GW&K Equity Fund
GW&K Government Securities Fund
Semi-Annual Report
March 31, 1998
(Unaudited)
The Gannett Welsh & Kotler Funds
222 Berkeley Street
Boston, Massachusetts 02116
Board of Trustees
Arlene Zoe Aponte-Gonzalez
Benjamin H. Gannett
Morton S. Grossman
Harold G. Kotler
Timothy P. Neher
Josiah A. Spaulding, Jr.
Allan Tofias
Investment Adviser
GANNETT WELSH & KOTLER, INC.
222 Berkeley Street
Boston, Massachusetts 02116
(617) 236-8900
Transfer Agent
COUNTRYWIDE FUND SERVICES, INC.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
Shareholder Service
Nationwide: (Toll-Free) 888-GWK-FUND
(888-495-3863)
<PAGE>
Letter from the President
May 10, 1998
Dear Shareholders,
During the first quarter of 1998, stocks established all-time highs, while the
yield on the 30-year Treasury bond barely changed. As the stock market continues
to rise, however, concern builds about the valuation of underlying earnings and
their future sustainability. Continued strength of the economy seems inevitably
to incite fears of increased inflation and higher interest rates, a negative for
both stocks and bonds.
Yet, long-term history does not support this belief that growth must inevitably
cause inflation. Thus, despite growing concerns, we continue to take a
particularly sanguine approach to inflation. We still see little reason to
change this outlook.
While equity valuations are up in the area of historical highs, opportunities
prevail in many individual issues. At current low inflationary levels, real
interest rates have not declined as much as nominal rates over the past several
years and thus nominal yields have the potential to fall significantly below the
current 6% level, a positive for both stocks and bonds.
As we close this quarter, we would like to welcome any new shareholders to the
Gannett Welsh and Kotler Mutual Fund Family. With the experience gained from
managing individual accounts, we have successfully built a firm that currently
manages $2.4 billion in assets. We hope to enjoy a long and rewarding
relationship with all of you and welcome your comments and suggestions.
Best regards,
Harold G. Kotler, CFA
President
<PAGE>
GW&K Equity Fund
Letter to Shareholders
May 10, 1998
Dear Fellow Shareholders,
We are pleased to send you the second semi-annual report for the GW&K Equity
Fund. As of March 31, 1998, assets reached $49 million, more than double the
amount a year ago, and up sharply from the $37.3 million as of September 30,
1997. At this writing, the Fund has over $50 million in net assets.
We are participating in the inflows to mutual funds that you have undoubtedly
read about in the financial press. Net inflows during the past six months
totaled $7.2 million and $13 million in the last year.
Total return (price change and reinvested distributions) has also contributed to
the rise in assets. Performance for the past quarter was 13.63%, which compares
with 13.94% for the Standard & Poor's 500 Index and 10.06% for the Russell 2000
Index of smaller companies. Among the 721 growth and income funds tracked by
Lipper Analytical Services for the quarter, whose average return was 11.85%, we
placed in the 15th percentile. For the past year, the Fund's 45.67% return
outperformed the Lipper average of 40.84%, placing your Fund 133rd out of 646
funds, or in the 21st percentile. When compared with the Morningstar growth and
income funds, our percentile rankings were 24th for the quarter and 31st for the
past year.
The economy is growing, inflation is low, and interest rates, while higher than
we believe they will be in the period ahead, remain relatively conducive to
growth. These conditions in the past have been ideal for equity investors. This
growth has brought prosperity and an unprecedented flow into investment
programs, both in the United States and around the world. Valuations may appear
high compared with past levels, but opportunities are also great for many
businesses.
We will continue to focus our efforts on finding businesses that have long term
prospects for growth, that will do well at home but can also export their goods
or services to the growing countries of the world economy, and achieve fair
profit doing so. Many of these investments will be in less well-known companies
that are priced today at earnings multiples below their larger capitalization
competition, giving the investor a clearer path to good returns.
Your Fund today has about 55% of its assets in smaller companies.
Sincerely,
Edward B. White
GW&K Equity Fund
Portfolio Manager
<PAGE>
GW&K Government Securities
Letter to Shareholders
May 10, 1998
Dear Fellow Shareholders,
We are pleased to report on the status of the GW&K Government Securities Fund
for the six-month period ending March 31, 1998. Assets have grown to $27.6
million from $24.8 million at September 30, 1997. This growth came exclusively
from an increase in the number of shareholders.
Although interest rates declined during the six-month period the net asset value
of the Fund declined slightly resulting in a total six-month return of 2.92%.
The decline in interest rates was a general indication of the state of the
economy and the outlook for inflation. We have been in a period of steady
growth, low inflation, high employment, and strong consumer confidence. Within
this backdrop housing starts and existing home sales are at all time highs.
While this is good for the economy and the consumer, it is a drag on the
performance of mortgage-backed securities as prepayment rates of existing home
mortgages necessarily rise. Additionally fueling the prepayment rate increase is
the high level of refinancing activity which occurred during the first quarter
of 1998 as mortgage holders took advantage of the declining mortgage rates.
Despite the effects of the return of principal from prepayments, the yield on
the Fund averaged 5.86% for the six-month period as compared with an average
3-year Treasury yield of 5.70%.
We continue to search for value within the premium mortgage-backed sector and
also other sectors with similar high income and short duration characteristics.
We have identified the taxable premium housing bond market as a new sector
within the Fund and purchased a small bond position. These housing bonds are
issued by state and local governments, are generally AA rated or above and are
backed by mortgages. The position which we purchased offered similar yields to
conventional mortgage-backed securities with better call or prepayment
protection.
The prepayment outlook for the next few months is forecast to slow down as the
refinancing wave recedes. However, the strength of the housing market should
continue to pressure speeds. We believe that the diversification resulting from
the number of pools within the fund, the coupon range, and the seasoning of the
portfolio, protects us from severe prepayment losses and we should continue to
see consistent income distributions.
Sincerely,
Jeanne M. Skettino
GW&K Government Securities Fund
Portfolio Manager
<PAGE>
<TABLE>
<CAPTION>
The Gannett Welsh & Kotler Funds
Statements of Assets and Liabilities
March 31, 1998 (Unaudited)
====================================================================================================================================
GW&K
GW&K GOVERNMENT
EQUITY SECURITIES
FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities:
At amortized cost..................................................... $ 36,056,691 $ 27,185,605
=============== ===============
At market value (Note 2).............................................. $ 49,596,311 $ 27,469,613
Cash .................................................................... 259,438 109,561
Receivable for capital shares sold....................................... 66,800 36,000
Receivable for securities sold........................................... 24,649 --
Receivable for principal paydowns........................................ -- 91,976
Dividends and interest receivable........................................ 56,791 257,848
Organization expenses, net (Note 2)...................................... 24,567 24,567
--------------- ---------------
TOTAL ASSETS.......................................................... 50,028,556 27,989,565
--------------- ---------------
LIABILITIES
Dividends payable to shareholders........................................ -- 26,255
Payable for capital shares redeemed...................................... 300 --
Payable for securities purchased......................................... 639,150 302,216
Payable to affiliates (Note 4)........................................... 37,090 10,719
Other accrued expenses and liabilities................................... 47,613 39,397
--------------- ---------------
TOTAL LIABILITIES..................................................... 724,153 378,587
--------------- ---------------
NET ASSETS ............................................................ $ 49,304,403 $ 27,610,978
=============== ===============
Net assets consist of:
Paid-in capital.......................................................... $ 34,678,847 $ 27,333,142
Undistributed net investment income (loss)............................... 11,083 (2,952 )
Accumulated net realized gains (losses) from security transactions....... 1,074,853 ( 3,220 )
Net unrealized appreciation on investments (Note 1)...................... 13,539,620 284,008
--------------- ---------------
Net assets............................................................... $ 49,304,403 $ 27,610,978
=============== ===============
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value)............................ 3,840,120 2,704,824
=============== ===============
Net asset value, offering price and redemption price per share (Note 1).. $ 12.84 $ 10.21
=============== ===============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Gannett Welsh & Kotler Funds
Statements of Operations
For the Six Months Ended March 31, 1998 (Unaudited)
====================================================================================================================================
GW&K
GW&K GOVERNMENT
EQUITY SECURITIES
FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest.............................................................. $ 31,697 $ 886,815
Dividends............................................................. 279,322 --
--------------- ---------------
TOTAL INVESTMENT INCOME............................................. 311,019 886,815
--------------- ---------------
EXPENSES
Investment advisory fees (Note 4)..................................... 203,200 97,347
Administration fees (Note 4).......................................... 20,479 13,061
Accounting services fees (Note 4)..................................... 12,000 12,000
Professional fees..................................................... 11,371 11,371
Reports to shareholders............................................... 11,553 9,550
Registration fees..................................................... 10,355 8,445
Custodian fees........................................................ 10,760 7,318
Pricing fees.......................................................... 604 11,929
Transfer agent fees (Note 4).......................................... 6,000 6,000
Insurance expense..................................................... 5,107 5,107
Trustees' fees and expenses........................................... 5,266 5,266
Organization expenses (Note 2)........................................ 3,350 3,350
Postage and supplies.................................................. 3,509 2,195
Distribution expenses (Note 4)........................................ 1,946 1,857
--------------- ---------------
TOTAL EXPENSES...................................................... 305,500 194,796
Fees waived by the Adviser (Note 4)................................... ( 51,500 ) ( 65,000 )
--------------- ---------------
NET EXPENSES........................................................ 254,000 129,796
--------------- ---------------
NET INVESTMENT INCOME ................................................... 57,019 757,019
--------------- ---------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains (losses) from security transactions................ 4,172,228 ( 3,461 )
Net change in unrealized appreciation/depreciation on investments..... 543,880 ( 19,530 )
--------------- ---------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS ............... 4,716,108 ( 22,991 )
--------------- ---------------
NET INCREASE IN NET ASSETS FROM OPERATIONS .............................. $ 4,773,127 $ 734,028
=============== ===============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Gannett Welsh & Kotler Funds
Statements of Changes in Net Assets
For the Periods Ended March 31, 1998 and September 30, 1997
====================================================================================================================================
GW&K GW&K
EQUITY FUND GOVERNMENT SECURITIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS PERIOD SIX MONTHS PERIOD
ENDED ENDED ENDED ENDED
MARCH 31, 1998 SEPT. 30, MARCH 31, 1998 SEPT. 30,
(UNAUDITED) 1997(A) (UNAUDITED) 1997(A)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income....................... $ 57,019 $ 94,608 $ 757,019 $ 985,602
Net realized gains (losses) from security
transactions 4,172,228 694,978 ( 3,461 ) 42,296
Net change in unrealized appreciation/
depreciation on investments............... 543,880 6,776,858 ( 19,530 ) 303,538
------------ -------------- ------------- -------------
Net increase in net assets from operations..... 4,773,127 7,566,444 734,028 1,331,436
------------ -------------- ------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income........ ( 140,544) -- ( 759,971 ) ( 985,602 )
Distributions from net realized gains....... ( 3,792,353) -- ( 42,055 ) --
------------ -------------- ------------- -------------
Decrease in net assets from distributions to
shareholders ( 3,932,897) -- ( 802,026) ( 985,602 )
------------ -------------- ------------- -------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold................... 9,044,299 30,589,751 3,554,898 25,204,381
Net asset value of shares issued in
reinvestment of distributions to shareholders 3,902,989 -- 628,441 686,801
Payments for shares redeemed................ ( 1,829,869) ( 809,441) ( 1,359,090 ) ( 1,382,289 )
------------ -------------- ------------- -------------
Net increase in net assets from capital
share transactions 11,117,419 29,780,310 2,824,249 24,508,893
------------ -------------- ------------- -------------
TOTAL INCREASE IN NET ASSETS .................. 11,957,649 37,346,754 2,756,251 24,854,727
NET ASSETS:
Beginning of period......................... 37,346,754 -- 24,854,727 --
------------ -------------- ------------- -------------
End of period............................... $ 49,304,403 $ 37,346,754 $27,610,978 $24,854,727
============ ============== ============= =============
UNDISTRIBUTED NET
INVESTMENT INCOME .......................... $ 11,083 $ 94,608 $ ( 2,952 ) $ --
============ ============== ============= =============
NUMBER OF SHARES:
Sold........................................ 750,337 2,962,639 347,623 2,497,150
Reinvested.................................. 354,791 -- 61,485 67,615
Redeemed.................................... ( 154,003) ( 73,644) ( 132,929 ) ( 136,120 )
------------ -------------- ------------- -------------
Net increase in shares outstanding.......... 951,125 2,888,995 276,179 2,428,645
Shares outstanding, beginning of period..... 2,888,995 -- 2,428,645 --
------------ -------------- ------------- -------------
Shares outstanding, end of period........... 3,840,120 2,888,995 2,704,824 2,428,645
============ ============== ============= =============
(A) Represents the period from the commencement of operations (October 17, 1996)
through September 30, 1997.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Gannett Welsh & Kotler Funds
Financial Highlights
For the Periods Ended March 31, 1998 and September 30, 1997
====================================================================================================================================
GW&K GW&K
EQUITY FUND GOVERNMENT SECURITIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS PERIOD SIX MONTHS PERIOD
ENDED ENDED ENDED ENDED
MARCH 31, 1998 SEPT. 30, MARCH 31, 1998 SEPT. 30,
(UNAUDITED) 1997(A) (UNAUDITED) 1997(B)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD:
Net asset value at beginning of period...... $ 12.93 $ 10.00 $ 10.23 $ 10.00
------------ -------------- ------------- -------------
Income from investment operations:
Net investment income..................... 0.01 0.03 0.30 0.50
Net realized and unrealized gains (losses)
on investments........................... 1.16 2.90 -- 0.23
------------ -------------- ------------- -------------
Total from investment operations............ 1.17 2.93 0.30 0.73
------------ -------------- ------------- -------------
Less distributions:
Dividends from net investment income...... ( 0.04) -- ( 0.30 ) ( 0.50 )
Distributions from net realized gains..... ( 1.22) -- ( 0.02 ) --
------------ -------------- ------------- -------------
Total distributions......................... ( 1.26) -- ( 0.32 ) ( 0.50 )
------------ -------------- ------------- -------------
Net asset value at end of period............ $ 12.84 $ 12.93 $ 10.21 $ 10.23
============ ============== ============= =============
RATIOS AND SUPPLEMENTAL DATA:
Total return (not annualized)............... 10.75% 29.30% 2.92% 7.50%
============ ============== ============= =============
Net assets at end of period (000's)......... $ 49,304 $ 37,347 $ 27,611 $ 24,855
============ ============== ============= =============
Ratio of net expenses to average net
assets(C) (D) 1.25% 1.25% 1.00% 0.97%
Ratio of net investment income to average
net assets(D) 0.28% 0.43% 5.83% 6.19%
Portfolio turnover rate(D) ................. 43% 13% 25% 44%
Average commission rate per share........... $ 0.0742 $ 0.0842 $ -- $ --
(A) Represents the period from the initial public offering of shares (December 10, 1996) through September 30, 1997.
(B) Represents the period from the initial public offering of shares (December 16, 1996) through September 30, 1997.
(C) Absent fee waivers by the Adviser, the ratios of expenses to average net
assets would have been 1.50%(D) and 1.51%(D) for the periods ended March 31,
1998 and September 30, 1997, respectively, for the Equity Fund, and 1.50%(D)
and 1.47%(D) for the periods ended March 31, 1998 and September 30, 1997,
respectively, for the Government Securities Fund.
(D) Annualized.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
The Gannett Welsh & Kotler Funds
Notes to Financial Statements
March 31, 1998 (Unaudited)
================================================================================
1. ORGANIZATION
The GW&K Equity Fund and the GW&K Government Securities Fund (individually, a
Fund and, collectively, the Funds) are each a diversified series of shares of
The Gannett Welsh & Kotler Funds (the Trust). The Trust is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Trust was established as a Massachusetts business trust under a
Declaration of Trust dated April 30, 1996. The Declaration of Trust, as amended,
permits the Trustees to issue an unlimited number of shares of each Fund.
The Trust commenced operations on October 17, 1996, when shares of each Fund
were issued at $10.00 per share to affiliates of Gannett Welsh & Kotler, Inc.,
the Funds' investment adviser, in order to provide the initial capitalization of
the Trust.
On December 10, 1996, the GW&K Equity Fund, prior to offering shares to the
public, exchanged its shares for portfolio securities of GW&K Equity Fund, L.P.
(the Partnership) as part of a tax-free reorganization of the Partnership. The
GW&K Equity Fund acquired the securities of the Partnership at the Partnership's
cost basis and holding periods, thus resulting in the acquisition of securities
with unrealized appreciation of $6,218,882 as of December 10, 1996. Subsequent
to the exchange transaction, the Fund began the initial public offering of
shares.
The GW&K Government Securities Fund began its initial public offering of shares
on December 16, 1996.
The GW&K Equity Fund seeks long-term total return, from a combination of capital
growth and growth of income, by investing in a diversified portfolio of equity
securities.
The GW&K Government Securities Fund seeks total return, through both income and
capital appreciation. The Fund invests primarily in obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies or instrumentalities.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the Funds' significant accounting policies:
Security valuation -- The Funds' portfolio securities are valued as of the close
of business of the regular session of the New York Stock Exchange (currently
4:00 p.m., Eastern time). U.S. Government obligations and mortgage-backed
securities are generally valued at their most recent bid price as obtained from
one or more of the major market makers for such securities or are valued based
on estimates of market values obtained from yield data relating to instruments
or securities with similar characteristics. Portfolio securities traded on stock
exchanges and securities traded in the over-the-counter market are valued at the
last sales price as of the close of business on the day the securities are being
valued. Securities not traded on a particular day, or for which the last sale
price is not readily available, are valued at the closing bid price quoted by
brokers that make markets in the securities. Securities for which market
quotations are not readily available are valued at their fair value as
determined in good faith in accordance with consistently applied procedures
approved by and under the general supervision of the Board of Trustees.
Share valuation -- The net asset value per share of each Fund is calculated
daily by dividing the total value of each Fund's assets, less liabilities, by
the number of shares outstanding. The offering price and redemption price per
share of each Fund is equal to the net asset value per share.
Investment income -- Interest income is accrued as earned. Dividend income is
recorded on the ex-dividend date. Discounts and premiums on securities purchased
are amortized in accordance with income tax regulations which approximate
generally accepted accounting principles.
<PAGE>
Distributions to shareholders -- Dividends arising from net investment income
are declared daily and paid on the last business day of each month to
shareholders of the GW&K Government Securities Fund. Dividends arising from net
investment income are declared and paid annually to shareholders of the GW&K
Equity Fund. With respect to each Fund, net realized short-term capital gains,
if any, may be distributed throughout the year and net realized long-term
capital gains, if any, are distributed at least once each year. Income dividends
and capital gain distributions are determined in accordance with income tax
regulations.
Securities transactions -- Security transactions are accounted for on the trade
date. Securities sold are valued on a specific identification basis.
Securities traded on a to-be-announced basis -- The GW&K Government Securities
Fund trades portfolio securities on a to-be-announced (TBA) basis. In a TBA
transaction, the Fund has committed to purchase securities for which all
specific information is not yet known at the time of the trade, particularly the
face amount in mortgage-backed securities transactions. Securities purchased on
a TBA basis are not settled until they are delivered to the Fund, normally 15 to
45 days later. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other portfolio
securities. When effecting such transactions, assets of a dollar amount
sufficient to make payment for the portfolio securities to be purchased are
placed in a segregated account on the trade date.
Organizational expenses -- Expenses of organization, net of certain expenses
paid by the Adviser, have been capitalized and are being amortized on a
straight-line basis over five years.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Federal income tax -- It is each Fund's policy to comply with the special
provisions of the Internal Revenue Code applicable to regulated investment
companies. As provided therein, in any fiscal year in which a Fund so qualifies
and distributes at least 90% of its taxable net income, the Fund (but not the
shareholders) will be relieved of federal income tax on the income distributed.
Accordingly, no provision for income taxes is made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also each Fund's intention to declare as dividends
in each calendar year at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains (earned during the
twelve months ending October 31) plus undistributed amounts from prior years.
<TABLE>
<CAPTION>
The following information is based upon the federal income tax cost of portfolio
investments as of March 31, 1998:
- ------------------------------------------------------------------------------------------------------------------------------------
GW&K
GW&K GOVERNMENT
EQUITY SECURITIES
FUND FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross unrealized appreciation............................................ $ 14,531,484 $ 307,720
Gross unrealized depreciation............................................ ( 991,864 ) ( 23,712 )
--------------- ---------------
Net unrealized appreciation.............................................. $ 13,539,620 $ 284,008
=============== ===============
Federal income tax cost.................................................. $ 36,056,691 $ 27,185,605
=============== ===============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
3. INVESTMENT TRANSACTIONS
For the six months ended March 31, 1998, purchases and proceeds from sales and
maturities of investment securities, other than short-term investments, amounted
to $14,644,648 and $8,635,931, for the GW&K Equity Fund and $6,418,736 and
$3,160,760, respectively, for the GW&K Government Securities Fund.
4. TRANSACTIONS WITH AFFILIATES
The President and the Treasurer of the Trust are also principals of Gannett
Welsh & Kotler, Inc. (the Adviser), the Trust's investment adviser. Certain
other officers of the Trust are also officers of Countrywide Fund Services, Inc.
(CFS), the Trust's administrative services agent, transfer agent and shareholder
service agent, and accounting services agent.
ADVISORY AGREEMENT
Each Fund's investments are managed by the Adviser under the terms of an
advisory agreement (Advisory Agreement). Under the terms of the Advisory
Agreement, the GW&K Equity Fund pays the Adviser a fee, which is computed and
accrued daily and paid monthly, at an annual rate of 1.00% of its average daily
net assets; the GW&K Government Securities Fund pays the Adviser a fee, which is
computed and accrued daily and paid monthly, at an annual rate of 0.75% of its
average daily net assets.
In order to reduce the operating expenses of the GW&K Equity Fund and the GW&K
Government Securities Fund for the six months ended March 31, 1998, the Adviser
voluntarily waived advisory fees of $51,500 and $65,000, respectively.
ADMINISTRATIVE SERVICES AGREEMENT
Under the terms of an Administration Agreement with the Trust, CFS supplies
executive and regulatory services, supervises the preparation of tax returns,
and coordinates the preparation of reports to shareholders and reports to and
filings with the Securities and Exchange Commission and state securities
authorities. For these services, each Fund pays CFS a fee monthly, at the annual
rate of 0.10% of the average value of its daily net assets up to $100 million;
0.075% of such assets from $100 million to $200 million; and 0.05% of such
assets in excess of $200 million; subject to a $1,000 minimum monthly fee for
each Fund.
TRANSFER AGENT AND SHAREHOLDER SERVICE AGREEMENT
Under the terms of the Transfer, Dividend Disbursing, Shareholder Service and
Plan Agency Agreement with the Trust, CFS maintains the records for each
shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of each Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. For these services, CFS receives a monthly fee at an annual
rate of $17 per shareholder account from the GW&K Equity Fund and $21 per
shareholder account from the GW&K Government Securities Fund, subject to a
$1,000 minimum monthly fee for each Fund. In addition, each Fund pays
out-of-pocket expenses including, but not limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of the Accounting Services Agreement with the Trust, CFS
calculates the daily net asset value per share and maintains the financial books
and records of each Fund. For these services, CFS receives a monthly fee of
$2,000 from each Fund. In addition, each Fund pays certain out-of-pocket
expenses incurred by CFS in obtaining valuations of such Fund's portfolio
securities.
PLAN OF DISTRIBUTION
The Trust has a plan of distribution (the Plan) under which each Fund may incur
or reimburse the Adviser for expenses related to the distribution and promotion
of capital shares. The annual limitation for payment of such expenses under the
Plan is 0.25% of the average daily net assets of each Fund.
<PAGE>
<TABLE>
<CAPTION>
GW&K Equity Fund
Schedule of Investments
March 31, 1998 (Unaudited)
====================================================================================================================================
MARKET
SHARES COMMON STOCKS -- 96.6% VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS -- 4.8%
40,000 Huntco, Inc. - Class A......................................................... $ 575,000
16,000 Ionics, Inc.*.................................................................. 689,000
65,000 Universal Forest Products, Inc................................................. 1,105,000
------------
$ 2,369,000
------------
CONSUMER, CYCLICAL -- 11.3%
40,000 DeVry, Inc.*................................................................... $ 1,367,500
70,000 Extended Stay America, Inc.*................................................... 1,028,125
13,000 May Department Stores Company.................................................. 825,500
19,000 Sears Roebuck & Co............................................................. 1,091,313
30,000 Staffing Resources, Inc.*...................................................... 202,500
70,000 Standard-Pacific Corp.......................................................... 1,063,125
------------
$ 5,578,063
------------
CONSUMER, NON-CYCLICAL -- 17.2%
42,000 Chiron Corp.*.................................................................. 879,375
12,000 General Mills, Inc............................................................. 912,000
18,000 First Health Group Corp.*...................................................... 976,500
8,500 Merck & Co., Inc............................................................... 1,091,188
31,000 NCO Group, Inc.*............................................................... 775,000
33,000 Panamerican Beverages, Inc..................................................... 1,324,125
21,000 PepsiCo, Inc................................................................... 896,438
12,000 Pfizer, Inc.................................................................... 1,196,250
63,000 Response USA, Inc.*............................................................ 366,188
------------
$ 8,417,064
------------
ENERGY -- 9.6%
30,972 AES Corp.*..................................................................... $ 1,624,094
16,000 Camco International, Inc....................................................... 968,000
24,000 Questar Corp................................................................... 997,500
20,000 Royal Dutch Petroleum Company.................................................. 1,136,250
------------
$ 4,725,844
------------
FINANCIAL SERVICES -- 16.1%
64,000 Berkshire Realty Company, Inc.................................................. $ 768,000
23,000 Boston Properties, Inc......................................................... 809,313
21,000 Capital One Financial Corp..................................................... 1,656,375
6,000 Citicorp....................................................................... 852,000
58,000 CRIIMI MAE, Inc................................................................ 895,375
4,400 General Re Corp................................................................ 970,750
46,000 Health & Retirement Property Trust............................................. 925,750
14,000 MBIA, Inc...................................................................... 1,085,000
------------
$ 7,962,563
------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GW&K Equity Fund
Schedule of Investments (Continued)
March 31, 1998 (Unaudited)
====================================================================================================================================
MARKET
SHARES COMMON STOCKS -- 96.6% VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL -- 11.8%
19,000 Boeing Company................................................................. $ 990,375
20,000 Dames & Moore, Inc............................................................. 266,250
12,000 General Electric Company....................................................... 1,034,250
13,000 General Motors Corp. - Class H................................................. 588,250
7,311 Raytheon Company - Class A..................................................... 415,813
25,000 Republic Industries, Inc.*..................................................... 645,313
24,500 Samsonite Corp.*............................................................... 719,688
42,000 U.S. Rentals, Inc.*............................................................ 1,160,250
------------
$ 5,820,189
------------
TECHNOLOGY -- 16.0%
35,000 Bay Networks, Inc.*............................................................ $ 949,375
45,000 Brightpoint, Inc.*............................................................. 773,438
47,000 Cognex Corp.*.................................................................. 1,004,625
33,000 Mastech Corp.*................................................................. 1,681,969
29,000 Oracle Corp.*.................................................................. 915,313
50,000 SDL, Inc.*..................................................................... 1,187,500
13,000 Xerox Corp..................................................................... 1,383,688
------------
$ 7,895,908
------------
UTILITIES -- 9.8%
15,000 AT&T Corp...................................................................... $ 984,370
18,000 Enron Corp..................................................................... 834,750
16,000 GTE Corp....................................................................... 958,000
30,000 Houston Industries, Inc........................................................ 862,500
28,000 WorldCom, Inc.*................................................................ 1,205,750
------------
$ 4,845,370
------------
TOTAL COMMON STOCKS (COST $34,074,381) ........................................ $47,614,001
------------
CASH EQUIVALENTS -- 4.0%
1,982,310 Merrimac Cash Fund - Institutional Class (Cost $1,982,310)..................... $ 1,982,310
------------
TOTAL INVESTMENTS AT VALUE-- 100.6% (COST $36,056,691) ....................... $49,596,311
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.6)% ............................... (291,908 )
------------
NET ASSETS-- 100.0% ........................................................... $ 49,304,403
============
* Non-income producing security.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GW&K Government Securities Fund
Portfolio of Investments
March 31, 1998 (Unaudited)
====================================================================================================================================
PAR MARKET
VALUE MORTGAGE-BACKED SECURITIES-- 97.1% VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 25.5%
$ 1,247,593 9.50%, 06/15/09 thru 10/15/09.................................................. $ 1,354,363
8,220 9.75%, 12/15/00 thru 01/15/01.................................................. 8,528
2,183,201 10.00%, 10/15/00 thru 02/20/21................................................. 2,408,652
23,292 10.25%, 05/15/99 thru 02/15/01................................................. 24,088
402,443 10.50%, 02/20/05 thru 10/20/19................................................. 444,279
478,637 11.00%, 12/15/09 thru 01/15/16................................................. 541,503
8,544 11.25%, 05/15/98 thru 04/15/01................................................. 8,971
1,032,210 11.50%, 03/15/10 thru 08/20/19................................................. 1,184,007
226,894 11.75%, 05/15/04 thru 08/15/13................................................. 253,996
16,746 12.00%, 08/15/13 thru 09/15/14................................................. 19,553
15,134 12.25%, 04/15/14............................................................... 17,329
189,572 13.00%, 01/15/11 thru 01/15/15................................................. 224,030
- -------------- ------------
$ 5,832,486 TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ................................ $ 6,489,299
- -------------- ------------
(Amortized Cost $6,377,606)
FEDERAL HOME LOAN MORTGAGE CORPORATION -- 39.3%
$ 436,272 7.50%, 02/01/22................................................................ $ 452,850
548,508 8.25%, 06/01/17................................................................ 572,341
978,464 8.50%, 03/01/08 thru 09/01/17.................................................. 1,024,378
828,810 8.75%, 10/01/08................................................................ 872,496
1,039,117 9.00%, 06/01/08 thru 07/01/18.................................................. 1,107,256
2,185,450 9.25%, 10/01/08 thru 12/01/10.................................................. 2,330,716
133,893 9.50%, 03/01/09................................................................ 143,357
1,405,562 9.75%, 04/01/08 thru 12/01/17.................................................. 1,511,701
34,777 10.00%, 01/01/01 thru 03/01/03................................................. 36,397
1,299,175 10.25%, 04/01/09 thru 02/01/10................................................. 1,408,691
292,525 10.50%, 06/01/00 thru 10/01/19................................................. 317,995
270,669 10.75%, 07/01/10............................................................... 297,164
234,670 11.00%, 12/01/00 thru 01/01/19................................................. 257,361
44,196 11.25%, 09/01/09 thru 11/01/13................................................. 49,235
201,294 11.50%, 06/01/11 thru 06/01/19................................................. 226,218
68,778 11.75%, 02/01/11 thru 07/01/13................................................. 77,638
134,441 12.50%, 01/01/10 thru 05/01/15................................................. 153,380
- -------------- ------------
$ 10,136,601 TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION .................................. $ 10,839,174
- -------------- ------------
(Amortized Cost $10,764,246)
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 34.3%
$ 346,606 8.00%, 08/01/19................................................................ $ 364,072
1,523,110 8.50%, 12/01/08 thru 03/01/22.................................................. 1,602,144
503,545 8.75%, 08/01/07 thru 08/01/17.................................................. 528,119
1,973,866 9.00%, 09/01/24 thru 03/01/25.................................................. 2,084,329
260,087 9.25%, 12/01/15................................................................ 279,731
372,165 9.50%, 07/01/17................................................................ 403,539
119,126 9.75%, 05/01/09................................................................ 128,103
<PAGE>
GW&K Government Securities Fund
Portfolio of Investments (Continued)
March 31, 1998 (Unaudited)
====================================================================================================================================
PAR MARKET
VALUE MORTGAGE-BACKED SECURITIES-- 97.1% VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 34.3% (CONTINUED)
2,422,167 10.00%, 11/01/00 thru 10/01/20................................................. 2,642,239
83,077 10.25%, 05/01/09 thru 03/01/16................................................. 91,530
774,587 10.50%, 08/01/00 thru 09/01/20................................................. 856,571
73,452 10.75%, 09/01/09 thru 03/01/14................................................. 82,302
228,958 11.00%, 10/01/11............................................................... 238,116
19,161 11.25%, 10/01/15............................................................... 21,648
72,349 12.00%, 03/01/13 thru 07/01/13................................................. 83,343
58,859 12.25%, 05/01/10 thru 07/01/15................................................. 67,132
- -------------- ------------
$ 8,831,115 TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION ................................... $ 9,472,918
- -------------- ------------
(Amortized Cost $9,375,579)
$ 24,800,202 TOTAL MORTGAGE-BACKED SECURITIES .............................................. $ 26,801,391
- -------------- ------------
- --------------
(Amortized Cost $26,517,431)
MUNICIPAL OBLIGATIONS -- 0.9%
$ 250,000 Mississippi Housing Rev. Bond, 9.15%, 09/15/14 (Amortized Cost $264,951)....... $ 265,000
- --------------
- -------------- ------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
MARKET
SHARES CASH EQUIVALENTS -- 1.5% VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
403,222 Merrimac Cash Fund - Institutional Class (Cost $403,222)....................... $ 403,222
------------
TOTAL INVESTMENTS AT VALUE-- 99.5% ............................................ $ 27,469,613
OTHER ASSETS IN EXCESS OF LIABILITIES-- 0.5% .................................. 141,365
------------
NET ASSETS-- 100.0% ........................................................... $ 27,610,978
============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001012401
<NAME> THE GANNETT WELSH & KOTLER FUNDS
<SERIES>
<NUMBER> 1
<NAME> GW&K EQUITY FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 36,056,691
<INVESTMENTS-AT-VALUE> 49,596,311
<RECEIVABLES> 148,240
<ASSETS-OTHER> 259,438
<OTHER-ITEMS-ASSETS> 24,567
<TOTAL-ASSETS> 50,028,556
<PAYABLE-FOR-SECURITIES> 639,150
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 85,003
<TOTAL-LIABILITIES> 724,153
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,678,847
<SHARES-COMMON-STOCK> 3,840,120
<SHARES-COMMON-PRIOR> 2,888,995
<ACCUMULATED-NII-CURRENT> 11,083
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,074,853
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,539,620
<NET-ASSETS> 49,304,403
<DIVIDEND-INCOME> 279,322
<INTEREST-INCOME> 31,697
<OTHER-INCOME> 0
<EXPENSES-NET> 254,000
<NET-INVESTMENT-INCOME> 57,019
<REALIZED-GAINS-CURRENT> 4,172,228
<APPREC-INCREASE-CURRENT> 543,880
<NET-CHANGE-FROM-OPS> 4,773,127
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 140,544
<DISTRIBUTIONS-OF-GAINS> 3,792,353
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 750,337
<NUMBER-OF-SHARES-REDEEMED> 154,003
<SHARES-REINVESTED> 354,791
<NET-CHANGE-IN-ASSETS> 11,957,649
<ACCUMULATED-NII-PRIOR> 94,608
<ACCUMULATED-GAINS-PRIOR> 694,978
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 203,200
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 305,500
<AVERAGE-NET-ASSETS> 40,817,313
<PER-SHARE-NAV-BEGIN> 12.93
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> 1.16
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> 1.22
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.84
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001012401
<NAME> THE GANNETT WELSH & KOTLER FUNDS
<SERIES>
<NUMBER> 2
<NAME> GW&K GOVERNMENT SECURITIES FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 27,185,605
<INVESTMENTS-AT-VALUE> 27,469,613
<RECEIVABLES> 385,824
<ASSETS-OTHER> 109,561
<OTHER-ITEMS-ASSETS> 24,567
<TOTAL-ASSETS> 27,989,565
<PAYABLE-FOR-SECURITIES> 302,216
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76,371
<TOTAL-LIABILITIES> 378,587
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 27,333,142
<SHARES-COMMON-STOCK> 2,704,824
<SHARES-COMMON-PRIOR> 2,428,645
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 2,952
<ACCUMULATED-NET-GAINS> (3,220)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 284,008
<NET-ASSETS> 27,610,978
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 886,815
<OTHER-INCOME> 0
<EXPENSES-NET> 129,796
<NET-INVESTMENT-INCOME> 757,019
<REALIZED-GAINS-CURRENT> (3,461)
<APPREC-INCREASE-CURRENT> (19,530)
<NET-CHANGE-FROM-OPS> 734,028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 759,971
<DISTRIBUTIONS-OF-GAINS> 42,055
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 347,623
<NUMBER-OF-SHARES-REDEEMED> 132,929
<SHARES-REINVESTED> 61,485
<NET-CHANGE-IN-ASSETS> 2,756,251
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 42,296
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 97,347
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 194,796
<AVERAGE-NET-ASSETS> 26,045,720
<PER-SHARE-NAV-BEGIN> 10.23
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .30
<PER-SHARE-DISTRIBUTIONS> .02
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.21
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
