<PAGE> 1
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MEMBER OF
==============================
100% NO-LOAD(TM)
MUTUAL FUND
COUNCIL
==============================
[GRAPHIC]
THE GATEWAY TRUST
P.O.Box 5211
CINCINNATI, OH 45201-5211
(800) 354-6339
================================================================================
[GRAPHIC]
GATEWAY
INDEX PLUS FUND
======================
ANNUAL REPORT
1996
================================================================================
<PAGE> 2
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GATEWAY INDEX PLUS FUND
================================================================================
Highlights at December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Annual Total Return
----------------------------------------------------
Past One Three Five Ten Since Inception Dividends Price
Quarter Year Years Years Years on 12/7/77 Year to Date Per Share
------- ---- ----- ----- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gateway Index Plus 3.30% 10.53% 9.02% 7.91% 9.88% 10.37% $0.20 $18.48
S&P 500 8.34 22.96 19.67 15.22 15.26
Lehman Gov't/
Corp. Bond 3.06 2.91 5.79 7.18 8.38
U.S. Inflation (CPI) 0.76 3.59 2.93 2.89 3.70
<CAPTION>
Cumulative Total Return
-----------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 12/7/77
------- ---- ----- ----- ----- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gateway Index Plus 3.30% 10.53% 29.56% 46.32% 156.62% 552.30%
S&P 500 8.34 22.96 71.40 103.05 313.76
Lehman Gov't/
Corp. Bond 3.06 2.91 18.39 41.44 123.71
U. S. Inflation (CPI) 0.76 3.59 9.06 15.30 43.86
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. 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.
This report must be preceded or accompanied by a current prospectus.
1
<PAGE> 3
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GATEWAY INDEX PLUS FUND
Letter from the Chairman
- -------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to report that 1996 was another year of progress for the
financial markets. Stocks, particularly the large capitalization blue chips
owned by the Index Plus Fund, advanced dramatically on a surfeit of good
business news -- corporate profits advanced, employment increased, the nation's
fiscal deficit declined, and inflation was subdued.
As stock prices advanced in response to these good events, risks increased
accordingly. The Fund's managers endeavored to control those risks so that the
risk-averse investor could continue to participate. And that participation, as
in the past, was superior to other low- risk investments. While there was no
major test of the Fund's risk-reducing techniques during 1996, we were secure in
the knowledge that the Fund's assets were defended by hedging transactions
throughout the year, as described in the accompanying co-portfolio managers'
report.
As the Fund's portfolio has grown, its expense ratio has declined. In 1996, the
expense ratio for the Fund declined from 1.19% to 1.14%. This benefits all
shareholders. Our managers continue to focus on all elements of return,
including the reduction of the cost of operations.
In addition to its investment return and reduced expenses, the Fund earned
broader financial market recognition. Our family of funds is now listed under
the bold heading "GATEWAY" in the mutual fund section of The Wall Street Journal
and many other fine newspapers. Major mutual fund research firms such as
Morningstar and Value Line regularly report on the Fund's risk/reward
characteristics. These outside sources make it easier for all investors to keep
abreast of our truly unique approach to management.
As we approach 1997, all of the favorable economic factors that prevailed in
1996 are still in place. Equities may again prevail as investors' asset of
choice. We will work hard to deliver the benefits of equity ownership within a
reduced-risk environment.
Cordially,
/s/ Walter G. Sall
Walter G. Sall
Chairman
2
<PAGE> 4
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GATEWAY INDEX PLUS FUND
Co-Portfolio Managers' Report
- -------------------------------------------------------------------------------
The goal for the Gateway Index Plus Fund has remained the same since its
founding in 1977 -- to produce a risk/reward profile which is unlike any other
mutual fund in the country. Essentially, we strive to earn the highest return
possible within very limited risk parameters. In reviewing our relatively long
track record, we feel this objective has been accomplished.
Due to the Fund's uniqueness, it has been difficult for ranking services
(Morningstar, Lipper, etc.) to properly categorize the Index Plus Fund. For
example, although the Fund is fully invested in stocks, its risk profile is much
more similar to intermediate-term bonds. In fact, many institutional consultants
consider the Fund as a bond alternative rather than a typical stock investment.
This may cause some confusion for investors when they compare the Fund to other
"Growth and Income" funds. Our opinion is that the Fund is not comparable to any
other investment, which is precisely why it is such an excellent addition to a
portfolio.
Our objectives were met once again in 1996. For the twelve months ended December
31, 1996, the Index Plus Fund produced a total return of 10.53%. This may not
appear terrific in comparison to the 22.96% return of the S&P 500. But remember,
the Fund's risk level is more in line with the bond market -- and the Lehman
Government/Corporate Bond Index actually produced a return of only 2.91% in
1996! It has been easy to ignore risk over the past two incredibly strong years
in the stock market. However, history certainly tells us that strong markets do
not last forever.
How does the Index Plus Fund produce such a unique risk/reward profile? Similar
to an owner/landlord of an apartment building, the Fund's main objective is to
maximize cash flow by renting/leasing our asset base. Unlike the landlord whose
asset is real estate, the Fund's asset is a diversified portfolio of stocks. In
effect, we allow others to derive any potential benefits from our portfolio of
stocks in exchange for "rent" they pay to the Fund. Therefore, the success of
the Gateway Index Plus Fund is more dependent upon the amount of "rent" we can
charge, instead of the rise or fall from the stocks held in the portfolio.
Is this a good deal? Over the past twenty years, this "rent" from the portfolio
has ranged from 9% to 30% annually, averaging approximately 16% per year. Since
we trade UNKNOWN stock market appreciation for KNOWN cash flow, the Fund has
significantly reduced its risk. With these levels of "rent," it is easy to see
why being the owner/landlord of stocks owned over a complete market cycle is an
attractive alternative.
3
<PAGE> 5
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GATEWAY INDEX PLUS FUND
Co-Portfolio Managers' Report
- -------------------------------------------------------------------------------
However, like the owner/landlord of real estate, we are somewhat exposed to a
decline in our underlying asset base. Although we generate cash flow, or "rent,"
into the Fund, this may not be sufficient to replace the potential loss of
principal in a rapidly falling market. To minimize this risk, the Fund
occasionally buys index put options on our portfolio of stocks. Put options act
like the insurance you purchase to protect your home. After a deductible is met,
we want to make sure our asset does not suffer a dramatic decline in value. If
our portfolio does not decline, the put options become a "cost" to the Fund just
like the premium paid on the insurance policy.
The table below analyzes the different components of the Fund's total return for
each quarter of 1996. In addition, the following page presents this information
annually dating back to 1988.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
1996
- --------------------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 6.23% 4.05% 2.12% 8.83%
Dividends Earned 0.54 0.51 0.58 0.54
INTEREST EARNED 0.02 0.06 0.04 0.05
CONTRIBUTIONS OF OPTIONS
Effect of Options: Calls (4.16) (0.48) (0.38) (4.89)
Effect of Options: Puts (0.58) (0.78) 0.06 (0.91)
EFFECT OF FEES
Fund Expenses (0.29) (0.29) (0.28) (0.28)
Brokerage Commissions (0.04) (0.04) (0.04) (0.04)
- --------------------------------------------------------------------------------------------
TOTAL RETURN 1.72% 3.03% 2.10% 3.30%
- --------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
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GATEWAY INDEX PLUS FUND
Co-Portfolio Managers' Report
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
-----------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 10.75% 24.81% (5.74%) 24.18% 2.87% 8.27% (0.19%) 33.02%
Dividends Earned 4.02 4.01 3.63 3.25 2.90 2.51 2.80 2.53
INTEREST EARNED 0.21 0.12 0.29 0.33 0.19 0.07 0.03 0.17
CONTRIBUTIONS OF OPTIONS
Effect of Options: 7.06 (7.68) 8.85 (7.66) 4.24 1.48 4.19 (21.48)
Calls
Effect of Options: 0.00 0.00 4.94 (0.72) (3.58) (3.68) 0.00 (1.91)
Puts
EFFECT OF FEES
Fund Expenses (2.07) (1.50) (1.33) (1.22) (1.11) (1.11) (1.21) (1.19)
Brokerage Commissions (0.21) (0.31) (0.32) (0.36) (0.36) (0.14) (0.05) (0.10)
-----------------------------------------------------------------------------------------------
TOTAL RETURN 19.76% 19.45% 10.32% 17.80% 5.15% 7.40% 5.57% 11.04%
-----------------------------------------------------------------------------------------------
</TABLE>
STOCKS: 1996 was another outstanding year to be a stock investor. The Index Plus
Fund's blue chip portfolio of one hundred stocks fully participated in this
bullish environment.
DIVIDENDS: The trend of declining dividend yields continued in 1996. This is not
a result of companies reducing their dividend payments, but rather from the
tremendous rise in underlying stock prices which lowered their yields.
INTEREST EARNED: Since the objective of the Index Plus Fund is to stay fully
invested, the Fund earns a small amount of interest on idle cash balances.
EFFECT OF CALL OPTIONS: Think of this component as the "rent" we charge. Why
negative? Any time the stock market advances by more than the "rent", this item
will be a loss. Remember, we still own the underlying portfolio of stocks. In
order to determine the amount of "rent" we charged during a period of positive
stock performance, you need to add "Performance of Stocks" to "Effect of
Options: Calls." For example, during the fourth quarter of 1996 as shown in the
table on page 4, the "rent" the Fund collected was 3.94% (8.83% added to
- -4.89%). This quarterly cash flow would equal 15.76% annually, which is
historically typical "rent." You will notice in prior years where stock
performance was disappointing, the "Effect of Options: Calls" was a positive
number.
5
<PAGE> 7
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GATEWAY INDEX PLUS FUND
Co-Portfolio Managers' Report
- -------------------------------------------------------------------------------
EFFECT OF PUT OPTIONS: As discussed earlier, this is the Fund's "insurance
policy" in the event of a rapidly declining market. Since 1996 was a favorable
one for stocks, we never filed a claim for any damage done to our portfolio.
Thus, put options were a "cost" to the Fund.
FUND EXPENSES: Like all mutual funds, the Index Plus Fund incurs expenses to
conduct its business. These expenses range from investment management fees to
custodial charges to independent accounting fees. Fund expenses in 1996 totaled
1.14%, which is a slight decline from 1995.
BROKERAGE COMMISSIONS: The Fund has an extremely low level of turnover because
we "index" the portfolio of stocks. Since we buy and hold these positions,
commission costs are held to a minimum.
Although it is difficult to accurately predict the direction of the financial
markets, it is difficult to imagine the next few years will be as rewarding for
stock investors as the 1995-1996 period has been. In fact, this two-year period
is only the eighth time since 1900 that the Dow Jones Industrial Average has
produced back-to-back years of greater-than-20% returns! The previous seven
periods have produced a loss in the third year in six out of seven cases.
Regardless of the market's future path, we are confident that being a "landlord"
of stocks will remain a prudent way to produce the favorable risk/reward profile
we seek for our shareholders.
On behalf of the entire staff at Gateway, we thank you for your support and
commitment. We look forward to many rewarding years ahead!
/s/ J. Patrick Rogers
J. Patrick Rogers, CFA
Co-Portfolio Manager
/s/ Peter W. Thayer
Peter W. Thayer, CFA
Co-Portfolio Manager
6
<PAGE> 8
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GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 8.51%
14,900 American Electric Power Co. $ 613,694
43,200 Ameritech 2,621,700
126,700 AT&T 5,503,531
34,400 Bell Atlantic Corp. 2,227,400
17,900 Entergy Corp. 495,606
54,000 MCI Communications Corp. 1,765,125
34,500 Nynex Corporation 1,660,313
52,900 Southern Co. 1,200,169
16,900 UNICOM Corp. 458,413
------------
16,545,951
------------
ENERGY 11.59%
39,100 Amoco Corp. 3,147,550
12,600 Atlantic Richfield Co. 1,671,863
11,600 Baker Hughes Incorporated 400,925
8,300 Coastal Corp. 405,663
97,600 Exxon Corp. 9,564,800
9,300 Halliburton Co. 560,906
31,000 Mobil Corp. 3,791,688
25,400 Occidental Petroleum Corp. 592,138
19,400 Schlumberger Ltd. 1,936,363
12,300 Williams Companies 462,788
------------
22,534,684
------------
FINANCE 9.10%
37,300 American Express 2,112,113
16,100 American General Corporation 658,088
36,900 American International Group, Inc. 3,999,038
28,300 BankAmerica Corp. 2,824,694
6,000 CIGNA Corp. 819,750
37,800 Citicorp 3,893,400
24,900 First Chicago NBD Corp. 1,338,375
11,100 Great Western Financial Corp. 321,900
9,300 ITT Hartford Group Inc. 628,913
13,300 Merrill Lynch & Co. 1,083,950
------------
17,680,221
------------
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 9
================================================================================
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
INDUSTRIAL CYCLICAL 14.59%
<S> <C> <C>
9,048 Allegheny Teledyne $ 208,093
13,700 Aluminum Company of America 873,375
9,500 Bethlehem Steel Corporation * 84,906
7,100 Black & Decker Manufacturing Corp. 214,331
28,127 Boeing Company 2,993,725
3,900 Boise Cascade Corp. 123,825
8,100 Brunswick Corp. 194,906
7,500 Champion International Corporation 324,844
19,300 Dow Chemical Company 1,512,638
44,100 DuPont E.I. de Nemours 4,156,425
26,500 Eastman Kodak Company 2,124,969
6,600 Fluor Corp. 414,563
5,100 General Dynamics Corp. 359,869
80,400 Hewlett-Packard Company 4,045,125
11,900 Homestake Mining Corp. 169,575
8,700 International Flavors & Fragrances, Inc. 391,500
23,800 International Paper Company 962,413
32,900 Minnesota Mining and Manufacturing 2,726,588
46,100 Monsanto Company 1,795,019
3,700 Polaroid Corp. 160,950
17,300 Rockwell International Corp. 1,053,138
14,500 Unisys Corp. * 98,781
19,200 United Technologies Corp. 1,267,200
15,800 Weyerhauser Co. 749,513
25,500 Xerox Corp. 1,341,938
------------
28,348,209
------------
CONSUMER DURABLES 4.21%
57,300 Chrysler Corporation 1,890,900
93,000 Ford Motor Company 2,970,188
59,400 General Motors Corp. 3,315,263
------------
8,176,351
------------
</TABLE>
See accompanying notes to financial statements
8
<PAGE> 10
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GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER STAPLES 8.86%
10,500 Avon Products, Inc. $ 599,813
195,900 Coca-Cola Co. 10,309,238
11,500 Colgate Palmolive Company 1,061,594
29,100 Heinz (H. J.) Company 1,042,144
123,100 PepsiCo, Inc. 3,600,675
8,400 Ralston Purina Company 616,350
-------------
17,229,814
-------------
SERVICES 4.70%
12,100 Burlington Northern, Inc. 1,045,894
6,200 Delta Air Lines, Inc. 439,425
9,200 Federal Express * 409,400
8,400 Harrah's Entertainment, Inc. * 166,425
55,000 McDonald's Corp. 2,488,750
9,900 Norfolk Southern Corp. 865,631
53,300 Walt Disney Productions 3,714,344
-------------
9,129,869
-------------
RETAIL 4.19%
39,100 K-Mart Corp. * 408,106
19,600 May Department Stores Company 916,300
30,800 Sears, Roebuck & Company 1,418,725
4,900 Tandy Corporation 215,906
21,300 The Limited, Inc. 391,388
21,800 Toys R Us * 655,363
180,300 Wal-Mart Stores, Inc. 4,135,631
-------------
8,141,419
-------------
HEALTH 11.30%
21,700 Baxter International 889,700
39,400 Bristol-Myers Squibb Company 4,284,750
52,750 Columbia Healthcare Corp. 2,152,859
104,700 Johnson & Johnson 5,208,825
6,000 Mallinckrodt, Inc. 265,500
95,600 Merck & Company 7,576,300
40,000 Pharmacia & Upjohn 1,585,000
-------------
21,962,934
-------------
</TABLE>
See accompanying notes to financial statements
9
<PAGE> 11
================================================================================
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 20.09%
17,300 AMP, Inc. $ 664,969
5,500 Ceridian Corporation * 223,438
50,900 Cisco Systems Inc. * 3,241,694
4,600 Computer Sciences Corporation * 377,200
12,400 Digital Equipment Corp. * 451,050
129,800 General Electric Company 12,842,071
3,200 Harris Corp. 219,400
9,900 Honeywell, Inc. 652,163
64,600 Intel Corporation 8,458,563
41,500 International Business Machines Corp. 6,269,094
11,000 National Semiconductor Corp. * 268,813
20,300 Northern Telecom Ltd. 1,256,063
51,450 Oracle Corporation * 2,144,822
18,600 Raytheon Company 895,125
2,700 Tekronix, Inc. 138,544
14,900 Texas Instruments, Inc. 949,875
------------
39,052,884
------------
Total Common Stocks 97.14% $188,802,336
(cost $121,560,809) ------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE> 12
===============================================================================
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contracts Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Put Options on the Standard & Poor's 100 Stock Index
427 expiring January 17, 1997 at 630 $ 22,684
500 expiring February 21, 1997 at 645 187,500
950 expiring February 21, 1997 at 650 385,940
745 expiring March 21, 1997 at 660 596,000
------------
Total Put Options Outstanding 0.61% 1,192,124
(cost $1,756,715) ------------
Repurchase Agreement 4.87%
5% repurchase agreement dated December 31, 1996 with Star
Bank, N.A., due January 2, 1997 (repurchase proceeds
$9,462,628) collateralized by $10,085,000
6.5% GNMA Pool #8359, maturity January 20, 2024
(market value $10,217,366) 9,460,000
------------
Total Investments and Repurchase Agreement 102.62% 199,454,460
------------
Call Options on the Standard & Poor's 100 Stock Index **
(504) expiring January 17, 1997 at 705 (1,108,800)
(287) expiring January 17, 1997 at 720 (355,163)
(287) expiring January 17, 1997 at 725 (270,856)
(509) expiring January 17, 1997 at 745 (1,520,637)
(298) expiring January 17, 1997 at 750 (771,075)
(371) expiring February 21, 1997 at 720 (788,375)
(366) expiring February 21, 1997 at 725 (681,675)
------------
Total Call Options Outstanding (2.83%) (5,496,581)
(premiums received $5,903,814) ------------
Other Assets and Liabilities, Net 0.21% 404,946
-------------
Net Assets 100% $194,362,825
============
<FN>
* Denotes a non-income producing security.
** The aggregate value of investments that covers
outstanding call options is $188,802,336.
</TABLE>
See accompanying notes to financial statements
11
<PAGE> 13
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GATEWAY INDEX PLUS FUND
Statement of Assets and Liabilities - December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Common stocks, at value (original cost $121,560,809) $188,802,336
Put options, at value (original cost $1,756,716) 1,192,124
Repurchase agreement 9,460,000
Dividends receivable 376,491
Receivable for fund shares sold 298,466
Cash 494
Other assets 48,359
------------
200,178,270
------------
LIABILITIES:
Call options outstanding, at value
(premiums received $5,903,814) 5,496,581
Payable for fund shares redeemed 135,050
Dividends payable to shareholders 121,696
Other accrued expenses and liabilities 62,118
------------
5,815,445
------------
NET ASSETS $194,362,825
============
Net assets consist of:
Paid-in capital applicable to 10,519,995 shares outstanding
(unlimited number of shares authorized, no par value) $153,741,123
Undistributed net investment income 64,293
Accumulated realized loss, net (26,526,759)
Unrealized appreciation, net 67,084,168
------------
$194,362,825
============
NET ASSET VALUE, OFFERING, AND
REDEMPTION PRICE PER SHARE $ 18.48
===========
</TABLE>
See accompanying notes to financial statements
12
<PAGE> 14
===============================================================================
GATEWAY INDEX PLUS FUND
Statement of Operations - For the Year Ended December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividend income $ 3,836,855
Interest income 305,596
-----------
4,142,451
-----------
EXPENSES:
Investment advisory and management fees 1,272,990
Transfer agent and accounting fees 402,835
Professional fees 99,892
Reports to shareholders 98,495
Trustees' fees 27,021
Registration fees 26,451
Custodian fees 25,170
Other expenses 84,611
-----------
2,037,465
-----------
NET INVESTMENT INCOME 2,104,986
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 20,545,477
Call options expired and closed (18,899,139)
Put options expired and closed (3,641,315)
-----------
(1,994,977)
-----------
Change in unrealized appreciation (depreciation) on investments:
Securities 16,918,901
Call options 1,040,286
Put options (137,801)
-----------
17,821,386
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 15,826,409
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $17,931,395
===========
</TABLE>
See accompanying notes to financial statements
13
<PAGE> 15
===============================================================================
GATEWAY INDEX PLUS FUND
Statements of Changes in Net Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 2,104,986 $ 2,626,376
Net realized loss on investments (1,994,977) (23,126,218)
Change in unrealized appreciation (depreciation) of investments 17,821,386 38,629,096
------------ ------------
Net increase in net assets resulting from operations 17,931,395 18,129,254
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,040,693) (2,626,376)
In excess of realized gains on investments -- (249,721)
------------ ------------
Decrease in net assets from dividends and distributions (2,040,693) (2,876,097)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 71,436,839 38,274,968
Net asset value of shares issued in reinvestment of
dividends and distributions 1,698,283 2,637,064
Payments for shares redeemed (70,882,651) (44,596,352)
------------ ------------
Net increase (decrease) in net assets from fund shares transactions 2,252,471 (3,684,320)
------------ ------------
NET INCREASE IN NET ASSETS 18,143,173 11,568,837
NET ASSETS:
Beginning of period 176,219,652 164,650,815
------------ ------------
End of period, including undistributed net investment income
of $64,293 and $0, respectively $194,362,825 $176,219,652
============ ============
FUND SHARE TRANSACTIONS:
Shares sold 4,045,402 2,357,484
Shares issued in reinvestment of dividends and distributions 95,552 160,498
Less shares redeemed (4,043,930) (2,733,507)
------------ ------------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 97,024 (215,525)
============ ============
</TABLE>
See accompanying notes to financial statements
14
<PAGE> 16
===============================================================================
GATEWAY INDEX PLUS FUND
Financial Highlights - Per share data for a share outstanding throughout each
year
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995(1) 1994 1993 1992
---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $16.91 $15.48 $15.85 $15.51 $15.24
------ ------ ------ ------ ------
Net investment income 0.21 0.24 0.26 0.26 0.27
Net gains on securities 1.56 1.46 0.61 0.88 0.51
------ ------ ------ ------ ------
Total from investment operations 1.77 1.70 0.87 1.14 0.78
------ ------ ------ ------ ------
Dividends from net investment income (0.20) (0.24) (0.27) (0.26) (0.28)
Distributions from capital gains -- -- (0.86) (0.47) (0.23)
Distributions in excess of realized capital gains -- (0.03) (0.11) (0.07) --
------ ------ ------ ------ ------
Total distributions (0.20) (0.27) (1.24) (0.80) (0.51)
------ ------ ------ ------ ------
Net asset value, end of period $18.48 $16.91 $15.48 $15.85 $15.51
====== ====== ====== ====== ======
Total Return 10.53% 11.04% 5.57% 7.40% 5.15%
Net assets, end of period (millions) $194.36 $176.22 $164.65 $207.18 $212.95
Ratio of expenses to average net assets 1.14% 1.19% 1.21% 1.11% 1.11%
Ratio of net investment income to average
net assets 1.18% 1.51% 1.54% 1.58% 1.96%
Portfolio turnover rate 17% 5% 4% 17% 15%
Average commission per share $0.0335 -- (2) -- (2) -- (2) -- (2)
<FN>
(1) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
(2) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
</TABLE>
See accompanying notes to financial statements
15
<PAGE> 17
===============================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- -------------------------------------------------------------------------------
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 (the Fund) are
included in this report. The investment objective of the Gateway Index Plus Fund
is to achieve a high total return at a reduced level of risk. The Fund attempts
to achieve its investment objective primarily by investing in the 100 stocks in
the S&P 100 Stock Index and by selling call options on that Index. The financial
statements of Gateway Mid Cap Index Fund, Gateway Small Cap Index Fund, and
Cincinnati Fund are included in separate 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 and option
contracts (both purchased and written) 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 - 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
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 the
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 $26,642,117, none of which expires prior to December 31,
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).
ESTIMATES - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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
16
<PAGE> 18
===============================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- -------------------------------------------------------------------------------
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 0.90% 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.
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, 1996, the Adviser held in a fiduciary capacity 7% of the
outstanding shares of the Fund.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1996, purchases of investment securities
(excluding short-term investments) totaled $30,938,233 and proceeds from sales
totaled $56,879,062.
The Fund may write (sell) call options on stock indexes 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 indexes. 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, 1996, transactions in written options were as follows:
<TABLE>
<CAPTION>
Number of Contracts Premiums
------------------- --------
<S> <C> <C>
Outstanding at December 31, 1995 3,044 $ 5,616,247
Options written 21,839 38,630,264
Options exercised (21,291) (37,694,182)
Options expired (970) (648,515)
------- ------------
Outstanding at December 31, 1996 2,622 $ 5,903,814
======= ============
</TABLE>
4. UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Gross unrealized appreciation of common stock totaled $69,292,113 and
depreciation totaled $2,050,586 at December 31, 1996, based on the cost of
investments.
17
<PAGE> 19
===============================================================================
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, 1996, and the related statement
of operations, the statements of changes in net assets, and the 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 financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, 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, 1996, the
results of its operations, the changes in its net assets, and the financial
highlights for periods indicated thereon, in conformity with generally accepted
accounting principles.
Cincinnati, Ohio Arthur Andersen LLP
January 17, 1997
18
<PAGE> 20
RISK/REWARD CHART
-----------------
TEN YEARS
12/31/86 TO 12/31/96
<TABLE>
<CAPTION>
Risk Average Annual
(monthly standard deviation Total
of return) Return
--------------------------- --------------
<S> <C> <C>
U.S. Treasury bills (30 day) 0.50 5.44%
Gateway Index Plus Fund 7.63 9.88%
S&P 500 Stock Index 14.35 15.26%
</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 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.
<PAGE> 21
[GATEWAY LOGO]
GATEWAY
MID CAP INDEX FUND
AND
SMALL CAP INDEX FUND
ANNUAL REPORT 1996
<PAGE> 22
================================================================================
GATEWAY MID CAP INDEX AND SMALL CAP INDEX FUNDS
Highlights at December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------
Past One Three Five Ten Since Inception Price
Quarter Year Years Years Years Inception Date Per Share
------- ---- ----- ----- ----- --------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GATEWAY MID CAP INDEX 4.45% 15.33% 11.21% N/A N/A 9.25% 9/30/92 $12.78
GATEWAY SMALL CAP INDEX 5.58 17.04 10.25 N/A N/A 10.55 6/16/93 $12.06
S&P MidCap 400 Index 6.06 19.20 14.59 13.93 15.94
Wilshire Small Cap Index 7.01 19.97 13.75 n/a n/a
S&P 500 Stock Index 8.34 22.96 19.67 15.22 15.26
Lehman Gov't/Corp. Bond 3.06 2.91 5.79 7.18 8.38
U. S. Inflation (CPI) 0.76 3.59 2.93 2.89 3.70
<CAPTION>
CUMULATIVE TOTAL RETURN
----------------------------------------------------------------------
Past One Three Five Ten Since
Quarter Year Years Years Years Inception
------- ---- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
GATEWAY MID CAP INDEX 4.45% 15.33% 37.53% N/A N/A 45.66%
GATEWAY SMALL CAP INDEX 5.58 17.04 34.03 N/A N/A 42.74
S&P MidCap 400 Index 6.06 19.20 50.49 91.96 338.69
Wilshire Small Cap Index 7.01 19.97 47.17 n/a n/a
S&P 500 Stock Index 8.34 22.96 71.40 103.05 313.76
Lehman Gov't/Corp. Bond 3.06 2.91 18.39 41.44 123.71
U. S. Inflation (CPI) 0.76 3.59 9.06 15.30 43.86
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. 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.
This report must be preceded or accompanied by a current prospectus.
1
<PAGE> 23
================================================================================
GATEWAY MID CAP INDEX AND SMALL CAP INDEX FUNDS
Letter from the Chairman
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to report that 1996 was another year of progress for the
financial markets. Stocks advanced dramatically on a surfeit of good business
news -- corporate profits advanced, employment increased, the nation's fiscal
deficit declined, and inflation was subdued.
The middle capitalization and small capitalization indexes went up, although not
quite as enthusiastically as their "large capitalization" brethren. Gateway's
Mid Cap Index Fund and Small Cap Index Fund both advanced. Risks were reduced as
gains were delivered in the form of increased net asset values and capital gain
distributions.
In the accompanying report, the co-portfolio managers describe the effects of
hedging transactions on the portfolios during 1996. Each of the funds enjoyed
some measure of risk reduction as a result of their application of hedging
technology. As the stock market indexes pass successive new all-time highs, our
shareholders should derive some comfort from the portfolios' reduced risk
exposures.
As we approach 1997, all of the favorable economic factors that pre-vailed in
1996 are still in place. Equities may again prevail as investors' asset of
choice. We will work hard to deliver the benefits of equity ownership within a
reduced-risk environment.
Cordially,
/s/ Walter G. Sall
Walter G. Sall
Chairman
Co-Portfolio Managers' Report
- --------------------------------------------------------------------------------
We are pleased to report on the Gateway Mid Cap Index Fund and the Small Cap
Index Fund for the calendar year ended December 31, 1996. For the trailing
twelve months, the Mid Cap Index Fund produced a total return of 15.33%, which
includes an income dividend of $0.06 and a capital gains distribution of $0.55.
Over this same time period, the Small Cap Index Fund produced a total return of
17.04%, which includes an income dividend of $0.501 and a capital gains
distribution of $0.372.
At first glance, the overall stock market appeared to have another outstanding
year with the S&P 500 Stock Index gaining 22.96%. The Dow Jones Industrial
Average led all the major averages in 1996 with a total return of 28.69%. But
the Dow's outstanding performance was NOT representative of the entire stock
market. The average stock gained far less than these major indexes whose
performances were predominantly driven by relatively few large capitalization
stocks. For example, the ten largest stocks in the NASDAQ composite advanced on
average an astounding 75%, while the remaining 5,000+ stocks averaged only 13%.
In comparison, the Russell 2000, an index recognized as a benchmark for smaller
capitalization stocks, delivered a total return of 16.49% over the same time
period. Clearly, larger blue chip stocks outperformed the rest of the market in
1996.
The Gateway Mid Cap Index Fund invests in the 400 stocks represented in the S&P
MidCap 400 Index. Although Standard & Poor's is more known for its larger
capitalization indexes, their MidCap Index is the most widely followed for this
segment of the stock market. Incidentally, the MidCap 400 Index is not a subset
of the S&P 500 Index. Rather, this portfolio is comprised of middle-sized
companies with a median market capitalization of $2.3 billion. This particular
portfolio of stocks is well diversified across 23 industry groups. Looking back
on 1996, the first and fourth quarters were certainly strong performance periods
for the Fund.
2
<PAGE> 24
================================================================================
GATEWAY MID CAP INDEX AND SMALL CAP INDEX FUNDS
Co-Portfolio Managers' Report
- --------------------------------------------------------------------------------
The Gateway Small Cap Index Fund invests in the 250 stocks represented in the
Wilshire Small Cap Index. Wilshire and Associates is a respected investment
research firm, well known for its work on small capitalization indexes. Like the
Mid Cap Index Fund, this portfolio of stocks is also broadly diversified over 22
industry sectors with a median market capitalization of $818 million. With the
exception of the third quarter, the Fund's portfolio of stocks produced strong
results throughout 1996.
Listed in their respective tables, we analyze the different components of
return. Please note the line, "Effect of Options: Puts," on page 4. As discussed
in prior reports, we purchase index put options for the funds as a means of
protecting the value of the portfolio should a significant decline occur in the
market over a short period of time. Essentially, we purchase options in the same
manner as you buy insurance on your house. Even though the put options in both
funds made a slight profit in the third quarter (due to the July correction),
the options, or "insurance," were a cost to the portfolio over the year.
In forming expectations on the overall stock market for 1997, it is easy to draw
strong similarities between year-end 1996 and year-end 1995. In each case, the
market produced one of its best years for investors, corporate earnings
continued to grow, and inflation remained subdued. Since 1996 turned out to be a
generally good market environment, should we expect another terrific year in
1997? We cannot count on this for two reasons: (1) Interest rates have been
rising over the past twelve months and, historically, the stock market has a
difficult time continuing to rise as interest rates rise; (2) The
1995-through-1996 period was only the eighth time since 1900 that a two-year
period produced back-to-back 20% returns in the Dow Jones Industrial Average.
Unfortunately, in the following year after such a strong two-year bull run, the
market produced a positive rate of return only one time -- in 1956. We continue
to hedge the portfolio with index put options in the event the market does
experience weakness.
On behalf of the staff at Gateway, we thank you for your support and confidence.
Sincerely,
/s/ J. Patrick Rogers, CFA
J. Patrick Rogers, CFA
Co-Portfolio Manager
/s/ Peter W. Thayer, CFA
Peter W. Thayer, CFA
Co-Portfolio Manager
3
<PAGE> 25
================================================================================
GATEWAY MID CAP INDEX FUND
Co-Portfolio Managers' Overview
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
GATEWAY MID CAP INDEX FUND
1996
- ----------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 5.88% 2.42% 2.51% 5.46%
Dividends Earned 0.42 0.39 0.41 0.37
INTEREST EARNED 0.05 0.04 0.05 0.03
CONTRIBUTIONS OF OPTIONS
Effect of Options: Calls 0.00 0.00 0.00 0.00
Effect of Options: Puts (0.06) (0.79) 0.35 (0.89)
EFFECT OF FEES
Fund Expenses (0.50) (0.50) (0.50) (0.50)
Brokerage Commissions (0.02) (0.01) (0.01) (0.02)
- ----------------------------------------------------------------------------------
TOTAL RETURN 5.77% 1.55% 2.81% 4.45%
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOP TEN HOLDINGS
GATEWAY MID CAP INDEX FUND
AS OF DECEMBER 31, 1996
- ------------------------------------------------------------
<S> <C>
U. S. Robotics 0.92%
Parametric Technology Corporation 0.90%
Thermo Electron Corporation 0.87%
Coca-Cola Enterprises, Inc. 0.85%
HEALTHSOUTH Rehabilitation Corp. 0.84%
Cardinal Health, Inc. 0.83%
AFLAC Incorporated 0.82%
Charles Schwab Corporation 0.81%
Franklin Resources, Inc. 0.76%
State Street Boston Corporation 0.72%
- ------------------------------------------------------------
</TABLE>
================================================================================
GATEWAY SMALL CAP INDEX FUND
Co-Portfolio Managers' Overview
- --------------------------------------------------------------------------------
GATEWAY SMALL CAP INDEX FUND
1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 5.46% 3.92% 1.65% 6.48%
Dividends Earned 0.38 0.35 0.34 0.32
INTEREST EARNED 0.02 0.04 0.06 0.04
CONTRIBUTIONS OF OPTIONS
Effect of Options: Calls 0.00 0.00 0.00 0.00
Effect of Options: Puts (0.09) (0.71) 0.32 (0.88)
EFFECT OF FEES
Fund Expenses (0.41) (0.37) (0.36) (0.36)
Brokerage Commissions (0.02) (0.05) (0.01) (0.02)
- ----------------------------------------------------------------------------------
TOTAL RETURN 5.34% 3.18% 2.00% 5.58%
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOP TEN HOLDINGS
GATEWAY SMALL CAP INDEX FUND
AS OF DECEMBER 31, 1996
- ----------------------------------------------------------
<S> <C>
Western Digital Corp. 1.40%
Rowan Companies, Inc. 1.10%
Jones Apparel Group Inc. 1.09%
Noram Energy Corp. 1.08%
Standard Federal Bank 1.04%
Interstate Bakeries Corporation 1.04%
BJ Services Company 1.03%
Smith International, Inc. 1.02%
First American Corp. of Tennessee 1.00%
Nabors Industries, Inc. 0.95%
- ----------------------------------------------------------
</TABLE>
4
<PAGE> 26
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & EQUIPMENT 0.92%
200 OEA, Inc. $ 9,125
200 Rohr, Inc. * 4,513
100 Sequa Corp. 3,925
500 Sundstrand Corporation 21,250
200 Teleflex Incorporated 10,425
200 Thiokol Corporation 8,925
----------
58,163
----------
APPAREL 0.90%
200 Ann Taylor Stores Corp. * 3,488
400 Cintas Corporation 23,600
400 Jones Apparel Group Inc. * 14,900
500 Warnaco Group, Inc. 14,781
----------
56,769
----------
AUTOMOBILES & PARTS 1.15%
300 Arvin Industries, Inc. 7,425
300 Federal-Mogul Corporation 6,600
400 Federal Signal Corporation 10,325
700 Harley Davidson, Inc. 32,900
300 Modine Manufacturing Company 7,913
300 Superior Industries International 6,938
----------
72,101
----------
BUILDING MATERIALS & CONSTRUCTION 0.27%
300 Granite Construction, Inc. 5,850
200 Jacobs Engineering Group Inc. * 4,725
200 Southdown Incorporated 6,225
----------
16,800
----------
BUSINESS SERVICES & SUPPLIES 3.05%
450 Comdisco, Inc. 14,288
1,300 Equifax Inc. 39,731
300 Healthcare COMPARE Corp. * 12,750
305 Information Resources, Inc. * 4,308
400 Kelly Services, Inc. 10,975
700 Manpower Inc. 22,750
700 Medaphis Corp. * 7,831
500 Ogden Corp. 9,375
600 Olsten Corp. 9,075
675 Paychex, Inc. 34,720
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
BUSINESS SERVICES & SUPPLIES - Continued
400 Pittston Brinks Group $ 10,775
300 Rollins, Inc. 5,981
500 Sotheby's Holdings, Inc. 9,281
----------
191,840
----------
CHEMICALS 3.33%
600 Airgas Inc. * 13,200
600 Albemarle Corp. 10,913
200 Betzdearborn Inc. 11,675
600 Cabot Corporation 15,038
500 Crompton & Knowles 9,563
200 Dexter Corp. 6,375
1,100 Ethyl Corp. 10,519
300 Ferro Corporation 8,531
100 Fuller (H. B.) Company 4,650
400 Georgia Gulf Corp. 10,750
800 IMC Global, Inc. 31,300
400 Lawter International, Inc. 5,025
300 Loctite Corporation 18,281
500 Lubrizol Corporation 15,469
200 Minerals Technologies, Inc. 8,200
400 Olin Corporation 15,050
400 Schulman (A.), Inc. 9,850
300 Wellman, Inc. 5,138
----------
209,527
----------
COMPUTER SOFTWARE & PERIPHERALS 5.32%
600 Adobe Systems, Inc. 22,463
700 America Online Inc. * 18,813
900 BMC Software, Inc. * 37,406
700 Cadence Design Systems, Inc. * 27,825
400 Compuware Corporation * 20,050
400 Electronic Arts Inc. * 11,975
200 Exabyte Corporation * 2,688
400 FIserv, Inc. * 14,775
400 GTECH Holdings * 12,775
1,400 Informix Corporation * 28,613
500 Mentor Graphics Corporation * 4,906
1,100 Parametric Technology Corporation * 56,581
</TABLE>
5 See accompanying notes to financial statements
<PAGE> 27
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PERIPHERALS - Continued
200 Policy Management Systems Corp. * $ 9,225
677 Sterling Commerce * 23,780
504 Storage Technology Corporation * 24,003
300 Structural Dynamics Research Corporation * 5,944
300 Symantec Corp. * 4,369
200 Symbol Technologies, Inc. * 8,863
----------
335,054
----------
ELECTRONICS & COMPUTERS 8.90%
1,200 ADC Telecommunications, Inc. * 37,350
400 Altera Corporation * 29,075
900 American Power Conversion Corp. * 24,581
1,025 Analog Devices, Inc. * 34,722
400 Arrow Electronics, Inc. * 21,350
321 AST Research Inc. * 1,374
800 Atmel Corp. * 26,600
400 Avnet, Inc. 23,300
600 Cirrus Logic, Inc. * 9,263
800 Cypress Semiconductor Corporation * 11,350
600 Hubbell Inc. 25,913
400 Imation Corp. * 11,275
700 Integrated Device Technology * 9,581
700 Linear Technology Corporation 30,713
400 Litton Industries, Inc. * 18,975
200 MagneTek, Inc. * 2,588
500 Maxim Integrated Products * 21,656
850 Molex Incorporated 33,256
500 Nellcor, Inc. * 10,875
400 Octel Communications Corp. * 6,950
400 Quantum Corporation * 11,400
700 Sensormatic Electronics Corporation 11,769
400 Sequent Computer Systems, Inc. * 7,075
500 Solectron Corp. * 26,563
200 Stratus Computer, Inc. * 5,438
800 U. S. Robotics * 57,605
300 Varian Associates, Inc. 15,281
525 Vishay Intertechnology, Inc. * 12,141
600 Xilinx, Inc. * 22,088
----------
560,107
----------
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 7.05%
500 Anadarko Petroleum Corporation $ 32,375
800 Apache Corporation 28,300
300 BJ Services Company * 15,281
600 ENSCO International Incorporated * 29,100
1,600 Global Marine, Inc. * 32,900
800 Lyondell Petrochemical Company 17,600
500 MAPCO 17,031
400 Murphy Oil Corporation 22,250
800 Nabors Industries, Inc. * 15,350
500 Noble Affiliates, Inc. 23,906
500 Parker Drilling Company * 4,781
300 Parker & Parsley Petroleum 11,025
400 Quaker State Corporation 5,625
400 Questar Corporation 14,725
1,000 Ranger Oil Limited 9,938
600 Seagull Energy Corporation * 13,163
400 Smith International, Inc. * 17,900
400 Tosco Corporation 31,700
500 Transocean Offshore 31,313
706 Ultramar Diamond Shamrock Corp. 22,327
400 Valero Energy Corporation 11,450
300 Varco International, Inc. * 6,938
453 Weatherford International, Inc. * 13,618
500 Witco Corporation 15,281
----------
443,877
----------
FINANCE, INSURANCE, & REAL ESTATE 14.71%
1,200 AFLAC Incorporated 51,300
500 American Financial Group, Inc. 18,906
400 Bancorp Hawaii, Inc. 16,800
1,012 Bear Stearns Companies, Inc. 28,210
600 Central Fidelity Banks, Inc. 15,600
400 City National Corporation 8,600
400 Crestar Financial Corporation 29,700
300 Dauphin Deposit Corporation 9,825
600 Edwards (A. G.), Inc. 20,100
500 First of America Bank Corporation 30,031
650 First Security Corporation 22,019
600 First Tennessee National Corp. 22,463
</TABLE>
See accompanying notes to financial statements 6
<PAGE> 28
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE, INSURANCE, & REAL ESTATE - Continued
300 First Virginia Banks, Inc. $ 14,325
700 Firstar Corp. 36,706
500 Foundation Health Corp. * 15,875
700 Franklin Resources, Inc. 47,863
200 Hartford Steam Boiler Inspection and Insurance Co. 9,288
600 Healthsource, Inc. * 7,838
1,100 Hibernia Corporation 14,506
800 Marshall & Ilsley Corporation 27,800
500 Mercantile Bancorporation, Inc. 25,688
400 Mercantile Bankshares Corporation 12,750
1,000 Northern Trust Corporation 36,313
700 PaineWebber Group Inc. 19,731
300 PHH Corporation 12,863
300 PMI Group 16,613
600 Progressive Corporation 40,463
400 Provident Companies, Inc. 19,350
600 Regions Financial Corp. 31,013
1,600 Schwab (Charles) Corporation 51,100
800 SouthTrust Corporation 27,900
700 State Street Boston Corporation 45,150
800 Summit Bancorporation 34,950
1,000 SunAmerica Inc. 44,313
200 Transatlantic Holdings, Inc. 16,063
500 T. Rowe Price Associates, Inc. 21,750
499 Value Health, Inc. * 9,731
300 Wilmington Trust Corporation 11,925
----------
925,421
----------
FOOD, BEVERAGE, & TOBACCO 3.85%
1,100 Coca-Cola Enterprises, Inc. 53,281
400 Dean Foods Company 12,875
500 Dole Food Company, Inc. 16,906
200 Dreyer's Grand Ice Cream, Inc. 5,925
550 Flowers Industries, Inc. 11,791
1,000 IBP, Inc. 24,125
200 International Multifoods Corp. 3,638
300 Lancaster Colony Corporation 13,725
300 Lance, Inc. 5,344
800 McCormick & Company, Inc. 18,850
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
FOOD, BEVERAGE, & TOBACCO - Continued
400 Michael Foods, Inc. $ 5,125
200 Savannah Foods & Industries, Inc. 2,713
400 Smucker (J. M.) Company 7,050
1,300 Tyson Foods, Inc. 44,525
300 Universal Corporation Holding Co. 9,638
200 Universal Foods Corporation 7,025
----------
242,536
----------
HEALTH 7.25%
200 Acuson Corporation * 4,863
100 Advanced Technology Laboratories, Inc. * 3,063
300 APL Ltd. 7,106
400 Apria Healthcare Group Inc. * 7,475
400 Bergen Brunswig Corporation 11,400
600 Biogen, Inc. * 23,175
900 Cardinal Health, Inc. 52,425
400 Carter-Wallace, Inc. 6,225
500 Centocor, Inc. * 17,906
1,636 Chiron Corporation * 30,368
100 Datascope Corp. * 1,975
200 Dentsply International, Inc. 9,513
100 Diagnostic Products Corporation 2,588
400 FHP International Corporation * 14,800
400 Forest Laboratories, Inc. * 13,050
600 Genzyme Corporation * 13,088
450 Health Care & Retirement * 12,881
1,369 HEALTHSOUTH Rehabilitation Corp. * 52,878
415 Horizon CMS Healthcare Corp. * 5,213
1,100 IVAX Corporation * 11,344
576 Laboratory Corporation of America * 1,620
400 McKesson Corp. 22,425
1,200 Mylan Laboratories Inc. 20,175
600 NovaCare, Inc. * 6,563
300 PacifiCare Health Systems, Inc. * 25,538
700 Perrigo Company * 6,300
200 Scherer (R. P.) Corp. * 10,025
1,000 Stryker Corporation 29,938
600 Vencor Inc. * 18,975
300 Watson Pharmaceuticals * 13,481
----------
456,376
----------
</TABLE>
7 See accompanying notes to financial statements
<PAGE> 29
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
MACHINERY & RELATED PRODUCTS 0.78%
500 AC Nielsen Corp. * $ 7,594
200 Duriron Company, Inc. 5,400
200 Goulds Pumps Incorporated 4,600
200 Kennametal Inc. 7,775
100 Lawson Products, Inc. * 2,213
200 Nordson Corporation 12,800
300 Stewart & Stevenson Services, Inc. 8,738
----------
49,120
----------
MINING & METALS 0.94%
300 CalMat Co. 5,644
100 Cleveland-Cliffs, Inc. 4,538
200 Donaldson Company, Inc. 6,700
300 Keystone International, Inc. 6,000
625 RPM, Inc. 10,625
300 Vulcan Materials Co. 18,263
300 Watts Industries, Inc. 7,163
----------
58,933
----------
MISCELLANEOUS 2.35%
700 Callaway Golf Co. 20,125
900 Circus Circus Enterprises, Inc. * 30,994
200 GATX Corporation 9,700
200 Harsco Corp. 13,688
1,100 International Game Technology 20,006
1,600 Mirage Resorts Incorporated * 34,600
100 National Presto Industries, Inc. 3,744
900 Viad Corp. 14,794
----------
147,651
----------
OTHER CONSUMER DURABLES 2.17%
400 Albany International Corp. Class A 9,225
700 Burlington Industries, Inc. * 7,613
200 Church & Dwight Company, Inc. 4,575
900 Dial Corp. 13,275
400 GenCorp, Inc. 7,250
200 Herman Miller, Inc. 11,288
300 HON Industries, Inc. 9,938
800 Leggett & Platt, Inc. 27,700
100 NCH Corporation 6,025
1,300 Shaw Industries, Inc. 15,356
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
OTHER CONSUMER DURABLES - Continued
200 Stanhome Incorporated $ 5,288
600 Unifi, Inc. 19,313
----------
136,846
----------
OTHER INDUSTRIAL CYCLICALS 5.12%
400 Alexander & Baldwin Company 9,925
400 Alumax Inc. 13,350
100 Brush Wellman Inc. 1,638
100 Carlisle Companies Inc. 6,038
1,094 Clayton Homes, Inc. 14,766
200 Cross (A. T.) Company 2,313
500 Danaher Corp. 23,250
450 Diebold Incorporated 28,238
300 Fastenal Company 13,669
400 First Brands Corporation 11,375
450 Hanna (M. A.) Company 9,844
100 Kaydon Corporation 4,700
661 Mark IV Industries, Inc. 14,955
100 MAXXAM Inc. * 4,763
300 Newport News Shipbuilding, Inc. * 4,519
1,300 Office Depot, Inc. * 23,156
1,200 OfficeMax Inc. * 12,750
300 Overseas Shipholding Group, Inc. 5,081
400 Sealed Air Corporation * 16,625
300 Standard Register Company 9,731
1,350 Staples, Inc. * 24,384
200 Tecumseh Products Company 11,475
600 Tidewater Inc. 27,150
200 Verifone, Inc. * 5,900
400 York International Corporation 22,325
----------
321,920
----------
PAPER & FOREST PRODUCTS 1.82%
300 Bowater, Inc. 11,269
200 Chesapeake Corporation 6,313
400 Consolidated Papers, Inc. 19,625
400 Glatfelter (P. H.) Co. 7,225
500 Longview Fibre Company 9,156
400 Pentair, Inc. 12,900
300 Rayonier Inc. 11,550
</TABLE>
See accompanying notes to financial statements 8
<PAGE> 30
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS - Continued
840 Sonoco Products Company $ 21,735
300 Tambrands Inc. 12,244
120 Wausau Paper Mills Company 2,213
----------
114,230
----------
PRECISION INSTRUMENTS 1.47%
300 Ametek, Inc. 6,675
300 Beckman Instruments, Inc. 11,475
200 Measurex Corporation 4,775
600 Teradyne, Inc. * 14,625
1,325 Thermo Electron Corporation * 54,656
----------
92,206
----------
RETAIL 4.67%
600 Bed Bath and Beyond * 14,588
400 Best Buy Company, Inc. * 4,225
450 Claire's Stores, Inc. 5,878
625 Consolidated Stores Corp. * 20,117
650 Dollar General Corporation 20,759
300 Duty Free International, Inc. 4,350
500 Family Dollar Stores, Inc. 10,125
400 Fingerhut Companies, Inc. 4,875
200 Fred Meyer Inc. * 7,088
400 Hancock Fabrics, Inc. 4,175
400 Hannaford Brothers Company 13,575
500 Heilig-Meyers Company 8,094
500 Intelligent Electronics, Inc. 4,063
700 Kohl's Corp. * 27,431
300 Lands' End, Inc. * 7,913
200 MacFrugal's Bargains-Closeouts, Inc. * 5,200
300 Microwarehouse Inc. * 3,488
300 Nine West Group, Inc. * 13,913
400 Payless ShoeSource, Inc. * 15,000
600 Revco (D. S.) Inc. * 22,125
600 Ruddick Corporation 8,363
1,000 Service Merchandise Company Inc. * 4,188
300 Tiffany & Co. 10,988
800 Viking Office Products * 21,350
400 Vons Companies, Inc. * 23,950
300 Waban Inc. * 7,819
----------
293,640
----------
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
SERVICES 5.99%
200 Airborne Freight Corporation $ 4,663
100 Alaska Air Group, Inc. * 2,094
300 Arnold Industries, Inc. 4,725
300 Atlantic Southeast Airlines, Inc. 6,581
300 Banta Corp. 6,806
300 Belo (A. H.) Corporation Class A 10,481
400 Bob Evans Farms, Inc. 5,400
700 Brinker International, Inc. * 11,200
300 Buffets, Inc. * 2,709
600 Calgon Carbon Corp. 7,313
309 Chris-Craft Industries, Inc. * 12,939
400 Consolidated Freightways Inc. 8,875
100 CPI Corporation 1,681
600 Cracker Barrel Old Country Store, Inc. 15,263
100 Gibson Greetings, Inc. * 1,950
400 Golden Books Family Entertainment, Inc. * 4,400
100 Houghton Mifflin Company 5,663
405 HSN Inc. * 9,568
300 Hunt (J. B.) Transport Services, Inc. 4,238
500 Illinois Central Corp. 15,969
200 International Dairy Queen, Inc. * 4,038
300 Kansas City Southern Industries, Inc. 13,519
400 Lee Enterprises, Incorporated 9,300
300 Lone Star Steakhouse * 8,044
200 Media General, Inc. 6,038
700 Omnicom Group Inc. 32,025
400 Outback Steakhouse, Inc. * 10,650
400 Promus Hotel Corporation * 11,800
800 The Reynolds and Reynolds Company 20,750
200 Sbarro Incorporated 5,100
100 Scholastic Corp. * 6,688
200 TCA Cable TV Incorporated 5,988
400 Trinity Industries, Inc. 15,025
1,200 USA Waste Services, Inc. * 38,250
400 Wallace Computer Services, Inc. 13,825
100 Washington Post Company 33,500
----------
377,058
----------
</TABLE>
9 See accompanying notes to financial statements
<PAGE> 31
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
STEEL & IRON 0.30%
100 Carpenter Technology Corporation $ 3,663
100 Lukens Inc. 2,019
200 Oregon Steel Mills, Inc. 3,338
200 Precision Castparts Corporation 9,913
----------
18,933
----------
UTILITIES 14.18%
1,100 360 Communications Company * 25,438
700 AES Corp. * 32,506
500 AGL Resources Inc. 10,563
400 Aliant Communications Inc. 6,750
1,100 Allegheny Power System, Inc. 33,413
600 American Water Works Company, Inc. 12,413
500 Atlantic Energy Inc. 8,531
100 Black Hills Corporation 2,806
400 Brooklyn Union Gas Company 12,025
500 California Energy Company * 16,750
200 Central Louisiana Electric Company, Inc. 5,538
400 Central Maine Power Company 4,625
500 Century Telephone Enterprises, Inc. 15,438
800 CMS Energy Corporation 26,850
500 COMSAT 12,250
600 Delmarva Power & Light Company 12,188
60 Echelon International Corporation * 938
500 El Paso Natural Gas Company 25,250
900 Florida Progress Corporation 28,969
1,400 Frontier Corp. 31,675
300 Hawaiian Electric Industries, Inc. 10,856
300 Idaho Power Company 9,319
700 Illinova Corp. 19,206
300 Indiana Energy, Inc. 7,294
600 IPALCO Enterprises, Inc. 16,313
400 Kansas City Power & Light Company 11,375
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - Continued
600 LG&E Energy Corp. $ 14,625
600 MCN Corporation 17,325
888 MidAmerican Energy Holdings Company 14,042
300 Minnesota Power & Light Company 8,288
500 Montana Power Company 10,656
300 National Fuel Gas Company 12,375
400 Nevada Power Company 8,225
600 New England Electric System 20,888
700 New York State Electric & Gas Corp. 15,181
2,000 NEXTEL Communications, Inc. * 26,125
500 NIPSCO Industries, Inc. 19,844
1,200 Northeast Utilities 15,975
400 Oklahoma Gas & Electric Company 16,700
800 Pinnacle West Capital Corporation 25,350
500 Portland General Corp. Holding Co. 20,969
1,100 Potomac Electric Power Company 28,325
600 Public Service Company of Colorado 23,325
400 Public Service Company of New Mexico 7,850
700 Puget Sound Power & Light Co. 16,713
1,000 SCANA Corporation 26,688
600 Southern New England Telecommunications Corp. 23,288
400 Southwestern Public Service Company 14,100
1,100 TECO Energy, Inc. 26,606
500 Telephone & Data Systems, Inc. 18,063
400 UtiliCorp United 10,775
400 Vanguard Cellular Systems, Inc. * 6,250
400 Washington Gas Light Company 9,000
1,000 Wisconsin Energy Corporation 26,813
300 WPL Holdings, Inc. 8,419
----------
892,062
----------
TOTAL COMMON STOCKS 96.49% $6,071,170
(cost $4,800,065) ----------
</TABLE>
See accompanying notes to financial statements 10
<PAGE> 32
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contracts Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
PUT OPTIONS ON THE STANDARD & POOR'S 100
STOCK INDEX 0.31%
86 Expiring January 17, 1997 at 670
(cost $31,476) $ 19,350
-------------
REPURCHASE AGREEMENT 3.31%
5% repurchase agreement dated December 31, 1996
with Star Bank, N.A., due January 2, 1997
(repurchase proceeds $208,058)
collateralized by $225,000
6.5% GNMA Pool #8359, maturity January 20,
2024 (market value $227,953) 208,000
-------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 100.10% 6,298,520
OTHER ASSETS AND LIABILITIES, NET (0.10%)
(6,402)
-------------
NET ASSETS 100% $6,292,118
=============
<FN>
* Denotes a non-income producing security.
</TABLE>
================================================================================
GATEWAY MID CAP INDEX FUND
Statement of Assets and Liabilities - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $4,800,065) $ 6,071,170
Put options, at value (original cost $31,476) 19,350
Repurchase agreement 208,000
Dividends and interest receivable 6,573
Cash 818
Other assets 11,234
-----------
6,317,145
-----------
LIABILITIES:
Payable for fund shares redeemed 17,768
Other accrued expenses and liabilities 7,259
-----------
25,027
-----------
NET ASSETS $ 6,292,118
===========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 492,351 shares outstanding
(unlimited number of shares authorized, no par value) $ 5,019,775
Accumulated realized gain, net 13,364
Unrealized appreciation, net 1,258,979
-----------
$ 6,292,118
===========
NET ASSET VALUE, OFFERING, AND
REDEMPTION PRICE PER SHARE $12.78
======
</TABLE>
11 See accompanying notes to financial statements
<PAGE> 33
================================================================================
GATEWAY MID CAP INDEX FUND
Statement of Operations - For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 95,116
Interest income 10,156
---------
105,272
---------
EXPENSES:
Investment advisory and management fees 54,410
Transfer agent and accounting fees 78,000
Registration fees 15,246
Professional fees 12,491
Custodian fees 10,422
Trustees' fees 7,416
Reports to shareholders 6,443
Other expenses 8,064
---------
192,492
Fees waived under contract (54,410)
Expenses reimbursed voluntarily (17,578)
---------
Net operating expenses 120,504
---------
NET INVESTMENT LOSS (15,232)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 347,057
Put options expired and closed (47,892)
---------
299,165
---------
Change in unrealized appreciation (depreciation) on investments:
Securities 571,096
Put options 1,764
---------
572,860
---------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 872,025
---------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 856,793
=========
</TABLE>
================================================================================
GATEWAY MID CAP INDEX FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
----------- -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ (15,232) $ 2,708
Net realized gain on investments 299,165 201,764
Change in unrealized appreciation (depreciation)
of investments 572,860 1,077,912
----------- -----------
Net increase in net assets resulting from
operations 856,793 1,282,384
----------- -----------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
From net investment income -- (28,380)
From net realized gains on investments (287,434) (175,010)
----------- -----------
Decrease in net assets from dividends and )
distributions (287,434) (203,390
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 1,122,760 770,226
Net asset value of shares issued in reinvestment of
dividends and distributions 270,267 202,760
Payments for shares redeemed (1,363,697) (2,947,026)
----------- -----------
Net increase (decrease) in net assets from
fund share transactions 29,330 (1,974,040)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS 598,689 (895,046)
NET ASSETS:
Beginning of period 5,693,429 6,588,475
----------- -----------
End of period $ 6,292,118 $ 5,693,429
=========== ===========
FUND SHARE TRANSACTIONS:
Shares sold 91,308 68,899
Shares issued in reinvestment of dividends
and distributions 19,564 17,473
Less shares redeemed (108,756) (283,661)
----------- -----------
NET INCREASE (DECREASE) IN
SHARES OUTSTANDING 2,116 (197,289)
=========== ===========
</TABLE>
See accompanying notes to financial statements 12
<PAGE> 34
================================================================================
GATEWAY MID CAP INDEX FUND
Financial Highlights - Per share data for a share outstanding
throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
1996 1995(4) 1994 1993 1992(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $11.61 $ 9.58 $10.16 $10.04 $10.00
------ ------ ------ ------ ------
Net investment income (loss) (0.02) 0.03 0.08 0.11 0.03
Net gains or losses on securities 1.80 2.43 (0.60) 0.41 0.04
------ ------ ------ ------ ------
Total from investment operations 1.78 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 (0.61) (0.37) (0.01) (0.29) --
------ ------ ------ ------ ------
Total distributions (0.61) (0.43) (0.06) (0.40) (0.03)
------ ------ ------ ------ ------
Net asset value, end of period $12.78 $11.61 $ 9.58 $10.16 $10.04
====== ====== ====== ====== ======
TOTAL RETURN 15.33% 25.68% (5.12%) 5.18% 0.70%(3)
Net assets, end of period (millions) $ 6.29 $ 5.69 $ 6.59 $10.46 $10.69
Ratio of net expenses to average
net assets (2) 2.00% 1.98% 1.50% 1.50% 1.50%
Ratio of net investment income
(loss) to average net assets (2) (0.25%) 0.05% 0.59% 1.06% 1.39%
Portfolio turnover rate 14% 18% 8% 105% 0%(3)
Average commission per share $0.0355 --(5) --(5) --(5) --(5)
<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 0.29% in 1996 and 0.02% in 1995 had the Adviser not
voluntarily reimbursed expenses. Ratios are annualized in periods less than
one year.
(3) Not annualized.
(4) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
(5) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
</TABLE>
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & EQUIPMENT 1.07%
1,200 Kaman Corporation $ 15,450
1,000 Teleflex Incorporated 52,125
1,100 Thiokol Corporation 49,088
----------
116,663
----------
APPAREL 2.14%
1,200 Brown Group, Inc. 21,975
3,200 Jones Apparel Group Inc. * 119,200
1,500 Kellwood Company 29,813
2,100 Westpoint Stevens, Inc. * 62,475
----------
233,463
----------
AUTOMOBILES & PARTS 1.68%
1,400 Arvin Industries, Inc. 34,650
1,100 Clarcor Inc. 24,338
2,300 Federal-Mogul Corporation 50,600
1,200 Standard Products Co. 30,450
1,900 Superior Industries International 43,938
----------
183,976
----------
BUILDING MATERIALS & CONSTRUCTION 2.18%
1,800 Centex Corporation 67,613
2,300 Kaufman and Broad Home Corp. 29,469
2,100 Lennar Corporation 57,225
1,700 Pulte Corporation 52,275
1,000 Southdown Incorporated 31,125
----------
237,707
----------
BUSINESS SERVICES & SUPPLIES 3.81%
1,500 AMRESCO Inc. 39,938
3,150 Comdisco, Inc. 100,013
1,900 Coventry Corp. * 17,813
1,800 Employee Solutions, Inc. * 36,900
1,927 Information Resources, Inc. * 27,219
2,600 Pittston Brinks Group 70,038
1,100 Profit Recovery Group International * 17,394
2,300 Rollins, Inc. 45,856
3,300 Sotheby's Holdings, Inc. 61,256
----------
</TABLE>
13 See accompanying notes to financial statements
<PAGE> 35
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS 1.21%
600 Chemed Corporation $ 21,863
800 Fuller (H. B.) Company 37,200
2,800 Lawter International, Inc. 35,175
800 Petrolite Corporation 37,600
----------
131,838
----------
COMPUTER SOFTWARE & PERIPHERALS 6.92%
1,900 Cerner Corp. * 29,213
3,600 Computervision Corp. * 33,075
1,500 Exabyte Corporation * 20,156
1,400 FTP Software Inc. * 8,488
900 Global Village Communications * 2,897
2,000 Macromedia Inc. * 36,250
1,400 Medic Computer System Inc. * 56,438
2,500 NetManage Inc. * 15,078
2,800 Network General Corp. * 84,525
2,200 PSINet Inc. * 24,200
1,800 Quarterdeck Corporation * 7,481
2,600 S3, Incorporated * 42,413
1,400 Shared Medical Systems Corporation 68,950
2,000 Structural Dynamics Research Corporation * 39,625
3,100 Symantec Corp. * 45,144
1,400 Symbol Technologies, Inc. * 62,038
2,700 Western Digital Corp. * 153,192
1,200 Xircom Inc. * 26,250
----------
755,413
----------
ELECTRONICS & COMPUTERS 6.56%
1,848 AST Research Inc. * 7,912
2,700 Aura Systems Inc. * 5,948
1,650 Baldor Electric Company 40,734
1,100 Cyrix Corporation * 19,663
2,600 DSP Communications Inc. * 50,213
2,000 ESS Technology Inc. * 56,250
3,600 Geotek Communications, Inc. * 25,875
1,500 IMP Inc. * 3,352
2,400 Kemet Corp. * 55,350
1,200 Lattice Semiconductor * 55,050
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS & COMPUTERS - Continued
2,300 Oak Technology, Inc. * $ 26,019
3,000 Octel Communications Corp. * 52,125
3,300 Quantum Corporation * 94,050
1,800 SCI Systems, Inc. * 80,550
2,200 Sequent Computer Systems, Inc. * 38,913
1,800 Tencor Instruments * 47,588
2,400 VLSI Technology, Inc. * 57,000
----------
716,592
----------
ENERGY 8.49%
2,200 BJ Services Company * 112,063
2,700 Marine Drilling Companies Inc. * 53,156
7,700 Noram Energy Corp. 118,388
5,400 Nabors Industries, Inc. * 103,613
1,600 ONEOK Inc. 48,100
1,900 Pogo Producing Company 89,538
2,200 Quaker State Corporation 30,938
5,300 Rowan Companies, Inc. * 120,244
3,800 Seagull Energy Corporation * 83,363
2,500 Smith International, Inc. * 111,875
1,800 Southwestern Energy Company 27,113
1,500 Southwest Gas Corporation 28,781
----------
927,172
----------
FINANCE, INSURANCE, & REAL ESTATE 19.74%
3,200 20th Century Industries 54,000
900 Alex. Brown & Sons Incorporated 65,194
1,200 American Bankers Insurance Group, Inc. 61,200
1,600 Americredit Corp. * 32,700
1,400 Astoria Financial Corp. 51,713
3,100 California Federal Bank, F.S.B. * 76,144
4,300 Catellus Development Corporation * 48,913
2,800 City National Corporation 60,200
1,100 Coast Savings Financial, Inc. * 40,288
1,200 Collective Bancorp, Inc. 42,150
2,400 Compass Bancshares Inc. 95,850
2,600 Credit Acceptance Corp. * 60,775
1,800 Dauphin Deposit Corporation 58,950
</TABLE>
See accompanying notes to financial statements 14
<PAGE> 36
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE, INSURANCE, & REAL ESTATE - Continued
1,900 First American Corp. of Tennessee $ 109,725
2,400 First Commerce Corp. of Louisiana 93,000
600 Foremost Corporation of America 36,000
2,800 Glendale Federal Bank * 64,925
900 Great Financial Corp. 26,325
1,100 Integon Corporation 19,594
1,600 John Alden Financial Corp. 29,500
1,200 Liberty Corporation 47,100
800 Life Re Corporation 30,800
1,700 Long Island Bancorp, Inc. 59,500
1,700 Magna Group, Inc. 50,150
2,800 Mid Atlantic Medical Services * 37,275
1,100 NAC Re Corporation 37,125
1,700 Olympic Financial Ltd. * 24,438
900 Onbancorp, Inc. 33,525
2,300 Peoples Bank Bridgeport 65,981
2,000 PHH Corporation 85,750
7,300 Reliance Group Holdings Inc. 66,156
1,900 Riggs National Corp. 32,894
2,600 Rollins Truck Leasing Corp. 32,500
2,600 Roosevelt Financial Group 54,275
2,700 Sovereign Bancorp Inc. 35,269
2,000 Standard Federal Bank 113,875
1,800 United Companies Financial Corp. 47,925
2,094 Valley National Bancorp 53,921
800 Washington National Corporation 21,900
3,600 Western National Corp. 68,850
1,100 Zenith National Insurance Corp. 30,250
----------
2,156,605
----------
FOOD, BEVERAGE, & TOBACCO 3.19%
3,400 Chiquita Brands International 43,563
900 Dreyer's Grand Ice Cream, Inc. 26,663
3,400 Flowers Industries, Inc. 72,888
1,200 International Multifoods Corp. 21,825
2,300 Interstate Bakeries Corporation 113,131
2,100 Ralcorp Holdings Inc. * 44,100
1900 Savannah Foods & Industries, Inc. 25,769
----------
347,939
----------
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH 7.13%
1,600 Acuson Corporation * $ 38,900
900 Advanced Technology Laboratories, Inc. * 27,563
2,400 Advanced Tissue Sciences, Inc. * 23,175
1,600 Alliance Pharmaceutical Corp. * 21,800
1,600 Ballard Medical Products 29,800
2,200 Bergen Brunswig Corporation 62,700
1,270 Block Drug Company Inc. 59,372
1,400 Cephalon Inc. * 28,438
1,700 Dentsply International, Inc. 80,856
900 Diagnostic Products Corporation 23,288
1,700 Gilead Sciences, Inc. * 42,394
1,800 Haemonetics Corporation * 33,863
1,800 Herbalife International Inc. 58,613
1,700 ICN Pharmaceuticals, Inc. 33,256
1,200 Integrated Health Services 29,025
1,600 Lincare Holdings, Inc. * 66,000
1,700 Liposome Company Inc. * 32,619
4,800 Perrigo Company * 43,200
1,650 Summit Technology, Inc. * 9,178
1,400 Ventritex Inc. * 34,213
----------
778,253
----------
MACHINERY & RELATED PRODUCTS 2.99%
1,700 BW/IP, INC. 28,050
2,500 Cincinnati Milacron Inc. 54,531
1,500 Gerber Scientific, Inc. 22,313
2,300 Giddings & Lewis, Inc. 29,900
1,300 Goulds Pumps Incorporated 29,900
1,600 Kennametal Inc. 62,200
700 Lawson Products, Inc. * 15,488
500 Nacco Industries, Inc. 26,719
1,800 Silicon Valley Group, Inc. * 36,113
800 Zurn Industries, Inc. 20,800
----------
326,014
----------
MINING & METALS 0.98%
1,300 Coeur D' Alene Mines Corp. 19,581
1,600 Donaldson Company, Inc. 53,600
3,400 Hecla Mining Company * 18,913
2,000 Pegasus Gold Inc. * 15,188
----------
107,282
----------
</TABLE>
15 See accompanying notes to financial statements
<PAGE> 37
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS 1.44%
1,000 Avid Technology Inc. * $ 10,438
2,700 Aztar Corp. * 19,069
2,500 Grand Casinos, Inc. * 33,750
1,300 Kimball International, Inc. 53,788
1,000 Showboat, Inc. 17,313
2,000 Station Casinos Inc. * 22,375
----------
156,733
----------
OTHER CONSUMER DURABLES 2.84%
2,800 Acclaim Entertainment * 9,275
1,900 Albany International Corp. 43,819
1,000 Bassett Furniture Industries, Inc. 24,875
2,000 Cone Mills Corporation * 15,750
2,300 GenCorp, Inc. 41,688
1,600 HON Industries, Inc. 53,000
1,200 La-Z-Boy Incorporated 35,475
500 NCH Corporation 30,125
1,500 Russ Berrie and Company, Inc. 27,000
1,100 Stanhome Incorporated 29,081
----------
310,088
----------
OTHER INDUSTRIAL CYCLICALS 3.76%
1,800 ACX Technologies, Inc. * 35,663
1,100 Brush Wellman Inc. 18,013
1,000 Carlisle Companies Incorporated 60,375
1,200 Cross (A. T.) Company 13,875
2,200 Data General Corporation * 31,900
1,000 Handy and Harman 17,438
600 MAXXAM Inc. * 28,575
2,100 OMI Corporation * 18,375
2,300 Overseas Shipholding Group, Inc. 38,956
2,000 Standard Register Company 64,875
11,800 Sunshine Mining Company * 10,694
1,400 Verifone, Inc. * 41,300
1,100 West Company Incorporated 31,075
----------
411,114
----------
PAPER & FOREST PRODUCTS 1.65%
1,400 Chesapeake Corporation 44,188
3,400 Gaylord Container Corporation * 21,038
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS - Continued
2,200 Pentair, Inc. $ 70,950
2,363 Wausau Paper Mills Company 43,568
----------
179,744
----------
PRECISION INSTRUMENTS 1.45%
2,000 Ametek, Inc. 44,500
1,800 Beckman Instruments, Inc. 68,850
1,200 Credence Systems Corp. * 23,925
900 Measurex Corporation 21,488
----------
158,763
----------
RETAIL 3.57%
600 Blair Corporation 11,513
2,000 Cato Corporation 10,250
6,600 Charming Shoppes, Inc. * 33,206
1,600 The Dress Barn, Inc. * 24,300
1,900 Duty Free International, Inc. 27,550
1,600 Eagle Hardware & Garden, Inc. * 33,200
1,800 Fred Meyer Inc. * 63,788
1,700 Intelligent Electronics, Inc. 13,813
2,100 Lands' End, Inc. * 55,388
1,800 MacFrugal's Bargains-Closeouts, Inc. * 46,800
1,400 Ross Stores, Inc. 69,825
----------
389,633
----------
SERVICES 9.38%
1,200 Airborne Freight Corporation 27,975
900 Alaska Air Group, Inc. * 18,844
1,800 Arnold Industries, Inc. 28,350
1,800 Banta Corp. 40,838
2,500 Calgon Carbon Corp. 30,469
1,906 Chris-Craft Industries, Inc. * 79,814
1,100 Gibson Greetings, Inc. * 21,450
1,500 Golden Books Family Entertainment, Inc. * 16,500
3,100 Hilton Hotels Corp. 80,988
800 Houghton Mifflin Company 45,300
2,655 HSN Inc. * 62,724
2,600 Hunt (J. B.) Transport Services, Inc. 36,725
1,600 International Dairy Queen, Inc. * 32,300
1,500 Luby's Cafeterias, Inc. 30,000
</TABLE>
See accompanying notes to financial statements 16
<PAGE> 38
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
SERVICES - Continued
1,100 New England Business Service, Inc. $ 23,581
2,200 Pixar * 28,738
1,333 Pulitzer Publishing Co. 61,735
1,100 Ruby Tuesday Inc. 20,281
1,200 Sbarro Incorporated 30,600
1,000 Shorewood Packaging Corp. * 19,688
1,500 TCA Cable TV Incorporated 44,906
3,600 USAIR Group Inc. * 84,375
2,800 Wallace Computer Services, Inc. 96,775
1,900 World Color Press Inc. * 36,338
1,800 Yellow Corporation * 26,100
-----------
1,025,394
-----------
STEEL & IRON 1.19%
1,500 AK Steel Holding Corporation 59,250
1,800 Birmingham Steel Corporation 34,088
1,000 Carpenter Technology Corporation 36,625
-----------
129,963
-----------
UTILITIES 4.93%
1,000 Central Hudson Gas & Electric Corp. 31,313
900 CILCORP Inc. 32,963
1,200 Eastern Utilities Associates 20,775
1,700 IES Industries, Inc. 50,575
1,867 International CableTel Incorporated * 46,792
1,650 MDU Resources Group, Inc. 37,847
900 Orange & Rockland Utilities, Inc. 32,231
2,600 Public Service Company of New Mexico 51,025
1,500 Sierra Pacific Resources Holding Co. 43,125
900 Southern Indiana Gas & Electric Co. 31,163
1,980 Tucson Electric Power Company * 32,794
2,100 UGI Corporation 46,856
800 U. S. Long Distance Corp. * 6,500
2,500 Vanguard Cellular Systems, Inc. * 39,063
1,700 Washington Energy Company 34,956
-----------
537,978
-----------
TOTAL COMMON STOCKS 98.30% $10,734,754
(cost $9,338,140) -----------
</TABLE>
<TABLE>
<CAPTION>
Contracts Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
PUT OPTIONS ON THE STANDARD & POOR'S 100
STOCK INDEX 0.30%
147 Expiring January 17, 1997 at 670 $ 33,075
(cost $53,802) -----------
REPURCHASE AGREEMENT 1.82%
5% repurchase agreement dated December
31, 1996 with Star Bank, N.A., due January 2, 1997
(repurchase proceeds $199,055)
collateralized by $215,000
6.5% GNMA Pool #8359, maturity January 20, 2024
(market value $217,822) 199,000
----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 100.42% 10,966,829
OTHER ASSETS AND LIABILITIES, NET (0.42%)
(45,943)
----------
NET ASSETS 100% $10,920,886
===========
<FN>
* Denotes a non-income producing security.
</TABLE>
17 See accompanying notes to financial statements
<PAGE> 39
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Assets and Liabilities - December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $9,338,140) $10,734,754
Put options, at value (original cost $53,802) 33,075
Repurchase agreement 199,000
Dividend and interest receivable 11,692
Receivable for fund shares sold 1,250
Cash 979
Other assets 8,154
-----------
10,988,904
-----------
LIABILITIES:
Dividends payable to shareholders 51,424
Payable for fund shares redeemed 2,797
Other accrued expenses and liabilities 13,797
-----------
68,018
-----------
NET ASSETS $10,920,886
===========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 905,235 shares
outstanding (unlimited number of shares
authorized, no par value) $ 9,517,803
Accumulated realized gain, net 27,196
Unrealized appreciation, net 1,375,887
-----------
$10,920,886
===========
NET ASSET VALUE, OFFERING, AND
REDEMPTION PRICE PER SHARE $12.06
======
</TABLE>
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Operations - For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 140,325
Interest income 15,595
-----------
155,920
-----------
EXPENSES:
Investment advisory and management fees 91,823
Transfer agent and accounting fees 78,000
Professional fees 18,225
Reports to shareholders 17,317
Registration fees 15,219
Custodian fees 9,434
Trustees' fees 8,982
Other expenses 5,559
-----------
244,559
Fees waived under contract (91,823)
-----------
Net operating expenses 152,736
-----------
NET INVESTMENT INCOME 3,184
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 811,112
Put options expired and closed (80,179)
-----------
730,933
-----------
Change in unrealized appreciation (depreciation) on investments:
Securities 860,936
Put options 5,317
-----------
866,253
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 1,597,186
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,600,370
===========
</TABLE>
See accompanying notes to financial statements 18
<PAGE> 40
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------------ -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,184 $ 8,585
Net realized gain on investments 730,933 498,112
Change in unrealized appreciation (depreciation)
of investments 866,253 1,350,501
------------ -----------
Net increase in net assets resulting from
operations 1,600,370 1,857,198
------------ -----------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
From net investment income (3,184) (8,585)
From net realized gains on investments (737,327) (538,981)
------------ -----------
Decrease in net assets from dividends and
distributions (740,511) (547,566)
------------ -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 2,678,237 1,238,323
Net asset value of shares issued in reinvestment
of dividends and distributions 688,952 522,299
Payments for shares redeemed (2,724,199) (3,309,369)
------------ -----------
Net increase (decrease) in net assets from
fund share transactions 642,990 (1,548,747)
------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS 1,502,849 (239,115)
NET ASSETS:
Beginning of period 9,418,037 9,657,152
------------ -----------
End of period $ 10,920,886 $ 9,418,037
============ ===========
FUND SHARE TRANSACTIONS:
Shares sold 218,498 117,773
Shares issued in reinvestment of dividends
and distributions 57,127 47,267
Less shares redeemed (222,488) (315,501)
------------ -----------
NET INCREASE (DECREASE) IN
SHARES OUTSTANDING 53,137 (150,461)
============ ===========
</TABLE>
================================================================================
GATEWAY SMALL CAP INDEX FUND
Financial Highlights - Per share data for a share outstanding
throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From June 16,
to
December 31,
1996 1995(4) 1994 1993(1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $11.05 $ 9.63 $10.35 $10.00
------ ------ ------ ------
Net investment income (loss) 0.01 0.03 (0.02) 0.04
Net gains or losses on securities 1.87 2.07 (0.60) 0.61
------ ------ ------ ------
Total from investment operations 1.88 2.10 (0.62) 0.65
------ ------ ------ ------
Dividends from net investment income (0.01) (0.01) -- (0.04)
Distributions from capital gains (0.86) (0.67) (0.10) (0.26)
------ ------ ------ ------
Total distributions (0.87) (0.68) (0.10) (0.30)
------ ------ ------ ------
Net asset value, end of period $12.06 $11.05 $ 9.63 $10.35
====== ====== ====== ======
TOTAL RETURN 17.04% 21.81% (5.99%) 6.50%(3)
Net assets, end of period (millions) $10.92 $ 9.42 $ 9.66 $13.00
Ratio of net expenses to average
net assets (2) 1.50% 1.68% 2.00% 1.92%
Ratio of net investment income (loss)
to average net assets (2) 0.03% 0.09% (0.14%) 0.98%
Portfolio turnover rate 20% 20% 39% 3%(3)
Average commission per share $0.0371 --(5) --(5) --(5)
<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. Ratios are annualized in periods less than one year.
(3) Not annualized.
(4) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
(5) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
</TABLE>
19 See accompanying notes to financial statements
<PAGE> 41
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
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. The primary investment objective of both the Gateway Mid Cap
Index Fund and the Gateway Small Cap Index Fund is long-term growth of capital.
The Gateway Mid Cap Index Fund and the Gateway Small Cap Index Fund attempt to
achieve their investment objectives primarily by investing in the 400 stocks
included in the S&P MidCap 400 Index and the 250 stocks included in the Wilshire
Small Cap Index, respectively, and by purchasing put or call options on an
index. The financial statements of Gateway Index Plus Fund and the Cincinnati
Fund are included in separate 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 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 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.
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).
ESTIMATES - The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION OF CAPITAL ACCOUNTS - During the year ended December 31, 1996,
Mid Cap reclassified $13,553 from undistributed net investment income to
accumulated realized gains, net. This reclassification, which had no impact on
total net assets, is a result of differences in the computation of income and
capital gains under GAAP and tax rules.
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 1996,
the Adviser agreed to voluntarily waive some or all of its advisory fee if the
Small Cap's expense ratio exceeded 1.50%. Any contractual or voluntary waiver,
however, would not exceed the aggregate advisory fee paid by the Fund for the
applicable year. As a result, for the year ended December 31, 1996, the Adviser
waived advisory fees of $54,410 for Mid Cap and $91,823 for Small Cap.
Additionally for 1996, the
20
<PAGE> 42
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
Adviser voluntarily reimbursed other expenses of Mid Cap as necessary to limit
Mid Cap's expenses to 2.00%, and accordingly reimbursed $17,578 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, 1996, the Adviser held in a fiduciary capacity 59% of Mid Cap's
outstanding shares, and 51% of Small Cap's outstanding shares.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1996, purchases and proceeds from sales of
common stocks are as follows:
<TABLE>
<CAPTION>
MID CAP SMALL CAP
------- ---------
<S> <C> <C>
Purchases of investment securities $ 801,617 $2,010,334
Proceeds from sales of investment securities 1,089,005 2,289,778
</TABLE>
The Funds may buy put or call options on stock indexes. The purchase of options
involves the risk of loss of all or part of the cash paid for the options. The
value of purchased puts increases to offset declines and decreases to offset
rises in the portfolio value. The value of purchased calls increases
proportionately to the value of the underlying index.
4. UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Unrealized appreciation (depreciation) of common stocks at December 31, 1996,
based on the cost of investments, is as follows:
<TABLE>
<CAPTION>
MID CAP SMALL CAP
------- ---------
<S> <C> <C>
Gross unrealized appreciation $1,711,740 $2,675,840
Gross unrealized depreciation (440,635) (1,279,226)
---------- ----------
Net unrealized appreciation $1,271,105 $1,396,614
========== ==========
</TABLE>
================================================================================
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, 1996, and the related statements 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, 1996, 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, 1996, 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 17, 1997
<PAGE> 43
================================================================================
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Sevicing:
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
R. S. Harrison
John F. Lebor
Walter G. Sall
William H. Schneebeck
Peter W. Thayer
<PAGE> 44
[graphic]
THE GATEWAY TRUST
P.O. Box 5211
Cincinnati, OH 45201-5211
(800) 354-6339
MEMBER OF
=========================
100% NO-LOAD(TM)
MUTUAL FUND
COUNCIL
=========================
<PAGE> 45
[LOGO]
Cincinnati
Fund
P. O. Box 5211 Cincinnati, OH 45201-5211
(800) 354-5525
[LOGO]
Cincinnati
Fund
Annual Report
1996
<PAGE> 46
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Highlights at December 31, 1996
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------
Past One Three Five Ten Since Inception Price
Quarter Year Years Years Years on 11/7/94 Per Share
------- ---- ----- ----- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CINCINNATI FUND 6.14% 19.98% N/A N/A N/A 24.74% $15.40
S&P 500 8.34 22.96 19.67 15.22 15.26
Lehman Gov't/Corp. Bond 3.06 2.91 5.79 7.18 8.38
U. S. Inflation (CPI) 0.76 3.59 2.93 2.89 3.70
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 11/7/94
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
CINCINNATI FUND 6.14% 19.98% N/A N/A N/A 60.88%
S&P 500 8.34 22.96 71.40 103.05 313.76
Lehman Gov't/Corp. Bond 3.06 2.91 18.39 41.44 123.71
U. S. Inflation (CPI) 0.76 3.59 9.06 15.30 43.86
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. 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> 47
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Letter from the Chairman
Dear Shareholder:
The Cincinnati business community experienced another outstanding year
in 1996. Companies in Greater Cincinnati competed successfully both in local
area markets and throughout the world. Their growth in sales and profits powered
further upward momentum in their stock prices. Consequently, the Cincinnati Fund
achieved another excellent year.
The growth in Cincinnati businesses is no accident. Hard work, good
decision making, and a dedicated workforce have enabled Cincinnati to outpace
its peers throughout the country. Portfolio manager, Patrick Rogers, has
successfully steered the Cincinnati Fund right down Main Street, focusing
investment attention on the region's best and brightest companies. His
accompanying letter provides his insights into building the Cincinnati Fund's
portfolio.
I am especially pleased to report that the Cincinnati Fund is now
listed daily in The Wall Street Journal and The Cincinnati Enquirer.
Shareholders can locate it in the mutual fund section of these and other fine
papers under the bold heading "Gateway."
As the Fund continues to grow, we will strive to keep the portfolio on
the performance edge of Cincinnati businesses. We are proud to be able to
deliver the investment benefits of our dynamic business community to you, our
shareholders.
Cordially,
/s/ Walter G. Sall
Walter G. Sall
Chairman
CINCINNATI FUND 2
<PAGE> 48
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Portfolio Manager's Report - December 31, 1996
We are pleased to report another strong year for the Cincinnati Fund.
For the calendar year ended December 31, 1996, the Fund produced a total return
of 20.0%. This includes an income dividend of $0.019 and a capital gain
distribution of $0.322 per share. Since its inception on November 7, 1994, the
Cincinnati Fund has delivered an average annualized total return of 24.7%.
Big Blue Chips Once Again Lead A Vibrant Market
At first glance, the overall stock market appeared to have another
outstanding year with the S&P 500 Stock Index gaining 23.0%. The Dow Jones
Industrial Average led all the major averages in 1996 with a total return of
28.7%. But the Dow's outstanding performance was NOT representative of the
entire stock market. The average stock gained far less than these major indexes
whose performances were predominantly driven by relatively few large
capitalization stocks. For example, the ten largest stocks in the NASDAQ
composite advanced on average an astounding 75%, while the remaining 5,000+
stocks averaged only 13%. In comparison, the Russell 2000, an index recognized
as a benchmark for smaller capitalization stocks, delivered a total return of
16.5% over the same time period. Clearly, larger blue chip stocks outperformed
the rest of the market in 1996.
Cincinnati Fund's Performance Was Broadly Based
The Cincinnati Fund enjoyed this advance made by the larger
capitalization issues. Listed below are the Fund's top ten portfolio holdings as
of December 31, 1996. Each of these stocks have at least a $1 billion market
capitalization, with General Electric and Procter & Gamble leading the way at
$162.8 billion and $73.4 billion, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Top Ten Holdings
As of December 31, 1996
- ----------------------------------------------------------
<S> <C>
Cincinnati Bell Inc. 6.17%
The Kroger Co. 5.49%
The Procter & Gamble Company 5.38%
Cinergy Corp. 5.36%
General Electric Company 4.18%
Cincinnati Financial Corporation 3.71%
Comair Holdings, Inc. 3.24%
Provident Bancorp, Inc. 2.79%
American Financial Group, Inc. 2.65%
Fifth Third Bancorp 2.53%
- ----------------------------------------------------------
</TABLE>
3 CINCINNATI FUND
<PAGE> 49
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Portfolio Manager's Report - December 31, 1996
However, the Fund's gains were not limited to only the larger
companies. Sixty-one of the sixty-seven stocks that were held in the Cincinnati
Fund for the entire year turned in a positive rate of return. This broad advance
is indicative of the excellent economic conditions our area companies have
enjoyed over the past few years. In fact, the Fund's best percentage
performances during 1996 were turned in by smaller companies, as shown below.
<TABLE>
<CAPTION>
- ------------------------------------------- ---------------------------
Price % Change
Top Ten Performers During 1996
- ------------------------------------------- ---------------------------
<S> <C>
Pomeroy Computer Resources, Inc. 308.3%
Multi-Color Corporation 142.1%
Frisch's Restaurants, Inc. 84.8%
NS Group, Inc. 80.0%
Skyline Chili, Inc. 67.7%
Provident Bancorp, Inc. 62.8%
Jacor Communications, Inc. 56.4%
Star Banc Corporation 54.4%
Omnicare, Inc. 43.6%
- ------------------------------------------- ---------------------------
</TABLE>
The performance of Pomeroy Computer Resources was remarkable during
1996. This Northern Kentucky firm installs and services computer hardware
primarily for institutional customers. As corporations continue to commit
capital to upgrade computer networks, Pomeroy has successfully obtained
significant contracts to supply and design their information system needs. Their
revenue growth has been phenomenal: a 60% increase from 1994 to 1995 and a 45%
increase from 1995 to 1996!
The Fund was also well rewarded from its sizable position in Cincinnati
Bell. Why such enthusiasm for a local telephone company? Because it is not just
a local telephone company. During 1996, over 50% of its revenue was a result of
its subsidiaries, Matrixx Marketing, and Cincinnati Bell Information Systems.
Services performed by these units, such as billing and customer service centers,
have been growing rapidly as other telephone companies continue to outsource
these functions.
CINCINNATI FUND 4
<PAGE> 50
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Portfolio Manager's Report - December 31, 1996
Cincinnati Banks Are In A Class By Themselves
From previous Cincinnati Fund reports, you know the success we have had
by investing in local bank stocks. Cincinnati is unquestionably unique with
three independent banks earning high national recognition for their ability to
produce excellent results. During 1996, their impressive stock gains continued:
<TABLE>
<CAPTION>
- --------------------------- ----------------------
Top Performing Price % Change
Bank Stocks During 1996
- --------------------------- ----------------------
<S> <C>
Provident Bancorporation 62.8%
Star Banc Corporation 54.4%
Fifth Third Bancorp 28.6%
- --------------------------- ----------------------
</TABLE>
As a result of our commitment to these banks, as well as to local
insurance companies, the largest industry group in the Fund at year end remains
the Finance sector. A graph depicting the Fund's holdings by industry group is
shown on page seven.
Removals From The Portfolio
Unlike the very active merger and acquisition activity during 1995,
only two significant corporate events occurred during 1996. Jacor Communications
acquired Citicasters, formerly Great American Communications, which had
interests in local tele-vision and radio broadcasting. Jacor has extended its
dominance in the local market and has increased its market share in selected
cities around the country. Since the Fund owned Citicasters at the time of the
acquisition, the Fund received additional shares of Jacor which has increased
the overall position compared to year-end 1995.
After a volatile existence, Cincinnati Microwave announced the sale of
the company to the privately held Bel-Tronics, a competitive manufacturer of
laser/radar detectors. The Fund therefore sold its relatively small position in
Cincinnati Microwave near the end of the year.
5 CINCINNATI FUND
<PAGE> 51
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Portfolio Manager's Report - December 31, 1996
Looking Into 1997
In forming expectations on the overall stock market for 1997, it is
easy to draw strong similarities between year-end 1996 and year-end 1995. In
each case, the market produced one of its best years for investors, corporate
earnings continued to grow, and inflation remained subdued. Since 1996 turned
out to be a generally good market environment, should we expect another terrific
year in 1997? We cannot count on this for two reasons: (1) Interest rates have
been rising over the past twelve months and, historically, the stock market has
a difficult time continuing to rise as interest rates rise; (2) The
1995-through-1996 period was only the eighth time since 1900 that a two-year
period produced back-to-back 20% returns in the Dow Jones Industrial Average.
Unfortunately, in the following year after such a strong two-year bull run, the
market produced a positive rate of return only one time -- in 1956.
Although we do not expect any major changes to the portfolio in 1997,
our expectations are for smaller capitalization stocks to outperform the larger
blue chip names. In addition, you will notice subtle changes toward stocks which
appear to have greater upside potential.
On behalf of the staff at Gateway, I thank you for your support of the
Cincinnati Fund. We firmly believe the Fund offers investors a unique
opportunity for long-term growth of capital for its investors.
Sincerely,
/s/ J. Patrick Rogers
J. Patrick Rogers, CFA
Portfolio Manager
CINCINNATI FUND 6
<PAGE> 52
Cincinnati Fund
Industry Weightings - December 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Technology 10.43%
Finance 20.18%
Industrial Cyclicals 8.28%
Consumer Staples 8.52%
Services 12.25%
Consumer Durables 4.69%
Retail 8.76%
Health 4.67%
Utilities 12.89%
Energy 0.98%
</TABLE>
As a percentage of net assets
7 CINCINNATI FUND
<PAGE> 53
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Portfolio of Investments - December 31, 1996
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
UTILITIES 12.89%
2,800 AT&T $ 121,625
9,000 Cincinnati Bell Inc. 554,625
14,400 Cinergy Corp. 481,500
---------
1,157,750
---------
ENERGY 0.98%
2,000 Ashland Oil, Inc. 87,875
---------
FINANCE 20.18%
2,500 American Annuity Group, Inc. 35,625
1,000 American Financial Enterprises 28,000
6,300 American Financial Group, Inc. 238,219
660 Banc One Corp. 28,545
5,143 Cincinnati Financial Corporation 333,652
2,500 Duke Realty Investments, Inc. 95,930
3,623 Fifth Third Bancorp 227,570
770 First Financial Bancorp 24,736
924 Huntington Bancshares Incorporated 24,428
4,300 McDonald & Company Investments, Inc. 149,425
3,000 Ohio Casualty Corporation 107,250
800 PNC Bank Corp. 30,100
7,425 Provident Bancorp, Inc. 250,594
2,100 Star Banc Corporation 193,069
1,000 Suburban Bancorporation, Inc. 15,500
800 The Midland Company 30,700
---------
1,813,343
---------
INDUSTRIAL CYCLICAL 8.28%
4,000 AK Steel Holding Corporation 158,000
800 Champion International Corporation 34,650
3,700 Chemed Corporation 134,819
7,000 Cincinnati Milacron Inc. 152,688
300 Corning Incorporated 13,856
600 International Paper 24,263
7,500 LSI Industries Inc. 100,313
1,500 Monsanto Company 58,406
4,300 Multi-Color Corporation * 24,188
6,000 NS Group, Inc. * 26,250
1,500 Zaring Homes, Inc. * 16,406
---------
743,839
---------
</TABLE>
See accompanying notes to financial statements
CINCINNATI FUND 8
<PAGE> 54
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Portfolio of Investments - December 31, 1996
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
CONSUMER DURABLES 4.69%
2,800 Cintas Corporation $ 165,200
4,500 Ford Motor Company 143,719
1,600 General Motors Corporation 89,300
600 Hasbro, Inc. 23,325
---------
421,544
---------
CONSUMER STAPLES 8.52%
800 Avon Products, Inc. 45,700
3,500 Chiquita Brands International 44,844
1,800 Heinz (H. J.) Company 64,463
3,600 PepsiCo, Inc. 105,300
300 Sara Lee Corporation 11,175
300 SYSCO Corporation 9,788
4,500 The Procter & Gamble Company 483,750
---------
765,020
---------
SERVICES 12.25%
12,025 Comair Holdings, Inc. 290,855
2,664 Comcast Cable Communications, Inc. 47,453
200 CSX Corporation 8,450
1,300 Delta Air Lines, Inc. 92,138
4,391 Frisch's Restaurants, Inc. 70,254
1,200 Gannett Co., Inc. 89,775
5,300 Gibson Greetings, Inc. * 103,350
6,500 Jacor Communications, Inc. * 178,344
1,800 McDonald's Corporation 81,450
3,000 Skyline Chili, Inc. 19,125
2,300 The E.W. Scripps Company 80,069
600 Time Warner Inc. 22,538
800 Wendy's International, Inc. 16,400
---------
1,100,201
---------
RETAIL 8.76%
3,800 Federated Department Stores, Inc. * 129,675
1,500 Mercantile Stores Company, Inc. 74,250
1,000 Nine West Group, Inc. * 46,375
10,600 The Kroger Co. * 492,900
1,400 Winn Dixie Stores, Inc. 44,275
---------
787,475
---------
</TABLE>
See accompanying notes to financial statements
9 CINCINNATI FUND
<PAGE> 55
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Portfolio of Investments - December 31, 1996
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
HEALTH 4.67%
5,500 Duramed Pharmaceuticals, Inc. * $ 37,813
2,600 Johnson & Johnson 129,350
4,522 Meridian Diagnostics, Inc. 59,634
6,000 Omnicare, Inc. 192,750
-----------
419,547
-----------
TECHNOLOGY 10.43%
3,800 General Electric Company 375,963
800 International Business Machines Corp. 120,850
4,000 International Lottery, Inc. * 27,500
300 Litton Industries, Inc. * 14,231
4,950 Pomeroy Computer Resources, Inc. * 180,675
11,000 Structural Dynamics Research Corp. * 217,938
-----------
937,157
-----------
TOTAL COMMON STOCKS 91.65% 8,233,751
(cost $5,808,751)
REPURCHASE AGREEMENT 9.03%
5% repurchase agreement dated December 31, 1996
with Star Bank, N.A., due January 2, 1997
(repurchase proceeds $811,225)
collateralized by $865,000
6.5% GNMA Pool #8359, maturity
January 20, 2024
(market value $876,353) 811,000
OTHER ASSETS AND LIABILITIES, NET (0.68%) (60,863)
-----------
NET ASSETS 100% $ 8,983,888
===========
<FN>
* Denotes a non-income producing security.
</TABLE>
See accompanying notes to financial statements
CINCINNATI FUND 10
<PAGE> 56
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Statement of Assets and Liabilities - December 31, 1996
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Common stocks, at value (original cost $5,808,751) $ 8,233,751
Repurchase agreement 811,000
Receivable for fund shares sold 11,750
Dividends receivable 10,290
Cash 595
Other assets 5,127
-------------
9,072,513
-------------
LIABILITIES:
Dividends payable to shareholders 76,528
Other accrued expenses and liabilities 12,097
-------------
88,625
-------------
NET ASSETS $ 8,983,888
=============
NET ASSETS CONSIST OF:
Paid-in capital applicable to 583,476 shares outstanding
(unlimited number of shares authorized, no par value) $ 6,557,060
Accumulated realized gain, net 1,828
Unrealized appreciation, net 2,425,000
-------------
$ 8,983,888
=============
NET ASSET VALUE, OFFERING, AND REDEMPTION
PRICE PER SHARE $15.40
======
</TABLE>
See accompanying notes to financial statements
11 CINCINNATI FUND
<PAGE> 57
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Statement of Operations
For Year Ended December 31, 1996
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividend income $ 123,630
Interest income 35,809
---------------
159,439
---------------
EXPENSES:
Investment advisory and management fees 37,585
Transfer agent and accounting fees 78,000
Reports to shareholders 22,823
Professional fees 15,331
Custodian fees 8,076
Trustees' fees 7,889
Registration fees 3,378
Other expenses 3,153
---------------
176,235
Fees waived under contract (26,264)
---------------
Net operating expenses 149,971
---------------
NET INVESTMENT INCOME 9,468
---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gains 186,554
Change in net unrealized appreciation 1,172,645
---------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,359,199
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,368,667
===============
</TABLE>
See accompanying notes to financial statements
CINCINNATI FUND 12
<PAGE> 58
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------------ ------------
FROM OPERATIONS:
<S> <C> <C>
Net investment income $ 9,468 $ 21,591
Net realized gain on investments 186,554 96,868
Change in unrealized appreciation (depreciation) of investments 1,172,645 1,284,165
----------- -----------
Net increase in net assets resulting from operations 1,368,667 1,402,624
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (9,468) (31,594)
From net realized gain on investments (186,592) (95,002)
----------- -----------
Decrease in net assets from dividends and distributions (196,060) (126,596)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 2,588,482 1,642,766
Net asset value of shares issued in reinvestment of
dividends and distributions 119,474 123,748
Payments for shares redeemed (773,533) (390,897)
----------- -----------
Net increase in net assets from fund share transactions 1,934,423 1,375,617
----------- -----------
NET INCREASE IN NET ASSETS 3,107,030 2,651,645
NET ASSETS:
Beginning of period 5,876,858 3,225,213
----------- -----------
End of period $ 8,983,888 $ 5,876,858
=========== ===========
FUND SHARE TRANSACTIONS:
Shares sold 181,494 144,900
Shares issued in reinvestment of dividends and distributions 7,758 9,432
Less shares redeemed (53,864) (31,771)
----------- -----------
NET INCREASE IN SHARES OUTSTANDING 135,388 122,561
=========== ===========
</TABLE>
See accompanying notes to financial statements
13 Cincinnati Fund
<PAGE> 59
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Financial Highlights
Per share data for a share outstanding throughout each period
<TABLE>
<CAPTION>
For the Period From
Year Ended December 31, November 7, 1994 to
1996 1995(4) December 31, 1994
---- ------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period $13.12 $ 9.91 $10.00
------ ------ -------
Net investment income 0.02 0.03
0.04
Net gains (losses) on securities 2.60 3.46 (0.12)
------ ------ -------
Total from investment operations 2.62 3.50 (0.09)
------ ------ -------
Dividends from net investment income (0.02) (0.07) 0.00
Distributions from capital gains (0.32) (0.22) 0.00
------ ------ -------
Total distributions (0.34) (0.29) 0.00
------ ------ -------
Net asset value, end of period $15.40 $13.12 $ 9.91
====== ======= =======
TOTAL RETURN 19.98% 35.31% (0.90%)(2)
Net assets, end of period (millions) $8.98 $5.88 $3.23
Ratio of net expenses to average net assets 2.00% 1.98% (1) 1.96%(1)
Ratio of net investment income to average net 0.13% 0.46% (1) 2.24%(1)
assets
Portfolio turnover rate 10% 9% 0%(2)
Average commission per share $0.0381 -- (3) -- (3)
<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
one year.
(2) Not annualized.
(3) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
(4) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
</TABLE>
See accompanying notes to financial statements
CINCINNATI FUND 14
<PAGE> 60
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Notes to Financial Statements - December 31, 1996
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 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. The financial statements
of Gateway Index Plus Fund, Gateway Mid Cap Index Fund, and Gateway Small Cap
Index Fund are included in separate 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 re-corded 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).
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the
15 CINCINNATI FUND
<PAGE> 61
- -------------------------------------------------------------------------------
CINCINNATI FUND
- -------------------------------------------------------------------------------
Notes to Financial Statements - December 31, 1996
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 advisory contract requires the Adviser to reduce its fee
as necessary to limit the Fund's expenses to this level. As a result, for the
year ended December 31, 1996, the Adviser waived management fees of $26,264.
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, 1996, the Adviser held in a fiduciary capacity 13% of the
outstanding shares of the Fund.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1996, purchases of investment securities
(excluding short-term investments) totaled $2,362,613, and proceeds from sales
totaled $649,262.
4. UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
At December 31, 1996, gross unrealized appreciation of common stocks totaled
$2,515,544 and gross unrealized depreciation totaled $90,544, based on the
cost of investments.
CINCINNATI FUND 16
<PAGE> 62
- -------------------------------------------------------------------------------
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, 1996, 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 manage-ment. 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, 1996, 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, 1996, 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 17, 1997
17 CINCINNATI FUND
<PAGE> 63
- ------------------------------------------------------------------------------
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
R. S. Harrison
John F. Lebor
Walter G. Sall
William H. Schneebeck
Peter W. Thayer
CINCINNATI FUND 18
<PAGE> 64
Daily Fund Listing
You can now find the daily closing price of the Cincinnati Fund
in the mutual fund section of The Cincinnati Enquirer,
The Wall Street Journal, and U. S. A. Today.
IRA Reminder
IT'S NOT TOO LATE FOR 1996!
You still have until April 15, 1997, to make your 1996 IRA Contribution.
OR START YOUR 1997 IRA TODAY.
Our Automatic Investment Program is available free of charge.
Call shareholder services at (800) 354-5525 for appropriate forms.
Flexibility
The Cincinnati Fund is available for numerous investment options:
Individuals
No-Fee IRAs
Trusts
Pension Plans
Gifts to Minors
This report must be preceded by or accompanied by a prospectus.
