<PAGE> 1
THE GATEWAY TRUST
Registration No. 2-59859
Registration Statement on Form N-1A
Cross Reference Sheet
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Section in the Combined
Prospectus of the Gateway Fund Section in the Cincinnati Fund
Form N-1A Item and Small Cap Index Fund Prospectus
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Item 1 - Cover Page - Cover Page - Cover Page
Item 2 - Synopsis - Fees and Expenses - Fees and Expenses
- Table of Contents - Table of Contents
Item 3 - Condensed Financial Information - Financial Highlights - Financial Highlights
- Gateway Performance - Performance and Risk Information
- Supplement to Prospectus
Item 4 - General Description - General Information about Gateway - General Information about Gateway
- Cover Page - Cover Page
- Investment Practices - Investment Practices
- Investment Restrictions - Investment Restrictions
- Supplement to Prospectus
Item 5 - Management of the Fund - General Information about Gateway - General Information about Gateway
- About the Investment Manager - About the Investment Manager
- Supplement to Prospectus
Item 5A - Management's Discussion of Fund - Gateway Performance - Performance and Risk Information
Performance
Item 6 - Capital Stock - General Information about Gateway - General Information about Gateway
- Cover Page - Cover Page
- Dividends and Distribution - Dividends and Distribution
- Taxes - Taxes
Item 7 - Purchase of Securities - How to Open a Gateway Account - How to Open a Gateway Account
- How to Buy Additional Shares - How to Buy Additional Shares
- Additional Shareholder Information - Additional Shareholder Information
- How Fund Shares are Priced - How Fund Shares are Priced
- Supplement to Prospectus
Item 8 - Redemption - How to Sell Shares - How to Sell Shares
- Additional Shareholder Information - Additional Shareholder Information
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Section in the Combined
Prospectus of the Gateway Fund Section in the Cincinnati Fund
Form N-1A Item and Small Cap Index Fund Prospectus
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Item 9 - Pending Legal Proceedings - Not Applicable - Not Applicable
Item 10 - Cover Page - Cover Page - Cover Page
Item 11 - Table of Contents - Table of Contents - Table of Contents
Item 12 - General Information and History - Introduction - Introduction
Item 13 - Investment Objectives and - Investment Objectives and Practices - Information about Investment Practices
Policies - Option Transactions and Restrictions
- Investment Practices, Risks and - Schedule A
Restrictions
- Schedules A and B
Item 14 - Management of the Fund - Trustees and Officers of the Trust - Trustees and Officers of the Trust
Item 15 - Control Persons and Principal - Trustees and Officers of the Trust - Trustees and Officers of the Trust
Holders of Securities - Principal Holders of Fund Shares - Principal Holders of Fund Shares
Item 16 - Investment Advisory and Other - Investment Advisory and Other Services - Investment Advisory and Other Services
Services - Independent Public Accountants and - Independent Public Accountants and
Financial Statements Financial Statements
Item 17 - Brokerage Allocation and Other - Brokerage - Brokerage
Practices
Item 18 - Capital Stock and Other - Not Applicable - Not Applicable
Securities
Item 19 - Purchase, Redemption, and - Shareholder Services - Shareholder Services
Pricing of Securities - Additional Purchase and Redemption - Additional Purchase and Redemption
Information Information
Item 20 - Tax Status - Additional Tax Matters - Additional Tax Matters
Item 21 - Underwriters - Not Applicable - Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Section in the Combined
Prospectus of the Gateway Fund Section in the Cincinnati Fund
Form N-1A Item and Small Cap Index Fund Prospectus
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Item 22 - Calculation Of Performance Data - Performance and Risk Information - Performance and Risk Information
- Schedule C - Schedule A
Item 23 - Financial Statements - Independent Public Accountants and - Independent Public Accountants and
Financial Statements Financial Statements
</TABLE>
<PAGE> 4
THE GATEWAY TRUST
SUPPLEMENT DATED JANUARY 1, 1999
TO
PROSPECTUS DATED MAY 1, 1998
================================================================================
The following material supplements the Prospectus dated May 1, 1998, for the
Gateway Fund and the Gateway Small Cap Index Fund. This supplemental material
addresses issues approved in a Special Meeting of the Shareholders of The
Gateway Trust which was held on December 9, 1998, as well as certain changes to
investment practices of the Gateway Fund which became effective September 28,
1998.
NEW DISTRIBUTION AND INVESTMENT ADVISORY ARRANGEMENTS PERTAINING ONLY TO THE
GATEWAY FUND
Among the issues approved at the meeting were new distribution and investment
advisory arrangements for the Gateway Fund. The new arrangements include a
Distribution Plan pursuant to Rule 12b-1 of the Investment Company Act of 1940,
and a new Management Agreement with Gateway Investment Advisers, L.P., the
Fund's investment adviser, which replaces the Investment Advisory Contract that
had been in effect since December 15, 1995.
As a result of these new arrangements, the following changes affect portions of
the Prospectus:
- - Throughout the Prospectus and all accompanying material, all references
to the words "no-load" and "100% no-load" pertaining to the Gateway
Fund are deleted.
- - The disclosure under "FUND OPERATING EXPENSES" on page 3 is qualified
by the revisions to "FUND EXPENSES" on page 17, described below.
- - The table titled "ANNUAL FUND OPERATING EXPENSES" on page 3 is replaced
in its entirety by:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
GATEWAY
GATEWAY FUND * SMALL CAP
ANNUAL FUND OPERATING EXPENSES INDEX FUND
- --------------------------------------------------------------------------------
<S> <C> <C>
Management Fee (after waiver) *** 0.74% 0.34%
12b-1 Fees ** 0.19 0.00
Other Expenses 0.11 1.16
---- ----
Total Fund Operating Expenses (after waiver)
(The Fund's Expense Ratio) 1.04% 1.50%
===== =====
- --------------------------------------------------------------------------------
</TABLE>
* The expense information for the Gateway Fund has been restated to
reflect the current fees that would have been applicable had the new
arrangements been in effect during the most recent fiscal year.
** Gateway Fund may pay distribution expenses of up to 0.50% of average
annual net assets under a Distribution Plan pursuant to Rule 12b-1 of
the Investment Company Act of 1940. As a result of the Distribution
Plan, long-term investors may pay more than the economic equivalent of
the maximum sales charge permitted under the rules of the National
Association of Securities Dealers. However any distribution expenses
the Fund incurs will reduce, dollar for dollar, the Management Fee
paid by the Fund. Thus, shareholders will not experience any increase
in Total Fund Operating Expenses as a result of distribution expenses
incurred.
*** Waiver of 1997 Advisory Fee for Small Cap Index Fund. The investment
advisory contract requires the Adviser to waive some or all of its
advisory fees as necessary to limit the Small Cap Index Fund's expense
ratio to an annual rate of 2.00% of its average daily net assets. Any
contractual or voluntary waiver will not exceed the aggregate advisory
fee payable by the Fund for the applicable year. In addition, the
Adviser has voluntarily agreed to waive any remaining advisory fees to
the extent the Fund's expense ratio exceeds 1.50%. The Adviser waived
a portion of its advisory fees in 1997. The actual advisory fees and
total annual fund operating expenses of the Fund in 1997
<PAGE> 5
were 0.34% and 1.50%, respectively. Absent the waiver, the advisory
fees and total annual fund operating expenses of the Fund in 1997
would have been 0.90% and 2.06%, respectively.
- - The table appearing under the caption "EXAMPLE" on page 3 is replaced
in its entirety by:
<TABLE>
<CAPTION>
- ---------------------------------------------------
GATEWAY
GATEWAY SMALL CAP
FUND INDEX FUND
- ---------------------------------------------------
<S> <C> <C>
One year $ 11 $ 15
- ---------------------------------------------------
Three years 33 47
- ---------------------------------------------------
Five years 57 82
- ---------------------------------------------------
Ten years 126 179
- ---------------------------------------------------
</TABLE>
- - With respect to the Gateway Fund, the paragraph titled "ADVISORY FEES"
on page 17 is replaced in its entirety by the following. With respect
to the Gateway Small Cap Index Fund, the paragraph is unchanged.
GATEWAY FUND
------------
Under the Management Agreement approved by shareholders on December 9,
1998, and effective January 1, 1999, the Gateway Fund pays the Adviser
a daily fee computed at (a) the annual rate of 0.925% of the average
value of the daily net assets of the Fund, minus (b) the amount of the
Fund's expenses incurred pursuant to its Distribution Plan. Under the
Management Agreement, the Adviser bears certain expenses of the Fund,
including expenses of printing and distributing all registration
statements, prospectuses, and reports to current shareholders, costs of
printing and transmitting reports to governmental agencies, and
printing and mailing costs. In addition, during the term of the
Management Agreement, as long as the Adviser provides transfer agency,
fund accounting, and other services under the Services Agreement with
the Trust dated January 1, 1998, the Adviser shall receive no separate
compensation for such services with respect to the Gateway Fund.
- - With respect to the Gateway Fund, the paragraphs under the caption
"FUND EXPENSES" on page 17 are replaced in their entirety by the
following. With respect to the Gateway Small Cap Index Fund, the
paragraphs are unchanged.
GATEWAY FUND
------------
The Gateway Fund pays all of its ordinary business expenses with the
exception of certain expenses that are borne by the Adviser pursuant to
the Management Agreement. The expenses borne by the Adviser include:
expenses of printing and distributing all Fund registration statements,
prospectuses, and reports to current shareholders, costs of printing
and transmitting reports to governmental agencies, and printing and
mailing costs. In addition, during the term of the Management
Agreement, as long as the Adviser provides transfer agency, fund
accounting, and other services under the Services Agreement with the
Trust dated January 1, 1998, the Adviser shall receive no separate
compensation for such services with respect to the Gateway Fund. The
Fund also reimburses the Adviser for compliance expenses. Ordinary
business expenses of the Fund include but are not limited to the fees
paid to the Adviser under the Management Agreement, expenses incurred
under the Distribution Plan, custodial fees, brokerage commissions,
expenses incurred in the registration of Fund shares with federal and
state securities agencies, and the Fund's proportionate share of the
collective general expenses of the Trust. Expenses applicable to more
than one fund are either allocated on the basis of the number of
shareholders or the net assets in each fund, including the Cincinnati
Fund. These collective expenses include, but are not limited to,
professional fees and insurance costs.
Under the Distribution Plan approved by shareholders and effective
January 1, 1999, the Trust may, directly or indirectly, engage in any
activities related to the distribution of shares of the Fund, which
activities may include, but are not limited to, the following: (a)
payments to securities dealers and others that are engaged
<PAGE> 6
in the sale of shares, that may be advising shareholders of the Fund
regarding the Fund, that hold shares for shareholders in omnibus
accounts or as shareholders of record, or that provide shareholder
support or administrative services to the Fund and its shareholders;
(b) expenses of maintaining personnel who engage in or support
distribution; (c) costs of preparing, printing, and distributing
prospectuses and statements of additional information and reports of
the Fund for recipients other than existing shareholders of the Fund;
(d) costs of formulating and implementing marketing and promotional
activities; and (e) costs of preparing, printing, and distributing
sales literature. The expenditures to be made by the Trust pursuant to
the Distribution Plan and the basis upon which payment of such
expenditures will be made is determined by the Trustees, but in no
event may such expenditures exceed in any fiscal year an amount
calculated at the rate of 0.50% of the average daily net asset value of
the Fund. If the Distribution Plan had been in effect during 1997,
estimated expenses under the Plan would have amounted to 0.19% of the
average daily net asset value of the Fund.
SUPPLEMENTAL FINANCIAL INFORMATION
The following unaudited condensed financial information for the six months ended
June 30, 1998, supplements the section titled "FINANCIAL HIGHLIGHTS" on pages 4
and 5. The 1998 Semi-Annual Report to shareholders should be read in conjunction
with this condensed financial information. The 1998 Semi-Annual Report to
shareholders is incorporated by reference in the Statement of Additional
Information and is available from The Gateway Trust. The presentation is for a
share outstanding throughout the period.
UNAUDITED FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
GATEWAY
GATEWAY SMALL CAP
FUND INDEX FUND
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $18.85 $13.48
-------- -------
Net investment income (loss) 0.06 (0.03)
Net gains on securities 1.34 0.79
-------- -------
Total from investment operations 1.40 0.76
-------- -------
Dividends from net investment income (0.06) --
Total distributions (0.06) --
-------- -------
Net asset value, end of period $20.19 $14.24
======== =======
TOTAL RETURN 7.43%(1) 5.64%(1)
Net assets, end of period (thousands) $376,018 $17,014
Ratio of expenses to average net assets 1.00%(2) 1.50%(2)
Ratio of net investment income (loss) to average net assets 0.61%(2) (0.47%)(2)
Portfolio turnover rate 1%(1) 20%(1)
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Not annualized
(2) Annualized
SUPPLEMENTAL MATERIAL REGARDING INVESTMENT PRACTICES (INITIALLY EFFECTIVE
SEPTEMBER 28, 1998)
Historically, the Gateway Fund (the "Fund") sold call options exclusively on the
S&P 100 Index. To better serve the Fund, the investment adviser may now sell
call options on various additional indexes such as the S&P 500 Index.
Accordingly, the Prospectus has been modified as follows:
<PAGE> 7
- - "GATEWAYFUND", page 1, the third sentence of paragraph 2 is amended, as
highlighted, to read as follows:
The Fund also sells INDEX call options on the S&P 100 Index,
THE S&P 500 INDEX, AND OTHER STOCK INDEXES, and as the seller,
receives cash from the purchasers of the options.
- - "GATEWAY FUND, INVESTMENT PRACTICES:", page 20, the first sentence of
paragraph 1 is amended, as highlighted, to read as follows:
The Fund attempts to achieve its investment objective
primarily by investing in the 100 stocks included in the S&P
100 Stock Index (the "100 Index") and by selling INDEX call
options.
- - "GATEWAY FUND, INVESTMENT PRACTICES:", page 20, the first sentence of
paragraph 2 is amended, as highlighted, to read as follows:
When the Fund sells INDEX call options, it receives cash from
the purchasers of the options.
- - "SELLING INDEX CALL OPTIONS", page 21, the first sentence of paragraph
1 is amended, as highlighted, to read as follows:
The Gateway Fund regularly sells INDEX call options.
<PAGE> 8
PROSPECTUS
May 1, 1998
GATEWAY FUND
The Gateway Fund (previously known as the Gateway Index Plus Fund) seeks
a high total return at a reduced level of risk. The Fund is designed for
conservative investors whose investment objective is to maximize total rate of
return over the long term.
The Fund invests in the 100 stocks included in the S&P 100 Stock Index.
The Fund's portfolio duplicates the composition of the S&P 100 Index. The Fund
also sells call options on the S&P 100 Index and, as the seller, receives cash
from the purchasers of the options. By selling index options, the Fund attempts
to earn a greater total return over the long term than it would earn by
investing only in the stocks in the S&P 100 Index. Selling call options reduces
the risk of owning stocks, but limits the opportunity to profit from an increase
in the market value of stocks. The Fund occasionally buys index put options in
an attempt to protect the Fund from a significant market decline in a short
period of time. The value of a put option generally increases as stock prices
decrease.
GATEWAY SMALL CAP INDEX FUND
The Small Cap Index Fund designed for a more aggressive investor, seeks
long-term growth of capital. The Fund invests in the 250 stocks included in the
Wilshire Small Cap Index. The Fund's portfolio generally parallels the
composition of the Wilshire Small Cap Index. The Wilshire Small Cap Index
consists of the common stock of 250 companies with a median market
capitalization of approximately $775 million, selected to reflect the general
characteristics and performance profile of small companies. At times, the Fund
may purchase index put options to reduce the risk of principal loss and may also
buy index call options to increase the potential for gain.
RISK FACTORS RELATED TO INDEX OPTION TRANSACTIONS
Option transactions on securities indexes involve risks not generally
associated with investments in stocks. The sale of call options limits a fund's
opportunity to profit from an increase in the market value of the underlying
index. The purchase of options involves the risk of loss of all or part of the
cash paid for the options. The use of options to protect a fund's portfolio will
not fully protect the fund against declines in the value of its portfolio. A
fund could experience a loss on both its portfolio securities and the options
used to hedge these securities. Unusual market conditions, the lack of a ready
market for any particular option at a specific time, or restrictions imposed by
regulatory agencies may adversely affect a fund's hedging strategy. Additional
information about various risk factors and each fund's investment practices,
strategies, and restrictions is located on pages 20 through 23 of this
Prospectus.
THE GATEWAY FAMILY OF MUTUAL FUNDS
Each fund is a series of The Gateway Trust ("Trust"). This Prospectus
sets forth concisely the information about the funds that you should know before
investing. You should keep it for future reference. Additional information has
been filed with the Securities and Exchange Commission (the "SEC") and is
included in the Statement of Additional Information (the "SAI") of The Gateway
Trust dated May 1, 1998. The SAI is incorporated herein by reference. You can
obtain more information about the funds or free copies of the SAI by writing or
calling: THE GATEWAY TRUST, P. O. BOX 5211, CINCINNATI, OH 45201-5211, (800)
354-6339. The SEC maintains a Web Site (http://www.sec.gov) that contains the
SAI, material incorporated by reference, and other information regarding
registrants that file electronically with the SEC.
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT APPROVE SHARES OF ANY MUTUAL
FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 9
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
FEES AND EXPENSES --- All Gateway funds are 100% no-load. There are no sales charges,
12b-1 fees, redemption fees, or annual account charges when you
invest in a Gateway fund.
FINANCIAL HIGHLIGHTS --- Tables displaying financial information for each fund.
HOW TO OPEN A GATEWAY ACCOUNT --- New investors can open an account by mail or by telephone.
HOW TO PURCHASE ADDITIONAL SHARES --- Shares may be purchased by check, by wire transfer, or by automatic
withdrawals from your bank account.
HOW TO REDEEM SHARES --- Redemption requests can be made by mail or by telephone.
ADDITIONAL SHAREHOLDER INFORMATION --- Additional information about buying and selling shares.
GATEWAY PERFORMANCE --- Total return information.
EXPLANATION OF INVESTMENT TERMS --- Glossary of investment terms.
GATEWAY FUND INFORMATION --- Graphs and tables showing fund performance, risk/reward and top ten
holdings for the Gateway Fund.
GATEWAY SMALL CAP INDEX FUND INFORMATION --- Graph and tables showing fund performance and top ten holdings for
the Small Cap Index Fund.
PORTFOLIO MANAGER PROFILE --- Profile of the portfolio manager.
DIVIDENDS AND DISTRIBUTIONS --- Investors may reinvest their dividends and distributions at no charge.
ABOUT THE INVESTMENT ADVISER --- Gateway Investment Advisers, L.P. provides investment advisory
services to each fund.
HOW FUND SHARES ARE PRICED --- Fund share prices are available 24 hours a day by calling (800)
354-6339.
TAXES --- Tax information will be reported to you on Form 1099.
INVESTMENT PRACTICES --- An explanation of the investment practices, risk factors and
strategies employed by each fund.
INVESTMENT RESTRICTIONS --- Each fund has adopted certain investment restrictions.
GENERAL INFORMATION/THE GATEWAY TRUST --- Additional information on The Gateway Trust and its Trustees.
</TABLE>
<PAGE> 10
FEES AND EXPENSES
THE GATEWAY FAMILY OF MUTUAL FUNDS IS 100% NO-LOAD. YOU DO NOT PAY ANY SALES
CHARGES WHEN YOU INVEST IN A GATEWAY FUND.
SHAREHOLDER TRANSACTION EXPENSES
The Gateway family of funds does not charge a fee for purchases,
exchanges, or redemptions. All Gateway funds are 100% no-load.
<TABLE>
<CAPTION>
Small Cap
Shareholder Transaction Expenses Gateway Index Fund
-------------------------------- ------- ----------
Fund
----
<S> <C> <C>
Maximum Sales Load on Purchase None None
Maximum Sales Load on
Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fee None None
Exchange Fee None None
</TABLE>
The custodian for the Gateway funds charges $10 for each wire transfer.
FUND OPERATING EXPENSES
Annual fund operating expenses are paid from a fund's assets. Each fund
pays an advisory fee to Gateway Investment Advisers, L.P. (the "Adviser"). Each
fund also pays other expenses for services such as maintaining shareholder
records and furnishing shareholder statements and fund reports. A fund's
expenses are factored into its share price each day and are not charged directly
to shareholder accounts. The numbers in the following table are calculated as
percentages of average net assets.
<TABLE>
<CAPTION>
Gateway Small Cap
Annual Fund Operating Expenses Fund Index Fund
------------------------------ ---- ----------
<S> <C> <C>
Advisory Fees (after waiver) 0.69% 0.34%
12b-1 Fees 0.00 0.00
Other Expenses 0.38 1.16
---- ----
Total Fund Operating Expenses (after waiver) 1.07% 1.50%
===== =====
(The Fund's Expense Ratio)
</TABLE>
EXAMPLE
Assume that each fund's annual return is 5% and its operating expenses
are exactly as previously described in the Annual Fund Operating Expenses table.
For every $1,000 you invested, the table below shows the amount of expenses you
would incur if you sold your shares after the number of years indicated. THIS
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
<TABLE>
<CAPTION>
Gateway Small Cap
Fund Index Fund
---- ----------
<S> <C> <C>
1 year $11 $15
3 years 34 47
5 years 59 82
10 years 130 179
</TABLE>
The purpose of these tables is to assist you in understanding the direct
and indirect costs and expenses you will bear as a fund shareholder.
WAIVER OF 1997 ADVISORY FEE FOR SMALL CAP INDEX FUND. The investment advisory
contract requires the Adviser to waive some or all of its advisory fees as
necessary to limit the Small Cap Index Fund's expense ratio to an annual rate of
2.00% of its average daily net assets. Any contractual or voluntary waiver will
not exceed the aggregate advisory fee payable by the Fund for the applicable
year. In addition, the Adviser has voluntarily agreed to waive any remaining
advisory fees to the extent the Fund's expense ratio exceeds 1.50%. The Adviser
waived a portion of its advisory fees in 1997. The actual advisory fees and
total annual fund operating expenses
<PAGE> 11
of the Fund in 1997 were 0.34% and 1.50%, respectively. Absent the waiver, the
advisory fees and total annual fund operating expenses of the Fund in 1997 would
have been 0.90% and 2.06%, respectively.
<PAGE> 12
5
FINANCIAL HIGHLIGHTS
The following condensed financial information for the eight years ended
December 31, 1997, has been audited by Arthur Andersen LLP, independent public
accountants. Other independent public accountants audited the condensed
financial information for the years ended December 31, 1988 and December 31,
1989. The audit report on the 1997 financial statements should be read in
conjunction with this condensed financial information. The audit report on the
1997 financial statements is incorporated by reference in the SAI and is
available from the Trust. The presentation is for a share outstanding throughout
each period.
<TABLE>
<CAPTION>
GATEWAY FUND Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995(3) 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) 0.00 0.00 (0.86) (0.47)
Distributions in excess of realized
capital gains 0.00 0.00 (0.03) (0.11) (0.07)
----
Returns of capital 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
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
net assets 0.90% 1.18% 1.51% 1.54% 1.58%
Portfolio turnover rate 82% 17% 5% 4% 17%
Average commission per share $0.0271 $0.0335 -- (4) -- (4) -- (4)
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
GATEWAY FUND Year Ended December 31,
------------------------------------------------------------
1992 1991 1990 1989 1988
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $15.24 $13.64 $15.49 $13.67 $11.60
------ ------ ------ ------ ------
Net investment income 0.27 0.31 0.41 0.33 0.23
Net gains on securities 0.51 2.10 1.15 2.29 2.05
------ ------ ------ ------ ------
Total from investment operations 0.78 2.41 1.56 2.62 2.28
------ ------ ------ ------ ------
Dividends from net investment income (0.28) (0.30) (0.41) (0.37) (0.21)
Distributions from capital gains (0.23) (0.51) (3.00) (0.35) 0.00
Distributions in excess of realized
capital gains 0.00 0.00 0.00 0.00 0.00
Returns of capital 0.00 0.00 0.00 (0.08) 0.00
------ ------ ------ ------ ------
Total distributions (0.51) (0.81) (3.41) (0.80) (0.21)
------ ------ ------ ------ ------
Net asset value, end of year $15.51 $15.24 $13.64 $15.49 $13.67
------ ------ ------ ------ ------
TOTAL RETURN 5.15% 17.80% 10.32% 19.45% 19.76%
Net assets, end of year (thousands) $212,947 $81,368 $38,084 $31,509 $27,338
Ratio of expenses to average net assets 1.11% 1.22% 1.34% 1.40% 2.08%(2)
Ratio of net investment income to average
net assets 1.96% 2.17% 2.59% 2.21% 1.75%(2)
Portfolio turnover rate 15% 31% 79% 30% 10%
Average commission per share -- (4) -- (4) -- (4) -- (4) -- (4)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Additional information about the performance of each Gateway fund is contained
in 1997 Annual Reports to shareholders of the Gateway funds. Annual Reports
for 1997 may be obtained without charge by writing THE GATEWAY TRUST, P. O.
BOX 5211, CINCINNATI, OH 45201-5211 or by calling (800) 354-6339.
<PAGE> 13
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
GATEWAY SMALL CAP INDEX FUND Year Ended Year Ended Year Ended Year Ended From 6/16/93 to
12/31/97 12/31/96 12/31/95(3) 12/31/94 12/31/93
------------------------------------------------------------------------
<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 or 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 (0.00) (0.01) (0.01) (0.00) (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 net 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 ratios of net expenses to average net assets would have increased and
the ratio of net investment income to average net assets would have
decreased 0.13% for the Gateway Fund in 1988 and 0.08% for the Small Cap
Index Fund in 1993 had the Adviser not voluntarily waived fees. The 1993
ratios for the Small Cap Index Fund are annualized.
(3) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the funds.
(4) Disclosure of average commission per share was not required prior to the
year ended December 31, 1996.
6
<PAGE> 14
HOW TO OPEN A GATEWAY ACCOUNT
GATEWAY FUNDS ARE AVAILABLE TO INDIVIDUALS, IRAS, TRUSTS, AND PENSION PLANS.
OPENING A NEW ACCOUNT
You may open an account by mail or by telephone. Generally, the minimum
initial investment is $1,000 (or $500 for an IRA account) in any fund. At its
discretion, the Trust may waive these minimums for investments made by
employer-sponsored qualified retirement plans or through automatic investment
programs. No sales commission is charged by the Gateway funds for purchases or
redemptions of fund shares. Your purchase will be based on the closing share
price of the fund as next determined after your request has been received in
good order. (See "How Fund Shares Are Priced" on page 18.)
After your purchase you will receive a confirmation statement showing the
value of your account. Certificates are not issued for fund shares.
BY MAIL
To open your account by mail, please complete and sign the New Account
Application which accompanies this Prospectus. The application has instructions
to assist you. Please indicate the amount of your investment in each Gateway
fund. When you have completed the application, please mail it to: THE GATEWAY
TRUST, SHAREHOLDER SERVICES, P.O. BOX 5211, CINCINNATI, OH 45201-5211.
Please include your check or money order payable to THE GATEWAY TRUST
with your application.
BY TELEPHONE
To open your account by telephone, you must wire your investment to The
Gateway Trust. Please call Gateway shareholder services at (800) 354-6339 for
instructions.
See Page 9 for additional information about wire transfers and telephone
instructions.
OPENING A NEW IRA ACCOUNT/TRANSFERRING AN EXISTING IRA
To open a new IRA in a Gateway fund, please call Gateway shareholder
services at (800) 354-6339 to obtain the appropriate IRA Account Application and
IRA Agreement and Disclosure Statement. To transfer an existing IRA from a bank
or other mutual fund to your Gateway IRA, you must complete the appropriate IRA
Transfer Form in addition to the IRA Account Application. To transfer or roll
over funds from an employer-sponsored plan such as a 401(k) plan, please call
Gateway shareholder services at (800) 354-6339 for instructions. GATEWAY IRAS
ARE FREE OF ANY ANNUAL CHARGES OR TRANSACTION FEES.
OPENING A TRUST/PENSION PLAN ACCOUNT
To open a trust account in a Gateway fund, please complete the New
Account Application. In the registration section, give the full legal name of
the trust. Pension plans may invest in a Gateway fund by completing the New
Account Application.
OPENING A UNIFORM GIFT TO MINORS ACT ACCOUNT
To open a Gateway account for a minor (typically used for educational
savings plans), please complete the UGMA/UTMA section of the New Account
Application. Be sure to include the minor's social security number.
7
<PAGE> 15
HOW TO PURCHASE ADDITIONAL SHARES
THE MINIMUM AMOUNT FOR AN ADDITIONAL INVESTMENT IS $100.
You may add to your Gateway account at any time by choosing one of the
following purchase options. The minimum amount for an additional investment in
any fund is $100. Your purchase will be based on the closing share price of the
fund as next determined after your request has been received in good order. (See
"How Fund Shares Are Priced" on page 18.)
After each purchase you will receive a confirmation statement showing the
value of your account. Certificates are not issued for fund shares.
BY MAIL
The most common way of purchasing additional shares in a Gateway fund is
by mail. Please send your check or money order and an Additional Investment Form
in a prepaid envelope. Additional Investment Forms and prepaid envelopes are
included with each confirmation statement, quarterly report, and periodic
newsletter sent to you. Please make all checks or money orders payable to THE
GATEWAY TRUST and mail to: THE GATEWAY TRUST, SHAREHOLDER SERVICES, P. O. BOX
5211, CINCINNATI, OH 45201-5211.
BY TELEPHONE
To avoid any mail delay, you may call Gateway shareholder services at
(800) 354-6339 to arrange a purchase by wire. See Page 9 for additional
information about wire transfers and telephone instructions.
BY AUTOMATIC INVESTMENT PROGRAM
Gateway's Automatic Investment Program is a convenient way to make
regularly scheduled purchases in your existing Gateway account. When you use the
program, funds are electronically transferred from your bank account to Gateway
and additional shares are then purchased for your account. This service is
available on a monthly or quarterly basis with a minimum of $100 per transfer.
GATEWAY DOES NOT CHARGE ANY FEE FOR USE OF THE AUTOMATIC INVESTMENT PROGRAM.
Please call Gateway shareholder services at (800) 354-6339 for instructions.
BY EXCHANGE FROM ANOTHER GATEWAY FUND
To purchase shares by exchanging from another Gateway fund, please call
Gateway shareholder services at (800) 354-6339 for instructions. The exchange
will be based on the closing share prices for the funds involved in the exchange
as next determined after your request has been received in good order. (See "How
Fund Shares Are Priced" on page 18.)
The Trust does not charge any fee for exchanges between Gateway funds.
Generally, an exchange between funds is a taxable event. State securities laws
may restrict your ability to make exchanges. The Trust reserves the right to
temporarily or permanently terminate the exchange privilege for any shareholder
who makes an excessive number of exchanges between funds. You will receive
advance written notice that the Trust intends to limit your use of the exchange
privilege. The Trust also reserves the right to terminate or modify the exchange
privilege or to refuse an exchange if the exchange would adversely affect any
Gateway fund involved in the exchange.
8
<PAGE> 16
HOW TO REDEEM SHARES
INVESTORS MAY REDEEM SHARES BY WRITING OR CALLING GATEWAY.
You may redeem shares from your Gateway account at any time by choosing
one of the following options. Your redemption will be based on the closing share
price of the fund as next determined after your request is received in good
order. (See "How Fund Shares Are Priced" on page 18.)
The proceeds from your redemption will be mailed or wired, depending on
the method of redemption and your instructions. Normally the proceeds will be
sent on the following business day. Payments to shareholders who have purchased
shares by check will not be made until the purchase check has cleared, which
could take up to fifteen days.
BY MAIL
Redemption requests made in writing should be sent to: THE GATEWAY TRUST,
SHAREHOLDER SERVICES, P. O. BOX 5211, CINCINNATI, OH 45201-5211.
Each redemption request should include a letter of instruction specifying
the fund and the number of fund shares or dollar amount to be redeemed and
should be signed by all owners of the shares exactly as their names appear on
the account. In certain cases, other supporting legal documents may be required.
A check for the redemption proceeds will be mailed to the address shown on your
account.
A signature guarantee is not usually required. However, a signature
guarantee is required under certain circumstances, including redemptions
involving payment to persons other than the record owner(s) of the shares. A
signature guarantee will be accepted from banks, brokers, dealers, municipal
securities dealers or brokers, government securities dealers or brokers, credit
unions (if authorized by state law), national securities exchanges, registered
securities associations, clearing agencies, and savings associations. Notary
publics cannot guarantee your signature.
BY TELEPHONE
Unless you have declined telephone exchange and/or redemption privileges,
you may redeem your shares by calling Gateway shareholder services at (800)
354-6339. If you redeem your shares by telephone, the redemption proceeds will
be paid by check to the owner(s) of the shares shown on Gateway's records and
mailed to the address shown on Gateway's records for your account. Redemption
proceeds can be sent by wire if you completed the wire transfer instructions in
your original New Account Application or you have sent separate wire transfer
instructions to Gateway. Separate wire transfer instructions must be signed by
all owners of the shares exactly as their names appear on the account, and the
signatures must be guaranteed. The telephone redemption procedure is not
available for IRAs.
SYSTEMATIC WITHDRAWAL PROGRAM
If the value of your account is at least $5,000, you can arrange for
systematic quarterly or monthly withdrawals in the amount of $100 or more.
Please call Gateway shareholder services at (800) 354-6339 to make arrangements
to use this program.
See Page 9 for additional information about redemptions and telephone
instructions.
9
<PAGE> 17
ADDITIONAL SHAREHOLDER INFORMATION
FEES CHARGED BY YOUR BROKER OR BANK
If you buy or sell shares of a Gateway fund through a broker, the broker
may charge you additional fees and expenses. If you buy shares through a wire
transfer, The Gateway Trust will not charge you for the wire. Your financial
institution may charge you for this service or for transfers from your bank
account to a Gateway fund through the Automatic Investment Program. If you
redeem shares through a wire transfer, the Trust's custodian will assess a wire
charge of $10. Your financial institution may also charge you for receiving a
wire transfer of redemption proceeds.
ADDITIONAL IRA INFORMATION
For information about redeeming shares from an IRA, please call Gateway
shareholder services at (800) 354-6339. More detailed information about
transfers to and distributions from an IRA is set forth in the IRA Agreement and
Disclosure Statement.
TELEPHONE TRANSACTIONS
The Gateway Trust will not be liable for any damages resulting from
following instructions received by telephone that it reasonably believes to be
genuine. The Trust will employ reasonable procedures to confirm that telephone
instructions are genuine. All shareholders of the Gateway funds have telephone
redemption and exchange privileges unless the shareholder has specifically
declined these privileges. If you do not wish to have telephone privileges for
your account, you must mark the appropriate section on the New Account
Application or notify the Trust in writing. To protect shareholders who have
telephone privileges, the Trust follows certain procedures, including requiring
a form of personal identification before acting upon telephone instructions,
making redemption checks requested by telephone payable only to the owner(s) of
the account shown on the Trust's records, mailing such redemption checks only to
the account address shown on the Trust's records, directing wire redemptions
requested by telephone only to the bank account shown on the Trust's records,
providing written confirmation of all transactions, and normally tape recording
any instructions received by telephone.
REDEMPTIONS BY THE TRUST
The Gateway Trust reserves the right to reject any investment at any
time. The Trust also reserves the right to redeem your account(s) under certain
circumstances. You will receive written notice at least 60 days prior to the
redemption of your account(s) by the Trust. The Trust may redeem your account(s)
when the aggregate value of your account(s) falls below $800 (other than as a
result of market action) unless you purchase additional shares to increase the
value of your account(s) to at least $1,000 before the end of the 60-day period.
The Trust will redeem your account(s) if you do not provide a valid U. S. social
security number or taxpayer identification number or other requested documents
before the end of the 60-day period. The Trustees of The Gateway Trust can
terminate any series of the Trust upon written notification to the shareholders
of the applicable series.
ADDITIONAL REDEMPTION INFORMATION
Redemption proceeds will be sent to you no later than five business days
after your request is received in good order. The right of redemption may be
suspended in certain circumstances, such as the closing of the New York Stock
Exchange for a period other than weekends or normal holidays.
10
<PAGE> 18
GATEWAY PERFORMANCE
GATEWAY HAS BECOME AN INDUSTRY LEADER IN PROVIDING PROSPECTIVE INVESTORS AND
EXISTING SHAREHOLDERS WITH COMPLETE INFORMATION ON ITS NO-LOAD FUNDS.
It is important for you to understand completely the risks as well as the
potential rewards of each Gateway fund before investing. The tables and graphs
appearing in this section of the Prospectus are designed to help you understand
these risks and rewards and should be studied carefully. A brief description of
each table and graph, as well as its significance, is included on the following
pages. For a more complete explanation see the SAI.
YEAR-BY-YEAR TOTAL RETURNS SINCE INCEPTION
<TABLE>
<CAPTION>
Gateway
------- Gateway Small S&P 500 Wilshire Lehman Gov't/Corp
Fund Cap Index Fund Stock Index Small Cap Bond Index
---- ---------- ----------- Index ----------
-----
<S> <C> <C> <C> <C> <C>
1997 12.35% 20.64% 33.36% 26.76% 9.75%
1996 10.53 17.04 22.96 19.97 2.91
1995 11.04 21.81 37.58 26.58 19.24
1994 5.57 (5.99) 1.32 (3.09) (3.52)
1993 7.40 6.50* 10.08 12.92 11.02
1992 5.15 7.62 7.58
1991 17.80 30.47 16.13
1990 10.32 (3.11) 8.28
1989 19.45 31.69 14.23
1988 19.76 16.52 7.58
1987 (5.65) 5.05 2.29
1986 12.69 18.51 15.62
1985 15.89 31.57 21.30
1984 4.04 6.10 15.02
1983 14.80 22.47 8.00
1982 9.46 21.40 31.09
1981 4.59 (5.05) 7.26
1980 16.50 32.33 3.06
1979 15.37 18.20 2.30
1978 5.90 6.40 1.19
</TABLE>
*June 16, 1993 to December 31, 1993
COMPARATIVE PERFORMANCE INFORMATION
Each Gateway fund may compare its performance to various indexes, such as
the S&P 500 Index. Each Gateway fund may also compare its performance to that of
other mutual funds or categories of mutual funds as reported by independent
services, such as Morningstar, Inc. and Value Line Mutual Fund Survey, or by
other financial publications.
11
<PAGE> 19
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS* CUMULATIVE TOTAL RETURNS*
------------------------------------------- --------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gateway Fund 12.35% 11.30% 9.35% 11.82% 12.35% 37.88% 56.33% 205.56%
Gateway Small Cap Index Fund 20.64 19.81 N/A N/A 20.64 72.00 N/A N/A
S&P 100 Index 30.01 31.74 21.14 17.68 30.01 128.66 160.83 409.54
Wilshire Small Cap Index 26.76 24.39 N/A N/A 26.76 92.49 N/A N/A
S&P 500 Index 33.36 31.15 20.27 18.04 33.36 125.60 151.61 425.23
Lehman Gov't/Corp Bond Index 9.75 10.43 7.61 9.15 9.75 34.67 44.30 139.98
Consumer Price Index 2.02 2.63 2.66 3.44 2.02 8.09 14.03 40.22
</TABLE>
* For periods ended December 31, 1997
12
<PAGE> 20
EXPLANATION OF INVESTMENT TERMS
TOTAL RETURN is the change in the value of an investment in a fund over
a given period, assuming reinvestment of distributions.
A CUMULATIVE TOTAL RETURN reflects actual performance over a stated
period of time.
An AVERAGE ANNUAL TOTAL RETURN is a rate of return that, if achieved
consistently throughout a given period, would produce a cumulative total return
equal to that actually achieved by the fund over the same period. Average annual
total returns smooth out variations in performance; they are not the same as
actual year-by-year results.
STANDARD DEVIATION is a statistical measure of volatility. It measures
the expected change in the value of a fund or a market index such as the S&P 500
Index. A fund with an expected return of 10% and a standard deviation of 15%
would be expected to show returns of -5% to +25% in two out of every three
years. Volatility is often used as a measure of risk. A lower standard deviation
implies lower volatility.
BETA is a measure of a fund's volatility relative to an appropriate
index. It measures how much the value of a fund fluctuates compared to the
index. As an example, the S&P 500 Index has a beta of 1.0. Any stock mutual fund
with a beta greater than 1.0 is more volatile than the stock market, and any
fund with a beta lower than 1.0 is less volatile than the stock market as
represented by the S&P 500 Index.
RISK of an investment is very important for investors to understand.
The Trustees of The Gateway Trust are concerned that some investors may purchase
mutual funds without an appreciation for the risk they have assumed. The tables
and charts presented in this document measure risk in four ways: beta, standard
deviation, number of negative periods experienced by the fund, and the worst
total return in one of those periods. Each measure of risk is more fully
described in the SAI.
The S&P 100 INDEX is an unmanaged index of 100 common stocks with a
market capitalization range of $980 million to $240 billion. The performance of
this index assumes reinvestment of all dividends paid on the stocks in the
index.
The S&P 500 INDEX is a widely recognized measure of performance for the
stock market. The S&P 500 figures represent the prices of an unmanaged index of
500 common stocks and assume reinvestment of all dividends paid on the stocks in
the index.
The WILSHIRE SMALL CAP INDEX is an unmanaged index of 250 common stocks
with a market capitalization range of $39 million to $3.2 billion. The
performance of this index assumes reinvestment of all dividends paid on the
stocks in the index.
The LEHMAN GOVERNMENT/CORPORATE BOND INDEX is a widely recognized
measure of performance for the bond market representing an unmanaged index of
selected government and corporate bonds. The Lehman Index figures assume
reinvestment of all distributions paid on the bonds in the index. As of December
31, 1997, the average maturity of this index was 10.07 years.
The CONSUMER PRICE INDEX is a widely recognized measure of inflation
calculated by the U. S. government.
U. S. TREASURY BILLS are negotiable debt obligations of the U. S.
government. Since they are secured by the full faith and credit of the
government, they are regarded as risk-free investments. Treasury bills are
short-term securities with maturities of one year or less.
13
<PAGE> 21
GATEWAY FUND INFORMATION
GROWTH OF A $10,000 INVESTMENT
- ------------------------------
(Insert Chart Here)
Gateway Fund Plot Points - Growth of $10,000 Chart
<TABLE>
<CAPTION>
Gateway Fund S&P 500 Lehman Gov't/Corp U.S. T-Bills
Bond Index
<S> <C> <C> <C> <C>
$10,000.00 $10,000.00 $10,000.00 $10,000.00
Jan-88 $10,370.69 $10,420.00 $10,343.00 $10,029.42
Feb-88 $10,646.55 $10,904.53 $10,461.94 $10,075.11
Mar-88 $10,611.96 $10,571.94 $10,358.37 $10,119.52
Apr-88 $10,802.39 $10,682.95 $10,298.29 $10,166.23
May-88 $11,001.47 $10,768.41 $10,229.29 $10,217.60
Jun-88 $11,200.62 $11,263.76 $10,460.48 $10,267.18
Jul-88 $11,330.96 $11,224.33 $10,400.85 $10,319.26
Aug-88 $11,252.76 $10,848.32 $10,427.89 $10,380.53
Sep-88 $11,618.04 $11,314.80 $10,664.61 $10,444.55
Oct-88 $11,792.49 $11,620.30 $10,853.37 $10,508.27
Nov-88 $11,862.27 $11,451.80 $10,725.30 $10,567.77
Dec-88 $11,975.89 $11,652.21 $10,761.77 $10,634.78
Jan-89 $12,300.03 $12,505.15 $10,904.90 $10,693.42
Feb-89 $12,326.31 $12,193.77 $10,822.02 $10,758.98
Mar-89 $12,344.49 $12,477.89 $10,879.38 $10,831.13
Apr-89 $12,635.26 $13,125.49 $11,110.02 $10,904.22
May-89 $12,776.24 $13,657.07 $11,383.33 $10,990.07
Jun-89 $12,829.01 $13,579.23 $11,754.42 $11,068.02
Jul-89 $13,218.84 $14,805.43 $11,998.92 $11,145.00
Aug-89 $13,422.62 $15,095.62 $11,812.93 $11,227.38
Sep-89 $13,538.12 $15,034.33 $11,864.91 $11,300.87
Oct-89 $13,680.63 $14,685.23 $12,165.09 $11,377.32
Nov-89 $14,010.18 $14,984.81 $12,274.58 $11,455.43
Dec-89 $14,304.71 $15,344.45 $12,292.99 $11,524.96
Jan-90 $13,806.03 $14,314.22 $12,124.58 $11,590.30
Feb-90 $14,129.24 $14,498.59 $12,151.25 $11,656.12
Mar-90 $14,591.09 $14,882.80 $12,152.46 $11,731.20
Apr-90 $14,656.10 $14,510.95 $12,040.66 $11,811.83
May-90 $15,111.21 $15,925.63 $12,389.84 $11,891.81
Jun-90 $15,176.48 $15,818.13 $12,590.56 $11,966.14
Jul-90 $15,241.85 $15,767.35 $12,746.68 $12,047.17
Aug-90 $14,616.12 $14,341.98 $12,561.85 $12,126.34
Sep-90 $14,476.52 $13,643.96 $12,666.12 $12,198.90
Oct-90 $14,504.70 $13,585.84 $12,834.57 $12,282.08
Nov-90 $15,350.18 $14,464.02 $13,114.37 $12,351.48
Dec-90 $15,780.93 $14,867.14 $13,312.40 $12,425.46
Jan-91 $16,370.98 $15,514.60 $13,461.49 $12,489.78
Feb-91 $16,625.51 $16,624.20 $13,577.26 $12,549.32
Mar-91 $16,787.66 $17,026.84 $13,670.95 $12,604.43
Apr-91 $16,834.16 $17,067.20 $13,828.16 $12,671.67
May-91 $17,159.68 $17,803.47 $13,893.15 $12,731.49
Jun-91 $17,066.79 $16,987.90 $13,877.87 $12,784.60
Jul-91 $17,405.55 $17,779.70 $14,052.73 $12,847.04
Aug-91 $17,709.27 $18,200.90 $14,375.95 $12,906.27
Sep-91 $17,813.76 $17,896.40 $14,676.40 $12,965.10
Oct-91 $18,072.06 $18,136.93 $14,807.02 $13,020.15
</TABLE>
14
<PAGE> 22
<TABLE>
<S> <C> <C> <C> <C>
Nov-91 $17,826.28 $17,406.19 $14,955.09 $13,071.13
Dec-91 $18,589.24 $19,396.94 $15,459.68 $13,120.69
Jan-92 $18,552.62 $19,035.58 $15,230.88 $13,165.19
Feb-92 $18,760.04 $19,282.09 $15,311.60 $13,202.41
Mar-92 $18,760.04 $18,907.05 $15,227.39 $13,246.98
Apr-92 $18,980.66 $19,461.97 $15,318.75 $13,290.02
May-92 $19,041.97 $19,557.72 $15,615.93 $13,326.68
Jun-92 $19,103.28 $19,266.71 $15,845.49 $13,369.34
Jul-92 $19,287.82 $20,053.75 $16,251.13 $13,410.48
Aug-92 $19,287.82 $19,643.25 $16,395.77 $13,445.41
Sep-92 $19,361.69 $19,874.06 $16,618.75 $13,480.01
Oct-92 $19,398.86 $19,942.62 $16,364.48 $13,510.82
Nov-92 $19,683.25 $20,621.67 $16,349.75 $13,542.52
Dec-92 $19,545.86 $20,874.70 $16,630.97 $13,580.75
Jan-93 $19,760.09 $21,049.21 $16,993.53 $13,612.46
Feb-93 $19,911.25 $21,336.11 $17,346.99 $13,642.53
Mar-93 $19,848.33 $21,786.30 $17,405.97 $13,677.15
Apr-93 $19,886.24 $21,259.73 $17,540.00 $13,709.59
May-93 $20,088.68 $21,828.43 $17,531.23 $13,739.31
Jun-93 $20,202.59 $21,892.38 $17,929.19 $13,774.18
Jul-93 $20,316.93 $21,804.38 $18,043.93 $13,807.26
Aug-93 $20,596.70 $22,631.63 $18,458.94 $13,841.84
Sep-93 $20,507.72 $22,458.05 $18,523.55 $13,877.30
Oct-93 $20,699.26 $22,922.71 $18,599.50 $13,907.97
Nov-93 $20,775.85 $22,704.25 $18,389.32 $13,942.61
Dec-93 $20,992.96 $22,978.75 $18,470.23 $13,974.17
Jan-94 $21,350.56 $23,760.02 $18,747.29 $14,009.15
Feb-94 $21,151.89 $23,114.94 $18,338.60 $14,038.85
Mar-94 $20,449.92 $22,107.13 $17,889.30 $14,076.68
Apr-94 $20,636.19 $22,390.54 $17,753.34 $14,114.84
May-94 $21,048.65 $22,757.97 $17,708.96 $14,159.31
Jun-94 $20,729.33 $22,200.17 $17,668.23 $14,203.46
Jul-94 $21,317.39 $22,929.23 $17,958.87 $14,242.53
Aug-94 $21,664.89 $23,869.33 $18,027.11 $14,295.05
Sep-94 $21,678.25 $23,285.72 $17,754.91 $14,347.36
Oct-94 $22,040.68 $23,808.95 $17,742.48 $14,402.46
Nov-94 $21,664.83 $22,941.83 $17,703.44 $14,455.61
Dec-94 $22,161.48 $23,282.06 $17,820.29 $14,519.65
Jan-95 $22,533.70 $23,885.76 $18,167.78 $14,579.99
Feb-95 $22,862.98 $24,816.59 $18,583.82 $14,638.06
Mar-95 $23,092.04 $25,548.92 $18,708.34 $14,705.67
Apr-95 $23,278.96 $26,301.34 $18,990.83 $14,771.11
May-95 $23,422.74 $27,352.61 $19,763.76 $14,850.21
Jun-95 $23,523.39 $27,988.01 $19,921.87 $14,920.22
Jul-95 $23,667.80 $28,916.09 $19,844.17 $14,987.70
Aug-95 $23,783.32 $28,988.67 $20,098.18 $15,057.60
Sep-95 $24,043.27 $30,211.99 $20,303.18 $15,122.48
Oct-95 $24,115.79 $30,104.13 $20,601.64 $15,193.77
Nov-95 $24,449.31 $31,425.70 $20,941.56 $15,257.60
Dec-95 $24,607.49 $32,030.96 $21,249.40 $15,332.09
Jan-96 $24,927.64 $33,121.30 $21,381.15 $15,397.67
Feb-96 $24,840.39 $33,428.33 $20,927.87 $15,457.85
Mar-96 $25,029.68 $33,750.25 $20,752.08 $15,518.80
Apr-96 $25,350.81 $34,247.73 $20,608.89 $15,590.19
May-96 $25,569.84 $35,130.97 $20,573.85 $15,655.66
Jun-96 $25,788.71 $35,264.82 $20,849.54 $15,718.29
Jul-96 $25,378.93 $33,706.82 $20,897.50 $15,789.02
Aug-96 $25,730.18 $34,417.70 $20,847.34 $15,853.75
Sep-96 $26,330.20 $36,354.73 $21,218.42 $15,923.51
</TABLE>
15
<PAGE> 23
<TABLE>
<S> <C> <C> <C> <C>
Oct-96 $26,653.01 $37,357.39 $21,712.81 $15,990.39
Nov-96 $27,107.98 $40,181.24 $22,112.33 $16,055.95
Dec-96 $27,199.06 $39,385.25 $21,866.88 $16,129.81
Jan-97 $27,655.19 $41,846.04 $21,893.12 $16,202.39
Feb-97 $27,684.51 $42,174.11 $21,936.91 $16,265.58
Mar-97 $27,522.55 $40,441.18 $21,675.86 $16,335.52
Apr-97 $28,083.46 $42,855.51 $21,993.19 $16,405.77
May-97 $28,304.76 $45,464.56 $22,197.73 $16,486.15
Jun-97 $28,688.57 $47,501.37 $22,464.10 $16,547.15
Jul-97 $29,206.11 $51,281.05 $23,151.51 $16,618.31
Aug-97 $28,718.08 $48,408.29 $22,892.21 $16,686.44
Sep-97 $29,590.53 $51,059.61 $23,251.62 $16,759.86
Oct-97 $29,131.29 $49,352.18 $23,623.64 $16,830.25
Nov-97 $30,094.37 $51,636.69 $23,748.85 $16,895.89
Dec-97 $30,556.62 $52,523.29 $23,998.21 $16,976.99
</TABLE>
December 31, 1987 - December 31, 1997
16
<PAGE> 24
This chart shows the growth of a $10,000 investment made ten years ago.
<TABLE>
<CAPTION>
==============================================
Gateway Fund
------------
Average Annual Total Returns
----------------------------
As Of December 31, 1997
-----------------------
==============================================
<S> <C>
One Year 12.35%
-------- ------
Five Years 9.35%
---------- -----
Ten Years 11.82%
--------- ------
==============================================
</TABLE>
Performance data shown throughout this document represents past performance and
assumes 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.
OVERVIEW
- --------
The Gateway Fund is designed for conservative investors whose investment
objective is to maximize total rate of return over the long term.
<TABLE>
<CAPTION>
=======================================================
Top Ten Holdings
As Of December 31, 1997
(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>
17
<PAGE> 25
RISK/REWARD CHARTS
- ------------------
(Insert Risk/Reward Charts Here)
Gateway Fund Plot Points - Risk/Reward Charts
<TABLE>
<CAPTION>
5 Years
12/31/92 - 12/31/97
Risk Return
<S> <C> <C>
U.S. Treasury bills (30 day) 0.31 4.57%
Gateway Fund 4.22 9.35%
S&P 500 10.59 20.27%
<CAPTION>
10 Years
12/31/87 - 12/31/97
Risk Return
<S> <C> <C>
U.S. Treasury bills (30 day) 0.49 5.44%
Gateway Fund 5.06 11.82%
S&P 500 12.01 18.04%
</TABLE>
These charts show that, in general, more risk must be taken to earn higher total
returns. Any investment can be shown on the graph by plotting its risk (standard
deviation) and its reward (average annual total return). The charts show three
points. One point shows 30-day U. S. Treasury bills, one point shows the S&P 500
Index, and the third point shows the Gateway Fund. The line connecting Treasury
bills and the S&P 500 Index shows all the possible outcomes if an investment had
been allocated between these two choices in varying proportions. When the
Gateway Fund point appears above the line, it shows that the Fund earned a
higher-than-expected return during the period covered by the chart, considering
the amount of risk it took to earn that return. When the point appears below the
line, it shows the reverse. The next ten years may be quite different in terms
of risk and reward for all three investments shown on the charts.
18
<PAGE> 26
SMALL CAP INDEX FUND INFORMATION
GROWTH OF A $10,000 INVESTMENT
- ------------------------------
(Insert Chart Here)
Small Cap Plot Points - Growth of $10,000 Chart
<TABLE>
<CAPTION>
Small Cap Wilshire Small US T-bills
Index Fund Cap Index
<S> <C> <C> <C>
$10,000.00 $10,000.00 $10,000.00
Jun-93 $10,100.00 $10,162.00 $10,025.38
Jul-93 $10,179.99 $10,293.09 $10,049.46
Aug-93 $10,539.96 $10,759.37 $10,074.63
Sep-93 $10,639.98 $10,923.99 $10,100.44
Oct-93 $10,579.97 $10,991.71 $10,122.76
Nov-93 $10,449.94 $10,772.98 $10,147.97
Dec-93 $10,649.96 $11,292.24 $10,170.94
Jan-94 $10,927.81 $11,625.36 $10,196.40
Feb-94 $10,866.07 $11,580.02 $10,218.02
Mar-94 $10,361.88 $11,031.13 $10,245.55
Apr-94 $10,310.39 $11,009.06 $10,273.33
May-94 $10,156.04 $10,870.35 $10,305.69
Jun-94 $9,806.16 $10,527.93 $10,337.83
Jul-94 $9,981.11 $10,742.70 $10,366.27
Aug-94 $10,516.19 $11,346.44 $10,404.49
Sep-94 $10,248.66 $11,082.07 $10,442.56
Oct-94 $10,330.96 $11,172.94 $10,482.67
Nov-94 $9,878.21 $10,717.09 $10,521.35
Dec-94 $10,011.97 $10,943.22 $10,567.96
Jan-95 $9,856.02 $10,831.60 $10,611.88
Feb-95 $10,271.88 $11,379.68 $10,654.15
Mar-95 $10,427.83 $11,496.89 $10,703.36
Apr-95 $10,646.16 $11,852.14 $10,750.99
May-95 $10,906.08 $12,117.63 $10,808.56
Jun-95 $11,249.17 $12,579.31 $10,859.52
Jul-95 $11,862.57 $13,302.62 $10,908.62
Aug-95 $12,101.69 $13,600.60 $10,959.51
Sep-95 $12,112.09 $13,703.96 $11,006.73
Oct-95 $11,623.45 $13,120.17 $11,058.61
Nov-95 $11,987.26 $13,621.37 $11,105.07
Dec-95 $12,195.24 $13,851.57 $11,159.29
Jan-96 $12,173.17 $13,829.40 $11,207.02
Feb-96 $12,471.17 $14,187.59 $11,250.82
Mar-96 $12,846.42 $14,648.68 $11,295.18
Apr-96 $13,475.51 $15,458.75 $11,347.14
May-96 $13,861.86 $15,916.33 $11,394.80
Jun-96 $13,254.98 $15,214.42 $11,440.38
Jul-96 $12,316.93 $14,012.48 $11,491.86
Aug-96 $13,001.26 $14,871.45 $11,538.98
Sep-96 $13,520.01 $15,530.25 $11,589.75
Oct-96 $13,442.81 $15,455.71 $11,638.42
Nov-96 $14,093.98 $16,319.68 $11,686.14
Dec-96 $14,273.82 $16,618.33 $11,739.90
Jan-97 $14,640.65 $17,185.02 $11,792.73
Feb-97 $14,593.37 $17,178.14 $11,838.72
Mar-97 $14,013.43 $16,504.76 $11,889.63
</TABLE>
20
<PAGE> 27
Apr-97 $14,202.75 $16,711.07 $11,940.75
May-97 $15,196.94 $18,291.94 $11,999.26
Jun-97 $15,623.06 $18,895.57 $12,043.66
Jul-97 $16,735.58 $20,539.11 $12,095.45
Aug-97 $17,138.07 $20,917.03 $12,145.04
Sep-97 $17,978.35 $22,197.15 $12,198.48
Oct-97 $17,232.79 $21,118.37 $12,249.71
Nov-97 $17,114.40 $20,976.88 $12,297.48
Dec-97 $17,220.34 $21,064.98 $12,356.51
This chart shows the growth of a $10,000 investment at the Fund's inception.
June 16, 1993 (Inception Date) - December 31, 1997
<TABLE>
<CAPTION>
============================================
Small Cap Index Fund
Average Annual Total Returns
As Of December 31, 1997
============================================
<S> <C>
One Year 20.64%
Five Years N/A
Life of Fund 12.69%
============================================
</TABLE>
Performance data shown throughout this document represents past performance and
assumes 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.
OVERVIEW
- --------
The Small Cap Index Fund is designed for an aggressive investor who seeks
long-term growth of capital.
<TABLE>
<CAPTION>
========================================================
Top Ten Holdings
----------------
As Of December 31, 1997
-----------------------
(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>
21
<PAGE> 28
PORTFOLIO MANAGER PROFILE
J. PATRICK ROGERS, CFA
- ----------------------
Portfolio Manager from 1997
Co-Portfolio Manager from 1994
MBA Xavier University
1994 BBA University of Notre Dame 1986
Age 34
J. Patrick Rogers, CFA, joined Gateway Investment Advisers, Inc.,
general partner of Gateway Investment Advisers, L.P., in 1989 and has been its
president since 1995. He is the portfolio manager for the Gateway Fund and the
Gateway Small Cap Index Fund, as well as the portfolio manager for the
Cincinnati Fund. In addition, he is the president of The Gateway Trust.
Mr. Rogers currently serves as a board member of the Cincinnati Center
for Developmental Disorders Foundation.
He was awarded the Martin B. Friedman Award at Xavier University which
is given annually to the most outstanding MBA student. Mr. Rogers is a frequent
speaker at various individual investor groups, including AAII, and is active in
many industry associations.
He and his wife, Elizabeth, have three children.
22
<PAGE> 29
DIVIDENDS AND DISTRIBUTIONS
GATEWAY INVESTORS MAY REINVEST THEIR DIVIDENDS AND DISTRIBUTIONS AT NO CHARGE.
Shareholders of each Gateway fund may elect to receive distributions
either in cash or in additional shares of a fund. To receive your distributions
in cash, please mark the appropriate box on the New Account Application. Once
your account is opened, you may change the way your distributions are handled by
writing or calling Gateway.
GATEWAY FUND
The Gateway Fund normally declares dividends at the end of March, June,
September, and December. The amount of the quarterly dividend is based on
interest earned plus common stock dividends received by the Fund, minus
expenses.
If the Fund has net capital gains from stock or option transactions, it
normally declares a capital gain distribution at the end of December. The
capital gain distribution is calculated in accordance with tax regulations and
has varied substantially from year to year.
GATEWAY SMALL CAP INDEX FUND
The Small Cap Index Fund declares dividends and net capital gains, if
any, at the end of December.
FUND PRICING WHEN DIVIDENDS ARE DECLARED
The price of a Gateway fund is affected by its declaration of dividends
and capital gain distributions. The price of a fund, as adjusted for market
activity, generally drops by the amount of the declared dividend and capital
gain distribution. As an example, assume that on December 31 the Gateway Fund
declares a dividend in the amount of $0.50 per share. If the Fund's price per
share was $16.50 on December 30, and there was no change in the value of the
Fund's investments due to market activity, the Fund's price on December 31 would
be $16.00. The decline of $0.50 per share would be the result of the declaration
of the $0.50 dividend.
TAX CONSEQUENCES OF BUYING A DIVIDEND
If you buy fund shares just before the fund declares a dividend, you
will pay the full price for the shares and then receive a portion of the price
back as a taxable distribution. In the example above, if you bought shares of
the Gateway Fund on December 30, you would pay $16.50 per share. On December 31,
the Fund would pay you $0.50 per share as a dividend and your shares would be
worth $16.00 per share. The dividend paid to you would generally be included in
your gross income for tax purposes, whether or not you reinvested the dividend.
For this reason, you should carefully consider the tax consequences of buying
shares of a Gateway fund in late December.
23
<PAGE> 30
ABOUT THE INVESTMENT ADVISER
INVESTMENT ADVISER
Gateway Investment Advisers, L.P. (the "Adviser"), a Delaware limited
partnership, has acted as the investment adviser for the funds since December
15, 1995. Gateway Investment Advisers, Inc. ("GIA") provided investment advisory
services to the funds from their formation until December 15, 1995. The Adviser
is the successor in interest to the assets, business, and personnel of GIA. The
Adviser is a limited partnership in which GIA is the general partner with a 76%
partnership interest. The sole limited partner of the Adviser is Alex. Brown
Investments Incorporated, an affiliate of BT Alex. Brown Incorporated, a
nationally known investment banking firm and registered broker/dealer located in
Baltimore, Maryland. The principal and controlling shareholders of GIA are
Walter G. Sall and J. Patrick Rogers. As of December 31, 1997, the Adviser had
approximately $476 million in assets under its management, including
approximately $296 million in assets invested in the funds including the
Cincinnati Fund. The Adviser has entered into an Advisory Referral Agreement
with BT Alex. Brown Incorporated under which the Adviser will pay a referral fee
for those shares of the funds that have been directed to the Adviser by BT Alex.
Brown Incorporated.
ADVISORY SERVICES
The Adviser provides each fund with investment research and advice. The
Adviser also places with brokers each fund's buy and sell orders for portfolio
securities. When the Adviser places these orders, it uses its best efforts to
obtain the most favorable price and execution available for the fund, except to
the extent that the fund may be permitted to pay higher commissions for
brokerage and research services pursuant to Section 28(e) of the Securities
Exchange Act of 1934. Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., the Adviser may consider sales of fund
shares as a factor in the selection of brokers to execute fund portfolio
transactions. Because the Board of Trustees believes that in certain
circumstances it is advantageous to the Trust to execute portfolio transactions
through BT Alex. Brown Incorporated, each fund may pay brokerage commissions to
that broker.
ADVISORY FEES
Each fund pays the Adviser an advisory fee calculated at an annual rate
of 0.90% of the first $50 million of the average daily net asset value of the
fund, 0.70% of the average daily net asset value of the fund in excess of $50
million but less than $100 million, and 0.60% on the average daily net asset
value of the fund in excess of $100 million. The advisory contracts require the
Adviser to waive fees as necessary to limit the Small Cap Index Fund's expense
ratio to 2.00% of its average daily net assets. The Adviser waived advisory fees
in accordance with the advisory contracts of $73,783 for the Small Cap Index
Fund in 1997. Any contractual waiver will not exceed the aggregate advisory fee
payable by any fund for the applicable year.
FUND EXPENSES
Each fund pays all of its ordinary business expenses, other than
advertising and marketing expenses which are paid by the Adviser. Ordinary
business expenses include the advisory fees, custodial fees, brokerage
commissions, fees paid to the Adviser for providing shareholder services,
expenses incurred in the registration of the fund shares with federal and state
securities agencies, and each fund's proportionate share of the collective
general expenses of the Trust. Expenses applicable to more than one fund are
either allocated on the basis of the number of shareholders or the net assets in
each fund, including the Cincinnati Fund. These collective expenses include, but
are not limited to, certain printing and mailing costs, professional fees, and
insurance costs.
Each fund reimburses the Adviser for printing, mailing, and compliance
expenses. The Adviser provides shareholder, transfer, dividend disbursing,
financial, and administrative services to each fund. Each fund compensates the
Adviser for these services at a fixed rate of $4,000 per month, plus the greater
of $2,500 per month or an annual rate of 0.20% of each fund's average net
assets.
24
<PAGE> 31
HOW FUND SHARES ARE PRICED
The net asset value (closing share price) of a fund ordinarily is
determined as of the close of the New York Stock Exchange (the "NYSE"), normally
4:00 P.M. Eastern Time, on each day during which the NYSE is open for trading.
Under unusual circumstances, the net asset value may be determined at other
times as authorized by the Board of Trustees. Net asset value is determined by
deducting the liabilities of a fund from the market or fair value of its assets.
The funds normally value stocks and options at the average of the closing
bid and asked quotations. Under normal circumstances, closing option quotations
are considered to be reflective of the option contract values as of the stock
market close and will be used to value the option contracts. Securities for
which market quotations are not readily available, securities in which trading
has been suspended during the day, and all other assets are valued at fair
value. Furthermore, if the Adviser determines that closing options quotations do
not reflect option contract values as of the close of the NYSE, options are
valued at fair value. Fair value is determined in good faith under procedures
adopted by the Board of Trustees.
25
<PAGE> 32
TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Gateway fund intends to distribute to its shareholders substantially
all of its net investment income and net capital gains, as determined in
accordance with appropriate tax regulations.
TAXES ON DIVIDENDS AND DISTRIBUTIONS
Each January you will receive a Form 1099-DIV from Gateway. It will show
the amount and federal income tax treatment of all distributions paid to you
during the year. Distributions of any net investment income and net realized
short-term capital gains are taxable to you as ordinary income, whether or not
you reinvest. Distributions of net long-term capital gains are taxable as
long-term capital gains, whether or not you reinvest and regardless of how long
you held your fund shares.
TAXES ON REDEMPTIONS AND EXCHANGES
Redemptions, including exchanges between Gateway funds, will be reported
to you on Form 1099-B.
TAXES ON IRAS
Contributions, investments, and distributions with respect to IRAs are
subject to specific IRS rules. The IRA Agreement and Disclosure Statement
contains additional information about these rules.
ADDITIONAL INFORMATION
The tax discussion set forth above and in the SAI is included for general
information only. You must determine the applicability of federal, state, and
local taxes to dividends and distributions received on your shares of the fund
and to proceeds received from redemptions or exchanges of fund shares.
Prospective investors should consult their own tax advisers concerning the tax
consequences of an investment in a Gateway fund.
26
<PAGE> 33
INVESTMENT PRACTICES
GATEWAY FUND
The investment objective of the Gateway Fund is to achieve a high total
return at a reduced level of risk. The Fund is designed for conservative
investors who want to maximize total rate of return over the long term.
INVESTMENT PRACTICES: The Fund attempts to achieve its investment
objective primarily by investing in the 100 stocks included in the S&P 100 Stock
Index (the "100 Index") and by selling call options on the 100 Index. The
proportion of the Fund's assets invested in each stock held in the Fund's
portfolio is substantially similar to the proportion of the 100 Index
represented by the stock. For example, if a stock represents 2% of the value of
the 100 Index, the Fund invests approximately 2% of its assets in the stock. The
Adviser seeks to maintain a correlation of at least 99% between the composition
of the 100 Index and the Fund's portfolio. The Adviser monitors the composition
of the 100 Index on a daily basis and makes adjustments to the Fund's portfolio,
as needed.
When the Fund sells call options on the 100 Index, it receives cash from
the purchasers of the options. By selling options, the Fund attempts to earn a
greater total return over the long term than it would have earned by investing
only in the stocks in the 100 Index. Selling index call options reduces the risk
of owning stocks, but limits the opportunity to profit from an increase in the
market value of stocks. The Fund occasionally buys index put options in an
attempt to protect the Fund from a significant market decline in a short period
of time. The value of a put option generally increases as stock prices decrease.
The Fund is not affiliated with or sponsored by Standard and Poor's.
GATEWAY SMALL CAP INDEX FUND
The investment objective of the Small Cap Index Fund is to achieve
long-term growth of capital.
INVESTMENT PRACTICES: The Fund attempts to achieve its investment
objective primarily by investing in the 250 stocks included in the Wilshire
Small Cap Index (the "250 Index") and by purchasing put or call options on an
index as market conditions warrant. The Adviser seeks to maintain a correlation
of at least 90% between the composition of the 250 Index and the Fund's
portfolio. The Adviser monitors the composition of the 250 Index on a daily
basis and makes adjustments to the Fund's portfolio, as needed.
At times, the Fund may purchase index put options to reduce the risk of
principal loss and may also buy index call options to increase the potential for
gain.
The 250 Index focuses on capturing the performance profile of the small
capitalization sector of the United States equity market. The 250 Index consists
of common stock of 250 companies with a median market capitalization of $775
million and is designed to accurately reflect the general characteristics of
small capitalization companies. The 250 Index was developed in 1993 by Wilshire
Associates, Inc. in conjunction with the Pacific Stock Exchange.
The Fund is not affiliated with or sponsored by Wilshire Associates, Inc.
or the Pacific Stock Exchange.
SELLING INDEX CALL OPTIONS
The Gateway Fund regularly sells call options on the 100 Index. If you
are a shareholder in the Fund, it is important for you to understand some basic
information about this investment strategy and the risks involved in option
transactions.
It is easier to understand how index options work if you know some basic
concepts about a call option on an individual stock. A covered call option on an
individual stock is an option sold (written) on an individual stock owned by the
seller. The seller receives cash (a premium) from the purchaser. If the option
is not exercised by the purchaser, the seller realizes a gain equal to the
premium. This gain may be offset by a decline in the market value of the
underlying security. If the option is exercised by the purchaser, the purchaser
pays the seller the exercise price and the seller delivers the underlying
security. The premium, the exercise price, and the market value of the
underlying security determine the gain or loss realized by the seller. The
seller's obligation terminates when the option expires or when the seller enters
into a closing purchase transaction. The cost of entering into a closing
transaction reduces any gain realized by the seller.
A covered call option on a securities index is similar to an option on an
individual stock. However, the seller does not deliver the underlying securities
if the option is exercised. Index option transactions are settled in cash. The
seller pays the purchaser an amount equal to the difference between the closing
price of the index and the exercise price of the option. The premium and the
settlement amount determine the gain or loss realized by the seller.
RISK FACTORS
There are risks inherent in all securities investments. Thus, there can
be no assurance that a fund will be able to achieve its investment objective(s).
Because each fund has long-term investment objectives, none may be an
appropriate investment for persons intending to hold fund shares for less than
six months.
INVESTING IN SMALLER COMPANIES: Investments in companies with smaller
capitalization are generally more speculative than investments in companies with
larger capitalization. However, stocks of smaller companies tend to have more
growth potential. The Small Cap Index Fund attempts to provide shareholders with
the opportunity to participate in the potential long-term growth of smaller
companies.
27
<PAGE> 34
SELLING INDEX CALL OPTIONS: Option transactions involve risks not
generally associated with investments in stocks. The sale of index call options
by the Gateway Fund limits the Fund's opportunity to profit from an increase in
the market value of the underlying index. If the Fund sells exchange-traded call
options to hedge its portfolio, the purchaser usually has the right to exercise
the options at any time prior to the expiration date. The purchaser normally
exercises the options when it is to the purchaser's advantage rather than the
Fund's advantage. In addition, the Fund generally does not receive notice of the
exercise until the next business day. As a result, the Fund's portfolio is not
fully hedged between the time the options are exercised and the time the Fund
sells new call options on the next business day.
PURCHASING INDEX OPTIONS: The purchase of index options involves a risk
of loss of all or part of the cash paid for the options.
CLOSING OPTION TRANSACTIONS: There can be no assurance that a ready
market will exist for any particular option at a specific time. Closing
transactions for over-the-counter options generally must be negotiated with the
other party. These factors could limit the Adviser's ability to close a
particular option transaction at a fair price or in a timely manner or to carry
out a particular investment or hedging strategy. A Gateway fund will enter into
an option transaction only if there appears to be a ready market for such option
or the fund can effectively close its position by entering into an offsetting
position.
HEDGING STRATEGIES: The use of index options to protect or hedge a
Gateway fund's portfolio will not fully protect the fund against declines in the
market value of the securities held in the fund's portfolio. The Adviser may
choose not to use all of the available hedging strategies to protect a fund's
portfolio. The Adviser may also hedge a fund's portfolio at an inappropriate
time or incorrectly anticipate market conditions. In addition, a fund could
experience a loss on both its portfolio securities and the options used to hedge
these securities. Under unusual market conditions, such as an interruption in
trading in an index or certain stocks in the index, the Adviser may be unable to
hedge a fund's portfolio effectively. Restrictions imposed by regulatory
agencies may also adversely affect a fund's hedging strategy.
OTHER INVESTMENT STRATEGIES
Each Gateway fund may hold cash for purposes of liquidity or for
temporary defensive purposes. Cash is normally invested in repurchase
agreements. Cash may be also invested in securities of the U. S. government or
any of its agencies, bankers' acceptances, commercial paper, or certificates of
deposit. For temporary defensive purposes, a fund may hold up to 100% of its
assets in such instruments.
REPURCHASE AGREEMENTS: In a repurchase agreement, a fund acquires
securities suitable for investments in accordance with its policies and the
seller (usually a bank) agrees at the time of sale to repurchase such securities
at an agreed-upon date, price, and interest rate. Investments in repurchase
agreements are subject to the risk that the selling bank may default in its
repurchase obligation. Investments in repurchase agreements are also subject to
the risk that the selling bank may become financially insolvent which could
prevent or delay the fund's disposition of the collateral held as security for
these transactions. Each Gateway fund's repurchase agreements are fully
collateralized and the fund takes possession of such collateral, thus reducing
the risk of default. The collateral is subject to continuing market fluctuations
and its value could be more or less than the repurchase price.
ADDITIONAL INFORMATION
For further information concerning the investment practices described
above and certain risks associated with them, see "INVESTMENT OBJECTIVES AND
PRACTICES" in the SAI.
FUNDAMENTAL POLICIES
The investment objectives and investment restrictions applicable to each
Gateway fund are designated as fundamental policies of the fund. Such
fundamental policies may not be changed without approval of the holders of a
majority of the fund's outstanding shares.
The investment practices and strategies of a fund, as described above,
are not fundamental policies and may be changed without shareholder approval.
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INVESTMENT RESTRICTIONS
INVESTMENT RESTRICTIONS
Certain investment restrictions applicable to the Gateway funds are
described below. The complete text of these restrictions is set forth in the SAI
under "INVESTMENT PRACTICES, RISKS AND RESTRICTIONS." Additional investment
restrictions pertaining to the funds are set forth in the SAI under the same
caption.
OPTIONS ON SECURITIES INDEXES: No Gateway fund may purchase or sell put
options, call options, or combinations thereof except in accordance with its
investment objectives and practices and the following restrictions. The Gateway
Fund may sell covered call options on securities indexes. The Gateway Fund may
also purchase exchange-traded put options on securities indexes, provided that
after any such purchase not more than 5% of the fund's net assets would be
invested in premiums on the purchase of such options. The Small Cap Index Fund
may purchase exchange-traded call and put options on securities indexes,
provided that after any such purchase not more than 5% of the fund's net assets
would be invested in premiums on the purchase of such options. Each Gateway fund
may enter into closing transactions with respect to options.
REPURCHASE AGREEMENTS: No Gateway fund may invest more than 5% of its
total assets in repurchase agreements with a maturity longer than seven days. .
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GENERAL INFORMATION ABOUT THE GATEWAY TRUST
THE TRUST AND THE BOARD OF TRUSTEES
The Gateway Trust is an open-end management investment company
established as an Ohio business trust in 1986. From 1977 to 1986, the Trust's
predecessor operated as a Maryland corporation. The Trust has three series: the
Gateway Fund (previously known as the Gateway Index Plus Fund), the Gateway
Small Cap Index Fund, and the Cincinnati Fund. The Cincinnati Fund is offered by
a separate prospectus.
The Board of Trustees is generally responsible for management of the
business and affairs of the Trust. The Trustees formulate the general policies
of the Trust, approve contracts, and authorize the Trust officers to carry out
the decisions of the Board.
Under the Trust's Second Amended Agreement and Declaration of Trust, no
annual or regular meetings of shareholders are required. As a result, the
Trustees will continue in office until resignation, retirement, death, or
removal. Trustee vacancies normally are filled by vote of the remaining
Trustees. If at any time less than a majority of the Trustees in office has been
elected by the shareholders, the Trustees must call a shareholder meeting for
the purpose of electing Trustees.
SHAREHOLDER MEETINGS AND VOTING
A meeting of shareholders must be called if shareholders holding at least
10% of the Trust's shares (or shareholders holding at least 10% of any fund's
shares as to any matter affecting only such fund) file a written request for a
meeting.
On any matter submitted to a vote of shareholders, shares are voted by
fund, unless an aggregate vote is required by the Investment Company Act of
1940. Shares are voted by fund with respect to the approval or amendment of such
fund's advisory contract. As of April 1, 1998, the Adviser held, in a fiduciary
capacity, more than 25% of the outstanding shares of the Small Cap Index Fund.
Thus, the Adviser may be deemed to be a control person of this Fund as of that
date. As of April 1, 1998, BT Alex. Brown Incorporated held more than 25% of the
outstanding shares of the Gateway Fund. Thus, BT Alex. Brown Incorporated may be
deemed to be a control person of this Fund as of that date.
As of December 31, 1997, the shareholders of the Gateway Fund controlled
approximately 86% of the outstanding shares of the Trust. Therefore, in the
foreseeable future, when the shareholders of the Trust elect the Trustees or
vote in the aggregate on any other issue, the shareholders of the Gateway Fund
will be able to elect the Trustees or to decide the issue. Shareholders do not
have cumulative voting rights as to the election of Trustees. As a result, if a
shareholder meeting is called to elect Trustees, a majority of the shares voting
at the meeting can elect all of the Trustees.
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- --------------------------------------------------------------------------------
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Registration Statement
Securities Act of 1933 Registration No. 2-59895
Investment Company Act of 1940 Registration No. 811-02773
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 1, 1999
This Statement is not a prospectus but should be read in conjunction
with the current Prospectus of The Gateway Trust for the Gateway Fund
(previously known as the Gateway Index Plus Fund) and the Gateway Small Cap
Index Fund dated May 1, 1998 and any supplement thereto. A copy of the
Prospectus may be obtained from the Trust by written or telephone request
directed to the Trust at the address or the telephone number shown below.
- --------------------------------------------------------------------------------
P. O. BOX 5211
CINCINNATI, OHIO 45201-5211
(800) 354-6339
- --------------------------------------------------------------------------------
<PAGE> 38
TABLE OF CONTENTS
-----------------
INTRODUCTION...................................................................4
General Information About The Gateway Trust...............................4
INVESTMENT OBJECTIVES AND PRACTICES............................................5
Gateway Fund..............................................................5
Gateway Small Cap Index Fund..............................................5
OPTION TRANSACTIONS............................................................5
Selling Covered Call Options..............................................5
Selling Covered Put Options...............................................6
Purchase Of Put And Call Options..........................................6
Options On Securities Indexes.............................................6
Covered Index Call Options Sold By The Gateway Fund.......................6
INVESTMENT PRACTICES, RISKS, AND RESTRICTIONS..................................7
Other Investment Practices................................................7
Certain Risks.............................................................8
Investment Restrictions...................................................8
PERFORMANCE AND RISK INFORMATION..............................................10
Performance Information..................................................10
Total Return Calculations............................................10
Historical Results...................................................11
Risk Information.........................................................11
Comparative Indexes..................................................11
Standard Deviation...................................................11
Beta.................................................................12
Rankings And Comparative Performance Information.........................12
SHAREHOLDER SERVICES..........................................................12
Open Account.............................................................12
Automatic Investment Program.............................................12
IRAs.....................................................................12
Systematic Withdrawal Program............................................14
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................14
INVESTMENT ADVISORY AND OTHER SERVICES........................................15
Gateway Investment Advisers, L.P.........................................15
Gateway Fund Management Agreement........................................15
Gateway Small Cap Index Fund Investment Advisory Contract................16
Distribution Plan........................................................18
Custodian................................................................18
Shareholder Servicing, Transfer, Dividend Disbursing, And Financial
Servicing Agent........................................................18
<PAGE> 39
BROKERAGE.....................................................................19
ADDITIONAL TAX MATTERS........................................................21
Federal Tax Matters......................................................21
State And Local Tax Aspects..............................................21
TRUSTEES AND OFFICERS OF THE TRUST............................................22
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS.......................24
PRINCIPAL HOLDERS OF FUND SHARES..............................................24
Gateway Fund.............................................................24
Small Cap Index Fund.....................................................25
Shares Held By Adviser...................................................25
SCHEDULE A....................................................................26
SCHEDULE B....................................................................27
SCHEDULE C....................................................................29
<PAGE> 40
INTRODUCTION
------------
GENERAL INFORMATION ABOUT THE GATEWAY TRUST
The Gateway Trust (the "Trust") is an Ohio business trust which is
authorized to establish and operate one or more separate series of mutual funds
(herein referred to as "funds" or individually as a "fund"). Each fund has its
own investment policies, restrictions, practices, assets, and liabilities. Each
fund is represented by a separate series of shares of beneficial interest in the
Trust ("Shares"). The Trust's operation is governed by Chapter 1746 of the Ohio
Revised Code, by the Second Amended Agreement and Declaration of Trust dated as
of December 29, 1992, as amended, and by the Trust's bylaws, as amended.
At present, there are three series of the Trust:
- --------------------------------------------- --------------------------
NAME OF FUND DATE ORGANIZED
- --------------------------------------------- --------------------------
Gateway Fund 1977
Gateway Small Cap Index Fund April 1993
Cincinnati Fund November 1994
- --------------------------------------------- --------------------------
Gateway Fund was known as the Gateway Index Plus Fund until April 30,
1998; as Gateway Option Index Fund until March 1990; as Gateway Option Income
Fund until February 1988; and as Gateway Option Income Fund, Inc. until May
1986. Gateway Option Income Fund, Inc., the predecessor to the Trust, was
organized in 1977 as a Maryland corporation. It was reorganized to become the
Trust effective as of May 2, 1986, with the Gateway Option Income Fund as its
sole initial fund. As a result of the transaction, shareholders of the
corporation on May 2, 1986, became shareholders of the Option Income Fund.
The Gateway Fund and the Gateway Small Cap Index Fund are offered in
one combined prospectus (the "Combined Prospectus"). The Cincinnati Fund(R) is
offered in a separate prospectus and has a separate Statement of Additional
Information. Gateway Investment Advisers, L.P. (the "Adviser") acts as the
funds' investment adviser.
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<PAGE> 41
INVESTMENT OBJECTIVES AND PRACTICES
-----------------------------------
GATEWAY FUND
The investment objective of the Gateway Fund (previously known as the
Gateway Index Plus Fund) is to achieve a high total return at a reduced level of
risk. Descriptions of the Fund's current investment practices and strategies and
certain risk factors applicable to the Fund are set forth under the caption
"INVESTMENT PRACTICES" in the Combined Prospectus.
The Gateway Fund primarily invests in a portfolio of common stocks
which parallels the composition of the Standard & Poor's 100 Stock Index (the
"100 Index"). A list of the companies whose stocks are included in the 100 Index
is set forth in Schedule "A" attached to this Statement. The Fund sells index
call options on the S&P 100 Index, the S&P 500 Index and other stock indexes,
and, when appropriate, the Fund enters into closing purchase transactions with
respect to such options. The Fund occasionally purchases put options on
securities indexes.
In addition, the Fund has authority to, and when deemed appropriate
may, invest in the stocks of other securities indexes, sell put options on
securities indexes, and purchase call options on securities indexes; however,
the Fund does not intend to enter into these types of transactions in the coming
year.
GATEWAY SMALL CAP INDEX FUND
The investment objective of the Small Cap Index Fund is to achieve
long-term growth of capital. Descriptions of the Fund's current investment
practices and strategies and certain risk factors applicable to the Fund are set
forth under the caption "INVESTMENT PRACTICES" in the Combined Prospectus.
The Small Cap Index Fund primarily invests in a portfolio of common
stocks which parallels the composition of the Wilshire Small Cap Index (the "250
Index"). A list of the companies whose stocks are included in the 250 Index is
set forth in Schedule "B" attached to this Statement. Because the 250 Index is
comprised of 250 equity securities and the Fund purchases such securities in
round lots, the portfolio does not correlate perfectly with the 250 Index.
Although the Adviser monitors the Small Cap Index Fund portfolio so that the
percentage of assets invested in each stock in the Small Cap Index Fund
substantially corresponds to the composition of the 250 Index, the Fund bears
the risk that the price of its portfolio will not increase as much as (or will
decrease more than) the 250 Index.
The Small Cap Index Fund may also purchase put and call options on
securities indexes such as the S&P 500 Index, the 250 Index, the Russell 2000
Index, and comparable small capitalization securities indexes. The Small Cap
Index Fund limits its aggregate investment in premiums on put and call options
to an amount not exceeding 5% of the Fund's net assets. Options on the 250 Index
are a relatively new investment vehicle and the secondary market for any
particular option on this index at a specific time may be limited.
OPTION TRANSACTIONS
-------------------
This section contains a brief general description of various types of
options, certain option trading strategies, and some of the risks of option
trading. It is included to help a shareholder understand the investment
practices of the funds. It is easier to understand index options if you
understand options on individual stocks. For this reason, the first three parts
of this section discuss individual stock options.
SELLING COVERED CALL OPTIONS
A covered call option is an option sold on a security owned by the
seller of the option. If the option is exercised by the purchaser during the
option period, the seller is required to deliver the underlying security against
payment of the exercise price. The seller's obligation terminates upon
expiration of the option period or when the seller executes a closing purchase
transaction with respect to such option.
The seller of a covered call option gives up, in return for the
premium, the opportunity to profit from an increase in the value of the
underlying security above the exercise price. At the same time, the seller
retains the risk of loss from a decline in the value of the underlying security
during the option period. Although the seller may terminate its obligation by
executing a closing purchase transaction, the cost of effecting such a
transaction may be greater than the premium received upon its sale, resulting in
a loss to the
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<PAGE> 42
seller. If such an option expires unexercised, the seller realizes a gain equal
to the premium received. Such a gain may be offset or exceeded by a decline in
the market value of the underlying security during the option period. If an
option is exercised, the exercise price, the premium received, and the market
value of the underlying security determine the gain or loss realized by the
seller.
The Gateway Fund is the only Gateway fund authorized to sell covered
call options. A more complete description of the details and risks involved in
selling covered call options is set forth below under the caption "COVERED INDEX
CALL OPTIONS SOLD BY THE GATEWAY FUND."
SELLING COVERED PUT OPTIONS
The seller of a covered put option has the obligation to buy, and the
purchaser the right to sell, the underlying security at the exercise price
during the option period. To cover a put option, a seller usually deposits U. S.
government securities (or other high-grade debt obligations) in a segregated
account at the seller's custodian. The value of the deposited securities is
equal to or greater than the exercise price of the underlying security. The
value of the deposited securities is marked to market daily and, if necessary,
additional assets are placed in the segregated account to maintain a value equal
to or greater than the exercise price. The seller maintains the segregated
account so long as it is obligated as the seller. The obligation of the seller
is terminated when the purchaser exercises the put option, when the option
expires, or when a closing purchase transaction is effected by the seller.
The seller's gain on the sale of a put option is limited to the premium
received plus interest earned on its segregated account. The seller's potential
loss on a put option is determined by taking into consideration the exercise
price of the option, the market price of the underlying security when the put is
exercised, the premium received, and the interest earned on its segregated
account. Although a seller risks a substantial loss if the price of the stock on
which it has sold a put option drops suddenly, the seller can protect itself
against serious loss by entering into a closing purchase transaction. The degree
of loss will depend upon the seller's ability to detect the movement in the
stock's price and to execute a closing transaction at the appropriate time.
The Gateway Fund is the only Gateway fund authorized to sell covered
put options. To comply with state securities requirements, the Fund will not
sell any covered put option if, as a result, the Fund would have to invest more
than 50% of its total assets (taken at current value) to meet its obligation
upon the exercise of put options.
PURCHASE OF PUT AND CALL OPTIONS
Put options can be employed to protect against declines in the market
value of portfolio securities or to attempt to retain unrealized gains in the
value of portfolio securities. Put options might also be purchased to facilitate
the sale of portfolio securities. Call options can be purchased as a temporary
substitute for the purchase of individual stocks, which then could be purchased
in orderly fashion. Upon the purchase of the stocks, the purchaser would
normally terminate the call position.
The purchase of both put and call options involves the risk of loss of
all or part of the premium paid. If the price of the underlying stock does not
rise (in the case of a call) or drop (in the case of a put) by an amount at
least equal to the premium paid for the option contract, the purchaser will
experience a loss on the option contract equal to the deficiency.
The Gateway Fund and the Small Cap Index Fund each are authorized to
purchase index put and call options. Each fund limits its aggregate investment
in premiums on put and call options to an amount not exceeding 5% of its net
assets.
OPTIONS ON SECURITIES INDEXES
An option on a securities index is generally similar to an option on an
individual stock, but an option on a securities index is settled only in cash.
The exercising holder of an index option, instead of receiving a security,
receives the difference between the closing price of the securities index and
the exercise price of the index option times a specified multiple ($100 in the
case of the S&P 100 Stock Index). The seller of index options may realize a gain
or loss according to movement in the level of securities prices in that index
and in the securities markets generally.
COVERED INDEX CALL OPTIONS SOLD BY THE GATEWAY FUND
The Gateway Fund sells index call options in an attempt to earn a
greater total return over the long term than it would earn by investing only in
the stocks in the 100 Index.
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<PAGE> 43
Frequently the Fund executes a closing purchase transaction with
respect to the option it has sold and sells another option (with either a
different exercise price or expiration date or both). The Fund's objective in
entering into such closing transactions is to increase option premium income, to
limit losses, or to protect anticipated gains in underlying stocks. The cost of
a closing transaction, while reducing the premium income realized from the sale
of the option, should be offset, at least in part, by appreciation in the value
of the underlying index, and by the opportunity to realize additional premium
income from selling a new option.
When the Fund sells an index call option, it does not deliver the
underlying stocks or cash to the broker through whom the transaction is
effected. In the case of an exchange-traded option, the Fund establishes an
escrow account. The Trust's Custodian (or a securities depository acting for the
Custodian) acts as the Trust's escrow agent. The escrow agent enters into
documents known as escrow receipts with respect to the stocks included in the
Fund (or escrow receipts with respect to other acceptable securities). The
escrow agent releases the stocks from the escrow account when the call option
expires or the Fund enters into a closing purchase transaction. Until such
release, the underlying stocks cannot be sold by the Fund. The Fund may enter
into similar collateral arrangements with the counterparty when it sells
over-the-counter index call options.
When the Fund sells an index call option, it is also required to
"cover" the option pursuant to requirements enunciated by the staff of the
Securities and Exchange Commission ("the SEC"). The staff has indicated that a
mutual fund may "cover" an index call option by (1) owning and holding for the
term of the option a portfolio of stocks substantially replicating the movement
of the index underlying the call option; (2) purchasing an American-style call
option on the same index with an exercise price no greater than the exercise
price of the written option; or (3) establishing and maintaining for the term of
the option a segregated account consisting of cash, U. S. government securities,
or other high-grade debt securities, equal in value to the aggregate contract
price of the call option (the current index value times the specific multiple).
The Fund generally "covers" the index options it has sold by owning and holding
the stocks included in the 100 Index. As an alternative method of "covering" the
option, the Fund may purchase an appropriate offsetting option.
The purchaser of an index call option sold by the Fund may exercise the
option at a price fixed as of the closing level of the the index on the date of
exercise. Unless the Fund has liquid assets sufficient to satisfy the exercise
of the index call option, the Fund would be required to liquidate portfolio
securities to satisfy the exercise. The market value of such securities may
decline between the time the option is exercised and the time the Fund is able
to sell the securities. If the Fund fails to anticipate an exercise, it may have
to borrow from a bank (in amounts not exceeding 5% of the Fund's total assets)
pending settlement of the sale of the portfolio securities and thereby incur
interest charges. If trading is interrupted on the index, the Fund would not be
able to close out its option positions.
Additional information about the Fund's investment practices and
strategies with respect to option transactions, and certain risks related to
such transactions, is set forth under the caption "INVESTMENT PRACTICES" in the
Combined Prospectus.
INVESTMENT PRACTICES, RISKS, AND RESTRICTIONS
---------------------------------------------
OTHER INVESTMENT PRACTICES
Each fund may hold cash for purposes of liquidity or for temporary
defensive purposes. Each fund generally will hold cash reserves for the purpose
of paying expenses and share redemptions and may hold cash received from the
sale of its shares which has not yet been invested. In addition, the Adviser may
determine from time to time that, for temporary defensive purposes, one or more
funds should reduce (and in periods of unusual market conditions reduce
substantially or liquidate entirely) its investment in common stock. For
temporary defensive purposes, each fund may hold up to 100% of its assets in
cash.
Cash is normally invested in repurchase agreements. Cash may also be
invested in securities of the U. S. government or any of its agencies, bankers'
acceptances, commercial paper, or certificates of deposit (collectively "cash
instruments"). Commercial paper investments will be limited to investment grade
issues rated A-1 or A-2 by Standard & Poor's or Prime-1 or Prime-2 by Moody's
Investors Service, Inc. Certificates of deposit investments will be limited to
obligations of domestic banks with assets of $1 billion or more.
Repurchase agreements are instruments under which a fund buys
securities suitable for investment under its policies and obtains the concurrent
agreement of the seller (usually a bank) to repurchase such securities at an
agreed-upon date, price, and interest rate. Investments in repurchase agreements
are subject to the risk that the selling bank may default in its repurchase
obligation. However, not more than 5% of any fund's total assets may be invested
in repurchase agreements which have a maturity longer than seven days.
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<PAGE> 44
CERTAIN RISKS
The success of each fund's option strategy depends upon the ability of
the Adviser to identify an appropriate index in which to invest and the
Adviser's ability to enter into transactions involving index options at
appropriate times in the stock market cycle. In pursuing this course, the
Adviser is subject to the risks of change in general economic conditions,
adverse developments in specific industries, and factors affecting the
performance of individual stocks.
Standard and Poor's ("S&P") obtains information for inclusion in or for
use in the calculation of the S&P 100 Index from sources which S&P considers
reliable. S&P HAS ADVISED THE TRUST THAT IT MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST OR OWNERS OF THE GATEWAY
FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 100 INDEX OR ANY
DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY
EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, FOR USE WITH RESPECT TO THE S&P 100 INDEX OR ANY DATA
INCLUDED THEREIN.
Wilshire Associates, Inc. ("Wilshire") obtains information for
inclusion in or for use in the calculation of the Wilshire Small Cap Index from
sources which Wilshire considers reliable. WILSHIRE HAS ADVISED THE TRUST THAT
IT MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
TRUST OR OWNERS OF THE SMALL CAP INDEX FUND, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE WILSHIRE SMALL CAP INDEX OR ANY DATA INCLUDED THEREIN. WILSHIRE
MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH
WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, FOR USE WITH
RESPECT TO THE WILSHIRE SMALL CAP INDEX OR ANY DATA INCLUDED THEREIN.
Other risks related to the investment practices and strategies of each
fund are described under the caption "INVESTMENT PRACTICES" in the Combined
Prospectus.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental policies with respect to each
of the funds that may not be changed without a vote of shareholders of that
fund. Under these policies, the Gateway Fund and the Small Cap Index Fund each
are subject to the following restrictions:
1. A fund may not purchase any security if, as a result, the fund
(or the funds in the Trust together) would then hold more than
10% of any class of securities of an issuer (taking all common
stock issues of an issuer as a single class, all preferred stock
issues as a single class, and all debt issues as a single
class), or more than 10% of the outstanding voting securities of
an issuer.
2. A fund may not purchase any security if, as a result, the fund
would then have more than 5% of its total assets (taken at
current value) invested in securities of companies (including
predecessors) less than three years old and in equity securities
for which market quotations are not readily available.
3. A fund may not purchase securities on margin (but a fund may
obtain such short-term credits as may be necessary for the
clearance of purchase and sales of securities).
4. A fund may not make short sales of securities or maintain a
short position (a) unless, at all times when a short position is
open, the fund owns an equal amount of such securities or
securities convertible into or exchangeable (without payment of
any further consideration) for securities of the same issue as,
and equal in amount to, the securities sold short, and (b)
unless not more than 10% of such fund's net assets (taken at
current value) are held as collateral for such sales at any one
time.
It is the present intention of management to make such sales
only for the purpose of deferring realization of gain or loss
for federal income tax purposes. It is the present intention of
management that short sales of securities subject to outstanding
options will not be made.
5. A fund may not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only from banks and
only in amounts not in excess of 5% of the fund's total assets
(except to meet redemption requests as discussed below), taken
at the lower of cost or market.
In order to meet redemption requests without immediately selling
any portfolio securities, a fund may borrow an amount up to 25%
of the value of its total assets including the amount borrowed.
If, due to market fluctuations or other reasons, the value of
such fund's assets falls below 400% of its borrowing, the fund
will
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<PAGE> 45
reduce its borrowing which may result in the fund being required
to sell securities at a time when it may otherwise be
disadvantageous to do so. This borrowing is not for investment
leverage but solely to facilitate management of the portfolio by
enabling the fund to meet redemption requests where the
liquidation of portfolio securities is deemed to be inconvenient
or disadvantageous. However, the fund might be deemed to be
engaged in leveraging in that any such borrowing will enable the
fund to continue to earn money on investments which otherwise
may have been sold in order to meet redemption requests.
6. A fund may not pledge more than 10% of its total assets, taken
at market value. The deposit in escrow of underlying securities
in connection with the writing of call options is not deemed to
be a pledge.
7. A fund may not purchase or retain securities of any company if,
to the knowledge of the Trust, officers and trustees of the
Trust or of the Adviser who individually own more than 1/2 of 1%
of the securities of that company together own beneficially more
than 5% of such securities.
8. A fund may not buy or sell commodities or commodities futures or
options contracts, or real estate or interests in real estate,
although it may purchase and sell (a) securities which are
secured by real estate, and (b) securities of companies which
invest or deal in real estate.
9. A fund may not act as underwriter except to the extent that, in
connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under certain provisions of the
federal securities laws.
10. A fund may not make investments for the purpose of exercising
control or management.
11. A fund may not participate on a joint or joint and several basis
in any trading account in securities.
12. A fund may not purchase any security restricted as to
disposition under the federal securities laws.
13. A fund may not invest in securities of other investment
companies, except as part of a merger, consolidation, or other
acquisition.
14. A fund may not invest in interests in oil, gas, or other mineral
exploration or development programs, although it may invest in
the common stocks of companies which invest in or sponsor such
programs.
15. A fund may not make loans, except through the purchase of bonds,
debentures, commercial paper, corporate notes, and similar
evidences of indebtedness of a type commonly sold privately to
financial institutions (subject to the limitation in paragraph
12 above), and except through repurchase agreements.
No more than 5% of any fund's assets will be invested in
repurchase agreements which have a maturity longer than seven
days. In addition, the fund will not enter into repurchase
agreements with a securities dealer if such transactions
constitute the purchase of an interest in such dealer under the
Investment Company Act of 1940. The purchase of a portion of an
issue of such securities distributed publicly, whether or not
such purchase is made on the original issuance, is not
considered the making of a loan.
16. A fund may not purchase any security (other than U. S.
government obligations) if, as a result thereof, less than 75%
of the value of the fund's total assets is represented by cash
and cash items (including receivables), government securities,
and other securities which, for purposes of this calculation,
are limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the fund's total assets
and to not more than 10% of the outstanding voting securities of
such issuer. All of the funds in the Trust taken as a group also
must satisfy this 10% test.
17. A fund may not concentrate the investments of the fund in a
single industry nor invest more than 25% of the current value of
its total assets in a single industry.
18. A fund may not sell call or put options, or purchase call or put
options, except that (a) the Gateway Fund may (i) sell covered
call options with respect to all of its portfolio securities or
with respect to securities indexes; (ii) purchase
exchange-traded put and call options, provided that after any
such purchase not more than 5% of the Fund's net assets would be
invested in premiums on the purchase of put and call options or
combinations thereof; (iii) sell covered put options, provided
that after any such sale the Gateway Fund would not have more
than 50% of its total assets (taken at current value) subject to
being invested on the exercise of put options; and (iv) enter
into closing purchase transactions with respect to such options,
and (b) the Small Cap
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<PAGE> 46
Index Fund may purchase exchange-traded puts and calls provided
that after any such purchase not more than 5% of the Fund's
assets would be invested in premiums on the purchase of such
options.
The Trust has no fundamental policy with respect to the issuance of
senior securities by any fund; however, the Investment Company Act of 1940
prohibits the Trust's issuance of any such securities.
In addition to these fundamental policies, each fund will limit its
investment in warrants to no more than 5% of such fund's assets. The Adviser has
no current intention of causing any fund to invest in warrants in the coming
year.
Although the practices described in paragraphs 4, 5, and 6 above could
involve more than 5% of a fund's assets, none of those practices have been
employed by any fund since January 1, 1983. The Adviser has no current intention
of causing any fund to employ any such practice in the coming year.
PERFORMANCE AND RISK INFORMATION
--------------------------------
PERFORMANCE INFORMATION
The funds may quote performance in various ways. All performance
information supplied by the funds is based upon historical results and is not
intended to indicate future performance. Total returns and other performance
information may be shown numerically or in a table, graph, or similar
illustration. A fund's share prices and total returns fluctuate in response to
market conditions, interest rates, and other factors.
TOTAL RETURN CALCULATIONS
-------------------------
Total returns reflect all aspects of a fund's return, including the
effect of reinvesting dividends and capital gain distributions, and any change
in a fund's net asset value per share (the "NAV") over the period.
Average annual total returns are calculated by determining the average
annual compounded rates of return over one-, five-, and ten-year periods that
would equate an initial hypothetical investment to the ending redeemable value
according to the following formula:
P (1 + T)n[exponent] = ERV where T = Average annual total return
n = Number of years and portion
of a year
ERV = Ending redeemable value (of
an initial hypothetical
$1,000 investment) at the
end of the period
P = $1,000 (the hypothetical
initial investment)
If a fund has been in existence for less than one, five, or ten years,
the time period since the date it commenced operations will be substituted for
the periods stated.
As a hypothetical example, a cumulative return of 100% growth on a
compounded basis in ten years would produce an average annual total return of
7.18%, which is the annual rate that would equal 100% growth on a compounded
basis in ten years. While average annual total returns are convenient means of
comparing investment alternatives, investors should realize that a fund's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of the fund.
Average annual total return is calculated as required by applicable
regulations promulgated by the SEC. In addition to average annual total returns,
a fund may quote year-by-year total returns and cumulative total returns
reflecting the simple change in value of any investment over a stated period.
Average annual, year-by-year, and cumulative total returns may be quoted as a
percentage or as a dollar amount.
10
<PAGE> 47
HISTORICAL RESULTS
------------------
The following table shows each fund's average annual and cumulative
total returns for the period ended December 31, 1997:
<TABLE>
<CAPTION>
- -------------------------------------------- --------------- ---------------- --------------- ---------------------
AVERAGE ANNUAL TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
- -------------------------------------------- --------------- ---------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Gateway Fund 12.35% 9.35% 11.82% 10.43%
Gateway Small Cap Index Fund 20.64 N/A N/A 12.69
- -------------------------------------------- --------------- ---------------- --------------- ---------------------
<CAPTION>
- -------------------------------------------- --------------- --------------- ---------------- ---------------------
CUMULATIVE TOTAL RETURN ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
- -------------------------------------------- --------------- --------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Gateway Fund 12.35% 56.33% 205.56% 632.83%
Gateway Small Cap Index Fund 20.64 N/A N/A 72.20
- -------------------------------------------- --------------- --------------- ---------------- ---------------------
</TABLE>
The table below shows the redeemable value on December 31, 1997, for an
initial investment of $10,000 in the fund that was made at the beginning of the
one-, five-, and ten-year periods, or at the commencement of the fund's
operations. The table assumes all dividends and distributions have been
reinvested in additional fund shares.
<TABLE>
<CAPTION>
- --------------------------------------------- --------------- -------------- ---------------- ---------------------
ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
- --------------------------------------------- --------------- -------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Gateway Fund $11,235 $15,633 $30,556 $73,283
Gateway Small Cap Index Fund $12,064 N/A N/A $17,220
- --------------------------------------------- --------------- -------------- ---------------- ---------------------
</TABLE>
RISK INFORMATION
In evaluating the performance of any investment including a Gateway
fund, it is important to understand the risks involved in the investment.
Information regarding the performance of an investment, while valuable in
itself, is more meaningful when it is related to the level of risk associated
with that investment. Thus, two different mutual funds that produce similar
average annual total returns may present markedly different investment
opportunities if the risk of loss associated with one mutual fund is greater
than that of the other mutual fund.
For example, an investment in a mutual fund that invests in stocks
generally will present greater potential for variation in the share price of the
mutual fund, and hence a greater risk of gain or loss than an investment in a
mutual fund that invests in short-term U. S. government securities. Because the
potential for greater gain typically carries with it a greater degree of risk,
the advisability of an investment in a particular mutual fund for a given
investor will depend not only on historical performance of the fund but also on
the potential for gain and loss associated with that mutual fund.
The Gateway Trust offers three different funds that produce different
total returns and present different risk potentials. The difference in risk
potential can be demonstrated by various statistical concepts. The following
statistical concepts can be used to measure some of the risks associated with an
investment in each fund.
COMPARATIVE INDEXES
-------------------
The performance and risk of the Gateway Fund and the Small Cap Index
Fund may be compared to various broadly recognized indexes such as the S&P 500
Index or the Lehman Government/Corporate Bond Index. These comparative indexes
are used because they are the standard benchmarks of the stock market and bond
market respectively. A fund's performance and risk may also be compared to other
appropriate indexes.
STANDARD DEVIATION
------------------
Standard deviation measures the volatility of the total return of a
fund. Standard deviation is one method of comparing the total return of a fund
to the average monthly total return of the fund. In general, a fund that has a
greater standard deviation is a fund that has displayed a greater tendency to
vary from its own average monthly total return. Standard deviation can also be
used to compare the total return of a fund to the total return of an index or
another mutual fund. By comparing the magnitude of the standard deviation of
each investment, an analyst is able to determine the relative volatility of each
investment.
11
<PAGE> 48
For example, as of December 31, 1997, the annual standard deviation for
the Gateway Fund over the past three years was 3.78% while the standard
deviation for the S&P 500 Index was 11.14%. Thus, the S&P 500 Index was
approximately three times as volatile as the Gateway Fund. An investment with an
expected return of 10% and a standard deviation of 15% would be expected to earn
a total return ranging from -5% to +25% about 68% of the time, a total return
ranging from -20% to +40% about 95% of the time, and a total return ranging from
- -35% to +55% about 97% of the time.
BETA
----
Beta analyzes the market risk of a fund by showing how responsive the
fund is to the market as defined by an index. Beta is a comparative measure of a
fund's volatility in relation to an appropriate index. Generally, higher betas
represent riskier investments. By definition, the beta of the market is 1.00.
Thus, a fund with a beta higher than 1.00 is expected to perform better than the
market in up markets and worse than the market in down markets.
For example, the beta of the Gateway Fund was 0.32 for the five-year
period ended December 31, 1997. The Gateway Fund would be expected to perform
approximately 1/3 as well as the market (as defined by S&P 500 Index) in up
markets and 1/3 as poorly as the market in down markets. Beta is the slope of
the "least square line" which compares the fund with an index.
RANKINGS AND COMPARATIVE PERFORMANCE INFORMATION
Each fund may compare its performance to that of other mutual funds or
categories of mutual funds as reported by independent services such as
Morningstar, Inc., Lipper Analytical Services, Inc., and Value Line Mutual Fund
Survey, or by other financial publications with a circulation of 10,000 readers
or more. Performance comparisons may be expressed as ratings, such as the
proprietary ratings published by Morningstar, Inc., or rankings, such as the
rankings of funds in various categories published by Lipper Analytical Services,
Inc. Performance comparisons may also be expressed as designations (such as a
certain number of "stars") or descriptions (such as "best fund") assigned by
such services or publications.
SHAREHOLDER SERVICES
--------------------
Gateway Investment Advisers, L.P. serves as the Trust's shareholder
servicing, transfer, dividend disbursing, and financial servicing agent (the
"Servicing Agent"). In this capacity, it performs various shareholder services
on behalf of the Trust.
OPEN ACCOUNT
Each fund's regular account for investors who purchase its shares is
the Open Account. The Open Account facilitates regular purchases of fund shares
over a period of years and provides the option of receiving dividends and
distributions either in cash or in fund shares. Gateway does not charge for the
automatic reinvestment of dividends and distributions.
The Servicing Agent maintains a record of the investor's purchases,
redemptions, and share balances in the investor's Open Account. Shortly after
each purchase, the Servicing Agent will mail a confirmation to the investor
showing the shares purchased, the exact price paid for the shares, and the total
number of shares owned. Share certificates will not be issued.
Upon opening an account, the investor may elect either of the following
options: (1) reinvestment at net asset value of all distributions, or (2)
payment in cash of all distributions. If no election is made, all distributions
will be reinvested at net asset value. An election may be changed by a letter or
telephone call to the Servicing Agent. No annual maintenance fees are charged by
the Trust on any Open Account. The Trust reserves the right to charge annual
fees in the future. Shareholders will be notified of any change in the annual
fee arrangement.
AUTOMATIC INVESTMENT PROGRAM
Investors can arrange to use our Automatic Investment Program by either
making the election on the New Account Application or by contacting Shareholder
Services at (800) 354-6339 for the appropriate forms. With this service,
investors purchase additional shares by having a predetermined amount of $100 or
more automatically transferred from a bank account to the Trust on a monthly or
quarterly basis. Changes to an Automatic Investment Program, including
discontinuing participation, must be in writing and sent to The Gateway Trust,
Shareholder Services, P. O. Box 5211, Cincinnati, OH 45201-5211. All changes to
the Program must be received by Gateway at least five business days prior to the
next scheduled transfer.
IRAS
12
<PAGE> 49
Investors may purchase shares of any Gateway fund through Individual
Retirement Accounts ("IRAs") which are permitted to invest in shares of a mutual
fund. The Trust itself sponsors a traditional IRA (the "Gateway Traditional
IRA") and a Roth IRA (the "Gateway Roth IRA") (or jointly as a "Gateway IRA"). A
Gateway IRA can be adopted by an investor and is specifically designed to permit
the investor to invest in shares of any Gateway fund selected by the investor.
The custodian of the Gateway IRA is Star Bank. Investors can obtain forms to
establish a Gateway IRA by calling Shareholder Services at (800) 354-6339.
An IRA is a special program with certain tax benefits that generally
permits an investor to establish and contribute to his or her own retirement
plan. For detailed information about a Gateway IRA, please refer to the
Agreement and Disclosure Statement for the appropriate Gateway IRA. Agreements
and Disclosure Statements can be obtained by calling Shareholder Services
at (800) 354-6339.
An investor may make a direct transfer of assets from one IRA to a
Gateway IRA by directing the existing IRA custodian or trustee to transfer
directly to a Gateway IRA the amount held in that prior IRA, without directly
receiving those funds or being taxed on the transfer. There is no minimum
holding period for a direct transfer of IRA assets from one custodian or trustee
to another. Call Shareholder Services at (800) 354-6339 to obtain the
appropriate transfer form.
A Gateway Traditional IRA is eligible to receive direct rollovers of
distributions from a qualified employer plan. An investor can make a direct
rollover by instructing the employer's plan to wire the distribution to Star
Bank as custodian for the Gateway Traditional IRA. The distribution should be
wired to:
The Gateway Trust c/o Star Bank, N.A.
ABA #042-0000-13
Cincinnati, OH
Name (insert investor name)
Gateway Account No. (insert investor account number)
Name of Gateway fund(s) in which you wish to invest
An investor can also make a direct rollover to a Gateway Traditional
IRA by instructing the employer's plan to prepare a check for the amount to be
rolled over payable to "Star Bank, N.A., as Custodian of Individual Retirement
Account of (insert investor name)," and sending that check to Gateway. The check
can also be delivered in person to Gateway, or mailed to:
The Gateway Trust
Shareholder Services
P. O. Box 5211
Cincinnati, OH 45201-5211
An investor can make a 60-day rollover of a distribution from a
qualified employer plan by instructing the employer's plan to prepare a check
payable to the investor and by endorsing or cashing the check and depositing
some or all of the proceeds in a Gateway Traditional IRA. The deposit must be
delivered in person to Gateway, or mailed to The Gateway Trust at the above
address within 60 days of when the investor receives the distribution. The
employer's plan must withhold 20% of the taxable amount for federal income tax
if the investor chooses a 60-day rollover for the distribution.
Some portions of distributions from other IRAs or from tax-qualified
profit sharing, stock bonus, pension, or annuity plans are not eligible for
regular or direct rollovers. For instance, distributions of nontaxable after-tax
employee contributions or required minimum payments made after an individual
reaches age 70 1/2 cannot be rolled over.
To make a withdrawal from a Gateway IRA, an investor should contact
Shareholder Services at (800) 354-6339.
The rules for contributing to, investing under, and distributing from
IRAs are complex, and any investor should consult with his or her own tax
adviser if he or she has any questions with respect to IRAs and to determine if
there have been any recent changes to the rules. At the time an IRA is
established, the custodian or trustee of the IRA is required by law to provide a
disclosure statement to the individual setting forth important information
concerning IRAs.
Further information concerning IRAs can be obtained from any district
office of the Internal Revenue Service. In particular, Publication 590 of the
Internal Revenue Service provides general information as to IRAs.
13
<PAGE> 50
No annual maintenance fees are charged by the Trust for any account,
including IRAs, SEP-IRAs, retirement, and pension or profit-sharing plans,
including 401(k) plans. The Trust reserves the right to charge annual fees in
the future. Shareholders will be notified of any change in the annual fee
arrangement.
SYSTEMATIC WITHDRAWAL PROGRAM
If the value of a shareholder's account is at least $5,000, the
shareholder can request withdrawals on either a monthly or a quarterly basis in
the minimum amount of $100. The Trust makes no recommendation as to the minimum
amount to be periodically withdrawn by a shareholder. A sufficient number of
shares in the shareholder's account will be sold periodically (normally one
business day prior to each withdrawal payment date) to meet the requested
withdrawal payments.
If a shareholder participates in the Systematic Withdrawal Program, all
dividends and distributions on shares held in the account will be reinvested in
additional shares at net asset value. Since the withdrawal payments represent
the proceeds from sales of the fund shares, there will be a reduction, and there
could even be an eventual depletion, of the amount invested in the funds to the
extent that withdrawal payments exceed the dividends and distributions paid and
reinvested in shares. Withdrawals under the Systematic Withdrawal Program should
not, therefore, be considered a yield on investment. A shareholder can make
arrangements to use the Systematic Withdrawal Program (or discontinue
participation) by contacting Shareholder Services at (800) 354-6339.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Basic information concerning the purchase and redemption of shares is
set forth under the captions "HOW TO PURCHASE ADDITIONAL SHARES" and "HOW TO
REDEEM SHARES" in the Combined Prospectus. Shares of all funds are purchased and
redeemed at their net asset value as next determined following receipt of the
purchase order or redemption notice. Redemptions under the Systematic Withdrawal
Program and installment distributions from IRAs are effected at the net asset
value next determined on or after the date designated for the redemption or
distribution. Information as to the method of calculating the net asset value of
shares of any fund is included in the Combined Prospectus under the caption "HOW
FUND SHARES ARE PRICED."
Certificates for shares of any fund will not be issued.
The minimum initial investment is $1,000 ($500 for IRAs). The minimum
additional investment is $100, subject to certain exceptions such as investments
by the Adviser's employees, by participants in an SEP-IRA program, and by
participants in the Automatic Investment Program. The Trust reserves the right
to accept or reject any purchase order of any fund.
There is no minimum or maximum applicable to redemption of shares of
any fund. The Trust, however, reserves the right to redeem a shareholder's
account(s) under certain circumstances. The shareholder will receive at least 60
days' written notice prior to the redemption of the account(s).
The Trust may redeem a shareholder's account(s) in any fund when the
aggregate value of the shareholder's account(s) falls below $800 (other than as
a result of market action.). The shareholder may prevent such redemption by
increasing the value of the account(s) to $1,000 or more within the 60-day
period.
The Trust will redeem a shareholder's account if the shareholder does
not provide a valid U. S. social security number or taxpayer identification
number or other requested documents. The shareholder may prevent such redemption
by providing the requested information within the 60-day period.
The Trust reserves the right to terminate temporarily or permanently
the exchange privilege for any shareholder who makes an excessive number of
exchanges between funds. The shareholder will receive written notice that the
Trust intends to limit the shareholder's use of the exchange privilege.
Generally the Trust limits a shareholder to twelve exchange transactions per
calendar year. Accounts under common ownership or control, including accounts
with the same taxpayer identification number, normally will be counted as one
account for purposes of the exchange limit.
The Trust also reserves the right to terminate or modify the exchange
privilege or to refuse an exchange if the exchange would adversely affect a fund
involved in the exchange.
Signature guarantees are required for all redemptions, (on the date of
receipt by the Servicing Agent of all necessary documents), regardless of the
amount involved, when the proceeds are to be paid to someone other than the
registered owner(s). The signature guarantee requirement may be waived by the
Trust in certain instances. The Trust also reserves the right to require a
14
<PAGE> 51
signature guarantee on any instructions or redemptions given to the Trust for
any reason. The purpose of signature guarantees is to prevent fraudulent
redemptions which could result in losses to the Trust, the Servicing Agent, or
shareholders. A signature guarantee will be accepted from banks, brokers,
dealers, municipal securities dealers or brokers, government securities dealers
or brokers, credit unions (if authorized by state law), national securities
exchanges, registered securities associations, clearing agencies, and savings
associations. Notary publics are unacceptable guarantors. The signature
guarantees must appear either (a) on the written request for redemption; (b) on
a stock power which should specify the total number of shares to be redeemed; or
(c) on all stock certificates tendered for redemption.
The right of redemption may be suspended or the date of payment
postponed (a) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend and holiday closings); (b) when trading in any
of the markets which a fund normally utilizes is restricted as determined by the
SEC; (c) if any emergency exists as defined by the SEC so that disposal of
investments or determination of a fund's net asset value is not reasonably
practicable; or (d) for such other periods as the SEC by order may permit for
protection of the Trust's shareholders.
The Trust has elected to be governed by Rule18f-1 of the Investment
Company Act which obligates each fund to redeem shares in cash with respect to
any one shareholder during any 90-day period up to the lesser of $250,000 or 1%
of the assets of the fund. Although payment for redeemed shares generally will
be made in cash, under abnormal circumstances the Board of Trustees of the Trust
may determine to make payment in securities owned by the fund. In such event,
the securities will be selected in such manner as the Board of Trustees deems
fair and equitable, in which case brokerage and other costs may be incurred by
such redeeming shareholders in the sale or disposition of their securities. To
date, all redemptions have been made in cash.
The Trust reserves the right to modify or terminate any purchase,
redemption, or other shareholder service procedure upon notice to shareholders.
Purchases and redemptions generally may be effected only on days when
the stock and options exchanges are open for trading. These exchanges are closed
on Saturdays and Sundays and the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving, and Christmas Day.
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------
GATEWAY INVESTMENT ADVISERS, L.P.
Gateway Investment Advisers, L.P., (the "Adviser"), a Delaware limited
partnership, has acted as the investment adviser for the funds since December
15, 1995. Gateway Investment Advisers, Inc. ("GIA") provided investment advisory
services to the funds from their formation until December 15, 1995. The Adviser
became the successor in interest to the assets, business, and personnel of GIA
which was organized in June 1977. GIA is the general partner of the Adviser with
a 76% ownership interest, while Alex. Brown Investments Incorporated ("ABII") is
the sole limited partner with a 24% ownership interest. ABII is an affiliate of
BT Alex. Brown Incorporated, a nationally known investment banking firm and
registered broker/dealer located in Baltimore, Maryland. Walter G. Sall,
Chairman and a Trustee of the Trust, and J. Patrick Rogers, the portfolio
manager of the funds, and President and a Trustee of the Trust, together own of
record and beneficially 99.85% of the outstanding shares of GIA and thereby
control the Adviser. Mr. Sall is Chairman and a director of GIA and Mr. Rogers
is its President and a director. The third director of GIA is Margaret-Mary V.
Preston who is employed by BT Alex. Brown Incorporated as a Managing Director.
GATEWAY FUND MANAGEMENT AGREEMENT
The Trust has retained the Adviser under an investment advisory
contract (the "Management Agreement") to act as investment manager and in such
capacity supervise the investments of the Gateway Fund, subject to the policies
and control of the Trust's Board of Trustees. The Management Agreement for the
Gateway Fund became effective January 1, 1999. Services were provided by the
Adviser under an investment advisory contract beginning December 15, 1995, and
previously by GIA under a similar contract prior to December 15, 1995.
Pursuant to the Management Agreement, the Adviser, at its sole expense,
provides the Fund with (i) investment recommendations regarding such fund's
investments; (ii) office space, telephones, and other office equipment; and
(iii) clerical and secretarial staff and the services, without additional
compensation, of all officers of the Trust. In addition, the Adviser has agreed
to bear (i) expenses incurred in connection with association membership dues,
except the annual dues of the Trust for its membership in the Investment Company
Institute, which shall be paid by the Trust; (ii) expenses of printing and
distributing all Fund registration statements, prospectuses and reports to
current Fund shareholders; (iii) costs of printing and transmitting reports to
governmental
15
<PAGE> 52
agencies; and (iv) printing and mailing costs. The Management Agreement further
provides that under certain circumstances the Adviser may cause each fund to pay
brokerage commissions in order to enable the Adviser to obtain brokerage and
research services for its use in advising such fund and the Adviser's other
clients, provided that the amount of commission is determined by the Adviser, in
good faith and in the best interests of the Fund, to be reasonable in relation
to the value of the brokerage and research services provided.
The Management Agreement provides that all expenses not specifically
assumed by the Adviser which may be incurred in the operation of the Trust and
the offering of its shares will be borne by the Trust. Such expenses will be
allocated among the funds in the Trust by direction of the Board of Trustees,
most frequently on the basis of expenses incurred by each fund, but where that
is not practicable on such basis as the Trustees determine to be appropriate.
Expenses to be borne by the Trust include:
- expenses of continuing the Trust's existence;
- fees and expenses of trustees not employed by the Adviser;
- expenses incurred by the Fund pursuant to the Fund's Distribution
Plan;
- expenses of registering or qualifying the Trust or its shares under
federal and various state laws and maintaining and updating such
registrations and qualifications on a current basis;
- interest expenses, taxes, fees, and commissions of every kind;
expenses of issue, including cost of share certificates;
- repurchases and redemption of shares;
- charges and expenses of custodians, transfer agents, fund accountants,
shareholder servicing agents, dividend disbursing agents, and
registrars;
- expenses of valuing shares of each Fund;
- auditing, accounting, and legal expenses;
- expenses of shareholder meetings and proxy solicitations therefore;
- insurance expenses;
- membership fees of the Investment Company Institute;
- and all "extraordinary expenses" as may arise, including all losses
and liabilities in administrating the Trust; expenses incurred in
connection with litigation proceedings and claims and the legal
obligations of the Trust to indemnify its officers, trustees, and
agents with respect thereto
A majority of the Board of Trustees of the Trust and a majority of the
trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of any party to the Adviser Contracts, voting separately, shall
determine which expenses shall be characterized as "extraordinary expenses."
In return for the services and facilities furnished by the Adviser
under the Management Agreement, the Gateway Fund pays the Adviser a management
fee (the "Management Fee") at (a) the annual rate of 0.925% of the average value
of the daily net assets of the Fund; minus (b) the amount of the Fund's expenses
incurred pursuant to its Distribution Plan. In addition, as long as the Adviser
is providing transfer agency, fund accounting, and other services pursuant to
the Services Agreement with the Trust dated January 1, 1998, the Adviser shall
receive no separate compensation for such services with respect to the Gateway
Fund during the term of the Management Agreement.
If total expenses of the Fund for any fiscal year (including the
Adviser's compensation, but exclusive of taxes, interest, brokerage commissions,
and any "extraordinary expenses" determined as above described) exceed the
specified percentage of the Fund's average daily net asset value for such year,
the Management Agreement requires the Adviser to bear all such excess expenses
up to the amount of the Management Fee. The applicable expense limitation
percentage for the Fund is 1.50% of the Fund's average daily net asset value.
Each month the Management Fee is determined and the Fund's expenses are
projected. If the Fund's projected expenses are in excess of the above-stated
expense limitations, the Management Fee paid to the Adviser will be reduced by
the amount of the excess expenses, subject to an annual adjustment; provided,
however, that the aggregate annual reduction from the Adviser to the Fund shall
not exceed the aggregate Management Fee paid by the Fund to the Adviser for the
year.
GATEWAY SMALL CAP INDEX FUND INVESTMENT ADVISORY CONTRACT
The Trust has retained the Adviser under an investment advisory
contract (the "Adviser Contract") to act as investment manager and in such
capacity supervise the investments of the Gateway Small Cap Index Fund, subject
to the policies and control of the Trust's Board of Trustees. The Adviser
Contract for the Small Cap Index Fund became effective December 15, 1995.
Services were provided by GIA under a substantially identical contract prior to
this date.
Pursuant to the Adviser Contract, the Adviser, at its sole expense,
provides the Fund with (i) investment recommendations regarding such fund's
investments; (ii) office space, telephones, and other office equipment; and
(iii) clerical and secretarial staff and the services, without additional
compensation, of all officers of the Trust. In addition, the Adviser has agreed
to bear (i) advertising
16
<PAGE> 53
and other marketing expenses in connection with the sale of the shares of the
funds; (ii) expenses of printing and distributing prospectuses and related
documents to prospective shareholders; and (iii) association membership dues
(other than for the Investment Company Institute). The Adviser Contract further
provides that under certain circumstances the Adviser may cause each fund to pay
brokerage commissions in order to enable the Adviser to obtain brokerage and
research services for its use in advising such fund and the Adviser's other
clients, provided that the amount of commission is determined by the Adviser, in
good faith and in the best interests of the Fund, to be reasonable in relation
to the value of the brokerage and research services provided.
The Adviser Contract provides that all expenses not specifically
assumed by the Adviser which may be incurred in the operation of the Trust and
the offering of its shares will be borne by the Trust. Such expenses will be
allocated among the funds in the Trust by direction of the Board of Trustees,
most frequently on the basis of expenses incurred by each fund, but where that
is not practicable on such basis as the Trustees determine to be appropriate.
Expenses to be borne by the Trust include:
- fees and expenses of trustees not employed by the Adviser;
- expenses of printing and distributing prospectuses to current
shareholders of the Trust;
- expenses pertaining to registering or qualifying the Trust or its
shares under various federal and state laws, and maintaining and
updating such registrations and qualifications;
- interest expense, taxes, fees, and commissions (including brokerage
commissions) of every kind;
- expenses related to repurchases and redemptions of shares;
- charges and expenses of custodians, transfer agents, dividend
disbursing agents, and registrars;
- expenses of valuing shares of each fund;
- printing and mailing costs other than those expressly assumed by the
Adviser;
- auditing, accounting, and legal expenses;
- expenses incurred in connection with the preparation of reports to
shareholders and governmental agencies;
- expenses of shareholder meetings and proxy solicitations;
- insurance expenses;
- all "extraordinary expenses" which may arise, including all losses and
liabilities incurred in connection with litigation proceedings and
claims, and the legal obligations of the Trust to indemnify its
officers, trustees, and agents with respect thereto.
A majority of the Board of Trustees of the Trust and a majority of the
trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of any party to the Adviser Contracts, voting separately, shall
determine which expenses shall be characterized as "extraordinary expenses."
In return for the services and facilities furnished by the Adviser
under the Adviser Contract, the Small Cap Index Fund pays the Adviser an
advisory fee (the "Advisory Fee") computed at an annual rate of 0.90% of the
first $50 million of the average daily net asset value of such fund, 0.70% of
such asset value in excess of $50 million and less than $100 million, and 0.60%
of such asset value in excess of $100 million.
If total expenses of the Fund for any fiscal year (including the
Adviser's compensation, but exclusive of taxes, interest, brokerage commissions,
and any "extraordinary expenses" determined as above described) exceed the
specified percentage of the Fund's average daily net asset value for such year,
the Adviser Contract requires the Adviser to bear all such excess expenses up to
the amount of the Advisory Fee. The applicable expense limitation percentage for
the Fund is 2.00% of the Fund's average daily net asset value. Each month the
Advisory Fee is determined and the Fund's expenses are projected. If the Fund's
projected expenses are in excess of the above-stated expense limitations, the
Advisory Fee paid to the Adviser will be reduced by the amount of the excess
expenses, subject to an annual adjustment; provided, however, that the aggregate
annual reduction from the Adviser to the Fund shall not exceed the aggregate
Advisory Fee paid by the Fund to the Adviser for such year.
17
<PAGE> 54
The following table shows the Advisory Fees earned by the Adviser (or
GIA) for providing services to the funds under the then-current investment
advisory contracts. It also shows the amount of the fees waived by the Adviser
for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
- --------------------- --------------------------------- ----------------------------------
FEE AND WAIVER GATEWAY FUND SMALL CAP INDEX FUND
- --------------------- --------------------------------- ----------------------------------
<S> <C> <C>
1997 Fee Earned $1,530,637 $118,875
1997 Fee Waived 0 73,783
---------- ---------
1997 Fee Paid $1,530,637 $ 45,092
========== =========
- --------------------- --------------------------------- ----------------------------------
1996 Fee Earned $1,272,990 $91,823
1996 Fee Waived 0 91,823
---------- -------
1996 Fee Paid $1,272,990 $ 0
========== =======
- --------------------- --------------------------------- ----------------------------------
1995 Fee Earned $1,246,576 $85,502
1995 Fee Waived 0 85,502
---------- --------
1995 Fee Paid $1,246,576 $ 0
========== ========
- --------------------- --------------------------------- ----------------------------------
</TABLE>
The Management Agreement and the Adviser Contract further provide that
in the absence of willful misfeasance, bad faith, gross negligence, or reckless
disregard of its duties or obligations thereunder, the Adviser is not liable to
the Trust or any of its shareholders for any act or omission by the Adviser. The
Management Agreement and the Adviser Contract contemplate that the Adviser may
act as an investment manager or adviser for others.
The Management Agreement and the Adviser Contract may be amended at any
time by the mutual consent of the parties thereto, provided that such consent on
the part of the Trust shall have been approved by the vote of a majority of the
Trust's Board of Trustees, including the vote cast in person by a majority of
the trustees who are not "interested persons" (as defined in the Investment
Company Act of 1940) of any party to the Adviser Contracts, and by vote of the
shareholders of the applicable fund.
The Management Agreement and the Adviser Contract may be terminated,
upon 60 days' written notice (which notice may be waived) at any time without
penalty (i) by the Board of Trustees of the Trust; (ii) by the vote of a
majority of the outstanding voting securities of the applicable fund; or (iii)
by the Adviser. Both the Management Agreement and the Adviser Contract terminate
automatically in the event of assignment (as that term is defined in the
Investment Company Act of 1940) by the Adviser.
The Management Agreement continues in effect until December 31, 2000
and the Adviser Contract continues in effect until December 31, 1999, and
thereafter, provided that their continuance for the funds for each renewal year
is specifically approved in advance (i) by the Board of Trustees of the Trust or
by vote of a majority of the outstanding voting securities of the funds, and
(ii) by vote of a majority of the trustees who are not parties to the Adviser
Contracts or "interested persons" of any party to the Management Agreement or
the Adviser Contract (other than as Trustees of the Trust) by votes cast in
person at a meeting specifically called for such purposes.
DISTRIBUTION PLAN
As described in the Supplement dated January 1, 1999 to the Gateway
Fund's Prospectus, a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act (the "Plan") became effective on January 1, 1999. Any
amendment that materially increases the amount of expenditures permitted under
the Plan must be approved by a vote of a majority of the outstanding voting
securities of the Gateway Fund. The Plan may be terminated at any time by the
vote of a majority of i) the Trustees who are not "interested persons" of the
Trust (as defined in the Investment Company Act) and who have no direct or
indirect financial interest in the operation of the Plan or ii) the outstanding
voting securities of the Gateway Fund. The Adviser, and Walter G. Sall, J
Patrick Rogers and the other officers of the Trust (because of their respective
associations with the Adviser), may indirectly benefit from any payments made
pursuant to the Plan. For a description of other material aspects of the Plan,
see the Supplement to the Prospectus.
CUSTODIAN
Star Bank, 425 Walnut Street, Cincinnati, OH 45202, acts as custodian
of the Trust's assets (the "Custodian"). The Custodian has no part in
determining the investment policies of any fund or which securities are to be
purchased or sold by any fund.
SHAREHOLDER SERVICING, TRANSFER, DIVIDEND DISBURSING, AND FINANCIAL SERVICING
AGENT
18
<PAGE> 55
The Adviser is the Trust's Shareholder Servicing, Transfer, Dividend
Disbursing, and Financial Servicing Agent (the "Servicing Agent"). The Adviser's
mailing address for its activities as Servicing Agent is The Gateway Trust, 400
TechneCenter Drive, Suite 220, Milford, OH 45150. As Transfer Agent for the
Trust, the Servicing Agent's general duties include transferring shares,
processing applications for new accounts, depositing the payments for the
purchase of fund shares with the Custodian, and notifying the Trust and
Custodian of such deposits. The Servicing Agent opens and maintains a bookshare
account for each shareholder as set forth in the subscription application,
maintains records of each shareholder account, and sends confirmation of shares
purchased to each shareholder. The Servicing Agent also receives and processes
requests by shareholders for redemption of shares. If the shareholder request
complies with the redemption standards of the Trust, the Servicing Agent will
direct the Custodian to pay the appropriate redemption price. If the redemption
request does not comply with such standards, the Servicing Agent will promptly
notify the shareholder of the reasons for rejecting the redemption request.
As the Dividend Disbursing Agent for the Trust, the Servicing Agent,
upon notification of the declaration of a dividend or distribution, will
determine the total number of shares issued and outstanding as of the record
date for the dividend or distribution and the amount of cash required to satisfy
such dividend or distribution. The Servicing Agent will prepare and mail to
shareholders dividend checks in the amounts to which they are entitled. In the
case of shareholders participating in the dividend reinvestment plan, the
Servicing Agent will make appropriate credits to their bookshare accounts.
Shareholders will be notified by the Servicing Agent of any dividends or
distributions to which they are entitled, including any amount of additional
shares purchased with their dividends. In addition, the Servicing Agent will
prepare and file with the Internal Revenue Service and with any state, as
directed by the Trust, returns for reporting dividends and distributions paid by
such fund.
The Servicing Agent, as the Shareholder Servicing Agent, will open and
maintain any plan or program for shareholders in accordance with the terms of
such plans or programs (see "SHAREHOLDER SERVICES" herein). With regard to the
Systematic Withdrawal Program, the Servicing Agent will process such Systematic
Withdrawal Program orders as are duly executed by shareholders and will direct
appropriate payments to be made by the Custodian to the shareholder. In
addition, the Servicing Agent will process such accumulation plans, group
programs, and other plans or programs for investing shares as provided in the
funds' current prospectuses.
The Small Cap Index Fund reimburses the Servicing Agent for printing,
mailing, and compliance expenses. The Gateway Fund reimburses the Servicing
Agent for compliance expenses. The Small Cap Index Fund compensates the
Servicing Agent for these services at a fixed rate of $4,000 per month, plus the
greater of $2,500 per month or an annual rate of 0.20% of the Fund's average net
assets. Beginning January 1, 1999, pursuant to the Gateway Fund Management
Agreement, the Servicing Agent receives no compensation for its services to
Gateway Fund. For the year ended December 31, 1997, the Adviser earned $726,747
in its capacity as Servicing Agent to the four funds of the Trust then in
effect.
BROKERAGE
---------
Transactions on stock and option exchanges involve the payment of
negotiated brokerage commissions. In the case of securities traded in the
over-the-counter market, there is generally no stated commission but the price
usually includes an undisclosed commission or mark-up.
In effecting portfolio transactions for each fund, the Adviser is
obligated to seek best execution, which is to execute a fund's transaction where
the most favorable combination of price and execution services are available
("best execution"), except to the extent that it may be permitted to pay higher
brokerage commissions for brokerage and research services as described below. In
seeking best execution, the Adviser, in each fund's best interest, considers all
relevant factors, including:
- price;
- the size of the transaction;
- the nature of the market for the security;
- the amount of commission;
- the timing of the transaction taking into account market prices and
trends;
- the reputation, experience, and financial stability of the
broker-dealer involved;
- the quality of service rendered by the broker-dealer in other
transactions.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such other
factors as the Trustees may determine, the Adviser may consider sales of shares
of a fund as a factor in the selection of broker-dealers to execute securities
transactions for such fund. Closing option transactions are usually effected
through the same broker-dealer that executed the opening transaction.
19
<PAGE> 56
The Trust has no obligation to deal with any broker or dealer in the
execution of its transactions. However, it is contemplated that BT Alex. Brown
Incorporated, or any of its affiliates ("Alex. Brown"), in its capacity as a
registered broker-dealer, will effect securities transactions which are executed
on a national securities exchange and over-the-counter transactions conducted on
an agency basis. Such transactions will be executed at competitive commission
rates.
Transactions in the over-the-counter market can be placed directly with
market makers who act as principals for their own account and include mark-ups
in the prices charged for over-the-counter securities. Transactions in the
over-the-counter market can also be placed with broker-dealers who act as agents
and charge brokerage commissions for effecting over-the-counter transactions.
The Trust may place its over-the-counter transactions either directly with
principal market makers, or with broker-dealers if that is consistent with the
Adviser's obligation to obtain best qualitative execution. Under the Investment
Company Act of 1940, persons affiliated with an affiliate of the Adviser (such
as Alex. Brown) may be prohibited from dealing with the Trust as a principal in
the purchase and sale of securities. Therefore, Alex. Brown will not serve as
the Trust's dealer in connection with over-the-counter transactions. However,
Alex. Brown may serve as the Trust's broker in over-the counter transactions
conducted on an agency basis and will receive brokerage commissions in
connection with such transactions.
The Trust will not effect any brokerage transactions in its portfolio
securities with Alex. Brown if such transactions would be unfair or unreasonable
to the Trust's shareholders, and the commissions will be paid solely for the
execution of trades and not for any other services. In determining the
commissions to be paid to Alex. Brown, it is the policy of the Trust that such
commissions will, in the judgment of the Trust's Board of Trustees, be (a) at
least as favorable to the Trust as those which would be charged by other
qualified brokers having comparable execution capability, and (b) at least as
favorable to the Trust as commissions contemporaneously charged by Alex. Brown
on comparable transactions for its most favored unaffiliated customers, except
for customers of Alex. Brown considered by a majority of the Trust's
disinterested trustees not to be comparable to the Trust. The disinterested
trustees from time to time review, among other things, information relating to
the commissions charged by Alex. Brown to a fund and its other customers, and
other information concerning the commissions charged by other qualified brokers.
It is not contemplated that brokerage transactions will be effected exclusively
through Alex. Brown. The Adviser may from time to time use other brokers,
including brokers that provide research services as discussed below.
While the Adviser does not intend to limit the placement of orders to
any particular broker or dealer, the Adviser generally gives preference to those
brokers or dealers who are believed to give best execution at the most favorable
prices and who also provide research, statistical, or other services to the
Adviser and/or the Trust. Commissions charged by brokers who provide these
services may be higher than commissions charged by those who do not provide
them. Higher commissions are paid only if the Adviser determines that they are
reasonable in relation to the value of the services provided, and it has
reported to the Board of Trustees of the Trust on a periodic basis to that
effect. The availability of such services was taken into account in establishing
the Advisory Fee. Specific research services furnished by brokers through whom
the Trust effects securities transactions may be used by the Adviser in
servicing all of its accounts. Similarly, specific research services furnished
by brokers who execute transactions for other Adviser clients may be used by the
Adviser for the benefit of the Trust.
The Adviser has an agreement with Bridge Information Systems, Inc.
("Bridge") to direct brokerage transactions to Bridge in exchange for research
services provided to the Adviser. For the fiscal year ended December 31, 1997,
the Trust paid brokerage commissions to Bridge of $291,064 for effecting
brokerage transactions totaling $483,366,912. The Adviser may from time to time
enter into similar agreements with other brokers.
The Adviser Contracts provide that, subject to such policies as the
Trustees may determine, the Adviser may cause a fund to pay a broker-dealer who
provides brokerage and research services to the Adviser an amount of commission
for effecting a securities transaction for such fund in excess of the amount of
commission which another broker-dealer would have charged for effecting that
transaction. As provided in Section 28(e) of the Securities Exchange Act of
1934, "brokerage and research services" include:
- advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of
securities, or purchasers, or sellers of securities;
- furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of accounts;
- effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement);
- services that provide lawful and appropriate assistance to the Adviser
in the performance of its investment decision-making responsibilities.
The following table shows the brokerage commissions paid by the funds
in the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
- --------------------------- -------------------------- -------------------------- ---------------------------
NAME OF FUND 1997 COMMISSIONS 1996 COMMISSIONS 1995 COMMISSIONS
- --------------------------- -------------------------- -------------------------- ---------------------------
20
<PAGE> 57
<S> <C> <C> <C>
Gateway Fund $570,068 $274,816 $128,373
Small Cap Index Fund $ 24,496 $ 9,766 $ 12,492
- --------------------------- -------------------------- -------------------------- ---------------------------
</TABLE>
The increased levels of commissions paid by the Gateway Fund from 1995
to 1996 are attributable to increased levels of shareholder activity resulting
in higher portfolio turnover and to increased use of put options to hedge the
portfolio. The increased level paid by the Gateway Fund and the Small Cap Index
Fund from 1996 to1997 is attributable to an overall increase in total assets
during the 1997 fiscal year.
The Gateway Fund paid a total of $1,750 of brokerage commissions to BT
Alex. Brown Incorporated for the year ended December 31, 1997 or 0.30% of the
entire amount of commissions paid to all brokers for this Fund. The aggregate
amount of transactions involving the payment of these commissions is $1,339,775,
or 0.21% of the entire amount of transactions effected through all brokers
combined for this Fund.
ADDITIONAL TAX MATTERS
----------------------
The tax discussion set forth below and in the Combined Prospectus is
included for general information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of an investment in a
fund.
FEDERAL TAX MATTERS
Each of the funds is treated as a separate association taxable as a
corporation. The following information, therefore, applies to each fund
separately unless otherwise specifically stated.
Each fund has met, and each of the funds in the future intends to meet,
the requirements of the Internal Revenue Code, applicable to regulated
investment companies so as to qualify for the special tax treatment afforded to
such companies. Under Subchapter M of the Code, a regulated investment company
is not subject to federal income tax on the portion of its net investment income
and net realized capital gains which it distributes currently to its
shareholders, provided that certain distribution requirements are met, including
the requirement that at least 90% of the sum of its net investment income and
net short-term capital gains in any fiscal year is so distributed. In addition
to this distribution requirement, one of the principal tests which each fund
must meet in each fiscal year in order to qualify as a regulated investment
company is the "90% Test." The 90% Test requires that at least 90% of a fund's
gross income must be derived from dividends, interest, and gains from the sale
or other disposition of securities, including gains from options.
Gains realized from transactions on put and call options (other than
options on securities indexes) generally will be long term or short term,
depending on the nature of the option transaction and on the length of time the
option is owned by the fund.
Long-term capital gain distributions (i.e., the excess of any net
long-term capital gains over net short-term capital losses), after utilization
of available capital loss carryforwards, are taxable as long-term capital gains
whether received in cash or additional shares, regardless of how long the
shareholder has held his or her shares, and are not eligible for the
dividends-received deduction for corporations. Distributions of long-term
capital gains which are offset by available loss carryforwards, however, may be
taxable as ordinary income.
Distributions on shares of any fund received shortly after their
purchase, although substantially in effect a return of capital, are subject to
federal income taxes.
The tax status of distributions made by each fund during the fiscal
year will be sent to shareholders shortly after the end of such year. Each
prospective investor is advised to consult his or her own tax adviser.
Distributions of net investment income are taxable as ordinary income subject to
allowable exclusions and deductions. Distributions of capital gains are taxable
at either ordinary or long-term capital gains rates, as appropriate, except that
all such gains are normally taxable as ordinary income to the extent they are
offset by capital loss carryforwards.
STATE AND LOCAL TAX ASPECTS
The laws of several state and local taxing authorities vary with
respect to taxation, and each prospective investor is advised to consult his or
her own tax adviser as to the status of his or her shares and distributions in
respect of those shares under state and local tax laws.
21
<PAGE> 58
TRUSTEES AND OFFICERS OF THE TRUST
----------------------------------
The Trustees and officers of the Trust, together with information as to
their positions with the Trust and its predecessor, Gateway Option Income Fund,
Inc. (the "Company") and their principal occupations during at least the past
five years, are
listed below.
*WALTER GENE SALL, 400 TechneCenter Drive, Suite 220, Milford, OH
45150; Chairman and Trustee of the Trust; Chairman of the Adviser; various
senior management positions and offices held with the Trust, the Company, and
the Adviser since 1977.
Age 53.
*J. PATRICK ROGERS, 400 TechneCenter Drive, Suite 220, Milford, OH
45150; Trustee of the Trust since December 1998; President of the Trust since
1997; President of the Adviser since 1995; portfolio manager of the funds since
1997; co-portfolio manager of the funds from 1995 to 1997; various senior
management positions and offices held with the Trust and the Adviser since 1989.
Age 34.
JAMES M. ANDERSON, Children's Hospital Medical Center, 3333 Burnet
Avenue, Cincinnati, OH 45229; Trustee of the Trust since April 1997; Children's
Hospital Medical Center, President and Chief Executive Officer since November
1996, Chairman of the Board of Trustees from 1992 through 1996, and Trustee
since 1979; Taft Stettinius & Hollister (law firm), Partner from 1982 to
November 1996; Access Corporation (software distributor), Secretary from 1985 to
1996, Consultant from 1996 to 1997, and Director 1997 to 1998; Cincinnati Stock
Exchange, Trustee since 1978; River City Insurance Limited, Director since 1991.
Age 56.
STEFEN F. BRUECKNER, ProMutual Group, Inc., P. O. Box 9178, Boston, MA
02205; Trustee of the Trust since October 1992; President, ProMutual Group (a
professional liability insurance company) since 1998; Director, President, and
Chief Executive Officer, Anthem Companies, Inc. (health insurer) 1995 to 1998;
Director and President of Community Mutual Insurance Company (health insurer)
from 1991 to 1998, and various management positions from 1986 to 1998. Director
of Anthem Health and Life Insurance Company, Anthem Life Insurance Company, and
various other affiliates and subsidiaries. Age 49.
KENNETH A. DRUCKER, Sequa Corp., 200 Park Avenue, New York, NY 10166;
Director of the Company from January 1984 to May 1986; Trustee of the Trust
since April 1986; Vice President and Treasurer, Sequa Corporation (gas turbine
and industrial equipment) since November 1987. Prior thereto, Senior Vice
President and Treasurer, JWT Group, Inc. (advertising, public update relations,
and market research). Age 53.
BEVERLY J. FERTIG, 8591 Woodbrier Drive, Sarasota, FL 34238; Trustee of
the Trust since September 1988; arbitrator, National Association of Securities
Dealers, Inc., since January 1992; Vice President, Marketing and Communications,
Coffee, Sugar and Cocoa Exchange from January 1989 to December 1991; Executive
Director, National Institutional Options and Futures Society, March 1988 to
December 1988; prior thereto, Vice President, Institutional Marketing, Chicago
Board Options Exchange. Age 68.
R. S. (DICK) HARRISON, 4040 Mt. Carmel Road, Cincinnati, OH 45244;
Director of the Company from 1977 to 1982; Trustee of the Trust since April
1996; Director/Chairman of the Board, Baldwin Piano & Organ Company from 1994 to
1997; Chairman of the Board/CEO, Baldwin Piano & Organ Company from 1983 to
1994. Prior thereto, various management positions with Baldwin Piano & Organ
Company, Cincinnati, OH. Director of Anderson Bank of Cincinnati, OH and Trustee
of Kenyon College. Age 66.
WILLIAM HARDING SCHNEEBECK, 251 Indian Harbor Road, Vero Beach, FL
32963; Director of the Company from September 1977 to May 1986; Trustee of the
Trust since April 1986; retired, formerly Chairman of Midwestern Fidelity Corp.
Age 69.
JAMES E. SCHWAB, XTEK, Inc., 11451 Reading Road, Cincinnati, OH
45241-2283; Trustee of the Trust since December 1998; President of XTEK, Inc. (a
manufacturing company), from November 1995 to present, Vice President of XTEK,
Inc. from October 1994 to November 1995; various executive positions with
American Financial Corporation and its affiliates from 1985 to 1994, including
Senior Vice President of General Cable Corporation from 1992 to 1994 and Senior
Vice President of the Penn Central Corporation (now called the American
Financial Group) from 1989 to 1992. Age 55.
*GEOFFREY KEENAN, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Vice President of the Trust since April 1996; Chief Operating Officer, Gateway
Investment Advisers, L.P. since December 1995; Executive Vice President and
Chief Operating Officer, Gateway Investment Advisers, Inc. since 1995; Vice
President, Gateway Investment Advisers, Inc. from 1991 to 1995. Age 40.
22
<PAGE> 59
*PAUL R. STEWART, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Treasurer of the Trust since October 1995; Chief Financial Officer of the
Adviser since 1996, Controller of the Adviser from October 1995 to December
1996; Audit Manager and Senior, Price Waterhouse from September 1992 to 1995 and
from August 1988 to August 1991. Age 33.
*DONNA M. SQUERI, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Secretary of the Trust since October 1995; Secretary and General Counsel of the
Adviser since September 1995; in-house counsel of Bartlett & Co., a registered
investment adviser, from October 1984 to September 1993. Age 39.
*Messrs. Sall, Rogers, Keenan, and Stewart and Ms. Squeri are
affiliated persons of the Trust and the Adviser as defined by the Investment
Company Act of 1940. Mr. Sall is an "interested person" of the Trust as defined
by the Investment Company Act of 1940.
Messrs. Sall, Rogers, Keenan, and Stewart and Ms. Squeri, each of whom
is employed by the Adviser, receive no remuneration from the Trust. Each Trustee
of the Trust other than Mr. Sall receives fees as follows: (a) an annual fee of
$3,000, payable in equal quarterly installments for services during each fiscal
quarter; (b) a $500 base fee plus $100 per fund for each regular or special
meeting of the Board of Trustees attended; and (c) $200 per fund ($1,000 per
fund for the Chairman) for each Audit Committee meeting attended. The Trust also
reimburses each Trustee for any reasonable and necessary travel expenses
incurred in connection with attendance at such meetings. In addition, Trustees
may receive attendance fees for service on other committees.
23
<PAGE> 60
The following table provides information about the compensation
received by each Trustee from the Trust for the year ended December 31, 1997.
<TABLE>
<CAPTION>
- ---------------------- ----------------------------------------------
TOTAL COMPENSATION
NAME OF TRUSTEE FROM TRUST
- ---------------------- ----------------------------------------------
<S> <C>
James M. Anderson $ 3,300
Stefen F. Brueckner $ 6,600
Kenneth A. Drucker $ 12,200
Beverly J. Fertig $ 6,600
R. S. Harrison $ 7,400
Walter G. Sall $ 0
William H. Schneebeck $ 8,100
- ---------------------- ----------------------------------------------
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS
-------------------------------------------------------
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, OH 45202, serves as
independent public accountants of the Trust. Arthur Andersen LLP performs an
annual audit of each fund's financial statements, reviews each fund's tax
returns, and provides financial, tax, and accounting consulting services as
requested.
The financial statements and independent auditors' report required to
be included in this SAI are incorporated herein by this reference to the Trust's
Annual Report to Shareholders for the fiscal year ended December 31, 1997. In
addition, the Trust's Semi-Annul Report to Shareholders for the period ended
June 30, 1998 is incorporated herein by this reference.
PRINCIPAL HOLDERS OF FUND SHARES
--------------------------------
GATEWAY FUND
As of October 30, 1998, the Gateway Fund had 21,265,603.553 shares
outstanding. As of such date, each of the following persons or groups was known
by Trust management to be the record and/or beneficial owner (as defined below)
of the indicated amounts of the Fund's outstanding shares.
<TABLE>
<CAPTION>
--------------------------------------------------- ---------------------------------- --------------------------
NUMBER OF SHARES
NAME AND ADDRESS PERCENT OF CLASS
--------------------------------------------------- ---------------------------------- --------------------------
<S> <C> <C>
BT Alex. Brown Inc. Mutual Funds Dept. 9,224,022.223 43.38%
P. O. Box 1346
Baltimore, MD 21203
Charles Schwab and Company, Inc. 3,067,588.439 14.43%
Reinvest Account Special Custody Account for
Mutual Fund Department
101 Montgomery Street
San Francisco, CA 94104
Trustees and officers of the Trust as a group 239,163.893 1.12%
Adviser officers and directors as a group 58,126.041 Less than 1%
--------------------------------------------------- ---------------------------------- --------------------------
</TABLE>
24
<PAGE> 61
SMALL CAP INDEX FUND
As of October 30, 1998, the Small Cap Index Fund had 1,144,568.603
shares outstanding. As of such date, each of the following persons or groups was
known by Trust management to be the record and/or beneficial owner (as defined
below) of the indicated amounts of the Fund's outstanding shares.
<TABLE>
<CAPTION>
------------------------------------------------ ------------------------------------- --------------------------
NAME AND ADDRESS OF OWNER NUMBER OF SHARES PERCENT OF CLASS
------------------------------------------------ ------------------------------------- --------------------------
<S> <C> <C>
Andrew Wyeth 162,688.431 14.21%
Chadds Ford, PA 19317
Up East, Inc. 113,854.405 9.95%
c/o Betsy J. Wyeth
P.O. Box 48
Chadds Ford, PA 19317
Betsy Wyeth 105,701.808 9.24%
Chadds Ford, PA 19317
BT Alex. Brown Inc. Mutual Funds Dept. 80,569.265 7.04%
P.O. Box 1346
Baltimore, MD 21203
Betsy Wyeth Growth 79,793.168 6.97%
Chadds Ford, PA 19317
Trustees and officers of the Trust as a group 27,891.188 2.44%
Adviser officers and directors as a group 5,757.788 Less than 1%
------------------------------------------------ ------------------------------------- --------------------------
</TABLE>
The SEC has defined "beneficial owner" of a security to include any
person who has voting power or investment power with respect to any such
security, any person who shares voting power or investment power with respect to
any such security, or any person who has the right to acquire beneficial
ownership of any such security within 60 days.
SHARES HELD BY ADVISER
As of October 30, 1998, the Adviser held in a fiduciary capacity the
indicated amounts of the outstanding shares of each fund. The Adviser has
investment and voting power over all shares held by it in a fiduciary capacity.
<TABLE>
<CAPTION>
- ------------------------------------ ------------------------------------ --------------------------------------
NAME OF FUND NUMBER OF SHARES PERCENTAGE OF SHARES
- ------------------------------------ ------------------------------------ --------------------------------------
<S> <C> <C>
Gateway Fund 552,294 2.60%
Small Cap Index Fund 458,818 40.09%
- ------------------------------------ ------------------------------------ --------------------------------------
</TABLE>
25
<PAGE> 62
<TABLE>
<CAPTION>
SCHEDULE A
----------
(STOCKS INCLUDED IN THE S&P 100 INDEX)
<S> <C> <C>
Allegheny Teledyne Incorporated Entergy Corporation Northern Telecom Limited
Aluminum Company of America Exxon Corporation Occidental Petroleum Corporation
American Electric Power Co., Inc. Federal Express Corporation Oracle Corporation
American Express Company First Chicago NBD Corporation PepsiCo, Inc.
American General Corp. Fluor Corporation Pharmacia & Upjohn
American International Group, Inc. Ford Motor Company Polaroid Corporation
Ameritech Corporation General Dynamics Corporation Ralston Purina Co.
Amoco Corporation General Electric Company Raytheon Co Class A Stock
AMP, Incorporated General Motors Corporation Rockwell International Corporation
AT&T Halliburton Company Schlumberger Limited
Atlantic Richfield Co. Harrah's Entertainment, Inc. Sears, Roebuck and Co.
Avon Products, Inc. Harris Corporation Southern Company
Baker Hughes, Inc. Heinz (H. J.) Company Tandy Corporation
BankAmerica Corporation Hewlett Packard Company Tektronix, Inc.
Baxter International Inc. Homestake Mining Company Texas Instruments, Incorporated
Bell Atlantic Corporation Honeywell Inc. The Black & Decker Corporation
Bethlehem Steel Corporation Intel Corporation The Boeing Company
Boise Cascade Corporation International Business The Coastal Corporation
Bristol-Myers Squibb Company Machines Corporation The Coca-Cola Company
Brunswick Corporation International Flavors & The Dow Chemical Company
Burlington Northern Santa Fe Corp. Fragrances Inc. The Hartford Financial
Ceridian Corporation International Paper Company Services Group, Inc.
Champion International Corporation Johnson & Johnson The Limited, Inc.
Chrysler Corporation Kmart Corporation The May Department Stores Co.
CIGNA Corporation Mallinckrodt Inc. The Williams Companies, Inc.
Cisco Systems, Inc. McDonald's Corporation Toys "R" Us, Inc.
Citicorp MCI Communications Corporation Unicom Corporation
Colgate-Palmolive Company Merck & Co., Inc. Unisys Corporation
Columbia/HCA Healthcare Corporation Merrill Lynch & Co., Inc. United Technologies Corporation
Computer Sciences Corporation Microsoft Corp. Wal-Mart Stores, Inc.
Delta Air Lines, Inc. Minnesota Mining Walt Disney Productions
Digital Equipment Corporation and Manufacturing Weyerhaeuser Company
DuPont (E. I.) de Nemours and Co. Mobil Corporation Xerox Corporation
Eastman Kodak Company Monsanto Company
National Semiconductor Corp.
NationsBank Corporation
Norfolk Southern Corporation
</TABLE>
26
<PAGE> 63
<TABLE>
<CAPTION>
SCHEDULE B
----------
(STOCKS INCLUDED IN THE WILSHIRE SMALL CAP INDEX)
<S> <C> <C>
20th Century Industries Catellus Development Corporation Geotek Communications, Inc.
ACC Corp. Centex Corporation Gerber Scientific, Inc.
Acuson Corporation Central Hudson Gas & Gibson Greetings, Inc.
ACX Technologies, Inc. Electric Corporation Gilead Sciences, Inc.
Advanced Tissue Sciences Inc. Cephalon, Inc. Glenayre Technologies
ADVANTA Cerner Corporation Golden Books Family
Agouron Pharmaceuticals, Inc. Charming Shoppes, Inc. Entertainment, Inc.
Airborne Freight Corporation Chemed Corporation Golden State Bancorp Inc.
AK Steel Holding Corporation Chesapeake Corporation Grand Casinos Inc. *
Alaska Air Group, Inc. Chiquita Brands International Gymboree Corp
Albany International Corp. Chris-Craft Industries, Inc. Haemonetics Corporation
Alliance Pharmaceutical Corp. CILCORP Inc. Harken Energy Corporation
American Bankers Insurance Cincinnati Milacron Inc. Hecla Mining Company *
Group, Inc. Cirrus Logic, Inc. Herbalife International Inc
American Management Citrix Systems Inc Class A Stock
Systems Inc City National Corporation HON INDUSTRIES, Inc.
Americredit Corp. Clarcor Inc. Houghton Mifflin Company
AMRESCO, Inc. Coast Savings Financial, Inc. Hunt (J. B.) Transport
APAC TeleServices Inc Coeur d'Alene Mines Corporation Services, Inc.
Arcadia Financial Ltd. Computervision Corporation Hutchinson Technology Inc
Arnold Industries, Inc. Coventry Corporation Hyperion Software Corp
Arvin Industries, Inc. Credence Systems Corporation ICN Pharmaceuticals Inc.
Aspect Telecommunications Corp Credit Acceptance Corporation Imperial Credit Industries, Inc.
Astoria Financial Corporation Data General Corporation Information Resources, Inc.
ATL Ultrasound Inc. Dentsply International Inc. Integrated Device Technology, Inc.
Avid Technology, Inc. Diagnostic Products Corporation Integrated Health Services, Inc.
Aztar Corporation Donaldson Company, Inc. International Dairy Queen, Inc.
B/E Aerospace, Inc. Dreyer's Grand Ice Cream, Inc. International Multifoods Corp.
Baldor Electric Company DSP Communications Inc Intuit Inc
Ballard Medical Products Eagle Hardware & Garden, Inc. John Alden Financial Corporation
Bank United Corp Eastern Utilities Associates Kaman Corporation
Banta Corporation Echo Bay Mines Ltd. Kaufman and Broad
Barrett Resources Corp Envoy Corp Home Corporation
Bassett Furniture Industries, Inc. ESS Technology Inc. Kellwood Company
Beckman Instruments, Inc. Exabyte Corporation Kemet Corporation *
Benton Oil and Gas Co. Extended Stay America Inc. Kennametal Inc.
Bergen Brunswig Corporation Federal-Mogul Corporation Kimball International, Inc.
Best Buy Co., Inc. First Commerce Corporation Lam Research Corporation
Birmingham Steel Corporation Fleming Companies, Inc. Lands' End, Inc.
Block Drug Company Inc. Flowers Industries, Inc. Lattice Semiconductor Corporation
Brightpoint, Inc. Forcenergy Inc. Lawson Products, Inc.
Broderbund Software Inc Foremost Corporation of America Lawter International, Inc.
Brown Group, Inc. FPA Medical Management Inc La-Z-Boy Incorporated
Brush Wellman Inc. Fred Meyer, Inc. Lennar Corporation
Calgon Carbon Corporation Fuller (H. B.) Company Life Re Corporation
Carlisle Companies Incorporated Gaylord Container Corp. Lincare Holdings Inc.
Carpenter Technology Corporation GenCorp Inc. Lomak Petroleum, Inc.
</TABLE>
27
<PAGE> 64
<TABLE>
<S> <C> <C>
Lone Star Steakhouse & Pride International Inc. Superior Industries
Saloon, Inc. PSINet Inc. International, Inc.
Long Island Bancorp, Inc. Public Service Company Swift Energy Company
Luby's Cafeterias, Inc. of New Mexico Sybase Inc
Mac Frugal's Bargainso Pulitzer Publishing Co. Symantec Corporation
Close-outs Inc. Pulte Corporation Symbol Technologies, Inc.
Macromedia, Inc. Quaker State Corporation TCA Cable TV, Inc.
Magna Group, Inc. Quick and Reilly Group Inc. Teleflex Incorporated
Marine Drilling Companies, Inc. Ralcorp Holdings Inc. Tesoro Petroleum Corporation
MAXXAM Inc. Rational Software Corporation The Dress Barn, Inc.
MDU Resources Group, Inc. Regal Cinemas Inc. The Liberty Corporation
Mercury Finance Co Reliance Group Holdings, Inc. The Liposome Company Inc.
Micro Warehouse, Inc. Riggs National Corporation The Profit Recovery Group
Mid Atlantic Medical Services Rollins Truck Leasing Corp. International, Inc.
Mobile Telecommunication Rollins, Inc. The Standard Products Co.
Tech Corp. Roslyn Bancorp Inc The Standard Register Company
Mohawk Industries Inc. Ross Stores, Inc. The West Company, Incorporated
Money Store Inc. Ruby Tuesday, Inc. Thiokol Corporation
NAC Re Corporation Russ Berrie and Company, Inc. Tucson Electric Power Company
NACCO Industries, Inc. S3 Incorporated UGI Corporation
National Semiconductor Corp. Sbarro, Inc. United Companies Financial Corp.
NCH Corporation Seagull Energy Corporation Valley National Bancorp
Networks Associates Inc. Sequent Computer Systems, Inc. Vanguard Cellular Systems, Inc.
New England Business Shared Medical Systems Corp. Varco International, Inc.
Service, Inc. Shiva Corp Vitesse Semiconductor Corp
Northeast Utilities Shorewood Packaging Corporation Vivus Inc
NTL Inc. Showboat, Inc. VLSI Technology, Inc.
Oak Technology, Inc. Sierra Pacific Resources Wallace Computer Services, Inc.
OMI Corp. Silicon Valley Group, Inc. Washington Federal Inc.
ONBANCorp, Inc. Sotheby's Holdings, Inc. Wausau Mosinee Paper Corp.
ONEOK Inc. Southdown Inc. Western National Corporation
Orange and Rockland Utilities, Inc. Southern Indiana Gas & Westpoint Stevens Inc.
Overseas Shipholding Group, Inc. Electric Co. World Color Press, Inc.
Paging Network Inc Southwest Gas Corporation Xircom Inc.
Papa John's International Southwestern Energy Company Xylan Corp
Pegasus Gold Inc. Sovereign Bancorp, Inc. Yellow Corporation
Pentair, Inc. St. Paul Bancorp Inc. Zenith National Insurance Corp.
Peoples Bank Stanhome Inc. Zoltek Companies, Inc.
Perrigo Company Station Casinos, Inc. Zurn Industries, Inc.
Pittston Brink's Group Stride Rite Corp.
Pixar Animation Studios Structural Dynamics
Playtex Products Inc Research Corporation
Pogo Producing Company Sunglass Hut International Inc
</TABLE>
28
<PAGE> 65
SCHEDULE C
----------
The beta measurements used in the Combined Prospectus were calculated
by using MicroSoft Excel spreadsheets and the statistical function slope
available in MicroSoft Excel. The SLOPE function returns the slope of the linear
regression line through data points in known y's and known x's. The slope is the
vertical distance divided by the horizontal distance between any two points on
the line, which is the rate of change along the regression line.
The equation for beta (slope) is shown below.
Beta = n(SIGMA)xy - ((SIGMA)x)((SIGMA)y)
----------------------------------------
n(SIGMA)x to the power of 2 - ((SIGMA)x)to the power of 2
Where y = the Fund's monthly total returns in the period
x = the Index's monthly total returns in the period
29
<PAGE> 66
- --------------------------------------------------------------------------------
THE GATEWAY TRUST
- --------------------------------------------------------------------------------
Registration Statement
Securities Act of 1933 Registration No. 2-59895
Investment Company Act of 1940 Registration No. 811-02773
CINCINNATI FUND(R)
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1999
This Statement is not a prospectus but should be read in conjunction
with the current Prospectus of the Cincinnati Fund dated May 1, 1998. A copy of
the Prospectus may be obtained from the Fund by written or telephone request
directed to the Fund at the address or the telephone number shown below.
- --------------------------------------------------------------------------------
P. O. BOX 5211
CINCINNATI, OHIO 45201-5211
(800) 354-5525
- --------------------------------------------------------------------------------
<PAGE> 67
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
INTRODUCTION......................................................................................................3
General Information About The Gateway Trust.....................................................................3
INVESTMENT PRACTICES AND RESTRICTIONS.............................................................................4
General.........................................................................................................4
Investment Restrictions.........................................................................................4
PERFORMANCE AND RISK INFORMATION..................................................................................6
Performance Information.........................................................................................6
Total Return Calculations...................................................................................6
Historical Results..........................................................................................6
Risk Information................................................................................................7
Comparative Indexes.........................................................................................7
Standard Deviation..........................................................................................7
Beta........................................................................................................7
Rankings And Comparative Performance Information................................................................7
SHAREHOLDER SERVICES..............................................................................................7
Open Account....................................................................................................8
Automatic Investment Program....................................................................................8
IRAs............................................................................................................8
Systematic Withdrawal Program...................................................................................9
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION....................................................................9
INVESTMENT ADVISORY AND OTHER SERVICES...........................................................................11
Gateway Investment Advisers, L.P...............................................................................11
Investment Advisory Contract...................................................................................11
Custodian......................................................................................................12
Shareholder Servicing, Transfer, Dividend Disbursing, And Financial Servicing Agent............................12
BROKERAGE........................................................................................................13
Additional Tax Matters.........................................................................................14
Federal Tax Matters............................................................................................14
State And Local Tax Aspects....................................................................................14
TRUSTEES AND OFFICERS OF THE TRUST...............................................................................15
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS..........................................................16
PRINCIPAL HOLDERS OF CINCINNATI FUND SHARES......................................................................16
SCHEDULE A.......................................................................................................17
</TABLE>
<PAGE> 68
INTRODUCTION
------------
GENERAL INFORMATION ABOUT THE GATEWAY TRUST
The Gateway Trust (the "Trust") is an Ohio business trust which is
authorized to establish and operate one or more separate series of mutual funds
(herein referred to as "funds" or individually as a "fund"). Each fund has its
own investment policies, restrictions, practices, assets, and liabilities. Each
fund is represented by a separate series of shares of beneficial interest in the
Trust ("Shares"). The Trust's operation is governed by Chapter 1746 of the Ohio
Revised Code, by a Second Amended Agreement and Declaration of Trust dated as of
December 29, 1992, as amended, and by the Trust's bylaws, as amended.
At present, there are three series of the Trust:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
NAME OF FUND DATE ORGANIZED FORMER NAMES
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Gateway Fund 1977 Gateway Index Plus Fund until April 30,
1998; Gateway Option Index Fund until
March 1990; Gateway Option Income Fund
until February 1988; Gateway Option
Income Fund, Inc. until May 1986
Gateway Small Cap Index Fund April 1993 None
Cincinnati Fund(R) November 1994 None
-------------------------------------------------------------------------------------------------
</TABLE>
Gateway Option Income Fund, Inc., the predecessor to the Trust, was
organized in 1977 as a Maryland corporation. It was reorganized to become the
Trust effective as of May 2, 1986, with the Gateway Option Income Fund as its
sole initial fund. As a result of the transaction, shareholders of the
corporation on May 2, 1986, became shareholders of the Option Income Fund.
The Gateway Fund and the Gateway Small Cap Index Fund are offered in
one combined prospectus (the "Combined Prospectus"). The Cincinnati Fund is
offered in a separate prospectus (the "Cincinnati Prospectus"). The Cincinnati
Fund has a separate Statement of Additional Information. The other two funds
have a combined Statement of Additional Information.
Gateway Investment Advisers, L.P. (the "Adviser") acts as the funds'
investment adviser.
<PAGE> 69
INVESTMENT PRACTICES AND RESTRICTIONS
-------------------------------------
GENERAL
The Cincinnati Fund, (the "Fund"), may hold cash for purposes of
liquidity or for temporary defensive purposes. The Fund generally will hold cash
reserves for the purpose of paying expenses and share redemptions and may hold
cash received from the sale of the Fund's shares which has not yet been
invested. In addition, the Adviser may determine from time to time that, for
temporary defensive purposes, the Fund should reduce (and in periods of unusual
market conditions reduce substantially or liquidate entirely) its investment in
common stock. For temporary defensive purposes, the Fund may hold up to 100% of
its assets in cash.
Cash is normally invested in repurchase agreements. Cash may also be
invested in securities of the U. S. government or any of its agencies, bankers'
acceptances, commercial paper, or certificates of deposit (collectively "cash
instruments"). Commercial paper investments will be limited to investment grade
issues rated A-1 or A-2 by Standard & Poor's or Prime-1 or Prime-2 by Moody's
Investors Service, Inc. Certificates of deposit investments will be limited to
obligations of domestic banks with assets of $1 billion or more. Under normal
conditions, the Adviser does not intend to invest more than 5% of the Fund's net
assets in any cash instruments other than repurchase agreements.
Repurchase agreements are instruments under which the Fund buys
securities suitable for investment under its policies and obtains the concurrent
agreement of the seller (usually a bank) to repurchase such securities at an
agreed-upon date, price, and interest rate. Investments in repurchase agreements
are subject to the risk that the selling bank may default in its repurchase
obligation. However, not more than 5% of the Fund's total assets may be invested
in repurchase agreements which have a maturity longer than seven days.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental policies with respect to the
Fund that may not be changed without a vote of shareholders of the Fund. Under
these policies, the Fund may not:
1. purchase any security if, as a result, the Fund (or the funds in
the Trust together) would then hold more than 10% of any class
of securities of an issuer (taking all common stock issues of an
issuer as a single class, all preferred stock issues as a single
class, and all debt issues as a single class), or more than 10%
of the outstanding voting securities of an issuer.
2. purchase any security if, as a result, the Fund would then have
more than 5% of its total assets (taken at current value)
invested in securities of companies (including predecessors)
less than three years old and in equity securities for which
market quotations are not readily available.
3. purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of
purchase and sales of securities).
4. make short sales of securities or maintain a short position (a)
unless, at all times when a short position is open, the Fund
owns an equal amount of such securities or securities
convertible into or exchangeable (without payment of any further
consideration) for securities of the same issue as, and equal in
amount to, the securities sold short, and (b) unless not more
than 10% of the Fund's net assets (taken at current value) are
held as collateral for such sales at any one time.
It is the present intention of management to make such sales
only for the purpose of deferring realization of gain or loss
for federal income tax purposes.
5. borrow money except as a temporary measure for extraordinary or
emergency purposes and then only from banks and only in amounts
not in excess of 5% of the Fund's total assets (except to meet
redemption requests as discussed below), taken at the lower of
cost or market.
It is the present intention of management that the Fund will not
purchase additional portfolio securities at any time when its
borrowing exceeds 5% of its total assets. In order to meet
redemption requests without immediately selling any portfolio
securities, the Fund may borrow an amount up to 25% of the value
of its total assets including the amount borrowed. If, due to
market fluctuations or other reasons, the value of the Fund's
assets falls below 400% of its borrowing, the Fund will reduce
its borrowing which may result in the Fund being required to
sell securities at a time when it may otherwise be
disadvantageous to do so. This borrowing is not for investment
leverage but solely to facilitate management of the portfolio by
enabling the Fund to meet
<PAGE> 70
redemption requests where the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous.
However, the Fund might be deemed to be engaged in leveraging in
that any such borrowing will enable the Fund to continue to earn
money on investments which otherwise may have been sold in order
to meet redemption requests.
6. pledge more than 10% of its total assets, taken at market value.
7. purchase or retain securities of any company if, to the
knowledge of the Trust, officers and trustees of the Trust or of
the Adviser who individually own more than 1/2 of 1% of the
securities of that company together own beneficially more than
5% of such securities.
8. buy or sell commodities or commodities futures or options
contracts, or real estate or interests in real estate, although
it may purchase and sell (a) securities which are secured by
real estate, and (b) securities of companies which invest or
deal in real estate.
9. act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be
an underwriter under certain provisions of the federal
securities laws.
10. make investments for the purpose of exercising control or
management.
11. participate on a joint or joint and several basis in any trading
account in securities.
12. purchase any security restricted as to disposition under the
federal securities laws.
13. invest in securities of other investment companies, except as
part of a merger, consolidation, or other acquisition.
14. invest in interests in oil, gas, or other mineral exploration or
development programs, although it may invest in the common
stocks of companies which invest in or sponsor such programs.
15. make loans, except through the purchase of bonds, debentures,
commercial paper, corporate notes, and similar evidences of
indebtedness of a type commonly sold privately to financial
institutions (subject to the limitation in paragraph 12 above),
and except through repurchase agreements.
No more than 5% of the Fund's assets will be invested in
repurchase agreements which have a maturity longer than seven
days. In addition, the Fund will not enter into repurchase
agreements with a securities dealer if such transactions
constitute the purchase of an interest in such dealer under the
Investment Company Act of 1940. The purchase of a portion of an
issue of such securities distributed publicly, whether or not
such purchase is made on the original issuance, is not
considered the making of a loan.
16. purchase any security (other than U. S. government obligations)
if, as a result thereof, less than 75% of the value of the
Fund's total assets is represented by cash and cash items
(including receivables), government securities, and other
securities which, for purposes of this calculation, are limited
in respect of any one issuer to an amount not greater in value
than 5% of the value of the Fund's total assets and to not more
than 10% of the outstanding voting securities of such issuer.
All of the funds in the Trust taken as a group also must satisfy
this 10% test.
17. concentrate the investments of the Fund in a single industry.
18. write, purchase, or sell puts, calls, or combinations thereof.
19. buy or sell commodities, commodities futures contracts, or
commodities options contracts.
The Trust has no fundamental policy with respect to the issuance of
senior securities by the Fund; however, the Investment Company Act of 1940
prohibits the Trust's issuance of any such securities.
Although the practices described in paragraphs 4, 5, and 6 above could
involve more than 5% of the Fund's assets, none of those practices have been
employed by the Fund. The Adviser has no current intention of causing the Fund
to employ any such practice in the coming year.
<PAGE> 71
PERFORMANCE AND RISK INFORMATION
--------------------------------
PERFORMANCE INFORMATION
The Fund may quote performance in various ways. All performance
information supplied by the Fund is based upon historical results and is not
intended to indicate future performance. Total returns and other performance
information may be shown numerically or in a table, graph, or similar
illustration. The Fund's share prices and total returns fluctuate in response to
market conditions, interest rates, and other factors.
TOTAL RETURN CALCULATIONS
-------------------------
Total returns reflect all aspects of a fund's return, including the
effect of reinvesting dividends and capital gain distributions, and any change
in a fund's net asset value per share (the "NAV") over the period.
Average annual total returns are calculated by determining the average
annual compounded rates of return over one-, five-, and ten-year periods that
would equate an initial hypothetical investment to the ending redeemable value
according to the following formula:
P (1 + T)n = ERV where T = Average annual total return
n = Number of years and portion of a year
ERV = Ending redeemable value (of an
initial hypothetical $1,000
investment) at the end of the period
P = $1,000 (the hypothetical initial
investment)
If a fund has been in existence for less than one, five, or ten years,
the time period since the date it commenced operations will be substituted for
the periods stated.
As a hypothetical example, a cumulative return of 100% growth on a
compounded basis in ten years would produce an average annual total return of
7.18%, which is the annual rate that would equal 100% growth on a compounded
basis in ten years. While average annual total returns are convenient means of
comparing investment alternatives, investors should realize that a fund's
performance is not constant over time, but changes from year to year, and that
average annual total returns represent averaged figures as opposed to the actual
year-to-year performance of the fund.
Average annual total return is calculated as required by applicable
regulations promulgated by the Securities and Exchange Commission (the "SEC").
In addition to average annual total returns, the Fund may quote year-by-year
total returns and cumulative total returns reflecting the simple change in value
of any investment over a stated period. Average annual, year-by-year, and
cumulative total returns may be quoted as a percentage or as a dollar amount.
HISTORICAL RESULTS
------------------
The following table shows the Fund's average annual and cumulative
total returns for the period ended December 31, 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------ ---------------------
ONE YEAR FIVE YEARS LIFE OF FUND
- ------------------------------------------------------------------------ ---------------------
<S> <C> <C> <C>
Average Annual Total Return 28.98% n/a 26.10%
- ------------------------------------------------------------------------ ---------------------
Cumulative Total Return 28.98% n/a 107.50%
- ------------------------------------------------------------------------ ---------------------
</TABLE>
The table below shows the redeemable value on December 31, 1997, for an
initial investment of $10,000 in the Fund that was made at the beginning on the
one- and five-year periods, and the commencement of the Fund's operations. The
table assumes all dividends and distributions have been reinvested in additional
shares.
<TABLE>
<CAPTION>
- -------------------------------------------------------
ONE YEAR FIVE YEARS LIFE OF FUND
- -------------------------------------------------------
<S> <C> <C>
$12,898 n/a $20,750
- -------------------------------------------------------
</TABLE>
<PAGE> 72
RISK INFORMATION
In evaluating the performance of any investment including the Fund, it
is important to understand the risks involved in the investment. Information
regarding the performance of an investment, while valuable in itself, is more
meaningful when it is related to the level of risk associated with that
investment. Thus, two different mutual funds that produce similar average annual
total returns may present markedly different investment opportunities if the
risk of loss associated with one mutual fund is greater than that of the other
mutual fund.
For example, an investment in a mutual fund that invests in stocks
generally will present greater potential for variation in the share price of the
mutual fund, and hence a greater risk of gain or loss than an investment in a
mutual fund that invests in short-term U. S. government securities. Because the
potential for greater gain typically carries with it a greater degree of risk,
the advisability of an investment in a particular mutual fund for a given
investor will depend not only on historical performance of the fund but also on
the potential for gain and loss associated with that mutual fund.
The Gateway Trust offers three different funds that produce different
total returns and present different risk potentials. The difference in risk
potential can be demonstrated by various statistical concepts. The following
statistical concepts can be used to measure some of the risks associated with an
investment in the Fund.
COMPARATIVE INDEXES
-------------------
The performance and risk of the Fund may be compared to various broadly
recognized indexes such as the S&P 500 Index or the Lehman Government/Corporate
Bond Index. These comparative indexes are used because they are the standard
benchmarks of the stock market and bond market respectively. The Fund's
performance and risk may also be compared to other appropriate indexes.
STANDARD DEVIATION
------------------
Standard deviation measures the volatility of the total return of the
Fund. Standard deviation is one method of comparing the total return of a fund
to the average monthly total return of the Fund. In general, a fund that has a
greater standard deviation is a fund that has displayed a greater tendency to
vary from its own average monthly total return. Standard deviation can also be
used to compare the total return of a fund to the total return of an index or
another mutual fund. By comparing the magnitude of the standard deviation of
each investment, an analyst is able to determine the relative volatility of each
investment. An investment with an expected return of 10% and a standard
deviation of 15% would be expected to earn a total return ranging from -5% to
+25% about 68% of the time, a total return ranging from -20% to +40% about 95%
of the time, and a total return ranging from -35% to +55% about 97% of the time.
BETA
----
Beta analyzes the market risk of the Fund by showing how responsive the
Fund is to the market as defined by an index. Beta is a comparative measure of
the Fund's volatility in relation to an appropriate index. Generally, higher
betas represent riskier investments. By definition, the beta of the market is
1.00. Thus, a fund with a beta higher than 1.00 is expected to perform better
than the market in up markets and worse than the market in down markets.
Beta is the slope of the "least square line" which compares the Fund with an
index.
RANKINGS AND COMPARATIVE PERFORMANCE INFORMATION
The Fund may compare its performance to that of other mutual funds or
categories of mutual funds as reported by independent services such as
Morningstar, Inc., Lipper Analytical Services, Inc., and Value Line Mutual Fund
Survey, or by other financial publications with a circulation of 10,000 readers
or more.
Performance comparisons may be expressed as ratings, such as the proprietary
ratings published by Morningstar, Inc., or rankings, such as the rankings of
funds in various categories published by Lipper Analytical Services, Inc.
Performance comparisons may also be expressed as designations (such as a certain
number of "stars") or descriptions (such as "best fund") assigned by such
services or publications.
SHAREHOLDER SERVICES
--------------------
Gateway Investment Advisers, L.P. serves as the Trust's shareholder
servicing, transfer, dividend disbursing, and financial servicing agent (the
"Servicing Agent"). In this capacity, it performs various shareholder services
on behalf of the Trust.
<PAGE> 73
OPEN ACCOUNT
The Fund's regular account for investors who purchase its shares is the
Open Account. The Open Account facilitates regular purchases of Fund shares over
a period of years and provides the option of receiving dividends and
distributions either in cash or in Fund shares. Gateway does not charge for the
automatic reinvestment of dividends and distributions.
The Servicing Agent maintains a record of the investor's purchases,
redemptions, and share balances in the investor's Open Account. Shortly after
each purchase, the Servicing Agent will mail a confirmation to the investor
showing the shares purchased, the exact price paid for the shares, and the total
number of shares owned. Share certificates will not be issued.
Upon opening an account, the investor may elect either of the following
options: (1) reinvestment at net asset value of all distributions, or (2)
payment in cash of all distributions. If no election is made, all distributions
will be reinvested at net asset value. An election may be changed by a letter or
telephone call to the Servicing Agent. No annual maintenance fees are charged by
the Trust on any Open Account. The Trust reserves the right to charge annual
fees in the future. Shareholders will be notified of any change in the annual
fee arrangement.
AUTOMATIC INVESTMENT PROGRAM
Investors can arrange to use our Automatic Investment Program by either
making the election on the New Account Application or by contacting Shareholder
Services at (800) 354-6339 for the appropriate forms. With this service,
investors purchase additional shares by having a predetermined amount of $100 or
more automatically transferred from a bank account to the Trust on a monthly or
quarterly basis. Changes to an Automatic Investment Program, including
discontinuing participation, must be in writing and sent to The Gateway Trust,
Shareholder Services, P. O. Box 5211, Cincinnati, OH 45201-5211. All changes to
the Program must be received by Gateway at least five business days prior to the
next scheduled transfer.
IRAS
Investors may purchase shares of the Fund through Individual Retirement
Accounts ("IRAs") which are permitted to invest in shares of a mutual fund. The
Trust itself sponsors a traditional IRA (the "Gateway Traditional IRA") and a
Roth IRA (the "Gateway Roth IRA") or jointly as a "Gateway IRA"). A Gateway IRA
can be adopted by an investor and is specifically designed to permit the
investor to invest in shares of any Gateway fund selected by the investor. The
custodian of the Gateway IRA is Star Bank. Investors can obtain forms to
establish a Gateway IRA by calling Shareholder Services at (800) 354-5525.
An IRA is a special program with certain tax benefits that generally
permits an investor to establish and contribute to his or her own retirement
plan. For detailed information about a Gateway IRA, please refer to the
Agreement and Disclosure Statement for the appropriate Gateway IRA. Agreements
and Disclosure Statements can be obtained by calling Shareholder Services at
(800) 354-5525.
An investor may make a direct transfer of assets from one IRA to a
Gateway IRA by directing the existing IRA custodian or trustee to transfer
directly to the Gateway IRA the amount held in that prior IRA, without directly
receiving those funds or being taxed on the transfer. There is no minimum
holding period for a direct transfer of IRA assets from one custodian or trustee
to another. Call Shareholder Services at (800) 354-5525 to obtain the
appropriate transfer form.
A Gateway Traditional IRA is eligible to receive direct rollovers of
distributions from a qualified employer plan. An investor can make a direct
rollover by instructing the employer's plan to wire the distribution to Star
Bank as custodian for a Gateway Traditional IRA. The distribution should be
wired to:
The Gateway Trust c/o Star Bank, N.A.
ABA #042-0000-13
Cincinnati, OH
Name (insert investor name)
Gateway Account No. (insert investor account number)
Name of Gateway fund(s) in which you wish to invest.
<PAGE> 74
An investor can also make a direct rollover to a Gateway Traditional
IRA by instructing the employer's plan to prepare a check for the amount to be
rolled over payable to "Star Bank, N.A., as Custodian of Individual Retirement
Account of (insert investor name)," and sending that check to Gateway. The check
can also be delivered in person to Gateway, or mailed to:
The Gateway Trust
Shareholder Services
P. O. Box 5211
Cincinnati, OH 45201-5211
An investor can make a 60-day rollover of a distribution from a
qualified employer plan by instructing the employer's plan to prepare a check
payable to the investor and by endorsing or cashing the check and depositing
some or all of the proceeds in a Gateway Traditional IRA. The deposit must be
delivered in person to Gateway, or mailed to The Gateway Trust at the above
address within 60 days of when the investor receives the distribution. The
employer's plan must withhold 20% of the taxable amount for federal income tax
if the investor chooses a 60-day rollover for the distribution.
Some portions of distributions from other IRAs or from tax-qualified
profit sharing, stock bonus, pension, or annuity plans are not eligible for
regular or direct rollovers. For instance, distributions of nontaxable after-tax
employee contributions or required minimum payments made after an individual
reaches age 70 1/2 cannot be rolled over.
To make a withdrawal from a Gateway IRA, an investor should contact
Shareholder Services at (800) 354-5525.
The rules for contributing to, investing under, and distributing from
IRAs are complex, and any investor should consult with his or her own tax
adviser if he or she has any questions with respect to IRAs and to determine if
there have been any recent changes to the rules. At the time an IRA is
established, the custodian or trustee of the IRA is required by law to provide a
disclosure statement to the individual setting forth important information
concerning IRAs.
Further information concerning IRAs can be obtained from any district
office of the Internal Revenue Service. In particular, Publication 590 of the
Internal Revenue Service provides general information as to IRAs.
No annual maintenance fees are charged by the Trust for any account,
including IRAs, SEP-IRAs, retirement, and pension or profit-sharing plans,
including 401(k) plans. The Trust reserves the right to charge annual fees in
the future. Shareholders will be notified of any change in the annual fee
arrangement.
SYSTEMATIC WITHDRAWAL PROGRAM
If the value of a shareholder's account is at least $5,000, the
shareholder can request withdrawals on either a monthly or a quarterly basis in
the minimum amount of $100. The Trust makes no recommendation as to the minimum
amount to be periodically withdrawn by a shareholder. A sufficient number of
shares in the shareholder's account will be sold periodically (normally one
business day prior to each withdrawal payment date) to meet the requested
withdrawal payments.
If a shareholder participates in the Systematic Withdrawal Program, all
dividends and distributions on shares held in the account will be reinvested in
additional shares at net asset value. Since the withdrawal payments represent
the proceeds from sales of fund shares, there will be a reduction, and there
could even be an eventual depletion, of the amount invested in the Fund to the
extent that withdrawal payments exceed the dividends and distributions paid and
reinvested in shares. Withdrawals under the Systematic Withdrawal Program should
not, therefore, be considered a yield on investment. A shareholder can make
arrangements to use the Systematic Withdrawal Program (or discontinue
participation) by contacting Shareholder Services at (800) 354-5525.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
----------------------------------------------
Basic information concerning the purchase and redemption of shares is
set forth under the captions "How To Purchase Additional Shares" and "How To
Redeem Shares" in the Cincinnati Prospectus. Shares of the Fund are purchased
and redeemed at their net asset value as next determined following receipt of
the purchase order or redemption notice. Redemptions under the Systematic
Withdrawal Program and installment distributions from IRAs are effected at the
net asset value next determined on or after the date designated for the
redemption or distribution. Information as to the method of calculating the net
asset value of shares of the Fund is included in the Cincinnati Prospectus under
the caption "How Fund Shares Are Priced."
Certificates for shares of the Fund will not be issued.
<PAGE> 75
The minimum initial investment is $1,000 ($500 for IRAs). The minimum
additional investment is $100, subject to certain exceptions such as investments
by the Adviser's employees, by participants in an SEP-IRA program, and by
participants in the Automatic Investment Program. The Trust reserves the right
to reject any purchase order of the Fund.
There is no minimum or maximum applicable to redemption of shares of
the Fund. The Trust, however, reserves the right to redeem a shareholder's
account(s) under certain circumstances. The shareholder will receive at least 60
days' written notice prior to the redemption of the account(s).
The Trust may redeem a shareholder's account(s) in the Fund when the
aggregate value of the shareholder's account(s) falls below $800 (other than as
a result of market action). The shareholder may prevent such redemption by
increasing the value of the account(s) to $1,000 or more within the 60-day
period.
The Trust will redeem a shareholder's account if the shareholder does
not provide a valid U. S. social security number or taxpayer identification
number or other requested documents. The shareholder may prevent such redemption
by providing the requested information within the 60-day period.
The Trust reserves the right to terminate temporarily or permanently
the exchange privilege for any shareholder who makes an excessive number of
exchanges between funds. The shareholder will receive written notice that the
Trust intends to limit the shareholder's use of the exchange privilege.
Generally the Trust limits a shareholder to twelve exchange transactions per
calendar year. Accounts under common ownership or control, including accounts
with the same taxpayer identification number, normally will be counted as one
account for purposes of the exchange limit.
The Trust also reserves the right to terminate or modify the exchange
privilege or to refuse an exchange if the exchange would adversely affect a fund
involved in the exchange.
Signature guarantees are required for all redemptions (on the date of
receipt by the Servicing Agent of all necessary documents), regardless of the
amount involved, when the proceeds are to be paid to someone other than the
registered owner(s). The signature guarantee requirement may be waived by the
Trust in certain instances. The Trust also reserves the right to require a
signature guarantee on any instructions or redemptions given to the Trust for
any reason. The purpose of signature guarantees is to prevent fraudulent
redemptions which could result in losses to the Trust, the Servicing Agent, or
shareholders. A signature guarantee will be accepted from banks, brokers,
dealers, municipal securities dealers or brokers, government securities dealers
or brokers, credit unions (if authorized by state law), national securities
exchanges, registered securities associations, clearing agencies, and savings
associations. Notary publics are unacceptable guarantors. The signature
guarantees must appear either (a) on the written request for redemption; (b) on
a stock power which should specify the total number of shares to be redeemed; or
(c) on all stock certificates tendered for redemption.
The right of redemption may be suspended or the date of payment
postponed (a) for any periods during which the New York Stock Exchange is closed
(other than for customary weekend and holiday closings); (b) when trading in any
of the markets which the Fund normally utilizes is restricted as determined by
the SEC; (c) if any emergency exists as defined by the SEC so that disposal of
investments or determination of the Fund's net asset value is not reasonably
practicable; or (d) for such other periods as the SEC by order may permit for
protection of the Trust's shareholders.
The Trust has elected to be governed by Rule 18f-1 of the Investment
Company Act which obligates the Fund to redeem shares in cash with respect to
any one shareholder during any 90-day period up to the lesser of $250,000 or 1%
of the assets of the Fund. Although payment for redeemed shares generally will
be made in cash, under abnormal circumstances the Board of Trustees of the Trust
may determine to make payment in securities owned by the Fund. In such event,
the securities will be selected in such manner as the Board of Trustees deems
fair and equitable, in which case brokerage and other costs may be incurred by
such redeeming shareholders in the sale or disposition of their securities. To
date, all redemptions have been made in cash.
The Trust reserves the right to modify or terminate any purchase,
redemption, or other shareholder service procedure upon written notice to
shareholders.
Purchases and redemptions generally may be effected only on days when
the stock exchanges are open for trading. These exchanges are closed on
Saturdays and Sundays and the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas Day.
<PAGE> 76
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------
GATEWAY INVESTMENT ADVISERS, L.P.
Gateway Investment Advisers, L.P. (the "Adviser"), a Delaware limited
partnership, has acted as the investment adviser for the Fund since December 15,
1995. Gateway Investment Advisers, Inc. ("GIA") provided investment advisory
services to the Fund from its formation until December 15, 1995. The Adviser
became the successor in interest to the assets, business, and personnel of GIA
which was organized in June 1977. GIA is the general partner of the Adviser with
a 76% ownership interest, while Alex. Brown Investments Incorporated ("ABII") is
the sole limited partner with a 24% ownership interest. ABII is an affiliate of
BT Alex. Brown Incorporated, a nationally known investment banking firm and
registered broker/dealer located in Baltimore, Maryland. Walter G. Sall,
Chairman and a Trustee of the Trust, and J. Patrick Rogers, the portfolio
manager of the funds and President and a Trustee of the Trust, together own of
record and beneficially 99.85% of the outstanding shares of GIA and thereby
control the Adviser. Mr. Sall is Chairman and a director of GIA and Mr. Rogers
is its President and a director. The third director of GIA is Margaret-Mary V.
Preston who is employed by BT Alex. Brown Incorporated as a Managing Director.
INVESTMENT ADVISORY CONTRACT
The Trust has retained the Adviser under an investment advisory
contract ("Adviser Contract") to act as investment manager and in such capacity
supervise the investments of the Fund, subject to the policies and control of
the Trust's Board of Trustees. The Adviser Contract for the Fund became
effective on December 15, 1995. Services were provided by GIA under a
substantially identical contract prior to this date.
Pursuant to the Adviser Contract, the Adviser, at its sole expense,
provides the Fund with (i) investment recommendations regarding the Fund's
investments; (ii) office space, telephones, and other office equipment; and
(iii) clerical and secretarial staff and the services, without additional
compensation, of all officers of the Trust. In addition, the Adviser has agreed
to bear (i) advertising and other marketing expenses in connection with the sale
of the shares of the Fund; (ii) expenses of printing and distributing the Fund's
prospectus and related documents to prospective shareholders; and (iii)
association membership dues (other than for the Investment Company Institute).
The Adviser Contract further provides that under certain circumstances the
Adviser may cause the Fund to pay brokerage commissions in order to enable the
Adviser to obtain brokerage and research services for its use in advising the
Fund and the Adviser's other clients, provided that the amount of commission is
determined by the Adviser, in good faith and in the best interests of the Fund,
to be reasonable in relation to the value of the brokerage and research services
provided.
The Adviser Contract provides that all expenses not specifically
assumed by the Adviser which may be incurred in the operation of the Trust and
the offering of its shares will be borne by the Trust. Such expenses will be
allocated among the funds in the Trust by direction of the Board of Trustees,
most frequently on the basis of expenses incurred by each fund, but where that
is not practicable on such basis as the Trustees determine to be appropriate.
Expenses to be borne by the Trust include:
- fees and expenses of trustees not employed by the Adviser;
- expenses of printing and distributing prospectuses to current
shareholders of the Trust;
- expenses pertaining to registering or qualifying the Trust or its
shares under various federal and state laws, and maintaining and
updating such registrations and qualifications;
- interest expense, taxes, fees, and commissions (including brokerage
commissions) of every kind;
- expenses related to repurchases and redemptions of shares;
- charges and expenses of custodians, transfer agents, dividend
disbursing agents, and registrars;
- expenses of valuing shares of each fund;
- printing and mailing costs other than those expressly assumed by the
Adviser;
- auditing, accounting, and legal expenses;
- expenses incurred in connection with the preparation of reports to
shareholders and governmental agencies;
- expenses of shareholder meetings and proxy solicitations;
- insurance expenses;
- all "extraordinary expenses" which may arise, including all losses and
liabilities incurred in connection with litigation proceedings and
claims, and the legal obligations of the Trust to indemnify its
officers, trustees, and agents with respect thereto.
A majority of the Board of Trustees of the Trust and a majority of the
trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of any party to the Adviser Contract of the Fund, voting
separately, shall determine which expenses shall be characterized as
"extraordinary expenses."
<PAGE> 77
In return for the services and facilities furnished by the Adviser
under the Adviser Contract, the Fund pays the Adviser an advisory fee ("the
Advisory Fee") computed at an annual rate of 0.50% of the average daily net
asset value of the Fund.
If total expenses of the Fund for any fiscal year (including the
Adviser's compensation, but exclusive of taxes, interest, brokerage commissions,
and any "extraordinary expenses" determined as described above) exceed 2.00% of
the Fund's average daily net asset value for such year, the Adviser Contract
requires the Adviser to bear all such excess expenses up to the amount of the
Advisory Fee. Each month the Advisory Fee is determined and the Fund's expenses
are projected. If the Fund's projected expenses are in excess of the
above-stated expense limitation, the Advisory Fee paid to the Adviser will be
reduced by the amount of the excess expenses, subject to an annual adjustment;
provided, however, that the aggregate annual reduction from the Adviser to the
Fund shall not exceed the aggregate Advisory Fee paid by the Fund to the Adviser
for such year.
The Adviser Contract further provides that in the absence of willful
misfeasance, bad faith, gross negligence, or reckless disregard of its duties or
obligations thereunder, the Adviser is not liable to the Trust or any of its
shareholders for any act or omission by the Adviser. The Adviser Contract
contemplates that the Adviser may act as an investment manager or adviser for
others.
The Adviser Contract may be amended at any time by the mutual consent
of the parties thereto, provided that such consent on the part of the Trust
shall have been approved by the vote of a majority of the Trust's Board of
Trustees, including the vote cast in person by a majority of the trustees who
are not "interested persons" (as defined in the Investment Company Act of 1940)
of any party to the Adviser Contract, and by vote of the shareholders of the
Fund.
The Adviser Contract may be terminated, upon 60 days' written notice
(which notice may be waived) at any time without penalty (i) by the Board of
Trustees of the Trust; (ii) by the vote of a majority of the outstanding voting
securities of the Fund; or (iii) by the Adviser. The Adviser Contract terminates
automatically in the event of its assignment (as that term is defined in the
Investment Company Act of 1940) by the Adviser.
The Adviser Contract continues in effect until December 31, 1998, and
thereafter, provided that its continuance for the Fund for each renewal year is
specifically approved in advance (i) by the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Fund, and (ii) by
vote of a majority of the trustees who are not parties to the Adviser Contract
or "interested persons" of any party to the Adviser Contract (other than as
Trustees of the Trust), by votes cast in person at a meeting specifically called
for such purpose.
The following table shows the Advisory Fees earned by the Adviser (or
GIA) for providing services to the Cincinnati Fund. It also shows the amount of
the fees waived by the Adviser for the year ended December 31, 1997, 1996, and
1995.
<TABLE>
<CAPTION>
-------------------------------------------------
FEE AND WAIVER CINCINNATI FUND
-------------------------------------------------
<S> <C>
1997 Fee Earned $65,378
1997 Fee Waived 1,281
-------
1997 Fee Paid $64,097
=======
1996 Fee Earned $37,585
1996 Fee Waived 26,264
-------
1996 Fee Paid $11,321
=======
1995 Fee Earned $23,429
1995 Fee Waived 23,429
-------
1995 Fee Paid $ 0
=======
-------------------------------------------------
</TABLE>
CUSTODIAN
Star Bank, 425 Walnut Street, Cincinnati, OH 45202, acts as custodian
of the Trust's assets (the "Custodian"). The Custodian has no part in
determining the investment policies of the Fund or which securities are to be
purchased or sold by the Fund.
SHAREHOLDER SERVICING, TRANSFER, DIVIDEND DISBURSING, AND FINANCIAL SERVICING
AGENT
The Adviser is the Trust's Shareholder Servicing, Transfer, Dividend
Disbursing, and Financial Servicing Agent (the "Servicing Agent"). The Adviser's
mailing address for its activities as Servicing Agent is The Gateway Trust, 400
TechneCenter Drive, Suite 220, Milford, OH 45150. As Transfer Agent for the
Trust, the Servicing Agent's general duties include transferring shares,
processing applications for new accounts, depositing the payments for the
purchase of Fund shares with the Custodian, and notifying the Trust and
Custodian of such deposits. The Servicing Agent opens and maintains a bookshare
account for each
<PAGE> 78
shareholder as set forth in the subscription application, maintains records of
each shareholder account, and sends confirmation of shares purchased to each
shareholder. The Servicing Agent also receives and processes requests by
shareholders for redemption of shares. If the shareholder request complies with
the redemption standards of the Trust, the Servicing Agent will direct the
Custodian to pay the appropriate redemption price. If the redemption request
does not comply with such standards, the Servicing Agent will promptly notify
the shareholder of the reasons for rejecting the redemption request.
As the Dividend Disbursing Agent for the Trust, the Servicing Agent,
upon notification of the declaration of a dividend or distribution, will
determine the total number of shares issued and outstanding as of the record
date for the dividend or distribution and the amount of cash required to satisfy
such dividend or distribution. The Servicing Agent will prepare and mail to
shareholders dividend checks in the amounts to which they are entitled. In the
case of shareholders participating in the dividend reinvestment plan, the
Servicing Agent will make appropriate credits to their bookshare accounts.
Shareholders will be notified by the Servicing Agent of any dividends or
distributions to which they are entitled, including any amount of additional
shares purchased with their dividends. In addition, the Servicing Agent will
prepare and file with the Internal Revenue Service and with any state, as
directed by the Trust, returns for reporting dividends and distributions paid by
such fund.
The Servicing Agent, as the Shareholder Servicing Agent, will open and
maintain any plan or program for shareholders in accordance with the terms of
such plans or programs (see "SHAREHOLDER SERVICES" herein). With regard to the
Systematic Withdrawal Program, the Servicing Agent will process such Systematic
Withdrawal Program orders as are duly executed by shareholders and will direct
appropriate payments to be made by the Custodian to the shareholder. In
addition, the Servicing Agent will process such accumulation plans, group
programs, and other plans or programs, for investing shares as provided in the
Fund's current prospectus.
The Fund reimburses the Servicing Agent for printing, mailing, and
compliance expenses. The Fund compensates the Servicing Agent for these
services, at a fixed rate of $4,000 per month, plus the greater of $2,500 per
month, or an annual rate of 0.20% of the Fund's average net assets. For the year
ended December 31, 1997, the Servicing Agent earned $726,747 in its capacity as
Servicing Agent to the four funds of the Trust then in effect.
BROKERAGE
---------
Transactions on stock exchanges involve the payment of negotiated
brokerage commissions. In the case of securities traded in the over-the-counter
market, there is generally no stated commission but the price usually includes
an undisclosed commission or mark-up.
In effecting portfolio transactions for the Fund, the Adviser is
obligated to seek best execution, which is to execute the Fund's transaction
where the most favorable combination of price and execution services are
available ("best execution"), except to the extent that it may be permitted to
pay higher brokerage commissions for brokerage and research services as
described below. In seeking the best execution, the Adviser, in the Fund's best
interest, considers all relevant factors, including:
- price;
- the size of the transaction;
- the nature of the market for the security;
- the amount of commission;
- the timing of the transaction taking into account market prices and
trends;
- the reputation, experience, and financial stability of the
broker-dealer involved;
- the quality of service rendered by the broker-dealer in other
transactions.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to seeking best execution and such other
factors as the Trustees may determine, the Adviser may consider sales of shares
of the Fund as a factor in the selection of broker-dealers to execute securities
transactions for the Fund.
While the Adviser does not intend to limit the placement of orders to
any particular broker or dealer, the Adviser generally gives preference to those
brokers or dealers who are believed to give best execution at the most favorable
prices and who also provide research, statistical, or other services to the
Adviser and/or the Trust. Commissions charged by brokers who provide these
services may be higher than commissions charged by those who do not provide
them. Higher commissions are paid only if the Adviser determines that they are
reasonable in relation to the value of the services provided, and it has
reported to the Board of Trustees of the Trust on a periodic basis to that
effect. The availability of such services was taken into account in establishing
the Advisory Fee. Specific research services furnished by brokers through whom
the Trust effects securities transactions may be used by the Adviser in
servicing all of its accounts. Similarly, specific research services furnished
by brokers who execute transactions for other Adviser clients may be used by the
Adviser for the benefit of the Trust.
<PAGE> 79
The Adviser Contract provides that, subject to such policies as the
Trustees may determine, the Adviser may cause the Fund to pay a broker-dealer
who provides brokerage and research services to the Adviser an amount of
commission for effecting a securities transaction for the Fund in excess of the
amount of commission which another broker-dealer would have charged for
effecting that transaction. As provided in Section 28(e) of the Securities
Exchange Act of 1934, "brokerage and research services" include:
- advice as to the value of securities, the advisability of investing in,
purchasing, or selling securities, and the availability of securities,
or purchasers, or sellers of securities;
- furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and
performance of accounts;
- effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement);
- services that provide lawful and appropriate assistance to the Adviser
in the performance of its investment decision-making responsibilities.
For the years ended December 31, 1997, 1996, and 1995, the Fund paid
$10,885.00, $3,470.28 and $3,534.20, respectively, in brokerage commissions.
Total commissions paid in 1997 had increased relative to previous years due to
the increase in total net assets of the Fund. Principal transactions with a
total value of $102,987 also took place in 1997.
ADDITIONAL TAX MATTERS
The tax discussion set forth below and in the Cincinnati Prospectus is
included for general information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of an investment in the
Fund.
FEDERAL TAX MATTERS
The Fund is treated as a separate association taxable as a corporation.
The Fund has met and intends to meet the requirements of the Internal
Revenue Code, applicable to regulated investment companies so as to qualify for
the special tax treatment afforded to such companies. Under Subchapter M of the
Code, a regulated investment company is not subject to federal income tax on the
portion of its net investment income and net realized capital gains which it
distributes currently to its shareholders, provided that certain distribution
requirements are met, including the requirement that at least 90% of the sum of
its net investment income and net short-term capital gains in any fiscal year is
so distributed. In addition to this distribution requirement, one of the
principal tests which the Fund must meet in each fiscal year in order to qualify
as a regulated investment company is the "90% Test." The 90% Test requires that
at least 90% of a fund's gross income must be derived from dividends, interest,
and gains from the sale or other disposition of securities.
Long-term capital gain distributions (i.e., the excess of any net
long-term capital gains over net short-term capital losses), after utilization
of available capital loss carryforwards, are taxable as long-term capital gains
whether received in cash or additional shares, regardless of how long the
shareholder has held his or her shares, and are not eligible for the
dividends-received deduction for corporations. Distributions of long-term
capital gains which are offset by available loss carryforwards, however, may be
taxable as ordinary income.
Distributions on shares of the Fund received shortly after their
purchase, although substantially in effect a return of capital, are subject to
federal income taxes.
The tax status of distributions made by the Fund during the fiscal year
will be sent to shareholders shortly after the end of such year. Each
prospective investor is advised to consult his or her own tax adviser.
Distributions of net investment income are taxable as ordinary income subject to
allowable exclusions and deductions. Distributions of capital gains are taxable
at either ordinary or long-term capital gains rates, as appropriate, except that
all such gains are normally taxable as ordinary income to the extent they are
offset by capital loss carryforwards.
STATE AND LOCAL TAX ASPECTS
The laws of several state and local taxing authorities vary with
respect to taxation, and each prospective investor is advised to consult his or
her own tax adviser as to the status of his or her shares and distributions in
respect of those shares under state and local tax laws.
<PAGE> 80
TRUSTEES AND OFFICERS OF THE TRUST
----------------------------------
The Trustees and officers of the Trust, together with information as to
their positions with the Trust and its predecessor, Gateway Option Income Fund,
Inc. (the "Company") and their principal occupations during at least the past
five years, are listed below.
*WALTER GENE SALL, 400 TechneCenter Drive, Suite 220, Milford, OH
45150; Chairman and Trustee of the Trust; Chairman of the Adviser; various
senior management positions and offices held with the Trust, the Company, and
the Adviser since 1977. Age 53.
*J. PATRICK ROGERS, 400 TechneCenter Drive, Suite 220, Milford, OH
45150; Trustee of the Trust since December 1998; President of the Trust since
1997; President of the Adviser since 1995; portfolio manager of the funds since
1997; co-portfolio manager of the funds from 1995 to 1997; various senior
management positions and offices held with the Trust and the Adviser since 1989.
Age 34.
JAMES M. ANDERSON, Children's Hospital Medical Center, 3333 Burnet
Avenue, Cincinnati, OH 45229; Trustee of the Trust since April 1997; Children's
Hospital Medical Center, President and Chief Executive Officer since November
1996, Chairman of the Board of Trustees from 1992 through 1996, and Trustee
since 1979; Taft Stettinius & Hollister (law firm), Partner from 1982 to
November 1996; Access Corporation (software distributor), Secretary from 1985 to
1996, Consultant from 1996 to 1997, and Director 1997 to 1998; Cincinnati Stock
Exchange, Trustee since 1978; River City Insurance Limited, Director since 1991.
Age 56.
STEFEN F. BRUECKNER, ProMutual Group, Inc., P. O. Box 9178, Boston, MA
02205; Trustee of the Trust since October 1992; President, ProMutual Group (a
professional liability insurance company) since 1998; Director, President, and
Chief Executive Officer, Anthem Companies, Inc. (health insurer) 1995 to 1998;
Director and President of Community Mutual Insurance Company (health insurer)
from 1991 to 1998, and various management positions from 1986 to 1998. Director
of Anthem Health and Life Insurance Company, Anthem Life Insurance Company, and
various other affiliates and subsidiaries. Age 49.
KENNETH A. DRUCKER, Sequa Corp., 200 Park Avenue, New York, NY 10166;
Director of the Company from January 1984 to May 1986; Trustee of the Trust
since April 1986; Vice President and Treasurer, Sequa Corporation (gas turbine
and industrial equipment) since November 1987. Prior thereto, Senior Vice
President and Treasurer, JWT Group, Inc. (advertising, public update relations,
and market research). Age 53.
BEVERLY J. FERTIG, 8591 Woodbrier Drive, Sarasota, FL 34238; Trustee of
the Trust since September 1988; arbitrator, National Association of Securities
Dealers, Inc., since January 1992; Vice President, Marketing and Communications,
Coffee, Sugar and Cocoa Exchange from January 1989 to December 1991; Executive
Director, National Institutional Options and Futures Society, March 1988 to
December 1988; prior thereto, Vice President, Institutional Marketing, Chicago
Board Options Exchange. Age 68.
R. S. (DICK) HARRISON, 4040 Mt. Carmel Road, Cincinnati, OH 45244;
Director of the Company from 1977 to 1982; Trustee of the Trust since April
1996; Director/Chairman of the Board, Baldwin Piano & Organ Company from 1994 to
1997; Chairman of the Board/CEO, Baldwin Piano & Organ Company from 1983 to
1994. Prior thereto, various management positions with Baldwin Piano & Organ
Company, Cincinnati, OH. Director of Anderson Bank of Cincinnati, OH and Trustee
of Kenyon College. Age 66.
WILLIAM HARDING SCHNEEBECK, 251 Indian Harbor Road, Vero Beach, FL
32963; Director of the Company from September 1977 to May 1986; Trustee of the
Trust since April 1986; retired, formerly Chairman of Midwestern Fidelity Corp.
Age 69.
JAMES E. SCHWAB, XTEK, Inc., 11451 Reading Road, Cincinnati, OH
45241-2283; Trustee of the Trust since December 1998; President of XTEK, Inc. (a
manufacturing company), from November 1995 to present, Vice President of XTEK,
Inc. from October 1994 to November 1995; various executive positions with
American Financial Corporation and its affiliates from 1985 to 1994, including
Senior Vice President of General Cable Corporation from 1992 to 1994 and Senior
Vice President of the Penn Central Corporation (now called the American
Financial Group) from 1989 to 1992. Age 55.
*GEOFFREY KEENAN, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Vice President of the Trust since April 1996; Chief Operating Officer, Gateway
Investment Advisers, L.P. since December 1995; Executive Vice President and
Chief Operating Officer, Gateway Investment Advisers, Inc. since 1995; Vice
President, Gateway Investment Advisers, Inc. from 1991 to 1995. Age 40.
*PAUL R. STEWART, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Treasurer of the Trust since October 1995; Chief Financial Officer of the
Adviser since 1996, Controller of the Adviser from October 1995 to December
1996; Audit Manager and Senior, Price Waterhouse from September 1992 to 1995 and
from August 1988 to August 1991. Age 33.
*DONNA M. SQUERI, 400 TechneCenter Drive, Suite 220, Milford, OH 45150;
Secretary of the Trust since October 1995;
<PAGE> 81
Secretary and General Counsel of the Adviser since September 1995; in-house
counsel of Bartlett & Co., a registered investment adviser, from October 1984 to
September 1993. Age 39.
*Messrs. Sall, Rogers, Keenan, Stewart, and Ms. Squeri are affiliated
persons of the Trust and the Adviser as defined by the Investment Company Act of
1940. Mr. Sall is an "interested person" of the Trust as defined by the
Investment Company Act of 1940.
Messrs. Sall, Rogers, Keenan, Stewart and Ms. Squeri each of whom is
employed by the Adviser, receive no remuneration from the Trust. Each Trustee of
the Trust other than Mr. Sall receives fees as follows: (a) an annual fee of
$3,000, payable in equal quarterly installments for services during each fiscal
quarter; (b) a $500 base fee plus $100 per fund for each regular or special
meeting of the Board of Trustees attended; and (c) $200 per fund ($1,000 per
fund for the Chairman) for each Audit Committee meeting attended. The Trust also
reimburses each Trustee for any reasonable and necessary travel expenses
incurred in connection with attendance at such meetings. In addition, Trustees
may receive attendance fees for service on other committees.
The following table provides information about the compensation
received by each Trustee from the Trust for the year ended December 31, 1997.
<TABLE>
<CAPTION>
------------------------------------------------------
TOTAL COMPENSATION
NAME OF TRUSTEE FROM TRUST
------------------------------------------------------
<S> <C>
James M. Anderson $ 3,300
Stefen F. Brueckner $ 6,600
Kenneth A. Drucker $ 12,200
Beverly J. Fertig $ 6,600
R. S. Harrison $ 7,400
Walter G. Sall $ 0
William H. Schneebeck $ 8,100
------------------------------------------------------
</TABLE>
INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL STATEMENTS
-------------------------------------------------------
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, OH 45202, will
serve as independent public accountants of the Trust. Arthur Andersen LLP
performs an annual audit of the Fund's financial statements, reviews the Fund's
tax returns, and provides financial, tax, and accounting consulting services as
requested.
The financial statements and independent auditors' report required to
be included in this SAI are incorporated herein by this reference to the Fund's
Annual Report to Shareholders for the fiscal year ended December 31, 1997.
PRINCIPAL HOLDERS OF CINCINNATI FUND SHARES
-------------------------------------------
As of October 30, 1998, the Fund had 1,267,851.560 shares outstanding,
out of an unlimited number of authorized shares. As of such date, each of the
following persons or groups was known by Trust management to be the record
and/or beneficial owner (as defined below) of the indicated amounts of the
Fund's outstanding shares.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
NAME AND ADDRESS OF OWNER NUMBER OF SHARES PERCENT OF CLASS
-------------------------------------------------------------------------------------------
<S> <C> <C>
Firstcinco, a common trust fund of Star Bank 200,000.000 15.77%
Attention: Joyce Lucht
P. O. Box 640229
Cincinnati, OH 45264
Up East, Inc. 87,621.797 6.91%
c/o Betsy J. Wyeth
P.O. Box 48
Chadds Ford, PA 19317
Trustees and officers of the Trust as a group 37,206.494 2.93%
Adviser officers & directors as a group 11,739.688 Less than 1%
-------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 82
The SEC has defined "beneficial owner" of a security to include any
person who has voting power or investment power with respect to any such
security, any person who shares voting power or investment power with respect to
any such security, or any person who has the right to acquire beneficial
ownership of any such security within 60 days.
As of October 30, 1998, the Adviser held in a fiduciary capacity 73,217
(5.77%) of the outstanding shares of the Fund. The Adviser has investment and
voting power over all shares held by it in a fiduciary capacity.
<PAGE> 83
SCHEDULE A
----------
The beta measurements that may be used in the Cincinnati Prospectus
were calculated by using Microsoft Excel spreadsheets and the statistical
function slope available in Microsoft Excel. The SLOPE function returns the
slope of the linear regression line through data points in known y's and known
x's. The slope is the vertical distance divided by the horizontal distance
between any two points on the line, which is the rate of change along the
regression line.
The equation for beta (slope) is shown below.
n(SIGMA)xy -((SIGMA)x)((SIGMA)y)
Beta = ---------------------------------
n(SIGMA) x 2 -((SIGMA)x) 2
Where y = the Fund's monthly total returns in the period
x = the benchmark index's monthly total returns in the period