<PAGE> 1
TABLE OF CONTENTS
Overview 2
Wasatch Equity Funds 2
Wasatch Fixed Income Fund 2
Expense Information 3
Annual Fund Operating Expenses 4
Financial Highlights 5
The Funds In Detail 16
Investment Objective and Process 16
General Policies, Investment Techniques and Risks 20
Risk Factors that may Affect the Wasatch Equity Funds 21
Additional Policies and Risk Factors that may Affect the
Wasatch-Hoisington U.S. Treasury Fund 23
Shareholder's Guide 25
To Reach Wasatch Funds by Phone 25
To Open a New Account 25
Types of Account Ownership 25
Retirement Accounts 26
To Purchase Shares 26
Automatic Investment Plan 27
Who Can Purchase Shares in the Aggressive Equity Fund 27
To Exchange Shares 28
To Redeem Shares 30
Instructions for Written Requests 31
Signature Guarantee 32
How Fund Shares are Priced 32
Shareholder Services and Account Policies 33
Shareholder Reports 33
Account Statements 33
Involuntary Redemption 33
Telephone Transactions 34
Registration Changes 34
Address Changes 34
Management of Wasatch Funds 34
Investment Personnel 35
Management Fees, Expenses and Expense Limitations 36
Additional Service Providers 37
Organization of Wasatch Funds 38
Dividends, Capital Gains Distributions and Taxes 38
Guide to Understanding Fund Performance 40
Glossary of Investing Terms 42
Explanation of Rating Categories 45
Prospectus
<PAGE> 2
[Wasatch Logo]
WASATCH FUNDS, INC.
68 South Main Street
Salt Lake City, UT 84101-1502
1 (800) 551-1700
January 31, 1998
WELCOME TO THE
WASATCH FUNDS
FAMILY OF NO-LOAD
MUTUAL FUNDS
No-load means there is no sales charge to purchase, exchange or sell shares
in any of the Wasatch Funds. When you sign up to automatically invest $50
monthly or $100 quarterly, your minimum initial investment is $1,000. Otherwise,
the minimum initial investment is $2,000. Please see the Shareholder's Guide
beginning on page 25 for complete information on how to purchase, exchange or
redeem shares.
This Prospectus describes the investment opportunities offered by the
Mid-Cap Fund, Micro-Cap Fund, Aggressive Equity Fund, Micro-Cap Value Fund,
Growth Fund and Wasatch-Hoisington U.S. Treasury Fund (the "Funds"). Each Fund
is a series of Wasatch Funds, Inc. ("Wasatch Funds") and is managed by Wasatch
Advisors, Inc. (the "Manager"). Wasatch Funds is registered with the Securities
and Exchange Commission ("SEC") as an open-end management investment company.
This Prospectus contains information about the Funds that you should consider
before investing. Please read it carefully and keep it for future reference.
Additional information about the Funds is contained in a Statement of
Additional Information ("SAI") filed with the SEC. The SAI dated January 31,
1998, is incorporated by reference into this Prospectus. There is no charge to
obtain a copy of the SAI. Please call 1 (800) 551-1700, or write to Wasatch
Funds at P.O. Box 2172, Milwaukee, WI 53201-2172 to request your copy.
The SEC maintains a World Wide Web site (http://www.sec.gov) that contains
reports and information regarding registrants that file electronically with the
SEC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus does not constitute an offer to sell securities in any state or
other jurisdiction to any person to whom it is unlawful to make such an offer in
such state or other jurisdiction.
Prospectus 1
<PAGE> 3
OVERVIEW
Wasatch Funds offers investors shares of common stock in each of the
Funds. Wasatch Advisors, Inc. (the "Manager"), which has been in business since
1975, provides investment advice to the Funds.
The following section is designed to provide you with a short
description of each Fund and its investment emphasis. A more detailed
discussion of the Funds' investment objectives, techniques and policies begins
on page 16. As with any investment there are risks inherent in mutual fund
investments. Please see page 00 to learn more about risk factors and how they
can affect your investments in the Funds. For complete information on how to
purchase, exchange or redeem shares see the Shareholder's Guide, beginning on
page 25.
WASATCH EQUITY FUNDS
WASATCH MID-CAP FUND
- - FOCUS: The Fund seeks long-term growth of capital by investing primarily
in the common stocks of mid-sized companies with market capitalizations
between $300 million and $5 billion at the time of initial purchase.
Securities are selected for their rapid growth potential.
- - INCEPTION: August 1992
- - LEAD MANAGER: Karey Barker,CFA
WASATCH MICRO-CAP FUND
- - FOCUS: The Fund seeks long-term growth of capital by investing primarily
in the common stocks of companies with market capitalizations of less than
$200 million at the time of initial purchase.
- - INCEPTION: June 1995
- - LEAD MANAGER: Robert Gardiner, CFA
The Micro-Cap Fund closed to new
investors on August 29, 1997.
WASATCH AGGRESSIVE
EQUITY FUND
- - FOCUS: The Fund seeks long-term growth of capital through investments in
growing companies. Securities are selected for superior growth potential.
- - INCEPTION: December 1986
- - LEAD MANAGER: Jeff Cardon, CFA
The Aggressive Equity Fund is currently
closed to new investors.
(NEW) WASATCH MICRO-CAP
VALUE FUND
- - FOCUS: The Fund seeks long-term growth of capital through investments in
companies with market capitalizations of less than $300 million at the
time of initial purchase. The Manager seeks to invest in companies whose
stock is temporarily undervalued but has significant potential for
appreciation.
- - INCEPTION: December 1997
- - CO-MANAGERS: Robert Gardiner, CFA and Jeff Cardon, CFA
It is presently intended that the Fund will close to new investors when
it reaches $200 million in assets.
WASATCH GROWTH FUND
- - FOCUS: The Fund seeks long-term growth of capital through investments in
growing companies. Securities are selected for their potential to produce
steady, sustained growth.
- - INCEPTION: December 1986
- - LEAD MANAGER: Samuel S. Stewart, Jr., PhD, CFA
WASATCH FIXED INCOME FUND
WASATCH-HOISINGTON
U.S. TREASURY FUND
- - FOCUS: The "U.S. Treasury" Fund emphasizes both income and capital
2 Prospectus
<PAGE> 4
appreciation. The Fund seeks to provide a rate of return over a business
cycle that exceeds the rate of inflation by investing in U.S. Treasury
Securities.
- - INCEPTION: December 1986
- - SUB-ADVISOR: Hoisington Investment Management Company
- - LEAD MANAGER: Van Robert Hoisington
WASATCH FUNDS
RISK RANKING SCALE
The scale below shows the Manager's assessment of the potential overall
risk of the Funds in relation to each other and should not be used to compare
the Funds to other mutual funds or other types of investments. The scale was
determined based on a number of factors such as selected historic volatility
measurements, the types of securities in which the Funds intend to invest, the
degree of diversification, the size of each Fund, and each Fund's investment
strategy. These factors will be reassessed with each new Prospectus. See pages
20-24 for a discussion of specific risks that may be associated with certain
types of investment instruments. This scale is not indicative of the future
volatility or performance of a Fund. Relative positions of the Funds within this
scale may change in the future.
[SCALE]
EXPENSE INFORMATION
The following tables and example are designed to assist you in
understanding the various costs and expenses that you will bear directly or
indirectly as an investor in the Funds. Shareholder Transaction Expenses are
fees that may be charged directly to an individual account when shares are
bought, sold or exchanged. As the table below shows, shareholders of Wasatch
Funds, which are no-load funds, do not pay these fees. Annual Fund Operating
Expenses are paid out of each Fund's assets and include fees for portfolio
management, maintenance of shareholder accounts, shareholder servicing,
accounting and other services.
Shareholder Transaction Expenses (applicable to each Fund)
Maximum sales load imposed on purchases None
Maximum sales load imposed on reinvested dividends None
Deferred sales load None
Exchange fee None
Redemption fee* None
*$7.50 service fee for redemptions by wire. Prosepectus 3
<PAGE> 5
You will notice that operating expenses are different for each of the
Funds. Reasons for the differences include management fees, average shareholder
account size, degree of fundamental research required to find suitable
investments and market capitalizations of investments.
ANNUAL FUND OPERATING EXPENSES (as a percentage of net assets) (The Micro-Cap
Value Fund commenced operations on December 17, 1997)
<TABLE>
<CAPTION>
Mid-Cap Micro-Cap Aggressive Micro-Cap Growth U.S. Treasury
Fund Fund Equity Fund Value Fund Fund Fund
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MANAGEMENT FEES(1) 1.25% 2.00% 1.00% 1.50% 1.00% 0.50%
12B-1 FEES(2) NONE NONE NONE NONE NONE NONE
OTHER EXPENSES(1)
(net of reimbursement) 0.50% 0.50% 0.50% 0.45% 0.50% 0.25%
TOTAL FUND
OPERATING EXPENSES(1),(3) 1.75% 2.50% 1.50% 1.95% 1.50% 0.75%
</TABLE>
(1) Such annual rates are higher than the rates paid by most registered
investment companies.
(2) 12b-1 fees are charged by some mutual fund companies to help cover
advertising expenses. Wasatch Funds has chosen not to charge shareholders
these fees.
(3) The Manager has voluntarily agreed to limit the operating expenses for each
Fund until at least September 30, 1998. The Funds' expenses are limited to:
1.75%--Mid-Cap; 2.50%--Micro-Cap; 1.50%--Aggressive Equity;
1.95%--Micro-Cap Value; 1.50%--Growth; and 0.75%--U.S. Treasury Fund. The
Manager reimburses the Funds for expenses that exceed the limitations. If
the expense reimbursements were eliminated, Other Expenses and Total Fund
Operating Expenses for the fiscal year ended September 30, 1997 would have
been 0.65% and 1.90% for the Mid-Cap Fund, 0.58% and 2.58% for the
Micro-Cap Fund, 0.54% and 1.54% for the Aggressive Equity Fund and 0.72%
and 1.22% for the U.S. Treasury Fund, respectively. There were no
reimbursements for the Growth Fund.
EXAMPLE
The table below illustrates the operating expenses you would indirectly bear
as an investor in the Funds. It assumes that you invest $1,000, that each Fund's
annual return is 5%, that you redeem at the end of each time period and that
each Fund's expense ratio remains as listed above.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mid-Cap Fund $18 $56 $ 96 $209
Micro-Cap Fund $26 $79 $136 $289
Aggressive Equity Fund $15 $48 $ 83 $181
Micro-Cap Value Fund $20 $62 $107 $231
Growth Fund $15 $48 $ 83 $181
U.S. Treasury Fund $ 8 $24 $ 42 $ 94
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE RETURNS
OR EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
4 Prospectus
<PAGE> 6
Financial Highlights
Unless otherwise noted, the information below is for fiscal periods ending
on September 30 of each year. (The Micro-Cap Value Fund commenced operations on
December 17, 1997.) The accounting firm of Arthur Andersen LLP, independent
accountants, has audited the Funds' financial statements since September 30,
1993. Their report is included in the Funds' Annual Report and in the SAI. The
Funds' financial statements for fiscal periods prior to September 30, 1993 were
audited by other independent accountants whose reports are not included in the
Annual Report. The Funds' Annual Report contains additional information about
each Fund's performance, including comparisons to appropriate securities
indices. For a copy of Wasatch Funds' 1997 Annual Report, please call 1 (800)
551-1700 or write to Wasatch Funds at P.O. Box 2172, Milwaukee, WI 53201-2172.
Please see the Financial Highlights tables beginning on page 6.
Financial Highlights Guide
This section is designed to help you better understand the information
presented in the Financial Highlights tables which begin on page 6. The tables
contain important historical operating information that you may find useful in
making investment decisions or understanding your investment's performance.
Net Asset Value ("NAV") is the value of a single share of a Fund. It is
computed by adding the value of all of a Fund's investments and other assets,
subtracting any liabilities and dividing the result by the number of shares
outstanding. The difference between the Net asset value, beginning of period and
the Net asset value, end of period in the Financial Highlights tables is the
change in value of a Fund's shares over the fiscal period, but not its total
return.
Net investment income (loss) is the per share amount of dividends and
interest income earned on securities held by a Fund, less the Fund's expenses.
Net realized and unrealized gains (losses) on securities is the per share
increase or decrease in value of the securities a Fund holds and has sold during
the reporting period. Gains or (losses) are realized when securities are sold.
Gains or (losses) are unrealized when securities increase or decrease in value
but are not sold.
Dividends from net investment income is the per share amount that a Fund
paid from net investment income.
Distributions are the per share amount that a Fund paid to shareholders
from net investment income and net realized gains.
Total return is the percentage increase or decrease in the value of an
investment over a stated period of time. A total return percentage includes both
changes in realized and unrealized gains and income. For the purposes of
calculating total return, it is assumed that dividends and distributions are
reinvested at the NAV on the day of the distribution. A FUND'S TOTAL RETURN
CANNOT BE COMPUTED DIRECTLY FROM THE FINANCIAL HIGHLIGHTS TABLES.
Ratio of expenses to average net assets is the total of a Fund's operating
expenses divided by its average net assets for the stated period.
Ratio of net income (loss) to average net assets is a Fund's net investment
income divided by its average net assets for the stated period.
Portfolio turnover rate is a measure of the annual amount of a Fund's
buying and selling activity. It is computed by dividing total purchases or
sales, whichever is less, by the average monthly market value of a Fund's
portfolio securities. This calculation does not include securities held by any
Fund with a maturity date of less than 12 months.
<PAGE> 7
MID-CAP FUND-FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended September 30,
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning
of period $17.95 $18.61 $11.02
Income (loss) from investment
operations:
Net investment income (loss) (0.35) (0.26) (0.02)
Net realized and unrealized
gains (losses) on securities 4.25 (0.21) 7.64
------ ------ ------
Total from investment operations 3.90 (0.47) 7.62
Less distributions:
Distributions from capital gains -- (0.19) (0.03)
------ ------ ------
Total distributions -- (0.19) (0.03)
------ ------ ------
Net asset value, end of period $21.85 $17.95 $18.61
====== ====== ======
Total return(2) 21.75% (2.54)% 69.24%
Supplemental data and ratios:
Net assets, end of period
(in thousands) $77,243 $128,490 $98,605
Ratio of expenses to average
net assets(2), (3) 1.75% 1.75% 1.75%
Ratio of net income (loss) to
average net assets(3) (1.48)% (1.27)% (0.71)%
Portfolio turnover rate 103% 121% 46%
Average commission rate
paid on portfolio
investment transactions(4) $0.05 $0.05 N/A
</TABLE>
(1) Commencement of operations.
(2) Not annualized for periods less than a year.
(3) Net of reimbursements by advisor. Absent reimbursement of expenses by
advisor, the ratio of expenses to average net assets for the Mid-Cap Fund
would be 1.89%, 1.81%, 1.94%, 3.33%, 2.69% and 7.65% respectively, and the
ratio of net loss to average net assets would be (1.62)%, (1.33)%, (0.90)%,
(2.76)%, (1.81)% and (6.47)%, respectively.
(4) Disclosure required by the Securities and Exchange Commission beginning
1996.
6 Prospectus
<PAGE> 8
<TABLE>
<CAPTION>
MID-CAP FUND--FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Aug. 16, 1992(1)
Year ended September 30, through
1994 1993 Sept. 30, 1992
- --------------------------------------------------------------------------------
<S> <C> <C>
$10.51 $ 9.93 $10.00
(0.27) (0.07) --
0.78 0.65 (0.07)
------ ------ ------
0.51 0.58 (0.07)
-- -- --
------ ------ ------
-- -- --
------ ------ ------
$11.02 $10.51 $ 9.93
====== ====== ======
4.85% 5.85% (0.70)%
$1,091 $2,451 $148
1.75% 1.74% 1.56%
(1.19)% (0.86)% (0.38)%
213% 113% 40%
N/A N/A N/A
</TABLE>
Prospectus 7
<PAGE> 9
<TABLE>
<CAPTION>
MICRO-CAP FUND--Financial Highlights
- --------------------------------------------------------------------------------
June 19, 1995(1)
Year ended September 30, through
1997 1996 September 30, 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning
of period $3.15 $2.72 $2.00
Income (loss) from investment
operations:
Net investment income (loss) (0.04) (0.03) --
Net realized and unrealized
gains on securities 1.36 0.46 0.72
------ ------ -----
Total from investment
operations 1.32 0.43 0.72
Less distributions:
Distributions from
capital gains (0.18) -- --
------ ------ -----
Total distributions (0.18) -- --
------ ------ -----
Net asset value,
end of period $4.29 $3.15 $2.72
====== ====== =====
Total return(2) 44.58% 15.81% 36.00%
Supplemental data and ratios:
Net assets, end of period
(in thousands) $157,907 $94,004 $25,368
Ratio of expenses to average
net assets(3) 2.50% 2.50% 2.50%
Ratio of net income (loss)
to average net assets(3) (1.64)% (1.53)% (0.76)%
Portfolio turnover rate 99% 84% 0%
Average commission rate
paid on portfolio
investment transactions(5) $0.05 $0.04 N/A
</TABLE>
(1) Commencement of operations.
(2) Not annualized for periods less than a year.
(3) Net of reimbursements by advisor. Absent reimbursement of expenses by
advisor, the ratio of expenses to average net assets would be 2.58%, 2.67%
and 3.40%, respectively, and the ratio of net income (loss) to average net
assets would be (1.72)%, (1.70)% and (1.66)%, respectively.
(4) Annualized.
(5) Disclosure required by the Securities and Exchange Commission beginning
1996.
8 Prospectus
<PAGE> 10
(This page intentionally left blank.)
Prospectus 9
<PAGE> 11
AGGRESSIVE EQUITY FUND--Financial Highlights
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year ended September 30,
1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period $24.17 $25.00 $19.96 $19.75
Income (loss) from investment
operations:
Net investment income (loss) (0.12) (0.18) (0.04) (0.02)
Net realized and unrealized
gains (losses) on securities 6.90 (0.11) 6.59 1.33
------ ------ ------ ------
Total from investment operations 6.78 (0.29) 6.55 1.31
Less distributions:
Dividends from net investment
income -- -- -- --
Distributions from capital gains (1.22) (0.54) (1.51) (1.10)
Total distributions (1.22) (0.54) (1.51) (1.10)
------ ------ ------ ------
Net asset value, end of period $29.73 $24.17 $25.00 $19.96
====== ====== ====== ======
Total return 29.45% (1.09)% 35.19% 6.85%
Supplemental data and ratios:
Net assets, end of period
(in thousands) $188,965 $253,319 $305,311 $46,369
Ratio of expenses to average
net assets(1) 1.50% 1.50% 1.47% 1.50%
Ratio of net income (loss) to
average net assets (0.39)% (0.65)% (0.37)% (0.67)%
Portfolio turnover rate 48% 73% 29% 64%
Average commission rate
paid on portfolio
investment transactions(2) $0.05 $0.05 N/A N/A
</TABLE>
(1) Net of reimbursements by advisor. Absent reimbursement of expenses by
advisor, 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, 1997 and September 30, 1994 to September 30,
1988 would be 1.54%, 1.52%, 1.64%, 1.69%, 1.67% and 1.75%, 1.91%, 2.03% and
1.36%, respectively, and the ratio of net income (loss) to average net
assets would be (0.43)%, (0.69)%, (0.92)%, (0.59)%, (0.52)%, (0.27)%,
(0.55)% and (0.22)%, respectively.
(2) Disclosure required by the Securities and Exchange Commission beginning
1996.
10 Prospectus
<PAGE> 12
<TABLE>
<CAPTION>
AGGRESSIVE EQUITY FUND--Financial Highlights
- -------------------------------------------------------------------------------
Year ended September 30,
1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$15.23 $16.42 $ 9.77 $10.92 $ 9.07 $11.76
(0.09) (0.03) (0.04) 0.01 (0.01) 0.03
5.40 (0.26) 6.69 (1.16) 1.91 (1.66)
------ ------ ------ ------ ------ -------
5.31 (0.29) 6.65 (1.15) 1.90 (1.63)
-- -- -- -- (0.05) (0.01)
(0.79) (0.90) -- -- -- (1.05)
------ ------ ------ ------ ------ -------
(0.79) (0.90) -- -- (0.05) (1.06)
------ ------ ------ ------ ------ -------
$19.75 $15.23 $16.42 $ 9.77 $10.92 $ 9.07
====== ====== ====== ====== ====== =======
35.73% (2.30)% 68.07% (10.53)% 21.09% (13.17)%
$23,293 $12,542 $7,588 $2,767 $1,191 $833
1.50% 1.51% 1.51% 1.56% 1.50% 1.50%
(0.77)% (0.41)% (0.36)% 0.08% (0.12)% 0.30%
70% 32% 41% 74% 82% 71%
N/A N/A N/A N/A N/A N/A
</TABLE>
Prospectus 11
<PAGE> 13
GROWTH FUND--Financial Highlights
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year ended September 30,
1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period $17.57 $15.97 $15.30 $15.68
Income (loss) from investment
operations:
Net investment income (loss) 0.08 0.07 0.02 (0.14)
Net realized and unrealized
gains (losses) on securities 6.07 1.87 4.59 0.71
------ ------ ------ ------
Total from investment operations 6.15 1.94 4.61 0.57
Less distributions:
Dividends from net investment
income (0.07) (0.05) -- --
Distributions from capital gains (1.31) (0.29) (3.94) (0.95)
------ ------ ------ ------
Total distributions (1.38) (0.34) (3.94) (0.95)
------ ------ ------ ------
Net asset value, end of period $22.34 $17.57 $15.97 $15.30
====== ====== ====== ======
Total return 37.58% 12.39% 39.76% 3.75%
Supplemental data and ratios:
Net assets, end of period
(in thousands) $135,437 $104,237 $53,533 $11,219
Ratio of expenses to average
net assets (1) 1.50% 1.50% 1.50% 1.50%
Ratio of net income (loss) to
average net assets (1) 0.44% 0.40% 0.29% (0.51)%
Portfolio turnover rate 81% 62% 88% 163%
Average commission rate
paid on portfolio
investment transactions (2) $0.05 $0.05 N/A N/A
</TABLE>
(1) Net of reimbursements by advisor. Absent reimbursement of expenses by
advisor, except for the fiscal year ended September 30, 1997 where there
were no reimbursements, 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% and
0.80%, respectively.
(2) Disclosure required by the Securities and Exchange Commission beginning
1996.
12 Prospectus
<PAGE> 14
<TABLE>
<CAPTION>
GROWTH FUND--Financial Highlights
- -------------------------------------------------------------------------------
Year ended September 30,
1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$13.64 $15.01 $10.73 $11.39 $ 9.48 $11.47
(0.08) (0.02) (0.08) 0.10 (0.13) 0.10
3.21 (0.45) 5.16 (0.65) 1.89 (1.67)
------ ------ ------ ------ ------ --------
3.13 (0.47) 5.24 (0.55) 2.02 (1.57)
-- (0.04) (0.16) (0.11) (0.11) (0.02)
(1.09) (0.86) (0.80) -- -- (0.40)
------ ------ ------ ------ ------ --------
(1.09) (0.90) (0.96) (0.11) (0.11) (0.42)
------ ------ ------ ------ ------ --------
$15.68 $13.64 $15.01 $10.73 $11.39 $ 9.48
====== ====== ====== ====== ====== ========
23.57% (3.61)% 51.90% (4.82)% 21.60% (13.39)%
$17,619 $14,243 $11,651 $4,574 $3,378 $2,605
1.50% 1.49% 1.51% 1.87% 1.50% 1.50%
(0.55)% 0.15% (0.51)% 1.45% 1.37% 1.21%
104% 40% 37% 69% 63% 88%
N/A N/A N/A N/A N/A N/A
</TABLE>
Prospectus 13
<PAGE> 15
U.S. TREASURY FUND--Financial Highlights
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year ended September 30,
1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period $10.21 $10.50 $10.09 $10.42
Income (loss) from investment
operations:
Net investment income (loss) 0.61 0.44 0.56 0.55
Net realized and unrealized
gains (losses) on securities 0.73 0.01 0.44 (0.40)
------ ------ ------ ------
Total from investment operations 1.34 0.45 1.00 0.15
Less distributions:
Dividends from net investment
income (0.23) (0.74) (0.59) (0.46)
Distributions from capital gains -- -- -- (0.02)
------ ------ ------ ------
Total distributions (0.23) (0.74) (0.59) (0.48)
------ ------ ------ ------
Net asset value, end of period $11.32 $10.21 $10.50 $10.09
====== ====== ====== ======
Total return 13.23% 4.42% 10.46% 1.51%
Supplemental data and ratios:
Net assets, end of period
(in thousands) $11,205 $7,427 $4,035 $3,250
Ratio of expenses to average
net assets (1) 0.75% 0.93% 1.00% 1.00%
Ratio of net income (loss) to
average net assets(1) 5.97% 5.21% 5.88% 5.15%
Portfolio turnover rate 19% 30% 43% 45%
</TABLE>
(1) Net of reimbursements by advisor. Absent reimbursement of expenses by
advisor, the ratio of expenses to average net assets would be 1.22%, 1.67%,
1.59%, 1.39%, 1.35%, 1.20%, 1.20%, 1.57%, 1.42% and 1.35%, respectively,
and the ratio of net income to average net assets would be 5.50%, 4.47%,
5.29%, 4.76%, 4.24%, 4.71%, 6.59%, 9.75%, 7.82% and 8.06%, respectively.
14 Prospectus
<PAGE> 16
<TABLE>
<CAPTION>
U.S. TREASURY FUND--Financial Highlights
- -------------------------------------------------------------------------------
Year ended September 30
1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$11.17 $11.14 $10.13 $10.61 $ 10.64 $10.19
0.55 (0.03) 0.58 0.69 1.25 0.81
(0.17) 0.94 1.24 (0.19) (0.06) 0.25
------ ------ ------ ------ ------ --------
0.38 0.91 1.82 0.50 1.19 1.06
(0.53) (0.56) (0.81) (0.69) (1.22) (0.61)
(0.60) (0.32) -- (0.29) -- --
------ ------ ------ ------ ------ --------
(1.13) (0.88) (0.81) (0.98) (1.22) (0.61)
------ ------ ------ ------ ------ --------
$10.42 $11.17 $11.14 $10.13 $10.61 $ 10.64
====== ====== ====== ====== ====== ========
3.80% 8.44% 18.74% 4.87% 12.50% 10.84%
$3,748 $5,234 $3,540 $1,771 $1,119 $816
1.00% 1.00% 1.01% 1.32% 0.99% 0.95%
4.60% 4.90% 6.79% 10.00% 8.25% 8.47%
46% 95% 66% 71% 29% 30%
</TABLE>
Prospectus 15
<PAGE> 17
THE FUNDS IN DETAIL
To help you decide which Fund is appropriate for you, this section
takes a closer look at the Funds' investment objectives, process and the
securities in which they invest. For a discussion of general policies,
investment techniques and the risks associated with certain investment
techniques please see "General Policies, Investment Techniques and Risks," on
page 20, and the "Wasatch Funds Risk Ranking Scale" on page 3. Consult the
"Glossary of Investing Terms" on page 42 for a more detailed description of
investment terms used throughout this Prospectus. You should carefully
consider your own investment goals time horizon and risk tolerance before
investing in a Fund.
Investment objectives presented in this section cannot be changed
without shareholder approval. Investment techniques and policies may be
changed without shareholder approval unless otherwise stated in this Prospectus
or the SAI.
WASATCH EQUITY FUNDS
The Mid-Cap Fund, Micro-Cap Fund, Aggressive Equity Fund, Micro-Cap
Value Fund and Growth Fund (the "Wasatch Equity Funds") are each
non-diversified funds (see definition on page 20) designed for long-term
investors who seek growth of capital and who can tolerate the greater risks
associated with common stock investments.
SELECTION OF INVESTMENTS
Securities for all the Wasatch Equity Funds are selected by an
experienced in-house research team. See "Management of the Wasatch Funds" on
page 34. Each Fund has a Lead Manager who ensures that investments recommended
by the research team are compatible with a particular Fund's investment
objective, techniques and policies.
The Wasatch research team picks stocks using a "bottom-up"
process of fundamental securities analysis. This means the team seeks to
identify growing companies that are either underfollowed or undervalued by
the market at large. The process includes prescreening potential
investments using databases and industry contacts, analyzing annual
reports and financial statements, and visiting companies to meet with top
management.
PRIMARY
INVESTMENT OBJECTIVE:..........................GROWTH OF CAPITAL
PRIMARY HOLDINGS:..................................COMMON STOCKS
SHAREHOLDER'S
INVESTMENT HORIZON:....................................LONG-TERM
Wasatch defines a long-term investor as someone who plans to hold an
investment for a period of five years or longer. Within a long-term investment
time frame, investment performance will fluctuate. Investor's capital will grow
more at some times, less at other times or it may decline.
WASATCH MID-CAP FUND
LEAD MANAGER: Karey Barker, CFA
INVESTMENT OBJECTIVE
The primary investment objective of the Mid-Cap Fund is long-term
growth of capital. Income is a secondary objective to be sought only when
consistent with the primary objective.
INVESTMENT PROCESS
In pursuit of its investment objective, the Mid-Cap Fund will
normally invest at least 65% of its total assets in common stocks of companies
that have market capitalizations between $300 million and $5 billion at
the time of initial pur-
16 Prospectus
<PAGE> 18
chase. The Mid-Cap Fund seeks to invest in rapidly growing companies. The Fund
does not limit its investments to certain sectors or industries. However, it
will generally focus on the fastest growing sectors. The Manager believes that
companies growing earnings in excess of 25% annually present opportunities for
investors to get higher long-run returns. The Fund is designed for long-term
investors seeking higher growth of capital, who are comfortable with the greater
degree of risk this aggressive strategy entails.
WASATCH MICRO-CAP FUND
The Micro-Cap Fund is currently closed to new investors. The Fund's
shareholders and certain others may continue to add to existing accounts or open
new accounts (see "Who Can Purchase Shares in Closed Funds" on page 27). The
Fund may resume sales to new investors in the future. It has no intention to
do so at the present time.
LEAD MANAGER: Robert Gardiner, CFA
INVESTMENT OBJECTIVE
The investment objective of the Micro-Cap Fund is long-term growth of
capital. Income is a secondary objective to be sought only when consistent with
the primary objective.
INVESTMENT PROCESS
In pursuit of its investment objective, the Micro-Cap Fund will normally
invest at least 65% of its total assets in common stocks of companies with
market capitalizations of less than $200 million at the time of initial
purchase. The Fund is designed for long-term investors. Its strategy is to
invest in the smallest companies that the Manager believes possess superior
growth potential. The Fund targets two types of investments, core and momentum
holdings. Core holdings are companies the Manager believes have the potential to
grow at around 15% annually. Core holdings are selected for characteristics that
may give the Fund a solid foundation. Momentum holdings are companies growing
aggressively, often in excess of 25% annually. These companies can boost the
Fund's performance, but may be subject to greater stock price fluctuations than
core holdings. While the Manager believes investments in Micro-Cap companies
present exceptional opportunities for capital appreciation, they may be subject
to greater risks and wide price fluctuations. Investors should assess their
tolerance for risk before investing in this Fund.
WASATCH AGGRESSIVE EQUITY FUND
The Aggressive Equity Fund is currently closed to new investors. The Fund's
shareholders and certain others may continue to add to existing accounts or open
new accounts (see "Who Can Purchase Shares in Closed Funds" on page 27). The
Fund may resume sales to new investors in the future. It has no intention to
do so at the present time.
LEAD MANAGER: Jeff Cardon, CFA
INVESTMENT OBJECTIVE
The primary investment objective of the Aggressive Equity Fund is long-term
growth of capital. Income is a secondary objective to be sought only when
consistent with the primary objective.
INVESTMENT PROCESS
In pursuit of its investment objective, the Aggressive Equity Fund will
normally invest at least 65% of its total assets in common stocks of growth
companies. Its strategy is to invest in small companies that the Manager
believes possess superior growth potential. The Fund targets two types of
investments, core and momentum holdings. Core holdings are companies that are
well-established and have the potential to grow at least 15% annually and
Prospectus 17
<PAGE> 19
can anchor the portfolio with steady growth over long periods of time. Momentum
holdings are companies growing aggressively, often in excess of 25% annually.
These companies can boost the Fund's performance, but may be subject to greater
stock price fluctuations than core holdings. Investments in small companies make
this Fund susceptible to greater short-term price fluctuations.
It is best suited for patient, long-term investors.
(NEW) WASATCH MICRO-CAP
VALUE FUND
It is presently intended that the Micro-Cap Value Fund will close to new
investors when it reaches $200 million in assets. The Fund reserves the right to
reconsider closing to new investors, and, once closed, may choose to reopen
although it has no present intention to do so.
CO-MANAGERS: Robert Gardiner, CFA and Jeff Cardon, CFA
INVESTMENT OBJECTIVE
The investment objective of the Micro-Cap Value Fund is long-term growth of
capital. Income is a secondary objective to be sought only when consistent with
the Fund's primary objective.
INVESTMENT PROCESS
In pursuit of its investment objective, the Micro-Cap Value Fund will
normally invest at least 65% of its total assets in the common stock of
companies with market capitalizations of less than $300 million at the time of
initial purchase. Its strategy is to invest in stocks the Manager believes are
temporarily undervalued but have significant potential for appreciation.
The Manager initially looks for companies that have stocks with low
valuations or depressed prices. These companies are then subjected to additional
fundamental analysis to determine if they have positive characteristics that
could lead to increases in their stock prices.
The Manager typically expects appreciation of a company's stock price to be
driven by one or more of the following events: 1) attention from Wall Street
analysts; 2) resolution of short-term fundamental issues leading to increased
earnings growth; and 3) exciting new products or services.
The Manager looks for companies that have characteristics which may
include: 1) low stock valuations in the form of a low price-to-earnings (P/E)
ratio, which is the price of a stock divided by its earnings per share, or a low
market capitalization to revenue ratio; 2) potential for improved earnings
growth; 3) competent top management with a substantial stake in the future of
the company; 4) a history of profitable growth; and 5) products or services that
may increase market share.
This Fund is designed for long-term investors. While the Manager believes
investments in undervalued Micro-Cap companies present exceptional opportunities
for capital appreciation, they may be subject to greater risks and wide stock
price fluctuations. Investors should assess their tolerance for risk before
investing in this Fund.
WASATCH GROWTH FUND
LEAD MANAGER: Samuel S. Stewart, Jr., PhD, CFA
INVESTMENT OBJECTIVE
The primary investment objective of the Growth Fund is long-term growth of
capital. Income is a secondary objective to be sought only when consistent with
the Fund's primary objective.
INVESTMENT PROCESS
In pursuit of its investment objective, the Growth Fund will normally
invest at least 65% of its total assets in common stocks of growth companies.
The Fund
18 Prospectus
<PAGE> 20
is designed for long-term investors. However, it takes a more conservative
approach to investing than is typical of many funds in this category. Its
strategy is to invest in companies the Manager believes are stable and
well-established and have the potential to grow steadily for long periods of
time. Growth may come from market positioning that takes advantage of favorable
demographics, increasing demand for products and services, lack of competition
in the marketplace and other factors.
WASATCH FIXED INCOME FUND
WASATCH-HOISINGTON
U.S. TREASURY FUND
SUB-ADVISOR: Hoisington Investment Management Company
LEAD MANAGER: Van Robert Hoisington
INVESTMENT
OBJECTIVE: INCOME AND CAPITAL APPRECIATION
PRIMARY
HOLDINGS:................U.S. TREASURY SECURITIES
SHAREHOLDER'S
INVESTMENT HORIZON:.....................LONG-TERM
INVESTMENT OBJECTIVE
The investment objective of the Wasatch-Hoisington U.S. Treasury Fund
("U.S. Treasury Fund") is to provide a real rate of return (i.e., a rate of
return that exceeds the rate of inflation) over a business cycle by investing in
U.S. Treasury Securities with an emphasis on both income and capital
appreciation.
INVESTMENT PROCESS
The U.S. Treasury Fund is a diversified Fund (see definition on page 20).
In pursuit of its investment objective, the Fund will invest at least 90% of its
total assets 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 Sub-Advisor present only minimal credit risks.
Under the terms of a Sub-Advisory Agreement, and subject to the supervision
of the Manager, Hoisington is responsible for the formulation and implementation
of a continuing program for the management of the Fund's assets, including the
placement of purchase and sale orders on behalf of the Fund.
The U.S. Treasury Fund may take full advantage of the entire range of
maturities offered. The Sub-Advisor 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 (see "Glossary of Investing Terms" on page 42),
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. When the Fund is invested in longer weighted average
maturities it will be more sensitive to changes in market interest rates and may
be subject to greater volatility.
Depending on market opportunities, the turnover rate of the U.S. Treasury
Fund will vary substantially from year to year. During some periods, turnover
will be well below 50% but at other times could exceed 200% annually. While such
portfolio adjustments may require the sale of securities prior to their maturity
date, the goal of such transactions will be either to increase income and/or to
change the duration of the overall portfolio.
Prospectus 19
<PAGE> 21
General Policies, Investment Techniques and Risks
The investment policies and techniques discussed in this section may be
changed by the Board of Directors without shareholder approval unless otherwise
stated in this Prospectus or in the SAI. Unless otherwise stated, each of the
following policies and techniques apply to all of the Funds. The percentage
limitations included in these policies and elsewhere in this Prospectus apply at
the time of purchase of a security. For example, if a Fund exceeds a limit as a
result of market fluctuations or the sale of other securities, it will not be
required to dispose of any securities.
TYPES OF INVESTMENTS
This section is designed to help you understand the types of investments
made by each of the Funds and the various factors that may have bearing on
investment decisions.
WASATCH EQUITY FUNDS
The Wasatch Equity Funds invest primarily in the common stocks of domestic
companies. Each of the Funds will normally invest at least 65% of its total
assets in common stocks although the percentage invested can vary. Up to 15% of
each Fund's investments may be in foreign securities. Each Fund may also invest
in investment grade convertible securities.
It may not always be possible for the Funds to stay fully invested in
stocks. For example, if the research team is unable to find desirable equity
investments, a Fund may increase its cash position or invest a larger portion of
its assets in interest-bearing securities or cash equivalents such as preferred
stocks, government securities, investment grade debt securities or money market
instruments. Most often, investments in fixed income, cash equivalents or cash
represent the assets that remain after the research team has taken full
advantage of suitable stock investments. When a Fund increases its position in
cash or cash equivalents, it may not participate in stock or bond market
advances or declines to the same extent that it would if the Fund remained more
fully invested in stocks or bonds.
WASATCH FIXED INCOME FUND
The U.S. Treasury Fund, in pursuing its investment objective, may invest at
least 90% of its total assets in U.S. Treasury Securities and in repurchase
agreements collateralized by such securities. U.S. Treasury Securities include
inflation-protection securities. The value of such securities is adjusted for
inflation, and periodic interest payments are made in an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The remainder of
the Fund's assets can be invested in high-quality money market instruments, cash
equivalents and cash.
DIVERSIFICATION
The 1940 Act classifies investment companies as either diversified or
non-diversified. All of the Equity Funds are non-diversified funds.The Fixed
Income Fund is a diversified fund.
A diversified fund is required to invest 75% of its assets in accordance
with the following guideline: it may not own more than 10% of the outstanding
voting securities of any one issuer or purchase securities of any one issuer if
such purchase would cause such fund's holdings of that issuer to amount to more
than 5% of that fund's total assets. Investments in securities of the U.S.
government, its agencies or instrumentalities are exempt from this restriction.
A non-diversified fund is required to invest only 50% of its assets in
accordance with the above guideline.
In addition, neither a diversified fund nor a non-diversified fund may
invest
<PAGE> 22
more than 25% of its total assets in any single issuer except for
securities issued by the U.S. government.
The non-diversified status of the Equity Funds permits the investment of a
greater portion of such Funds' respective assets in the securities of individual
companies than would be permissible if such Funds were diversified. The
non-diversified status of the Equity Funds subjects them to a greater degree of
risk.
For a description of each Fund's investment policies and restrictions,
please see "Investment Restrictions" in the SAI.
PORTFOLIO TURNOVER
Each Fund generally intends to purchase securities for long-term investment
rather than short-term gains. However, short-term transactions may result from
liquidity needs, securities having reached a price or yield objective, changes
in interest rates or the credit standing of an issuer, or by reason of economic
or other developments not foreseen at the time of the initial investment
decision. Changes are made in a Fund's portfolio whenever its Lead Manager
believes such changes are desirable. Portfolio turnover rates are generally not
a factor in making decisions to buy or sell securities.
To a limited extent, a Fund may purchase securities in anticipation of
relatively short-term price gains. Increased portfolio turnover may result in
higher costs for brokerage commissions, dealer mark-ups and other transaction
costs and may also result in taxable capital gains.
ILLIQUID INVESTMENTS
All of the Wasatch Funds may invest up to 15% of their net assets in
illiquid investments, including restricted securities or private placements. An
illiquid investment is a security or other holding that cannot be disposed of
quickly in the normal course of business.
RISK FACTORS
THAT MAY AFFECT THE
WASATCH EQUITY FUNDS
SMALL COMPANIES
Small companies are defined by the Manager as those companies with market
capitalizations of less than $1 billion. While small companies generally have
potential for rapid growth and their stocks have historically outperformed
large company stocks, they are also subject to greater investment risks.
Small companies may lack the management experience, financial resources,
product diversification and competitive strengths of larger companies. In
addition, the frequency and volume of trading in their stock may be
substantially less than that typical of larger companies. Therefore, the
securities of small companies may be subject to wider and more erratic price
fluctuations.
The spreads between the bid and asked prices of small company stocks may be
wider than the spreads for more actively traded securities. As a result, a fund
that invests in small companies could incur a loss if a security is sold
shortly after buying it. Large sales of the securities of small companies may
require selling portfolio holdings at a discount from quoted prices or making a
series of small sales over a period of time due to the trading volume of small
company securities.
The securities of small companies are often traded over-the-counter and
may not have the trading volume typical of securities traded on a national
securities exchange. The values of their shares may move independently of the
value of shares of large companies or of general stock market indices such as
the Dow Jones Industrial Average or the Standard & Poor's 500 Stock Index.
MICRO-CAP COMPANIES
Micro-Cap companies are defined by the manager as companies with market
capitalizations of less than $300 million. Micro-Cap companies may be more
sensitive to, and share prices may be more affected by, the risk factors
mentioned for small companies on page 21.
SPECIAL SITUATIONS
Each Fund may invest up to 5%, except the Micro-Cap Value Fund which may
invest up to 10%, of its total assets at the time of purchase in "Special
Situations," which the Manager defines as companies in the process of
reorganization or buy-out. Such companies may have limited financial resources
or may be dependent upon a small manage-
Prospectus 21
<PAGE> 23
ment group. As a result, their securities may be subject to more abrupt or
erratic market movements.
CREDIT AND INTEREST RATE RISK
To the extent that the Wasatch Equity Funds invest in fixed income
securities, they will be subject to credit risk and interest rate risk. (Also
see "Policies and Risk Factors that may Affect the U.S. Treasury Fund" on page
23.)
LENDING OF PORTFOLIO SECURITIES
As a general rule, the Wasatch Equity Funds do not intend to lend portfolio
securities. However, if such occasion arises, they will be subject to the risks
involved by extending credit. For more information please see "Policies and Risk
Factors that may Affect the U.S. Treasury Fund--Lending of Portfolio Securities"
on page 24.
FOREIGN SECURITIES
Each Equity Fund may invest up to 15% of its total assets at the time of
purchase in foreign securities that are traded primarily in foreign markets.
Securities of foreign issuers which are publicly traded in the United States,
either directly or through American Depositary Receipts, are not subject to this
15% limitation. Investments in foreign securities often entail greater risks and
may be subject to greater fluctuation than comparable investments in domestic
securities.
ADDITIONAL RISKS
of Foreign Securities
CURRENCY RISK. The value of the assets of a fund as measured in U.S.
dollars may be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations. A change in the value of any
foreign currency relative to the U.S. dollar may cause a corresponding change in
the dollar value of a fund's assets that are denominated or traded in that
country. In addition, a fund may incur costs in connection with conversion
between various currencies.
POLITICAL AND ECONOMIC RISK. Foreign investments may be subject to
heightened political and economic risks, particularly in underdeveloped or
developing countries which may have relatively unstable governments and
economies based on only a few industries. In some countries, there is the risk
that the government could seize or nationalize companies, could impose
additional withholding taxes on dividends or interest income payable on
securities, impose exchange controls or adopt other restrictions that could
affect a fund's investment.
REGULATORY RISK. Foreign companies not publicly traded in the U.S. are not
subject to the regulatory requirements of U.S. companies. There may be less
publicly available information about such companies. Foreign companies are not
subject to uniform accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies.
MARKET RISK. Foreign securities markets, particularly those of
underdeveloped or developing countries, may be less liquid and more volatile
than domestic markets. Certain markets may require payment for securities before
delivery and delays may be encountered in settling securities transactions. In
some foreign markets, there may not be protection against failure by other
parties to complete transactions. There may be limited legal recourse against an
issuer in the event of a default on a debt instrument.
TRANSACTION COSTS. Transaction costs of buying and selling foreign
securities, including brokerage, tax and custody costs, are generally higher
than those involved in domestic transactions.
<PAGE> 24
POLICIES AND RISK FACTORS
THAT MAY AFFECT THE
U.S. TREASURY FUND
CREDIT RISK. The risk that the issuer of a debt security will fail to make
payments on the security when due. The Manager/Sub-Advisor seeks to limit credit
risk by investing primarily in U.S. Treasury Securities and in repurchase
agreements collateralized by such securities. 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. 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 Sub-Advisor forecasts that interest rates will decrease, the average
maturity of the portfolio can be extended out to 30 years. If the Sub-Advisor
forecasts an increase in interest rates, a defensive policy may be more
appropriate, and the Sub-Advisor may deem it prudent to reduce the average
maturity of the portfolio to less than one year.
EFFECTIVE DURATION. Is an estimate of the interest rate risk (price
volatility) of a security, i.e., how much the value of the security is expected
to change with a given change in interest rates. The longer a security's
effective duration, the more sensitive its price is to changes in interest
rates. For example, if the interest rate increased 1% on a bond with an
effective duration of five years, the price of the bond would decline 5%.
Similarly, if the interest rate increased 1% on a bond with an effective
duration of 15 years, the price of the bond would decline 15%. At a yield of 7%,
the effective duration of a 30-year U.S. Treasury bond is about 13 years. The
effective duration of a 30-year U.S. Treasury zero coupon bond is 30 years. If
interest rates increase 1%, the value of such security would decline 30%.
It is important to understand that, while a valuable measure, effective
duration is based on certain assumptions and has several limitations. It is most
useful as a measure of interest rate risk when interest rate changes are small,
rapid and occur equally across all the different points of the yield curve.
U.S. Treasury STRIPS. Zero coupon Treasury Securities (U.S. Treasury
STRIPS) are debt obligations which do not entitle the holder to periodic
interest payments prior to maturity and are traded at a discount from their face
amounts. The discount of zero coupon Treasury Securities varies primarily
depending on the time remaining until maturity and prevailing levels of interest
rates. Zero coupon securities can be sold prior to their due date in the
secondary market at the then-prevailing market value. The market prices of zero
coupon securities are generally more volatile than the market prices of
securities of comparable quality and similar maturity
Prospectus 23
<PAGE> 25
that pay interest periodically and may respond to a greater degree to
fluctuations in interest rates than do non-zero coupon securities.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
respect to U.S. Treasury Securities. A repurchase agreement involves the
purchase by a 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. This 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 U.S. Treasury Fund may lend its portfolio securities
(principally to broker-dealers) where such loans are callable at any time and
are continuously secured by collateral (cash or government securities) equal to
no less than the market value, determined daily, of the securities loaned. The
Fund will receive amounts equal to interest on the securities loaned. The Fund
will also earn income for having made the loan. The Fund will limit its loans of
portfolio securities to an aggregate of 33-1/3% of the value of its total
assets, measured at the time such loan is made. ("Total assets" of the Fund
include the amount lent as well as the collateral securing such loans.) In
determining whether the Fund meets the requirement that at least 90% of its
total assets be invested in U.S. Treasury Securities, the Fund will consider
the securities lent as well as the collateral securing such loans.
As with other extensions of credit, there are risks of delay in recovery or
even loss of rights in the collateral should the borrower of the securities fail
financially. However, the Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which either the Manager or the
Sub-Advisor 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
herein and in the SAI, the Fund will not make loans to other persons.
24 Prospectus
<PAGE> 26
<TABLE>
<S> <C>
INVESTMENT MINIMUMS
To open a new account with an Automatic Investment Plan................$1,000
Subsequent Automatic Investments
Monthly.............................................................$50
Quarterly..........................................................$100
For a new account without the Automatic Investment Plan................$2,000
Subsequent Investments................................................$100
Individual Retirement Account (IRA)....................................$1,000
</TABLE>
SHAREHOLDER'S GUIDE
This section provides information about how to invest in the Funds and the
different types of accounts and services available through Wasatch Funds.
TO REACH WASATCH FUNDS BY PHONE
If you have any questions about Wasatch Funds, the Prospectus or opening a
new account, please call one of our Shareholder Services Representatives at 1
(800) 551-1700. They are available to assist you Monday through Friday, 7:00
a.m. to 7:00 p.m. Central Time.
TO OPEN A NEW ACCOUNT
- - Read the Prospectus carefully.
- - Complete and sign the New Account Application included with the Prospectus.
- - Be sure to provide your Social Security or Taxpayer Identification Number
on the New Account Application.
- - New Account Applications are also available from Wasatch Funds and can be
obtained by calling a Shareholder Services Representative at 1 (800)
551-1700.
- - New accounts are subject to acceptance by Wasatch Funds.
Make your check payable to Wasatch Funds and send it along with your
completed Application to:
Wasatch Funds
P.O. Box 2172
Milwaukee, WI 53201-2172
To send your check and Application by express or certified mail:
Wasatch Funds
207 East Buffalo Street, Suite 315
Milwaukee, WI 53202-5712
OPENING NEW ACCOUNTS BY WIRE
Please call a Shareholder Services Representative at 1 (800) 551-1700 for
special instructions.
TYPES OF ACCOUNT OWNERSHIP
By completing the New Account Application included with this Prospectus you
can establish one of three types of accounts:
INDIVIDUAL OR JOINT OWNERSHIP. Individual accounts are owned by one person.
Joint accounts are owned by two or more people and are JTWROS (Joint Tenants
with Right of Survivorship) unless otherwise specified.
GIFT TO MINOR. This is a custodial account managed for the benefit of a
minor. To open this type of account you must provide the minor's Social Security
Number along with your own on the New Account Application.
CORPORATION, PARTNERSHIP, TRUST OR OTHER ENTITY. You must provide the name
of the entity and the Taxpayer Identification Number. The New Account
Application must be signed by an authorized officer of a corporation or other
entity or a trustee.
Prospectus 25
<PAGE> 27
RETIREMENT ACCOUNTS
If you are eligible, you may set up your Wasatch Funds account under a
tax-sheltered retirement plan by filling out a special application. To receive
an application and information about Wasatch Funds' retirement plans please call
1 (800) 551-1700 or write to:
Wasatch Funds
P.O. Box 2172
Milwaukee, WI 53201-2172.
In general, a retirement plan allows eligible individuals to defer current
income taxes on contributions, dividends and capital gains on investments.
Withdrawals from retirement plans made prior to age 59-1/2 are generally subject
to income tax and may be subject to a penalty for early withdrawal.
There is no charge to set up an IRA account but there is an annual
maintenance fee of $12.50 per account for accounts under $10,000, with a maximum
charge of $25 per shareholder. Please refer to the IRA Disclosure Statement and
Custodial Agreement for information on additional fees.
INDIVIDUAL RETIREMENT ACCOUNT (IRA). Individuals who receive compensation
or earned income, even if they are active participants in a qualified retirement
plan, may establish their own tax-sheltered IRA. Non-earning spouses of such
individuals may also establish their own tax-sheltered IRA. The minimum initial
investment for an IRA is $1,000.
ROTH IRA. For tax years beginning January 1, 1998, a new type of IRA called
the Roth IRA will be available. Roth IRAs are different from traditional IRAs in
that contributions are never tax deductible and earnings on amounts held in the
account can be withdrawn tax-free if the assets remain in the IRA for at least
five years and the IRA holder is at least 59-1/2 at the time of the withdrawal.
Roth IRAs are also available for non-earning spouses. The ability to make a
contribution to a Roth IRA is phased out for individuals whose incomes exceed
specific limits.
SIMPLE IRA. Individuals may establish SIMPLE IRAs through a qualifying
employer.
Section 403(b)(7) Plan. This plan is designed to allow employees of certain
educational, non-profit, hospital and charitable organizations to invest for
retirement.
TO PURCHASE
ADDITIONAL SHARES
Your request to purchase shares will be processed at the next Net Asset
Value ("NAV") calculated after your request has been received in good order by
Wasatch Funds.
- - Checks must be made payable to Wasatch Funds.
- - Purchases must be made in U.S. dollars and checks must be drawn on U.S.
banks.
- - You may add to established Wasatch Funds accounts by making investments of
$100 or more.
- - Cash, credit cards, third party checks and credit card checks will not be
accepted.
- - See "Shareholder Services and Account Policies--Returned Check Policy" on
page 34 for a summary of the Funds' policy regarding checks
[GRAPHIC]
The Funds are required to withhold and remit to the U.S. Treasury 31% of
dividend payments, capital gains distributions and redemption proceeds for any
account on which the owner provides an incorrect Taxpayer Identification
Number. Applications without a Taxpayer Identification Number will not be
accepted and will be returned along with the purchase check.
26 Prospectus
<PAGE> 28
returned for insufficient funds.
- - The Funds reserve the right to reject any specific purchase request.
- - Telephone orders are not accepted except from broker-dealers who have been
previously approved by the Funds.
- - There are no sales charges to purchase shares.
- - If a purchase is made by check, and a redemption is requested shortly
thereafter, payment may be delayed for up to seven business days to ensure
that the check has cleared.
- - Shares should be purchased by wire if you intend to redeem them shortly
after purchase. For more information contact a Shareholder Services
Representative at 1 (800) 551-1700.
TO PURCHASE ADDITIONAL
SHARES BY MAIL
Send your remittance to one of the addresses listed previously. Please
include the detachable form from your most recent statement. If you do not have
the form, include a note stating the name of the account and the account number.
TO PURCHASE
ADDITIONAL SHARES BY
BANK-WIRE
You can purchase shares by wiring money from your bank account to your
Wasatch Funds account.
Wiring Instructions:
UMB Bank, n.a.
A.B.A. Number 101000695
For credit to Wasatch Funds
Account Number 987-060-9800
For further credit to:
(shareholder account number)
(name or account registration)
(Social Security or Tax Identification
Number)
(identify which account to purchase)
AUTOMATIC INVESTMENT PLAN
- - You can choose to make automatic investments for as little as $50 monthly
or $100 quarterly.
- - Selecting this option when you open a new Fund account lowers the minimum
initial investment to $1,000.
- - You may elect to have your automatic investments made on the 5th and/or the
20th day of each month.
- - You can begin investing automatically on an established Fund account by
completing and returning an Automatic Investment Plan Application available
from Wasatch Funds.
- - It takes 10 business days after the receipt of your Application for the
Plan to begin.
- - Send an unsigned, voided check along with your Application.
- - The bank or financial institution you designate can then begin debiting a
preauthorized amount from your account on a specified date that will be
used to purchase shares for your Fund account.
- - Your financial institution must be a member of the Automated Clearing House
- - No service fee is currently charged by the Funds for participating in the
Automatic Investment Plan.
- - A $20 service fee will be imposed by the Funds if sufficient funds are not
available in your bank account at the time of the automatic transaction.
- - If you redeem an account with an Automatic Investment Plan so the balance
is zero, the Plan will be discontinued.
WHO CAN PURCHASE SHARES IN
CLOSED FUNDS (AGGRESSIVE EQUITY
AND MICRO-CAP)
(Also see "To Additional Purchase Shares" on pg. 26.)
- - These Funds are currently closed to new investors.
- - Aggressive Equity Fund shareholders as of the July 15, 1995 closing date,
Prospectus 27
<PAGE> 29
Micro-Cap Fund shareholders as of the August 29, 1997 closing date and
certain others may continue to add to their respective accounts through the
reinvestment of dividends and cash distributions on any shares owned and through
the purchase of additional shares.
- - Aggressive Equity Fund shareholders as of July 15, 1995 and Micro-Cap Fund
shareholders as of August 29, 1997 may also open and add to Fund accounts
that use the same Social Security Number as the accounts existing as of the
closing date. (For example, accounts where the shareholder is the owner, a
joint owner or a custodian for a minor child.)
- - Financial planners whose clients beneficially own in the aggregate existing
Aggressive Equity Fund accounts in excess of $1 million as of July 15, 1995
may continue to purchase Fund shares.
- - Financial planners whose clients beneficially own Micro-Cap Fund accounts
may continue to purchase Fund shares.
- - Directors of the Funds and employees, affiliates and directors of Wasatch
Advisors, Inc. may continue to open new accounts.
- - The Aggressive Equity and Micro-Cap Funds may resume sales to new investors
at some future date, but they have no present intention to do so.
- - Participants in certain 401(k) plans may open new accounts and purchase
Aggressive Equity and Micro-Cap Fund shares.
PURCHASING SHARES THROUGH
OTHER INSTITUTIONS
You may buy or sell shares of the Funds through an investment professional,
including a broker who may charge you a transaction fee for this service. If you
want to purchase shares through another institution or service provider, you
should read their materials carefully for any fees that may apply. Certain
features of the Funds, such as the minimum initial investment or subsequent
investment amounts, may be modified or may not be available through other
institutions. Once you have established an account through an investment
professional, any subsequent transactions for that account must be made through
that professional.
The Manager or the Funds may enter into agreements with various brokerage
or other firms pursuant to which such firms provide administrative services with
respect to customers who are beneficial owners of shares of the Funds. The
Manager or the Funds may compensate such firms in amounts based on assets of
customers invested in the Funds.
TO EXCHANGE SHARES
- - Shares of any Wasatch Fund may be exchanged for shares of any other Wasatch
Fund or Northern U.S. Government Money Market Fund ("Money Market Fund") on
any day the New York Stock Exchange (the "Exchange") is open for business.
- - Exchanges for shares in closed funds may only be made by shareholders with
existing accounts in those funds.
- - You may open a new account or purchase additional shares by making an
exchange from an existing Fund account.
- - The value of shares being exchanged and the price of shares being purchased
will be at the next NAV calculated after your exchange request has been
received in good order by the Funds. (For more information see "How Fund
Shares are Priced" on page 32.)
- - Exchanges can be made by calling a Shareholder Services Representative at 1
(800) 551-1700 (if you have telephone privileges).
28 Prospectus
<PAGE> 30
- - Exchanges are subject to the minimum initial investment requirements.
- - Additional exchanges may be made for $500 or more.
- - New accounts will have the same registration as existing accounts.
WRITTEN EXCHANGE REQUESTS
- - See "Instructions for Written Requests" on page 31.
TELEPHONE EXCHANGE REQUESTS
- - Call 1 (800) 551-1700 to exchange shares (if you have telephone
privileges).
- - The Funds do not accept exchange requests made via FAX.
- - It may be difficult to reach the Funds during periods of unusual market
activity. If you are unable to contact the Funds by telephone, you may also
exchange shares by mail or overnight express.
EXCHANGES FROM
WASATCH FUNDS TO THE
NORTHERN U.S. GOVERNMENT
MONEY MARKET FUND
- - You may exchange all or a portion of your investment from Wasatch Funds to
the Money Market Fund.
- - Before authorizing any investment in shares of the Money Market Fund you
must obtain a copy of the Northern U.S. Government Money Market Fund
Prospectus, available from Wasatch Funds. Please read it carefully before
investing.
- - Exchanges are subject to the minimum purchase and redemption amounts set
forth in this Prospectus.
- - Exchange requests received in good order by the Funds by 3:00 p.m. Central
Time, or market close, on a day during which each Fund's NAV is determined
will be effective that day for both the Fund being purchased and the Fund
being redeemed. (For more informa-
Prospectus 29
<PAGE> 31
tion see "How Fund Shares are Priced" on page 32.)
- - Dividends earned in the Money Market Fund are payable at the end of the
month, not at the time of an exchange.
OTHER INFORMATION
ABOUT EXCHANGES
- - You may make four exchanges out of each Fund during a calendar year
(excluding automatic monthly exchanges).
- - Exchange requests may be subject to other limitations, including those
relating to frequency, that may be established from time to time to ensure
that exchanges do not disadvantage Fund shareholders or the Funds.
- - Shareholders will be notified at least 60 days in advance of any changes in
limitations and may obtain the terms of the limitations by writing to:
Wasatch Funds, P.O. Box 2172, Milwaukee, WI 53201-2172.
- - Exchanging shares is considered a taxable event by the Internal Revenue
Service. You could realize a taxable capital gain or loss when you exchange
shares. You may want to consult a tax or other financial adviser before
deciding to make an exchange.
- - Additional documentation and signature guarantees may be required for
exchange requests if shares are registered in the name of a corporation,
partnership or fiduciary. Contact Wasatch Funds for more information.
TO REDEEM SHARES
- - You may request that the Funds redeem all or a portion of your shares.
- - Your transaction will be processed at the next NAV calculated after your
request is received in good order by the Funds. (For more information see
"How Fund Shares are Priced" on page 32.)
- - If shares are held in certificate form you must return the certificates
before or with your redemption request.
- - Additional documentation and signature guarantees may be required for
redemption requests from corporations, executors, administrators, trustees
and guardians. Please call Wasatch Funds at 1 (800) 551-1700 for additional
information.
- - There is no charge for redemption requests submitted directly to the Funds.
- - The Funds reserve the right to reject any redemption request if it believes
it is advisable to do so.
- - If the account is worth less than the amount requested, the entire value of
the account will be redeemed.
WRITTEN REDEMPTION REQUESTS
- - See "Instructions for Written Requests" on page 31.
TELEPHONE REDEMPTION REQUESTS
- - You may redeem shares in your account in amounts of $500 up to $50,000, by
calling 1 (800) 551-1700 (if you have telephone privileges).
- - Redemption requests for over $50,000 must be made in writing. (A signature
guarantee is required.)
- - The Funds do not accept redemption requests made via FAX.
- - Reaching the Funds by telephone during periods of unusual market activity
may be difficult. If this is the case, you may redeem shares by mail or
overnight express.
SYSTEMATIC WITHDRAWAL PLAN
- - You may arrange to make monthly redemptions of $50 or more.
- - Your Fund account balance must be at least $5,000 at the time you begin
participation in the Plan.
- - You may choose either the 5th or the 20th of the month to have systematic
withdrawals distributed to you. If the day falls on a weekend or legal
holi-
30 Prospectus
<PAGE> 32
day, the distribution will be made on the next business day.
- - A Systematic Withdrawal Plan Application is available from the Funds by
calling 1 (800) 551-1700.
- - Any changes made to your distribution information must be made in writing
and signed by each account holder.
- - There is no charge to shareholders for using this Plan.
- - You may terminate the Systematic Withdrawal Plan at any time without charge
or penalty.
- - The Funds may terminate or modify the Plan after 60 days' written notice to
shareholders.
- - Changes in banking information require a signature guaranteed letter of
instruction.
- - Distributions can be made monthly, quarterly or annually.
PLEASE NOTE!
Systematic redemptions, like any sale of shares, may result in a capital
gain or loss for federal income tax purposes. Purchases of additional shares
concurrent with withdrawals may have adverse tax consequences for shareholders.
Your account may be depleted if the amount withdrawn under the Plan exceeds the
dividends credited to your account.
PAYMENT OF
REDEMPTION PROCEEDS
- - Payment will be mailed within seven days after the Funds have received your
request in good order.
- - Redemption proceeds can be sent by wire or electronic funds transfer to
your preauthorized bank account.
- - There is a $7.50 fee for wire redemptions which will be deducted from your
proceeds.
- - Payment may be delayed for up to seven business days on redemption requests
for recent purchases made by check in order to ensure that the check has
cleared.
SUSPENSION OF REDEMPTIONS
- - The right to redeem Fund shares will be suspended for any period during
which the Exchange is closed because of financial conditions or any other
extraordinary reason.
- - The right to redeem may be suspended for any period during which (a)
trading on the Exchange is restricted pursuant to rules and regulations of
the Securities and Exchange Commission ("SEC"), (b) the SEC has by order
permitted such suspension, or (c) an emergency, as defined by rules and
regulations of the SEC, exists making it impracticable for the Funds to
dispose of portfolio securities or fairly determine the net asset value.
For further information on the right to redeem see "Purchase, Redemption
and Pricing of Securities being Offered" in the SAI.
INSTRUCTIONS FOR
WRITTEN REQUESTS
- - You can redeem or exchange shares by writing to Wasatch Funds.
- - Your request should be sent to: Wasatch Funds P.O. Box 2172 Milwaukee, WI
53201-2172 - Please include:
Your name
The Fund(s) name
Your account number(s)
The dollar amount or number of shares to be redeemed or
exchanged
Your telephone number
Signature(s) of all registered account owners. Be sure
to sign your request exactly as your account is registered.
Signature guarantee, if required.
SIGNATURE REQUIREMENTS
BASED ON ACCOUNT TYPE
- - Individual or Joint Owner. Written instructions must be signed by each
Prospectus 31
<PAGE> 33
shareholder exactly as the names appear on the account registration.
- - Gift to Minor. Written instructions must be signed by the Custodian exactly
as the name appears on the account registration.
- - Corporation, Partnership, Trust or Other Entity. Written instructions must
be signed by the person(s) authorized to act on the account. Additional
documentation may be required. Call 1 (800) 551-1700 for information.
- - IRA. Written instructions must be signed by the account owner. If you do
not want federal income tax withheld from your redemption you must state
that you elect not to have such taxes withheld. Please remember that the
Internal Revenue Service imposes a 10% penalty tax, in addition to current
income taxes, on amounts withdrawn before age 591/2 unless the distribution
is made for a qualified use.
SIGNATURE GUARANTEE
A signature guarantee assures that a signature is genuine. It protects
shareholders and the Funds against fraudulent transactions by unauthorized
persons.
Signature guarantees are required by Wasatch Funds in the following cases:
- - To change the bank account or bank address designated to receive redemption
proceeds.
- - Redemption requests in excess of $50,000.
- - To request a wire transfer of redemption proceeds to a person other than
the registered shareholder(s).
- - Requests for redemption proceeds to be mailed to an address other than the
address of record.
- - Accounts involving corporations, executors, administrators, trustees or
guardians.
- - Redemptions made within 30 days of an address change.
- - To change the registered account holders.
The Funds reserve the right to require a signature guarantee under other
circumstances or to reject or delay a redemption on certain legal grounds. For
more information about signature guarantees, please call 1 (800) 551-1700.
HOW TO OBTAIN A
SIGNATURE GUARANTEE
You may obtain a signature guarantee from a commercial bank or trust
company in the United States, a brokerage firm which is a member of the National
Association of Securities Dealers, Inc. or an eligible guarantor institution
such as a credit union or savings association. Call your financial institution
to see if they have the ability to guarantee a signature.
A SIGNATURE GUARANTEE MAY NOT BE PROVIDED BY A NOTARY PUBLIC.
HOW FUND SHARES
ARE PRICED
A Fund's share price, or Net Asset Value (NAV), is calculated by dividing
the value of all securities and other assets owned by the Fund, less the
liabilities charged to that Fund, by the number of the Fund's shares
outstanding. The NAV is calculated each day the New York Stock Exchange is open
for trading. The NAV is determined as of the close of trading (generally 3:00
p.m. Central Time) or, if different, the close of the Exchange. Shares of the
Funds will not be priced on holidays the Exchange observes, including New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Securities which are traded on a recognized stock exchange are valued at
the last sale price on the securities exchange
32 Prospectus
<PAGE> 34
on which such securities are primarily traded or at the last sale price on the
national securities market. Exchange-traded securities for which there were no
transactions are valued at the current bid prices. Securities traded on only
over-the-counter markets are valued on the basis of closing over-the-counter bid
prices. Debt securities (other than short-term instruments) are valued at prices
furnished by a pricing service, subject to review and possible revision by the
Manager. Short-term securities are valued at either original cost or amortized
cost, both of which approximate current market value. Restricted securities,
securities for which market value quotations are not readily available, and
other assets are valued at fair value by the Manager under the supervision of
the Board of Directors.
Since all of the Wasatch Funds are no-load, you may purchase, redeem or exchange
shares at Net Asset Value without paying a sales charge. Because the Funds'
share prices change daily, your purchase price will be the next NAV calculated
after your request is received in good order by the Funds.
SHAREHOLDER SERVICES AND ACCOUNT POLICIES
- --------------------------------------------------------------------------------
WASATCH FUNDS AUTOMATED TELERESPONSE SERVICE
- - Call 1 (800) 551-1700 and, using a touch-tone telephone, press 3, and then
1 to access the following:
- - For account inquiries, including your account balance, or the last five
transactions on your account, press 1.
- - To request duplicate statements, reorder money market checks, or order
duplicate tax forms, press 2.
- - For Fund information, including general Fund descriptions, current Fund
pricing and performance information, press 3.
- - Press 0 for a Representative or * for the previous menu.
SHAREHOLDER REPORTS
Reports are mailed twice a year. Annual reports are dated September 30,
which is the close of the Funds' fiscal year. The annual report contains
important information about the Funds, including portfolio holdings and audited
financial statements. Semi-annual reports are dated March 31 and help keep
shareholders up-to-date on the Funds' performance and portfolio holdings.
Financial statements in the semi-annual reports are unaudited.
To reduce the volume of mail received by shareholders, as well as Fund
expenses, only one copy of most financial reports will be mailed to accounts
listed under the same Social Security Number. Additional copies of shareholder
reports are available by calling the Funds at 1 (800) 551-1700.
ACCOUNT STATEMENTS
You will receive account statements quarterly. The Funds will send you a
confirmation statement after every transaction that affects your account balance
or your account registration. If you invest through the Automatic Investment
Plan, you will receive confirmation of your purchases quarterly. Information
regarding the tax status of income dividends and capital gains distributions
will be mailed to shareholders on or before January 31. Account tax information
will also be sent to the Internal Revenue Service.
SHARE CERTIFICATES
The Funds stopped issuing share certificates as of February 1, 1996.
Instead, shares purchased are automatically credited to an account maintained
for you on the books of the Funds. You will receive a statement showing the
details of each transaction.
Prospectus 33
<PAGE> 35
INVOLUNTARY REDEMPTION
The Funds reserve the right to redeem the shares held in any account if, at
the time of any redemption of shares in the account, the Net Asset Value of the
remaining shares falls below $500. Shareholders will be given at least 60 days'
written notice before involuntary redemptions are made. Shareholders can prevent
involuntary redemptions by making additional investments to restore the account
to the minimum investment amount during the 60 days.
TELEPHONE TRANSACTIONS
You may initiate transactions by telephone. The Funds and their agents will
not be responsible for any losses resulting from unauthorized transactions
providing reasonable procedures to prevent fraudulent transactions have been
followed.
The Funds and their agents have implemented procedures designed to
reasonably assure that telephone instructions are genuine. These procedures
include requesting verification of various pieces of personal information,
recording telephone transactions, confirming transactions in writing and
restricting transmittal of redemption proceeds to preauthorized destinations.
Other procedures may be implemented from time to time.
During periods of substantial economic or market change, it may be
difficult to contact the Funds by telephone. If you are unable to contact the
Funds by telephone, please consider sending written instructions.
TEMPORARY SUSPENSION OF SERVICES
The Funds or their agents may, in case of emergency, temporarily suspend
telephone transactions and other shareholder services.
RETURNED CHECK POLICY
When investing in the Funds by check, the Funds reserve the right to cancel
the purchase if a check does not clear your bank. The Funds will charge your
account a $20 service fee and you will be responsible for any losses or fees
imposed by your bank and any losses that may be incurred by the Funds as a
result of the canceled purchase. If you are already a shareholder in the Funds,
the Funds may redeem shares in your account(s) to cover any such losses due to
fluctuations in share price.
UNACCEPTABLE ACCOUNT REGISTRATIONS
The Funds will not accept accounts registered as Power of Attorney ("POA")
or Attorney-in-Fact. The Funds will not accept accounts with addresses outside
the United States.
REGISTRATION CHANGES
To change the name on an account, the shares are generally transferred to a
new account. Legal documentation and a signature guarantee are required. For
more information, call 1 (800) 551-1700.
ADDRESS CHANGES
To change the address on your account, call 1 (800) 551-1700 or send a
written request signed by all account owners. Include the name of your Fund(s),
the account number(s), the name(s) on the account and both the old and new
addresses. Certain options, including redemptions, may be suspended for 30 days
following an address change unless a signature guarantee is provided.
MANAGEMENT
OF WASATCH FUNDS
Wasatch Advisors, Inc. (the "Manager" or "Wasatch Advisors"), which is
located at the same address as Wasatch Funds, serves as the Manager for the
Funds. The Manager is responsi-
34 Prospectus
<PAGE> 36
ble for investing Wasatch Funds' assets. In addition, the Manager provides
certain administrative services and manages the Funds' business affairs. Wasatch
Advisors has been in the investment advisory business since 1975 and as of
October 31, 1997 had approximately $984 million in assets under management.
The business affairs of Wasatch Funds are supervised by its Board of
Directors. The Board consists of five Directors who are elected each year and
serve for one-year terms and/or until their successors are elected and
qualified.
Dr. Samuel S. Stewart, Jr., is President and Chairman of the Board of
Wasatch Funds and Wasatch Advisors. Dr. Stewart is the only owner of more than
25% of Wasatch Advisors and is thus deemed to control the Manager. All
interested Directors of Wasatch Funds are also Officers and Directors of Wasatch
Advisors.
INVESTMENT PERSONNEL
The following key investment personnel for Wasatch Advisors are senior
members of the Wasatch research team which consists of 10 securities analysts
who are responsible for making investment decisions for Wasatch Funds.
Samuel S. Stewart, Jr., PhD, CFA, is President and Chairman of the Board of
Wasatch Funds and Wasatch Advisors. Dr. Stewart has served as President of
Wasatch Advisors since 1975. Dr. Stewart serves as Lead Manager of the Wasatch
Growth Fund. He served as Lead Manager of the Wasatch Aggressive Equity Fund
from 1986 through January 1997. He earned a Bachelor of Science in Business
Administration degree from Northwestern University. He went on to earn a Master
of Business Administration and a Doctorate in Finance from Stanford University.
Since 1975, Dr. Stewart has been a professor of Finance at the University of
Utah. Jeff Cardon, CFA, is Vice President and Director of Wasatch Funds and
Wasatch Advisors. He serves as Lead Manager of the Wasatch Aggressive Equity
Fund and as Co-Manager, with Robert Gardiner, of the Wasatch Micro-Cap Value
Fund. From 1986 through January 1997, he served as Lead Manager of the Wasatch
Growth Fund. Mr. Cardon joined Wasatch Advisors as a securities analyst in
1980. He is a Chartered Financial Analyst and holds a Bachelor of Science
degree in Finance from the University of Utah. Karey Barker, CFA, is a Director
of Wasatch Advisors and has been Lead Manager of the Wasatch Mid-Cap Fund since
1994. Ms. Barker joined Wasatch Advisors as a securities analyst in 1989. She
is a Chartered Financial Analyst and holds Bachelor of Arts and Bachelor of
Science degrees from the University of Utah.
Robert Gardiner, CFA, is a Director of Wasatch Advisors and has served
as Lead Manager of the Wasatch Micro-Cap Fund since 1995. In addition, he is
Co-Manager, with Jeff Cardon, of the Wasatch Micro-Cap Value Fund. Mr. Gardiner
joined Wasatch Advisors as a securities analyst in 1987. He is a Chartered
Financial Analyst and holds Bachelor of Arts and Bachelor of Science degrees
from the University of Utah.
ABOUT THE SUB-ADVISOR
Hoisington Investment Management Company ("Hoisington" or the
"Sub-Advisor") is a registered investment advisor that has been in business
since 1980. The Sub-Advisor has offices at 1250 Capital of Texas Highway South,
Building 3, #600, Austin, Texas 78746-6464.
Hoisington is wholly-owned by Van Robert Hoisington and provides invest-
Prospectus 35
<PAGE> 37
ment management services for individuals, pension and profit-sharing plans,
trusts and estates, charitable organizations and corporations, and other
business entities. As of September 30, 1997, Hoisington provided investment
advice to 41 separately managed accounts and had approximately $2.6 billion in
assets under management. Hoisington provides investment management for fixed
income securities, including U.S. government securities.
Van Robert Hoisington has been Lead Manager of the Wasatch-Hoisington U.S.
Treasury Fund since 1996. In addition, he is President and Senior Investment
Officer of Hoisington Investment Management Company (HIMCO). He has served as
such since founding HIMCO in 1980. Prior to forming his own firm, Mr. Hoisington
was Executive Vice President of Texas Commerce Bancshares, Executive Trust
Officer of Texas Commerce Bank and Senior Investment Officer of Texas Commerce
Bank's Trust Department. Before joining Texas Commerce Bank, Mr. Hoisington was
Vice President and Economist with United California Bank in Los Angeles, where
he was Director of National and International Macroeconomic Studies. Mr.
Hoisington received a Bachelor of Arts degree from the University of Kansas and
a Master's degree in business from Fort Hays Kansas University.
MANAGEMENT FEES, EXPENSES
AND EXPENSE LIMITATIONS
- --------------------------------------------------------------------------------
Under investment advisory and service contracts which are explained in more
detail in the SAI, each Fund pays Wasatch Advisors a
monthly management fee which is computed on the average daily net assets of
each Fund.
<TABLE>
<CAPTION>
Monthly Fee Total Expense Amount
based on an Limitations on Limit including Reimbursed as of
Wasatch Fund Annual Rate Other Expenses Management Fees September 30, 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mid-Cap Fund 1.25% 0.50% 1.75% $123,680
Micro-Cap Fund 2.00% 0.50% 2.50% $ 68,760
Aggressive Equity Fund 1.00% 0.50% 1.50% $ 81,327
Micro-Cap Value Fund 1.50% 0.45% 1.95% --
Growth Fund 1.00% 0.50% 1.50% --
U.S. Treasury Fund* 0.50% 0.25% 0.75% $ 47,278
</TABLE>
*Fund is managed by a Sub-Advisor. Under a sub-advisory agreement between the
Manager and the Sub-Advisor, the Manager has agreed to pay the Sub-Advisor a
management fee. For further information please see "Sub-Advisory Agreement
between the Manager and Hoisington Investment Management Company" in the SAI.
The Funds pay all of their own expenses, including, without limitation; the
cost of preparing and printing registration statements required under the
Securities Act of 1933 and the 1940 Act and any amendments thereto; the expense
of registering shares with the SEC and in the various states; printing and
distribution costs of Prospectuses mailed to existing investors, reports to
36 Prospectus
<PAGE> 38
investors, reports to government authorities and proxy statements; fees paid to
Directors who are not interested persons (as defined in the 1940 Act); interest
charges; taxes; legal expenses; association membership dues; auditing services;
administrative services; insurance premiums; brokerage commissions and expenses
in connection with Fund transactions; fees and expenses of the Custodian of the
Funds' assets; printing and mailing expenses; charges and expenses of dividend
disbursing agents; accounting services agents; registrars and stock transfer
agents; certain expenses incurred by employees of the Manager; and extraordinary
and non-recurring expenses.
The Manager has voluntarily agreed to limit the expenses of each Fund at
least through September 30, 1998, to the percentage of average net assets
computed on a daily basis shown in the chart on page 36. The Manager will pay
all expenses excluding interest, taxes, extraordinary expenses, brokerage
commissions and transactions costs in excess of such limitations. The Manager
may rescind these voluntary limitations on expenses at any time after September
30, 1988.
PORTFOLIO TRANSACTIONS
The Manager is responsible for placing orders to purchase and sell
securities for the Funds. In addition, brokerage commissions on portfolio
transactions are negotiated by the Manager. Brokerage firms are selected for
their professional capability to execute the types of transactions required by
the Funds. The Manager also considers the value and quality of services rendered
on a continuing basis. The Manager is authorized to place portfolio transactions
with brokerage firms participating in the distribution of shares of the Funds if
it reasonably believes that the quality of services and commissions are
comparable to those available from other qualified brokerage firms. The Manager
may pay higher commissions to brokerage firms that provide investment and
research information to Wasatch Advisors than to firms that do not provide these
services if the Manager determines that commissions are reasonable in relation
to the services provided. Investment and research information received from
brokerage firms may be used by the Manager to manage the assets of other
advisory accounts as well as to manage the assets of the Funds.
ADDITIONAL SERVICE PROVIDERS
The SAI provides more detailed information concerning the agreements
between Wasatch Funds and the Administrator, Transfer Agent and Custodian.
ADMINISTRATOR
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, WI 53202-5712
TRANSFER AGENT
Sunstone Investor Services, LLC
207 East Buffalo Street, Suite 315
Milwaukee, WI 53202-5712
CUSTODIAN
UMB Bank, n.a.
1010 Grand Blvd.
Kansas City, MO 64106-2008
LEGAL COUNSEL
Michael J. Radmer
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402-1498
INDEPENDENT AUDITORS
Arthur Andersen LLP
100 East Wisconsin Ave., Suite 1900
Milwaukee, WI 53202-4107
Prospectus 37
<PAGE> 39
ORGANIZATION
OF WASATCH FUNDS
Wasatch Funds, Inc. ("Wasatch Funds" or the "Company"), was incorporated
under Utah law on November 18, 1986, and was reincorporated as a Minnesota
corporation in January 1998. The Company is an open-end, registered management
investment company under the 1940 Act.
Wasatch Funds is comprised of the Mid-Cap Fund, Micro-Cap Fund, Aggressive
Equity Fund, Micro-Cap Value Fund, Growth Fund and Wasatch-Hoisington U.S.
Treasury Fund (the "Funds"), each of which consists of a separate portfolio
which issues a separate class of shares. The Board of Directors is authorized to
create new Funds in addition to those already existing without the approval of
the shareholders of the Company. All shares of each respective Fund have equal
voting rights; each share is entitled to one vote per share (with proportionate
voting for fractional shares). Only shareholders of a Fund are entitled to vote
on matters concerning that Fund.
The assets received by the Company upon the sale of shares of each Fund and
all income, earnings, profits and proceeds thereof, subject only to the rights
of creditors, are specifically allocated to such Fund. They constitute the
underlying assets of each Fund, are required to be segregated on the books of
account, and are to be charged with the expenses of such Fund. Any general
expenses of the Company not readily identifiable as belonging to a particular
Fund will be allocated on the basis of each Fund's relative net assets during
the fiscal year.
Each share of a Fund has equal dividend, distribution, liquidation and
voting rights with other shares of that Fund. Each issued and outstanding share
is entitled to one vote and to participate equally in dividends and
distributions declared by the Fund out of that series and upon liquidation or
dissolution of the series in the net assets remaining after satisfaction of
outstanding liabilities.
The shares of each Fund, when issued, will be fully paid and
non-assessable, have no preference, preemptive, conversion, or exchange or
similar rights, and will be freely transferable.
SHAREHOLDER MEETINGS
Reincorporating the Funds in the state of Minnesota means that the Funds
are no longer required to hold an annual meeting of shareholders as they were
under Utah law. The Manager believes reincorporation will help reduce Fund
expenses as it has become increasingly expensive to notify all shareholders of
annual meetings and to print, mail and monitor proxy votes. Minnesota bylaws
provide for addressing important issues at specially scheduled shareholder
meetings.
Wasatch Funds is always happy to meet with shareholders. We communicate
important information about the Funds through Annual and Semi-Annual Reports,
newsletters, special mailings and other events throughout the year.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
In addition to any increase in the value of shares which a Fund may
achieve, shareholders may receive dividends and capital gains distributions from
the Fund. For more information please contact a Shareholder Services
Representative at 1 (800) 551-1700.
DIVIDENDS
Dividends from stocks and interest earned from other investments are the
Funds' main source of ordinary income.
38 Prospectus
<PAGE> 40
Substantially all of the income, less expenses, of the Funds is distributed
annually as dividends to shareholders.
CAPITAL GAINS
When the Funds sell portfolio securities they may realize a gain or loss,
depending on whether the security is sold for more or less than its cost. Net
realized capital gains, if any, will be distributed at least annually.
Dividends and capital gains distributions from a Fund are automatically
applied to purchase additional shares of the Fund at the Net Asset Value per
share on the payable date unless the shareholder has requested in writing to the
Transfer Agent that payment be made in cash. This option may be changed at any
time by written request to the Transfer Agent. The election is effective for
distributions with a dividend record date on or after the date that the Transfer
Agent receives notice of the election.
TAXES
Dividends paid from the Funds' net investment income and net short-term
capital gains will be taxable to shareholders as ordinary income, whether paid
in cash or in additional shares.
Distributions paid from the Funds' long-term capital gains and designated
as capital gains dividends generally are taxable as long-term capital gains in
the hands of shareholders, regardless of the length of time during which they
have held their shares. For individuals, estates, and trusts, the Taxpayer
Relief Act of 1997 (the "1997 Act") has created new categories of long-term
capital gains subject to maximum tax rates of 20%, 25% and 28%. Although the
1997 Act did not expressly address this issue, the Internal Revenue Service
("IRS") has issued a notice pursuant to the Act providing that a regulated
investment company such as the Funds must notify shareholders who are
individuals, estates or trusts as to the maximum tax rate that will apply.
Gain or loss upon the sale of shares of the Funds will be treated as a
capital gain or loss, provided that (as is usually the case) the shares
represented a capital asset in the hands of the shareholder. For corporate
shareholders, such gain or loss will be a long-term gain or loss if the shares
were held more than one year. For shareholders who are individuals, estates or
trusts, the gain or loss will be considered long-term if the shareholder
held the shares for more than one year subject to the new maximum rates of 20%
and 28%, depending upon the holding period in excess of one year.
Before investing, prospective shareholders (except for shareholders exempt
from federal income tax, such as tax-sheltered retirement plans) should consider
the impact of dividends or capital gains distributions which are expected to be
announced, or have been announced but not paid. Dividends or capital gains
distributions paid shortly after a purchase of shares by an investor prior to
the record date will have the effect of reducing the per share Net Asset Value
by the amount of the dividends or distributions. All or a portion of such
dividends or distributions, although in effect a return of capital, are subject
to taxation.
The Funds are required to withhold and remit to the U.S. Treasury 31% of
dividend payments, capital gains distributions, and redemption proceeds for any
account on which the owner provides an incorrect Taxpayer Identification Number.
Applications without a Taxpayer Identification Number will not be accepted and
will be returned along with the purchase check.
WHEN YOU WILL RECEIVE
TAX INFORMATION
At the end of each calendar year, shareholders are sent full information
Prospectus 39
<PAGE> 41
on redemptions, dividends and long-term capital gains distributions for tax
purposes, including information as to the portion taxable as ordinary income and
the portion taxable as long-term capital gains. The Fund is required to
inform shareholders who are individuals, estates or trusts of the portions of
their long-term capital gains dividends which will be taxed at various maximum
rates.
TAXATION OF THE FUNDS
The Funds intend to qualify annually for and elect tax treatment applicable
to a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended. Because each Fund intends to distribute substantially
all of its net investment income and capital gains to shareholders, it is not
expected that the Funds will be required to pay any federal income taxes. Should
a Fund fail to distribute the amount required by the Tax Reform Act of 1986, as
amended, during any calendar year, the Fund would be required to pay a 4%
non-deductible excise tax on the amount of the under-distribution.
TAXES AND DISTRIBUTIONS ON ZERO COUPON BONDS AND U.S. TREASURY INFLATION
PROTECTION SECURITIES
If a Fund invests in zero coupon bonds upon their issuance, such
obligations will have original issue discount in the hands of the Fund.
Generally, the original issue discount equals the difference between the "stated
redemption price at maturity" of the obligation and its "issue price," as those
terms are defined in the Code. Similarly, if the Fund acquires an already issued
zero coupon bond from another holder, the bond will have original issue discount
in the Fund's hands, equal to the difference between the "adjusted issue price"
of the bond at the time the Fund acquires it (that is, the original issue price
of the bond plus the amount of original issue discount accrued to date) and its
stated redemption price at maturity. In each case, the Fund is required to
accrue as ordinary interest income a portion of the original issue discount even
though it receives no cash currently as interest payment on the obligation.
If a Fund invests in U.S. Treasury inflation protection securities, it will
be required to treat as original issue discount any increase in the principal
amount of the securities that occurs during the course of its taxable year. If a
Fund purchases such inflation protection securities that are issued in stripped
form either as stripped bonds or coupons, it will be treated as if it had
purchased a newly issued debt instrument having original issue discount.
Because each Fund is required to distribute substantially all of its net
investment income (including accrued original issue discount), a Fund investing
in either zero coupon bonds or U.S. Treasury inflation protection securities may
be required to distribute to shareholders an amount greater than the total cash
income it actually receives. Accordingly, in order to make the required
distributions, a Fund may be required to borrow or to liquidate securities.
GUIDE TO UNDERSTANDING FUND PERFORMANCE
As a mutual fund investor you will frequently see terms that are used to
describe fund performance. In addition, many discussions are based on
comparisons of one fund's performance to that of other mutual funds or
recognized stock market indices. These discussions may appear in reports to
shareholders, newsletters, advertisements and media articles. This section is
designed to help you understand common terms and familiarize you with indices
that may be used to compare the Funds' performance.
PERFORMANCE QUOTATIONS REPRESENT A FUND'S PAST PERFORMANCE AND ARE NOT
40 Prospectus
<PAGE> 42
INDICATIVE OF FUTURE RESULTS. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT IN A FUND WILL FLUCTUATE SO AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
Cumulative Total Return represents the actual rate of return on an
investment for a specified period. The "Financial Highlights" tables beginning
on page 6 show total return for single fiscal periods. Cumulative total return
is generally quoted for more than one year (usually the life of the Fund). A
cumulative total return does not show interim fluctuations in the value of an
investment and assumes reinvestment of all dividends and distributions.
Average Annual Total Return reflects the average annual percentage change
in the value of an investment in a Fund over a specified period. It is
calculated by taking the cumulative total return for the stated period and
determining what constant annual return would have produced the same cumulative
return. Average annual returns for more than one year tend to smooth out
variations in a Fund's return and are not the same as actual annual results.
Yield shows the rate of income a Fund earns on its investments as a
percentage of the Fund's share price. It is calculated by dividing a Fund's net
investment income for a 30-day period by the average number of shares entitled
to receive dividends and dividing the result by the Fund's NAV per share at the
end of the 30-day period. Yield does not include changes in NAV.
Yields are calculated according to standardized SEC formulas and may not
equal the income on an investor's account. Yield is usually quoted on an
annualized basis. An annualized yield represents the amount you would earn if
you remained in a Fund for a year and that Fund continued to have the same yield
for the entire year.
Dow Jones Industrial Average ("The Dow") is probably the most well known
index. The Dow was developed in 1884 and is the oldest market index in the
United States. Currently, the Dow contains 30 stocks that in the opinion of Dow
Jones' Wall Street Journal editors, are the industrial giants of Wall Street.
When the Dow goes up, conventional wisdom suggests that investors are seeking
the certainty associated with large, well-established companies, especially
those that pay dividends. Typically, therefore, the more large, dividend-paying
stocks a fund owns, the better it will perform when the Dow rises. The stocks of
small- and mid-size companies may perform differently than the Dow.
Standard & Poor's Composite Index of 500 Stocks (S&P 500). While the Dow is
better known, many professionals consider the S&P 500 to be a more accurate
measure of general stock market activity. The Index includes 500 of the nation's
largest stocks from a broad variety of industries. It represents about 80% of
the total market value of all stocks on the New York Stock Exchange. The
performance of the S&P is dominated by the fortunes of its largest stocks. Funds
that invest heavily in the stocks of small- and mid-size companies may not
always have performance that is in line with the S&P 500.
Standard & Poor's MidCap 400 (S&P 400) is designed to track significant,
mid-sized companies. According to Standard & Poor's, the vast majority of the
stocks in the Index have market capitalizations (or total market value) of
between $200 million and $3 billion. The S&P 400 was first published in 1991 and
was designed to be a more accurate benchmark for mutual funds that invest in
small- to mid-sized companies.
Nasdaq Composite Index keeps tabs on the stocks of 3,500 or so small- and
mid-size companies that trade only on
Prospectus 41
<PAGE> 43
the computerized over-the-counter (OTC) system. Due to their number and size,
technology stocks tend to dominate the direction of the Index. Funds that
invest heavily in technology stocks often reflect the performance of the
Nasdaq.
Russell 2000 represents the smallest two-thirds of the largest 3,000
publicly traded companies domiciled in the United States. This index is a
popular measure of the performance of small company stocks.
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 stocks
represented in the major unmanaged stock indices.
Lipper Micro-Cap Funds Index includes the largest 30 funds which, by
prospectus or portfolio practice, normally invest in companies with market
capitalizations less than $300 million at the time of purchase.
Lehman Brothers Government/Corporate Bond Index is an unmanaged market
value weighted index measuring both pricnipal 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. For more details see "Explanation of
Rating Categories" on page 00.
GLOSSARY OF INVESTING TERMS
This glossary provides definitions of terms as they pertain to investments
made by the Funds. It also provides more detailed descriptions of some of the
types of securities and other instruments in which the Funds may invest to the
extent permitted by their investment objectives and policies. The Funds are not
limited by this discussion and may invest in any other types of instruments not
precluded by the policies discussed elsewhere in this Prospectus. Please refer
to the SAI for a more detailed discussion of certain instruments.
Bonds are debt securities issued by a company, municipality, government or
government agency. The issuer of a bond is required to pay the holder the amount
of the loan (or par value) at a specified maturity and to make scheduled
interest payments.
Business Cycle is a term commonly used to describe fluctuations in total
economic activity. It refers to the period of time it takes the economy to shift
from a peak in business activity to a trough and back to a peak. (In other
words, it refers to the start of a recession through recovery and expansion and
back to recession.) The average post-war business cycle (measured from the end
of one recession to the start of the next recession) has been about 48 months,
ranging from 12 to 94 months. Interest rates generally follow this cycle, being
at relatively high levels near the beginning of a recession and falling during
the recession and the early part of the business recovery. Generally, interest
rates begin to rise toward the end of a business expansion, again peaking near
the start of the next recession.
Certificates of Deposit are issued by a bank and usually pay interest.
Maturities range from a few weeks to several years. Interest rates are set by
competitive forces in the marketplace.
Commercial Paper is a short-term debt obligation with a maturity ranging
from 2 to 270 days and is issued by banks, corporations and other borrowers to
investors with temporarily idle cash. The Funds may purchase commercial
42 Prospectus
<PAGE> 44
paper issued under Section 4(2) of the Securities Act of 1933.
COMMON STOCK represents units of ownership (shares) in a public
corporation. Owners of shares of common stock usually have the right to vote on
the selection of directors and other important matters as well as to receive
dividends on their holdings.
CONVERTIBLE SECURITIES are preferred stocks or bonds that pay a fixed
dividend or interest payment and are convertible into common stock at a
specified price or conversion ratio within a specified period of time. By
investing in convertible securities, a fund seeks the opportunity, through the
conversion feature, to participate in a portion of the capital appreciation of
the common stock into which the securities are convertible, while earning higher
current income than is available from the common stock. (Also see Investment
Grade Debt Securities.)
DEPOSITARY RECEIPTS are receipts for shares of a foreign-based corporation
that entitle the holder to dividends and capital gains on the underlying
security. Receipts include those issued by domestic banks (American Depositary
Receipts), foreign banks (Global or European Depositary Receipts) and
broker-dealers (depositary shares.)
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.
Eurodollars are U.S. currency held in banks outside the United States,
mainly in Europe, and are commonly used for settling international transactions.
Some securities are issued in Eurodollars--that is, with a promise to pay
interest in dollars deposited in foreign bank accounts.
Fixed Income Securities are securities that pay a specified rate of return.
The term generally includes short- and long-term government, corporate and
municipal obligations that pay a specified rate of interest or coupons for a
specified period of time and preferred stock, which pays fixed dividends. Coupon
and dividend rates may be fixed for the life of the issue or, in the case of
adjustable and floating rate securities, for a shorter period.
Government Securities are securities issued by U.S. government agencies.
Although these securities have high credit ratings, they are not considered
government obligations and therefore are not directly backed by the full faith
and credit of the government as are U.S. Treasury Securities.
Investment Grade Debt Securities are debt obligations rated within the four
highest rating categories by Moody's Investors Service, Inc., Standard & Poor's
Corporation, or other nationally recognized rating agencies. They may also be
unrated obligations that are comparable in quality to investment grade debt
securities. Obligations rated in the lowest of the top four ratings, though
considered investment grade, are deemed to have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead to
a lower rated security's weakened capacity to make principal and interest
payments. Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. Such an event will be considered in determining whether
the Fund should continue to hold the security. Securities are expected to be
sold promptly if they become non-investment grade and exceed 5% of a Fund's net
assets. (For a more detailed description of ratings, see the "Explanation of
Rating Categories" on page 00.)
Market Capitalization is used to
Prospectus 43
<PAGE> 45
measure the size and value of a company. It is calculated by multiplying the
number of a company's outstanding shares by the current market price of a share.
Master Demand Notes are demand instruments without a fixed maturity that
bear interest at rates which are fixed to known lending rates and are
automatically adjusted when such lending rates change.
Money Market Instruments are short-term debt instruments such as negotiable
certificates of deposit (CDs), Eurodollars, commercial paper, banker's
acceptances, Treasury bills, and discount notes of the Federal Home Loan Bank,
Federal National Mortgage Association, and Federal Farm Credit System, among
others. These instruments have low risk and liquidity in common.
Preferred Stock generally pays dividends at a specified rate and takes
precedence over common stock in the payment of dividends and in the event a
company must liquidate its assets. Preferred stock generally does not carry
voting rights.
Repurchase Agreements involve the purchase of a security 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
security at a predetermined price or yield.
U.S. Government Securities include direct obligations of the U.S.
government that are supported by its full faith and credit. Treasury Bills have
initial maturities of less than one year, Treasury Notes have initial maturities
of one to 10 years and Treasury Bonds may be issued with any maturity but
generally have maturities of at least 10 years. U.S. government securities also
include indirect obligations of the U.S. government that are issued by federal
agencies and government-sponsored entities. Unlike Treasury Securities, agency
securities generally are not backed by the full faith and credit of the U.S.
government. Some agency securities are supported by the right of the issuer to
borrow from the Treasury; others are supported by the discretionary authority of
the U.S. government to purchase the agency's obligations; and others are
supported only by the credit of the sponsoring agency.
U.S. Treasury Securities 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 10 years and shorter, and bonds are currently
issued with a maturity of 30 years.
U.S. Treasury STRIPS, or zero coupon Treasury Securities are debt
obligations which do not entitle the holder to periodic interest payments prior
to maturity and are traded at a discount from their face amounts. The discount
of U.S. Treasury STRIPS varies primarily depending on the time remaining until
maturity and prevailing levels of interest rates. STRIPS can be sold prior to
their due date in the secondary market at the then-prevailing market value. The
market prices of STRIPS are generally more volatile than the market prices of
securities of comparable quality and similar maturity that pay interest
periodically and may respond to a greater degree of fluctuations in interest
rates than do such non-zero coupon securities.
Warrants are securities, typically issued with preferred stock or bonds,
that give the holder the right to buy a proportionate amount of common stock at
a specified price, usually at a price that is higher than the market price at
the time of issuance of the warrant. The right may last for a period of years or
indefinitely.
44 Prospectus
<PAGE> 46
EXPLANATION OF
RATING CATEGORIES
The following is a description of credit ratings issued by two of the major
credit ratings agencies. Credit ratings evaluate only the safety of principal
and interest payments, not the market value risk of lower quality securities.
Credit rating agencies may fail to change credit ratings to reflect subsequent
events on a timely basis. Although the Manager considers security ratings when
making investment decisions, it also performs its own investment analysis and
does not rely solely on the ratings assigned by credit agencies.
MOODY'S INVESTORS SERVICE, INC.
BOND RATING EXPLANATION
Investment Grade
Aaa Highest quality, smallest degree of investment risk.
Aa High quality; together with Aaa bonds, they compose the
high-grade bond group.
A Upper-medium grade obligations; many favorable
investment attributes.
Baa Medium-grade obligations; neither highly protected nor
poorly secured. Interest and principal appear adequate
for the present but certain protective elements may be
lacking or may be unreliable over any great length of
time.
Non-Investment Grade
Ba More uncertain, with speculative elements.Protection of
interest and principal payments not well safeguarded.
B Lack characteristics of desirable investment;
potentially low assurance of timely interest and
principal payments or maintenance of other contract
terms over time.
Caa Poor standing, may be in default; elements of danger
with respect to principal or interest payments.
Ca Speculative in a high degree; could be in default or
have other marked shortcomings.
C Lowest-rated; extremely poor prospects of ever
attaining investment standing.
Prospectus 45
<PAGE> 47
STANDARD & POOR'S RATINGS SERVICE
BOND RATING EXPLANATION
Investment Grade
AAA Highest rating; extremely strong capacity to pay
principal and interest.
AA High quality; very strong capacity to pay principal and
interest.
A Strong capacity to pay principal and interest; somewhat
more susceptible to the adverse effects of changing
circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters, but
adverse economic conditions or changing circumstances
more likely to lead to a weakened capacity to pay
principal and interest than for higher rated bonds.
Non-Investment Grade
BB, B Predominantly speculative with respect to the
issuer's capacity to meet required interest and
principal payments.
CCC, CC, C BB--lower degree of speculation; C--the highest
degree of speculation. Quality and protective
characteristics outweighed by large uncertainties or
major risk exposure to adverse conditions.
D In default.
Unrated securities will be treated as non-investment grade securities
unless the Manager determines that such securities are the equivalent of
investment grade securities. Securities that have received different ratings
from more than one agency are considered investment grade if at least one agency
has rated the security investment grade.
Prospectus #
46 Prospectus
<PAGE> 48
NOTES
Prospectus 47
<PAGE> 49
NOTES
48 Prospectus
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NOTES
Prospectus 49
<PAGE> 51
STATEMENT OF ADDITIONAL INFORMATION
WASATCH FUNDS, INC.
68 South Main Street
Salt Lake City, UT 84101
January 31, 1998
WASATCH FUNDS, INC. ( "Wasatch Funds" or the "Company") is an open-end
management investment company issuing shares of Common Stock in separate
series or "Funds." The Company presently consists of seven Funds, six of
which are publicly offered and are described herein: the Wasatch-Hoisington
U.S. Treasury Fund is a diversified fund; the Mid-Cap, Micro-Cap, Aggressive
Equity, Micro-Cap Value and Growth Funds are each non-diversified funds. Each
of the Funds has its own investment objective designed to meet different
investment goals.
This Statement of Additional Information is not a Prospectus but contains
information in addition to, and more detailed than, that set forth in the
Prospectus and should be read in conjunction with the Prospectus. A
Prospectus may be obtained without charge by calling 1 (800) 551-1700 or
writing to Wasatch Funds at P.O. Box 2172, Milwaukee, Wisconsin 53202-2172.
The Statement of Additional Information and the related Prospectus are both
dated January 31, 1998. Capitalized terms used herein and not defined have
the same meanings as those used in the Prospectus.
TABLE OF CONTENTS
General Information and History ............................... 2
Investment Objectives and Policies ............................ 2
Additional Investment Information ............................. 3
Description of Corporate Bond Ratings ......................... 9
Investment Restrictions ....................................... 10
Management of the Company ..................................... 11
Control Persons and Principal Holders of Securities ........... 13
Investment Advisory and Other Services ........................ 14
Brokerage Allocation and Other Practices ...................... 17
Capital Stock and Other Securities ............................ 18
Purchase, Redemption and Pricing of Securities Being Offered .. 19
Tax Status .................................................... 19
Calculation of Performance Data ............................... 20
Financial Statements .......................................... 22
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GENERAL INFORMATION AND HISTORY
Wasatch Funds, Inc. ("Wasatch Funds" or the "Company") was incorporated under
Utah law on November 18, 1986, and was reincorporated as a Minnesota
Corporation in January 1998. The Company is an open-end management investment
company currently offering six separate Funds which are described herein. The
Mid-Cap Fund, Micro-Cap Fund, Aggressive Equity Fund, Micro-Cap Value Fund and
Growth Fund are each non-diversified funds. The Wasatch-Hoisington U.S.
Treasury Fund is a diversified fund. The Growth Fund, Wasatch-Hoisington U.S.
Treasury Fund and Aggressive Equity Fund commenced operations on December 6,
1986, the Mid-Cap Fund on August 16, 1992, the Micro-Cap Fund on June 19, 1995,
and the Micro-Cap Value Fund commenced operations on December 17, 1997.
INVESTMENT OBJECTIVES AND POLICIES
Wasatch Funds is a no-load mutual fund currently offering six separate series
(the "Funds"), each of which has its own investment objective designed to meet
different investment goals. Each of the six Funds are described below.
The Wasatch Mid-Cap Fund seeks long-term growth of capital. Income is a
secondary objective to be sought only when consistent with the primary
objective. In pursuit of its investment objective the Fund will normally
invest at least 65% of its total assets in common stocks of companies that have
market capitalizations between $300 million and $5 billion at the time of
initial purchase. The Mid-Cap Fund seeks to invest in rapidly growing
companies. The Fund does not limit its investments to certain sectors or
industries. However, it will generally focus on the fastest growing sectors.
The Manager believes that companies growing earnings in excess of 25% annually
present opportunities for investors to get higher long-run returns. The Fund
is designed for long-term investors seeking higher growth of capital, who are
comfortable with the greater degree of risk this aggressive strategy entails.
The Wasatch Micro-Cap Fund. The Micro-Cap Fund is currently closed to new
investors. The Fund's shareholders and certain others may continue to add to
existing accounts or open new accounts. The Fund may resume sales to new
investors in the future. It has no intention to do so at the present time.
The Micro-Cap Fund seeks long-term growth of capital. Income is a secondary
objective to be sought only when consistent with the primary objective. In
pursuit of its investment objective, the Fund will normally invest at least 65%
of its total assets in common stocks of companies with market capitalizations
of less than $200 million at the time of initial purchase. The Fund is
designed for long-term investors. Its strategy is to invest in the smallest
companies that the Manager believes possess superior growth potential. The
Fund targets two types of investments, core and momentum holdings. Core
holdings are companies the Manager believes have the potential to grow at
around 15% annually. Core holdings are selected for characteristics that may
give the Fund a solid foundation. Momentum holdings are companies growing
aggressively, often in excess of 25% annually. These companies can boost the
Fund's performance, but may be subject to greater stock price fluctuations than
core holdings. While the Manager believes investments in the smallest
companies present exceptional opportunities for capital appreciation, stock
prices of such companies may fluctuate widely. Investors should assess their
tolerance for short-term price volatility before investing in this Fund.
The Wasatch Aggressive Equity Fund. The Aggressive Equity Fund is currently
closed to new investors. The Fund's shareholders and certain others may
continue to add to existing accounts or open new accounts. The Fund may resume
sales to new investors in the future. It has no intention to do so at the
present time. The Aggressive Equity Fund's primary investment objective is
long-term growth of capital. Income is a secondary objective to be sought only
when consistent with the primary objective. In pursuit of its investment
objective,
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the Fund will normally invest at least 65% of its total assets in common stocks
of growth companies. Its strategy is to invest in small companies that the
Manager believes possess superior growth potential. The Fund targets two types
of investments, core and momentum holdings. Core holdings are companies that
are well-established and have the potential to grow at least 15% annually and
can anchor the portfolio with steady growth over long periods of time.
Momentum holdings are companies growing aggressively, often in excess of 25%
annually. These companies can boost the Fund's performance, but may be subject
to greater stock price fluctuations than core holdings. Investments in small
companies make this Fund susceptible to greater short-term price fluctuations.
It is best-suited for patient, long-term investors.
The Wasatch Micro-Cap Value Fund. It is presently intended that the Micro-Cap
Value Fund will close to new investors when it reaches $200 million in assets.
The Micro-Cap Value Fund reserves the right to reconsider closing the Fund to
new investors, and once closed, may choose to reopen the Fund although it has
no present intention to do so. The Micro-Cap Value Fund seeks long-term growth
of capital. Income is a secondary objective to be sought only when consistent
with the primary objective. The Fund will normally invest at least 65% of its
total assets in the common stock of companies with a market capitalization of
less than $300 million at the time of initial purchase. It seeks to invest in
the stocks of companies the Manager believes are temporarily undervalued due to
short-term factors, companies that have declined in value and no longer command
an investor following and viable businesses that have not yet become popular.
The Wasatch Growth Fund's primary investment objective is long-term growth of
capital. Income is a secondary objective to be sought only when consistent
with the Fund's primary objective. In pursuit of its investment objectives,
the Fund will normally invest at least 65% of its total assets in common stocks
of growth companies. The Fund is designed for long-term investors. However,
it takes a more conservative approach to investing than is typical of many
funds in this category. Its strategy is to invest in companies the Manager
believes are stable and well-established and have the potential to grow
steadily for long periods of time. Growth may come from market positioning
that takes advantage of favorable demographics, increasing demand for products
and services, lack of competition in the marketplace and other factors.
The Wasatch-Hoisington U.S. Treasury Fund's investment objective is to provide
a real rate of return (i.e. a rate of return that exceeds the rate of
inflation) over a business cycle by investing in U.S. Treasury Securities with
an emphasis on both income and capital appreciation. In pursuit of its
objective, the Fund will invest at least 90% of its total assets 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 Sub-Adviser present only minimal credit risks.
ADDITIONAL INVESTMENT INFORMATION
MONEY MARKET INSTRUMENTS. Each Fund may invest in a variety of money market
instruments for temporary defensive purposes, pending investment, to meet
anticipated redemption requests and/or to retain the flexibility to respond
promptly to changes in market and economic conditions. Commercial paper
represents short-term unsecured promissory notes issued in bearer form by banks
or bank holding companies, corporations and finance companies. Certificates of
deposit are generally negotiable certificates issued against funds deposited in
a commercial bank for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally
drawn by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Fixed time deposits are
bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed time deposits may be withdrawn on demand by the
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investor, but may be subject to early withdrawal penalties that vary depending
upon market conditions and the remaining maturity of the obligation. There are
no contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits. Bank notes and bankers' acceptances rank junior to deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are classified as "other borrowings" on a bank's
balance sheet, while deposit notes and certificates of deposit are classified
as deposits. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
CONVERTIBLE SECURITIES. The Mid-Cap, Micro-Cap, Aggressive Equity, Micro-Cap
Value and Growth Funds may invest in convertible securities. Convertible
securities entitle the holder to receive interest paid or accrued on debt or
the dividend paid on preferred stock until the convertible securities mature or
are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities or
preferred stocks in that they normally provide a stable stream of income with
generally higher yields than those of common stock of the same or similar
issuers. Convertible securities rank senior to common stock in a corporation's
capital structure and therefore generally entail less risk of loss of principal
than the corporation's common stock.
In selecting convertible securities for the Funds, the Manager will consider
among other factors, its evaluation of the creditworthiness of the issuers of
the securities; the interest or dividend income generated by the securities;
the potential for capital appreciation of the securities and the underlying
common stocks; the prices of the securities relative to other comparable
securities and to the underlying common stocks; whether the securities are
entitled to the benefits of sinking funds or other protective conditions;
diversification of a Fund's portfolio as to issuers; and whether the securities
are rated by a rating agency and, if so, the ratings assigned.
The value of convertible securities is a function of their investment value
(determined by yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
their conversion value (their worth, at market value, if converted into the
underlying common stock). The investment value of convertible securities is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline, and by the
credit standing of the issuer and other factors. The conversion value of
convertible securities is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment value,
the price of the convertible securities is governed principally by their
investment value. To the extent the market price of the underlying common
stock approaches or exceeds the conversion price, the price of the convertible
securities will be increasingly influenced by their conversion value. In
addition, convertible securities generally sell at a premium over their
conversion value determined by the extent to which investors place value on the
right to acquire the underlying common stock while holding fixed income
securities.
Capital appreciation for a Fund may result from an improvement in the credit
standing of an issuer whose securities are held in the Fund or from a general
lowering of interest rates, or a combination of both. Conversely, a reduction
in the credit standing of an issuer whose securities are held by a Fund or a
general increase in interest rates may be expected to result in capital
depreciation to the Fund.
FOREIGN SECURITIES. The Mid-Cap, Micro-Cap, Aggressive Equity, Micro-Cap Value
and Growth Funds may invest up to 15% of their total assets at the time of
purchase in foreign securities. (Securities of foreign issuers which are
publicly traded in the United States, either directly or through American
Depositary Receipts, are not subject to this 15% limitation.) Investments in
foreign countries involve certain risks which are not typically associated with
U.S. investments. There may be less publicly available information about
foreign companies comparable to reports and ratings published about U.S.
companies. Foreign companies are not
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generally subject to uniform accounting, auditing, and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
There also may be less government supervision and regulation of foreign stock
exchanges, brokers and listed companies than in the United States.
Foreign stock markets may have substantially less volume than the New York
Stock Exchange, and securities of comparable U.S. companies. Brokerage
commissions and other transaction costs on foreign securities exchanges
generally are higher than in the United States.
Because investment in foreign companies will usually involve currencies of
foreign countries, and because a Fund may temporarily hold funds in bank
deposits in foreign currencies during the course of investment programs, the
value of the assets of a Fund as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency exchange rates and
exchange control regulations, and the Fund may incur costs in connection with
conversion between various currencies. A change in the value of any foreign
currency relative to the U.S. dollar, when the Fund holds that foreign currency
or a security denominated in that foreign currency, will cause a corresponding
change in the dollar value of the Fund's assets denominated or traded in that
country.
UNITED STATES GOVERNMENT SECURITIES. To the extent consistent with their
respective investment objectives, the Funds may invest in a variety of U.S.
Treasury obligations consisting of bills, notes and bonds, which principally
differ only in their interest rates, maturities and time of issuance. The
Funds may also invest in other securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Obligations of certain agencies
and instrumentalities, such as the Government National Mortgage Association
("GNMA"), are supported by the full faith and credit of the U.S. Treasury;
others, such as those of the Export-Import Bank of the United States, are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association ("FNMA"), are supported
by the discretionary authority of the U.S. government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported only by the credit of the
instrumentalities. No assurance can be given that the U.S. government would
provide financial support to its agencies or instrumentalities if it is not
obligated to do so by law. Obligations of the International Bank for
Reconstruction and Development (also known as the World Bank) are supported by
subscribed, but unpaid, commitments of its member countries. There is no
assurance that these commitments will be undertaken or complied with in the
future.
Securities guaranteed as to principal and interest by the U.S. government, its
agencies or instrumentalities are deemed to include: (a) securities for which
the payment of principal and interest is backed by an irrevocable letter of
credit issued by the U.S. government or an agency or instrumentality thereof;
and (b) participations in loans made to foreign governments or their agencies
that are so guaranteed. The secondary market for certain of these
participations is limited. Such participations will therefore be regarded as
illiquid. No assurance can be given that the U.S. government would provide
financial support to its agencies or instrumentalities if it is not obligated
to do so by law.
U.S. TREASURY INFLATION-PROTECTION SECURITIES. Inflation-protection
securities are a new type of marketable book-entry security issued by the
United States Department of Treasury ("Treasury") with a nominal return linked
to the inflation rate in prices. Inflation-protection securities will be
auctioned and issued on a quarterly basis on the 15th of January, April, July,
and October, beginning on January 15, 1997. Initially, they will be issued as
10-year notes, with other maturities added thereafter. The index used to
measure inflation will be the non-seasonally adjusted U.S. City Average All
Items Consumer Price Index for All Urban Consumers ("CPIU").
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The value of the principal will be adjusted for inflation, and every six
months the security will pay interest, which will be an amount equal to a
fixed percentage of the inflation-adjusted value of the principal. The final
payment of principal of the security will not be less than the original par
amount of the security at issuance.
The principal of the inflation-protection security will be indexed to the
non-seasonally adjusted CPIU. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance
is multiplied by the index ratio applicable to that valuation date. The index
ratio for any date is the ratio of the reference Consumer Price Index ("CPI")
applicable to such date to the reference CPI applicable to the original issue
date. Semi-annual coupon interest is determined by multiplying the
inflation-adjusted principal amount by one-half of the stated rate of interest
on each interest payment date.
Inflation-adjusted principal or the original par amount, whichever is larger,
will be paid on the maturity date as specified in the applicable offering
announcement. If at maturity the inflation-adjusted principal is less than
the original principal value of the security, an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the
case of a stripped security, the holder of the stripped principal component
would receive this additional amount. The final interest payment, however,
will be based on the final inflation-adjusted principal value, not the
original par amount.
The reference CPI for the first day of any calendar month is the CPIU for the
third preceding calendar month. (For example, the reference CPI for December
1 is the CPIU reported for September of the same year, which is released in
October.) The reference CPI for any other day of the month is calculated by a
linear interpolation between the reference CPI applicable to the first day of
the month and the reference CPI applicable to the first day of the following
month.
Any revisions the Bureau of Labor Statistics (or successor agency) makes to
any CPIU number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In
the case that the CPIU for a particular month is not reported by the last day
of the following month, the Treasury will announce an index number based on
the last year-over-year CPIU inflation rate available. Any calculations of
the Treasury's payment obligations on the inflation-protection security that
need that month's CPIU number will be based on the index number that the
Treasury has announced. If the CPIU is rebased to a different year, the
Treasury will continue to use the CPIU series based on the base reference
period in effect when the security was first issued as long as that series
continues to be published. If the CPIU is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in
consultation with the Bureau of Labor Statistics (or successor agency),
determine an appropriate substitute index and methodology for linking the
discontinued series with the new price index series. Determinations of the
Secretary of the Treasury in this regard are final.
Inflation-protection securities will be held and transferred in either of two
book-entry systems: the commercial book-entry system (TRADES) and TREASURY
DIRECT. The securities will be maintained and transferred at their original
par amount, i.e., not their inflation-adjusted value. STRIPS components will
be maintained and transferred in TRADES at their value based on their
original par amount of the fully constituted security.
LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Funds may lend their portfolio securities to brokers,
dealers and financial institutions, provided that outstanding loans do not
exceed in the aggregate 33-1/3% of the value of a Fund's total assets and
provided that such loans are callable at any time by a Fund and are at all
times secured by cash or equivalent collateral that is at least equal to the
market value, determined daily, of the loaned securities. The advantage of
such loans is that a Fund continues to
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receive interest and dividends of the loaned securities, while at the same
time earning interest either directly from the borrower or on the collateral
which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by a
Fund at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms determined to
be creditworthy pursuant to procedures approved by the Board of Directors. On
termination of the loan, the borrower is required to return the securities to
a Fund and any gain or loss in the market price during the loan would be borne
by a Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, a Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on a Fund's investment in the
securities which are the subject of the loan. A Fund will pay reasonable
finders, administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase portfolio securities
from financial institutions subject to the seller's agreement to repurchase
them at a mutually agreed upon date and price ("repurchase agreements").
Although the securities subject to a repurchase agreement may bear maturities
exceeding one year, settlement for the repurchase agreement will never be more
than one year after a Fund's acquisition of the securities and normally will
be within a shorter period of time. Securites subject to repurchase
agreements are held either by the Funds' custodian or subcustodian (if any),
or in the Federal Reserve/Treasury Book-Entry System. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement in an amount exceeding the repurchase price
(including accrued interest). Repurchase agreements may be considered loans
to the seller, collateralized by the underlying securities. The risk to a
Fund is limited to the ability of the seller to pay the agreed upon sum on the
repurchase date; in the event of default, the repurchase agreement provides
that a Fund is entitled to sell the underlying collateral. If the value of
the collateral declines after the agreement is entered into, however, and if
the seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, a Fund could incur a
loss of both principal and interest. The Funds' Manager and the sub-adviser
for the Wasatch-Hoisington U.S. Treasury Fund, monitor the value of the
collateral at the time the action is entered into and at all times during the
term of the repurchase agreement. This is done in an effort to determine that
the value of the collateral always equals or exceeds the agreed upon
repurchase price to be paid to the Fund. If the seller were to be subject to
a federal bankruptcy proceeding, the ability of a Fund to liquidate the
collateral could be delayed or impaired because of certain provisions of the
bankruptcy laws.
STRIPPED OBLIGATIONS. The Wasatch-Hoisington U.S. Treasury Fund may purchase
Treasury receipts and other "stripped" securities that evidence ownership in
either the future interest payments or the future principal payments on U.S.
Government obligations. These participations, which may be issued by the U.S.
Government (or a U.S. Government agency or instrumentality) or by private
issuers such as banks and other institutions, are issued at a discount to
their "face value," and may include stripped mortgage-backed securities
("SMBS"). Stripped securities, particularly SMBS, may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors.
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SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage-backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class received all of the
principal. However, in some cases, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying
obligations experience greater than anticipated prepayments of principal the
Fund may fail to fully recoup its initial investment. The market value of the
class consisting entirely of principal payments can be extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest are generally higher than prevailing
market yields on other mortgage-backed obligations because their cash flow
patterns are also volatile and there is a greater risk that the initial
investment will not be fully recouped.
SMBS issued by the U.S. Government (or a U.S. Government agency or
instrumentality) may be considered liquid under guidelines established by the
Board of Directors if they can be disposed of promptly in the ordinary course
of business at a value reasonably close to that used in the calculation of the
Fund's per share net asset value.
Within the past several years, the Treasury Department has facilitated
transfers of ownership of zero coupon securities by accounting separately for
the beneficial ownership of particular interest coupon and principal payments
on Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program was established by the Treasury
Department and is known as "STRIPS" or "Separate Trading of Registered
Interest and Principal of Securities." The Fund may purchase securities
registered in the STRIPS program. Under the STRIPS program, the Fund will be
able to have their beneficial ownership of zero coupon securities recorded
directly in the book-entry record-keeping system in lieu of having to hold
certificates or other evidences of ownership of the underlying U.S. Treasury
Securities.
In addition, the Fund may acquire U.S. Government obligations and their
unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including
"Treasury Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on
Treasury Securities" ("CATS"). The stripped coupons are sold separately from
the underlying principal, which is usually sold at a deep discount because the
buyer receives only the right to receive a future fixed payment on the
security and does not receive any rights to periodic interest (cash) payments.
The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are ostensibly owned by the
bearer or holder), in trust on behalf of the owners. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for Federal tax purposes. The Manager
is unaware of any binding legislative, judicial or administrative authority on
this issue.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for the
Funds is calculated by dividing the lesser of purchases or sales of portfolio
investments for the reporting period by the monthly average value of the
portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements
which enable the Funds to receive favorable tax treatment. The Funds are not
restricted by policy with regard to portfolio turnover and will make changes
in their investment portfolios from time to time as business and economic
conditions as well as market prices may dictate. The current portfolio
turnover rates for the Mid-Cap, Micro-Cap, Aggressive Equity, Growth and
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Wasatch Hoisington U.S. Treasury Funds are set forth in the Prospectus. It is
anticipated that the portfolio turnover rate for the Micro-Cap Value Fund
generally will not exceed 100%. However, this should not be considered as a
limiting factor.
DESCRIPTION OF CORPORATE BOND RATINGS
Each Fund may invest in corporate bonds that are rated, at the time of
purchase, in the four highest categories by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P") or other nationally
recognized rating agencies or unrated securities deemed by the Manager to be
of comparable quality. The following list describes the various ratings of
corporate bonds:
Description of corporate bond ratings of Moody's:
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa-Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A-Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such Bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Description of corporate bond ratings of S&P:
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
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BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than in higher rated categories.
INVESTMENT RESTRICTIONS
The Company has adopted the following restrictions and policies relating to
the investment of assets of the Funds and their activities. These are
fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding voting shares of each Fund affected
(which for this purpose and under the Investment Company Act of 1940 means the
lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). A change in policy affecting only one Fund may be
effected with the approval of a majority of the outstanding shares of such
Fund.
The Mid-Cap Fund, Micro-Cap Fund, Aggressive Equity Fund, Micro-Cap Value
Fund, Growth Fund and Wasatch Hoisington U.S. Treasury Fund may not:
1. Purchase or sell real estate, provided that the Funds may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein. Each of
the Funds has no current intention to invest in securities of this
nature.
2. Purchase or sell physical commodities (including by way of example
and not by way of limitation, grains, oilseeds, livestock, meat, food,
fiber, metals, petroleum, petroleum-based products or natural gas) or
futures or options contracts with respect to physical commodities.
This restriction shall not restrict the Funds from purchasing or
selling any financial contracts or instruments which may be deemed
commodities (including, by way of example and not by way of limitation,
options, futures, and options on futures with respect, in each case, to
interest rates, currencies, stock indices, bond indices or interest rate
indices) or any security which is collateralized or otherwise backed by
physical commodities.
3. Purchase any security on margin, except that the Funds may obtain
such short-term credit as may be necessary for the clearance of
transactions.
4. Make short sales of securities.
5. Make loans to other persons, except that they may lend portfolio
securities representing up to one-third of the value of their total
assets. (The Funds, however, may purchase and hold debt instruments and
enter into repurchase agreements in accordance with their investment
objectives and policies.)
6. Issue any senior securities (as defined in the 1940 Act) other than as
set forth in restriction number 7 below.
7. Borrow money, except for temporary purposes. The amount of such
borrowing may not exceed 10% of each Fund's total assets. The Funds
will not borrow money for leverage purposes. For the purpose of this
restriction, the use of options and futures transactions shall not be
deemed the borrowing of money. (As a non-fundamental policy, no Fund
will make additional investments while its borrowing exceeds 5% of
total assets.)
10
<PAGE> 61
8. Underwrite securities of other issuers except insofar as the Funds
may be deemed an underwriter under the Securities Act of 1933 in
selling portfolio securities.
9. Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any
particular industry.
In addition, the Wasatch-Hoisington U.S. Treasury Fund may not:
a. As to 75% of the Fund's total assets, invest in the securities
of any one issuer (other than the United States Government or
government agencies or instrumentalities) if immediately after and as
a result of such investment, the value of the holdings of the Fund in
the securities of such issuer exceeds 5% of the Fund's total assets,
taken at market value.
b. As to 75% of the Fund's total assets, invest in the securities
of any one issuer (other than the United States Government or
government agencies or instrumentalities) if immediately after and as
a result of such investment, the Fund owns more than 10% of the
outstanding voting securities, or more than 10% of any class of
securities of such issuer.
The following restrictions are non-fundamental and may be changed by the
Company's Board of Directors without shareholder vote.
The Mid-Cap Fund, Micro-Cap Fund, Aggressive Equity Fund, Micro-Cap Value
Fund, Growth Fund and Wasatch-Hoisington U. S. Treasury Fund will not:
1. Make investments for the purpose of exercising control or
management.
2. Invest more than 5% of its net assets in other investment companies.
3. Invest more than 15% of its net assets in all forms of illiquid
investments, as determined pursuant to applicable Securities and
Exchange Commission rules and interpretations.
4. Purchase or sell interests in oil, gas or other mineral
exploration or development programs, although it may invest in the
securities of issuers which invest in or sponsor such programs.
5. Invest more than 5% of its total assets (taken at market value at the
time of each investment) in "Special Situations," i.e., companies in the
process of reorganization or buy-out, except the Micro-Cap Value Fund
may invest up to 10% of its net assets in "Special Situations."
6. Invest more than 10% of its net assets in the securities of new
issuers, who with predecessors have operating records of three (3)
years or less.
Any investment restriction or limitation, fundamental or otherwise, appearing
in the Prospectus or Statement of Additional Information, which involves a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after an
acquisition of securities or utilization of assets, and such excess results
therefrom.
11
<PAGE> 62
MANAGEMENT OF THE COMPANY
The Directors and executive officers of the Funds and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Executive Officer and Director is 68
South Main Street, Salt Lake City, Utah 84101. Wasatch Advisors, Inc.
retains proprietary rights to the Company name.
*Samuel S. Stewart, Jr., Ph.D., CFA - President and Chairman of the Board
President and Chairman of the Board of the Company; President,
Chairman of the Board and Director of Research for the Manager since
1975; Professor of Finance at the University of Utah since 1975.
Age 55.
*Roy S. Jespersen, MBA - Vice President and Director
Vice President and Director of the Company; Vice President and
Portfolio Manager for the Manager since 1983. Age 54.
*Venice F. Edwards, CFA - Secretary/Treasurer
Secretary/Treasurer of the Company; Compliance Officer for the
Manager since 1995; Portfolio Manager for the Manager since 1983.
Age 47.
*Jeff S. Cardon, CFA - Vice President and Director
Vice President and Director of the Company; Vice President and
Director of the Manager since 1985; Security Analyst for the Manager
since 1980. Age 40.
James U. Jensen - Director
NPS Pharmaceuticals, Inc.
420 Chipeta Way
Salt Lake City, Utah 84108
Director of the Company; Vice President of Corporate Development and
Legal Affairs, NPS Pharmaceuticals, Inc.; previously Chairman and a
partner at Woodbury, Jensen, Kesler & Swinton, P.C. from 1986 to
1991. Age 53.
William R. Swinyard - Director
Management Office
660 Tanner Building
Brigham Young University
Provo, Utah 84602
Director of the Company; Professor of Business Management, Brigham
Young University since 1985; Vice President for Struman and
Associates, Inc., a management consulting firm since 1983. Age 57.
* Interested person, as defined in the Investment Company Act of 1940, of
the Company.
The Board of Directors has appointed the officers of the Company to be
responsible for the overall management and day to day operations of the
Company's business affairs between board meetings.
12
<PAGE> 63
The Funds' standard method of compensating Directors is to pay each
disinterested Director an annual fee of $6,000 for services rendered,
including attending meetings of the Board of Directors. Mr. Jensen was paid
an additional $1,500 for attending a Directors' conference. The Funds also
may reimburse its disinterested Directors for travel expenses incurred in
order to attend meetings of the Board of Directors. Officers serve in that
capacity without compensation from the Company. The table below sets forth
the compensation paid to the Company's Directors and Officers during the
fiscal year ended September 30, 1997 (exclusive of out-of-pocket expenses
reimbursed).
COMPENSATION TABLE
<TABLE>
<CAPTION>
Aggregate Total Compensation
Name of Person, Compensation From From Company Paid
Position Company to Directors
<S> <C> <C>
Samuel S. Stewart, $0 $0
Jr. President and
Chairman of the
Board
Roy S. Jespersen, $0 $0
Vice President and
Director
Venice Edwards $0 $0
Secretary/Treasurer
Jeff S. Cardon, $0 $0
Vice President
and Director
James U. Jensen $7,500 $7,500
Director
William R. Swinyard $6,000 $6,000
Director
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 31, 1997, the Funds were aware that the following persons or
entities owned a controlling interest (ownership of greater than 25%) or owned
of record 5% or more of the outstanding shares of each of the Funds.
Shareholders with a controlling interest could effect the outcome of proxy
voting or the direction of management of the Company.
13
<PAGE> 64
SERIES A - WASATCH AGGRESSIVE EQUITY FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
19%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY, 10281-1003, 9%.
SERIES B - WASATCH GROWTH FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
31%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY, 10281-1003, 14%; Smith Barney, Inc., 388
Greenwich Street, New York, NY, 10013, 14%.
SERIES C - WASATCH-HOISINGTON U.S. TREASURY FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
24%; Firstar Trust Co., Custodian for Ray R. Christensen IRA Rollover, 175 S.
West Temple, #510, Salt Lake City, Utah, 84101, 7%; Lee G. Cantwell, 58 N. 470
E., Smithfield, UT, 84335, 8%.
SERIES D - WASATCH MID-CAP FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
30%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY, 10281-1003, 12%.
SERIES E - WASATCH MICRO-CAP FUND
Charles Schwab & Co., Inc.*, 101 Montgomery Street, San Francisco, CA, 94104,
28%; National Financial Services Corp.*, 200 Liberty Street, One World
Financial Center, New York, NY, 10281-1003, 14%.
As of October 31, 1997 the directors and officers as a group owned less than
1% of the outstanding shares of each Fund except the Wasatch-Hoisington U.S.
Treasury Fund. Mr. Stewart, whose address is that of the Manager, owned 5% of
the Wasatch-Hoisington U.S. Treasury Fund.
* Shareholders of record, not beneficial owners.
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, Wasatch Advisors, Inc. is the Company's
manager and investment advisor, providing services under the advisory and
service contracts. The Manager was organized in September 1975, has been in
the business of investment management since November 1975, and currently has
total assets under management including the assets of the Funds, of
approximately $984 million as of October 31, 1997.
The principal executive officers and directors of the Manager are Samuel S.
Stewart, Jr., Ph.D., President and Director; Roy S. Jespersen, Vice President
and Director; Mark E. Bailey, Vice President and Director; Jeff S. Cardon,
Vice President and Director; Jeff H. Collings, Secretary/Treasurer; Karey
Barker, Director; Robert Gardiner, Director and James Milligan, Director. Dr.
Samuel S. Stewart, Jr. is the only owner of the Manager who owns more than 25%
of the Manager's outstanding equity and is deemed to control the Manager.
Under Advisory and Service Contracts, the Aggressive Equity and Growth Funds
pay the Manager a monthly fee computed on average daily net assets of each
Fund at the annual rate of 1.0%, the Micro-Cap Value Fund
14
<PAGE> 65
pays the Manager at the annual rate of 1.5%, the Micro-Cap Fund pays the
Manager at the annual rate of 2.0%, and the Mid-Cap Fund pays the Manager at
an annual rate of 1.25%. These fees are higher than those paid by other
investment companies. The Wasatch-Hoisington U.S. Treasury Fund pays the
Manager a monthly fee computed on average daily net assets of the Fund at the
annual rate of 0.50%. The management fees are computed and accrued daily and
are payable monthly.
The Manager provides an investment program for, and carries out the investment
policy and manages the portfolio assets of, each Fund. The Manager is
authorized, subject to the control of the Board of Directors of the Company,
to determine the selection, quantities and time to buy or sell securities for
each Fund. In addition to providing investment services, the Manager pays for
office space and facilities for the Company.
Among other expenses, the Funds pay taxes (if any), brokerage commissions on
portfolio transactions, expenses of issuance and redemption of shares, charges
of custodians and dividend disbursing agents, proxy material, auditing and
legal expenses, certain expenses of registering and qualifying shares for
sale, fees of directors who are not "interested persons" of the Manager, costs
of typesetting, printing and mailing the Prospectus, Statement of Additional
Information and periodic reports to existing shareholders, and any other
charges or fees not specifically enumerated.
The Manager has voluntarily agreed to limit until September 30, 1998
Aggressive Equity Fund and Growth Fund expenses to 1.5%, Micro-Cap Fund
expenses to 2.50%, Mid-Cap Fund expenses to 1.75%, Micro-Cap Value Fund
expenses to 1.95%, and Wasatch-Hoisington U.S. Treasury Fund expenses to 0.75%
of average net assets calculated on a daily basis and will pay all expenses
excluding interest, taxes, extraordinary expenses, brokerage commissions and
transaction costs in excess of such limitation. The Manager may rescind these
limitations on expenses at any time and in the event of rescission the terms
of the Advisory and Service Contract would govern.
For the fiscal years ended September 30, 1997, 1996, and 1995, the Manager
accrued the following management fees and waived a portion of its management
fees in the following amounts (the Micro-Cap Value Fund commenced operations
on December 17, 1997):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Mid-Cap Fund
Gross Management Fees $1,060,550 $1,861,206 $237,215
Waived Management Fees 123,680 90,368 35,750
Micro-Cap Fund
Gross Management Fees $1,774,510 $1,313,728 $52,691
Waived Management Fees 68,760 113,106 23,438
Aggressive Equity Fund
Gross Management Fees $1,934,279 $2,861,337 $1,446,523
Waived Management Fees 81,327 0 0
Growth Fund
Gross Management Fees $954,694 $839,865 $195,697
Waived Management Fees 0 10,572 16,636
Wasatch-Hoisington U.S. Treasury Fund
Gross Management Fees $50,068 $27,810 $16,871
Waived Management Fees 47,278 41,168 19,946
</TABLE>
15
<PAGE> 66
GENERAL INFORMATION
Administrator
Pursuant to Adminstration and Fund Accounting Agreements (the "Administration
Agreements"), Sunstone Financial Group, Inc. (the "Administrator"), 207 East
Buffalo Street, Suite 400, Milwaukee, WI 53202-5712, calculates daily net
asset values of each Fund, oversees the Funds' Custodian and Transfer Agent,
prepares and files all federal and state tax returns and required tax filings
(other than those required to be made by the Funds' Custodian and Transfer
Agent), oversees the Funds' insurance relationships, participates in the
preparation of the Funds' registration statement, proxy statements and
reports, prepares compliance filings pursuant to state securities laws,
compiles data for and prepares notices to the Securities and Exchange
Commission, prepares financial statements for the annual and semi-annual
reports to the Securities and Exchange Commission and current investors,
monitors the Funds' expense accounts, monitors the Funds' status as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), monitors compliance with the Funds'
investment policies and restrictions and generally assists in the Funds'
administrative operations. The Administrator, at its own expense, and without
reimbursement from the Funds, furnishes office space and all necessary office
facilities, equipment, supplies and clerical and executive personnel for
performing the services required to be performed by it under the
Administration Agreements. For the foregoing, the Administrator receives a
fee on the combined value of the Funds computed daily and payable monthly, at
the annual rate of twenty-eight one-hundredths of one percent (0.28%) on the
first $50 million of the average daily net assets, eighteen one-hundredths of
one percent (0.18%) on the next $50 million of the average daily net assets
and thirteen one-hundredths of one percent (0.13%) on the average daily net
assets in excess of $100 million, subject to the following minimum fees:
Aggressive Equity Fund ($75,000); Mid-Cap Fund ($75,000); Growth Fund
($40,000); Micro-Cap Fund ($17,500); and Wasatch-Hoisington U.S. Treasury Fund
($4,000).
Custodian and Transfer Agent
UMB Bank, n.a. serves as the Funds' Custodian. The Custodian is responsible
for, among other things, safeguarding and controlling the Company's cash and
securities. The Funds pay a monthly fee at the annual rate of .75 basis
points on combined net assets up to $500,000,000, plus .50 basis points on the
combined net assets in excess of $500,000,000. Sunstone Investor Services,
LLC, 207 East Buffalo Street, Suite 315, Milwaukee, Wisconsin 53202-2172, is
the Company's Transfer Agent. Sunstone Investor Services, LLC is an affiliate
of Sunstone Financial Group, Inc., the Funds' Administrator. The Transfer
Agent keeps records of all shareholder accounts and transactions. Each Fund
pays Sunstone Investor Services, LLC a Transfer Agent fee based on the number
of shareholder accounts subject to a minimum annual fee.
The Company, on behalf of each of the Funds, has also entered into service
agreements with various brokerage firms pursuant to which the brokers provide
certain administrative services with respect to their customers who are
beneficial owners of shares of the Funds. Pursuant to these service
agreements, the Funds compensate the brokers for the administrative services
provided which compensation is based on the aggregate assets of their
customers that are invested in the Funds.
Legal Counsel
Michael J. Radmer, Dorsey & Whitney, LLP, 220 South Sixth Street, Minneapolis,
Minnesota 55402-1498, acts as legal counsel to the Company and reviews certain
legal matters for the Company in connection with the shares offered by the
Prospectus.
16
<PAGE> 67
Independent Auditors
Arthur Andersen LLP, 100 East Wisconsin Avenue, Suite 1900, Milwaukee, WI
53202-4107 are the Company's independent Certified Public Accountants. In
this capacity the firm is responsible for auditing the financial statements of
the Company and reporting thereon.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities for the
Company and for the placement of its portfolio business and the negotiation of
the commissions paid on such transactions. It is the policy of the Manager to
seek the best security price available with respect to each transaction.
Except to the extent that the Company may pay higher brokerage commissions for
brokerage and research services (as described below) on a portion of its
transactions executed on securities exchanges, the Manager seeks the best
security price at the most favorable commission rate. In selecting dealers
and in negotiating commissions, the Manager considers the firm's reliability,
the quality of its execution services on a continuing basis and its financial
condition. When more than one firm are believed to meet these criteria,
preference may be given to firms which also provide research services to the
Company or the Manager.
Pursuant to provisions of the investment advisory agreements, the Company's
Board of Directors has authorized the Manager to cause the Company to incur
brokerage commissions in an amount higher than the lowest available rate in
return for the opinion that the continued receipt of supplemental investment
research services from dealers is essential to its provision of high quality
portfolio management services to the Company. The Manager undertakes that
such higher commissions will not be paid by the Company unless (a) the Manager
determines in good faith that the amount is reasonable in relation to the
services in terms of the particular transaction or in terms of the Manager's
overall responsibilities with respect to the accounts as to which it exercises
investment discretion, (b) such payment is made in compliance with the
provisions of Section 28(e) of the Securities and Exchange Act of 1934 and
other applicable state and federal laws, and (c) in the opinion of the Manager
the total commissions paid by the Company are reasonable in relation to the
expected benefits to the Company over the long-term. The investment advisory
fees paid by the Funds under the investment advisory agreements are not
reduced as a result of the Manager's receipt of research services. Consistent
with both the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and such policies as the Board of Directors may determine, and
subject to seeking best execution, the Manager may consider sales of shares of
the Company as a factor in the selection of dealers to execute portfolio
transactions for the Company.
The Manager places portfolio transactions for other advisory accounts.
Research services furnished by firms through which the Company effects its
securities transactions may be used by the Manager in servicing all of its
accounts; not all of such services may be used by the Manager in connection
with the Company. In the opinion of the Manager, the benefits from research
services to each of the accounts (including the Company) managed by the
Manager cannot be measured separately. Because the volume and nature of the
trading activities of the accounts are not uniform, the amount of commissions
in excess of the lowest available rate paid by each account for brokerage and
research services will vary. However, in the opinion of the Manager, such
costs to the Company will not be disproportionate to the benefits received by
the Company on a continuing basis.
The Manager's brokerage practices are monitored on at least an annual basis by
the Board of Directors including the disinterested persons (as defined in the
Investment Company Act of 1940) of the Manager.
17
<PAGE> 68
During the years ended September 30, 1997, 1996 and 1995, the Company paid the
following brokerage commissions (the Micro-Cap Value Fund commenced operations
on December 17, 1997):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Mid-Cap Fund $139,068 $145,703 $31,846
Micro-Cap Fund 102,691 35,506 15,947
Aggressive Equity Fund 181,019 280,635 232,209
Growth Fund 136,424 99,242 65,361
Wasatch-Hoisington U.S. Treasury Fund -0- 700 774
</TABLE>
The changes in brokerage commissions are partially the result of changes in
the turnover rates of the Funds and changes in the amount of assets under
management. There are no stated markups on the principal transactions of the
Company. The purchases are executed at the ask price net and the sales are
executed at the bid price net.
CAPITAL STOCK AND OTHER SECURITIES
The Company is authorized to issue shares in separate series, or "Funds."
Seven such Funds have been established:
Series A Common - Aggressive Equity Fund
Series B Common - Growth Fund
Series C Common - Wasatch-Hoisington U.S. Treasury Fund
Series D Common - Mid-Cap Fund
Series E Common - Micro-Cap Fund
Series F Common - World Wide Fund
Series G Common - Micro-Cap Value Fund
See "Organization of the Company" in the Prospectus, for a discussion of the
relative rights and characteristics of the shares.
To illustrate the method of computing the offering price of Company shares,
the offering price per share on September 30, 1997 was as follows (the
Micro-Cap Value Fund commenced operations on December 17, 1997):
<TABLE>
<CAPTION>
Mid-Cap Micro-Cap Aggressive Equity Growth U.S. Treasury
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Net Assets
divided by $77,242,736 $157,934,325 $188,965,085 $135,437,191 $11,205,045
Shares Outstanding 3,534,975 36,837,354 6,356,637 6,062,835 989,913
equals
Net Asset Value Per Share $21.85 $4.29 $29.73 $22.34 $11.32
(Offering & Redemption Price)
</TABLE>
18
<PAGE> 69
PURCHASE, REDEMPTION AND PRICING OF SECURITIES BEING OFFERED
The procedures to be followed in the purchase and redemption of shares as well
as the method of determining the net asset value are fully disclosed in the
Prospectus. As indicated in the Prospectus, the net asset value is calculated
each day the New York Stock Exchange is open for trading. The New York Stock
Exchange is closed on the following national holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Investors may exchange their shares of a Fund for the Northern U.S. Government
Money Market Fund as provided in the Prospectus. Sunstone, in its capacity as
Transfer Agent for the Funds, receives a service fee from the U.S. Government
Money Market Fund Fund at the annual rate of 0.25% of 1% of the average daily
net asset value of the shares exchanged from the Funds into the U.S.
Government Money Market Fund Fund.
The Funds have filed a notification of election under Rule 18f-1 of the
Investment Company Act committing itself to pay in cash all requests for
redemption by any shareholder of record, limited in amount with respect to
each shareholder of record during any 90-day period to the lesser of :
(1) $250,000 or
(2) 1% of the net asset value of each Fund at the beginning of such
election period.
The Funds intend to also pay redemption proceeds in excess of such lesser
amount in cash, but reserve the right to pay such excess amount in kind, if it
is deemed in the best interest of the Funds to do so. In making a redemption
in kind, the Funds reserve the right to make a selection from each portfolio
holding of a number of shares which will reflect the portfolio makeup and the
value will approximate as closely as possible the value of the Funds' shares
being redeemed; any shortfall will be made up in cash. Investors receiving an
in kind distribution are advised that they will likely incur a brokerage
charge on the sale of such securities through a broker. The values of
portfolio securities distributed in kind will be the values used for the
purpose of calculating the per share net asset value used in valuing the
Funds' shares tendered for redemption.
TAX STATUS
Reference is made to "Dividends, Capital Gain Distributions and Taxes" in the
Prospectus.
Each Fund will be treated as a separate entity for Federal income tax purposes
since The Tax Reform Act of 1986 requires that all portfolios of a series fund
be treated as separate taxpayers. Each Fund intends to qualify each year as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). By so qualifying, each Fund will not be subject to
Federal income taxes to the extent that it distributes its net investment
income and realized net capital gains.
For Federal income tax purposes, distributions paid from net investment income
and from any realized net short-term capital gain are taxable to shareholders
as ordinary income, whether received in cash or in additional shares.
Dividends are taxable as ordinary income, whereas capital gains distributions
are taxable as long-term capital gains. The 70% dividends-received deduction
for corporations will apply only to the proportionate share of the dividend
attributable to dividends received by the Fund from domestic corporations.
19
<PAGE> 70
Any dividend or capital gain distribution paid shortly after a purchase of
shares of the Fund will have the effect of reducing the per share net asset
value of such shares by the amount of the dividend or distribution.
Furthermore, even if the net asset value of the shares of the Fund immediately
after a dividend or distribution is less than the cost of such shares to the
investor, the dividend or distribution will be taxable to the investor.
Redemption of shares will generally result in a capital gain or loss for
income tax purposes. Such capital gain or loss will be long-term or
short-term, depending upon the holding period. However, if a loss is realized
on shares held for six months or less, and the investor received a capital
gain distribution during that period, then such loss is treated as a long-term
capital loss to the extent of the capital gain distribution received.
Investors may also be subject to state and local taxes.
The Fund is required to withhold federal income tax at a rate of 31% ("backup
withholding") from dividend payments and redemption and exchange proceeds if
an investor fails to furnish the Fund with his social security number or other
tax identification number or fails to certify under penalty of perjury that
such number is correct or that he is not subject to backup withholding due to
the underreporting of income. The certification form is included as part of
the share purchase application and should be completed when the account is
opened.
Under the Code, each Fund will be subject to a 4% excise tax on a portion of
its undistributed income if it fails to meet certain distribution requirements
by the end of the calendar year. Each Fund intends to make distributions in a
timely manner and accordingly does not expect to be subject to the excise tax.
Under the Code, any dividend declared by a regulated investment company in
December of any calendar year and payable to shareholders of record on a
specified date in such month shall be deemed to have been received by each
shareholder on such date, and to have been paid by such company on such date
if such dividend is actually paid by the company before February 1 of the
following calendar year. The Company intends to pay all dividends during the
month of December so that they will not be impacted by this rule.
This section is not intended to be a full discussion of present or proposed
federal income tax laws and the effect of such laws on an investor. Investors
are urged to consult with their respective tax advisers for a complete review
of the tax ramifications of an investment in the Fund.
CALCULATION OF PERFORMANCE DATA
The Funds may occasionally advertise performance data such as total return or
yield. To facilitate the comparability of these statistics from one mutual
fund to another, the Securities and Exchange Commission has developed
guidelines for the calculation of these statistics. The Funds will calculate
their performance data in accordance with these guidelines. The total return
for a mutual fund represents the average annual compounded rate of return over
a specified period of time that would equate the initial amount invested to
the value of the investment at the end of the period of time. This is done by
dividing the ending redeemable value of a hypothetical $1,000 initial payment
by $1,000 and raising the quotient to a power equal to one divided by the
number of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as
follows:
20
<PAGE> 71
ERV 1/n
T=[(------)-1]
P
Where: T= average annual total return.
ERV= ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P= hypothetical initial payment of $1,000.
n= period covered by the computation, expressed in terms of
years.
The Funds compute their aggregate total returns by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment.
The formula for calculating aggregate total return is as follows:
ERV
T=[(------)-1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gains
distributions on the reinvestment dates during the period. The ending
redeemable value is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the
end of the period covered by the computations.
A yield quotation is based upon a 30-day period and is computed by
dividing the net investment income per share earned during a 30-day (or one
month) period by the net asset value per share on the last day of the period
and annualizing the result on a semi-annual basis by adding one to the
quotient, raising the sum to the power of six, subtracting one from the result
and then doubling the difference. A Fund's net investment income per share
earned during the period is based on the average daily number of shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements.
This calculation can be expressed as follows:
a-b
Yield=2[(----+1)6 -1]
cd
Where: a= dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of Units outstanding during the
period that were entitled to receive dividends.
d= net asset value per share on the last day of the period.
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<PAGE> 72
FINANCIAL STATEMENTS
The Funds' financial statements and notes thereto appearing in the September
30, 1997 Annual Report and the report thereon of Arthur Andersen LLP,
independent certified public accountants, appearing therein, are incorporated
by reference in this Statement of Additional Information. The Funds will
furnish, without charge, a copy of such Annual Report upon request. Requests
may be made by calling the Funds at 1 (800)551-1700, or writing to Wasatch
Funds, 207 East Buffalo Street, Suite 315, Milwaukee, Wisconsin 53202-5712.
22
