<PAGE> 1
GATEWAY
INDEX PLUS FUND
(LOGO)
Annual Report
1997
(LOGO)
THE GATEWAY TRUST
P.O. BOX 5211
CINCINNATI, OH 45201-5211
(800) 354-6339
<PAGE> 2
================================================================================
GATEWAY INDEX PLUS FUND
Highlights at December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------
Past One Three Five Ten Since Inception Dividends Price
Quarter Year Years Years Years on 12/7/77 Year to Date Per Share
------- ---- ----- ----- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GATEWAY INDEX PLUS 3.26% 12.35% 11.30% 9.35% 11.82% 10.43% $1.902 $18.85
S&P 500 2.87 33.36 31.15 20.27 18.04
Lehman Gov't/
Corp. Bond 3.21 9.75 10.43 7.61 9.15
U. S. Inflation (CPI) 0.60 2.02 2.63 2.66 3.44
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 12/7/77
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
GATEWAY INDEX PLUS 3.26% 12.35% 37.88% 56.33% 205.56% 632.83%
S&P 500 2.87 33.36 125.60 151.61 425.23
Lehman Gov't/
Corp. Bond 3.21 9.75 34.67 44.30 139.98
U. S. Inflation (CPI) 0.60 2.02 8.09 14.03 40.22
</TABLE>
PERFORMANCE DATA THROUGHOUT THIS REPORT REPRESENTS PAST PERFORMANCE. THE AVERAGE
ANNUAL TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF DIVIDENDS. YOUR
INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT
YOUR SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
1
<PAGE> 3
================================================================================
GATEWAY INDEX PLUS FUND
Letter from the Chairman
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to report that 1997 was yet another extraordinary year for the U.
S. financial markets. Blue chip stocks, particularly those owned by the Gateway
Index Plus Fund, responded dramatically to advancing corporate profits, falling
interest rates, full employment, and the impending disappearance of the annual
federal budget deficit. Fixed income investments also responded favorably to the
abundance of good financial news.
As interest rates declined throughout 1997, stocks advanced in price and risks
escalated accordingly. Bond yields declined commensurately leaving risk-averse,
income-oriented investors with fewer and fewer alternatives. The Gateway Index
Plus Fund's low-risk, hedged equity portfolio proved itself as the alternative
investment for stock investors wishing to reduce equity risk exposure and also
for fixed income investors wishing to enhance their returns.
As the Gateway Index Plus Fund fulfilled the objectives of a wide variety of
investors, its assets grew dramatically. This growth served to reduce the
expense ratio from 1.14% as of December 31, 1996, to 1.07% as of December 31,
1997. Lower expenses benefit all shareholders. Your management continued to
focus attention on expense reduction throughout the year.
The financial environment in the U.S. is still extraordinarily favorable.
However, as 1997 drew to a close, new financial risks were appearing from Asia.
The Gateway management team will continue to utilize hedging strategies to
provide worthwhile tax-favored returns and to control the risk factors that are
always present in our financial markets. We look forward with enthusiasm to
1998.
Cordially,
/s/ WALTER G. SALL
- ------------------
Walter G. Sall
Chairman
2
<PAGE> 4
================================================================================
GATEWAY INDEX PLUS FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
By most measures, the stock market had another terrific year of performance in
1997. For the twelve months ended December 31, 1997, the S&P 500 Stock Index
produced a total return of 33.36%, whereas the Dow Jones Industrial Average
produced a total return of 24.99%. Even seasoned professionals were surprised by
the continued strength of U.S. equity markets, after equally impressive years
in 1995 and 1996. Many Wall Street research firms have concluded that the past
three years have produced the highest performance of all time!
Unlike 1995 and 1996, this past year saw the return of market volatility. It has
become routine to witness the Dow Jones Industrial Average up or down 100 points
in a single day. The dramatic differences of the monthly performance of the S&P
500 during 1997, as shown below, are indicative of this heightened volatility.
S&P 500
JANUARY 1, 1997 - DECEMBER 31, 1997
Jan-97 6.25%
Feb-97 0.78%
Mar-97 (4.11)%
Apr-97 5.97%
May-97 6.09%
Jun-97 4.48%
Jul-97 7.96%
Aug-97 (5.60)%
Sep-97 5.48%
Oct-97 (3.34)%
Nov-97 4.63%
Dec-97 1.72%
3
<PAGE> 5
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GATEWAY INDEX PLUS FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
However, our research team at Gateway believes that current volatility is
historically quite normal. Our professionals analyzed daily performance of the
overall market dating back to 1926 and the results show today's volatility is
actually slightly below the long-term average.
Although an increase in volatility may cause concern for investors, we welcome
this type of environment. As we have stated in earlier reports, the total return
produced by the Index Plus Fund is dependent upon the amount of cash flow we
generate from our hedging techniques. The amount of this cash flow will increase
at higher levels of volatility. In other words, we expect a favorable
environment for our strategy going forward. A more detailed explanation follows
in the Effect of Call Options and Effect of Put Options sections.
The Fund's total return for the twelve months ended December 31, 1997, was
12.35%. At year end 1997, the board of trustees declared a capital gain
distribution of $1.72 per share. All of this distribution qualified for the new
20% tax rate. Over the last three quarters of 1997, you can see the consistency
of the Fund's results during an erratic market environment. The following tables
also show how the marriage of the components of the Fund work together to
produce this unique performance record.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
1997
- ---------------------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 2.38% 16.87% 6.16% 0.61%
Dividends Earned 0.48 0.43 0.44 0.43
INTEREST EARNED 0.07 0.05 0.05 0.06
CONTRIBUTIONS OF OPTIONS
Effect of Call Options (0.72) (11.12) (2.12) 1.87
Effect of Put Options (0.71) (1.66) (1.02) 0.60
EFFECT OF FEES
Fund Expenses (0.27) (0.27) (0.27) (0.26)
Brokerage Commissions (0.04) (0.06) (0.10) (0.05)
- ---------------------------------------------------------------------------------------------
TOTAL RETURN 1.19% 4.24% 3.14% 3.26%
- ---------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 6
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GATEWAY INDEX PLUS FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
- -------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 24.81% (5.74%) 24.18% 2.87% 8.27% (0.19%) 33.02% 21.61%
Dividends Earned 4.01 3.63 3.25 2.90 2.51 2.80 2.53 2.17
INTEREST EARNED 0.12 0.29 0.33 0.19 0.07 0.03 0.17 0.17
CONTRIBUTIONS OF OPTIONS
Effect of Call Options (7.68) 8.85 (7.66) 4.24 1.48 4.19 (21.48) (9.91)
Effect of Put Options 0.00 4.94 (0.72) (3.58) (3.68) 0.00 (1.91) (2.21)
EFFECT OF FEES
Fund Expenses (1.50) (1.33) (1.22) (1.11) (1.11) (1.21) (1.19) (1.14)
Brokerage Commissions (0.31) (0.32) (0.36) (0.36) (0.14) (0.05) (0.10) (0.16)
- --------------------------------------------------------------------------------------------------
TOTAL RETURN 19.45% 10.32% 17.80% 5.15% 7.40% 5.57% 11.04% 10.53%
- --------------------------------------------------------------------------------------------------
</TABLE>
STOCKS: The Fund's portfolio is indexed to the S&P 100 Index, a diversified mix
of large blue chip companies. This index has historically behaved similarly to
the better-known S&P 500. As of December 31, 1997, the top ten holdings were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
GATEWAY INDEX PLUS FUND
TOP TEN HOLDINGS
- ------------------------------------------------------------------------------------------
STOCKS AS A PERCENTAGE OF NET ASSETS
- ------------------------------------------------------------------------------------------
<S> <C>
General Electric Company 7.18%
The Coca-Cola Company 4.94%
Microsoft Corp. 4.63%
Exxon Corporation 4.52%
Merck & Co., Inc. 3.83%
Intel Corporation 3.42%
International Business Machines Corporation 3.07%
AT&T 2.97%
Bristol-Myers Squibb Company 2.82%
Wal-Mart Stores, Inc. 2.67%
- ------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
================================================================================
GATEWAY INDEX PLUS FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
DIVIDENDS: The recent trend of falling dividend yields continued in 1997. This
is a direct result of the tremendous rise in stock prices in the Fund's
portfolio.
INTEREST EARNED: The objective of the Index Plus Fund is to remain fully
invested in its stated strategy. Therefore, this contribution of performance is
minimal.
EFFECT OF CALL OPTIONS: We often describe this component as the "rent" we charge
others to use the Fund's assets (i.e., its stock portfolio). In order to
determine the amount of cash flow received from rent during a period of positive
stock performance, simply add "Performance of Stocks" to "Effect of Call
Options" in the tables shown on pages 4 and 5. In a period of negative stock
performance, this cash flow will be simply the number shown for "Effect of Call
Options."
EFFECT OF PUT OPTIONS: We view buying put options on the Fund's portfolio of
stocks in the same manner as purchasing a homeowner's insurance policy. These
options serve as a measure of protection from a significant decline in the stock
market in a short period of time. Any time this "insurance" is not necessary, it
is a cost equal to the total amount paid in premiums. Even though the stock
market produced a positive number for the fourth quarter of 1997, the Fund
received a positive benefit from owning put options. This is due to the dramatic
October sell-off which enabled the Fund to "collect a claim" for a portion of
the damage done to its portfolio.
FUND EXPENSES: As Walter Sall points out on page 2, the expense ratio has been
falling due to an increase in the size of the Fund.
6
<PAGE> 8
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GATEWAY INDEX PLUS FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
BROKERAGE COMMISSIONS: Many mutual fund investors may not realize that brokerage
commissions are not included in the total expense ratio. However they are a cost
and therefore should be considered in determining the total expense structure of
a fund. Since the Index Plus Fund is a "buy and hold" investor in its stock
portfolio, the Fund's commission costs are quite low in comparison to most
equity funds.
To all of our shareholders, thank you for supporting our efforts over the years.
Many of you have been shareholders since 1977! We look forward to another twenty
years of providing excellent service.
/s/ J. PATRICK ROGERS, CFA
- --------------------------
J. Patrick Rogers, CFA
Portfolio Manager
7
<PAGE> 9
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GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DURABLES 3.78%
51,500 Chrysler Corporation $ 1,812,156
91,200 Ford Motor Company 4,440,300
55,700 General Motors Corporation 3,378,553
------------
9,631,009
------------
CONSUMER STAPLES 8.37%
10,100 Avon Products, Inc. 620,203
22,600 Colgate-Palmolive Company 1,661,100
28,200 Heinz (H. J.) Company 1,434,675
116,800 PepsiCo, Inc. 4,255,900
8,100 Ralston Purina Company 753,047
189,300 The Coca-Cola Company 12,612,113
------------
21,337,038
------------
ENERGY 10.82%
37,500 Amoco Corporation 3,193,359
24,500 Atlantic Richfield Co. 1,963,063
12,900 Baker Hughes Incorporated 562,763
188,900 Exxon Corporation 11,552,498
19,400 Halliburton Company 1,006,981
60,000 Mobil Corporation 4,331,250
25,300 Occidental Petroleum Corporation 740,816
37,800 Schlumberger Limited 3,044,081
8,100 The Coastal Corporation 501,694
24,200 The Williams Companies, Inc. 687,431
------------
27,583,936
------------
FINANCE 10.67%
35,800 American Express Company 3,197,388
19,000 American General Corp. 1,027,781
53,500 American International Group, Inc. 5,816,453
53,300 BankAmerica Corporation 3,890,900
5,600 CIGNA Corporation 969,325
35,000 Citicorp 4,424,219
22,600 First Chicago NBD Corporation 1,887,100
25,300 Merrill Lynch & Co., Inc. 1,845,319
54,300 NationsBank Corporation 3,302,119
9,000 The Hartford Financial Services Group, Inc. 842,344
------------
27,202,948
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 10
================================================================================
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH 10.94%
21,300 Baxter International Inc. $ 1,074,984
76,100 Bristol-Myers Squibb Company 7,200,963
49,950 Columbia/HCA Healthcare Corporation 1,481,330
101,600 Johnson & Johnson 6,689,725
5,600 Mallinckrodt Inc. 212,625
92,200 Merck & Co., Inc. 9,796,250
38,800 Pharmacia & Upjohn 1,423,475
------------
27,879,352
------------
INDUSTRIAL CYCLICALS 12.26%
13,447 Allegheny Teledyne Incorporated 348,361
13,300 Aluminum Company of America 936,403
8,100 Bethlehem Steel Corporation * 70,116
4,200 Boise Cascade Corporation 126,919
7,600 Brunswick Corporation 230,138
7,300 Champion International Corporation 330,781
86,300 DuPont (E. I.) de Nemours and Company 5,186,091
24,900 Eastman Kodak Company 1,513,453
6,400 Fluor Corporation 239,200
4,800 General Dynamics Corporation 414,900
79,400 Hewlett-Packard Company 4,962,500
11,200 Homestake Mining Company 99,050
8,300 International Flavors & Fragrances Inc. 427,191
23,100 International Paper Company 996,909
31,700 Minnesota Mining and Manufacturing 2,603,363
45,000 Monsanto Company 1,891,406
3,500 Polaroid Corporation 170,625
15,900 Rockwell International Corporation 831,272
7,200 The Black & Decker Corporation 281,025
76,452 The Boeing Company 3,743,759
17,400 The Dow Chemical Company 1,767,188
13,300 Unisys Corporation 184,538
18,000 United Technologies Corporation 1,310,625
15,200 Weyerhaeuser Company 747,175
24,800 Xerox Corporation 1,831,325
------------
31,244,313
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 11
================================================================================
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL 4.34%
37,200 Kmart Corporation * $ 428,963
29,900 Sears, Roebuck and Co. 1,352,975
8,100 Tandy Corporation 312,609
20,700 The Limited, Inc. 527,203
17,800 The May Department Stores Company 937,281
21,800 Toys "R" Us, Inc. * 684,656
172,900 Wal-Mart Stores, Inc. 6,818,744
------------
11,062,431
------------
SERVICES 4.30%
11,900 Burlington Northern Santa Fe Corporation 1,106,328
5,600 Delta Air Lines, Inc. 666,575
8,800 Federal Express Corporation * 537,625
7,700 Harrah's Entertainment, Inc. * 144,856
52,500 McDonald's Corporation 2,506,875
28,800 Norfolk Southern Corporation 886,500
51,500 The Walt Disney Company 5,101,719
------------
10,950,478
------------
TECHNOLOGY 23.54%
16,800 AMP, Incorporated 706,125
6,200 Ceridian Corporation * 284,425
76,650 Cisco Systems, Inc. * 4,278,028
5,900 Computer Sciences Corporation * 492,466
11,700 Digital Equipment Corporation * 432,900
249,900 General Electric Company 18,336,413
6,100 Harris Corporation 279,838
9,700 Honeywell Inc. 665,359
124,600 Intel Corporation 8,749,256
75,000 International Business Machines Corporation 7,839,844
91,500 Microsoft Corp. * 11,823,516
11,100 National Semiconductor Corporation * 287,213
20,000 Northern Telecom Limited 1,780,625
74,825 Oracle Corporation * 1,667,195
18,000 Raytheon Co. Class B Stock 908,487
3,750 Tektronix, Inc. 148,711
29,200 Texas Instruments, Incorporated 1,313,088
------------
59,993,489
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 12
================================================================================
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 8.55%
14,400 American Electric Power Company, Inc. $ 742,950
42,000 Ameritech Corporation 3,383,625
124,000 AT&T 7,595,000
59,268 Bell Atlantic Corporation 5,389,684
18,400 Entergy Corporation 550,850
52,800 MCI Communications Corporation 2,262,150
52,300 Southern Company 1,349,994
16,500 Unicom Corporation 506,859
------------
21,781,112
------------
TOTAL COMMON STOCKS 97.57% $248,666,106
(cost $205,365,019) ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 13
================================================================================
GATEWAY INDEX PLUS FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contracts Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUT OPTION ON THE STANDARD & POOR'S 100 STOCK INDEX 0.53%
1,354 expiring January 16, 1998 $ 131,176
(cost $1,339,879)
REPURCHASE AGREEMENT 5.13%
5.5% repurchase agreement dated December 31, 1997 with Star
Bank, N.A., due January 2, 1998 (repurchase proceeds
$13,080,996) collateralized by 7.0% GNMA Pool #8359,
maturity January 20, 2024 with face value $13,820,000
and market value $14,126,631 13,077,000
------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 102.74% 261,874,282
------------
CALL OPTIONS OUTSTANDING ON THE
STANDARD & POOR'S 100 STOCK INDEX **
(940) expiring January 16, 1998 at 425 (3,525,000)
(500) expiring January 16, 1998 at 430 (1,643,750)
(475) expiring January 16, 1998 at 435 (1,347,811)
(1,302) expiring January 16, 1998 at 440 (3,092,250)
(530) expiring January 16, 1998 at 450 (821,500)
(614) expiring January 16, 1998 at 460 (552,600)
(1,049) expiring February 20, 1998 at 450 (2,399,589)
------------
TOTAL CALL OPTIONS OUTSTANDING (5.25%) (13,382,500)
(premiums received $13,140,520) ------------
OTHER ASSETS AND LIABILITIES, NET 2.51% 6,966,396
------------
NET ASSETS 100% $255,458,178
============
* Denotes a non-income producing security.
** The aggregate value of investments that covers
outstanding call options is $248,666,106.
</TABLE>
See accompanying notes to financial statements
12
<PAGE> 14
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GATEWAY INDEX PLUS FUND
Statement of Assets and Liabilities - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $205,365,019) $248,666,106
Put option, at value (original cost $1,339,879) 131,176
Repurchase agreement 13,077,000
Receivable for fund shares sold 7,654,452
Dividend and interest receivable 416,847
Receivable for investments sold 174,295
Cash 27,485
Other assets 49,420
------------
270,196,781
------------
LIABILITIES:
Call options outstanding, at value
(premiums received $13,140,520) 13,382,500
Payable for fund shares redeemed 80,440
Dividends payable to shareholders 1,228,185
Other accrued expenses and liabilities 47,478
------------
14,738,603
------------
$255,458,178
NET ASSETS ============
NET ASSETS CONSIST OF:
Paid-in capital applicable to 13,552,107 shares outstanding $211,940,193
(unlimited number of shares authorized, no par value)
Undistributed net investment income 1,130
Accumulated realized gain, net 1,666,451
Unrealized appreciation, net 41,850,404
------------
$255,458,178
============
NET ASSET VALUE, OFFERING, AND REDEMPTION $18.85
PRICE PER SHARE ======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 15
================================================================================
GATEWAY INDEX PLUS FUND
Statement of Operations - For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 3,858,056
Interest income 510,617
-----------
4,368,673
-----------
EXPENSES:
Investment advisory and management fees 1,530,637
Transfer agent and accounting fees 490,970
Reports to shareholders 102,365
Professional fees 60,269
Custodian fees 32,499
Registration fees 30,895
Trustees' fees 30,686
Insurance expense 29,265
Other expenses 62,385
-----------
2,369,971
-----------
NET INVESTMENT INCOME 1,998,702
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 75,945,660
Call options expired and closed (22,022,423)
Put options expired and closed (4,894,317)
-----------
Net realized gain on investments 49,028,920
-----------
Decrease in unrealized appreciation of investments:
Securities (23,940,439)
Call options (649,213)
Put options (644,112)
-----------
Decrease in unrealized appreciation of investments (25,233,764)
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 23,795,156
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $25,793,858
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 16
================================================================================
GATEWAY INDEX PLUS FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------- --------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 1998,702 $ 2,104,986
Net realized gain (loss) on investments 49,028,920 (1,994,977)
(Decrease) increase in unrealized appreciation of investments
(25,233,764) 17,821,386
------------ -------------
Net increase in net assets resulting from operations
25,793,858 17,931,395
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,061,865) (2,040,693)
From net realized gain on investments
(20,835,710) --
------------ -------------
Decrease in net assets from dividends and distributions
(22,897,575) (2,040,693)
------------ -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 146,834,992 71,436,839
Net asset value of shares issued in reinvestment of dividends and 21,418,015 1,698,283
distributions
Payments for shares redeemed (110,053,937) (70,882,651)
------------ -------------
Net increase in net assets from fund shares transactions 58,199,070 2,252,471
------------ -------------
NET INCREASE IN NET ASSETS 61,095,353 18,143,173
NET ASSETS:
Beginning of year 194,362,825 176,219,652
------------ -------------
End of year, including undistributed net investment
income of $1,130 and $64,293, respectively $255,458,178 $ 194,362,825
============ =============
FUND SHARE TRANSACTIONS:
Shares sold 7,585,872 4,045,402
Shares issued in reinvestment of dividends and distributions 1,135,132 95,552
Less shares redeemed (5,688,892) (4,043,930)
------------ -------------
NET INCREASE IN SHARES OUTSTANDING 3,032,112 97,024
============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
15
<PAGE> 17
================================================================================
GATEWAY INDEX PLUS FUND
Financial Highlights - Per share data for a share outstanding throughout
each year
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995 (1) 1994 1993
---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $18.48 $16.91 $15.48 $15.85 $15.51
------ ------ ------ ------ ------
Net investment income 0.18 0.21 0.24 0.26 0.26
Net gains on securities 2.09 1.56 1.46 0.61 0.88
------ ------ ------ ------ ------
Total from investment operations 2.27 1.77 1.70 0.87 1.14
------ ------ ------ ------ ------
Dividends from net investment income (0.18) (0.20) (0.24) (0.27) (0.26)
Distributions from capital gains (1.72) -- -- (0.86) (0.47)
Distributions in excess of realized capital
gains -- -- (0.03) (0.11) (0.07)
------ ------ ------ ------ ------
Total distributions (1.90) (0.20) (0.27) (1.24) (0.80)
------ ------ ------ ------ ------
Net asset value, end of year $18.85 $18.48 $16.91 $15.48 $15.85
====== ====== ====== ====== ======
TOTAL RETURN 12.35% 10.53% 11.04% 5.57% 7.40%
Net assets, end of year (thousands) $255,458 $194,363 $176,220 $164,651 $207,176
Ratio of expenses to average net assets 1.07% 1.14% 1.19% 1.21% 1.11%
Ratio of net investment income to average 0.90% 1.18% 1.51% 1.54% 1.58%
net assets
Portfolio turnover rate 82% 17% 5% 4% 17%
Average commission per share $0.0271 $0.0335 --(2) --(2) --(2)
</TABLE>
(1) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
(2) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
16
<PAGE> 18
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of four no-load diversified mutual
funds. The financial statements of Gateway Index Plus Fund (the Fund) are
included in this report. The investment objective of the Gateway Index Plus Fund
is to achieve a high total return at a reduced level of risk. The Fund attempts
to achieve its investment objective primarily by investing in the 100 stocks in
the S&P 100 Stock Index and by selling call options on that Index. The financial
statements of Gateway Mid Cap Index Fund, Gateway Small Cap Index Fund, and
Cincinnati Fund are included in separate reports. The Trust is registered under
the Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks and option
contracts (both purchased and written) at the average of the closing bid and
asked quotations. Other securities for which market quotations are not readily
available are valued at fair value as determined in good faith under procedures
adopted by the board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies approved by
the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Dividends from net
investment income are recorded on the ex-dividend date and are declared and paid
quarterly. Net realized capital gains, if any, are distributed to shareholders
annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all of its taxable income to the
shareholders. Based on this policy, the Fund makes no provision for income
taxes. The cost of common stock for tax purposes is $205,386,898 at December 31,
1997; gross unrealized appreciation is $47,394,168 and depreciation is
$4,114,959.
Tax regulations require the Fund to assume that open option contracts are closed
each year end and include the resulting calculated capital gain or loss in the
determination of federal taxable income.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
17
<PAGE> 19
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser a monthly investment advisory and management fee
computed at an annual rate of 0.90% of the first $50 million of the average
daily net assets of the Fund, 0.70% of the next $50 million, and 0.60% of all
such assets over $100 million.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 1.50% of the
average daily net assets, the Adviser has agreed to reduce its fee as necessary
to limit the Fund's expenses to that level.
The Adviser maintains the Fund's accounting records for a monthly fee of $4,000.
The Adviser also provides shareholder servicing, transfer, and dividend
disbursing agent services for the Trust. The Fund reimburses the Adviser for the
cost to provide these services subject to a minimum monthly fee of $2,500 and a
limitation of 0.20% of average daily net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At December 31, 1997, the Adviser held in a fiduciary capacity 3% of the
outstanding shares of the Fund.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1997, purchases of investment securities
(excluding short-term investments) totaled $187,230,413 and proceeds from sales
totaled $179,371,864.
The Fund may write (sell) call options on stock indexes for cash (that is, "the
option premium") to enhance earnings on the portfolio securities. However, using
these contracts limits the opportunity to participate in appreciation of the
underlying portfolio beyond certain upper limits set by the contracts. The Fund
may also buy put options on stock indexes. The purchase of put options involves
the risk of loss of all or part of the cash paid for the put options. The
liability recorded upon receipt of written option premiums increases to offset
rises and decreases to offset declines in the market value of the hedged
portfolio. Similarly, the value of purchased put options increases to offset
declines and decreases to offset rises in portfolio value. For the year ended
December 31, 1997, transactions in written options were as follows:
<TABLE>
<CAPTION>
Number of Contracts Premiums
------------------- --------
<S> <C> <C>
Outstanding at December 31, 1996 2,622 $ 5,903,814
Options written 36,102 100,770,108
Options exercised (31,410) (89,164,756)
Options expired (1,904) (4,368,646)
-------- ------------
Outstanding at December 31, 1997 5,410 $ 13,140,520
======== ============
</TABLE>
18
<PAGE> 20
================================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Gateway Index Plus Fund of The
Gateway Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Gateway Index Plus Fund (one of the funds
constituting THE GATEWAY TRUST) (an Ohio business trust) as of December 31,
1997, and the related statement of operations, the statements of changes in net
assets, and the financial highlights for the periods indicated thereon. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gateway Index Plus Fund of The Gateway Trust as of December 31, 1997, the
results of its operations, the changes in its net assets, and the financial
highlights for the periods indicated thereon, in conformity with generally
accepted accounting principles.
Cincinnati, Ohio Arthur Andersen LLP
January 20, 1998
19
<PAGE> 21
================================================================================
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. Harrison
Walter G. Sall
William H. Schneebeck
20
<PAGE> 22
================================================================================
MORNINGSTAR AWARDS
(FOUR STARS HERE)
Morningstar Rating. Overall rating among
2,332 domestic equity funds as of 12/31/97.
TO
GATEWAY INDEX PLUS FUND
Morningstar proprietary ratings reflect historical risk-adjusted performance as
of December 31, 1997. The ratings are subject to change every month. Past
performance is no guarantee of future results. Morningstar ratings are
calculated from the fund's three-, five-, and ten-year average annual returns in
excess of 90-day Treasury bill returns with appropriate fee adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The Gateway Index Plus Fund received three stars, three stars, and four stars
for the three-, five-, and ten-year periods, respectively. Ten percent of the
funds in a category receive five stars, 22.5% receive four stars, 35% receive
three stars, 22.5% receive two stars, and 10% receive one star. The Fund was
rated among 2,332, 1,292, and 676 funds for the three-, five-, and ten-year
periods respectively.
================================================================================
<PAGE> 23
================================================================================
GATEWAY
MID CAP INDEX
FUND
Annual Report
1997
- --------------------------------------------------------------------------------
THE GATEWAY TRUST
P. O. BOX 5211
CINCINNATI, OH 45201-5211
(800) 354-6339
================================================================================
<PAGE> 24
================================================================================
GATEWAY MID CAP INDEX FUND
Highlights at December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------------------
Past One Three Five Ten Since Inception Dividends Price
Quarter Year Years Years Years on 9/30/92 Year to Date Per Share
------- ---- ----- ----- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GATEWAY MID CAP
INDEX FUND 1.52% 25.03% 21.92% 12.58% N/A 14.08% $0.849 $15.13
S&P MidCap 400 Index 0.83 32.25 27.33 17.80 19.47
S&P 500 2.87 33.36 31.15 20.27 18.04
U. S. Inflation (CPI) 0.60 2.02 2.63 2.66 3.44
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 9/30/92
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
GATEWAY MID CAP
INDEX FUND 1.52% 25.03% 81.23% 80.86% N/A 82.12%
S&P MidCap 400 Index 0.83 32.25 106.43 126.81 492.29
S&P 500 2.87 33.36 125.60 151.61 425.23
U. S. Inflation (CPI) 0.60 2.02 8.09 14.03 40.22
</TABLE>
PERFORMANCE DATA THROUGHOUT THIS REPORT REPRESENTS PAST PERFORMANCE. THE AVERAGE
ANNUAL TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF DIVIDENDS. YOUR
INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT
YOUR SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
1
<PAGE> 25
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
For the twelve months ending December 31, 1997, the Gateway Mid Cap Index Fund
produced a total return of 25.03%. This compares to 33.36% for the Standard &
Poor's 500 Stock Index over the same time period. The Standard & Poor's 500
Stock Index is commonly recognized as the standard of performance for large
capitalization stocks. Smaller capitalization stocks, as represented by the
Russell 2000 Index, delivered a total return of 22.36% during 1997.
The Mid Cap Index Fund invests in the 400 stocks represented in the S&P MidCap
400 Index. Similar to the more widely followed S&P 500 Index, the S&P MidCap 400
Index is a market capitalization weighted index. This portfolio is comprised of
middle-sized companies with a median market capitalization of $3 million.
We purchase index put options for the Fund as a way to protect the portfolio
should a significant decline occur in the market in a short period of time. If a
decline does not occur, the cost of put options reduces the total return of the
Fund. During the market downturn of this past October, the put options did
mitigate some of the loss in the portfolio.
Sincerely,
/s/ J. PATRICK ROGERS, CFA
- --------------------------
J. Patrick Rogers, CFA
Portfolio Manager
2
<PAGE> 26
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & EQUIPMENT 0.82%
200 OEA, Inc. $ 5,788
100 Sequa Corporation 6,513
500 Sundstrand Corporation 25,188
300 Teleflex Incorporated 11,334
200 Thiokol Corporation 16,256
------------
65,079
------------
APPAREL 0.81%
800 Cintas Corporation 31,250
400 Jones Apparel Group, Inc. * 17,213
500 The Warnaco Group, Inc. 15,766
------------
64,229
------------
AUTOMOBILES & PARTS 1.35%
200 Arvin Industries, Inc. 6,663
200 Borg Warner Automotive Inc. 10,400
300 Federal-Mogul Corporation 12,159
400 Federal Signal Corporation 8,638
1,400 Harley Davidson, Inc. 38,369
600 Meritor Automotive, Inc. 12,694
300 Modine Manufacturing Company 10,303
300 Superior Industries International, Inc. 8,044
------------
107,270
------------
BUILDING MATERIALS & CONSTRUCTION 0.48%
300 Granite Construction Incorporated 6,900
200 Jacobs Engineering Group Inc. * 5,081
400 Martin Marietta Materials Inc. 14,625
200 Southdown Inc. 11,800
------------
38,406
------------
BUSINESS SERVICES & SUPPLIES 3.21%
675 Comdisco, Inc. 22,570
800 CompUSA Inc. * 24,825
600 Corrections Corp. of America 22,275
300 HealthCare COMPARE Corp. * 15,459
305 Information Resources, Inc. * 4,098
300 Kelly Services, Inc. 9,019
700 Manpower Inc. 24,653
700 Medaphis Corp. * 4,561
500 Ogden Corporation 14,094
700 Olsten Corporation 10,478
912 Paychex, Inc. 46,341
300 Pittston Brink's Group 12,094
750 Robert Half International Inc. * 29,766
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 27
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
BUSINESS SERVICES & SUPPLIES - Continued
300 Rollins, Inc. $ 6,094
500 Sotheby's Holdings, Inc. 9,266
------------
255,593
------------
CHEMICALS 3.14%
600 Airgas, Inc. * 8,456
600 Albemarle Corporation 14,344
200 BetzDearborn Inc. 12,231
140 BF Goodrich Co. 5,801
600 Cabot Corporation 16,575
600 Crompton & Knowles Corporation 15,919
400 Cytec Industries Inc. * 18,775
1,100 Ethyl Corporation 8,491
300 Ferro Corporation 7,294
100 Fuller (H. B.) Company 4,975
300 Georgia Gulf Corporation 9,197
800 IMC Global Inc. 26,225
400 Lawter International, Inc. 4,350
500 Lubrizol Corporation 18,438
200 Minerals Technologies Inc. 9,094
400 Olin Corporation 18,763
400 Schulman (A.) Inc. 10,100
1,000 Solutia Inc. 26,719
200 The Dexter Corporation 8,644
300 Wellman, Inc. 5,859
------------
250,250
------------
COMPUTER SOFTWARE & PERIPHERALS 5.85%
800 America Online, Inc. * 71,350
900 BMC Software, Inc. * 59,006
1,800 Cadence Design Systems, Inc. * 44,100
1,600 Compuware Corporation * 51,250
500 Electronic Arts Inc. * 18,922
400 Fiserv, Inc. * 19,700
400 GTECH Holdings * 12,800
1,400 Informix Corporation * 6,694
600 Mentor Graphics Corporation * 5,831
600 Networks Associates Inc. * 31,669
200 Policy Management Systems Corp. * 13,906
777 Sterling Commerce, Inc. * 29,890
404 Storage Technology Corporation * 25,073
335 Structural Dynamics Research Corporation * 7,579
800 SunGard Data Systems Inc. 24,800
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 28
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER SOFTWARE & PERIPHERALS - Continued
500 Symantec Corporation * $ 11,047
300 Symbol Technologies, Inc. * 11,325
600 SynOpsys Inc. * 21,413
-----------
466,355
-----------
ELECTRONICS & COMPUTERS 7.56%
1,100 ADC Telecommunications, Inc. * 45,994
800 Altera Corporation * 26,525
800 American Power Conversion Corporation * 18,950
1,366 Analog Devices, Inc. * 37,778
800 Arrow Electronics, Inc. * 25,975
900 Atmel Corp. * 16,734
400 Avnet, Inc. 26,425
600 Cirrus Logic, Inc. * 6,394
800 Cypress Semiconductor Corporation * 6,825
600 Hubbell Incorporated 29,606
400 Imation Corp. * 6,413
700 Integrated Device Technology, Inc. * 6,606
600 Lexmark International Group Inc. * 22,800
600 Linear Technology Corporation 34,538
400 Litton Industries, Inc. * 23,013
200 MagneTek, Inc. * 3,900
1,000 Maxim Integrated Products * 34,563
1,327 Molex Incorporated 42,547
900 NCR CORP. * 25,088
1,100 Quantum Corporation * 22,103
500 SCI Systems, Inc. * 21,797
700 Sensormatic Electronics Corporation * 11,484
400 Sequent Computer Systems, Inc. * 8,025
1,000 Solectron Corporation * 41,563
200 Stratus Computer, Inc. * 7,569
300 Varian Associates, Inc. 15,159
551 Vishay Intertechnology, Inc. * 13,000
600 Xilinx, Incorporated * 21,000
-----------
602,374
-----------
ENERGY 6.41%
300 BJ Services Company * 21,581
1,200 ENSCO International Incorporated * 40,125
1,600 Global Marine Inc. * 39,200
800 Lyondell Petrochemical Company 21,225
500 MAPCO Inc. 23,172
400 Murphy Oil Corporation 21,650
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 29
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY - Continued
900 Nabors Industries, Inc. * $ 28,294
500 Noble Affiliates, Inc. 17,625
1,200 Noble Drilling Corp. 36,675
700 Parker Drilling Company * 8,575
600 Pioneer Natural Resources Company 17,344
400 Quaker State Corporation 5,713
300 Questar Corporation 13,359
1,000 Ranger Oil Limited 6,813
600 Seagull Energy Corporation * 12,338
300 Smith International, Inc. * 18,375
1,300 Tosco Corporation 49,197
800 Transocean Offshore Inc. 38,525
706 Ultramar Diamond Shamrock Corporation 22,460
500 Valero Energy Corporation 15,719
600 Varco International, Inc. * 12,863
453 Weatherford Enterra, Inc. * 19,790
500 Witco Corporation 20,453
------------
511,071
------------
FINANCE, INSURANCE & REAL ESTATE 18.25%
1,200 AFLAC Incorporated 61,425
600 Ambac Financial Group Inc. 27,619
500 American Financial Group, Inc. 20,188
400 Associated Bancorporation 22,075
600 Capital One Financial Corp. 32,475
500 Charter One Financial, Inc. 31,469
400 City National Corporation 14,763
900 Crestar Financial Corporation 51,300
1,100 Dime Bancorp Inc. 33,241
800 Edwards (A.G.), Inc. 31,800
400 Finova Financial Trust 19,913
750 First of America Bank Corporation 57,867
975 First Security Corporation 40,889
500 First Tennessee National Corporation 32,984
450 First Virginia Banks, Inc. 23,288
1,200 Firstar Corporation 50,925
1,050 Franklin Resources, Inc. 91,284
1,100 Hibernia Corporation 20,694
200 HSB Group, Inc. 11,038
800 Marshall & Ilsley Corporation 49,725
1,050 Mercantile Bancorporation Inc. 64,542
600 Mercantile Bankshares Corporation 23,250
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 30
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE, INSURANCE & REAL ESTATE - Continued
900 Northern Trust Corporation $ 62,944
800 Old Kent Financial Corp. 31,800
700 Old Republic International Corporation 25,988
700 Oxford Health Plans Inc. 10,872
800 Pacific Century Financial Corp. 19,825
1,200 PaineWebber Group Inc. 41,700
1,100 Provident Companies, Inc. 42,522
1,200 Regions Financial Corp. 50,663
800 SouthTrust Corporation 50,700
400 Stewart Enterprises Inc. 18,675
1,500 Summit Bancorp 79,734
500 T. Rowe Price Associates, Inc. 31,500
800 TCF Financial Corporation 27,175
962 The Bear Stearns Companies Inc. 45,695
300 The PMI Group, Inc. 21,731
300 Transatlantic Holdings, Inc. 21,422
600 Union Planters Corporation 40,763
300 Wilmington Trust Corporation 18,619
------------
1,455,082
------------
FOOD, BEVERAGE & TOBACCO 4.76%
3,400 Coca-Cola Enterprises Inc. 120,913
300 Dean Foods Company 17,822
500 Dole Food Company, Inc. 22,875
200 Dreyer's Grand Ice Cream, Inc. 4,850
825 Flowers Industries, Inc. 16,938
700 Hormel Foods Corporation 22,947
800 IBP, Inc. 16,725
200 International Multifoods Corporation 5,656
600 Interstate Bakeries Corporation 22,369
200 Lancaster Colony Corporation 11,363
300 Lance, Inc. 7,950
600 McCormick & Company, Incorporated 16,838
700 Starbucks Corporation * 26,884
200 The Smucker (J. M.) Company 4,725
1,950 Tyson Foods Inc. 39,853
300 Universal Corporation 12,347
200 Universal Foods Corporation 8,463
------------
379,518
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 31
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH 7.06%
300 Acuson Corporation * $ 4,988
500 Allegiance Corp. 17,734
500 Apria Healthcare Group Inc. * 6,719
100 ATL Ultrasound Inc. * 4,613
400 Bergen Brunswig Corporation 16,838
1,000 Beverly Enterprises, Inc. 13,000
600 Biogen, Inc. * 21,863
400 Carter-Wallace, Inc. 6,750
600 Centocor, Inc. * 20,025
1,436 Chiron Corporation * 24,457
300 Concentra Managed Care Inc. 10,106
500 Covance Inc. 9,938
100 Datascope Corp. * 2,606
400 Dentsply International Inc. 12,363
100 Diagnostic Products Corporation 2,775
300 Forest Laboratories, Inc. * 14,794
1,050 Foundation Health Systems, Inc. 23,527
700 Genzyme Corporation * 19,381
350 Health Care & Retirement Corporation * 14,109
1,500 Health Management Associates, Inc. 37,922
600 Hillenbrand Industries 30,731
1,100 IVAX Corporation * 7,356
400 McKesson Corporation 43,250
1,000 Mylan Laboratories Inc. 20,938
600 NovaCare, Inc. * 7,856
700 Omnicare, Inc. 21,613
370 PacifiCare Health Systems, Inc. * 19,437
700 Perrigo Company * 9,625
600 Quorum Health Group, Inc. 15,750
200 Scherer (R. P.) Corporation * 12,213
800 Stryker Corporation 29,800
400 Sybron International Corporation 18,788
600 Vencor, Inc. * 14,700
800 Watson Pharmaceuticals Inc. 26,100
------------
562,665
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 32
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
MACHINERY & RELATED PRODUCTS 0.80%
500 ACNielsen Corporation * $ 12,188
600 Agco Corp. 17,588
300 Flowserve Corp. 8,363
200 Kennametal Inc. 10,369
100 Lawson Products, Inc. * 2,994
100 Nordson Corporation 4,588
300 Stewart & Stevenson Services, Inc. 7,688
------------
63,778
------------
MINING & METALS 0.94%
300 CalMat Co. 8,363
100 Cleveland-Cliffs Inc. 4,581
200 Donaldson Company, Inc. 9,019
906 RPM, Inc. 13,986
300 Vulcan Materials Company 30,647
300 Watts Industries, Inc. 8,484
------------
75,080
------------
MISCELLANEOUS 1.41%
600 Callaway Golf Company 17,138
900 Circus Circus Enterprises, Inc. * 18,478
200 GATX Corporation 14,500
400 Harsco Corporation 17,238
1,100 International Game Technology 27,809
900 Viad Corp. 17,522
------------
112,685
------------
OTHER CONSUMER DURABLES 2.36%
400 Albany International Corp. 9,188
700 Burlington Industries, Inc. * 9,691
200 Church & Dwight Co., Inc. 5,619
400 GenCorp Inc. 9,975
400 Herman Miller, Inc. 21,775
300 HON INDUSTRIES, Inc. 17,663
800 Leggett & Platt Incorporated 33,500
100 NCH Corporation 6,556
500 Premark International Inc. 14,516
1,300 Shaw Industries, Inc. 15,113
200 Stanhome Inc. 5,150
900 The Dial Corporation 18,731
500 Unifi, Inc. 20,359
------------
187,836
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 33
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OTHER INDUSTRIAL CYCLICALS 4.89%
400 Alexander & Baldwin, Inc. $ 10,988
500 Alumax, Inc. 16,984
100 Brush Wellman Inc. 2,456
300 Carlisle Companies Incorporated 12,825
1,093 Clayton Homes, Inc. 19,708
500 Danaher Corporation 31,563
575 Diebold, Incorporated 29,109
300 Fastenal Company 11,531
400 First Brands Corporation 10,800
450 Hanna (M. A.) Company 11,363
200 Kaydon Corporation 6,550
494 Mark IV Industries, Inc. 10,822
100 MAXXAM Inc. * 4,375
300 Newport News Shipbuilding Inc. * 7,641
1,400 Office Depot, Inc. * 33,513
1,200 OfficeMax, Inc. * 17,100
300 Overseas Shipholding Group, Inc. 6,563
400 Sealed Air Corporation * 24,700
1,450 Staples, Inc. * 40,328
200 Tecumseh Products Company 9,788
300 The Standard Register Company 10,434
500 Tidewater Inc. 27,594
900 US Office Products Co. 17,550
400 York International Corporation 15,838
------------
390,123
------------
PAPER & FOREST PRODUCTS 1.74%
300 Bowater Incorporated 13,331
200 Chesapeake Corporation 6,894
400 Consolidated Papers, Inc. 21,338
800 Georgia Pacific Corp. Timber Group 18,225
400 Glatfelter (P. H.) Co. 7,425
500 Longview Fibre Company 7,625
300 Pentair, Inc. 10,800
200 Rayonier Inc. 8,494
840 Sonoco Products Company 29,164
600 Unisource Worldwide Inc. 8,588
320 Wausau Mosinee Paper Corp. * 6,520
------------
138,404
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 34
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRECISION INSTRUMENTS 0.48%
300 AMETEK, Inc. $ 8,128
200 Beckman Instruments, Inc. 8,013
700 Teradyne, Inc. * 22,400
------------
38,541
------------
RETAIL 4.62%
600 Barnes and Noble Inc. 20,025
600 Bed Bath and Beyond Inc. * 23,063
400 Best Buy Co., Inc. * 14,800
300 BJs Wholesale Club Inc. 9,394
450 Claire's Stores, Inc. 8,747
681 Consolidated Stores Corporation * 29,921
1,015 Dollar General Corporation 36,825
750 Family Dollar Stores, Inc. 21,984
400 Fingerhut Companies, Inc. 8,563
400 Fred Meyer, Inc. * 14,538
700 General Nutrition Companies, Inc. 23,297
400 Hannaford Bros. Co. 17,338
500 Heilig-Meyers Company 6,000
700 Kohl's Corporation * 47,688
300 Lands' End, Inc. * 10,528
200 Mac Frugal's Bargainso Close-outs Inc. * 8,231
300 Micro Warehouse, Inc. * 4,191
300 Nine West Group Inc. * 7,781
300 Payless ShoeSource, Inc. * 20,128
400 Ruddick Corporation 6,950
1,000 Service Merchandise Company, Inc. * 2,156
300 Tiffany & Co. 10,819
700 Viking Office Products, Inc. * 15,378
------------
368,345
------------
SERVICES 6.51%
200 Airborne Freight Corporation 12,419
100 Alaska Air Group, Inc. * 3,869
300 Arnold Industries, Inc. 5,100
300 ASA Holdings, Inc. 8,541
300 Banta Corporation 8,194
500 Belo (A. H.) Corporation Class A 28,016
400 Bob Evans Farms, Inc. 8,875
700 Brinker International, Inc. * 11,244
400 Buffets, Inc. * 3,775
300 Calgon Carbon Corporation 3,272
218 Chris-Craft Industries, Inc. * 11,404
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 35
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
SERVICES - Continued
400 CNF Transportation Inc. $ 15,350
500 Cracker Barrel Old Country Store, Inc. 16,750
100 Gibson Greetings, Inc. * 2,200
300 Houghton Mifflin Company 11,541
300 Hunt (J. B.) Transport Services, Inc. 5,644
500 Illinois Central Corporation 17,031
200 International Dairy Queen, Inc. * 5,363
900 Kansas City Southern Industries, Inc. 28,491
400 Lee Enterprises, Incorporated 11,838
400 Lone Star Steakhouse & Saloon, Inc. * 7,025
200 Media General, Inc. 8,363
1,400 Omnicom Group Inc. 59,238
400 Outback Steakhouse, Inc. * 11,575
370 Promus Hotel Corporation * 15,482
700 Reynolds and Reynolds Company 12,928
200 Sbarro, Inc. 5,269
100 Scholastic Corporation * 3,769
200 TCA Cable TV, Inc. 9,263
100 The Washington Post Company 48,620
400 Trinity Industries, Inc. 17,850
700 United States Filter Corp. 21,000
1,400 USA Waste Services, Inc. * 55,038
400 Wallace Computer Services, Inc. 15,538
400 Wisconsin Central Transportation 9,375
------------
519,250
------------
STEEL & IRON 0.62%
400 AK Steel Holding Corporation 7,063
200 Carpenter Technology Corporation 9,625
200 Oregon Steel Mills, Inc. 4,281
200 Precision Castparts Corp. 12,131
400 Ucar International Inc. 15,963
------------
49,063
------------
UTILITIES 13.42%
1,100 360(degree)Communications Company * 22,138
1,400 AES Corporation * 65,275
500 AGL Resources Inc. 10,234
400 Aliant Communications Inc. 12,675
1,100 Allegheny Energy Inc. 35,681
700 American Water Works Company, Inc. 19,163
500 Atlantic Energy Inc. 10,609
100 Black Hills Corporation 3,531
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 36
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - Continued
600 California Energy Company * $ 17,269
200 Central Louisiana Electric Company, Inc. 6,475
400 Central Maine Power Company 6,138
500 Century Telephone Enterprises, Inc. 24,891
800 CMS Energy Corporation 35,200
400 COMSAT Corporation 9,675
600 Delmarva Power & Light Company 13,838
500 El Paso Energy Corporation 33,250
800 Florida Progress Corporation 31,400
300 Hawaiian Electric Industries, Inc. 12,272
300 Idaho Power Company 11,278
700 Illinova Corporation 18,878
300 Indiana Energy, Inc. 9,891
400 IPALCO Enterprises, Inc. 16,800
500 Kansas City Power & Light Company 14,750
400 KeySpan Energy Corporation 14,713
700 LCI International, Inc. * 21,547
600 LG&E Energy Corp. 14,813
700 MCN Energy Group Inc. 28,197
888 MidAmerican Energy Holdings Company 19,481
300 Minnesota Power 13,069
300 National Fuel Gas Company 14,597
400 Nevada Power Company 10,638
880 New Century Energies Inc. 42,185
500 New England Electric System 21,328
700 New York State Electric & Gas Corporation 24,894
2,300 NEXTEL Communications, Inc. * 59,513
500 NIPSCO Industries, Inc. 24,688
1,200 Northeast Utilities 14,100
300 OGE Energy Corp. 16,406
700 Pinnacle West Capital Corporation 29,663
1,000 Potomac Electric Power Company 25,813
400 Public Service Company of New Mexico 9,475
700 Puget Sound Energy 21,088
900 SCANA Corporation 26,916
600 Southern New England Telecommunications Corporation 30,169
1,100 TECO Energy, Inc. 30,903
500 Telephone and Data Systems, Inc. 23,281
500 The Montana Power Company 15,891
500 UtiliCorp United Inc. 19,391
400 Vanguard Cellular Systems, Inc. * 5,113
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 37
================================================================================
GATEWAY MID CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES - Continued
400 Washington Gas Light Company $ 12,350
1,000 Wisconsin Energy Corporation 28,656
300 WPL Holdings, Inc. 9,900
----------
1,070,089
----------
TOTAL COMMON STOCKS 97.49% 7,771,086
(cost $5,281,036)
REPURCHASE AGREEMENT 2.77%
5.5% repurchase agreement dated December 31, 1997 with Star
Bank, N.A., due January 2, 1998 (repurchase proceeds
$221,068) collateralized by 7.0% GNMA Pool #8359, maturity
January 20, 2024 with face value $235,000
and market value $240,214 221,000
----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 100.26% 7,992,086
OTHER ASSETS AND LIABILITIES, NET (0.26%) (20,522)
----------
NET ASSETS 100% $7,971,564
==========
</TABLE>
* Denotes a non-income producing security.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 38
================================================================================
GATEWAY MID CAP INDEX FUND
Statement of Assets and Liabilities - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $5,281,036) $7,771,086
Repurchase agreement 221,000
Dividend and interest receivable 6,358
Cash 1,103
Other assets 5,308
----------
8,004,855
----------
LIABILITIES:
Dividends payable to shareholders 21,564
Payable for fund shares redeemed 1,665
Other accrued expenses and liabilities 10,062
----------
33,291
----------
NET ASSETS $7,971,564
==========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 526,890 shares outstanding
(unlimited number of shares authorized, no par value) $5,478,027
Accumulated realized gain, net 3,487
Unrealized appreciation, net 2,490,050
----------
$7,971,564
==========
NET ASSET VALUE, OFFERING, AND REDEMPTION
PRICE PER SHARE $15.13
======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
15
<PAGE> 39
================================================================================
GATEWAY MID CAP INDEX FUND
Statement of Operations -- For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 97,650
Interest income 16,969
----------
114,619
----------
EXPENSES:
Investment advisory and management fees 64,741
Transfer agent and accounting fees 78,000
Registration fees 18,373
Custodian fees 11,973
Reports to shareholders 11,665
Professional fees 5,631
Trustees' fees 4,274
Other expenses 10,827
----------
205,484
Fees waived under contract (64,741)
Expenses reimbursed voluntarily (8,207)
----------
Net operating expenses 132,536
----------
NET INVESTMENT LOSS (17,917)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on investments:
Securities 572,332
Put options expired and closed (157,466)
----------
414,866
----------
Increase in unrealized appreciation of investments:
Securities 1,218,945
Put options 12,126
----------
1,231,071
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,645,937
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,628,020
==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
16
<PAGE> 40
================================================================================
GATEWAY MID CAP INDEX FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------ -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment loss $ (17,917) $ (15,232)
Net realized gain on investments 414,866 299,165
Increase in unrealized appreciation of investments 1,231,071 572,860
---------- ----------
Net increase in net assets resulting from operations 1,628,020 856,793
---------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gain on investments (424,743) (287,434)
---------- ----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 1,605,971 1,122,760
Net asset value of shares issued in reinvestment of dividends and 403,179 270,267
distributions
Payments for shares redeemed (1,532,981) (1,363,697)
---------- ----------
Net increase in net assets from fund share transactions 476,169 29,330
----------- ----------
NET INCREASE IN NET ASSETS 1,679,446 598,689
NET ASSETS:
Beginning of year 6,292,118 5,693,429
---------- ----------
End of year $7,971,564 $6,292,118
========== ==========
FUND SHARE TRANSACTIONS:
Shares sold 115,103 91,308
Shares issued in reinvestment of dividends and distributions 26,648 19,564
Less shares redeemed (107,212) (108,756)
---------- ---------
NET INCREASE IN SHARES OUTSTANDING 34,539 2,116
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
17
<PAGE> 41
================================================================================
GATEWAY MID CAP INDEX FUND
Financial Highlights -- Per share data for a share outstanding throughout
each year
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 (1) 1994 1993
---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.78 $11.61 $ 9.58 $10.16 $10.04
------ ------ ------- ------ ------
Net investment income (loss) (0.03) (0.02) 0.03 0.08 0.11
Net gains or losses on securities 3.23 1.80 2.43 (0.60) 0.41
------ ------ ------- ------ ------
Total from investment operations 3.20 1.78 2.46 (0.52) 0.52
------ ------ ------ ------ ------
Dividends from net investment income -- -- (0.06) (0.05) (0.11)
Distributions from capital gains (0.85) (0.61) (0.37) (0.01) (0.29)
------ ------ ------ ------ ------
Total distributions (0.85) (0.61) (0.43) (0.06) (0.40)
------ ------ ------ ------ ------
Net asset value, end of year $15.13 $12.78 $11.61 $ 9.58 $10.16
====== ====== ====== ====== ======
TOTAL RETURN 25.03% 15.33% 25.68% (5.12%) 5.18%
Net assets, end of year (thousands) $7,972 $6,292 $5,693 $6,588 $10,465
Ratio of expenses to average net assets (3) 1.84% 2.00% 1.98% 1.50% 1.50%
Ratio of net investment income (loss) to
average net assets (3) (0.25%) (0.25%) 0.05% 0.59% 1.06%
Portfolio turnover rate 20% 14% 18% 8% 105%
Average commission per share $0.0400 $0.0355 -- (2) -- (2) -- (2)
</TABLE>
(1) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
(2) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
(3) The ratio of net expenses to average net assets would have increased and
the ratio of net investment income to average net assets would have
decreased by 0.11%, 0.29%, and 0.02% in 1997, 1996, and 1995,
respectively, had the Adviser not voluntarily reimbursed expenses.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
18
<PAGE> 42
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of four no-load diversified mutual
funds. The financial statements of Gateway Mid Cap Index Fund (the Fund) are
included in this report. The primary investment objective of the Fund is
long-term growth of capital. The Fund attempts to achieve its investment
objective primarily by investing in the 400 stocks included in the S&P MidCap
400 Index, and by purchasing put or call options on an index. The financial
statements of Gateway Index Plus Fund, Gateway Small Cap Index Fund, and the
Cincinnati Fund are included in separate reports. The Trust is registered under
the Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks and option
contracts at the average of the closing bid and asked quotations. Other
securities for which market quotations are not readily available are valued at
fair value as determined in good faith under procedures adopted by the board of
trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies approved by
the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from
net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all taxable income to the shareholders.
Based on this policy, the Fund makes no provision for income taxes. The cost of
investments is the same for financial reporting and tax purposes.
At December 31, 1997, gross unrealized appreciation of common stocks totaled
$2,860,416 and gross unrealized depreciation totaled $370,366, based on the cost
of investments.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION OF CAPITAL ACCOUNTS -- During the year ended December 31, 1997,
the Fund reclassified $17,917 from undistributed net investment income to
paid-in capital. This reclassification, which had no impact on total net assets,
is due to tax regulations not permitting the carryforward of net investment
losses to future periods.
19
<PAGE> 43
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser a monthly investment advisory and management fee
computed at an annual rate of 0.90% of the first $50 million of the average
daily net assets of the Fund, 0.70% of the next $50 million, and 0.60% of all
such assets over $100 million.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 1.50% of the Fund's
average daily net assets, the advisory contract requires the Adviser to waive
some or all of its advisory fee as necessary to limit the Fund's expenses to the
stated level. Any contractual waiver, however, would not exceed the aggregate
advisory fee paid by the Fund. As a result, for the year ended December 31,
1997, the Adviser waived advisory fees of $64,741 for the Fund. Additionally for
1997, the Adviser voluntarily reimbursed other expenses of the Fund in the
amount of $8,207.
The Adviser maintains the Fund's accounting records for a monthly fee of $4,000.
The Adviser also provides shareholder servicing, transfer, and dividend
disbursing agent services for the Trust. The Fund reimburses the Adviser for the
cost to provide these services subject to a minimum monthly fee of $2,500 and a
limitation of 0.20% of average daily net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At December 31, 1997, the Adviser held in a fiduciary capacity, 53% of the
Fund's outstanding shares.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1997, purchases of investment securities
(excluding short-term investments) totaled $1,375,983, and proceeds from sales
totaled $1,467,343.
The Fund may buy put or call options on stock indexes. The purchase of options
involves the risk of loss of all or part of the cash paid for the options. The
value of purchased put options increases to offset declines and decreases to
offset rises in the portfolio value. The value of purchased call options
increases proportionately to the value of the underlying index.
20
<PAGE> 44
================================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Gateway Mid Cap Index Fund of
The Gateway Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Gateway Mid Cap Index Fund (one of the
funds constituting THE GATEWAY TRUST) (an Ohio business trust) as of December
31, 1997, and the related statement of operations, the statements of changes in
net assets, and the financial highlights for the periods indicated thereon.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gateway Mid Cap Index Fund of The Gateway Trust as of December 31, 1997, the
results of its operations, the changes in its net assets, and the financial
highlights for the periods indicated thereon, in conformity with generally
accepted accounting principles.
Cincinnati, Ohio Arthur Andersen LLP
January 20, 1998
21
<PAGE> 45
================================================================================
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. Harrison
Walter G. Sall
William H. Schneebeck
22
<PAGE> 46
GATEWAY
SMALL CAP INDEX
FUND
(LOGO)
Annual Report
1997
(LOGO)
THE GATEWAY TRUST
P.O. BOX 5211
CINCINNATI, OH 45201-5211
(800) 354-6339
<PAGE> 47
================================================================================
GATEWAY SMALL CAP INDEX FUND
Highlights at December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------
Past One Three Five Ten Since Inception Dividends Price
Quarter Year Years Years Years on 6/16/93 Year to Date Per Share
------- ---- ----- ----- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GATEWAY SMALL CAP
INDEX FUND (4.22%) 20.64% 19.81% N/A N/A 12.69% $1.0695 $13.48
Wilshire Small Cap Index (5.10) 26.76 24.39 n/a n/a
Russell 2000 (3.35) 22.36 22.33 16.41 15.76
U. S. Inflation (CPI) 0.60 2.02 2.63 2.66 3.44
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 6/16/93
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
GATEWAY SMALL CAP
INDEX FUND (4.22%) 20.64% 72.00% N/A N/A 72.20%
Wilshire Small Cap Index (5.10) 26.76 92.49 n/a n/a
Russell 2000 (3.35) 22.36 83.05 113.77 332.10
U. S. Inflation (CPI) 0.60 2.02 8.09 14.03 40.22
</TABLE>
PERFORMANCE DATA THROUGHOUT THIS REPORT REPRESENTS PAST PERFORMANCE. THE AVERAGE
ANNUAL TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF DIVIDENDS. YOUR
INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT
YOUR SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
THIS REPORT MUST BE PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
1
<PAGE> 48
================================================================================
GATEWAY SMALL CAP INDEX FUND
Letter from the Chairman
- --------------------------------------------------------------------------------
Dear Shareholder:
The stock market continued to benefit from an abundance of favorable economic
news in 1997. As interest rates, inflation rates, and unemployment fell to
thirty-year lows, corporate profits expanded sharply, government tax receipts
increased, and the federal deficit nearly disappeared.
Small capitalization stocks participated in the advance, although not as
dramatically as the multinational S&P 500 stocks. Domestic companies have less
exposure to rapid growth economies in overseas markets. Consequently they may
not appear to grow quite as fast as S&P 500 companies when the world economy is
booming. They are the place to be, however, when the world economy catches a
cold.
In the accompanying portfolio manager's report, Patrick Rogers describes the
year in detail and his judicious use of hedging transactions to alter the
portfolio's risk/reward profile.
As 1998 unfolds, smaller domestic companies may be insulated from the stormy
winds buffeting foreign markets. Certainly further economic growth in the U. S.
should permit these smaller companies to enhance their market prospects.
We look forward with enthusiasm to 1998.
Cordially,
/s/ WALTER G. SALL
- ------------------
Walter G. Sall
Chairman
2
<PAGE> 49
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
We are pleased to report on the Gateway Small Cap Index Fund for the calendar
year ended December 31, 1997. Over the past twelve months, the Fund produced a
total return of 20.64%. This compares to the 22.36% return earned by the Russell
2000, a commonly used benchmark for small cap investing. The S&P 500, indicative
of large cap performance, produced a gain of 33.36% over the same time period.
The year 1997 was a continuation of what has transpired over the past three
years with big blue chip stocks outperforming their smaller brethren.
The Gateway Small Cap Index Fund invests in the 250 stocks represented in the
Wilshire Small Cap Index with a median market capitalization of $933 million.
The portfolio is broadly diversified over numerous industry groups, the largest
of which is "Finance, Insurance & Real Estate" at 20.90%. The top ten holdings,
listed below, represent only 9.98% of the Fund.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
GATEWAY SMALL CAP INDEX FUND
TOP TEN HOLDINGS
- ---------------------------------------------------------------------------------------
STOCKS AS A PERCENTAGE OF NET ASSETS
- ---------------------------------------------------------------------------------------
<S> <C>
Fred Meyer, Inc. 1.45%
First Commerce Corporation 1.15%
People's Bank 1.03%
Catellus Development Corporation 0.97%
Bergen Brunswig Corporation 0.97%
Western National Corporation 0.92%
Citrix Systems, Inc. 0.91%
Intuit Inc. 0.89%
Sovereign Bancorp, Inc. 0.85%
American Bankers Insurance Group, Inc. 0.84%
- ---------------------------------------------------------------------------------------
</TABLE>
On the following page, we analyze the different components of the Fund's total
return. The "Effect of Put Options" shows how this hedging technique has served
to reduce the risk of the Fund in relation to its comparable index. According to
Morningstar, the mutual fund
3
<PAGE> 50
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio Manager's Report
- --------------------------------------------------------------------------------
industry's most recognized rating service, the Gateway Small Cap Index Fund's
beta is 0.80 compared to the Russell 2000. This means the Fund has historically
been 20% less risky than this particular index.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
GATEWAY SMALL CAP INDEX FUND
1997
- ----------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks (0.95%) 13.89% 16.84% (5.31%)
Dividends Earned 0.32 0.35 0.25 0.25
INTEREST EARNED 0.01 0.05 0.05 0.04
CONTRIBUTIONS OF OPTIONS
Effect of Put Options (0.81) (2.34) (1.62) 1.20
EFFECT OF FEES
Fund Expenses (0.37) (0.38) (0.37) (0.38)
Brokerage Commissions (0.02) (0.08) (0.07) (0.02)
- ----------------------------------------------------------------------------------
TOTAL RETURN (1.82%) 11.49% 15.08% (4.22%)
- ----------------------------------------------------------------------------------
</TABLE>
Looking ahead in 1998, we do not expect that the overall market will advance at
the feverish pace of the past three years, but more likely that it will return
to more historical norms. In addition, we believe the small cap sector should
outpace the big blue chip stocks. On a valuation basis, many Wall Street
analysts are recommending the stocks represented in the Gateway Small Cap Index
Fund.
On behalf of the entire staff at Gateway, we appreciate your support and we will
continue to work hard to retain your trust and confidence.
/s/ J. PATRICK ROGERS, CFA
- --------------------------
J. Patrick Rogers, CFA
Portfolio Manager
4
<PAGE> 51
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & EQUIPMENT 1.73%
1,600 B/E Aerospace, Inc. * $ 42,850
1,400 Kaman Corporation 23,450
2,700 Teleflex Incorporated 102,009
1,300 Thiokol Corporation 105,666
------------
273,975
------------
APPAREL 1.62%
1,300 Brown Group, Inc. 17,347
1,800 Gymboree Corp. * 49,388
1,600 Kellwood Company 48,050
3,500 Stride Rite Corp. 42,000
2,100 Westpoint Stevens Inc. * 99,881
------------
256,666
------------
AUTOMOBILES & PARTS 1.80%
1,800 Arvin Industries, Inc. 59,963
1,200 Clarcor Inc. 35,663
2,600 Federal-Mogul Corporation 105,381
2,000 Superior Industries International, Inc. 53,625
1,200 The Standard Products Co. 30,825
------------
285,457
------------
BUILDING MATERIALS & CONSTRUCTION 2.62%
2,100 Centex Corporation 132,169
2,800 Kaufman and Broad Home Corporation 62,738
2,600 Lennar Corporation 56,144
1,500 Pulte Corporation 62,719
1,700 Southdown Inc. 100,300
------------
414,070
------------
BUSINESS SERVICES & SUPPLIES 2.90%
2,600 AMRESCO, Inc. * 77,838
3,400 APAC TeleServices Inc. * 46,325
2,400 Coventry Corporation * 36,225
2,027 Information Resources, Inc. * 27,238
3,000 Pittston Brink's Group 120,938
2,500 Rollins, Inc. 50,781
4,100 Sotheby's Holdings, Inc. 75,978
1,300 The Profit Recovery Group International, Inc. * 23,319
------------
458,642
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 52
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS 0.73%
700 Chemed Corporation $ 29,094
1,000 Fuller (H. B.) Company 49,750
3,300 Lawter International, Inc. 35,888
------------
114,732
------------
COMPUTER SOFTWARE & PERIPHERALS 7.60%
3,000 American Management Systems Inc. * 58,313
1,500 Broderbund Software, Inc. * 38,484
2,400 Cerner Corporation * 51,150
1,900 Citrix Systems Inc. * 144,459
4,600 Computervision Corporation * 17,538
1,200 Envoy Corp. * 35,175
1,600 Exabyte Corporation * 10,450
1,300 Hyperion Software Corp. * 46,800
3,400 Intuit Inc. * 140,463
2,800 Macromedia, Inc. * 23,363
1,291 Networks Associates Inc. * 68,141
2,900 PSINet Inc. * 15,044
6,300 Rational Software Corporation * 72,450
3,600 S3 Incorporated 18,113
1,800 Shared Medical Systems Corporation 118,688
2,424 Structural Dynamics Research Corporation * 54,843
5,700 Sybase Inc. * 76,059
3,900 Symantec Corporation * 86,166
2,900 Symbol Technologies, Inc. * 109,475
1,600 Xircom Inc. * 16,150
------------
1,201,324
------------
ELECTRONICS & COMPUTERS 6.44%
3,500 Aspect Telecommunications Corp. * 73,500
2,600 Baldor Electric Company 56,550
4,900 Cirrus Logic, Inc. * 52,216
2,900 DSP Communications, Inc. * 34,891
2,900 ESS Technology Inc. * 22,158
4,900 Geotek Communications, Inc. * 7,427
4,400 Glenayre Technologies * 43,725
1,400 Hutchinson Technology Incorporated * 30,800
5,800 Integrated Device Technology, Inc. * 54,738
2,800 Kemet Corporation * 54,075
2,700 Lam Research Corporation * 79,144
1,600 Lattice Semiconductor Corporation * 76,000
1,155 National Semiconductor Corporation * 29,886
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 53
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS & COMPUTERS - Continued
3,000 Oak Technology, Inc. * $ 19,688
7,500 Paging Network Inc. * 80,859
2,900 Sequent Computer Systems, Inc. * 58,181
2,100 Shiva Corp. * 18,113
2,600 Vitesse Semiconductor Corporation * 98,963
3,400 VLSI Technology, Inc. * 80,325
3,100 Xylan Corp. * 47,081
------------
1,018,320
------------
ENERGY 5.60%
2,300 Barrett Resources Corp. * 69,359
2,100 Benton Oil and Gas Co. 27,038
1,700 Forcenergy Inc. * 44,413
8,400 Harken Energy Corporation * 57,750
1,500 Lomak Petroleum, Inc. 24,281
3,700 Marine Drilling Companies, Inc. * 77,006
2,000 ONEOK Inc. 80,688
2,400 Pogo Producing Company 70,875
3,400 Pride International Inc. * 86,063
2,600 Quaker State Corporation 37,131
4,600 Seagull Energy Corporation * 94,588
2,000 Southwest Gas Corporation 37,438
1,800 Southwestern Energy Company 23,288
1,210 Swift Energy Company * 25,561
2,000 Tesoro Petroleum Corporation * 31,063
4,600 Varco International, Inc. * 98,613
------------
885,155
------------
FINANCE, INSURANCE & REAL ESTATE 20.90%
3,600 20th Century Industries 94,050
3,200 Advanta Corp. 84,000
2,900 American Bankers Insurance Group, Inc. 133,128
2,100 Americredit Corp. * 58,275
2,800 Arcadia Financial Ltd. * 20,913
1,900 Astoria Financial Corporation 106,400
2,000 Bank United Corp. 98,375
7,700 Catellus Development Corporation * 153,759
3,200 City National Corporation 118,100
1,300 Coast Savings Financial, Inc. * 89,213
3,400 Credit Acceptance Corporation * 26,775
2,700 First Commerce Corporation 182,081
600 Foremost Corporation of America 41,850
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 54
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE, INSURANCE & REAL ESTATE - Continued
3,500 Golden State Bancorp Inc. * $ 130,922
1,000 Great Financial Corporation 51,375
2,800 Imperial Credit Industries, Inc. * 57,925
1,800 John Alden Financial Corporation 43,425
1,000 Life Re Corporation 65,281
1,700 Long Island Bancorp, Inc. 84,575
2,400 Magna Group, Inc. 109,800
12,500 Mercury Finance Co. * 7,813
4,000 Mid Atlantic Medical Services * 51,250
4,200 Money Store Inc. 88,331
1,300 NAC Re Corporation 63,538
900 ONBANCorp., Inc. 63,788
4,250 People's Bank 162,297
8,000 Reliance Group Holdings, Inc. 112,500
2,200 Riggs National Corporation 59,400
3,000 Rollins Truck Leasing Corp. 53,719
3,000 Roslyn Bancorp, Inc. 69,844
6,440 Sovereign Bancorp, Inc. 133,831
2,500 St. Paul Bancorp Inc. 65,469
1,400 The Liberty Corporation 65,450
2,800 The Quick & Reilly Group, Inc. 120,575
2,100 United Companies Financial Corporation 32,550
3,098 Valley National Bancorp 121,790
3,300 Washington Federal, Inc. 103,847
4,900 Western National Corporation 145,316
1,300 Zenith National Insurance Corp. 33,516
------------
3,305,046
------------
FOOD, BEVERAGE & TOBACCO 2.26%
4,100 Chiquita Brands International 66,497
2,000 Dreyer's Grand Ice Cream, Inc. 48,500
6,400 Flowers Industries, Inc. 131,400
3,108 Imperial Holly Corp. 33,804
1,300 International Multifoods Corporation 36,766
2,400 Ralcorp Holdings, Inc. * 40,650
------------
357,617
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 55
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH 7.72%
2,100 Acuson Corporation * $ 34,913
2,700 Advanced Tissue Sciences Inc. * 33,244
2,200 Agouron Pharmaceuticals, Inc. * 64,419
2,200 Alliance Pharmaceutical Corp. * 15,675
1,000 ATL Ultrasound Inc. * 46,125
2,100 Ballard Medical Products 50,859
3,650 Bergen Brunswig Corporation 153,642
1,516 Block Drug Company Inc. 65,567
1,900 Cephalon, Inc. * 21,672
3,800 Dentsply International Inc. 117,431
1,000 Diagnostic Products Corporation 27,750
2,400 FPA Medical Management Inc. * 45,000
2,100 Gilead Sciences, Inc. * 80,588
1,900 Haemonetics Corporation * 26,956
733 Herbalife International Inc. Class A Stock 15,767
2 Herbalife International Inc. Class B Stock 36
2,700 ICN Pharmaceuticals, Inc. 131,963
1,900 Integrated Health Services, Inc. 59,375
2,000 Lincare Holdings Inc. * 114,500
5,600 Perrigo Company * 77,000
2,700 The Liposome Company Inc. * 12,572
2,400 Vivus Inc. * 25,575
------------
1,220,629
------------
MACHINERY & RELATED PRODUCTS 2.35%
2,900 Cincinnati Milacron Inc. 75,038
1,700 Gerber Scientific, Inc. 33,734
1,800 Kennametal Inc. 93,319
800 Lawson Products, Inc. * 23,950
600 NACCO Industries, Inc. 64,256
2,300 Silicon Valley Group, Inc. * 52,325
900 Zurn Industries, Inc. 28,350
------------
370,972
------------
MINING & METALS 1.09%
1,600 Coeur d'Alene Mines Corporation 14,350
1,700 Donaldson Company, Inc. 76,659
10,100 Echo Bay Mines Ltd. 24,934
4,000 Hecla Mining Company * 19,875
3,000 Pegasus Gold Inc. * 1,969
1,200 Zoltek Companies, Inc. * 33,825
------------
171,612
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 56
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS 1.66%
1,700 Avid Technology, Inc. * $ 45,581
3,300 Aztar Corporation * 20,728
3,000 Grand Casinos Inc. * 40,969
3,000 Kimball International, Inc. 55,594
3,700 Playtex Products Inc. * 38,041
1,200 Showboat, Inc. 35,288
2,600 Station Casinos, Inc. * 26,488
------------
262,689
------------
OTHER CONSUMER DURABLES 3.35%
2,200 Albany International Corp. 50,531
900 Bassett Furniture Industries, Inc. 27,253
3,000 GenCorp Inc. 74,813
2,200 HON INDUSTRIES, Inc. 129,525
1,300 La-Z-Boy Incorporated 56,144
3,750 Mohawk Industries Inc. * 82,266
500 NCH Corporation 32,781
1,600 Russ Berrie and Company, Inc. 42,200
1,300 Stanhome Inc. 33,475
------------
528,988
------------
OTHER INDUSTRIAL CYCLICALS 2.89%
2,000 ACX Technologies, Inc. * 48,875
1,200 Brush Wellman Inc. 29,475
2,200 Carlisle Companies Incorporated 94,050
3,500 Data General Corporation * 60,922
600 MAXXAM Inc. * 26,250
3,100 OMI Corp. * 28,966
2,700 Overseas Shipholding Group, Inc. 59,063
2,100 The Standard Register Company 73,041
1,200 The West Company, Incorporated 35,738
------------
456,380
------------
PAPER & FOREST PRODUCTS 1.49%
1,700 Chesapeake Corporation 58,597
3,800 Gaylord Container Corporation * 22,088
2,800 Pentair, Inc. 100,800
2,663 Wausau Mosinee Paper Corp. * 54,259
------------
235,744
------------
PRECISION INSTRUMENTS 0.83%
2,100 Beckman Instruments, Inc. 84,131
1,600 Credence Systems Corporation * 47,300
------------
131,431
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 57
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL 5.34%
3,200 Best Buy Co., Inc. * $ 118,400
7,700 Charming Shoppes, Inc. * 35,853
2,100 Eagle Hardware & Garden, Inc. * 40,819
2,700 Fleming Companies, Inc. 36,450
6,300 Fred Meyer, Inc. * 228,966
2,200 Lands' End, Inc. 77,206
1,800 Mac Frugal's Bargainso Close-outs Inc. * 74,081
2,500 Micro Warehouse, Inc. * 34,922
3,400 Ross Stores, Inc. 123,888
4,000 Sunglass Hut International Inc. 25,375
1,700 The Dress Barn, Inc. * 47,866
------------
843,826
------------
SERVICES 9.83%
1,600 Airborne Freight Corporation 99,350
1,100 Alaska Air Group, Inc. * 42,556
1,900 Arnold Industries, Inc. 32,300
2,200 Banta Corporation 60,088
2,900 Calgon Carbon Corporation 31,628
2,257 Chris-Craft Industries, Inc. * 118,069
6,900 Extended Stay America Inc. * 85,603
1,200 Gibson Greetings, Inc. * 26,400
1,900 Golden Books Family Entertainment, Inc. * 19,653
2,200 Houghton Mifflin Company 84,631
2,700 Hunt (J. B.) Transport Services, Inc. 50,794
1,600 International Dairy Queen, Inc. * 42,900
3,000 Lone Star Steakhouse & Saloon, Inc. * 52,688
1,700 Luby's Cafeterias, Inc. 29,963
1,000 New England Business Service, Inc. 33,813
2,100 Papa John's International * 73,369
3,000 Pixar Animation Studios * 65,438
1,533 Pulitzer Publishing Company 96,292
2,600 Regal Cinemas Inc. * 72,800
1,300 Ruby Tuesday, Inc. 33,556
1,500 Sbarro, Inc. 39,516
1,300 Shorewood Packaging Corporation * 34,938
1,800 TCA Cable TV, Inc. 83,363
3,100 Wallace Computer Services, Inc. 120,416
2,700 World Color Press, Inc. * 71,888
2,100 Yellow Corporation * 52,697
------------
1,554,709
------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 58
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
STEEL & IRON 1.09%
4,000 AK Steel Holding Corporation $ 70,625
2,200 Birmingham Steel Corporation 34,788
1,400 Carpenter Technology Corporation 67,375
-----------
172,788
-----------
UTILITIES 6.27%
1,200 ACC Corp. * 60,750
3,600 Brightpoint, Inc. * 49,950
1,300 Central Hudson Gas & Electric Corporation 57,119
1,000 CILCORP Inc. 48,969
1,500 Eastern Utilities Associates 39,375
2,150 MDU Resources Group, Inc. 67,994
4,000 Mobile Telecommunication Tech Corp. * 88,500
9,400 Northeast Utilities * 110,450
2,367 NTL Inc. * 65,832
1,000 Orange and Rockland Utilities, Inc. 46,594
3,000 Public Service Company of New Mexico 71,063
2,200 Sierra Pacific Resources 82,431
1,750 Southern Indiana Gas & Electric Co. 51,406
2,400 UGI Corporation 70,350
2,380 Unisource Energy Corp. Holding Co. * 43,212
2,900 Vanguard Cellular Systems, Inc. * 37,066
-----------
991,061
-----------
TOTAL COMMON STOCKS 98.11% $15,511,833
-----------
(cost $12,997,696)
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 59
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- ----------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT 2.57%
5.5% repurchase agreement dated December 31, 1997
with Star Bank, N.A., due January 2, 1998
(repurchase proceeds $407,124) collateralized
by 7.0% GNMA Pool #8359, maturity
January 20, 2024 with face value $435,000
and market value $444,652 $ 407,000
-----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 100.68% 15,918,833
OTHER ASSETS AND LIABILITIES, NET (0.68%) (107,732)
-----------
NET ASSETS 100% $15,811,101
===========
* Denotes a non-income producing security.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
13
<PAGE> 60
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Assets and Liabilities - December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $12,997,696) $15,511,833
Repurchase agreement 407,000
Receivable for fund shares sold 14,990
Dividend and interest receivable 11,963
Cash 1,713
Other assets 6,322
-----------
15,953,821
-----------
LIABILITIES:
Dividends payable to shareholders 132,215
Other accrued expenses and liabilities 10,505
----------
142,720
----------
NET ASSETS $15,811,101
===========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 1,173,324 shares outstanding
(unlimited number of shares authorized, no par value) $13,285,278
Accumulated realized gain, net 11,686
Unrealized appreciation, net 2,514,137
-----------
$15,811,101
===========
NET ASSET VALUE, OFFERING, AND REDEMPTION
PRICE PER SHARE $13.48
======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 61
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Operations - For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 151,264
Interest income 21,977
----------
173,241
----------
EXPENSES:
Investment advisory and management fees 118,875
Transfer agent and accounting fees 78,820
Registration fees 18,823
Custodian fees 17,995
Reports to shareholders 13,968
Professional fees 12,672
Trustees' fees 5,997
Other expenses 4,584
----------
271,734
Fees waived under contract (73,783)
----------
Net operating expenses 197,951
----------
NET INVESTMENT
LOSS (24,710)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on investments:
Securities 1,422,118
Put options expired and closed (266,475)
----------
1,155,643
----------
Increase in unrealized appreciation of investments:
Securities 1,117,523
Put options 20,727
----------
1,138,250
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,293,893
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,269,183
==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
15
<PAGE> 62
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
----------- -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment (loss) income $ (24,710) $ 3,184
Net realized gain on investments 1,155,643 730,933
Increase in unrealized appreciation of investments 1,138,250 866,253
----------- -----------
Net increase in net assets resulting from operations 2,269,183 1,600,370
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (3,184)
From net realized gain on investments (1,171,153) (737,327)
----------- -----------
Decrease in net assets from dividends and distributions (1,171,153) (740,511)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 5,882,790 2,678,237
Net asset value of shares issued in reinvestment of dividends and 1,038,765 688,952
distributions
Payments for shares redeemed (3,129,370) (2,724,199)
----------- -----------
Net increase in net assets from fund share transactions 3,792,185 642,990
----------- -----------
NET INCREASE IN NET ASSETS 4,890,215 1,502,849
NET ASSETS:
Beginning of year 10,920,886 9,418,037
----------- -----------
End of year $15,811,101 $10,920,886
=========== ===========
FUND SHARE TRANSACTIONS:
Shares sold 425,462 218,498
Shares issued in reinvestment of dividends and distributions 77,073 57,127
Less shares redeemed (234,446) (222,488)
----------- -----------
NET INCREASE IN SHARES OUTSTANDING 268,089 53,137
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
16
<PAGE> 63
================================================================================
GATEWAY SMALL CAP INDEX FUND
Financial Highlights - Per share data for a share outstanding throughout
each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From June 16,
to
Year Ended December 31, December 31,
1997 1996 1995 (3) 1994 1993
---- ---- -------- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.06 $11.05 $ 9.63 $10.35 $10.00
------- ------- ------- ------- -------
Net investment income (loss) (0.02) 0.01 0.03 (0.02) 0.04
Net gains (losses) on securities 2.51 1.87 2.07 (0.60) 0.61
------- ------- ------- ------- -------
Total from investment operations 2.49 1.88 2.10 (0.62) 0.65
------- ------- ------- ------- -------
Dividends from net investment income -- (0.01) (0.01) -- (0.04)
Distributions from capital gains (1.07) (0.86) (0.67) (0.10) (0.26)
------- ------- ------- ------- -------
Total distributions (1.07) (0.87) (0.68) (0.10) (0.30)
------- ------- ------- ------- -------
Net asset value, end of period $13.48 $12.06 $11.05 $ 9.63 $10.35
======= ======= ======= ======= =======
TOTAL RETURN 20.64% 17.04% 21.81% (5.99%) 6.50% (1)
Net assets, end of period (thousands) $15,811 $10,921 $9,418 $9,657 $13,002
Ratio of expenses to average net assets 1.50% 1.50% 1.68% 2.00% 1.92% (2)
Ratio of net investment income (loss) to
average net assets (0.19%) 0.03% 0.09% (0.14%) 0.98% (2)
Portfolio turnover rate 32% 20% 20% 39% 3% (1)
Average commission per share $0.0401 $0.0371 -- (4) -- (4) -- (4)
</TABLE>
(1) Not annualized.
(2) The ratio of net expenses to average net assets would have increased and
the ratio of net investment income to average net assets would have
decreased by 0.08% in 1993 had the Adviser not voluntarily reimbursed
expenses. Ratios are annualized in periods less than one year.
(3) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
(4) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
17
<PAGE> 64
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of four no-load diversified mutual
funds. The financial statements of Gateway Small Cap Index Fund (the Fund) are
included in this report. The primary investment objective of the Fund is
long-term growth of capital. The Fund attempts to achieve its investment
objective primarily by investing in the 250 stocks included in the Wilshire
Small Cap Index, and by purchasing put or call options on an index. The
financial statements of Gateway Index Plus Fund, Gateway Mid Cap Index Fund, and
the Cincinnati Fund are included in separate reports. The Trust is registered
under the Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks and option
contracts at the average of the closing bid and asked quotations. Other
securities for which market quotations are not readily available are valued at
fair value as determined in good faith under procedures adopted by the board of
trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies approved by
the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from
net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid to shareholders annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all taxable income to the shareholders.
Based on this policy, the Fund makes no provision for income taxes. The cost of
investments is the same for financial reporting and tax purposes.
At December 31, 1997, gross unrealized appreciation of common stocks totaled
$3,999,417 and gross unrealized depreciation totaled $1,485,280, based on the
cost of investments.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION OF CAPITAL ACCOUNTS -- During the year ended December 31, 1997,
the Fund reclassified $24,710 from undistributed net investment income to
paid-in capital. This reclassification, which had no impact on total net assets,
is due to tax regulations not permitting the carryforward of net investment
losses to future periods.
18
<PAGE> 65
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser a monthly investment advisory and management fee
computed at an annual rate of 0.90% of the first $50 million of the average
daily net assets of the Fund, 0.70% of the next $50 million, and 0.60% of all
such assets over $100 million.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 2.00% of the Fund's
average daily net assets, the advisory contract requires the Adviser to waive
some or all of its advisory fee as necessary to limit the Fund's expenses to the
stated level. For 1997, the Adviser agreed to voluntarily waive some or all of
its advisory fee if the Fund's expense ratio exceeded 1.50%. Any contractual or
voluntary waiver, however, would not exceed the aggregate advisory fee paid by
the Fund for the applicable year. As a result, for the year ended December 31,
1997, the Adviser waived advisory fees of $73,783.
The Adviser maintains the Fund's accounting records for a monthly fee of $4,000.
The Adviser also provides shareholder servicing, transfer, and dividend
disbursing agent services for the Trust. The Fund reimburses the Adviser for the
cost to provide these services subject to a minimum monthly fee of $2,500 and a
limitation of 0.20% of average daily net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At December 31, 1997, the Adviser held in a fiduciary capacity, 41% of the
Fund's outstanding shares.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1997, purchases of investment securities
(excluding short-term investments) totaled $6,304,562, and proceeds from sales
totaled $4,067,123.
The Fund may buy put or call options on stock indexes. The purchase of options
involves the risk of loss of all or part of the cash paid for the options. The
value of purchased puts increases to offset declines and decreases to offset
rises in the portfolio value. The value of purchased calls increases
proportionately to the value of the underlying index.
19
<PAGE> 66
================================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Gateway Small Cap Index Fund of
The Gateway Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Gateway Small Cap Index Fund (one of the
funds constituting THE GATEWAY TRUST) (an Ohio business trust) as of December
31, 1997, and the related statement of operations, the statements of changes in
net assets, and the financial highlights for the periods indicated thereon.
These financial statements and financial highlights are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gateway Small Cap Index Fund of The Gateway Trust as of December 31, 1997, the
results of its operations, the changes in its net assets, and the financial
highlights for the periods indicated thereon, in conformity with generally
accepted accounting principles.
Cincinnati, Ohio Arthur Andersen LLP
January 20, 1998
20
<PAGE> 67
================================================================================
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. Harrison
Walter G. Sall
William H. Schneebeck
21
<PAGE> 68
================================================================================
AFFORDABILITY
-------------
$1,000 Minimum Initial Investment
$500 Minimum Initial IRA Investment
$100 Minimum Additional Investment
No Annual Account Charges
No-Fee IRA Accounts
CONVENIENCE
-----------
Free Telephone Exchanges Between Gateway Funds
Automatic Investment Program
Systematic Withdrawal Program
Telephone Redemptions
FLEXIBILITY
-----------
Available for numerous investment options:
Individuals
IRAs
Trusts
Pension Plans
Gifts to Minors
================================================================================
<PAGE> 69
CINCINNATI
===FUND===
ANNUAL REPORT
1997
CINCINNATI
===FUND===
P. O. BOX 5211 * CINCINNATI, OHIO 45201-5211
(800) 354-5525
<PAGE> 70
CINCINNATI FUND(R)
- ------------------------Highlights at December 31, 1997-------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------
Past One Three Five Ten Since Inception Price
Quarter Year Years Years Years on 11/7/94 Per Share
------- ---- ----- ----- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CINCINNATI FUND(R) 7.43% 28.98% 27.93% N/A N/A 26.10% $18.98
S&P 500 2.87 33.36 31.15 20.27 18.04
Lehman Gov't./Corp. Bond 3.21 9.75 10.43 7.61 9.15
U. S. Inflation (CPI) 0.60 2.02 2.63 2.66 3.44
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 11/7/94
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
CINCINNATI FUND(R) 7.43% 28.98% 109.39% N/A N/A 107.50%
S&P 500 2.87 33.36 125.60 151.61 425.23
Lehman Gov't./Corp. Bond 3.21 9.75 34.67 44.30 139.98
U. S. Inflation (CPI) 0.60 2.02 8.09 14.03 40.22
</TABLE>
PERFORMANCE DATA THROUGHOUT THIS REPORT REPRESENTS PAST PERFORMANCE. THE
AVERAGE ANNUAL TOTAL RETURN FIGURES ASSUME THE REINVESTMENT OF DIVIDENDS.
YOUR INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE
SO THAT YOUR SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST.
THIS REPORT MUST BE PRECEDED BY OR ACCOMPANIED BY A PROSPECTUS.
- --------------------------------------------------------------------------------
1 CINCINNATI FUND
<PAGE> 71
CINCINNATI FUND(R)
- ----------------------------Letter from the Chairman----------------------------
Dear Shareholder:
The Cincinnati business community experienced another outstanding year
in 1997. Its continued growth was no accident. Hard work and good
decision-making by its dedicated Midwestern work force has allowed Cincinnati
companies to outpace their peers throughout the country. The diversification of
our local companies adds to the stability and solidity that our region is known
for. The Cincinnati Fund(R) is proud to be able to deliver the financial
benefits of its midwestern portfolio to its shareholders.
In his accompanying report, portfolio manager Patrick Rogers describes
his stewardship of the Fund's portfolio of excellent companies -- both large and
small. His focus on the values of "Main Street" brings you the fruits of "Wall
Street."
We are pleased to report that Cincinnati Fund shareholders as of
December 31, 1996, gained a lot of company in 1997. The total number of
shareholders increased in 1997 from less than 900 to over 2,500. As the Fund's
shareholder base and assets increase, expenses will continue to fall - a benefit
to all shareholders.
Your management team looks forward to further growth in the Cincinnati
business community in 1998. We are pleased to count you among our shareholders.
Cordially,
/s/ WALTER G. SALL
------------------
Walter G. Sall
Chairman
- --------------------------------------------------------------------------------
CINCINNATI FUND 2
<PAGE> 72
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1997-----------------
We are pleased to report on another strong year of performance for the
Cincinnati Fund(R). For the twelve months ended December 31, 1997, the Fund
produced a total return of 28.98%. Since its inception on November 7, 1994, the
Cincinnati Fund's annualized return was 26.10%.
We are quite proud of achieving these results at risk levels which have
proven to be lower than the overall market or than comparable stock funds. The
conservative nature of Cincinnati has definitely made its mark on the Fund.
According to Morningstar, the mutual fund industry's most recognized rating
service, the Cincinnati Fund's beta is 0.63 compared to the S&P 500. This means
the Fund has historically been 37% less risky than this particular index.
This pattern of more consistent performance relative to major indexes
was evident in reviewing the quarterly performance of the Cincinnati Fund during
1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cincinnati Fund(R) 1.17% 9.50% 8.38% 7.43%
S&P 500 2.68 17.46 7.49 2.87
Russell 2000 (5.17) 16.21 14.88 (3.35)
- ------------------------------------------------------------------------------------------
</TABLE>
------Top Holdings------
No significant changes were made in the top ten holdings during the
past year. Our philosophy is to follow a "buy and hold" strategy. When we
started this fund, our major belief was that local stocks were excellent
investments over a long period of time. As such, the Cincinnati Fund's portfolio
turnover rate of 17% in 1997 is quite low for an equity fund.
- --------------------------------------------------------------------------------
3 CINCINNATI FUND
<PAGE> 73
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1997-----------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Top Ten Holdings
As of December 31, 1997
- --------------------------------------------------------------------------------
Stocks As a Percentage of Net Assets
- --------------------------------------------------------------------------------
<S> <C>
Cincinnati Bell Inc. 4.96%
Cinergy Corp. 4.57%
The Procter & Gamble Company 4.55%
The Kroger Co. 4.47%
Cincinnati Financial Corporation 4.13%
Comair Holdings, Inc. 3.84%
Fifth Third Bancorp 3.40%
Federated Department Stores, Inc. 3.39%
General Electric Company 3.18%
Cincinnati Milacron Inc. 3.10%
- --------------------------------------------------------------------------------
</TABLE>
------Top Performers------
Similar to previous years, the Fund's gains were broadly based across
many industries. Of the fifty-three stocks held in the Fund for the entire year,
forty-seven produced a positive rate of return. This is a continuation of not
only the favorable environment for stocks, but also the excellent conditions of
the midwest economy. The Fund's best percentage performers during 1997 among
local stocks are shown on the next page.
- --------------------------------------------------------------------------------
CINCINNATI FUND 4
<PAGE> 74
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1997-----------------
<TABLE>
<CAPTION>
----------------------------------------------------------
Top Ten Performers
January 1, 1997 to December 31, 1997
----------------------------------------------------------
<S> <C>
NS Group, Inc. 283.3%
Cincinnati Financial Corporation 117.0%
Fifth Third Bancorp 95.2%
Jacor Communications, Inc. 94.1%
Star Banc Corporation 87.4%
The Midland Company 63.6%
The Kroger Co. 58.1%
American Annuity Group, Inc. 55.8%
Comair Holdings, Inc. 50.8%
The Procter & Gamble Co. 48.3%
----------------------------------------------------------
</TABLE>
The financial stocks owned by the Fund continued to be outstanding
performers during 1997. Cincinnati Financial Corporation, after a few years of
unspectacular performance, more than doubled this past year. Much of the gain
was attributable to recognition finally received for the outstanding management
of this local insurer. The icing on the cake was the December 16 announcement by
Standard and Poor's that Cincinnati Financial Corporation was being added to the
S&P 500. The stock jumped 22% in the following two days!
Another well-managed local finance concern in the S&P 500 made
considerable news during the fourth quarter. Fifth Third Bancorp announced three
sizeable acquisitions/ mergers in late 1997 and early 1998: Citfed Bancorp, a
$3.3 billion banking corporation in Dayton; State Savings, a $2.8 billion
privately held thrift in Columbus; and the Ohio Company, a full service broker,
dealer, and underwriter also headquartered in Columbus. These sizeable
transactions will not only increase Fifth Third's market share outside of
Cincinnati, but also provide an excellent platform to market a growing array of
financial products.
- --------------------------------------------------------------------------------
5 CINCINNATI FUND
<PAGE> 75
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1997-----------------
Lastly, Wall Street analysts are finally singing the praises of Comair
Holdings, Inc. and the stock performance has followed. The strategic plan to
move to an all-regional jet fleet has not only proven to be financially sound,
but has led Comair to be viewed as a major regional airline instead of just a
commuter. Clearly, Delta's commitment to our airport has provided Comair with
the infrastructure to enjoy a growth rate that is the envy of the industry.
------Looking into 1998------
Will this terrific bull market and, consequently, the Cincinnati Fund
performance continue? It's hard to believe it will at the pace enjoyed over the
past three years. However, we remain confident in the Cincinnati Fund's ability
to deliver excellent results relative to the overall market. Our economy remains
strong, the interest rate environment is favorable, and executive management of
local companies continues to impress. Finally, we continue to have great faith
in the resource upon which all of Cincinnati area's past, present, and future
success has depended -- its hardworking citizens.
As always, all of us at Gateway thank you for your support -- we look
forward to serving you in the years ahead.
/s/ J. PATRICK ROGERS, CFA
--------------------------
J. Patrick Rogers, CFA
Portfolio Manager
- --------------------------------------------------------------------------------
CINCINNATI FUND 6
<PAGE> 76
CINCINNATI FUND(R)
- --------------------Industry Weightings - December 31, 1997---------------------
(Pie Chart)
Energy - 1.23%
Technology - 8.16%
Finance - 23.18%
Industrial Cyclicals - 9.20%
Consumer Staples - 8.19%
Services - 15.17%
Consumer Durables - 5.28%
Retail - 10.75%
Health - 4.89%
Utilities - 12.43%
As a percentage of net assets
- --------------------------------------------------------------------------------
7 CINCINNATI FUND
<PAGE> 77
CINCINNATI FUND(R)
- ------------------Portfolio of Investments - December 31, 1997------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
CONSUMER DURABLES 5.28%
11,100 Cintas Corporation $ 433,594
5,000 Ford Motor Company 243,438
4,100 General Motors Corporation 248,691
----------
925,723
----------
CONSUMER STAPLES 8.19%
21,000 Chiquita Brands International 340,594
3,300 Heinz (H. J.) Company 167,888
2,300 Sara Lee Corporation 129,519
10,000 The Procter & Gamble Company 798,125
----------
1,436,126
----------
ENERGY 1.23%
4,000 Ashland, Inc. 214,625
----------
FINANCE 23.18%
2,500 American Annuity Group, Inc. 55,234
8,800 American Financial Group, Inc. 355,300
2,160 Banc One Corporation 117,315
5,143 Cincinnati Financial Corporation 723,234
12,000 Duke Realty Investments, Inc. 290,625
7,299 Fifth Third Bancorp 596,237
847 First Financial Bancorp 41,503
2,116 Huntington Bancshares Incorporated 76,044
19,100 McDonald & Company Investments, Inc. 541,963
4,500 Ohio Casualty Corporation 203,063
800 PNC Bank Corp. 45,650
7,925 Provident Financial Group, Inc. 386,839
8,800 Star Banc Corporation 504,625
2,000 The Midland Company 126,000
----------
4,063,632
----------
HEALTH 4.89%
5,500 Duramed Pharmaceuticals, Inc. * 31,453
5,100 Johnson & Johnson 335,803
29,522 Meridian Diagnostics, Inc. 304,446
6,000 Omnicare, Inc. 185,250
----------
856,952
----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CINCINNATI FUND 8
<PAGE> 78
CINCINNATI FUND(R)
- ------------------Portfolio of Investments - December 31, 1997------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
INDUSTRIAL CYCLICALS 9.20%
14,000 AK Steel Holding Corporation $ 247,188
7,700 Chemed Corporation 320,031
21,000 Cincinnati Milacron Inc. 543,375
20,000 LSI Industries Inc. 357,500
4,300 Multi-Color Corporation * 28,488
6,000 NS Group, Inc. * 103,125
1,500 Zaring National Corp. * 13,125
----------
1,612,832
----------
RETAIL 10.75%
13,800 Federated Department Stores, Inc. * 593,831
5,500 Mercantile Stores Company, Inc. 334,297
1,000 Nine West Group Inc. * 25,938
21,200 The Kroger Co. * 783,075
3,400 Winn-Dixie Stores, Inc. 147,794
----------
1,884,935
----------
SERVICES 15.17%
10,000 Ciao Cucina Corp. * 11,250
27,788 Comair Holdings, Inc. 673,847
3,800 Delta Air Lines, Inc. 452,319
9,390 Frisch's Restaurants, Inc. 125,298
2,400 Gannett Co., Inc. 148,200
11,300 Gibson Greetings, Inc. * 248,600
2,000 Harte-Hanks Communications Inc. 74,250
6,500 Jacor Communications, Inc. * 345,719
3,000 Loewen Group Inc. 77,063
4,100 Skyline Chili, Inc. 26,650
9,800 The E.W. Scripps Company 475,300
----------
2,658,496
----------
TECHNOLOGY 8.16%
7,600 General Electric Company 557,650
4,000 Interlott Technologies Inc. * 32,500
5,000 LanVision Systems Inc. * 23,125
20,000 Medplus Inc. * 150,000
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9 CINCINNATI FUND
<PAGE> 79
CINCINNATI FUND(R)
- ------------------Portfolio of Investments - December 31, 1997------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
TECHNOLOGY - Continued
17,925 Pomeroy Computer Resources, Inc. * $ 315,928
15,500 Structural Dynamics Research Corporation * 350,711
-----------
1,429,914
-----------
UTILITIES 12.43%
8,300 AT&T 508,375
28,000 Cincinnati Bell Inc. 868,875
20,900 Cinergy Corp. 800,732
-----------
2,177,982
-----------
TOTAL COMMON STOCKS 98.48% 17,261,217
(Cost $12,118,157)
REPURCHASE AGREEMENT 2.31%
5.5% repurchase agreement dated December 31, 1997
with Star Bank, N.A., due January 2, 1998
(repurchase proceeds $404,123) collateralized
by 7.0% GNMA Pool #8359, maturity
January 20, 2024 with face value $430,000
and market value $439,541 404,000
-----------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 100.79% 17,665,217
OTHER ASSETS AND LIABILITIES, NET (0.79%) (137,951)
-----------
NET ASSETS 100.00% $17,527,266
===========
* Denotes a non-income producing security.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CINCINNATI FUND 10
<PAGE> 80
CINCINNATI FUND(R)
- ------------Statement of Assets and Liabilities - December 31, 1997-------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $12,118,157) $17,261,217
Repurchase agreement 404,000
Cash 49,962
Dividend and interest receivable 15,952
Receivable for investments sold 12,811
Other assets 3,826
-----------
17,747,768
-----------
LIABILITIES:
Dividends payable to shareholders 202,901
Payable for fund shares redeemed 7,458
Other accrued expenses and liabilities 10,143
-----------
220,502
-----------
NET ASSETS $17,527,266
===========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 923,329 shares outstanding
(unlimited number of shares authorized, no par value) $12,374,200
Undistributed net investment income 1,129
Accumulated realized gain, net 8,877
Unrealized appreciation, net 5,143,060
-----------
$17,527,266
===========
NET ASSET VALUE, OFFERING, AND REDEMPTION
PRICE PER SHARE $18.98
======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11 CINCINNATI FUND
<PAGE> 81
CINCINNATI FUND(R)
- ----------------------------Statement of Operations-----------------------------
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 187,292
Interest income 99,653
-----------
286,945
-----------
EXPENSES:
Transfer agent and accounting fees 78,957
Investment advisory and management fees 65,378
Reports to shareholders 35,561
Professional fees 15,905
Custodian fees 9,200
Trustees' fees 8,896
Registration fees 3,309
Other expenses 5,784
-----------
222,990
Fees waived voluntarily (1,281)
-----------
221,709
-----------
NET INVESTMENT INCOME 65,236
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gains 729,143
Increase in unrealized appreciation of investments 2,718,060
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,447,203
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,512,439
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CINCINNATI FUND 12
<PAGE> 82
CINCINNATI FUND(R)
- -----------------------Statements of Changes in Net Assets----------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 65,236 $ 9,468
Net realized gain on investments 729,143 186,554
Increase in unrealized appreciation of investments 2,718,060 1,172,645
----------- ----------
Net increase in net assets resulting from operations 3,512,439 1,368,667
----------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (64,107) (9,468)
From net realized gain on investments (722,095) (186,592)
----------- ----------
Decrease in net assets from dividends and distributions (786,202) (196,060)
----------- ----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 6,204,650 2,588,482
Net asset value of shares issued in reinvestment
of dividends and distributions 582,605 119,474
Payments for shares redeemed (970,114) (773,533)
----------- ----------
Net increase in net assets from fund shares transactions 5,817,141 1,934,423
----------- ----------
NET INCREASE IN NET ASSETS 8,543,378 3,107,030
NET ASSETS:
Beginning of year 8,983,888 5,876,858
----------- ----------
End of year, including undistributed net investment
income of $1,129 and $0, respectively $17,527,266 $8,983,888
=========== ==========
FUND SHARE TRANSACTIONS:
Shares sold 365,881 181,494
Shares issued in reinvestment of dividends and distributions 30,743 7,758
Less shares redeemed (56,771) (53,864)
----------- ----------
NET INCREASE IN SHARES OUTSTANDING 339,853 135,388
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13 CINCINNATI FUND
<PAGE> 83
CINCINNATI FUND(R)
- ------------------------------Financial Highlights-----------------------------
Per share data for a share outstanding throughout each period
<TABLE>
<CAPTION>
For the Period From
Year Ended December 31, November 7, 1994 to
1997 1996 1995 (4) December 31, 1994
---- ---- -------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $15.40 $13.12 $ 9.91 $10.00
------ ------- ------ ------
Net investment income 0.07 0.02 0.04 0.03
Net gains (losses) on securities 4.39 2.60 3.46 (0.12)
------ ------- ------ ------
Total from investment operations 4.46 2.62 3.50 (0.09)
------ ------- ------ ------
Dividends from net investment income (0.07) (0.02) (0.07) --
Distributions from capital gains (0.81) (0.32) (0.22) --
------ ------ ------ ------
Total distributions (0.88) (0.34) (0.29) --
------ ------ ------ ------
Net asset value, end of period $18.98 $15.40 $13.12 $ 9.91
====== ====== ====== ======
TOTAL RETURN 28.98% 19.98% 35.31% (0.90%)(2)
Net assets, end of period (thousands) $17,527 $8,984 $5,877 $3,225
Ratio of net expenses to average
net assets (1) 1.69% 2.00% 1.98% 1.96%
Ratio of net investment income to average 0.50% 0.13% 0.46% 2.24%
net assets (1)
Portfolio turnover rate 17% 10% 9% 0%(2)
Average commission per share $0.0393 $0.0389 --(3) --(3)
</TABLE>
(1) The ratio of net expenses to average net assets would have increased and
the ratio of net investment income to average net assets would have
decreased by 0.01% in 1997, 0.02% in 1995, and 0.04% in 1994 had the
Adviser not voluntarily waived fees or reimbursed expenses. Ratios are
annualized in periods less than one year.
(2) Not annualized.
(3) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
(4) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CINCINNATI FUND 14
<PAGE> 84
CINCINNATI FUND(R)
- ---------------Notes to Financial Statements - December 31, 1997----------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of four no-load diversified mutual
funds. The financial statements of the Cincinnati Fund (the Fund) are included
in this report. The investment objective of the Cincinnati Fund is to achieve
capital appreciation through investment in the common stock of companies with
an important presence in the Greater Cincinnati Area. The financial statements
of Gateway Index Plus Fund, Gateway Mid Cap Index Fund, and Gateway Small Cap
Index Fund are included in separate reports. The Trust is registered under the
Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks at the average
of the closing bid and asked quotations. Other securities for which market
quotations are not readily available are valued at fair value as determined in
good faith under procedures adopted by the board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are re-corded on the trade date. Dividend income is recorded on
the ex-dividend date, and interest income is accrued daily. Capital gains and
losses are calculated on an identified cost basis. Expenses that cannot be
directly associated with a specific Trust fund are allocated under policies
approved by the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Distributions
from net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid to shareholders annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all of its taxable income to
shareholders. Based on this policy, the Fund makes no provision for income
taxes. The cost of investments is the same for financial reporting and tax
purposes.
At December 31, 1997, gross unrealized appreciation of common stocks totaled
$5,255,298 and gross unrealized depreciation totaled $112,238, based on the
cost of investments.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in
its repurchase transactions, the Fund enters into repurchase agreements only
with banks that have more than $1 billion in assets and are creditworthy in
the judgment of Gateway Investment Advisers, L.P. (the Adviser).
- --------------------------------------------------------------------------------
15 CINCINNATI FUND
<PAGE> 85
CINCINNATI FUND(R)
- ---------------Notes to Financial Statements - December 31, 1997----------------
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser a monthly investment advisory and management fee
computed at an annual rate of 0.50% of its average daily net assets.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 2.00% of average
daily net assets, the advisory contract requires the Adviser to reduce its fee
as necessary to limit the Fund's expenses to this level. For the year ended
December 31, 1997, the Adviser voluntarily waived management fees of $1,281.
The Adviser maintains the Fund's accounting records for a monthly fee of
$4,000. The Adviser also provides shareholder servicing, transfer, and
dividend disbursing agent services for the Trust. The Fund reimburses the
Adviser for the cost to provide these services subject to a minimum monthly
fee of $2,500 and a limitation of 0.20% of average daily net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 for the committee chairman) for each
committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At December 31, 1997, the Adviser held in a fiduciary capacity 8% of the
outstanding shares of the Fund.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1997, purchases of investment securities
(excluding short-term investments) totaled $7,430,151, and proceeds from sales
totaled $1,849,714.
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CINCINNATI FUND 16
<PAGE> 86
CINCINNATI FUND(R)
- --------------------Report of Independent Public Accountants--------------------
To the Shareholders and Board of Trustees of the Cincinnati Fund(R) of The
Gateway Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Cincinnati Fund (one of the funds
constituting THE GATEWAY TRUST) (an Ohio business trust) as of December 31,
1997, and the related statement of operations, the statements of changes in net
assets, and the financial highlights for the periods indicated thereon. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Cincinnati Fund of The Gateway Trust as of December 31, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
periods indicated thereon, in conformity with generally accepted accounting
principles.
Cincinnati, Ohio Arthur Andersen LLP
January 20, 1998
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17 CINCINNATI FUND
<PAGE> 87
CINCINNATI FUND(R)
- -----------------------Professional Services and Trustees-----------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Star Bank, N.A.
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. Harrison
Walter G. Sall
William H. Schneebeck
- --------------------------------------------------------------------------------
CINCINNATI FUND 18
<PAGE> 88
=========================== AFFORDABILITY ==========================
$1,000 Minimum Initial Investment
$500 Minimum Initial IRA Investment
$100 Minimum Additional Investment
No Annual Account Charges
No-Fee IRA Accounts
============================ CONVENIENCE ===========================
Free Telephone Exchanges Between Gateway Funds
Automatic Investment Program
Systematic Withdrawal Program
Telephone Redemptions
============================ FLEXIBILITY ===========================
The Cincinnati Fund(R) is available for numerous investment options:
Individuals
IRAs
Trusts
Pension Plans
Gifts to Minors
