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As filed with the Securities and Exchange Commission on February 26, 1999
Securities Act Registration No. 33-98358
Investment Company Act Registration No. 811-9116
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Post-Effective Amendment No. 7 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 8 |X|
(Check appropriate box or boxes)
VAN WAGONER FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
345 CALIFORNIA STREET
SUITE 2450
SAN FRANCISCO, CA 94104
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 228-2121
GARRETT R. VAN WAGONER Copy to:
Van Wagoner Funds, Inc. Richard L. Teigen
345 California Street, Suite 2450 Foley & Lardner
San Francisco, CA 94104 777 East Wisconsin Avenue
(Name and Address of Agent for Service) Milwaukee, WI 3202
It is proposed that this filing will become effective:
( ) immediately upon filing pursuant to paragraph (b)
( ) on April 30, 1998 pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(i)
( X ) on April 30, 1999 pursuant to paragraph (a)(i)
( ) 75 days after filing pursuant to paragraph (a)(ii)
( ) on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
( ) this Post-Effective Amendment designates a new effective date
for a previously filed Post-Effective Amendment.
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front cover
VAN WAGONER FUNDS
Growth stock investing
Emerging Growth Fund
Micro-Cap Fund
Mid-Cap Fund
Post-Venture Fund
Technology Fund.
Prospectus
April 30, 1999
As with all mutual funds, the Securities and Exchange
Commission has not approved or disapproved these
securities or passed on the adequacy of this
prospectus. Any representation to the contrary is a
criminal offense.
inside
CONTENTS
THE FUNDS
What you should know about each fund's investment
strategies, risks, performance and expenses
Emerging Growth Fund.................................
Micro-Cap Fund.......................................
Mid-Cap Fund.........................................
Post-Venture Fund....................................
Technology Fund......................................
Other policies and risks.............................
Management...........................................
YOUR INVESTMENT
How to open and maintain your Van Wagoner account
How shares are priced................................
Buying shares........................................
Selling shares.......................................
Exchanging shares....................................
Dividends, distributions and taxes...................
12b-1 fees...........................................
Shareholder services.................................
Automated information.......................
Statements and reports......................
Automatic plans.............................
Retirement plans............................
LEARN MORE
Where to get more information about the
funds............Back cover
section head THE FUNDS
While each of the five Van Wagoner Funds seeks
capital appreciation and is an aggressive growth
fund, there are differences in fund strategies, risks
and performance, as described in the following pages.
The funds are designed for long-term investors who
can accept frequent short-term ups and downs in their
investment's value.
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The funds base investment buy and sell decisions on
- intensive company-specific research, which includes
on-site visits;
- interviews with management, customers, competitors
and suppliers; and
- review of analysis by brokerage houses, industry
consultants, trade publications and other sources.
head VAN WAGONER EMERGING GROWTH FUND
INVESTMENT OBJECTIVE: Long-term capital
appreciation.
MAIN STRATEGY
The Emerging Growth Fund invests primarily in common
stocks of companies with the potential for
above-average, long-term growth based on
- innovative products or services
- a unique strength in areas such as research,
product development, and marketing
- strong management teams
- a strong financial position
The Fund invests in companies of all sizes but
prefers companies that are beginning a growth stage
to established growth companies.
MAIN RISKS
All the Van Wagoner funds invest mainly in common
stocks, whose prices rise and fall as market and
economic conditions change. The value of your fund
shares will fluctuate, and you could lose money.
The small-cap and mid-cap companies in which the fund
invests presents additional risks. The market may
value companies according to size, or market
capitalization, rather than financial performance.
When small-cap and mid-cap stocks are out of favor,
the fund's share prices may fall even though the
companies it holds have sound fundamentals. Also,
these companies may be in the developmental stage, or
may be older companies undergoing significant
changes. They may be subject to greater business
risks and more sensitive to changes in economic
conditions than larger, more established companies.
This fund purchases restricted securities in private
placements. It may be difficult for the fund to
accurately price these securities. The fund may not
be able to sell these securities at the prices at
which it has valued them for purposes of calculating
its net asset value without experiencing delays or
additional costs, if at all.
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In general, this fund is likely to be more volatile
(experience more price swings) than the S&P 500
Index(R).
FUND PERFORMANCE
The bar chart and table below give some indication of
the risks of investing in the Emerging Growth Fund by
showing how its performance can change from year to
year and how its average annual returns compare with
those of a broad market index. Please note that past
performance does not necessarily indicate how the
fund will perform in the future.
Commencement date 12/31/95
Annual Total Return: 12/31/96 12/31/97 12/31/98
-------- -------- --------
26.90% (20.02)% 7.98%
Nasdaq Industrial Index* 15.57% 10.51% 7.22%
Highest Quarterly Return: Date 12/31/98 total return 35.48%
Lowest Quarterly Return: Date 12/31/97 total return (25.75)%
Average Annual Total Return (as of 12/31): 1 year Life of
------ -------
Fund
----
7.98% 3.10%
Nasdaq Industrial Index 7.22% 11.05%
*Nasdaq Industrial Index tracks the performance of
domestic common stocks traded on the regular Nasdaq
market and which are classified as industrial
companies. As of December 31, 1998, this index
included 2,866 companies, including agricultural,
mining, construction, manufacturing (electronic
components), services and public administration
enterprises.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses you may
pay if you buy and hold shares of the fund.
Shareholder transaction expenses are direct expenses such as fees and sales
loads that you pay when buying or selling shares of some
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mutual funds. There are no fees or sales loads charged to your account when you
buy or sell shares of the Van Wagoner Emerging Growth Fund. However, if you sell
shares and request your money by wire transfer, there is a $10.00 fee. In
addition, there is a $15 IRA redemption fee.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)
Management Fees 1.25%
Distribution (12b-1) 0.17%
Fees(1)
Other Fees (2) 0.68%
Total Annual Fund Operating Expenses 2.10%
Expense Reimbursement (0.10)%
Net Expenses (3) 2.00%
(1) The maximum distribution fee is 0.25% of the Fund's average net assets per
year. Because these fees are paid out of the Fund's assets on an ongoing basis,
the distribution expenses you pay over time will increase the cost of your
investment and may total more than paying other types of sales charges.
(2) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses.
(3) The Adviser has voluntarily agreed to limit the total expenses of each Fund
(excluding interest, taxes, brokerage and extraordinary expenses) to an
annual rate of 1.95% of the Fund's average net assets until at least January 1,
2000. After such date, the expense limitation may be terminated or revised at
any time. For the fiscal year ended December 31, 1998, Other Fees and Total
Annual Fund Operating Expenses were 0.53% and 1.95%, respectively.
This example is intended to help you compare the cost of investing in the Van
Wagoner Emerging Growth Fund with the cost of investing in other mutual funds.
The
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example assumes that you invest $10,000 in a Fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
One Year $203
Three Year $627
Five Year $1,078
Ten Year $2,327
head VAN WAGONER MICRO-CAP FUND
INVESTMENT OBJECTIVE: Long-term capital
appreciation.
MAIN STRATEGY
The Micro-Cap Fund invests primarily (at least 65% of
its net assets) in very small companies - those with
market capitalizations under $500 million at time of
purchase - that the investment adviser believes have
the potential to be the market leaders of the future.
The adviser looks for companies with a strong
management team and the ability to grow significantly
over the next several years. Most of these companies
are not followed by Wall Street at this early stage.
MAIN RISKS
All the Van Wagoner funds invest mainly in common
stocks, whose prices rise and fall as market and
economic conditions change. The value of your fund
shares will fluctuate, and you could lose money.
The types of companies in which the fund invests
present additional risks. The market may value
companies according to size, or market
capitalization, rather than financial performance.
When small-cap investing is out of favor, the fund's
share prices may fall even though the companies the
fund holds have sound fundamentals. Also, micro-cap
companies may still be developing. They may lack the
management experience, financial resources, product
diversity and competitive strengths of larger
companies, and may be traded at a lower volume. They
may also be subject to greater business risks and
more sensitive to changes in economic conditions than
larger, more established companies. As a result,
their prices may rise and fall more sharply.
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This fund purchases restricted securities in private
placements. It may be difficult for the fund to
accurately price these securities. The fund may not
be able to sell these securities at the prices at
which it has valued them for purposes of calculating
its net asset value without experiencing delays or
additional costs, if at all.
In general, this fund is likely to be significantly
more volatile than the S&P 500 Index(R).
FUND PERFORMANCE
The bar chart and table below give some indication of
the risks of investing in the Micro-Cap Fund by
showing how its performance can change from year to
year and how its average annual returns compare with
those of a broad market index. Please note that past
performance does not necessarily indicate how the
fund will perform in the future.
Commencement date 12/31/95
Annual Total Return: 12/31/96 12/31/97 12/31/98
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24.50% (19.76)% 13.11%
Russell
2000* 16.49% 22.36% (2.55)%
Highest Quarterly Return: Date 12/31/98 total return 30.64%
Lowest Quarterly Return: Date 12/31/97 total return (25.45)%
Average Annual Total Return (as of 12/31): 1 year Life of
------ -------
Fund
----
13.11% 4.16%
Russell
2000 (2.55)% 11.58%
*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.
FEES AND EXPENSES OF THE FUND
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This table describes the fees and expenses you may
pay if you buy and hold shares of the fund.
Shareholder transaction expenses are direct expenses such as fees and sales
loads that you pay when buying or selling shares of some mutual funds. There are
no fees or sales loads charged to your account when you buy or sell shares of
the Van Wagoner Micro-Cap Fund. However, if you sell shares and request your
money by wire transfer, there is a $10.00 fee. In addition, there is a $15 IRA
redemption fee.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)
Management Fees 1.50%
Distribution (12b-1) 0.18%
Fees(1)
Other Fees (2) 0.95%
Total Annual Fund Operating Expenses 2.63%
Expense Reimbursement (0.63)%
Net Expenses (3) 2.00%
(1) The maximum distribution fee is 0.25% of the Fund's average net assets per
year. Because these fees are paid out of the Fund's assets on an ongoing basis,
the distribution expenses you pay over time will increase the cost of your
investment and may total more than paying other types of sales charges.
(2) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses.
(3) The Adviser has voluntarily agreed to limit the total expenses of each Fund
(excluding interest, taxes, brokerage and extraordinary expenses) to an annual
rate of 1.95% of the Fund's average net assets until at least January 1, 2000.
After such date, the expense limitation may be terminated or revised at any
time. For the fiscal year ended December 31, 1998, Other Fees and Total Annual
Fund Operating Expenses were 0.27% and 1.95%, respectively.
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This example is intended to help you compare the cost of investing in the Van
Wagoner Micro-Cap Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in a Fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions,
your costs would be:
One Year $203
Three Year $627
Five Year $1,078
Ten Year $2,327
head VAN WAGONER MID-CAP FUND
INVESTMENT OBJECTIVE: Long-term capital
appreciation.
MAIN STRATEGY
This fund invests primarily (at least 65% of its net
assets) in common stocks of companies that, at time
of purchase, have market capitalizations between $500
million and $7 billion.
The Mid-Cap Fund looks for companies that are more
established than those in the Micro-Cap Fund but are
still growing, usually because of a new, improved or
upgraded product, service or business operation.
MAIN RISKS
All the Van Wagoner funds invest mainly in common
stocks, whose prices rise and fall as market and
economic conditions change. The value of your fund
shares will fluctuate, and you could lose money.
The types of companies in which the fund invests
present additional risks. The market may value
companies according to size, or market
capitalization, rather than financial performance.
When mid-cap investing is out of favor, the fund's
share prices may fall even though the companies the
fund holds have sound fundamentals. Also, the mid-cap
companies in which the fund invests may be developing
or changing. They may be subject to greater business
risks and more sensitive to changes in economic
conditions than larger, more established companies.
As a result, their prices may rise and fall more
sharply.
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This fund purchases restricted securities in private
placements. It may be difficult for the fund to
accurately price these securities. The fund may not
be able to sell these securities at the prices at
which it has valued them for purposes of calculating
its net asset value without experiencing delays or
additional costs, if at all.
In general, this fund is likely to be less volatile
than the Micro-Cap Fund but more volatile than the
S&P 500 Index(R).
FUND PERFORMANCE
The bar chart and table below give some indication of
the risks of investing in the Mid-Cap Fund by showing
how its performance can change from year to year and
how its average annual returns compare with those of
a broad market index. Please note that past
performance does not necessarily indicate how the
fund will perform in the future.
Commencement date 12/31/95
Annual Total Return: 12/31/96 12/31/97 12/31/98
-------- -------- --------
23.90% (13.88)% 16.49%
S&P MidCap 400 Index* 19.20% 32.25% 19.12%
Highest Quarterly Return: Date 12/31/98 total return 33.37%
Lowest Quarterly Return: Date 12/31/97 total return (23.24)%
Average Annual Total Return (as of 12/31): 1 year Life of
------ -------
Fund
----
16.49% 7.52%
S&P MidCap 400 Index 19.12% 23.37%
*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.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses you may
pay if you buy and hold shares of the fund.
9
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Shareholder transaction expenses are direct expenses such as fees and sales
loads that you pay when buying or selling shares of some mutual funds. There are
no fees or sales loads charged to your account when you buy or sell shares of
the Van Wagoner Mid Cap Fund. However, if you sell shares and request your money
by wire transfer, there is a $10.00 fee. There is also a $15 IRA redemption fee.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)
Management Fees 1.00%
Distribution (12b-1) 0.17%
Fees(1)
Other Fees (2) 0.95%
Total Annual Fund Operating Expenses 2.12%
Expense Reimbursement (0.12)%
Net Expenses (3) 2.00%
(1) The maximum distribution fee is 0.25% of the Fund's average net assets per
year. Because these fees are paid out of the Fund's assets on an ongoing basis,
the distribution expenses you pay over time will increase the cost of your
investment and may total more than paying other types of sales charges.
(2) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses.
(3) The Adviser has voluntarily agreed to limit the total expenses of each Fund
(excluding interest, taxes, brokerage and extraordinary expenses) to an annual
rate of 1.95% of the Fund's average net assets until at least January 1, 2000.
After such date, the expense limitation may be terminated or revised at any
time. For the fiscal year ended December 31, 1998, Other Fees and Total Annual
Fund Operating Expenses were 0.78% and 1.95%, respectively.
This example is intended to help you compare the cost of investing in the Van
Wagoner Mid-Cap Fund with the cost of investing in other
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mutual funds. The example assumes that you invest $10,000 in a Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
One Year $203
Three Year $627
Five Year $1,078
Ten Year $2,327
head VAN WAGONER POST-VENTURE FUND
INVESTMENT OBJECTIVE: Long-term capital
appreciation.
MAIN STRATEGY
The Post-Venture Fund invests in companies of all
sizes usually in the early stages of their public
existence. The investment adviser looks for companies
that either have recently become publicly traded or
are taking a new direction, with the potential for
above-average growth in market value.
Most of these companies have received venture capital
financing some time during their development or as
part of a reorganization, restructuring or
recapitalization. The adviser looks for companies
with strong management teams, innovative products or
services and a solid business plan.
MAIN RISKS
All the Van Wagoner funds invest mainly in common
stocks, whose prices rise and fall as market and
economic conditions change. The value of your fund
shares will go up and down, which means you could
lose money.
The types of companies in which the fund invests
present additional risks. Companies going through
restructuring or reorganization have a greater risk
of being undervalued by the market. Also,
post-venture-capital companies are generally
developing or making significant changes. They may be
subject to greater business risk and more sensitive
to changes in economic conditions than larger, more
established companies. As a result, their prices may
rise and fall more sharply.
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This fund purchases restricted securities in private
placements. It may be difficult for the fund to
accurately price these securities. The fund may not
be able to sell these securities at the prices at
which it has valued them for purposes of calculating
its net asset value without experiencing delays or
additional costs, if at all.
In general, this fund is likely to be more volatile
than the S&P 500 Index(R).
FUND PERFORMANCE
The bar chart and table below give some indication of
the risks of investing in the Post-Venture Fund by
showing how its performance can change from year to
year and how its average annual returns compare with
those of a broad market index. Please note that past
performance does not necessarily indicate how the
fund will perform in the future.
Commencement date 12/31/96
Annual Total Return: 12/31/97 12/31/98
(12.20)% 37.59%
Nasdaq Industrial Index* 10.51% 7.22%
Highest Quarterly Return: Date 12/31/98 total return 37.59%
Lowest Quarterly Return: Date 12/31/97 total return (24.76)%
Average Annual Total Return (as of 12/31): 1 year Life of
------ -------
Fund
----
37.59% 9.91%
Nasdaq Industrial Index (24.76)% 8.85%
*Nasdaq Industrial Index tracks the performance of
domestic common stocks traded on the regular Nasdaq
market and which are classified as industrial
companies. As of December 31, 1998, this index
included 2,866 companies, including agricultural,
mining, construction, manufacturing (electronic
components), services and public administration
enterprises.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses you may
pay if you buy and hold shares of the fund.
Shareholder transaction expenses are direct expenses such as fees and sales
loads that you pay when buying or selling shares of some
12
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mutual funds. There are no fees or sales loads charged to your account when you
buy or sell shares of the Van Wagoner Post-Venture Fund. However, if you sell
shares and request your money by wire transfer, there is a $10.00 fee. There is
also a $15 IRA redemption fee.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)
Management Fees 1.50%
Distribution (12b-1) 0.09%
Fees(1)
Other Fees (2) 1.31%
Total Annual Fund Operating Expenses 2.90%
Expense Reimbursement (0.90)%
Net Expenses (3) 2.00%
(1) The maximum distribution fee is 0.25% of the Fund's average net assets per
year. Because these fees are paid out of the Fund's assets on an ongoing basis,
the distribution expenses you pay over time will increase the cost of your
investment and may total more than paying other types of sales charges.
(2) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses.
(3) The Adviser has voluntarily agreed to limit the total expenses of each Fund
(excluding interest, taxes, brokerage and extraordinary expenses) to an annual
rate of 1.95% of the Fund's average net assets until at least January 1, 2000.
After such date, the expense limitation may be terminated or revised at any
time. For the fiscal year ended December 31, 1998, Other Fees and Total Annual
Fund Operating Expenses were 0.36% and 1.95%, respectively.
This example is intended to help you compare the cost of investing in the Van
Wagoner Post-Venture Fund with the cost of investing in other mutual funds. The
13
<PAGE> 15
example assumes that you invest $10,000 in a Fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
One Year $203
Three Year $627
Five Year $1,078
Ten Year $2,327
head VAN WAGONER TECHNOLOGY FUND
INVESTMENT OBJECTIVE: Long-term capital
appreciation.
MAIN STRATEGY
The Technology Fund invests primarily (at least 65%
of its net assets) in technology companies of all
sizes, in industries characterized by advances based
on research and development. Such industries include
(but aren't limited to)
- computers
- computer services and software
- communications
- consumer electronics
- cable television
- pharmaceuticals
- biotechnology
- medical devices
- semi-conductors
- technical services
- robotics
The investment adviser believes that because advances
in technology bring about growth and innovations in
nearly every other industry, technology companies
offer increased potential for long-term return.
MAIN RISKS
All the Van Wagoner funds invest mainly in common
stocks, whose prices rise and fall as market and
economic conditions change. The value of your fund
shares will fluctuate, and you could lose money.
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<PAGE> 16
The type of companies in which the fund invests
presents additional risks. The market may value
companies according to size, or market
capitalization, rather than financial performance.
When small-cap investing is out of favor, the fund's
share prices may fall even though the companies the
fund holds have sound fundamentals.
Also, technology companies may be developing or
changing. They may be subject to greater business
risks and more sensitive to changes in economic
conditions than larger, more established companies.
Company earnings in this sector may fluctuate more
than those of other companies because of short
product cycles (technological obsolescence) and
competitive pricing. Investors' enthusiasm for
technology stocks can also change dramatically. This
all means technology stock prices may rise and fall
sharply.
This fund purchases restricted securities in private
placements. It may be difficult for the fund to
accurately price these securities. The fund may not
be able to sell these securities at the prices at
which it has valued them for purposes of calculating
its net asset value without experiencing delays or
additional costs, if at all.
The Technology Fund may be the most volatile of all
the Van Wagoner Funds because it focuses on just one
market sector. In general, this fund is likely to be
significantly more volatile than the S&P 500
Index(R).
FUND PERFORMANCE
The bar chart and table below give some indication of
the risks of investing in the Technology Fund by
showing how its performance can change from year to
year and how its average annual returns compare with
those of a broad market index. Please note that past
performance does not necessarily indicate how the
fund will perform in the future.
Commencement date 12/31/97
Annual Total Return: 12/31/98
--------
85.10%
Morgan Stanley High Tech* 95.69%
S&P 500 Index(R)* 28.58%
Highest Quarterly Return: Date 12/31/98 total return 45.52%
Lowest Quarterly Return: Date 9/30/98 total return (9.85)%
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Average Annual Total Return (as of 12/31): 1 year Life of
------ -------
Fund
----
85.10% 85.10%
Morgan Stanley High Tech 95.69% 95.69%
S&P 500 Index(R) 28.58% 28.58%
*Morgan Stanley High-Technology 35 Index is a
broad-market technology indicator dedicated
exclusively to the electronics-based technology
sector. The 35 stocks in the Index include the most
highly capitalized American companies drawn from nine
technology subsectors: computer services/design
software, server software, PC software and new media,
networking and telecom equipment, server hardware, PC
hardware and peripherals, specialized systems and
semiconductors. Capitalization ranges from $1 billion
to $54 billion. S&P 500(R) Index is an unmanaged
index of 500 selected stocks, most of which are
listed on the New York Stock Exchange. It's heavily
weighted toward large-cap stocks and represents about
two-thirds of the total market value of all domestic
stocks.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses you may
pay if you buy and hold shares of the fund.
Shareholder transaction expenses are direct expenses such as fees and sales
loads that you pay when buying or selling shares of some mutual funds. There are
no fees or sales loads charged to your account when you buy or sell shares of
the Van Wagoner Technology Fund. However, if you sell shares and request your
money by wire transfer, there is a $10.00 fee. There is also a $15 IRA
redemption fee.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)
Management Fees 1.25%
Distribution (12b-1) 0.25%
Fees(1)
Other Fees (2) 4.30%
Total Annual Fund Operating Expenses 5.80%
Expense Reimbursement (3.80)%
Net Expenses (3) 2.00%
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<PAGE> 18
(1) The maximum distribution fee is 0.25% of the Fund's average net assets per
year. Because these fees are paid out of the Fund's assets on an ongoing basis,
the distribution expenses you pay over time will increase the cost of your
investment and may total more than paying other types of sales charges.
(2) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses.
(3) The Adviser has voluntarily agreed to limit the total expenses of each Fund
(excluding interest, taxes, brokerage and extraordinary expenses) to an annual
rate of 1.95% of the Fund's average net assets until at least January 1, 2000.
After such date, the expense limitation may be terminated or revised at any
time. For the fiscal year ended December 31, 1998, Other Fees and Total Annual
Fund Operating Expenses were 0.45% and 1.95%, respectively.
This example is intended to help you compare the cost of investing in the Van
Wagoner Technology Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in a Fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
One Year $203
Three Year $627
Five Year $1,078
Ten Year $2,327
section head OTHER POLICIES AND RISKS
MONEY MARKET INSTRUMENTS. In adverse markets, the
funds may invest up to 100% of their assets in
high-quality, short-term money market instruments.
Following such a strategy could prevent the funds
from achieving their investment objective of capital
appreciation. The funds may also use money market
instruments to have cash available to take advantage
of investment opportunities, to pay expenses and to
meet anticipated redemptions.
HEDGING STRATEGIES. The funds may use various hedging
strategies, such as buying and selling options on
particular securities or stock indices, in an effort
to reduce risk. Options trading is a highly
specialized activity that may entail
17
<PAGE> 19
increased investment risk. Options trading may reduce
return or increase volatility. If a Fund buys a put
or call option but doesn't exercise or close it
before the option expires, the Fund will lose the
premium it paid plus commission costs.
PORTFOLIO TURNOVER. The adviser makes buy and sell
decisions without considering how long a fund has
held a security. The funds buy securities when the
adviser believes they'll advance the fund's
objective, even if the fund has only recently sold
that same security.
The adviser expects the funds' portfolio turnover to
be higher than that of general equity funds. Higher
turnover may lead to higher trading costs, reducing
return on your investment. It may also result in
increased short-term capital gains, which are
generally taxable as ordinary income for federal tax
purposes.
FUND OBJECTIVES. The Board of Directors may change
the funds' investment objectives without shareholder
approval. You would receive advance notice of any
such changes.
section head MANAGEMENT
INVESTMENT ADVISER
The funds are advised by Van Wagoner Capital
Management Inc., 345 California Street, Suite 2450,
San Francisco, CA 94104. The adviser was organized
October 24, 1995 and supervises and manages the
funds, overseeing administration and making
day-to-day investment decisions subject to policies
set by the Board of Directors.
Each fund pays the adviser an annual management fee
equal to the following percentages of daily net
assets:
Emerging Growth 1.25%
Micro-Cap 1.50%
Mid-Cap 1.00%
Post-Venture 1.50%
Technology 1.25%
PORTFOLIO MANAGER
Garrett R. Van Wagoner, president and a director of
the adviser, is Van Wagoner Capital Management's sole
shareholder. He is the portfolio manager for each of
the funds.
Mr. Van Wagoner has more than 20 years of experience
as a securities analyst and portfolio manager. From
March 1993 to December 1995, he was portfolio manager
of the Govett Smaller Companies Fund, a portfolio of
The Govett Funds, Inc. Before that, he was senior
vice president at Bessemer Trust, N.A., since 1982,
where he was responsible for its emerging growth
stock investment program.
The Govett Smaller Companies Fund earned a 5-star
Morningstar, Inc. ranking for the three years during
which Mr. Van Wagoner was responsible for day-to-day
management and investment selection. Morningstar's
ratings reflect historical performance, adjusted for
risk, and can change every month. Ten
18
<PAGE> 20
percent of the funds in each investment category
receive five stars; 22.5 percent receive four stars;
and the next 35 percent receive three stars. There
were 172 funds in Morningstar's Small Company
category for the three years ending December 31,
1995.
The table below shows how the Govett Smaller
Companies Fund's average annual returns for the year
ended December 31, 1995, and for Mr. Van Wagoner's
tenure compared with Nasdaq Composite Index and S&P
500 performance.
Govett Nasdaq
Smaller Composite
Companies Fund(1) Index(2) S&P 500 (3)
One year 69% 39.9% 37.6%
3/1/93 -
12/31/95 54.7% 17.2% 15.4%
footnotes (1) Average annual total return reflects changes in
share prices and reinvestment of dividends and
distributions and is net of fund expenses. The
expense ratio of the Govett Smaller Companies Fund
was capped at 1.95% from March 1, 1993 to December
31, 1995.
(2) 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 foreign common
stocks and ADRs traded on the National Market System.
(3) The S&P 500 is an unmanaged index of 500 selected
stocks, most of which are listed on the New York
Stock Exchange. It's heavily weighted toward
large-cap stocks and represents about two-thirds of
the total market value of all domestic stocks.
copy
This information shows Mr. Van Wagoner's performance
in managing a portfolio similar to the Emerging
Growth Fund, using substantially similar investment
policies and strategies. Unlike the Emerging Growth
Fund which isn't limited as to the capitalization of
portfolio securities, the Govett Smaller Companies
Fund was required to invest at least 65% of its total
assets in companies with individual market
capitalizations which would, at the time of purchase,
place them in the same size range as companies
included in the Nasdaq Composite Index, excluding its
top 75 companies.
Of course, past performance doesn't guarantee future
results. Investment returns vary, affected by market
conditions and company-specific changes.
OTHER SERVICE PROVIDERS
Administrator and transfer agent: Sunstone Financial
Group, Inc., provides clerical, compliance,
regulatory, fund accounting, dividend disbursing,
transfer agency and other services.
Custodian: UMB Bank, n.a.
The adviser and service providers receive
compensation. However, they may choose to waive some
or all of their fees, which will cause fund returns
to be higher than they would have been without the
waiver.
19
<PAGE> 21
section head YOUR INVESTMENT
Here's what you need to know about opening and
maintaining your account with Van Wagoner Funds.
head HOW SHARES ARE PRICED
When you buy or sell (redeem) fund shares, the funds
will price your transaction at the next net asset
value (NAV) calculated after the funds receive your
request in good order. You pay no front-end sales
charge, commission, or redemption fee (except for a
$10 fee for redemptions made by wire and IRA
redemptions).
NAV, the price of one share of a fund, is calculated
at the close of regular trading (generally 4 p.m.
Eastern time) each day the New York Stock Exchange
(NYSE) is open. The NYSE is closed on weekends and
most major holidays.
If the transfer agent receives your buy or sell
request in good order before the close of regular
trading on the NYSE, you will pay or receive that
day's NAV. If the transfer agent receives your buy or
sell request in good order after the close of regular
trading on the NYSE, you will pay or receive the next
day's NAV.
The funds value securities other than debt
instruments maturing within 60 days at market prices.
The funds value debt securities maturing within 60
days at amortized cost. If market prices aren't
readily available for particular securities, the
funds price these securities at their fair value as
determined by the adviser under the Board of
Directors' supervision.
HOW TO BUY, SELL AND EXCHANGE SHARES
BUYING SHARES
All the Van Wagoner Funds are no-load. You pay no
sales charge to buy, sell or exchange shares. (There
is a $10 fee for each redemption made by wire and a
$15 fee for a redemption from an IRA account.)
Minimum investment.
Initial Additional
Regular accounts $1,000 $50
Automatic Investment Plan $500 $50
IRAs $500 $50
Gift to Minors $500 $50
The funds may waive minimums for qualified retirement
plans. Investors must make purchases in U.S. dollars,
by checks drawn on U.S. banks. The funds won't accept
cash, credit cards or third party checks.
Accepting orders. The funds must receive a properly
completed New Account Application to establish
telephone and exchange privileges. The funds may
return incomplete applications or checks.
Each fund may reject any purchase order or refuse a
telephone transaction if the fund believes it's
advisable to do so. The funds won't accept an account
if you're investing for another person as
attorney-in-fact, or an account with "Power of
Attorney" or "POA" in the New Account Application's
registration section.
20
<PAGE> 22
Certificates. The funds don't issue stock
certificates. You'll receive a statement confirming
your purchase.
[chart copy]
OPENING AN ACCOUNT
By mail.
- Complete a New Account Application (available by
calling 1-800-228-2121 or online at
www.vanwagoner.com).
- Mail the completed application with a check payable
to Van Wagoner Funds to:
Van Wagoner Funds, Inc.
P.O. Box 1628
Milwaukee, WI 53201-1628
- For overnight or express mail, use this address:
Van Wagoner Funds, Inc.
207 E. Buffalo St., Suite 315
Milwaukee, WI 53202-5712
By wire.
- You must call 1-800-228-2121 for an investor
account number. You must also complete a New Account
Application prior to the wire purchase.
- The wire instructions are as follows:
UMB Bank, n.a.
A.B.A. #101000695
For credit to Van Wagoner Funds, Inc.
Account #9870610183
For further credit to:
(investor account number)
(name or account registration)
(Social Security or Taxpayer Identification Number)
(Name of fund you intend to purchase)
- As soon as possible after wiring money, send the
funds your New Account Application. THE FUNDS MUST
RECEIVE A PROPERLY COMPLETED AND EXECUTED APPLICATION
TO ESTABLISH TELEPHONE AND EXCHANGE PRIVILEGES. IF
THE FUNDS DO NOT RECEIVE YOUR ORIGINAL APPLICATION,
THEY MAY DELAY PAYMENT OF REDEMPTION PROCEEDS AND
WITHHOLD TAXES.
Automatic Investment Plan
- Complete the Automatic Investment Plan section on
your New Account Application, and open your account
with at least $500.
- Each month, quarter or year the amount you specify
($50 or more) is automatically withdrawn from your
bank account to buy fund shares. You can choose to
have withdrawals on the 5th, 10th, 15th, 20th, 25th,
or end of each month. You will receive QUARTERLY
statements showing these purchases.
- The funds do not charge a service fee for the plan,
but if there's not enough money in your bank account
to cover the withdrawal, you'll be charged $20,
21
<PAGE> 23
your purchase will be cancelled, and you'll be
responsible for any resulting loss to the funds.
- A redemption of all funds from your account will
not automatically discontinue the plan. To terminate
your Automatic Investment Plan, send the funds a
written request at least five days before your next
plan withdrawal date or call our Shareholder Services
department.
ADDING TO AN ACCOUNT
By mail.
- Send your check, plus an investment slip from a
recent statement or a signed note with the account's
full name and number.
- Use the addresses at left.
By wire.
- Follow the instructions at left. Be sure to include
your account number and the fund name.
- Wired funds are considered received in good order
on the day they reach the funds' bank account by the
funds' purchase cut-off time (3:00 p.m. Central time)
and all required information is provided in the wire
instructions. The wire instructions will determine
the terms of the purchase transaction.
By electronic funds transfer.
- The funds require ten business days to verify your
bank information before initiating this privilege. If
your account is already open and you'd like to
establish electronic funds transfer privileges, call
1-800-228-2121.
- Request the electronic transfer by phone or in
writing, in amounts from $50 to $50,000.
- The funds withdraw money from the bank account you
designated when establishing the privilege and invest
it at the net asset value calculated after they
receive your transfer request in good order.
Automatic Investment Plan
- If your account is already open and you'd like to
add the Automatic Investment Plan, call
1-800-228-2121 for an application. Plan investment
minimums apply. Adding this plan to your account
requires a signature guarantee, described on page .
- The funds require ten business days to verify your
bank information before initiating the plan.
- When your plan is established, it follows the
description at left.
[end of chart copy]
OTHER PURCHASE POLICIES
22
<PAGE> 24
Purchases through third parties. If you buy shares
from a broker-dealer, financial institution, or other
provider, their policies and fees may differ from
those described here.
The funds may accept requests to buy additional
shares into a broker-dealer street name account only
from the broker-dealer.
The funds may authorize service providers and their
designees to accept purchase orders on the funds'
behalf. The funds consider such orders received when
the service provider accepts them, and price them at
the next net asset value calculated after receipt by
the service provider.
The funds have agreed to allow some service providers
to enter purchase orders for their customers by
telephone, with payment to follow. The funds price
these telephone orders at the next net asset value
calculated after the service provider receives them.
The service provider is responsible for placing the
orders promptly and for ensuring the funds receive
payment within the agreed-upon period. Otherwise, the
provider could be liable for resulting fees or
losses.
Returned checks/insufficient funds. The funds will
charge a $20 service fee against your account for any
check or electronic transfer returned unpaid. YOUR
PURCHASE WILL BE CANCELLED, AND YOU'LL BE RESPONSIBLE
FOR ANY RESULTING LOSS TO THE FUNDS.
Redemption requests shortly after purchase. Payment
for redemptions may be delayed up to 7 business days
to make sure there are sufficient funds to cover the
check or electronic transfer you use to make the
purchase. If you plan to exchange or redeem shares
shortly after purchase, you may want to make your
purchase by wire.
SELLING SHARES
You may sell, or redeem, your fund shares anytime.
The price you receive will be the next net asset
value calculated after the funds receive your request
in good order. Note that when you sell shares, you
may realize a capital gain or loss for federal tax
purposes.
There's no charge to redeem shares except for a $10
wire redemption fee and an IRA redemption fee
(detailed in your IRA Disclosure Statement &
Custodial Agreement) to cover tax reporting. The
funds may withhold taxes on IRA redemptions to meet
federal law requirements.
The funds reserve the right to redeem in kind--that
is, in securities whose market value equals the
redemption amount.
[chart copy]
By mail
-Send the funds your unconditional written request
with
- the number of shares or the dollar amount
to be redeemed
- the fund's name
- the name(s) on the account registration
- the account number
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<PAGE> 25
If you are redeeming from an IRA, please tell us the
proper tax withholding on your redemption request. If
you don't, we will automatically withhold 10% of your
redemption proceeds.
-Sign the request exactly as the account is
registered. You'll need a signature guarantee if
- the amount to be redeemed is more than
$50,000
- the proceeds are to be sent to someone
other than the shareholders of record or
to somewhere other than the address of
record
- the request is made within 30 days of an
address change
See "Signature guarantees," under "Other investment
policies" on page .
- Include any documentation required for corporate,
partnership or fiduciary accounts. Call
1-800-228-2121 for details.
- Mail to:
Van Wagoner Funds, Inc.
P.O. Box 1628
Milwaukee, WI 53201-1628
- For overnight or express mail, use this address:
Van Wagoner Funds, Inc.
207 E. Buffalo St., Suite 315
Milwaukee, WI 53202-5712
By telephone
- If you did not waive this privilege on your New
Account Application, you may call the funds at
1-800-228-2121 to redeem share amounts of $500 to
$50,000. You must request redemptions exceeding
$50,000 in writing with signatures guaranteed.
- The funds will mail proceeds to your address of
record, or send by wire or electronic funds transfer
to the bank account listed in your records. The funds
will deduct a $10 wire redemption fee from your
proceeds. There is also a $15 fee for redemptions
from IRAs.
- The funds reserve the right to refuse a telephone
redemption request and do not accept redemption
requests via fax.
[end of chart copy]
OTHER REDEMPTION POLICIES
Payment. When you redeem shares, you'll receive
payment as follows:
- Mailed payments will be sent within 7 business days
of receiving redemption instructions in good order.
- Wire payments for redemptions requested by phone
will usually be made on the next business day.
- Electronic funds transfers will ordinarily arrive
at your bank 2 to 3 banking days after transmission.
The funds may delay payment for up to 7 business days
after receiving a redemption request, to allow checks
used to purchase fund shares to clear. The
25
<PAGE> 26
funds may also suspend redemptions if the NYSE closes
or for other emergencies.
If the dollar amount you request to be redeemed is
greater than the current account value (as determined
by the NAV on the redemption date), the funds will
redeem your entire account balance.
When you redeem a partial balance from the Money
Market Fund (see "Exchanging Shares" for details on
that fund), your proceeds exclude accrued and unpaid
income through the redemption date. If you redeem
your entire balance from the fund, accrued income
will be paid separately at the end of the month.
Redeeming shares through third parties. A
broker-dealer, financial institution or other service
provider may charge a fee to redeem your fund shares.
If the service provider is the shareholder of record,
the funds may accept redemption requests only from
that provider.
The funds may authorize service providers and their
designees to accept redemption requests on the funds'
behalf. The funds consider these requests received
when the provider accepts them, and price them at the
next asset value calculated.
Telephone redemptions. The funds won't accept
telephone redemption requests for payment by check
for 30 days following an address change. You must
make the request in writing, with all signatures
guaranteed.
During shifts in the market or economy, it may be
difficult to redeem shares by telephone or wire. You
can deliver or mail your redemption requests as
described in the chart.
Small accounts. If a redemption or exchange leaves
your account below the $1,000 minimum, or you
discontinue the Automatic Investment Plan before you
reach the minimum, the funds may provide you a 60-day
notice to add to your balance or renew your Automatic
Investment Plan. Otherwise, the funds may close your
account and send you the proceeds.
Systematic Withdrawal Plan. If your account balance
is $10,000 or more, you can request regular
distributions of at least $50. Note that withdrawals
may result in a gain or loss for federal income tax
purposes.
Call 1-800-228-2121 for a Systematic Withdrawal Plan
application. To change your plan, send a request in
writing, with a signature guarantee for each
registered holder of the account. You can stop your
plan anytime without charge or penalty. The funds may
change or eliminate the plan anytime with 60 days'
notice.
EXCHANGING SHARES
You can exchange shares of one Van Wagoner Fund for
those of any other Van Wagoner Fund available for
investment. Note that an exchange is an ordinary sale
and purchase for federal income tax purposes; you may
realize a capital gain or loss.
How it works. You can request an exchange in writing
or by phone (if you haven't declined this privilege).
Shares from your existing account are redeemed
25
<PAGE> 27
at the next net asset value calculated after the
funds receive your instructions in good order. The
proceeds are used to buy shares in another Van
Wagoner Fund (also priced at the next net asset value
calculated after the funds receive your instructions
in good order).
If you're opening a new account with an exchange, the
transaction must meet account minimums. If you're
adding to an account, the exchange must be $500 or
more. New accounts will have the same registration
and privileges as your existing account unless you
specify otherwise.
Money Market Fund. You can also exchange your Van
Wagoner Funds shares for those of the Northern U.S.
Government Money Market Fund (the "Money Market
Fund"). The minimum to open such an account is
$1,000; for additions, it's $500. Call 1-800-228-2121
for the Money Market Fund prospectus and read it
carefully before investing.
When you exchange from a fund into the Money Market
Fund, dividends begin to accrue the day after the
exchange. When you exchange a partial balance out of
the Money Market Fund, your proceeds exclude accrued
and unpaid dividends through the exchange date. When
you're exchanging your entire Money Market balance,
the Money Market Fund will exchange accrued and
unpaid dividends when the Money Market Fund pays it,
at the end of the month.
Telephone exchanges. Follow the instructions under
"Selling shares - By phone."
Automatic Exchange Plan. You may make automatic
monthly exchanges from one Van Wagoner Fund to
another or from the Money Market Fund to a Van
Wagoner Fund. The minimum transaction is $50. Keep in
mind that an exchange is an ordinary sale and
purchase for federal income tax purposes; you may
realize a capital gain or loss.
Your account must meet minimum account requirements
before you establish this plan. To set up an
Automatic Exchange Plan when you open your account,
complete that section of the New Account Application.
To start the plan after your account is open, call
the funds at 1-800-228-2121.
Exchange restrictions. The Van Wagoner Funds are for
long-term investing, not short-term market
speculation. Excessive trading can hurt the funds'
performance and shareholders. A pattern of exchanges
with a "market timer" strategy can be especially
disruptive. Therefore,
- The funds may restrict the number of exchanges you
can make.
- The funds may suspend or terminate, without notice,
the exchange privilege of any investor who uses it
excessively (e.g. more than 5 times a year).
- The funds may restrict or refuse exchanges if they
receive or anticipate simultaneous orders affecting
significant portions of a fund's assets.
OTHER PURCHASE, REDEMPTION AND EXCHANGE POLICIES
Good order. The funds must receive your request to
buy, sell or exchange shares in good order. The
request must include
- the fund's name and your account number
- the number or dollar amount of shares you want to
buy or sell
26
<PAGE> 28
- signatures of all owners, exactly as registered on
the account
- signature guarantees for redemption requests over
$50,000
- any documentation required for redemptions by
estates, trusts, and other organizations
Telephone transactions. Unless you waive telephone
privileges on your New Account Application, you
automatically have the privilege to make telephone
inquiries, exchanges and redemptions. Once your
account is established, you must make requests to
change these privileges in writing, signed by each
registered holder of the account, with all signatures
guaranteed. A notary public is not an acceptable
guarantor.
The funds will take reasonable measures to prevent
unauthorized telephone transactions and will not be
liable for such transactions. THE FUNDS RESERVE THE
RIGHT TO REFUSE A TELEPHONE TRANSACTION.
Signature guarantees. Generally, whenever you change
your account privileges, your bank information, or
your registration information, you need signature
guarantees for each registered holder. These
guarantee requirements help protect you from fraud.
You can have signatures guaranteed by a U.S.
commercial bank or trust company, a member of the
National Association of Securities Dealers, Inc., or
other eligible institutions. A NOTARY PUBLIC IS NOT
ACCEPTABLE.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The funds intend to pay dividends, if any, from net
investment income and net realized capital gains, if
any, at least annually. The funds will reinvest these
dividends and distributions unless you request
otherwise.
Whether you receive dividends and distributions in
cash or reinvest them, they're generally subject to
federal income tax as ordinary income or capital
gains, respectively. Each year the funds will give
you an annual statement about the dividends and other
distributions you've received or reinvested. Because
everyone's tax situation is unique, and state and
local law may also affect you, the funds strongly
suggest you consult with your tax adviser.
If you don't give the funds your Taxpayer
Identification Number, federal law requires
withholding of 31% of any distribution and redemption
proceeds for federal income tax purposes.
12B-1 FEES
The funds' plan under Rule 12b-1 allows them to pay
distribution and other fees for activities generally
intended to result in sales of shares--for example,
advertising, compensation for sales and marketing
activities and materials, and shareholder account
servicing.
The Board of Directors determines these fees, paid at
an annual rate of up to 0.25% of a fund's average
daily net assets. Because these fees are paid out of
a fund's assets year after year, over time they will
increase the cost of your investment and may exceed
other types of sales charges.
SHAREHOLDER SERVICES
27
<PAGE> 29
AUTOMATED INFORMATION. Use a touch-tone phone to
access information about the funds and your account
24 hours a day, 7 days a week. During regular
business hours (7 a.m. to 7 p.m. Central time, Monday
through Friday) you may also choose to speak with a
fund representative.
With automated shareholder services, you can:
- Find out a fund's closing price and how that price
changed from the previous day
- Check your account balance
- Review your last 5 transactions
- Order duplicate forms and statements
INTERNET ACCESS. Visit the funds' web site to review
your account balances, transactions and other
information. Go to www.vanwagoner.com to select your
password and initiate this privilege.
STATEMENTS AND REPORTS. As a shareholder you'll
receive:
- Confirmation statements. You'll receive a
confirmation statement after each transaction that
affects your account balance or registration.
Automatic Investment Plan participants receive
QUARTERLY confirmations of all automatic
transactions.
- Account statements. All shareholders receive
quarterly account statements. You can order
additional copies of previous statements for the
current and preceding year at no charge. Statements
for earlier years cost $5 each. Call 1-800-228-2121.
If you need to contact the funds about your account,
you can call or write to us at:
Van Wagoner Funds, Inc.
P.O. Box 1628
Milwaukee, WI 53201-1628
For overnight or express mail:
Van Wagoner Funds, Inc.
207 E. Buffalo St., Suite 315
Milwaukee, WI 53202-5712
- Financial reports. Shareholders receive financial
reports twice a year. Annual reports include audited
financial statements. To reduce expenses, we'll mail
one copy of each report to each Taxpayer
Identification Number even though the investor may
have more than one account with the funds.
AUTOMATIC PLANS. The funds offer an Automatic
Investment Plan, described under "Buying shares"; a
Systematic Withdrawal Plan, described under "Selling
shares"; and an Automatic Exchange Plan, described
under "Exchanging shares."
28
<PAGE> 30
RETIREMENT PLANS. The funds offer several retirement
accounts and employer plans. The custodian is UMB for
individuals and employers. For a current list call
1-800-228-2121.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help
you understand each fund's financial performance
since inception. Some of the information reflects
results for one fund share. "Total return" is the
rate your investment would have earned (or lost),
assuming you reinvested all dividends and
distributions. This information has been audited by
PricewaterhouseCoopers LLP. Their report and the
funds' financial statements are included in the
annual report, which is available on request.
Van Wagoner Funds Financial Highlights
For a Fund Share Outstanding Throughout the Period Ended December 31
<TABLE>
<CAPTION>
EMERGING GROWTH FUND MICRO-CAP FUND
-------------------- --------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.15 $12.69 $10.00 $9.99 $12.45 $10.00
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment loss (0.20) (0.25) (0.15) (0.16) (0.26) (0.09)
Net realized and unrealized gains
(losses) on investments 1.01 (2.29) 2.84(2) 1.47 (2.20) 2.54(2)
---- ----- ------ ---- ----- ------
Total from investment operations 0.81 (2.54) 2.69 1.31 (2.46) 2.45
---- ----- ---- ---- ----- ----
Net Asset Value, End of Period $10.96 $10.15 $12.69 $11.30 $9.99 $12.45
==================================================
Total Return 7.98% (20.02)% 26.90% 13.11% (19.76)% 24.50%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $189,372 $313,217 $638,159 $46,113 $71,867 $140,698
Ratio of net expenses to average
net assets - net of waivers and
reimbursements 1.95% 1.88% 1.95% 1.95% 1.95% 1.95%
Ratio of net investment loss to
average net assets - net of waivers
and reimbursements (1.55)% (1.68)% (1.49)% (1.30)% (1.72)% (1.04)%
Ratio of net expenses to average
net assets - before voluntary waivers
and reimbursements 2.00% 1.88% 1.98% 2.00% 2.00% 2.00%
Ratio of net investment loss to
average net assets - before voluntary
waivers and reimbursements (1.60)% (1.68)% (1.52)% (1.35)% (1.77)% (1.09)%
Portfolio turnover rate 668% 333% 159% 367% 232% 153%
</TABLE>
(1) Commenced operations after the close of business on December 31, 1997
(2) The amount shown may not correlate with the aggregate gains and losses of
portfolio securities due to the timing of sales and redemptions of Fund shares.
29
<PAGE> 31
<TABLE>
<CAPTION>
MID-CAP FUND POST-VENTURE FUND TECHNOLOGY FUND(1)
------------ ----------------- ------------------
1998 1997 1996 1998 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.67 $12.39 $10.00 $8.78 $10.00 $10.00
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment loss (0.16) (0.22) (0.09) (0.14) (0.15) (0.08)
Net realized and unrealized gains
(losses) on investments 1.92 (1.50) 2.48(2) 3.44 (1.07) 8.59
---- ----- ------ ---- ----- ----
Total from investment operations 1.76 (1.72) 2.39 3.30 (1.22) 8.51
---- ------ ---- ---- ------ ----
Net Asset Value, End of Period $12.43 $10.67 $12.39 $12.08 $8.78 $18.51
==========================================================
Total Return 16.49% (13.88)% 23.90% 37.59% (12.20)% 85.10%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $45,925 $73,837 $137,740 $19,081 $20,468 $8,176
Ratio of net expenses to average
net assets - net of waivers and
reimbursements 1.95% 1.80% 1.95% 1.95% 1.95% 1.95%
Ratio of net investment loss to
average net assets - net of waivers
and reimbursements (1.15)% (1.42)% (1.16)% (1.39)% (1.39)% (0.88)%
Ratio of net expenses to average
net assets - before voluntary waivers
and reimbursements 2.00% 1.80% 2.00% 2.00% 2.00% 2.00%
Ratio of net investment loss to
average net assets - before voluntary
waivers and reimbursements (1.20)% (1.42)% (1.21)% (1.44)% (1.44)% (0.93)%
Portfolio turnover rate 787% 304% 173% 641% 317% 888%
</TABLE>
back cover
LEARN MORE
To find out more about Van Wagoner Funds, ask for a
free copy of the following:
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI
gives more information about various aspects of the
funds. It's filed with the Securities and Exchange
Commission (SEC) and is incorporated by reference
into the Prospectus, which means it's legally part of
this prospectus.
ANNUAL/SEMI-ANNUAL REPORT. These reports discuss fund
holdings. The Annual Report tells how market
conditions, economic trends and fund investment
strategies affected fund performance during the last
fiscal year.
TO OBTAIN THIS AND OTHER INFORMATION, OR INQUIRE,
ABOUT THE FUNDS... BY TELEPHONE
Call 1-800-228-2121.
BY MAIL
Write to: Van Wagoner Funds
30
<PAGE> 32
P.O. Box 1628
Milwaukee, Wisconsin 53201-1628
ON THE INTERNET
View or download the prospectus, investor
application, and other fund information at our web
site, www.vanwagoner.com, or at the SEC's web site,
www.sec.gov.
You can also obtain copies of the Statement of
Additional Information and other information about
the funds at the SEC Public Reference Room in
Washington, D.C. Call 1-800-SEC-0330 for information
on the operation of the Public Reference Room. Or
send your request and a duplicating fee to the SEC's
Public Reference Section, Washington, D.C.
20549-6009.
SEC file number 811-9116 1999 Van Wagoner Funds
31
<PAGE> 33
front cover
VAN WAGONER FUNDS
Growth stock investing
Capital Appreciation Funds
Growth Fund
Prospectus
April 30, 1999
As with all mutual funds, the Securities and Exchange
Commission has not approved or disapproved these
securities or passed on the adequacy of this
prospectus. Any representation to the contrary is a
criminal offense.
inside
CONTENTS
THE FUNDS
What you should know about each fund's investment
strategies, risks, performance and expenses
Capital Appreciation Fund............................
Growth Fund..........................................
Other policies and risks.............................
Management...........................................
YOUR INVESTMENT
How to open and maintain your Van Wagoner account
How shares are priced................................
Buying shares........................................
Selling shares.......................................
Exchanging shares....................................
Dividends, distributions and taxes...................
12b-1 fees...........................................
Shareholder services.................................
Automated information........................
Statements and reports.......................
Automatic plans..............................
Retirement plans.............................
LEARN MORE
Where to get more information about the funds.......
.....Back cover
section head THE FUNDS
While each of the Van Wagoner Funds seeks capital
appreciation and is an aggressive growth fund, there
are differences in fund strategies, risks and
performance, as described in the following pages. The
funds are designed for long-term investors who can
accept frequent short-term ups and downs in their
investment's value.
The funds base investment buy and sell decisions on
- intensive company-specific research, which includes
on-site visits;
- interviews with management, customers, competitors
and suppliers; and
1
<PAGE> 34
- review of analysis by brokerage houses, industry
consultants, trade publications and other sources.
head VAN WAGONER CAPITAL APPRECIATION FUND
INVESTMENT OBJECTIVE: Long-term capital appreciation.
MAIN STRATEGY
The Capital Appreciation Fund invests in the common
stocks of companies with the potential for
above-average, long-term growth. The investment
adviser looks for companies with
- innovative products or services
- unique competitive strengths
- capable management
- a strong balance sheet
MAIN RISKS
All the Van Wagoner funds invest mainly in common
stocks, whose prices rise and fall as market and
economic conditions change. The value of your fund
shares will fluctuate, and you could lose money.
The types of companies in which the fund invests
present additional risks. The market may value
companies according to size, or market
capitalization, rather than financial performance.
When small-cap and mid-cap stocks are out of favor,
the fund's share prices may fall even though the
companies it holds have sound fundamentals.
Also, these companies may be in the developmental
stage, or may be older companies undergoing
significant changes. They may be subject to greater
business risks and more sensitive to changes in
economic conditions than larger, more established
companies. As a result, their prices may rise and
fall more sharply.
This fund purchases restricted securities in private
placements. It may be difficult for the fund to
accurately price these securities. The fund may not
be able to sell these securities at the prices at
which it has valued them for purposes of calculating
its net asset value without experiencing delays or
additional costs, if at all.
In general, this fund is likely to be more volatile
than the S&P 500 Index(R).
FUND PERFORMANCE
The bar chart and table below give some indication of
the risks of investing in the Capital Appreciation
Fund by showing how its performance can change from
year to year and how its average annual returns
compare with those of a broad market index. Please
note that past performance does not necessarily
indicate how the fund will perform in the future.
2
<PAGE> 35
Commencement date 12/31/96
Annual Total Return: 12/31/97 12/31/98
4.56% 78.18%
S&P 500(R)Index* 33.36% 28.58%
Highest Quarterly Return: Date 12/31/98 total return 45.88%
Lowest Quarterly Return: Date 12/31/97 total return (22.15)%
Average Annual Total Return (as of 12/31): 1 year Life of
Fund
78.18% 36.49%
S&P 500(R) 28.58% 30.95%
Index
*The S&P(R) 500 is an unmanaged index of 500 selected
stocks, most of which are listed on the New York
Stock Exchange. It's heavily weighted toward
large-cap stocks and represents about two-thirds of
the total market value of all domestic stocks.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses you may
pay if you buy and hold shares of the fund.
Shareholder transaction expenses are direct expenses such as fees and sales
loads that you pay when buying or selling shares of some mutual funds. There are
no fees or sales loads charged to your account when you buy or sell shares of
the Van Wagoner Capital Appreciation Fund. However, if you sell
shares and request your money by wire transfer, there is a $10.00 fee. In
addition, there is a $15 IRA redemption fee.
3
<PAGE> 36
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)
Management Fees 1.25%
Distribution (12b-1) 0.00%
Fees(1)
Other Fees 15.88%
(2)
Total Annual Fund Operating Expenses 17.13%
Expense Reimbursement (15.13)%
Net Expenses (3) 2.00%
(1) The maximum distribution fee is 0.25% of the Fund's average net assets per
year. Because these fees are paid out of the Fund's assets on an ongoing basis,
the distribution expenses you pay over time will increase the cost of your
investment and may total more than paying other types of sales charges.
(2) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses.
(3) The Adviser has voluntarily agreed to limit the total expenses of each Fund
(excluding interest, taxes,
(4) brokerage and extraordinary expenses) to an annual rate of 1.95% of the
Fund's average net assets until at least January 1, 2000. After such date,
the expense limitation may be terminated or revised at any time. For the
fiscal year ended December 31, 1998, Other Fees and Total Annual Fund
Operating Expenses were 0.70% and 1.95%, respectively.
This example is intended to help you compare the cost of investing in the Van
Wagoner Capital Appreciation Fund with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in a Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be
4
<PAGE> 37
higher or lower, based on these assumptions, your costs would be:
One Year $203
Three Year $627
Five Year $1,078
Ten Year $2,327
head VAN WAGONER GROWTH FUND
INVESTMENT OBJECTIVE: Long-term capital appreciation.
MAIN STRATEGY
The Growth Fund invests in common stocks of companies
with the potential for above-average, long-term
growth. This fund focuses on companies that are more
established than traditional emerging growth
companies but whose potential may be enhanced by
- new products or services
- new or revitalized management
- changes in financial or other conditions
- other factors
MAIN RISKS
All the Van Wagoner funds invest mainly in common
stocks, whose prices rise and fall as market and
economic conditions change. The value of your fund
shares will fluctuate, and you could lose money.
The types of companies in which the fund invests
present additional risks. The market may value
companies according to size, or market
capitalization, rather than financial performance.
When mid-cap or large-cap stocks are out of favor,
the fund's share prices may fall even though the
companies it holds have sound fundamentals.
Also, these companies may be developing or undergoing
significant changes. They may be subject to greater
business risks and more sensitive to changes in
economic conditions than larger, more established
companies. As a result, their prices may rise and
fall more sharply.
This fund purchases restricted securities in private
placements. It may be difficult for the fund to
accurately price these securities. The fund may not
be able to sell these securities at the prices at
which it has valued them for purposes
5
<PAGE> 38
of calculating its net asset value without
experiencing delays or additional costs, if at all.
In general, this fund is likely to be more volatile
than the S&P 500 Index(R).
FUND PERFORMANCE
The bar chart and table below give some indication of
the risks of investing in the Growth Fund by showing
how its performance can change from year to year and
how its average annual returns compare with those of
a broad market index. Please note that past
performance does not necessarily indicate how the
fund will perform in the future.
Commencement date 12/31/96
Annual Total Return: 12/31/97 12/31/98
-------- --------
5.74% 72.86%
S&P 500(R)Index* 33.36% 28.58%
Highest Quarterly Return: Date 12/31/98 total return 43.01%
Lowest Quarterly Return: Date 12/31/97 total return (19.47)%
Average Annual Total Return (as of 12/31): 1 year Life of
------ -------
Fund
----
72.86% 35.20%
S&P 500(R) 28.58% 30.95%
Index
*The S&P 500(R) is an unmanaged index of 500 selected
stocks, most of which are listed on the New York
Stock Exchange. It's heavily weighted toward
large-cap stocks and represents about two-thirds of
the total market value of all domestic stocks.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses you may
pay if you buy and hold shares of the fund.
6
<PAGE> 39
Shareholder transaction expenses are direct expenses such as fees and sales
loads that you pay when buying or selling shares of some mutual funds. There are
no fees or sales loads charged to your account when you buy or sell shares of
the Van Wagoner Growth Fund. However, if you sell shares and request your money
by wire transfer, there is a $10.00 fee. In addition, there is a $15 IRA
redemption fee.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED
FROM FUND ASSETS)
Management Fees 1.00%
Distribution (12b-1) 0.00%
Fees(1)
Other Fees 15.58%
(2)
Total Annual Fund Operating 16.58%
Expenses
Expense Reimbursement (14.58)%
Net Expenses (3) 2.00%
(1) The maximum distribution fee is 0.25% of the Fund's average net assets per
year. Because these fees are paid out of the Fund's assets on an ongoing basis,
the distribution expenses you pay over time will increase the cost of your
investment and may total more than paying other types of sales charges.
(2) These expenses include custodian, transfer agency and administration
expenses as well as other customary Fund expenses.
(3) The Adviser has voluntarily agreed to limit the total expenses of each
Fund (excluding interest, taxes,
(4) brokerage and extraordinary expenses) to an annual rate of 1.95% of the
Fund's average net assets until at least January 1, 2000. After such date,
the expense limitation may be terminated or revised at any time. For the
fiscal year ended December 31, 1998, Other Fees and Total Annual Fund
Operating Expenses were 0.95% and 1.95%, respectively.
7
<PAGE> 40
This example is intended to help you compare the cost of investing in the Van
Wagoner Growth Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in a Fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The example
also assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
One Year $203
Three Year $627
Five Year $1,078
Ten Year $2,327
section head OTHER POLICIES AND RISKS
MONEY MARKET INSTRUMENTS. In adverse markets, the
funds may invest up to 100% of their assets in
high-quality, short-term money market instruments.
Following such a strategy could prevent the funds
from achieving their investment objective of capital
appreciation. The funds may also use money market
instruments to have cash available to take advantage
of investment opportunities, to pay expenses and to
meet anticipated redemptions.
HEDGING STRATEGIES. The funds may use various hedging
strategies, such as buying and selling options on
particular securities or stock indices, in an effort
to reduce risk. Options trading is a highly
specialized activity that may entail increased
investment risk. Options trading may reduce return or
increase volatility. If a fund buys a put or call
option but doesn't exercise or close it before the
option expires, the fund will lose the premium it
paid plus commission costs.
PORTFOLIO TURNOVER. The adviser makes buy and sell
decisions without considering how long a fund has
held a security. The funds buy securities when the
adviser believes they'll advance the fund's
objective, even if the fund has only recently sold
that same security.
The adviser expects the funds' portfolio turnover to
be higher than that of general equity funds. Higher
turnover may lead to higher trading costs, reducing
return on your investment. It may also result in
increased short-term capital gains, which are
generally taxable as ordinary income for federal tax
purposes.
FUND OBJECTIVES. The Board of Directors may change
the funds' investment objectives without shareholder
approval. You would receive advance notice of any
such changes.
section head MANAGEMENT
8
<PAGE> 41
INVESTMENT ADVISER
The funds are advised by Van Wagoner Capital
Management Inc., 345 California Street, Suite 2450,
San Francisco, CA 94104. The adviser was organized
October 24, 1995 and supervises and manages the
funds, overseeing administration and making
day-to-day investment decisions subject to policies
set by the Board of Directors.
Each fund pays the adviser an annual management fee
equal to the following percentages of daily net
assets:
Capital Appreciation 1.25%
Growth 1.00%
PORTFOLIO MANAGER
Garrett R. Van Wagoner, president and a director of
the adviser, is Van Wagoner Capital Management's sole
shareholder. He is the portfolio manager for each of
the funds.
Mr. Van Wagoner has more than 20 years of experience
as a securities analyst and portfolio manager. From
March 1993 to December 1995, he was portfolio manager
of the Govett Smaller Companies Fund, a portfolio of
The Govett Funds, Inc. Before that, he was senior
vice president at Bessemer Trust, N.A., since 1982,
where he was responsible for its emerging growth
stock investment program.
copy OTHER SERVICE PROVIDERS
Administrator and transfer agent: Sunstone Financial
Group, Inc., provides clerical, compliance,
regulatory, fund accounting, dividend disbursing,
transfer agency and other services.
Custodian: UMB Bank, n.a.
The adviser and service providers receive
compensation. However, they may choose to waive some
or all of their fees, which will cause fund returns
to be higher than they would have been without the
waiver.
section head YOUR INVESTMENT
Here's what you need to know about opening and
maintaining your account with Van Wagoner Funds.
head HOW SHARES ARE PRICED
When you buy or sell (redeem) fund shares, the funds
will price your transaction at the next net asset
value (NAV) calculated after the funds receive your
request in good order. You pay no front-end sales
charge, commission, or redemption fee (except for a
$10 fee for redemptions made by wire and a $15 fee
for IRA redemptions).
9
<PAGE> 42
NAV, the price of one share of a fund, is calculated
at the close of regular trading (generally 4 p.m.
Eastern time) each day the New York Stock Exchange
(NYSE) is open. The NYSE is closed on weekends and
most major holidays.
If the transfer agent receives your buy or sell
request in good order before the close of regular
trading on the NYSE, you will pay or receive that
day's NAV. If the transfer agent receives your buy or
sell request in good order after the close of regular
trading on the NYSE, you will pay or receive the next
day's NAV.
The funds value securities other than debt
instruments maturing within 60 days at market prices.
The funds value debt securities maturing within 60
days at amortized cost. If market prices aren't
readily available for particular securities, the
funds price these securities at their fair value as
determined by the adviser under the Board of
Directors' supervision.
HOW TO BUY, SELL AND EXCHANGE SHARES
BUYING SHARES
All the Van Wagoner Funds are no-load. You pay no
sales charge to buy, sell or exchange shares. (There
is a $10 fee for each redemption made by wire and
redemption from an IRA account.)
Minimum investment.
Initial Additional
Regular accounts $1,000 $50
Automatic Investment Plan $500 $50
IRAs $500 $50
Gift to Minors $500 $50
The funds may waive minimums for qualified retirement
plans. Investors must make purchases in U.S. dollars,
by checks drawn on U.S. banks. The funds won't accept
cash, credit cards or third party checks.
Accepting orders. The funds must receive a properly
completed New Account Application to establish
telephone and exchange privileges. The funds may
return incomplete applications or checks.
Each fund may reject any purchase order or refuse a
telephone transaction if the fund believes it's
advisable to do so. The funds won't accept an account
if you're investing for another person as
attorney-in-fact, or an account with "Power of
Attorney" or "POA" in the New Account Application's
registration section.
Certificates. The funds don't issue stock
certificates. You'll receive a statement confirming
your purchase.
[chart copy]
OPENING AN ACCOUNT
By mail.
- Complete a New Account Application (available by
calling 1-800-228-2121 or online at
www.vanwagoner.com).
10
<PAGE> 43
- Mail the completed application with a check payable
to Van Wagoner Funds to:
Van Wagoner Funds, Inc.
P.O. Box 1628
Milwaukee, WI 53201-1628
- For overnight or express mail, use this address:
Van Wagoner Funds, Inc.
207 E. Buffalo St., Suite 315
Milwaukee, WI 53202-5712
By wire.
- You must call 1-800-228-2121 for an investor
account number. You must also complete a New Account
Application prior to the wire purchase.
- The wire instructions are as follows:
UMB Bank, n.a.
A.B.A. #101000695
For credit to Van Wagoner Funds, Inc.
Account #9870610183
For further credit to:
(investor account number)
(name or account registration)
(Social Security or Taxpayer Identification Number)
(Name of fund you intend to purchase)
- As soon as possible after wiring money, send the
funds your New Account Application. THE FUNDS MUST
RECEIVE A PROPERLY COMPLETED AND EXECUTED APPLICATION
TO ESTABLISH TELEPHONE AND EXCHANGE PRIVILEGES. IF
THE FUNDS DO NOT RECEIVE YOUR ORIGINAL APPLICATION,
THEY MAY DELAY PAYMENT OF REDEMPTION PROCEEDS AND
WITHHOLD TAXES.
Automatic Investment Plan
- Complete the Automatic Investment Plan section on
your New Account Application, and open your account
with at least $500.
- Each month, quarter or year the amount you specify
($50 or more) is automatically withdrawn from your
bank account to buy fund shares. You can choose to
have withdrawals on the 5th, 10th, 15th, 20th, 25th,
or end of each month. You will receive QUARTERLY
statements showing these purchases.
- The funds do not charge a service fee for the plan,
but if there's not enough money in your bank account
to cover the withdrawal, you'll be charged $20, your
purchase will be cancelled, and you'll be responsible
for any resulting loss to the funds.
- A redemption of all funds from your account will
not automatically discontinue the plan. To terminate
your Automatic Investment Plan, send the funds a
written request at least five days before your next
plan withdrawal date or call our Shareholder Services
department.
ADDING TO AN ACCOUNT
By mail.
11
<PAGE> 44
- Send your check, plus an investment slip from a
recent statement or a signed note with the account's
full name and number.
- Use the addresses at left.
By wire.
- Follow the instructions at left. Be sure to include
your account number and the fund name.
- Wired funds are considered received in good order
on the day they reach the funds' bank account by the
funds' purchase cut-off time (3:00 p.m. Central time)
and all required information is provided in the wire
instructions. The wire instructions will determine
the terms of the purchase transaction.
By electronic funds transfer.
- The funds require ten business days to verify your
bank information before initiating this privilege. If
your account is already open and you'd like to
establish electronic funds transfer privileges, call
1-800-228-2121.
- Request the electronic transfer by phone or in
writing, in amounts from $50 to $50,000.
- The funds withdraw money from the bank account you
designated when establishing the privilege and invest
it at the net asset value calculated after they
receive your transfer request in good order.
Automatic Investment Plan
- If your account is already open and you'd like to
add the Automatic Investment Plan, call
1-800-228-2121 for an application. Plan investment
minimums apply. Adding this plan to your account
requires a signature guarantee, described on page __.
- The funds require ten business days to verify your
bank information before initiating the plan.
- When your plan is established, it follows the
description at left.
[end of chart copy]
OTHER PURCHASE POLICIES
Purchases through third parties. If you buy shares
from a broker-dealer, financial institution, or other
provider, their policies and fees may differ from
those described here.
The funds may accept requests to buy additional
shares into a broker-dealer street name account only
from the broker-dealer.
The funds may authorize service providers and their
designees to accept purchase orders on the funds'
behalf. The funds consider such orders received when
the service provider accepts them, and price them at
the next net asset value calculated after receipt by
the service provider.
12
<PAGE> 45
The funds have agreed to allow some service providers
to enter purchase orders for their customers by
telephone, with payment to follow. The funds price
these telephone orders at the next net asset value
calculated after the service provider receives them.
The service provider is responsible for placing the
orders promptly and for ensuring the funds receive
payment within the agreed-upon period. Otherwise, the
provider could be liable for resulting fees or
losses.
Returned checks/insufficient funds. The funds will
charge a $20 service fee against your account for any
check or electronic transfer returned unpaid. YOUR
PURCHASE WILL BE CANCELLED, AND YOU'LL BE RESPONSIBLE
FOR ANY RESULTING LOSS TO THE FUNDS.
Redemption requests shortly after purchase. Payment
for redemptions may be delayed up to 7 business days
to make sure there are sufficient funds to cover the
check or electronic transfer you use to make the
purchase. If you plan to exchange or redeem shares
shortly after purchase, you may want to make your
purchase by wire.
SELLING SHARES
You may sell, or redeem, your fund shares anytime.
The price you receive will be the next net asset
value calculated after the funds receive your request
in good order. Note that when you sell shares, you
may realize a capital gain or loss for federal tax
purposes.
There's no charge to redeem shares except for a $10
wire redemption fee and an IRA redemption fee
(detailed in your IRA Disclosure Statement &
Custodial Agreement) to cover tax reporting. The
funds may withhold taxes on IRA redemptions to meet
federal law requirements.
The funds reserve the right to redeem in kind--that
is, in securities whose market value equals the
redemption amount.
[chart copy]
By mail
- Send the funds your unconditional written request
with
- the number of shares or the dollar amount
to be redeemed
- the fund's name
- the name(s) on the account registration
- the account number
If you are redeeming from an IRA, please tell us the
proper tax withholding on your redemption request. If
you don't, we will automatically withhold 10% of your
redemption proceeds.
- Sign the request exactly as the account is
registered. You'll need a signature guarantee if
- the amount to be redeemed is more than
$50,000
- the proceeds are to be sent to someone
other than the shareholders of record or to
somewhere other than the address of record
- the request is made within 30 days of an
address change
See "Signature guarantees," under "Other investment
policies" on page _____.
13
<PAGE> 46
- Include any documentation required for corporate,
partnership or fiduciary accounts. Call
1-800-228-2121 for details.
- Mail to:
Van Wagoner Funds, Inc.
P.O. Box 1628
Milwaukee, WI 53201-1628
- For overnight or express mail, use this address:
Van Wagoner Funds, Inc.
207 E. Buffalo St., Suite 315
Milwaukee, WI 53202-5712
By telephone
- If you did not waive this privilege on your New
Account Application, you may call the funds at
1-800-228-2121 to redeem share amounts of $500 to
$50,000. You must request redemptions exceeding
$50,000 in writing with signatures guaranteed.
- The funds will mail proceeds to your address of
record, or send by wire or electronic funds transfer
to the bank account listed in your records. The funds
will deduct a $10 wire redemption fee from your
proceeds. There is also a $15 fee for redemptions
from IRAs.
- The funds reserve the right to refuse a telephone
redemption request and do not accept redemption
requests via fax.
[end of chart copy]
OTHER REDEMPTION POLICIES
Payment. When you redeem shares, you'll receive
payment as follows:
- Mailed payments will be sent within 7 business
days of receiving redemption instructions in good
order.
- Wire payments for redemptions requested by phone
will usually be made on the next business day.
- Electronic funds transfers will ordinarily arrive
at your bank 2 to 3 banking days after transmission.
The funds may delay payment for up to 7 business days
after receiving a redemption request, to allow checks
used to purchase fund shares to clear. The funds may
also suspend redemptions if the NYSE closes or for
other emergencies.
If the dollar amount you request to be redeemed is
greater than the current account value (as determined
by the NAV on the redemption date), the funds will
redeem your entire account balance.
When you redeem a partial balance from the Money
Market Fund (see "Exchanging Shares" for details on
that fund), your proceeds exclude accrued and unpaid
income through the redemption date. If you redeem
your entire balance from the fund, accrued income
will be paid separately at the end of the month.
14
<PAGE> 47
Redeeming shares through third parties. A
broker-dealer, financial institution or other service
provider may charge a fee to redeem your fund shares.
If the service provider is the shareholder of record,
the funds may accept redemption requests only from
that provider.
The funds may authorize service providers and their
designees to accept redemption requests on the funds'
behalf. The funds consider these requests received
when the provider accepts them, and price them at the
next asset value calculated.
Telephone redemptions. The funds won't accept
telephone redemption requests for payment by check
for 30 days following an address change. You must
make the request in writing, with all signatures
guaranteed.
During shifts in the market or economy, it may be
difficult to redeem shares by telephone or wire. You
can deliver or mail your redemption requests as
described in the chart.
Small accounts. If a redemption or exchange leaves
your account below the $1,000 minimum, or you
discontinue the Automatic Investment Plan before you
reach the minimum, the funds may provide you a 60-day
notice to add to your balance or renew your Automatic
Investment Plan. Otherwise, the funds may close your
account and send you the proceeds.
Systematic Withdrawal Plan. If your account balance
is $10,000 or more, you can request regular
distributions of at least $50. Note that withdrawals
may result in a gain or loss for federal income tax
purposes.
Call 1-800-228-2121 for a Systematic Withdrawal Plan
application. To change your plan, send a request in
writing, with a signature guarantee for each
registered holder of the account. You can stop your
plan anytime without charge or penalty. The funds may
change or eliminate the plan anytime with 60 days'
notice.
EXCHANGING SHARES
You can exchange shares of one Van Wagoner Fund for
those of any other Van Wagoner Fund available for
investment. Note that an exchange is an ordinary sale
and purchase for federal income tax purposes; you may
realize a capital gain or loss.
How it works. You can request an exchange in writing
or by phone (if you haven't declined this privilege).
Shares from your existing account are redeemed at the
next net asset value calculated after the funds
receive your instructions in good order. The proceeds
are used to buy shares in another Van Wagoner Fund
(also priced at the next net asset value calculated
after the funds receive your instructions in good
order).
If you're opening a new account with an exchange, the
transaction must meet account minimums. If you're
adding to an account, the exchange must be $500 or
more. New accounts will have the same registration
and privileges as your existing account unless you
specify otherwise.
Money Market Fund. You can also exchange your Van
Wagoner Funds shares for those of the Northern U.S.
Government Money Market Fund (the "Money Market
Fund"). The minimum to open such an account is
$1,000; for additions,
15
<PAGE> 48
it's $500. Call 1-800-228-2121 for the Money Market
Fund prospectus and read it carefully before
investing.
When you exchange from a fund into the Money Market
Fund, dividends begin to accrue the day after the
exchange. When you exchange a partial balance out of
the Money Market Fund, your proceeds exclude accrued
and unpaid dividends through the exchange date. When
you're exchanging your entire Money Market balance,
the Money Market Fund will exchange accrued and
unpaid dividends when the Money Market Fund pays it,
at the end of the month.
Telephone exchanges. Follow the instructions under
"Selling shares - By phone."
Automatic Exchange Plan. You may make automatic
monthly exchanges from one Van Wagoner Fund to
another or from the Money Market Fund to a Van
Wagoner Fund. The minimum transaction is $50. Keep in
mind that an exchange is an ordinary sale and
purchase for federal income tax purposes; you may
realize a capital gain or loss.
Your account must meet minimum account requirements
before you establish this plan. To set up an
Automatic Exchange Plan when you open your account,
complete that section of the New Account Application.
To start the plan after your account is open, call
the funds at 1-800-228-2121.
Exchange restrictions. The Van Wagoner Funds are for
long-term investing, not short-term market
speculation. Excessive trading can hurt the funds'
performance and shareholders. A pattern of exchanges
with a "market timer" strategy can be especially
disruptive. Therefore,
- The funds may restrict the number of exchanges you
can make.
- The funds may suspend or terminate, without notice,
the exchange privilege of any investor who uses it
excessively (e.g. more than 5 times a year).
- The funds may restrict or refuse exchanges if they
receive or anticipate simultaneous orders affecting
significant portions of a fund's assets.
OTHER PURCHASE, REDEMPTION AND EXCHANGE POLICIES
Good order. The funds must receive your request to
buy, sell or exchange shares in good order. The
request must include
- the fund's name and your account number
- the number or dollar amount of shares you want to
buy or sell
- signatures of all owners, exactly as registered on
the account
- signature guarantees for redemption requests over
$50,000
- any documentation required for redemptions
by estates, trusts, and other organizations
Telephone transactions. Unless you waive telephone
privileges on your New Account Application, you
automatically have the privilege to make telephone
inquiries, exchanges and redemptions. Once your
account is established, you must make requests to
change these privileges in writing, signed by each
registered holder of the account, with all signatures
guaranteed. A notary public is not an acceptable
guarantor.
16
<PAGE> 49
The funds will take reasonable measures to prevent
unauthorized telephone transactions and will not be
liable for such transactions. THE FUNDS RESERVE THE
RIGHT TO REFUSE A TELEPHONE TRANSACTION.
Signature guarantees. Generally, whenever you change
your account privileges, your bank information, or
your registration information, you need signature
guarantees for each registered holder. These
guarantee requirements help protect you from fraud.
You can have signatures guaranteed by a U.S.
commercial bank or trust company, a member of the
National Association of Securities Dealers, Inc., or
other eligible institutions. A NOTARY PUBLIC IS NOT
ACCEPTABLE.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The funds intend to pay dividends, if any, from net
investment income and net realized capital gains, if
any, at least annually. The funds will reinvest these
dividends and distributions unless you request
otherwise.
Whether you receive dividends and distributions in
cash or reinvest them, they're generally subject to
federal income tax as ordinary income or capital
gains, respectively. Each year the funds will give
you an annual statement about the dividends and other
distributions you've received or reinvested. Because
everyone's tax situation is unique, and state and
local law may also affect you, the funds strongly
suggest you consult with your tax adviser.
If you don't give the funds your Taxpayer
Identification Number, federal law requires
withholding of 31% of any distribution and redemption
proceeds for federal income tax purposes.
12B-1 FEES
The funds' plan under Rule 12b-1 allows them to pay
distribution and other fees for activities generally
intended to result in sales of shares--for example,
advertising, compensation for sales and marketing
activities and materials, and shareholder account
servicing.
The Board of Directors determines these fees, paid at
an annual rate of up to 0.25% of a fund's average
daily net assets. Because these fees are paid out of
a fund's assets year after year, over time they will
increase the cost of your investment and may exceed
other types of sales charges.
SHAREHOLDER SERVICES
AUTOMATED INFORMATION. Use a touch-tone phone to
access information about the funds and your account
24 hours a day, 7 days a week. During regular
business hours (7 a.m. to 7 p.m. Central time, Monday
through Friday) you may also choose to speak with a
fund representative.
With automated shareholder services, you can:
- Find out a fund's closing price and how that price
changed from the previous day
- Check your account balance
- Review your last 5 transactions
17
<PAGE> 50
- Order duplicate forms and statements
INTERNET ACCESS. Visit the funds' web site to review
your account balances, transactions and other
information. Go to www.vanwagoner.com to select your
password and initiate this privilege.
STATEMENTS AND REPORTS. As a shareholder you'll
receive:
- Confirmation statements. You'll receive a
confirmation statement after each transaction that
affects your account balance or registration.
Automatic Investment Plan participants receive
QUARTERLY confirmations of all automatic
transactions.
- Account statements. All shareholders receive
quarterly account statements. You can order
additional copies of previous statements for the
current and preceding year at no charge. Statements
for earlier years cost $5 each. Call 1-800-228-2121.
If you need to contact the funds about your account,
you can call or write to us at:
Van Wagoner Funds, Inc.
P.O. Box 1628
Milwaukee, WI 53201-1628
For overnight or express mail:
Van Wagoner Funds, Inc.
207 E. Buffalo St., Suite 315
Milwaukee, WI 53202-5712
- Financial reports. Shareholders receive financial
reports twice a year. Annual reports include audited
financial statements. To reduce expenses, we'll mail
one copy of each report to each Taxpayer
Identification Number even though the investor may
have more than one account with the funds.
AUTOMATIC PLANS. The funds offer an Automatic
Investment Plan, described under "Buying shares"; a
Systematic Withdrawal Plan, described under "Selling
shares"; and an Automatic Exchange Plan, described
under "Exchanging shares."
RETIREMENT PLANS. The funds offer several retirement
accounts and employer plans. The custodian is UMB for
individuals and employers. For a current list call
1-800-228-2121.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help
you understand each fund's financial performance
since inception. Some of the information reflects
results for one fund share. "Total return" is the
rate your investment would have earned (or lost),
assuming you reinvested all dividends and
distributions. This information has been audited by
PricewaterhouseCoopers LLP. Their report and the
funds' financial statements are included in the
annual report, which is available on request.
18
<PAGE> 51
VAN WAGONER FUNDS, INC.
FINANCIAL HIGHLIGHTS
For a Fund share outstanding throughout the period.
<TABLE>
<CAPTION>
Capital Appreciation Fund Growth Fund (1)
(1)
---------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1998 Dec. 31,
1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.08 $10.00 $ 9.58 $10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment loss
(0.03) (0.11) (0.02) (0.12)
Net realized and unrealized gains on investments
7.13 0.54 7.00 0.68
---- ---- ---- ----
Total from investment operations
7.10 0.43 6.98 0.56
---- ---- ---- ----
DISTRIBUTIONS:
Of net realized gains
(0.43) - (1.65) -
In excess of net realized gains
(0.70) (1.35) (0.85) (0.98)
----- ----- ----- -----
Total distributions
(1.13) (1.35) (2.50) (0.98)
----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $15.05 $9.08 $14.06 $9.58
====== ===== ====== =====
TOTAL RETURN 78.18% 4.56% 72.86% 5.74%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (000s) $ 871 $1,304 $ 798 $ 1,323
Ratio of expenses to average net assets, net of
waivers and reimbursements 1.95% 1.95% 1.95% 1.95%
Ratio of net investment loss to average net assets,
net of waivers and reimbursements (0.21)% (1.36)% (0.18)% (1.40)%
Ratio of expenses to average net assets, before
voluntary waivers and reimbursements 2.00% 2.00% 2.00% 2.00%
Ratio of net investment loss to average net assets,
before voluntary waivers and reimbursements (0.26)% (1.41)% (0.23)% (1.45)%
Portfolio turnover rate 1263% 625% 1233% 593%
</TABLE>
19
<PAGE> 52
(1) Commenced operations after the close of business on December 31, 1996
back cover
LEARN MORE
To find out more about Van Wagoner Funds, ask for a
free copy of the following:
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI
gives more information about various aspects of the
funds. It's filed with the Securities and Exchange
Commission (SEC) and is incorporated by reference
into the Prospectus, which means it's legally part of
this prospectus.
ANNUAL/SEMI-ANNUAL REPORT. These reports discuss fund
holdings. The Annual Report tells how market
conditions, economic trends and fund investment
strategies affected fund performance during the last
fiscal year.
TO OBTAIN THIS AND OTHER INFORMATION, OR INQUIRE,
ABOUT THE FUNDS...
BY TELEPHONE
Call 1-800-228-2121.
BY MAIL
Write to: Van Wagoner Funds
P.O. Box 1628
Milwaukee, Wisconsin 53201-1628
ON THE INTERNET
View or download the prospectus, investor
application, and other fund information at our web
site, www.vanwagoner.com, or at the SEC's web site,
www.sec.gov.
You can also obtain copies of the Statement of
Additional Information and other information about
the funds at the SEC Public Reference Room in
Washington, D.C. Call 1-800-SEC-0330 for information
on the operation of the Public Reference Room. Or
send your request and a duplicating fee to the SEC's
Public Reference Section, Washington, D.C.
20549-6009.
SEC file number 811-9116 1999 Van Wagoner Funds
20
<PAGE> 53
VAN WAGONER FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
EMERGING GROWTH FUND
MICRO-CAP FUND
MID-CAP FUND
POST-VENTURE FUND
TECHNOLOGY FUND
This Statement of Additional Information dated April 30, 1999, is meant
to be read in conjunction with the Prospectus dated April 30, 1999, for the
Emerging Growth Fund, Micro-Cap Fund, Mid-Cap Fund, Post-Venture Fund and
Technology 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 calling 1-800-228-2121 or 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.
The following financial statements are incorporated by reference to the
Annual Report, dated December 31, 1998, of Van Wagoner Funds, Inc. (File No.
811-9116) as filed with the Securities and Exchange Commission on February 25,
1999.
1. Schedules of Investments as of December 31, 1998
2. Statements of Assets and Liabilities as of December 31,
1998
3. Statements of Operations for the Year Ended December 31,
1998
4. Statements of Changes in Net Assets for the Years Ended
December 31, 1997 and 1998
5. Financial Highlights
6. Notes to Financial Statements
7. Report of Independent Accountants
Shareholders may obtain a copy of the Annual Report, without charge, by
calling 1-800-228-2121.
<PAGE> 54
TABLE OF CONTENTS
Page
----
GENERAL INFORMATION AND FUND HISTORY.............................. 3
INVESTMENT STRATEGIES............................................. 3
INVESTMENT RESTRICTIONS........................................... 14
ADDITIONAL COMPANY INFORMATION.................................... 16
Directors and Officers................................... 16
Control Persons and Principal Holders of Securities...... 18
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser....................................... 19
Administrator and Transfer Agent......................... 21
Custodian................................................ 22
Legal Counsel ........................................... 22
Independent Accountants.................................. 22
DISTRIBUTION OF SHARES............................................ 22
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................. 23
TAXES ......................................................... 25
CAPITAL STRUCTURE................................................. 27
SHAREHOLDER MEETINGS.............................................. 28
RETIREMENT PLANS.................................................. 29
PERFORMANCE INFORMATION........................................... 29
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE.................................. 32
OTHER INFORMATION................................................. 33
APPENDIX A (Description of Securities Ratings).................... A-1
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR IN
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUNDS. THE PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE FUNDS IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
2
<PAGE> 55
GENERAL INFORMATION AND FUND HISTORY
Van Wagoner Funds, Inc. (collectively referred to as the "Funds" or
individually referred to as a "Fund") constitute a single corporation (the
"Company") that was organized as a Maryland corporation on October 18, 1995.
This Statement of Additional Information provides information on five of the
Funds. The Emerging Growth Fund, Mid-Cap Fund and Micro-Cap Fund commenced
operations after the close of business on December 31, 1995. The Post-Venture
Fund commenced operations after the close of business on December 31, 1996 and
the Technology Fund commenced operations after the close of business on December
31, 1997.
INVESTMENT STRATEGIES
Van Wagoner Funds, Inc. is an open-end, management investment company
presently offering seven diversified investment portfolios or Funds designed to
offer investors a range of equity-oriented investment opportunities. This
Statement of Additional Information provides information on five of the Funds.
The following supplements the investment objectives and policies of the
Funds as set forth in their Prospectus.
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.
Each of the Funds may invest in commercial paper and other cash
equivalents rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, commercial
paper master notes (which are demand instruments bearing interest at rates which
are fixed to known lending rates and automatically adjusted when such lending
rates and automatically adjusted when such lending rates change) of issuers
whose commercial paper is rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by
Moody's, and unrated debt securities which are deemed by the Adviser to be of
comparable quality. Each of the Funds may also invest in United States Treasury
bills and notes, certificates of deposit of domestic branches of U.S. banks and
corporate bonds with remaining maturities of 13 months or less. For debt
obligations other than commercial paper, these securities are limited to those
rated at least Aa by Moody's or AA by S&P, or unrated but deemed by the Adviser
to be of comparable quality.
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
3
<PAGE> 56
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.
Each Fund's investment in money market instruments for the foregoing
reasons may also include securities issued by other investment companies that
invest in high quality, short-term debt securities (i.e., money market
instruments). In addition to the advisory fees and other expenses a Fund bears
directly in connection with its own operations, as a shareholder of another
investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses, and such fees and other
expenses will be borne indirectly by the Fund's shareholders.
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. Repurchase agreements will be acquired in accordance with
procedures established by the Company's Board of Directors which are designed to
evaluate the creditworthiness of the other parties to the repurchase agreements.
UNITED STATES GOVERNMENT OBLIGATIONS. Each Fund may invest in Treasury
securities which differ only in their interest rates, maturities and times of
issuance. Treasury Bills have
4
<PAGE> 57
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 Fund may invest up to 10% 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. Because an active market may
not exist for illiquid securities, the Funds may experience delays and
additional cost when trying to sell 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 10% 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 10% 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
5
<PAGE> 58
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.
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 Index 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
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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 a segregated account, as described below, 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
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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
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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.
SHORT SALES. Each Fund may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which a
Fund sells a security it does not own in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund is then obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to repay the lender any dividends or interest which accrue during the
period of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The net proceeds
of the short sale will be retained by the broker, to the extent necessary to
meet margin requirements, until the short position is closed out. The Fund also
will incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of a short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
price of the security declines in price between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
the premium, dividends or interest the Fund may be required to pay, if any, in
connection with a short sale.
The Funds may each make short sales "against the box," i.e., when a
security identical to or convertible or exchangeable into one owned by the Fund
is borrowed and sold short.
A Fund will not sell short securities whose underlying value, minus any
amounts pledged by a Fund as collateral (which does not include proceeds from
the short sale), exceeds 5% of a Fund's net assets or 5% of the outstanding
shares of the class of securities being sold short.
Whenever a Fund engages in short sales, it segregates liquid securities
in an amount that, when combined with the amount of collateral deposited with
the broker in connection with the short sale, equals the current market value of
the security sold short. The segregated assets are marked to market daily.
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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, either : (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. A Fund will make such investments only if the
underlying equity securities are deemed appropriate by the Adviser for inclusion
in a Fund's portfolio. 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. Each Fund may invest in convertible securities.
A convertible security may be converted either at a stated price or rate within
a specified period of time into a specified number of shares of common stock. By
investing in convertible securities, a Fund seeks the opportunity, through the
conversion feature, to participate in a portion of the capital appreciation of
the common stock into which the securities are convertible, while earning higher
current income than is available from the common stock. 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.
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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
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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.
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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.
FOREIGN SECURITIES. Each Fund may invest without limitation in
securities of foreign issuers which are publicly traded in the United States,
either directly or through sponsored and unsponsored American Depositary
Receipts ("ADRs"). ADRs typically are issued by a U.S. bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
Unsponsored ADRs differ from sponsored ADRs in that the establishment of
unsponsored ADRs are not approved by the issuer of the underlying securities. As
a result, available information concerning the issuer may not be as current or
reliable as the information for sponsored ADRs, and the price of unsponsored
ADRs may be more volatile.
Investments in foreign securities involve special risks and costs and
opportunities which are in addition to those inherent in domestic investments.
Political, economic or social instability of the issuer or the country of issue,
the possibility of expropriation or confiscatory taxation, limitations on the
removal of assets or diplomatic developments, and the possibility of adverse
changes in investment or exchange control regulations are among the inherent
risks. Foreign companies are not subject to the regulatory requirements of U.S.
companies and, as such, there may be less publicly available information about
such companies. Moreover, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Dividends and interest payable
on a Fund's foreign portfolio securities may be subject to foreign withholding
taxes. To the extent such taxes are not offset by credits or deductions allowed
to investors under U.S. federal income tax law, such taxes may reduce the net
return to shareholders. Because of these and other factors, securities of
foreign companies acquired by the Funds may be subject to greater fluctuation
than securities of domestic companies.
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
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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. 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 7 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.
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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
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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 ten percent (10%) 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.
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. As a Maryland corporation, the business and
affairs of the Company are managed by its officers under the direction of its
Board of Directors. 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, 345 California Street,
Suite 2450, San Francisco, California, 94104.
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*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 43.
LARRY P. ARNOLD, DIRECTOR
Larry P. Arnold, Private investor since 1993. Founder and Managing
General Partner of Wessels Arnold & Henderson (n/k/a Dain Rauscher Wessels) from
June 1986 to January 1993. Senior Vice President of Piper Jaffray & Hopwood from
1979 to March 1986. Director of Sparta Foods, Inc. Age 56.
ROBERT S. COLMAN, DIRECTOR
Partner since February 1991 of Colman Furlong & Co. and since 1996 the
founder of Colman Partners LLC, both private merchant banking firms. Mr. Colman
is a Director of Cleveland Cliffs, Inc. and First Health Group Corp. Age 57.
PETER R. KRIS, VICE PRESIDENT
Mr. Kris is Vice President of the Company and has served in such
capacity since February 1996. He was a Vice President of Govett and Company
Limited from May 1992 until February 1996. Age 33.
The Director of the Company who is an officer of the Adviser receives
no remuneration from the Funds. In 1999, each of the other Directors will be
paid a fee of $2,500 for each meeting attended. This fee will be paid equally by
each of the Van Wagoner Funds. 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 ended December 31, 1998.
- ------------
* Mr. Van Wagoner is the only director who is an "interested person" of
the Funds (as defined in the Investment Company Act).
<TABLE>
<CAPTION>
COMPENSATION TABLE
Aggregate Compensation Total Compensation from
Name of Person from Company Company Paid to Directors
- -------------- ------------ -------------------------
<S> <C> <C>
Garrett R. Van Wagoner $0 $0
</TABLE>
17
<PAGE> 70
<TABLE>
<S> <C> <C>
Larry P. Arnold $6,000 $6,000
Robert S. Colman $6,000 $6,000
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. As of February 1,
1999, 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,
18%; 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,
20%; National Financial Services Corp. *, 200 Liberty Street, One World
Financial Center, New York, NY 10281-1003, 18%.
VAN WAGONER MID-CAP FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA 94104,
23%; National Financial Services Corp.*, 200 Liberty Street, One World Financial
Center, New York, NY 10281-1003, 27%.
VAN WAGONER POST-VENTURE FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA 94104,
19%; National Financial Services Corp.*, 200 Liberty Street, One World Financial
Center, New York, NY 10281-1003, 16%.
VAN WAGONER TECHNOLOGY FUND
Garrett R. Van Wagoner, 345 California Street, Suite 2450, San Francisco, CA
94104, 7%; Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA
94104, 13%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY 10281-1003, 12%.
As of February 1, 1999, the directors and officers as a group owned 7% of the
outstanding shares of the Technology Fund and less than 1% of the outstanding
shares of the Emerging Growth Fund, Micro-Cap Fund, Mid-Cap Fund and Post
Venture Fund.
- -------------
*Shareholders of record, not beneficial owners.
18
<PAGE> 71
INVESTMENT ADVISORY AND OTHER SERVICES
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 Agreement for the Technology Fund is dated as of December
31, 1997. 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 Agreement for the Technology 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 November 20, 1997, and by
the initial shareholder of the Technology Fund on November 20, 1997. 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 Emerging Growth,
Micro-Cap and Mid-Cap Funds were advanced by the Adviser and will be reimbursed
by each Fund over a period of not more than 60 months.
Each Fund pays all of its own expenses, including without limitation,
the cost of preparing and printing its registration statement required under the
Securities Act and the Investment Company Act and any amendments thereto, the
expense of registering its shares with
19
<PAGE> 72
the SEC and qualifying for sale in the various states, the printing and
distribution costs of prospectuses mailed to existing investors, reports to
investors, reports to government authorities and proxy statements, fees paid to
directors who are not interested persons of the Adviser, interest charges,
taxes, legal expenses, association membership dues, auditing services, insurance
premiums, brokerage commissions and expenses in connection with portfolio
transactions, fees and expenses of the custodian of the Fund's assets, printing
and mailing expenses and charges and expenses of dividend disbursing agents,
accounting services agents, registrars and stock transfer agents.
The Adviser has voluntarily agreed to reimburse each Fund to the extent
aggregate annual operating expenses (excluding interest, dividends on securities
sold short, taxes, brokerage commissions and other costs incurred in connection
with the purchase or sale of portfolio securities and extraordinary items)
exceed 1.95% of the average daily net assets of each Fund, until January 1,
2000. 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. In addition to the
involuntary reimbursements, each Investment Advisory Agreement requires the
Adviser to reimburse each Fund to the extent aggregate annual operating
expenses, as described above, exceed 2.00% of the average daily net assets of
the Fund.
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 years ended December 31, 1996, 1997 and 1998, the
Adviser accrued the following management fees and waived a portion of its
management fees and made additional reimbursements in the following amounts*:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Emerging Growth Fund
Gross Management Fees $6,508,760 $5,815,171 $2,728,083
Waived Management Fees $ 178,686 - $ 318,072
Micro-Cap Fund
Gross Management Fees $1,397,953 $1,628,215 $ 770,904
Waived Management Fees $ 563,718 $ 397,422 $ 350,235
Mid-Cap Fund
Gross Management Fees $ 834,015 $1,068,243 $ 517,445
Waived Management Fees $ 80,281 - $ 90,188
</TABLE>
20
<PAGE> 73
<TABLE>
<S> <C> <C> <C>
Post Venture Fund
Gross Management Fees - $387,026 $244,996
Waived Management Fees - $190,694 $154,934
Technology Fund
Gross Management Fees - - $ 50,993
Waived Management Fees $156,888
And Additional Reimbursements - - -
</TABLE>
*The Post-Venture Fund commenced operations after the close of business on
December 31, 1996. The Technology Fund commenced operations after the close of
business on December 31, 1997.
ADMINISTRATOR AND TRANSFER AGENT. Sunstone Financial Group, Inc.
("Sunstone") provides various administrative and fund accounting services to the
Funds which include but are not limited to the following: calculating daily net
asset values for each Fund; overseeing the Funds' Custodian; preparing and
filing all federal and state tax returns and required tax filings (other than
those to be made by the Funds' Custodian); overseeing the Funds' insurance
relationships; participating in the preparation of the Funds' registration
statement; preparing notice and renewal filings pursuant to state securities
laws; compiling data for and preparing notices to the SEC; preparing financial
statements for the annual and semi-annual reports to the SEC and current
investors; monitoring the Funds' expenses; monitoring the Funds' status as a
regulated investment company under Subchapter M of the Code; monitoring
compliance with the Funds' investment policies and restrictions and generally
assisting in the Funds' administrative operations. Sunstone, at its own expense,
and without reimbursement from the Funds, furnishes office space and all
necessary office facilities, equipment, supplies and clerical and executive
personnel for performing the services required to be performed by it under the
Administration and Fund Accounting Agreement. 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 foregoing,
Sunstone receives a fee on the value of each Fund computed daily and payable
monthly, at the annual rate of eighteen one-hundredths of one percent (0.18%) on
the first $50 million of the average daily net assets, and decreasing as assets
reach certain levels, subject to an annual minimum fee of $61,667, plus
out-of-pocket expenses.
For the fiscal years ended December 31, 1996, 1997 and 1998, Sunstone
was paid the following fees for administrative services*:
21
<PAGE> 74
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Emerging Growth Fund $280,175 $289,564 $207,536
Micro-Cap Fund $130,643 $147,075 $ 91,441
Mid-Cap Fund $120,846 $146,137 $ 91,812
Post-Venture Fund - $ 61,667 $ 61,667
Technology Fund - - $ 61,667
</TABLE>
*The Post-Venture Fund commenced operations after the close of business
on December 31, 1996. The Technology Fund commenced operations after the close
of business on December 31, 1997.
Sunstone also acts as the Funds' Transfer Agent. As Transfer Agent,
Sunstone keeps records of the shareholder accounts and transactions. Each Fund
pays Sunstone a Transfer Agent fee based on the number of shareholder accounts ,
subject to an annual minimum annual fee, plus out-of-pocket
CUSTODIAN. UMB Bank, n.a. serves as the Custodian for the Funds. Under
the terms of the Custodial Agreement, UMB Bank, n.a. is responsible for the
receipt and delivery of each Fund's securities and cash. UMB Bank, n.a. does 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. Ernst & Young 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. PricewaterhouseCoopers, LLP performed
such services for the fiscal year ended December 31, 1998 and for prior fiscal
years.
DISTRIBUTION OF SHARES
The Funds have adopted a Service and Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Investment Company Act. The Plan authorizes
payments by the Funds in connection with the distribution of their shares at an
annual rate, as determined from time to time by the Board of Directors, of up to
0.25% of a Fund's average daily net assets. Payments may be made by each Fund
under the Plan for the purpose of financing any activity primarily intended to
result in the sales of shares of the Fund as determined by the Board of
Directors. Such activities include advertising, compensation for sales and sales
marketing activities of financial institutions and others, such as dealers or
other distributors, shareholder account servicing, production and dissemination
of prospectuses and sales and marketing materials, and capital or other expenses
of
22
<PAGE> 75
associated equipment, rent, salaries, bonuses, interest and other overhead. To
the extent any activity is one which a Fund may finance without a Plan, the Fund
may also make payments to finance such activity outside of the Plan and not be
subject to its limitations.
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, 1998, the Funds paid a total of
$583,837 in 12b-1 fees. Of this total, $286,358 was spent on payments to brokers
or dealers, $88,962 was spent on printing and mailing prospectuses to other than
current shareholders, and the balance of $114,688 was spent on expenses
associated with trade shows and web site development. Except for payments to
brokers or dealers, the distribution activities under the Plan were applicable
to all of the Funds. The Funds allocated the cost in accordance with relative
net assets.
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
23
<PAGE> 76
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
(i.e., "markups" when the market maker sells a security and "markdowns" when the
market maker purchases a security). 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
24
<PAGE> 77
commitments generally held, and the opinions of the persons responsible for
recommending the investment.
During the fiscal years ended December 31, 1996, 1997 and 1998, the
Funds paid the following brokerage commissions*:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Emerging Growth Fund $1,962,362 $1,849,021 $1,858,918
Micro-Cap Fund 260,568 302,640 297,620
Mid-Cap Fund 321,769 376,219 496,197
Post-Venture Fund - 62,747 116,288
Technology Fund - - 41,853
</TABLE>
*The Post-Venture Fund commenced operations after the close of business on
December 31, 1996. The Technology Fund commenced operations after the close of
business on December 31, 1997.
None of the brokers to whom commissions were paid during the fiscal
years ended December 31, 1996, 1997 or 1998 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 stock or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or those currencies ("Income
Requirement"); (2) 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 (3) 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. Additional rules apply for related corporations.
25
<PAGE> 78
If a Fund fails to qualify for treatment as a RIC in any fiscal year,
it will be treated as a corporation for federal income tax purposes. As such,
the Fund would be required to pay income taxes on its net investment income and
net realized capital gains, if any, at the rates generally applicable to
corporations. Shareholders of a Fund that did not qualify for treatment as a RIC
would not be liable for income tax on the Fund's net investment income or net
realized capital gains in their individual capacities. Distributions to
shareholders, whether from the Fund's net investment income or net realized
capital gains, would be treated as taxable dividends to the extent of current or
accumulated earnings and profits of the Fund.
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 January of the following calendar year. 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, with certain exceptions. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are potentially subject to the corporate 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.
NON U.S. SHAREHOLDERS
In general, 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 if IRS Form W-8 is properly filed).
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.
26
<PAGE> 79
CAPITAL STRUCTURE
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. The common stock is divisible into an unlimited number
of "series", each of which is a separate Fund. Each share of a Fund represents
an equal proportionate interest in that Fund. Each share of the Funds has equal
voting, dividend, distribution and liquidation rights.
The Board of Directors may classify or reclassify any unissued series
of shares of the Funds and may designate or redesignate the name of any
outstanding series of shares of the Funds. As a general matter, shares are voted
in the aggregate and not by series, except where series voting would be required
by Maryland law or the Investment Company Act (e.g., a change in investment
policy or approval of an investment advisory agreement). All consideration
received from the sale of shares of any series of the Funds' shares, together
with all income, earnings, profits and proceeds thereof, would belong to that
series and would be charged with the liabilities in respect of that series and
of that series' share of the general liabilities of the Funds in the proportion
that the total net assets of the series bear to the total net assets of all
series of the Funds' shares. The net asset value of a share of any series would
be based on the assets belonging to that series less the liabilities charged to
that series, and dividends could be paid on shares of any series of Common Stock
only out of lawfully available assets belonging to that series. In the event of
liquidation or dissolution of the Funds, the holders of each series would be
entitled, out of the assets of the Funds available for distribution, to the
assets belonging to that series.
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. Shareholders may not cumulate their votes in
the election of directors. Consequently the holders of more than 50% of the
shares of the common stock voting for the election of directors can elect the
entire Board of Directors and in such event, the holders of the remaining shares
voting for the election of directors will not be able to elect any person or
persons to the Board of Directors.
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
27
<PAGE> 80
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.
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<PAGE> 81
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
The Funds offer several retirement account options to shareholders.
Qualifying shareholders may establish the following tax deferred retirement
accounts: traditional and SEP IRA, Roth IRA and SIMPLE IRA. The Funds also offer
a Section 402(b) arrangement for employers of certain tax exempt or educational
organizations. The shareholder's employer must establish a plan before the
shareholder opens a SEP, SIMPLE or 402(b) account.
A description of accounts currently offered, applicable service fees
and certain limitations on account 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
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
From time to time, the Funds may advertise their "average annual total
return" over various periods of time. An average annual total return refers to
the rate of return which, if applied to an initial investment at the beginning
of a stated period and compounded over the period, would result in the
redeemable value of the investment at the end of the stated period assuming
reinvestment of all dividends and distributions and reflecting the effect of all
recurring
29
<PAGE> 82
fees. A shareholder's investment in a Fund and its return are not guaranteed and
will fluctuate according to market conditions. When considering "average" annual
total return figures for periods longer than one year, shareholders should note
that a Fund's annual total return for any one year in the period might have been
greater or less than the average for the entire period. Each Fund also may use
"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in a Fund for a specific period
(again reflecting changes in a Fund's share price and assuming reinvestment of
dividends and distributions). 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:
P(1 + T)N = ERV
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $10,000 payment made at
the beginning of the period.
P = hypothetical initial payment of $10,000.
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.
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<PAGE> 83
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, 1998 for each
of the Emerging Growth Fund, Micro-Cap Fund, Mid-Cap Fund, Post-Venture Fund and
Technology Fund was 7.98%, 13.11%, 16.49%, 37.59% and 85.10%, respectively. The
average annual total return from inception through December 31, 1998 for each of
the Emerging Growth Fund, Micro-Cap Fund, Mid-Cap Fund and Post-Venture Fund was
3.10%, 4.16%, 7.52%, 9.91% respectively. The Post-Venture Fund commenced
operations after the close of business on December 31, 1996. The Technology Fund
commenced operations after the close of business on December 31, 1997. Such
performance results reflect reimbursements made by the Adviser during each of
the fiscal years to keep the ratio of net expenses to average net assets of each
Fund at or below 1.95%. Performance quotations of a Fund represent its past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in a Fund will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
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.
31
<PAGE> 84
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, Dr. Martin Luther King, Jr. 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,
securities which are traded on a recognized stock exchange are valued at the
last sale price on the securities exchange on which such securities are
primarily traded. Securities traded on only over-the-counter markets are valued
on the basis of closing over-the-counter trade prices. Securities for which
there were no transactions are valued at the closing bid prices. Options written
or purchased by
32
<PAGE> 85
the Funds are valued at the last sales price if such sales price is between the
current bid and asked prices. Otherwise, options are valued at the mean between
the current bid and asked prices. Debt securities (other than short-term
instruments) are valued at prices furnished by a pricing service, subject to
review and possible revision by the Funds' Adviser. Any modification of the
price of a debt security furnished by a pricing service is made pursuant to
procedures adopted by the Company's Board of Directors. Debt instruments
maturing within 60 days are valued by the amortized cost method. Any securities
for which market quotations are not readily available are valued at their fair
value as determined in good faith by the Adviser under the supervision of the
Company's Board of Directors.
To illustrate the method of computing the offering price of shares of
the Funds, the offering price on December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Emerging Post-
Growth Micro-Cap Mid-Cap Venture Technology
------ --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net Assets $189,371,685 $46,113,497 $45,924,523 $19,081,007 $8,176,176
divided by
Shares Outstanding 17,275,207 4,081,642 3,693,271 1,579,788 441,616
equals
Net Asset Value Per Share $10.96 $11.30 $12.43 $12.08 $18.51
(Offering & Redemption Price
</TABLE>
Shares of the Funds may be exchanged for shares of the Northern U.S.
Government Money Market Fund as provided in the Prospectus. Sunstone Financial,
Group, Inc. 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.
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
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<PAGE> 86
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.
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<PAGE> 87
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.
A-1
<PAGE> 88
"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."
A-2
<PAGE> 89
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.
A-3
<PAGE> 90
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.
A-4
<PAGE> 91
CC - Debt rated `CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied `CCC' rating.
C - Debt rated `C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI - The rating `CI' is reserved for income bonds on which no interest
is being paid.
D - Debt rated `D' is in payment default. The `D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such period. The `D' rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes Bonds in this class.
A-5
<PAGE> 92
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
deterring 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.
A-6
<PAGE> 93
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.
A-7
<PAGE> 94
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.
A-8
<PAGE> 95
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of `BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
RATING SCALE DEFINITION
- --------------------------------------------------------------------------------
AAA Highest credit quality. The risk factors are
negligible, being only slightly more than for
risk-free U.S. Treasury debt.
- --------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic
conditions.
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic uncertainty.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BBB+ Below average protection factors but still
BBB considered sufficient for prudent investment.
BBB- Considerable variability in risk during economic
cycles.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that
B obligations will not be met when due.
B- Financial protection factors will fluctuate
widely according to economic cycles.
- --------------------------------------------------------------------------------
CCC Well below investment grade securities.
Considerable uncertainty exists as to timely
payment of principal, interest or preferred
dividends. Protection factors are narrow and
risk can be substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
- --------------------------------------------------------------------------------
A-9
<PAGE> 96
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DD Default debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- --------------------------------------------------------------------------------
A-10
<PAGE> 97
VAN WAGONER FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
CAPITAL APPRECIATION FUND
GROWTH FUND
This Statement of Additional Information dated April 30, 1999 is meant
to be read in conjunction with the Prospectus dated April 30, 1999 for the
Capital Appreciation Fund and Growth Fund (collectively referred to as the
"Funds") and is incorporated by reference in its entirety into the Prospectus.
Because this Statement of Additional Information is not itself a prospectus, no
investment in shares of these Funds should be made solely upon the information
contained herein. Copies of the Prospectus for the Funds may be obtained by
calling 1-800-228-2121 or 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.
The following financial statements are incorporated by reference to the
Annual Report, dated December 31, 1998 of Van Wagoner Funds, Inc. (File No.
811-9116) as filed with the Securities and Exchange Commission on February 25,
1999.
1. Schedules of Investments as of December 31, 1998
2. Statements of Assets and Liabilities as of December 31, 1998
3. Statements of Operations for the Year Ended December 31, 1998
4. Statements of Changes in Net Assets for the Years Ended December 31,
1997 and 1998
5. Financial Highlights
6. Notes to Financial Statements
7. Report of Independent Accountants
Shareholders may obtain a copy of the Annual Report, without charge, by
calling 1-800-228-2121.
<PAGE> 98
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
GENERAL INFORMATION AND FUND HISTORY............................................................. 3
INVESTMENT STRATEGIES............................................................................ 3
INVESTMENT RESTRICTIONS.......................................................................... 14
ADDITIONAL COMPANY INFORMATION................................................................... 16
Directors and Officers.................................................................. 16
Control Persons and Principal Holders of Securities..................................... 18
INVESTMENT ADVISORY AND OTHER SERVICES.......................................................... 18
Investment Adviser...................................................................... 18
Administrator and Transfer Agent........................................................ 20
Custodian............................................................................... 21
Legal Counsel .......................................................................... 21
Independent Accountants................................................................. 21
DISTRIBUTION OF SHARES........................................................................... 21
PORTFOLIO TRANSACTIONS AND BROKERAGE............................................................. 22
TAXES ........................................................................................ 23
CAPITAL STRUCTURE................................................................................ 25
SHAREHOLDER MEETINGS............................................................................. 26
RETIREMENT PLANS................................................................................. 27
PERFORMANCE INFORMATION.......................................................................... 28
PURCHASE, EXCHANGE AND REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE................................................................. 30
OTHER INFORMATION................................................................................ 31
APPENDIX A (Description of Securities Ratings)................................................... A-1
</TABLE>
----------------
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.
2
<PAGE> 99
GENERAL INFORMATION AND FUND HISTORY
The Van Wagoner Funds (collectively referred to as the "Funds" or
individually referred to as a "Fund") constitute a single corporation (the
"Company") that was organized as a Maryland corporation on October 18, 1995.
This Statement of Additional Information provides information on two of the
Funds. The Capital Appreciation Fund and the Growth Fund commenced operations
after the close of business on December 31, 1996.
INVESTMENT OBJECTIVES AND STRATEGIES
Van Wagoner Funds, Inc. is an open-end, management investment company
presently offering seven diversified investment portfolios or Funds designed to
offer investors a range of equity-oriented investment opportunities. This
Statement of Additional Information provides information on two of the Funds.
The following supplements the investment objectives and policies of the
Funds as set forth in their Prospectus.
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.
Each of the Funds may invest in commercial paper and other cash
equivalents rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by Moody's, commercial
paper master notes (which are demand instruments bearing interest at rates which
are fixed to known lending rates and automatically adjusted when such lending
rates and automatically adjusted when such lending rates change) of issuers
whose commercial paper is rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by
Moody's, and unrated debt securities which are deemed by the Adviser to be of
comparable quality. Each of the Funds may also invest in United States Treasury
bills and notes, certificates of deposit of domestic branches of U.S. banks and
corporate bonds with remaining maturities of 13 months or less. For debt
obligations other than commercial paper, these securities are limited to those
rated at least Aa by Moody's or AA by S&P, or unrated but deemed by the Adviser
to be of comparable quality.
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
3
<PAGE> 100
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.
Each Fund's investment in money market instruments for the foregoing
reasons may also include securities issued by other investment companies that
invest in high quality, short-term debt securities (i.e., money market
instruments). In addition to the advisory fees and other expenses a Fund bears
directly in connection with its own operations, as a shareholder of another
investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses, and such fees and other
expenses will be borne indirectly by the Fund's shareholders.
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. Repurchase agreements will be acquired in accordance with
procedures established by the Company's Board of Directors which are designed to
evaluate the creditworthiness of the other parties to the repurchase agreements.
UNITED STATES GOVERNMENT OBLIGATIONS. Each Fund 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.
4
<PAGE> 101
ILLIQUID SECURITIES. Each Fund may invest up to 10% 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. Because an active market may
not exist for illiquid securities, the Funds may experience delays and
additional cost when trying to sell 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 10% 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 10% 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
5
<PAGE> 102
hedging instruments is subject to applicable regulations of the SEC, the several
options exchanges upon which they are traded and various state regulatory
authorities.
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 Index 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
6
<PAGE> 103
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 a segregated account, as
described below, 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
7
<PAGE> 104
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
8
<PAGE> 105
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.
SHORT SALES. Each Fund may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which a
Fund sells a security it does not own in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund is then obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to repay the lender any dividends or interest which accrue during the
period of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The net proceeds
of the short sale will be retained by the broker, to the extent necessary to
meet margin requirements, until the short position is closed out. The Fund also
will incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of a short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
price of the security declines in price between those dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount of
the premium, dividends or interest the Fund may be required to pay, if any, in
connection with a short sale.
The Funds may each make short sales "against the box," i.e., when a
security identical to or convertible or exchangeable into one owned by the Fund
is borrowed and sold short.
A Fund will not sell short securities whose underlying value, minus any
amounts pledged by a Fund as collateral (which does not include proceeds from
the short sale), exceeds 5% of a Fund's net assets or 5% of the outstanding
shares of the class of securities being sold short.
Whenever a Fund engages in short sales, it segregates liquid securities
in an amount that, when combined with the amount of collateral deposited with
the broker in connection with the short sale, equals the current market value of
the security sold short. The segregated assets are marked to market daily.
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
9
<PAGE> 106
such securities is made, either : (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. A Fund will make such investments only if the
underlying equity securities are deemed appropriate by the Adviser for inclusion
in a Fund's portfolio. 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. Each Fund may invest in convertible securities.
A convertible security may be converted either at a stated price or rate within
a specified period of time into a specified number of shares of common stock. By
investing in convertible securities, a Fund seeks the opportunity, through the
conversion feature, to participate in a portion of the capital appreciation of
the common stock into which the securities are convertible, while earning higher
current income than is available from the common stock. 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
10
<PAGE> 107
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
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<PAGE> 108
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
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<PAGE> 109
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.
FOREIGN SECURITIES. Each Fund may invest without limitation in
securities of foreign issuers which are publicly traded in the United States,
either directly or through sponsored and unsponsored American Depositary
Receipts ("ADRs"). ADRs typically are issued by a U.S. bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
Unsponsored ADRs differ from sponsored ADRs in that the establishment of
unsponsored ADRs are not approved by the issuer of the underlying securities. As
a result, available information concerning the issuer may not be as current or
reliable as the information for sponsored ADRs, and the price of unsponsored
ADRs may be more volatile.
Investments in foreign securities involve special risks and costs and
opportunities which are in addition to those inherent in domestic investments.
Political, economic or social instability of the issuer or the country of issue,
the possibility of expropriation or confiscatory taxation, limitations on the
removal of assets or diplomatic developments, and the possibility of adverse
changes in investment or exchange control regulations are among the inherent
risks. Foreign companies are not subject to the regulatory requirements of U.S.
companies and, as such, there may be less publicly available information about
such companies. Moreover, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Dividends and interest payable
on a Fund's foreign portfolio securities may be subject to foreign withholding
taxes. To the extent such taxes are not offset by credits or deductions allowed
to investors under U.S. federal income tax law, such taxes may reduce the net
return to shareholders. Because of these and other factors, securities of
foreign companies acquired by the Funds may be subject to greater fluctuation
than securities of domestic companies.
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. The Funds are not
restricted by policy with regard to portfolio turnover
13
<PAGE> 110
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 7 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
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<PAGE> 111
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.
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<PAGE> 112
5. Acquire illiquid securities if, as a result of such investments,
more than ten percent (10%) of the Fund's net assets (taken at market value at
the time of each investment) would be invested in illiquid securities. "Illiquid
securities" means securities that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which the Fund has
valued the securities.
6. Purchase securities on margin (except to obtain such short-term
credits as are necessary for the clearance of purchases and sales of securities)
or participate in a joint trading account; provided, however, the Fund may (i)
purchase or sell futures contracts, (ii) make initial and variation margin
payments in connection with purchases or sales of futures contracts or options
on futures contracts, (iii) write or invest in put or call options on securities
and indexes, and (iv) engage in foreign currency transactions. (The "bunching"
of orders for the sale or purchase of marketable portfolio securities with other
accounts under the management of the Adviser to save brokerage costs or average
prices among them is not deemed to result in a securities trading account.)
7. Borrow money except for temporary bank borrowings (not in excess of
five percent (5%) of the value of its total assets) for emergency or
extraordinary purposes, or engage in reverse repurchase agreements, or pledge
any of its assets except to secure borrowings and only to an extent not greater
than ten percent (10%) of the value of the Fund's net assets; provided, however,
a Fund may engage in transactions involving options. Each Fund will not purchase
any security while borrowings representing more than 5% of its total assets are
outstanding.
8. Purchase any interest in any oil, gas or any other mineral
exploration or development program, including any oil, gas or mineral leases.
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. As a Maryland corporation, the business and
affairs of the Company are managed by its officers under the direction of its
Board of Directors. 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, 345 California Street,
Suite 2450, San Francisco, California, 94104.
*GARRETT R. VAN WAGONER, PRESIDENT, TREASURER, SECRETARY AND DIRECTOR
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<PAGE> 113
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 43.
LARRY P. ARNOLD, DIRECTOR
Larry P. Arnold, Private investor since 1993. Founder and Managing
General Partner of Wessels Arnold & Henderson (n/k/a Dain Rauscher Wessels) from
June 1986 to January 1993. Senior Vice President of Piper Jaffray & Hopwood from
1979 to March 1986. Director of Sparta Foods, Inc. Age 56.
ROBERT S. COLMAN, DIRECTOR
Partner since February 1991 of Colman Furlong & Co. and since 1996 the
founder of Colman Partners LLC, both private merchant banking firms. Mr. Colman
is a Director of Cleveland Cliffs, Inc. and First Health Group Corp. Age 57.
PETER R. KRIS, VICE PRESIDENT
Mr. Kris is Vice President of the Company and has served in such
capacity since February 1996. He was a Vice President of Govett and Company
Limited from May 1992 until February 1996. Age 33.
- -------------
* Mr. Van Wagoner is the only director who is an "interested person" of
the Funds (as defined in the Investment Company Act).
The Director of the Company who is an officer of the Adviser receives
no remuneration from the Funds. In 1999, each of the other Directors will be
paid a fee of $2,500 for each meeting attended. This fee will be paid equally by
each of the Van Wagoner Funds. 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 ended December 31, 1998.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Aggregate Compensation from Total Compensation from Company
Name of Person Company Paid to Directors
- -------------- ------- -----------------
<S> <C> <C>
Garrett R. Van Wagoner $0 $0
Larry P. Arnold $6,000 $6,000
Robert S. Colman $6,000 $6,000
</TABLE>
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<PAGE> 114
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. As of February 1,
1999, 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 CAPITAL APPRECIATION FUND
Garrett R. Van Wagoner, 345 California Street, Suite 2450, San
Francisco, California, 94104, 99%.
VAN WAGONER GROWTH FUND
Garrett R. Van Wagoner, 345 California Street, Suite 2450, San
Francisco, California, 94104, 100%.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISER. The investment adviser to the Funds is Van Wagoner
Capital Management, Inc. (the "Adviser"). Mr. Van Wagoner is the founder and
President of the Adviser and owns all of the outstanding common stock of the
Adviser. As such, he controls the Adviser. Pursuant to Investment Advisory
Agreements entered into between the Company on behalf of each of the Funds and
the Adviser (the "Investment Advisory Agreements"), the Adviser provides
continuous investment advisory services to the Funds. The Adviser also provides
the Funds with office space, equipment and personnel necessary to operate and
administer the Funds' business and to supervise the provision of services by
third parties. The Advisory Agreements for the Capital Appreciation and Growth
Funds are dated 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. Each Investment Advisory Agreement was approved by the
vote of a majority of the Directors who are not parties to the respective
Investment Advisory Agreement or interested persons of any such party on August
7, 1996 for the Capital Appreciation and Growth Funds. The Investment Advisory
Agreements are terminable without penalty with respect to a Fund, on 60 days'
written notice by the Directors, by vote of a majority of a Fund's outstanding
voting securities, or by the Adviser, and will terminate automatically in the
event of its assignment.
As compensation for its services, each Fund pays to the Adviser a
monthly advisory fee at the annual rate specified in the Prospectus. From time
to time, the Adviser may voluntarily waive all or a portion of its fee for one
or more Funds.
Each Fund pays all of its own expenses, including without limitation,
the cost of preparing and printing its registration statement required under the
Securities Act and the Investment Company Act and any amendments thereto, the
expense of registering its shares with the SEC and qualifying for sale in the
various states, the printing and distribution costs of
18
<PAGE> 115
prospectuses mailed to existing investors, reports to investors, reports to
government authorities and proxy statements, fees paid to directors who are not
interested persons of the Adviser, interest charges, taxes, legal expenses,
association membership dues, auditing services, insurance premiums, brokerage
commissions and expenses in connection with portfolio transactions, fees and
expenses of the custodian of the Fund's assets, printing and mailing expenses
and charges and expenses of dividend disbursing agents, accounting services
agents, registrars and stock transfer agents.
The Adviser voluntarily agreed to reimburse each Fund to the extent
aggregate annual operating expenses (excluding interest, dividends on securities
sold short, taxes, brokerage commissions and other costs incurred in connection
with the purchase or sale of portfolio securities and extraordinary items)
exceeded 1.95% of the average daily net assets of each Fund, until January 1,
2000. 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. In addition to the
voluntary reimbursements, each Investment Advisory Agreement requires the
Adviser to reimburse each Fund to the extent aggregate annual operating
expenses, as described above, exceed 2.00% of the average daily net assets of
the Fund.
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 years ended December 31, 1997 and 1998, the Adviser
accrued the following management fees, waived a portion of its management fees
and additional reimbursements were made in the following amounts:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Capital Appreciation Fund
Gross Management Fees $14,327 $8,958
Waived Management Fees and Additional $112,705 $108,789
Reimbursements
Growth Fund
Gross Management Fees $11,376 $7,337
Waived Management Fees and Additional $109,775 $107,285
Reimbursements
</TABLE>
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<PAGE> 116
ADMINISTRATOR AND TRANSFER AGENT. Sunstone Financial Group, Inc.
("Sunstone") provides various administrative and fund accounting services to the
Funds which include, but are not limited to the following: calculating daily net
asset values for each Fund; overseeing the Funds' Custodian; preparing and
filing all federal and state tax filings (other than those to be made by the
Funds' Custodian); overseeing the Funds' insurance relationships; participating
in the preparation of the Funds' registration statement; preparing notice and
renewal filings pursuant to state securities laws; compiling data for and
preparing notices to the SEC; preparing financial statements for the annual and
semi-annual reports to the SEC and current investors; monitoring the Funds'
expenses; monitoring the Funds' status as a regulated investment company under
Subchapter M of the Code; monitoring compliance with the Funds' investment
policies and restrictions and generally assisting the Funds' administrative
operations. Sunstone, at its own expense, and without reimbursement from the
Funds, furnishes office space and all necessary office facilities, equipment,
supplies and clerical and executive personnel for performing the services
required to be performed by it under the Administration and Fund Accounting
Agreement. 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 foregoing, Sunstone receives a fee on the value of the each
Fund computed daily and payable monthly, at the annual rate of eighteen
one-hundredths of one percent (0.18%) on the first $50 million of the average
daily net assets, and decreasing as assets reach certain levels, subject to an
annual minimum fee of $61,667, plus out-of-pocket expenses.
For the fiscal years ended December 31, 1997 and 1998, Sunstone was
paid the following fees for administrative services:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Capital Appreciation Fund $61,667 $61,667
Growth Fund $61,667 $61,667
</TABLE>
Sunstone also acts as the Funds' Transfer Agent. As Transfer Agent,
Sunstone keeps records of the shareholder accounts and transactions. Each Fund
pays Sunstone a Transfer Agent fee based on the number of shareholder accounts,
subject to a minimum annual fee.
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<PAGE> 117
CUSTODIAN. UMB Bank, n.a. serves as the Custodian for the Funds. Under
the terms of the agreement, UMB Bank, n.a. is responsible for the receipt and
delivery of each Fund's securities and cash. UMB Bank, n.a. does 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. Ernst & Young 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. PricewaterhouseCoopers, LLP performed
such services for the fiscal year ended December 31, 1998 and for prior fiscal
years.
DISTRIBUTION OF SHARES
The Funds have adopted a Service and Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Investment Company Act. The Plan authorizes
payments by the Funds in connection with the distribution of their shares at an
annual rate, as determined from time to time by the Board of Directors, of up to
0.25% of a Fund's average daily net assets. Payments may be made by each Fund
under the Plan for the purpose of financing any activity primarily intended to
result in the sales of shares of the Fund as determined by the Board of
Directors. Such activities include advertising, compensation for sales and sales
marketing activities of financial institutions and others, such as dealers or
other distributors, shareholder account servicing, production and dissemination
of prospectuses and sales and marketing materials, and capital or other expenses
of associated equipment, rent, salaries, bonuses, interest and other overhead.
To the extent any activity is one which a Fund may finance without a Plan, the
Fund may also make payments to finance such activity outside of the Plan and not
be subject to its limitations.
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
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<PAGE> 118
Rule 12b-1 Directors. For the fiscal year ended December 31, 1998, no payments
were made under the Plan.
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 (i.e., "markups" when the market maker sells
a security and "markdowns" when the market maker purchases a security). 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.
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<PAGE> 119
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 fiscal years ended December 31, 1997 and 1998, the Funds
paid the following brokerage commissions:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Capital Appreciation Fund $8,564 $9,326
Growth Fund $7,990 $9,127
</TABLE>
None of the brokers to whom commissions were paid during the fiscal
years ended December 31, 1997 and 1998 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 stock or
securities or foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with
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<PAGE> 120
respect to its business of investing in such stock, securities or those
currencies ("Income Requirement"); (2) 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 (3) 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. Additional rules apply for related
corporations.
If a Fund fails to qualify for treatment as a RIC in any fiscal year,
it will be treated as a corporation for federal income tax purposes. As such,
the Fund would be required to pay income taxes on its net investment income and
net realized capital gains, if any, at the rates generally applicable to
corporations. Shareholders of a Fund that did not qualify for treatment as a RIC
would not be liable for income tax on the Fund's net investment income or net
realized capital gains in their individual capacities. Distributions to
shareholders, whether from the Fund's net investment income or net realized
capital gains, would be treated as taxable dividends to the extent of current or
accumulated earnings and profits of the Fund.
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 January of the following calendar year. 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, with certain exceptions. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are potentially subject to the corporate 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.
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<PAGE> 121
NON U.S. SHAREHOLDERS
In general, 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 if IRS Form W-8 is properly filed).
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.
CAPITAL STRUCTURE
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. The common stock is divisible into an unlimited number
of "series", each of which is a separate Fund. Each share of a Fund represents
an equal proportionate interest in that Fund. Each share of the Funds has equal
voting, dividend, distribution and liquidation rights.
The Board of Directors may classify or reclassify any unissued series
of shares of the Funds and may designate or redesignate the name of any
outstanding series of shares of the Funds. As a general matter, shares are voted
in the aggregate and not by series, except where series voting would be required
by Maryland law or the Investment Company Act (e.g., a change in investment
policy or approval of an investment advisory agreement). All consideration
received from the sale of shares of any series of the Funds' shares, together
with all income, earnings, profits and proceeds thereof, would belong to that
series and would be charged with the liabilities in respect of that series and
of that series' shares of the general liabilities of the Funds in the proportion
that the total net assets of the series bear to the total net assets of all
series of the Funds' shares. The net asset value of a share of any series would
be based on the assets belonging to that series less the liabilities charged to
that series, and dividends could be paid on shares of any series of Common Stock
only out of lawfully available assets belonging to that series. In the event of
liquidation or dissolution of the Funds, the holders of each series would be
entitled, out of the assets of the Funds available for distribution, to the
assets belonging to that series.
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. Shareholders may not cumulate their votes in
the election of directors. Consequently, the holders of more than 50% of the
shares of the common stock voting for the election of directors can elect the
entire
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<PAGE> 122
Board of Directors and in such event, the holders of the remaining shares voting
for the election of directors will not be able to elect any person or persons to
the Board of Directors.
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
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<PAGE> 123
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
The Funds offer several retirement account options to shareholders.
Qualifying shareholders may establish the following tax deferred retirement
accounts: traditional and SEP IRA, Roth IRA and SIMPLE IRA. The Funds also offer
a Section 402(b) arrangement for employers of certain tax exempt or educational
organizations. The shareholder's employer must establish a plan before the
shareholder opens a SEP, SIMPLE or 402(b) account.
A description of accounts currently offered, applicable service fees
and certain limitations on account 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
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.
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<PAGE> 124
PERFORMANCE INFORMATION
From time to time, the Funds may advertise their "average annual total
return" over various periods of time. An average annual total return refers to
the rate of return which, if applied to an initial investment at the beginning
of a stated period and compounded over the period, would result in the
redeemable value of the investment at the end of the stated period assuming
reinvestment of all dividends and distributions and reflecting the effect of all
recurring fees. A shareholder's investment in a Fund and its return are not
guaranteed and will fluctuate according to market conditions. When considering
"average" annual total return figures for periods longer than one year,
shareholders should note that a Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period. Each Fund also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in a Fund
for a specific period (again reflecting changes in a Fund's share price and
assuming reinvestment of dividends and distributions). 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:
P(1 + T)N = ERV
Where: T= average annual total return.
ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $10,000 payment made at
the beginning of the period.
P = hypothetical initial payment of $10,000.
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
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<PAGE> 125
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, 1998 for the
Capital Appreciation Fund and Growth Fund was 78.18% and 72.86%, respectively.
The average annual return from inception through December 31, 1998 for the
Capital Appreciation Fund and the Growth Fund was 36.49% and 35.20%,
respectively. The Fund commenced operations after the close of business on
December 31, 1996. Such performance results reflect reimbursements made by the
Adviser during the fiscal year ended December 31, 1998 to keep the ratio of net
expenses to average net assets of each Fund at or below 1.95%. Performance
quotations of a Fund represent its past performance and should not be considered
as representative of future results. The investment return and principal value
of an investment in a Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
From time to time, in marketing and other literature, the Funds'
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objective and assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income and capital gains dividends
reinvested. Such calculations do not include the effect of any sales charges
imposed by other funds. The Funds will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the performance of other
mutual funds by Morningstar, Inc., which ranks funds on the basis of historical
risk and total return. Morningstar's rankings range from five stars (highest) to
one star (lowest) and represent Morningstar's assessment of the historical risk
level and total return of a fund as a weighted average for 3, 5, and 10 year
periods. Ranking are not absolute or necessarily predictive of future
performance.
Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning the Funds, including reprints of or selections
from, editorials or articles about the Funds. Sources for Fund performance and
articles about the Funds may
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<PAGE> 126
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, Dr. Martin Luther King, Jr. 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,
securities which are traded on a recognized stock exchange are valued at the
last sale price on the securities exchange
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<PAGE> 127
on which such securities are primarily traded. Securities traded on only
over-the-counter markets are valued on the basis of closing over-the-counter
trade prices. Securities for which there were no transactions are valued at the
closing bid prices. 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. Debt securities (other than short-term instruments) are valued at
prices furnished by a pricing service, subject to review and possible revision
by the Funds' Adviser. Any modification of the price of a debt security
furnished by a pricing service is made pursuant to procedures adopted by the
Company's Board of Directors. Debt instruments maturing within 60 days are
valued by the amortized cost method. Any securities for which market quotations
are not readily available are valued at their fair value as determined in good
faith by the Adviser under the supervision of the Company's Board of Directors.
To illustrate the method of computing the offering price of shares of
the Funds, the offering price on December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Capital
Appreciation Growth
------------- ------
<S> <C> <C>
Net Assets $870,608 $798,148
divided by
Shares Outstanding 57,859 56,759
equals
Net Asset Value Per Share (Offering & Redemption Price) $15.05 $14.06
</TABLE>
Shares of the Funds may be exchanged for shares of the Northern U.S.
Government Money Market Fund as provided in the Prospectus. Sunstone Financial
Group, Inc. receives a service fee from the Northern U.S. Government Money
Market Fund at the annual rate of 0.25 of 1% of the average daily net asset
value of the shares of the Fund exchanged into the Northern U.S. Government
Money Market Fund.
OTHER INFORMATION
It is possible that conditions may exist in the future which would, in
the opinion of the Board of Directors, make it undesirable for a Fund to pay for
redemptions in cash. In such cases the Board may authorize payment to be made in
portfolio securities of a Fund. However, the Funds have obligated themselves
under the 1940 Act to redeem for cash all shares presented for redemption by any
one shareholder up to $250,000 (or 1% of a Fund's net assets if that is less) in
any 90-day period. Securities delivered in payment of redemptions are valued at
the same value assigned to them in computing the net asset value per share.
Shareholders receiving such securities generally will incur brokerage costs when
selling such securities.
Payment for shares of a Fund may, in the discretion of the Adviser, be
made in the form of securities that are permissible investments for the Fund as
described in the Prospectus. For further information about this form of payment,
contact the Transfer Agent. In connection with an in-kind securities payment,
the Funds will require, among other things, that the securities be valued on the
day of purchase in accordance with the pricing methods used by the Fund and that
31
<PAGE> 128
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.
32
<PAGE> 129
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.
A-1
<PAGE> 130
"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."
A-2
<PAGE> 131
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.
A-3
<PAGE> 132
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.
A-4
<PAGE> 133
CC - Debt rated `CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied `CCC' rating.
C - Debt rated `C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied `CCC-' debt rating. The `C' rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI - The rating `CI' is reserved for income bonds on which no interest
is being paid.
D - Debt rated `D' is in payment default. The `D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such period. The `D' rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes Bonds in this class.
A-5
<PAGE> 134
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
deterring 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.
A-6
<PAGE> 135
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.
A-7
<PAGE> 136
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.
A-8
<PAGE> 137
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of `BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
RATING SCALE DEFINITION
- --------------------------------------------------------------------------------
AAA Highest credit quality. The risk factors are
negligible, being only slightly more than for
risk-free U.S. Treasury debt.
- --------------------------------------------------------------------------------
AA+ High credit quality. Protection factors are
AA strong. Risk is modest, but may vary slightly
AA- from time to time because of economic
conditions.
- --------------------------------------------------------------------------------
A+ Protection factors are average but adequate.
A However, risk factors are more variable and
A- greater in periods of economic uncertainty.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BBB+ Below average protection factors but still
BBB considered sufficient for prudent
BBB- investment. Considerable variability in risk
during economic cycles.
- --------------------------------------------------------------------------------
BB+ Below investment grade but deemed likely to 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.
- --------------------------------------------------------------------------------
B+ Below investment grade and possessing risk that
B obligations will not be met when due.
B- Financial protection factors will fluctuate
widely according to economic cycles.
- --------------------------------------------------------------------------------
CCC Well below investment grade securities.
Considerable uncertainty exists as to timely
payment of principal, interest or preferred
dividends. Protection factors are narrow and
risk can be substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
A-9
<PAGE> 138
- --------------------------------------------------------------------------------
DD Default debt obligations. Issuer failed to meet
scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
- --------------------------------------------------------------------------------
A-10
<PAGE> 139
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
a. Registrant's Articles of Incorporation (including all
amendments).
b. Registrant's By-Laws. (Incorporated by reference to Exhibit 2
of Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A)
c. None.
d-1 Investment Advisory Agreements by and between Registrant on
behalf of the Emerging Growth Fund, Micro-Cap Fund and
Mid-Cap Fund and Van Wagoner Capital Management, Inc.
(Incorporated by reference to Exhibit 5 of Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on
Form N-1A)
d-2 Form of Investment Advisory Agreements by and between
Registrant on behalf of the Capital Appreciation, Growth and
Post-Venture Funds and Van Wagoner Capital Management, Inc.
(Incorporated by reference to Exhibit 5.2 of Post-Effective
Amendment No.1 to Registrant's Registration Statement on Form
N-1A)
d-3 Form of Investment Advisory Agreement by and between
Registrant on behalf of the Technology Fund and Van Wagoner
Capital Management, Inc. (Incorporated by reference to
Exhibit 5.3 of Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A)
e. None.
f. None.
g-1 Custody Agreement by and between Registrant and UMB Bank,
n.a. (Incorporated by reference to Exhibit 8.1 of
Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A)
g-2 Amended and Restated Appendix B to the Custody Agreement by
and between Registrant and UMB Bank, n.a. (Incorporated by
reference to Exhibit 8.2 of Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A)
<PAGE> 140
h-1 Administration and Fund Accounting Agreement by and between
Registrant and Sunstone Financial Group, Inc. (Incorporated
by reference to Exhibit 9.1 of Pre-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A)
h-2 Transfer Agency Agreement by and between Registrant and
Sunstone Financial Group, Inc. (Incorporated by reference to
Exhibit 9.2 of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
h-3 Amended and Restated Schedules A and B to the Administration
and Fund Accounting Agreement by and between Registrant and
Sunstone Financial Group, Inc. (Incorporated by reference to
Exhibit 9.3 of Post-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-1A)
h-4 Amended and Restated Schedules A and C to the Transfer Agency
Agreement by and between Registrant and Sunstone Financial
Group, Inc. (Incorporated by reference to Exhibit 9.4 of
Post-Effective Amendment No.2 to Registrant's Registration
Statement on Form N-1A)
h-5 Amended and Restated Schedules A and B to the Administration
and Fund Accounting Agreement by and between Registrant and
Sunstone Financial Group, Inc. (Incorporated by reference to
Exhbit 9.5 of Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A)
h-6 Transfer Agency Agreement by and between Registrant and
Sunstone Investor Services, LLC. (Incorporated by reference
to Exhibit 9.6 of Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A)
h-7 Amended and Restated Schedules A and C to the Transfer Agency
Agreement by and between Registrant and Sunstone Investor
Services, LLC. (Incorporated by reference to Exhibit 9.7 of
Post-Effective Amendment No. 5 to Registrant's Registration
Statement on Form N-1A)
i. Opinion of Foley & Lardner, counsel for Registrant.
j. Consent of Independent Accountants.
k. None.
l-1 Subscription Agreement. (Incorporated by reference to Exhibit
13.1 of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
<PAGE> 141
l-2 Organizational Expenses Agreement. (Incorporated by reference
to Exhibit 13.2 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
m. Registrant's Service and Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940. (Incorporated
by reference to Exhibit 15 of Pre-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A)
n. Financial Data Schedules.
o. None.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Registrant neither controls any person nor is under common control with
any other person.
ITEM 25. INDEMNIFICATION.
Pursuant to the authority of the Maryland General Corporation Law,
particularly Section 2-418 thereof, Registrant's Board of Directors has adopted
the following bylaw which is in full force and effect and has not been modified
or cancelled:
ARTICLE VII
GENERAL PROVISIONS
Section 7. Indemnification.
A. The Corporation shall indemnify all of its corporate representatives
against expenses, including attorneys fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with the
defense of any action, suit or proceeding, or threat or claim of such action,
suit or proceeding, whether civil, criminal, administrative, or legislative, no
matter by whom brought, or in any appeal in which they or any of them are made
parties or a party by reason of being or having been a corporate representative,
if the corporate representative acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation and
with respect to any criminal proceeding, if he had no reasonable cause to
believe his conduct was unlawful provided that the corporation shall not
indemnify corporate representatives in relation to matters as to which any such
corporate representative shall be adjudged in such action, suit or proceeding to
be liable for gross negligence, willful misfeasance, bad faith, reckless
disregard of the duties and obligations involved in the conduct of his office,
or when indemnification is otherwise not permitted by the Maryland General
Corporation Law.
B. In the absence of an adjudication which expressly absolves the
corporate representative, or in the event of a settlement, each corporate
representative shall be indemnified hereunder only if
<PAGE> 142
there has been a reasonable determination based on a review of the facts that
indemnification of the corporate representative is proper because he has met the
applicable standard of conduct set forth in paragraph A. Such determination
shall be made: (i) by the board of directors, by a majority vote of a quorum
which consists of directors who are not parties to the action, suit or
proceeding, or if such a quorum cannot be obtained, then by a majority vote of a
committee of the board consisting solely of two or more directors, not, at the
time, parties to the action, suit or proceeding and who were duly designated to
act in the matter by the full board in which the designated directors who are
parties to the action, suit or proceeding may participate; or (ii) by special
legal counsel selected by the board of directors or a committee of the board by
vote as set forth in (i) of this paragraph, or, if the requisite quorum of the
full board cannot be obtained therefor and the committee cannot be established,
by a majority vote of the full board in which directors who are parties to the
action, suit or proceeding may participate.
C. The termination of any action, suit or proceeding by judgement,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall create a rebuttable presumption that the person was guilty of
willful misfeasance, bad faith, gross negligence or reckless disregard to the
duties and obligations involved in the conduct of his or her office, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
D. Expenses, including attorneys' fees, incurred in the preparation of
and/or presentation of the defense of a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding as authorized in the manner provided in Section
2-418(F) of the Maryland General Corporation Law upon receipt of: (i) an
undertaking by or on behalf of the corporate representative to repay such amount
unless it shall ultimately be determined that he or she is entitled to be
indemnified by the corporation as authorized in this bylaw; and (ii) a written
affirmation by the corporate representative of the corporate representative's
good faith belief that the standard of conduct necessary for indemnification by
the corporation has been met.
E. The indemnification provided by this bylaw shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
these bylaws, any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person subject
to the limitations imposed from time to time by the Investment Company Act of
1940, as amended.
F. This corporation shall have the power to purchase and maintain
insurance on behalf of any corporate representative against any liability
asserted against him or her and incurred by his or her in such capacity or
arising out of his or her status as such, whether or not the corporation would
have the power to indemnify his or her against such liability under this bylaw
provided that no insurance may be purchased or maintained to protect any
corporate representative against liability for gross negligence, willful
misfeasance, bad faith or reckless disregard of the duties and obligations
involved in the conduct of his or her office.
<PAGE> 143
G. "Corporate Representative" means an individual who is or was a
director, officer, agent or employee of the corporation or who serves or served
another corporation, partnership, joint venture, trust or other enterprise in
one of these capacities at the request of the corporation and who, by reason of
his or her position, is, was, or is threatened to be made, a party to a
proceeding described herein.
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in a successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser was organized in October 1995 for the purpose of providing
investment advisory services for the Registrant and other investment advisory
clients. The Adviser is not, nor has it been, engaged in any other business
since its inception. Certain information regarding the director and officer of
the Adviser including any business, profession, vocation or employment in which
such person is or has been at any time during the past two fiscal years engaged
for his or her own account or in the capacity of director, officer, employee,
partner or trustee, is set forth under "MANAGEMENT OF THE FUND" in the
Prospectus and under "ADDITIONAL COMPANY INFORMATION" in the Statement of
Additional Information and is incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS
Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of the Registrant, at Registrant's corporate
offices, except (1) records held and maintained by UMB Bank, n.a. relating to
its functions as custodian and (2) records held and maintained by Sunstone
Financial Group, Inc., 207 East Buffalo Street, Suite 400, Milwaukee, Wisconsin,
53202, relating to its functions as administrator, fund accountant and transfer
agent.
<PAGE> 144
ITEM 29. MANAGEMENT SERVICES.
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
ITEM 30. UNDERTAKINGS.
Registrant undertakes to provide its Annual Report upon request without
charge to any recipient of a Prospectus.
<PAGE> 145
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amended
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on the 23rd day of February, 1999.
VAN WAGONER FUNDS, INC.
(Registrant)
By: /s/Garrett R. Van Wagoner
------------------------------------
Garrett R. Van Wagoner
President
Pursuant to the requirements of the Securities Act of 1933, this
Amended Registration Statement on Form N-1A has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/Garrett R. Van Wagoner President; Director February 23, 1999
- ------------------------- (principal executive officer and
Garrett R. Van Wagoner principal financial and
accounting officer)
/s/Larry Arnold Director February 12, 1999
- -------------------------
Larry Arnold
Director February 18, 1999
/s/Robert S. Colman
- -------------------------
Robert S. Colman
</TABLE>
<PAGE> 146
EXHIBIT INDEX
a. Registrant's Articles of Incorporation (including all
amendments).
b. Registrant's By-Laws. (Incorporated by reference to Exhibit 2
of Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A)
c. None.
d-1 Investment Advisory Agreements by and between Registrant on
behalf of the Emerging Growth Fund, Micro-Cap Fund and
Mid-Cap Fund and Van Wagoner Capital Management, Inc.
(Incorporated by reference to Exhibit 5 of Pre-Effective
Amendment No. 1 to Registrant's Registration Statement on
Form N-1A)
d-2 Form of Investment Advisory Agreements by and between
Registrant on behalf of the Capital Appreciation, Growth and
Post-Venture Funds and Van Wagoner Capital Management, Inc.
(Incorporated by reference to Exhibit 5.2 of Post-Effective
Amendment No.1 to Registrant's Registration Statement on Form
N-1A)
d-3 Form of Investment Advisory Agreement by and between
Registrant on behalf of the Technology Fund and Van Wagoner
Capital Management, Inc. (Incorporated by reference to
Exhibit 5.3 of Post-Effective Amendment No. 5 to Registrant's
Registration Statement Form N-1A)
e. None.
f. None.
g-1 Custody Agreement by and between Registrant and UMB Bank,
n.a. (Incorporated by reference to Exhibit 8.1 of
Pre-Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A)
g-2 Amended and Restated Appendix B to the Custody Agreement by
and between Registrant and UMB Bank, n.a. (Incorporated by
reference to Exhibit 8.2 of Post-Effective Amendment No. 5 to
Registrant's Statement on Form N-1A)
h-1 Administration and Fund Accounting Agreement by and between
Registrant and Sunstone Financial Group, Inc. (Incorporated
by reference to Exhibit 9.1 of Pre-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A)
<PAGE> 147
h-2 Transfer Agency Agreement by and between Registrant and
Sunstone Financial Group, Inc. (Incorporated by reference to
Exhibit 9.2 of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
h-3 Amended and Restated Schedules A and B to theAdministration
and Fund Accounting Agreement by and between Registrant and
Sunstone Financial Group, Inc. (Incorporated by reference to
Exhibit 9.3 of the Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A)
h-4 Amended and Restated Schedules A and C to the Transfer Agency
Agreement by and between Registrant and Sunstone Financial
Group, Inc. (Incorporated by reference to Exhibit 9.4 of
Post-Effective Amendment No. 2 to Registrant's Registration
Statement on Form N-1A)
h-5 Amended and Restated Schedules A and B to the Administration
and Fund Accounting Agreement by and between Registrant and
Sunstone Financial Group, Inc. (Incorporated by reference to
Exhibit 9.5 of Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form N-1A)
h-6 Transfer Agency Agreement by and between Registrant and
Sunstone Investor Services, LLC. (Incorporated by reference
to Exhbit 9.6 of Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A)
h-7 Amended and Restated Schedules A & C to the Transfer Agency
Agreement by and between Registrant and Sunstone Investor
Services, LLC. (Incorporated by reference to Exhbit 9.7 of
Post-Effective Amendment No. 5 to Registrant's Registration
Statement on Form N-1A)
i. Opinion of Foley & Lardner, counsel for Registrant. (
j. Consent of Independent Accountants.
k. None.
l-1 Subscription Agreement. (Incorporated by reference to Exhibit
13.1 of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A)
l-2 Organizational Expenses Agreement. (Incorporated by reference
to Exhibit 13.2 of Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A)
<PAGE> 148
m. Registrant's Service and Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act of 1940. (Incorporated
by reference to Exhibit 15 of Pre-Effective Amendment No. 1
to Registrant's Registration Statement on Form N-1A)
n. Financial Data Schedules.
o. None.
<PAGE> 1
EXHIBIT-a
ARTICLES OF INCORPORATION
ARTICLES OF INCORPORATION
OF
VAN WAGONER FUNDS, INC.
The undersigned sole incorporator, being at least eighteen years of
age, hereby adopts the following Articles of Incorporation for the purpose of
forming a Maryland corporation under the general laws of the State of Maryland:
ARTICLE I
The name of the corporation (hereinafter called "Corporation") is:
VAN WAGONER FUNDS, INC.
ARTICLE II
The period of existence shall be perpetual.
ARTICLE III
The purposes for which the Corporation is formed are to engage in any
lawful business for which corporations may be organized under the Maryland
General Corporation Law.
ARTICLE IV
A. The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is One Billion (1,000,000,000) shares,
all with a par value of One Hundredth of a Cent ($0.0001) per share, to be known
and designated as "Common Stock." The aggregate par value of the authorized
shares of the Corporation is One Hundred Thousand Dollars ($100,000). The Board
of Directors of the Corporation may increase or decrease the aggregate number of
authorized shares of Common Stock pursuant to Section 2-105 of the Maryland
General Corporation Law or any successor provision thereto. The Board of
Directors of the Corporation may classify or reclassify any unissued shares of
Common Stock and may designate or redesignate the name of any class of
outstanding Common Stock. The Board of Directors may fix the number of shares of
Common Stock in any such class and, except as specifically set forth in these
Articles of Incorporation, may set or change the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms or conditions of redemption of any class of unissued
shares of Common Stock. A total of Eight Hundred Million (800,000,000) shares of
Common Stock shall initially be classified as follows:
<PAGE> 2
<TABLE>
<CAPTION>
Class Fund Shares
- ----- ---- ------
<S> <C> <C>
A Micro-Cap Fund* 100,000,000
B Emerging Growth Fund* 200,000,000
C Mid-Cap Fund* 100,000,000
D Capital Appreciation Fund* 100,000,000
E Growth Fund* 100,000,000
F Post-Venture Fund* 100,000,000
G Technology Fund* 100,000,000
</TABLE>
- -----------------
* or such other name designated by the Corporation's Board of Directors.
B. Notwithstanding the authority granted to the Board of Directors of
the Corporation with respect to the designation, classification and
reclassification of the unissued shares of Common Stock of the Corporation, each
class of Common Stock shall have the following preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms or conditions of redemption:
1. Each holder of shares of Common Stock of the Corporation,
irrespective of the class, shall be entitled to one (1) vote for each full share
(and a fractional vote for each fractional share) then standing in his or her
name on the books of the Corporation; provided, however, that shares of any
class of Common Stock owned, other than in a fiduciary capacity, by the
Corporation or by another corporation in which the Corporation owns shares
entitled to cast a majority of all the votes entitled to be cast by all shares
outstanding and entitled to vote of such corporation, shall not be voted at any
meeting of stockholders. On any matter submitted to a vote of stockholders all
shares of the Corporation's Common Stock then issued and outstanding and
entitled to vote, irrespective of the class, shall be voted in the aggregate and
not by class, except that: (a) when otherwise expressly provided by the Maryland
General Corporation Law, the Investment Company Act of 1940 and the regulations
thereunder, or other applicable law, shares shall be voted by individual class;
and (b) when the matter to be acted upon does not affect any interest of a
particular class of the Corporation's Common Stock, then only shares of the
affected class shall be entitled to vote thereon. At all elections of directors
of the Corporation, each stockholder shall be entitled to vote the shares owned
of record by him for as many persons as there are directors to be elected, but
shall not be entitled to exercise any right of cumulative voting.
2. All consideration received by the Corporation for the issue or sale
of shares of any class of the Corporation's Common Stock, together with all
assets in which such consideration is invested and reinvested, income, earnings,
profits and proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation thereof, and any such funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to the class of the Corporation's Common Stock with respect
to which such assets, payments or funds were received by the Corporation for all
purposes, subject only to the rights of creditors, and shall be so handled upon
the books of account of the
-2-
<PAGE> 3
Corporation. Such consideration, assets, income, earnings, profits and proceeds
thereof, including any proceeds derived from the sale, exchange or liquidation
thereof, and any assets derived from any reinvestment of such proceeds in
whatever form, are herein referred to as "assets belonging to" such class. Any
assets, income, earnings, profits and proceeds thereof, funds or payments which
are not readily attributable to any particular class of the Corporation's Common
Stock shall be allocable among any one or more of the classes of the
Corporation's Common Stock in such manner and on such basis as the Board of
Directors, in its sole discretion, shall deem fair and equitable. The power to
make such allocations may be delegated by the Board of Directors from time to
time to one or more of the officers of the Corporation.
3. The assets belonging to any class of the Corporation's Common Stock
shall be charged with the liabilities in respect of such class of the
Corporation's Common Stock, and shall also be charged with the share of the
general liabilities of the Corporation allocated to such class determined as
hereinafter provided. The determination of the Board of Directors shall be
conclusive as to: (a) the amount of such liabilities, including the amount of
accrued expenses and reserves; (b) any allocation of the same to a given class;
and (c) whether the same are allocable to one or more classes. The liabilities
so allocated to a class are herein referred to as "liabilities belonging to"
such class. Any liabilities which are not readily attributable to any particular
class of the Corporation's Common Stock shall be allocable among any one or more
of the classes of the Corporation's Common Stock in such manner and on such
basis as the Board of Directors, in its sole discretion, shall deem fair and
equitable. The power to make such allocations may be delegated by the Board of
Directors from time to time to one or more of the officers of the Corporation.
4. Shares of a class of the Corporation's Common Stock shall be
entitled to such dividends and distributions, in stock or in cash or both, as
may be declared from time to time by the Board of Directors, acting in its sole
discretion, with respect to such class; provided, however, that dividends and
distributions on shares of a class of the Corporation's Common Stock shall be
paid only out of the lawfully available "assets belonging to" such class as such
phrase is defined in this Article IV.
5. In the event of the liquidation or dissolution of the Corporation,
stockholders of a class of the Corporation's Common Stock shall be entitled to
receive, as a class, out of the assets of the Corporation available for
distribution to stockholders, but other than general assets not belonging to any
particular class, the assets belonging to such class, and the assets so
distributable to the holders of any class of the Corporation's Common Stock
shall be distributed among such holders in proportion to the number of shares of
such class of the Corporation's Common Stock held by them and recorded on the
books of the Corporation. In the event that there are any general assets not
belonging to any particular class of the Corporation's Common Stock and
available for distribution, such distribution shall be made to the holders of
all classes of the Corporation's Common Stock in proportion to the net asset
value of the respective class of the Corporation's Common Stock determined as
set forth in the Bylaws of the Corporation.
-3-
<PAGE> 4
6. Each share of each class of Common Stock of the Corporation now or
hereafter issued shall be subject to redemption by the stockholders of the
Corporation and, subject to the suspension of such right of redemption as
provided in the Bylaws, each holder of shares of any class of Common Stock of
the Corporation, upon request to the Corporation accompanied by surrender of the
appropriate stock certificate or certificates, if any, in proper form for
transfer and after complying with any other redemption procedures established by
the Board of Directors, shall be entitled to require the Corporation to redeem
all or any part of the shares of such class of Common Stock standing in the name
of such holder on the books of the Corporation at the net asset value of such
shares. In the event that no certificates have been issued to the holder, the
Board of Directors may require the submission of a stock power with an
appropriate signature guarantee. All shares of any class of its Common Stock
redeemed by the Corporation shall be deemed to be cancelled and restored to the
status of authorized but unissued shares. The method of computing the net asset
value of shares of each class of Common Stock of the Corporation for purposes of
the issuance and sale, or redemption, thereof, as well as the time as of which
such net asset value shall be computed, shall be as set forth in the Bylaws.
Payment of the net asset value of each share of each class of Common Stock of
the Corporation surrendered to it for redemption shall be made by the
Corporation within seven (7) days after surrender of such stock to the
Corporation for such purpose, or within such other reasonable period as may be
determined from time to time by the Board of Directors. The Board of Directors
of the Corporation may, upon reasonable notice to the stockholders of the
Corporation, impose a fee for the privilege of redeeming shares, such fee to be
not in excess of one percent (1.0%) of the proceeds of any such redemption. The
Board shall have discretionary authority to rescind the imposition of any such
fee and to reimpose the redemption fee from time to time upon reasonable notice.
Any fee so imposed shall be uniform as to all stockholders.
7. If, at any time when a request for transfer or redemption of the
shares of any class of Common Stock is received by the Corporation or its agent,
the value (computed as set forth in the Bylaws) of the shares of such class in a
stockholder's account is less than One Thousand Dollars ($1000.00), after giving
effect to such transfer or redemption, the Corporation may cause the remaining
shares of such class in such stockholder's account to be redeemed in accordance
with such procedures as the Board of Directors shall adopt.
8. Each holder of shares of the Corporation's Common Stock,
irrespective of the class, may, upon request to the Corporation accompanied by
surrender of the appropriate stock certificate or certificates, if any, in
proper form for transfer and after complying with any other conversion
procedures established by the Board of Directors, convert such shares into
shares of any other class of the Corporation's Common Stock on the basis of
their relative net asset values (determined in accordance with the Bylaws of the
Corporation) less a conversion charge or discount determined by the Board of
Directors. Any fee so imposed shall be uniform as to all stockholders.
9. No holder of shares of any class of Common Stock of the Corporation
shall, as such holder, have any right to purchase or subscribe for any shares of
any class of the Common Stock of the Corporation which it may issue or sell
(whether out of the number of
-4-
<PAGE> 5
shares authorized by these Articles of Incorporation, or out of any shares of
any class of Common Stock of the Corporation acquired by it after the issue
thereof, or otherwise) other than such right, if any, as the Board of Directors,
in its discretion, may determine.
ARTICLE V
The number of directors constituting the Board of Directors shall
initially be two (2), and the names of the initial directors are Miriam M.
Allison and Randy M. Pavlick. Thereafter, the number of directors shall be such
number as is fixed from time to time by the Bylaws.
ARTICLE VI
The Corporation reserves the right to enter into, from time to time,
investment advisory and administration agreements providing for the management
and supervision of the investments of the Corporation, the furnishing of advice
to the Corporation with respect to the desirability of investing in, purchasing
or selling securities or other property and the furnishing of clerical and
administrative services to the Corporation. Such agreements shall contain such
other terms, provisions and conditions as the Board of Directors of the
Corporation may deem advisable and as are permitted by the Investment Company
Act of 1940.
The Corporation may designate custodians, transfer agents, registrars
and/or disbursing agents for the stock and assets of the Corporation and employ
and fix the powers, rights, duties, responsibilities and compensation of each
such custodian, transfer agent, registrar and/or disbursing agent.
ARTICLE VII
The following provisions define, limit and regulate the powers of the
Corporation, the Board of Directors and the stockholders:
A. The Corporation may issue and sell shares of any class of its own
Common Stock in such amounts and on such terms and conditions, for such purposes
and for such amount or kind of consideration now or hereafter permitted by the
laws of the State of Maryland, the Bylaws and these Articles of Incorporation,
as its Board of Directors may determine; provided, however, that the
consideration per share to be received by the Corporation upon the sale of any
shares of any class of its Common Stock shall not be less than the net asset
value per share of such class of Common Stock outstanding at the time as of
which the computation of said net asset value shall be made.
B. The Board of Directors may, in its sole and absolute discretion,
reject in whole or in part orders for the purchase of shares of any class of
Common Stock and may, in addition, require such orders to be in such minimum
amounts as it shall determine.
C. The holders of any fractional shares of any class Common Stock shall
be entitled to the payment of dividends on such fractional shares, to receive
the net asset value
-5-
<PAGE> 6
thereof upon redemption, to share in the assets of the Corporation upon
liquidation and to exercise voting rights with respect thereto.
D. The Board of Directors shall have full power in accordance with good
accounting practice: (a) to determine what receipts of the Corporation shall
constitute income available for payment of dividends and what receipts shall
constitute principal and to make such allocation of any particular receipt
between principal and income as it may deem proper; and (b) from time to time,
in its discretion (i) to determine whether any and all expenses and other
outlays paid or incurred (including any and all taxes, assessments or
governmental charges which the Corporation may be required to pay or hold under
any present or future law of the United States of America or of any other taxing
authority therein) shall be charged to or paid from principal or income or both,
and (ii) to apportion any and all of said expenses and outlays, including taxes,
between principal and income.
E. The Board of Directors shall have the power to determine from time
to time whether and to what extent and at what time and places and under what
conditions and regulations the books, accounts and documents of the Corporation
or any of them, shall be open to the inspection of stockholders, except as
otherwise provided by applicable law; and except as so provided, no stockholder
shall have any right to inspect any book, account or document of the Corporation
unless authorized to do so by resolution of the Board of Directors.
ARTICLE VIII
The address of the principal office of the Corporation in Maryland is
c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland
21202.
ARTICLE IX
The address of the initial registered office is c/o The Corporation
Trust Incorporated, 32 South Street, Baltimore, Maryland 21202.
ARTICLE X
The name of the initial registered agent at such address is The
Corporation Trust, Incorporated, a Maryland corporation.
ARTICLE XI
The name and address of the sole incorporator is:
Name Address
---- -------
Richard L. Teigen c/o Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, WI 53202
-6-
<PAGE> 7
IN WITNESS WHEREOF, the undersigned incorporator who executed the
foregoing Articles of Incorporation hereby acknowledges the same to be his act
and further acknowledges that, to the best of his knowledge, the matters and
facts set forth therein are true in all material respects under the penalties of
perjury.
Dated this 17th day of October, 1995.
/s/ Richard L. Teigen
---------------------
Richard L. Teigen
Sole Incorporator
-7-
<PAGE> 1
EXHIBIT 99.i
Legal Opinion
[FOLEY & LARDNER LETTRHEAD]
February 24, 1999
Van Wagoner Funds, Inc.
345 California Street
Suite 2450
San Francisco, CA 94104
Ladies & Gentlemen:
We have acted as counsel for you in connection with the
preparation of an Amended Registration Statement on Form N-1A relating to the
sale by you of an indefinite amount of Van Wagoner Funds, Inc. Common Stock
(such Common Stock being hereinafter referred to as the "Stock") in the manner
set forth in the Amended Registration Statement to which reference is made. In
this connection we have examined: (a) the Amended Registration Statement on Form
N-1A; (b) your Articles of Incorporation and Bylaws, as amended to date; (c)
corporate proceedings relative to the authorization for issuance of the Stock;
and (d) such other proceedings, documents and records as we have deemed
necessary to enable us to render this opinion.
Based upon the foregoing, we are of the opinion that the
shares of Stock when sold as contemplated in the Amended Registration Statement
will be legally issued, fully paid and nonassessable
We hereby consent to the use of this opinion as an exhibit to
the Amended Registration Statement on Form N-1A. In giving this consent, we do
not admit that we are experts within the meaning of Section 11 of the Securities
Act of 1933, as amended, or within the category of persons whose consent is
required by Section 7 of said Act.
Very truly yours,
/s/ Foley & Lardner
Foley & Lardner
<PAGE> 1
EXHIBIT 99.j-1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 7 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
January 29, 1999, relating to the financial statements and financial highlights
of the Van Wagoner Capital Appreciation Fund and the Van Wagoner Growth Fund,
two of the portfolios of the Van Wagoner Funds, Inc., which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading "Financial
Highlights" in such Prospectus.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
February 24, 1999
<PAGE> 1
EXHIBIT 99.j-2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 7 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
January 29, 1999, relating to the financial statements and financial highlights
of the Van Wagoner Emerging Growth Fund, the Van Wagoner Micro-Cap Fund, the Van
Wagoner Mid-Cap Fund, the Van Wagoner Post-Venture Fund and the Van Wagoner
Technology Fund, five of the portfolios of the Van Wagoner Funds, Inc., which
appears in such Statement of Additional Information, and to the incorporation by
reference of our report into the Prospectus which constitutes part of this
Registration Statement. We also consent to the reference to us under the heading
"Financial Highlights" in such Prospectus.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
February 24, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001002556
<NAME> VAN WAGONER FUNDS INC
<SERIES>
<NUMBER> 2
<NAME> EMERGING GROWTH FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 123,320,735
<INVESTMENTS-AT-VALUE> 170,659,118
<RECEIVABLES> 85,006,275
<ASSETS-OTHER> 680,781
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 256,346,174
<PAYABLE-FOR-SECURITIES> 66,377,909
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