<PAGE> 1
PROSPECTUS
May 1, 1996
GATEWAY INDEX PLUS FUND
The Index Plus Fund seeks a high total return at a reduced level of risk.
The Fund is designed for conservative investors whose investment objective is to
maximize total rate of return over the long term.
The Fund invests in the 100 stocks included in the S&P 100 Stock Index.
The Fund's portfolio duplicates the composition of the S&P 100 Index. The Fund
also sells call options on the S&P 100 Index and, as the seller, receives cash
from the purchasers of the options. By selling index options, the Fund attempts
to earn a greater total return over the long term than it would earn by
investing only in the stocks in the S&P 100 Index. Selling call options reduces
the risk of owning stocks, but limits the opportunity to profit from an increase
in the market value of stocks. The Fund occasionally buys index put options in
an attempt to protect the Fund from a significant decline in the market in a
short period of time. The value of a put option generally increases as stock
prices decrease.
GATEWAY MID CAP INDEX FUND
The Mid Cap Index Fund, designed for a more aggressive investor, seeks
long-term growth of capital with a secondary objective of conserving principal.
The Fund invests in the 400 stocks included in the S&P MidCap 400 Index. The
Fund's portfolio generally parallels the composition of the S&P MidCap 400
Index. The S&P MidCap 400 Index consists of the common stock of 400 companies
with a median market capitalization of approximately $1.9 billion, selected to
reflect the stock price performance of companies in the middle capitalization
range. At times, the Fund may purchase index put options to reduce the risk of
principal loss. The Fund occasionally buys index call options to increase the
potential for gain.
GATEWAY SMALL CAP INDEX FUND
The Small Cap Index Fund, also designed for a more aggressive investor,
seeks long-term growth of capital. The Fund invests in the 250 stocks included
in the Wilshire Small Cap Index. The Fund's portfolio generally parallels the
composition of the Wilshire Small Cap Index. The Wilshire Small Cap Index
consists of the common stock of 250 companies with a median market
capitalization of approximately $676 million, selected to reflect the general
characteristics and performance profile of small companies. At times, the Fund
may purchase index put options to reduce the risk of principal loss. The Fund
occasionally buys index call options to increase the potential for gain.
RISK FACTORS RELATED TO INDEX OPTION TRANSACTIONS
Option transactions on securities indexes involve risks not generally
associated with investments in stocks. The sale of call options limits a fund's
opportunity to profit from an increase in the market value of the underlying
index. The purchase of options involves the risk of loss of all or part of the
cash paid for the options. The use of options to protect a fund's portfolio will
not fully protect the fund against declines in the value of its portfolio. A
fund could experience a loss on both its portfolio securities and the options
used to hedge these securities. Unusual market conditions, the lack of a ready
market for any particular option at a specific time, or restrictions imposed by
regulatory agencies may adversely affect a fund's hedging strategy. Additional
information about various risk factors and each fund's investment practices,
strategies and restrictions is located on pages XX through XX of the Prospectus.
THE GATEWAY FAMILY OF MUTUAL FUNDS
Each fund is a series of The Gateway Trust. This Prospectus sets forth
concisely the information about the funds that you should know before investing.
You should keep it for future reference. Additional information has been filed
with the Securities and Exchange Commission and is included in the Statement of
Additional Information of The Gateway Trust dated May 1, 1996. The Statement of
Additional Information ("SAI") is incorporated herein by reference. You can
obtain more information about the funds or free copies of the SAI by writing or
calling: THE GATEWAY TRUST, P. O. BOX 5211, CINCINNATI, OHIO 45201-5211, (800)
354-6339.
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT APPROVE SHARES OF ANY MUTUAL
FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
FEES AND EXPENSES ____ All Gateway funds are 100% no-load. There are no sales charges, 12b-1
fees, redemption fees or annual account charges when you invest in a
Gateway fund.
FINANCIAL HIGHLIGHTS ____ Tables displaying financial information for each fund.
HOW TO OPEN A GATEWAY ACCOUNT ____ New investors can open an account by mail or by telephone.
HOW TO PURCHASE ADDITIONAL SHARES ____ Shares may be purchased by check, by wire transfer or by automatic
withdrawals from your bank account.
HOW TO REDEEM SHARES ____ Redemption requests can be made by mail or by telephone.
ADDITIONAL SHAREHOLDER INFORMATION ____ Additional information about buying and selling shares.
GATEWAY PERFORMANCE ____ Total return information.
EXPLANATION OF INVESTMENT TERMS ____ Dictionary of investment terms.
INDEX PLUS FUND INFORMATION ____ Graphs and tables showing fund performance, risk/reward and top
ten holdings for the Fund.
MID CAP INDEX FUND INFORMATION ____ Graph and tables showing fund performance and top ten holdings for the
Fund.
SMALL CAP INDEX FUND INFORMATION ____ Graph and tables showing fund performance and top ten holdings for the
Fund.
CO-PORTFOLIO MANAGERS' PROFILES ____ Profiles of the co-portfolio managers.
DIVIDENDS AND DISTRIBUTIONS ____ Investors may reinvest their dividends and distributions at no charge.
ABOUT THE INVESTMENT ADVISER ____ Gateway Investment Advisers, L.P. provides investment advisory services to
each fund.
HOW FUND SHARES ARE PRICED ____ Fund share prices are available 24 hours a day by calling (800) 354-6339.
TAXES ____ Tax information will be reported to you on Form 1099.
INVESTMENT PRACTICES ____ Explanations of the investment practices, risk factors and strategies
employed by each fund.
INVESTMENT RESTRICTIONS ____ Each fund has adopted certain investment restrictions.
GENERAL INFORMATION/THE GATEWAY TRUST ____ Additional information on The Gateway Trust and its Trustees.
</TABLE>
<PAGE> 3
FEES AND EXPENSES
THE GATEWAY FAMILY OF MUTUAL FUNDS IS 100% NO-LOAD. YOU DO NOT PAY ANY SALES
CHARGES WHEN YOU INVEST IN A GATEWAY FUND.
SHAREHOLDER TRANSACTION EXPENSES
The Gateway family of funds does not charge a fee for purchases,
exchanges or redemptions. All Gateway funds are 100% no- load.
<TABLE>
<CAPTION>
Index Mid Cap Small Cap
Shareholder Transaction Expenses Plus Fund Index Fund Index Fund
- -------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Maximum Sales Load on Purchase None None None
Maximum Sales Load on
Reinvested Dividends None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fee None None None
</TABLE>
The custodian for the Gateway funds charges $10 for each wire transfer.
FUND OPERATING EXPENSES
Annual fund operating expenses are paid from a fund's assets. Each fund
pays an advisory fee to Gateway Investment Advisers, L.P. (the "Adviser"). Each
fund also pays other expenses for services such as maintaining shareholder
records and furnishing shareholder statements and fund reports. A fund's
expenses are factored into its share price each day and are not charged directly
to shareholder accounts. The numbers in the following table are calculated as
percentages of average net assets.
<TABLE>
<CAPTION>
Index Mid Cap Small Cap
Annual Fund Operating Expenses Plus Fund Index Fund Index Fund
- ------------------------------ --------- ---------- ----------
<S> <C> <C> <C>
Advisory Fees (after waiver) .71% .00% .00%
12b-1 Fees .00 .00 .00
Other Expenses (after reimbursements) .48% 2.00% 1.68%
Total Fund Operating Expenses (after waiver 1.19% 2.00% 1.68%
and reimbursements)
(The Fund's Expense Ratio)
</TABLE>
EXAMPLE
Assume that each fund's annual return is 5% and its operating expenses
are exactly as previously described in the Fund Operating Expenses table. For
every $1,000 you invested, the table below shows the amount of expenses you
would incur if you sold your shares after the number of years indicated. THIS
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
<TABLE>
<CAPTION>
Index Plus Mid Cap Small Cap
Fund Index Fund Index Fund
---- ---------- ----------
<S> <C> <C> <C>
1 year $12 $20 $17
3 years 38 63 53
5 years 66 108 91
10 years 145 233 198
</TABLE>
The purpose of these tables is to assist you in understanding the direct
and indirect costs and expenses you will bear as a fund shareholder.
Waiver of 1995 Advisory Fee and Expense Reimbursements for Mid Cap Index Fund.
The investment advisory contract requires the Adviser to waive some or all of
its advisory fees as necessary to limit the Mid Cap Index Fund's expense ratio
to 1.50% of its average daily net assets. Any contractual waiver will not exceed
the aggregate advisory fee payable by the Fund for the applicable year. In
addition, the Adviser has voluntarily agreed to reimburse expenses to the extent
required (after giving full effect to the fee waiver) to maintain the Fund's
expense ratio at 2.00%. The Fund's actual expense ratio for 1995 was 1.98% due
to additional voluntary expense reimbursements. Absent the waiver and voluntary
reimbursements, the advisory fees and operating expenses of the Fund in 1995
would have been 0.90% and 3.38%, respectively.
<PAGE> 4
Waiver of 1995 Advisory Fee for Small Cap Index Fund. The investment advisory
contract requires the Adviser to waive some or all of its advisory fees as
necessary to limit the Small Cap Index Fund's expense ratio to 2.00% of its
average daily net assets. Any contractual or voluntary waiver will not exceed
the aggregate advisory fee payable by the Fund for the applicable year. In
addition, the Adviser has voluntarily agreed to waive any remaining advisory
fees to the extent the Fund's expense ratio exceeds 1.50%. The Adviser waived
all of its advisory fees in 1995. The actual advisory fees and total fund
operating expenses of the Fund in 1995 were 0.0% and 1.68%, respectively. Absent
the waiver, the advisory fees and total fund operating expenses of the Fund in
1995 would have been 0.90% and 2.58%, respectively.
<PAGE> 5
FINANCIAL HIGHLIGHTS
The following condensed financial information for the six years ended
December 31, 1995 has been audited by Arthur Andersen LLP, independent public
accountants. Other independent public accountants audited the condensed
financial information for the years ended December 31, 1986 through December 31,
1989. The audit report on the 1995 financial statements should be read in
conjunction with this condensed financial information. The audit report on the
1995 financial statements is incorporated by reference in the Statement of
Additional Information and is available from the Trust. The presentation is for
a share outstanding throughout each period.
<TABLE>
<CAPTION>
GATEWAY INDEX PLUS FUND Year Ended December 31,
------------------------------------------------------------------------------
1995(3) 1994 1993 1992 1991
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.48 $ 15.85 $ 15.51 $ 15.24 $ 13.64
------- ------- ------- ------- -------
Net investment income 0.24 0.26 0.26 0.27 0.31
Net gains (losses) on securities 1.46 0.61 0.88 0.51 2.10
------- ------- ------- ------- -------
Total from investment operations 1.70 0.87 1.14 0.78 2.41
------- ------- ------- ------- -------
Dividends from net investment income (0.24) (0.27) (0.26) (0.28) (0.30)
Distributions from capital gains (0.00) (0.86) (0.47) (0.23) (0.51)
Distributions in excess of realized
capital gains (0.03) (0.11) (0.07) 0.00 0.00
Returns of capital 0.00 0.00 0.00 0.00 0.00
------- ------- ------- ------- -------
Total distributions (0.27) (1.24) (0.80) (0.51) (0.81)
------- ------- ------- ------- -------
Net asset value, end of period $ 16.91 $ 15.48 $ 15.85 $ 15.51 $ 15.24
======= ======= ======= ======= =======
TOTAL RETURN 11.04% 5.57% 7.40% 5.15% 17.80%
Net assets, end of period (millions) $176.22 $164.65 $207.18 $212.95 $ 81.37
Ratio of expenses to average net assets (1) 1.19% 1.21% 1.11% 1.11% 1.22%
Ratio of net investment income to average
net assets (1) 1.51% 1.54% 1.58% 1.96% 2.17%
Portfolio turnover rate 5% 4% 17% 15% 31%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GATEWAY INDEX PLUS FUND Year Ended December 31,
-----------------------------------------------------------------------
1990 1989 1988 1987 1986
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.49 $ 13.67 $ 11.60 $ 14.63 $14.69
------- ------- ------- ------- ------
Net investment income 0.41 0.33 0.23 0.27 0.33
Net gains (losses) on securities 1.15 2.29 2.05 (1.05) 1.41
------- ------- ------- ------- ------
Total from investment operations 1.56 2.62 2.28 (0.78) 1.74
------- ------- ------- ------- ------
Dividends from net investment income (0.41) (0.37) (0.21) (0.33) (0.34)
Distributions from capital gains (3.00) (0.35) 0.00 (0.28) (1.46)
Distributions in excess of realized
capital gains 0.00 0.00 0.00 0.00 0.00
Returns of capital 0.00 (0.08) 0.00 (1.64) 0.00
------- ------- ------- ------- ------
Total distributions (3.41) (0.80) (0.21) (2.25) (1.80)
------- ------- ------- ------- ------
Net asset value, end of period $ 13.64 $ 15.49 $ 13.67 $ 11.60 $14.63
======= ======= ======= ======= ======
TOTAL RETURN 10.32% 19.45% 19.76% (5.65%) 12.69%
Net assets, end of period (millions) $ 38.08 $ 31.51 $ 27.33 $ 27.35 $45.31
Ratio of expenses to average net assets (1) 1.34% 1.40% 2.08% 1.48% 1.49%
Ratio of net investment income to average
net assets (1) 2.59% 2.21% 1.75% 1.83% 2.23%
Portfolio turnover rate 79% 30% 10% 175% 85%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Additional information about the performance of each Gateway fund is contained
in 1995 Annual Reports to shareholders of the Gateway funds. Annual Reports
for 1995 may be obtained without charge by writing THE GATEWAY TRUST, P. O.
BOX 5211, CINCINNATI, OHIO 45201-5211 or by calling (800) 354-6339.
<PAGE> 6
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
GATEWAY MID CAP INDEX FUND From 9/30/92 to
1995 (3) 1994 1993 12/31/92 (2)
----------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.58 $ 10.16 $ 10.04 $ 10.00
------- ------- ------- -------
Net investment income 0.03 0.08 0.11 0.03
Net gains (losses) on securities 2.43 (0.60) 0.41 0.04
------- ------- ------- -------
Total from investment operations 2.46 (0.52) 0.52 0.07
------- ------- ------- -------
Dividends from net investment income (0.06) (0.05) (0.11) (0.03)
Distributions from capital gains (0.37) (0.01) (0.29) 0.00
------- ------- ------- -------
Total distributions (0.43) (0.06) (0.40) (0.03)
------- ------- ------- -------
Net asset value, end of period $ 11.61 $ 9.58 $ 10.16 $ 10.04
======= ======= ======= =======
TOTAL RETURN 25.68% (5.12%) 5.18% 0.70%(2)
Net assets, end of period (millions) $ 5.69 $ 6.59 $ 10.46 $ 10.69
Ratio of net expenses to average net assets (1) 1.98% 1.50% 1.50% 1.50%
Ratio of net investment income to average net assets (1) 0.05% 0.59% 1.06% 1.39%
Portfolio turnover rate 18% 8% 105% 0%(2)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GATEWAY SMALL CAP INDEX FUND Year Ended Year Ended From 6/16/93 to
12/31/95(3) 12/31/94 12/31/93 (2)
---------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.63 $10.35 $10.00
------
Net investment income (loss) 0.03 (0.02) 0.04
Net gains (losses) on securities 2.07 (0.60) 0.61
------
Total from investment operations 2.10 (0.62) 0.65
------
Dividends from net investment income (0.01) (0.00) (0.04)
Distributions from capital gains (0.67) (0.10) (0.26)
------
Total distributions (0.68) (0.10) (0.30)
------
Net asset value, end of period $11.05 $ 9.63 $10.35
======
TOTAL RETURN 21.81% (5.99%) 6.50%(2)
Net assets, end of period (millions) $9.42 $ 9.66 $13.00
Ratio of net expenses to average net assets (1) 1.68% 2.00% 1.92%
Ratio of net investment income (loss) to average net assets (1) 0.09% (0.14%) 0.98%
Portfolio turnover rate 20% 39% 3%(2)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The ratios of expenses to average net assets would have increased and net
investment income (loss) to average net assets would have decreased
(increased) by the following amounts had the Adviser not voluntarily
reimbursed expenses: 0.13% for the Index Plus Fund in 1988; 0.02% for the
Mid Cap Index Fund in 1995, and 0.08% for the Small Cap Index Fund in 1993.
(2) Operations of the Mid Cap Index Fund and Small Cap Index Fund commenced on
September 30, 1992 and June 16, 1993, respectively. The expense and net
income ratios and portfolio turnover rates in those initial years have been
annualized. The total returns in those initial years have not been
annualized.
(3) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser of the funds.
<PAGE> 7
HOW TO OPEN A GATEWAY ACCOUNT
GATEWAY FUNDS ARE AVAILABLE FOR INDIVIDUALS, IRAS, TRUSTS AND PENSION PLANS.
OPENING A NEW ACCOUNT
You may open an account by mail or by telephone. The minimum initial
investment generally is $1,000 in any fund. No sales commission is charged by
the Gateway funds for purchases or redemptions of fund shares.
BY MAIL
To open your account by mail, please complete and sign the New Account
Application Form which accompanies this Prospectus. The application has
instructions to assist you. Please indicate the amount of your investment in
each Gateway fund. When you have completed the application, please mail it to:
THE GATEWAY TRUST, SHAREHOLDER SERVICES, P. O. BOX 5211, CINCINNATI, OH
45201-5211.
Please include your check or money order payable to THE GATEWAY TRUST
with your application.
BY TELEPHONE
To open your account by telephone, you must wire your investment to The
Gateway Trust. Please call Gateway shareholder services at (800) 354-6339 for
instructions. You must provide the following information to open your new
account: your name, your address, your social security or tax identification
number, the size of your initial investment, the Gateway fund(s) in which you
wish to invest, and the name and address of your financial institution wiring
the funds. You must then instruct your financial institution to wire the funds
to:
The Gateway Trust, c/o Star Bank, N.A.
ABA #042-0000-13
Cincinnati, Ohio
Your name
Your Gateway Account No. xxxxx
The Gateway fund(s) in which you wish to invest.
You must send the following information with your wire: your name, your
Gateway account number, and the name of the fund(s) in which you wish to invest.
See Page X for additional information about wire transfers and telephone
instructions.
OPENING A NEW IRA ACCOUNT/TRANSFER OF EXISTING IRA
To open a new IRA in a Gateway fund, please call Gateway shareholder
services at (800) 354-6339 to obtain an IRA Account Application and an IRA
Investment Kit. To transfer an existing IRA from a bank or other mutual fund to
your Gateway IRA, you must complete an IRA Transfer Form which is included in
the IRA Investment Kit, in addition to an IRA Account Application. To transfer
or roll over funds from an employer-sponsored plan such as a 401(k) plan, please
call Gateway shareholder services at (800) 354- 6339for instructions. GATEWAY
IRAS ARE FREE OF ANY ANNUAL CHARGES OR TRANSACTION FEES.
OPENING A TRUST/PENSION PLAN ACCOUNT
To open a trust account in a Gateway fund, please complete the New
Account Application Form. In the registration section, give the full legal name
of the trust. Pension plans may invest in a Gateway fund by completing the New
Account Application Form.
OPENING A UNIFORM GIFT TO MINORS ACT ACCOUNT
To open a Gateway account for a minor (typically used for educational
savings plans), please complete the UGMA/UTMA section of the New Account
Application Form. Be sure to include the minor's social security number.
<PAGE> 8
HOW TO PURCHASE ADDITIONAL SHARES
THE MINIMUM AMOUNT FOR AN ADDITIONAL INVESTMENT IS $100.
You may add to your Gateway account at any time by choosing one of the
following purchase options. The minimum amount for an additional investment in
any fund is $100. If your purchase request is received in good order by 4:15
P.M. Eastern Time, your purchase will be based on that day's closing price for
the fund.
After each purchase you will receive a confirmation statement showing the
value of your account. Certificates are not issued for fund shares.
BY MAIL
The most common way of purchasing additional shares in a Gateway fund is
by mail. Please send your check or money order and an Additional Investment Form
in a prepaid envelope. Additional Investment Forms and prepaid envelopes are
included with each confirmation statement, quarterly report and periodic
newsletter sent to you. Please make all checks or money orders payable to THE
GATEWAY TRUST and mail to: THE GATEWAY TRUST, SHAREHOLDER SERVICES, P. O. BOX
5211, CINCINNATI, OH 45201-5211.
BY WIRE
To avoid any mail delay, you may purchase additional shares by wire.
Please call Gateway shareholder services at (800) 354- 6339 to arrange a
purchase by wire. You must then instruct your financial institution to wire
funds to:
The Gateway Trust, c/o Star Bank, N.A.
ABA #042-0000-13
Cincinnati, Ohio
Your name
Your Gateway Account No. xxxxx
The Gateway fund(s) in which you wish to invest.
You must send the following information with your wire: your name, your
Gateway account number, and the name of the fund(s) in which you wish to invest.
See Page X for additional information about wire transfers and telephone
instructions.
BY AUTOMATIC INVESTMENT PROGRAM
Gateway's Automatic Investment Program is a way to add systematically to
your existing Gateway account. When you use the program, funds are
electronically transferred from your bank account into your Gateway account and
additional shares are then purchased for your account. This service is available
on a monthly or quarterly basis with a minimum of $100 per transfer. THE
AUTOMATIC INVESTMENT PROGRAM IS FREE OF CHARGE. Please call Gateway shareholder
services at (800) 354-6339 to make arrangements to use this program.
BY EXCHANGE FROM ANOTHER GATEWAY FUND
To purchase shares by exchanging from another Gateway fund, please call
Gateway shareholder services at (800) 354-6339 for instructions. If your
exchange request is received by 4:15 P.M. Eastern Time, the exchange will be
based on that day's closing prices for the funds involved in the exchange.
The Trust does not charge any fee for exchanges between Gateway funds.
Generally, an exchange between funds is a taxable event. State securities laws
may restrict your ability to make exchanges. The Trust reserves the right to
temporarily or permanently terminate the exchange privilege for any shareholder
who makes an excessive number of exchanges. You will receive advance written
notice that the Trust intends to limit your use of the exchange privilege. The
Trust also reserves the right to terminate or modify the exchange privilege or
to refuse an exchange if the exchange would adversely affect any Gateway fund
involved in the exchange.
<PAGE> 9
HOW TO REDEEM SHARES
INVESTORS MAY REDEEM SHARES BY WRITING OR CALLING GATEWAY.
You may redeem shares from your Gateway account at any time by choosing
one of the following options. If your redemption request is received in good
order by 4:15 P.M. Eastern Time, your redemption will be based on that day's
closing price for the fund.
The proceeds from your redemption will be mailed or wired, depending on
the method of redemption and your instructions. Normally the proceeds will be
sent on the following business day. Payments to shareholders who have purchased
shares by check will not be made until the purchase check has cleared, which
could take up to fifteen days.
BY MAIL
Redemption requests made in writing should be sent to: THE GATEWAY TRUST,
SHAREHOLDER SERVICES, P. O. BOX 5211, CINCINNATI, OHIO 45201-5211.
Each redemption request should include a letter of instruction, specify
the fund and the number of fund shares or dollar amount to be redeemed, and
should be signed by all owners of the shares exactly as their names appear on
the account. In certain cases, other supporting legal documents may be required.
The redemption proceeds will be mailed to the address shown on your account.
A signature guarantee is not usually required. However, a signature
guarantee is required under certain circumstances, including redemptions
involving payment to persons other than the record owner(s) of the shares. A
signature guarantee will be accepted from banks, brokers, dealers, municipal
securities dealers or brokers, government securities dealers or brokers, credit
unions (if authorized by state law), national securities exchanges, registered
securities associations, clearing agencies, and savings associations. Notary
publics cannot guarantee your signature.
BY TELEPHONE
Unless you have declined telephone exchange and/or redemption privileges,
you may redeem your shares by calling Gateway shareholder services at (800)
354-6339. If you redeem your shares by telephone, the redemption proceeds will
be paid by check to the owner(s) of the shares shown on Gateway's records and
mailed to the address shown on Gateway's records for your account. Redemption
proceeds can be sent by wire if you completed the wire transfer instructions in
your original New Account Application Form or you have sent separate wire
transfer instructions to Gateway. Separate wire transfer instructions must be
signed by all owners of the shares exactly as their names appear on the account,
and the signatures must be guaranteed. The telephone redemption procedure is not
available for IRAs.
SYSTEMATIC WITHDRAWAL PROGRAM
If the value of your account is at least $5,000, you can arrange for
systematic quarterly or monthly withdrawals in the amount of $100 or more.
Please call Gateway shareholder services at (800) 354-6339 to make arrangements
to use this program.
See Page X for additional information about redemptions and telephone
instructions.
<PAGE> 10
ADDITIONAL SHAREHOLDER INFORMATION
FEES CHARGED BY YOUR BROKER OR BANK
If you buy or sell shares of a Gateway fund through a broker, the broker
may charge you additional fees and expenses. If you buy shares through a wire
transfer, The Gateway Trust will not charge you for the wire. Your financial
institution may charge you for this service or for transfers from your bank
account to a Gateway fund through the Automatic Investment Program. If you
redeem shares through a wire transfer, the Trust's custodian will assess a wire
charge of $10. Your institution may charge you for receiving a wire transfer of
redemption proceeds.
ADDITIONAL IRA INFORMATION
For information about redeeming shares from an IRA, please call Gateway
shareholder services at (800) 354-6339. More detailed information about
transfers to and distributions from an IRA and a general description of some of
the Internal Revenue Service rules governing IRAs are set forth in the SAI.
TELEPHONE TRANSACTIONS
The Gateway Trust will not be liable for following instructions received
by telephone that it reasonably believes to be genuine. The Trust will employ
reasonable procedures to confirm that telephone instructions are genuine. All
shareholders of the Gateway funds have telephone redemption and exchange
privileges unless the shareholder has specifically declined these privileges. If
you do not wish to have telephone privileges for your account, you must mark the
appropriate section on the New Account Application Form or notify the Trust in
writing. To protect shareholders who have telephone privileges, the Trust
follows certain procedures, including requiring a form of personal
identification before acting upon telephone instructions, making redemption
checks requested by telephone payable only to the owner(s) of the account shown
on the Trust's records, mailing such redemption checks only to the account
address shown on the Trust's records, directing wire redemptions requested by
telephone only to the bank account shown on the Trust's records, providing
written confirmation of any transaction requested by telephone, and normally
tape recording any instructions received by telephone.
AUTOMATIC REDEMPTIONS BY THE TRUST
The Gateway Trust reserves the right to reject any investment at any
time. The Trust also reserves the right to automatically redeem your account(s)
under certain circumstances. You will receive written notice at least 60 days
prior to the automatic redemption of your account(s) by the Trust. Your
account(s) may be automatically redeemed when the aggregate value of your
account(s) falls below $800 (other than as a result of market action) unless you
purchase additional shares to increase the value of your account(s) to at least
$1,000 before the end of the 60-day period. Your account(s) may also be
automatically redeemed if you do not provide a valid U. S. social security
number or taxpayer identification number or other requested documents before the
end of the 60-day period. The Trustees of The Gateway Trust can terminate any
series of the Trust upon written notification to the shareholders of the
applicable series.
ADDITIONAL REDEMPTION INFORMATION
Redemption proceeds will be sent to you no later than five business days
after your request is received in good order. The right of redemption may be
suspended in certain circumstances, such as the closing of the New York Stock
Exchange for a period other than weekends or normal holidays.
<PAGE> 11
GATEWAY PERFORMANCE
GATEWAY HAS BECOME AN INDUSTRY LEADER IN PROVIDING PROSPECTIVE INVESTORS AND
EXISTING SHAREHOLDERS WITH COMPLETE INFORMATION ON ITS NO-LOAD FUNDS.
It is important for you to understand completely the risks as well as the
potential rewards of each Gateway fund before investing. The tables and graphs
appearing in this section of this Prospectus are designed to help you understand
these risks and rewards and should be studied carefully. A brief description of
each table and graph, as well as its significance, is included on the following
pages. For a more complete explanation see the Statement of Additional
Information.
YEAR-BY-YEAR TOTAL RETURNS SINCE INCEPTION
<TABLE>
<CAPTION>
Index Mid Cap Small Cap S&P 500 Lehman Gov't/Corp
Plus Fund Index Fund Index Fund Stock Index Bond Index
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1995 11.04% 25.68% 21.81% 37.58% 19.24%
1994 5.57 (5.12) (5.99) 1.32 (3.52)
1993 7.40 5.18 6.50** 10.08 11.02
1992 5.15 0.70* 7.62 7.58
1991 17.80 30.47 16.13
1990 10.32 (3.11) 8.28
1989 19.45 31.69 14.23
1988 19.76 16.52 7.58
1987 (5.65) 5.05 2.29
1986 12.69 18.51 15.62
1985 15.89 31.57 21.30
1984 4.04 6.10 15.02
1983 14.80 22.47 8.00
1982 9.46 21.40 31.09
1981 4.59 (5.05) 7.26
1980 16.50 32.33 3.06
1979 15.37 18.20 2.30
1978 5.90 6.40 1.19
</TABLE>
*September 30, 1992 to December 31,1992
**June 16, 1993 to December 31, 1993
COMPARATIVE PERFORMANCE INFORMATION
Each Gateway fund may compare its performance to various indexes, such as
the S&P 500 Index. Each Gateway fund may also compare its performance to that of
other mutual funds or categories of mutual funds as reported by independent
services, such as Morningstar, Inc. and Value Line Mutual Fund Survey, or by
other financial publications.
<PAGE> 12
<TABLE>
<CAPTION>
Average Annual Total Returns* Cumulative Total Returns*
---------------------------------------------- ----------------------------------------------
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gateway Index Plus 11.04% 7.98% 9.29% 10.10% 11.04% 25.90% 55.93% 161.63%
GATEWAY MID CAP INDEX 25.68 7.84 N/A N/A 25.68 25.42 N/A N/A
Gateway Small Cap Index 21.81 N/A N/A N/A 21.81 N/A N/A N/A
S&P 100 Index 40.09 16.91 16.72 14.49 40.09 59.80 116.62 287.10
S&P MidCap 400 Index 30.95 12.89 N/A N/A 30.95 43.87 N/A N/A
Wilshire Small Cap Index 26.58 N/A N/A N/A 26.58 N/A N/A N/A
S&P 500 Index 37.58 15.34 16.59 14.83 37.58 53.44 115.45 298.76
Lehman Gov't/Corp Bond 19.24 8.51 9.80 9.65 19.24 27.77 59.62 151.28
Index
Consumer Price Index 2.61 2.68 2.80 3.47 2.61 8.25 14.80 40.61
</TABLE>
* For periods ended December 31, 1995
<PAGE> 13
EXPLANATION OF INVESTMENT TERMS
Total return is the change in the value of an investment in a fund over a given
period, assuming reinvestment of distributions.
A cumulative total return reflects actual performance over a stated period of
time.
An average annual total return is a rate of return that, if achieved
consistently throughout a given period, would produce a cumulative total return
equal to that actually achieved by the fund over the same period. Average annual
total returns smooth out variations in performance; they are not the same as
actual year-by-year results.
Standard deviation is a statistical measure of volatility. It measures the
expected change in the value of a fund or a market index such as the S&P 500
Index. A fund with an expected return of 10% and a standard deviation of 15%
would be expected to show returns of -5% to +25% in two out of every three
years. Volatility is often used as a measure of risk. A lower standard deviation
implies lower volatility.
Beta is a measure of a fund's volatility relative to an appropriate index. It
measures how much the value of a fund fluctuates compared to the index. As an
example, the S&P 500 Index has a beta of 1.0. Any stock mutual fund with a beta
greater than 1.0 is more volatile than the stock market, and any fund with a
beta lower than 1.0 is less volatile than the stock market as represented by the
S&P 500 Index.
Risk of an investment is very important for investors to understand.
The Trustees of The Gateway Trust are concerned that some investors
may purchase mutual funds without an appreciation for the risk they have
assumed. Risk is measured in four ways: beta, standard deviation, number of
negative periods experienced by the fund, and the worst total return in one of
those periods. Each measure of risk is described more fully in the Statement of
Additional Information.
The S&P 500 Index is a widely recognized measure of performance for the stock
market. The S&P 500 figures represent the prices of an unmanaged index of 500
common stocks and assume reinvestment of all dividends paid on the stocks in the
index.
The S&P MidCap 400 Index is an unmanaged index of 400 common stocks with a
market capitalization range of $300 million to $5.2 billion. The performance of
this index assumes reinvestment of all dividends paid on the stocks in the
index.
The Wilshire Small Cap Index is an unmanaged index of 250 common stocks with a
market capitalization range of $75 million to $800 million. The performance of
this index assumes reinvestment of all dividends paid on the stocks in the
index.
The Lehman Government/Corporate Bond Index is a widely recognized measure of
performance for the bond market representing an unmanaged index of selected
government and corporate bonds. The Lehman Index figures assume reinvestment of
all distributions paid on the bonds in the index. As of December 31, 1995, the
average maturity of this index was 9.8 years.
The Consumer Price Index is a widely recognized measure of inflation calculated
by the U. S. government.
U. S. Treasury bills are negotiable debt obligations of the U. S. government.
Since they are secured by the full faith and credit of the government, they are
regarded as risk-free investments. Treasury bills are short-term securities with
maturities of one year or less.
<PAGE> 14
INDEX PLUS FUND INFORMATION
GROWTH OF $10,000 CHART
(Insert Chart Here)
This chart shows the growth of a $10,000 investment made ten years ago. It
assumes all distributions were reinvested in additional shares.
<TABLE>
<CAPTION>
===================================================
Index Plus Fund
Average Annual Total Returns
As Of December 31, 1995
---------------------------------------------------
<S> <C>
One Year 11.04%
Five Years 9.29%
Ten Years 10.10%
===================================================
</TABLE>
Performance data represents past performance and your investment return and
principal value of an investment will fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost.
OVERVIEW
The Index Plus Fund is designed for conservative investors whose investment
objective is to maximize total rate of return over the long term.
<TABLE>
<CAPTION>
====================================================
Top Ten Holdings
As Of December 31, 1995
----------------------------------------------------
<S> <C>
General Electric Company 6.36%
AT&T Corporation 5.36%
Exxon Corp. 5.19%
Coca-Cola Co. 4.88%
Merck & Company 4.23%
Johnson & Johnson 2.88%
International Business Machines Corp. 2.71%
Wal-Mart Stores, Inc. 2.67%
Intel Corporation 2.44%
Mobil Corp. 2.31%
====================================================
</TABLE>
<PAGE> 15
RISK/REWARD CHARTS
(Insert Risk/Reward Charts Here)
These charts show that, in general, more risk must be taken to earn higher total
returns. Any investment can be shown on the graph by plotting its risk (standard
deviation) and its reward (average annual total return). The charts show three
points. One point shows 30-day U. S. Treasury bills, one point shows the S&P 500
Index, and the third point shows the Index Plus Fund. The line connecting
Treasury bills and the S & P 500 Index shows all the possible outcomes if an
investment had been allocated between these two choices in varying positions.
When the Index Plus Fund point appears above the line, it shows that the fund
earned a higher-than-expected return during the period covered by the chart,
considering the amount of risk it took to earn that return. When the point
appears below the line, it shows the reverse. The next ten years may be quite
different in terms of reward for all three investments shown on the charts. The
risk, however, tends to be constant over time.
<PAGE> 16
MID CAP INDEX FUND INFORMATION
GROWTH OF $10,000 CHART
(Insert Chart Here)
This chart shows the growth of a $10,000 investment at the Fund's inception. It
assumes all distributions were reinvested in additional shares.
<TABLE>
<CAPTION>
==========================================
Mid Cap Index Fund
Average Annual Total Returns
As Of December 31, 1995
------------------------------------------
<S> <C>
One Year 25.68%
Five Years N/A
Life of Fund 7.45%
==========================================
</TABLE>
Performance data represents past performance and your investment return and
principal value of an investment will fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost.
OVERVIEW
The Mid Cap Index Fund is designed for an aggressive investor who seeks
long-term growth of capital and a secondary objective of conserving principal.
<TABLE>
<CAPTION>
===========================================================
Top Ten Holdings
As Of December 31, 1995
-----------------------------------------------------------
<S> <C>
Bay Networks, Inc. 1.23%
Worldcom Inc. 1.06%
Aon Corporation 0.87%
Chiron Corporation 0.79%
Fifth Third Bancorp 0.77%
Adobe Systems, Inc. 0.76%
First Tennessee National Corp. 0.74%
Frontier Corp. 0.73%
HFS Inc. 0.72%
Parametric Technology Corporation 0.70%
===========================================================
</TABLE>
<PAGE> 17
SMALL CAP INDEX FUND INFORMATION
GROWTH OF $10,000 CHART
(Insert Chart Here)
This chart shows the growth of a $10,000 investment at the Fund's inception. It
assumes all distributions were reinvested in additional shares.
<TABLE>
<CAPTION>
===========================================
Small Cap Index Fund
Average Annual Total Returns
As Of December 31, 1995
-------------------------------------------
<S> <C>
One Year 21.81%
Five Years N/A
Life of Fund 8.12%
===========================================
</TABLE>
Performance data represents past performance and your investment return and
principal value of an investment will fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost.
OVERVIEW
The Small Cap Index Fund is designed for an aggressive investor who seeks
long-term growth of capital.
<TABLE>
<CAPTION>
=======================================================
Top Ten Holdings
As Of December 31, 1995
-------------------------------------------------------
<S> <C>
Macromedia Inc. 1.11%
Centocor, Inc. 1.05%
-------------- -----
Fore Systems Inc. 1.01%
----------------- -----
Global Marine, Inc. 0.98%
------------------- -----
Presstek Inc. 0.90%
------------- -----
Surgical Care Affiliates, Inc. 0.90%
------------------------------ -----
Bed Bath and Beyond 0.86%
------------------- -----
Cordis Corporation 0.85%
First American Corp. of Tennessee 0.81%
Shared Medical Systems Corporation 0.81%
=======================================================
</TABLE>
<PAGE> 18
CO-PORTFOLIO MANAGERS' PROFILES
PETER W. THAYER, CFA
Portfolio Manager from 1977 to 1994
Co-Portfolio Manager from 1994
MBA Harvard Business School 1973
BBA University of Wisconsin 1971
Age 47
Peter W. Thayer, CFA, is the co-founder of Gateway Investment Advisers,
Inc. Mr. Thayer is often quoted in The Wall Street Journal, Business Week,
Money, Donoghue'$ MONEYLETTER, Barron's, and other financial publications. He
has made numerous television and radio appearances and has been a speaker at
over thirty investment conferences in the U.S. and Europe.
He is the author of over 25 articles on options and investing. Mr.
Thayer enjoys chess, tennis, scuba diving, collecting Rookwood Pottery and bird
watching.
He and his wife, Roz, have been married twenty-four years and have
three children.
J. PATRICK ROGERS, CFA
Co-Portfolio Manager from 1994
MBA Xavier University 1994
BBA University of Notre Dame 1986
Age 32
J. Patrick Rogers, CFA, joined Gateway Investment Advisers, Inc. in
1989 and has been its president since 1995. He is a co- portfolio manager for
the Index Plus Fund, the Mid Cap Index Fund, and the Small Cap Index Fund. In
addition, he is portfolio manager for the Cincinnati Fund.
He was awarded the Martin B. Friedman Award at Xavier University which
is given annually to the most outstanding MBA student. Mr. Rogers is a frequent
speaker at various individual investor groups, including AAII, and is active in
many industry associations, including the 100% No-Load Mutual Fund Council.
He and his wife, Elizabeth, have two children.
<PAGE> 19
DIVIDENDS AND DISTRIBUTIONS
GATEWAY INVESTORS MAY REINVEST THEIR DIVIDENDS AND DISTRIBUTIONS AT NO CHARGE.
Shareholders of each Gateway fund may elect to receive distributions
either in cash or in additional shares of a fund. To receive your distributions
in cash, please mark the appropriate box on the New Account Application Form.
Once your account is opened, you may change the way your distributions are
handled by writing or calling Gateway.
GATEWAY INDEX PLUS FUND
The Index Plus Fund normally declares dividends at the end of March,
June, September and December. The amount of the quarterly dividend is based on
interest earned plus common stock dividends received by the Fund, minus
expenses.
If the Fund has net capital gains from stock or option transactions, it
normally declares a capital gains distribution at the end of December. The
capital gains distribution is calculated in accordance with tax regulations and
has varied substantially from year to year.
GATEWAY MID CAP INDEX FUND AND SMALL CAP INDEX FUND
The Mid Cap Index Fund and the Small Cap Index Fund each declares
dividends and net capital gains, if any, at the end of December.
FUND PRICING WHEN DIVIDENDS ARE DECLARED
The price of a Gateway fund is affected by its declaration of dividends
and capital gains distributions. The price of a fund, as adjusted for market
activity, generally drops by the amount of the declared dividend and capital
gains distribution. As an example, assume that on December 31, the Gateway Index
Plus Fund declares a dividend in the amount of $0.50 per share. If the Fund's
price per share was $16.50 on December 30, the Fund's price on December 31 would
be $16.00. The decline of $0.50 per share would be the result of the declaration
of the $0.50 dividend.
TAX CONSEQUENCES OF BUYING A DIVIDEND
If you buy fund shares just before the fund declares a dividend, you
will pay the full price for the shares and then receive a portion of the price
back as a taxable distribution. In the example above, if you bought shares of
the Gateway Index Plus Fund on December 30, you would pay $16.50 per share. On
December 31, the Fund would pay you $0.50 per share as a dividend and your
shares would be worth $16.00 per share. The dividend paid to you would generally
be included in your gross income for tax purposes, whether or not you reinvested
the dividend. For this reason, you should carefully consider the tax
consequences of buying shares in a Gateway fund in late December.
<PAGE> 20
ABOUT THE INVESTMENT ADVISER
INVESTMENT ADVISER
Gateway Investment Advisers, L.P. ("Adviser"), a Delaware limited
partnership, has acted as the investment adviser for the funds since December
15, 1995. Gateway Investment Advisers, Inc. ("GIA") provided investment advisory
services to the funds from their formation until December 15, 1995. The Adviser
is the successor in interest to the assets, business and personnel of GIA. The
Adviser is a limited partnership in which GIA is the general partner with a 76%
partnership interest. The sole limited partner of the Adviser is Alex. Brown
Capital Advisory & Trust Company (formerly known as Alex. Brown Investments
Incorporated), an affiliate of Alex. Brown & Sons Incorporated, a nationally
known investment banking firm and registered broker/dealer located in Baltimore,
Maryland. The principal and controlling shareholders of GIA are Walter G. Sall
and J. Patrick Rogers. As of December 31, 1995, the Adviser had approximately
$600 million in assets under its management, including approximately $195
million in assets invested in the funds including the Cincinnati Fund. The
Adviser has entered into an Advisory Referral Agreement with Alex. Brown & Sons
Incorporated under which the Adviser will pay a referral fee for those shares of
the funds that have been directed to the Adviser by Alex. Brown & Sons
Incorporated.
The Small Cap Index Fund's portfolio holds stock of Alex. Brown
Incorporated, an affiliate of Alex. Brown Capital Advisory & Trust Company,
because this security is a part of the Wilshire Small Cap Index. This stock is
owned in proportion to its representation in the Index.
ADVISORY SERVICES
The Adviser provides each fund with investment research and advice. The
Adviser also places with brokers each fund's buy and sell orders for portfolio
securities. When the Adviser places these orders, it uses its best efforts to
obtain the most favorable price and execution available for the fund, except to
the extent that the fund may be permitted to pay higher commissions for
brokerage and research services pursuant to Section 28(e) of the Securities
Exchange Act of 1934. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., the Adviser may consider sales of fund
shares as a factor in the selection of brokers to execute fund portfolio
transactions.
ADVISORY FEES
Each fund pays the Adviser an advisory fee calculated at an annual rate
of 0.90% of the first $50 million of the average daily net asset value of the
fund, 0.70% of the average daily net asset value of the fund in excess of $50
million but less than $100 million, and 0.60% on the average daily net asset
value of the fund in excess of $100 million. The advisory contracts require the
Adviser to waive fees as necessary to limit the Mid Cap Index Fund's expense
ratio to 1.50% of its average daily net assets and the Small Cap Index Fund's
expense ratio to 2.00% of its average daily net assets. The Adviser waived
advisory fees in accordance with the advisory contracts of $50,766 for the Mid
Cap Index Fund and $85,502 for the Small Cap Index Fund in 1995. Any contractual
waiver will not exceed the aggregate advisory fee payable by any fund for the
applicable year.
FUND EXPENSES
Each fund pays all of its ordinary business expenses, other than
advertising and marketing expenses which are paid by the Adviser. Ordinary
business expenses include the advisory fees of the Adviser, custodial fees,
brokerage commissions, fees paid to the Adviser for providing shareholder
services, expenses incurred in the registration of the fund shares with federal
and state securities agencies, and expenses of printing and distributing a
fund's prospectus and shareholder reports. Expenses applicable to more than one
fund are either allocated on the basis of the number of shareholders or the net
assets in each fund, including the Cincinnati Fund. These collective expenses
include certain printing and mailing costs, professional fees, and insurance
costs.
The Adviser provides shareholder, transfer, and dividend disbursing
services to each fund. The Adviser charges each fund a monthly minimum fee of
$2,500 for these shareholder services. Each fund reimburses the Adviser for
printing, mailing, compliance, and processing expenses associated with providing
shareholder services. The portion of the reimbursement related to processing
expenses cannot exceed 0.20% of the fund's average net assets. Each fund pays
the Adviser a monthly fee of $4,000 for financial and administrative services
provided by the Adviser.
<PAGE> 21
HOW FUND SHARES ARE PRICED
The net asset value (closing share price) of a fund ordinarily is
determined as of the close of the options exchanges (normally 4:15 P.M. Eastern
Time) on each day during which the options exchanges are open for trading. Under
unusual circumstances, the net asset value may be determined at other times as
authorized by the Board of Trustees. Net asset value is determined by deducting
the liabilities of a fund from the market or fair value of its assets.
The funds normally value stocks and options at the average of the closing
bid and asked quotations. Securities for which market quotations are not readily
available, securities in which trading has been suspended during the day, and
all other assets are valued at fair value. Fair value is determined in good
faith under procedures adopted by the Board of Trustees.
<PAGE> 22
TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Gateway fund intends to distribute to its shareholders substantially
all of its net investment income and net capital gains, as determined in
accordance with appropriate tax regulations.
TAXES ON DIVIDENDS AND DISTRIBUTIONS
Each January you will receive a Form 1099-DIV from Gateway. It will show
the amount and federal income tax treatment of all distributions paid to you
during the year. Distributions of any net investment income and net realized
short-term capital gains are taxable to you as ordinary income, whether or not
you reinvest. Distributions of net long-term capital gains are taxable as
long-term capital gains, whether or not you reinvest and regardless of how long
you held your fund shares.
TAXES ON REDEMPTIONS AND EXCHANGES
Redemptions, including exchanges between Gateway funds, will be reported
to you on Form 1099-B.
TAXES ON IRAS
Contributions, investments and distributions with respect to IRAs are
subject to specific IRS rules. The SAI contains additional information about
these rules.
ADDITIONAL INFORMATION
The tax discussion set forth above and in the SAI is included for general
information only. You must determine the applicability of federal, state and
local taxes to dividends and distributions received on your shares of the fund
and to proceeds received from redemptions or exchanges of fund shares.
Prospective investors should consult their own tax advisors concerning the tax
consequences of an investment in a Gateway fund.
<PAGE> 23
INVESTMENT PRACTICES
GATEWAY INDEX PLUS FUND
The investment objective of the Index Plus Fund is to achieve a high
total return at a reduced level of risk. The Fund is designed for conservative
investors who want to maximize total rate of return over the long term.
Investment Practices: The Fund attempts to achieve its investment
objective primarily by investing in the 100 stocks included in the S&P 100 Stock
Index (the "100 Index") and by selling call options on the 100 Index. The
proportion of the Fund's assets invested in each stock held in the Fund's
portfolio is substantially similar to the proportion of the 100 Index
represented by the stock. For example, if a stock represents 2% of the value of
the 100 Index, the Fund invests approximately 2% of its assets in the stock. The
Adviser seeks to maintain a correlation of at least 99% between the composition
of the 100 Index and the Fund's portfolio. The Adviser monitors the composition
of the 100 Index on a daily basis and makes adjustments to the Fund's portfolio,
as needed.
When the Fund sells call options on the 100 Index, it receives cash from
the purchasers of the options. By selling options, the Fund attempts to earn a
greater total return over the long term than it would have earned by investing
only in the stocks in the 100 Index. Selling index call options reduces the risk
of owning stocks, but limits the opportunity to profit from an increase in the
market value of stocks. The Fund occasionally buys index put options in an
attempt to protect the Fund from a significant decline in the market in a short
period of time. The value of a put option generally increases as stock prices
decrease.
The Fund is not affiliated with or sponsored by Standard and Poor's
Corporation.
GATEWAY MID CAP INDEX FUND
The Mid Cap Index Fund's primary investment objective is long-term growth
of capital with a secondary objective of conserving principal.
Investment Practices: The Fund attempts to achieve its investment
objectives primarily by investing in the 400 stocks included in the S&P MidCap
400 Index (the "400 Index") and by purchasing put or call options on an index as
market conditions warrant. The Adviser seeks to maintain a correlation of at
least 90% between the composition of the 400 Index and the Fund's portfolio. The
Adviser monitors the composition of the 400 Index on a daily basis and makes
adjustments to the Fund's portfolio, as needed.
At times, the Fund may purchase index put options to reduce the risk of
principal loss. The Fund occasionally buys index call options to increase the
potential for gain.
The 400 Index consists of common stock of 400 companies with a median
market capitalization of $1.9 billion, selected to reflect the stock price
performance of companies in the middle capitalization range. Stocks in the 400
Index were selected on the basis of market capitalization, liquidity and
industry group representation. The 400 Index was developed by Standard & Poor's
Corporation in 1991.
The Fund is not affiliated with or sponsored by Standard and Poor's
Corporation.
GATEWAY SMALL CAP INDEX FUND
The investment objective of the Small Cap Index Fund is to achieve
long-term growth of capital.
Investment Practices: The Fund attempts to achieve its investment
objective primarily by investing in the 250 stocks included in the Wilshire
Small Cap Index (the "250 Index") and by purchasing put or call options on an
index as market conditions warrant. The Adviser seeks to maintain a correlation
of at least 90% between the composition of the 250 Index and the Fund's
portfolio. The Adviser monitors the composition of the 250 Index on a daily
basis and makes adjustments to the Fund's portfolio, as needed.
At times, the Fund may purchase index put options to reduce the risk of
principal loss. The Fund occasionally buys index call options to increase the
potential for gain.
The 250 Index focuses on capturing the performance profile of the small
capitalization sector of the United States equity market. The 250 Index consists
of common stock of 250 companies with a median market capitalization of $676
million and is designed to accurately reflect the general characteristics of
small capitalization companies. Stocks in the 250 Index were selectedon the
basis of market capitalization, liquidity and industry group representation. The
250 Index was developed by Wilshire Associates, Inc. in conjunction with the
Pacific Stock Exchange. Trading in the 250 Index began in January 1993.
The Fund is not affiliated with or sponsored by Wilshire Associates, Inc.
or the Pacific Stock Exchange.
SELLING INDEX CALL OPTIONS
The Index Plus Fund regularly sells call options on the 100 Index. If you
are a shareholder in the Fund, it is important for you to understand some basic
information about this investment strategy and the risks involved in option
transactions.
It is easier to understand how index options work if you know some basic
concepts about a call option on an individual stock. A covered call option on an
individual stock is an option sold (written) on an individual stock owned by the
seller. The seller receives cash (a premium) from the purchaser. If the option
is not exercised by the purchaser, the seller realizes a gain equal to the
premium. This gain may be offset by a decline in the market value of the
underlying security. If the option is exercised by the purchaser, the purchaser
pays the seller the exercise price and the seller delivers the underlying
security. The premium, the exercise price and the
<PAGE> 24
market value of the underlying security determine the gain or loss realized by
the seller. The seller's obligation terminates when the option expires or when
the seller enters into a closing purchase transaction. The cost of entering into
a closing transaction reduces any gain realized by the seller.
A covered call option on a securities index is similar to an option on an
individual stock. However, the seller does not deliver the underlying securities
if the option is exercised. Index option transactions are settled in cash. The
seller pays the purchaser an amount equal to the difference between the closing
price of the index and the exercise price of the option. The premium and the
settlement amount determine the gain or loss realized by the seller.
RISK FACTORS
There are risks inherent in all securities investments. Thus, there can
be no assurance that a fund will be able to achieve its investment objective(s).
Because each fund has long-term investment objectives, none may be an
appropriate investment for persons intending to hold fund shares for less than
six months.
Investment in Smaller Companies: Investments in companies with smaller
capitalization are generally more speculative than investments in companies with
larger capitalization. However, stocks of smaller companies tend to have more
growth potential. The Mid Cap Index Fund and the Small Cap Index Fund attempt to
provide shareholders with the opportunity to participate in the potential
long-term growth of smaller companies.
Selling Index Call Options: Option transactions involve risks not
generally associated with investments in stocks. The sale of index call options
by the Index Plus Fund limits the Fund's opportunity to profit from an increase
in the market value of the underlying index. If the Fund sells exchange-traded
call options to hedge its portfolio, the purchaser usually has the right to
exercise the options at any time prior to the expiration date. The purchaser
normally exercises the options when it is to the purchaser's advantage rather
than the Fund's advantage. In addition, the Fund generally does not receive
notice of the exercise until the next business day. As a result, the Fund's
portfolio is not fully hedged between the time the options are exercised and the
time the Fund sells new call options on the next business day.
Purchasing Index Options: The purchase of index options involves a risk
of loss of all or part of the cash paid for the options.
Closing Option Transactions: There can be no assurance that a ready
market will exist for any particular option at a specific time. Closing
transactions for over-the-counter options generally must be negotiated with the
other party. These factors could limit the Adviser's ability to close a
particular option transaction at a fair price or in a timely manner or to carry
out a particular investment or hedging strategy. A Gateway fund will enter into
an option transaction only if there appears to be a ready market for such option
or the fund can effectively close its position by entering into an offsetting
position.
Hedging Strategies: The use of index options to protect or hedge a
Gateway fund's portfolio will not fully protect the fund against declines in the
market value of the securities held in the fund's portfolio. The Adviser may
choose not to use all of the available hedging strategies to protect a fund's
portfolio. The Adviser may also hedge a fund's portfolio at an inappropriate
time or incorrectly anticipate market conditions. In addition, a fund could
experience a loss on both its portfolio securities and the options used to hedge
these securities. Under unusual market conditions, such as an interruption in
trading in an index or certain stocks in the index, the Adviser may be unable to
hedge a fund's portfolio effectively. Restrictions imposed by regulatory
agencies may also adversely affect a fund's hedging strategy. Regulatory Issues:
Due to the option strategies employed by the Adviser in managing the portfolios
of each Gateway fund, it may be more difficult for the fund to qualify as a
regulated investment company. Failure to qualify as a regulated investment
company could subject the fund to certain tax liabilities and could affect the
ability of the fund to meet the regulatory requirements of certain states. In
this case, the Adviser might employ investment techniques different from those
usually employed by the fund in order to reduce the potential tax liability and
to resolve the regulatory issues.
OTHER INVESTMENT STRATEGIES
Each Gateway fund may hold cash for purposes of liquidity or for
temporary defensive purposes. Cash is normally invested in repurchase
agreements. Cash may be also invested in securities of the U. S. government or
any of its agencies, bankers acceptances, commercial paper, or certificates of
deposit. For temporary defensive purposes, a fund may hold up to 100% of its
assets in such instruments.
Repurchase Agreements: In a repurchase agreement, a fund acquires
securities suitable for investments in accordance with its policies and the
seller (usually a bank) agrees at the time of sale to repurchase such securities
at an agreed-upon date, price, and interest rate. Investments in repurchase
agreements are subject to the risk that the selling bank may default in its
repurchase obligation. Investments in repurchase agreements are also subject to
the risk that the selling bank may become financially insolvent which could
prevent or delay the fund's disposition of the collateral held as security for
these transactions. Each Gateway fund's repurchase agreements are fully
collateralized and the fund takes possession of such collateral, thus reducing
the risk of default. The collateral is subject to continuing market fluctuations
and its value could be more or less than the repurchase price.
<PAGE> 25
ADDITIONAL INFORMATION
For further information concerning the investment practices described
above and certain risks associated with them, see "Investment Objectives and
Practices" in the SAI.
FUNDAMENTAL POLICIES
The investment objectives and investment restrictions applicable to each
Gateway fund are designated as fundamental policies of the fund. Such
fundamental policies may not be changed without approval of the holders of a
majority of the fund's outstanding shares.
The investment practices and strategies of a fund as described above are
not fundamental policies and may be changed without shareholder approval.
<PAGE> 26
INVESTMENT RESTRICTIONS
INVESTMENT RESTRICTIONS
Certain investment restrictions applicable to the Gateway funds are
described below. The complete text of these restrictions is set forth in the SAI
under the caption "Other Information about Investment Practices and
Restrictions." Additional investment restrictions pertaining to the funds are
set forth in the SAI under the same caption.
Options on Securities Indexes: No Gateway fund may purchase or sell put
options, call options or combinations thereof except in accordance with its
investment objectives and practices and the following restrictions. The Index
Plus Fund may sell covered call options on securities indexes. The Index Plus
Fund may purchase exchange-traded put options on securities indexes, provided
that after any such purchase not more than 5% of the fund's net assets would be
invested in premiums on the purchase of such options. The Mid Cap Index Fund and
the Small Cap Index Fund may purchase exchange-traded call and put options on
securities indexes, provided that after any such purchase not more than 5% of
the fund's net assets would be invested in premiums on the purchase of such
options. Each Gateway fund may enter into closing transactions with respect to
options.
Repurchase Agreements: No Gateway fund may invest more than 5% of its
total assets in repurchase agreements with a maturity longer than seven days.
<PAGE> 27
GENERAL INFORMATION ABOUT THE GATEWAY TRUST
THE TRUST AND THE BOARD OF TRUSTEES
The Gateway Trust is an open-end management investment company
established as an Ohio business trust in 1986. From 1977 to 1986, the Trust's
predecessor operated as a Maryland corporation. The Trust has four series: the
Gateway Index Plus Fund, the Gateway Mid Cap Index Fund (formerly the Gateway
Capital Fund), the Gateway Small Cap Index Fund and the Cincinnati Fund. The
Cincinnati Fund is offered by a separate prospectus.
The Board of Trustees is generally responsible for management of the
business and affairs of the Trust. The Trustees formulate the general policies
of the Trust, approve contracts and authorize the Trust officers to carry out
the decisions of the Board.
Under the Trust's Second Amended Agreement and Declaration of Trust, no
annual or regular meetings of shareholders are required. As a result, the
Trustees will continue in office until resignation, death, or removal. Trustee
vacancies normally are filled by vote of the remaining Trustees. If at any time
less than a majority of the Trustees in office has been elected by the
shareholders, the Trustees must call a shareholder meeting for the purpose of
electing Trustees.
SHAREHOLDER MEETINGS AND VOTING
A meeting of shareholders must be called if shareholders holding at least
10% of the Trust's shares (or shareholders holding at least 10% of any fund's
shares as to any matter affecting only such fund) file a written request for a
meeting.
On any matter submitted to a vote of shareholders, shares are voted by
fund, unless an aggregate vote is required by the Investment Company Act of
1940. Shares are voted by fund with respect to the approval or amendment of such
fund's advisory contract. As of February 1, 1996, the Adviser held, in a
fiduciary capacity, more than 25% of the outstanding shares of the Mid Cap Index
Fund and the Small Cap Index Fund. Thus, the Adviser may be deemed to be a
control person of each of these funds as of that date.
As of December 31, 1995, the shareholders of the Index Plus Fund
controlled approximately 89% of the outstanding shares of the Trust. Therefore,
in the foreseeable future, when the shareholders of the Trust elect the Trustees
or vote in the aggregate on any other issue, the shareholders of the Index Plus
Fund will be able to elect the Trustees or to decide the issue. Shareholders do
not have cumulative voting rights as to the election of Trustees. As a result,
if a shareholder meeting is called to elect Trustees, a majority of the shares
voting at the meeting can elect all of the Trustees.
<PAGE> 28
Registration Statement
Securities Act of 1933 Registration No. 2-59895
Investment Company Act of 1940 Registration No. 811-02773
THE GATEWAY TRUST
STATEMENT OF ADDITIONAL INFORMATION
This Statement is not a prospectus but should be read in conjunction with the
current Prospectus of The Gateway Trust (the "Trust") for the Gateway Index
Plus, Mid Cap Index, and Small Cap Index Funds dated May 1, 1996. A copy of the
Prospectus may be obtained from the Trust, by written or telephone request,
directed to the Trust at the address or the telephone number shown below.
The date of this Statement of Additional Information is May 1, 1996.
P. O. Box 5211, Cincinnati, Ohio 45201-5211
(800) 354-6339
<PAGE> 29
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION......................................................................................... 4
General Information about Gateway Trust..................................................... 4
INVESTMENT OBJECTIVES AND PRACTICES.................................................................. 5
Gateway Index Plus Fund..................................................................... 5
Gateway Mid Cap Index Fund.................................................................. 5
Gateway Small Cap Index Fund................................................................ 6
OPTION TRANSACTIONS.................................................................................. 6
Selling Covered Call Options................................................................ 6
Selling Covered Put Options................................................................. 7
Purchase of Put and Call Options............................................................ 7
Options on Securities Indexes............................................................... 8
Covered Index Call Options Sold by the Index Plus Fund ..................................... 8
INVESTMENT PRACTICES, RISKS AND RESTRICTIONS......................................................... 9
Other Investment Practices.................................................................. 9
Certain Risks............................................................................... 10
Investment Restrictions..................................................................... 10
PERFORMANCE AND RISK INFORMATION..................................................................... 14
Performance Information..................................................................... 14
Total Return Calculations.......................................................... 14
Historical Results................................................................. 15
Risk Information............................................................................ 15
Comparative Indexes................................................................ 16
Standard Deviation................................................................. 16
Beta............................................................................... 16
Rankings and Comparative Performance Information............................................ 17
SHAREHOLDER SERVICES................................................................................. 17
Shareholder Account......................................................................... 17
Automatic Investment Plan................................................................... 17
Systematic Withdrawal Plan.................................................................. 18
IRAs........................................................................................ 18
Qualified Pension and Profit Sharing Plans.................................................. 21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................................... 21
INVESTMENT ADVISORY AND OTHER SERVICES............................................................... 23
Gateway Investment Advisers, L.P............................................................ 23
Investment Advisory Contracts............................................................... 23
Custodian................................................................................... 26
Shareholder Servicing, Transfer, Dividend Disbursing and Financial
Servicing Agent............................................................................. 26
BROKERAGE............................................................................................ 27
</TABLE>
Page 2
<PAGE> 30
<TABLE>
<S> <C>
ADDITIONAL TAX MATTERS............................................................................... 29
Federal Tax Matters......................................................................... 29
State and Local Tax Aspects................................................................. 30
TRUSTEES AND OFFICERS OF THE TRUST................................................................... 30
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL
STATEMENTS........................................................................................... 33
PRINCIPAL HOLDERS OF FUND SHARES..................................................................... 33
Index Plus Fund............................................................................. 33
Mid Cap Index Fund.......................................................................... 34
Small Cap Index Fund........................................................................ 34
Shares Held By Adviser...................................................................... 35
SCHEDULE A........................................................................................... 36
SCHEDULE B........................................................................................... 37
SCHEDULE C........................................................................................... 41
SCHEDULE D........................................................................................... 44
</TABLE>
Page 3
<PAGE> 31
INTRODUCTION
GENERAL INFORMATION ABOUT GATEWAY TRUST
The Gateway Trust (the "Trust") is an Ohio business trust which is
authorized to establish and operate one or more separate series of mutual funds
(herein referred to as "funds" or individually as a "fund"). At present, there
are four series of the Trust:
<TABLE>
<CAPTION>
Name of Fund Date Organized
--------------------------------------------------------------
<S> <C>
Gateway Index Plus Fund 1977
Gateway Mid Cap Index Fund July 1992
Gateway Small Cap Index Fund April 1993
Cincinnati Fund November 1994
</TABLE>
Gateway Index Plus Fund was known as Gateway Option Index Fund until
March, 1990; as Gateway Option Income Fund until February, 1988; and as Gateway
Option Income Fund, Inc. until May, 1986. Gateway Mid Cap Index Fund was known
as Gateway Capital Fund until December, 1993.
Gateway Option Income Fund, Inc., the predecessor to the Trust, was
organized in 1977 as a Maryland corporation. It was reorganized to become the
Trust effective as of May 2, 1986, with the Gateway Option Income Fund as its
sole initial fund. As a result of the transaction, shareholders of the
corporation on May 2, 1986, became shareholders of the Option Income Fund.
The Gateway Index Plus Fund, the Gateway Mid Cap Index Fund, and the
Gateway Small Cap Index Fund are offered in one combined prospectus (the
"Combined Prospectus"). The Cincinnati Fund is offered in a separate prospectus
and Statement of Additional Information.
Each fund has its own investment policies, restrictions, practices,
assets, and liabilities. Each fund is represented by a separate series of shares
of beneficial interest in the Trust ("Shares"). The Trust's operation is
governed by Chapter 1746 of the Ohio Revised Code, by the Second Amended
Agreement and Declaration of Trust dated as of December 29, 1992, as amended,
and by the Trust's By-laws, as amended.
Page 4
<PAGE> 32
INVESTMENT OBJECTIVES AND PRACTICES
GATEWAY INDEX PLUS FUND
The Index Plus Fund's investment objective is to achieve a high total
return at a reduced level of risk. Descriptions of the Fund's current investment
practices and strategies and certain risk factors applicable to the Fund are set
forth under the caption "Investment Practices" in the Combined Prospectus.
The Index Plus Fund primarily invests in a portfolio of common stocks
which parallels the composition of the Standard & Poor's 100 Stock Index (the
"100 Index"). A list of the companies whose stocks are included in the 100 Index
is set forth in Schedule "A" to this Statement. The Fund sells call options on
the 100 Index and, when appropriate, the Fund enters into closing purchase
transactions with respect to such options. The Fund occasionally purchases put
options on securities indexes.
In addition, the Fund has authority to, and when deemed appropriate
may, invest in the stocks of other securities indexes, sell put options on
securities indexes and , purchase call options on securities indexes; however,
the Fund does not intend to enter into these types of transactions in the coming
year.
GATEWAY MID CAP INDEX FUND
The Mid Cap Index Fund's primary investment objective is long-term
growth of capital with a secondary objective of conserving principal.
Descriptions of the Fund's current investment practices and strategies and
certain risk factors applicable to the Fund are set forth under the caption
"Investment Practices" in the Combined Prospectus.
The Mid Cap Index Fund primarily invests in a portfolio of common
stocks which parallels the composition of the S&P MidCap 400 Index (the "400
Index"). A list of the companies whose stocks are included in the 400 Index is
set forth in Schedule "B" to this Statement. Because the 400 Index is composed
of four hundred equity securities and the Fund purchases such securities in
round lots, the portfolio does not correlate perfectly with the 400 Index.
Although Gateway Investment Advisers, L.P., the Adviser to the Funds ("Adviser")
monitors the Mid Cap Index Fund portfolio so that the percentage of assets
invested in each stock in the Mid Cap Index Fund substantially corresponds to
the composition of 400 Index, the Fund bears the risk that the price of its
portfolio will not increase as much as (or will decrease more than) the 400
Index.
The Mid Cap Index Fund occasionally engages in the purchase of put and
call options on securities indexes, such as the S&P 500 Index, the 400 Index and
similar middle capitalization securities indexes. The Mid Cap Index Fund limits
its aggregate investment in premiums on put and call options to an amount not
exceeding 5% of the Fund's net assets.
Page 5
<PAGE> 33
GATEWAY SMALL CAP INDEX FUND
The investment objective of the Small Cap Index Fund is to achieve
long-term growth of capital. Descriptions of the Fund's current investment
practices and strategies and certain risk factors applicable to the Fund are set
forth under the caption "Investment Practices" in the Combined Prospectus.
The Small Cap Index Fund primarily invests in a portfolio of common
stocks which parallels the composition of the Wilshire Small Cap Index (the "250
Index"). A list of the companies whose stocks are included in the 250 Index is
set forth in Schedule "C" to this Statement. Because the 250 Index is comprised
of 250 equity securities and the Fund purchases such securities in round lots,
the portfolio does not correlate perfectly with the 250 Index. Although the
Adviser monitors the Small Cap Index Fund portfolio so that the percentage of
assets invested in each stock in the Small Cap Index Fund substantially
corresponds to the composition of 250 Index, the Fund bears the risk that the
price of its portfolio will not increase as much as (or will decrease more than)
the 250 Index.
The Small Cap Index Fund occasionally engages in the purchase of put
and call options on securities indexes, such as the S&P 500 Index, the 250
Index, the Russell 2000 Index, and comparable small capitalization securities
indexes. The Small Cap Index Fund limits its aggregate investment in premiums on
put and call options to an amount not exceeding 5% of the Fund's net assets.
Options on the 250 Index are a relatively new investment vehicle and the
secondary market for any particular option on this index at a specific time may
be limited.
OPTION TRANSACTIONS
This section contains a brief general description of various types of
options, certain option trading strategies and some of the risks of option
trading. It is included to help a shareholder understand the investment
practices of the funds. It is easier to understand index options if you
understand options on individual stocks. For this reason, the first three parts
of this section discuss individual stock options.
SELLING COVERED CALL OPTIONS
A covered call option is an option sold on a security owned by the
seller of the option. If the option is exercised by the purchaser during the
option period, the seller is required to deliver the underlying security against
payment of the exercise price. The seller's obligation terminates upon
expiration of the option period or when the seller executes a closing purchase
transaction with respect to such option.
The seller of a covered call option gives up, in return for the
premium, the opportunity to profit from an increase in the value of the
underlying security above the exercise price. At the same time, the seller
retains the risk of loss from a decline in the value of the underlying security
during the option period. Although the seller may terminate its obligation by
executing a closing purchase transaction, the cost of effecting such a
transaction may be greater than the premium received upon its sale, resulting in
a loss to the seller. If such an option expires unexercised, the
Page 6
<PAGE> 34
seller realizes a gain equal to the premium received. Such a gain may be offset
or exceeded by a decline in the market value of the underlying security during
the option period. If an option is exercised, the exercise price, the premium
received and the market value of the underlying security determine the gain or
loss realized by the seller.
The Index Plus Fund is the only Gateway fund authorized to sell covered
call options. A more complete description of the details and risks involved in
selling covered call options is set forth below under the caption "Sale of
Covered Call Index Options by the Index Plus Fund."
SELLING COVERED PUT OPTIONS
The seller of a covered put option has the obligation to buy, and the
purchaser the right to sell, the underlying security at the exercise price
during the option period. To cover a put option, a seller usually deposits U. S.
government securities (or other high grade debt obligations) in a segregated
account at the seller's custodian. The value of the deposited securities is
equal to or greater than the exercise price of the underlying security. The
value of the deposited securities is marked to market daily and, if necessary,
additional assets are placed in the segregated account to maintain a value equal
to or greater than the exercise price. The seller maintains the segregated
account so long as it is obligated as the seller. The obligation of the seller
is terminated when the purchaser exercises the put option, when the option
expires, or when a closing purchase transaction is effected by the seller.
The seller's gain on the sale of a put option is limited to the premium
received plus interest earned on its segregated account. The seller's potential
loss on a put option is determined by taking into consideration the exercise
price of the option, the market price of the underlying security when the put is
exercised, the premium received, and the interest earned on its segregated
account. Although a seller risks a substantial loss if the price of the stock on
which it has sold a put option drops suddenly, the seller can protect itself
against serious loss by entering into a closing purchase transaction. The degree
of loss will depend upon the seller's ability to detect the movement in the
stock's price and to execute a closing transaction at the appropriate time.
The Index Plus Fund is the only Gateway fund authorized to sell covered
put options. To comply with state securities requirements, the Fund will not
sell any covered put option if, as a result, the Fund would have to invest more
than 50% of its total assets (taken at current value) to meet its obligation
upon the exercise of put options.
PURCHASE OF PUT AND CALL OPTIONS
Put options can be employed to protect against declines in the market
value of portfolio securities or to attempt to retain unrealized gains in the
value of portfolio securities. Put options might also be purchased to facilitate
the sale of portfolio securities. Call options can be purchased as a temporary
substitute for the purchase of individual stocks, which then could be purchased
in orderly fashion. Upon the purchase of the stocks, the purchaser would
normally terminate the call position.
Page 7
<PAGE> 35
The purchase of both put and call options involves the risk of loss of
all or part of the premium paid. If the price of the underlying stock does not
rise (in the case of a call) or drop (in the case of a put) by an amount at
least equal to the premium paid for the option contract, the purchaser will
experience a loss on the option contract equal to the deficiency.
The Index Plus Fund, the Mid Cap Index Fund and the Small Cap Index
Fund each are authorized to purchase index put and call options. Each fund
limits its aggregate investment in premiums on put and call options to an amount
not exceeding 5% of its net assets.
OPTIONS ON SECURITIES INDEXES
An option on a securities index is generally similar to an option on an
individual stock, but an option on a securities index is settled only in cash.
The exercising holder of an index option, instead of receiving a security,
receives the difference between the closing price of the securities index and
the exercise price of the index option times a specified multiple ($100 in the
case of the S&P 100 Stock Index). The seller of index options may realize a gain
or loss according to movement in the level of securities prices in that index
and in the securities markets generally.
COVERED INDEX CALL OPTIONS SOLD BY THE INDEX PLUS FUND
The Index Plus Fund sells call options on the 100 Index in an attempt
to earn a greater total return over the long term than it would earn by
investing only in the stocks in the 100 Index.
Frequently the Fund executes a closing purchase transaction with
respect to the option it has sold and sells another option (with either a
different exercise price or expiration date or both) on the 100 Index. The
Fund's objective in entering into such closing transactions is to increase
option premium income, to limit losses, or to protect anticipated gains in
underlying stocks. The cost of a closing transaction, while reducing the premium
income realized from the sale of the option, should be offset, at least in part,
by appreciation in the value of the underlying index, and by the opportunity to
realize additional premium income from selling a new option.
When the Fund sells a call option on the 100 Index, it does not deliver
the underlying stocks or cash to the broker through whom the transaction is
effected. In the case of an exchange-traded option, the Fund establishes an
escrow account. The Trust's Custodian (or a securities depository acting for the
Custodian) acts as the Trust's escrow agent. The escrow agent enters into
documents known as escrow receipts with respect to the stocks included in the
100 Index (or escrow receipts with respect to other acceptable securities). The
escrow agent releases the stocks from the escrow account when the call option
expires or the Fund enters into a closing purchase transaction. Until such
release, the underlying stocks cannot be sold by the Fund. The Fund may enter
into similar collateral arrangements with the counterparty when it sells
over-the-counter index call options.
When the Fund sells a call option on the 100 Index, it is also required
to "cover" the option pursuant to requirements enunciated by the staff of the
Securities and Exchange Commission. The staff has indicated that a mutual fund
may "cover" an index call option by (1) owning and holding for the term of the
option the securities against which the call option is
Page 8
<PAGE> 36
written, (2) purchasing an American-style call option on the same index with an
exercise price no greater than the exercise price of the written option, or (3)
establishing and maintaining for the term of the option a segregated account
consisting of cash, U.S. government securities or other high-grade debt
securities, equal in value to the aggregate contract price of the call option
(the current index value times the specific multiple). The Fund generally
"covers" the index options it has sold by owning and holding the stocks included
in the 100 Index. As an alternative method of "covering" the option, the Fund
may purchase an appropriate offsetting option on the 100 Index.
The purchaser of an index call option sold by the Fund may exercise the
option at a price fixed as of the closing level of the 100 Index on the date of
exercise. Unless the Fund has liquid assets sufficient to satisfy the exercise
of the index call option, the Fund would be required to liquidate portfolio
securities to satisfy the exercise. The market value of such securities may
decline between the time the option is exercised and the time the Fund is able
to sell the securities. If the Fund fails to anticipate an exercise, it may have
to borrow from a bank (in amounts not exceeding 5% of the Fund's total assets)
pending settlement of the sale of the portfolio securities and thereby incur
interest charges. If trading is interrupted on the 100 Index, the Fund would not
be able to close out its option positions.
The Index Plus Fund has the authority to sell covered call options on
indexes other than the 100 Index. If the Fund did so, considerations similar to
those described above would be applicable to such options.
Additional information about the Fund's investment practices and
strategies with respect to option transactions, and certain risks related to
such transactions, is set forth under the caption "Investment Practices" in the
Combined Prospectus.
INVESTMENT PRACTICES, RISKS AND RESTRICTIONS
OTHER INVESTMENT PRACTICES
Each fund generally will hold cash reserves for the purpose of paying
expenses and share redemptions. In addition, each fund may hold cash received
from the sale of its shares which it has not yet invested. The Adviser may
determine, from time to time, that one or more funds should temporarily reduce
(and in periods of unusual market conditions reduce substantially or liquidate
entirely) its investment in common stocks. Cash held by a fund, for whatever
reason, may be invested in securities of the U. S. government or any of its
agencies, bankers' acceptances, commercial paper or certificates of deposit
(collectively "cash equivalents") or repurchase agreements.
Commercial paper investments will be limited to investment grade issues
rated A-1 or A-2 by Standard & Poors Corporation or Prime-1 or Prime-2 by
Moody's Investors Service, Inc. Certificates of deposit investments will be
limited to obligations of domestic banks with assets of $1 billion or more.
Page 9
<PAGE> 37
Repurchase agreements are instruments under which the fund buys
securities suitable for investment under its policies and obtains the concurrent
agreement of the seller (usually a bank) to repurchase such securities at an
agreed-upon date, price and interest rate. Investments in repurchase agreements
are subject to the risk that the selling bank may default in its repurchase
obligation. However, not more than 5% of any fund's total assets may be invested
in repurchase agreements which have a maturity longer than seven days.
CERTAIN RISKS
The success of each fund's option strategy depends upon the ability of
the Adviser to identify an appropriate index in which to invest and the
Adviser's ability to enter into transactions involving index options at
appropriate times in the stock market cycle. In pursuing this course, the
Adviser is subject to the risks of change in general economic conditions,
adverse developments in specific industries and factors affecting the
performance of individual stocks.
Standard and Poor's Corporation ("S&P") obtains information for
inclusion in or for use in the calculation of the S&P 100 Index and the S&P
MidCap 400 Index from sources which S&P considers reliable. S&P HAS ADVISED THE
TRUST THAT IT MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY THE TRUST, OWNERS OF THE INDEX PLUS FUND OR THE MID CAP INDEX FUND,
OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 100 INDEX, THE S&P MIDCAP
400 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, FOR USE WITH RESPECT TO THE
S&P 100 INDEX, THE S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN.
Wilshire Associates, Inc. ("Wilshire") obtains information for
inclusion in or for use in the calculation of the Wilshire Small Cap Index from
sources which Wilshire considers reliable. WILSHIRE HAS ADVISED THE TRUST THAT
IT MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
TRUST, OWNERS OF THE SMALL CAP INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE WILSHIRE SMALL CAP INDEX OR ANY DATA INCLUDED THEREIN. WILSHIRE
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH
WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, FOR USE WITH
RESPECT TO THE WILSHIRE SMALL CAP INDEX OR ANY DATA INCLUDED THEREIN.
Other risks related to the investment practices and strategies of each
fund are described in the under the caption "Investment Practices" in the
Combined Prospectus.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental policies with respect to each
of the funds that may not be changed without a vote of shareholders of that
fund. Under these policies, the Index Plus Fund, the Mid Cap Index Fund, and the
Small Cap Index Fund each are subject to the following restrictions:
1. A fund may not purchase any security if, as a result, the fund
(or the funds together) would then hold more than 10% of any
class of securities of an issuer (taking all common stock issues
of an issuer as a single class, all
Page 10
<PAGE> 38
preferred stock issues as a single class, and all debt issues as
a single class) or more than 10% of the outstanding voting
securities of an issuer.
2. A fund may not purchase any security if, as a result, the fund
would then have more than 5% of its total assets (taken at
current value) invested in securities of companies (including
predecessors) less than three years old and in equity securities
for which market quotations are not readily available.
3. A fund may not purchase securities on margin (but the fund may
obtain such short-term credits as may be necessary for the
clearance of purchase and sales of securities).
4. A fund may not make short sales of securities or maintain a
short position, (a) unless, at all times when a short position
is open, the fund owns an equal amount of such securities or
securities convertible into or exchangeable (without payment of
any further consideration) for securities of the same issue as,
and equal in amount to, the securities sold short, and (b)
unless not more than 10% of such fund's net assets (taken at
current value) are held as collateral for such sales at any one
time. It is the present intention of management to make such
sales only for the purpose of deferring realization of gain or
loss for Federal income tax purposes. It is the present
intention of management that short sales of securities subject
to outstanding options will not be made.
5. A fund may not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only from banks and
only in amounts not in excess of 5% of the fund's total assets
(except to meet redemption requests as discussed below), taken
at the lower of cost or market. In order to meet redemption
requests without immediately selling any portfolio securities, a
fund may borrow in an amount up to one-quarter of the value of
its total assets including the amount borrowed. If due to market
fluctuations or other reasons the value of such fund's assets
falls below 400% of its borrowing, the fund will reduce its
borrowing which may result in the fund being required to sell
securities at a time when it may otherwise be disadvantageous to
do so. This borrowing is not for investment leverage, but solely
to facilitate management of the portfolio by enabling the fund
to meet redemption requests where the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous.
However, the fund might be deemed to be engaged in leveraging in
that any such borrowing will enable the fund to continue to earn
money on investments which otherwise may have been sold in order
to meet redemption requests.
6. A fund may not pledge more than 10% of its total assets, taken
at market value. (The deposit in escrow of underlying securities
in connection with the writing of call options is not deemed to
be a pledge.)
Page 11
<PAGE> 39
7. A fund may not purchase or retain securities of any company if,
to the knowledge of the Trust, officers and trustees of the
Trust or of the Adviser who individually own more than one-half
of 1% of the securities of that company, together own
beneficially more than 5% of such securities.
8. A fund may not buy or sell commodities or commodities futures or
options contracts, or real estate or interests in real estate,
although it may purchase and sell (a) securities which are
secured by real estate and (b) securities of companies which
invest or deal in real estate.
9. A fund may not act as underwriter except to the extent that, in
connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under certain provisions of the
Federal securities laws.
10. A fund may not make investments for the purpose of exercising
control or management.
11. A fund may not participate on a joint basis, or a joint and
several basis, in any trading account in securities.
12. A fund may not purchase any security restricted as to
disposition under the Federal securities laws.
13. A fund may not invest in securities of other investment
companies, except as part of a merger, consolidation or other
acquisition.
14. A fund may not invest in interests in oil, gas or other mineral
exploration or development programs, although it may invest in
the common stocks of companies which invest in or sponsor such
programs.
15. A fund may not make loans, except through the purchase of bonds,
debentures, commercial paper, corporate notes and similar
evidences of indebtedness of a type commonly sold privately to
financial institutions (subject to the limitation in paragraph
12 above), and except through repurchase agreements. No more
than 5% of the fund's assets will be invested in repurchase
agreements which have a maturity longer than seven days. In
addition, the fund will not enter into repurchase agreements
with a securities dealer if such transactions constitute the
purchase of an interest in such dealer under the Investment
Company Act of 1940. The purchase of a portion of an issue of
such securities distributed publicly, whether or not such
purchase is made on the original issuance, is not considered the
making of a loan.
16. A fund may not purchase any security (other than U. S.
Government obligations) if, as a result thereof, less than 75%
of the value of the fund's total assets is represented by cash
and cash items (including receivables),
Page 12
<PAGE> 40
Government securities and other securities which, for purposes
of this calculation, are limited in respect of any one issuer to
an amount not greater in value than 5% of the value of the
fund's total assets and to not more than 10% of the outstanding
voting securities of such issuer. (All of the Trust's funds
taken as a group also must satisfy this 10% test.)
17. A fund may not concentrate the investments of the fund in a
single industry nor invest more than 25% of the current value of
its total assets in a single industry.
18. A fund may not sell call or put options, or purchase call or put
options, except that (a) the Index Plus Fund may (i) sell
covered call options with respect to all of its portfolio
securities or with respect to securities indexes, (ii) purchase
exchange-traded put and call options, provided that after any
such purchase not more than 5% of the Fund's net assets would be
invested in premiums on the purchase of put and call options or
combinations thereof, (iii) sell covered put options, provided
that after any such sale the Index Plus Fund would not have more
than 50% of its total assets (taken at current value) subject to
being invested on the exercise of put options, and (iv) enter
into closing purchase transactions with respect to such options,
and (b) the Mid Cap Index Fund and the Small Cap Index Fund each
may purchase exchange-traded puts and calls, provided that after
any such purchase not more than 5% of the Fund's assets would be
invested in premiums on the purchase of such options.
The Trust has no fundamental policy with respect to the issuance of
senior securities by any fund; however, the Investment Company Act of 1940
prohibits the Trust's issuance of any such securities.
In addition to these fundamental policies, the Trust has specifically
undertaken, as a condition of state registration, to limit the investment in
warrants by any fund to no more than 5% of such fund's net assets, and to
further limit to 2% of any fund's net assets any investment by such fund in
warrants which are not listed on the New York or American Stock Exchanges.
Similarly, the Trust has undertaken to limit the short sales discussed in
paragraph 4 above to the lesser of 2% of the value of securities of any one
issuer in which any fund is short, or 2% of the securities of any class of any
issuer.
In order to comply with the securities laws and regulations of the
State of Texas, the Trust has also agreed that the following restrictions will
be applicable to each fund that registers its securities in the State of Texas.
(1) The fund will not invest in any oil, gas or other mineral. (2) The fund will
not invest in real estate limited partnerships. (3) The fund will not invest
more than 15% of its net assets in "illiquid" securities.
Although the practices described in paragraphs 4, 5 and 6 above could
involve more than 5% of a fund's assets, none of those practices has been
employed by any fund (or the Index Plus
Page 13
<PAGE> 41
Fund's predecessor, Gateway Option Income Fund, Inc.) since January 1, 1983. The
Adviser has no current intention of causing any fund to employ any such practice
in the coming year.
PERFORMANCE AND RISK INFORMATION
PERFORMANCE INFORMATION
The funds may quote performance in various ways. All performance
information supplied by the funds is based upon historical results and is not
intended to indicate future performance. Total returns and other performance
information may be shown numerically or in a table, graph or similar
illustration. A fund's share prices and total returns fluctuate in response to
market conditions, interest rates and other factors.
TOTAL RETURN CALCULATIONS
Total returns reflect all aspects of a fund's return, including the
effect of reinvesting dividends and capital gains distributions, and any change
in a fund's net asset value per share (NAV) over the period.
Average annual total returns are calculated by determining the average
annual compounded rates of return over one-, five- and ten-year periods that
would equate an initial hypothetical investment to the ending redeemable value
according to the following formula.
P (1 + T)n = ERV where T equals: Average annual total return
n equals: Number of years and portion of a
year
ERV equals: Ending redeemable value (of an
initial hypothetical
$1,000 investment) at the end of
the period
P equals: $1,000 (the hypothetical initial
investment)
If a fund has been in existence for less than one, five or ten years,
the time period since the date it commenced operations will be substituted for
the periods stated.
As a hypothetical example, a cumulative return of 100% growth on a
compounded basis in ten years would produce an average annual total return of
7.18%, which is the annual rate that would equal 100% growth on a compounded
basis in ten years. While average annual total returns are convenient means of
comparing investment alternatives, shareholders should realize that a fund's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of the fund.
Average annual total return is calculated as required by applicable
regulations promulgated by the Securities and Exchange Commission. In addition
to average annual total returns, a fund may quote year-by-year total returns and
cumulative total returns reflecting the simple change in value of any investment
over a stated period. Average annual, year-by-year and cumulative total returns
may be quoted as a percentage or as a dollar amount.
Page 14
<PAGE> 42
HISTORICAL RESULTS
The following chart shows each fund's average annual and cumulative
total returns for the period ended December 31, 19954:
<TABLE>
<CAPTION>
Average Annual Total Return One Year Five Year Ten Years Life of Fund
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Index Plus Fund 11.04% 9.29% 10.10% 10.37%
Mid Cap Index Fund 25.68 N/A N/A 7.45
Small Cap Index Fund 21.81 N/A N/A 8.12
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total Return One Year Five Year Ten Years Life of Fund
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Index Plus Fund 11.04% 55.93% 161.63% 590.03%
Mid Cap Index Fund 25.68 N/A N/A 26,30
Small Cap Index Fund 21.81 N/A N/A 21.95
</TABLE>
The table below shows the redeemable value on December 31, 1995 for an
initial investment of $10,000 in the fund that was made at the beginning of the
one-, five-, and ten-year periods (or at the commencement of the fund's
operations). The table assumes all dividends and distributions have been
reinvested in additional fund shares.
<TABLE>
<CAPTION>
One Year Five Years Ten Years Life of Fund
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Index Plus Fund $11,104 $15,593 $26,163 $59,003xx
Mid Cap Index Fund $12,568 N/A N/A $12,630
Small Cap Index Fund $12,181 N/A N/A $12,195
</TABLE>
RISK INFORMATION
In evaluating the performance of any investment, including an
investment in a Gateway Fund, it is important to understand the risks involved
in the investment. Information regarding the performance of an investment, while
valuable in itself, is more meaningful when it is related to the level of risk
associated with that investment. Thus, two different mutual funds that produce
similar average annual total returns may present markedly different investment
opportunities if the risk of loss associated with one mutual fund is greater
than that of the other mutual fund.
For example, an investment in a mutual fund that invests in stocks
generally will present greater potential for variation in the share price of the
mutual fund, and hence a greater risk of gain or loss, than an investment in a
mutual fund that invests in U. S. government securities. Because the potential
for greater gain typically carries with it a greater degree of risk, the
advisability of an investment in a particular mutual fund for a given
shareholder will depend not only on historical performance of the fund but also
on the potential for gain and loss associated with that mutual fund.
Page 15
<PAGE> 43
The Gateway Trust offers four different funds that produce different
total returns and present different risk potentials. The difference in risk
potential can be demonstrated by various statistical concepts. The following
statistical concepts can be used to measure some of the risks associated with an
investment in each fund.
COMPARATIVE INDEXES
The performance and risk of the Index Plus Fund, the Mid Cap Index
Fund, and the Small Cap Index Fund is compared to the performance and risk of
the S&P 500 Index and the Lehman Government/Corporate Bond Index. These
comparative indexes are used because they are the standard benchmarks of the
stock market and bond market respectively. A fund's performance and risk may
also be compared to other appropriate indexes.
STANDARD DEVIATION
Standard deviation measures the volatility of the total return of a
fund. Standard deviation is one method of comparing the total return of a fund
to the average monthly total return of the fund. In general, a fund that has a
greater standard deviation is a fund that has displayed a greater tendency to
vary from its own average monthly total return. Standard deviation can also be
used to compare the total return of a fund to the total return of an index or
another mutual fund. By comparing the magnitude of the standard deviation of
each investment, an analyst is able to determine the relative volatility of each
investment.
For example, as of December 31, 1995, the annual standard deviation for
the Index Plus Fund over the past three years was 3.98% while the standard
deviation for the S&P 500 Index was 8.22 %. Thus, the S&P 500 Index was almost
twice as volatile as the Index Plus Fund. An investment with an expected return
of 10% and a standard deviation of 15% would be expected to earn a total return
ranging from -5% to +25% about 68% of the time, a total return ranging from -20%
to +40% about 95% of the time and a total return ranging from -35% to +55% about
97% of the time.
BETA
Beta analyzes the market risk of a fund by showing how responsive the
fund is to the market as defined by an index. Beta is a comparative measure of a
fund's volatility in relation to an appropriate index. Generally, higher betas
represent riskier investments. By definition, the beta of the market is 1.00.
Thus, a fund with a beta higher than 1.00 is expected to perform better than the
market in up markets and worse than the market in down markets.
For example, the beta of the Index Plus Fund was 0.34 for the five year
period ended December 31, 1995. The Index Plus Fund would be expected to perform
approximately half as well as the market (as defined by S&P 500 Index) in up
markets and half as poorly as the market in down markets. Beta is the slope of
the "least square line" which compares the fund with an index.
Page 16
<PAGE> 44
RANKINGS AND COMPARATIVE PERFORMANCE INFORMATION
Each fund may compare its performance to that of other mutual funds or
categories of mutual funds as reported by independent services, such as
Morningstar, Inc., Lipper Analytical Services, Inc. and Value Line Mutual Fund
Survey, or by other financial publications with circulations of 10,000 readers
or more. Performance comparisons may be expressed as ratings (such as the
proprietary ratings published by Morningstar, Inc.) or rankings (such as the
rankings of funds in various categories published by Lipper Analytical Services,
Inc.). Performance comparisons may also be expressed as designations (such as a
certain number of "stars") or descriptions (such as "best fund") assigned by
such services or publications.
SHAREHOLDER SERVICES
Gateway Investment Advisers, L.P. serves as the Trust's shareholder
servicing, transfer, dividend disbursing and financial servicing agent (the
"Servicing Agent"). In this capacity, it performs various shareholder services
on behalf of the Trust.
SHAREHOLDER ACCOUNT
Each fund maintains a shareholder account for investors who purchase
its shares. The shareholder account facilitates regular purchases of fund shares
over a period of years and provides the option of receiving dividends and
distributions either in cash or in fund shares. There is no charge for the
automatic reinvestment of dividends and distributions.
The Servicing Agent maintains a record of purchases, redemptions, and
share balances for each shareholder. Shortly after each purchase, the Servicing
Agent will mail a confirmation to the shareholder showing the shares purchased,
the exact price paid for the shares and the total number of shares owned. Share
certificates will not be issued.
Upon opening an account, a shareholder may elect any of the following
options: (1) reinvestment at net asset value of all distributions or (2) payment
in cash of all distributions. If no election is made, all distributions will be
reinvested at net asset value. An election may be changed by a letter or
telephone call to the Servicing Agent. No annual maintenance fees are charged by
the Trust on any shareholder account. The Trust reserves the right to charge
annual fees in the future. Shareholders will be notified of any change in the
annual fee arrangement.
AUTOMATIC INVESTMENT PLAN
For established accounts, shares of any of the funds may be purchased
on a monthly or quarterly basis in amounts of $100 or more per purchase.
Shareholder Services can arrange to have such money transferred automatically
from a shareholder's bank account to the Trust for purchase of shares. A
shareholder can make arrangements to use the Automatic Investment Plan (or
discontinue use of the Plan) by contacting Shareholder Services at (800)
354-6339.
Page 17
<PAGE> 45
SYSTEMATIC WITHDRAWAL PLAN
If the value of a shareholder's account is at least $5,000, the
shareholder can request withdrawals on either a monthly or a quarterly basis in
the minimum amount of $100. The Trust makes no recommendation as to the minimum
amount that ought to be periodically withdrawn by a shareholder. A sufficient
number of shares in the shareholder's account will be sold periodically
(normally one business day prior to each withdrawal payment date) to meet the
requested withdrawal payments.
If a shareholder establishes an account in the Systematic Withdrawal
Plan, all dividends and distributions on shares held in the account will be
reinvested in additional shares at net asset value. Since the withdrawal
payments represent the proceeds from sales of the fund shares, there will be a
reduction, and there could even be an eventual depletion, of the amount invested
in the funds to the extent that withdrawal payments exceed the dividends and
distributions paid and reinvested in shares. Withdrawals under the Systematic
Withdrawal Plan should not, therefore, be considered a yield on investment. A
shareholder can make arrangements to use the Systematic Withdrawal Plan (or
discontinue use of the Plan) by contacting Shareholder Services at (800)
354-6339.
IRAS
Investors may purchase shares of any Gateway fund through Individual
Retirement Accounts ("IRAs") which are permitted to invest in shares of a mutual
fund. The Trust itself sponsors a form of IRA (the "Gateway IRA") which can be
adopted by an investor and which is specifically designed to permit the
shareholder to invest in shares of the Gateway funds selected by the
shareholder. The custodian of the Gateway IRAs is Star Bank. Investors can
obtain forms to establish Gateway IRAs by calling Shareholder Services at (800)
354-6339.
An IRA is a special program with certain tax benefits that generally
permits an investor to establish and contribute to his or her own retirement
plan. As is briefly discussed below, an investor who has compensation for a
taxable year may make contributions within certain limits to his or her own IRA
(and, in limited situations, an IRA for his or her spouse). Certain of the
investor's contributions to the IRA may be deductible from income in determining
his or her Federal income tax for the taxable year of the contributions and not
taxed until withdrawn from the IRA. Also, certain amounts received from another
IRA may be able to be rolled over or transferred to an IRA and thereby avoid
Federal income tax on the amounts rolled over or transferred until withdrawn
from the new IRA. In addition, certain amounts distributed from a tax-qualified
employer plan may be able to be rolled over directly to an IRA and thereby avoid
income tax withholding on the amounts rolled over. Further, all earnings
generated in the IRA are not taxed until distributed from the IRA.
To explain in more detail, in general, any investor who has
compensation in a taxable year is eligible: (1) to establish and/or make
contributions to an IRA for his or her own benefit for such taxable year (except
for the taxable year in which he or she attains the age of 70-1/2 or any later
taxable year); and (2) to establish and/or make contributions to an IRA for his
or her spouse, provided the spouse either has (or elects to be treated as
having) no compensation for the taxable year and provided the spouse has not
attained the age of 70-1/2 by the close of such taxable year.
Page 18
<PAGE> 46
Such an investor may contribute for the applicable taxable year up to the lesser
of $2,000 ($2,250 for spousal IRAs for both the investor and his or her
non-earning spouse, if applicable) or 100% of his or her compensation for the
taxable year. If both the investor and his or her spouse have compensation, each
may contribute up to such limits to separate IRAs.
The amount contributed to an IRA under the above rules is deductible
from income of the investor in determining Federal income tax for the applicable
taxable year; except that if the investor (or his or her spouse) is an active
participant in an employer-maintained retirement or profit sharing or similar
type of plan for such taxable year, the ability to deduct the contribution is
phased out if the adjusted gross income, as modified in certain respects for
this purpose ("AGI"), of the investor is above a certain amount. Specifically,
for such an investor filing a joint return with his or her spouse, the deduction
is phased out for AGI between $40,000 and $50,000 (and hence is not available at
all when the AGI on the joint return is above $50,000). When such an investor is
not married, the deduction is phased out for AGI between $25,000 and $35,000
(and hence is not available when the AGI is above $35,000). For an investor who
is married but files a separate tax return, the deduction is phased out for AGI
between $0 and $10,000 (and hence is not available when the AGI is above
$10,000). In determining whether the investor's spouse's active participant
status is taken into consideration and the applicable AGI limits, an investor
and his or her spouse who file separate returns for the applicable tax year and
live apart at all times during such tax year will not be treated as married for
such year.
Additional contributions can be made to an investor's IRA if
contributed by the investor's employer pursuant to a simplified employee pension
plan ("SEP") maintained by the employer. Currently, the maximum amount able to
be contributed to an investor's IRA through his or her employer's SEP (and
assuming the employer maintains and has maintained no other qualified plans for
the investor) is generally 15% of the investor's compensation from that employer
(determined without regard to the SEP contributions) or $22,500, whichever is
less. Contributions to an investor's IRA under an SEP program generally, if
within the above limits, are not included in the investor's income for Federal
income tax purposes.
Further, an investor may be able to roll over amounts received from
another IRA, or from a tax-qualified profit sharing, stock bonus, pension, or
annuity plan of an employer, to a Gateway IRA and be able by such method defer
paying taxes on the part of the distribution rolled over until such amounts are
withdrawn from the new IRA, provided certain conditions are met.
A shareholder may make a direct transfer of assets from one IRA to a
Gateway IRA by directing the existing IRA custodian or trustee to transfer
directly to the Gateway IRA the amount held in that prior IRA, without directly
receiving those funds or being taxed on the transfer. There is no minimum
holding period for a direct transfer of IRA assets from one custodian or trustee
to another. The Adviser has forms, available upon request, that a shareholder
can use to make direct IRA transfers.
A shareholder can make a direct rollover by instructing the employer's
plan to wire the distribution to Star Bank as custodian for the Gateway IRA. The
distribution should be wired to:
The Gateway Trust c/o Star Bank, N.A.
Page 19
<PAGE> 47
ABA #042-0000-13
Cincinnati, Ohio
Name (insert shareholder name)
Gateway Account No. (insert shareholder account number)
Name of Gateway fund(s) in which you wish to invest
A shareholder can also make a direct rollover by instructing the
employer's plan to prepare a check for the amount to be rolled over payable to
"Star Bank, N.A., as Custodian of Individual Retirement Account of (insert
shareholder name)," and delivering that check to Gateway. The check can be
delivered in person or mailed to:
The Gateway Trust
Shareholder Services
P. O. Box 5211
Cincinnati, Ohio 45201-5211
A shareholder can make a sixty-day rollover of a distribution from a
qualified employer plan by instructing the employer's plan to prepare a check
payable to the shareholder and by endorsing or cashing the check and depositing
some or all of the proceeds in his or her Gateway IRA. The deposit must be
delivered in person or mailed to The Gateway Trust at the above address within
sixty days of receiving the distribution. The employer's plan must withhold 20%
of the taxable amount for Federal income tax if a shareholder chooses a
sixty-day rollover for the distribution..
Some portions of distributions from other IRAs or from tax-qualified
profit sharing, stock bonus, pension, or annuity plans are not eligible for
regular or direct rollovers. For instance, distributions of nontaxable after-tax
employee contributions or required minimum payments made after an individual
reaches age 70-1/2 cannot be rolled over.
In general, amounts earned in an IRA from any contributions (whether
such contributions are deductible, nondeductible, or rollover contributions) are
not subject to Federal income tax until such amounts are distributed to the
owner of the IRA (or, in the case of the owner's death, his or her beneficiary
under the IRA), at which time they are taxed as ordinary income. All
distributions from an IRA are taxable, except for the part of any distribution
deemed a return of prior nondeductible contributions to the IRA. Generally,
distributions cannot begin without penalty until the owner reaches age 59-1/2 or
is disabled, and must both begin by April 1 of the year following the year he or
she attains age 70-1/2 and be paid in accordance with tax rules over the life of
the IRA owner or the joint lives of the owner and his or her IRA beneficiary (or
the life expectancy of the owner or the joint life and last survivor expectancy
of the owner and the IRA beneficiary). In addition, certain excise (or penalty)
taxes apply under Federal law if contributions exceed applicable limits, if
distributions are not made when required, or if the amount distributed in any
taxable year exceeds certain high levels. To make a withdrawal from a Gateway
IRA, a shareholder should contact Shareholder Services at (800) 354-6339.
The rules for contributing to, investing under, and distributing from
IRAs are complex, and any investor should consult with his or her own tax
advisor if he or she has any questions with respect to IRAs and to determine if
there have been any recent changes to the rules. At the
Page 20
<PAGE> 48
time an IRA is established, the custodian or trustee of the IRA is required by
law to provide a disclosure statement to the individual setting forth important
information concerning IRAs.
Further information concerning IRAs can be obtained from any district
office of the Internal Revenue Service. In particular, Publication 590 of the
Internal Revenue Service provides general information as to IRAs.
No annual maintenance fees are charged by the Trust on any IRA,
SEP-IRA, retirement, pension or profit-sharing plan, including a 401(k) plan.
The Trust reserves the right to charge annual fees in the future. Shareholders
will be notified of any change in the annual fee arrangement.
QUALIFIED PENSION AND PROFIT SHARING PLANS
Employers with existing retirement, pension or profit sharing plans may
purchase shares of any fund by completing the New Account Application Form which
accompanies the Prospectus. The possible use, at no additional charge, of the
Systematic Withdrawal Plan provides an optional method for employees to receive
retirement benefits on a regular basis.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Basic information concerning the purchase and redemption of shares is
set forth under the captions "How To Buy Shares" and "How To Sell Shares" in the
Combined Prospectus. Shares of all funds are purchased and redeemed at their net
asset value as next determined following receipt of the purchase order or
redemption notice. Redemptions under the Systematic Withdrawal Program and
installment distributions from IRAs are effected at the net asset value next
determined after the date designated for the redemption or distribution.
Information as to the method of calculating the net asset value of shares of any
fund is included in the Combined Prospectus under the caption "How Fund Shares
Are Priced."
Certificates for shares of any fund will not be issued.
The minimum initial investment is $1,000 and the minimum additional
investment is $100, subject to certain exceptions such as investments by the
Adviser's employees and by participants in SEP programs. The Trust reserves the
right to accept or reject any purchase order of any fund.
There is no minimum or maximum applicable to redemption of shares of
any fund. The Trust, however, reserves the right to automatically redeem a
shareholder's account(s) under certain circumstances. The shareholder will
receive written notice prior to the redemption of the account(s). Generally the
Trust will send the shareholder a letter 60 days prior to redeeming the
shareholder's account(s).
The Trust may automatically redeem a shareholder's account(s) in any
fund when the aggregate value of the shareholder's account(s) (taken at current
value) falls below $800. The shareholder may prevent such redemption by
increasing the value of the account(s) to $1,000 or
Page 21
<PAGE> 49
more within the 60-day period. The Trust will not automatically redeem a
shareholder's account(s) if market action caused the aggregate value of the
account(s) to fall below $800 or if shares of the funds are not available for
purchase at the time the aggregate value of the account(s) falls below $800.
The Trust also will automatically redeem a shareholder's account if the
shareholder does not provide a valid U. S. social security number or taxpayer
identification number or other requested documents such as corporate
resolutions. The shareholder may prevent such redemption by providing the
requested information within the 60-day period.
The Trust may institute additional mandatory redemption policies as
approved by the Board of Trustees.
The Trust reserves the right to terminate temporarily or permanently
the exchange privilege for any shareholder who makes an excessive number of
exchanges between funds. The shareholder will receive written notice that the
Trust intends to limit the shareholder's use of the exchange privilege.
Generally the Trust limits a shareholder to twelve exchange transactions per
calendar year. Accounts under common ownership or control, including accounts
with the same taxpayer identification number, normally will be counted as one
account for purposes of the exchange limit.
The Trust also reserves the right to terminate or modify the exchange
privilege or to refuse an exchange if the exchange would adversely affect a
fund.
Signature guarantees are required for all redemptions, (on the date of
receipt by the Servicing Agent of all necessary documents)regardless of the
amount involved, when the proceeds are to be paid to someone other than the
registered owner(s). The signature guarantee requirement may be waived by the
Trust in certain instances. The Trust also reserves the right to require a
signature guarantee on any instructions or redemptions given to the Trust for
any reason. The purpose of signature guarantees is to prevent fraudulent
redemptions which could result in losses to the Trust, the Servicing Agent or
shareholders. A signature guarantee will be accepted from banks, brokers,
dealers, municipal securities dealers or brokers, government securities dealers
or brokers, credit unions (if authorized by state law), national securities
exchanges, registered securities associations, clearing agencies, and savings
associations. Notary publics are unacceptable guarantors. The signature
guarantees must appear either (1) on the written request for redemption, (2) on
a stock power which should specify the total number of shares to be redeemed, or
(3) on all stock certificates tendered for redemption.
The right of redemption may be suspended or the date of payment
postponed (1) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend and holiday closings), (2) when trading in any
of the markets which a fund normally utilizes is restricted as determined by the
Securities and Exchange Commission (the "Commission"), (3) if any emergency
exists as defined by the Commission so that disposal of investments or
determination of a fund's net asset value is not reasonably practicable, or (4)
for such other periods as the Commission by order may permit for protection of
the Trust's shareholders.
Page 22
<PAGE> 50
The Trust has elected to be governed by Rule18f-1 of the Investment
Company Act, which obligates each fund to redeem shares in cash, with respect to
any one shareholder during any 90-day period, up to the lesser of $250,000 or 1%
of the assets of the fund. Although payment for redeemed shares generally will
be made in cash, under abnormal circumstances the Board of Trustees of the Trust
may determine to make payment in securities owned by the fund whose shares are
being redeemed. In such event, the securities will be selected in such manner as
the Board of Trustees deems fair and equitable, in which case brokerage and
other costs may be incurred by such redeeming shareholders in the sale or
disposition of their securities. To date, all redemptions have been made in
cash.
The Trust reserves the right to modify or terminate any purchase,
redemption or other shareholder service procedure upon notice to shareholders.
Purchases and redemptions generally may be effected only on days when
the options exchanges are open for trading. These exchanges are closed on
Saturdays and Sundays and the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas Day.
INVESTMENT ADVISORY AND OTHER SERVICES
GATEWAY INVESTMENT ADVISERS, L.P.
Gateway Investment Advisers, L.P., a Delaware limited partnership, has
acted as the investment adviser for the funds since December 15, 1995. Gateway
Investment Advisers Inc. ("GIA") provided investment advisory services to the
funds from their formation until December 15, 1995. Gateway Investment Advisers,
L.P. (the "Adviser") became the successor in interest to the assets, business
and personnel of GIA which was organized in June 1977. GIA is the general
partner of the Adviser with a 76% ownership interest, while Alex. Brown Capital
Advisory & Trust Company ("ABCA&T"), previously known as Alex. Brown Investments
Incorporation, is the sole limited partner with a 24% ownership interest. ABCA&T
is an affiliate of Alex. Brown & Sons Incorporated, a nationally known
investment management firm and registered broker/dealer located in Baltimore,
Maryland. As of December 15, 1995, Walter G. Sall, Chairman and a Trustee of the
Trust, and J. Patrick Rogers, a co-portfolio manager of the funds of the Trust,
together owned of record and beneficially 99.85% of the outstanding shares of
GIA and thereby control the Adviser. Mr. Sall is the Chairman and a director of
GIA and Mr. Rogers is its President and a director. The third director of GIA is
Lucinda S. Mezey who is employed by Brown Asset Management as their Chief
Investment Officer. Brown Asset Management is affiliated with ABCA&T.
INVESTMENT ADVISORY CONTRACTS
The Trust has retained the Adviser under investment advisory contracts
("Adviser Contracts") to act as investment manager and in such capacity
supervise the investments of the Gateway funds, subject to the policies and
control of the Trust's Board of Trustees. Contracts for the Index Plus Fund, Mid
Cap Index Fund and Small Cap Index Fund became effective
Page 23
<PAGE> 51
December 15, 1995. Services were provided by GIA under substantially identical
contracts prior to this date.
Pursuant to the Adviser Contracts, the Adviser, at its sole expense,
provides each fund with (1) investment recommendations regarding such fund's
investments, (2) office space, telephones, and other office equipment, and (3)
clerical and secretarial staff and the services, without additional
compensation, of all officers of the Trust. In addition, the Adviser has agreed
to bear (1) advertising and other marketing expenses in connection with the sale
of the shares of the funds, (2) expenses of printing and distributing
prospectuses and related documents to prospective stockholders, and (3)
association membership dues (other than for the Investment Company Institute).
The Adviser Contracts further provide that under certain circumstances the
Adviser may cause each fund to pay brokerage commissions in order to enable the
Adviser to obtain brokerage and research services for its use in advising such
fund and the Adviser's other clients, provided that the amount of commission is
determined by the Adviser, in good faith and in the best interests of the fund,
to be reasonable in relation to the value of the brokerage and research services
provided.
The Adviser Contracts provide that all expenses not specifically
assumed by the Adviser which may be incurred in the operation of the Trust and
the offering of its shares will be borne by the Trust. Such expenses will be
allocated between the funds by direction of the Board of Trustees, most
frequently on the basis of expenses incurred by each fund, but where that is not
practicable on such basis as the Trustees determine to be appropriate. Expenses
to be borne by the Trust include:
- - fees and expenses of Trustees not employed by the Adviser.
- - expenses of printing and distributing prospectuses to current shareholders
of the Trust.
- - expenses pertaining to registering or qualifying the Trust or its shares
under various federal and state laws and maintaining and updating such
registrations and qualifications.
- - interest expense, taxes, fees and commissions (including brokerage
commissions).
- - expenses related to repurchases and redemptions of shares.
- - charges and expenses of custodians, transfer agents, dividend disbursing
agents and other service providers.
- - expenses of valuing shares of each fund.
- - printing and mailing costs other than those expressly assumed by the
Adviser.
- - auditing, accounting and legal expenses.
- - expenses incurred in connection with the preparation of reports to
shareholders and governmental agencies.
- - expenses of shareholder meetings and proxy solicitations.
- - insurance expenses.
- - all "extraordinary expenses" which may arise, including all losses and
liabilities incurred in connection with litigation proceedings and claims,
and the legal obligations of the Trust to indemnify its officers, trustees
and agents with respect thereto.
A majority of the Board of Trustees of the Trust and a majority of the Trustees
who are not "interested persons" (as defined in the Investment Company Act of
1940) of any party to the Adviser Contracts, voting separately, shall determine
which expenses shall be characterized as "extraordinary expenses."
Page 24
<PAGE> 52
In return for the services and facilities furnished by the Adviser, the
Index Plus Fund, the Mid Cap Index Fund and the Small Cap Index Fund each pays
the Adviser an advisory fee computed at an annual rate of 0.90% of the first $50
million of the average daily net asset value of such fund, 0.70% of such asset
value in excess of $50 million and less than $100 million, and 0.60% of such
asset value in excess of $100 million. The rate of such advisory fee is higher
than that paid by many other funds for advisory services.
If total expenses of any fund for any fiscal year (including the
Adviser's compensation, but exclusive of taxes, interest, brokerage commissions
and any "extraordinary expenses" determined as described above) exceed the
specified percentage of such fund's average daily net asset value for such year,
the Adviser Contracts require the Adviser to bear all such excess expenses up to
the amount of the advisory fees. The applicable expense limitation percentage
for each fund are: 1.5% of the Index Plus Fund's average daily net asset value,
1.5% of the Mid Cap Index Fund's average daily net asset value, and 2.0% of the
Small Cap Index Fund's average daily net asset value. Each month the investment
advisory fee is determined and each fund's expenses are projected. If such
fund's projected expenses are in excess of the above-stated expense limitations,
the investment advisory fee paid to the Adviser will be reduced by the amount of
the excess expenses, subject to an annual adjustment; provided, however, that
the aggregate annual reduction from the Adviser to each fund shall not exceed
the aggregate advisory fee paid by such fund to the Adviser for such year.
The following table shows the advisory fees earned by the Adviser and
the amount of the fees waived by the Adviser in the years ended December 31,
1995, 1994, 1993 and 1992. The 1992 information shown for the Mid Cap Index Fund
is for the three-month period ended December 31, 1992. The 1993 information
shown for the Small Cap Index Fund is for the period from June 16 to December
31, 1993.
<TABLE>
<CAPTION>
Fee and Waiver Index Plus Fund Mid Cap Index Fund Small Cap Index Fund
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 Fee Earned $1,246,576 $ 50,766 $ 85,502
1995 Fee Waived None $ 50,766 $ 85,502
1995 Fee Paid $1,246,576 0 0
1994 Fee Earned $1,273,842 $ 84,778 $ 114,449
1994 Fee Waived None $ 81,284 $ 15,135
---------- ----------
1994 Fee Paid $1,273,842 $ 3,494 $ 99,314
1993 Fee Earned $1,506,566 $ 95,395 $ 47,791
1993 Fee Waived None $ 66,914 $ 16,373
---------- ----------
1993 Fee Paid $1,506,566 $ 28,481 $ 31,418
</TABLE>
Page 25
<PAGE> 53
The Adviser Contracts further provide that the Adviser is not liable to the
Trust or any of its shareholders for any act or omission by the Adviser in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties or obligations thereunder. The Advisory Contracts
contemplate that the Adviser may act as an investment manager or adviser for
others.
The Adviser Contracts may be amended at any time by the mutual consent
of the parties thereto, provided that such consent on the part of the Trust
shall have been approved by the vote of a majority of the Trust's Board of
Trustees, including the vote cast in person by a majority of the Trustees who
are not "interested persons" (as defined in the Investment Company Act of 1940)
of any party to the Adviser Contract, and by vote of the shareholders of the
applicable fund.
The Adviser Contracts may be terminated, upon 60-days' written notice
(which notice may be waived), at any time without penalty, (i) by the Board of
Trustees of the Trust, (ii) by the vote of a majority of the outstanding voting
securities of the applicable fund or (iii) by the Adviser. Each Adviser Contract
terminates automatically in the event of its assignment (as that term is defined
in the Investment Company Act of 1940) by the Adviser.
The Adviser Contracts continue in effect until December 31, 1996; and
thereafter, provided that its continuance for the funds for each renewal year is
specifically approved in advance (i) by the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Funds, and (ii)
by vote of a majority of the Trustees who are not parties to the advisory
contract or "interested persons" (as defined in The Investment Company Act of
1940) by votes cast in person at a meeting specifically called for such
purposes.
CUSTODIAN
Star Bank, 425 Walnut Street, Cincinnati, Ohio 45202, acts as custodian
of the Trust's assets (the "Custodian"). The Custodian has no part in
determining the investment policies of any fund or which securities are to be
purchased or sold by any fund.
SHAREHOLDER SERVICING, TRANSFER, DIVIDEND DISBURSING AND FINANCIAL SERVICING
AGENT
The Adviser is the Trust's Shareholder Servicing, Transfer, Dividend
Disbursing and Financial Servicing Agent (the "Servicing Agent"). The Adviser's
mailing address for its activities as Servicing Agent is The Gateway Trust, 400
TechneCenter Drive, Suite 220, Milford, Ohio 45150. As Transfer Agent for the
Trust, the Servicing Agent's general duties include transferring shares,
processing applications for new accounts and depositing the payments for the
purchase of fund shares with the Custodian, and notifying the Trust and
Custodian of such deposits. The Servicing Agent opens and maintains an account
for each shareholder as set forth in the subscription application, maintains
records of each shareholder account, and sends confirmation of shares purchased
to each shareholder. The Servicing Agent also receives and processes requests by
shareholders for redemption of shares. If the shareholder request complies with
the redemption standards of the Trust, the Servicing Agent will direct the
Custodian to pay the appropriate redemption price. If the redemption request
does not comply with such standards, the Servicing Agent will promptly notify
the shareholder of the reasons for rejecting the redemption request.
Page 26
<PAGE> 54
As the Dividend Disbursing Agent for the Trust, the Servicing Agent,
upon notification of the declaration of a dividend or distribution, will
determine the total number of shares issued and outstanding as of the record
date for the dividend or distribution and the amount of cash required to satisfy
such dividend or distribution. The Servicing Agent will prepare and mail to
shareholders dividend checks in the amounts to which they are entitled. In the
case of shareholders participating in the dividend reinvestment plan, the
Servicing Agent will make appropriate credits to their bookshare accounts.
Shareholders will be notified by the Servicing Agent of any dividends or
distributions to which they are entitled, including any amount of additional
shares purchased with their dividends. In addition, the Servicing Agent will
prepare and file with the Internal Revenue Service and with any state, as
directed by the Trust, returns for reporting dividends and distributions paid by
such fund.
The Servicing Agent, as the Shareholder Servicing Agent, will open and
maintain any plan or program for shareholders in accordance with the terms of
such plans or programs (see "SHAREHOLDER SERVICES" herein). With regard to the
systematic withdrawal plans, the Servicing Agent will process such systematic
withdrawal plan orders as are duly executed by shareholders and will direct
appropriate payment to be made by the Custodian to the shareholder. In addition,
the Servicing Agent will process such accumulation plans, group programs and
other plans or programs for investing shares as provided in the Trust's current
prospectuses
Each fund pays the Servicing Agent a monthly minimum fee of $2,500 for
its services. Each fund also reimburses the Servicing Agent for printing,
mailing, compliance, and processing expenses associated with providing its
services. The portion of the reimbursement related to processing expenses cannot
exceed 0.2% of the fund's average net assets. In addition, each fund pays the
Servicing Agent a monthly fee of $4,000 for the financial and administrative
services it provides. For the year ended December 31, 1995, the Adviser earned
$630,694 in its capacity as Servicing Agent to all four funds of the Trust.
BROKERAGE
Transactions on stock and option exchanges involve the payment of
negotiated brokerage commissions. In the case of securities traded in the
over-the-counter market, there is generally no stated commission but the price
usually includes an undisclosed commission or mark-up.
In effecting portfolio transactions for each fund, the Adviser is
obligated to seek best execution, which is to execute the Fund's transactions
where the most favorable combination of price and execution services are
available ("best execution"), except to the extent that it may be permitted to
pay higher brokerage commissions for brokerage and research services as
described below. In seeking best execution, the Adviser, in each fund's best
interests, considers all relevant factors, including:
- - price.
- - the size of the transaction, the nature of the market for the security.
- - the amount of commission.
- - the timing of the transaction taking into account market prices and trends.
Page 27
<PAGE> 55
- - the reputation, experience and financial stability of the broker-dealer
involved.
- - the quality of service rendered by the broker-dealer in other transactions.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such other
factors as the Trustees may determine, the Adviser may consider sales of shares
of a fund as a factor in the selection of broker-dealers to execute securities
transactions for such fund. Closing option transactions are usually effected
through the same broker-dealer that executed the opening transaction.
The Adviser Contracts provide that, subject to such policies as the
Trustees may determine, the Adviser may cause a fund to pay a broker-dealer who
provides brokerage and research services to the Adviser an amount of commission
for effecting a securities transaction for such fund in excess of the amount of
commission which another broker-dealer would have charged for effecting that
transaction. As provided in Section 28(e) of the Securities Exchange Act of
1934, "brokerage and research services" include:
- - advice as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities.
- - furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and performance of
accounts.
- - effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement).
- - services that provide lawful and appropriate assistance to the Adviser in
the performance of its investment decision-making responsibilities.
While the Adviser does not intend to limit the placement of orders to
any particular broker or dealer, the Adviser generally gives preference to those
brokers or dealers who are believed to give best execution and who also provide
research, statistical or other services to the Adviser and/or the Trust.
Commissions charged by brokers who provide these services may be higher than
commissions charged by those who do not provide them. Higher commissions are
paid only if the Adviser determines that they are reasonable in relation to the
value of the services provided, and it has reported to the Board of Trustees of
the Trust on a periodic basis to that effect. The availability of such services
was taken into account in establishing the investment advisory fees. Specific
research services furnished by brokers through whom the Trust effects securities
transactions may be used by the Adviser in servicing all of its accounts.
Similarly, specific research services furnished by brokers who execute
transactions for other of the Adviser's clients may be used by the Adviser for
the benefit of the Trust.
At December 31, 1995, the Index Plus Fund and the Mid Cap Index Fund
each held securities (valued as set forth below) of one of its "regular"
brokers. A "regular" broker, as defined by the Investment Company Act of 1940,
is one of the ten brokers that received the greatest dollar amount of brokerage
commissions from a fund's portfolio transactions.
Page 28
<PAGE> 56
<TABLE>
<CAPTION>
Name of Fund Broker Value of Securities
--------------------------------------------------------------------
<S> <C> <C>
Index Plus Fund Merrill Lynch $867,000
Mid Cap Index Fund Paine Webber $ 13,956
</TABLE>
The following table shows the brokerage commissions paid by the funds
in the years ended December 31, 1995, 1994 and 1993.. The 1993 brokerage
commissions for the Small Cap Index Fund are for the period from June 15 to
December 31, 1993.
<TABLE>
<CAPTION>
Name of Fund 1995 Commissions 1994 Commissions 1993 Commissions
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Index Plus Fund 128,373.06 $76,077 $326,174
Mid Cap Index Fund 6,982.42 $ 9,121 $ 32,234
Small Cap Index Fund 12,492.44 $24,677 $ 26,797
</TABLE>
The higher level of brokerage commissions paid by the Mid Cap Index Fund in 1993
was attributable to the restructuring of the portfolio in December, 1993. To
implement the restructuring, the Fund sold all of its portfolio securities and
then purchased the 400 stocks included in the S&P MidCap 400 Index.
ADDITIONAL TAX MATTERS
The tax discussion set forth below and in the Prospectuses is included
for general information only. Prospective investors should consult their own tax
advisors concerning the tax consequences of an investment in the Trust.
FEDERAL TAX MATTERS
Each of the funds is treated as a separate association taxable as a
corporation. The following information, therefore, applies to each fund
separately unless otherwise specifically stated.
Except as noted below, each fund has met, and each of the funds in the
future intends to meet, the requirements of the Internal Revenue Code,
applicable to regulated investment companies so as to qualify for the special
tax treatment afforded to such companies. Under Subchapter M of the Code, a
regulated investment company is not subject to federal income tax on the portion
of its net investment income and net realized capital gains which it distributes
currently to its stockholders, provided that certain distribution requirements
are met, including the requirement that at least 90% of the sum of its net
investment income and net short-term capital gains in any fiscal year is so
distributed. In addition to this distribution requirement, two of the principal
tests which each fund must meet in each fiscal year in order to qualify as a
regulated investment company are the "90% Test" and the "30% Test." The 90% Test
requires that at least 90% of a fund's gross income must be derived from
dividends, interest and gains from the sale or other disposition of securities,
including gains from options. The 30% Test that requires no more than 30% of a
fund's gross income be derived from the sale or other disposition of securities
held less than three months. The 30% Test limits each fund's ability to deal
with investments held, or options outstanding, less than three months. In 1987,
the Index Plus Fund
Page 29
<PAGE> 57
failed to satisfy the 30% Test as a result of an unusual volume of short-term
gains realized by the fund following the stock market drop in October 1987. As a
consequence, the Fund failed to qualify under Subchapter M and became subject to
federal income tax and state franchise tax for 1987. The Index Plus Fund has
qualified under Subchapter M each year since 1987.
Gains realized from transactions on put and call options (other than
options on securities indexes) generally will be long term or short term,
depending on the nature of the option transaction and on the length of time the
option is owned by the fund.
The tax status of distributions made by each fund during the fiscal
year will be sent to shareholders shortly after the end of such year. Each
prospective investor is advised to consult his own tax advisor. Distributions of
net investment income are taxable as ordinary income subject to allowable
exclusions and deductions. Distributions of capital gains are taxable at either
ordinary or long-term capital gains rates, as appropriate, except that all such
gains are normally taxable as ordinary income to the extent they are offset by
capital-loss carryforwards.
Long-term capital gains distributions (i.e., the excess of any net
long-term capital gains over net short-term capital losses), after utilization
of available capital-loss carryforwards, are taxable as long-term capital gains
whether received in cash or additional shares, regardless of how long the
shareholder has held his shares, and are not eligible for the dividends received
deduction for corporations. Distributions of long-term capital gains which are
offset by available loss carryforwards, however, may be taxable as ordinary
income.
Distributions on shares of any fund received shortly after their
purchase, although substantially in effect a return of capital, are subject to
federal income taxes.
STATE AND LOCAL TAX ASPECTS
The laws of the several states and local taxing authorities vary with
respect to taxation, and each prospective investor is advised to consult his own
tax advisor as to the status of his shares and distributions in respect of those
shares under state and local tax laws.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and Officers of the Trust, together with information as to
their positions with the Trust and its predecessor, Gateway Option Income Fund,
Inc. (the "Company") and their principal occupations during at least the past
five years, are listed below.
*Walter Gene Sall, 400 TechneCenter Drive, Suite 220, Milford, Ohio,
45150; Chairman and Trustee of the Trust; Chairman of the Adviser; various
senior management positions and offices held with the Trust, the Company and the
Adviser since 1977. Age 51.
*Peter Whitney Thayer, 400 TechneCenter Drive, Suite 220, Milford,
Ohio, 45150; President and Trustee of the Trust; co-portfolio manager of the
funds; various senior management positions and offices held with the Trust, the
Company and the Adviser since 1977.
Age 47.
Page 30
<PAGE> 58
Stefen F. Brueckner, Trustee of the Trust Since October 1992; Director,
Chief Executive Officer, and President, Anthem Companies, Inc. since 1995. Prior
thereto, Director, and President of Community Mutual Insurance Company (health
insurer) since 1991 and various management positions since 1986. Director of
Anthem Health and Life Insurance Company, Anthem Life Insurance Company, and
various other affiliates and subsidiaries. Age 46.
Kenneth A. Drucker, Sequa Corp., 200 Park Avenue, New York, New York,
10166; Director of the Company from January 20, 1984 to May 1986; Trustee of the
Trust since April 1986; Vice President and Treasurer, Sequa Corporation (gas
turbine and industrial equipment) since November 1987. Prior thereto, Senior
Vice-President and Treasurer, JWT Group, Inc. (advertising, public update
relations and market research). Age 50.
Beverly S. Gordon, 1625 Starling Drive, Sarasota, Florida, 34231;
Trustee of the Trust since September 1988; arbitrator, National Association of
Securities Dealers, Inc., since January 1992; Vice President, Marketing and
Communications, Coffee, Sugar and Cocoa Exchange from January 1989 to December
1991; Executive Director, National Institutional Options and Futures Society,
March 1988 to December 1988; prior thereto, Vice President, Institutional
Marketing, Chicago Board Options Exchange. Age 65.
R.S. (Dick) Harrison, 422 Wards Corner Road, Loveland, Ohio 45140;
Trustee of the Trust since April 1996 and from 1977 through 1982;
Director/Chairman of the Board, Baldwin Piano & Organ Company since 1994;
Chairman of the Board/CEO, Baldwin Piano & Organ Company from 1983 to 1994.
Prior thereto, various management positions with Baldwin Piano & Organ Company,
Cincinnati, Ohio. Director of Sencorp and Anderson Bank of Cincinnati, Ohio and
Trustee of Kenyon College. Age 64.
John F. Lebor, 12233 West End, Lost Tree Village, North Palm Beach, Florida.
33408; Director of the Company from September 1977 to May 1986; Trustee of the
Trust since April 1986. Retired director of several corporations. Age 90.
William Harding Schneebeck, 251 Indian Harbor Road, Vero Beach,
Florida, 32963; Director of the Company from September 1977 to May 1986; Trustee
of the Trust since April 1986; retired, formerly Chairman of Midwestern Fidelity
Corp. Age 67.
*Geoffrey Keenan, 400 TechneCenter Drive, Suite 220, Milford, Ohio
45150; Vice President of the Trust since April 1996; Chief Operations Officer,
Gateway Investment Advisers, L.P. since 1995; Executive Vice President and Chief
Operations Officer, Gateway Investment Advisers, Inc. since 1995; Vice
President, Gateway Investment Advisers, Inc. from 1991 to 1995. Age 37.
*Paul R. Stewart, 400 TechneCenter Drive, Suite 220, Milford, Ohio,
45150; Treasurer of the Trust since October, 1995; Comptroller of the Adviser
since October, 1995; Audit Manager and Senior Manager, Price Waterhouse from
September, 1992 to 1995 and from August 1988 to August 1991; accountant for
Lexmark International from August 1991 to September 1992. Age 30.
Page 31
<PAGE> 59
*Donna M. Squeri, 400 TechneCenter Drive, Suite 220, Milford, Ohio
45150; Secretary of the Trust since October, 1995; Secretary and General Counsel
of the Adviser since September, 1995; in house counsel of Bartlett & Co., a
registered investment adviser, from October, 1984 to September, 1993. Age 36.
*Messrs. Sall, Thayer, Keenan, and Stewart and Ms. Squeri are
affiliated persons of the Trust and the Adviser as defined by the Investment
Company Act of 1940. Messrs. Sall and Thayer are "interested persons" of the
Trust as defined by the Investment Company Act of 1940.
Messrs. Sall, Thayer, Keenan and Stewart and Ms. Squeri, each of whom
is employed by the Adviser, receive no remuneration from the Trust. Each Trustee
of the Trust other than Messrs. Sall and Thayer receives fees as follows: (a) an
annual fee of $3,000, payable in equal quarterly installments for services
during each fiscal quarter, (b) a $500 base fee plus $100 per fund for each
regular or special meeting of the Board of Trustees attended, and (c) $200 per
fund ($1,000 per fund for the Chairman) for each Audit and Contract Review
Committee meeting attended. The Trust also reimburses each Trustee for any
reasonable and necessary travel expenses incurred in connection with attendance
at such meetings. In addition, Trustees may receive attendance fees for service
on other committees.
Page 32
<PAGE> 60
The following table provides information about the compensation
received by each Trustee from the Trust for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Aggregate
Compensation Total Compensation
Name of Trustee From Trust From Trust
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Stefen F. Brueckner $6,535.14 $6,535.14
Kenneth A. Drucker $8,135.14 $8,135.14
Beverly S. Gordon $6,535.14 $6,535.14
John F. Lebor $14,535.14 $14,535.14
Walter G. Sall $0.00 $0.00
William H. Schneebeck $8,135.14 $8,135.14
Peter W. Thayer $0.00 $0.00
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, Ohio 45202, serves
as independent public accountants of the Trust. Arthur Andersen LLP performs an
annual audit of each fund's financial statements, prepares each fund's tax
returns and provides financial, tax and accounting consulting services as
requested.
PRINCIPAL HOLDERS OF FUND SHARES
INDEX PLUS FUND
As of April 26, 1996, the Index Plus Fund had 9,997,301 shares
outstanding. As of such date, each of the following persons or groups was known
by Trust management to be the record and/or beneficial owner (as defined below)
of the indicated amounts of the Fund's outstanding shares.
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent of Class
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab and Company 1,433,243 14.34%
101 Montgomery Street
San Francisco, California 94104
Trustees and Officers of the Trust as a group 152,524 1.52%
Officers and Directors of the Adviser as a group 28,251 less than 1%
</TABLE>
Page 33
<PAGE> 61
MID CAP INDEX FUND
As of April 26, 1996, the Mid Cap Index Fund had 477,268 shares
outstanding. As of such date, each of the following persons or groups was known
by Trust management to be the record and/or beneficial owner (as defined below)
of the indicated amounts of the Fund's outstanding shares.
<TABLE>
<CAPTION>
Name and Address of Owner Number of Shares Percent of Class
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Andrew Wyeth 80,496 16.87%
Chadds Ford, Pennsylvania 19317
Betsy Wyeth (Growth) 52,459 10.99%
Chadds Ford, Pennsylvania 19317
Betsy Wyeth 52,239 10.95%
Chadds Ford, Pennsylvania 19317
Lawrence F. Silver, Trustee 39,643 8.31%
8901 North 58th Place
Paradise, Arizona 85253
R. S. Harrison, Trustee 27,278 5.72%
440 Mt. Carmel Road
Cincinnati, Ohio 45244
Trustees and Officers of the Trust as a group 36,868 7.72%
Officer and Directors of the Adviser as a group 4,296 less than 1%
</TABLE>
SMALL CAP INDEX FUND
As of April 26,, 1996, the Small Cap Index Fund had 846,428 shares
outstanding. As of such date, each of the following persons or groups was known
by Trust management to be the record and/or beneficial owner (as defined below)
of the indicated amounts of the Fund's outstanding shares.
<TABLE>
<CAPTION>
Name and Address of Owner Number of Shares Percent of Class
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Andrew Wyeth 140,946 16.65%
Chadds Ford, Pennsylvania 19317
Betsy Wyeth 91,713 10.84%
Chadds Ford, Pennsylvania 19317
Betsy Wyeth (Growth) 68,938 8.14%
</TABLE>
Page 34
<PAGE> 62
<TABLE>
<S> <C> <C>
Chadds Ford, Pennsylvania 19317
Trustees and Officers of the Trust as a group 15,439 1.82%
Officers and Directors of the Adviser as a group 5,250 Less than 1%
</TABLE>
The Securities and Exchange Commission has defined "beneficial owner"
of a security to include any person who has voting power or investment power
with respect to any such security, any person who shares voting power or
investment power within respect to any such security. or any person who has the
right to acquire beneficial ownership of any such security within 60 days.
SHARES HELD BY ADVISER
As of February 1, 1996, the Adviser held in a fiduciary capacity the
indicated amounts of the outstanding shares of each fund. The Adviser has
investment and voting power over all shares held by it in a fiduciary capacity.
<TABLE>
<CAPTION>
Name of Fund Number of Shares Percentage of Shares
- --------------------------------------------------------------------------------------
<S> <C> <C>
Index Plus Fund 843,931 8.24%
Mid Cap Index Fund 284,437 57.98%
Small Cap Index Fund 442,805 52.08%
</TABLE>
Page 35
<PAGE> 63
SCHEDULE A
----------
Stocks included in the S&P 100 Index
------------------------------------
ALUMINUM COMPANY OF AMERICA
AMERICAN ELECTRIC POWER COMPANY INC.
AMERICAN GENERAL CORPORATION
AMERICAN INTERNATIONAL GROUP INC.
AMERITECH
AMP INCORPORATED
AMOCO CORPORATION
ATLANTIC RICHFIELD COMPANY
AVON PRODUCTS INC.
AMERICAN EXPRESS COMPANY
BOEING COMPANY
BANKAMERICA CORPORATION
BAXTER INTERNATIONAL INC.
BRUNSWICK CORPORATION
BOISE CASCADE CORPORATION
BLACK AND DECKER CORPORATION
BELL ATLANTIC CORPORATION
BAKER HUGHES INCORPORATED
BRISTOL MYERS SQUIBB COMPANY
BURLINGTON NORTHERN SANTA FE CORP
BETHLEHEM STEEL CORPORATION
CHRYSLER CORPORATION
CITICORP
CERIDIAN CORPORATION
COASTAL CORPORATION
CHAMPION INTERNATIONAL CORPORATION
CIGNA CORPORATION
COLGATE PALMOLIVE COMPANY
COLUMBIA/HCA HEALTHCARE CORPORATION
COMPUTER SCIENCES CORPORATION
CISCO SYSTEMS INC.
DELTA AIR LINES INC.
DU PONT COMPANY
DIGITAL EQUIPMENT CORP.
DISNEY, WALT COMPANY
DOW CHEMICAL COMPANY
EASTMAN KODAK COMPANY
ENTERGY CORPORATION
FORD MOTOR COMPANY
FIRST CHICAGO NBD CORP
FEDERAL EXPRESS CORPORATION
FLUOR CORPORATION
GENERAL DYNAMICS CORPORATION
GENERAL ELECTRIC COMPANY
GENERAL MOTORS CORPORATION
GREAT WESTERN FINANCIAL CORPORATION
HALLIBURTON COMPANY
HARRAH'S ENTERTAINMENT, INC.
ITT HARTFORD GROUP INC.
HOMESTAKE MINING COMPANY
H.J. HEINZ COMPANY
HONEYWELL INC.
HARRIS CORPORATION
HEWLETT PACKARD COMPANY
INTERNATIONAL BUSINESS MACHINES CORP
INTERNATIONAL FLAVORS AND FRAGRANCES
INTEL CORPORATION
INTERNATIONAL PAPER COMPANY
JOHNSON AND JOHNSON
K MART CORPORATION
COCA COLA COMPANY
LIMITED INC.
MAY DEPARTMENT STORES COMPANY
MCDONALDS CORPORATION
MCI COMMUNICATIONS CORPORATION
MERRILL LYNCH AND COMPANY
MALLINKRODT GROUP INC.
MINNESOTA MINING AND MANUFACTURING
MOBIL CORPORATION
MERCK AND COMPANY INC.
MONSANTO COMPANY
NORFOLK SOUTHERN CORPORATION
NATIONAL SEMICONDUCTOR CORPORATION
NORTHERN TELECOM LIMITED
NYNEX CORPORATION
ORACLE SYSTEMS CORPORATION
OCCIDENTAL PETROLEUM CORPORATION
PEPSICO INC.
PHARMACIA & UPJOHN
POLAROID CORPORATION
RALSTON PURINA COMPANY
ROCKWELL INTERNATIONAL CORPORATION
RAYTHEON COMPANY
SEARS ROEBUCK AND COMPANY
SCHLUMBERGER LIMITED
SOUTHERN COMPANY
AT&T CORP
TANDY CORPORATION
TELEDYNE INC.
TEKTRONIX INC.
TOYS R US HOLDING CO
TEXAS INSTRUMENTS INCORPORATED
UNICOM CORP.
UNISYS CORPORATION
UNITED TECHNOLOGIES CORPORATION
WILLIAMS COMPANIES
WAL MART STORES INC.
WEYERHAEUSER COMPANY
EXXON CORPORATION
XEROX CORPORATION
<PAGE> 64
SCHEDULE B
----------
Stocks included in the S&P MidCap 400 Index
-------------------------------------------
AIRBORNE FREIGHT CORPORATION
ACUSON CORPORATION
ADOBE SYSTEMS
ADC TELECOMMUNICATIONS INC.
ANALOG DEVICES INC
AES CORPORATION
AMERICAN FINANCIAL GROUP INC.
AFLAC INC.
A.G. EDWARDS INC.
ANGELICA CORPORATION
ALBANY INTERNATIONAL CORP. CL. A
ARNOLD INDUSTRIES INC.
ALBEMARLE CORP
ALEXANDER AND BALDWIN COMPANY
ALASKA AIR GROUP INC.
ALLEGHENY LUDLUM CORPORATION
ALTERA CORPORATION
AMETEK INC
AMERICA ON LINE
ALUMAX INC.
ANN TAYLOR STORES, INC.
APACHE CORPORATION
APPLIED BIOSCIENCE INTERNATIONAL INC
ANADARKO PETROLEUM CORP.
AMERICAN POWER CONVERSION CORP.
APRIA HEALTHCARE GROUP INC.
AMERICAN PRESIDENT COMPANIES LTD.
ARVIN INDUSTRIES INC.
ARROW ELECTRONICS INC.
ATLANTIC SOUTHEAST AIRLINES INC.
AST RESEARCH INC.
ATLANTIC ENERGY INC.
AGL RESOURCES INC.
ADVANCED TECHNOLOGY LABORATORIES INC
ATMEL CORP
A.T. CROSS COMPANY
AVNET INC
AMERICAN WATER WORKS COMPANY INC.
AIR AND WATER TECHNOLOGIES CORP.
ALLEGHENY POWER SYSTEM INC.
BED BATH & BEYOND
BERGEN BRUNSWIG CORPORATION
BEST BUY COMPANY INC.
BECKMAN INSTRUMENTS INC.
FRANKLIN RESOURCES INC.
BIOGEN INC.
SOTHEBY'S HOLDINGS, INC. (CLASS A)
BJ SERVICES COMPANY
BLACK HILLS CORPORATION
A.H. BELO CORPORATION CLASS A
BMC SOFTWARE INC.
BATTLE MOUNTAIN GOLD COMPANY
BANTA CORP.
BOB EVANS FARMS INC
BUFFETS INC.
BANCORP HAWAII INC
BORLAND INTERNATIONAL INC.
BOWATER INCORPORATED
BEAR STEARNS COMPANIES INC.
BETZ LABORATIES
BROOKLYN UNION GAS COMPANY
BURLINGTON INDUSTRIES INCORPORATED
BRUSH WELLMAN INC.
CARDINAL HEALTH INC.
NEXTEL COMMUNICATIONS INC.
CARTER WALLACE INC.
CRACKER BARREL OLD COUNTRY STORE INC
CABOT CORPORATION
CALGON CARBON CORP.
COCA COLA ENTERPRISES INC.
CHRIS CRAFT INDUSTRIES INC.
CADENCE DESIGN SYSTEMS INC.
COMDISCO INC.
CONSOLIDATED PAPERS INC.
CALENERGY COMPANY
CRESTAR FINANCIAL CORP.
CENTRAL FIDELITY BANKS INC.
CHURCH & DWIGHT CO. INC.
CHIRON CORPORATION
CIRCUS CIRCUS ENTERPRISES INC.
CLAIRES STORES INC.
CLEVELAND CLIFFS INC HOLDING COMPANY
CLAYTON HOMES INCORPORATED
CML GROUP INC.
CMS ENERGY CORPORATION
CROMPTON AND KNOWLES CORPORATION
CENTRAL LOUISIANA ELECTRIC CO INC
CENTOCOR INC.
COMPUWARE CORP
CPI CORPORATION
COMSAT CORPORATION
CORAM HEALTHCARE CORP.
CARPENTER TECHNOLOGY CORPORATION
CIRRUS LOGIC INC.
CHESAPEAKE CORPORATION
CARLISLE COMPANIES INC. HOLDING CO.
CINTAS CORPORATION
CENTURY TELEPHONE ENTERPRISES
CENTRAL MAINE POWER COMPANY
CYPRESS SEMICONDUCTOR CORPORATION
CITY NATIONAL CORPORATION
CALMAT COMPANY
DAUPHIN DEPOSIT CORPORATION
DIEBOLD INCORPORATED
DONALDSON COMPANY INC.
DELL COMPUTER CORPORATION
DELMARVA POWER AND LIGHT COMPANY
DEXTER CORPORATION
DEAN FOODS COMPANY
DUTY FREE INTERNATIONAL INC.
DOLLAR GENERAL CORPORATION
DANAHER CORPORATION
DOLE FOOD COMPANY INC.
DIAGNOSTIC PRODUCTS CORPORATION
DIAMOND SHAMROCK INC.
DREYERS GRAND ICE CREAM INC.
DATASCOPE CORPORATION
DURIRON COMPANY
BRINKER INTERNATIONAL INC.
ENNIS BUSINESS FORMS INC.
EQUIFAX INC.
CALLAWAY GOLF COMPANY
EL PASO NATURAL GAS COMPANY
ELECTRONIC ARTS INC
ENSCO INC.
EXABYTE CORPORATION
ETHYL CORPORATION
FASTENAL COMPANY
FIRST BRANDS CORP.
FAMILY DOLLAR STORES
FOUNDATION HEALTH CORPORATION
FHP INTERNATIONAL CORP.
FINGERHUT COMPANIES INC.
FISERV INC.
<PAGE> 65
FLOWER INDUSTRIES INC.
FEDERAL MOGUL CORPORATION
FRED MEYER INC.
FIRST OF AMERICA BANK CORPORATION
FERRO CORPORATION
FLORIDA PROGRESS CORPORATION
FRONTIER CORPORATION
FOREST LABORATORIES INC.
FIRST SECURITY CORPORATION
FLIGHTSAFETY INTERNATIONAL INC.
FIRSTAR CORP.
FEDERAL SIGNAL CORPORATION
FIRST TENNESSEE NATIONAL CORP.
H.B. FULLER COMPANY
FIRST VIRGINIA BANKS INC.
GRANITE CONSTRUCTION INCORPORATED
GENZYME CORPORATION
GEORGIA GULF CORP.
GIBSON GREETINGS INC.
GLOBAL MARINE INC.
GLATFELTER, P.H. COMPANY
GATX CORPORATION
GOULDS PUMPS INCORPORATED
GENCORP INC.
HEALTHCARE COMPARE CORP.
HEALTH CARE & RETIREMENT
HARLEY DAVIDSON INC.
HAWAIIAN ELECTRIC INDUSTRIES INC.
HFS INC
HORIZON CMS HEALTHCARE CORP
HIBERNIA CORP
HANCOCK FABRICS INC.
HEILIG MEYERS COMPANY
HON INDUSTRIES INC
HEALTHSOUTH REHABILITATION CORP
HANNAFORD BROTHERS COMPANY
HEALTHSOURCE INC
HARTFORD STEAM BOILER INSPEC AND INS
HARSCO CORPORATION
HOME SHOPPING NETWORK INC.
HOUGHTON MIFFLIN COMPANY
HUBBELL INCORPORATED
IBP INC.
ILLINOIS CENTRAL CORPORATION
IDAHO POWER COMPANY
INTEGRATED DEVICE TECHNOLOGY INC.
INDIANA ENERGY INC.
INFORMIX CORPORATION
IMC GLOBAL INC.
INTERNATIONAL GAME TECHNOLOGY
ILLINOVA CORPORATION HOLDING C
INTERNATIONAL MULTIFOODS CORPORATION
INTERNATIONAL DAIRY QUEEN INC
INTELLIGENT ELECTRONICS INC.
IPALCO ENTERPRISES INC.
INFORMATION RESOURCES INC.
MARK IV INDUSTRIES INC.
IVAX CORPORATION
J.B. HUNT TRANSPORT SERVICES INC.
JACOBS ENGINEERING GROUP INC
JONES APPAREL GROUP INC.
KAYDON CORPORATION
KELLY SERVICES INC.
KEYSTONE INTERNATIONAL INC.
KANSAS CITY POWER & LIGHT
KENNAMETAL INC
QUAKER STATE CORPORATION
KOHLS CORP.
KANSAS CITY SOUTHERN INDUSTRIES
LANCASTER COLONY CORPORATION
LAWTER INTERNATIONAL INC.
LAWSON PRODUCTS INC
LANDS END INC.
LEE ENTERPRISES INCORPORATED
LEGGETT AND PLATT INC
LONGVIEW FIBRE COMPANY
LG AND E ENERGY CORP.
LABORATORY CORP OF AMERICA
LITTON INDUSTRIES INC.
LINEAR TECHNOLOGY CORPORATION
LANCE INC
LOCTITE CORPORATION
LINCOLN TELECOMMUNICATIONS COMPANY
LUKENS INC. DELAWARE HOLDINGS CO.
LYONDELL PETROCHEMICAL COMPANY
LUBRIZOL CORPORATION
MAGNETEK INC.
HANNA, M.A. COMPANY
MANPOWER INC.
MCCORMICK AND COMPANY INCORPORATED
MCKESSON CORPORATION
MCN CORPORATION
MAPCO INC.
MID AMERICAN ENGERGY COMPANY
MEDAPHIS CORP.
MEDIA GENERAL INC.
MENTOR GRAPHICS CORPORATION
MACFRUGALS BARGAINS CLOSE OUTS INC.
MICHAEL FOODS INC.
MIRAGE RESORTS INCORPORATED
HERMAN MILLER INC.
MODINE MANUFACTURING COMPANY
MOLEX INCORPORATED
MINNESOTA POWER AND LIGHT COMPANY
MERCANTILE BANKSHARES CORPORATION
MARSHALL AND ILSLEY CORPORATION
MERCANTILE BANCORPORATION INC.
MONTANA POWER COMPANY
MINERALS TECHNOLOGY INC.
MURPHY OIL CORPORATION
MICROWAREHOUSE INC
MEASUREX CORPORATION
MAXIM INTEGRATED PRODUCTS
MAXXAM INC.
MYLAN LABORATORIES INC.
NOBLE AFFILIATES INC.
NABORS INDUSTRIES INC.
NCH CORPORATION
NORDSON CORPORATION
NELLCOR INCORPORATED
NEW ENGLAND ELECTRIC SYSTEM
NATIONAL FUEL GAS COMPANY
NEW YORK STATE ELECTRIC AND GAS
NIPSCO INDUSTRIES INC.
NINE WEST
NOVACARE INC.
NATIONAL PRESTO INDUSTRIES INC.
NORTHERN TRUST CORPORATION
NORTHEAST UTILITIES
NEVADA POWER COMPANY
OCTEL COMMUNICATIONS CORP.
OFFICE DEPOT INC.
OEA INC.
OKLAHOMA GAS AND ELECTRIC COMPANY
OLIN CORPORATION
<PAGE> 66
OLSTEN CORPORATION
OMNICOM GROUP INC.
OREGON STEEL MILLS INC.
OVERSEAS SHIPHOLDING GROUP INC.
OUTBACK STEAKHOUSE
PAYCHEX INC.
PRECISION CASTPARTS CORPORATION
PARKER AND PARSLEY PETROLEUM COMPANY
PORTLAND GENERAL CORP. HOLDING CO.
PROGRESSIVE CORPORATION
PHH GROUP INC.
PACIFIC HEALTHCARE SYSTEMS
PARKER DRILLING COMPANY
POLICY MANAGEMENT SYSTEMS CORP.
PARAMETRIC TECHNOLOGY CORPORATION
PUBLIC SERVICE COMPANY OF NEW MEXICO
PENTAIR INC.
PINNACLE WEST CAPITAL CORPORATION
POTOMAC ELECTRIC POWER COMPANY
PERRIGO COMPANY
PROMUS HOTEL CORPORATION
PUGET SOUND POWER AND LIGHT CO.
PUBLIC SERVICE COMPANY OF COLORADO
PROVIDENT LIFE & ACCIDENT INS CLASS B
PAINE WEBBER GROUP INC.
PITTSON BRINKS GROUP
QUANTUM CORPORATION
RUDDICK CORPORATION
ROLLINS ENVIRONMENTAL SERVICES INC.
REYNOLDS AND REYNOLDS COMPANY
REGIONS FINANCIAL CORP
RANGER OIL LIMITED
ROHR INDUSTRIES INC.
ROLLINS INC.
RPM INCORPORATED
REVCO DS INC.
RAYONIER INC.
SUNAMERICA INC.
SBARRO INCORPORATED
SYMBOL TECHNOLOGIES INC.
SCANA CORPORATION HOLDING COMPANY
CHARLES SCHWAB CORPORATION
SCHOLASTIC CORP
STRUCTURAL DYNAMICS RESEARCH CORP.
SOUTHDOWN INCORPORATED
SEALED AIR CORPORATION
SEGATE TECHNOLOGY INC.
SAVANNAH FOOD INC.
SEAGULL ENERGY CORPORATION
A. SCHULMAN INC.
RP SCHERER CORP
SHAW INDUSTRIES INC.
SMITH INTERNATIONAL INC.
J.M. SMUCKER COMPANY
SOLECTRON CORP
SERVICE MERCHANDISE COMPANY INC.
SOUTHERN NEW ENGLAND TELECOMMUN CORP.
SUNDSTRAND CORPORATION
SONOCO PRODUCTS
SOUTHTRUST CORPORATION
STAPLES INC.
SOUTHWESTERN PUBLIC SERVICE COMPANY
SEQUA CORPORATION, CLASS A
SEQUENT COMPUTER SYSTEMS INC.
STRATUS COMPUTER INC.
STANDARD REGISTER COMPANY
SENSORMATIC ELECTRONICS CORPORATION
STEWART AND STEVENSON SERVICES INC.
LONE STAR STEAKHOUSE
STANHOME INCORPORATED
STORAGE TECHNOLOGY CORPORATION
QUESTAR CORP HOLDING CO
STRATACOM INC
STRYKER CORPORATION
STATE STREET BOSTON CORP.
STERLING CHEMICALS
SUMMIT BANK CORP
SUPERIOR INDUSTRIES INTERNATIONAL
SYMANTEC CORPORATION
TCA CABLE TV INCORPORATED
TELEPHONE AND DATA SYSTEMS INC.
TIDEWATER INC.
TECO ENERGY INC.
<PAGE> 67
TECUMSEH PRODUCTS CO.
TERADYNE INC.
TELEFLEX INCORPORATED
TIFFANY AND COMPANY
THIOKOL CORPORATION
TAMBRANDS INC.
THERMO ELECTRON CORPORATION
TOPPS COMPANY INC.
TOSCO CORPORATION
TRANSATLANTIC HOLDINGS INC.
TRINITY INDUSTRIES INC.
T. ROWE PRICE ASSOCIATES INC.
TYSON FOODS INC
UTILICORP UNITED INC.
UNIVERSAL FOODS CORPORATION
UNIFI INCORPORATED
U.S. ROBOTICS
UNIVERSAL CORPORATION HOLDING CO.
VARIAN ASSOCIATES INC.
VENCOR INC.
VANGUARD CELLULAR SYSTEMS INC.
VERIFONE INC.
VALUE HEALTH INC.
VIKING OFFICE PRODUCTS
VALERO ENERGY CORPORATION
VULCAN MATERIALS COMPANY
VONS COMPANIES INC.
VARCO INTERNATIONAL INC.
VISHAY INTERTECHNOLOGY
WARNACO GROUP INC.
WATSON PHARMACEUTICALS
WABAN INC.
WALLACE COMPUTER SERVICES INC.
WISCONSIN ENERGY CORP. HOLDING CO.
WASHINGTON GAS LIGHT COMPANY
WEATHERFORD INTERNATIONAL INC
WILMINGTON TRUST CORPORATION
WITCO CORPORATION
WELLMAN INC.
WESTERN PUBLISHING GROUP INC.
WPL HOLDINGS INC.
WASHINGTON POST COMPANY
WAUSAU PAPER MILLS COMPANY
WATTS INDUSTRIES
XILINX INC.
360 COMMUNICATIONS COMPANY
DENTSPLY INTERNATIONAL INC.
YORK INTERNATIONAL CORPORATION
<PAGE> 68
SCHEDULE C
----------
Stocks included in the Wilshire 250 Index
-----------------------------------------
ALEX BROWN INCORPORATED
AIRBORNE FREIGHT CORPORATION
AMERICAN BANKERS INSURANCE GROUP INC
ACUSON CORPORATION
ACX TECHNOLOGIES INC.
ANGELICA CORPORATION
ALBANY INTERNATIONAL CORP. CL. A
ARNOLD INDUSTRIES INC.
ACCLAIM ENTERTAINMENT
AK STEEL HOLDING CORP
ALASKA AIR GROUP INC.
ALLWASTE INC.
AMETEK INC
ARGOSY GAMING COMPANY
ARVIN INDUSTRIES INC.
ASTORIA FINANCIAL CORP
AST RESEARCH INC.
AMSCO INTERNATIONAL INC.
ADVANCED TISSUE SCIENCES INC.
ADVANCED TECHNOLOGY LABORATORIES INC
A.T. CROSS COMPANY
AURA SYSTEMS INC.
AVID TECHNOLOGY INC.
AIR AND WATER TECHNOLOGIES CORP.
BED BATH & BEYOND
BERGEN BRUNSWIG CORPORATION
SUMMIT TECHNOLOGY INC.
BECKMAN INSTRUMENTS INC.
BELL BANCORP
BALDOR ELECTRIC COMPANY
BROWN GROUP INC.
SOTHEBY'S HOLDINGS, INC. (CLASS A)
BIRMINGHAM STEEL CORPORATION
BJ SERVICES COMPANY
BLAIR CORPORATION
BLOCK DRUG COMPANY
BALLARD MEDICAL PRODUCTS
BANTA CORP.
BASSETT FURNITURE INDUSTRIES INC
BRUSH WELLMAN INC.
BWIP HOLDING INC. CL A
CATO CORPORATION
CAL FED BANCORP INC HOLDING CO
COMPASS BANCSHARES
CALGON CARBON CORP.
CHRIS CRAFT INDUSTRIES INC.
COMDISCO INC.
CATELLUS DEVELOPMENT CORPORATION
CEPHALON INC.
CILCORP INC HOLDING COMPANY
CHEMED CORPORATION
CHARMING SHOPPES INC.
CLARCOR INC.
CREDENCE SYSTEMS CORP
CINCINNATI MILACRON INC.
CENTRAL HUDSON GAS AND ELECTRIC CORP
CENTOCOR INC.
CONE MILLS CORP.
COLLECTIVE BANCORP, INC.
COMPUSA INC.
CHIQUITA BRANDS INTL INC
CARPENTER TECHNOLOGY CORPORATION
CHESAPEAKE CORPORATION
CARLISLE COMPANIES INC. HOLDING CO.
CENTEX CORPORATION
CHEYENNE SOFTWARE INC.
CITY NATIONAL CORPORATION
CYRIX CORP
DAUPHIN DEPOSIT CORPORATION
DRESS BARN INC.
DONALDSON COMPANY INC.
DUTY FREE INTERNATIONAL INC.
DATA GENERAL CORPORATION
DIAGNOSTIC PRODUCTS CORPORATION
DREYERS GRAND ICE CREAM INC.
EAGLE HARDWARE AND GARDEN INC.
ELECTRONICS FOR IMAGING
EASTERN UTILITIES ASSOCIATES
EXABYTE CORPORATION
FIRST AMERICAN CORP. OF TENNESSEE
FIRST COMMERCE CORP OF NEW ORLEANS
<PAGE> 69
FLOWER INDUSTRIES INC.
FEDERAL MOGUL CORPORATION
FRED MEYER INC.
FOREMOST CORP OF AMERICA
FORE SYSTEMS INC.
FOXMEYER HEALTH CORP
FTP SOFTWARE INC.
H.B. FULLER COMPANY
GAYLORD CONT CLA
GIBSON GREETINGS INC.
GIDDINGS AND LEWIS INC. DEP SHRS
GILEAD SCIENCES
GLOBAL MARINE INC.
GLENDALE FEDERAL BANK
GRAND CASINOS INC.
OSHKOSH B GOSH INC.
GEOTEK COMMUNICATIONS INC.
GERBER SCIENTIFIC INC.
GREAT FINANCIAL CORP.
GOULDS PUMPS INCORPORATED
GLOBAL VILLAGE COMMUNICATIONS
GENCORP INC.
HAEMONETICS CORPORATION
HANDLEMAN COMPANY
HERBALIFE INT'L INC.
HECLA MINING COMPANY
HANDY AND HARMAN
HOME FINANCIAL CORP DEL H
HON INDUSTRIES INC
HOME SHOPPING NETWORK INC.
HOUGHTON MIFFLIN COMPANY
INTERSTATE BAKERIES CORPORATION
INTERNATIONAL CABLETEL
IES INDUSTRIES INC.
INTEGRATED HEALTH SERVICES
INTERNATIONAL MULTIFOODS CORPORATION
INTEGON CORPORATION
INTERNATIONAL DAIRY QUEEN INC
INTELLIGENT ELECTRONICS INC.
INFORMATION RESOURCES INC.
JOHN ALDEN FINANCIAL CORP
J.B. HUNT TRANSPORT SERVICES INC.
JONES APPAREL GROUP INC.
KAMAN CORPORATION
KIMBALL INTERNATIONAL INC
KAUFMAN AND BROAD HOME CORP.
KEMET CORP
KENNAMETAL INC
QUAKER STATE CORPORATION
KELLWOOD COMPANY
LAWTER INTERNATIONAL INC.
LAWSON PRODUCTS INC
LIBERTY CORPORATION
LCI INTERNATIONAL INC.
LANDS END INC.
LENNAR CORPORATION
LONG ISLAND BANCORP
LINCARE HOLDINGS, INC.
LIFE PARTNERS GROUP INC.
LIFE RE CORPORATION
LATTICE SEMICONDUCTOR
LUBYS CAFETERIAS INC.
LIFE USA HOLDING, INC.
LA Z BOY CHAIR COMPANY
MACROMEDIA INC.
MAGNA GROUP INC.
MEDIC COMPUTER SYSTEM INC.
MDU RESOURCES GROUP INC.
MACFRUGALS BARGAINS CLOSE OUTS INC.
MICHAEL FOODS INC.
MID ATLANTIC MEDICAL SERVICES
MERISEL, INC.
MIDWEST GRAIN PRODUCTS INC.
MEASUREX CORPORATION
MAXXAM INC.
NORAM ENERGY CORP.
NABORS INDUSTRIES INC.
NACCO INDUSTRIES INC HOLDING CO CL A
NCH CORPORATION
NEW ENGLAND BUSINESS SERVICE INC.
NETWORK GENERAL
NETMANAGE INC.
NAC RE CORP
OCTEL COMMUNICATIONS CORP.
ONEOK INC.
OMI CORPORATION
ONBANCORP
ORANGE AND ROCKLAND UTILITIES INC.
OVERSEAS SHIPHOLDING GROUP INC.
PEOPLES BK BRIDGEPORT
<PAGE> 70
PEGASUS GOLD INC.
PHH GROUP INC.
PULTE CORPORATION
PETROLITE CORPORATION
PUBLIC SERVICE COMPANY OF NEW MEXICO
PENTAIR INC.
POGO PRODUCING COMPANY
PERRIGO COMPANY
PRESSTEK INC
PULITZER PUBLISHING CO.
PYXIS CORPORATION
PITTSON BRINKS GROUP
QUANTUM CORPORATION
RALCORP HOLDINGS INC.
ROWAN COMPANIES INC.
RELIANCE GROUP HOLDINGS INC.
ROOSEVELT FINANCIAL GROUP
RUBY TUESDAY INC
RIGS NATIONAL CORP WASHINGTON
ROLLINS TRUCK LEASING CORP.
ROLLINS INC.
ROSS STORES INC.
RUSS BERRIE AND COMPANY INC.
SBARRO INCORPORATED
SYMBOL TECHNOLOGIES INC.
STARBUCKS CORPORATION
SCI SYSTEMS INC.
STRUCTURAL DYNAMICS RESEARCH CORP.
SOUTHDOWN INCORPORATED
STANDARD FEDERAL BANCORPORATION INC. HOLDING CO.
SAVANNAH FOOD INC.
SEAFIELD CAPITAL CORP.
SEAGULL ENERGY CORPORATION
SHOREWOOD PACKAGING CORP.
SIGCORP INC HOLDING CO
SMITH INTERNATIONAL INC.
S3 INC.
SHARED MEDICAL SYSTEMS CORPORATION
STANDARD PRODUCTS COMPANY
SEQUENT COMPUTER SYSTEMS INC.
STANDARD REGISTER COMPANY
SIERRA PACIFIC RESOURCES HOLDING CO.
SUNSHINE MINING COMPANY
STANHOME INCORPORATED
STERLING CHEMICALS
SUPERIOR INDUSTRIES INTERNATIONAL
SILICON VALLEY GROUP INC.
SOUTHWESTERN ENERGY COMPANY
SOUTHWEST GAS CORPORATION
SYMANTEC CORPORATION
SIZZLER INTERNATIONAL INC.
TCA CABLE TV INCORPORATED
TUCSON ELECTRIC POWER COMPANY
TELEFLEX INCORPORATED
THIOKOL CORPORATION
T. ROWE PRICE ASSOCIATES INC.
TULTEX CORPORATION
20TH CENTURY INDS CAL
UNITED COS FINANCIAL CORP
UGI CORPORATION
US LONG DISTANCE CORP
VANGUARD CELLULAR SYSTEMS INC.
VERIFONE INC.
VLSI TECHNOLOGY, INC.
VALLEY NATIONAL BANCORP
VENTRITEX INC.
WALLACE COMPUTER SERVICES INC.
WESTERN DIGITAL, CORP
WASHINGTON ENERGY COMPANY
WESTERN NATIONAL CORP.
WASHINGTON NATIONAL CORPORATION
WESTERN PUBLISHING GROUP INC.
WESTPOINT STEVENS INC.
WAUSAU PAPER MILLS COMPANY
WEST COMPANY INCORPORATED
DENTSPLY INTERNATIONAL INC.
YELLOW FREIGHT SYSTEM INC
ZENITH NATIONAL INSURANCE CORP
ZURN INDUSTRIES INC.
<PAGE> 71
SCHEDULE D
The beta measurements used in the Combined Prospectus were calculated by using
MicroSoft Excel spreadsheets and the statistical function slope available in
MicroSoft Excel. The SLOPE function returns the slope of the linear regression
line through data points in known y's and known x's. The slope is the vertical
distance divided by the horizontal distance between any two points on the line,
which is the rate of change along the regression line.
The equation for beta (slope) is shown below.
Beta equals n[SIGMA]xy - ([SIGMA]x)([SIGMA]y)
n[SIGMA]x(2) - ([SIGMA]x)(2)
Where
y equals the Fund's monthly total returns in the period
x equals= the Index's monthly total returns in the period
Page 44
<PAGE> 72
- -----------------------------------------------
MEMBER OF
===============================================
100% NO-LOAD(TM) MUTUAL FUND COUNCIL
===============================================
[THE GATEWAY TRUST LOGO]
P.O. BOX 5211
CINCINNATI, OH 45201-5211
(800) 354-6339
- -----------------------------------------------
[STATUE OF LIBERTY GRAPHIC]
GATEWAY
INDEX PLUS FUND
===================
ANNUAL REPORT
1995
- -----------------------------------------------
<PAGE> 73
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Highlights at December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
------------------------------------
Past One Three Five Ten Inception Dividends Price
Quarter Year Years Years Years Date Year to Date Per Share
------- ---- ----- ----- ----- ---- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gateway Index Plus 2.35% 11.04% 7.98% 9.29% 10.10% 12/7/77 $0.269 $16.91
S&P 500 6.02 37.58 15.34 16.59 14.83
Lehman Gov't/Corp. Bond 4.66 19.24 8.51 9.80 9.65
U. S. Inflation (CPI) 0.26 2.61 2.68 2.80 3.47
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-------------------------------------
Past One Three Five Ten
Quarter Year Years Years Years
------- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Gateway Index Plus 2.35% 11.04% 25.90% 55.93% 161.63%
S&P 500 6.02 37.58 53.44 115.45 298.76
Lehman Gov't/Corp. Bond 4.66 19.24 27.77 59.62 151.28
U. S. Inflation (CPI) 0.26 2.61 8.25 14.80 40.61
</TABLE>
Performance data represents past performance and your investment return and
principal value of an investment will fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost.
1
<PAGE> 74
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Co-Portfolio Managers' Report
- --------------------------------------------------------------------------------
The objective of the Index Plus Fund is to produce a unique balance between risk
and reward. Our goal over a complete market cycle is to provide investors with a
competitive return at less than one-half the risk of the stock market. In fact,
the Fund's risk profile, as measured by standard deviation, is similar to an
intermediate bond portfolio.
We have been able to achieve this unique risk/reward profile over the long-term
by adhering to an investment philosophy that has been in place at Gateway since
1977. Although our objectives were met in 1995, the Fund did not produce a total
return comparable to the more aggressive funds during such an extraordinary and
explosive year for stocks and bonds.
The Gateway Index Plus Fund's total return for the twelve months ended December
31, 1995, was 11.04%. This compares to 5.72% for 90-day Treasury bills, 19.24%
for the Lehman Government/Corporate Bond Index and 37.58% for the Standard and
Poor's 500 Stock Index.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
1995
- -------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 9.55% 10.31% 7.31% 5.44%
Dividends Earned 0.71 0.65 0.58 0.59
INTEREST EARNED 0.03 0.06 0.04 0.04
CONTRIBUTIONS OF OPTIONS
Effect of Options: Calls (5.77) (8.23) (4.46) (3.02)
Effect of Options: Puts 0.00 (0.59) (0.93) (0.39)
EFFECT OF FEES
Fund Expenses (0.31) (0.30) (0.29) (0.29)
Brokerage Commissions (0.01) (0.03) (0.04) (0.02)
- -------------------------------------------------------------------------------
TOTAL RETURN 4.20% 1.87% 2.21% 2.35%
- -------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 75
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Co-Portfolio Managers' Report
- --------------------------------------------------------------------------------
The table on page 2 analyzes the different components of the Fund's total return
for each quarter of 1995. We present the same information for each of the
preceding five years below. The interplay between these components (when stocks
are up, call options are down and vice versa) creates our unique low-risk
profile.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
- --------------------------------------------------------------------------------
1990 1991 1992 1993 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks (5.74)% 24.18% 2.87% 8.27% (0.19)%
Dividends Earned 3.63 3.25 2.90 2.51 2.80
INTEREST EARNED 0.29 0.33 0.19 0.07 0.03
CONTRIBUTIONS OF OPTIONS
Effect of Options: Calls 8.85 (7.66) 4.24 1.48 4.19
Effect of Options: Puts 4.94 (0.72) (3.58) (3.68) 0.00
EFFECT OF FEES
Fund Expenses (1.33) (1.22) (1.11) (1.11) (1.21)
Brokerage Commissions (0.32) (0.36) (0.36) (0.14) (0.05)
- --------------------------------------------------------------------------------
TOTAL RETURN 10.32% 17.80% 5.15% 7.40% 5.57%
- --------------------------------------------------------------------------------
</TABLE>
STOCKS: The year 1995 witnessed the strongest stock market rally since 1975! The
Index Plus Fund's stock portfolio fully participated in this outstanding rally
by appreciating at least 5% in each quarter. Our large capitalization, blue chip
portfolio of one hundred stocks fully benefited from excellent corporate
earnings growth, a decline in long-term interest rates, and a strong overseas
demand for U. S. goods.
DIVIDENDS EARNED: The dividend yield on our portfolio averaged 2.50% for the
year. This is the lowest yield for a major index for quite some time and is
indicative of the strength of the current rally in stocks.
3
<PAGE> 76
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Co-Portfolio Managers' Report
- --------------------------------------------------------------------------------
INTEREST EARNED: Since our objective is to stay fully invested, we do not
maintain significant cash balances. As such, the Fund earns a minimal amount of
interest.
EFFECT OF CALL OPTIONS: In conjunction with maintaining a fully invested
position in stocks, the Fund always sells index call options. The selling of
these options provides cash flow into the Fund. This annualized cash flow has
fluctuated from a high of 19% in 1988 to a low of 9% in 1993 and 1994. In
exchange for last year's option premium cash flow of approximately 12%, the Fund
sold the upside potential of its stocks. In down, flat, or moderately rising
markets (less than 12% annualized), the call options should add to the Fund's
performance as they did in 1990, 1992, 1993 and 1994. If stock prices rise
rapidly, as they did during 1991 and 1995, the Fund may have to buy back the
call options at prices higher than their original cost. This inverse price
relationship between call options and common stocks produces our lower level of
risk.
EFFECT OF PUT OPTIONS: Put options act like insurance on your home -- they serve
as protection against a sudden decline in the value of an asset. We purchase put
options in the Fund when we believe the probability of a "soft market" has
increased. On May 31, we purchased put options for the first time in two years
and maintained a position in puts for the remainder of 1995. Since a decline did
not occur in the market, the cost of our "protection" was 1.91%.
BROKERAGE COMMISSIONS: The Fund has extremely low turnover because we "index"
the portfolio of stocks. A great benefit of this "buy-and-hold" strategy is low
commission costs.
4
<PAGE> 77
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Co-Portfolio Managers' Report
- --------------------------------------------------------------------------------
FUND EXPENSES: Like all mutual funds, the Fund must incur expenses to conduct
business. These expenses range from investment management fees to custodial
charges to independent accounting fees. Fund expenses in 1995 were 1.19%, which
is in line with our historical expense ratio.
We have included a risk/reward chart on the back of this Annual Report to
illustrate the merits of the Index Plus Fund. As always, we appreciate your
support and confidence and look forward to many rewarding years.
/s/ J. Patrick Rogers
J. Patrick Rogers, CFA
Co-Portfolio Manager
/s/ Peter W. Thayer
Peter W. Thayer, CFA
Co-Portfolio Manager
5
<PAGE> 78
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- --------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 12.77%
18,000 American Electric Power Co. $ 729,000
50,900 Ameritech 3,003,100
145,800 AT&T Corporation 9,440,550
40,100 Bell Atlantic Corp. 2,681,688
22,000 Entergy Corp. 643,500
62,300 MCI Communications Corp. 1,627,588
39,300 Nynex Corporation 2,122,200
64,300 Southern Co. 1,583,388
20,700 UNICOM Corp. 677,925
-----------
22,508,939
-----------
ENERGY 12.54%
45,600 Amoco Corp. 3,266,100
15,500 Atlantic Richfield Co. 1,716,625
13,600 Baker Hughes, Inc. 331,500
10,100 Coastal Corp. 376,225
114,200 Exxon Corp. 9,150,275
11,000 Halliburton Co. 556,875
36,400 Mobil Corp. 4,067,700
30,700 Occidental Petroleum Corp. 656,213
22,200 Schlumberger Ltd. 1,537,350
9,900 Williams Companies 434,363
-----------
22,093,226
-----------
FINANCE 9.09%
44,800 American Express 1,859,200
19,800 American General Corp. 690,525
43,650 American International Group, Inc. 4,037,625
34,400 BankAmerica Corp. 2,227,400
7,000 CIGNA Corp. 722,750
38,400 Citicorp 2,582,400
15,747 First Chicago NBD Corp. 622,007
7,700 First Fidelity Bancorporation 580,388
7,300 First Interstate Bancorp 996,450
13,100 Great Western Financial Corp. 332,413
10,500 ITT Hartford Group Inc. * 507,938
17,000 Merrill Lynch & Co. 867,000
-----------
16,026,096
-----------
</TABLE>
See accompanying notes to financial statements 6
<PAGE> 79
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
- --------------------------------------------------------------------------------
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- --------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL CYCLICALS 18.23%
17,200 Aluminum Company of America $ 909,450
10,700 Bethlehem Steel Corporation * 149,800
8,300 Black & Decker Manufacturing Corp. 292,575
31,500 Boeing Company 2,468,813
4,600 Boise Cascade Corp. 159,275
9,300 Brunswick Corp. 223,200
9,300 Champion International 390,600
24,700 Dow Chemical Company 1,735,175
51,000 DuPont E.I. de Nemours 3,563,625
31,400 Eastman Kodak Company 2,103,800
8,000 Fluor Corp. 528,000
6,100 General Dynamics Corp. 360,663
47,000 Hewlett Packard Company 3,936,250
13,300 Homestake Mining Corp. 207,813
52,300 International Business Machines Corp. 4,772,375
10,800 International Flavors & Fragrances, Inc. 518,400
24,600 International Paper 931,725
38,600 Minnesota Mining and Manufacturing 2,557,250
11,100 Monsanto Company 1,359,750
4,400 Polaroid Corp. 208,450
21,000 Rockwell International Corp. 1,110,375
5,400 Teledyne, Inc. 138,375
16,600 Unisys Corp. * 93,375
11,900 United Technologies Corp. 1,129,013
19,600 Weyerhauser Co. 847,700
10,400 Xerox Corp. 1,424,800
-----------
32,120,627
-----------
CONSUMER DURABLES 4.80%
36,700 Chrysler Corporation 2,023,088
97,000 Ford Motor Company 2,800,875
68,700 General Motors Corp. 3,632,513
-----------
8,456,476
-----------
</TABLE>
7 See accompanying notes to financial statements
<PAGE> 80
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- --------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER STAPLES 9.04%
6,000 Avon Products, Inc. $ 497,475
115,900 Coca-Cola Co. 8,605,575
14,100 Colgate Palmolive Company 990,525
35,300 Heinz (H. J.) Co. 1,164,900
72,400 PepsiCo, Inc. 4,045,350
10,100 Ralston Purina Co. 629,988
-----------
15,933,813
-----------
SERVICES 5.77%
9,200 Burlington Northern, Inc. 717,600
14,100 Capital Cities/ABC 1,739,588
4,900 Delta Air Lines, Inc. 361,988
5,400 Federal Express * 398,925
9,900 Harrah's Entertainment, Inc. * 240,075
63,900 McDonald's Corp. 2,883,488
12,700 Norfolk Southern Corp. 1,008,063
47,900 Walt Disney Productions 2,826,100
----------
10,175,827
----------
RETAIL 5.07%
44,300 K-Mart Corp. * 315,638
24,000 May Department Stores Company 1,011,000
37,600 Sears, Roebuck & Company 1,466,400
6,300 Tandy Corp. 261,450
34,500 The Limited, Inc. 595,125
26,700 Toys R Us * 580,725
211,200 Wal-Mart Stores, Inc. 4,699,200
----------
8,929,538
----------
HEALTH 10.74%
26,700 Baxter International 1,118,063
46,600 Bristol-Myers Squibb Company 4,001,761
59,300 Johnson & Johnson 5,077,563
7,400 Mallinckrodt Group, Inc. 269,175
113,700 Merck & Company 7,461,563
25,665 Pharmacia & Upjohn 994,519
-----------
18,922,644
-----------
</TABLE>
See accompanying notes to financial statements 8
<PAGE> 81
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 12.55%
20,900 AMP, Inc. $ 802,038
4,400 Ceridian Corporation * 181,500
5,400 Computer Sciences Corp. * 379,350
14,200 Digital Equipment Corp. * 908,800
155,700 General Electric Company 11,210,400
3,800 Harris Corp. 207,575
12,300 Honeywell, Inc. 598,088
75,700 Intel Corporation 4,295,975
11,900 National Semiconductor Corp. * 264,775
24,500 Northern Telecom Ltd. 1,053,500
23,600 Raytheon Company 1,115,100
3,200 Tekronix, Inc. 157,200
18,200 Texas Instruments, Inc. 937,300
------------
22,111,601
------------
TOTAL COMMON STOCKS 100.60% 177,278,787
------------
(cost $126,956,161)
</TABLE>
9 See accompanying notes to financial statements
<PAGE> 82
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contracts Value
- -------------------------------------------------------------------------------------------
<S> <C> <C>
PUT OPTIONS ON THE STANDARD & POOR'S 100 STOCK INDEX
750 expiring January 19, 1996 at 540 $ 44,550
275 expiring January 19, 1996 at 530 11,172
500 expiring February 16, 1996 at 530 54,700
------------
TOTAL PUT OPTIONS OUTSTANDING 0.06% 110,422
(cost $537,213)
REPURCHASE AGREEMENT 2.36%
5.3% repurchase agreement dated December 29, 1995 with Star
Bank, N.A., due January 2, 1996 (repurchase proceeds
$4,156,446), collateralized by $4,380,000 6% GNMA Pool
#8974, maturity May 20, 2022
(market value $4,486,763) 4,154,000
------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 103.02% 181,543,209
------------
CALL OPTIONS ON THE STANDARD & POOR'S 100 STOCK INDEX **
(250) expiring January 19, 1996 at 550 (931,250)
(738) expiring January 19, 1996 at 560 (2,075,623)
(194) expiring January 19, 1996 at 565 (452,263)
(245) expiring January 19, 1996 at 570 (462,438)
(309) expiring January 19, 1996 at 575 (448,050)
(170) expiring January 19, 1996 at 580 (179,563)
(193) expiring February 16, 1996 at 570 (429,425)
(580) expiring February 16, 1996 at 580 (855,500)
(365) expiring February 16, 1996 at 585 (415,188)
------------
TOTAL CALL OPTIONS OUTSTANDING (3.55%) (6,249,300)
(premiums received $5,616,247)
OTHER ASSETS AND LIABILITIES, NET 0.53% 925,743
------------
NET ASSETS 100% $176,219,652
============
<FN>
* Denotes a non-income producing security.
** The aggregate value of investments that covers
outstanding call options is $177,278,787.
</TABLE>
See accompanying notes to financial statements 10
<PAGE> 83
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Statement of Assets and Liabilities - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $126,956,161) $177,278,787
Put options, at value (original cost $537,213) 110,422
Repurchase agreement 4,154,000
Receivable for investments sold 790,571
Dividends receivable 369,344
Receivable for fund shares sold 43,850
Cash 682
Other assets 31,376
------------
182,779,032
------------
LIABILITIES:
Call options outstanding, at value
(premiums received $5,616,247) 6,249,300
Payable for fund shares redeemed 164,119
Dividends payable to shareholders 52,277
Payable to affiliate 17,153
Other accrued expenses and liabilities 76,531
------------
6,559,380
------------
NET ASSETS $176,219,652
============
NET ASSETS CONSIST OF:
Paid-in capital applicable to 10,422,971 shares outstanding
(unlimited number of shares authorized, no par value) $151,488,652
Accumulated realized loss, net (24,531,782)
Unrealized appreciation, net 49,262,782
------------
$176,219,652
============
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 16.91
============
</TABLE>
11 See accompanying notes to financial statements
<PAGE> 84
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Statement of Operations - For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 4,388,712
Interest income 321,240
------------
4,709,952
------------
EXPENSES:
Investment advisory and management fees 1,246,576
Transfer agent and accounting fees 396,964
Reports to shareholders 175,000
Professional fees 90,242
Trustees' fees 31,663
Registration fees 24,487
Custodian fees 16,792
Other expenses 101,852
------------
2,083,576
------------
NET INVESTMENT INCOME 2,626,376
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 13,607,602
Call options expired and closed (34,440,957)
Put options expired and closed (2,292,863)
------------
Net realized loss on investments (23,126,218)
------------
Change in unrealized appreciation (depreciation) of investments:
Securities 41,052,518
Call options (1,996,631)
Put options (426,791)
------------
Change in net unrealized appreciation (depreciation) of investments 38,629,096
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 15,502,878
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 18,129,254
============
</TABLE>
See accompanying notes to financial statements 12
<PAGE> 85
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------- --------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 2,626,376 $ 2,757,888
Net realized gain (loss) on investments (23,126,218) 9,434,982
Change in unrealized appreciation (depreciation) of investments 38,629,096 (2,993,130)
------------ ------------
Net increase in net assets resulting from operations 18,129,254 9,199,740
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,626,376) (2,880,615)
From net realized gain on investments -- (8,568,083)
In excess of realized gains on investments (249,721) (1,155,843)
------------ ------------
Decrease in net assets from dividends and distributions (2,876,097) (12,604,541)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 38,274,968 42,407,019
Net asset value of shares issued in reinvestment of
dividends and distributions 2,637,064 11,563,076
Payments for shares redeemed (44,596,352) (93,090,250)
------------ ------------
Net decrease in net assets from fund share transactions (3,684,320) (39,120,155)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS 11,568,837 (42,524,956)
NET ASSETS:
Beginning of period 164,650,815 207,175,771
------------ ------------
End of period $176,219,652 $164,650,815
============ ============
FUND SHARE TRANSACTIONS:
Shares sold 2,357,484 2,665,993
Shares issued in reinvestment of dividends and distributions 160,498 745,445
Less shares redeemed (2,733,507) (5,841,163)
------------ -------------
NET DECREASE IN SHARES OUTSTANDING (215,525) (2,429,725)
============ =============
</TABLE>
13 See accompanying notes to financial statements
<PAGE> 86
- --------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1995 (1) 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.48 $ 15.85 $ 15.51 $ 15.24 $ 13.64
------- ------- ------- ------- -------
Net investment income 0.24 0.26 0.26 0.27 0.31
Net gains on securities 1.46 0.61 0.88 0.51 2.10
------- ------- ------- ------- -------
Total from investment operations 1.70 0.87 1.14 0.78 2.41
------- ------- ------- ------- -------
Dividends from net investment income (0.24) (0.27) (0.26) (0.28) (0.30)
Distributions from capital gains (0.00) (0.86) (0.47) (0.23) (0.51)
Distributions in excess of realized capital gains (0.03) (0.11) (0.07) 0.00 0.00
------- ------- ------- ------- -------
Total distributions (0.27) (1.24) (0.80) (0.51) (0.81)
------- ------- ------- ------- -------
Net asset value, end of period $ 16.91 $ 15.48 $ 15.85 $ 15.51 $ 15.24
======= ======= ======= ======= =======
TOTAL RETURN 11.04% 5.57% 7.40% 5.15% 17.80%
Net assets, end of period (millions) $176.22 $164.65 $207.18 $212.95 $ 81.37
Ratio of expenses to average net assets 1.19% 1.21% 1.11% 1.11% 1.22%
Ratio of net investment income to average net 1.51% 1.54% 1.58% 1.96% 2.17%
assets
Portfolio turnover rate 5% 4% 17% 15% 31%
<FN>
(1) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser of the Fund.
</TABLE>
See accompanying notes to financial statements 14
<PAGE> 87
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of four no-load diversified mutual
funds. The financial statements of Gateway Index Plus Fund (Index or the Fund)
are included in this report. Gateway Mid Cap Index Fund, Gateway Small Cap Index
Fund and the Cincinnati Fund are included in separate annual reports. The Trust
is registered under the Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION - Index normally values common stocks traded on national
exchanges or markets at the last sale price on each trading day. Option
contracts (both purchased and written) are normally valued at the average of the
closing bid and asked quotations. Other securities (including over-the-counter
written call options) for which market quotations are not readily available are
valued at fair value as determined in good faith under procedures adopted by the
board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES - Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies set by the
board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS - Dividends from net
investment income are recorded on the ex-dividend date and are declared and paid
quarterly. Net realized capital gains, if any, are distributed to shareholders
in December.
FEDERAL INCOME TAXES - The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all of its taxable income to
shareholders. Based on this policy, the Fund makes no provision for income
taxes. The cost of investments is the same for financial reporting and tax
purposes. Tax regulations require the Fund to assume that open option contracts
are closed each year end and include the resulting calculated capital gain or
loss in the determination of federal taxable income. The Fund has a net capital
loss carryforward of $25,549,652 that expires in 2003.
REPURCHASE AGREEMENTS - The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
2. TRANSACTIONS WITH AFFILIATES
Gateway Investment Advisers, Inc. (GIA) was the investment adviser of the Fund
prior to December 15, 1995. On December 15, 1995, the advisory contract between
the Fund and GIA terminated, and a new contract was entered into with the
Adviser. There were no changes in the advisory fee, or the computation thereof,
as a result of the new contract. Index pays the Adviser a monthly management fee
computed at an annual rate of 0.90% of the first $50 million of the average
daily net assets of the Fund, 0.70% of the next $50 million and 0.60% of all
such assets over $100 million.
15
<PAGE> 88
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions and expenses of an extraordinary nature) exceed 1.50% of the average
daily net assets, the Adviser has agreed to reduce its fee as necessary to limit
the Fund's expenses to that level.
The Adviser maintains the Fund's accounting records for a monthly fee of $4,000.
The Adviser also provides shareholder servicing, transfer, and dividend
disbursing agent services for the Trust. The Fund reimburses the Adviser for the
cost to provide these services, subject to a minimum monthly fee of $2,500 and a
limitation of 0.20% of average daily net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At December 31, 1995, the Adviser controlled, but did not own, 8.1% of the
outstanding shares of the Fund.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1995, purchases of investment securities
(excluding short-term investments) totaled $8,340,960 and proceeds from sales
totaled $48,346,076.
The Fund may write (sell) call options on stock indices for cash (that is, "the
option premium") to enhance earnings on the portfolio securities. However, using
these contracts limits the opportunity to participate in appreciation of the
underlying portfolio beyond certain upper limits set by the contracts. The Fund
may also buy put options on stock indices. The purchase of put options involves
the risk of loss of all or part of the cash paid for the put options. The
liability recorded upon receipt of written option premiums increases to offset
rises and decreases to offset declines in the market value of the hedged
portfolio. Similarly, the value of purchased puts increases to offset declines
and decreases to offset rises in portfolio value. For the year ended December
31, 1995, transactions in written options were as follows:
<TABLE>
<CAPTION>
Number of Contracts Premiums
<S> <C> <C>
Outstanding at December 31, 1994 3,790 $ 3,245,786
Options written 14,053 19,605,716
Options expired (1,310) (1,085,771)
Options exercised (13,489) (16,149,484)
------- ------------
Outstanding at December 31, 1995 3,044 $ 5,616,247
======= ============
</TABLE>
4. UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Gross unrealized appreciation of common stock totaled $53,309,865 and
depreciation totaled ($2,987,239) at December 31, 1995, based on the cost of
investments.
16
<PAGE> 89
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Gateway Index Plus Fund of The
Gateway Trust:
We have audited the accompanying statement of assets and liabilities of the
Gateway Index Plus Fund of THE GATEWAY TRUST (an Ohio business trust), including
the portfolio of investments, as of December 31, 1995, and the related statement
of operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gateway Index Plus Fund of The Gateway Trust as of December 31, 1995, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for the five years in the period then ended, in conformity with generally
accepted accounting principles.
Cincinnati, Ohio Arthur Andersen LLP
January 19, 1996
17
<PAGE> 90
- --------------------------------------------------------------------------------
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
Stefen F. Brueckner
Kenneth A. Drucker
Beverly S. Gordon
John F. Lebor
Walter G. Sall
William H. Schneebeck
Peter W. Thayer
18
<PAGE> 91
RISK/REWARD CHARTS
<TABLE>
<S> <C> <C>
Index Plus Fund
12/31/85 - 12/31/95
- -------------------
Risk Return
US T-bills (30 day) 0.48% 5.42%
Gateway Index Plus Fund 7.91% 10.10%
S&P 500 Stock Index 14.99% 14.83%
</TABLE>
The above chart shows that, in general, more risk must be taken to earn higher
total returns. The chart shows three points. One point shows 30-day U.S.
Treasury bills, one point shows the S&P 500 Index, and the third point shows
the Index Plus Fund. The line connecting Treasury bills and the S&P 500 Index
shows all the possible outcomes if an investment had been allocated between
these two choices in varying positions. When the Index Plus Fund point appears
above the line, it shows that the Fund earned a higher-than-expected return
during the period covered by the chart, considering the amount of risk it took
to earn that return. If the point appears below the line, it shows the reverse.
The next ten years may be quite different in terms of reward for all three
investments shown on the charts. The risk, however, tends to be constant over
time.
<PAGE> 92
RESULTS OF SPECIAL MEETING OF SHAREHOLDERS ON DECEMBER 11, 1995
On December 11, 1995, a special meeting of shareholders of The Gateway Trust was
held to approve new investment advisory contracts for each separate Fund series
of the Trust. The investment advisory contracts approved at the meeting were
substantially identical with the advisory contracts in place prior to the
meeting except for the investment advisor which was changed from Gateway
Investment Advisers, Inc. to Gateway Investment Advisers, L.P.
The results of the voting for the new investment advisory contracts were as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN
- ---- --- ------- -------
<S> <C> <C> <C>
Gateway Index Plus Fund 6,291,436 119,633 291,668
Gateway Mid Cap Index Fund 355,310 1,184 3,009
Gateway Small Cap Index Fund 596,088 5,054 9,602
The Cincinnati Fund 366,890 1,022 1,568
</TABLE>
<PAGE> 93
[STATUE OF LIBERTY GRAPHIC]
GATEWAY
MID CAP INDEX FUND
AND
SMALL CAP INDEX FUND
ANNUAL REPORT 1995
<PAGE> 94
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX AND SMALL CAP INDEX FUNDS
Highlights at December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
Past One Three Five Ten Inception Price
Quarter Year Years Years Years Date Per Share
------- ---- ----- ----- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Gateway Mid Cap Index 0.25% 25.68% 7.84% n/a n/a 9/30/92 $11.61
Gateway Small Cap Index 0.69 21.81 n/a n/a n/a 6/16/93 $11.05
S&P MidCap 400 Index 1.43 30.95 12.89 n/a n/a
S&P 500 Stock Index 6.02 37.58 15.34 16.59 14.83
Lehman Gov't/Corp. Bond 4.66 19.24 8.51 9.80 9.65
U. S. Inflation (CPI) 0.26 2.61 2.68 2.80 3.47
Wilshire 250 Index 1.08 26.58 n/a n/a n/a
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-------------------------------------
Past One Three Five Ten
Quarter Year Years Years Years
------- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Gateway Mid Cap Index 0.25% 25.68% 25.42 n/a n/a
Gateway Small Cap Index 0.69 21.81 n/a n/a n/a
S&P MidCap 400 Index 1.43 30.95 43.87 n/a n/a
S&P 500 Stock Index 6.02 37.58 53.44 115.45 298.76
Lehman Gov't/Corp. Bond 4.66 19.24 27.77 59.62 151.28
U. S. Inflation (CPI) 0.26 2.61 8.25 14.80 40.61
Wilshire 250 Index 1.08 26.58 n/a n/a n/a
</TABLE>
Performance data represents past performance and your investment return and
principal value of an investment will fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost.
1
<PAGE> 95
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Co-Portfolio Managers' Report
- --------------------------------------------------------------------------------
The Gateway Mid Cap Index Fund and Small Cap Index Fund produced their best-ever
calendar year returns during 1995, 25.68% and 21.81%, respectively. On December
29, 1995, the Mid Cap Index Fund paid a $0.06 per share income dividend and a
$0.37 per share capital gain distribution; the Small Cap Index Fund paid a
$0.245 per share income dividend and $0.435 per share capital gain distribution.
Average annual returns since inception for the Mid Cap Index Fund and the Small
Cap Index Fund are 7.45% and 8.12%, respectively.
The year 1995 was one of the greatest years ever for stock market performance.
Large capitalization stocks, as measured by the Standard and Poor's 500 Stock
Index, advanced 37.58%. This is only the eighth year since 1926 that the market
has earned greater than 35%. These large, multinational companies benefited from
excellent corporate earnings growth, a decline in long-term interest rates, and
a strong overseas demand for U. S. goods.
The Gateway Mid Cap Index Fund invests in the same stocks and weightings
represented in the Standard and Poor's MidCap 400 Index. This well diversified
portfolio of 400 stocks has a range of market capitalization generally between
$500 million to $5 billion. As the table on page 3 shows, the stock component of
the Mid Cap Index Fund posted terrific gains during the first three quarters of
1995. Like middle capitalization stocks, the Fund produced a relatively modest
gain in the fourth quarter.
With the market advancing so quickly during 1995, our proprietary computer model
was sending cautionary signals for the better part of the year. As such, we
began purchasing put options in the Fund as a means of lowering risk. The table
shows the cost of that insurance for each quarter under the subheading "Effect
of Options: Puts."
The Gateway Small Cap Index Fund invests in the 250 stocks represented in the
Wilshire Small Cap Index. This portfolio is broadly based across twenty-two
industry groups with a median market capitalization of $675 million. The Small
Cap Index Fund had strong performance for each of the first three quarters of
1995 before settling down in the fourth quarter as outlined in the table on page
13. Also, similar to the Mid Cap Index Fund, we purchased put options in the
Fund to lower the risk of owning stocks.
As we head into 1996, the financial news hitting Wall Street appears to be
favorable; interest rates are declining, inflation remains in check, and
corporate earnings are growing at a more moderate rate. We are concerned,
however, that much of this good news has already been reflected in the market.
History certainly suggests that 1996 will not match 1995's spectacular gains. A
bright spot for the Mid Cap Index and Small Cap Index Funds is the expectation
that these smaller capitalization segments of the market will "catch up" to the
larger blue chip stocks during 1996.
As always, we appreciate your continued support and look forward to serving you
in the years to come.
/s/ J. Patrick Rogers
J. Patrick Rogers, CFA
Co-Portfolio Manager
/s/ Peter W. Thayer
Peter W. Thayer, CFA
Co-Portfolio Manager
2
<PAGE> 96
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Co-Portfolio Managers' Overview
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------
TOP TEN HOLDINGS
GATEWAY MID CAP INDEX FUND
AS OF DECEMBER 31, 1995
-------------------------------------------------------
<S> <C>
Bay Networks, Inc. 1.23%
Worldcom Inc. 1.06%
Aon Corporation 0.87%
Chiron Corporation 0.79%
Fifth Third Bancorp 0.77%
Adobe Systems, Inc. 0.76%
First Tennessee National Corp. 0.74%
Frontier Corp. 0.73%
Hospitality Franchise Systems 0.72%
Parametric Technology Corporation 0.70%
-------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
1995
- --------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 7.14% 8.52% 8.65% 0.63%
Dividends Earned 0.53 0.46 0.48 0.40
INTEREST EARNED 0.01 0.03 0.06 0.09
CONTRIBUTIONS OF OPTIONS
Effect of Options: Calls 0.28 0.00 0.00 0.00
Effect of Options: Puts (0.33) (1.14) (0.40) (0.33)
EFFECT OF FEES
Fund Expenses (0.50) (0.49) (0.48) (0.51)
Brokerage Commissions (0.07) (0.02) (0.01) (0.03)
- --------------------------------------------------------------------------------
TOTAL RETURN 7.72% 7.36% 8.30% 0.25%
- --------------------------------------------------------------------------------
</TABLE>
RISK/REWARD CHART
-----------------
SINCE INCEPTION
9/30/92 TO 12/31/95
Mid Cap Index Fund
9/30/92 - 12/31/95
<TABLE>
<CAPTION>
Risk Return
<S> <C> <C>
US T-bills (30 day) 0.31% 3.92%
Mid Cap Index Fund 7.92% 7.45%
S&P 500 7.91% 15.75%
</TABLE>
The above chart shows that, in general, more risk must be taken to earn higher
total returns. The chart shows three points. One point shows 30-day U. S.
Treasury bills, one point shows the S&P 500 Index, and the third point shows the
Mid Cap Index Fund. The line connecting Treasury bills and the S&P 500 Index
shows all the possible outcomes if an investment had been allocated between
these two choices in varying positions. When the Mid Cap Index Fund point
appears above the line, it shows that the Fund earned a higher-than-expected
return during the period covered by the chart, considering the amount of risk it
took to earn that return. If the point appears below the line, it shows the
reverse. The succeeding years may be quite different in terms of reward for all
three investments shown on the chart. The risk, however, tends to be constant
over time.
3
<PAGE> 97
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- --------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & EQUIPMENT 0.89%
200 OEA, Inc. $ 5,950
400 Rohr Inc. * 5,750
100 Sequa Corp. * 3,063
300 Sundstrand Corporation 21,150
200 Teleflex Incorporated 8,200
200 Thiokol Corporation 6,788
--------
50,901
--------
APPAREL 0.77%
200 Ann Taylor Stores Corp. * 2,075
500 Cintas Corp. 22,375
200 Jones Apparel Group Inc. * 7,875
300 Nine West Group, Inc. * 11,250
--------
43,575
--------
AUTOMOBILES & PARTS 0.66%
300 Arvin Industries, Inc. 4,969
300 Federal-Mogul Corporation 5,869
400 Federal Signal Corporation 10,325
300 Modine Manufacturing Company 7,275
300 Superior Industries International 7,894
--------
36,332
--------
OTHER CONSUMER DURABLES 1.74%
400 Albany International Corp. Class A 7,275
700 Burlington Industries, Inc. * 9,144
200 Church & Dwight Company, Inc. 3,713
400 GenCorp, Inc. 4,925
200 Herman Miller Inc. 6,050
100 HON Industries, Inc. 2,350
800 Leggett & Platt, Inc. 19,450
100 NCH Corporation 5,775
1,300 Shaw Industries, Inc. 19,094
200 Stanhome Incorporated 5,813
700 Unifi, Inc. 15,531
--------
99,120
--------
BUILDING MATERIALS & CONSTRUCTION 0.27%
200 Granite Construction, Inc. $ 6,325
200 Jacobs Engineering Group Inc. * 5,025
200 Southdown Incorporated * 3,875
--------
15,225
--------
BUSINESS SERVICES & SUPPLIES 2.75%
100 Angelica Corporation 2,050
450 Comdisco, Inc. 10,238
1,400 Equifax Inc. 29,838
300 FlightSafety International, Inc. 15,075
300 Healthcare COMPARE Corp. * 13,106
300 Information Resources, Inc. * 3,656
400 Kelly Services, Inc. 11,250
700 Manpower Inc. 19,644
400 Olsten Corp. 15,750
450 Paychex, Inc. 22,359
300 Rollins, Inc. 6,638
500 Sotheby's Holdings, Inc. 7,125
--------
156,729
--------
CHEMICALS 3.62%
600 Albemarle Corp. 11,588
300 Betz Laboratories, Inc. 12,281
300 Cabot Corporation 16,163
500 Crompton & Knowles 6,594
300 Dexter Corp. 7,069
1,100 Ethyl Corp. 13,750
300 Ferro Corporation 6,975
700 Fuller (H. B.) Company 24,588
400 Georgia Gulf Corp. 12,250
600 IMC Global, Inc. 24,488
400 Lawter International, Inc. 4,650
300 Loctite Corporation 14,269
600 Lubrizol Corporation 16,725
200 Olin Corporation 14,863
</TABLE>
See accompanying notes to financial statements 4
<PAGE> 98
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- --------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS - Continued
400 Schulman (A.), Inc. $ 8,950
500 Sterling Chemicals, Inc. * 4,063
300 Wellman, Inc. 6,844
--------
206,110
--------
ELECTRONICS & COMPUTERS 9.71%
500 ADC Telecommunications, Inc. * 18,188
400 Altera Corporation * 19,875
900 American Power Conversion Corp. * 8,494
1,125 Analog Devices, Inc. * 26,438
400 Arrow Electronics, Inc. * 17,225
321 AST Research Inc. * 2,769
800 Atmel Corp. * 17,800
400 Avnet, Inc. 17,850
1,700 Bay Networks, Inc. * 69,806
600 Cirrus Logic, Inc. * 11,888
800 Cypress Semiconductor Corporation * 10,150
800 Dell Computer Corporation * 27,850
300 Hubbell Inc. 19,706
700 Integrated Device Technology 9,056
500 Linear Technology Corporation 19,688
400 Litton Industries, Inc. 17,800
200 MagneTek, Inc. * 1,600
500 Maxim Integrated Products 19,250
1,050 Molex Incorporated 33,600
200 Nellcor, Inc. * 11,675
200 Octel Communications Corp. * 6,463
400 Quantum Corporation * 6,475
700 Seagate Technology, Inc. * 33,200
700 Sensormatic Electronics Corporation 12,075
400 Sequent Computer Systems, Inc. * 5,750
400 Solectron Corp. 17,650
200 Stratus Computer, Inc. * 6,925
400 U. S. Robotics 35,150
300 Varian Associates, Inc. 14,288
500 Vishay Intertechnology Inc. 15,688
600 Xilinx, Inc. * 18,225
--------
552,597
--------
COMPUTER SOFTWARE & PERIPHERALS 5.12%
700 Adobe Systems, Inc. 43,488
400 BMC Software, Inc. * 17,050
300 Borland International, Inc.* 4,969
600 Cadence Design Systems, Inc. * 25,200
400 Compuware Corp. 7,500
700 Conner Peripherals, Inc. * 14,613
400 Electronic Arts Inc. 10,475
1,900 EMC Corporation * 29,213
200 Exabyte Corporation * 2,938
400 FIserv, Inc. * 11,975
1,200 Informix Corporation * 36,075
500 Mentor Graphics Corporation * 9,063
600 Parametric Technology Corporation * 39,825
200 Policy Management Systems Corp. * 9,550
504 Storage Technology Corporation * 12,002
100 Structural Dynamics Research Corp. * 2,925
300 Symantec Corp. * 6,956
200 Symbol Technologies, Inc. * 7,900
--------
291,717
--------
ENERGY 4.61%
600 Anadarko Petroleum Corp. 32,438
600 Apache Corporation 17,663
300 BJ Services Company * 8,700
300 Diamond Shamrock, Inc. 7,763
1,600 Global Marine, Inc. * 13,900
800 Lyondell Petrochemical Company 18,350
300 MAPCO 16,369
400 Murphy Oil Corporation 16,600
1,100 Nabors Industries, Inc. * 12,306
</TABLE>
5 See accompanying notes to financial statements
<PAGE> 99
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- --------------------------------------------------------------------------------
<S> <C> <C>
ENERGY - Continued
500 Noble Affiliates, Inc. $ 14,969
300 Parker & Parsley Petroleum 6,619
500 Parker Drilling Company * 3,094
400 Quaker State Corporation 5,100
400 Questar Corporation 13,400
1,000 Ranger Oil Limited 6,250
300 Seagull Energy Corporation * 6,713
400 Smith International, Inc. * 9,425
300 Tosco Corporation 11,494
400 Valero Energy Corporation 9,800
300 Varco International, Inc. * 3,619
453 Weatherford International, Inc. 13,109
500 Witco Corporation 14,594
--------
262,275
--------
FINANCE, INSURANCE & REAL ESTATE 15.02%
800 AFLAC Incorporated 34,750
500 American Financial Group, Inc. 15,313
1,000 Aon Corporation 49,813
400 Bancorp Hawaii, Inc. 14,325
1,155 Bear Stearns Companies, Inc. 22,883
200 Castle and Cooke Inc. 3,375
400 Central Fidelity Banks, Inc. 12,750
400 City National Corporation 5,600
400 Crestar Financial Corporation 23,600
100 Dauphin Deposit Corporation 2,900
200 Edwards (A. G.), Inc. 4,750
600 Fifth Third Bancorp 43,725
600 First of America Bank Corporation 26,663
100 First Security Corporation 3,825
700 First Tennessee National Corp. 42,263
300 First Virginia Banks, Inc. 12,525
500 Foundation Health Corp. * 21,469
700 Franklin Resources, Inc. 35,263
1,200 Green Tree Financial Corporation 31,650
200 Hartford Steam Boiler Inspection and Insurance Co. 10,000
600 Healthsource, Inc. 21,563
1,100 Hibernia Corporation 11,756
300 Kemper Corporation 14,888
900 Marshall & Ilsley Corporation 23,344
500 Mercantile Bancorporation, Inc. 23,031
500 Mercantile Bankshares Corporation 13,844
600 Meridian Bancorp, Inc. 27,938
500 Northern Trust Corporation 27,844
700 Paine Webber Group, Inc. 13,956
200 PHH Corporation 9,338
700 Progressive Corporation 34,300
400 Provident Companies, Inc. 13,525
400 Regions Financial Corp. 17,225
1,600 Schwab (Charles) Corporation 32,100
900 SouthTrust Corporation 23,175
800 State Street Boston Corporation 36,000
500 SunAmerica Inc. 23,688
200 Transatlantic Holdings, Inc. 14,688
500 UJB Financial Corp. 17,781
441 U. S. Bancorp of Oregon 14,801
499 Value Health, Inc. * 13,691
300 Wilmington Trust Corporation 9,300
--------
855,218
--------
FOOD, BEVERAGE & TOBACCO 3.80%
1,300 Coca-Cola Enterprises, Inc. 34,856
400 Dean Foods Company 11,000
600 Dole Food Company, Inc. 20,963
200 Dreyer's Grand Ice Cream, Inc. 6,725
750 Flowers Industries, Inc. 9,234
500 IBP, Inc. 25,313
200 International Multifoods Corp. 4,025
300 Lancaster Colony Corporation 11,213
300 Lance, Inc. 4,894
</TABLE>
See accompanying notes to financial statements 6
<PAGE> 100
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FOOD, BEVERAGE & TOBACCO - Continued
800 McCormick & Company, Inc. $ 19,400
400 Michael Foods, Inc. 4,700
500 Savannah Foods & Industries, Inc. 5,688
400 Smucker (J. M.) Company 8,800
1,300 Tyson Foods, Inc. 34,206
300 Universal Corporation Holding Co. 7,313
200 Universal Foods Corporation 8,013
--------
216,343
--------
HEALTH 7.97%
400 Acuson Corporation * 4,900
200 Advanced Technology Laboratories, Inc. * 4,925
600 Applied Bioscience International, Inc. * 4,125
400 Apria Healthcare Group Inc. 11,400
400 Bergen Brunswig Corporation 9,975
300 Biogen, Inc. * 18,375
400 Cardinal Health, Inc. 21,825
400 Carter-Wallace, Inc. 4,550
500 Centocor, Inc. * 15,500
409 Chiron Corporation * 45,246
400 Coram Healthcare Corp. * 1,750
300 Cordis Corporation * 30,150
300 Datascope Corporation * 7,125
300 Dentsply International Inc. 11,981
100 Diagnostic Products Corporation 3,788
400 FHP International Corp. * 11,300
400 Forest Laboratories, Inc. * 18,075
200 Genzyme Corporation * 12,450
300 Health Care & Retirement * 10,500
800 HEALTHSOUTH Rehabilitation Corp. * 23,250
415 Horizon CMS Healthcare Corp. 10,427
1,100 IVAX Corporation 31,419
576 Laboratory Corp. of America * 5,364
400 McKesson Corp. 20,250
1,200 Mylan Laboratories, Inc. 28,050
600 NovaCare, Inc. * 3,113
300 PacifiCare Health Systems, Inc. * 26,175
700 Perrigo Company * 8,356
200 Scherer (R. P.) Corp. 9,813
500 Stryker Corporation 26,219
400 Surgical Care Affiliates, Inc. 13,550
--------
453,926
--------
MACHINERY & RELATED PRODUCTS 0.71%
200 Duriron Company, Inc. 4,675
200 Goulds Pumps Incorporated 4,988
300 Kennametal Inc. 9,488
100 Lawson Products, Inc. 2,469
200 Nordson Corporation 11,375
300 Stewart & Stevenson Services, Inc. 7,613
--------
40,608
--------
MINING & METALS 1.36%
800 Battle Mountain Gold Company 6,700
300 CalMat Company 5,475
400 CBI Industries, Inc. 13,150
100 Cleveland-Cliffs, Inc. 4,088
300 Donaldson Company, Inc. 7,556
300 Keystone International, Inc. 6,019
625 RPM, Inc. 10,234
300 Vulcan Materials Co. 17,288
300 Watts Industries, Inc. 6,956
--------
77,466
--------
PAPER & FOREST PRODUCTS 2.13%
400 Bowater, Inc. 14,175
200 Chesapeake Corporation 5,863
400 Consolidated Papers, Inc. 22,450
400 Glatfelter (P. H.) Co. 6,850
500 Longview Fibre Company 8,094
200 Pentair, Inc. 10,000
300 Rayonier Inc. 9,994
</TABLE>
7 See accompanying notes to financial statements
<PAGE> 101
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- --------------------------------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS - Continued
840 Sonoco Products Company $ 22,050
400 Tambrands Inc. 19,100
96 Wausau Paper Mills Company 2,640
--------
121,216
--------
PRECISION INSTRUMENTS 1.33%
300 Ametek, Inc. 5,663
300 Beckman Instruments, Inc. 10,631
200 Measurex Corporation 5,650
600 Teradyne, Inc. * 14,963
750 Thermo Electron Corporation * 38,859
--------
75,766
--------
RETAIL 3.18%
400 Best Buy Company, Inc. * 6,500
200 Claire's Stores, Inc. 3,538
700 CML Group, Inc. 3,500
600 Dollar General Corporation 12,525
300 Duty Free International, Inc. 4,800
500 Family Dollar Stores, Inc. 6,875
400 Fingerhut Companies, Inc. 5,525
200 Fred Meyer Inc. * 4,513
400 Hancock Fabrics, Inc. 3,650
400 Hannaford Brothers Company 9,825
500 Heilig-Meyers Company 9,125
900 Home Shopping Network, Inc. * 8,156
500 Intelligent Electronics, Inc. 3,031
400 Kohl's Corp. * 21,000
300 Lands' End, Inc. * 4,125
400 MacFrugal's Bargains-Closeouts, Inc. * 5,575
300 Microwarehouse Inc. 13,050
600 Revco (D. S.) Inc. 16,950
600 Ruddick Corporation 6,900
1,000 Service Merchandise Company Inc. * 5,000
200 Tiffany & Co. 10,100
400 Vons Companies, Inc. * 11,250
300 Waban Inc. * 5,644
--------
181,157
--------
SERVICES 5.92%
500 Air & Water Technologies Corp. * 3,094
200 Airborne Freight Corporation 5,338
100 Alaska Air Group, Inc. * 1,625
300 Arnold Industries, Inc. 5,288
300 Atlantic Southeast Airlines, Inc. 6,488
200 Banta Corp. 8,875
400 Belo (A. H.) Corporation Class A 13,875
400 Bob Evans Farms, Inc. 7,650
700 Brinker International, Inc. * 10,631
300 Buffets, Inc. * 4,200
600 Calgon Carbon Corp. 7,163
300 Chris-Craft Industries, Inc. * 12,938
100 CPI Corporation 1,594
600 Cracker Barrel Old Country Store, Inc. * 10,388
300 Ennis Business Forms, Inc. 3,694
300 Gibson Greetings, Inc. * 4,819
100 Houghton Mifflin Company 4,288
500 Hunt (J. B.) Transport Services, Inc. 8,438
400 Illinois Central Corp. 15,400
200 International Dairy Queen, Inc. * 4,600
400 Kansas City Southern Industries, Inc. 18,350
400 Lee Enterprises, Incorporated 9,150
300 Media General, Inc. 9,113
300 Morrison Restaurants Inc. 4,181
800 Omnicom Group Inc. 29,750
400 Outback Steakhouse Inc. 14,375
400 Promus Hotel Corporation 8,850
400 Reynolds and Reynolds Company 15,500
500 Rollins Environmental Services, Inc. * 1,438
200 Sbarro Incorporated 4,288
</TABLE>
See accompanying notes to financial statements 8
<PAGE> 102
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- --------------------------------------------------------------------------------
<S> <C> <C>
SERVICES - Continued
100 Scholastic Corp. $ 7,788
600 Sizzler International, Inc. * 2,550
400 Standard Register Company 8,050
200 TCA Cable TV Incorporated 5,563
600 Topps Company, Inc. 3,150
400 Trinity Industries, Inc. 12,575
200 Wallace Computer Services, Inc. 10,925
100 Washington Post Company 28,150
400 Western Publishing Group, Inc. * 3,175
--------
337,307
--------
STEEL & IRON 0.61%
700 Allegheny Ludlum Corporation 13,038
200 Carpenter Technology Corporation 8,225
100 Lukens Inc. 2,869
200 Oregon Steel Mills, Inc. 2,800
200 Precision Castparts Corporation 7,975
--------
34,907
--------
OTHER INDUSTRIAL CYCLICALS 4.71%
200 Alexander & Baldwin Company 4,650
400 Alumax, Inc. * 12,300
300 American President Companies Ltd. 6,975
300 Brush Wellman Inc. 5,156
100 Carlisle Companies Inc. 4,038
875 Clayton Homes, Inc. 18,758
200 Cross (A. T.) Company 3,025
600 Danaher Corp. 18,975
300 Diebold Incorporated 16,613
400 Fastenal Company 17,000
200 First Brands Corporation 9,488
300 Hanna (M. A.) Company 8,381
30 Hewlett Packard Company 2,483
200 Kaydon Corporation 6,088
630 Mark IV Industries, Inc. 12,403
100 MAXXAM Inc. * 3,525
1,300 Office Depot, Inc. * 25,594
300 Overseas Shipholding Group, Inc. 5,738
400 Sealed Air Corporation * 11,250
900 Staples, Inc. * 22,050
200 Tecumseh Products Company 10,425
600 Tidewater Inc. 18,863
200 Verifone, Inc. * 5,725
400 York International Corporation 18,875
--------
268,378
--------
UTILITIES 15.70%
700 AES Corporation * 16,756
1,100 Allegheny Power System, Inc. 31,419
500 Atlantic Energy Inc. 9,625
700 Atlanta Gas Light Company 13,694
100 Black Hills Corporation 2,475
500 Brooklyn Union Gas Company 14,563
500 California Energy Company * 9,688
200 Central Louisiana Electric Company, Inc. 5,400
400 Central Maine Power Company 5,750
500 Century Telephone Enterprises, Inc. 15,938
800 CMS Energy Corporation 23,850
500 COMSAT 9,375
600 Delmarva Power & Light Company 13,725
400 El Paso Natural Gas Company 11,425
900 Florida Progress Corporation 31,838
1,400 Frontier Corp. 41,738
300 Hawaiian Electric Industries, Inc. 11,606
400 Idaho Power Company 11,950
100 Illinova Corp. 3,000
300 Indiana Energy, Inc. 7,163
400 IPALCO Enterprises, Inc. 15,200
400 Kansas City Power & Light Company 10,475
300 LG&E Energy Corp. 12,713
</TABLE>
9 See accompanying notes to financial statements
<PAGE> 103
- --------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- --------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - Continued
400 Lincoln Telecommunications Company $ 8,500
600 MCN Corporation 13,913
888 Mid American Energy Company 14,874
300 Minnesota Power & Light Company 8,531
500 Montana Power Company 11,344
300 National Fuel Gas Company 10,050
400 Nevada Power Company 8,875
600 New England Electric System 23,813
700 New York State Electric & Gas Corp. 18,069
1,700 NEXTEL Communications, Inc. * 25,181
600 NIPSCO Industries, Inc. 22,950
1,200 Northeast Utilities 29,250
400 Oklahoma Gas & Electric Company 17,200
800 Pinnacle West Capital Corporation 23,050
500 Portland General Corp. Holding Co. 14,531
1,100 Potomac Electric Power Company 28,806
600 Public Service Company of Colorado 21,188
400 Public Service Company of New Mexico * 7,000
700 Puget Sound Power & Light Co. 16,275
1,000 SCANA Corporation 28,563
600 Southern New England Telecommunications Corp. 23,813
400 Southwestern Public Service Company 13,050
1,100 TECO Energy, Inc. 28,119
500 Telephone & Data Systems, Inc. 19,813
400 UtiliCorp United Inc. 11,775
400 Vanguard Cellular Systems, Inc. * 8,050
400 Washington Gas Light Company 8,250
1,000 Wisconsin Energy Corporation 30,563
1,700 Worldcom Inc. 60,138
300 WPL Holdings, Inc. * 9,131
----------
894,031
----------
MISCELLANEOUS 2.98%
700 Callaway Golf Co. 15,794
800 Circus Circus Enterprises, Inc. * 22,250
200 GATX Corporation 9,725
700 Harley Davidson, Inc. 20,169
200 Harsco Corp. 11,650
500 Hospitality Franchise Systems * 40,813
1,300 International Game Technology 14,138
900 Mirage Resorts Incorporated * 31,050
100 National Presto Industries, Inc. 3,969
----------
169,558
----------
TOTAL COMMON STOCKS 95.56% 5,440,462
(cost $4,740,453)
Contracts
- -----------
PUT OPTIONS ON THE STANDARD & POOR'S 500
STOCK INDEX 0.18%
40 expiring March 1996 at 570 10,250
(cost $24,140)
REPURCHASE AGREEMENT 4.07%
5.3% repurchase agreement dated December 29, 1995
with Star Bank, N.A., due January 2, 1996
(repurchase proceeds $232,137),
collateralized by $245,000
6% GNMA Pool #8974, maturity May 20, 2022
(market value $250,972) 232,000
----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 99.81% 5,682,712
OTHER ASSETS AND LIABILITIES, NET 0.19% 10,717
----------
NET ASSETS 100% $5,693,429
==========
<FN>
* Denotes a non-income producing security.
</TABLE>
See accompanying notes to financial statements 10
<PAGE> 104
================================================================================
GATEWAY MID CAP INDEX FUND
Statement of Assets and Liabilities - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $4,740,453) $5,440,462
Put options, at value (original cost of $24,140) 10,250
Repurchase agreement 232,000
Dividends receivable 8,726
Receivable for fund shares sold 530
Cash 305
Other assets 15,204
----------
5,707,477
----------
LIABILITIES:
Payable for fund shares redeemed 2,700
Dividends payable to shareholders 1,109
Other accrued expenses and liabilities 10,239
----------
14,048
----------
NET ASSETS $5,693,429
==========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 490,235 shares outstanding
(unlimited number of shares authorized, no par value) $4,990,445
Undistributed net investment income 1,679
Accumulated realized gain, net 15,186
Unrealized appreciation, net 686,119
----------
$5,693,429
==========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 11.61
==========
</TABLE>
================================================================================
GATEWAY MID CAP INDEX FUND
Statement of Operations - For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 104,142
Interest income 10,071
-----------
114,213
-----------
EXPENSES:
Transfer agent and accounting fees 78,000
Investment advisory and management fees 50,766
Custodian fees 15,153
Registration fees 15,031
Professional fees 13,620
Trustees' fees 6,234
Reports to shareholders 4,600
Other expenses 7,112
-----------
190,516
Fees waived and expenses reimbursed under contract (77,744)
Expenses reimbursed voluntarily (1,267)
-----------
111,505
-----------
NET INVESTMENT INCOME 2,708
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 281,196
Call options expired and closed (14,102)
Put options expired and closed (65,330)
-----------
Net realized gain on investments 201,764
-----------
Change in unrealized appreciation (depreciation) of
investments:
Securities 1,059,752
Call options 32,050
Put options (13,890)
-----------
Change in net unrealized appreciation (depreciation)
of investments 1,077,912
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 1,279,676
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,282,384
===========
</TABLE>
11 See accompanying notes to financial statements
<PAGE> 105
================================================================================
GATEWAY MID CAP INDEX FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
----------- -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 2,708 $ 55,915
Net realized gain (loss) on investments 201,764 (8,877)
Change in unrealized appreciation (depreciation)
of investments 1,077,912 (574,930)
----------- ------------
Net increase (decrease) in net assets resulting
from operations 1,282,384 (527,892)
----------- ------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
From net investment income (28,380) (34,422)
From net realized gain on investments (175,010) (6,884)
----------- ------------
Decrease in net assets from dividends and distributions (203,390) (41,306)
----------- ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 770,226 2,603,076
Net asset value of shares issued in reinvestment
of dividends and distributions 202,760 61,306
Payments for shares redeemed (2,947,026) (5,971,331)
----------- ------------
Net decrease in net assets from fund share transactions (1,974,040) (3,306,949)
----------- ------------
NET DECREASE IN NET ASSETS (895,046) (3,876,147)
NET ASSETS:
Beginning of period 6,588,475 10,464,622
----------- ------------
End of period, including undistributed net
investment income of $1,679 and $27,351 $ 5,693,429 $ 6,588,475
=========== ============
FUND SHARE TRANSACTIONS:
Shares sold 68,899 258,936
Shares issued in reinvestment of dividends and 17,473 6,258
distributions
Less shares redeemed (283,661) (607,657)
----------- ------------
NET DECREASE IN SHARES OUTSTANDING (197,289) (342,463)
=========== ============
</TABLE>
================================================================================
GATEWAY MID CAP INDEX FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1995(4) 1994 1993 1992 (1)
------ ---- ---- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.58 $10.16 $ 10.04 $10.00
------ ------ ------- ------
Net investment income 0.03 0.08 0.11 0.03
Net gains (losses) on securities 2.43 (0.60) 0.41 0.04
------ ------ ------- ------
Total from investment operations 2.46 (0.52) 0.52 0.07
------ ------ ------- ------
Dividends from net investment income (0.06) (0.05) (0.11) (0.03)
Distributions from capital gains (0.37) (0.01) (0.29) 0.00
------ ------ ------- ------
Total distributions (0.43) (0.06) (0.40) (0.03)
------ ------ ------- ------
Net asset value, end of period $11.61 $ 9.58 $ 10.16 $10.04
====== ====== ======= ======
TOTAL RETURN 25.68% (5.12%) 5.18% 0.70%(3)
Net assets, end of period (millions) $ 5.69 $ 6.59 $ 10.46 $10.69
Ratio of net expenses to average
net assets (2) 1.98% 1.50% 1.50% 1.50%
Ratio of net investment income to
average net assets (2) 0.05% 0.59% 1.06% 1.39%
Portfolio turnover rate 18% 8% 105% 0%(3)
<FN>
(1) The Mid Cap Index Fund commenced operations on September 30, 1992.
(2) The ratio of net expenses to average net assets would have increased and
the ratio of net investment income to average net assets would have
decreased by 0.02% in 1995 had the Adviser not voluntarily reimbursed
expenses. These ratios have been annualized for periods less than a year.
(3) Not annualized.
(4) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser of the Fund.
</TABLE>
See accompanying notes to financial statements 12
<PAGE> 106
===============================================================================
GATEWAY SMALL CAP INDEX FUND
Co-Portfolio Managers' Overview
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOP TEN HOLDINGS
GATEWAY SMALL CAP INDEX FUND
AS OF DECEMBER 31, 1995
- --------------------------------------------- ------------
<S> <C>
Macromedia Inc. 1.11%
Centocor, Inc. 1.05%
Fore Systems Inc. 1.01%
Global Marine, Inc. 0.98%
Presstek Inc. 0.90%
Surgical Care Affiliates, Inc. 0.90%
Bed Bath and Beyond 0.86%
Cordis Corporation 0.85%
First American Corp. of Tennessee 0.81%
Shared Medical Systems Corporation 0.81%
- --------------------------------------------- ------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
GATEWAY SMALL CAP INDEX FUND
1995
- ----------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 4.41% 9.17% 8.13% 1.06%
Dividends Earned 0.51 0.47 0.37 0.43
INTEREST EARNED 0.00 0.00 0.01 0.01
CONTRIBUTIONS OF OPTIONS
Effect of Options: Calls (0.77) 0.00 0.00 0.00
Effect of Options: Puts 0.44 (1.25) (0.41) (0.37)
EFFECT OF FEES
Fund Expenses (0.41) (0.43) (0.42) (0.43)
Brokerage Commissions (0.03) (0.08) (0.01) (0.01)
----------------------------------------------------------------------------------
TOTAL RETURN 4.15% 7.88% 7.67% 0.69%
----------------------------------------------------------------------------------
</TABLE>
RISK/REWARD CHART
-----------------
SINCE INCEPTION
6/16/93 To 12/31/95
<TABLE>
<CAPTION>
Small Cap Index Fund
6/16/93 - 12/31/95
Risk Return
---- ------
<S> <C> <C>
US T-bills (30 day) 0.30% 4.23%
Mid Cap Index Fund 9.12% 8.12%
S&P 500 7.32% 15.76%
</TABLE>
The above chart shows that, in general, more risk must be taken to earn
higher total returns. The chart shows three points. One point shows 30-day
U. S. Treasury bills, one point shows the S&P 500 Index, and the third
point shows the Small Cap Index Fund. The line connecting Treasury bills
and the S&P 500 Index shows all the possible outcomes if an investment had
been allocated between these two choices in varying positions. When the
Small Cap Index Fund point appears above the line, it shows that the Fund
earned a higher-than-expected return during the period covered by the
chart, considering the amount of risk it took to earn that return. If the
point appears below the line, it shows the reverse. The succeeding years
may be quite different in terms of reward for all three investments shown
on the chart. The risk, however, tends to be constant over time.
13
<PAGE> 107
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
-----------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & EQUIPMENT 0.97%
1,200 Kaman Corporation $ 13,275
1,000 Teleflex Incorporated 41,000
1,100 Thiokol Corporation 37,331
---------
91,606
---------
APPAREL 1.87%
1,200 Brown Group, Inc. 17,025
1,600 Jones Apparel Group Inc. * 63,000
1,500 Kellwood Company 30,656
900 Oshkosh B' Gosh, Inc. 15,413
2,000 Tultex Corporation * 8,250
2,100 Westpoint Stevens Inc. * 41,869
---------
176,213
---------
AUTOMOBILES & PARTS 1.72%
1,400 Arvin Industries, Inc. 23,188
1,100 Clarcor Inc. 22,275
2,300 Federal-Mogul Corporation 44,994
1,200 Standard Products Co. 21,075
1,900 Superior Industries International 49,994
---------
161,526
---------
OTHER CONSUMER DURABLES 3.16%
2,800 Acclaim Entertainment * 34,825
1,900 Albany International Corp. Class A 34,556
1,000 Bassett Furniture Industries, Inc. 23,000
2,000 Cone Mills Corporation * 22,500
2,300 GenCorp, Inc. 28,319
1,600 HON Industries, Inc. 37,600
1,200 La-Z-Boy Chair Company 36,900
500 NCH Corporation 28,875
1,500 Russ Berrie and Company, Inc. 18,938
1,100 Stanhome Incorporated 31,969
---------
297,482
---------
BUILDING MATERIALS & CONSTRUCTION 2.34%
1,800 Centex Corporation 62,438
2,300 Kaufman and Broad Home Corp. 34,213
2,100 Lennar Corporation 53,156
2,300 Morrison Knudsen Corporation * 10,063
1,100 Pulte Corporation 36,988
1,200 Southdown Incorporated * 23,250
---------
220,108
---------
BUSINESS SERVICES & SUPPLIES 2.57%
600 Angelica Corporation 12,300
3,150 Comdisco, Inc. 71,663
1,200 CompUSA, Inc. * 37,350
1,900 Information Resources, Inc. * 23,156
2,300 Rollins, Inc. 50,888
3,300 Sotheby's Holdings, Inc. 47,025
---------
242,382
---------
CHEMICALS 1.46%
600 Chemed Corporation 23,288
800 Fuller (H. B.) Company 28,100
2,800 Lawter International, Inc. 32,550
800 Petrolite Corporation 22,300
3,800 Sterling Chemicals, Inc. * 30,875
---------
137,113
---------
ELECTRONICS & COMPUTERS 3.35%
1,848 AST Research Inc. * 15,939
2,700 Aura Systems Inc. * 15,273
1,650 Baldor Electric Company 33,103
1,100 Cyrix Corporation * 25,163
3,600 Geotek Communications, Inc. * 23,063
1,200 Lattice Semiconductor * 39,225
1,500 Octel Communications Corp. * 48,469
2,500 Quantum Corporation * 40,469
2,200 Sequent Computer Systems, Inc. * 31,625
2,400 VLSI Technology, Inc. * 43,350
---------
315,679
---------
COMPUTER SOFTWARE & PERIPHERALS 9.00%
2,500 Cheyenne Software Inc. * 65,781
1,400 Electronics for Imaging Inc. * 60,725
1,500 Exabyte Corporation * 22,031
</TABLE>
See accompanying notes to financial statements 14
<PAGE> 108
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- -----------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PERIPHERALS - Continued
1,600 Fore Systems Inc. * $ 95,300
1,400 FTP Software Inc. * 40,688
900 Global Village Communications * 17,156
2,000 Macromedia Inc. * 104,125
700 Medic Computer System Inc. * 42,263
2,000 Merisel, Inc. * 8,625
2,500 NetManage Inc. * 57,813
1,400 Network General Corp. * 46,375
2,600 S3, Incorporated * 45,663
1,400 Shared Medical Systems Corporation 75,863
2,000 Structural Dynamics Research Corp. * 58,500
1,400 Symbol Technologies, Inc. * 55,300
2,900 Western Digital Corp. * 51,656
---------
847,864
---------
ENERGY 6.45%
1,700 BJ Services Company * 49,300
10,600 Global Marine, Inc. * 92,088
5,400 Nabors Industries, Inc. * 60,413
7,700 Noram Energy Corp. 67,856
1,600 Oneok, Inc. 36,600
2,100 Pogo Producing Company 59,194
2,200 Quaker State Corporation 28,050
5,300 Rowan Companies, Inc. * 51,675
2,400 Seagull Energy Corporation * 53,700
2,500 Smith International, Inc. * 58,906
1,500 Southwest Gas Corporation 26,531
1,800 Southwestern Energy Company 22,725
---------
607,038
---------
FINANCE, INSURANCE & REAL ESTATE 19.79%
3,200 20th Century Industries * 63,600
1,000 Alex. Brown & Sons Incorporated 42,063
1,200 American Bankers Insurance Group, Inc. 47,025
700 Astoria Financial Corp. * 32,025
600 Bell Bancorp 21,563
3,100 California Federal Bank, F.S.B. * 48,825
5,200 Catellus Development Corporation * 30,550
2,800 City National Corporation 39,200
1,200 Collective Bancorp, Inc. 30,600
1,800 Compass Bancshares Inc. 59,063
2,000 Dauphin Deposit Corporation 58,000
1,600 First American Corp. of Tennessee 76,000
1,800 First Commerce Corp. of Louisiana 57,263
600 Foremost Corporation of America 30,600
1,700 Fourth Financial Corporation 69,275
2,500 Glendale Federal Bank * 44,063
900 Great Financial Corp. 21,263
1,500 Home Financial Corp. 23,250
1,100 Integon Corporation 22,619
1,600 John Alden Financial Corp. 33,300
1,200 Liberty Corporation 40,350
1,800 Life Partners Group, Inc. 24,525
1,100 Life Re Corporation 27,569
1,400 Life USA Holding Inc. * 11,200
1,700 Long Island Bancorp 44,944
2,800 Mid Atlantic Medical Services * 67,725
1,100 NAC Re Corp. 39,531
900 Onbancorp, Inc. 30,094
2,300 Peoples Bank Bridgeport 43,988
1,000 PHH Corporation 46,688
2,200 Premier Bancorp, Inc. * 51,288
7,300 Reliance Group Holdings Inc. 63,419
1,900 Riggs National Corp. * 24,581
3,100 Rollins Truck Leasing Corp. 34,100
2,600 Roosevelt Financial Group 50,050
400 Seafield Capital Corp. 13,800
1,600 Standard Federal Bank 63,100
2,000 Summit Bancorporation 62,750
1,400 T. Rowe Price Associates Inc. 68,600
1,800 United Companies Financial Corp. 47,700
1,995 Valley National Bancorp 49,750
800 Washington National Corporation 22,100
3,900 Western National Corp. 62,644
1,100 Zenith National Insurance Corp. 23,581
---------
1,864,224
---------
</TABLE>
15 See accompanying notes to financial statements
<PAGE> 109
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- -----------------------------------------------------------------------------------
<S> <C> <C>
FOOD, BEVERAGE & TOBACCO 3.43%
3,400 Chiquita Brands International, Inc. $ 46,325
900 Dreyer's Grand Ice Cream, Inc. 30,263
3,900 Flowers Industries, Inc. 48,019
1,200 International Multifoods Corp. 24,150
1,400 Interstate Bakeries Corporation 31,238
1,300 Michael Foods, Inc. 15,275
500 Midwest Grain Products Inc. 7,188
1,500 Ralcorp Holdings Inc.* 36,375
1,900 Savannah Foods & Industries, Inc. 21,613
3,000 Starbucks Corp. * 62,813
---------
323,259
---------
HEALTH 8.23%
2,100 Acuson Corporation * 25,725
900 Advanced Technology Laboratories, Inc. * 22,163
2,400 Advanced Tissue Sciences Inc. * 24,150
2,100 Amsco International, Inc. * 31,238
1,600 Ballard Medical Products 28,400
2,200 Bergen Brunswig Corporation 54,863
1,234 Block Drug Company Inc. 43,034
3,200 Centocor, Inc. * 99,200
800 Cordis Corporation * 80,400
800 Dentsply International Inc. 31,950
900 Diagnostic Products Corporation 34,088
1,800 Haemonetics Corporation * 31,838
1,800 Herbalife International Inc. 15,750
1,200 Integrated Health Services 30,000
4,800 Perrigo Company * 57,300
1,650 Summit Technology, Inc. * 55,894
2,500 Surgical Care Affiliates, Inc. 84,688
1,400 Ventritex Inc. * 24,588
---------
775,269
---------
MACHINERY & RELATED PRODUCTS 3.18%
1,700 BW/IP, Inc. 27,625
1,200 Cincinnati Milacron, Inc. 31,425
1,500 Gerber Scientific, Inc. 24,469
2,300 Giddings & Lewis, Inc. 37,663
1,300 Goulds Pumps Incorporated 32,419
1,600 Kennametal Inc. 50,600
700 Lawson Products, Inc. 17,281
500 Nacco Industries, Inc. 27,719
1,300 Silicon Valley Group Inc. * 32,906
800 Zurn Industries, Inc. 17,000
---------
299,107
---------
MINING & METALS 1.03%
1,600 Donaldson Company, Inc. 40,300
3,400 Hecla Mining Company * 23,588
2,400 Pegasus Gold Inc. * 33,150
---------
97,038
---------
PAPER & FOREST PRODUCTS 1.87%
1,400 Chesapeake Corporation 41,038
3,400 Gaylord Container Corp. * 27,838
1,100 Pentair, Inc. 55,000
1,891 Wausau Paper Mills Company 52,003
---------
175,879
---------
PRECISION INSTRUMENTS 1.41%
2,000 Ametek, Inc. 37,750
1,200 Beckman Instruments, Inc. 42,525
1,200 Credence Systems Corp. * 27,300
900 Measurex Corporation 25,425
---------
133,000
---------
RETAIL 4.10%
2,100 Bed Bath and Beyond * 81,375
600 Blair Corporation 18,938
2,000 Cato Corporation 15,375
6,600 Charming Shoppes, Inc. * 19,183
1,600 Dress Barn, Inc. * 15,600
1,900 Duty Free International Inc. 30,400
1,600 Eagle Hardware & Garden, Inc. * 11,800
1,800 Fred Meyer Inc. * 40,613
5,900 Home Shopping Network, Inc. * 53,469
2,000 Intelligent Electronics, Inc. 12,125
2,100 Lands' End, Inc. * 28,875
</TABLE>
See accompanying notes to financial statements 16
<PAGE> 110
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- -----------------------------------------------------------------------------------
<S> <C> <C>
RETAIL - Continued
1,800 MacFrugal's Bargains-Closeouts, Inc. * $ 25,088
1,700 Ross Stores, Inc. 32,831
---------
385,672
---------
SERVICES 9.62%
2,200 Air & Water Technologies Corp. * 13,613
1,200 Airborne Freight Corporation 32,025
900 Alaska Air Group, Inc. * 14,625
2,600 Allwaste, Inc. * 12,350
1,800 Arnold Industries, Inc. 31,725
1,200 Banta Corp. 53,250
2,500 Calgon Carbon Corp. 29,844
1,560 Chris-Craft Industries, Inc. * 67,275
1,100 Gibson Greetings, Inc. * 17,669
900 Houghton Mifflin Company 38,588
2,600 Hunt (J. B.) Transport Services, Inc. 43,875
1,600 International Dairy Queen, Inc. * 36,800
1,500 Luby's Cafeterias, Inc. 33,469
2,200 Morrison Restaurants Inc. 30,663
1,100 New England Business Service, Inc. 24,338
2,200 Pittston Services Group 69,024
900 Presstek Inc. * 85,163
1,000 Pulitzer Publishing Co. 47,813
1,200 Sbarro Incorporated 25,725
1,300 Shorewood Packaging Corp. * 18,688
2,000 Sizzler International, Inc.* 8,500
2,000 Standard Register Company 40,250
1,500 TCA Cable TV Incorporated 41,719
1,000 Wallace Computer Services, Inc. 54,625
1,500 Western Publishing Group, Inc. * 11,906
1,800 Yellow Corporation * 22,388
---------
905,910
---------
STEEL & IRON 1.34%
1,700 AK Steel Holding Corp. * 58,086
1,800 Birmingham Steel Corporation 26,888
1,000 Carpenter Technology Corporation 41,125
---------
126,099
---------
OTHER INDUSTRIAL CYCLICALS 3.71%
1,800 ACX Technologies Inc. * 27,225
1,100 Brush Wellman Inc. 18,906
1,000 Carlisle Companies Inc. 40,375
1,200 Cross (A. T.) Company 18,150
2,600 Data General Corporation * 35,588
1,000 Handy and Harman 16,563
600 MAXXAM Inc. * 21,150
2,100 OMI Corporation * 13,781
2,300 Overseas Shipholding Group, Inc. 43,988
2,200 Pyxis Corporation * 32,313
11,800 Sunshine Mining Company * 15,488
1,400 Verifone, Inc. * 40,075
1,100 West Company Incorporated 25,781
---------
349,383
---------
UTILITIES 6.48%
1,200 Central Hudson Gas & Electric Corp. 36,900
900 CILCORP Inc. 38,250
1,200 Eastern Utilities Associates 28,425
1,700 IES Industries Inc. 44,944
1,867 International CableTel Inc. * 45,275
3,200 LCI International Inc. * 65,400
1,650 MDU Resources Group Inc. 33,103
900 Orange & Rockland Utilities, Inc. 32,175
2,600 Public Service Company of New Mexico * 45,500
1,800 Sierra Pacific Resources Holding Co. 42,075
900 Southern Indiana Gas & Electric Co. 31,388
9,900 Tucson Electric Power Company * 31,556
2,100 UGI Corporation 42,263
800 U. S. Long Distance Corp. * 11,050
2,500 Vanguard Cellular Systems, Inc. * 50,313
1,700 Washington Energy Company 31,663
---------
610,280
---------
MISCELLANEOUS 2.12%
1,700 Argosy Gaming Company * 12,750
1,000 Avid Technology Inc. * 19,063
1,200 Cobra Golf, Inc. * 42,900
</TABLE>
17 See accompanying notes to financial statements
<PAGE> 111
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stock Value
- -----------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS - Continued
1,100 FoxMeyer Health Corporation * $ 29,425
2,100 Grand Casinos Inc. * 48,956
2,400 Handleman Company 14,100
1,300 Kimball International Inc. 32,825
------------
200,019
------------
Total Common Stocks 99.20% 9,342,150
(cost $8,806,472)
Contracts
---------
PUT OPTIONS ON THE STANDARD & POOR'S 500
STOCK INDEX 0.20%
75 expiring March 1996 at 570 19,219
(cost $45,263)
REPURCHASE AGREEMENT 0.83%
5.3% repurchase agreement dated December 29, 1995
with Star Bank, N.A., due January 2, 1996
(repurchase proceeds $78,047),
collateralized by $85,000
6% GNMA Pool #8974, maturity May 20, 2022
(market value $87,072) 78,000
------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 100.23% 9,439,369
OTHER ASSETS AND LIABILITIES, NET (0.23%) (21,332)
------------
NET ASSETS 100% $9,418,037
============
<FN>
* Denotes a non-income producing security.
</TABLE>
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Assets and Liabilities - December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
ASSETS:
<S> <C>
Common stocks, at value (original cost $8,806,472) $9,342,150
Put options, at value (original cost $45,263) 19,219
Repurchase agreement 78,000
Dividends receivable 11,511
Cash 628
Receivable for fund shares sold 340
Other assets 7,844
------------
9,459,692
------------
LIABILITIES:
Dividends payable to shareholders 25,112
Payable for fund shares redeemed 4,890
Other accrued expenses and liabilities 11,653
------------
41,655
------------
NET ASSETS $9,418,037
============
Net assets consist of:
Paid-in capital applicable to 852,098 shares outstanding
(unlimited number of shares authorized, no par value) $8,874,813
Accumulated realized gain, net 33,590
Unrealized appreciation, net 509,634
------------
$9,418,037
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $11.05
============
</TABLE>
See accompanying notes to financial statements 18
<PAGE> 112
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Operations - For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 165,793
Interest income 2,195
-----------
167,988
-----------
EXPENSES:
Investment advisory and management fees 85,502
Transfer agent and accounting fees 78,000
Reports to shareholders 20,484
Professional fees 16,867
Registration fees 15,501
Custodian fees 12,264
Trustees' fees 6,914
Other expenses 9,373
-----------
244,905
Fees waived under contract (85,502)
-----------
159,403
-----------
NET INVESTMENT INCOME 8,585
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 722,507
Call options expired and closed (97,875)
Put options expired and closed (126,520)
-----------
Net realized gain on investments 498,112
-----------
Change in unrealized appreciation (depreciation) of investments:
Securities 1,352,108
Call options 24,437
Put options (26,044)
-----------
Change in net unrealized appreciation (depreciation)
of investments 1,350,501
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 1,848,613
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,857,198
===========
</TABLE>
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
----------- ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 8,585 $ (17,972)
Net realized gain on investments 498,112 35,208
Change in unrealized appreciation (depreciation)
of investments 1,350,501 (877,071)
----------- ------------
Net increase (decrease) in net assets
resulting from operations 1,857,198 (859,835)
----------- ------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
From net investment income (8,585) --
From net realized gain on investments (538,981) (99,797)
----------- ------------
Decrease in net assets from dividends and
distributions (547,566) (99,797)
----------- ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 1,238,323 6,047,384
Net asset value of shares issued in reinvestment
of dividends and distributions 522,299 95,519
Payments for shares redeemed (3,309,369) (8,527,840)
----------- ------------
Net decrease in net assets from fund share (1,548,747) (2,384,933)
transactions
----------- ------------
NET DECREASE IN NET ASSETS (239,115) (3,344,565)
NET ASSETS:
Beginning of period 9,657,152 13,001,717
----------- ------------
End of period $ 9,418,037 $ 9,657,152
=========== ============
FUND SHARE TRANSACTIONS:
Shares sold 117,773 590,569
Shares issued in reinvestment of dividends
and distributions 47,267 9,919
Less shares redeemed (315,501) (853,574)
----------- ------------
NET DECREASE IN SHARES OUTSTANDING (150,461) (253,086)
=========== ============
</TABLE>
19 See accompanying notes to financial statements
<PAGE> 113
================================================================================
GATEWAY SMALL CAP INDEX FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1995(4) 1994 1993 (1)
-------- ------------ ------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.63 $10.35 $10.00
------ ------ ------
Net investment income (loss) 0.03 (0.02) 0.04
Net gains (losses) on securities 2.07 (0.60) 0.61
------ ------ ------
Total from investment operations 2.10 (0.62) 0.65
------ ------ ------
Dividends from net investment income (0.01) 0.00 (0.04)
Distributions from capital gains (0.67) (0.10) (0.26)
------ ------ ------
Total distributions (0.68) (0.10) (0.30)
------ ------ ------
Net asset value, end of period $11.05 $ 9.63 $10.35
====== ====== ======
TOTAL RETURN 21.81% (5.99%) 6.50%(3)
Net assets, end of period (millions) $ 9.42 $ 9.66 $13.00
Ratio of net expenses to average net 1.68% 2.00% 1.92%
assets (2)
Ratio of net investment income (loss) to
average net assets (2) 0.09% (0.14%) 0.98%
Portfolio turnover rate 20% 39% 3%(3)
<FN>
(1) The Small Cap Index Fund commenced operations on June 16, 1993.
(2) The ratio of net expenses to average net assets would have increased and
the ratio of net investment income to average net assets would have
decreased by 0.08% in 1993 had the Adviser not voluntarily reimbursed
expenses. These ratios are annualized in periods less than a year.
(3) Not annualized.
(4) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser of the Fund
</TABLE>
==============================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- ------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of four no-load diversified mutual
funds. The financial statements of Gateway Mid Cap Index Fund (Mid Cap) and
Gateway Small Cap Index Fund (Small Cap), collectively the (Funds), are included
in this report. Gateway Index Plus Fund and the Cincinnati Fund are included in
separate annual reports. The Trust is registered under the Investment Company
Act of 1940.
The following is a summary of the Funds' significant accounting policies.
INVESTMENTS VALUATION - The Funds normally value common stocks and option
contracts at the mean of the closing bid and asked quotation on each trading
day. Other securities for which market quotations are not readily available are
valued at fair value as determined in good faith under procedures adopted by the
board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME AND EXPENSES - Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies set by the
board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS - Distributions from
net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid annually.
FEDERAL INCOME TAXES - The Funds intend to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all taxable income to the shareholders.
Based on this policy, the Funds make no provision for income taxes. The cost of
investments is the same for financial reporting and tax purposes. Tax
regulations require the Funds to assume that open option contracts are closed
each year end and include the resulting calculated capital gain or loss in the
determination of federal taxable income.
See accompanying notes to financial statements 20
<PAGE> 114
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - The Funds require the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Funds enter into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
2. TRANSACTIONS WITH AFFILIATES
Gateway Investment Advisers, Inc. (GIA) was the investment adviser of the Funds
prior to December 15, 1995. On December 15, 1995, the advisory contracts between
the Funds and GIA were terminated, and new contracts were entered into with the
Adviser. There were no changes in the advisory fee, or the computation thereof,
as a result of the new contracts. The Funds pay the Adviser a monthly management
fee computed at an annual rate of 0.90% of the first $50 million of the average
daily net assets of the respective fund, 0.70% of the next $50 million and 0.60%
of all such assets over $100 million.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions and expenses of an extraordinary nature) exceed 2.00% of Small Cap's
average daily net assets, or 1.50% of Mid Cap's average daily net assets, the
advisory contracts require the Adviser to waive some or all of its advisory fee
as necessary to limit each Fund's expenses to the stated level. For 1995, the
Adviser has agreed to voluntarily waive some or all of its advisory fee if the
Small Cap's expense ratio exceeds 1.50%. Any contractual or voluntary waiver,
however, will not exceed the aggregate advisory fee paid by the Fund for the
applicable year. As a result, for the year ended December 31, 1995, the Adviser
waived advisory fees of $50,766 for Mid Cap and $85,502 for Small Cap.
Additionally for 1995, the Adviser has agreed to reimburse other expenses of Mid
Cap as necessary to limit Mid Cap's expenses to 2.00%, and accordingly
reimbursed $28,245 in expenses.
The Adviser maintains the Funds' accounting records for a monthly fee of $4,000
for each fund. The Adviser also provides shareholder servicing, transfer, and
dividend disbursing agent services for the Trust. The Funds reimburse the
Adviser for the cost to provide these services subject to a minimum monthly fee
of $2,500 and a limitation of 0.20% of average daily net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At December 31, 1995, the Adviser controlled, but did not own, 58.1% of Mid
Cap's outstanding shares, and 52.0% of Small Cap's outstanding shares.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1995, purchases and proceeds from sales of
common stocks are as follows:
<TABLE>
<CAPTION>
MID CAP SMALL CAP
------- ---------
<S> <C> <C>
Purchases of investment securities $ 992,207 $1,909,377
Proceeds from sales of investment securities 3,329,580 4,159,594
</TABLE>
The Funds may write (sell) call options on stocks indices for cash (that is,
"the option premium") to enhance earnings on the portfolio securities. However,
using these contracts limits the opportunity to participate in appreciation of
the underlying portfolio beyond certain upper limits set by the contracts. The
Funds may also buy put options on stock indices. The purchase of put options
involves the risk of loss of all or part of the cash paid for the put options.
The liability recorded upon receipt of written option premiums increases to
offset rises and decreases to offset declines in the market value of the hedged
portfolio. Similarly, the value of purchased puts increases to offset declines
and decreases to offset rises in portfolio value.
4. UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Unrealized appreciation (depreciation) of common stocks at December 31, 1995,
based on the cost of investments, is as follows:
<TABLE>
<CAPTION>
MID CAP SMALL CAP
------- ---------
<S> <C> <C>
Gross unrealized appreciation $1,083,690 $1,758,665
Gross unrealized depreciation (383,681) (1,222,987)
---------- ----------
Net unrealized appreciation (depreciation) $ 700,009 $ 535,678
========== ==========
</TABLE>
21
<PAGE> 115
================================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Gateway Mid Cap Index Fund and
Gateway Small Cap Index Fund of The Gateway Trust:
We have audited the accompanying statements of assets and liabilities of the
Gateway Mid Cap Index Fund and Gateway Small Cap Index Fund of THE GATEWAY TRUST
(an Ohio business trust), including the portfolios of investments, as of
December 31, 1995, and the related statements of operations, statements of
changes in net assets and financial highlights for the periods indicated thereon
(see pages 4 to 12 and 14 to 21). These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gateway Mid Cap Index Fund and Gateway Small Cap Index Fund of The Gateway Trust
as of December 31, 1995, the results of their operations, the changes in their
net assets, and the financial highlights for the periods indicated thereon, in
conformity with generally accepted accounting principles.
Cincinnati, Ohio Arthur Andersen LLP
January 19, 1996
================================================================================
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
Stefen F. Brueckner
Kenneth A. Drucker
Beverly S. Gordon
John F. Lebor
Walter G. Sall
William H. Schneebeck
Peter W. Thayer
22
<PAGE> 116
RESULTS OF SPECIAL MEETING OF SHAREHOLDERS ON DECEMBER 11, 1995
On December 11, 1995, a special meeting of shareholders of The Gateway Trust was
held to approve new investment advisory contracts for each separate Fund series
of the Trust. The investment advisory contracts approved at the meeting were
substantially identical with the advisory contracts in place prior to the
meeting except for the investment advisor which was changed from Gateway
Investment Advisers, Inc. to Gateway Investment Advisers, L.P.
The results of the voting for the new investment advisory contracts were as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN
- ---- --- ------- -------
<S> <C> <C> <C>
Gateway Index Plus Fund 6,291,436 119,633 291,668
Gateway Mid Cap Index Fund 355,310 1,184 3,009
Gateway Small Cap Index Fund 596,088 5,054 9,602
The Cincinnati Fund 366,890 1,022 1,568
</TABLE>
<PAGE> 117
[LOGO]
THE GATEWAY TRUST
P.O. BOX 5211
CINCINNATI, OH 45201-5211
(800) 354-6339
MEMBER OF
====================================
100% NO-LOAD(TM) MUTUAL FUND COUNCIL
====================================
<PAGE> 118
PROSPECTUS
May 1, 1996
CINCINNATI FUND
The Cincinnati Fund seeks capital appreciation through investment in
the common stock of companies with an important presence in the Greater
Cincinnati Area. Through the use of a proprietary model, portfolio stocks are
selected on the basis of level of employment and nature of operations in the
Greater Cincinnati Area. Certain industry diversification, liquidity, market
capitalization, and listing requirements are also included in the model.
THE GATEWAY FAMILY OF MUTUAL FUNDS
The Cincinnati Fund ("Fund") is a series of The Gateway Trust
("Trust"). This Prospectus sets forth concisely the information about the Fund
that you should know before investing. You should keep it for future reference.
Additional information has been filed with the Securities and Exchange
Commission and is included in the Statement of Additional Information of the
Fund dated May 1, 1996. The Statement of Additional Information ("SAI") is
incorporated herein by reference. You can obtain more information about the Fund
or free copies of the SAI by writing or calling: THE GATEWAY TRUST, P.O. BOX
5211, CINCINNATI, OHIO 45201-5211, (800) 354-5525.
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT APPROVE SHARES OF ANY MUTUAL
FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
April 30, 1996
<PAGE> 119
Table Of Contents
<TABLE>
<S> <C>
Fees And Expenses................................ The Cincinnati Fund is 100 % no-load. There are no
sales charges, 12b-1 fees, redemption fees or
annual account charges when you invest in the Fund.
Financial Highlights............................. This table displays financial information for the
Cincinnati Fund.
How To Open An Account........................... New investors can open an account by mail or by
telephone.
How To Purchase Additional Shares................ Shares may be purchased by check, by wire transfer
or by automatic withdrawals from your bank account.
How To Redeem Shares............................. Redemption requests can be made by mail or by
telephone.
Additional Shareholder Information............... Additional information about buying and selling
shares.
Performance Information.......................... Performance information on the Fund.
Dividends And Distributions...................... Investors may reinvest their dividends and
distributions at no charge.
How Fund Shares Are Priced....................... The Fund's share price is available 24 hours a day
by calling (800) 354-5525.
Portfolio Manager Profile........................ Profile of the portfolio manager.
About The Investment Adviser..................... Gateway Investment Advisers, L.P. provides
investment advisory services to the Fund.
Taxes............................................ Tax information will be reported to you Form 1099.
Investment Practices And Restrictions............ Investment management practices follow specific
guidelines. The Fund has adopted certain investment
restrictions.
General Information/The Gateway Trust............ Additional information on The Gateway Trust and its
Trustees.
</TABLE>
<PAGE> 120
Fees And Expenses
The Cincinnati Fund is 100% no-load. You do not pay any sales charges when you
invest in the Cincinnati Fund.
SHAREHOLDER TRANSACTION EXPENSES
The Cincinnati Fund does not charge a fee for purchases, exchanges or
redemptions. The Fund is 100% no-load.
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------
Maximum Sales Load on Purchase None
Maximum Sales Load on
Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
The custodian for the Fund charges $10 for each wire transfer.
FUND OPERATING EXPENSES
Annual fund operating expenses are paid from the Fund's assets. The
Fund pays an advisory fee to Gateway Investment Advisers, L.P. (the "Adviser").
The Fund also pays other expenses for services such as maintaining shareholder
records and furnishing shareholder statements and Fund reports. The Fund's
expenses are factored into its share price each day and are not charged directly
to shareholder accounts. The investment advisory contract for the Fund provides
for an advisory fee computed at an annual rate of 0.50% of its average daily net
assets. The investment advisory contract requires the Adviser to waive some or
all of its advisory fees as necessary to limit the Fund's ratio to 2.00% of its
average daily net assets. Any contractual waiver will not exceed the aggregate
advisory fee payable by the Fund for the applicable year. The table presents the
advisory fees for the Fund net of the contractual fee waiver. In addition, the
Adviser has voluntarily agreed to reimburse expenses to the extent required
(after giving full effect to the fee waiver) to maintain the Fund's expense
ratio at 2.00%, and the table reflects such reimbursements. The Fund's actual
expense ratio for 1995 was 1.98% due to additional voluntary expense
reimbursements. Absent the waiver and voluntary reimbursements, the advisory
fees and operating expenses of the Fund would have been 0.50% and 3.18%,
respectively. The numbers in the following table are calculated as a percentage
of average net assets.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
- ------------------------------
<S> <C>
Advisory Fees (after waiver) 0.00%
12b-1 Fees 0.00%
Other Expenses (after reimbursements) 2.00%
----
Total Fund Operating Expenses (after waiver and reimbursements) 2.00%
(The Fund's Expense Ratio)
</TABLE>
<PAGE> 121
Fees and Expenses (Continued)
EXAMPLE
Assume that the Fund's annual return is 5% and that its operating
expenses are exactly as previously described in the Fund Operating Expenses
table. For every $1,000 you invested, the table below shows the amount of
expenses you would incur if you sold your shares after the number of years
indicated. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
<TABLE>
<CAPTION>
CINCINNATI FUND
- ---------------
<S> <C>
One Year $ 20
Three Years $ 63
Five Years $ 108
Ten Years $ 233
</TABLE>
The purpose of this table is to assist you in understanding the direct and
indirect costs and expenses you will bear as a Fund shareholder.
<PAGE> 122
Financial Highlights
The following condensed financial information has been audited by Arthur
Andersen LLP, independent public accountants. The audit report on the 1995
financial statements should be read in conjunction with this condensed financial
information. The audit report on the 1995 financial statements is incorporated
by reference in the Statement of Additional Information and is available from
the Trust. The presentation is for a share outstanding throughout each period.
<TABLE>
<CAPTION>
For the Period from
Year Ended November 7, 1994 to
December 31, 1995 (3) December 31, 1994
--------------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 9.91 $10.00
------ ------
Net investment income 0.04 0.03
Net gains (losses) on securities 3.46 (0.12)
------ ------
Total from investment operations 3.50 (0.09)
------ ------
Dividends from net investment income (0.07) 0.00
Distributions from capital gains (0.22) 0.00
------ ------
Total distributions (0.29) 0.00
------ ------
Net asset value, end of period $13.12 $ 9.91
====== ======
TOTAL RETURN 35.31% (0.90%)(2)
Net assets, end of period (millions) $ 5.88 $ 3.23
Ratio of net expenses to average net assets (1) 1.98% 1.96%
Ratio of net investment income to average net 0.46% 2.24%
assets (1)
Portfolio turnover rate 9% 0%(2)
</TABLE>
(1) The ratio of net expenses to average net assets would have increased
and the ratio of net investment income to average net assets would have
decreased by 0.02% in 1995 and 0.04% in 1994 had the Adviser not
voluntarily reimbursed expenses. Ratios are annualized in periods less
than a year.
(2) Not annualized.
(3) On December 15, 1995, Gateway Investment Advisers, L.P. became
investment adviser of the Fund.
Additional information about the performance of the Fund is contained in the
1995 Annual Report to shareholders. An Annual Report may be obtained without
charge by writing THE GATEWAY TRUST, P. O. BOX 5211, CINCINNATI, OHIO 45201-5211
or by calling (800) 354-5525.
<PAGE> 123
How To Open An Account
The Cincinnati Fund is available for individuals, IRAs, trusts and pension
plans.
OPENING A NEW ACCOUNT
You may open an account by mail or by telephone. The minimum initial
investment generally is $1,000. No sales commission is charged by the Fund for
purchases or redemptions of its shares.
BY MAIL
To open your account by mail, please complete and sign the New Account
Application Form which accompanies this Prospectus. The application has
instructions to assist you. Please indicate the amount of your investment in the
Fund. When you have completed the application, please mail it to: THE GATEWAY
TRUST, SHAREHOLDER SERVICES, P. O. BOX 5211, CINCINNATI, OH 45201-5211.
Please include your check or money order payable to THE GATEWAY TRUST
with your application.
BY TELEPHONE
To open your account by telephone, you must wire your investment to The
Gateway Trust. Please call Gateway shareholder services at (800) 354-5525 for
instructions. You must provide the following information to open your new
account: your name, your address, your social security or tax identification
number, the size of your initial investment, the Gateway fund(s) in which you
wish to invest, and the name and address of your financial institution wiring
the funds. You must then instruct your financial institution to wire the funds
to: THE GATEWAY TRUST, C/O STAR BANK, N.A.ABA #042-0000-13, CINCINNATI, OHIO,
YOUR NAME, YOUR GATEWAY ACCOUNT NO. XXXXX, AND THE GATEWAY FUNDS(S) IN WHICH YOU
WISH TO INVEST.
You must send the following information with your wire: your name, your
Gateway account number, and the name of the fund(s) in which you wish to invest.
See Page 9 for additional information about wire transfers and telephone
instructions.
OPENING A NEW IRA ACCOUNT/TRANSFER OF EXISTING IRA
To open a new IRA in the Fund, please call Gateway shareholder services
at (800) 354-5525 to obtain an IRA Account Application and an IRA Investment
Kit. To transfer an existing IRA from a bank or other mutual fund to your
Gateway/Cincinnati Fund IRA, you must complete an IRA Transfer Form which is
included in the IRA Investment Kit, in addition to an IRA Account Application.
To transfer or roll over funds from an employer-sponsored plan such as a 401(k)
plan, please call Gateway shareholder services at (800) 354-5525 for
instructions. GATEWAY IRAS ARE FREE OF ANY ANNUAL CHARGES OR TRANSACTION FEES.
OPENING A TRUST/PENSION PLAN ACCOUNT
To open a trust account in the Fund, please complete the New Account
Application Form. In the registration section, give the full legal name of the
trust. Pension plans may invest in the Fund by completing the New Account
Application Form.
OPENING A UNIFORM GIFT TO MINORS ACT ACCOUNT
To open a Gateway account for a minor (typically used for educational
savings plans), please complete the UGMA/UTMA section of the New Account
Application Form. Be sure to include the minor's social security number.
<PAGE> 124
How To Purchase Additional Shares
The minimum amount for an additional investment is $100.
You may add to your Gateway account at any time by choosing one of the
following purchase options. The minimum amount for an additional investment is
$100. If your purchase request is received in good order by 4:00 P.M. Eastern
Time, your purchase will be based on that day's closing price for the Fund.
After each purchase you will receive a confirmation statement showing
the value of your account. Certificates are not issued for Fund shares.
BY MAIL
The most common way of purchasing additional shares in the Fund is by
mail. Please send your check or money order and an Additional Investment Form in
a prepaid envelope. Additional Investment Forms and prepaid envelopes are
included with each confirmation statement, quarterly report and periodic
newsletter sent to you. Please make all checks or money orders payable to THE
GATEWAY TRUST and mail to: THE GATEWAY TRUST, SHAREHOLDER SERVICES, P. O. BOX
5211, CINCINNATI, OH 45201-5211.
BY WIRE
To avoid any mail delay, you may purchase additional shares by wire.
Please call Gateway shareholder services at (800) 354-5525 to arrange a purchase
by wire. You must then instruct your financial institution to wire funds to: THE
GATEWAY TRUST, C/O STAR BANK, N.A., ABA #042-0000-13, CINCINNATI, OHIO, YOUR
NAME, YOUR GATEWAY ACCOUNT NO. XXXXX, AND THE GATEWAY FUND(S) IN WHICH YOU WISH
TO INVEST.
You must send the following information with your wire: your name, your
Gateway account number, and the name of the fund(s) in which you wish to invest.
See Page 9 for additional information about wire transfers and telephone
instructions.
BY AUTOMATIC INVESTMENT PROGRAM
Gateway's Automatic Investment Program is a way to add systematically
to your existing Gateway account. When you use the program, funds are
electronically transferred from your bank account into your Gateway account and
additional shares are then purchased for your account. This service is available
on a monthly or quarterly basis with a minimum of $100 per transfer. THE
AUTOMATIC INVESTMENT PROGRAM IS FREE OF CHARGE. Please call Gateway shareholder
services at (800) 354-5525 to make arrangements to use this program.
BY EXCHANGE FROM ANOTHER GATEWAY FUND
To purchase shares by exchanging from another Gateway fund, please call
Gateway shareholder services at (800) 354-5525 for instructions. If your
exchange request is received by 4:00 P.M. Eastern Time, the exchange will be
based on that day's closing prices for the funds involved in the exchange.
The Trust does not charge any fee for exchanges between Gateway funds.
Generally, an exchange between funds is a taxable event. State securities laws
may restrict your ability to make exchanges. The Trust reserves the right to
temporarily or permanently terminate the exchange privilege for any shareholder
who makes an excessive number of exchanges. You will receive advance written
notice that the Trust intends to limit your use of the exchange privilege. The
Trust also reserves the right to terminate or modify the exchange privilege or
to refuse an exchange if the exchange would adversely affect any Gateway fund
involved in the exchange.
<PAGE> 125
How To Redeem Shares
Investors may redeem shares by writing or calling Gateway.
You may redeem shares from your Gateway account at any time by choosing
one of the following redemption options. If your redemption request is received
in good order by 4:00 P.M. Eastern Time, your redemption will be based on that
day's closing price for the Fund.
The proceeds from your redemption will be mailed or wired, depending on
the method of redemption and your instructions. Normally the proceeds will be
sent on the following business day. Payments to shareholders who have purchased
shares by check will not be made until the purchase check has cleared, which
could take up to fifteen days.
BY MAIL
Redemption requests made in writing should be sent to: THE GATEWAY
TRUST, SHAREHOLDER SERVICES, P. O. BOX 5211, CINCINNATI, OHIO 45201-5211.
Each redemption request should include a letter of instruction, specify
the number of Fund shares or dollar amount to be redeemed, and should be signed
by all owners of the shares exactly as their names appear on the account. In
certain cases, other supporting legal documents may be required. The redemption
proceeds will be mailed to the address shown on your account.
A signature guarantee is not usually required. However, a signature
guarantee is required under certain circumstances, including redemptions
involving payment to persons other than the record owner(s) of the shares. A
signature guarantee will be accepted from banks, brokers, dealers, municipal
securities dealers or brokers, government securities dealers or brokers, credit
unions (if authorized by state law), national securities exchanges, registered
securities associations, clearing agencies, and savings associations. Notary
publics cannot guarantee your signature.
BY TELEPHONE
Unless you have declined the telephone exchange and/or redemption
privileges, you may redeem your Fund shares by calling Gateway shareholder
services at (800) 354-5525. If you redeem your shares by telephone, the
redemption proceeds will be paid by check to the owner(s) of the shares shown on
Gateway's records and mailed to the address shown on Gateway's records for your
account. Redemption proceeds can be sent by wire if you completed the wire
transfer instructions in your original New Account Application Form or you have
sent separate wire transfer instructions to Gateway. Separate wire transfer
instructions must be signed by all owners of the shares exactly as their names
appear on the account, and the signatures must be guaranteed. The telephone
redemption procedure is not available for IRAs.
SYSTEMATIC WITHDRAWAL PROGRAM
If the value of your account is at least $5,000, you can arrange for
systematic quarterly or monthly withdrawals in the amount of $100 or more.
Please call Gateway shareholder services at (800) 354-5525 to make arrangements
to use this program.
See Page 9 for additional information about redemptions and telephone
instructions.
<PAGE> 126
Additional Shareholder Information
FEES CHARGED BY YOUR BROKER OR BANK
If you buy or sell shares of the Fund through a broker, the broker may
charge you additional fees and expenses. If you buy shares through a wire
transfer, The Gateway Trust will not charge you for the wire. Your financial
institution may charge you for this service or for transfers from your bank
account to the Fund through the Automatic Investment Program. If you redeem
shares through a wire transfer, the Trust's custodian will assess a wire charge
of $10. Your institution may also charge you for receiving a wire transfer of
redemption proceeds.
ADDITIONAL IRA INFORMATION
For information about redeeming shares from an IRA, please call Gateway
shareholder services at (800) 354-5525. More detailed information about
transfers to and distributions from an IRA and a general description of some of
the Internal Revenue Service rules governing IRAs are set forth in the SAI.
TELEPHONE TRANSACTIONS
The Gateway Trust will not be liable for following instructions
received by telephone that it reasonably believes to be genuine. The Trust will
employ reasonable procedures to confirm that telephone instructions are genuine.
All shareholders of the Fund have telephone redemption and exchange privileges
unless the shareholder has specifically declined these privileges. If you do not
wish to have telephone privileges for your account, you must mark the
appropriate section on the New Account Application Form or notify the Trust in
writing. To protect shareholders who have telephone privileges, the Trust
follows certain procedures, including requiring a form of personal
identification before acting upon telephone instructions, making redemption
checks requested by telephone payable only to the owner(s) of the account shown
on the Trust's records, mailing such redemption checks only to the account
address shown on the Trust's records, directing wire redemptions requested by
telephone only to the bank account shown on the Trust's records, providing
written confirmation of any transaction requested by telephone, and normally
tape recording any instructions received by telephone.
AUTOMATIC REDEMPTIONS BY THE TRUST
The Gateway Trust reserves the right to reject any investment at any
time. The Trust also reserves the right to automatically redeem your account(s)
under certain circumstances. You will receive written notice at least 60 days
prior to the automatic redemption of your account(s) by the Trust. Your
account(s) may be automatically redeemed when the aggregate value of your
account(s) falls below $800 (other than as a result of market action) unless you
purchase additional shares to increase the value of your account(s) to at least
$1,000 before the end of the 60-day period. Your account(s) may also be
automatically redeemed if you do not provide a valid U. S. social security
number or taxpayer identification number or other requested documents before the
end of the 60-day period. The Trustees of The Gateway Trust can terminate any
series of the Trust upon written notification to the shareholders of the
applicable series.
ADDITIONAL REDEMPTION INFORMATION
Redemption proceeds will be sent to you no later than five business
days after your request is received in good order. The right of redemption may
be suspended in certain circumstances, such as the closing of the New York Stock
Exchange for a period other than weekends or normal holidays.
<PAGE> 127
Performance Information
Gateway has become an industry leader in providing prospective investors and
existing shareholders with the most complete information on its no-load funds.
COMPARATIVE PERFORMANCE INFORMATION
The Fund may compare its performance to various indexes, such as the
S&P 500 Index. The Fund may also compare its performance to that of other mutual
funds or categories of mutual funds as reported by independent services, such as
Morningstar, Inc. and Value Line Mutual Fund Survey, or by other financial
publications.
EXPLANATION OF TERMS
Total return is the change in the value of an investment in a fund over
a given period, assuming reinvestment of distributions.
An average annual total return is a rate of return that, if achieved
consistently throughout a given period, would produce a cumulative total return
equal to that actually achieved by the fund over the same period. Average annual
total returns smooth out variations in performance; they are not the same as
actual year-by-year results.
The S&P 500 Index is a widely recognized measure of performance for the
stock market. The S&P 500 figures represent the prices of an unmanaged index of
500 common stocks and assume reinvestment of all dividends paid on the stocks in
the index.
U. S. Treasury bills are negotiable debt obligations of the United
States government. Since they are secured by the full faith and credit of the
government, they are regarded as risk-free investments. Treasury bills are
short-term securities with maturities of one year or less.
<PAGE> 128
Performance Information (Continued)
Growth of $10,000 Chart
(Insert Chart Here)
This chart shows the growth of a $10,000 investment made at the Fund's
inception. It assumes all distributions were reinvested in additional shares.
<TABLE>
<CAPTION>
============================================
Cincinnati Fund
Average Annual Total Returns
As Of December 31, 1995
============================================
<S> <C>
One Year 35.31%
Five Years N/A
Life of Fund 29.22%
============================================
</TABLE>
Performance data represents past performance and your investment return and
principal value of an investment will fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost.
<PAGE> 129
Dividends And Distributions
Fund shareholders may reinvest their dividends and distributions at no charge.
Shareholders of the Fund may elect to receive distributions either in
cash or in additional shares of the Fund. To receive your distributions in cash,
please mark the appropriate box on the New Account Application Form. Once your
account is opened, you may change the way your distributions are handled by
writing or calling Gateway.
The Fund normally declares dividends and net capital gains, if any, at
the end of December.
FUND PRICING WHEN DIVIDENDS ARE DECLARED
The price of the Fund is affected by its declaration of dividends and
capital gains distributions. The price of the Fund, as adjusted for market
activity, generally drops by the amount of the declared dividend and capital
gains distribution. As an example, assume that on December 31, the Fund declares
a dividend in the amount of $0.50 per share. If the Fund's price per share was
$16.50 on December 30, the Fund's price on December 31 would be $16.00. The
decline of $0.50 per share would be the result of the declaration of the $0.50
dividend.
TAX CONSEQUENCES OF BUYING A DIVIDEND
If you buy Fund shares just before the Fund declares a dividend, you
will pay the full price for the shares and then receive a portion of the price
back as a taxable distribution. In the example above, if you bought shares of
the Fund on December 30, you would pay $16.50 per share. On December 31, the
Fund would pay you $0.50 per share as a dividend and your shares would be worth
$16.00 per share. The dividend paid to you would generally be included in your
gross income for tax purposes, whether or not you reinvested the dividend. For
this reason, you should carefully consider the tax consequences of buying shares
in the Fund in late December.
<PAGE> 130
How Fund Shares Are Priced
The net asset value (closing share price) of the Fund ordinarily is
determined as of the close of the New York Stock Exchange, normally 4:00 P.M.
Eastern Time on each day during which the Exchange is open for trading. Under
unusual circumstances, the net asset value may be determined at other times as
authorized by the Board of Trustees. Net asset value is determined by deducting
the liabilities of the Fund from the market or fair value of its assets.
The Fund normally values stocks and options at the average of the
closing bid and asked quotations. Securities for which market quotations are not
readily available, securities in which trading has been suspended during the
day, and all other assets are valued at fair value. Fair value is determined in
good faith under procedures adopted by the Board of Trustees.
<PAGE> 131
PORTFOLIO MANAGER PROFILE
J. Patrick Rogers, CFA
MBA Xavier University 1994
BBA University of Notre Dame 1986
Age 32
J. Patrick Rogers, CFA, portfolio manager of the Cincinnati Fund,
joined Gateway Investment Advisers, Inc. in 1989. He is currently president of
Gateway Investment Advisers, Inc. and co-portfolio manager for the Index Plus
Fund, the Mid Cap Index Fund, and the Small Cap Index Fund along with Mr. Peter
Thayer.
He was awarded the Martin B. Friedman Award at Xavier University which
is given annually to the most outstanding MBA student. Mr. Rogers is a frequent
speaker at various individual investor groups, including AAII, and is active in
many industry associations, including the 100% No-Load Mutual Fund Council.
He and his wife, Elizabeth, have two children.
<PAGE> 132
About The Investment Adviser
INVESTMENT ADVISER
Gateway Investment Advisers, L.P. ("Adviser"), a Delaware limited
partnership, has acted as the investment adviser for the Fund since December 15,
1995. Gateway Investment Advisers, Inc. ("GIA") provided investment advisory
services to the Fund from its formation until December 15, 1995. The Adviser is
the successor in interest to the assets, business and personnel of GIA. The
Adviser is a limited partnership in which GIA is the general partner with a 76%
partnership interest. The sole limited partner of the Adviser is Alex. Brown
Capital Advisory & Trust Company previously known as Alex. Brown Investments
Incorporated), an affiliate of Alex. Brown & Sons Incorporated, a nationally
known investment banking firm and registered broker/dealer located in Baltimore,
Maryland. The principal and controlling shareholders of GIA are Walter G. Sall
and J. Patrick Rogers. As of December 31, 1995, the Adviser had approximately
$600 million in assets under its management, including approximately $195
million in assets invested in the Gateway funds.
ADVISORY SERVICES
The Adviser provides the Fund with investment research and advice. The
Adviser also places with brokers the Fund's buy and sell orders for portfolio
securities. When the Adviser places these orders, it uses its best efforts to
obtain the most favorable price and execution available for the Fund, except to
the extent that the Fund may be permitted to pay higher commissions for
brokerage and research services pursuant to Section 28(e) of the Securities
Exchange Act of 1934. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., the Adviser may consider sales of Fund
shares as a factor in the selection of brokers to execute Fund portfolio
transactions.
ADVISORY FEES
The Fund pays the Adviser an advisory fee calculated at an annual rate
of 0.50% of the average daily net asset value of the Fund. The advisory contract
requires the Adviser to waive some or all of its advisory fees as necessary to
limit the Fund's expense ratio to 2.00% of its average daily net assets. Any
contractual waiver will not exceed the aggregate advisory fee payable by the
Fund for the applicable year.
FUND EXPENSES
The Fund pays all of its ordinary business expenses, other than
advertising and marketing expenses which are paid by the Adviser. Ordinary
business expenses include the advisory fees of the Adviser, custodial fees,
brokerage commissions, fees paid to the Adviser for providing shareholder
services, expenses incurred in the registration of the Fund shares with federal
and state securities agencies, and the Fund's proportionate share of the
collective general expenses, such as expenses of printing and distributing
shareholder reports. Expenses applicable to more than one of the Gateway funds
are either allocated on the basis of the number of shareholders or net assets in
each fund. These collective expenses include certain printing and mailing costs,
professional fees, and insurance costs.
The Adviser provides shareholder, transfer, and dividend disbursing
services to the Fund. The Adviser charges a monthly minimum fee of $2,500 for
these shareholder services. The Fund reimburses the Adviser for printing,
mailing, compliance, and processing expenses associated with providing
shareholder services. The portion of the reimbursement related to processing
expenses cannot exceed 0.20% of the Fund's average net assets. The Fund pays the
Adviser a monthly fee of $4,000 for financial and administrative services
provided by the Adviser
<PAGE> 133
Taxes
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute to its shareholders substantially all of
its net investment income and net capital gains, as determined in accordance
with appropriate tax regulations.
TAXES ON DIVIDENDS AND DISTRIBUTIONS
Each January you will receive a Form 1099-DIV from Gateway. It will show
the amount and federal income tax treatment of all distributions paid to you
during the year. Distributions of any net investment income and net realized
short-term capital gains are taxable to you as ordinary income, whether or not
you reinvest. Distributions of net long-term capital gains are taxable as
long-term capital gains, whether or not you reinvest and regardless of how long
you held your Fund shares.
TAXES ON REDEMPTIONS AND EXCHANGES
Redemptions, including exchanges between Gateway funds, will be reported
to you on Form 1099-B.
TAXES ON IRAS
Contributions, investments and distributions with respect to IRAs are
subject to specific IRS rules. The SAI contains additional information about
these rules.
ADDITIONAL INFORMATION
The tax discussion set forth above and in the SAI is included for general
information only. You must determine the applicability of federal, state and
local taxes to dividends and distributions received on your shares of the Fund
and to proceeds received from redemptions or exchanges of Fund shares.
Prospective investors should consult their own tax advisors concerning the tax
consequences of an investment in the Fund.
<PAGE> 134
Investment Practices And Restrictions
CINCINNATI FUND
The investment objective of the Cincinnati Fund is to achieve capital
appreciation through investment in the common stock of companies with an
important presence in the Greater Cincinnati Area ("Cincinnati Companies").
Investment Practices: The Fund attempts to achieve its objective by
investing in the common stocks of Cincinnati Companies that meet certain
criteria included in a proprietary model developed by the Adviser. These
criteria include level of employment and nature of operations in the Greater
Cincinnati Area. The Adviser has also incorporated certain industry
diversification, liquidity, market capitalization, and listing criteria into the
model. The Adviser uses the proprietary model to select the Fund's portfolio of
stocks and to determine the proportion of the Fund's assets that are invested in
each stock.
To be eligible for inclusion in the Fund's portfolio, a stock currently
must meet the following model criteria: (1) the stock must be issued either by a
company that employs at least fifty persons in the Greater Cincinnati Area or by
a company that maintains its corporate headquarters in the Greater Cincinnati
Area, (2) the stock must be issued by a company with a market capitalization of
$5 million or more, and (3) the stock must be listed on a national securities
exchange, such as the New York Stock Exchange, the American Stock Exchange or
the National Market System of the NASDAQ. The Greater Cincinnati Area, for
purposes of the model, is defined as the Cincinnati and Hamilton-Middletown
Consolidated Metropolitan Statistical Area ("CMSA"). The CMSA includes Hamilton,
Clermont, Warren, and Butler counties in Ohio; Boone, Campbell, and Kenton
counties in Kentucky; and Dearborn county in Indiana.
The Adviser rebalances the portfolio and makes appropriate adjustments
in the portfolio to reflect changes in the underlying corporate data. In
addition, the Adviser may modify the proprietary model, or the selection
criteria incorporated in the model, in response to market and economic
developments. Such modifications could result in changes to the composition of
the Fund's portfolio.
RISK FACTORS
There are risks inherent in all securities investments. Thus, there can
be no assurance that the Fund will be able to achieve its investment objective.
Changes and developments in the economic environment of the Greater Cincinnati
Area may have a disproportionate effect on the Fund's portfolio. Because the
composition of the Fund's portfolio is determined by the model's criteria, the
Adviser generally will not consider other factors, such as favorable or
unfavorable developments regarding a particular Cincinnati Company or its stock,
in managing the portfolio.
The portfolio of the Fund contains some small capitalization stocks.
Investments in companies with smaller capitalization are generally more volatile
and may be less liquid than investments in companies with larger capitalization.
As the Fund has a long-term investment objective, it may not be an
appropriate investment for persons intending to hold Fund shares for less than
six months.
<PAGE> 135
Investment Practices And Restrictions (Continued)
OTHER INVESTMENT STRATEGIES
Under normal conditions, the Adviser invests at least 65% of the Fund's
total assets in securities from two sources: 1) those issued by companies that
maintain their headquarters in the Greater Cincinnati Area; and, 2) those issued
by companies that are headquartered elsewhere who rank among the 25 largest
publicly held employers in the Greater Cincinnati Area. The Fund may hold cash
for purposes of liquidity or for temporary defensive purposes. Cash is normally
invested in repurchase agreements. Cash may also be invested in securities of
the U. S. government or any of its agencies, bankers acceptances, commercial
paper, or certificates of deposit. For temporary defensive purposes, the Fund
may hold up to 100% of its assets in cash instruments. Under normal conditions,
the Adviser does not intend to invest more than 5% of the Fund's net assets in
any cash instrument other than repurchase agreements.
In a repurchase agreement, the Fund acquires securities suitable for
investments in accordance with its policies and the seller (usually a bank)
agrees at the time of sale to repurchase such securities at an agreed-upon date,
price, and interest rate. Investments in repurchase agreements are subject to
the risk that the selling bank may default in its repurchase obligation.
Investments in repurchase agreements are also subject to the risk that the
selling bank may become financially insolvent which could prevent or delay the
Fund's disposition of the collateral held as security for these transactions.
Such repurchase agreements are fully collateralized and the Fund takes
possession of such collateral, thus reducing the risk of default. The collateral
is subject to continuing market fluctuations and its value could be more or less
than the repurchase price.
ADDITIONAL INFORMATION
For further information concerning the investment practices described
above and certain risks associated with them, see "Investment Objectives and
Practices" in the SAI.
FUNDAMENTAL POLICIES
The investment objective and investment restrictions of the Fund are
designated as fundamental policies. Such fundamental policies may not be changed
without approval of the holders of a majority of the Fund's outstanding shares.
The investment practices of the Fund as described above are not
fundamental policies and may be changed without shareholder approval.
INVESTMENT RESTRICTIONS
Certain investment restrictions applicable to the Fund are described
below. The complete text of these restrictions is set forth in the SAI under the
caption "Other Information about Investment Practices and Restrictions."
Additional investment restrictions pertaining to the Fund are set forth in the
SAI under the same caption.
Investments in One Issuer: The Fund may not purchase any security if,
as a result, the Fund would then hold more than 10% of the common stock of the
issuer.
Investments in Start-Up Companies: The Fund may not purchase any
security if, as a result, the Fund would then have more than 5% of its total
assets invested in securities of companies less than three years old.
Investments in Repurchase Agreements: The Fund may not invest more than
5% of its total assets in repurchase agreements with a maturity longer than
seven days.
<PAGE> 136
General Information About The Gateway Trust
THE TRUST AND THE BOARD OF TRUSTEES
The Gateway Trust is an open-end management investment company
established as an Ohio business trust in 1986. From 1977 to 1986, the Trust's
predecessor operated as a Maryland corporation. The Trust has four series: the
Cincinnati Fund, the Gateway Index Plus Fund, the Gateway Mid Cap Index Fund
(formerly the Gateway Capital Fund) and the Gateway Small Cap Index Fund. Shares
of the Cincinnati Fund are offered by this prospectus. The Gateway Index Plus
Fund, the Gateway Mid Cap Index Fund and the Small Cap Index Fund are offered by
a separate prospectus.
The Board of Trustees is generally responsible for management of the
business and affairs of the Trust. The Trustees formulate the general policies
of the Trust, approve contracts and authorize the Trust officers to carry out
the decisions of the Board.
Under the Trust's Second Amended Agreement and Declaration of Trust, no
annual or regular meetings of shareholders are required. As a result, the
Trustees will continue in office until resignation, death, or removal. Trustee
vacancies normally are filled by vote of the remaining Trustees. If at any time
less than a majority of the Trustees in office has been elected by the
shareholders, the Trustees must call a shareholder meeting for the purpose of
electing Trustees.
SHAREHOLDER MEETINGS AND VOTING
A meeting of shareholders must be called if shareholders holding at
least 10% of the Trust's shares (or shareholders holding at least 10% of any
fund's shares as to any matter affecting only such fund) file a written request
for a meeting.
On any matter submitted to a vote of shareholders, shares are voted by
fund, unless an aggregate vote is required by the Investment Company Act of
1940. Shares are voted by fund with respect to the approval or amendment of such
fund's advisory contract. As of February 1, 1996, Firstcinco, a common trust
fund of Star Bank, N.A. of Cincinnati, Ohio, held more than 25% of the
outstanding shares of the Fund. Thus, Firstcinco may be deemed to be a control
person of the Fund as of that date.
As of December 31, 1995, the shareholders of the Index Plus Fund
controlled approximately 89% of the outstanding shares of the Trust. Therefore,
in the foreseeable future, when the shareholders of the Trust elect the Trustees
or vote in the aggregate on any other issue, the shareholders of the Index Plus
Fund will be able to elect the Trustees or to decide the issue. Shareholders do
not have cumulative voting rights as to the election of Trustees. As a result,
if a shareholder meeting is called to elect Trustees, a majority of the shares
voting at the meeting can elect all of the Trustees.
<PAGE> 137
THE GATEWAY TRUST
Registration Statement
Securities Act of 1933 Registration No. 2-59895
Investment Company Act of 1940 Registration No. 811-02773
CINCINNATI FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1996
This Statement is not a prospectus but should be read in conjunction
with the current Prospectus of the Cincinnati Fund dated May 1, 1996, A copy of
the Prospectus may be obtained from the Fund by written or telephone request
directed to the Fund at the address or the telephone number shown below.
P. O. BOX 5211
CINCINNATI, OHIO 45201-5211
(800) 354-5525
<PAGE> 138
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION.......................................................................................................................3
General Information About The Gateway Trust......................................................................................3
INVESTMENT PRACTICES AND RESTRICTIONS..............................................................................................4
General..........................................................................................................................4
Investment Restrictions..........................................................................................................4
PERFORMANCE AND RISK INFORMATION...................................................................................................7
Performance Information..........................................................................................................7
Total Return Calculations....................................................................................................7
Risk Information.................................................................................................................8
Comparative Indexes..........................................................................................................8
Standard Deviation...........................................................................................................8
Beta.........................................................................................................................8
Rankings and Comparative Performance Information.................................................................................9
SHAREHOLDER SERVICES...............................................................................................................9
Open Account.....................................................................................................................9
Systematic Withdrawal Plan.......................................................................................................9
Automatic Investment Plan.......................................................................................................10
IRAs............................................................................................................................10
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................................................................13
INVESTMENT ADVISORY AND OTHER SERVICES............................................................................................15
Gateway Investment Advisers, L.P................................................................................................15
Investment Advisory Contract....................................................................................................15
Custodian.......................................................................................................................17
Shareholder Servicing, Transfer, Dividend Disbursing and Financial Servicing Agent..............................................17
BROKERAGE.........................................................................................................................18
ADDITIONAL TAX MATTERS............................................................................................................19
Federal Tax Matters.............................................................................................................19
State and Local Tax Aspects.....................................................................................................20
TRUSTEES AND OFFICERS OF THE TRUST................................................................................................20
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS...........................................................................22
PRINCIPAL HOLDERS OF CINCINNATI FUND SHARES.......................................................................................23
SCHEDULE A........................................................................................................................24
</TABLE>
<PAGE> 139
INTRODUCTION
GENERAL INFORMATION ABOUT THE GATEWAY TRUST
The Gateway Trust (the "Trust") is an Ohio business trust which is
authorized to establish and operate one or more separate series of mutual funds
(herein referred to as "funds" or individually as a "fund"). Each fund has its
own investment policies, restrictions, practices, assets, and liabilities. Each
fund is represented by a separate series of shares of beneficial interest in the
Trust ("Shares"). The Trust's operation is governed by Chapter 1746 of the Ohio
Revised Code, by a Second Amended Agreement and Declaration of Trust dated as of
December 29, 1992, as amended, and by the Trust's Bylaws.
At present, there are four series of the Trust:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Name of Fund Date Organized Former Names
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gateway Index Plus Fund 1977 Gateway Option Index Fund until
March, 1990; Gateway Option
Income Fund until February, 1988;
Gateway Option Income Fund, Inc.
until May, 1986
Gateway Mid Cap Index Fund July 1992 Gateway Capital Fund until
December, 1993
Gateway Small Cap Index Fund April 1993 None
Cincinnati Fund November 1994 None
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Gateway Option Income Fund, Inc., the predecessor to the Trust, was
organized in 1977 as a Maryland corporation. It was reorganized to become the
Trust effective as of May 2, 1986, with the Gateway Option Income Fund as its
sole initial fund. As a result of the transaction, shareholders of the
corporation on May 2, 1986, became shareholders of the Option Income Fund.
The Gateway Index Plus Fund, the Gateway Mid Cap Index Fund, and the
Gateway Small Cap Index Fund are offered in one combined prospectus (the
"Combined Prospectus"). The Cincinnati Fund is offered in a separate prospectus
(the "Cincinnati Prospectus"). The Cincinnati Fund has a separate Statement of
Additional Information. The other three funds have a combined Statement of
Additional Information.
Gateway Investment Advisers, L.P. (the "Adviser") acts as the Fund's
investment adviser.
3
<PAGE> 140
INVESTMENT PRACTICES AND RESTRICTIONS
GENERAL
The Fund may hold cash for purposes of liquidity or for temporary
defensive purposes. The Fund generally will hold cash reserves for the purpose
of paying expenses and share redemptions and, in addition, cash received from
the sale of the Fund's shares which has not yet been invested. In addition, the
Adviser may determine from time to time that, for temporary defensive purposes,
the Fund should reduce (and in periods of unusual market conditions reduce
substantially or liquidate entirely) its investment in common stock. For
temporary defensive purposes, the Fund may hold up to 100% of its assets in
cash.
Cash is normally invested in repurchase agreements. Cash may also be
invested in securities of the U. S. government or any of its agencies, bankers
acceptances, commercial paper or certificates of deposit (collectively "cash
instruments"). Commercial paper investments will be limited to investment grade
issues rated A-1 or A-2 by Standard & Poor's Corporation or Prime-1 or Prime-2
by Moody's Investors Service, Inc. Certificates of deposit investments will be
limited to obligations of domestic banks with assets of $1 billion or more.
Under normal conditions, the Adviser does not intend to invest more than 5% of
the Fund's net assets in any cash instrument other than repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental policies with respect to the
Fund that may not be changed without a vote of shareholders of the Fund. Under
these policies, the Fund may not:
1. purchase any security if as a result the Fund (or the funds in
the Trust together) would then hold more than 10% of any class
of securities of an issuer (taking all common stock issues of an
issuer as a single class, all preferred stock issues as a single
class, and all debt issues as a single class) or more than 10%
of the outstanding voting securities of an issuer.
2. purchase any security if as a result the Fund would then have
more than 5% of its total assets (taken at current value)
invested in securities of companies (including predecessors)
less than three years old and in equity securities for which
market quotations are not readily available.
3. purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
purchase and sales of securities).
4. make short sales of securities or maintain a short position, (a)
unless, at all times when a short position is open, the Fund
owns an equal amount of such securities or securities
convertible into or exchangeable (without payment of any further
consideration) for securities of the same issue as, and equal in
amount to, the securities sold short, and (b) unless not more
than 10% of the Fund's net assets (taken at current value) are
held as collateral for such sales at any one time.
It is the present intention of management to make such sales
only for the purpose of deferring realization of gain or loss
for federal income tax purposes. It is the present
4
<PAGE> 141
intention of management that short sales of securities subject
to outstanding options will not be made.
5. borrow money except as a temporary measure for extraordinary or
emergency purposes and then only from banks and only in amounts
not in excess of 5% of the Fund's total assets (except to meet
redemption requests as discussed below), taken at the lower of
cost or market.
It is the present intention of management that the Fund will not
purchase additional portfolio securities at any time when its
borrowing exceeds 5% of its total assets. In order to meet
redemption requests without immediately selling any portfolio
securities, the Fund may borrow an amount up to 25% of the value
of its total assets including the amount borrowed. If, due to
market fluctuations or other reasons, the value of the Fund's
assets falls below 400% of its borrowing, the Fund will reduce
its borrowing which may result in the Fund being required to
sell securities at a time when it may otherwise be
disadvantageous to do so. This borrowing is not for investment
leverage but solely to facilitate management of the portfolio by
enabling the Fund to meet redemption requests where the
liquidation of portfolio securities is deemed to be inconvenient
or disadvantageous. However, the Fund might be deemed to be
engaged in leveraging in that any such borrowing will enable the
Fund to continue to earn money on investments which otherwise
may have been sold in order to meet redemption requests.
6. pledge more than 10% of its total assets, taken at market value.
The deposit in escrow of underlying securities in connection
with the writing of call options is not deemed to be a pledge.
7. purchase or retain securities of any company if officers and
trustees of the Trust or of the Adviser who individually own
more than 1/2 of 1% of the securities of that company together
own beneficially more than 5% of such securities.
8. buy or sell commodities or commodity contracts, or real estate
or interests in real estate, although it may purchase and sell
(a) securities which are secured by real estate, and (b)
securities of companies which invest or deal in real estate.
9. act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be
an underwriter under certain provisions of the Federal
securities laws.
10. make investments for the purpose of exercising control or
management.
11. participate on a joint or joint and several basis in any trading
account in securities.
12. purchase any security restricted as to disposition under the
Federal securities laws.
5
<PAGE> 142
13. invest in securities of other investment companies, except as
part of a merger, consolidation or other acquisition.
14. invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the common
stocks of companies which invest in or sponsor such programs.
15. make loans, except through the purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of
indebtedness of a type commonly sold privately to financial
institutions (subject to the limitation in paragraph 12 above),
and except through repurchase agreements.
No more than 5% of the Fund's assets will be invested in
repurchase agreements which have a maturity longer than seven
days. In addition, the Fund will not enter into repurchase
agreements with a securities dealer if such transactions
constitute the purchase of an interest in such dealer under the
Investment Company Act of 1940. The purchase of a portion of an
issue of such securities distributed publicly, whether or not
such purchase is made on the original issuance, is not
considered the making of a loan.
16. purchase any security (other than U. S. government obligations)
if, as a result thereof, less than 75% of the value of the
Fund's total assets is represented by cash and cash items
(including receivables), government securities and other
securities which for purposes of this calculation are limited in
respect of any one issuer to an amount not greater in value than
5% of the value of the Fund's total assets and to not more than
10% of the outstanding voting securities of such issuer.
All of the funds in the Trust taken as a group also must satisfy
this 10% test.
17. concentrate the investments of the Fund in a single industry.
18. write, purchase or sell puts, calls or combinations thereof.
19. buy or sell commodities, commodities futures contracts or
commodities options contracts.
The Trust has no fundamental policy with respect to the issuance of
senior securities by the Fund; however, the Investment Company Act of 1940
prohibits the Trust's issuance of any such securities.
In addition to these fundamental policies, the Fund may not invest more
than 15% of the Fund's net assets in "illiquid assets." Further, the Trust has
specifically undertaken as a condition of state registration to limit the
investment in warrants by the Fund to no more than 5% of the Fund's net assets,
and to further limit to 2% of the Fund's net assets any investment by the Fund
in warrants which are not listed on the New York or American Stock Exchanges.
Similarly, the Trust has undertaken to limit the short sales discussed in
Paragraph 4 above to the lesser of 2% of the value of securities of any one
issuer in which the Fund is short, or 2% of the securities of any class of any
issuer.
6
<PAGE> 143
Although the practices described in paragraphs 4, 5 and 6, above, could
involve more than 5% of a Fund's assets, the Adviser has no current intention of
causing the Fund to employ any such practice in the coming year.
PERFORMANCE AND RISK INFORMATION
PERFORMANCE INFORMATION
The Fund may quote performance in various ways. All performance
information supplied by the Fund is based upon historical results and is not
intended to indicate future performance. Total returns and other performance
information may be shown numerically or in a table, graph or similar
illustration. The Fund's share prices and total returns fluctuate in response to
market conditions, interest rates and other factors.
TOTAL RETURN CALCULATIONS
Total returns reflect all aspects of a fund's return, including the
effect of reinvesting dividends and capital gains distributions, and any change
in a fund's net asset value per share (NAV) over the period.
Average annual total returns are calculated by determining the average
annual compounded rates of return over one-, five- and ten-year periods that
would equate an initial hypothetical investment to the ending redeemable value
according to the following formula:
P (1 + T)n = ERV where: T = Average annual total return
n = Number of years and portion of a year
ERV = Ending redeemable value (of an initial
hypothetical $1,000 investment) at the end of the
period
P = $1,000 (the hypothetical initial investment)
If a fund has been in existence for less than one, five or ten years,
the time period since the date of the initial public offering will be
substituted for the periods stated.
As a hypothetical example, a cumulative return of 100% growth on a
compounded basis in ten years would produce an average annual total return of
7.18%, which is the annual rate that would equal 100% growth on a compounded
basis in ten years. While average annual total returns are convenient means of
comparing investment alternatives, investors should realize that a fund's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
Average annual total return is calculated as required by applicable
regulations promulgated by the Securities and Exchange Commission. In addition
to average annual total returns, the Fund may quote year-by-year total returns
and cumulative total returns reflecting the simple change in value of any
investment over a stated period. Average annual, year-by-year, and cumulative
total returns may be quoted as a percentage or as a dollar amount.
7
<PAGE> 144
RISK INFORMATION
In evaluating the performance of any investment including the Fund, it
is important to understand the risks involved in the investment. Information
regarding the performance of an investment, while valuable in itself, is more
meaningful when it is related to the level of risk associated with that
investment. Thus, two different mutual funds that produce similar average annual
total returns may present markedly different investment opportunities if the
risk of loss associated with one mutual fund is greater than that of the other
mutual fund.
For example, an investment in a mutual fund that invests in stocks
generally will present greater potential for variation in the share price of the
mutual fund, and hence a greater risk of gain or loss than an investment in a
mutual fund that invests in short-term U. S. government securities. Because the
potential for greater gain typically carries with it a greater degree of risk,
the advisability of an investment in a particular mutual fund for a given
investor will depend not only on historical performance of the fund but also on
the potential for gain and loss associated with that mutual fund.
The Gateway Trust offers four different funds that produce different
total returns and present different risk potentials. The difference in risk
potential can be demonstrated by various statistical concepts. The following
statistical concepts can be used to measure some of the risks associated with an
investment in the Fund.
COMPARATIVE INDEXES
The performance and risk of the Fund may be compared to the performance
and risk of the S&P 500 Index and the Lehman Government/Corporate Bond Index.
These comparative indexes are used because they are the standard benchmarks of
the stock market and bond market respectively.
STANDARD DEVIATION
Standard deviation measures the volatility of the total return of the
Fund. Standard deviation is one method of comparing the total return of a fund
to the average monthly total return of the Fund. In general, a fund that has a
greater standard deviation is a fund that has displayed a greater tendency to
vary from its own average monthly total return. Standard deviation can also be
used to compare the total return of a fund to the total return of an index or
another mutual fund. By comparing the magnitude of the standard deviation of
each investment, an analyst is able to determine the relative volatility of each
investment. An investment with an expected return of 10% and a standard
deviation of 15% would be expected to earn a total return ranging from -5% to
+25% about 68% of the time, a total return ranging from -20% to +40% about 95%
of the time, and a total return ranging from -35% to +55% about 97% of the time.
BETA
Beta analyzes the market risk of the Fund by showing how responsive the
Fund is to the market as defined by an index. Beta is a comparative measure of
the Fund's volatility in relation to an appropriate index. Generally, higher
betas represent riskier investments. By definition, the beta of the market is
1.00. Thus, a fund with a beta higher than 1.00 is expected to perform better
than the market in up markets and worse than the market in down markets. Beta is
the slope of the "least square line" which compares the Fund with an index.
8
<PAGE> 145
RANKINGS AND COMPARATIVE PERFORMANCE INFORMATION
The Fund may compare its performance to that of other mutual funds or
categories of mutual funds as reported by independent services, such as
Morningstar, Inc., Lipper Analytical Services, Inc. and Value Line Mutual Fund
Survey, or by other financial publications with circulations of 10,000 readers
or more. Performance comparisons may be expressed as ratings, such as the
proprietary ratings published by Morningstar, Inc., or rankings, such as the
rankings of funds in various categories published by Lipper Analytical Services.
Inc. Performance comparisons may also be expressed as designations (such as a
certain number of "stars") or descriptions (such as "best fund") assigned by
such services or publications.
SHAREHOLDER SERVICES
Gateway Investment Advisers, L.P. serves as the Trust's shareholder
servicing, transfer, dividend disbursing and financial servicing agent (the
"Servicing Agent"). In this capacity, it performs various shareholder services
on behalf of the Trust.
OPEN ACCOUNT
The Fund's regular account for investors who purchase its shares is the
Open Account. The Open Account facilitates regular purchases of Fund shares over
a period of years and provides the option of receiving dividends and
distributions either in cash or in Fund shares. There is no charge for the
automatic reinvestment of dividends and distributions.
The Servicing Agent maintains a record of the investor's purchases,
redemption, and share balance in the investor's open account. Shortly after each
purchase, the Servicing Agent will mail a confirmation to the investor showing
the shares purchased, the exact price paid for the shares and the total number
of shares owned. Share certificates will not be issued to an investor.
Upon opening an account, the investor may elect any of the following
options: (1) reinvestment at net asset value of all distributions, or (2)
payment in cash of all distributions. If no election is made, all distributions
will be reinvested at net asset value. An election may be changed by a letter or
telephone call to the Servicing Agent. The Fund presently bears all expenses of
its Open Accounts but reserves the right upon notice to establish a maintenance
charge in the future.
SYSTEMATIC WITHDRAWAL PLAN
If the value of an investor's account is at least $5,000, an investor
can request withdrawals on either a monthly or a quarterly basis in the minimum
amount of $100. The Trust makes no recommendation as to the minimum amount that
ought to be periodically withdrawn by an investor. A sufficient number of shares
in the investor's account will be sold periodically (normally one business day
prior to each withdrawal payment date) to meet the requested withdrawal
payments.
9
<PAGE> 146
If an investor establishes an account in the Systematic Withdrawal
Plan, all dividends and distributions on shares held in the account will be
reinvested in additional shares at net asset value. Since the withdrawal
payments represent the proceeds from sales of Fund shares, there will be a
reduction, and there could even be an eventual depletion, of the amount invested
in the Fund to the extent that withdrawal payments exceed the dividends and
distributions paid and reinvested in shares. Withdrawals under the Systematic
Withdrawal Plan should not, therefore, be considered a yield on investment. An
investor can make arrangements to use the Systematic Withdrawal Plan (or
discontinue use of the Plan) by contacting Shareholder Services at (800)
354-5525.
AUTOMATIC INVESTMENT PLAN
For established accounts, shares of the Fund may be purchased on a
regular monthly or quarterly basis in amounts of $100 or more per purchase.
Shareholder Services can arrange to have such funds transferred automatically
from an investor's checking account to the Trust for purchase of shares. An
investor can make arrangements to use the Automatic Investment Plan (or
discontinue use of the Plan) by contacting Shareholder Services at (800)
354-5525.
IRAS
Investors may purchase shares of the Fund through Individual Retirement
Accounts ("IRAs") which are permitted to invest in shares of a mutual fund. The
Trust itself sponsors a form of IRA which can be adopted by an investor and
which is specifically designed to permit the investor to invest in shares of any
Gateway fund selected by the investor. The custodian of such Gateway-sponsored
IRAs is Star Bank. Investors can obtain forms to establish IRAs by calling
Shareholder Services at (800) 354-5525.
An IRA is a special program with certain tax benefits that generally
permits an investor to establish and contribute to his or her own retirement
plan. As is briefly discussed below, an investor who has compensation for a
taxable year may make contributions within certain limits to his or her own IRA
(and, in limited situations, an IRA for his or her spouse). Certain of the
investor's contributions to the IRA may be deductible from income in determining
his or her federal income tax for the taxable year of the contributions and not
taxed until distributed from the IRA. Also, certain amounts received from
another IRA may be able to be rolled over or transferred to an IRA and thereby
avoid federal income tax on the amounts rolled over or transferred until
withdrawn from the new IRA. In addition, certain amounts distributed from a
tax-qualified employer plan may be able to be rolled over directly to an IRA and
thereby avoid income tax withholding on the amounts rolled over. Further, all
earnings generated in the IRA are not taxed until distributed from the IRA.
To explain in more detail, in general, any investor who has
compensation in a taxable year is eligible: (1) to establish and/or make
contributions to an IRA for his or her own benefit for such taxable year (except
for the taxable year in which he or she attains the age of 70-1/2 or any later
taxable year); and (2) to establish and/or make contributions to an IRA for his
or her spouse, provided the spouse either has (or elects to be treated as
having) no compensation for the taxable year and provided the spouse has not
attained the age of 70-1/2 by the close of such taxable year. Such an investor
may contribute for the applicable taxable year up to the lesser of $2,000
($2,250 for spousal IRAs for both the investor and his or her non-earning
spouse, if applicable) or 100%
10
<PAGE> 147
of his or her compensation for the taxable year. If both the investor and his or
her spouse have compensation, each may contribute up to such limits to separate
IRAs.
The amount contributed to an IRA under the above rules is deductible
from income of the investor in determining federal income tax for the applicable
taxable year; except that if the investor (or his or her spouse) is an active
participant in an employer-maintained retirement or profit sharing or similar
type of plan for such taxable year, the ability to deduct the contribution is
phased out if the adjusted gross income, as modified in certain respects for
this purpose ("AGI"), of the investor is above a certain amount. Specifically,
for such an investor filing a joint return with his or her spouse, the deduction
is phased out for AGI between $40,000 and $50,000 (and hence is not available at
all when the AGI on the joint return is above $50,000). When such an investor is
not married, the deduction is phased out for AGI between $25,000 and $35,000
(and hence is not available when the AGI is above $35,000). For an investor who
is married but files a separate tax return, the deduction is phased out for AGI
between $0 and $10,000 (and hence is not available when the AGI is above
$10,000). In determining whether the investor's spouse's active participant
status is taken into consideration and the applicable AGI limits, an investor
and his or her spouse who file separate returns for the applicable tax year and
live apart at all times during such tax year will not be treated as married for
such year.
Additional contributions can be made to an investor's IRA if
contributed by the investor's employer pursuant to a simplified employee pension
plan (a "SEP") maintained by the employer. Currently, the maximum amount able to
be contributed to an investor's IRA through his or her employer's SEP (and
assuming the employer maintains and has maintained no other qualified plans for
the investor) is generally 15% of the investor's compensation from that employer
(determined without regard to the SEP contributions) or $22,500, whichever is
less. Contributions to an investor's IRA under an SEP program generally, if
within the above limits, are not included in the investor's income for federal
income tax purposes.
Further, an investor may be able to roll over amounts received from
another IRA, or from a tax-qualified profit sharing, stock bonus, pension, or
annuity plan of an employer, to an IRA which invests in Gateway fund shares and
be able by such method to defer paying taxes on the part of the distribution
rolled over until such amounts are withdrawn from the new IRA, provided certain
conditions are met.
An investor may make a direct transfer of assets from one IRA to
another by directing the existing IRA custodian or trustee to transfer directly
to a new IRA investing in Gateway fund shares the amount held in that prior IRA,
without directly receiving those funds or being taxed on the transfer. There is
no minimum holding period for a direct transfer of IRA assets from one custodian
or trustee to another. The Adviser has forms, available upon request, that an
investor can use to make direct IRA transfers.
A Gateway-sponsored IRA is eligible to receive direct rollovers of
distributions from a qualified employer plan. An investor can make a direct
rollover by instructing the employer's plan to wire the distribution to Star
Bank as custodian for the Gateway-sponsored IRA. The distribution should be
wired to:
The Gateway Trust c/o Star Bank, N.A.
ABA #042-0000-13
Cincinnati, Ohio
Name (insert shareholder name)
11
<PAGE> 148
Gateway Account No. (insert shareholder account number)
Name of Gateway fund(s) in which you wish to invest
An investor can also make a direct rollover by instructing the
employer's plan to prepare a check for the amount to be rolled over payable to
"Star Bank, N.A., as Custodian of Individual Retirement Account of (insert
shareholder name)," and delivering that check to Gateway. The check can be
delivered in person or mailed to:
The Gateway Trust
Shareholder Services
P. O. Box 5211
Cincinnati, Ohio 45201-5211
An investor can make a sixty-day rollover of a distribution from a
qualified employer plan by instructing the employer's plan to prepare a check
payable to the investor and by endorsing or cashing the check and depositing
some or all of the proceeds in an IRA. The deposit must be delivered in person
or mailed to Gateway at the above address within sixty days of when the investor
receives the distribution. The employer's plan must withhold 20% of the taxable
amount for federal income tax if the investor chooses a sixty-day rollover for
the distribution. Some portions of distributions from other IRAs or from
tax-qualified profit sharing, stock bonus, pension, or annuity plans are not
eligible for regular or direct rollovers. For instance, distributions of
nontaxable after-tax employee contributions or required minimum payments made
after an individual reaches age 70-1/2 cannot be rolled over.
In general, amounts earned in an IRA from any contributions (whether
such contributions are deductible, nondeductible, or rollover contributions) are
not subject to federal income tax until such amounts are distributed to the
owner of the IRA (or, in the case of the owner's death, his or her beneficiary
under the IRA), at which time they are taxed as ordinary income. All
distributions from an IRA are taxable, except for the part of any distribution
deemed a return of prior nondeductible contributions to the IRA. Generally,
distributions cannot begin without penalty until the owner reaches age 59-1/2 or
is disabled, and must both begin by April 1 of the year following the year he or
she attains age 70-1/2 and be paid in accordance with tax rules over the life of
the IRA owner or the joint lives of the owner and his or her IRA beneficiary (or
the life expectancy of the owner or the joint life and last survivor expectancy
of the owner and the IRA beneficiary). In addition, certain excise (or penalty)
taxes apply under federal law if contributions exceed applicable limits, if
distributions are not made when required, or if the amount distributed in any
taxable year exceeds certain high levels. To make a withdrawal from a
Gateway-sponsored IRA, an investor should contact Shareholder Services at (800)
354-5525.
The rules for contributing to, investing under, and distributing from
IRAs are complex, and any investor should consult with his or her own tax
advisor if he or she has any questions with respect to IRAs and to determine if
there have been any recent changes to the rules. At the time an IRA is
established, the custodian or trustee of the IRA is required by law to provide a
disclosure statement to the individual setting forth important information
concerning IRAs.
Further information concerning IRAs can be obtained from any district
office of the Internal Revenue Service. In particular, Publication 590 of the
Internal Revenue Service provides general information as to IRAs.
12
<PAGE> 149
No annual maintenance fees are charged by the Trust to IRAs, SEP-IRAs,
retirement, pension or profit-sharing plans, including 401(k) plans.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Basic information concerning the purchase and redemption of shares is
set forth under the captions "How To Buy Additional Shares" and "How To Sell
Shares" in the Cincinnati Prospectus. Shares of the Fund are purchased and
redeemed at their net asset value as next determined following receipt of the
purchase order or redemption notice. Redemptions under the Systematic Withdrawal
Program and installment distributions from IRAs are effected at the net asset
value next determined after the date designated for the redemption or
distribution. Information as to the method of calculating the net asset value of
shares of the Fund is included in the Cincinnati Prospectus under the caption
"How Fund Shares Are Priced."
Certificates for shares of the Fund will not be issued.
The minimum initial investment is $1,000 and the minimum additional
investment is $100, subject to certain exceptions such as investments by the
Adviser's employees and by participants in SEP programs. The Trust reserves the
right to reject any purchase order of the Fund.
There is no minimum or maximum applicable to redemption of shares of
the Fund. The Trust, however, reserves the right to automatically redeem a
shareholder's account(s) under certain circumstances. The shareholder will
receive written notice prior to the redemption of the account(s). Generally the
Trust will send the shareholder a letter sixty days prior to redeeming the
shareholder's account(s).
The Trust may automatically redeem a shareholder's account(s) in the
Fund when the aggregate value of the shareholder's account(s) (taken at current
value) falls below $800. The shareholder may prevent such redemption by
increasing the value of the account(s) to $1,000 or more within the sixty-day
period. The Trust will not automatically redeem a shareholder's account(s) if
market action caused the aggregate value of the account(s) to fall below $800 or
if shares of the Fund are not available for purchase at the time the aggregate
value of the account(s) falls below $800.
The Trust also will automatically redeem a shareholder's account if the
shareholder does not provide a valid U. S. social security number or taxpayer
identification number or other requested documents such as corporate
resolutions. The shareholder may prevent such redemption by providing the
requested information within the sixty-day period.
The Trust may institute additional mandatory redemption policies as
approved by the Board of Trustees.
The Trust reserves the right to terminate temporarily or permanently
the exchange privilege for any shareholder who makes an excessive number of
exchanges between funds. The shareholder will receive written notice that the
Trust intends to limit the shareholder's use of the exchange privilege.
Generally the Trust limits a shareholder to twelve exchange transactions per
calendar year. Accounts under common ownership or
13
<PAGE> 150
control, including accounts with the same taxpayer identification number,
normally will be counted as one account for purposes of the exchange limit.
The Trust also reserves the right to terminate or modify the exchange
privilege or to refuse an exchange if the exchange would adversely affect a
fund.
Signature guarantees are required for all redemptions (on the date of
receipt by the Servicing Agent of all necessary documents), regardless of the
amount involved, when the proceeds are to be paid to someone other than the
registered owner(s). The signature guarantee requirement may be waived by the
Trust in certain instances. The Trust also reserves the right to require a
signature guarantee on any instructions or redemptions given to the Trust for
any reason. The purpose of signature guarantees is to prevent fraudulent
redemptions which could result in losses to the Trust, the Servicing Agent or
shareholders. A signature guarantee will be accepted from banks, brokers,
dealers, municipal securities dealers or brokers, government securities dealers
or brokers, credit unions (if authorized by state law), national securities
exchanges, registered securities associations, clearing agencies, and savings
associations. Notary publics are unacceptable guarantors. The signature
guarantees must appear either: (a) on the written request for redemption, (b) on
a stock power which should specify the total number of shares to be redeemed, or
(c) on all stock certificates tendered for redemption.
The right of redemption may be suspended or the date of payment
postponed (a) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend and holiday closings), (b) when trading in any
of the markets which the Fund normally utilizes is restricted as determined by
the Securities and Exchange Commission (the "Commission"), (c) if any emergency
exists as defined by the Commission so that disposal of investments or
determination of the Fund's net asset value is not reasonably practicable, or
(d) for such other periods as the Commission by order may permit for protection
of the Trust's shareholders.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act., which obligates the Fund to redeem shares in cash, with respect to
any one shareholder during any 90 day period, up to the lesser of $250,000 or 1%
of the assets of the fund. Although payment for redeemed shares generally will
be made in cash, under abnormal circumstances the Board of Trustees of the Trust
may determine to make payment in securities owned by the Fund. In such event,
the securities will be selected in such manner as the Board of Trustees deems
fair and equitable, in which case brokerage and other costs may be incurred by
such redeeming shareholders in the sale or disposition of their securities.
The Trust reserves the right to modify or terminate any purchase,
redemption or other shareholder service procedure upon notice to shareholders.
Purchases and redemptions generally may be effected only on days when
the stock exchanges are open for trading. These exchanges are closed on
Saturdays and Sundays and the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas.
14
<PAGE> 151
INVESTMENT ADVISORY AND OTHER SERVICES
GATEWAY INVESTMENT ADVISERS, L.P.
Gateway Investment Advisers, L.P. (the "Adviser"), a Delaware limited
partnership, has acted as the investment adviser for the Fund since December 15,
1995. Gateway Investment Advisers, Inc. ("GIA") provided investment advisory
services to the Fund from its formation until December 15, 1995. The Adviser
became the successor in interest to the assets, business and personnel of GIA
which was organized in June 1977. GIA is the general partner of the Adviser with
a 76% ownership interest, while Alex. Brown Capital Advisory & Trust Company
("ABCA&T"), formerly known as Alex Brown Investments Incorporation is the sole
limited partner with a 24% ownership interest. ABCA&T is an affiliate of Alex.
Brown & Sons Incorporated, a nationally known investment management firm and
registered broker/dealer located in Baltimore, Maryland. As of December 15, 1995
Walter G. Sall, Chairman and a Trustee of the Trust, and J. Patrick Rogers, a
co-portfolio manager of the funds of the Trust, together owned of record and
beneficially 99.85% of the outstanding shares of GIA and thereby control the
Adviser. Mr. Sall is Chairman and a director of GIA and Mr. Rogers is its
President and a director. The third director of GIA is Lucinda S. Mezey who is
employed by Brown Asset Management as their Chief Investment Officer. Brown
Asset Management is affiliated with ABI.
INVESTMENT ADVISORY CONTRACT
The Trust has retained the Adviser under an investment advisory
contract ("Adviser Contract") to act as investment manager and in such capacity
supervise the investments of the Fund. The Adviser Contract for the Fund became
effective on December 15, 1995. Services were provided by GIA under a
substantially identical contract prior to this date.
Pursuant to the Fund's advisory contract, the Adviser, at its sole
expense, provides the Fund with (i) investment recommendations regarding such
fund's investments, (ii) office space, telephones, and other office equipment,
and (iii) clerical and secretarial staff and the services, without additional
compensation, of all officers of the Trust. In addition, the Adviser has agreed
to bear (i) advertising and other marketing expenses in connection with the sale
of the shares of the Fund, (ii) expenses of printing and distributing all of the
Fund prospectuses and related documents to prospective stockholders, and (iii)
association membership dues (other than for the Investment Company Institute).
The advisory contract further provides that under certain circumstances the
Adviser may cause the Fund to pay brokerage commissions in order to enable the
Adviser to obtain brokerage and research services for its use in advising the
Fund and the Adviser's other clients, provided that the amount of commission is
determined by the Adviser, in good faith and in the best interests of the Fund,
to be reasonable in relation to the value of the brokerage and research services
provided.
The Fund's advisory contract provides that all expenses not
specifically assumed by the Adviser which may be incurred in the operation of
the Trust and the offering of its shares will be borne by the Trust. Such
expenses will be allocated among the funds in the Trust by direction of the
Board of Trustees, most frequently on the basis of expenses incurred by each
fund, but where that is not practicable on such basis as the Trustees determine
to be appropriate. Expenses to be borne by the Trust include fees and expenses
of trustees not employed by the Adviser; expenses of printing and distributing
all of the Trust's prospectuses to current shareholders of the Trust; expenses
pertaining to registering or qualifying the Trust or its shares under various
15
<PAGE> 152
federal and state laws, and maintaining and updating such registrations and
qualifications; interest expense, taxes, fees and commissions (including
brokerage commissions) of every kind; expenses related to repurchases and
redemptions of shares; charges and expenses of custodians, transfer agents,
dividend disbursing agents and registrars; expenses of valuing shares of each
fund; printing and mailing costs other than those expressly assumed by the
Adviser; auditing, accounting and legal expenses; expenses incurred in
connection with the preparation of reports to shareholders and governmental
agencies; expenses of shareholder meetings and proxy solicitations; insurance
expenses; and all "extraordinary expenses" which may arise, including all losses
and liabilities incurred in connection with litigation proceedings and claims,
and the legal obligations of the Trust to indemnify its officers, trustees and
agents with respect thereto. A majority of the Board of Trustees of the Trust
and a majority of the trustees who are not "interested persons" (as defined in
the Investment Company Act of 1940) of any party to the advisory contracts of
the funds, voting separately, shall determine which expenses shall be
characterized as "extraordinary expenses."
In return for the services and facilities furnished by the Adviser, the
Fund pays the Adviser a management fee computed at an annual rate of 0.50% of
the average daily net asset value of the Fund.
If total expenses of the Fund for any fiscal year (including the
Adviser's compensation, but exclusive of taxes, interest, brokerage commissions
and any "extraordinary expenses" determined as described above) exceed 2.0% of
the Fund's average daily net asset value for such year, the advisory contract
requires the Adviser to bear all such excess expenses up to the amount of the
advisory fees. Each month the investment advisory fee is determined and the
Fund's expenses are projected. If the Fund's projected expenses are in excess of
the above-stated expense limitation, the investment advisory fee paid to the
Adviser will be reduced by the amount of the excess expenses, subject to an
annual adjustment; provided, however, that the aggregate annual reduction from
the Adviser to the Fund shall not exceed the aggregate advisory fee paid by the
Fund to the Adviser for such year.
The Fund's advisory contract further provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
duties or obligations thereunder, the Adviser is not liable to the Trust or any
of its shareholders for any act or omission by the Adviser. The advisory
contract contemplates that the Adviser may act as an investment manager or
adviser for others.
The Fund's advisory contract may be amended at any time by the mutual
consent of the parties thereto, provided that such consent on the part of the
Trust shall have been approved by the vote of a majority of the Trust's Board of
Trustees, including the vote cast in person by a majority of the Trustees who
are not "interested persons" (as defined in the Investment Company Act of 1940)
of any party to the advisory contract, and by vote of the shareholders of the
Fund.
The Fund's advisory contract may be terminated, upon sixty-days'
written notice (which notice may be waived), at any time without penalty, (i) by
the Board of Trustees of the Trust, (ii) by the vote of a majority of the
outstanding voting securities of the Fund or (iii) by the Adviser. The advisory
contract terminates automatically in the event of its assignment (as that term
is defined in the Investment Company Act of 1940) by the Adviser.
The Fund's advisory contract provides that it will continue in effect
until December 31, 1996, and thereafter, provided that its continuance for the
Fund for each renewal year is specifically approved, in advance,
16
<PAGE> 153
(i) by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Fund, and (ii) by vote of a majority of the
trustees who are not parties to the advisory contract or interested persons of a
party to the advisory contract (other than as Trustees of the Trust), by votes
cast in person at a meeting specifically called for such purpose.
The following table shows the management fees earned by the Adviser for
providing services to the Cincinnati Fund. It also shows the amount of the fees
waived by the Adviser for the year ended December 31, 1995 and for the period
from November 7, 1994 through December 31, 1994.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Fee and Waiver Cincinnati Fund
- ---------------------------------------------------------
<S> <C> <C>
1995 Fee Earned $23,429
1995 Fee Waived $23,429
1995 Fee Paid 00
1994 Fee Earned $ 2,191
1994 Fee Waived 2,191
-------
1994 Fee Paid 00
- ---------------------------------------------------------
</TABLE>
CUSTODIAN
Star Bank, 425 Walnut Street, Cincinnati, Ohio 45202, acts as custodian
of the Trust's assets (the "Custodian"). The Custodian has no part in
determining the investment policies of any fund or which securities are to be
purchased or sold by any fund.
SHAREHOLDER SERVICING, TRANSFER, DIVIDEND DISBURSING AND FINANCIAL SERVICING
AGENT
The Adviser is the Trust's Shareholder Servicing, Transfer, Dividend
Disbursing and Financial Servicing Agent (the "Servicing Agent"). The Adviser's
mailing address for its activities as Servicing Agent is The Gateway Trust, 400
TechneCenter Drive, Suite 220, Milford, Ohio 45150. As Transfer Agent for the
Trust, the Servicing Agent's general duties include transferring shares,
processing applications for new accounts and depositing the payments for the
purchase of Fund's shares with the Custodian, and notifying the Trust and
Custodian of such deposits. The Servicing Agent opens and maintains a bookshare
account for each shareholder as set forth in the subscription application,
maintains records of each shareholder account, and sends confirmation of shares
purchased to each shareholder. The Servicing Agent also receives and processes
requests by shareholders for redemption of shares. If the shareholder request
complies with the redemption standards of the Trust, the Servicing Agent will
direct the Custodian to pay the appropriate redemption price. If the redemption
request does not comply with such standards, the Servicing Agent will promptly
notify the shareholder of the reasons for rejecting the redemption request.
As the Dividend Disbursing Agent for the Trust, the Servicing Agent,
upon notification of the declaration of a dividend or distribution, will
determine the total number of shares issued and outstanding as of the record
date for the dividend or distribution and the amount of cash required to satisfy
such dividend or distribution. The Servicing Agent will prepare and mail to
shareholders dividend checks in the amounts to which they are entitled. In the
case of shareholders participating in the dividend reinvestment plan, the
17
<PAGE> 154
Servicing Agent will make appropriate credits to their bookshare accounts.
Shareholders will be notified by the Servicing Agent of any dividends or
distributions to which they are entitled, including any amount of additional
shares purchased with their dividends. In addition, the Servicing Agent will
prepare and file with the Internal Revenue Service and with any state, as
directed by the Trust, returns for reporting dividends and distributions paid by
such fund.
The Servicing Agent, as the Shareholder Servicing Agent, will open and
maintain any plan or program for shareholders in accordance with the terms of
such plans or programs (see "SHAREHOLDER SERVICES" herein). With regard to the
systematic withdrawal plans, the Servicing Agent will process such systematic
withdrawal plan orders as are duly executed by shareholders and will direct
appropriate payments to be made by the Custodian to the shareholder. In
addition, the Servicing Agent will process such accumulation plans, group
programs and other plans or programs for investing shares as provided in the
Trust's current prospectuses.
The Fund pays the Servicing Agent a monthly minimum fee of $2,500 for
its services. The Fund also reimburses the Servicing Agent for printing,
mailing, compliance, and processing expenses associated with providing its
services. The processing expenses cannot exceed 0.2% of the Fund's average net
assets. In addition, the Fund pays the Servicing Agent a monthly fee of $4,000
for the financial and administrative services it provides. For the year ended
December 31, 1995, the Adviser earned $630,694 in its capacity as Servicing
Agent to all four funds of the Trust.
BROKERAGE
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. In the case of securities traded in the over-the-counter
market, there is generally no stated commission but the price usually includes
an undisclosed commission or mark-up.
In effecting portfolio transactions for the Fund, the Adviser is
obligated to seek best execution, which is to execute the Fund's transaction
where the most favorable combination of price and execution services are
available ("best execution"), , except to the extent that it may be permitted to
pay higher brokerage commissions for brokerage and research services as
described below. In seeking the best execution, the Adviser, in the Fund's best
interests, considers all relevant factors, including price, the size of the
transaction, the nature of the market for the security, the amount of
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of the broker-dealer
involved, and the quality of service rendered by the broker-dealer in other
transactions. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to seeking best execution
and such other factors as the Trustees may determine, the Adviser may consider
sales of shares of a fund as a factor in the selection of broker-dealers to
execute securities transactions for such fund.
While the Adviser does not intend to limit the placement of orders to
any particular broker or dealer, the Adviser generally gives preference to those
brokers or dealers who are believed to give best execution at the most favorable
prices and who also provide research, statistical or other services to the
Adviser and/or the Trust. Commissions charged by brokers who provide these
services have been higher than commissions charged by those who do not provide
them. Higher commissions are paid only if the Adviser determines that they are
18
<PAGE> 155
reasonable in relation to the value of the services provided, and it has
reported to the Board of Trustees of the Trust on a periodic basis to that
effect. The availability of such services was taken into account in establishing
the investment advisory fees. Specific research services furnished by brokers
through whom the Trust effects securities transactions may be used by the
Adviser in servicing all of its accounts. Similarly, specific research services
furnished by brokers who execute transactions for other of the Adviser's clients
may be used by the Adviser for the benefit of the Trust.
The advisory contract provides that, subject to such policies as the
Trustees may determine, the Adviser may cause the Fund to pay a broker-dealer
who provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount of commission which another broker-dealer would have charged for
effecting that transaction. As provided in Section 28(e) of the Securities
Exchange Act of 1934, "brokerage and research services" include (1) advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and performance of
accounts; (3) effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement); and (4) services that
provide lawful and appropriate assistance to the Adviser in the performance of
its investment decision-making responsibilities.
For the years ended December 31, 1995 and 1994, the Fund paid $3534.20 and
$4,332, respectively, in brokerage commissions.
ADDITIONAL TAX MATTERS
The tax discussion set forth below and in the Cincinnati Prospectus is
included for general information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of an investment in the
Fund.
FEDERAL TAX MATTERS
The Fund is treated as a separate association taxable as a corporation.
The Fund intends to meet the requirements of the Internal Revenue Code,
applicable to regulated investment companies so as to qualify for the special
tax treatment afforded to such companies. Under Subchapter M of the Code, a
regulated investment company is not subject to federal income tax on the portion
of its net investment income and net realized capital gains which it distributes
currently to its stockholders, provided that certain distribution requirements
are met, including the requirement that at least 90% of the sum of its net
investment income and net short-term capital gains in any fiscal year is so
distributed. In addition to this distribution requirement, two of the principal
tests which the Fund must meet in each fiscal year in order to qualify as a
regulated investment company are the "90% Test" and the "30% Test." The 90% Test
requires that at least 90% of a fund's gross income must be derived from
dividends, interest and gains from the sale or other disposition of securities,
including gains from options. The 30% Test requires that no more than 30% of a
19
<PAGE> 156
fund's gross income be derived from the sale or other disposition of securities
held less than three months. The 30% Test limits a fund's ability to deal with
investments held less than three months.
Long-term capital gains distributions (i.e., the excess of any net
long-term capital gains over net short-term capital losses), after utilization
of available capital loss carryforwards, are taxable as long-term capital gains
whether received in cash or additional shares, regardless of how long the
shareholder has held his shares, and are not eligible for the dividends received
deduction for corporations. Distributions of long-term capital gains which are
offset by available loss carryforwards, however, may be taxable as ordinary
income.
Distributions on shares of the Fund received shortly after their
purchase, although substantially in effect a return of capital, are subject to
federal income taxes.
The tax status of distributions made by the Fund during the fiscal year
will be sent to shareholders shortly after the end of such year. Each
prospective investor is advised to consult his own tax advisor. Distributions of
net investment income are taxable as ordinary income subject to allowable
exclusions and deductions. Distributions of capital gains are taxable at either
ordinary or long-term capital gains rates, as appropriate, except that all such
gains are normally taxable as ordinary income to the extent they are offset by
capital loss carryforwards.
STATE AND LOCAL TAX ASPECTS
The laws of the several states and local taxing authorities vary with
respect to taxation, and each prospective investor is advised to consult his own
tax advisor as to the status of his shares and distributions in respect of those
shares under state and local tax laws.
TRUSTEES AND OFFICERS OF THE TRUST
The trustees and officers of the Trust, together with information as to
their positions with the Trust and its predecessor, Gateway Option Income Fund,
Inc. (the "Company") and their principal occupations during at least the past
five years, are listed below.
*Walter Gene Sall, 400 TechneCenter Drive, Suite 220, Milford, Ohio
45150; Chairman and Trustee of the Trust; Chairman of the Adviser; various
senior management positions and offices held with the Trust, the Company and the
Adviser since 1977. Age 51.
*Peter Whitney Thayer, 400 TechneCenter Drive, Suite 220, Milford, Ohio
45150; President and Trustee of the Trust; co-manager of the funds various
senior management positions and offices held with the Trust, the Company and the
Adviser since 1977. Age 47.
20
<PAGE> 157
Stefen F. Brueckner, Trustee of the Trust Since October 1992; Director,
President and Chief Operating Officer, Anthem Companies, Inc. since 1995. Prior
thereto, Director and President of Community Mutual Insurance Company (health
insurer) since 1991; and various management positions since 1986. Director of
Anthem Health and Life Insurance Company, Anthem Life Insurance Company, and
various other affiliates and subsidiaries. Age 46.
Kenneth A. Drucker, Sequa Corp., 200 Park Avenue, New York, New York
10166; Director of the Company from January 20, 1984 to May 1986; Trustee of the
Trust since April 1986; Vice President and Treasurer, Sequa Corporation (gas
turbine and industrial equipment) since November 1987. Prior thereto, Senior
Vice-President and Treasurer, JWT Group, Inc. (advertising, public update
relations and market research). Age 50.
Beverly S. Gordon, 1625 Starling Drive, Sarasota, Florida 34231;
Trustee of the Trust since September 1988; arbitrator, National Association of
Securities Dealers, Inc., since January 1992; Vice President, Marketing and
Communications, Coffee, Sugar and Cocoa Exchange from January 1989 to December
1991; Executive Director, National Institutional Options and Futures Society,
March 1988 to December 1988; prior thereto, Vice President, Institutional
Marketing, Chicago Board Options Exchange. Age 65.
R.S. (Dick) Harrison, 422 Wards Corner Road, Loveland, Ohio 45140;
Trustee of the Trust since April 1996 and from 1977 through 1982;
Director/Chairman of the Board, Baldwin Piano & Organ Company since 1994;
Chairman of the Board/CEO, Baldwin Piano & Organ Company from 1983 to 1994.
Prior thereto, various management positions with Baldwin Piano & Organ Company,
Cincinnati, Ohio. Director of Sencorp and Anderson Bank of Cincinnati, Ohio and
Trustee of Kenyon College. Age 64.
John F. Lebor, 12233 West End, Lost Tree Village, North Palm Beach,
Florida 33408; Director of the Company from September 1977 to May 1986; Trustee
of the Trust since April 1986. Retired director of several corporations. Age 90.
William Harding Schneebeck, 251 Indian Harbor Road, Vero Beach, Florida
32963; Director of the Company from September 1977 to May 1986; Trustee of the
Trust since April 1986; retired, formerly Chairman of Midwestern Fidelity Corp.
Age 67.
*Geoffrey Keenan, 400 TechneCenter Drive, Suite 220, Milford, Ohio
45150; Vice President of the Trust since April 1996; Chief Operations Officer,
Gateway Investment Advisers, L.P. since December 1995; Executive Vice President
and Chief Operations Officer, Gateway Investment Advisers, Inc. since 1995; Vice
President, Gateway Investment Advisers, Inc. from 1991 to 1995. Age 37.
*Paul R. Stewart, 400 TechneCenter Drive, Suite 220, Milford, Ohio
45150; Treasurer of the Trust since October, 1995; Comptroller of the Adviser
since October, 1995; Audit Manager and Senior Manager, Price Waterhouse from
September, 1992 to 1995 and from August 1988 to August 1991; accountant for
Lexmark International from August 1991 to September 1991. Age 30.
21
<PAGE> 158
*Donna M. Squeri, 400 TechneCenter Drive, Suite 220 Milford, Ohio
45150; Secretary of the Trust since October, 1995; Secretary and General Counsel
of the Adviser since September, 1995; in house counsel of Bartlett & Co., a
registered investment advisor, from October, 1984 to September, 1993. Age 36.
*Messrs. Sall, Thayer, Keenan, Stewart and Ms. Squeri are affiliated
persons of the Trust and the Adviser as defined by the Investment Company Act of
1940. Messrs. Sall and Thayer are "interested persons" of the Trust as defined
by the Investment Company Act of 1940.
Messrs. Sall, Thayer, Keenan, Stewart and Ms. Squeri each of whom is
employed by the Adviser, receive no remuneration from the Trust. Each Trustee of
the Trust other than Messrs. Sall and Thayer receives fees as follows: (a) an
annual fee of $3,000, payable in equal quarterly installments for service during
each fiscal quarter, (b) a $500 base fee plus $100 per fund for each regular or
special meeting of the Board of Trustees attended, and (c) $200 per fund ($1,000
per fund for the Chairman) for each Audit and Contract Review Committee meeting
attended. The Trust also reimburses each Trustee for any reasonable and
necessary travel expenses incurred in connection with attendance at such
meetings. In addition, Trustees may receive attendance fees for service on other
committees.
The following table provides information about the compensation
received by each Trustee from the Trust for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Aggregate
Compensation Total Compensation
Name of Trustee From Trust from Trust
- -----------------------------------------------------------------------------
<S> <C> <C>
Stefen F. Brueckner $6,535.14 $6,535.14
Kenneth A. Drucker $8,135.14 $8,135.14
Beverly S. Gordon $6,535.14 $6,535.14
John F. Lebor $14,535.14 $14,535.14
Walter G. Sall $0.00 $0.00
William H. Schneebeck $8,135.14 $8,135.14
Peter W. Thayer $0.00 $0.00
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, Ohio 45202, will
serve as independent public accountants of the Trust. Arthur Andersen LLP will
perform an annual audit of the funds' financial statements, prepares the funds'
tax returns and provides financial, tax and accounting consulting servicess
requested. The financial statement and notes thereto of the Fund, together with
the report thereon of Arthur Andersen LPP dated January 19, 1995 are attached to
this Statement of Additional Information.
22
<PAGE> 159
PRINCIPAL HOLDERS OF CINCINNATI FUND SHARES
As of April 26,, 1996, the Cincinnati Fund had 502,728 of its shares
outstanding, out of an unlimited number of authorized shares. As of such date,
each of the following persons or groups was known by Trust management to be the
record and/or beneficial owner (as defined below) of the approximate amounts of
the Cincinnati Fund's outstanding shares indicated below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Name and Address of Owner Number of Shares Percent of Class
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Firstcinco, a common trust fund of Star Bank 200,000 39.78%
P.O. Box 1118
Cincinnati, Ohio 45201
R. S. Harrison, Trustee 25,551 5.08%
440 Mt. Carmel Road
Cincinnati, Ohio 45244
Trustees and officers of the Trust as a group 58,764 11.68%
Adviser Officers & Directors as a group 11,646 2.32%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 1, 1996, the Adviser held in a fiduciary capacity 80,146
(17.53%)of the outstanding shares of the Cincinnati Fund. The Adviser has
investment and voting power over all shares held by it in a fiduciary capacity.
23
<PAGE> 160
SCHEDULE A
The beta measurements that may be used in the Cincinnati Prospectus will be
calculated by using MicroSoft Excel spreadsheets and the statistical function
slope available in MicroSoft Excel. The SLOPE function returns the slope of the
linear regression line through data points in known y's and known x's. The slope
is the vertical distance divided by the horizontal distance between any two
points on the line, which is the rate of change along the regression line.
The equation for beta (slope) is shown below.
[GRAPHIC OMMITED]
Where y = the Fund's monthly total returns in the period
x = the benchmark index's monthly total returns in the period
24
<PAGE> 161
CINCINNATI
---FUND---
P.O. BOX 5211 - CINCINNATI, OHIO 45201-5211
(800) 354-5525
CINCINNATI
---FUND---
ANNUAL REPORT
1995
<PAGE> 162
CINCINNATI FUND
- -----------------Portfolio Manager's Report - December 31, 1995----------------
The Cincinnati Fund had an excellent year in 1995, producing a total return of
35.31%. The average annual total return for the Fund since inception is 29.22%.
On December 29, 1995, the Fund paid a $0.251 per share income dividend and a
$0.038 per share capital gain distribution.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Top Ten Holdings
As of December 31, 1995
- ----------------------------------------------------------------
<S> <C>
Kroger Co. 5.47%
CINergy Corp. 4.89%
Procter & Gamble Co. 4.23%
Cincinnati Bell Inc. 4.12%
Star Banc Corp. 3.44%
General Electric Company 3.43%
Cincinnati Financial Corp. 2.73%
Federated Department Stores, Inc. 2.71%
Provident Bancorp, Inc. 2.65%
AT&T Corporation 2.53%
- ----------------------------------------------------------------
</TABLE>
The stock market, as measured by the Standard and Poor's 500 Stock Index,
posted the strongest calendar year gain since 1975. Local stocks were equally
impressive -- 90% of the stocks included in the Fund posted gains for the year.
These gains were not only derived from both large and small capitalization
stocks, but from many industry sectors, as well. Listed above are the top ten
holdings in the portfolio as of December 31, 1995.
-------------Largest Sector Weightings-------------
Many names from the finance sector populate the list of the top ten holdings. In
fact at 18.45%, the finance sector boasts the largest industry weighting in the
portfolio. If interest rates, particularly short-term, continue to decline, the
profitability of the banking industry should remain strong. The commercial loan
demand in the Cincinnati area remains healthy. Without question, the banking
industry in our area is extremely well managed.
Performance data represents past performance and your investment return and
principal value of an investment will fluctuate so that your shares, when
redeemed, may be worth more or less than the original cost.
- ----------------------------------------------------------------
1 CINCINNATI FUND
<PAGE> 163
CINCINNATI FUND
- -----------------Portfolio Manager's Report - December 31, 1995-----------------
The strong presence of local utility companies in the top ten list is also
reflective of our optimistic view of the Cincinnati area economy. Additionally,
the move to overweight this industry group is based upon our desire to become
more conservative in a stock market environment which appears to be fully
valued. As of December 31, 1995, the utility sector had the second highest
weighting in the Fund.
-------------Portfolio Changes-------------
The fourth quarter of 1995 was noticeably quiet on the restructuring front
after a very active nine months of mergers and acquisitions affected the
Cincinnati Fund's portfolio:
- U. S. Shoe Corporation sold its footwear division to Nine West
Group, its Lenscrafters division to Luxottica Group S.P.A. and its
women's apparel division to a Luxottica-related Italian firm.
- Federated Department Stores, Inc. continued its buying spree with
the acquisition of Broadway Stores on the West Coast, after the
megadeal of acquiring Macy's earlier in the year.
- American Financial Corp., owned by the Lindner family, was merged
into the Lindner-controlled, publicly traded, American Premier
Underwriters to form the newly created American Financial Group,
Inc.
- Thriftway Inc., the local supermarket chain run by Richard Lindner,
was sold to Winn Dixie Stores, Inc. It will be fascinating to watch
Winn Dixie challenge its largest national competitor, Kroger Co.,
right in its foe's backyard.
- Other notable transactions included the nonlocal purchases of The
Future Now and USA Mobile Communications.
- A few of our local companies considered selling or merging; Gibson
Greetings, Inc. decided to sell only its Cleo gift-wrap division,
and Citicasters called off a merger with OmniAmerica Communications
in Cleveland.
- --------------------------------------------------------------------------------
CINCINNATI FUND 2
<PAGE> 164
CINCINNATI FUND
- -----------------Portfolio Manager's Report - December 31, 1995-----------------
As we head into 1996, the financial news hitting Wall Street appears to be
favorable; interest rates are declining, inflation remains in check, and
corporate earnings are growing at a more moderate rate. We are concerned,
however, that much of this good news has already been discounted into the
market. History certainly suggests that 1996 will not match 1995's spectacular
gains. This more cautious view of the market, however, does not diminish our
long-term optimism for the Cincinnati Fund.
All in all, 1995 was a hectic but highly rewarding year for the Cincinnati
Fund. We remain steadfast in our belief that Cincinnati continues to offer its
corporate citizens unique opportunities and excellent conditions to perform. We
appreciate your support and look forward to many more rewarding years!
/s/ J. Patrick Rogers
J. Patrick Rogers, CFA
President
-------------Industry Weightings-------------
<TABLE>
<S> <C>
Utilities 11.5%
Finance 18.5%
Industrial Cyclicals 8.6%
Consumer Durables 5.0%
Consumer Staples 8.7%
Services 11.2%
Retail 10.8%
Health 5.2%
Technology 8.4%
</TABLE>
As a Percentage of Net Assets
- -------------------------------------------------------------------------------
3 CINCINNATI FUND
<PAGE> 165
CINCINNATI FUND
- -----------------Portfolio of Investments - December 31, 1995-----------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ------ ------------- -----
<S> <C> <C>
UTILITIES 11.54%
2,300 AT&T Corporation $148,781
7,000 Cincinnati Bell Inc. 241,938
9,400 CINergy Corp. 287,288
---------
678,007
---------
FINANCE 18.45%
2,500 American Annuity Group, Inc. 29,688
1,000 American Financial Enterprises, Inc. 22,375
1,300 American Financial Group, Inc. 39,813
600 Banc One Corp. 22,650
2,470 Cincinnati Financial Corp. 160,550
1,700 Fifth Third Bancorp 123,874
700 First Financial Bancorp 24,238
840 Huntington Bancshares Inc. 20,055
1,000 Kentucky Enterprise Bancorp Inc. 27,875
1,000 Manhattan Life Insurance Co. * 4,250
3,300 McDonald & Company Investments, Inc. 59,194
800 Midland Co. 39,300
2,000 Ohio Casualty Corp. 77,000
1,800 PNC Bank Corp. 57,713
3,300 Provident Bancorp, Inc. 155,513
3,400 Star Banc Corp. 202,088
1,000 Suburban Bancorporation, Inc. 18,125
---------
1,084,301
---------
INDUSTRIAL CYCLICALS 8.56%
3,500 AK Steel Holding Corp. 119,656
300 Champion International Corp. 12,581
1,200 Chemed Corporation 46,575
4,500 Cincinnati Milacron, Inc. 117,844
300 Corning Inc. 9,581
600 International Paper Co. 22,688
800 James River Corp. of Virginia 19,150
5,000 LSI Industries Inc. 81,875
300 Monsanto Company 36,750
4,300 Multi-Color Corp. * 11,825
6,000 NS Group Inc. * 15,375
1,000 Zaring Homes, Inc. * 9,125
---------
503,025
---------
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
CINCINNATI FUND 4
<PAGE> 166
CINCINNATI FUND
- ----------------- Portfolio of Investments - December 31, 1995 -----------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ------ ------------- -----
<S> <C> <C>
CONSUMER DURABLES 5.04%
3,000 Baldwin Piano & Organ Co. * $ 37,875
1,800 Cintas Corp. 80,550
3,500 Ford Motor Company 101,281
1,100 General Motors Corp. 57,888
600 Hasbro, Inc. 18,525
--------
296,119
--------
CONSUMER STAPLES 8.70%
400 Avon Products, Inc. 30,125
2,500 Chiquita Brands International, Inc. 34,063
1,800 Heinz (H. J.) Co. 59,288
1,800 PepsiCo Inc. 100,463
3,000 Procter & Gamble Co. 248,625
300 Sara Lee Corp. 9,563
1,500 Super Food Services, Inc. 19,688
300 Sysco Corp. 9,731
--------
511,546
--------
SERVICES 11.17%
1,800 Citicasters Inc. 42,075
4,350 Comair Holdings, Inc. 116,363
200 CSX Corp. 9,113
1,300 Delta Air Lines, Inc. 95,794
4,222 Frisch's Restaurants, Inc. 38,266
200 Gannett Co., Inc. 12,288
5,300 Gibson Greetings, Inc. * 85,131
2,000 Jacor Communications Inc. * 34,000
1,800 McDonald's Corp. 80,888
2,300 Scripps (E. W.) Co. 90,563
3,000 Skyline Chili Inc. * 12,188
600 Time Warner, Inc. 22,650
800 Wendy's International Inc. 17,050
--------
656,369
--------
RETAIL 10.79%
5,800 Federated Department Stores, Inc.* 159,138
8,600 Kroger Co. * 321,425
2,200 Mercantile Stores Company, Inc. 101,613
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
5 CINCINNATI FUND
<PAGE> 167
CINCINNATI FUND
- ----------------- Portfolio of Investments - December 31, 1995 -----------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ------ ------------- -----
<S> <C> <C>
RETAIL - Continued
1,000 Nine West Group, Inc. * $ 37,500
400 Winn Dixie Stores, Inc. 14,700
----------
634,376
----------
HEALTH 5.16%
3,500 Duramed Pharmaceuticals, Inc. * 52,063
1,300 Johnson & Johnson 111,313
4,522 Meridian Diagnostics Inc. 50,025
2,000 Omnicare, Inc. 89,625
----------
303,026
----------
TECHNOLOGY 8.41%
4,500 Cincinnati Microwave Inc. * 19,969
2,800 General Electric Company 201,425
800 International Business Machines Corp. 73,200
3,000 International Lottery, Inc. * 24,938
300 Litton Industries, Inc. * 13,350
3,300 Pomeroy Computer Resources, Inc. * 44,550
4,000 Structural Dynamics Research Corp. * 117,000
----------
494,432
----------
TOTAL COMMON STOCKS 87.82% 5,161,201
(cost $3,908,846)
REPURCHASE AGREEMENT 12.08%
5.3% repurchase agreement dated December 29, 1995
with Star Bank, N.A., due January 2, 1996
(repurchase proceeds $710,418),
collateralized by $750,000
6% GNMA Pool #8974, maturity May 20, 2022
(market value $768,281) 710,000
OTHER ASSETS AND LIABILITIES, NET 0.10% 5,657
----------
NET ASSETS 100% $5,876,858
==========
<FN>
*Denotes a non-income producing security.
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
CINCINNATI FUND 6
<PAGE> 168
CINCINNATI FUND
- ------------Statement of Assets and Liabilities - December 31, 1995------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Common stocks, at value (original cost $3,908,846) $5,161,201
Repurchase agreement 710,000
Dividends receivable 8,876
Receivable for fund shares sold 7,989
Cash 21
Other assets 2,055
----------
5,890,142
----------
LIABILITIES:
Dividends payable to shareholders 2,721
Other accrued expenses and liabilities 10,563
----------
13,284
----------
NET ASSETS $5,876,858
==========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 448,088 shares outstanding
(unlimited number of shares authorized, no par value) $4,622,637
Accumulated realized gain, net 1,866
Unrealized appreciation, net 1,252,355
----------
$5,876,858
==========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE $ 13.12
==========
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
7 CINCINNATI FUND
<PAGE> 169
CINCINNATI FUND
- --------------------------- Statement of Operations --------------------------
For Year Ended December 31, 1995
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividend income $ 76,708
Interest income 37,820
-----------
114,528
-----------
EXPENSES:
Transfer agent and accounting fees 78,000
Investment advisory and management fees 23,429
Reports to shareholders 13,000
Professional fees 12,927
Custodian fees 8,891
Trustees' fees 6,155
Registration fees 2,423
Other expenses 4,832
-----------
149,657
Fees waived and expenses reimbursed under contract (55,581)
Expenses reimbursed voluntarily (1,139)
-----------
92,937
-----------
NET INVESTMENT INCOME 21,591
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gains 96,868
Change in net unrealized appreciation 1,284,165
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,381,033
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,402,624
===========
</TABLE>
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
CINCINNATI FUND 8
<PAGE> 170
CINCINNATI FUND
- ---------------------- Statement of Changes in Net Assets ----------------------
<TABLE>
<CAPTION>
For the Period from
Year Ended November 7, 1994 to
December 31, 1995 December 31, 1994
----------------- -------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 21,591 $ 10,003
Net realized gain on investments 96,868 --
Change in unrealized appreciation (depreciation) of investments 1,284,165 (31,810)
----------- -----------
Net increase (decrease) in net assets resulting from operations 1,402,624 (21,807)
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (31,594) --
From net realized gain on investments (95,002) --
----------- -----------
Decrease in net assets from dividends and distributions (126,596) --
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 1,642,766 3,247,020
Net asset value of shares issued in reinvestment of
dividends and distributions 123,748 --
Payments for shares redeemed (390,897) --
----------- -----------
Net increase in net assets from fund share transactions 1,375,617 3,247,020
----------- -----------
NET INCREASE IN NET ASSETS 2,651,645 3,247,020
NET ASSETS:
Beginning of period 3,225,213 --
----------- -----------
End of period, including undistributed
net investment income of $0 and $10,003, respectively $ 5,876,858 $ 3,225,213
=========== ===========
FUND SHARE TRANSACTIONS:
Shares sold 144,900 325,527
Shares issued in reinvestment of dividends and distributions 9,432 --
Less shares redeemed (31,771) --
----------- -----------
NET INCREASE IN SHARES OUTSTANDING 122,561 325,527
=========== ===========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to financial statements
9 CINCINNATI FUND
<PAGE> 171
CINCINNATI FUND
- ------------------------------Financial Highlights------------------------------
<TABLE>
<CAPTION>
For the Period from
Year Ended November 7, 1994 to
December 31, 1995 (3) December 31, 1994
--------------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 9.91 $10.00
--------- ------
Net investment income 0.04 0.03
Net gains (losses) on securities 3.46 (0.12)
--------- ------
Total from investment operations 3.50 (0.09)
--------- ------
Dividends from net investment income (0.07) 0.00
Distributions from capital gains (0.22) 0.00
--------- ------
Total distributions (0.29) 0.00
--------- ------
Net asset value, end of period $ 13.12 $ 9.91
========= ======
TOTAL RETURN 35.31% (0.90%)(2)
Net assets, end of period (millions) $ 5.88 $ 3.23
Ratio of net expenses to average net assets (1) 1.98% 1.96%
Ratio of net investment income to average net
assets (1) 0.46% 2.24%
Portfolio turnover rate 9% 0%(2)
</TABLE>
[FN]
(1) The ratio of net expenses to average net assets would have increased
and the ratio of net investment income to average net assets would have
decreased by 0.02% in 1995 and 0.04% in 1994 had the Adviser not
voluntarily reimbursed expenses. Ratios are annualized in periods less
than a year.
(2) Not annualized.
(3) On December 15, 1995, Gateway Investment Advisers, L.P. became
investment adviser of the Fund.
See accompanying notes to financial statements
- --------------------------------------------------------------------------------
CINCINNATI FUND 10
<PAGE> 172
CINCINNATI FUND
- ----------------Notes to Financial Statements - December 31, 1995---------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of four no-load diversified mutual
funds. The financial statements of the Cincinnati Fund (the Fund) are included
in this report. The Fund commenced operation on November 7, 1994. Gateway Index
Plus Fund, Gateway Mid Cap Index Fund, and Gateway Small Cap Index Fund are
included in separate annual reports. The Trust is registered under the
Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION - The Fund normally values common stocks at the average
of the closing bid and asked quotations. Other securities for which market
quotations are not readily available are valued at fair value as determined in
good faith under procedures adopted by the board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME AND EXPENSES - Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies set by the
board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS - Distributions from
net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid annually.
FEDERAL INCOME TAXES - The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all of its taxable income to
shareholders. Based on this policy, the Fund makes no provision for income
taxes. The cost of investments is the same for financial reporting and tax
purposes.
REPURCHASE AGREEMENTS - The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
- --------------------------------------------------------------------------------
11 CINCINNATI FUND
<PAGE> 173
CINCINNATI FUND
- -------------- Notes to Financial Statements - December 31, 1995 ---------------
2. TRANSACTIONS WITH AFFILIATES
Gateway Investment Advisers, Inc. (GIA) was the investment adviser of the Fund
prior to December 15, 1995. On December 15, 1995, the advisory contract between
the Fund and GIA was terminated, and a new contract was entered into with the
Adviser. There were no changes in the advisory fee, or the computation thereof,
as a result of the new contract. The Fund pays the Adviser a monthly management
fee computed at an annual rate of 0.50% of its average daily net assets.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions and expenses of an extraordinary nature) exceed 2.00% of average
daily net assets, the Adviser has agreed to reduce its fee (and for 1995
reimburse other expenses) as necessary to limit the Fund's expenses to this
level. As a result for the year ended December 31, 1995, the Adviser waived its
entire management fees of $23,429 and reimbursed $33,291 in other expenses.
The Adviser maintains the Fund's accounting records for a monthly fee of
$4,000. The Adviser also provides shareholder servicing, transfer, and dividend
disbursing agent services for the Trust. The Fund reimburses the Adviser for the
cost to provide these services, subject to a minimum monthly fee of $2,500 and a
limitation of 0.20% of average daily net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 for the committee chairman) for each
committee meeting attended. The annual retainer and base fee are allocated among
the funds based on the number of shareholders in each fund.
At December 31, 1995, the Adviser controlled, but did not own, 17.7% of the
outstanding shares of the Fund.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1995, purchases of investment securities
(excluding short-term investments) totaled $1,522,240, and proceeds from sales
totaled $367,444.
4. UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
At December 31, 1995, gross unrealized appreciation of common stocks totaled
$1,294,481 and gross unrealized depreciation totaled ($42,126), based on the
cost of investments.
- --------------------------------------------------------------------------------
CINCINNATI FUND 12
<PAGE> 174
CINCINNATI FUND
- ------------------- Report of Independent Public Accountants -------------------
To the Shareholders and Board of Trustees of the Cincinnati Fund of The Gateway
Trust:
We have audited the accompanying statement of assets and liabilities of the
Cincinnati Fund of THE GATEWAY TRUST (an Ohio business trust), including the
portfolio of investments, as of December 31, 1995, and the related statement of
operations, statements of changes in net assets and financial highlights for the
periods indicated thereon. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Cincinnati Fund of The Gateway Trust as of December 31, 1995, the results of its
operations, the changes in its net assets, and the financial highlights for the
periods indicated thereon, in conformity with generally accepted accounting
principles.
Cincinnati, Ohio Arthur Andersen LLP
January 19, 1996
- --------------------------------------------------------------------------------
13 CINCINNATI FUND
<PAGE> 175
CINCINNATI FUND
Professional Services and Trustees
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
Stefen F. Brueckner
Kenneth A. Drucker
Beverly S. Gordon
John F. Lebor
Walter G. Sall
William H. Schneebeck
Peter W. Thayer
- -------------------------------------------------------------------------------
CINCINNATI FUND 14
<PAGE> 176
RISK/REWARD CHART - CINCINNATI FUND
11/7/94 - 12/31/95
- ------------------
<TABLE>
<CAPTION>
Risk Return
---- ------
<S> <C> <C>
US T-bills (30 day) 0.12% 5.29%
Cincinnati Fund 5.88% 29.22%
S&P 500 Stock Index 7.32% 29.50%
</TABLE>
The above chart shows that, in general, more risk must be taken to earn
higher total returns. The chart shows three points. One point shows 30-day U.S.
Treasury bills, one point shows the S&P 500 Index, and the third point shows
the Cincinnati Fund. The line connecting Treasury bills and the S&P 500 Index
shows all the possible outcomes if an investment had been allocated between
these two choices in varying positions. When the Cincinnati Fund point appears
above the line, it shows that the Fund earned a higher-than-expected return
during the period covered by the chart, considering the amount of risk it took
to earn that return. If the point appears below the line, it shows the reverse.
The succeeding years may be quite different in terms of reward for all three
investments shown on the charts. The risk, however, tends to be constant over
time.
<PAGE> 177
RESULTS OF SPECIAL MEETING OF SHAREHOLDERS ON DECEMBER 11, 1995
On December 11, 1995, a special meeting of shareholders of The Gateway Trust was
held to approve new investment advisory contracts for each separate Fund series
of the Trust. The investment advisory contracts approved at the meeting were
substantially identical with the advisory contracts in place prior to the
meeting except for the investment advisor which was changed from Gateway
Investment Advisers, Inc. to Gateway Investment Advisers, L.P.
The results of the voting for the new investment advisory contracts were as
follows:
<TABLE>
<CAPTION>
FUND FOR AGAINST ABSTAIN
- ---- --- ------- -------
<S> <C> <C> <C>
Gateway Index Plus Fund 6,291,436 119,633 291,668
Gateway Mid Cap Index Fund 355,310 1,184 3,009
Gateway Small Cap Index Fund 596,088 5,054 9,602
The Cincinnati Fund 366,890 1,022 1,568
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000215952
<NAME> GATEWAY INDEX PLUS FUND
<SERIES>
<NUMBER> 1
<NAME> GATEWAY INDEX PLUS FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 127493
<INVESTMENTS-AT-VALUE> 177389
<RECEIVABLES> 1204
<ASSETS-OTHER> 4186
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 182779
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6559
<TOTAL-LIABILITIES> 6559
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 151489
<SHARES-COMMON-STOCK> 10423051
<SHARES-COMMON-PRIOR> 10638576
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (24532)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 49263
<NET-ASSETS> 176220
<DIVIDEND-INCOME> 4389
<INTEREST-INCOME> 321
<OTHER-INCOME> 0
<EXPENSES-NET> 2084
<NET-INVESTMENT-INCOME> 2626
<REALIZED-GAINS-CURRENT> (23126)
<APPREC-INCREASE-CURRENT> 38629
<NET-CHANGE-FROM-OPS> 18129
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2626
<DISTRIBUTIONS-OF-GAINS> 250
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2357484
<NUMBER-OF-SHARES-REDEEMED> 2733507
<SHARES-REINVESTED> 160498
<NET-CHANGE-IN-ASSETS> 11569
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 1156
<GROSS-ADVISORY-FEES> 1247
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2084
<AVERAGE-NET-ASSETS> 174460
<PER-SHARE-NAV-BEGIN> 15.48
<PER-SHARE-NII> .24
<PER-SHARE-GAIN-APPREC> 1.46
<PER-SHARE-DIVIDEND> .24
<PER-SHARE-DISTRIBUTIONS> 0.03
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.91
<EXPENSE-RATIO> 1.19%
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000215952
<NAME> GATEWAY MIDCAP INDEX FUND
<SERIES>
<NUMBER> 4
<NAME> MIDCAP INDEX FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 4765
<INVESTMENTS-AT-VALUE> 5451
<RECEIVABLES> 9
<ASSETS-OTHER> 247
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5707
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14
<TOTAL-LIABILITIES> 14
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4990
<SHARES-COMMON-STOCK> 490235
<SHARES-COMMON-PRIOR> 687524
<ACCUMULATED-NII-CURRENT> 2
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 686
<NET-ASSETS> 5693
<DIVIDEND-INCOME> 104
<INTEREST-INCOME> 10
<OTHER-INCOME> 0
<EXPENSES-NET> 111
<NET-INVESTMENT-INCOME> 3
<REALIZED-GAINS-CURRENT> 202
<APPREC-INCREASE-CURRENT> 1078
<NET-CHANGE-FROM-OPS> 1282
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 28
<DISTRIBUTIONS-OF-GAINS> 175
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 68898
<NUMBER-OF-SHARES-REDEEMED> 283660
<SHARES-REINVESTED> 17473
<NET-CHANGE-IN-ASSETS> (895)
<ACCUMULATED-NII-PRIOR> 27
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 12
<GROSS-ADVISORY-FEES> 51
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 191
<AVERAGE-NET-ASSETS> 5639
<PER-SHARE-NAV-BEGIN> 9.58
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 2.43
<PER-SHARE-DIVIDEND> .06
<PER-SHARE-DISTRIBUTIONS> .37
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.61
<EXPENSE-RATIO> 1.98%
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000215952
<NAME> GATEWAY SMALL CAP INDEX FUND
<SERIES>
<NUMBER> 5
<NAME> SMALL CAP INDEX FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 8852
<INVESTMENTS-AT-VALUE> 9361
<RECEIVABLES> 12
<ASSETS-OTHER> 87
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9460
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42
<TOTAL-LIABILITIES> 42
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8875
<SHARES-COMMON-STOCK> 852272
<SHARES-COMMON-PRIOR> 1002733
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 34
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 510
<NET-ASSETS> 9418
<DIVIDEND-INCOME> 166
<INTEREST-INCOME> 2
<OTHER-INCOME> 0
<EXPENSES-NET> 159
<NET-INVESTMENT-INCOME> 9
<REALIZED-GAINS-CURRENT> 498
<APPREC-INCREASE-CURRENT> 1351
<NET-CHANGE-FROM-OPS> 1857
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9
<DISTRIBUTIONS-OF-GAINS> 539
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 117773
<NUMBER-OF-SHARES-REDEEMED> 315501
<SHARES-REINVESTED> 47267
<NET-CHANGE-IN-ASSETS> (239)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 92
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 245
<AVERAGE-NET-ASSETS> 9500
<PER-SHARE-NAV-BEGIN> 9.63
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 2.07
<PER-SHARE-DIVIDEND> .01
<PER-SHARE-DISTRIBUTIONS> .67
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.05
<EXPENSE-RATIO> 1.68%
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000215952
<NAME> CINCINNATI FUND
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 3909
<INVESTMENTS-AT-VALUE> 5161
<RECEIVABLES> 17
<ASSETS-OTHER> 712
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5890
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13
<TOTAL-LIABILITIES> 13
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4623
<SHARES-COMMON-STOCK> 448088
<SHARES-COMMON-PRIOR> 325527
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1252
<NET-ASSETS> 5877
<DIVIDEND-INCOME> 77
<INTEREST-INCOME> 38
<OTHER-INCOME> 0
<EXPENSES-NET> 93
<NET-INVESTMENT-INCOME> 22
<REALIZED-GAINS-CURRENT> 97
<APPREC-INCREASE-CURRENT> 1284
<NET-CHANGE-FROM-OPS> 1403
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 32
<DISTRIBUTIONS-OF-GAINS> 95
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 144900
<NUMBER-OF-SHARES-REDEEMED> 31771
<SHARES-REINVESTED> 9432
<NET-CHANGE-IN-ASSETS> 2652
<ACCUMULATED-NII-PRIOR> 10
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (31)
<GROSS-ADVISORY-FEES> 23
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 150
<AVERAGE-NET-ASSETS> 4704
<PER-SHARE-NAV-BEGIN> 9.91
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 3.46
<PER-SHARE-DIVIDEND> .07
<PER-SHARE-DISTRIBUTIONS> .22
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.12
<EXPENSE-RATIO> 1.98%
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>