous 1,599 1,610
---------- ----------
Total expenses before waiver 135,055 131,958
Less: Waiver of expenses (112,705) (109,775)
---------- ----------
Net Expenses 22,350 22,183
---------- ----------
NET INVESTMENT LOSS (15,549) (15,885)
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on investments (53,771) (53,971)
Change in unrealized appreciation
on investments 63,809 82,576
---------- ----------
Net Gain on Investments 10,038 28,605
---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(5,511) $12,720
========== ==========
See notes to financial statements.
VAN WAGONER FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
Capital
Appreciation Growth
Fund Fund
------------- -------
OPERATIONS:
Net investment loss $(15,549) $(15,885)
Net realized loss on investments (53,771) (53,971)
Change in unrealized appreciation
on investments 63,809 82,576
---------- ----------
Net increase (decrease) in net assets
resulting from operations (5,511) 12,720
---------- ----------
DISTRIBUTIONS:
In excess of net realized gains (168,197) (122,118)
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 1,309,860 1,309,860
Proceeds from reinvestment of dividends 168,197 122,118
Redemption of shares - -
---------- ----------
Net increase from share transactions 1,478,057 1,431,978
---------- ----------
TOTAL INCREASE IN NET ASSETS 1,304,349 1,322,580
NET ASSETS:
Beginning of period - -
---------- ----------
End of period $1,304,349 $1,322,580
========== ==========
TRANSACTIONS IN SHARES:
Shares sold 124,722 125,094
Shares issued in reinvestment of dividends 18,899 12,977
Shares redeemed - -
---------- ----------
Net increase 143,621 138,071
========== ==========
See notes to financial statements.
VAN WAGONER FUNDS, INC.
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31, 1997
For a Fund share outstanding throughout the period.
Capital
Appreciation Growth
Fund<1> Fund<1>
------------- ---------
NET ASSET VALUE,
BEGINNING OF PERIOD $ 10.00 $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss (0.11) (0.12)
Net realized and unrealized
gains on investment 0.54 0.68
---------- ----------
Total from investment operations 0.43 0.56
---------- ----------
DISTRIBUTIONS:
In excess of net realized gains (1.35) (0.98)
NET ASSET VALUE, END OF PERIOD $ 9.08 $ 9.58
========== ==========
TOTAL RETURN 4.56% 5.74%
SUPPLEMENTAL DATA and RATIOS:
Net assets, end of period (000s) $ 1,304 $ 1,323
Ratio of expenses to average net
assets, net of waivers and reimbursements 1.95% 1.95%
Ratio of net investment loss to average net
assets, net of waivers and reimbursements (1.36)% (1.40)%
Ratio of expenses to average net assets,
before waivers and reimbursements 11.78% 11.60%
Ratio of net investment loss to average
net assets, before waivers and
reimbursements (11.19)% (11.05)%
Portfolio turnover rate 625% 593%
Average commission rate paid on portfolio
investment transactions $ 0.0458 $ 0.0465
<F1>Commenced operations after the close of business on December 31, 1996
See notes to financial statements.
VAN WAGONER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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 Capital Appreciation Fund and the Growth Fund (collectively, the
"Funds") are separate, diversified investment portfolios of Van Wagoner
Funds, Inc. The Funds commenced operations after the close of business
on December 31, 1996. The sole shareholder of the Funds is an affiliate
of the investment adviser.
(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. 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 affect 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 Funds'
investment adviser pursuant to guidelines established by the Board of
Directors.
(b) Repurchase Agreements - During the term of a repurchase agreement, the
market value of the underlying collateral, including accrued interest, is
required to equal or exceed the market value of the repurchase agreement.
The underlying collateral for all repurchase agreements is held by the
Funds' custodian.
VAN WAGONER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(c) 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.
(d) 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.
(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. Each 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. Accordingly,
at December 31, 1997, reclassifications were recorded to increase
undistributed net investment income and decrease accumulated net realized
loss on investments by $15,549 and $15,885 for the Capital Appreciation
and Growth Funds, respectively.
(f) Other - Investment transactions are accounted for on the 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.
(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 rate
of 1.25% and 1.00% of the average daily net assets of the Capital
Appreciation Fund and Growth Fund, respectively. The Adviser has agreed
to voluntarily reduce fees for expenses (exclusive of brokerage,
interest, taxes and extraordinary expenses) that exceed the expense
limitation of 1.95% for each Fund until January 1, 1999. Expenses of
$112,705 and $109,775 were waived in the Capital Appreciation and Growth
Funds, respectively.
VAN WAGONER FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(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, 1997 were as
follows:
Capital
Appreciation Growth
Fund Fund
------------ ------
Purchases $7,042,850 $6,783,559
Sales 5,909,791 5,672,505
For the year ended December 31, 1997, there were no purchases or sales of
long-term U.S. Government securities.
The cost of securities on a tax basis for the Capital Appreciation Fund
and Growth Fund is $1,818,994 and $1,802,463, respectively. At December
31, 1997, gross unrealized appreciation and depreciation on investments
for federal income tax purposes were as follows:
Capital
Appreciation Growth
Fund Fund
------------ ------
Unrealized appreciation $ 85,965 $ 93,546
(Unrealized depreciation) (78,347) (51,270)
-------- --------
Net unrealized appreciation
on investments $ 7,618 $ 42,276
======== ========
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of The Van Wagoner Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios 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 Van Wagoner Capital
Appreciation Fund and the Van Wagoner Growth Fund, two of the portfolios of the
Van Wagoner Funds, Inc. (the "Funds") at December 31, 1997, the results of each
of their operations, the changes in each of their net assets and the financial
highlights for each of the periods indicated, 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, 1997 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
/s/ Price Waterhouse LLP
Milwaukee, Wisconsin
January 28, 1998
