June 21, 1996
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: Wasatch Funds, Inc.
(33-10451; 811-4920)
Filing Under Rule 497(e) of the Securities Act of 1933
Gentlemen:
On behalf of the above-referenced registered investment company, transmitted
herewith for filing pursuant to Rule 497(e) under the Securities Act of 1933, as
amended, is a Supplement dated June 21, 1996 to the Prospectus dated January 31,
1996. Questions regarding this filing may be directed to the undersigned at
(414) 271-5885.
Very truly yours,
/s/ Mike Yanke
Mike Yanke
Client Services and Accounting Manager
cc: Mike Radmer
WASATCH INCOME FUND
IS NOW
WASATCH-HOISINGTON
U.S. TREASURY FUND
WASATCH FUNDS, INC.
SUPPLEMENT
DATED JUNE 21, 1996
TO THE PROSPECTUS DATED JANUARY 31, 1996
WASATCH-HOISINGTON
U.S. TREASURY FUND
IS A MEMBER OF
WASATCH FUNDS
FAMILY
OF NO-LOAD MUTUAL FUNDS
WASATCH-HOISINGTON
U.S. TREASURY FUND
WASATCH-HOISINGTON U.S. TREASURY FUND
INVESTMENT OBJECTIVES
- - Income and capital appreciation through investments in high-quality U.S.
Treasury Securities.
- - Provide a rate of return over a business cycle that exceeds the rate of
inflation.
WASATCH-HOISINGTON U.S. TREASURY FUND
INVESTMENT STRATEGY
- - Long-term approach to investing in fixed income securities.
- - Invest in high-quality U.S. Treasury Securities
- Typically the most liquid
- Pose only minimal credit risk
- - Manage maturity of the Fund's portfolio to attempt to get superior returns
for long-term Shareholders
- Shorten maturity to help protect capital during periods of sharply rising
economic activity and inflation.
- Lengthen maturity to capture potential profits when the economy is stable
and interest rates are falling.
- - Portfolio decisions are based on fundamental research and critical
assessment of
- National and international economic trends
- Interest rate trends
- Changes in inflationary pressures
- Value of long treasury bonds relative to inflation
ABOUT HOISINGTON
- - Hoisington Investment Management Company - founded in 1980.
- - Specializes in managing assets through a strategic approach to fixed income
investing.
- - Manages approximately $2.8 billion in assets for individuals, pension &
profit-sharing plans, trusts & estates, charitable organizations and
corporations.
- - Minimum size for individually managed account - $10 million.
WHY INVEST IN THIS FUND?
- - Wasatch-Hoisington U.S. Treasury Fund Shareholders minimum initial
investment-$2,000 or $1,000 for an IRA.
- - Tap the knowledge and expertise of a premier fixed income money manager.
- - Take advantage of Wasatch Funds' experience, integrity and dedication to
customer service.
- - Opportunity to add a high-quality fixed income component to a long-term
investment plan.
- - The need to be more conservative but want to protect assets from the
corrosive effects of inflation.
AS ALWAYS WASATCH FUNDS PROVIDES
- - Investment options to meet a wide range of Shareholder needs and financial
goals.
- - Shareholder Services Representatives available toll-free at 1-800-551-1700.
- - Quarterly Fund statements, reports and newsletters.
Please read the prospectus and supplement, including the section on interest
rate risk, before you invest.
WASATCH FUNDS, INC.
SUPPLEMENT
dated June 21, 1996
to the Prospectus dated January 31, 1996
At a special meeting of the shareholders of the WASATCH INCOME FUND (the
"Income Fund" or the "Fund") held on June 21, 1996, the following items were
approved:
1. An amendment to the Advisory and Service Contract between the Fund and
Wasatch Advisors, Inc. (the "Adviser") authorizing the Adviser to retain a
sub-adviser or sub-advisers to assist the Adviser in furnishing investment
advice to the Fund.
2. A sub-advisory agreement between the Adviser and Hoisington Investment
Management Company ("Hoisington") pursuant to which Hoisington will direct the
investment of the Fund's assets and be responsible for the formulation and
implementation of a continuing program for the management of the Fund's assets.
3. A modification to the investment objective of the Fund.
4. An amendment to the Fund's fundamental investment restrictions to allow it
to lend portfolio securities.
Presented below are the details of each item with a reference to the pages in
the Prospectus and/or Statement of Additional Information which are modified.
ITEM 1
AMENDMENT TO THE ADVISORY AND SERVICE CONTRACT BETWEEN THE FUND AND WASATCH
ADVISORS, INC. (THE "ADVISER")
The following information is added to the section titled "Advisory and Other
Agreements" on pages 23 and 24 of the Prospectus.
Shareholders approved an amendment authorizing the Adviser, at its option and
expense, to retain a sub-adviser or sub-advisers to assist the Adviser in
furnishing investment advice to the Income Fund. The amendment was proposed
because the Adviser and the Board of Directors of Wasatch Funds, Inc. (the
"Company") believe that the Fund's investment performance would likely be
enhanced if a sub-adviser specializing in fixed income management could be
engaged and that Fund marketing might also be enhanced if a sub-adviser with an
excellent reputation for fixed income management were retained. The Amendment
provides that the Adviser shall be responsible for monitoring compliance by any
sub-adviser it retains with the investment policies and restrictions of the Fund
and with any other limitations or directions prescribed by the Board of
Directors. The Amendment further provides that any appointment of a sub-adviser
will in no way limit or diminish the Adviser's obligations and responsibilities
under the Advisory Agreement.
The Amendment does not change the rate of the advisory fee payable by the Fund,
which remains at an annual rate of 1/2 of 1.0% of the Fund's average daily net
assets.
ITEM 2
SUB-ADVISORY AGREEMENT BETWEEN
THE ADVISER AND HOISINGTON INVESTMENT MANAGEMENT COMPANY ("HOISINGTON")
The following information is added to the section "Advisory and Other
Agreements" on pages 23 and 24 of the Prospectus.
Under the terms of the Sub-Advisory Agreement, and subject to the supervision of
the Adviser, Hoisington will direct the investment of the Fund's assets and be
responsible for the formulation and implementation of a continuing program for
the management of the Fund's assets, including the placement of purchase and
sale orders on behalf of the Fund.
The Sub-Advisory Agreement provides that the Adviser shall pay Hoisington a
monthly management fee computed at the annual rate of 0.02% of the Fund's
average daily net assets as long as and whenever the Fund has net assets less
than $20 million and one-half (1/2) of the monthly fee the Adviser receives from
the Fund under the Advisory Contract as long as and whenever the Fund has net
assets of $20 million or more. The Adviser will retain the remainder of the
advisory fee paid under the Advisory Contract.
The Sub-Advisory Agreement will terminate automatically in the event of its
assignment. In addition, the Sub-Advisory Agreement is terminable at any time,
without penalty, by the Board of Directors or by a vote of a majority of the
Fund's outstanding voting securities on 60 days' written notice to the Adviser
and Hoisington, by the Adviser on 60 days' written notice to the Sub-Adviser, or
by the Sub-Adviser on 60 days' written notice to the Adviser. The Sub-Advisory
Agreement shall continue in effect only so long as such continuance is
specifically approved at least annually by either the Board of Directors of the
Company, or by a vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Fund, provided that, in either event, such
continuance is also approved by a vote of a majority of the directors who are
not parties to such Agreement, or interested persons of such parties, cast in
person at a meeting called for the purpose of voting on such approval.
SUPPLEMENTAL INFORMATION
ABOUT THE SUB-ADVISER
Hoisington is a registered investment adviser that was incorporated in 1980.
Hoisington is wholly-owned by Van Robert Hoisington and provides investment
management services for individuals, pension and profit-sharing plans, trusts
and estates, charitable organizations and corporations and other business
entities. As of December 31, 1995, Hoisington provided investment advice to 43
separately managed accounts and had approximately $2.8 billion of assets under
management. Hoisington provides investment management for fixed income
securities, including U.S. government securities.
The address of Hoisington and each of its Directors is 1250 Capital of Texas
Highway South, Building 3, #600, Austin, Texas 78746. The names and principal
occupations of the principal executive officer and each Director of Hoisington
are set forth below.
NAME PRINCIPAL OCCUPATION
- ---- --------------------
Van Robert Hoisington President and Director of Hoisington
Ethel Jeanne Hoisington Director of Hoisington
David M. Hoisington Director and Vice President of Hoisington
Van Robert Hoisington, Jr. Director and Vice President of Hoisington
Janice Teague Green Senior Vice President of Hoisington
CHANGE OF NAME OF THE FUND
The Board of Directors of the Company has adopted a resolution CHANGING THE NAME
OF THE WASATCH INCOME FUND TO THE "WASATCH-HOISINGTON U.S. TREASURY FUND" (the
"Fund") effective on the date the Sub-Advisory Agreement becomes effective,
which is expected to be June 21, 1996. PLEASE CONTINUE TO USE NEW ACCOUNT
APPLICATION FORMS, CONTRIBUTION FORMS, ETC. WHICH BEAR THE NAME "WASATCH INCOME
FUND." ALL INVESTMENTS WILL AUTOMATICALLY BE MADE IN THE WASATCH-HOISINGTON
U.S. TREASURY FUND.
EXPENSES
On an annual basis and as a percentage of average daily net assets, the Adviser
has voluntarily agreed to limit Other Expenses (after reimbursements) to 0.25%.
This limits annual Total Fund Operating Expenses (after reimbursements) to 0.75%
of the Fund's average net assets computed on a daily basis. The Adviser will
maintain such expense limitation at least through September 30, 1997. This
information supersedes the information for the Income Fund which appears in the
table "Annual Fund Operating Expenses" on page 2 of the Prospectus.
The following amounts for expenses paid on a $1,000 investment supersede the
figures for the Income Fund shown in the table on page 3 of the Prospectus.
1 year $ 8
3 years $24
5 years $42
10 years $94
ITEM 3
MODIFICATION TO THE INVESTMENT OBJECTIVE
OF THE FUND
The following information supersedes in its entirety the information which
appears in the sections titled "INCOME FUND Investment Objective" and
"Investment Policies and Techniques" on pages 19 through 21 of the Prospectus.
The following information also supersedes the paragraph about the Wasatch Income
Fund under the heading "Investment Objectives and Policies" on page 2 of the
Statement of Additional Information dated January 31, 1996.
WASATCH-HOISINGTON U.S. TREASURY FUND
INVESTMENT OBJECTIVE. The investment objective of the Fund is to provide a real
rate of return (i.e., a rate of return that exceeds the rate of inflation) over
a business cycle by investing in U.S. Treasury Securities with an emphasis on
both income and capital appreciation. In pursuing its objective, at least 90% of
the Fund's total assets will be invested in U.S. Treasury Securities and in
repurchase agreements collateralized by such securities. The remainder of the
Fund's portfolio can also be invested in high-quality money market instruments,
cash equivalents and cash, which in the opinion of the Manager/Sub-Adviser
present only minimal credit risks.
The Fund is not limited as to the 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. The Manager/Sub-Adviser may adjust
the average maturity (effective duration) of the Fund's portfolio from time to
time depending upon its assessment of national and international economic and
interest rate trends, changes in inflationary pressures, and the value of long
treasury bonds relative to inflation. Under normal market conditions, it is
expected that over the course of a business cycle, the effective duration of the
Fund will vary from less than a year to a maximum of 15 years. In terms of
maturity, it will range from less than a year to a maximum of 30 years.
The term "business cycle" is used to describe fluctuations in total economic
activity. It refers to the period of time it takes the economy to shift from a
peak in business activity to a trough and back to a peak. (In other words, it
refers to the start of a recession through recovery and expansion and back to
recession.) The average post-war business cycle (measured from the end of one
recession to the start of the next recession) has been about 48 months, ranging
from 12 to 94 months. Interest rates generally follow this cycle, being at
relatively high levels near the beginning of a recession and falling during the
recession and the early part of the business recovery. Generally, interest rates
begin to rise toward the end of a business expansion again peaking near the
start of the next recession.
An investment in the Fund involves certain risks. These include the following:
CREDIT RISK. Credit risk is the risk that the issuer of a debt security will
fail to make payments on the security when due. The Manager/Sub-Adviser seek to
limit credit risk by investing primarily in U.S. Treasury Securities and in
repurchase agreements collateralized by such securities. Treasury securities
means securities which are direct obligations of the United States Treasury such
as bonds, notes and bills. Treasury bills are issued on a discount rate basis
and have a maturity of one year or less. Longer-dated treasury securities are
issued with interest paid semiannually to holders. Notes are generally issued in
maturities of 10 years and shorter, and bonds are currently issued with a
maturity of 30 years. Unlike corporate bonds or government agency securities,
all treasury securities are direct obligations of the U.S. government varying
only in maturity and coupon. Treasury securities generally are viewed as
carrying minimal credit risk.
INTEREST RATE RISK. Interest rate risk is the risk that the value of a fixed-
rate debt security will decline due to changes in market interest rates. Even
though some interest-bearing securities are investments which offer a stable
stream of income at relatively high current yields, the prices of such
securities are affected by changes in interest rates and are therefore subject
to market price fluctuations. The value of fixed income securities varies
inversely with changes in market interest rates. When interest rates rise, the
value of the Fund's portfolio securities, and therefore its net asset value per
share, generally will decline. In general, the value of fixed-rate debt
securities with longer maturities is more sensitive to changes in market
interest rates than the value of such securities with shorter maturities. Thus,
if the Fund is invested in securities with longer weighted average maturities,
the net asset value of the Fund should be expected to have greater volatility in
periods of changing market interest rates.
If the Manager/Sub-Adviser forecast that interest rates will decrease, the
average maturity of the portfolio can be extended out to 30 years. If the
Manager/Sub-Adviser forecast an increase in interest rates, a defensive policy
may be more appropriate, and the Manager/Sub-Adviser may deem it prudent to
reduce the average maturity of the portfolio to less than one year.
Effective duration estimates the interest rate risk (price volatility) of a
security, i.e., how much the value of the security is expected to change with a
given change in interest rates. The longer a security's effective duration, the
more sensitive its price is to changes in interest rates. For example, if the
interest rate increased 1% on a bond with an effective duration of five years,
the price of the bond would decline 5%. Similarly, if the interest rate
increased 1% on a bond with an effective duration of 15 years, the price of the
bond would decline 15%. At a yield of 7%, the effective duration of a 30-year
U.S. treasury bond is about 13 years. It is important to understand that, while
a valuable measure, effective duration is based on certain assumptions and has
several limitations. It is most useful as a measure of interest rate risk when
interest rate changes are small, rapid and occur equally across all the
different points of the yield curve.
U.S. TREASURY STRIPS. The Fund may invest in zero coupon Treasury Securities
(U.S. Treasury STRIPS). Such securities are debt obligations which do not
entitle the holder to periodic interest payments prior to maturity and are
traded at a discount from their face amounts. The discount of zero coupon
Treasury Securities varies primarily depending on the time remaining until
maturity and prevailing levels of interest rates. Zero coupon securities can be
sold prior to their due date in the secondary market at the then-prevailing
market value. The market prices of zero coupon securities are generally more
volatile than the market prices of securities of comparable quality and similar
maturity that pay interest periodically and may respond to a greater degree to
fluctuations in interest rates than do such non-zero coupon securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
respect to U.S. Treasury Securities. A repurchase agreement involves the
purchase by the Fund of treasury securities with the condition that after a
stated period of time the original seller (a member bank of the Federal Reserve
System or a recognized securities dealer) will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements
involve certain risks not associated with direct investments in securities. In
the event the original seller defaults on its obligation to repurchase, as a
result of its bankruptcy or otherwise, the Fund will seek to sell the
collateral, which action could involve costs or delays. In such case, the Fund's
ability to dispose of the collateral to recover such investment may be
restricted or delayed. While collateral will at all times be maintained in an
amount equal to the repurchase price under the agreement (including accrued
interest due thereunder), to the extent proceeds from the sale of collateral
were less than the repurchase price, the Fund would suffer a loss. Repurchase
agreements maturing in more than seven days are considered illiquid and subject
to the Fund's restriction on investing in illiquid securities.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities (principally to broker-
dealers) where such loans are callable at any time and are continuously secured
by collateral (cash or government securities) equal to no less than the market
value, determined daily, of the securities loaned. The Fund will receive amounts
equal to interest on the securities loaned. The Fund will also earn income for
having made the loan. The Fund will limit its loans of portfolio securities to
an aggregate of 33-1/3% of the value of its total assets, measured at the time
such loan is made. ("Total assets" of the Fund include the amount lent as well
as the collateral securing such loans.)In determining whether the Fund meets the
requirement that at least 90% of its total assets be invested in U.S. Treasury
Securities, the Fund will consider the securities lent as well as the collateral
securing such loans.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. However, the Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which either the Manager or the Sub-
Adviser has determined are creditworthy under guidelines established by the
Company's Board of Directors. The Fund may also experience a loss if, upon the
failure of a borrower to return loaned securities, the collateral is not
sufficient in value or liquidity to cover the value of such loaned securities
(including accrued interest thereon). Apart from lending its securities,
investing in repurchase agreements, and acquiring debt securities, as described
in the Prospectus and Statement of Additional Information, the Fund will not
make loans to other persons.
The rate of turnover in the Fund will vary substantially from year to year
depending on market opportunities. During some periods, turnover will be well
below 50% but at other times could exceed 200% annually. While such portfolio
adjustments may require the sale of securities prior to their maturity date, the
goal of such transactions will be either to increase income and/or to change the
duration of the overall portfolio.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS
AND TAXES
With the change in the Fund's Investment Objective, the Fund will not emphasize
current income but instead will emphasize both income and capital appreciation.
With the reduced emphasis on current income, the Board of Directors of the
Company has adopted a resolution providing that following the payment of the
monthly dividend for the month ended July 31, 1996, the Fund will pay dividends
annually, rather than monthly. This information supersedes the information
regarding monthly dividend distributions for the Income Fund in the section
titled "Dividends" on page 35 of the Prospectus.
ITEM 4
AMENDMENT TO THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS TO ALLOW IT TO LEND
PORTFOLIO SECURITIES
Previously, the Fund had a fundamental policy which stated in relevant part that
it may not "make loans to other persons"(Statement of Additional Information
dated January 31, 1996, Investment Restrictions, Item 8, page 5). The Board of
Directors of the Company adopted a resolution, which the shareholders approved,
modifying this restriction as follows:
The Fund may not make loans to other persons, except that it may lend
portfolio securities representing up to one-third of the value of its
total assets. (The Fund, however, may purchase and hold debt
instruments and enter into repurchase agreements in accordance with
its investment objective and policies as, in the opinion of the Fund
Manager/Sub-Adviser, these investments do not constitute the making of
loans.)
The lending of portfolio securities to broker-dealers, banks and certain other
institutions may increase Fund income but also may involve certain risks. For
further information on securities lending, including limitations and measures to
be taken to mitigate such risks, see the "Lending of Portfolio Securities"
section under the heading "Modification to the Investment Objective of the
Fund" above.
If you have any questions about this Supplement
or about any of the Wasatch Funds
please contact the Funds at
1-800-551-1700
This Supplement should be retained with your Prospectus for future reference.
WASATCH FUNDS
68 SOUTH MAIN STREET
SALT LAKE CITY, UT 84101
-
FOR FUND INFORMATION AND SHAREHOLDER SERVICES
1-800-551-1700
