Sunstone Financial Group, Inc.
207 East Buffalo Street
Suite 400
Milwaukee, WI 53202
(414) 271-5885
November 25, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: Wasatch Funds Annual Report
Filing Pursuant to Rule 30b2-1 and Section 24(b)
under the Investment Company Act of 1940
File Nos. 811-4920; 33-10451
Dear Sir/Madam:
On behalf of Wasatch Funds (the "Funds"), transmitted herewith for
filing pursuant to Rule 30b2-1 and Section 24(b) under the Investment Company
Act of 1940, as amended, is the Funds' Annual Report to Shareholders for
the year ended September 30, 1996.
Questions regarding this filing should be directed to the undersigned.
Sincerely,
/s/ Trudy Snyder
Trudy Snyder
Financial Analyst
TS/kg
Encl.
c: Venice Edwards
Michael J. Radmer
WASATCH FUNDS
68 South Main Street
Salt Lake City, Utah 84101
(800) 551-1700
LETTER FROM THE INVESTMENT ADVISOR
SEPTEMBER 30, 1996
DEAR SHAREHOLDER:
OVERVIEW OF THE YEAR
The market has continued to climb throughout the fiscal year ending
September 30, 1996. Since January its ascent has been marked by sporadic
dips. The most notable of these occurred in June and July. Even so, the Dow
Jones Industrial Average recently went over the 6000 mark.
Market fluctuations, especially since the start of 1996, seemed to be due
to investors reacting to news about the economy and the valuation levels in
certain sectors of the market. Much of the reaction appeared to center
around whether or not the Federal Reserve Board would raise interest rates.
The Board's decision to maintain interest rates at current levels has
generally been viewed as a sign that the economy is not overheating and
that inflation remains in check. This has helped boost investor confidence,
keeping the market on its upward track.
As the market has risen, so have the valuation levels of many of this
year's best performing stocks. Wasatch's strategy of purchasing stock in
high-quality companies at reasonable prices has gotten progressively more
challenging since the end of fiscal 1995. Even though the current
environment is not the most favorable for our investment style, we are
confident that consistent application of our "growth-at-a-price" strategy
will help keep Wasatch Funds on track for producing favorable long-run
returns.
Building portfolios that are filled with good, solid companies that have
outstanding long-term growth prospects is the goal of Wasatch Funds. Our
process of in-depth, fundamental research has helped us find many
exceptional companies. However, even with our many years of stockpicking
experience, we occasionally have a quarter or two where companies that fail
to meet our expectations can affect the Funds' short-term performance.
This quarter, performance of the Wasatch equity funds was hampered by the
summer's market corrections and an unusually high number of companies that
fell short of expectations. We have sold several companies that face
challenges that could affect their long-term business outlooks. We continue
to hold other companies because we believe the impact of events causing
them to miss earnings estimates this quarter will more than likely be
short-term. A more detailed explanation of individual companies can be
found in the reviews of each Fund.
As previously mentioned, certain stages of bull markets present challenging
stockpicking environments for the research team. Our strategy of investing
in high-quality companies at reasonable prices becomes more difficult when
many desirable companies are fully- or over-valued. Making sure we pay
reasonable prices for companies in Wasatch portfolios is an important part
of our long-term strategy. Reasonable to us means that a company's
price-to-earnings (P/E) ratio should be roughly equal to how much we think
the company's earnings can grow.
In the long run there is an almost perfect correlation between a company's
stock price and its earnings growth. No matter how excellent a company may
be, we don't think it makes sense to pay many times beyond the earnings
growth prospects. When the overall market corrects, stock prices of
excellent companies also fall. Our strategy is to wait and buy the stock
when the price comes back in line with the company's earnings growth
prospects. Refusing to purchase stock at P/E ratios sky-high above the
predicted earnings growth rate hurt the Funds' performance this quarter.
However, our experience has shown that not paying up for the sake of
short-term gains can help put shareholders ahead in the long run.
ANNUALIZED
-------------
3RD
INDEX QUARTER 1 YEAR 5 YEARS
---------------------------------------------------------------------------
S&P 500 Composite 3.1% 20.3% 15.2%
S&P MidCap 400 Index 2.9% 14.0% 15.2%
Russell 2000 Index 0.3% 13.1% 15.8%
Nasdaq Composite Index 3.5% 17.6% 18.4%
Lipper Growth Compostie Index 2.8% 13.7% 13.7%
Lehman Bros. Gov't/Corp. Bond Index 1.8% 4.5% 7.6%
ANNUALIZED
-------------------------
3RD SINCE
WASATCH FUNDS QUARTER 1 YEAR 5 YEARS COMMENCEMENT<F1>
--------------------------------------------------------------------------
Aggressive Equity (4.2)% (1.1)% 13.6% 13.7%
Micro-Cap (2.8)% 15.8% - 42.4%
Growth (1.7)% 12.4% 14.2% 13.2%
Mid-Cap (0.2)% (2.5)% - 15.6%
U.S. Treasury<F2> 0.8% 4.4% 5.7% 7.8%
<F1> Commencement of operations for the Aggressive Equity, Growth and U.S.
Treasury Funds is December 6, 1986; for the Mid-Cap Fund, August 16,
1992; and for the Micro-Cap Fund, June 19, 1995.
<F2> Formerly Income Fund
OUTLOOK
There are few economic signs to indicate excessive strength which could
trigger inflation, or weakness which might indicate a recession. Since the
underpinning of the market is the economy, the environment should continue
to be favorable for investors in the last quarter of 1996. Of course,
valuation in certain sectors and industries remains a concern. Wasatch will
continue to invest in those sectors that offer the best opportunities to
find companies with exceptional long-run growth potential.
Our 21 years of experience has given us a pretty good idea about the kinds
of returns shareholders can realistically expect from their mutual fund
investments. For some shareholders, the heightened expectations that come
with an extended bull market can make it more difficult to remain focused
on realistic long-term returns. Wasatch expects annualized returns to
average between 10 and 15 percent over periods of five to ten years. The
volatility of some stocks, especially those of smaller companies, can cause
returns to fluctuate, sometimes wildly, from month-to-month,
quarter-to-quarter and even year-to-year. Our experience indicates that the
best way to take the edge off volatility is to invest in good, solid
companies, pay reasonable prices for stocks and stay invested through the
market's ups and downs.
At Wasatch Funds our goal is to help shareholders build their nest egg by
filling a niche in their investment plan. Our investment strategy uses an
intensive research process to identify growing businesses. Ideally, we try
to capture increases in the stock price as the company grows and Wall
Street recognizes its success. We don't make bets on what the market or the
economy will do. We believe that the way to make money in the stock market
is to develop a sound investment strategy and apply it consistently in all
types of investing environments.
We want to assure you that we have our eye on the ball. Finding and
investing in "America's Best Growth Companies"<F3> remains an excellent
investment strategy and is the course we still pursue. We will continue to
do our best to help make your investments in Wasatch Funds a rewarding part
of your long-term investment plan. We are optimistic about the future. We
firmly believe that the Wasatch Funds are strategically positioned to
become top performers.
<F3> 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 (CLOSED TO NEW INVESTORS)
REVIEW OF THE QUARTER AND YEAR
The strength of the Wasatch Aggressive Equity Fund continues to be our
disciplined pursuit of the Fund's time-tested strategy of investing in
high-quality small capitalization companies at reasonable prices. Some
markets reward this strategy more than others. In fact, 1995 was very
rewarding. The Fund finished fiscal 1995 up 35.2 percent. This year has
proved to be more challenging, in part due to the Fund's valuation
sensitivity. In addition, several companies fell short of expectations. The
Fund lagged its peers and benchmarks, finishing fiscal 1996 down slightly
at minus 1.1 percent. It is not unusual for the Fund to occasionally
underperform its peers. In 1988 the Fund fell behind the Russell 2000. In
the three years following, the Fund stayed even or outpaced this benchmark.
Again in 1992, the Fund lagged the Russell 2000, but outperformed the next
three years.
To help put the Aggressive Equity Fund's performance in perspective, it is
important to remember that stock prices of small companies are often
subject to wide swings. This can cause the Fund's short-term performance to
fluctuate. Rather than focus on the returns of a single quarter or year, we
extend our horizon out to between five and ten years. It is Wasatch's goal
to outperform the market over time. The Fund is on track to produce the
long-run returns we seek. Keep in mind that it is not in the nature of the
market or the Fund to move in a straight line. It has been our experience
that if we follow our discipline and stay invested, we can achieve our
objectives. We encourage you to stay invested and maintain your long-term
focus.
Turning our attention to the third quarter, we noted that particularly
during September, many of the Fund's technology holdings gained strength
and started to rebound from weakness earlier in the year. Even though our
refusal to pay up for overvalued companies hindered performance this
quarter, our experience indicates that this strategy can pay off in the
long run and has done especially well when the market turns bearish.
The Fund's largest holding, National Health Investors, Inc. (NHI),
continues to be reasonably valued and anchors the portfolio with stable,
fairly predictable returns. In fact, the top three holdings all contributed
positively. The number two holding, OEA, Inc. (OEA), a manufacturer of
airbag initiators and inflators, continues to exceed our expectations.
Micrel, Inc. (MCRL), the third largest holding, a maker of highly
specialized semiconductor chips for cellular telephones and laptop
computers, also was a strong performer.
We have thrown in the towel on long-time holding Heilig-Meyers Co. (HMY).
We had hoped the furniture retailer would follow the path of Wal-Mart,
building from a small town base to double its industry. However, furniture
retailing has proven to be a much tougher business than Wal-Mart's.
Kent Electronics Corp. (KNT), a manufacturer of electronic components, met
last quarter's expected earnings growth. The company guided analysts to
lower estimates this quarter when several large semiconductor customers
delayed manufacturing orders. In our opinion, Kent remains an excellent
company with opportunities to grow as more companies outsource the
manufacturing of electronic components. At this time, however, Kent is
largely dependent on semiconductor companies for its ability to grow
earnings. Since the outlook for that industry continues to be uncertain, we
have decided to move out of the stock.
Madge Networks, N.V. (MADGF), a provider of multimedia data transmission
solutions for local area networks, was a top performing stock last year.
This year the company faced some challenges that caused it to miss earnings
estimates in the second quarter. In addition, we underestimated the
strength of the competition's foothold on the market. Even though Madge has
award-winning technology, its biggest competitor, Cisco Systems, has the
lion's share of the market. We sold Madge because the company may not be
able to gain market share as easily as we once believed.
We held BMC West Corp. (BMCW), Express Scripts, Inc. (ESRX), Friedman's,
Inc. (FRDM) and Nature's Sunshine Products, Inc. (NATR)through recent stock
price weakness that we believe is likely to be short-term.
OUTLOOK
Wasatch is focused on getting favorable returns over the long run. We are
optimistic that the Fund is in an excellent position to accomplish this
task. We are excited about the prospects of companies in the portfolio and
look forward to capturing increases in the stock prices as these businesses
grow and prosper.
Since its inception in 1986, the Aggressive Equity Fund has followed a
disciplined, consistent investment strategy. We continue to apply our
strategy of investing in high-quality, small companies at reasonable prices
through all types of market and economic environments. In the past this
practice has helped many shareholders achieve their long-term financial
goals. We are confident it can continue to do so.
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEARS SINCE COMMENCEMENT
---------------------------------------------------------------------------
WASATCH AGGRESSIVE EQUITY FUND -1.1% 13.6% 13.7%
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
12/6/86 9/30/87 9/30/88 9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wasatch Aggressive
Equity Fund $10,000 $11,760 $10,211 $12,365 $11,063 $18,593 $18,165 $24,655 $26,345 $35,615 $35,225
S&P 500 Composite $10,000 $13,238 $11,602 $15,431 $14,005 $18,369 $20,399 $23,051 $23,901 $31,010 $37,315
Nasdaq Composite Index $10,000 $12,356 $10,783 $13,152 $9,581 $14,653 $16,221 $21,214 $21,259 $29,022 $34,122
</TABLE>
This chart assumes an initial gross investment of $10,000 made on 12/6/86
(commencement). Returns shown include the reinvestment of all dividends.
Past performance is not predictive of future performance. Investment return
and principal value will fluctuate, so that your shares, when redeemed, may
be worth more or less than the original cost.
The S&P 500 Composite is an unmanaged but commonly used measure of common
stock total return performance.
The Nasdaq Composite Index is an unmanaged market capitalization price
only index that tracks the performance of domestic common stocks traded on
the regular Nasdaq market as well as National Market System-traded foreign
common stocks and ADRs.
WASATCH AGGRESSIVE EQUITY FUND
FIVE LARGEST STOCK HOLDINGS-As of September 30, 1996
COMPANY INDUSTRY % OF NET ASSETS
---------------------------------------------------------------------------
National Health Investors, Inc. REIT Real Estate 6.1%
OEA, Inc. Capital Goods 3.5%
Micrel, Inc. Semiconductors 3.1%
O'Reilly Automotive, Inc. Retail 3.0%
United States Cellular Corp. Telecommunications 3.0%
WASATCH MICRO-CAP FUND
Please note as of September 30, 1996, the Micro-Cap Fund was at $94 million
in net assets and intends to close to new investors when it reaches $100
million in net assets.
REVIEW OF THE QUARTER AND YEAR
The Wasatch Micro-Cap Fund invests in companies that fall into two broad
categories. The Fund's major holdings are in the core category. These
companies are chosen for their ability to anchor the portfolio with
relatively consistent returns. They typically produce annual earnings
growth of 15 percent or more. Their potential to produce consistent returns
may be partially due to stable demand for products and services. The second
category is made up of more aggressive, momentum stocks. These companies
are capable of rapid growth, sometimes in excess of 25 percent annually.
They can be found in some of the most dynamic industries like technology
and health care.
The Fund has continued upon its chosen investment course throughout fiscal
1996. Overall, it has been a good year for the Fund. Since this time last
year, the Micro-Cap Fund has returned 15.8 percent. It is up a solid 42.4
percent since inception in June 1995. Although the Fund finished the third
quarter behind its peers, it is still well-positioned to produce the
long-run returns Wasatch expects.
The current environment tends to favor large, expensive, liquid stocks. We
say a stock is liquid when it is relatively easy to find a buyer or seller
for the company's shares. This summer's corrections have been harder on
small company stocks which tend to be less liquid than large cap stocks.
Many investors have chosen to put their money in more visible large
capitalization names like Coca-Cola, Gillette and Microsoft. These
companies have the ability to provide investors with more predictable
earnings growth but tend to grow much slower than typical micro-cap
companies. With stock prices ranging from 25 to 50 times earnings, Wasatch
analysts believe the valuation levels of these large-cap companies are
clearly not sustainable. We base our assumption on historical data which
indicates that over the long run stock prices tend to follow a company's
earnings growth.
A few of the Fund's holdings have been slow to rebound from earlier price
declines. Companies experiencing price drops this quarter were: National
Dentex Corp. (NADX), dental laboratories; Sunstone Hotel Investors, Inc.
(SSI), hotel real estate investment trust; BMC West Corp. (BMCW), building
materials retailer; Thompson PBE,Inc. (THOM), distributor of paints and
supplies to the auto repair industry; Varsity Spirit Corp. (VARS), producer
of cheerleading camps and accessories; and Ambassadors International, Inc.
(AMIE), operator of international educational travel programs. The
long-term business outlooks of these companies appear to be intact. Wasatch
analysts are optimistic that stock prices will rebound.
One company that rebounded strongly in the third quarter was the Fund's
largest holding, Micrel, Inc. (MCRL), a maker of analog semiconductors for
cellular telephones and laptop computers. Other top performers were:
Central Financial Acceptance Corp. (CFAC), a specialty consumer lender; K &
G Men's Center, Inc. (MENS), a men's discount clothing retailer; and
F.Y.I., Inc.(FYII), a document management service provider.
As valuations on several companies soared, we were happy to sell them and
lock in price gains. We profitably sold Diamond Home Services, Inc. (DHMS),
Keystone Automotive Industries, Inc. (KEYS) and Datastream Systems, Inc.
(DSTM).
Finding reasonably priced companies was less of a concern for the Micro-Cap
Fund than any of the other Wasatch Funds. The Fund has an advantage because
it invests in the smallest companies. Many are underfollowed by Wall Street
analysts. The Wasatch research team can still find excellent opportunities
to purchase attractively priced stock in companies that have excellent top
management, strongly focused business plans and outstanding growth
prospects.
OUTLOOK
Wasatch analysts enjoy the excitement of trying to discover micro-cap
companies that have the potential to become the market leaders of tomorrow.
Many of these excellent, relatively tiny companies get overlooked by other
investors. Since micro-cap companies have a hard time making a dent in the
performance of large mutual funds, managers usually think they aren't worth
the trouble to research.
Wasatch believes that having a Fund composed entirely of micro-cap names
can fill a unique niche in your long-term investment plan. That is why we
spend the time and effort trying to unearth potential micro-cap gems. Our
hands-on approach to investing is well suited to separating the diamonds
from the rocks. To remain focused on the smallest companies and to ensure
that they have impact on performance, we intend to close the Fund to new
investors when it reaches $100 million in assets. With assets currently at
$94 million, the doors will only stay open a little while longer.
Going into the fourth quarter, analysts have freshened up the Micro-Cap
Fund's portfolio by adding exciting new names. We look forward to the
potential contributions of Molecular Devices Corp. (MDCC), a leading
developer and manufacturer of bioanalytical measurement systems used in
life science research, and REMEC, Inc. (REMC), a manufacturer of microwave
multi-function modules. REMEC's products are in great demand in the
wireless telecommunications market.
The Wasatch team continues to find excellent companies with a market cap of
around $150 million. Many stocks of companies within micro-cap range are
attractively priced when compared to overall market valuations. We
appreciate your investments in the Wasatch Micro-Cap Fund. We strongly
believe the Fund's current holdings have the potential to contribute to the
health and success of your long-term investment plan.
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEARS SINCE COMMENCEMENT
--------------------------------------------------------------------------
WASATCH MICRO-CAP FUND 15.8% N/A 42.4%
---------------------------------------------------------------------------
6/19/95 9/30/95 9/30/96
------- ------- -------
Wasatch Micro-Cap Fund $10,000 $13,600 $15,750
Russell 2000 Index $10,000 $11,042 $12,353
This chart assumes an initial gross investment of $10,000 made on 6/19/95
(commencement). Returns shown include the reinvestment of all dividends.
Past performance is not predictive of future performance. Investment return
and principal value will fluctuate, so that your shares, when redeemed, may
be worth more or less than the original cost.
The Russell 2000 Index is an unmanaged total return index of the smallest
2,000 companies in the Russell 3000 Index, as ranked by total market
capitalization. The Russell 2000 is widely regarded in the industry to
accurately capture the universe of small-cap stocks.
WASATCH MICRO-CAP FUND
FIVE LARGEST STOCK HOLDINGS-As of September 30, 1996
COMPANY INDUSTRY % OF NET ASSETS
---------------------------------------------------------------------------
Micrel, Inc. Semiconductors 5.2%
Sunstone Hotel Investors, Inc. REIT Real Estate 4.7%
National Dentex Corp. Business Services 4.4%
Physician Support Systems, Inc. Health Care Services 4.1%
Central Financial Acceptance Corp. Financial Services 3.9%
WASATCH GROWTH FUND
REVIEW OF THE QUARTER AND YEAR
Looking back over the year, the Growth Fund's conservative investment style
is holding up well in what continues to be a powerful bull market. Although
the Fund's year-to-date performance trails the Lipper Growth Fund Index by
about 3 percent, it is worth noting that the Growth Fund beat the Lipper
Index by 9 percent last year. A positive indication that the Fund continues
to produce the consistent returns we expect is its compound annual return
which was just over 13 percent at the end of fiscal 1996, almost the same
as it was a year ago.
The Fund's investment strategy has not changed significantly over the past
year. We don't expect many changes in the future. The Fund seeks to invest
in small- to mid-sized companies that have the potential to grow
consistently and yet still achieve a minimum annual earnings growth target
of 15 percent. Companies that are well suited to the Fund's objectives can
be found in industries that take advantage of long-term demographic
trends. In keeping with the Fund's investment strategy of seeking to
capture earnings growth over the long run, the research team is finding
exciting companies in telecommunications, health care and contract
manufacturing. We believe these industries can benefit from favorable
demographics. For example, the aging of the United States population is a
demographic trend that can have significant impact on the health care
industry well into the next century. Investment opportunities can be found
in areas as diverse as herb and vitamin products, extended care facilities
and funeral homes.
While the Growth Fund focuses on capturing favorable long-run returns, this
leg of the current bull market seems to be rewarding investors who focus on
capturing short-term gains in stock prices. Gains can be driven by positive
news about a company's rising short-run estimates. In contrast to the
Growth Fund's investment philosophy, this investment style, commonly
referred to as "momentum investing" is not as concerned with valuation
levels or understanding a company's fundamental business plan. We believe
that while momentum investors may get good short-term results, Wasatch's
focus on consistently applying the Fund's time-tested strategy in all types
of market and economic conditions is the best way to help shareholders
achieve their long-term financial objectives.
For the Growth Fund's portfolio, the Wasatch research team targets stable,
well-run companies that can benefit by increasing demand for products and
services. Excellent fundamentals can give these companies a competitive
advantage that may allow them to grow faster than the typical large-cap
company. Companies held by the Fund are also capable of generating
consistent earnings growth over a longer time period than typical "momentum
investments." Also important to the Fund's investment discipline is the
commitment to pay reasonable prices for stocks. It is comforting to know
that the Fund's average P/E ratio is only 20 when many momentum stocks have
prices of 50 to 100 times earnings.
Because we invest for the long run, the Growth Fund has historically had
low portfolio turnover. The turnover of the Fund continues to be low this
year, particularly when compared with the turnover rates of other growth
funds. However, we did sell two stocks in the third quarter, Heilig-Meyers
Co. (HMY) and Kent Electronics Corp. (KNT), due to fundamental changes that
are likely to affect their ability to continue meeting our earnings growth
targets.
In addition, we sold a number of stocks because their P/E ratios
had gotten out of range. High valuations allowed the Fund to capture nice
profits by selling Equity Corp. International (ECII), Doubletree Corp.
(TREE) and Seattle Filmworks, Inc. (FOTO).
Wasatch analysts added only one company to the Fund during the quarter.
Telephone and Data Systems, Inc. (TDS) is a conglomerate of telecom
businesses. The company provides local telephone services to rural and
suburban markets in 29 states and offers radio paging and cellular
telephone services in metropolitan areas. We believe that TDS is a superb
investment in telecommunications, one of the fastest growing industries in
the world. The company has many opportunities and we expect demand for its
products and services to increase as the industry grows.
Strong performers for the third quarter were American Business Information,
Inc. (ABII), Expeditors International of Washington, Inc. (EXPD), Green
Tree Financial Corp. (GNT), Sanmina Corp. (SANM) and Washington Federal,
Inc. (WFSL). Long-time favorite, Loewen Group, Inc. (LWN), rebounded
strongly on news of a takeover bid by rival funeral home operator Service
Corp.
The Fund endured disappointing stock price performance from BMC West Corp.
(BMCW), Express Scripts, Inc. (ESRX), Friedman's, Inc. (FRDM) and Nature's
Sunshine Products, Inc. (NATR). We are holding these companies because we
believe drops in the stock prices were due to news about events that should
not affect their long-term business outlooks.
OUTLOOK
We believe the excellent quality of companies held in the Fund, combined
with attractive valuations, can result in superior long-run returns. We are
enthusiastic about the Fund's opportunities today and in the future. Our
time-tested philosophy of investing in high-quality companies and paying
reasonable prices for stocks is a sound investment strategy that can help
shareholders achieve their long-term financial goals.
In hopes of providing you with a better yardstick for measuring the Growth
Fund's performance we are adding a new benchmark. The current benchmarks
are the S&P 500 Composite and the Nasdaq Composite Index. The new index
will be the Lipper Growth Fund Index which ranks performance of funds with
similar objectives to the Wasatch Growth Fund. While the Nasdaq was once
appropriate, it is now largely composed of high technology companies. Given
that the Growth Fund normally does not invest in classic technology stocks,
we feel the Nasdaq has lost much of its relevance as a benchmark for the
Fund. To comply with SEC regulations, the Fund will have three benchmarks
this year but Wasatch plans to drop the Nasdaq next year.
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEARS SINCE COMMENCEMENT
---------------------------------------------------------------------------
WASATCH GROWTH FUND 12.4% 14.2% 13.2%
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
12/6/86 9/30/87 9/30/88 9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WASATCH GROWTH FUND $10,000 $11,470 $9,934 $12,080 $11,498 $17,466 $16,836 $20,804 $21,584 $30,167 $33,903
S&P 500 Composite $10,000 $13,238 $11,602 $15,431 $14,005 $18,369 $20,399 $23,051 $23,901 $31,010 $37,315
Nasdaq Composite
Index $10,000 $12,356 $10,783 $13,152 $9,581 $14,653 $16,221 $21,214 $21,259 $29,022 $34,122
Lipper Growth Funds
Index $10,000 $12,744 $11,375 $14,855 $12,787 $17,452 $18,793 $22,386 $22,786 $29,178 $33,178
</TABLE>
This chart assumes an initial gross investment of $10,000 made on 12/6/86
(commencement). Returns shown include the reinvestment of all dividends.
Past performance is not predictive of future performance. Investment return
and principal value will fluctuate, so that your shares, when redeemed, may
be worth more or less than the original cost.
The S&P 500 Composite is an unmanaged but commonly used measure of common
stock total return performance.
The Nasdaq Composite Index is an unmanaged market capitalization price
only index that tracks the performance of domestic common stocks traded on
the regular Nasdaq market as well as National Market System-traded foreign
common stocks and ADRs.
The Lipper Growth Funds Index includes the largest 30 funds which, by
prospectus or portfolio practice, normally invest in companies whose long-
term earnings are expected to grow significantly faster than the earnings
of the stocks represented in the major unmanaged stock indices.
WASATCH GROWTH FUND
FIVE LARGEST STOCK HOLDINGS-As of September 30, 1996
COMPANY INDUSTRY % OF NET ASSETS
---------------------------------------------------------------------------
National Health Investors, Inc. REIT Real Estate 7.7%
American Business Information, Inc. Business Products 6.0%
Franklin Quest Co. Personal Products 5.7%
Green Tree Financial Corp. Financial Services 5.2%
General Nutrition Cos., Inc. Health Care Products 5.1%
WASATCH MID-CAP FUND
REVIEW OF THE QUARTER AND YEAR
After being a front-runner last year, the Wasatch Mid-Cap Fund lagged most
of 1996, along with other mutual funds that have significant technology
holdings. The Fund came back strongly late in the third quarter as many
technology stocks started to recover. The Mid-Cap Fund is the most
aggressive of all the Wasatch Funds. Its strategy is to take large
positions in sectors and individual securities that have the best potential
for rapid growth. The Fund targets companies growing at 25 percent or more
annually. Two sectors that consistently provide excellent opportunities for
finding companies that can meet our targeted growth rates are technology
and health care. Technology holdings account for almost half of the Fund's
portfolio. Health care makes up another 13 percent. This lack of
diversification paid off handsomely in 1995. Last year when the technology
and health care sectors were booming, the Fund returned 59 percent.
This year many companies within those same sectors experienced difficulty
maintaining previous levels of growth. To explain how a sector can do so
well one year and be down the next, it may help to look at the mentality of
many investors. Last year was a great year for investments in technology.
Companies grew at unprecedented rates. Many investors hoping to cash in on
the phenomenal earnings growth rates of technology companies pumped money
into the stocks. Then when some companies fell short of expectations, a lot
of investors were quick to pull their money out. Stock prices tended to
decline across the board even though many companies did not have problems
or were not related to the ones that experienced difficulty.
Two Mid-Cap Fund holdings illustrate how similar companies can be affected
when one company has trouble. Kent Electronics Corp. (KNT) and Sanmina
Corp. (SANM) are manufacturers of electronic components. Kent makes
electronic components for customers in a variety of industries. Sanmina
manufactures electronic components for customers primarily in the data and
telecommunications industries. Earlier in the year, weakness in the
semiconductor industry caused several of Kent's large customers to delay
manufacturing orders. Kent guided analysts to lower earnings estimates and
the stock price declined substantially. In keeping with our discipline of
selling companies that lose momentum, we sold Kent in the Mid-Cap Fund.
Investors feared that Sanmina could have similar problems so its stock
price declined too. Since Sanmina sells to a different customer base, its
earnings were not affected by the semiconductor slowdown. Sanmina's stock
price has since rebounded and helped contribute to the Fund's burst of
performance in September.
Other companies that contributed to the Fund's strong comeback in September
were: Aspen Technologies, Inc. (AZPN), ETEC Systems, Inc. (ETEC), Green
Tree Financial Corp. (GNT) and Synopsys, Inc. (SNPS).
Wasatch's decision in the second quarter to increase positions in
semiconductor companies that make highly specialized chips paid off during
the third quarter. Stock prices have been weak throughout the semiconductor
industry this year due to excess inventory and competitive pricing. This
environment created opportunities to invest in some high-quality
semiconductor names that could rebound quickly from industry problems. Two
proprietary chipmakers held by the Fund ranked among the third quarter's
top performers. The companies were: Microchip Technology, Inc. (MCHP),
maker of programmable 8-bit microcontrollers and other specialty memory
products; and Micrel, Inc. (MCRL), maker of analog semiconductors for
cellular telephones and laptop computers.
Strength in technology was somewhat offset by poor performance in health
care. The Fund's largest holding, Express Scripts, Inc. (ESRX), is a
pharmacy benefits manager for health care organizations. Recent news about
Express Scripts caused its stock to drop which adversely affected this
quarter's performance. FHP, the company's largest customer, announced that
they intend to be acquired by Pacificare. Investors logically fear that FHP
won't renew its contract with Express Scripts since Pacificare has an
internal pharmacy benefits manager. Wasatch analysts don't believe that the
loss of FHP will be a major setback for Express Scripts. The company is
pursuing other contracts and has new products that should help make up for
any lost business. We are holding our position in Express Scripts. Wasatch
believes this is an unusual event that doesn't reflect negatively on the
company's operations or long-term growth potential.
OUTLOOK
The Mid-Cap Fund will continue to have high turnover of companies in the
portfolio, although we don't expect the turnover rate to always be as high
as it was in the third quarter. Our discipline dictates that we seek to
replace companies fairly quickly if they fail to meet our expectations. The
research team's goal is to keep the portfolio filled with companies growing
25 percent or more annually. Right now the Fund is in excellent shape. We
are excited by the growth possibilities of recently added companies. The
outlook is improving and stock prices on many previously depressed
technology holdings have been moving up again.
We will continue to invest heavily in those sectors, like technology and
health care, where we have the most stockpicking expertise and expect to
find the highest growth rates. Attempting to capture growth rates that
exceed 25 percent is an aggressive goal and can contribute to the Mid-Cap
Fund's volatility. We believe the rewards of this strategy can be higher
average returns over the long run. It has been our experience that time
flattens the effects of volatility. That is why it's important to stay
invested and remain focused on your goals.
The Mid-Cap Fund's investment discipline is unchanged. Adhering
consistently to the Fund's strategy of finding and investing in rapidly
growing companies through all types of market and economic environments
helps position the Fund to get excellent returns for shareholders over the
long run. The Mid-Cap Fund's goal is to be a successful and important part
of your long-term investment plan.
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEARS SINCE COMMENCEMENT
---------------------------------------------------------------------------
WASATCH MID-CAP FUND -2.5% N/A 15.6%
---------------------------------------------------------------------------
8/16/92 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
------- ------- ------- ------- ------- -------
Wasatch Mid-Cap Fund $10,000 $9,930 $10,511 $11,021 $18,653 $18,179
S&P 500 Composite $10,000 $9,910 $11,199 $11,612 $15,066 $18,129
S&P MidCap 400 Index $10,000 $10,000 $12,404 $12,603 $15,850 $18,069
This chart assumes an initial gross investment of $10,000 made on 8/16/92
(commencement). Returns shown include the reinvestment of all dividends.
Past performance is not predictive of future performance. Investment return
and principal value will fluctuate, so that your shares, when redeemed, may
be worth more or less than the original cost.
The S&P 500 Composite is an unmanaged but commonly used measure of common
stock total return performance.
The S&P MidCap 400 Index is an unmanaged capitalization weighted total
return index that measures the performance of the mid-range sector of the
U.S. stock market where the median market capitalization is approximately
$700 million.
WASATCH MID-CAP FUND
FIVE LARGEST STOCK HOLDINGS-As of September 30, 1996
COMPANY INDUSTRY % OF NET ASSETS
---------------------------------------------------------------------------
Express Scripts, Inc., Class A Health Care Services 7.2%
Microchip Technology, Inc. Semiconductors 6.2%
Micrel, Inc. Semiconductors 5.8%
Green Tree Financial Corp. Financial Services 5.4%
Sanmina Corp. Business Services 5.4%
WASATCH-HOISINGTON U.S. TREASURY FUND
(FORMERLY WASATCH INCOME FUND)
REVIEW OF THE QUARTER AND YEAR
Fiscal 1996 has been a year of change for the Wasatch Income Fund. In the
second quarter, shareholders and the Board of Directors approved changes in
the Fund's investment objectives and management. The Fund then became the
"Wasatch-Hoisington U.S. Treasury Fund" ("U.S. Treasury Fund").
Hoisington Investment Management Company took over making the day-to-day
investment decisions for the Fund in June. Hoisington focuses on investing
in U.S. Treasury securities for the Fund's portfolio. Since the changes
were adopted, the Fund's investment strategy has been to attempt to get
returns for shareholders that are better than the rate of inflation. The
key to accomplishing this goal, Hoisington believes, is the maturity of
securities held in the Fund. When the economy is stable or when news about
the economy is bearish, the Fund will usually be invested in securities of
maximum duration. When inflation and rising interest rates point to
excessive economic strength, the Fund may go to very short maturities.
It is our belief that the Fund's current strategy will make it a better
vehicle for shareholders desiring capital appreciation and income from
their fixed income investments. If you have questions or would like to
receive more information, please call Wasatch Funds at 1-800-551-1700.
Unlike the Wasatch equity funds, investment decisions for the U.S. Treasury
Fund are based on analysis of the U.S. economy. In the third quarter,
evidence of slower economic growth supported the manager's decision to stay
invested in long-term U.S. Treasury securities. Long-term Treasury bond
yields fluctuated in a wide range in the third quarter, reaching as high as
7.25 percent and as low as 6.7 percent. However, yields were essentially
unchanged at 6.9 percent at the end of September, similar to the June 30
levels. The reasons for the fluctuation were the varying views of investors
on the strength of the U.S. economy and uncertainty about whether or not
Federal Reserve Board authorities would raise interest rates.
The U.S. Treasury Fund was up slightly at 0.8 percent in the quarter. The
Fund's benchmark, the Lehman Brothers Government/Corporate Bond Index
ended the quarter up 1.8 percent.
OUTLOOK
During their early October meeting, Federal Reserve Board authorities
decided that the forward-looking indicators for the U.S. economy were
quickly decelerating, and that slower growth was evident in the third
quarter. Further, despite some worries of rising wage pressures, inflation
indicators were quite stable. As a consequence, the Federal Reserve decided
to hold rates steady. It is apparent that the economy's growth slowed to
the 2 percent range in the third quarter, versus the 4.8 percent annualized
growth rate in the second quarter. It is expected that this rapidly
decelerating trend in growth will continue into the fourth quarter of the
year, and that the economy will register less than 1 percent expansion in
the fourth quarter. If this trend continues, long- and short-term interest
rates are likely to decline noticeably over the remainder of 1996 and 1997.
With indicators pointing to continued economic stability, the Fund's
manager feels comfortable with the decision to stay invested in long-term
U.S. Treasury securities.
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEARS SINCE COMMENCEMENT
---------------------------------------------------------------------------
WASATCH-HOISINGTON
U.S. TREASURY FUND 4.4% 5.7% 7.8%
<TABLE>
<CAPTION>
12/6/86 9/30/87 9/30/88 9/30/89 9/30/90 9/30/91 9/30/92 9/30/93 9/30/94 9/30/95 9/30/96
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WASATCH-HOISINGTON U.S.
TREASURY FUND $10,000 $10,190 $11,295 $12,707 $13,325 $15,823 $17,158 $17,810 $18,078 $19,970 $20,852
Lehman Bros. Gov't./Corp.
Bond Index $10,000 $9,700 $10,938 $12,177 $12,999 $15,061 $17,053 $18,994 $18,207 $20,819 #21,758
</TABLE>
This chart assumes an initial gross investment of $10,000 made on 12/6/86
(commencement). Returns shown include the reinvestment of all dividends.
Past performance is not predictive of future performance. Investment return
and principal value will fluctuate, so that your shares, when redeemed, may
be worth more or less than the original cost.
The Lehman Brothers Government/Corporate Bond Index is an unmanaged market
value weighted index measuring both principal price changes of, and income
provided by, the underlying universe of securities that comprise the
Index. Securities included in the Index must meet the following criteria:
fixed as opposed to variable rate; not less than one year to maturity;
minimum outstanding principal value of $50 million; and minimum quality
rating of BBB by Standard & Poor's or Baa by Moody's.
WRAPPING UP
Wasatch Funds' investment strategy is unchanged. We continue to follow our
chosen investment course because we believe it is well-grounded in sound
investment principles and hands-on analysis. This tried and true method was
designed with the best interests of our shareholders at heart.
At Wasatch, we know we have little control over the market or the economy.
We concentrate instead on doing what we do best-finding and investing in
"America's Best Growth Companies." We also try to pay reasonable prices for
the stocks we buy. Our "growth-at-a-price" philosophy has helped the Funds
to do well in the past. We believe it also holds a key to getting favorable
long-run returns in the future.
Investing is an ongoing learning experience. The Wasatch research team
continually refines the stockpicking process, looking for better ways to
evaluate companies and minimize mistakes. An important part of the process
is to remain focused on the big picture. In stock investing, we believe the
companies that underlie the equities are the biggest part of the big
picture. We remind ourselves that by investing in securities we are really
buying a piece of a company. Therefore, we try to gain a thorough
understanding of the factors affecting each company.
We take the stewardship of our shareholders' assets very seriously. We
appreciate the confidence and trust you have shown by investing your assets
in Wasatch Funds. While we can't promise that returns will be up every
quarter, we can promise that we will do our best to try to get returns over
the long run that will help you achieve your investment objectives.
We welcome the opportunity to talk to you. If you have questions or
comments, please call us at 1-800-551-1700. Once again, thank you for
investing in Wasatch Funds.
Sincerely,
/s/Samuel S. Stewart, Jr.
-------------------------
Samuel S. Stewart, Jr.
Chairman of the Board
RESULTS OF THE SPECIAL SHAREHOLDER MEETING
A special meeting of the shareholders of the Wasatch Income Fund (the
"Fund") was held on June 21, 1996.
The matters voted on by the shareholders of record as of May 15, 1996 and
the results of the shareholders' vote at the June 21, 1996 meeting were as
follows:
A. Approval of 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.
For Against Abstain
-------- --------- ---------
324,064 933 20,732
B. Approval of a sub-advisory agreement between the Adviser and
Hoisington Investment Management Company ("Hoisington") pursuant to which
Hoisington would 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.
For Against Abstain
-------- --------- ----------
323,380 1,617 20,732
C. Approval of a modification to the investment objectives of the Fund.
For Against Abstain
-------- --------- ----------
324,064 933 20,732
D. Approval of an amendment to the Fund's fundamental investment
restrictions to allow it to lend portfolio securities.
For Against Abstain
-------- --------- ----------
311,844 12,252 21,634
AGGRESSIVE EQUITY FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
COMMON STOCKS 94.5%
BUSINESS PRODUCTS 7.4%
361,950 American Business Information, Inc.<F4> $ 6,515,100
401,512 BMC West Corp.<F4> 5,570,979
660,950 Thompson PBE, Inc.<F4> 6,609,500
-------------
18,695,579
-------------
BUSINESS SERVICES 7.3%
125,950 Altron, Inc.<F4> 1,700,325
181,625 Barrett Business Services, Inc.<F4> 2,906,000
136,000 F.Y.I., Inc.<F4> 2,720,000
228,000 National Dentex Corp.<F4> 4,360,500
90,000 Rental Service Corp. 1,946,250
118,700 Sanmina Corp.<F4> 4,777,675
-------------
18,410,750
-------------
COMMUNICATION PRODUCTS 0.7%
66,500 Hummingbird Communications Ltd.<F4> 1,911,875
-------------
COMMUNICATION SERVICES 1.0%
118,600 Data Transmission Network Corp.<F4> 2,490,600
-------------
COMPUTER SOFTWARE 7.7%
62,200 Aspen Technologies, Inc.<F4> 4,214,050
124,300 Learning Co., Inc.<F4> 2,408,313
177,000 Mercury Interactive Corp.<F4> 2,455,875
269,900 Phoenix Technologies Ltd.<F4> 4,655,775
75,950 Synopsys, Inc.<F4> 3,503,194
130,500 Tecnomatix Technologies Ltd.<F4> 2,267,437
-------------
19,504,644
-------------
COMPUTER SYSTEMS & COMPONENTS 2.6%
260,900 Active Voice Corp.<F4> 2,869,900
75,600 C.P. Clare Corp. 704,025
70,950 Digitran Systems, Inc.<F4> 1
40,000 Drexler Technology Corp.<F4><F5> 463,250
75,000 Eltron International, Inc.<F4> 2,428,125
-------------
6,465,301
-------------
AGGRESSIVE EQUITY FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
FINANCIAL SERVICES 0.9%
98,800 Central Financial Acceptance Corp.<F4> $ 1,908,075
75,286 World Acceptance Corp.<F4> 442,305
-------------
2,350,380
-------------
HEALTH CARE PRODUCTS 7.0%
166,650 Bio-Plexus, Inc.<F4> 1,291,537
267,900 Epitope, Inc.<F4> 3,717,112
93,500 Mentor Corp. 2,571,250
173,000 Molecular Devices Corp.<F4> 1,816,500
279,806 Nature's Sunshine Products, Inc. 4,896,605
147,600 Techne Corp.<F4> 3,450,150
-------------
17,743,154
-------------
HEALTH CARE SERVICES 9.2%
167,325 Corvel Corp.<F4> 5,082,497
199,050 Express Scripts, Inc., Class A<F4> 7,215,562
130,150 HealthCor Holdings, Inc.<F4> 1,578,069
259,200 Home Health Corp. of America<F4> 3,110,400
154,925 Phamis, Inc.<F4> 2,594,994
154,100 Physician Support Systems, Inc.<F4> 3,736,925
-------------
23,318,447
-------------
PERSONAL PRODUCTS 3.6%
318,700 Franklin Quest Co.<F4> 5,975,625
194,824 Varsity Spirit Corp. 3,068,478
-------------
9,044,103
-------------
PERSONAL SERVICES 2.9%
83,600 Equity Corp. International<F4> 2,654,300
158,000 Fortress Group, Inc.<F4> 1,303,500
153,100 Seattle Filmworks, Inc.<F4> 3,368,200
-------------
7,326,000
-------------
REAL ESTATE 8.1%
464,300 National Health Investors, Inc. REIT 15,496,012
116,025 Oasis Residential, Inc. REIT 2,538,047
AGGRESSIVE EQUITY FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
REAL ESTATE 8.1% (CONT'D.)
256,350 Sunstone Hotel Investors, Inc. REIT $ 2,595,544
-------------
20,629,603
-------------
RETAIL 12.8%
76,850 Buckle, Inc. (The)<F4> 2,439,987
67,150 Doubletree Corp.<F4> 2,677,606
115,500 Fine Host Corp.<F4> 1,848,000
242,600 Friedman's, Inc.<F4> 4,548,750
340,500 General Nutrition Cos., Inc.<F4> 5,980,031
35,300 K & G Men's Center, Inc.<F4> 891,325
221,150 O'Reilly Automotive, Inc.<F4> 7,629,675
124,000 Marks Bros. Jewelers, Inc.<F4> 3,348,000
62,350 St. John Knits, Inc. 3,125,294
-------------
32,488,668
-------------
SEMICONDUCTORS 7.9%
132,900 Lattice Semiconductor Corp.<F4> 3,837,487
328,000 Micrel, Inc.<F4> 7,790,000
153,200 Microchip Technology, Inc.<F4> 5,725,850
87,600 Photronics, Inc.<F4> 2,715,600
-------------
20,068,937
-------------
TELECOMMUNICATIONS 8.8%
188,190 Century Telephone Enterprises 6,469,014
275,150 Intercel, Inc.<F4> 5,778,150
173,000 REMEC, Inc.<F4> 2,443,625
250,490 United States Cellular Corp.<F4> 7,577,323
-------------
22,268,112
-------------
TRANSPORTATION 2.4%
170,950 Expeditors International of Washington, Inc. 6,025,988
-------------
OTHER 4.2%
62,300 Cinar Films, Inc., Class B Sub VTG<F4> 1,623,694
225,600 OEA, Inc. 8,967,600
-------------
10,591,294
-------------
AGGRESSIVE EQUITY FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
Total Common Stocks
(cost $196,099,901) $239,333,435
-------------
CONVERTIBLE BONDS 1.4%
1,433,000 National HealthCare L.P., 6.00%, 7/1/00 3,586,082
-------------
Total Convertible Bonds
(cost $2,751,360) 3,586,082
-------------
PREFERRED STOCK 0.0%
12,500 Digitran Systems, Inc. 1
-------------
Total Preferred Stock
(cost $95,729) 1
-------------
PRINCIPAL
AMOUNT
----------
SHORT-TERM INVESTMENTS 4.0%
(Variable Rate)
$10,138,011 UMB Bank Money Market Fiduciary 10,138,011
-------------
Total Short-Term Investments
(cost $10,138,011) 10,138,011
-------------
Total Investments 99.9%
(cost $209,085,001) 253,057,529
Cash and Other Assets,
less Liabilities 0.1% 261,458
-------------
NET ASSETS 100.0% $253,318,987
=============
<F4> Non-income producing
<F5> Restricted security - See Note 7
See notes to financial statements.
MICRO-CAP FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
--------------------------------------------------------------------------
COMMON STOCKS 90.4%
BUSINESS PRODUCTS 7.8%
265,374 BMC West Corp.<F6> $3,682,064
367,200 Thompson PBE, Inc.<F6> 3,672,000
-------------
7,354,064
-------------
BUSINESS SERVICES 9.9%
37,875 Barrett Business Services, Inc.<F6> 606,000
93,000 Electrostar, Inc.<F6> 1,092,750
172,000 F.Y.I., Inc.<F6> 3,440,000
216,950 National Dentex Corp.<F6> 4,149,169
-------------
9,287,919
-------------
COMMUNICATION SERVICES 2.0%
86,400 Data Transmission Network Corp.<F6> 1,814,400
-------------
COMPUTER SOFTWARE 6.1%
131,000 Phoenix Technologies Ltd.<F6> 2,259,750
185,500 Restrac, Inc.<F6> 3,478,125
-------------
5,737,875
-------------
COMPUTER SYSTEMS & COMPONENTS 1.9%
56,850 Active Voice Corp.<F6> 625,350
30,000 C.P. Clare Corp.<F6> 279,375
75,200 Pinnacle Systems, Inc.<F6> 921,200
-------------
1,825,925
-------------
FINANCIAL SERVICES 6.7%
192,000 Central Financial Acceptance Corp.<F6> 3,708,000
102,000 Fortress Group, Inc.<F6> 841,500
102,500 Rockford Industries, Inc.<F6> 1,768,125
-------------
6,317,625
-------------
HEALTH CARE PRODUCTS 8.8%
38,000 Anesta Corp.<F6> 536,750
38,000 Bio-Plexus, Inc.<F6> 294,500
171,000 Epitope, Inc.<F6> 2,372,625
MICRO-CAP FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
HEALTH CARE PRODUCTS 8.8% (cont'd.)
285,000 Molecular Devices Corp.<F6> $ 2,992,500
90,550 Techne Corp.<F6> 2,116,606
-------------
8,312,981
-------------
HEALTH CARE SERVICES 10.5%
56,300 Corvel Corp.<F6> 1,710,112
43,000 HealthCor Holdings, Inc.<F6> 521,375
229,700 Home Health Corp. of America<F6> 2,756,400
60,200 Phamis, Inc.<F6> 1,008,350
158,500 Physician Support Systems, Inc.<F6> 3,843,625
-------------
9,839,862
-------------
PERSONAL PRODUCTS 5.7%
346,000 Successories, Inc.<F6> 1,989,500
212,299 Varsity Spirit Corp. 3,343,709
-------------
5,333,209
-------------
PERSONAL SERVICES 5.6%
293,200 Ambassadors International, Inc.<F6> 2,565,500
28,200 Equity Corp. International<F6> 895,350
81,050 Seattle Filmworks, Inc.<F6> 1,783,100
-------------
5,243,950
-------------
REAL ESTATE 4.7%
434,200 Sunstone Hotel Investors, Inc. REIT 4,396,275
-------------
RETAIL 11.6%
36,300 Buckle, Inc. (The)<F6> 1,152,525
77,500 Fine Host Corp.<F6> 1,240,000
90,700 Friedman's, Inc.<F6> 1,700,625
89,635 Harold's Stores, Inc.<F6> 1,277,299
138,600 K & G Men's Center, Inc.<F6> 3,499,650
57,600 O'Reilly Automotive, Inc.<F6> 1,987,200
-------------
10,857,299
-------------
SEMICONDUCTORS 5.2%
207,500 Micrel, Inc.<F6> 4,928,125
-------------
MICRO-CAP FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
TELECOMMUNICATIONS 3.1%
98,918 REMEC, Inc.<F6> $ 1,397,217
148,000 Rural Cellular Corp., Class A<F6> 1,554,000
-------------
2,951,217
-------------
TRANSPORTATION 0.8%
85,500 USA Truck, Inc.<F6> 758,813
-------------
Total Common Stocks
(cost $78,526,427) 84,959,539
-------------
PRINCIPAL
AMOUNT
----------
SHORT-TERM INVESTMENTS 8.9%
(Variable Rate)
$8,341,461 UMB Bank Money Market Fiduciary 8,341,461
-------------
Total Short-Term Investments
(cost $8,341,461) 8,341,461
-------------
Total Investments 99.3%
(cost $86,867,888) 93,301,000
Cash and Other Assets,
less Liabilities 0.7% 702,754
-------------
NET ASSETS 100.0% $94,003,754
=============
<F6>Non-income producing
See notes to financial statements.
GROWTH FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
COMMON STOCKS 90.6%
BUSINESS PRODUCTS 11.1%
349,375 American Business Information, Inc.<F7> $ 6,288,750
209,910 BMC West Corp.<F7> 2,912,501
240,000 Thompson PBE, Inc.<F7> 2,400,000
-------------
11,601,251
-------------
BUSINESS SERVICES 5.8%
106,000 Altron, Inc.<F7> 1,431,000
21,500 Kent Electronics Corp.<F7> 464,937
126,700 National Dentex Corp.<F7> 2,423,137
42,900 Sanmina Corp.<F7> 1,726,725
-------------
6,045,799
-------------
COMPUTER SYSTEMS & COMPONENTS 0.0%
18,100 Digitran Systems, Inc.<F7> 1
-------------
FINANCIAL SERVICES 9.8%
5,000 Franklin Savings Assn.<F7> 1
137,350 Green Tree Financial Corp. 5,390,986
190,189 Washington Federal, Inc. 4,493,215
60,000 World Acceptance Corp.<F7> 352,500
-------------
10,236,702
-------------
HEALTH CARE PRODUCTS 5.9%
38,000 Medtronic, Inc. 2,436,750
34,500 Mentor Corp. 948,750
51,020 Nature's Sunshine Products, Inc. 892,850
77,750 Techne Corp.<F7> 1,817,406
-------------
6,095,756
-------------
HEALTH CARE SERVICES 6.2%
68,900 Corvel Corp.<F7> 2,092,838
119,600 Express Scripts, Inc., Class A<F7> 4,335,500
-------------
6,428,338
-------------
GROWTH FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
PERSONAL PRODUCTS 7.4%
316,900 Franklin Quest Co.<F7> $ 5,941,875
110,200 Varsity Spirit Corp. 1,735,650
-------------
7,677,525
-------------
PERSONAL SERVICES 3.0%
73,500 Loewen Group, Inc. 3,077,812
1 Seattle Filmworks, Inc.<F7> 22
-------------
3,077,834
-------------
REAL ESTATE 14.6%
240,200 National Health Investors, Inc. REIT 8,016,675
136,200 Oasis Residential, Inc. REIT 2,979,375
420,400 Sunstone Hotel Investors, Inc. REIT 4,256,550
-------------
15,252,600
-------------
RETAIL 15.2%
42,300 Buckle, Inc. (The)<F7> 1,343,025
101,600 Friedman's, Inc.<F7> 1,905,000
302,600 General Nutrition Cos., Inc.<F7> 5,314,413
90,000 Marks Bros. Jewelers, Inc.<F7> 2,430,000
103,950 O'Reilly Automotive, Inc.<F7> 3,586,275
25,800 St. John Knits, Inc. 1,293,225
-------------
15,871,938
-------------
TELECOMMUNICATIONS 5.9%
93,738 Century Telephone Enterprises 3,222,227
73,000 Telephone and Data Systems, Inc. 2,938,250
-------------
6,160,477
-------------
TRANSPORTATION 2.4%
71,800 Expeditors International of Washington, Inc. 2,530,950
-------------
OTHER 3.3%
87,500 OEA, Inc. 3,478,125
-------------
Total Common Stocks
(cost $86,213,005) 94,457,296
-------------
GROWTH FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
CONVERTIBLE BONDS 2.7%
1,105,000 National HealthCare L.P., 6.00%, 7/1/00 $ 2,765,262
-------------
Total Convertible Bonds
(cost $2,233,270) 2,765,262
-------------
PRINCIPAL
AMOUNT
---------
WARRANTS 0.0%
$ 1 Cherokee, Inc., Series C 1
-------------
Total Warrants
(cost $6) 1
-------------
SHORT-TERM INVESTMENTS 5.5%
(Variable Rate)
5,726,639 UMB Bank Money Market Fiduciary 5,726,639
-------------
Total Short-Term Investments
(cost $5,726,639) 5,726,639
-------------
Total Investments 98.8%
(cost $94,172,920) 102,949,198
Cash and Other Assets,
less Liabilities 1.2% 1,287,444
-------------
NET ASSETS 100.0% $104,236,642
=============
<F7>Non-income producing
See notes to financial statements.
MID-CAP FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
COMMON STOCKS 97.5%
BUSINESS SERVICES 5.4%
173,000 Sanmina Corp.<F8> $ 6,963,250
-------------
COMPUTER SOFTWARE 26.0%
90,975 Aspen Technologies, Inc.<F8> 6,163,556
249,700 Learning Co., Inc.<F8> 4,837,937
189,000 Mercury Interactive Corp.<F8> 2,622,375
71,200 Parametric Technology Corp.<F8> 3,515,500
331,150 Phoenix Technologies Ltd.<F8> 5,712,338
141,500 Synopsys, Inc.<F8> 6,526,688
233,950 Tecnomatix Technologies Ltd.<F8> 4,064,881
-------------
33,443,275
-------------
COMPUTER SYSTEMS & COMPONENTS 7.4%
123,500 American Power Conversion Corp.<F8> 1,806,188
85,000 Drexler Technology Corp.<F8><F9> 984,406
134,000 Eltron International, Inc.<F8> 4,338,250
198,800 Pinnacle Systems, Inc.<F8> 2,436,525
-------------
9,565,369
-------------
FINANCIAL SERVICES 5.4%
177,400 Green Tree Financial Corp. 6,962,950
-------------
HEALTH CARE PRODUCTS 4.3%
48,500 Mentor Corp. 1,333,750
241,750 Nature's Sunshine Products, Inc. 4,230,625
-------------
5,564,375
-------------
HEALTH CARE SERVICES 11.4%
255,325 Express Scripts, Inc., Class A<F8> 9,255,531
116,475 Home Health Corp. of America<F8> 1,397,700
166,100 Physicians Resource Group, Inc.<F8> 3,924,113
-------------
14,577,344
-------------
PERSONAL PRODUCTS 1.3%
43,000 CUC International, Inc.<F8> 1,714,625
-------------
MID-CAP FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
NUMBER
OF SHARES VALUE
------------------------------------------------------------------------
PERSONAL SERVICES 3.3%
191,350 Seattle Filmworks, Inc.<F8> $ 4,209,700
-------------
RETAIL 6.8%
283,000 Friedman's, Inc.<F8> 5,306,250
97,850 O'Reilly Automotive, Inc.<F8> 3,375,825
-----------
8,682,075
-------------
SEMICONDUCTORS 14.1%
78,400 ETEC Systems, Inc.<F8> 2,665,600
316,100 Micrel, Inc.<F8> 7,507,375
213,000 Microchip Technology, Inc.<F8> 7,960,875
-------------
18,133,850
-------------
TELECOMMUNICATIONS 7.8%
205,875 Intercel, Inc.<F8> 4,323,375
186,170 United States Cellular Corp.<F8> 5,631,642
-------------
9,955,017
-------------
OTHER 4.3%
139,000 OEA, Inc. 5,525,250
-------------
Total Common Stocks
(cost $108,068,012) 125,297,080
-------------
PRINCIPAL
AMOUNT
---------
SHORT-TERM INVESTMENTS 2.8%
(Variable Rate)
$3,608,143 UMB Bank Money Market Fiduciary 3,608,143
-------------
Total Short-Term Investments
(cost $3,608,143) 3,608,143
-------------
MID-CAP FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
VALUE
-----------------------------------------------------------------------
Total Investments 100.3%
(cost $111,676,155) $128,905,223
-------------
Liabilities, less
Cash and Other Assets (0.3%) (414,893)
-------------
NET ASSETS 100.0% $128,490,330
=============
<F8> Non-income producing
<F9> Restricted security - See Note 7
See notes to financial statements.
WASATCH-HOISINGTON U.S. TREASURY FUND SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
PRINCIPAL
AMOUNT VALUE
------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS 94.9%
$3,750,000 U.S. Treasury Bond,
6.25%, 8/15/23 $3,390,188
1,800,000 U.S. Treasury Bond,
7.50%, 11/15/24 1,902,870
1,205,000 U.S. Treasury Bond,
6.875%, 8/15/25 1,186,298
650,000 U.S. Treasury Bond,
6.00%, 2/5/26 571,564
-------------
Total U.S. Government Obligations
(cost $7,078,756) 7,050,920
-------------
SHORT-TERM INVESTMENTS 3.4%
(Variable Rate)
253,591 UMB Bank Money Market Fiduciary 253,591
-------------
Total Short-Term Investments
(cost $253,591) 253,591
-------------
Total Investments 98.3%
(cost $7,332,347) 7,304,511
Cash and Other Assets,
less Liabilities 1.7% 122,373
-------------
NET ASSETS 100.0% $7,426,884
=============
See notes to financial statements.
WASATCH FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
---------------------------------------------------------------------------
AGGRESSIVE
EQUITY MICRO-CAP
FUND FUND
---------------------------------------------------------------------------
ASSETS:
Investments, at market value
Nonaffiliated issuers (cost $193,277,382,
$79,848,096, $94,172,920, $111,676,155
and $7,332,347, respectively) $239,217,629 $87,162,331
Affiliated issuers (cost $15,807,619,
$7,019,792,$0, $0 and $0, respectively) 13,839,900 6,138,669
Receivable for investment securities sold 708,075 1,301,750
Interest and dividends receivable 369,967 22,526
Prepaid expenses and other assets 39,539 17,403
Receivable from adviser - 9,323
------------ ------------
Total Assets 254,175,110 94,652,002
------------ ------------
LIABILITIES:
Payable for securities purchased 682,860 546,239
Accrued investment advisory fee 55,549 41,094
Accrued expenses 117,714 60,915
------------ ------------
Total Liabilities 856,123 648,248
------------ ------------
NET ASSETS $253,318,987 $94,003,754
============ ============
NET ASSETS CONSIST OF:
Capital stock $ 10,480 $ 29,817
Paid-in-capital in excess of par 204,031,396 83,509,575
Undistributed net investment income - -
Undistributed net realized gain (loss)
on investments 5,304,583 4,031,250
Net unrealized appreciation (depreciation)
on investments 43,972,528 6,433,112
------------ ------------
Net Assets $253,318,987 $94,003,754
============ ============
CAPITAL STOCK, $.001 PAR VALUE:
Authorized 100,000,000 100,000,000
Issued and outstanding 10,479,701 29,817,167
NET ASSET VALUE REDEMPTION PRICE $24.17 $3.15
AND OFFERING PRICE PER SHARE ======= =====
See notes to financial statements.
STATEMENTS OF ASSETS AND LIABILITIES (cont'd)
U.S.
GROWTH MID-CAP TREASURY
FUND FUND FUND
--------------------------------------------------------------------------
ASSETS:
Investments, at market value
Nonaffiliated issuers (cost
$193,277,382,$79,848,096,
$94,172,920, $111,676,155 and
$7,332,347, respectively) $102,949,198 $128,905,223 $7,304,511
Affiliated issuers (cost
$15,807,619, $7,019,792,
$0, $0 and $0, respectively) - - -
Receivable for investment securities
sold 1,582,563 150,506 -
Interest and dividends receivable 213,546 20,925 97,733
Prepaid expenses and other assets 27,428 25,058 9,611
Receivable from adviser 5,014 5,003 19,632
--------- --------- ---------
Total Assets 104,777,749 129,106,715 7,431,487
--------- --------- ---------
LIABILITIES:
Payable for securities purchased 467,383 505,900 -
Accrued investment advisory fee 22,671 35,064 805
Accrued expenses 51,053 75,421 3,798
--------- --------- ---------
Total Liabilities 541,107 616,385 4,603
--------- --------- ---------
NET ASSETS
$104,236,642 $128,490,330 $7,426,884
============ ============ ==========
NET ASSETS CONSIST OF:
Capital stock $ 5,933 $ 7,158 $ 727
Paid-in-capital in excess of par 91,419,444 119,279,990 7,450,541
Undistributed net investment
income 204,038 - 70,417
Undistributed net realized gain (loss)
on investments 3,830,949 (8,025,886) (66,965)
Net unrealized appreciation
(depreciation) on investments 8,776,278 17,229,068 (27,836)
--------- --------- ---------
Net Assets $104,236,642 $128,490,330 $7,426,884
============ ============ ==========
CAPITAL STOCK, $.001 PAR VALUE:
Authorized 100,000,000 100,000,000 100,000,000
Issued and outstanding 5,933,434 7,158,391 727,602
NET ASSET VALUE, REDEMPTION PRICE
AND OFFERING PRICE PER SHARE $17.57 $17.95 $10.21
====== ====== ======
See notes to financial statements.
WASATCH FUNDS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------------------
AGGRESSIVE
EQUITY MICRO-CAP
FUND FUND
---------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 382,178 $ 375,870
Dividends 2,049,669 263,006
---------- ----------
2,431,847 638,876
---------- ----------
EXPENSES:
Investment advisory fee 2,861,337 1,313,728
Shareholder servicing fees 654,422 217,957
Fund administration and accounting fees 420,448 96,521
Reports to shareholders 163,564 34,326
Custody fees 61,789 21,771
Federal and state registration fees 54,059 51,210
Legal fees 27,838 9,739
Audit fees 14,100 5,193
Directors' fees 6,110 1,175
Pricing fees 2,818 1,731
Other 14,633 2,188
--------- ---------
Total expenses before reimbursement 4,281,118 1,755,539
Reimbursement of expenses by adviser - (113,105)
--------- ---------
Net expenses 4,281,118 1,642,434
--------- ---------
NET INVESTMENT INCOME (LOSS) (1,849,271) (1,003,558)
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments 10,202,825 5,035,561
Change in unrealized appreciation/
depreciation on investments (13,631,797) 4,725,256
------------- -----------
Net gain (loss) on investments (3,428,972) 9,760,817
------------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $(5,278,243) $8,757,259
============ ==========
See notes to financial statements.
STATEMENTS OF OPERATIONS (cont'd)
U.S.
GROWTH MID-CAP TREASURY
FUND FUND FUND
---------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 351,586 $ 642,082 $341,495
Dividends 1,247,244 69,987 -
---------- ---------- ----------
1,598,830 712,069 341,495
---------- ---------- ----------
EXPENSES:
Investment advisory fee 839,865 1,861,206 27,810
Shareholder servicing fees 174,755 398,737 11,913
Fund administration and accounting
fees 123,411 218,791 8,200
Reports to shareholders 44,041 88,945 6,910
Custody fees 17,683 31,197 1,186
Federal and state registration fees 44,927 62,733 18,939
Legal fees 12,765 14,591 13,647
Audit fees 6,660 8,768 3,484
Directors' fees 1,490 3,199 83
Pricing fees 1,609 1,389 462
Other 3,014 6,338 6
--------- --------- --------
Total expenses before
reimbursement 1,270,220 2,695,894 92,640
Reimbursement of expenses
by adviser (10,572) (90,368) (41,168)
--------- --------- ---------
Net expenses 1,259,648 2,605,526 51,472
--------- --------- ---------
NET INVESTMENT INCOME (LOSS) 339,182 (1,893,457) 290,023
--------- ----------- ---------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on
investments 4,300,860 (6,760,269) 19,162
Change in unrealized
appreciation/depreciation
on investments 2,666,547 5,203,852 (67,058)
--------- --------- ---------
Net gain (loss) on investments 6,967,407 (1,556,417) (47,896)
--------- ----------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $7,306,589 $(3,449,874) $242,127
========== ============ =========
See notes to financial statements.
WASATCH FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------------------------------------------------
AGGRESSIVE EQUITY FUND
Year ended September 30,
1996 1995
---------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss) $ (1,849,271) $ (529,243)
Net realized gain (loss) on
investments 10,202,825 2,696,275
Change in unrealized appreciation/
depreciation on investments (13,631,797) 54,953,184
-------------- -------------
Net increase (decrease) in net assets
resulting from operations (5,278,243) 57,120,216
-------------- -------------
DIVIDENDS PAID FROM:
Net investment income - -
Net realized gains (6,568,893) (4,403,597)
-------------- -------------
(6,568,893) (4,403,597)
-------------- -------------
CAPITAL SHARE TRANSACTIONS:
Shares sold 67,968,096 246,050,188
Shares issued to holders in
reinvestment of dividends 6,096,326 4,262,844
-------------- -------------
74,064,422 250,313,032
Shares redeemed (114,209,328) (44,087,768)
-------------- -------------
Net increase (decrease) (40,144,906) 206,225,264
-------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (51,992,042) 258,941,883
NET ASSETS:
Beginning of period 305,311,029 46,369,146
-------------- -------------
End of period $253,318,987 $305,311,029
============== =============
Undistributed net investment income
included in net assets at end of
period - -
============== =============
<F10> Commencement of operations.
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS (cont'd)
---------------------------------------------------------------------------
MICRO-CAP FUND GROWTH FUND
Year June 19, Year
ended 1995<F10> ended September 30,
September30,1996 to September 30, 1995 1996 1995
---------------------------------------------------------------------------
OPERATIONS:
Net investment income
(loss) $ (1,003,558) $ (19,989) $ 339,182 $ 57,262
Net realized gain (loss)
on investments 5,035,561 (753) 4,300,860 736,267
Change in unrealized
appreciation/
depreciation on
investments 4,725,256 1,707,856 2,666,547 6,268,326
------------ ---------- ---------- ----------
Net increase (decrease)
innet assets resulting
from operatio 8,757,259 1,687,114 7,306,589 7,061,855
------------ ---------- ---------- ----------
DIVIDENDS PAID FROM:
Net investment income - - (190,396) -
Net realized gains - - (1,105,143) (2,878,781)
------------ ---------- ---------- ----------
(1,295,539) (2,878,781)
CAPITAL SHARE TRANSACTIONS:
Shares sold 98,979,879 24,358,929 97,935,584 40,273,774
Shares issued to holders
in reinvestment
of dividends - - 1,219,162 2,805,588
------------- ---------- ---------- ----------
98,979,879 24,358,929 99,154,746 43,079,362
Shares redeemed (39,101,525) (677,902) (54,462,619) (4,947,865)
------------- ---------- ----------- ----------
Net increase
(decrease) 59,878,354 23,681,027 44,692,127 38,131,497
------------- ---------- ---------- ----------
TOTAL INCREASE (DECREASE)
IN NET ASSETS 68,635,613 25,368,141 50,703,177 42,314,571
NET ASSETS:
Beginning of period 25,368,141 - 53,533,465 11,218,894
------------- ---------- ---------- ----------
End of period $94,003,754 $25,368,141 $104,236,642 $53,533,465
============= =========== ============ ===========
Undistributed net investment
income included in net assets
at end of period - - $ 204,038 $ 57,262
============= =========== =========== ===========
<F10> Commencement of operations.
See notes to financial statements.
WASATCH FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------------------------------------------------
MID-CAP FUND U.S. TREASURY FUND
Year ended September 30, Year ended September 30,
1996 1995 1996 1995
---------------------------------------------------------------------------
OPERATIONS:
Net investment income
(loss) $ (1,893,457) $ (135,323) $ 290,023 $ 198,688
Net realized gain
(loss) on
investments (6,760,269) 417,714 19,162 (35,783)
Change in unrealized
appreciation/
depreciation on
investments 5,203,852 12,017,873 (67,058) 167,864
------------ ------------ ---------- ---------
Net increase
(decrease) in
net assets
resulting from
operations (3,449,874) 12,300,264 242,127 330,769
------------ ------------ ---------- ---------
DIVIDENDS PAID FROM:
Net investment
income - - (371,160) (183,919)
Net realized
gains (1,324,019) (2,697) - -
------------ ------------ ---------- ----------
(1,324,019) (2,697) (371,160) (183,919)
------------ ------------ ---------- ----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 182,179,742 93,354,746 5,609,929 1,362,975
Shares issued
to holders in
reinvestment of
dividends 1,239,102 2,678 359,319 179,666
------------ ------------ ---------- ----------
183,418,844 93,357,424 5,969,248 1,542,641
Shares redeemed (148,760,098) (8,140,574) (2,448,554) (904,145)
------------ ------------ ---------- ----------
Net increase 34,658,746 85,216,850 3,520,694 638,496
------------ ------------ ---------- ----------
TOTAL INCREASE IN
NET ASSETS 29,884,853 97,514,417 3,391,661 785,346
NET ASSETS:
Beginning of
period 98,605,477 1,091,060 4,035,223 3,249,877
------------ ------------ ---------- ----------
End of period $128,490,330 $98,605,477 $7,426,884 $4,035,223
============ ============ =========== ==========
Undistributed net
investment income
included in net
assets at end of
period - - $ 70,417 $ 151,554
============ ============ =========== ==========
See notes to financial statements.
WASATCH FUNDS
FINANCIAL HIGHLIGHTS
AGGRESSIVE EQUITY FUND
Year ended September 30,
1996 1995 1994
---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $25.00 $19.96 $19.75
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income (loss) (0.18) (0.04) (0.02)
Net realized and unrealized
gains (losses) on securities (0.11) 6.59 1.33
------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS (0.29) 6.55 1.31
LESS DISTRIBUTIONS:
Distributions from capital gains (0.54) (1.51) (1.10)
------- ------ ------
TOTAL DISTRIBUTIONS (0.54) (1.51) (1.10)
------- ------ ------
NET ASSET VALUE, END OF PERIOD $24.17 $25.00 $19.96
======= ======= ======
TOTAL RETURN (1.09)% 35.19% 6.85%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period
(in thousands) $253,319 $305,311 $46,369
Ratio of expenses to average net
assets<F11> 1.50% 1.47% 1.50%
Ratio of net income (loss) to
average net assets<F11> (0.65)% (0.37)% (0.67)%
Portfolio turnover rate 73% 29% 64%
Average commission rate paid
on portfolio investment
transactions<F12> $0.0480 N/A N/A
<F11> Net of reimbursements by adviser. Absent reimbursement of expenses
by adviser, except for the years ended September 30, 1996 and 1995 where
there were no reimbursements, the ratio of expenses to average net assets
for the years ending September 30, 1994 through September 30, 1990 would
be 1.52%, 1.64%, 1.69%, 1.67% and 1.75%, respectively, and the ratio of
net income (loss) to average net assets would be (0.69)%, (0.92)%,
(0.59)%,(0.52)% and (0.27)%, respectively.
<F12> Disclosure required by the Securities Exchange Commission beginning
1996.
See notes to financial statements.
FINANCIAL HIGHLIGHTS (cont'd)
AGGRESSIVE EQUITY FUND
Year ended September 30,
1993 1992 1991 1990
---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $15.23 $16.42 $ 9.77 $10.92
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income (loss) (0.09) (0.03) (0.04) 0.01
Net realized and unrealized
gains (losses) on securities 5.40 (0.26) 6.69 (1.16)
------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 5.31 (0.29) 6.65 (1.15)
LESS DISTRIBUTIONS:
Distributions from capital gains (0.79) (0.90) - -
------- ------- ------- -------
TOTAL DISTRIBUTIONS (0.79) (0.90) - -
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $19.75 $15.23 $16.42 $ 9.77
======= ====== ====== =======
TOTAL RETURN 35.73% (2.30)% 68.07% (10.53)%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period
(in thousands) $23,293 $12,542 $7,588 $2,767
Ratio of expenses to average
net assets<F11> 1.50% 1.51% 1.51% 1.56%
Ratio of net income (loss) to average
net assets<F11> (0.77)% (0.41)% (0.36)% 0.08%
Portfolio turnover rate 70% 32% 41% 74%
Average commission rate paid on
portfolio investment transactions<F12> N/A N/A N/A N/A
<F11> Net of reimbursements by adviser. Absent reimbursement of expenses
by adviser, except for the years ended September 30, 1996 and 1995 where
there were no reimbursements, the ratio of expenses to average net assets
for the years ending September 30, 1994 through September 30, 1990 would
be 1.52%, 1.64%, 1.69%, 1.67% and 1.75%, respectively, and the ratio of
net income (loss) to average net assets would be (0.69)%, (0.92)%,
(0.59)%,(0.52)% and (0.27)%, respectively.
<F12> Disclosure required by the Securities Exchange Commission beginning
1996.
See notes to financial statements.
WASATCH FUNDS
FINANCIAL HIGHLIGHTS (cont'd)
AGGRESSIVE EQUITY FUND (cont'd.)
Year ended Dec. 6, 1986<F13>
September 30, through
1989 1988 Sept. 30, 1987
-------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.07 $11.76 $10.00
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income (loss) (0.01) 0.03 0.02
Net realized and unrealized
gains (losses) on securities 1.91 (1.66) 1.74
------- -------- -------
TOTAL FROM INVESTMENT OPERATIONS 1.90 (1.63) 1.76
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.05) (0.01) -
Distributions from capital
gains - (1.05) -
------- -------- -------
TOTAL DISTRIBUTIONS (0.05) (1.06) -
------- -------- -------
NET ASSET VALUE, END OF PERIOD $10.92 $ 9.07 $11.76
======= ======== ========
TOTAL RETURN<F14> 21.09% (13.17)% 17.60%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period
(in thousands) $1,191 $833 $1,266
Ratio of expenses to average
net assets<F15> 1.50% 1.50% 1.26%<F14>
Ratio of net income
(loss) to average
net assets<F15> (0.12)% 0.30% 0.16%
Portfolio turnover rate 82% 71% 58%
Average commission rate
paid on portfolio
investment transactions<F16> N/A N/A N/A
<F13> Commencement of operations.
<F14> Not annualized for periods less than a year.
<F15> Net of reimbursements by adviser. Absent reimbursement of expenses
by adviser, the ratio of expenses to average net assets for the Aggressive
Equity Fund would be 1.91%, 2.03% and 1.36%, respectively, and the ratio
of net income (loss) to average net assets would be (0.55)%, (0.22)% and
0.06%, respectively. The ratio of expenses to average net assets for the
Micro-Cap Fund would be 2.67% and 3.40%, respectively, and the ratio of
net loss to average net assets would be (1.70)% and (1.66)%, respectively.
<F16> Disclosure required by the Securities Exchange Commission beginning
1996.
See notes to financial statements.
FINANCIAL HIGHLIGHTS (cont'd)
MICRO-CAP FUND
Year ended June 19, 1995<F13>
September 30, through
1996 Sept. 30, 1995
---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $2.72 $2.00
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income (loss) (0.03) -
Net realized and unrealized
gains (losses) on securities 0.46 0.72
------ ------
TOTAL FROM INVESTMENT OPERATIONS 0.43 0.72
LESS DISTRIBUTIONS:
Dividends from net investment income - -
Distributions from capital gains - -
------ ------
TOTAL DISTRIBUTIONS - -
------ ------
NET ASSET VALUE, END OF PERIOD $3.15 $2.72
====== ======
TOTAL RETURN<F14> 15.81% 36.00%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period
(in thousands) $94,004 $25,368
Ratio of expenses to average net
assets<F15> 2.50% 2.50%
Ratio of net income (loss) to average
net assets<F15> (1.53)% (0.76)%
Portfolio turnover rate 84% 0%
Average commission rate paid on
portfolio investment
transactions<F16> $0.0446 N/A
<F13> Commencement of operations.
<F14> Not annualized for periods less than a year.
<F15> Net of reimbursements by adviser. Absent reimbursement of expenses
by adviser, the ratio of expenses to average net assets for the Aggressive
Equity Fund would be 1.91%, 2.03% and 1.36%, respectively, and the ratio
of net income (loss) to average net assets would be (0.55)%, (0.22)% and
0.06%, respectively. The ratio of expenses to average net assets for the
Micro-Cap Fund would be 2.67% and 3.40%, respectively, and the ratio of
net loss to average net assets would be (1.70)% and (1.66)%, respectively.
<F16> Disclosure required by the Securities Exchange Commission beginning
1996.
See notes to financial statements.
WASATCH FUNDS
FINANCIAL HIGHLIGHTS (cont'd)
GROWTH FUND
Year Ended September 30,
1996 1995 1994 1993
---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $15.97 $15.30 $15.68 $13.64
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income (loss) 0.07 0.02 (0.14) (0.08)
Net realized and unrealized
gains (losses) on securities 1.87 4.59 0.71 3.21
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.94 4.61 0.57 3.13
LESS DISTRIBUTIONS:
Dividends from net investment income (0.05) - - -
Distributions from capital gains (0.29) (3.94) (0.95) (1.09)
------ ------ ------ ------
TOTAL DISTRIBUTIONS (0.34) (3.94) (0.95) (1.09)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $17.57 $15.97 $15.30 $15.68
====== ====== ====== ======
TOTAL RETURN<F18> 12.39% 39.76% 3.75% 23.57%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period
(in thousands) $104,237 $53,533 $11,219 $17,619
Ratio of expenses to average
net assets<F18><F19> 1.50% 1.50% 1.50% 1.50%
Ratio of net income (loss) to average
net assets<F19> 0.40% 0.29% (0.51)% (0.55)%
Portfolio turnover rate 62% 88% 163% 104%
Average commission rate paid
on portfolio investment
transactions<F20> $0.0476 N/A N/A N/A
<F17> Commencement of operations.
<F18> Not annualized for periods less than a year.
<F19) Net of reimbursements by adviser. Absent reimbursement of expenses
by adviser, the ratio of expenses to average net assets would be 1.51%,
1.58%, 1.64%, 1.61%, 1.67%, 1.66%, 2.02%, 1.89%, 1.91% and 1.37%,
respectively, and the ratio of net income (loss) to average net assets
would be 0.39%, 0.21%,(0.64)%, (0.66)%, (0.03)%, 0.36%, 1.29%, 0.96%,
0.80% and 0.06%, respectively.
<F20> Disclosure required by the Securities Exchange Commission beginning
1996.
See notes to financial statements.
FINANCIAL HIGHLIGHTS (cont'd)
GROWTH FUND(cont'd)
Dec. 6, 1986<F17>
Year ended September 30, through
1992 1991 1990 1989 1988 Sept. 30, 1987
---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $15.01 $10.73 $11.39 $ 9.48 $11.47 $10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income
(loss) (0.02) 0.08 0.10 0.13 0.10 0.01
Net realized and unrealized
gains (losses) on
securities (0.45) 5.16 (0.65) 1.89 (1.67) 1.46
------ ------ ------- ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS (0.47) 5.24 (0.55) 2.02 (1.57) 1.47
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.04) (0.16) (0.11) (0.11) (0.02) -
Distributions from
capital gains (0.86) (0.80) - - (0.40) -
------ ------ ------- ------ ------ ------
TOTAL DISTRIBUTIONS (0.90) (0.96) (0.11) (0.11) (0.42) -
------ ------ ------- ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $13.64 $15.01 $10.73 $11.39 $ 9.48 $11.47
====== ====== ====== ====== ====== ======
TOTAL RETURN<F18> (3.61)% 51.90% (4.82)% 21.60% (13.39)% 14.70%
SUPPLEMENTAL DATA AND
RATIOS:
Net assets, end of
period (in thousands) $14,243 $11,651 $4,574 $3,378 $2,605 $2,699
Ratio of expenses
to average net
assets<F18><F19> 1.49% 1.51% 1.87% 1.50% 1.50% 1.25%
Ratio of net income
(loss) to average
net assets<F19> 0.15% 0.51% 1.45% 1.37% 1.21% 0.18%
Portfolio turnover rate 40% 37% 69% 63% 88% 50%
Average commission rate
paid on portfolio investment
transactions<F20> N/A N/A N/A N/A N/A N/A
<F17> Commencement of operations.
<F18> Not annualized for periods less than a year.
<F19> Net of reimbursements by adviser. Absent reimbursement of expenses
by adviser, the ratio of expenses to average net assets would be 1.51%,
1.58%, 1.64%, 1.61%, 1.67%, 1.66%, 2.02%, 1.89%, 1.91% and 1.37%,
respectively, and the ratio of net income (loss) to average net assets
would be 0.39%, 0.21%,(0.64)%, (0.66)%, (0.03)%, 0.36%, 1.29%, 0.96%,
0.80% and 0.06%, respectively.
<F20> Disclosure required by the Securities Exchange Commission beginning
1996.
See notes to financial statements.
WASATCH FUNDS
FINANCIAL HIGHLIGHTS (cont'd)
MID-CAP FUND MID-CAP FUND
Year ended September 30, Year ended Aug.16,1992<F21>
September 30, through
1996 1995 1994 1993 Sept. 30, 1992
---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $18.61 $11.02 $10.51 $ 9.93 $10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment income
(loss) (0.26) (0.02) (0.27) (0.07) -
Net realized and
unrealized gains
(losses) on
securities (0.21) 7.64 0.78 0.65 (0.07)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS (0.47) 7.62 0.51 0.58 (0.07)
LESS DISTRIBUTIONS:
Distributions from
capital gains (0.19) (0.03) - - -
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (0.19) (0.03) - - -
------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $17.95 $18.61 $11.02 $10.51 $ 9.93
====== ====== ====== ====== =======
TOTAL RETURN<F22> (2.54)% 69.24% 4.85% 5.85% (0.70)%
SUPPLEMENTAL DATA
AND RATIOS:
Net assets, end
of period
(in thousands) $128,490 $98,605 $1,091 $2,451 $148
Ratio of expenses
to average net
assets<F22><F23> 1.75% 1.75% 1.75% 1.74% 1.56%
Ratio of net income
(loss) to average
net assets<F23> (1.27)% (0.71)% (1.19)% (0.86)% (0.38)%
Portfolio turnover
rate 121% 46% 213% 113% 40%
Average commission
rate paid on
portfolio investment
transactions<F24> $0.0500 N/A N/A N/A N/A
<F21> Commencement of operations.
<F22> Not annualized for periods less than a year.
<F23> Net of reimbursements by adviser. Absent reimbursement of expenses by
adviser, the ratio of expenses to average net assets would be 1.81%,
1.94%, 3.33%, 2.69% and 7.65%, respectively, and the ratio of net loss
to average net assets would be (1.33)%, (0.90)%, (2.76)%, (1.81)% and
(6.47)%, respectively.
<F24> Disclosure required by the Securities Exchange Commission beginning
1996.
See notes to financial statements.
WASATCH FUNDS
FINANCIAL HIGHLIGHTS (cont'd)
U.S. TREASURY FUND
Year ended September 30,
1996 1995 1994 1993
---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $10.50 $10.09 $10.42 $11.17
INCOME (LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income (loss) 0.44 0.56 0.55 0.55
Net realized and unrealized
gains (losses) on securities 0.01 0.44 (0.40) (0.17)
------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 0.45 1.00 0.15 0.38
LESS DISTRIBUTIONS:
Dividends from net investment income (0.74) (0.59) (0.46) (0.53)
Distributions from capital gains - - (0.02) (0.60)
------- ------- ------- -------
TOTAL DISTRIBUTIONS (0.74) (0.59) (0.48) (1.13)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.21 $10.50 $10.09 $10.42
======= ======= ======= =======
TOTAL RETURN<F26> 4.42% 10.46% 1.51% 3.80%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period
(in thousands) $7,427 $4,035 $3,250 $3,748
Ratio of expenses to average
net assets<F26><F27> 0.93% 1.00% 1.00% 1.00%
Ratio of net income (loss) to average
net assets<F27> 5.21% 5.88% 5.15% 4.60%
Portfolio turnover rate 30% 43% 45% 46%
<F25> Commencement of operations.
<F26> Not annualized for the period ended September 30, 1987.
<F27> Net of reimbursements by adviser. Absent reimbursement of expenses by
adviser, the ratio of expenses to average net assets would be 1.67%,
1.59%,1.39%, 1.35%, 1.20%, 1.20%, 1.57%, 1.42%, 1.35% and 1.20%,
respectively, and the ratio of net income to average net assets would
be 4.47%, 5.29%, 4.76%, 4.24%, 4.71%, 6.59%, 9.75%, 7.82%, 8.06% and
5.70%, respectively.
See notes to financial statements.
FINANCIAL HIGHLIGHTS (cont'd)
U.S. TREASURY FUND (cont'd)
Dec. 6, 1986<F25>
Year ended September 30, through
1992 1991 1990 1989 1988 Sept. 30, 1987
---------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD $11.14 $10.13 $10.61 $10.64 $10.19 $10.00
INCOME (LOSS) FROM
INVESTMENT OPERATIONS:
Net investment
income (loss) (0.03) 0.58 0.69 1.25 0.81 0.39
Net realized and
unrealized gains
(losses) on
securities 0.94 1.24 (0.19) (0.06) 0.25 (0.20)
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS 0.91 1.82 0.50 1.19 1.06 0.19
LESS DISTRIBUTIONS:
Dividends from net
investment income (0.56) (0.81) (0.69) (1.22) (0.61) -
Distributions from
capital gains (0.32) - (0.29) - - -
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS (0.88) (0.81) (0.98) (1.22) (0.61) -
------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $11.17 $11.14 $10.13 $10.61 $10.64 $10.19
====== ====== ====== ====== ====== ======
TOTAL RETURN<F26> 8.44% 18.74% 4.87% 12.50% 10.84% 1.90%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period
(in thousands) $5,234 $3,540 $1,771 $1,119 $816 $504
Ratio of expenses to
average net
assets<F26><F27> 1.00% 1.01% 1.32% 0.99% 0.95% 0.94%
Ratio of net income (loss)
to average net
assets<F27> 4.90% 6.79% 10.00% 8.25% 8.47% 5.97%
Portfolio turnover rate 95% 66% 71% 29% 30% -
<F25> Commencement of operations.
<F26> Not annualized for the period ended September 30, 1987.
<F27> Net of reimbursements by adviser. Absent reimbursement of expenses by
adviser, the ratio of expenses to average net assets would be 1.67%,
1.59%, 1.39%, 1.35%, 1.20%, 1.20%, 1.57%, 1.42%, 1.35% and 1.20%,
respectively, and the ratio of net income to average net assets would
be 4.47%, 5.29%, 4.76%, 4.24%, 4.71%, 6.59%, 9.75%, 7.82%, 8.06% and
5.70%, respectively.
See notes to financial statements.
WASATCH FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. ORGANIZATION
Wasatch Funds, Inc., formerly Wasatch Advisors Funds, Inc., was
incorporated on November 18,1986 under the laws of the State of Utah and is
registered under the Investment Company Act of 1940 as an open-end
management investment company. The Aggressive Equity, Micro-Cap and Mid-Cap
Funds are non-diversified portfolios and the Growth and Wasatch-Hoisington
U.S. Treasury (formerly Income) ("U.S. Treasury") Funds are diversified
portfolios of Wasatch Funds, Inc. The Aggressive Equity Fund, Growth Fund
and Wasatch-Hoisington U.S. Treasury Fund commenced operations on December
6, 1986. The Mid-Cap Fund commenced operations on August 16, 1992 and the
Micro-Cap Fund commenced operations on June 19, 1995. The Aggressive
Equity, Micro-Cap, Growth, Mid-Cap and Wasatch-Hoisington U.S. Treasury
Funds (the "Funds") have entered into an investment advisory agreement with
Wasatch Advisors, Inc. (the "Manager") as investment adviser.
Wasatch Funds, Inc. is authorized to issue 100,000,000 shares of Series
A common stock (Aggressive Equity Fund), 100,000,000 shares of Series B
common stock (Growth Fund), 100,000,000 shares of Series C common stock
(U.S. Treasury Fund), 100,000,000 shares of Series D common stock
(Mid-Cap Fund) and 100,000,000 shares of Series E common stock
(Micro-Cap Fund) all with a par value of $.001 per share.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Funds conform to generally
accepted accounting principles. The following is a summary of the more
significant of such policies.
a) VALUATION OF SECURITIES - Securities listed or admitted for trading
privileges on the New York Stock Exchange or the American Stock Exchange
are valued at the closing price on the exchange on which the security is
traded. Securities traded in the over-the-counter market are valued at
the last sales price or, if no sales occurred on the valuation date, at
the last available bid price in the over-the-counter market or on the
basis of yield equivalents as obtained from one or more dealers that
make markets in these securities. Short-term securities are valued at
either original cost or amortized cost, both of which approximate
current market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good
faith by or under the direction of the Board of Directors of the Funds.
b) INVESTMENT IN SECURITIES - Security transactions are accounted for on
the trade date plus one. Gain or loss from sale of investment securities is
computed on the identified cost basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income is
recorded on the accrual basis.
Wasatch Funds
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
c) FEDERAL INCOME TAXES - It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of their taxable
income to their shareholders.
d) EXPENSES - The Funds are charged for those expenses that are directly
attributable to it, such as advisory and custodian fees. Expenses that are
not directly attributable to a portfolio are allocated among the portfolios
in proportion to their respective net assets.
e) USE OF MANAGEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires that
Management make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. The reported amounts
of revenues and expenses during the reporting period may also be affected
by the estimates and assumptions management is required to make. Actual
results may differ from those estimates.
3. DISTRIBUTIONS
Dividends from net investment income are declared and paid annually.
Distributions of net realized gains, if any, will be declared at least
annually. The amount of dividends and distributions from net investment
income and net realized capital gains are determined in accordance with
federal income tax regulations, which may differ from generally accepted
accounting principles. To the extent these book and tax differences are
permanent in nature, such amounts are reclassified to paid-in capital in
excess of par value. Accordingly, at September 30, 1996, reclassifications
were recorded to increase/(decrease) undistributed net investment income by
$1,849,271, $1,003,558, ($2,010) and $1,893,457; increase/(decrease)
undistributed net realized gain on investments by $383,597, ($1,003,558),
$2,003 and ($194,359); and decrease paid-in-capital in excess of par by
$2,232,868, $0, $7 and $1,699,098 for the Aggressive Equity, Micro-Cap,
Growth and Mid-Cap Funds, respectively.
4. CAPITAL STOCK
Transactions in shares of capital stock were as follows:
Year ended September 30, 1996
Aggressive U.S.
Equity Micro-Cap Growth Mid-Cap Treasury
Fund Fund Fund Fund Fund
--------- -------- ------ ------- --------
Shares sold 2,799,772 33,670,987 5,814,862 10,158,198 547,955
Dividends
reinvested 257,555 - 76,725 68,459 35,305
Shares redeemed (4,789,910)(13,187,618) (3,309,665) (8,365,863) (239,816)
---------- ----------- ----------- ----------- ---------
Net increase
(decrease) (1,732,583) 20,483,369 2,581,922 1,860,794 343,444
=========== ========== ========= ========= =======
WASATCH FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
Period ended September 30, 1995
Aggressive U.S.
Equity Micro-Cap Growth Mid-Cap Treasury
Fund Fund Fund Fund Fund
--------- -------- ------ ------- --------
Shares sold 11,583,792 9,592,412 2,724,508 5,698,649 132,150
Dividends
reinvested 223,654 - 241,652 230 18,774
Shares redeemed (1,917,750) (258,614) (347,867) (500,319) (88,885)
----------- ---------- ---------- --------- --------
Net increase 9,889,696 9,333,798 2,618,293 5,198,560 62,039
=========== ========== ========== ========= ========
5. PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities, excluding U.S. government
and short-term securities, for the year ended September 30, 1996 are
summarized below:
Aggressive U.S.
Equity Micro-Cap Growth Mid-Cap Treasury
Fund Fund Fund Fund Fund
--------- -------- ------ ------- --------
Purchases $206,156,077 $103,378,386 $92,736,015 $205,762,766 -
Sales 255,699,135 48,970,960 48,536,527 163,906,171 425,875
The only purchases and sales of U.S. government securities occurred in the
U.S. Treasury Fund and were $7,073,276 and $416,766, respectively. Net gain
or loss on securities sold is determined on the identified cost basis which
is the same as that used for federal income tax reporting. The U.S.
Treasury Fund's basis in investments is the same for income tax and
financial reporting purposes. The Aggressive Equity, Micro-Cap, Growth and
Mid-Cap Funds' tax basis in their investments is $210,663,977, $87,006,999,
$94,530,302 and $112,084,900, respectively. At September 30, 1996, the U.S.
Treasury Fund had an accumulated net realized capital loss carryover of
$31,182 and $35,783 expiring in 2002 and 2003, respectively. To the extent
the U.S. Treasury Fund realizes future net capital gains, taxable
distributions to its shareholders will be offset by any unused capital loss
carryover. For the year ended September 30, 1996, 25%, 1% and 14% of
dividends paid from taxable income for the Aggressive Equity, Micro-Cap and
Growth Funds, respectively, qualify for the dividends received deduction
available to corporate shareholders.
WASATCH FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
As of September 30, 1996, gross unrealized appreciation and
(depreciation) for federal income tax purposes were as follows:
Aggressive U.S.
Equity Micro-Cap Growth Mid-Cap Treasury
Fund Fund Fund Fund Fund
--------- -------- ------ ------- --------
Unrealized
appreciation $52,532,336 $13,228,913 $13,018,559 $24,480,835 $ 34,481
Unrealized
depreciation (10,138,784) (6,934,912) (4,689,674) (7,660,512) (62,317)
------------ ----------- ----------- ----------- --------
Net unrealized
appreciation
(depreciation) $42,393,552 $ 6,294,001 $ 8,328,885 $16,820,323 $(27,836)
=========== =========== =========== =========== =========
6. INVESTMENT ADVISORY
The investment policies of the Funds and the management of the Funds'
portfolios are administered by the Manager. The Manager paid for the Funds'
office space, facilities and certain business equipment in addition to
those provided by the Funds' custodian, administrator and transfer agent.
The Manager also compensates all officers and directors of the Funds,
provided such persons are also employees of the Manager or its affiliates.
For the year ended September 30, 1996, management fees for the Aggressive
Equity, Micro-Cap, Growth, Mid-Cap and U.S. Treasury Funds were 1.0%, 2.0%,
1.0%, 1.25% and 0.5% of the daily net assets of each portfolio,
respectively. The Manager voluntarily agreed to reimburse its management
fee to the extent that total expenses exceeded 1.5% of the net assets of
the Aggressive Equity Fund, 2.5% of the net assets of the Micro-Cap Fund,
1.5% of the net assets of the Growth Fund, 1.75% of the net assets of the
Mid-Cap Fund, and 0.75% (1.0% prior to July 1, 1996), of the net assets of
the U.S. Treasury Fund computed on a daily basis. For the year ended
September 30, 1996, the Manager reimbursed $113,105 for the Micro-Cap Fund,
$10,572 for the Growth Fund, $90,368 for the Mid-Cap Fund, and $41,168 for
the U.S. Treasury Fund.
7. RESTRICTED SECURITIES
Each Fund may invest up to 5% of its total assets or 10% of its net
assets in securities which cannot be readily sold because of legal or
contractual restrictions. At the end of the fiscal year, the Aggressive
Equity and Mid-Cap Funds held the securities of Drexler Technology Corp.
(DRXR), a restricted security, valued at 0.2% and 0.8% of total Fund
assets, respectively. Registration of these securities is currently
pending. The security is currently valued at a discount to the market
price of the equivalent unrestricted security. As of October 24, 1996, the
restriction was removed from 75,000 shares of the 85,000 shares held by the
Mid-Cap Fund.
WASATCH FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
The following table summarizes Wasatch Funds' holdings in DRXR:
Fund Acquisition Date Value Cost
------ ----------------- ------ ------
Aggressive
Equity Fund 12/27/94 $463,250 $160,000
Mid-Cap Fund 12/27/94 115,813 40,000
Mid-Cap Fund 6/30/95 868,594 300,000
8. TRANSACTIONS WITH AFFILIATES
The following is an analysis of transactions for the year ended
September 30, 1996 in the Aggressive Equity and Micro-Cap Funds with
"affiliated companies" as defined by the Investment Company Act of 1940:
AGGRESSIVE EQUITY FUND
Amount of
Amount of Gain (Loss)
Dividends Realized
Share Activity Credited on Sale
----------------------- to Income of Shares
Balance Balance in Fiscal in Fiscal
Security Name 9/30/95 Purchases Sales 9/30/96 1996 1996
------------- ------- --------- ------ ------- --------- ----------
Active Voice Corp. 100,800 243,400 83,300 260,900 - $(1,257,337)
Children's Discovery
Centers of
America, Inc. 492,200 - 492,200 - - (5,173,101)
Interpore
International 562,416 - 562,416 - - (354,939)
Mity-Lite, Inc. 157,120 - 157,120 - - (207,166)
National Dentex
Corp. 178,200 86,500 36,700 228,000 - 90,155
Thompson PBE, Inc. - 822,500 161,550 660,950 - (110,388)
WASATCH FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
MICRO-CAP FUND
Amount of
Amount of Gain (Loss)
Dividends Realized
Share Activity Credited on Sale
--------------------- to Income of Shares
Balance Balance in Fiscal in Fiscal
Security Name 9/30/95 Purchases Sales 9/30/96 1996 1996
------------- ------- --------- ------ ------- --------- ----------
National Dentex
Corp. 83,950 142,000 9,000 216,950 - $ 41,780
Successories, Inc. - 352,000 6,000 346,000 - (18,249)
WASATCH FUNDS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Shareholders and Board of Directors of
Wasatch Funds, Inc.:
We have audited the accompanying statements of assets and liabilities of
Wasatch Funds, Inc. (a Utah corporation, which includes the Wasatch
Aggressive Equity Fund, Wasatch Micro-Cap Fund, Wasatch Growth Fund,
Wasatch Mid-Cap Fund and Wasatch-Hoisington U.S. Treasury Fund), including
the schedules of investments, as of September 30, 1996, and the related
statements of operations for the year then ended, statements of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the four years in the period then ended.
These financial statements and financial highlights are the responsibility
of the Company's Management. Our responsibility is to express an opinion
on these financial statements and financial highlights based on our audits.
The financial highlights for the year ended September 30, 1992 and all
prior years presented were audited by other auditors whose report dated
November 18, 1992 expressed an unqualified opinion on the financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1996, by correspondence with the
custodians and brokers. As to securities purchased but not received, we
requested confirmation from brokers and, when replies were not received, we
carried out other alternative auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Wasatch Funds, Inc. as of September 30, 1996, and the results of its
operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and its financial highlights for
each of the four years in the period then ended, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
October 29, 1996
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