Sunstone Financial Group, Inc.
207 East Buffalo Street
Suite 400
Milwaukee, WI 53202
Phone: (414) 271-5885
Fax #: (414) 271-5910
July 31, 1996
Via EDGAR
- ----------
Securities and Exchange Commission
Division of Investment Management
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Wasatch Funds, Inc. (the Funds);
(Registration Nos.: 33-10451; 811-4920)
--------------------------------
Gentlemen:
On behalf of the Fund and pursuant to Rule 30b2-1 and Section 24(b) under the
Investment Company Act of 1940, as amended, we hereby file the Quarterly Report
to shareholders for the period ended June 30, 1996.
If you have any questions concerning this filing, please do not hesitate to
contact me.
Very Truly Yours,
/s/ Mike Yanke
Mike Yanke
Sunstone Financial Group, Inc.
Client Services and Accounting Manager
MEY/sb
Encl.
WASATCH FUNDS
68 South Main Street
Salt Lake City, Utah 84101
(800) 551-1700
LETTER FROM THE INVESTMENT ADVISOR
JUNE 30, 1996
Dear Shareholder:
INVESTMENT PERSPECTIVE
Over the years we have cautioned Wasatch Funds' shareholders about the
difficulty of market timing. The performance of stocks in both the first and
second quarters of 1996 underscores the rationale of our argument. In January,
the market, and smaller stocks in particular, experienced a sell off and prices
fell. Unfortunately, market timers who sold their stocks during the decline are
probably worse off for it today. April and May were especially good months for
small stocks and Wasatch Funds. However, investors who saw this rise in prices
as a signal to enter the market are probably now licking their wounds and having
second thoughts about the soundness of their judgment. Why? Because in June
prices once again fell and technology stocks, in particular, were hit hard.
The economy, which alternately showed signs of strength and weakness throughout
the first half of the year and particularly in the second quarter, finished on a
surprisingly strong note. This only heightened concerns about inflation causing
stock prices to fall. Investors, confused and uncertain about which direction
the economy will take, reacted by being sometimes bullish and sometimes bearish.
The Federal Reserve Board has also been keeping investors guessing about whether
or not they will raise interest rates. Those predicting lower rates earlier in
the year are now talking about a rate increase in August.
Short-term performance and market volatility is always a concern for both the
Wasatch team and Wasatch Funds' shareholders. We want to once again remind
ourselves that we do not expect our performance to always be in line with the
market or market indexes. Our 21 year performance history clearly demonstrates
this fact. The fundamental reason is that instead of making top-down decisions
in response to the economy or market, our focus is on finding excellent
companies through intensive bottom-up research. Simply stated, this means that
all of our investment focus centers on trying to understand the characteristics
of successful companies. We leave trying to understand the economy and the
market to others.
AVERAGE ANNUAL
2ND ---------------------
INDEX QUARTER 1 YEAR 5 YEARS
---------------------------------------------------------------------
S&P 500 4.5% 26.0% 15.7%
S&P Midcap 400 2.9% 21.6% 16.7%
Russell 2000 5.0% 23.9% 17.5%
Nasdaq Composite Index 7.6% 27.0% 20.0%
Lehman Bros. Gov't./Corp.
Bond Index 0.5% 4.7% 10.5%
AVERAGE ANNUAL
--------------------------------
2ND SINCE
WASATCH FUNDS QUARTER 1 YEAR 5 YEARS COMMENCEMENT<F1>
------------------------------------------------------------------------
Aggressive Equity 2.4% 16.2% 16.8% 14.6%
Micro-Cap 9.1% 50.0% -- 59.5%
Growth 2.6% 27.4% 16.5% 13.8%
Mid-Cap (1.6)% 15.1% -- 16.7%
Wasatch-Hoisington U.S.
Treasury (formerly
Income Fund) 1.4% 4.8% 6.9% 7.9%
<F1> Commencement of operations for the Aggressive Equity, Growth and Wasatch-
Hoisington U.S. Treasury (formerly Income Fund) Funds is December 6, 1986;
for the Mid-Cap Fund, August 16, 1992; and for the Micro-Cap Fund, June 19,
1995.
REVIEW OF THE QUARTER
While the second quarter can be characterized by downside volatility in June, we
do not expect the downside to be without an upside. Our investment style is to
own relatively few companies and take large positions in the companies we like
the most. This style can really pay off for investors when the largest holdings
do well. In fact, throughout Wasatch's history our largest holdings have
rewarded shareholders more often than not. However, quarterly performance can
suffer when one or two of the larger holdings hit a bumpy patch of road. Madge
Networks, N.V. (MADGF) is a case in point. The company was one of our best
performers in 1995. However, in the second quarter of 1996 Madge announced an
earnings shortfall. This news caused the stock, which had been at $40 per share
at the beginning of the quarter, to drop dramatically. The price decline attests
to the wariness of investors and the harshness with which this market deals with
companies that miss their earnings targets.
Even with the experience of this quarter, we believe Wasatch Funds are
positioned to provide the targeted returns for shareholders. If the first half
of 1996 is any indication, things could change rather quickly. To move ahead, we
prune Fund holdings that have experienced problems and look for new companies to
refresh our portfolios. The Wasatch team has extensive knowledge about the
companies we are invested in. We feel as good about the makeup of Fund
portfolios as at any time in the past. It is our philosophy that over the long
run earnings growth drives stock prices. We expect the Wasatch Funds to lag the
indexes at times. We try to look past the performance of a quarter or a year to
focus on the long-term. Our efforts go into finding companies with excellent
earnings growth potential. Wasatch believes this is the key to getting solid
returns for shareholders over the long run.
LOOKING AHEAD
We are optimistic about the earnings growth potential of the companies in
Wasatch Funds' portfolios. While valuations tend to be at the higher end of the
valuation scale in the overall market, extreme valuations seem to be associated
with certain groups of stocks such as Internet-related companies. We are still
able to find many high-quality companies at reasonable prices. Even though
technology stocks have recently been giving shareholders the wildest ride in
terms of stock price volatility, we believe technology companies still offer
some of the best potential for gains due to long-term earnings growth prospects.
The need for technology at home, in schools and in the workplace continues to
grow. Corporate, home and recreational users still seem willing to pay for
faster and better ways of using technology. Wasatch analysts are taking a look
at companies in the consumer and business services sectors. These sectors seem
to be doing well right now and we are able to find high-quality companies with
exciting growth prospects at attractive valuations.
The economic backdrop should continue to be favorable for investors in the
latter half of 1996. We believe the corrections experienced by overvalued or
speculative segments of the market help to relieve pressure and keep the market,
as a whole, more healthy. At some point we expect a market correction that will
be felt by all. Corrections are something no one can predict or control. We
learned a long time ago to direct our energy toward research and serving our
shareholders. These are two aspects of the mutual fund business that we can do
something about.
We encourage you to stay on your chosen investment course. Recognize that the
road to wealth is not a smooth, straight ascent. Avoid the trap of market
timing. Peter Lynch has made the analysis that if you were out of stocks in 40
key months over the last 40 years your annual investment return would have
dropped from 11.4 percent to 2.7 percent.
Staying invested in the market is the only way to insure that you will capture
the biggest gains. Wasatch believes that wealth can be attained by deciding
which road to take and then guiding investments through the peaks and valleys,
attempting to obtain favorable returns over the long run.
In summary, companies in Wasatch Funds' portfolios are positioned to capitalize
on economic strength and stability, positive business forecasts and continued
strong consumer spending. We maintain our enthusiasm by focusing on our
investment discipline of finding and investing in "America's Best Growth
Companies."<F2> As long as we can find excellent companies at reasonable
valuations we will stay invested in the market. Over the past 21 years this
investment philosophy has served investors well.
<F2> These are companies we believe may possess an identifiable, sustainable
competitive advantage, are underfollowed, undervalued, well-managed, and have
sufficient "headroom" in their markets to double their size in five years.
WASATCH AGGRESSIVE EQUITY FUND
The Aggressive Equity Fund is composed of a blend of core, relatively stable
holdings and more aggressive, momentum stocks. We look for core holdings to
provide consistent performance over a range of market conditions. The Fund's
momentum holdings, while generally exhibiting more short-term volatility, give
it the potential for exceptional returns especially in rising markets.
During the second quarter the Fund's core holdings had stable performance, as
expected, and offset some of the volatility suffered by a few of the technology-
related, momentum holdings. Technology stocks did well in April and May, but
were hit hard in June. Business was good for retailers this quarter and several
of our core retail stocks did well. We believe this is due to continued strong
consumer spending. A long-time holding, Heilig-Meyers Co. (HMY), a furniture
retailer, is seeing a solid improvement in business, as is our second largest
holding, BMC West Corp. (BMCW), a building materials retailer. The Buckle, Inc.
(BKLE), a youth fashion retailer, also reported that business is going well.
The Fund's momentum holdings, which include quite a few technology stocks, had a
more difficult time this quarter. We sold some that seem to have longer-term
issues to resolve. We held others that we believe could rebound quickly. We sold
Digi International, Inc. (DGII), because the company experienced weakened demand
for its products and was at a loss to explain lower sales volume. International
Imaging Materials, Inc. (IMAK), was also sold during the quarter. Although the
company should meet its earnings estimates for the year, we see annual growth
decelerating to below our targeted minimum of 15 percent. Integrated Process
Equipment Corp. (IPEC), is an outstanding company that sells a machine for
making semiconductor wafers perfectly flat. IPEC also develops wafer cleaning
systems. We sold IPEC because we believe weakness in the semiconductor industry
could continue for at least a year. Madge Networks, N.V. (MADGF), disappointed
us by missing their earnings estimates. We have decided to hold the stock based
on our assessment of the company's long-term outlook. In the meantime, we will
monitor it closely looking for signs of fundamental weakness.
Several companies were sold because we felt valuation was getting too far ahead
of earnings growth potential. For example, WorldCom, Inc. (WCOM), is a classic
core holding. It is an international long distance company, similar to AT&T,
that leases high-quality, data capable lines to businesses. The company has also
capitalized on the growth and popularity of the Internet by leasing lines to
Internet Service Providers. The company is much larger now than when we first
bought it. We felt it was really getting too big for the Aggressive Equity Fund,
and now would be a good time to take our profits.
OUTLOOK
The Aggressive Equity Fund, with its blend of core and momentum holdings, has
provided Wasatch Funds' shareholders with returns that have beaten the market
averages over the long run. We think the Fund's long-term performance is
directly linked to our intensive research process. Since we believe earnings
growth drives stock prices, then the key is for us to find those companies with
the most earnings growth potential. Experience has shown us that smaller
companies can grow faster and longer than large companies. The Aggressive Equity
Fund is composed of small, fast-growing companies capable of providing the
earnings growth we seek. While there is little we can do to control short-term
volatility, we can focus on finding and investing in companies that will
position the Aggressive Equity Fund to help shareholders reach their long-term
financial goals.
FIVE LARGEST STOCK HOLDINGS - AS OF JUNE 30, 1996
COMPANY INDUSTRY % OF NET ASSETS
- ----------------------------------------------------------------------
National Health Investors,
Inc. REIT Real Estate 5.4%
BMC West Corp. Business Products 3.4%
Franklin Quest Co. Personal Products 3.3%
Heilig-Meyers Co. Retail 3.1%
O'Reilly Automotive, Inc. Retail 2.9%
WASATCH MICRO-CAP FUND
June 1996 marked the end of the Micro-Cap Fund's first full year and the news
couldn't be better. The Fund was up 50 percent for the year and just over nine
percent in the second quarter. On top of that the Fund has taken in around $95
million in assets, just $5 million short of its $100 million asset size limit.
We expect to close the Fund to new investors when it reaches the $100 million
mark.
This quarter's performance came from the overall strong earnings of both the
Fund's core and momentum holdings. It is noteworthy that the ten largest
holdings all contributed positively to performance. Solid performers included
Data Transmission Network (DTLN), a provider of information services and
communications; Ambassadors International, Inc. (AMIE), an operator of
international educational travel programs; and Datastream Systems, Inc. (DSTM),
a producer of software that helps factories manage maintenance and inventory via
the computer. This fine showing reaffirms our confidence in the Fund's
investment strategy and in the caliber of the portfolio's companies.
Companies bought on initial public offerings were a small, but exciting part of
the story this quarter. In June, the previously frenzied IPO market started to
cool off and prices came down from stratospheric heights. We were able to get
the allocations we wanted in some reasonably priced, high-quality companies
within Micro-Cap range. New names included: Central Financial Acceptance Corp.
(CFAC), a company that provides financing services to creditworthy lower income
borrowers; Fine Host Corp. (FINE), a contract food service management company;
The Fortress Group, Inc. (FRTG), a company that consolidates small independent
home builders and helps them control the costs of borrowing, administration and
supplies; Keystone Automotive Industries, Inc. (KEYS), a distributor of
replacement parts, produced by independent manufacturers for cars and light
trucks, to collision repair shops throughout the United States; and Diamond Home
Services, Inc. (DHMS), a company that markets and sells installed home
improvement products like roofing systems, doors, gutters and fencing, under the
"Sears" brand name. Even though our new Micro-Cap holdings had no significant
impact in the second quarter, we are optimistic about their potential impact in
the latter half of the year and beyond.
OUTLOOK
At the end of the Micro-Cap Fund's first year, we are where we like to be-
well-positioned for the future. The favorable returns have shown that the idea
of a specialized strategy of investing in the smallest companies has merit.
While we cannot control the economic and market forces that affect a fund's
returns, we will do our best to find and invest in high-quality Micro-Cap
companies.
We think this year's success is evidence that shareholders can benefit by making
Micro-Cap investing a component of their overall, long-term investment strategy.
Wasatch shareholders also get a level of commitment we believe is virtually
unmatched in the industry. Controlling the asset size of the Fund by closing it
to new investors helps insure that existing shareholders get the maximum benefit
of the Fund's investment style. We want your Micro-Cap Fund shares to be a
positive force that helps you reach your long-term financial objectives.
FIVE LARGEST STOCK HOLDINGS - AS OF JUNE 30, 1996
COMPANY INDUSTRY % OF NET ASSETS
- ----------------------------------------------------------------------
Sunstone Hotel Investors,
Inc. REIT Real Estate 4.8%
BMC West Corp. Business Products 4.5%
Micrel, Inc. Semiconductors 4.2%
Ambassadors International, Inc. Personal Services 4.2%
Thompson PBE, Inc. Business Products 3.8%
WASATCH GROWTH FUND
During the second quarter, the Growth Fund lived up to our expectations,
delivering stable performance in a fairly volatile market. As you are probably
aware, the Growth Fund came about as a result of opportunities we perceived in
the core holdings of our "flagship," the Wasatch Aggressive Equity Fund. The
Growth Fund is composed entirely of what Wasatch analysts consider to be stable
companies capable of consistent long-term earnings growth. The Fund has
virtually no exposure to classic technology stocks which were hit hard at the
first of the year and again in June.
Although slightly off in June, the Fund ended the quarter up nearly three
percentage points. Stocks in the consumer services sector were strong,
contributing significantly to this quarter's performance. It should also be
noted that several of the largest holdings were up, while most others stayed
level, helping to keep performance on track. BMC West Corp. (BMCW), a building
materials retailer, did well during the quarter. We bought more BMCW stock based
on the strength of our assessment of the company's long-term outlook. O'Reilly
Automotive, Inc. (ORLY), an automotive parts retailer and distributor also
contributed favorably to performance. Steady performers were: National Health
Investors, Inc. REIT (NHI), Sunstone Hotel Investors, Inc. REIT (SSHI) and
Washington Federal Savings, Inc. (WFSL).
Of the companies experiencing weakness during the quarter, most seemed to be off
due to market perceptions or unfavorable publicity rather than circumstances
that would cause us to worry about fundamentals or reconsider our long-term
view. Examples are: General Nutrition Co. (GNCI), a retailer that sells
vitamins, health care and sports nutrition products; and Franklin Quest Co.
(FNQ), a manufacturer and distributor of time management and personal
productivity products.
GNCI was hit by a price decline that was driven by negative news stories about
consumers abusing herbal medicine. We believe instances of abuse are rare and
not a threat to GNCI's long-run outlook. Negative impact from stories like these
has happened before and tends to die down in about 10 weeks. Wasatch analysts
believe demand for the company's products should be relatively stable because
they are tied into the megatrend toward healthier lifestyles as well as the
aging of the population. We have increased our GNCI investment in the Growth
Fund because we feel the company can still meet our targeted annual growth rate
of 15 percent.
Wasatch took advantage of a recent decline in the price of Franklin Quest's
stock to purchase more shares. We believe the price weakness is due to largely
unfounded concerns about the company. Several Wasatch analysts visited the firm
recently and came away feeling positive about management's plan to create growth
by using multiple channels to distribute Franklin's day planners. From our
vantage point, we believe Franklin Quest has the potential to generate the
consistent earnings growth we seek.
OUTLOOK
We believe the Growth Fund is well-positioned. Our focus will remain on pursuing
the Fund's investment strategy of finding and investing in stable companies
capable of consistent earnings growth. Using this bottom-up approach, we have
been able to get favorable returns for Growth Fund shareholders over the long
run.
FIVE LARGEST STOCK HOLDINGS - AS OF JUNE 30, 1996
COMPANY INDUSTRY % OF NET ASSETS
- ----------------------------------------------------------------------
National Health Investors,
Inc. REIT Real Estate 6.7%
General Nutrition Co. Retail 4.7%
BMC West Corp. Business Products 3.9%
Sunstone Hotel
Investors, Inc. REIT Real Estate 3.9%
Franklin Quest Co. Personal Products 3.8%
WASATCH MID-CAP FUND
Most market analysts agreed that concern over weak earnings caused prices of
technology stocks to fall in June. As the third quarter begins many are
predicting a further correction in the technology sector as fear over rising
inflation and interest rates continues. Because of its high exposure to this
segment of the market, investors in the Wasatch Mid-Cap Fund should continue to
expect greater fluctuation in share prices relative to the other Wasatch Funds.
This was evident in 1995 as the Fund rose over 58 percent.
The Fund continues to target rapidly growing companies in high growth
industries. Extreme growth rates can be accompanied by a greater margin of
error, making these companies more risky than companies with more consistent
growth rates. Generally, the more the expected risk, the greater the potential
reward. The second quarter shows the Mid-Cap Fund's volatility. It was up in
April and May, but down in June. The chart below clearly shows the historical
volatility of this Fund. One month of outperformance can more than make up for
underperformance and vice versa. We remind you that this Fund is designed for
long-term investors. You should expect short-term volatility. Our strategy is
not to be up every month. What we hope to do is capture superior returns for
shareholders over the long run. The Fund's average annual returns have been
nearly 17 percent since inception. The only way to insure that you will capture
the great months is to stay invested through the ups and downs.
Wasatch Mid-Cap Fund's outperformance or underperformance relative to the
S&P Midcap 400 on a monthly basis from the Fund's inception in August 1992
through June 1996.
8/92 +1.38 12/93 -0.59 3/95 +5.48
9/92 -2.10 4/95 +2.18
10/92 +2.33 1/94 +2.12 5/95 +1.39
11/92 +1.53 2/94 +1.07 6/95 +5.13
12/92 -3.52 3/94 -4.63 7/95 +3.84
4/94 -7.22 8/95 -1.44
1/93 -1.43 5/94 +9.34 9/95 +5.21
2/93 -6.53 6/94 -1.11 10/95 -2.21
3/93 -1.00 7/94 -4.71 11/95 -0.31
4/93 -4.16 8/94 +6.07 12/95 +0.47
5/93 +2.92 9/94 +3.62
6/93 -1.64 10/94 +4.99 1/96 -5.99
7/93 -1.84 11/94 +1.69 2/96 +1.53
8/93 -2.26 12/94 +1.77 3/96 -1.42
9/93 +0.49 4/96 +5.16
10/93 +2.62 1/95 -0.09 5/96 +0.93
11/93 -1.95 2/95 +0.89 6/96 -9.57
Although we were disappointed by Madge Networks, N.V. (MADGF) and General
Nutrition Co. (GNCI), we were encouraged by two of the Fund's large holdings.
WorldCom, Inc. (WCOM), an international long distance carrier, continues to have
a high rate of growth and is well-positioned to compete in the deregulated
telecom industry. Aspen Technologies, Inc. (AZPN), a manufacturer of chemical
engineering design software, has reported positive earnings growth for the
quarter. The company appears optimistic about the future. It has raised earnings
estimates based on a recent successful acquisition and a strong acquisition
program. We purchased the stock at less than $20 per share, today it's over $50
per share.
The Fund has nearly 48 percent of its holdings in technology companies. Despite
weakness in technology stocks in June, many of our companies reported strong
earnings during the quarter. With the decline in stock prices, valuations are
becoming more attractive. Wasatch analysts are especially attracted to the
valuations of high-end chip makers like Microchip Technology, Inc. (MCHP). The
value of products made by companies like Microchip is found in the design of the
chip rather than in the manufacturing of commodity parts which tend to be more
price sensitive.
We are also excited by the new companies we added to the portfolio during the
quarter. One example is Tecnomatix Technologies Ltd. (TCNOF), a manufacturer of
computer-aided production engineering "CAPE" software products. The company
has excellent growth potential because its software helps manufacturers
streamline the industrial design process. Manufacturers already using CAD and
CAM software are just beginning to use CAPE, leaving the field wide open for
Tecnomatix to introduce its CAPE products. Another example is Physicians
Resource Group, Inc. (PRG). The company helps eye care professionals consolidate
their business so they can more effectively compete for managed care contracts.
With the trend toward managed care, we think PRG has considerable opportunity
for rapid growth.
OUTLOOK
Going into the second half of the year, we feel good about the growth prospects
of companies in the Mid-Cap Fund's portfolio. We will stay with our investment
strategy of aggressively investing in companies we feel have the most earnings
growth momentum. We encourage you to remain focused on your long-term financial
objectives.
FIVE LARGEST STOCK HOLDINGS - AS OF JUNE 30, 1996
COMPANY INDUSTRY % OF NET ASSETS
- ----------------------------------------------------------------------
Express Scripts, Inc., Class A Health Care Services 7.6%
Kent Electronics Corp. Business Services 5.5%
WorldCom, Inc. Telecommunications 5.4%
Microchip Technology, Inc. Semiconductors 4.5%
Aspen Technologies, Inc. Computer Software 3.6%
WASATCH-HOISINGTON U.S. TREASURY FUND
(FORMERLY WASATCH INCOME FUND)
Late in the second quarter the Wasatch Income Fund became the "Wasatch-
Hoisington U.S. Treasury Fund." Changes in the Fund's investment objectives and
management were approved by the Board of Directors and Fund shareholders. A
prospectus supplement which details changes to the Fund is available from
Wasatch Funds.
In brief, Hoisington Investment Management Company was approved as sub-adviser
to the Fund, and took over making the day-to-day investment decisions. Wasatch
believes our arrangement with Hoisington and the Fund's focus on investing in
U.S. Treasury Securities, the highest-quality fixed income securities, will make
it a better vehicle for shareholders desiring capital appreciation and income
from their investments. It should also be a good choice for investors who feel
nervous about investing in stock mutual funds.
The investment strategy for the Fund is to attempt to get returns for
shareholders that are better than the rate of inflation. Hoisington believes the
key to positive returns rests in decisions regarding the maturity of securities
held in the Fund. When economic news is bearish, the Fund will most likely be
invested in securities of maximum duration, for example, 30-year Treasury Bonds.
When the economy shows signs of excessive strength, signaled by inflation and
rising interest rates, the Fund may go to very short maturities.
The Fund was up slightly in the second quarter. Performance came in at 1.4
percent, just ahead of the Lehman Bros. Government/Corporate Bond Index which
was at 0.5 percent for the quarter. Like the stock market, the bond market
fluctuated frequently in the second quarter due to uncertainty about whether the
economy was heating up or cooling off. At this time, longer maturities remain
attractive due to higher bond yields. The Fund's portfolio is currently holding
U.S. Treasury Securities with longer maturities. This is in keeping with
Hoisington's investment strategy of extending maturities in low inflation
environments.
OUTLOOK
Even though economic news was a mixed bag in the second quarter, the consensus
seems to be that the economy will not overheat in the second half of the year.
Hoisington's independent assessment of the economy is in agreement. Factors
influencing this outlook are: (1) broadly measured inflation is rising at 2%;
(2) worldwide capacity is plentiful and industrial prices are falling; (3) labor
markets are not tight when all the workers are counted; (4) the slowdown in
consumer spending is plainly observable; and (5) capital spending is currently
flagging. With a good deal of news indicating that the economy is not gaining
excessive strength, it is the Fund's present intention to stay invested in long-
term U.S. Treasury Securities.
Wasatch is pleased to welcome Hoisington Investment Management Company as part
of the Wasatch team. Hoisington brings considerable fixed income investment
expertise to the Fund. We look forward to Hoisington's contributions now and in
the future.
If you have any questions or would like more information about the Fund, please
call Wasatch Funds at 1-800-551-1700. We will be happy to send you a prospectus
supplement which details the Fund's investment strategy.
WRAPPING UP
We know that short-term volatility may concern shareholders who have not
experienced it before. We hope it will reassure you to know that over our 21
year history Wasatch has participated in several market corrections. In spite of
that participation we have been able to achieve an excellent track record. One
thing we have learned is that every cloud has a silver lining. We think our
bottom-up research process helps us find it.
Wasatch Funds are well-positioned to take advantage of buying opportunities in
the market right now. Many exceptional, but overvalued, companies have seen
their stock prices decline in recent weeks making them attractive to investors
who have done their homework. We are finding high-quality companies at
reasonable prices. Overall, the majority of companies we are invested in
continue to produce solid earnings growth.
Once again we encourage you to stay on your investment course. We will do our
best to find and invest in companies we believe have the most potential for
helping you achieve your long-term financial goals.
We appreciate the opportunity to serve you. It is important to us, not only to
manage your assets in our Funds, but to be available to address your needs and
concerns. Please call us at 1-800-551-1700 if we can be of assistance.
Sincerely,
/s/ Samuel S. Stewart, Jr.
- --------------------------
Samuel S. Stewart, Jr.
Chairman of the Board
AGGRESSIVE EQUITY FUND SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
NUMBER
OF SHARES VALUE
- ----------------------------------------------------------------------
COMMON STOCKS 98.6%
BUSINESS PRODUCTS 8.4%
361,950 American Business Information, Inc.<F3> $ 6,605,587
587,812 BMC West Corp.<F3> 10,066,280
715,200 Thompson PBE, Inc.<F3> 8,582,400
-----------
25,254,267
-----------
BUSINESS SERVICES 7.9%
135,950 Altron, Inc.<F3> 2,752,988
226,625 Barrett Business Services, Inc.<F3> 4,249,218
85,000 FYI, Inc. 1,572,500
261,800 Kent Electronics Corp.<F3> 8,181,250
197,500 National Dentex Corp.<F3> 4,443,750
96,200 Sanmina Corp. 2,597,400
-----------
23,797,106
-----------
COMMUNICATIONS PRODUCTS 4.0%
119,100 Digi International, Inc. 3,185,925
89,400 Hummingbird Communications Ltd.<F3> 2,726,700
410,900 Madge Networks, N.V.<F3> 5,958,050
-----------
11,870,675
-----------
COMMUNICATIONS SERVICES 1.1%
52,400 Data Transmission Network Corp.<F3> 3,353,600
-----------
COMPUTER SOFTWARE 8.2%
86,200 Aspen Technologies, Inc.<F3> 4,741,000
96,650 Datastream Systems, Inc.<F3> 3,406,912
222,000 Mercury Interactive Corp. 3,052,500
317,200 Phoenix Technologies Ltd.<F3> 5,313,100
119,300 Softkey International, Inc.<F3> 2,259,244
81,950 Synopsys, Inc.<F3> 3,257,513
138,000 Tecnomatix Technologies Ltd. 2,622,000
-----------
24,652,269
-----------
COMPUTER SYSTEMS & COMPONENTS 3.4%
329,200 Active Voice Corp.<F3> 3,950,400
39,200 C.P. Clare Corp. 1,009,400
70,950 Digitran Systems, Inc.<F3><F4> 1
40,000 Drexler Technology Corp.<F3><F4> 518,500
140,785 Pinnacle Systems, Inc.<F3> 2,921,289
COMPUTER SYSTEMS & COMPONENTS 3.4% (CONT'D.)
119,600 Zoom Telephonics, Inc. $ 1,734,200
-----------
10,133,790
-----------
ELECTRONICS 0.8%
76,000 Cyberoptics Corp.<F3> 1,178,000
83,000 PCD, Inc. 1,099,750
-----------
2,277,750
-----------
FINANCIAL SERVICES 1.0%
123,000 Central Financial Acceptance Corp. 1,706,625
166,286 World Acceptance Corp.<F3> 1,205,574
-----------
2,912,199
-----------
HEALTH CARE PRODUCTS 7.5%
262,450 Bio-Plexus, Inc.<F3> 2,624,500
254,075 Epitope, Inc.<F3> 3,969,921
391,741 Interpore International<F3> 2,399,414
97,500 Mentor Corp. 2,486,250
253,906 Nature's Sunshine Products, Inc. 6,474,603
158,100 Techne Corp.<F3> 4,624,425
-----------
22,579,113
-----------
HEALTH CARE SERVICES 7.1%
120,500 Corvel Corp.<F3> 4,307,875
159,050 Express Scripts, Inc., Class A<F3> 7,316,300
229,200 Home Health Corp. of America<F3> 3,108,525
38,000 Lanvision Systems, Inc. 451,250
261,925 Phamis, Inc.<F3> 3,863,394
99,100 Physician Support Systems, Inc. 2,242,138
-----------
21,289,482
-----------
PERSONAL PRODUCTS 4.5%
477,800 Franklin Quest Co.<F3> 9,914,350
218,324 Varsity Spirit Corp. 3,493,184
-----------
13,407,534
-----------
PERSONAL SERVICES 2.5%
17,800 Ambassadors International 249,200
110,100 Equity Corp. International<F3> 2,972,700
163,000 Fortress Group, Inc. 1,426,250
171,100 Seattle Filmworks, Inc.<F3> 2,780,375
-----------
7,428,525
-----------
REAL ESTATE 7.4%
493,600 National Health Investors, Inc. REIT $ 16,165,400
129,525 Oasis Residential, Inc. REIT 2,833,359
275,550 Sunstone Hotel Investors, Inc. REIT 2,996,606
-----------
21,995,365
-----------
RETAIL 15.1%
98,850 Buckle, Inc. (The)<F3> 3,385,613
93,800 Doubletree Corp.<F3> 3,329,900
10,500 Fine Host Corp. 1,206,000
247,600 Friedman's, Inc.<F3> 6,313,800
390,500 General Nutrition Co. 6,833,750
386,390 Heilig-Meyers Co. 9,273,360
139,700 Marks Bros. Jewelers, Inc. 3,178,175
238,150 O'Reilly Automotive, Inc.<F3> 8,632,938
67,350 St. John Knits, Inc. 3,005,494
-----------
45,159,030
-----------
SEMICONDUCTORS 7.6%
178,900 Lattice Semiconductor Corp.<F3> 4,315,962
415,600 Micrel, Inc.<F3> 6,961,300
360,200 Microchip Technology, Inc. 6,439,950
77,600 Photronics, Inc. 2,037,000
106,950 SDL, Inc. 2,967,862
-----------
22,722,074
-----------
TELECOMMUNICATIONS 7.1%
212,690 Century Telephone Enterprises 6,779,478
275,150 Intercel, Inc.<F3> 5,503,000
237,790 United States Cellular Corp.<F3> 7,371,490
28,250 WorldCom, Inc.<F3> 1,564,343
-----------
21,218,311
-----------
TRANSPORTATION 2.2%
215,450 Expeditors International of Washington, Inc. 6,678,950
-----------
OTHER 2.8%
220,600 OEA, Inc. 8,272,500
-----------
Total Common Stocks
(cost $249,950,166) 295,002,540
-----------
CONVERTIBLE BONDS 1.2%
1,485,000 National HealthCare LP,
6.00%, 7/1/00 $ 3,682,800
-----------
Total Convertible Bonds
(cost $2,851,200) 3,682,800
-----------
PREFERRED STOCK 0.0%
12,500 Digitran Systems, Inc.<F4> 1
-----------
Total Preferred Stock
(cost $95,729) 1
-----------
PRINCIPAL
AMOUNT
- -------------
SHORT-TERM INVESTMENTS 1.1%
(variable rate)
$3,267,600 UMB Bank Money Market Fiduciary 3,267,600
-----------
Total Short-Term Investments
(cost $3,267,600) 3,267,600
-----------
Total Investments 101.0%
(cost $256,164,695) 301,952,941
Liabilities, less
Cash and Other Assets (1.0)% (2,847,049)
-----------
NET ASSETS 100.0% $299,105,892
===========
<F3>Non-income Producing
<F4>Restricted Security
MICRO-CAP FUND SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
NUMBER
OF SHARES VALUE
- ----------------------------------------------------------------------
COMMON STOCKS 90.8%
BUSINESS PRODUCTS 9.4%
250,374 BMC West Corp.<F5> $ 4,287,654
105,000 Keystone Automotive Industries, Inc. 1,089,375
297,200 Thompson PBE, Inc.<F5> 3,566,400
-----------
8,943,429
-----------
BUSINESS SERVICES 11.5%
149,475 Barrett Business Services, Inc.<F5> 2,802,656
133,000 Electrostar, Inc. 1,463,000
158,500 FYI, Inc. 2,932,250
131,950 National Dentex Corp.<F5> 2,968,875
52,500 PC Service Source, Inc. 761,250
-----------
10,928,031
-----------
COMMUNICAITONS SERVICES 3.3%
48,800 Data Transmission Network Corp.<F5> 3,123,200
-----------
COMPUTER SOFTWARE 3.8%
43,100 Datastream Systems, Inc.<F5> 1,519,275
126,000 Phoenix Technologies Ltd.<F5> 2,110,500
-----------
3,629,775
-----------
COMPUTER SYSTEMS & COMPONENTS 2.7%
49,750 Active Voice Corp.<F5> 597,000
74,700 Pinnacle Systems, Inc.<F5> 1,550,025
27,000 Zoom Telephonics, Inc. 391,500
-----------
2,538,525
-----------
ELECTRONICS 2.3%
42,000 Cyberoptics Corp.<F5> 651,000
114,100 PCD, Inc. 1,511,825
-----------
2,162,825
-----------
FINANCIAL SERVICES 5.2%
152,000 Central Financial Acceptance Corp. 2,109,000
100,000 Fortress Group, Inc. 875,000
110,500 Rockford Industries, Inc. 1,975,188
-----------
4,959,188
-----------
HEALTH CARE PRODUCTS 6.7%
29,000 Anesta Corp. $ 355,250
41,500 Bio-Plexus, Inc.<F5> 415,000
156,000 Epitope, Inc.<F5> 2,437,500
40,000 Resound Corp. 510,000
90,550 Techne Corp.<F5> 2,648,588
-----------
6,366,338
-----------
HEALTH CARE SERVICES 8.0%
54,300 Corvel Corp.<F5> 1,941,225
224,700 Home Health Corp. of America<F5> 3,047,493
70,200 Phamis, Inc.<F5> 1,035,450
69,000 Physician Support Systems, Inc. 1,561,125
-----------
7,585,293
-----------
PERSONAL PRODUCTS 7.4%
356,000 Celex Group, Inc. 2,625,500
70,000 Diamond Home Services, Inc. 1,172,500
201,799 Varsity Spirit Corp. 3,228,784
-----------
7,026,784
-----------
PERSONAL SERVICES 6.4%
283,200 Ambassadors International, Inc.<F5> 3,964,800
31,200 Equity Corp. International<F5> 842,400
81,050 Seattle Filmworks, Inc.<F5> 1,317,063
-----------
6,124,263
-----------
REAL ESTATE 4.8%
416,500 Sunstone Hotel Investors, Inc. REIT 4,529,437
-----------
RETAIL 10.9%
56,300 Buckle, Inc. (The)<F5> 1,928,275
28,675 Eateries, Inc.<F5> 161,297
72,500 Fine Host Corp. 870,000
90,700 Friedman's, Inc.<F5> 2,312,850
89,635 Harold's Stores, Inc.<F5> 1,378,138
77,500 K & G Men's Center, Inc. 1,627,500
57,600 O'Reilly Automotive, Inc.<F5> 2,088,000
-----------
10,366,060
-----------
SEMICONDUCTORS 5.5%
37,000 Integrated Measurement Systems, Inc. 952,750
236,500 Micrel, Inc.<F5> 3,961,375
SEMICONDUCTORS 5.5% (CONT'D.)
93,000 Micro Component Technology, Inc.<F5> $ 337,125
-----------
5,251,250
-----------
TELECOMMUNICATIONS 2.0%
148,000 Rural Cellular Corp., Class A 1,887,000
-----------
TRANSPORTATION 0.9%
83,500 USA Truck, Inc.<F5> 876,750
-----------
Total Common Stocks
(cost $77,829,589) 86,298,148
-----------
PRINCIPAL
AMOUNT
- -------------
SHORT-TERM INVESTMENTS 11.8%
(variable rate)
$11,181,998 UMB Bank Money Market Fiduciary 11,181,998
-----------
Total Short-Term Investments
(cost $11,181,998) 11,181,998
-----------
Total Investments 102.6%
(cost $89,011,587) 97,480,146
Liabilities, less
Cash and Other Assets (2.6)% (2,430,993)
-----------
NET ASSETS 100.0% $95,049,153
===========
<F5>Non-income Producing
GROWTH FUND SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
NUMBER
OF SHARES VALUE
- ----------------------------------------------------------------------
COMMON STOCKS 88.2%
BUSINESS PRODUCTS 9.8%
223,375 American Business Information, Inc.<F6> $ 4,076,594
267,000 BMC West Corp.<F6> 4,572,375
240,000 Thompson PBE, Inc.<F6> 2,880,000
-----------
11,528,969
-----------
BUSINESS SERVICES 8.0%
112,500 Altron, Inc. 2,278,125
108,450 Kent Electronics Corp.<F6> 3,389,063
121,700 National Dentex Corp.<F6> 2,738,250
38,200 Sanmina Corp. 1,031,400
-----------
9,436,838
-----------
COMPUTER SYSTEMS & COMPONENTS 0.0%
18,100 Digitran Systems, Inc.<F6><F7> 1
-----------
FINANCIAL SERVICES 6.7%
5,000 Franklin Savings Assn.<F6> 1
113,550 Green Tree Financial Corp. 3,548,437
213,989 Washington Federal, Inc. 4,386,773
-----------
7,935,211
-----------
HEALTH CARE PRODUCTS 6.6%
40,000 Medtronic, Inc. 2,240,000
28,000 Mentor Corp. 714,000
78,120 Nature's Sunshine Products, Inc. 1,992,060
94,450 Techne Corp.<F6> 2,762,662
-----------
7,708,722
-----------
HEALTH CARE SERVICES 4.8%
47,900 Corvel Corp.<F6> 1,712,425
56,100 Express Scripts, Inc., Class A<F6> 2,580,600
91,000 Phamis, Inc.<F6> 1,342,250
-----------
5,635,275
-----------
PERSONAL PRODUCTS 5.0%
215,100 Franklin Quest Co.<F6> 4,463,325
91,400 Varsity Spirit Corp. 1,462,400
-----------
5,925,725
-----------
PERSONAL SERVICES 3.3%
45,700 Equity Corp. International<F6> $ 1,233,900
36,500 Loewen Group, Inc. 1,104,125
98,238 Seattle Filmworks, Inc.<F6> 1,596,359
-----------
3,934,384
-----------
REAL ESTATE 13.4%
240,200 National Health Investors, Inc. REIT 7,866,550
155,200 Oasis Residential, Inc. REIT 3,395,000
417,900 Sunstone Hotel Investors, Inc. REIT 4,544,663
-----------
15,806,213
-----------
RETAIL 21.6%
118,900 Buckle, Inc. (The)<F6> 4,072,325
50,600 Doubletree Corp.<F6> 1,796,300
94,600 Friedman's, Inc.<F6> 2,412,300
318,400 General Nutrition Co. 5,572,000
178,100 Heilig-Meyers Co. 4,274,400
90,000 Marks Bros. Jewelers, Inc. 2,047,500
109,950 O'Reilly Automotive, Inc.<F6> 3,985,688
28,300 St. John Knits, Inc. 1,262,888
-----------
25,423,401
-----------
TELECOMMUNICATIONS 4.0%
108,737 Century Telephone Enterprises 3,466,007
22,600 WorldCom, Inc.<F6> 1,251,475
-----------
4,717,482
-----------
TRANSPORTATION 2.1%
79,500 Expeditors International of Washington, Inc. 2,464,500
-----------
OTHER 2.9%
87,500 OEA, Inc. 3,281,250
4,300 Speedway Motorsports, Inc. 110,187
-----------
3,391,437
-----------
Total Common Stocks
(cost $91,229,737) 103,908,158
-----------
CONVERTIBLE BONDS 2.3%
1,082,000 National HealthCare LP,
6.00%, 7/1/00 $ 2,683,360
-----------
Total Convertible Bonds
(cost $2,173,910) 2,683,360
-----------
PRINCIPAL
AMOUNT
- -------------
WARRANTS 0.0%
$ 1 Cherokee, Inc., Series C 1
-----------
Total Warrants
(cost $6) 1
-----------
SHORT-TERM INVESTMENTS 8.6%
(variable rate)
10,190,559 UMB Bank Money Market Fiduciary 10,190,559
-----------
Total Short-Term Investments
(cost $10,190,559) 10,190,559
-----------
Total Investments 99.1%
(cost $103,594,212) 116,782,078
Cash and Other Assets,
less Liabilities 0.9% 1,050,587
-----------
NET ASSETS 100.0% $117,832,665
===========
<F6>Non-income Producing
<F7>Restricted Security
MID-CAP FUND SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
NUMBER
OF SHARES VALUE
- ----------------------------------------------------------------------
COMMON STOCKS 96.9%
BUSINESS SERVICES 10.2%
165,485 Altron, Inc.<F8> $ 3,351,071
289,200 Kent Electronics Corp.<F8> 9,037,500
160,000 Sanmina Corp. 4,320,000
-----------
16,708,571
-----------
COMMUNICATIONS PRODUCTS 6.1%
142,200 Digi International, Inc. 3,803,850
109,000 Hummingbird Communications Ltd.<F8> 3,324,500
192,850 Madge Networks, N.V.<F8> 2,796,325
-----------
9,924,675
-----------
COMPUTER SOFTWARE 21.6%
106,975 Aspen Technologies, Inc.<F8> 5,883,625
15,500 Checkpoint Systems, Inc. 372,000
55,000 Legato Systems, Inc. 3,025,000
269,000 Mercury Interactive Corp. 3,698,750
82,200 Parametric Technology Corp.<F8> 3,565,425
331,150 Phoenix Technologies Ltd.<F8> 5,546,762
259,700 Softkey International, Inc.<F8> 4,918,069
130,000 Synopsys, Inc.<F8> 5,167,500
163,950 Tecnomatix Technologies Ltd. 3,115,050
-----------
35,292,181
-----------
COMPUTER SYSTEMS & COMPONENTS 3.6%
15,500 Drexler Technology Corp.<F8><F9> 1,101,813
233,900 Pinnacle Systems, Inc.<F8> 4,853,425
-----------
5,955,238
-----------
FINANCIAL SERVICES 3.9%
185,000 Green Tree Financial Corp. 5,781,250
20,000 Security First Network Bank 660,000
-----------
6,441,250
-----------
HEALTH CARE PRODUCTS 2.8%
38,500 Mentor Corp. 981,750
141,650 Nature's Sunshine Products, Inc. 3,612,075
-----------
4,593,825
-----------
HEALTH CARE SERVICES 11.0%
271,325 Express Scripts, Inc., Class A<F8> 12,480,950
HEALTH CARE SERVICES 11.0% (CONT'D.)
113,100 Phamis, Inc.<F8> $ 1,668,225
112,600 Physicians Resource Group, Inc. 3,758,025
-----------
17,907,200
-----------
PERSONAL PRODUCTS 1.2%
53,000 CUC International, Inc. 1,881,500
2,500 Donna Karan International, Inc. 70,000
-----------
1,951,500
-----------
PERSONAL SERVICES 1.3%
129,000 Seattle Filmworks, Inc.<F8> 2,096,250
-----------
RETAIL 4.9%
174,000 Friedman's, Inc.<F8> 4,437,000
97,850 O'Reilly Automotive, Inc.<F8> 3,547,063
-----------
7,984,063
-----------
SEMICONDUCTORS 15.8%
90,000 Atmel Corp.<F8> 2,711,250
150,000 ETEC Systems, Inc. 3,337,500
71,800 Integrated Process Equipment Corp.<F8> 1,489,850
76,500 Maxim Integrated Products, Inc. 2,089,406
232,600 Micrel, Inc.<F8> 3,896,050
295,000 Microchip Technology, Inc. 7,301,250
181,400 SDL, Inc. 5,033,850
-----------
25,859,156
-----------
TELECOMMUNICATIONS 11.3%
213,500 Intercel, Inc.<F8> 4,270,000
171,170 United States Cellular Corp.<F8> 5,306,270
160,138 WorldCom, Inc.<F8> 8,867,642
-----------
18,443,912
-----------
OTHER 3.2%
139,000 OEA, Inc. 5,212,500
-----------
Total Common Stocks
(cost $140,224,965) 158,370,321
-----------
SHORT-TERM INVESTMENTS 2.5%
(variable rate)
$4,017,565 UMB Bank Money Market Fiduciary $ 4,017,565
-----------
Total Short-Term Investments
(cost $4,017,565) 4,017,565
-----------
Total Investments 99.4%
(cost $144,242,530) 162,387,886
Cash and Other Assets,
less Liabilities 0.6% 1,044,114
-----------
NET ASSETS 100.0% $163,432,000
===========
<F8>Non-income Producing
<F9>Restricted Security
WASATCH-HOISINGTON U.S. TREASURY FUND SCHEDULE OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS 93.4%
$ 250,000 U.S. Treasury Note,
9.375%, 2/15/06 $ 297,032
3,750,000 U.S. Treasury Note,
6.25%, 8/15/23 3,401,588
1,800,000 U.S. Treasury Note,
7.50%, 11/15/24 1,910,088
-----------
Total U.S. Government Obligations
(cost $5,577,678) 5,608,708
-----------
SHORT-TERM INVESTMENTS 5.0%
(variable rate)
301,310 UMB Bank Money Market Fiduciary 301,310
-----------
Total Short-Term Investments
(cost $301,310) 301,310
-----------
Total Investments 98.4%
(cost $5,878,988) 5,910,018
Cash and Other Assets,
less Liabilities 1.6% 93,854
-----------
NET ASSETS 100.0% $ 6,003,872
===========
