<PAGE> 1
GATEWAY FUND
(Statue of Liberty Logo)
Annual Report
1998
(Statue of Liberty Logo)
THE GATEWAY TRUST
P. O. BOX 5211
CINCINNATI, OH 45201-5211
(800) 354-6339
<PAGE> 2
================================================================================
GATEWAY FUND
Highlights at December 31, 1998
================================================================================
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------
Past One Three Five Ten Since Inception Dividends Price
Quarter Year Years Years Years on 12/7/77 Year to Date Per Share
------- ---- ----- ----- ----- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GATEWAY FUND 7.20% 12.26% 11.71% 10.32% 11.10% 10.51% $0.1356 $21.02
S&P 500 21.30 28.58 28.23 24.06 19.21
Russell 2000 16.31 (2.55) 11.58 11.86 12.92
Lehman Gov't/
Corp. Bond 0.13 9.47 7.33 7.30 9.33
U. S. Inflation (CPI) 0.60 2.03 2.42 2.50 3.19
<CAPTION>
CUMULATIVE TOTAL RETURN
-----------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 12/7/77
------- ---- ----- ----- ----- ----------
GATEWAY FUND 7.20% 12.26% 39.41% 63.41% 186.44% 772.70%
S&P 500 21.30 28.58 110.84 193.89 479.57
Russell 2000 16.31 (2.55) 38.92 75.20 236.99
Lehman Gov't/
Corp. Bond 0.13 9.47 23.63 42.23 144.10
U. S. Inflation (CPI) 0.60 2.03 7.44 13.12 36.87
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. Your
investment return and principal value of an investment will fluctuate so that
your shares, when redeemed, may be worth more or less than the original cost.
This report must be preceded or accompanied by a current prospectus.
1
<PAGE> 3
================================================================================
GATEWAY FUND
Letter from the Chairman
================================================================================
Dear Shareholder:
We are pleased to report another year of dramatic progress in an increasingly
chaotic market environment. Your Fund again achieved its dual objectives of
earning competitive returns while significantly reducing risk exposure. For a
complete report on the Fund's investment returns, please refer to portfolio
manager Patrick Rogers's report beginning on page 4.
In addition to its investment returns, the Gateway Fund experienced a dramatic
increase in both the number of shareholders and the total assets during 1998.
The overall increase in total assets, from $255 million at the beginning of the
year to $464 million at December 31, 1998, benefited all shareholders by
reducing the Fund's expense ratio to the lowest level in its history. A lower
expense ratio means that more of the investment return earned by the portfolio
manager can be delivered to each shareholder.
Shareholders have expressed concern regarding the potential effect of Year
2000-related computer problems on their Gateway investments. We are pleased to
announce that the majority of the systems used in conducting our business have
been demonstrated to be Year-2000 compliant. A small number of problem areas
have been identified, and we are taking appropriate action to head off any
adverse effects well in advance of January 1, 2000. In addition, we are working
closely with our third-party suppliers to our funds to obtain satisfactory
assurances regarding their state of preparedness for the Year 2000. It is
nevertheless important to point out that, like all other mutual funds and
financial services operations worldwide, The Gateway Trust could be adversely
affected by problems which may afflict the entire industry. At the present time,
we do not believe that the operations or investments of our funds will suffer
any material adverse effects on January 1, 2000, or thereafter.
2
<PAGE> 4
================================================================================
GATEWAY FUND
Letter from the Chairman
================================================================================
At a special meeting of shareholders in December, shareholders re-elected seven
incumbent trustees and elected two new trustees. On behalf of all our
shareholders, I take great pleasure in welcoming James E. Schwab, president and
chief executive officer of XTEK, Inc., a Cincinnati-based machinery company, and
J. Patrick Rogers, president and chief investment officer of the Fund's adviser,
Gateway Investment Adviser, L.P., as trustees of The Gateway Trust. Their
expertise will add further depth to your board of trustees.
As we move into 1999, Gateway's management team will focus on the most efficient
and profitable uses of the hedging tools available to us. We look forward to
further progress in the year ahead.
Cordially,
/s/ Walter G. Sall
Walter G. Sall
Chairman
3
<PAGE> 5
================================================================================
GATEWAY FUND
Portfolio Manager's Report
================================================================================
Manic depressive adj. characterized by alternating periods of extreme
excitability, excessive activity and severe depression
There is no better description of the stock market during 1998. After a
sensational start, the third quarter saw the financial markets suffer one of
their worst quarterly returns since the market crash in 1987. The summer
decline, which began over nervousness of the true health of emerging market
economies, cut across all lines. Small capitalization stocks, lacking the
liquidity available in blue chips, were hit particularly hard. Finally, after a
dramatic effort by the Federal Reserve to calm fears of a further collapse by
reducing interest rates three times, the stock market rallied during the fourth
quarter and produced its best quarterly performance in over ten years.
<TABLE>
<CAPTION>
- ---------------------- ------------------ ----------------- ----------------- ------------------
First Qtr. Second Third Fourth
1998 Qtr. Qtr. Qtr.
1998 1998 1998
- ---------------------- ------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
S&P 500 13.95% 3.30% (9.95%) 21.30%
- ---------------------- ------------------ ----------------- ----------------- ------------------
Russell 2000 10.05 (4.67) (20.14) 16.31
- ---------------------- ------------------ ----------------- ----------------- ------------------
Gateway Fund 4.09 3.22 (2.53) 7.20
- ---------------------- ------------------ ----------------- ----------------- ------------------
</TABLE>
The objective of the Gateway Fund is to earn a consistent, dependable total
return in various types of market environments. This past year was an excellent
period to put our strategy to the test. Our lower risk profile does not provide
the opportunity to perform like other stock funds during a strong market. On the
other hand, the Gateway Fund is not exposed to dramatic declines when the
markets really suffer. The table above vividly shows the "merry-go-round"
approach versus the "roller coaster" ride of the stock market.
The Gateway Fund's total return for the twelve months ended December 31, 1998,
was 12.26%. This compares to 9.47% for the Lehman Government/Corporate Bond
Index. The more volatile S&P 500 Index and Russell 2000 earned 28.58% and
- -2.55%, respectively.
4
<PAGE> 6
================================================================================
GATEWAY FUND
Portfolio Manager's Report
================================================================================
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
GATEWAY FUND
1998
- ---------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Qtr. Qtr. Qtr. Qtr.
- ----------------------------------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 15.05% 4.85% (11.20%) 22.55%
Dividends Earned 0.34 0.33 0.38 0.34
INTEREST EARNED 0.06 0.06 0.07 0.06
CONTRIBUTIONS OF OPTIONS
Effect of Call Options (9.20) 0.06 4.97 (12.05)
Effect of Put Options (1.82) (1.78) 3.60 (3.41)
EFFECT OF FEES
Fund Expenses (0.26) (0.24) (0.25) (0.24)
Brokerage Commissions (0.08) (0.06) (0.10) (0.05)
- ----------------------------------------- ----------- ------------- ------------ ------------
TOTAL RETURN 4.09% 3.22% (2.53%) 7.20%
- ----------------------------------------- ----------- ------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
GATEWAY FUND
- ------------------------------ ---------- ---------- ---------- --------- --------- ----------- ---------- ---------- ---------
1989 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------ ---------- ---------- ---------- --------- --------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 24.81% (5.74%) 24.18% 2.87% 8.27% (0.19%) 33.02% 21.61% 26.54%
Dividends Earned 4.01 3.63 3.25 2.90 2.51 2.80 2.53 2.17 1.78
INTEREST EARNED 0.12 0.29 0.33 0.19 0.07 0.03 0.17 0.17 0.23
CONTRIBUTIONS OF OPTIONS
Effect of Call Options (7.68) 8.85 (7.66) 4.24 1.48 (4.19) (21.48) (9.91) (12.09)
Effect of Put Options 0.00 4.94 (0.72) (3.58) (3.68) (0.008) (1.91) (2.21) (2.79)
EFFECT OF FEES
Fund Expenses (1.50) (1.33) (1.22) (1.11) 1.11 (1.21) (1.19) (1.14) (1.07)
Brokerage Commissions (0.31) (0.32) (0.36) (0.36) (0.14) (0.05) (0.10) (0.16) (0.25)
- ------------------------------ ---------- ---------- ---------- --------- --------- ----------- ---------- ---------- ---------
TOTAL RETURN 19.45% 10.32% 17.80% 5.15% 7.40 5.57% 11.04% 10.53% 12.35%
- ------------------------------ ---------- ---------- ---------- --------- --------- ----------- ---------- ---------- ---------
</TABLE>
5
<PAGE> 7
================================================================================
GATEWAY FUND
Portfolio Manager's Report
================================================================================
STOCKS: The Fund's portfolio is indexed to the S&P 100 Index, a diversified mix
of large blue chip companies. As of December 31, 1998, the top ten holdings
were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
GATEWAY FUND
TOP TEN HOLDINGS
----------------------------------------------------------------------
STOCKS AS A PERCENTAGE
OF NET ASSETS
----------------------------------------------------------------------
<S> <C>
Microsoft Corporation 7.51%
General Electric Company 7.29
Intel Corporation 4.38
Wal-Mart Stores, Inc. 4.01
Exxon Corporation 3.93
Merck & Co., Inc. 3.87
International Business Machines Corporation 3.79
The Coca-Cola Company 3.63
Cisco Systems, Inc. 3.18
AT&T Corp. 2.99
----------------------------------------------------------------------
</TABLE>
DIVIDENDS: The recent trend of falling dividend yields continued in 1998. This
is a direct result of the tremendous rise in stock prices in the Fund's
portfolio.
INTEREST EARNED: The objective of the Gateway Fund is to remain fully invested
in its stated strategy. Therefore, this contribution to performance is minimal.
EFFECT OF CALL OPTIONS: We often describe this component as the "rent" we charge
others to use the Fund's assets (i.e., its stock portfolio). In order to
determine the amount of cash flow received from rent during a period of positive
stock performance, simply add "Performance of Stocks" to "Effect of Call
Options" in the tables shown on page 5. In a period of negative stock
performance, this cash flow will be simply the number shown for "Effect of Call
Options."
6
<PAGE> 8
================================================================================
GATEWAY FUND
Portfolio Manager's Report
================================================================================
EFFECT OF PUT OPTIONS: We view buying put options on the Fund's portfolio of
stocks in the same manner as purchasing a homeowner's insurance policy. These
options serve as a measure of protection from a significant decline in the stock
market in a short period of time. Any time this "insurance" is not necessary, it
is a cost equal to the total amount paid in premiums. As you can see on page 5,
the put options helped performance during the difficult third quarter of 1998.
FUND EXPENSES: As Walter Sall points out on page 2, the expense ratio continues
to fall due to the increasing total assets of the Fund.
BROKERAGE COMMISSIONS: Many mutual fund investors may not realize that brokerage
commissions are not included in the total expense ratio. However they are a cost
and therefore should be considered in determining the total expense structure of
a fund. Since the Gateway Fund is a "buy and hold" investor in its stock
portfolio, the Fund's commission costs are quite low in comparison to most
equity funds.
/s/ J. Patrick Rogers
J. Patrick Rogers, CFA
Portfolio Manager
7
<PAGE> 9
================================================================================
GATEWAY FUND
Portfolio Manager's Report
================================================================================
GROWTH OF A $10,000 INVESTMENT
[Graph showing the following information]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
GATEWAY FUND S&P 500 LEHMAN GOV.T/CORP.BOND INDEX
- ----------------------------------------------------------------------
<S> <C> <C>
$10,000.00 $10,000.00 $10,000.00
$10,270.67 $10,732.00 $10,133.00
$10,292.61 $10,464.77 $10,055.99
$10,307.79 $10,708.60 $10,109.29
$10,550.59 $11,264.38 $10,323.60
$10,668.31 $11,720.59 $10,577.56
$10,712.37 $11,653.78 $10,922.39
$11,037.88 $12,706.12 $11,149.58
$11,208.04 $12,955.15 $10,976.76
$11,304.49 $12,902.56 $11,025.06
$11,423.48 $12,602.96 $11,303.99
$11,698.66 $12,860.06 $11,405.73
$11,944.59 $13,168.70 $11,422.84
$11,528.19 $12,284.55 $11,266.34
$11,798.08 $12,442.78 $11,291.13
$12,183.73 $12,772.51 $11,292.26
$12,238.01 $12,453.39 $11,188.37
$12,618.03 $13,667.47 $11,512.83
$12,672.53 $13,575.22 $11,699.34
$12,727.12 $13,531.64 $11,844.41
$12,204.62 $12,308.38 $11,672.67
$12,088.06 $11,709.33 $11,769.55
$12,111.59 $11,659.45 $11,926.09
$12,817.58 $12,413.12 $12,186.07
$13,177.26 $12,759.07 $12,370.08
$13,669.96 $13,314.73 $12,508.63
$13,882.49 $14,267.00 $12,616.20
$14,017.88 $14,612.54 $12,703.25
$14,056.71 $14,647.18 $12,849.34
$14,328.53 $15,279.06 $12,909.73
$14,250.96 $14,579.12 $12,895.53
$14,533.83 $15,258.65 $13,058.02
$14,787.44 $15,620.13 $13,358.35
$14,874.69 $15,358.81 $13,637.54
$15,090.37 $15,565.23 $13,758.92
$14,885.14 $14,938.11 $13,896.50
$15,522.23 $16,646.58 $14,365.37
$15,491.65 $16,336.45 $14,152.76
$15,664.85 $16,548.01 $14,227.77
$15,664.85 $16,226.15 $14,149.52
$15,849.06 $16,702.39 $14,234.42
$15,900.26 $16,784.56 $14,510.57
$15,951.46 $16,534.81 $14,723.87
$16,105.55 $17,210.26 $15,100.80
$16,105.55 $16,857.96 $15,235.20
$16,167.23 $17,056.04 $15,442.40
$16,198.27 $17,114.89 $15,206.13
$16,435.74 $17,697.65 $15,192.44
$16,321.02 $17,914.80 $15,453.75
$16,499.90 $18,064.57 $15,790.65
$16,626.12 $18,310.79 $16,119.09
$16,573.58 $18,697.14 $16,173.90
$16,605.24 $18,245.23 $16,298.44
$16,774.28 $18,733.29 $16,290.29
$16,869.39 $18,788.18 $16,660.08
$16,964.87 $18,712.65 $16,766.70
$17,198.48 $19,422.61 $17,152.34
$17,124.18 $19,273.64 $17,212.37
$17,284.12 $19,672.41 $17,282.94
$17,348.07 $19,484.93 $17,087.64
$17,529.36 $19,720.51 $17,162.83
$17,827.96 $20,391.01 $17,420.27
$17,662.07 $19,837.39 $17,040.51
$17,075.92 $18,972.48 $16,623.02
$17,231.45 $19,215.71 $16,496.68
$17,575.86 $19,531.04 $16,455.44
$17,309.22 $19,052.33 $16,417.59
$17,800.27 $19,678.01 $16,687.66
$18,090.43 $20,484.81 $16,751.07
$18,101.59 $19,983.95 $16,498.13
$18,404.21 $20,432.99 $16,486.58
$18,090.38 $19,688.82 $16,450.31
$18,505.09 $19,980.81 $16,558.89
$18,815.90 $20,498.91 $16,881.78
$19,090.84 $21,297.75 $17,268.38
$19,282.11 $21,926.25 $17,384.07
$19,438.19 $22,571.98 $17,646.57
$19,558.26 $23,474.18 $18,364.79
$19,642.30 $24,019.49 $18,511.71
$19,762.88 $24,815.97 $18,439.51
$19,859.34 $24,878.26 $18,675.54
$20,076.40 $25,928.12 $18,866.03
$20,136.96 $25,835.56 $19,143.36
$20,415.45 $26,969.74 $19,459.22
$20,547.54 $27,489.18 $19,745.28
$20,814.86 $28,424.91 $19,867.70
$20,742.01 $28,688.41 $19,446.50
$20,900.06 $28,964.68 $19,283.15
$21,168.21 $29,391.62 $19,150.10
$21,351.10 $30,149.63 $19,117.54
$21,533.87 $30,264.50 $19,373.72
$21,191.70 $28,927.41 $19,418.28
$21,484.99 $29,537.49 $19,371.67
$21,986.02 $31,199.86 $19,716.49
$22,255.57 $32,060.35 $20,175.88
$22,635.47 $34,483.79 $20,547.12
$22,711.53 $33,800.67 $20,319.05
$23,092.40 $35,912.54 $20,343.43
$23,116.88 $36,194.09 $20,384.11
$22,981.64 $34,706.88 $20,141.54
$23,450.01 $36,778.88 $20,436.42
$23,634.79 $39,017.97 $20,626.47
$23,955.28 $40,765.98 $20,873.99
$24,387.44 $44,009.73 $21,512.74
$23,979.92 $41,544.30 $21,271.79
$24,708.43 $43,819.68 $21,605.76
$24,324.96 $42,354.35 $21,951.45
$25,129.14 $44,314.94 $22,067.80
$25,515.12 $45,075.82 $22,299.51
$25,921.32 $45,574.36 $22,613.93
$26,300.29 $48,861.19 $22,568.70
$26,557.51 $51,363.37 $22,638.67
$26,828.66 $51,880.08 $22,751.86
$27,004.93 $50,988.26 $22,995.30
$27,411.62 $53,059.41 $23,229.86
$27,357.35 $52,494.32 $23,248.44
$25,972.52 $44,904.70 $23,701.78
$26,719.23 $47,781.29 $24,379.66
$27,643.98 $51,667.82 $24,206.56
$28,405.57 $54,799.41 $24,351.80
$28,644.46 $57,956.95 $24,410.24
</TABLE>
December 31, 1988 - December 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------
GATEWAY FUND
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
- ----------------------------------------------
<S> <C>
One Year 12.26%
- ----------------------- ----------------------
Five Years 10.32%
- ----------------------- ----------------------
Ten Years 11.10%
- ----------------------- ----------------------
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. Your
investment return and principal value of an investment will fluctuate so that
your shares, when redeemed, may be worth more or less than the original cost.
8
<PAGE> 10
================================================================================
GATEWAY FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DURABLES 2.59%
123,800 Ford Motor Company $ 7,253,912
66,800 General Motors Corporation 4,786,641
--------------
12,040,553
--------------
CONSUMER STAPLES 9.73%
26,900 Avon Products, Inc. 1,189,486
45,900 Campbell Soup Company 2,520,199
30,200 Colgate-Palmolive Company 2,802,938
37,000 Heinz (H. J.) Company 2,089,346
150,500 PepsiCo, Inc. 6,161,094
31,900 Ralston Purina Company 1,031,767
251,900 The Coca-Cola Company 16,845,813
137,000 The Procter & Gamble Company 12,509,813
--------------
45,150,456
--------------
ENERGY 8.60%
97,500 Amoco Corporation 5,850,000
32,800 Atlantic Richfield Co. 2,139,177
32,500 Baker Hughes Incorporated 574,844
249,200 Exxon Corporation 18,222,750
28,800 Halliburton Company 853,200
79,900 Mobil Corporation 6,961,288
38,000 Occidental Petroleum Corporation 641,250
55,600 Schlumberger Limited 2,564,550
21,700 The Coastal Corporation 758,144
43,400 Williams Companies, Inc. 1,350,825
--------------
39,916,028
--------------
FINANCE 11.54%
46,600 American Express Company 4,763,396
25,900 American General Corporation 2,021,011
107,250 American International Group, Inc. 10,363,031
119,630 Bank One Corporation 6,112,351
177,543 BankAmerica Corporation 10,680,330
21,700 CIGNA Corporation 1,678,360
233,550 Citigroup Inc. 11,560,725
35,600 Merrill Lynch & Co., Inc. 2,375,189
23,900 The Hartford Financial Services Group, Inc. 1,310,767
75,900 US Bancorp 2,694,450
--------------
53,559,610
--------------
</TABLE>
See accompanying notes to financial statements
9
<PAGE> 11
================================================================================
GATEWAY FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH 10.72%
29,200 Baxter International Inc. $ 1,876,100
101,600 Bristol-Myers Squibb Company 13,589,000
65,950 Columbia/HCA Healthcare Corporation 1,624,019
137,400 Johnson & Johnson 11,520,138
8,000 Mallinckrodt Inc. 246,750
121,700 Merck & Co., Inc. 17,946,953
51,900 Pharmacia & Upjohn, Inc. 2,938,838
--------------
49,741,798
--------------
INDUSTRIAL CYCLICALS 9.12%
21,547 Allegheny Teledyne Incorporated 439,695
19,100 Aluminum Company of America 1,424,144
13,600 Bethlehem Steel Corporation * 113,476
6,200 Boise Cascade Corporation 191,813
10,600 Brunswick Corporation 262,350
10,500 Champion International Corporation 425,250
115,600 DuPont (E. I.) de Nemours and Company 6,137,643
33,000 Eastman Kodak Company 2,377,033
9,000 Fluor Corporation 383,063
12,900 General Dynamics Corporation 755,456
106,200 Hewlett-Packard Company 7,254,788
23,100 Homestake Mining Company 212,231
11,800 International Flavors & Fragrances Inc. 519,200
31,400 International Paper Company 1,407,113
41,300 Minnesota Mining and Manufacturing 2,937,463
61,400 Monsanto Company 2,916,500
4,900 Polaroid Corporation 91,569
20,400 Rockwell International Corporation 988,764
9,500 The Black & Decker Corporation 532,594
103,252 The Boeing Company 3,368,597
22,900 The Dow Chemical Company 2,081,038
23,300 United Technologies Corporation 2,531,692
20,300 Weyerhaeuser Company 1,031,494
33,600 Xerox Corporation 3,964,800
--------------
42,347,766
--------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE> 12
================================================================================
GATEWAY FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL 5.20%
50,300 Kmart Corporation * $ 768,649
40,100 Sears, Roebuck and Co. 1,705,505
11,100 Tandy Corporation 456,835
24,900 The Limited, Inc. 723,656
23,600 The May Department Stores Company 1,424,850
27,900 Toys "R" Us, Inc. * 470,813
228,400 Wal-Mart Stores, Inc. 18,600,325
--------------
24,150,633
--------------
SERVICES 4.14%
48,300 Burlington Northern Santa Fe Corporation 1,630,125
73,200 CBS, Inc. 2,397,300
15,500 Delta Air Lines, Inc. 806,000
15,100 FDX Corp. Holding Co. * 1,343,900
11,100 Harrah's Entertainment, Inc. * 174,131
70,000 McDonald's Corporation 5,363,750
38,700 Norfolk Southern Corporation 1,226,306
209,300 The Walt Disney Company 6,272,470
--------------
19,213,982
--------------
TECHNOLOGY 30.10%
22,300 AMP Incorporated 1,158,904
8,000 Ceridian Corporation * 558,000
158,825 Cisco Systems, Inc. * 14,745,917
16,100 Computer Sciences Corporation 1,036,438
332,500 General Electric Company 33,842,282
8,800 Harris Corporation 322,025
12,900 Honeywell Inc. 970,725
171,700 Intel Corporation 20,351,824
95,300 International Business Machines Corporation 17,597,745
251,800 Microsoft Corporation * 34,882,176
18,000 National Semiconductor Corporation * 242,438
66,600 Northern Telecom Limited 3,334,163
99,425 Oracle Corporation * 4,290,815
34,600 Raytheon Company 1,839,208
5,350 Tektronix, Inc. 160,667
39,900 Texas Instruments Incorporated 3,413,944
27,600 Unisys Corporation * 950,475
--------------
139,697,746
--------------
</TABLE>
See accompanying notes to financial statements
11
<PAGE> 13
================================================================================
GATEWAY FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 7.33%
19,500 American Electric Power Company, Inc. $ 917,719
112,600 Ameritech Corporation 7,111,399
184,600 AT&T Corp. 13,896,928
158,736 Bell Atlantic Corporation 8,408,055
25,200 Entergy Corporation 784,350
71,300 Southern Company 2,074,387
22,200 Unicom Corporation 854,007
--------------
34,046,845
--------------
TOTAL COMMON STOCKS 99.07% 459,865,417
(cost $334,404,636) --------------
</TABLE>
See accompanying notes to financial statements
12
<PAGE> 14
================================================================================
GATEWAY FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Contracts Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUT OPTIONS 0.93%
1,200 on S&P 100 Stock Index expiring February 19, 1999 at 500 $ 330,000
1,589 on S&P 100 Stock Index expiring March 19, 1999 at 530 1,390,375
363 on S&P 100 Stock Index expiring April 16, 1999 at 550 571,725
920 on S&P 500 Stock Index expiring February 19, 1999 at 1050 644,000
975 on S&P 500 Stock Index expiring March 19, 1999 at 1050 1,365,000
(cost $8,186,114) ------------
4,301,100
------------
REPURCHASE AGREEMENT 7.45%
3.5% repurchase agreement dated December 31, 1998
with Star Bank, N.A., due January 4, 1999
(repurchase proceeds $34,606,453) fully collateralized
by U. S. Government Agencies 34,593,000
------------
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 107.45% 498,759,517
------------
CALL OPTIONS OUTSTANDING ON THE S&P 100 STOCK INDEX **
(1,300) expiring January 15, 1999 at 550 (7,458,750)
(920) expiring January 15, 1999 at 560 (4,404,500)
(878) expiring January 15, 1999 at 570 (3,380,300)
(1,234) expiring January 15, 1999 at 580 (3,640,300)
(901) expiring February 19, 1999 at 560 (5,113,175)
(919) expiring February 19, 1999 at 570 (4,457,150)
(1,462) expiring February 19, 1999 at 580 (5,848,000)
------------
TOTAL CALL OPTIONS OUTSTANDING (7.39%) (34,302,175)
(premiums received $21,182,640) ------------
OTHER ASSETS AND LIABILITIES, NET (0.06%) (257,090)
------------
NET ASSETS 100% $464,200,252
============
</TABLE>
* Denotes a non-income producing security.
** The aggregate value of investments that
covers outstanding call options is
$459,865,417.
See accompanying notes to financial statements
13
<PAGE> 15
================================================================================
GATEWAY FUND
Statement of Assets and Liabilities - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Common stocks, at value (original cost $334,404,636) $459,865,417
Put options, at value (original cost $8,186,114) 4,301,100
Repurchase agreement 34,593,000
Receivable for fund shares sold 402,863
Dividend and interest receivable 526,165
Cash 684
Other assets 26,050
-------------
499,715,279
-------------
LIABILITIES:
Call options outstanding, at value
(premiums received $21,182,640) 34,302,175
Payable for securities purchased 544,522
Payable for fund shares redeemed 523,025
Dividends payable to fund shareholders 81,824
Other accrued expenses and liabilities 63,481
-------------
35,515,027
-------------
NET ASSETS $464,200,252
============
NET ASSETS CONSIST OF:
Paid-in capital applicable to 22,085,667 shares outstanding
(unlimited number of shares authorized, no par value) 381,975,428
Undistributed net investment income 31,185
Accumulated realized loss, net (26,262,593)
Unrealized appreciation, net 108,456,232
-------------
$464,200,252
============
NET ASSET VALUE, OFFERING, AND REDEMPTION
PRICE PER SHARE $21.02
</TABLE>
See accompanying notes to financial statements
14
<PAGE> 16
================================================================================
GATEWAY FUND
Statement of Operations - For the Year Ended December 31, 1998
================================================================================
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 5,114,025
Interest income 915,914
------------
6,029,939
------------
EXPENSES:
Investment advisory and management fees 2,382,457
Transfer agent and accounting fees 779,088
Reports to shareholders 106,406
Professional fees 91,085
Registration fees 70,000
Custodian fees 42,315
Trustees' fees 29,409
Insurance expense 21,029
Other expenses 95,340
------------
3,617,129
------------
NET INVESTMENT INCOME 2,412,810
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 14,794,386
Call options expired and closed (34,664,170)
Put options expired and closed (7,781,462)
------------
Net realized loss on investments (27,651,246)
------------
Increase (decrease) in unrealized appreciation of investments:
Securities 82,159,694
Call options (12,877,555)
Put options (2,676,311)
------------
Net increase in unrealized appreciation of investments 66,605,828
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 38,954,582
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 41,367,392
============
</TABLE>
See accompanying notes to financial statements
15
<PAGE> 17
================================================================================
GATEWAY FUND
Statements of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 2,412,810 $ 1,998,702
Net realized gain (loss) on investments (27,651,246) 49,028,920
Change in unrealized appreciation (depreciation) of investments 66,605,828 (25,233,764)
------------- -------------
Net increase in net assets resulting from operations 41,367,392 25,793,858
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,382,755) (2,061,865)
From net realized gain on investments (277,798) (20,835,710)
------------- -------------
Decrease in net assets from dividends and distributions (2,660,553) (22,897,575)
------------- -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 302,072,143 146,834,992
Net asset value of shares issued in reinvestment
of dividends and distributions 2,501,190 21,418,015
Payments for shares redeemed (134,538,098) (110,053,937)
------------- -------------
Net increase in net assets from fund shares transactions 170,035,235 58,199,070
------------- -------------
NET INCREASE IN NET ASSETS 208,742,074 61,095,353
NET ASSETS:
Beginning of year 255,458,178 194,362,825
------------- -------------
End of year, including undistributed net investment
income of $31,185 and $1,130, respectively $ 464,200,252 $ 255,458,178
============= =============
FUND SHARE TRANSACTIONS:
Shares sold 15,943,506 7,585,872
Less shares redeemed (7,498,906) (5,688,892)
Shares issued in reinvestment of dividends and distributions 88,960 1,135,132
------------- -------------
NET INCREASE IN SHARES OUTSTANDING 8,533,560 3,032,112
============= =============
</TABLE>
See accompanying notes to financial statements
16
<PAGE> 18
================================================================================
GATEWAY FUND
Financial Highlights - Per share data for a share outstanding throughout each
year
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995(1) 1994
---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $18.85 $18.48 $16.91 $15.48 $15.85
------ ------ ------ ------ ------
Net investment income 0.12 0.18 0.21 0.24 0.26
Net gains on securities 2.18 2.09 1.56 1.46 0.61
------ ------ ------ ------ ------
Total from investment operations 2.30 2.27 1.77 1.70 0.87
------ ------ ------ ------ ------
Dividends from net investment income (0.12) (0.18) (0.20) (0.24) (0.27)
Distributions from capital gains (0.01) (1.72) -- -- (0.86)
Distributions in excess of realized capital gains -- -- -- (0.03) (0.11)
------ ------ ------ ------ ------
Total distributions (0.13) (1.90) (0.20) (0.27) (1.24)
------ ------ ------ ------ ------
Net asset value, end of year $21.02 $18.85 $18.48 $16.91 $15.48
====== ====== ====== ====== ======
TOTAL RETURN 12.26% 12.35% 10.53% 11.04% 5.57%
Net assets, end of year (thousands) $464,200 $255,458 $194,363 $176,220 $164,651
Ratio of expenses to average net assets 0.99% 1.07% 1.14% 1.19% 1.21%
Ratio of net investment income to
average net assets 0.66% 0.90% 1.18% 1.51% 1.54%
Portfolio turnover rate 12% 82% 17% 5% 4%
</TABLE>
(1) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
See accompanying notes to financial statements
17
<PAGE> 19
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of three diversified mutual funds. The
financial statements of the Gateway Fund, formerly known as the Gateway Index
Plus Fund, (the Fund) are included in this report. The investment objective of
the Fund is to achieve a high total return at a reduced level of risk. The Fund
attempts to achieve its investment objective primarily by investing in the 100
stocks in the S&P 100 Stock Index and by selling call options on an Index. The
financial statements of Gateway Small Cap Index Fund and Cincinnati Fund are
included in separate reports. The Trust is registered under the Investment
Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks and option
contracts (both purchased and written) at the average of the closing bid and
asked quotations. Other securities for which market quotations are not readily
available are valued at fair value as determined in good faith under procedures
adopted by the board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies approved by
the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Dividends from net
investment income are recorded on the ex-dividend date and are declared and paid
quarterly. Net realized capital gains, if any, are distributed to shareholders
annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all of its taxable income to the
shareholders. Based on this policy, the Fund makes no provision for income
taxes. The cost of common stock for tax purposes is $334,405,428 at December 31,
1998; gross unrealized appreciation is $130,544,138 and depreciation is
$5,084,149. The Fund has a net capital loss carryforward of $43,225,339 that
expires on December 31, 2006.
Tax regulations require the Fund to assume that open option contracts are closed
each year-end and include the resulting calculated capital gain or loss in the
determination of federal taxable income.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser an investment advisory and management fee computed at
an annual rate of 0.90% of the first $50 million of the average daily net assets
of the Fund, 0.70% of the next $50 million, and 0.60% of all such assets over
$100 million.
18
<PAGE> 20
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 1.50% of the
average daily net assets, the Adviser has agreed to reduce its fee as necessary
to limit the Fund's expenses to that level.
The Adviser provides shareholder, transfer, dividend disbursing, accounting, and
administrative services to the Fund. The 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 the Fund's average net assets.
On December 9, 1998, a meeting of the shareholders of The Gateway Trust was
held. One purpose of the meeting was to approve new distribution and advisory
arrangements which include: (a) approval of a Distribution Plan pursuant to Rule
12b-1 of the Investment Company Act of 1940, and (b) approval of a new
Management Agreement with Gateway Investment Advisers, L.P. The new
arrangements, effective January 1, 1999, restructure the Adviser's fee such that
all of the services the Adviser provides to the Fund are included in a single
asset-based fee calculated at 0.925% of the average daily net assets minus the
Fund's expenses under the Distribution Plan. Shareholders approved both the
proposed Distribution Plan and Management Agreement.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1998, purchases of investment securities
(excluding short-term investments) totaled $156,358,832 and proceeds from sales
totaled $42,113,601.
The Fund may write (sell) call options on stock indexes in exchange for cash
(that is, "the option premium") to enhance earnings on the portfolio securities.
However, using these contracts limits the opportunity to participate in
appreciation of the underlying portfolio beyond certain upper limits set by the
contracts. The Fund may also buy put options on stock indexes. The purchase of
put options involves the risk of loss of all or part of the cash paid for the
put options. The liability recorded upon receipt of written option premiums
increases to offset rises and decreases to offset declines in the market value
of the hedged portfolio. Similarly, the value of purchased put options increases
to offset declines and decreases to offset rises in portfolio value. For the
year ended December 31, 1998, transactions in written options were as follows:
<TABLE>
<CAPTION>
Number of Contracts Premiums
------------------- --------
<S> <C> <C>
Outstanding at December 31, 1997 5,410 $ 13,140,520
Options written 91,433 179,914,444
Options exercised (89,229) (171,872,324)
-------- ------------
Outstanding at December 31, 1998 7,614 $ 21,182,640
======== ============
</TABLE>
4. BANK LOANS
The Trust has an uncommitted $20,000,000 bank line of credit to be used as a
temporary liquidity source for meeting redemption requests. Borrowings under
this arrangement, expiring October 31, 1999, bear interest at the bank's prime
rate minus 0.5%. There are no fees associated with maintaining this facility.
For the year ended December 31, 1998, there were no borrowings on this line of
credit.
19
<PAGE> 21
================================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
To the Shareholders and Board of Trustees of the Gateway Fund of The Gateway
Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Gateway Fund, formerly the Gateway Index
Plus Fund, (one of the funds constituting The Gateway Trust) as of December 31,
1998, and the related statement of operations, the statements of changes in net
assets, and the financial highlights for the periods indicated thereon. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gateway Fund of The Gateway Trust as of December 31, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for the
periods indicated thereon, in conformity with generally accepted accounting
principles.
Cincinnati, Ohio Arthur Andersen LLP
January 19, 1999
20
<PAGE> 22
================================================================================
GATEWAY FUND
Results of Special Meeting of Shareholders on December 9, 1998
================================================================================
A special meeting of the shareholders of The Gateway Trust was held on December
9, 1998. Several matters were submitted for shareholder vote.
The first matter voted upon was the election of the members of the board of
trustees. All sitting members of the board of trustees were nominated for
election; Messrs. Schwab and Rogers were also nominated. All persons nominated
were elected, and the results of the voting, presented for The Gateway Trust as
a whole, were as follows:
<TABLE>
<CAPTION>
- --------------------- ---------------------------- ----------------------------
AUTHORITY GIVEN AUTHORITY WITHHELD
- --------------------- ---------------------------- ----------------------------
<S> <C> <C>
Walter G. Sall 12,565,183 183,721
- --------------------- ---------------------------- ----------------------------
J. Patrick Rogers 12,584,662 164,242
- --------------------- ---------------------------- ----------------------------
James M. Anderson 12,588,485 160,419
- --------------------- ---------------------------- ----------------------------
Stefen F. Brueckner 12,588,485 159,930
- --------------------- ---------------------------- ----------------------------
Kenneth A. Drucker 12,588,974 159,707
- --------------------- ---------------------------- ----------------------------
Beverly J. Fertig 12,589,197 159,678
- --------------------- ---------------------------- ----------------------------
R. S. (Dick) Harrison 12,590,751 158,153
- --------------------- ---------------------------- ----------------------------
William H. Schneebeck 12,590,585 158,319
- --------------------- ---------------------------- ----------------------------
James E. Schwab 12,590,870 158,034
- --------------------- ---------------------------- ----------------------------
</TABLE>
The next matter voted upon was the ratification of the selection of Arthur
Andersen LLP as independent accountants for the Trust for the fiscal year ending
December 31, 1998. The shareholders ratified the selection and the results of
the voting were as follows:
<TABLE>
<CAPTION>
- ------------------------------ ---------------- ----------------- -------------
FUND FOR AGAINST ABSTAIN
- ------------------------------ ---------------- ----------------- -------------
<S> <C> <C> <C>
Gateway Fund 10,600,663 116,676 196,740
- ------------------------------ ---------------- ----------------- -------------
Gateway Small Cap Index Fund 972,565 15,057 9,384
- ------------------------------ ---------------- ----------------- -------------
Cincinnati Fund(R) 815,759 13,299 8,757
- ------------------------------ ---------------- ----------------- -------------
</TABLE>
The next matter voted upon was an amendment to the Trust's Declaration of Trust,
which would have required the shareholders of all funds to vote in the aggregate
except as otherwise required by law. The results of the voting, in which the
matter was NOT PASSED, were as follows:
21
<PAGE> 23
================================================================================
GATEWAY FUND
Results of Special Meeting of Shareholders on December 9, 1998
================================================================================
<TABLE>
<CAPTION>
- ------------------------------ ---------------- ----------------- ---------------- -----------------
BROKER
FUND FOR AGAINST ABSTAIN NON-VOTE
- ------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gateway Fund 9,897,747 361,136 247,692 407,505
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Gateway Small Cap Index Fund 867,535 22,490 20,935 86,047
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Cincinnati Fund(R) 776,828 22,686 12,099 26,204
- ------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
The next matter voted upon was an amendment of the Trust's Declaration of Trust
that would have permitted the Trustees to make future amendments to the
Declaration of Trust without shareholder authorization provided the amendment
did not adversely affect the rights of any shareholder. The results of the
voting, in which the matter was not passed, were as follows:
<TABLE>
<CAPTION>
- ------------------------------ ---------------- ----------------- ---------------- -----------------
BROKER
FUND FOR AGAINST ABSTAIN NON-VOTE
- ------------------------------ ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gateway Fund 9,070,589 917,439 518,547 407,505
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Gateway Small Cap Index Fund 848,365 43,213 19,382 86,047
- ------------------------------ ---------------- ----------------- ---------------- -----------------
Cincinnati Fund(R) 735,998 60,606 15,010 26,203
- ------------------------------ ---------------- ----------------- ---------------- -----------------
</TABLE>
The next matter voted upon was the approval of a Distribution Plan pursuant to
Rule 12b-1 of the Investment Company Act of 1940 for the Gateway Fund only,
which if approved, would take effect on January 1, 1999. The Distribution Plan
was approved, and the results of the voting were as follows:
<TABLE>
<CAPTION>
- -------------- ----------------- ---------------- ----------------- ----------------
FUND FOR AGAINST ABSTAIN BROKER
NON-VOTE
- -------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Gateway Fund 9,193,127 753,545 338,357 407,505
- -------------- ----------------- ---------------- ----------------- ----------------
</TABLE>
The next matter voted upon was the approval of a new Management Agreement
between the Gateway Fund and Gateway Investment Advisers, L.P. which would take
effect on January 1, 1999. The Management Agreement was approved, and the
results of the voting were as follows:
<TABLE>
<CAPTION>
- -------------- ----------------- ---------------- ----------------- ----------------
FUND FOR AGAINST ABSTAIN BROKER
NON-VOTE
- -------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Gateway Fund 9,517,052 519,603 469,921 407,504
- -------------- ----------------- ---------------- ----------------- ----------------
</TABLE>
22
<PAGE> 24
================================================================================
THE GATEWAY TRUST
================================================================================
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Firstar Corporation
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. Harrison
J. Patrick Rogers
Walter G. Sall
William H. Schneebeck
James E. Schwab
<PAGE> 25
CINCINNATI FUND
ANNUAL REPORT
1998
CINCINNATI FUND
P.O. BOX 5211 - CINCINNATI, OHIO 45201-5211
(800) 354-5525
<PAGE> 26
CINCINNATI FUND(R)
- ------------------------Highlights at December 31, 1998-------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------
Past One Three Five Ten Since Inception Price
Quarter Year Years Years Years on 11/7/94 Per Share
------- ---- ----- ----- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CINCINNATI FUND(R) 19.91% 11.89% 20.08% N/A N/A 22.52% $20.84
S&P 500 21.30 28.58 28.23 24.06 19.21
Russell 2000 16.31 (2.55) 11.58 11.86 12.92
Lehman Gov't./
Corp. Bond 0.13 9.47 7.33 7.30 9.33
U. S. Inflation (CPI) 0.60 2.03 2.42 2.50 3.19
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
---------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 11/7/94
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
CINCINNATI FUND(R) 19.91% 11.89% 73.15% N/A N/A 132.18%
S&P 500 21.30 28.58 110.84 193.89 479.57
Russell 2000 16.31 (2.55) 38.92 75.20 236.99
Lehman Gov't./
Corp. Bond 0.13 9.47 23.63 42.23 144.10
U. S. Inflation (CPI) 0.60 2.03 7.44 13.12 36.87
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. Your
investment return and principal value of an investment will fluctuate so that
your shares, when redeemed, may be worth more or less than the original cost.
CINCINNATI FUND 1
<PAGE> 27
CINCINNATI FUND(R)
- ---------------------------Letter from the Chairman----------------------------
Dear Shareholder:
We are pleased to report another year of worthwhile progress in an
increasingly chaotic environment. Your Fund displayed some of the conservative
traits that characterize the Cincinnati business community. On the accompanying
pages, portfolio manager Patrick Rogers describes the Fund's results in 1998. We
are proud to be a part of the Cincinnati business community and to be able to
deliver its financial benefits directly to you.
In addition to its investment returns, the Fund reached new highs in
both total number of shareholders and in total assets. The increase in total
assets is especially important, as it allowed the Fund to post its lowest
expense ratio since it was founded in 1994. A lower expense ratio means that
more of the investment return earned by the portfolio manager can be delivered
to each shareholder.
Shareholders have expressed concern regarding the potential effect of
Year 2000-related computer problems on their Gateway investments. We are pleased
to announce that the majority of the systems used in conducting our business
have been demonstrated to be Year-2000 compliant. A small number of problem
areas have been identified, and we are taking appropriate action to head off any
adverse effects well in advance of January 1, 2000. In addition, we are working
closely with our third-party suppliers to our funds to obtain satisfactory
assurances regarding their state of preparedness for the Year 2000. It is
nevertheless important to point out that, like all other mutual funds and
financial services operations worldwide, The Gateway Trust could be adversely
affected by problems which may afflict the entire industry. At the present time,
we do not believe that the operations or investments of our funds will suffer
any material adverse effects on January 1, 2000, or thereafter.
2 CINCINNATI FUND
<PAGE> 28
CINCINNATI FUND(R)
- ---------------------------Letter from the Chairman----------------------------
In December, The Gateway Trust, of which the Cincinnati Fund is a proud
constituent, held a special shareholder meeting. At the meeting shareholders
re-elected seven incumbent trustees and elected two new trustees. On behalf of
all the Fund's shareholders, I take great pleasure in welcoming James E. Schwab,
president and chief executive officer of XTEK, Inc., a Cincinnati-based
machinery company, and J. Patrick Rogers, president and chief investment officer
of the Fund's adviser, Gateway Investment Adviser, L.P., as trustees of The
Gateway Trust. Their expertise will add further depth to your board of trustees.
As we move into 1999, the Cincinnati Fund's management team will
continue to focus on fully representing our dynamic business community in the
Fund's portfolio. As Cincinnati extends its worldwide reach, we look forward to
further progress with a portfolio of fine companies.
Cordially,
/s/ Walter G. Sall
Walter G. Sall
Chairman
CINCINNATI FUND 3
<PAGE> 29
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1998-----------------
The year 1998 brought major changes to the investing climate for the
Cincinnati Fund. This past year was, by far, the most volatile period for the
market since the inception of the Fund. Small capitalization stocks were
particularly hit hard in the summer and early fall months. In fact, the third
quarter produced the worst return for the overall market since the crash of
1987. This was followed in the fourth quarter by one of the market's best
performances ever! Talk about volatility!
<TABLE>
<CAPTION>
------------------------ --------------- --------------- --------------- ---------------
First Qtr. Second Qtr. Third Qtr. Fourth Qtr.
------------------------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
CINCINNATI FUND 10.27% (1.77%) (13.86%) 19.91%
S&P 500 13.95 3.30 (9.95) 21.30
Russell 2000 10.05 (4.67) (20.14) 16.31
------------------------ --------------- --------------- --------------- ---------------
</TABLE>
For the year ended December 31, 1998, the Cincinnati Fund produced a
total return of 11.89%, compared to 28.58% and -2.55% for the S&P 500 and
Russell 2000, respectively. Clearly large capitalization stocks, particularly
from the technology sector, dominated the favorable gains made in the market
during the year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Top Ten Holdings
As of December 31, 1998
- -------------------------------------------------- -----------------
As a Percentage
Stocks of Net Assets
- -------------------------------------------------- -----------------
<S> <C>
The Kroger Co. 6.88%
Cincinnati Bell Inc. 5.54
General Electric Company 5.02
The Procter & Gamble Company 4.99
Fifth Third Bancorp 4.42
Cinergy Corp. 4.00
Comair Holdings, Inc. 3.84
Firstar Corporation 3.79
Federated Department Stores, Inc. 3.57
Structural Dynamics Research Corporation 3.40
- -------------------------------------------------- -----------------
</TABLE>
4 CINCINNATI FUND
<PAGE> 30
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1998-----------------
In addition to the roller coaster ride of the market this year, many of
the Fund's stock holdings were affected individually by changes announced by the
companies.
- Star Bank, Cincinnati's second largest bank, announced their
merger with Firstar and the relocation of the headquarters to
Milwaukee. The change marks the end of a local institution
that began as First National Bank during the Civil War.
- Kroger acquired Oregon-based Fred Meyer, Inc. in a $13 billion
deal. This secures our locally based grocer as the nation's
largest in a rapidly consolidating industry.
- Cincinnati lost its second largest retailer, Mercantile, when
Dillard's made an all-cash offer to acquire the chain, which
included McAlpin's.
- Jacor, an aggressive buyer of broadcasting companies over the
past few years, sold itself to Clear Channel Communication in
Texas. Currently, the plan is to allow Jacor, owner of
high-profile radio stations such as WLW, to be managed
independently and remain in Cincinnati.
- Milacron and Cincinnati Bell either sold or spun-off a
significant portion of their operations during this past year.
- Finally, Cincinnati's largest corporate citizen, Procter &
Gamble, announced a new management and business strategy
called Organization 2005. This major initiative is the first
of Durk Jager, the new president and chief executive officer
of Procter & Gamble. The goal of Organization 2005 is to move
from four business units within a certain geographic region to
seven business units that span the globe.
Needless to say, 1998 was by far the most challenging year in the
history of the Cincinnati Fund.
CINCINNATI FUND 5
<PAGE> 31
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1998-----------------
[Chart with the following data]
<TABLE>
<S> <C>
Energy 1.09%
Technology 12.06%
Finance 21.73%
Industrial Cyclicals 9.18%
Consumer Staples 7.96%
Services 12.80%
Consumer Durables 7.09%
Retail 11.26%
Health 4.45%
Utilities 11.89%
</TABLE>
As a percentage of net assets
As always, our objective with the Cincinnati Fund is to provide
investors with an opportunity to invest in our local business climate. It is
also important to achieve diversification across the many industry groups
represented in the Tristate. As has been the case since the Fund started in
November 1994, the Finance Sector continues to be the largest holding in the
Cincinnati Fund.
6 CINCINNATI FUND
<PAGE> 32
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1998-----------------
It seems like every report we issue that lists the best performing
stocks, Kroger, Comair, and Firstar (formerly Star Bank) are always included.
This string of great performances from these three extremely well managed
corporations continued in 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------
Top Five Performers
January 1, 1998 to December 31, 1998
(price appreciation only)
- ---------------------------------------------------
<S> <C>
Cintas Corporation 81%
The Kroger Company 65
Firstar Corporation 63
Comair Holdings, Inc. 41
AK Steel 36
- ---------------------------------- ----------------
</TABLE>
As the Cincinnati Fund continues to grow, both with total assets
invested and the number of shareholders (approximately 3,500), I am pleased to
report the expense ratio has dropped to 1.37%.
We believe Cincinnati continues to offer unique investment
opportunities and we are looking forward to 1999.
/s/ J. Patrick Rogers
J. Patrick Rogers, CFA
Portfolio Manager
CINCINNATI FUND 7
<PAGE> 33
CINCINNATI FUND(R)
- -----------------Portfolio Manager's Report - December 31, 1998-----------------
GROWTH OF A $10,000 INVESTMENT
[Graph showing the following information]
<TABLE>
<CAPTION>
CINCINNATI FUND S&P 500 RUSSELL 2000
--------------- ------- ------------
<S> <C> <C>
$10,000.00 $10,000.00 $10,000.00
$9,780.00 $9,635.80 $9,596.00
$9,910.00 $9,778.70 $9,853.17
$10,070.00 $10,032.26 $9,729.02
$10,350.00 $10,423.22 $10,133.75
$10,620.00 $10,730.81 $10,307.04
$10,930.00 $11,046.83 $10,535.85
$11,290.03 $11,488.37 $10,717.07
$11,650.07 $11,755.25 $11,273.29
$12,150.08 $12,145.05 $11,922.63
$12,310.08 $12,175.53 $12,169.43
$12,739.70 $12,689.34 $12,387.26
$12,689.70 $12,644.04 $11,833.55
$13,169.37 $13,199.11 $12,330.56
$13,409.71 $13,453.33 $12,656.08
$13,460.81 $13,911.28 $12,642.16
$13,920.77 $14,040.24 $13,036.60
$14,544.14 $14,175.45 $13,302.54
$14,554.32 $14,384.39 $14,014.23
$14,922.25 $14,755.36 $14,566.39
$14,769.00 $14,811.58 $13,967.71
$13,930.86 $14,157.21 $12,748.33
$14,544.10 $14,455.78 $13,489.01
$15,157.28 $15,269.35 $14,016.43
$14,871.11 $15,690.48 $13,800.58
$15,923.83 $16,876.53 $14,369.16
$16,088.33 $16,542.20 $14,745.63
$16,454.01 $17,575.76 $15,040.54
$16,621.19 $17,713.55 $14,675.06
$16,276.46 $16,985.70 $13,982.40
$16,516.70 $17,999.75 $14,021.55
$17,185.30 $19,095.57 $15,580.74
$17,822.53 $19,951.06 $16,249.16
$18,731.48 $21,538.56 $17,004.74
$18,303.09 $20,331.97 $17,394.15
$19,316.53 $21,445.55 $18,667.40
$19,159.88 $20,728.41 $17,847.90
$19,891.21 $21,687.93 $17,731.89
$20,750.91 $22,060.31 $18,042.20
$20,608.76 $22,304.30 $17,757.13
$21,723.90 $23,912.89 $19,069.39
$22,882.87 $25,137.47 $19,855.05
$22,642.37 $25,390.35 $19,964.25
$22,008.16 $24,953.89 $18,888.18
$22,478.26 $25,967.52 $18,927.84
$21,691.07 $25,690.96 $17,396.58
$18,673.62 $21,976.56 $14,018.16
$19,362.49 $23,384.38 $15,115.78
$20,860.38 $25,286.47 $15,732.51
$21,669.34 $26,819.08 $16,556.89
$23,218.48 $28,364.40 $17,581.76
</TABLE>
November 7, 1994 (inception date) - December 31, 1998
<TABLE>
<CAPTION>
----------------------------
CINCINNATI FUND
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
----------------------------
<S> <C>
One Year 11.89%
----------------------------
Life of Fund 22.52%
----------------------------
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. Your
investment return and principal value of an investment will fluctuate so that
your shares, when redeemed, may be worth more or less than the original cost.
8 CINCINNATI FUND
<PAGE> 34
CINCINNATI FUND(R)
- ------------------Portfolio of Investments - December 31, 1998------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
CONSUMER DURABLES 7.09%
12,100 Cintas Corporation $ 851,916
9,500 Ford Motor Company 556,641
6,600 General Motors Corporation 472,932
----------
1,881,489
----------
CONSUMER STAPLES 7.96%
26,000 Chiquita Brands International 246,189
7,300 Heinz (H. J.) Company 412,222
4,600 Sara Lee Corporation 129,663
14,500 The Procter & Gamble Company 1,324,031
----------
2,112,105
----------
ENERGY 1.09%
6,000 Ashland Inc. 290,438
----------
FINANCE 21.73%
2,500 American Annuity Group, Inc. 57,188
8,800 American Financial Group, Inc. 385,550
2,376 Bank One Corporation 121,399
15,429 Cincinnati Financial Corporation 565,570
19,000 Duke Realty Investments, Inc. 441,157
16,448 Fifth Third Bancorp 1,173,463
1,863 First Financial Bancorp 53,748
10,800 Firstar Corporation 1,007,100
2,327 Huntington Bancshares Incorporated 70,174
24,804 KeyCorp 792,178
4,500 Ohio Casualty Corporation 185,344
1,800 PNC Bank Corp. 97,425
17,925 Provident Financial Group, Inc. 673,308
6,000 The Midland Company 144,563
----------
5,768,167
----------
HEALTH 4.44%
5,500 Duramed Pharmaceuticals, Inc. * 20,281
8,600 Johnson & Johnson 721,057
34,522 Meridian Diagnostics, Inc. 230,866
6,000 Omnicare, Inc. 207,938
----------
1,180,142
----------
</TABLE>
See accompanying notes to financial statements
CINCINNATI FUND 9
<PAGE> 35
CINCINNATI FUND(R)
- ------------------Portfolio of Investments - December 31, 1998------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
INDUSTRIAL CYCLICALS 9.18%
34,000 AK Steel $ 799,000
14,700 Chemed Corporation 492,450
21,000 LSI Industries Inc. 471,188
27,500 Milacron Inc 528,517
4,300 Multi-Color Corporation * 29,160
23,500 NS Group, Inc. * 104,281
1,500 Zaring National Corp. * 12,938
----------
2,437,534
----------
RETAIL 11.26%
21,800 Federated Department Stores, Inc. * 948,300
4,000 Nine West Group Inc. * 61,750
30,200 The Kroger Co. * 1,826,150
3,400 Winn-Dixie Stores, Inc. 152,363
----------
2,988,563
----------
SERVICES 12.80%
30,288 Comair Holdings, Inc. 1,019,365
10,600 Delta Air Lines, Inc. 551,200
9,390 Frisch's Restaurants, Inc. 100,650
2,400 Gannett Co., Inc. 154,650
12,800 Gibson Greetings, Inc. * 150,400
4,000 Harte-Hanks, Inc. 114,000
6,500 Jacor Communications, Inc. * 420,469
17,300 The E.W. Scripps Company 860,675
3,000 The Loewen Group Inc. 25,125
----------
3,396,534
----------
TECHNOLOGY 12.06%
13,100 General Electric Company 1,333,335
4,000 Interlott Technologies, Inc. * 26,500
5,000 LanVision Systems, Inc. * 7,188
20,000 Medplus, Inc. * 41,876
39,425 Pomeroy Computer Resources, Inc. * 888,297
45,600 Structural Dynamics Research Corporation * 903,450
----------
3,200,646
----------
</TABLE>
See accompanying notes to financial statements
10 CINCINNATI FUND
<PAGE> 36
CINCINNATI FUND(R)
- ------------------Portfolio of Investments - December 31, 1998------------------
<TABLE>
<CAPTION>
Shares Common Stocks Value
------ ------------- -----
<S> <C> <C>
UTILITIES 11.89%
8,300 AT&T Corp. $ 624,835
39,000 Cincinnati Bell Inc. 1,469,813
30,900 Cinergy Corp. 1,062,188
----------
3,156,836
----------
TOTAL COMMON STOCKS 99.50% 26,412,454
(cost $19,336,879)
REPURCHASE AGREEMENT 1.60%
3.5% repurchase agreement dated December 31,
1998 with Star Bank, N.A., due January 4,
1999 (repurchase proceeds $424,165) fully
collateralized by U. S. Government Agencies 424,000
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 101.10% 26,836,454
OTHER ASSETS AND LIABILITIES, NET (1.10%) (292,204)
----------
NET ASSETS 100.00% $26,544,250
===========
</TABLE>
* Denotes a non-income producing security.
See accompanying notes to financial statements
11 CINCINNATI FUND
<PAGE> 37
CINCINNATI FUND(R)
- ------------Statement of Assets and Liabilities - December 31, 1998-------------
<TABLE>
<S> <C>
ASSETS:
Common stocks, at value (original cost $19,336,879) $26,412,454
Repurchase agreement 424,000
Dividend and interest receivable 21,986
Receivable for fund shares sold 4,023
Cash 861
Other assets 2,950
-----------
26,866,274
-----------
LIABILITIES:
Payable for securities purchased 210,725
Dividends payable to fund shareholders 90,254
Payable for fund shares redeemed 6,542
Other accrued expenses and liabilities 14,503
-----------
322,024
-----------
NET ASSETS $26,544,250
===========
NET ASSETS CONSIST OF:
Paid-in capital applicable to 1,273,652 shares outstanding
(unlimited number of shares authorized, no par value) $19,462,600
Accumulated realized gain, net 6,075
Unrealized appreciation, net 7,075,575
-----------
$26,544,250
===========
NET ASSET VALUE, OFFERING, AND REDEMPTION
PRICE PER SHARE $20.84
======
</TABLE>
See accompanying notes to financial statements
12 CINCINNATI FUND
<PAGE> 38
CINCINNATI FUND(R)
- -----------------------------Statement of Operations----------------------------
For the Year Ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 353,063
Interest income 41,191
----------
394,254
----------
EXPENSES:
Investment advisory and management fees 118,179
Transfer agent and accounting fees 96,136
Reports to shareholders 48,667
Professional fees 20,259
Trustees' fees 11,810
Custodian fees 8,617
Registration fees 3,810
Other expenses 15,524
----------
323,002
NET INVESTMENT INCOME 71,252
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gains 422,739
Increase in unrealized appreciation of investments 1,932,515
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,355,254
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,426,506
==========
</TABLE>
See accompanying notes to financial statements
CINCINNATI FUND 13
<PAGE> 39
CINCINNATI FUND(R)
- -----------------------Statements of Changes in Net Assets----------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 71,252 $ 65,236
Net realized gain on investments 422,739 729,143
Change in unrealized appreciation of investments 1,932,515 2,718,060
------------ ------------
Net increase in net assets resulting from operations 2,426,506 3,512,439
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (72,381) (64,107)
From net realized gain on investments (425,541) (722,095)
------------ ------------
Decrease in net assets from dividends and distributions (497,922) (786,202)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 10,152,314 6,204,650
Net asset value of shares issued in reinvestment
of dividends and distributions 407,597 582,605
Payments for shares redeemed (3,471,511) (970,114)
------------ ------------
Net increase in net assets from fund shares transactions 7,088,400 5,817,141
------------ ------------
NET CHANGE IN NET ASSETS 9,016,984 8,543,378
NET ASSETS:
Beginning of year 17,527,266 8,983,888
------------ ------------
End of year, including undistributed net investment
income of $0 and $1,129, respectively $26,544,250 $17,527,266
============ ============
FUND SHARE TRANSACTIONS:
Shares sold 529,125 365,881
Shares issued in reinvestment of dividends and distributions 16,071 30,743
Less shares redeemed (194,873) (56,771)
------------ ------------
NET INCREASE IN SHARES OUTSTANDING 350,323 339,853
============ ============
</TABLE>
See accompanying notes to financial statements
14 CINCINNATI FUND
<PAGE> 40
CINCINNATI FUND(R)
- ------------------------------Financial Highlights------------------------------
Per share data for a share outstanding throughout each period
<TABLE>
<CAPTION>
For the Period From
Year Ended December 31, November 7, 1994 to
1998 1997 1996 1995(3) December 31, 1994
---- ---- ---- ------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $18.98 $15.40 $13.12 $9.91 $10.00
---------- ---------- --------- --------- ---------
Net investment income 0.06 0.07 0.02 0.04 0.03
Net gains (losses) on securities 2.20 4.39 2.60 3.46 (0.12)
---------- ---------- --------- --------- ---------
Total from investment operations 2.26 4.46 2.62 3.50 (0.09)
---------- ---------- --------- --------- ---------
Dividends from net investment income (0.06) (0.07) (0.02) (0.07) --
Distributions from capital gains (0.34) (0.81) (0.32) (0.22) --
---------- ---------- --------- --------- ---------
Total distributions (0.40) (0.88) (0.34) (0.29) --
---------- ---------- --------- --------- ---------
Net asset value, end of period $20.84 $18.98 $15.40 $13.12 $9.91
========== ========== ========= ========= =========
TOTAL RETURN 11.89% 28.98% 19.98% 35.31% (0.90%)(2)
Net assets, end of period (thousands) $26,544 $17,527 $8,984 $5,877 $3,225
Ratio of expenses to average net
assets(1) 1.37% 1.69% 2.00% 1.98% 1.96%
Ratio of net investment income to
average net assets(1) 0.30% 0.50% 0.13% 0.46% 2.24%
Portfolio turnover rate 8% 17% 10% 9% 0%(2)
</TABLE>
(1) The ratio of net expenses to average net assets would have increased and
the ratio of net investment income to average net assets would have
decreased by 0.01% in 1997, 0.02% in 1995, and 0.04% in 1994 had the
Adviser not voluntarily waived fees or reimbursed expenses. Ratios are
annualized in periods less than one year.
(2) Not annualized.
(3) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
See accompanying notes to financial statements
CINCINNATI FUND 15
<PAGE> 41
CINCINNATI FUND(R)
- ---------------Notes to Financial Statements - December 31, 1998----------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of three diversified mutual funds.
The financial statements of the Cincinnati Fund (the Fund) are included in
this report. The investment objective of the Fund is to achieve capital
appreciation through investment in the common stock of companies with an
important presence in the Greater Cincinnati Area. The financial statements of
the Gateway Fund and the Gateway Small Cap Index Fund are included in separate
reports. The Trust is registered under the Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks at the average
of the closing bid and asked quotations. Other securities for which market
quotations are not readily available are valued at fair value as determined in
good faith under procedures adopted by the board of trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are recorded on the trade date. Dividend income is recorded on
the ex-dividend date, and interest income is accrued daily. Capital gains and
losses are calculated on an identified cost basis. Expenses that cannot be
directly associated with a specific Trust fund are allocated under policies
approved by the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Distributions
from net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid to shareholders annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all of its taxable income to
shareholders. Based on this policy, the Fund makes no provision for income
taxes. The cost of investments is the same for financial reporting and tax
purposes.
At December 31, 1998, gross unrealized appreciation of common stocks totaled
$8,304,813 and gross unrealized depreciation totaled $1,229,238, based on the
cost of investments.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in
its repurchase transactions, the Fund enters into repurchase agreements only
with banks that have more than $1 billion in assets and are creditworthy in
the judgment of Gateway Investment Advisers, L.P. (the Adviser).
16 CINCINNATI FUND
<PAGE> 42
CINCINNATI FUND(R)
- ---------------Notes to Financial Statements - December 31, 1998----------------
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser an investment advisory and management fee computed
at an annual rate of 0.50% of its average daily net assets.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 2.00% of average
daily net assets, the advisory contract requires the Adviser to reduce its fee
as necessary to limit the Fund's expenses to this level.
The Adviser provides shareholder, transfer, dividend disbursing, accounting,
and administrative services to the Fund. The 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 the Fund's average net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 for the committee chairman) for each
committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1998, purchases of investment securities
(excluding short-term investments) totaled $8,529,501, and proceeds from sales
totaled $1,733,516.
CINCINNATI FUND 17
<PAGE> 43
CINCINNATI FUND(R)
- --------------------Report of Independent Public Accountants--------------------
To the Shareholders and Board of Trustees of the Cincinnati Fund(R) of The
Gateway Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Cincinnati Fund (one of the funds
constituting THE GATEWAY TRUST) as of December 31, 1998, and the related
statement of operations, the statements of changes in net assets, and the
financial highlights for the periods indicated thereon. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Cincinnati Fund of The Gateway Trust as of December 31, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for the
periods indicated thereon, in conformity with generally accepted accounting
principles.
Cincinnati, Ohio Arthur Andersen LLP
January 19, 1999
18 CINCINNATI FUND
<PAGE> 44
CINCINNATI FUND(R)
- ---------Results of Special Meeting of Shareholders on December 9, 1998---------
A special meeting of the shareholders of The Gateway Trust was held on
December 9, 1998. Several matters were submitted for shareholder vote.
The first matter voted upon was the election of the members of the
board of trustees. All sitting members of the board of trustees were nominated
for election; Messrs. Schwab and Rogers were also nominated. All persons
nominated were elected, and the results of the voting, presented for The Gateway
Trust as a whole, were as follows:
<TABLE>
<CAPTION>
- ----------------------------- ---------------------------- ----------------------------
AUTHORITY GIVEN AUTHORITY WITHHELD
- ----------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Walter G. Sall 12,565,183 183,721
- ----------------------------- ---------------------------- ----------------------------
J. Patrick Rogers 12,584,662 164,242
- ----------------------------- ---------------------------- ----------------------------
James M. Anderson 12,588,485 160,419
- ----------------------------- ---------------------------- ----------------------------
Stefen F. Brueckner 12,588,485 159,930
- ----------------------------- ---------------------------- ----------------------------
Kenneth A. Drucker 12,588,974 159,707
- ----------------------------- ---------------------------- ----------------------------
Beverly J. Fertig 12,589,197 159,678
- ----------------------------- ---------------------------- ----------------------------
R. S. (Dick) Harrison 12,590,751 158,153
- ----------------------------- ---------------------------- ----------------------------
William H. Schneebeck 12,590,585 158,319
- ----------------------------- ---------------------------- ----------------------------
James E. Schwab 12,590,870 158,034
- ----------------------------- ---------------------------- ----------------------------
</TABLE>
The next matter voted upon was the ratification of the selection of
Arthur Andersen LLP as independent accountants for the Trust for the fiscal year
ending December 31, 1998. The shareholders ratified the selection and the
results of the voting were as follows:
<TABLE>
<CAPTION>
- -------------------------------------- ---------------- ----------------- ----------------
FUND FOR AGAINST ABSTAIN
- -------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Gateway Fund 10,600,663 116,676 196,740
- -------------------------------------- ---------------- ----------------- ----------------
Gateway Small Cap Index Fund 972,565 15,057 9,384
- -------------------------------------- ---------------- ----------------- ----------------
Cincinnati Fund(R) 815,759 13,299 8,757
- -------------------------------------- ---------------- ----------------- ----------------
</TABLE>
CINCINNATI FUND 19
<PAGE> 45
CINCINNATI FUND(R)
- ---------Results of Special Meeting of Shareholders on December 9, 1998---------
The next matter voted upon was an amendment to the Trust's Declaration
of Trust, which would have required the shareholders of all funds to vote in the
aggregate except as otherwise required by law. The results of the voting, in
which the matter was NOT PASSED, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
BROKER
FUND FOR AGAINST ABSTAIN NON-VOTE
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gateway Fund 9,897,747 361,136 247,692 407,505
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
Gateway Small Cap Index Fund 867,535 22,490 20,935 86,047
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
Cincinnati Fund(R) 776,828 22,686 12,099 26,204
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
The next matter voted upon was an amendment of the Trust's Declaration
of Trust that would have permitted the Trustees to make future amendments to the
Declaration of Trust without shareholder authorization provided the amendment
did not adversely affect the rights of any shareholder. The results of the
voting, in which the matter was NOT PASSED, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
BROKER
FUND FOR AGAINST ABSTAIN NON-VOTE
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gateway Fund 9,070,589 917,439 518,547 407,505
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
Gateway Small Cap Index Fund 848,365 43,213 19,382 86,047
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
Cincinnati Fund(R) 735,998 60,606 15,010 26,203
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
20 CINCINNATI FUND
<PAGE> 46
CINCINNATI FUND(R)
- -----------------------Professional Services and Trustees-----------------------
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Firstar Corporation
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. Harrison
J. Patrick Rogers
Walter G. Sall
William H. Schneebeck
James E. Schwab
CINCINNATI FUND 21
<PAGE> 47
=============================== Affordability ================================
$1,000 Minimum Initial Investment
$500 Minimum Initial IRA Investment
$100 Minimum Additional Investment
No Annual Account Charges
No-Fee IRA Accounts
================================ Convenience =================================
Free Telephone Exchanges Between Gateway Funds
Automatic Investment Program
Systematic Withdrawal Program
Telephone Redemptions
================================ Flexibility =================================
The Cincinnati Fund(R) is available for numerous investment options:
Individuals
IRAs
Trusts
Pension Plans
Gifts to Minors
<PAGE> 48
GATEWAY SMALL CAP INDEX FUND
(STATUE OF LIBERTY LOGO)
Annual Report
1998
(Statue of Liberty Logo)
THE GATEWAY TRUST
P.O. Box 5211
CINCINNATI, OH 45201-5211
(800)354-6339
<PAGE> 49
================================================================================
GATEWAY SMALL CAP INDEX FUND
Highlights at December 31, 1998
================================================================================
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
--------------------------------------------------
Past One Three Five Ten Since Inception Dividends Price
Quarter Year Years Years Years on 6/16/93 Year to Date Per Share
------- ---- ----- ----- ----- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GATEWAY SMALL CAP
INDEX FUND 17.10% (3.40%) 10.90% 9.33% N/A 9.61% $1.492 $11.53
Wilshire Small Cap Index 18.99 (0.43) 14.83 13.18 n/a
Russell 2000 16.31 (2.55) 11.58 11.86 12.92
U. S. Inflation (CPI) 0.60 2.03 2.42 2.50 3.19
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------------
Past One Three Five Ten Since Inception
Quarter Year Years Years Years on 6/16/93
------- ---- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
GATEWAY SMALL CAP
INDEX FUND 17.10% (3.40%) 36.41% 56.20% N/A 66.35%
Wilshire Small Cap Index 18.99 (0.43) 51.42 85.74 n/a
Russell 2000 16.31 (2.55) 38.92 75.14 237.06
U. S. Inflation (CPI) 0.60 2.03 7.44 13.12 36.87
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. Your
investment return and principal value of an investment will fluctuate so that
your shares, when redeemed, may be worth more or less than the original cost.
This report must be preceded or accompanied by a current prospectus.
1
<PAGE> 50
================================================================================
GATEWAY SMALL CAP INDEX FUND
Letter from the Chairman
================================================================================
Dear Shareholder:
The small capitalization stock sector of the market provided excitement in 1998.
The Gateway Small Cap Index Fund enjoyed both the peaks and valleys. For an
in-depth look at the Fund's results, please refer to portfolio manager Patrick
Rogers's report on the next two pages.
Shareholders have expressed concern regarding the potential effect of Year
2000-related computer problems on their Gateway investments. We are pleased to
announce that the majority of the systems used in conducting our business have
been demonstrated to be Year-2000 compliant. A small number of problem areas
have been identified, and we are taking appropriate action to head off any
adverse effects well in advance of January 1, 2000. In addition, we are working
closely with our third-party suppliers to our funds to obtain satisfactory
assurances regarding their state of preparedness for the Year 2000. It is
nevertheless important to point out that, like all other mutual funds and
financial services operations worldwide, The Gateway Trust could be adversely
affected by problems which may afflict the entire industry. At the present time,
we do not believe that the operations or investments of our funds will suffer
any material adverse effects on January 1, 2000, or thereafter.
At a special meeting of shareholders in December, shareholders re-elected seven
incumbent trustees and elected two new trustees. On behalf of all our
shareholders, I take great pleasure in welcoming James E. Schwab, president and
chief executive officer of XTEK, Inc., a Cincinnati-based machinery company, and
J. Patrick Rogers, president and chief investment officer of the Fund's adviser,
Gateway Investment Adviser, L.P., as trustees of The Gateway Trust. Their
expertise will add further depth to your board of trustees.
Small capitalization stocks have lagged their large capitalization brethren for
some time. As investors seek even better prices, their attention will eventually
shift to the values that can be identified in the small cap sector. Your Fund
will be there to participate. We look forward to progress in 1999.
Cordially,
/s/ Walter G. Sall
Walter G. Sall
Chairman
2
<PAGE> 51
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio Manager's Report
================================================================================
Small capitalization stocks took investors on a wild ride in 1998. After a
strong showing in the first quarter, the second and third quarters produced
losses the market has not seen since the crash of 1987. Finally, the dramatic
decline in the summer set the stage for a sharp increase in the fourth quarter.
For the year ended December 31, 1998, the Gateway Small Cap Index Fund produced
a total return of -3.40%. This compares to a total return of -2.55% for the
Russell 2000, a commonly used benchmark for small cap stocks.
As has been the case for the past several years, large blue chip stocks easily
outperformed small capitalization stocks. In fact, due to a lesser decline in
the summer and a more dramatic rise at the end of the year, the S&P 500 Index
produced a total return of 28.58% for the year. Most analysts attribute this
great divergence in part to the superior liquidity large cap stocks provide.
During highly uncertain environments, investors will favor those securities that
offer greater confidence in their ability to trade.
The Gateway Small Cap Index Fund invests in the 250 stocks represented in the
Wilshire Small Cap Index. The weighted average market capitalization for the
portfolio is $1.5 billion. The largest industry group as of December 31, 1998,
was Finance, Insurance & Real Estate at 16.60%. A list of the top ten holdings
at year-end follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
GATEWAY SMALL CAP INDEX FUND
TOP TEN HOLDINGS
----------------------------------------------------------------------
AS A PERCENTAGE OF
STOCKS NET ASSETS
----------------------------------------------- ----------------------
<S> <C>
Vitesse Semiconductor Corporation 1.45%
Jabil Circuit, Inc. 1.21
Centex Corporation 1.18
Mohawk Industries, Inc. 1.15
Astoria Financial Corporation 1.10
Sepracor, Inc. 1.06
Flowers Industries, Inc. 1.03
Excite, Inc. 1.01
Rational Software Corporation 0.98
E Trade Group Inc. 0.96
----------------------------------------------- ----------------------
</TABLE>
3
<PAGE> 52
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio Manager's Report
================================================================================
As discussed in prior reports, the "Effect of Put Options" shows the effect of
owning put options over a given period of time. In the third quarter of this
year, the put options made a small, positive contribution to the Fund's
performance, as shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
GATEWAY SMALL CAP INDEX FUND
1998
- ----------------------------------------- ----------- ------------- ------------ ------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- ----------------------------------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
CONTRIBUTION OF STOCKS
Performance of Stocks 13.09% (5.90%) (22.82%) 17.86%
Dividends Earned 0.22 0.21 0.26 0.28
INTEREST EARNED 0.04 0.04 0.03 0.02
CONTRIBUTIONS OF OPTIONS
Effect of Put Options (0.57) 0.10 1.01 (0.65)
EFFECT OF FEES
Fund Expenses (0.37) (0.38) (0.38) (0.37)
Brokerage Commissions (0.02) (0.08) (0.01) (0.04)
- ----------------------------------------- ----------- ------------- ------------ ------------
TOTAL RETURN 12.39% (6.01%) (21.91%) 17.10%
- ----------------------------------------- ----------- ------------- ------------ ------------
</TABLE>
At year-end, the Fund's trustees declared a capital gain distribution in the
amount of $1.492 per share. The Wilshire organization altered the Wilshire Small
Cap Index twice during 1998. As the Gateway Small Cap Index Fund is modeled to
this index, substantial capital gains resulted from these rebalancing
transactions. The Fund is required to distribute 98% of its realized gains
annually.
/s/ J. Patrick Rogers
J. Patrick Rogers, CFA
Portfolio Manager
4
<PAGE> 53
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio Manager's Report
================================================================================
GROWTH OF A $10,000 INVESTMENT
[Graph showing the following information]
<TABLE>
<CAPTION>
GATEWAY SMALL CAP INDEX FUND RUSSELL 2000
---------------------------- ------------
<S> <C>
$10,000.00 $10,000.00
$10,100.00 $10,062.00
$10,179.99 $10,200.86
$10,539.96 $10,641.53
$10,639.98 $10,941.62
$10,579.97 $11,223.92
$10,449.94 $10,858.02
$10,649.96 $11,229.36
$10,927.81 $11,580.84
$10,866.07 $11,539.15
$10,361.88 $10,931.04
$10,310.39 $10,995.53
$10,156.04 $10,872.38
$9,806.16 $10,505.98
$9,981.11 $10,678.28
$10,516.19 $11,273.06
$10,248.66 $11,234.73
$10,330.96 $11,189.79
$9,878.21 $10,737.72
$10,011.97 $11,025.50
$9,856.02 $10,886.57
$10,271.88 $11,339.46
$10,427.83 $11,533.36
$10,646.16 $11,789.40
$10,885.27 $11,992.18
$11,249.17 $12,614.57
$11,862.57 $13,341.17
$12,101.69 $13,617.33
$12,112.09 $13,861.08
$11,623.45 $13,241.49
$11,987.26 $13,797.64
$12,195.24 $14,161.89
$12,173.17 $14,146.32
$12,471.17 $14,587.68
$12,846.43 $14,885.27
$13,475.52 $15,681.63
$13,861.86 $16,299.49
$13,254.99 $15,629.58
$12,316.93 $14,265.12
$13,001.26 $15,093.92
$13,520.01 $15,684.09
$13,442.81 $15,442.56
$14,093.98 $16,078.79
$14,273.82 $16,500.06
$14,640.66 $16,830.06
$14,593.37 $16,421.09
$14,013.43 $15,646.01
$14,202.75 $15,689.82
$15,196.94 $17,434.53
$15,623.06 $18,182.47
$16,735.58 $19,027.95
$17,138.07 $19,463.69
$17,978.35 $20,888.44
$17,232.79 $19,971.43
$17,114.40 $19,841.62
$17,220.34 $20,188.85
$17,105.31 $19,869.86
$18,561.65 $21,338.25
$19,353.68 $22,217.38
$19,698.56 $22,339.58
$18,523.34 $21,135.48
$18,191.22 $21,179.86
$16,785.95 $19,466.41
$13,349.53 $15,686.03
$14,205.37 $16,914.25
$15,010.10 $17,604.35
$15,853.22 $18,526.82
$16,635.10 $19,673.63
</TABLE>
JUNE 16, 1993 (INCEPTION DATE) - DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------
GATEWAY SMALL CAP INDEX FUND
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
- ----------------------------------------------
<S> <C>
One Year (3.40%)
- ----------------------- ----------------------
Five Years 9.33%
- ----------------------- ----------------------
Life of Fund 9.61%
- ----------------------- ----------------------
</TABLE>
Performance data throughout this report represents past performance. The average
annual total return figures assume the reinvestment of dividends. Your
investment return and principal value of an investment will fluctuate so that
your shares, when redeemed, may be worth more or less than the original cost.
5
<PAGE> 54
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & EQUIPMENT 1.77%
1,700 B/E Aerospace, Inc. * $ 35,648
2,200 Cordant Technologies Inc. 82,431
1,700 Kaman Corporation 27,306
2,300 Teleflex Incorporated 105,297
----------
250,682
----------
APPAREL 1.83%
1,300 Brown Group, Inc. 22,750
1,600 Kellwood Company 39,950
2,900 Nautica Enterprises, Inc. * 43,228
1,800 The Gymboree Corporation * 11,419
3,500 The Stride Rite Corporation 30,297
3,500 WestPoint Stevens Inc. * 110,360
----------
258,004
----------
AUTOMOBILES & PARTS 1.41%
1,500 Arvin Industries, Inc. 62,390
2,300 BREED Technologies, Inc. * 18,759
1,800 CLARCOR 35,775
2,100 Superior Industries International, Inc. 58,341
1,200 The Standard Products Company 24,488
----------
199,753
----------
BUILDING MATERIALS & CONSTRUCTION 3.48%
3,700 Centex Corporation 166,616
2,400 Kaufman and Broad Home Corporation 68,925
3,300 Lennar Corporation 83,119
2,600 Pulte Corporation 72,231
1,700 Southdown, Inc. 100,513
----------
491,404
----------
BUSINESS SERVICES & SUPPLIES 2.66%
3,000 AMRESCO, Inc. * 26,344
3,600 APAC TeleServices, Inc. * 13,781
2,500 Coventry Health Care, Inc. * 22,031
2,127 Information Resources, Inc. * 21,602
2,500 Pittston Brink's Group 79,219
2,500 Rollins, Inc. 43,750
3,500 Sotheby's Holdings, Inc. 112,000
1,500 The Profit Recovery Group International, Inc. * 56,344
----------
375,071
----------
</TABLE>
See accompanying notes to financial statements
6
<PAGE> 55
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS 1.47%
2,600 AgriBio Tech, Inc. * $ 33,556
5,200 Airgas, Inc. * 46,313
700 Chemed Corporation 23,450
6,100 Ethyl Corporation 35,075
1,000 Fuller (H. B.) Company 46,375
2,000 Lawter International, Inc. 23,250
----------
208,019
----------
COMPUTER SOFTWARE & PERIPHERALS 10.26%
2,600 American Management Systems, Incorporated * 104,161
3,900 Cambridge Technology Partners Inc. * 86,166
2,400 Cerner Corporation * 64,350
3,100 CHS Electronics, Inc. * 52,410
3,300 Electronics for Imaging Inc. * 131,897
1,500 ENVOY Corporation * 87,750
3,400 Excite, Inc. * 143,225
2,130 Hyperion Solutions Corp. 38,473
900 Infoseek Corporation * 44,438
2,400 Macromedia, Inc. * 80,775
2,300 Open Market, Inc. * 26,881
3,700 PSINet Inc. * 77,700
5,200 Rational Software Corporation * 137,800
3,700 S3 Incorporated * 27,230
1,600 Shared Medical Systems Corporation 79,750
2,524 Structural Dynamics Research Corporation * 50,007
5,900 Sybase, Inc. * 43,605
3,500 Symantec Corporation * 75,906
3,500 System Software Associates, Inc. * 24,610
1,800 Vantive Corporation * 14,456
1,700 Xircom, Inc. * 58,278
----------
1,449,868
----------
ELECTRONICS & COMPUTERS 10.41%
3,700 Aspect Telecommunications Corporation * 64,519
2,600 Baldor Electric Company 52,569
3,900 Cirrus Logic, Inc. * 38,147
6,600 Cypress Semiconductor Corporation * 54,861
3,400 Digital Microwave Corporation 23,269
2,900 DSP Communications, Inc. * 44,225
4,500 Glenayre Technologies Inc. * 19,828
</TABLE>
See accompanying notes to financial statements
7
<PAGE> 56
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRONICS & COMPUTERS (Continued)
1,500 Hutchinson Technology Incorporated * $ 53,109
6,000 Integrated Device Technology, Inc. * 36,656
2,300 Jabil Circuit, Inc. * 171,494
3,000 KMET Corporation * 34,313
2,800 Lam Research Corporation * 50,138
1,400 Lattice Semiconductor Corporation * 64,269
2,300 Level One Communications, Inc. * 81,722
2,100 Novellus Systems Inc. * 103,753
1,300 Oak Industries Inc. * 45,500
7,600 Paging Network, Inc. * 35,388
3,000 Sequent Computer Systems, Inc. * 36,094
2,200 Shiva Corp. * 12,478
1,300 Smart Modular Technologies Inc. * 35,994
4,500 Vitesse Semiconductor Corporation * 205,031
3,400 VLSI Technology, Inc. * 37,188
5,200 Western Wireless Corporation * 114,238
3,100 Xylan Corporation * 56,091
----------
1,470,874
----------
ENERGY 3.19%
2,300 Barrett Resources Corporation * 55,054
2,200 Benton Oil and Gas Company * 6,463
1,900 Forcenergy Inc. * 4,988
9,000 Harken Energy Corporation * 17,157
3,800 Marine Drilling Companies, Inc. * 29,094
1,900 ONEOK, Inc. 68,638
5,600 Parker Drilling Company * 17,850
2,133 Pennzoil Quaker State Co. * 31,796
2,700 Pogo Producing Company 34,931
3,500 Pride International, Inc. * 24,719
4,700 Seagull Energy Corporation * 29,522
2,000 Southwest Gas Corporation 53,688
1,210 Swift Energy Company * 8,999
2,000 Tesoro Petroleum Corporation * 24,188
1,500 Trico Marine Services, Inc. * 7,359
4,700 Varco International, Inc. * 36,425
----------
450,871
----------
</TABLE>
See accompanying notes to financial statements
8
<PAGE> 57
]
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE, INSURANCE & REAL ESTATE 16.60%
3,800 20th Century Industries $ 88,350
1,900 Advanta Corporation 25,055
3,700 Allied Capital Corp. 64,172
4,400 Americredit Corp. * 60,775
2,900 Arcadia Financial Ltd. * 10,422
3,370 Astoria Financial Corporation 154,809
1,700 Bank United Corp. 66,566
6,500 Catellus Development Corporation * 92,828
2,900 City National Corporation 120,713
1,600 CMAC Investment Corp. 73,300
3,200 Community First Bankshares Inc. 67,300
3,400 Credit Acceptance Corporation * 24,863
2,900 Doral Financial Corporation 64,888
2,900 E Trade Group Inc. * 135,666
2,700 Firstplus Financial Group Inc. * 7,510
2,000 Foremost Corporation of America 41,750
4,300 Golden State Bancorp Inc. * 71,219
2,900 Imperial Credit Industries, Inc. * 24,106
5,200 Independence Community Bank Corporation 82,550
4,000 Mid Atlantic Medical Services, Inc. * 39,375
1,300 NAC Re Corporation 60,856
700 Nationwide Financial Services 36,116
4,900 Oxford Health Plans, Inc. * 72,581
1,400 Provident Bankshares Corporation 34,913
3,300 Raymond James Financial Inc. 69,713
7,100 Reliance Group Holdings, Inc. 91,635
2,200 Riggs National Corporation 44,756
3,600 Rollins Truck Leasing Corp. 53,100
2,500 Roslyn Bancorp, Inc. 53,516
1,500 Silicon Valley Banchares * 25,547
2,500 St. Paul Bancorp, Inc. 68,047
1,100 The Liberty Corporation 54,244
2,100 United Companies Financial Corporation 7,022
2,100 UST Corp. 49,481
3,372 Valley National Bancorp 95,048
</TABLE>
See accompanying notes to financial statements
9
<PAGE> 58
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE, INSURANCE & REAL ESTATE (Continued)
3,230 Washington Federal, Inc. $ 86,806
2,600 Westamerica Bancorp. 95,631
1,300 Zenith National Insurance Corp. 30,022
----------
2,345,251
----------
FOOD, BEVERAGE & TOBACCO 2.12%
4,600 Chiquita Brands International 43,557
2,000 Dreyer's Grand Ice Cream, Inc. 30,125
6,100 Flowers Industries, Inc. 145,828
1,400 International Multifoods Corporation 36,181
2,400 Ralcorp Holdings, Inc. * 43,800
----------
299,491
----------
HEALTH 6.56%
2,100 Acuson Corporation * 31,236
2,800 Advanced Tissue Sciences, Inc. * 7,394
1,900 Agouron Pharmaceuticals, Inc. * 111,566
2,100 Ballard Medical Products 50,991
1,800 Beckman Coulter Inc. 97,425
1,364 Block Drug Company Inc. 59,270
2,100 Cephalon, Inc. * 18,769
3,200 DENTSPLY International Inc. 82,000
1,000 Diagnostic Products Corporation 31,125
2,200 Gilead Sciences, Inc. * 90,269
1,900 Haemonetics Corporation * 43,106
3,100 Integrated Health Services, Inc. 43,594
4,100 NBTY, Inc. * 29,085
5,600 Perrigo Company * 49,175
4,700 PhyCor, Inc. * 32,019
1,700 Sepracor, Inc. * 149,759
----------
926,783
----------
MACHINERY & RELATED PRODUCTS 2.06%
1,700 Gerber Scientific, Inc. 40,375
2,200 Kennametal Inc. 46,750
1,700 Kulicke and Soffa Industries * 30,069
2,900 Milacron Inc. 55,735
600 NACCO Industries, Inc. 54,956
4,800 Newpark Resources Inc. 32,400
2,400 Silicon Valley Group, Inc. * 30,525
----------
290,810
----------
</TABLE>
See accompanying notes to financial statements
10
<PAGE> 59
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
MINING & METALS 0.84%
3,600 Donaldson Company, Inc. $ 74,250
10,200 Echo Bay Mines 18,168
4,100 Hecla Mining Company * 14,863
1,200 Zoltek Companies, Inc. * 10,988
----------
118,269
----------
MISCELLANEOUS 2.59%
1,700 Avid Technology, Inc. * 39,844
3,300 Aztar Corporation * 16,603
5,500 Callaway Golf Company * 56,031
3,100 Grand Casinos, Inc. * 25,381
2,500 Kimball International, Inc. 47,422
3,000 P COM, Inc. * 11,953
7,100 PetsMart, Inc. * 76,769
4,400 Playtex Products, Inc. * 70,400
2,600 Station Casinos, Inc. * 21,369
----------
365,772
----------
OTHER CONSUMER DURABLES 3.77%
2,368 Albany International Corp. 44,851
1,000 Bassett Furniture Industries, Inc. 24,000
3,000 GenCorp Inc. 74,719
3,800 Hon Industries, Inc. 90,250
3,900 La-Z-Boy Incorporated 68,981
3,850 Mohawk Industries, Inc. * 161,821
500 NCH Corporation 29,688
1,600 Russ Berrie and Company, Inc. 37,600
----------
531,910
----------
OTHER INDUSTRIAL CYCLICALS 3.57%
2,100 ACX Technologies, Inc. * 27,824
2,900 Asarco Incorporated 43,681
1,200 Brush Wellman Inc. 20,850
1,900 Carlisle Companies Incorporated 97,731
7,900 Corporate Express Inc. * 40,735
3,600 Data General Corporation * 59,175
600 MAXXAM Inc. * 34,388
2,700 Overseas Shipholding Group, Inc. 43,369
</TABLE>
See accompanying notes to financial statements
11
<PAGE> 60
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OTHER INDUSTRIAL CYCLICALS (Continued)
2,050 Shorewood Packaging Corporation * $ 41,833
1,700 The Standard Register Company 52,541
1,200 The West Company, Incorporated 42,825
----------
504,952
----------
PAPER & FOREST PRODUCTS 1.61%
1,300 Chesapeake Corporation 47,897
3,900 Gaylord Container Corporation * 23,888
2,400 Pentair, Inc. 95,400
3,363 Wausau-Mosinee Paper Corporation 59,588
----------
226,773
----------
PRECISION INSTRUMENTS 0.21%
1,600 Credence Systems Corporation * 29,500
----------
RETAIL 3.26%
7,800 Charming Shoppes, Inc. * 33,150
2,100 Eagle Hardware & Garden, Inc. * 68,250
1,300 Enesco Group Inc. 30,184
2,800 Fleming Companies, Inc. 28,963
2,300 Lands' End, Inc. * 61,813
2,100 Micro Warehouse, Inc. * 70,809
2,900 Ross Stores, Inc. 114,097
4,000 Sunglass Hut International, Inc. * 27,875
1,700 The Dress Barn, Inc. * 25,819
----------
460,960
----------
SERVICES 10.30%
3,100 Airborne Freight Corporation 111,695
1,400 Alaska Air Group, Inc. * 61,950
2,300 Applebees International Inc. 47,941
1,900 Arnold Industries, Inc. 30,519
2,200 Banta Corporation 59,950
2,900 Calgon Carbon Corporation 21,478
2,024 Chris-Craft Industries, Inc. * 97,342
7,000 Extended Stay America, Inc. * 73,282
1,200 Gibson Greetings, Inc. * 14,100
1,900 Houghton Mifflin Company 89,656
2,700 Hunt (J. B.) Transport Services, Inc. 62,016
2,200 Landry's Seafood Restaurants, Inc. * 16,259
3,000 Lone Star Steakhouse & Saloon, Inc. * 27,469
</TABLE>
See accompanying notes to financial statements
12
<PAGE> 61
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Shares Common Stocks Value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
SERVICES (Continued)
1,700 Luby's Cafeterias, Inc. $ 26,191
1,000 New England Business Service, Inc. 39,000
1,800 Papa John's International, Inc. * 79,313
2,700 Pixar Animation Studios * 94,163
1,333 Pulitzer Publishing Company 115,305
1,900 Rainforest Cafe, Inc. * 11,459
2,000 Ruby Tuesday, Inc. 42,125
1,500 Sbarro, Inc. * 39,234
3,100 TCA Cable TV, Inc. 110,535
2,700 Wallace Computer Services, Inc. 71,128
2,400 World Color Press, Inc. * 72,900
2,100 Yellow Corporation * 40,097
------------
1,455,107
------------
STEEL & IRON 1.07%
3,600 AK Steel Corporation 84,600
2,200 Birmingham Steel Corporation 9,144
1,700 Carpenter Technology Corporation 57,694
------------
151,438
------------
UTILITIES 7.13%
3,700 Brightpoint, Inc. * 50,528
1,000 Central Hudson Gas & Electric Corporation 44,688
800 CILCORP Inc. 48,900
1,500 Eastern Utilities Associates 42,328
3,675 MDU Resources Group, Inc. 96,928
8,000 Northeast Utilities System * 127,500
2,367 NTL Incorporated * 133,514
800 Orange and Rockland Utilities, Inc. 45,500
3,100 Public Service Company of New Mexico 63,163
1,900 Sierra Pacific Resources 72,200
3,400 SkyTel Communications Inc. * 74,694
1,750 Southern Indiana Gas & Electric Co. 62,399
2,400 UGI Corporation 56,850
2,380 UniSource Energy Corporation * 32,056
2,200 Vanguard Cellular Systems, Inc. * 56,719
------------
1,007,967
------------
TOTAL COMMON STOCKS 98.17% 13,869,529
(cost $13,327,258)
</TABLE>
See accompanying notes to financial statements
13
<PAGE> 62
================================================================================
GATEWAY SMALL CAP INDEX FUND
Portfolio of Investments - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
Contracts Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
140 PUT OPTION ON RUSSELL 2000 STOCK INDEX 0.66% $ 93,625
expiring March 19, 1999 at 370
(cost $119,490)
REPURCHASE AGREEMENT 1.72%
3.5% repurchase agreement dated December 31, 1998 with Star
Bank, N.A., due January 4, 1999 (repurchase proceeds
$243,095) fully collateralized
by U. S. Government Agencies 243,000
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT 100.55% 14,206,154
OTHER ASSETS AND LIABILITIES, NET (0.55%) (78,576)
-----------
NET ASSETS 100.00% $14,127,578
===========
</TABLE>
* Denotes a non-income producing security.
See accompanying notes to financial statements
14
<PAGE> 63
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Assets and Liabilities - December 31, 1998
================================================================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Common stocks, at value (original cost $13,327,258) $13,869,529
Put options, at value (original cost $119,490) 93,625
Repurchase agreement 243,000
Dividend and interest receivable 9,228
Receivable for fund shares sold 1,541
Cash 928
Other assets 6,156
--------------
14,224,007
--------------
LIABILITIES:
Dividends payable to fund shareholders 76,384
Payable for fund shares redeemed 9,916
Other accrued expenses and liabilities 10,129
--------------
96,429
--------------
NET ASSETS $14,127,578
==============
NET ASSETS CONSIST OF:
Paid-in capital applicable to 1,224,991 shares outstanding
(unlimited number of shares authorized, no par value) $13,660,431
Accumulated realized loss, net (49,259)
Unrealized appreciation, net 516,406
--------------
$14,127,578
==============
NET ASSET VALUE, OFFERING, AND REDEMPTION
PRICE PER SHARE $11.53
======
</TABLE>
15
See accompanying notes to financial statements
<PAGE> 64
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Operations - For the Year Ended December 31, 1998
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 149,190
Interest income 20,129
------------
169,319
------------
EXPENSES:
Investment advisory and management fees 140,709
Transfer agent and accounting fees 80,479
Registration fees 23,133
Reports to shareholders 16,818
Professional fees 12,618
Custodian fees 11,650
Trustees' fees 6,891
Other expenses 5,915
------------
298,213
Fees waived (63,744)
------------
Net operating expenses 234,469
------------
NET INVESTMENT LOSS (65,150)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain (loss) on investments:
Securities 1,650,729
Put options expired and closed (83,684)
------------
Net realized gain on investments 1,567,045
------------
Decrease in unrealized appreciation of investments:
Securities (1,971,866)
Put options (25,865)
------------
Net decrease in unrealized appreciation of investments (1,997,731)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (430,686)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (495,836)
============
</TABLE>
See accompanying notes to financial statements
16
<PAGE> 65
================================================================================
GATEWAY SMALL CAP INDEX FUND
Statement of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------------ -----------
<S> <C> <C>
FROM OPERATIONS:
Net investment loss $ (65,150) $ (24,710)
Net realized gain on investments 1,567,045 1,155,643
Change in unrealized (depreciation) appreciation of investments (1,997,731) 1,138,250
------------ -----------
Net change in net assets resulting from operations (495,836) 2,269,183
------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gain on investments (1,578,731) (1,171,153)
In excess of realized gain on investments (49,259) --
------------ -----------
Decrease in net assets from dividends and distributions (1,627,990) (1,171,153)
------------ -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 3,490,541 5,882,790
Net asset value of shares issued in reinvestment
of dividends and distributions 1,551,351 1,038,765
Payments for shares redeemed (4,601,589) (3,129,370)
------------ -----------
Net increase in net assets from fund shares transactions 440,303 3,792,185
------------- -----------
NET INCREASE (DECREASE) IN NET ASSETS (1,683,523) 4,890,215
NET ASSETS:
Beginning of year 15,811,101 10,920,886
------------ -----------
End of year $14,127,578 $15,811,101
============ ===========
FUND SHARE TRANSACTIONS:
Shares sold 306,934 425,462
Shares issued in reinvestment of dividends and distributions 117,956 77,073
Less shares redeemed (373,223) (234,446)
------------ -----------
NET INCREASE IN SHARES OUTSTANDING 51,667 268,089
============= ===========
</TABLE>
See accompanying notes to financial statements
17
<PAGE> 66
================================================================================
GATEWAY SMALL CAP INDEX FUND
Financial Highlights - Per share data for a share outstanding throughout each
year
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995(1) 1994
---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $13.48 $12.06 $11.05 $9.63 $10.35
---------- ---------- ---------- --------- ---------
Net investment (loss) income (0.05) (0.02) 0.01 0.03 (0.02)
Net gains (losses) on securities (0.41) 2.51 1.87 2.07 (0.60)
---------- ---------- ---------- --------- ---------
Total from investment operations (0.46) 2.49 1.88 2.10 (0.62)
---------- ---------- ---------- --------- ---------
Dividends from net investment income -- -- (0.01) (0.01) --
Distributions from capital gains (1.45) (1.07) (0.86) (0.67) (0.10)
Distributions in excess of realized gains (0.04) -- -- -- --
Total distributions (1.49) (1.07) (0.87) (0.68) (0.10)
---------- ---------- ---------- --------- ---------
Net asset value, end of year $11.53 $13.48 $12.06 $11.05 $9.63
========== ========== ========== ========= =========
TOTAL RETURN (3.40%) 20.64% 17.04% 21.81% (5.99%)
Net assets, end of year (thousands) $14,128 $15,811 $10,921 $9,418 $9,657
Ratio of expenses to average net assets 1.50% 1.50% 1.50% 1.68% 2.00%
Ratio of net investment income (loss) to
average net assets (0.42%) (0.19%) 0.03% 0.09% (0.14%)
Portfolio turnover rate 30% 32% 20% 20% 39%
</TABLE>
(1) On December 15, 1995, Gateway Investment Advisers, L.P. became investment
adviser to the Fund.
See accompanying notes to financial statements
8
<PAGE> 67
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Gateway Trust (the Trust) is a family of three diversified mutual funds. The
financial statements of the Gateway Small Cap Index Fund (the Fund) are included
in this report. The primary investment objective of the Fund is long-term growth
of capital. The Fund attempts to achieve its investment objective primarily by
investing in the 250 stocks included in the Wilshire Small Cap Index, and by
purchasing put or call options on an index. The financial statements of the
Gateway Fund and the Cincinnati Fund are included in separate reports. The Trust
is registered under the Investment Company Act of 1940.
The following is a summary of the Fund's significant accounting policies.
INVESTMENTS VALUATION -- The Fund normally values common stocks and option
contracts at the average of the closing bid and asked quotations. Other
securities for which market quotations are not readily available are valued at
fair value as determined in good faith under procedures adopted by the board of
trustees.
INVESTMENT TRANSACTIONS, INVESTMENT INCOME, AND EXPENSES -- Investment
transactions are recorded on the trade date. Dividend income is recorded on the
ex-dividend date, and interest income is accrued daily. Capital gains and losses
are calculated on an identified cost basis. Expenses that cannot be directly
associated with a specific Trust fund are allocated under policies approved by
the board of trustees.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from
net investment income and net realized capital gains are recorded on the
ex-dividend date and are declared and paid to shareholders annually.
FEDERAL INCOME TAXES -- The Fund intends to comply with the provisions of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies and distribute substantially all taxable income to the shareholders.
Based on this policy, the Fund makes no provision for income taxes.
The cost of common stock for tax purposes is $13,495,096 at December 31, 1998;
gross unrealized appreciation of common stocks is $3,251,545 and gross
unrealized depreciation totaled $2,877,112, based on the cost of investments.
REPURCHASE AGREEMENTS -- The Fund requires the custodian to hold sufficient
collateral to secure repurchase agreements. To reduce the chance of loss in its
repurchase transactions, the Fund enters into repurchase agreements only with
banks that have more than $1 billion in assets and are creditworthy in the
judgment of Gateway Investment Advisers, L.P. (the Adviser).
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION OF CAPITAL ACCOUNTS -- During the year ended December 31, 1998,
the Fund reclassified $65,150 from undistributed net investment income to
paid-in capital. This reclassification, which had no impact on total net assets,
is due to tax regulations not permitting the carryforward of net investment
losses to future periods.
19
<PAGE> 68
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
================================================================================
2. TRANSACTIONS WITH AFFILIATES
The Fund pays the Adviser an investment advisory and management fee computed at
an annual rate of 0.90% of the first $50 million of the average daily net assets
of the Fund, 0.70% of the next $50 million, and 0.60% of all such assets over
$100 million.
If total expenses for any fiscal year (excluding taxes, interest, brokerage
commissions, and expenses of an extraordinary nature) exceed 2.00% of the Fund's
average daily net assets, the advisory contract requires the Adviser to waive
some or all of its advisory fee as necessary to limit the Fund's expenses to the
stated level. For 1998, the Adviser committed to waive some or all of its
advisory fee if the Fund's expense ratio exceeded 1.50%. Any waiver, however,
would not exceed the aggregate advisory fee paid by the Fund for the applicable
year. As a result, for the year ended December 31, 1998, the Adviser waived
advisory fees of $63,744.
The Adviser provides shareholder, transfer, dividend disbursing, accounting, and
administrative services to the Fund. The 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 the Fund's average net assets.
Each trustee of the Trust who is not affiliated with the Adviser receives an
annual retainer of $3,000, a $500 base fee plus $100 per fund for each meeting
attended, and $200 per fund ($1,000 per fund for the committee chairman) for
each committee meeting attended. The annual retainer and base fee are allocated
among the funds based on the number of shareholders in each fund.
At December 31, 1998, the Adviser held in a fiduciary capacity, 40% of the
Fund's outstanding shares.
3. SECURITIES TRANSACTIONS
For the year ended December 31, 1998, purchases of investment securities
(excluding short-term investments) totaled $4,383,818, and proceeds from sales
totaled $5,704,985.
The Fund may buy put or call options on stock indexes. The purchase of options
involves the risk of loss of all or part of the cash paid for the options. The
value of purchased puts increases to offset declines and decreases to offset
rises in the portfolio value. The value of purchased calls increases as the
value of the underlying index increases.
20
<PAGE> 69
================================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
To the Shareholders and Board of Trustees of the Gateway Small Cap Index Fund of
The Gateway Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Gateway Small Cap Index Fund (one of the
funds constituting THE GATEWAY TRUST) as of December 31, 1998, and the related
statement of operations, the statements of changes in net assets, and the
financial highlights for the periods indicated thereon. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gateway Small Cap Index Fund of The Gateway Trust as of December 31, 1998, the
results of its operations, the changes in its net assets, and the financial
highlights for the periods indicated thereon, in conformity with generally
accepted accounting principles.
Cincinnati, Ohio Arthur Andersen LLP
January 19, 1999
21
<PAGE> 70
================================================================================
GATEWAY SMALL CAP INDEX FUND
Results of Special Meeting of Shareholders on December 9, 1998
================================================================================
A special meeting of the shareholders of The Gateway Trust was held on December
9, 1998. Several matters were submitted for shareholder vote.
The first matter voted upon was the election of the members of the board of
trustees. All sitting members of the board of trustees were nominated for
election; Messrs. Schwab and Rogers were also nominated. All persons nominated
were elected, and the results of the voting, presented for The Gateway Trust as
a whole, were as follows:
<TABLE>
<CAPTION>
- ----------------------------- ---------------------------- ----------------------------
AUTHORITY GIVEN AUTHORITY WITHHELD
- ----------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Walter G. Sall 12,565,183 183,721
- ----------------------------- ---------------------------- ----------------------------
J. Patrick Rogers 12,584,662 164,242
- ----------------------------- ---------------------------- ----------------------------
James M. Anderson 12,588,485 160,419
- ----------------------------- ---------------------------- ----------------------------
Stefen F. Brueckner 12,588,485 159,930
- ----------------------------- ---------------------------- ----------------------------
Kenneth A. Drucker 12,588,974 159,707
- ----------------------------- ---------------------------- ----------------------------
Beverly J. Fertig 12,589,197 159,678
- ----------------------------- ---------------------------- ----------------------------
R. S. (Dick) Harrison 12,590,751 158,153
- ----------------------------- ---------------------------- ----------------------------
William H. Schneebeck 12,590,585 158,319
- ----------------------------- ---------------------------- ----------------------------
James E. Schwab 12,590,870 158,034
- ----------------------------- ---------------------------- ----------------------------
</TABLE>
The next matter voted upon was the ratification of the selection of Arthur
Andersen LLP as independent accountants for the Trust for the fiscal year ending
December 31, 1998. The shareholders ratified the selection and the results of
the voting were as follows:
<TABLE>
<CAPTION>
- -------------------------------------- ---------------- ----------------- ----------------
FUND FOR AGAINST ABSTAIN
- -------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Gateway Fund 10,600,663 116,676 196,740
- -------------------------------------- ---------------- ----------------- ----------------
Gateway Small Cap Index Fund 972,565 15,057 9,384
- -------------------------------------- ---------------- ----------------- ----------------
Cincinnati Fund(R) 815,759 13,299 8,757
- -------------------------------------- ---------------- ----------------- ----------------
</TABLE>
22
<PAGE> 71
================================================================================
GATEWAY SMALL CAP INDEX FUND
Results of Special Meeting of Shareholders on December 9, 1998
================================================================================
The next matter voted upon was an amendment to the Trust's Declaration of Trust,
which would have required the shareholders of all funds to vote in the aggregate
except as otherwise required by law. The results of the voting, in which the
matter was NOT PASSED, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
BROKER
FUND FOR AGAINST ABSTAIN NON-VOTE
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gateway Fund 9,897,747 361,136 247,692 407,505
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
Gateway Small Cap Index Fund 867,535 22,490 20,935 86,047
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
Cincinnati Fund(R) 776,828 22,686 12,099 26,204
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
The next matter voted upon was an amendment of the Trust's Declaration of Trust
that would have permitted the Trustees to make future amendments to the
Declaration of Trust without shareholder authorization provided the amendment
did not adversely affect the rights of any shareholder. The results of the
voting, in which the matter was NOT PASSED, were as follows:
<TABLE>
<CAPTION>
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
BROKER
FUND FOR AGAINST ABSTAIN NON-VOTE
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Gateway Fund 9,070,589 917,439 518,547 407,505
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
Gateway Small Cap Index Fund 848,365 43,213 19,382 86,047
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
Cincinnati Fund(R) 735,998 60,606 15,010 26,203
- -------------------------------------- ---------------- ----------------- ---------------- -----------------
</TABLE>
23
<PAGE> 72
================================================================================
AFFORDABILITY
-------------
$1,000 Minimum Initial Investment
$500 Minimum Initial IRA Investment
$100 Minimum Additional Investment
No Annual Account Charges
No-Fee IRA Accounts
CONVENIENCE
-----------
Free Telephone Exchanges Between Gateway Funds
Automatic Investment Program
Systematic Withdrawal Program
Telephone Redemptions
FLEXIBILITY
-----------
Available for numerous investment options:
Individuals
IRAs
Trusts
Pension Plans
Gifts to Minors
<PAGE> 73
================================================================================
THE GATEWAY TRUST
================================================================================
Investment Adviser:
Gateway Investment Advisers, L.P.
Shareholder Servicing:
Gateway Investment Advisers, L.P.
Auditors:
Arthur Andersen LLP
Cincinnati, OH
Custodian:
Firstar Corporation
Cincinnati, OH
Trustees:
James M. Anderson
Stefen F. Brueckner
Kenneth A. Drucker
Beverly J. Fertig
R. S. HARRISON
J. Patrick Rogers
Walter G. Sall
William H. Schneebeck
James E. Schwab
24
