-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QINUzrg8YwvhBugiJRxLV4sy0MO/xzgObkUsqVAvtVgVcZxjZzxigx8hPCVMPXD5 urhMsS4LyPNgFzoDod6M7A== 0000950124-97-006269.txt : 19971127 0000950124-97-006269.hdr.sgml : 19971127 ACCESSION NUMBER: 0000950124-97-006269 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19971126 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASATCH ADVISORS FUNDS INC CENTRAL INDEX KEY: 0000806633 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: UT FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 033-10451 FILM NUMBER: 97729804 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 811-04920 FILM NUMBER: 97729775 BUSINESS ADDRESS: STREET 1: 68 S MAIN ST STE 400 CITY: SALT LAKE CITY STATE: UT ZIP: 84101 BUSINESS PHONE: 8015330777 485APOS 1 485APOS 1 As filed with the Securities and Exchange Commission on November 26, 1997 Securities Act Registration No. 33-10451 Investment Company Act Registration No. 811-4920 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________ FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X Post-Effective Amendment No. 17 X and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X Amendment No. 19 X (Check appropriate box or boxes) WASATCH FUNDS, INC. (Exact Name of Registrant as Specified in Charter) 68 SOUTH MAIN STREET SUITE 400 SALT LAKE CITY, UTAH 84101 (Address of Principal Executive Offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 708-7228 SAMUEL S. STEWART, JR. Copy to: Wasatch Funds, Inc. Michael J. Radmer, Esq. 68 South Main Street, Suite 400 Dorsey & Whitney LLP Salt Lake City, Utah 84101 220 South Sixth Street (Name and Address of Agent for Service) Minneapolis, Minnesota 55402-1498
It is proposed that this filing will become effective: ( ) immediately upon filing pursuant to paragraph (b) ( ) pursuant to paragraph (b) ( ) 60 days after filing pursuant to paragraph (a)(i) (X) on January 30, 1998 pursuant to paragraph (a)(i) ( ) 75 days after filing pursuant to paragraph (a)(ii) ( ) on (date) pursuant to paragraph (a)(ii) of Rule 485. If appropriate, check the following box: ( ) this Post-Effective Amendment designates a new effective date for a previously filed Post-Effective Amendment. Pursuant to Rule 414 under the Securities Act of 1933, Wasatch Funds, Inc., a Minnesota corporation, as successor issuer to Wasatch Funds, Inc., a Utah corporation, hereby expressly adopts the registration statement on Form N-1A, together with all amendments thereto, of Wasatch Funds, Inc., a Utah corporation, as said successor issuer's own registration statement for all purposes of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940. - -------------------------------------------------------------------------------- 2 WASATCH FUNDS CROSS REFERENCE SHEET (Pursuant to Rule 481 showing the location in the Prospectus and the Statement of Additional Information of the responses to the Items of Parts A and B of Form N-1A).
Caption or Subheading in Prospectus Item No. on Form N-1A or Statement of Additional Information - --------------------- -------------------------------------- PART A - INFORMATION REQUIRED IN PROSPECTUS 1. Cover Page Cover Page 2. Synopsis Annual Fund Operating Expenses 3. Condensed Financial Information Financial Highlights 4. General Description of Registrant Management of the Company; Investment Objective, Policies and Risks 5. Management of the Fund Management of the Company 6. Capital Stock and Other Securities Organization of the Company; Net Asset Value and Days of Operation; Dividends, Capital Gains, Distributions and Taxes 7. Purchase of Securities Being Offered Purchase of Shares; Exchange Privilege; Retirement Plans; Net Asset Value and Days of Operation 8. Redemption or Repurchase Redemption of Shares; Exchange Privilege; Net Asset Value and Days of Operation 9. Legal Proceedings * PART B - INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION 10. Cover Page Cover Page 11. Table of Contents Table of Contents 12. General Information and History General Information and History 13. Investment Objectives and Policies Investment Objectives and Policies; Additional Investment Information 14. Management of the Fund Management of the Company; Principal Holders of Securities 15. Control Persons and Principal Holders of Principal Holders of Securities Securities
3 16. Investment Advisory and Other Services Investment Advisory and Other Services 17. Brokerage Allocation and Other Policies Brokerage Allocation and Other Policies 18. Capital Stock and Other Securities Capital Stock and Other Securities 19. Purchase, Redemption and Pricing of Purchase, Redemption and Pricing of Securities Being Offered Securities Being Offered 20. Tax Status Tax Status 21. Underwriters * 22. Calculations of Yield Quotations of Money * Market Funds 23. Financial Statements *
- -------------- * Answer negative or inapplicable. * * Complete answer to the Item is contained in the Prospectus. 4 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 14 The Funds' Investment Process and Objectives 14 General Policies, Investment Techniques and Risks 17 Risk Factors that may Affect the Wasatch Equity Funds 18 Additional Policies and Risk Factors that may Affect the Wasatch-Hoisington U.S. Treasury Fund 20 Shareholder's Guide 22 To Reach Wasatch Funds by Phone 22 To Open a New Account 22 Types of Account Ownership 22 To Purchase Shares 23 Automatic Investment Plan 24 Who Can Purchase Shares in the Aggressive Equity Fund 24 To Exchange Shares 25 To Redeem Shares 26 Instructions for Written Requests 28 Signature Guarantee 28 How Fund Shares are Priced 29 Shareholder Services and Account Policies 29 Shareholder Reports 29 Account Statements 29 Share Certificates 30 Involuntary Redemption 30 Telephone Transactions 30 Registration Changes 30 Address Changes 31 Management of Wasatch Funds 31 Investment Personnel 31 Management Fees, Expenses and Expense Limitations 33 Additional Service Providers 34 Organization of Wasatch Funds 34 Dividends, Capital Gains Distributions and Taxes 35 Guide to Understanding Fund Performance 36 Glossary of Investing Terms 38 Explanation of Rating Categories 41 Prospectus 5 [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 00 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 6 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 00. 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 00. 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 7 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-ADVISER: 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 00 - 00 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 8 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 8, 1997)
Mid-Cap Micro-Cap Aggressive Micro-Cap Growth U.S. Treasury Fund Fund Equity Fund Value Fund Fund Fund - -------------------------------------------------------------------------------------------------------------------------------- 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%
(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.
1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------------------------------- 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
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 9 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 8, 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 0. Financial Highlights Guide This section is designed to help you better understand the information presented in the Financial Highlights tables which begin on page 0. 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. 10 MID-CAP FUND-FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------
Year ended September 30, 1997 1996 1995 - ------------------------------------------------------------------------------- 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
(1) Commencement of operations. (2) Not annualized for periods less than a year. (3) Net of reimbursements by adviser. Absent reimbursement of expenses by adviser, 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 11
MID-CAP FUND--FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- Aug. 16, 1992(1) Year ended September 30, through 1994 1993 Sept. 30, 1992 - -------------------------------------------------------------------------------- $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
Prospectus 7 12
MICRO-CAP FUND--Financial Highlights - -------------------------------------------------------------------------------- Year ended September 30 June 19, 1995(1) Year ended September 30, through 1997 1996 September 30, 1995 - -------------------------------------------------------------------------------- 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
(1) Commencement of operations. (2) Not annualized for periods less than a year. (3) Net of reimbursements by adviser. Absent reimbursement of expenses by adviser, 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 13 (This page intentionally left blank.) Prospectus 9 14 AGGRESSIVE EQUITY FUND--Financial Highlights
- ------------------------------------------------------------------------------- Year ended September 30, 1997 1996 1995 1994 - ------------------------------------------------------------------------------- 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 return1 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), (2) 1.50% 1.50% 1.47% 1.50% Ratio of net income (loss) to average net assets(2) (0.39)% (0.65)% (0.37)% (0.67)% Portfolio turnover rate 48% 73% 29% 64% Average commission rate paid on portfolio investment transactions(3) $0.05 $0.05 N/A N/A
(1) Not annualized for periods less than a year. (2) Net of reimbursements by adviser. Absent reimbursement of expenses by adviser, except for the years ended September 30, 1996 and 1995 where there were no reimbursements, the ratio of expenses to average net assets for the years ending September 30, 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. (3) Disclosure required by the Securities and Exchange Commission beginning 1996. 10 Prospectus 15
AGGRESSIVE EQUITY FUND--Financial Highlights - ------------------------------------------------------------------------------- Year ended September 30, 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------- $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
Prospectus 11 16 GROWTH FUND--Financial Highlights
- ------------------------------------------------------------------------------- Year ended September 30, 1997 1996 1995 1994 - ------------------------------------------------------------------------------- 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 (1) 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), (2) 1.50% 1.50% 1.50% 1.50% Ratio of net income (loss) to average net assets (2) 0.44% 0.40% 0.29% (0.51)% Portfolio turnover rate 81% 62% 88% 163% Average commission rate paid on portfolio investment transactions (3) $0.05 $0.05 N/A N/A
(1) Not annualized for periods less than a year. (2) Net of reimbursements by adviser. Absent reimbursement of expenses by adviser, 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. (3) Disclosure required by the Securities and Exchange Commission beginning 1996. 12 Prospectus 17
GROWTH FUND--Financial Highlights - ------------------------------------------------------------------------------- Year ended September 30, 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------- $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
Prospectus 13 18 U.S. TREASURY FUND--Financial Highlights
- ------------------------------------------------------------------------------- Year ended September 30, 1997 1996 1995 1994 - ------------------------------------------------------------------------------- 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(1) 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), (2) 0.75% 0.93% 1.00% 1.00% Ratio of net income (loss) to average net assets(2) 5.97% 5.21% 5.88% 5.15% Portfolio turnover rate 19% 30% 43% 45%
(1) Not annualized for periods less than a year. (2) Net of reimbursements by adviser. Absent reimbursement of expenses by adviser, 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 19
U.S. TREASURY FUND--Financial Highlights - ------------------------------------------------------------------------------- Year ended September 30 1993 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------- $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%
Prospectus 15 20 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 00, and the "Wasatch Funds Risk Ranking Scale" on page 0. Consult the "Glossary of Investing Terms" 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 00) 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 00. 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 [PHOTO] 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 21 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 "Shareholder's Guide--To Purchase Shares" on page 00). 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 the smallest companies present exceptional opportunities for capital appreciation, the stock prices of such companies may fluctuate widely. Investors should assess their tolerance for short-term price volatility 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 "Shareholder's Guide--To Purchase Shares" on page 00). 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 22 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 small companies present exceptional opportunities for capital appreciation, the stock prices of these companies may fluctuate widely. 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 23 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-ADVISER: 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 00). 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-Adviser 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-Adviser may adjust the average maturity (effective duration) of the Fund's portfolio from time to time depending upon its assessment of national and international economic and interest rate trends, changes in inflationary pressures, and the value of long Treasury bonds relative to inflation. Under normal market conditions, it is expected that over the course of a business cycle (see the "Glossary of Investing Terms" on page 00), 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 24 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 25 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 CAPITALIZATION COMPANIES While small capitalization ("small-cap") companies generally have potential for rapid growth, they often involve higher risks because they 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 in many instances than that typical of larger companies. Therefore, the securities of smaller companies may be subject to wider price fluctuations. The spreads between the bid and asked prices of the securities of these companies may be wider than the spreads for more actively traded securities. As a result, a fund that invests in small-cap companies could incur a loss if a security was sold shortly after buying it. Large sales of the securities of small-cap 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 smaller company securities. The values of the shares of small capitalization companies may move independently of the values of larger capitalization companies or of general stock market indices such as the Dow Jones Industrial Average or the Standard & Poor's 500 Stock Index. 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 26 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 00.) 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 00. 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. 27 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-Adviser 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-Adviser forecasts that interest rates will decrease, the average maturity of the portfolio can be extended out to 30 years. If the Sub-Adviser forecasts an increase in interest rates, a defensive policy may be more appropriate, and the Sub-Adviser 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 28 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-Adviser has determined are creditworthy under guidelines established by the Company's Board of Directors. The Fund may also experience a loss if, upon the failure of a borrower to return loaned securities, the collateral is not sufficient in value or liquidity to cover the value of such loaned securities (including accrued interest thereon). Apart from lending its securities, investing in repurchase agreements, and acquiring debt securities, as described herein and in the SAI, the Fund will not make loans to other persons. 24 Prospectus 29 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
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 30 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 00 for a summary of the Funds' policy regarding checks [GRAPHIC] 26 Prospectus 31 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 ("ACH"). - - 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 Purchase Shares" on pg. 00.) - - These Funds are currently closed to new investors. - - Aggressive Equity Fund shareholders as of the July 15, 1995 closing date, Prospectus 27 32 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 33 - - 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 00. 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 34 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 00. 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 35 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 36 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 37 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 38 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 39 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 had assets under management of approximately $984 million as of October 31, 1997. 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, for the portfolio 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-ADVISER Hoisington Investment Management Company ("Hoisington" or the "Sub-Adviser") is a registered investment adviser that has been in business since 1980. The Sub-Adviser 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 40 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.
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 - --------------------------------------------------------------------------------------- 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
*Fund is managed by a Sub-Adviser. Under a sub-advisory agreement between the Manager and the Sub-Adviser, the Manager has agreed to pay the Sub-Adviser 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 41 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 above. 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 42 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 43 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 44 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 45 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 46 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 47 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 48 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 49 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 50 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 51 NOTES Prospectus 47 52 NOTES 48 Prospectus 53 NOTES Prospectus 49 54 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 1 55 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 will commence operations on February 9, 1998. 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, 2 56 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 3 57 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 4 58 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"). 5 59 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 6 60 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. 7 61 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 8 62 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. 9 63 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 commodities (including by way of example and not by way of limitation, grains, oilseeds, livestock, meat, food, fiber, metals, 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. The Funds may not 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 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 64 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 securities 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 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 65 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 66 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
Aggregate Total Compensation Name of Person, Compensation From From Company Paid Position Company to Directors 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
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 67 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 68 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 will commence operations on February 9, 1998):
1997 1996 1995 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
15 69 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 70 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 71 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 8, 1997):
1997 1996 1995 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
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 will commence operations on February 9, 1998):
Mid-Cap Micro-Cap Aggressive Equity Growth U.S. Treasury Fund Fund Fund Fund Fund 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)
18 72 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 73 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 74 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. 21 75 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 76 PART C OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS a. Financial Statements The following audited financial statements for the fiscal year ended September 30, 1997 are included in Parts A and B: 1. Independent Auditors Report 2. Statement of Assets and Liabilities 3. Statement of Operations 4. Schedule of Investments 5. Statement of Changes in Net Assets 6. Financial Highlights 7. Notes to Financial Statements b. Exhibits: 1a. Articles of Incorporation(1) - Updated September 1988(2) 1b. Articles of Correction(3) 1c. Articles of Restatement of Articles of Incorporation(11) 1d. Articles of Amendment of Articles of Incorporation(9) 1e. Articles of Amendment dated April 1995 of Articles of Incorporation(11) 1f. Articles of Amendment dated January 1996 of Articles of Incorporation(11) 1g. Articles of Amendment dated July 1996 of Articles of Incorporation(11) 1h. Form of Articles of Amendment dated September 1997 of Articles of Incorporation(13) 1k. Articles of Incorporation - November 1997(14) 2a. Bylaws of Registrant(1) - Updated January 1988(2), September 1988(2) and August 1991(4) 2b. Bylaws of Registrant - Updated March 1993(3) 2c. Bylaws of Registrant - Updated May 1995(8) 2d. Bylaws of Registrant - Updated May 1996(11) 2e. Bylaws of Registrant - November 1997(14) 3. None 4. Specimen(6) 5. Advisory Service Contract between Wasatch Funds, Inc. and Wasatch Advisors, Inc.(5) 5a. Corporate Resolution - Appendix to the Investment Advisory Agreements(4) 5b. Advisory Service Contract between Wasatch Micro-Cap Fund and Wasatch Advisors, Inc.(8) 5c. Advisory Service Contract between Wasatch World Wide Fund and Wasatch Advisors, Inc.(11) 5d. Advisory Service Contract between Wasatch Micro-Cap Value Fund and Wasatch Advisors, Inc.(13) 6. None 7. None 8. Custodian Agreement between Wasatch Mid-Cap Fund and First Security Bank of Utah, n.a.(5) 8a. Custodian Agreement between Firstar Trust Company and Wasatch Funds, Inc.(8) 8b. Custodian Agreement between Wasatch Funds, Inc. and UMB Bank, n.a.(11)
77 8c. Amendment to Custodian Agreement between Wasatch Funds, Inc. and UMB Bank, n.a.(11) 8d. Amendment to Custodian Agreement between Wasatch Funds, Inc. and UMB Bank, n.a.(13) 9. Shareholder Servicing Agent Agreement between Wasatch Funds, Inc. and Firstar Trust Company(6) 9a. Administration Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(6) 9b. Transfer Agent Agreement between Wasatch Micro-Cap Fund and Firstar Trust Company(8) 9c. Administration Agreement between Wasatch Micro-Cap Fund and Sunstone Financial Group, Inc.(8) 9d. Services Agreement between Wasatch Funds, Inc. and Fidelity Brokerage Services, Inc.(8) 9e. Operating Agreement between Wasatch Funds, Inc. and Charles Schwab & Co., Inc.(8) 9f. Amendment to Administration Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(11) 9g. Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(11) 9h. Amendment to Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(11) 9i. Amendment to Administration Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc. (13) 9j. Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Investor Services, LLC.(13) 9k. Amendment to Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Investor Services.(13) 9l. Amendment to Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Investor Services, LLC.(13) 10. Opinion of Counsel(14) 11. Consent of Arthur Andersen LLP(14) 12. None 13. None 14. None 15. None 16. Schedule of Computation of Performance Quotation - Aggressive Equity Fund(14) 16a. Schedule of Computation of Performance Quotation - Growth Fund(14) 16b. Schedule of Computation of Performance Quotation - Wasatch-Hoisington U.S. Treasury Fund(14) 16c. Schedule of Computation of Performance Quotation - Mid-Cap Fund (14) 16d. Schedule of Computation of Performance Quotation - Micro-Cap Fund(14) 16e. Schedule of Computation of Performance Quotation - World Wide Fund(14) 16f. Schedule of Computation of Performance Quotation - Micro-Cap Value Fund(14) 17. Financial Data Schedules(14) 18. None
________________________ (1) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Pre-Effective Amendment No. 2 to the Company's Registration Statement on Form N-1A. (2) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to Exhibit 1 to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form N-1A. 78 (3) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 8 to the Company's Registration Statement on Form N-1A. (4) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 5 to the Company's Registration Statement on Form N-1A. (5) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 6 to the Company's Registration Statement on Form N-1A. (6) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 7 to the Company's Registration Statement on Form N-1A. (7) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the Company's Rule 24f-2 Notice filed on November 6, 1995. (8) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 11 to the Company's Registration Statement on Form N-1A. (9) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 12 to the Company's Registration Statement on Form N1-A. (10) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 13 to the Company's Registration Statement on Form N-1A. (11) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 14 to the Company's Registration Statement on Form N-1A. (12) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 15 to the Company's Registration Statement on Form N-1A. (13) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 16 to the Company's Registration Statement on Form N-1A. (14) Filed herewith. ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is controlled by its Board of Directors. Registrant neither controls any person or is under common control with any other person. 79 ITEM 26. NUMBERS OF HOLDERS OF SECURITIES
Title of Class Number of Record - -------------- Holders Common Stock, par as of October 31, 1997 value $0.001 per share Series A - Aggressive Equity Fund 9,951 Series B - Growth Fund 3,080 Series C - Wasatch-Hoisington U.S. Treasury Fund 1,151 Series D - Mid-Cap Fund 4,176 Series E - Micro-Cap Fund 6,695 Series F - World Wide Fund 0 Series G - Micro-Cap Value Fund 0
ITEM 27. INDEMNIFICATION The Registrant's Articles of Incorporation provide that the Registrant shall indemnify such persons for such expenses and liabilities, in such manner, under such circumstances, and to the full extent as permitted by Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended; provided, however, that no such indemnification may be made if it would be in violation of Section 17(h) of the Investment Company Act of 1940, as now enacted or hereafter amended. Section 302A.521 of the Minnesota Statutes, as now enacted, provides that a corporation shall indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties, fines, settlements and reasonable expenses, including attorneys fees and disbursements, incurred by the person in connection with the proceeding if, with respect to the acts or omissions of the person complained of in the proceeding, the person has not been indemnified by another organization for the same judgments, penalties, fines, settlements, and reasonable expenses incurred by the person in connection with the proceeding with respect to the same acts or omissions; acted in good faith, received no improper personal benefit, and the Minnesota Statutes dealing with directors conflicts of interest, if applicable, have been satisfied; in the case of a criminal proceeding, had no reasonable cause to believe that the conduct was unlawful; and reasonably believed that the conduct was in the best interests of the corporation or, in certain circumstances, reasonably believed that the conduct was not opposed to the best interests of the corporation. Indemnification shall only be made when (1) a final decision on the merits by a court or other body before whom the proceeding was brought that the person to be indemnified ("indemnitee") was not liable by reason of disabling conduct or, (2) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the indemnitee was not liable by reason of disabling conduct, by (a) the vote of a majority of a quorum of directors who are neither "interested persons" of the company as defined in Section 2(a)(19) of the 1940 Act nor parties to the proceeding ("disinterested, non-party directors"), or (b) an independent legal counsel in a written opinion. Insofar as the conditional advancing of indemnification monies for actions based upon the Investment Company Act of 1940 may be concerned, such payments will be made only on the following conditions: (1) the indemnitee shall provide a security for his undertaking, (2) the investment company shall be insured against losses arising by reason of any lawful advances, or (3) a majority of a quorum of the disinterested, non-party directors of the investment company, or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the indemnitee ultimately will be found entitled to indemnification. 80 Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR As of September 30, 1997, Wasatch, Inc. (the "Manager" of the Registrant) acted as the investment advisor for employee benefit plans, other tax free plans including individual retirement accounts, Keoghs, endowments and foundations, and taxable accounts in addition to the five series of Wasatch Funds, Inc. The total assets under management were approximately $984 million (including the Funds) as of October 31, 1997. Certain information regarding each officer and director of the Manager including each business, profession, vocation or employment of a substantial nature in which each such person is or has been engaged at any time during the past two fiscal years is set forth below.
Other Substantial Position Business, Profession, Name with Manager Vocation or Employment - ---- ------------ ---------------------- Samuel S. Stewart, Jr., Ph.D. President, Chairman of the Board, Professor of Finance, Director and Director of Research University of Utah Roy S. Jespersen Vice President, Director, and - - Portfolio Manager Jeff S. Cardon Vice President, Director, and - - Securities Analyst Mark E. Bailey Vice President, Director, and - - Portfolio Manager Jeff H. Collings Secretary, Treasurer - - Karolyn Barker Director and Research Analyst Robert Gardiner Director and Research Analyst James Milligan Director and Marketing Manager
ITEM 29. PRINCIPAL UNDERWRITERS None 81 ITEM 30. LOCATION OF ACCOUNTS AND RECORDS 1. Wasatch, Inc., 68 South Main Street, Salt Lake City, Utah 84101 (records relating to its function as investment advisor). 2. UMB Bank, n.a., 928 Grand Avenue, Kansas City, MO 64141 (records relating to its function as custodian. 3. Sunstone Financial Group, Inc. 207 East Buffalo Street, Suite 400, Milwaukee, WI 53202 (records relating to its function as administrator and fund accounting servicing agent). 4. Sunstone Investor Services, LLC, 207 East Buffalo Street, Suite 315, Milwaukee, WI 53202 (records relating to its function as transfer agent and shareholder servicing agent). 5. ITEM 31. MANAGEMENT SERVICES Other than as set forth under the caption "Management of the Company" in the Prospectus constituting Part A of the Registration Statement and under the captions "Management of the Fund" and "Investment Advisory and Other Services" in the Statement of Additional Information constituting Part B of the Registration Statement, Registrant is not a party to any management-related service contract. ITEM 32. UNDERTAKINGS The Company undertakes to furnish each person to whom a current prospectus is delivered with a copy of the Company's latest annual report to shareholders, upon request and without charge. The Company undertakes further to file a post-effective amendment, using financial statements which need not be certified, within four to six months from the effective date of the Company's Registration Statement. 82 SIGNATURES Pursuant to the requirement of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it has duly caused this Amended Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Salt Lake City, and the State of Utah on the 24th day of November 1997. WASATCH FUNDS, INC. By /s/ Samuel S. Stewart, Jr., Ph.D -------------------------------- Samuel S. Stewart, Jr., Ph.D., President Pursuant to the requirements of the Securities Act of 1933, this Amended Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- /s/ Samuel S. Stewart, Jr., Ph.D President and Director November 24, 1997 - ------------------------------------- (principal executive Samuel S. Stewart, Jr., Ph.D. officer) /s/ Venice Edwards Secretary and Treasurer November 24, 1997 - ------------------------------------- (principal financial and Venice Edwards accounting officer) /s/ Roy S. Jespersen Vice President and Director November 24, 1997 - ------------------------------------- Roy S. Jespersen /s Jeff Cardon Vice President and Director November 24, 1997 - ------------------------------------- Jeff S. Cardon Director - ------------------------------------- James U. Jensen, Esquire Director - ------------------------------------- William R. Swinyard
83 EXHIBIT INDEX a. Financial Statements Included in Part A of the Registration Statement: Financial Highlights Included in Part B of the Registration Statement: Financial Statements for the period December 6, 1986 (commencement of operations) through September 30, 1996 for the Aggressive Equity Fund, Growth Fund, and Wasatch-Hoisington U.S. Treasury Fund; August 16, 1992 (commencement of operations) through September 30, 1996 for the Mid-Cap Fund; June 19, 1995 (commencement of operations) through September 30, 1996 for the Micro-Cap Fund, are incorporated by reference in the Statement of Additional Information from the Registrant's Annual Report dated as of September 30, 1996. b. Exhibits 1a. Articles of Incorporation(1) - Updated September 1988(2) 1b. Articles of Correction(3) 1c. Articles of Restatement of Articles of Incorporation(11) 1d. Articles of Amendment of Articles of Incorporation(9) 1e. Articles of Amendment dated April 1995 of Articles of Incorporation(11) 1f. Articles of Amendment dated January 1996 of Articles of Incorporation(11) 1g. Articles of Amendment dated July 1996 of Articles of Incorporation(11) 1h. Article of Amendment dated September 1997 of Articles of Incorporation(13) 1k. Articles of Incorporation - November 1997(14) 2a. Bylaws of Registrant(1) - Updated January 1988(2), September 1988(2) and August 1991(4) 2b. Bylaws of Registrant - Updated March 1993(3) 2c. Bylaws of Registrant - Updated May 1995(8) 2d. Bylaws of Registrant - Updated May 1996(11) 2e. Bylaws of Registrant - November 1997(14) 3. None 4. Specimen(6) 5. Advisory Service Contract between Wasatch Funds, Inc. and Wasatch Advisors, Inc.(5) 5a. Corporate Resolution - Appendix to the Investment Advisory Agreements(4) 5b. Advisory Service Contract between Wasatch Micro-Cap Fund and Wasatch Advisors, Inc.(8) 5c. Advisory Service Contract between Wasatch World Wide Fund and Wasatch Advisors, Inc.(11) 5d. Advisory Service Contract between Wasatch Micro-Cap Value Fund and Wasatch Advisors, Inc.(13) 6. None 7. None 8. Custodian Agreement between Wasatch Mid-Cap Fund and First Security Bank of Utah, N.A.(5) 8a. Custodian Agreement between Firstar Trust Company and Wasatch Funds, Inc.(8) 8b. Custodian Agreement between Wasatch Funds, Inc., and UMB Bank, n.a.(11) 8c. Amendment to Custodian Agreement between Wasatch Funds, Inc. and UMB Bank, n.a.(11) 8d. Amendment to Custodian Agreement between Wasatch Funds, Inc. and UMB Bank, n.a.(13)
84 9. Shareholder Servicing Agent Agreement between Wasatch Funds, Inc. and Firstar Trust Company(6) 9a. Administration Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(6) 9b. Transfer Agent Agreement between Wasatch Micro-Cap Fund and Firstar Trust Company(8) 9c. Administration Agreement between Wasatch Micro-Cap Fund and Sunstone Financial Group, Inc.(8) 9d. Services Agreement between Wasatch Funds, Inc. and Fidelity Brokerage Services, Inc.(8) 9e. Operating Agreement between Wasatch Funds, Inc. and Charles Schwab & Co., Inc.(8) 9f. Amendment to Administration Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(11) 9g. Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(11) 9h. Amendment to Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(11) 9i. Amendment to Administration Agreement between Wasatch Funds, Inc. and Sunstone Financial Group, Inc.(13) 9j. Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Investor Services, LLC.(13) 9k. Amendment to Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Investor Services, LLC.(13) 9l. Amendment to Transfer Agent Agreement between Wasatch Funds, Inc. and Sunstone Investor Services, LLC.(13) 10. Opinion of Counsel(14) 11. Consent of Arthur Andersen LLP(14) 12. None 13. None 14. None 15. None 16. Schedule of Computation of Performance Quotation - Aggressive Equity Fund(14) 16a. Schedule of Computation of Performance Quotation - Growth Fund(14) 16b. Schedule of Computation of Performance Quotation - Wasatch-Hoisington U.S. Treasury Fund(14) 16c. Schedule of Computation of Performance Quotation - Mid-Cap Fund(14) 16d. Schedule of Computation of Performance Quotation - Micro-Cap Fund(14) 16e. Schedule of Computation of Performance Quotation - World Wide Fund(14) 16f. Schedule of Computation of Performance Quotation - Micro-Cap Value Fund(14) 17. Financial Data Schedules(14) 18. None
_________________________ (1) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Pre-Effective Amendment No. 2 to the Company's Registration Statement on Form N-1A. (2) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to Exhibit 1 to Post-Effective Amendment No. 2 to the Company's Registration Statement on Form N-1A. (3) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 8 to the Company's Registration Statement on Form N-1A. 85 (4) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 5 to the Company's Registration Statement on Form N-1A. (5) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 6 to the Company's Registration Statement on Form N-1A. (6) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 7 to the Company's Registration Statement on Form N-1A. (7) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the Company's Rule 24f-2 Notice filed on November 6, 1995. (8) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 11 to the Company's Registration Statement to Form N-1A. (9) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 12 to the Company's Registration Statement to Form N-1A. (10) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 13 to the Company's Registration Statement to Form N-1A. (11) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 14 to the Company's Registration Statement to Form N-1A. (12) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 15 to the Company's Registration Statement to Form N-1A. (13) Incorporated by reference pursuant to Rule 411 under the Securities Act of 1933 to the same exhibit number in Post-Effective Amendment No. 16 to the Company's Registration Statement to Form N-1A. (14) Filed herewith. EX-99.B(1) 2 EX-99.B(1) 1 Articles of Incorporation of WASATCH FUNDS, INC. Pursuant to the provisions of Minnesota Statutes, Chapter 302A, the following Articles of Incorporation are adopted: 1. The name of this corporation is Wasatch Funds, Inc. 2. This corporation shall have general business purposes and shall have unlimited power to engage in and do any lawful act concerning any and all lawful businesses for which corporations may be organized under the Minnesota Statutes, Chapter 302A. Without limiting the generality of the foregoing, this corporation shall have specific power: (a) To conduct, operate and carry on the business of a so-called "open-end" management investment company pursuant to applicable state and federal regulatory statutes, and exercise all the powers necessary and appropriate to the conduct of such operations. (b) To purchase, subscribe for, invest in or otherwise acquire, and to own, hold, pledge, mortgage, hypothecate, sell, possess, transfer or otherwise dispose of, or turn to account or realize upon, and generally deal in, all forms of securities of every kind, nature, character, type and form, and other financial instruments which may not be deemed to be securities, including but not limited to futures contracts and options thereon. Such securities and other financial instruments may include but are not limited to shares, stocks, bonds, debentures, notes, scrip, participation certificates, rights to subscribe, warrants, options, certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper, choses in action, evidences of indebtedness, certificates of indebtedness and certificates of interest of any and every kind and nature whatsoever, secured and unsecured, issued or to be issued, by any corporation, company, partnership (limited or general), association, trust, entity or person, public or private, whether organized under the laws of the United States, or any state, commonwealth, territory or possession thereof, or organized under the laws of any foreign country, or any state, province, territory or possession thereof, or issued or to be issued by the United States government or any agency or instrumentality thereof, options on stock indexes, stock index and interest rate futures contracts and options thereon, and other futures contracts and options thereon. (c) In the above provisions of this Article 2, purposes shall also be construed as powers and powers shall also be construed as purposes, and the 2 enumeration of specific purposes or powers shall not be construed to limit other statements of purposes or to limit purposes or powers which the corporation may otherwise have under applicable law, all of the same being separate and cumulative, and all of the same may be carried on, promoted and pursued, transacted or exercised in any place whatsoever. 3. This corporation shall have perpetual existence. 4. The location and post office address of the registered office in Minnesota is CT Corporation, 405 Second Avenue South, #454, Minneapolis, MN 55401. 5. The total authorized number of shares of the Corporation is one trillion (1,000,000,000,000), all of which shall be common shares of the par value of $.01 each. The corporation may issue and sell any of its shares in fractional denominations to the same extent as its whole shares, and shares and fractional denominations shall have, in proportion to the relative fractions represented thereby, all the rights of whole shares, including, without limitation, the right to vote, the right to receive dividends and distributions, and the right to participate upon liquidation of the corporation. (a) Of said common shares, seventy billion of these shares may be issued in seven separate series: ten billion (10,000,000,000) shares designated as Series A Common Shares, ten billion (10,000,000,000) shares designated as Series B Common Shares, ten billion (10,000,000,000) shares designated as Series C Common Shares, ten billion (10,000,000,000) shares designated as Series D Common Shares, ten billion (10,000,000,000) shares designated as Series E Common Shares, ten billion (10,000,000,000) shares designated as Series F Common Shares, and ten billion (10,000,000,000) shares designated as Series G Common Shares. The balance of 930,000,000,000 shares may be issued in such series with such designations, preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, as shall be stated or expressed in a resolution or resolutions providing for the issue of any series of common shares as may be adopted from time to time by the Board of Directors of this corporation pursuant to the authority hereby vested in said Board of Directors. Series A, B, C, D, E and F referred to above shall each represent interests in separate and distinct portions of the corporation's assets and liabilities which shall take the form of separate portfolios of investment securities, cash and other assets and liabilities. Each additional series of common shares which the Board of Directors may establish, as provided herein, may evidence, if the Board of Directors shall so determine by resolution, an interest in a separate and distinct portion of the corporation's assets, which shall take the form of a separate portfolio of investment securities, cash and other assets. Authority to establish such separate portfolios is hereby vested in the Board of Directors of this corporation, and such separate portfolios may be established by the Board of Directors without the authorization or approval of the holders of any series or shares of this corporation. 3 (b) The shares of each series may be classified by the Board of Directors in one or more classes with such relative rights and preferences as shall be stated or expressed in a resolution or resolutions providing for the issue of any such class or classes as may be adopted from time to time by the Board of Directors of the corporation pursuant to the authority hereby vested in the Board of Directors and Minnesota Statutes, Section 302A.401, Subd. 3, or any successor provision. The shares of each class within a series may be subject to such charges and expenses (including by way of example, but not by way of limitation, such front-end and deferred sales charges, as may be permitted under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the "1940 Act") and rules of the National Association of Securities Dealers, Inc. ("NASD"), expenses under Rule 12b-1 plans, administration plans, service plans, or other plans or arrangements, however designated) as may be adopted from time to time by the Board of Directors in accordance, to the extent applicable, with the 1940 Act, which charges and expenses may differ from those applicable to another class within such series, and all of the charges and expenses to which a class is subject shall be borne by such class and shall be appropriately reflected (in the manner determined or approved by the Board of Directors) in determining the net asset value and the amounts payable with respect to dividends and distributions on, and redemptions or liquidations of, such class. Subject to compliance with the requirements of the 1940 Act, the Board of Directors shall have the authority to provide that shares of any class shall be convertible (automatically, optionally or otherwise) into shares of one or more other classes in accordance with such requirements and procedures as may be established by the Board of Directors. (c) The Board of Directors, from time to time, may select names for any series (or class) of the corporation, without the authorization or approval of the holders of shares of any class or series of the corporation. (d) Shares of any class or series of the corporation may be issued to the holders of shares of another series (or class) of this corporation, whether to effect a stock dividend or split or otherwise, without the authorization or approval of the holders of shares of any class or series of the corporation. 6. The shareholders of each series (or class thereof) of common shares of this corporation: (a) shall not have the right to cumulate votes for the election of directors; and (b) shall have no preemptive right to subscribe to any issue of shares of any class or series of this corporation now or hereafter made. 4 7. A description of the relative rights and preferences of all series of shares (and classes thereof) is as follows, unless otherwise set forth in one or more amendments to these Articles of Incorporation or in the resolutions providing for the issue of such series (and classes thereof): (a) On any matter submitted to a vote of shareholders of this corporation, all common shares of this corporation then issued and outstanding and entitled to vote, irrespective of series, shall be voted in the aggregate and not by series or class, except: (i) when otherwise required by Minnesota Statutes, Chapter 302A, in which case shares will be voted by individual series or class, as applicable; (ii) when otherwise required by the 1940 Act, as amended, or the rules adopted thereunder, in which case shares shall be voted by individual series or class, as applicable; and (iii) when the matter does not affect the interests of a particular series or class, in which case only shareholders of the series or class affected shall be entitled to vote thereon and shall vote by individual series or class, as applicable. (b) All consideration received by this corporation for the issue or sale of shares of any series, together with all assets, income, earnings, profits and proceeds derived therefrom (including all proceeds derived from the sale, exchange or liquidation thereof and, if applicable, any assets derived from any reinvestment of such proceeds in whatever form the same may be) shall become part of the assets of the portfolio to which the shares of that series relate, for all purposes, subject only to the rights of creditors, and shall be so treated upon the books of account of this corporation. Such assets, income, earnings, profits and proceeds (including any proceeds derived from the sale, exchange or liquidation thereof and, if applicable, any assets derived from any reinvestment of such proceeds in whatever form the same may be) are herein referred to as "assets belonging to" a series of the common shares of this corporation. (c) Assets of this corporation not belonging to any particular series are referred to herein as "General Assets." General Assets shall be allocated to each series in proportion to the respective net assets belonging to such series. The determination of the Board of Directors shall be conclusive as to the amount of assets, as to the characterization of assets as those belonging to a series or as General Assets, and as to the allocation of General Assets. (d) The assets belonging to a particular series of common shares shall be charged with the liabilities incurred specifically on behalf of such series of common shares ("Special Liabilities"). Such assets shall also be charged with a share of the general liabilities of this corporation ("General Liabilities") in proportion to the respective net assets belonging to such series of common shares. The determination of the Board of Directors shall be conclusive as to the amount of liabilities, including accrued expenses and reserves, as to the characterization of any liability as a Special Liability or General Liability, and as to the allocation of General Liabilities among series. 5 (e) The Board of Directors may, to the extent permitted by Minnesota Statutes, Chapter 302A, and in the manner provided herein, declare and pay dividends or distributions in shares or cash on any or all series of common shares, the amount of such dividends and the payment thereof being wholly in the discretion of the Board of Directors. Dividends or distributions on shares of any series of common shares shall be paid only out of the earnings, surplus, or other lawfully available assets belonging to such series (including, for this purpose, any General Assets allocated to such series). (f) In the event of the liquidation or dissolution of this corporation, holders of the shares of any series shall have priority over the holders of any other series with respect to, and shall be entitled to receive, out of the assets of this corporation available for distribution to holders of shares, the assets belonging to such series of common shares and the General Assets allocated to such series of common shares, and the assets so distributable to the holders of the shares of any series shall be distributed among such holders in proportion to the number of shares of such series held by them and recorded on the books of this corporation, except that, in the case of a series with more than one class of shares, such distributions shall be adjusted to reflect appropriately any changes and expenses borne by each individual class. (g) With the affirmative vote of the holders of a majority of the voting power of the shares entitled to vote, the Board of Directors may transfer the assets of any series to any other series. Upon such a transfer, the corporation shall issue common shares representing interests in the series to which the assets were transferred in exchange for all common shares representing interests in the series from which the assets were transferred. Such shares shall be exchanged at their respective net asset values. 8. The following additional provisions, when consistent with law, are hereby established for the management of the business, for the conduct of the affairs of the corporation, and for the purpose of describing certain specific powers of the corporation and of its directors and shareholders. (a) In furtherance and not in limitation of the powers conferred by statute and pursuant to these Articles of Incorporation, the Board of Directors is expressly authorized to do the following: (1) to make, adopt, alter, amend and repeal Bylaws of the corporation unless reserved to the shareholders by the Bylaws or by the laws of the State of Minnesota, subject to the power of the shareholders to change or repeal such Bylaws; 6 (2) to distribute, in its discretion, for any fiscal year (in the year or in the next fiscal year) as ordinary dividends and as capital gains distributions, respectively, amounts sufficient to enable the corporation to qualify under the Internal Revenue Code as a regulated investment company to avoid any liability for federal income tax in respect of such year. Any distribution or dividend paid to shareholders from any capital source shall be accompanied by a written statement showing the source or sources of such payment; (3) to authorize, subject to such vote, consent, or approval of shareholders and other conditions, if any, as may be required by any applicable statute, rule or regulation, the execution and performance by the corporation of any agreement or agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization whereby, subject to the supervision and control of the Board of Directors, any such other person, corporation, association, company, trust, partnership (limited or general), or other organization shall render managerial, investment advisory, distribution, transfer agent, accounting and/or other services to the corporation (including, if deemed advisable, the management or supervision of the investment portfolios of the corporation) upon such terms and conditions as may be provided in such agreement or agreements; (4) to authorize any agreement of the character described in subparagraph 3 of this paragraph (a) with any person, corporation, association, company, trust, partnership (limited or general) or other organization, although one or more of the members of the Board of Directors or officers of the corporation may be the other party to any such agreement or an officer, director, employee, shareholder, or member of such other party, and no such agreement shall be invalidated or rendered voidable by reason of the existence of any such relationship; (5) to allot and authorize the issuance of the authorized but unissued shares of any series, or class thereof, of this corporation; (6) to accept or reject subscriptions for shares of any series, or class thereof, made after incorporation; (7) to fix the terms, conditions and provisions of and authorize the issuance of options to purchase or subscribe for shares of any series including the option price or prices at which shares may be purchased or subscribed for; and (8) to determine what constitutes net income, total assets and the net asset value of the shares of each series (or class thereof) of the 7 corporation. Any such determination made in good faith shall be final and conclusive and shall be binding upon the corporation and all holders (past, present and future) of shares of each series (and class thereof). (b) Except as provided in the next sentence of this para- graph (b), shares of any series, or class thereof, which are redeemed, exchanged, or otherwise acquired by this corporation shall return to the status of authorized and unissued shares of such series or class. Upon the redemption, exchange, or other acquisition by the corporation of all outstanding shares of any series (or class thereof), such shares shall return to the status of authorized and unissued shares without designation as to series (if no shares of the series remain outstanding) or with the same designation as to series, but no designation as to class within such series (if shares of such series remain outstanding, but no shares of such class thereof remain outstanding), and all provisions of these Articles of Incorporation relating to such series, or class thereof (including, without limitation, any statement establishing or fixing the rights and preferences of such series, or class thereof), shall cease to be of further effect and shall cease to be a part of these Articles. Upon the occurrence of such events, the Board of Directors of the corporation shall have the power, pursuant to Minnesota Statutes Section 302A.135, Subd. 5 or any successor provision and without shareholder action, to cause restated articles of incorporation of the corporation to be prepared and filed with the Secretary of State of the State of Minnesota which reflect such removal from these Articles of all such provisions relating to such series, or class thereof. (c) The determination as to any of the following matters made by or pursuant to the direction of the Board of Directors consistent with these Articles of Incorporation and in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of duties, shall be final and conclusive and shall be binding upon the corporation and every holder of shares of its capital stock: namely, the amount of the assets, obligations, liabilities and expenses of each series (or class thereof) of the corporation; the amount of the net income of each series (or class thereof) of the corporation from dividends and interest for any period and the amount of assets at any time legally available for the payment of dividends in each series (or class thereof); the amount of paid-in surplus, other surplus, annual or other net profits, or net assets in excess of capital, undivided profits, or excess of profits over losses on sales of securities of each series (or class thereof); the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); the market value, or any sale, bid or asked price to be applied in determining the market value, of any security owned or held by or in each series (or class thereof) of the corporation; the fair value of any other asset owned by or in each series (or class thereof) of the corporation; the number of shares of each series (or class thereof) of the corporation issued or issuable; any matter relating to the acquisition, holding and disposition of 8 securities and other assets by each series (or class thereof) of the corporation; and any question as to whether any transaction constitutes a purchase of securities on margin, a short sale of securities, or an underwriting of the sale of, or participation in any underwriting or selling group in connection with the public distribution of any securities. (d) The Board of Directors or the shareholders of the corporation may adopt, amend, affirm or reject investment policies and restrictions upon investment or the use of assets of each series of the corporation and may designate some such policies as fundamental and not subject to change other than by a vote of a majority of the outstanding voting securities, as such phrase is defined in the 1940 Act, of the affected series of the corporation. (e) The corporation shall indemnify such persons for such expenses and liabilities, in such manner, under such circumstances, and to the full extent permitted by Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended, provided, however, that no such indemnification may be made if it would be in violation of Section 17(h) of the 1940 Act, as now enacted or hereafter amended. (f) Any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, may be taken without a meeting if done in writing and signed by a majority of the directors or committee members. (g) To the fullest extent permitted by the Minnesota Business Corporation Act, as the same exists or may hereafter be amended (except as prohibited by the 1940 Act, as the same exists or may hereafter be amended), a director of this corporation shall not be liable to this corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. 9. The names of the members of the first Board of Directors are: Samuel S. Stewart, Jr. Roy S. Jespersen Jeffrey S. Cardon James U. Jensen William R. Swinyard 9 10. The name and address of the incorporator, who is a natural person of full age, are: Name Address ---- ------- Michael J. Radmer Dorsey & Whitney LLP 220 South Sixth Street Minneapolis, MN 55402 Dated: November 3, 1997 Michael J. Radmer EX-99.B(2) 3 EX-99.B(2) 1 BYLAWS OF WASATCH FUNDS, INC. ARTICLE I OFFICES, CORPORATE SEAL Section 1.01. Name. The name of the corporation is Wasatch Funds, Inc. The Articles of Incorporation of the corporation have designated the following series of Common Shares: Series A, Series B, Series C, Series D, Series E, Series F and Series G. The names of the series represented by Series A Common Shares, Series B Common Shares, Series C Common Shares, Series D Common Shares, Series E Common Shares, Series F Common Shares and Series G Common Shares shall be "Wasatch Aggressive Equity Fund," "Wasatch Growth Fund," "Wasatch-Hoisington U.S. Treasury Fund," "Wasatch Mid-Cap Fund," "Wasatch Micro-Cap Fund," "Wasatch World Wide Fund," and "Wasatch Micro-Cap Value Fund," respectively. Section 1.02. Registered Office. The registered office of the corporation in Minnesota shall be that set forth in the Articles of Incorporation or in the most recent amendment of the Articles of Incorporation or resolution of the directors filed with the Secretary of State of Minnesota changing the registered office. Section 1.03. Other Offices. The corporation may have such other offices and places of business, within or without the State of Minnesota, as the directors shall, from time to time, determine. Section 1.04. Corporate Seal. The corporation shall not have a corporate seal. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.01. Place and Time of Meetings. Except as provided otherwise by Minnesota Statutes Chapter 302A, meetings of the shareholders may be held at any place, within or without the State of Minnesota, designated by the directors and, in the absence of such designation, shall be held at the registered office of the corporation in the State of Minnesota. The directors shall designate the time of day for each meeting and, in the absence of such designation, every meeting of shareholders shall be held at ten o'clock a.m. -1- 2 Section 2.02. Regular Meetings. Annual meetings of shareholders are not required by these Bylaws. Regular meetings shall be held only with such frequency and at such times and places as provided in and required by law. Section 2.03. Special Meetings. Special meetings of the shareholders may be held at any time and for any purpose and may be called by the Chairman of the Board, the President, and two or more directors, or by one or more shareholders holding ten percent (10%) or more of the shares entitled to vote on the matters to be presented to the meeting, except that a special meeting for the purpose of considering any action directly or indirectly to facilitate or effect a business combination, including any action to change or otherwise affect the composition of the Board of Directors for that purpose, must be called by 25% of the voting power of all shares entitled to vote. Section 2.04. Quorum; Adjourned Meetings. The holders of ten percent (10%) of the shares outstanding and entitled to vote at the meeting shall constitute a quorum for the transaction of business at any regular or special shareholders' meeting. In case a quorum shall not be present at a meeting, those present in person or by proxy shall adjourn to such day as they shall, by majority vote, agree upon without further notice other than by announcement at the meeting at which such adjournment is taken. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at the meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present, the shareholders may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 2.05. Voting. At each meeting of the shareholders, every shareholder shall have the right to vote in person or by proxy. Each shareholder, unless the Articles of Incorporation or applicable laws provide otherwise, shall have one vote for each share having voting power registered in his name on the books of the corporation. Upon the demand of any shareholder, the vote upon any question before the meeting shall be by written ballot. Except as otherwise specifically provided by these Bylaws or as required by provisions of the Investment Company Act of 1940 or other applicable laws, all questions shall be decided by a majority vote of the number of shares entitled to vote and represented at the meeting at the time of the vote. If the matter(s) to be presented at a regular or special meeting relates only to a particular series (or class) of the corporation, then only the shareholders of such series (or class) are entitled to vote on such matter(s). Section 2.06. Voting - Proxies. Shareholders shall have the right to cast or authorize the casting of a vote by proxy, as provided by Section 302A.449 of the Minnesota Statutes, as it may be amended from time-to-time. -2- 3 Section 2.07. Closing of Books. The Board of Directors may fix a time not exceeding sixty (60) days preceding the date of any meeting of shareholders, as a record date for the determination of the shareholders entitled to notice of, and to vote at, such meeting, notwithstanding any transfer of shares on the books of the corporation after any record date so fixed. If the Board of Directors fails to fix a record date for determination of the shareholders entitled to notice of, and to vote at, any meeting of shareholders, the record date shall be the thirtieth (30th) day preceding the date of such meeting. Section 2.08. Notice of Meetings. The Secretary or an Assistant Secretary shall mail to each shareholder, shown by the books of the corporation to be a holder of record of voting shares, at his address as shown by the books of the corporation, a notice setting out the time and date and place of each regular meeting and each special meeting, which notice shall be mailed at least ten (10) days prior thereto; except that notice of a meeting at which an agreement of merger or consolidation is to be considered shall be mailed to all shareholders of record, whether entitled to vote or not, at least two (2) weeks prior thereto; and except that notice of a meeting at which a proposal to dispose of all, or substantially all, of the property and assets of the corporation is to be considered shall be mailed to all shareholders of record, whether entitled to vote or not, at least ten (10) days prior thereto; and except that notice of a meeting at which a proposal to dissolve the corporation or to amend the Articles of Incorporation is to be considered shall be mailed to all shareholders of record, whether entitled to vote or not, at least ten (10) days prior thereto. Every notice of any special meeting shall state the purpose or purposes for which the meeting has been called, pursuant to Section 2.03, and the business transacted at all special meetings shall be confined to the purpose stated in the call. Section 2.09. Waiver of Notice. Notice of any regular or special meeting may be waived either before, at or after such meeting in writing signed by each shareholder or representative thereof entitled to vote the shares so represented. ARTICLE III DIRECTORS Section 3.01. Number, Qualifications and Term of Office. Until the first meeting of shareholders, or until the directors increase their number by resolution, the number of directors shall be the number named in the Articles of Incorporation. Thereafter, the number of directors shall be established by resolution of the shareholders (subject to the authority of the Board of Directors to increase the number of directors as permitted by law), but shall not be less than the lesser of (i) the number of shareholders of record and beneficially, or (ii) three (3). In the absence of such resolution, the number of directors shall be the number last fixed by the shareholders or the Board of Directors, or the Articles of Incorporation. Directors may but need not be -3- 4 shareholders. Each of the directors shall hold office until the regular meeting of shareholders next held after his election and until his successor shall have been elected and shall qualify, or until he shall resign, or shall have been removed as hereinafter provided. Section 3.02. Election of Directors. Except as otherwise provided in Section 3.11 and 3.12 hereof, the directors shall be elected at all regular shareholders' meeting. Directors may be elected at a special shareholders' meeting, provided that the notice of such meeting shall contain mention of such purpose. At each shareholders' meeting for the election of directors, the directors shall be elected by a plurality of the votes validly cast at such election. The shareholders of each series of stock of the corporation shall be entitled to vote for directors and shall have equal voting power. Section 3.03. General Powers. (a) The property, affairs and business of the corporation shall be managed by the Board of Directors, which may exercise all the powers of the corporation except those powers vested solely in the shareholders of the corporation by statute, the Articles of Incorporation, or these Bylaws, as amended. (b) All acts done by any meeting of the Directors or by any person acting as a director, so long as his successor shall not have been duly elected or appointed, shall, notwithstanding that it be afterwards discovered that there was some defect in the election of the directors or such person acting as aforesaid or that they or any of them were disqualified, be as valid as if the directors or such other person, as the case may be, had been duly elected and were or was qualified to be directors or a director of the corporation. Section 3.04. Power to Declare Dividends. (a) The Board of Directors, from time to time as they may deem advisable, may declare and pay dividends in cash or other property of the corporation, out of any source available for dividends, to the shareholders of each series (or class) of the corporation according to their respective rights and interests in such series (or class). (b) The Board of Directors shall cause to be accompanied by a written statement any dividend payment wholly or partly from any source other than (i) each series' accumulated and accrued undistributed net income (determined in accordance with generally accepted accounting practice and the rules and regulations of the Securities and Exchange Commission then in effect) and not including profits or losses realized upon the sale of securities or other properties; or -4- 5 (ii) each series' net income so determined for the current or preceding fiscal year. Such statement shall adequately disclose the source or sources of such payment and the basis of calculation, and shall be in such form as the Commission may prescribe. (c) Notwithstanding the above provisions of this Section 3.04, the Board of Directors may at any time declare and distribute pro rata among the shareholders of each series of stock a "stock dividend" out of each series' authorized but unissued shares of stock, including any shares previously purchased by a series of the corporation. Section 3.05. Annual Meeting. The Board of Directors shall meet annually at the registered office of the corporation, or at such other place within or without the State of Minnesota as may be designated by the Board of Directors, for the purpose of electing the officers of the corporation and for the transaction of such other business as shall come before the meeting. Section 3.06. Regular Meetings. Regular meetings of the Board of Directors shall be held from time to time at such time and place within or without the State of Minnesota as may be fixed by resolution adopted by a majority of the whole Board of Directors. Section 3.07. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President, or by any two of the directors and shall be held from time to time at such time and place as may be designated in the notice of such meeting. Section 3.08. Notice of Meetings. Unless otherwise required by Statute, no notice need be given of any annual or regular meeting of the Board of Directors. Notice of each special meeting of the Board of Directors shall be given by the Secretary who shall give at least twenty-four (24) hours' notice thereof to each director by mail, telephone, telegram or in person. Section 3.09. Waiver of Notice. Notice of any meeting of the Board of Directors may be waived either before, at, or after such meeting in writing signed by each director. A director, by his attendance and participation in the action taken at any meeting of the Board of Directors, shall be deemed to have waived notice of such meeting. Section 3.10. Quorum. A majority of the whole Board of Directors shall constitute a quorum for the transaction of business except that, when a vacancy or vacancies exist, a majority of the remaining directors (provided such majority consists -5- 6 of not less than the lesser of (i) the number of directors required by Section 3.02, or (ii) two (2) directors) shall constitute a quorum. Section 3.11. Vacancies; Newly Created Directorships. Vacancies in the Board of Directors of this corporation occurring by reason of death, resignation or increase in the number of directors by the shareholders to the minimum number required by Section 3.01 or by the Board pursuant to Section 3.01, shall be filled for the unexpired term by a majority of the remaining directors of the Board although less than a quorum; newly created directorships resulting from an increase in the authorized number of directors by action of the Board of Directors as permitted by Section 3.01 may be filled by a two-thirds (2/3) vote of the directors serving at the time of such increase; and each person so elected shall be a director until his successor is elected by the shareholders, who may make such election at their next regular meeting or at any meeting duly called for that purpose; provided, however, that no vacancy can be filled as provided above if prohibited by the provisions of the Investment Company Act of 1940. Section 3.12. Removal. Removal of directors shall be governed by the provisions of Section 302A.233 of the Minnesota Statutes or other applicable provisions of the Minnesota Statutes or successors thereto. Section 3.13. Executive Committee. The Board of Directors, by the affirmative vote of a majority of the entire Board, may establish an Executive Committee consisting of two (2) or more directors. Such Committee may meet at stated times or on notice of all given by any of their own number. During the intervals between meetings of the Board of Directors, such Committee shall advise and aid the officers of the corporation in all matters concerning the business and affairs of the corporation and, generally, perform such duties and exercise such powers as may be directed or delegated by the Board of Directors from time to time. The Board of Directors may, by the affirmative vote of a majority of the entire Board, delegate to such Committee authority to exercise all the powers of the Board of Directors, except the power to amend the Bylaws and to take action on matters reserved to the entire Board by the Investment Company Act of 1940, while the Board of Directors is not in session. Vacancies in the membership of the Committee shall be filled by the Board of Directors at a regular meeting or at a special meeting called for that purpose. Section 3.14. Other Committees. The Board of Directors may establish other committees from time to time making such regulations as it deems advisable with respect to the membership, authority and procedures of such committees. Section 3.15. Written Action. Any action which might be taken at a meeting of the Board of Directors, or any duly constituted committee thereof, may be -6- 7 taken without a meeting if done in writing and signed by a majority of the directors or committee members. Section 3.16. Compensation. Directors who are not salaried officers of this corporation shall receive such fixed sum per meeting attended or such fixed annual sum as shall be determined, from time to time, by resolution of the Board of Directors. All directors may receive their expenses, if any, of attendance at meetings of the Board of Directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving this corporation in any other capacity and receiving proper compensation therefor. ARTICLE IV OFFICERS Section 4.01. Number. The officers of the corporation shall consist of a Chairman of the Board (if one is elected by the Board), the President, one or more Vice Presidents (if desired by the Board), a Secretary and one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers, and such other officers and agents as may, from time to time, be elected by the Board of Directors. Section 4.02. Election, Term of Office and Qualifications. At each annual meeting of the Board of Directors, the Board shall elect, from within or without their number, the President, the Secretary, the Treasurer and such other officers as may be deemed advisable. Such officers shall hold office until the next annual meeting of the directors or until their successors are elected and qualified. The President and all other officers who may be directors shall continue to hold office until the election and qualification of their successors, notwithstanding an earlier termination of their directorship. Section 4.03. Resignation. Any officer may resign his office at any time by delivering a written resignation to the Board of Directors, the President, the Secretary, or any Assistant Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 4.04. Removal and Vacancies. Any officer may be removed from his office by a majority of the whole Board of Directors, with or without cause. Such removal, however, shall be without prejudice to the contract rights of the person so removed. If there be a vacancy among the officers of the corporation by reason of death, resignation or otherwise, such vacancy shall be filled for the unexpired term by the Board of Directors. -7- 8 Section 4.05. Chairman of the Board. The Chairman of the Board, if one is elected, shall preside at all meetings of the shareholders and directors and shall have such other duties as may be prescribed, from time to time, by the Board of Directors. Section 4.06. President. The President shall have general active management of the business of the corporation. In the absence of the Chairman of the Board, he shall preside at all meetings of the shareholders and directors. He shall be the chief executive officer of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall be ex officio a member of all standing committees. He may execute and deliver, in the name of the corporation, any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation and, in general, shall perform all duties usually incident to the office of President. He shall have such other duties as may, from time to time, be prescribed by the Board of Directors. Section 4.07. Vice President. Each Vice President shall have such powers and shall perform such duties as may be specified in the Bylaws or prescribed by the Board of Directors or by the President. In the event of absence or disability of the President, Vice Presidents shall succeed to his power and duties in the order designated by the Board of Directors. Section 4.08. Secretary. The Secretary shall be secretary of, and shall attend all, meetings of the shareholders and Board of Directors and shall record all proceedings of such meetings in the minute book of the corporation. He shall give proper notice of meetings of shareholders and directors. He shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the President. Section 4.09. Treasurer. The Treasurer shall keep accurate accounts of all moneys of the corporation received or disbursed. He shall deposit all moneys, drafts and checks in the name of, and to the credit of, the corporation in such banks and depositories as a majority of the whole Board of Directors shall, from time to time, designate. He shall have power to endorse, for deposit, all notes, checks and drafts received by the corporation. He shall disburse the funds of the corporation, as ordered by the Board of Directors, making proper vouchers therefor. He shall render to the President and the directors, whenever required, an account of all his transactions as Treasurer and of the financial condition of the corporation, and shall perform such other duties as may, from time to time, be prescribed by the Board of Directors or by the President. Section 4.10. Assistant Secretaries. At the request of the Secretary, or in his absence or disability, any Assistant Secretary shall have power to perform all the duties of the Secretary and, when so acting, shall have all the powers of, and be subject -8- 9 to all restrictions upon, the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be assigned to them by the Board of Directors or the President. Section 4.11. Assistant Treasurers. At the request of the Treasurer, or in his absence or disability, any Assistant Treasurer shall have power to perform all the duties of the Treasurer, and when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Treasurer. The Assistant Treasurers shall perform such other duties as from time to time may be assigned to them by the Board of Directors or the President. Section 4.12. Compensation. The officers of this corporation shall receive such compensation for their services as may be determined, from time to time, by resolution of the Board of Directors. Section 4.13. Surety Bonds. The Board of Directors may require any officer or agent of the corporation to execute a bond (including, without limitation, any bond required by the Investment Company Act of 1940 and the rules and regulations of the Securities and Exchange Commission) to the corporation in such sum and with such surety or sureties as the Board of Directors may determine, conditioned upon the faithful performance of his duties to the corporation, including responsibility for negligence and for the accounting of any of the corporation's property, funds or securities that may come into his hands. In any such case, a new bond of like character shall be given at least every six years, so that the date of the new bond shall not be more than six years subsequent to the date of the bond immediately preceding. ARTICLE V SHARES AND THEIR TRANSFER AND REDEMPTION Section 5.01. Certificates for Shares. (a) The predecessor of this corporation (Wasatch Funds, Inc., a Utah corporation) stopped issuing share certificates as of February 1, 1996. Shareholders as of such date may receive share certificates of this corporation to represent interests in the Utah corporation held at the time of merger of it into this corporation. Other shareholders may only receive uncertificated shares. The share certificate, to be in such form as shall be prescribed by the Board of Directors, shall certify the number of shares of the corporation owned by him. The certificates for such shares shall be numbered in the order in which they shall be issued and shall be signed, in the name of the corporation, by the President or a Vice President and by the Treasurer, or by such officers as the Board of Directors may designate. Such signatures may be facsimile if authorized by the Board of Directors. Every certificate surrendered to the corporation -9- 10 for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in Section 5.08. (b) In case any officer, transfer agent or registrar who shall have signed any such certificate, or whose facsimile signature has been placed thereon, shall cease to be such an officer (because of death, resignation or otherwise) before such certificate is issued, such certificate may be issued and delivered by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 5.02. Issuance of Shares. The Board of Directors is authorized to cause to be issued shares of the corporation up to the full amount authorized by the Articles of Incorporation in such series and classes and in such amounts as may be determined by the Board of Directors and as may be permitted by law. No shares shall be allotted except in consideration of cash or of an amount transferred from surplus to stated capital upon a share dividend. At the time of such allotment of shares, the Board of Directors making such allotments shall state, by resolution, their determination of the fair value to the corporation in monetary terms of any consideration other than cash for which shares are allotted. The amount of consideration to be received in cash, or otherwise, shall not be less than the par value of the shares so allotted. No shares of stock issued by the corporation shall be issued, sold, or exchanged by or on behalf of the corporation for any amount less than the net asset value per share of the shares outstanding as determined pursuant to Article XI hereunder. Section 5.03. Redemption of Shares. Upon the demand of any shareholder this corporation shall redeem any share of stock issued by it held and owned by such shareholder at the net asset value thereof as determined pursuant to Article XI hereunder. The Board of Directors may suspend the right of redemption or postpone the date of payment during any period when: (a) trading on the New York Stock Exchange is restricted or such Exchange is closed for other than weekends or holidays; (b) the Securities and Exchange Commission has by order permitted such suspension; or (c) an emergency as defined by rules of the Securities and Exchange Commission exists, making disposal of portfolio securities or valuation of net assets of the corporation not reasonably practicable. Section 5.04. Transfer of Shares. Transfer of shares on the books of the corporation may be authorized only by the shareholder named in the certificate, or the shareholder's legal representative, or the shareholder's duly authorized attorney-in-fact, and upon surrender of the certificate or the certificates for such shares or a duly executed assignment covering shares held in unissued form. The corporation may treat, as the absolute owner of shares of the corporation, the person or persons in whose name shares are registered on the books of the corporation. -10- 11 Section 5.05. Registered Shareholders. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the laws of Minnesota. Section 5.06. Transfer Agents and Registrars. The Board of Directors may from time to time appoint or remove transfer agents and/or registrars of transfers of shares of stock of the corporation, and it may appoint the same person as both transfer agent and registrar. Upon any such appointment being made all certificates representing shares of capital stock thereafter issued shall be countersigned by one of such transfer agents or by one of such registrars of transfers or by both and shall not be valid unless so countersigned. If the same person shall be both transfer agent and registrar, only one countersignature by such person shall be required. Section 5.07. Transfer Regulations. The shares of stock of the corporation may be freely transferred, and the Board of Directors may from time to time adopt rules and regulations with reference to the method of transfer of the shares of stock of the corporation. Section 5.08. Lost, Stolen, Destroyed and Mutilated Certificates. The holder of any stock of the corporation shall immediately notify the corporation of any loss, theft, destruction or mutilation of any certificate therefor, and the Board of Directors may, in its discretion, cause to be issued to him a new certificate or certificates of stock upon the surrender of the mutilated certificate or in case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction, after the owner of the lost, stolen or destroyed certificate, or his legal representatives, gives to the corporation and to such registrar or transfer agent as may be authorized or required to countersign such new certificate or certificates a bond, in such sum as they may direct, and with such surety or sureties, as they may direct, as indemnity against any claim that may be made against them or any of them on account of or in connection with the alleged loss, theft, or destruction of any such certificate. ARTICLE VI DIVIDENDS, SURPLUS, ETC. Section 6.01. The corporation's net investment income will be determined, and its dividends shall be declared and made payable at such time(s) as the Board of Directors shall determine; dividends shall be payable to shareholders of record as of the date of declaration. -11- 12 It shall be the policy of the corporation to qualify for and elect the tax treatment applicable to regulated investment companies under the Internal Revenue Code, so that the corporation will not be subjected to Federal income tax on such part of its income or capital gains as it distributes to shareholders. ARTICLE VII BOOKS AND RECORDS, AUDIT, FISCAL YEAR Section 7.01. Books and Records. The corporation shall cause to be kept such books and records as required by law. Section 7.02. Audit, Accountant. (a) The Board of Directors shall cause the records and books of account of the corporation to be audited at least once in each fiscal year and at such other times as it may deem necessary or appropriate. (b) The corporation shall employ an independent certified public accountant or firm of independent certified public accountants as its Accountant to examine the accounts of the corporation and to sign and certify financial statements filed by the corporation. The Accountant's certificates and reports shall be addressed both to the Board of Directors and to the shareholders. (c) Any vacancy occurring between regular meetings, due to the death, resignation or otherwise of the Accountant, may be filled by the Board of Directors. Section 7.03. Fiscal Year. The fiscal year of the corporation shall be determined by the Board of Directors. ARTICLE VIII VOTING OF STOCK HELD Section 8.01. Unless otherwise provided by resolution of the Board of Directors, the President, any Vice President, the Secretary or the Treasurer, may from time to time appoint an attorney or attorneys or agent or agents of the corporation, in the name and on behalf of the corporation, to cast the votes which the corporation may be entitled to cast as a stockholder or otherwise in any other corporation or association, any of whose stock or securities may be held by the corporation, at meetings of the holders of the stock or other securities of any such other corporation or association, or to consent in writing to any action by any such other corporation or association, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the corporation and under its corporate seal, or otherwise, such written proxies, consents, -12- 13 waivers, or other instruments as it may deem necessary or proper in the circumstances; or any of such officers may themselves attend any meeting of the holders of stock or other securities of any such corporation or association and thereat vote or exercise any or all other powers of the corporation as the holder of such stock or other securities of such other corporation or association, or consent in writing to any action by any such other corporation or association. ARTICLE IX VALUATION OF NET ASSET VALUE Section 9.01. The net asset value per share of each series (and classes thereof, if any) issued by the corporation shall be determined in good faith by or under supervision of the officers of the corporation as authorized by the Board of Directors as often and on such days and at such time(s) as the Board of Directors shall determine. ARTICLE X CUSTODY OF ASSETS Section 10.01. All securities and cash owned by this corporation shall, as hereinafter provided, be held by or deposited with a bank or trust company having (according to its last published report) not less than two million dollars ($2,000,000) aggregate capital, surplus and undivided profits (the "Custodian"). This corporation shall enter into a written contract with the Custodian regarding the powers, duties and compensation of the Custodian with respect to the cash and securities of this corporation held by the Custodian. Said contract and all amendments thereto shall be approved by the Board of Directors of this corporation. In the event of the Custodian's resignation or termination, the corporation shall use its best efforts promptly to obtain a successor Custodian and shall require that the cash and securities owned by this corporation held by the Custodian be delivered directly to such successor Custodian. ARTICLE XI AMENDMENTS Section 11.01. These Bylaws may be amended or altered by a vote of the majority of the whole Board of Directors at any meeting provided that notice of such proposed amendment shall have been given in the notice given to the directors of such meeting. Such authority in the Board of Directors is subject to the power of the shareholders to change or repeal such Bylaws by a majority vote of the shareholders present or represented at any regular or special meeting of shareholders called for such purpose. The Board of Directors shall not make or alter any Bylaws fixing their -13- 14 qualifications, classifications, term of office, or number, except that the Board of Directors may make or alter any Bylaw to increase their number. ARTICLE XII MISCELLANEOUS Section 12.01. Interpretation. When the context in which words are used in these Bylaws indicates that such is the intent, singular words will include the plural and vice versa, and masculine words will include the feminine and neuter genders and vice versa. Section 12.02. Article and Section Titles. The titles of Sections and Articles in these Bylaws are for descriptive purposes only and will not control or alter the meaning of any of these Bylaws as set forth in the text. -14- EX-99.B(10) 4 EX-99.B(10) 1 Wasatch Funds, Inc. November 20, 1997 Page 1 November 20, 1997 Wasatch Funds, Inc. 68 South Main Street Suite 400 Salt Lake City, UT 84101 Ladies and Gentlemen: We have acted as counsel to Wasatch Funds, Inc., a Utah corporation (the "Company"), in rendering the opinions hereinafter set forth with respect to the authorization of the Company's Series G Common Shares (which represent interests in a series named Wasatch Micro-Cap Value Fund). The shares of the Company referred to above are referred to herein collectively as the "Shares." We understand that the Shares are being registered under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, pursuant to the Company's Registration Statement on Form N-1A relating to such shares (the "Registration Statement"). In rendering the opinions hereinafter expressed, we have reviewed the corporate proceedings taken by the Company in connection with the authorization and issuance of the Shares, and we have reviewed such questions of law and examined copies of such corporate records of the Company, certificates of public officials and of responsible officers of the Company, and other documents as we have deemed necessary as a basis for such opinions. As to the various matters of fact material to such opinions, we have, when such facts were not independently established, relied to the extent we deem proper on certificates of public officials and of responsible officers of the Company. In connection with such review and examination, we have assumed that all copies of documents provided to us conform to the originals and that all signatures are genuine. 2 WASATCH FUNDS, INC. November 20, 1997 Page 2 In addition, in rendering the opinions hereinafter expressed, we have assumed, with the concurrence of the Company, that all of the Shares will be issued and sold upon the terms and in the manner set forth in the Registration Statement; that the Company will not issue Shares in excess of the numbers authorized in the Company's Articles of Incorporation (and Certificates of Designation) as in effect at the respective dates of issuance; and that the Company will maintain its corporate existence and good standing under the laws of the State of Utah in effect at all times after the date of this opinion. Based on the foregoing, it is our opinion that the Shares issued from and after the date hereof, when issued and delivered by the Company as described in the Registration Statement, will be legally issued and fully paid and non-assessable; and the issuance of such Shares is not subject to preemptive rights. In rendering the foregoing opinions, we express no opinion as to the laws of any jurisdiction other than the State of Utah. We hereby consent to the filing of this opinion letter as an exhibit to the Registration Statement. Very truly yours, /s/ Dorsey & Whitney LLP MJR EX-99.B(11) 5 EX-99.B(11) 1 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to all references to our firm included in or made a part of this Form N-1A registration statement for the Wasatch Funds, Inc. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, November 24, 1997 EX-99.B(16).1 6 EX-99.B(16).1 1 Exhibit 16 WASATCH AGGRESSIVE EQUITY FUND SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATION FOR THE ONE YEAR PERIOD ENDED SEPTEMBER 30, 1997 TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE)-1 Total return = 29.5% 29.5% = (45,600/35,225)-1 FOR THE THREE YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Cumulative total return = 73.1% 73.1% = (45,600/26,345)-1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 20.1% 1/3 20.1% = (45,600/26,345) -1 FOR THE FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT)-1 Cumulative total return = 151.0% 151.0% = (45,600/18,165)-1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 20.2% 1/5 20.2%% = (45,600/18,165) -1 2 FOR THE TEN YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Cumulative total return = 287.8% 287.8% = (45,600/11,760)-1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 14.5% 1/10 14.5% = (45,600/11,760) -1 FOR THE PERIOD FROM DECEMBER 6, 1986 (COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Cumulative total return = 356.0% 356.0% = (45,600/10,000)-1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Total return = 15.0% 1/10.8 15.0% = (45,600/10,000) -1 EX-99.B(16).2 7 EX-99.B(16).2 1 Exhibit 16a WASATCH GROWTH FUND SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATION FOR THE ONE YEAR PERIOD ENDED SEPTEMBER 30, 1997 TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE)-1 Total return = 37.6% 37.6% = (46,643/33,903)-1 FOR THE THREE YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT)-1 Cumulative total return = 116.1% 116.1% = (46,643/21,584)-1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 29.3% 1/3 29.3% = (46,643/21,584) -1 FOR THE FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Cumulative total return = 177.0% 177.0% = (46,643/16,836)-1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 22.6% 1/5 22.6% = (46,643/16,836) -1 2 FOR THE TEN YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT)-1 Cumulative total return = 306.6% 306.6% = (46,643/11,470)-1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 15.1% 1/10 15.1% = (46,643/11,470) -1 FOR THE PERIOD FROM DECEMBER 6, 1986 (COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Cumulative total return = 366.4% 366.4% = (46,643/10,000) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Of $10,000 Total return = 15.3% 1/10.8 15.3% = (46,643/10,000) -1 EX-99.B(16).3 8 EX-99.B(16).3 1 Exhibit 16b WASATCH HOISINGTON U.S. TREASURY FUND SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATION ------------------------------------------------- FOR THE ONE YEAR PERIOD ENDED SEPTEMBER 30, 1997 TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 13.2% 13.2% = (23,612/20,852) -1 FOR THE THREE YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Cumulative total return = 30.6% 30.6% = (23,612/18,078) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 9.3% 1/3 9.3% = (23,612/18,078) -1 FOR THE FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Cumulative total return = 37.6% 37.6% = (23,612/17,158) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 6.6% 1/5 6.6% = (23,612/17,158) -1 2 FOR THE TEN YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Cumulative total return = 131.7% 131.7% = (23,612/10,190) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 8.8% 1/10 8.8% = (23,612/10,190) -1 FOR THE PERIOD FROM DECEMBER 6, 1986 (COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Cumulative total return = 136.1% 136.1% = (23,612/10,000) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Total return = 8.3% 1/10.8 8.3% = (23,612/10,000) -1 EX-99.B(16).4 9 EX-99.B(16).4 1 Exhibit 16d WASATCH MICRO-CAP FUND SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATION FOR THE ONE YEAR PERIOD ENDED SEPTEMBER 30, 1997 TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 44.6% 44.6% = (22,771/15,750) -1 FOR THE PERIOD FROM JUNE 19, 1995 (COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Cumulative total return = 127.7% 127.7% = (22,771/10,000) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Total return = 43.3% 1/2.3 43.3% = (22,771/10,000) -1 EX-99.B(16).5 10 EX-99.B(16).5 1 Exhibit 16c WASATCH MID-CAP FUND SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATION FOR THE ONE YEAR PERIOD ENDED SEPTEMBER 30, 1997 TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 21.75% 21.75% = (22,132/18,179) -1 FOR THE THREE YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Cumulative total return = 100.8% 100.8% = (22,132/11,021) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 26.2% 1/3 26.2% = (22,132/11,021) -1 FOR THE FIVE YEAR PERIOD ENDED SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 Cumulative total return = 122.9% 122.9% = (22,132/9,930) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL VALUE) -1 Total return = 17.4%% 1/5 17.4% = (22,132/9,930) -1 2 FOR THE PERIOD FROM AUGUST 16, 1992 (COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 30, 1997 CUMULATIVE TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Cumulative total return = 121.3% 121.3% = (22,132/10,000) -1 1/n TOTAL RETURN = (ENDING REDEEMABLE VALUE/INITIAL PAYMENT) -1 OF $10,000 Total return = 16.8% 1/5.1 16.8% = (22,132/10,000) -1 EX-27.1 11 EX-27.1
6 1 WASATCH AGGRESSIVE EQUITY 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 129,396,545 189,427,524 810,269 25,131 0 190,262,924 1,122,838 0 175,001 1,297,839 0 103,640,350 6,356,637 10,479,701 64,216 0 25,229,540 0 60,030,979 188,965,085 1,956,778 187,663 0 (2,901,486) (757,045) 31,513,784 16,058,451 45,815,190 0 0 (10,767,566) 0 661,672 5,215,254 430,518 (64,353,902) 0 5,304,583 0 0 1,934,279 0 2,982,813 195,729,662 24.17 (.12) 6.90 0 (1.22) 0 29.73 1.5 0 0
EX-27.2 12 EX-27.2
6 2 WASATCH GROWTH FUND 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 111,761,401 137,401,254 281,411 20,363 0 137,703,028 2,174,596 0 91,241 2,265,837 0 97,515,649 6,062,835 5,933,434 159,222 0 12,122,467 0 25,639,853 135,437,191 1,547,602 302,625 0 1,430,292 419,935 14,521,194 16,863,575 31,804,704 0 (342,214) (6,352,213) 0 3,579,929 3,836,178 385,650 31,200,549 204,038 3,830,949 0 0 954,694 0 1,430,292 97,306,459 17.57 .08 6.07 (.07) (1.31) 0 22.34 1.50 0 0
EX-27.3 13 EX-27.3
6 3 WASATCH-HOISINGTON U.S. TREASURY FUND 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 10,530,161 11,062,703 143,266 7,674 0 11,213,643 0 0 8,598 8,598 0 10,242,611 989,913 727,602 473,945 0 (44,053) 0 532,542 11,205,045 0 673,024 0 75,103 597,921 22,912 560,378 1,181,211 0 (194,393) 0 0 747,986 503,742 18,067 3,778,161 71,417 (66,965) 0 0 50,068 0 122,381 9,992,355 10.21 .61 .73 (.23) 0 0 11.32 .75 0 0
EX-27.4 14 EX-27.4
6 4 WASATCH MID-CAP FUND 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 58,975,244 77,796,859 20,080 19,728 0 77,836,667 500,997 0 92,934 593,931 0 52,458,113 3,534,975 7,158,391 0 0 5,963,008 0 18,821,615 77,242,736 137,860 92,556 0 (1,484,833) (1,254,417) 15,258,686 1,592,547 15,596,816 0 0 (15,375) 0 1,705,312 5,329,545 817 (51,247,594) 0 (8,025,886) 0 0 1,060,550 0 1,608,513 85,792,832 17.95 (.35) 4.25 0 0 0 21.85 1.75 0 0
EX-27.5 15 EX-27.5
6 5 WASATCH MICRO-CAP 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 126,520,819 157,263,443 1,561,840 17,672 0 158,842,955 790,268 0 145,237 935,505 0 116,101,871 36,837,354 29,817,167 0 0 11,062,955 0 30,742,624 157,907,450 418,556 341,707 0 (2,218,693) (1,458,430) 13,149,891 24,309,512 36,000,973 0 0 (4,659,756) 0 24,988,962 19,517,552 1,548,777 63,903,696 0 4,031,250 0 0 1,774,510 0 2,287,453 91,742,263 3.15 (.04) 1.36 0 (.18) 0 4.29 2.5 0 0
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