<TABLE>
<CAPTION>
THE WALL STREET FUND, INC.
SCHEDULE OF INVESTMENTS
December 31, 1996
COMMON STOCKS AND WARRANTS - 90.61%
<C> <S> <C>
Market
Shares Value
------ -----
BASIC MATERIALS - 7.71%
8,000+ Barrick Gold Corp................... $ 230,000
180,000+ Federation Resources................ 15,732
10,000+ ICC Technologies Inc................ 53,125
3,149+ IMC Global Inc...................... 123,205
100,000+ International Precious Metals Corp.. 442,182
12,000+ Jilin Chemical Ind.................. 175,500
3,000+ Nucor Corp.......................... 153,000
1,000+ Zoltek Companies Inc................ 36,313
---------
1,229,057
---------
CAPITAL GOODS- 6.94%
80,000+ Flow Intl. Corp.................... 740,000
2,500+ Hewlett Packard Co................. 125,625
10,000+ Nematron Corp...................... 53,125
40,000+ Stevens Graphics Series A.......... 60,000
2,500+ Zygo Corp.......................... 128,125
----------
1,106,875
----------
CONSUMER - CYCLICAL - 8.49%
6,000+ CompUSA Inc........................ 123,750
2,500+ Delia*s, Inc....................... 49,219
4,000+ Gap Inc............................ 120,500
3,000+ Home Depot Inc..................... 150,375
10,000+ Metromedia International Group Inc. 98,750
3,000+ North Face Inc..................... 57,375
8,000+ Pixar.............................. 104,500
3,500+ Saks Holdings Inc.................. 94,500
20,000+ Sport-Haley Inc.................... 252,500
6,000+ Tiffany & Co....................... 219,750
15,000+ Zomax Optical Media................ 81,563
----------
1,352,782
----------
CONSUMER NON-CYCLICAL - 19.41%
25,000+ Alpha-Beta Technology Inc.......... 265,625
10,000+ Alza Corp.......................... 258,750
2,000+ Amgen Inc.......................... 108,875
6,000+ Amway Japan Ltd. ADR............... 99,750
2,000+ Biochem Pharm. Inc................. 100,125
5,000+ Cellpro Inc........................ 61,250
10,000+ Centocor Inc....................... 358,125
4,000+ Chiron Corp........................ 74,250
3,500+ Genzyme Corp....................... 76,344
4,500+ Healthcare Compare Corp............ 191,250
5,000+ Idexx Laboratories Inc............. 180,625
12,000+ Isis Pharmaceuticals............... 214,500
15,000+ Liposome Co. Inc................... 287,813
5,000+ Martek Biosciences Corp............ 98,125
3,000+ Merck & Co......................... 237,750
2,000+ Pfizer Inc......................... 165,750
10,000+ Retirement Care Associates Inc..... 82,500
4,000+ Transkaryotic Therapies Inc........ 73,750
5,000+ Vencor Inc......................... 158,125
----------
3,093,282
----------
COMMON STOCKS AND WARRANTS (continued)
Market
Shares Value
------ ------
DIVERSIFIED - 1.81%
598,000+ International UNP Holdings Ltd..... $ 122,171
2,000+ Minnesota Mining & Manufacturing Co. 165,750
----------
287,921
----------
ENERGY - 2.62%
4,000+ Anadarko Petroleum Corporation..... 259,000
5,000+ Gulf Canada Resources.............. 36,875
3,000+ Unocal Corp........................ 121,875
----------
417,750
----------
FINANCIAL 2.38%
8,000+ Allmerica Financial Corp........... 268,000
3,000+ Federal National Mortgage
Association...................... 111,750
----------
379,750
----------
SERVICES - 8.77%
2,000+ APAC Teleservices Inc.............. 76,750
2,000+ Cintas Corp........................ 118,000
49,500+ Executive Telecard Ltd............. 300,094
6,000+ First Data Corp.................... 219,000
5,000+ Ogden Corp......................... 93,750
15,000+ Premis Corporation................. 81,563
28,000+ Qualmark Corporation............... 80,500
4,000+ Renaissance Solutions Inc.......... 181,500
15,750+ Strategic Distribution Inc......... 126,000
37,000+ U-Ship Inc......................... 120,250
----------
1,397,407
----------
TECHNOLOGY - 31.41%
7,500+ Adobe Systems Inc.................. 280,781
1,500+ Altera Corp........................ 109,031
5,000+ Ascend Communications Inc.......... 310,625
20,000+ Astea International Inc............ 115,625
5,191+ Avant Corporation.................. 164,165
15,000+ Celeritek Inc...................... 161,250
1,000+ Cisco Systems Inc.................. 63,688
2,000+ Digital Equipment Corp............. 72,750
1,000+ Electronics for Imaging Inc........ 81,875
3,000+ ESS Technology .................... 84,375
20,000+ Excite Inc......................... 207,500
100,000+ Executone Info. Systems............ 240,625
3,000+ Fusion Systems Corp................ 64,500
7,000+ Harbinger Corp..................... 182,000
2,000+ Intel Corp......................... 261,875
25,000+ Kasten Chase Applied Research...... 72,958
7,000+ Metatools, Inc..................... 81,813
4,000+ MFS Communications Inc............. 217,500
2,510+ Millicom Int'l. Cellular S.A....... 80,477
1,000+ Motorola Inc....................... 61,375
2,000+ Netscape Communications Corp....... 113,750
5,000+ Octel Communications Corp.......... 86,875
30,000+ On Technology Corporation ......... 163,125
3,000+ Oracle Systems Corporation......... 125,063
5,000+ Paging Network Inc................. 76,563
4,000+ Parametric Technologies............ 205,750
See notes to financial statements
<PAGE>
THE WALL STREET FUND, INC.
SCHEDULE OF INVESTMENTS
December 31, 1996
COMMON STOCKS AND WARRANTS (continued)
Market
Shares Value
------ -----
3,000+ Raptor Systems Inc................ $ 60,188
6,502+ Rational Software Corp............ 257,235
2,500+ Rogue Wave Software Inc........... 40,000
2,000+ Sawtek Inc........................ 78,625
4,000+ Seagate Technology ............... 158,000
11,000+ Select Software Tools Ltd.
Sponsored Adr.................. 195,938
3,000+ Synopsys Inc...................... 138,000
7,000+ Vitesse Semi-Conductor Corp....... 318,938
2,000+ Xilinx Inc........................ 73,625
----------
5,006,463
----------
TRANSPORTATION 0.50%
2,000+ Wisconsin Central Transportation.. 79,250
----------
UTILITIES 0.57%
2,000+ GTE Corp.......................... 91,000
----------
WARRANTS - 0.00%
875+ American Satellite Network Inc.
Warrants....................... 0
580+ Stevens International Inc. Cl A
Warrants....................... 0
----------
0
----------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $11,993,036)................ 14,441,537
----------
BONDS - 8.78%
Principal Market
Value Value
--------- ------
CONVERTIBLE BONDS - 8.78%
$200,000+ Air & Water Technologies 8.00%
05/15/2015..................... $ 176,000
200,000+ Alza Corp. 5.00%
05/01/2006..................... 196,000
220,000+^ Bonneville Pacific Corp. 7.75%
08/15/2009..................... 286,000
500,000+ Executone Information Systems 7.50%
03/15/2011..................... 443,750
300,000+ VLSI Technology Inc. 8.25%
10/01/2005..................... 298,500
----------
TOTAL BONDS
(Cost $841,353)................... 1,400,250
----------
TOTAL INVESTMENTS
(Cost $12,834,389) 99.39%.... 15,841,787
OTHER ASSETS LESS
LIABILITIES 0.61%.... 97,526
----------
TOTAL NET ASSETS 100.00%....$ 15,939,313
====== ==========
(1) Federal Tax Information: At December 31, 1996 the net unrealized
appreciation based on cost for Federal Income tax purposes of $12,887,404
was as follows:
Aggregate gross unrealized for all investments in
which there was an excess of value over cost....$ 3,894,385
Aggregate gross unrealized depreciation for all
investments in which there was an excess of
cost over value................................. (940,002)
---------
Net unrealized appreciation ....................$ 2,954,383
=========
<FN>
+ Non-income producing security.
^ Priced at fair value as determined by the Board of Directors.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE WALL STREET FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $12,834,389) (Note 1)............. $ 15,841,787
Cash ....................................... 58,243
Receivables:
Investment securities sold.......... $67,598
Fund shares sold.................... 68,033
Interest and dividends.............. 29,544
-------
165,175
Other assets................................ 1,535
Total Assets....................... 16,066,740
LIABILITIES:
Payables:
Investment securities purchased.... 111,405
Investment adviser fee............. 10,000
Other payables and accrued
expenses.................. 6,022
-------
Total Liabilities......... 127,427
----------
Net Assets....... $ 15,939,313
==========
Net Assets Consist of:
Capital stock at par value......... $ 2,003,045
Additional paid in capital......... 10,976,343
Unrealized appreciation on
investments............... 3,007,398
Accumulated net realized loss
on investments............ (47,473)
---------
Net Assets....... $ 15,939,313
==========
Net asset value and
redemption price per share
($15,939,313/2,003,045 shares
of capital stock outstanding)
(Note 4).......................... $7.96
=========
Maximum offering price per share
(100/96 of $7.96)................. $8.29
=========
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE WALL STREET FUND, INC.
STATEMENT OF OPERATIONS
December 31, 1996
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends.................... $ 52,028
Interest..................... 125,624
-------
Total income.......................... 177,652
Expenses:
Investment adviser fees
(Note 3)................... $116,345
Transfer agent fees and
dividend paying expenses.. 26,099
Custodian fees............... 17,126
Accounting services.......... 49,000
Reports to shareholders...... 11,645
Professional fees............ 27,759
Directors fees and expenses.. 18,673
Registration fees............ 7,119
Miscellaneous................ 11,853
-------
Total Expenses................... 285,619
Less:
Reimbursed expenses
(Note 3).................. (2,547)
-------
Net expenses.............. 283,072
-------
Net investment loss ...... (105,420)
NET REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
(Note 1)
Net realized gains from
investment transactions..... 2,067,893
Net decrease in unrealized appreciation
of investments.............. (333,671)
---------
Net realized and unrealized gains
on investments.............. 1,734,222
---------
Net increase in net assets
resulting from operations... $1,628,802
=========
</TABLE>
<TABLE>
<CAPTION>
THE WALL STREET FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the For the
year ended year ended
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Net investment loss $ (105,420) $ (48,766)
Net realized gains from
investment transactions 2,067,893 2,612,789
Net increase (decrease) in unrealized
appreciation of investments (333,671) 1,347,456
--------- ---------
Net increase in net assets
resulting from operations 1,628,802 3,911,479
Distributions to shareholders
from:
Net realized gains from
investment transactions
($1.15 and $1.80 per share,
respectively) (2,009,946) (2,567,131)
Net capital share transactions
(Note 4) 1,937,669 1,958,367
--------- ---------
Total increase in net assets 1,556,525 3,302,715
NET ASSETS:
Beginning of year 14,382,788 11,080,073
---------- ----------
End of year $15,939,313 $14,382,788
========== ==========
</TABLE>
<PAGE>
THE WALL STREET FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(1) Summary of significant accounting policies:
The Fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The following
is a summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles for investment
companies. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(A) Securities Valuations - The value of investments is based on the published
last sale prices on national securities exchanges, or, in the absence of
recorded sales, at the mean between the closing bid and asked prices on such
exchanges or over-the-counter. At December 31, 1996, the Fund held a security
for which a market quotation was not readily available and which was valued in
good faith by the Board of Directors. This security had a value of $286,000
representing 1.79% of the Fund's net assets.
(B) Federal Income Taxes - No provision for federal income taxes has been made
in the accompanying financial statements, since the Fund intends to continue to
comply with the provisions of the Internal Revenue Code applicable to regulated
investment companies and to distribute to its shareholders substantially all of
its net investment income and net realized gains on investments.
(C) Other - Security transactions are accounted for on the date securities are
purchased or sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. The net realized gains and losses are
determined on the identified cost basis. The Fund may periodically make
reclassifications among certain of its capital accounts as a result of the
timing and characterization of certain income and capital gains distributions
determined annually in accordance with federal tax regulations which may differ
from generally accepted accounting principles. During the year ended December
31, 1996, the Fund increased additional paid-in-capital by $39,676, decreased
accumulated net realized loss by $105,420 and decreased accumulated net realized
gain on investments by $145,096.
(2) Purchases and sales of securities:
Purchases and sales of investment securities, during the year ended
December 31, 1996 aggregated $21,321,470 and $21,322,565, respectively.
(3) Investment advisory fees and other:
The advisory agreement provides for advisory fees of 1/16 of 1% monthly
(equivalent to 3/4 of 1% per annum) of the first $125,000,000 of average net
assets of the Fund. The present advisory agreement also provides for the adviser
to reimburse the Fund for any expenses (including the advisory fee but excluding
taxes, interest and brokerage fees and extraordinary expenses incurred in
connection with any matter not in the ordinary course of business of the Fund)
over 2% of the first $10,00,000, 1 1/2% of the next $20,000,000 and 1% of any
balance of the average daily net asset value.
For the year ended December 31, 1996, Wall Street Management Corporation
(WSMC) earned investment advisory fees of $116,345 and reimbursed the Fund
$2,547 for expenses.
The adviser also serves as the Fund's principal underwriter. For the year
ended December 31, 1996, WSMC received $4,957 as its portion of the sales charge
on sales of shares of the Fund. Certain of the officers and directors of the
Fund are officers and directors of WSMC.
The Fund has arranged for American Data Services, Inc., of which the Fund's
Secretary and Treasurer is a principal, to prepare the accounting records and
perform administrative and transfer agent services for the Fund. Costs incurred
totalled $75,099 for the year ended December 31, 1996.
Morse, Williams & Co., Inc. (MWC), 100% owner of WSMC, performs
administrative services for the Fund. This includes costs of shared office
expenses, rent, telephone charges and supply expenses. For the year ended
December 31, 1996, no remuneration was paid by the Fund to MWC.
(4) Capital stock:
At December 31, 1996 there were 5,000,000 shares of $1 par value capital
stock authorized. Transactions in capital stock during the year ended December
31, 1996 and the year ended December 31, 1995 were as follows:
<TABLE>
<S> <C> <C> <C> <C>
1996 1995
---- ----
Shares Amount Shares Amount
------ ------ ------ ------
Shares sold.................. 78,951 698,614 40,412 $ 347,329
Shares issued for
reinvestment of
distribution from
realized gains.......... 243,015 1,905,236 320,091 2,432,692
Shares redeemed.............. (76,029) (666,181) (95,787) (821,654)
------- --------- ------- ---------
Net increase................. 245,937 $1,937,669 264,716 $1,958,367
======= ========= ======= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a fund share outstanding throughout each year)
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Net asset value, beginning of year........ $ 8.19 $ 7.42 $ 8.03 $ 7.60 $ 7.27
Income from investment operations
Net investment income (loss).............. (0.06) (0.03) (0.02) (0.02) 0.01
Net realized and unrealized
gains (losses) on investments.... 0.98 2.60 (0.38) 1.00 0.54
Total from investment operations.......... 0.92 2.57 (0.40) 0.98 0.55
Less distributions
Dividends from net investment income...... 0.00 0.00 0.00 0.00 (0.01)
Distribution from realized gains
from security transactions....... (1.15) (1.80) (0.21) (0.55) (0.21)
Total distributions....................... (1.15) (1.80) (0.21) (0.55) (0.22)
Net asset value, end of year ............. $ 7.96 $ 8.19 $ 7.42 $ 8.03 $ 7.60
Total return**............................ 11.45% 36.50% (4.86%) 13.17% 7.61%
Ratios/supplemental data
Net assets, end of year (in 000's)........ 15,939 14,383 11,080 11,561 11,202
Ratio of expenses to average net assets... 1.84% 2.02% 2.12% 2.04% 2.15%
Ratio of expenses to average net assets,
net of reimbursement................. 1.82% 1.90% 1.96% 1.96% 1.97%
Ratio of net investment income (loss)
to average net assets............... (0.70%) (0.50%) (0.47%) (0.31%) (0.08%)
Ratio of net investment income (loss)
to average net assets,
net of reimbursement................. (0.68%) (0.38%) (0.31%) (0.23%) 0.09%
Portfolio turnover rate................... 142.11% 143.27% 89.01% 107.22% 112.47%
Average commission rate paid+............. .0666 - - - -
<FN>
**Excluding sales charge.
+ For fiscal years beginning on or after September 1, 1996, a fund is required
to disclose its average commission rate per share for trades on which a
commission is charged.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Directors of
The Wall Street Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Wall Street Fund, Inc., including the schedule of investments, as of December
31, 1996, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Wall Street Fund, Inc. as of December 31, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
New York, New York
February 24, 1997
<PAGE>
PRINCIPAL INVESTMENT CHANGES
For the year ended December 31, 1996
NEW POSITIONS
Alpha-Beta Technology, Adtran Inc., Allmerica Financial Corp., Apac
Teleservices, Anadarko Petroleum Corporation, Ascend Communications, Astea
International Inc., Avant Corporation, Celeritek Inc., Cellpro Inc., Cisco
Systems Inc., Delia*s, Inc., Electronics For Imaging Inc., ESS Technology,
Federal Nat. Mtg. Assn., Fusion Systems Corp., Gulf Canada Resources, Gap Inc.,
Idexx Laboratories Inc., IMC Global Inc., Kasten Chase Applied Research, MFS
Communications Inc., Metromedia International Group, Minnesota Mining &
Manufacturing, Metatools, Inc., Nematron Corp., Netscape Communications, Ogden
Corp., On Technology Corp., Paging Network Inc., Pixar, Premis Corporation,
Qualmark Corporation, Raptor Systems Inc., Retirement Care Associates Inc.,
Rogue Wave Software, Sawtek Inc., Seagate Technology, Stevens International Cl A
Warrants, Saks Holdings Inc., Select Software Tools Ltd. Spon. ADR, Sport-Haley
Inc., Transkaryotic Therapies Inc., North Face Inc., U-Ship Inc., Wisconsin
Central Trans, Excite Inc., Zoltek Companies Inc., Zomax Optical Media.
CONVERTIBLE BONDS: Alza Corp. 5.00%, 05/01/2006.
ELIMINATIONS
Apple Computer Inc., Abbott Labs, Analog Devices Inc., Adaptec Inc., ADT
Limited, Adtran Inc., Acclaim Entertainment Inc., Aura Systems Inc, Boeing Co.,
BAB Holdings, Inc., Basic Petroleum Intl. Ltd., Brio Industries Inc., Boston
Scientific Corp., Bio Technology General Corp., CAI Wireless Systems Inc., CCH
Inc. Cl B, Cephalon Inc., Cerner Corp., Columbia Healthcare Corp., Dresser
Industries, Datalogix International, Data Works, Fluor Corp., Groupo Mexicano
Desarollo ADR, Heart Technology Inc., Immulogic Pharm. Corp., Inference Corp.
"A", Intersolv Inc., Liposome Convertible Preferred Stock, McDonalds Corp.,
Micro Component Technology, Medimmune Inc., Mariner Health Co., Microsoft Corp.,
Mobile Telecom Tech. Corp., Mattson Technology, Inc., Measurex Corp., New Plan
Realty Trust, Netstar Inc., Novadigm Inc., Northwest Pipe Co., Office Depot
Inc., Orphan Med. Inc., Picturetel Corp., Parker & Parsley Petroleum Co., PDT
Inc., Pete Geo Service ADR, Paget Mining Ltd., Pall Corp., Platinum Software,
Read-Rite Corp., Radius Inc., Ribi Immunechem Res. Inc., Repap Enterprises Inc.
Common, Singer Co., Sheldahl Inc., Shuffle Master Inc., Shiva Corp., Solectron
Corp., Sun Micro Systems, Tipperary Corp., United Meridian, Uunet Technologies
Inc., Ventritex Inc., Video Sentry Corp., Wal-Mart Stores Inc., Youth Services
Intl. Inc. Convertible Bonds: Browning Ferris Industries 6.25%, 08/15/2012,
Centocor 7.25%, 02/01/2001, IMC Global 6.25%, 12/01/2001, Seagate 6.75%,
05/01/2012.
This report is not to be construed as an offering for the sale of
The Wall Street Fund, Inc., or as a solicitation of an offer to buy any such
shares, unless accompanied by an effective prospectus setting forth details of
the Fund including the sales charge and other material information.
AVERAGE ANNUAL TOTAL RETURN++
[GRAPH SHOWN HERE]
AVERAGE ANNUAL TOTAL RETURN
After Sales Charge at the Beginning of each period
Including Reinvestment of Dividends.
1 YEAR: 6.99% 5 YEAR: 11.09% 10 YEAR: 11.23%
The maximum initial sales charge payable on an investment in the Fund was 5.50%
at December 31, 1986. At public offering price of $10,000, the net investment
in the Fund would be $9,450, assuming no waiver or reduction of sales charges.
Currently, the maximum sales charge is 4.0%. The performance information shown
represents past performance and should not be interpreted as indicative of the
Fund's future performance. Return and share price will fluctuate so that
shares, when redeemed, may be worth more or less than their original cost.
++ Not covered by report of independent accountants.
MANAGEMENTS DISCUSSION OF
FUND PERFORMANCE
The Fund's broad diversification policy combined with Fund Management's
stock selection were significant factors contributing to Fund performance in
1996. Management's strategy of investing in companies selected from a variety of
broad industry groups and investing in a large number of different companies
with strong fundamental growth characteristics provides protection from long
term fundamental portfolio risk. Fund Management's analytical emphasis on a
company's future sustainable earnings growth and the quality of corporate
management are also important to Fund performance.
Throughout most of 1996 interest rates were higher than the previous years
lower levels which affected the prices of the Fund's equity investments and
convertible bond investments. Market prices for your Fund's investments
generally increased due to strong corporate earnings. The very high inflow of
new funds into the US market increased the prices of large capitalization
businesses as investors bought these names and ignored many excellent smaller
and medium capitalization issues. Your fund includes small, medium as well as
large capitalization issues but is weighted in the faster growing smaller
companies.
<PAGE>
Dear Fellow Shareholders:
As the performance numbers indicate, 1996 was a positive year for your
Fund. We enjoyed a total return of +11.5% for the year as reported by
CDA/Weisenberger Mutual Fund reports. Since December 31, 1990, we have had an
average annual total return of better than 17% through December 31, 1996.
The year 1996 was good for U.S. investors in large stocks as indicated by
the S&P 500 total return of +22.8%. The smaller capitalization index, the
Russell 2000, was +14.8% and intermediate Lehman Government/Corporate bond index
was +2.8%.
The extraordinary strength in large capitalization equities in 1996 and
especially 4Q96, is likely to be matched or exceeded in 1997 by medium to
smaller capitalization securities as well as convertibles. The 1996 returns on
convertibles and the Russell 2000 was a little more than half as much as the
larger capitalization weighted S&P 500. It was difficult for an equity portfolio
blended with medium size companies and convertible securities to equal or exceed
the S&P 500 capitalization weighted index last year due to the vast quantity
of new investment dollars flowing to the larger company names.
As we progress into the new year we expect to see investment funds flow to
the areas of greater value, higher earnings per share growth investments. This
should prove beneficial to the Fund's portfolio along with lower interest rates.
The jury is still out on the economy; a number of people believe the
Federal Reserve will have to raise interest rates while others think the next
move will be down. We see the economy continuing real growth at a modest,
non-inflationary rate in the 2 1/2% range for the foreseeable future. We frankly
expect interest rates to resume their secular decline in 1997 once the markets
come to accept the paradigm that non-inflationary full employment is closer to a
4% than a 5 1/2% unemployment rate.
A modest slowing in the growth rate of earnings for the S&P 500 in 1997 and
beyond may be in the cards due to the cyclical nature of many of the companies
in the index. In this environment, the high sustainable growth names which we
favor for the Fund should perform well, especially the well managed smaller
capitalization stocks with innovative technologies and large market potentials.
We note with particular interest the expansion of market price earnings
multiples in progress. While this has been driven in part by the supply and
demand considerations of large inflows of money in the past several years (and
is therefore suspect as to its sustainability), we expect that gradually
declining interest rates will provide further (and perhaps more sustainable)
momentum to this expansion. In January 1995 and January 1996, the market P/E was
about 15X those years' estimated earnings; in January 1997 the P/E is 18 on this
year's earnings. For the owners of companies with superior growth prospects, as
the earnings come through, the stock prices should rise. Price earnings multiple
expansion merely adds more fuel to this very powerful engine.
We constantly ask ourselves whether the market has the ability to continue
to go upward. History tells us that we shouldn't expect another booming market
and to expect a price correction when money flows lessen, which may happen in
time. The magnitude of funds available for investment remains the largest
unknown, but it appears that the members of the massive "baby boom" generation
will continue to aggressively invest toward their retirement goals over the next
5 to 8 years and this savings pool should provide sufficient liquidity to limit
market corrections. For the foreseeable future, we continue to believe that good
quality growth equity investments will deliver the best long term returns. It is
our intention to remain fairly fully invested and to take advantage of any
correction to add to already solid positions.
If there is a cause for concern it comes from outside the U.S. where
economics are not solid, Europe and Japan especially come to mind. Given the
relative strength of the US, the dollar and dollar based investments are likely
to continue to shine, especially smaller capitalization growth companies in the
U.S.
Should you have any questions, please don't hesitate to call me directly or
send e-mail to [email protected].
Sincerely,
/s/ Robert P. Morse
Robert P. Morse
President
January 31, 1997
<PAGE>
DIRECTORS
John F. Carr, Emeritus
Clifton H.W. Maloney
Robert P. Morse, Chairman
Sharon A. Queeney
Harlan K. Ullman
OFFICERS
Robert P. Morse, President
Michael R. Linburn, Vice President
Allen C. Post, Vice President
Michael Miola, Secretary, Treasurer
INVESTMENT ADVISER
WALL STREET MANAGEMENT CORPORATION
230 Park Avenue
New York, New York 10169
CUSTODIAN
THE BANK OF NEW YORK
90 Washington Street, 11th Floor
New York, New York 10286
TRANSFER AGENT
AMERICAN DATA SERVICES
24 West Carver Street
Huntington, New York 11743
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
THE WALL STREET FUND INC.
ANNUAL REPORT
December 31, 1996
