<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant /x/
Filed by a party other than the registrant / /
Check the appropriate box:
/x/ Preliminary proxy statement / / Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
/ / Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
WASATCH ADVISORS FUNDS
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(Name of Registrant as Specified in Its Charter)
Payment of filing fee (Check the appropriate box):
/x/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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<PAGE> 2
May , 1996
Dear Shareholder:
We are very excited to present the enclosed proxy to you requesting your
approval on amendments that we believe will enhance the Income Fund as an
investment vehicle.
The Board of Directors of Wasatch Funds has unanimously and enthusiastically
approved, and asks that you approve, the changes detailed in the enclosed Proxy
Statement, including:
1. that Wasatch Advisors (the Adviser) be authorized to hire Hoisington
Investment Management Company (Hoisington) as Sub-Adviser to the Fund; and
2. that the investment objectives of the Fund be modified. The Fund's
Prospectus currently provides that the "Income Fund's primary investment
objective is to receive current income at low risk by investing in fixed
income securities. The secondary objective is capital appreciation." It
is proposed that the language be modified to provide that "The primary
investment objective of the Fund is to provide a real rate of return over a
market cycle by investing in U.S. treasury securities with an emphasis on
both income and capital appreciation."
The Board of Directors feels strongly that adopting the proposed changes will
make the Fund a better vehicle for investors desiring income and capital
appreciation. At the time of inception, the Income Fund was the only Wasatch
investment choice offering current income. Now, the Wasatch family of funds
provides for investments in a money market fund (the Northern U.S. Government
Money Market Fund) for investors desiring only current income at low risk.
Upon your approval of the sub-advisory agreement, Hoisington will take over the
day-to-day investment decisions for the Income Fund while Wasatch will retain
responsibility for monitoring compliance with the investment policies and
restrictions of the Fund.
We feel strongly that the association between Wasatch and Hoisington will be
advantageous for shareholders. First, Hoisington is an experienced money
manager specializing in investments in high-quality fixed income securities.
The firm manages $2.8 billion in assets for a distinguished list of
institutional clients and requires a minimum account size of $10 million. The
sub-advisory agreement between Wasatch and Hoisington will create an
opportunity for mutual fund investors to access the expertise of this premier
fixed income manager. Second, just as Wasatch's research analysts follow a
strict discipline for investing in companies, Hoisington's investment
professionals have a focused strategy for investing in fixed income securities.
Also similar to Wasatch, Hoisington takes a long-term approach to investing and
is committed to building lasting relationships with clients. Finally, upon
approval of the proposals, the total annual expense ratio for the Fund will be
lowered from 1% to 0.75%.
<PAGE> 3
If approved, the Income Fund will be renamed "Wasatch-Hoisington U.S. Treasury
Fund." As the name implies, the Fund will invest primarily in high-quality U.S.
treasury securities. This strategy means that Fund shareholders will be exposed
to minimal credit risk. The Fund may take full advantage of the entire range
of maturities offered, from less than a year to a maximum of 30 years.
Hoisington believes the decision regarding the maturity of the portfolio is the
key to getting favorable returns for investors. Please read Exhibit C of the
proxy statement, the proposed prospectus language, for a discussion of
investment objectives and risks.
We ask that you please review the enclosed Proxy Statement and complete and
mail your proxy as soon as possible. If you have any questions about the
proposed changes, please call us at (800) 381-1065. We appreciate the
association we enjoy with Fund shareholders and look forward to strengthening
our relationship with you.
Sincerely,
Samuel S. Stewart, Jr.
President
<PAGE> 4
20/96
[PRELIMINARY COPY]
WASATCH INCOME FUND
a Series of Wasatch Funds, Inc.
68 South Main Street, Suite 400
Salt Lake City, Utah 84101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 21, 1996
NOTICE IS HEREBY GIVEN that the special meeting of shareholders of the
Wasatch Income Fund, (the "Fund"), a series of Wasatch Funds, Inc. (the
"Company"), will be held at ___________ 3:00 p.m., Mountain Time, on
Friday, June 21, 1996, at 68 South Main Street, Suite 400, Salt Lake City,
Utah. The purposes of the meeting are as follows:
1. To vote on an amendment to the Advisory and Service Contract between
the Fund and Wasatch Advisors, Inc. (the "Adviser")
authorizing the Adviser to retain a sub-adviser or
sub-advisers to assist the Adviser in furnishing investment
advice to the Fund.
2. To vote on 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.
3. To vote on a proposed modification to the investment
objectives of the Fund.
4. To vote on a proposed amendment to the Fund's fundamental investment
restrictions to allow it to lend portfolio securities.
5. To vote on such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Shareholders of record on May 15, 1996, are the only persons entitled to
notice of and to vote at the meeting.
Your attention is directed to the attached Proxy Statement. WHETHER OR NOT
YOU EXPECT TO BE PRESENT AT THE UPCOMING MEETING, PLEASE FILL IN, SIGN, DATE,
AND MAIL THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO SAVE THE FUND
FURTHER SOLICITATION EXPENSE. No postage necessary if mailed in the United
States.
Samuel S. Stewart, Jr., President
Dated: May , 1996
----------
-1-
<PAGE> 5
[PRELIMINARY COPY]
PROXY STATEMENT
WASATCH INCOME FUND
a Series of Wasatch Funds, Inc.
68 South Main Street, Suite 400
Salt Lake City, Utah 84101
SPECIAL MEETING OF SHAREHOLDERS -- JUNE 21, 1996
The enclosed proxy is solicited by the Board of Directors of Wasatch Funds,
Inc. (the "Company") in connection with a special meeting of shareholders of
the Wasatch Income Fund (the "Fund"), a series of the Company, to be held June
21, 1996, and any adjournments or postponements thereof. The costs of
solicitation, including the cost of preparing and mailing the Notice of Meeting
and this Proxy Statement, will be paid by the Adviser, and it is expected that
such mailing will take place on or about June ______ , 1996. In addition to
solicitations by mail, representatives of Wasatch Advisors, Inc. (the
"Adviser"), the investment adviser and manager of the Fund, and the Company
may, without extra remuneration, solicit proxies on behalf of the management of
the Fund by means of mail, telephone or personal interviews.
A proxy may be revoked before the meeting by giving written notice of
revocation to the Secretary of the Company, or at the meeting prior to the
voting. In instances where choices are specified by the shareholders in the
proxy, those proxies will be voted or the vote will be withheld in accordance
with the shareholder's choice. Unless revoked, properly executed proxies in
which choices are not specified by the shareholders will be voted "for" each
item for which no choice is specified, in accordance with the recommendation of
the Board of Directors. Abstentions may be specified on all proposals and
abstentions (including broker non-votes, if any) will be counted as present for
purposes of determining whether a quorum of shares is present at the meeting
with respect to the item on which the abstention is noted but will not be
counted as a vote "for" or "against" such item. Under the Rules of the New
York Stock Exchange, if a proposal is considered "discretionary," then brokers
who hold Fund shares in street name for customers are authorized to vote on
such proposal on behalf of their customers with or without specific voting
instructions from such customers. If a broker returns a "non-vote" proxy,
indicating a lack of authority to vote on a proposal, then the shares covered
by such non-vote shall not be counted as present for purposes of calculating
the vote with respect to such proposal. So far as the Board of Directors is
aware, no matters other than those described in this Proxy Statement will be
acted upon at the meeting. Should any other matters come before the meeting
calling for a vote of shareholders, it is the intention of the persons named as
proxies in the enclosed proxy to vote upon such matters according to their best
judgment.
If a quorum is not present at a meeting, or if a quorum is present but
sufficient votes to approve any of the proposals are not received, the persons
named as proxies may propose one or more adjournments of the meeting to permit
further solicitation of proxies. In determining whether to adjourn the
meeting, the following factors may be considered: the nature of the proposals
that are the subject of the meeting, the percentage of votes actually cast, the
percentage of negative votes actually cast, the nature of any further
solicitation and the information to be provided to shareholders with respect to
the reasons for the solicitation. Any adjournment will require the affirmative
vote of a majority of those shares represented at the meeting in person or by
proxy.
Only shareholders of record on May 15, 1996 may vote at the meeting or
any adjournments thereof. As of that date, there were issued and outstanding
________________________________________ common shares, $.001
-2-
<PAGE> 6
par value, of the Fund. Common shares represent the only class of securities
of the Fund. Each shareholder of the Fund is entitled to one vote for each
share held. None of the matters to be presented at the meeting will entitle
any shareholder to appraisal rights.
The Fund's annual report for the fiscal year ended September 30, 1995
and semi-annual report for the fiscal period ended March 31, 1996, including
financial statements, were previously mailed to shareholders. If you have not
received these reports or would like to receive another copy, please contact
the Fund at P.O. Box 2172, Milwaukee, Wisconsin 53201-2172, or call
800-551-1700 and one will be sent, without charge, by first-class mail within
three business days of your request.
To the knowledge of Fund management, the following were the owners
(beneficially or of record) of more than 5% of the outstanding shares of the
Fund as of May 15, 1996:
Percentage Number
Name Ownership of Shares
----- ---------- ---------
Charles Schwab & Company 27.39%156,660.598
Attn: Mutual Funds Department
101 Montgomery Street
San Francisco, CA 94104-4122
UMB Bank, n.a., Trustee 12.39%70,833.426
Ray R. Christensen IRA Rollover
175 South West Temple, Suite 510
Salt Lake City, UT 84101-1422
UMB Bank, n.a., Trustee 6.20%35,465.094
Dr. Jaime Mosquera IRA
Box 1504, HCR-3
Rocky Mount, MO 65072
PROPOSAL ONE
APPROVAL OF AN AMENDMENT TO THE ADVISORY AND
SERVICE CONTRACT BETWEEN THE FUND AND
WASATCH ADVISORS, INC.
The Proposed Amendment
The Company's Board of Directors has approved, and recommends that
shareholders approve, an amendment (the "Amendment") to the Advisory and
Service Contract dated December 4, 1986 (the "Advisory Contract") between the
Company, on behalf of the Fund, and Wasatch Advisors, Inc. (the "Adviser").
The Amendment authorizes the Adviser, at its option and expense, to retain a
sub-adviser or sub-advisers to assist the Adviser in furnishing investment
advice to the Fund. The Amendment is being proposed because the Adviser and
the Company's Board of Directors believe that the Fund's investment performance
would likely be enhanced if a sub-adviser specializing in fixed income
management could be engaged and that Fund marketing might also be enhanced if a
sub-adviser with an excellent reputation for fixed income management were
retained. A copy of the Amendment is attached as Exhibit A to the Proxy
Statement. The Amendment provides that the Adviser shall be responsible for
monitoring compliance by any sub-adviser it retains with the investment
policies and restrictions of the Fund and with any other limitations or
directions prescribed by the Board of Directors. The Amendment further
provides that any appointment of a sub-adviser will in no way limit or diminish
the Adviser's obligations and responsibilities under the Advisory Agreement.
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<PAGE> 7
The Amendment does not change the rate of the advisory fee payable by
the Fund. The Adviser would continue to receive compensation (paid monthly) at
the current annual rate of 0.50% of the Fund's average daily net assets. A
sub-advisory agreement (the "Sub-Advisory Agreement") between the Adviser and
Hoisington Investment Management Company ("Hoisington") is also being presented
for shareholder approval. See "Proposal Two -- Approval of a Sub-Advisory
Agreement Between Wasatch Advisors, Inc. and Hoisington Investment Management
Company." If the proposed Sub-Advisory Agreement is approved by shareholders,
the Adviser will pay the Sub-Adviser a monthly management fee computed at the
annual rate of .02% of the Fund's average daily net assets as long as and
whenever the Fund has net assets less than $20 million and one-half (1/2) of
the monthly fee the Adviser receives from the Fund under the Advisory Contract
as long as and whenever the Fund has net assets of $20 million or more. The
Adviser will retain the remainder of the advisory fee paid under the Advisory
Contract.
The Adviser has voluntarily agreed to limit the total expenses of the
Fund to .75% of the Funds' average net assets computed on a daily basis
following the approval and effectiveness of proposals one, two and three as set
forth in this Proxy Statement. The Adviser will maintain such expense
limitation at least through _____________, 19__.
The Amendment was approved by the Board of Directors at a meeting held
May 17, 1996, subject to the approval of the shareholders of the Fund. A
discussion of the factors considered by the Company's Board of Directors in
approving the Amendment and the Sub-Advisory Agreement is set forth below under
"Proposal Two -- Approval of a Sub-Advisory Agreement Between Wasatch Advisors,
Inc. and Hoisington Investment Management Company."
GENERAL INFORMATION CONCERNING THE ADVISORY CONTRACT
The Advisory Contract was approved by the Fund's initial shareholders
at inception in 1986 and has not been submitted to shareholders since that
time. The contract was last approved by the Company's Board of Directors,
including the disinterested directors, on December 8, 1995. Pursuant to the
Advisory Contract, the Adviser furnishes the Fund with investment advice and,
in general, supervises the management and investment program of the Fund. The
Adviser furnishes at its own expense office facilities and simple business
equipment. In addition, the Adviser pays the salaries and fees of any officers
of the Adviser serving as officers or directors of the Fund. Under the
Advisory Contract, the Fund pays the Adviser an advisory fee calculated and
paid monthly at the per annum rate of 0.50% of the Fund's average daily net
assets. For the fiscal year ended September 30, 1995, the Fund paid $16,871 in
advisory fees to the Adviser and the Adviser waived an additional $19,946 in
advisory fees which would otherwise have been payable.
The Advisory Contract will terminate automatically in the event of its
assignment. In addition, the Advisory Contract is terminable at any time,
without penalty, by the Board of Directors or by a vote of a majority of the
Fund's outstanding voting securities on 60 days' written notice to the Adviser,
and by the Adviser on 60 days' written notice to the Fund. The Advisory
Contract shall continue in effect only so long as such continuance is
specifically approved at least annually by either the Board of Directors of the
Company, or by a vote of a majority, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act"), of the outstanding voting securities of
the Fund, provided that, in either event, such continuance is also approved by
a vote of a majority of the directors who are not parties to such Contract, or
interested persons of such parties, cast in person at a meeting called for the
purpose of voting on such approval.
VOTE REQUIRED
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE SHAREHOLDERS
OF THE FUND VOTE TO APPROVE THE PROPOSED AMENDMENT TO THE ADVISORY CONTRACT.
Adoption of the proposal requires the
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<PAGE> 8
favorable vote of a majority of the outstanding shares of the Fund, as defined
in the 1940 Act, which means the lesser of the vote of (a) 67% of the shares of
the Fund present at a meeting where more than 50% of the outstanding shares are
present in person or by proxy, or (b) more than 50% of the outstanding shares
of the Fund (i.e., a "supra-majority" vote). Unless otherwise instructed, the
proxies will vote for the approval of the proposed Amendment.
PROPOSAL TWO
APPROVAL OF A SUB-ADVISORY AGREEMENT
BETWEEN WASATCH ADVISORS, INC. AND
HOISINGTON INVESTMENT MANAGEMENT COMPANY
THE PROPOSED SUB-ADVISORY AGREEMENT
Following the Adviser's decision to recommend hiring a sub-adviser,
the Adviser presented the Sub-Advisory Agreement to the Company's Board of
Directors for its approval. The Board has approved, and recommends that
shareholders of the Fund approve, the Sub-Advisory Agreement. A copy of the
Sub-Advisory Agreement is attached as Exhibit B to this Proxy Statement. The
following discussion is qualified in its entirety by reference to the text of
the Sub-Advisory Agreement.
Under the terms of the Sub-Advisory Agreement, and subject to the
supervision of the Adviser, Hoisington will direct the investment of the Fund's
assets and will be responsible for the formulation and implementation of a
continuing program for the management of the Fund's assets and resources.
Hoisington will make all determinations with respect to the investment of the
assets of the Fund and will take all steps as may be necessary to implement the
determinations, including the placement of purchase and sale orders on behalf
of the Fund.
The Sub-Advisory Agreement provides that the Adviser shall pay
Hoisington a monthly management fee computed at the annual rate of .02% of the
Fund's average daily net assets as long as and whenever the Fund has net assets
less than $20 million and one-half (1/2) of the monthly fee the Adviser
receives from the Fund under the Advisory Contract as long as and whenever the
Fund has net assets of $20 million or more. The Adviser will retain the
remainder of the advisory fee paid under the Advisory Contract. See "Proposal
One -- Approval of an Amendment to the Advisory and Service Contract Between the
Fund and Wasatch Advisors, Inc."
The Board of Directors of the Company has adopted a resolution
changing the name of the Fund to "Wasatch-Hoisington U.S. Treasury Fund"
effective on the date the Sub-Advisory Agreement becomes effective, which is
expected to be July 1, 1996.
The Sub-Advisory Agreement will terminate automatically in the event
of its assignment. In addition, the Sub-Advisory Agreement is terminable at
any time, without penalty, by the Board of Directors or by a vote of a majority
of the Fund's outstanding voting securities on 60 days' written notice to the
Adviser and Hoisington, by the Adviser on 60 days' written notice to the
Sub-Adviser, or by the Sub-Adviser on 60 days' written notice to the Adviser.
The Sub-Advisory Agreement shall continue in effect only so long as such
continuance is specifically approved at least annually by either the Board of
Directors of the Company, or by a vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Fund, provided that, in either
event, such continuance is also approved by a vote of a majority of the
directors who are not parties to such Agreement, or interested persons of such
parties, cast in person at a meeting called for the purpose of voting on such
approval.
BOARD DELIBERATIONS
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<PAGE> 9
The Sub-Advisory Agreement was approved by the Company's Board of
Directors, subject to shareholder approval, at a meeting held May 17, 1996.
Prior to approving the Sub-Advisory Agreement, the Board considered a variety
of factors, including (a) the historical performance of the Fund and the types
of portfolio securities purchased by the Fund to achieve its investment
objectives; (b) the nature, quality and extent of the services proposed to be
provided by the Adviser and Hoisington relative to those currently provided by
the Adviser alone; (c) the organizational depth, reputation and experience of
Hoisington in managing fixed income portfolios; (d) the financial condition of
Hoisington; and (e) the performance of accounts advised by Hoisington that are
similar in portfolio composition to the Fund. The Board also considered the
reasonableness of the proposed fee allocation between the Adviser and
Hoisington in light of the Adviser's reduced investment role but continued
overall responsibility.
VOTE REQUIRED
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT THE SHAREHOLDERS
OF THE FUND VOTE TO APPROVE THE PROPOSED SUB-ADVISORY AGREEMENT. Adoption of
the proposal requires a "supra-majority" vote. Unless otherwise instructed,
the proxies will vote for the approval of the proposed Sub-Advisory Agreement.
PROPOSAL THREE
APPROVAL OF A MODIFICATION
TO THE FUND'S INVESTMENT OBJECTIVES
The Fund's Prospectus currently provides that the
"Income Fund's primary investment objective is to
receive current income at low risk by investing in fixed
income securities. The secondary objective is capital
appreciation."
It is proposed that the Prospectus language be modified to provide:
"The primary investment objective of the Fund is to
provide a real rate of return over a market cycle by investing
in U.S. Treasury Securities with an emphasis on both income
and capital appreciation."
If this change is approved the Fund will not emphasize current income,
but instead will emphasize both income and capital appreciation. With the
reduced emphasis on current income the Board of Directors of the Fund has
adopted a resolution providing that following the payment of the monthly
dividend for the month ended July 31, 1996, the Fund will pay dividends
annually, rather than monthly.
A description of the Fund, following the approval of items #1 through
#4 of this Proxy Statement, is set forth in Exhibit C hereto.
VOTE REQUIRED
The Board of Directors of the Company recommends that shareholders of
the Fund vote to approve the proposed modification to the Fund's investment
objectives. Adoption of the proposal requires a "supra-majority" vote. Unless
otherwise instructed, the proxies will vote for the approval of the modified
investment objectives.
PROPOSAL FOUR
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<PAGE> 10
APPROVAL OF THE PROPOSAL
TO ALLOW THE FUND
TO LEND PORTFOLIO SECURITIES
Currently the Fund has a fundamental policy which states that it may
not "make loans to other persons." The Board of Directors of the Company has
adopted a resolution to modify this restriction as follows:
"The Income Fund may not make loans to other persons,
except that it may lend portfolio securities representing up
to one-third of the value of its total assets. (The Income
Fund however, may purchase and hold debt instruments and enter
into repurchase agreements in accordance with its investment
objectives and policies, as in the opinion of the Income Fund
manager, these investments do not constitute the making of
loans.)"
The lending of portfolio securities to broker-dealers, banks and
certain other institutions may increase Fund income, but also may involve
certain risks. For further information on securities lending, including
limitations and measures to be taken to mitigate such risks, see the "Lending
of Portfolio Securities" section of Exhibit C hereto.
VOTE REQUIRED
The Board of Directors of the Company recommends that shareholders of
the Fund vote to approve the proposal to allow securities lending. Adoption of
the proposal requires a "supra-majority" vote. Unless otherwise instructed,
the proxies will vote for the approval of the proposal to allow securities
lending.
OTHER MATTERS
Management does not intend to present any business to the meeting not
mentioned in this Proxy Statement and currently knows of no other business to
be presented. If any other matters are brought before the meeting, the persons
named as proxies will vote on such matters in accordance with their judgment of
the best interests of the Fund.
SUPPLEMENTAL INFORMATION ABOUT THE ADVISER, THE FUND AND THE COMPANY
No officers or Directors of the Company have family relationships with
other officers or Directors of the Company. The Adviser does not currently
serve as investment adviser for any other investment companies that have an
investment objective similar to that of the Fund. The name and principal
occupation of the principal executive officer and each director of the Adviser
are set forth below. The address of each person is 68 South Main Street, Suite
400, Salt Lake City, Utah 84101.
<TABLE>
<S> <C>
Name and Address Principal Occupation
- ----------------------------------------------
Samuel S. Stewart, Jr. Chairman of the Board of Directors and President of the Adviser; President and Director of
Wasatch Funds, Inc. (the
"Company"); Director of
Research for the Adviser;
Professor of Finance at the
University of Utah.
</TABLE>
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<PAGE> 11
<TABLE>
<S> <C>
Roy S. Jespersen Director, Vice President and Portfolio Manager of the Adviser; Director and Vice
President of the Company.
Mark E. Bailey Director, Vice President and Portfolio Manager of the Adviser.
Jeffrey S. Cardon Director, Vice President and Security Analyst of the Adviser; Director and Vice President of
the Company.
Karolyn Barker Director and Security Analyst of the Adviser.
Robert Gardiner Director and Security Analyst of the Adviser.
James Milligan Director and Marketing Director of the Adviser.
Venice F. Edwards is Secretary/Treasurer of the Company and Compliance Officer of the Adviser. No officer or
Director of the Company owns any voting securities of the Adviser except for Messrs. Stewart (25%), Jespersen (13%) and
Cardon (13%).
</TABLE>
SUPPLEMENTAL INFORMATION ABOUT THE SUB-ADVISER
Hoisington is a registered investment adviser that was incorporated in
1980. Hoisington is wholly-owned by Van Robert Hoisington and provides
investment management services for individuals, pension and profit sharing
plans, trusts and estates, charitable organizations and corporations and other
business entities. As of December 31, 1995, Hoisington provided investment
advice to 43 separately managed accounts and had approximately $2.8 billion of
assets under management. Hoisington provides investment management for fixed
income securities, including U.S. government securities.
The address of Hoisington and each of its directors is 1250 Capital of
Texas Highway South, Building 3, #600, Austin, Texas 78746. The names and
principal occupations of the principal executive officer and each director of
Hoisington are set forth below.
Name Principal Occupation
- -------------------------------------
Van Robert Hoisington President and Director of Hoisington.
Ethel Jeanne Hoisington Director of Hoisington.
David M. Hoisington Director and Vice President of Hoisington.
Van Robert Hoisington, Jr. Director and Vice President of Hoisington.
.
Janice Teague Green Senior Vice President of Hoisington.
SHAREHOLDER PROPOSALS
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<PAGE> 12
Any proposal by a shareholder to be considered for presentation at
the next Annual Meeting must be received at the Fund's offices, 68 South Main
Street, Suite 400, Salt Lake City, Utah 84101-, no later than August 15, 1996.
Samuel S. Stewart, Jr., President
Dated: May __________ , 1996
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<PAGE> 13
WASATCH INCOME FUND
a series of Wasatch Funds, Inc.
THIS PROXY IS SOLICITED ON BEHALF OF MANAGEMENT
The undersigned appoints Samuel S. Stewart, Jr. and Venice Edwards,
and each of them, with power to act without the other and with the right of
substitution in each, the proxies of the undersigned to vote all shares of the
Wasatch Income Fund, a series of Wasatch Funds, Inc. (the "Company") held by
the undersigned at a special meeting of shareholders to be held June 21, 1996,
and at any adjournments thereof, with all the powers the undersigned would
possess if present in person. All previous proxies given with respect to the
meeting are revoked.
THE PROXIES ARE INSTRUCTED:
<TABLE>
<S> <C>
1. To vote: FOR AGAINST ABSTAIN 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.
2. To vote: FOR AGAINST ABSTAIN 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.
3. To vote: FOR AGAINST ABSTAIN approval of a
------------ ----------------- --------------------
proposed modification to the investment objectives of the Fund.
4. To vote: FOR AGAINST ABSTAIN approval of a
------------ ----------------- --------------------
proposed modification to the Fund's fundamental investment restrictions to allow it to lend portfolio securities.
In their discretion, the proxies are authorized to vote upon such other business as may properly come before
the special meeting or any adjournments or postponements thereof.
THIS PROXY WILL BE VOTED AS INSTRUCTED ON THE ABOVE MATTERS. IT IS UNDERSTOOD THAT, IF NO CHOICE IS SPECIFIED,
THIS PROXY WILL BE VOTED "FOR" ALL ITEMS. UPON ALL OTHER MATTERS THE PROXIES SHALL VOTE AS THEY DEEM IN THE BEST
INTERESTS OF THE FUND. RECEIPT OF NOTICE OF MEETING AND PROXY STATEMENT IS ACKNOWLEDGED BY YOUR EXECUTION OF THIS
PROXY. SIGN, DATE, AND RETURN IN THE ADDRESSED ENVELOPE-NO POSTAGE REQUIRED. PLEASE MAIL PROMPTLY TO SAVE THE FUND
FURTHER SOLICITATION EXPENSE.
Dated:_______________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
IMPORTANT: Please date and sign this proxy.
If the stock is held jointly, signature should
include both names. Executors, administrators,
trustees, guardians, and others signing in a
representative capacity should give their full
title as such.
</TABLE>
<PAGE> 1
EXHIBIT A
WASATCH INCOME FUND
AMENDMENT DATED AS OF__________, 1996
TO ADVISORY AND SERVICE CONTRACT
WHEREAS, Wasatch Funds, Inc., a Utah corporation (the "Company"), and
Wasatch Advisors, Inc., a Utah corporation (the "Adviser"), previously entered
into that Advisory and Service Contract dated December 4, 1986 (the "Advisory
Contract"), on behalf of Wasatch Income Fund (the "Fund");
WHEREAS, the Company and the Adviser contemplate that the Adviser will
retain a sub-adviser to assist the Adviser in furnishing an investment program
to the Fund and wish to make provision therefor.
NOW, THEREFORE, the Company and the Adviser agree as follows:
The Adviser is hereby authorized, at its option and expense, to retain
a sub-adviser or sub-advisers to assist the Adviser in furnishing investment
advice to the Fund; provided that the Adviser shall be responsible for
monitoring compliance by such sub-adviser(s) with the investment policies and
restrictions of the Company and the Fund and with such other limitations or
directions as the Board of Directors of the Company may from time to time
prescribe. Any such retention of a sub-adviser shall be subject to approval by
the Board of Directors of the Company and, to the extent required by law, the
shareholders of the Fund. Any appointment of a sub-adviser pursuant hereto
shall in no way limit or diminish the Adviser's obligations and
responsibilities under the Advisory Agreement.
IN WITNESS WHEREOF, the Company and the Adviser have caused this
Amendment to the Advisory Contract to be executed by their duly authorized
officers as of the day and year first above written.
WASATCH FUNDS, INC. WASATCH ADVISORS, INC.
By __________________________ By __________________________
Its _________________________ Its _________________________
<PAGE> 1
EXHIBIT B
SUB-ADVISORY AGREEMENT
Agreement, dated as of _____, 1996, by and between Wasatch
Advisors, Inc., a Utah corporation (the "Adviser"), and Hoisington Investment
Management Company, a Texas corporation (the "Sub-Adviser").
WHEREAS, the Adviser is the investment adviser to the
Wasatch-Hoisington U.S. Treasury Fund (the "Fund") (formerly "Wasatch Income
Fund"), which is a series of Wasatch Funds, Inc. (the "Company"), which is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to assist the
Adviser in furnishing an investment program to the Fund.
NOW, THEREFORE, in consideration of the mutual agreements herein made,
the Adviser and the Sub-Adviser agree as follows:
1. The Adviser hereby employs the Sub-Adviser to serve as sub-adviser
with respect to the assets of the Fund, and to perform the services hereinafter
set forth. The Sub-Adviser hereby accepts such employment and agrees, for the
compensation herein provided, to assume all obligations herein set forth and to
bear all expenses of its performance of such obligations (but no other
expenses). The Sub-Adviser shall not be required to pay expenses of the Fund
or the Company, unless otherwise explicitly provided herein. The Sub-Adviser
shall for all purposes herein be deemed to be an independent contractor and
shall, except as expressly provided or authorized (whether herein or
otherwise), have no authority to act for or on behalf of the Fund or the
Company in any way or otherwise be deemed an agent of the Fund or the Company.
2. The Sub-Adviser shall direct the investment of the Fund's assets
in accordance with the 1940 Act, the provisions of the Internal Revenue Code of
1986, as amended, relating to regulated investment companies, applicable laws,
and the investment objectives, policies and restrictions set forth in the
Fund's Prospectus and Statement of Additional Information filed with the
Securities and Exchange Commission pursuant to Rule 497 under the Securities
Act of 1933, subject to the supervision of the Company, its officers and
directors, and the Adviser and in accordance with the investment objectives,
policies and restrictions from time to time prescribed by the Board of
Directors of the Company and communicated by the Adviser to the Sub-Adviser and
subject to such further limitations as the Adviser may from time to time impose
by written notice to the Sub-Adviser.
3. The Sub-Adviser shall formulate and implement a continuing program
for the management of the Fund's assets. The Sub-Adviser shall amend and
update such program from time to time as financial and other economic
conditions warrant. The Sub-Adviser shall make all determinations with respect
to the investment of the assets of the Fund and shall take such steps as may be
necessary to implement the same, including the placement of purchase and sale
orders on behalf of the Fund. The Sub-Adviser shall advise the Adviser and, if
requested by the Adviser, advise the Company's Board of Directors (which shall
make all non-investment decisions with respect to the securities in which the
assets of the Fund may be invested), of the manner in which voting rights,
rights to consent to corporate action, and any other noninvestment decisions
pertaining to the Fund's portfolio securities should be exercised.
<PAGE> 2
4. The Sub-Adviser shall furnish such reports to the Adviser as the
Adviser may reasonably request for the Adviser's use in discharging its
obligations under the Advisory and Service Contract between the Fund and the
Adviser (the "Advisory Agreement"), which reports may be distributed by the
Adviser to the Company's Board of Directors at periodic meetings of such Board
and at such other times as may be reasonably requested by the Company's Board
of Directors. Copies of all such reports shall be furnished to the Adviser for
examination and review within a reasonable time prior to the presentation of
such reports to Company's Board of Directors.
5. The Sub-Adviser shall select the brokers and dealers that will
execute the purchases and sales of portfolio instruments for the Fund and
markets on or in which such transactions will be executed and shall place, in
the name of the Fund or its nominee, all such orders.
(a) When placing such orders, the Sub-Adviser is authorized to employ
such dealers and brokers as may, in the judgment of the Sub-Adviser (taking
into account such factors as price, including dealer spread, the size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities and the firm's risk in positioning the securities),
implement the policy of the Fund to obtain the best price and execution.
Consistent with this policy, the Sub-Adviser is authorized to direct the
execution of the Fund's portfolio transactions to dealers and brokers
furnishing statistical information or research deemed by the Sub-Adviser to be
useful or valuable to the performance of its sub-advisory functions for the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Sub-Adviser.
It is understood that certain other clients of the Sub-Adviser may
have investment objectives and policies similar to those of the Fund, and that
the Sub-Adviser may, from time to time, make recommendations that result in the
purchase or sale of a particular security by its other clients simultaneously
with the Fund. If transactions on behalf of more than one client during the
same period increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or quantity. In
such event, the Sub-Adviser shall allocate advisory recommendations and the
placing of orders in a manner that is deemed equitable by the Sub-Adviser to
the accounts involved, including the Fund. When two or more of the clients of
the Sub-Adviser (including the Fund) are purchasing or selling the same
security on a given day from the same broker or dealer, such transactions may
be averaged as to price.
(b) The Sub-Adviser agrees that, except to the extent permitted under
Rule 17a-7 under the 1940 Act, or under any no-action letter or exemptive order
issued to the Company or the Fund by the Securities and Exchange Commission, it
will not purchase or sell securities for the Fund in any transaction in which
it, the Adviser or any "affiliated person" of the Company, the Fund, the
Adviser or Sub-Adviser or any affiliated person of such "affiliated person" is
acting as principal. The Sub-Adviser agrees that any transactions effected
under Rule 17a-7 shall comply with the then-effective procedures adopted under
such rule by the Company's Board of Directors.
(c) The Sub-Adviser agrees that it will not execute any portfolio
transactions for the Fund with a broker or dealer or futures commission
merchant which is an "affiliated person" of the Company, the Fund, the Adviser
or the Sub-Adviser or an "affiliated person" of such an "affiliated person"
without the prior written consent of the Adviser. In effecting such
transactions, the Sub-Adviser shall comply with Section 17(e)(1) of the 1940
Act and the then-effective procedures adopted under such rule by the Company's
Board of Directors.
(d) The Sub-Adviser shall promptly communicate to the Adviser and, if
requested by the Adviser, to the Company's Board of Directors, such information
relating to portfolio transactions as the Adviser may reasonably request. The
parties understand that the Fund shall bear all brokerage commissions in
connection with the purchases and sales of portfolio securities for the Company
and all
<PAGE> 3
ordinary and reasonable transaction costs in connection with purchases of such
securities in private placements and subsequent sales thereof.
6. The Sub-Adviser may (at its cost except as contemplated by
paragraph 5 of this Agreement) employ, retain or otherwise avail itself of the
services and facilities of persons and entities within its own organization or
any other organization for the purpose of providing the Sub-Adviser, the
Adviser, the Fund, or the Company with such information, advice or assistance,
including but not limited to advice regarding economic factors and trends and
advice as to transactions in specific securities, as the Sub-Adviser may deem
necessary, appropriate or convenient for the discharge of its obligations
hereunder or otherwise helpful to the Adviser, the Fund, or the Company, or in
the discharge of the Sub-Adviser's overall responsibilities with respect to the
other accounts for which it serves as investment manager or investment adviser.
7. The Sub-Adviser shall cooperate with and make available to the
Adviser, the Fund, the Company and any agents engaged by the Company, the
Sub-Adviser's expertise relating to matters affecting the Company.
8. For the services to be rendered and the facilities to be furnished
under this Agreement, the Adviser shall pay to the Sub-Adviser a monthly
management fee computed at the annual rate of .02% of the Fund's average daily
net assets as long as and whenever the Fund has net assets of less than $20
million, and one-half (1/2) of the monthly fee the Adviser receives from the
Fund under the Advisory and Service Contract as long as and whenever the Fund
has net assets of $20 million or more. Such fee shall be payable on the
fifteenth day of each calendar month for services performed hereunder during
the preceding month. The net asset value of the Fund shall be calculated as of
the close of the New York Stock Exchange on each day the Exchange is open for
trading or as of such other time or times as the Company's Board of Directors
may determine in accordance with the provisions of the 1940 Act. On each day
when net asset value is not calculated, the net asset value of a share of
common stock of the Fund shall be deemed to be the net asset value of such a
share as of the close of business on the last day on which such calculation was
made for the purpose of the foregoing computations.
If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for that
part of the month during which this Agreement is in effect shall be prorated in
a manner consistent with the calculation of fees as set forth above.
9. The Sub-Adviser represents, warrants and agrees that:
(a) The Sub-Adviser is registered as an "investment adviser"
under the Investment Advisers Act of 1940 ("Advisers Act") and is
currently in compliance and shall at all times continue to comply with
the requirements imposed upon it by the Advisers Act and other
applicable laws and regulations. The Sub-Adviser agrees to (i) supply
the Adviser with such documents as the Adviser may reasonably request
to document compliance with such laws and regulations and
(ii) immediately notify the Adviser of the occurrence of any event
which would disqualify the Sub-Adviser from serving as an investment
adviser of a registered investment company pursuant to any applicable
law or regulation.
(b) The Sub-Adviser will maintain, keep current and preserve
on behalf of the Fund in the manner provided by the 1940 Act all
records required by the 1940 Act with respect to the Sub-Adviser's
activities hereunder. The Sub-Adviser agrees that such records are
the property of the Company, and will be surrendered to the Company
promptly upon request.
(c) The Sub-Adviser will complete such reports concerning
purchases or sales of securities on behalf of the Fund as the Adviser
may from time to time require to document
<PAGE> 4
compliance with the 1940 Act, the Advisers Act, the Internal Revenue Code,
applicable state securities laws and other applicable laws and regulations or
regulatory and taxing authorities in countries other than the United States.
(d) After filing with the Securities and Exchange Commission
any amendment to its Form ADV, the Sub-Adviser will promptly furnish
a copy of such amendment to the Adviser.
(e) The Sub-Adviser will immediately notify the Adviser of
the occurrence of any event which would disqualify the Sub-Adviser
from serving as an investment adviser of an investment company
pursuant to Section 9 of the 1940 Act or any other applicable statute
or regulation.
10. The Adviser represents, warrants and agrees that:
(a) It has been duly authorized by the Board of Directors of
the Company to delegate to the Sub-Adviser the provision of the
services contemplated hereby.
(b) The Adviser and the Company are currently in compliance
and shall at all times continue to comply with the requirements
imposed upon the Adviser and the Company by applicable law and
regulations.
11. The Sub-Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund or its shareholders in
connection with the performance of its duties under this Agreement, except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
duties under this Agreement.
12. The Sub-Adviser hereby grants the Fund and the Company the right
to use "Hoisington" in the name of the Fund so long as the Sub-Adviser is the
sub-adviser to the Fund. If the Sub-Adviser ceases to be the Fund's
sub-adviser, the Fund will promptly change its name to omit the reference to
"Hoisington." The Sub-Adviser agrees that so long as "Hoisington" is included
in the Fund's name, it will not allow the use of "Hoisington" in the name of
any other public investment company without the express written consent of the
Adviser or the Fund.
13. This Agreement shall become effective as of the date first set
forth above. Unless sooner terminated as hereinafter provided, this Agreement
shall continue in effect for a period of two years from the date of its
execution, and thereafter shall continue in effect only so long as such
continuance is specifically approved at least annually (a) by the Board of
Directors of the Company or by the vote of a majority of the outstanding voting
securities of the Company, and (b) by the vote of a majority of the directors
who are not parties to this Agreement or Interested Persons of any such
parties, cast in person at a meeting called for the purpose of voting on such
approval. It shall be the duty of the Directors of the Company to request and
evaluate, and the duty of the Adviser and Sub-Adviser to furnish, such
information as may be reasonably necessary to evaluate the terms of this
Agreement and any renewal thereof.
This Agreement may be terminated at any time without the payment of
any penalty (a) by the vote of the Board of Directors of the Company or by the
vote of the holders of a majority of the outstanding voting securities of the
Fund, upon 60 days' written notice to the Adviser and the Sub-Adviser, or
(b) by the Adviser, upon 60 days' written notice to the Sub-Adviser; or (c) by
the Sub-Adviser, upon 60 days' written notice to the Adviser. This Agreement
shall automatically terminate in the event of its assignment as defined in the
1940 Act and the rules thereunder.
Wherever referred to in this Agreement, the vote or approval of the
holders of a majority of the outstanding voting securities or shares of the
Fund shall mean the vote of 67% or more of such shares if
<PAGE> 5
the holders of more than 50% of such shares are present in person or by proxy
or the vote of more than 50% of such shares, whichever is less.
14. No amendment to or modification of this Agreement shall be
effective unless and until approved by the vote of a majority of the
outstanding shares of the Fund.
15. This Agreement shall be binding upon, and inure to the benefit
of, the Adviser and the Sub-Adviser, and their respective successors.
16. If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
17. Nothing herein shall be deemed to limit or restrict the right of
the Sub-Adviser, or any affiliate of the Sub-Adviser, or any employee of the
Sub-Adviser, to engage in any other business or to devote time and attention to
the management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
18. To the extent that state law is not preempted by the provisions
of any law of the United States heretofore or hereafter enacted, as the same
may be amended from time to time, this Agreement shall be administered,
construed and enforced according to the laws of the State of Utah.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers thereunto duly authorized in multiple
counterparts, each of which shall be an original but all of which shall
constitute one and the same instrument.
WASATCH ADVISORS, INC.
By________________________
Name:
Title:
HOISINGTON INVESTMENT
MANAGEMENT COMPANY
By________________________
Name:
Title:
<PAGE> 1
EXHIBIT C
WASATCH-HOISINGTON U.S. TREASURY FUND
INVESTMENT OBJECTIVE
The primary investment objective of the Fund is to provide a real rate
of return over a market cycle by investing in U.S. treasury securities with an
emphasis on both income and capital appreciation. In pursuing its objective,
at least 90% of the Fund's total assets will be invested in U.S. treasury
securities and in repurchase agreements collateralized by such securities. The
remainder of the Fund's portfolio can also be invested in high-quality money
market instruments, cash equivalents and cash, which in the opinion of the
Manager/Sub-Adviser present only minimal credit risks.
The Fund is not limited as to the maturities of its portfolio
investments and, to the extent consistent with its investment objectives, may
take full advantage of the entire range of maturities offered. The
Manager/Sub-Adviser may adjust the average maturity (effective duration) of the
Fund's portfolio from time to time depending upon its assessment of national
and international economic and interest rate trends, changes in inflationary
pressures, and the value of long treasury bonds relative to inflation. Under
normal market conditions, it is expected that over the course of a business
cycle, the effective duration of the Fund will vary from less than a year to a
maximum of 15 years. In terms of maturity, it will range from less than a year
to a maximum of 30 years.
An investment in the Fund involves certain risks. These include the
following:
Credit Risk. Credit Risk is the risk that the issuer of a debt
security will fail to make payments on the security when due. The
Manager/Sub-Adviser seek to limit credit risk by investing primarily in U.S.
treasury securities and in repurchase agreements collateralized by such
securities. Treasury securities means securities which are direct obligations
of the United States treasury such as bonds, notes and bills. Treasury bills
are issued on a discount rate basis and have a maturity of one year or less.
Longer-dated treasury securities are issued with interest paid semi-annually
to holders. Notes are generally issued in maturities of ten years and shorter,
and bonds are currently issued with a maturity of 30 years. Unlike corporate
bonds or government agency securities, all treasury securities are direct
obligations of the U.S. government varying only in maturity and coupon.
Treasury securities generally are viewed as carrying minimal credit risk.
Interest Rate Risk. Interest rate risk is the risk that the value of
a fixed-rate debt security will decline due to changes in market interest
rates. Even though some interest-bearing securities are investments which
offer a stable stream of income at relatively high current yields, the prices
of such securities are affected by changes in interest rates and are therefore
subject to market price fluctuations. The value of fixed income securities
varies inversely with changes in market interest rates. When interest rates
rise, the value of the Fund's portfolio securities, and therefore its net asset
value per share, generally will decline. In general, the value of fixed-rate
debt securities with longer maturities is more sensitive to changes in market
interest rates than the value of such securities with shorter maturities.
Thus, if the Fund is invested in securities with longer weighted average
maturities, the net asset value of the Fund should be expected to have greater
volatility in periods of changing market interest rates.
If the Manager/Sub-Adviser forecast that interest rates will decrease,
the average maturity of the portfolio can be extended out to 30 years. If the
Manager/Sub-Adviser forecast an increase in interest rates, a defensive policy
may be more appropriate, and the Manager/Sub-Adviser may deem it prudent to
reduce the average maturity of the portfolio to less than one year.
<PAGE> 2
Effective duration estimates the interest rate risk (price volatility)
of a security, i.e., how much the value of the security is expected to change
with a given change in interest rates. The longer a security's effective
duration, the more sensitive its price is to changes in interest rates. For
example, if the interest rate were to increase by 1% on a bond with an
effective duration of 5 years, the price of the bond would decline by 5%.
Similarly, if the interest rate were to increase by 1% on a bond with an
effective duration of 15 years, the price of the bond would decline by 15%. At
a yield of 7%, the effective duration of a 30-year U.S. treasury bond is about
13 years. It is important to understand that, while a valuable measure,
effective duration is based on certain assumptions and has several limitations.
It is most useful as a measure of interest rate risk when interest rate changes
are small, rapid and occur equally across all the different points of the yield
curve.
Repurchase Agreements. The Fund may enter into repurchase agreements
with respect to U.S. treasury securities. A repurchase agreement involves the
purchase by the Fund of treasury securities with the condition that after a
stated period of time the original seller (a member bank of the Federal Reserve
System or a recognized securities dealer) will buy back the same securities
("collateral") at a predetermined price or yield. Repurchase agreements
involve certain risks not associated with direct investments in securities. In
the event the original seller defaults on its obligation to repurchase, as a
result of its bankruptcy or otherwise, the Fund will seek to sell the
collateral, which action could involve costs or delays. In such case, the
Fund's ability to dispose of the collateral to recover such investment may be
restricted or delayed. While collateral will at all times be maintained in an
amount equal to the repurchase price under the agreement (including accrued
interest due thereunder), to the extent proceeds from the sale of collateral
were less than the repurchase price, the Fund would suffer a loss. Repurchase
agreements maturing in more than seven days are considered illiquid and subject
to the Fund's restriction on investing in illiquid securities.
Lending of Portfolio Securities. Consistent with applicable
regulatory requirements, the Fund may lend its portfolio securities
(principally to broker-dealers) where such loans are callable at any time and
are continuously secured by collateral (cash or government securities) equal to
no less than the market value, determined daily, of the securities loaned. The
Fund will receive amounts equal to interest on the securities loaned. The Fund
will also earn income for having made the loan. The Fund will limit its loans
of portfolio securities to an aggregate of 33 1/3% of the value of its total
assets, measured at the time such loan is made. ("Total assets" of the Fund
includes the amount lent as well as the collateral securing such loans.) In
determining whether the Fund meets the requirement that at least 90% of its
total assets be invested in U.S. treasury securities, the Fund will consider
the securities lent as well as the collateral securing such loans.
As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. However, the Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which either the
Manager or the Sub-Adviser has determined are creditworthy under guidelines
established by the Company's Board of Directors. The Fund may also experience
a loss if, upon the failure of a borrower to return loaned securities, the
collateral is not sufficient in value or liquidity to cover the value of such
loaned securities (including accrued interest thereon). Apart from lending its
securities, investing in repurchase agreements, and acquiring debt securities,
as described in the Prospectus and Statement of Additional Information, the
Fund will not make loans to other persons.
The rate of turnover in the Fund will vary substantially from year to
year depending on market opportunities. During some periods, turnover will be
well below 50% but at other times could exceed 200% annually. While such
portfolio adjustments may require the sale of securities prior to their
maturity date, the goal of such transactions will be either to increase income
and/or to change the duration of the over-all portfolio.
