<PAGE> 1
<TABLE>
<CAPTION>
THE GATEWAY TRUST
Registration No. 2-59859
Registration Statement on Form N-1A
Cross Reference Sheet
Section in the Combined
Prospectus of the Gateway Fund Section in the Cincinnati Fund
Form N-1A Item and Small Cap Index Fund Prospectus
- ---------------------------------------------- ------------------------------------------ ------------------------------------------
<S> <C> <C>
Item 1 - Cover Page - Cover Page - Cover Page
Item 2 - Synopsis - Fees and Expenses - Fees and Expenses
- Table of Contents - Table of Contents
Item 3 - Condensed Financial Information - Financial Highlights - Financial Highlights
- Gateway Performance - Performance and Risk Information
Item 4 - General Description - General Information about Gateway - General Information about Gateway
- Cover Page - Cover Page
- Investment Practices - Investment Practices
- Investment Restrictions - Investment Restrictions
- Supplement to Prospectus dated
September 25, 1998
Item 5 - Management of the Fund - General Information about Gateway - General Information about Gateway
- About the Investment Manager - About the Investment Manager
Item 5A - Management's Discussion of Fund - Gateway Performance - Performance and Risk Information
Performance
Item 6 - Capital Stock - General Information about Gateway - General Information about Gateway
- Cover Page - Cover Page
- Dividends and Distribution - Dividends and Distribution
- Taxes - Taxes
Item 7 - Purchase of Securities - How to Open a Gateway Account - How to Open a Gateway Account
- How to Buy Additional Shares - How to Buy Additional Shares
- Additional Shareholder Information - Additional Shareholder Information
- How Fund Shares are Priced - How Fund Shares are Priced
Item 8 - Redemption - How to Sell Shares - How to Sell Shares
- Additional Shareholder Information - Additional Shareholder Information
Item 9 - Pending Legal Proceedings - Not Applicable - Not Applicable
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Section in Combined Statement of
Additional Information of the Gateway Section in Cincinnati Fund Statement of
Form N-1A Item Fund and Gateway Small Cap Index Fund Additional Information
- --------------------------------------------- ----------------------------------------- --------------------------------------------
<S> <C> <C>
Item 10 - Cover Page - Cover Page - Cover Page
Item 11 - Table of Contents - Table of Contents - Table of Contents
Item 12 - General Information and History - Introduction - Introduction
Item 13 - Investment Objectives and Policies - Investment Objectives and Practices - Information about Investment Practices
- Option Transactions and Restrictions
- Investment Practices, Risks and - Schedule A
Restrictions
- Schedules A and B
Item 14 - Management of the Fund - Trustees and Officers of the Trust - Trustees and Officers of the Trust
Item 15 - Control Persons and Principal - Trustees and Officers of the Trust - Trustees and Officers of the Trust
Holders of Securities - Principal Holders of Fund Shares - Principal Holders of Fund Shares
Item 16 - Investment Advisory and Other - Investment Advisory and Other Services - Investment Advisory and Other Services
Services - Independent Public Accountants and - Independent Public Accountants and
Financial Statements Financial Statements
Item 17 - Brokerage Allocation and Other - Brokerage - Brokerage
Practices
Item 18 - Capital Stock and Other Securities - Not Applicable - Not Applicable
Item 19 - Purchase, Redemption, and Pricing - Shareholder Services - Shareholder Services
of Securities - Additional Purchase and Redemption - Additional Purchase and Redemption
Information Information
Item 20 - Tax Status - Additional Tax Matters - Additional Tax Matters
Item 21 - Underwriters - Not Applicable - Not Applicable
Item 22 - Calculation Of Performance Data - Performance and Risk Information - Performance and Risk Information
- Schedule C - Schedule A
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Item 23 - Financial Statements - Independent Public Accountants and - Independent Public Accountants and
Financial Statements Financial Statements
</TABLE>
<PAGE> 4
THE GATEWAY TRUST
SUPPLEMENT DATED SEPTEMBER 28, 1998
TO
PROSPECTUS DATED MAY 1, 1998
================================================================================
The following material supplements the Prospectus dated May 1, 1998, for the
Gateway Fund and the Gateway Small Cap Index Fund and particularly the
information contained under "GATEWAY FUND" on page 1 of the Prospectus, "GATEWAY
FUND, Investment Practices" on page 20 of the Prospectus, and "SELLING INDEX
CALL OPTIONS" on page 21of the Prospectus. Each of the funds is a series of The
Gateway Trust.
Historically, the Gateway Fund (the "Fund") has sold call options exclusively on
the S&P 100 Index. In order to better serve the Fund, the investment adviser
will begin selling call options on various additional indexes such as the S&P
500 Index. Effective immediately, the Prospectus has been modified as follows:
- - "GATEWAY FUND", page 1, the third sentence of paragraph 2 is amended, as
highlighted, to read as follows:
The Fund also sells INDEX call options on the S&P 100 Index, THE S&P
500 INDEX, AND OTHER STOCK INDEXES, and as the seller, receives cash
from the purchasers of the options.
- - "GATEWAY FUND, INVESTMENT PRACTICES:", page 20, the first sentence of
paragraph 1 is amended, as highlighted, to read as follows:
The Fund attempts to achieve its investment objective primarily by
investing in the 100 stocks included in the S&P 100 Stock Index (the
"100 Index") and by selling INDEX call options.
- - "GATEWAY FUND, INVESTMENT PRACTICES:" page 20, the first sentence of
paragraph 2 is amended, as highlighted, to read as follows:
When the Fund sells INDEX call options, it receives cash from the
purchasers of the options.
- - "SELLING INDEX CALL OPTIONS", page 21, the first sentence of paragraph 1 is
amended, as highlighted, to read as follows:
The Gateway Fund regularly sells INDEX call options.
<PAGE> 5
GATEWAY TRUST
Registration Statement
Securities Act of 1933 Registration No. 2-59895
Investment Company Act of 1940 Registration No. 811-02773
STATEMENT OF ADDITIONAL INFORMATION
DATED SEPTEMBER 28, 1998
This Statement is not a prospectus but should be read in conjunction
with the current Prospectus of The Gateway Trust for the Gateway Fund
(previously known as the Gateway Index Plus Fund) and the Gateway Small Cap
Index Fund dated May 1, 1998 and any supplement thereto. A copy of the
Prospectus may be obtained from the Trust by written or telephone request
directed to the Trust at the address or the telephone number shown below.
P. O. BOX 5211
CINCINNATI, OHIO 45201-5211
(800) 354-6339
<PAGE> 6
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
INTRODUCTION.........................................................................4
General Information About The Gateway Trust.....................................4
INVESTMENT OBJECTIVES AND PRACTICES..................................................5
Gateway Fund....................................................................5
Gateway Small Cap Index Fund....................................................5
OPTION TRANSACTIONS..................................................................5
Selling Covered Call Options....................................................5
Selling Covered Put Options.....................................................6
Purchase Of Put And Call Options................................................6
Options On Securities Indexes...................................................6
Covered Index Call Options Sold By The Gateway Fund.............................6
INVESTMENT PRACTICES, RISKS, AND RESTRICTIONS........................................7
Other Investment Practices......................................................7
Certain Risks...................................................................8
Investment Restrictions.........................................................8
PERFORMANCE AND RISK INFORMATION....................................................10
Performance Information........................................................10
Total Return Calculations..................................................10
Historical Results.........................................................11
Risk Information...............................................................11
Comparative Indexes........................................................11
Standard Deviation.........................................................11
Beta.......................................................................12
Rankings And Comparative Performance Information...............................12
SHAREHOLDER SERVICES................................................................12
Open Account...................................................................12
Automatic Investment Program...................................................12
IRAs...........................................................................12
Systematic Withdrawal Program..................................................14
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................................14
INVESTMENT ADVISORY AND OTHER SERVICES..............................................15
Gateway Investment Advisers, L.P...............................................15
Investment Advisory Contracts..................................................15
Custodian......................................................................17
Shareholder Servicing, Transfer, Dividend Disbursing,
And Financial Servicing Agent..............................................17
BROKERAGE...........................................................................18
ADDITIONAL TAX MATTERS..............................................................19
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
Federal Tax Matters............................................................20
State And Local Tax Aspects....................................................20
TRUSTEES AND OFFICERS OF THE TRUST..................................................20
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS.............................22
PRINCIPAL HOLDERS OF FUND SHARES....................................................22
Gateway Fund...................................................................22
Small Cap Index Fund...........................................................23
Shares Held By Adviser.........................................................23
SCHEDULE A..........................................................................24
SCHEDULE B..........................................................................25
SCHEDULE C..........................................................................27
</TABLE>
<PAGE> 8
27
INTRODUCTION
------------
GENERAL INFORMATION ABOUT THE GATEWAY TRUST
The Gateway Trust (the "Trust") is an Ohio business trust which is
authorized to establish and operate one or more separate series of mutual funds
(herein referred to as "funds" or individually as a "fund"). Each fund has its
own investment policies, restrictions, practices, assets, and liabilities. Each
fund is represented by a separate series of shares of beneficial interest in the
Trust ("Shares"). The Trust's operation is governed by Chapter 1746 of the Ohio
Revised Code, by the Second Amended Agreement and Declaration of Trust dated as
of December 29, 1992, as amended, and by the Trust's bylaws, as amended.
At present, there are three series of the Trust:
<TABLE>
<CAPTION>
- --------------------------------------------- --------------------------
NAME OF FUND DATE ORGANIZED
- --------------------------------------------- --------------------------
<S> <C>
Gateway Fund 1977
Gateway Small Cap Index Fund April 1993
Cincinnati Fund November 1994
- --------------------------------------------- --------------------------
</TABLE>
Gateway Fund was known as the Gateway Index Plus Fund until April 30,
1998; as Gateway Option Index Fund until March 1990; as Gateway Option Income
Fund until February 1988; and as Gateway Option Income Fund, Inc. until May
1986. Gateway Option Income Fund, Inc., the predecessor to the Trust, was
organized in 1977 as a Maryland corporation. It was reorganized to become the
Trust effective as of May 2, 1986, with the Gateway Option Income Fund as its
sole initial fund. As a result of the transaction, shareholders of the
corporation on May 2, 1986, became shareholders of the Option Income Fund.
The Gateway Fund and the Gateway Small Cap Index Fund are offered in
one combined prospectus (the "Combined Prospectus"). The Cincinnati Fund(R) is
offered in a separate prospectus and has a separate Statement of Additional
Information. Gateway Investment Advisers, L.P. (the "Adviser") acts as the
funds' investment adviser.
4
<PAGE> 9
INVESTMENT OBJECTIVES AND PRACTICES
-----------------------------------
GATEWAY FUND
The investment objective of the Gateway Fund (previously known as the
Gateway Index Plus Fund) is to achieve a high total return at a reduced level of
risk. Descriptions of the Fund's current investment practices and strategies and
certain risk factors applicable to the Fund are set forth under the caption
"INVESTMENT PRACTICES" in the Combined Prospectus.
The Gateway Fund primarily invests in a portfolio of common stocks
which parallels the composition of the Standard & Poor's 100 Stock Index (the
"100 Index"). A list of the companies whose stocks are included in the 100 Index
is set forth in Schedule "A" attached to this Statement. The Fund sells index
call options on the S&P 100 Index, the S&P 500 Index and other stock indexes,
and, when appropriate, the Fund enters into closing purchase transactions with
respect to such options. The Fund occasionally purchases put options on
securities indexes.
In addition, the Fund has authority to, and when deemed appropriate
may, invest in the stocks of other securities indexes, sell put options on
securities indexes, and purchase call options on securities indexes; however,
the Fund does not intend to enter into these types of transactions in the coming
year.
GATEWAY SMALL CAP INDEX FUND
The investment objective of the Small Cap Index Fund is to achieve
long-term growth of capital. Descriptions of the Fund's current investment
practices and strategies and certain risk factors applicable to the Fund are set
forth under the caption "INVESTMENT PRACTICES" in the Combined Prospectus.
The Small Cap Index Fund primarily invests in a portfolio of common
stocks which parallels the composition of the Wilshire Small Cap Index (the "250
Index"). A list of the companies whose stocks are included in the 250 Index is
set forth in Schedule "B" attached to this Statement. Because the 250 Index is
comprised of 250 equity securities and the Fund purchases such securities in
round lots, the portfolio does not correlate perfectly with the 250 Index.
Although the Adviser monitors the Small Cap Index Fund portfolio so that the
percentage of assets invested in each stock in the Small Cap Index Fund
substantially corresponds to the composition of the 250 Index, the Fund bears
the risk that the price of its portfolio will not increase as much as (or will
decrease more than) the 250 Index.
The Small Cap Index Fund may also purchase put and call options on
securities indexes such as the S&P 500 Index, the 250 Index, the Russell 2000
Index, and comparable small capitalization securities indexes. The Small Cap
Index Fund limits its aggregate investment in premiums on put and call options
to an amount not exceeding 5% of the Fund's net assets. Options on the 250 Index
are a relatively new investment vehicle and the secondary market for any
particular option on this index at a specific time may be limited.
OPTION TRANSACTIONS
-------------------
This section contains a brief general description of various types of
options, certain option trading strategies, and some of the risks of option
trading. It is included to help a shareholder understand the investment
practices of the funds. It is easier to understand index options if you
understand options on individual stocks. For this reason, the first three parts
of this section discuss individual stock options.
SELLING COVERED CALL OPTIONS
A covered call option is an option sold on a security owned by the
seller of the option. If the option is exercised by the purchaser during the
option period, the seller is required to deliver the underlying security against
payment of the exercise price. The seller's obligation terminates upon
expiration of the option period or when the seller executes a closing purchase
transaction with respect to such option.
The seller of a covered call option gives up, in return for the
premium, the opportunity to profit from an increase in the value of the
underlying security above the exercise price. At the same time, the seller
retains the risk of loss from a decline in the value of the underlying security
during the option period. Although the seller may terminate its obligation by
executing a closing purchase transaction, the cost of effecting such a
transaction may be greater than the premium received upon its sale, resulting in
a loss to the
5
<PAGE> 10
seller. If such an option expires unexercised, the seller realizes a gain equal
to the premium received. Such a gain may be offset or exceeded by a decline in
the market value of the underlying security during the option period. If an
option is exercised, the exercise price, the premium received, and the market
value of the underlying security determine the gain or loss realized by the
seller.
The Gateway Fund is the only Gateway fund authorized to sell covered
call options. A more complete description of the details and risks involved in
selling covered call options is set forth below under the caption "COVERED INDEX
CALL OPTIONS SOLD BY THE GATEWAY FUND."
SELLING COVERED PUT OPTIONS
The seller of a covered put option has the obligation to buy, and the
purchaser the right to sell, the underlying security at the exercise price
during the option period. To cover a put option, a seller usually deposits U. S.
government securities (or other high-grade debt obligations) in a segregated
account at the seller's custodian. The value of the deposited securities is
equal to or greater than the exercise price of the underlying security. The
value of the deposited securities is marked to market daily and, if necessary,
additional assets are placed in the segregated account to maintain a value equal
to or greater than the exercise price. The seller maintains the segregated
account so long as it is obligated as the seller. The obligation of the seller
is terminated when the purchaser exercises the put option, when the option
expires, or when a closing purchase transaction is effected by the seller.
The seller's gain on the sale of a put option is limited to the premium
received plus interest earned on its segregated account. The seller's potential
loss on a put option is determined by taking into consideration the exercise
price of the option, the market price of the underlying security when the put is
exercised, the premium received, and the interest earned on its segregated
account. Although a seller risks a substantial loss if the price of the stock on
which it has sold a put option drops suddenly, the seller can protect itself
against serious loss by entering into a closing purchase transaction. The degree
of loss will depend upon the seller's ability to detect the movement in the
stock's price and to execute a closing transaction at the appropriate time.
The Gateway Fund is the only Gateway fund authorized to sell covered
put options. To comply with state securities requirements, the Fund will not
sell any covered put option if, as a result, the Fund would have to invest more
than 50% of its total assets (taken at current value) to meet its obligation
upon the exercise of put options.
PURCHASE OF PUT AND CALL OPTIONS
Put options can be employed to protect against declines in the market
value of portfolio securities or to attempt to retain unrealized gains in the
value of portfolio securities. Put options might also be purchased to facilitate
the sale of portfolio securities. Call options can be purchased as a temporary
substitute for the purchase of individual stocks, which then could be purchased
in orderly fashion. Upon the purchase of the stocks, the purchaser would
normally terminate the call position.
The purchase of both put and call options involves the risk of loss of
all or part of the premium paid. If the price of the underlying stock does not
rise (in the case of a call) or drop (in the case of a put) by an amount at
least equal to the premium paid for the option contract, the purchaser will
experience a loss on the option contract equal to the deficiency.
The Gateway Fund and the Small Cap Index Fund each are authorized to
purchase index put and call options. Each fund limits its aggregate investment
in premiums on put and call options to an amount not exceeding 5% of its net
assets.
OPTIONS ON SECURITIES INDEXES
An option on a securities index is generally similar to an option on an
individual stock, but an option on a securities index is settled only in cash.
The exercising holder of an index option, instead of receiving a security,
receives the difference between the closing price of the securities index and
the exercise price of the index option times a specified multiple ($100 in the
case of the S&P 100 Stock Index). The seller of index options may realize a gain
or loss according to movement in the level of securities prices in that index
and in the securities markets generally.
COVERED INDEX CALL OPTIONS SOLD BY THE GATEWAY FUND
The Gateway Fund sells index call options in an attempt to earn a
greater total return over the long term than it would earn by investing only in
the stocks in the 100 Index.
6
<PAGE> 11
Frequently the Fund executes a closing purchase transaction with
respect to the option it has sold and sells another option (with either a
different exercise price or expiration date or both). The Fund's objective in
entering into such closing transactions is to increase option premium income, to
limit losses, or to protect anticipated gains in underlying stocks. The cost of
a closing transaction, while reducing the premium income realized from the sale
of the option, should be offset, at least in part, by appreciation in the value
of the underlying index, and by the opportunity to realize additional premium
income from selling a new option.
When the Fund sells an index call option, it does not deliver the
underlying stocks or cash to the broker through whom the transaction is
effected. In the case of an exchange-traded option, the Fund establishes an
escrow account. The Trust's Custodian (or a securities depository acting for the
Custodian) acts as the Trust's escrow agent. The escrow agent enters into
documents known as escrow receipts with respect to the stocks included in the
Fund (or escrow receipts with respect to other acceptable securities). The
escrow agent releases the stocks from the escrow account when the call option
expires or the Fund enters into a closing purchase transaction. Until such
release, the underlying stocks cannot be sold by the Fund. The Fund may enter
into similar collateral arrangements with the counterparty when it sells
over-the-counter index call options.
When the Fund sells an index call option, it is also required to
"cover" the option pursuant to requirements enunciated by the staff of the
Securities and Exchange Commission ("the SEC"). The staff has indicated that a
mutual fund may "cover" an index call option by (1) owning and holding for the
term of the option a portfolio of stocks substantially replicating the movement
of the index underlying the call option; (2) purchasing an American-style call
option on the same index with an exercise price no greater than the exercise
price of the written option; or (3) establishing and maintaining for the term of
the option a segregated account consisting of cash, U. S. government securities,
or other high-grade debt securities, equal in value to the aggregate contract
price of the call option (the current index value times the specific multiple).
The Fund generally "covers" the index options it has sold by owning and holding
the stocks included in the 100 Index. As an alternative method of "covering" the
option, the Fund may purchase an appropriate offsetting option.
The purchaser of an index call option sold by the Fund may exercise the
option at a price fixed as of the closing level of the 100 Index on the date of
exercise. Unless the Fund has liquid assets sufficient to satisfy the exercise
of the index call option, the Fund would be required to liquidate portfolio
securities to satisfy the exercise. The market value of such securities may
decline between the time the option is exercised and the time the Fund is able
to sell the securities. If the Fund fails to anticipate an exercise, it may have
to borrow from a bank (in amounts not exceeding 5% of the Fund's total assets)
pending settlement of the sale of the portfolio securities and thereby incur
interest charges. If trading is interrupted on the 100 Index, the Fund would not
be able to close out its option positions.
Additional information about the Fund's investment practices and
strategies with respect to option transactions, and certain risks related to
such transactions, is set forth under the caption "INVESTMENT PRACTICES" in the
Combined Prospectus.
INVESTMENT PRACTICES, RISKS, AND RESTRICTIONS
---------------------------------------------
OTHER INVESTMENT PRACTICES
Each fund may hold cash for purposes of liquidity or for temporary
defensive purposes. Each fund generally will hold cash reserves for the purpose
of paying expenses and share redemptions and may hold cash received from the
sale of its shares which has not yet been invested. In addition, the Adviser may
determine from time to time that, for temporary defensive purposes, one or more
funds should reduce (and in periods of unusual market conditions reduce
substantially or liquidate entirely) its investment in common stock. For
temporary defensive purposes, each fund may hold up to 100% of its assets in
cash.
Cash is normally invested in repurchase agreements. Cash may also be
invested in securities of the U. S. government or any of its agencies, bankers'
acceptances, commercial paper, or certificates of deposit (collectively "cash
instruments"). Commercial paper investments will be limited to investment grade
issues rated A-1 or A-2 by Standard & Poor's or Prime-1 or Prime-2 by Moody's
Investors Service, Inc. Certificates of deposit investments will be limited to
obligations of domestic banks with assets of $1 billion or more.
Repurchase agreements are instruments under which a fund buys
securities suitable for investment under its policies and obtains the concurrent
agreement of the seller (usually a bank) to repurchase such securities at an
agreed-upon date, price, a,nd interest rate. Investments in repurchase
agreements are subject to the risk that the selling bank may default in its
repurchase obligation. However, not more than 5% of any fund's total assets may
be invested in repurchase agreements which have a maturity longer than seven
days.
7
<PAGE> 12
CERTAIN RISKS
The success of each fund's option strategy depends upon the ability of
the Adviser to identify an appropriate index in which to invest and the
Adviser's ability to enter into transactions involving index options at
appropriate times in the stock market cycle. In pursuing this course, the
Adviser is subject to the risks of change in general economic conditions,
adverse developments in specific industries, and factors affecting the
performance of individual stocks.
Standard and Poor's ("S&P") obtains information for inclusion in or for
use in the calculation of the S&P 100 Index from sources which S&P considers
reliable. S&P HAS ADVISED THE TRUST THAT IT MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST OR OWNERS OF THE GATEWAY
FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 100 INDEX OR ANY
DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY
EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, FOR USE WITH RESPECT TO THE S&P 100 INDEX OR ANY DATA
INCLUDED THEREIN.
Wilshire Associates, Inc. ("Wilshire") obtains information for
inclusion in or for use in the calculation of the Wilshire Small Cap Index from
sources which Wilshire considers reliable. WILSHIRE HAS ADVISED THE TRUST THAT
IT MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
TRUST OR OWNERS OF THE SMALL CAP INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE WILSHIRE SMALL CAP INDEX OR ANY DATA INCLUDED THEREIN. WILSHIRE
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH
WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, FOR USE WITH
RESPECT TO THE WILSHIRE SMALL CAP INDEX OR ANY DATA INCLUDED THEREIN.
Other risks related to the investment practices and strategies of each
fund are described under the caption "INVESTMENT PRACTICES" in the Combined
Prospectus.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental policies with respect to each
of the funds that may not be changed without a vote of shareholders of that
fund. Under these policies, the Gateway Fund and the Small Cap Index Fund each
are subject to the following restrictions:
1. A fund may not purchase any security if, as a result, the fund
(or the funds in the Trust together) would then hold more than
10% of any class of securities of an issuer (taking all common
stock issues of an issuer as a single class, all preferred stock
issues as a single class, and all debt issues as a single
class), or more than 10% of the outstanding voting securities of
an issuer.
2. A fund may not purchase any security if, as a result, the fund
would then have more than 5% of its total assets (taken at
current value) invested in securities of companies (including
predecessors) less than three years old and in equity securities
for which market quotations are not readily available.
3. A fund may not purchase securities on margin (but a fund may
obtain such short-term credits as may be necessary for the
clearance of purchase and sales of securities).
4. A fund may not make short sales of securities or maintain a
short position (a) unless, at all times when a short position is
open, the fund owns an equal amount of such securities or
securities convertible into or exchangeable (without payment of
any further consideration) for securities of the same issue as,
and equal in amount to, the securities sold short, and (b)
unless not more than 10% of such fund's net assets (taken at
current value) are held as collateral for such sales at any one
time.
It is the present intention of management to make such sales
only for the purpose of deferring realization of gain or loss
for federal income tax purposes. It is the present intention of
management that short sales of securities subject to outstanding
options will not be made.
5. A fund may not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only from banks and
only in amounts not in excess of 5% of the fund's total assets
(except to meet redemption requests as discussed below), taken
at the lower of cost or market.
In order to meet redemption requests without immediately selling
any portfolio securities, a fund may borrow an amount up to 25%
of the value of its total assets including the amount borrowed.
If, due to market
8
<PAGE> 13
fluctuations or other reasons, the value of such fund's assets
falls below 400% of its borrowing, the fund will reduce its
borrowing which may result in the fund being required to sell
securities at a time when it may otherwise be disadvantageous to
do so. This borrowing is not for investment leverage but solely
to facilitate management of the portfolio by enabling the fund
to meet redemption requests where the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous.
However, the fund might be deemed to be engaged in leveraging in
that any such borrowing will enable the fund to continue to earn
money on investments which otherwise may have been sold in order
to meet redemption requests.
6. A fund may not pledge more than 10% of its total assets, taken
at market value. The deposit in escrow of underlying securities
in connection with the writing of call options is not deemed to
be a pledge.
7. A fund may not purchase or retain securities of any company if,
to the knowledge of the Trust, officers and trustees of the
Trust or of the Adviser who individually own more than 1/2 of 1%
of the securities of that company together own beneficially more
than 5% of such securities.
8. A fund may not buy or sell commodities or commodities futures or
options contracts, or real estate or interests in real estate,
although it may purchase and sell (a) securities which are
secured by real estate, and (b) securities of companies which
invest or deal in real estate.
9. A fund may not act as underwriter except to the extent that, in
connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under certain provisions of the
federal securities laws.
10. A fund may not make investments for the purpose of exercising
control or management.
11. A fund may not participate on a joint or joint and several basis
in any trading account in securities.
12. A fund may not purchase any security restricted as to
disposition under the federal securities laws.
13. A fund may not invest in securities of other investment
companies, except as part of a merger, consolidation, or other
acquisition.
14. A fund may not invest in interests in oil, gas, or other mineral
exploration or development programs, although it may invest in
the common stocks of companies which invest in or sponsor such
programs.
15. A fund may not make loans, except through the purchase of bonds,
debentures, commercial paper, corporate notes, and similar
evidences of indebtedness of a type commonly sold privately to
financial institutions (subject to the limitation in paragraph
12 above), and except through repurchase agreements.
No more than 5% of any fund's assets will be invested in
repurchase agreements which have a maturity longer than seven
days. In addition, the fund will not enter into repurchase
agreements with a securities dealer if such transactions
constitute the purchase of an interest in such dealer under the
Investment Company Act of 1940. The purchase of a portion of an
issue of such securities distributed publicly, whether or not
such purchase is made on the original issuance, is not
considered the making of a loan.
16. A fund may not purchase any security (other than U. S.
government obligations) if, as a result thereof, less than 75%
of the value of the fund's total assets is represented by cash
and cash items (including receivables), government securities,
and other securities which, for purposes of this calculation,
are limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the fund's total assets
and to not more than 10% of the outstanding voting securities of
such issuer. All of the funds in the Trust taken as a group also
must satisfy this 10% test.
17. A fund may not concentrate the investments of the fund in a
single industry nor invest more than 25% of the current value of
its total assets in a single industry.
18. A fund may not sell call or put options, or purchase call or put
options, except that (a) the Gateway Fund may (i) sell covered
call options with respect to all of its portfolio securities or
with respect to securities indexes; (ii) purchase
exchange-traded put and call options, provided that after any
such purchase not more than 5% of the Fund's net assets would be
invested in premiums on the purchase of put and call options or
combinations thereof; (iii) sell covered put options, provided
that after any such sale the Gateway Fund would not have more
than 50% of its total assets (taken at current value) subject to
being invested on the exercise of put
9
<PAGE> 14
options; and (iv) enter into closing purchase transactions with
respect to such options, and (b) the Small Cap Index Fund may
purchase exchange-traded puts and calls provided that after any
such purchase not more than 5% of the Fund's assets would be
invested in premiums on the purchase of such options.
The Trust has no fundamental policy with respect to the issuance of
senior securities by any fund; however, the Investment Company Act of 1940
prohibits the Trust's issuance of any such securities.
In addition to these fundamental policies, each fund will limit its
investment in warrants to no more than 5% of such fund's assets. The Adviser has
no current intention of causing any fund to invest in warrants in the coming
year.
Although the practices described in paragraphs 4, 5, and 6 above could
involve more than 5% of a fund's assets, none of those practices have been
employed by any fund since January 1, 1983. The Adviser has no current intention
of causing any fund to employ any such practice in the coming year.
PERFORMANCE AND RISK INFORMATION
--------------------------------
PERFORMANCE INFORMATION
The funds may quote performance in various ways. All performance
information supplied by the funds is based upon historical results and is not
intended to indicate future performance. Total returns and other performance
information may be shown numerically or in a table, graph, or similar
illustration. A fund's share prices and total returns fluctuate in response to
market conditions, interest rates, and other factors.
TOTAL RETURN CALCULATIONS
-------------------------
Total returns reflect all aspects of a fund's return, including the
effect of reinvesting dividends and capital gain distributions, and any change
in a fund's net asset value per share (the "NAV") over the period.
Average annual total returns are calculated by determining the average
annual compounded rates of return over one-, five-, and ten-year periods that
would equate an initial hypothetical investment to the ending redeemable value
according to the following formula:
P(1 + T)n(exponent) = ERV where T = Average annual total return
n = Number of years and portion of a year
ERV = Ending redeemable value (of an
initial hypothetical $1,000
investment) at the end of the period
P = $1,000 (the hypothetical initial
investment)
If a fund has been in existence for less than one, five, or ten years,
the time period since the date it commenced operations will be substituted for
the periods stated.
As a hypothetical example, a cumulative return of 100% growth on a
compounded basis in ten years would produce an average annual total return of
7.18%, which is the annual rate that would equal 100% growth on a compounded
basis in ten years. While average annual total returns are convenient means of
comparing investment alternatives, investors should realize that a fund's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of the fund.
Average annual total return is calculated as required by applicable
regulations promulgated by the SEC. In addition to average annual total returns,
a fund may quote year-by-year total returns and cumulative total returns
reflecting the simple change in value of any investment over a stated period.
Average annual, year-by-year, and cumulative total returns may be quoted as a
percentage or as a dollar amount.
10
<PAGE> 15
HISTORICAL RESULTS
------------------
The following table shows each fund's average annual and cumulative
total returns for the period ended December 31, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------- --------------- ---------------- --------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
- -------------------------------------------- --------------- ---------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Gateway Fund 12.35% 9.35% 11.82% 10.43%
Gateway Small Cap Index Fund 20.64 N/A N/A 12.69
- -------------------------------------------- --------------- ---------------- --------------- ---------------------
<CAPTION>
- -------------------------------------------- --------------- --------------- ---------------- ---------------------
CUMULATIVE TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
- -------------------------------------------- --------------- --------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Gateway Fund 12.35% 56.33% 205.56% 632.83%
Gateway Small Cap Index Fund 20.64 N/A N/A 72.20
- -------------------------------------------- --------------- --------------- ---------------- ---------------------
</TABLE>
The table below shows the redeemable value on December 31, 1997, for an
initial investment of $10,000 in the fund that was made at the beginning of the
one-, five-, and ten-year periods, or at the commencement of the fund's
operations. The table assumes all dividends and distributions have been
reinvested in additional fund shares.
<TABLE>
<CAPTION>
- --------------------------------------------- --------------- -------------- ---------------- ---------------------
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
- --------------------------------------------- --------------- -------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Gateway Fund $11,235 $15,633 $30,556 $73,283
Gateway Small Cap Index Fund $12,064 N/A N/A $17,220
- --------------------------------------------- --------------- -------------- ---------------- ---------------------
</TABLE>
RISK INFORMATION
In evaluating the performance of any investment including a Gateway
fund, it is important to understand the risks involved in the investment.
Information regarding the performance of an investment, while valuable in
itself, is more meaningful when it is related to the level of risk associated
with that investment. Thus, two different mutual funds that produce similar
average annual total returns may present markedly different investment
opportunities if the risk of loss associated with one mutual fund is greater
than that of the other mutual fund.
For example, an investment in a mutual fund that invests in stocks
generally will present greater potential for variation in the share price of the
mutual fund, and hence a greater risk of gain or loss than an investment in a
mutual fund that invests in short-term U. S. government securities. Because the
potential for greater gain typically carries with it a greater degree of risk,
the advisability of an investment in a particular mutual fund for a given
investor will depend not only on historical performance of the fund but also on
the potential for gain and loss associated with that mutual fund.
The Gateway Trust offers three different funds that produce different
total returns and present different risk potentials. The difference in risk
potential can be demonstrated by various statistical concepts. The following
statistical concepts can be used to measure some of the risks associated with an
investment in each fund.
COMPARATIVE INDEXES
-------------------
The performance and risk of the Gateway Fund and the Small Cap Index
Fund may be compared to various broadly recognized indexes such as the S&P 500
Index or the Lehman Government/Corporate Bond Index. These comparative indexes
are used because they are the standard benchmarks of the stock market and bond
market respectively. A fund's performance and risk may also be compared to other
appropriate indexes.
STANDARD DEVIATION
------------------
Standard deviation measures the volatility of the total return of a
fund. Standard deviation is one method of comparing the total return of a fund
to the average monthly total return of the fund. In general, a fund that has a
greater standard deviation is a fund that has displayed a greater tendency to
vary from its own average monthly total return. Standard deviation can also be
used to compare the total return of a fund to the total return of an index or
another mutual fund. By comparing the magnitude of the standard deviation of
each investment, an analyst is able to determine the relative volatility of each
investment.
11
<PAGE> 16
For example, as of December 31, 1997, the annual standard deviation for
the Gateway Fund over the past three years was 3.78% while the standard
deviation for the S&P 500 Index was 11.14%. Thus, the S&P 500 Index was
approximately three times as volatile as the Gateway Fund. An investment with an
expected return of 10% and a standard deviation of 15% would be expected to earn
a total return ranging from -5% to +25% about 68% of the time, a total return
ranging from -20% to +40% about 95% of the time, and a total return ranging from
- -35% to +55% about 97% of the time.
BETA
----
Beta analyzes the market risk of a fund by showing how responsive the
fund is to the market as defined by an index. Beta is a comparative measure of a
fund's volatility in relation to an appropriate index. Generally, higher betas
represent riskier investments. By definition, the beta of the market is 1.00.
Thus, a fund with a beta higher than 1.00 is expected to perform better than the
market in up markets and worse than the market in down markets.
For example, the beta of the Gateway Fund was 0.32 for the five-year
period ended December 31, 1997. The Gateway Fund would be expected to perform
approximately 1/3 as well as the market (as defined by S&P 500 Index) in up
markets and 1/3 as poorly as the market in down markets. Beta is the slope of
the "least square line" which compares the fund with an index.
RANKINGS AND COMPARATIVE PERFORMANCE INFORMATION
Each fund may compare its performance to that of other mutual funds or
categories of mutual funds as reported by independent services such as
Morningstar, Inc., Lipper Analytical Services, Inc., and Value Line Mutual Fund
Survey, or by other financial publications with a circulation of 10,000 readers
or more. Performance comparisons may be expressed as ratings, such as the
proprietary ratings published by Morningstar, Inc., or rankings, such as the
rankings of funds in various categories published by Lipper Analytical Services,
Inc. Performance comparisons may also be expressed as designations (such as a
certain number of "stars") or descriptions (such as "best fund") assigned by
such services or publications.
SHAREHOLDER SERVICES
--------------------
Gateway Investment Advisers, L.P. serves as the Trust's shareholder
servicing, transfer, dividend disbursing, and financial servicing agent (the
"Servicing Agent"). In this capacity, it performs various shareholder services
on behalf of the Trust.
OPEN ACCOUNT
Each fund's regular account for investors who purchase its shares is
the Open Account. The Open Account facilitates regular purchases of fund shares
over a period of years and provides the option of receiving dividends and
distributions either in cash or in fund shares. Gateway does not charge for the
automatic reinvestment of dividends and distributions.
The Servicing Agent maintains a record of the investor's purchases,
redemptions, and share balances in the investor's Open Account. Shortly after
each purchase, the Servicing Agent will mail a confirmation to the investor
showing the shares purchased, the exact price paid for the shares, and the total
number of shares owned. Share certificates will not be issued.
Upon opening an account, the investor may elect either of the following
options: (1) reinvestment at net asset value of all distributions, or (2)
payment in cash of all distributions. If no election is made, all distributions
will be reinvested at net asset value. An election may be changed by a letter or
telephone call to the Servicing Agent. No annual maintenance fees are charged by
the Trust on any Open Account. The Trust reserves the right to charge annual
fees in the future. Shareholders will be notified of any change in the annual
fee arrangement.
AUTOMATIC INVESTMENT PROGRAM
Investors can arrange to use our Automatic Investment Program by either
making the election on the New Account Application or by contacting Shareholder
Services at (800) 354-6339 for the appropriate forms. With this service,
investors purchase additional shares by having a predetermined amount of $100 or
more automatically transferred from a bank account to the Trust on a monthly or
quarterly basis. Changes to an Automatic Investment Program, including
discontinuing participation, must be in writing and sent to The Gateway Trust,
Shareholder Services, P. O. Box 5211, Cincinnati, OH 45201-5211. All changes to
the Program must be received by Gateway at least five business days prior to the
next scheduled transfer.
12
<PAGE> 17
IRAs
Investors may purchase shares of any Gateway fund through Individual
Retirement Accounts ("IRAs") which are permitted to invest in shares of a mutual
fund. The Trust itself sponsors a traditional IRA (the "Gateway Traditional
IRA") and a Roth IRA (the "Gateway Roth IRA") (or jointly as a "Gateway IRA"). A
Gateway IRA can be adopted by an investor and is specifically designed to permit
the investor to invest in shares of any Gateway fund selected by the investor.
The custodian of the Gateway IRA is Star Bank. Investors can obtain forms to
establish a Gateway IRA by calling Shareholder Services at (800) 354-6339.
An IRA is a special program with certain tax benefits that generally
permits an investor to establish and contribute to his or her own retirement
plan. For detailed information about a Gateway IRA, please refer to the
Agreement and Disclosure Statement for the appropriate Gateway IRA. Agreements
and Disclosure Statements can be obtained by calling Shareholder Services
at (800) 354-6339.
An investor may make a direct transfer of assets from one IRA to a
Gateway IRA by directing the existing IRA custodian or trustee to transfer
directly to a Gateway IRA the amount held in that prior IRA, without directly
receiving those funds or being taxed on the transfer. There is no minimum
holding period for a direct transfer of IRA assets from one custodian or trustee
to another. Call Shareholder Services at (800) 354-6339 to obtain the
appropriate transfer form.
A Gateway Traditional IRA is eligible to receive direct rollovers of
distributions from a qualified employer plan. An investor can make a direct
rollover by instructing the employer's plan to wire the distribution to Star
Bank as custodian for the Gateway Traditional IRA. The distribution should be
wired to:
The Gateway Trust c/o Star Bank, N.A.
ABA #042-0000-13
Cincinnati, OH
Name (insert investor name)
Gateway Account No. (insert investor account number)
Name of Gateway fund(s) in which you wish to invest
An investor can also make a direct rollover to a Gateway Traditional
IRA by instructing the employer's plan to prepare a check for the amount to be
rolled over payable to "Star Bank, N.A., as Custodian of Individual Retirement
Account of (insert investor name)," and sending that check to Gateway. The check
can also be delivered in person to Gateway, or mailed to:
The Gateway Trust
Shareholder Services
P. O. Box 5211
Cincinnati, OH 45201-5211
An investor can make a 60-day rollover of a distribution from a
qualified employer plan by instructing the employer's plan to prepare a check
payable to the investor and by endorsing or cashing the check and depositing
some or all of the proceeds in a Gateway Traditional IRA. The deposit must be
delivered in person to Gateway, or mailed to The Gateway Trust at the above
address within 60 days of when the investor receives the distribution. The
employer's plan must withhold 20% of the taxable amount for federal income tax
if the investor chooses a 60-day rollover for the distribution.
Some portions of distributions from other IRAs or from tax-qualified
profit sharing, stock bonus, pension, or annuity plans are not eligible for
regular or direct rollovers. For instance, distributions of nontaxable after-tax
employee contributions or required minimum payments made after an individual
reaches age 70 1/2 cannot be rolled over.
To make a withdrawal from a Gateway IRA, an investor should contact
Shareholder Services at (800) 354-6339.
The rules for contributing to, investing under, and distributing from
IRAs are complex, and any investor should consult with his or her own tax
adviser if he or she has any questions with respect to IRAs and to determine if
there have been any recent changes to the rules. At the time an IRA is
established, the custodian or trustee of the IRA is required by law to provide a
disclosure statement to the individual setting forth important information
concerning IRAs.
Further information concerning IRAs can be obtained from any district
office of the Internal Revenue Service. In particular, Publication 590 of the
Internal Revenue Service provides general information as to IRAs.
13
<PAGE> 18
No annual maintenance fees are charged by the Trust for any account,
including IRAs, SEP-IRAs, retirement, and pension or profit-sharing plans,
including 401(k) plans. The Trust reserves the right to charge annual fees in
the future. Shareholders will be notified of any change in the annual fee
arrangement.
SYSTEMATIC WITHDRAWAL PROGRAM
If the value of a shareholder's account is at least $5,000, the
shareholder can request withdrawals on either a monthly or a quarterly basis in
the minimum amount of $100. The Trust makes no recommendation as to the minimum
amount to be periodically withdrawn by a shareholder. A sufficient number of
shares in the shareholder's account will be sold periodically (normally one
business day prior to each withdrawal payment date) to meet the requested
withdrawal payments.
If a shareholder participates in the Systematic Withdrawal Program, all
dividends and distributions on shares held in the account will be reinvested in
additional shares at net asset value. Since the withdrawal payments represent
the proceeds from sales of the fund shares, there will be a reduction, and there
could even be an eventual depletion, of the amount invested in the funds to the
extent that withdrawal payments exceed the dividends and distributions paid and
reinvested in shares. Withdrawals under the Systematic Withdrawal Program should
not, therefore, be considered a yield on investment. A shareholder can make
arrangements to use the Systematic Withdrawal Program (or discontinue
participation) by contacting Shareholder Services at (800) 354-6339.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Basic information concerning the purchase and redemption of shares is
set forth under the captions "HOW TO PURCHASE ADDITIONAL SHARES" and "HOW TO
REDEEM SHARES" in the Combined Prospectus. Shares of all funds are purchased and
redeemed at their net asset value as next determined following receipt of the
purchase order or redemption notice. Redemptions under the Systematic Withdrawal
Program and installment distributions from IRAs are effected at the net asset
value next determined on or after the date designated for the redemption or
distribution. Information as to the method of calculating the net asset value of
shares of any fund is included in the Combined Prospectus under the caption "HOW
FUND SHARES ARE PRICED."
Certificates for shares of any fund will not be issued.
The minimum initial investment is $1,000 ($500 for IRAs). The minimum
additional investment is $100, subject to certain exceptions such as investments
by the Adviser's employees, by participants in an SEP-IRA program, and by
participants in the Automatic Investment Program. The Trust reserves the right
to accept or reject any purchase order of any fund.
There is no minimum or maximum applicable to redemption of shares of
any fund. The Trust, however, reserves the right to redeem a shareholder's
account(s) under certain circumstances. The shareholder will receive at least 60
days' written notice prior to the redemption of the account(s).
The Trust may redeem a shareholder's account(s) in any fund when the
aggregate value of the shareholder's account(s) falls below $800 (other than as
a result of market action.). The shareholder may prevent such redemption by
increasing the value of the account(s) to $1,000 or more within the 60-day
period.
The Trust will redeem a shareholder's account if the shareholder does
not provide a valid U. S. social security number or taxpayer identification
number or other requested documents. The shareholder may prevent such redemption
by providing the requested information within the 60-day period.
The Trust reserves the right to terminate temporarily or permanently
the exchange privilege for any shareholder who makes an excessive number of
exchanges between funds. The shareholder will receive written notice that the
Trust intends to limit the shareholder's use of the exchange privilege.
Generally the Trust limits a shareholder to twelve exchange transactions per
calendar year. Accounts under common ownership or control, including accounts
with the same taxpayer identification number, normally will be counted as one
account for purposes of the exchange limit.
The Trust also reserves the right to terminate or modify the exchange
privilege or to refuse an exchange if the exchange would adversely affect a fund
involved in the exchange.
Signature guarantees are required for all redemptions, (on the date of
receipt by the Servicing Agent of all necessary documents), regardless of the
amount involved, when the proceeds are to be paid to someone other than the
registered owner(s). The signature guarantee requirement may be waived by the
Trust in certain instances. The Trust also reserves the right to require a
14
<PAGE> 19
signature guarantee on any instructions or redemptions given to the Trust for
any reason. The purpose of signature guarantees is to prevent fraudulent
redemptions which could result in losses to the Trust, the Servicing Agent, or
shareholders. A signature guarantee will be accepted from banks, brokers,
dealers, municipal securities dealers or brokers, government securities dealers
or brokers, credit unions (if authorized by state law), national securities
exchanges, registered securities associations, clearing agencies, and savings
associations. Notary publics are unacceptable guarantors. The signature
guarantees must appear either (a) on the written request for redemption; (b) on
a stock power which should specify the total number of shares to be redeemed; or
(c) on all stock certificates tendered for redemption.
The right of redemption may be suspended or the date of payment
postponed (a) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend and holiday closings); (b) when trading in any
of the markets which a fund normally utilizes is restricted as determined by the
SEC; (c) if any emergency exists as defined by the SEC so that disposal of
investments or determination of a fund's net asset value is not reasonably
practicable; or (d) for such other periods as the SEC by order may permit for
protection of the Trust's shareholders.
The Trust has elected to be governed by Rule18f-1 of the Investment
Company Act which obligates each fund to redeem shares in cash with respect to
any one shareholder during any 90-day period up to the lesser of $250,000 or 1%
of the assets of the fund. Although payment for redeemed shares generally will
be made in cash, under abnormal circumstances the Board of Trustees of the Trust
may determine to make payment in securities owned by the fund. In such event,
the securities will be selected in such manner as the Board of Trustees deems
fair and equitable, in which case brokerage and other costs may be incurred by
such redeeming shareholders in the sale or disposition of their securities. To
date, all redemptions have been made in cash.
The Trust reserves the right to modify or terminate any purchase,
redemption, or other shareholder service procedure upon notice to shareholders.
Purchases and redemptions generally may be effected only on days when
the stock and options exchanges are open for trading. These exchanges are closed
on Saturdays and Sundays and the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving, and Christmas Day.
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------
GATEWAY INVESTMENT ADVISERS, L.P.
Gateway Investment Advisers, L.P., (the "Adviser"), a Delaware limited
partnership, has acted as the investment adviser for the funds since December
15, 1995. Gateway Investment Advisers, Inc. ("GIA") provided investment advisory
services to the funds from their formation until December 15, 1995. The Adviser
became the successor in interest to the assets, business, and personnel of GIA
which was organized in June 1977. GIA is the general partner of the Adviser with
a 76% ownership interest, while Alex. Brown Investments Incorporated ("ABII") is
the sole limited partner with a 24% ownership interest. ABII is an affiliate of
BT Alex. Brown Incorporated, a nationally known investment banking firm and
registered broker/dealer located in Baltimore, Maryland. Walter G. Sall,
Chairman and a Trustee of the Trust, and J. Patrick Rogers, the portfolio
manager of the funds and President of the Trust, together own of record and
beneficially 99.85% of the outstanding shares of GIA and thereby control the
Adviser. Mr. Sall is Chairman and a director of GIA and Mr. Rogers is its
President and a director. The third director of GIA is Margaret-Mary V. Preston
who is employed by BT Alex. Brown Incorporated as a Managing Director.
INVESTMENT ADVISORY CONTRACTS
The Trust has retained the Adviser under investment advisory contracts
("Adviser Contracts") to act as investment manager and in such capacity
supervise the investments of the Gateway funds, subject to the policies and
control of the Trust's Board of Trustees. The Adviser Contracts for the Gateway
Fund and Small Cap Index Fund became effective December 15, 1995. Services were
provided by GIA under substantially identical contracts prior to this date.
Pursuant to the Adviser Contracts, the Adviser, at its sole expense,
provides each fund with (i) investment recommendations regarding such fund's
investments; (ii) office space, telephones, and other office equipment; and
(iii) clerical and secretarial staff and the services, without additional
compensation, of all officers of the Trust. In addition, the Adviser has agreed
to bear (i) advertising and other marketing expenses in connection with the sale
of the shares of the funds; (ii) expenses of printing and distributing
prospectuses and related documents to prospective shareholders; and (iii)
association membership dues (other than for the Investment Company Institute).
The Adviser Contracts further provide that under certain circumstances the
Adviser may cause each fund to pay brokerage commissions in order to enable the
Adviser to obtain brokerage and research services for its use in advising such
fund and
15
<PAGE> 20
the Adviser's other clients, provided that the amount of commission is
determined by the Adviser, in good faith and in the best interests of the fund,
to be reasonable in relation to the value of the brokerage and research services
provided.
The Adviser Contracts provide that all expenses not specifically
assumed by the Adviser which may be incurred in the operation of the Trust and
the offering of its shares will be borne by the Trust. Such expenses will be
allocated among the funds in the Trust by direction of the Board of Trustees,
most frequently on the basis of expenses incurred by each fund, but where that
is not practicable on such basis as the Trustees determine to be appropriate.
Expenses to be borne by the Trust include:
- fees and expenses of trustees not employed by the Adviser;
- expenses of printing and distributing prospectuses to current
shareholders of the Trust;
- expenses pertaining to registering or qualifying the Trust or its
shares under various federal and state laws, and maintaining and
updating such registrations and qualifications;
- interest expense, taxes, fees, and commissions (including brokerage
commissions) of every kind;
- expenses related to repurchases and redemptions of shares;
- charges and expenses of custodians, transfer agents, dividend
disbursing agents, and registrars;
- expenses of valuing shares of each fund;
- printing and mailing costs other than those expressly assumed by the
Adviser;
- auditing, accounting, and legal expenses;
- expenses incurred in connection with the preparation of reports to
shareholders and governmental agencies;
- expenses of shareholder meetings and proxy solicitations;
- insurance expenses;
- all "extraordinary expenses" which may arise, including all losses and
liabilities incurred in connection with litigation proceedings and
claims, and the legal obligations of the Trust to indemnify its
officers, trustees, and agents with respect thereto.
A majority of the Board of Trustees of the Trust and a majority of the
trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of any party to the Adviser Contracts, voting separately, shall
determine which expenses shall be characterized as "extraordinary expenses."
In return for the services and facilities furnished by the Adviser
under the Adviser Contracts, the Gateway Fund and the Small Cap Index Fund each
pays the Adviser an advisory fee (the "Advisory Fee") computed at an annual rate
of 0.90% of the first $50 million of the average daily net asset value of such
fund, 0.70% of such asset value in excess of $50 million and less than $100
million, and 0.60% of such asset value in excess of $100 million. The rate of
such Advisory Fee is higher than that paid by many other funds for advisory
services.
If total expenses of any fund for any fiscal year (including the
Adviser's compensation, but exclusive of taxes, interest, brokerage commissions,
and any "extraordinary expenses" determined as above described) exceed the
specified percentage of such fund's average daily net asset value for such year,
the Adviser Contracts require the Adviser to bear all such excess expenses up to
the amount of the Advisory Fee. The applicable expense limitation percentage for
each fund are: 1.50% of the Gateway Fund's average daily net asset value and
2.00% of the Small Cap Index Fund's average daily net asset value. Each month
the Advisory Fee is determined and each fund's expenses are projected. If such
fund's projected expenses are in excess of the above-stated expense limitations,
the Advisory Fee paid to the Adviser will be reduced by the amount of the excess
expenses, subject to an annual adjustment; provided, however, that the aggregate
annual reduction from the Adviser to each fund shall not exceed the aggregate
Advisory Fee paid by such fund to the Adviser for such year.
16
<PAGE> 21
The following table shows the Advisory Fees earned by the Adviser for
providing services to the funds. It also shows the amount of the fees waived by
the Adviser for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
- --------------------- ----------------------------- ------------------------------
FEE AND WAIVER GATEWAY FUND SMALL CAP INDEX FUND
- --------------------- ----------------------------- ------------------------------
<S> <C> <C>
1997 Fee Earned $1,530,637 $118,875
1997 Fee Waived 0 73,783
---------- --------
1997 Fee Paid $1,530,637 $45,092
========== ========
- --------------------- ----------------------------- ------------------------------
1996 Fee Earned $1,272,990 $91,823
1996 Fee Waived 0 91,823
---------- -------
1996 Fee Paid $1,272,990 $ 0
========== =======
- --------------------- ----------------------------- ------------------------------
1995 Fee Earned $1,246,576 $85,502
1995 Fee Waived 0 85,502
---------- -------
1995 Fee Paid $1,246,576 $ 0
========== =======
- --------------------- ----------------------------- ------------------------------
</TABLE>
The Adviser Contracts further provide that in the absence of willful
misfeasance, bad faith, gross negligence, or reckless disregard of its duties or
obligations thereunder, the Adviser is not liable to the Trust or any of its
shareholders for any act or omission by the Adviser. The Adviser Contracts
contemplate that the Adviser may act as an investment manager or adviser for
others.
The Adviser Contracts may be amended at any time by the mutual consent
of the parties thereto, provided that such consent on the part of the Trust
shall have been approved by the vote of a majority of the Trust's Board of
Trustees, including the vote cast in person by a majority of the trustees who
are not "interested persons" (as defined in the Investment Company Act of 1940)
of any party to the Adviser Contracts, and by vote of the shareholders of the
applicable fund.
The Adviser Contracts may be terminated, upon 60 days' written notice
(which notice may be waived) at any time without penalty (i) by the Board of
Trustees of the Trust; (ii) by the vote of a majority of the outstanding voting
securities of the applicable fund; or (iii) by the Adviser. Each Adviser
Contract terminates automatically in the event of its assignment (as that term
is defined in the Investment Company Act of 1940) by the Adviser.
The Adviser Contracts continue in effect until December 31, 1998, and
thereafter, provided that its continuance for the funds for each renewal year is
specifically approved in advance (i) by the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the funds, and (ii)
by vote of a majority of the trustees who are not parties to the Adviser
Contracts or "interested persons" of any party to the Adviser Contracts (other
than as Trustees of the Trust) by votes cast in person at a meeting specifically
called for such purposes.
CUSTODIAN
Star Bank, 425 Walnut Street, Cincinnati, OH 45202, acts as custodian
of the Trust's assets (the "Custodian"). The Custodian has no part in
determining the investment policies of any fund or which securities are to be
purchased or sold by any fund.
SHAREHOLDER SERVICING, TRANSFER, DIVIDEND DISBURSING, AND FINANCIAL SERVICING
AGENT
The Adviser is the Trust's Shareholder Servicing, Transfer, Dividend
Disbursing, and Financial Servicing Agent (the "Servicing Agent"). The Adviser's
mailing address for its activities as Servicing Agent is The Gateway Trust, 400
TechneCenter Drive, Suite 220, Milford, OH 45150. As Transfer Agent for the
Trust, the Servicing Agent's general duties include transferring shares,
processing applications for new accounts, depositing the payments for the
purchase of fund shares with the Custodian, and notifying the Trust and
Custodian of such deposits. The Servicing Agent opens and maintains a bookshare
account for each shareholder as set forth in the subscription application,
maintains records of each shareholder account, and sends confirmation of shares
purchased to each shareholder. The Servicing Agent also receives and processes
requests by shareholders for redemption of shares. If the shareholder request
complies with the redemption standards of the Trust, the Servicing Agent will
direct the Custodian to pay the appropriate redemption price. If the redemption
request does not comply with such standards, the Servicing Agent will promptly
notify the shareholder of the reasons for rejecting the redemption request.
As the Dividend Disbursing Agent for the Trust, the Servicing Agent,
upon notification of the declaration of a dividend or distribution, will
determine the total number of shares issued and outstanding as of the record
date for the dividend or distribution and the amount of cash required to satisfy
such dividend or distribution. The Servicing Agent will prepare and mail to
shareholders
17
<PAGE> 22
dividend checks in the amounts to which they are entitled. In the case of
shareholders participating in the dividend reinvestment plan, the Servicing
Agent will make appropriate credits to their bookshare accounts. Shareholders
will be notified by the Servicing Agent of any dividends or distributions to
which they are entitled, including any amount of additional shares purchased
with their dividends. In addition, the Servicing Agent will prepare and file
with the Internal Revenue Service and with any state, as directed by the Trust,
returns for reporting dividends and distributions paid by such fund.
The Servicing Agent, as the Shareholder Servicing Agent, will open and
maintain any plan or program for shareholders in accordance with the terms of
such plans or programs (see "SHAREHOLDER SERVICES" herein). With regard to the
Systematic Withdrawal Program, the Servicing Agent will process such Systematic
Withdrawal Program orders as are duly executed by shareholders and will direct
appropriate payments to be made by the Custodian to the shareholder. In
addition, the Servicing Agent will process such accumulation plans, group
programs, and other plans or programs for investing shares as provided in the
funds' current prospectuses.
Each fund reimburses the Servicing Agent for printing, mailing, and
compliance expenses. Each fund compensates the Servicing Agent for these
services at a fixed rate of $4,000 per month, plus the greater of $2,500 per
month or an annual rate of 0.20% of each fund's average net assets. For the year
ended December 31, 1997, the Adviser earned $726,747 in its capacity as
Servicing Agent to the four funds of the Trust then in effect.
BROKERAGE
---------
Transactions on stock and option exchanges involve the payment of
negotiated brokerage commissions. In the case of securities traded in the
over-the-counter market, there is generally no stated commission but the price
usually includes an undisclosed commission or mark-up.
In effecting portfolio transactions for each fund, the Adviser is
obligated to seek best execution, which is to execute a fund's transaction where
the most favorable combination of price and execution services are available
("best execution"), except to the extent that it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
seeking best execution, the Adviser, in each fund's best interest, considers all
relevant factors, including:
- price;
- the size of the transaction;
- the nature of the market for the security;
- the amount of commission;
- the timing of the transaction taking into account market prices and
trends;
- the reputation, experience, and financial stability of the
broker-dealer involved;
- the quality of service rendered by the broker-dealer in other
transactions.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such other
factors as the Trustees may determine, the Adviser may consider sales of shares
of a fund as a factor in the selection of broker-dealers to execute securities
transactions for such fund. Closing option transactions are usually effected
through the same broker-dealer that executed the opening transaction.
The Trust has no obligation to deal with any broker or dealer in the
execution of its transactions. However, it is contemplated that BT Alex. Brown
Incorporated, or any of its affiliates ("Alex. Brown"), in its capacity as a
registered broker-dealer, will effect securities transactions which are executed
on a national securities exchange and over-the-counter transactions conducted on
an agency basis. Such transactions will be executed at competitive commission
rates.
Transactions in the over-the-counter market can be placed directly with
market makers who act as principals for their own account and include mark-ups
in the prices charged for over-the-counter securities. Transactions in the
over-the-counter market can also be placed with broker-dealers who act as agents
and charge brokerage commissions for effecting over-the-counter transactions.
The Trust may place its over-the-counter transactions either directly with
principal market makers, or with broker-dealers if that is consistent with the
Adviser's obligation to obtain best qualitative execution. Under the Investment
Company Act of 1940, persons affiliated with an affiliate of the Adviser (such
as Alex. Brown) may be prohibited from dealing with the Trust as a principal in
the purchase and sale of securities. Therefore, Alex. Brown will not serve as
the Trust's dealer in connection with over-the-counter transactions. However,
Alex. Brown may serve as the Trust's broker in over-the counter transactions
conducted on an agency basis and will receive brokerage commissions in
connection with such transactions.
18
<PAGE> 23
The Trust will not effect any brokerage transactions in its portfolio
securities with Alex. Brown if such transactions would be unfair or unreasonable
to the Trust's shareholders, and the commissions will be paid solely for the
execution of trades and not for any other services. In determining the
commissions to be paid to Alex. Brown, it is the policy of the Trust that such
commissions will, in the judgment of the Trust's Board of Trustees, be (a) at
least as favorable to the Trust as those which would be charged by other
qualified brokers having comparable execution capability, and (b) at least as
favorable to the Trust as commissions contemporaneously charged by Alex. Brown
on comparable transactions for its most favored unaffiliated customers, except
for customers of Alex. Brown considered by a majority of the Trust's
disinterested trustees not to be comparable to the Trust. The disinterested
trustees from time to time review, among other things, information relating to
the commissions charged by Alex. Brown to a fund and its other customers, and
other information concerning the commissions charged by other qualified brokers.
It is not contemplated that brokerage transactions will be effected exclusively
through Alex. Brown. The Adviser may from time to time use other brokers,
including brokers that provide research services as discussed below.
While the Adviser does not intend to limit the placement of orders to
any particular broker or dealer, the Adviser generally gives preference to those
brokers or dealers who are believed to give best execution at the most favorable
prices and who also provide research, statistical, or other services to the
Adviser and/or the Trust. Commissions charged by brokers who provide these
services may be higher than commissions charged by those who do not provide
them. Higher commissions are paid only if the Adviser determines that they are
reasonable in relation to the value of the services provided, and it has
reported to the Board of Trustees of the Trust on a periodic basis to that
effect. The availability of such services was taken into account in establishing
the Advisory Fee. Specific research services furnished by brokers through whom
the Trust effects securities transactions may be used by the Adviser in
servicing all of its accounts. Similarly, specific research services furnished
by brokers who execute transactions for other Adviser clients may be used by the
Adviser for the benefit of the Trust.
The Adviser has an agreement with Bridge Information Systems, Inc.
("Bridge") to direct brokerage transactions to Bridge in exchange for research
services provided to the Adviser. For the fiscal year ended December 31, 1997,
the Trust paid brokerage commissions to Bridge of $291,064 for effecting
brokerage transactions totaling $483,366,912. The Adviser may from time to time
enter into similar agreements with other brokers.
The Adviser Contracts provide that, subject to such policies as the
Trustees may determine, the Adviser may cause a fund to pay a broker-dealer who
provides brokerage and research services to the Adviser an amount of commission
for effecting a securities transaction for such fund in excess of the amount of
commission which another broker-dealer would have charged for effecting that
transaction. As provided in Section 28(e) of the Securities Exchange Act of
1934, "brokerage and research services" include:
- advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of
securities, or purchasers, or sellers of securities;
- furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of accounts;
- effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement);
- services that provide lawful and appropriate assistance to the Adviser
in the performance of its investment decision-making responsibilities.
The following table shows the brokerage commissions paid by the funds
in the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
- --------------------------- -------------------------- -------------------------- ---------------------------
NAME OF FUND 1997 COMMISSIONS 1996 COMMISSIONS 1995 COMMISSIONS
- --------------------------- -------------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Gateway Fund $570,068 $274,816 $128,373
Small Cap Index Fund $ 24,496 $ 9,766 $ 12,492
- --------------------------- -------------------------- -------------------------- ---------------------------
</TABLE>
The increased levels of commissions paid by the Gateway Fund from 1995
to 1996 are attributable to increased levels of shareholder activity resulting
in higher portfolio turnover and to increased use of put options to hedge the
portfolio. The increased level paid by the Gateway Fund and the Small Cap Index
Fund from 1996 to 1997 is attributable to an overall increase in total assets
during the 1997 fiscal year.
The Gateway Fund paid a total of $1,750 of brokerage commissions to BT
Alex. Brown Incorporated for the year ended December 31, 1997 or 0.30% of the
entire amount of commissions paid to all brokers for this Fund. The aggregate
amount of transactions involving the payment of these commissions is $1,339,775,
or 0.21% of the entire amount of transactions effected through all brokers
combined for this Fund.
ADDITIONAL TAX MATTERS
----------------------
19
<PAGE> 24
The tax discussion set forth below and in the Combined Prospectus is
included for general information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of an investment in a
fund.
FEDERAL TAX MATTERS
Each of the funds is treated as a separate association taxable as a
corporation. The following information, therefore, applies to each fund
separately unless otherwise specifically stated.
Each fund has met, and each of the funds in the future intends to meet,
the requirements of the Internal Revenue Code, applicable to regulated
investment companies so as to qualify for the special tax treatment afforded to
such companies. Under Subchapter M of the Code, a regulated investment company
is not subject to federal income tax on the portion of its net investment income
and net realized capital gains which it distributes currently to its
shareholders, provided that certain distribution requirements are met, including
the requirement that at least 90% of the sum of its net investment income and
net short-term capital gains in any fiscal year is so distributed. In addition
to this distribution requirement, one of the principal tests which each fund
must meet in each fiscal year in order to qualify as a regulated investment
company is the "90% Test." The 90% Test requires that at least 90% of a fund's
gross income must be derived from dividends, interest, and gains from the sale
or other disposition of securities, including gains from options.
Gains realized from transactions on put and call options (other than
options on securities indexes) generally will be long term or short term,
depending on the nature of the option transaction and on the length of time the
option is owned by the fund.
Long-term capital gain distributions (i.e., the excess of any net
long-term capital gains over net short-term capital losses), after utilization
of available capital loss carryforwards, are taxable as long-term capital gains
whether received in cash or additional shares, regardless of how long the
shareholder has held his or her shares, and are not eligible for the
dividends-received deduction for corporations. Distributions of long-term
capital gains which are offset by available loss carryforwards, however, may be
taxable as ordinary income.
Distributions on shares of any fund received shortly after their
purchase, although substantially in effect a return of capital, are subject to
federal income taxes.
The tax status of distributions made by each fund during the fiscal
year will be sent to shareholders shortly after the end of such year. Each
prospective investor is advised to consult his or her own tax adviser.
Distributions of net investment income are taxable as ordinary income subject to
allowable exclusions and deductions. Distributions of capital gains are taxable
at either ordinary or long-term capital gains rates, as appropriate, except that
all such gains are normally taxable as ordinary income to the extent they are
offset by capital loss carryforwards.
STATE AND LOCAL TAX ASPECTS
The laws of several state and local taxing authorities vary with
respect to taxation, and each prospective investor is advised to consult his or
her own tax adviser as to the status of his or her shares and distributions in
respect of those shares under state and local tax laws.
TRUSTEES AND OFFICERS OF THE TRUST
----------------------------------
The Trustees and officers of the Trust, together with information as to
their positions with the Trust and its predecessor, Gateway Option Income Fund,
Inc. (the "Company") and their principal occupations during at least the past
five years, are listed below.
*WALTER GENE SALL, 400 TechneCenter Drive, Suite 220, Milford, OH
45150; Chairman and Trustee of the Trust; Chairman of the Adviser; various
senior management positions and offices held with the Trust, the Company, and
the Adviser since 1977. Age 53.
*J. PATRICK ROGERS, 400 TechneCenter Drive, Suite 220, Milford, OH
45150; President of the Trust since 1997; President of the Adviser since 1995;
portfolio manager of the funds since 1997; co-portfolio manager of the funds
from 1995 to 1997; various senior management positions and offices held with the
Trust and the Adviser since 1989. Age 34.
20
<PAGE> 25
JAMES M. ANDERSON, Children's Hospital Medical Center, 3333 Burnet
Avenue, Cincinnati, OH 45229; Trustee of the Trust since April 1997; Children's
Hospital Medical Center, President and Chief Executive Officer since November
1996, Chairman of the Board of Trustees from 1992 through 1996, and Trustee
since 1979; Taft Stettinius & Hollister, Partner from 1992 to November 1996;
Access Corporation, Secretary from 1985 to 1996, and Consultant since 1996;
Cincinnati Stock Exchange, Trustee since 1978; Command System Incorporated,
Director and Secretary since 1988; River City Insurance Limited, Director since
1991. Age 57.
STEFEN F. BRUECKNER, Anthem Companies, Inc., 120 Monument Circle, Mail
Location #M4C, Indianapolis, IN 46204; Trustee of the Trust since October 1992;
Director, President, and Chief Executive Officer, Anthem Companies, Inc. since
1995. Prior thereto, Director and President of Community Mutual Insurance
Company (health insurer) since 1991, and various management positions since
1986. Director of Anthem Health and Life Insurance Company, Anthem Life
Insurance Company, and various other affiliates and subsidiaries. Age 48.
KENNETH A. DRUCKER, Sequa Corp., 200 Park Avenue, New York, NY 10166;
Director of the Company from January 1984 to May 1986; Trustee of the Trust
since April 1986; Vice President and Treasurer, Sequa Corporation (gas turbine
and industrial equipment) since November 1987. Prior thereto, Senior Vice
President and Treasurer, JWT Group, Inc. (advertising, public update relations,
and market research). Age 52.
BEVERLY J. FERTIG, 8591 Woodbrier Drive, Sarasota, FL 34238; Trustee of
the Trust since September 1988; arbitrator, National Association of Securities
Dealers, Inc., since January 1992; Vice President, Marketing and Communications,
Coffee, Sugar and Cocoa Exchange from January 1989 to December 1991; Executive
Director, National Institutional Options and Futures Society, March 1988 to
December 1988; prior thereto, Vice President, Institutional Marketing, Chicago
Board Options Exchange. Age 67.
R. S. (DICK) HARRISON, 4040 Mt. Carmel Road, Cincinnati, OH 45244;
Director of the Company from 1977 to 1982; Trustee of the Trust since April
1996; Director/Chairman of the Board, Baldwin Piano & Organ Company from 1994 to
1997; Chairman of the Board/CEO, Baldwin Piano & Organ Company from 1983 to
1994. Prior thereto, various management positions with Baldwin Piano & Organ
Company, Cincinnati, OH. Director of Sencorp and Anderson Bank of Cincinnati, OH
and Trustee of Kenyon College. Age 66.
WILLIAM HARDING SCHNEEBECK, 251 Indian Harbor Road, Vero Beach, FL
32963; Director of the Company from September 1977 to May 1986; Trustee of the
Trust since April 1986; retired, formerly Chairman of Midwestern Fidelity Corp.
Age 69.
*GEOFFREY KEENAN, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Vice President of the Trust since April 1996; Chief Operating Officer, Gateway
Investment Advisers, L.P. since December 1995; Executive Vice President and
Chief Operating Officer, Gateway Investment Advisers, Inc. since 1995; Vice
President, Gateway Investment Advisers, Inc. from 1991 to 1995. Age 39.
*PAUL R. STEWART, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Treasurer of the Trust since October 1995; Chief Financial Officer of the
Adviser since 1996, Controller of the Adviser from October 1995 to December
1996; Audit Manager and Senior, Price Waterhouse from September 1992 to 1995 and
from August 1988 to August 1991. Age 32.
*DONNA M. SQUERI, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Secretary of the Trust since October 1995; Secretary and General Counsel of the
Adviser since September 1995; in-house counsel of Bartlett & Co., a registered
investment adviser, from October 1984 to September 1993. Age 38.
*Messrs. Sall, Rogers, Keenan, and Stewart and Ms. Squeri are
affiliated persons of the Trust and the Adviser as defined by the Investment
Company Act of 1940. Mr. Sall is an "interested person" of the Trust as defined
by the Investment Company Act of 1940.
Messrs. Sall, Rogers, Keenan, and Stewart and Ms. Squeri, each of whom
is employed by the Adviser, receive no remuneration from the Trust. Each Trustee
of the Trust other than Mr. Sall receives fees as follows: (a) an annual fee of
$3,000, payable in equal quarterly installments for services during each fiscal
quarter; (b) a $500 base fee plus $100 per fund for each regular or special
meeting of the Board of Trustees attended; and (c) $200 per fund ($1,000 per
fund for the Chairman) for each Audit Committee meeting attended. The Trust also
reimburses each Trustee for any reasonable and necessary travel expenses
incurred in connection with attendance at such meetings. In addition, Trustees
may receive attendance fees for service on other committees.
21
<PAGE> 26
The following table provides information about the compensation
received by each Trustee from the Trust for the year ended December 31, 1997.
<TABLE>
<CAPTION>
- ---------------------- ----------------------------------------------
TOTAL COMPENSATION
NAME OF TRUSTEE FROM TRUST
- ---------------------- ----------------------------------------------
<S> <C>
James M. Anderson $ 3,300
Stefen F. Brueckner $ 6,600
Kenneth A. Drucker $ 12,200
Beverly J. Fertig $ 6,600
R. S. Harrison $ 7,400
Walter G. Sall $ 0
William H. Schneebeck $ 8,100
- ---------------------- ----------------------------------------------
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS
-------------------------------------------------------
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, OH 45202, serves as
independent public accountants of the Trust. Arthur Andersen LLP performs an
annual audit of each fund's financial statements, reviews each fund's tax
returns, and provides financial, tax, and accounting consulting services as
requested.
The financial statements and independent auditor's report required to
be included in this SAI are incorporated herein by this reference to the Trust's
Annual Report to Shareholders for the fiscal year ended December 31, 1997.
PRINCIPAL HOLDERS OF FUND SHARES
--------------------------------
GATEWAY FUND
As of March 19, 1998, the Gateway Fund had 15,451,533.258 shares
outstanding. As of such date, each of the following persons or groups was known
by Trust management to be the record and/or beneficial owner (as defined below)
of the indicated amounts of the Fund's outstanding shares.
<TABLE>
<CAPTION>
---------------------------------------------------------- ------------------------- ----------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF CLASS
---------------------------------------------------------- ------------------------- ----------------------------
<S> <C> <C>
BT Alex. Brown Inc. Mutual Funds Dept. 5,608,155.372 36.30%
P. O. Box 1346
Baltimore, MD 21203
Charles Schwab and Company, Inc. 1,960,844.899 12.69%
Reinvest Account Special Custody Account for
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104
Trustees and officers of the Trust as a group 187,573.353 1.21%
Adviser officers and directors as a group 105,534.508 Less than 1%
---------------------------------------------------------- ------------------------- ----------------------------
</TABLE>
22
<PAGE> 27
SMALL CAP INDEX FUND
As of March 19, 1998, the Small Cap Index Fund had 1,204,706.275 shares
outstanding. As of such date, each of the following persons or groups was known
by Trust management to be the record and/or beneficial owner (as defined below)
of the indicated amounts of the Fund's outstanding shares.
<TABLE>
<CAPTION>
----------------------------------------------------------- -------------------------- --------------------------
NAME AND ADDRESS OF OWNER NUMBER OF SHARES PERCENT OF CLASS
----------------------------------------------------------- -------------------------- --------------------------
<S> <C> <C>
Andrew Wyeth 162,833.621 13.52%
Chadds Ford, PA 19317
Up East, Inc. 113,854.405 9.45%
c/o Betsy J. Wyeth
P.O. Box 48
Chadds Ford, PA 19317
Betsy Wyeth 105,846.998 8.79%
Chadds Ford, PA 19317
BT Alex. Brown Inc. Mutual Funds Dept. 104,401.659 8.67%
P.O. Box 1346
Baltimore, MD 21203
Betsy Wyeth Growth 79,793.168 6.62%
Chadds Ford, PA 19317
Trustees and officers of the Trust as a group 26,111.810 2.17%
Adviser officers and directors as a group 19,311.903 1.60%
----------------------------------------------------------- -------------------------- --------------------------
</TABLE>
The SEC has defined "beneficial owner" of a security to include any
person who has voting power or investment power with respect to any such
security, any person who shares voting power or investment power with respect to
any such security, or any person who has the right to acquire beneficial
ownership of any such security within 60 days.
SHARES HELD BY ADVISER
As of March 19, 1998, the Adviser held in a fiduciary capacity the
indicated amounts of the outstanding shares of each fund. The Adviser has
investment and voting power over all shares held by it in a fiduciary capacity.
<TABLE>
<CAPTION>
- ------------------------------------ ------------------------------------ --------------------------------------
NAME OF FUND NUMBER OF SHARES PERCENTAGE OF SHARES
- ------------------------------------ ------------------------------------ --------------------------------------
<S> <C> <C>
Gateway Fund 472,398 3.06%
Small Cap Index Fund 497,372 41.29%
- ------------------------------------ ------------------------------------ --------------------------------------
</TABLE>
23
<PAGE> 28
SCHEDULE A
----------
(STOCKS INCLUDED IN THE S&P 100 INDEX)
<TABLE>
<CAPTION>
<S> <C> <C>
Allegheny Teledyne Incorporated Exxon Corporation Northern Telecom Limited
Aluminum Company of America Federal Express Corporation Occidental Petroleum Corporation
American Electric Power Co., Inc. First Chicago NBD Corporation Oracle Corporation
American Express Company Fluor Corporation PepsiCo, Inc.
American General Corp. Ford Motor Company Pharmacia & Upjohn
American International Group, Inc. General Dynamics Corporation Polaroid Corporation
Ameritech Corporation General Electric Company Ralston Purina Co.
Amoco Corporation General Motors Corporation Raytheon Co Class A Stock
AMP, Incorporated Halliburton Company Rockwell International Corporation
AT&T Harrah's Entertainment, Inc. Schlumberger Limited
Atlantic Richfield Co. Harris Corporation Sears, Roebuck and Co.
Avon Products, Inc. Heinz (H. J.) Company Southern Company
Baker Hughes, Inc. Hewlett Packard Company Tandy Corporation
BankAmerica Corporation Homestake Mining Company Tektronix, Inc.
Baxter International Inc. Honeywell Inc. Texas Instruments, Incorporated
Bell Atlantic Corporation Intel Corporation The Black & Decker Corporation
Bethlehem Steel Corporation International Business The Boeing Company
Boise Cascade Corporation Machines Corporation The Coastal Corporation
Bristol-Myers Squibb Company International Flavors & The Coca-Cola Company
Brunswick Corporation Fragrances Inc. The Dow Chemical Company
Burlington Northern Santa Fe Corp. International Paper Company The Hartford Financial
Ceridian Corporation Johnson & Johnson Services Group, Inc.
Champion International Corporation Kmart Corporation The Limited, Inc.
Chrysler Corporation Mallinckrodt Inc. The May Department Stores Co.
CIGNA Corporation McDonald's Corporation The Williams Companies, Inc.
Cisco Systems, Inc. MCI Communications Corporation Toys "R" Us, Inc.
Citicorp Merck & Co., Inc. Unicom Corporation
Colgate-Palmolive Company Merrill Lynch & Co., Inc. Unisys Corporation
Columbia/HCA Healthcare Corporation Microsoft Corp. United Technologies Corporation
Computer Sciences Corporation Minnesota Mining Wal-Mart Stores, Inc.
Delta Air Lines, Inc. and Manufacturing Walt Disney Productions
Digital Equipment Corporation Mobil Corporation Weyerhaeuser Company
DuPont (E. I.) de Nemours and Co. Monsanto Company Xerox Corporation
Eastman Kodak Company National Semiconductor Corp.
Entergy Corporation NationsBank Corporation
Norfolk Southern Corporation
</TABLE>
24
<PAGE> 29
<TABLE>
<CAPTION>
SCHEDULE B
----------
(STOCKS INCLUDED IN THE WILSHIRE SMALL CAP INDEX)
<S> <C> <C>
20th Century Industries Catellus Development Corporation Geotek Communications, Inc.
ACC Corp. Centex Corporation Gerber Scientific, Inc.
Acuson Corporation Central Hudson Gas & Gibson Greetings, Inc.
ACX Technologies, Inc. Electric Corporation Gilead Sciences, Inc.
Advanced Tissue Sciences Inc. Cephalon, Inc. Glenayre Technologies
ADVANTA Cerner Corporation Golden Books Family
Agouron Pharmaceuticals, Inc. Charming Shoppes, Inc. Entertainment, Inc.
Airborne Freight Corporation Chemed Corporation Golden State Bancorp Inc.
AK Steel Holding Corporation Chesapeake Corporation Grand Casinos Inc. *
Alaska Air Group, Inc. Chiquita Brands International Gymboree Corp
Albany International Corp. Chris-Craft Industries, Inc. Haemonetics Corporation
Alliance Pharmaceutical Corp. CILCORP Inc. Harken Energy Corporation
American Bankers Insurance Cincinnati Milacron Inc. Hecla Mining Company *
Group, Inc. Cirrus Logic, Inc. Herbalife International Inc
American Management Citrix Systems Inc Class A Stock
Systems Inc City National Corporation HON INDUSTRIES, Inc.
Americredit Corp. Clarcor Inc. Houghton Mifflin Company
AMRESCO, Inc. Coast Savings Financial, Inc. Hunt (J. B.) Transport
APAC TeleServices Inc Coeur d'Alene Mines Corporation Services, Inc.
Arcadia Financial Ltd. Computervision Corporation Hutchinson Technology Inc
Arnold Industries, Inc. Coventry Corporation Hyperion Software Corp
Arvin Industries, Inc. Credence Systems Corporation ICN Pharmaceuticals Inc.
Aspect Telecommunications Corp Credit Acceptance Corporation Imperial Credit Industries, Inc.
Astoria Financial Corporation Data General Corporation Information Resources, Inc.
ATL Ultrasound Inc. Dentsply International Inc. Integrated Device Technology, Inc.
Avid Technology, Inc. Diagnostic Products Corporation Integrated Health Services, Inc.
Aztar Corporation Donaldson Company, Inc. International Dairy Queen, Inc.
B/E Aerospace, Inc. Dreyer's Grand Ice Cream, Inc. International Multifoods Corp.
Baldor Electric Company DSP Communications Inc Intuit Inc
Ballard Medical Products Eagle Hardware & Garden, Inc. John Alden Financial Corporation
Bank United Corp Eastern Utilities Associates Kaman Corporation
Banta Corporation Echo Bay Mines Ltd. Kaufman and Broad
Barrett Resources Corp Envoy Corp Home Corporation
Bassett Furniture Industries, Inc. ESS Technology Inc. Kellwood Company
Beckman Instruments, Inc. Exabyte Corporation Kemet Corporation *
Benton Oil and Gas Co. Extended Stay America Inc. Kennametal Inc.
Bergen Brunswig Corporation Federal-Mogul Corporation Kimball International, Inc.
Best Buy Co., Inc. First Commerce Corporation Lam Research Corporation
Birmingham Steel Corporation Fleming Companies, Inc. Lands' End, Inc.
Block Drug Company Inc. Flowers Industries, Inc. Lattice Semiconductor Corporation
Brightpoint, Inc. Forcenergy Inc. Lawson Products, Inc.
Broderbund Software Inc Foremost Corporation of America Lawter International, Inc.
Brown Group, Inc. FPA Medical Management Inc La-Z-Boy Incorporated
Brush Wellman Inc. Fred Meyer, Inc. Lennar Corporation
Calgon Carbon Corporation Fuller (H. B.) Company Life Re Corporation
Carlisle Companies Incorporated Gaylord Container Corp. Lincare Holdings Inc.
Carpenter Technology Corporation GenCorp Inc. Lomak Petroleum, Inc.
</TABLE>
25
<PAGE> 30
<TABLE>
<S> <C> <C>
Lone Star Steakhouse & Pride International Inc. Superior Industries
Saloon, Inc. PSINet Inc. International, Inc.
Long Island Bancorp, Inc. Public Service Company Swift Energy Company
Luby's Cafeterias, Inc. of New Mexico Sybase Inc
Mac Frugal's Bargainso Pulitzer Publishing Co. Symantec Corporation
Close-outs Inc. Pulte Corporation Symbol Technologies, Inc.
Macromedia, Inc. Quaker State Corporation TCA Cable TV, Inc.
Magna Group, Inc. Quick and Reilly Group Inc. Teleflex Incorporated
Marine Drilling Companies, Inc. Ralcorp Holdings Inc. Tesoro Petroleum Corporation
MAXXAM Inc. Rational Software Corporation The Dress Barn, Inc.
MDU Resources Group, Inc. Regal Cinemas Inc. The Liberty Corporation
Mercury Finance Co Reliance Group Holdings, Inc. The Liposome Company Inc.
Micro Warehouse, Inc. Riggs National Corporation The Profit Recovery Group
Mid Atlantic Medical Services Rollins Truck Leasing Corp. International, Inc.
Mobile Telecommunication Rollins, Inc. The Standard Products Co.
Tech Corp. Roslyn Bancorp Inc The Standard Register Company
Mohawk Industries Inc. Ross Stores, Inc. The West Company, Incorporated
Money Store Inc. Ruby Tuesday, Inc. Thiokol Corporation
NAC Re Corporation Russ Berrie and Company, Inc. Tucson Electric Power Company
NACCO Industries, Inc. S3 Incorporated UGI Corporation
National Semiconductor Corp. Sbarro, Inc. United Companies Financial Corp.
NCH Corporation Seagull Energy Corporation Valley National Bancorp
Networks Associates Inc. Sequent Computer Systems, Inc. Vanguard Cellular Systems, Inc.
New England Business Shared Medical Systems Corp. Varco International, Inc.
Service, Inc. Shiva Corp Vitesse Semiconductor Corp
Northeast Utilities Shorewood Packaging Corporation Vivus Inc
NTL Inc. Showboat, Inc. VLSI Technology, Inc.
Oak Technology, Inc. Sierra Pacific Resources Wallace Computer Services, Inc.
OMI Corp. Silicon Valley Group, Inc. Washington Federal Inc.
ONBANCorp, Inc. Sotheby's Holdings, Inc. Wausau Mosinee Paper Corp.
ONEOK Inc. Southdown Inc. Western National Corporation
Orange and Rockland Utilities, Inc. Southern Indiana Gas & Westpoint Stevens Inc.
Overseas Shipholding Group, Inc. Electric Co. World Color Press, Inc.
Paging Network Inc Southwest Gas Corporation Xircom Inc.
Papa John's International Southwestern Energy Company Xylan Corp
Pegasus Gold Inc. Sovereign Bancorp, Inc. Yellow Corporation
Pentair, Inc. St. Paul Bancorp Inc. Zenith National Insurance Corp.
Peoples Bank Stanhome Inc. Zoltek Companies, Inc.
Perrigo Company Station Casinos, Inc. Zurn Industries, Inc.
Pittston Brink's Group Stride Rite Corp.
Pixar Animation Studios Structural Dynamics
Playtex Products Inc Research Corporation
Pogo Producing Company Sunglass Hut International Inc
</TABLE>
26
<PAGE> 31
SCHEDULE C
----------
The beta measurements used in the Combined Prospectus were calculated
by using MicroSoft Excel spreadsheets and the statistical function slope
available in MicroSoft Excel. The SLOPE function returns the slope of the linear
regression line through data points in known y's and known x's. The slope is the
vertical distance divided by the horizontal distance between any two points on
the line, which is the rate of change along the regression line.
The equation for beta (slope) is shown below.
Beta = n(SIGMA)xy - ((SIGMA)x)((SIGMA)y)
---------------------------------
n(SIGMA)x to the power of 2 - ((SIGMA)x) to the power of 2
Where y = the Fund's monthly total returns in the period
x = the Index's monthly total returns in the period
27
