<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
WASATCH FUNDS, INC.
68 South Main, Suite 400
Salt Lake City, UT 84101
January 31, 1996
WASATCH FUNDS, INC. ( "Wasatch Funds" or the "Company") is an open-end
management investment company issuing shares of Common Stock in separate
series or "Funds". The Company includes five Funds: the Growth Fund and
Income Fund are each diversified funds; the Aggressive Equity, Micro-Cap and
Mid-Cap Funds are each non-diversified funds. Each of the Funds has its own
investment objective designed to meet different investment goals.
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. A
Prospectus may be obtained without charge by calling or writing Wasatch Funds
at P.O. Box 2172, Milwaukee, Wisconsin 53202-2172 at (800) 551-1700. The
Statement of Additional Information and the related Prospectus are both dated
January 31, 1996. Capitalized terms used herein and not defined have the same
meanings as used in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History ..................................... 2
Investment Objectives and Policies .................................. 2
Description of Corporate Bond Ratings ............................... 3
Investment Restrictions ............................................. 4
Management of the Company ........................................... 6
Control Persons and Principal Holders of Securities ................. 7
Investment Advisory and Other Services .............................. 8
Brokerage Allocation and Other Practices ............................ 10
Capital Stock and Other Securities .................................. 11
Purchase, Redemption and Pricing of Securities Being Offered ........ 12
Tax Status .......................................................... 13
Calculation of Performance Data ..................................... 14
Financial Statements ................................................ 15
</TABLE>
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GENERAL INFORMATION AND HISTORY
Wasatch Funds, Inc. ("Wasatch Funds" or the "Company") was incorporated under
Utah law on November 18, 1986. It is an open-end management investment company
composed of five separate Funds. The Growth Fund and Income Fund are each
diversified funds; the Aggressive Equity Fund, the Micro-Cap Fund and Mid-Cap
Fund are each non-diversified funds. The Growth Fund, Income Fund and
Aggressive Equity Fund commenced operations on December 6, 1986, the Mid-Cap
Fund on August 16, 1992, and the Micro-Cap Fund on June 19, 1995.
INVESTMENT OBJECTIVES AND POLICIES
Wasatch Funds is a no-load mutual fund consisting of five separate series (the
"Funds"), each of which has its own investment objective designed to meet
different investment goals.
The Wasatch Aggressive Equity Fund is designed for the investor looking for
long-term growth of capital through investments in a non-diversified portfolio
of companies believed by the Manager to be rapidly growing. The "Flagship" of
the Wasatch Fund Family, this portfolio seeks to invest in smaller companies
which the Manager believes to have the potential to become much larger. These
companies are believed by the Manager to possess certain attributes which will
enable them to double in size within five years.
The Wasatch Micro-Cap Fund seeks long-term growth of capital. The Fund seeks
this objective by investing primarily in small capitalization companies
believed by the Manager to possess superior growth potential. The major
distinction between the Wasatch Aggressive Equity Fund and the Wasatch
Micro-Cap Fund is that the Micro-Cap Fund will normally invest primarily in
common stocks of companies with market capitalizations less than $150 million
at the time of initial purchase.
The Wasatch Growth Fund is designed for the more conservative equity investor
looking for long-term growth of capital through investments in a diversified
portfolio of companies which the Manager believes to be relatively stable and
offer superior growth prospects. The Manager seeks companies with the
potential to become much larger and grow at a more consistent, but slower rate
than the companies in the Wasatch Aggressive Equity Fund and the Wasatch
Mid-Cap Fund. As a further measure of conservatism, when the market conditions
warrant, the Fund will hold more cash or other fixed income investments than
the Wasatch Aggressive Equity Fund and the Wasatch Mid-Cap Fund.
The Wasatch Mid-Cap Fund seeks long-term growth of capital through investments
in small- to mid-sized companies believed by the Manager to have exceptional
growth potential. The companies in this portfolio are expected by the Manager
to grow their earnings at even higher rates than the companies in the Wasatch
Aggressive Equity Fund, the Wasatch Growth Fund or the Wasatch Mid-Cap Fund.
These anticipated higher growth rates may cause the Wasatch Mid-Cap Fund to be
more volatile than the other Wasatch Advisors Funds.
The Wasatch Income Fund's primary investment objective is to receive current
income at relatively lower risk by investing in fixed income securities. The
secondary objective is capital appreciation. The Manager may adjust the
average maturity of the Fund's portfolio from time to time, depending on its
assessment of the relative yields available on securities of different
maturities and its assessment of future interest rate patterns. The Fund is
not limited as to maturities of its portfolio investments, and to the extent
consistent with its investment objective, may take full advantage of the entire
range of maturities offered. However, under normal market conditions, the Fund
anticipates it will maintain a dollar weighted average portfolio maturity of
three years or less.
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Reference is made to "INVESTMENT OBJECTIVES, POLICIES AND RISKS" in the
Prospectus for a more complete discussion of the investment objectives,
policies and associated risks of the Company.
DESCRIPTION OF CORPORATE BOND RATINGS
Each Fund may invest in corporate bonds that are rated, at the time of
purchase, in the four highest categories by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P") or other nationally
recognized rating agencies or unrated securities deemed by the Manager to be
of comparable quality. The following list describes the various ratings of
corporate bonds:
Description of corporate bond ratings of Moody's:
Aaa-Bonds 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-edge". 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 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 risks appear somewhat larger than in Aaa
securities.
A-Bonds 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 sometime in the future.
Baa-Bonds 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.
Description of corporate bond ratings of S&P:
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 bonds in this category than in higher rated categories.
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<PAGE> 4
INVESTMENT RESTRICTIONS
The Company has adopted the following restrictions and policies relating to
the investment of assets of the Funds and their activities. These are
fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding voting shares of each Fund affected
(which for this purpose and under the Investment Company Act of 1940 means the
lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). A change in policy affecting only one Fund may be
effected with the approval of a majority of the outstanding shares of such
Fund.
The Aggressive Equity Fund and the Micro-Cap Fund may not:
1. As to 50% of the Fund's total assets, invest in individual companies
in which the Fund has invested 5% of the Fund's total assets or has
acquired more than 10% of the outstanding voting securities of such
company, measured at the time of each such investment.
The Mid-Cap Fund may not:
1. As to 75% of the Fund's total assets, invest in the securities of
any one issuer (other than the United States Government or government
agencies or instrumentalities) if immediately after and as a result of
such investment, the Fund owns more than 10% of any class of securities
of such issuer.
The Growth Fund and the Income Fund may not:
1. As to 75% of the Fund's total assets, invest in the securities of
any one issuer (other than the United States Government or government
agencies or instrumentalities) if immediately after and as a result of
such investment the value of the holdings of the Fund in the securities
of such issuer exceeds 5% of the Fund's total assets, taken at market
value.
2. As to 75% of the Fund's total assets, invest in the securities of
any one issuer (other than the United States Government or government
agencies or instrumentalities) if immediately after and as a result of
such investment, the Fund owns more than 10% of the outstanding voting
securities, or more than 10% of any class of securities, of such
issuer.
Each of the Aggressive Equity, Micro-Cap, Growth, Mid-Cap and Income Funds
may not:
1. Make investments for the purpose of exercising control or
management.
2. Invest more than 10% of its total assets in other investment
companies, or invest more than 5% of its assets in a single investment
company, or hold more than 3% of the total outstanding voting stock of
an acquired investment company. Investments in other investment
companies will be limited to Money Market Funds for the purpose of
investing idle cash balances.
3. Purchase or sell real estate, provided that the Funds may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein. Each of
the Funds has no current intention to invest in securities of this
nature.
4. Purchase or sell commodities or commodity contracts.
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5. Purchase any security on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of
transactions.
6. Make short sales of securities.
7. Invest in securities which cannot be readily sold because of legal
or contractual restrictions including repurchase agreements which
mature in more than 7 days or which are not otherwise readily
marketable if, regarding all such securities, more than 5% of its total
assets, or 10% of the net asset value of the Fund, taken at market
value, would be invested in such securities. Each of the Funds has no
current intention to invest in securities of this nature.
8. Make loans to other persons. (The Funds however may purchase and
hold debt instruments and enter into repurchase agreements in
accordance with their investment objectives and policies, as in the
opinion of the fund manager, these investments do not constitute the
making of loans.)
9. Issue senior securities, borrow money or pledge its assets except
that the Fund may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions in amounts
not exceeding 5% (taken at the market value) of its total assets and
pledge its assets to secure such borrowing. Each of the Funds has no
current intention to borrow as a temporary measure as allowed under the
above exception.
10. Underwrite securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
selling portfolio securities.
11. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof.
12. Purchase or sell interests in oil, gas or other mineral exploration
or development programs, although it may invest in the securities of
issuers which invest or sponsor such programs.
13. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any
particular industry.
14 Invest more than 5% of its total assets (taken at market value at
the time of each investment) in warrants of which no more than 2% will
be invested in non-listed issues that have warrants.
15. Invest more than 5% of its total assets (taken at market value at
the time of each investment) in the securities of new issuers, who with
predecessors have operating records of three (3) years or less.
16. Invest more than 5% of its total assets (taken at market value at
the time of each investment) in "Special Situations", i.e., companies
in the process of reorganization or buy-out.
Any investment restriction or limitation, fundamental or otherwise, appearing
in the Prospectus or Statement of Additional Information, which involves a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after an
acquisition of securities or utilization of assets, and such excess results
therefrom.
In addition, the Funds have made certain undertakings to a state securities
commission which are not deemed fundamental. These include not investing in
real estate mortgages, real estate limited partnerships, and oil, gas or other
mineral leases.
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Although a Fund cannot accurately predict its annual portfolio turnover rate,
the Manager expects that, under normal circumstances, the annual portfolio
turnover rate of the Micro-Cap Fund will not exceed 100%, but may be as high
as 150%. The current portfolio turnover rates for the Aggressive Equity,
Growth, Income and Mid-Cap Funds are set forth in the prospectus.
MANAGEMENT OF THE COMPANY
The Directors and executive officers of the Fund and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and Director is 68
South Main, Salt Lake City, Utah 84101.
*Samuel S. Stewart, Jr., Ph.D., CFA - President and Director
President and Director of the Company; President and Director of
Research for the Manager since 1975; Professor of Finance at the
University of Utah since 1975.
*Roy S. Jespersen, MBA - Vice President and Director
Vice President and Director of the Company; Vice President and
Portfolio Manager for the Manager since 1983.
*Heidi Preuss - Secretary/Treasurer
Controller and Administration Adviser for the Manager since December
1990; previously, a Ph.D. candidate in Accounting at the University
of Alberta, Canada.
*Jeff S. Cardon, CFA - Vice President and Director
Vice President and Director of the Company; Vice President and
Director of the Manager since 1985; Security Analyst for the Manager
since 1980.
James U. Jensen - Director
NPS Pharmaceuticals, Inc.
420 Chipeta Way
Salt Lake City, Utah 84108
Director of the Company; Vice President of Corporate Development and
Legal Affairs, NPS Pharmaceutical; previously Chairman and a partner
at Woodbury, Jensen, Kesler & Swinton, P.C. from 1986 to 1991.
William R. Swinyard - Director
Management Office
660 Tanner Building
Brigham Young University
Provo, Utah 84602
Director of the Company; Professor of Business Management, Brigham
Young University since 1985; Vice President for Struman and
Associates, Inc., a management consulting firm since 1983.
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* Interested person, as defined in the Investment Company Act of 1940, of
the Company.
The Board of Directors has appointed the officers of the Company to be
responsible for the overall management and day to day operations of the
Company's business affairs between board meetings.
The Funds' standard method of compensating directors is to pay each
disinterested director an annual fee of $3,600 for services rendered,
including attending meetings of the Board of Directors. The annual fee for
directors is increased to $6,000 for the fiscal year ending September 30,
1996. The Funds also may reimburse its disinterested directors for travel
expenses incurred in order to attend meetings of the Board of Directors.
Officers serve in that capacity without compensation from the Company. The
table below sets forth the compensation paid to the Company's directors and
officers during the fiscal year ended September 30, 1995 (exclusive of
out-of-pocket expenses reimbursed).
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Benefits Estimated Annual Total Compensation
Compensation From Accrued As Part of Benefits Upon From Company Paid
Name of Person, Position Company Fund Expenses Retirement to Directors
<S> <C> <C> <C> <C>
Samuel S. Stewart, Jr.
President and Director $ 0 None N/A $ 0
Roy S. Jespersen, Vice
President and Director $ 0 None N/A $ 0
Heidi Preuss
Secretary/Treasurer $ 0 None N/A $ 0
Jeff S. Cardon, Vice
President and Director $ 0 None N/A $ 0
James U. Jensen
Director $3,600 None N/A $3,600
William R. Swinyard
Director $3,600 None N/A $3,600
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 31, 1995, 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.
Shareholders with a controlling interest could effect the outcome of proxy
voting or the direction of management of the Company.
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SERIES A - WASATCH AGGRESSIVE EQUITY FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
31%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY, 10281-1003, 11%.
SERIES B - WASATCH GROWTH FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
45%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY, 10281-1003, 14%.
SERIES C - WASATCH INCOME FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
22%; Firstar Trust Co., Custodian for Ray R. Christensen IRA Rollover, 175 S.
West Temple, #510, Salt Lake City, Utah, 84101, 15%; Firstar Trust Co.,
Custodian for Dr. Jaime Mosquera IRA, 800 Pralle Lane, St. Charles, Missouri,
63303, 7%.
SERIES D - WASATCH MID-CAP FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
45%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY, 10281-1003, 19%.
SERIES E - WASATCH MICRO-CAP FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
33%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY, 10281-1003, 14%.
As of October 31, 1995 the directors and officers as a group owned less than
1% of the outstanding shares of the Wasatch Funds.
* Shareholders of record, not beneficial owners.
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, Wasatch Advisors, Inc. is the Company's
manager and investment advisor, providing services under the advisory and
service contracts. The Manager was organized in September 1975, has been in
the business of investment management since November 1975, and currently has
total assets under management including the assets of the Funds, of
approximately $924 million.
The principal executive officers and directors of the Manager are Samuel S.
Stewart, Jr., Ph.D., President and Director; Roy S. Jespersen, Vice President
and Director; Mark E. Bailey, Vice President and Director; Jeff S. Cardon,
Vice President and Director; Luana Buhler, Secretary; Karolyn Barker,
Director; Robert Gardiner, Director and James Milligan, Director. Dr. Samuel
S. Stewart, Jr. is the only owner of the Manager who owns more than 25% of the
Manger's outstanding equity and is deemed to control the Manager.
Under Advisory and Service Contracts, the Aggressive Equity and Growth Funds
pay the Manager a monthly fee computed on average daily net assets of each
Fund at the annual rate of 1.0%, the Micro-Cap Fund pays the Manager at the
annual rate of 2.0%, and the Mid-Cap Fund pays the Manager at an annual rate
of 1.25%.
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These fees are higher than those paid by other investment companies. The
Income Fund pays the Manager a monthly fee computed on average daily net
assets of the Fund at the annual rate of 0.50%. The management fees are
computed and accrued daily and are payable monthly.
The Manager provides an investment program for, and carries out the investment
policy and manages the portfolio assets of, each Fund. The Manager is
authorized, subject to the control of the Board of Directors of the Company, to
determine the selection, quantities and time to buy or sell securities for each
Fund. In addition to providing investment services, the Manager pays for office
space and facilities for the Company. Among other expenses, the Funds pay taxes
(if any), brokerage commissions on portfolio transactions, expenses of issuance
and redemption of shares, charges of custodians and dividend disbursing agents,
proxy material and costs of printing and engraving stock certificates, auditing
and legal expenses, certain expenses of registering and qualifying shares for
sale, fees of directors who are not "interested persons" of the Manager, costs
of typesetting, printing and mailing the Prospectus, Statement of Additional
Information and periodic reports to existing shareholders, and any other charges
or fees not specifically enumerated.
The Advisory and Service Contract provides that the Manager shall reimburse
each Fund for expenses in excess of the most restrictive expense limitation
required by state regulation. At the current time, the lowest applicable
expense limitation is 2 1/2% of the first $30 million of the average net
assets, 2% of the next $70 million of the average net assets, and 1 1/2% of
the remaining net assets of the investment company.
The Manager has voluntarily agreed to limit the Aggressive Equity Fund and the
Growth Fund expenses to 1.5%, the Micro-Cap Fund expenses to 2.50%, the
Mid-Cap Fund expenses to 1.75% and the Income Fund expenses to 1% of average
net assets calculated on a daily basis and will pay all expenses excluding
interest, taxes, extraordinary expenses, brokerage commissions and
transactions costs in excess of such limitation. The Manager may rescind
these limitations on expenses at any time and in the event of rescission the
terms of the Advisory and Service Contract would govern.
For the fiscal years ended September 30, 1995, 1994, and 1993, the Manager
accrued the following management fees and waived a portion of its management
fees in the following amounts (the Micro-Cap Fund commenced operations on June
19, 1995):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Aggressive Equity Fund
Gross Management Fees $1,446,523 $349,837 $174,390
Waived Management Fees 0 7,283 25,959
Growth Fund
Gross Management Fees $ 195,697 $140,933 $161,673
Waived Management Fees 16,636 19,106 17,804
Income Fund
Gross Management Fees $ 16,871 $ 17,515 $ 22,512
Waived Management Fees 19,946 13,802 15,999
Mid-Cap Fund
Gross Management Fees $ 237,215 $ 18,382 $ 22,733
Waived Management Fees 35,750 23,141 17,299
Micro-Cap Fund
Gross Management Fees $ 52,691 - -
Waived Management Fees 23,438 - -
</TABLE>
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GENERAL INFORMATION
Custodian and Transfer Agent
UMB Bank, n.a. serves as the Funds' Custodian. The Custodian is responsible
for, among other things, safeguarding and controlling the Company's cash and
securities. The Funds pay a monthly fee at the annual rate of .75 basis
points on combined net assets up to $500,000,000, plus .50 basis points on the
combined net assets in excess of $500,000,000. Sunstone Financial Group,
Inc., 207 East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202-2172, is
the Company's Transfer Agent. The Transfer Agent keeps records of all
shareholder accounts and transactions. Each Fund pays Sunstone Financial
Group, Inc. a Transfer Agent fee based on the number of shareholder accounts
subject to a minimum annual fee.
Counsel
Michael J. Radmer, Dorsey & Whitney, P.L.L.P., 220 South Sixth Street,
Minneapolis, Minnesota 55402-1498, acts as legal counsel to the Company and
reviews certain legal matters for the Company in connection with the shares
offered by the Prospectus.
Independent Auditors
Arthur Andersen LLP, 777 East Wisconsin Avenue, Milwaukee, WI 53202 are the
Company's independent Certified Public Accountants. In this capacity the firm
is responsible for auditing the financial statements of the Company and
reporting thereon.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities for the
Company and for the placement of its portfolio business and the negotiation of
the commissions paid on such transactions. It is the policy of the Manager to
seek the best security price available with respect to each transaction.
Except to the extent that the Company may pay higher brokerage commissions for
brokerage and research services (as described below) on a portion of its
transactions executed on securities exchanges, the Manager seeks the best
security price at the most favorable commission rate. In selecting dealers
and in negotiating commissions, the Manager considers the firm's reliability,
the quality of its execution services on a continuing basis and its financial
condition. When more than one firm are believed to meet these criteria,
preference may be given to firms which also provide research services to the
Company or the Manager.
Pursuant to provisions of the investment advisory agreements, the Company's
Board of Directors has authorized the Manager to cause the Company to incur
brokerage commissions in an amount higher than the lowest available rate in
return for the opinion that the continued receipt of supplemental investment
research services from dealers is essential to its provision of high quality
portfolio management services to the Company. The Manager undertakes that
such higher commissions will not be paid by the Company unless (a) the Manager
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Manager's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion, (b) such payment is made in compliance with the
provisions of Section 28(e) of the Securities and Exchange Act of 1934 and
other applicable state and federal laws, and (c) in the opinion of the Manager
the total commissions paid by the Company are reasonable in relation to the
expected benefits to the Company over the long term. The investment advisory
fees paid by the Funds under the investment advisory agreements are not
reduced as a result of the Manager's receipt of research services.
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<PAGE> 11
Consistent with both the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and such policies as the Board of Directors may
determine, and subject to seeking best execution, the Manager may consider
sales of shares of the Company as a factor in the selection of dealers to
execute portfolio transactions for the Company.
The Manager places portfolio transactions for other advisory accounts.
Research services furnished by firms through which the Company effects its
securities transactions may be used by the Manager in servicing all of its
accounts; not all of such services may be used by the Manager in connection
with the Company. In the opinion of the Manager, the benefits from research
services to each of the accounts (including the Company) managed by the
Manager cannot be measured separately. Because the volume and nature of the
trading activities of the accounts are not uniform, the amount of commissions
in excess of the lowest available rate paid by each account for brokerage and
research services will vary. However, in the opinion of the Manager, such
costs to the Company will not be disproportionate to the benefits received by
the Company on a continuing basis.
The Manager's brokerage practices are monitored on at least an annual basis by
the Board of Directors including the disinterested persons (as defined in the
Investment Company Act of 1940) of the Manager.
During the years ended September 30, 1995, 1994 and 1993, the Company paid the
following brokerage commissions:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Aggressive Equity Fund $232,209 $101,516 $55,067
Micro-Cap Fund 15,947 - -
Growth Fund 65,361 74,171 49,115
Income Fund 774 436 475
Mid-Cap Fund 31,846 16,241 10,639
</TABLE>
The changes in brokerage commissions are partially the result of changes in
the turnover rates of the Funds and changes in the amount of assets under
management. There are no stated markups on the principal transactions of the
Company. The purchases are executed at the ask price net and the sales are
executed at the bid price net.
CAPITAL STOCK AND OTHER SECURITIES
The Company is authorized to issue shares in separate series, or "Funds."
Five such Funds have been established:
Series A Common - Aggressive Equity Fund
Series B Common - Growth Fund
Series C Common - Income Fund
Series D Common - Mid-Cap Fund
Series E Common - Micro-Cap Fund
See "Organization of the Company" in the Prospectus, for a discussion of the
relative rights and characteristics of the shares.
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<PAGE> 12
To illustrate the method of computing the offering price of Company shares,
the offering price per share on September 30, 1995 was as follows:
<TABLE>
<CAPTION>
Aggressive Micro-Cap Growth Mid-Cap Income
Equity Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Net Assets
divided by $305,311,029 $25,368,141 $53,533,465 $98,605,477 $4,035,223
Shares Outstanding 12,212,284 9,333,798 3,351,512 5,297,597 384,158
equals
Net Asset Value Per Share $ 25.00 $ 2.72 $ 15.97 $ 18.61 $ 10.50
(Offering & Redemption Price)
</TABLE>
PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED
The procedures to be followed in the purchase and redemption of shares as well
as the method of determining the net asset value are fully disclosed in the
Prospectus. As indicated in the Prospectus, the net asset value is calculated
each day the New York Stock Exchange is open for trading. The New York Stock
Exchange is closed on the following national holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
Investors may exchange their shares of a Fund for the U.S. Government Money
Market Fund Fund as provided in the prospectus. Sunstone, in its capacity as
transfer agent for the Funds, receives a service fee from the U.S. Government
Money Market Fund Fund at the annual rate of 0.25% of 1% of the average daily
net asset value of the shares exchanged from the Funds into the U.S.
Government Money Market Fund Fund.
The Funds have filed a notification of election under Rule 18f-1 of the
Investment Company Act committing itself to pay in cash all requests for
redemption by any shareholder of record, limited in amount with respect to
each shareholder of record during any 90-day period to the lesser of:
(1) $250,000 or
(2) 1% of the net asset value of each Fund at the beginning of such
election period.
The Funds intend to also pay redemption proceeds in excess of such lesser
amount in cash, but reserve the right to pay such excess amount in kind, if it
is deemed in the best interest of the Funds to do so. In making a redemption
in kind, the Funds reserve the right to make a selection from each portfolio
holding of a number of shares which will reflect the portfolio make-up and the
value will approximate as closely as possible the value of the Funds' shares
being redeemed; any shortfall will be made up in cash. Investors receiving an
in kind distribution are advised that they will likely incur a brokerage
charge on the sale of such securities through a broker. The values of
portfolio securities distributed in kind will be the values used for the
purpose of calculating the per share net asset value used in valuing the
Funds' shares tendered for redemption.
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<PAGE> 13
TAX STATUS
Reference is made to "Dividends, Capital Gain Distributions and Taxes" in the
Prospectus.
Each Fund will be treated as a separate entity for Federal income tax purposes
since The Tax Reform Act of 1986 requires that all portfolios of a series fund
be treated as separate taxpayers. Each Fund intends to qualify each year as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). By so qualifying, each Fund will not be subject to
Federal income taxes to the extent that it distributes its net investment
income and realized net capital gains.
For Federal income tax purposes, distributions paid from net investment income
and from any realized net short-term capital gain are taxable to shareholders
as ordinary income, whether received in cash or in additional shares.
Dividends are taxable as ordinary income, whereas capital gain distributions
are taxable as long-term capital gains. The 70% dividends-received deduction
for corporations will apply only to the proportionate share of the dividend
attributable to dividends received by the Fund from domestic corporations.
Any dividend or capital gain distribution paid shortly after a purchase of
shares of the Fund will have the effect of reducing the per share net asset
value of such shares by the amount of the dividend or distribution.
Furthermore, even if the net asset value of the shares of the Fund immediately
after a dividend or distribution is less than the cost of such shares to the
investor, the dividend or distribution will be taxable to the investor.
Redemption of shares will generally result in a capital gain or loss for
income tax purposes. Such capital gain or loss will be long-term or
short-term, depending upon the holding period. However, if a loss is realized
on shares held for six months or less, and the investor received a capital
gain distribution during that period, then such loss is treated as a long-term
capital loss to the extent of the capital gain distribution received.
Investors may also be subject to state and local taxes
The Fund is required to withhold federal income tax at a rate of 31% ("backup
withholding") from dividend payments and redemption and exchange proceeds if
an investor fails to furnish the Fund with his social security number or other
tax identification number or fails to certify under penalty of perjury that
such number is correct or that he is not subject to backup withholding due to
the underreporting of income. The certification form is included as part of
the share purchase application and should be completed when the account is
opened.
Under the Code, each fund will be subject to a 4% excise tax on a portion of
its undistributed income if it fails to meet certain distribution requirements
by the end of the calendar year. Each fund intends to make distributions in a
timely manner and accordingly does not expect to be subject to the excise tax.
Under the Code, any dividend declared by a regulated investment company in
December of any calendar year and payable to shareholders of record on a
specified date in such month shall be deemed to have been received by each
shareholder on such date, and to have been paid by such company on such date
if such dividend is actually paid by the company before February 1 of the
following calendar year. The Company intends to pay all dividends during the
month of December so that they will not be impacted by this rule.
This section is not intended to be a full discussion of present or proposed
federal income tax laws and the effect of such laws on an investor. Investors
are urged to consult with their respective tax advisers for a complete review
of the tax ramifications of an investment in the Fund.
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CALCULATION OF PERFORMANCE DATA
The Funds may occasionally advertise performance data such as total return or
yield. To facilitate the comparability of these statistics from one mutual
fund to another, the Securities and Exchange Commission has developed
guidelines for the calculation of these statistics. The Funds will calculate
their performance data in accordance with these guidelines. The total return
for a mutual fund represents the average annual compounded rate of return over
a specified period of time that would equate the initial amount invested to
the value of the investment at the end of the period of time. This is done by
dividing the ending redeemable value of a hypothetical $1,000 initial payment
by $1,000 and raising the quotient to a power equal to one divided by the
number of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as
follows:
ERV 1/n
T=[(------)-1]
P
Where: T= average annual total return.
ERV= ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the
beginning of the period.
P= hypothetical initial payment of $1,000.
n= period covered by the computation, expressed in terms of years.
The Funds compute their aggregate total returns by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment.
The formula for calculating aggregate total return is as follows:
ERV
T=[(------)-1]
P
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.
A yield quotation is based upon a 30 day period and is computed by
dividing the net investment income per share earned during a 30-day (or
one-month) period by the net asset value per share on the last day of the
period and annualizing the result on a semiannual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. A Fund's net investment income per share
earned during the period is based on the average daily number of shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements.
This calculation can be expressed as follows:
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<PAGE> 15
a-b 6
Yield=2[(----+1) -1]
cd
Where: a= dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of Units outstanding during the period
that were entitled to receive dividends.
d= net asset value per share on the last day of the period.
FINANCIAL STATEMENTS
The following information from the Annual Report for the Company for the year
ended September 30, 1995 is attached hereto:
(a) Schedule of Investments
(b) Statements of Assets and Liabilities
(c) Statements of Operations
(d) Statements of Changes in Net Assets
(e) Financial Highlights
(f) Notes to Financial Statements
(g) Independent Auditor's Report
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