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, 2000
(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
INTEGRATED 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 1, 2000
================================================================================
Dear Shareholders,
Markets often find themselves in unhealthy circumstances when investors begin to
believe that that which rises will rise forever, and that which falls will fall
forever. Last year, we saw long-term rates rise, driving down bond prices, and
until the fourth quarter, small capitalization stocks were declining. The only
game in town was large capitalization growth stocks. Today, in contrast, the
bond market is strong and small capitalization stocks came surging back in the
fourth quarter of 1999 to finish even with large capitalization stocks for the
year. That trend continued through the first quarter of 2000.
The lesson to be learned, and about which we often remind our clients, is that
only through proper diversification can an investor expect continued success. As
always, trends come and go and asset class leadership shifts. In the end, the
best strategy over the long-term is a disciplined investment approach
diversified across asset classes. We have designed our strategies to take
advantage of market weaknesses. We believe there are always good investment
opportunities in the markets in which we are involved.
Today, information is instantaneous making it possible for the world's investors
to move in unison. Valuations are driven by both earnings and psychology,
therefore, momentum shifts will be quick and without warning. Market corrections
can take three days now, rather than three months or three years in times past.
Volatility is an integral part of all markets and investors should neither panic
nor take undue risks. We at Gannett Welsh & Kotler, Inc. see this and believe
that a thorough, disciplined investment approach, along with proper
diversification, will allow us to succeed during these volatile times as we have
during our company's 27 year history. Our strategy remains consistent regardless
of market volatility.
Later this spring we look forward to introducing two new mutual funds to the
marketplace, the GW&K Large Cap Growth Fund and the GW&K Small Cap Growth Fund.
These funds, patterned after our existing Large Cap Growth and Small Cap Growth
separate account strategies, will employ an investment approach that blends
together macro investment themes and rigorous fundamental research. These new
funds will give our investors additional vehicles to gain access to the equity
markets, as well as alternative ways to diversify portfolios across equity
market segments.
We are pleased to continue to offer our clients additional services and we look
forward to increased success on your behalf.
Harold G. Kotler, CFA
President
2
<PAGE>
GW&K EQUITY FUND
LETTER TO SHAREHOLDERS MAY 1, 2000
================================================================================
Dear Fellow Shareholders,
As we send you this Semi-Annual Report for the GW&K Equity Fund, we have
received recognition of the Fund's record from a number of sources. The
performance that attracted this attention is detailed below.
As of March 31, 2000, assets stood at a record $90 million, compared with $61
million six months ago. With net new investment just a bit more than $1 million
for the past six months, the increase in assets was driven by performance.
The Fund's total return (price change and reinvested distributions) for the six
months ended March 31, 2000, was 44.97%, ahead of both the Standard & Poor's 500
Index, up 17.51%, and the Russell 2000 Index of smaller companies, which gained
27.01%. These results were also ahead of the Morningstar Growth and Income
group, whose average return was 13.01%, and the Lipper Analytical Services
Multi-Cap Core group, which showed an average return of 24.29%.
For the quarter ended March 31, 2000, the Fund was up 16.42%, compared with
2.29% and 7.08% for the S&P 500 and the Russell 2000 indices, respectively. Your
Fund's quarterly return was in the 1st percentile measured against the
Morningstar Growth and Income funds' average return of 1.80% and in the 5th
percentile of the Lipper Multi-Cap Core group, which had an average return of
5.39%.
The recent performance of the Fund was recognized in the April 2000 issue of
Bloomberg PERSONAL FINANCE magazine. In their "Top Mutual Funds" section, the
Fund was listed as the number one Equity Income Fund out of 485 Equity Income
Funds for the year ending February 3, 2000, just ahead of the Janus Equity
Income Fund. Morningstar has also now tracked the Fund's returns for the
required three years ending March 31, 2000. For that period, the Fund was
awarded a four star rating.
Turnover has remained relatively low, at under 30% annualized. We added a few
positions in the health sector in companies with excellent growth prospects and
strong niche positions. We continued our trimming of some positions in the
technology sector whose valuations seemed generous compared with expectations
for future growth and that had come to represent 10% or so of the entire
portfolio.
3
<PAGE>
GW&K EQUITY FUND
LETTER TO SHAREHOLDERS MAY 1, 2000
================================================================================
With few changes, your Fund is still positioned to participate whether markets
favor large or small companies. What has changed a bit is the accumulation of
cash, which is currently near 10%. With the Federal Reserve publicly committed
to raising interest rates, and heading into a Presidential election that will
put a new man in the White House, we believe that it is a good time to have
reserves available. In the recent past, this has allowed us to add holdings when
current news caused sharp price declines in the stocks of companies that have
excellent long-term prospects. In a nervous market, these opportunities seem to
come more frequently and we want to be ready.
While we have compiled good results since the inception of the Fund, we
recognize that volatile markets can undo that work in a hurry. We commit to you
to work hard to steer a successful course through both calm and turbulent
markets.
Sincerely,
Edward B. White, CFA, CIC
GW&K Equity Fund
Portfolio Manager
4
<PAGE>
GW&K GOVERNMENT SECURITIES FUND
LETTER TO SHAREHOLDERS MAY 1, 2000
================================================================================
Dear Fellow Shareholders,
We are pleased to report on the status of the GW&K Government Securities Fund
for the semi-annual period ending March 31, 2000. Shares within the Fund have
grown to 3.08 million representing 311 shareholders. This growth continues to
come primarily from the investment allocation to the Fund for managed accounts
at GW&K.
Most bond markets experienced significant volatility over the six-month period
ending March 31, 2000. The 10-year US Treasury Note, the primary benchmark for
mortgage pricing, swung from 5.88% on September 30, 1999 to 6.44% on December
31,1999, and then back down to 6.00% by March 31, 2000. In general, this type of
volatility leads to uncertainty and weaker bond prices. The declining interest
rate environment experienced over the last few months also facilitated mortgage
re-financing which led to mortgage-backed securities (MBS) prepayments, a
negative for the premium mortgages which underlie the Fund. Additionally, over
the six-month period, the housing market remained robust with home sales
approaching record levels; this too led to MBS prepayments and negative pressure
on prices.
The Fund's net asset value per share on March 31, 2000 was $9.53, $0.23 lower
than it was on September 30, 1999, reflecting the accelerating rate of principal
paydowns of the Fund's premium mortgage-backed securities. Although the share
price declined, the dividend distribution rate increased during the period to
7.32%, satisfying our objective for strong current income flow. As a result, the
total performance of the Fund was 1.26% for the six-month period as compared to
1.82% for the Lehman Brothers 1-3 Year Government Bond Index over the same
period.
At Gannett Welsh & Kotler, we continue to search for value within the premium
mortgage-backed sector. In the last two quarters we added $5.55 million in new
mortgage-backed pools. While the yields on these were attractive, we did see
spreads widening during the past six months. We will continue to look for
additional securities that meet the maturity and income requirements for the
Fund, while exhibiting reduced prepayment risk.
Sincerely,
David M. Carter
GW&K Government Securities Fund
Portfolio Manager
5
<PAGE>
<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 2000 (Unaudited)
=====================================================================================
GW&K
GW&K Government
Equity Securities
Fund Fund
-------------------------------------------------------------------------------------
ASSETS
Investments in securities:
<S> <C> <C>
At amortized cost .......................... $ 51,702,966 $ 29,501,683
============ ============
At market value (Note 2) ................... $ 91,117,569 $ 28,861,853
Cash ............................................... 25,536 36,000
Dividends and interest receivable .................. 63,344 302,068
Receivable for principal paydowns .................. -- 130,634
Receivable for capital shares sold ................. 14,600 20,000
Receivable for securities sold ..................... 171,888 --
Organization expenses, net (Note 2) ................ 11,167 11,167
Other assets ....................................... 11,221 7,528
------------ ------------
TOTAL ASSETS ............................... 91,415,325 29,369,250
------------ ------------
LIABILITIES
Dividends payable to shareholders .................. -- 23,765
Payable for capital shares redeemed ................ 400 3,000
Payable for securities purchased ................... 1,009,918 --
Payable to affiliates (Note 4) ..................... 89,525 23,383
Other accrued expenses and liabilities ............. 25,582 14,893
------------ ------------
TOTAL LIABILITIES .......................... 1,125,425 65,041
------------ ------------
NET ASSETS ......................................... $ 90,289,900 $ 29,304,209
============ ============
Net assets consist of:
Paid-in capital .................................... $ 44,512,344 $ 31,175,384
Accumulated net investment income (loss) ........... (70,199) --
Distributions in excess of net investment income ... -- (227,046)
Accumulated net realized gains (losses)
from security transactions ................. 6,433,152 (1,004,299)
Net unrealized appreciation (depreciation)
on investments (Note 1) .................... 39,414,603 (639,830)
------------ ------------
Net assets ......................................... $ 90,289,900 $ 29,304,209
============ ============
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value) . 4,564,807 3,076,334
============ ============
Net asset value, offering price and redemption
price per share (Note 1) ................... $ 19.78 $ 9.53
============ ============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 (Unaudited)
==========================================================================================
GW&K
GW&K Government
Equity Securities
Fund Fund
------------------------------------------------------------------------------------------
INVESTMENT INCOME
<S> <C> <C>
Interest $ -- $ 986,867
Dividends 392,654 23,375
------------ ------------
TOTAL INVESTMENT INCOME 392,654 1,010,242
------------ ------------
EXPENSES
Investment advisory fees (Note 4) 370,283 112,112
Administration fees (Note 4) 37,241 14,994
Professional fees 15,500 15,500
Accounting services fees (Note 4) 15,000 12,000
Custodian fees 19,248 6,990
Trustees' fees and expenses 13,000 13,000
Pricing fees 488 15,326
Insurance expense 8,136 4,618
Reports to shareholders 7,567 4,805
Transfer agent fees (Note 4) 6,000 6,000
Postage and supplies 5,151 3,976
Registration fees 3,889 3,812
Organization expenses (Note 2) 3,350 3,350
------------ ------------
TOTAL EXPENSES 504,853 216,483
Fees waived by the Adviser (Note 4) (42,000) (67,000)
------------ ------------
NET EXPENSES 462,853 149,483
------------ ------------
NET INVESTMENT INCOME (LOSS) (70,199) 860,759
------------ ------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains from security transactions 6,550,527 --
Net change in unrealized appreciation/
depreciation on investments 21,328,065 (502,489)
------------ ------------
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS 27,878,592 (502,489)
------------ ------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 27,808,393 $ 358,270
============ ============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
=================================================================================================================================
GW&K GW&K
Equity Fund Government Securities Fund
----------------------------- -----------------------------
Six Months Year Six Months Year
Ended Ended Ended Ended
March 31, 2000 Sept. 30, March 31, 2000 Sept. 30,
(Unaudited) 1999 (Unaudited) 1999
---------------------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
<S> <C> <C> <C> <C>
Net investment income (loss) ......................... $ (70,199) $ (48,002) $ 860,759 $ 1,669,870
Net realized gains (losses) from security transactions 6,550,527 1,816,559 -- (89,284)
Net change in unrealized appreciation/depreciation
on investments ............................... 21,328,065 11,651,312 (502,489) (306,966)
------------ ------------ ------------ ------------
Net increase in net assets from operations ................... 27,808,393 13,419,869 358,270 1,273,620
------------ ------------ ------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ................. -- (77,789) (860,759) (1,669,870)
Distributions in excess of net investment income ..... -- -- (16,642) (748,688)
Return of capital .................................... -- -- (210,404) (86,428)
Distributions from net realized gains ................ (1,725,055) (41,932) -- --
------------ ------------ ------------ ------------
Decrease in net assets from distributions to shareholders .... (1,725,055) (119,721) (1,087,805) (2,504,986)
------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ............................ 6,232,875 7,113,037 1,829,202 4,372,991
Net asset value of shares issued in
reinvestment of distributions to shareholders 1,706,053 118,604 890,753 2,059,395
Payments for shares redeemed ......................... (5,173,220) (6,274,588) (2,428,124) (10,771,178)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
capital share transactions ........................... 2,765,708 957,053 291,831 (4,338,792)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS ........................................... 28,849,046 14,257,201 (437,704) (5,570,158)
NET ASSETS
Beginning of period .................................. 61,440,854 47,183,653 29,741,913 35,312,071
------------ ------------ ------------ ------------
End of period ........................................ $ 90,289,900 $ 61,440,854 $ 29,304,209 $ 29,741,913
============ ============ ============ ============
ACCUMULATED NET
INVESTMENT LOSS ...................................... $ (70,199) $ -- $ (16,642) $ --
============ ============ ============ ============
NUMBER OF SHARES
Sold ................................................. 371,282 525,932 189,879 440,081
Reinvested ........................................... 110,139 8,938 92,652 206,831
Redeemed ............................................. (309,010) (469,830) (253,294) (1,089,713)
------------ ------------ ------------ ------------
Net increase (decrease) in shares outstanding ........ 172,411 65,040 29,237 (442,801)
Shares outstanding, beginning of period .............. 4,392,396 4,327,356 3,047,097 3,489,898
------------ ------------ ------------ ------------
Shares outstanding, end of period .................... 4,564,807 4,392,396 3,076,334 3,047,097
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
GW&K EQUITY FUND
FINANCIAL HIGHLIGHTS
===========================================================================================================================
Six Months
Ended Year Year Period
March 31, Ended Ended Ended
2000 Sept. 30, Sept. 30, Sept. 30,
(Unaudited) 1999 1998 1997(A)
---------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD:
<S> <C> <C> <C> <C>
Net asset value at beginning of period ........... $ 13.99 $ 10.90 $ 12.93 $ 10.00
---------- ---------- ---------- ----------
Income (loss) from investment operations:
Net investment income (loss) ............. (0.02) (0.01) 0.03 0.03
Net realized and unrealized gains (losses)
on investments .......................... 6.20 3.13 (0.80) 2.90
---------- ---------- ---------- ----------
Total from investment operations ................. 6.18 3.12 (0.77) 2.93
---------- ---------- ---------- ----------
Less distributions:
Dividends from net investment income ..... -- (0.02) (0.04) --
Distributions from net realized gains .... (0.39) (0.01) (1.22) --
---------- ---------- ---------- ----------
Total distributions .............................. (0.39) (0.03) (1.26) --
---------- ---------- ---------- ----------
Net asset value at end of period ................. $ 19.78 $ 13.99 $ 10.90 $ 12.93
========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA:
Total return ..................................... 44.97%(C) 28.62% (5.99%) 29.30%(C)
========== ========== ========== ==========
Net assets at end of period (000's) .............. $ 90,290 $ 61,441 $ 47,184 $ 37,347
========== ========== ========== ==========
Ratio of net expenses to average net assets(B) ... 1.25%(D) 1.25% 1.25% 1.25%(D)
Ratio of net investment income (loss) to
average net assets ....................... (0.19%)(D) (0.08)% 0.27% 0.43%(D)
Portfolio turnover rate .......................... 39%(D) 28% 30% 13%(D)
</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 1.36%(D), 1.36%, 1.41% and 1.51%(D) for the periods
ended March 31, 2000, and September 30, 1999, 1998 and 1997, respectively
(Note 4).
(C) Not annualized.
(D) Annualized.
See accompanying notes to financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
THE GANNETT WELSH & KOTLER FUNDS
GW&K GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
========================================================================================================================
Six Months
Ended Year Year Period
March 31, Ended Ended Ended
2000 Sept. 30, Sept. 30, Sept. 30,
(Unaudited) 1999 1998 1997(A)
-------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD:
<S> <C> <C> <C> <C>
Net asset value at beginning of period ................. $ 9.76 $ 10.12 $ 10.23 $ 10.00
-------- -------- -------- --------
Income from investment operations:
Net investment income .......................... 0.28 0.45 0.56 0.50
Net realized and unrealized gains (losses)
on investments ................................ (0.16) (0.09) (0.05) 0.23
-------- -------- -------- --------
Total from investment operations ....................... 0.12 0.36 0.51 0.73
-------- -------- -------- --------
Less distributions:
Dividends from net investment income ........... (0.28) (0.45) (0.56) (0.50)
Distributions in excess of net investment income (0.07) (0.24) (0.04) --
Return of capital .............................. -- (0.03) -- --
Distributions from net realized gains .......... -- -- (0.02) --
-------- -------- -------- --------
Total distributions .................................... (0.35) (0.72) (0.62) (0.50)
-------- -------- -------- --------
Net asset value at end of period ....................... $ 9.53 $ 9.76 $ 10.12 $ 10.23
======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Total return ........................................... 1.27%(C) 3.68% 5.07% 7.50%(C)
======== ======== ======== ========
Net assets at end of period (000's) .................... $ 29,304 $ 29,742 $ 35,312 $ 24,855
======== ======== ======== ========
Ratio of net expenses to average net assets(B) ......... 1.00%(D) 1.00% 1.00% 0.97%(D)
Ratio of net investment income to average
net assets ..................................... 5.77%(D) 6.62% 5.40% 6.19%(D)
Portfolio turnover rate ................................ 26%(D) 27% 37% 44%(D)
</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 1.45%(D), 1.31%, 1.36% and 1.47%(D) for the periods
ended March 31, 2000, and September 30, 1999, 1998 and 1997, respectively
(Note 4).
(C) Not annualized.
(D) Annualized.
See accompanying notes to financial statements.
10
<PAGE>
THE GANNETT WELSH & KOTLER FUNDS
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000 (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.
11
<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 determined on a specific identification basis.
Securities traded on a to-be-announced basis -- The GW&K Government Securities
Fund occasionally 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, 2000:
--------------------------------------------------------------------------------
GW&K
GW&K Government
Equity Securities
Fund Fund
--------------------------------------------------------------------------------
Gross unrealized appreciation ................ $ 43,027,312 $ 13,804
Gross unrealized depreciation ................ (3,650,280) (653,634)
------------ ------------
Net unrealized appreciation (depreciation) ... $ 39,377,032 $ (639,830)
============ ============
Federal income tax cost ...................... $ 51,740,537 $ 29,501,683
============ ============
--------------------------------------------------------------------------------
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.
12
<PAGE>
As of September 30, 1999, the GW&K Government Securities Fund had capital loss
carryforwards for federal income tax purposes of $915,015, none of which expire
prior to September 30, 2007. In addition, the Fund elected to defer until its
subsequent tax year $89,284 of net realized capital losses incurred after
October 31, 1998. These capital loss carryforwards and "post-October" losses 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, 2000, cost of purchases and proceeds from
sales and maturities of investment securities, other than short-term
investments, amounted to $14,205,609 and $13,383,597, respectively, for the GW&K
Equity Fund and $5,552,536 and $3,703,328, 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 Integrated Fund Services, Inc.
(IFS), 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, 2000, the Adviser
voluntarily waived advisory fees of $42,000 and $67,000, respectively.
ADMINISTRATION AGREEMENT
Under the terms of an Administration Agreement, IFS 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, IFS 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, IFS 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, IFS 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 IFS out-of-pocket expenses including, but not
limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of an Accounting Services Agreement, IFS calculates the daily
net asset value per share and maintains the financial books and records of each
Fund. For these services, IFS 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 IFS certain
out-of-pocket expenses incurred by IFS 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.
13
<PAGE>
GW&K EQUITY FUND
PORTFOLIO OF INVESTMENTS
MARCH 31, 2000 (Unaudited)
================================================================================
MARKET
SHARES COMMON STOCKS-- 93.3% VALUE
--------------------------------------------------------------------------------
BASIC MATERIALS-- 1.2%
85,000 Universal Forest Products, Inc. .................. $ 1,051,875
------------
CONSUMER, CYCLICAL-- 13.6%
90,000 AutoNation, Inc.* ................................ $ 714,375
125,000 DeVry, Inc.* ..................................... 3,812,500
100,000 Extended Stay America, Inc.* ..................... 750,000
76,000 Insight Communications Company, Inc. * ........... 1,567,500
27,000 May Department Stores Company .................... 769,500
15,000 MediaOne Group, Inc.* ............................ 1,215,000
63,000 PROVANT, Inc.* ................................... 504,000
100,000 Standard Pacific Corp. ........................... 1,000,000
49,000 Staples, Inc.* ................................... 980,000
43,000 TJX Companies, Inc. .............................. 954,062
------------
$ 12,266,937
------------
CONSUMER, NON-CYCLICAL-- 7.7%
28,000 General Mills, Inc. .............................. $ 1,013,250
17,000 Merck & Co., Inc. ................................ 1,056,125
42,000 NCO Group, Inc.* ................................. 1,341,375
50,000 Panamerican Beverages, Inc. ...................... 881,250
35,000 PepsiCo, Inc. .................................... 1,209,688
40,000 Pfizer, Inc. ..................................... 1,462,500
------------
$ 6,964,188
------------
ENERGY-- 8.8%
35,972 AES Corp.* ....................................... $ 2,832,795
26,000 Independent Energy Holdings plc - ADR* ........... 1,166,750
41,000 Noble Affiliates, Inc. ........................... 1,345,312
65,000 Questar Corp. .................................... 1,206,562
24,000 Royal Dutch Petroleum Company .................... 1,381,500
------------
$ 7,932,919
------------
FINANCIAL SERVICES-- 10.2%
30,000 Bank of New York Company, Inc. ................... $ 1,246,875
17,000 BISYS Group, Inc.* ............................... 1,130,500
35,000 Boston Properties, Inc. .......................... 1,113,438
63,000 Capital One Financial Corp. ...................... 3,020,062
28,000 Citigroup, Inc. .................................. 1,660,750
20,000 MBIA, Inc. ....................................... 1,041,250
------------
$ 9,212,875
------------
HEALTH CARE PRODUCTS & SERVICES-- 2.9%
23,000 Cardinal Health, Inc. ............................ $ 1,055,125
75,000 HealthGate Data Corp.* ........................... 421,875
40,000 IMS Health Inc. .................................. 677,500
7,000 Techne Corp.* .................................... 483,000
------------
$ 2,637,500
------------
14
<PAGE>
GW&K EQUITY FUND
PORTFOLIO OF INVESTMENTS (Continued)
================================================================================
MARKET
SHARES COMMON STOCKS-- 93.3% (CONTINUED) VALUE
INDUSTRIAL-- 6.9%
10,000 General Electric Company ......................... $ 1,551,875
18,000 General Motors Corp. - Class H ................... 2,241,000
34,000 Tyco International, Ltd. ......................... 1,695,750
45,000 United Rentals, Inc.* ............................ 776,250
------------
$ 6,264,875
------------
TECHNOLOGY-- 34.4%
45,000 Cognex Corp.* .................................... $ 2,595,938
26,000 Dell Computer Corp.* ............................. 1,402,375
18,000 EMC Corp.* ....................................... 2,250,000
102,000 iGATE Capital Corp.* ............................. 4,602,750
19,000 Lucent Technologies, Inc. ........................ 1,154,250
108,000 Oracle Corp.* .................................... 8,430,750
50,000 SDL, Inc.* ....................................... 10,643,750
------------
$ 31,079,813
------------
UTILITIES-- 7.6%
45,000 Enron Corp. ...................................... $ 3,369,375
54,000 MCI WorldCom, Inc.* .............................. 2,446,875
45,000 Reliant Energy, Inc. ............................. 1,054,688
------------
$ 6,870,938
------------
TOTAL COMMON STOCKS-- (Cost $44,867,317) ......... $ 84,281,920
------------
================================================================================
MARKET
SHARES CASH EQUIVALENTS-- 7.6% VALUE
--------------------------------------------------------------------------------
6,835,649 Merrimac Cash Fund-- Institutional Class
(Cost $6,835,649) ................................ $ 6,835,649
------------
TOTAL INVESTMENTS AT VALUE-- 100.9%
(Cost $51,702,966) ............................... $ 91,117,569
LIABILITIES IN EXCESS OF OTHER ASSETS-- (0.9%) ... (827,669)
------------
NET ASSETS-- 100.0% .............................. $ 90,289,900
============
* Non-income producing security.
ADR - American Depository Receipt.
See accompanying notes to financial statements
15
<PAGE>
GW&K GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
MARCH 31, 2000 (Unaudited)
================================================================================
PAR MARKET
VALUE MORTGAGE-BACKED SECURITIES-- 96.2% VALUE
--------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION-- 40.1%
$ 146,368 7.50%, 02/01/22 .................................. $ 144,968
140,139 8.00%, 11/01/10 .................................. 140,621
696,113 8.50%, 03/01/08 thru 09/01/17 .................... 707,044
666,064 8.75%, 10/01/08 thru 10/01/17 .................... 674,685
1,072,905 9.00%, 06/01/08 thru 06/01/21 .................... 1,095,933
1,842,606 9.25%, 10/01/08 thru 12/01/10 .................... 1,887,474
813,892 9.50%, 05/01/05 thru 02/01/21 .................... 844,178
1,621,490 9.75%, 04/01/08 thru 02/01/18 .................... 1,685,875
1,246,527 10.00%, 01/01/01 thru 11/01/20 ................... 1,321,989
1,146,166 10.25%, 04/01/09 thru 09/01/12 ................... 1,206,930
292,686 10.50%, 06/01/00 thru 10/01/19 ................... 314,206
339,647 10.75%, 07/01/10 thru 04/01/11 ................... 363,505
72,262 11.00%, 01/01/01 thru 01/01/19 ................... 77,798
359,506 11.25%, 09/01/09 thru 11/01/13 ................... 386,395
167,006 11.50%, 09/01/11 thru 06/01/19 ................... 182,051
20,268 11.75%, 02/01/11 thru 07/01/13 ................... 21,982
130,540 12.00%, 05/01/10 thru 03/01/15 ................... 142,166
362,176 12.50%, 01/01/10 thru 05/01/15 ................... 400,635
117,710 13.50%, 01/01/11 ................................. 129,665
18,756 14.50%, 12/01/10 ................................. 20,707
----------- ------------
$11,272,827 TOTAL FEDERAL HOME LOAN MORTGAGE CORPORATION $ 11,748,807
----------- (Amortized Cost $12,017,095) ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-- 35.9%
$ 248,963 7.50%, 02/01/14 .................................. $ 247,484
216,704 8.00%, 08/01/19 .................................. 218,871
895,543 8.50%, 12/01/08 thru 03/01/22 .................... 908,430
417,065 8.75%, 08/01/07 thru 08/01/17 .................... 425,038
757,313 9.00%, 03/01/10 thru 09/01/21 .................... 774,183
157,544 9.25%, 12/01/15 .................................. 161,901
471,743 9.50%, 02/01/11 thru 01/01/19 .................... 490,091
289,158 9.75%, 03/01/06 thru 02/01/19 .................... 302,897
3,015,045 10.00%, 11/01/00 thru 04/01/21 ................... 3,184,298
36,156 10.25%, 05/01/09 thru 03/01/16 ................... 38,879
1,206,961 10.50%, 08/01/00 thru 09/01/20 ................... 1,261,972
45,147 10.75%, 03/01/14 ................................. 49,013
180,558 11.00%, 10/01/11 thru 07/01/15 ................... 191,865
73,994 11.25%, 10/01/15 thru 12/01/15 ................... 81,638
186,339 11.50%, 05/01/19 ................................. 205,789
184,427 11.75%, 04/01/12 thru 02/01/14 ................... 202,608
1,561,377 12.00%, 03/01/13 thru 10/01/15 ................... 1,729,576
6,208 12.25%, 05/01/10 thru 07/01/13 ................... 6,763
30,423 13.50%, 12/01/14 ................................. 34,380
----------- ------------
$ 9,980,668 TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION ...... $ 10,515,676
----------- (Amortized Cost $10,725,504) ------------
16
<PAGE>
GW&K GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS (Continued)
================================================================================
PAR MARKET
VALUE MORTGAGE-BACKED SECURITIES-- 96.2% (CONTINUED) VALUE
--------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-- 18.8%
$ 382,207 7.00%, 05/15/23 .................................. $ 373,130
171,574 8.75%, 11/15/08 .................................. 174,738
386,945 9.00%, 11/15/19 thru 06/15/21 .................... 403,048
97,224 9.25%, 09/15/09 .................................. 100,156
773,449 9.50%, 06/15/09 thru 08/20/19 .................... 804,431
471 9.75%, 12/15/00 thru 01/15/01 .................... 474
2,027,279 10.00%, 10/15/00 thru 10/15/21 ................... 2,169,324
676 10.25%, 02/15/01 ................................. 681
516,021 10.50%, 02/20/05 thru 10/20/19 ................... 560,342
413,830 11.00%, 12/15/09 thru 03/15/16 ................... 452,444
1,350 11.25%, 04/15/01 ................................. 1,372
231,286 11.50%, 01/20/13 thru 08/20/19 ................... 255,288
78,986 11.75%, 05/15/04 thru 08/15/13 ................... 85,457
14,681 12.00%, 08/15/13 thru 09/15/14 ................... 16,474
104,859 13.00%, 01/15/11 thru 01/15/15 ................... 117,931
----------- ------------
$ 5,200,838 TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ... $ 5,515,290
----------- (Amortized Cost $5,631,460) ------------
OTHER MORTGAGE-BACKED SECURITIES-- 1.4%
$ 31,609 Arkansas Development Finance Authority
REMIC #93-C, 8.20%, 02/15/14 ..................... $ 31,612
395,000 Delta Funding Home Equity Loan Trust
#96-1-A7, 7.95%, 06/25/27 ........................ 386,113
----------- ------------
$ 426,609 TOTAL OTHER MORTGAGE-BACKED SECURITIES ........... $ 417,725
----------- (Amortized Cost $452,161) ------------
$26,880,942 TOTAL MORTGAGE-BACKED SECURITIES ................. $ 28,197,498
----------- (Amortized Cost $28,826,220) ------------
================================================================================
PAR MARKET
VALUE MUNICIPAL OBLIGATIONS -- 1.9% VALUE
--------------------------------------------------------------------------------
$ 300,000 Texas St. HFA SFM Rev. Bond, 8.05%, 12/01/01 ..... $ 303,783
236,832 Mississippi Housing Rev. Bond, 9.15%, 09/15/14 242,185
----------- ------------
$ 536,832 TOTAL MUNICIPAL OBLIGATIONS ...................... $ 545,968
----------- (Amortized Cost $557,076) ------------
17
<PAGE>
GW&K GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
================================================================================
MARKET
SHARES CASH EQUIVALENTS-- 0.4% VALUE
--------------------------------------------------------------------------------
118,387 Merrimac Cash Fund - Institutional Class
(Cost $118,387) .................................. $ 118,387
------------
TOTAL INVESTMENTS SECURITIES-- 98.5%
(Cost $29,501,683) ............................... $ 28,861,853
OTHER ASSETS IN EXCESS OF LIABILITIES-- 1.5% ..... 442,356
------------
NET ASSETS-- 100.0% .............................. $ 29,304,209
============
See accompanying notes to financial statements.
18
