The
Gannett
[LOGO]Welsh &
Kotler
Funds
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GW&K Equity Fund
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GW&K Government Securities Fund
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Semi-Annual Report
March 31, 1999
(Unaudited)
<PAGE>
LETTER FROM THE PRESIDENT MAY 14, 1999
================================================================================
Dear Shareholders,
During this reporting period we witnessed one of the most significant gains in
market history, as major indices rebounded from the market uncertainty that
characterized the late summer and fall of 1998. At the end of September,
investors worldwide sought the safety and liquidity of U.S. Government
securities, as yields hit record lows during the "flight to quality." In order
to halt the liquidity squeeze and boost consumer confidence, the Federal Reserve
cut rates three times from September to November, bringing the overnight rate to
4.75%. This action helped calm financial markets, which had been hurt by the
default of emerging debt from Asia, Russia and Latin America. Financial
conditions in these markets have improved since the summer, but the economies
are still facing the burden of deflation. The most visible example of this is in
Asia where demand has been slow, thus creating excess capacity. This excess
capacity ultimately has led to a decrease in income and profitability for Japan,
in particular.
The last year in the United States has been characterized by many as a period in
which we have seen growth with little or no inflation. At Gannett Welsh &
Kotler, we have taken the stance that the United States has not necessarily been
in a period of little or no inflation, but rather deflation. The general public
has viewed deflation, since the turn of the century, with vast negativity;
however, that is not always correct. It is our belief that the United States for
the last year has undergone significant growth and economic prosperity, while in
an economic cycle highlighted by deflation.
As we reflect on the changes of the past decade, we discover that the United
States has been involved in an ongoing technological revolution. This revolution
has benefited society immensely as information and products are more readily
available, at lower prices, via the Internet. The development of technology and
its products has yielded an increased demand for new jobs as national
unemployment figures, currently 4.2%, have not been this low since 1970. With
rapid technological development and low unemployment, the United States has been
able to sharply increase productivity, thus creating "good" deflation. This good
deflation has led to lower prices and profits, unlike the deflation in Asia,
which was characterized as "bad" due to excess capacity.
The United States stock indices have rebounded from losses last summer with
strong returns in the last two quarters. Even so, we must be prepared for
volatility in markets as numerous stocks are trading at record high multiples
and world financial markets are always susceptible to downward turns. As
difficult as the corrections in the past year were for investors worldwide, it
heightened a needed awareness of the economic interdependence between the United
States and its global partners. At Gannett Welsh & Kotler, we look forward to
this new era because we have always selected your stocks and bonds one at a
time, using bottom-up fundamental research.
Gannett Welsh & Kotler's investment advisory business continues to grow at a
steady pace, as do our mutual funds. As of March 31,1999 the firm's total assets
under management were approaching $3.1 billion, and the Equity and Government
Securities Funds reached $58 million and $35 million, respectively. The Funds
allow clients to access our management, exclusive of account size. We are
committed to meeting the financial aspirations of all our clients.
Harold G. Kotler, CFA
President
1
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GW&K EQUITY FUND
LETTER TO SHAREHOLDERS MAY 14, 1999
================================================================================
Dear Fellow Shareholders,
The semi-annual report for the GW&K Equity Fund is coming to you reflecting a
period of strength in the stock market. After significant declines in stock
prices at the time of the 1998 annual report, most major indices have rebounded
to end on higher ground. We remain committed to our strategy of holding stocks
of companies with solid growth, but which trade at reasonable prices.
As of March 31, 1999, the Fund's total net assets stood at $58.0 million, up
from $47.2 million on September 30, 1998.
For the six-month period ended March 31, 1999, the total return for the GW&K
Equity Fund was 24.21%, which compares with 27.34% for the Standard & Poors's
500 Index, 10.00% for the Russell 2000 Index of smaller companies, and average
returns of 19.88% and 14.64% for Lipper and Morningstar Growth and Income funds,
respectively. Your Fund's total return of 22.00% for the first quarter ending
December 31, 1998 placed it in the Morningstar 15th percentile, while the 1.81%
return for the second quarter ended March 31, 1999 placed it in the 58th
percentile. When compared with the Lipper Growth and Income funds, whose average
returns were 17.79% for the first quarter and 1.77% for the second quarter, the
Fund was ranked in the 18th and 53rd percentiles, respectively.
The performance spread widening between the S&P 500 and the Russell 2000 of the
past several years highlighted this reporting period. The S&P 500's surge was
due in part to the returns of a few large capitalization, mostly technology
related stocks. We think it is important to remember that, since 1979, there
have been roughly the same number of years (eleven) when the S&P 500 returned
more than the Russell 2000, as years when the Russell 2000 outperformed the
total return of the S&P 500 (nine).
At GW&K, we have made a commitment to hold approximately one-fifth of the
portfolio in a carefully selected group of smaller capitalization companies,
with a similar 20% in mid capitalization stocks, and the remaining 60% in large
capitalization stocks. The smaller companies in the Fund provide high as well as
steady growth and should continue to build their businesses and stock prices
without a dramatic increase in their price to earnings ratios. The large
capitalization side has been driven by the opposite, as price to earnings ratios
have hit all time highs. While we have added large capitalization names to the
Fund, we have been careful not to pay too high a price for future earnings.
2
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GW&K EQUITY FUND
LETTER TO SHAREHOLDERS (CONTINUED) MAY 14, 1999
================================================================================
We continue to believe that long-term investors should hold diversified
portfolios of growing companies. Many of our smaller capitalization holdings are
reporting significant earnings progress which, we believe, will be translated
into share price gain in the periods ahead. Many stocks are fairly priced and
represent excellent value in a market that is led by many stocks that appear
richly valued. As long as their businesses remain successful, the stocks that
have been lagging should do well. At GW&K we look forward to meeting the
financial goals of our shareholders, while adhering to the bottom-up research
that is critical in selecting stocks for the portfolio.
Sincerely,
Edward B. White, CFA, CIC
GW&K Equity Fund
Portfolio Manager
3
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GW&K GOVERNMENT SECURITIES FUND
LETTER TO SHAREHOLDERS MAY 14, 1999
================================================================================
Dear Fellow Shareholders,
We are pleased to report on the status of the GW&K Government Securities Fund
for the semi-annual period ended March 31,1999. Shares within the Fund have
reached 3.52 million, as growth continues to come from the investment allocation
to the Fund for managed accounts at GW&K.
The bond market experienced dramatic movement over the six-month period ended
March 31, 1999. The 10-year U.S. Treasury bond, a benchmark for mortgage
pricing, moved from 4.42% at September 30, 1998 to 5.24%. While the rate
movement down had little to do with domestic economic fundamentals, the movement
up has been directed by the continued strength of the U.S. economy. Despite the
upward movement of rates, this current cycle of economic prosperity has
maintained a healthy prepayment rate into second quarter. Housing statistics
remain strong which suggests that prepayments should continue to remain at
levels higher than prepayment models might suggest based on current interest
rates.
The net asset value of the Fund dropped over the six-month period, reflecting
the effects of the accelerating rate of principal paydowns. Although the Fund's
share price declined, its dividend distribution rate increased during the period
to 7.12%, consistent with our objective for good current income flow. As a
result, the total return of the Fund was 2.36% for the six-month period, versus
1.38% for the Lehman 1-3 Year U.S. Government Bond Index.
At Gannett Welsh and Kotler, we continue to search for value within the premium
mortgage-backed sector. In the last two quarters we added $5.25 million in new
mortgage-backed pools. While the yields on these were attractive, we did see
spread tightening during the second quarter. In addition, we purchased $0.7
million of two pools of home equity loans. This type of security is not
government guaranteed, but is rated AAA, and may be backed by private insurance.
The home equity loans are of interest to us, due to their principal paydown
lockout and low dollar price. We will continue to look for additional types of
securities that meet the maturity and income requirements for the Fund, while
exhibiting reduced prepayment risk.
Sincerely,
Jeanne M. Skettino, CFA
GW&K Government Securities Fund
Portfolio Manager
4
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<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
=====================================================================================
GW&K
GW&K GOVERNMENT
EQUITY SECURITIES
FUND FUND
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ASSETS
Investments in securities:
<S> <C> <C>
At amortized cost ............................... $ 40,599,898 $ 34,693,525
============ ============
At market value (Note 2) ........................ $ 57,903,090 $ 34,802,154
Cash ............................................... 32,100 --
Dividends and interest receivable .................. 45,453 339,898
Receivable for principal paydowns .................. -- 170,551
Receivable for capital shares sold ................. 85,844 --
Receivable for securities sold ..................... 33,399 --
Organization expenses, net (Note 2) ................ 17,867 17,867
Other assets ....................................... 8,930 8,328
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TOTAL ASSETS .................................... 58,126,683 35,338,798
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LIABILITIES
Dividends payable to shareholders .................. -- 37,604
Payable for capital shares redeemed ................ 50,750 30,311
Payable for securities purchased ................... 19,000 --
Payable to affiliates (Note 4) ..................... 69,980 37,296
Other accrued expenses and liabilities ............. 16,353 12,136
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TOTAL LIABILITIES ............................... 156,083 117,347
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NET ASSETS ......................................... $ 57,970,600 $ 35,221,451
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Net assets consist of:
Paid-in capital .................................... $ 40,393,356 $ 35,633,144
Distributions in excess of net investment income ... (55,406) (224,262)
Accumulated net realized gains (losses)
from security transactions ...................... 329,458 (296,060)
Net unrealized appreciation on investments (Note 1) 17,303,192 108,629
------------ ------------
Net assets ......................................... $ 57,970,600 $ 35,221,451
============ ============
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value) ...... 4,292,067 3,522,149
============ ============
Net asset value, offering price and
redemption price per share (Note 1) ............. $ 13.51 $ 10.00
============ ============
</TABLE>
See accompanying notes to financial statements.
5
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<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
==========================================================================================
GW&K
GW&K GOVERNMENT
EQUITY SECURITIES
FUND FUND
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INVESTMENT INCOME
<S> <C> <C>
Interest ............................................. $ -- $ 1,063,772
Dividends ............................................ 322,535 --
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TOTAL INVESTMENT INCOME ........................... 322,535 1,063,772
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EXPENSES
Investment advisory fees (Note 4) .................... 268,808 131,710
Administration fees (Note 4) ......................... 27,021 17,705
Professional fees .................................... 15,634 15,634
Accounting services fees (Note 4) .................... 14,000 12,000
Custodian fees ....................................... 14,331 8,807
Pricing fees ......................................... 558 20,066
Transfer agent fees (Note 4) ......................... 6,000 6,000
Insurance expense .................................... 6,842 4,578
Trustees' fees and expenses .......................... 5,434 5,434
Registration fees .................................... 4,226 5,838
Reports to shareholders .............................. 5,185 3,866
Organization expenses (Note 2) ....................... 3,350 3,350
Postage and supplies ................................. 2,066 1,421
Distribution expenses (Note 4) ....................... 1,554 1,204
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TOTAL EXPENSES .................................... 375,009 237,613
Fees waived by the Adviser (Note 4) .................. (39,000) (62,000)
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NET EXPENSES ...................................... 336,009 175,613
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NET INVESTMENT INCOME (LOSS) ............................ (13,474) 888,159
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REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from security transactions ........ 496,405 --
Net change in unrealized appreciation/
depreciation on investments ....................... 10,867,966 (60,996)
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NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS 11,364,371 (60,996)
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NET INCREASE IN NET ASSETS FROM OPERATIONS .............. $ 11,350,897 $ 827,163
============ ============
</TABLE>
See accompanying notes to financial statements.
6
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<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIODS ENDED MARCH 31, 1999 AND SEPTEMBER 30, 1998
============================================================================================================================
GW&K GW&K
EQUITY FUND GOVERNMENT SECURITIES FUND
----------------------------- -----------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
MARCH 31, 1999 SEPT. 30, MARCH 31, 1999 SEPT. 30,
(UNAUDITED) 1998 (UNAUDITED) 1998
- ----------------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
<S> <C> <C> <C> <C>
Net investment income (loss) ......................... $ (13,474) $ 123,725 $ 888,159 $ 1,563,936
Net realized gains (losses) from security transactions 496,405 2,930,429 -- (31,710)
Net change in unrealized appreciation/depreciation
on investments .................................... 10,867,966 (6,560,514) (60,996) (133,913)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from operations ... 11,350,897 (3,506,360) 827,163 1,398,313
------------ ------------ ------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ................. -- (140,544) (888,159) (1,563,936)
Distributions in excess of net investment income ..... (119,721) -- (353,995) (134,858)
Distributions from net realized gains ................ -- (3,792,354) -- (42,055)
------------ ------------ ------------ ------------
Decrease in net assets from distributions to shareholders (119,721) (3,932,898) (1,242,154) (1,740,849)
------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ............................ 3,113,225 15,867,029 1,667,080 13,536,142
Net asset value of shares issued in
reinvestment of distributions to shareholders ..... 118,604 3,902,989 1,023,095 1,393,399
Payments for shares redeemed ......................... (3,676,058) (2,493,861) (2,365,804) (4,129,661)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
capital share transactions ........................... (444,229) 17,276,157 324,371 10,799,880
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS ........................................... 10,786,947 9,836,899 (90,620) 10,457,344
NET ASSETS
Beginning of period .................................. 47,183,653 37,346,754 35,312,071 24,854,727
------------ ------------ ------------ ------------
End of period ........................................ $ 57,970,600 $ 47,183,653 $ 35,221,451 $ 35,312,071
============ ============ ============ ============
UNDISTRIBUTED NET
INVESTMENT INCOME .................................... $ -- $ 77,789 $ -- $ 129,733
============ ============ ============ ============
NUMBER OF SHARES
Sold ................................................. 245,599 1,290,520 166,139 1,330,599
Reinvested ........................................... 8,938 354,791 101,773 136,897
Redeemed ............................................. (289,826) (206,950) (235,661) (406,243)
------------ ------------ ------------ ------------
Net increase (decrease) in shares outstanding ........ (35,289) 1,438,361 32,251 1,061,253
Shares outstanding, beginning of period .............. 4,327,356 2,888,995 3,489,898 2,428,645
------------ ------------ ------------ ------------
Shares outstanding, end of period .................... 4,292,067 4,327,356 3,522,149 3,489,898
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
GW&K EQUITY FUND
FINANCIAL HIGHLIGHTS
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
=========================================================================================================
SIX MONTHS
ENDED YEAR PERIOD
MARCH 31, ENDED ENDED
1999 SEPT. 30, SEPT. 30,
(UNAUDITED) 1998 1997(A)
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PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<S> <C> <C> <C>
Net asset value at beginning of period .................... $ 10.90 $ 12.93 $ 10.00
-------- -------- --------
Income from investment operations:
Net investment income .................................. -- 0.03 0.03
Net realized and unrealized gains (losses)
on investments ...................................... 2.64 (0.80) 2.90
-------- -------- --------
Total from investment operations .......................... 2.64 (0.77) 2.93
-------- -------- --------
Less distributions:
Dividends from net investment income ................... (0.03) (0.04) --
Distributions from net realized gains .................. -- (1.22) --
-------- -------- --------
Total distributions ....................................... (0.03) (1.26) --
-------- -------- --------
Net asset value at end of period .......................... $ 13.51 $ 10.90 $ 12.93
======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Total return .............................................. 24.21%(D) (5.99%) 29.30%(D)
======== ======== ========
Net assets at end of period (000's) ....................... $ 57,971 $ 47,184 $ 37,347
======== ======== ========
Ratio of net expenses to average net assets(B) ............ 1.25%(C) 1.25% 1.25%(C)
Ratio of net investment income (loss) to average net assets (0.05%)(C) 0.27% 0.43%(C)
Portfolio turnover rate ................................... 29%(C) 30% 13%(C)
</TABLE>
(A) Represents the period from the initial public offering of shares (December
10, 1996) through September 30, 1997.
(B) Absent fee waivers by the Adviser, the ratios of expenses to average net
assets would have been 1.39%(C), 1.41% and 1.51%(C) for the periods ended
March 31, 1999, September 30, 1998 and September 30, 1997, respectively
(Note 4).
(C) Annualized.
(D) Not annualized.
See accompanying notes to financial statements.
8
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<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
GW&K GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
=========================================================================================================
SIX MONTHS
ENDED YEAR PERIOD
MARCH 31, ENDED ENDED
1999 SEPT. 30, SEPT. 30,
(UNAUDITED) 1998 1997(A)
- ---------------------------------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<S> <C> <C> <C>
Net asset value at beginning of period ............. $ 10.12 $ 10.23 $ 10.00
--------- --------- ---------
Income from investment operations:
Net investment income ........................... 0.25 0.56 0.50
Net realized and unrealized gains (losses)
on investments ............................... (0.02) (0.05) 0.23
--------- --------- ---------
Total from investment operations ................... 0.23 0.51 0.73
--------- --------- ---------
Less distributions:
Dividends from net investment income ............ (0.25) (0.56) (0.50)
Distributions in excess of net investment income (0.10) (0.04) --
Distributions from net realized gains ........... -- (0.02) --
--------- --------- ---------
Total distributions ................................ (0.35) (0.62) (0.50)
--------- --------- ---------
Net asset value at end of period ................... $ 10.00 $ 10.12 $ 10.23
========= ========= =========
RATIOS AND SUPPLEMENTAL DATA:
Total return ....................................... 2.36%(D) 5.07% 7.50%(D)
========= ========= =========
Net assets at end of period (000's) ................ $ 35,221 $ 35,312 $ 24,855
========= ========= =========
Ratio of net expenses to average net assets(B) ..... 1.00%(C) 1.00% 0.97%(C)
Ratio of net investment income to average net assets 6.74%(C) 5.40% 6.19%(C)
Portfolio turnover rate ............................ 31%(C) 37% 44%(C)
</TABLE>
(A) Represents the period from the initial public offering of shares (December
16, 1996) through September 30, 1997.
(B) Absent fee waivers by the Adviser, the ratios of expenses to average net
assets would have been 1.35%(C), 1.36% and 1.47%(C) for the periods ended
March 31, 1999, September 30, 1998 and September 30, 1997, respectively
(Note 4).
(C) Annualized.
(D) Not annualized.
See accompanying notes to financial statements.
9
<PAGE>
THE GANNETT WELSH & KOTLER FUNDS
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999 (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 24, 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 its 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 trading on the New York Stock Exchange
(normally 4:00 p.m., Eastern time). U.S. Government obligations, mortgage-backed
securities and municipal obligations are generally valued at their most recent
bid prices as obtained from one or more of the major market makers for such
securities or are valued by an independent pricing service based on estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Portfolio securities traded on stock exchanges or
quoted by NASDAQ are valued at the closing sales price or, if not traded on a
particular day, at the closing bid price. Securities traded in the
over-the-counter market, and which are not quoted by NASDAQ, are valued at the
last sales price, if available, otherwise, at the last quoted bid price.
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.
10
<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, if any, 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 has been 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.
The following information is based upon the federal income tax cost of portfolio
investments as of March 31, 1999:
- --------------------------------------------------------------------------------
GW&K
GW&K Government
Equity Securities
Fund Fund
- --------------------------------------------------------------------------------
Gross unrealized appreciation .......... $ 20,646,660 $ 201,304
Gross unrealized depreciation .......... (3,399,294) (92,675)
------------ ------------
Net unrealized appreciation ............ $ 17,247,366 $ 108,629
============ ============
Federal income tax cost ................ $ 40,655,724 $ 34,693,525
============ ============
- --------------------------------------------------------------------------------
The difference between the federal income tax cost of portfolio investments and
financial statement cost for the GW&K Equity Fund is due to certain timing
differences in the recognition of capital losses under income tax regulations
and generally accepted accounting principles.
11
<PAGE>
As of September 30, 1998, the GW&K Equity Fund and the GW&K Government
Securities Fund had capital loss carryforwards for federal income tax purposes
of $111,490 and $296,060, respectively, none of which expire prior to September
30, 2006. These capital loss carryforwards may be utilized in the current and
future years to offset net realized capital gains, if any, prior to distribution
to shareholders.
3. INVESTMENT TRANSACTIONS
For the six months ended March 31, 1999, cost of purchases and proceeds from
sales and maturities of investment securities, other than short-term
investments, amounted to $9,049,510 and $7,594,184, respectively, for the GW&K
Equity Fund and $5,250,205 and $5,396,825, 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, shareholder servicing and
transfer agent, and accounting services agent.
ADVISORY AGREEMENT
Each Fund's investments are managed by the Adviser pursuant to the terms of an
Advisory Agreement. The GW&K Equity Fund and the GW&K Government Securities Fund
each pay the Adviser a fee, which is computed and accrued daily and paid
monthly, at an annual rate of 1.00% and 0.75%, respectively, of 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, 1999, the Adviser
voluntarily waived advisory fees of $39,000 and $62,000, respectively.
ADMINISTRATIVE SERVICES AGREEMENT
Under the terms of an Administration Agreement, 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, CFS receives a monthly fee from each Fund at the annual rate of 0.10%
on each Fund's respective average daily net assets up to $100 million; 0.075% on
such net assets from $100 million to $200 million; and 0.05% on such net assets
in excess of $200 million, subject to a $1,000 minimum monthly fee from each
Fund.
TRANSFER AGENT AGREEMENT
Under the terms of a Transfer, Dividend Disbursing, Shareholder Service and Plan
Agency Agreement, 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 CFS out-of-pocket expenses including, but not
limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of an Accounting Services Agreement, 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, based on current asset
levels, of $2,500 and $2,000 from the GW&K Equity Fund and the GW&K Government
Securities Fund, respectively. 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
directly 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.
12
<PAGE>
GW&K EQUITY FUND
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
================================================================================
MARKET
SHARES COMMON STOCKS -- 99.3% VALUE
- --------------------------------------------------------------------------------
BASIC MATERIALS-- 3.9%
23,000 Ionics, Inc.* .................................. $ 692,875
77,000 Universal Forest Products, Inc. ................ 1,578,500
------------
$ 2,271,375
------------
CONSUMER, CYCLICAL -- 11.7%
30,000 Career Blazers, Inc. *+ ........................ $ 150,000
80,000 DeVry, Inc.* ................................... 2,320,000
90,000 Extended Stay America, Inc.* ................... 916,875
27,000 May Department Stores Company .................. 1,056,375
23,000 Provant, Inc. * ................................ 411,125
22,500 Sears Roebuck & Company ........................ 1,016,719
70,000 Standard-Pacific Corp. ......................... 901,250
------------
$ 6,772,344
------------
CONSUMER, NON-CYCLICAL-- 17.7%
46,000 Chiron Corp.* .................................. $ 1,009,125
43,000 First Health Group Corp.* ...................... 690,687
17,000 Merck & Co., Inc. .............................. 1,363,187
39,000 NCO Group, Inc.* ............................... 1,443,000
40,000 Panamerican Beverages, Inc. .................... 702,500
32,000 PepsiCo, Inc. .................................. 1,254,000
7,500 Pfizer, Inc. ................................... 1,040,625
26,000 Service Corporation International .............. 370,500
33,000 Sunrise Assisted Living, Inc.* ................. 1,503,563
12,000 Tyco International, Ltd. ....................... 861,000
------------
$ 10,238,187
------------
ENERGY -- 8.1%
35,972 AES Corp.* ..................................... $ 1,339,957
40,000 Noble Affiliates, Inc. ......................... 1,160,000
58,000 Questar Corp. .................................. 982,375
23,000 Royal Dutch Petroleum Company .................. 1,196,000
------------
$ 4,678,332
------------
FINANCIAL SERVICES -- 14.4%
28,000 Bank of New York Company, Inc. ................. $ 1,006,250
80,000 Berkshire Realty Company, Inc. ................. 895,000
30,000 Boston Properties, Inc. ........................ 948,750
21,000 Capital One Financial Corp. .................... 3,171,000
15,000 Citigroup, Inc. ................................ 958,125
140,000 CRIIMI MAE, Inc. ............................... 376,250
17,000 MBIA, Inc. ..................................... 986,000
------------
$ 8,341,375
------------
13
<PAGE>
GW&K EQUITY FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
================================================================================
MARKET
SHARES COMMON STOCKS -- 99.3% (CONTINUED) VALUE
- --------------------------------------------------------------------------------
INDUSTRIAL -- 7.8%
24,000 Boeing Company ................................. $ 819,000
10,000 General Electric Company ....................... 1,106,250
18,000 General Motors Corp. - Class H * ............... 907,875
43,100 Republic Industries, Inc.* ..................... 533,363
40,425 United Rentals, Inc.* .......................... 1,152,113
------------
$ 4,518,601
------------
TECHNOLOGY -- 24.3%
45,000 Cognex Corp.* .................................. $ 1,065,937
23,000 Dell Computer Corp. * .......................... 940,125
26,000 Lernout & Hauspie Speech Products N.V.* ........ 780,000
8,500 Lucent Technologies, Inc. ...................... 915,875
100,500 Mastech Corp.* ................................. 1,306,500
14,000 MediaOne Group, Inc. * ......................... 889,000
54,000 Oracle Corp.* .................................. 1,424,250
57,000 SDL, Inc.* ..................................... 5,172,750
30,000 Xerox Corp. .................................... 1,601,250
------------
$ 14,095,687
------------
UTILITIES -- 11.4%
15,000 AT&T Corp. ..................................... $ 1,197,187
22,000 Enron Corp. .................................... 1,413,500
34,000 MCI WorldCom, Inc.* ............................ 3,011,125
40,000 Reliant Energy, Inc. ........................... 1,042,500
------------
$ 6,664,312
------------
TOTAL COMMON STOCKS (Cost $40,277,021) ......... $ 57,580,213
------------
================================================================================
MARKET
SHARES CASH EQUIVALENTS -- 0.6% VALUE
- --------------------------------------------------------------------------------
322,877 Merrimac Cash Fund - Institutional Class
(Cost $322,877) .............................. $ 322,877
------------
TOTAL INVESTMENT SECURITIES -- 99.9%
(Cost $40,599,898) ........................... $ 57,903,090
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.1% .. 67,510
------------
NET ASSETS -- 100.0% ........................... $ 57,970,600
============
* Non-income producing security.
+ Restricted security.
See accompanying notes to financial statements.
14
<PAGE>
GW&K GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
================================================================================
PAR MARKET
VALUE MORTGAGE-BACKED SECURITIES -- 94.7% VALUE
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION-- 41.2%
$ 222,653 7.50%, 02/01/22 ................................ $ 230,410
202,386 8.00%, 11/01/10 ................................ 209,500
441,358 8.25%, 06/01/17 ................................ 463,903
961,862 8.50%, 03/01/08 thru 09/01/17 .................. 1,011,983
917,552 8.75%, 10/01/08 thru 10/01/17 .................. 967,485
915,584 9.00%, 06/01/08 thru 06/01/21 .................. 970,675
1,604,644 9.25%, 10/01/08 thru 12/01/10 .................. 1,702,458
829,113 9.50%, 03/01/09 thru 02/01/21 .................. 886,710
2,184,019 9.75%, 04/01/08 thru 02/01/18 .................. 2,341,323
468,585 9.85%, 05/01/16 ................................ 503,804
866,446 10.00%, 01/01/01 thru 10/01/20 ................. 940,872
1,495,597 10.25%, 04/01/09 thru 09/01/12 ................. 1,613,676
188,123 10.50%, 06/01/00 thru 10/01/19 ................. 204,295
460,584 10.75%, 07/01/10 thru 04/01/11 ................. 505,479
812,817 11.00%, 12/01/00 thru 01/01/19 ................. 891,342
525,862 11.25%, 09/01/09 thru 11/01/13 ................. 578,847
166,362 11.50%, 06/01/11 thru 06/01/19 ................. 185,740
28,460 11.75%, 02/01/11 thru 07/01/13 ................. 31,784
108,213 12.50%, 01/01/10 thru 05/01/15 ................. 122,293
142,775 13.50%, 01/01/11 ............................... 163,677
- ----------- ------------
$13,542,995 TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION ... $ 14,526,256
- ----------- (Amortized Cost $14,492,336) ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 26.2%
$ 342,570 7.50%, 02/01/14 ................................ $ 350,264
244,622 8.00%, 08/01/19 ................................ 255,248
1,130,202 8.50%, 12/01/08 thru 03/01/22 .................. 1,189,269
606,312 8.75%, 08/01/07 thru 08/01/17 .................. 639,257
899,691 9.00%, 06/01/10 thru 09/01/21 .................. 953,839
208,080 9.25%, 12/01/15 ................................ 222,481
384,510 9.50%, 02/01/11 thru 07/01/17 .................. 414,339
403,060 9.75%, 03/01/06 thru 02/01/19 .................. 429,858
2,785,191 10.00%, 11/01/00 thru 02/01/21 ................. 3,007,903
64,949 10.25%, 05/01/09 thru 03/01/16 ................. 70,982
480,561 10.50%, 08/01/00 thru 09/01/20 ................. 526,048
69,784 10.75%, 09/01/09 thru 03/01/14 ................. 77,593
326,651 11.00%, 10/01/11 thru 07/01/15 ................. 350,145
14,159 11.25%, 10/01/15 ............................... 15,894
190,233 11.50%, 05/01/19 ............................... 214,694
252,314 11.75%, 04/01/12 thru 02/01/14 ................. 286,669
194,503 12.00%, 03/01/13 thru 07/01/15 ................. 222,673
15,577 12.25%, 05/01/10 thru 07/01/13 ................. 17,744
- ----------- ------------
$ 8,612,969 TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION .... $ 9,244,900
- ----------- (Amortized Cost $9,229,614) ------------
15
<PAGE>
GW&K GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
================================================================================
PAR MARKET
VALUE MORTGAGE-BACKED SECURITIES -- 94.7% (CONTINUED) VALUE
- --------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-- 25.2%
$ 440,085 7.00%, 05/15/23 ................................ $ 448,015
202,058 8.75%, 11/15/08 ................................ 216,406
609,771 9.00%, 11/15/19 thru 06/15/21 .................. 655,526
169,649 9.25%, 09/15/09 ................................ 183,869
1,058,309 9.50%, 06/15/09 thru 08/20/19 .................. 1,151,615
3,261 9.75%, 12/15/00 thru 01/15/01 .................. 3,335
2,620,961 10.00%, 10/15/00 thru 02/20/21 ................. 2,872,348
6,806 10.25%, 12/15/99 thru 02/15/01 ................. 6,973
696,841 10.50%, 02/20/05 thru 10/20/19 ................. 771,576
351,815 11.00%, 12/15/09 thru 01/15/16 ................. 392,447
4,036 11.25%, 04/15/01 ............................... 4,178
1,555,349 11.50%, 03/15/10 thru 08/20/19 ................. 1,765,544
192,522 11.75%, 05/15/04 thru 08/15/13 ................. 218,016
15,980 12.00%, 08/15/13 thru 09/15/14 ................. 18,462
116,273 13.00%, 01/15/11 thru 01/15/15 ................. 135,766
- ----------- ------------
$ 8,043,716 TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION . $ 8,844,076
- ----------- (Amortized Cost $8,779,304) ------------
OTHER MORTGAGE-BACKED SECURITIES -- 2.1%
$ 39,105 Arkansas Development Finance Authority
REMIC #93-C, 8.20%, 02/15/14 ................. $ 40,161
300,000 Contimortgage Home Equity Loan Trust
#98-2-A7, 6.57%, 03/15/23 .................... 295,080
395,000 Delta Funding Home Equity Loan Trust
#96-1-A7, 7.95%, 06/25/27 .................... 416,108
- ----------- ------------
$ 734,105 TOTAL OTHER MORTGAGE-BACKED SECURITIES ......... $ 751,349
- ----------- (Amortized Cost $765,885) ------------
$30,933,785 TOTAL MORTGAGE-BACKED SECURITIES ............... $ 33,366,581
=========== (Amortized Cost $33,267,139) ------------
================================================================================
PAR MARKET
VALUE MUNICIPAL OBLIGATIONS -- 1.7% VALUE
- --------------------------------------------------------------------------------
$ 300,000 Texas St. HFA SFM Rev. Bond, 8.05%, 12/01/01 ... $ 316,800
250,000 Mississippi Housing Rev. Bond, 9.15%, 09/15/14 . 267,675
- ----------- ------------
$ 550,000 TOTAL MUNICIPAL OBLIGATIONS .................... $ 584,475
=========== (Amortized Cost $575,288) ------------
16
<PAGE>
GW&K GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
================================================================================
MARKET
SHARES CASH EQUIVALENTS -- 2.4% VALUE
- --------------------------------------------------------------------------------
851,098 Merrimac Cash Fund - Institutional Class
(Cost $851,098) .............................. $ 851,098
------------
TOTAL INVESTMENTS SECURITIES -- 98.8%
(Cost $34,693,525) ........................... $ 34,802,154
OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.2% .. 419,297
------------
NET ASSETS -- 100.0% ........................... $ 35,221,451
============
See accompanying notes to financial statements.
17
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18
<PAGE>
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19
<PAGE>
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)
